Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE company Second Quarter 2018 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 second quarter 2018 earnings conference call. Here with me today are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell. Today's presentation and the earnings release that was issued earlier today can be found on our website 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. Please review our SEC filings for a discussion of some of the factors that could cause actual results to differ materially. As you know, reconciliations of operating income and other non-GAAP to GAAP measures can be found in our earnings release and on our website at bhge.com under the Investor Relations section. Similar to prior quarters, all results discussed today are on a combined business basis as if the transaction closed on January 1, 2016. With that, I will turn the call over to Lorenzo.

Thank you, Phil. Good morning everyone and thanks for joining us. On the call today, I will give a brief overview of our second quarter results. Then given that we've just celebrated the one year mark as BHGE, I'll provide a summary of what we've accomplished as a combined company over the past 12 months. I'd then share some perspectives on market dynamics and highlight some of our key achievements in the quarter and how our company is delivering results in the current environment. Brian will then review our financial results in more detail before we open the call for questions. In the second quarter, we delivered $6 billion in orders and $5.5 billion in revenues. Both were in line with our expectations. Adjusted operating income in the quarter was $289 million. We are seeing continued improvement in our Oil Field Services and Digital Solutions businesses, while our longer cycle businesses are positioning for the future. Free cash flow in the quarter was negative $22 million, and included $110 million of restructuring and deal related cash outflows. Earnings per share for the quarter were negative $0.05, and adjusted EPS was $0.10. We remain committed to top- tier shareholder returns. Since closing the deal, we've returned over $2.3 billion to shareholders. Now I'd like to take a few moments to review our progress over the last year as a combined company. Twelve months ago we formed BHGE, a company that spans the oil and gas value chain. For our customers, we leverage leading technology, global scale, and an integrated offering to provide fullstream solutions through the cycle. For our shareholders, we are differentiated investment opportunity with a clear plan to generate synergies and drive shareholder returns. From the outset, we've had three clear priorities. Growing market share, increasing margin rates and…

Thanks Lorenzo. I'll begin with the total company results and then move into the segment details. We delivered another strong commercial quarter with orders of $6 billion, up 9% year-over-year. The growth was driven by our upstream businesses. Oilfield Equipment was up 30% and oilfield services was up 13% partially offset by Turbomachinery down 4% and Digital Solutions down 6%. Quarter-over-quarter orders were up 15% with oilfield equipment up over a 100%. Remaining Performance Obligation or RPO was $20.9 billion, down $0.4 billion or 2% sequentially, driven by the effect of foreign exchange. Equipment RPO ended at $5.5 billion, up 1%. Services RPO ended at $15.4 billion down 3%. Our book-to-bill ratio in the quarter was 1.1. We are very pleased with this result. Both Oilfield Equipment and Turbomachinery had a book-to- bill ratio above one, an important step in rebuilding backlog in our longer cycle businesses. Revenue for the quarter was $5.5 billion, up 3% sequentially driven by our shorter cycle businesses of oilfield services and digital solutions. Oilfield services were up 8% and digital solutions were up 11%, partially offset by oilfield equipment down 7%, and Turbomachinery down 5%. Year-over-year revenue was up 2%, driven by oilfield services up 14% and digital solutions up 7%, partially offset by oilfield equipment down 9% and Turbomachinery down 13%. Operating income for the quarter was $78 million; adjusted operating income was $289 million, which excludes $211 million of restructuring, impairment and other charges. Adjusted operating income was up 27% sequentially and up over a 100% year-over-year. Our adjusted operating income rate for the quarter was 5.2%, compared to the same quarter last year; our adjusted operating income rate is up over 300 basis points. This is a clear indicator that we are making progress on our goal to expand margin rates…

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

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

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

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

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

Okay, great. And then specific to LNG. I was down there in DC at the gas conference as well, and it would seem to me that we're pulling forward a lot of LNG projects that maybe we're supposed to go in 2019 or 2020, but they seem to be coming on faster. Is that the sense that you're getting, that we're getting a bit of a pull forward here for LNG?

Again, James, you have to look at the overall market demand, and we continue to expect LNG demand to double to about 500 million tons per annum by 2030. So growing at a pace of 4% to 5% more closer to 5% to 4% a year, and based on that growth, yes, you're starting to see a lot of projects being discussed at the World Gas Conference, many of the customers talking about project activity internationally as well as in North America. You saw that we were able to indicate the Cheniere’s Corpus Christi train free during our quarter, which is the first LNG in North America in some time. So, again, as you look at the activity second half 2018 and 2019, and we think that LNG market is a good outlook.

Great. And then maybe just a final last one for me, a smaller really for Brian probably here on the TPS margin at 8%, but we had a $30 million kind of one-time charge. So we're more like 10%, is that your starting point as we think about some improvement in margin in 3Q and 4Q?

Yes. James, you've got the right math there, there's about a two-point drag on margin, so the base business was closer to 10%.

Thank you. And our next question comes from the line of Angeline Sedita with UBS. Your line is now open.

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

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

Okay, that's perfect. That's what I wanted to hear and then on the sale of NGS for $375 million, maybe you could talk a little bit about the logic behind the transaction? Are there other non core business opportunities for sales? Just the thoughts there.

Yes, Ange, we continue to execute our strategy which includes looking at potential dispositions to further focus on our core activities. If you look at the NGS business it was part of our TPS segment. As you mentioned sale announced earlier this week. That's exactly that. It's a small business unit. There was non core and will do very well with its new owners. The sales anticipated to close in second half and we'll continue to invest in high-growth areas. And as we go through we'll continue to execute this strategy of looking and focusing on what's core.

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

Thanks, good morning. The question from Lorenzo or Brian. Maybe if you could talk a little bit about the big growth in OFS margins. I assume what we've seen so far in the last few quarters has been primarily cost synergies. If you could confirm that and then help us think about as you execute the rest of the cost synergies. Our assumption is still that you see most of in OFS, if that's the case how do we think about OFS margins progressing over the back half of 2018?

Yes. Sure, Jud. We are pleased with where we are from a margin standpoint in OFS. It was one of the key tenets of the deal and a key priority as we close the deal and have been executing 550 basis points since the second quarter of last year. And to your point, we have executed a significant amount of synergies and most of them do come through in OFS. Incrementals are still very strong. We deliver 23% in the quarter and that's despite the non repeat of the D&A catch up we had last quarter, so feel good about the core incrementals of the business and you look at history the core incrementals on the base business had been between 20% and 25%. We would expect that to continue and the synergies would be on top of that as we continue to execute on the synergies. Earlier I did mention some modest headwinds around material inflation, that's really limited to a couple places in the business, where we have petrochemicals and oil as an input. And then also in a couple places where we use nickel and steel. So it's not broad-based inflation. It's in a couple of places and don't expect that to be a significant impact. So, look, we are confident in what we laid out in terms of the margin progression in OFS like the way the team under Maria Claudia are performing out in the field, taking cost out and feel good about where we are for the rest of the year.

Okay and if I could follow up on that as I kind of take all that in is thinking about OFS margins getting the double digits like 10% or so by the fourth quarter. Is that are still a reasonable expectation if I kind of add all that up?

Yes. You put all the synergies that got in with the incremental margins and the volume that comes through. It's certainly reasonable.

Thank you. And our next question comes from the line of Scott Gruber with Citigroup. Your line is now open.

Yes, good morning. Lorenzo, I think in the prepared remarks I heard you state that Baker would retain key technology IP post separation from GE. There's been a bit of debate on this in the marketplace. Can you just provide some more color on the key technology, particularly within turbomachinery where Baker holds the IP and those were that IP will be retained by GE and implications for operations post separation for any agreement that's needed with GE?

Yes. Scott, so thanks for the question. I think may be taking a step back and maybe just to bring some history. If you look at what GE actually announced, it's completed its strategic Business Review and confirmed that it's going to separate BHGE over the next two to three years in an orderly fashion. As you know, BHGE has already been operating as an independent company over the last 12 months. So we're prepared and we'll continue to deliver to our customers the technology and all the capability that's required to execute in the oil and gas industry. And there are agreements in place to ensure that there's a seamless separation, and we're going to work with GE as they evaluate the timing and the structure of the separation. In relation to the agreements that we have in place today, they're across the technology and infrastructure and they're on an arm's-length basis already. And I think it's important also to remember when you look at Baker Hughes, as well as GE Oil and Gas, we've been in the industry for many decades, and we have all the capability that's required to execute within BHGE. So BHGE will remain and if today and will remain going forward, the channel for GE technology and specifically for gas turbines and aero derivatives in the oil and gas base. So we're going to continue to work on an arm's length relationship with GE on technology. And we have everything we need within BHGE.

Got it. And I wanted to turn to OFS, we heard from Schlumberger, really are the first signs of a kind of an optimistic tone on pricing and pricing momentum building within oil services, and their outlook was for an acceleration of pricing improvement in 2019 given a trend towards full utilization of people and equipment. What are you seeing today within international markets with regard to pricing within oil services? And as you look to deploy people and equipment on newly won tenders' kind of where we'll you sit from a utilization standpoint on labor and equipment heading into next year?

Yes, Scott, we see -- again the international activity, as you know it's different than North America. It is very much contract base or it remains competitive from a pricing perspective. We do see pickup in some of the international markets from a perspective of activity levels. So we think there's going to be some modest opportunities for recovery and improvement there, and again we feel that overall the industry continues to recover as we go into 2019.

Thank you. And our next question comes from the line of Dave Anderson with Barclays. Your line is now open.

Hi, good morning. I was just wondering if you can just talk about some of the LNG orders going forward. We saw the Cheniere orders, I'm just kind of curious was that share or a good proxy for the size of equipment orders as we think about it going forward? Is there anything -- I guess I'm asking is there anything unusual about Cheniere that may have less or more equipment or maybe price was a little less. Just trying to get a sense as you guys are going forward how that should compare relative?

Yes. Dave, just on LNG and then firstly on Cheniere, it's a great win for BHGE and it is the first FID in some years here in the United States. It is also the fifth order for similar equipment for Cheniere Energy through Bechtel and BHGE. And I think again it just shows the confidence and also the heritage that we have within the LNG space. I think as you know the size and scale differs from project by project and so it's difficult to just take one and the call it as the same base, but from an average perspective you can look at this as being a good project and a proxy of different types of projects. If you look at LNG going forward, again, we see the trend positive and the overall market demand continuing to be strong. As we've mentioned before, there's going to be an LNG demand that doubles to 500 tons by 2030. And as I referenced some of the customer activity at the World Gas Conference in Washington, internationally as well as domestically here you've got a number of customers that are going through decision points of FIDs. And we see a strong outlook as you look at the back half of 2018-2019 relative to these projects moving forward. So we've got a lot of experience here, and we're looking forward to it.

Yes, David. One thing to think specifically about with Cheniere is this is an add-on to a project that's already existing there, So there's a lot of the infrastructure and a lot of equipment that can be utilize that volume might actually be lower on this, but execution is much more straightforward since it's virtually a repeat of what we've done there before with some obvious tweaks, but anyway that's how I think about it specifically to Cheniere.

So in others -- because it's an add-on maybe the revenue is a little bit lower but the margins are higher, is that fair to say?

Yes, execution yes is much more straightforward on there and we've done things like this before, yes.

And I guess shifting to more of a short cycle question; internationally you had said earlier that --you said you had strengthened your commercial positioning particularly in the Middle East. And I'm wondering is that --I think there's a reference sort of rebuilding kind of the legacy Baker Hughes business that had been shifted to a more of an asset light model and kind of in prior years. So I guess I'm just kind of wondering a year into the merger here where are you in that process relative to its kind of where you want to be? I mean is that kind of -- you kind of rebuilding under certain elements there? Is that particular server, it's a product line or region that might take a little longer? Could you just give us an update of your progress on that part of the business?

Yes. Dave, if you look at what we've mentioned all along, there's been a commercial intensity focus through the integration, and that has been really rebuilding within the oilfield services, and it's regaining some of the presence that we have in some of the key regions and basins. You've seen some of the award announcements and we feel good about the processes that we put in place. There's been a complete revamp of the way in which we're incentivizing our salesforce making sure that there's accountability, that there's focus on the customers and you're seeing early wins and we're continuing the focus there from a standpoint of the commercial intensity. So we are not looking at asset light type of model anymore. There is an aspect of continuing to play the full spectrum leveraging the larger footprint of the combined company at BHGE. And we feel good about the progress being made and we'll continue on that front.

Thank you. And our next question comes from the line of Sean Meakim with JP Morgan. Your line is now open.

Thanks, hey, good morning. So on TPS and the orders grew 3% sequentially perhaps has maybe a little less than one would have expected given some of the big wins that you've had during the quarter. Can you give us a little more of a breakdown of the order mix and how pricing is for these awards is looking relative to maybe what you're realizing through the P&L today?

Yes, Sean, if you take a look at it from a pricing perspective, no real moves there or anything to raise any flags over. The team executed in the quarter and we're pleased with where they ended up. As I pointed out versus last year and that's really the way to kind of look at this business from the equipment standpoint, we had the large SLNG order in Mozambique last year that makes that compares a little bit tougher. And then the other thing, I'd reinforce here is the transactional orders volume increase. We saw that up quite a bit versus both last year and sequentially. If you look at services, total services versus the prior quarter up 11%, so again that's a strong indicator for conversion in the second half. And we've got a really good outlook and line of sight into what we think orders are going to do here in the second half.

And so to clarify you'd say that --how would you characterize pricing going into the backlog today versus what's coming out today?

Yes, look as I said, if I look at overall I'm not seeing any significant pricing moves on what we're booking right now. Obviously, depends on the market; depends on geography and application but what I'm seeing right now is in line with what we expected.

Thank you and our next question comes from the line of Kurt Hallead with RBC. Your line is now open.

Hey, good morning. So, Lorenzo, maybe start off with a question for you and it kind of ducktails with maybe some of the earlier commentary. I think up until about this quarter no Baker Hughes had maybe a slightly more muted kind of viewpoint on the international progression as a related to oilfield services. So what do you think is transpired here over the course and past maybe three to six months to provide you with much greater convictions to now come out and say, we feel really good about the dynamics? And in that context, what kind of visibility do you have into say some oil field service related projects going out into next year? What kind of discussions that you have with your customer base?

Yes, Kurt, and as you said correctly, there's definitely more of a positive sign in some of our geo markets. It's always too early to say everything Kurt or shake out in 2019, but you're seeing indications continued momentum in the Middle East where activity has continued to improve. And then also as you look at the North Sea, which is a key area of activity where we've historically had good share, we're seeing pockets of activity pick up there. You heard about the Equinor award obviously that we spoke about and then you also look at pockets of activity in Latin America continuing to be discussed. So as I go around and also speak to the customers and as you look at people starting to firm up their plans for 2019. You are starting to hear more about CapEx increases and projects moving forward. Again, it's going to vary by customer segments, but overall there's a sense of again positive direction there.

Okay, that's great color. And then maybe for Brian on the market front as a relates at TPS, if I did hear the one of the earlier responses in question earlier you said the second quarter baseline margin for TPS was around 10% to date. Did I hear that correctly?

Yes. You did with the one-time charge that we had it-- that had about a two-point impact on the margin rate so around 10%.

Thank you. And our next question comes from the line of Jim Wicklund with Credit Suisse. Your line is now open.

Good morning, guys. Just a couple of clarifications because all the good questions have already been asked by my smarter associates. Which segments have the most non core divestiture potential? We've heard that TPS maybe selling some of the compression equipment manufacturing, you already sold you noted, as you noted the sale of natural gas solutions in oilfield equipment, you've got the high drill business that's been slow. Is there any one segment that has more non core than others and over the next couple of years no timeframe given, how much you expect really just broadly to realize from the sale of non-core assets?

Jim and maybe just to clarify and again the strategy here is really we like overall our business set up in BHGE. There are some small elements here that are non core and we continue to have a strategy where we look at these, but I'd say it's minimal. And we like the position we have, and the focus of the company going forward.

The way I think about it is we've got a clear framework. We're focused on returns and improving ROIC, and we continue to evaluate that in light of the portfolio and how we're performing and where we're investing, so that's the way I think about it.

Okay, that is helpful. And one of the things that you all focus on is the free cash flow generation, and obviously it's being muddied these days but the effects of the synergy efforts that will continue, which are clearly positive long term. But do we see any of those synergy or severance costs really coming through after this year's? Will 2019 be a clear year for cash flow generation? And do you have any targets in terms of free cash flow yields or any targets you can share with us or just maximize as much as you can?

Sure, Jim. If you think about the restructuring charges that we have to generate the synergies here as we've said before, heavier from a cash standpoint clearly this year. There might be some that goes into next year but it would be relatively small. And then I say looking at 2019, obviously, depending on how the market plays out, how things go we don't have big restructuring plans for 2019, but we've always got to look at our cost structure and make sure we're competitive there. And in terms of targets, as we've laid out we are driving the business to get to 90% free cash flow conversion. As I've said before we --it's a journey, we're making a lot of improvements, some core fundamentals and core metrics around our working capital performance are improving. But we still have some work to do there. So we're still committed to strong free cash flow.

Thank you. And our final question comes from the line of Marc Bianchi with Cowen. Your line is now open.

Thank you. My first question on the pace of the synergies so you had a very strong delivery of synergies in the second quarter and you act -- it seems like you expect some continued improvement in the back half of the year. Can you talk a little bit about the pace of incremental synergies in the second half and when would we expect to get any kind of an update your overall targets?

Yes. We did execute on the incremental $45 million of synergies in the quarter. We're pleased with the pacing of the synergies about $10 million of that was related to revenue, so $35 million of cost. And so what I'd say Marc is look, we're in line with our plan here to deliver the $700 million this year. And are working a strong funnel for 2019. So no real update to the aggregate number, but feel good about where we are and how the teams are executing.

Okay. Is it fair to conclude that the incremental synergies added in the second half are at a smaller absolute number than what we saw in the first half?

Yes, I'd say if you look at it they might be slightly smaller, but again if you look at the ramp up to the total 700, they're not going to be too far off-- of where we were in the in the second quarter.

Thank you. And that does conclude today's Q&A session. And I'd like to return the call to Mr. Lorenzo Simonelli for any closing remarks.

Thanks. Just a couple of quick points here. I just want to thank everybody for joining us today. Also we are celebrating our first 12 months, so I'm proud of what we've achieved and I do want to thank everybody for all the hard effort all the employees as well as for yourselves in joining us. And our outlook is becoming more positive and we remain focused on our priorities, which is we've said is making sure we gain share, growing also margin and free cash flow. So thanks a lot.

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