Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Fourth Quarter and Full Year 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. Jud Bailey, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to the Baker Hughes Company fourth quarter and full year 2019 earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell. The earnings release we issued earlier today can be found on our website at bakerhughes.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. Please review our SEC filings and website 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. With that, I will turn the call over to Lorenzo.

Thank you, Jud. Good morning, everyone, and thanks for joining us. We delivered a solid fourth quarter with strong orders in our Turbomachinery and Oilfield Equipment segments, solid operating performance from our TPS business, strong free cash flow and better execution in our Digital Solutions business. These positives were partially offset by weaker-than-expected margin performance from our OFS business. For the full year 2019, we achieved a number of key milestones, including 20% year-over-year order growth in TPS, almost 300 basis points of margin improvement in TPS, 12% order growth in OFE and free cash flow of $1.2 billion. In addition, we accelerated our separation efforts from GE, launched our new company brand and positioned ourselves to compete more effectively in a changing marketplace. I cannot thank our employees enough for their hard work and dedication to achieve our goals throughout the year. As we look into 2020, we see a macro environment that is slowly improving as well as a range of opportunities to further strengthen Baker Hughes on both the near-term and long-term basis. In the near-term, we continue to identify and execute on opportunities to improve our day-to-day operations and cash flow efficiency in 2020. Looking out on a longer-term basis, we see a number of attractive growth opportunities for our company. And we remain focused on positioning Baker Hughes for the upcoming energy transitions and the digital transformation of the industry. This balance between near-term and long-term objectives can be found in each of the strategic goals that I highlighted on our last earnings call. To remind you, these goals are: One, margin improvement in our Oilfield Services and Oilfield Equipment businesses. Two, evolving our portfolio, specifically leveraging some of our unique core competencies to expand our offerings in the industrial and chemical end markets, as…

Thanks, Lorenzo. I will begin with the total company results and then move into the segment details. Orders for the quarter were $6.9 billion, up 1% year-over-year and down 11% sequentially. The year-over-year growth was driven by strong orders in Oilfield Equipment. Sequentially the decrease was driven by Turbomachinery which booked a very large LNG order in the third quarter. Remaining performance obligation was $22.9 billion, up 3% sequentially. Equipment RPO ended at $8.1 billion, up 10% sequentially and services RPO ended at $14.8 billion. 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 $6.3 billion, up 8% sequentially driven by Turbomachinery, Digital Solutions and Oilfield Equipment offset by Oilfield Services. Year-over-year revenue was up 1%, driven by OFS and OFE offset by declines in TPS and DS. Operating income for the quarter was $331 million, which is up 11% sequentially and down 13% year-over-year. Adjusted operating income was $546 million, which excludes $216 million of restructuring, separation and other charges. We incurred $135 million of new restructuring charges in our OFS business during the quarter as we continue to work through a new phase of cost out and productivity initiatives. These are primarily focused on supply chain optimization, improving asset utilization and driving down product and service delivery costs. Separation and merger-related charges in the quarter were $57 million. Adjusted operating income was up 30% sequentially, and up 10% year-over-year. Our adjusted operating income rate for the quarter was 8.6%, up 140 basis points sequentially, and up 70 basis points year-over-year. Corporate costs were $118 million in the quarter, which is modestly higher than third quarter levels and our initial expectations a few months ago. We expect the corporate line to increase slightly from…

Thank you. Operator, let’s open the call for questions.

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

So Lorenzo, you guys are clear leaders in the energy transition here. And I wanted to maybe talk a little bit high level about the various buckets you’re attacking this. I mean clearly natural gas is a big part of the strategy and I know you have some lead products there. You also have your own internal ESG plans and goals, many of which you've been highlighted over the last year. But then you also have products and services that hit all parts of the carbon chain, whether that's monitoring and then carbon capture. So how do you think about -- I mean if I bucket those into those three, if that's the way you think about it, if not, please let me know. But how do you think about which ones do you want to allocate more capital to, less capital to, which are the bigger growth drivers maybe in the intermediate term for Baker, and then I guess what is your overall strategy?

Yes, James. Thanks. And as you know as the energy transition -- the beam of energy transition has gained a lot of attention over the course of the last 12 months. A year ago, you'll recall that we actually made our commitment relative to reducing our own carbon footprint 50% by 2030, and achieve net-zero by 2050. And as you look at Baker Hughes, we're really playing a critical role in the energy transition across a number of areas given our broad portfolio, and I highlighted some of those in the script that was prepared. But if you look at some of the key areas, the first I would say is, as you look at natural gas and you look at LNG, clearly energy transition in reducing the amount of CO2, there is going to be an increasing use of natural gas as a transition but also destination target. And we see that LNG is going to continue to grow over the next few decades even as renewables grows as well. And that’s a key focus for us with the introduction that we’ve made with the LM9000, also our first application, the NovaLT, which is hydrogen-based. So clearly a shift towards -- on the -- with the tech and equipment side helping in the energy transition. Beyond that as you look kind of also the Digital Solutions platform, clearly what we have is LUMEN and also Avitas, these are solutions that enable our customers to monitor and also understand how they can reduce their carbon footprint. So if you look at our broad portfolio, we are uniquely positioned and that’s what we say from a standpoint of moving energy forwards and also being an energy technology company, we're going to be helping our customers and partners through this energy transition.

Yes, I mean James if you look at how we're allocating capital, clearly we are continuing to invest in TPS which is having an impact today. We’ve got lots of opportunities in adjacencies in TPS. We are going to put a little bit of capital to work either do technology development or some partnerships and can grow our footprint there. And then Digital Solutions, it’s a high-margin business to get good returns we will continue to invest capital there. So I think you will see us balance the capital allocation with short-term and then long-term as we continue to pivot the portfolio as part of energy transition. So we will update you if there are any changes to that. But I think we’ve got a pretty good approach right now to drive short-term growth in margins as well as position the portfolio for the long-term.

Yes, totally agree. And then maybe a follow up on the LNG pricing issue, short-term pricing weakness has impacted perception of the LNG, a liquefaction build-out story. But it seems to me -- two things. One, it hasn’t really changed the conversations on better capitalized projects. And number two, lower prices now probably see the better demand in the future for LNG. Are those fair statements that I am making and do you agree that it's not going to cause any real weakness in the kind of build-out cycle beyond the -- I know we are onto the same record, GE we saw last year but other than we're pretty much full steam ahead?

Yes, James, looking at it the right way. If you look at recent LNG spot price weakness, it doesn’t change the overall long-term LNG demand and supply dynamics. And in fact the conversations we're having with our customers are really towards the continued demand for LNG over the long-term. And if you take a step back, you look at where we're going to be by 2030, it’s going to be between 550 million to 600 million tons of demand and to produce that you're going to need 700 million tons of installed capacity. So even with where we are today with the construction of 60 MTPA and also the 90 that was FID last year, you still got another 130 million to 150 million that’s going to go in the next coming year. And so we feel good about the LNG space and feel good about the long-term aspect of it.

Thank you. Your next question comes from Angie Sedita with Goldman Sachs.

So I appreciate the details Brian on the revenue side when we think about 2020 Q1. But if you could drill down a little bit on the margin side, thoughts around Oilfield Service margins in 2020. I know you're not where you really want to be but how much self help you think you could have going into the year for 2020 and when do you think we could start to see some parity versus your peers?

Hey, Angie. Look, we did see margins below where we wanted them to be in the fourth quarter and there wasn't really one thing that I can point to let’s say was the main driver. There were a couple things going on that impacted the margin. I'd say first is we saw slightly lower-than-anticipated activity in the U.S. land market for us which we think was really largely customer and basin specific. We also saw as we went into the end of the year some weakness in Gulf of Mexico operations, which obviously carries higher margin rates for obvious reasons there. And then lastly I'd say our products sales were lower than we anticipated. We knew they were going to be lower because if you remember we had a very strong third quarter as we accelerated some of those product deliveries to meet customer demand, and we did have some of those flip out of the quarters. So, those three things combined put pressure on the margin rate versus what we expected. But based on what I'm seeing today, they are largely transitory in nature and I don't see them impacting us we roll into 2020. And if I look at 2020, we expect a large portion of that margin improvement to as you say be self-help with cost out and productivity initiatives that we’re driving. So, we posted some restructuring reserves in the quarter as we had very specific programs in supply chain and service delivery across Maria Claudia’s portfolio to help drive the margin rate improvement. And I'd say that the other thing that supports margin rate improvement in 2020 is, we are really getting to the maturation phase of some of the larger integrated contracts internationally, where we saw some ramp up costs this year and we’ve…

Thanks. That's very helpful, Brian. I appreciate that. So maybe if you can do the same thing around TPS, given the strong backlog you already had [indiscernible]. Thoughts around margins for 2020. I think you said in past maybe low to mid teens, is that still a fair assumption? And do you think ultimately that the high teens is where you would consider your run rate?

Yes, Angie. I am very pleased with how Rod and the team to have closed out the year and are managing customer expectations with this incredibly large backlog and balancing cost and returns as they go through this. So, pleased with where they are today. Look, our outlook for 2020 for margin is again largely unchanged with what we talked about in the last call. And just to remind you, there are a few dynamics that come into play that really impact how much margin accretion we will have in the year. First, we expect contractual services and transactional services to grow in 2020, which is accretive to margins. You mentioned the large backlog, the largest in our history. We will see more LNG equipment revenue come through in 2020. While that is accretive to overall equipment margin, it does have a negative mix effect as we’ve talked about for the total business. And then we are in the early stages of executing on the two very large LNG projects, Arctic 2, and BG which tend to have lowest margin point at the beginning of execution and you start to see that accrete over time. So that will have an impact there. And then we've talked a bit about the technology spend in TPS and we said we were evaluating that. And back to actually James’ earlier question, we see a lot of opportunity in energy transition to continue to grow this franchise and strengthen this position in the marketplace. So I'd expect technology spend to be roughly where it is this year. So if you add all that up, I’d say that the more revenue we have, the faster it grows, impacts the magnitude of the upside in margins. And you saw that come through in the dynamics of third and fourth quarter, and how strong the services was versus the equipment. But overall goal is to continue to drive margin enhancement in the business. And over time we do see mid to high teens as revenue normalizes in the portfolio and services continue to grow. And with the large equipment backlog we have now such in LNG, you'll start to see that services backlog grow over time as we sign customers up for long-term service agreements. So largely unchanged tailwinds in the business. And I think Rod and the team have done a great job managing through that.

Thank you. Our next question comes from Chase Mulvehill with Bank of America Merrill Lynch.

I guess I wanted to come back to the TPS service commentary. Earlier you talked about the largest LNG backlog in the history and you kind of touched on some of the digital things that you're doing. Could you talk a little bit about the opportunities that you have on this -- the LNG service side with this significant backlog and then what digital ultimately means for the TPS or the LNG service business? And potentially maybe some shift over to the contractual side of the services business?

Yes, Chase. Look, very happy with how the services business is performing in TPS. And on a reported basis, for the year, the service revenue was flattish, slightly down. When you take into account some of the dispositions that we had, as well as the impact of FX for the total year, revenue actually was up mid-single-digits operationally. So pretty much in line with how we would expect this portfolio to perform. And this year it represents about 60% of TPS' revenue. And that will obviously change over time as the equipment starts to convert. And as you pointed out, contractual services is a big piece of that as our transactional services and that contractual services backlog is about $13 billion today. And we expect that to continue to grow. And just round out services, we do have installations and upgrades, including theirs as well as some services on pumps and valves but the large majority are contractual services. If I take a look at the transactional piece, we had growth in 2019 in mid single-digits. I would expect that to continue into 2020. And from a digital standpoint, lots of opportunities in the services portfolio. One internally to help us operate better and use our partnership with C3. We’ve got tons of data on this equipment and how we operate in the field. We think that C3 can help us unlock even more internal productivity as we execute on the service contracts and provide transactional services and upgrades and then additional opportunities to introduce some of this into these contractual services to help the customers’ equipment perform better. And then there's lots of things we can do with the data that, that we have from things that aren't on contractual services and put together offerings for customers to help drive better productivity, and better uptime for the equipment. So, I think it's an untapped opportunity right now. We're not counting on a lot of that as we roll into 2020. We'll be working a lot with C3 and our teams. And I would expect to see some of this digital things kick in the outer years to have a meaningful impact on revenue.

Hey, Chase, just maybe to add. If you look at on the digital side and the C3 partnership, we have actually launched already two solutions into the marketplace, one around reliability, which really targets the uptime for the equipment and that can be applied to the service agreements and drive efficiency and productivity, and then also optimization. And so, really if we look at the next few years, digital is a key area of focus and it's going to drive a lot of efficiencies.

One real quick follow up. I mean obviously you got the GE offering overhanging out there still. Could you talk to you know how much Baker Hughes would look to repurchase alongside an offering. Should we think of it kind of free cash flow after dividend for 2020? Or would you actually add a little bit of leverage to take down a little bit more stock?

Chase, I'd say that look our overall capital allocation and corporate finance policy really hasn't changed from what we’ve talked about in terms of commitments to return 40% to 50% of net to shareholders through dividends and buybacks. And I think as you and I have talked before, we will certainly evaluate any potential offerings by GE and put that into our thinking as we allocate capital over the course of the year. So no real change there in terms of how we are thinking about it. And you should assume that we are certainly taking that into account as we look at our free cash flow, and all of our message for the year.

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

I was hoping to dig into a little bit in your chemicals business here, which is gaining some more attention lately with your biggest competitor changing hands. I'm wondering if you can just talk about the business mix and what you see as the primary growth drivers the next several years in terms of offshore-onshore, now down downstream, which is not really a market we hear much about. You had a big contract with Valero today. Could you just kind of talk about that business and how you see that developing?

Yes, Dave, if you look at our chemical franchise, and again, we've mentioned it before that we think it's a great area that we've been in on the upstream side and actually got a good footprint in North America. And we've actually allocated capital to increase our presence internationally. If you look at our expansion in Singapore facility, as well as in the Kingdom of Saudi Arabia, and I think actually the M&A activity you just mentioned validates a lot of the approach that we've had. We’ve got an increasing usage of chemicals, when you look at enhanced oil recovery. You've also got an opportunity on the downstream side, as you mentioned, which we’ve got an opportunity that’s growing. And when you look at the specialty chemicals that we provide and its application, it's increasing across both the upstream and downstream. So we feel good about the strategy we got in place and also the growth in Baker Hughes chemicals business over time.

Yes. And David, if I look at where we are today, we're predominantly North America. We do have an international presence. But with the investments we're making in Singapore and Saudi to shift capacity, we see more growth coming for us internationally. And today, we're mostly upstream. We do have some downstream and I think there's a lot of growth opportunities for us in downstream as well. And the other thing I’d point out about the investments that we're making, the Singapore investment is really going to reduce our cost base, better manufacturing, better supply chain costs, better logistics costs. And then what we're doing in Saudi is really size for the region to allow us to be very responsive to a lot of very large customers in that region. So again, we like this space. We're putting capital to work there, and we would expect to see growth and margin accretion in chemicals.

Yes, I can say presumably this is rather accretive to your test business I’d assume, correct?

Yes, we like this business. Yes.

Okay. And maybe just on a different subject. I just want to ask about kind of your OFS business, things in North America and just kind of how you feel about kind of where you are and whether or not you're satisfied out there? I’ve seen some reports out there that potentially you may be looking to exit the Lufkin rod lift business. I would have thought that it would be kind of part of your longer term strategy. You talked about more of the production side. But maybe this is more capital intensive than you'd like. I was just wondering if maybe you could comment on that, and perhaps more broadly on your North American mix in terms of where you want to be?

Yes, Dave, I’d say we’ve talked about the portfolio before. And I basically said we want to focus the company in areas that are highly differentiated with less fragmentation that allow us to generate higher returns. And look as we look at the energy transition and how we expect that to unfold, if there are areas that don't meet that criteria, we would potentially look to generate cash by not having those in the portfolio and redeploying that cash into areas where we can get higher returns over the short-term and are a benefit long-term within the portfolio. So I'd say look the North American market has changed quite a bit over the last few years. And there are some areas where we think the technology or the fragmentation are going to make it harder to get returns that justify them being inside the portfolio, we will continue to look at that. But nothing right now that I need to update you on in terms of things that are changing and as we have news we will certainly let you know. But I want you to understand, we are focused on returns here and where we deploy this incremental capital dollars. And I think the market has changed quite a bit, and we'll be looking some things.

Our next question comes from Sean Meakim with JP Morgan.

So, good free cash in the quarter, typical seasonality and maybe some catch up from 3Q in OFS like you mentioned. Of the $600 million working capital benefit, how much would you attribute to just typical seasonal collections versus progress payments on some of the new projects coming in? I was just thinking maybe with perhaps the peak order cycle in '19, we'll see. Can you maybe just talk about how the cash flow profile looks over the course of a typical TPS project? And how that should influence expectations for free cash in '20 and '21 as you start to convert these projects?

Sean, I would say, we did have typical seasonality and I think the majority of what we saw in the quarter was related to that typical seasonality. As we talked about on the third quarter call, OFS came in below expectations. And they really turned the corner here in the fourth quarter by making up on some of that miss. It was really driven by strong collection process overall and that's all the way from billing on time, following up, getting the collections in. And then the team did a really good job of managing inventory inputs as we had been making a lot of process changes over the course of the year and that came through. We did have some benefits from progress collections in TPS and OFE, but I think you have to look at it in totality, it's a small piece. But progress is only one piece of the equation, because at the same time you're getting down-payments where you're getting progress collections as you're executing on a project, you're also bringing in inventories as well. So, it's not a one-to-one follow through in terms of free cash flow, you have to look at more accounts on the balance sheet. And in the TPS typically, you start out with a down-payment. We have long lead items that you bring into the project. And then based on certain milestones you bill the customer and you collect. So, one of the first things I look at in any TPS project is cash curve to see what our cash position looks like in that. And our goal is to have them be favourable from a cash flow standpoint. So, you will see ebbs and flows in progress collections over the lifecycle of a project and receivables and inventory. But I would say, it was a small impact here in the fourth quarter. As I go into 2020 and look at how I think it will play out, we should see a smaller impact from progress payments than we saw in 2019, but do believe that the improvements we've been driving in working capital processes across the franchise, not just in OFS, should help offset that. The other thing I would say is the CapEx, net CapEx to be roughly flat from dollar standpoint, but down as a percentage of sales as obviously we see more growth in TPS and OFE. And in the round out free cash flow in total Sean, we do expect restructuring cash outlay to be down significantly, but the separation cash outlay will offset that. So, net-net the good dynamics as we roll into 2020 for free cash flow strength.

Got it. Thank you for that, Brian. So maybe just coming back to margin progression in TPS. So you got strong revenue growth this year, you topped up your guidance today versus last quarter. I think that make sense. We got somewhat limited historicals from last cycle. So how much of a track record in terms of incremental margins? And I think early on the call you talked about kind of high level of the impact between fixed costs absorption versus services versus equipment mix. Just as we roll all that together in terms of the flow through to year-over-year incremental margins, how do you think about that on a normalized basis?

Yes, look, Sean, as I said, it really depends on how quickly revenue grows on the equipment side and so what the absolute margin percentage increase will be. But under all the scenarios that I see today, we do see some margin accretion in TPS. I will note that based on the customer requested delivery schedules and way the projects are executed, we do see the second half being much heavier from an equipment standpoint and an overall revenue standpoint. So we would expect the second half to be much larger from a revenue standpoint. And then obviously has an impact on the fixed cost absorption as you look at more revenue in the first half. So, look, we will continue to update you throughout the year of changes. But right now, that's how I see things playing out.

Thanks. Your next question comes from Bill Herbert with Simmons.

So, back to cash flow and free cash flow Brian just very quickly. One, do you expect working capital to be a cash generator or cash consumer in 2020? And secondly, remind us what your free cash flow conversion target is? I think it’s like 90% of net income. And if that's the case, it seems like you are going to crush that again. So, maybe update us on both of those please. Thank you.

Okay, Bill. Yes. So, if I look at the free cash flow conversion target, it is 90% of net income over time. And again, you are going to have some years based on the projects business and how we're driving working capital where you could exceed that, in some years where it could be below that based on mix of business. So, 90% is through the cycle goal. And if I look at overall working capital with the dynamics we talked about earlier, the strong progress we’ve seen from 2019, again not quite as strong in 2020 but we will have some offsets with the other working capital processes that we are driving. I mean you could see a year where working capital is slight usage based on those dynamics and the growth that we have in the portfolio, but you should expect our working capital metrics to continue to improve.

Next question comes from Scott Gruber with Citigroup.

Just a couple of detailed ones here. What was the profitability split between the North American OFS business and international business in 4Q and is that spread pretty similar to what you're looking for in 1Q? And then it sounds like you believe that the Gulf activity slumped, which impacted 4Q, is this transitory. Does that snap back in 1Q? Is that in your guide or is that more of a 2Q event?

Yes, Scott. Look, we do see some improvement in 1Q in the Gulf. I don't know exactly I’ll call it a snap back, but we do see improvement there. And obviously that has a positive impact on margin rate, as I said for obvious reasons. So, look, frac loads were down in 4Q, which was a big driver of that and we do expect that to come back. As far as the profitability, now look, we don't disclose profitability by region there. But I would say from a dynamics standpoint, we continue to expect to see the softness in North America, and feel pretty good about the growth opportunities that we're seeing in international. And the thing that I would remind you but I think I mentioned in when I was talking to Angie is that, a lot of these large integrated projects were up the learning curve there and we should see margin accretion in 2020, as we execute on those projects and those start-up costs as well as just getting another field costs have abated. So, feel pretty good about the margin progress internationally, and the growth backdrop there.

Got it. And then just going back to the chemicals business, it sounds like the growth investments there will be beneficial to your overall mix and return profile. Are you able to provide any color on the magnitude of the new plans relative to the size of your current chemicals business? Just trying to think about the impact of the petro line as they come on and when do they come in the years ahead?

Yes, and look from a timing perspective, again it’s -- these plants are in construction. So you won't see anything in 2020. They'll start going into a commissioning phase in 2021. As we mentioned, we see international growth opportunities. Stay tuned, we'll give more updates as we start completing the plants.

Yes, and again, I’d just reiterate here. It's not all going to be incremental capacity. We are shifting capacity here. And again, the Singapore facility is going to be very cost advantage. So in addition to growing internationally, we'll have the benefits of higher margin rates for product that's coming out of Singapore. And look as we get closer to commissioning and things form up, we will give you guys some insight into how we're thinking about that. But spending a lot of time there and again, like I said, we liked this business. And like the capital we're putting to work there.

Ladies and gentlemen, this concludes today's Q&A portion of the conference. I’d like to turn the call back over to our host for any closing remarks.

Just thanks again for joining us. We closed out a strong 2019. You saw the full quarter results and we feel the macro environment is improving as we look at 2020 and feel good about our outlook. Thanks.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.