Good morning ladies and gentlemen, and welcome to the Smith International Third Quarter 2008 Investor Relations Conference. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over Mr. Doug Rock, Mr. Rock you may begin.

Thanks Hilda. Good day and welcome to the Smith International third quarter 2008 investor conference call. I am Doug Rock, Chairman and CEO of Smith. I'll be talking today along with John Yearwood, who is President of our Completion and Production Group, and he's also Smith's new President and CEO as of January 1, 2009; and also Margaret Dorman, our Executive Vice President and Chief Financial Officer will speak. This morning Margaret, John, and I will talk for about 30 minutes, and we'll have about a half hour for your questions. So that everyone has a chance to ask questions, please ask not more than two at a time. If time permits, you can re-queue and ask more questions later in the call. Now let's talk about Smith's third quarter 2008 results, and I'll talk a little bit about where our industry is headed over the next year. Smith's third quarter 2008 revenues up $2.85 billion were up 14% sequentially and 27% year-on-year. These revenues include our merger with W-H Energy Services for 37 days of the third quarter, but had we consolidated W-H Energy Services for the whole third quarter, Smith's revenues would have been up 37% year-on-year. September 2008 was Smith's first $1 billion plus revenue month and October looks even better. Also had Smith consolidated W-H Energy Services revenues for the entire third quarter, revenues would have been $3.71 billion. This quarterly revenue level would make Smith the third largest broad services array oil field service firm in the world. We believe Smith will improve on our third quarter revenues and earnings in the fourth quarter of 2008. Although we expect the North American rig count to contract in 2009, as of last Friday, the Smith U.S. rig count is still almost 300 rigs or 17% above…

Thank you Doug and hello everyone. As you have seen in our Q3 press release of this morning and as a direct result of our plan to maximize our growth through the creation of value from synergistic operations, we now manage our business within three operating segments: M-I SWACO, Smith Oilfield, and Distribution. The M-I SWACO segment includes our majority owned joint venture operations and is managed through four divisions: drilling solutions, environmental solutions, wellbore productivity and production technologies. The Smith Oilfield segment provides three-cone and diamond drill bits, drilling tubulars, borehole enlargement tools, turbine motors, directional drilling, measurement while drilling, and logging-while-drilling services, as well as completions, coiled tubing, wireline and drilling related services. The Distribution segment includes the Wilson distribution operations and a majority owned interest in CE Franklin, Limited, a publicly-traded Canadian distribution company. I will now make a few Q3 2008 related comments regarding each of our operating segments. Starting with M-I SWACO, Q3 revenues increased 6% sequentially to $1.36 billion and 23% year-on-year. Despite decreased revenues in the Gulf of Mexico due to Hurricane Gustav and Ike, total North America revenues grew $33 million sequentially with most of this growth coming from Western Canada. M-I SWACO generated 72% of its third-quarter revenues from outside of North America with Russia, Europe, and Sub-Sahara Africa being the region with the largest quarterly sequential revenue growth. Overall, offshore revenues were relatively flat on a sequential basis at $631 million, but up 18% year-over-year versus an ODS-Petrordata offshore count increase of only 3% over the same period. During Q3 2008, M-I SWACO was awarded a number of multi-year contracts with an aggregate value approaching $1 billion. The majority of these contracts were for operations in the eastern hemisphere. New technology revenues, which are generated from technology that has been…

Thank you John, hello everyone. For the third quarter of 2008, Smith International generated earrings of $210 million or $1 per diluted share on revenues at $2.85 billion. The result reflects $5 million of non-occurring charges, which primarily relate to uninsured property losses sustained at our Galveston grinding [ph] plant facility as a result of Hurricane Ike. Excluding these costs, net earnings were slightly higher. We generated $212 million of after tax earnings or $1 per deluded share. Net of charges, our after tax earnings grew 16% sequentially, and we are 27% higher than the September 2007 quarter. As many of you know, we close the W-H Energy transaction nine weeks ago on August, the 25th. This is our first earnings call post closing. And for any of the W-H personnel we may have on the call, I want to pass on how pleased we are to have you as the part of those Smith family, and want to thank each of you for the contribution made to Smith's record third quarter results. While we are on the topic of the only copy could W-H let me recap the transaction. We issued 17.78 million shares of Smith and $1.64 billion of cash to the former shareholders of W-H. And we also repaid $261 million in borrowings outstanding under W-H revolving credit line. The required cash was obtained under a combination of bridge and term one borrowing arrangement; we will cover the terms of the debt in a few minutes. As Doug noted earlier, Smith's third quarter reported results included 37 days of the W-H business operations. And as we noted in the press release, we are reporting all of the former W-H operating groups as a part of the Smith Oilfield segment. W-H's revenues for the 37 days subsequent to…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Kurt Hallead from RBC Capital Markets.

Hi good morning.

Hi Kurt.

Good morning. Welcome aboard, John.

Thank you, Kurt, thank you.

Hey Doug, your comments this morning regarding the outlook for '09 as much as it, maybe disappointed in that '09, not being above of '08. Other than the bigger picture comments that you outlined, how much of your business is backed by specific contractual obligations that kind of gives you that conviction to come out at this point especially in light of the spending touch we've been seeing?

Yes, about 80% of M-I SWACO's eastern hemisphere businesses contract, but it's not the contract itself that gives the faith, because it's a kind of contract, where if they don't drill, they don't need to pay us. But the real underlying thing is the contract with the rig operator. Because on the deepwater even the in the medium water stuff, 40% of the cost of the project is the rig. So even when we are seeing big declines in prior years going back as much as 30 years, we have always seen the operator drill to the end of the rig contract, because why have 40% so on cost and get nothing out of it. So that's what gave us the real confidence the contract with the rig contract give then the secondary contract with us services that provided there.

Okay. And your view point will be apples-to-apples on a pro forma basis if W-H were part of Smith for the full year?

I don't understand the question.

Just assuming if you look at '09, it will be above '08 that would assume on a pro forma basis that W-H were part Smith for all of '08 as well.

No, just the base GAAP numbers from '08 to '09.

On an average.

Got it, okay. All right, thanks Doug.

Not recast, yes.

Appreciate it.

You are welcome.

Our next question comes from Jim Crandall [ph] from Barclays Capital.

Good morning. Doug, congratulations on your retirement; you've certainly done a great job over the 30 years I have known you.

Thank you Jim.

Doug or John, can you describe how you start up in terms of tool capability and rotary steer LWD, and as the your intention overtime to become either fully competitive or more fully competitive with the major companies in the sector?

Thanks Jim. Right now we are able to... we are sold out without tool capabilities both in the U.S. and in certain of our international markets. We're able to provide DDMW, DLW these services for a large number of drilling operations, where we have gaps with the larger rotary steerable tool sizes for deepwater applications. We don't have those, so we are working on them. On LWD, we have some imaging tool gaps, we've just... I talked about our iFinder, our density imaging tools 400 quarter, which is proving very successful in two countries today. But we need larger size there and we need some resistivity imaging capabilities as well.

Would you think, John that you would have to step up CapEx and R&D spending fairly materially in those businesses over the next two years. And as a part of that question, maybe you could address the role that international expansion is going to play in the company's growth on a sort of one to two year basis?

Okay. In terms of Capital and R&D, compared to if you think compared to what W-H Energy was doing, yes, we are going to increase it, I wouldn't say materially. It's going to be focused capital spend. We have already identified the targeted countries in the international area and also in the U.S., the path finder was not playing in all of the regions of the U.S. So, we have a plan now, where we are focused on and we are building tools or ordering tools then now for those markets. So, I don't see a material increase in capital, but there will be some and R&D as well yet, there will be an increase compared to what W-H was doing. Our international growth plan is now defined and we are going forward with that in the tool ordering, the people recruiting and the training.

Okay. And last brief question, John, do you see a lot of synergy between this business and sort of the rotary steerable LWD business? And do you see this business becoming increasingly integrated in regards to rotary steerables than literally the sensors over time being on the bit itself and the companies, who are in the bit business and in the rotaries steerable business ultimately should have an advantage in that they offer part of the system?

I do believe there is synergy across the entire down haul drilling assembly on the surface to the bit. It's really... it's made up of multiple elements, but it performs... and you have to have it perform as one element in terms of the drilling and well placements. So, yes there is synergy; that's we have our service, I'm sure you are familiar was called i-Drill, which looks at optimizing the type of drill bit according to the requirements of the operator, where the wells should be placed, and how, and with the drilling assembly that will be used. Clearly our strategy now is to take i-Drill and expand it from the not just optimizing the drill bit, but optimizing the entire downhaul drilling assembly. So, to answer your question, yes, there is synergy and that is our plan going forward to optimize that synergy.

But I might add, Jim, with us having maybe 5% of the world directional market and maybe 30% of the bit market, the customer is still going to continue to use the best elements when they go together. And just as we do other bit programs today, if the path finder system works better with a huge Christensen bit or with a National Oil Well, Reid-Colleague or with Halliburton and with Albertan [ph] we will use that fit. So we'll continue to use the best in class with whichever component we use if we get the job.

Although, Doug, if I could just add something, many of... or certainly your competitors anyway, who are in the rotary steerable business make the comment that their bid is gone like over 90% of your job. So, it certainly seems to be the way the businesses is heading.

The data does not show that. And in fact if you get a hold of the SPE world record bit runs of which we have about 58%, you will find we have the world records on virtually all of our... the percentage of world records on most all of our competitors. Plus we have done research in finding out that 90% number just does not exist.

Okay. That's enough, thank you very much.

You are welcome.

Our next question comes from Doug Becker from Banc of America Securities.

Thanks. Doug, once again Wilson did very well. I think last quarter you were mentioning you have some new contractual relationships, and just the demand for new infrastructure provides some visibility over the next two quarters. I guess with activity looking like it is going to decline in North America. I guess what's the outlook specifically there?

Yes, I think the good part of that is even though we believe the rig count will go down and then you've heard from other companies also that we think in some of the higher profile areas like the Haynesville and the Barnett activity... and the Haynesville along, we actually expected to go up quite a bit. There we are seeing the demand for the bulb house [ph] and the connection equipments, the mid-stream stuff very strong and actually in some of those areas will increase. So really with the rig count going down as we look at the customers as they high grade their prospects, we think the higher cost or higher value drilling areas are going to continue to either be flat or in some case improve, which is really where Wilson is getting their additional revenues and profits from. So we don't see that at all going in line with the decline of the rig count.

And so just to clarify, you could see Wilson still posting better numbers over the next couple of quarters?

Certainly for this quarter looking into the first quarter, I don't have all the data, but just as I made my early comments, we don't see any dramatic declines here if there are some.

Okay. And then as you look at your contracts with operators. How much concern do you have about potentially the late rig deliveries or I guess more specifically deep-water rig deliveries as we go forward?

I think in the shorter-term, probably not that much, I think the further out we get, where maybe, one statistics that sit with all the people that have ordered floaters of the big five that go from 75% to 50% market share by 2012. I think when we look out beyond 2009, those things are almost ready to be delivered or contracted. I think you get more uncertainty particularly those that are being finance from banks and not from cash flow from the rig companies.

Thank you.

You are welcome.

Our next question comes from Chuck Minervino from Goldman Sachs.

Hi good morning.

Good morning.

Good morning.

I was just wondering if you can give us a little update on new awards for fluids contracts associated with some of these new offshore rigs coming. Is there any update, are there some tenders out that you guys are looking to bid on and potentially win? What's the latest update there?

As John mentioned, we got something like $1 billion in new contracts, but the contracts are all with the operators. And for example, if I went out three years and BP was getting the rig, and I had to re-do my contracts with BP in that timeframe. I wouldn't know if I got the rating loss like at the BP work, but it's not for the rig, it's with the operator. So it's operator dependent.

Okay. And then just a couple of questions on W-H one question, how much... how EPS accretive was it this quarter?

Chuck, it was been 4% to 5% earning accretion.

Okay. And then if we look out into next year, just in terms of your guidance or outlook that you don't expect EPS to be down. If we excluded W-H from that, would you still expect it to be up or at this stage, it's difficult to tell?

Yes, I think it's too early to make that call. We are not going to have our formal plan presented to you until January, and we'll have our Board to take a look at it in December. So I really couldn't answer that now.

Okay. Thank you.

Our next question comes from Brad Handler from Credit Suisse.

Thanks. Good morning all.

Good morning Brad.

Hi Brad.

Could you... couple of things, I guess. First, was there anything in the third quarter results that was a function of W-H integration costs? Maybe I missed something in the release, but I don't think I saw anything?

No. There is no... you are saying are there non-recurring costs that are in income statement Brad?

Yes.

The answer to that is no.

And the reason is they took... because we closed it three or four weeks later than we plan they took some of those costs into their second quarter and then some into the stub period prior to the acquisition. So there was really not much left.

Got you, okay; that's helpful. And then I guess sort of unrelated follow up though. In terms of your thinking on the fourth quarter, I know there are a number of moving parts, but I guess I am trying to reconcile the guidance a little bit, if I had backed the hurricane stuff and you get through about $1.06.

Although we may not all fully be back.

Okay. That's part of the answer; okay. Well, here is that... maybe you can help me with thinking a little bit. If I... if there is a couple of $200 million or more revenues that we're going to get, because of... which you are going to get because of W-H being on and healthy margins. Even allowing for higher interest expense and allowing for the higher share account, it seems as though that you might be talking about a nice amount of accretion relative to that $1.06 or admittedly maybe it's not a $1.06.

Yes, but on the other side, we're not sure with the prices of gas how much the rig count will decline between now and the end of the year. Some people think it could go 100 and150, hopefully not that much, but you've got something going the other way.

Is there anything...

Trying to make a judgment with our guidance.

Fair enough. Is there anything going the other way potentially outside of North America?

Nothing that I'm aware of. Do you think anything, John?

Nothing in particular that I am aware of, no Brad.

Okay. So it's just they are allowing for some conservatism potentially on the interest in the U.S. rig count basis stuff and Canadian as well?

Yes.

Okay. All right, thanks; appreciate it.

You're welcome.

Our next question comes from Mike Urban from Deutsche Bank.

Thanks, good morning.

Good morning Mike.

The W-H businesses are... tend to have a little more operating leverage, a little more cyclicality than some of the legacies in Smith businesses especially with respect to North America. Is there anything that you are doing proactively or any adjustments you are making or thinking about making in light of the expected declines in North America?

No, Mike, this is John here. No, they have very executionally focused, operationally focused personnel close customer contact, highly respected in the areas that they operate. So, we are continuing as business as usual, we're sold out, turning out jobs at the moment across the entire ex-W-H product line. We are just watching the situation carefully; and if anything going forward, we'll make the necessary adjustments, but right now...

Yes, two things, Michaels, feel that the cyclicality won't be maybe to the extend that you are thinking. Number one, we are in the higher tech end and in the higher margin end of the... of our customers operations in North America. And secondly, with the much lower penetration internationally, we think that will offset that for some period of years as we build it up. So I think those two factors lead us to believe we won't see just your normal North American cyclicality of the W-H businesses.

Okay, that's helpful. So your... Doug, then in on your comments about so far so good in October pertained to, I realize as the company as a whole, but you would apply that to both the Smith and the former W-H side?

Definitely, yes.

Okay, great, that's helpful.

And like I said, we are 30% of the way through the quarter, so at least we've got some feel for it.

Okay, great. That's all for me, thank you.

Okay.

Our next question comes from Bill Herbert from Simmons & Company.

Thanks, good morning.

Yes good morning Bill.

Doug, not your process, so I get that. But just sort of walking through a world of sort of scenario planning here for a second. In the event that you or we witness a relatively consequential decline in the U.S. rig count, call it, 500 rigs from the recent peak and the international growth rate in activity is well off the recent trend of 12% to 15% per annum to something closer to 5%. Under that scenario, do you think '09 EPS is up year-over-year?

I am just working on those numbers right now that I couldn't tell you under that scenario.

Okay.

I mean we don't think the international probably at this point is going to be up double-digits.

Yes.

Maybe not at the single-highs, and we don't think North America will be down as much as some people think. But we think it will be down under that basis. But using your, I mean even when you say that 400 to 500 rigs, does that occur by March or does that occur by next December. Timing is so critical, and that's what we are trying to lay out right now.

Okay. And in the event that a contraction in U.S. activity is relatively sharp and severe and quick. Do you think we get back to '01, '02 margins, or is that too penal?

It just depends. If you look at where we were in '02 with the 37% rig count contraction, we actually lost about 100 basis points on pricing. The margins were really sense of volume.

Right.

But really our margins were higher than they were in other downturns. So we had higher highs and higher lows. I mean I think to get to that point with that kind of size of downturn, you need 700 to 800 rig decline when you are talking close top 40%.

Yes, Got you.

So I mean, it's still penal just from your description.

Okay. Last one for you; walk me through how... well, simply stated the integration of WH. How does that formulation change in terms of you plans in the event you see a pretty significant contraction in the U.S. rig count in 2009?

Bill, this is John. I will try to answer that.

Sure.

W-H company is their one of the key growth services they have product of course is pathfinder DMW, LWD. And they are performing on as I have mentioned those high value added wells horizontal place in the unconventional gas.

Right.

And they are also in certain other international markets high value.

Yes.

Our plan is to continue to grow that business line.

Yes.

Without they can perform.

Yes.

Into the high end plays. We see those high end plays continuing as the margins for the operators are generally better. And we will continue to fund the R&D and the capital to grow our market share.

In the U.S., are you guys still adding to a headcount with regard to W-H business and to Smith overall or are you taking away to see approach?

We are headcounts up, there were 4,000 great team members coming in from the W-H organizations that joined us the third quarter. We are adding people, we are adding engineers for our MWD, LWD.

Got you. Okay.

And good quality direction drillers.

All right

As the past, Bill, when we had reference parts, we continue with the research and the product development. So under any case I wouldn't see any reductions in those areas. It could be field people if a particular area went down and we couldn't... we didn't have a way to higher cost structure, but the product development research definitely goes on.

Okay, great. Thanks for your insights.

Yes, you're welcome.

Thanks Bill.

Our next question comes from Geoff Kieburtz from Weeden.

Good morning.

Yes, hi Geoff.

Maybe a little bit out of sorts of questions, but we have seen a lot of financial strengths across the industry, potentially I guess. Having just completed this large merger W-H, do you feel like Smith is still in a position to take advantage of opportunities over the next 12 months that might arise because other financial difficulty?

Yes, definitely. I mean essentially if you look at a year ago, our debt to capital is 23%, now it's 32.6%. So we are just mildly increased our leverage, but I think we have substantially increased our cash flows, so I mean we paid down over a period of one year or less time, I think 700 basis points debt to cap. So we've got the huge cash flow coming out of the company. So if there is some opportunities there, whether it's acquisitions or whatever, we still plan to take advantage of them.

And when you look at the portfolio businesses within Smith, post the W-H combination, do you see obvious places, where acquisitions might be the better past to fill out that portfolio rather than just organic growth?

Yes, essentially W-H added four additional areas of growth on top of the four that we had in some areas of higher potential growth, certainly.

Okay. Any thoughts you are willing to share in terms of your where acquisitions might be the most effective path?

Really in any of those areas, I mean just as in the past, we wanted to buy a diamond bit company, we couldn't find one. So we built it ourselves. We wanted to buy a completion fluids company, we couldn't find one at the right value, so we built it ourselves. It's just a matter of value and timing. And we are looking at alternatives on both sides of that right now.

Okay, great, thank you.

You are welcome.

Our next question comes from Dan Pickering from Tudor Pickering.

Good morning guys.

Good morning Dan.

If we look at cash spend for next year at this point assuming virtues to simply add W-H full year, directionally guys, I mean what's the budget looks like, you talked a little bit about Q4 spending for tools et cetera. Do we spend more in '09 versus '08 pro forma?

Dan, my expectation is we'll be able to give clear guidance on that on the fourth quarter call. But I think directionally, John mentioned, you are going to see the spending up marginally. We gave you a 140 run rate for the fourth quarter, but I also talked about the fact that there is non-recurring spend in there. But yes, I think directionally, you'll see the full year '09 number somewhat over the full year as reported '08 number. But I think that's marginal, and I think we'll be able to give you a better guidance on the fourth quarter call.

That field is now is similar.

Okay. So even with W-H added queue added, it would only be flattish to slightly up.

Yes, there is some areas that may go down and some that will go up. So we've got out... Margaret says, we've got to look at each one and balance it out.

Right. Margaret, while we've got you talking, as you look at the balance sheet and the debt sort of world out there right now, how do you... how would you characterize your ability to go out and swap out the billion in the short term line, I mean is it there right now, and how do you monitor those...

I mean it's... I mean we are an investment grade company, and it's there just a question of the price that you would pay, but as I noted in my comments, the bridge loan is it matures in mid-August of '09, so we don't see that as a near time event. But certainly there is a shelf registration out there when it gets to a range that we like the price, then we'll consider it.

Fair enough. Thank you.

Thanks.

Our next question comes from Michael LaMotte from JPMorgan.

Thanks. Good morning.

Good morning Mike.

John, first of all, if I may to you on the notion of efficiency at the drill string, it strikes me their optimization of it. There is a lot of low hanging fruit now that you have got essentially all the parts in there and the underlying system of, i-Drill. Can you talk us through that a little bit in terms of what it looks like and what potentially the benefits are?

Yes, Michael, yes. You used the word low hanging fruit. But I would say that there are great growth opportunities. The ability of i-Drill to do what it does today in optimizing the selection and type of drill bit for the whole is going to be drilled, it's recognized by our customers around the world as being best-in-class. We are growing that and we are looking to optimize it with the addition of another proprietary piece of software that we have so that in the near future and starting very quickly, we will be looking to optimize the entire drilling assembly. We know today that the many, many rigs are drilling in sub optimal conditions in terms of excessive vibration or excessive torque, they are taking too long to drill these wells. And we believe that in a very short period of time with the in-house capabilities that we now have across the entire drilling assembly. And with the proprietary i-Drill software, we can make a difference to our customers drilling performance. And that's something that does not require any more CapEx or equipment than what we have today. It's basically taking what we have and optimizing it.

If I think about the opportunity to package is the priority going to be on, sorry to use the word bundling, but on bundling the components of the bottom whole assembly or do you envision Smith ultimately bundling everything including... everything that you do including fluids et cetera.

No, no, I don't see it as bundling. I see it as the our, client the operators saying look, I need to place the well at a certain depth at certain angle, certain direction, x amount of feet horizontal. And tell me how is the best way to drill that well into safest and most... shortest period of time. So, we will do the work, do the software analysis, do the simulation, design the well before even committing to anything and in many cases in today as Doug has mentioned, we will use competitor element within that drilling assembly. We will make sure that what we are offering to our clients is the best in class available technologies to achieve the well construction and well work placement in the way that they want it to happen. So, no I am not talking about bundling our services at all, I am talking about knowing what is best to create the optimum well as per our clients requirements and then using the bits and pieces that we have if they are the best in class to make that happen.

Essentially, Mike, it's performance based drilling, where really the direction of drilling component with the LWD is the lead in.

I think that's such clear clarification on strategy relative to others out there, I just wanted to make sure that point, got me?

Yes.

Yes, it's very clear for us, so where we are going now. By having this knowledge of with what works best where and when and how. Of course that provides a loop mechanism back into our research and engineering department, so that we are constantly able to know what tools are going to be required going forward.

Thank you. Margaret or Doug, if I can ask you a question on the change in the bit market over the last five or so years it's gone a lot more rental versus consumable, and I am curious as to your thoughts in terms of how that impacts that the capital cycle for Smith particularly as we enter into a period, where there is a lot of uncertainty on drilling activity.

Actually it's usually the diamond bits that are more on the rental side, and that's... mainly North America was probably 95% plus. But part of the North Sea certainly does it. It's not a high amount of capital just because you depreciate the most of it on your first run. So, we haven't seen a big capital increase at all by doing it that way. And that's only because in the past what we did is we built on dollar, which meant we didn't... even if somebody brought the bit, we didn't build until after they used it. So, essentially we haven't changed the cash flow model to any extent.

Okay, that's very helpful.

Sort of an order deal this business, but that's how it works.

Okay, great. And then last thing Margaret, if I can on Wilson, was there any inventory gain in terms of impact on the margin here in the second quarter, just trying to look senses sustainability?

No. Not, we didn't pull LIFO through if that is the question.

Yes, okay. Great, thanks.

And there is no anomalies in those numbers, just had a very good quarter.

Very good quarter.

We just did really, really well.

Really well. Okay, thanks guys.

Thank you Michael.

Our next question comes from Robin Shoemaker from Citigroup.

Thank you, good morning.

Hi Rob.

Just a one question; Doug, on the last call, you referenced some cost pressures that Smith was experiencing in transportation in other areas. Could you just generally comment on what you see as the cost environment going forward? And are there areas, where you are looking at potentially lower costs in any category of costs that Smith has?

Yes.

That could benefit us going forward?

Yes, the transportation and the petroleum based fluids pressures are actually coming off right now as the price of the petroleum products goes down, surcharges come off to the extent those to go back or index back to the customers in a number of cases they are, but it certainly takes the short-term pressure often from that stand point.

Okay, and in terms of W-H and Smith sort of just wage kind of rates or equalization or whatever is, is there any say reduced pressure on labor costs impacting you going forward?

No, not really. I think the wages as we look that in for both of groups were similar than they both of them paid recently well around the world and we'd see a normal increase in the wages this year some place in the 4% range, so no change really at all.

Okay. Finally just a quick one: Margaret mentioned that there would be kind of a natural deleveraging of the balance sheet in '09, assuming both your free cash flow from operations and perhaps a reduced level of working capital. Would that be in any scenarios sufficient to not need to refinance this debt becomes due in August of '09?

Well, certainly, that's why I made the comment that if we see the activity levels moderate, we could generate more cash flow and that could limit how much we needed to tap the public market for us. So certainly we'll look at as we go forward. But that's our mindset is to generate positive free cash and that might limit the amount of rigs that you had to refinance, Robin.

Yes, okay.

Yes, still two-thirds of our tangible network is working capital, so less growth we have, the more cash that comes out.

Yes, thank you.

Our next questions comes from David Anderson from UBS.

Thank you. I was just wondering if you could expand a little bit on the comment about drill pipes, so it was down 61% quarter-to-quarter, primarily because you are looking at more spot sales. I don't quite understand how that works out to 61% down. I know we had some pretty good numbers in drill pipe and overall I thought the market was pretty tight.

Yes, we actually only act as a representative, we don't manufacture the drill pipe itself. So typically it's a big order type of business, and we just didn't see those big orders coming in from the quarter. So we are just selling as John mentioned more on the spot, which is higher margins for us. It's not a primary business. We don't manufacture, we just do it as a pass through.

And roughly how much in revenue is that on an annual basis, pipe?

It goes up and down.

But a couple of $100 million or so?

It was... it's certainly a lot. No, I don't think it ever reach that much, but it may have for the prior year.

Okay, fair enough. One last...

Main productive, but that's very low margins for us.

Okay. Just one last question, recognizing that your secondary sales on the contracts with the offshore rigs, just wonder if you could talk a little bit about pricing. How does pricing work with the contracts? Is that kind of fix, is there a flexibility, how do you see that playing out?

Yes, there is nothing fixed about it. What we do is we give our project managers the responsibility to improve margins through new products, and we also escalate prices based on costs. We index most on the flat soil gram in terms of petroleum feed stocks or transportation costs. So typical contracts by the time we are complete with them, we actually have somewhat higher margins on where we start.

Okay. Thank you very much.

David, the question on drill pipe, I think the year-to-date number is around $110 million.

Okay. Thank you, Margaret.

Thank you.

Yes.

And Hilda, I think we've exceeded our time allotment for the call. Why don't we take one more question?

Our next question is from Rob Mackenzie from FBR Capital Markets.

Good morning folks. One last follow up for you. I just wanted to get some guidance on how we should think about potential inventory destalking in the distribution business in the light of a contraction of several hundred... 400, 500 rigs in the U.S. and perhaps the severe break up in Canada in next spring?

Certainly most of the inventory there is very high turn rate typically 30 to 60 days. So clearly if you just work on the turn ratios, but we don't see... as I mentioned, so much of this is going into your higher end areas. We don't see a huge decline in that business. But I think if you model the revenue inventory relationship, we get that in the line of very quickly.

Okay. Thanks.

You're welcome. Well again, thank you very much for joining us for the third quarter call, and we look forward to talking you in late January for the year-end results. Good bye.

Thank you. Ladies and gentlemen, this concludes your conference call. We thank you for participating. You may now disconnect. .