Welcome to the Smith International second quarter earnings conference call. Before I turn the call over to Mr. John Yearwood, Smith's Chief Executive Officer, the company would like to call your attention to the forward-looking disclosure included in today's press release. Certain comments made on today's call may be forward-looking in nature and are intended to constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These comments include, without limitation, statements regarding the company's outlook, financial projections, and business strategies and any other statements that are not historical facts. Please consult the company's annual report on Form 10-K for a discussion of additional risks and uncertainties that could impact the company's results. Mr. Yearwood, please proceed.

I will be talking today along with Margaret Dorman, our Executive Vice President and Chief Financial Officer, and Chris Rivers, President and CEO of M-I SWACO. This morning, I will start the conference call with some opening comments followed by Chris and then Margaret. I anticipate that we will speak for about 30 minutes and then we will have another half an hour for your questions. So that 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 in the call. Looking at the second quarter, I can say that it can be characterized as having two distinct and separate areas of focus. On the one hand, we spent a significant amount of time reducing our costs to match the [drilling] material slowdown in U.S. drilling activity combined with the seasonal break-up in Canada. On the other hand, and simultaneously, we continue to aggressively pursue our strategy of delivering top quartile drilling optimization solutions and commercializing performance-driven new technologies. I am very pleased with the performance of all of our segments, but in particular I have to highlight M-I SWACO and Oilfield. Despite the extreme operating conditions of lower volumes and aggressive competitive pricing, our management teams remained focused on the customer by looking for opportunities to lower overall costs through greater efficiencies, optimized solutions and fit for purpose technology. In addition, we strengthened our balance sheet through material reductions in working capital and have put in place an organization that will deliver significant value to our shareholders. Our cost reduction measures have primarily been focused in the U.S. and Canada and in the areas of headcount, supply chain and discretionary spend. Total annualized cost reductions to date are in the order…

Thank you, John. Good morning. I am going to discuss M-I SWACO's overall performance and then comment on our segments, the deep-water market and our premium products. Second quarter revenues for M-I SWACO were $1.13 billion, approximately 13% lower than the first quarter of 2009 and 21% lower than last year's second quarter. We were about 26% lower than our peak revenues of $1.364 billion in the third quarter of last year. Both major rig count industries declined from the first quarter, ours by 15% and Baker's by 25%. Obviously, the decline was primarily due to North American activity where the rig count fell by 34% according to our count and 38% according to Baker's. Offshore deep-water rigs fell by 2% and shelf rigs fell by 13%, so the overwhelming demand decline was on land. Total off shore revenues for M-I SWACO were $529 million for the second quarter. This is a decrease of nine% from the prior quarter. Off shore revenue was 52% of total revenue up from 50% in the first quarter. Seventy-eight percent of our revenues were outside North America, up 400 basis points due to the seasonal contraction in Canada and reduced land drilling in the U.S. Now I'll cover some geographic variations. North American revenues fell by 25% sequentially and six% from last year due to the previously mentioned land and shelf rig reductions. South American revenue fell by 20% sequentially and 7% from last year primarily due to lower revenues in Venezuela and Mexico where some high value critical wells were drilled in the first quarter offset by revenue gains in Brazil. Eastern hemisphere revenues declined 5% sequentially, mainly due to lower activity levels in Africa and Asia Pacific on shelf base rigs. Our revenue base outside North America contracted 8% on a sequential…

Thank you, Chris. Good morning, everyone. We appreciate your taking time to join us for the call today. Starting off, I think the results for the quarter are fairly straightforward. As outlined in this morning's release, we reported earnings of $24 million on revenues of $1.9 billion for the second quarter 2009. After adjusting for $13 million in severance costs, second quarter operating earnings totaled $0.15 per diluted share. Consolidated revenues fell 19% from the levels reported in the March quarter. Revenues for our oilfield related operations decline 17% sequentially, sustained by the high relative international and offshore exposure of the M-I business while the North American focus distribution operations experience a 28% revenue reduction. Operating profit fell sharply due to the substantial decline in North American business volumes driven by the lower U.S. natural gas recount and the seasonal breakup in Canada. Increased competitive pricing pressure in a number of the Smith Oilfield product lines also placed downward pressure on earnings. Considering the magnitude of the revenue loss, operating margins for our oilfield-related businesses held up reasonably well. After excluding the impact of charges reported in the June, as well as the March- quarter, sequential decremental margins for Smith's oilfield related operations were 34%. In the distribution operations we lost $0.16 of EBIT on every revenue dollar, reflecting volume reductions, softness in line pipe product pricing and higher inventory costs largely associated with LFIO inventory evaluation. The majority of the normalized EBIT and margin compression, reflected volume and to a lesser extent pricing reductions in the U.S. and the seasonal drilling downturn in Canada, which as most of you know is a higher margin product and service market. The U.S. was much more competitive from a pricing standpoint in the June quarter with pricing contributing roughly one third of…

(Operator Instructions). Our first question comes from Daniel Boyd – Goldman Sachs. Daniel Boyd – Goldman Sachs Thanks. Margaret, I'd like to focus on North American margins, what you said actually were in the positive this quarter, what are your expectations going forward given your cost reduction so far, your continuing to make cost reductions and then your comment that you think pricing is stabilized?

Yes, I think, Dan, that's an excellent question. I think that as we look forward we do feel like that we've realized most of the pricing impact in the North American market, so our expectation as we go forward is that you'll see those positive margins in that realm. Daniel Boyd – Goldman Sachs Can you help us with some type of magnitude? We've seen margins anywhere from 1% to 6.5% from some competitors in North America, are they in the middle of that range, higher end or lower end?

Yes, I think as you know we run the business from a product versus a geographic perspective, but based on the financial performance as you noted of some of our peers in North America we thought it was important to highlight our North American results. I would put those margins in the high single digits. Keep in mind we have one of the leading drill bit franchises which generates very good margins and returns, and this really helped contribute to the solid North American results this quarter.

And those were our oil field-related segments.

Yes, and I guess in a very similar way to follow up for Chris on SWACO, given that we should see a positive mix going forward in terms of more deepwater, you also said that you've taken the hit on much of the re-pricing already in the second quarter. Should we also see margin improvement in SWACO?

Well, I think we'll see it gradually as we go forward, yes.

Our next question comes from Robin Shoemaker – Citi.

Yes. Just continuing on that theme, Chris, you described the international tendering is very competitive. You went after some new business and I think won some of that. A lot of it was deepwater. So when you say that you're kind of roughly current 12% margins would not decline further from here based on the business that you booked here in the first half of '09.

That's my expectation. Yes.

My follow-up question then would be related to distribution. Is there a prospect or plan in place for that business to reach a breakeven level even if line pipe sales don't pick up or are we looking at negative operating income for a while in that arena?

Robin, unlike the oil field related activities where we have seen some stabilization of pricing and utilization in North America on the distribution side it is still fairly soft. There are actually a record number of tenders that our team are addressing in the June and July period as we speak. But it's still fairly soft, so I think our expectations are that probably it's going to continue in a fairly depressed mode for the time being.

Our next question comes from Dan Pickering – Tudor, Pickering, Holt & Co.

Good morning. John, could you give us an update generally on the progress of growing the W-H businesses out into the international marketplace. I know that's been a goal. Has the softer market slowed that down? Where do you stand relative to your initial game plan?

Dan, yes, it is our goal. It's a key part of our strategy, not only for Pathfinder, but as you know for our completion product lines as well where we have a fairly relatively low market share. In terms of the W-H, we are now in three new countries since in Q2 with our Pathfinder offerings and it's going fine. We had all of those countries we got on board through – we did a field trial in one of them. It performed exceptionally well. And in the other ones it's through performance. It's having the right focus of operationally strong people with the right technology offering for their particular application. So the Pathfinder's on track, and I'm very happy with what the team is doing. We have a strong group in Aberdeen that's really performing exceptionally in a tough North Sea market. But they're also supporting the future growth that you're going to see in the coming quarters in the Eastern hemisphere. With the other W-H companies, we are also – I haven't mentioned it. I'll mention it probably in the third quarter call. We will be probably in a couple of new countries with some of those services on the production side, and we're being a bit more, I'd say, cautious on that. We will go into the countries similar to Pathfinder, but in the case of cold tubing wire line, we'll go in where we can clearly see value added for our shareholders. They are countries that have a need for what we can offer. We're operationally extremely strong in both land, and in the case of cold tubing, in the deep water market in the Gulf of Mexico. So we are hand picking those countries that we go in. So overall, Dan, expect to see continued strong expansion of our Pathfinder business. And on the production services side, it'll be a little bit slower than the Pathfinder in terms international expansion, but the plan is to make it happen.

Okay. Is the net impact of that growth, John and Margaret, is that a net benefit to margins? I mean are there start up costs that make it a net drag to margins or is it essentially neutral?

Well, I would say that, of course, there are some. We've been investing the last six months in those countries by having people go there, transferring people in. We have the facilities already, but we've had people costs, and travel, and expenses and shipping costs of course. So we've been absorbing that as we go along. But our expectation is that once we are in country, like we are in these three new countries, and have X number of rigs, however many we get assigned in the next few months in addition to what we are on now, that we will have positive margins definitely going forward. You know the DDM, WDL, WB business, as you know well Dan, it generates very good margins and we have the tools and the assets and the people as we speak.

Absolutely. We'd expect that to be incremental to earnings.

Yes.

All right. I understand it's incremental to earnings but I just didn't know if it was help or a drag to margins this quarter. It sounds like it's like that.

Not with the margins and –

For Q2, of course, we have had some expenses. So you could say it was a drag to Q2 but going forward, it shouldn't be.

Right. And then my non-related follow-up would be just around the recovery in Canada. If we look outside the distribution business, how meaningful should the Canada bounce back be? I understand you're saying you think margins in North America generally have bottomed. Was Canada a pretty big chunk of your decline quarter-to-quarter from Q1 to Q2? And should it therefore help us bounce back in Q3?

Well I'll start and then Margaret can add anything on the margins. Overall we were quite very satisfied with the performance of Canada Q2 to Q1, typical margin decline in business decline. I was just in Canada week. I spent almost the entire week up there to get a very good feel for what's going on, and we've cut back our cost structure there, but we're very focused on certain plays that we believe will be active even in a depressed natural gas price, namely some other plays that are there. And we're working closer as an organization to bring our drilling optimization and completion products to the offering. So Canada won't have a boom year of course. We know that because of the gas pricing, and tax issues, and so forth, but I can tell you that I'm very impressed with our team there. I'm very impressed. I take off my hat to how CE Franklin and the Smith organization, M-I SWACO, handled the Q2 breakup. It was a tough, tough breakup. But they handled it. Margins are positive, and I think activity won't bounce back a tremendous amount, but we're well positioned to capture whatever does come back.

Our next question comes from Brad Handler – Credit Suisse.

Could you please a little bit more on, I guess, the M-I side to the issue of contract success? You highlight the $1.7 billion of incremental or incumbent renewal. And I guess maybe you could focus your comments a little on what we think we see in press releases a sense that you're saying you're growing in Brazil. How does that work with, based on what we think we've seen from not working for Petrobras as part of the normal frame agreement, maybe that's one example. And then if I could ask you also to comment on StatoilHydro and the renewal there. I'm sorry this is growing into a long question, but I guess what I'm trying to get at is you're sustaining your share; maybe you're growing it a little bit. Are there rigs and contracts that are being swapped around among the major fluids providers now and you just think you're gaining your more fair share of what is sort of open for you to win?

Okay. Well let me start with the StatoilHydro question first because obviously our competitor has announced something. I mean we share that work with them and the same renewal will occur, although that has not been completed yet. But that would be, if I could characterize that as a normal contract extension, so there's no difference there, if you like. With regard to the Brazilian market, there are several facets to that which I'm not going to go into in detail but there's obviously a Petrobras market and an IOC market that we participate very well in. But I think the bottom line is is what we see as quarter-to-quarter share differences due to activity fluctuations are fairly normal. I mean we don't announce our awards. People don't announce their losses either. But we do have the best intelligence in the market in my opinion, and we have every reason to believe that our share is steady if not slightly improved in the long term. I think we all recognize the values on contracts awards are vastly overstated. I mean, they rarely perform based on what they've asked you to bid on. And as the incumbent generally, I think we see a more real view, a more real future view of the market than some others. That being said though, I think that it's important for everyone to note that we run the business and focus on our returns. It's our remit to be the most profitable company in our segments. So we do on occasion walk away from work that's not profitable, and so if that answers your question, I hope it does.

Actually it does and I appreciate that you waded through mine to answer it, so that's very helpful. Just as I guess as a related follow-up, maybe Margaret, can you help us think about the proportion of operating income that is likely to be shared with your minority interest partners in the second half of the year? So the percentage was somewhat lower than we were looking for in this quarter, I know there are various facets that go in there, but can you help us at all recognizing this is quasi-guidance I suppose but can you help us at all with kind of what proportion, is it the 65% that we saw this quarter, is that a pretty good run rate for the second half?

I would think that that's probably a decent run rate for the second half of the business. But I think what you'll have to determine is which side of the business do you think you're going to see more growth? Is it M-I? Is it Smith Oilfield, is it CE Franklin? But I think with that said, that's probably a decent run rate to use for the second half of the year at this point.

Our next question comes from Jeff Kieburtz – Weeden & Company.

Good morning. It sounds like in the oil field and M-I businesses, both you feel as if the pricing effects have been fully impacted in the second quarter and that margins should stabilize to move somewhat higher in the second half of the year. Did I kind of get that all right?

Margins I would say yes, they're stabilized. How much higher in the second half, well it's volume drives a lot of that. And business mix depending on a particular activity in a country with a couple of deepwater rigs, it can have a big impact. But yes in principle I would say yes, we agree with what you said.

Okay and you are expecting I think as Chris went through, some meaningful increases in both the Gulf of Mexico and international deepwater markets as rigs arrive in the second half of the year. So that's at least some indicator of activity. I understand your reluctance to give guidance, but what are the scenarios in which you make less money per quarter in the second half than you made in the second quarter?

The natural gas price in the U.S. is still fairly depressed and storage is filling up. One scenario could be that if the natural gas price drops further or significantly below where it is today and drilling slows down in the unconventional place, which we really haven't seen too much of yet or not compared to the nonconventional. So we're cautious because to be honest, there are no – we don't see any reason for gas drilling to increase in North America over the rest of this year. There could be reasons for it to decrease.

Okay, so that's the primary downside scenario driver as you see it today.

Correct.

And then with that in mind, you've highlighted several times both the effort going in and the success coming out of the performance drilling initiatives that you've been pressing. Do you feel like the traction that you're getting in that business is and the scale of it is enough to, let's say, grow earnings if activity is otherwise flat or maybe hold earnings if activity does take a downtick?

Activity taking a downtick, volume always has a bigger impact over our results than anything else. So I don't want to talk about that one. But to be in activity flat scenario, yes definitely, there's tremendous customer uptake about our drilling optimization offering, tremendous. Our issue is being able to focus it in terms of where we get our best returns and also to be able to execute multiple, I'm talking lots of these projects simultaneously in different parts of the world. We're far away from that so far, but we are progressing. Now, we won't be giving releases for every success we have, we've had a number of others that we have not come out with, but we came out with this one today because it was so significant, being able to do the entire curve and horizontal lateral with one assembly. So our customer, Chesapeake Energy, we're very excited about that and we felt it was justified. But we will continue to in a flat market, yes, I believe we gained share in the second quarter because we're in these new countries, where in some of those countries rig count is actually flat or gone down, and I think as we execute more of these projects Jeff, that it will have an impact of course on our – a positive impact on our margins.

And what today is the principal bottleneck in or limiting factor in terms of expanding that business?

It's really having a process whereby we're able to do the pre-planning of the job and then monitor the job in almost – in real time to make sure that everything that we simulated is happening and taking those decisions as we go along in case something is not as we predicted. So we have a certain number of people. We were structured for a certain volume of activity and as we're ramping this up, it really is adding a few more experts in the right area and fine tuning the process of pre-planning, execution, post execution evaluation, learning from that and repeating the cycle. So its people and process improvements that we need to continue to add to what we have today.

Our next question comes from Mike Urban – Deutsche Bank Securities.

Thanks, good morning. Wanted to follow up a little bit on those last couple of questions internationally and rolling out the new product. Sounds like you've made a good bit of progress and had some nice success on the drilling side, taking maybe a little more cautious approach on the completion and production side. Are you seeing customers asking for more on that side or is there something in particular that you need and that you look to add and would that be an organic add or do you have to potentially acquire something to fill those holes?

Let me just correct something you said, you said more cautious on the completions and production. On completions, no, we're not being cautious at all. We're having very good buy-in on our completion products, whether it's our new liner hanger system or our new bridge plugs or our new quick flow testing assembly. So completions is full steam ahead and we're going to continue to be adding to that portfolio, both organically in-house as well as looking for nice acquisitions to add to our completions offering. In the case of production services, that's – and I'm talking a really wireline, cased-hole wireline and coiled tubing, we are being a little bit more cautious because those businesses, I'm very familiar with those businesses and they – to really create incremental or accretive margins in new countries, you have to come in with something that's a little bit – you have some differentiation with local providers. There are a number of competitors in those activity lines and we are making sure that when we go into a country, and as I said, we're looking at a couple as we speak, that we're offering something that local competitors do not have and where we can differentiate and then command higher margins for our services. The plan is not just to spread cased-hole wireline and coiled tubing units around the world and suffer decrementals. That's not the plan. It's a very competitive business line and we want to strategically enter markets where we can generate decent margins for our shareholders.

And you feel like you're developing those solutions in-house or is that something where you might have to look outside?

Combination, we believe for where we've targeted so far, we do have very nice synergistic offering between our completions and production lines. And we will – we're always looking to maybe add some acquisitions to that portfolio, yes, combination of both. Well I think we're – for a ten o'clock, almost ten o'clock, sorry 11 o'clock here in Houston, [Loraine], so if there are no more questions, I'd like to thank everyone of participating on the call and look forward to our future discussions. Thank you.

Thank you. And thank you ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may now disconnect.