Weatherford International plc (WFRD) Earnings Call Transcript & Summary

Good morning. So Weatherford is a well-known name in our energy services sector, but it's a very different company than it was the prior cycle. Weatherford has undergone a remarkable turnaround over the past few years, much of which is going to be attributed to Mr. Girish Saligram, CEO of Weatherford, position he held since October of 2020. Before joining Weatherford, Girish served as Exterran COO and previously spent 20 years with GE in various position. Girish thank you very much for joining us today.

Thanks so much for having us and pleasure to be here.

So let's just start with this -- Weatherford has undergone a pretty dramatic transformation as the past 5 years. Okay. I've got a number of investors who haven't seen your company may not even recognize it right now. Can you just bring people up to speed in terms of kind of what have been the key elements to the turnaround? What have been the critical decisions and the critical changes?

Sure. Look, I think it's really 5 major things that we focused on. Most important being the leadership team for the company. So within my first 90 days, as I evaluated the organization, the team, we pretty much made a decision to change out the entire executive team. And over time, that has evolved a little bit more as we have gone through different phases. But putting in place a leadership team that has enormously deep expertise, the domain knowledge, but coupled with a sense of very, very operating focused leadership. So I kind of joke that every CEO will tell you they want leaders who are hands on to roll up their sleeves, I don't. I want people who roll up their pants and wait into the muck. So that's the kind of leader that I look for. So putting that leadership team in place. The second piece has been being very simplistic, but having a not star that everyone can focus on. And for us, that's really been cash generation. So we've put that out as our [ north star ] make sure that we've gotten the entire organization aligned around that. So it means different things to everybody, simplifying that, breaking that down. I think, look, that's what the company is about. The third is creating an operating cadence and incentives that align -- that help that alignment, that creates, that sense of rigor a sense of perspective, but also create transparency and create focus. So that's been the third thing. So those are the three cultural elements. The other 2 focuses around the portfolio strategy. What we really decided is kind of call it my confusion view of, "if you can't have what you want, you want what you have." And so we had a portfolio that wasn't perfect but we said like, let's focus it on the intersection of every product line in every country and that's what we started doing. So we took the approach. There's nothing strategic about losing money. So this dramatic notion that you're going to have these product lines that lose money in the country so they can pull others doesn't work. Everyone's got to stand on their own 2-feet. So we drove that, let it through and drove innovation through the portfolio that now resulted in something that is an extremely differentiated portfolio. And the last piece has been the capital structure that we have started with taking sledgehammer and now we continue to chip away at that, which has given us enormously higher degrees of freedom.

But as you kind of broke apart the company and really dug into it, what were some of the kind of the surprises, either positive or negative, as you were going through, this maybe the product line or your regional presence there, what kind of...

So I think a couple of things. On the positive side, I have been amazed and just enormously grateful for the passion that our teams have around the world, for our customers, for the brand. It is incredible, especially given everything that Weatherford went through. I found myself asking people, why do you stay, what happened here, but it is just incredible to see that passion come through. I've also been incredibly heartened by the customer support that we got. I walked into the job I met all of our key customers in the first month. This was during the pandemic. So it was all on Zoom, et cetera. And I expect it to get behaved about the challenges and stuff. I was amazed because they all to a [ T ] said, look, we want you to succeed, we want you because you provide a critical set of technologies for us. So how do we help and we are rooting for you. So I think that was incredibly positive. And then lastly would be, we found some really interesting things in our portfolio. Weatherford has incredible technology. Our challenge historically has been commercializing it and really making it well known. And one of my favorite example is our multiphase flow meter. This is the industry's only nonnuclear source flow meter. So this is something that is now selling really well. We've got a lot of traction in the marketplace. We've put a very strong strategy around the commercialization of this and the adoption is very strong. So I think that's been positive. The challenge in part every day has been an interesting experience, but I think it's a lack of infrastructure that probably surprised me the most. For a company that speak was $15 billion in revenue, 85,000 people, just the plumbing, the wiring around the company the systems, the processes around that. Everyone talks about Weatherford has never really integrated, et cetera. And -- but the sheer degree of that has been something that's taken a while to get our heads around.

So is that a legacy of all the acquisitions that happened last cycle that it just kind of added on a product line, product line, product line, but nothing around it? And that's kind of one of the reasons why Weatherford is kind of struggled?

That is the big reason and again lack of that operating cadence through the company, right? Again, one of the things I talk about is Weatherford was never really designed to be what it is today. not quite sure what it was designed for. It just sort of grew into something over time. And so that's what we're doing now, though is fixing that infrastructure. It's kind of like moving into a house you're living there and then you're in the middle of all of it, switching out your plumbing and your electrical system and oh, by the way, I think reground the foundation a little bit. But you're continuing to live and you're doing fairly well.

Not necessarily the best place to live at the time. Sure. If -- going back to what you just said about the technology and the commercialization. So why wasn't the technology commercialize -- what's the kind of the -- what sort of roadblock or speed bump to getting technology commit?

I think part of it, look, a lot of it just had to do with the way the company evolved again, that lack of integration, the silos that existed, the incentive systems that really didn't align it was sort of every person for themselves under every function, et cetera. And then on top of that, you look back at the recent past, right, the last 10 years, the company strategy was get to tomorrow. That was it. It was all about survival. So at that point in time, there wasn't a whole lot of focus on, hey, how do we go create something for the future. how do we go invest in something and build out a platform. So that was the reason for a lot of it. But again, look, we are benefiting from that today.

The Middle East is one of -- I've consider one of your crown jewels, kind of one of the legacies -- one of the positive legacy that left over you have this footprint, which is pretty unique and not a lot of other companies have it. Can you help investors understand kind of Saudi, if I'm thinking just maybe specifically set just to carve 1 area out. What are the kind of the product lines in the areas where -- what's the Weatherford sweet spot? What are you guys -- where do you -- where is your greatest success live, which probably -- versus kind of some of your larger competitors over there?

Yes. So the Middle East is really where we have our most comprehensive portfolio. We have pretty much every product line in the company that we offer. And the way I describe the portfolio there is we have a full range of services that enables us to go toe-to-toe with everybody else in the space. And ultimately allows us to offer fully integrated contracts like we have in Oman and Saudi, for example, provide that. But we're able to complement that with highly differentiated specialty services. So things like MPD, TRS, intervention, et cetera, that not only are extremely profitable and accretive to the company, but then they also serve as an enabler for bringing other things to bear. So that's really what we have. Having said that, as important as the Middle East is as big as it is, and we really are excited about that region. We think it will spearhead the growth for the next several years. We actually think we still have room to grow. We still think we are underrepresented, especially in a place like Saudi. I've talked about previously, both gas and offshore are opportunities for us in Saudi to make a bigger impact. And so we think we've still got a fair amount of headroom to grow it and get some more share.

So in other words, your product line for what you're doing, you're not getting to commence your revenue there...

Yes. So look, it's a variety of reasons. Some of it is just, again, that lack of focus over the past several years. Some of it is we've got some technology gaps in other areas, we've pulled back from certain things. So as we rectify those step by step, I think it will give us a little bit more growth than maybe hopefully the market.

So I know you have a number of integrated projects, a number of LSTK projects in Middle East. But I think the majority of your work is on discrete contracts?

Yes.

Can you just talk a little bit about the pricing trends and kind of maybe where pricing is, I don't know, if you want to call it any specific product lines. But just kind of curious where pricing is today, say, versus where it was 2 years ago. And where do you see that? Is it flattening out, is it continue to move higher?

Yes. So pricing is certainly better, especially, look, '22 and '23, I think were really good years from a pricing standpoint. We talked about in 23, about 20% of our top line growth came from price. So a very significant chunk of it. And it was really driven by a variety of factors, a tightness of supply, especially on differentiated products and services. But there was also a significant element of just catching up and demonstrating value to customers. There's also been a focus from our customer base on locking in supply for a longer period of time. So that they have that security of supply. So as all of that has played out, the pricing trend has come down, it's not as robust as it used to be. But we think this year, for example, we think it's still a net positive it's enough to offset the effects of inflation because we are still feeling that to a fairly large degree, but we have enough price to offset that in a little bit more -- and we think we've still got an opportunity as you head into '25 and maybe '26 to still push that pricing lever higher, again, but the key is differentiation. So as long as we can demonstrate that differentiation, demonstrate the value to customers, we think we can get that. I think the industry has been very disciplined on this cycle to not create a lot of capacity that typically drives it down.

In terms of the pricing, sort of, I don't know, I guess the trajectory is kind of flattening out here. And what's the cause behind that? And we've seen Saudi make a number of changes to their capital program. Is it related to that? Is it related to oil prices? Is it just nature of the pricing cycle?

I think it's much more related to the pricing cycle, right? So we've priced it in you've now got contracts that are much longer term. You've just increased prices you're starting to see the effects of inflation moderate a little bit. So all of those factors go into it. we still see a robust demand scenario. We still see demand increasing from an activity standpoint over the rest of the decade. So I think all of that goes into it. So again, I think it will be a net positive, but not to the extent it was in '22 and '23.

So I don't -- we don't have great visibility in the Middle East market, but it seems to me we haven't seen a lot of LSTK tenders out there recently. Is there a reason for that? Why aren't we seeing more of that? I thought the whole market was -- you asked me 3 years ago, I thought the market was going to go this direction.

Yes. And look, again, 3 years ago, I would have told you that at that point, I would have probably said I hope not. But look, we've never had that view, and we think there is a balance, right? There's some customers that will go a little bit more, a little bit less, but we don't think anyone is going to necessarily completely shift and go one way or the others. So we are seeing tenders in the market. There are some. But look, these tend to be very lumpy. They don't come at a steady run rate. So we have seen a little bit, obviously, in Saudi, there's a little bit of a change right now. So that's paused things to a certain extent. We just really ramped up over the course of last year on the contracts that we had with executing at full speed today in Oman and Saudi. And for us, look, the way we've thought about these integrated projects are very, very selective about them. So we don't go bid on everyone. We only really focus on the ones where we know we can execute. We can deliver value and getting a margin profile that is within the envelope that we look at. These contracts do tend to be lower margin just given the pass-through services, but they're great from a cash flow conversion standpoint.

Last question on the Middle East. Is this a market you want to get bigger in? I mean you've talked about kind of getting some more of your share back. But beyond that, are there M&A opportunities? Or is this more of an organic...

Yes. We really -- look, the bulk of our focus on growth tends to be organic. That's what we think about. On the inorganic side, we've done some. So what we always look at is when we do an organic deals we think about them is what is the potential, especially in places like the Middle East, where we've got that footprint and it's a much easier channel and we can scale up. So we're probably not really focused on, hey, we're going to do a deal specifically around that region, that those regional players are quite different. But again, differentiated technology that we can bring to bear, we think has got an exaggerated value proposition in that region.

I'd like to shift over to another part of your story, which I think is maybe underappreciated deepwater. You have a couple of really unique product lines that are lined up there, and I -- I'd like to understand a little bit more the tubular running services, managed pressure drilling are kind of the two ones that really stick out to me. So starting with TRS you've got a handful of players in this market. So what sets your technologies apart here? And I'm also curious, this is a rental business. So do you need to replace or add capacity? Where are you on that? Obviously, we've got fewer rigs and we had 2 years ago. So on those 2 things.

Yes. So I'll come back to TRS for a second. But first, let me point out look. MPD and TRS are certainly the sort of hallmarks of our offshore and deepwater strategy. But we've also got a very strong presence in invention services. I'm very excited about what we're doing in completions now on the offshore space. So you've got a lot of other things that go in beyond just that the ones that we talk about. But look, on TRS, our strategy, our focus has been really around automation. That's what we've been driving with this TRS business. TRS is a product line that is as old as the sector. And it doesn't typically involved a lot of manual operations. A lot of people on the rig floor, especially in the red zone, huge safety concerns in this business. So think about an offshore rig. Historically, you'd have 6 to 8 people go out to do a TRS job. We've now changed that with our Vero system to essentially be one person sitting inside a module in the control room, operating a joystick. And we've enabled that with -- we've got, obviously, mechanization, the hardware that comes with it. But we've got software and artificial intelligence algorithms in there that completely take out human intervention. So that's really the focus for us. Now what that enables is dramatically lower labor costs, it is much better connection integrity. And from a safety standpoint, it's unparallel because you're taking people out of the red zone. So those are the kinds of things we're now deploying artificial intelligence to do positioning. We have just put in place a new -- we launched a new system called String guard that also gives a much higher degree of reliability and essentially gives customers a very high degree of assurance that there will never be a drop string incident on their rigs. So things like that. Now in terms of the equipment, we've got a fair amount of equipment. We continue to build more Vero systems. That is a big part of our CapEx for the TRS business. But it's something that we are very comfortable. There is a lead time. But as we see the rigs out there, we think we've got more than enough equipment, and there's a lot of fungibility of moving things around between rigs. So we think as the offshore story continues to unfold, there will continue to be big opportunities. This is really, as you said, a rental business, but more importantly, it is a service that comes with that [ regular ] that service that is critical.

So the other was MPD. So MPD, this is something we've been talking about, I want to say, for 15 years. I mean we heard this for ad nauseam never really happened and then all of a sudden now, every [indiscernible] MPD system. So what's changed in recent years. Why is this all of a sudden in a critical technology that -- it's not just -- I know it's not just offshore, it is also onshore as well. So maybe kind of talk about the evolution of that tool.

Yes. So what is really, I think, it's customer adoption and realization as we have sort of really proven out the technology and seen the efficacy the well integrity, the loss reduction on fluids, et cetera, all of that has really led customers to the point that they really have understood that this is a better way to drill. So we are very, very excited, obviously, about MPD. It's our flagship product line, global leader in this for several years. You look at today, deepwater exploration, for example. Most customers will tell you that they will simply not drill without MPD on the rig. And this is -- on the deepwater side, it tends to be our highest end MPD system. We've got a very close working relationship with the drilling operators, the real trip operators. All of them, we work very closely with them. They recognize that MPD enablement is an important part of their strategy. And it's also a better way for them to manage their business. So we look at it in terms of different business models, there's rentals. But we also do capital sales to them. When we do the capital sales, we really look at how do we augment that with their services element that comes through because it's ultimately it's the technology, it's the service, the personnel, the software, all of those things that really go hand-in-hand not just the technology. But look, the other thing we're very excited about with MPD is we've just launched this program called Motus. Motus is a new product structure the same at the performance tier of the market. And that opens up a whole new segment of MPD of wells that customers have not used MPD for before that come into play. And one of my favorite examples is the jack-up market. So that's something that becomes a really interesting proposition. But now you've got a package that has the right cost point and the right footprint for the jack-up space, but also on the land side. So things like that, I'm very excited about.

So from a customer standpoint, is the driver for MPD like a reduction of cost or sort of a risk element there. So just like a fluid loss? Or is it safety?

Both. It's really everything, right? It's a much lower degree of risk for them. They really feel better with that you can detect a kick, minute kick with far greater accuracy, far greater response times. We reduce your adrenaline fluid losses, you have better [ valid integrity ] lower chance all of those things.

Excellent. In the remaining time, I wanted to kind of focus on some of the targets and maybe we just go back to just the recent earnings. You lowered the third quarter guide a little bit, but actually full year numbers were brought up. Markets didn't like it. What did the market miss? I was rather surprised to kind of maybe just sort of digging back and looking back on what happened and the stock sale are recovered. So I'm just kind of curious, where do you think the market is missing? I've still been little -- actually what's going on there?

Dave, if I could tell you what that was. I'd probably do some.

So I should tell you right now...

But no, look, again, we had a really good second quarter. We exceeded our guidance in EBITDA. Cash flow was strong. The second half looks pretty good. Yes, there's a little bit of softness in revenue. But again, margins at 25%. I think there was also a little bit of a concern that margins from Q2 to Q3 were going to drop a little bit. 26% is -- there's really not a lot of people in that space at 26%. So I think, look, at the end of the day, this is all about us continuing to perform. That's what we are focused on. I don't -- trying to level best not to lose a whole ton of sleep on what exactly the market list or stuff like that. But look, in terms of our execution, we still believe we've got a lot of opportunities to deliver margin expansion, which is why we laid out the thesis that goes out a few years we think we can get margins into the high 20s, improve our free cash flow conversion to 50% and continue to generate higher returns. Ultimately, all of that leads to a higher earnings per share. So that's really what it's about.

So in terms of getting those margin targets, can you talk about where you are in the -- I think you call it your fulfillment plan, which is essentially a different word for transformation cost. So -- and I know a big part of it was taking out a lot of manufacturing facilities that were redundant, if I remember, something like 140 of them that are -- which just like a mind-blowing number to me. What's next, I think it was repair and maintenance, supply chain. Can you just talk about kind of what are the next timelines here? What are the next big milestone?

Yes. So look, the big phase of consolidation is over. And look, fulfillment is really focused around how we deliver to customers. It's manufacturing, repair and maintenance, our supply chain and sourcing and logistics. It's kind of that ecosystem. So 140-odd factories down to order of [indiscernible]. That phase is done. It's behind us. Now it's about optimizing the footprint we have. By making sure that our supply chain is set up to support those factories. So one of the things we talked about on an earnings call a few quarters ago was moving to low-cost countries. We are behind on this, right? People did this 10 years ago. We're playing catch-up. But what is really exciting about it is without having done that, if we can generate EBITDA margins in the mid-20s, once we get that finished, that's a big set of improvements. So that's well underway now, but it takes some time to work through to get suppliers qualified then get all your material into inventory by the time the inventory works its way through the system. So that's why we think '25 and '26 will continue to see gains from fulfillment. But it's then also about repair and maintenance, how do we optimize that network. So we're working on that. We've got someone who's focused terrifically driving that. And we just brought in another senior leader into the company, Todd Glance, who started a few weeks ago. Todd's got a terrific background at Otis, [ Learjet ] and Dell, really an expert on supply chain management. So he's leading this entire function capability for us now. So we're making great progress on all of those things, leaning out those factories, improving asset utilization. That's really what the name of the game there is on the repair and maintenance side because improved asset utilization gives us an ability to get faster inventory turns. It gives us more revenue exposure. So those are the things that we will and we think that will continue to play out over the next couple of years.

So that repair and maintenance side is that, once again, sort of a legacy of the integration and everything there's kind of -- they just kind of wherever I need one, I put one here on the...

It is, and it's also look a function again of how the company was run. There was all these different P&Ls effectively, and everyone thought they were a P&L. So there was sub optimization around that. And we have made it very clear now where the P&L reside, what's the cost center, who's responsible for what. So our repair and maintenance centers, their entire focus is now moving assets. Their metrics are cycle time and inventory. And then everybody else can go worry about the other things that they need to go over here.

And having covered this company for so long, I shouldn't be surprised to hear all these different things that what it was like before, but I still...

Well, it you've realized that these things take time, the words -- Carl, who was our CEO 4 years ago, when I first kept reminded me seated when I got here. So after 4 years, I'm kind of wanting to make sure that I'm not saying that. But look, it's what again, though, I'm really excited. We've been able to do everything we have over the past 4 years, with a lot of shackles around us with the lot of constraints. Now that we've got more degrees of freedom, there's a huge opportunity for us to do a lot more.

Fascinating. Well, at least you're busy, you have things to do.

No worries on that.

No worries on that. Last question, just kind of broadly outlook, looking into 2025. So how are you sort of thinking about international markets? Do you think you could see kind of international markets double digits next year? Is that a little too aggressive? What's kind of your best guess looking now based on our oil price and everything you've been...

Again, we have not given guidance yet for '25, I'm not going to do that today. But in general, look, we still see growth. It's not going to be to the extent it was this year, certainly not last year. So I think a slightly more moderated view sort of mid-single digits kind of growth, but still growth. Then company-specific piece will give -- when we give guidance because, again, we've got other things that we've got to look at, but that's what the market looks like. And we think there's a huge opportunity that for the differentiation that we have the portfolio. One of the other things we haven't touched upon that I'm really excited about is our digital portfolio. We just announced an acquisition yesterday. It's a small technology platform. But it's really cool. It's called Datagration. I heard [ Olivier ] here earlier, he was talking about the open architecture, and that is incredibly important. What you get with an open architecture is you've got all of these different systems, who's going to connect them. And that's really what the Datagration does. It effectively, the way I think about it is it's a plug adapter that you take with you when you go to international location. It's that for the digital world. So it connects multiple different systems. They've got a unified data model that has over 100 connectors already in the library, the ability to build more fast. So we are now able to give customers a completely different view of their data on a very simplified viewing platform. They've got a dashboard called [ Petrowiser ]. They've got one now for a sustainability platform called EcoWiser. So huge applications even outside of the OFS and oil and gas space. So very excited about that.

Great. Thank you very much. .

All right. Dave, thanks so much for having me. Appreciate it.