Baker Hughes Company

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company third 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 zero 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. Judd Bailey, Vice President of Investor Relations. Sir, you may begin.

Thank you, Catherine. Good morning, everyone, and welcome to the Baker Hughes Company third quarter 2019 earnings conference call. Here with me are our chairman and CEO, Lorenzo Simonelli, and our CFO, Brian Worrell. The earnings release we issued earlier today can be found on our website at BakerHughes.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. please review our SEC filings and website for a discussion of some of the factors that could cause actual results to differ materially. As you know, reconciliations of operating income and other non-gap-to-gap measures can be found in our earnings release. With that, I will turn the call over to Lorenzo. Thank you, Judd.

Good morning, everyone, and thanks for joining us. We delivered a solid third quarter with strong growth in turbo machinery and oilfield equipment orders and continued margin improvement in our oilfield services business. Overall, we are very pleased with our continued execution as a team, and we are firmly on the right path financially, operationally, and strategically. Before I turn it over to Brian for more details on our financials and outlook, I would like to take some time to discuss what we view as an exciting new beginning for Baker Hughes. During the third quarter, GE sold down a portion of its stake in our company through a secondary offering and concurrent buyback, taking its ownership percentage from just over 50% to just below 37%. This most recent transaction is another major step in our separation from GE. As you know, GE announced their intention to exit their stake in our company over a year and a half ago, and we've been working on this process since that time. At the end of July 2019, we finalized our separation agreements, which included a number of transitional services. These are intended to ensure continuity of operations during the separation period for IT systems and other critical infrastructure. As you have seen in the weeks following the sell-down, we changed our company name, stock ticker, and branding. In addition, GE's representation on our board went from five seats to one. These are important, highly visible steps we have taken that outline the direction of the company going forward. While less visible, An equally important near-term impact is the acceleration of our separation efforts, as we work quickly to minimize our time in transition and to be fully operational on our own systems as soon as possible. I want to emphasize that these separation efforts are largely focused on back-office functions, such as IT, HR, and treasury systems, and other supporting infrastructure. The commercial and operational front end of our business is largely unaffected by the separation, Although our name change, ownership, and board structure are the most visible aspects of this new beginning for Baker Hughes, we are also entering a new chapter as we move into the next stage of our corporate development and prepare for the energy transition we see unfolding over the next decade. Two years after the formation of our company, we have executed on our integration and synergy targets and are in the early stages of evaluating the optimal portfolio for Baker Hughes, not only in the current environment, but into the future. In the coming decades, we forecast natural gas to be the key transition fuel for a lower carbon future as oil demand growth slows and demand for renewable energy sources accelerates. While it is clear that renewables will grow as a share of the overall energy supply, renewable sources will not be able to fulfill global energy demand given currently available technology and its small footprint today. These dynamics create the opportunity for natural gas to take a more prominent role over the coming years. Our view is that natural gas demand will grow at more than twice the pace of oil, and LNG demand growth will be higher still at an annual rate of 4% to 5%. This creates tremendous opportunity for our businesses, and we will position the company to capture the high-value, higher technology opportunities along the gas value chain. In this environment, our strategic goals are simple. First, we will improve margins in our oilfield services and oilfield equipment businesses. In OFS, we have executed over the last two years on some of the more straightforward synergy areas, such as right-sizing our footprint and flexibility consolidation to help improve margins. Moving forward, we are increasingly focused on the next stage of margin improvement, which we expect to be driven by supply chain efficiencies, increases in asset utilization, and lower product costs for better procurement and standardization. In RFE, we expect margin improvements as growing volumes from backlog conversion should drive cost absorption and allow us to capitalize on significant cost out initiatives we have implemented in the recent years. Second, we will leverage some of our unique core competencies in TPS and digital solutions to further expand our offerings in the industrial and chemical end markets. We see the opportunity to grow more in the gas value chain with our turbo machinery segment, grow in the downstream space with our digital solution segment, and grow our industrial and chemicals presence across our portfolio. As an example, we have utilized our expertise in gas turbine technology to develop and launch the NOVA LT family. This new class of turbine builds on TPS's deep domain experience in the rotating equipment space. This product line targets the industrial markets and lower megawatt applications where we had not previously competed, such as distributed power, EFRAC, and pulp and paper. In our digital solutions business, we have leveraged our strengths in inspection technology to enter the automotive and consumer electronics space with limited incremental investment. For our third strategic goal, we will work to continue to improve our digital offering to help facilitate better safer, and more reliable operations for our customers through our recent joint venture with Seafree.ai, which we have branded BH Seafree. In addition, we will be able to apply Seafree's offering internally to improve our own operational and execution capabilities. By integrating our strong suite of digital offerings and capabilities, oil and gas industry expertise, and Seafree's unique AI solutions, we will accelerate the overall digital transformation of this industry. As we focus on these initiatives and work to complete the separation from GE, we are also fully aware that we will be executing against a somewhat challenging macro backdrop. On the demand side, global crude oil demand appears to be slowing due to a number of factors, most notably trade tensions, which are beginning to manifest into slower growth and weaker manufacturing data in some of the major economies around the world. Recent PMI data has shown slowing momentum for bellwether economies with the most recent data for the United States, China, and Eurozone signaling softening demand. On the supply side, we agree with the view that OPEC may have to consider additional cuts as non-OPEC, non-U.S. production appears poised for solid growth in 2020 as new offshore developments come online. In the U.S., Production growth is likely to decelerate, but should remain resilient despite the expectation of EMP capex cuts next year. Weighing these factors together, we expect an adequately supplied market under most economic scenarios, resulting in a range-bound oil price environment for 2020 and potentially beyond. Despite this macro backdrop, we still feel good about the potential for revenue and margin growth across our portfolio in 2020. We believe the geographical and business mix in our OFS segment should still be conducive to modest growth next year, while our long-cycle business segments should produce solid revenue growth as we execute current backlog and anticipate continued firm order activity. More specifically, within our OFS segment, we are preparing for a North American market that is likely to see another reduction in E&P spending in 2020, as operators exercise capital restraint and seek to improve their free cash flow. Although it's still early, we agree with some estimates suggesting that lower 48 drilling and completion spending could decline in the high single-digit or even low double-digit range in 2020 on a year-over-year basis due to a combination of weaker pricing and lower activity levels. Internationally, we expect growth to moderate compared to 2019. but we still believe that drilling and completion spend can grow in the mid-single-digit range or higher in 2020, depending on a number of macro factors. International revenue growth for Baker Hughes has significantly outpaced market trends over the last two years, as we sought to recapture share and regain critical scale in select regions. Our core focus going forward will be on improving margins. Therefore, I would expect our top line to be more representative of overall international market trends. Overall, I am generally pleased with the continued performance and execution of our OFS team, the operational improvements they have made, and some of their recent contract wins. In the third quarter, OFS had a number of important wins in the Middle East across multiple product lines, including artificial lift, completions, and international pressure pumping. We also continue to see progress in our partnership with ADNOC, delivering strong execution as we help to build our agnostic drilling capabilities. In North America, we want an important artificial lift contract with a key customer in the Permian, building on our strong relationships and execution capabilities in this important basin. In our ROC segment, we continue to see demand for around 300 trees in 2019, which is roughly flat versus 2018. We also see an opportunity for additional orders in the flexible pipe market in 2019 following a subdued 2018. We were extremely pleased with our orders performance in the third quarter in OSE, as we secured some important wins with INPEX GS4, ViEnergy's Boulder Field, and with Apache in the North Sea. Overall, we remain constructive on the opportunity for order growth in the OSE segment in 2019. In our TPS segment, order growth remained solid compared to 2018, driven by continued strength in LNG and resilient order activity in our non-LNG businesses. Looking more closely at the LNG market, the project cadence is playing out largely as we expected. So far this cycle, 80 out of the 100 MTPA we outlined earlier this year has reached FID, which includes the recent FID of Venture Global's Calcasieu Pass and Novatec's Arctic II. Today, our technology drives almost 400 million tons of LNG production capacity, And in this most recent cycle, our technology has been selected for each of the projects that have reached the successful FID. As we look to the remainder of the year and into 2020, we believe there are several large LNG projects still to come, and we are well positioned to win many of them. Although the year got off to a slow start for the non-LNG portion of TPS, I am very pleased with the progression of non-LNG equipment order intake over the last six months. We have been successful in securing awards across a wide range of applications, such as electric track, FPSOs, and pipelines, while still being selective in the less profitable markets of refining and petrochemical. During the quarter, we were awarded two FPSO contracts, Offshore Brazil and Offshore India, as well as a number of awards in the onshore, offshore production, and pipeline businesses. Lastly, in our digital solutions segment, The broad, diversified nature of our portfolio and growth in oil and gas and other end markets has helped to partially offset weakness in the power market. Going forward, we generally expect these trends to continue. On the commercial side, only weeks after forming the BHC3 joint venture, the team launched its first artificial intelligence software application, BHC3 Reliability. We are extremely excited about this partnership and the potential it brings to our industry. That is a short summary of how we see the market today. Overall, we believe that Baker Hughes is well-positioned to navigate a potentially choppy macro backdrop. This is enabled by our combination of long-cycle businesses in TPS and OFE, more stable end markets within digital solutions, and a differentiated OFS portfolio that is focused on high-technology drilling and completion applications and production-related offerings such as upstream chemicals and artificial lifts. I am confident that we have the right team in place to execute our strategy and position Baker Hughes to generate strong free cash flow, improve margins, and drive returns. With that, let me turn the call over to Brian.