Weatherford International plc Q4 FY2022 Earnings Call

Thank you all for being here. Welcome to Weatherford International's earnings call for the fourth quarter and full year of 2022. This event is being recorded. I will now hand the call over to Mohammed Topiwala, Director of Investor Relations and M&A. Please go ahead.

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.

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. I am 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 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 declining 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 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 Greater 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 enhanced 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 enhances 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 multi-year 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.

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 an 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 the Middle East, North Africa, and 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.

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-digit 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-digit 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.

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 our previous 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.

Today's first question comes from James West of Evercore ISI.

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?

Absolutely, that's a great question. Ultimately, our financial performance reflects all our efforts. We need to focus on all aspects, and I believe that prioritizing lean operations and customer experience is crucial. This emphasis on delivering value to our customers, along with how we manage our processes internally, unites our efforts and enhances our efficiency and effectiveness.

Okay. Fair enough. And then just looking at your strengths in MPD and TRS and really just these nice inflections and accelerations 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?

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 times for both MPD and TRS, they 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.

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

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?

Sure. I'll start with North America. We expect growth in this region, but after last year's more than 20% increase, we don't anticipate similar rates this time. Instead, we foresee growth in the mid- to high single digits for North America. The offshore inflection, particularly in the Gulf of Mexico, will provide some support. In Latin America, it was our strongest region last year with a 30% increase. We remain optimistic about Latin America, though we expect growth to slow down a bit this year as we leverage last year's gains to drive margin expansion. The Middle East is where we feel most enthusiastic, as we've mentioned several times during the call. We anticipate growth in the Middle East to significantly outpace that of other regions, aiming for a high teens to over 20% increase on its own. As for Europe and Russia, especially Russia, we expect some challenges. Russia's environment remains complex with currency volatility, making predictions difficult. We believe Europe will see growth as well, though likely not at the same levels as the other regions. I hope this provides you with a clearer perspective.

Yes, absolutely. And then on the margin side, you talked about your goal to get to the low to mid-20% EBITDA range over the next few years. Of course, you get the low 20% range on a quarterly basis in Q4. Can you talk a little bit about what it takes and maybe bridge the gap to get to the mid-20% margin level?

Yes. So I think, look, a couple of things, Luke, that are important, as Arun pointed out and Desmond referenced, right? In our Q4 numbers, we had a little bit of a pricing catch-up. The total year numbers, everything sort of still fits within that envelope. But there was a little bit of a catch-up that really should be attributed to Q3. So net-net, it's probably about 50 to 100 basis points. If you look at it from that perspective, I think we will continue to see very strong and solid margin expansion this year on an operational basis, and we'll continue to drive that. Having said that, we have this year a couple of things going on. The first piece is we have a few investments that we have talked about all over the course of last year in systems, in our processes, that we are going to be very, very diligent about, very conscious and we'll do it in a metered fashion, but we have to get this company ready for the next decade or 2. So that's going to come in a little bit over the course of the year. And the second is our new contracts have some start-up costs, especially in the second and maybe a little bit in the third quarter. So we've got a little bit of that. But I think once we are sort of past that as we get our fulfillment network and our overall platform around repair and maintenance fully established, and it should be in a much better state by the end of this year, as we are able to bring out more new technology, I think we will be able to then look at '24 as really the year where we transition into that sort of a realm on a consistent basis.

And our next question today comes from Ati Modak with Goldman Sachs.

You talked about a lot of improvements in working capital in 2022. Are you now in a position to talk about normalized free cash flow conversion from EBITDA just yet? And if not, what else do you need to see happen before you get there?

Ati, I believe there are a few points to consider. When we talk about normalization, it's a broad term and somewhat relative. We have made significant strides in working capital efficiencies, but we are not finished yet. Additionally, as you think about converting EBITDA to free cash flow, it's important to acknowledge that we still have a substantial amount of debt. While our debt and interest payments are currently manageable, our blended cost of debt is around 8%, which is competitive in today's market. We believe we can handle this, but it does present a slight challenge in the conversion ratio. I think we need a bit more time, and hopefully by the second half of this year, we can provide more insight into what normalization means from your perspective. We also see further opportunities to enhance our working capital, particularly regarding our payables.

Got it. And then, Arun, maybe one for you. Firstly, congratulations on the role, and we look forward to working with you. I'd like to get your view on what your key areas of focus are for the firm as you think about the role? And how do you think about the capital allocation priorities for the firm in terms of just the milestones you would like to achieve?

Thank you, Ati. I’m very enthusiastic about my new role. There’s much to accomplish, but we’ve already made significant progress and the excitement is evident. I’m pleased to be here. However, as Girish noted earlier, there’s still work needed in optimizing our working capital. I aim to achieve a 40% to 50% conversion on an unlevered basis. Regarding capital allocation priorities, as Girish has frequently pointed out, our focus is on rebalancing our debt structure and continuing to pay down our debt. This will provide us with the flexibility and resilience needed in our balance sheet when a downturn occurs. Ensuring the resilience of our balance sheet is a clear priority at this time.

And our next question today comes from James Hubbard with Deutsche Bank.

Congratulations on your impressive results, as others have noted. My first question is regarding the comments I've been hearing all week from BP, Shell, Total, and others. They assert they are experiencing mid- to low single-digit inflation on their capital expenditures. We've heard similar claims in the past that have turned out differently. Can you help me understand how that aligns with the notable margin expansion we are witnessing in the U.S. oilfield service sector, yourself included? Do you not have much work for the major companies? Is that the explanation? Additionally, looking at the sector more broadly, it is traditionally very cyclical, and we might expect EBITDA margins of 20% to 25% in the coming years. However, we also worry about a potential decline in activity. Historically, companies in this sector have responded by significantly reducing their workforce. It seems like you have been attempting a different strategy with the new Weatherford over the previous analyst calls. How do you plan to navigate through the next downturn, whenever it may arrive, ideally many years from now? Will it be a drastic cut of, say, 50% of the workforce again, or do you have a different vision for Weatherford's future?

Yes, those are both excellent questions. Thank you. In response to the first one, I can’t say we do enough for our customers; we always want to do more. We have a diverse customer mix, and as we've mentioned before, our revenue is largely international, with 75% of our revenues coming from outside North America. This means we work more with national oil companies than international oil companies. We value partnerships with all the companies you've mentioned, as they are strategic for us, along with various national oil companies. Regarding margin expansion, pricing plays a role, but there are two other factors to consider. Firstly, we’re focusing on our cost structure and finding efficiencies. Secondly, there's a straightforward mathematical effect of fall-throughs, as we maintain the same cost base without adding costs at the same rate as our overall growth. This contributes to our margin expansion, and we are optimistic about continuing that trend in the future. As for your second question, we are approaching things differently than in the past. One principle I've emphasized is that we are prepared to sacrifice some potential gains during up cycles to secure the stability of the company and protect against downturns when they occur. Like everyone, we hope the downturn doesn’t come soon, but we are working to build a more resilient organization that can withstand cycles. It’s not effective to just downsize the workforce during a downturn; that’s not a sustainable way to manage an organization. We are focusing on building scalable infrastructure. Looking at our revenue growth, we ended 2020 with an approximate run rate of $3 billion. Our guidance for this year expects our exit run rate to be 60% higher than that, yet our workforce has only increased by less than 10%. We are making significant changes in how we leverage our resources, utilizing third-party labor, enhancing efficiency, and incorporating automation in our services and customer delivery. This is a crucial part of the margin expansion we anticipate.

And our next question comes from Doug Becker at Capital One.

Girish, I wanted to approach the margin outlook a little differently. Last year, Weatherford Group EBITDA margin's more than 300 basis points. Guidance for this year calls for at least 100 basis points of margin improvement and full disclosure, I'm trying to gauge the potential upside to that, but what assumptions around pricing benefits from the fulfillment initiatives are really needed just to reach that 100 basis point of margin expansion?

Yes. Doug, I want to emphasize that our commitment to providing credible guidance and maintaining transparency about our processes has not changed. Last year, we began with at least a 50 basis point margin and increased it as we encountered more activity. This year, we have accounted for cost increases due to inflation and wage hikes, recognizing that all our team members are facing a high-inflation environment, which necessitates a merit increase. There are also start-up costs associated with new contracts, but these are manageable timing issues related to long-term agreements, such as three years in Saudi Arabia and five years in Oman, which will affect us this year. We believe pricing will continue to positively impact our margins, though perhaps not to the extent seen last year, when we achieved significant benefits, particularly in the fourth quarter, by effectively communicating our value proposition to customers. While we haven't provided specific quantitative details yet, we anticipate at least 100 basis points of margin expansion. As we progress and return each quarter, we will continue to update you on our initiatives and the progress we’re making.

That all sounds very reasonable. Europe, SSA and Russia revenue grew 22% sequentially. Just can you highlight which countries were the primary drivers of this growth?

So again, Doug, we don't break it out by country. But look, we had multiple growth areas. And you have to also look at it on a quarterly sequential basis but also on a total year basis. If you look at it on a total year basis, it was only a 4% growth year-over-year. So we also highlight some of the challenges that we see as opposed to the other regions.

Fair. And then Arun, you touched base on this a little bit, but I just want to get a little more color on what attracted you to Weatherford and maybe get your initial assessment of the internal systems and maybe down the road, would you anticipate providing segment guidance, not just total company revenue guidance?

Thank you for your question. This is something that has been asked quite often lately. My usual response has been that I should have been here a year ago. The excitement within the team is clear. It feels nothing like a company that faced an existential crisis three years ago. Instead, we are positioned for growth and ongoing margin improvement. While there might still be some negative perceptions when searching for Weatherford, a deeper look reveals the outstanding progress this management team has made over the last two and a half years. Girish has assembled an excellent management team, and communication throughout the company is very transparent. Based on what I've observed in the past month, there is a strong alignment with our strategic goals. I'm very optimistic. We do not disclose segment EBITDA margins. However, as Girish mentioned earlier, we expect at least a 100 basis point improvement compared to 2022, with potential for further upside. We will provide more details as the quarters progress in 2023.

Yes. And Doug, look, if I could just add to that. We are very committed to transparency, but we also need to make sure that we give you things that are constructive and helpful versus giving you more information that will just lead to more questions. Our job is to manage all of this together. And we always give you the full details on our retroactive base of exactly what happened in each segment, so to get a bit of a better sense around the company. Look, given our size and scale, we still have a situation where individual product lines in a single country do have an effect, and we've got to manage that at a holistic level.

Fair point. And Girish, I don't say this on calls very often, but nice quarter.

Our next question comes from Gregg Brody of Bank of America.

Congrats on a great quarter. I don't say that very often either. You mentioned the capital allocation priorities and your focus on recalibrating the debt structure. Can you provide more details on your thoughts about that? What do you consider the appropriate debt number today?

Yes. So Gregg, I'll take that. Arun and I have just started to have a lot of discussions as he's coming up to speed on that. We have not explicitly laid out a leverage target or a specific debt number. However, our priority has been to first and foremost eliminate the high-cost debt we still have. We reduced another $20 million of that, paying it down in January after calling it in December, leaving us with $105 million. The call premium on that will go away in December, and we will continue to assess the economics. I want to emphasize that this won't be an issue in the long term; we will manage it. Additionally, we began buying back some bonds opportunistically in the fourth quarter when their prices dipped below par due to market volatility. We aim to further reduce our debt costs. Although our blended rate of around 8% is competitive, we want to lower it a bit more. Once we have streamlined the credit facilities and have a few more quarters of performance behind us, we can provide a more specific update. I appreciate your patience as we focus on this top priority.

Last quarter, you established a new revolver. One of the advantages of that facility was the potential to unlock some of the cash that was previously collateralized for letters of credit. Have you made any headway in releasing that cash? Can you provide any insights on how that might develop over the year?

Yes, Gregg, I'll take that. Based on what I've seen, I think we are on target to release about $15 million in Q1 and another $20 million in Q2. So we should be able to free up restricted cash to the extent of $70 million through the first half of the year.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any final remarks.

Great. Thank you all for joining and taking the time today. We look forward to coming back towards the end of April and sharing our Q1 results. Thank you all.