Good day, ladies and gentlemen and welcome to the Baker Hughes Company First Quarter 2021 Earnings Call. [Operator Instructions] As a reminder, this conference 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 2021 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 GAAP to non-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 are pleased with our first quarter results as we generated strong free cash flow, continued to drive forward our cost-out efforts and took further meaningful steps in the execution of our strategy to lead the energy transition. During the quarter, TPS delivered solid orders and operating income, while OFS continued to execute our cost-out program to help drive another strong quarter of margin performance. As we look ahead to the rest of 2021, we remain cautiously optimistic that the global economy and oil demand will recover from the impact of the global pandemic. As vaccine rollouts ramp up around the world, we expect rising oil and gas demand, combined with continued discipline from OPEC+ and publicly traded operators to rebalance inventories. This should be supportive of higher oil prices and solid free cash flow across the industry. Following a resilient 2020, the natural gas and LNG markets longer term demand outlook appears increasingly positive. We anticipate future demand improving as governments around the world accelerate the transition towards cleaner sources of energy. Accordingly, we see potential upside to our 2030 LNG demand view, which previously called for 550 to 600 MTPA of demand by the end of the decade. Based on recent third-party analysis and directionally supported by discussions with some of our customers, we now see the potential 600 to 650 MTPA of global LNG demand by 2030. Outside of oil and gas, the focus on cleaner energy sources and technology to decarbonize resource-intense industries continues to accelerate. The U.S. is more closely aligning with Europe and other developed nations in steering government policy to incentivize clean energy sources as well as carbon capture technologies. We believe that these policy shifts will be crucial to supporting new…

Thanks, Lorenzo. I will begin with the total company results and then move into the segment details. Orders for the quarter were $4.5 billion, down 12% sequentially, driven by OFE and TPS partially offset by an increase in Digital Solutions. Year-over-year, orders were down 18%, driven by declines in OFS and OFE partially offset by increases in Digital Solutions and TPS. Remaining performance obligation was $23.2 billion, down 1% sequentially. Equipment RPO ended at $7.5 billion, down 6% sequentially and services RPO ended at $15.7 billion, up 2% sequentially. Our total company book-to-bill ratio in the quarter was 0.9 and our equipment book-to-bill in the quarter was 0.8. Revenue for the quarter was $4.8 billion, down 13% sequentially, with declines in all four segments. Year-over-year, revenue was down 12%, driven by declines in OFS, OFE and Digital Solutions partially offset by an increase in TPS. Operating income for the quarter was $164 million. Adjusted operating income was $270 million, which excludes $106 million of restructuring, separation and other charges. The restructuring charges in the first quarter relate to projects first quarter relate to projects previously announced in 2020. Adjusted operating income was down 42% sequentially and up 13% year-over-year. Our adjusted operating income rate for the quarter was 5.6%, down 280 basis points sequentially. Year-over-year, our adjusted operating income rate was up 120 basis points. We are pleased with the operating margin improvement on a year-over-year basis, which was largely driven by strong execution on our restructuring actions and continued improvements in operating productivity. Adjusted EBITDA in the quarter was $562 million, which excludes $106 million of restructuring, separation and other charges. Adjusted EBITDA was down 27% sequentially and down 5% year-over-year. This quarter, we began disclosing total company adjusted EBITDA in our earnings release as well as EBITDA by…

Thanks Brian. Operator, let’s open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Sean Meakim with JPMorgan. Your line is now open.

Thank you. Good morning.

Hi Sean.

Hi Sean.

So, I wanted to start on free cash flow. Brian, I appreciate your comments. You walked through the moving parts quite nicely in the prepared comments. Particularly, 1Q is seasonally challenging for collections. It sounds like your customers are feeling more comfortable with their cash flow profiles than maybe they did in the back half of last year. But it sounds like free cash flow will be positive even without the collections benefit. So, how should we think about that full year free cash flow expectation given the strong start, you had said you like – you expect to get back to historical levels. That sounds like maybe in the low $1 billion type of number. Shouldn’t expectations start to move higher based on how you started the year?

Yes, Sean. Look, we are pleased with how free cash flow is pacing so far this year. And I would say that the framework that we laid out when we were on the call in January is still largely intact, but with a couple of positive exceptions. And you pointed out one, really driven by receivables and then some work we have been doing around inventory. I think working capital will likely be better and EBITDA is pacing slightly better so far this year. So, indications are pretty good for the full year free cash flow performance. And as we talked with you about before, we have worked a lot on improving our supply chain and working capital processes. We have gotten a lot of systems in place. And we are becoming more efficient in managing cash collections and inventory overall. And then I think you will recall we pointed out, I think this is very important, our incentive structure company-wide is really more focused on free cash flow and cash conversion. And so look, when I put all that together, I do think there are certainly tailwinds for free cash flow for the year. Sean, over the course of the year, working capital can fluctuate just really depending on the dynamics of each segment, OFS activity, TPS progress collections, but it should be a source of cash this year, and that’s a little better than we talked about in January. And just as a reminder, the other drivers of the backdrop of free cash flow for the year: Operating income should be higher; CapEx should be slightly lower with the activity levels that are similar to what we have been talking about here. While earnings are higher, cash taxes should be lower because some of the refunds that we have and the mix of income. And then as you know, the biggest thing is just the reduction in restructuring and separation-related charges. We had $108 million in the first quarter. I would expect the second quarter to be around the same level, Sean, and then taper off in the second half of the year. So, as you said, like the start to the year and the progress that we have made and feel pretty good about the overall performance.

Yes. It’s very encouraging. Thank you, Brian. So then Lorenzo, thinking about OFS and OFE. These are 2 segments where you have been really focused on transforming the operations and the portfolios to boost margins and returns. Progress in OFS is continuing. OFE still seems like have your lift, it’s later cycle. It’s more offshore levered, so that’s understandable. But where would you say you are in the transformation for each in terms of operating efficiency and portfolio adjustments?

Yes. Sean, I will jump in here first. Look, I feel really good about the momentum in margin accretion that we have created, to the cost-out actions, really over the last year with Maria Claudia and the team in OFS. And I would say, based on the actions that we have taken to-date and actions we are still executing on in the outlook that we talked about, I continue to believe that we should have operating margin rates in the high-single digits by the fourth quarter, with a real good shot at double digits. The team is executing incredibly well. Not done with everything that we have got to do, but I think you have seen the momentum here. And the team is still working hard at this and certainly have a lot that they have been working on and are continuing to execute on, and I feel good about their execution capability. So look, you should see a steady margin improvement, obviously, depending on activity levels throughout the course of the year in OFS. So, I would say we are well on our way. Processes are beginning to be stabilized. And I think we are going to have a great margin business here as we continue to execute this year. You pointed out OFS – or sorry, OFE is a bit of a heavier lift. Pleased with the joint venture announcement that we have. We expect that to close in the second half. And I think that’s a good step in our overall portfolio optimization. For the remainder of OFE, we are continuing to focus on cost-out across the business as we see overall pressure in the offshore market. We have been reducing headcount and footprint to align with the lower volumes. And I think just given the activity levels and backdrop that we see, we want to offset the volume pressure this year with those cost-out actions. So, a margin profile that’s better, but still not where this business needs to be over the long-term. And we will continue to evaluate how we run it differently and better given this market environment.

Sean, I would just add. If you look at our strategy and the 3 pillars, this really fits in the transform of the core. And the team has been doing a good job of executing on that first pillar, and it’s crucial that we continue to execute. But pleased with the performance as we are going through the year.

Thank you, both.

Thank you. Our next question comes from the line of James West with Evercore ISI. Your line is now open.

Thanks. Good morning guys and congrats on the solid free cash flow in the first quarter. So Lorenzo, your upgraded view of LNG was interesting. There is some crosscurrents, of course, in the market right now, with some suggesting LNG has some standard asset risk. We don’t agree with that at all, but there is some suggestion of that. And then, of course, our view that is LNG is our transition fuel and is – and it could be a landed fuel even much further in the future. And so I am curious, your customer base, how they are thinking about LNG. Why you see – or how you see the upgraded numbers that you are talking about today and the outlook overall for LNG?

Yes, James. And as we mentioned in the prepared remarks, we see the long-term outlook for LNG remaining intact and actually seeing positive upside. And so we have taken up the outlook from 600 MTPA to 650 MTPA from what we said previously for demand for 2030. And if you look at the backdrop, 2020 was very resilient. And also coming into 2021, you are continuing to see a good demand robust from countries such as India, China. And there is a couple of factors at play here. Really, the move from coal to natural gas, given some of the commitments relative to energy transition which are going to play out. Also, as you look at getting to 600 million tons to 650 million tons by the end of the decade from a demand perspective, that means we are going to have approximately 700 million tons to 800 million tons of nameplate capacity. So, that suggests that we are going to have another 100 million tons to 150 million tons FID over the course of the next 3 years to 4 years. And that’s an incremental 50 million tons to 100 million tons than we indicated before. So, I feel good about that outlook. This year, we still see 3 FIDs to 4 FIDs taking place. And in the discussion with customers, there is a lot of off-take discussions with the robust demand outlook. As you look at the backdrop, you have had some expansions in Qatar. You have had some expansions announced in other locations. You have got some of the North America projects that are out there commercially, looking at off-take agreements. And again, it’s really encouraging to see just the announcements being made by several of the large users on the way in which they are going to transition from coal to natural gas, which clearly applies to LNG as well. So, feel good about the outlook as we go forward.

Right. Okay. That makes perfect sense. Rod must be pretty busy guy these days. So, how should we think about the order outlook for TPS then as we go to the next several quarters?

Yes. As we look at TPS orders, overall, we still think the order outlook for ‘21 and ‘22 looks roughly similar to what we booked in 2020. There could be some mix change from a year-over-year perspective. On the LNG side, as I mentioned, 3 projects to 4 projects likely to move forward in 2021, followed by a robust pipeline of LNG projects to reach FID beyond 2021. So, that continues to be a positive momentum, as we have indicated before. For non-LNG equipment, we believe there is an opportunity for 2021 to be in line with 2020. The mix could move around a little bit between onshore and offshore in valves and other areas, but the opportunity is roughly the same. We are also starting to see, even though minimal in numbers, increased traction on our offerings for CCUS and hydrogen. There is a pickup there relative to discussions with customers as more forward-looking, but some of the technologies that we’re bringing on to the scene getting traction, and that will bring some possibility over the next couple of years. And then Services, we’re optimistic with the outlook that we’ve mentioned for ‘21 and ‘22, as customers resume their maintenance activity, and in some cases, also look for upgrade equipment. So again, no real change from what we said, and it’s becoming more robust.

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

Hi, good morning everyone.

Hi, Chase.

I guess I’ll start with CCUS. Lots of investor interest these days around the CCUS. And on the capture side, you’ve got one of the broadest technology offerings that include chilled ammonia, amines and also mixed salt process technologies. But could you maybe just take a minute and speak to your comprehensive offering today across the entire CCUS value chain? Where are you investing more? And finally, what parts of the value chain you think Baker will be able to differentiate the most?

Yes. Sure, Chase. And then as you said, we’ve been spending quite a bit of time on CCUS, and it is much broader than just the process aspect. As you look at Baker Hughes from a portfolio perspective, I think we’re uniquely positioned because we can play across multiple areas of the value chain. If you look at it from a post-combustion capture, we’ve also got consulting and reservoir evaluation and design, as well as then subsurface storage services like well construction, reservoir modeling, and also, as you look at the longer term integrity and monitoring. As you think about technology from a CCUS perspective, again, you’ve mentioned some of the carbon capture technologies that we have. Turbomachinery, solvent-based state-of-the-art capture processes are going to be key. The chilled ammonia process, which is commercially available already today, is going to be ideal for large-scale projects. The combat carbon capture, which is rotating bed technology, which we acquired at the end of last year, this is going to be for smaller and mid-scale projects and key for offshore industries as well as cement factories and different types of industries. And then the recently announced mixed salt process, which we mentioned during the SRI International license that we got, which is, again, another process that we will be utilizing our key equipment and allow for lower energy usage, also reduce water and greater efficiency. So we’re building a portfolio here across CCUS from a technology standpoint as well across the value chain.

Yes. I appreciate the color there. And maybe as a quick follow-up to this, could you maybe talk to the addressable market across the CCUS value chain? But then maybe also speak to what you see as an addressable market for hydrogen?

Sure. And then we announced in 2019 being an energy technology company focusing on the energy transition. So we spent a lot of time over the course of the last 12 to 18 months evaluating the market opportunities for ourselves as it relates to these different areas. And we’ve really looked at three things: where our technology can play today; also how our technology may evolve and the investments required to remain competitive and also other areas in the value chain. So, talking specifically to CCUS, we look at the addressable market for ourselves to be between $35 billion to $40 billion by 2030. Now this addressable market covers a full range of technologies that Baker Hughes can currently offer like the carbon capture technologies, we mentioned, the compression storing and monitoring, and also assumes really a relatively mid-case of 450 million tons of CCUS by 2030. So feel good about being able to play in this market. And again, it’s going to be an important market for us going forward. On hydrogen, we’ve been looking at this for some time. You know we’ve been present in hydrogen with some of our key technologies already. As we look out to 2030, we see an addressable market for us – for ourselves of $25 billion to $30 billion. I think you got to keep in mind that this is evolving. But again, it’s going to encompass a wide range of products and technologies across the value chain. And we’re going to be focused on where our higher technology solutions can be better than the conventional technology and also address the market that way.

Perfect. Thanks, Lorenzo.

Thanks, Chase.

Thank you. Our next question comes from the line of Marc Bianchi with Cowen. Your line is now open.

Thank you. I’d like to go back to TPS. And I think if I heard right, the guidance for second quarter was for the margin rate to be flat with the second quarter of 2020, which would imply like 100 basis point sequential decline or so. And I think you mentioned that, that was related to some technology setting. So could you maybe talk to us about the technology spending, and what that’s allocated towards, and then how that would progress over the remainder of the year?

Yes. Yes, Marc. In the prepared remarks, we did talk about TPS margin throughout the year as you described. And I’d say, look, the thing you got to keep in mind is that as we execute on our large backlog of projects. Margin rate will likely fluctuate a little bit quarter-to-quarter, depending on the equipment service mix, but also due to the mix of the projects in the backlog. There can be some differentiation there just given the broad range of of offerings that we have and the pretty diverse set of projects in the backlog, that range from LNG to onshore offshore production to industrial turbines and some rep and pet things. So look, that’s – quarter-on-quarter, you can see some fluctuation based on that. As far as technology goes, roughly in 2020, we spent at the total company level about $600 million on R&D. TPS makes up a decent portion of that given the overall end markets it serves and the new products we’re bringing to market and we’re focused on. And I’d say, look, from a second quarter standpoint, we are going to see a bit of a ramp-up across some areas in traditional markets like LNG and onshore and offshore production, but also in some of the new frontiers that you’ve heard us talk about. Lorenzo just described around CCUS hydrogen and then some in energy storage. So specifically, we’ve got some increased program spend in high-pressure recip compressors for hydrogen and some more work on the hydrogen gas turbine development. We already have turbines today that run 100% on hydrogen. There is some more work that we can do to expand that to our broader turbine base. And then, look, we’re spending some more in advanced and additive manufacturing to position TPS from a cost and a competitiveness standpoint both in new equipment and services going forward. So look, this – it’s a great business, a really strong franchise. You see our positioning in some key markets. And this is an area where we think investments do make sense at this stage. And even despite that, TPS will have a strong year from a margin and overall income standpoint.

Okay. Thanks a lot for that. The next question, unrelated, I wanted to ask about the revenue commitment that you have with C3.ai. I believe that, that was restruc lower during COVID, but still is a pretty sizable number as we go through the next few years. I’m just curious if you could tell us where you stand with that. What your sort of visibility is to meeting or exceeding the revenue commitment? And what are the consequences if you don’t?

Yes, Matt. The relationship with C3.ai remains very important to us and it’s a strategic long-term. Really, the restructuring of the contract was based on the strategic element of it being a long-term relationship and also the deployment of artificial intelligence capabilities to our customers. We’ve seen good traction, good pickup. We’re in a number of deployments across the industry and also associated industries. So feel very good about the progression that we’re making. We’ve talked about releases of different products that we’ve done externally as well as the usage of C3.ai internally within ourselves to drive our process efficiencies as well. So on pace and feel good about the future with C3.ai.

Thank you. Our next question comes from the line of Scott Gruber with Citigroup. Your line is now open.

Yes. Can you hear me?

Yes. Hey, Scott.

Hey, good morning. I wanted to stay on the theme of less carbon-intensive LNG. The Yamal project is great to hear. Have you started to hear from buyers or hear of buyers, particularly Asian buyers, starting to request less carbon-intensive gas? Not only just shifting from coal to gas, but actually starting to request less carbon-intensive gas? And do you think that manifests in the near future or will this kind of trend towards hydrogen blends and the turbines be more operator driven?

So Scott, as you can imagine, we’ve been in this industry a long time. And a number of our customers have already started to measure the carbon intensity of their LNG cargoes. We do see a theme and a trend that that’s going to continue. And as we look at also the disclosures that people are starting to make. Customers on the back end of that, on the LNG side, we are hearing that there is a move towards more disclosure, more transparency. And we think we can actually apply that to helping our customers because we’ve got new equipment that can upgrade and reduce the carbon intensity. We’ve also got capabilities around CCUS. So LNG is a destination transition fuel for the energy transition. We feel good about the outlook. And we also feel good about the way in which we support our customers to continue to drive lower the carbon intensity.

Got it. And I just want to come back to CCUS. Obviously, you have the biggest oil company in the U.S. talking about now potentially a mega project along the Gulf Coast. Is that something that you look to participate with them? Are you in discussions with them? And just for some clarification, these operators with low-carbon ventures, the primary area of overlap with your portfolio would be just on the subsurface expertise and maybe some project engineering. Is that correct? So it seemed like the vast majority of your offering is still in play and even if you worked on a project like this with Exxon. Is that fair?

Scott, it is fair. I would take a step back. And then – again, this is a space that is evolving and is an ecosystem that will emerge. If you think of a parallel to LNG, within LNG, there is various processes that can be utilized, an API, a ConocoPhillips, different across the board. You’ve got different companies as well as different operators that have their processes. We apply our equipment to that. We integrate with their processes. And we also apply our own processes as well where appropriate. So it is an ecosystem where definitely we will participate and we will work to optimize. Also, all of these projects require, from an engineering perspective, different scale, different modules, stick builds. And so it’s going to be dependent a lot on whether it’s small-scale or mid-scale, large scale, and that will evolve as we go forward. But I look at it being very similar to LNG from a marketplace as it develops, and we will be participating along the value chain.

Thank you. Our next question comes from the line of David Anderson with Barclays. Your line is now open. Mr. Anderson, if your line is on mute, please unmute your line. [Operator Instructions] Our next question comes from the line of Connor Lynagh with Morgan Stanley. Your line is now open.

Yes. Thanks very much. I’m not sure if you guys have spoken much about this before. But I was interested with the discussion of the well link service you’ve deployed for Saudi Aramco. Can you maybe just discuss in a little greater detail what this offers relative to some of the competition out there? And then I guess, more broadly, what is your sort of upstream software suite that you can offer to customers these days?

Yes. So again, on the web link, we’re very pleased with the deployment with Aramco. And it’s one that we displaced an existing competitor, and it’s actually one of the largest deployments. What this allows is visualization and also better understanding of the wells themselves and the drilling activity. And across the board, if you look at our upstream business, we’ve been investing in digital capabilities and transformation, from a remote operations perspective, from a visualization, from also an artificial intelligence perspective to reduce downtime. We’ve got deployments with a number of our customers. And so the drive here is for productivity to be enabled for our customers, and that’s where we see the continued focus with our digital investments taking place.

Yes. Got it. And then maybe just sticking with the digital theme, I was wondering if you could discuss the ARMS Reliability deal, and just basically how that fits into your portfolio, and effectively, where you see that adding to your offering and evolving the business over time?

Yes, sure. And look, we’re very pleased with the ARMS acquisition that we announced. It’s ARMS Reliability that really helps a broad range of industrial asset management solutions. And if you think about what we offer today already within Bently Nevada, it’s around condition monitoring, vibration. ARMS Reliability actually provides similar capabilities in mining, metals, manufacturing and other industries. And so as you continue to look at our expansion into other industries, applying condition monitoring, ARMS is a great asset to have within the portfolio. So I feel very good about being able to integrate it into our current offering as well as then laying the platform for system 1 over 60 in ARMS together as an offering to our customers to drive their productivity.

Thank you. Our next question comes from the line of Chris Voie with Wells Fargo. Your line is now open.

Thanks. Good morning. I guess, thanks for the EBITDA color that we have got now across the segment. The 15.6% EBITDA margin in OFS, just curious if you can give a little bit of color on where that is expected to go over the long-term, obviously, aiming for some improvement over the course of this year, but what would you think a normalized EBITDA margin should be for Baker’s OFS business?

Yes, Chris. Look, as I said, pleased with how Maria Claudia and the team have been transforming the business. And from a normalized EBITDA margin standpoint, look, there is no reason this business should not be a 20% EBITDA margin business. So Maria Claudia and the team feel confident that with the actions they are taking, they have got line of sight to get there, and it should be at that level.

Okay. That’s helpful. Thank you. And then maybe one more, coming back to LNG, obviously, a lot of good pieces coming together here over the next few years, probably 3 to 4 projects this year, robust after that on the revenue side. Maybe if you could talk about the prospects for EBIT going forward past ‘21. So obviously, some growth this year on flat margins, but as the business progressed and given your visibility into services revenues and equipment, do you expect EBIT growth in ‘22 and after that?

Yes. Look, I’d point out a couple of things. I’d say, as we said this year, we do expect solid growth in operating income based on the higher volume even though mix might be a bit of a headwind from an equipment standpoint, from a rate standpoint. The other thing I would point out is services, we are starting to see services pick up a bit. I mean the first quarter service orders and TPS were slightly ahead of 1Q ‘19 levels, which is, I think, a good indicator. Based on what Lorenzo talked about from LNG order intake and the overall order set, feel good about rebuilding the backlog for equipment, we just booked a large extension on a contractual services agreement in TPS. So our RPO remains robust at about $13.5 billion for services. So look, I’d say in ‘22, when I put all that together, I’d expect service revenue to continue to grow, depending on how orders play out this year in final backlog conversion, equipment orders could be flattish or modestly down, again depending on timing of how orders come in and the the pace of backlog conversion over the next 18 months. And so in this scenario, revenue would be flat or slightly down, but margin, I think, would improve and show some growth in operating income. So look, I mean, I think the backdrop from a market standpoint is pretty solid for TPS. From where I sit today, services is showing some nice indication as I mentioned here. And I think the backdrop for ‘22 margin progression looks pretty good sitting here today.

Okay. Thank you very much.

Thank you. This concludes today’s question-and-answer session. I will now turn the call back over to Lorenzo Simonelli for any further remarks.

Thanks. And thought I’d just leave you with some closing thoughts here. And firstly, we’re pleased with the first quarter results. We generated strong free cash flow, continue to drive forward our cost-out efforts. And we took meaningful steps in the execution of our strategy to lead the energy transition. We’re going to continue to execute on our strategy of becoming an energy technology company through the three strategic pillars of transforming the core, investing for growth and positioning for new frontiers in areas like CCUS, hydrogen and energy storage. As we execute on our strategic pillars and we continue the evolution as an energy technology company, we will maintain our discipline and prioritize free cash flow and returns. Thanks a lot. We look forward to speaking to you again soon. Operator, you can end the call.

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