Baker Hughes Company

Ladies and gentlemen, and welcome to the Baker Hughes Company fourth quarter and full year 2019 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. If anyone should require 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. Good morning, everyone, and welcome to the Baker Hughes Company fourth quarter and full year 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, John. Good morning, everyone, and thanks for joining us. We delivered a solid fourth quarter with strong orders in our turbo machinery and also equipment segments. Solid operating performance from our TPS business, strong free cash flow, and better execution in our digital solutions business. These positives were partially offset by weaker than expected margin performance from our OFS business. For the full year 2019, we achieved a number of key milestones, including 20% year-over-year order growth in TPS, almost 300 basis points of margin improvement in TPS, 12% order growth in OSE, and free cash flow of $1.2 billion. In addition, we accelerated our separation efforts from GE, launched our new company brand, and positioned ourselves to compete more effectively in a changing marketplace. I cannot thank our employees enough for their hard work and dedication to achieve our goals throughout the year. As we look into 2020, we see a macro environment that is slowly improving, as well as a range of opportunities to further strengthen Baker Hughes on both a near-term and long-term basis. In the near term, we continue to identify and execute on opportunities to improve our day-to-day operations and cash flow efficiency in 2020. Looking out on a longer-term basis, we see a number of attractive growth opportunities for our company, and we remain focused on positioning Baker Hughes for the upcoming energy transition and the digital transformation of the industry. This balance between near-term and long-term objectives can be found in each of the strategic goals that I highlighted on our last earnings call. To remind you, these goals are, one, margin improvement in our oilfield services and oilfield equipment businesses. Two, evolving our portfolio, specifically leveraging some of our unique core competencies to expand our offerings in the industrial and chemical end markets. as well as improving our position for the energy transition. And three, continuing to expand our digital offerings to drive greater efficiency, as well as safer and more reliable operations for our customers, together with our AI partner, Seafree. Over the last several months, we have spoken at length about our first goal of execution and operational improvement, which remains an important focus for Baker Hughes in 2020. However, today I'd like to spend some time providing insight on how we're thinking about our goal of portfolio evolution and positioning for the energy transition. As you know, energy transition is an important topic that has gained a significant amount of momentum in the industry and in the investment community over the last six to 12 months. As we have stated previously, Bacon Hughes is firmly committed to playing a leading role in a lower carbon future. One year ago, we made our own commitment to achieve net zero carbon emissions by 2050, and our corporate strategy remains clearly focused on being the leading energy technology company to help facilitate the energy transition. As we look ahead to the next two decades, there are various published forecasts on the long-term demand outlook for hydrocarbons and the expected growth rate for renewable energy sources. Within these forecasts, there are a wide range of predictions for growth or peak demand for the different types of hydrocarbons in the coming decades. Our view remains that in almost any scenario, natural gas will be the key transition fuel, and perhaps even a destination fuel, for a lower carbon future. As a result, we believe that natural gas demand will grow at more than twice the pace of oil over the next 10 years, and that LNG demand growth will be higher still at an annual rate of 4% to 5%. Against this backdrop, we believe that Baker Hughes is uniquely positioned to provide technologies and solutions that help our customers lower their carbon footprint. While there is a strong recognition of our world-class LNG franchise, our broad portfolio also offers a wide range of products that help customers lower their carbon footprint today, and that are directly tied to the continued growth in renewable energy sources. Some examples of these products are well known, like our LM9000 aero derivative gas turbine, which can reduce NOx emissions by 40% and overall CO2 equivalent emissions by up to 25% compared to alternative turbines in its class. However, there are broader system level uses where our TPS equipment has the opportunity to be deployed in carbon reduction applications. For example, our core technologies in compression have the capability to help deliver carbon capture, utilization, and storage, and we are actively marketing these solutions to customers today. In one application, we reconfigured our Nova LT gas turbine generator technology to operate 100% on hydrogen, and we continue to explore opportunities in the hydrogen value chain in both transportation and production. As another example, our turbo machinery equipment can be used to help deliver mechanical storage of energy for use in peak demand for renewables, enabling customers to store and deliver renewable source energy to the grid efficiently and effectively. In addition, we see three new technology areas emerging as part of the energy transition, for which our digital solution segment is uniquely positioned. The first is emissions monitoring, where our products such as Lumen and Avitas are directly applicable. Lumen is a suite of methane monitoring and inspection solutions, and Avitas offers smart inspection and monitoring service solutions in both land and aerial applications. The second area is emissions reduction, where our FlareIQ flare management system allows downstream operators to reduce flaring emissions by 90%. The third area is condition monitoring for renewables. specifically in wind turbine applications. Our Bentley Nevada business within Digital Solutions has monitoring devices which ensure the detectability of the most costly and critical drivetrain failure modes. Deployed on more than 32,000 wind turbines globally, a tremendous installed base we have built over the last decade. While these technologies combined represent a small percentage of Baker Hughes' overall revenue today, They are products and services that we believe have a great growth potential and also provide a strong platform for future product introductions and carbon-based initiatives with customers. As we execute on these near-term and long-term strategic initiatives, we are also mindful of the ever-changing macro backdrop across the energy markets. On this note, we generally believe that macro fundamentals have slightly improved over the last few months, as dynamics on both the demand and supply side have become more positive. With that said, our incrementally positive view of the macro environment is tempered by growing geopolitical risk, most notably in the Middle East. On the demand side, the outlook for oil and gas has modestly improved with the recent Phase I trade deal, the slight improvement in PMIs for key economies, and continued positive economic data out of the U.S., We believe that these variables should be supportive of a firm oil demand outlook in 2020 and one in which our customers will continue to execute their budget plans and advance important projects. On the supply side, the outlook is also affirmed with another recent round of OPEC production cuts and more signs of slowing U.S. production growth. Importantly, we believe the continuation of solid demand growth combined with the growing commitment to EMP capital discipline helps support a more constructive macro outlook. Further, we believe the continuation of these trends could begin to reduce excess crude inventory by later this year or into 2021 and support multiple years of growth internationally. Although the macro environment appears to be improving, our overall outlook for our OFS and OFE segments remain largely unchanged from the framework we outlined on our third quarter earnings call. For our OFS segment, we now believe that North America's DNC spend in 2020 is trending towards a low double-digit decline rate versus 2019. This view is based on early EMP budget announcements and the lower exit rate in the fourth quarter of 2019. We continue to believe that our differentiated OFS portfolio will provide somewhat of a buffer to the challenges in the North American markets. Internationally, our expectations remain mid-single-digit growth, but with a slight bias to the upside, driven primarily by an improving pipeline of opportunities. In the OFE segment, our outlook is for the subsea tree market to remain stable, around 300 trees in 2020. We expect to maintain our position in the subsea market, driven by strong execution for customers and continued traction with our subsea connect strategy. For TPS, while we do not expect the exceptionally strong year for LNG FIDs in 2019 to repeat in 2020, our outlook for this segment remains constructive as we execute the largest backlog in the company's history and expect continued growth in services and non-LNG equipment awards. For the LNG portion of our TPS segment, our outlook remains constructive. Despite some softness in near-term spot prices, conversations with our customers have not changed materially. If swap price weakness persists, we would expect this to shift the balance for future FIDs towards more economically-advantaged brownfield projects in the 2021 to 2025 timeframe. We were pleased to see around 90 MCPA of LNG FIDs between the fourth quarter of 2018 and the end of 2019. While just short of the 100 MCPA we thought the industry could FID in this period, we believe that FID activity in 2020 should remain solid. and at least in line with the average annual FID levels witnessed in the prior cycle between 2011 and 2015. In our digital solution segment, we continue to believe global GDP growth is the most relevant metric by which to forecast this business, given the variety of end markets it serves. The oil and gas market drives approximately 50% of DS revenue, with 20% coming from the power market and the balance from a number of industries including aerospace, automation, consumer electronics, and other industrials. With over 90% of DS revenue coming from hardware and associated software solutions across a range of brands such as Bentley Nevada, Nexus Controls, Druck, Panametrics, and Royce Stokes, this is a mature, stable business with the best in class measurement, sensing, and inspection technology. In summary, we delivered a solid fourth quarter and full year 2019. We are clearly focused on executing our strategy and generating strong free cash flow, improving margins, and driving returns. With that, let me turn the call over to Brian.