Q2 2020 Baker Hughes Co Earnings Call
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Good day, ladies and gentlemen, and welcome to the Baker Hughes Company second quarter 2020 earnings call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero Touchstone telephone as a reminder, this conference call is being recorded I would now like the entered.
These 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 second quarter 2020 earnings Conference call.
With me, our chairman and CEO, Lorenzo Semiannually, and our CFO Bryan World. The earnings release, we issued earlier today can be found on our website at Baker Hughes Dot 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 NCC.
Filings and our web site for 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 dilorenzo.
Thank you John Good morning, everyone and thanks for joining us the second quarter Twentytwenty was challenging in several areas as our company navigated through the impacts of the cobot 19 pandemic and the sharp decline in activity levels due to lower oil and gas prices.
Despite these headwinds I was pleased with how our team executed with strong margin performance in TPS NDS solid cost out execution in our Fs solid order bookings and oversee MTTS and another quarter of free cash flow generation.
Although the majority of luck bounce have been easing globally and economic activity likely trough during the second quarter visibility on the economic outlook remains extremely limited.
More specifically the risk of a second wave a virus cases globally. The reinstitution of some locked down and the potential for lingering high unemployment create an uncertain economic environment that likely persists through the rest of Twentytwenty.
We expect this economic uncertainty to weigh on the oil and gas markets, which are currently in an excess supply position.
Given these factors, we're preparing for potential future volatility, while also focusing on both structurally reducing our cost base and implementing a number of strategic initiatives across all of our product company.
In our oilfield services segment, despite the challenging environment, we remain strongly engaged with our customers to proactively office solutions that lower costs improve efficiency and deliver a tons for Baker Hughes.
In North America drilling and completion activity declined largely inline with the expectations, we referenced on our first quarter call with activity down over 50%.
While the U.S. market appears to have trough and we started to see some improvements in our production related businesses in June and July.
His ability over the second half of Twentytwenty remains limited.
If any incremental activity closely tied to oil prices.
Overall, we maintain our view the U.S. drilling and completion spend will be down more than 50% for the full year.
Internationally the decline in activity was higher during the second quarter than our initial estimates primarily due to quarantines encoded related impacts in Latin America, and sub Saharan Africa.
As we look into the second half of Twentytwenty, we see competing forces with potential for some cobot impacted rigs to come back online, but like any offset by signs of favour activity declines in the middle East.
Based on these dynamics, we now see full year international drilling and completion spending down 15% to 20% versus our initial estimates of a 10% to 15% decline compared to 29 team.
Given this challenging backdrop and the high likelihood that Twentytwenty. One will also be somewhat subdued we are focused on what we control in our effects.
From both a cost and product perspective.
Looking at costs, we are accelerating our efforts in remote operations to drive further cost reductions for both Baker Hughes and our customers improving productivity and ensuring safety by reducing person to person interactions.
We have seen a solid increase in remote operations, so far and twentytwenty with the over 70% of our drilling operations in the second quarter utilizing remote capabilities up from 60% in the first quarter and roughly 50% in 2019.
The Best example of our success in remote operations is with equity in Norway, where we have recently implemented there I O three automated remote operations model on another six rigs, reducing our field service personnel on the rigs by 50%.
While the majority of our drilling operations are now utilizing remote capabilities, we still see further opportunities for margin improvement as we are in the relatively early stages of recognizing the full scope of cost and productivity benefits of this technology.
Additionally, we see increased opportunities over time, as we apply remote operation capabilities outside of drilling and towards border well construction and completion related activities.
Looking at products within our own Fs portfolio, we remain committed to providing the best technology in drilling services in completions, and we see opportunities to capitalize on our strong presence in the production value chain.
More specifically, we see opportunities to leverage our strength in artificial lift and production chemicals, we've outgrown competencies in remote operations and AI to provide a comprehensive production solutions platform to help customers optimize production.
Overall, I'm quite pleased with the execution and strategic direction of our RFS business in navigating this downturn and positioning for the future.
Moving to our TPS segment, the team continues to execute very well despite a challenging environment.
We've locked down in Italy in other parts of the World easing I'm pleased to report that our facilities in Italy, or almost back to 100% utilization and our schedule for equipment backlog execution remains largely intact.
As we indicated on our first quarter earnings call the biggest impact to our TPS operations in Twentytwenty from the pandemic isn't TPS services, which experienced dislocations during the second quarter due to mobility restrictions and the delay of some customer outages.
Despite the short term headwinds impacting services. The team is managing the environment extremely well and has been able to drive productivity improvements supporting higher year over year margins for the business.
On the TPS equipment side, our onshore offshore production segment has held up relatively well despite the pressure on offshore related equipment.
For the first half of Twentytwenty order activity for onshore offshore production is up versus the first off for 2019 following several FPSO bookings this year.
We also continued to gain traction in our growing industrial gas turbines segment.
Highlighted by the second quarter award of nine Nova LT gas turbines for utility power generation project in the Middle East.
The Nova L. T family provides a more efficient cleanup power generation solution for a broad range of industrial and emerging energy applications.
We've outgrown range competitive products as well as new applications, such as operating on a 100% hydrogen we're confident in the potential growth of this product line.
For our LNG equipment business, the near term outlook remains challenging, but we continue to stay optimistic on the longer term fundamentals for natural gas and especially LNG.
In the near term LNG Friday's remain uncertain, given the macro economic environment with the economic impact of Covance 19, putting pressure on LNG demand and driving further weakness in LNG prices.
Despite this uncertainty we expect there could be one or two if I'd. These by year end were smaller or brownfield projects likely more competitively advantaged.
Longer term, we remained firm believers that natural gas and the LNG demand growth will outpace oil demand as natural gas will be both a transition and destination fuel at the world looks for cleaner sources of energy in the coming decades.
In fact, we have seen several actions during the pandemic that could help accelerate the shift away from coal and oil to natural gas.
For example, we see signs at the lower cost of natural gas is helping to drive incremental demand as LNG prices in most economies and not only cheaper than oil, but also cheaper than the coal equivalent in some instances.
Furthermore, a number of government pandemic stimulus packages, having to date requirements for green energy or a focus on energy transition, including LNG.
For example, clean energy features heavily in the European Commission stimulus package and in Germany, LNG trucks have been granted toll road exceptions into Twentytwenty free.
The positive long term outlook for LNG reaffirms, our strategy to position Baker Hughes and our TPS segment to catch the high value higher technology opportunities along the gas value chain.
We see quite a few opportunities across our TPS portfolio, including the introduction of more efficient power generation and compression technology helped minimize carbon emissions for new projects and for our current installed base of LNG equipment.
For example, one of the key Differentiators of our LM 9000, Aeroderivative turbines is it's lower carbon footprint and efficiency, which was recently validated by the completion of the fast engine to test with Novatech for the Arctic LNG to project an important milestone for the ongoing development.
Of this leading turbine technology.
We have our installed base of over 400 Mtpa of liquefaction equipment globally. Our TTS service franchise is uniquely positioned to offer upgrades and technology services that can extend equipment life enhance equipment availability and performance and contribute to favour emissions reductions and controls.
Some recent examples include upgrading our gas turbine to increased fuel flexibility, specifically around hydrogen blends and injecting new technology into equipment with a focus on reducing potential MFN leakages.
Overall, we're very excited with the direction of our TPS franchise and how it is positioned to benefit from the growth in natural gas and LNG demand as well as the growing demand for lower carbon solutions.
Next our digital solutions business is executing well in the face of weakness across all of its major end markets.
The slowdown on the oil and gas markets, specifically in the midstream and downstream areas is negatively impacting volumes for our best in Nevada and process and pipeline services businesses.
Going forward, a key focus for D.S. will be to leverage the strong condition monitoring technology, abandoning Nevada to drive new opportunities in the oil and gas renewables and industrial sectors.
Broader industrial activity trends are also negatively impacting our inspection measurement and sensing businesses.
Outside of oil and gas and power. The aerospace segment is a significant end market for DS and has also been the weakest as global flight activity remains far below historical levels.
Conversely, the electronics markets and some other industrial end markets are showing improvement, but visibility is limited.
On a more positive note customer activity in the Asia Pacific region has rebounded well from the lows of the first quarter.
Despite these challenges our team is executing incredibly well, taking decisive cock sections and delivering strong sequential margin improvement in a difficult environment.
Finally on oilfield equipment for business faces challenges on several fronts.
With lower oil prices and significant macro uncertainty major operators are reprioritizing their portfolio of potential projects and investments, which is delaying the sanctioning of many offshore projects.
As a result, our outlook for the subsea tree market remains muted with an expectation for approximately 100 trees being awarded to the industry and Twentytwenty.
We see this uncertainty extending into 2021 as majors and Nrcs reassess their portfolios and capital allocation priorities.
We continue to see strength in on offshore Flexibles offering with strong orders performance in the second quarter in Brazil in Saudi Arabia.
Orders for the first half of the a roughly flat versus 2019, and Fps remains well positioned not only in Brazil, where we've seen success, but also in the rest of world, where our flexibles offering continues to gain traction.
The continued weakness in floater activity is also likely to linger for the second half Twentytwenty, which would negatively impact service activity and our subsea drilling systems business.
Budget and mobility constraints are also negatively impacting intervention work.
And other sub sea services across our installed base.
As these challenges persist we remain focused on identifying ways to rightsize, the business and improve profitability across our fee.
Overall, we are executing on the framework, we laid out on our first quarter earnings call. We're on track to hit our goals of Rightsizing, our business and generating positive free cash flow for Twentytwenty and to achieve the 700 million in annualized cost savings by year end.
We continue to explore and identify further ways to make all of these savings structural in nature.
We believe that the expanded use of remote operations and multi skilling will drive greater productivity and a step change in service delivery capabilities.
Ensuring the health and safety of our employees during the pandemic and greatly reducing our resource needs in a longer term recovery.
We also continue to improve our supply chain organization and procurement processes by identifying and eliminating redundant infrastructure and excess inventory.
Although we are managing through this downturn and focused on ways to structurally improve our cost base and productivity levels I would reiterate that our portfolio evolution an inch transition very much remain a strategic focus for Baker Hughes.
Over the past few years, we have evaluated the key growth areas associated with energy transmission and analyze where we can leverage our core competencies and technology to capitalize on these opportunities.
As we go through this process, we are committed to taking a disciplined approach and focusing on the areas that can provide growth, but also good financial returns.
We are evaluating a range of opportunities and see potential in a few key areas that include carbon capture mechanical energy storage in various parts of the hydrogen value chain.
In all three of these we believed that our turbine compression valves subsurface monitoring and detection technologies can play a key role in providing solutions.
In fact Baker Hughes has been involved in Cc U.S. projects for more than a decade, and RFS segment and our turbo machinery technologies currently deployed in the world's largest cc U.S. project in Australia.
Although it's still early days I'm excited about the level of engagement, we're having with customers on these topics as well as multiple trials around the world in which we are currently participating.
Before I turn the call over to Brian I want to take a moment to thank our employees for their resilience and commitment to delivering for our customers shareholders any Trevor all while balancing the potential threats and implications from the Corona virus pandemic and the broader challenges in the economic environment.
I'm extremely proud of the Baker Hughes team during these difficult past few months and we have once again proven our collective strength as we have adapted to in the face of unprecedented market conditions and covered 19.
Thank you this portfolio operates across the energy value chain, which makes us uniquely positioned to navigate the challenging market environment. The industry is currently facing.
We remain focused on execution disciplined on cost actions committed supporting our customers and delivering for our shareholders with that I'll turn the call over to Brian.
Thanks, Lorenzo I'll begin with the total company results and then move into the segment details I'm very pleased with the results in the second quarter, the level of execution and operations and our progress on cost on initiatives, particularly volatile environment.
Orders for the quarter were $4.9 billion down 25% year over year, driven by declines and Fs TPS and digital solutions, partially offset by growth in our fee.
Remaining performance obligation was $22.9 billion up 1% sequentially.
Equipment Artemio ended at $8 billion up 2% sequentially and services Artemio ended at $14.9 billion.
Our total company book to Bill ratio in the quarter was one and our equipment book to Bill in the quarter was 1.1.
Revenue for the quarter was $4.7 billion down 13% sequentially driven by declines in Lss digital solutions and our fee.
Year over year revenue was down 21% driven by declines in our Fs digital solutions and TPS.
Operating loss for the quarter was $52 million.
Adjusted operating income was $104 million, which excludes $156 million of restructuring separation and other charges.
Adjusted operating income was down 56% sequentially and down 71% year over year, our adjusted operating income rate for the quarter was 2.2%.
Corporate costs were $117 million in the quarter, we expect corporate costs to be at similar levels in the third quarter as we continue to execute separation related activities.
Depreciation and amortization was $340 million, we expect DNA to decreased slightly in the third quarter.
Net interest expense was $69 million. The sequential increase was primarily driven by lower interest income is rate sell globally.
We had a $21 million income tax credit in the quarter included an income taxes, a $75 million benefit related to the cares App, which we expect will lower our cash tax payments in the second half 2020.
GAAP loss per share was 31 cents adjusted loss per share was five cents.
Free cash flow in the quarter was $63 million. We are pleased with another positive cash performance during the second quarter, which was supported by a reduction in capital spending and $205 million from working capital.
Included in free cash flow were $221 billion of cash payment related to restructuring and separation.
As Lorenzo mentioned, we are on track with $800 million and cash expenditures related to restructuring separation and cost reduction programs, we announced on the first quarter call as well as the associated paybacks.
For the rest of the year, we expect to make further reductions in capex from second quarter levels, but also expect cash flow from working capital to moderate versus the strong levels in the first half.
Moving to the balance sheet as I discussed on our last earnings call. Our goal through this downturn is to remain disciplined in our capital allocation, we continue to focus on liquidity and cash preservation and protecting our investment grade rating, while maintaining our current dividend payout.
During the second quarter, we took further steps to strengthen our balance sheet by issuing $500 million a 10 year senior notes in early may as well is drawing on a UK short dated commercial paper facility to ensure we have ample liquidity on hand to manage through this downturn and the uncertainty it is created.
Our positive free cash flow and incremental liquidity actions resulted in over $4 billion in cash on hand at the end of the quarter, we continue to view, our financial strength and liquidity as a key differentiator.
During the quarter, we completed the sale of our Rod lift product line. This disposition is in line with our strategy of exiting businesses that do not meet our return requirements and aligns with our objectives of transitioning the portfolio to a higher mix of industrial and chemical end markets and capitalizing on energy transition related growth opportunities.
Now I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward.
In oilfield services the team delivered a solid quarter, despite a significant drop in activity.
Oh FX revenue in the quarter was $2.4 billion down 23% sequentially.
In North America revenue was down 41% sequentially as the rig count sell 58% in the quarter.
International revenue was down 15% sequentially as anticipated our production related product lines and geographic mix helped to mitigate some of the broader market declines in the second quarter, allowing us to outperform activity trends in North America and internationally.
Operating income in the quarter was $46 million down 78% sequentially with margins declining 470 basis points the team executed well on the cost out initiatives, we outlined in the first quarter.
As we look ahead to the third quarter visibility in both in North American and International market remains limited in North America production related activity is beginning to recover as some operators. During previously shut in wells back online completion activity is also showing signs of recovery done from a very low base.
Firstly, while drilling related work is showing some signs of stabilizing the rig count is still drifting lower at the beginning of the third quarter, taking all this into account, we expect overall north American activity to be relatively flat on a sequential basis.
Internationally, we see competing forces over the second half of the year with some coal that impacted rigs potentially coming back online likely more than offset by expected slowdowns in the middle East and some offshore markets.
Overall, we estimate the international activity could decline sequentially in the high single digit low double digit range.
Although we expect to experience continued volume pressure in the third quarter, we remain committed to taking aggressive cost actions to offset activity declines and believe that lss margin rates could be flat to down slightly versus the second quarter.
As long as I mentioned earlier for the full year 2020, we continue to expect us drilling and completion spending to be down more than 50% versus 2019, and now expect international spending to declined 15% 20% versus 2019.
Moving to oilfield equipment orders in the quarter were $699 million up 13% year over year, driven by an extension of the subsea production systems project, we were awarded in 2019.
We also had another solid orders quarter in dyslexia, all pipe systems business, specifically in Brazil, and Middle East.
We are pleased with the orders performance by LSC, which demonstrates the strength of our product offerings, even in a difficult offshore environment.
Revenue was $696 million flat year over year.
Revenue growth in subsea production systems, and Flexibles was offset by declines in surface pressure control in North America and subsea services.
Operating loss was $14 million driven by lower volume in subsea services due to mobility limitations and suspension of several installation campaigns as well as lower volume surface pressure control driven by activity declines. This was partially offset by the increased volume in our subsea production systems business.
For the third quarter, we expect a modest sequential revenue increase as continued backlog execution in Sps in Flexibles is offset by declines in surface pressure control and subsea services.
With higher revenues sequentially, an incremental cost savings from the restructuring projects currently underway, we expect operating income for alessi to be better than the second quarter.
As we looked at our Olathe segment for 2020, we continue to expect revenue in Sps and Flexibles to grow as the team executes on current backlog.
However, we expect to see declines in surface pressure control and subsea services driven by broader market dynamics largely offsetting these increases.
Overall, we estimate that this likely results in margins below 2019 low levels.
Next I will cover Turbomachinery the team delivered a solid quarter with very strong execution in cost productivity, despite significant challenges related to the pandemic.
Orders in the quarter were $1.3 billion down 34% year over year.
Equipment orders were down 48% year over year end equipment book to Bill was 1.2.
We were pleased to receive the order for the third train of the Arctic LNG to project several awards in onshore offshore production and an order for nine of the Ltvs in the industrial sector in the Middle East.
Service orders in the quarter were down 19% year over year, mainly driven by fewer upgrades and lower service orders from midstream and downstream customers.
Revenue for the quarter was $1.2 billion down 17% versus the prior year.
Equipment revenues were down 15% driven primarily by cobot 19 related delays.
Services revenue was down 19% versus the prior year due to colder at 19 mobility limitations and customer spending delays caused by lower commodity prices.
Operating income for TTS was $149 million up 10% year over year, driven by strong execution on cost productivity.
Operating margin was 12.8% up 320 basis points year over year.
For the third quarter, we expect equipment related revenue to grow as we execute on our LNG and onshore offshore production backlog.
We expect TPS services to continue to face pressure as operators delay service activity in upgrades, where possible to conserve cash flow.
Based on these factors, we expect TPS revenue and operating income to increase on a sequential basis.
For the full year 2020, we expect operating income degree roughly flat with 2019.
Finally in digital solutions orders for the quarter were $465 million down 32% year over year.
We saw declines in orders across all end markets, most notably aviation oil and gas and power.
Orders were down across our regions as well.
Revenue for the quarter was $468 million down 26% year over year due to lower volumes across all of our product lines.
This was driven by a large drop in maintenance activity and pipeline in process solutions as well as the weaker automotive and aviation sectors, which impacted the inspection and measurement and sensing product lines.
Operating income for the quarter was $41 million down 51% year over year, driven by lower volume.
The team executed on their cost out plans, improving margins 280 basis points sequentially.
For the third quarter, we expect digital solutions to continue to be impacted by weakness in several end markets, particularly oil and gas and aerospace as a result, we expect to see revenue and operating income flat to modestly higher versus second quarter levels for the full year. We continue to expect revenue declines in the double digits as the current.
Economic outlook Dampens customer spending.
With that I will turn the call back over to Jeff.
Thank you with that let's open it up for questions.
Ladies and gentlemen to ask a question you need to press Star then one of your telephone.
Please limit yourself to one question and one follow up.
So let's try your question you press the pound key please stand by a lot of composite can a hospital.
Our first question comes as James West of Evercore. Your line is open.
Hey, good morning, guys.
Hi, James.
So Lorenzo big increase sequentially and remote operations and as a percentage and certainly big increase year over year up could you maybe expand on hellbent wrote up system to your broader digital strategy.
Yeah sure James and.
Remote operations as you've mentioned good increased in the second quarter around drilling services jobs up to 70% to 72% and it's really a key part of our digital strategy at Baker Hughes to continue the fiber cost reductions for us and our customers improving productivity and ensuring the safety by reducing past the press and interactions I think.
As you look at the example, we gave them with excellent or in the Norwegian Continental shelf. It's a great example, where we recently implemented there Io free oilfield service.
Remote operations and were able to implemented another six rigs and reducing our service personnel by 50% and that's really the opportunity we have going forward, it's going to take some time and really as customers gain more comfort with the idea of remote operations, but.
Thats going to be the opportunity a hand, so it really fits in well with our overall digital strategy, including what we do with sea freight thought AI as well as a across all of our Rob product companies.
Okay, Great and then Brian on the call set of initiatives. The 700 million that we've been talking about or could you.
Update us a bit on where we stand and if they're typically upside to that number.
Yes, James we feel pretty good about delivering the $700 million that we that we talked about in the last call and I'd say, we're on track with what we anticipated the execution cadence would be and you're seeing some of those benefits come through here.
During the second quarter margins, if I look at you know sort of where we are in terms of that cost out were about 25% to 30% of the way there with a with ask the you know at the at the higher end to that so there is more that will be coming through in the second half of the year and if you look at the big buckets really North America.
Because where we've seen the largest part of the benefits come through so far and you see them into strong Decrementals and know what asked this quarter.
In addition, you know this the second areas with the international as you know it takes a little longer to get those restructuring projects done just based on regulations and thats in a west as well as other other product line. So look I feel good about the margin rate performance, particularly in Oh fs from the cost out digital solutions executed.
Pretty well and I think the most important thing James is as volume starts to come back across the portfolio Incrementals will be stronger because these are structural costs that are coming out of the business. So I teams are executing really well and we're all focused on us on this as we roll into the second half of the year.
Okay, great. Thanks, guys.
Thanks James.
Our next question comes on E Comm JP Morgan Your line is open.
Thank you good morning.
Neutral.
So the rents on the TPS trajectory for revenue and margins.
The guide for the back half of the year implied by the the full year flat from 19, it looks pretty constructive.
Looking at 21, you're hoping to get more service mix back in there, which will help from them a margin perspective as well.
Given the the better visibility you have and how you've seen the team's performance for the first half the year, so compared to maybe where you where you saw things three months ago.
How does that give you more confidence that the longer term targets. This cycle around profitability for TPS are back on track more.
A.
More likely realizable compared to what you saw three months ago.
Yes, hey, so I'll them I'll jump in here look I was really pleased with where the TPS margins and operating income came in for the quarter well ahead of where we thought they would where we thought they would be based on some execution that to the team.
I was able to pull through with the you know significant potential disruption that that could have been caused by the Coca 19 pandemic that the team did incredibly well in quickly adjusting to that rod and the team has been focused on.
Cost productivity efforts for well over a year now as we've discussed with you and really you started to see some of those benefits come through.
Over the last over the last couple of quarters I'd say on the equipment side, we're seeing margins get better as the team execute and we've talked about as you actually on these projects you come up the learning curve and margins get better as you as you go through the construction cycle here and then we're also seeing them some better performance on the services.
Right.
As margins get better there as a as well and then specifically around your question on the on the second half I do believe this level of cost productivity and execution is sustainable going forward as I mentioned margin accretion and in.
Both equipment and service I would say, though that you know as we go through the second half the mix of equipment versus service.
I would likely lean more towards a equipment, which is a natural headwind on the overall margin rate on a year over year basis, but look despite those headwinds still expect to see operating income grow and I think this is that the cost productivity work. How the team is executing is certainly.
You know a good indicator of the potential of the margin rates of the business as we get it back to levels of profitability.
That is we've seen previously.
Thanks, Brian I appreciate all that detail.
On energy transmission opportunities.
Really investor sentiments shifting last few years it may be accelerating this year lots of interest in hydrogen related opportunities carbon capture as well we should probably include lower carbon technology around the traditional business or reducing flaring methane you you mentioned that you're participating in some trials there are some revenue.
Opportunities here and there can you just talk about the addressable markets for those businesses, what's a reasonable expectation for investors in terms of bakers ability to scale revenue for those businesses in on medium or long term basis.
Yeah, Shaun and side you mentioned you know the clean energy is that theme, that's ongoing and we've seen on increasing momentum and Baker Hughes has really uniquely positioned to provide technologies and solutions to help our customers lower that carbon footprint, a you've known the strong recognition we have in the LNG franchise.
And the ability to provide equipment tie with lower emissions as well as increased efficiencies, but as you correctly state. There's more that's taking place from as Cc U.S. perspective, also hydrogen and we actively playing TC U.S. already now as we continue to evolve I think you'll start to see an increase.
So with regards to the compressors that are utilized and you know where on the largest Ccs project out there in Australia with goal gone utilizing our compressors and that we're also entering the theme of hydrogen and most recently last week, we tested our raw Novell t. with a blend of gas and hydrogen which now.
Which is the largest European pipeline provider and we see that.
This is really in line with the strategy that we set for the company with regards to being energy technology in helping in the energy transition that won't be an increasing part of the portfolio.
Our next question comes in and you see neither of Goldman Sachs. Your line is open.
Hi, good morning, guys.
Hi, Angie.
So maybe Brian or the rental they can talk a little bit about orders I mean, obviously TPS some pressure here in Q2 ways with thoughts, but looks like you'll meet your floor like Thats roughly 5 billion for 2020 pretty easily any other color around TPS orders for this year and and the potential.
Sold for next year as awards are pushed forward and then maybe even thoughts around lucky orders give it a nice Q2.
Yeah and G. M. Atvs, we mentioned, we're very pleased with the performance onto care sort of some yet today and again being able to achieve the 2.7 billion and also the award that we received for Novatech.
Optic LNG in the quarter and over the environment time, you know, it's starting to stabilize you know visibility for the second half is on continuing to be yam challenging, but speaking to our customers on a range of projects on a regular basis, we think again the floor that we've given up the 5 billion.
It is reasonable and believe that could be some upside to that and the number I think if you look at 2021.
Little too early to make any calls on the equipment side are you would expect to see fab assays improve especially as the impact of the pandemic com goes away and customers actually go through their maintenance, which are they need to take 'em take on next year as well. So really you asked silicon scanning equipment five to 21, but.
Yes, it should improve relative to your second area on the our fee side down again for the autos Sam we believe the second half orders could be modestly below five times order rate activity.
This assumes that Sps order activity remains weak and that the flexible orders remain somewhat resilient as they have done during the first half of the year and you know we expect our revenues, though as Brian mentioned to continue to be converted from our longer cycle businesses and also from the flexible so.
To grow in the second half and stuff has pressure control and sub sea services businesses will like any decline given some of the market activity levels and does it as we go through next year again very early to say on the our fee side clearly, it's a challenge marketplace with some of the projects being on continuing to be pushed out.
Okay fair enough, thanks for rental and they didn't think circling back to margins obviously.
Oh, that's margins and cost out continues to be a focus maybe if there's any additional color there on the opportunities driving margins higher with the cost out in the second half are going into 21, and then on TPS service revenues as you just magazines and started to come back that's a higher mix thoughts around margin, but we've done.
The back half and more importantly, 21.
Hey, Angie yeah on underwear S. S. Oh, Fs margin, sorry, definitely pleased with with where the team.
Executed a here in the second quarter with 22% Decrementals and look the Ria cloudy and the team like I said or are you know about 30% of the ways through a on a on the cost out that they're driving toward the portfolio. So if you. If you look at that go.
Going into the second half of the year no. That's a tailwind for margins, but I think the big variable over the next few quarters is obviously going to be the level of volume declines, which you know we still expect and we're starting to see more in international markets. So that will certainly have an impact on the.
A level of margin, but based on the cost out actions in the piece that Maria cloudy and the team or dry that margins could be anywhere from slightly up to slightly down sequentially in the third and fourth quarter, depending on the magnitude of the topline pressure on as I look out into you know 2021, it's really too early to get into a lot of.
You know detail here, but I think it'd be difficult for the international market to increase on a year over year basis next year given to slowly moving nature of some of those you know markets would expect to see some modest improvement. The second half of 21, you know Nam is quite difficult to call at this at this.
Just in time, but given the cost out efforts and the impact on operating income you know we feel good about how margins could perform even if volumes are down next year. So really it's a it's a cost out story and the level of.
Volume declines that we see here over the next 18 months.
TPS a you know as I mentioned I think the team is executing incredibly well and you know just reiterate that we're focused on.
Generating strong free cash flow and operating income dollars here and as I said, we're seeing a lot of productivity come through on the equipment side as well as productivity on the services side.
But do expect a heavier level of equipment revenue and a into second half, which is a natural headwinds to overall TPS margin rates, but again the pieces underneath that are both showing strong productivity. So that's very good for absolute operating income dollars and I run the team are very focused on.
On a delivering strong results and a in executing you know on the backlog and I'd say for 2021. Other orders you know I'm will be down for TPS year over year. This year. It doesn't necessarily mean that revenue will decline at the same levels in all likelihood would expect you know revenue to go.
Grow given the equipment version.
Version cycles, roughly in a couple of years and TPS and then given what's been going on in services and some of the deferrals in maintenance and upgrades and things that we're seeing here in 2020 would expect services revenue to recover somewhat assuming the commodity prices continue to trend higher and stabilize.
And if the economy picks up a bit should expect to see that come through which is a a tailwind from margin rates as we go into 21. So that gives you. Some ah you know some color on the moving pieces, there, but but all in all feel good about where TPS isn't where they're headed.
Our next question comes from Chase Mulvehill of Bank of America. Your line is open.
Hey, Thanks, good morning, everyone.
So I guess, firstly I wanted to ask about free cash flow you another solid quarter free cash flow.
In the first half it looks like you did a little bit over 200 million of free cash flow you talked about kind of modestly positive free cash flow probably in that range for the full year. So could you talk a little bit about cash flow free cash flow expectations over the back half of the year and maybe some moving pieces I think I heard earlier, you know some positive comp.
Material and cash taxes in moderate cash from working capital that maybe you can just flush that out a little bit little bit more.
Yes, Hi, Jay certainly look I am pleased with the free cash flow generation of $250 million in the first half of the year and I you know I do think you have to look at the moving pieces here as we as we go into the second half. So a couple of things I'd I'd highlight first restructuring and separation cash.
Outlays will be significantly higher in the second half is we.
Finalize execution on the restructuring program as I mentioned earlier and it really finalize the separation activities that we've been working on here. So so that will be a headwind as it did point out you did hear right cash taxes will be lower in the second half versus the first half. But then you also have income that should be stronger in the.
In the second has.
Capex will we're planning for it to be down from the second quarter levels. So we are you know well in line with what we talked about from a capex year over year on the last call and that leaves the biggest variable thing working capital So would anticipate Oh esas to.
Continue to have working capital release, given where we see volume coming in in the in the second half of the year and then the other big one chase is really around progress collections, primarily in TPS and.
I see the order volume can certainly have an impact on the level of progress collections and we're still working with customers on a number of large projects and those could move around a bit. So I think thats going to be I'm, probably the biggest variable as to what happens in the working capital lines and as I said I do.
Expect the working capital generation to to moderate versus the versus the first half. So so feel good about the dynamics there the metrics are getting better. The teams are working this pretty hard but im pleased with with with what we're doing on the free cash flow fun when I when I think about 2021 I'd say the.
Largest changes is cash restructuring and separation charges, which we don't expect to recur with any level of materiality. So if you think about it without the inner million of cash restructuring charges rolling over into.