Good morning ladies and gentlemen. And welcome to the Smith International, Inc. Second 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 Mr. Doug Rock, Mr. Rock you may begin.

Yes, thank you Michele. Good morning, welcome to the Smith International second quarter 2008 investor conference call. I am Doug Rock, Chairman and CEO of Smith and speaking today are Don McKenzie, President and CEO M-I SWACO and Margaret Dorman, Senior Vice President, Chief Financial Officer of Smith. Don will be talking today from Calgary, where he is working on the fast recovering Canadian market. This morning Margaret, Don and I speak for about 30 minutes then we'll have another half hour for your questions. So everyone has a chance to ask questions, please ask no more than two questions at one time. If time permits you can re-queue and ask more questions later. Before we get started with our discussion concerning Smith's second quarter 2008. I want to point out that this conference call is not about our current exchange offer for W-H Energy Services which expires on Monday August 4, 2008 unless extended. Any questions regarding this offer should be directed to our Information Agent, Dan Birch of Mackenzie Partners Incorporated. His phone number is 1-800-322-2885. Additionally, we won't discuss W-H [ph] Energy Services second quarter operating results or any information related to their past quarter's activities. Now let's talk about Smith. The second quarter 2008 was a superior growth quarter for Smith. Revenues of $2.49 billion, were up 5.2% sequentially, and 18% year-on-year. The $123 million sequential quarterly revenue gain, was the highest first to second quarter revenue gain, in Smith's history. If we exclude the $88 million sequential quarterly revenue losses from Canada, due to the yearly breakup, worldwide non-Canadian revenues were up 10% in sequential quarters. Quarterly combined company wide Latin American Eastern Hemisphere revenues were up 22% year-on-year and 7% sequentially. The strongest growth was from Latin America, up 41% year-on-year and 8% sequentially.…

Thank you, Doug. Good morning, I am going to discuss M-I SWACO. First I will make some overall comments, address the deep water market and the individual business segments. Overall comments; the second quarter was a successful quarter for M-I SWACO. Revenues increased almost 5% sequentially to 1.2858 billion following are some of the highlights for the quarter. Despite a significant revenue reduction in Canada, North America revenues grew $1.2 million sequentially. The Lower 48 land and Gulf of Mexico markets recorded healthy revenue increases of 11% and 3% respectively. Eastern Hemisphere led by strong gains in Norway, Russia, South Africa accounted for about 80% of the total sequential revenue gain. Inflation deferred revenue which were exceptionally strong in number of markets increased $45 million or 39% sequentially. Our produced water treatment business Epcon recorded revenues of $16 million this marked the first quarter we have seen significant water treatment equipment sales into West Africa, Asia and markets outside the traditional North Sea base. Evidencing that we have market penetration with this key technology. Our offshore revenues for the quarter were $639 million and accounted for almost two-thirds of the increased revenue for the quarter. Deepwater revenues accounted for 75% of the offshore revenue increase. Now let's look at the deepwater. The average that we have raised operating in the US deepwater market declined 2.8 rigs or 7.5% in the second quarter. The rig count engaged in drilling and completion operations averaged 35.8 units. The decrease was due primarily to rig mobilizations to Brazil. Of the 36 rigs 62% were engaged in drilling operations while the rest were engaged in work over and completion. M-I SWACO serviced and average of 18 of the total as compared to 22 rigs in the first quarter and generated revenues of $83.7 million. This…

Thanks, Don. And good morning, we appreciate everyone taking time to joining us on the call today. We had a good quarter on a number of fronts. Our oilfield segment businesses continue to strengthen, and we are extremely pleased with the level of performance in the distribution operations, this quarter. The results are straight forward. Earnings were $0.91 a share on a diluted basis. This reflects year-over-year earnings growth of 20% and a sequential profitability improvement of 5%. As is typically the case in the second quarter, a seasonal down turn in Canadian activity level impacted second quarter revenues, margins, and profits. Excluding influence of our Canadian operations, oilfield earnings grew 9% above the March quarter, and our revenues improved 7%. From a revenue perspective, consolidated business volumes gained 18% over the year earlier period and 5% sequentially. Our consolidated North American revenue base increased 15% year-over-year and improved 4% over the March period, with the sequential increase, mostly influenced, by the strong performance of the U.S. distribution operations. Although, each of our oilfield operating units, continue to benefit from a higher number of land-based drilling programs in the U.S., all of the segment sequential net revenue improvement in over 80% of its year-on-year growth came out of the international markets. The key geographic contributors to the oilfield segment sequential revenue growth were first the Former Soviet Union in which we saw 14% higher sales volumes due to increased demands for drilling fluids, fluid processing equipment and to lesser extent projects utilizing our turbine motor drilling technology. Next the Latin American market mainly Mexico and Brazil where our revenues have grown 12% sequentially influenced by drilling fluids for onshore projects in both of these markets as well as exceptionally strong drill bit sales which have significantly out paced the underlying…

Thank you, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Kurt Hallead from Royal Banc of Canada. Please go ahead.

Hi good morning.

Yes, hi good morning.

Hey, Doug. I just want... heard a number of different things over the last week here coming into your earnings call. Most of you have been reflected of your positive commentary and question relates to the increased horizontal drilling that we are seeing in U.S. in the Shale Plays. What do you guess is the revenue intensity of these plays, vis-à-vis kind of standard drilling?

We think that the average horizontal wells that being drilled in a Shale play is in the $2.5 million to $3 million dollar range which is a little bit more than double what you have seen as non-horizontal prior to that. And that the main beneficiaries for that are the pressure pumping and the directional. That's why we see the directional business growing at about this year we think it's growing about 18% I think that's consistent with the spirit numbers year-over-year and could be in that range next year. And pressure pumping in some of these wells, right now is actually more than the rig costs. So I'd say those are primary beneficiaries.

And you referenced a comment in general about pricing, I may have missed part of that, I don't think you got as any specific product line and I think your referenced it, you expect to get some element of net pricing, did I understand that correctly?

I have not way that but we did mention that we thought that price increases will accelerate and we wouldn't need to wait the normal one year time frame as you have seen in the past because the demand for the product and for relative product performance.

All right. One of your peers highlighted a 10% to 15% price increase for North America, obviously that's on a growth basis not on net bases. Your other primary big at it was mentioned in increases as well for a bit specifically. Are we still talking kind of single digit type changes on growth basis or cost really ramping up to the point where we had to start talking about double digit increase?

But I can't talk about future prices and those numbers I wasn't aware of. But essentially on bits and things like that where there is not a high transportation component the costs aren't up, that might which I think we can get a much better margin spread. Because steel is a very small component of bits and it's mainly labor and the labor cost aren't up nearly that much. So we are only seeing really price increases as Margaret, mentioned on the transportation side on some of the oil related fluids. Even automobiles, I thing we got 5000 trucks and cars in the company. So we actually see about finding a quarter something like that just every dollar fuel goes up per gallon, so these are some areas we are working on. But in general if we get those kind of price increases they would be significant margin improvements because with cost relationship is much less than that.

Great, thank you.

Kurt, with your comment on this pricing I would tell you this. The bit operating management has a done a very good job of realizing the price increase that we put out earlier this year. And as, Doug, said, if and when we think the timing is right we would look at price increase does not just in bit but in other areas.

That's a great color. I appreciate it, thanks.

Yes. You are welcome

Our next question comes from Robin Shoemaker from Citigroup. Please go ahead.

Thanks, Doug. Wanted to ask you in some of your international markets particularly Latin America where you are seeing good revenue growth. Could you comment on to what extent these are coming from integrated projects, where you are partnered up with or what's the kind of the participation that you have in some of those projects?

The smaller amount is on integrated projects as we mentioned mention last year the 11 contracts we gotten in Mexico to the end last year and they are all started up by two of them more in integrated projects. So it's a important part but it's not huge. I think we've mentioned in the past but percentage of integrated projects for M-I SWACO's revenues were in the 5% range. Actually running a lit bit to less than that. So it's important buts it not huge number.

And how are positioned apart from Sunbridge [ph] with other major service company's that carrying out integrated projects?

Well the interesting part to ask is that sometimes service industry talks as though we are the one who put together the projects its really our customers the national oil companies, the integrated oil companies and many places that we have our products and services on other peoples integrated projects because of the customers, that's the environmental solutions we want, those are the bits we want, those are the down hole tools distributions. So if you made a list of all the innovative you'd find Smith having some services in some products on most if not all of them.

Okay, then just one final question if I may on the incremental margin in oilfield you decided transportation cost impacting this 16% year-on-year incremental margin. Anything else there that would or could you give us a sense of order of magnitude that how transportation or other costs might have impacted that number?

No Robin, I don't that are going to a lot of specifics on that but I think as I pointed out certainly transportation had an impact if you think about first quarter year-over-year also the incremental were in that 20% range. So year-over-year incremental in second quarter aren't that much lower than what we saw in the March period and I would tell you that the... downward pressure on the incremental came from transportation and to a lesser extent from the mix of business in project.

Yes, certainly we had very low utilization in Canada as, Don, might want to comments that's thus picking up significantly right now.

Yes, if you take a look at the Canadian market in Calgary today, we anticipate that the third quarter its going to be substantially better than the second and the fourth quarter I think its going to be a very-very good.

Great, thank you.

You're welcome.

Our next question comes from Dan Pickering from Tudor Pickering Holt. Please go ahead.

Good morning.

Good morning, Dan.

Margaret, I didn't hear in your remarks any discussion of either share repurchase or acquisitions, were there either during the quarter?

No. I mean, we consider ourselves to be in a registration period, so there were no.

Okay.

Share repurchases.

Okay. So we should not read anything into no share repurchases, other than its just problematic?

Absolutely not. We were advised, we couldn't enter into any share repurchases this quarter.

Yes. We've started the process, prior to the beginning of the quarter. As you'll notice in the scores. So there was really no time that we could.

Okay. And then on the distribution business, can you talk a little bit about the sustainability of that margin level. And how if any of... kind of that whole pipe business, steel inventory et cetera. Played into the recovery and margin?

Looking forward we see that business certainly expanding through the next two or three quarters. Its hard to say beyond that. I would hope it would go beyond that. But I think it's a general pick up in business. We've got a number of new contractual arrangements certainly with all the new gas wells being drilled you get an awful lot of new line pipe, I mean whether it's in the Haynesville or the Fayetteville or the Barnett. I guess from ourselves really I would start to pick up yet. And then you have see an awful lot of activity even up in the Bakken areas like that. So yes with the rigs coming in I noticed right now we've got almost 70 rigs running in the Bakken and trying to develop some networks for the performing of that oil. So it's yes we see it continuing.

Thank you.

You are welcome.

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

Hi, good morning.

Good morning, Chuck.

Good morning, Chuck.

If I got your numbers correctly I think you said that seven of the loader contracts have been awarded and you want four of them. Is it safe to say that the other 12 will likely be awarded this quarter?

No, we didn't mean to say that they been awarded the contract is actually with the operator and is using multi-year. So what we meant to convey is that of the 7 coming in we already have those contracts with the operators four of them. And I think what we are also saying is that we look at over the next couple of years certainly there are new contracts coming and going. But we will expect to have at least half of those rigs coming under M-I SWACO because of the relationship and longer term contract with the operator.

Okay. And were the others three awarded yet or?

Yes, I mean...

Okay.

Some of the operators have contracts with one of our competitors, that's correct.

Okay. And when we just think about that from a revenue standpoint going forward on a revenue per rig basis is it fairly similar to your current revenue per rig?

What, we'll say for deepwater is that with our mix of products we get some of them we have the environmental solutions. In the wellbore productivity. In the $3 million to $4 million per rig per quarter range is what we look at for our deepwater market.

Okay. Thank you very much.

You're welcome.

Our next question comes from Jeff Skybert from Weeden [ph]. Please go ahead.

Good morning.

Good morning.

Just wanted to come back on that question about Wilson and the margin performance I mean, how much of the both of revenue and the profitability improvement is upstream versus downstream?

I would tell you, Jeff, that its pretty mix. But we did have a very good quarter as I talked of that in my comments had a very big quarter in industrial and downstream areas of business. And also the line pipe which some of the special projects but the rest of it is sprinkled in the energy as well as the downstream had very good pricing and close room the line pipe is for us.

And on the industrial and downstream businesses. Are they trending in meaningfully way from the upstream resistance... if Wilson's exposure to those market kind of... your old same thing rising commodity prices all the others things we've been talking about?

I would say that Wilson is doing a better and better job of getting contracts and getting profitability. Certainly on the engineering and construction side. I mean the mainly the energy verticals. So these are energy related things that's certainly picking up with the investment. But on the general and industrial side I think they are just doing a better job getting some revenue, getting some more flow through and managing their cost well. So it's I think that's management performance issue.

And it sounded like you are pretty confident with the margin performance being sustained, if not improved upon?

Certainly the business is growing. Hopefully the margins, it will continue right with it.

Okay. And just as, each one of the three pieces of M-I SWACO is becoming,, fairly substantial. Are there meaningful margin differences between the fluids; the wellbore productivity and the environmental solutions?

Yes, what we'll just say is just give a general guidance, about 40% of M-I, now may be a little bit more, is not in fluids. Its in the environmental, its in the wellbore productivity and the rest. And those margins are higher than just the straight fluids. But on the other side, if you look at the very high end fluids, if you look at the Alfred Drill [ph], if you look at the work on those things. Those individual fluids may have higher margins of some of the products in wellbore productivity or in the environmental solutions. But in general, the 40 somewhat percent is non-fluids related on average as higher margins. One of the reasons that we are growing at such a strong rate.

Thanks very much.

Yes, you're welcome.

Our next question comes from Alan Laws from Merrill Lynch. Please go ahead.

Good morning.

Good morning Allan.

I have a couple of questions here on I am not going to ask the Wilson ones since you just talked about that. How strategic is Wilson do you given solid results now and good operational execution is there a potential divestiture here in the future or there is a candidate for that?

Well, as we have mentioned before is not just Wilson any of our businesses if there were an opportunity to sell or to combine joint venture whatever with someone else to the benefit of shareholders we'll do it and we probably look to as many opportunities with Wilson as anything else. But yes, the opportunity is still there.

So people are still getting approached on this and its still on an active part of your... I guess your M&A type discussions?

I wouldn't say they are active but there are certainly people that are interested I wouldn't say I have got any active numbers or anything of that nature.

Okay. Then a follow up to that would be another strategic kind of question. Can you comment on your expanding products and service line beyond W-H and you would party your strategy be to become more of a Shale player given the trends there?

Well certainly part of the reasoning for the directional side of W-H I mean that great coil tubing group. They have got a great group that's involved in case total logging superior renal tools, moulds and things like that. From the pathfinder side the big current issue really is the unconventional Shale plays but also the real opportunity to taking lot of those businesses where they complement Smith Services to take them internationally. So you got both sides of that clearly that's the where we are going.

We have seen that, of that mix, the only thing that's really not there in pressure pumping. Are you interested, you already have core turbine business, and sort of part of that or would that be something that you would be interested in. As if know there is a number of smaller players out there with build up capacity, and there may be targets that--

Well, all of our major competitors, clearly Becker Hughes operates without pressure pumping. So we need it as a product. We could contract that, so I wouldn't say at this point that it critical.

Okay. All right. And then the last thing was just a quick reminder kind of a question. I am just wondering you remind us of the magnitude of revenue potential in the M-I business from deepwater, say versus jack-up and land rigs?

Yes, again. We say that in the three to four million per rig per quarter kind of range for deepwater. So if we figure we have 50% market share, just take the rigs that are coming on and use that all of them, I think you get pretty close.

All right. Great, thank you.

You are welcome.

Our next question comes from Daken Shah from Icast. Please go ahead.

Hi I just had a question about the timing can you talk about the timing of the closer of the merger and also the HSR is set to expire on August 18th. So I was just curious to see if you are expecting second year re-class or non-issue with that and potentially early acceleration of the HSR?

Yes, as we said of the beginning any questions involving the that we would like you to report to our Information Agent which Dan Birch of Mackenzie Partners on his phone numbers 1-800-322-2885 as I mentioned earlier in the call the offer expire on the four. So we think it's coming up soon.

Okay.

Specifics that need to come through our information agent.

Okay. Just one follows up question. There has been some concern because of the Hurricanes Dolly and potential other hurricanes. That you may have... we may have can you talk about how the company has impacted for that matter of the emerging may be in fact firm from those hurricanes or extremes?

Merger would have nothing to do with the hurricanes. Typical revenue declines based on hurricanes in past years have been $15 million to $20 million we just had very minimal from, Dolly, you might even not see that. But a couple of more came through it could have effect I mean in that kind of range but its not that high. Particularly with the jack-up rigs being so low right now. The shelf gas drilling and actually the gas component from the Gulf actually falling down into the just about the mid teens. In term of the total U.S. gas. Its declining less, unless this part is an impact from hurricanes on Smith has raised the potential.

Great thank you.

You're welcome.

[Operator Instructions].

Well, there no further questions. I want to thank you for joining us and look forward to talking to you in the end of October for our third quarter results. Thanks for joining us.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.