Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE Company, Second 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 of Investor Relations. Sir, you may begin.

Thank you, Catherine. Good morning, everyone, and welcome to the Baker Hughes, a GE company's second quarter 2019 earnings conference call.Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell. Today’s presentation and our earnings release can be found on our website at bhge.com. As a reminder, during the course of this conference call, we will provide forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. 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'll give a brief overview of our second quarter results, update you on our view of the market and take you through the quarter highlights. Brian will then review our second quarter financial results in more detail before we open the call for questions.In the second quarter, we booked $6.6 billion in orders. We delivered $6 billion in revenue. Adjusted operating income in the quarter was $361 million. Free cash flow in the quarter was $355 million. Earnings per share for the quarter were negative $0.02 and adjusted EPS was $0.20. We executed well in the second quarter, and importantly, our financial outlook for 2019 is unchanged from what we communicated previously.Now let me take a few moments to share our view on the macro environment. Beginning with the longer cycle markets, the outlook for LNG remained strong. We have seen approximately 50 MTPA of new capacity reach FID since the fourth quarter of 2018, and the industry is on track to reach the 100 MTPA we outlined by the end of 2019. I'm pleased to report that our technology has been selected for each one of the projects that has reached a successful FID thus far.We remain well positioned for a number of other projects that we expect to move towards positive FID this year. When I look out beyond this immediate investment cycle, I see continued growth and a multiyear opportunity set for BHGE. By 2030, LNG demand is expected to be approximately 550 MTPA.Let me put that into context for you. To produce 550 MTPA, the industry will need to operate approximately 650 MTPA of nameplate capacity. This represent significant growth from today's installed capacity of approximately 380 million tons. Therefore, even…

Thanks, Lorenzo. I'll begin with the total company results and then move into the segment details. Orders for the quarter were $6.6 billion, up 9% year-over-year and up 15% sequentially. The year-over-year growth was driven by Turbomachinery, which was up 32%. Oilfield Services up 14% and Digital Solutions up 8%, partially offset by lower order intake in Oilfield Equipment due to deal timing.We delivered solid orders growth across both equipment and services. Equipment orders were up 10%percent and service orders were up 7%. Sequentially the increase was driven by Turbomachinery, which was up 56%, Oilfield Services up 9% and Digital Solutions up 4%, partially offset by Oilfield Equipment, which was down 19%.Remaining performance obligation was $20.6 billion, flat sequentially. Equipment RPO ended at $5.6 billion, up 2% and services RPO ended at $15 billion, flat sequentially. Our total company book-to-bill ratio in the quarter was 1.1 and our Equipment book-to-bill in the quarter was 1.2. Revenue for the quarter was $6 billion dollars, up 7% sequentially. The sequential increase was driven by Oilfield Services, which was up 9%, Turbomachinery up 8% and Digital Solutions up 7%, partially offset by Oilfield Equipment, which was down 6%. Year-over-year revenue was up 8% driven by Oilfield Services up 13%, Oilfield Equipment up 12% and Turbomachinery up 1%, partially offset by Digital Solutions, which was down 5%.Operating income for the quarter was $271 million, which is up 54% sequentially. Operating income was up $193 million year-over-year. Adjusted operating income was $361 million, which excludes $90 million of restructuring, separation and other charges. Adjusted operating income was up 32% sequentially and up 25% year-over-year.Our adjusted operating income rate for the quarter was 6%, up 120 basis points sequentially and up 80 basis points year-over-year. Corporate costs were $105 million in the quarter. Depreciation and amortization…

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

Thank you. [Operator Instructions] And our first question comes from James West with Evercore. Your line is open.

Hey, good morning guys.

Hi, James.

Hey, James.

And before I get started Phil thanks for your help during the first two years of the new Baker Hughes and best of luck in the future as you transition out.

Thank you. Thanks James.

So, Lorenzo, maybe to start on the international side a significant OFS growth year-over-year in the first half. I know Brian mentioned it would moderate somewhat, but it seems like that high single-digit initial forecast you gave for the year, may be conservative at this point and even going a bit further here with the acceleration that's underway internationally, could we see that flip into the double-digits both for 2019 overall, but then really 2020?

Yes, James, we feel really good about the execution of our strategy on the international side and we said we were going to be increasing commercial intensity there. You mentioned core OFS revenues up 12% in the quarter, 18% year-to-date. It's really driven by the Middle East, North Sea, Asia-Pacific, and we saw strong growth across multiple product lines as a number of our integrated well services contract ramp-up significantly.As we look for the rest of the year, we continue to see a positive outlook and I think you can now say that we're certainly in the double-digit growth range based on our strong performance in the first half. We do expect that growth rate to moderate somewhat in the second half as Brian mentioned, but we are now seeing positive signs in some of the other areas sub-Saharan Africa, Asia-Pacific, Latin America continued momentum in the Middle East. So solid international growth continues in 2019 and we like our positioning.As we look at 2020, a little bit early to call right now. We do expect to see growth continuing into international markets. Let's see how that continues to fall out with the activities in the Middle East and the North Sea.

Okay. Fair enough. And then Lorenzo on the TPS segment, very strong orders. Again Brian mentioned the mix shifting, hydrating of the orders. What does this mean for the margin profile we should expect there over the next 12 to 18 months? I'm assuming this will lead to much better margin opportunity.

Yeah, James I think again this is playing out the way we've said. And if you look at TPS, we've seen the LNG come through and we continue to feel positive about the second half outlook with regards to LNG. And our forecast is unchanged on that TPS and we remain committed to the strategy we're executing.

Thank you. And our next question comes from Angie Sedita with Goldman Sachs. Your line is open.

Hi, gentlemen, good morning.

Hi, Angie.

Hi, Angie.

And Phil I -- the same, I wish you the best in the next chapter of your career.

Thank you, Angie.

So a little bit of a follow-up on TPS, I mean it really is impressive this order intake on the LNG side with orders up 32% year-over-year driven by the equipment, which is key to driving margins as you high grade. So can you talk a little bit and you did a little bit in your prepared remarks about the pace going into not only in the second half of the year, but 2020 and clearly it sounds like there's much more to come?

Angie and I think we've been talking about LNG for some time now. We indicate it back at the beginning of the year that we saw 100 million tons for 2019 with the fourth quarter of 2018. We're seeing about 50 million tons FID to date. And when you look at the growth and the expected demand by 2030, 550 million tons is going to be necessary from an LNG standpoint.And to put that into perspective as I mentioned, we need about 650 million tons of nameplate capacity. So the 380 million we have today and with some of the projects that have been sanctioned, we still see positive opportunities in LNG as we go forward. And I think you see some of those statements with the FERC approval of Venture Global, the Calcasieu Pass, Tellurian’s Driftwood, Sempra’s Port Arthur, and then you got opportunity internationally such as Qatar, which is a great opportunity to add capacity. So, again, feeling confident with the LNG side.

Yeah, Angie if I look, I’m really happy with how the team is performing here. We feel very strong about substantial increase in TPS orders this year. If I look at how that translates the forecast and the outlook for this year really remains unchanged, because a lot of the equipment orders that we're booking now, really won't start taking revenue on those until the second half of next year.The other dynamic that I highlighted is the transactional service orders are pretty strong. They've been strong through the past and that bodes well for the second half and reinforcing that our outlook is unchanged given what we see in the equipment backlog and how services is performing. So look, we expect strong orders to continue, and we'll talk with you guys about how that plays out in the P&L as we start to book those orders.

Thanks. That's very helpful. And then on the international side, you touched on your mark, a little bit of pricing traction in some markets. Can you talk about that further? Do you think that we could see some broadening of the pricing going into 2020, or is this still going to be pretty competitive in very select markets?

Yes, Angie. I did mention in the remarks that we are seeing some pricing improvements internationally. And that really is a factor of the excess capacity that's being absorbed. It will take some time for that all to come through, but with a period of stable growth in international markets, also driven by the large international tenders that we've been awarded. We feel good about the opportunity over the long term to continue to see the pricing come through.

Thank you. And our next question comes from Byron Pope with Tudor, Pickering, Holt. Your line is open.

Good morning, guys.

Hi, Byron.

Just thinking about what the segment against the backdrop of robust international topline growth and notwithstanding the near-term North America headwinds. It seems fair to think that there are going to be decent incremental margins associated with that international growth given that I think you mentioned earlier that you're starting to move into the execution phase for some of the many projects that you won. So just wondering if you can provide some qualitative color on how you're thinking about the incremental margins associated with that international topline growth?

Yes. Byron, again, we do like the growth we're seeing internationally and it's after some hard work to regain market share. And some of that is off the back of executing really well on projects that we were executing last year. A lot of these international projects are in the early phases of execution and some of them are larger integrated well services contracts. And so the early stages of execution, we always have a learning curve, and we're coming up that learning curve right now. For example, in Equinor, we've ramped up into new fields and versus Troll, where we've been operating for 20 years and know that field really well and the crews.There are some teething pains as we worked through that. So profitable today but we feel like there are tailwinds as we go about execution curve for these large integrated well services contracts. So some of our product lines were operating in these fields for the first time so feel good about the execution that we've had to date and think we do have tailwinds and margin rate internationally as we continue to execute well for the customers.

Thanks, Brian. And one quick second question, just on global gas, I realize it's more than just turbomachinery within the Baker Hughes portfolio that's tied to global net gas. Could you just remind us whether it’s within OFS or OFE, how should we think about the other products sort of signs that you have that are tied into global gas?

Yes. Byron, it's a very good point that you mention. If you think about gas, we are large in gas. And in fact, when you look at our Oilfield Services product lines as well as our Oilfield Equipment site, we are more on the gas side than we are in the oil side. And I think in particular when you look at the gas oriented projects, they are increasing on the offshore side. And we feel that there is opportunities for integrated projects such as BP Tortue, which we talked about in the first quarter, and that helps both our OFE and also OFS segments as well.

Thank you. Our next question comes from Sean Meakim with JPMorgan. Your line is open.

Thanks. Hi. Good morning.

Hi, Sean.

So good progress on cash flow in the second quarter. You're about breakeven on free cash flow in the first half, so as we look to the back half, certainly, we could maybe just dial in some of the details? It seems like, earnings should be up nicely on seasonality, CapEx looks pretty set. I'm assuming merger costs start to recede, but separation cost from GE little bit harder to quantify maybe.Is there anything else, we should be thinking about on working capital for the back half, particularly with maybe some LNG prepays making their way in? And just trying to sum it up and getting a sense Brain of how comfortable you are in dividend coverage for 2019?

Yes, Sean very happy with the performance here in the second quarter and the linearity for the year is lining up about like the linearity we had last year, given the cadence of the business and the volume. So if I take a look at the second half, you got a few dynamics here. We have been building up inventory to deliver on the volume in the second half of the year.So you will likely see an inventory drawdown there. We do expect significant volume ramps in the second half. So with that you will have some headwinds from receivables for an absolute number, but we are continuing to improve our working capital performance in the metrics.I mean days sales outstanding are down by 6 days, our inventory turns are up 0.5 points. Our days payable are up 17 days. So the team is making good progress on the efficient use of working capital.Do we expect with the orders coming in that progress collections will continue to come in helping the overall profile. And as you say, we pretty much have CapEx dialed in.So we’re pretty confident that our core working capital metrics will continue to get better here in the second half and improve year-over-year. And we're on track with what we talked about from a free cash flow standpoint earlier in the year.

Okay, great. Thank you for that. And then so within Oilfield Equipment you sound pretty optimistic about 2020 revenue growth. And Lorenzo you’ve been consistent on the outlook for subsea, nicely you’re flexible, it seems like they're getting better.So it sounds like -- to underpin that optimism in the back for 2020 you must be pretty optimistic about orders for the back half of the year. And could we maybe just talk a little bit about to margin progression. I don't think Brian we heard much about that? Just think about -- how should investors should be thinking about the impact of mix and new backlog pricing converting into throughput as we get into next year?

Yes. Sean, if you think about the offshore market, our view is relatively unchanged from what we said at the beginning of the year specifically on the subsea tree demand. We see the same as about 2018, 2019 will be around 300 trees and we anticipate we are going to maintain our share. We've got a number of good projects in the pipeline that come through in the second half.You saw that we announced the GS4 with impacts which obviously comes through. And I think also encouraging is what we're seeing with the FPS site and that obviously comes through in 2020. So from a competitive standpoint subsea remains competitive, but we feel good and we like our portfolio. And the way we're structured today and feel good about 2020.

And if I look particularly at the margins look, Neil and the team, we've been working with them on repositioning the business from cost standpoint like where we are there. I do expect sequential increases in their margin rate as we execute on the volume that's in the backlog and continue to see services growth in that business. If I look where we are today, really, pricing's not a headwind, given where we've been in the industry. So don't see a significant change there. And the other thing to think about, as you look at 2020 is, you've seen the recovery and the flexibles business in the orders and that’s actually a positive for 2020 margins just given the mix of that business.

Our next question comes from David Anderson with Barclays. Your line is open.

Thanks. Good morning. It sounded like you're ramping up pretty well along those international contracts you won in the last 12 months. So I wonder if you could just dig in a little more in to the ADNOC Drilling partnership. You talked about four rigs you're on right now or during the quarter, presumably those are all jackups. They have 20 jackups currently operating out there.Just wondering, can you just give us a sense, do you expect to be on all 20 of those? How does that ramp-up work? And then secondarily, you talked about making a lot of these drilling efficiencies, can you just talk about how you did that? I know you're providing drilling equipment, there's also a technology component. Maybe just help us a little to understand what you're doing there for ADNOC.

Yeah. Dave, I won't go through the specific operational side of ADNOC Drilling, but as you know, the partnership is one in which where we essentially have our employees with their employees and we're together in ADNOC drilling, actually completing the -- both the drill side and the services. And what this enables is efficiency.So with that integration and operational commitment that we have, we've been able to reduce the number of days to drill and as I mentioned, 88 days saved on the eight wells that have been drilled. And it's really a partnership that shows the success of collaboration. And we've seen that time and time again as we take away the silos between the operator and ourselves, we can find efficiencies and also the best-in-class technology that we've been providing them over the years.

Yeah. And then, just to reiterate, we are in early days of this contract as you pointed out. It's a relatively small number in terms of revenue and margin right now, but we do expect that to ramp through the year. And just as a reminder, we haven't even started on all the unconventional work that ADNOC is planning. So that's definitely tailwind as we look into next year and when they start their unconventional campaign. We're really well positioned for that.And I just reiterate what Lorenzo said there. We were bringing the best of what we have to offer to this partnership. We are working really closely with ADNOC Drilling and it's an integration and a partnership that I think is showing real results. So there's not any one particular thing there. It's the combination of how we're planning, working together, collaborating and we're very pleased with how it's performing and so is the ADNOC Drilling and the ADNOC team.

So let me ask you about another partnership is of the C3.ai joint venture. I know, you guys have been involved in predictive failure, the digital twin and to a certain extent AI for some time now. Is the right way to think about this is that C3 kind of brings a new software platform that effectively replaces what GE was providing? And that this is -- then this is a significant step-up that allows you to accelerate that digital business? Am I thinking about that right?

So, Dave, we've been working hard on digital offerings since we formed BHGE and we've also been monitoring the space. And every time I meet with the customers, the topic of digitization is at the top of their mind and thinking about how it's moving, transitioning and really should look at the C3.ai partnership as being an extension of the ecosystem of the capabilities that we have in digital for our customers in improving their outcomes.Our collective goal is to deliver artificial intelligence that is faster, easier and more scalable and we're extremely excited about our partnership with C3, because it extends our reach. Also C3 is very well-known in the space across multiple industries. They are renowned for their artificial intelligence and we really see this being as the digital transformation of this industry as we go forward. So again it's a step that we're taking to be at the forefront with our customers.

Yeah. And, Dave, the way I think about this is that the C3 technology and what we're doing within is really complementary to what we do today. Depending on what the customer is looking to achieve, it can go in with a lot of the other software offerings that we provide. Some of those are provided by GE, others we have in-house today.So it's really an integrated approach with a world-class provider. And we're really excited about the partnership with the C3 team and what we can integrate there and offer the customers to make a step function change for customers and their outcomes.The other thing that I'd point out that I really like about the C3 partnership is C3's got a lot of experience in other industries and with other companies and we're actually going to be able to take what C3 already has and use it internally to drive better process, more opportunities for cost reduction, better working capital management. So look I've spent some time with them and really excited about what we can do together for customers, but also what we can do internally to help back margins and returns inside of Baker.

Our next question comes from Bill Herbert with Simmons. Your line is open.

Thanks, good morning. Brian, you sort of reaffirmed guidance for the full year on EPS, but you didn't specify what that means. So could you just remind us in terms of what the full year guidance is? And what that implies for second half top-line in margins?

Yeah, like I said we really have an unchanged outlook for TPS in total. In third quarter, we do expect the impact of those earlier customer deliveries that they requested that happened in the second quarter to have an impact on revenue in the third quarter, but no change to the full year. Don't see any change to mid-teens margins in the second half like we talked about. Again, so really good about how the team is performing there, good visibility on what's in the equipment backlog and we'll convert in the second half and then with the transactional service orders strength that we anticipated, feel good about their total year.

Okay, thank you. And then with regard to OFS margins, you mentioned the conceptual underpinning of the guidance, but specifically it sounds like it's below 20% sequential incremental margin for the foreseeable future. Is that a fair interpretation of what you said?

Yeah, look I think from a revenue standpoint as you look at the second half, we expect to see the international growth rates. They will moderate versus what we saw in the first half. And as I outlined expect North America to be slightly down. So, look, I still expect that we will expand margin rates in the year as well as sequentially through the second half. And the dynamics I talked about on international, on the large contracts we'll continue to get better as we operate more in those contracts but still expect sequential margin improvement as we progress through the year.

Our next question comes from Brad Handler with Jefferies. Your line is open.

Thanks. Good morning, guys.

Hi, Brad.

Hi, Brad.

Hi. A couple of questions from me also related to TPS but different questions. And I think I know the answer to this is going to be no, but maybe you can speak to this idea in general. Concerns are being expressed that the current issue surrounding global economic growth, U.S./China tariff issues all of that might disrupt the LNG order flow to some degree, obviously, in broad strokes you said that's not happening and you see the outlay, but are you finding that in any conversations you're having? Are you sensing that is -- at a risk? That it could slow certain FIDs through the course of the next 12 months?

No. The answer is no. And really it comes down to the cycle-time that these projects go through. And if you look at today's discussions and also today's spot pricing really isn't impacting the FID decisions that are going to be bringing online the LNG that's required for 2030.As you look at demand, Chinese LNG imports continue to grow. You got South Korea continuing to grow, India continuing to grow. It really is as a fuel source one of the growth as you continue to see the energy transition take place. So, again, you got to look at it from a multiyear perspective.

Okay, fair enough. And I guess I expected to hear as much, but it's nice to hear you say all the same. Unrelated as I mentioned, but still in TPS, maybe Brian I'm not sure I appreciate the distinction you're drawing between service orders and transactional service orders. So, if I'm thinking about margin, I had been under the impression that LNG-related service orders are your highest margin contributors within TPS. I don't know if I should be thinking about it that way, but if we fast-forward to the end of the year, given the nature of the equipment orders and that's starting to flow through backlog, what would you expect with service and equipment mix to be either towards the end of 2019 into 2020? Does that have any bearing at all on how we think about margins?

Yes, I think if you look I mean our services portfolio is a great portfolio. We've got the contractual services portfolio which is primarily LNG-related. And these are the long-term service contracts where we have guarantees in place about performance. We're on the site every day, working with the customer, planning all the service activities, and have obviously decades of experience with those. And we've got pretty good visibility into that revenue.The transactional services are basically services parts, field engineers, things of that nature that are not on contract, but again, we've got good line of sight into what needs to happen to the equipment and how it's operating throughout a quarter. But the customer actually determines when they buy parts or when they do the service. So, that's the distinction between transactional and contractual. So that transactional services has been up it's up 10% through the first half.Specifically on how these orders can be looked, orders that we're taking today for LNG you're not going to see that revenue come through really until the second half of 2020 and beyond. And then in the service cycle for those particular units, doesn’t really start until a few years after installations, depending on the application and where it is. So what we're doing today by winning all these equipment deals is we're building a great annuity stream for years to come.So the service activity that you're seeing today is on equipment that has been installed. Specifically around your question around mix, listen, we've got a profitable equipment business. It tends to be less profitable than services so as you have an outsized growth on equipment, it will have mix implication in terms of the overall business. But all of that is taken into account in terms of how we talk about the business and the margin progression in 2019 and 2020.

Our next question comes from Chase Mulvehill with Bank of America. Your line is open.

Hey, appreciate you squeezing me in. Let's, I guess, stick with LNG and talk about maybe U.S. LNG, the potential for FIDs over the next couple of quarters. You know you've talked about you know one large order. Do you expect to see any additional larger orders in 2019, or is some of that kind of pushed out to 2020?

Look, as we mentioned, and again, we see the second half continuing to bode well for LNG. You've seen the FERC approval sort of gone through. So you look at Venture Global’s Calcasieu Pass to Lauren's Driftwood, you got port offer. There are a number of projects we stay very close to all of the customers and they're all working through it. I do anticipate that again in the second half we'll see some final FIDs on these projects and also internationally we've got other projects as well. So we look at it staying close to the customers, but LNG activities strong in the second half.

Okay. Very good to hear. Brian, a quick follow-up for you on other non-core divestitures. You've had some nice noncore divestitures over the past couple of quarters. Do you have anything else that we think that you could sell and bring in some cash in the door?

Yes, I think. We've talked about looking at the portfolio and making sure we are focused on core areas that are accretive return here. So, look, I don't have anything that is imminent or any place where we have to take any action. But look we'll continue to look at the portfolio and if the right opportunity comes along to be able to maximize value for shareholders expand returns, we'll take a look at it. But, again, there's nothing specific that we have to get done here.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Lorenzo Simonelli for any closing remarks.

Yes. Thanks a lot. And just a few words in closing, I think we're very pleased with the execution in the second quarter. Our outlook is positive as our international business is growing and our longer-cycle businesses are rebuilding high-quality backlog, remaining focused on the priorities that we've set out from the beginning, gaining share, improving the margins and delivering strong cash flow. And I’d just like to end also in thanking Phil for two years and we wish him well going back to Europe and all the best to him and thanks a lot for joining us today on the call.

Thank you, ladies and gentlemen, for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.