Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, today's call is being recorded. I would now like to turn the conference over to Karen David-Green, Vice President of Investor Relations, Marketing and Communications. Ma'am, you may begin your conference.

Thank you, Carol. Good morning, and welcome to the Weatherford International Third Quarter Conference Call. With me on today's call, we have Mark McCollum, President and Chief Executive Officer; and Christoph Bausch, Executive Vice President and Chief Financial Officer. Today's call is being recorded, and a replay will be available on Weatherford's website for 10 days. Before we begin with our prepared statements, I'd like to remind our audience that some of today's comments may include forward-looking statements. These matters may involve risks and uncertainties that could cause our actual results to differ materially from our forward-looking statements. Please refer to our latest Form 10-K, 8-K and other SEC filings for risk factors and cautions regarding forward-looking statements. A reconciliation of GAAP to non-GAAP financial measures is included in our third quarter press release and accompanying presentation, which can be found on our website. Christoph will now provide an overview of our third quarter results, followed by Mark's comments on our strategy and progress of our transformation. Following these prepared statements, we welcome your questions. And now, I'd like to turn the call over to Christoph.

Thank you, Karen. Revenue in the third quarter of 2018 was $1.44 billion, essentially flat compared to the second quarter of 2018 and slightly lower than the $1.46 billion of revenue reported for the third quarter of 2017. Sequentially, seasonal improvements in Canada, activity increases in Continental Europe and deliveries of liner hangers delayed from the previous quarter were offset by lower activity levels in the United States and foreign exchange impacts in Latin America. On a year-over-year basis, higher revenues associated with integrated services projects in Latin America were offset by lower activity levels in Canada as crude oil differentials expanded, reducing demand for completions and production services and products. Results in Russia were also negatively impacted by adverse foreign exchange rate effects although activity levels remain broadly flat. Operating loss for the third quarter of 2018 was $13 million. Segment operating income in the third quarter of 2018 was $116 million, up $47 million or 68% sequentially and up $123 million year-over-year. The sequential improvement was mainly driven by seasonal activity increases in Canada and higher margins across all segments on reduced costs and improved efficiencies as a result of our transformation efforts. Significant year-over-year operating income improvements were due to improved operating efficiencies and reduced expenses as a result of our transformation. Higher revenues in Latin America produced solid incremental margins, which more than offset relatively weak results in Canada. Non-GAAP net loss for the third quarter of 2018, excluding unusual charges and credits, was $103 million or $0.10 diluted loss per share. This compares to a $156 million non-GAAP net loss in the second quarter of 2018 or $0.16 diluted loss per share, and a $221 million non-GAAP net loss for the third quarter of the prior year or $0.22 diluted loss per share. In the…

Thank you, Christoph, and good morning, everyone. I'm pleased with our third quarter results, especially the accelerating trajectory of our transformation path. Our transformation efforts have added approximately $150 million in incremental EBITDA compared to the 2017 baseline. This amount represents approximately 75% of the total EBITDA increase for the first 3 quarters of 2018 versus the first 3 quarters of 2017. Thousands across the organization have come together to drive our transformation forward. Because of their commitment, we're carrying out initiatives that will continue to deliver improved financial results and add long-term value for all of our stakeholders. I'll revisit these in a few minutes to give you our cumulative progress on the transformation initiatives and some details behind each work stream. Our progress this quarter has not come without some bumps in the road. Revenue was flat sequentially versus our expectation of mid-single-digit growth. Some of the variance was created by our own choices, such as when revenues were decreased when we started turning down unprofitable contracts. But we also experienced transitory supply chain issues and manufacturing inefficiencies that decreased top line results during the quarter. Adjusted free cash flow came in about $35 million below our goal of breakeven for the quarter. Although we fell short of our target, we've made significant improvements in this metric, both sequentially and on a year-over-year basis. Continued challenges converting working capital to cash are mostly to blame for the lower-than-expected cash flow results. Make no mistake, we are laser focused on these issues, and we have initiatives in place to keep us moving in the right direction. The transformation initiatives are not designed to solve small problems one time and then move on. In order for this massive integration program to be successful, each item, each process must be evaluated…

[Operator Instructions] Our first question comes from Jim Wicklund from Crédit Suisse.

Sorry you missed your goal on cash flow, but at least you were close. Mark, everybody has looked at the Middle East as nirvana for oilfield services, and everyone's been signing up lump-sum contracts and everything. Why was your service revenue lower in the Middle East? And is this something that is specific to Weatherford? And where do you see that going? Talk to us a little bit about Weatherford's operations, results and potential in the Middle East specifically, if you could.

Jim, it's Christoph. We'll split the answers, and Mark will cover the second half. But one of the main reason is drilling rigs has reduced. And that's several rigs came off contract to go through a normal recertification process, which will take a couple of months. So that's one part of the reduction. The other part of the reduction was a temporary reduction in one country related to some tools, which were not available during the quarter. And I think that explains a little bit the sequential, and Mark will talk a little bit about going forward.

Yes. Look, I think the outlook for the Middle East for Weatherford is very similar to our peers. I mean, we still look at it very constructively. As Christoph said, in the quarter, there were some transitory things that happened around rigs and availability of tools. But we have been, over the last couple of quarters, mobilizing into some very large wireline contracts. When we get the Magnus tool up and running, and we're about to run it through its paces on several wells there in the Middle East, we expect a big ramp-up. There is big demand from customers, a lot of interest in using that tool. And it should be very well-oriented to working in that particular region. We have been, like others, looking at participating tendering around the margins for some of the LSTK work that's been coming down. We haven't necessarily won any of those contracts. I mean, in part, given our financial constraints, we are having to be smarter about pricing than some of our peers have been. I mean, there's a lot of, obviously, enthusiasm about some of the activity levels, but that's coming at a price. And you've heard some discussions around that, and those contracts have been very, very aggressively bid. I think that's not necessarily a road that we're going to go down. We're going to be smart about what we do and how we tender. But that doesn't mean that there won't be opportunities around the margins, not just with additional contracts, but also working into some of those contracts. We've already seen that, in some cases, our peers don't have all the right tools for those contracts and the commitments. And so they're reaching out to us as a subcontractor. And hopefully, we can work into those contracts well and price them effectively.

Okay. Well, the technology development that you guys are coming up with are interesting because most people don't think of you guys, as Weatherford, as particularly leading in technology. And it's getting obvious that you do. You mentioned in the press release that you displaced an incumbent in Brazil a new tubular running contract, and that you've been awarded work on 14 deepwater rigs. I remember back when the deepwater rig count was huge and well construction was lucrative. You say you're seeing greenshoots that grew 2020 for deepwater. But 14 deepwater rigs, how many deepwater rigs are you working on in total around the world now? So we can get an idea of the increment that, that is.

Well, Jim, I don't know that I have the answer to that question. I mean, it's not as many surely as we would like to. But we continue to hold in and do fairly well. I mean, obviously, Weatherford's well construction technology, particularly around tubular running and managed pressure drilling, are considered sort of best-in-class. And we continue to work in that environment. We've got the new AutoTong technology we call VERO. That's been introduced and having a lot of customer interest in that technology. And so we're excited about it. It's just as we look forward, recognizing that the economics still aren't there, in our view, to justify significant increase in the deepwater rig count. We think that later on, in 2019, we're going to start seeing a wave of tendering activity getting ready for deeper spending in 2020. It seems to what customers continue to signal to us. And so we're trying to make sure that we're ready, continuing to introduce new technologies in this space to stay kind of at the front of the pack. And at the margin, being able to pick up contracts where we might have lost them as a result of some pricing moves on customers, but now they're coming back for quality and hopefully, fill in some of the gaps along the way.

That gives you an extended runway. I like that.

Our next question comes from James West from Evercore ISI.

Mark and Christoph, obviously, the cash conversion is key here. DSOs, DSIs, getting those down is key. I know you're talking about cash generation in the fourth quarter. Is that baked -- given what you're seeing in your -- with inventories, et cetera, is that kind of baked in now at this point? I mean, you're getting a lot better, you're getting closer to that. But having free cash flow, is that kind of a foregone conclusion for 4Q?

I'm not sure how you define foregone conclusion, but for us, that's our estimate, James. So maybe I'll go back a little bit. We, in Q2, we had a significant miss on working capital because of a lot of seasonal effects coming out of the Middle East. Those 2 partially have reversed in Q3, so we've called up some. We had a little bit more than normal delays in the Western Hemisphere, and that's due to some integrated projects, which have a different billing profile, and some effects in Canada, which had very low billing in the -- lower revenue in the second quarter, which means there is less collection in the third quarter. As we go in the fourth quarter, we will probably reduce our DSO, as I've talked about. So that will have a positive effect. We will further improve on our inventory. And I think I've prepared -- said that in my prepared remarks, based just upon the various action items we have already taken. And we will see a slight improvement on our accounts payable. So that will all help into Q4 and plus our forecasted EBITDA and CapEx levels and slightly lower cash for taxes and interest. Going into 2019 -- and I don't want to go too far out, but whatever you mean foregone conclusion, for us, this is imperative. Going into next year, we will generate positive cash flow, and there might be some seasonal differences in one or the other quarter. But for the entire year, we will generate positive cash flow in 2019.

Let me see if I can back up, James, for a second, if you'll indulge me, right, to give a little bit of color, commentary and remind folks what I've been saying. In order for us to be cash flow positive from EBITDA, we need to be generating nearly $1 billion, around $1 billion of EBITDA. That's because of our -- between the interest burden of nearly $600 million, CapEx, cash taxes, all those things sort of are roughly $1 billion of fixed outflows that we have to cover. And they are what they are. I mean, we'll delever at the margin, but they -- as the market improves, it's very difficult to bring CapEx down. Selling the rigs and getting that closed will help in that regard. But roughly $1 billion has been that number, that bogey that we're aiming for. We knew coming into the year, if we try to guide The Street, that we weren't going to necessarily get all the way there even though it will be a substantial increase over 2017, that we would probably still fall somewhat short in 2018 for generating breakeven cash flow. And the intent always was to get a couple of hundred million dollars out of working capital to fill the gap. And most of that had to come from inventories because that's where the real excess lies. I mean, our DSO statistics, I think, are the best of the peer group. Our payables are in line with others. And given where our credit is, I mean, you can't see that as a tremendous source, but clearly inventories. The thing that we've been having difficulty overcoming this year has been that working capital, particularly inventories, have been intransigent. It's just been difficult to get out. It has been sitting in…

Okay. Fair enough. And then Mark, on your 2019 outlook in the Middle East, you mentioned you'll see revenue growth maybe less than some others. But with the transformation, it seems to me just simple back of the envelope math that your EBITDA growth should outpace the rest of the -- at least your kind of large diversified peers. Is that a fair statement?

That's a very fair statement. Absolutely. Absolutely.

Our next question comes from Sean Meakim from JPMorgan.

So with the comments regarding the asset sales and not committing to further time lines, being patient for proper valuations, all that seems totally fair. But does that suggest that the work you've done so far and maybe the market for those assets hasn't been as robust as you'd thought? Or can you maybe help us understand the reasons for the shift in mentality here?

Sean, it's Christoph. It's essentially 2 points, right? The market's been actually good for our laboratories business. We had a lot of interest in that. To get to the very end took time. And one of the things is once you go out publicly and commit to something, that plays into negotiations. And we simply don't like that. So that's the reason why we want to take that time line off. As Mark pointed out and I mentioned as well, we will continue to work on the targets we had identified, but we don't commit to timing and amounts. We want to do that at our pace and to make sure that we really achieve the best outcome for our group. Now the M&A market, as you know, for certain businesses, it's not the best, particularly around North America for non-differentiated businesses, and so -- and there is many IPOs on the market as well who don't launch. So from that perspective, I think that needs to be taken into consideration. But for the various businesses we have, I think we're quite focused to get that done at our time.

Yes. I mean, bottom line, I mean look, our transparency and commitments around dates, actually, this is a buyer's market for M&A. And just bluntly, they've been used against us a little bit. At least we perceive that. And so we're taking that stick out of buyer's hands. We're going to do the right deal. We're going to do it for the right values given what these businesses do and perform. And we'll deliver when they -- when we get them done. So we're still working on same process. Internally, nothing's changed. The only thing that's changing is my laying out a specific time line commitment.

Got it. That's very helpful. Thank you for that additional detail. I don't think I heard anything about the $500 million of the onetime cash benefits that you identified. I think maybe we were trying to get to somewhere like 60% of that by the end of this year. Can you give us an update on that portion of the transformation?

Yes. That was what I was speaking to. I mean, the lion's share of the onetime cash benefit came out -- is coming out of working capital. Roughly $350 million, I believe, Christoph of the $500 million is working capital reductions. And that's been the bugaboo for us this year in terms of getting things out of inventories. In the other categories, such as some of the miscellaneous property sales, some of the excess land as we consolidate field camps or manufacturing, those are going right along just as the time line. And I think for the year, our total within the transformation, we will get a good portion of those completed. It's the working capital area that, for the year, I mean, as I've said, we were expecting to get several hundred million dollars out of working capital as a source of cash this year. And you can look through 3 quarters that we're not -- we're certainly short of that goal.

Our next question comes from Bill Herbert from Simmons.

I have 2 questions here for Christoph. Christoph, so with regard to your guidance for fourth quarter in terms of Q4 witnessing a similar sequential rate of improvement as in Q3, was that for operating cash flow or free cash flow?

Free cash flow.

Okay. So we're modestly free cash in Q4 then is ultimately what the conclusion is, correct?

Correct.

Okay. Great. Secondly, with regard to the expected cash inflows from the asset sales in Q4, what's that number?

We just said we're not going to go forward and put exactly the timing on that. So what we said that the majority of the ones we have announced will close before year-end and...

Well, that's what I'm talking about. I mean, so I'm not asking about the ones that are in purgatory due to the buyer's market. I'm asking with regards to the ones that you basically announced deals on, so I can get to, basically, a pro forma debt number.

Yes. And you know the number we announced for rigs, the $287.5 million. We'd announced labs at $205 million. Those, as we said, the majority will close for sure at year-end. There is a little bit of fees attached to that, and that will be the number.

Is there any tax leakage on those or no?

No.

Great. Last one for me, pro forma DD&A to reflect these assets at sales going forward.

We'll talk about that in the modeling later on, if you're okay with that. Because it depends a little bit on when the rest of the rigs will divest, right? And based on that, the DD&A will change obviously.

Okay. And sorry, one quick one for me. Pro forma capital spending on a quarterly basis, if you think about just conceptually 2019 with the sale of the capital-intensive land rig business or at least part of it, what does that go to?

Yes. You can think about on an adjusted revenue basis. So if you take the rigs business out, it's about 4%.

Our next question comes from Byron Pope from Tudor, Pickering, Holt.

Just one question for me. As I think about the Q4 revenue guidance of flattish sequentially, I'd like to think about the business units that drive those revenues. So any incremental color you could provide in terms of which of the 4 business units you expect to see the most seasonality offset by the product sales? Just trying to, again, think about the Q4 top line guidance in the context of the 4 business units.

Yes. Byron, there's a couple of points we guided towards in our prepared remarks. So we'll have -- Latin America will have a full quarter of inflationary effects. That is one element. So essentially, it's mainly Argentina with the lower vessel. Does not necessarily affect all the bottom line from that side, but there is a little bit inflation in costs as well. Other things, seasonality in Russia is the other part. Q3 was the highest quarter. Q4 usually drops off a little bit. And then on the U.S. side, as we said, with the exhaustion of E&P budget for this year and holidays coming up and some weather delays, there will be a little bit of reduction in the U.S. as far as we can see. That will be offset by some year-end product sales in the Eastern Hemisphere mainly as we've seen last year as well. So these are the pieces of the puzzle.

From a product line standpoint, right, those year-end product sales completions, there -- some of the transitory things that we talked about that should sort of slide in the fourth quarter will be in the production segment and possibly a little -- just maybe to a lesser extent but still there in the well construction, managed pressure drilling, have some things lined up. So those will benefit. And of course, on the completions side U.S., we may see a little bit of softness around cementation products and plugs, packers, things that are all lined up with some lower spending on the -- of the overall conventional completion side.

Our next question comes from Kurt Hallead from RBC.

I had a follow-up question for you on the free cash flow outlook going out into 2019. I appreciate the commentary that it's moving in the direction that you wanted to. I was wondering if you'd be willing to share kind of a target range on free cash flow on '19.

I think it's pretty simple, Kurt. It's breakeven. That's what we are going to -- Mark went through that we need $1 billion on EBITDA in order to be cash flow positive throughout the year. And I think that we'll head towards that. And we'll see with growth and revenue growth, that will eat a little bit of that. So we need to do actually slightly better than the $1 billion for next year.

Right. But that's the key difference between '18 and '19. Because next year and coming in and sort of shooting at that EBITDA, that breakeven EBITDA or better, it's not coming by having to sort of work the margins or working capital. Our expectation is it's coming from EBITDA. And we're going to -- we're internally working through the transformation to drive enough of that so that even possibly with investing a little bit back into working capital, for revenue growth purposes, we can still achieve that mark.

Okay. I appreciate that color. And then secondly, I think Christoph, you mentioned that the interest expense would be down on a sequential basis. Can you just give us a handle on what's driving that?

It's simply the maturities of the bond -- or sorry, the interest dates on the bonds there. We tried to flatten it out through the year, but it was not -- it's not perfect. Q4 is a little bit lower than Q3. Q1 is usually the highest on the interest side, and Q2 is the lowest. So it's simply, whenever the coupon are due.

Well, thank you all for joining us on today's call. I will now turn the line back over to the operator for closing comments.

Thank you. This does conclude today's conference, and you may now disconnect.