Weatherford International plc (NASDAQ:WFRD) Q4 2022 Earnings Call Transcript

Weatherford International plc (NASDAQ:WFRD) Q4 2022 Earnings Call Transcript February 8, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Weatherford International’s Fourth Quarter and Full Year 2022 Earnings Call. . As a reminder, this event is being recorded. I would now like to turn the conference over to Mohammed Topiwala, Director Investor Relations and M&A. Sir, you may begin.

Mohammed Topiwala: Welcome, everyone, to the Weatherford International’s Fourth Quarter and Full Year 2022 Conference Call. I’m joined today by Girish Saligram, President and CEO, Arun Mitra, our Executive Vice President and Chief Financial Officer; and Desmond Mills, our Chief Accounting Officer. We will start today with our prepared remarks and then open it up for questions. You may download a copy of the presentation slides corresponding to today’s call from our website’s Investor Relations section. I want to remind everyone that some of today’s comments include forward-looking statements. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein.

Please refer to our latest Securities and Exchange Commission filings for risk factors and cautions regarding forward-looking statements. Our comments today also include non-GAAP financial measures. The underlying details and a reconciliation of GAAP to non-GAAP financial measures are included in our fourth quarter earnings press release, which can be found on our website. As a reminder, today’s call is being webcast, and a recorded version will be available on our website section following the conclusion of this call. With that, I’d like to turn the call over to Girish.

Girishchandra Saligram: Thanks, Mohammed, and thank you all for joining the call today. Weatherford delivered outstanding results in the fourth quarter and all of 2022, and I’m incredibly gratified, proud and humbled. Gratified that our strategy and actions have come together to deliver strong performance; proud of what we have achieved; and humbled by being given the privilege to represent the 17,700 members of the One Weatherford team and share our results with all of you. The spirit, resilience and talent of our team is the driving force behind the commercial wins, revenue growth, margin expansion and free cash flow we delivered. My immense pride and deep gratitude goes out to all of our Weatherford team. Thank you for what you do every day for our customers and the company.

There are many significant milestones in our full year 2022 results. It was the first time we generated positive free cash flow for 3 consecutive years in over 3 decades. We achieved a leverage ratio of 1.4x, the lowest in over 15 years. Revenue grew year-over-year by 19%, the highest growth rate in over 10 years and perhaps most notably, we generated positive net income of $26 million, another first in over 10 years. These results clearly demonstrate the effectiveness of our refreshed operating paradigm and reaffirm the strength of our strategy to enable margin expansion and generate free cash flow. With this marking the tenth successive quarter of results that demonstrate performance, credibility, transparency and stability, we can now confidently say the turnaround at Weatherford is complete.

We are the new Weatherford, a Weatherford that continues to deliver differentiation in technology and people, but now with the culture, leadership and operating paradigm around consistency and credibility of performance. As we confidently move into the next phase of our journey, we have a broader horizon and a longer range vision to deliver value. Desmond and Arun will cover more details, but I wanted to share a few of the more significant highlights of our results. Our fourth quarter 2022 revenue of $1.2 billion was up 8% sequentially and 25% year-over-year. Our focus on directed growth and pricing allowed us to grow the top line and was aided by general market activity increase. I’m especially pleased with our performance on margins and free cash flow.

We delivered 22% adjusted EBITDA margins, expanding margins by 290 basis points sequentially driven by solid execution across the board. In fact, the Q4 2022 EBITDA margin is the highest that the company has achieved in any quarter in more than 12 years. The improvements we have made in our net working capital efficiencies, alongside higher adjusted EBITDA were reflected in our $171 million of free cash flow performance. This is $38 million higher than the third quarter despite $65 million in additional interest payments. We delivered $72 million of net income in Q4, leading to a full year profitability as measured by net income of $26 million. Few would have bet on Weatherford being net income positive in 2022, and we are excited to turn the page and add to shareholder equity on our balance sheet.

While we clearly acknowledge the benefit of the tailwinds of a strong market, our performance improvements are equally driven by the execution intensity on our 2022 focus areas. In fulfillment, we continued our multiyear initiative and have begun to fundamentally change the company’s manufacturing, sourcing and repair platform. Over the course of the year, we identified our new flagship centers, put in place a new logistics management system, and continue to make progress on facility optimization, as we have now exited over 12% of our operating facilities since 2021. I have been emphatic about not chasing revenue growth without margins and directed growth was a focus area for us to ensure that incremental revenues also provide margin lift. We complemented this with a company-wide initiative on driving price consistently and systematically as we offset the inflationary pressures from our suppliers and wage increases.

Excellence in execution. Our focus area aimed at improving our enterprise effectiveness continued to progress over the course of the year. We saw improved inventory efficiency evidenced by an 11-day reduction in DSI year-over-year, in a year where revenue increased by 19%. Overall, net working capital days improved by 13 days to 91 days, an impressive achievement in a growth environment. Simplification. Our focus area to increase operational efficiency was led by several global and localized initiatives aimed at delayering and driving more accountability across the organization, resulting in overhead costs as a percentage of revenue to decline over 280 basis points on a full year basis. These initiatives are crucial in delivering our year-over-year increases of 320 basis points in EBITDA margins and $21 million of free cash flow.

Over the past 3 years, Weatherford has generated $655 million of free cash flow, which exceeds the past 2 decades combined. In the fourth quarter of 2022, we also had many commercial wins, demonstrating our position as both a broad spectrum and specialty services provider, providing a solid foundation for 2023 and beyond. Kuwait Oil Company or KOC awarded us a 5-year contract to provide directional drilling and logging while drilling services, which provide fit-for-purpose solutions to overcome complex challenges. A major IOC in the Middle East awarded us a 5-year contract to provide fishing equipment and services. We attribute this win to our consistent service quality and safety performance. We won 3 awards worth more than $600 million with a Latin American customer to deliver integrated drilling and completion services in onshore and offshore operations, enabled by our technological and operational leadership.

In Brazil, we secured a 2-year sole provider award with Petrobras for the provision of our newly enhanced chemical injection system, addressing the reliability and conveyance requirements of the pre-salt play. As previously announced, we received a 3-year lump sum turnkey or LSTK contract with Aramco to deliver drilling and intervention services with the possibility of extending it for 2 years and a 5-year contract exceeding $500 million from Petroleum Development Oman to deliver integrated drilling services in the Marmul and Grater Saqar fields, which is already underway. Shifting to our technology and partnership highlights for the quarter. Our Firma Plug and Abandonment team in Europe won an OWI award for significant contribution to the industry.

This recognition showcases our Firma Solutions’ rigorous approach to well decommissioning, resulting in reduced carbon emissions and enhance safety in every operation. We announced a partnership with Ardyne, a leader in specialized well decommissioning technology that will enable Weatherford and Ardyne to deliver significant value to customers globally by offering the industry’s most comprehensive portfolio of Plug and Abandonment and Slot Recovery solutions. This partnership demonstrates our continuing commitment to innovation and value creation in the well decommissioning space and further enhancing our industry-leading Firma offering. We signed a multiyear agreement with DataRobot, a leader in artificial intelligence, to deliver advanced AI solutions in our digital platforms, including ForeSite production optimization and central well construction platforms.

Now turning to our view on the markets. In North America, the last several quarters have seen a high rate of growth for drilling and completions activity, and we expect the trajectory to start flattening. We still expect North America to grow in 2023, but at a lower rate. On the supply side, we are now beginning to see signs of recovery, as logistical constraints are slowly correcting and raw materials are becoming available. On the offshore side, we are seeing signs of market activity picking up and are well positioned to capture it across our portfolio, especially with our MPD and TRS offerings. The momentum of our international markets continues to gain traction and support the multiyear up-cycle view across all segments and markets. Middle East and Latin America activity continue to be robust, and there will be incremental opportunities as activity further ramps up.

In summary, the overall macro environment for the sector continues to be supported by solid fundamentals despite continued inflationary and geopolitical headwinds. Our ability to carry our momentum forward is evident in the commercial wins in 2022, including over $6.5 billion of wins with IOCs and NOCs across our broad customer footprint. In the coming quarters, we will begin to see the impact of our new contracts, technology advancements and partnerships, as we continue to focus on margins, cash flow and positioning the company for success over the long term. Our confidence in the growing revenue pipeline and intense focus on driving lean business operations enable us to envision low to mid-20% EBITDA margins over the next few years. We also added a new member to our leadership team.

In January, Arun Mitra joined Weatherford as Executive Vice President and Chief Financial Officer. Arun’s decision to join Weatherford speaks volumes to the caliber of talent we attract as a best-in-class organization. Arun, we are thrilled to have you on our team. Before I hand things over to Arun, I’d like to thank Desmond Mills for his service as our interim Chief Financial Officer and his continued leadership in guiding our finance team. With that, I’d now like to hand it over to Desmond to talk more specifically about our financial performance this quarter, followed by Arun to walk us through the guidance for the first quarter and full year of 2023.

Desmond Mills: Thank you, Girish. Good morning. and thank you, everyone, for joining us on the call. I’ll begin with our consolidated results and then move into our segment results, liquidity and cash flows. As Girish outlined, we had a stellar fourth quarter to close out the full year with great momentum. Full year 2022 revenue of $4.33 billion grew 19% as all segments experienced growth with adjusted EBITDA of $817 million or 18.9%, adjusted EBITDA margin, a 320 basis point improvement. Revenue for the fourth quarter of 2022 was $1.21 billion, an increase of 8% sequentially and 25% year-over-year. Operating income was $169 million in the fourth quarter of 2022 compared to $121 million in the third quarter of 2022 and $33 million in the fourth quarter of 2021.

Net income was $72 million compared to $28 million in the third quarter of 2022 and a net loss of $161 million in the fourth quarter of 2021. Adjusted EBITDA of $266 million in the fourth quarter increased 24% sequentially and 73% year-over-year with adjusted EBITDA margin of 22%, a sequential improvement of 290 basis points. These results were primarily driven by increased activity, share improvement and pricing across all of our segments, coupled with successful execution across the focus areas we laid out for ourselves in 2022. Now moving into segment results. Drilling and Evaluation or DRE revenues of $371 million increased by $23 million or 7% sequentially, mainly driven by higher volumes and price increases for drilling services and higher wireline and managed pressure drilling activity in Latin America and Middle East, North Africa, Asia regions.

Segment adjusted EBITDA of $111 million increased by $26 million or 31% sequentially, leading all segments with Q4 adjusted EBITDA of nearly 30%, 550 basis points higher than Q3. This increase is largely attributable to price increases to certain drilling services contracts, which were retroactive back to Q3. Additionally, we achieved higher fall-throughs from increased activity in drilling services. Well construction and completion or WCC revenues of $403 million increased by $12 million or 3% sequentially, primarily driven by higher cementation and liner hanger products in the Middle East, North Africa, Asia and Latin America regions. Segment adjusted EBITDA of $87 million increased by $9 million or 12% sequentially, largely due to higher fall-through and execution efficiencies for cementation and liner hanger products in the Middle East, North Africa, Asia and Latin America regions.

Production and Intervention or PRI revenues of $407 million increased by $50 million or 14% sequentially, primarily driven by higher international pressure pumping activity along with higher artificial lift activity in North America. Segment adjusted EBITDA of $88 million increased by $22 million or 33% sequentially, mainly due to higher margin fall-through for pressure pumping overall. Turning to liquidity and cash flows. For the full year 2022, operating cash flow was $349 million and free cash flow was $299 million. In the fourth quarter, net cash provided by operating activities was $193 million, an increase of $33 million and free cash flow was $171 million, an increase of $38 million sequentially. These improvements were primarily driven by higher EBITDA margins as well as improved working capital efficiencies, especially around inventory utilization.

We drove outstanding performance with DSI metrics improving by 7 days to end the quarter at 51 days on improved sales and operational plan execution. We made a lot of progress improving operational efficiencies as seen from our cost of products and services, which as a percentage of revenue was 70% in 2022 compared to 74.5% in 2021, an improvement of 450 basis points. This is reflective of the high utilization on a more efficient operating cost structure, coupled with price improvements, which offset some of the impacts from supply chain disruptions and inflationary headwinds. We are beginning to see the working capital benefits of our ongoing fulfillment and inventory optimization initiatives. The improvements are evidenced by our year-end inventory levels, which were up less than 3% compared to 2021, despite a 19% increase in revenue.

We ended the fourth quarter of 2022 with total cash of approximately $1.1 billion as of December 31, 2022, down $31 million sequentially, reflecting payments made to pay down some of our debt. During the fourth quarter, we completed the debt paydown of previously announced redemption of the $125 million principal amount of our 11% senior notes due in 2024. In addition, we are also opportunistic in buying back some of our debt on the open market as we optimize the economics of our debt paydown by open market purchases, all below par. We bought $8 million of our 6.5% secured notes during the fourth quarter and an additional $11 million in January 2023. Finally, we also redeemed a further $20 million of our 11% senior notes in January 2023 by calling it in December 2022.

In total, since the beginning of 2022, we have now paid down a total of $214 million of debt as we continue to improve our debt profile and reduce annual interest expense by approximately $23 million. Our overall debt stack at this point comprises $1.6 billion of senior notes due in 2030 at 8.625%, $481 million of secured notes due in 2028 at 6.5% and the original exit note stub of $105 million due in 2024 at 11%. Finally, during the fourth quarter of 2022, Standard & Poor upgraded our credit rating to B and we also increased the aggregate amount available under our credit facility to $400 million. Thanks all for your time today. I will now pass the call to Arun for his comments on the outlook for the first quarter and full year 2023.

Arunava Mitra: Thank you, Girish, for the introduction and Desmond for supporting me with the 2022 commentary, and good morning, everyone. I just wrapped up my first full month here, and it’s been a busy one. I’m truly excited to be part of an organization that has achieved so much in such a short span. I look forward to contributing to the company’s strategic direction and driving further financial performance as we pivot to position the company to generate sustainable returns over the longer term. In the first quarter of 2023, we expect consolidated revenues to grow on a year-over-year basis by mid- to high teens. However, there will be the usual Q4 to Q1 sequential decline by mid- to high single digits, mainly driven by seasonality and some FX impacts.

Across the segments, DRE revenue is expected to decline in the high single digits. WCC is expected to increase low to mid-single digits and PRI is expected to decline by mid- to high teens, mainly driven by seasonality. Adjusted EBITDA margins for the first quarter of 2023 are expected to decline by 150 to 200 basis points, compared to the record fourth quarter we experienced in 2022, which was augmented by catch-up pricing adjustments. So normalized for Q4, the decline is around 50 to 100 basis points. Although the margins will witness a seasonal decline in Q1, they are still expected to be over 20%. CapEx is expected to range between $40 million to $60 million and free cash flow will be in the range of negative $15 million to negative $35 million due to seasonal working capital payments during the quarter.

Our full year 2023 consolidated revenues are expected to grow by low double digits to mid-teens compared to 2022, driven by mid-single-digits growth in North America, mid-teens growth internationally, excluding Russia, with our Russia business expected to be a drag on overall company growth. Across the segments, DRE is forecasted to deliver mid- to high single-digits growth, WCC to deliver in the mid- to high teens growth, and PRI to deliver mid- to high single digits growth. There continue to be multiple headwinds highlighted by labor inflation, geopolitical uncertainty and supply chain disruptions. 2023 will also be a year where we invest in the company for the longer term and also have some start-up costs on the new contracts we have announced.

Regardless, we are confident in our ability to deliver margin expansion and cash flow generation. We also have visibility to some significant opportunities and we fully expect to offset the aforementioned risk and have a slight bias to the upside. As a result, full year consolidated adjusted EBITDA margins are expected to expand by at least 100 basis points over 2022. We expect 2023 free cash flow to be in line with 2022 with a slight bias to growth in spite of higher CapEx and net working capital. CapEx for the full year is expected to be in the range of $200 million to $230 million. As in our prior years, our CapEx will be a metered spend with rigor around delivering returns and within the 3% to 5% range we’ve previously discussed. Thank you for your time today.

I will now pass the call back to Girish for his closing comments.

Girishchandra Saligram: Thanks, Arun. As we take a final lap on 2022 and take time to communicate and celebrate these results, we are also very clear that now is not the time to rest. Rather, we are marching forward with a renewed, refreshed and rejuvenated sense of purpose. As we are moving on to the next phase of our journey, I will share our strategic imperatives. However, this time around, our priorities are broader and will be a multiyear journey. The first and foremost priority remains financial performance. We successfully demonstrated in 2022 that we could achieve growth along with margin expansion and positive cash flow. For 2023 and beyond, we are driving to ensure cash flow generation is cycle agnostic. While taking advantage of the up cycle, we will drive cost efficiencies and technology differentiation to provide greater leverage now and enhanced support in a different cycle.

The second priority is organizational vitality. Our goal is to upskill and develop our team to meet industry challenges and continue to lead. We will drive greater focus and investment in training and development across all levels of the company. But like all other investments, this will also have a rigorous payback lens. We want to attract great talent, but more importantly, develop, engage and retain our team to grow their careers in the manner they aspire to. Next, we have customer experience. Customers will continue to be the focal point of everything we do. As we build our opportunity pipeline, we want to ensure that we employ robust processes, solutions, technologies and data that help us achieve both customer success and satisfaction.

As we forge ahead, we want to look at building a sticky customer base through our approach of delivering services. Despite the continuing logistical challenges faced by the industry, we will endeavor to maintain our uptime for our customers and minimize our total incident rate. The fourth priority is lean operations. Efficiency and waste elimination will be the motives that guide all our internal processes. Our ultimate goal is to provide value to the customer, and this will be achieved on the back of nimble and agile operations. This will be achieved through a combination of various factors such as maximizing the value per dollar spent on support costs, increasing asset utilization efficiency and tightening the working capital cycle. This is a very significant change for our company as we bring together disparate systems, processes and workflows built on acquisitions and become a more integrated company.

Our final priority is creating the future. Innovation is the key tenet to achieving this objective. Our focus will be to enable our people to understand the needs of our customers and to introduce new products and services that create a unique value proposition for our customers and differentiate us in the market. We will continue to actively engage in further building our core products and services, energy transition and digital portfolios, thereby positioning ourselves for the next decade. As a responsible organization that is committed to its sustainability journey, Weatherford will continue to advance our ESG strategies and collaborate with stakeholders to achieve our net zero commitments. We have come a long way, and our progress energizes and reassures me that we are on the right path.

I’ve seen what this organization is capable of, and I’m excited about the journey ahead. Thank you for joining the call today. And now operator, let’s open it up for questions, please.

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Q&A Session

Operator: . Today’s first question comes from James West of Evercore ISI.

James West: Congrats on a great quarter. And welcome to the team, Arun. And I know, Chuck, you’ve been there a little longer but welcome as well. I was curious I guess, maybe for you, first question for me. You laid out the 5 priorities going forward, all important priorities and really shows a company that’s much matured from where Weatherford was just several years ago. If you had to pick kind of 1 or 2 of those priorities as kind of keys to success, what would those 2 be? I understand that all 5 are important, but what were the key 1 or 2 messages that we should take away?

Girishchandra Saligram: Yes. So a great question, James. Look, I think at the end of the day, financial performance, frankly, is an output of everything that we do. So the way I look at it, for us, we have to — you’re 100% right. We have to do all of it. But this whole notion of lean operations and customer experience, I think that external focus on delivering to customers and how we deliver it internally really brings everything together and ultimately drives our ability to be more efficient and more effective.

James West: Okay. Okay. Fair enough. And then just looking at your strengths in MPD and TRS and really just these nice inflection and acceleration that we’re seeing offshore and in particular in deep water. Could you maybe talk for a minute about how well positioned you guys are there? And if there are any kind of geographical or product holes you need to fill?

Girishchandra Saligram: Yes. So look, we are excited as we referenced a little bit in our prepared remarks on the offshore inflection. Look, the industry is starting to adopt MPD a little bit more. So that’s, I think, a big positive for us given our leading-edge technology in that space. And as we have said multiple types for both MPD and TRS have a bit more of an exaggerated value proposition on the offshore piece. So look, we don’t think we’ve got any gaps per se, but we continue to drive new product development to position us at multiple different application levels and different price points. So we’re excited about a couple of things that we’ve got coming through the pipeline that we’ll be talking about over the course of the year.

Operator: And our next question today comes from Luke Lemoine with Piper Sandler.

Luke Lemoine: Girish, congrats on a pretty remarkable turnaround here. I wanted to see, you gave us the outlook and briefly touched on the geo markets. I was wondering if you could expand on the geo markets and the outlook for each of these in ’23?

Girishchandra Saligram: Sure. Look, I’ll start with North America. Again, we expect North America to grow. But as you look at last year, we grew over 20% in North America. So certainly not anything close to that kind of a rate. I think probably instead of the mid- to high single digits is where we see the North America business going. Again, this offshore inflection will help a little bit, especially on the Gulf of Mexico side. Look, Latin America was probably — if you look at just on a numbers basis, it was our most robust region, grew 30% last year. We are still continuing to be excited about Latin America, but that will again taper down a little bit. We got the bulk of our growth. And so this year, we will be building on that and driving margin expansion.