Baker Hughes Company

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 on 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 phone. 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, so you may begin.

Thank you. Good morning, everyone, and welcome to the Baker Hughes fourth quarter and full year 2021 earnings conference call. Here with me are our chairman and CEO, Lorenzo Ciminelli, 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 gap to non-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 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 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 ElectroKia, a biomeffination company, and also entered into an exclusive license with SRI for the mixed salt process. In hydrogen, we made an investment in Econa, 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 continued 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 EMP 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's 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, oil field 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 in the 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 all field 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 RFS 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 U.S. 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 EMPs and IOCs remaining disciplined in deploying capital, while private EMPs will remain more active. While we were pleased to achieve 10% operating margin rates in OFS in the fourth 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 nine FPSOs and offshore topside project awards. On the execution side, TPS generated over a billion dollars 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 5MTPA 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 to three years. Based on the continued pace of discussions with multiple customers, and the positive fundamentals in the global gas market, 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 NEON 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 turbo machinery equipment for the Mamba 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 a 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'll 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 right-sizing the business, improving profitability, and optimizing the portfolio. The merger of our subsea drilling systems with MH Wirth to create HMH is an excellent example of how we're continuing to transform the OSE portfolio. Finally, in digital solutions, overall market conditions are improving. We experienced solid growth across our industrial and markets through 2021 and are starting to see a pickup in markets that lagged. 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. Bentley Nevada secured a contract with Yara to enable digital transformation and improve asset reliability and efficiency. The enterprise-wide contract will enable data availability between Yara's plant operations and the cloud across 23 sites using Bentley Nevada's latest System 1 EVO asset management software. Bentley 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, Bentley Nevada secured a five-year services agreement to support the operator's digital transformation by providing maintenance services and supporting the customer's 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 were the investments we executed in 2021 that I previously mentioned, the acquisition of Arms Reliability early in the year, and more recently, the alliance we formed with Augury. Both complement our Bentley Nevada Systems One 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 plants. 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 trend 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.

Thanks, Lorenzo. I'll begin with the total company results and then move into the segment details. Orders for the quarter were $6.7 billion, up 24% sequentially, driven by TPS, digital solutions, and OFS, partially offset by a decrease in OFE. Year over year, orders were up 28%, driven by increases in TPS, digital solutions, and OFS, and a decrease in OFE. Remaining performance obligation was $23.6 billion, up 1% sequentially. Equipment RPO ended at $8.2 billion, up 9% sequentially, and services RPO ended at $15.3 billion, down 4% sequentially. We are pleased with our strong orders performance in the quarter, particularly in TPS, which provides a good level of revenue visibility into 2022 and beyond. Our total company book-to-bill ratio in the quarter was 1.2, and our equipment book-to-bill in the quarter was 1.4. Revenue for the quarter was $5.5 billion, up 8% sequentially, driven by increases across all four segments. Year-over-year, revenue was flat, driven by an increase in OFS and offset by decreases in TPS and OFE. Operating income for the quarter was $574 million, Adjusted operating income was $571 million. Adjusted operating income was up 42% sequentially and up 23% year-over-year. Our adjusted operating income rate for the quarter was 10.3%, up 240 basis points sequentially and up 190 basis points year-over-year. Adjusted EBITDA in the quarter was $844 million, up 27% sequentially and up 10% year-over-year. Adjusted EBITDA rate was 15.3%, up 130 basis points year over year. We are particularly pleased with the margin improvement in the fourth quarter, which was largely driven by increased productivity, higher pricing, and mix. All four of our segments experienced strong improvements in adjusted operating income and adjusted EBITDA rate sequentially. Corporate costs were $106 million in the quarter. For the first quarter, we expect corporate costs to be roughly flat with fourth quarter levels. Depreciation and amortization expense was $273 million in the quarter. For the first quarter, we expect DNA to increase slightly from fourth quarter levels. Interest in the quarter was $95 million, which includes a make-whole premium relating to the debt refinancing we completed during the fourth quarter. We expect interest expense to return to historical levels in the first quarter. Income tax expense in the quarter was $352 million, which includes $103 million in charges that relate to liabilities indemnified under the Tax Matters Agreement with General Electric. These tax expenses are offset in the other non-operating line of our income statement. Gap diluted earnings per share were $0.32. Included in gap diluted earnings per share is a $241 million gain from the net change in fair value of our investment in Ad Knock Drilling and a $131 million loss from the net change in fair value of our investment in C3AI, both are recorded and other non-operating income. As a reminder, in 2018, we formed our strategic partnership with AdNoc Drilling and invested $500 million for a 5% stake. In October 2021, AdNoc Drilling completed their IPO, which requires us to mark our investment to fair value. Since our investment is recorded as a marketable security on our balance sheet, The change in fair value will be reflected in the other non-operating income line on a quarterly basis going forward. Adjusted diluted earnings per share were $0.25. Turning to the cash flow statement, free cash flow in the quarter was $645 million. The sequential improvement was driven by higher adjusted EBITDA, strong cash collections, and modestly higher proceeds from disposal of assets due to increased real estate sales. We also continue to execute on our $2 billion share repurchase program during the fourth quarter, repurchasing 13.2 million Baker Hughes Class A shares for $328 million at an average price just under $25 per share. For the first quarter, we expect free cash flow to decline sequentially, primarily due to seasonality. When I look at the total year 2021, I am very pleased with our financial results, particularly with regards to our free cash flow performance, and broader margin rate improvements. Orders for the full year were $21.7 billion, up 5% driven by TPS, digital solutions, and OFE, partially offset by OFS. Total company book-to-bill was 1.1 for the year. Total year revenue of $20.5 billion was down 1%, driven by declines in OFS and OFE, partially offset by increases in TPS and digital solutions. Adjusted operating income of $1.6 billion was up 52% in the year, with total company adjusted operating income margins improving 270 basis points, mainly driven by productivity improvements in TPS and cost-out programs and productivity improvements in OFS. Adjusted EBITDA of $2.7 billion was up 14% in the year. Total company adjusted EBITDA rate improved 170 basis points in 2021. Corporate costs for the year were $429 million. For 2022, we expect corporate expenses to be approximately in line with 2021 levels. For the full year, we generated $1.8 billion of free cash flow. Free cash flow includes $175 million of cash payments related to restructuring and separation activities. Our strong free cash flow performance was driven by higher adjusted EBITDA, lower CapEx, an increase in cash flow generated from working capital, and a significant reduction in cash restructuring and separation charges. Not included in free cash flow are over $200 million of proceeds from asset or investment sales during the year, which include the sale of a small portion of our C3 AI stake and the proceeds we received from the formation of the HMH joint venture with Acastor. As Lorenzo mentioned, We returned almost $1.2 billion to shareholders through dividends and share repurchases and also deployed over $250 million in tuck-in acquisitions and investments in the industrial and new energy sectors. Our free cash flow in 2021 resulted in 68% conversion from adjusted EBITDA. While our free cash flow conversion was positively impacted by the large cash generation from working capital, We believe that Baker Hughes should be able to generate free cash flow conversion at or above 50% on a multi-year through the cycle basis. For 2022, we expect free cash flow conversion from adjusted EBITDA to be around 50% as working capital should be a use of cash due to expected revenue growth. Going forward, we expect our strong balance sheet and free cash flow generation to continue to provide us with attractive flexibility and optionality to return cash to shareholders and invest in tuck-in M&A and technology on an opportunistic basis. Now, I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward. In oilfield services, the team delivered a strong quarter. OFS revenue in the quarter was $2.6 billion, up 6% sequentially. International revenue was up 7% sequentially, led by increases in Sub-Saharan Africa, the North Sea, Russia, and Latin America. North America revenue increased 4% sequentially with similar growth in both the land and offshore markets. Over 55% of OFS revenues in North America were in our production-related businesses of chemicals and artificial lift in the fourth quarter. Operating income in the quarter was $256 million, a 35% increase sequentially and a 210 basis point improvement in margin rate. The improvement in margin was driven by better operating productivity, pricing gains in certain product lines, and favorable product mix. For the total year of 2021, OFS improved operating income margin rate by 320 basis points. As we look ahead to the first quarter, we expect to see continued growth in international and North American activity, offset by typical seasonal softness in the international markets. As a result, we expect our first quarter revenue to decline modestly on a sequential basis, along with a modest decline in margin rates. For the full year 2022, our expectations are largely in line with the view we shared in October on our third quarter earnings call. In the international market, we expect the continuation of a broad-based recovery with growth in the low to mid double digits. In North America, we expect a continuation of the ramp-up in activity levels and believe that the broader market could experience strong growth in the 25% to 30% range. With this type of macro backdrop, we would expect to generate solid double-digit revenue growth in 2022 in OFS. Margin rates should also see solid improvement as some of the recent supply chain and cost escalation headwinds normalize, and we remain focused on achieving 20% EBITDA margin rates by the end of 2022. Moving to oilfield equipment, orders in the quarter were $510 million, down 9% year-over-year. The reduction in orders was driven by SPS as well as the removal of subsea drilling systems from consolidated OFE operations as a result of the merger with MHWRF. These declines were partially offset by growth in services and flexibles. Revenue was $619 million, down 13% year-over-year. The reduction in revenue was driven by the removal of SDS and lower volumes in SPS and SPC projects, partially offset by growth in services. Operating income was $23 million, a 1% improvement year-over-year. This was driven by higher volume in services and cost productivity, partially offset by lower volume in SPS and the removal of SDS. For the first quarter, we expect a double-digit sequential decline in revenue driven primarily by seasonality and lower backlog. We expect operating income to also decline sequentially with margin rates in the low single digits. For the full year 2022, we expect a modest recovery in offshore activity driven by higher oil prices and capital deployment into low-cost basins and projects. We expect OFE revenue to be down double digits primarily driven by the deconsolidation of SDS, but we expect OSE margins to remain in the low to mid-single-digit range driven by business mix and benefits from the recent cost-out actions taken. Next, I will cover Turbo Machinery. The team delivered another strong quarter with solid execution. Orders in the quarter were $3 billion, up 62% year-over-year. Equipment orders were up $1.1 billion year-over-year. As Lorenzo mentioned earlier, orders this quarter were supported by an award to supply power generation for a major LNG project in North America, an order for the Pluto Train 2 LNG project, and an award for a large-scale LNG project in the Eastern Hemisphere. Service orders in the quarter were up 7% year over year, driven by growth in both contractual and transactional services, partially offset by lower volume and upgrades. Revenue for the quarter was $1.8 billion, down 9% versus the prior year. Equipment revenue was down 30% driven by the timing of our equipment backlog conversion. Services revenue was up 16% versus the prior year. Operating income for TPS was $346 million, up 4% year-over-year, driven by favorable mix from a strong volume quarter in services. Operating margin was 19.5%, up 240 basis points year-over-year, driven by higher services mix. For the first quarter, we expect revenue to be roughly flat year-over-year with higher service revenues offsetting a decline in equipment revenue. Based on this revenue outlook, we expect TPS operating income rates to increase slightly on a year-over-year basis. For the full year, we expect TPS orders in 2022 to be roughly the same as 2021, driven by continued strength in LNG awards. We also continue to see a solid pipeline in our onshore-offshore production segment, along with opportunities in pumps, valves, and new energy areas. We now expect solid revenue growth in 2022, driven by growth in services and strong orders growth in 2021. On the margin side, we still expect operating income margin rates to be roughly flat year over year in 2022, depending on the mix between services and equipment. Included in this framework is an expected increase in investments and R&D expenses that relate to our new energy and industrial growth areas. Finally, in digital solutions, orders for the quarter were $605 million, up 14% year-over-year. We saw improvements in orders across most end markets, most notably in industrial, transportation, and oil and gas. Sequentially, orders were up 16% driven by seasonality in oil and gas, power generation, and industrial. Revenue for the quarter was $558 million, flat year-over-year, with higher volumes in Waygate, Reuter Stokes, and PPS, offset by lower volumes in Nexus Controls, Druck, and Bentley Nevada. Sequentially, revenue was up 9% with improvements across most product lines. Operating income for the quarter was $51 million, down 33% year-over-year, driven by headwinds from mix and higher R&D costs. Sequentially, operating income was up 97%, primarily driven by higher volume. For the first quarter, we expect to see modest revenue growth year-over-year, supported by a stronger opening backlog. We expect operating margin rates to be down slightly year-over-year, but to remain in the mid-single digits. For the full year, we expect solid growth in revenue as supply chain constraints begin to ease and orders pick up across digital solutions. With higher volumes, we expect strong improvements in DS margins, which could approach double digits for the total year. Overall, I am very pleased with the execution in the fourth quarter and the total year across all the key financials. We are confident in our strategy and our ability to continue to execute as we head into 2022. With that, I will turn the call back over to Judd.

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

Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered and you wish to move yourself from the queue, please press the pound key. And we also ask that you limit yourself to one question and one follow-up. Our first question comes from James West with Evercore ISI. Hey, good morning, guys.

Hey, James.

Lorenzo, As you continue to make changes in the industrial energy technology part of your business, you're increasingly becoming, and you're thinking about it, and you've talked about this, two different companies, the LFS business and the industrial energy technologies business. You talked a little bit about some new divisions you've formed within energy technology. I'm curious as to how you're thinking about the potential separation of the two companies, what the timeline could look like if you're thinking about accelerating your initial thoughts on timeline.

Yeah, 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 equal entities and tax structures. 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 increases shareholder value. As you've seen from our prepared remarks, the formation of CTS – climate technology solutions, and industrial asset management groups. One of the first steps towards strengthening our focus around our two strategic business areas of OFSE and IET that we mentioned last third quarter. As we said last year, you know, 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 improve help us give the most optionality longer term. So the work we've done only just reinforces our view. Again, the company is strong together at this stage and will continue to align across the two business areas, continue the 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.

Of course, absolutely. And then maybe an unrelated follow-up, Lorenzo, on TPS, you gave some good guidance on kind of expected orders over the next several years. I'm just curious how we should think about 2022, the cadence of the orders, and then what that means for growth in TPS as we get into 2023.

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're 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 off-take agreements. So we also believe the recent policy movement out of Europe, that's encouraging to see what would be FIDs in 2023 maybe potentially be pulled forward into 2022 as well. So there are a couple of large awards this year in 2022, and also some smaller 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 are 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 water intake in 2021.

Okay. Got it.

Thanks, Vincent. Our next question comes from Chase in Louisville with Bank of America.

Hey, good morning, everyone. Hi, Chase. Hi, Chase. So I guess I wanted to kind of dig in a little bit deeper and ask on, you know, you creating two new divisions. You know, you've got the climate technology solutions and the industrial asset management divisions that you will split out now. So I guess first kind of what was the catalyst for doing this and how do you think that splitting this up will impact how you run these businesses and then You know, 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?

Yeah, great, Chase. And, look, we're excited to take this step to formally create CTS, Climate Technology Solutions, and also IAM, Industrial Asset Management, that are both going to report into ROD. And as we've mentioned before, you know, as the energy landscape continues to change, we'll adapt our – organizational structure accordingly. And as we look at what we announced the third quarter last year within the two business areas of oilfield services, equipment, and IT, we really see this as being one of the first steps in enhancing our capabilities to solve for customer requests. And as the market evolves, we think we're going to continue formalizing these groups. This provides leadership accountability in two important growth areas. If you look at climate technology solutions, It's going to bring together four of our growth areas, hydrogen, CCUS, emissions management, and clean integrated power solutions. It's going to continue to build on the product roadmap and commercial offerings, as well as support the sale of products and solutions we have in these areas today across Baker Hughes. And as you look at industrial asset management, this is really going to bring together our digital software and hardware capabilities across Baker Hughes to develop an integrated IAM ecosystem that that enables us to respond to what customers are looking for. So it's going to be an interaction across the various product lines, both for CTS and IAM. And at this stage, we're not looking to change the reporting segments as we continue to develop in these two growth areas.

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

Yeah, Chase, you know, we were very pleased with the performance in 2021 for the new energy orders. You cited the two in the fourth quarter, one for hydrogen and also CO2 with the Santos Cooper Basin. And we see those opportunities continuing. We've given, you know, a 2022 outlook of between 100, 200 million. We think that we're on the higher end of that. And it's continued momentum with our customers on really helping them to achieve their net zero targets. And I think the Econa investment that you mentioned, again, it's another way in which we're expanding our portfolio of capabilities. It's a growth stage company which develops turquoise hydrogen production technology, and it's another solution that can really help our customers. As we look at 2022 and beyond, again, we still see the opportunity to create a new business through the energy transition program. that by 2030 is six to $7 billion. And, uh, we're actively building our portfolio to represent that through the small tuck in technologies. And I see us continuing to do that.

Alrighty. Perfect. Thanks. I'll turn it back over.

Our next question comes from Scott Gruber with city group.

Yes. Good morning.

Hey Scott.

Good morning. Um, 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?

Yeah, Scott, I'd say that you got to look at it in a couple of fronts. I'd say a lot of the supply chain disruptions that we were seeing in the third quarter, primarily from logistics, some shortages more broadly and disruptions in shipments because of COVID have pretty much stabilized. And we've figured out ways to work with that through planning and different shipping routes and increasing some of our lead times and those sorts of things. I'd say that's That's pretty much stabilized. Where you're still continuing to see some disruptions are around chips. That primarily impacts digital solutions a little bit in oil field services. And just to give you perspective, right now, you know, pretty much all of about 90% of, you know, our suppliers are, you know, giving us one-year lead times. And we have all of our 2022 supply. on order there. And to give you perspective, if I go back seven months, that 90% was about 20 to 30%. So that's really what's going on in the industry. So we're planning for it. We're working through it. You know, suppliers give allotments, you know, 60 to, you know, roughly 60 days out. So I'd say the teams are working incredibly well to make sure that has limited impact on our customers. So we're operating in this new normal. The other area around supply chain is really particular to our chemicals business, where you've seen some inflation come through. We had a supplier who had a fire that disrupted our supply, and we've been working with them to get supply from other places. That appears to be stabilizing as well. I'd say we'd anticipate the inflation in that space to be relatively stable here. in the first quarter. And so the chemicals business had about 150 basis point drag on OFS overall in the quarter to give you a little bit of the magnitude of what we were seeing there. But again, I'd say we're operating well in this new normal, and I would expect things to continue to improve as the year progresses. But we've got plans in place to offset disruptions and as much of the inflation as we can.

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 what 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's convergence across those items such that Baker should be really hitting its stride over the course of the year. Uh, so, you know, just putting the separation question to the side, you know, if we just kind of think about kind of where the business sits, you know, versus a couple of years ago when, 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? Um, you know, how to think about, you know, cadence of, of profit, profit growth. Obviously we have the 20% exit target in, in, in oil services, but, um, 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 given the convergence of what seems to be some pretty favorable factors from a tailwind perspective.

Yeah, sure, Scott. And I think, you know, the last four years have been an interesting roller coaster. And I'm really pleased about the way in which we as a team and Baker Hughes has been focused on approaching it and also creating a good setting for 2022 and beyond. You know, we started out with a lot of integrations, restructuring, the separation from GE, then another major restructuring to the COVID downturn. At the same time, We continued laying the groundwork for the energy transition, pivoting to be an energy technology company, making the investment in C3AI, disposing of unprofitable or non-strategic operations, and really continuing our strategy to transform the company across what we said were the three pillars, transform the core, invest for growth, and also the new energy frontiers. And, you know, over the course of time, we continued to actively cut costs, We've invested in growth areas with over six transactions, either small-scale acquisitions or also new energy or industrial investments. We've created a good partnership network across multiple capabilities that are required for the future. And we've always been optimistic on natural gas and the continued role that it plays in the energy transition and LNG. So I'm very excited about the macro environment for Baker Hughes and, more importantly, how we're positioned as a company to capitalize on the LNG cycle, the upstream spending cycle, and longer-term growth for the new energy opportunities. I think, in my tenure at least, it's nice to see macro tailwinds across both of our two large business areas.

And, Scott, the only thing I'd add there to what Lorenzo says is, you know, 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 there. You know, we're able to maintain the dividend, you know, during the latest, you know, turmoil because of COVID. And, you know, 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.

Appreciate the call. Thank you.

Our next question comes from Maroon JRAM with JP Morgan.

Yeah, good morning. I had a couple 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 realize in 2021 and TPS.

Yeah, Iroon, yeah, look, again, very pleased with the strength we're seeing in TPS. And Look, as I said, overall for 2022, expect margin rates to be roughly flattish in TPS depending on the mix of equipment and services, and that does include some of the increased expenditures in R&D really associated with the new energy and industrial areas. So kind of stepping back from that, you know, you can surmise that, you know, very pleased with the order book and the margins that are in the order book. I think this year we've demonstrated that we've been able to deliver strong productivity in an inflationary environment as we're executing on these projects. So I'd say in general, like where the order book is sitting.

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

Yeah, yeah. Look, based on where we're sitting today and the strength of orders that came in um, you know, uh, in, in 2021 and what we're looking at in 2022, as Lorenzo and I mentioned, I would expect orders to be, you know, flattish, um, with, with the potential of being higher in, in 2022 across both equipment and services. Um, I'd say high single digit, uh, you know, range is, is quite reasonable for what we see in, in, in revenue growth, uh, in, in 2022. And, you know, look, um, I think based on the order profile, how the equipment backlog will convert, what we're seeing in, you know, 2022 order pipeline, you know, I would expect revenue growth in 2022 to most likely, sorry, 2023 most likely exceed 2022 growth. So, look, as we've talked about, we've, you know, we've been seeing a strong set of tailwinds in TPS that's continued throughout the year. And where we're sitting today, it looks pretty solid in LNG and, as Lorenzo mentioned, onshore-offshore production. And we're seeing a lot of activity in new energy orders as well that are going to provide more growth in the medium term.

Super helpful. Thanks.

Thanks, Arun.

Our next question comes from David Anderson with Barclays.

Hi, good morning. I was just wondering if you could talk a little bit about the tendering activity going on in the Middle East. Lorenzo, you talked about kind of the beginning of a multi-year growth phase in the Middle East. There's been a bunch of large awards. You guys have been pretty selective. I was wondering if you could just kind of talk about kind of maybe some of the dynamics you're seeing out there, and would you expect to see more large tenders in the coming months and kind of your view on the pricing? Thank you.

Good evening, Ben. From the international outlook for RFS in particular, based on conversations with our customers, we expect a broad-based recovery across all major geographies and overall international growth in the low to mid-teens. And unlike 2021, where the Middle East has 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 if the NOCs in the region look to add 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. Not as much as the Middle East or Latin America, but still solid growth. And then also West Africa, off a low base, starting to see some growth returns. With regards to some of the larger LSDKs that take place, we're continuing to see that scene. We are very judicious in the way in which we tender. We've always said we're going to be disciplined. and we like the outlook internationally as we go forward.

Great. Thank you. On a separate subject, you have a number of partnerships and investments that you've got involved in across the new energy spectrum, which I think all of them are going to fall under this new climate technology solutions group. Just kind of curious where you go from here. A number of these technologies are going to take time to scale. So do you keep expanding your portfolio and keep kind of looking out to other technologies like with the Saccone and hydrogen, or do you get into other parts of clean tech with smaller investments? Or is there a point where there's more sizable M&A opportunities out there? I mean, I'm just kind of curious of kind of what that looks like and kind of the horizon. Is it just too early even to be talking about M&A opportunities in the space?

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 the other industrial segments we serve, customers are asking, help me achieve a net zero roadmap, whether it be the 2030 target or the 2050 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, Electro-Kia investments, You look at also FreeSea. You look at the already in-house child ammonia process. You mentioned also what we've done with Econa. 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 requests. Likewise, on industrial asset management, if you think about the investments we've made, both Seafree, Augury, Arms, we're really developing an ecosystem of capability to respond to customers' requests 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.

Thank you. Our next question comes from Neil Mehta with Goldman Sachs.

Good morning, team. A couple 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 today, And it looks like in the release, GE is selling radibly. Is it fair to say at this pace they'll be out of the market by the middle of this year?

Yeah, Neil, look, we like what we've done so far from a buyback perspective. Since we started in September, you know, we purchased 17.2 million Class A shares and spent about $434 million. So the price per share is just over $24.50 million. We're planning right now to have a consistent buyback program with the ability to accelerate it if the conditions warrant an acceleration. So I'd say if you think about sitting here today, our plan right now is roughly through the first half of this year to keep up the pace you've seen us since we started the program. And that, as you point out, if GE continues to sell at the pace they're selling – that roughly coincides with them selling down the remainder of their stake. And so I'd say, look, at that point in time, you know, we'd reevaluate what the right levels are. But I think, you know, from an overall stepping back and looking at capital allocation, you know, once G is out, I think, you know, buybacks in the range of roughly $200 to $300 million, you know, annually is a good place to be. And look, I think we are uniquely positioned here to continue paying a strong dividend, have a pretty consistent buyback program, and be able to do M&A to tuck in technologies or capabilities that we think are going to enhance our growth capabilities. So very pleased with the free cash flow generation. what we've been doing from a capital allocation point so far in terms of recycling some of the proceeds from dispositions or the investment sales back into growth areas in the business.

And just to clarify, $200 million to $300 million quarterly, right? Yeah, buybacks, yeah. Yeah, yeah. Okay, great. And then on the dividend side, You've been sitting here at this 18 cents a quarter level really since 2017, and the earnings power and the free cash flow generation of the business, again, is the point where you can get more aggressive around the dividend, recognize your dividend 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? tie that in with your comments around the buyback.

Yeah, Neil, just to clarify there, in the $200 million to $300 million, I was speaking more to once we've gone through this pace here in the first half, we'll take a step back and look at buybacks. But I'd say that $200 million to $300 million was more annually after we get through here the first half of the year is how I would how I would think about it. In terms of evaluating the dividend, look, it's something we're always taking a look at and discussing with our board in terms of the best way to return value to shareholders. I think we demonstrated during the downturn that even with all of that volatility, maintaining the dividend was an important priority for us. So we're at a level where we don't want to get out over our skis because as you know, this industry can be quite volatile, and we want to make sure we can be relied upon from an investor base on a consistent basis here. Saying that, though, as we continue to generate strong free cash flow, look at investment opportunities, and the best way to continue to meet our return objectives, it's not out of the cards, but at this moment in time, I'd say we're happy with where it sits today, and we'll continue to update you if our thinking changes.

Thanks, Tim.

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.

Thank you, and thank you to everyone for joining our earnings call today. Before we end the call, I wanted to leave you with some closing thoughts. We're very pleased with the way the team executed during the fourth quarter and navigated the many challenges over the course of 2021. For the full year, we delivered growth in orders and operating margins and delivered record-free cash flow generation, helping us return almost $1.2 billion to shareholders. Looking ahead, we're excited about the multi-year growth opportunities developing across our portfolio and believe that Baker Hughes is well-positioned to capitalize on the cyclical growth in upstream and longer-term structural growth in LNG and new energy. Thank you for taking the time, and I look forward to speaking with you all again soon. Operator, you may now close out the call.

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