Baker Hughes Co - Class A (BKR) — Q3 2023 Earnings Call Transcript

Thank you, Justin. Good morning everyone, and welcome to the Baker Hughes third quarter 2023 earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Nancy Buese. The earnings release we issued yesterday evening can be found on our website at bakerhughes.com. We will also be using a presentation with our prepared remarks during this webcast, which can also be found on our website. 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 the factors that could cause actual results to differ materially. Reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release. With that I will turn the call over to Lorenzo.

Thank you, Chase. Good morning, everyone, and thanks for joining us. We were pleased with our third quarter results and remain optimistic about the outlook. As you can see on Slide 4, we maintain strong orders performance in both IET and SSPS, with large awards coming from Venture Global in LNG and VAR's Energy in subsea. We also delivered strong operating results at the upper end of our EBITDA guidance range, booked almost $100 million of new energy orders, and generated $592 million of free cash flow. We continue to see positive momentum across our portfolio despite persisting global uncertainty. Turning to the macro on Slide 5, oil prices have rebounded as the combination of resilient oil demand and production cuts have tightened the market. As a result, the oil market is likely to see inventory draws through the rest of 2023. Continued discipline from the world's largest producers, the pace of oil demand growth in the face of economic uncertainty, and geopolitical risk will be important factors to monitor as we look into 2024. While oil prices have strengthened during the second half of this year, upstream development plans are mostly set through year-end; therefore, we remain confident in our 2023 outlook. We still expect international drilling and completion spending to be up year-over-year in the mid-teens and North America up by mid-to-high single digits. As we have said previously, we expect this upstream spending cycle to be more durable and less sensitive to commodity price swings relative to prior cycles. Higher carbon prices do provide positive momentum into operators' development plans for next year. While it is still early, and with the caveat there is growing geopolitical risk, we do see another year of solid upstream spending growth in 2024, led by international and offshore markets. In the offshore market specifically, we were awarded 21 subsea trees during the quarter, which includes a significant equipment order from a sub-Saharan African operator. This award expands Baker Hughes's presence in offshore Angola and consists of 11 deep water horizontal trees, up-tide manifolds, and subsea controls. OFSE also saw continued growth in the North Sea, booking two major multi-year contracts from VAR's Energy, one being a long-term contract for well-intervention and exploration logging services, and the other being an order to deliver seven vertical tree systems for the Balderfield. Turning to LNG, despite a soft economy, the global LNG market remains fundamentally tight. This tightness is evidenced by the recent LNG price spikes that resulted from the current geopolitical situation and strikes in Australia by LNG workers, which temporarily interrupted operations at several LNG facilities. In the third quarter, global LNG demand was up approximately 1.5% year-over-year, and year-to-date, global LNG demand has reached record levels at just over 300 MTPA, despite softer than anticipated gas demand and economic weakness persisting in key LNG-consuming markets like Europe and China. Globally, we expect 2023 LNG demand to approach 410 MTPA, or up about 2% compared to last year. With estimated global nameplate capacity of 490 MTPA this year, effective utilization is expected to be over 90%, which has historically represented a tight market. Looking into 2024, we forecast LNG demand to increase by 3%, resulting in utilization rates remaining at elevated levels, as we forecast just 15 MTPA of nameplate capacity coming online next year. Looking out to 2025 and 2026, we see a similar trend of supply growth being balanced by demand growth, which should keep global LNG markets at relatively strong utilization levels. LNG prices remain healthy, which has helped sustain the strength and off-take contracting, a key driver of LNG FIDs. During the quarter, we received an order to provide additional liquefaction equipment and a power island to Venture Global as part of our upsized master equipment supply agreement of over 100 MTPA. As a reminder, we have provided LNG modules for both of Venture Global's 10 MTPA Calcasieu Pass and 20 MTPA Plaquemines projects. Additionally, we were pleased to be recently awarded by ADNOC Gas, on behalf of ADNOC, two electric liquefaction systems for the 9.6 MTPA Ruiz-LNG project in the United Arab Emirates. The award is expected to be booked in the fourth quarter of 2023 and was announced at this year's ADIPEC conference. The LNG trains will be driven by Baker's 75-megawatt brush electric motor technology and will feature our state-of-the-art compressor technology, making Ruiz-LNG one of the first all-electric LNG projects in the Middle East. We are pleased to see continued traction from Brush Power Generation, which we acquired in 2022 to enhance our industrial electric machinery portfolio and to support our strategic commitment to provide lower carbon solutions. Since then, we have secured several additional orders for our electric machinery portfolio, including a contract from WISN in the first quarter for four ELNG compressor trains in Sub-Saharan Africa. These recent successes of Brush further validate our strategy of investing in bolt-on M&A opportunities that can complement the current IET and OFSE portfolios, as well as our efforts in new energy. Turning to Slide 6, through the third quarter, 53 MTPA of capacity has taken FID this year. For 2023, we expect to book LNG orders totaling approximately 80 MTPA, given we sometimes receive larger LNG orders before projects have taken FID. The LNG project pipeline remains strong, both in the US and internationally, therefore we expect to see similar year-over-year levels of FID activity in 2024 and could see between 30 to 60 MTPA of LNG FIDs in both 2025 and 2026. Based on existing capacity, projects under construction, and future FIDs in the pipeline, we have line-of-sight for global LNG-installed capacity to reach 800 MTPA by the end of 2030. This represents an almost 70% increase in nameplate capacity from 2022, which provides significant near-term growth for gas tech equipment and further long-term structural growth for gas tech services. Importantly, since 2017, there have been 204 MTPAs of LNG FIDs, and Baker Hughes has been selected for 201 MTPA of this new capacity. These projects are scheduled to come online over the coming years, representing almost a 50% increase in our global liquefaction installed base between now and 2028. Turning to Slide 7, we have long held the view that natural gas is an abundant, low-carbon, and versatile energy source. It will play a critical role as both a transition and destination fuel. Accordingly, natural gas will be fundamental in satisfying the world's energy needs for many decades to come, while also improving air quality and reducing global emissions, displacing coal in the broader energy mix. We forecast that primary energy demand will continue to grow beyond 2040 due to rising population and increasing consumption per capita in the developing world. However, it is essential to meet this growing demand with affordable and reliable energy to ensure a strong global economy. Today's mix of primary energy demand is still heavily reliant upon coal, which accounted for 24% of global energy demand in 2022. In many Asian countries, like China and India, coal is a much higher share of the energy mix. This is the opportunity for cleaner-burning natural gas to be paired with renewables and/or CCUS as a baseload energy source to displace coal in the energy mix over the coming decades. That being said, all energy sources will be needed to meet increasing energy demand, although with an increasing focus on minimizing global emissions. Importantly, many of our customers' long-term spending plans are beginning to reflect this evolving energy mix. This presents significant customer synergies across our IET and OFSE portfolios, providing a unique opportunity to be an integrated solutions provider as the energy transition takes shape. Turning to Slide 8, as we take energy forward, making it safer, cleaner, and more efficient for people and the planet, we are focused on our strategic framework of transforming our core to strengthen our margin and returns profile while also investing for growth and positioning for new frontiers in the energy transition. Through these key pillars, our company is building and executing a plan to deliver sustainable value for our shareholders and stakeholders. As our strategy and the energy markets have evolved, we have been increasingly focused on the execution of our strategy across three time horizons. Across the first time horizon, which spans through 2025, we are focused on driving enhanced margin accretion through organizational simplification and expanded efficiencies, operational discipline, and optimization of asset and people productivity. Importantly, these actions are well within our control. During this period, Baker Hughes remains poised to benefit from the macro tailwinds that we see across our two business segments. Specifically, we remain well-positioned to benefit from the continued strength in the natural gas and LNG growth cycle, as well as multi-year increases in upstream spending driven by international and offshore markets. We also remain focused on navigating short-term supply constraints, specifically in the aerospace sector, and broader macroeconomic and political uncertainty. Throughout horizon one, we will be focused on transforming our business and simplifying the way we work. Additionally, we remain committed to further developing and commercializing our new energy portfolio, while also evolving our digital offerings. All of this will underpin our goals to deliver 20% EBITDA margins in OFSE by 2025 and in IET by 2026. During the second horizon, which extends out to 2027, the focus shifts towards investing for the next phase of growth, where our strategy is to solidify our presence in the new energy and industrial sectors while leveraging gas tech services growth across our expanding installed equipment base. At the same time, we see upstream and natural gas spending continuing to grow at a lower rate. We also expect an increasing customer focus on efficiency gains and emissions reductions, offering meaningful opportunities for our IET and OFSE digital businesses, as we further deploy our Lucifer, Coordinate, and flare reduction solutions during this horizon. To illustrate, the IEA estimates that improving efficiencies by just 10% across oil and gas operations would save almost half a gigaton of CO2 per year, which is equivalent to achieving 5% of the Paris Agreement goals. Also in horizon two, we expect to exceed our ROIC targets of 15% and 20% in OFSE and IET, respectively, and drive further margin expansions across both business segments above our stated 20% EBITDA margin targets. Lastly, Horizon three looks to 2030 and beyond, where our execution over the coming years will position Baker Hughes to compete across many new industrial and energy frontiers, including CCUS, hydrogen, clean power, and geothermal. By this time, we expect decarbonization solutions to be a fundamental component, and in most cases, a prerequisite for energy projects, regardless of the end market. The need for smarter, more efficient energy solutions and emissions management will have firmly extended into the industrial sector. Considering this backdrop, we expect our new energy orders to reach $6 billion to $7 billion in 2030 and across a much broader customer base. Before turning over to Nancy, I'd like to speak to the positive momentum that Baker Hughes has built during 2023, and where we have experienced strengthening tailwinds in both OFSE and IET. International and offshore markets are set to drive the strongest year of OFSE growth in more than five years. While continued robust LNG activity is set to push IET orders to yet another record year in 2023, and most importantly, our improved operational execution and cost structure, along with our continued commitment to our customers, are helping us to deliver on our commitments to our shareholders. With that, I'll turn the call over to Nancy.

Lorenzo, I will begin on Slide 10 with an overview of our consolidated results and then briefly talk to segment details before outlining our fourth quarter and full-year 2023 outlook. We were very pleased with our third quarter results, as both segments continued to execute well and benefit from market tailwinds. Adjusted EBITDA of $983 million came in at the high end of our guidance range, mostly due to better than expected IET performance driven by strong backlog conversion in gas tech equipment and continued improving execution in industrial tech. GAAP operating income was $714 million during the quarter. Adjusted operating income was $716 million. GAAP earnings per share were $0.51. Excluding adjusting items, earnings per share were $0.42. Orders for both business segments maintained strong momentum, highlighted by another record quarter for IET and the third consecutive quarter of at least $1 billion of subsea and surface pressure systems orders. The first time this has happened since 2014. New energy orders totaled almost $100 million this quarter, which brings year-to-date orders to just under $540 million and puts us on track to hit our $600 million to $700 million target range. Due to the sustained strength in orders, IET RPO is at record levels and SSPS RPO is now at the highest level since 2015, providing strong volume and earnings visibility over the coming years. Free cash flow was strong again this quarter, coming in at $592 million and resulting in free cash flow conversion from adjusted EBITDA of 60%. We continue to target free cash flow conversion of 45% to 50% this year. Turning to Slide 11, our balance sheet remains strong as we ended the third quarter with cash of $3.2 billion and a net debt to trailing 12-month adjusted EBITDA ratio of one time. Turning to capital allocation on Slide 12, we continue to return excess free cash flow to shareholders. We recently increased our dividend by a penny to $0.20 per quarter. We remain committed to growing our dividend over time, with growth ultimately tied to the structural earnings power and growth of the company. Additionally, we repurchased $119 million of stock during the quarter, which brings total repurchases at the end of the third quarter to $219 million. Including our dividend and buybacks through the end of the third quarter, we have returned $805 million to shareholders. We remain committed to returning 60% to 80% of free cash flow to investors. Now I will walk you through the business segment results in more detail and give you our thoughts on our forward outlook. Starting with oil-filled services and equipment on Slide 13. The segment performed above expectations in the quarter, driven by better than expected revenue and margin in SSPS, and a resilient oil-filled services performance in North America. SSPS orders of $1 billion maintained strong momentum as offshore project awards continued at robust levels. Accordingly, SSPS booked to bill of 1.3 times was above one for the seventh consecutive quarter and SSPS RPO now sits at $3.6 billion, which is up 52% versus the same quarter last year. OFSE revenue in the quarter was $4 billion, up 2% sequentially and up 16% year-over-year. Excluding SSPS, international revenue was up 1% sequentially, as declines in Latin America offset increases in other regions. Excluding SSPS, North America revenue was up 4% sequentially, with strength in North America offshore, partially offset by North America land revenues down 2%, which outperformed the US land rig count that fell 10%. OFSE EBITDA in the quarter was $670 million, up 5% sequentially and up 27% year-over-year, while also slightly above our guidance midpoint of $665 million. OFSE EBITDA margin rate was 17%, with margins increasing 60 basis points sequentially and 140 basis points year-over-year as SSPS margins outperformed expectations. Now turning to industrial and energy technology on Slide 14, this segment also performed above expectations again during the quarter. The stronger performance was primarily due to higher volume in gas tech equipment and industrial tech, slightly offset by lower than expected volume in gas tech services due to delivery timing for upgrades and supply chain challenges for aero-derivative components. IET also had record orders this quarter, driven by robust LNG awards. IET orders were $4.3 billion, up 32% sequentially and up 84% on a year-over-year basis, and included almost $2.5 billion of LNG equipment orders. Major awards during the quarter included liquefaction equipment for an FLNG project in the Eastern Hemisphere and a major award to provide additional liquefaction equipment in a power island to Venture Global. IET RPO ended the quarter at $28.8 billion, up 5% sequentially. Gas Tech equipment RPO was $12.8 billion, and Gas Tech services RPO was $13.8 billion. Gas Tech equipment booked to bill was 2.2 times, the ninth consecutive quarter above one. Turning to Slide 15, IET revenue for the quarter was $2.7 billion, up 37% versus the prior year, led by gas tech equipment growth that was up over 100% year-over-year, driven by execution and project backlog. IET EBITDA was $403 million, up 23% year-over-year, and coming in above our guidance midpoint of $385 million. EBITDA margin was 15%, down 160 basis points year-over-year, driven by higher equipment mix and higher R&D spend related to our new energy investments. This increased R&D spending balances our broader margin improvement objectives with the demands to drive technology growth in our climate technology solutions portfolio. In September, we announced a realignment of our IET product lines across five key value vectors, simplifying our organizational structure to focus operations and decision-making and drive margin and returns improvement. Through this realignment, which was effective on October 1st and shown on Slide 16, we are also providing increased transparency for our CTS business, a key growth engine for Baker Hughes, as well as integrating our asset performance management capabilities under industrial solutions.

Before turning to our outlook, I'd like to quickly speak to a part of our growth story that we think is a key differentiator for Baker Hughes. As highlighted on Slide 17, is the visibility we have around structural IET growth into the latter part of this decade. We believe this growth will drive meaningful free cash flow expansion for the company, which we can attribute to four areas. The first is LNG equipment orders. Based on our expectation, we will book almost $9 billion of LNG equipment orders across 2022 and 2023. As a result, our Gas Tech equipment RPO is at a record level, giving IET strong equipment backlog coverage over the next few years. The second is Gas Tech services. As Lorenzo mentioned, we see the global LNG installed base growing by 70% from today through the end of this decade. Also, the 172 MTPA of capacity additions during the 2016 to 2022 timeframe will begin to earn increasing service revenue over the medium term. Given that Baker Hughes equipment is installed on the majority of these projects, we have significant earnings and return visibility through 2030 and beyond from our Gas Tech services franchise. As LNG accounts for almost 80% of our $13.8 billion RPO and Gas Tech services. The third growth area that we see is across industrial solutions and industrial products. We believe that these businesses can be so much more than the collection of technologies that they are today. For industrial solutions, the focus of this platform is to provide an integrated suite of solutions supporting industrial asset performance management and process optimization. There is a significant opportunity to advance solutions that can provide recurring revenue streams at attractive margin rates. The starting point for this is our coordinate platform, which we launched in January this year. In industrial products, we've been focusing on driving further simplification and unifying the industrial hardware capabilities that we have in our portfolio today. As we focus on industry verticals that allow for stronger growth opportunities and improve profitability into the future. The fourth growth area is new energy. We remain excited about new energy opportunities where we will focus on differentiated technologies that add value for our customers in CCUS, hydrogen, clean power, geothermal, and emissions management. Accordingly, we see a path to growing new energy orders from our $600 to $700 million target this year towards $6 to $7 billion in 2030. Next, I'd like to update you on our outlook for the two business segments, which is detailed on Slide 18. Overall, we remain optimistic about the outlook for both OFSE and IET, given strong growth tailwinds across each business, as well as continued operational enhancements to drive backlog execution and margin improvement. For Baker Hughes, we expect fourth quarter revenue to be between $6.7 and $7.1 billion and EBITDA between $1.05 and $1.11 billion, with an EBITDA midpoint of $1.08 billion. For the full year, we are increasing and narrowing our guidance ranges as we flow through third quarter results and fourth quarter guidance. Accordingly, we now expect 2023 Baker Hughes revenue to be between $25.4 and $25.8 billion and EBITDA between $3.7 billion and $3.8 billion.

For IET, we expect fourth quarter results to reflect sequential and year-over-year revenue growth for both Gas Tech and industrial tech. Therefore, we expect fourth quarter IET revenue between $2.8 billion and $3.1 billion and EBITDA between $430 million and $490 million. The major factors driving this range will be the pace of backlog conversion in gas tech equipment and the impact of any aero-derivative supply chain tightness in gas tech. Our full-year outlook for IET remains constructive for orders, revenue, and EBITDA. For orders, we've increased our 2023 expectations from $11.5 to $12.5 billion to a new range of $14 to $14.5 billion. Flowing through the third quarter upside and fourth quarter guidance, we now expect full-year IET revenue between $10.05 billion and $10.35 billion and EBITDA between $1.5 billion and $1.55 billion. For OFSE, we expect fourth quarter results to reflect the typical year-end growth in international revenue and in decline in North America. We therefore expect fourth quarter OFSE revenue between $3.85 billion and $4.05 billion and EBITDA between $675 million and $735 million. Factors driving this range include the pacing of some international projects, the level of year-end product sales, SSPS backlog conversion, and the pace of our cost-out initiatives. After including the third quarter results and fourth quarter guidance, we now forecast full-year OFSE revenue between $15.3 billion and $15.5 billion and EBITDA between $2.55 and $2.65 billion.

We will provide detailed 2024 guidance alongside our fourth quarter results in January. Looking out to next year, we remain optimistic for continued growth across both OFSE and IET, as well as further operational enhancements to drive increasing margins and returns. We also remain focused on navigating aero-derivative supply chain challenges and broader macroeconomic and geopolitical uncertainty as we head into 2024. More broadly, our transformation journey continues, and we're pleased with the progress we're making in identifying areas to drive efficiencies, structurally removing costs, and modernizing how the business operates. We are continuing to see the cost-out performance come through our operating results, and we see further opportunities to enhance our operating performance through continued business transformation efforts. In summary, we remain relentlessly focused on achieving the targets we've set for 20% EBITDA margins in OFSE in 2025 and IET in 2026, and we remain committed to delivering our ROIC targets at 15% for OFSE and 20% for IET. Importantly, we are continuing to take actions today to help us achieve and exceed these targets. Overall, we remain excited about the future of Baker Hughes. I'll turn the call back over to Chase.

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

Yes, good morning team. Lorenzo, I wanted to start with the IET order outlook and guidance. Since the beginning of the year, Baker has raised its IET order guidance by more than $3 billion. So I was wondering if you could talk about some of the drivers of the higher inbound this year and just thoughts on 2024. Because one of the questions is, are you taking some of the 2024 orders and accelerating the timing of that into this year?

Yes, definitely Arun, and good to hear from you. If you go back to the beginning of the year, we always said that we saw a robust pipeline of opportunities for IET. As we've gone forward through the year, that has continued to get stronger, and more of the pipeline has been converting. It's given us the opportunity to be able to take up our guidance on the IET orders. Now it stands at a range of $14 billion to $14.5 billion. It really plays out in three areas as you look at the activity level. The first is LNG. You've seen that LNG continues to be robust, and there have been a number of projects that have moved forward as you saw this quarter with the uptake of the Venture Global Agreement, also with the ADNOC gas and the Ruiz facility. So continuing to see good uptake on the LNG side. The second, we continue to see strength in onshore offshore production. That's trending better than expected. We also expect to see a good fourth quarter with the larger FPSO orders. The last area is new energy; we initially forecast to be at $400 million. We've taken it up to $600 to $700 million; you can see that by the end of the third quarter, we're already at $540 million. We still expect to see orders coming through in the fourth quarter, so I feel good about that $600 to $700 million and remain confident about reaching $6 to $7 billion by the end of the decade. There's strong overall momentum in those three areas from an IET perspective. Looking out to 2024, we see a pipeline of good project opportunities, and we'll update you further in January. There are continued strengths in several opportunities.

Great. Just to follow up, Lorenzo, on slide 6, you give us a full update on LNG. But I was wondering if you could talk a little about the pipeline of opportunities that you see over the next 12 to 18 months, Brownfield versus Greenfield, U.S. Gulf Coast versus international, modular versus stick build. What are you seeing in terms of the emerging pipeline for Baker?

Yes, it's definitely all of the above. As you think about LNG and the role that natural gas is going to play as a transition and destination fuel, we see that we need an installed capacity of LNG by 2030 of 800 MTPA. We've mentioned that before. In 2023, we've had a good set of FIDs, with 53 MTPA taking FID. We've obviously booked 80 MTPA because we do get some orders prior to projects reaching FID, and we see that continuing as we go into 2024, and also feel good about 65 MTPA of FIDs in 2024. This trend will continue in 2025 and 2026 at the rate we previously stated, between 30 to 60 MTPA. When you look at both greenfield and brownfield, and internationally versus the U.S., we see activity across the board. The U.S. has a unique advantage with its natural gas reserves and associated gas, along with many projects including Venture Global and others in Mexico. There are also exciting prospects in Qatar and ADNOC projects. We're starting to see stronger activity emerge in Africa as well. We remain positive, and at the end of the day, it's all tied to the 800 MTPA that we need to have by 2030 to satisfy the world's growing energy demands.

Great. Thanks, Lorenzo.

Thanks. Operator, Justin, next question please. Operator, can we go to the next question, please?

Yes, hey, good morning. Hi, Lorenzo.

Hi there.

Hi.

Sorry about the technical issues.

All good. Your IET results came in at the top end of the 3Q guide, even with some of the concerns about air derivative tightness that could impact IET. I know you've incorporated this into your guidance and managed the process pretty well. But could you help us understand and refresh us on what's going on with the air derivative supply chain and how you see this unfolding over the next 12 months, and maybe what the upside could be once this improves?

Yes, Luke, I'll kick off here and then let Nancy chime in. I think we've mentioned at the start that we continue to navigate a challenging aerospace supply chain. You will have heard from others that also reported results regarding challenges across the aerospace industry. We factored this into our guidance at the beginning of the year and are continuing to monitor and work closely with the supply chain to mitigate any consequences. I am pleased with our progress. It's important to note that with respect to our rotating equipment, about one-third of the LNG equipment is aero-derivative related; the other two-thirds consists of heavy-duty gas turbines and electric motors, and we continue to see robust supply chain availability for those. We are working through planning and keeping a close eye on supply chain dynamics.

Yes, as I said previously, supply chain challenges are certainly considered in our 2023 guidance and will also be included in 2024. We're working carefully with vendors in terms of timing improvements. As we gain better visibility toward when these improvements will occur, we'll incorporate them into the guidance. However, they are certainly factored in.

Okay. Perfect. Thank you, guys.

Thanks. Good morning, Lorenzo and Nancy.

Hi, James.

So hi, Lorenzo and Nancy. I wanted to touch on the horizon strategy. It's something we talked about in September, but you've now laid out a much more detailed view of the three different horizons you're thinking about. I was curious how this informs the overall strategy for Baker, how it has informed, and how it is informing strategy going forward.

Definitely. We've been working on our strategy and monitoring how the energy markets have evolved. This has given rise to the three time horizons we've discussed. We've been planning this for some time, and we are now starting to reveal it externally. The first horizon, which goes through 2025, focuses on enhancing margin accretion through simplification, efficiencies, operational discipline, and optimizing our assets and people productivity, all variables within our control as we create an energy technology company. This will help us benefit from the macro tailwinds we see across our two business segments relative to the LNG growth cycle and a multi-year upswing in upstream spending. The second horizon extends to 2027, shifting the focus to the next phase of growth in new energy and industrial sectors. We'll benefit from gas tech service growth that will emerge through our expanding installed base and opportunities to provide efficiency through our digital applications. As we approach 2030, we see initial signs of new energy orders reaching between $6 billion and $7 billion.

Okay, right. Makes sense. And then maybe just a quick follow-up, Lorenzo, on the new energy side. Obviously, orders this year have been stronger than last year. You're already likely to exceed your target for this year. With the DOE recently announcing the hydrogen hubs program, I'm curious about what you're seeing in new energy, broadly, but maybe more focused on hydrogen specifically, given the activity in that sector.

Definitely, James. We're pleased with the new energy orders we are securing, and as noted, we've increased our target for 2023. We expect to reach between $600 and $700 million. An important note is that we are already producing equipment from our existing technology stack. We're continuing to invest in new areas of the energy transition. Policies are emerging and evolving quickly. The recent DOE awarding of $7 billion in grants for seven hydrogen hubs in the United States has created faster-than-anticipated opportunities. We are confident in our differentiation in hydrogen, as we have a long history in this area, and we've been able to provide technology related to hydrogen projects.

Got it. Thanks, Lorenzo.

Thanks, James.

Good morning, Lorenzo.

Hi, Neil.

Good morning. I want to ask about the 20% EBITDA margin target for IET. Consensus currently stands at about 16.2% for next year. I realize you restructured the business, but just looking at going from 16% in '24 to 20% in two years or so, it's a big jump. Can you provide some color on the drivers of margin expansion in the segment and your overall confidence level in achieving the 20% by '26?

Sure. It's a great question, given how strong the pipeline and orders have been since we published our margin targets last September. The biggest driver is mix. Service has a significantly higher margin than equipment. We will see improvements in the industrial tech margins, and we believe that ongoing normalization in the supply chain will help. While the gas tech services ramp up is slower due to ongoing aerospace supply chain issues, we anticipate improvements in 2024. We're also absorbing additional R&D costs due to investments in climate tech. Given the strong top-line growth, we believe we can reach the targeted 20% margin.

Appreciate that. As we think about going from '24 to '25 to '26, is it a linear expansion, or because of the mixed headwind with equipment growth, is the margin expansion a bit more back-weighted with more expansion likely from '25 to '26?

You will see a gradual ramp-up, but it may be a little lumpy. The timing of equipment orders and service revenue will affect where the gains occur, but we will provide you with more guidance as we go along.

Great. Thanks, Nancy. I'm just going to stick with you if we could, please. I want to ask you about the backlog conversion on the Gas Tech equipment side. Last quarter, there was a little bit slower. It seems like you righted it this quarter. If I look generally compared to last year, conversion looks like it will be something around 45% compared to 2022 year-end backlog. How should we think about this trending over the next year or two? Are you doing things internally to speed up backlog conversion? But I also think some of the mix of orders could affect conversion rates?

Dave, I'll take this one. As you can imagine, with the intake of orders we’ve had, we've been actively working on lean processes and continuous improvements in our manufacturing facilities. We feel good about our ability to handle additional orders and ensure timely conversions. You won't see dramatic changes because large LNG projects typically take 18 to 24 months to convert from intake to installation. However, we are focused on fulfilling customer commitments.

Great. Thank you. You mentioned earlier about the longer duration of the energy transition and complexities surrounding it. We've seen Shell announce a pullback on some of their CCS initiatives and BP pivoting away as well. Do you think that LNG and upstream businesses now have a longer runway than initially thought? Can you elaborate on some of those complexities?

We definitely see that the transition is complicated. There was an eagerness for immediate results, but there are energy supply demands, particularly for the growing populations in developing countries. We're still seeing a clear continuation of the use of oil and gas and that trend toward cleaner energy as CCS and emissions management technologies are adopted. The reality is taking longer than expected but does not change the direction toward a low-carbon economy. As a unique position in our combined offerings can benefit from both the transitional complexities and growing demands across all sectors.

Understood. Thank you.

Hey, good morning.

Hi, Kurt.

Hey Lorenzo, I wanted to follow up on the early questions around the new energy business and outline growth opportunities on a number of different occasions. You referenced earlier a 10X growth profile over the next seven years. Are you confident in your internal capabilities to deliver on that? Will substantial external investment be required to execute on the $6 to $7 billion target?

Yes, Kurt. We have indeed been investing. As you've seen, associated R&D expenditures have increased this year. We are preparing for reaching that $6 to $7 billion target and feel comfortable. Our equipment readiness spans beyond compression to the turbo expander space. We're also linked with net power, which we see as a big growth opportunity in clean power generation, hydrogen, and applying our compression technologies. We've already built a robust base and have various projects lined up, strengthened by policies emerging in the U.S., Europe, and the Middle East.

Okay. Appreciate the color, and maybe a follow-up, Nancy, on capital allocation. How do you gauge the preference between dividends and share buybacks?

For now, I would say we are committed to returning 60% to 80% of returns back to shareholders. The dividend will adjust as the business grows, and we aim to increase it over time. Share buybacks will be opportunistic and will function as a complement to the dividends. Our goal is to establish stability in the business and transition away from cyclical swings towards secular growth, allowing dividends to grow consistently.

Hi. Thank you. You mentioned an expectation for solid upstream spending growth next year. There's some investor concern that mid-teens or even double digits might be a stretch for international spending. Could you comment on the outlook and whether you think mid-teens is achievable?

Again, if you look at this year, we've said mid-teens for international spending. As we look ahead, we believe it will be double digits. Offshore activity remains robust. Latin America, especially Brazil and Guyana, is seeing continued upticks as is West Africa. Anticipated spending in the Middle East on the D&C side is also promising. We still feel good about seeing double-digit growth in the upcoming year.

Okay, that's great. Thanks, Lorenzo. The other question I had was on LNG services. You laid out the growing installed base and what that could mean for the service opportunities. Can you elaborate on how much of Gas Tech services today comes from LNG service?

Yes, as you review our service business, LNG accounts for approximately 35% of service-driven revenues. We have service transactions across all of our onshore and offshore applications, in addition to our installed equipment in other sectors such as downstream and pipeline sectors. But for LNG, it's notably about 35%.

Okay, great. Thank you very much. I'll turn it back.