Baker Hughes Co - Class A (BKR) — Q2 2025 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to Baker Hughes Second quarter earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Ahmed Moghal. 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 be found on our investor website. As a reminder, we will provide forward-looking statements during this conference call. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and website for the factors that could cause actual results to differ materially. Reconciliation of adjusted EBITDA and certain GAAP to non-GAAP measures can be found in our earnings release. With that, I'll turn the call over to Lorenzo.

Thank you, Chase. Good morning, everyone, and thanks for joining us. First, I'd like to provide a quick outline for today's call. I will begin by discussing our strong second quarter results and recently announced transactions. I will then highlight key awards and technology developments announced during the quarter and provide some thoughts on the macro backdrop. After this, I will share an update on the exciting progress we are making in the distributed power space. We have a particular focus on data centers. Ahmed will then cover our financial performance, followed by an overview of our portfolio optimization strategy and our outlook. Finally, I'll provide a quick recap before opening the line for questions. Let's now turn to the key highlights on Slide 4. We delivered another strong set of results, maintaining the trend of meeting or exceeding the midpoint of our EBITDA guidance for the 10th consecutive quarter. Adjusted EBITDA rose to $1.21 billion reflecting a 170 basis point year-over-year improvement in margins. This was driven by the impact of structural cost actions and stronger operational execution. We continue to make clear progress in scaling our business system, a standardized platform that enables consistent strategy execution and delivers differentiated outcomes. These efforts are driving structural margin improvement, strengthening the resilience of our earnings and laying the foundation for long-term value creation. This performance reflects strong execution across both segments amid ongoing macro and industry-related headwinds. Oilfield Services & Equipment delivered 90 basis points of sequential margin improvement driven by stronger International and Subsea & Surface Pressure Systems revenue as well as meaningful progress on cost-out initiatives. In Industrial & Energy Technology, margins expanded by 190 basis points year-over-year, supported by the continued deployment of our business system, which is enhancing operational discipline and execution. IET orders continued to demonstrate strong momentum, totaling $3.5 billion in the quarter. Notably, this was achieved with no material LNG equipment orders, once again highlighting the strength and versatility of our technology portfolio as we further expand across energy and industrial end markets. This diversification is reflected in the growing demand for our data center solutions. During the quarter, we booked more than $550 million in power generation equipment orders for data centers. In addition, we experienced another strong quarter for gas tech services, upgrades and transactional bookings as customers focus on improving performance and extending the life of equipment. IET backlog grew 3% sequentially, reaching a new record of $31.3 billion, reinforcing the durability of our growth outlook. Following a strong first half and a positive outlook for the second half awards, we are confident in achieving IET's full year order guidance range of $12.5 billion to $14.5 billion. Looking beyond this year, we see continued momentum for power solutions, sustained growth in new energy and a robust pipeline of LNG and gas infrastructure opportunities, all of which support a constructive outlook for orders. During the quarter, we generated free cash flow of $239 million and returned a total of $423 million to shareholders, including $196 million in share repurchases. Turning to Slide 5. We also announced 3 strategic transactions in the quarter, to advance our portfolio optimization strategy, reinforcing efforts to enhance the durability of earnings and cash flow while creating long-term value for shareholders. First, regarding divestitures. We entered into an agreement to establish a joint venture with Cactus, contributing surface pressure control in exchange for approximately $345 million, while maintaining a minority ownership stake. Additionally, we announced the sale of Precision Sensors & Instrumentation to Crane Company for approximately $1.15 billion. These proceeds will provide the company with increased flexibility to reinvest in higher-growth, higher-return opportunities, supporting further margin expansion and enhancing overall returns. Next, from a strategic acquisition perspective, we signed an agreement to purchase Continental Disc Corporation, a leading provider of pressure management solutions for approximately $540 million. CDC represents a high-quality bolt-on acquisition within IET, adding a highly complementary offering to our existing valves portfolio that expands our presence in the pressure and flow control market and brings margin-accretive life cycle-based revenue. As we advance our portfolio optimization initiatives, we remain focused on executing a strategic and disciplined capital allocation approach to maximize long-term shareholder value. Overall, we made strong progress on multiple fronts during the quarter, and each of these actions support our commitment to profitable growth, continuous margin expansion and improving quality of earnings. Turning to Slide 6. We continue to build strong commercial momentum across new and existing markets with growing synergy opportunities across our portfolio that enhance how we deliver value to customers while expanding our market presence. During the quarter, IET secured 2 significant data center awards. First, we received our largest data center award to date for 30 NovaLT gas turbines. These units will deliver almost 500 megawatts of power to data centers in the United States and operate on a blend of natural gas and hydrogen, supporting both reliability and lower carbon operations. Second, we received an order for 16 NovaLT gas turbines representing up to 270 megawatts of power for deployment of Frontier's data centers in Wyoming and Texas. This award is the first phase of the previously announced enterprise-wide agreement with Frontier to advance power solutions and large-scale carbon capture and storage. These awards reflect the accelerating long-term demand for distributed, lower carbon power in support of digital infrastructure. This trend is also unlocking greater commercial synergies across our power and decarbonization portfolios, reinforcing the potential for sustained data center and new energy growth. In total, IET booked 69 NovaLT units this quarter with more than 70% allocated to data center projects. Year-to-date, we have secured almost 1.2 gigawatts of NovaLT capacity for data center applications, highlighting our expanding role in enabling the growth of digital infrastructure through flexible, lower carbon power solutions. We are also expanding our pipeline of future digital infrastructure opportunities. At the recent Saudi-U.S. Investment Forum, we signed an MoU with DataVolt for data center projects globally, which includes plans to power data centers in the Kingdom with our NovaLT turbines using hydrogen from NEOM. Beyond data centers, we continue to see strong demand in gas infrastructure. In Saudi Arabia, we secured an award for 4 NovaLT turbines to support Aramco's Master Gas System III pipeline. Also, in Climate Technology Solutions, we signed a framework agreement with Energinet to supply 16 reciprocating compressor packages, supporting an increase in biogas production while driving emissions reduction for gas infrastructure in Denmark. In GTS, we secured more than $350 million in contractual service agreements during the quarter, strengthening our backlog of recurring revenue. Key awards included a new maintenance agreement with Petrobel to improve uptime and reliability of critical turbomachinery equipment and a renewal of a multiyear service contract with Oman LNG, featuring remote monitoring and diagnostic services delivered through our iCenter. In New Energy, we continue to build momentum internationally, where we have historically seen the greatest concentration of orders. During the quarter, CTS secured one of the largest CCS orders to date, providing compression technology for a large CCS hub in the Middle East. In geothermal, we successfully drilled Lower Saxony's first productive deep exploration well in Germany. This project highlights the strength of our integrated well construction and production solutions capabilities supported by advanced digital solutions that optimize performance. In OFSE, we maintained strong momentum in production and mature asset solutions, booking several meaningful awards. Notably, we signed a significant master services agreement with Aramco for installation and maintenance of electric submersible pumps across the Kingdom. We also received 2 large multiyear contracts to help optimize production, throughput and reliability for 2 major operators in offshore Angola and the U.S. Gulf Coast, leveraging our chemicals, artificial lift and digital solutions. In Norway, Equinor awarded us a contract to industrialize offshore plug and abandonment operations in the Oseberg East field, which followed the announcement of a new multiyear framework agreement for integrated well services. OFSE also secured a multiyear contract to provide drag-reducing chemicals to be deployed on 2 major offshore pipeline systems operated by Genesis Energy. To support this agreement, we will expand our chemicals manufacturing footprint and deploy Leucipa, our digitally automated fuel production solution. Also for Leucipa, we received an award from Repsol for next-generation AI capabilities and entered into a new agreement with ENI to deploy Leucipa for ESP optimization and AI-driven predictive analytics in the Middle East. Continuing on digital, Cordant Solutions secured a notable contract with a large NOC to deploy asset performance management for several compressor stations in the Middle East. Cordant Solutions was also awarded a contract with NOVA Chemicals to optimize maintenance and maximize production across multiple petrochemical facilities, leveraging APM's asset strategy and asset health digital offerings. Overall, it was another strong quarter, both from a commercial and technology engagement perspective. We are building strong order and technology pipelines that extend beyond our traditional oil and gas markets, creating additional life cycle growth opportunities that further enhance our earnings and cash flow durability. Turning to the macro on Slide 7. Amid continued macro uncertainty, I want to take a moment to reaffirm the strong long-term fundamentals underpinning our business. Global energy demand continues to grow, supported by durable secular macro trends that are shaping the future of the energy landscape. Population growth, particularly in emerging markets, is driving baseline demand for energy across residential, mobility and infrastructure. At the same time, continued economic development and industrialization are expanding energy needs across critical sectors such as manufacturing, transportation and technology. Urbanization and the global push for electrification are accelerating the build-out of modern energy systems. This includes both expanding access to reliable electricity and supporting new demand drivers like data centers and industrial decarbonization. Amid this backdrop, there is a global push for lower carbon solutions as countries advance their emission reduction goals. In response, we are seeing increased investment in clean power CCUS, emissions abatement, geothermal and hydrogen. These markets require scalable, flexible, and efficient energy solutions, capabilities that are core to Baker Hughes and essential to enabling a lower carbon economy. Consistent with this trend, we booked $1 billion in new energy orders during the quarter, bringing year-to-date bookings to $1.25 billion, already matching our total for last year. As a result, we now anticipate exceeding the high end of our $1.4 billion to $1.6 billion order range for this year. This performance reflects increasing global demand for lower carbon solutions and reinforces our confidence in achieving our $6 billion to $7 billion order target by 2030. Collectively, these macro trends support a strong long-term outlook for the global energy and industrial landscape as customers increasingly prioritize efficiency, reliability and sustainability. It is an environment aligned with our strengths and one that positions us to capitalize on the significant opportunities ahead. Now turning to natural gas. We continue to see growing divergence between oil and natural gas fundamentals. Its abundance, low-cost reliability, and lower emissions set natural gas apart from other fossil fuels. This year is increasingly being validated across policy and market dynamics. While we expect significant growth from renewables, scaling these technologies at pace required to meet growing energy needs remains a challenge, particularly in light of supply chain constraints, permitting delays, cost inflation and less favorable policy support. These challenges further reinforce the positive long-term outlook for natural gas. By 2040, we expect natural gas demand to grow by over 20% with global LNG increasing by at least 75%. This growth outlook creates a favorable environment for Baker Hughes. We are already seeing strong momentum, booking $2.9 billion in gas infrastructure equipment orders over the past 6 quarters, a trend we expect to continue as countries turn to natural gas to support power generation and industrial development. In LNG, approximately 60 MTPA of additional FIDs are needed over the next 18 months to reach our 3-year target of 100 MTPA, which would bring the global installed base to our long-held target of 800 MTPA by 2030. Beyond this, we see continued growth in the installed base as energy demand and emission reduction efforts converge. This year, LNG demand continues to grow rapidly, up 5% year-over-year as softness in China is more than offset by strength in Europe. This increase in demand is driving sustained momentum in LNG contracting activity. For example, with Mackenzie reports that 49 MTPA of long-term LNG offtake contracts have been signed in the first half of the year, positioning 2025 to exceed the record 81 MTPA signed last year. Now turning to our markets. This year has been marked by heightened volatility, with Brent prices ranging from a lower $60 per barrel in early May to a high of $77 per barrel in June, with continued volatility into July. The market continues to navigate cross currents, balancing weakening demand and rising OPEC+ production against persistent geopolitical risk in both the Middle East and Russia. As we look into the second half of the year, we expect continued volatility as OPEC+ accelerates the return of its 2.2 million barrels per day of idle production into what we anticipate will be a soft market. Ultimately, until all excess OPEC+ barrels are absorbed by the market, we anticipate oil-related upstream spending will remain subdued. On global upstream spending, we maintain our outlook for a high single-digit decline this year. In International, we now expect spending to decline toward the high end of our mid- to high single-digit range, given downward pressure in key countries such as Saudi Arabia and Mexico. In North America, we still project spending to decline in the low double digits. These forecasts assume current oil prices hold and no further trade policy escalation. Any meaningful deterioration in EVA could present incremental downside. Longer term, we expect oil demand to grow beyond 2030. To meet that demand, significant investments will be required. In addition, we anticipate growing customer focus on mitigating reservoir decline and optimizing production efficiency. This underscores our strategic focus on mature asset solutions in OFSE. These technologies will improve production reliability, boost field performance and expand our presence in more durable OpEx-led production markets, increasing the resilience of our revenue base. Turning to Slide 8. I wanted to take a few minutes to discuss the opportunity we see in distributed power solutions for data center market and beyond. Distributed power represents a compelling growth vector for Baker Hughes, drawing on multiple parts of our enterprise, from industrial gas turbines and electric motors to geothermal and CCS technologies. This opportunity broadens our market exposure to digital infrastructure and reinforces the stability of our earnings and cash flow through life cycle-driven equipment and service revenue. According to IEA, global energy consumption from data centers is expected to more than double, reaching 945 terawatt hours by 2030. In the U.S., electricity demand for data processing alone is projected to surpass the combined power needs of all energy-intensive manufacturing sectors, including aluminum, steel, cement and chemicals. To support this surge in power requirements, gas turbine manufacturers are experiencing robust order activity across both utility scale and sub-utility-scale power applications. Our portfolio is well suited for the sub-utility scale behind-the-meter solutions, providing advanced technology and shorter deployment timelines with our hydrogen-ready NovaLT 12 and 16-megawatt turbines as well as brush electric generators. To meet rising demand, we continue to make targeted organic investments to enhance our NovaLT capabilities, including initiatives to increase power range and reduce start-up times. In addition, activities are underway to significantly increase our manufacturing capacity by 2027, capitalizing on strong order visibility. In the utility scale space, our geothermal solutions offer customers reliable and scalable baseload power, supported by IET's Organic Rankine Cycle, steam turbine technologies, and OFE's subsurface expertise. More broadly, we are seeing expanded market opportunities to deploy advanced and enhanced geothermal technologies to deliver dispatchable, low carbon power to data centers. Additionally, we are collaborating on the development of the utility and industrial scale net power solutions, further expanding our power range in enabling near zero emissions power generation. The growing frequency of grid disruptions is prompting industries with critical operations to seek more reliable on-site power solutions. This shift is especially evident in sectors like energy, health care, data centers, airports and other mission-critical infrastructure, where our distributed power offerings are well positioned to meet this emerging need for behind-the-meter power. Building on the momentum from our recent data center-related awards totaling more than $650 million year-to-date, we are making strong progress towards our 3-year target of $1.5 billion. The pace of recent awards positions us to meet or exceed this target earlier than planned. Importantly, this excludes the substantial recurring revenue opportunity tied to aftermarket services, which typically generate 1 to 2x the original equipment value over a 20-year period. In summary, the surging momentum in data center development is reinforcing IET's fundamental demand drivers, while also increasing the pipeline of enterprise-wide opportunities. We are expanding into attractive high-growth markets beyond our traditional oil and gas space, creating new avenues for growth while further strengthening the durability of our earnings and cash flow. To conclude, it was another strong quarter for the company with significant progress on several fronts despite the challenges presented by the external environment. Our focus remains on the areas within our control, most notably, the continued deployment of our business system across the enterprise, which is driving productivity and accelerating our efforts to be a leaner, more efficient company. Baker Hughes is well positioned to deliver sustainable growth and create long-term shareholder value. We are excited about the future as we advance into the next phase of our journey. With that, I'll turn the call over to Ahmed.

Thanks, Lorenzo. I'll begin with a review of our consolidated results and segment performance. I will then outline our portfolio optimization strategy and conclude with a summary of our outlook before turning it back to Lorenzo for final remarks. Starting on Slide 10. As Lorenzo highlighted, we delivered another strong quarter of orders with total company bookings of $7 billion, including $3.5 billion from IET. This performance demonstrates continued customer confidence in our diversified portfolio and underscores the strength and breadth of our market-leading technologies and solutions. Adjusted EBITDA increased by 7% year-over-year to $1.21 billion despite lower revenue, driven by strong margin expansion across both segments. This performance reflects the benefits of structural cost improvements and continued deployment of our business system, which is driving greater productivity, stronger operating leverage and more durable earnings. GAAP diluted earnings per share were $0.71. Excluding adjusting items, earnings per share were $0.63, up 11% year-over-year. We generated free cash flow of $239 million. For the full year, we maintained our free cash flow conversion target of 45% to 50%, with a typical stronger performance expected in the second half of the year. Turning to capital allocation on Slide 11. Our balance sheet remains in a very strong position. We ended the quarter with cash of $3.1 billion and net debt-to-EBITDA ratio of 0.6x and liquidity of $6.1 billion. We also returned $423 million to shareholders. This included $227 million of dividends and $196 million in share repurchases. We remain committed to returning 60% to 80% of free cash flow to shareholders. The portfolio optimization actions announced in the second quarter are expected to generate about $1 billion in net proceeds upon closure of these transactions, further strengthening our balance sheet and increasing flexibility for organic investments, shareholder returns and value accretive acquisitions. I will now highlight the results for both segments, starting with IET on Slide 12. During the quarter, we secured IET orders totaling $3.5 billion, including record bookings for both CTS and Cordant Solutions as well as a 28% year-over-year increase in GTS, driven by another strong quarter of upgrades and transactional orders. This brings our year-to-date total to $6.7 billion, which includes $1.9 billion in GTS, $1.4 billion for LNG and gas infrastructure and more than $650 million for data center power solutions. These commercial achievements further underscore the versatility of our technology portfolio and our strategic positioning to benefit from multiple secular growth trends across the energy and industrial sectors. With a book-to-bill of 1.1x for the quarter, IET achieved another record RPO of $31.3 billion. This RPO level and a structurally expanding installed base provides strong revenue visibility in the years ahead. IET revenue increased by 5% year-over-year to $3.3 billion, led by a 9% increase in GTS and 22% increase in CTS, partially offset by the expected softness in Industrial Tech. Segment EBITDA growth significantly outpaced segment revenue, increasing 18% year-over-year as margins expanded by 190 basis points to 17.8% despite some tariff-related headwinds. This performance was driven by record Gas Tech equipment margins and strong execution in Cordant Solutions partially offset by CTS. These results clearly highlight the benefit of our business system implementation. Now in its third year, this disciplined operating model is focused on performance management, strategy deployment and continuous improvement. Rooted in Lean and Kaizen principles, it is equipping teams across the enterprise with tools to simplify workflows, eliminate waste and improve execution, ultimately supporting progress towards our 20% EBITDA margin target. Turning to OFSE on Slide 13. OFSE revenue in the quarter was $3.6 billion, up 3% sequentially. In international markets, revenue increased 4% sequentially, led by Europe and Middle East, excluding Saudi Arabia, where activity continued to trend lower. We also saw solid growth in Latin America, driven by Mexico. While upstream activity in Mexico remains subdued, we experienced strong growth in chemicals as refiners work to address rising crude quality challenges. In North America, revenue was up 1% sequentially. North America land revenues remained stable compared to the first quarter, outperforming the 3% decline in U.S. onshore rig activity due to our strong weighting towards production-related work. Driven by disciplined execution and a continued focus on cost efficiencies, OFSE delivered EBITDA of $677 million, exceeding the midpoint of our guidance range despite a challenging market. Importantly, EBITDA margins expanded 90 basis points sequentially to 18.7%. Turning to Slide 14. I'd like to take a few minutes to highlight the progress we've made on portfolio optimization and how we are advancing the strategic priority as we transition from Horizon One, a period defined by significant operational improvement, into Horizon Two, which will be characterized by continued execution discipline and an increased focus on strategic growth particularly in industrial, new energy markets and mature asset solutions. We have remained focused on reshaping the portfolio to drive higher profitability and position Baker Hughes for more durable long-term growth. Including the $1.5 billion of expected proceeds from the PSI and SPC transactions, we will have generated over $2.5 billion in cash from a series of strategic actions since the merger in 2017. Our divested businesses will now be with owners where they are a stronger strategic fit, while enabling Baker Hughes to further streamline its portfolio and concentrate on higher-margin recurring revenue opportunities. These transactions have unlocked significant value, strengthened our balance sheet and enhanced our strategic focus and flexibility. We have also been disciplined in how we've redeployed this capital. Including the acquisition of CDC, we have reinvested approximately $1.8 billion to expand our industrial presence and align with long-term growth trends. Other notable investments include BRUSH electric motors, which expanded IET's driver and power generation offerings and Altus Intervention, which strengthened our capabilities within mature asset solutions. We have also made early stage investments in decarbonization technologies that, once commercialized, could drive meaningful long-term growth. The combination of the PSI divestiture and CDC acquisition is a clear example of our portfolio strategy in action. We are monetizing noncore assets and unlocking significant value while reinvesting into higher-margin, recurring revenue businesses at attractive multiples that enhance returns. Collectively, these actions advance our strategy to reshape the portfolio for more resilient earnings and cash flows. They demonstrate our disciplined approach, prioritizing strategic fit, exposure to growth markets, accretive margins and returns and life cycle-based business models. Looking ahead, we will continue to invest in opportunities that strengthen our industrial footprint and unlock meaningful synergies. Our ability to integrate acquisitions effectively is enabled by the strength of our business system. It provides the structure, discipline and repeatability to execute with speed and consistency, accelerating synergy capture and driving faster value creation. With a net leverage ratio of 0.6x EBITDA, we have ample capacity to pursue value-accretive opportunities, including high-return organic investments, disciplined M&A and continued capital return to shareholders. This financial flexibility enables us to allocate capital with precision and purpose with a clear focus on actions to accelerate revenue growth, enhance margins, improve returns and strengthen our long-term position. Our ultimate objective remains the same, to maximize long-term shareholder value and position Baker Hughes for sustainable differentiated growth. Turning to Slide 15. I want to provide an update on the dynamic trade policy environment and our outlook. In the second quarter, we estimate that the increase in tariff rates negatively impacted our EBITDA by approximately $15 million. We executed a series of mitigation initiatives that help limit the financial impact and these actions will continue to play a critical role in managing ongoing exposure. Since our trade policy update on our previous earnings call, there have been several changes, both implemented and proposed relative to the tariff rates assumed in our original analysis. At a high level, our updated analysis suggests that these developments largely offset each other. As a result, we are maintaining the previously communicated estimate of $100 million to $200 million net EBITDA impact for the year. Note that this assumes recently announced tariffs are implemented as planned, no further trade policy escalation, including retaliatory tariffs and continued success of our mitigation actions across both segments. We are tracking the risk for retaliatory tariffs in key regions. While not currently reflected in our net tariff impact estimate, we remain prepared to implement additional mitigation initiatives to limit, where possible, any further impact on our global operations and financial performance. Beyond the direct impact of ongoing trade policy shifts, we continue to monitor potential secondary effects such as more cautious customer behavior and signs of broader economic weakness. Next, I would like to update you on our outlook. The details of our third quarter and full year 2025 guidance are also found on Slide 15. The ranges for revenue, EBITDA and depreciation and amortization are shown on this slide, and I will focus on the midpoint of our guidance. While there's still volatility around trade policy developments, we have been successfully executing our mitigation plans and our underlying business continues to perform well. In light of these factors and consistent with our commitment to transparency, we are reestablishing full year guidance for both segments and the company overall. For the third quarter, we expect total company EBITDA of approximately $1.185 billion at the midpoint of our guidance range, led by continued strong growth in IET and resilient margins in OFSE. For IET, we expect third quarter results to benefit from continued productivity gains supported by the enhanced implementation of our business system as well as strong revenue conversion from the segment's record backlog. Overall, we anticipate IET EBITDA of $600 million at the midpoint of our guidance range. For OFSE, we expect third quarter EBITDA of $665 million at the midpoint of our guidance range which represents flat sequential margins on a slight revenue decline. Now turning to our full year guidance. We see continued strength in IET fundamentals, while OFSE remains challenged by subdued market conditions. Taking this into account, we expect total company EBITDA of $4.675 billion at the midpoint of our guidance range. In IET, we maintained the midpoint of our orders guidance range of $13.5 billion given our solid first half orders performance and positive outlook for the second half, particularly in LNG. Also, we are raising the guidance range for both revenue and EBITDA, increasing the midpoint for revenue to $12.9 billion from $12.75 billion and EBITDA to $2.35 billion from $2.3 billion. The major factors driving our third quarter and full year guidance ranges for IET will be the pace of backlog conversion in GTE. The impact of any aeroderivative supply chain tightness in Gas Tech, foreign exchange rates, trade policy and operational execution in Industrial Tech and CTS. For OFSE, we are reestablishing full year guidance with midpoints of $14.2 billion for revenue and $2.625 billion for EBITDA, implying margin improvement despite lower revenue, driven by strong execution of our structural cost-out program and reinforcing the durability of our margins. Factors driving our third quarter and full year guidance range for OFSE include execution of our SSPS backlog, the impact on near-term activity levels in North America and international markets, trade policy and pricing across more transactional markets. We remain confident in our ability to deliver solid performance in 2025 with continued growth in IET helping to offset softness in more market sensitive areas of OFSE, underscoring the strength of our portfolio and the benefits of our strategic diversification. In summary, we are pleased with the company's operational performance during the second quarter. OFSE delivered strong margin performance despite softness in the upstream market, while IET margins continued to progress towards our 20% target. We remain focused on elements within our control, streamlining operations and driving efficiencies that will benefit us well beyond the cycle. With that, I'll turn the call back over to Lorenzo.

Thank you, Ahmed. Our strong second quarter results clearly demonstrate the continued progress we are making in transforming our operations and streamlining the organization, even in a challenging and uncertain market environment. As you can see illustrated on Slide 17, we have evolved into a much more profitable energy and industrial technology company. At the midpoint of our 2025 guidance, Baker Hughes EBITDA margin will have increased by almost 600 basis points over the past 5 years. Additionally, EBITDA has more than doubled over the same period. The magnitude of this improvement speaks to the substantial progress we've made and reinforces our confidence in the strategic vision we set out when we formed the company. We are entering Horizon Two from a position of strength, with a clear path to drive further growth and enhanced margins, underscoring our commitment to delivering long-term value for our shareholders. Our business system is a critical enabler for continued success, driving operational discipline, improving productivity and accelerating the consistency of execution. We are now complementing our operational efforts with additional portfolio optimization actions. These transactions announced in the second quarter serve as a clear blueprint for our strategy, unlocking value from noncore businesses and recycling that capital into higher-margin opportunities aligned with our financial and strategic frameworks. In addition to our operational and portfolio progress, our complementary and versatile technology portfolio supports our strong position in key growth markets, including natural gas, new energy and mature basins. This enables us to capitalize on emerging secular trends, driving sustained order momentum into Horizon Two and beyond. The opportunities emerging within these growth markets are fostering enhanced commercial integration throughout the company. By leveraging our enterprise-wide customer relationships, cross-segment sales channels and integrated offerings, we will be able to drive incremental growth and capture a greater share of our addressable market. To conclude, thank you to the entire Baker Hughes team for yet again delivering outstanding results. As we continue our journey to take Baker Hughes and energy forward, we remain committed to our customers, shareholders and employees. With that, I'll turn the call back over to Chase.

Operator, we can now open up for questions.

So the margin performance across both segments was impressive and the outlook in OFS was better than we expected given the backdrop. Can you just unpack the drivers of the margin performance a bit more? And as we start to think about '26, your confidence level in hitting the 20% mark in IET? And then thinking about OFS, given your internal drivers, do you think you can grind those margins a bit higher in the soft market? Or is kind of flat assumption a good starting point for us?

Yes, Scott. We are certainly pleased with how the teams have performed in the first half and in the second quarter, showing progress and continuous improvement despite external challenges. It’s useful to consider this by segment. In OFSE, the EBITDA margins increased by about 90 basis points sequentially to 18.7%, which was driven by stronger revenue and our advancements in cost efficiency. Regarding cost efficiency, we are focused on a few areas. We continue to optimize our cost structure by rightsizing and ensuring we understand current activity levels. Additionally, we are eliminating duplication across the segment, a process we’ve been engaged in for over a year. Cost management is one aspect, but we also maintain discipline with pricing.

So we may have lost you for a second, but I was discussing the IET EBITDA margin. The margins expanded by 190 basis points, approaching 18%, despite facing some tariff-related challenges that impacted margins by around 40 basis points in IET. The performance was driven by record margins in GTE, and Cordant Solutions also played a role in our solid performance, supported by our business system, which is entering its third year. Additionally, OFSE and IET are collaborating to implement best practices with the business system across the company. Looking ahead, we see additional efficiency opportunities in IET, and we are confident about reaching the 20% margin target. Similarly, in OFSE, we are narrowing the margin gap with our peers, focusing on margins rather than market share. Overall, we have a strong setup, and the teams are executing well to ensure continuous improvement.

Yes, Scott, I'm not sure how much cut out there. But really, as you look at it from a trajectory of going forward, again, as Ahmed said, margin accretion is the name of the game. It's what we've stated with regards to the progression going forward. Great progress across both segments, even with some of the headwinds we see in the marketplace, in particular, OFSE and the performance that they've been able to demonstrate. And as we go forward, we aim to continue that margin progression into '26.

I was wondering if you could just expand a little bit more on the IET order performance this quarter. Gas Tech Equipment was a bit light, but Services was surprisingly strong. I was just wondering how you think these components should trend the rest of the year? And maybe what gets you to the high end of that order guide that you had reiterated? And also while we're here, if you could provide some insight to how these orders are starting to shape up for 2026, particularly with the data center orders on track to what looks to be far exceeding your prior targets there?

I'm very pleased with the order progress made in IET, as we saw bookings of $3.5 billion in the quarter, bringing the year-to-date total to $6.7 billion. This puts us on track toward our full-year guidance midpoint of $13.5 billion, thanks to strong visibility on orders for the second half of the year. We are confident in achieving this target and continue to see strength in the overall market. Orders so far have been driven by non-LNG markets, gas infrastructure, data centers, GTS upgrades, and Cordant Solutions. Looking ahead to the second half, we expect an increase in LNG orders and progress on various projects we've previously mentioned. The data center market is emerging as a significant growth area for us, having received several awards for our NovaLT turbines. Year-to-date, we've booked over 70 NovaLT turbines for data centers, providing 1.2 gigawatts of power, including our largest order of 30 turbines for a U.S. data center project and 16 for Frontier Infrastructure projects. This showcases the link between the growing demand for digital infrastructure and the need for lower carbon solutions. We see opportunities to leverage our hydrogen-ready capabilities with NovaLT turbines and to provide CCS solutions like the Frontier projects. In the New Energy sector, our second-quarter New Energy orders surpassed $1 billion, setting a new record, and we are prepared to meet or exceed our targets for the year. In terms of data centers, we have a pre-order target of $1.5 billion, which we expect to achieve ahead of schedule due to the strength we see in the marketplace. We've also booked several Gas Tech Services agreements totaling over $350 million. This quarter was strong for both transactional and upgrade orders, enhancing the lifespan of our installed equipment. Year-to-date, we've secured $1.9 billion in GTS orders, a 28% increase compared to last year, with upgrades rising by 165% and transactional orders up by 20%. The services side of Gas Technology has performed very well, and in the digital sector, Cordant Solutions has achieved record orders, with overall Cordant orders up 16% year-over-year and software orders increasing by 56%. We see significant growth potential within Cordant as customer adoption rises and we leverage our large installed base along with third-party equipment opportunities, while also gaining traction with our iCenter. A major milestone this quarter was connecting over 2,000 critical turbomachinery assets. As we look to the second half, we feel positive about reaching the midpoint of our forecast range and expect LNG orders to strengthen, with projects already in place. We anticipate continued strength in GTS orders and emerging opportunities in the FPSO market. For 2026, we foresee ongoing favorable trends across many end markets, which will contribute to solid momentum in LNG, with IET orders expected to be consistent with 2025 levels. In summary, we're optimistic about our strong start to the year, expectations for the second half, and the visibility we have looking into 2026 and beyond.

You guys have had called a more muscular approach to the portfolio more recently with the 3 transactions announced in June. I was wondering, perhaps for Ahmed, if you could discuss perhaps the net impact from these 3 transactions as we think about sharpening our pencil on 2026, perhaps top line or EBITDA thoughts. And maybe thoughts, Lorenzo, on further portfolio moves. And do you expect some of these moves to be focused in IET, OFSE or both?

Yes. Arun, it's Ahmed. Look, I think on the impact, the first thing I'd highlight is that these transactions, we've never intended them to drive progress towards OFSE and IET, 20% margin target. So that's an important point. And so when you take the 3 transactions in aggregate that we announced in the second quarter, there is going to be a very modest benefit to both segment margins. And then when you roll that forward in terms of when we expect things to close and so forth and you look at the net EBITDA impact from these 3 transactions in 2026, we expect that to be just over $100 million.

And Arun, adding to the aspect of going forward, first of all, we're very pleased with the transactions we announced. Excited about the prospect of welcoming CDC into the family. And also, we exited businesses that are no longer aligned with the strategic priorities or return expectations, and they're going to better owners and better strategic fit for the future. So what we've been able to do is unlock significant value and get some good valuations and redeploy that into accretive assets that come into the portfolio. And as you look at it, that's really what we've highlighted within the prepared remarks about portfolio optimization, continuing to be a key part of our strategy. And we've been doing that since we came together in 2017, and it's fair to assume that we're going to continue doing that as we strengthen the portfolio through additional acquisitions and continue to look at the right divestitures. If you think about the 2 segments, we have over 30 businesses that are competing for capital. And so we're really concentrating on looking at where the stronger margin profiles are, the recurring revenue potential and the long-term growth opportunities across all of the 30 and across the 2 segments, and we do a rigorous assessment of each of the businesses. And it's natural to think that over time, there will be evolution that takes place and certain businesses may no longer align with our strategic priorities. On the further acquisitions, we'll continue to target opportunities that strengthen our industrial footprint and unlock meaningful synergies. We like businesses that offer margin-accretive life cycle-driven revenue, and are poised to drive IET towards leading margins. In OFSE, we'll continue to focus on strengthening our leading franchise in production solutions and mature asset solutions, and creating our exposure to the more resilient OpEx-focused end markets. So with a leverage ratio of 0.6x and an additional $1 billion of net proceeds from the transactions that are yet to close, we have ample capacity to pursue value-accretive opportunities to strengthen the portfolio. So overall, the ultimate objective remains maximize shareholder value, maintaining strategic and financial discipline, strengthening the earnings durability and really continuing to position Baker Hughes for sustainable differentiated growth.

I have a question on the tariff side of things. I don't know if, Lorenzo, you want to take it or Ahmed, you want to take it. But on the tariff side, your guidance, your outlook of $100 million to $200 million potential impact is the same as it was from 3 months back, right? And we have probably seen 1,000 headlines come out in the last 3 months. So maybe if you can just walk us through the puts and takes of what has happened over the past 3 months? And what businesses are impacted? And maybe as a follow-up, I think if I heard you correctly, Ahmed, you said $15 million impact in the second quarter, right? So it sounds like you're baking in higher impact in the back half of the year. But if you can just walk us through that, the implied second half expectations, that would be helpful.

Yes. I'll let Ahmed take that one.

Yes, certainly. I'll discuss the second quarter results and our outlook for the second half. In the second quarter, the net tariff impact was around $15 million to EBITDA, mainly affecting the U.S., China, and Europe, with most of it in the IET segment. Looking ahead to the second half, we anticipate that the overall net EBITDA impact will likely exceed $100 million, with increases expected in both the third and fourth quarters. This projection is influenced by how inventory moves through our balance sheet and any surcharges from our supply chain partners that materialize in the second half. It's important to note that these impacts are factored into our guidance but do not account for any potential escalation of trade policies, and we assume that U.S.-China tariffs remain at their current levels. In the second quarter, we made significant progress with our mitigation efforts. We experienced some positive changes in May when tariffs between the U.S. and China were temporarily eased, but these were mostly negated by recent unfavorable tariff-related announcements. For instance, in early June, the U.S. implemented an increase on steel and aluminum tariffs to 50%. In July, a 50% tariff on copper imports was announced, set to start on August 1. Additionally, increased tariffs on U.S. imports from various countries, such as Brazil, Canada, Mexico, and the EU, were also announced for implementation on August 1 unless a trade deal is reached beforehand. Considering these factors, we have confidence in our response strategies, supported by our flexible global supply chain. We maintain our previous estimate of a $100 million to $200 million net EBITDA impact for the year. However, this estimate assumes that the recently announced tariffs are enforced as planned and does not account for any further escalation of trade policies or retaliatory tariffs. I hope this provides clarity on our approach for the remainder of the year.

Yes. Thanks to everyone for taking the time to join our earnings call today, and I look forward to speaking with you all again soon. Operator, you may now close out the call.