Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE Company, Fourth Quarter and Full Year 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]. 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, Daniel. Good morning everyone and welcome to the Baker Hughes, a GE Company, fourth quarter and full-year 2018 earnings conference call. We are hosting today's call from London after having just concluded our 20th Annual Customer Meeting in Florence. Here with me 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. 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 fourth quarter results, update you on our view of the market, and take you through some of the highlights of the quarter. Brian will then review our fourth quarter results and full-year in more detail before we open up the call for questions. In the fourth quarter, we booked $6.9 billion in orders, our largest order quarter in three years. We delivered $6.3 billion in revenues. Adjusted operating income in the quarter was $498 million. The strength of our portfolio was evidenced in the fourth quarter. Strong results in our Turbomachinery business offset the challenges in the OFS market. Free cash flow in the quarter was $876 million, our best cash flow quarter as a combined company. Earnings per share for the quarter were $0.28 and adjusted EPS was $0.26. When I looked at our total year results for 2018, I am pleased with how we executed on the priorities we set out. I cannot thank our employees enough for their hard work and dedication to achieve our goals throughout the year. For the total year, orders were $23.9 billion as we grew market share and re-built our equipment backlog. We delivered $1.4 billion of operating income and generated $1.2 billion of free cash flow. 2018 was also a year of significant change for us. We moved beyond the initial integration phase into the next chapter for BHGE, as a combined company. We saw the market environment change significantly as we progressed through the year and our majority shareholder announced their intent to exit their stake in our company. We took the first step in this process in November by reducing GE's ownership to approximately 50.4%. At…

Thanks, Lorenzo. I will begin with the fourth quarter and 2018 total company results and then move into the segment details. Orders for the quarter were $6.9 billion, up 20% sequentially and up 21% year-over-year. The fourth quarter was our largest orders quarter in three years. We grew orders sequentially in all segments. Oilfield Equipment was up 88%, Turbomachinery up 37%, Digital Solutions up 6%, and Oilfield Services up 1%. The year-over-year growth was driven by equipment orders in our longer cycle businesses which were up 44% versus the fourth quarter of 2017. Overall Oilfield Equipment was up over 100% and Turbomachinery was up 23%. Remaining Performance Obligation or RPO was $21 billion, up $0.2 billion or 1% sequentially. Equipment RPO ended at $5.8 billion, up 6%. Services RPO ended at $15.2 billion down 1%. Year-over-year RPO was flat with equipment up $0.4 billion offset by services. Our book-to-bill ratio in the quarter was 1.1 and our equipment book-to-bill with 1.2. Revenue for the quarter was $6.3 billion, up 11% sequentially. We grew revenue sequentially in all segments. Turbomachinery was up 28%, Oilfield Equipment up 16%, Digital Solutions up 6%, and Oilfield Services up 2%. Year-over-year revenue was up 8% driven by Oilfield Equipment which was up 12%, Oilfield Services up 10% and Turbomachinery machinery up 8%, partially offset by Digital Solutions down 4%. Operating income for the quarter was $382 million which is up 35% sequentially and $493 million year-over-year. Adjusted operating income was $498 million which excludes $116 million of restructuring and other charges. Adjusted operating income was up 32% sequentially and up 75% year-over-year. Our adjusted operating income rate for the quarter was 7.9%, up over 300 basis points year-over-year and 130 basis points sequentially. We continue to make progress on our goal of expanding margin rates.…

Thanks, Brian. We are pleased with our 2018 results. Despite the recent commodity price volatility, BHGE is well positioned to capture the benefits of a growing LNG market and a resilient international market, while navigating the challenges in North America. Our priorities remain unchanged. We are focused on executing to deliver on our commitments on share, margins, and cash. Phil, now, over to you for questions.

Thanks. Scott Daniel, let's open the call for questions.

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

Lorenzo, clearly you demonstrated the strength of the portfolio this quarter and what was a choppy environment in North America but solid EPS, solid orders, solid cash flow. I have recognized that you guys just wrapped up your Annual Event in Florence with I think the top 1,500 or so clients of Baker. What are they telling you about what we see as the three kind of major themes that are developing this cycle and that's the international growth, the rebirth of the offshore markets, and then of course the one you have highlighted several times but the LNG markets, I'm curious to get that real time feedback?

Yes, thanks, James, and we're pleased with the way 2018 panned out. And as you said the Annual Meeting in Florence we got 1,500 of our customers there. We had a theme about energy forward and we had an opportunity really to focus on the new technologies and the products that we're providing our customers. I would say the key things that came out were customers are still talking a lot about productivity, about needing to focus on making ourselves as productive as possible, a lot of focus on the new technology. As you look at the market, North America definitely more challenging. We saw that happen during the course of the fourth quarter and we'll see that continue in the first half of 2019. International we had a more conservative view than others and that remains unchanged. We see still good opportunities and momentum in the Middle East as well as the North Sea. And on the offshore, we remain relatively unchanged expecting about 300 trees in 2019 and we've got to see how that pans out with some of the customers with their capital budgets that they're finalizing. But as you point out the one area where there's a lot of activity is LNG. And we've seen an increased interest and also an opportunity for up to 100 million tons per annum to be sanctioned by year-end 2019, including LNG Canada. So it was the great conference and really good to be with the customers.

Great. And just maybe just a follow-up on the LNG side, so 100 million tons sanctioned likely this year. What's your bouquet scenario as we look out over the next two, three years because looking our numbers we could get to probably 250 million, 300 million tons over the next couple of years, how are you guys thinking about that playing out?

So James we really look at it from an aspect of the longer-term growth and if you look out to 2030, there is an expectation of about 550 million tons per annum. We see about 5% CAGR growth from now until 2030 driven by power generation and really consumption in some of the emerging markets, India, China. The project sanctioning hard to tell how it will evolve in all cases, again there is a lot of activity in 2019 that's why we've increased our view to the potential sanctioning of 100 million tons and then we will see the step function as it happens going forward towards that 550.

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

Thanks, good morning. I wanted to follow-up on, on the TPS commentary obviously pretty positive improvement and sentiment there, 100 million in TPA this year. Can you Brian or Lorenzo help us think about that would obviously imply a pretty substantial increase in TPS orders this year, I don't know if you can help us think about the ramifications of that for the TPS business and perhaps the timing of those orders, is it more back-end loaded, is it more evenly distributed? And then how would we think about margins in that environment. I think Brian previously you talked about an exit rate in the mid-teens; does this change that at all and helping us balance that against the incremental investment a lot of questions in there but if you could help us think about how you're thinking about TPS in light of the stronger order outlook?

Yes, Jud let's break it down and clearly we are seeing the LNG market be stronger and so. What we're doing is clearly finishing off our products and getting the substations in place, we've got great capacity there and we're aligned with our customers in what they need to go forward. We expect TPS revenues to grow and earnings to grow in 2019 similar profile for 2018 for the second half of the year is significantly stronger than the first half.

Yes, Jud, I mean basically the -- our general 2019 financial framework for TPS is unchanged. We still expect services to continue to improve both transactional as well as contractual. The team is continuing to drive productivity and we will have some higher revenue come through for LNG that we've already booked partially offset with lower equipment installs as we go through the year. And to put it into perspective the 100 million tons per annum roughly represents MTPA that came to market between 2011 and 2014. So as we've mentioned before we have been protecting our capacity here, so we could deliver on what we saw is an increase in LNG demand here. So it's really about the volume and the pace of how quickly that's coming in and that's really what's driving the incremental investment here. This is basically redeploying as resources into application engineering, getting ready for the customer projects that are coming, more testing, and getting the new products ready for the solutions that we've got to offer. So long-term this is a great investment for BHGE. Overall we feel good about 2019 and the dynamics are generally playing out as we expected but obviously increased volume in LNG and the outlook is much better. And as Lorenzo mentioned, we expect the dynamics to be a stronger second half and I still see the opportunity for the mid-teens margin rate there obviously depending on the cadence of the incremental investment which I would expect to be heavier weighted to the first half, given what we're hearing from customers and when they want FID.

Okay, that's helpful. And if I could squeeze in just one follow-up and just a clarification, you talked about the Novatek selecting your technology for Arctic 2 that was not booked though in the fourth quarter, I just want to clarify that's still something that has not been FID officially, correct?

That's right that has not been FID yet and is not in our orders number.

Okay, just wanted to check, thanks a lot. I'll turn it back.

Thanks, Jud.

Thank you. And our next question comes from Bill Herbert with Simmons. Your line is now open.

Good morning. Lorenzo, with regard to your outlook, you and your peers are waxing understandably conservative with regard to first half of 2019 for lower 48 and yet WTI is up 25% to 30% from the late December lows and we're up 20% year-to-date hence probably witness the strongest gain in January in 35 to 40 years coupled with that ongoing a significant frac cost deflation collectively that yields better than expected E&P cash flows. Do you think that the industry in light of these developments is waxing too conservative with regard to drilling and completion activities first half or does that pertain to an even stronger set up for second half?

So I think you look at what happened over the course of October to December in 2018 and clearly the markets showed that it continues to be volatile. And within North America, we saw the market reactions, we saw lower volumes and that impacted well construction product lines for us obviously we are not as exposed on the pressure pumping side but we do expect that to continue at least through the first half. As you mentioned there is encouragement relative to the second half and we'll see how that pans out we're staying close to our customers but second half could be better, let's wait and see.

And can you remind us; you mentioned that your international outlook is largely unchanged, what does that basically mean in terms of an expectation for the growth in E&P capital spending internationally for 2019?

Yes. As we mentioned our outlook for international remains unchanged and if you look at some of the wins that we announced in 2018, a lot of those were international with Equinor on the Norwegian Continental Shelf, Marjan in Saudi, also the Qatar drilling. So we will be seeing growth there from those execution.

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

So want to stay on in international side of that certainly the international growth in 2018 relative to the rig count growth was impressive, you clearly have taken some share on the international side which is a key initiative of the company post merger. Are you satisfied with where the share will sit once these latest contract wins are fully realized, are you targeting additional share gains and how you've been mentioning the share gains in order to measuring your performance?

Yes, Scott, just on the international side clearly there is a lot of activity in many countries and what we always said was there's an opportunity for they can use to come in and regain some lost territory there. I think we made good progress in 2018. The commercial intensity is there. We've now got dedicated plans by sales person and we've got the accountability that's going to continue in 2019. And I think again you're going to continue to see us having the opportunity to gain share as well as accrete margin within in the OFS business.

Great. And just on the margins in OFS, they are little lighter than we expected in 4Q, was that primarily driven by the completion slowdown in the U.S., what was kind of trajectory in the business in the U.S. versus international?

Yes, if you take a look at fourth quarter from a macro standpoint, we are more insulated than others but clearly not immune to what was going on in North America. Activity was lower in completions. So we did see an impact there. But we do expect artificial lift and chemicals to continue to remain strong as they did in the fourth quarter. One thing in the fourth quarter that we saw is pricing was softer in North America than we had expected and we did see -- we did see that come through a bit. But revenue was up 2% in EMEA and international was up 3%. Within North America, we did see the impact come through on the profit line of the completions mix. Additionally in OFS, we did have some lower international pressure pumping utilization and that obviously has an impact on margin rates. So some market dynamics there that were giving us some pressure. We did see more synergies come through, so I was very happy with how Maria Claudia and the team executed on taking cost out of the business but we did see some higher inflation come through on the material side. And remember we talked about it at the end of the third quarter on the call that we did have some higher ramp up costs associated with those large international wins as we positioned resources to start executing on those. So we'll still have some of those ramp costs come through but obviously you'll start to see margin come through on those later in 2019.

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

Hi good morning. I was just going to take on the same subject on the OFS but maybe dig down a level, could you just kind of talk about the artificial lift market, sort of looking at international versus North America perhaps you could at least first just give us a sense of the size of the two business NAM versus international. And then kind of talk about the dynamics you see a bit seemed like North America is going to get a -- has been getting a lot more competitive on that front yet on the international side you've talked about a number of wins over there, we don't really hear about artificial lift being used, I think it's still pretty new maybe talk about the opportunities for the number of wells that could be addressed internationally? Thanks.

So, Dave, just clearly the artificial lift market is very precedent in North America. We do see it increasing also internationally expense be around 50:50. If you look at North America we're not as impacted in the as the pressure pumping and also the completion side. We think will be relatively stable as we go into 2019 and we are seeing internationally the opportunity to take some of our new capability especially in ESPs and some of the new wells.

And if I could dig maybe certainly different subject on the TPS side, LNG gets obviously all the headlines in there. You also talked about a number of pipeline projects, can you talk about that part of as kind of non-LNG part of the business, I mean how should we think about the prospects for those, can you talk about some of those end markets, do you see more of these pipeline projects? And secondarily is this lower technology equipment, I would assume it would be versus LNG and how did the margins kind of, do we think about the margins a little bit?

Yes, thanks. So the pipeline clearly is opportunity for us. We've got a strong presence that historically and we see actually the opportunity growing. There's a number of new pipelines that are going to be required across the globe. You've seen some of the activity in North America also some of the discussions in Latin America and across Europe. If you look at the technology we've got a great new Turbine line of the NovaLT which is amply which applies to the pipelines as well as PGC25 and so we got a very good presence. It is slightly lower margin than the LNG space but we see this as being one of our core strengths.

Thank you. And our next question comes from Sean Meakim with JPMorgan. Your line is now open.

Thanks. I appreciate all the commentary on TPS and the moving pieces within the P&L, also you can maybe also help us think through the impact of cash flow in 2019, just thinking about contract cash advances as some of these projects start to come in, what that conversion cycle may look like in this environment versus prior cycles just trying to think about how that all will -- how TPS ultimately impact cash flow in 2019?

Yes, Sean, if you think about it in this cycle what you will have specifically as it relates to LNG, we typically have down payments that come in for the large projects, we do start to spend some money as we execute on those projects. So I would actually expect in this cycle with the down payment that we're getting and the money that we would spend to be relatively neutral to slightly positive. But I look at TPS overall, I would expect them to have a strong free cash flow year next year given the dynamics that we talked about with the services growth that we're anticipating with some of the conversions with the orders that we booked this year on the equipment side so relatively, relatively positive. And for cash flow in general for 2019, we will benefit overall from higher net income coming through at the DHC level. Do expect our working capital metrics to continue to improve but we will have revenue growth there but again processes, I think are getting much better, lower restructuring cash outflows as well but we may have some of that, we will have some of the $200 million to $300 million we talked about from the GE separation cost coming through and we'll continue to invest up to 5% of our revenues in CapEx. So we've been disciplined about investments this year. We'll continue to be disciplined there, but I think overall the backdrop with the operating process improvements that we've made and seen that come through in our working capital metrics as well as what we're seeing specifically in Turbomachinery we feel good about our ability to generate strong free cash flow in 2019.

Thanks, Brian. I appreciate that. That's really helpful with respect to the cash flow and then just know the comments from GE on their call earlier were consistent with prior comments and orderly exit over time, as you think about your stock and using that as a being a good source of cash today, how do you think about, is there a way to kind of marry perhaps share repurchase alongside GEs desire press over time to again -- to exit its position in BHGE, just curious how you think about your own stock as a use of cash as free cash flow improves and then within the broader context of GE's long- term goals?

Yes, Sean, just maybe to take it back on the macro side, our capital allocation isn't changing and again GE has indicated that they will be exiting from BHG. We've always run BHG as a strong independent public company and we'll continue to do that. We started the separation with the actions that we've taken in November 18 and their ownership is down to 50.4%. As we look at our capital allocation though again we think we've got a good strong balance sheet and we'll continue to review it as we go forward but we like where we are.

So guys I think Sean a couple of things there. We do remain committed to returning 40% to 50% of our net income to shareholders over time and there are obviously different ways that we can do that. We do like our current credit rating and the strength of the balance sheet especially with the volatility in this marketplace. So we think that it's strength, but we've got a lot of opportunity here with this free cash flow profile with how we've outlined our capital allocation priorities. So I think you should expect us to be prudent and take a step back and look at what's best for our stockholders here in terms of capital allocation and we certainly consider what GE sell down means for that and take that into consideration.

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

Good morning, guys. If I could drill down a little bit from a different perspective you guys there's been a great deal of commentary around lumpsum contracts that have been bid and awarded particularly in the Middle East just to the industry over the last year and Middle East is one of the two areas along with U.S. where you are working hard to regain market share. We already talked about and Gruber mentioned it, you do this on revenue but you missed this on margins, you mentioned big awards in the Mace in Latin America in all the cities, what percentage of these awards were lumpsum turnkey projects and is that the beginning of the impact of Baker winning some of these highly competitive bids, is this going to be accretive to current margins? And finally if these projects are just really now ramping up, what kind of drag on OF margins could they be through 2019 and 2020 because these things have duration, could you just talk about those aspects of the business?

Yes, Jim. Just maybe clearly there is a lot in that question. And as you look at some of the comments we've had in the past, there is LSPK models that have been around for a long time. We really haven’t participated much in the LSPKs and our wins that we have done are from new commercial innovation and working closely with the customers. If you look at the Marjan fields in Saudi Arabia, you look at also the ADNOC drilling transaction, it's ways in which we come with a new proposition and been able to use the breadth of our portfolio and the capabilities we have in the field. And we feel good about the ramp up that's in place again it doesn't change our full capital allocation and framework of CapEx for the total year and we feel confident that we will continue to be successful.

Yes, Jim, and what I would say is if we look at some of these costs that we talked about there really ramp up cost is we have won new business where we didn't have resources in place and needed to redeploy both people and assets there, so that's the type of cost, we're talking about. I'd say in general though we have looked at the book of business that we have in the international markets what we think we're going to win and all that is baked into the framework that we talked to you about in terms of how we think about OFS margins progressing during the year. So we've certainly considered that in our framework and I think you'll see that we've been pretty disciplined in what we've been going after and the pricing that we've been putting forward in international markets and we will continue to do that.

So these kinds of projects are going to be ones where you can upsell on technology through the course of the project and then possibly even improve margins versus where they start, right?

Yes, we talked about it in terms of the traditional LSPK. We need to be aligned with the customers, we talk to customers about alignment, if they win, we win and the models that Lorenzo talked about are structured in such a way that if we perform and help them beat performance expectations, we get upside from that as well. So we're trying to completely align with the customers in what they need to generate more profitability and better productivity and we're structuring our contracts in a way that help us getting some of that upside.

Thank you. And ladies and gentlemen, that concludes our question-and-answer session for today's call. I would now like to turn the call back over to Lorenzo Simonelli for any further remarks.

Thanks a lot and thanks for joining us today. We're excited about 2019 and the future of our company. We did just wrap up our Annual Customer Meeting, lots of outstanding feedback from our customers and one of the items that was top of mind for the customers is really the climate change and also how they get ready for the environmental carbon footprints and I did want to point out that we're very conscious of that at BHGE. We've got a whole new brand of products that have been released the focus also on emissions, the carbon footprint and it's aligned with our customers, it is a great business case around it and we also announced that BHGE is committed to reduce its carbon footprint by 50% by 2030 and up to a net zero by 2050. We think this is important for the industry and again it aligns with our customers, it makes good business sense and again we're going to keep on driving the energy forward motto as we compete in the industry. Thanks a lot and look forward to speaking to you soon.

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