Good morning. My name is Kim, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International Second Quarter 2016 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 Ms. Karen David-Green, Vice President of Investor Relations, Corporate Marketing and Communications. You may begin your conference.

Thank you, Kim. Good morning, and welcome to the Weatherford International Second Quarter Conference call. I'd like to thank everyone for accommodating the earlier start to this conference call. As you know, we wanted to avoid an overlap of our call with one of our peers. With me on today's call, 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'd 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 second 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 recap of our operating performance in the second quarter. Overall, our revenue of $1.4 billion declined 11% or by $183 million sequentially, while our operating income before R&D and corporate expenses reduced only marginally by $11 million, reflecting the beneficial impact of the large cost reduction actions taken this year. Sequential operating income margins deteriorated by 168 basis points to reach negative 8.3%. Sequential decrementals were excellent at 6%. Loss per share for the quarter before charges and credits was $0.28, which was $0.01 better than the first quarter, while EBITDA was flat with the first quarter at $58 million. North America revenue declined 26%, outperforming a 35% reduction in average rig count and continued pricing headwinds. Seasonal activity reductions due to the spring breakup in Canada coupled with pressure-pumping activity hitting new lows with 2 fewer crews operating at the end of the quarter compared to the start of the quarter. Having said that, operating losses reduced substantially by $27 million with the aggressive cost actions taken this year, resulting in resilient margins albeit negative of minus 25.2% and sequential incrementals of 19%. Internationally, our revenue declined 3% on a sequential rig count reduction of 7%. Latin America bore the brunt of the decline with sequential revenue dropping 18% due to steep customer spending cuts in Argentina, Mexico, Brazil and Colombia. Operating income margins also fell sharply, as cost-reduction actions that were taken late in the quarter, while benefiting future quarters, were not enough to mitigate the drop in revenue. Operating income margins dropped to just 1%, but with the recent cost actions, this should improve going forward. Eastern Hemisphere revenue increased by 4% sequentially. In the Europe/Caspian/Russia/Sub-Sahara Africa region, sharp activity reductions in offshore West Africa…

Thank you, Krishna. Good morning, everyone. Few comments on Q2. The second quarter evolved as we expected. We thought NAM would trough, and it did. Despite of a devastated Canada [ph] in Q2 making a severe activity drop that much worse for NAM, operating income actually improved, improved significantly. This is entirely due to cost management and excellent operating execution. We thought the Eastern Hemisphere would not deteriorate further in Q2, and this was correct. We have crossed currents in Q2 of the Eastern Hemisphere. Pricing concession given out in prior quarters impacted the quarter. This conflicted with some early startups and powerful cost cuts. The end result was marginal declines in overall revenues and flat profitability. We viewed Latin America as having a very weak prognosis. This proved also, and unfortunately, correct. Mexico, Colombia, our largest market, Brazil and even Argentina, all weakened further, in some instances dramatically. By way of an illustration, our largest client in our largest national market, Colombia, moved their drilling activity in late '14 from 30 rigs within plan for over 40 to 0 in this second quarter. In the course of the quarter, the client went actually down to 0 drilling rigs. Q2 showed exemplary decremental of 6% on 11% decline in sequential revenues. We expect these will be industry-leading decrementals. They reflect, above all, the very aggressive cost actions taken from day 1 of the down cycle. We have had the best, as in lowest, decrementals consistently. Lastly, Q2 was to be the last quarter with ongoing -- the ongoing Zubair project, and it was. Zubair is completed. You won't hear of Zubair anymore. It is a closed issue. On cash flow, a long-term focus and objective, profitability, CapEx, inventory and cash payment of the 15 operating bonuses traditionally paid in Q2…

[Operator Instructions] And your first question comes from the line of Jim Wicklund with Crédit Suisse.

Bernard, operationally, it looked like a decent quarter, especially in North America. Internationally, you mentioned that the Middle East and Russia will show improvement in the second half, and you specifically mentioned contract wins. Can you tell us what product lines, what areas that you're winning contracts in, in the International markets, especially in the Middle East these days?

Saudi Arabia, Kuwait, Abu Dhabi, Oman, would be essentially it. And in terms of product lines, it would be essentially drilling-related, drilling and with some completion add-ons.

Okay. And Latin America, you know that's going to continue to lag. Obviously Mexico, Baker had of big blow-up in Ecuador. I mean, everything seems to be stalled. Do you see Latin America coming back in '17? Or is this going to be a longer-term endemic issue?

I think that places like Colombia, Argentina, and, to a more limited degree, Mexico, will have an awakening in '17, nothing extravagant, of course it depends on oil, et cetera. I think Brazil will take a bit longer. And I cannot speak for Venezuela because there are financing issues there. So it's an unknown.

And your next question comes from the line of Bill Herbert with Simmons.

Bernard, could you expand on the recovery path for Eastern Hemisphere margins by year-end? I mean, we're going effectively from breakeven to low double digits by year-end. Is that -- I mean, are those basically costs that have already been taken out of the system that didn't necessarily manifest themselves on the P&L in the second quarter and should begin to blossom in Q3 and Q4?

I think, when you look at the margin expansion we're planning to get, which I agree is a big number if we are to achieve our targets. You will see that about a large 1/3 of it is driven by simply the incorporation of the cost actions we took through the P&L. It's not so much that we acted later throughout the Eastern Hemisphere. It just takes longer simply because of regulations and culture in those places. So our assessment is we're pretty good on the cost metrics, on figuring out what will happen. Our assessment, again, is that it is take just about full effect in Q4 and most of the effect in Q3. So Q3 already benefit, Q4 in full on the cost side and then drives a large 1/3 of the margin improvements that we're hoping to see in dollar terms. The balance of 2/3, or small 2/3, is really nothing more but a measurement of the activity that we see as very, well not only likely, but planned for, we are increasing volume of activity in a number of Middle Eastern markets. It's not in a -- it's not a large number, but it's in a number of markets. We could measure what that means. We know the profitability of the contracts, and we can measure it. And if you add all of that, it provides us with the just a certain dollar margin for the fourth quarter, which, combined with the costs, brings us to somewhere between 10% to 11%, very specifically, operating income margins for MENAP, because Asia Pacific is combined with it. Asia will not change very much. A little bit of cost benefits, will not change very much. So it's all driven by MENAP, and so we see that will still allows us to say that we can see that particular part of our business being driven to double-digit results.

Okay. So to be clear, the double-digit aspiration is for MENAP and not necessarily Eastern Hemisphere?

No, it's for Eastern Hemisphere. I just covered the part of it that. Directly, it's seasonal in the case of Russia, which is very powerful, and then also cost cuts. I mean, cost cuts are seasonal. The European side doesn't move that much in terms of activities, just cost. So the one that was more granular was MENAP. Forgive me.

Okay. And the second line of inquiry here is, I think, Krishna referenced putting 2 fleets back to work in North America in July, and I just want to drill down a little bit on your frac fleet in North America. I think you have something along in the order of kind of 900,000 horsepower in North America. And first, how much of that is working? Second, what's the health of the fleet? And I'm just kind of wondering about how much of your idle capacity can go back to work in short order with a minimal amount of CapEx?

I'll cover some of the aspects and Krishna fill in the blanks. We have originally 23 spreads, and we would calibrate the spread at just about 50,000 horsepower a piece. It's a bit more than 900,000 horsepower in the U.S. However, we feel today we only have 20 that realistically. Out of the 20 spreads, it will be 1 million horsepower rather than the prime number. We have 10 which is hot-stacked -- 10 marketed and also hot-stacked and 10 which is cold-stacked. Of the 10 that are hot-stacked, we went all the way down for 5 operating as recently as Q2 and the 5 becomes 7. So if you will, 7 out of 10 are active, 7 actually under contract, and 3 which are ready to go, assuming we can find the crews. The other 10 cold-stacked are being minimally maintained. They're not just being -- they're not being dilapidated. They're not being sort of cannibalized and the rest of it. There is a CapEx involved for the other 10, which Krishna will cover.

Thanks, Bernard. So yes, first of all, to bring the 3 hot-stacked fleets back on there’s minimal, absolutely we're talking 3 weeks’ time to bring those fleets back to work with very, very minimal expenditure. The cold-stacked fleets will roughly take about $5 million to $7 million each with about a 4-week turnaround time to bring each fleet back. So we could work on all those fleets concurrently, of course. So really the CapEx needed, additional CapEx needed to bring the 10 cold-stacked fleet back to work is actually quite minimal for a company of our size. And we are very cognizant of the market, working closely with our customers, and we should be able to react quite quickly to any kind of upswing in the market.

To put it in a perspective, Bill, I think, on cold-stacked, which is half of our fleet, now the 10 out of the 20, about $150 a horsepower on average to bring them back to the market. They have been, again, minimally maintained. They have not been cannibalized.

And your next question comes from the line of Sean Meakim with JPMorgan.

So just looking to expand on that discussion on the pumping fleet. As you think about more -- the restart of the activity and the impact of pricing, I think you noted in the prepared remarks some tightening of labor, just curious, as you think about pricing progression, do you expect to see some concessions from your customers on pass-through costs first before you can get toward the net pricing? Just curious how that dynamic will play out as activity were to pick up.

So, Sean, you are absolutely right on that. It is a utilization story. In North America, the way the recovery unfolds, which you know very well, is you start getting more fleets back to work. The overall utilization of the U.S. fleet, not just our fleet but industry fleet, has to reach a certain threshold before we then start gradually renegotiating terms and conditions, which include pass-throughs, et cetera. That's how the pricing improvement starts manifesting. And eventually at some point, when the market picks up to a certain threshold, then you start having a little bit tightness in both in equipment and in labor in terms of shortage, and that's when you start getting a little bit more pricing power. But we don't envisage anything in our assumptions on pricing for the rest of this year.

Sean, also be careful that -- be careful, be mindful more so than careful that in the breadth of the product lines, lift completion, well construction and so forth, you’ve had absolutely also terrible pricing and you're probably a bit more likely to see pricing, I wouldn't say strong pricing, no, but some pricing move in the other products and service lines rather than pressure pumping. Pressure pumping will really be initially by our assessment, utilization gain, for quite some time, until you get to a level of utilization where it's more natural to get some pricing relief.

No, I think that's fair. And then just to circle back on the updated free cash flow guidance, there is some moving parts. I was just hoping you could give us a little bit more detail. Particularly I was thinking around the working capital, how you -- how that component is going to help you achieve those targets for the second half?

Right. So first of all, receivables, we should -- I have mentioned that NOCs are managing the cash flow actively. This is an industry thing. It's not a Weatherford thing. And we expect that to continue through the second half. We think NOCs worldwide are going to continue to manage their cash flow quite actively through the end of the year. So the DSO will stay where it is, but obviously, the collections in the second half will exceed that on a prorated basis what we saw in the second quarter. Inventory levels initially for the first, like I would say, 6 to 9 months starting now, will actually dip because there will be a step-up in activity. That's our assumption based on what we are seeing in the marketplace. So you'll see inventory levels dip a little bit before we need to start restocking. Restocking will start some time mid-next year. So in terms of working capital, we expect to see some inventory declines. We expect to see an increase -- marginal increase in receivable balances, and payables will go with the business. If business goes up, payables will increase as we go forward, allowing us to manage the receivables from a liquidity perspective. So it'll be a little bit of a mixed bag, I would say, kind of flattish working capital for the next 6 to 9 months and then gradual increase after that, as the business picks up to a new level.

And your next question comes from the line of Marshall Adkins with Raymond James.

I want to drill down on the -- your ability to respond in an upturn. I think, Krishna, you mentioned that the activity could -- would need to improve 2.5x before you need meaningful CapEx. First of all, did I hear that right? And how does that apply by product line and by geographic areas? Is North America going to be the same? For example, 2.5x where we are today is 1,100 rigs before you really need to spend any CapEx.

I'll give some element of comments, Marshall, and then Krishna will add. It's actually a little bit, even a bit more than that. The manufacturing capabilities can accommodate 3x more volume, not 2.5. The infrastructure, which is a bit of on artificial measurement, the roof line that we developed over the years is so wide and actually is. So it give up a much higher volume. It can also accommodate throughput of 3x the volume that we presently have easily. The 2.5x concerns the tools deployed in the field. Whether it's completion service tools, whether it's LWD kits to both ends of the spectrum, that's what Krishna was referring to. And all of these numbers are absolutely correct. We actually do not need to expand manufacturing or infrastructure period in the foreseeable future, because 3x the volume, even in the recovery, it's a lot. In terms of the service tools that I just mentioned and all the formation evaluation tools, as you can tell also, 2.5x is a vast number. In addition to which I will tell you, we are improving really by a large measure the intensity of usable tools, which if anything will tend to make the 2.5x the bigger number and/or last longer, if you will. As volumes come in, we'll still have that kind of ability to accommodate more business. So CapEx, we're not starving the business, not the business which is being deprived of anything. The reality is we have very long assets. So we can use assets. We are using assets. We've learned how to do that intelligently. And although CapEx as activity, obviously, will grow, you will be surprised by how modest it is. And it's not we’re suppressing our capabilities at all. It’s just that we spent much in past years and it has not been wasted. That's really all. Krishna, you want to add to?

Yes, I'd like to add just to give some context here as well. In the last 2 years or so, we have immensely strengthened the management of our product lines. People in the field -- the product line people in the field, they have asset-sharing objectives, and that culture change has happened nicely over the last 2 years. So today, they all carry a global CapEx objective by product line. Every product line has got utilization metrics which are now embedded. People understand them. And sharing of tools is one aspect of it. The other aspect of it is to localize repairs and maintenance. So we have opened up R&M centers locally in many geographies in the last 2 years. What this does is that when a tool goes down after using them in a job, it gets now maintained and repaired locally and it's redeployed immediately back in the field from where it came as opposed to the past when it would have to come back to Houston or go back to the U.K., it would take months and months of turnaround time, which means you had to have a huge number of backup tools in every country to cope with that R&M kind of facility that we had -- in a centralized facility that we had. Now having localized everything, we have much more confident in telling you that we don't need that many backup tools as before. This is part of the transformation of Weatherford, just the way we're managing our fleet, global fleet of tools, the way we're managing the deployment of tools, and the repair and maintenance of tools. So all of this goes into the kind of statistic that I was talking about, 2.5x.

We managed our costs down. We've talked a lot about it, because it's easy to measure people. What we don't talk much about is the quality of the people and the priorities they have, the operating guidelines they have, the culture change. We also don't talk as much either as to the work we done on and around the assets, understanding the asset base we have, understanding how to use it more efficiently. There's an enormous amounts of headroom in us doing that. But we've done all 3 at the same time. We just put the emphasis on just the raw numbers of people leaving and the cost measurement because it's just easier to get your hands around it. So really our ability to manage the upswing in terms of physical tools and CapEx is actually very, very strong, without meaningfully adding to CapEx and eroding our cash flow going forward.

And in closing, that doesn't have anything to do with the availability of capital. It has to do with returns. That was returns-driven initiative.

That was a surprisingly high number and that's a good color and helps me -- help me understanding how you get there. The other surprising thing that I heard was, I think, Krishna, you mentioned that you're already starting to see a little bit of a tightening in the labor side and maybe 6 weeks to re-staff a frac crew today. If activity is, let's say, 30%, 50% higher than today, how long do you think that’d take you to hire out and train a crew?

We are not alone in this. Our peers are also recruiting hand over fist right now or to start some few additional crews that they're putting out there. So I think, frankly, as an industry, the first, I would say -- there's no empirical verification of this, of course, but I would say the first 25%, 30%, 40% increased physical activity, it'll be fairly straightforward to recruit back some of the labor that have been laid off. After that, it'll get really tight. So when I would say up to 600 oil rigs, it should be fairly easy. After that, it gets tighter. So we'll reach a situation where we tell the customers we have the equipment but we have less people, we don't have people to run it. And that's what I was talking about in the prepared comments that the crunch will come on people first, then it'll come on equipment much later.

Marshall, at the end of the day, what he means is the elasticity, a response of North America on the oil side, meaning on the production, on the capacity side, is overstated for a simple reason that -- forget the reservoir issues and what are others zones we can go after, production is the one that we are after and blah, blah, blah, forget that. That's one issue. But the other issue is just the shareability for the industry to bounce back. Of course, it will. It will take much longer. It is not a normal depression we went through. It lasted much longer, much, much, much longer. It’s already twice as long as '09 and deeper, and there are consequences. And the consequences is measured with the elasticity of response.

And presumably, that's on pricing that was hyperbolic when you started to have running in those bottlenecks?

Yes, that's not what we want. I mean, as an industry, that's correct. We don't make the rules.

And your next question comes from the line of the Waqar Syed with Goldman Sachs.

Just quickly on the Zubair. I guess, last time around the $150 million of settlement, have you received proceeds for that? Or when do you expect them, if not already?

So we signed a settlement agreement with them, Waqar, and really they're following the settlement agreement to the letter. So we received $60 million in the second quarter, and offsetting that was operating expenses because we had operations, which have not finished, in the second quarter. But the rest of the money, most of it'll come in the third quarter, as negotiated and agreed. And that's part of our second half cash flow forecast.

And your next question comes from the line of Kurt Hallead with RBC.

So I just wanted to follow up on 2 things. First, focus on the cash flow dynamics you guys outlined, what do you expect for the full year cash flow generation. Just wondering how you guys are risk-assessing getting to that cash flow number in the context -- in that context and maybe what percentage of working capital is going to represent that cash flow.

So obviously there is a number of elements in our second half cash flow guidance, right? We see an improvement in earnings, as Bernard mentioned in his comments, right, with the growth both in North America and Eastern Hemisphere, excluding Latin America. Latin America has not yet grown. And there is also, of course, a working capital relief, both mainly from inventories, really, and some amount of receivables as well just flowing through from the Q2. And I think from a risk assessment standpoint, these are the main assumptions we have because the rest of it, the severance is going to go down because we've accelerated much of it into the second quarter. Interest payments actually will go down as well in cash terms because -- again, because of acceleration into second quarter. And the Zubair contract will be cash positive more so in the second half, much more so than in the first half. So when you aggregate all of the moving pieces, these are the things most of it should happen as planned. I think from a risk standpoint, commodity prices, activity levels, et cetera, those are the elements of it. But I'd like to mention that no matter what the numbers are, the implications are completely dampened now because from a liquidity and capital structure standpoint, as we mentioned earlier, and the covenant management, there is no issue at all.

So to summarize, Kurt, I mean, I’ll add a couple of things also if you wanted to get more comfort, which is that we always have a large operating bonus payment in Q2, every Q2 of every year. It's in the range of $18 million. It occurs in one quarter, in Q2. It isn't a routine, thus far, but it won't occur in Q3, Q4. So there you are. The other thing also as you take a look, for no particular reason out of the individual agreements, payables were taken down quite a lot in Q2 also. I mean, these are all obvious things you'll see, find. So I have mentioned also -- so that's one set of factors. And Krishna is right, it is not -- we are not a company which is -- have any issues of either liquidity or anything like that. We have now the kind of capital structure that we want, and we do feel that we can take the net debt number down to, if you analyze the numbers to $4 billion as a matter of 3 different events, which is free cash flow, and the sale of assets, which is rigs, and also in our minds we believe the conversion of the convertible into equity takes you down, just mechanically, very easily, to $4 billion, and from there on we’ll take it down further. It's all very clear. Do not assume, though -- because we believe that the measurement of free cash flow is not the critical or only measurement that matters at Weatherford anymore, don't presume that we don't have within the organization ingrained in everyone's metrics the importance of free cash. That won't change precisely because we intend to make generous free cash flow in the years ahead, not just in the second half of the year. This is perennial. So don't assume because we say this that we don't view free cash flow generation as critical when you run the company. This is actually the measurements of success long term of any company.

Okay, that's great. And then my follow-up is, so you mentioned breakeven in a couple of different context, one on operating income. I think that was related specifically to North America. And then Krishna, I think, your reference to breakeven was on an earnings per share basis. Can you guys clarify?

What I put forth is what we see internally, which is we see a path towards North America going from what was $100 million negative operating profit in Q2, which was better than Q1, to being breakeven. That's one. And we see that occurring in the first half of next year, Q1 or Q2. There are number of reasons for that. And of course, it depends also on oil being reasonable and so forth and so on. But a lot of it are things we control. This is one thing. What Krishna mentioned severances distinct is simply the fact that he doesn't see, and he's right, how we can predictively be able to make enough of a progress to be able to be breakeven this year. It's doesn't mean numbers will not get better. Everybody is saying they will get better. The question is, can we go from where we are $0.28 negative to a breakeven, which is, I think, urgently needed. We'll get there. We don't think we'll get there by Q4, unfortunately, but the numbers will be better. That's what Krishna was conveying. And I think, thank you very much. I think we have to close the Q&A session. We have -- there's a lot of calls today from our peers. And just to allow people to attend the other calls, we're just closing here. Thank you very much, everyone, for your time.

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