Good morning. My name is Lori, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, today's call is being recorded. I would now like to turn the call over to Ms. Karen David-Green, Vice President of Investor Relations, Corporate Marketing and Communications. Please go ahead.

Thank you, Lori. Good morning, and welcome to the Weatherford International first quarter conference call. With me on today's call from Geneva, we have Bernard Duroc-Danner, Chairman, President and Chief Executive Officer; and Krishna Shivram, Executive Vice President and Chief Financial Officer. Today's call is being webcast, and a replay will be available on Weatherford's website for 10 days. Before we begin with our opening comments, I would like to remind our audience that some of today's comments may include forward-looking statements and non-GAAP financial measures. Please refer to our first quarter press release, which can be found on our website, for the customary caution on forward-looking statements and a reconciliation of non-GAAP to GAAP financial measures. We welcome your questions after the prepared statements. And now, I'd like to hand over the call to Krishna.

Thank you, Karen, and good morning, everyone. Let me start with a brief recap of our operating performance in the first quarter. Overall, this was a disappointing quarter, reflecting a sudden plunge in revenue across all regions, led by North America, while our aggressive cost reduction actions were not enough to stem the revenue drop, resulting in a sharp decline in operating margins. Loss per share for the quarter before charges and credits was $0.29. Revenue of $1.6 billion for the quarter decreased 21% sequentially and 43% year-on-year. The sequential decline was affected by a sharp decrease in the level of product sales, as customers around the world cut back on product spending, which is partly seasonal after a strong Q4 and partly reflective of the new lower 2016 spending budget kicking in for these customers. Products sales were down 30% sequentially, mainly in the U.S., Canada, Asia-Pacific, Middle East and Latin American markets, with the Artificial Lift and Completion product lines declining the most. Excluding the decrease in product sales, service revenue was down 16% sequentially, in line with our peers. Operating income margins, before R&D and corporate expenses, declined by 943 basis points sequentially to negative 6.6%. Excluding the rigs business, our core business revenue decreased 21% sequentially with a 931-basis-point deterioration in operating income margins to negative 5.4%. Right through this long down cycle, we've been cutting costs and reducing our structure to cope with reduced activity and pricing pressures. This was evidenced by our 2015 decrementals versus 2014, which were best-in-class at 28%. While we continue to reduce costs in 2016, we have now reached the point in several operating locations around the world where any further reductions in structure or in cost will mean exiting the business in those locations. This means that we have…

Thank you, Krishna, and good morning, everyone. Few comments on Q1 results. Historically, Q1 is always our worst quarter. This year's the same. The four key numbers are: revenue declined 21% sequentially, 43% year-on-year; decrementals, 38% sequentially and 28% year-on-year. Free cash flow was $260 million use of cash, but $50 million better than Q1 '15, and that without any consideration for large severance cash payments and final cash outlays for Zubair. Free cash flow doesn't matter for our peers; it does for us given balance sheet differentials. It is worth observing Weatherford's free cash flow numbers, as is, inclusive of all, were the best or the least bad, if you will, in class year-on-year performance of our peer group. This is just an accident. The company has had all levels of operations, an ingrained focus on cash flow here and now and perennially. Breaking down Q1 revenues into its main components: product sales dropped by over 30%, service revenue by 16% and rigs by 19%. This added up to sequential 21% drop. Product sales usually drop sequentially in Q1, and this year was no exception. The overwhelming [indiscernible] to the drop was seasonal and particularly affected the Eastern Hemisphere. Product sales for Weatherford are well construction, except TRS and Managed Pressure Drilling, Completion and Lift. Service revenues are Tubular Running services, MPD and Formation Evaluation. Taken together, the proportion of product sales to total revenues is on average about 40% with large quarter-to-quarter variations. Product sales will improve in Q2 seasonally. Regionally, the quarter was difficult in every corner of the world. Both U.S. and Canada were very challenged. Canada's Q1 was the lowest in company's recorded history for first quarter, normally that region's strongest seasonal peak. Q1 was in fact lower than Q2 of last year, [indiscernible] then…

[Operator Instructions] Your first question is from Bill Herbert of Simmons & Company.

Krishna, could we discuss Zubair a bit here, because it seems like the range of outcomes there are reasonably wide in terms of order of magnitude on the impact on free cash flow possibilities for 2016. So can you discuss that with a little bit more detail because you talked about revising the free cash flow forecast down to $400 million. But in the event that Zubair doesn't swing your way, that could be too high by a couple hundred million dollars, if I understood you correctly. So can you shed some light on that, please?

Yes, Bill. First of all, I said that the free cash flow forecast for the year is going to be revised down by $200 million down to about $450 million, right? Now included in that $450 million is an assumption that we will successfully negotiate a settlement of our variation order claims on our customer. That settlement is being discussed right now, and we have not reached a point where we can mutually agree to the settlement. If we don't reach a settlement, we will not get any more cash, even against the milestone payments that are due to us contractually, because we believe our customer will withhold all cash going forward. If that happens, then about $150 million to $200 million of cash, that would otherwise have come to us, including the settlement estimate, will not come to us anymore, so which means basically the $450 million of free cash flow will then reduce to -- by $200 million -- $150 million to $200 million, right? That's what I was talking about. Now in fact, we are getting closer to a settlement agreement with our customer. And maybe, if everything works out, we'll be able to announce the settlement in the next several weeks. If that happens, then the $450 million remains intact.

So you believe that it's likely you will reach a favorable settlement on this front?

I think both sides are not too far apart right now. And so, I think it is -- I would give it more than 50% chance that we will reach a settlement, yes [indiscernible].

And so, what exactly -- yes, what exactly is being disputed here?

It's a level of compensation for the change orders. We have a number of change orders that we have documented over the last 3 years, which are changes to the original design of the facility that was in the tender. And none of those change orders have been compensated for. So we have a certain claim, and that claim has not been honored or recognized by our customer. So that's basically the subject matter of the discussion.

Okay. Switching gears for a second for the balance sheet. Bernard, in the event that international revenues, as a whole, continue to bleed lower over the course of the year, what then is the likely roadmap for margins given the interplay between pricing concessions on the one hand and those continuing to roll through, and on the other hand, a more aggressive cost cutting that you continue to implement?

Well, just to put things in perspective, as I mentioned, a lot of the cost cuts have not impacted much yet, but they will follow in Q2, the international operations, and more specifically, the Eastern Hemisphere, which takes the longest from a regulatory standpoint to be able to absorb the layoffs and so forth. We have approximately -- going through all the cost cuts through Q1, there are approximately $100 million a quarter more of cost cuts that are going to come through the Eastern Hemisphere and also Latin America. But that is actually -- but lobbying didn't come through the Eastern Hemisphere. That is quite a cushion on further erosion coming from volumes and pricing. The second thing also, Bill, is that when we talk about product sales, that is one we have some visibility on. We have a notion of what is going to be delivered or expected to be delivered, a number of different products. And that gives us also a sense of volume and margins to come. The services more, I think, are vulnerable in the event the project gets further canceled and so forth. With respect to pricing, we have also a sense of what was given. In our particular case, pricing concessions have been given. There is no significant amounts of other pricing concessions being negotiated from us. We'll also point out to you that there are very large tender activities, which are ongoing, which have been very recent, which suggest that many of our clients are, all of a sudden, very interested in locking in volumes at current pricing, which suggest also that volume is unlikely to go down further, more likely to inch up some. All this would tell you that the cost reductions are sizable, the product line deliveries are relatively predictable. Pricing concessions, we have already quite a bit, has gone through Q4 and Q1 P&L. There isn't much that we know of analytically to go through incrementally in Q2. All this to say that the roadmap for international in Q2, Q3, Q4 should be depending on your viewpoint, on the macro, either constructive or better than constructive in our particular case.

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

So just to clarify, you say that a similar quarter in the second quarter to also deliver in the first quarter. Do you mean at the EPS level or at the normalized level, the EBITDA level?

Yes, yes. Well, actually, the EBITDA and the EPS level. The EBITDA may be a little bit higher, but not materially. But net-net, at the net income level, at EPS level, similar made up of deteriorating North America further, if it was possible. Latin America, a little bit lower and Eastern Hemisphere, a little bit higher on the top line, but operating income -- the biggest moving part for us, simply because of product mix in Q2 versus Q1. You add the pieces together, it suggests to us that we would have Q1 or Q2 flat at the earnings level, albeit the revenues may come down some when all is added up together.

And if we think about the normalized free cash flow loss in the first quarter as $50 million, and it excludes Zubair on the second quarter, what were they -- a reasonable range be to bracket the second quarter free of cash flow, excluding Zubair?

Yes, yes. Let's put Zubair on the side, because it is a onetime event. And so with -- for clarity's sake, without Zubair, our free cash flow in Q2 should be $100 million to $125 million, something like that, excluding Zubair. That's net of whatever severance would be still occurring, which should be less than in Q1, but some still.

Understood. And just finally, at your macro statements, you highlighted the declines. Is it anything particularly that you see around the world, which makes you more confident that we are closer to this inflection point? And any particular region or anything else that you see?

I would say that one of the benefits of having a fabulous team around me at Weatherford today is I tend to have more time to do what I think might be useful as a juncture. And what is more useful, I think, at this juncture is trying to interact as much as I can with the client base. And that's a long-term process. What does that have to do with your question? I have then a multiplicity of verbal, qualitative, but meaningful, nonetheless, data points from the Continental Europe, from Russia, from Latin America, from pockets of the Middle East. And I know full well what's going on in the deepwater plays, which are longer to have an effect. So ignoring the latter, just all the commentary on the particular regions I'm describing, add them together, it doesn't take a great modeling capability to see a frightening amount of volume being lost permanently. And it doesn't have to be spectacular individually. 100,000, 115,000 being lost over a period of a few quarters and accelerating. But you add them all together, and the picture is, for us, actually is as much as we recompute our numbers all the time, we have a hard time believing it. The picture is one of a shrinking supply base, which we do not see any available capacity, which is there to be able to replace it, certainly not on-call. And I mean on-call, within a year or 2. So it's qualitative, but it's multifaceted. Many, many client interactions, particularly in more relaxed atmosphere after meetings take place.

[Operator Instructions] Your next question is from Jim Wicklund of Crédit Suisse.

Just as a quick follow-up to Bill's, how much -- will you lose any cash in Zubair in Q2?

So it depends on -- Jim, it depends on you -- whether you assume we strike a settlement or not. If we do or do not strike...

If you do strike a settlement, will the cash actually hit in the second quarter, is that what you're saying?

Yes. So that's part of the settlement discussion, so we don't know where that's going to end up. But assuming that no settlement takes place at all, right, and we go to arbitration, then, yes, we will have a cash outflow in April and May.

I understand getting paid back for change orders. I'm just trying to figure out how much the operating loss -- cash loss would be?

They are intertwined. So operating cash flows is about $10 million to $15 million a month. And we will have 2 months of operations in the second quarter. That's the worst-case scenario.

And Jim, if that is the case, we will shut -- the operation will come to an end anyway at the end of this month.

There are several of us who are looking forward to Zubair being over almost as much as you are.

That's impossible. That is not possible, I think.

Almost, you'd be amazed. CapEx, you've dropped CapEx by 80-plus percent since 2014. I understand there's overcapacity, your rental business is not doing fabulous. And that's, I guess, historically been a big eater of CapEx. How much do you jeopardize the future? How much are you going to have to ramp up in '19? I mean, are we sacrificing...

I'll give you beginning of an answer and then Krishna will do the second half. If you take CapEx, and you break it down into 3 different places of application, so you talk about the infrastructure, which is all the bases around the world, you talk about supply chain and you talk about the tools, the service tools, generally service tools being applicable whether it's a completion service tool, whether it's LWD kit, et cetera, okay? I would have to say that the supply chain, as it now stands, can accommodate easily, easily, 3x of volume we have, and that's actually almost a silly statement, because we have no -- we have plenty of machining and roofline and so forth. So we're rationalizing it right now. It is not a source of CapEx requirement, until and unless the industry is materially different, and I'm talking a level of volume that you do not expect any time soon, talking about years. So that one is just not a consumer of CapEx. And to the infrastructure, we rationalize North America. We did take down a number of facilities, not too many, internationally. We now have, in 85 countries, by my latest count, the sort of base representation we feel is desirable given our long-term presence, et cetera. And I will have to say that the infrastructure can accommodate more than 2x of volume that we are running through the company today, easily. That, again, is not an area of CapEx that will remind you that we built this infrastructure ourselves. It was a big use of CapEx in years past. Then you get to the tools side, the service tools side. Well, we do have -- take a look at our inventory, take a look at our PP&E, depending on where -- what kind of tool will be in one of the other category. By our assessment, also, we have largely available somewhere between -- something -- tool components that can accommodate 50% to twice the size of volume we have, right? That's a lot of numbers that suggest we're not starting the business. We're very careful how we do it. We are not sort of holding our breath waiting for better times. We have far more PP&E and equipment capabilities than people realize, which is, in a way, sanctioning an overspending of the past, which none of us are very proud of, least of all myself, but it is an asset today. If you don't presume we're starving. Do you want to add, Krishna, to that?

Yes. I think when we normally you look at 2017 and '18, we can certainly spend very low levels of CapEx, while still maintaining a healthy growth potential. And then from '19 onwards, I would suggest that as a percentage of revenue, we will stay at -- between 5% to 6% of revenue for the next 2 or 3 years. So this is quite low compared to historical levels, but it's well explained by Bernard. We have plenty of capacity.

Okay. And my follow-up, if I could. Latin America, what and where gets better first?

That's a good question. I would say that my guess, it's a guess, is Colombia, primarily, because it's so devastated, and it's heavily a land market, you know that, not only heavily a land market, it's so eviscerated. They don't have a counter political upheaval here in Brazil. Argentina has remained healthy. I can't imagine Venezuela because they are so, I think, financially, let's say, strained. That leaves Mexico, but Mexico is still going through a lot of the restructuring of the industry and so on and so on. By process of elimination, I have to say, Ecuador -- sorry, Colombia is your best bet.

Your next question comes from the line of Rob MacKenzie of Iberia Capital.

Bernard, couple questions for you, if I may. First, are you guys seeing any signs of pickup, say, in the U.S. in any kind of completions or work-over activities for you guys? And secondly, as part of your conversations with your customers that you talked about earlier, how have those changed, if you will, over the past week, 2 weeks, months, 2 months? Are we seeing a turn in sentiment there?

Okay. On the first one, I'm sorry to say that no, there isn't any signs of pickup or anything else like that as of today in the U.S. I think the U.S., it's really a question of cash flow for our clients. And that's price of oil, it's also financing capabilities. So this is one thing. The second is an interesting question. It is very simple. I'm getting a lot of questions on what I am seeing in terms of production rate difficulties with other reservoirs in other plays from particular clients. They are wanting to know how the other ones are doing, what do I see in terms of trends? It's sort of interesting that they want to compare their own difficulties, all around decline rates, with other difficulties, not so much for competitive reasons, but to get a sense what is happening to the industry. There's been a really a lot -- these are informal conversations, and they are outside of the realm of formal meetings, which take place also with clients and, I think, for me, are far more valuable than the formal aspects. So there's a lot of conversations, systematically, really, from what am I seeing in other parts of the world. One of the advantages of being an oilfield service person from an oil and gas perspective is you get to see lots of reservoirs and lots of reservoir situations, actually more so than if you were exploiting it, who are constrained or restricted to the ones they're developing. So you have a richer sort of pool of information as -- if you will, a traveling salesman, as it were.

Great. But in terms of what they're indicating to you -- I understand they're pumping you for information. But what are they indicating to you, if anything, about how their plans are evolving?

They are sort of -- in general, they are -- they have no authority or capital or plans for additional drilling, and they're trying to hold off decline rates. And they are -- in many cases, it's coming to the point where they cannot do that anymore. And so it creates a lot of strain and worries. And they're quite anxious to know when -- where and when cash flow will allow them to restart activity because they're very afraid of losing production rather rapidly now. There is an acceleration. You hold it off and ultimately, there's acceleration. So it's really a sense of we're at the point now where they are afraid of declines, that they cannot hold off, hence their interest in understanding where and when the industry could have a turn because they're sort of worried about their own production profile given the fact they're running out of -- through intervention and the sort of things you could do with limited budget, and they're very scared drilling. They're worried about being able to hold off the decline rates, where they are, without them accelerating further.

You have no further questions at this time.

Then we'll conclude the call. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.