Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE company, First Quarter 2019 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, Investor Relations. Sir, you may begin.

Thank you, Kevin. Good morning, everyone, and welcome to the Baker Hughes, a GE company, first quarter 2019 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. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings for 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. 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 first quarter results, update you on our view of the market and some key themes and take you through the quarter highlights. Brian will then review our first quarter financial results in more detail before we open the call for questions. In the first quarter, we booked $5.7 billion in orders. We delivered $5.6 billion in revenue. Adjusted operating income in the quarter was $273 million. Free cash flow for the quarter was negative $419 million. Earnings per share for the quarter was $0.06 and adjusted EPS was $0.15. Importantly, our financial outlook for the second quarter and the total year 2019 is unchanged from what we communicated at the end of the fourth quarter 2018. Let me take a few moments to share our view on the market. The first quarter proved to be a period of stabilization for the global oil and gas markets. Oil prices rose during the quarter with Brent up 34% and WTI up 33%, rebounding from fourth quarter 2018 lows. OPEC and Russian production cuts and continued challenges in Venezuela are balancing the markets. U.S. production growth remained strong, but the lower CapEx budgets announced by our U.S. customers will likely have an impact on supply over the medium term. Rig counts in the U.S. was down 3% or 29 rigs in the first quarter, slightly less than previously expected. The U.S. DUC inventory hit a new all-time high in February at just over 8,500 DUCs. U.S. production is expected to be up more than 1 million barrels per day in 2019. While our independent customers focus on working within their cash flows, the major operators are moving with speed into…

Thanks, Lorenzo. I will begin with the total company results and then move into the segment details. Orders for the quarter were $5.7 billion, up 9% year-over-year and down 17% sequentially. The year-over-year growth was driven by Oilfield Equipment, which was up 54%, and Oilfield Services which was up 14% partially offset by lower order intake in Turbomachinery due to timing. We delivered solid orders growth across both equipment and services. Equipment orders were up 17% and service orders were up 4%. Sequentially, the decline was driven by typical seasonality across all segments following our strong fourth quarter. Remaining performance obligation was $20.5 billion, down 2% sequentially. Equipment RPO ended at $5.5 billion. Services RPO ended at $15 billion. Our total company book-to-bill ratio and our equipment book-to-bill in the quarter were both 1.0. Revenue for the quarter was $5.6 billion, down 10% sequentially. This sequential decline was driven by seasonality across most segments. Turbomachinery was down 27%. Digital Solutions was down 14% and Oilfield Services was down 3%, partially offset by Oilfield Equipment up 1%. Year-over-year, revenue was up 4% driven by Oilfield Services, which was up 12%, and Oilfield Equipment up 11%, partially offset by Turbomachinery down 11% and digital solutions down 1%. Operating income for the quarter was $176 million, which is down 54% sequentially. Operating income was up $217 million year-over-year. Adjusted operating income was $273 million, which excludes $97 million of restructuring, separation and other charges. Adjusted operating income was down 45% sequentially and up 20% year-over-year. Our adjusted operating income rate for the quarter was 4.9%, up 60 basis points year-over-year. Corporate costs were $100 million in the quarter, down 9% sequentially and up 2% year-over-year. Depreciation and amortization was $350 million, down 1% sequentially and down 10% year-over-year. Tax expense for the quarter…

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

[Operator Instructions] Our first question comes from James West with Evercore ISI.

Hey, good morning guys, or actually good afternoon to you. Lorenzo, in your prepared comments about LNG, obviously, very bullish but kind of holding one from where you were last quarter. It seems to me that even in the last three months, we've had more of an acceleration and a rush to kind of FID LNG projects. Do you think you're perhaps conservative at this point with respect to the number of projects that will go forward this year? And could we see upside surprises to that? And then, I guess, secondarily to that, any changes in the competitive dynamics on the LNG side given your dominant position?

James, we feel good about the 100 million tons. And if you break it down you can see year-to-date, you've got the FID of Golden Pass, that's 16 million tons. You've got BP Tortue, another 2.5 million tons. And also, if you put in the LNG Canada, 14 million tons at the end of last year, you've got 35 million tons that's taken place so far. You've also got the FERC approval that came through this quarter from a number of projects in North America, Venture Global with Calcasieu Pass, Tellurian Driftwood and also Port Arthur as Sempra's LNG project. So we're working closely with these customers. So we feel good about those continuing and reaching certain milestones internationally. We've also got Qatar, Mozambique projects, and of course, Arctic 2. So I'd say 100 million tons looks good and we continue to feel positive. Regarding the competitive landscape, as we said before, competition has always been there. We feel good about our proven technology and also the incumbency we have. And also, if you look at the new technology that we've been releasing, the LM9000, so it's going to remain competitive. But again, we're taking the steps from a technology standpoint to make sure that we can compete and stay ahead.

Okay. Great. That's great. And then Brian, with respect to kind of full year estimates that are out there, I know you guys don't give specific guidance, but it seems to be that this is a sector, obviously, that's had a negative earnings revision cycle for a long period of time, but we may be at a bottom here and to kind of finding our way to where we can at least meet expectations, if not exceed expectations. Do you have any concerns around kind of where consensus is shaking out for the full year?

Yes. James, I actually feel pretty good about where we are and how the year is shaping up for us. If you take a look at it by segment, in OFS, the international business is growing as we expected, and we still see that in the high single-digit range. And the main areas of that growth are really in the Middle East, and we're seeing some growth in the North Sea. In North America, the business looks more flattish given the current backdrop and, of course, we're watching North America closely, and it's a bit early for visibility into the second half. But as I said, we are watching that. And you got to remember, we do have the synergies and the cost out in the OFS business that we are -- we're driving, and that's a tailwind for OFS. You highlighted the LNG cycle here. I like how we're positioned there from a TPS standpoint and our general outlook's unchanged. But for the year specifically, we expect higher services activity. We like the mix of business in our equipment backlog. And then Rod and the team are continuing to drive the cost out, and we are investing more in the first half to get ready for this LNG ramp. So that's a slight headwind versus the cost out that they're driving. And then in OFE, as we've said, I expect better results in 2018, but that's going to be slightly tempered by the FPS business where we're seeing lower volume and higher volume in the FPS business. And then finally, on digital, roughly flat versus 2018. The industrial end markets are looking pretty strong right now. We are seeing continued weakness in the power end markets, but we'll continue to watch that as the macroeconomic environment develops throughout the year. So to sum up, as I started, I feel pretty good about where we are and how the year is shaping up.

Our next question comes from Angie Sedita with Goldman Sachs.

Thanks. Good morning, guys.

Hi, Angie.

So on the Oilfield Services, clearly, you had a good quarter with better-than-expected revenues and nice margins as well. Maybe Lorenzo, you can talk a little bit about the opportunity set that you see in international markets for gaining additional shares and where you are on your targets as you think about where you want to be on Oilfield Service market share. Are we still in early stages or midway through those share gains? And then just some commentary on the pricing outlook as you gain share with margin.

Yes, Angie. As we look at the international markets, we see it continuing to be mid- to high single-digit growth rates. We feel good about the momentum that continues in the Middle East. Obviously, if you look at the North Sea, there's been some key wins with Equinor and the Norwegian Continental Shelf that's driving some of our growth there. And as you look at Sub-Saharan Africa, Asia Pacific, that will remain challenging with some slower market growth. And Latin America, we'll see some pockets of opportunity. I think, overall, the international markets in the last few years have been -- continue to be more competitive on the pricing side. What you're seeing come through at the moment is some of the revenue from the projects that have been won in the 2017, 2018time frame. And what we're focused on is really winning deals that are accretive to our operations as we've won with ADNOC Drilling, Marjan, Qatar drilling, and we feel good about the trade-offs that we're making between the margins and share gains. So international continues to be a spot of focus for us as we go forward.

Yes. Angie, I would just add on that. What we're seeing in the international market is not really idiosyncratic to us. It's seen across the industry, and I think we're doing a nice job of looking at deals and looking at markets and making the right trade-off between share and margin, and it's something we spend a lot of time with Maria Claudia and the team on as we evaluate these deals. And we're happy with where we are from a share point right now, but there's always more we can do, and we are looking to continue to grow share in areas where we can improve returns.

That's helpful. Then maybe if you go to Oilfield Equipment and talk about some of the wins you're seeing with Subsea Connect and the opportunity set for the rest of the year and even the margin outlook going into 2020 and if Flexible Pipe could be add as we go into 2020.

Yes. Angie, if you look at where we are, very happy with the wins that we're seeing in Oilfield Equipment, some early wins with Subsea Connect. When you did talk about 2018, better volume in that business and Neil and the team have taken a lot of structural costs out and taken a lot of product costs out of the products. So you'll start to see some of that come through as we see more SPS volume here in the second half, and that's definitely a tailwind as we go into 2020 from all the cost out of the actual product and the wins we're seeing with Subsea Connect. From a Flexible Pipe business standpoint, we did have softer orders in 2018, and you're seeing that play through in 2019 and having an impact on the business. But we did talk about 2019 seeing some potential growth in Flexible Pipes. The projects are definitely out there. As you know, these big project timings can move from one quarter to another. But right now, things are pretty much playing out as we anticipated, and I'd say it should be a tailwind as we go into 2020. But overall, we feel good about the trajectory of our OFE business, how we're positioned in the market and the offshore market in general.

Angie, I would say we're very pleased with the Subsea Connect we launched in November 2018 and its a new modular approach towards deepwater technology. It provides a lot of standardization opportunity to become more productive for the operators. And we're offering a lot of flexibility for the different operators. So Subsea Connect is definitely doing what it said it would do.

Our next question comes from Jud Bailey with Wells Fargo.

Question if I could, maybe for Brian. Could you maybe give us some more color on TPS orders, given that you booked Golden Pass and also Tortue? And can appreciate everything outside of LNG was down. It seems like orders should have been higher. And so could you help us maybe size up to the extent you can kind of what's going on there given where orders should go overall?

Yes, Jud. To start with, as you know, we don't give LNG specifics by deal due to the competitive sensitivity of that information, but we did have LNG orders up significantly year-over-year. The majority of the other segments were down and were offsetting that. We still feel very good about the overall LNG orders this year and the FIDs that are going to come through, as Lorenzo mentioned. And if you take a look at the other segments, there are lots of opportunities there. We are seeing more activity. But as you know, deal timing can move across quarters depending on when customers decide to run some of these FIDs. So overall, the market backdrop is pretty constructive. I will say that, as we previously talked about, we will make some trade-offs between relatively higher-margin projects, particularly in LNG and some of the other segments where we have higher margins versus others that we had flow through the backlog over the course of the last couple of years when things were a bit softer. So look, I wouldn't be surprised if some of the lower-margin segments are actually down on orders year-over-year, and we're spending a lot of time looking at that mix of business and making sure we're doing what we need to do for our customers but also optimizing returns during the cycle.

Okay. I appreciate that. I guess if I could maybe follow up on that. So if I think about the non-LNG OEM kind of order portion, I guess, do we think that kind of normalizes back to -- over 2Q and 3Q to a little bit higher levels? Or is that like a good baseline to use unless we see some bigger orders start to come through? Just trying to understand kind of what the new normal may be for non-LNG orders, just to have a rough kind of estimate.

Look, I do think it will, to use your words, normalize a bit and maybe not be at the same levels that you're seeing in terms of the year-over-year. But again, I wouldn't be surprised if for the total year, in some of those segments, we're not down as we make those trade-offs. So we are down in the first quarter year-over-year. But again, I don't know that it will be to this level as we look at the rest of the year.

Our next question comes from Sean Meakim with JPMorgan.

To follow on the question on LNG competition and the read-through to your expectations for 2019, how should we think about the level of OEM orders needed to exit 2019 at that mid to upper teens profitability that you've put out there as a bogey for exiting the year?

Yes. Sean, if you think about it, the orders that we're going to be booking right now in LNG really don't have an impact on margin rates in TPS here in the second half. The timing of win that converts to revenue really depends on the scope of the project, greenfield versus brownfield, those types of things. But in a typical greenfield within the first six months of FID you actually book the order, but the revenue really starts up a little bit six months but goes really through 24 months of post-FID. And we recognize revenue based on milestones like construction progress, testing and installation. So that's really a later impact. So what you see in Turbomachinery really this year is a couple of things. One is we expect to benefit from better mix in the equipment backlog like I talked about, and we do expect higher services activity throughout the year. And the transactional service orders in the first quarter certainly are a good indicator that things are playing out as we'd expect if you're early on in the year. We are continuing to drive cost out in the portfolio and then the incremental LNG spend that we had talked to you about earlier really should abate here in the second half of the year. So you've got a profile that looks a lot like last year in terms of margin progression, and the dynamics are really playing out that way. So look, we booked a lot of orders in the second half of 2018 that you saw that certainly helped second half of 2019 and what we're booking right now plays out really in 2020 and beyond.

So it sounds like no walk back from prior expectations around the margin progression aside from what you already called out for the first half.

Yes, that's right. As I said, I feel good about how we're positioned there and don't see anything that changes that right now.

Okay. I appreciate that. That's very helpful. And then just thinking about cash a little bit. Anything beyond typical seasonality as we look at the working capital draw in the first quarter? And I'm just curious how much room is left to optimize OFS working capital metrics. Just thinking about some of those key initiatives, Brian, that you've been focused on for the last year-plus.

Yes, yes. Sean, as I did say, we did expect a usage in the first quarter. You got the -- outside of working capital, you've got the typical bonus and employee-related compensation that happens in the first quarter. Inventory, we did build intentionally to fulfill the increased volume that we're seeing coming to the portfolio. And I'd say that one area that was lower than we anticipated in the quarter was around collections, and that was mainly timing, and a lot of that came in the first week after the quarter closed and has pretty much fixed itself by now. So there's nothing structural there from a working capital standpoint. And look, we do have opportunities to continue to improve. I mean, we've reduced days sales outstanding by 23 days since we merged. We've increased payable days by 27 days, and we've improved inventory almost by a turn. We've got dedicated teams continue to look at this, and I do think there's still opportunities in those working capital metrics to help us continue to grow without it being such large drag on working capital, and we are all focused on free cash flow generation and managing working capital better. So feel good about the dynamics and the framework that we laid out earlier in terms of free cash flow and our ability there to generate high free cash flow.

Our next question comes from Marc Bianchi with Cowen.

Most of my questions have been answered, but I guess I'd like to explore the electric frac fleet opportunity a little bit more. Is there any way you could help size this opportunity relative to some of the LNG awards that you talk about? Any way to put some dollars around that, maybe dollars per fleet and compare the profitability?

Yes, Marc. Just again, if you look at the electric frac market, it's going to vary by the different fields. We see a good opportunity for our TPS business. Where it's going to be most prevalent is if you look into areas such as the Permian where there's challenges around logistics, power and flare gas emissions. So you're able to take some of the gas and instead of utilizing the flare gas, you can actually utilize within the electric frac. So if you look at some metrics, you think about 20 million horsepower translates into about 15 gigawatts of power, so the market potential is there. And for us, it's a very interesting new market entry with the pressure pumpers and also the packages and it's starting to be offered now and starting to grow with our customers.

Yes. Marc, if you think about it, the sheer size of this from an individual transaction is much, much lower dollar value versus LNG or some of the larger projects and things that we have, but you can have a very profitable business here in selling our turbine technology. And in this space, we've got a lot of options here, the LM2500 technology, our Nova 16 technology. And the value proposition is really all around less people at site you've got less equipment mobilize and demobilize one trailer versus multiple. And then if you think about it for the operator that actually owns the well, taking that flare gas potentially, putting into a gas turbine and using that for your field is a pretty significant cost reduction. So there's a really good value proposition here that will drive better economics for customers as well as allow us to have pretty good economics as we sell the equipment here. But from an actual dollar size individual transaction, it's a lot lower than what you typically see in Turbomachinery for these larger transactions.

Okay. Thanks for that Brian, I do have one more, kind of unrelated, on CapEx. I noticed this quarter you've combined the kind of the capital expenditures and the gain on disposal. Just wondering if, as we roll through the rest of the year in the context of your up to 5% of revenue guidance for CapEx, should we be thinking about that number that you reported here in the first quarter as being the relevant number for the up to 5%? Or are we going to see something different in the Q and think about kind of that actual outlay of CapEx being the relevant number for the guidance?

Yes, yes, Marc, that’s really the way to think about it here. I mean, if you think about it, the gross CapEx is really not a material change versus last year other than specific international projects like ADNOC and some of the deals that we've won in the Middle East. And in the first quarter, I'd say it's pretty representative of where we're investing in our CapEx, CapEx spend in new tools to drive growth as well as in Turbomachinery as we're launching new products there. So the numbers that you see there in the first quarter are pretty representative of how we think about the up to 5% of revenue.

Thank you. Our next question comes from David Anderson with Barclays.

Hi. I was wondering if you could just talk about the path towards normalized and peak margins in TPS over the next several years. Kind of moving beyond 2019, just thinking about how the LNG equipment orders convert into revenue. I would expect the first wave maybe is a little bit lower margins but you also have the aftermarket starting to build in from last cycle. Can you just talk about the interplay of those two functions and kind of when you think you hit normalize and perhaps when you think you could hit peak margins in TPS?

Yes, David, if you think about it, it's a little bit in an earlier question. What you're seeing right now really is not going to convert into – what coming through right now in orders really isn't going to start converting into revenue until 2020. You'll start to see some of the things from the second half of last year later in 2019 and we talked about tailwinds in 2019 in the second half that will improve margin rates. The other dynamic that you have is really the services revenue, and we talked about contractual services revenue being up in 2019, and we are starting to see that play out and that's really from LNG installs from a few years ago. So as you look at that portfolio, you really got to take a look at – and you can see when equipment was installed and when LNG started to be produced in all these different projects to see how that services revenue starts to roll off. But right now, we are seeing an upcycle in the contractual services revenue. You'll start to see more equipment rolling off next year from the orders that we booked this year. And then we do have a healthy CSA backlog that's going to continue to produce the high-margin revenue in 2020 and 2021.

Do you have a sense as to when that service side kind of peaks from last cycle? Is that a 2021 event on those ones?

Yes. No. Look, you're going to have some times where it doesn't grow as much. But based on what we have installed and where they are in the operating cycle, I would expect that services revenue to continue growing. Year-on-year, you'll have some different growth rates. But in general, that service revenue for the foreseeable future, we would expect it to grow.

And then on the OFS side, you talked about reentering a number of international markets that Baker or kind of, Lorenzo, your predecessor exited over the prior years. Just curious, where are you in that process now? Are you kind of where you want to be? I think you're talking about kind of – talking about market share, kind of the gains, but are there more opportunities? And do you think you can regain kind of satisfactorily what you've lost in the prior cycles? And I'm just trying to think about how do you strike that balance, obviously, through gaining share and improving margins in OFS as you think about this.

Yes, Dave. As mentioned, we've heightened our commercial intensity and we're always going to look at the tradeoffs between share and margin. When we're taking on projects, we're looking for them to be accretive to the operations. I'd say we've made good progress in the Middle East over the course of 2018. We're continuing to focus there. We see international markets within Eastern Europe and also some of Africa as opportunities. So we’re making very good progress, but there’s still some more we can do. But again, we’ll always take into account the tradeoff of margin and share.

Thank you. our next question comes from Chase Mulvehill with Bank of America.

Hey good afternoon.

Hi, Chase.

Hey. I’m going to come back to the TPS orders. So if we can, I guess, I think there’s more moving pieces in base orders. I guess, they’re not really appreciated in TPS. So the order rate was down about 12% year-over-year. Could you talk through what the biggest kind of year-over-year declines were within TPS? And then maybe do you think for 2019 that orders will be up?

Chase, as I said, LNG was up significantly in the quarter. The other segments were down enough to obviously offset that growth there. And if you look, it really varies by segment. And taking a look at it by quarter, Chase, is really difficult given the nature of the projects and when they are FID-ing. So I think you really have to take a look over the course of a few quarters here, and that’s really how I look at the business over rolling quarters to see what we’re doing vis-a-vis the market. But the speed at which different parts the business grow is really governed by customer FID. So the on- and offshore is really going to be driven by some of these large projects and when they decide to FID. But as we said earlier, we do expect the total year to be up significantly given the LNG cycle that we’re seeing and what we expect to FID there. And in addition, I’ll just reiterate what I said earlier, that we are taking a look, a hard look at the opportunities, and we will make some tradeoffs based on margin and returns here as we see a pretty positive backdrop for Turbomachinery in total.

Chase, I think it’s important to remember as you look at the LNG, it’s always been lumpy and it will continue to be lumpy as we go forward. But again, the expectation hasn’t changed for the year and TPS should have good orders here.

Okay. All right. That’s a good color. Appreciate it. And then if we think about OFS business in – particularly in North America, if we kind of look of your peers on a sequential performance basis, you underperformed your peers a little bit, but it was a bit surprising just given that you don’t have Pressure Pumping. So maybe could you kind of give us some moving pieces in the first quarter, kind of what kind of surprise to the downside, which business segments do you think kind of underperformed in the first quarter?

Yes, again, if you look at what we expected and also what we discussed, sequential revenue was a decline in North America largely driven by Canada and U.S., really played out as much as we’d said it would and we continue to feel very good about our positioning. If you think about our well construction segment, we’ve indicated that it would be lower. But if you look at our drilling systems and again what we’re doing from a technology differentiation, feel good about outpacing the rig count as we go forward as well. So I think artificial lift and chemicals, we continue to grow. So very much in line as we anticipated the first quarter would be.

And then look, I’d say well construction pretty much played out as we thought it would. We’re coming off of a very strong fourth quarter, and I feel pretty good about where Maria Claudia and the team are positioned in North America and globally right now.

Thank you. And ladies and gentlemen, that conclude the Q&A portion for today’s conference. I would like to turn the call back over to Lorenzo for closing remarks.

Yes. Thanks a lot. And maybe just a few words in closing. We’re pleased with our first quarter results and specifically with the outlook for our business. Our financial outlook for 2019 remains unchanged. And when I refer to the outer years, I see multiple growth drivers for our company. We remain focused on our priorities of gaining share, improving margins and delivering strong cash flow. Thank you for joining us today and for your interest in our company. We look forward to speaking to you again soon.

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