Operator:

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Second Quarter 2024 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Chase Mulvehill, Vice President of Investor Relations. Please go ahead, sir.

Lorenzo Simonelli:

Thank you, Chase. Good morning, everyone, and thanks for joining us. We delivered outstanding second quarter results, highlighted by strong operational performance across the company. Our IET performance benefited from excellent execution of its robust backlog. In OFSE, results were supported by a solid seasonal recovery in the Eastern Hemisphere, portfolio resilience in North America and added success in driving enhanced cost efficiencies across the business. We continue to improve our operational consistency, as this marks the sixth consecutive quarter of meeting or exceeding the midpoint of our quarterly EBITDA guidance. As highlighted on Slide 4, we had another strong quarter for orders. This is particularly evident in IET, where we booked $3.5 billion during the quarter, including a large SONATRACH award for gas boosting in Algeria's Hassi R'Mel gas field. This marks the highest level of non-LNG equipment quarterly bookings in the company's history and again underscores the breadth and versatility of our IET portfolio. We also secured two major offshore topside contracts to provide power generation systems for innovative all-electric FPSO units, which will be installed offshore in Latin America. These awards further build on IET's positive momentum in the offshore market. On the digital front, Baker Hughes secured a multimillion dollar global frame agreement with BP, covering all of their upstream and downstream assets. This provides an enterprise subscription for Cordant Asset Health, enabling BP to deliver reliable, efficient condition monitoring and supporting its digital optimization strategy. We also saw continued traction in our Gas Tech Services business, booking to backlog free multi-year service awards that totaled $500 million. This included a 25 year service agreement to support our customers' offshore operations in Latin America. Our services backlog uniquely differentiates Baker Hughes, adding recurring long term and profitable revenue streams. In the new energy, we continue to see solid order momentum. We booked record new energy orders of $445 million during the quarter, taking year-to-date orders to $684 million sand already approaching the $750 million we booked in 2023. Considering this strong first half performance, we are trending toward the high end of this year's new energy guidance range of $800 million to $1 billion. This is another reflection of our technology differentiation and the versatility of our portfolio to provide new energy customers with innovative solutions. In Asia Pacific, we secured a major Gas Tech and Climate Tech Solutions contract to supply electric-driven compression and power generation to a global energy operator. This will enhance gas operations and power CO2 capture to reduce the carbon intensity at the customer's LNG facility. We also continue to build on our strategic collaboration with Air Products. In the second quarter, CTS was awarded a contract for CO2 and hydrogen compressors as well as pumps for one of Air Products' hydrogen projects in North America. In Germany, CTS also secured an award to provide [Passoni Deutschland] with zero emission integrated compressors, providing increased compression capacity to handle the large volumes of gas entering the network from new LNG regasification terminals. In July, we signed a long-term agreement to be a preferred equipment and service supplier for Wabash Valley Resources' ammonia and carbon sequestration plant in Indiana. The project will capture and sequester 1.6 MTPA of CO2, making it one of the largest carbon sequestration projects in the U.S. Importantly, the EPA issued Wabash Class VI permits in January of this year. Once this project is FID, we have the potential to book a wide range of orders that could span across both OFSE and IET. These include compression, pumps, valves, digital hardware and software, NovaLT turbines in IET, and sequestration analysis, CO2 flexible pipe, well construction, and surface and sub-surface monitoring in OFSE. This is one example of how we realize synergies between IET and OFSE, a theme we believe will become a common thread for new energy projects at Baker Hughes. In OFSE, we received another significant Petrobras award for workover and plug and abandonment services in pre-salt and post-salt fields offshore Brazil. The multi-year project will leverage Baker Hughes' integrated solutions portfolio to optimize performance for Petrobras. Turning to our operational performance. We delivered strong second quarter results, highlighted by 46% year-over-year EPS growth and 25% increase in EBITDA. Importantly, we again exceeded our EBITDA margin guidance, driven by outstanding execution and continued cost productivity improvements across the company. Our efforts to structurally change the way we operate are evident in our margin performance. Overall, EBITDA margins increased almost 150 basis points year-over-year to 15.8%. In OFSC, margins came in above our guidance, driven by strong performance in SSPS and the acceleration of our cost optimization initiatives announced earlier this year. Notably, OFSE's year-over-year incremental margins were approximately 60%, highlighting the team's persistent focus on cost productivity. In IET, margins also exceeded our guidance. Gas Tech Equipment posted another strong quarter with margin significantly increasing from the same period last year, as we convert higher margin backlog. In addition, Industrial Products & Solutions benefited from higher volumes and improved supply chain efficiency with both contributing to IET's better margin performance. Turning to the macro view on Slide 5. On the back of softer global demand and continued economic uncertainty, oil prices experienced some volatility during the second quarter. Yes, Brent prices still averaged $85 per barrel with support from the extension of OPEC+ production cuts, rising geopolitical risk, and firming oil demand in June. The trajectory of global economic activity, the persistence of inflation and geopolitical risk will be key factors in determining the oil price path for the remainder of this year. Next year, the pace of OPEC+ barrels returning to the market will likely be the major determinant of oil prices. Our global upstream spending outlook for the year is revised slightly lower due to North American softness. In North America, we previously expected the market to decline in the low to mid-single-digit range compared to last year. Due to lower-than-expected first half rig activity and tempered second half expectations, we now expect year-over-year declines in North America spending to be down in the mid-single-digits. With our Gulf of Mexico exposure, which is expected to demonstrate another year of solid growth and our portfolio mix that is more tied to production, we believe that our North American revenues will outperform the market. Across international markets, we maintain our expectations for high single-digit growth compared to last year. The market outlook already contemplated the expansion that OPEC+ cuts through the end of the year, as well as any potential timing differences between the transitioning of rigs from oil to gas in Saudi Arabia. Looking out beyond 2024, we expect global upstream growth to be led by Latin America and West Africa offshore markets and the Middle East, albeit at a decelerated pace. As the cycle matures, we expect our customers to increasingly focus on optimizing production from existing assets, providing significant growth opportunities for our mature asset solutions. This leverages our decades of experience, deep-domain knowledge and industry-leading technologies, including Leucipa and coveted franchises in both upstream chemicals and artificial lift. Turning to global natural gas and LNG on Slide 6. We reiterate our positive outlook for global gas markets. Earlier this year, the IEA updated its projections for electricity consumption, noting that, global demand for data centers, driven by crypto currency and AI could double by 2026. This robust data center growth implies its annual electricity consumption could account for 4% of global energy demand. To put this in perspective, this would equal roughly the same amount of electricity, used by the entire country of Japan. We believe natural gas will be essential to meet this growing power demand, which will be additive to the growth required for new energy sources in the future. Therefore, the notable rise in generative AI could provide upside to our current expectations for natural gas demand to increase by almost 20% between now and 2040. We are confident that, strong underlying natural gas demand will lead to robust and sustainable growth in LNG. Through the end of this decade, we maintain our expectations for LNG demand to increase by mid-single-digits annually, requiring an installed nameplate capacity of 800 MTPA by 2030. As we highlight on the slide, year-to-date offtake contracting for LNG is 42% higher than the same period last year. With recent contracting of Middle East capacity from Asian buyers and portfolio players, we expect a record breaking year for contracting offtake volumes. Contracting of offtake capacity is a key factor in many LNG projects reaching FID. Therefore, these recent trends only increase our confidence in the pipeline of potential projects progressing. We continue to expect global LNG FIDs of about 100 MTPA over the next three years, which would result in our installed capacity increasing by 70%. Importantly, our growing installed base of equipment, brings significant aftermarket service opportunities for Baker Hughes across the lifecycle of the equipment. Turning to Slide 7, I want to take a moment to reflect on the strong tailwinds outside of LNG that we are experiencing within IET's Gas Technology Equipment portfolio. The versatility of Gas Tech Equipment uniquely sets Baker Hughes apart from our peers. This enables us to sell our equipment into numerous end markets, outside of LNG, where we often compete and win against a diverse group of industrial companies. In the first half of this year, we have booked $6.4 billion of orders, with about 85% associated with non-LNG equipment and services. This strength has been most notable in Gas Tech Equipment, where we booked almost $1.4 billion of non-LNG orders during the quarter. On the back of a robust fast half, we now expect Gas Tech Equipment orders outside of LNG to exceed $3 billion for the full year, which is almost double last year's level. Looking beyond 2024, we see an opportunity for our GTE business to capture increasing share of the addressable non-LNG market, which we expect to total $100 billion to $120 billion through 2030. This significant opportunity includes a broad set of growing end markets, including gas processing and pipeline infrastructure, onshore and offshore production, downstream, and industrial. This year, we have experienced a notable increase infrastructure orders. In the first quarter, we announced the Master Gas System Free award with Aramco. During the second quarter, we booked the Hassi R'Mel pipeline expansion project in Algeria that will bring gas to Europe. In total, these two projects accounted for more than $1 billion of equipment bookings. Looking over the next few years, we see continued strength in gas infrastructure opportunities across the Middle East, U.S., Latin America, and Sub-Saharan Africa, due to secular growth in global natural gas and LNG demand through at least 2040. This will drive further momentum in gas infrastructure equipment orders well beyond this year and provides opportunities for Gas Tech services, condition monitoring and pipeline inspection. A key strength of our business model is to monetize equipment cycles and leverage our growing installed base for sustainable and profitable revenue growth. Beyond gas infrastructure markets, we also expect continued strength in onshore and offshore production orders, led by the FPSO market. Over the next few years, we anticipate the market awards 7 to 9 FPSOs per year, driven by growth in Brazil and Guyana. Long, X.M recent discoveries in Namibia's Orange Basin provide growing confidence in FPSO orders outside the strong momentum we see over the next couple of years. In onshore production, we are optimistic about associated processing opportunities as global gas production increases, particularly in the Middle East. One example is the Jafurah gas field where we have been previously awarded compression trains, stabilizer compressors, valves and condition monitoring for the strategic gas basin in Saudi Arabia. As this basin is set to significantly increase production, we see opportunity to book additional IET orders in the future. In refining and petrochemicals, we are also experiencing positive momentum. We see growing opportunities for refinery conversion to bio-feedstock as well as growth in ethylene and ammonia markets, driven by rising fuel, fertilizer, and plastics demand. We are seeing increasing power demand led by data center and electric vehicle growth. This dynamic coupled with renewables intermittency and planned reduction in coal-fired generation capacity is expected to result in power shortages across U.S. grid network. For example, ERCOT's Texas power grid operator has forecasted that 2030 peak summer low demand will exceed generation by 33 gigawatts. This is equivalent to the energy needed to power 25 million homes, which amounts to 10x the number of homes in Houston. Due to these grid reliabilities and availability concerns, we are experiencing increased interest in our turbo-machinery technology for behind-the-meter and off-grid solutions across data centers, transportation sectors such as airports and seaports, and oil and gas markets. Our NovaLT turbines, which can run either on natural gas or hydrogen, are the core technology for our micro-grid offering. We will also benefit from increased demand for utility scale power solutions through our partnership with NET Power as well as our steam turbine generators and super-critical CO2 technology that enable power generation through small modular reactor solutions. Lastly, we have experienced solid growth across our BRUSH portfolio, which includes solutions to meet most challenging requirements for power generation, grid stabilization and decarbonization with its electric motors, synchronous generators and condensers. As additional intermittent renewable power capacity and electrification-driven demand are added to the grid, we expect that grid stabilization will be an area of significant growth for IET. In summary, we are very excited by the strong tailwinds that we are seeing across our energy and industrial end markets. We remain confident in our ability to deliver $11.5 billion to $13.5 billion of IET orders this year. Before I turn the call over to Nancy, I wanted to briefly provide some highlights around the progress we are making on our emissions and the success we're having in helping our customers reduce their own emissions intensity. Baker Hughes was one of the first companies in our industry to make a public commitment to a reduction in our operational emissions by 2030 and achieve net zero by 2050. As detailed in our Corporate Sustainability Report published in May, we remain on-track to achieve these goals, and we continue to provide products and services that help our customers reduce their emissions intensity. In IEC, we have sold a number of zero emission integrated compressors or ICLs. Also, customers are increasingly interested in our more efficient turbines highlighted by increasing NovaLT order flow. Our Panametrics' flare.IQ technology is also seeing increased customer adoption. It helps to monitor, reduce and control emissions associated with flaring and covers a wide range of assets, including assisted flares associated with downstream petrochemical, refinery, and upstream operations. In OFSC, our artificial lift product line deploys more efficient permanent magnet motors at well sites, replacing older, more emissive technology. Combining permanent Magnum motor technology with Baker Hughes' electrical, submersible pump capabilities creates differentiated solutions, providing advantages for our customers and producing fewer emissions. Across both segments, we have developed digital and condition monitoring solutions that enable our customers to efficiently monitor their equipment performance, highlighting any inefficiencies that drive emissions up. Our customers are clearly focused on reducing their emissions, and we have a broad suite of products to help them on this journey. With that, I'll turn the call over to Nancy.

Lorenzo Simonelli:

Thank you, Nancy. Turning to Slide 18. We are exceptionally proud of the progress we have demonstrated on the margin front. EBITDA margins are expected to be in the high teens range during the second half of this year, and 2024 is anticipated to produce Baker Hughes' highest margin rate. Our transformation efforts are clearly driving structural improvement in underlying margins. Our progress is clear and we are confident in our plan to achieve 20% margins for OFSE in 2025 and IET in 2026. The story today of Baker Hughes is more than just improving operational performance. As I highlighted earlier, we have growth tailwinds in IET that span across multiple end markets, including gas infrastructure, LNG, FPSOs, distributed power, and new energy. Orders from these key growth markets have been major drivers of our record equipment backlog. Throughout our transformation, we have taken steps to reinforce our culture as one Baker Hughes. Our people are the driving force behind our success. We put people first and take energy forward. I'd like to conclude by thanking the Baker Hughes team for yet again delivering very strong operating results. It's a testament to the strength of our people, the culture we're building, the portfolio we have created, and the value of the Baker Hughes enterprise. With that, I'll turn the call back over to Chase.

Operator:

[Operator Instructions] Our first question comes from the line of Luke Lemoine with Piper Sandler.

Lorenzo Simonelli:

Definitely, Luke. And I'm really proud of what the team's been able to accomplish. As you said at 2Q, really some great results and it's a testament to the execution that we started also back in the fall of 2022, when we went from four discrete segments into two. We had numerous changes and also we started a restructuring of taking cost out, $150 million in 2023, and really streamlining processes, reducing duplication. As you look at the segments in particular, I mean, IET is really on a process of continuous improvement, adopting lean mindset as they have a great backlog that they're continuing to churn out and we're increasing automation, the efficiencies of supply chain, the customer-centric approach and really delivering more value to our customers with what we have. And that volume is great for the future as well, and we're continuing to do more with it and getting the efficiencies from a margin perspective. On OFSC, again, it's cost competitiveness. It's continuing to drive as you saw in the fall of '23, announcing a restructuring with taking out duplication, announcing execution, service delivery improvements, a focus on best cost country sourcing and really profitable growth as we go forward. It doesn't stop in the segments, also across the company, the structural improvements that you heard, Nancy mentioned beforehand. We're expecting the margin expansion to continue. As you look at '24, we're going to be up about 150 basis points, which is better than what we said previously, and we're fully committed to the 20% in OFSE in 2025 and also the 20% in IET in 2026 and very confident in our ability to achieve those. A lot of things coming together and a lot of hard work by the team.

Luke Lemoine:

This is somewhat related, Nancy, but you raised your EBITDA guidance by 5% this year, and we saw some of the segment detail in the slide deck. Could you walk through some of the drivers that's pushing this higher? I mean, I know some is probably the margin expansion here, but anything else that's noteworthy?

Operator:

Our next question is going to come from the line of David Anderson with Barclays.

Lorenzo Simonelli:

David, as you said, it's an impressive growth rate. Over the course of the last five years, again, a 50% growth in the RPO. I think that's a testament to the portfolio that we have of equipment that goes into critical areas. It's a key differentiator. We're not just in one aspect of an industry or market. We can cut across many. Gas Tech is a full life cycle business. I think you've got to look at it from a standpoint of razor, razor blade. We've said this before, this isn't just an equipment sale, this is the ability to stay close to the customer and be with them for 20 to 30 years. That may come later than the equipment sale, but it's there. And so, we look constantly at our installed base and look at the opportunity for that services revenue stream to come through. You're starting to see it come through and it provides that long-term visibility and confidence in the sustained growth outlook that we see for the company going forward. It's under-appreciated right now, we feel, because, again, it's that aspect of an amazing backlog that's been built over five years, now starting to come out, and we've got the equipment being installed and you'll see that service stream continuing for many years to come and again being on a life cycle basis. Razor, razor blades, that's clearly a model here that we're taking forward.

Lorenzo Simonelli:

Yes. Definitely, Dave. And as you said, we continue to see an outlook of high single-digit in the international market and very pleased with also the second quarter performance from a quarter-over-quarter being up 7%. Again, as we look at the marketplaces, there's the significant offshore as you look at Suriname, Namibia, Guyana that continues to be strong, Brazil. Again, you've got, as you mentioned, some of the dynamics that take place in Mexico, which will continue, no doubt. With the international overall, continues to be strong. Middle East is also an area of growth for us as we continue to move forward. There's several good prospects. I would look at it from a standpoint of growth in the future at a slower pace, so positive, but again decelerating as we go forward. We remain very optimistic about the continued aspect of international growth and also the mature assets and the opportunity around mature asset solutions that we can actually provide to the company and the customers we have, and brownfield opportunities that exist, as people continue to look at increasing production. That's a sweet spot for us. As you know, we are more on the production side. We've got the chemicals. We've got the ESPs, and we've got the solutions also from a digital standpoint that we rolled out to the marketplace.

James West:

Thanks. Good morning, Lorenzo and Nancy. Clearly from your prepared remarks and some of the comments made already in the Q&A, you guys are feeling good momentum. That's great to hear. Perhaps the first question for me, Lorenzo, if we think about the really with an unappreciated part of your business is leverage to the behind the meter. You mentioned some of the things, but there's micro grids, obviously the off-grid solutions and of course data centers are an opportunity that we all see going forward. Could you still elaborate on the role you see Baker and your gas technologies playing in these other solutions outside of the big LNG and other projects?

James West:

Great. We certainly agree with that. And maybe, Nancy, for you. We have the new range for the year. Curious about the puts and takes on cash flow, the high end of the range versus the low end of the range. What are the key drivers to either hit the high end or be towards the low end? And I know you've always talked this year about cash flow and free cash flow, especially being back-end loaded, which looks like it's going to be. But I'd love to hear -- maybe some additional color there would be great.

Operator:

Our next question is going to come from the line of Arun Jayaram with JPMorgan Securities.

Lorenzo Simonelli:

Yes, definitely, Arun. As you say, LNG has not gone away, and we anticipate it's going to be coming back and again, we've seen the pause in the U.S. But our orders continue to be strong across IET and in particular, as you look at the onshore/offshore production, as you look at gas infrastructure, and all of this plays into the ecosystem that's required around gas. And that's where we play strongly from a compression standpoint. We play strongly with the turbines that we provide. And so as you look at the first half, $6.4 billion booked, and we see that even the second half going to be strong again. And we're affirming, as you heard from Nancy, the range. And as I look at the year, we should be around $12 billion to $12.5 billion from orders perspective. As we go forward, we'll start to see LNG come back. So this isn't an aspect of the backlog or also the industry shifting and going away. We're going to continue to see robust orders as we continue also into 2025. And it's the breadth of the portfolio that we have and the capability of having the right equipment to be installed at the right time. So we feel very good about the way in which the differentiation of the technology comes through here.

Lorenzo Simonelli:

Yes, Arun, we've often said it's the age of gas, and this is the time for natural gas. It's a plentiful resource. We know it's merits again, from an emissions perspective being lower than coal. And we think that gas has a lot of growth potential going forward. And we're seeing that also from the developments of gas infrastructure around the world as energy demand continues to be there and also people are looking for lower carbon intensity and gas is the solution. So as we go forward, we're seeing that gas production being a positive for Baker Hughes. You mentioned and highlighted the Master gas system free that was booked earlier this year. Again, there are going to be other Master gas systems required. You mentioned also Algeria Hassi R’Mel. There's going to be other countries that need that same gas infrastructure. As I talk to customers, as I go around the world, there's a common theme around gas infrastructure being needed, and we're going to have that opportunity to leverage our portfolio into that marketplace.

Stephen Gengaro:

You've given us a lot of good detail around 2024. And I was curious, as we look into next year, given the IET backlog at record levels and what appears to be international oilfield service strength continuing. Can you give us some thoughts on sort of the pluses and minuses we should be thinking about heading into '25?

Stephen Gengaro:

And just as a follow-up, you mentioned New Energy orders. Can you just give us a quick recap of the key technologies and areas that are driving the New Energy orders?

Operator:

That was our last question. I will hand you back to Mr. Lorenzo Simonelli, Chairman and Chief Executive Officer, to conclude the call.

Operator:

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.

Operator:

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

Chase Mulvehill:

Thank you. Good morning, everyone, and welcome to Baker Hughes First Quarter Earnings Conference Call. Here with me are Chairman and CEO, Lorenzo Simonelli; and our CFO, Nancy Buese. The earnings release we issued yesterday evening can be found on our website at bakerhughes.com. We will also be using a presentation with our prepared remarks during this webcast, which can be found on our investor website.

Lorenzo Simonelli:

Thank you, Nancy. Turning to Slide 18. 2024 is off to a strong start for Baker Hughes, highlighted by our strong margin performance in both OFSE and IET. Our continued focus on commercial enhancements and cost efficiencies are driving structural improvement in both segments underlying margins. With these transformational efforts gaining momentum, we remain on track to achieve our 20% margin targets for both segments.

Operator:

[Operator Instructions] Our first question comes from the line of Scott Gruber from Citigroup.

Lorenzo Simonelli:

Yes, Scott, first of all, very strong quarter for the company. And as you said, led by also IET, but overall, very pleased by both segments. And IET, a very strong, solid quarter. And as we've said, we've been committed to our journey on IET towards the 20% EBITDA, and you're starting to see some of those levers coming through as you look at first quarter and as you look at the rest of the year, again, you've got strong backlog conversion in Gas Tech equipment.

Lorenzo Simonelli:

Yes, Scott, it's a very good point. And for us, what's happening from the external perspective and the dynamics doesn't change the strategy, and we've been firmly focused on a strategy around production solutions for some time. As you know, from the comments that I made at the annual meeting, 70% of the world's production comes from mature assets. And a mature asset being a well that's produced 50% of its reserves or has been in production for over 25 years. And when we look at the future, there's a tremendous focus on improving that optimization.

Operator:

Our next question comes from the line of Arun Jayaram from JPMorgan Securities LLC.

Lorenzo Simonelli:

Yes, Arun. We remain confident in the international market outlook. We expect E&P spending to be up high single digits this year. And as we look at, in particular, the MSC reduction, as we said in the last call, we don't anticipate any real changes. And in fact, when we look at Saudi, we see it as opportunities outside of just the upstream area given our presence. As you know, natural gas production is set to grow by 60% through 2030, and it's going to benefit our IET business. You saw the announcement that was made in 1Q relative to the Master Gas System 3, the pipeline project. There's going to be more opportunities down the road.

Arun Jayaram:

Great. That's helpful. Maybe a follow-up, maybe for Nancy. Nancy, I want to get your take on some of the puts and takes around the 2Q guide. It looks to be about 3% above our model and it looks like just slightly better margins. And so just wondering if you could talk about some of the puts and takes and just the fact that you kept the back half, maybe a follow-up to Scott's question, the full year is the same. And are you getting a little bit more confidence on the full year outlook given what's transpiring in the first half of the year?

Operator:

Our next question comes from the line of Dave Anderson from Barclays.

Lorenzo Simonelli:

Definitely, Dave, and thanks for the question. Obviously, we've spoken a lot about LNG, and we will, I'm sure, in the future. And I think at times, we don't get a lot of time to talk about the non-LNG sector, and it's a very important part of our portfolio, and it's very expensive as well in the equipment and solutions that play across a number of end markets, including the upstream, midstream, refining, petrochemical, as you look at the pipelines and various industrial and other end markets. And it's really the versatility of our equipment that not only goes into LNG but goes into these other end markets. And 1Q was evident of that. And as you said, tripled in 1Q versus prior year.

Lorenzo Simonelli:

Yes, Dave, thanks. And I know that you and the team also had the chance to tour the region and also visit the Kingdom. And that's true. We focused a lot on localization. And as I mentioned, we've just recently opened our chemicals facility on new Petrolite. We've also got wellheads that are manufactured. We've also got compressors. And as we look at drill bits and across the Kingdom, we focused on localization to support not just the Kingdom, but also support the region and outside of the region through capability close to our customers. And that's been a strategy of focus.

James West:

Lorenzo, I wanted to touch back on carbon capture because it sounded like there was a bit of a shift in your tone there with respect to projects starting to move forward and to scale. So I want to know, one, is that accurate? Two, have you seen any change or have you put any change in your CCUS strategy? And how about an update on your kind of commercialization of some of the newer technologies in carbon capture?

James West:

Great. And then maybe a follow-up on the all of the above comment. Lorenzo, wouldn't you have relationships with all the major tech companies, and they're trying to scale data centers and that's being supercharged by AI. It seems to me that renewable deployment is not going to be able to keep up with that. So we're going to have to go towards some type of fossil fuels, and it sounds like gas is the one they're targeting. But all of these data center providers beginning to at least acknowledge that reality that for some period of time, we're going to have to build out potentially is more gas infrastructure to support this because the power generation needs are running well ahead of renewable or cleaner fuel sources?

Luke Lemoine:

The IET orders you had in 1Q put you on a nice pathway to hit the midpoint of the annual guide with GTE being the largest component. I'm sure most of the durability resides here. And you talked about some of the LNG awards outlook within GTE. But can you just talk about some of the puts and takes within the annual order guidance for IET?

Nancy Buese:

Absolutely. We absolutely remain confident in hitting those 20% EBITDA margins, and you're starting to see some traction with a lot of the activities that have been done in the segment and continuing actions. And we do still see strength in international markets this year. We're also maintaining our outlook for high single-digit E&P CapEx. So those are good drivers as well. I would also just note that hitting that margin target does not require an acceleration of growth compared to where we already are. So that's all baked into it.

Operator:

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.

Operator:

Good day, ladies and gentlemen and welcome to the Baker Hughes Company Fourth Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Chase Mulvehill, Vice President of Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Chase. Good morning, everyone and thanks for joining us. 2023 proved to be a pivotal year for Baker Hughes as we continue our journey to reshape the company. We successfully removed $150 million of costs, realigned our IET business and recently launched actions to further streamline our OFSE business. Our strategy to transform the way we operate is working. Turning to Slide 4. In 2023, we set records for all primary financial metrics, including orders, revenue, EBITDA, EPS, free cash flow and most importantly, returns. Adjusted EBITDA was up 26% year-over-year, a third consecutive year of double-digit increases and exceeding prior cycle peak levels by 25%. Adjusted diluted earnings per share was $1.60, 76% above 2022 levels. Free cash flow increased 83% year-over-year to just over $2 billion. Total company orders increased 14% year-over-year as IET orders of $14.2 billion grew 12% when compared to last year’s record orders and marked the third consecutive year of double-digit growth. New Energy orders totaled $750 million, up 45% year-over-year. SSPS orders increased by 27% to $3.9 billion, the largest order year since 2014. These record results highlight strong market tailwinds across both segments and the significant operational improvements the company has accomplished since 2022. Clearly, we are pleased with the progress demonstrated in 2023 and excited about where the company is headed in 2024 and beyond. Turning to Slide 5. Fourth quarter adjusted EBITDA of $1.09 billion came in above the midpoint of our guidance range due to the continued operational improvement and full realization of the $150 million of cost out. Free cash flow of $633 million exceeded expectations and resulted in full year free cash flow conversion of 54%. IET orders remained strong, exceeding $3 billion for the fifth consecutive quarter. In addition, we were awarded more than $1 billion of CSA commitments. In OFSE, we continue to demonstrate solid margin improvement during the quarter, with segment EBITDA margin increasing to 17.9% as OFS EBITDA margins now exceed 20%, both record margins. Turning to the macro on Slide 6. Oil prices have weakened considerably since peaking in late September. Ultimately, weaker-than-anticipated oil demand coupled with robust production growth led to an unexpected inventory build into year end. However, prices still remain at levels that are favorable for growth across our core OFSE markets. For 2024, demand growth remains the biggest unknown in the face of global economic uncertainty and heightened geopolitical risk. On the supply side, the biggest risk factor is non-OPEC supply outpacing demand, possibly requiring OPEC+ to maintain the current level of cuts through the end of 2024. The volatility in commodity prices experienced during the fourth quarter and so far in 2024 will likely have some influence on upstream development plans. Accordingly, we now see international D&C spend growth decelerating into the high single-digit range this year, which is down slightly from our prior expectations for low double-digit growth. Nevertheless, the international cycle remains healthy and we see no deviation from the long-term development plans set in place amongst some of the world’s largest NOCs. The offshore cycle is maintaining the momentum built over the past couple of years and we have good visibility on the development pipeline, which is expected to support strong activity levels over the next several years. In North America, activity continues to lag and we are now anticipating no meaningful recovery in activity during the first half of the year. On our last quarterly call, we expected 2024 North American D&C spend to be flattish, but now expect spending down in low to mid single-digits driven by mid single-digit declines in U.S. land. The combination of a volatile commodity price environment, sector consolidation and the inherent elasticity of shale versus conventional developments are all factors contributing to the slower ramp up in activity. In OFSE, we secured two significant multiyear integrated services contracts with a Latin American operator for drilling, completion and plug and abandonment services, highlighting the customers’ confidence in Baker Hughes’ diverse technology and service offering. In the offshore market, we were awarded additional subsea trees during the quarter, bringing our total number of subsea tree awards in 2023 to 60. Turning to LNG on Slide 7. Despite the recent weakness in LNG prices, we believe the long-term outlook for the global LNG market remains solid. In fact, LNG prices remain at relatively strong levels compared to historical averages. For example, 2023 European and Asian gas prices averaged about 20% above the 10-year average. In the fourth quarter, global LNG demand was up approximately 4% year-over-year. For the full year, global LNG demand reached record levels of 405 MTPA, up 2% compared to 2022 despite softer than anticipated gas demand in Europe. LNG demand in Europe was around 115 MTPA in line with 2022 levels. Demand in China was 71 MTPA, up 10% year-over-year. With estimated global nameplate capacity of 491 MTPA last year, effective utilization averaged 86%, which represents a tight LNG market. Looking into 2024, we forecast LNG demand to increase by 2% which should result in utilization rates remaining at strong levels as we forecast just 15 MTPA of nameplate capacity coming online this year. Looking out to 2025 and 2026, we see a similar trend of supply growth being balanced by demand growth, which should keep global LNG markets at good utilization levels. With energy markets, including LNG, still fundamentally tight, global coal demand set another record last year, increasing 1.4% year-over-year to 8.5 billion tons. We think this recent growth in coal demand provides additional long-term growth opportunities for LNG, where we see cleaner burning natural gas replacing high emission coal in the energy mix across many Asian countries, where coal is still the predominant energy source for electricity. During the fourth quarter, we were pleased to be awarded by ADNOC gas on behalf of ADNOC to electric liquefaction systems for the 9.6 MTPA Ruwais LNG project in the United Arab Emirates. The LNG trains will be driven by Baker Hughes’ 75-megawatt brush electric motor technology and will feature our state-of-the-art compressor technology making Ruwais LNG one of the first all-electric LNG projects in the Middle East. In 2023, we were extremely pleased to book almost 80 MTPA of LNG orders, which outpaced FIDs of 57 MTPA. This variance was the result of the timing difference between orders and FIDs, which has been accentuated by the tightening LNG equipment market. The outlook for FIDs over the next few years remains strong and we see projects progressing across all markets. For 2024 specifically, we expect LNG FIDs of around 65 MTPA. However, it is important to note this includes a couple of major LNG orders that were booked during 2023. As we look out to 2025 and 2026, we could see between 30 to 60 MTPA of FIDs annually bringing total potential LNG FIDs to 125 MTPA and 185 MTPA through 2026. Based on existing capacity, projects under construction and future FIDs in the pipeline, we have line of sight for global LNG installed capacity to reach 800 MTPA by the end of 2030, representing an almost 75% increase in nameplate capacity from 2022 levels. This provides good visibility for significant near-term growth in Gas Tech equipment, where we have the broadest set of LNG solutions to suit customer needs, including our modular, stick build, onshore, offshore, floating and small-scale LNG offerings. In addition, this expansion in our LNG installed base will provide long-term structural growth for our Gas Tech services. Turning now to Slide 8. On the New Energy front, we have seen a number of developments over the past quarter. At COP28, which brought together 154 heads of state and other government officials and was well represented by Baker Hughes, I was particularly pleased to see the increased representation and participation from energy companies. Key commitments from the conference include doubling the global average annual rate of energy efficiency improvements by 2030, net-zero methane emissions and no routine flaring by 2030, endorsement for a global hydrogen certification standard and accelerating efforts towards the phase down of unabated coal power. We also continue to see progress on the policy and permitting front in the United States that should help advance emissions reductions progress. We are pleased with the U.S.’ final ruling on the methane standards that should prevent an estimated 58 million tons of methane emissions from 2024 to 2038, according to the EPA. Additionally, the state of Louisiana being granted primacy on Class 6 well permitting should help to reduce CCUS project bottlenecks in that region of the United States. In the area of hydrogen, the U.S. Treasury provided clarity on the 45V hydrogen tax credit, which could impact the pace of green hydrogen development. We are hopeful that a pragmatic resolution will be reached that actually encourages rather than inhibits new investments in this critical industry that will play a vital role in decarbonizing hard-to-abate sectors. As we have stated previously, the energy transition will likely be more challenging and take longer than many expect. This is why we, at Baker Hughes, are pursuing an all-of-the-above strategy, where our technologies and capabilities have a key role to play in decarbonizing the planet irrespective of the fuel source. It is important to note the pace of the transition will not impact the ultimate size of the new energy market opportunity. As an illustration, the IEA has sized the annual clean energy investment at $4.5 trillion by the early 2030s and $4.7 trillion by 2050 under their net zero scenario. In comparison, investment in fossil fuels totaled just under $1 trillion last year. Turning to Slide 9. We are focused on executing our strategy over our free time horizons. Over the first horizon, we are focused on unlocking the full potential of Baker Hughes, successfully transforming our business and simplifying the way we work. We are committed to developing and commercializing our New Energy portfolio while also evolving our digital offerings across both OFSE and IET. These strategic investments, along with better penetration across various underserved energy and industrial markets will be the underpinning for driving peer-leading growth across our next two time horizons. While our activities in LNG and New Energy have been the focus for investors in recent years, I’d like to take this opportunity to shine a spotlight on parts of the broader IET portfolio. In Gas Tech, almost 50% of our equipment business is focused on serving customers outside of LNG. Our turbomachinery equipment, generators, motors and pumps have applications across multiple end markets, including upstream, midstream, refining, petrochemical and various industrial end markets. These segments have demonstrated exceptional growth since 2020, increasing by more than 50% and we have good visibility on a number of growth opportunities in the coming year. Take the FPSO markets, for example, we have booked more than $1 billion of awards over the past 2 years and expect the market could see a further 7 to 9 FPSOs take FID each year out to the latter part of this decade. We are also seeing a lot of potential opportunities in onshore gas processing and pipelines as natural gas becomes an important aspect of the energy mix around the world, particularly in places like the Middle East and Southeast Asia. The diversity of our end markets and the opportunity set is not confined to equipment. In Gas Tech Services, over 50% of our revenue has been generated from our transactional and upgrade services, which focus on maintaining our rotating equipment utilized in upstream, midstream, refining and petrochemical sectors. Like LNG, which accounts for less than 40% of the Gas Tech Services revenue, these non-LNG markets also have significant growth opportunities as our installed base expands significantly. Our industrial tech portfolio provides additional diversity into industrial markets like aerospace, automotive, steel and electronics. In Industrial Solutions, we leverage our digital technology to monitor and maintain critical equipment. We have a significant opportunity to extend this service beyond our critical equipment to the balance of plant. In industrial products, we are focused on increasing market penetration in high-margin niche sectors. Finally and most importantly, we are able to leverage core technologies like compressors, turbo expanders and turbines across CTS’ 5 targeted new energy markets. These are CCUS, hydrogen, geothermal, clean power and emissions management, providing additional long-term growth for IET. As you can see, we have a differentiated portfolio of technologies within IET that provides Baker Hughes a unique opportunity to grow well beyond LNG. Before turning it over to Nancy, I would like to speak at a high level about our 2024 outlook. In OFSE, we expect solid revenue growth led by international, with a year of strong incremental margins as we continue to focus on reshaping the OFSE cost structure in pursuit of 20% margins in 2025. In IET, conversion of our record Gas Tech Equipment RPO will drive robust IET revenue growth, with margins improving despite increasing mix headwinds and putting us on a path toward our 20% margin target in 2026. With that, I’ll turn the call over to Nancy.

Lorenzo Simonelli:

Thank you, Nancy. As you can see from our strong 2023 results and the exceptionally strong margin improvement illustrated on Slide 20. Baker Hughes is on its way to becoming a leaner and more efficient energy technology company. We continue to carefully execute our plan to drive margins meaningfully higher. Put simply, we remain relentless in transforming the way we operate. We also have a unique technology portfolio that will drive growth across all three of our horizons irrespective of the pace of the energy transition. In addition, our versatile OFSE and IET portfolios provide significant growth opportunities across underserved end markets. It’s this broad-based portfolio that underpinned our 17% EBITDA compounded annual growth rate from 2020 through 2023. Given our balanced portfolio, untapped market opportunities and overhaul cost structure, Baker Hughes is becoming less cyclical in nature and therefore, should generate more durable earnings and free cash flow across cycles. Finally, while on this journey, we remain committed to our employees, customers and shareholders as we continue to push Baker Hughes forward. With that, I’ll turn the call back over to Chase.

Operator:

Thank you. [Operator Instructions] Our first question comes from James West with Evercore ISI. You may proceed.

Lorenzo Simonelli:

Hi, James.

Lorenzo Simonelli:

Yes, definitely, James. And we’ve said it before, and we wanted to state it more clearly. Our IET business has a very expansive portfolio of equipment and solutions, which really play across many different end markets, including upstream, midstream, refining, petrochemical and a number of industrial end markets, aerospace, automotive. And we think that’s been underappreciated to date. And largely because there is been a large focus, which quite reasonably on LNG and New Energy, and we’re very proud of our LNG business. We’ve worked hard over the years to build it, and we’ve got differentiated solutions. And we’re going to be committed to continue being the market leader for liquefaction solutions across all of the LNG markets. And we think that LNG is still very positive with LNG awards over the next 2 to 3 years and also reaching the market installed capacity of 800 MTPA by 2030. But our Gas Tech Equipment is also more than that. We’ve demonstrated exceptional growth since 2020 increasing by more than 50% in other areas, and we’ve got good visibility on a number of growth opportunities in the coming years. A couple of examples, as you look at onshore offshore production OOP, we’ve got a leadership position in FPSOs, and we see another 7 to 9 FPSOs over the course of the next few years. In onshore production, we’re seeing the emergence of a number of opportunities associated with pipeline and the processing of gas in particular, as that continues to grow in places like the Middle East and also exposure to petrochemicals, which is ultimately anticipated to continue to grow and we’ve got the new Nova class of turbines, compressors, valves, pumps, gears, digital solutions. So put all in all, it boils down to an exceptionally versatile IET portfolio that provides us significant growth opportunities as we serve many of the strengthening underserved markets in the coming years.

Lorenzo Simonelli:

Definitely. We’ve been very pleased with the progress of New Energy orders and you saw last year that we continue to take up also our guidance on New Energy. And as you correctly stated, we’ve given guidance this year relative to the $800 million and also the $1 billion. And we really think that this growth continues going forward. The markets are growing, maturing across both IET and OFSE portfolio technologies. And when you look at it, it really is a sequence of carbon capture technologies that we have in our portfolio, Compact Carbon Capture, Mosaic, as you look at direct air capture, you look at the partnership we have with NET Power supplying turbo expanders. And also, as you look at hydrogen and you’ve seen the growing emphasis on hydrogen and hard-to-abate areas but also geothermal and looking at emissions management and deflaring. And I think again, as a consequence of some of the discussions at COP 28, there is a clear move towards accelerating some of these as we continue to move forward. And our total addressable market, we’ve mentioned it before, for New Energy in 2030 is between $60 billion to $70 billion across the five major markets that we serve. And we believe we can book $6 billion to $7 billion of New Energy orders by 2030. So again, it’s something that we see as a growing area of the business and feel confident in that $6 billion to $7 billion of New Energy orders in 2030.

Lorenzo Simonelli:

Thanks, James.

Luke Lemoine:

Hi. Good morning Lorenzo and Nancy. Your ‘24 quantitative outlook is pretty clear, and you gave us the international North America OFSE growth rates as well. But I want to see if you could just loosely walk us through some of the qualitative aspects of the ‘24 OFSE margin increase, along with the drivers of the increase in IET revs and margins.

Luke Lemoine:

Alright. Thank you.

Luke Lemoine:

Okay. Thanks. And then maybe just to touch on it a little more, Lorenzo, the 20% EBITDA margin targets for OFSE in ‘25 and IET in ‘26. Can you walk us through how you see those business lines unfolding to achieve those targets kind of relative to your ‘24 guidance?

Nancy Buese:

Yes. We remain, as we have said, very committed to those 20% EBITDA targets for both OFSE and IET. We have a clearly defined path on how we are going to get to each of those targets. And as we highlighted on the call today, there is a number of actions we are taking to make structural changes to the way we operate and truly streamline our overall cost profile and that’s going to really help aid that margin progression in the timeline we have indicated. And again, what we have said earlier this year about OFSE, we have taken those charges in the fourth quarter. Those are largely severance with a very short payback period that’s going to clear that path for the OFSE business to get to those 20% margins by 2025. And they will also drive some good margin upside in the back half of this year, paving the way for us there. And then this is in addition to the more than $60 million of costs we already removed from the OFSE business following a combination of OFS and OFE at the end of 2022. And then also in IET, recall that we accomplished the $50 million of cost synergies by combining TPS and DS businesses in that same timeframe. So, when we think about the building blocks from the 2023 IET margin of 15% to 20% in 2026, that’s also a combination of steps. I would outline those as first is the conversion of higher-margin backlog with improved volume, improved pricing. Secondly, thinking about variable cost productivity in terms of supply chain, engineering, design and other areas for improvement. We also in the industrial tech business plan to return to historical margin rates, which we have been working on. Also new digital offerings and enhanced services models in that space. And then finally, I would say base cost productivity which we have elevated R&D now, that will start to normalize and then also working towards further business simplification there. So, we have a path for both segments to get to that 20% margin rate. We are working that hard in a series of planned, calculated executable steps. I would say, overall, we are very proud of what we have accomplished so far. We are coming a long ways, but we know we are far from done, and we remain intensely focused on driving these margins and the returns higher. And ultimately, that’s intended to create much more value for our shareholders.

Operator:

Thank you. [Operator Instructions] Our next question comes from Arun Jayaram with JPMorgan. You may proceed.

Lorenzo Simonelli:

Yes, sure. And Arun, good to hear from you. And we see another strong year of orders. And again, if you look at our history, this again would be a significant year for us. And in GTE, we see another strong year of LNG orders. We anticipate 65 MTPA of LNG FIDs. Just note some of those FIDs this year, we actually booked last year. But outside of LNG, we expect another strong year of onshore/offshore production where there are a number of potential FPSO awards and some good opportunities also on the onshore side as well. You have also got the continued momentum of booking outside of LNG orders and GTE in 2024 increasing by more than 50%. Services had a strong year last year. We signed over $1 billion of CSA commitments in the fourth quarter, and we expect to continue to see that contractual service agreement momentum to continue as the projects get near commissioning. And you will also recall that we signed our service contracts closer to commissioning time of projects, which is coming into place. We discussed new energy and CTS expect $800 million to $1 billion of orders that we highlighted and continuing momentum in Industrial Tech, which should continue to progress in line with GDP. And I would look at overall IET order outlook remains strong, excited about the opportunities across all of our areas that we serve. And our midpoint $12.5 billion would still rival our second biggest order year in 2022 when we booked $12.7 billion of IET orders. So, continuing to see the momentum on the order side here.

Lorenzo Simonelli:

Yes, very topical at the moment, Arun. And again, if you look at the aspect of LNG, no impact for us this year. And again, as you know, the project landscape and also the cycle of projects is multiyear. But I would say that, again, there is some uncertainty, in particular, on North America, given some of the discussions that are taking place and some of the delays in the permitting. I would also say I am disappointed that this is coming about right now. U.S. LNG is enormously beneficial to the U.S. economy. It’s had a large impact, beneficial impact on global energy markets, especially when you look at everything that’s happened in. There has been commitments made to providing LNG supply to many other countries. And I think it’s important that we continue to go down that path, and it’s a matter of national security for many. And so we anticipate that this will work itself through, and we don’t anticipate that there will be any detrimental impact over the long-term to U.S. LNG. Outside of U.S. LNG though international projects continue to be buoyant, and there is several opportunities in the Middle East, you look at Africa, you look at Southeast Asia. And again, we have got an extensive reach on the international projects as well. So, no impact in ‘24 and continuing to monitor the situation in the U.S., but anticipate that will solve itself over the long-term.

Operator:

Thank you. [Operator Instructions] Our next question comes from Saurabh Pant with Bank of America. You may proceed.

Lorenzo Simonelli:

Yes, sure. It’s something that we continue to navigate. I think externally, you see all the news around the aerospace supply chain and you have seen that we have managed it in 2023, and there will be no change to managing it in 2024 and that’s contemplated within the guidance that we provided. The situation remains stable, but will be tight through the end of 2024. And we are working closely with our supply base to make sure that we continue executing. It is tight, though, and we have incorporated that into the guidance that we have provided, but ensuring we don’t have any impact to our results.

Nancy Buese:

Yes. It’s a great question. And I would say in every aspect across the company, our focus is truly on operational excellence, execution and continuous improvement. Last year, we really laid the groundwork for improving that execution, accountability, transparency, and we did achieve that $150 million cost-out goal and that was really designed around sustainable structural changes that will benefit the organization longer term and will stick over time. And we have really begun the work as well as synchronizing many diverse systems, working towards efficient, streamlined processes and reporting everything from our underlying technology just to the way we do things. So, that’s permitting through the business, and we will create efficiencies over time. We also have discrete projects, and I will give you one example. So, in 2023, we guided to a 35% to 40% tax rate, and this year, we are guiding to a 27% to 32% tax rate. And again, these things over time have a meaningful impact to our earnings done in a really structured, thoughtful way. So, all of these projects and initiatives will allow us efficiency gains, improve data, improve transparency, all focusing on structural margin improvements over time. I would say, though, there is still much more to do as we continue down this journey. In 2024, we continue to focus on things like eliminating duplication, thinking about how to execute at a world-class level, how we listen to our customers and execute from a point of excellence and then just making sure that while we are doing these things today, we are also setting up for real success in the back half of the decade. So, we are making some investments in things like systems and processes today to drive that back half of the decade. And then earlier this year, of course, we have talked about the actions in OFSE really designed around removing duplication, driving more cost efficiency inside that business. So all-in-all, we are going to stay on the journey. We are stopping short of putting on another cost target. I would encourage you to think about that in terms of just margin improvement in both segments and overall. So, stay tuned and keep focusing on margins, and that’s where you will see the improvements over time.

Lorenzo Simonelli:

Thanks.

Scott Gruber:

Yes. Good morning.

Scott Gruber:

Good morning. I want to circle back to the LNG approval discussion just given that it’s a hot topic. Lorenzo, so if there is a slowdown in U.S. approvals, do you think that would pull forward some international projects to fill the gap. It seems that buyers would pivot their focus. But is the international slate of projects ready from a timing perspective to offsetting the U.S. slowdown?

Scott Gruber:

I appreciate the color. Still a lot of coal to displays out there. Shifting to the service opportunity for non-LNG equipment, over the next 5 years, could you provide some color on the rough growth rate in your installed base of non-LNG equipment just so we can get a sense of the associated growth and the service opportunity?

Scott Gruber:

Okay. Thank you.

Operator:

Thank you. [Operator Instructions] Our next question comes from Marc Bianchi with TD Cowen. You may proceed.

Lorenzo Simonelli:

Yes. Again, Marc, going to also what I mentioned before relative to LNG, we see that in 2024, there should be 65 MTPA of awards, and within our guidance, obviously, we have taken account for what we have booked in the past and what we anticipate to book this year. And we wouldn’t go and actually start putting in orders that we haven’t seen FID-ed yet. So, that’s from a guidance perspective, we are banking on the projects being FID this year and coming through. And then if there is an opportunity, it’s that there is an acceleration, as was discussed earlier with Scott relative to other projects that come into our order book but haven’t FID-ed yet. So, feel confident with the range that we have given and again, there is the growth outside of LNG that is significant as well. And I just maybe mention again, if you look at what we have laid out, this would be close to the second year record that has already been here for that business. So, feeling good about the momentum continuing as we go forward.

Nancy Buese:

Yes, it’s a great question. It’s something we are working hard on. There is a lot of history and baggage associated with tax rate given the formation of the company and in all of that. But we are working, I would say, moving ourselves into somewhere in the low-20% over time, can’t give you exact specifics on how we get there. But I would say there is a lot of important work being done in the next year or 2 years to really focus on that rate. It’s very important to move the needle from an earnings perspective. So, we are doing all the things to understand our attributes and really think about structuring as we move forward. We are a lot of complex structures over the course of the globe with some of our contracts and our customer base. But I can tell you this is something I am personally very invested in and we are working hard to bring that rate down over the coming years.

Lorenzo Simonelli:

Thanks. And look, we are coming to time here. So, I just want to thank everyone for joining the call. And as we mentioned, very much looking forward to 2024, continuing the momentum of change within Baker Hughes and continuing to execute for our customers and also for the employee base and meeting what we have laid out from a guidance perspective. So, thank you very much everybody.

Operator:

Good day, ladies, and gentlemen. Welcome to the Baker Hughes Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, the conference call is being recorded. I’d now like to introduce your host for today’s conference Mr. Chase Mulvehill, Vice President of Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Chase. Good morning, everyone, and thanks for joining us. We were pleased with our third quarter results and remain optimistic on the outlook. As you can see on Slide 4, we maintain strong orders performance in both IET and SSPS, with large awards coming from Venture Global in LNG and VAR's Energy in subsea. We also delivered strong operating results at the upper end of our EBITDA guidance range, booked almost $100 million of new energy orders, and generated $592 million of free cash flow. We continue to see positive momentum across our portfolio despite persisting global uncertainty. Turning to the macro on Slide 5, oil prices have rebounded as the combination of resilient oil demand and production cuts have tightened the market. As a result, the oil market is likely to see inventory draws through the rest of 2023. Continued discipline from the world's largest producers, the pace of oil demand growth in the face of economic uncertainty, and geopolitical risk will be important factors to monitor as we look into 2024. While oil prices have strengthened during the second half of this year, upstream development plans are mostly set through year-end, therefore we remain confident in our 2023 outlook. We still expect international drilling and completion spending to be up year-over-year in the mid-teens, and North America up by mid-to-high single digits. As we have said previously, we expect this upstream spending cycle to be more durable and less sensitive to commodity price swings relative to prior cycles. Higher carbon prices do provide positive momentum into operators' development plans for next year. While it is still early and with the caveat there is growing geopolitical risk, we do see another year of solid upstream spending growth in 2024, led by international and offshore markets. In the offshore market specifically, we were awarded 21 subsea trees during the quarter, which includes a significant equipment order from a sub-Saharan African operator. This award expands Baker Hughes's presence in offshore Angola and consists of 11 deep water horizontal trees, up-tire manifolds, and subsea controls. OFSE also saw continued growth in the North Sea, booking two major multi-year contracts from VAR's Energy, one being a long-term contract for well-intervention and exploration logging services, and the other being an order to deliver seven vertical tree systems for the Balderfield. Turning to LNG, despite a soft economy, the global LNG market remains fundamentally tight. This tightness is evidenced by the recent LNG price spikes that resulted from the current geopolitical situation and strikes in Australia by LNG workers, which temporarily interrupted operations at several LNG facilities. In the third quarter, global LNG demand was up approximately 1.5% year-over-year. Year-to-date, global LNG demand has reached record levels at just over 300 MTPA. This is despite softer than anticipated gas demand and economic weakness persisting in key LNG-consuming markets like Europe and China. Globally, we expect 2023 LNG demand to approach 410 MTPA, or up about 2% compared to last year. With estimated global nameplate capacity of 490 MTPA this year, effective utilization is expected to be over 90%, which has historically represented a tight market. Turning into 2024, we forecast LNG demand to increase by 3%, which should result in utilization rates remaining at elevated levels, as we forecast just 15 MTPA of nameplate capacity coming online next year. Looking out to 2025 and 2026, we see similar trend of supply growth being balanced by demand growth, which should keep global LNG markets at relatively strong utilization levels. LNG prices remain healthy, which has helped to sustain the strength and off-take contracting a key driver of LNG FIDs. During the quarter, we received an order to provide additional liquefaction equipment and a power island to venture global as part of our upsized master equipment supply agreement of over 100 MTPA. As a reminder, we have provided LNG modules for both of VentureGlobal's 10 MTPA Calcashu Pass and 20 MTPA Platrimon's projects. Additionally, we were pleased to be recently awarded by ADNOC Gas on behalf of ADNOC, two electric liquefaction systems for the 9.6 MTPA Ruiz-LNG project in the United Arab Emirates. The award is expected to be booked in the fourth quarter of 2023 and was announced at this year's ADIPEC conference. The LNG trains will be driven by Baker's users 75 megawatt brush electric motor technology and will feature our state-of-the-art compressor technology, making Ruiz-LNG one of the first all-electric LNG projects in the Middle East. We are pleased to see continued traction from brush power generation, which we acquired in 2022 to enhance our industrial electric machinery portfolio and to support our strategic commitment to provide lower carbon solutions. Since then, we have secured several additional orders for our electric machinery portfolio, including a contract from WISN in the first quarter for four ELNG compressor trains in Sub-Saharan Africa. These recent successes of brush further validate our strategy of investing in bolt-on M&A opportunities that can complement the current IET and OFSE portfolios, as well as our efforts in new energy. Turning to Slide six, through the third quarter, 53 MTPA of capacity has taken FID this year. For 2023, we expect to book LNG orders totaling approximately 80 MTPA, given we sometimes receive larger LNG orders before projects have taken FID. The LNG project pipeline remains strong, both in the US and internationally. Therefore, we expect to see similar year-over-year levels of FID activity in 2024 and could see between 30 to 60 MTPA of LNG FIDs in both 2025 and 2026. Based on existing capacity, projects under construction, and future FIDs in the pipeline, we have line-of-sight for global LNG-installed capacity to reach 800 MTPA by the end of 2030. This represents an almost 70% increase in name-blank capacity from 2022, which provides significant near-term growth for gas tech equipment and further long-term structural growth for gas tech services. Importantly, since 2017, there have been 204 MTPAs. of LNG FIDs, and Baker Hughes has been selected for 201 MTPA of this new capacity. These projects are scheduled to come online over the coming years, representing an almost 50% increase in our global liquefaction installed base between now and 2028. Turning to Slide 7, we have long held the view that natural gas is an abundant, low-carbon and versatile energy source. It will play a critical role as both a transition and destination fuel. Accordingly, natural gas will be fundamental in satisfying the world's energy needs for many decades to come, while also improving air quality and reducing global emissions, displacing coal in the broader energy mix. We forecast that primary energy demand will continue to grow beyond 2040 due to rising population and increasing consumption per capita in the developing world. However, it is essential to meet this growing demand with affordable and reliable energy to ensure a strong global economy. Today's mix of primary energy demand is still heavily reliant upon coal, which accounted for 24% of global energy demand in 2022. In many Asian countries, like China and India, coal is a much higher share of the energy mix. This is the opportunity for cleaner, burning natural gas to be paired with renewables and or CCUS as a base load energy source to displace coal in the energy mix over the coming decades. That being said, all energy sources will be needed to meet increasing energy demand, although with an increasing importance on minimizing global emissions. Importantly, many of our customers' long-term spending plans are beginning to reflect this evolving energy mix. This presents significant customer synergies across our IET and OFSE portfolios, providing a unique opportunity to be an integrated solutions provider as the energy transition takes shape. Turning to Slide 8, as we take energy forward, making it safer, cleaner and more efficient for people in the planet, we are focused on our strategic framework of transforming our core to strengthen our margin and returns profile, while also investing for growth and positioning for new frontiers in the energy transition. Through these key pillars, our company is building and executing a plan to deliver sustainable value for our shareholders and stakeholders. As our strategy and the energy markets have evolved, we have been increasingly focused on the execution of our strategy across free time horizons. Across the first time horizon, which spans through 2025, we are focused on driving enhanced margin accretion through organizational simplification and expanded efficiencies, operational discipline, and optimization of asset and people productivity. Importantly, these actions are well within our control. During this period, Baker Hughes remains poised to benefit from the macro tailwinds that we see across our two business segments. Specifically, we remain well positioned to benefit from the continued strength in the natural gas and LNG growth cycle, as well as a multi-year increases in upstream spending driven by international and offshore markets. We also remain focused on navigating short-term supply constraints, specifically in aerospace sector, and broader macroeconomic and political uncertainty. Throughout horizon one, we will be focused on transforming our business and simplifying the way we work. Additionally, we remain committed to further developing and commercializing our new energy portfolio, while also evolving our digital offerings. All of this will underpin our goals to deliver 20% EBITDA margins in OFSE by 2025 and in IET by 2026. During the second horizon, which extends out to 2027, the focus shift towards investing for the next phase of growth, where our strategy is to solidify our presence in the new energy and industrial sectors, while leveraging Gas Tech services growth across our expanding installed equipment base. At the same time, we see upstream and natural gas spending continuing to grow at a lower rate. We also expect an increasing customer focus on efficiency gains and emissions reductions, offering meaningful opportunities for our IET and OFSE digital businesses, as we further deploy our Lucifer, Coordinate and Flare reduction solutions during this horizon. To illustrate, the IEA estimates that improving efficiencies by just 10% across oil and gas operations would save almost half a gigaton of CO2 per year, which is equivalent to achieving 5% of the Paris Agreement goals. Also in horizon two, we expect to exceed our ROIC targets of 15% and 20% in OFSE and IET, respectively, and drive further margin expansions across both business segments above our stated 20% EBITDA margin targets. Lastly, Horizon Free looks to 2030 and beyond, where our execution over the coming years will position Baker Hughes to compete across many new industrial and energy frontiers, including CCUS, hydrogen, clean power, and geothermal. By this time, we expect decarbonization solutions to be a fundamental component, and in most cases, a prerequisite for energy projects, regardless of the end market. The need for smarter, more efficient energy solutions and emissions management will have firmly extended into the industrial sector. Considering this backdrop, we expect our new energy orders to reach $6 billion to $7 billion in 2030 and across a much broader customer base. Before turning over to Nancy, I'd like to speak to the positive momentum that Baker Hughes has built during 2023, and where we have experienced strengthening tailwinds in both OFSE and IET. International and offshore markets are set to drive the strongest year of OFSE growth in more than five years. While continued robust LNG activity is set to push IET orders to yet another record year in 2023, and most importantly, our improved operational execution and cost structure and continued commitment to our customers are helping us to deliver on our commitments to our shareholders. With that, I'll turn the call over to Nancy.

Lorenzo Simonelli:

Thank you, Nancy. As we enhance our position as a leading energy technology company, we remain encouraged about the continued growth that we see for our organization across our free time horizons. While there is a growing consensus that the energy transition will likely take longer than many expected, our unique portfolio is set to benefit irrespective of how quickly the energy transition develops. For example, a faster energy transition drives quicker growth across our climate technology solutions business, while a slower energy transition would extend the cycle of our traditional oil and gas businesses. Accordingly, we have set out a strategy to grow irrespective of the pace that the energy transition unfolds. Considering this balanced portfolio, Baker Hughes is becoming less cyclical in nature and therefore set to experience solid growth irrespective of the energy transition pace. Importantly, we are laying the foundation today for a more durable earnings and free cash flow growth profile, which will enable us, in parallel, to deliver best in class performance and structurally increasing shareholder returns. With that, I'll turn the call back over to Chase.

Operator:

[Operator Instructions] And our first question will come from Arun Jayaram of JPMorgan. Your line is open.

Lorenzo Simonelli:

Yes, definitely Arun. And good to hear from you. And I think if you go back to the beginning of the year, we always said that we saw a robust pipeline of opportunities for IET. And as we've gone forward through the year, that has continued to get stronger and stronger, and more of the pipeline has been converting. And so it's given us the opportunity really to be able to take up our guidance on the IET orders. And as you said correctly, now it stands at a range of 14 billion to 14.5. And it really plays out in three areas as you look at the activity level. The first is LNG. You've seen that LNG continues to be robust. And there's been a number of projects that have moved forward. As you saw this quarter with the uptake of the Venture Global Agreement, also with the ADNOC gas and the Ruiz facility. So continuing to see good uptake on the LNG side. And we've booked $4.8 billion of LNG equipment orders. And we still expect more in the fourth quarter. And very pleased to see also the uptake in the electrification and the electric motor being used from our brush division as well. So one is LNG. The second, we continue to see strength in the onshore offshore production. And that's trending better than expected. And we also expect to see a good fourth quarter with the larger FPSO orders. And that continuing to be a case with the offshore activity. And the last area, new energy, we had a forecast at the start of the year to be at $400 million. We've taken it up to $600 to $700. And you can see that by the end of the third quarter, we're already at $540. We still expect to see orders coming through in the fourth quarter. So feel good about that $6 to $700 million and still remain very confident on the end of the decade being at the $6 to $7 billion. So good overall strength in those three areas from an IET perspective. And because we look out to 2024, we continue to see a pipeline of good project opportunities. And we'll obviously be able to update you further in January. But in the three cases, there's continued strength and a number of opportunities.

Lorenzo Simonelli:

Yes, it's definitely all of the above. And as you think about LNG, and you think about also the role that natural gas is going to play as a transition and destination fuel, we see that we need an installed capacity of LNG by 2030 of 800 mTPA. We've mentioned that before. And as you look at 23, we've had a good set of FIDs. There's 53 mTPA that's happened of FID. We've obviously booked 80 mTPA because we do get some orders prior to projects going to FID. But we see that continuing as we go into 2024 and also feel good about 65 mTPA of FIDs in 24. And continuing in 25 and 26 at what we stated previously, the rate of 30 to 60 mTPA. And I think when you look at both Greenfield, international, North America, Brownfield, we're seeing activity across the board. I think obviously the US has a unique opportunity with the natural gas reserves that it has and also the associated gas and a number of projects, both Greenfield and Brownfield, [indiscernible] Venture Global have made comments about their activity. That there's some projects in Mexico. There's other new projects that, again, are working towards FID, such as Telurion. So US continuing to be strong. But then also internationally, you see Qatar. You also see, again, Canada. You see the ADNOC of the world. And I think you're starting to emerge with Africa as well. So we remain very positive. And I think at the end of the day, it's all towards that 800 mTPA that we need to have by 2030 to make sure that we meet the energy demands of the world.

Lorenzo Simonelli:

Thanks.

Operator:

Our next question comes from Luke Lemoine with Piper Sandler. Luke, your line is open.

Lorenzo Simonelli:

Hi, there.

Lorenzo Simonelli:

Sorry about the technical issues.

Lorenzo Simonelli:

Yes, Luke, I'll kick off here and then also let Nancy chime in. And I think we've mentioned it at the start that we continue to navigate a challenging aerospace supply chain. And you will have heard from others that also reported results that this is across the aerospace industry. And we factored this in at the beginning of the year. And we're continuing to monitor it, work closely with the supply chain, and make sure that we mitigate as much as possible any consequences. And we feel good about being able to do that as we go forward. I think it is important to note, when you think about our rotating equipment about one third of the LNG is a derivative, but the other is heavy duty gas turbines, and then also electric motors. And we continue to see robust supply chain availability there. So we're working through it and continuing to keep an eye on it.

Luke Lemoine:

Okay. Perfect. Thank you, guys.

James West:

Thanks. Good morning, Lorenzo and Nancy.

James West:

So hi, Lorenzo and Nancy. I wanted to touch on the horizon strategy. It's something that I know we talked about in September, but you've now laid out kind of a much more detailed kind of view of the three different horizons that you're thinking about. And I was curious how this informs the overall strategy for Baker, how it has informed, and how it is informing strategy going forward, and how you're thinking about it.

James West:

Okay, right. Makes sense. And then maybe just a quick follow up Lorenzo on the new energy side. Obviously orders this year have been much stronger than last year. You're already likely to blow through your target here for this year. With the DOE recently, you announced the hydrogen hubs program or announced the awards, the hydrogen hubs. And I'm curious kind of what you're seeing new energy, broadly, but maybe more focused on hydrogen in particular, just given that there's a lot of activity in hydrogen today.

James West:

Got it. Thanks, Lorenzo.

Operator:

Thank you. We apologize for the technical difficulties. [Operator Instructions] One moment for our next question. Our next question comes from Neil Mehta with Goldman Sachs. Your line is open. Neil, your line is open. Please ensure you're not muted. One moment. One moment for our next question. Our next question comes from Scott Gruber with Citigroup. Your line is open.

Nancy Buese:

Yes, sure. It's a great question, giving how strong the pipeline is in order since we really published our margin targets last September. I would say the biggest driver is the mix of the mix, and that's really the headwind, and that's sort of the variable to our EBITDA target. So while we continue to expand the install base, that's sort of pushing the services revenue as a percentage of the margin targets. And we've said publicly that service is in a much higher margin than the equipment. So when you think about the things we're doing to drive to that 20% margin, it's really a continued progress on our cost-out and transformation process at the segment level, thinking how we can be leaner, how we can operate more efficiently. You'll also see improvement in the industrial tech margins, and the supply chain and chip shortages really continue to normalize in that space. And then certainly Gas Tech services is slower to ramp in the impact this year of the continued aviation supply chain issues, which we believe will start to abate in 2024. And then the other piece to remember is that we have been absorbing additional R&D costs as we think about the investments we're making into climate tech for the back half of the decade. So all of those things together with a very strong top-lying growth allow us the past and to see the transparency around how we get to the 20% margin. But we are confident in our ability to attain those margins, and we will continue to work for more, but we definitely see line of sight towards the 20%.

Nancy Buese:

Yes, I think you'll see a gradual ramp up, but it will be a little bit lumpy, and the part we can't necessarily predict is the pace of the equipment orders and where the services revenue will pop in. So I would say you'll continue to see a trajectory up and to the right. It's hard to say exactly where those bigger gains will occur, but we will continue to provide line of sight of that with our guidance.

Operator:

Thank you. One moment for our next question. Our next question comes from David Anderson with Barclays. Your line is open.

Lorenzo Simonelli:

Dave, I'll take this one. Look, as you can imagine with the intake of orders that we've had, we've been working on making sure that we've got lean processes and kaizans in the different manufacturing shops that we have. And we feel very good about the ability to take on the additional orders and also turn it around from a cycle time perspective and also from a conversion. You won't see that dramatic a change. Again, if you look at the large LNG projects, they normally take between 18 to 24 months from the intake out to the actual installation. And so that will remain the case. But definitely we're focused on making sure that we're meeting the customer commitments.

Lorenzo Simonelli:

Dave, look, we definitely see that the transition is complicated. We've always said that. And I think there was an eagerness that it should happen overnight. There's an energy supply that needs to be given to the growing population and also the developing world that needs to be there. And we're going to see in parallel the continuation of the use of oil and gas. And we're going to see it continuing to be cleaner as well with the adoption of CCS, the adoption of emissions management. And what we're mentioning here is that the reality is, I think, becoming known that it's going to take some time and it's going to be more gradual, but it doesn't change the destination. And I think ultimately we're going towards a low carbon economy and everybody's focused on that. And we're going to see growing activity across both of our business segments associated with that. So again, we're in a, I think, unique position where irrespective of the speed of the transition, we have the opportunity to benefit.

Operator:

Thank you. [Operator Instructions] One moment for our next question. Our next question comes from Kurt Hallead with Benchmark. Your line is open.

Lorenzo Simonelli:

Hi, Kurt.

Lorenzo Simonelli:

Yes, Kurt. And actually, we have been investing. And I think as you've seen the associated R&D expenditures increase this year and, we are preparing for that six to seven billion and feel very comfortable. And it's not just within the compression space. It's also within the turbo expander base. And you look at net power, for example, and we're obviously linked closely with them. And we see that as a big growth opportunity in the future with regards to clean power generation, hydrogen, and again, application of our compression. You look at our gas turbines that we already have that can be, that are hydrogen ready. So I actually think we've got a large complement of the equipment either already ready to go or already in research and development with the aspect of the associated engineering that's taking place. And we're seeing the flow of orders and also pipeline opportunities come about. And that's just further reinforced with era. It's further reinforced with some of the European policies and also what you're seeing in the Middle East. So many, many opportunities as we go forward and feel comfortable with that 6 billion to 7 billion and also our opportunity to convert on it.

Nancy Buese:

Yes. So at this point, how I would think about it is we've committed to the 60% to 80% of returns back to shareholders. The dividend will structurally go as the business goes and we'll work to increase the dividend over time. How I would think about the share buyback is it'll be opportunistic to get somewhere in that 60% to 80% range. So that will be the opportunistic add on to the dividend. Our sincere goal is as we get more structure, stability, linearity in the business, we'll be able to grow that dividend over time and especially as we pivot away from the cyclical nature of certain parts of the business and more to sexual, secular growth. So that's the goal, but we still remain very committed to the 60% to 80% return to holders.

Marc Bianchi:

Hi. Thank you. I think you had mentioned an expectation for solid upstream spending growth next year. There's some investor concern that maybe mid-teens or even double digits might be a stretch for international spending. Could you just comment on how you're seeing the outlook if you think that that mid-teens is achievable or any other puts and takes to be thinking about?

Marc Bianchi:

Okay, that's great. Thanks, Lorenzo. The other question I had was on LNG service. So you laid out the growing installed base and what that could mean for the service opportunity. Can you talk about how much of Gas Tech services today comes from LNG service so we could just get a sense of what that growth could mean for the business?

Marc Bianchi:

Okay, great. Thank you very much. I'll turn it back.

Operator:

Good day, ladies, and gentlemen. Welcome to the Baker Hughes Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I’d now like to introduce your host for today’s conference Mr. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Jud. Good morning, everyone, and thanks for joining us. We were pleased with our second quarter results and remain optimistic on the outlook for 2023. As you can see on slide four, we maintained our order momentum in IET and SSPS. We also delivered strong operating results at the higher end of our guidance in both business segments, booked almost $150 million of New Energy orders and generated approximately $620 million of free cash flow. Turning to slide five, growing economic uncertainty continues to drive commodity price volatility globally. However, despite lower oil prices over the first-half of the year, we maintain a constructive outlook for global upstream spending in 2023. Market softness in North America is expected to be more than offset by strength in international and offshore markets. As we have said previously, we expect this spending cycle to be more durable and less sensitive to commodity price swings relative to prior cycles. This is due to strong balance sheets across the industry, disciplined capital spending that is based on low asset break evens and a focus on returns versus growth. We are seeing this in North America where, despite the decline in WTI prices, IOCs and large independent E&P companies have yet to deviate from development plans. It is also evident in international and offshore markets, where we continue to see steady activity increases from NOCs and IOCs and production discipline from large producers. Outside of the upstream markets, we remain optimistic on the LNG outlook, with solid demand growth this year led by Europe and Asia. In fact, despite a 50% decline in LNG prices over the first-half of the year, contracted long-term offtake agreements of over 45 MTPA are slightly above contracting levels over the same period in 2022. The continued strength in long-term LNG contracts has been a key driver of the momentum in industry FIDs, which have now totaled 53 MTPA so far this year. This includes the recent FIDs for Phase 1 of Next Decade’s 17.6 MTPA Rio Grande project and QatarEnergy’s 16 MTPA North Field South project. Based on the continued development of the LNG project pipeline, we still expect the market to exceed 65 MTPA of FIDs this year and should see a similar level of activity in 2024. We continue to see the potential for this LNG cycle to extend for several years with a pipeline of new international opportunities expanding project visibility out to 2026 and beyond. As we have stated consistently, we fully expect natural gas and LNG to play a key role in the energy transition as a baseload fuel to help balance against intermittent renewable energy sources. We believe the expanding pipeline of LNG opportunities is tied to the growing recognition of this reality and that the transition will take more time and must be financially viable. As we highlight on slide six, Baker Hughes’ unique portfolio enables us to weather a choppy macro environment. We have a diverse mix of long and short cycle businesses with leading technologies that play across value chains within today’s energy and industrial complex, and are well positioned to play a leading role into the future. In addition to the earnings and cash flow durability of our portfolio, we continue to drive actions to optimize our corporate structure and drive higher margins and returns. While reducing costs is one lever, we are also fundamentally re-wiring the organization to simplify reporting lines, eliminate duplication, and taking measured steps to upgrade our financial reporting systems. We believe this will lead to more standardization, increase automation, and provide greater real-time information and analytical capabilities around our business performance. We have now completed the actions required to achieve the first $150 million of our cost-out target by the end of 2023 and believe there are additional opportunities for further cost reductions in 2024 and beyond. As we continue to redesign our organization and install new processes and systems, our goal is to drive continued cost productivity, with the ultimate objective of exceeding 20% EBITDA levels for each business segment over the next few years. As we work to optimize our organizational structure, we are also focused on capitalizing on favorable market trends across both business segments in the near-term, as well as the long-term. In the near-term, both IET and OFSE are well positioned to capitalize on multiple growth vectors, most notably the multi-year upstream growth cycle in international and offshore, the wave of LNG sanctions expected through this decade, and the New Energy opportunities that utilize our existing core technologies. Longer term, we believe that our unique portfolio positions us well to capitalize on the Energy Transition, which is driving fundamental changes to the energy landscape, our customer base, and how they operate. Given our position as a strategic supplier for both subsurface and surface solutions, our portfolio is increasingly aligned to our customers’ capital allocation decisions, and provides a unique vantage point as we work with them on planning and developing the next generation of energy projects. Turning to slide seven, Baker Hughes’ portfolio and our customer relationships have never been stronger. Since 2017, we have significantly enhanced our size and scale in key regions like the Middle East, as well as our relationships with key customers. By selling a range of solutions that includes LNG, power generation, and compression solutions for onshore and offshore production applications, and integrated solutions for well construction and production, we are able to offer capabilities that uniquely position us for today and the future. Today, our wide range of core competencies are being utilized in select areas like deepwater projects, where we provide power generation and compression for FPSOs, in addition to subsea equipment and flexible risers. We are also seeing growth opportunities through further investment in natural gas value chains, increasing investment in New Energy, and higher demand for integrated solutions. Some of these unique and emerging solutions play to our strengths as they combine subsurface capabilities with highly engineered surface technologies that also layer in digital offerings across the scope of work. As we look to the future, it is clear that almost all energy companies are transitioning, and while the pace of change may differ, the direction of travel is clear. We believe that as the need to decarbonize becomes more widespread, the demand for integrated solutions across these areas will grow. In fact, we are in the early stages of collaborating with key customers on a range of future opportunities that leverage our unique set of technologies for New Energy applications. For example, in CCUS we can evaluate and drill reservoirs for CO2 storage and provide CO2 compression expertise. Other solutions include geothermal power, where we drill geothermal wells and provide steam turbines, and blue ammonia projects, where we provide ammonia and CO2 compression solutions, as well as the drilling and monitoring of CO2 storage wells. Overall, I am extremely excited about the multitude of new opportunities developing for solutions that leverage our unique portfolio. We believe, combining these growth opportunities with our business transformation objectives provides attractive upside for our margins and returns going forward. Turning to slide eight, I will provide an update on each of our business segments. In Oilfield Services & Equipment, we continue to be encouraged by the multi-year cycle unfolding in international markets, particularly in offshore basins. With approximately 70% of our OFSE business internationally focused, and around 40% exposed to offshore, we remain well positioned to benefit from these market dynamics. On a regional basis, we are experiencing strong growth in most areas, with particular strength in Latin America and the Middle East. We see no change to the pace of activity across international markets and continue to see promising signs in markets such as West Africa and the Eastern Mediterranean. One area that continues to lag is the North Sea, where U.K. fiscal uncertainty is hampering developments. In North America, the market continues to trend softer on lower oil and gas prices. However, the impact of price volatility in the first-half of the year has largely been limited to the activity of private operators and in gas basins. Our OFSE business in North America is production-levered and the majority of our customer base is made up of major oil companies and public E&Ps, which have yet to deviate from plans laid out at the start of the year. This portfolio and customer mix results in a business that is generally less volatile than fluctuations in North America activity and rig count. This resiliency was evident during the second quarter, where our OFSE North America revenue was modestly higher despite a 15% sequential decline in the North America rig count. Within our OFSE product lines, we continue to experience strong growth across the portfolio, which was led in the second quarter by Completions, Intervention & Measurements. We also continue to develop new technologies for the CIM portfolio with innovations like SONUS, the industry’s only acoustic set liner hanger system, which can cut the time taken to set a liner hanger from hours to minutes. In Production Solutions, we continue to see solid growth in artificial lift globally. During the quarter, we had early commercial success with our recently acquired AccessESP technology, winning two awards with key customers in the Middle East. The AccessESP system offers an efficient alternative to conventional ESP installations without the need for a heavy workover rig, which reduces time, costs and emissions while boosting well performance. In Subsea & Surface Pressure Systems, we continue to experience positive order momentum. We booked a major award during the second quarter with Eni for the Baleine field offshore Ivory Coast, providing eight subsea trees and three Aptara manifolds. Operationally, we are encouraged by the early success of repositioning the Subsea Projects & Services business to focus on selected key markets with a leaner cost base. While top line trends for OFSE remain strong and should maintain strong momentum into 2024, we remain equally committed to translating higher revenue growth into higher margins and returns. For 2023, this will translate into double-digit revenue growth and an expansion of EBITDA margins by 150 basis points to 200 basis points. In IET, we saw another excellent quarter commercially, with $3.3 billion in orders, maintaining the strong momentum from the first quarter. Gas Tech Equipment achieved $1.6 billion in orders, driven by multiple areas, including almost $900 million of LNG awards in the quarter. In LNG, Baker Hughes booked an order for three Main Refrigerant Compressors for NextDecade’s Rio Grande LNG project in Texas. Baker Hughes will supply Frame 7 turbines paired with centrifugal compressors across Rio Grande’s first three LNG trains in a parallel configuration arrangement, providing more operational flexibility. In Onshore/Offshore Production, we were pleased to be awarded a major order from MODEC to supply gas technology equipment for Equinor’s BM-C-33 project in the Brazilian pre-salt Campos area. Baker Hughes will be providing turbomachinery equipment for the FPSO, including LM2500 gas turbine and steam turbine generators, for a combined cycle power generation solution to reduce the project’s carbon footprint. Combined cycle solutions are an important trend in the offshore oil and gas industry, as they enable the reduction of overall FPSO carbon emissions. Baker Hughes expects to reduce carbon emissions by more than 20% for this project versus similar open cycle FPSOs with the same power demand. On the New Energy front, we booked over $100 million of orders in the quarter in IET, including multiple orders for Air Products to support its Louisiana Clean Energy Complex. These awards included vertical centrifugal pumps for ammonia loading, compression trains for CO2 storage, and a subsurface study undertaken by OFSE to assess the capacity of the reservoir. In addition to the Louisiana project, we also received an award for hydrogen compression equipment for Air Products’ New York Green Hydrogen facility. IET also saw increased traction in the growing blue ammonia space. During the quarter, IET secured multiple orders in the Middle East, including awards to supply syngas and ammonia compressor trains and centrifugal pump trains. Orders in our Industrial Technology businesses maintained strong momentum in the second quarter with 8% growth year-over-year led by Pumps, Valves & Gears, and Inspection. In our Condition Monitoring business, we secured an agreement to deliver asset protection and monitoring hardware, software, and services for a floating LNG project offshore Malaysia. The scope includes Bently Nevada’s Orbit 60 condition monitoring system, Ranger Pro wireless monitoring systems, System 1 software, and cyber security enhancements, as well as end-to-end project management support and services. On the operational side, Industrial Tech also continues to benefit from volume and margin improvements in Condition Monitoring and Inspection, as chip shortages and supply chain issues gradually abate. Although there is still work to do, profitability in Industrial Tech is experiencing a solid recovery that we expect to continue over the course of 2023. IET is also making solid progress on its strategic initiatives around digital and growing outside its traditional customer base into new markets. We received our first major award for Cordant from a large ammonia producer in the Middle East in the first quarter, delivering an integrated suite of solutions for asset performance management, process optimization and digitally enabled services through IET’s iCenter. Building on this award, during the second quarter, we signed a long-term Multi-Maintenance Program contract where we will be providing maintenance planning, project management, and resident engineering on site for the customer’s current fleet of steam turbines and centrifugal compressors. This contract demonstrates the full range of capabilities and complementary services of our IET Digital and Gas Tech Services portfolio, providing a blueprint for expanding our digital platform with new and existing customers. Overall, we are pleased with the continued momentum in IET this year. With a record RPO that now exceeds $27 billion, we expect to generate strong revenue growth over the next few years that will be accompanied by strong margin improvement and higher returns. I would also like to spend some time on slide nine to highlight Baker Hughes’ 2022 Corporate Sustainability Report, which was published during the second quarter, and shows that the company is on-track to meet its Scope 1 and 2 net-zero emissions goal by 2050. The report also outlined Baker Hughes’ progress toward driving more sustainable operations through improved performance in its ESG metrics. Baker Hughes continues to strive for a diverse and inclusive workplace, as people are at the heart of any company’s progress. Fresh perspectives, unique experiences and innovative ideas are critical to driving competitiveness going forward. To this end, Baker Hughes has enhanced its reporting with over 20 new metrics to help drive more transparency and was recognized for attracting, retaining, and developing talent. As one of the first companies in the industry to announce a net-zero emissions goal, we continued to push forward with reducing our Scope 1 and 2 emissions, which have declined by 28%, compared to our 2019 baseline year. We are also now reporting on 10 categories of Scope 3 emissions. Against the backdrop of a challenging and complex global energy environment, I am proud that while we continue supporting our customers on their energy transition journeys, we have not lost sight of our goal to operate in a responsible and more sustainable way. Overall, I remain very excited on the outlook for Baker Hughes and confident we will execute on all the growth opportunities across our business, as well as the structural changes we are implementing across our organization. With that, I will turn the call over to Nancy.

Lorenzo Simonelli:

Thank you, Nancy. I would also like to welcome Chase to Baker Hughes and wish Jud well in his new role. Turning to slide 19, Baker Hughes remains committed to delivering for our customers and our shareholders. We see exciting growth opportunities across our portfolio, as well as opportunities to drive higher margins and returns through the simplification and optimization of our organizational structure. Through these initiatives, our goal is to exceed the 20% EBITDA margin targets in OFSE and IET, as well as the ROIC targets in both businesses of 15% and 20% respectively. And finally, we continue to focus on generating strong free cash flow and returning 60% to 80% of this free cash flow to shareholders, while also investing for growth across our world class business. With that, I will turn the call back over to Jud.

Operator:

Thank you. [Operator Instructions] And our first question coming from the line of James West with Evercore. Your line is open.

Lorenzo Simonelli:

Hey, James.

Lorenzo Simonelli:

Yes, sure, James. And as you correctly stated, we did raise the guidance from an IET order perspective this quarter by $1 billion. And if you look at what we've consistently said this year, we've seen a large pipeline of opportunities for IET. And that's been robust and the visibility is improving both for this year and also the next few years. So whereas at the start of the year, we had some conservatism based on project timing that can move around. We've now seen that solidify. And as we see the year play out, we see higher opportunities across several areas. And let's start off with LNG, which obviously we were announcing some FID activity in the quarter, but also continue to see a number of projects that can come to FID through the rest of this year, but also going into next year as well. And I was just up at Vancouver with LNG 2023, and I can say that the customer discussions are very robust and there's a clear understanding that natural gas and LNG is going to play a key role as a base load for the energy mix going forward. But also on the offshore/onshore production and we've seen strength in the offshore activity. You've seen some of the announcements there on the FPSO sites, and then on the new energy orders, and we've already met our full-year guidance in the second quarter. We're starting to see some opportunities in the back half as well. So overall confident not only on the order momentum for this year, but also going into 2024.

Lorenzo Simonelli:

Yes. I'm very pleased with the way in which we're progressing on the new energies and you know, we booked about $150 million of new energy orders in 2Q bringing the first-half as you said correctly above the $400 million target. And as we look at the rest of the year, we think we could be at $600 million to $700 million of new energy orders. And predominantly, it's around the attributes of CCUS projects and also hydrogen. And what I'm pleased about is that it’s really taking the whole portfolio of capabilities we have existing today in Baker Hughes. You all have seen that we announced the combined cycle technology. We also announced ammonia, blue ammonia that's gaining traction. And also on the subsurface side with our oilfield services equipment and being able complete a study there. So it's great to see the continued momentum utilizing existing Baker Technology, as we continue to invest in the future technology as well. And I just think it speaks to the portfolio that we have.

Lorenzo Simonelli:

Thanks, James.

Arun Jayaram:

Hey, good morning Lorenzo. I was wondering if you could discuss what type of visibility do you have in IET order strength into 2024? You mentioned that you expect more than 65 MTPA of LNG FIDs this year with a similar amount in 2024? Do you think that you can keep up this robust pace of IET orders next year?

Arun Jayaram:

Great. And maybe my follow-up is for Nancy. Nancy, you raised the low-end of your full-year EBITDA guide. Orders were strong. You raised your IET order guide by a $1 billion. Maybe some thoughts on the 3Q guide, midpoints 960, the streets, just a hair above that. Just thoughts on 3Q guide and some of the assumptions behind that?

Arun Jayaram:

Thanks a lot. Bye.

Marc Bianchi:

Hi, thanks. I first wanted to ask on the cost reductions that you've put in place I think there's an expectation that there's some more to come on that. When should we be expecting you to update the market on that? And maybe you could talk to in a little more detail what those might look like.

Lorenzo Simonelli:

And Marc, I would just say we've always communicated that this is a multiyear journey, which has various aspects to it. And obviously, through the time that we've created Baker Hughes, we've been through a lot, and now we're really simplifying the business. And given the separation activities that have now stopped, it's really an opportunity for us to rationalize across the -- and optimize.

Lorenzo Simonelli:

Yes. Just, Marc, I think when you referenced the 150 basis points to 200 basis points, that's specific to our SSPS business, and that's a component of what we're seeing in oilfield services and equipment.

Operator:

Thank you. And our next question coming from the line of Scott Gruber with Citigroup. Your line is now open.

Lorenzo Simonelli:

Hi, Scott.

Lorenzo Simonelli:

Yes, Scott. In terms of pricing, I'll break it down. The environment in North America has leveled off, and we're hearing some of the customers requesting discounts, particularly in the more commoditized markets like pressure pumping. However, we continue to expect pricing for our technology in North America to hold up in this environment, and we remain firm on pricing. Internationally, we're continuing to see good traction given the strong activity levels and tightness in the market from a supply chain standpoint. That being said, it will take some time for it to flow through from an earnings standpoint and given the longer-term nature of the contract structures in the international markets. But again, still feeling we're in a constructive outlook.

Nancy Buese:

Yes. I would say on the whole, for that part of the business, we do expect to see good incrementals. I think there's still a lot of macro conditions, so it's a little bit soon. But from a cost-out perspective and efficiency perspective, we are expecting certainly better incremental. So we'll continue to provide guidance as we go along, but that would be our expectation at this time.

Nancy Buese:

I think it's a little hard to say at this point. I think it's a little bit early for us to seeing the macro backdrop, but we hope so. So we'll keep our eyes peeled for that.

Operator:

Thank you. And our next question coming from the line of Neil Mehta with Goldman Sachs. Your line is now open.

Lorenzo Simonelli:

Yes, for sure. And as you said correctly, offshore continues to be strong. And if you look at it from a tree count perspective, obviously, there's been over 200 tree awards and the market is on track to exceed 300 for the second consecutive year. In fact, we believe that offshore is entering a period of sustained higher activity which could support those tree awards in excess of 300 trees for the next two to three years. We're encouraged. We are also very pleased with the way in which we've taken on our business and restructured it and recentered it around certain key regions and also key customers. You've seen the recent awards of Belen, Agogo in West Africa. So we're going to participate in the markets like Eastern Mediterranean, Middle East, and Southeast Asia, which are getting a lot of traction. So I agree with you. We remain confident on the outlook for the second half of the year and also into 2024. And we're monitoring a number of potential awards to further increase our backlog.

Nancy Buese:

Yes. I think I would simplify it to say there's really three things we're focused on. We're focused on revenue, which is obviously going quite well. We're really focused on EBITDA margins, and we've still got work to do there and we're focused on free cash flow and the conversion rate, which you are starting to see. So a lot of that also is centered around our working capital and our cycle. So we're really thinking about our billing and collection cycle, our inventory turns and management and all of the bits and pieces. So it starts with transparency of the reporting. So we've been working a lot on that front and then a lot of good discussion with our teams about where do we need to focus on sort of that relentless pursuit of operational excellence. So that's what you're really seeing come to roost. And there's still quite a lot for us to do. I think we can improve our systems, just the history of the company, created a lot of bits and pieces that weren't necessarily talking to each other as well as they could. And we've started to really focus on how to improve those systems, integrations, and interfaces to get information and data that our teams and leaders can use to manage more effectively. So lots of work ahead, but you are starting to see some of the benefits of a laser focus on some of those key metrics that really matter. And as we've said, you'll see that flow through the margins as we become more efficient over time.

Operator:

Thank you. And our next question coming from the line of David Anderson with Barclays. Your line is now open.

Lorenzo Simonelli:

Yes. So it takes, Dave, a number of factors into account. First of all, there's project timing on the LNG side, and we still feel that there's the opportunity for some LNG projects to come in there. So that is a component of the $1 billion extra. But also on the offshore side, we're seeing strength in the marketplace and the activity there. And then you've got the obvious increase in the new energy. So you put those three together, and that really accumulates. And I'd say the last area is on the industrial side, we are seeing continued momentum come through as there's a pickup there in the industrial tech.

Lorenzo Simonelli:

It's really the work that the team has been doing in concentrating on the customer activity and also the service performance, and we've been reaping the rewards through incremental business with our customers. So in line with the strategy that we had and also good execution by the team.

Operator:

Thank you. One moment for our next question. And our next question coming from the line of Luke Lemoine with Piper. Your line is open.

Lorenzo Simonelli:

Sure. And look, I think you've seen the number of projects that are out there. And when you think about both internationally and also within the U.S., you've got a number of brownfield opportunities you've seen the announcement by Cheniere looking to do an expansion. As you look at ‘24 and ‘25, you've got a number of extensions on brownfield projects activities and coming out of the LNG 2023 meetings last week in Vancouver, a lot of dialogue on the continued need for LNG. And we stay very much with the view that we're going to need in excess of 800 MTPA by 2030. And given some of the environment and situation in the marketplace, we're seeing that pull forward with these FIDs coming in sooner. So it's really a multiyear cycle where we see consistency in LNG FIDs. And you know the projects as well as I do. You've got opportunities from Cameron to Port Arthur to different elements of Commonwealth. You've got Tellurian, you've got a number of projects out there that are imminently looking at FIDs as we go forward.

Lorenzo Simonelli:

Thanks.

Operator:

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I’d now like to introduce your host for today’s conference Mr. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Jud. Good morning, everyone, and thanks for joining us. We were pleased with our first quarter results and remain optimistic on the outlook for 2023. As you can see on Slide 4, we maintained our strong order momentum in IET and SSPS. We also delivered solid operating results at the high-end of our guidance in both business segments, booked almost $300 million of new energy orders and generated approximately $200 million of free cash flow. Turning to Slide 5. While 2023 has already started off with some macro volatility, we remain optimistic on the outlook for Energy Services and Baker Hughes. Our diverse portfolio features long-cycle and short-cycle businesses that position us well to navigate any periods of variability that may occur across the energy sector. Despite the elevated recession risk for major developed economies, we expect the supply-demand balance in the global oil markets to gradually tighten over the course of the year. Factors driving this include China's economy recovering, non-OECD demand continuing to grow and OPEC+ remaining proactive in maintaining adequate and stable oil price levels. We expect this macro backdrop to still support a double-digit increase in global upstream spending in 2023 with multiple international projects being executed and the offshore development pipeline growing. We continue to believe current environment remains unique with a spending cycle that is more durable and less sensitive to commodity price swings relative to prior cycles. Factors driving this extended cycle include financially stronger operator balance sheet, disciplined capital spending focused on returns versus growth and IOCs and NOCs that are balancing modest production growth with longer-term investments in new energy. Another notable characteristic of this cycle is the continued shift towards the development of natural gas and LNG. As the world increasingly recognizes the crucial role natural gas will play in the energy transition, serving us both a transition and destination fuel, the case for a multi-decade growth opportunity in gas is steadily improving. This is driving operators of all sizes to dedicate more spending towards natural gas development as well as LNG projects and associated infrastructure. We are seeing the early stages of this shift through a step-up in the exploration and development of gas reserves in regions like Africa, the Middle East and the Eastern Mediterranean. We are also seeing the introduction of new technologies and entrance into the LNG sector more broadly as well as an evolution in contracting structures for LNG offtake volumes. For these reasons, LNG project sanctioning activity has gotten off to a strong start in 2023 with 20 MTPA already reaching FID and other projects likely to soon follow. Contrary to conventional wisdom, we believe that recent declines in global LNG prices from the unsustainably high levels reached last year is a net positive for the sector by supporting demand growth in key developing markets and bringing closer alignment on LNG pricing expectations between buyers and sellers. Based on conversations with existing and new customers, we see the potential for this LNG cycle to extend for several years with a pipeline of new international opportunities expanding project visibility out to 2026 and beyond. We remain confident that we will see 65 to 115 MTPA of LNG projects reach FID in 2023 and continue to see solid project activity in 2024 and 2025. In addition to capitalizing on the commercial opportunities presented by this favorable macro backdrop, our primary focus for Baker Hughes in 2023 is transforming the company operationally and positioning it for the future of the energy markets. This includes executing on our previously stated cost-out initiatives, which Nancy will talk about in more detail and reshaping the company into two strategically managed business segments with a leaner corporate function. We have done a lot of work evaluating our entire organization these last few months, and the changes we are driving will enable faster decision making and allow us to operate as a leaner, more simplified organization. It will take time to reach our ultimate goals, but I strongly believe that the work we are undertaking this year will lay the foundation for consistently better operating results and higher returns in the future. Turning to Slide 6. I will provide an update on each of our business segments. In Oilfield Services and Equipment, despite recent volatility in oil and gas prices, we remain positive on the outlook for a multi-year cycle, with growth trends clearly shifting in favor of international and off-shore markets. With approximately 70% of our OFSE business internationally focused, we are well-positioned to capitalize on these unfolding market dynamics. Geographically, multiple regions are poised for strong growth this year, led by the Middle East and Latin America, where the pipeline for both shallow water and deepwater growth opportunities becoming more visible. In other markets like, West Africa and the Eastern Mediterranean, offshore activity is also improving with multi-year drilling programs starting to come into focus. In North America, activity has been seasonally weaker to start the year as expected with a high likelihood of further softness as activity and gas basins responds to recent natural gas price weakness. However, with roughly 55% of our North American business comprised of artificial lift and production chemicals and a customer mix weighted towards the majors and large independents we expect our portfolio to perform relatively well in the current environment. Within our OFSE product lines, we continue to see the strongest growth and performance in our well construction product line, which is supported by the leading technologies in our drilling portfolio. Our completions, intervention and the measurement product line also continues to perform well and will be further improved by the recently closed acquisition of Altus Intervention. Altus will complement our existing intervention solutions business and add new technology that can be scaled into new geographic markets. In Production Solutions, we continue to see incremental improvements in our chemicals business as supply chain constraints ease and profitability continues to normalize. Our Singapore facility will soon be fully operational and we remain on-track for margins in the Chemicals business to return to historical levels by the end of this year. Another positive development for our Production Solutions business is the recent announcement of Leucipa, which is a platform-agnostic digital solution. This software enables the automation of field production, connecting artificial lift, fluids and chemicals and removing unnecessary costs and manual processes, which will ultimately drive enhanced production. We also recently announced a collaboration with Corva, a third-party digital solution that improves well construction efficiency, further enhancing OFSE's digital capabilities. In our Subsea and Surface Pressure Systems product line, the demand outlook continues to strengthen. During the first quarter, we booked a major award to provide equipment and services for the Agogo field offshore Angola. We will be providing 23 subsea trees and 11 Aptara manifolds, representing our largest subsea tree order in almost five years. As we reposition the Subsea Projects and Services business to focus predominantly on a few key markets, we see a robust pipeline of opportunities building and anticipate further order momentum for this year and beyond. For our flexible business within SSPS, we expect orders to remain strong in 2023 after a record year in 2022 given robust demand, conversion cycles are lengthening in the business with limited excess capacity until 2025. On the operational front, the integration of SSPS into our OFSE segment and restructuring of the business continues to progress well. In line with the capacity rationalization for SSPS that we disclosed last quarter, we are in the process of decommissioning and right-sizing multiple manufacturing sites. Our focus is now shifting to the surface pressure control business, where we see similar opportunities to right-size capacity, integrate supply chain and engineering, and localizing key growth markets, particularly the Middle East. As a reminder, these steps are in addition to the cost savings gains from removing management layers and will largely come into effect in 2024. For 2023, we continue to expect OFSE to deliver double-digit revenue growth and for EBITDA margins to expand by 150 basis points to 200 basis points as activity increases in multiple regions and self-help initiatives in key areas are executed. Moving to IET. We saw another excellent quarter commercially, continuing on the strong momentum from the end of 2022. Gastech equipment booked a number of LNG awards in the quarter, totaling almost $1.4 billion with continued progress across our world-class franchise. The recent decline in energy prices have had virtually no impact on our discussions in terms of timing or the pipeline of opportunities with project cycle times that can last eight to 10 years from the initial planning phase to final commissioning, operators take a long-term view for LNG project development and look through near-term commodity price fluctuations. During the first quarter, we were pleased to be awarded a major order to supply two main refrigerant compressors for the North Field South project, which will be executed by Qatar Gas. The MRCs are part of two LNG mega trains, representing 16 MTPA of additional capacity that is estimated to further boost Qatar's LNG's production capacity to 126 MTPA by 2027. Also during the quarter, Baker Hughes was awarded an ordered by Bechtel to supply two MRCs for Sempra Port Arthur’s LNG Phase 1 project in Jefferson County, Texas. Baker Hughes will supply gas turbine and centrifugal compressors across two LNG trains, for a nameplate capacity of approximately 13 MTPA, as well as two electric motor driven compressors for the plant’s boosting services. Baker Hughes was also awarded an order by Black & Veatch to deliver two LM9000 driven compressor trains for the PETRONAS LNG facility in Sabah, Malaysia. PETRONAS specifically selected the LM9000 gas turbine technology for the two MTPA FLNG facility to reduce complexity, maximize efficiency and minimize footprint, while lowering CO2 emissions compared to other technologies in its class. On the new energy front, we booked almost $250 million of orders in the quarter in IET, including contracts to supply CO2 compression solutions for multiple FPSO projects in Brazil. The six gas turbine-driven compression streams will each reinject more than one MTPA of CO2 into oil reservoirs, enhancing production rates and reducing emissions. We were also pleased to book an order for centrifugal pumps and hydraulic powered recovery turbines for Air Products blue hydrogen project in Edmonton to enable CO2 capture during the auto thermal reforming process. This award is another example of how Baker Hughes and Air Products continue to collaborate to drive the hydrogen economy forward. During the quarter, we also announced an agreement with HIF Global, the world's leading e-fuels company to cooperate on the development of technology for direct air capture. HIF Global intends to test Bakers Hughes Mosaic technology to capture carbon dioxide for direct air capture and combine it with the green hydrogen to produce e-fuels. Orders in the Industrial Technology businesses will maintained strong momentum to start 2023 with double-digit growth year-over-year across all product lines, led by some of the hydrogen-related awards in pumps, valves and gears. In our Condition Monitoring business, we saw notable awards in the Middle East and in Europe, which featured the full suite of our capabilities in monitoring, sensing and asset health across multiple sectors. On the operational side, Industrial Tech also continues to benefit from volume and margin improvements in condition monitoring and inspection as chip shortages and supply chain issues gradually abate. Although, supply chain functionality and operational performance is still not back to where we would like, we are seeing steady progress that we expect to continue over the course of the year. In IET Digital, Cordant, our recently launched integrated suite of solutions is seeing some initial success. We are pleased to be collaborating with BP (ph) on further defining and developing Cordant for asset performance management and process optimization. BP will deploy 1 PM in select locations across its Gulf of Mexico production assets, where Baker Hughes currently has a large installed base of rotating equipment, controls and associated digital services. The companies will look for opportunities to expand this collaboration across other regions in the future. Overall, we are pleased to see strong momentum for IET continue into 2023, with a record backlog of $26.5 billion and a robust pipeline of new order opportunities in LNG, onshore/offshore production and new energy. Based on our strong first quarter and the growing pipeline of project opportunities, we are increasingly confident that IET orders for 2023 are likely to meet or potentially exceed the high end of our guidance range of $10.5 billion to $11.5 billion. Before I turn the call over to Nancy, I'd like to spend some time on the commitments Baker Hughes is making in the areas of sustainability and ESG. As many of you know, we are one of the first companies in the energy sector to commit to a 50% reduction in Scope 1 and Scope 2 emissions by 2030 and to be at net zero by 2050. To help achieve these goals, we are empowering Baker Hughes employees to remove carbon from our products and operations as we better integrate our carbon out program. We are also intently focused on developing our own scope-free emissions reduction road map and expect to have more news to share on this area later this year. Overall, I feel confident in the structural changes we are executing at Baker Hughes and our positioning to capitalize on the multi-year upstream spending cycle, the ongoing wave of LNG investments and the acceleration in new energy opportunities. With that, I'll turn the call over to Nancy.

Lorenzo Simonelli:

Thank you, Nancy. Turning to Slide 16. Baker Hughes is committed to delivering for our customers and our shareholders. We remain focused on capitalizing on the growth opportunities across OFSE and IET, including LNG and new energy. We continue to invest in R&D to develop our technology portfolio in hydrogen, carbon capture and clean power. We also remain committed to delivering on our cost-out objective by optimizing our corporate structure to enhance our margin and return profile. We continue to target EBITDA margins of 20% in OFSE and IET and increasing ROIC in both businesses to 15% and 20%, respectively. And finally, we continue to focus on generating strong free cash flow and returning 60% to 80% of this free cash flow to shareholders, while also investing for growth across our world-class business. With that, I'll turn the call back over to Jud.

Operator:

Thank you. [Operator Instructions] And our first question coming from the line of James West with Evercore ISI. Your line is open.

Lorenzo Simonelli:

Hey, James.

Lorenzo Simonelli:

[Technical Difficulty] near term and also the long-term prospects for natural gas and LNG. And I think you've seen some of the comments made by the G7 and others that natural gas and LNG has a role to play, not just as a transition, but as a destination fuel. So even though 2022 saw the pace of FIDs slowed down somewhat because of the high interest rates and also the inflation, the customer conversations have continued. And I'm very pleased that we were able to book the Qatar NFS expansion, also Sempra Port Arthur and also some smaller projects in Asia Pacific and West Africa during the course of the first quarter. And there's still several more projects that we're tracking for FID this year. You've seen some of the external press around Rio Grande and what they're expecting from the Fast, et cetera. And so we remain confident that this year, we'll see between 65 MTPA to 115 MTPA of FIDs in '23. And in terms of pipeline of opportunities, they continue to grow as well. I think a good example is Cheniere’s 20 MTPA expansion that they've communicated at Sabine Pass. And so we're seeing a number of also International projects. So based on what we see today, there's a reasonable expectation that LNG FIDs in '24 could be approaching the same FID levels we see in 2023. Still early call, but there are a number of projects that are moving towards that. And then it continues in '25 and '26, we also see a set of opportunities improving and with the potential for FID ranges between 30 to 60 MTPA each year. So again, the market is very active at the moment, and we like the position that we have and helping our customers.

Lorenzo Simonelli:

James, I think we are seeing the benefits from some of the legislation, the Inflation Reduction Act that we've discussed before had the potential to pull forward some of this activity. And I'd say, we're very pleased with our progress on the new energy orders. I mean, in the first quarter, you said it, we booked $300 million of orders. A large portion of that $250 million were in IET, large orders around CCUS and Latin America, CO2 compression for multiple FPSOs, two hydrogen awards in North America. So I think it's fair to say that we anticipate that at least in 2023, we should exceed the $400 million guidance we gave. Again, we're looking at the pipeline of opportunities. And over the course of the next three to four years, we think that the energy -- new energy content should be around 10% of our Gas Tech orders. And we’ve stated previously that we believe that by the end of this decade, new energy orders could be in the range of $6 billion to $7 billion and that would imply about 10% of our Gas Tech orders could accelerate over the course of the last half of the decade. So the overall direction is positive. I think it’s in line with what we’ve been saying. We have seen some acceleration. I feel good about our positioning, and also the product capability we have here.

Operator:

Thank you. One moment for next question. And our next question coming from the line of Arun Jayaram from JPM Chase. Your line is open.

Lorenzo Simonelli:

Yeah. Sure, Arun. And let's feel good about IET. And again, we indicated that we should be at the upper end of the guidance range. And you heard some of the comments around LNG, the activity we're seeing there. Also some of the new energy coming through from an orders perspective. So those are elements that clearly help us. We still expect the offshore production to be down after a very strong year in 2022 with the FPSOs. But overall, again, positioning for the upper end of the guide here.

Lorenzo Simonelli:

Yeah, definitely. And look, we've been indicating that we wanted to rationalize some of our capacity. And as you look at SSPS, we've taken several steps also last -- at the end of last year and beginning of this year to really take out some of our excess capacity on the subsea trees. We've also been rationalizing capacity in Asia, Latin America, outsourcing some of the basic machining that we've typically done in the U.K. And now we're looking also at some of the facilities for SPC consolidating those in the Middle East, which is our primary market for the business. So we think that on the cost-side, we're taking the appropriate actions, and this will be part of the broader $150 million and on top of that relative to some of these actions we're taking OFSE (ph) as we go forward. So on the actual offshore market, again, we've seen some strong momentum. You saw our orders. And again, the highest order rate from a five-year period for the business, and we're seeing good traction in flexibles. So our market momentum is positive at this stage, and we see that continuing also in 2024.

Chase Mulvehill:

Hey. Good morning, everyone.

Chase Mulvehill:

Hi, Lorenzo. I guess a first question to you. Back at your annual meeting, you announced a few new digital offerings which included Leucipa in the OFSE segment encoded in the IET segment. So could you speak to how these differentiated digital offerings actually can help you accelerate your digital strategy and how they complement your current digital solutions offering?

Chase Mulvehill:

Okay. Awesome. Appreciate the color there. A follow-up maybe for Nancy. You mentioned line of sight of exceeding the $150 million of cost-outs. And I know you plan to kind of have all the work completed by the end of 2Q. So maybe it's a little bit early to ask, but can we -- can you maybe spend a minute or 2 and kind of give us some color around where you see the most opportunity for incremental cost savings across Baker?

Chase Mulvehill:

Okay. Perfect. Thanks for the color. I’ll turn it back over.

Scott Gruber:

Yes. Good morning. Questions on the outlook for your North American business within OFSE. Lorenzo, you lowered your year-on-year D&C spend forecast which looks appropriate in light of the onshore drilling activity trending down here and it's likely down, exit to exit. But oil production is still growing in the U.S. It's still growing in Canada, which should drive chemicals growth. And I believe Gulf of Mexico revenues should still be up for Baker this year. I think you can still hold the $1 billion, or so revenue run rate through year-end, even if the land rig count onshore is down?

Scott Gruber:

Good. And then a question on the Middle East, following the OPEC production quota (ph), are you seeing or do you expect to see any impact on your chemical or less sales in the Middle East this year?

Scott Gruber:

Okay. Appreciate the color. Thank you.

Luke Lemoine:

Hey. Good morning. Lorenzo, could you talk a little more about your agreement with HIF for Direct Air Capture with your Mosaic business? And maybe what the time line could be and what the opportunity set you see for Mosaic over the next few years?

Luke Lemoine:

All right. Great. Thanks, Lorenzo.

Marc Bianchi:

Hey. Thank you. First question relates to Gas Tech Services. Revenue grew year-over-year here in first quarter, which I think is pretty impressive considering the comparison includes benefit from Russia last year. Maybe you could talk to the year-over-year outlook as we progress through the year? I guess you still have a difficult comparison with Russia in the second quarter, but then that goes away as we get into the back half. Just talk about what we should expect there if you could?

Marc Bianchi:

Okay. And presumably, we should see that year-over-year growth rate improve as we get into the back half?

Marc Bianchi:

Yeah. Okay. Nancy, sticking with you, the share repurchase was -- there wasn't any in the first quarter. You're talking about 60%, 80% return of free cash flow in the year. I'm just curious, is it more about price sensitivity on the stock price? Are there M&A that is being contemplated? Is it just a matter of when to hold on to some more cash because of what's going on in the banking system? Maybe you could just sort of talk to those drivers?

Marc Bianchi:

Thank you so much.

David Anderson:

Good morning, Lorenzo.

David Anderson:

I was just shifting back to the Middle East. Hi. Good morning. I was wondering, if you could talk about Abu Dhabi in specifically. You have a very unique position there with ADNOC Drilling. I believe you've been on your integrated services, you're on something like 40 rigs right now with ADNOC Drilling. I was wondering how that's progressing. Maybe kind of talk about some of the work that you're pulling in there? And where that number is going to -- we just saw an announcement with at Upper Zack (ph) was just awarded all IBS work. So maybe can you just talk about that business in particular and how that's developing and where you see that going?

David Anderson:

Do you need to bring in more equipment in there? I mean, I guess, capacity is going to be one of the things we're going to be talking about quite a bit going forward. But just in terms of that business itself, do you need to pull-in more? Do you need to build more? Do you have enough kind of on hand?

David Anderson:

And then just looking at bigger picture at this region. Middle East Asia was essentially flat in 4Q, I'm sorry, in the first quarter. I'm assuming that weakness was because of product sales that weren't recurring from the fourth quarter. But can you just talk about how revenue kind of -- should progress throughout the rest of the year in this part of the market make sure we kind of stay at this sort of 20% year-on-year growth clip throughout the year? Should that be the expectation here?

David Anderson:

Okay. Thanks, Lorenzo.

Stephen Gengaro:

Thanks. Good morning, everybody. Can you talk -- I guess, two things as it relates to OFSE. Can you talk about just current pricing trends internationally? And then maybe as a follow-up, when you think about the 20% EBITDA margin target, how much of that is price versus sort of activity and self-help, et cetera.?

Stephen Gengaro:

Thanks. And when you think about production chemicals, I think Nancy mentioned getting back to sort of historical levels by the end of the year. Can you just give us kind of an update on the traction there? And are those historical levels accretive to overall service margins? I think they are, but just checking.

Stephen Gengaro:

Great. Thank you for the color.

Roger Read:

Yeah. Thank you. Good morning. I think most of the stuff has been hit. I just have one question. It was a topic at the event back at the end of January on servicing and the maintenance for the LNG facilities that are already out there. I was just wondering if you've seen any change in that, any improvement in that as we think about kind of the impact on margins later I guess, really Q2 onwards for this year?

Roger Read:

That’s it from me. Thank you.

Operator:

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Fourth Quarter and Full Year 2022 Earnings Call [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Jud. Good morning, everyone, and thanks for joining us. I'd like to start off by highlighting a couple of changes for this earnings call. For the first time, we are hosting our earnings call from Florence, Italy, where we will host our Board meeting later this week and welcome over 2,000 customers and industry experts next week at our Annual Meeting. We will also be using a presentation during this webcast, which has also been published on our investor Web site that we will reference over the course of our prepared remarks. As you can see on Slide 4, we were very pleased to end 2022 with solid momentum across our two business segments. In the fourth quarter, we saw continued margin improvement in our OFSE segment and an extremely strong level of orders for IET, which was driven by multiple awards across different end markets. 2022 was an important year for Baker Hughes on a number of fronts. Strategically, we took a large step forward in reshaping the company as we announced our formal restructuring and resegmentation of Baker Hughes into two business segments. This kicked off a major transformation effort across the organization, including key executive management changes, which will fundamentally improve the way the company operates. Operationally, our performance for the year was mixed. During the first half of this year, we experienced multiple headwinds across our organization as well as a number of operational challenges. While our performance improved over the second half, we still have more work to do and are focused on various initiatives to improve shorter term execution and meet the longer term financial objectives we laid out at an investor conference last September. Commercially, orders performance in LNG and new energy hit new highs and are poised to remain strong into 2023. In 2022, we booked almost $3.5 billion in LNG equipment orders, our highest ever and booked over $400 million in new energy orders, showing over 50% growth versus 2021. Although not yet back to previous historical levels, orders for our offshore exposed businesses also accelerated. Within OFSE, SSPS booked over $3 billion in orders in 2022, representing 36% growth versus 2021. In IET, onshore/offshore production recorded equipment orders of almost $1.9 billion in 2022. We are also seeing improvements in our industrial segments with industrial technology orders of $3.3 billion in 2022, up 6% year-over-year. As we look ahead to 2023, we expect order momentum to continue across both OFSE and IET despite what is likely to be a mixed macro environment. Turning to Slide 5. In 2023, the global economy is expected to experience some challenges under the weight of inflationary pressures and tightening monetary conditions. Despite recessionary pressures in some of the world's largest economies, we maintain a positive outlook for the energy sector. With years of under-investments now being amplified by recent geopolitical factors, global spare capacity for oil and gas has deteriorated and will likely require years of investment growth to meet forecasted future demand. For this reason, we continue to believe that we are in the early stages of a multiyear upturn in global activity and are poised to see a second consecutive year of solid double digit increases in global upstream spending in 2023. In addition to strong growth in traditional oil and gas spending we also believe that the Inflation Reduction Act in the US and potential new legislation in Europe will support significant growth opportunities in new energy in 2023 and beyond. We also remain positive on the near term and long term prospects for the natural gas and LNG investment cycle. Near term, we believe that the likely reopening of China, combined with Europe's need to refill gas storage supplies will play a critical role in keeping global gas and LNG markets tight. Longer term, we remain optimistic on the structural growth outlook for natural gas and LNG as the world looks to lower emissions and displace the consumption of coal. While cost inflation and higher interest rates slowed the pace of new LNG FIDs in 2022, we are seeing progress on a number of fronts. We continue to expect significant growth in new project sanctions in 2023 with elevated activity levels likely continuing into 2024. Following 36 MTPA of LNG FIDs in 2022 we continue to expect to see an additional 65 to 115 MTPA of LNG projects reach FID in 2023. Just as important as the near term outlook for LNG orders, we are now gaining visibility into new project opportunities that are developing towards the middle of the decade. Most notably, we are seeing progress on a number of brownfield initiatives and advancements in our new modular concept that is likely to extend the current wave of activity several more years. Turning to Slide 6. Given this macro backdrop, Baker Hughes is intensely focused on four key areas in 2023 in order to drive future value for shareholders. First, we are well positioned to capitalize on the significant growth opportunities that are building across both business segments. These opportunities reach across the entire OFSE portfolio as well as in IET, most notably in LNG, onshore/offshore production and new energy. Second, we remain focused on optimizing our corporate structure and transforming the Baker Hughes organization to drive improvements in our margin and returns profile. While we are still in the early stages of this process, we are increasingly confident in driving at least $150 million of cost out by the end of 2023 as well as structural changes that will simplify the organization and enhance our operational efficiency. The cost out and integration initiatives we are undertaking over the next 12 to 18 months will play a key role in hitting our EBITDA margin target of 20% in OFSE and IET over the next two to three years, and delivering return on invested capital of 15% and 20% for OFSE and IET, respectively. Third, we continue to develop our portfolio of new energy technologies. We've been particularly active over the last few years acquiring and investing in multiple new technologies around hydrogen, carbon capture, clean power and geothermal. We are now transitioning more towards the incubation of the existing portfolio. This will enable our new energy portfolio to achieve its full commercial potential with a particular focus on high impact technologies like Met Power and Mosaic. Finally, we will continue to focus on all these initiatives and while also generating strong free cash flow and returning 60% to 80% of this to shareholders through a combination of share buybacks and dividends. In 2022, we increased our dividend for the first time since 2017. Going forward, our goal is to continue to increase shareholder returns with an emphasis on continuing to grow the dividend as the IET business experiences broader structural growth in revenue and earnings. Turning to Slide 7. I'll provide an update on each of our segments. In Oilfield Services and Equipment, the outlook remains promising with growth trends shifting more in favor of international and offshore markets, while North America activity levels off. Importantly, the team continues to execute well as supply chain pressures moderate and the pricing environment remains favorable. Geographically, the Middle East retains the most promising outlook with activity scheduled to increase in multiple countries this year and likely next year. In Latin America and West Africa, offshore activity is driving growth in several countries and creating opportunities across our diverse portfolio. In North America, visibility remains limited given the current oil and gas price environment and generally expect range bound activity from current levels over the course of 2023. Within our OFSE product lines, we have seen strong growth for well construction driven by opportunities across our drilling portfolio and for SIM, where our completions portfolio continues to see solid improvement. In production solutions, we saw strong volume growth and margin improvement in our chemicals business throughout the year as supply chain constraints continue to ease and profitability normalizes. For 2023, we expect further improvement in our chemicals business as margin levels normalize back to historical levels and our Singapore plant becomes fully operational. Our legacy OFS segment executed well in the fourth quarter and we were pleased to see them achieve 19.6% EBITDA margins and 20% when normalizing for the impact of Russia. In SSPS, order activity remains strong as offshore activity continues to pick up. Importantly, we saw good order traction in both subsea trees and flexibles in the fourth quarter. After a record year in 2022 in flexibles orders, we expect another strong year in 2023 as well as a significant increase in subsea trees awards. We also continue to make progress on integrating SSPS into our OFSE segment as well as restructuring the business to drive better profitability and returns. After a thorough review of the SSPS business, Maria Claudia and her team are finalizing plans to rationalize approximately 40% to 50% of the manufacturing capacity in subsea production systems. These steps will be in addition to the cost savings gained from removing management layers and will largely come into effect in 2024. For 2023, we expect OFSE to deliver double digit revenue growth and solid improvements in margins as activity increases in multiple regions, inflationary pressures subside and we execute our cost out program and pricing remains favorable in most key markets. Moving to IET, the fourth quarter generated record orders driven by multiple awards in LNG and multiple awards in onshore/offshore production. Operationally, IET continues to navigate challenges in the Gastech services as well as challenges in different parts of the supply chain, ranging from chips and circuit boards to gas engines, castings and forgings. Orders during the fourth quarter for gas technology illustrates the breadth and depth of this portfolio. In LNG, we saw continued progress across our world class franchise. During the quarter, we were pleased to be awarded another major order to provide an LNG system for the second phase of Venture Global's Plaquemines project. This order builds on an award in the third quarter of 2022 for another Power Island system. Furthermore, this follows an award in the first quarter of 2022 for the first phase of Plaquemines and a similar contract for VG's CalcaShoePass terminal in 2019, which are all part of a 70 MTPA master supply agreement. In onshore/offshore production, IET booked contracts for five different projects in Latin America and Sub-Saharan Africa worth almost $900 million on a combined basis. With these awards, IET maintains its leadership in the FPSO market by providing power generation systems, compression trains and pumps that totals more than 30 aero-derivative gas turbines, two steam turbines and 20 compressors of various sizes. On the new energy front, we were pleased to book an order from Malaysia Marine and Heavy Engineering to supply CO2 compression equipment to PETRONAS' Carigali offshore carbon capture and sequestration project in Sarawak, Malaysia. The project is expected to be the world's largest offshore CCS facility with capacity to reduce CO2 emissions by 3.3 MTPA. Baker Hughes will deliver two trains of low pressure booster compressors to enable CO2 removal through membrane separation technology as well as two trains for reinjecting the separated CO2 into a dedicated storage site. Orders in our industrial technology business continued to perform well with strong traction this quarter across inspection and pumps, valves and gears. In our inspection business, we achieved significant commercial wins in the recovering aviation industry, including a record deal for visual inspection services in Latin America region as well as a number of orders for advanced ultrasonic testing systems with different customers in Asia Pacific. In addition to solid growth in orders, we were pleased to see some signs of operational improvement in our industrial tech businesses, led by volume and margin increases in condition monitoring and inspection. We expect this positive momentum to continue into 2023 as the chip shortage and supply chain issues start to abate and backlog convertibility recovers. As we enter 2023, IET has a record backlog of $25 billion and a robust pipeline of new order opportunities in LNG, onshore/offshore and new energy, and we now expect IET orders in 2023 between $10.5 billion to $11.5 billion. Despite the supply chain challenges, we are closely monitoring for both Gastech and industrial tech. We are well positioned to execute on this backlog to help drive significant revenue growth in 2023 and 2024. While 2022 presented some unique challenges to Baker Hughes, it was also a pivotal year for us strategically and accelerated a number of changes in the organization. As we look at 2023 and beyond, I feel confident in the structural changes we are executing and are positioning to capitalize on the multiyear upstream spending cycle, the unfolding wave of LNG investment and the acceleration in new energy opportunities. Across our entire enterprise, Baker Hughes is focused on significantly improving our margins and financial returns and meeting our customers' needs in a quickly changing energy landscape. Achieving these goals will require acute focus across the entire organization as well as the depth and scale of global resources and engineering talent. The culture of this company is unique in its diversity, its inclusiveness and its principles as well as its ability to adapt to change. Our team is focused on taking energy forward, transforming the way we operate and achieving the margin and return targets we have laid out to help drive best-in-class shareholder value and returns. With that, I'll turn the call over to Nancy.

Lorenzo Simonelli:

Thank you, Nancy. Turning to Slide 16. Baker Hughes is committed to delivering for our customers and our shareholders. We remain focused on capitalizing on the growth opportunities across OFSE and IET, including LNG and new energy, where we are increasing R&D to develop our technology portfolio in hydrogen, carbon capture and clean power. We also remain committed to optimizing our corporate structure to enhance our margins and return profile where we are targeting EBITDA margins of 20% in OFSE and IET and increasing ROIC in both businesses to 15% and 20% respectively. And finally, we will continue to focus on generating strong free cash flow and returning 60% to 80% of this free cash flow to shareholders while also investing for growth across our world class business. With that, I'll turn it back over to Jud.

Operator:

[Operator Instructions] Our first question comes from James West with Evercore ISI.

Lorenzo Simonelli:

And since that trip, I've also been back another 2 times, and I can tell you the customer discussions have been remaining, and there's a lot of positive momentum. And I think both as you look at the near term and also the long term prospects for natural gas and LNG, it's a positive investment cycle. In 2022, we did experience some cost inflation, some high interest rates, which slowed the pace of FIDs but conversations with customers definitely hasn't slowed down. And I think you've seen some of the announcements also within North America from Sempra related to Port Arthur, NextDecade, which has signed up a supply agreement. So importantly, I think the operators globally have recalibrated the project costs to the current environment, and they're actually starting to see success in securing some of the offtake agreements. So I think there's a realization out there as well that natural gas and LNG are going to play a key role, not just this transition but also destination as the world continues to need more energy. And so we see a number of projects that are getting close to FID. We feel comfortable with, at least 65 MTPA reaching FID this year and expect to see sanctioning activity actually exceed that. So it's not just about 2023. I think as we look at the environment right now, we're actually going beyond and seeing also 2024 and also 2025 with the portfolio we have of modular approaches and a good time to be in LNG.

Nancy Buese:

Baker Hughes remains committed to a flexible capital allocation policy, and as Lorenzo already mentioned, balancing returns to shareholders and also continuing to invest in growth opportunities. Our philosophy starts really with the priority of maintaining a strong balance sheet and also targeting free cash flow conversion from adjusted EBITDA in excess of 50% on a through cycle basis. This framework will allow us to return 60% to 80% of our free cash flow back to shareholders. That also gives us the ability to invest in bolt-on M&A opportunities that will complement the current IET and OFSE portfolios as well as our efforts in new energy. So as we look to return cash to shareholders, we will prioritize growing our regular dividend given the secular growth opportunities for IET and also complementing this with opportunistic share repurchases. And just as a reminder, during 2022, we did return a total of $1.6 billion to shareholders through both dividends and buybacks.

Operator:

Our next question comes from Scott Gruber with Citi.

Nancy Buese:

And we do believe the free cash flow conversion potential should be around 50% through the cycle. And in ‘22, we saw conversion below this range for a handful of items primarily we had about $300 million to $400 million of cash generation that didn't materialize given the shutdown of the Russia operations. We also saw cash consumption from inventory build in OFSE and Gastech equipment as we prepare for growth in '23. We also had lower collections from some international customers during the year. And as we think about 2023, we believe we should be in the low to mid-40% range with higher EBITDA, higher CapEx, but still about 4% to 5% of revenue. And then cash taxes should be roughly the same as in '22, cash restructuring around $75 million to $100 million versus almost zero in '22. And then also for '23, working capital will be a use of cash versus a modest source of cash and that's another strong year of revenue growth in OFSE and Gastech equipment. So hopefully, that gives you a little bit of a picture.

Nancy Buese:

So on the cost out, we really put that program together last September and have identified a number of ways to remove cost from the organization and create a more efficient operating structure overall. I put the cost out efforts really in two categories. The first is cost reduction from structural changes in our organization identified around simplifying and streamline operations from four product companies to two business segments and the leaner HQ. That's about two thirds to three quarters of the $150 million in cost out we're targeting. These also include headcount reductions from removing layers and really thinking about implementing a strategically managed business structure where we can push some activities down into the business from HQ and then do it on a more cost efficient basis. The second bucket is really cost optimization or cost controls. So things -- headcount reductions to optimize our support functions and then also areas to optimize our cost in technology, third party services, external expenses, those sorts of things. And we should, in terms of timing, have all the process completed by the end of Q2 and all actions taken by the end of Q4 of this year. And then we should hit the annualized run rate sometime in the fourth quarter. So our plan today considers pretty conservative guides in terms of FX. And then the other piece on that is if the euro appreciates versus the USD, there could also be some upside to our revenue outlook for IET.

Operator:

Our next question comes from Chase Mulvehill with Bank of America.

Nancy Buese:

And really, as within a year, there's a lot of moving pieces when we think about the orders, particularly with some of the large projects that are still out there. '22, as you noted, was an exceptionally strong year for orders for IET at $12.7 billion and then a record 4Q at $4.2 billion. And so, broadly speaking, as we think about '23 Gastech equipment orders should be down versus 2022 primarily driven by onshore/offshore orders. And as you asked about the drivers, '22 was just a huge year for onshore/offshore and then LNG orders are likely to be down modestly. The biggest driver, though, will be the onshore/offshore. We do think Gastech services orders will be up modestly in '23 versus '22 with growth somewhat in line with '22. And then industrial tech orders will probably grow at a modestly slower pace than in 2022, and those were up about 6% in '22. So as you mentioned, overall, we now do expect IET orders to be in the $10.5 billion to $11.5 billion range for the year.

Chase Mulvehill:

Lorenzo, maybe a quick follow-up here with new energy opportunities. Obviously, a lot of color on the conference call and in the press release around CCUS and hydrogen and clean power as well. So we obviously got some legislation that's helping accelerate some of these markets. So talk about the outlook that you have and the opportunity for Baker alongside some of these markets for '23 and beyond.

Operator:

Our next question comes from Arun Jayaram with JPMorgan.

Nancy Buese:

If we look at the full year IET guidance, it would apply about a 200 bps decline in margin rates from '22. And so, the real drivers are around the equipment mix is it continues to move up and the step-up in R&D around our new energy efforts. So on mix, you can see by our '22 results and our '23 guidance that equipment orders are going up. And in '22, Gastech revenue was 50% equipment and this year, it's likely to be 65% or higher. R&D, as we've been communicating, we're stepping up our effort there, about $50 million to $75 million as we look to commercialize some of the most promising technologies that include things like Met Power and Mosaic. And I think for the longer term, we would really reaffirm the margin levels that we previously indicated.

Arun Jayaram:

And my follow-up is, Lorenzo, I believe you mentioned that the plan is to rationalize 40% or more of your subsea capacity. I was wondering if you could provide more details on this plan? And which markets do you plan -- or which markets will be focused markets on a go-forward basis for Baker?

Operator:

Our next question comes from Dave Anderson with Barclays.

Lorenzo Simonelli:

And I think as we continue to evolve Baker Hughes, and as you saw from the announcement we made in September and moving to the two business segments, we continue to look at the future of how the growth of both the IET segment and OFSE is going to take place. And in discussions with Rod and also how we are growing in the space of digital services, industrial and also climate technology solutions, it's not a one year journey, it's a multiple year journey. And bringing Ganesh was maybe sooner than anticipated, but we found a great talent that can help us drive the growth going forward, comes from an experienced background of having built digital solutions at an enterprise level. Also knows well the climate technology solutions space. And if we look at where the growth is in the second half of the decade, we said it's around the new energy and also the industrial asset management. So great candidate at the right time. And Rod is staying with us and helping with the transition and then he will be moving on. But very happy with the new structure. And as you look at the changes we've made overall, it's all with the contemplation of, again, how we're moving forward for the next three years, the plan that we laid out in September and achieving the 20% EBITDA across the two segments.

Marc Bianchi:

I wanted to ask first about the guidance for first quarter in 2023. It seems to imply a steeper slope of improvement throughout the year than we typically see. I was curious if you could talk about your confidence in that progression and maybe how much traction we might see in the second quarter?

Marc Bianchi:

And then following up on the prior discussion around orders for '23. Nancy, I think I heard you say that you expected LNG orders to be down year-over-year, but the macro outlook that you guys have has a near doubling of LNG FID at the low end. So maybe you could just kind of talk to that a little bit, if you could.

Operator:

Our next question comes from Connor Lynagh with Morgan Stanley.

Nancy Buese:

Yes, I can kind of walk you through some of the variables. So the midpoint of the range assumes that the OFS business sees growth within the market fundamentals we've talked about with NAM, DMC growing to high double digits, international growing mid double digits and then adjusting for our portfolio, really high concentration of production related business lines in North America, higher concentration in the Middle East and also the sale of OFS Russia. We assume SSPS generates strong double digit revenue growth based on the backlog conversion. And then for margin rates, we assume 30-plus percentage incrementals as the chemical business continues to normalize and we see some benefits from our cost out efforts. The high point of that range assumes significantly stronger growth in North America driven by higher commodity prices and modestly stronger international growth. Also, SSPS backlog conversion remains the same as it's already locked in and then incremental margins in the high 30% range. So on the downside, I would say the low point assumes OFS North America revenue is essentially flat and international growth goes to low double digit growth, and then SSPS backlog conversion remains the same and then also really weaker incremental margins in the low 30% range.

Lorenzo Simonelli:

As you look at some of the external factors that we're monitoring, it really comes down to the supply chain associated with the IET. And as you look at it, we mentioned that forgings, castings and some of the disruption you've heard about in the aerospace supply chain, we're managing. We think we've got that in check, but we're obviously monitoring the component flow very closely. We are starting to see some improvement in the electronic chips but monitoring that as well. So just something that we've got to keep our focus on and be aware that we're not the only users of some of these components.

Lorenzo Simonelli:

All right. Well, look, thank you very much to everyone for taking the time to join our earnings call today. I look forward to speaking to you all soon and seeing some of you also in Florence in the next week. Operator, you may now close out the call.

Operator:

Good day, ladies and gentlemen and welcome to Baker Hughes Company Third Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Jud. Good morning, everyone and thanks for joining us. We were generally pleased with our third quarter results with strong performance in OFS, while TPS successfully managed multiple challenges. We also saw strong orders performance with continued momentum in OFE as well as TPS. As I mentioned during our second quarter earnings call, the macro outlook has grown increasingly uncertain. The global economy is dealing with the strongest inflationary pressures since the 1970s, a rising interest rate environment and sizable fluctuations in global currencies. Despite these economic challenges, we remain constructive on the outlook for oil and gas and believe that underlying fundamentals remain supportive of a multiyear upturn in global upstream spending. Operators around the world have shown a great deal of financial discipline, which we expect to translate into a more durable upstream spending cycle even in the face of an unpredictable commodity price environment. In the oil market, we expect continued price volatility as demand growth likely softens under the weight of higher interest rates and inflationary pressures. However, we expect supply constraints and production discipline to largely offset any demand weakness. This should support price levels that are conducive to driving double-digit upstream spending growth in 2023. In the natural gas and LNG markets, prices remained elevated as a multitude of factors increased tensions on an already stressed global gas market. Europe’s surging demand for LNG has redirected cargoes from other regions and created an exceptionally tight global market that could get even tighter in 2023. This situation has resulted in record high LNG prices, but has also slowed down switching from coal to gas in some developing countries. We believe that significant investment is still required over the next 5 to 10 years to ensure natural gas’ position as a key part of the energy transition. However, while the current price environment is attractive for new projects, this is also a pivotal time for the industry with price-related demand destruction occurring in some markets and LNG developers facing inflationary pressures and a higher cost of capital for new projects. As a result, we believe the landscape maybe shifting in favor of established LNG players with the scale, diversity and financial strength to navigate the risks and uncertainties. Those with brownfield projects and projects that utilize faster-to-market modular lines maybe particularly advantaged in the coming years. On the new energy front, recent policy movements in Europe and the United States are likely to help support a significant increase in clean energy development. In the U.S., the Inflation Reduction Act should be particularly impactful in accelerating the development of green hydrogen, CCUS and direct air capture. While we have not changed our expectations for the ultimate addressable market sizes in these areas, the attractive tax incentives could accelerate development ahead of previously expected forecast. We also believe that the bill will create favorable economic conditions for our portfolio of new energy investments. Given the dynamic macro backdrop, Baker Hughes is focused on preparing for a range of scenarios and executing on what is within our control. Last month, we announced the restructuring and resegmentation of the company into two reporting segments

Jud Bailey:

Thanks, Brian. Operator, let’s open the call for questions.

James West:

Hey, good morning, Lorenzo, Brian and Jud.

Brian Worrell:

Hey, James.

Brian Worrell:

Yes. Great. Thanks, James. And I’ll see you down in Chapel Hill at the being down.

Lorenzo Simonelli:

Yes. Sure, James. And as I mentioned in the pre-prepared remarks, overall outlook is constructive. And it’s definitely not free from volatility and challenges as you’ve seen in the continued supply chain constraints and likely global economic weakness in the broader industrial activity. But as you look at Baker Hughes, as an energy technology company, we feel we’re very well positioned going into 2023. And as you look at the two reporting segments, let’s maybe kick off where you started. On the Oilfield Services and Equipment, again, we see a multiyear upturn in global upstream spending and double-digit upstream spending growth in 2023. As you look at offshore, as you look at the international market, we’ve seen Latin America come back, again, the Middle East with Saudi as well as UAE. So we feel good that it is a multiyear upstream uptick as we go forward. And then as you look at the industrial and energy technology, we continue to see the LNG upcycle. We’ve mentioned before the 100 to 150 MTPA over the next 2 years. CPS remains on track to generate $8 billion to $9 billion in orders in 2022 and 2023. And as you look at some of the new recent regulations on the new energy front, we see policy movements in Europe and the U.S.A. that are likely to help support the – and accelerate some of the clean energy development. So again, market from an energy technology perspective is constructive. And then our announced restructuring provides at least $150 million of cost out. It sharpens our focus, improves operational execution and better positions us to capitalize on the quickly changing energy market. So heading into ‘23, while we’re preparing for the volatility, we are confident we can negate these and we’ve got the market backdrop.

Lorenzo Simonelli:

Yes. Sure, James. And as you look at the Inflation Reduction Act, also in conjunction with the earlier past investment and Infrastructure Jobs Act, it provides significant investments and incentives for the deployment of critical decarbonization technologies. We think that, again, it will be particularly positive for green hydrogen, CCUS and direct air capture. You mentioned on hydrogen, and the act establishes a new production tax credit for $3 per kilogram from green hydrogen, and blue gets up to $1 per kilogram. So we think that these tax credits will be a significant factor in attracting capital. And I can tell you that customer discussions have actually intensified since the passing of the Inflation Reduction Act. And we see a number of projects that are looking to see how they proceed. Likewise on carbon capture and also CCUS, the bill makes a meaningful improvement on what was already out there from the 45Q. It’s increasing to $85 per metric ton for geologic storage and 180 per metric ton for direct air capture. So again, these advances, in particular, have seen more conversations around direct air capture. And as you know, we’ve got investments from a technology standpoint in that area, and we see increasing conversations with our customers. So as we look at new energy, again, for 2022, we’ve already seen orders at 170. And we feel good that we’re going to end at the 200 or above for 2022.

Operator:

And thank you. And our next question comes from Chase Mulvehill from Bank of America. Your line is now open.

Lorenzo Simonelli:

Hey, Chase.

Chase Mulvehill:

Hi, Brian. Look, this is sad day. I really hate to see you go. I know I speak for everybody, and you’re going to be deeply missed. I mean, I know everybody at Baker, everybody on Wall Street. So really hate to see you leave. But hopefully, we can grab a drink or something before you get out of there.

Chase Mulvehill:

Yes. I guess I will kick a question off and ask you about capital allocation. Obviously, you have kind of continued at the same pace of buybacks, about 265 in that range every quarter. You step into 2023 free cash flow conversion is going to get better. Obviously, you look at the base business it’s going to continue to get better. So free cash flow could continue – should continue to expand. And you should have some excess cash that you have to decide what to do with, whether it’s special dividend, whether it’s increasing the base dividend, whether it’s continuing with the pace of buybacks. So how should we think about capital allocation as we kind of go forward?

Chase Mulvehill:

Alright. It makes sense. As a follow-up question, maybe this one is for Lorenzo. On the subsea business, the SPS business, obviously, Flexibles has been pretty strong. Maybe the subsea business has been maybe a little bit softer. Obviously, you’ve had a different strategy in the past of kind of potentially looking at alternatives for the business. But you look at into the first half of next year to potentially announce a new strategy or ultimately, what you’re going to do with this business. So when we think about this business and what you could potentially do with it, could you just lay out some of the options of kind of what’s you’re exploring and potential go-forward for this business?

Brian Worrell:

Yes. And Chase, the only thing I will add here is just remember, there are multiple parts of this business. And we have got an incredibly strong, flexible pipe systems franchise here that’s doing incredibly well with record orders sort of two quarters in a row. So, it is it is a bifurcated strategy in the portfolio here. And I am encouraged by what we are seeing so far with the changes that we have recently made. So, look forward to updating you guys more as we start to execute a little more.

Operator:

And thank you. [Operator Instructions] And our next question comes from Arun Jayaram from JPMorgan. Your line is now open.

Brian Worrell:

Great. Thanks Arun.

Brian Worrell:

Yes. Arun, I will start out. We did start to see some push-outs in LNG as well as some of the transactional service outages as well, just given the higher commodity prices. And our customers obviously wanted to capitalize on that. This is not lost revenue for Baker Hughes. If I look everything that has started to push out, we will see some of that coming in likely in the fourth quarter based on the schedules that I have seen. But largely, all of that will happen in 2023. The big thing that we are working through with customers right now is will there be things in 2023 that likely push out a little bit. But look, it is not lost revenue and should be a tailwind for services going forward. I mean look, I would anticipate sitting here today that there should be elevated services revenues in 2023 as operators do look to catch up on the maintenance. And just to add, look, for CSAs, it’s generally a three-month to six-month window that they can move things around contractually. As you know, we have guarantees associated with those. So, to keep those in place, there is a window there. On the transactional side, they have a little more flexibility, but it is a bit of a risk in terms of running things in excess of recommendations and those sorts of things. So, in the past, I have actually seen when those types of service things get pushed out where we actually get more revenue because unexpected things happen. So, again, this is a longer cycle business and what I see here is revenue definitely coming in and not lost revenue. And then I will let Lorenzo comment on the longer term outlook with the massive increase in installed base that we are seeing.

Arun Jayaram:

Great. Lorenzo, maybe a follow-up. You reiterated your 100 MTPA to 150 MTPA outlook over the next couple of years. You did mention how you are seeing some impacts from inflation and financing challenges, think about Driftwood. And so I just wanted to see if you could put that into context or do you expect some of the brownfield opportunities to offset some of these challenges we have seen?

Arun Jayaram:

Thank you very much.

Marc Bianchi:

Hey. Thank you. I wanted to start with digital and get a better understanding of where you see those margins going. If we can get – it looks like maybe revenues getting back to that $600 million level here in the fourth quarter, and perhaps margins are still quite a bit below where they were if we go back a couple of years. What do you think is needed to get those margins back to where they were in 2019 and kind of how likely is that in ‘23?

Marc Bianchi:

Okay. Super. And I will just echo what others have said, Brian. Thank you so much for your time. We are going to miss you.

Marc Bianchi:

Next question for – you bet. Next question for Lorenzo. You announced this power gen acquisition from BRUSH. I am just curious, you mentioned in the prepared remarks in the press release, like how should we think about the contribution from that business in ‘23 and ‘24? And then sort of what’s the longer term opportunity?

Brian Worrell:

Yes. And I would say specifically looking at 2023, Marc, I would expect revenue should be around the $200 million mark. And if I look at EBITDA, it’s probably in the $40 million to $50 million range. But remember, the first year of an acquisition, you have got integration costs as well as some increased amortization and depreciation in there. So, that level is probably going to be in the $35 million to $40 million range. So, you are looking at the operating income level relatively small, but definitely some strong EBITDA. And once you get through the integration and some of those early purchase accounting things, you have some very nice margins coming through this. So, we are really excited to have this technology in-house now.

Operator:

And thank you. [Operator Instructions] And our next question comes from Neil Mehta from Goldman Sachs.

Brian Worrell:

Yes. If I take a step back and look at the fourth quarter overall, starting with OFS. International would expect some pretty strong growth prospects for fourth quarter. North America, I would say activity is leveling off here towards the end of the year. And that should really result in solid sequential increase from a revenue standpoint, I would say, in the mid-single-digit range. And look, as I said, EBITDA margin rates should be between 19% and 20%. And the only reason they are not firm at the 20% is just the timing of the sale of the Russia business, which we expect to happen within the quarter and the timing of that and how that plays out, Neil, will be the swing there. But look, Maria Claudia and the team have done an outstanding job and clearly have line of sight to that 20%, especially as chemicals continues to improve as they have done in the last couple of quarters. On OFE, revenue will be flat to slightly higher sequentially based on what I see from a backlog conversion. We will still be below breakeven levels due to the cost under-absorption given the suspension of the contracts that we talked about, primarily really in Russia that have come through. Switching gears a little bit, turbo, given where we are from an equipment conversion standpoint, I would expect revenues to be up double digit in the fourth quarter on a year-over-year basis. And services should show strength as well. But margin rates will likely be modestly lower on a year-over-year basis due to the higher equipment mix that we talked about compared to the fourth quarter of 2021. And then Digital Solutions, look, we have been growing backlog in that business, and you heard me talking to Marc’s question there. I would expect to see strong sequential revenue growth given the backlog and what we see coming through here and operating income, a strong increase in operating margin rate. So, adding all of that up and the moving pieces, it looks to be in line with how folks are thinking about the quarter from an overall standpoint and based on what I see out there today. So, no real significant change here, but a lot of moving pieces that the team is managing and getting through.

Brian Worrell:

Yes. Look, I mean I think what we have seen recently, I think we will all agree that the change in the euro exchange rate, we haven’t seen anything like that in a long time. And look, if I take a step back and look at it from a revenue standpoint, the year-over-year impact was about 200 and – roughly $200 million of year-over-year revenue pressure. And the bulk of that was in turbomachinery at about $120 million. Sequentially in turbo, it was around $50 million or so. So, that gives you perspective on the top line. And from a translation standpoint, obviously, you have lower income in euros, so you have lower income in dollars coming from that. But remember, we do hedge economically. And some of those hedges are actually – those hedges were in the money just given where everything moves. So, the net impact at the overall Baker level is much less than that. But you will see some potential choppiness in the segment results as FX does move around, but largely manageable at the bottom line. You see the bigger impact in revenue.

Lorenzo Simonelli:

Thanks Neil.

Lorenzo Simonelli:

Hi Dave.

Lorenzo Simonelli:

Yes. Definitely, Dave. And again, I mentioned, we feel good about the LNG outlook. And we stated 100 to 150 and also mentioned that as you look at projects going forward, brownfield projects as well as those that utilize the fast market modular design are likely to be particularly advantaged in the coming years. As we look at it, we have always said we are going to have a complete solution offering for LNG. And definitely, the aspect of fast LNG and modular is gaining traction right now. And it could lead to more players coming into the field as you look at different gas reserves that are being found and also look to capitalize on those as the need for energy continues. I would say right now, still the outlook is 800 million tons by 2030. I wouldn’t go off that at this time, and we will continue to monitor the situation.

Dave Anderson:

That’s what I was getting at. And just sort of sticking on the equipment side, you also talked about the 26 compressor trains for the Jafurah Basin in Saudi. And if I also just kind of take into account the ADNOC drilling relationship you have there, I was wondering if you could help us sort of understand Baker’s opportunity in the Middle East on the equipment side versus the OFS side. I normally would have thought the OFS would be still the bigger business and have the bigger growth prospects. But am I – but where does equipment fit in there? Because I wouldn’t have necessarily thought that would have been a huge business, but now you can kind of really start to see that growing alongside the OFS. So, could you just frame that for us a little bit?

Dave Anderson:

Okay. Thank you.

Operator:

Ladies and gentlemen, thank you for participating in the program. You may all disconnect. Everyone, have a great day.

Operator:

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Second Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Jud. Good morning, everyone, and thanks for joining us. Our second quarter results were mixed as each product company navigated a different set of challenges ranging from component shortages and supply chain inflation to the suspension of our Russian operations. While OFS and TPS are managing through the current situation fairly well, OFE and DS have both experienced more difficulty. As we look to the second half of 2022 and into 2023, the oil markets face an unusual set of circumstances and challenges. On one hand, the demand outlook for the next 12 to 18 months is deteriorating, as inflation erodes consumer purchasing power and central banks aggressively raise interest rates to combat inflation. On the other hand, due to years of underinvestment globally and the potential need to replace Russian barrels, broader supply constraints can realistically keep commodity prices at elevated levels, even in a scenario of moderate demand destruction. As a result, we believe the outlook for oil prices remains volatile, but still supportive of relatively strong activity levels as higher spending is required to re-order the global energy map and likely offsets moderate demand destruction in most recessionary scenarios. In the natural gas market, the re-drawing of the energy map is having an even greater impact, with sustained high prices, a frenzy of offtake contracting activity, and a growing pipeline of major LNG projects that seem likely to reach FID. There has been a significant increase in long-term LNG offtake agreements in the U.S., totaling over 35 MTPA during the first half of 2022. For comparison, year-to-date LNG contracting activity is 3x greater than the average annual U.S. contracting volume going back to 2015. This sharp increase reflects the growing importance of natural gas and LNG as governments rebalance their priorities between sustainability, security, and affordability. We believe that solving this energy trilemma will be another long-term positive for natural gas. This theme will continue to grow in importance as countries around the world face acute energy shortages and are working to avoid industrial interruptions in certain sectors of their economies. Overall, we remain very positive on the outlook for natural gas. We also believe that a significant increase in natural gas and LNG infrastructure investment is required over the next five to 10 years in order to make natural gas a more affordable and reliable baseload fuel source that can be paired with intermittent renewable power sources. Against this uncertain macro backdrop, Baker Hughes is preparing for all scenarios and will continue to execute on our long-term strategy. If commodity prices remain resilient as we expect, our portfolio is well positioned to benefit from a strong LNG cycle and a multi-year upstream spending cycle. We will also continue to invest in our energy transition and industrial initiatives, while also returning 60% to 80% of free cash flow to shareholders. However, if the global economy experiences further turbulence and commodity price volatility, we believe our balanced portfolio of short and long cycle businesses will enable us to generate peerleading free cash flow and allow us to maintain our policy of returning cash to shareholders. In addition to a strong backlog that affords cash flow visibility, we have a best-in-class balance sheet that allows us to invest opportunistically, either through share buybacks or tuck-in investment opportunities. In either scenario, Baker Hughes is well positioned to create value for shareholders. From an operational and strategic perspective, we were active over the first half of the year, executing on a number of exciting tuck-in acquisitions and new energy investments such as Mosaic, Net Power, and HIF Global, which position us in key technologies for the future. We have also been focused on setting up internal commercial structures like CTS and IAM, which will help us to capitalize on opportunities in the energy transition and industrial areas. In addition to these initiatives, our time is increasingly focused on optimizing and formalizing our operations around the two core business areas of OFSE and IET. As the energy markets continue to evolve, it is becoming clearer that aligning across these two core areas makes strategic sense. We are focusing on ways to simplify our process and systems, with a distinct focus on productivity and efficiency across our operations, as we look to drive additional synergies between both TPS and DS, and OFS and OFE. We believe that this will be a significant area of opportunity for Baker Hughes, as we look to further streamline our organization and position it for the future. Now, I will give you an update on each of our segments. In Oilfield Services, activity levels continue to trend positively in both the international and North American markets and net pricing is being achieved across multiple product lines. We also see improving visibility for growth in some key areas into 2023 and beyond. In international markets, broad diversified growth continues, with recent strength in Latin America, West Africa and the Middle East. We expect growth in most international markets to continue, with the strongest increases likely to come from the Middle East over the second half of the year and into 2023. Producers in the region are committed to an orderly increase in production and are beginning to execute drilling plans to improve both oil and natural gas production capacity in the region. In North America, activity and pricing remains strong, with the rig count continuing to track above our expectations. We expect continued modest growth in rig count in the coming months, but the outlook for 2023 will be dependent on broader macro factors and oil prices. Operationally, I am pleased overall with the progress made by the OFS team during the second quarter in navigating the challenges related to Russia, as well as supply chain constraints and inflation. During the second quarter, the suspension of our OFS operations in Russia accelerated quicker than anticipated as we moved closer to reaching an agreement to sell our OFS operations in the country. Outside of the impacts from Russia, our OFS business executed well in the second quarter, with improvements in our production chemicals business. After being weighed down for several consecutive quarters by supply chain and inflationary impacts, chemicals saw a sequential increase in margins and has a line of sight to further increases in the coming quarters. Going forward, we expect to continue to drive margin improvement despite the cost headwinds from the suspension of our operations in Russia. Moving to TPS, the second quarter represented another solid performance in orders, where we remain on track to generate $8 billion to $9 billion in orders in 2022 with an optimistic view of 2023. Operationally, TPS performed well despite some revenue impacts from the suspension of operations in Russia, as well as some project shipment delays across both equipment and services. We continue to believe that we are at the beginning of another constructive LNG cycle, particularly for U.S. projects. Including the FID of VG’s Plaquemines Phase 1 at the end of May and Cheniere’s FID of Corpus Christi Stage 3 in June, we continue to expect 100 to 150 MTPA of LNG FIDs over the next two years with additional FIDs in 2024 and 2025. During the second quarter, we were pleased to be awarded an order to provide seven mid-scale LNG trains to support the Stage 3 expansion project of Cheniere’s Corpus Christi Liquefaction facility. Each train is comprised of two electric motor-driven compressors producing approximately 1.5 MTPA of LNG, totaling 10.5 MTPA of production capacity. This award builds on the strong relationship between Baker Hughes and Cheniere since 2012, as we currently provide all liquefaction equipment for Cheniere’s Corpus Christi and Sabine Pass projects. Outside of LNG, the TPS team booked an important gas processing award in Saudi Arabia to supply 14 electric motor-driven compressors for the Jafurah unconventional gas field project, the largest non-associated gas field in the country. Baker Hughes is leveraging its local compressor packaging facility in Modon to deliver the equipment and support the Kingdom’s in-country total value add program. Also, during the quarter, TPS booked an award from Tellurian to provide electric-powered Integrated Compressor Line technology and turbomachinery equipment for a natural gas transmission project in southwest Louisiana. The project is expected to supply upwards of 5.5 billion cubic feet of natural gas daily, with virtually no emissions. ICL zero-emissions is landmark technology that lowers the carbon footprint of a key segment of the natural gas supply chain and is already reducing the climate footprint of pipeline projects in many regions that deliver vital gas supplies. This order marks the first time Baker Hughes will install its ICL decarbonization technology for pipeline compression in North America. During the quarter, TPS’ CTS organization continued to support the growth of the hydrogen economy. TPS secured a contract with Air Products to supply advanced syngas and ammonia compression technology for the production of green ammonia for the NEOM carbon-free hydrogen and ammonia facility in Saudi Arabia. This order builds on our hydrogen collaboration framework with Air Products and leverages Baker Hughes’ broad experience and references in supplying syngas and ammonia compressors. Next, on Oilfield Equipment, we are encouraged to see improving demand trends across the different business areas. However, we remain disappointed with the overall level of profitability of the business and are executing on further actions to drive additional cost out and improve operations across the portfolio. At a macro level, trends in the subsea and offshore markets continue to improve and should have solid order momentum over the next couple of years. Despite recent commodity price volatility, we believe that a solid pipeline of deepwater opportunities will continue to develop across a few key markets. Importantly, we continue to see OFE gain momentum outside of Brazil with its offshore flexible pipe technology, securing several large contracts with multiple customers across the Americas and the Middle East. OFE will provide flexible pipe systems and services, including risers, flowlines and jumpers, to improve oil recovery and help to extend field life and profitability. OFE booked their highest orders ever in flexibles in the second quarter, and over $600 million in flexibles orders for the first half of the year in 2022, also a record. While activity and project awards are improving offshore, we recognize that we have work to do in OFE to drive operating margins back to an acceptable level. We are driving continued actions across the business to improve operations, while also ensuring we have the appropriate resources in place to take this business forward. We are also in the final stages of planning more integration between OFE and OFS, driving more efficient cost management across certain parts of the OFSE business area globally. Finally, in Digital Solutions, while order activity was strong in the second quarter, the business continues to be hampered by supply chain challenges, mainly electronic shortages, as well as inflationary pressures. During the quarter, DS saw continued interest for its condition monitoring systems and services in the industrial sector. Bently Nevada secured a contract to upgrade the machinery protection systems for critical machines at a steel plant in the Middle East. The contract includes Bently Nevada’s latest Orbit 60 system, which will provide the customer reliable protection and will enable advanced condition monitoring without additional hardware spend. DS also gained traction with its emissions management portfolio of technologies. Following an MOU signed in February, DS secured a contract with Petrosafe for the first deployment of flare.IQ technology for refining operations in Egypt. The deployment will be implemented at the APC Refinery in Alexandria, supporting Egypt’s low-carbon strategy, and tackling emissions in the sector as the country prepares to host COP27 in November. We also recently reached an agreement for the sale of our Nexus Controls product line to General Electric. GE will continue to provide Baker Hughes with GE’s Mark control products currently in the Nexus Controls portfolio and Baker Hughes will be the exclusive supplier and service provider of such GE products for its oil and gas customers’ control needs. The transaction is expected to close in the second quarter of 2023. As we have mentioned in the past, we continue to make strategic and operational changes across DS, including recent leadership changes in Bently Nevada during the quarter. We are also conducting a review of the broader DS portfolio, taking actions to ensure we have the right business composition to serve our customers and drive returns. As we move forward, there is clearly more work to do. We are committed to driving better performance, profitability and returns for the DS business. Before I turn the call over to Brian, I would like to spend a few moments highlighting some of the achievements from our Corporate Responsibility Report that was published at the end of the second quarter. This report provides an expanded view of our environmental, social, and governance performance and outlines our corporate strategy and commitments for a sustainable energy future. We again lowered our emissions footprint and expanded our emissions reporting. We achieved an 8% reduction in our Scope 1 and 2 carbon emissions in 2021 versus 2020, and a 23% reduction in 2021 compared to our 2019 baseline. We also expanded reporting of Scope 3 emissions across our value chain to include emissions from several new categories. I am also pleased to say that in 2021, we launched Carbon Out, an internal company-wide initiative to take carbon out of our operations and meet our pledge to achieve a 50% reduction in emissions by 2030 and net-zero emissions by 2050. We further expanded our programs and processes to embed Diversity, Equity, and Inclusion into our operating process. We launched a Global Council in 2021 to increase accountability on this strategic priority, and we updated our process to evaluate and reconcile pay equity across the company. Overall, Baker Hughes is successfully executing on its vision as an energy technology company and to take energy forward, making it safer, cleaner, and more efficient for people and the planet. Our Corporate Responsibility Report demonstrates our progress in many of these areas. Baker Hughes is well-positioned to drive energy efficiency gains to meet global energy demand and support broader decarbonization objectives. With that, I will turn the call over to Brian.

Jud Bailey:

Thanks, Brian. Operator, let’s open the call for questions.

James West:

Hey, good morning, guys.

Brian Worrell:

Hi, James.

Brian Worrell:

Yes. James, look, you’re right. There’s been a lot about Russia over the last couple of years. And just to frame it up for you, when I step back and take a look at the full year, there is going to be some impact on operations, obviously, due to the disruption and the suspension of our operations, but also just as you point out just managing through this and the time commitment from dealing with the complexities of the current environment. So at the beginning of the year, we were expecting around $300 million of EBITDA for Russia this year. And our Russian operations are generally quite accretive to our overall mix, really due to the risk premium of operating there, as well as some business mix primarily in TPS services, as well as in some OFS product lines. And look, we did generate some level of this EBITDA in first quarter and quite a bit less in the second quarter. So when I think through the rest of the year, OFS is the largest product line that we have in Russian. And we will see cost under absorption there with virtually no revenue generation, roughly about $25 million to $30 million per quarter that will remain in place until we get resolution of a transaction, whether it’s an outright sale or a management buyout. Look, we’re continuing to work that. And James we’re working hard on things that are in our control and trying to those done quickly. Some of it’s out of our control. So for planning purposes, I’m thinking by the end of the year that should be done. We’ll try to get it done sooner if we can. But I will point out that Maria Claudia and the team have been able to offset some of the negative impacts from Russia in other areas across the world. And so, they’ve done a nice job there and really their overall outlook hasn’t changed versus our first quarter earnings call. So offsetting a lot of that Russia impact in other parts of the world. The biggest negative impact for Russia this year is likely in OFE where some of the contracts that were quite profitable and sizable have now come out of the backlog. And as you know, it takes time to get cost out of the business to be able to deal with that. So that’s where you’ll see the biggest impact. And then TPS, like I talked about earlier, you’ll see some revenue impact there, but roughly margin impact is de minimis. You might see some movement across quarters in terms of timing of how things were laid out, but generally no real impact there. And so like I’ve said earlier, short-term discontinuity, long-term manageable for Russia. And then James, just kind of to round out the year for you as you’re thinking through it, while it’s not direct – it’s not directly related, FX is obviously being impacted by what’s going on in Russia and the overall macro environment. And I’d say it’s worth highlighting that with the weakness in the euro versus the dollar relative to our original plan, we’ll have about $200 million to $300 million of revenue pressure. To be clear, our costs are coming down as well. But the actual translation of income from euro to dollar is going to be slightly lower. So that kind of rounds out how we’re thinking about Russia and the full year there. So like I said, manageable over the long-term.

Lorenzo Simonelli:

Yes, James. And again, as you say, and based on our conversations with our customers, internationally, we continue to expect a broad-based recovery, all major geographies really growing and growing up to double digits. As we look at Middle East, that could be one of the strongest markets in 2022 with a lot of that coming through in the second half, as we stated before. You’ve seen their capital budgets increase. We also see strength in Latin America led likely by Brazil and Mexico. And then also, as we look at North Sea and Asia Pacific continuing to see solid growth in 2022, not as strong as Middle East or Latin America, but still solid growth. And lastly, West Africa should see pretty good growth off a low base. As you look at North America, again, activity and pricing remained strong, the rig count continuing to track above our expectations. And we expect continued activity increases with the broader market sector experience strong growth of 50% or greater. So again, as you look at the rest of 2022, barring any, again, big changes from a recessionary outlook perspective, we remain constructive.

Operator:

Our next question comes from Chase Mulvehill with Bank of America. Your line is open.

Lorenzo Simonelli:

Hey Chase.

Lorenzo Simonelli:

Yes, sure, Chase. And as we think about when we formed the company back in 2017, running it across four product companies made the most sense based on the size of each business, the outlook at the time. As you know, the business has run relatively independently of each other with separate leadership and other supporting functions, finance, communications, technology. As we’ve evolved, the energy markets have evolved also, and the outlook for some of the businesses have changed quite a bit. And so we think that there’s the opportunity to manage them differently as well. And as you’ve seen over the years, we’ve made a couple of divestments, made some of them smaller. And so we conducted a broader portfolio review that could lead to some further changes. And as a result, we think there are multiple ways we can drive more alignment between TPS and DS as well as OFS and OFE that can drive synergies between the businesses. Also, you’ll recall that last year, we started saying we were evaluating our corporate structure across the two broad business areas of IET and OFSE. And we’ve been conducting an exhaustive and deep analysis. So as part of this exercise, we’ve been looking at a number of organizational structures that could make sense. So in summary, we’ve got several things that we’re evaluating. We think there are synergies as we go forward to drive better productivity and efficiencies across the organization, and we know what needs to be done.

Chase Mulvehill:

Okay. All right. Perfect. Follow-up, just want to pivot over to kind of Europe and the energy crisis there. It seems like that there’s lot of worries around winter and soaring energy prices and the potential for some rationing of supply in the winter. So really, I guess, maybe two questions for you. Number one is, could you help us kind of understand your European manufacturing exposure and how energy intensive your manufacturing footprint is across Europe? And then number two, what steps are you taking to mitigate the potential power rationalization that could happen in the winter in Europe this year?

Brian Worrell:

Yeah. And Chase, I’d say the one other thing that we’ve been working on for quite sometimes, it’s not like we’ve just started today, is we’ve been working with our supply base and we’ve actually shifted some supply out of Europe for energy intensive in supply like castings and forgings and where we still have that supply in Europe. We are working with the supply base to make sure we understand what risk is there. And I have to give kudos to the supply chain team for working through that for the last few quarters.

Operator:

Our next question comes from Arun Jayaram with JPMorgan. Your line is open.

Lorenzo Simonelli:

Yeah, definitely Arun. And look as you think about the leading edge indicators for LNG they remain extremely positive. And based on our conversations with customers, the pipeline of opportunities has continued to grow since the first quarter call. If you look at overall growth in projects, we are seeing a notable trend towards modular LNG designs, as well as fast LNG concepts. And given the success that we’ve demonstrated with Venture Global and the speed to market of the modular designs, this presents a growing opportunity. I think, as you look at other indicators just look at the activity on long-term supply agreements. I mentioned in the prepared remarks that we’ve seen over 35 MTPA contracted under long-term agreements so far this year, and that’s three times greater than the average for the entire year going back to 2015. Another good data point Conoco agreeing to an investment in Port Arthur which again reflects the attractiveness of LNG from a long-term perspective, so overall we still feel comfortable with the 100 MTPA to 150 MTPA of FIDs over the course of next two years and also continuing FID activity in 2024, 2025. Just to frame it up this year, so far we’ve already booked 27 MTPA with the awards of VG Plaquemines, Cheniere, Corpus Christi Stage 3 and also some other small award for NFE. So for the year, feel good about the $8 billion to $9 billion of orders for TPSs and also looking out into 2023. Again, consistent with what we said before, feel good about $8 billion to $9 billion of orders for TPS.

Brian Worrell:

Yeah. The biggest thing we have going on in DS right now, that’s preventing us to be at the levels that of conversion that we would normally be is really around chip and component shortages. So that’s really impacting convertibility of the backlog and negatively impacting delivery schedules, as well as our ability to drive more productivity with more volume flowing through the business. We did see a little bit of pressure from cost inflation as well as a little bit of labor inflation, but we’ve been pushing through pricing increases to offset those pressures. And if I take a step back and look at what’s happening with the chip and component shortages, we’ve been working this for some time and our on-time delivery rate particularly in Nevada to our customers have – we think after [ph] this quarter but to give you perspective Arun, right now, we’re sitting at 60% on-time delivery from our suppliers of electronics and chips to us. And it’s been stable at that 60% for some time. The problem is the P80 confidence interval, as in terms of the lateness is more than doubled from third quarter of last year from 11 days to 25 days. So on top of that lead times have gone up by two and a half times. So planning and working through that volatility is really what’s been pushing the team a bit in terms of things being laid into the factory. We’ve been running engineering programs for redesigns. We’ve got projects and programs in place right now that are going through testing that should come out of testing and all indications are pretty good that will come through in August. So we’re anticipating the convertibility and on-time delivery of us to our customers going up here, but fundamentally that’s what the core issue is in DS. And once we are through that, you’ll see the profitability of this business improve because it’s at higher gross margins. So team is all over it. Working it a lot, we’re just in the mix of what’s going on in the broader industry here. And I’d say working everything we can in our control. The good news as you point out is demand is pretty strong. Orders are back up to high levels. We’re not seeing any cancellations. Customers really want the product and services. So everybody is on deck to work the supply chain issues with the electronics.

Operator:

Our next question comes from Marc Bianchi with Cowen. Your line is open.

Brian Worrell:

Yes. Marc look, your math is certainly in the right ballpark for what we see as a potential for fourth quarter. I’d say a couple of things. That underpin our view of the quarter one, OFS is quite strong even with the Russia implications you saw the performance in the quarter was pretty solid. We see pretty strong growth there, especially internationally where we’ve got obviously a pretty good presence and have been doing well there over the last few quarters, look. And the other thing I would say is TPS generally has a very strong fourth quarter just given the seasonality of that business particularly in the services franchise. And then if you look at the backlog, the schedules that are there with customers, how things are lining up, we’ve been growing backlog and I don’t see any execution issues there or any significant issues coming from customers that would impact that delivery schedule today. And look, those things really offset the weakness really in OFE because of the Russia contracts being suspended and coming out of RPO. So look, we understand what’s got to happen. The teams are aligned to get it done, but it’s not outside the realm of what we’ve seen before in terms of the jump in fourth quarter.

Brian Worrell:

Yes. Marc, again, it basically comes down to the mix between equipment and services. You’re right. You’d usually do see an uptick in fourth quarter because of the services mix coming in strong, just given the timing of what was laid out from a schedule in the backlog. And then some of the pushes that have come out of this quarter into later in the year, we are anticipating a pretty large equipment number in the fourth quarter that will mitigate some of that upside that you see from a stronger services, so it really ultimately will come down to the mix of equipment and services. And look as we talk with you guys before about, we really run those businesses that drive higher profitability in both, and the ultimate margin rate in any given quarter really just comes down to the mix of how much services come through versus equipment.

Operator:

Our next question comes from Scott Gruber with Citi. Your line is open.

Brian Worrell:

Yes. Look, I think talking specifically about chips first; I haven’t seen a lot of relief yet as we talked about here in terms of what was going on with late deliveries. But we do believe based on what our suppliers are telling us and how we’re working with them and what we’re hearing from others that we should start to see some relief in the second half. A lot of that’s driven by these programs that I’ve talked to you about where we’ve changed supply and standardized some things, so there’s more availability and would anticipate a better overall environment in this space in 2023. When I look at sort of your question around broader supply chain and really not only in DS, but outside of DS things have been relatively stable. But there’s definitely some tension in the system in a couple places. I’d say that the biggest challenge for us continues to be in chemicals where we’re seeing shortages in specialty chemicals. Commodity chemicals are pretty stable now and I’d say almost back to normal in terms of how we’re planning and operating there. You continue to see pricing for metals like copper, steel, nickel stabilizing and some have actually gone down, but are still elevated versus 2021 but manageable, and look we’ve been working twice hard to make sure we can offset that. And then I talked a little bit about what was going on in Europe with energy pricing and some availability around alloys and pig iron, and how we’ve been diversifying supply based there? And I’d say the big thing we’re working through there Scott is just really around lead times. And validity of quotes from suppliers as we’ve got all these orders coming in or specking out orders for TPS, we want to make sure that we’re protected on that input cost side. So we’ve tightened our order validity as well to deal with that. And as I said, we’ve moved some supply to other parts of the world where we already had supplier set up and we’ve worked with for a long time, but diversifying that to get at some of those impacts. So stabilizing I think is the right term there and just back to the chips, we’re – we think we’ll see some relief in the second half, but looking forward to a better 2023.

Lorenzo Simonelli:

Yes. Definitely and again on the contractual side, again we’re seeing the anticipation of the outages and customers continuing with the contractual side. On transactional services customers are looking to defer the maintenance as you say to produce at the higher commodity prices. That’s just being the further and they will have to catch up so that comes in later on. And again as you go through the actual cycle, you’d see that normalizing itself.

Scott Gruber:

Got it. Appreciate the color. Thank you.

Neil Mehta:

Thank you, Team. I know we’re at the top of the hour, so I’ll be quick here with two questions. The first is, what is your latest thoughts around return of capital? The company did buy back stock in the second quarter at a higher price than where we are right now. But of course, you have to weigh that return of capital with a slightly lower free cash flow outlook that you talked about on the call and economic uncertainty. So any color there? And then the second question is, just your latest thoughts on closing the sum of the parts gap and whether it makes sense to be a combined business or to ultimately break the businesses apart? So two strategic questions. Thank you.

Neil Mehta:

Thank you.

Lorenzo Simonelli:

Thanks, and thanks to everyone for joining our earnings call today. Just before we end, I want to leave you with some closing thoughts. Despite some of the challenges this quarter, we continue to remain optimistic on the outlook across both of our core business areas given the need for energy, sustainability, security and affordability. At Baker Hughes, we continue to execute on our long-term strategy. Our portfolio is well positioned to benefit from a strong LNG cycle and a multiyear upstream spending cycle. We’ll also continue to invest in our new energy transition activities and industrial initiatives while also returning 60% to 80% of free cash flow to shareholders. So thanks a lot for the time, and look forward to speaking to you all again soon. Operator, you may close the call.

Operator:

Good day, ladies and gentlemen and welcome to the Baker Hughes Company First Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Jud. Good morning, everyone and thanks for joining us. Our first quarter results reflect operating in a very volatile market environment during the first few months of 2022. On the positive side, TPS orders were up over 100% year-over-year, with TPS book-to-bill of 2.2 as the LNG order cycle continues to unfold. We also experienced some challenges in parts of our business due to continued pressures from broader global supply chain constraints as well as some impact from the recent geopolitical events. As we look ahead to the rest of 2022, we see a favorable oil and gas price backdrop as well as a dynamic operating environment with perhaps the most challenging supply chain and inflationary environment we have seen in several decades. The recent and unfortunate geopolitical events are amplifying several trends, including broad-based inflation and supply pressure for key materials, commodities and labor. These events are also driving changes on the economic front, where the world is transitioning from an era of strong economic growth to an environment that is more tenuous and likely to feature diverging economic conditions regionally. Despite broader political uncertainty around the world, Baker Hughes is committed to helping deliver energy globally in a safe, clean and reliable manner, while also maintaining our commitment to net zero carbon emissions and leadership in the energy transition. To meet the world’s energy needs in a responsible manner, we believe multiple years of spending growth will be required as well as significant increase in LNG infrastructure investment. While there is some near-term risk on the demand side, we expect global oil and gas supply to remain constrained in the coming years, which should support higher commodity prices and multiple years of spending growth from our customers. Recent geopolitical events have severely constrained what was already a tight global natural gas market and have refocused the world on the importance of energy security, diversity and reliability. As the world reacts to the rapid changes in the global commodity market, governments are prioritizing natural gas and LNG as a key transition and destination fuel. We continue to see a focus on prioritizing LNG from stable, lower cost markets and locations that can provide cleaner LNG. Given the current LNG price environment and the quickly changing dynamics, we believe that global LNG capacity will likely exceed 800 MTPA by the end of this decade to meet growing demand forecast. This compares to the current global installed base of 460 MTPA and projects under construction totaling almost 150 MTPA. In order to be operational by 2030, this additional capacity will need to reach FID by around 2025. Despite the volatile yet improving medium-term macro environment, Baker Hughes remains focused on executing our strategy and we continue to drive further optimization across the two core business areas of OFSE and IET. Earlier this year, we created Climate Technology Solutions, or CTS, and Industrial Asset Management, or IAM. The creation of these two groups is critical to accelerating the speed of commercial development across our key growth areas of new energy frontiers and industrials. We continue to make steady progress in developing our Climate Technology Solutions capabilities with recent investments and partnerships in NET Power, HIF Global and the acquisition of Mosaic Materials, which features a promising direct air capture technology. Mosaic’s materials science and technical expertise including their unique metal organic framework technology provides Baker Hughes with the potential to efficiently capture low concentrations of CO2 across a number of applications. NET Power is an emission-free gas-to-power technology, where Baker Hughes will develop supercritical CO2 turboexpanders and other critical pumping and compression technology. We will also bring system integration and process knowledge experience to the partnership to help accelerate the market positioning and deployment of NET Power’s emission-free and low-cost electric power. HIF Global develops projects in multiple geographies to produce e-fuels by blending green hydrogen and CO2. Baker Hughes is investing alongside EIG, Porsche, AME and Gemstone and will provide compressors, turbines, pumps, valves and other technology on future projects. We are also discussing how our recently acquired Mosaic Materials’ DAC technology could be incorporated into these future projects. Overall, we are excited about adding another carbon capture technology to our portfolio and the potential of these two partnerships to open new market opportunities in clean power and low carbon fuels for Baker Hughes. In Industrial Asset Management, we signed an important agreement with Accenture, C3.ai and Microsoft to collaborate on the build-out of the IAM solutions offering. The partnership will focus on creating and deploying Baker Hughes IAM solutions that use digital technologies to help improve the safety, efficiency and emissions profile of industrial machines, field equipment and other physical assets. In addition to advancing our commercial efforts in CTS and IAM, we also remain focused on optimizing our broader organizational structure under the core business areas of OFSE and IET. At the beginning of April, we took some steps to strengthen and better position Oilfield Services to more closely align our products, services and solutions to the lifecycle of the well and ultimately to what our customers require. OFS will move from a product line oriented structure to a solutions-focused business, centered around well construction, completions, intervention and measurements, and production solutions. In addition to the organizational changes in OFS, we were pleased to announce an agreement to acquire Altus Intervention, a leading international provider of well intervention services and downhole technology. The acquisition complements OFS’ existing portfolio by enhancing our life of wealth capabilities as operators look to improve efficiencies from mature fields. Maria Claudia and the OFS team are enhancing their operating model to become more competitive, improve the speed of decision-making and capitalize on growth opportunities in the market. These organizational changes are important steps in the OFS’ journey as customers are increasingly asking for integrated offerings and more solutions-oriented outcomes as well as a continuation of the strong productivity improvements in OFS over the past few years. As we continue to evolve Baker Hughes across the two business areas of OFSE and IET, we expect more meaningful synergy opportunities between TPS and DS. We are also focused on driving better returns in our OFE business as well as further synergies between OFS and OFE. Now, I will give you an update on each of our segments. In Oilfield Services, activity levels at the start of the year have continued to trend positively in both the international and North American markets. We also see improving visibility for stronger growth in several key areas over the rest of 2022. In the international markets, underlying activity is improving broadly with particular strength in Southeast Asia, Latin America and the Middle East. The uncertainty in Russia is an offset. We expect growth in most international markets to continue with the strongest increases likely to come from the Middle East over the second half of the year and into 2023. Producers in the region are in the early stages of investing in capacity expansion and should help drive a multiyear increase in activity across the region. In North America, drilling and completion activity continues to move solidly higher with further increases expected over the course of the year. Although current oil and gas prices would normally suggest a stronger increase in activity, the combination of E&P capital discipline and industry shortages in labor and equipment is likely to keep short-term incremental increases more moderate in nature. While we are pleased with the growth in activity and the growing pipeline of work in many regions, underlying operations continue to be impacted by supply chain and inflationary pressures and most recently, disruption to our operations in Russia. Our OFS team is working extremely hard to offset these headwinds and with price increases, sourcing actions and a global team working to solve logistics constraints. The product line that continues to feel the most supply chain-related pressure is our production chemicals business, where we have taken actions to enhance our sourcing and manufacturing functions. In addition to recently enacting a supply surcharge and changing out some of the leadership in our chemicals business, we are also taking steps to source and produce chemicals closer to key demand hubs with the opening of our production chemicals facility in Singapore later this year and the recently announced JV with Dussur in Saudi Arabia. As we look over the balance of the year, we remain committed to achieving a 20% EBITDA margin by the fourth quarter. Moving to TPS, the first quarter represented a continuation of the successes we achieved in 2021. TPS orders totaled $3 billion for the second consecutive quarter, driven again by strong orders in LNG. We believe that we are at the beginning of another constructive LNG cycle, which is being expedited by the current geopolitical situation, particularly for U.S. LNG projects. Our positive long-term view is also supported by the recent improvements in policy sentiment in certain parts of the world towards natural gas role within the energy transition. The recent EU taxonomy changes to now include natural gas as a transition fuel is an example of this and the added need to diversify and provide energy security will likely intensify policy efforts. As these market dynamics play out, a number of projects should accelerate and we now believe that 100 to 150 MTBA of LNG FIDs will be authorized over the next 2 years, with additional FIDs becoming more likely in 2024 and 2025. Given the strong TPS orders performance in the first quarter as well as the acceleration in timing for several LNG projects, we now expect TPS orders to increase in 2022 versus 2021. During the first quarter, we were pleased to be awarded a major order to provide an LNG system for the first phase of Venture Global’s Plaquemines LNG project. We will be providing 24 modularized compression trains for the first phase of the project and this award is part of a 70 MTPA master equipment supply agreement. The highly efficient liquefaction train system is modularized, helping to lower construction and operational costs with a plug-and-play approach that enables faster installation and first cargo. This important order builds on an award in the fourth quarter of 2021 for power generation and the electrical distribution equipment for the comprehensive power island system for the Plaquemines project. The Plaquemines order follows a similar contract for VG’s Calcasieu Pass LNG terminal in 2019. In 2021, Baker Hughes successfully completed delivery of the ninth and final block for Calcasieu Pass. All shipments were finalized ahead of schedule and excellent achievement by our team. Calcasieu Pass holds the global record for the fastest construction of a large scale Greenfield LNG project moving from FID to first LNG in 29 months. Outside of LNG, we booked an award for NovaLT16 turbines, which will run on 100% hydrogen for Air Products new net zero blue hydrogen energy complex in Edmonton, Alberta. Our collaboration with Air Products will be critical for a net zero future and this order follows the award we received for advanced compression technology for the NEOM carbon-free green hydrogen project. We were also pleased to be awarded a contract by TERNA to supply gas turbines and compressors that can run on a blend of natural gas and hydrogen for a new compression station for the Greek natural gas transmission system. Baker Hughes will provide free compression trains deploying our NovaLT12 hydrogen-ready gas turbines and PCL compressors with the capability to transport up to 10% hydrogen for this project. The project directly supports the EU’s hydrogen strategy goals to accelerate the development of clean hydrogen and show its role as a cornerstone of a climate-neutral energy system by 2050. These latest hydrogen orders build on Baker Hughes’s extensive experience in developing and supplying turbomachinery equipment to compress, transport and utilize hydrogen. Next, on Oilfield Equipment, we are encouraged to see improving demand trends across the different business areas. Although recent world events impacted first quarter results, we remain disappointed with the overall level of profitability. At a macro level, trends in the subsea and offshore markets continue to improve. In the subsea tree and flexible pipe market, we expect a solid increase in industry awards this year as a firm commodity price outlook supports a growing pipeline of deepwater opportunities in core markets. In our international wellhead business, we also see a positive order outlook across multiple regions and particularly in the Middle East. In the first quarter, we were awarded a contract in Asia to provide subsea wellheads and subsea production systems plus related services, including 12 subsea trees for a deepwater gas field. We also achieved our first award in Ivory Coast, where we will supply subsea trees, flexible flow lines and rises to develop the Baleine deepwater oil field. In Latin America, we were pleased to build on our flexible pipe business success, securing awards for flexible pipe systems in services that will be deployed across a number of key post-salt revitalization programs, enabling increased oil recovery and extending the life of multiple subsea developments. Finally, in Digital Solutions, order activity remains solid with growth across our industrial end markets as well as improvement in the oil and gas markets. DS continues to be affected by supply chain challenges and electronic shortages as well as continued inflationary pressures. The team is working tirelessly to manage the situation and navigate the evolving supply chain issues that have been exasperated by recent events. In the first quarter, we made a number of changes in the DS business as we look to improve the overall performance. We unified our unique sensor business units, Panametrics, Reuter Stokes and Druck under one product line, Precision Sensors and Instrumentation, or PSI. As a combined business, PSI will better support potential investment opportunities crucial for the future development and help optimize the unique technology and commercial requirements of each brand. Unifying the businesses will also help drive better cost and operational performance. While we recognize that there is still more work to do, we also continue to make key personnel and operational changes across DS to drive performance, profitability and return improvements and to ensure that we have the right team in place to take this business forward. During the quarter, Bentley Nevada secured an important contract with a refiner in Brazil. Our ARMS reliability OnePM solution will support the customers’ operations by providing visibility on over 10,000 assets. We will be providing optimal digital strategies to support asset integrity and availability, which will lead to maintenance cost optimization and effectively enable risk management while delivering enhanced performance. Despite some of the challenges this quarter, we are optimistic on the outlook across both of our core business areas and excited about the new energy investments we are making for Baker Hughes. We believe that we are well-positioned to benefit from an extended cyclical recovery in OFSC and longer term structural growth trends in LNG, new energy and industrial asset management. Importantly, we expect to generate strong free cash flow as the cycle plays out and remain committed to returning the majority of it back to shareholders. With that, I will turn the call over to Brian.

Jud Bailey:

Thanks, Brian. Operator, let’s open the call for questions.

James West:

Hey, good morning, Lorenzo, Brian.

James West:

So, Lorenzo, you had some great detail on the LNG outlook. But I was wondering if we could get a little more color from your conversations specifically with customers as things have clearly changed pretty dramatically in the last 8 or 9 weeks as LNGs come into focus here. And if you could maybe provide us what they are saying, what their urgency level is, kind of just a little more detail on how those conversations are going and how accelerated this buildout cycle could be.

James West:

Sure. Thanks for that, Lorenzo. And then maybe just a quick follow-up for me, you made this investment in April, a few weeks ago or a week ago with HIF Global to expand, I think, e-fuels. Could you maybe comment on what exactly is going on there, what that market looks like? How you see that playing out?

James West:

Okay. Thanks, Lorenzo.

Chase Mulvehill:

Yes. Good morning, everyone.

Brian Worrell:

Hi, Chase.

Lorenzo Simonelli:

Yes, Chase. On TPS, again, we’re seeing a continued order momentum that we saw start at the end of ‘21, and it’s really accelerated in ‘22, primarily driven by LNG, also the new energy opportunities, even though they are smaller in nature. But when you look at the LNG projects that are moving forward as I mentioned before, and you think about the likely timing, it could translate in an order number for TPS of $8 billion to $9 billion in 2022. And importantly, based on customer discussions, we’d expect our order levels to remain elevated in 2023 as well. As you can see, a lot of this on the LNG projects is a pull forward and also strong long-term LNG fundamentals. And we also see a continued traction in the new energy space. And as you saw again in the first quarter, we booked some awards on the new energy space, and we’re still at the upper end of our 100 to 200 range as we continue to see new energy orders in 2022.

Lorenzo Simonelli:

Yes, Chase, it’s a question that many are posing then. I think the focus right now in the near-term has switched to energy security, reliability and diversity. But we don’t believe that sustainability goes away. And in fact, if you look at some of the policies even introduced in Germany, the 2035 Energy Plan still continues focus on sustainability. We think the current environment will actually accelerate clean energy initiatives, particularly for fuels like hydrogen, which EU is making a large part of its long-term energy plan. What we’re seeing from the current situation is that you cannot become too reliant on one country or one source of energy. So diversity of supply is critical. And we think that pragmatism has come back into this discussion and the role of energy. Not just renewables but also, as we’ve mentioned before, gas playing a key critical role. Given the elevated commodity prices, a number of major oil companies and NOCs are going to report good profits and free cash flow. We think they will use this to continue actually developing and accelerating their carbon or decarbonization plans as well as healthy shareholder returns. And you can see that also with an example like Aramco with its CapEx plan that includes significant hydrogen. So we think Baker Hughes is very well positioned then with gas, LNG, hydrogen, CCUS, oil and pipelines. And we’ve got the technologies that are going to continue to drive this transition.

Lorenzo Simonelli:

Thanks.

Connor Lynagh:

Yes, thanks. I was hoping maybe we could talk a little bit more about Russia. So just wanted to understand, first off, the data point on the 4% of revenues. Is that already fully accounting for any ruble depreciation impacts? And so is what you’re basically guiding to, to actual activity declines? And I’m curious further to that, is it – at this point, you have received notification from your customers that your activity will decline or is that just your expectation based on what you’re seeing in the market?

Connor Lynagh:

Yes, thanks for all that color. The last portion you were talking about there was my follow-up. So basically, at this point, have you seen any of your major international customers alter plans or accelerate plans or indicate that they are planning to accelerate? Certainly, it seems like there is going to be some loss of Russian oil volumes to the market. I am curious how some of these bigger companies are going to respond to that?

Connor Lynagh:

Got it. Thanks very much.

Scott Gruber:

Yes. Thanks. So, just building upon Connor’s last question there, it sounds like the visibility into ‘23 is improving. What’s the potential for the international OFS market to actually see an acceleration in spending in ‘23, given the fact that budgets for this year were set before the surge in oil prices? And some additional color, if you will, on longer cycle projects, building in the queue to support growth in ‘23 and beyond.

Scott Gruber:

Got it. And with some of the international operators pulling forward some projects and responding to oil prices, can you provide some color on the pricing trends you are seeing on the international side OFS market? I imagine things are getting better. But do you foresee sufficient momentum there to propel above normal incrementals in ‘23 and continue to expand your margins beyond the 20% threshold?

Brian Worrell:

Yes. And look, I would say particularly from an OFS perspective, as the chemicals business recovers, I would expect to see some improvement in incrementals there. And then the only thing I would say, Scott, is we are all dealing with inflation in the market and we are working hard to get surcharges in and price increases in. But that’s something you got to take into consideration as you think about the next 12 months or so.

Operator:

And our next question is coming from the line of Arun Jayaram with JPMorgan Chase. Your line is open.

Brian Worrell:

Yes. Arun, look, we are very pleased that we have gotten the second phase of our work with VG here with Plaquemines. And look, I think it’s fair to assume that margins will be similar to what we saw on Calcasieu. I mean there is a couple of things going on here. Obviously, we have got experience with this type of project with this customer before. So, there are some natural synergies that come through in this project that we didn’t have in the first one. You did mention inflation there. Obviously, we have priced that in and have worked on productivity to help offset that as well. And look, you can imagine as we have said before, when we quote and when we win orders, we go out and we place orders for long lead items. Certainly have a view of what we believe is happening in the market today and what will happen and take the appropriate actions to protect ourselves and the customer from that inflation as much as possible. But look, this is a great order for us. It’s similar to what we did with Calcasieu. And you heard Lorenzo talk about we delivered all these modules ahead of schedule, which was very helpful for VG getting to first cargo in record time. So, our track record here is pretty good, and we are really excited about this space and this order and our partnership with VG.

Lorenzo Simonelli:

So Arun, I think you know well, we have capability and capacity to handle many different types of LNG equipment orders at the same time. We have got great capability in our facilities. And as you look at the 30 years we have been in LNG, we have always been looking at new technologies to reduce the cycle time and also to plug-and-play. So, this new modularized approach of fast LNG can be applied both to onshore and offshore. And the number of customer discussions are intensifying around the speed to market. So, I think again, with the technology enhancements we have made, we are well positioned to capture the market here.

Operator:

And our next question is coming from the line of Stephen Gengaro with Stifel. Your line is now open.

Lorenzo Simonelli:

Good morning.

Stephen Gengaro:

Can you – do you mind going back to your prepared comments on your oilfield services side and some of the changes you have made there. Can you talk about sort of the path to 20% EBITDA margins by the end of the year and maybe with some color around the impact of some of these changes you have made?

Lorenzo Simonelli:

And Stephen, just to add, the new organization that we announced is going to improve the speed of decision-making and also be able to capitalize on the growth opportunities in the market. So, it’s very much customer focused and allows us to be more responsive and more comprehensive in our integrated solutions and capture more of the market share of operating costs related to spend. So, it’s what our customers have been asking for, and we are delivering.

Brian Worrell:

Yes. Look, I would say we started to see some encouraging signs in the latter part of the fourth quarter as chemical prices started to stabilize and logistics started to look a bit better. But obviously, with everything going on in Russia and the increase in commodity prices that’s created some more headwinds. We have seen stabilization in the broader base chemical space. But I would say where inflation is still tough is in the specialty chemical market. And as I mentioned, we had some unique issues with the supplier who had a facility that was basically shutdown and getting that facility back up and running has taken them a bit longer. So, we have been having to get some alternative supply. That’s starting to normalize as well. So, we should see some recoveries come through. And then look, we have made some changes. We recently changed out leadership in chemicals. We are doing some specific things in supply chain to deal with the current environment. We broadened our sourcing relationships just given what we experienced with this large supplier that we had. We have actually taken a look and have eliminated some products where volumes were low and margins were relatively low to free up the capability to focus on some areas where we make more money and deal with some of the supply chain challenges and focus the team there. And then with the new factories coming on, it’s allowed us an opportunity to take a step back and look at the overall supply base, how we are contracting, and we have made some changes there that we should start to see come through here in the second half. But good visibility to what’s going on there. The team understands it, just working through a little bit of a perfect storm here that seems to be abating.

Operator:

And our next question is coming from the line of David Anderson with Barclays. Your line is now open.

Lorenzo Simonelli:

Yes, Dave. And I think you have to go back to the tenure we have had in the LNG cycle. And we have always said that there is going to be small-scale, mid-scale, large-scale, and we are going to be participating in all of those and also looking at modular as well as stick build. And depending on the customers’ needs, we are going to be providing them. Clearly, the modular is faster to market. It is a plug-and-play model. So, we are seeing increased interest from some of the independent players, and I would say also within North America. Globally with some of the larger projects, they still continue on the stick build. We don’t have a challenge on capacity. Again, we have had big flows of LNG projects in the past, and we feel good about being able to manage it. And our facilities that are set up in Florence and Massa and Avenza in Italy, are well prepared for the LNG project wave.

Lorenzo Simonelli:

I think the area that people are looking at and also reacting to is on the EPC side. And that’s one of the areas that I think is a focus right now. I would say also the modular approach reduces some of the dependence on the full aspect of EPCs. And so it’s a faster approach from that perspective. But labor continues to be constrained. And so that’s something that’s being looked at.

Operator:

And our next question is coming from the line of Roger Read with Wells Fargo. Your line is open.

Lorenzo Simonelli:

Good. Hi Roger.

Lorenzo Simonelli:

Hey Roger, I will go ahead. You cut off there a little bit. But on…

Lorenzo Simonelli:

That’s alright. On supply chain, it tends to be challenging. And obviously, with everything going on in the global geopolitical space, it’s been a little more challenging. But look, I would say from how it impacts us and how we are dealing with it, we are managing the price increases in various metals like copper and steel and nickel. There is no supply issue, it’s just managing through those pricing. And you can imagine that, that’s going into our quotes. And to deal with all of this, we have taken down the timing and validity of our quotes to be able to deal with this. So, customers know what’s going on, and they can have good visibility into what the cost of these projects are going to be. Look, from a castings and forgings standpoint, we are still able to get supply. We are dealing with scarcity in Europe and higher pricing there. So, we are seeing – what we are doing with our customers, our suppliers are doing as well, with quotes are only valid for a shorter period of time given the raw material pricing and the unique energy challenges in Europe. But look, that’s the beauty of being part of a global company like Baker Hughes. I mean we have been able to shift supply into China. We focused on Northwest China to be able to deal with some of the port issues and things we are seeing in COVID. We had really good experience there. We have also moved some supply to Mexico and India. So, we are able to pivot because we have got a large supply base and can direct that demand to different places. So, we feel good about what we are doing there on supply chain. We expect to see some stabilization come through, but have a great sourcing team, working with the projects team to make sure we can fulfill on the demand that we see coming through. From a logistics standpoint, I would say the team has done an outstanding job of managing that. Our inflation we have seen in logistics is well below the headline prices that you have seen. We have changed ports that we are using in North America and China. So, we have been incredibly reactive here. I don’t see it being a big constraint today for the LNG cycle that we are seeing, but that’s something that we will have to watch as it evolves.

Brian Worrell:

Yes. Look, I would say broadly, tightness you are seeing outside of the U.S., it’s similar to what you are seeing inside of North America, some labor tightness around the globe in some markets, not as much as you are seeing in North America. And look, just given the overall increase in activity, you are seeing tightness in supply of equipment. I think we have all got capability or I know we have got capability to ramp up and have been planning on that. But – but look, when you have got demand up as much as you are seeing in North America and globally, general economic tendencies come back into play and you start to see the ability to have more constructive pricing discussions, deal with some of those supply/demand issues. And I would say the international market, as you know, is more longer term contract base versus spot market like you see in North America. Where you see some real opportunity here is on some of that spot business, and I would say we are being very constructive with our customers, taking into account what we are seeing on the supply chain, what we are seeing in overall demand, and it’s a constructive backdrop for OFS at the moment.

Operator:

And I am showing no further questions at this time. I would now like to turn the call back over to Lorenzo Simonelli for any closing remarks.

Operator:

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating in today’s conference. You may all disconnect.

Operator:

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Fourth Quarter and Full-Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jud Bailey, Vice President, Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Jud. Good morning, everyone, and thanks for joining us. We are pleased with our fourth quarter results, as we generated another quarter of strong free cash flow, solid margin rate improvement, and strong orders performance from TPS. During the quarter, TPS continued to operate at a high level. OFE successfully executed on its cost improvement initiatives and OFS performed extremely well despite continued pressure on supply chain and commodity inflation. For the full year, we were pleased with our financial performance. We took several steps in 2021 to accelerate our strategy and help position the company for the future. Last year proved to be successful on many fronts for Baker Hughes with key commercial successes and developments in the LNG and new energy markets, as well as record free cash flow generation and peer leading capital allocation. After a quiet start to the year, LNG activity played an important role in helping TPS book almost $7.7 billion in orders in 2021, which was just below the record levels achieved in 2019. Perhaps more importantly, we believe that the step-up in LNG order activity provides a solid indication that a new LNG cycle is beginning to take shape. We also believe that the uptick in orders, along with other recent policy movements, particularly in Europe, confirms that natural gas is gradually gaining greater acceptance as a transition and destination fuel for a net zero world. In new energy frontiers, we started to see more pronounced commercial successes from our energy transition efforts, generating approximately $250 million in new orders across our TPS, OFS and DS product companies, primarily in the areas of hydrogen and CCUS. We remain confident in our ability to grow this business over the next decade to ultimately total $6 billion to $7 billion of orders by 2030. I'm also very pleased to report that Baker Hughes delivered its strongest ever free cash flow year, generating over $1.8 billion in 2021, which represents almost 70% conversion from adjusted EBITDA. We are pleased to see this performance as our cash restructuring and separation payments wound down and we continue to make progress on improving our working capital and broader cash processes. Our strong free cash flow profile provides the company with ample flexibility and optionality when it comes to our broader capital allocation strategy. As evidence of this, we returned almost $1.2 billion back to shareholders through dividends and buybacks in 2021, while also making multiple acquisitions and investments across the industrial and new energy spaces. On the industrial front, we completed the acquisition of ARMS Reliability and a major investment in Augury, which will help Baker Hughes continue to build out its Industrial Asset Management platform and deliver an expanded set of asset performance capabilities. On the new energy front, we were active this year in pursuing early-stage technologies in CCUS and in hydrogen. In CCUS, we acquired a position in Electrochaea, a biomethanation company and also entered into an exclusive license with SRI for the Mixed Salt Process. In hydrogen, we made an investment in Ekona, a growth stage company developing novel turquoise hydrogen production technology; as well as Nemesis, a technology company focused on a range of early-stage hydrogen technologies. While 2021 saw many positive achievements, the year was also not without its challenges. We saw continued disruptions from the COVID-19 pandemic, which continue to impact our operations. Supply chain and inflationary pressures also drove higher costs and delivery issues primarily across our OFS and DS product companies. Our teams have continued to work to offset some of these pressures, but we expect to continue to see some level of tension and disruption in these areas potentially through the first half of the year. As we look ahead to 2022, we expect the pace of global economic growth to remain strong. However, growth rates are likely to moderate from 2021 levels as central banks are expected to begin tightening monetary policy in order to reduce COVID-related stimulus plans and quell growing inflationary pressures. Despite the expected slowdown in the pace of growth, we believe the continuing broader macro recovery will translate into rising energy demand in 2022, with oil demand likely recovering to pre-pandemic levels by the end of the year. Pairing this demand scenario with continued OPEC+, IOC and E&P spending discipline, we expect the oil markets to remain tight for some time. We believe that this will provide an attractive investment environment for our customers and a strong tailwind for many of our product companies. We also expect continued momentum in the global gas markets in 2022 building on a strong 2021. A combination of demand and supply factors converged in 2021 pushing natural gas and LNG prices to record breaking levels in both Europe and in Asia. The gas price spikes also highlighted the fragility of the global energy system as the world transitions to net zero. Looking ahead, we expect a number of additional LNG FIDs in 2022 and beyond, supported by the growing appetite for longer-term LNG purchase agreements. As we have previously mentioned, we see significant structural demand growth for LNG in the coming decades. Our positive long-term view is also supported by the recent improvements in policy sentiments in certain parts of the world towards natural gas' role within the energy transition. Against this constructive macro backdrop, Baker Hughes remains focused on executing our strategy across the three pillars of transform the core, invest for growth and position for new energy frontiers. Importantly, we also continue to work towards aligning Baker Hughes across the two business areas that we outlined in the third quarter of last year. Oilfield services and equipment and industrial energy technology or OFSE and IET. Since we unveiled our vision of ultimately executing across these two broad business areas, we have been evaluating all aspects of the company in order to determine the most efficient organizational and corporate structure. Our goal is to find the right structure that properly aligns our internal resources and helps accelerate growth in key strategic areas, while also enhancing our profitability and returns and increasing shareholder value. We have reached some early conclusions and have started to implement changes internally. Most notably, we recently created The Climate Technology Solutions Group and Industrial Asset Management Group, which will both report to Rod Christie, Executive Vice President of TPS. Climate Technology Solutions or CTS will encompass CCUS, hydrogen, emissions management and clean and integrated power solutions. Industrial Asset Management or IAM will bring together key digital capabilities, software and hardware from across the company to help customers increase efficiencies, improve performance and reduce emissions for their energy and industrial assets. We believe that the creation of these two groups will help accelerate the speed for commercial development for solutions-based business models across our new energy and industrial asset management offerings. Importantly, it will not change any of our reporting structure today. Overall, we are very excited with the strategic direction of Baker Hughes and believe the company is well placed to capitalize on near-term slick cool recovery and well positioned for the long-term structural change in the energy markets. Now, I'll give you an update on each of our segments. In oilfield services, activity levels ended the year on a positive note, in both the international and North American markets and all signs point to a strong year of growth in 2022. Additionally, the OFS team had to navigate an increasingly difficult supply chain environment over the second half of 2021 and ended the year on a high note with a strong fourth quarter margin performance. Looking into 2022, we expect a strong broad-based recovery across the international markets, led by Latin America and the Middle East. While Latin America should see the second consecutive year of double-digit growth, the Middle East is in the very early stages of what we expect to be a multi-year growth cycle. Capital is being deployed in the region to restore near-term production levels and lay the foundation for longer-term capacity expansion. In North America, we expect another year of impressive growth in the US land market, as well as recovery offshore. Based on conversations with our customers, we expect the underlying trends in North America to remain the same as 2021 with public E&Ps and IOCs remaining disciplined in deploying capital while private E&Ps will remain more active. While we were pleased to achieve 10% operating margin rates in OFS in the 4th quarter, margins are still below our broader objectives, namely due to the recent negative impacts of commodity price inflation and supply chain disruptions. That being said, our OFS team is working extremely hard to offset these headwinds with successful pricing increases across multiple product lines and continued progress in mitigating some of the logistics constraints. Based on the actions being taken by our OFS team and assuming the gradual normalization of the current state of supply chain disorder, we remain focused on achieving 20% EBITDA levels in OFS by the end of 2022. Moving to TPS. The outlook remains constructive driven by opportunities in LNG, onshore offshore production and new energy initiatives. I'd like to thank Rod and the TPS team for an exceptional year in 2021, which exemplified the strength of the TPS business. TPS booked almost $7.7 billion of orders, which included 22 MTPA of LNG orders across four projects and 9 FPSOs and offshore topside project awards. On the execution side, TPS generated over $1 billion of operating income representing over 16% in operating margin rate despite revenue growth and equipment significantly outpacing services. We are excited about what the future holds for TPS across multiple fronts. In LNG, we were pleased to book two awards in the fourth quarter. We announced a major LNG award for the 5 MTPA Pluto Train 2 project in Western Australia, which is operated by Woodside, and also received a large scale LNG equipment award in the Eastern Hemisphere. Additionally, we were awarded an order to deliver power generation equipment for a major LNG project in North America. We continue to be optimistic on the outlook for LNG and remain confident on the potential for 100 to 150 MTPA of awards over the next two years to three years. Based on the continued pace of discussions with multiple customers and the positive fundamentals in the global gas markets, we have a general bias towards the upper end of this range. For the non-LNG segments of our TPS portfolio, we see multiple opportunities for continued growth and we were pleased to book a number of awards in new energy during the quarter. In hydrogen, we booked an award for advanced compression technology for the NEOM carbon-free hydrogen project in the Kingdom of Saudi Arabia, building on the announcement we made with Air Products in the second quarter of 2021. We will be providing our HPRC solutions to the NEOM project, which will enable a lower cost of production and accelerate the adoption of hydrogen as a zero carbon fuel. Our collaboration with Air Products will be critical for a net zero future, and the award is a good example of how Baker Hughes' proven technology is helping to accelerate the hydrogen economy. In CCUS, we received an order from Santos to supply turbomachinery equipment for the Moomba carbon capture and storage project in South Australia. Baker Hughes will provide gas turbine compressor and heat recovery steam generator technologies to compress the carbon dioxide. The project will serve as the gas processing plant and permanently store 1.7 million tons of carbon dioxide annually in the depleted natural gas reservoirs in the onshore Cooper Basin. Even though 2021 order activity came in well ahead of our expectations, we still expect to see a similar level of orders for TPS in 2022 driven primarily by LNG. Next, on oilfield equipment, we are pleased with the overall trends in this business as order activity is becoming more favorable and we continue to show progress in taking costs out. At a macro level, trends in the subsea and offshore markets are anticipated to continue to improve in 2022 after gaining modest traction over the course of 2021. In the subsea tree market, we expect industry awards to take another step higher in 2022 but likely remain below pre-pandemic levels for the foreseeable future. Outside of the tree market, we continue to see a strong pipeline of flexible order opportunities. We are also seeing improving market conditions in our international wellhead and subsea services businesses. In the fourth quarter, we were pleased to announce a major 10-year contract for surface wellheads and tree systems in the UAE. As part of ADNOC's largest ever wellhead award, this important win will further enhance our partnership with this key customer, as well as strengthen our footprint in the region. Our subsea services business saw some good traction in the fourth quarter with a strong orders performance driven by increased activity in the North Sea and Sub-Saharan Africa. Although OFE is showing signs of a path to recovery, we still believe the offshore markets will remain structurally challenged as the energy markets and our customers' budgets evolve. As a result, we remain focused on rightsizing the business, improving profitability and optimizing the portfolio. The merger of our Subsea Drilling Systems with MHWirth to create HMH is an excellent example of how we're continuing to transform the OFE portfolio. Finally, in Digital Solutions, overall market conditions are improving. We experienced solid growth across our industrial end markets through 2021 and are starting to see a pickup in markets that lag, particularly the oil and gas, transportation and aviation end markets. Additionally, the DS business continues to be impacted by the supply chain challenges and chip shortages that began earlier in the year. During the quarter, DS continued to secure important contracts with key customers for condition monitoring and Industrial Asset Management solutions. Bently Nevada secured a contract with Yara to enable digital transformation and improved asset reliability and efficiency. The enterprise-wide contract will enable data availability between Yara's plant operations and the cloud across 23 sites using Bently Nevada's latest System 1 EVO Asset Management software. Bently Nevada also secured a contract with a major oil company to deploy System 1 Asset Management software as a standardized platform for enterprise-wide conditioning, monitoring across 28 facilities worldwide. In addition, Bently Nevada secured a 5-year services agreement to support the operator's digital transformation by providing maintenance services and supporting the customers goal to move condition monitoring data out of its localized facilities network into a cloud environment. Going forward, DS will play an important role in the growth of our industrial franchise and the overall success of our strategy in Industrial Asset Management. Key to the build-out of IAM, with the investments we executed in 2021 that I previously mentioned, the acquisition of ARMS Reliability earlier in the year and more recently the alliance we formed with Augury, both complement our Bently Nevada Systems 1 cloud-enabled condition monitoring and protection platform, and deliver on our strategy of expanding our presence to non-critical assets and developing software capabilities to allow us to cover the entire balance of plant. As the world strives towards a net zero target in the coming decades, enterprise level industrial asset management capabilities will be a key driver by enabling better operating efficiency, lowering energy consumption and reducing emissions across multiple industries. Overall, I'm pleased with the progress we made in 2021 in navigating the many challenges presented during the year, while also executing on the commercial opportunities across our portfolio. At the same time, we were able to convert almost 70% of our 2021 adjusted EBITDA into free cash flow. We returned almost two-thirds of this free cash flow back to shareholders and made good progress on transforming our company into an energy transition leader. As we enter 2022, we expect to benefit from solid macro tailwinds across both of our major business areas with cyclical recovery in OFSE and a longer-term structural growth trends in LNG, new energy and Industrial Asset Management. We look forward to further developing our corporate strategy, building on our commercial success and focusing on a range of capital allocation opportunities. I want to conclude by thanking all of our Baker Hughes employees for their hard work in overcoming another year of challenges surrounding the pandemic. And I look forward to their continued commitment to our success in 2022 and beyond. With that, I'll turn the call over to Brian.

Jud Bailey:

Thanks, Brian. Operator, let's open the call for questions.

James West:

Hey, good morning, guys.

Brian Worrell:

Good morning, James.

Lorenzo Simonelli:

Yes, James. Thanks a lot. And as we've mentioned in the past, we've been doing a lot of work on evaluating the optimal corporate structure for Baker Hughes as we continue to see the energy markets evolve and also the energy transition accelerate. The process is going to take some time, as we evaluate all the parts of the company, which includes everything from the best organizational structure, all the way down to details like legal entities and tax structure, so the end goal is to develop the business or corporate structure that allows us to operate efficiently and accelerate growth in our key strategic areas, and doing so in a way that enhances our profitability and returns and increase the shareholder value. As you've seen from our prepared remarks, the formation of CTS Climate Technology Solutions and Industrial Asset Management Groups are one of the first steps towards strengthening our focus around two strategic business areas of OFSE and IAT that we mentioned last third quarter. As we said last year, as the energy markets evolve, we think operating around these two broad focus areas makes sense in terms of investment strategy, et cetera. And we also said that aligning across the two broad business areas will actually help us give the most optionality longer time. So the work we've done only just reinforces our view. Again, the company is strong together at this stage and we'll continue to align across the two business areas, continue to work and continue to update us on our progress and decisions. But it goes without saying, we continue to operate the company for the best returns to shareholders.

Lorenzo Simonelli:

Sure, James. And I think importantly, I believe the order momentum we saw at the end of 2021 is likely to continue into 2022. We've indicated over the past quarters that we are seeing an LNG cycle beginning to accelerate. And generally speaking, LNG projects are beginning to be pulled forward versus previous expectations due to the strong long-term LNG fundamentals and also the improving environment to secure long-term offtake agreements. So we also believe the recent policy movement out of Europe, that's encouraging to see what would be FIDs in 2023 may be potentially be pulled forward into 2022 as well. So there are a couple of large awards this year in 2022 and also some small and mid-size awards that should be coming through. And I think although we're calling the TPS orders in 2022 really flat to 2021, we believe that orders could potentially increase as we go through the year, so the specific areas, U.S., Middle East and Russia, and for 2023, it's a little early, but I think again the outlook is positive and we still see a lot of projects that we're discussing with our customers, as you know, we're very close on the LNG side. I also think it's important to remember that LNG is a headline for TPS orders. We also see a solid pipeline in our onshore-offshore production segment, along with opportunities in pumps, valves and we continue to see positive traction in the new energy front on the back of a strong order intake in 2021.

Operator:

Our next question comes from Chase Mulvehill with Bank of America.

Lorenzo Simonelli:

Hi Chase.

Chase Mulvehill:

So I guess I wanted to kind of dig in a little bit deeper and ask on you creating two new divisions, you get the Climate Technology Solutions and Industrial Asset Management divisions that you split out now. And so I guess, first, kind of, what was the catalyst for doing this and how do you think that this - splitting this up will impact how you run these businesses? And then a related follow-up there is just like, do you plan to give us some quarterly details to kind of track the progression of these two new businesses?

Chase Mulvehill:

Okay, perfect. The follow-up is really just kind of same line of questioning and just kind of digging a little bit more on the energy transition. I mean obviously in the fourth quarter, you had a key hydrogen order with NEOM and you had the CCUS with Moomba. But could you talk about other opportunities that you see on the horizon, and maybe also kind of hit on M&A opportunities, you did Ekona, the hydrogen investment there? So maybe highlight that, maybe other opportunities that you see the kind of - do some tuck-in acquisitions.

Chase Mulvehill:

All right. Perfect. Thanks, Lorenzo. I’ll turn it back over.

Scott Gruber:

It sounds like the supply chain issues may linger for you and peers here at least in the first half of the year. Are we finally at the point where we can see light at the end of the tunnel? Are you able to identify a quarter when the supply chain issues really just have a limited impact on reported financials or is that too early to call at this point?

Scott Gruber:

Got it. And then, somewhat of a related question. So supply chain issues are being managed better. They should hopefully ease over the course of the year. End markets are obviously recovering across most of the businesses and you're entering it seems to be the later innings of the restructuring efforts. So Lorenzo, maybe if we just kind of think high level here, it seems like there is convergence across those items such that Baker should be really hitting its stride over the course of the year. So can you just putting the separation question aside, if we just kind of think about where the business sits versus a couple of years ago when the two businesses came together in the merger. Can you just kind of talk high level about kind of where the business stands today, how to think about cadence of profit growth, obviously, we have the 20% exit target in oil services, but kind of kind of your perspective on where the business sits today from a performance standpoint and kind of where we go over the course of '22 and into '23, kind of gives us the convergence of what seems to be some pretty favorable factors from a tailwind perspective.

Brian Worrell:

And Scott, the only thing I'd add there to what Lorenzo says is, you've seen how we've been running the company, we've got a strong balance sheet, we believe we've had pretty shareholder-friendly capital allocation. We're able to maintain the dividend during the latest turmoil because of COVID and we'll continue to run the company with a strong balance sheet and make sure we maintain the most flexibility and optionality as we look to increase returns.

Arun Jayaram:

I had a couple of questions on TPS, you guys booked nearly $3 billion of inbound orders this quarter, $7.7 billion for the year. I was wondering if you could comment on, if you think the orders would be accretive to the margins you realized in 2021 in TPS?

Arun Jayaram:

Great. And my follow-up. Brian, you had mentioned how the strong inbound orders are driving more revenue visibility in TPS this year, next year. We had been thinking about low single-digit top line growth this year and how is the order strength influencing your thoughts about the top line, you mentioned the flattish margins, but I want to see if we're moving maybe to mid-single digits or upper single digits in TPS as this year?

Operator:

Our next question comes from David Anderson with Barclays.

Lorenzo Simonelli:

Yes David. On the international outlook for [indiscernible] based on conversations with our customers, we expect the broad-based recovery through our whole major geographies and overall international growth in the low to mid-teens and unlike 2021 where the Middle East was lagged, we believe this could be one of the strongest markets in 2022 and it's likely in the early stages of a growth cycle as you have seen in the region with at production capacity on a gradual long-term basis. So we also expect another strong year of growth in Latin America led by Brazil and Mexico, elsewhere North Sea, Russia, Asia Pacific solid growth and not as much as the Middle East in Latin America, but still solid growth and then also West Africa off a low base starting to see some productive time. We got to see some of the larger LSD case that take place. We're continuing to see that I think. We are very judicious in the way in which we enter. We've always said we're going to be disciplined and we like the outlook internationally as we go forward.

Lorenzo Simonelli:

I think it's a little early, but I think as you look at our approach and it really resonates with what we're hearing from our customers is across oil and gas and also at our industrial segments we serve, customers are asking help me achieve a net zero roadmap, whether it be the 20-30 target or the 20-50 target that they have. And that requires a compilation of different technologies. And what we're doing within our Climate Technology Solutions Group and why we stood it up, is really to be able to respond to that customer request and walk them through the various technologies and capabilities. When you look at the investments we've made Electrochaea, you look at also C3, you look at the already in-house chilled ammonia process, you mentioned also what we've done with Ekona. What we're providing is actually a capability to offer a roadmap towards those solutions and we'll continue to evaluate which solutions we think are best for our customers, but we do want to be like we are in other areas that we serve a provider of technology and capability to achieve the customer request. Likewise on Industrial Asset Management, if you think about the investments we've made, both C3 or ARMS, we're really developing an ecosystem of capability to respond to customers' request around how do we drive less downtime. How do we increase efficiency and productivity and that requires the ability to sense, have historical data on equipment, and be able to offer the foundation of a platform towards customers. So both of these areas actually help us in our growth initiatives, and are led by customer requests.

Neil Mehta:

Good morning, team. A couple of questions around capital allocation. And the first one is on the buyback, how are you thinking about the pacing of the buyback. Do you think it's reasonable to keep on the pace that we saw here in Q4, which is over $300 million and it looks like in the release GE selling ratably. Is it fair to say at this pace will be out of the market by the middle of this year?

Neil Mehta:

And just to clarify $200 million to $300 million quarterly right?

Neil Mehta:

Okay, great. And then on the dividend, you've been sitting here at this $0.18 a quarter level, really since 2017 in the earnings power and the free cash flow generation of the business get us a point where you can get more aggressive around the dividend recognize you're doing yields better than your large cap services peers, but it's still worse than the energy sector broadly. How do you think about what the right time is to evaluate an increase in distribution around the dividend and tie that in with your comments around the buyback.

Operator:

And ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back to Lorenzo for any closing remarks.

Operator:

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Operator:

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jud Bailey, Vice President, Investor Relations. Sir, you may begin.

Lorenzo Simonelli:

Thank you, Jud. Good morning, everyone, and thanks for joining us. We are pleased with the way the team has continued to execute on our strategy over the course of the third quarter. At the total Company level. We had a strong orders quarter grew adjusted EBITDA, and adjusted operating income margin rates sequentially and year-over-year. And had another solid quarter of free cash flow. While we did experience some mixed results across our product companies, on the positive side, TPS generated strong orders, operating income, and margin rates, and our fee had a solid orders quarter. On the more challenging side, our business was negatively impacted by Hurricane Ida, cost inflation in our chemicals business and delivery issues stemming from supply chain constraints, while DS also faced supply chain delays that impacted product deliveries. As we look at the macro environment, the global economy continues to recover. However, the pace of growth is being hampered by lingering effects from the COVID-19 Delta Variant, global ship shortages, supply chain issues, and energy supply constraints in multiple parts of the world. Despite these headwinds, global growth appears to be on a relatively solid footing, underpinning a favorable outlook for the oil market, aided by continued spending discipline by the world's largest producers. In the natural gas and LNG markets, fundamentals remain strong with a combination of solid demand growth and extremely tight supply in many parts of the world. In fact, we believe the positive case for structural demand growth in natural gas as part of the broader energy transition is becoming increasingly evident. The current environment illustrates the need for policy makers to focus on the utilization of natural gas as a base load fuel that can be combined with renewable energy sources to provide a cleaner, safer, more affordable, and more reliable source of energy to populations around the world. A number of developed economies have had great success over the last 10 to 15 years, lowering their carbon emissions by switching from coal to natural gas. However, some policy scenarios have seen a more rapid conversion straight to renewables, which limits the role of natural gas as a transition fuel and can lead to broader grid instability. We believe that there is a strong and logical combination of a secure, stable baseload of natural gas that is needed to complement renewable energy sources, and in turn offset intermittencies. As we can see from recent events, the cost of moving too aggressively are beginning to surface, as multiple parts of the world are experiencing energy shortages, unprecedented increases in energy prices, and shutdowns and brown outs across multiple industries. The increase in natural gas prices has been most acute due to a number of factors, including under-investment in gas reserves, a decline in contribution from hydroelectric and renewable power, and continued increases in energy demand. Ironically, the four-line from higher prices has also led to an increase in coal consumption, leading to coal shortages and a spike in coal prices. Natural gas has been a key contributor to lowering emissions in the United States over the last 15 years. As power generation consumption switch from coal to natural gas. U.S. power consumption of natural gas has increased from around 16% of total generation to roughly 40% over the past 20 years. While coal consumption has declined from over 50% of the energy supply mix to approximately 25% over the same period. By comparison, today roughly 60% of Asia-Pacific's power generation comes from coal, and about 10% from natural gas. As more countries step-up their carbon reduction commitments, we believe that natural gas will play a critical role in displacing higher emission sources, like coal and by supporting the growth in renewable energy technologies, with relatively cheaper, and affordable base load power. Natural gas and LNG are core to Baker Hughes ' strategy and we will continue to play a key role in providing natural gas as a safe, reliable resource to the world. In addition to our focus on natural gas and LNG, Baker Hughes are spent considerable time over the last few years to move and accelerate our broader strategy forward. During the third quarter, we outlined how we are working to best position Baker Hughes for today and in the coming years. We have given a lot of thought around how to service the oil and gas and energy markets today, while also investing for the future across the industrial space and various new energy initiatives. While we continue to execute our strategy through the three pillars of transform the core, investor growth, and position for new frontiers, the way that we're thinking about the Company and our broader long-term strategy is clearly evolving. As we recently highlighted at an investor conference at the beginning of September, we are starting to view our Company in two broad business areas

Operator:

[Operator Instructions] one follow-up. Our first question comes from James West with Evercore ISI.

Lorenzo Simonelli:

Hey, James.

James West:

So Lorenzo, TPS for 2022, I'm curious to hear your thoughts on both order rates, growth rates for that business. There's a lot of really positive momentum as you know in LNG and the natural gas in general, as you highlighted in your prepared comments. I'd like to kind of hear your -- broad outlook for that business, as we go into next year because I think we should be -- and maybe even 23, we should be going to a major cycle for TPS.

James West:

Okay. Good to hear. And maybe leveraging of the -- that last statement you made on the new energy's business. What are you thinking about growth there in '22 and '23 and beyond? Are you starting to mean business and now we're going through a period of everyday, there's announcement in hydrogen or CCUS, but are -- is this starting to translate now into concrete business, or is that still in the comm? How are we going to think about that, the new?

James West:

Okay. Great. Thanks, Lorenzo.

Operator:

Our next question comes from Chase Mulvehill with Bank of America.

Brian Worrell:

Hey, Chase.

Lorenzo Simonelli:

Hey, Chase.