Baker Hughes Company (BKR) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Baker Hughes, a GE Company Third Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Phil Mueller, Vice President of Investor Relations. Sir, you may begin.

Thank you, Sandra. Good morning, everyone, and welcome to the Baker Hughes, a GE Company third quarter 2017 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 at bhge.com. 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. We advise you to review our SEC filings for a discussion of some of the factors that could cause actual results to differ materially. In addition, we believe that using additional non-GAAP financial measures on a combined business basis will enhance the evaluation of the profitability of the company and its ongoing operations. Also, reconciliations of operating income and other non-GAAP measures to GAAP results can be found in our earnings release and on our website at bhge.com under the Investor Relations section. Because this is the first quarter of operation following our merger, we have prepared financial statements on a combined business basis as if the merger had been completed on January 1, 2016. All prior year and quarter comparisons are to these combined business results. With that, I'll turn the call over to Lorenzo Simonelli.

Thank you, Phil. Good morning everyone and thanks for joining us today. Before we begin with the quarter results, I would like to thank our team for what we've achieved in our first 90 days as a combined company. As we said, this will be a journey. Our current focus is on understanding and improving our core operations as we integrate. I'm particularly impressed with the progress and the speed of the integration since the creation of Baker Hughes, a GE Company on July 3. The combined business was fully operational on day one. Thanks to the very detailed preparation and planning prior to closing. I'm more convinced than ever that the creation of BHGE combine the right companies at the right time. Customer feedback continues to be very positive and we're having constructive discussions about how our capabilities can improve project economics. In this sustained low commodity price environment, the need to drive productivity is critical for our customers. Our new company has taken its first steps and our message of partnership along the value chain is clearly resonating. From upstream to downstream, we provide our customers a broad offering of solutions. We're also driving a culture of safety for our customers, our employees and everybody else involved in our operations. We've implemented the Perfect HSE Day process. As you know, in our first quarter as a combined company, we've already have to deal with a number of challenging environmental events such as hurricanes Harvey, Irma and Irwin. Our thoughts go out to all those who are affected by these events, including many of our employees. Turning to this morning's discussion, I'll cover three topics. First, I'll give a brief overview of our operational results in the quarter. Second, I'll share our perspective of the industry and the market dynamics in our key segments and highlight some of the key achievements of the quarter. Finally, I'll give you some more detailed thoughts on the new company and the integration. Brian, will then review our financial results in more detail, before we open the call for questions. In the third quarter, we delivered $5.7 billion in orders and $5.4 billion in revenues. We saw sequential revenue growth in our shorter cycle businesses and the clients in our long cycle businesses, consistent with the view we have shared with you previously. Adjusted operating income was $240 million. We continue to see improved margin performance in our oilfield service business, partially offset by challenges in our longer cycle business, particularly in our oilfield equipment segment. Earnings per share were negative $0.24 and adjusted EPS was $0.05. While I'm pleased with the positive orders results this quarter, we still have a lot of work ahead of us in order to improve operating margins and cash generation. Synergy execution is a critical component of that. Our synergy plans are full in place now and the teams are executing on them. Further, in our first 90 days of operations, we've identified additional opportunities to improve productivity in the company and simplifying and reduce cost in our operating structure. We are positioning the company for higher growth and profitability. We know where we have to focus to deliver on our commitments. Now, it's up to us to execute. Brian will go through the detail of the financial results, but I want to spend a few minutes on what we're seeing in the market place. In our oilfield services segment, we continue to see growth driven by our well construction business line to North America. While North American rig count is more than 40% up year-to-date, we saw a deceleration in the quarter with the US land rig counts up 6% versus the second quarter. While customers in North America are generally quite positive about the outlook, we expect activity to stay flat through the end of the year, until the market has better line of sight into 2018 budgets and operators production hedge positions. We continue to believe that our advanced drilling capabilities will differentiate us in the marketplace, where industrial well construction practices and service intensity per well continue to increase. Our drilling services and drill bits businesses outpaced rig count growth in North America in the third quarter. We've our AutoTrak curve high-build rotary steerable system, Talon high-efficiency PDC drill bits, tailored drilling fluids and enhanced solids removable techniques, we've helped operators reduce well cost and improve performance, particularly in the Marcellus and Utica. We delivered a total of a 100 wells, where more than a mile of footage was drilled in a 24 hour period. This speaks to how far we have raised the bar in the industrial well construction arena in North America, where our rates of penetration metrics in drilling can now be quoted in miles per day rather than in feet per hour. We have long laterals now that we know in [ph] every basin and longer more complex laterals being planned by our customers. Our drilling services business is positioned for growth in the coming quarters as these more challenging drilling horizons come into play. International activity in oilfield services remains muted with rig count flat year-to-date. However we are seeing signs of activity increase both in the volume and size of tenders for new work as customers feel more confident about their operating cost and commodity price stability. To that point we were awarded a large multi year integrated drilling contract with an important customer in the Middle East as well as two critical deep water completion contracts in Latin America offshore. In our oilfield equipments segment, the subsea market continues to be very challenging. Activity remains low and prices continue to be pressured. We expect three awards in 2017 to be a 150 to 170, up significantly versus 2016, but still 70% below peak levels seen in 2013. As we previously communicated, we had a significant win in the quarter to support this oil gas field. The win is a result of a productivity initiative using our digital tools across our design and manufacturing process to deliver the most cost competitive products in the subsea market. Our cost out efforts and ability to develop local content were critical in securing the award and being part of Egypt's energy future. During the quarter we also announced what is the first demonstration of our ability to generate value for our customers through our full stream offering. The agreement executed with Twinza Oil will provide support for an offshore development project in Papua New Guinea. This business model is an exciting development for the industry. With the combination of capability between our oilfield equipment, oilfield services and turbomachinery segments can provide a unique high productivity value proposition for our customers and commercial differentiation. Despite these successes in the quarter, we continue to expect the subsea markets to be very challenge in the short term. We have little sign of any significant recovery in 2018. In our Turbomachinery segment, the LNG market continues to be over supplied in the near term and with gas prices pressured in most markets. The long term value proposition for LNG remains positive and we have an industry leading portfolio in this segment with unsurpassed manufacturing and services capabilities. Opportunities for growth in the short to midterm exists across the board in mid-stream and downstream segments in which we participate, these include, gas to power projects, stranded gas monetization, pipelines and surface compressions to name a few. Many of these applications acquire a range of turbomachinery equipments that is fit for purpose in terms of both cost and function. To better serve this market, we have been expanding our Nova LT equipment applications to serve anything from traditional oil and gas segments to the industrial sector. I'm pleased to say that earlier this year we secured a contract to supply a co-generation power plant with our 16.5 megawatt Nova LT gas turbine generator. The plant will deliver electricity to our customer's facility in Malaysia and apply a wastage recovery process. This innovative approach will help increase energy efficiency and lower CO2 emissions by 54,000 tons per year. In refining, large complex refineries should gain an advantage in a more competitive over supplied landscape. However, costs in refining margins continue to move some projects that arrived. In the quarter, we won a critical contract in the Middle East to provide seven compression trends enabling a refinery plant to produce cleaner energy. In petrochemicals, we see healthy end market demand. Cost advantage supply basis continue to drive projects forward, particularly in North America and the Middle East. Earlier this year we won a deal to supply three large theme turbine driven compressors for an ethylene production plant in North America. In the digital solutions segment, we see end markets for our measurement and controls base portfolio slowly returning to growth. Non-oil and gas end markets continue to be robust, driven by aviation and industrials. Oil and Gas end markets are beginning to stabilize and we expect them to return to growth over the medium term. Our digital offerings in software and digital services continue to gain traction in the market place. And in the quarter we secured our largest ever award of approximately $300 million from an important international customer. This long term award includes a holistic asset performance management solution based on the GE Predix platform. In the third quarter, we went live with our plant operations advisory program with BT, in the Gulf of Mexico. Our technology is performing 25 million calculations a day and together with our customer, we are focused on reducing non-productive time. Almost all of our customers are either evaluating or applying new solutions in this emerging digital space and I believe we are uniquely positioned from our portfolio perspective, help them make step changes in productivity for their businesses. Lastly on integration, we've made significant progress over the first quarter as a combined company. The organization is in place and all leadership positions have been stalled. We have trained over 15,000 employees on changes impacting and their roles in the new company. We had personal touch points with over 90% of our customers in the first two weeks after closing. And in early September, we went live with our fully integrated commercial platform. I have personally had the opportunity to engage with many of our most important costumers around the globe and continue to update them regularly. As you know, cost actions are underway as well. We are taking restructuring actions wherever it is necessary. We successfully consolidated over 20 facilities in the quarter and initiated an additional 40 for completion by the end of the year. Overall, I feel we have made an incredible amount of progress in the third quarter. I feel good about achieving the synergy targets we laid out. We are still in the early days and just recently had our100 day anniversary. We are on track and what I've seen so far is highly encouraging. With that, let me turn the call over to Brian, to go through our financial results.

Thanks Lorenzo. I'll start with total company results and then go into the segment details. We had a strong orders quarter at $5.7 billion, which is up 2% sequentially and 18% year-over-year. Quarter-over-quarter the increase in orders was driven by our shorter cycle segments, oilfield services and digital solutions as activity picked up in North America as well as the Middle East. This increase was partially offset by headwinds in our long cycle business with turbomachinery and oilfield equipment down11% and 5% respectively. The declines in these businesses were driven by strong comparisons in the second quarter and continued delays in customer spending. Year-over-year total orders grew 18% our [indiscernible] base in the third quarter of 2016 and all of our segments showed growth. Backlog increased from $20.6 billion $20.9 billion in the quarter. Both equipment and services backlog grew. Equipment backlog ended at 5.7 billion. The third quarter was the first quarter and over six quarters as where our equipment backlog grew sequentially. The equipment book-to-bill was 1.1 marking this as the second straight quarter with a positive book-to-bill ratio. Service backlog was $15.2 billion and increased 1% sequentially. Revenue for this quarter was 5.4 billion, which is down 1% sequentially and flat year-over-year versus last quarter our short cycle business is oilfield services and digital solutions were up driven by activity increases in both North America and the Middle East. We saw sequential declines in our longer cycle businesses, turbomachinery and oilfield equipment as a result of lower 2016 order intake, which drove the lower opening backlog. Year-over-year the revenue increases in oilfield services and turbomachinery were offset by the significant decline in oilfield equipment. Operating loss in the quarter was 122 million. On an adjusted basis, we delivered 240 million of operating income. This excludes net restructuring, impairment and other charges of $203 million as well as merger and related costs of $159 million. Adjusted operating income was up 105% sequentially. As a reminder, when comparing our sequential results we called out some non-recurring charges in the second quarter. In the third quarter we had higher amortization expenses due to the impact from purchase accounting. Even when adjusting for those items, operating income was up significantly driven by strengths in oilfields services, digital solutions and turbomachinery, partially offset by continued softness in oilfield equipment. Included in our reported and adjusted operating income, it's a negative impact of approximately $15 million as a result of supply chain driven delays caused by hurricane Harvey. We expect the majority of that to come back to us in the fourth quarter. Year-over-year operating income was down 13%, the increase in oilfield services was more than offset by declines in the other segments. Next I'll cover taxes. Tax expense for the quarter was $93 million, while we were in an overall net loss position for the quarter, we generated income outside the US and losses within the US, primarily due to the restructuring actions that we have taken. Our foreign income with tax, but because we have been in a net loss position within the US for a period of time, we were unable to deduct these losses, that's driving the overall higher tax expense. As we start to generate earnings in the US overtime we expect to benefit from the valuation allowances built up including the ones from this quarter. For 4Q, we expect taxes to follow the similar profile to this quarter. Loss per share for the third quarter was $0.24. On an adjusted basis, third quarter earnings per share were $0.05 cents. Free cash flow in the quarter was negative 405 million. While we'd anticipated a significant out flow from merger and restructuring related activities, this quarter's performance was below the expectations. First, let me give you some details and then I will give you some insights into how we are going to run things differently going forward. As I said merger and restructuring related items had a significant negative impact of approximately 400 million in the quarter. This was driven by accelerated incentive compensation payment as well as a lease buy out that were both triggered by the merger. We had a significant amount of restructuring and severance payments as we execute to achieve our synergy targets. In addition we had a negative impact of approximately 200 million from the continued reduction in our receivables factoring programs. Operationally both accounts receivable and inventory performance were below our expectation and were mainly driven by our oilfield services business. While some of that might be attributable to distraction from the integration, we are expecting significantly better performance in the next quarters from the team. We have dedicated a senior leader to build our operational processes to deliver on our commitment of improved cash conversion. In addition, we are integrating both reporting and operating mechanisms to drive more visibility into cash flow. We expect fourth quarter operational free cash flow generation to be markedly better than in the third quarter. Next I'll walk through the segment results. In oilfield services, the market continues to improve in North America though we saw a deceleration in growth versus the second quarter and the rig count flattening since the end of July. International activity remains muted, in selected markets, we are seeing some signs of activity increases though. The oilfield services business delivered a solid quarter, revenues of 2.6 billion were up 4% sequentially. This quarter-over-quarter improvement was driven by the well construction product lines particularly in North America land and in the Middle East. The completions business delivered double digit growth sequentially with solid gains in Saudi Arabia, the Permian and the Rockies. As Lorenzo mentioned, revenue growth for the drilling services and drill bits business outpaced rig count growth in North America. Regionally increased activity in North America and the Middle East had higher volume. Revenues from North America were 1 billion up 5% sequentially driven by the onshore well construction business. Drilling services, drill bits, wire line and completions, all delivered double digit sequential growth. Internationally, revenue was 1.6 billion up 3% sequentially driven by the Middle East as the well construction product lines delivered solid growth in a flat rig count environment. Outside the Middle East, revenue growth in Asia is driven by completions and artificial lift businesses, and growth in Europe was drilling services, drill bits and pressure pumping. These gains were partially offset by declines in both Latin America and Sub-Saharan Africa. Operating income was 75 million up 48 million sequentially and 115 million year-over-year. The operating income for the quarter includes approximately 35 million of additional amortization as a result of purchase accounting. Despite this, the business delivered strong incremental margin. The increase in operating income is primarily driven by higher volume, cost out efforts and favorable mix, partially offset by hurricane Harvey impact, which primarily was in the chemicals and completions business. In the near term we expect the business to continue to perform in line with the markets in which we operate. We view current market dynamics as favorable for our drilling services and drill bits businesses as customers continue to drill complicated laterals. And for our completions business as North American operators begin to work down that drill but uncompleted inventory. As we continue to ramp up our synergy programs, we expect to drive additional operating margin leverage in the business. Our OFE business despite top line orders growth continues to operate in a very difficult environment. As Lorenzo mentioned, activity remains at low levels with few signs of significant improvement in the short term. Orders in the quarter were $760 million up 45% versus last year and the equipment book-to-bill was 1.4, primarily driven by the Zoro win. The team is building on the success from last quarter with the Eni Mozambique win. In addition orders increases in our flexible pipe systems business, which showed continued strength in the Brazilian market. Services orders were also up 3% year-over-year, driven by increasing levels of activity in North America for the pressure control business through supporting its install base. Neil and his OFE team are focused on rebuilding the backlog. Revenue was 600 million down 28% year-over-year. The decline in revenue was driven by lower subsea production system equipment project backlog, as well as continued market pressure in the rig drilling systems business. We expect the large deals won in 2017 to start generating revenue in 2018. Service revenues were up slightly only partially offsetting the weakness on the equipment revenues. Operating loss was $43 million which was unfavorable year-over-year. Foreign exchange movements negatively impacted operating income by approximately $30 million. This was mainly driven by the strengthening of the Brazilian real and the British pound versus the US dollar in the quarter. OFE has manufacturing bases in Brazil and the UK and is fulfilling long term contracts with key customers in Sub-Saharan Africa and Brazil. We consider the $30 million impact, operational in nature, but do not expect the FX impact to reoccur at the same level going forward. Even excluding the impact of FX, operating income was down year-over-year driven by significant volume pressure and negative cost leverage. In addition we continue to see pricing headwinds in the pressure control and flexible pipe systems businesses, which were only able to partially offset with productivity and cost out. Overall, we think the OFE business will continue to be challenged. We expect to build backlog and compete for key deals. However, as you've seen customer spending in large projects continues to push off, the team has been reducing cost and are prepared to operate in this environment. Now, moving to Turbomachinery and process solutions, the team delivered solid orders growth of 16% versus the prior year despite continued challenges across this primary market. Total orders were 1.4 billion in the third quarter and equipment orders were up 79% year-over-year. As we find several large deals for gas compression equipment in the quarter. The gas compression win rate remained strong and actually increased in the quarter. TPS also saw modest improvements in the offshore business as well as some wins in the onshore business mainly in the Middle East. There were no FID's for LNG projects in the quarter. Service orders were down 10% year-over-year driven primarily by fewer upgrades as a result of lower customer spending and some softness in the downstream portion of the business. In addition the transactional service business was also down year-over-year. Turbomachinery delivered revenues of $1.5 billion up 2% year-over-year. Revenue from equipment was down slightly year-over-year as a result of lower order intake in 2016. Service revenues were up. Contractual services, installations and transactional volumes were up, partially offset by lower activity in our downstream related services. Operating income for Turbo machine was $210 million, down 19% year-over-year. Our service volume was up, lower margin rates in our equipment backlog more than offset the positive impact from higher service sales. As the business is executing through a lower margin equipment project mix, primarily downstream projects, we expect equipment margins to continue to be at lower levels in the short term. Overall we expect the TPS business to continue its technology leadership and capture market opportunities as they present themselves. In the short term, we expect the headwinds on service orders from customer spin delays and low L&G orders to continue. Similar to prior years, we expect to see an increase in service volume in the fourth quarter and we are focused on winning more work on the downstream and industrial sides of the business to offset challenges in upstream. Next on Digital solutions, as a reminder as this business operates in a few different end markets across oil and gas, automotive, aerospace and power, while we see some stabilization in the oil and gas end markets, major project investments remain low. In the third quarter the digital solutions business delivered orders of 917 million. This was a 43% year-over-year driven by the large Predix deal with an important international customer that Lorenzo mentioned earlier. Excluding this deal, orders were down slightly year-over-year. The decline was mainly driven by the condition monitoring product lines, partially offset by growth and other businesses. Regionally we continue to see a slowdown in large EPC projects in the Middle East and Europe partially offset by strength in Latin America. Revenue for digital solutions was $629 million down 2% year-over-year. We saw growth in our inspection technologies business that was more than offset by pipeline and process solutions. Operating income was $87 million down 20% year-over-year driven by lower margin in the pipeline and process solutions business as well as negative mix. Overall, we expect Digital Solutions to continue to grow in the fourth quarter in line with the typical seasonality, but of a lower base in the fourth quarter of 2016. With that Lorenzo, I'll turn it back over to you.

Thanks Brian. Overall, I'm pleased with the progress we've made in the quarter. We closed the transaction and formed the brand new company on July 3. And we hit the ground running on day one from an inspiration perspective. Commercially we secured several key wins in the quarter and booked $5.7 billion of new orders. We are base lining operations and where we see a need for improvement, we are taking immediate action. We are focused on margin improvements that are cash generation and delivering the best results for our customers. We continue to position the company for growth and profitability and we are focused on executing our strategy to deliver on our commitments on growth, margins and cash. Actions are on the way and I feel optimistic about the future. Phil, now over to you for questions.

Thanks, with that let's open up the call for questions Sandra.

[Operator Instructions] Our first question comes from James West with Evercore ISI. Your line is now open.

HI, good morning guys. So, Lorenzo the three pillars you guys are focused on, on regaining some share margins and free cash flow conversion. And it's only been a 100 days, I assume you get that, where do you think you stand in that process, are we 10%, 20%? Where are we in kind of getting to the optimal results?

Thanks, James and thanks for recognizing. We're just celebrating our 100 days into this transaction that we feel is going very well. And maybe just as the backdrop relative to the three strategic pillars you mentioned, we remain very focused on what we control. As you look at the external environment, oil inventories are still 20% above the five year averages. When you look at the three pillars, let's take them one-by-one to begin with. On growth, you look at the performance during the course of the third quarter, you had drilling services and bits growing and outpaced the rig count growth in North America, we feel good about that. You look at the orders performance; sequentially it's the second quarter in a row, where we got positive orders. You look at a year-over-year performance up 18%, on the book-to-bill positive. Critical wins, you look at this all, which was a key one in Egypt from a subsea perspective, digital. So, we see good traction on the growth side, it's early days, the market remains challenging, but we are definitely focused from a commercial standpoint and getting out there and meeting with the customers has been a key aspect of the first 100 days and as you noted during the course of the first two week, we met over 90% of the customers. On margins the key focus here is on the synergies, as you look at integration, it's on track. I mentioned even in September that we are on track, with what we've committed to for 2018, relative to the integration and the synergies. You look at the sequential margins performance from a business segment perspective, Brian walked you through that and sequentially three of the four businesses are showing positive performance. We've got weakness in our sea segment which again, is part of the aspect of Sub Sea and the industry continuing to be delayed in its recovery. You look at the third pillar cash, as Brian mentioned, it's a key area of focus for us. During the course of the quarter, we had one time key related items, and restructuring, however, from an operational perspective it's an area that we continue to focus on. It's one of the key areas I have as a focus on inventory receivables, I'd say we didn't perform where we wanted to in the third quarter, and it's something that we've addressed and we've got people acting upon it immediately. So, when you look at it, early days, but definitely positive momentum, we've got the team rallied and focused on the key priorities. So thanks James.

Okay, okay fair enough. And then may be just one follow up or little bit unrelated, but the shareholder return strategy, and I know you've seen or work on this, your net cash position. How are you guys thinking now and over again those old days, but about dividend sheer buy pack pay program?

Yeah James, just maybe to give you an update on capital allocation and 100 days and we mentioned in September that we're committed to a share hold of a friendly capital allocation plan, that's going to be returning 40% to 50% of netting coming to shareholders. We also mentioned we are going through that with our board at the moment and it's part of the key strategic review that's being undertaken. We got a strong balance sheet that gives us the ability to drive buy backs and also inorganic actions. And our capital allocation priorities are going to be alliance with creating significant shareholder value. So, we are going to take a balanced approach and we want to make sure that we maintain the strong balance sheet, as the industry continues to be volatile as we look at it going forward, it's a challenging environment. We did as you know, in the third quarter announced a dividend of $0.17 per share and we are reviewing that as we go forward, with our team and also the board, so we'll be giving an update as we go forward.

Okay, get it, thanks Lorenzo.

Thank you and our next question comes from the line of [indiscernible] with Morgan Stanley. Your line is now open.

Yeah, thank you very much and yes, congratulations on the 100 days. So still early and the quarter is kind of a cash standpoint, I think it was a little noisy, a little light, even adjusting for the foreign exchange and a few other things. So, given that you have a better handle on the integration and targets ahead, could you give us a game back to the initiatives on the way. I wonder whether you could give us an update on, this kind of, let us say even though improvement in the environment, but I think you'll believe there will be more. What is your current view on normalize margins for these businesses, could you for example get without any improvement in subsea [indiscernible]. Could you get the equipment business into a profitable state if you think? If you could run through some of the initiatives, I know you've issued focus going on in CRM, for example in Baker Hughes and trying to implement some of the GE systems there, so could you give us a little bit of an update there on your updated view on margins?

To start out with the cash, alright it was a bit noisy this quarter, given that this is a first quarter. We had a quite a bit of merger and deal related cost as well as restructuring, as I mentioned that was about $400 million. We took down our monetization program that impacted us by about $200 million. But, you know as I said, working capital did come in under our expectations from our cash flow perspective, and that was primarily driven by sea bubbles and the OFS business. We had a little bit of an inventory build as well, so if I look at that going forward, the deal related cost should definitely be declining here in the fourth quarter and into the next year we'll trail off. We will continue to look at high payback restructuring earlier as we drive the synergies here. So, I expect the restructuring cost to continue and as I mentioned earlier, we have mobilized the team to look at how we can build stronger operating processes to drive better collections, better visibility, not only with us, but across the portfolio. So, I would definitely expect fourth quarter better operationally, some of that seasonality, others are some of the process changes that were making here and then, last onetime items.

These things are never done in overnight, and yes, we all wanted to aggressively go after all hanging opportunities, you mentioned still a lot of interest a lot of infrastructure to be merged, if it telecoms to the cost of it. Its strike me that maybe the second quarter or the third quarter next year is considered as a timing to when we should start to get a more of a clarity on the underlined performance?

Yeah, I think so, by then you have a lot of the restructuring under way clearly and will have full three four quarters here to get some of the operating processes in place. But I think that's a realistic expectation.

Okay, Lorenzo sorry.

Yeah now, just to address your question on the business segment and if you think about all of us you know, speedy recovery in North America, decelerating but still growing and internationally we see some activity rising. On the other sea, subsea, at the moment it's extremely low, you've seen the activity level, at the same time; we've won some major business, as you look at our second quarter win relative to Mozambique. And also Zorro in the third quarter, we're focused on cost cut and one of the key enablers that we were able to win this whole deal was by applying digital tools within our supply chain, there really key cause competitiveness. We feel it's being a very important aspect of our business and offering for our customers going forward and so you should see over the long term, continuing project execution excellence and margin improvement in that business.

Okay, thank you very much. Well I'll hand it back.

Thank you and our next question comes from the line of Andrew [indiscernible], your line is now open.

Thanks, good morning guys Lorenzo, Brian. I appreciate the granular details. That was really very helpful. So, I guess I would start of to follow up on capital allocation and maybe you can talk about your optimal cost, capital structure giving your undelivered balance sheet and also maybe, I suppose capital allocation talk about thoughts on M&A, given the recent shadow, we've had in the market on especially subsea 7?

Okay Andy, I think when we talked earlier we definitely have an opportunity to relook capital structure, we are under leverage. If you look at the balance sheet by a lot of metrics, we are working to that as Lorenzo said, with the board here and will update you guys, you know, once we've gone through that process. But, the metrics look good, you know, we've continued to have a strong balance sheet and as I was talking in the call, we got a plant in here to get the free cash flow into more of a steady straight in line with what we talked about in early September. So, we'll keep you posted as we work through things with the board.

And Andy just on the rumor that was out there relative to subsea 7, I think that I've mentioned previously, you know, our focus right now is really on the integration hand, we've got our hands full. We don't speculate on the aspect of rumors, we see our all three businesses previously well positioned with the winds also that we had. And we partner with numerous CPC's out there, and we work with our customers, really on what's the best outcome for them.

Alright thanks, that was very helpful. And then when you think through your strategy and how it could differ from the past, for specifically oilfield services, can you talk a little bit about the strategy there, maybe potentially some rolling back of that acid like model internationally and how things could change and how you look at the world, when these things have done in the past?

Yeah Andy, if you look at our product portfolio, we feel very good about the combination that we have. Now, when you put together, packaging's and geo oil and gas, we have a suite of capabilities that we think is unique in the industry and enable us to work with our customers really to drive efficiencies. When you think about going below the mud line from and above, we've got the combination of the lifting equipment, the drilling services. We also have the digital capabilities to drive efficiencies and productivity. That's the game changer here, it's really to take the aspect of inefficiency through silos and drive productivity. In this environment that's what our customers continue to ask us for, is get us to the lowest cost per barrel, get us the efficiencies and as we go forward, we are really working on well construction, we're working on the operating environments that are necessary within each of the workplace and that's going to be the strategy going forward.

And Andy as we talked before, we are taking a look at some of the regions were the asset like model was being contemplated. And because of the infrastructure we have, I decided really not to have folks between us and our customers, dramatically reducing that asset like model. You know we are going to continue to evaluate the geography from our profitability and our returns and make decisions based upon that. But, until now the asset like model is going well.

Alright thanks guys, I'll turn it over.

Thank you and our next question comes from the line of Jud Bailey with Wells Fargo, your line is now open.

Thank you, good morning. I got a question, could you maybe comment a little more broadly on the TPS segment, I have seen a big dragger for Baker Hughes. Could you talk a little bit about your outlook, maybe on orders and mixable, because we are looking at 2018, understanding L&G's oversupplied at the moment. But I think there's been some, if I do sort of move toward and tell rightly to comment, is it possible the quarters could be up next year or do you see more flatter or down, just one?

Yeah, Jud, if you look at the PPS business in the as you said rightly L&G is a portion of it, but there is actually much more in there relative to the midstream and downstream when you look at pipelines, you look at also what we do from an offshore and onshore production. And as you look at 2018, we should see better order activity and L&G remains challenging, we see that more being trauma, to the free perspectives started to comeback as there is demand out there. But we see the other segments continuing to pick up and then also as we go towards the transactional business on services continuing to maintain a focus on the operating activities within our customers.

Okay, thank you very much follow up is on the same segment, but I am just thinking about margins? As service revenue grows, that's basic quota of the margins obviously revenue is going to be under some pressure. Could you talk us through, how you're thinking about maybe that the mix in revenue next year and how that could impact margins year-over-year for TPS?

Yeah Jud, if you take a look at the dynamics right now in TPS, you know revenues are up in the quarter 2%, and operating incomes comes down 19% in service. Service mix was good and we are certainly a tailwind, but it was more than all set by margined in equipment as we work through a backlog, which is got some negative mix primarily driven by the downstream segments which is not as profitable. As I look into the next couple of quarters, I would expect that to continue the negative mix based on what the backlog is today. But if you look, we actually had a booked a bill of 1 in the quarter, equipment back log grew, so we are refilling that back log and that should get better as we progress through the year. On top of that, we have seen some headwinds in the transactional services business, as operators are really conserving cash and our bags and based on what we see, later in the year next year, that's a turn as well.

Okay, I appreciate the color. You've answered about, thanks.

Thank you and our next question comes from the line of Jim Wicklund with Credit Suisse, your line is now open.

Good morning guys. I am looking at oilfield services segment, and North America was at 4%, I realize that you guys don't have the petrol pumping business directly anymore, just under station BJ. And while you are operating income, was right from 27 to 75, it just strikes me that a 2.8% margin in the US when we've got some of your peers reporting higher numbers. I'm just wondering, how comfortable you guys are with the current consensus forecast for either down Q4, with the kind of outlook you've given and with the biggest engine driver North America onshore kind of having some really relatively weak performance in the quarter. Can you address any of that?

Yeah, if you take a look at El Paso and North America, as you rightly pointed out, our portfolios are a bit different. We don't have pressure pumping, we do have the chemicals business which is not directly related obviously to rig counting what's going on in North America land. If you look at those businesses that are really rig count driven, you know drilling services wire line, drill beds all are more than the rig count, strong performance in incompletion as well. And if you look at the minimal fear in this quarter, we had really strong growth in drilling services and completions, and that's really have higher margins. As Lorenzo and I both mentioned, we see the market flattening and really I don't think in the fourth quarter, in drilling services won't be as much as a tail end, but we do see some pretty strong growth in other product areas, were our margins are a bit lower. And then we also have some synergy that should be coming in in the fourth quarter and then in the next year. So, when I put all that together, from a mixed end point, from the market, you know flattening a little bit, I would expect incremental to be in line with historical averages. But it is something we are focused on and you know as we talked about gaining share here and positioning the products from a cost perspective to drive higher margins.

Okay and can you talk about the equity income contribution from BJ?

Yeah if you look at the quarter it was a negative by $39 and as a reminder we report BJ services on a one month lag, because they don't close as quickly as we do. And look from a position standpoint, you know we like our position in the business, we got good visibility in the what's going on there, we work with more within the team and where we need to do something commercially with pressure pumping , we can do that. But BJ services is in a mode of coming together and we building that business and we are working closely with the team as they do that.

Okay guys thank you very much, I appreciate the help.

Thank you and our next question comes from the line of David Anderson with Barclays, your line is now open.

Thank you and good morning. I'll just come with a bigger picture question here, your business is mix is quite a bit different than the other names in the space, so, I was worried for the sooner your oil prices remain range bound for the next couple of years. Can you talk about which parts of your business do you think will perform best, I guess in other words, which part of the claws will still be able to grow even without the oil price ensure margin expansion?

Thanks so, good to speak to you again. As you look at the portfolio, yes we are different and also we got a good compliment of the oilfield services as well as you look at the longer cycle businesses. When you think about the price being range bound, you look at the benefit that we are going to achieve through synergies and also key focus of growth. So, the synergies will come through on the revenue side , we've already indicated that by 2020 there's $400 million of EBITDA revenue synergies, we feel good about those, lot of good conversations happening with the customers that will enable us. As we look at the longer term on the gas side, we see gas continuing to grow and also L&G returning, and so when you think about our PPS business that returning, again mentioned previously, orders being growing again in 2018. And you look out also at the other segments when you think about the downstream, the refinery chemicals, the pipelines and then our digital solutions business. As you think about the segment that's outside of also oil and gas, which is more aviation industrial that's continuing to pace with GDP. So, we have an opportunity to race; again grow even in ranges that are based on outlook.

And I just wanted if you could just address how you are looking into next year, with respect to 2018 EBITDA? Your reasoning the case that your call consensus number is out there, and now kind of first quarter under your bottom, are you still constant about hitting those numbers even if you don't see oil prices move up appreciably from here?

Yeah so David, you back on that conference, you go to that September conference, you know I said that the market in 2018 was consistent and the market was looking at things. Also I said, that is we go forward, we won't be providing a new guidance but, we think similar to everyone else in the industry. And you look at that we are thinking similar to others in the industry continuing to be challenged on the overseas side with some pushups on some on some of the projects. We've seen a deceleration in the North America grove from the trust perspective. So, we are staying focused really what we control, the synergies the integration and we'll be providing more updates as we go forward.

Thank you, Lorenzo.

Thank you and our next question comes from the line of [indiscernible], your line is now open.

Hey, thanks for squeezing me in. I guess quick question if we trying to bridge the gap 3Q verses kind of 4Q consensus, if you can kind of walk through the moving pieces as we think about the sequential change. You got the 15 million for the supply chain under ways, we'll have some cost synergies, you have digital solutions should be up and TPS should be up. And so if you can kind of bridge the gap, you know I think there's a 100 million kind of increase in 4Q?

Yeah, to give you some perspective on that, a couple of things, you did point out Harvey, the majority of that will come back to us in the quarter, so that definitely should be helpful. We have some normal; seasonality in the digital solutions businesses, so digital solutions is supposed to grow in the fourth quarter. As I walk through with Tim, we feel good about our position in LFS and expect to see growth in LFS if synergies come through and we think, we'll have some volume increase there. And in TPS for us to grow in the fourth quarter as well, as we looked at the back log, equipment as well as services. And we got a lot of productivity lined up for that business as well. So, those are the big drivers and in synergy, it will start to ramp up after the lower base this quarter, we should see some improvement in the synergies.

Okay, and then also on the offshore equipment, another short decline in margins here, are you ready to call the bottom line margins and also the equipment and if so, how long do you think it will kind of get back to break even there?

Yeah, offshore equipment is definitely continuing to be challenging here. And this quarter in particular we did have an all size affect impact. So, I don't expect them to repeat at that level. So from that perspective, you should see margins get better quarter over quarter from that alone. You know calling the bottom, Neil and the team have really been focused on going after deals and makes sense for us. And they've been taking a lot of cost out to deal with this volume decline. So, we feel good about the cost position, they are working hard to drive, you know profitability, as we rebuild the back log. But I do think they will continue to be challenged, so I wouldn't expect other than this FX item in appreciable increase in margin right here as we look for the next few quarters.

Any feedback out there, if FX was a clean margin on there, do you have the number?

The FX was around $39.

Okay. I'll turn it back over. Thanks, Brian.

Thank you and our final question comes from the line of [indiscernible], your line is now open.

Thanks for taking my question. I guess just back to the 18 hour I appreciate that you don't want to get specific on a number but justify the phrase at this way. As we look at consensus now about $3.5 billion of EBITDA and you mentioned that you expect orders to be up. Can you give us a sense of how much orders need to be up, to kind to get to that level, and I understand that there are a lot of other variable, but just try to give us a sense of magnitude there?

Let's maybe just break it down by business and go for it, because if you just look orders are, it's may be better to take it down a level and take it by business. So we look at your first business, you know we continue to see activity ramping up in North America and The Middle East along with some recover in the hour international market when you look at also the North sea, Latin America. So, in 2018 even though North America is decelerated you should still see some momentum there. On OFE, we see that continuing to be pressured at this moment in time; you know we should have better orders performance in 2018. But actually, the revenue side continued to be pressured, TPS we mentioned orders being positive in 2018 and also from the revenues perspective we should stop see the offshore, onshore production, the downstream area, so if you look at the activity thing, but we should see revenues essentially improving there. And we as business, you look at again improving their relative to the elements outside of also oil and gas from aviation and industrial perspective. So, you know really three out of the four business segments are seeing an opportunity here from the revenue which help us in 2018 and that's sort of the landscape when you break it down by business segment.

Okay, thanks for that Lorenzo. Maybe on the follow up, as I look at the $3 billion of orders this quarter, can you break that down into how much was - you had a few pretty large one time benefits there, I suspect some portion of that is recurring if sort of the world stays at level that it's at right now. Can you help us break down that 3 billion in terms of recurring and kind of one time large order?

So I think that that 3 billion is maybe an extra or a FX number, it's in total for the business at 5.7 billion orders.

Yeah, correct. Sorry about that got you.

Okay, so again the - can you repeat the question relative to the 3 billion please?

So if we have the 3 billion in which is largely the legacy GE portion of the business, so the backlog really driven businesses, how much of that 3 billion in orders is something that might be recurring versus something that's large and maybe one time, just to get a sense of what the baseline recurring number might be.

Yeah, look there's always going to be some lumpiness based on big orders that take place. If you look at that 3 billion, you'd say, the Zoro is something that you'd highlight in there as a big order and then the digital as we mentioned close to 300 million with a big international customer.

Yeah, the one thing I would point out about that too is, while we had Zoro as a big order this quarter, we also had Eni Mozambique last quarter and for the quarter-over-quarter that's kind of normalized.

Okay, great. Thanks for that and I'll turn it back.

Thank you and this concludes the Q&A portion of the call. I'll now turn the call back to Mr. Simonelli for final remarks.

Thank you very much. And again thanks to all of you for joining us this morning. I just wanted to maybe close out, so we're 100 days into this terrific new business that we've created. I'm pleased with the progress we've made this quarter. We've had several key wins in the quarter and booked $5.7 billion of new orders. We're base lining operations and where we need improvement, we're taking immediate actions. We know where we need to execute and we've been very open in having that discussion with you today. We're focused on margin improvement that are cash generation and delivering the best results for our customers and that's what we're going to be doing going forward. So thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone have a great day.