Q2 2021 Baker Hughes Co Earnings Call

[music].

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company second quarter 2021 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.

The time, if anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone as.

As a reminder of this conference call is being recorded I would now like the juice Aerospace 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 2021 earnings Conference call and with me on our chairman and CEO Lorenzo Simonelli, and our CFO, Brian were out of 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 SEC filings and website for a discussion of the factors that could cause actual results to differ materially.

As you know reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release with that I will turn the call over to Lorenzo.

Thank you Scott good morning, everyone and thanks for joining us during the second quarter, we generated strong free cash flow of several key awards and took a number of positive steps and our journey to go on new energy businesses.

Product company level GPS once again delivered solid orders and the operating income on RFP booked of solid quarters quarter, and Olaf has continued to improve margins and.

And we look to the second half of 2021 and into 2020..2 we see continued signs of global economic recovery that should drive fab of demand growth for oil and natural gas.

Although we recognize the risks presented by the various strains of the COVID-19 virus, we believe that the oil price environment looks constructive with demand recovering and operators largely maintaining spending discipline.

And the natural gas and LNG markets fundamentals are equally as strong if not better than oil and the combination of the outages and strong demand and Asia, Latin America, and Europe have driven third quarter LNG prices to levels not seen since 2015.

Although of course, wherever and Europe and U S has contributed solid demand of improvement and lower gas storage levels structural growth continues unabated and Asia with Chinese LNG imports up almost 30% and the fast half of 2021 vessels. The first half of 2020 given.

Given the strong pace of current growth and the increasing demand for cleaner sources of energy, we maintain our positive long term outlook for natural gas and balance sheet.

Outside of traditional oil and gas the momentum for cleaner energy projects continues to increase around the world.

And the U S Europe, and Asia, various projects around wind and solar and green and blue hydrogen and moving forward as well as the number of carbon capture projects. For example, so far this year there have been 21 Cc U S projects and out and in the early stages of development compared to 19, 6 U S projects announced in 2020.

During the second quarter, we continued to build on a key pillar of our strategy to position for some of these new energy frontiers.

<unk> team has moved quickly and decisively and selected areas to establish relationships and build a strong foundation for the future commercial success on.

The approach has been 1 of collaboration and flexibility, which is reflected and the number of agreements we reached and the second quarter ranging from early stage partnerships and Mou to more immediate investments commercial agreement and tangible orders for Baker Hughes most.

And most recently, we announced the collaboration with Samsung Engineering, the low to zero carbon projects utilizing hydrogen and Ccs technology.

As part of the collaboration and we will work with Samsung engineering to identify joint business development opportunities for Korea, and energy and industrial customers domestically and abroad to help reduce their emissions.

Baker Hughes will look to deploy compression and nowhere else the gas turbine technology as well as flexible pipes, the transportation and hydrogen.

And <unk>, where we provide and reservoir studies, well construction services flexible pipes condition monitoring solutions, and SAS and ancillary solutions, such as carbon dioxide compression and liquefaction the key industrial assets.

And another example of our early stage partnerships is the collaboration agreement, we reached with Bloom energy on the potential commercialization and deployment of integrated low carbon power generation and hydrogen solutions.

This partnership will allow Baker Hughes, the WAC with Bloom energy across the number of areas, including integrated power solutions integrated hydrogen solutions and other technical collaborations.

Bloom energy has a lead and clean energy plan with solid oxide fuel cell technology, and natural gas and hydrogen and a growing electrolyze the prevalence.

And the disagreement we will game forever and sites and secure cell and Electrolyzed technologies. We of Bloom has key offerings per day and explore how we can integrate and utilize our world class GAAP tablet and compression technology alongside the solutions.

Yeah.

And we're also very pleased to announce and Mou with both <unk> and Norwegian cap carbon capture and storage developer to collaborate on a Ccs project to serve as a hub of the decarbonization of the industrial sites and the Bakken region of Norway.

Both the industrial cluster approach provides a great opportunity for Baker Hughes, the test and scale are wide, ranging ccs portfolio, including our share of the ammonia process and a compact carbon capture solution.

Builds on our Mou with horizon energy for the Polaris carbon and storage project, and Norway announced last quarter.

During the quarter, we also announced the 15% of investments and electrical care to expand Baker Hughes <unk> portfolio with power to gas and energy storage solutions.

Becker Hughes will combine its post combustion carbon capture technology with electric has bound machination technology to transform <unk> emissions and to synthetic natural gas and low carbon fuel capable of being used across multiple industries.

Lastly, during the second quarter, we were extremely pleased to finalize our collaboration with air products and global leader and hydrogen to develop next generation hydrogen compression and accelerate the adoption of hydrogen as a zero carbon fuel.

As part of the collaboration Baker Hughes will provide air products with advanced hydrogen compression and gas turbine technology for global projects.

This includes <unk> 16 gas turbines and compression equipment.

The net zero hydrogen energy complex and Alberta, Canada.

We will also provide advanced compression technology, using our high pressure ratio of compresses and the neon carbon free hydrogen project and Saudi Arabia.

Through these 2 projects with air products Baker Hughes will provide equipment on the world's largest blue and green hydrogen project.

And you can see from all of these recent announcements, we feel confident and the momentum we're building and both <unk> and hydrogen spaces and believe that we have of differentiated technology offering that positions us as the leader in these areas.

Now I'll give you an update on each of our segments.

And oil field services increases and activity level of became more broad base during the second quarter and the outlook for the second half of the of continues to improve.

Internationally, we have seen a pickup and activity across multiple regions over the last few months, including Latin America, Southeast Asia, and the North Sea.

Looking at the second half of the year, we expect stronger growth across a broader range of markets, most notably in the middle East and Russia.

Based on discussions with our customers, we expect international activity to gain momentum over the second half of the year and lay the foundation for growth and 2022.

And North America strong second quarter growth was evenly distributed between our onshore and offshore business lines, given the strength and oil prices and bid activity, we expect to see additional growth over the second half of the year.

While we expect to capitalize on the growing improvement and global activity levels. We are committed to being disciplined true this up cycle with a focus on profitability and returns.

This includes maintaining focus on our various cost reduction and operating efficiency initiatives as well as navigating the inflation and supply chain costs of situations that our team is managing well.

And as a result, Oss remains on track to achieve our goal of 20% EBITDA margins in the medium term.

Moving to TPS the outlook continues to improve driven by opportunities and LNG onshore and offshore production pumps and valves and new energy initiatives.

While the order of outlet for TPS and 2021 should be roughly consistent with 2020, we are growing increasingly confident that of multiyear growth opportunity will begin to emerge in 2022.

Underpinning. This framework is the strength that is developing and multiple parts of the TPS portfolio and the diversification of the business, which has commercial offerings and several end markets with high growth opportunities.

And LNG, we booked 2 awards during the second quarter with gas turbans and compresses the train 7 and Nigeria, LNG and liquefaction equipment for new fortresses Energy's fast fast LNG project.

On these 2 orders, we still expect 1 or 2 more LNG awards in 2021, and see a strong pipeline of opportunities that should produce the step up and LNG activity and 2022 and beyond.

For the non LNG segments of our GPS portfolio. We were pleased to book of awards, and the Middle East and Asia Pacific and our refinery and pipeline and gas processing segments CPE.

<unk> also secured of key industrial win with our Nova LTE 12 megawatt gas turbine technology and the middle East for a combined heat and power application.

We continue to see on <unk> range of gas turbines and cyber traction the lower megawatt industrial applications.

The TPS services, we are beginning to see real signs of recovery and remain optimistic about the outlook for 2021, and 2022 and the second quarter, we experienced strong growth and service orders, which grew year over year due to the significant upgrade of awards across multiple regions and for the various applications include.

The pipeline offshore and solutions to support customers' operational decarbonization efforts.

We also saw fiber improvements and transactional service orders as customers continue to increase spending.

And our contractual services business TPS maintain strategic long term relationships with LNG customers, achieving a major milestone by securing a 6 year services contract extension and North America for our key producer and building on the success, we saw on the first quarter.

Our PPS services <unk> and now stands at close to $14.1 billion, which is up of most 10% year over year.

Next on oilfield equipment, we remained focus on right sizing the business improving profitability and optimizing the portfolio and the face of what remains a challenge long term offshore outlook.

While Brent prices and near $70 and the activity is beginning to pick up we continue to expect only a modest improvement and industry Subsea tree awards in 2021, followed by some additional growth and 2022.

However, we continue to believe that it will be difficult to achieve and sustain 2019 order levels and the coming years as the deepwater market becomes increasingly concentrated into low cost basins and upstream spending budgets. The many larger operators are reallocated to other areas.

However, 1 of the wart area that we expect the benefit from this environment as Brazil with a pre salt reserves are viewed as attractive by a number of IOC.

This quarter, our flexible business signed and important frame agreement with Petrobras for a number of pre and post salt fields offshore Brazil.

And the first half of 2021 and including the 2 contracts we were awarded and the first quarter Petrobras has contracted Baker Hughes to provide up to 370 kilometers of flexible pipe.

This is larger than the volume of flexible pipe awarded by Petrobras and the Baker Hughes and 2019 and 2020 combined.

Finally, and digital solutions, we were pleased to see orders continuing to recover despite of challenging operating quarter.

Year over year growth and orders was led by strong performances and our industrial and transportation end markets. We saw continued traction and industrial end markets and the second quarter, which represented over 30% of second quarter orders as we continue to grow our presence in this key area.

During the quarter. The has continued to expand its industrial asset management presence with a number of wins across multiple end markets and in Nevada secured a contract with the large corrugated paper manufacturing company for its condition monitoring and protection solutions to optimize production and reduce maintenance costs.

We were also pleased to see the recently acquired arms reliability business to share some industrial asset management orders during the quarter and.

Including a subscription for its <unk> software to be deployed by a global chemicals customer with initial rollout in China and Chile.

The deal will include software and consulting services to develop the customers' equipment liability strategy library driving the deployment of best in class asset reliability strategies and real time alignment for its assets.

We're also having success integrating some of our emissions management solutions with our bank and Nevada business.

This quarter and secured a flare it and contract with BP, marking the first time flare IQ will be used in upstream oil and gas. This contract builds on our partnership with BP to measure and reduce their emissions across global flaring operations flare IQ will be embedded into bp's existing system, 1 condition monitoring softer.

Share from Bentley, Nevada, requiring no additional hardware for the customer.

Before I turn the call over to Brian I'd like to spend the few moments highlighting some of the achievements from our corporate responsibility report that was published at the end of the second quarter.

This report provides and expanded view of our environmental social and governance performance and outlines our corporate strategy and commitments for a sustainable energy future for.

The 2020, we achieved several notable milestones and our CR report.

We continue to advance our reporting around sustainability and climate related disclosures. This year. We included new reporting framework from the sustainability accounting standards Board and the task force on climate related financial disclosures.

Second we again lowered our emissions footprint and expanded our emissions reporting.

We achieved a 15% reduction and our scope 1 and 2 carbon emissions compared to 2019, and we reset our base here from 2012 to 2019 to account for corporate changes in line with the greenhouse gas protocol.

Importantly, we also expanded our reporting of scope 3 emissions to include new categories.

And third we made significant improvements and HSE performance and engagement during 2020.

We increased the number of perfect HSE days to 200 and reduced our total recordable incident rate by 18% and conducted more than $1 million HFC observations and leadership engagements globally.

Overall Baker Hughes of successfully executing on its vision to become and energy technology company and to take energy forward, making it safer cleaner and more efficient for people on the planet on.

Corporate responsibility report demonstrates our progress and many of these areas, while our second quarter results illustrate our progress towards our financial and strategic priorities.

We believe the Baker Hughes is uniquely positioned in the coming years to deliver sector, leading free cash flow conversion. While also building 1 of the most compelling energy transition growth stories.

We will also continue to evaluate our portfolio in order to drive the best financial returns and create the most value for shareholders at the energy markets evolve with that I'll turn the call over to Brian.

Thanks, Lorenzo I will begin with the total company results and then move into the segment details.

The orders for the quarter were $5.1 billion of 12% sequentially, driven by OSB, Oss and TPS, partially offset by a decrease and digital solutions.

Year over year orders were up 4% driven by increases in TPS and digital solutions, partially offset by decreases and OFC and Oss.

The remaining performance obligation was $23.8 billion up 3% sequentially equipment RPM ended at $7.6 billion up 1% sequentially and services <unk> ended at $16.2 billion up 3% sequentially.

Our total company book to Bill ratio and the quarter was 1 point and our equipment book to Bill and the quarter the 0.9.

Revenue for the quarter was $5.1 billion up 8% sequentially with increases and all 4 segments.

Year over year revenue was up 9% driven by increases in TPS, and DFS, partially offset by decreases and OSB and Oss.

Operating income for the quarter was $194 million.

Adjusted operating income was $333 million, which excludes $139 million of restructuring separation and other charges the restructuring charges and the second quarter, primarily relate to projects previously announced in 2020, we expect to see restructuring and separation charges taper off through the <unk>.

Half of the year.

Our adjusted operating income rate for the quarter was 6.5% up 80 basis points sequentially year over year, our adjusted operating income rate was up 430 basis points and.

Adjusted EBITDA and the quarter was $611 million, which.

<unk> $139 million of restructuring separation and other charges.

Adjusted EBITDA was up 9% sequentially and up 38% year over year.

Corporate costs were $111 million of the quarter for the third quarter, we expect corporate cost to be slightly down compared to second quarter levels dipped.

Depreciation and amortization expense was $278 million and the quarter for the third quarter, we expect DNA to be roughly flat sequentially.

Net interest expense was $65 million net interest expense was down $9 million sequentially, primarily driven by 1 time interest on tax credits.

Also slightly reducing interest expense and the second quarter was the repayment of our UK short dated commercial paper facility for the third quarter, we expect interest expense to be roughly in line with first quarter levels.

Income tax expense and the quarter was $143 million.

GAAP loss per share was 8.

Included in GAAP loss per share is a nonrecurring charge for a loss contingency related to certain tax matters.

Also included our losses for the net change in fair value of our investment and <unk> Dot AI.

These charges are recorded and other non operating income.

Adjusted earnings per share were <unk> 10.

Turning to the cash flow statement free cash flow and the quarter was $385 million free cash flow for the second quarter includes $62 million of cash payments related to restructuring and separation activities.

We are again, particularly pleased with our free cash flow performance and the second quarter. Following the strength. We saw on the first quarter. We have worked hard to improve our billing and cash collection process and if also updated the companys incentive structure with an increased focus on free cash flow and we are pleased to see the performance. So far this year.

We have now generated $883 million of free cash flow and the first half of the year, which includes $170 million of cash restructuring and separation related payments.

For the total year, we believe that our free cash conversion from adjusted EBITDA should be around 50% given the capital efficiency of our portfolio and the winding down of the restructuring and separation costs.

Now I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward.

And oilfield services, the team delivered a good quarter and and improving market environment.

S revenue and the quarter was $2.4 billion up 7% sequentially and.

International revenue was up 6% sequentially led by increases in Asia Pacific Europe, and Latin America.

North American revenue increased 11% with solid growth and both our U S land and offshore businesses.

Operating income was $171 million up 20% sequentially and margin rate expanded 80 basis points to 7.3% due to higher volume and lower depreciation.

While we continue to execute on our cost out program and the second quarter. This was partially offset by mix and cost inflation and some areas.

Although we have moved quickly to pass inflation on to our customers. There is a timing lag relative to the increase and cost.

As we look ahead to the third quarter, we expect to see strong sequential improvement and international activity and continued improvement in North America. As the result, we expect sequential revenue growth for Oss and the third quarter to be similar to the second quarter.

On the margin side, we expect the sequential increase and operating margin rate to solidly exceed the improvement and the second quarter due to more favorable mix and better cost recovery.

For the full year 2021, our industry outlook remains largely intact with the second half activity in North America modestly better than previously expected.

Overall, we still expect our Oss revenue to be down slightly year over year with North American revenues, roughly flat and international revenue down mid single digits on the margin side, we continue to expect growth and operating income and margin rates on the year over year basis.

Moving to oilfield equipment orders and the quarter were $681 million down 3% year over year and up 97% sequentially.

Strong year over year growth and subsea services and flexible orders was offset by declines in the SPC projects and subsea production systems.

The sequential improvement and the orders was driven by an increase in orders and Sps along with several of orders and flexible to outside of Brazil.

Revenue was $637 million down 8% year over year, primarily driven by declines and subsea drilling systems and the disposition of SPC flows, partially offset by growth and flexible.

Operating income was $28 million, which is up $42 million year over year. This was driven by increased volumes and flexible as well as productivity from our cost out programs.

For the third quarter, we expect revenue to decrease sequentially, driven by lower Sps and flexible as backlog conversion, we expect operating margin rate and the low single digits.

For the full year 2021, we believe the offshore markets will remain challenged as operators reassess their portfolios and project selection and we expect OSP revenue to be down double digits on a year over year basis due to the lower order intake and 2020 and the likely continuation of the lower order and Brian and 2021.

Although revenue is likely to be down in 2021, we expect to generate positive operating income as our cost out efforts should continue to offset the decline in volumes.

Next I will cover turbo machinery, and the team delivered another strong quarter with solid execution.

Orders in the quarter were $1.5 billion up 15% year over year.

Equipment orders were up 8% year over year.

As Lorenzo mentioned orders this quarter were supported by LNG Awards for Nigeria, LNG train 7 and for New Fortress Energy's fast LNG project we.

We were also pleased to book of number of non LNG awards, specifically and our refinery and petrochemical and industrial segments.

Service orders and the quarter were up 20% year over year and up 15% sequentially, primarily driven by increases and upgrades and transactional services.

Revenue for the quarter was $1.6 billion up 40% versus the prior year.

Equipment revenue was up almost 90% year over year as we continue to execute on our LNG and onshore offshore production backlog.

Services revenue was up 14% versus the prior year.

Operating income for TPS was $220 million up 48% year over year, driven by higher volume and continued execution on cost productivity, partially offset by a higher equipment mix on.

Operating margin was 13, 5% up 70 basis points year over year.

We continue to be very pleased with the TPS margin rate improvement, particularly as our equipment revenue mix has increased from 36% to 48% year over year.

For the third quarter, we expect revenue to increase modestly on a sequential basis based on expected equipment backlog conversion.

With this revenue outlook, we expect TPS margin rates to improve modestly on a sequential basis.

For the full year 2021, we expect EPS to generate strong double digit year over year revenue growth driven by equipment backlog conversion and growth and TPS services.

Despite a higher mix of equipment revenue, we now expect TPS margin rate slightly improved year over year.

Finally, and digital solutions orders for the quarter were $540 million up 16% year over year, we saw strong growth in orders and industrial and transportation offset by declines and power sequentially.

Sequentially orders were down, 2%, driven by declines and power and oil and gas, partially offset by improvements and transportation and industrial.

Revenue for the quarter was $520 million up 11% year over year, primarily driven by higher volumes and PPS and wake 8 offset by lower volume and Nexus controls sequentially revenue was up 11% driven by a higher order intake and the first quarter of 2021.

Operating income for the quarter was $25 million down 39% year over year, largely driven by costs related to of legacy software contract that we do not expect to repeat sequentially operating income was up 3% driven by higher volume for.

And the third quarter, we expect to see strong sequential revenue growth and operating margin rates back into the high single digits for the full year 2021.

And we still expect modest growth and revenue on a year over year basis, primarily driven by recovery and industrial end markets with lower.

Margins in the first half of the year and higher volumes over the second half, we expect the margin rates to be and the high single digits on a full year basis.

Overall, we delivered a solid quarter and continued strong free cash flow, while we faced challenges and our DS business, we are confident and our ability to execute as the rest of the year unfolds with that I will turn the call back over to Jeff.

Thanks, Brian operator, let's open the call for questions.

Okay.

Thank you if you of a question and at this time. Please press. The Star then the 1 key on your Touchtone telephone. If your question has been answered you assume of yourself from the queue. Please press the pound key and we also ask that you limit yourself to 1 question and 1 follow up on.

Our first question comes from Chase Mulvehill with Bank of America.

Yeah.

Hey, good morning.

Lorenzo.

Earlier in your prepared remarks, you talked about.

Lumi.

New order growth cycle, and the TPS segment.

That should get underway next year could you maybe just take a minute and provide some details around kind of really what's driving this.

This revised more positive outlook for TPS as we get into next year.

Yes, definitely and chase and.

As you mentioned for TPS, we see several avenues of growth developing as we go forward and really it's for a prolonged growth cycle of orders and EBITDA as you look at the near to intermediate term its really going to be LNG and the orders that we've seen you can also see the small awards, we booked this year, we still see some of her.

And maybe 1 or 2 small projects being awarded this year, but as we go forward. The next to the free as we see a step up and LNG order opportunity and its been highlighted by the increasing demand and also what we announced previously with the long term outlook of the LNG out to 'twenty fatty and then as you go longer time and also the next 5 to 10 years, we expect to see significant.

Growth around the energy transition initiatives, most notably hydrogen <unk>, but also on areas like valves integrated power as the clean energy ecosystem continues to evolve and I think as you look at our recent announcements with that product with.

Given we see some near term opportunities for hydrogen and those will actually be additional awards over the course of the next 2 to 3 years as the pathway, but continuing through the rest of the decade and <unk> looked at our announcement with Borg and horizon and energy and we're in a number of active collaborations with our customers.

Cross several geographies of increasing opportunities around <unk> and lastly on service business.

<unk> got solid growth potential for the next 10 years. When you look at the installed base as well as the upgrade opportunities I think with LNG growing about.

Our installed base and grow by about 30% by 2025 with the increasing tonnage of LNG and then you look also going forward with what we announced the EPS services <unk> and now standing at $14.1 billion, which is.

Up from 13 billion of year ago. So good signs of continued growth on the services side.

Awesome Awesome I appreciate the additional color there seems like the TPS has got a nice future ahead of it.

Maybe if I can transition and over to buybacks and ask Brian about buybacks and our numbers you have.

The in excess of $1.3 billion of free cash flow after dividend.

Through the end of next year your net debt to EBITDA is going to be sub 1 at the end of next quarter.

So Brian and kind of ask you. The question why not do a buyback to help partially offset the continued drag on your stock from from GE and continuing to kind of sell down their stake.

Yes, yes.

And I look we are pleased with our free cash flow generation this year and.

And the outlook going forward as I mentioned the teams have done a great job.

And changing a lot of processes and so look our.

Our view really on capital allocation hasn't really changed but as you pointed out the pace of our free cash flow is improving.

Particularly as restructuring is winding down over the rest of this year. So that's a big capital allocation interaction that won't be repeating there. So it leaves us I think and are positioned to have quite a bit more optionality.

And we're primarily focused on investing in areas, where we see the ability to grow offerings and new frontiers like energy transition and digital as well as some interesting places and industrial technologies and you've seen some of those examples like the 3 that AI compact carbon capture and more recently arms of liability and look and say you know beyond some small.

<unk> acquisitions and investments and some of the new energy frontiers share repurchases.

Certainly be and attractive piece of the capital allocation.

Portfolio.

View and the pace that we're generating free cash flow.

Certainly gives us the you know more optionality to evaluate that and.

The look at ways to return.

All of that.

To the shareholder so look we will keep you guys updated as we are evaluating that and and.

And.

It's good to have the flexibility.

Alright, Thanks, Brian and look forward to the hearing more about that I will turn it back over.

Thank you. Our next question comes from James West of Evercore ISI.

Hey, good morning, Lorenzo and Brian Jud.

Hey, James.

So.

Renzo you highlighted a couple of times.

And your prepared comments and also.

Last question, but the service.

Orders for TPS up nicely year over year could you maybe expand a bit more on.

On the what that means for the the margin profile of the business what the signaling for the future of.

TPS and I agree with what the what changed.

The the commentary made that there's a bright future year and really wanted to kind of understand exactly what were looking on.

Yes, James and I'll start off with the outlook on the activity side, and then and then I'll, let Brian jump in on the margin side because.

We are definitely seeing improvements across the whole TPS service business and it's really driven by some of the positive macro backdrop. Some of the improving outlook, we're seeing with customers re engaging with us on service equipment across our installed base. Following 2020, there was disrupted of course and now we're seeing strong growth and up.

Grades with recovery across regions and various applications pipeline offshore solutions, all sorts of support our customers on the operational decarbonization efforts with the upgrades that we can provide them and you saw the double digit growth and transactional services and the quarter as customers returning to normalized spending levels and also we've got a.

Solid CSA revenue stream, that's been resilient and so.

Overall, we think we could be reasonably back closer to a 2019 type level and 2022 with the continued upgrade on the transactional activity continuing strongly as we go forward.

Yeah, and James on the margin front I'd say, it's certainly a positive backdrop and service grows for TPS overall, and Rod and the team are doing a great job and driving productivity and the services portfolio and as Lorenzo mentioned, the and the install base is growing particularly in LNG. So I think that the as all of <unk>.

The positive backdrop of what the business can deliver.

Sure sure. Okay, well you guys have been a lot of moves and.

The new energies. This quarter you have been doing that for several years now repositioning the portfolio 1 of the things that caught my eye that we haven't really discussed is the electric.

The investment the <unk>.

The U S plus Biomethane technologies, I'd love to hear a bit more about that.

And what the yield of the outlook would the investment is what the outlook is whats going on with that transaction.

Yes, James I think it's part of our strategy as we set of develop our portfolio of for energy transition and we're very pleased with the electric co investment.

15% of investment, which really allows us to expand our whole portfolio around power at the gas and energy storage solutions will have a seat on the board of electro key and we're really going to combine our post combustion carbon capture technology with electro key of.

Biomass and Asian technology to transform Seo to emissions and to synthetic natural gas and this is maybe an area that we havent discussed much before but we really see synthetic natural gas as being applicable to multiple industries and the electro kiosk technology allows CRT recycling and it's a great quality low carb and synthetic <unk>.

GAAP, which helps to drive decarbonization and hot for various sectors, such as transportation and heaping. So.

It is going to be of great suite of capability that we're providing and again, we see that as being applicable to power and industrial plants and again, it's increasing our portfolio of applications.

Got it thanks for the thanks, Brian.

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

Yes, good morning.

Hey, Scott.

Good morning, Scott.

Brian 1 for you on the on.

On inflation, and you mentioned that you're pushing through price increases to offset inflation, but a couple of questions.

1 of our customers generally willing to accept the price increases.

Across the portfolio are there some puts and takes we should be thinking about and.

And based upon the time lag and 1 of the price increases the catch up with inflation and Ww.

And thus far.

Yes, Scott look I'd I'd love to tell you that customers of all customers say, yes. Sure go ahead and pass on price increases, but look they clearly understand whats going on and the commodity markets.

Have some contractual arrangements that allow us to pass those along and we're having discussions and places where it's not so clear and look we have seen some traction there and started to see.

And some pricing power come back across the portfolio not everywhere, but we're certainly.

Seeing that capability, we did get some price.

In the and the second quarter, but as I've mentioned.

And it takes a little while longer for some of that to kick in.

Versus the the inputs that are that are coming and so look I would say over the course of this year, we'll continue to push that and tried.

And tried to make sure that the the price increases are offsetting as much of the inflation is as possible. The 1 thing I would point out too is that look we've got of global supply chain, we got pretty good contractual arrangements in place.

And it's been working with our suppliers as we started to see this coming through the mute some of the impact.

This year, obviously, you have some some hedges in place as well and look really focused on looking at 2022, and making sure. We're securing things for for next year as well. So I'd say, it's a great collaboration with the sourcing and the the commercial teams and working through this but feel good about the actions that we've taken.

Got it and then based upon your efforts there and.

Your your activity outlook, how you're thinking about the timing of when you could get back to.

The 20% EBITDA margin and Oss.

Yeah look I listened Maria Claudia and the team are continuing to do a great job and executing on all of the restructuring and cost out and transformation initiatives that the team has been driving there and you've seen that come through and the results here and the first half with the margin rate improvements that the team has posted.

We're working hard to offset some of this inflation and a like.

And like we talked about here.

And.

I'd say with the the backdrop, we see and volume for the second half of this year into 2022, I could certainly see us hitting that 20% rate.

Some time next year, and any given quarter and be really well set up.

And as we execute and in 2022 and exit the year, but I think the the team is doing a really good job of of managing cost and driving productivity and I think we're still on the really good trajectory here.

Got it appreciate the color Bryan Thank you.

Alright, great. Thanks, Pat.

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

Hey, good morning, just sort of follow up on Scott's question, there on the 20% margin so.

Maybe not timing, but maybe how do you get there I mean is it pricing you talked about operating leverage or is there a component of mix here is required to get to the 20%.

About a couple of integrated drilling and well services contracts, which I assume are more accretive and traditional services. So is that another component of share or maybe just kind of talk about that mix and what that has to what do we have to see to get to that 20%.

Yes, David.

We're not counting on a significant mix shift to be able to the liver that level of margin share.

Some of the product lines and have higher margin rates get get more tailwind that will certainly help but we've taken the approach of.

Driving improvement across the entire business, we've done a lot around remote operations, we multi skilled.

The work force to be able to deploy them and different ways and more effectively we've made massive changes inside the supply chain and and our service shops, and you've seen us take a lot of cost out with the restructuring and and so a lot of those process improvements and cost out.

Are going to continue and Thats really whats going to whats going to drive the margin rates. So the actions have already been launched.

And the team is certainly executing on those now the pricing that we're talking about here is really to offset some of the inflation that we're that we're seeing so we're not counting on any pricing increases to.

To drive that margin improvement, but if we can get those pricing increases and to stick and and hold inflation levels down I think that could provide some upside so it's been a fundamental.

The change and how that business is operating how Maria Claudia and the team are leading it and how we're allocating capital and that's really what's driving the improvement here and we're making a fundamental and long lasting.

Thanks for the insight there Brian.

And of a different question Lorenzo sort of a bigger picture, we are starting to get more generalist investors back into the space here people are starting to look and people starting to buy into the cycle starting to pick up the Baker Hughes has a very different business portfolio of the than your peers. So I was just wondering maybe you could just talk about kind of over the next 2 to 3.

Years, maybe helping people understand what parts of your business do you think of it can have more pronounced growth and margin expansion.

Really just sort of asking what parts of the business do you expect to outperform over the next 2 to 3 years as the cycle accelerates and then I guess I'm just sort of thinking about your force segments, and how you sort of see them kind of progressing here.

Yes, David if you look at it from a macro picture and again.

And to the response given on the TPS cycle of bets.

The <unk>.

Really taking place here with the opportunity of LNG and the next few years also the energy transition opportunities and.

The last call, we mentioned the addressable markets of.

And hydrogen by 2000, and fatty being $25 billion to $30 billion and.

<unk> being 35% to $40 billion for Baker Hughes. So clearly as you look at the macro picture of the long term growth prospects of our TPS business look very solid and also in the short term with the continued to rebound and some of the upstream.

Upstream and also the production side oilfield services continuing to perform well so short time, youll see that pickup and the longer time of the TPS business continues to have a good future great.

Great. Thank you very much.

Thank you. Our next question comes from Ian Macpherson with Piper Sandler.

Okay.

Thanks, Good morning.

Hi, Brian Hi.

Hi, Good morning, Brian you gave us the the 50% free cash flow conversion for me, but the EBITDA bogie for this year and.

And then that you are overcoming the the cash restructuring charges headway.

Headwind.

But also on the other hand year to date and <unk> had favorable working capital.

So when we when we.

And net those out and we're trying to normalize for those looking into next year, its 50% free cash flow conversion from EBITDA of sustainable.

The area or would you point higher or lower than that when we normalized working capital and and remove substantially removed the the cash restructuring items.

Yes, Ian.

As you know, it's really early to predict exactly what's going to happen.

And next year, but what I would say is what I'd say is our goal.

And what I think the capability of this portfolio is to generate free cash flow conversion at the 50% level or higher I think if you look at next year, probably the biggest variable.

And as you probably know and you pointed out is really working capitals of as we're early in the cycle for Oss and the working capital.

Intensity of really be driven by that pace of growth and then if I step back and look at some of the other factors for next year look we would expect to see EBITDA continue to grow on higher revenues and the continued focus around productivity capex in absolute terms will be higher but as a percentage of revenue should be and the same range and the.

The last couple of years and that 3.5% of 4% range.

Taxes will likely be higher because of the refunds that we've gotten.

And this year and then you pointed out restructuring and separation charge and will go away and so that's roughly $200 million, which should contribute to a material improvement in free cash flow. So.

On that that 50% level is certainly what this portfolio is capable of and we're going to keep driving it higher.

Understood. Thanks, Brian.

The Renzo I was going to ask a separate follow up regarding portfolio optimization I would imagine that we've seen some more smaller oss.

Mergers and transactions recently and I wonder if the improvement and oilfield fundamentals has opened the window of wider for further.

And any further disposals within the orca sort of off the portfolio that might be more achievable now than they looked a few quarters ago.

And I think <unk>.

<unk> is on creating shareholder value and what's best for our shareholders long of time. So we're running the company today really to execute on the free pillars of our strategy transform the core invest for growth and also new frontier and.

We're going to be looking at margin accretion and continuing to allocate capital Accordingly, I think as we look forward.

Going to require for them and the energy transition perspective scale brought on extensive customer reach and the sizable R&D. So technology spending going into that we think our current term footprint provides for that I think when you look at overall, it's becoming apparent that.

The new growth energy growth opportunities and TPS of significant where when you look at the OFC business, it's more of a mature business.

Yeah.

Certainly well.

I'll stay tuned on that thank you both for the all the insight today.

Yeah.

Thank you. Your next question comes from Marc Bianchi with Cowen.

Yeah.

And thank you.

The first of all I'd to ask about Oss and the outlook in 'twenty, 2 and others.

1 of your peers reported the other day and said that they expect mid teens compound annual growth of over 22 and 23 on I'm just curious.

How you are looking at that outlook and.

And what you think specifically and 22.

Yes, just on maybe let's start off with the international outlook and.

Again, we do see of solid step up and growth internationally over the second half of the year.

And so far this year, we've seen strong recovery in Latin America, and North Sea Southeast Asia, the middle East of somewhat lag, but we expect incremental stronger activity over the course of the second half and into 2022, as well as and Russia being the biggest contributors to the second half as well so we've been somewhat more conservative in forecasting international activity.

I think that it really depends on how some of the regions come back right now, we think kind of growth and the second half of the exit the and the high single digits or low double digits on a year over year basis, and we expect that momentum to continue into 2022 with solid growth opportunities and.

North America, we generally expect the rig count to continue the trends of level higher over the second half, maybe adding an additional 50 rigs or so by the end of the year. So that would imply a modest improvement and the first quarter on fourth quarter. When you look at 2022 again and we anticipate.

Solid growth with the price is holding at the range and they are now but similar to this year. We expect some of the privates to be active and at these prices, but some of the public E&ps also will continue to be only increasing their spending modestly if they continue to adjust some of their operating cash flow to some of the other areas of capital.

Spending.

Got it thanks for that Lorenzo.

Shifting over to you have these 2 awards with air products and they've got very large projects that they're pursuing.

But they don't come on stream until I guess neon is 25, and this thing and Canada. The blue hydrogen is 24.

And do those projects need to be up and running for the floodgates to kind of open on the these types of awards or could we see more from.

<unk> from air products for Baker Hughes of over the near term.

I think it's fair to say the we're seeing a number of discussions with customers and partners continuing to gain momentum.

It's great to have achieved the announcement with the AD products and again when you look at those orders converting we expect it to be in the near term and I think that again as these projects start to get on the go you'll see others also follow as well. So we're focused on enabling the technology and with our products, we're going to be on the largest.

<unk> and green hydrogen projects that are out there at the moment and providing our best technology.

Yes, Mark and I would just add actually and in terms of bid activity and inquiries with customers over the last 6 months.

And they were up 2 X, what we were seeing and the fourth quarter of last year. So activity levels have definitely increase I expect to continue to see that to increase and look exactly when they will turn into orders, it's a bit tough to say right now, but there's a lot going on.

Got it thanks very much guys.

Thanks Mark.

Our next question comes from Arun Jairam with JP Morgan.

Yeah. Good morning, Lorenzo a number of announcements on the <unk> front during the quarter I was wondering if you could maybe talk about some of the <unk>.

<unk> dynamics and Ccs.

And your views on Baker's position.

And maybe just as a follow up could you talk a little bit about the scope of the board project and how did these the initial projects and Ccs lineup.

And.

Could these be accretive to your margins assuming good execution.

Yes, Firstly I think I feel very good about the positioning that way of developing around <unk> and if you look at it from.

And from a value chain perspective, we really go across the board of <unk> <unk> from the initial identification of where <unk> can be sequestered all the way to the transportation and also the compression capability. We've also developed multiple solutions for Ccs you've seen in the past we've got the.

Show of the ammonia process, we've got the mixed salt we've also got compact carbon capture so.

And we're providing the different solutions because there is no 1 solution that's going to be.

For everybody and like and LNG, we want to be able to provide capabilities for small and medium and large scale as they get undertaken specifically on bulk the bulk Mou announcement allows us again to really play at the forefront of capturing and storing up to 630000 tons of Cotwo.

Emissions annually and theyre going to be utilizing technology to do that and we're also going to be able to see and industrial cluster approach that's of great opportunity for us because we think those industrial clusters are going to continue to emerge elsewhere in and the world as well so Norway is at the forefront there and.

And we're at the forefront with both <unk> and also the Norwegian like.

Great and just my follow up is just on digital and it sounds like just the the margin.

The.

Missed this quarter is this driven by a 1 time legacy contract and and maybe you could outline.

Do you still feel good about.

Trending towards perhaps.

And a low double digit margins as we go through the year on digital.

Yes, we.

We do feel good about the volume recovery, we're seeing and quite a few of the end markets, particularly on the industrial side of the DFS and.

We were disappointed and the margin rate, which was really a function of.

Project delays for this legacy software contract and just to clarify this legacy software contract goes back several years and isn't the associated with the.

<unk> Dot AI partnership and so this resulted in some.

Higher cost and not revenue here in the quarter and that was the biggest driver I will note there was a little bit of.

And incremental costs, we had and the R&D front and DS this quarter related to some strategic areas like the arms reliability acquisition that we did earlier and the year and some of the acceleration of some work we were doing around emissions management and I'd say looking ahead into the third and fourth quarters I don't expect the overall level of costs and.

<unk> to be at the levels that you saw here and.

And the second quarter. So we do think the business is going to be back on track to generate higher margins with the volume growth that we're seeing and cost levels back to kind of lower levels to support those higher margin rates.

Thank you.

Thanks Robert.

Our next question comes from Stephen <unk> with Stifel.

Hi, Thanks, good morning, gentlemen.

Thanks, Dave.

And so I was curious you've.

You've talked a lot about you've done what you've done a tremendous amount on the energy transition and I was curious if you could talk more about the collaborative relationship you have with Bloom.

Sure Steve and.

We're very pleased to be collaborating with the bloom on a number of customer engagements, which are really going to come to the forefront of the course of the next 2 to 3 years on really looking at the way in which we can provide integrated power solutions and also the way in which we can provide integrate the hydrogen solutions. So I think.

You may know the flu manager as the leading player and solid oxide fuel cells and really of enables us to provide our technology of lightweight cash patent and technology within their proficient.

Solid oxide fuel cells to really enable integrated power solutions for customers that are looking to the independent of the grid. We've got the Nova LTE gas turbines. So we're looking at opportunities of combining there and then on the integrated hydrogen solutions, they've got our increasing portfolio on the electrolyte of cells that can produce 100% clean hydrogen.

And with our compression technology, we think we can provide really a <unk>.

<unk> production and also transport of hydrogen and usage again with our 100%.

No the LTE gas turbines that can run on hydrogen and our compression capability. So it's an evolving space there and we think a lot of good opportunities as the energy transition continues.

Very good thank you.

Our next question comes from Connor Lynagh with Morgan Stanley.

Yeah.

Yes. Thank you.

I was wondering if you could just discuss some of the trends youre seeing and obviously a nice.

Inflection and orders in the quarter here.

Based on based on that and what Youre seeing right. Now obviously you are anticipating the step down and the third quarter, but would you say the the direction of travel beyond that seems to be higher and I'm wondering if you could just characterize the the.

And the big end markets within that business.

Yes, if you look at again OFC and we've mentioned this before we continue to see the outlook for the offshore segment challenged we do expect.

This improvement and the industry of awards during 'twenty, 1 and some additional growth in 'twenty, 2 and we still think it's going to be difficult from a trade perspective to get back to the 2019 order levels. We.

We are seeing some strength on the composite flexible so as you saw from the Petrobras frame agreement also some international wealth business, which is good and subsea services coming back, but again as you look at.

Overall, I think it's the subdued growth trajectory for us.

Yeah.

Understood at the same time, you guys have obviously taken a lot of action on costs.

So is there is there a sort of target that we should think of similar to the 20% EBITDA margin target and.

Yes.

How do you think this business is earnings power should be and this and this lower activity environment.

Okay.

Yes kind of.

Right.

Is done and great job in terms of taking cost out restructuring their infrastructure to deal with the.

And at the lower industry volume that we're seeing I'd say, just given the mix of the portfolio and where things are we've talked about the business at these volume levels being high single digits from an operating income rate standpoint, I think if you. If you roll forward you see some incremental growth come in and flexible.

Some.

Other things beyond true growth around manifolds and the.

On the onshore business doing better you could get higher than that but right now based on the trajectory of the industry right now I'd say on the near term near to medium term, we expect high single digit operating income rate.

Okay. That's helpful. Thank you.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference I'd like to turn the call back over until the rental for any closing remarks.

Yes. Thank you very much and thanks to all of you for joining our earnings call. Today I just wanted to leave you with some closing thoughts very pleased with the second quarter results, we generated another quarter of strong free cash flow and so good levels of performance across a number of our product companies. We also see a multiyear growth opportunity developing and our TPS business drove.

And by the LNG and new energy initiatives as we continue to execute on our strategy of becoming and energy technology company will maintain our discipline and prioritize free cash flow and returns. We will also continue to evaluate our portfolio and audits to drive the best financial results and create the most value for our shareholders as the energy markets evolve. So thanks for taking.

And the time look forward to speaking to you again soon and operating and you may close the call.

Ladies and gentlemen, thank you for participating on today's conference. This concludes the program you may now disconnect everyone have a great day.

Yeah.

[music].

[music].

[music].

Good day, ladies and gentlemen of the walk through the Baker Hughes Company second quarter 2021 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 with that side of it.

If anyone should require assistance during the conference. Please press star zero on your Touchtone telephone.

As a reminder of this conference call is being recorded I would now like to do show. Some of these Crawford 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 of 2021 earnings Conference call here with me on our chairman and CEO Lorenzo Simonelli, and our CFO, Brian We're on the earnings release, we issued earlier today can be found on our website the 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 SEC filings and website for a discussion 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.

Sales and operating companies with that I will turn the call over to the rest of it.

Thank you Scott good morning, everyone and thanks for joining us during the second quarter, we generated strong free cash flow booked several key awards and took a number of positive steps and our journey and grow on new energy businesses and.

The product company level EPS once again delivered solid orders and the operating income on OSP, but the solid quarters quarter and all of our pets continues to improve margin and.

We look to the second half of 'twenty, 'twenty, 1 and into 2020..2 we see continued signs of global economic recovery that should drive the demand growth for oil and natural gas.

Although we recognize the risks presented by the Varian strength of the COVID-19 virus, we believe that the oil price environment looks constructive with demand recovering and operators largely maintain spending discipline.

And the natural gas and LNG market fundamentals that are equally as strong if not better than the oil.

The combination of the outages and strong demand and Asia, Latin America, and Europe have driven third quarter of LNG prices to levels not seen since 2015.

Although of course, wherever and Europe and U S has contributed solid demand of improvement and lower gas storage levels and structural growth continues unabated and Asia with Chinese LNG imports up almost 30% and the fast half of 2021 versus the first half of 2020 given.

Given the strong pace of current growth and the increasing demand for cleaner sources of energy, we maintain a positive long term outlook for natural gas and LNG.

Yeah.

Outside of traditional oil and gas the momentum for cleaner energy projects continues to increase around the world.

And the U S Europe, and Asia, various projects around wind and solar and green and blue hydrogen and moving forward as well as the number of carbon capture projects. For example, so far this year there have been 21 fifth of U S projects announced and in the early stages of development compared to 19, 6 U S projects announced in 2020.

During the second quarter, we continued to build on a key pillar of our strategy to position for some of these new energy frontiers.

The team has moved quickly and decisively and selected areas to establish relationships and build a strong foundation for future commercial success on.

Our approach has been 1 of collaboration and flexibility, which is reflected and the number of the 3 months, we've reached and the second quarter ranging from early stage partnerships and the Mou to more immediate investment commercial agreement and tangible orders for Baker Hughes most.

And most recently, we announced the collaboration with Samsung Engineering, the low to zero carbon projects utilizing hydrogen and Ccs technology.

As part of the collaboration and go away.

And with Samsung engineering to identify joint business development opportunities for Korea, and the energy and industrial customers domestically and abroad to help reduce their emissions Baker.

Baker Hughes will look to deploy compression and nowhere else the gas turbine technology as well as flexible pipes, the transportation and hydrogen and.

And <unk> will you provide and reservoir studies, well construction services flexible pipe condition monitoring solutions, and Seth and ancillary solutions, such as carbon dioxide compression and liquefaction the key industrial assets.

And now for example of our early stage partnerships and the collaboration agreement we reached the Bloom energy on the potential commercialization and deployment of the integrated low carbon power generation and hydrogen solutions.

This partnership will allow Baker Hughes, the WAC with Bloom energy across the number of areas, including integrated power solutions integrate the hydrogen solutions and other technical collaborations.

<unk> is the leading clean energy plan with solid oxide fuel cell technology, and natural gas and hydrogen and the growing electrolyze of presence.

True disagreement we will gain further insights into the fuel cell and Electrolyzed technologies, where bloom has key offerings per day and explore how we can integrate and utilize our world class GAAP cabin and compression technology alongside these solutions.

We were also very pleased to announce an Mou with both C O 2 and Norwegian cap carbon capture and storage developer to collaborate on a Ccs project to serve as a hub of the decarbonization of the industrial sites and the Bakken region of Norway.

Both the industrial cluster approach provides a great opportunity for Baker Hughes, the test and scale of wide ranging seafood portfolio, including our share of the ammonia process and our compact carbon capture solution.

Builds on our Mou with horizon energy for the Polaris carbon and storage project, and Norway announced last quarter.

During the quarter, we also announced the 15th set of investments and electro cash to expand Baker Hughes C for U S portfolio with power to gas and energy storage solutions.

The Hughes will combine its post combustion and carbon capture technology with electric cash borrowed machination technology to transform C. O 2 emissions interest and Patrick natural gas and low carbon fuel capable of being used across multiple industries.

Lastly, during the second quarter, we were extremely pleased to finalize our collaboration with air products and global leader and hydrogen to develop next generation and hydrogen compression and accelerate the adoption of hydrogen as a zero carbon fuel.

As part of the collaboration Baker Hughes will provide air products with advanced hydrogen compression and gas turbine technology for global projects.

This includes Novatel T 16 gas happens and compression equipment.

The net zero of hydrogen energy complex and Alberta, Canada.

And we will also provide advanced compression technology, using our high pressure ratio of compresses and the neon and carbon free hydrogen project and Saudi Arabia prove.

These 2 projects with air products Baker Hughes will provide equipment on the world's largest blue and green hydrogen project.

And you can see from all of these recent announcements, we feel confident and the momentum we're building and both <unk> and hydrogen spaces and believe that we have of differentiated technology operating that positions us as the leader in these areas.

Now I will give you an update on each of our segments.

In oilfield services increases and activity level of became more broad based during the second quarter and the outlook for the second half of the of continues to improve.

Internationally, we have seen a pickup in activity across multiple regions over the last few months, including Latin America Southeast Asia, and the North Sea looking at the second half of the year, we expect stronger growth across a broader range of markets, most notably in the middle East and Russia.

Based on discussions with our customers, we expect international activity at the gain momentum over the second half of the year and lay the foundation for growth and 2022.

And North America is strong second quarter growth was evenly distributed between our onshore and offshore business lines, given the strength and oil prices and bid activity, we expect to see additional growth over the second half of the year.

While we expect to capitalize on the growing improvement and global activity levels. We are committed to being disciplined through this up cycle with a focus on profitability and returns.

This includes maintaining focus on our various cost reduction and operating efficiency initiatives as well as navigating the inflation and supply chain costs of situations that our team is managing well as a result, Oss remains on track to achieve our goal of 20% EBITDA margins in the medium term.

Moving to TPS the outlook continues to improve driven by opportunities in the LNG onshore and offshore production pumps and valves and new energy initiatives.

While the order of outlet the GPS and 2021 should be roughly consistent with 2020, we are growing increasingly confident that the multiyear growth opportunity will begin to emerge in 2022.

Underpinning. This framework is the strength that is developing of multiple parts of the TPS portfolio and the diversification of the business, which has the commercial offerings and several end market with high growth opportunities.

And LNG, we booked 2 awards during the second quarter with GAAP happens and compresses the train 7 and at Nigeria, LNG and liquefaction equipment, the new fortress Energy's fast fast LNG project.

Following these 2 orders, we still expect 1 or 2 more LNG awards in 2021, and see a strong pipeline of opportunities that should produce the step up and LNG activity in 2022 and beyond.

For the non LNG segments of our GPS portfolio. We were pleased to book Award and the Middle East and Asia Pacific and our refinery and pipeline and gas processing segment.

<unk> also secured of key industrial win with our Nova L. T 12 megawatt gas turbine technology, and the middle East for a combined heat and power application.

We continue to see on Nobel <unk> range of gas turbines gang, sorry of attraction of lower megawatt industrial applications.

The TPS services, we are beginning to see real signs of recovery and remain optimistic about the outlook for 2021, and 2022 and the second quarter, we experienced strong growth and service orders, which grew year over year due to the significant upgrade awards across multiple regions and for the various applications include.

The pipeline offshore and solutions to support customers operation of Decarbonization efforts.

We also saw fiber improvements and transactional service orders as customers continue to increase spending.

And our contractual services business TPS maintain strategic long term relationships with LNG customers, achieving a major milestone by securing a 6 year services contract extension and North America for our key producer and building on the success, we saw on the first quarter.

Our PPS services <unk> and now stands at close to $14.1 billion, which is up almost 10% year over year.

Next on oilfield equipment, we remained focus on right sizing the business improving profitability and optimizing the portfolio and the face of what remains a challenge long term offshore outlook.

And while Brent prices and near $70 and the activity is beginning to pick up we continue to expect only a modest improvement and industry Subsea tree awards in 2021, followed by some additional growth and 2022.

However, we continue to believe that it will be difficult to achieve and sustain 2019 order levels and the coming years as the deepwater market becomes increasingly concentrated into low cost basins and upstream spending budgets. The many larger operators are reallocated to other areas.

However, 1 thing what area that we expect the benefit from this environment as Brazil, where the pre salt reserves are viewed as attractive by a number of Iot this quarter, our flexible business signs and important frame agreement with Petrobras for a number of pre and post salt fields offshore Brazil.

And the first half of 2021 and including the 2 contracts we were awarded and the first quarter Petrobras has contracted Baker Hughes to provide up to 370 kilometers of flexible pipe.

This is larger than the volume of flexible pipe of awarded by Petrobras and the Baker Hughes and 2019 and 2020 combined.

Finally, and digital solutions, we were pleased to see orders continue to recover despite of challenging operating quarter.

Year over year growth and orders was led by strong performances and our industrial and transportation end markets. We saw continued traction and industrial end markets and the second quarter, which represented over 30% of Dx second quarter orders as we continue to grow our presence in this key area.

During the quarter <unk> continued to expand its industrial asset management presence with a number of wins across multiple end markets.

And in Nevada, and secured a contract with the large corrugated paper manufacturing company for its condition monitoring and protection solutions to optimize production and reduce maintenance costs.

We were also pleased to see the recently acquired arms reliability business the share of some industrial asset management orders during the quarter, including of subscription for its 1 PM software to be deployed by our global chemicals customer with the initial rollout in China and Chile.

The deal will include software and consulting services to develop the customers' equipment liability strategy library driving the deployment of best in class asset reliability strategies and real time alignment for its assets.

We're also having success integrating some of our emissions management solutions with our bank and Nevada business.

This quarter and secured a flare IQ contract with BP, marking the first time flare IQ will be used in upstream oil and gas. This contract builds on our partnership with BP to measure and reduce their emissions across global flaring operations flare IQ will be embedded into bp's of existing system, 1 condition monitoring soft.

From bank of Nevada, requiring no additional hardware for the customer.

Before I turn the call over to Brian I'd like to spend the few moments highlighting some of the achievements from our corporate responsibility report that was published at the end of the second quarter.

This report provides and expanded view of our environmental social and governance performance and outlines our corporate strategy and commitments for a sustainable energy future for <unk>.

2020, we achieved several notable milestones and RCI report fast and we continue to advance our reporting around sustainability and climate related disclosures.

This year, we included new reporting framework from the sustainability accounting standards Board and the task force on climate related financial disclosures.

Second we again lowered our emissions footprint and expanded our emissions reporting.

We achieved a 15% reduction and our scope 1 and 2 carbon emissions compared to 2019, and we reset our base share from 2012 to 2019 to account for corporate changes in line with the greenhouse gas protocol and importantly, we also expanded our reporting of scope 3 emissions to include new categories.

And that we made significant improvements and HSE performance and engagement during 2020.

We increased the number of perfect HSE days to 200 and reduced our total recordable incident rate by 18% and conducted more than 1 million HFC observations and leadership engagement globally.

Overall Baker Hughes of successfully executing on its vision to become and energy technology company and to take energy forward, making it safer cleaner and more efficient the people on the planet are.

Our corporate responsibility report demonstrates our progress on many of these areas, while our second quarter results illustrate our progress towards our financial and strategic priorities.

We believe the Baker Hughes is uniquely positioned in the coming years to deliver sector, leading free cash flow conversion. While also building 1 of the most compelling energy transition growth stories.

And we will also continue to evaluate our portfolio in order to drive the best financial returns and create the most value for shareholders of the energy markets of all with that I'll turn the call over to Brian.

Thanks, Lauren Zone I will begin with the total company results and then move into the segment details.

Orders for the quarter were $5.1 billion of 12% sequentially, driven by OSB, Oss and TPS, partially offset by a decrease and digital solutions.

Year over year orders were up 4% driven by increases in TPS and digital solutions, partially offset by decreases in OSB and Oss.

The remaining performance obligation was $23.8 billion up 3% sequentially equipment RPM ended at $7.6 billion up 1% sequentially and services <unk> ended at $16.2 billion up 3% sequentially.

Our total company book to Bill ratio and the quarter was 1 point out and our equipment book to Bill on the quarter the 0.9.

Revenue for the quarter was $5.1 billion up 8% sequentially with increases and all 4 segments.

Year over year revenue was up 9% driven by increases in TPS and D. S, partially offset by decreases and OSB and Oss on.

Operating income for the quarter was $194 million.

Adjusted operating income was $333 million, which excludes $139 million of restructuring separation and other charges the restructuring charges and the second quarter, primarily relate to projects previously announced in 2020, we expect to see restructuring and separation charges taper off through the.

The second half of the year.

Adjusted operating income was up 23% sequentially and $229 million year over year.

Our adjusted operating income rate for the quarter was 6.5% up 80 basis points sequentially year over year, our adjusted operating income rate was up 430 basis points of.

Adjusted EBITDA and the quarter was $611 million, which excludes $139 million of restructuring separation and other charges.

Adjusted EBITDA was up 9% sequentially and up 38% year over year.

Corporate costs were $111 million and the quarter for the third quarter, we expect corporate cost to be slightly down compared to second quarter levels dipped.

Depreciation and amortization expense was $278 million and the quarter for the third quarter, we expect DNA to be roughly flat sequentially.

Net interest expense was $65 million net interest expense was down $9 million sequentially, primarily driven by 1 time interest on tax credits.

Also slightly reducing interest expense and the second quarter was the repayment of our UK short dated commercial paper facility for the third quarter, we expect interest expense to be roughly in line with first quarter levels.

Income tax expense and the quarter was $143 million.

GAAP loss per share was 8.

Included in GAAP loss per share is a nonrecurring charge for a loss contingency related to certain tax matters.

Also included our losses for the net change in fair value of our investment at G. III Dot AI.

These charges are recorded in other non operating income.

Adjusted earnings per share were <unk> 10.

Turning to the cash flow statement free cash flow and the quarter was $385 million free cash flow for the second quarter includes $62 million of cash payments related to restructuring and separation activities.

We are again, particularly pleased with our free cash flow performance and the second quarter. Following the strength. We saw on the first quarter. We have worked hard to improve our billing and cash collection process and if also updated the company's incentive structure with an increased focus on free cash flow and we are pleased to see the performance. So far this year.

We have now generated $883 million of free cash flow and the first half of the year, which includes $170 million of cash restructuring and separation related payments.

For the total year, we believe that our free cash conversion from adjusted EBITDA should be around 50% given the capital efficiency of our portfolio and the winding down at the restructuring and separation costs.

Now I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward.

And oilfield services, the team delivered a good quarter and and improving market environment.

S revenue and the quarter was $2.4 billion up 7% sequentially and.

International revenue was up 6% sequentially led by increases in Asia Pacific Europe, and Latin America.

North American revenue increased 11% with solid growth and both our U S land and offshore businesses.

Operating income was $171 billion up 20% sequentially and margin rate expanded 80 basis points to 7.3% due to higher volume and lower depreciation.

While we continue to execute on our cost out program and the second quarter. This was partially offset by mix and cost inflation and some areas.

Although we have moved quickly to pass inflation on to our customers. There is a timing lag relative to the increase and cost.

As we look ahead to the third quarter, we expect to see strong sequential improvement in the international activity and continued improvement in North America. As the result, we expect sequential revenue growth for Oss and the third quarter to be similar to the second quarter.

On the margin side, we expect the sequential increase in operating margin rate to solidly exceed the improvement and the second quarter due to more favorable mix and better cost recovery.

For the full year 2021, our industry outlook remains largely intact with second half activity in North America modestly better than previously expected.

Overall, we still expect our Oss revenue to be down slightly year over year with North American revenues, roughly flat and international revenue down mid single digits on.

And on the margin side, we continue to expect growth and operating income and margin rates on the year over year basis.

Moving to oilfield equipment orders and the quarter were $681 million down 3% year over year and up 97% sequentially.

Strong year over year growth and subsea services and flexible orders was offset by declines and SPC projects and subsea production systems the.

The sequential improvement and the orders was driven by an increase in orders and Sps along with several of orders and flexible outside of Brazil.

Revenue was $637 million down 8% year over year, primarily driven by declines and subsea drilling systems and the disposition of SPC flows, partially offset by growth and flexible.

Operating income was $28 million, which is up $42 million year over year. This was driven by increased volumes and flexible as well as productivity from our cost out programs.

For the third quarter, we expect revenue to decrease sequentially, driven by lower Sps and flexible as backlog conversion, we expect operating margin rate and the low single digits.

For the full year 2021, we believe the offshore markets will remain challenged as operators reassess their portfolios and project selection, we expect OSP revenue to be down double digits on a year over year basis due to the lower order intake and 2020 and the likely continuation of the lower order environment and 2021.

Although revenue is likely to be down in 2020..1 we expect to generate positive operating income as our cost out efforts should continue to offset the decline in volumes.

Next I will cover turbo machinery, and the team delivered another strong quarter with solid execution.

Orders in the quarter were $1.5 billion up 15% year over year.

Equipment orders were up 8% year over year.

As Lorenzo mentioned orders this quarter were supported by LNG Awards for Nigeria, LNG train 7 and for New fortress energy fast LNG project.

We were also pleased to book of number of non LNG awards, specifically and the refinery and petrochemical and industrial segments.

Service orders and the quarter were up 20% year over year and up 15% sequentially, primarily driven by increases and upgrades and transactional services.

Revenue for the quarter was $1.6 billion up 40% versus the prior year.

Equipment revenue was up almost 90% year over year as we continue to execute on our LNG and onshore offshore production backlog.

Services revenue was up 14% versus the prior year.

Operating income for TPS was $220 million up 48% year over year, driven by higher volume and continued execution on cost productivity, partially offset by a higher equipment mix.

Operating margin was 13, 5% up 70 basis points year over year.

We continue to be very pleased with the TPS margin rate improvement, particularly as our equipment revenue mix has increased from 36% to 48% year over year.

For the third quarter, we expect revenue to increase modestly on a sequential basis based on expected equipment backlog conversion.

With this revenue outlook, we expect EPS margin rates to improve modestly on a sequential basis.

For the full year 2021, we expect TPS to generate strong double digit year over year revenue growth driven by equipment backlog conversion and growth and TPS services. Despite a higher mix of equipment revenue. We now expect TPS margin rate slightly improved year over year.

Finally, and digital solutions orders for the quarter were $540 million up 16% year over year, we saw strong growth in orders and industrial and transportation offset by declines and power.

Sequentially orders were down, 2%, driven by declines and power and oil and gas, partially offset by improvements and transportation and industrial.

Revenue for the quarter was $520 million up 11% year over year, primarily driven by higher volumes and PPS and wake 8 offset by lower volume and Nexus controls sequentially revenue was up 11% driven by a higher order intake and the first quarter of 2021.

Operating income for the quarter was $25 million down 39% year over year, largely driven by costs related to of legacy software contract that we do not expect to repeat sequentially operating income was up 3% driven by higher volume for.

For the third quarter, we expect to see strong sequential revenue growth and operating margin rates back into the high single digits for the full year 2021 and we see.

We'll expect modest growth and revenue on the year over year basis, primarily driven by recovery and industrial end markets with lower margins and the first half of the year and higher volumes over the second half, we expect the es margin rates to be and the high single digits on a full year basis.

Overall, we delivered a solid quarter and continued strong free cash flow, while we faced challenges and our DS business, we are confident and our ability to execute as the rest of the year unfolds with that I will turn the call back over to Jeff.

Thanks, Brian operator, let's open the call for questions.

Thank you. If you are of a question at this time. Please press. The Star then the 1 key on your Touchtone telephone. If your question has been answered or you assume of yourself from the queue. Please press the pound key and we also the rest of you limit yourself to 1 question and 1 follow up.

Our first question comes from Chase Mulvehill with Bank of America.

Hey, good morning.

And where is the.

Earlier in your prepared remarks, you talked about.

The lumi.

New order growth cycle, and the TPS segment that.

And that should get on your way next year could you maybe just take a minute and provide some details around kind of really what's driving this.

This revised more positive outlook for TPS as we get into next year.

Yes definitely.

As you mentioned the TPS, we see several avenues of growth developing as we go forward and really it's for a prolonged growth cycle of orders and EBITDA as you look at the near to intermediate term its really going to be LNG and the orders that we've seen you can also Steve and the small awards, we booked this year, we still see some of our.

Maybe 1 or 2 small projects being awarded this year, but as we go forward. The next to the free as we see a step up and LNG order opportunity has been of highlighted by the increasing demand and also what we announced previously with the long term outlook of the LNG out to 'twenty fatty and.

And as you go longer time and also the next 5 to 10 years, we expect to see significant growth around the energy transition initiatives, most notably hydrogen <unk>, but also on areas like valves integrated power as the clean energy ecosystem continues to evolve and I think as you look at our recent announcements with air products.

And with.

Given we see some near term opportunities for hydrogen and those will actually be additional awards over the course of the next 2 to 3 years as the pathway, but continuing through the rest of the decade and <unk> you looked at our announcement with Borg and horizon energy and we're in a number of active collaborations with our customers.

Several geographies of increasing opportunities around <unk> and U S and lastly, our salvage business.

<unk> got solid growth potential for the next 10 years. When you look at the installed base as well as the upgrade opportunities I think with LNG growing about our installed base and grow by about 30% by 2025 with the increasing tonnage of LNG and then you look also going forward, what we announced box EPS services.

<unk> now standing at $14.1 billion, which is.

Up from 13 billion of year ago. So good signs of continued growth on the services side.

Awesome Awesome I appreciate the additional color there seems like the TPS. He has got a nice future ahead of it.

Maybe if I can transition and over to buybacks and ask Brian about buybacks and our numbers you have.

The in excess of $1.3 billion of free.

Free cash flow after dividend.

Through the end of next year.

Net debt to EBITDA is going to be sub 1 at the end of next quarter.

So Brian the kind of ask you. The question why not do a buyback to help partially offset the continued drag on your stock from from GE and continuing to kind of sell down their stake.

Yes, Hi, Chase Yeah look we are pleased with our free cash flow generation this year and the outlook going forward as I mentioned the teams have done a great job.

And changing a lot of processes and so look our R.

Our view really on capital allocation hasn't really changed but as you pointed out the pace of our free cash flow is improving and particularly as restructuring is winding down over the rest of this year. So that's a big capital allocation action that won't be repeating there. So it leaves us I think and are positioned to have quite a bit more optionality.

<unk>.

And we're primarily focused on investing in areas, where we see the ability to grow offerings and new frontiers like energy transition and digital as well as some interesting places and industrial technologies and you've seen some of those examples like C. III on AI.

And I compact carbon capture and more recently arms of liability and look and say you know beyond some small scale acquisitions and investments and some of the new energy frontiers share repurchases.

And certainly be and attractive piece of the capital allocation.

The.

Portfolio.

View, and and and the pace that we're generating free cash flow.

And certainly gives us and the you know more optionality to evaluate that and.

The look at ways to return.

No.

To shareholders. So look we will keep you guys updated as were evaluating that and and.

And.

It's good to have the flexibility.

Alright, Thanks, Brian and look forward to hearing more about that I will turn it back over.

Thank you. Our next question comes from James West of Evercore ISI.

Hey, good morning, Lorenzo and Brian Jud.

Hey, James.

So.

Renzo you you highlighted a couple of times.

And your prepared comments and also to the the last question, but the service.

Orders for TPS up nicely year over year could you maybe expand a bit more on.

On the what that means for the.

The margin profile of the business, what the signaling for the future of TPS and and I agree with what the.

The the commentary made that there's a bright future year, and and really want to kind of understand exactly what we're looking on it.

Yes, James So I'll start off with the outlook on the activity side, and then and I'll, let Brian jump in on the margin side because.

We are definitely seeing improvements across the whole TPS services business, and it's really driven by some of the positive macro backdrop and some of the improving outlook, we're seeing with customers re engaging with us on service equipment across our installed base.

During 2020, there was disrupted of course and.

And now we're seeing strong growth and upgrades with recovery across regions and various application pipeline offshore solutions also to support our customers on the operational decarbonization efforts with the upgrades that we can provide them and you saw the double digit growth and transactional services and the quarter as customers are returning to normalized spend.

The level and also we've got a solid CSA revenue stream, that's been resilient and so.

Overall, we think we could be reasonably back closer to our 2019 type level and 2022 with the continued upgrade on the transactional activity continuing strongly as we go forward.

Yeah, and James on the margin front I'd say, it's certainly a positive backdrop and service grows for TPS overall, and Rod and the team are doing a great job and driving productivity and the services portfolio and as Lorenzo mentioned the in the install base of is growing particularly in LNG. So I think that the us all.

All of pretty positive backdrop of what the business can deliver.

Sure sure. Okay, well you guys have been a lot of moves and.

New energies this quarter you have been doing that for several years now repositioning the portfolio 1 of the things that caught my eye that we haven't really discussed is the electric.

And the investment.

The U S plus Biomethane technologies, I'd love to hear a bit more about that.

And what the yield of the outlook will the investment is what the outlook is what's what's going on with that transaction.

Yes, James I think its.

Part of our strategy as we've set the developed portfolio of for energy transition and we're very pleased with the electric co investment of 50.

80% of investment, which really allows us to expand our whole portfolio around power to gas and energy storage solutions will have a seat on the board of electro key and we're really going to combine our post combustion carbon capture technology with electro key as biomass and Asian technology to transform <unk> emissions and <unk>.

<unk> natural gas and this is maybe an area that we havent discussed much before but.

We really see synthetic natural gas as being applicable to multiple industries and the electro kiosk technology allows CRT recycling and it's a great quality low carb and synthetic natural gas, which helps to drive decarbonization and hot for both the sectors such as transportation and heaping. So it's going to be of great suite of arc <unk>.

<unk> ability that we're providing and again, we see that as being applicable to power and industrial plants and.

And it's increasing our portfolio of applications.

Got it thanks for the thanks, Brian.

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

Yes, good morning.

Hey, Scott.

And Scott.

Brian 1 for you on the.

On inflation, you mentioned that you're pushing through price increases to offset inflation and a couple of questions..1 our customers generally willing to accept the price of increases.

Across the portfolio of Theres, some puts and takes we should be thinking about.

And the based upon the time lag and 1 of the price increases the catch up with inflation and WWE.

And thus far.

Yes, Scott look I'd love to tell you that customers are customers say, yes. Sure go ahead and pass on price increases, but look they clearly understand whats going on and the commodity markets.

We have some contractual arrangements that allow us to pass those along and we're having discussions and places where it's not so clear and look we have seen some traction there and started to see.

And some pricing power come back across.

<unk> the portfolio not everywhere, but we're certainly.

Seeing that capability, we did get some price and.

And the second quarter, but as I had mentioned it takes a little while longer for some of that to kick in.

Versus the the inputs that are that are coming and so look I would say over the course of this year, we'll continue to push that and tried.

Try to make sure that the.

The price increases are offsetting as much of the inflation is as possible. The 1 thing I would point out too is that look we've got of global supply chain, we got pretty good contractual arrangements in place and have been working with our suppliers as we started to see this coming through the mute some of the impact.

This year, obviously, you have some some hedges in place as well and look really focused on.

Looking at 'twenty, and 'twenty, 2 and making sure we're securing things for for next year as well. So I'd say, it's great collaboration with the sourcing and the commercial teams and working through this but feel good about the actions that we've taken.

Got it and then.

On your efforts, there and and your.

And your activity outlook, how you're thinking about the.

Timing of when you could get back to.

The 20% EBITDA margin and Oss.

Yeah look I listened Maria Claudia and the team are continuing to do a great job and executing on all of the restructuring.

And cost out and transformation initiatives that the the team has been driving there and you've seen that come through and the results here and the first half with the the margin rate improvements that the team has posted they're working hard to offset some of the same inflation and a like we are like we talked about here.

And.

I'd say with the the backdrop, we see and volume for the second half of this year into 2022, I could certainly see us hitting that 20% rate.

Some time next year, and any given quarter and be really well set up.

As we execute and in 2022 and exit the year, but I think that the the team is doing a really good job of of managing cost and driving productivity and.

I think we're still on the really good trajectory here.

Got it appreciate the color Bryan Thank you alright.

Alright, great. Thanks, Pat.

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

Hey, good morning, just sort of follow up on Scott's question, there on that 20% margin. So.

And maybe not timing, but maybe how do you get there I mean is it pricing you're talking about operating leverage or is there a component of mix here is required to get to the 20%.

Talked about on a couple of integrated drilling and well services contracts, which I assume are more accretive and traditional services. So is that another component of the sure maybe just kind of talk about that mix and what that has to what do we have to see to get to that 20%.

Yes, David.

We're not counting on a significant mix shift to be able to the liver that level of margin share.

Some of the product lines and have higher margin rates get get more tailwind that will certainly help but we've taken the approach of.

Driving improvement across the entire business, we've done a lot around remote operations, we multi skilled.

The work force to be able to deploy them and different ways and more effectively we've made massive changes inside the supply chain and and our service shops, and you've seen us take a lot of cost out with the restructuring and and so a lot of those process improvements and cost out.

Are going to continue and that's really what's going to what's going to drive the margin rates. So the actions have already been launched.

And the team is certainly executing on those now the <unk>.

<unk> that we're talking about here is really to offset some of the inflation that we're that we're seeing so we're not counting on any pricing increases to to drive that margin improvement but.

We can get those pricing increases the to stick and and hold inflation levels down I think that could provide some upside so it's been a fundamental.

Change and how that business is operating and how Maria Claudia and the team are leading it and how we're allocating capital and that's really what's driving the improvement here and where we're making a fundamental and long lasting.

Great. Thanks for the insight there Brian.

A different question Lorenzo sort of a bigger picture, we are starting to get more generalist investors back into the space here people are starting to look and people starting to buy into the cycle starting to pick up the Baker Hughes has a very different business portfolio of the than your peers. So I was just wondering maybe you could just talk about kind of over the next 2 to 3.

Years, maybe helping people understand what parts of your business do you think of it can have more pronounced growth and margin expansion.

Really I guess, what I'm asking what parts of the business do you expect to outperform over the next 2 to 3 years as the cycle accelerates and I guess I'm just sort of thinking about your your force segments, and how you sort of see them kind of progressing here.

Yes, David if you look at it from a macro picture and again.

2 the response given on the TPS cycle of that.

And really taking place here with the opportunity of LNG and the next few years also the energy transition opportunities and.

And our last call, we mentioned the addressable markets of.

Hydrogen by 'twenty fatty being $25 billion to $30 billion, and <unk> being 35% to $40 billion for Baker Hughes. So clearly as you look at the macro picture of the long term growth prospects of our TPS business look very solid and also in the short term with the continued to rebound and some of the apps.

Upstream and also the production side oilfield services continuing to perform well so short time, youll see that pickup and longer times. The TPS business continues to have a good future.

Great. Thank you very much.

Thank you. Our next question comes from Ian Macpherson with Piper Sandler.

Okay.

Thanks, Good morning.

Hi, Brian Hi.

Hi, Good morning, Brian you gave us the the 50% free cash flow conversion for me, but EBITDA bogey for this year and.

And then that you are overcoming the the cash restructuring charges.

Headwind.

But also on the out of hand year to date and <unk> had favorable working capital.

So when we when we.

And net those out and we're trying to normalize for those looking into next year, its 50% free cash flow conversion from EBITDA of sustainable.

The area or would you point higher or lower than that when we normalized working capital and and removed substantially removed the the cash restructuring items.

Yeah Ian.

As you know, it's really early to predict exactly what's going to happen.

The next year, but what I would say is what I'd say is our goal.

And what I think the capability of this portfolio is to generate free cash flow conversion at the 50% level or higher I think if you look at next year, probably the biggest variable.

And that you and you probably know and you pointed out is really working capitals of as we're early in the cycle for Oss and the working capital.

Intensity of really be driven by that pace of growth and then if I step back and look at some of the other factors for next year look we would expect to see EBITDA continue to grow on higher revenues and the continued focus around productivity capex and in absolute terms will be higher but as a percentage of revenue should be and the same range and thats been the.

Last couple of years and that 3.5% of 4% range.

Taxes will likely be higher because of the refunds that we got.

And this year and then you pointed out restructuring and separation charge and will go away and so that's roughly $200 million, which should contribute to a material improvement in free cash flow. So.

On that that 50% level is certainly what this portfolio is capable of and we're going to keep driving it higher.

Understood. Thanks, Brian.

Lorenzo I was going to ask a separate follow up regarding portfolio optimization I would imagine that we've seen some more smaller oss.

Mergers and transactions recently and I wonder if the improvement and oilfield fundamentals has has opened the window of wider for further.

And any further disposals within the ortho throughout the portfolio that might be more achievable now than they looked a few quarters ago.

And I think <unk>.

Our focus is on creating shareholder value on what's best for our shareholders long of time. So we're running the company today really to execute on the free pillars of our strategy transform the core invest for growth and also the new frontier and <unk>.

We're going to be looking at margin accretion and continuing to allocate capital. Accordingly, I think as we look forward, it's going to require for them and the energy transition perspective scale brought on expense of customer reach and the sizable R&D, so technology spending going into that we think.

Our current term footprint provides for that I think when you look at our overall, it's becoming apparent that the new energy growth opportunities and TPS of significant where when you look at the OFC business, it's more of a mature business.

Certainly well.

And I'll stay tuned on that thank you both for the all the insight today.

Okay.

Thank you. Our next question comes from Marc Bianchi with Cowen.

Yeah.

And thank you.

The first of all I'd to ask about Oss and the outlook in 'twenty..2 you know Theres a 1 of your peers reported the other day and said that they expect mid teens compound annual growth of over 22, and 23 and I'm just curious.

And how youre looking at that outlook.

And what you think specifically and 22.

Yes, just on maybe let's start off with the international outlook and again.

And again, we do see of solid step up and growth internationally over the second half of the year.

So far this year, we've seen strong recovery in Latin America, and North Sea Southeast Asia, the middle East of somewhat lag, but we expect incremental stronger activity over the course of the second half and into 2022 as well as in Russia being bigger contributors for the second half as well so we've been somewhat more conservative in forecasting international activity.

I think that is.

Really depends on how some of the regions come back right now, we think kind of growth in the second half of the year at the end of high single digits or low double digits on a year over year basis, and we expect that momentum to continue into 2022 with solid growth opportunities and.

North America, we generally expect the rig count to continue to trend the level of higher over the second half maybe adding an additional 50 rigs also by the end of the year, So that would imply a modest improvement and the first quarter on fourth quarter. When you look at 2022 again and we anticipate.

Solid growth, where the pricing is holding at the range and they are now but similar to this year. We expect some of the privates to be active and at these prices, but some of the public E&ps and also will continue to be only increasing their spending modestly as they continue to adjust some of their operating cash flow to some of the other areas of capital.

And spending.

Got it thanks for that Lorenzo.

Shifting over to you have these 2 awards with air products and they've got very large projects that they're pursuing.

But they don't come on stream until I guess neon is 25, and this thing and Canada. The blue hydrogen is 24.

And do those projects need to be up and running for the floodgates. The kind of open on the these types of awards or could we see more from.

And from Air products for Baker Hughes of over the nearer term.

I think it's fair to say the we're seeing a number of discussions with customers and partners continuing to gain momentum.

It's great to have achieved the announcement with their products and again when you look at those orders combating we expect it to be in the near term and I think that again as these projects start to get on the go Youll see of is also follow as well. So we're focused on enabling the technology and with our products, we're going to be on the largest.

<unk> and green hydrogen projects that are out there at the moment and providing our best technology.

Yes, Mark and I would just add actually and in terms of bid activity and inquiries with customers over the last 6 months.

And they're up 2 X, what we were seeing and the fourth quarter of last year. So activity levels have definitely increase I expect to continue to see that to increase and look exactly when they will turn into orders, it's a bit tough to say right now, but there's a lot going on.

Got it thanks very much guys.

Thanks Mark.

Our next question comes from Arun Jairam with JP Morgan.

Yeah, Good morning, and Lorenzo a number of announcements on the <unk> front during the quarter I was wondering if you could maybe talk about some of the <unk>.

<unk> dynamics and Ccs.

And your views on Baker's position.

And maybe just as a follow up could you talk a little bit about the scope of the Borg project and how did these the initial projects and Ccs lineup.

<unk>.

Could these be accretive to your margins assuming good execution.

Yes, Firstly I think I feel very good about the positioning that way of developing around <unk> and if you look at it from.

And from a value chain perspective, we really go across the board of <unk> <unk> from the initial identification of where <unk> can be sequestered all the way to the transportation and also the compression capability. We've also developed multiple solutions for Ccs you've seen in the past the we've got the.

Show of the ammonia process, we've got the mixed salt we've also got compact carbon capture so.

We are providing the different solutions because there is no 1 solution that's going to be.

For everybody and like and LNG, we want to be able to provide capabilities for small and medium and large scale as they get undertaken specifically on board. The bulk Mou announcement allows us again to really play at the forefront of capturing and storing up to 630000 tons of Cotwo.

Emissions annually and.

Is that going to be utilizing technology to do that and we're also going to be able to see and industrial cluster approach that's of great opportunity for us because we think those industrial clusters are going to continue to emerge elsewhere in and the world as well so Norway is at the forefront there and we're at the forefront with both <unk> and <unk>.

The Norwegian light.

Great and just my follow up is just on on digital and it sounds like just the the margin.

The missed this quarters is driven by a 1 time legacy contract and and maybe you could outline.

Do you still feel good about.

And the trending towards perhaps.

The low double digit margins as we go through the year on digital.

Yes, we.

We do feel good about the volume recovery, we're seeing and quite a few of the end markets, particularly on the industrial side of the DFS and.

We were disappointed and the margin rate, which was really a function of you know.

Project delays for this legacy software contract and just to clarify this legacy software contract goes back several years and isn't associated with the.

And our C III dot AI partnership and so this resulted in some.

Higher cost and and not revenue here in the quarter and that was the biggest driver I will note there was a little bit of.

And incremental costs, we had and the R&D front and DS this quarter related to some strategic areas like the arms reliability acquisition that we did earlier and the year and some of the acceleration of some work we were doing around emissions management and I'd say looking ahead into the third and fourth quarters I don't expect the overall level of costs and <unk>.

<unk> to be at the levels that you saw here and.

And the second quarter. So we do think the business is going to be back on track to generate higher margins with the volume growth that we're seeing and cost levels back to kind of lower levels to support those higher margin rates.

Thank you.

Thanks Owen.

Our next question comes from Stephen <unk> with Stifel.

Hi, Thanks, good morning, gentlemen.

Thanks, Dave.

Okay, and I was curious you've.

You've talked a lot about you've done what you've done a tremendous amount on the energy transition and I was curious if you could talk more about the collaborative relationship you have with Bloom.

Sure Steven.

We're very pleased to be collaborating with the bloom on a number of customer engagements which are.

Really are going to come to the forefront of the course of the next 2 to 3 years on really looking at the way in which we can provide integrated power solutions and also the way in which we can provide integrated the hydrogen solutions. So I think you may know the blue manager as the leading player and a solid oxide fuel sales and really of any.

Tables us to provide our technology of lightweight gas type and technology with and Theyre proficient.

Solid oxide fuel cells to really enable integrated power solutions for customers that are looking to the independent of the grid. We've got the <unk> gas turbines and so we're looking at opportunities of combining there and then on the integrated hydrogen solutions, they've got our increasing portfolio and electrolyte the cells that can produce a 100% clean hydrogen.

And with our compression technology, we think we can provide really a fashion.

<unk> production and also transport of hydrogen and usage again with our 100%.

No the LTE gas turbines that can run on hydrogen and the our compression capability. So it's an evolving space there and we think of lot of good opportunities as the energy transition continues.

Very good thank you.

Our next question comes from Connor Lynagh with Morgan Stanley.

Yeah.

Yes. Thank you.

I was wondering if you could just discuss some of the trends youre seeing in the OSB, obviously a nice.

Inflection and orders in the quarter here.

And based on based on that and.

And what Youre seeing right now obviously, you are anticipating of stepped down and the third quarter, but would you say that the direction of travel beyond that seems to be higher and I'm wondering if you could just characterize the the big end markets within that business.

Yes, if you look at again OFC and we've mentioned this before we continue to see the outlook for the offshore segment challenged we do expect and a modest improvement and the industry of awards during 'twenty, 1 and some additional growth and 22, and we still think it's going to be difficult from a trade perspective to get back to the <unk>.

And 19 order levels.

We are seeing some strength on the composite flexible so as you saw from the Petrobras frame agreement also some international wealth business, which is good and subsea services coming back, but again as you look at.

Overall, I think it's the subdued growth trajectory for us.

Understood at the same time, you guys of obviously taken a lot of action on costs.

So is there is there of sort of target that we should think of similar to the 20% EBITDA margin target and.

How do you think this businesses earnings power should be and this and this lower activity environment.

Okay.

Yes kind of.

Okay.

OFC.

Is done a great job in terms of taking cost out restructuring their infrastructure to deal with the.

And at the lower industry volume that we're seeing I would say just given the mix of the portfolio and where things are we've talked about the business at these volume levels being high single digits from an operating income rate standpoint, I think if you. If you roll forward you see some incremental growth come in and flexible.

Some.

The other things beyond true growth around manifolds and the.

The onshore business doing better you could get higher than that but right now based on the trajectory of the industry right now I'd say on the near term near to medium term, we expect high single digit operating income rate.

Okay. That's helpful. Thank you.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference I'd like to turn the callback of up until the Renzo for any closing remarks.

Yes. Thank you very much and thanks to all of you for joining our earnings call. Today I just wanted to leave you with some closing thoughts very pleased with the second quarter results, we generated another quarter of strong free cash flow and so good levels of performance across a number of our product companies. We also see a multiyear growth opportunity developing and our TPS business.

Driven by the LNG and new energy initiatives as we continue to execute on our strategy of becoming and energy technology company, we will maintain our discipline and prioritize free cash flow and returns. We will also continue to evaluate our portfolio in order to drive the best financial results and create the most value for our shareholders as the energy markets evolve. So thanks for.

Taking the time look forward to speaking to you again soon and operating and you may close the call.

Ladies and gentlemen, thank you for participating on today's conference. This concludes the program you may now disconnect everyone have a great day.