Good morning, ladies and gentlemen and welcome to the Smith International Incorporated first quarter 2008 investor conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Doug Rock, Chairman and Chief Executive Officer. Mr. Rock, you may begin.

Yes, thank you, Rosa. Good morning and welcome to the Smith International first quarter 2008 investor conference call. I'm Doug Rock, Chairman and CEO of Smith and speaking today are Don McKenzie, who is President of M-I SWACO; and Margaret Dorman, our Senior Vice President and Chief Financial Officer of Smith. This morning Margaret, Don, and I will speak for about 30 minutes and then we'll have another half hour to answer your questions. So, that everyone has a chance to ask questions, please ask no more than two questions at one time. Time permits, you can re-queue and ask more later in the call. Now, let's talk about Smith's first quarter 2008 results. Again our primary growth came from outside North America. Combined Eastern Hemisphere and Latin America revenues were up 24% year-on-year, while North American revenues grew 4% over the same time frame. Overall, Smith's revenues of $2.37 billion grew 12.5% year-on-year and our Oilfield segment revenues which exclude Wilson distribution revenues grew 15.4% year-on-year. In sequential quarter, Smith revenues grew $74 million or 3.2%. In the first quarter of 2008, non-North American revenues were 61% of Oilfield segment revenues, up from 56% revenues a year ago. Non-US revenues were 66% of Oilfield segments sales for the first quarter 2008. Also for the first quarter 2008, Europe/Africa/CIS revenues were 32% of revenues for Smith, just 2% short of our US total, which means that Europe/Africa/CIS could soon become our largest operating area if US gas drilling doesn't accelerate further. EBIT margins grew both sequentially and year-on-year with Oilfield margins of 20.1%. We had a 60 basis point sequential quarter margin growth. The results of a highest Oilfield margin Smith has recorded since the early 1980s. Due to the geographic revenue mix, our tax rate was up 60 basis…

Thank you, Doug. Good morning. I am going to discuss M-I SWACO. First, I will make some overall comments, address the deepwater market, and then the individual business segments. First quarter revenues for M-I SWACO were $1.2284 billion approximately 3% higher than the fourth quarter of 2007 and 18.7% higher than the first quarter of 2007. The M-I SWACO global rig count increased to 152 rigs or 3.7% from the fourth quarter to average 4598 rigs. Compared to the first quarter of 2007, the rig count increased by 326 rigs or 7.6%, 285 on land and 41 offshore. Approximately 72% of the growth in land-based rig and 100% of the growth in offshore rig occurred outside North America. The total offshore revenues for M-I SWACO were $601 million for the first quarter. This is an increase of 4% from the prior quarter. The offshore count was up 12 rigs or 2.1% and average 580 rigs for the quarter. North American revenues grew by 5.2% versus a rig count increase of 5.2 and accounted for approximately 46% of a sequential growth from the fourth quarter of 2007, about 89% of the North American growth came from offshore. Compared to the first quarter of 2007, North American revenues were flat, while the rig count increased 3%. Latin American revenues increased to 5.9% in the sequential quarter and 60.6% compared to the first quarter of 2007. The rig count in this market was flat sequentially but 13% year-over-year, Venezuela, Columbia, Ecuador and Trinidad accounted for the bulk of this sequential growth, while Mexico was the primary driver of growth versus Q1 '07. The Eastern Hemisphere revenue grew 1.6% sequentially and 22.7% annually and accounted for approximately two-thirds of our total growth compared to the first quarter of 2007. The Eastern Hemisphere now accounts…

Thanks, Don. Good morning, everyone. We're pretty pleased with how the quarter unfolded and leave it more to good start to the year. I'll finish up our prepared comments this morning covering the quarter's financial details. Just to summarize, first quarter results were $175 million or $0.87 per share. Earnings grew 5% sequentially and 15% year-over-year after taking into consideration the $0.04 non-recurring tax gain recorded in the March '07 quarter. The year-over-year profitability improvement was driven by Smith Oilfield segment operations, which saw earnings expansion of 17%. Exceptionally strong non-North American growth supported by more than 40% growth in FSU business volumes. Higher activity levels in the Norwegian sector of the North Sea and more than 50% growth in Latin America influenced by the increased number of land-based drilling programs in Mexico, Brazil and Argentina contributed to the year-on-year earnings expansion. On a sequential quarter basis, the earnings improvement was put equally between the Oilfield and Distribution segment. Improved financial performance from the Distribution segment, which reported revenue growth of 8% with significant earnings growth over the fourth quarter's levels, had a favorable impact on Smith's bottom line. Oilfield business lines also reported revenue and earnings improvement over the December quarter, influenced by increased spending by operators in the deepwater Gulf of Mexico, the Caspian and the North Sea market. Higher demand for based fluids, waste management equipment, our new third generation Rhino Reamer tool accounted for just over 90% of the sequential Oilfield segment revenue growth. As usual, I'll briefly cover the Smith Technologies, Smith Services and the distribution unit. Smith Technologies had another outstanding quarter. Revenues were $275 million, 13% above the prior year period and 3% higher than the December quarter. The year-over-year improvement was supported by 15% growth in drill bit volumes and strong demand…

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Scott Gill from Simmons & Company. Please go ahead.

Yes, good morning.

Hi, Scott

Margaret, my first question for you is you are walking through the year-over-year revenue growth in bits and reamers, I thought I heard you say 15%. You also talked about higher prices. Yet technology is only registering revenue growth of up 12%. Can you kind of walk us through the difference in those numbers?

Yes, Scott, I think the number was 13%.

13?

Yes.

Yes. So essentially what we are saying is that the diamond bits and the bottom stuff grew faster than the cone bits because it averages out to 13 and those grew 15.

Okay. And Doug for you on Brazil we seem more than a handful of a new build deepwater rigs get contracted into that market. I was wondering if you could talk a little bit about your prospects for the drilling fluids business in Brazil and just kind of refresh our memory as to what your current market share is in that market?

Well, this is Don McKenzie. We enjoy a significant market share in Brazil at this point and time. I think it's around 50%, but don't hold me to that number. And the contract is up coming. We've got lot of new technology fluids down there and of course, we typically do a very, very well in deepwater. We are investing in infrastructure in order to participate not only in the Petrabras work but also the IOC work. And we've got the high percentage of the IOC work that's drilling in Brazil right now. So we are very bullish on Brazil for the rest of 2008 and actually over the next five year.

And I might add there Scott that even our services and bit groups have a number of locations there and we're strong throughout Smith International in Brazil.

Hey, Doug, if I could just follow this up real quickly, how would you rank Brazil in terms of growth market for Smith over the next three to five years, is it your top market or within the top three or four?

Top three or four. In the major markets, it would be the former Soviet Union, but looking out five to 10 years with the amount of work that will have to be done on two 2P Jupiter and Carioca, the new field. It will be the number one growth offshore market over the next 10 years, but those fields won't be producing for five plus years.

Okay. Thank you.

Thank you.

Our next question comes from Robin Shoemaker from Bear Stearns. Please go ahead.

Thank you. Doug, you didn't mention the earnings guidance, so I assume that the 370 to 380 you gave us at the beginning of the year is still your expectation?

I believe I mentioned early on that we weren't changing it.

Oh, you did. Okay, I'm sorry. I wanted to ask you then about your expectation of the rig count in North America perhaps increasing by a 100 rigs by the end of the year. Do you see that as kind of a stretch goal, in other words that the industry's capacity is such that that would be the kind of highest level of increase we could see? Or is that really kind of just a demand driven number?

Just demand driven I think.

Okay.

When you look at the neighbors the number of rigs that they have and some of the others, I think you could probably go north towards of a couple hundred rigs if gas shot up into that $11 plus range. But from where we are right now that's my best guess.

Okay. I think then you had a drill bit price increase in the… I think end of the 2007. Is there any other initiative that where you would you see pricing in the context of this market where we might see the rig count pick up by a 100 rigs or so either in bits or fluids?

Hey, Robin. This is Margaret. Yeah, as I noted in my comments we had initiated a new price list on bit in mid January and things that we pick up a reasonable amount of that prices, so I think we are pretty pleased on that front. As for other price increases, we typically don't talk about those before we announced some, but it seems to us that the pricing environment across the globe and across all of our product and service lines look pretty solid at this point.

And clearly the more rig count growth we get the more aggressive we can be on our pricing.

Right. Okay. So this bit price increase in early '08 was in addition to the one you had in late '07?

I think we are probably talking about one and the same, it was the mid January.

Yeah.

Pricing.

Okay.

I think we are talking about the same one.

Same one. All right. Okay. Thank you.

Thank you.

Our next question comes from the Jeff Tillery from Tudor Pickering. Please go ahead.

Hi, good morning.

Good morning.

I wanted to ask a question around Oilfield incremental margins and kind of your expectations as we get to the second half of the year. I mean seem like within M-I SWACO your margins on an incremental basis were probably hurt to a degree by SWACO being down, being flat, while insurance being down slightly and the premium influence business being a little bit slow as well. Do you think you can get incremental margins back to kind of mid to high 20% level as we exit the year?

Jeff, this is Margaret. We don't typically talk about incrementals on a business unit basis. But again, as I talked about our year-over-year Oilfield incrementals were in the low 20s. Those improved from what we saw in the fourth quarter. And as the business mix improves going forward my expectation would be that maybe those incrementals get better.

Our two highest margin product areas are Smith Services and Smith Technologies. And to the extent we see growth in North America I would certainly tend to push the incrementals higher.

Okay. And my follow-up question is just around Mexico. I know there was some start-up cost and the floods hurt a little bit in Q4. Do you feel like you got all that back in Q1, or do you think there is a little bit of benefit left to be seen going forward?

This is Don McKenzie again. We think that there is more benefit to be incurred. We are working with IPM in Mexico and as we work together to drill those wells faster, we're paid on a per meter basis, the margin should improve even more. So we're very optimistic about Mexico as we get into the second, third and fourth quarter of this year.

And my last question is for you, Don, just around petroleum price increases and how that's impacting M-I. Can you talk about your ability to either pass on those cost increases or how you deal with those?

Well, first of all, when you talk about based oil and what not, every contract that we have is an index mechanism where we can charge it. Unfortunately, some of the indexes are trailing three months, so as the price continues to go up there is a slight impact and we've calculated that. But if the price of oil stays relatively constant or even drops a little bit, it would have a marginal impact on margins.

Okay. Thank you very much.

Our next question comes from Michael LaMotte from JPMorgan. Please go ahead.

Thanks. Good morning.

Hi, Michael.

Margaret, congratulations on top CFO by the way.

Thank you, Michael. Thank you.

Sure. Doug, first question for you, if I think about the comment that you have been able to grow 10% to 15% faster than the rig count and given the revenue per rig numbers that you have talked about in the past for your deepwater businesses. As we go into '09, how much of an acceleration do you think we'll get in that 10% to 15% numbers, is it going to be 25% faster the rig count or more?

Well actually, the reality is, if we don't grow as much in North America we grow faster because a number of offshore rigs coming in, but if we grow faster in North America because the gas prices will actually moderate that growth, it will still be in that range but it won't be as high. So essentially, we'll be above that, if it's just primarily grow than offshore rigs. If the US come back it's lower than offshore rigs, but again total profitability goes up.

Okay. So the rate of change clearly North America, I mean even adding a 100 rigs from here is much, much slower than what offshore theoretically could be in '09?

That's correct, because the revenue per rig is so much less.

Okay.

The margins are higher because offshore we don't get, I mean total to the company offshore we certainly get the highest margins for M-I but we don't give the high amount of say bits, but we do get some of our Rhino Reamer's and other things from services but not quite as much as the margin improvement as M-I SWACO gets.

Okay. And Don if I missed it, I apologize production chemicals.

Yes.

In the quarter, what was that number?

I didn't give that number, but it was pretty significant. Do you have that Margaret?

Production chemicals, first quarter $90.4 million.

Okay. And then sorry last one certainly on the strategic side, how is the acquisition market look today?

I was, quite a few properties that we are looking at right now. We buy maybe out of every 10 or 11 we look at, so we can't guarantee that we'll close any but the deal flow is very strong. We had a quite broad book on that.

Anything I mean in the past when we've seen markets look like they were going to roll over say as they looked say from December through late January, early February, that tends to sort of send a panic those that we are on the fence line for selling tend to rush through the door as they have been. First of all did that happen or was that too quick and second of all, has the recovery and mood and sentiment particularly around North America and gas oriented businesses. Have you seen a change I guess in terms of buy out buyer?

We haven't found any kind of sellers but if you find some, then send them our way.

But maybe a better way to ask the question is how is the deal flow compare on a year-over-year basis?

I think probably as strong or little bit stronger. I'd characterize it that way.

Okay. And the mix international versus domestic?

Mainly what we are looking at is not non-North America because we are looking primarily at technologies. But I wouldn't tell you if something came through for North America at the right price that we certainly would that.

Okay. And last one for me. Can you provide some color and context around the JV in Russia?

The one with Integra?

Yes.

Essentially when Integra was formed and then become public, we had a company that represented Smith Technologies called Smith Eurasia and it was formed by a guy named Mark Sadykhov who was a former employee of ours, and we rolled that right into Integra and he also had some drilling stuff. So we actually did a little venture with Integra to start up a directional drilling, Smith drilling services in Western Siberia and then we have added to that to do some rental equipment and some other types. But it's not… we do business in Russia in many ways. We bought these couple companies with M-I, we do most of our business direct with the Russian production companies. We also work through companies Integra, it's such a large market and world market, it's just one of the multiple ways where we do business.

With the growth in re-entry in Western Siberia in particular now, is the Smith Eurasia the principal avenue to address that growth or as you say could become multiple?

It's one of the multiple avenues.

Okay, great. Thanks.

Thank you.

Our next question comes from Bill Sanchez from Howard Weil. Please go ahead.

Good morning.

Good morning.

Margaret, were you a little surprise at the drop in drill pipe sales either sequentially or on a year-over-year basis and if so, you talked about the 60 basis point margin expansion in Oilfield. Could you help us with maybe one or more how that margin perhaps would have looked had drill pipe sales been a little bit different than what the actuals came in at?

Yeah, the drill pipe didn't have a high percentage of that, maybe in the 10 basis point kind of range. But, yeah, we were surprised but then again we're not a large marketer of drill pipe. So it tends to pretty lumpy. So if we have one order that gets push out, we don't get it. Yeah, we're surprised by the size of it, but it also as I said looks like it's coming back somewhat in the next couple of quarters.

Okay. So it sounds like it's only about a 10 basis point adjustment if you will, it doesn't make any structural change to kind of your margin expectations as we go --?

Essentially you can look it like this. You assume your margins are quite a bit lower than our average margin and it's only a drop of $27 million or so as 1% of a revenue, you can work out pretty quickly that it comes out probably less than 10 basis points.

Sure.

I think I calculated around eight, but I'm not sure, Margaret does a better job than I do on that.

Yes. The bottom line is pretty insignificant impact, but the deposit was the fact that the drill pipe was replaced with the higher margin product service lines in the Smith Services operations.

All right. And that trend I guess margin is expected to continue here?

That's our expectations.

Thank you all.

Absolutely thanks.

You're welcome.

Our next question comes from Geoff Kieburtz from Citi. Please go ahead.

Thanks. Good morning.

Good morning, Geoff.

Good morning.

You may have said this, I kind of got behind on all to keep in track all the numbers. Overall, Smith Oil Services' revenue from the offshore market, what is that?

I think the comment I made Geoff was that if you look at the sequential top line growth of the Oilfield business that roughly 90% of that was came out of the offshore market.

Okay.

Yeah, 90%.

But you wanted to know what the total?

Yeah.

It's around half.

Around half. Okay. And as you look at your expectations for margin improvement over the next year, can you give us some sense of the relative importance of volume mix and pricing for Oilfield Services in aggregate?

I don't think we have breakdown but certainly there is a volume aspect and certainly with additional growth in North America and the offshore international, it would be a function of the type of business that we do. Those will be the two main drivers.

Okay. So mostly volume and mix pricing would be secondary to those too?

Well, I'd say the more, we get more pricing acceleration if we can get more rigs. If you look over the last five years, our margins were up some place around 850 basis point, so we are averaging 160, 170 basis points a year or something like that. But we've been as high as 310 basis points and as low as last -- last year about a 100. So I think as we get acceleration, pricing moves and it starts to put those multiples, those basis points on there.

Okay. I guess what I'm really trying to get a handle on is the outlook would seem to be for a more rapid growth in offshore rigs over the next year and a half, then we'll probably see in land rigs and I'm trying to get a better handle on how that might impact Smith if I kind of make it little broader, can you offer any comment sir?

Clearly it's to our advantage, but I can't give you an exact range. We think that margin should accelerate certainly going into the end of the second half when you see a pick up of offshore mix and certainly as you see more rig active in North America, just even coming out of the second quarter breakup. So everything does suggest margin improvement. I think you're looking for maybe a range which I can't give you that exact number because it's part of the total mix that we achieve.

All right. I guess improvement you've had, would you expecting it to improve at a faster pace?

Yes, with volume and with the proper reasons.

Okay. And would that...

We can't really do all your work for you though. You got to make some guesses.

Come on Doug, it'd be a lot easier if you would.

And also be risky, what do you think?

And would that differ a great deal between the three Oilfield segments?

Yeah. I think the incrementals are traditionally on the technologies than on the services are higher because of the fixed cost base plus the product offering in North America than M-I that doesn't have the fixed cost space. So typically in the past where we've had high-20s incremental margins on the Oilfield Service we've said that the technologies and the services are greater than M-I, so there is some differential there.

And would mix benefit M-I more than the technology and services?

Yes. The offshore helps particularly deep offshore helps M-I more than the other two.

Okay, great. Thank you.

You are welcome.

Our next question comes from Charles Minervino from Goldman Sachs. Please go ahead.

Hi, good morning.

Good morning.

I guess just touching on the previous series of questions a little bit more. Can you talk to us a little bit about beyond the fluids in the environmental business, which products that you offer, do you see benefiting the most as these new offshore rigs come on?

Well, I think you hit on the key, you certainly got the environmental. I think this whole area of wellbore productivity where we combine the tools with the completion fluid, this is a business that grown from nothing seven or eight years ago to over $0.5 billion. I think cleaning out the wells, getting them ready for production is huge. You can see the tremendous growth in the production chemicals as it moved from more of the North American market to a worldwide market. And when you get into the tools, just about all types of downhole tools, particularly the reamer types of tools that we've talked about specialty bits, I think everything we're focused on has an advantage of the deep offshore market.

Okay. And when you look at the margins, can you give us a sense of what margins are like for your offshore business versus your onshore business?

They are better.

Yeah. Typically they're better and in the case of M-I, you're selling a premium fluid, it's a much better.

Can you give us any sort of a quantification there, is there a couple 100 basis points? Is it substantially? Just trying to get a sense of as these new rigs come, understanding what that might mean for you on the margin side?

Shuffle [ph] what normally said is that we can see premium fluid margins that rival what we see on the bit side, now that doesn't help you much, but it's a significantly better margins than what we would see on our a low-end land application.

That is exactly correct.

Yeah.

Okay. Thank you very much.

And I think as Don tells you, if you look at the number rig days in the Gulf Coast, the amount of revenues we're doing on the revenue side about $4 million per deeper water rig per quarter. So I mean that's the revenues driver and the margins are higher.

Okay. Thank you.

(Operator Instructions)

No more questions, Rosa.

At this time, we have no further questions.

Thank you very much for joining us for our first quarter 2008 investor conference call. And we look forward to talk again for the second quarter in three months. Thank you.

Thank you, ladies and gentlemen. This concludes Smith International Incorporated first quarter 2008 investor conference. Thank you for participating. You may all disconnect.