Q1 2020 Earnings Call
Talking 20 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.
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As a reminder, this conference call is being recorded.
I would now like to enter.
This is your hosts for today's conference Mr., Jeff 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 meet our chairman and CEO Lorenzo Semiannually, and our CFO, Brian Warrell. The earnings release, we issued earlier today can.
Be found on our website at Baker Hughes Dotcom.
As a reminder, during the course of this conference call. We will provide forward looking statements. These statements are not guarantees of future performance.
Involve a number of risks and assumptions. Please review, our SEC filings and web site for a discussion of some of the factors that could cause actual results to differ materially as you know.
Affiliations are operating income and other non-GAAP to GAAP measures can be found in our earnings release with that I will turn the could turn the call over to Lorenzo.
Thank you John Good morning, everyone and thanks for joining us the first quarter of Twentytwenty was challenging for Baker Hughes and the rest of the industry due to time, while an economic fallout.
Created from the Cobot 19 pandemic as well as a significant decline we saw in oil and gas prices.
Even with these ongoing disruptions, we produced solid results in our TPS and RFS businesses during the quarter and generated over 150 million in free cash flow despite typical seasonal headwinds.
Overall I'm extremely proud of our team for the level of focus and perseverance for an extraordinary set of circumstances.
The strength of our company and divestiture of our product portfolio as most apparent in times like these.
From the execution of our HSC operations and supply chain teams in the face of a crisis to the.
Continued emphasis on maintaining our balance sheet strength and the strong backlog of our work in our TPS segment Baker Hughes is uniquely positioned 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.
Avidly.
The southern demand shock to global GDP from covert 19, combined with the rising global oil supply drove 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.
The 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 to 30 million barrels per day in the second quarter.
And by nine to 10 million barrels per day for Twentytwenty as a whole.
On the supply side recent events have proven even more dynamic weve initial indications in much of a likely increase in production from some of the world's largest producers during the second infat quarters.
There are now signs that the dramatic.
Lapse in oil demand and the quickly growing Fred to global storage capacity could prompt a quick a supply response with production shut ins into United States potentially complimenting production cuts that were agreed to by the OPEC plus countries last week.
For the natural gas and LNG market, the excess supply the industry and.
Counted earlier this year is likely to be compounded by the decline in economic activity.
However, we also agree with the view that the gas markets make correct slightly faster than oil markets as a decline in associated U.S. gas production could lift north American prices sooner than previously thought.
Longer time, we.
Any positive on the medium to long term outlook for natural gas and the LNG prices as well as LNG his role as a transition fuel and as a destination fuel.
Considering these factors Twentytwenty will likely continue to be a very difficult year for the energy sector due to the magnitude of near term oil demand degradation.
Regardless of the outcome on the supply side in the coming months.
Looking into Twentytwenty, one the outlook remains unclear and it will largely be driven by the pace of economic recovery from the Cofunds 19 pandemic and the supply response that ultimately materializes.
As a result of this uncertain market we at Baker.
Hughes of taking multiple steps to prepare for what is likely to be a shock production and activity levels and delays the project Fridays.
For our office segment, we now believe that North America drilling and completion spend is likely to contract and twentytwenty by at least 50% versus 29 team.
This year.
Who is based on our conversations with customers. The wave of recently revised M. P budget announcements and our own expectations that private operators are likely to act in a similar or more severe fashion than public MPS.
The high percentage of production related businesses in our North American portfolio typically.
Acts as a buffer to the more volatile drilling and completion related product lines. However, we would caution that in the current environment, we may not see as much resilience as operators look to conserve cash.
We believe this could impact sales of Espeed and production chemicals as customers shut in wells and lower 48 production.
Finally declines over the next 12 to 18 months.
Internationally, we expect that the combination of lower oil prices and the impact from covert 19 pandemic to contribute to a double digit decline in spending in Twentytwenty Basetwenty 19.
Regionally, we expect Latin America and sub so.
Our in Africa to see the sharpest near time declines followed by the North Sea.
In the Middle East, we expect the combination of ongoing projects and the emerging natural gas focus could make spending modestly more resilient.
On a long time basis, we believe that a key consideration at the upper end of this crisis will.
Be the role of North American shale versus other low cost produces in meeting global demand.
While it's still too early to predict we believe it it's prudent to contemplate a shift in this balance over the next few years relative to what we have witnessed over the last decade.
But digital solutions, which is the other short cycle.
Business in our portfolio, we expect revenue and margins to remain under significant pressure and then at time before normalizing in the second half the twentytwenty, assuming improving economic activity.
As a reminder, we have typically frame D.S. as a diversified GDP plus business was exposure across a broad number of.
End markets from oil and gas to power and other industrial markets.
Given its presence in North America, Europe, and Asia Pacific and its exposure to end markets like aerospace and automotive, we expect that orders and revenue for the S will likely be meaningfully impacted by global GDP declines.
As well as oil and gas trends.
But the long cycle businesses in our portfolio, which are primarily driven by LNG and offshore development. We expect that the combination of constrain customer cash flow and economic uncertainty will likely delay a number of projects.
And our other fee segment, we expect to see industry.
The tree orders around 100 trees or fewer versus the last two years of approximately 300 freeze order daniely.
For TTS, we expect the uncertain environment to result in fewer LNG <unk> Friday's in Twentytwenty as operators delay sanctioning decisions in order to better assess the economic and commodity price outlook.
We expect to see a similar dynamic for the onshore offshore production segment within TPS with only a few large scale offshore projects likely to move forward this year.
In order to navigate this uncertain environment that will undoubtedly lead to lower activity levels, we have taken decisive actions in our effort to cut costs.
Accelerate structural changes and deploy technology and optimize processes that can lower costs for our customers.
We have cut our expectations for capital expenditures by over 20% compared to our prior estimate and have also began to execute on our restructuring plan that we expect to drive around $700 million and.
Annualized savings across our organization.
These cost savings will be the rise from reducing our headcount manufacturing footprint and overhead costs for lower activity levels across multiple geographies.
These cost out initiatives designed to respond to near term activity declines as well as anticipated longer.
Structural changes for the industry.
Some of these actions are an acceleration of the broader structural changes we've outlined over the past two quarters in order to drive improvement in margins and a greater level of operating efficiency.
In addition to the acceleration of many of these initiatives. The early stages as this downturn have also encouraged to.
Well I meant of cost saving technologies, we have a growing number of customers around the world.
One example, advances our capability in remote drilling and completion operations.
After establishing a successful remote drilling track records in the Marcellus basin, the North Sea and China, we're having promising discussions with several customers.
As by utilizing this technology going forward in an effort to lower operating costs.
Another example of pushing forward with new technology is our ability to run a virtual string test a process that proves the engineering functionality and performance of our turbo machinery equipment. We recently performed the virtual string test on the.
First compression train for venture Globals, Calasu, Pos project, which used cutting edge factual technology to connect 21 people and five cities around the world to facilitate run and observe the test.
Despite the downturn facing the industry and the cost outs initiatives, we are executing our corporate.
Did you remains clearly focused on being the leading energy technology company to help the industry facilitate the energy transition.
Now more than ever our customers with them on technology and solutions for increased productivity and efficiency both to achieve a carbon reduction goals and to navigate the current macro environment.
This gives us an.
Opportunity to engage with them on new commercial models focused on outcomes and new technical and operational solutions focused on improving efficiency and maximizing value.
Alongside our commitment to energy transition, we will continue to execute on our portfolio evolution strategy to reshape the company over the coming is.
The current.
Market environment reinforces our view on this strategic objective.
Given the already challenged outlook for some product lines to generate financial returns, which will be compounded by the declining commodity prices and full costed reduction and activity levels. We are accelerating the exit of noncore product lines in multiple countries around the.
World.
For example in North America, we are shutting down our full service drilling and completion fluids business and also ceasing operations in a number of smaller commoditized completions driven businesses.
Although the near term focus on our portfolio, our divestitures and some product line exits we will continue.
Due to evaluate opportunities to invest or partner in areas that generate more stable earnings and high returns.
These actions aligned with our objectives of transitioning the portfolio to a higher mix of industrial and chemical end markets and capitalizing on energy transmission related growth opportunities.
Before I turn the call over to Brian I want to.
Emphasize that through the Baker Hughes portfolio remains uniquely positioned our strong backlog of longer cycle projects and aftermarket services provide stability, while our shorter cycle businesses encounter pressure from the dramatic declines in activity. This balance portfolio operates across the energy value chain and makes us.
Equally position to navigate the challenging market environment. The industry is currently facing with that I'll turn the call over to Brian.
Thanks, Lorenzo I'll begin with an overview of how we are positioning Baker Hughes to navigate the challenges of this new in macro environment. I will then walk through our results for the first quarter and.
Right 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 rightsize the business for the activity levels, we expect.
Back to see over the coming quarters.
As a first step we have approved to plan for restructuring and other actions totaling $1.8 billion and we recorded $1.5 billion at this amount in the first quarter.
These charges are primarily related to the expected costs for reductions in workforce product line.
Sits 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 anticipated activity levels and remove management layers.
We expect cash expenditures from this restructuring plan to total approximately 500.
<unk> million dollars and for the cash payback to the less than one year.
Given the projected magnitude at this downturn and other structural changes that could 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 is the largest.
And in our head count in facilities footprint to adjust for lower levels of activity.
The majority of these cost savings will come from Oh, Fs and alessi.
The second category is the acceleration of broader structural changes we were already planning and then outlined over the past two earnings calls.
These initiatives.
Include accelerating our transformation efforts in global procurement and supply chain shifting and consolidating our manufacturing base and expanding the use of remote operations and multi skilling on a global basis.
The initial target at this plan was to drive significant operational and cost improvements in our service delivery capabilities over 20.
A couple of months, although volume levels will clearly be lower than when we initially develop this plan. We believe that we can still capture many of these cost savings.
Also included in this category or some of the product line exits that Lorenzo mentioned, which accelerates the portfolio initiatives, we introduced last September.
Exiting some of the.
Color to monetize business lines in our portfolio, we will be rationalizing a small percentage of our that's revenue base that is dilutive to overall fs margins and returns, allowing us to focus more on our core strengths.
We will continue to evaluate the portfolio is this market cycle unfolds acting where required.
Year to address businesses that do not meet our return to requirements.
The third category is simplification across the product companies in our entire organization.
Through this process, we have identified opportunities to streamline certain functions and are taking meaningful steps and accelerating the flattening of our organizational structure.
Not only.
Only will these actions helped to lower cost, but should also lead to better informed decisions and faster response times to customer needs and changes in the ever evolving business environment.
Overall, we estimate that the annualized savings from these restructuring initiatives around $700 million, which we plan to achieve by late 2020.
Next I will turn to liquidity in the strength of our balance sheet over the past two and a half years, we remain disciplined in order to prepare the company for potential periods of extreme volatility or a prolonged downturn based on the current macro outlook, we will likely be facing those.
I'll go through this downturn is to remain disciplined in our capital allocation.
Focus on liquidity and cash preservation and to protect our investment grade rating, while also maintaining our current dividend payout.
Some strategic opportunities may arise from this downturn, we will remain diligent and financially conservative.
We continue to view, our financial strength and liquidity as a key differentiator.
And cash equivalents totaled $3 billion at the ended the quarter, which is further supported by a revolving credit facility, a $3 billion and access to commercial paper and other uncommitted lines of credit.
At the ended the quarter, we had no borrowings outstanding under the revolver, the commercial paper program or uncommitted lines.
Our next debt maturity is in December 2022.
We have taken several actions to help the company navigate through this it's uncertain environment from a cash perspective I.
Our revised expectations for lowering net capital expenditures by over 20% versus 2019 is an important part of our plan.
We also.
You to evaluate our research and development spend and will be diligent to adjust where appropriate depending on market conditions. We will continue to relook our cost position as this downturn unfolds adjusting our resource levels as market conditions dictate.
Now I will walk through the total company results.
Orders for the quarter were 5.5 billion.
Billion dollars down 3% year over year.
Remaining performance obligation was $22.7 billion down 1% sequentially.
Equipment RTL ended at $7.9 billion down 3% sequentially and services ARPO ended at $14.9 billion, our total company book to.
Bill ratio in the quarter was 1.0, and our equipment book to Bill in the quarter was 1.0.
Revenue for the quarter was $5.4 billion down 15% sequentially year over year revenue was down 3% driven by declines in TPS digital solutions and our fee partially offset by growth in.
Lss.
Operating loss for the quarter was $16.1 billion. Our first quarter results included a number of onetime items, including a $14.8 billion goodwill impairment $1.5 billion in restructuring inventory and intangible impairment charges and $41 million and separation.
Related expense, we also estimate that the Coolfit 19 pandemic had a negative impact to our operating income of approximately $100 million.
Both digital solutions and TPS experienced supply chain disruptions, primarily in China in Europe that impacted volume levels. In addition.
Lss and Olathe were negatively impacted by travel and work related restrictions as well as rig and sites shutdowns related to the pandemic.
Efforts to perform customer related activities remotely helped but could not offset the volume declines.
Adjusted operating income was $240 million, which.
$16.3 billion, an impairment restructuring separation and other charges.
Adjusted operating income was down 56% sequentially and down 12% year over year, our adjusted operating income rate for the quarter was 4.4% down 44 basis points year over year.
Corporate costs were $122 million in the quarter.
Depreciation and amortization was $355 million flat sequentially and up year over year, we expect depreciation and amortization to be approximately $20 million lower per quarter going forward as a result at the impairments we booked during the quarter.
Tax expense for the quarter was $5 million.
GAAP loss per share was $15.64.
Adjusted earnings per share were 11 cents down four cents year over year.
Free cash flow in the quarter was $152 million, we delivered $183 million some working.
Capital driven by strong receivables performance and progress collections over.
Overall, we're very pleased with the cash performance in the first quarter. We continue to remain focused on improving our working capital processes and optimizing our cash performance.
As we look at the rest of 2020 for working capital, we expect to see lower levels of progress payments given the.
Certain market outlook.
We anticipate this to be largely offset by the improvements we have been driving in working capital processes across the franchise as well as the release of working capital from lower expected revenues in Lss.
Now I'll walk you through the segment results in more detail and give me your thoughts on the outlook going forward recognizing.
The current environment is extremely dynamic with potential risk coming from the coded 19 pandemic as well as the significant weakness in oil and gas prices.
Our expectations are based on the current weakness in commodity prices persisting for the rest of 2020, and we assume that economic conditions begin to improve in the third quarter.
Importantly, expectations assume that some form of travel restrictions strict social distancing and helped and also remain in place until the middle of the year and gradually began to ease in the second half of the year.
In oil field services the team delivered a solid quarter, despite the dramatic slowdown.
Activity in North America that began in March and multiple cobot 19 disruptions that developed internationally over the last few weeks of the quarter.
Well, let this revenue in the quarter was $3.1 billion down 5% sequentially.
North America revenue was down 2% sequentially driven by declining rig count International revenue was down.
6% sequentially driven by typical seasonality.
Oh Fs revenue in the first quarter was modestly impacted by coated 19 related disruptions in supply chain as well as lower demand in the Asia Pacific region during the extended economic shutdown.
Operating income in the quarter was $206 million down.
12% sequentially with margins declining 55 basis points.
Year over year margins were up 69 basis points as I outlined earlier, we are making several significant changes to the cost structure of our websites business.
As we look ahead to the second quarter, we expect in North America market to decline at.
50% as operators release rigs and Frac crews at a rapid pace in response to the significantly lower oil prices.
Internationally, we expect to low to mid teen sequential decline driven by lower oil prices and disruption from coated 19 as travel restrictions and safety protocols impact the number of rigs working in multiple regions.
We believe that the aggressive cost actions, we're taking will help to soften expected margin pressures that belief that our overall fs margin rate will be lower.
As we look at the remainder of 2020 and try to assess the impact for our office segment, we expect U.S. CMP spending to decline more than 50% versus.
2019, as Lorenzo indicated earlier, our North America, or if thats revenues could track industry spending an activity trends more closely than they have historically as operators cut spending across drilling completions and production.
Internationally, we believe that spending is likely to decline in the 10 to 15.
10% range and that our strong position in the middle East should help our international revenue slightly outperformed overall industry spending trends.
The margins, we believe that our cost actions can help to offset some of the activity pressures, we're seeing in the market.
Next I'll cover oilfield equipment the left the team experienced challenges.
As in the quarter from broader cobot, 19 impact specifically in Europe, where mobility restrictions and supply chain delays impacted performance.
Orders in the quarter were $492 million down 36% year over year, driven by no major subsea tree awards in the quarter offset by strong Flexibles orders in Brazil.
Revenue was $712 million down 3% year over year revenue growth in subsea production systems was offset by declines in surface pressure control in North America, and lower sub sea services revenues.
Operating loss was $8 million driven by supply chain and the ability related delays from co. Good.
19, lower overall volume due to seasonality and weaker results in our surface pressure control business.
As mentioned earlier, we've implemented a number of construction projects and alessi to align our workforce and capacity with lower expected activity levels.
For the second quarter, we expect revenue to decline sequentially as growth in.
Flexibles revenue was offset by declines in surface pressure control and subsea services. We also expect slower backlog conversion in Sps due to cope with 19 supply chain disruptions with lower revenue and most of our cost actions not impacting alessi into the second half the year, we expect sequential operating income to.
Also declined modestly.
As we look at our Olathe segment for 2020, we expect revenue and Sps and Flexibles to still grow as the team executes on current backlog while surface pressure control in subsea services will likely decline driven by broader market dynamics overall, we estimate this likely results in margins.
Below 2019 levels.
Moving to Turbomachinery, our TPS team delivered a strong first quarter, especially given the exceptional circumstances over the past few months in Italy, where as you know TPS has the majority of its operations.
We received essential business designation from the Italian government and has been able to maintain.
Durations through the quarantine period due to our importance to the oil and gas markets.
Now all of our plants are operational we have not been running at full capacity and the situation remains very fluid.
Orders in the quarter were $1.4 billion up 10% year over year equipment orders were up 8% year over year end equipment book to Bill was one.
0.4, we saw strong orders in our own offshore production segment booking a number of that FPSO Awards service orders in the quarter were up 11% year over year, mainly driven by growth in installations upgrades and contractual services.
Revenue for the quarter was $1.1 billion down 17%.
Rent versus the prior year.
Equipment revenues were down 24% driven by supply chain delays, primarily related to covert 19 and business dispositions services revenue was down 13% versus the prior year due to cobot 19 mobility related delays.
Operating income for TPS was 100.
$34 million up 13% year over year, driven by product line mix and cost productivity, which more than offset the impact. We saw from coated 19 operating margin was 12.3% up 326 basis points year over year.
For the second quarter TPS basins continued volatility given the situation in Italy.
And the mobility related challenges as well as the overall macro backdrop, particularly for our shorter cycle service businesses based on these factors operating income will likely decline on a sequential basis.
As we look at the rest of 2020 for TPS, we faced a number of challenges, but expect the businesses showed resilience due to the record.
Built over the last two years, we expect growth in equipment revenue. However, we expect that lower oil and gas prices and kobin related issues could impact service revenues versus prior expectations.
Based on these factors, we expect TTS operating income to be flat to modestly lower than 2019 levels.
Finally digital solutions was heavily impacted by cobot 19, as a significant portion of both the customer base and supply chain was offline during the quarter the team executed incredibly well given the unique and challenging circumstances.
Orders for the quarter were $500 million down 24% year over.
Year, driven primarily by coded 19 related demand disruptions, we saw declines in orders across all end markets, most notably aviation automotive and power.
Revenue for the quarter was $489 billion down 17% year over year, primarily due to lower convertible orders and.
Slippages driven by October 19.
The way gate technologies, and Bentley, Nevada product lines will most impacted as multiple deliveries in Europe, North America, and Asia Pacific were delayed shutdowns spread.
Operating income for the quarter was $29 million down 57% year over year, driven by lower volumes.
Related to Cobot 19.
In response to the disruption caused by the pandemic concurrent macro environment, we've taken steps to furloughed employees in some countries and we are implementing structural changes to our organization to operate more efficiently at lower cost.
That said, we still expect near term results in D.S. to continue to be.
Back to buy Cobot, 19, disruptions as well as the weak economic outlook and the oil and gas environment.
As a result, we expect revenue and operating income to be flat to slightly down on a sequential basis in the second quarter.
For the full year, we expect revenue declines in the double digits as the current outlook for weak economic activity weighs on results.
With that I will turn the call back over to Lorenzo.
Thank you Brian before we move to Q any I wanted to spend a few moments to recognize and Frank the Baker Hughes team, what they are doing to take care of each other our customers and the communities around them impacted by the Corona virus endemic.
We continue to spend.
Cities with great acts of courage and kindness.
Baker Hughes global additive teams in the U.S., Germany, Italy, UK and Saudi Arabia had been working collaboratively for weeks with local partners for identify test and now safely deliver preprinted pots critical for protective gear needed.
Hi fast responded.
At our additive manufacturing facility in Talamona, Italy additive experts have started production afridi printed components for respirators, such as valves and adapters.
Kits for respirator, Hamas 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 threed printing capabilities to support the communities around the old design time labor and pop for being donated.
These.
These assets are inspiring and I'm 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've our solid backlog of long cycle projects are balanced portfolio.
And our strong balance sheet Baker Hughes remains uniquely positioned to navigate the challenging in market environment.
With that let's open the call for questions.
Thank you.
If you have a question at this time. Please press Star then one Kieran you touched on telephone.
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Thank you please limit yourself to one question and one related follow up.
Our first question comes from James West with Evercore ISI.
Hey, good morning, gentlemen, and thanks for all of the bigger.
He is doing for first responders.
Thanks James.
Yes.
So youre Lorenzo this downturn.
I think is.
Different for Baker Hughes in previous downturns, you're in a much different situation are much larger company better.
Systems, and Youre, not hamstrung were hampered by the.
But some M&A type of activity.
Could you, perhaps I know you would in some detail in your comments that's going to describe.
How quickly how swiftly in Hell, what's ability you have to.
On this time versus what bakers season pass and held the passes is really not relevant and looking at healthy your might perform this on.
Yes, sure Jameson that as you say a lot has changed for Baker Hughes since the last downturn of 2015 2016, and we believe that it's not a good reference sites 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 our proposed merger with how about them since the creation of the new Baker Hughes business in July 2017, we have better visibility and improve processes and systems in place to react quickly and we mentioned.
With that in the prepared remarks.
Rick Cloudier and the RFS team have been executing on business transformation. During the past few years, when we're starting to see the benefits of that and the processes.
Also our engagement as you know a big focus was on being close to the customers and especially in our family that's improved considerably.
So we're in continuous dialogue with the customers, helping to improve efficiencies and also looking at new commercial offerings that we can apply at this time.
I'd also like to remind you that.
The portfolio Baker Hughes now is very different as well, we're not present in the pressure pumping North America and our mix is.
Also of longer cycle businesses as you look at TPS and the oilfield equipment and we have an IPO of approximately $23 billion.
Overall, I'd say I'm pleased with our positioning we've got a strong balance sheet and liquidity position and the team is ready for the challenges ahead.
Okay. That's great that's good to hear.
And then.
So 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 how bakers, enabling.
The shift and then do agree with me. This is a this could be somewhat.
On a permanent bore motor operations getting more people off the well sort of a rig site.
In creating better agency centers.
James I think you're right at one of the outcomes of the current environment and covered is that we're having more and more conversations with customers that are interested and the.
Kind of technology and capability and that we've been offering them and there's an increased utilization of remote drilling as well as virtual operations out we think that these benefits extend beyond just the current health and safety practices that are beneficial at this time, but they also help operates has a.
We look at more efficient and reduced nonproductive time.
As we mentioned in our fast Sam.
Red drilling has actually been not fixed extended the drilling performed in the first quarter was remote drilling and that's the highest percentage to date out we're also starting to see and TPS.
You heard us talk about.
Actual string test that was conducted with venture global on the Calasu Pops project for the fast time, we've done this remotely and we also recently completed eventual compression test for the LNG, Canada. So we do expect that.
Technology focus is the right area and we'll continue to see it applied as we go forward with the customers yeah.
James I would add that actually we've been doing a lot in a remote operations and have a lot of remote capabilities and TPS for some time, we've been using smart helmets for about four to five years out and that's basically PT equipment that has integrated video audio and Google glass, So NFC can actually a pretty.
Reject what's going on with the machine can pull up documents and CNN, Google glass and can access experts in that technology, no matter, where they sit in the world, we're migrating that iPhone and iPad to make it more available for our fees and then we also have been using virtual reality for some time in training and are.
Transitioning that into actual field work, where we can green our SCS customer employees into you know a virtual reality environment with people sitting in Florence or Houston or wherever they are in the world and do walk throughs before they repair things and actually solve problems quickly. So I see this downturn is.
Accelerating that at least at like I said quite a bit of the experience. There. So I think there's 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.
So I really do appreciate Brian a little color you gave them manage quite helpful in or around the oilfield services really didnt have better than expected revenues and margins in Q1, given the market and.
In light of the cost cutting efforts can you give additional color around the margin outlook for 2020 anything else you current add.
Your prepared remarks and detrimental margin.
Yeah, and you look I think Maria cloudy and the team has been working to improve process and the cost position of EUR uplift that.
As we've outlined or you know in calls and meetings and the delivering 18% decrementals in the quarter was was good performance in this environment.
Look that we're continuing to focus on cost efficiency and I think we can you know deliver strong margins in this environment you know to despite all the headwinds that we see so you know look is Lorenzo mentioned 15 16 is really not a good reference for how we think that with this business is going to.
Form now we've got better systems in place.
We've got better process in place to combat doesn't look we've already started taking actions.
We have potty. The team got ahead of this and started taking the restructuring actions and in March. So early on so look while it's difficult difficult to give you a definitive decremental going forward.
Can tell you that our goal is really for our cost out actions to offset the impact 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 second quarter may not be the case because.
You know the volume decline is coming faster than you can take some of the costs out and theres lot of uncertainty going on a you know this quarter, particularly in North America, but I'd say for the full year feel good about you know the decrementals being in line with historical activity declines and and I'd say look from an overall margins dam standpoint, we believe that.
And we'll be will likely be down significantly.
But I do think the cost out actions that we're taking will dampen the impact of the volume declines so fluid situation Angie Maria clouding. The team are working it will continue to to monitor the situation and so you can you just take more actions.
Perfect that's helpful.
I think.
I'd also add on TPS and just talk about the servicing called that I believe of revenues I.
I think 60% in service and 40% of equipment and obviously the fee ethane 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 end, but.
And 21.
Yeah I.
I think in general I would expect the services revenue to come under some pressure. This year. In addition, tightening customers cutting budgets because of everything going on with ER with commodity pricing to Kogut 19 restrictions are also.
Turning some delays and equipment deliveries and pickups in logistics backups, and those kind of things and in some instances its restricting the ability of a field engineers. So there will be a likely some immediate impact related to two some some EFI travel.
And as you.
You mentioned about 60% of the revenue 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 if customers start to try to move around maintenance events and minimize some opex, but as you recall.
So we got guarantees around these contracts and so we you know.
Were very closely with a customer and really drive windows outage events happened. There is some room to move them around a little but feel pretty good about the visibility there that will will continue to execute on those within a short window. The other area.
Jacksonville services, it's likely to be negatively impacted by the downturn is easier 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 boards and contractual services. The 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 de stocking like we saw you know sort of in 15.
The other.
Area of services around upgrades and installations and I think they.
They could hold up reasonably well, we could see some shorter cycle.
You know business declined for services for pumps and valves again is as customers look to conserve cash in the near term. So you know pulling all that together Angie you know the mobility related things I think you'll see more of an immediate impact.
And then in trend factional services, you could see that more spread throughout the year as customers work through their outage schedules and stocking levels, but Tom you know over the long run feel good about this service franchise that we have and and the teams working diligently to support customers and some of their remote technology I.
I mentioned in the question that that James ask are certainly helping.
Thank you. Our next question comes from Chase Mulvehill was thanks management. Your line is open.
Hey, good morning, gentlemen, hope everybody has a safe.
Good morning, It's I guess a 42.
Yes. Thank you think would so I guess first thing I wanted to hit always really kind of free cash flow. Obviously free cash flow was was strong enough seasonally at 182 million in one Q.
We think about.
That free cash flow profile, you know, obviously a lot of that was coming from strong operating cash flow which approach.
Almost 500 million in one Q.
This is this is a much better cash conversion is typically.
We typically see in one Q. So maybe if you can kinda talk through really what drove this year, how much of that was prepayments versus kind of underlying better cash conversion.
Yeah, you know chase.
Say look I I'm really happy with the performance on a on cash in a in the quarter.
I'd say, we did see some progress collections favorability come through but nothing extraordinary and we we planned on that I'd say, it's its.
This improvement in process across the board in our collections process see as well as overall inventory management I think you know again, we talk to you. When we first came together about the work we needed to due to improved cash processes and you're starting to see the benefits of the of that come through look I'd say.
For the total year and how I look at that free cash flow I think you know given the visibility from the long cycle businesses and the service franchise I.
I think we can generate modest a free cash flow for the year, despite the $800 million of cash restructuring and separation costs.
That will incur from a cash standpoint. It again, that's 300 million that we've talked about previously for the the separation and restructuring projects that we had ongoing as well as a 500 you know that we are that we launched here.
In the last few weeks. So if you if you exclude that 800 million dollar capital.
Asian decision for restructuring 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 you is that we do have some levers you talked about cutting capex.
But you know more than 20% versus last year, I think depending on where activity levels play out.
Over the rest of your chase, we could we could cut more and then cash taxes are likely to be down versus versus 2019, and where we thought they'd be coming coming into the year. So I think you know working capital again, good good process in place I would expect the.
The.
Yes collections to move around a bit just given you know what we're 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 you know through the lower.
Working capital related to lower oil Fs revenue. So you know again pleased with what the teams have done. We think this business can you know generate 90% free cash flow conversion over time, and and I think the progress you saw in the first quarter is a good indicator that.
Yes, definitely appreciate the color there, Brian pillar switching gears a little bit.
Over to LNG.
You know where is the you touched a little bit on kind of the some of the near term macro headwinds in that you're facing but could you talk about orders this year.
Probably going to be a pretty skinny your orders, but could you talk about your medium to longer term outlook for orders and then also.
So I've got a few questions about the risk of LNG backlog of your LNG backlog. So maybe if you could talk to the risk around is that you see your backlog and if there were any cancellations last downturn.
Yeah trade as I mentioned.
At the onset environment is likely to result in your LNG at high days in 2020 as.
Because the late summer sanctioning decisions in order to better assess the economic and commodity price outlook.
To comment on any special specific projects, but we've already seen some larger projects be delayed by operators are right now where we still see a couple of smaller LNG projects are likely happening this year and.
Perhaps one to two medium to large scale projects still having a small chance of if I'd later this year I fundamentally from a macro perspective medium to long time growth outlook for LNG remains strong and we still expect global demand to be in the 550 to 600 Mtpa range by 20 fatty and as you know to.
To produce that 500 5600, mtpa by 25 day, we're going to need to have approximately 650 to 700 mtpa of nameplate capacity in place, which I represent still significant growth from today's 460, Mtpa. So again macro perspective still feel good and.
We're continuing to stay close to a custom is and again that we'll see some at Fridays.
Going through this year.
Yeah, and chase that typically on the backlog look like during the last downturn, we didn't see any cancellations in LNG projects that had a F.I.D. with us and I was going through right.
History in LNG and can't recall any cancellations. Once the project has has been f. aidid with us to the one thing we have seen you've seen some schedules move around there's 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 in the projects that were executing on right now and obviously, we see very close with our customers and there's been no indication. So far have any worries about project for the that's aidid and how they're progressing.
Thank you and his question comes from Sean Meakim with JP Morgan.
Thanks.
Based on.
So in North America.
And your business pre production oriented so that's.
Really more stable the drilling and completions as you noted, but we have these stores challenges, creating an issue for producers next few months at a minimum I mean, maybe.
Three to 5 million barrels a day could have to come offline for some period.
We don't have much historical precedence here, just curious how that could impact your lifting chemicals businesses in the next couple of quarters.
Yeah, Shaun good to hear from you and we feel good about our competitive positioning in North America.
Got.
Official lift and chemicals.
As you mentioned, though in the current environment.
We believe that tied to shop decline and not production and also in potential production shut ins will impact, our DSP and chemicals business and.
MPS are looking aggressively to conserve cash and cutting back on spending a.
Across all product line.
So as we look at the next time once two quarters, you'll see some impact there. However, I would also say that Tom if that recovery in place you'll see our production driven businesses recovering quickly and also as operators look to bring back wells unlikely, we don't need more chemicals and also.
Yes piece from a stimulation perspective.
Right, Okay that makes sense and then.
How does look a lot on digital obviously, a challenging environment here.
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 it for revenue and margins as we go through the year that'd be helpful. I feel good.
Yes, Sean you're right you do see high Decrementals in high Incrementals I mean, the gross margins in the digital solutions business or are really strong and he is simply can't take.
Out cost fast enough as volume comes down, especially around RMB selling.
DNA. So we are taking some actions there to as I mentioned were Furloughing. Some employees as volume is lower and we anticipate that it will continue to be lower with the economic challenges and the struggling GDP we're seeing.
Around the world. So look I would expect digital solutions to look a lot you know like the first quarter in the second quarter, given what we're seeing from a demand standpoint, and the in activity around the world, but it will likely bounce back quickly as you start to see folks getting.
Back to work in economic activity picking up and as you point out should come through with 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.
Our two a blend of North America and international spending contractions.
For Q2.
You.
On the at least on my math that kind of results in a 25% to 30% sequential revenue contraction.
Given the violence of that contraction.
With Lss do well to generate breakeven margins.
Yeah look I I think if you look at the formulation that you have there I mean, you know there's there's always some variability around the around the edges, there, but I do expect significant revenue decline in the in the second quarter. The other thing you know Bill that you know I would remind you of.
Is we've talked about the cost out that Maria Cloudier has already been has already been executing and I do think that will dampen some of the impact of what we're seeing a you know from the from the downturn from the downturn here you know I'd say, probably where your math is probably.
Little more than what I'm seeing today based on.
The level of activity, we have internationally how strong we are in the middle East. So you know look I think things are moving around quite a bit but I feel good about how Maria cloudy and the team are addressing the current situation.
Okay. That's helpful.
Thanks, and then Lorenzo I hear you with regard to those long term secular outlook for LNG and TPS.
And understanding that we're not in this summer.
In this in this bunker other Q 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 like 50% year over year or is that too harsh.
Look I again, I think as you look at time, where were seeing LNG as well as where we're seeing.
The total TPS on the current macro environment is obviously on Sachin I, we continue to speak for 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 a service orders.
Which we.
Factors to be pressured in line with that service revenues as you can imagine we have a equipment orders and a wide range of outcomes offshore onshore production I also want refinery petrochemical given the service order outlook and also the equipment. You know, we think the 50 cents a little harsh and.
We would expect to do better than that.
If you look at the prior downtime as you know our floor is better than that from standpoint of orders and I'd also say you know we're still in a lot of conversations with our customers relative to potentially friday's that go forward.
Hey, you know, though I would say.
Hey, you know you could see orders down 40% based on what we've seen.
You know in prior downturns in 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 back Weber with Citigroup.
Yes, good morning.
Yeah.
So when you working through the restructuring of your fixed cost, especially items like facility closures.
What does the new normal environment.
No you're contemplating on the other side of this downturn you maybe if you could touch on that through the usual market indicators, so thinking about us rig count it sounds like you're thinking about that being weaker on the other side, but potential magnitude of international ERP spending recovery offshore tree orders when you reset your fixed cost.
What do you envision will do these three to four years, though.
Yeah, I think first of all its obviously a dynamic situation and things are unfolding as you look at time, what's happening with Covidien somebody longer time impacts if I saw you are starting to see more.
Of the remote operations as we said that being utilized that's obviously from an efficiency perspective, and also cost reduction and we're 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, if the way in which we walk.
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're working through and you know we're still we think we've taken the right restructuring actions and much of what time again, its restructured weren't necessarily come back and.
Thats sort of the aspect we're working for the moment.
Then I think that yet if we stress we stress tested quite a few scenarios and you know do feel like that you know we we prepare for scenarios that are worse than you know what we've outlined here as we looked at I recall, our overall cost out and how we think the industry's gonna.
Reform and I think that gives us some flexibility as we as we see activity maybe come in stronger than they were anticipating but as linzer points out I think it's it's a bit early to call exactly how this ah. This plays out over the medium term, but you know rest assured we're saying really close to our customers end to end the market and we'll adjust accordingly.
Okay understood Theres a lot of capacity out there right now a quick follow up roughly how much of your one Q.
With us revenues is targeted to.
To the exited.
It's it's a small amount it's.
Lower than lower than 5% and the work that the product lines that were exiting or you know will will be overall margin rate positive cash flow positive or for with us and the company.
And I'd just say this is very much in line with but you know 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 I really just accelerating that at this time with the North America land drilling and completion fluids that we're moving out off as well as some of the small lack commoditize completions driven activities.
Thank you know the now like turn call back over to management for any further remarks.
Just like to thank everybody for joining the call on.
Very well and stay safe and we look forward to speak with 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.
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