Baker Hughes Co - Class A (BKR) — Q2 2018 Earnings Call Transcript

Thank you, Sandra. Good morning everyone and welcome to the Baker Hughes, a GE company second quarter 2018 earnings conference call. Here with me today are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell. Today's presentation and the earnings release that was issued earlier today can be found on our website. As a reminder, during the course of this conference call, we will provide predictions, forecasts, and other forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings 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-GAAP to GAAP measures can be found in our earnings release and on our website. Similar to prior quarters, all results discussed today are on a combined business basis. 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 will give a brief overview of our second quarter results. Then given that we've just celebrated the one year mark as BHGE, I'll provide a summary of what we've accomplished as a combined company over the past 12 months. I'd then share some perspectives on market dynamics and highlight some of our key achievements in the quarter and how our company is delivering results in the current environment. Brian will then review our financial results in more detail before we open the call for questions. In the second quarter, we delivered $6 billion in orders and $5.5 billion in revenues. Both were in line with our expectations. Adjusted operating income in the quarter was $289 million. We are seeing continued improvement in our Oil Field Services and Digital Solutions businesses, while our longer-cycle businesses are positioning for the future. Free cash flow in the quarter was negative $22 million and included $110 million of restructuring and deal-related cash outflows. Earnings per share for the quarter were negative $0.05, and adjusted EPS was $0.10. We remain committed to top-tier shareholder returns. Since closing the deal, we've returned over $2.3 billion to shareholders. Now I'd like to take a few moments to review our progress over the last year as a combined company. Twelve months ago we formed BHGE, a company that spans the oil and gas value chain. For our customers, we leverage leading technology, global scale, and an integrated offering to provide fullstream solutions through the cycle. For our shareholders, we are a differentiated investment opportunity with a clear plan to generate synergies and drive shareholder returns. From the outset, we've had three clear priorities: growing market share, increasing margin rates, and delivering strong free cash flow. Over the past year, we have made progress on each of these priorities. To drive share gains, we have revamped our sales processes and incentives and are equipping our teams with the right tools to win. We are pushing the teams to be closer to our customers and driving accountability up and down the organization to meet our objectives. We continue to invest in leading technology that will enable our customers to achieve better productivity and make us more successful commercially. By strengthening our commercial position in the Middle East and North America, we are gaining momentum with key wins in these two critical regions. We have introduced new and innovative commercial models, resulting in a number of fullstream awards like Twinza, Siccar Point, and W&T Offshore that demonstrate the differentiated value of our portfolio and what it can bring to customers. One of the focus areas for our margin rate improvement priority is to increase profitability in our Oilfield Services segment. Year-over-year OFS margins are up more than 550 basis points. Our focus on synergies is driving significant improvements in this business. Going forward, we expect to increase margin rates as we benefit from an improving market and work through the remainder of our synergy programs. In 2018, BHGE has already delivered more than $330 million of synergies, and we are well on our way to achieving the $700 million target for the year. On cash flow, we are improving our processes in order to drive best-in-class cash conversion. We ended our factoring program and have enhanced working capital controls. Additionally, we have overhauled incentive structures from the leadership to the commercial teams to align employee outcomes with shareholder value. In the first half, we delivered $204 million of free cash flow, which included $210 million of restructuring and deal-related outflows. I'm also proud to say that we have accomplished all that while maintaining a relentless focus on HSE with more than 150 perfect HSE days since closing the deal. I'd like to spend a moment thanking our BHGE employees for their incredible commitment over the past year. This team has put a lot of time, heart, and soul into creating the new Baker Hughes, working tirelessly through the integration and executing on our priorities. I'm very proud of the team's achievements over the last year. We know there is more work to do and we remain committed to continuing this journey together. Now I'd like to spend a moment on the market environment. We continue to see positive momentum for our shorter cycle businesses of OFS and Digital Solutions. North American production is growing as operators grow rig and well counts. The US rig count increased 8% in the quarter, while the Canadian spring break up drove the overall North America rig count down sequentially. Year-to-date, US onshore operators have added more than 120 rigs. In the Permian, despite current uncertainty around takeaway capacity, the rig count grew 9% versus the first quarter, and operators have added 75 rigs year-to-date. Given our portfolio mix, we do not expect the current uncertainty to impact us materially. Internationally, our outlook remains unchanged. We have seen positive signs in a number of geo markets in the second quarter. Our outlook for the long-cycle businesses of OFE and TPS is becoming more constructive. OPEC has announced balance moves implying modest production increases. Overall, we feel that there are encouraging signs that will lead to a more positive environment where customers can move ahead with larger project final investment decisions. The combination of our short and long-cycle businesses positions us well for a balanced growth trajectory that captures near-term upsides but importantly extends well into the future as the next wave of customer projects comes into view and as we mature our fullstream model.

Thanks Lorenzo. I'll begin with the total company results and then move into the segment details. We delivered another strong commercial quarter with orders of $6 billion, up 9% year-over-year. The growth was driven by our upstream businesses. Oilfield Equipment was up 30% and oilfield services was up 13%, partially offset by Turbomachinery down 4% and Digital Solutions down 6%. Quarter-over-quarter orders were up 15% with oilfield equipment up over 100%. Remaining Performance Obligation or RPO was $20.9 billion, down $0.4 billion or 2% sequentially, driven by the effect of foreign exchange. Equipment RPO ended at $5.5 billion, up 1%. Services RPO ended at $15.4 billion, down 3%. Our book-to-bill ratio in the quarter was 1.1. We are very pleased with this result. Both Oilfield Equipment and Turbomachinery had a book-to-bill ratio above one, an important step in rebuilding backlog in our longer cycle businesses. Revenue for the quarter was $5.5 billion, up 3% sequentially, driven by our shorter cycle businesses of oilfield services and digital solutions. Oilfield services were up 8% and digital solutions were up 11%, partially offset by oilfield equipment down 7%, and Turbomachinery down 5%. Year-over-year revenue was up 2%, driven by oilfield services up 14% and digital solutions up 7%, partially offset by oilfield equipment down 9% and Turbomachinery down 13%. Operating income for the quarter was $78 million; adjusted operating income was $289 million, which excludes $211 million of restructuring, impairment, and other charges. Adjusted operating income was up 27% sequentially and up over 100% year-over-year. Our adjusted operating income rate for the quarter was 5.2%, compared to the same quarter last year; our adjusted operating income rate is up over 300 basis points. This is a clear indicator that we are making progress on our goal to expand margin rates specifically in oilfield services. There is more work to do, and we expect to see further improvements in total company margin rates as our longer cycle businesses return to better activity levels and we continue to deliver on our synergy plans. In the second quarter, we delivered $189 million of synergies. The corporate cost was $98 million in the quarter, flat sequentially and down 9% year-over-year. Depreciation and amortization for the quarter was $392 million, as anticipated we finalized the purchase accounting in the second quarter. Next on other non-operating income, we had a credit of $43 million in the quarter. This was primarily driven by a gain on a business sale in our turbomachinery segment which has been excluded from our adjusted earnings per share. Separately this week, we announced that we signed an agreement to sell our natural gas solutions product line. NGS is part of our turbomachinery segment and provides industrial products such as gas meters, chemical injection pumps, and electric actuators. The transaction includes the transfer of approximately 500 employees and four manufacturing sites. We expect the deal to close within the second half of 2018. These dispositions are in line with our strategy to further focus the portfolio on core activities.

Thanks. With that Sondra, let's open the call for questions.

Hey, good morning, guys. So, Lorenzo it looks like you had a busy quarter hopping around the world signing contracts, this order momentum and the order cadence was very impressive, both in the oilfield services and oilfield equipment business. Is this a cadence that can be kept up for the rest of this year? Are we at that inflection point where we can continue to see the orders continue with this type of pace?

James thanks. And as you said, we had a strong 2Q from an orders perspective, and we're pleased with what each of the business units was able to achieve. If you look at OFS, we feel good about the momentum there and the short cycle activity in North America continuing. From the OFE perspective, again that's the strongest quarter we've had since 2015 with the announcement of Gorgon and Shwe wins and we feel very good about the improving visibility to projects in the future with the commodity pricing being range-bound which is helping our customers decide on the larger FIDs. So as we look at in particular some of the gas-oriented projects, we feel good about the positioning we have with the technology in our portfolio both on the OFS side and the OFE side segment. So on the OFE side, we feel good about the long-term prospects there. TPS, again, continue to see constructive on the outlook of LNG and feeling good about the prospects there. I went to World Gas Conference and spoke to many of the customers. You've got LNG demand that continues to increase. So when you look overall at the longer cycle businesses of OFE and also TPS, we feel that projects are going to be coming into play in the second half of 2018 beginning of 2019, and we feel positive with the outlook there and short cycle continuing to be positive.

Thanks, good morning guys. So a little further up to follow up on TPS. Based on your commentary in your prepared remarks on the orders booked on transactional services, do you feel a little bit more optimistic about the revenue outlook for the second half of 2018? I know you're a little light on revenues in Q2, but has your full year revenue and margin outlook changed for TPS?

Yes, Angeline, no change to the full year revenue and margin outlook for TPS. If you break it down a little bit, for the last five quarters, we've had positive orders growth in TPS equipment. It was negative this quarter because of that large FLNG order we booked last year in Mozambique. So that's a really good set up for what we have that's going to convert here in the second half of the year; we've got good visibility into the equipment backlog, and we see better mix coming through that backlog specifically in the fourth quarter. Also from a top-line perspective, if you remember last year each quarter we had negative orders fees and services. For both the first quarter and the second quarter of this year, we’ve had positive orders fee and services, and specifically on transactional services, we were up 15% in the second quarter and 8% for the half combined. So those orders will start to convert in the second half and that's also good for margin rates as we go into the second half. The other thing to think about from a margin perspective is Rod and the team have been executing on the cost out that we talked about earlier in the year, so we expect to see that pick up in the fourth quarter, and then with the normal year-end volume ramp that we've experienced in that business that's also good for cost absorption and volume leverage. So no change to the overall year.

Our outlook on the market is favorable, and we continue to position the company for further growth and profitability. Over the last 12 months, we have made a tremendous amount of progress and we are excited about the future. Our priorities are unchanged. We are focused on executing to deliver on our commitments on share, margins, and cash.