Baker Hughes Company

Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE Company second quarter 2019 earnings call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance during the conference, please press star, then the zero key on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Phil Mueller, Vice President of Investor Relations. Sir, you may begin.

Thank you, Katherine. Good morning, everyone, and welcome to the Baker Hughes, a GE Company second quarter 2019 earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli, and our CFO, Brian Morrell. Today's presentation and our earnings release can be found on our website at bhge.com. As a reminder, during the course of this conference call, we will provide forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. As you know, reconciliations of operating income and other -to-gap measures can be found in our earnings release. With that, I will turn the call over to Lorenzo.

Thank you, Phil. Good morning, everyone, and thanks for joining us. On the call today, I'll give a brief overview of our second quarter results, update you on our view of the market, and take you through the quarter highlights. Brian will then review our second quarter financial results in more detail before we open the call for questions. In the second quarter, we booked $6.6 billion in orders. We delivered $6 billion in revenue. Adjusted operating income in the quarter was $361 million. Free cash flow in the quarter was $355 million. Earnings per share for the quarter were negative 2 cents, and adjusted EPS was 20 cents. We executed well in the second quarter, and importantly, our financial outlook for 2019 is unchanged from what we communicated previously. Now let me take a few moments to share our view on the macro environment. Beginning with the longer cycle markets, the outlook for LNG remains strong. We have seen approximately 50 MTPA of new capacity reach FID since the fourth quarter of 2018, and the industry is on track to reach the 100 MTPA we outlined by the end of 2019. I'm pleased to report that our technology has been selected for each one of the projects that have reached a successful FID thus far. We remain well positioned for a number of other projects that we expect to move towards positive FID this year. When I look out beyond this immediate investment cycle, I see continued growth and a multi-year opportunity set for BHGE. By 2030, LNG demand is expected to be approximately 550 MTPA. Let me put that into context for you. To produce 550 MTPA, the industry will need to operate approximately 650 MTPA of nameplate capacity. This represents significant growth from today's installed capacity of approximately 380 million tons. Therefore, even with 100 million tons FID at the end of 2019, we expect multi-year order activity through 2025. In the subsea market, we continue to see around 300 trees in 2019. Our base expectation for subsea trees going into the year was roughly flat versus 2018, and with activity levels still well below industry capacity, the space remains competitive. As discussed previously, we are expecting order activity for our flexible pipe business to improve in 2019. I am very pleased that orders in the first half of 2019 were up significantly versus the lows of 2018, a good sign for 2020 revenues in oilfield equipment. For the shorter cycle oilfield services markets, our outlook has not changed significantly. Internationally, most markets have a positive outlook, as we expected. This is largely driven by the Middle East, where we have seen continued momentum, and which remains a key area of activity for BHG. We also see positive signs across other markets, such as Sub-Saharan Africa, Asia Pacific, and Latin America. As oilfield services excess capacity is absorbed by increasing activity, we are seeing positive momentum on international pricing. Given contracting dynamics, it will take some time before we see the benefits of pricing in the US market today. In North America, we expect US production to grow over the coming years, even as capex slows. North America and the US land market specifically are very transactional and remain hard to predict even six to nine months out. We share the view that capex across North American operators will be down in 2019. The majority of that will be on the completion side, specifically around pressure pumping. We expect the increase in US production in the current year to drive growth in product lines, such as chemicals and artificial lift. With that macro framework in mind, our focus is on where we can differentiate ourselves to drive the right returns across our portfolio. Since we formed BHG just over two years ago, our priorities were clear and remained unchanged. From the outset, one of our priorities was to regain share and grow revenues faster than the market in OFS, especially internationally. Our initial focus was in reinvigorating our sales force and prioritizing commercial success. In parallel, we have been winning the right kind of contracts to drive better returns in the business. Now, with our commercial processes in place, the organization is even more focused on high quality execution for our customers. A couple of examples of how we are creating step changes in efficiency for our customers are AdNOT drilling and Equinil. We highlighted these important wins last year, and we have been transitioning into the execution phase. Our strategic partnership with AdNOT drilling gives us the opportunity to double our presence at AdNOT's conventional development program. We also have a unique position for the unconventional development, which is expected to ramp the gap significantly in the coming years. We began operating under the new partnership in January, and I am pleased to report that our operational performance today has been very strong. We have now helped to mobilize four rigs and drilled over 100,000 feet with 97% drilling efficiency. On the first eight wells, AdNOT drilling has saved more than 88 days of drilling time. Our performance in the early stages of the partnership is very encouraging. Together with AdNOT drilling, we are driving the highest level of collaboration and integration. The partnership works extremely well, both at the strategic level with the equity stake and our seat on the board, as well as at the field level. We have transferred BHG employees and assets to AdNOT drilling, and this has put the partnership on a path to driving higher productivity and efficiency. We look forward to continuing to work closely with AdNOT drilling to support AdNOT's 2030 smart growth strategy. On the Norwegian continental shelf, we are working closely with Equinor and have delivered outstanding results in the first six months of the new integrated well services contract. As you recall, integrated drilling is at the core of this project and a key driver behind the economic value for both our customer and BHG. In the first half of 2019, we fully integrated eight drilling units in addition to the two that were already existing and have drilled more than 330,000 feet with the best in class performance. Our success on this project centers on helping Equinor meet their overall non-productive time objectives and reducing drilling days towards a perfect well time, and thus far, we are progressing on both fronts. BHG is also the first oil field service provider to execute an Equinor's IO-free process to demand and move to a more automated remote operations model. This process is core to Equinor's strategy as it improves well performance and enables future automation through the aggregation of work. Fundamentally, this requires us to transform the way we work. We are developing new roles offshore, competencies onshore, and software to enable the safe and effective removal of work from the rig site. In the second quarter, we successfully executed the transition to IO-free on the first rig, and we'll continue to roll this out across the integrated rig fleet in the remainder of 2019. We are proud to be the first to deliver for Equinor on this important initiative. As a result of our strong performance today, we have been awarded additional scope on the Goderan and Martin Langer fields. While it's still early, I am very pleased on how our BHG team is executing. We have said from the beginning that running our oil field services business better would be a journey. The first steps on this commercial side have been successful, and now our organization is more focused on executing for our customers. Now let me share some specific highlights of the second quarter with you. In oil field services, we continue to win internationally in key markets. In Norway, we were awarded two long-term contracts by Equinor for down-home monitoring and sand control screens, expanding on our integrated contract awards. These wins are the result of our long track record of strong performance across our completions portfolio in Norway. In the UAE, BHG has been awarded a long-term contract to supply upper completions and well monitoring for 94 wells in ACNOX offshore islands and extended reach drilling project, displacing a competitor. This is the first time we have been awarded this scope since ACNOX offshore program began in 2014. In Malaysia, we secured an integrated well services contract for 22 wells, displacing the incumbent after 15 years. The same customer awarded BHG a lower completions contract to deploy our geoform sand control technology in the country for the first time. In Mexico, ENI awarded BHG a multi-year soft provider contract for artificial lift offshore. We were also awarded a contract by Petronas for drilling services offshore Mexico. Both of these wins demonstrate the strength of our offering in this market and the deep relationships we have with customers globally. Moving to North America, our production levered portfolio is driving growth amid uncertain market conditions. In the Balkan, Marathon awarded BHG a multi-year contract for artificial lift solutions, solidifying our leading position in the basin. A performance track record was critical in securing this contract award. In Canada, we extended a large contract for production chemicals. Over the last 10 years, we have helped our customer reduce their chemicals cost by 70% per barrel of oil produced, while their production has grown 500%. This is a tremendous result, and it was a critical factor in extending our long-term relationship. In parallel, our OFS team continues to drive innovation and develop technology where we have clear line of sight to differentiation and competitive advantage. Two examples are ShoreConnect and NaviDrill Duramax. In the quarter, we deployed ShoreConnect for the first time with BP in the North Sea. With this fiber optic technology, operators can now achieve real-time distributed monitoring of the entire well. Also in the quarter, we launched our new NaviDrill Duramax drilling motor. This technology is our latest generation of high-performing positive displacement motors and helps customers improve well construction productivity, specifically in the Permian and the Rockies. In all field equipment, we continue to expand our offerings through SubseaConnect and remain focused on technology, lowering project costs and delivering for our customers. As I mentioned earlier, our flexible pipe business is an important part of our OFE offering and a critical component of SubseaConnect. In the second quarter, flexible pipe system orders rebounded and were up over three times year over year. This is a very positive sign for us and a core component of the 2020 revenue outlook for all field equipment. In the second quarter, we secured flexible orders for various pre-salt and post-salt fields in Latin America, as well as for important projects offshore Saudi Arabia and China. We also recently signed an MOU with Saudi Aramco to create a new joint venture facility in the Kingdom to manufacture non-metallic materials. We are very pleased to be working closely with this important customer on non-metallic product development that will benefit a wide range of industries and support further innovation and manufacturing in Saudi Arabia. In June, we were very pleased to open our Subsea Center of Excellence in Montreux, Scotland. This world-class COE will deliver engineering, manufacturing, testing and services to our customers. The repurposing of this campus is an important milestone for BHG and enables us to offer product innovation from design to delivery from one location, servicing customers globally. The Center of Excellence is the home of our Optara Design Center, dedicated to the design and development of the Optara Totex Lite Subsea System, the cornerstone of our Subsea Connect vision. Lastly, on OFE, I am pleased to announce that this week, together with McDonough, we were awarded extension contracts to provide a joint, surf and SPS solution for the ICTIS Phase 1 LMG field. We will deliver Christmas trees, control systems, distribution equipment, as well as associated LIFA field services. This award is a further example of our Subsea Connect approach and our flexible partnership model to deliver improved project economics to impacts. We remain very well positioned on a number of other Subsea projects for the year and expect to see strong second half order intake in our Subsea business. In Turbo Machinery and Process Solutions, the second quarter saw the acceleration of activity in the LNG market. As mentioned previously in December of last year, Novatec selected VHCE's Liquifaction Technology for its Arctic II LNG project. In the second quarter, we were officially awarded the order for the first two trains, which includes the supply of a gas turbine compressors and generators. Each train will produce up to 6.6 MTPA of LNG. Additionally, in the past few months, two important projects achieved significant milestones. In June, the Anadarko-led Area 1 Mozambique LNG project moved ahead with positive FID for two trains. Through the engineering enhancements and technology investments we have made over the past few years, our compression trains are expected to achieve 6.44 MTPA per train, the highest ever output for this class of turbine. In mid-July, Venture Global announced that it had secured binding commitments for the enhancing of its 10 MTPA Calcutta Pass LNG project. We will provide a comprehensive process solution that utilizes highly efficient mid-scale modular liquefaction trains supporting Venture Global's low-cost development approach. While we did not book the orders for Mozambique's Area 1 or Calcutta Pass in the second quarter, we expect to receive full notice to proceed from our customers in the second half of 2019. Outside of LNG, we had a very strong orders quarter in our on and offshore production segments. We were awarded an important contract to provide compression and oil field power generation equipment for the development of the Antilla field in Algeria. The reliability and availability of our equipment together with our proven track record and strong local presence in Algeria were important factors that helped us to win this strategic award. We were also awarded an order to supply a gas turbine driven generator package for an FPSO offshore India. BHG will provide three of our LM2500 plus G4 gas turbines to produce over 50 MW of power for the FPSO's operations. These gas turbines have a proven track record in offshore operations with high reliability and availability and were optimized to meet the reduced footprint requirements, an important factor in the FPSO applications. In Digital Solutions, the second quarter was an important milestone for strategically positioning our digital software business. As you know, we announced a joint venture with C-Free AI in late June. I would like to share in a bit more detail why we're very excited about this strategic relationship. While there are varying approaches to digitizing the oil and gas industry, our focus has always been on helping our customers reduce non-productive time. This leads to improved production, lower maintenance costs, and better safety. We have made great progress and have developed a number of innovative solutions for customers over the recent years. As we moved further down the path of developing our digital offerings, we realized that establishing a relationship where a great AI partner would accelerate our progress and maintain our edge in this important space. Our joint venture with C-Free accomplishes just that. C-Free was recently named as the leader in IoT platforms within the energy sector by IDC MarketScape. C-Free is quickly becoming the standard enterprise AI platform, which makes them the perfect partner for us. Our collective goal is to deliver artificial intelligence that is faster, easier, and more scalable. The C-Free suite is currently in use by leading oil field businesses and in a number of other industries. Together with C-Free, we will deliver their existing technology to oil and gas customers and collaborate on new AI applications specific for oil and gas outcomes. We are deploying teams of data scientists and oil field experts into customer environments to deliver solutions that meet specific customer needs. We are extremely excited about the partnership with C-Free and looking forward to working in new ways that deliver the best possible outcomes for our customers. By integrating our strong suite of digital offerings and capabilities along with the oil and gas industry expertise with C-Free's unique AI solutions, we will accelerate the overall digital transformation of the industry. In closing, we delivered a solid second quarter. Our total year outlook is unchanged and we are encouraged by strengthening international markets and a robust LNG project pipeline. Our company is positioned to benefit from multiple growth drivers. We remain focused on our priorities of gaining share, improving margins, and generating strong cash flow. With that, let me turn the call over to Brian.

Thanks, Lorenzo. I'll begin with the total company results and then move into the segment details. Orders for the quarter were $6.6 billion, up 9% year over year, and up 15% sequentially. The year over year growth was driven by turbo machinery, which was up 32%, oil field services up 14%, and digital solutions up 8%, partially offset by lower order intake and oil field equipment due to deal timing. We delivered solid orders growth across both equipment and services. Equipment orders were up 10% and service orders were up 7%. Sequentially, the increase was driven by turbo machinery, which was up 56%, oil field services up 9%, and digital solutions up 4%, partially offset by oil field equipment, which was down 19%. Remaining performance obligation was $20.6 billion flat sequentially. Equipment RPO ended at $5.6 billion, up 2%, and services RPO ended at $15 billion, flat sequentially. Our total company -to-bill ratio in the quarter was 1.1, and our equipment -to-bill in the quarter was 1.2. Revenue for the quarter was $6 billion, up 7% sequentially. The sequential increase was driven by oil field services, which was up 9%, turbo machinery, up 8%, and digital solutions up 7%, partially offset by oil field equipment, which was down 6%. Year over year, revenue was up 8%, driven by oil field services, up 13%, oil field equipment, up 12%, and turbo machinery, up 1%, partially offset by digital solutions, which was down 5%. Operating income for the quarter was $271 million, which is up 54% sequentially. Operating income was up $193 million year over year. Adjusted operating income was $361 million, which excludes $90 million of restructuring, separation, and other charges. Adjusted operating income was up 32% sequentially, and up 25% year over year. Our adjusted operating income rate for the quarter was 6%, up 120 basis points sequentially, and up 80 basis points year over year. Corporate costs were $105 million in the quarter. Depreciation and amortization was $360 million, up 3% sequentially, and down 8% year over year. Tax expense for the quarter was $95 million. Gap loss per share was $0.02, down 8% sequentially, and up 3% year over year. Included in gap loss per share is a $145 million charge primarily related to the announced sale of the high-speed reciprocating compression business within our turbo machinery segment. The disposition is in line with our strategy to focus the portfolio on core activities. This loss has been excluded from adjusted earnings per share. Adjusted earnings per share were $0.20, up 5% sequentially, and up 10% year over year. Free cash flow in the quarter was $355 million. We delivered over $300 million of cash from working capital, driven primarily by an increase in progress collections, as well as improvements in core working capital processes. Overall, we are pleased with the cash performance in the second quarter, and our cash flow expectations for the year are unchanged. Now I will walk you through the segment results in more detail. In oil field services, the team delivered a solid quarter amid a mixed market backdrop. Revenue for the quarter was $3.3 billion, up 9% sequentially. North America revenue was $1.2 billion, up 5% sequentially. International revenue was $2 billion, up 12% sequentially, driven by growth in the Middle East, North Sea, and Asia Pacific. We saw strong execution across multiple product lines as a number of our integrated well services contracts ramped up significantly. Operating income in the quarter was $233 million, up 32% sequentially. Margins grew 125 basis points, driven primarily by higher revenues and better cost absorption, partially offset by unfavorable mix, especially in international markets. As we move into the second half, we continue to expect solid international revenue growth. We expect the growth rate to moderate from the strong year over year and sequential improvements we have seen in the first half. The outlook in North America remains difficult to predict. While we expect our production oriented product lines to grow, we expect overall revenues in North America to be down slightly in the second half. As a result, for OFS, we expect modest sequential increases in revenue and margin. Next on oil field equipment, orders in the quarter were $617 million, down 40% year over year. Equipment orders were down 58% year over year, driven by timing of orders in subsea production systems. This was partially offset by strong orders in flexible pipe systems, which were up more than three times year over year and over 120% year to date. We are pleased with the orders performance in SPS, which will improve volume and mix for OFS in the medium term. Service orders were up 13% versus last year and up 3% sequentially. Revenue was $693 million, up 12% year over year. Subsea production systems volume was up, partially offset by the expected lower revenues and flexibles. Operating profit was $14 million, up $26 million year over year and 22% sequentially, driven by increased volume in SPS and subsea services. We continue to expect modest growth in the second half of 2019 for OFE as backlog and subsea production systems converts into revenue. Moving to turbo machinery, orders in the quarter were $2 billion, up 32% year over year. Equipment orders were up over 100% year over year. The growth was driven by very strong orders in LNG and upstream production, partially offset by the other segments which were down. Equipment book to bill in the quarter was 2.0, driven by the award for Arctic II LNG. Importantly, major orders for Anadarko's Mozambique project and Venture Global's Kalkasu class project were not booked in the second quarter. We expect to receive full notices to proceed and book orders on these projects in the second half of 2019. For the first half of 2019, equipment orders were up 48% and our book to bill was 1.5. LNG and upstream production were up and the other segments were down. This is in line with our strategy and TPS to rebuild a high quality equipment backlog. Service orders in the quarter were down 5% year over year, mainly driven by timing. Importantly, transactional service orders were up 8% year over year and 12% sequentially. For the first half of the year, transactional service orders were up 10%. Revenue for the quarter was $1.4 billion, up 1% versus the prior year. Revenues were slightly higher than we initially anticipated as the team executed very well and accelerated certain equipment deliveries for the third quarter into the second quarter to meet our customers' needs. Operating income for turbo machinery was $135 million, up 19% year over year, driven by increased volume and better equipment mix. Operating margin was .6% of 140 basis points year over year and up 50 basis points sequentially. For the total year, our expectations for TPS are unchanged. While the earlier than planned deliveries in the second quarter will impact the quarterly revenue profile, we remain confident in the total year outlook. Finally, on digital solutions, orders for the quarter were $688 million, up 8% year over year, driven by our sensing and pipeline and process solutions businesses, partially offset by declines in inspection technologies. Regionally, we saw strong orders growth in North and Latin America. Revenue for the quarter was $632 million, down 5% year over year. Growth in the sensing and pipeline businesses was more than offset by declines in other product lines, primarily Bentley Nevada and software. Operating income for the quarter was $84 million, down 13% year over year, driven by lower volume and negative mix. In the third quarter, we expect digital solutions to be flat to slightly up sequentially on both revenue and margins. With that, I'll turn the call back over to Phil. Thanks. With that, Catherine, let's open the call for questions.

Thank you. If you have a question at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. We ask that you please limit yourself to one question and one related follow-up. And our first question comes from James West with Evercore. Your line is open.

Hey, good morning, guys. Hi,

James.

And before I get started, Phil, thanks for all your help during the first two years of the new Baker Hughes, and best of luck in the future as you transition out.

Thank you. Thanks, James.

So Lorenzo, maybe to start on the international side, significant OFS growth year over year in the first half. I know Brian mentioned it would moderate somewhat, but it seems like that high single-digit initial forecast you gave for the year may be conservative at this point, and then even going a bit further here with the acceleration that's underway internationally. Could we see that slip into the double digits, both for 19 overall, but then really for 2020?

Yeah, James, we feel really good about the execution of our strategy on the international side, and we said we were going to be increasing commercial intensity there. You mentioned OFS revenues up 12% in the quarter, 18% year to date. It's really driven by the Middle East, North Sea, Asia Pacific, and we saw strong growth across multiple product lines as a number of our integrated wealth services contracts ramped up significantly. As we look for the rest of the year, we continue to see a positive outlook, and I think you can now say that we're solidly in the double-digit growth range based on our strong performance in the first half. We do expect that growth rate to moderate somewhat in the second half, as Brian mentioned, but we are seeing positive signs in some of the other areas of Sub-Sahara Africa, Asia Pacific, Latin America, continued momentum in the Middle East. So solid international growth continues in 2019, and we like our positioning. As we look at 2020, a little bit early to call right now, we do expect to see growth continuing into international markets, but let's see how that continues to flow out with the activities in the Middle East and North Sea.

Okay, fair enough. And then Lorenzo, on the TPS segment, very strong orders. Again, Brian mentioned the mixed shifting, high grading of the orders. What does this mean for the margin profile we should expect there over the next 12 to 18 months? I'm assuming this will lead to much better margin opportunity.

Yeah, James, I think, again, this is playing out the way we've said, and if you look at TPS, we've seen the LNG come through, and we continue to feel positive about the second half outlook with regards to LNG, and our forecast is unchanged on TPS, and we remain committed to the strategies we're executing.

Thank you. Our next question comes from Angie Sededa with Goldman Sachs. Hi, Angie. Your line is open.

Hi, gentlemen. Good morning. Hi, Angie. Hi, Angie. And so the same. I wish you the best in the next chapter of your career.

Thank you, Angie.

So a little bit of a follow-up on TPS. I mean, it really is impressive, this order intake on the LNG side with orders up 32% -over-year driven by the equipment, which is key to driving margins as you high grade. So can you talk a little bit, and you did a little bit in your prepared remarks, about the pace going into not only the second half of the year, but 2020, and clearly it sounds like there's much more to come.

Yeah, Angie, and I think we've been talking about LNG for some time now. We indicated back at the beginning of the year that we saw 100 million tons for 2019 with the fourth quarter of 2018. We've seen about 50 million tons FID to date. And when you look at the growth and the expected demand, by 2030, 550 million tons is going to be necessary from an LNG standpoint. And to put that into perspective, as I mentioned, you need about 650 million tons of nameplate capacity. So that's just the 380 we have today. And with some of the projects that have been sanctioned, we still see positive opportunities in LNG as we go forward. And I think you've seen some of those statements with the FERC approval of Venture Global, the Calcasieu Pass, Silerians, Driftwood, Tempris, Port Arthur, and then you've got opportunities internationally such as Qatar, which is a great opportunity to add capacity. So again, feeling confident with the LNG side.

Yeah, Angie, if I look, you know, I'm really happy with how the team is performing here. We feel very strong about a substantial increase in TPS orders this year. If I look at how that translates, the forecast and the outlook for this year really remains unchanged because as you know, a lot of these equipment orders that we're booking now really won't start taking revenue on those until the second half of next year. The other dynamic that I highlighted is the transactional service orders are pretty strong. They've been strong through the first half, and that bodes well for the second half in reinforcing that our outlook is unchanged given what we see in the equipment backlog and how services is performing. So look, we expect strong orders to continue, and we'll talk with you guys about how that plays out in the P&L as we start to book those orders.

Thanks, that's very helpful. Thanks, Brian. And then on the international side, you touched on your remarks, a little bit of pricing traction in some markets. Can you talk about that further? Do you think that we could see some broadening of the pricing going into 2020, or is it still going to be pretty competitive in very select markets?

Yeah, Angie, I did mention in the remarks that we are seeing some pricing improvements internationally, and that really is a factor of the excess capacity that's being absorbed. It will take some time for that all to come through, but with a period of stable growth in international markets, also driven by the large international tenders that we've been awarded, we feel good about the opportunity over the long term to continue to see the pricing come through.

Thank you. And our next question comes from Byron Pope with Tudor Pickering Hope. Your line is open.

Morning, guys. Hi, Byron. Just thinking about the OFS segment and against the backdrop of the robust international top line growth, and notwithstanding the near-term North America headwinds, it seems fair to think that there are going to be decent incremental margins associated with that international growth, given that, I think you mentioned earlier, that you're starting to move into the execution phase for some of the many projects that you've won. So just wondering if you could provide some qualitative color on how you think about the incremental margins associated with that international top line growth.

Yeah, Byron. Again, we do like the growth we're seeing internationally, and it's after some hard work to regain market share. And some of that's off the back of executing really well on projects that we were executing last year. A lot of these international projects are in the early phases of executions, and some of them are the larger integrated well services contracts. And so the early stages of execution, you always have a learning curve, and we're coming up that learning curve right now. For example, in Equinor, we've ramped up into new fields, and versus Troll, where we've been operating for 20 years and know that field really well, and the crews. There are some teething pains as we work through that. So profitable today, but we feel like there are tailwinds as we go up that execution curve for these large integrated well services contracts. So some of our product lines, we're operating in these fields for the first time. So feel good about the execution that we've had to date, and think we do have tailwinds and margin rate internationally as we continue to execute well for the customers.

Thanks, Byron. And one quick second question just on global gas. I realize it's more than just turbo machinery within the Baker Hughes portfolio that's tied to global net gas. Could you just remind us, whether it's within OFS or OFE, how should we think about the other product service lines that you have that are tied into global gas?

Yeah, Byron, it's a very good point that you mentioned. If you think about gas, we are large in gas. And in fact, when you look at our oil field services product lines, as well as our oil field equipment side, we are more on the gas side than we are the oil side. And I think in particular when you look at the gas-oriented projects, they're increasing on the offshore side. And we feel that there's opportunities for integrated projects, such as BP Tour 2, which we talked about in the first quarter. And that helps both our OFE and also OFS segments as well.

Thank you. Our next question comes from Sean Mecham with JP Morgan. Your line is open.

Thanks. Hey, good morning.

Hi, Sean.

So good progress on cash flow in the second quarter. You're about to break even our free cash for the first half. So as we look to the back half, I was hoping we could maybe just dial into some of the details. It seems like earnings should be up nicely on seasonality. Catbacks looks pretty set. I'm assuming merger costs start to recede, but separation costs from GE are a bit harder to quantify maybe. Is there anything else we should be thinking about on working capital for the back half, particularly with maybe some LNG prepays making their way in? Just trying to kind of sum it up and getting a sense, Brian, of how comfortable you are on dividend coverage for 19.

Yeah, Sean, I'm very happy with the performance here in the second quarter. And the linearity for the year is lining up about like the linearity we had last year given the cadence of the business and the volume. So if I take a look at the second half, you've got a few dynamics here. We have been building up inventory to deliver on the volume in the second half of the year. So you will likely see an inventory draw down there. We do expect significant volume ramps in the second half. So with that, you will have some headwinds from receivables from an absolute number. But we are continuing to improve our working capital performance in the metrics. Our day sales outstanding are down by 6 days. Our inventory turns are up half a point. Our days payable are up 17 days. So the team is making good progress on efficient use of working capital. Do expect with the orders coming in that progress collections will continue to come in helping the overall profile. And as you say, we pretty much have capex dialed in. So look, pretty confident that our core working capital metrics will continue to get better here in the second half and improve year over year. And we are on track with what we talked about from a free cash flow standpoint earlier in the year.

Okay, great. Thank you for that. And so within oil field equipment, you sound pretty optimistic about 2020 revenue growth. And Lorenzo, you have been consistent on the outlook for subsea. Nice to hear flexibles sound like they are getting better. So it sounds like to underpin that optimism for 2020, you must be pretty optimistic about orders for the back half of the year. And can we maybe just talk a little bit about the margin progression? I don't think Brian we heard much about that. Just thinking about how should investors be thinking about the impact of mix and new backlog pricing converting into throughput as we get into next year?

Yes, Sean, if you think about the offshore market, our view is relatively unchanged from what we said at the beginning of the year, specifically on the subsea tree demand. We see it the same as about 2018. 2019 will be around 300 trees. And we anticipate we are going to maintain our share. We've got a number of good projects in the pipeline that come through in the second half. You saw that we announced the GS4 with Inpex, which obviously comes through. And I think also encouraging is what we've seen with the FPS side. And that obviously comes through in 2020. So from a competitive standpoint, subsea remains competitive, but we feel good and we like our portfolio and the way we're structured today and feel good about 2020.

Sean, if I look particularly at the margins, Neil and the team, we've been working with them on repositioning that business from cost standpoints, like where we are there. I do expect sequential increases in their margin rate as we execute on the volume that's in the backlog and continue to see services growth in that business. If I look where we are today, really, pricing is not a headwind given where we've been in the industry. So don't see a significant change there. And the other thing to think about as you look at 2020 is you've seen the recovery and the flexibles business and the orders. And that's actually a positive for 2020 margins, just given the mix of that business.

Our next question comes from David Anderson with Barclays. Your line is open.

Thanks. Good morning. It sounds like you're ramping up pretty well on a lot of those international contracts, one or less 12 months. I wonder if you could just dig in a little bit more into the AdNoc drilling partnership. You talked about four rigs you're on air right now or during the core. Presumably those are all jackups. They have 20 jackups currently operating out there. I was just wondering, can you just give us a sense, do you expect to be on all 20 of those? How does that ramp up work? And then secondarily, you talked about making a lot of these drilling efficiencies. Can you just talk about how you did that? I know you're providing drilling tools and equipment. There's also a technology component. Maybe just help us a little bit to understand what you're doing there for AdNoc.

Yeah, Dave, I won't go through the specific operational side of the AdNoc drilling, but as you know, the partnership is one in which where we essentially have our employees with their employees and we're together in AdNoc drilling, actually completing both the drilling side and the services. And what this enables is efficiency. So with that integration and operational commitment that we have, we've been able to reduce the number of days to drill. And as I mentioned, 88 days saved on the eight wells that have been drilled. And it's really a partnership that shows the success of collaboration. And we've seen that time and time again as we take away the silos between the operator and ourselves. We can find the efficiencies and also the -in-class technology that we've been providing them over the years.

Yeah, Dave, just to reiterate, we are in early days of this contract, as you pointed out. It's a relatively small number in terms of revenue and margin right now, but we do expect that to ramp through the year. And just as a reminder, we haven't even started on all the unconventional work that AdNoc is planning. So that's definitely tailwind as we look into next year and when they start their unconventional campaign, we're really well positioned for that. And I just reiterate what Lorenzo said there. We're bringing the best of what we have to offer to this partnership. We're working really closely with AdNoc drilling. And it's an integration and a partnership that I think is showing real results. So there's not any one particular thing there. It's the combination of how we're planning, working together, collaborating. And we're very pleased with how it's performing. And so is the AdNoc drilling and the AdNoc team.

So let me ask you about another partnership, the C3AI Joint Venture. You guys have been involved in predictive failure, the digital twin, and to a certain extent AI for some time now. Is the right way to think about this is that C3 kind of brings a new software platform that effectively replaces what GE was providing? And that this is a significant step up that allows you to accelerate that digital business? Am I thinking about that right?

So Dave, we've been working hard on digital offerings since we formed DHGE. And we've also been monitoring the space. And every time I meet with the customers, the topic of digitization is at the top of their minds and thinking about how it's moving, transitioning. And really you should look at the C3.AI partnership as being an extension of the ecosystem of the capabilities that we have in digital for our customers in improving their outcomes. Our collective goal is to deliver artificial intelligence that is faster, easier, and more scalable. And we're extremely excited about our partnership with C3 because it extends our reach. Also, C3 is very well known in the space across multiple industries. They are renowned for their artificial intelligence. And we really see this being as the digital transformation of this industry as we go forward. So again, it's a step that we're taking to be at the forefront with our customers.

Yeah, and Dave, the way I think about this is that the C3 technology and what we're doing with it is really complementary to what we do today, depending on what the customer is looking to achieve. It can go in with a lot of the other software offerings that we provide. Some of those are provided by GE, others we have in-house today. So it's really an integrated approach with a world-class provider. And we're really excited about the partnership with the C3 team and what we can integrate there and offer to customers to make a step-function change for customers and their outcomes. The other thing that I point out that I really like about the C3 partnership is C3 has got a lot of experience in other industries and with other companies. And we're actually going to be able to take what C3 already has and use it internally to drive better process, more opportunities for cost reduction, better working capital management. So look, I've spent some time with them and really excited about what we can do together for customers, but also what we can do internally to help drive margins and returns inside of Baker.

Our next question comes from Bill Herbert with Simmons. Your line is open.

Thanks. Good morning. Brian, you sort of reaffirmed guidance for the full year on QPS, but you didn't specify what that means. So could you just remind us in terms of what the full year guidance is and what that implies for second half top line and margins?

Like I said, really have unchanged outlook for TPS in total. In third quarter, we do expect the impact of those earlier customer deliveries that they requested that happened in the second quarter to have an impact on revenue in the third quarter, but no change for the full year. Don't see any change to mid-teens margin in the second half like we talked about. Again, feel really good about how the team is performing there, have good visibility on what's in the equipment backlog, and we'll convert in the second half. And then with the transactional service orders strength that we anticipated, feel good about their total year.

Okay, thank you. And then with regard to OFS margins, you mentioned the sort of conceptual underpinning of the guidance, but specifically it sounds like it's sort of a low 20% sequential incremental margin for the foreseeable future. Is that a fair interpretation of what you said?

Yeah, I think from a revenue standpoint, as you look at the second half, expect to see the international growth rates. They will moderate versus what we saw in the first half. And as I outlined, expect North America to be slightly down. So look, I still expect that we will expand margin rates in the year as well as sequentially through the second half. And the dynamics I talked about on international and the large contracts will continue to get better as we operate more in those contracts, but still expect sequential margin improvement as we progress through the year.

Our next question comes from Brad Handler with Jeffries. Your line is open.

Thanks. Good morning, guys. Hi, Brad. Hi, Brad. Hi. A couple questions from me also related to TPS, but different questions. And I think I know the answer to this is going to be no, but maybe you can speak to this idea in general. Concerns are being expressed that the current issues surrounding global economic growth, U.S.-China tariff issues, all of that might disrupt the LNG order flow to some degree. Obviously, in broad strokes, you said that's not happening and you see the outlay. But are you finding that in any conversations you're having, are you sensing that that is at all at a risk, that it could slow certain FIDs through the course of the next 12 months?

No, the answer is no. And really, it comes down to the cycle time that these projects go through. And if you look at it, today's discussions and also today's spot pricing really isn't impacting the FID decisions that are going to be bringing online the LNG that's required for 2030. As you look at demand, Chinese LNG imports continue to grow. You've got South Korea continuing to grow, India continuing to grow. It really is, as a fuel source, one of the growth areas as you continue to see the energy transition take place. So again, you've got to look at it from a multiyear perspective.

Okay, fair enough. And again, I guess I expected to hear as much, but it's nice to hear you say it all the same. Unrelated, as I mentioned, but still in TPS. Maybe, Brian, I'm not sure I appreciate the distinction you're drawing between service orders and transactional service orders. So if I'm thinking about margin, I had been under the impression that LNG-related service orders are your highest margin contributors within TPS. I don't know if I should be thinking about it that way, but if we fast forward to the end of the year, given the nature of the equipment orders and that starting to flow through backlog, what would you expect the service and equipment mix to be either towards the end of 2019 and into 2020? Does that have any bearing at all on how we think about margins?

Yeah, I mean, if you look, our services portfolio is a great portfolio. We've got the contractual services portfolio, which is primarily LNG-related. These are the long-term service contracts where we have guarantees in place about the performance. We're on the site every day working with the customer, planning all the service activities, and have, obviously, decades of experience with those. And we've got pretty good visibility into that revenue. The transactional services are basically services, parts, field engineers, things of that nature that are not on contract. But again, we've got good line of sight into what needs to happen to the equipment and how it's operating throughout a quarter. But the customer actually determines when they buy parts or when they do the service. So that's a distinction between transactional and contractual. So that transactional services has been up 10% through the first half. Specifically on how these orders come through, look, orders that we're taking today for LNG, you're not going to see that revenue come through really until the second half of 2020 and beyond. And then the service cycle for those particular units doesn't really start until a few years after installation, depending on the application and where it is. So what we're doing today by winning all these equipment deals is we're building a great annuity stream for years to come. So the service activity that you're seeing today is on equipment that has been installed. Specifically around your question around mix, listen, we've got a profitable equipment business. It tends to be less profitable than services. So as you have an outsized growth on equipment, it will have a mixed implication in terms of the overall business. But all of that is taken into account in terms of how we talk about the business and the margin progression in 2019 and 2020.

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

Hey, appreciate you squeezing me in. Let's, I guess, stick with LNG and talk about maybe US LNG, the potential for FIDs over the next couple of quarters. You've talked about one larger order. Do you expect to see any additional larger orders in 2019 or is some of that kind of pushed out to 2020?

Look, as we mentioned, and again, we see the second half continuing to bode well for LNG. You've seen the FERC approvals that have gone through. So, you know, you look at Venture Global, Calcasieu Pass, Tellurians, Driftwood, you've got Port Arthur. There are a number of projects. We stay very close to all of the customers and they're all working through it. I do anticipate that, again, in the second half, we'll see some final FIDs on these projects. And also internationally, we've got other projects as well. So, you know, we look at it staying close to the customers, but LNG activity is strong in the second half.

Okay, good to hear. Brian, a quick follow-up for you on other non-core divestitures. You know, you've had some nice non-core divestitures over the past couple of quarters. Do you have anything else that we think that you could sell and bring in some cash in the door?

Yeah, Chase, thanks. You know, we've talked about looking at the portfolio and making sure we're focused on core areas that are, you know, accretive returns here. So, look, I don't have anything that is imminent or any place where we have to take any action. But, look, we'll continue to look at the portfolio. And if the right opportunity comes along to be able to maximize value for shareholders, you know, expand returns, you know, we'll take a look at it. But, again, there's nothing specific that we have to get done here.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Lorenzo Seminelli for any closing remarks.

Yeah, thanks a lot. So in just a few words in closing, I think we're very pleased with the execution in the second quarter. Our outlook is positive as our international business is growing and our longer cycle businesses are rebuilding high quality backlog. We're remaining focused on the priorities that we set out from the beginning, gaining share, improving the margins, and delivering strong cash flow. And I'd just like to end also in thanking Phil for the two years. And we wish him well going back to Europe and all the best to him. And thanks a lot for joining us today on the call.

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