Ladies and gentlemen, thank you for standing by, and welcome to the Weatherford International Second Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Sebastian Pellizzer, Senior Director, Investor Relations. Sir, you may begin.

Welcome everyone to the Weatherford International Second Quarter 2020 Conference Call. I'm joined today by Karl Blanchard, Interim CEO and COO; and Christian Garcia, Executive Vice President and CFO. First, Karl and Christian will share their prepared remarks, and then we will open it up for questions. I'd like to remind everyone that some of today's comments include forward-looking statements. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein. Please refer to our latest Securities and Exchange Commission filings for risk factors and cautions regarding forward-looking statements. Our comments today also include non-GAAP financial measures. And as noted in our press release, the company adopted fresh-start accounting in December 2019, and our comments today include a comparison of the results of our predecessor and successor companies. The underlying details and a reconciliation of GAAP to non-GAAP financial measures are included in our second quarter press release, which can be found on our website. With that, I'd like to turn the call over to Karl.

Thank you, Sebastian. Good morning and good afternoon, everyone. The second quarter has been unlike any other, even for a cyclical industry like ours that is used to regular change. The unprecedented reductions in customer spending due to supply-demand disruption of commodities and resulting price decline, along with constraints associated with the COVID-19 pandemic had a substantial impact on the industry, with significant declines in activity in both North America and international. But I am proud of how our [ One Weatherford ] team managed the many challenges faced during the quarter. Our team adapted quickly, executed well against our plans and increased our cost reduction efforts. Unlevered free cash flow exceeded $100 million in the quarter, a significant increase in both sequential and year-on-year. We also won important new work from our customers and continued to leverage our product and service portfolio. Notably, I am pleased to announce a new $500 million financing agreement, which, subject to closing conditions, will strengthen the company's liquidity as it continues to support customers during this challenging environment. Christian will cover this in his remarks. Most importantly, however, we continue to meet the needs of our customers with little to no disruption to their operations, while also maintaining our commitment to the health and safety of our employees. This required a number of changes to how we work, whether from home or from remote locations in the field, the Weatherford team's discipline, ingenuity and determination were energizing. We were able to execute remote operations amidst global travel restrictions with relative ease as we have embedded digital capabilities throughout the organization and across our portfolio. Let me give you a few examples. In both Asia and Russia, our liner hanger team created remote installation protocols that trained, enabled and guided the operator's representatives through…

Thank you, Christian. As we bring the call to a close today, I want to leave you with these takeaways. We are executing on our plan to preserve margin and maximize liquidity, and we will take additional actions as necessary. We have a strong, diverse portfolio that's well positioned to leverage our solutions-based approach to meet our customers' objectives. And Weatherford is well positioned to meet the challenges the industry is facing. Thank you, again. Stay safe and be well. Operator, let's go ahead and open up for questions.

[Operator Instructions] Today first question comes from Marc Bianchi with Cowen.

I guess, first question has to do with the outlook here for the market. It looks like your revenue progression that you're talking about is pretty similar to what most are saying in terms of how the market is trending. But Weatherford is -- has this big cost reduction program and you're closing facilities around the world, which I would think would result in a loss of market share. Can you kind of talk through how you are able to perform kind of in line with what the market is doing yet closing facilities?

Yes. This is Karl. Christian may want to chime in here. But look, we feel very good about our position with our clients and the business that we have. And I will just tell you that we do not -- we -- I know that historically, the company has been perceived as losing share after the decline of 2014 and '15. But having said that, we feel very good about how we're positioned, our footprint. Where we're closing facilities is where there isn't work. And so as we look forward, we feel very comfortable that we've held share and in fact, in some cases, have been gaining share in certain product lines over the last few quarters. And so we're not concerned about losing share. We feel like we're making strategic cuts in locations that fit with where the activity will not occur going forward, and it is not projected to be an impact to market share. Christian Garcia;Executive Vice President and CFO: Yes. So the only thing I would like to add, Marc, is that if you look at our peers that reported in the quarter, certainly, our total revenues are in line with them, in fact, better for 1 particular peer that we compare ourselves in. So that's one point. The second point is if you look at it by region, we did very well in North America and Eastern Hemisphere. The exception is Latin America, and we've pointed out that it is because of our exposure in Argentina, which had been the largest country that the company has. So except for those 2 -- for the Latin America -- for our Argentina exposure, we're pretty much in line with the peers. The other point that I'd like to make is, as Karl mentioned, are -- there are some product lines that we're actually gaining share. One particular one is the tubular running services. Now that our peer -- that one of our competitors have reported, we have shown that we not only are leading, continue to lead in that product line, but we are actually expanding our lead. So I think we're not that worried about a loss of market share during this time.

Yes. Okay. In terms of the outlook for cash generation, so $108 million of unlevered free cash in the second quarter. It looks like there was $130 million working capital release and the outlook doesn't really contemplate a lot of working capital benefit. So if I exclude that working capital release, it would appear you were consuming some cash in the second quarter. Revenue trending lower, albeit with tempered decrementals because of the cost-saving program. But if I just sort of put all that together, it would seem like you'd have negative unlevered free cash in the back half of the year. Am I right about that? And are there other levers that you've got where you can get that back into positive territory here? Christian Garcia;Executive Vice President and CFO: Right. So we expect to be positive unlevered free cash flow in the second half of the year. So let me just walk you through how we think about the unwinding of the -- benefit of the unwinding of the working capital. So as you've mentioned, we saw $130 million of benefit from the unwinding of working capital in the second quarter. Of that amount, approximately $275 million came from receivables, a very small contribution from inventory, and the rest is negative outflow from payables. Now going forward in the second half, as revenues flatten out and the potential delays in customer payments, we expect that any contribution from receivables will be offset by lower payables and that the net working capital will be from inventory. At this point, we expect that the opportunity in inventory for the second half is maybe about $100 million. So which -- that $100 million is more weighted towards the fourth quarter. So we continue to believe that there is some benefit from working capital that we expect in the second half. So I hope that helps.

That's helpful. I just have 1 more as it relates to kind of the new capital structure here. And unlevered free cash flow does exclude interest expense, but it is a cash cost. So when we do think about that interest expense, you will be consuming quite a bit of cash here. What level of revenue do you think the company needs to be at, given the capital structure going forward, assuming the deal is closed, to be comfortably generating free cash flow, including all obligations that you have?

Yes. So let me just -- clearly, that's just a projection that we're not willing to provide but what this capital raise does is 2 things. One is that it replaces the ABL credit facility, and eliminates the risk of noncompliance, which is a big issue for the company. The second is that it provides a liquidity runway for the company to meet its obligations and continue to address the challenges of this market. So with that, we believe that we actually believe that this is a good transaction for the company.

And our next question comes from James West with Evercore.

Karl, with the -- you've had some pretty significant changes in parts of the management team and the Board here in recent months. Has there really been any change, though, to the strategic goals of the company?

James, a good question. Actually, that's a point that we have been very clear with our clients and with our employees that our strategic direction has not changed. We feel like we have set the company on the right strategic path and how we take our products and services to market and create value for the customer. And so that has been -- and that was reaffirmed by the Board after some of the changes that occurred in the quarter that we aren't changing strategy. We are just probably intensifying our focus and intensifying our cost management as we go into this market environment.

Okay. Got it. And then you talked a bit about digital in your prepared remarks. Do you have a baseline that we could talk to or think about as a percentage of maybe sales or the business is digital now? And what the goals are for digital going forward? You've had some pretty impressive -- quite frankly, very impressive digital wins this quarter. I'm just curious if we can find a starting point to figure out how that could flow out in the future.

Yes. James, I don't know how to easily quantify that. But a couple of data points. I mean if you look at -- when we exited 2019, for example, our production automation ForeSite architecture was deployed on about 50,000 wells. And quite frankly, that's on the back of our CygNet SCADA system that's deployed over several hundred thousand wells. But from the end of 2019, we've now more than doubled the number of wells that, that system are deployed on. On the other fronts, and I mentioned in my prepared remarks more around digital capability in some of our drilling services like tubular running services, I guess the way I would describe it, James, we're -- what we're doing is just designing and implementing that capability into our existing portfolio. And so as I mentioned, Vero is a great example of that. That didn't exist 2 years ago, right? So that was from no digital capability to today, that's a substantial portion of our capability, particularly offshore, where the value is highest. Again, not been able to provide a real clear benchmark. But rest assured, that concept goes across all of our product lines. And a lot of the remote capability that we talked about is actually delivered through our AccuView, which is a form of remote operations capability that we can apply to liner hangers, whipstocks, et cetera.

[Operator Instructions] Today's next question comes from Connor Lynagh with Morgan Stanley.

I appreciate you want to be a little guarded in some of this information for competitive reasons. But I was wondering if you could just couch for us the countries that you've exited? I mean how significant if we were looking at, say, your 2017, 2018, 2019 revenues, were those regions relative to your overall revenue or EBITDA? Basically, how should we think about how much you've scaled down relative to the prior cycle?

So I'll take a shot at that. Christian may want to add. But I don't think -- to be honest with you, a lot of the locations that we've exited probably aren't as significant on the revenue side. It's just that residual infrastructure as those countries' market activity change that created negative costs that were impacting our margins. And so the way I look at it is it's more of a cost cleanup than it is retracting our revenue on the top line. And really just good business management, making decisions that those markets have fundamentally altered in the course of the market progression, we chose to go ahead and exit and clean it up on the cost side. Christian Garcia;Executive Vice President and CFO: The other thing that we'd -- I'd like to point out is that the reduction in revenue, some of that obviously is activity related, but others are due to the divestitures that the company has entered into. They -- we -- as you know, we got out of labs, we got out of rigs and so forth that actually reduced the top line, but really not very much impactful on the bottom line. The second point is that we are not really -- as Karl mentioned, may not be exiting, but we are changing our go-to-market strategy for some of those countries where, instead of having a full-blown offering with both product and services, we are thinking about how to make sure that we get the returns from the investments that we're making for those countries. So again, those are the -- I think, the drivers for the reduction of revenue activity related, the divestitures and some changes to the way we go to market.

Understood. That's helpful. Maybe sort of the same question but on the product line side of things. I mean it seems a lot of your competitors are looking pretty closely at their portfolios and deciding what they want to be in for this coming cycle and what they don't. Are there any major areas that you think need strengthening or need you to scale back further? How do you feel about the portfolio now that we have at least some concept of what the bottom of the cycle looks like?

Yes. I think, Connor, we -- generally speaking, I think we are comfortable with the portfolio. There had been, as Christian pointed out, we had made a strategic review back in 2017, and that led and drove us to a number of divestitures prior to this year. What I will tell you is that I might say what we're doing is being more laser-focused on -- within the product lines that we have, making sure that the business that we accept and take is profitable. And so we may be trimming the edges of our services and what business we accept or take to improve profitability. But we're not fundamentally looking at major shifts in the portfolio offering that we have by product or service line. Christian Garcia;Executive Vice President and CFO: Right. And yes, the only other thing that I would add to what Karl said is that if you look at it on a regional basis, we have very, very good EBITDA margins internationally. And the question that we always have and everybody's asking is, how do we create an offering in the United States that would provide good returns for the investment that we're making for the country, right? So that is not a Weatherford issue. Clearly, that's an industry issue. And much like our peers, we're trying to decide on how to approach that -- this market.

And ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect your lines.