Weatherford International Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 26, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Weatherford International First Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this event is being recorded.

Operator

I would now like to turn the conference over to Mohammad Topawala, Director, Investor Relations and M and A. Sir, you may begin.

Speaker 1

Welcome everyone to the Weatherford International First Quarter 2023 Conference Call. I'm joined today by Girish Saligram, President and CEO and Arun Mitra, Executive Vice President and CFO. 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.

Speaker 1

These statements are subject to many risks and uncertainties that could cause our actual results to differ materially 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 Non GAAP financial measures are included in our Q1 earnings press release, which can be found on our website. As a reminder, today's call is being web And a recorded version will be available on our website following the conclusion of this call. With that, I'd like to turn the call over to Girish.

Speaker 2

Thanks, Mohammad, and thank you all for joining the call. Our first quarter results were another set of firsts, and I am incredibly grateful to our entire One Weatherford team for their passion and tireless focus on execution. Our results continue to demonstrate the viability of our strategy And the strength of our execution capabilities. We delivered above expectations in revenue, margins and cash and are set up well for the remainder of the year. The Q1 did benefit from some contract recoveries that we had expected to materialize in the second quarter.

Speaker 2

And as a result, we will see some timing deltas between the two In the first half, nonetheless, it will be a first half that is well ahead of performance last year and gives us the confidence to significantly increase our guidance for the total year. In the Q1 of 2023, revenue of $1,190,000,000 increased 26% over the Q1 of 2022, reflecting broad based growth in each of our three segments across all geozones. We also saw a sequential decline of 2%, which is very moderate relative to the usual seasonal declines demonstrating the strength of the cycle, especially in the international markets. North America revenues grew 20% over the Q1 of 2022. And as expected, the seasonal declines in activity, especially in PRI, Caused a sequential drop of 5%.

Speaker 2

The year over year international growth was largely broad based as revenue grew 29% over the Q1 of 2022. As we have been talking about for a while, Middle East activity is firming up strongly and we are also seeing greater strength in Latin America. I'm particularly pleased with our margin expansion performance as we delivered adjusted EBITDA of $269,000,000 Our adjusted EBITDA margin of 22.7 percent. A margin expansion of over 6.50 basis points year over year is very significant, especially coming on the heels of a strong margin expansion year in 2022 and puts us on the right trajectory towards our ambition of mid-20s EBITDA margins. We delivered $72,000,000 of net income in Q1.

Speaker 2

To put this in perspective, 2022 was the 1st year in 10 years we generated positive net income And that was $26,000,000 for the entire year. Finally, we generated $27,000,000 of adjusted free cash flow for the quarter Despite a significant investment in CapEx, working capital and annual incentive outflows, we have always stated that our investments will never come at the expense of generating cash 20, we have been intensely focused on improving the liquidity profile of the company and have come a long way towards enhancing the overall capital structure of the company. The announcement to pay down the $105,000,000 11 percent exit note stub is another important milestone in our post emergence journey, which brings our gross debt levels below December 2019 levels, another remarkable achievement. On our last I highlighted the 5 strategic priorities we have for Benefit Financial performance, customer experience, organizational vitality, lean operations Creating the future. Financial performance is hopefully clearly visible to everyone and is something that will remain our North Star.

Speaker 2

I wanted to take a few minutes today to share some of the important product launches and operational highlights from the Q1 that point to our to build upon our market leading managed pressure drilling product offering by adding a performance tier option. This comprehensive solution enhances pressure management and improves detection and visualization of kick or loss incidents. We also digitally captured data for post job analysis and process improvement By leveraging our industry leading monitoring and modeling software capability and gives us position points across the market spectrum. In our wireline product line, we deployed our Memory Raptor Case Toll Evaluation System, which uses our existing PulseNeutron wireline logging capabilities that provides advanced analysis of oil, water and gas saturation behind casing. As a result, the tool increases production by providing precise data and improving efficiency while reducing customer costs.

Speaker 2

In well construction and completion, we launched the Express XT liner system. With this launch, we are driving increased reliability of liner hanger systems, leading to reduced operational risk and superior well integrity. To enhance well integrity, we have implemented the Triple Plug Subsea Release or SSR system that features added fluid separation capability to prevent contamination before the cementing process. This cutting edge technology is the only system available in the market that offers a triple dart and plug feature, ensuring true fluid separation. In production and intervention, in joint development with the Middle East operator, we delivered the WIP check technology, Utilizing a sensor in the whipstock milling assembly that provides a reading of inclination and separation achieved at casing exit depth, allowing the customer to validate the casing We also released a fluid loss sleeve, a system enhancement in our existing reentry fleet, which will enable customers to save rig time to These are some examples of using digital technologies to enhance our differentiation while creating greater value in customer outcomes.

Speaker 2

These technology introductions and spirit of collaboration with customers are what enables us to win business and we had several noteworthy examples in the Q1. In Latin America, we were awarded a $290,000,000 2 year contract extension to provide multiple product line offerings, including pressure pumping, Wireline, belt services and testing services for onshore gas and shale wells. We were awarded a 3 year 5 rig deepwater contract with BP Azerbaijan. The contract allows BP to automate its TRS operations further and reduce red zone risk using the Vero technology. We've been awarded a 3 year joint operations contract with Saudi Arabian Chevron and Kuwait Gulf Oil Company.

Speaker 2

Weatherford is the 1st company to provide Premier MPD technology offering for an upcoming exploration campaign. In addition to our core offerings, we continue to gain traction in the geothermal energy space Through a combination of commercial wins and partnerships, these achievements build on our long history in this area and enable us to further our positioning. We entered into an exclusive collaboration agreement with Serafie Energy to provide an integrated package of products and services to end users for the development of geothermal energy. Weatherford will offer its global expertise in data acquisition, digitalization and automation services and Serafee will leverage its proven engineering and project management services to provide enhanced geothermal technology solutions to the market. We signed a contract with Ever, a revolutionary geothermal company to support 1st commercial ever loop in Germany, providing our liner hanger system, cementation products and associated services.

Speaker 2

This project is based on a new closed loop advanced geothermal system that will begin drilling in July with 3 more ever loops projected afterwards. Our successful track record in the geothermal market made us an ideal partner for this challenging project. In digital, we saw success in further enabling our customers to increase the production of their wells through our industry leading data analytics and measurement capabilities. Petroleum Development PTO awarded Weatherford a 7 year contract for our market leading Foresight technology, which enables improved production performance of wells through its integrated and automated well models. We received an award from Aramco to deliver Redeye Watercut Meter.

Speaker 2

This technology delivers real time measurements and enhanced accuracy in multi phase conditions. Now let's turn to our view on the markets. In North America, we are seeing signs of the growth trajectory starting to flatten as expected As rig counts have slightly decreased due to the softening in the gas market. However, we continue to see pricing resilience and expect an uptick in new As we've indicated before, our portfolio in U. S.

Speaker 2

Land markets is much more production oriented and has limited downside risk to the declining rig count in gas. At the same time, on offshore, we continue to see robust activity in the Gulf of Mexico and are actively engaged in planning mid- to longer term projects, especially for our market leading offerings of MPD and TRS. Net net, we believe North America will still grow for us this year, but at a lower pace closer to mid single digits. The outlook for international markets continues to demonstrate strength with the Middle East and Latin America leading the way. Additionally, we see incremental opportunities in Asia, The Mediterranean and Sub Sahara regions, driven by robust offshore project sanctions and startups.

Speaker 2

We expect to see The broader Middle East region grow north of 25%, followed by Latin America in the mid to high teens. There will be volatility With that, I'd like to hand it over to Arun to walk us through financial performance and the guidance for the Q2 and full year of 2023.

Speaker 3

Thank you, Karish. Good morning, and thank you, everyone, for joining the call. I'll begin with our consolidated results and then move into our segment results, liquidity and cash flows. As Kirish mentioned, we had a great start to 2023 with our Q1 revenue of $1,190,000,000 which grew 26% year over year, led by across support improvements in all segments and geographies. Operating income of $185,000,000 in the Q1 of 2023 increased by 9 28% year over year.

Speaker 3

Net income was $72,000,000 increased by 190% year over year when compared with a net $80,000,000 in the Q1 of 2022. Adjusted EBITDA for the quarter was $269,000,000 which translated into 22 point 7% adjusted EBITDA margins. 1st quarter results were favorably enhanced by the timing of inflation related cost recoveries, particularly in the DRE segment, which we had forecasted for the Q2 of 2023. Regardless, our 1st quarter margin expansion was noteworthy on a year on year basis and sets us up for a great first half of twenty twenty three. Now moving into our segment results.

Speaker 3

Trailing and Evaluation or DRE revenues of 3 by $80,000,000 or 27% year over year due to increased activity across product lines and geographies, largest contributors being Drilling related services. TRE segment adjusted EBITDA of $108,000,000 increased by $49,000,000 or 83 percent year over year, mainly due to higher service activity and larger fall throughs. Well Construction and Completion or WCC Revenues of $421,000,000 increased by $77,000,000 or 22% year over year, driven by increased activity across all product lines and geographies, especially by higher Cementation products, completions and TRS activity. WCC segment adjusted EBITDA of 96,000,000 Increased by $29,000,000 or 43% year over year, mainly due to increased activity across all our geographies. Production and Intervention or PRI revenues of $349,000,000 increased by $63,000,000 or 22 Due to increased activity across all product lines and geographies, intervention services in drilling tools, International Pressure Pumping and Artificial Lift experienced the highest activity increases.

Speaker 3

PRI segment adjusted EBITDA of $68,000,000 increased $29,000,000 or 74% year over year, mainly due to higher activity across all product Turning to liquidity and cash flows. I should point out that we are now referring to what used to be called in our non GAAP disclosures as free cash flow as adjusted free cash flow. This is just a terminology change structure and calculation remains exactly the same. Operating cash Close minus CapEx plus sale proceeds from disposition of assets is what it remains. Our cash flow performance It was robust despite seasonal headwinds in the Q1 of 2023.

Speaker 3

We generated an operating cash flow of $84,000,000 An improvement of $148,000,000 versus Q1 of 2022 and an adjusted free cash flow of positive $27,000,000 an improvement of $91,000,000 versus Q1 of 2022. These improvements were primarily driven by higher margins as well as ongoing improvements in operational and working capital efficiencies. It is important to note that we drove this cash flow despite the CapEx and working capital investments. CapEx at 60 $4,000,000 for the quarter is expected to be at the higher point of spend versus rest of the year and the total year will be in the 4% to 5% range of revenue. We closed the Q1 of 2023 with total cash of approximately $983,000,000 As of March 31, down $129,000,000 sequentially.

Speaker 3

This reduction was predominantly driven by a $52,000,000 remittance for tax obligations relating to equity awards vested And senior notes repayments and repurchases of $62,000,000 comprising of $20,000,000 On the previous call, I had suggested that we would reduce our restricted cash balance by $15,000,000 By moving cash collateralized bilateral LCs into a new credit facility, I'm very pleased that the team's execution as we accomplished a reduction of $52,000,000 this quarter. On April 20, 2023, we a notice to redeem the remaining $105,000,000 of our 11% senior unsecured notes, I. E. The exit notes. Our capital allocation strategy and priorities remain unchanged.

Speaker 3

We will continue to invest back in the company for technology, CapEx and working capital, but not at the expense of generating free cash flow. As seen from the recent announcements, We've made significant progress on debt reduction and thereby interest cost reduction and simultaneously leverage improvements. During the quarter, we continued to engage in opportunistic buyback for our secured debt below par and were able to retire $42,000,000 Subsequent The redemption of the $105,000,000 stub, our gross debt will be approximately 2,080,000,000 Comprised of $415,000,000 of secured notes due 2028 at 6.5 percent and 1.6 1,000,000,000 of unsecured notes due 2,030 at 8.625%. Our Q1 ending leverage of Turning to our outlook, I'll start by noting that we are taking up our total year guidance meaningfully. There are some shifts versus normal quarterly patterns that I'll explain as well.

Speaker 3

For the Q2 2023, We expect consolidated revenues to grow by mid single digits sequentially. Across the segments, DRE revenue is expected to be flat To down by low single digits, WCC is expected to grow by mid to high single digits and PRI is expected to grow by mid to high single digits. We are expecting to see a slight decrease in adjusted EBITDA margins versus the Q1 of 23, and this is driven by 3 factors: the shift to Q1 of contract recoveries, which were projected for Q2 The mix shift towards products in WCC driven by new business in the Middle East and the start up costs and new contracts that we have previously talked about. Nonetheless, adjusted EBITDA margins are expected to expand by over 400 basis points over the Q2 of 2022 and the first half Margins in total will remain very strong. CapEx is expected to be in the range of $40,000,000 to $15,000,000 and adjusted free cash Flow is expected to be greater than $15,000,000 despite higher cash interest and continued net working capital investments for the full year of 2023.

Speaker 3

Our full year 2023 consolidated revenues are now expected to grow by mid teens compared to 2022 versus the low double digits to mid teens we had indicated earlier. Across the segments, DRE forecasted to deliver low double digits to mid teens growth, WCC to deliver mid teens growth and PRI to deliver mid to high single digits As mentioned in our last earnings calls, 2023 will be a year in which we invest The company reinvest in the company for the long term and have some start up costs on the newly announced contracts. Having said that, we have visibility to some significant opportunities and continue to execute in favor of our long term strategic priorities. This will enable us to offset the aforementioned risks and deliver another year of meaningful margin expansion. Accordingly, we are raising our guidance for full year consolidated adjusted EBITDA margins to expand by at least 250 basis points over 2022.

Speaker 3

While the Q3 typically benefits from greater service fall throughs, This year, we anticipate that there will be some offset to that effect driven by service and product mix. Additionally, Labor inflation wage increases will start having an impact from Q2 through Q4. As mentioned earlier, CapEx for the full year is to be 4% to 5% of revenue. Notwithstanding, we are now increasing our adjusted free cash flow guidance As we now expect 2023 adjusted free cash flow to be greater than 2022 on the back of increasing margins. Thank you for your time today.

Speaker 3

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

Speaker 2

Thanks, Arun. To summarize our commentary thus far, a Very strong start to the year that enables taking up the full year outlook. While our financial results are clear, they are enabled by the people and the initiatives we have in the company, and I want to take a couple of minutes to highlight our other two strategic priorities as well. On lean operations, we are making good progress on simplification and our fulfillment initiative, which also has a direct impact on our financial performance and customer experience. We are streamlining our integrated supply chain by developing new strategic partners, which allows us to Our low cost region sourcing spend by over 5x over the next couple of years.

Speaker 2

It will also increase logistics network efficiencies and decrease delivery lead times as we intensify our execution footprint around our customers. We also continue to We focus on the intersection of product line and geography as we have discussed numerous times. In the Q1, we exited our Alaska operations as we didn't see a sustainable path to longer term profitability and scale in that region. We saw improved inventory See evidenced by a 12 day reduction in DSI year over year in a quarter where revenue increased by 26%. Overall, net working capital days improved 13 days to 99 days, a noteworthy achievement in a growth environment.

Speaker 2

We've also launched a program to modernize our human capital management platform and have selected Oracle to be our new platform. This is an important investment in the infrastructure of the company and one that will provide a solid foundation for people And talent development for the future. Like all other programs, this is viewed through a rigorous execution and payback lens and we're excited about the potential of this change in the next few quarters. We launched our turnaround with a clear goal of sustainable profitability and free cash flow generation. Over the past 11 quarters, We have consistently delivered and are committed to more of the same.

Speaker 2

Our margins now demonstrate the differentiation of our portfolio and make a Congrats for the continued investment potential in the company. While there has been significant equity appreciation over the past 2 years, we still believe there is further room for growth and that a rerating of the multiple is justified given the performance and trajectory of the company. We remain grateful to our customers for their unwavering trust, Our employees and business partners for their steadfast support and our investors for their continued confidence throughout this journey. And now operator, let's please open it up for questions.

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Luke LeMoyne with Piper Sandler. Please go ahead.

Speaker 4

Hey, good morning, everyone.

Speaker 2

Hey, Luke. Good morning.

Speaker 3

Good morning, Luke.

Speaker 4

Hey, morning. For 1Q, you guys talked about how contract recoveries that were expecting in 2Q kind of moved into 1Q. But was there anything else that was different versus your initial outlook that caused a large feat? And then, you gave what you expect regional growth rates this year, but could you talk about where the increasing confidence is coming from that raised your

Speaker 2

Yes, sure. Look, this is Girish. I'll start. So I think, look, a few things. The contract recoveries were a part of it for sure, but look, I think a couple of other things that contributed.

Speaker 2

Yes. The first one is activity continues to be really robust and we saw that in the revenue numbers, right? The seasonal decline was a lot less And that just I think really points to the strength of the market in general, especially on the international side. And that typically comes in at a higher fall through rate, so that benefits I think the other thing that I would point to is look, the team has done a just phenomenal job at executing, both on our commercial initiatives As well as internal cost controls and the initiatives that we're driving around margin expansion. So I think all of that put together really It drove the outperformance this quarter and something that we have continued to build on momentum last year and continues in.

Speaker 2

Look, a lot of that is what leads into the second part of your question, which is what gives us confidence. Yes, we are seeing the international markets So really, really strong, like we pointed out in our prepared remarks, the Middle East activity is very robust. We are very encouraged by the signs that we're seeing and ongoing tendering activity as well. And then Latin America is actually much stronger than we had potentially anticipated. And the other regions are starting to kick in as well.

Speaker 2

So net net, look, it's a very robust market. North America has been Strong as well. Look, the year on year growth in North America was very good. So we think there is a lot more traction left in the market and that gives us the confidence to increase

Speaker 4

Guidance. Okay, great. Thanks very much.

Operator

Thank you. And our next question today comes from Ati Motak with Goldman Sachs, please go ahead.

Speaker 5

Hi, good morning team. You made some incremental progress on the balance sheet, Which has been an area of focus for you, but as you think about the subsequent steps here, can you help refresh the thinking around capital allocation between return of Our

Speaker 3

Priorities really haven't changed. We continue to focus on balance sheet, debt stack optimization and access to liquidity. As we discussed before, we will be prioritizing allocation of capital associated with Infrastructure build out in the technology side, we are investing monies in R and D. As you would have noticed, our CapEx Spend went up meaningfully about 30% sequentially. So, our capital allocation priorities as far as reinvesting in the business Remains the same and we will continue to make meaningful progress on access to liquidity and debt reduction.

Speaker 3

So that time period continues to remain a priority.

Speaker 5

Great. Thank you for that. And then on the full year margin expectation, you raised your, I guess basis point change guidance here, but I'm wondering if that changes your longer term normalized expectations versus the guidance you provided last time or does that More so pull forward that expectation.

Speaker 2

Yes. Hey, Ati, this is Girish. Look, we have talked about this a few times now and We have very clearly stated a couple of things. One is our philosophy and our methodology is we set a target, we work towards it and unless Tantal, it's cemented. We don't take it up further, right?

Speaker 2

We started at 15% EBITDA margins about 2 years ago. We raised it to high teens. And now we have said, look, Mid-20s, which is a pretty remarkable achievement that we can get there, which we are confident we will and really sets us up In the highest year of the industry. So look, for us, that continues to be the goal right now is to get to that mid-20s. When we talked about it towards the end of last year, right, we basically said it is a multiyear journey.

Speaker 2

Obviously, it's always going to get With a stronger market and we are seeing that right now. So our hope is that over the next couple of years, we should be able To get there, but more importantly, we want to make sure that we can sustain that and that's really going to depend a little bit on the market. But while we are doing that, we are making We are making all the structural changes in the company and to set us up for a through cycle basis. So that's really our effort and if the market continues to go gangbusters, Then you'll certainly get accelerated, but we are much more focused on the sustainability aspect.

Speaker 5

Great. Appreciate the color. Thank you.

Operator

And our next question today comes from Kurt Hallead with RBC. Please go ahead.

Speaker 4

Hey, good morning everybody. How is it going?

Speaker 2

Good, Kurt. How are you doing?

Speaker 3

Hey, Kurt.

Speaker 4

Good morning.

Speaker 2

Doing well.

Speaker 4

Doing well. Doing well. Great work, great effort, great results. So congrats. Joe, market and look, you booked $1,200,000,000 in new contracts during the course of the Q1.

Speaker 4

You booked $6,500,000,000

Speaker 2

last

Speaker 4

Question number 1 along those lines is, do you think you have the Capacity and capability to potentially book more contract awards in 2023 than you did in 2022. Can your system handle that?

Speaker 2

Yes. So look, it's a really great question, Kurt. The short answer is yes. The longer version of the answer is look, A lot of these contracts are multiyear, right? So that's an important thing to remember.

Speaker 2

So a lot of it will depend The duration of the contract and what product lines, etcetera. But look, we are very confident not just in our capacity, but also our ability to scale. It's also partly why we are investing in capital, right? If you look at Q4 and Q1, collectively in those two quarters, we have invested about $110,000,000 of CapEx into the company and that really sets us up to execute on all of these contracts, not just in 2023 2024, but beyond as well. Look, we are gearing up from a CapEx capability.

Speaker 2

We are making sure we've got the right service delivery. We've got making sure we've got the right fulfillment networks and as well as that making sure the commercial efforts around the company Are set up to work the new opportunities as they come. A lot of these wins are sometimes extensions, some of them are incremental new opportunities And we're going all out on all of them.

Speaker 4

Got you. All right. So follow-up question then is you've obviously increased Your margin expectations for 2023, so how much of that upside And that margin dynamic is pricing of the contracts that are rolling through. How much of that is Specific internal drivers and it'd be great to get some color from you on that.

Speaker 2

Yes. Look, Kurt, we're not we don't have that degree of precision that we can point to exactly how many basis points comes from each piece. But what I think is Fair to say, look, the big components, pricing is certainly a factor around it. We continue to see a constructive environment for pricing. There is a significant offset from inflation.

Speaker 2

Look, that hasn't fully abated in a lot of different material areas And wage increases are a factor as well, and it's important given the cost of living increases for people around the world. We are committed to make sure that our employee base gets that, merit adjustment and that's baked into our forecast as well, which offsets the pricing piece a little bit. Look at the same time, like we've been talking about for the last couple of years, there's a lot of sort of, I'll call, self help initiatives That we are driving to really modernize the company and to make sure that our structure, instead of being what has been a historical disadvantage is actually a strategic advantage for us. So our efforts around fulfillment, what we are doing with The service delivery, the way we are driving our product line strategies, changing the mix around our product lines, the commercial strategy It's not just around pricing, how we really attack our contract base and make sure that we're getting the maximum utilization out of the contracts themselves. All of it are factors which are leading to very significant margin expansion now for a couple of years.

Speaker 4

Okay, great. And then if I may, just look, the markets are concerned about the significant macroeconomic Slowdown, recession, whatever you want to call it. How does that translate? Is any of that translating To discussions you're having with your international customers, are they starting to get wary? Are they starting to maybe Scale back on their aggressiveness on wanting to increase their work.

Speaker 4

I mean, it doesn't appear that way, but I just You guys are having these conversations on a regular basis. Are you sensing any tone change from your customers at all?

Speaker 2

Look, not at all. The only tone change that we are seeing is really around how can we do more. So if anything, look, I would say on the international side, are really committed to their investment thesis, their plans that they have laid out, which are not look on a short term basis. They've really talked this well through. There is a longer term disconnect on the energy security and energy supply side that has got to be Fixed given the longer term underinvestment that's happened in the sector.

Speaker 2

So we see our international customers very committed to that And continuing to go forward with their plans regardless of the sort of day to day perturbations and headlines that appear.

Speaker 4

That's great.

Operator

Today's next question comes from Doug Becker with Capital One. Please go ahead.

Speaker 6

Thanks. Girish, you highlighted the launch of a new MPD offering. Could you go into a little more detail about what markets that technology is really targeting and I'm guessing offshore? And then just your general outlook for MPD, we've been hearing that it's difficult to get the equipment offshore, which Suggests pretty good pricing power for Weatherford.

Speaker 2

Yes. Hey, Doug, thanks for joining the call. I appreciate the question. Yes. Look, we continue to remain very excited about MPD.

Speaker 2

It is really sort of our flagship product line. And as we have talked about multiple times before, This is really a story of adoption versus share for us given our technology leadership in the space. So look, What this really is, is a performance to your offering. So we've got a terrific offering on the onshore markets kind of the base MPD. We've got the higher end with our Victus offering.

Speaker 2

This really complements that overall portfolio by addressing the entire market now sort of at that midpoint of that performance tier That allows customers who want that but don't want the full scale and range of the offering. And so we get it a little bit on Both sides of the market on onshore and offshore, it's still early days, but we are tremendously excited about the potential, and really think that This will allow us to drive that adoption story even further on MPD and get more traction. Your point On supply tightness, I think is very correct. Look, this is a market that we are now seeing A lot more demand and the capital cycles are a little bit longer. And we are very committed to capital discipline This is not going to be a case of build it and they will come.

Speaker 2

This is going to be as with everything else that we have done, very rigorous payback lens, making sure that we've got a line of Good pricing. But at the same time, look, we want to make sure that we are working with our customers to make sure that they are getting the efficacy and the benefit of this. So It's a very holistic view, but look, it's a very profitable product line. There's a tremendous room for growth. We are very excited about it.

Speaker 6

That's very encouraging. I was also looking for a little more granularity on the free cash flow guidance. It seems to imply more than $300,000,000 this year. Last year, the EBITDA, the free cash flow conversion was north of 35%. Is that a reasonable expectation this year given the growth opportunities you see?

Speaker 3

So As is typical of our industry, cash flow generation is skewed to the second half of the year as opposed to the first. What we can Definitively tell you is that we are off to a great start. By the time we are done and dusted with the first half, we would Well in advance of where we would have been in the first half last year. But think about The number of investments we are making relative to what we did last year, we have meaningfully increased our CapEx spend. There will be some working capital buildup notwithstanding working capital efficiency that will drive top line growth Not only in the second half, but into the next calendar year as well.

Speaker 3

So I think at this point, it is What we are saying is we expect the cash flows to be greater than what we did last year. Hopefully, greater can be in 5 I don't know. At this point, we are not really talking about a number, but it will be meaningfully greater than what we did last year.

Speaker 6

Fair enough. And then Arun, just wanted to dig into DRE just a little bit. Is the inflation recoveries the primary reason That revenue is expected to be flat to maybe down a little bit in the second quarter or the other factors at play there?

Speaker 3

The primary reason is the fact that we experienced some cost recoveries, which typically flow through the revenue line as well. And had that not been the case, we would have experienced a sequential growth in the Q2. So that is why we are guiding towards maybe flat or Somewhat negative, on a sequential basis in Q2.

Speaker 6

Got it. Thank you very much.

Operator

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

Speaker 2

Great. Hey, thank you all so much for joining the call. I think I look appreciate everyone's interest in the company. Once again, a huge thanks to our entire Weatherford team for just fabulous execution in the Q1, and we look forward to talking to you again in 90 days on the 2nd Thank you all.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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