Good day, ladies and gentlemen, and welcome to the Baker Hughes Company First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question 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 first quarter 2020 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 risk 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. The first quarter of 2020 was challenging for Baker Hughes and the rest of the industry due to the turmoil and economic fallout created from the Covid-19 pandemic, as well as the significant declines we saw in oil and gas prices. Even with these ongoing disruptions, we produced solid results in our TPS and OFS businesses during the quarter and generated over $150 million in free cash flow despite typical seasonal headwinds. Overall, I am extremely proud of our team for the level of focus and perseverance through an extraordinary set of circumstances. The strength of our company and diversity of our product portfolio is most apparent in times like these. From the execution of our HSE operations and supply chain teams in the phase of a crisis to the continued emphasis on maintaining our balance sheet strength and the strong backlog of our works in our TPS segment. Thank you, Hughes. This uniquely positions to navigate the challenges we face as an industry. Since we last spoke on our fourth quarter earnings call in late January, it’s an understatement to say that the macro environment has changed rapidly. The sudden demand shocked the global GDP from Covid-19 combined with the rising global oil supply drove a 67% decline in oil prices during the first quarter. Looking forward, the outlook for oil supply and demand appears equally uncertain. On the demand side, U.S. GDP is forecasted to decline by 40% or more in the second quarter, while global GDP is expected to contract meaningfully for both the second quarter and the full year. This economic shock is estimated to negatively impact global oil demand by 20 million barrels to 30 million barrels per day in the second quarter and…

Thanks, Lorenzo. I will begin with an overview of how we are positioning Baker Hughes to navigate the challenges of this new macro environment. I will then walk through our results for the first quarter and provide an update on our outlook as we see it today for the remainder of 2020. After protecting the safety and health of our employees, our focus is first and foremost to maintain the financial strength of the company as we manage through this downturn. We are committed to taking all necessary actions to right-size the business for the activity levels we expect to see over the coming quarters. As a first step, we have approved a plan for restructuring and other actions totaling $1.8 billion and we recorded $1.5 billion of this amount in the first quarter. These charges are primarily related to the expected cost for reductions in workforce, product line exits in certain geographies and the write-down of inventory and intangible assets. These actions are taking place across the business and our corporate functions, as we align our workforce with anticipate activity levels and remove management layers. We expect cash expenditures in this restructuring plan to total approximately $500 million and for the cash payback to be less than one year. Given the projected magnitude of this downturn, and other structural changes that continue to evolve for the industry, we conducted a very thorough process to identify additional cost saving opportunities and further improvements to our overall operating efficiency. We feel very confident in our ability to generate significant cost savings from these initiatives in a short period of time and believe that these actions position Baker Hughes to generate better returns and cash flows in the future. These restructuring initiatives can be segmented into three major categories. The first, which…

Thank you, Brian. Before we move to Q&A, I wanted to spend a few moments to recognize and the thank the Baker Hughes team for what they are doing to take care of each other, our customers, and the communities around them impacted by the Coronavirus pandemic. We continue to support our communities with great acts of courage and kindness. Baker Hughes global additive teams in the U.S., Germany, Italy, the UK, and Saudi Arabia have been working collaboratively for weeks with local partners to identify, test and now safely deliver 3D printed parts critical for protective gear needed by first respondents. At our additive manufacturing facility in Talamona, Italy, additive experts have started production of 3D printed components, the respirators, such as valves and adapters. Kits for respiratory masks have already been distributed in Italy and more kits will be produced in partnership with Baker Hughes additive manufacturing labs in both Florence, Italy and Montrose, Scotland. We are committed to these efforts and looking beyond our business to apply the highest and best use of our unique 3D printing capabilities to support the communities around us. All design time, labor and parts are being donated. These efforts are inspiring and I am extremely proud of our team in this difficult time. We are proud to be part of a community of technologists who have come together to help contribute to mitigate the impact of this worldwide pandemic. Finally, I want to highlight that we have a solid backlog of longer cycle projects, a balanced portfolio and our strong balance sheet, Baker Hughes remains uniquely positioned to navigate the challenging market environment. With that, let’s open the call for questions.

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

Hey. Good morning, gentlemen. And thanks for all the Baker Hughes is doing for first responders.

Thanks, James.

Hi, James.

So, Lorenzo, this downturn, I think is different for Baker Hughes than the previous downturns. You are in a much different situation. You are a much larger company. You have better systems and you are not hamstrung or hampered by the – by some M&A type of activity. Could you perhaps – I know, you got into some detail in your prior comments, if you have to describe how quickly, how swiftly and how much ability you have to respond this time versus what Baker has seen in the past? And how the past is really not relevant in looking at how Baker might perform this on?

Yes. Sure, James. And, as you say, a lot of change for Baker Hughes since the last downturn at 2015, 2016 and we believe that it’s not a good reference for our current business as it is. As you recall, in 2015, 2016, Baker Hughes could not react to market conditions due to restrictions under its proposed merger with Halliburton. Since the creation of the new Baker Hughes business in July 2017, we have better visibility, improved processes and systems in place to react quickly and we mentioned some of that in the prepared remarks. Maria Claudia and the OFS team have been executing on business transformation during the past years and we are starting to see the benefits of that in the processes. Also our engagement, as you know a big focus was on being close to the customers and especially in OFS, that’s improved considerably. So we are in continuous dialogue with the customers helping to improve efficiencies and also looking at new commercial offering that we can apply at this time. I’d also like to remind you that, the portfolio of Baker Hughes now is very different, as well. We are not present in the pressure pumping North America and our mix is also of longer cycle businesses as you look at TPS and Oilfield Equipment and we have an IPO of approximately $23 billion. Overall, I’d say, I am pleased with our positioning. We’ve got a strong balance sheet and liquidity position and team is ready for the challenges ahead.

Okay. That’s good to hear. And then, Lorenzo, big shift to remote operations during the first quarter. I think, probably some of this is going to be permanent in nature. Could you talk about how Baker is enabling this shift? And do you read with me that this could be somewhat semi-permanent more remote operations, getting more people off the wells and also rig site and creating better HSE centers?

We are doing some. I think you are right and one of the outcomes of the current environment in COVID is that we are having more and more conversations with our customers that are interested and the kinds of technology and capability that we’ve been offering them. And there is an increased utilization of remote drilling as well as virtual operations. We think that these benefits extend beyond just the current health and safety factors that are beneficial at this time. But they also help operators really look at more efficient and reduce non-productive time. And as we mentioned in OFS, the rig drilling has actually been – of the drilling performed in the first quarter was remote drilling and that’s the highest percentage to-date. We are also starting to see in TPS. You heard us talk about virtual string test that was conducted with Venture Global on the Calcasieu Pass project for the first time. We’ve done this remotely and we also recently completed a virtual compression test for the LNG Canada. So, we do expect that our technology focus is the right area and we will continue to see it applied as we go forward with the customers.

Yes. And James, I would add that actually we’ve been doing a lot in remote operations and have a lot of remote capabilities in TPS for some time. We’ve been using smart helmets for about four to five years now and that’s basically PPE equipment that has integrated video, audio and Google glass. So, an FE can actually project what’s going on into the machine to pull up documents and see in a Google glass and can access experts in that technology, no matter where they sit in the world. We are migrating that to iPhone and iPad to make it more available for our FEs. And then, we also have been using virtual reality for sometime in training and are transitioning that into actual field work where we can bring RFEs, customer employees into a virtual reality environment with people sitting in Florence or Houston or wherever they are in the world and do block these before they repair things and actually solve problems quickly. So, I think this downturn is accelerating that and we got, like I said, quite a bit of experience there. So I think there is a huge opportunity for us in the industry.

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

Thanks. Good morning, guys.

Hi, Angie.

Hi, Angie.

Hi. So, I really do appreciate Brian, all the color you gave and it’s quite helpful and so around Oilfield Services really did have better than expected revenues and margins in Q1 given the markets and in light of the cost-cutting efforts, can you give us additional color around the margin outlook for 2020? Anything else you could add to your prepared remarks and decremental margin?

Yes. Angie, look, I think Maria Claudia and the team had been working to improve process and the cost position of OFS. As we’ve outlined, in calls and meetings and delivering 18% decrementals in the quarter was good performance in this environment. Look, we are continuing to focus on cost efficiency and I think we can deliver strong margins in this environment despite all headwinds that we see. So, look, as Lorenzo mentioned, 15. 16 is really not a good reference for how we think that what that business is going to perform now. We got better systems in place. We got better process in place to combat this and look, we’ve already started taking actions. Maria Claudia and the team got ahead of this and started taking the restructuring actions in March. So early on. So, look, difficult to give you a definitive decremental going forward. I can tell you that our goal is really for our cost out actions to offset the impacts of any pricing pressure that we may see during this particular downturn and keep decrementals more in line with what historically been consistent with activity level declines. Now, obviously, in the second quarter, that may not be the case, because the volume decline is coming faster than you can take some of the cost out and there is lot of uncertainty going on this quarter, particularly in North America. But I’d say, for the full year, feel good about the decrementals being in line with historical activity declines. And I’d say, look, from an overall margin standpoint, we believe that margins will be – will likely be down significantly. But I do think that the cost out actions that we are taking will dampen the impact of the volume declines. So, through this situation, Angie, Maria Claudia and the team are working and we’ll continue to monitor the situation and see if we need to take more action.

Perfect. That’s helpful. And then, if you could also add on TPS and just talk about the servicing part. That I believe the revenue, I think 60% of service and 40% of equipment and obviously the CSAs are stable. But can you talk about the other moving pieces and just the timeline of the declines. Is it more immediate or kind of ratable through the year? Any thoughts on 2021?

Yes. You know, Angie, I’d say in general, I would expect the services revenue to come under some pressure this year, in addition to I think customers cutting budgets because of everything going on with commodity pricing. The Covid-19 restrictions are also causing some delays in equipment deliveries and pickups. There is some logistics back outs and those kind of things and in some instances, that’s restricting mobility of our field engineers. So, there will be likely some immediate impact related to some FE travel. And as you mentioned, about 60% of the revenue in TPS is related to services and you pointed out contractual services primarily on LNG equipment. I would expect those revenues to be relatively stable. There could be a modest decline with customers start to try to move around maintenance events and minimize some OpEx. But, as you recall, we got guarantees around these contracts. And so, we work very closely with the customer and really drive when those outage don’t happen. There is some room to move them around a little. But I feel pretty good about the visibility there and that we will continue to execute on those within a short window. The other area transactional services, it’s likely to be negatively impacted by the downturn as these are immediate things that operators can do to save cash, have more control over moving servicing around in their spare parts inventory. So, I think you could see that impacted more than contractual services. But one thing I will say Angie, going into this downturn versus 2014, customers don’t have as much stock on their shelves as they did going into that downturn. So I don’t expect to see a large new stocking like we saw sort of in 2015. The other area of services is around upgrades and installations and I think they could hold up reasonably well while we could see some shorter cycle business decline for services for pumps and valves. Again, as customers look to conserve cash in the near-term. So, pulling all that together, Angie, the mobility-related things I think you’ll see more of an immediate impact and then in transactional services, you could see that more spread throughout the year as customers work through their outage schedules and stocking levels. But, over the long run, feel good about this service franchise that we have and the team is working diligently to support customers and some of the remote technology I mentioned and the question that James asked, we are certainly helping.

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

Hey. Good morning, gentlemen. Hope everybody is safe.

Good morning. Thanks, Chase. You too.

Thank you. So, I guess, firstly I want to hit on those really kind of free cash flow. Obviously, free cash flow was strong as seasonally in the $152 million 1Q. If we think about that free cash flow profile, obviously, a lot of that was coming from strong operating cash flow, which approach almost $500 million in 1Q. This is a much better cash conversion and it – than we typically see in 1Q. So, may be if you can kind of talk through really what drove this. How much of that was prepayments versus kind of underlying better cash conversion?

Yes, you know, Chase, I’d say, look, I am really happy with the performance on cash in the quarter. I’d say, we did see some progress collections favorability come through. But nothing extraordinary and we planned on that. I’d say, it’s improvement in process across the board and our collections processes as well as overall inventory management. I think, again, we talked to you when we first came together about the work we needed do to improve cash processes and you are starting to see the benefits of that come through. Look, I’d say for the total year and how I look at free cash flow, I think, given the visibility from the long cycle businesses and the service franchise, I think we can generate modest free cash flow for the year despite the $800 of cash restructuring and separation costs that we’ll incur from the cash standpoint. And again, that’s $300 million that we’ve talked about previously for the separation and restructuring projects that we had ongoing, as well as the $500 million that we launched here in the last few weeks. So, if you exclude that $800 million capital allocation decision for restructuring and the GE separation, that gives you a good view of the operating strength of the company from a free cash flow standpoint. Other thing you know, I’d point out to is that we do have some leverage. We talked about cutting CapEx more than 20% versus last year. I think depending on where activity levels play out over the rest of the year, Chase, we could cut more. And then cash taxes are likely to be more versus 2019 and where we thought they’d be coming into the year. So, I think, working capital, again, good process in place. I would expect the progress collections to move around a bit just given what we are seeing from some of the larger orders. But I would expect the impact of lower progress collections to be largely offset with the improvements that we’ve been driving and things we got in place to continue to drive improvement in working capital and then the lower working capital related to lower OFS revenue. So, again, pleased with what the teams have done. We think this business can generate 90% free cash flow conversion over time and the progress you saw on the first quarter is a good indicator of that.

Yes, that was – appreciate the color there. But I am kind of switching gears a little bit over to LNG. Lorenzo, you touched a little bit on kind of some of the near-term macro headwinds and - that you are facing. But could you talk about orders this year probably going to be a pretty skinny year of orders. But could you talk about could you talk about your medium to longer term outlook for orders and then also, some – I’ve gotten a few questions about the risk of LNG backlog – of your LNG backlog. So, maybe if you could tell to the risk around, did you see your backlog and if there were any cancellations last downturn?

Yes, Chase. As we mentioned, the uncertain environment is likely to result in fewer LNG FIDs in 2020 as operators delay some of the sanctioning decisions in order to better assess the economic and commodity price outlook. Hard to comment on any special specific projects. But we are already seeing some larger projects be delayed by operators. Right now, where we still see a couple of smaller LNG projects likely happening this year and perhaps one to two medium to large-scale projects still having a small chance of FID later this year. Fundamentally, from a macro perspective, medium to long-term growth outlook for LNG remains strong and we still expect global demand to be in the 550 to 600 MTPA range by 2030. And as you know, to produce that 550, 600 MTPA by 2030, we are going to need to have approximately 650 to 700 MTPA of nameplate capacity in place, which represents still significant growth from today's 460 MTPA. So, again, macro perspective, still feel good and we are continuing to stay close to our customers. And again that we'll see some FIDs going through this year.

Yes. And Chase, specifically on the backlog, look, during the last downturn, we didn't see any cancellations in LNG projects that had FID-ed with us. And I was going through our history in LNG and can't recall any cancellations once the project has been FID-ed with us. The one thing we have seen, you've seen some schedules move around. There is lots of things that can make that happen, but again, not significantly. I wouldn't be surprised if we didn't see some schedules move around a little bit. But I feel very good about the backlog and the projects that we are executing on right now. And obviously, we stay very close with our customers and there has been no indication so far of any worries about projects that have FID-ed and how they are progressing.

Thank you. Our next question comes from Sean Meakim with JPMorgan.

Hey Sean.

So, in North America, your business mix is pretty production-oriented. So, that's typically more stable to drilling and completions, as you noted. But, we have these store challenges creating an issue for producers in the next few months at a minimum. I mean, maybe 3 million to 5 million barrels a day could have to come offline for some period. We don't have much historical precedents here. Just curious how that could impact your lift in chemicals businesses in the next couple quarters?

Yes, Sean. Good to hear from you and we feel good about our competitive positioning in North America in artificial lift and chemicals. As you mentioned though, in the current environment, we believe that the sharp decline in production and also in potential production shut-ins will impact the ESP and the chemicals business. And E&Ps are looking aggressively to conserve cash and cutting back on spending across all product lines. And so, as we look at the next one to two quarters, you'll see some impact there. However, I would also say that, if there's a recovery in place, you'll see our production-driven businesses recovering quickly and also as operators look to bring back wells, likely they'll need more chemicals and also ESPs from a stimulation perspective.

Right. Okay. That makes sense. And then, haven't spoken a lot on digital. Obviously, a challenging environment here in the last quarter, as well as the one upcoming. Pretty high decrementals in that business, but also should be pretty high incrementals. Just curious, just about how you think about that cadence for revenue and margins as we go through the year? That’d be helpful if you don't mind.

Yes, Sean, you're right. You do see high decrementals and high incrementals. I mean, the gross margins in the Digital Solutions business are really strong. And you simply can't take out cost fast enough as volume comes down, especially around R&D, selling, G&A. So, we are taking some actions there to – as I mentioned, we are furloughing some employees as volume is lower and we anticipate that it will continue to be lower with economic challenges and the struggling GDP we are seeing around the world. So, look, I would expect Digital Solutions to look a lot like the first quarter in the second quarter, given what we are seeing from a demand standpoint and the inactivity around the world. But it will likely bounce back quickly as you start to see folks getting back to work and economic activity picking up. And as you point out it should come through with really strong incrementals.

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

Good morning, Brian and Lorenzo, with using your formulation with regard to a blend of North American and international spending contractions for Q2. I mean, at least on my math, that kind of results in a 25% to 30% sequential revenue contraction. Given the violence of that contraction, would OFS do well to generate breakeven margins?

Yes. Look, I think if you look at the formulation that you have there, I mean, you know there is always some variability around the edges there. But I do expect significant revenue decline in the second quarter. The other thing, Bill, that I would remind you of is, we've talked about the cost out that Maria Claudia has already been executing. And I do think that will dampen some of the impact of what we are seeing from the downturn here. I'd say, probably where your math that is probably a little more than what I am seeing today based on the level of activity we have internationally, how strong we are in the Middle East. So, look, I think things are moving around quite a bit, but I feel good about how Maria Claudia and the team are addressing the current situation.

Okay. That's helpful, thanks. And then Lorenzo, I hear you with regard to the long-term secular outlook for LNG and TPS and understanding that we are not in this bunker of acute crisis forever. But assuming that effectively capital allocators around the world are going to be very cautious for the balance of this year. Is it reasonable to expect that TPS orders for the year are down in the vicinity of like 50% year-over-year? Or is that too harsh?

Look, again, I think, as you look at where we are seeing LNG, as well as where we're seeing the total TPS, the current macro environment is obviously uncertain. We continue to speak to the customers on a regular basis and we are predicting some of these projects to move forward even though the timing is difficult to see. If you look at our orders in TPS, a large component of our orders are service orders, which we expect those to be pressured in line with the service revenues. As you can imagine, we have equipment orders and a wide range of outcomes, offshore/onshore production, also, refinery, petrochemical. Given the service order outlook and also the equipment, we think the $0.50 is a little harsh and we would expect to do better than that. If you look at the prior downturn, our floor is better than that from a standpoint of orders. And I'd also say, we are still in a lot of conversations with our customers relative to potential FIDs that go forward.

Hey, Bill, I would say, you could see orders down 40% based on what we have seen in prior downturns and in conversations with customers. But again, things are quite fluid right now. And we're staying close to the customer. So, we'll update you as we know more.

Thank you. Our next question comes from Scott Gruber with Citigroup.

Yes, good morning.

Hey, Scott.

Hey, Scott.

So, when you are working through the restructuring of your fixed costs, especially items like facility closures, what is the new normal environment that you are contemplating on the other side of this downturn? Maybe, if you could touch on that through the usual market indicators. So, thinking about U.S. rig count, it sounds like you are thinking about that being weaker on the other side. But potential magnitude of international E&P spending recovery, offshore tree orders, when you reset your fixed costs, what you are envisioning for these three years to four years out?

Yes. I think, first of all, it's obviously a dynamic situation and things are unfolding. As you look at what's happening with COVID and some of the longer-term impacts, first of all, you are starting to see more of the remote operations, as we said, being utilized. That's obviously from an efficiency perspective and also cost reduction. We are continuing to deploy more technologies out there, which will not result in us bringing back some of the people that are involved. And also, if you look at the standpoint of the way in which we work, the number of facilities we have and also people working from home as opposed to being in the office. So, I think these are elements that we are working through, and we are still – we think we've taken the right restructuring actions and much of what, again, is restructured won't necessarily come back. And that's sort of the aspects we are working through at the moment.

Got it.

And I think, Scott, we stress-tested quite a few scenarios and do feel like that we prepared for scenarios that are worse than what we've outlined here as we looked at our overall cost out, and how we think the industry is going to perform. And I think that gives us some flexibility as we see activity maybe come in stronger than we are anticipating. But, as Lorenzo points out, I think it's a bit early to call exactly how this plays out over the medium term. But, rest assured, we are staying really close to our customers and the market and we'll adjust accordingly.

Understood. There is a lot of capacity out there right now. A quick follow-up. Roughly, how much of your 1Q OFS revenue is targeted to be exited?

It's a small amount. It's lower than 5% and the work that the product lines that we are exiting will be overall margin rate positive and cash flow positive for OFS in the company.

And I'd just say, this is very much in line with the strategy we've laid out to focus on margin rate accretion and also return on invested capital. So, you can see the decisions that we've made are really just accelerating that at this time with the North America land drilling and completion fluids that we are moving out of, as well as some of the smaller commoditized completions-driven activities.

Thank you. I would now like to turn the call back over to management for any further remarks.

Just like to thank everybody for joining the call. Stay well and stay safe. And we look forward to speaking to you again soon.

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