Q4 2021 Baker Hughes Co Earnings Call
Good day, ladies and gentlemen, and welcome to the Baker Hughes Company fourth quarter and full year 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 at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone phone as a reminder, this conference is being recorded.
I'd now like to boost your host todays conference Mr. Jud Bailey, Vice President Investor Relations, Sir you may begin.
Thank you good morning, everyone and welcome to the Baker Hughes fourth quarter and full year 2021 earnings Conference call here with me are chairman and CEO , Lorenzo Simonelli, and our CFO , Brian Worrell. 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 some of the factors that could cause actual results to differ materially.
As you know reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release with that I will turn the call over to Lorenzo. Thank you Jonathan Good morning, everyone and thanks for joining US we are pleased with our fourth quarter results as we generated another quarter of strong free cash flow solid margin rate improvement and strong.
Orders performance from TPS during the quarter TPS continue to operate at a high level OSB successfully executed on its cost improvement initiatives and ofa has performed extremely well despite continued pressure on supply chain and commodity inflation.
For the full year, we were pleased with our financial performance. We took several steps in 2021 to accelerate our strategy and help position the company for the future.
Last year proved to be successful on many fronts for Baker Hughes with key commercial successes and developments in the LNG and new energy markets as well as record free cash flow generation and peer leading capital allocation.
After a quiet start to the year LNG activity played an important role in helping TPS book almost $7 7 billion in orders in 2021, which was just below the record levels achieved in 2019, perhaps more importantly, we believe that the step up in LNG order activity provides a solid and the.
<unk>, then a new LNG cycle is beginning to take shape.
We also believe that the uptick in orders along with other recent policy movements, particularly in Europe confirms that natural gas is gradually gaining greater acceptance as a transition and destination fuel for a net zero world.
In your energy frontier as we started to see more pronounced commercial successes from our energy transition efforts generating approximately $250 million and new orders across our TPS Oss and DS product companies, primarily in the areas of hydrogen and Cc U S. We remain calm.
And our ability to grow this business over the next decade to ultimately total $6 to $7 billion of orders by 2030.
I'm also very pleased to report that Baker Hughes delivered its strongest ever free cash flow year generating over one $8 billion in 2021, which represents almost 70% conversion from adjusted EBIT that we.
We are pleased to see this performance as our cash restructuring and separation payments wound down and we continue to make progress on improving our working capital and broader cash processes.
Our strong free cash flow profile provides the company with ample flexibility and optionality when it comes to our broader capital allocation strategy.
As evidence of this we returned almost $1 $2 billion back to shareholders through dividends and buybacks in 2021, while also making multiple acquisitions and investments across the industrial and new energy spaces.
On the industrial front, we completed the acquisition of <unk> reliability, and a major investment in <unk>, which will help Baker Hughes continued to build out its industrial asset management platform and deliver an expanded set of asset performance capabilities.
On the new energy front, we were active this year in pursuing early stage technologies, and <unk> and in hydrogen and.
In <unk>, we acquired a position in electric here at Bio <unk> company and also entered into an exclusive license with fri for the mixed cell process and.
In hydrogen we made an investment in a kona a growth stage company developing novel turquoise hydrogen production technology as well as nemesis of technology company focused on a range of early stage hydrogen technologies.
While 2021, so many positive achievements. The year was also notwithstanding challenges. We saw continued disruptions from the COVID-19, pandemic, which continued to impact our operations supply chain and inflationary pressures also drove higher costs and delivery issues, primarily across our <unk> product.
<unk>.
Our teams have continued to work to offset some of these pressures, but we expect to continue to see some level of tension and disruption in these areas potentially through the first half of the year.
As we look ahead to 2022, we expect the pace of global economic growth to remain strong.
However growth rates are likely to moderate from 2021 levels as central banks are expected to begin tightening monetary policy in order to reduce COVID-19 related stimulus plans and <unk> growing inflationary pressures.
Despite the expected slowdown in the pace of growth, we believe our continuing broader macro recovery will translate into rising energy demand in 2022 with oil demand likely recovering to pre pandemic levels by the end of the year.
Pairing this demand scenario with continued OPEC, plus IOC and E&P spending discipline, we expect the oil markets to remain tight for some time, we believe that this will provide an attractive investment environment for our customers and a strong tailwind for many of our product companies.
We also expect continued momentum in global gas markets in 2022 building on our strong 2021, a combination of demand and supply factors converge in 2021, pushing natural gas and LNG prices to record breaking levels in both Europe and in Asia.
The gas price spikes also highlighted the fragility of the global energy system as the world transitions to net zero.
Looking ahead, we expect a number of additional LNG <unk> in 2022 and beyond supported by the growing appetite for longer term LNG purchase agreements.
As we have previously mentioned, we see significant structural demand growth for LNG in the coming decades.
Positive long term view is also supported by the recent improvements and policy sentiment in certain parts of the world towards natural gases role within the energy transition.
Against this constructive macro backdrop Baker Hughes remains focused on executing our strategy across the three pillars of transformed the core investor growth and positioned for new energy frontiers.
Importantly, we also continue to work towards aligning Baker Hughes across the two business areas that we outlined in the first quarter of last year.
Oil field services, and equipment, and industrial energy technology, or OFC and IEP.
Since we unveiled our vision of ultimately executing across these two broad business areas. We have been evaluating all aspects of the company in order to determine the most efficient organizational and corporate structure.
Our goal is to find the right structure the properly aligns our internal resources and helps to accelerate growth in key strategic areas, while also enhancing our profitability and returns and increasing shareholder value.
We have reached some early conclusions and have started to implement changes internally most notably we recently created the climate technology solutions group and Indiana, Austro asset management group, which will both report to Rod Christie Executive Vice President of TPS.
Climate technology solutions, or Cts will encompass cc U S hydrogen emissions management and clean and integrated power solutions.
Industrial asset management or a M will bring together key digital capabilities software and hardware from across the company to help customers increase efficiencies improve performance and reduce emissions for the energy and industrial assets.
We believe that the creation of these two groups will help accelerate the speed for commercial development for solutions based business models across our new energy and industrial asset management offerings importantly.
Importantly, it will not change any of our reporting structure today.
Overall, we are very excited with the strategic direction of Baker Hughes and believe the company is well placed to capitalize on near term cyclical recovery and well positioned for the long term structural change in the energy markets.
Now I'll give you an update on each of our segments.
And oil field services activity levels ended the year on a positive note in both the international and North American markets and all signs point to a strong year of growth in 2022.
Additionally, the RFS team had to navigate an increasingly difficult supply chain environment over the second half of 2021 and ended the year on a high note with a strong fourth quarter margin performance.
Looking into 2022, we expect a strong broad based recovery across the international markets led by Latin America, and the Middle East.
While Latin America should see the second consecutive year of double digit growth. The middle East is in the very early stages of what we expect to be a multiyear growth cycle.
Capital is being deployed in the region to restore near term production levels and lay the foundation for longer term capacity expansion.
In North America, we expect another year of impressive growth in the U S land market as well as recovery offshore.
Based on conversations with our customers, we expect the underlying trends in North America to remain the same as 2021 with public E&ps and IOC is remaining disciplined in deploying capital while private E&ps will remain more active.
While we were pleased to achieve 10% operating margin rates in Oss in the fourth quarter margins are still below our broader objectives, namely due to the recent negative impacts of commodity price inflation and supply chain disruptions.
That being said our Oss team is working extremely hard to offset these headwinds with successful pricing increases across multiple product lines and continued progress in mitigating some of the logistics constraints.
Based on the actions being taken by our Oss team and assuming the gradual normalization of the current state of supply chain disorder. We remained focused on achieving 20% EBITA levels and Oss by the end of 2022.
Moving to TPS.
The outlook remains constructive driven by opportunities in LNG onshore offshore production and new energy initiatives.
I'd like to thank rod in the TPS team for an exceptional year in 2021, which exemplifies the strength of the TPS business.
TPS booked almost $7 $7 billion of orders, which included 22 M. Tpa of LNG orders across four projects and <unk> and offshore Topside Project Awards.
On the execution side TPS generated over $1 billion of operating income representing over 16% and operating margin rate despite revenue growth in equipment significantly outpacing services.
We are excited about what the future holds for TPS across multiple fronts.
In LNG, we were pleased to book two awards in the fourth quarter.
We announced a major LNG award for the five M. Tpa Pluto train two project in Western Australia, which is operated by Woodside and also received a large scale LNG equipment awards in the eastern Hemisphere.
Additionally, we were awarded in order to deliver power generation equipment for a major LNG project in North America.
We continue to be optimistic on the outlook for LNG and remain confident on the potential for 100 to 150 M. Tpa of awards over the next two to three years.
Based on the continued pace of discussions with multiple customers and the positive fundamentals in the global gas market, we have a general bias towards the upper end of this range.
But the non LNG segments of our TPS portfolio, we see multiple opportunities for continued growth and we were pleased to book a number of awards and new energy during the quarter.
And hydrogen we booked an award for advanced compression technology, but the NIM carbon free hydrogen project in the Kingdom of Saudi Arabia building on the announcement, we made with air products in the second quarter of 2021.
We will be providing <unk> solutions to the neon project, which will enable a lower cost of production and accelerate the adoption of hydrogen as a zero carbon fuel.
Our collaboration with air products will be critical for a net zero future and the award is a good example of how Baker Hughes proven technology is helping to accelerate the hydrogen economy.
In <unk>, we received an order from Santos to supply turbo machinery equipment for demand by carbon capture and storage project in South Australia.
<unk> will provide gas turbine compressor and heat recovery steam generator technologies to compress the carbon dioxide.
The project will serve as a gas processing plant and permanently store, one 7 million tons of carbon dioxide annually in the depleted natural gas reservoirs in the onshore Cooper basin.
Even though 2021 order activity came in well ahead of our expectations, we still expect to see a similar level of orders for TPS in 2022, driven primarily by LNG.
Next on oilfield equipment, we are pleased with the overall trends in this business as order activity is becoming more favorable and we continue to show progress in taking costs out.
At a macro level trends in the subsea and offshore markets are anticipated to continue to improve in 2022 after gaining modest traction over the course of 2021.
And the subsea tree market, we expect industry awards to take another step higher in 2022, but likely remain below pre pandemic levels for the foreseeable future.
Outside of the tree market, we continue to see a strong pipeline of flexible order opportunities we.
We are also seeing improving market conditions in our international wellhead and subsea services businesses.
In the fourth quarter, we were pleased to announce a major 10 year contract for surface Wellheads and trees systems in the UAE.
As part of Amdocs largest ever Wellhead award this important win with <unk> enhance our partnership with this key customer as well as strengthen our footprint in the region.
Our subsea services business saw some good traction in the fourth quarter with a strong orders performance driven by increased activity in the North Sea and sub Saharan Africa.
Although OSV is showing signs of a path to recovery will still believe the offshore markets, where remains structurally challenged as the energy markets and our customers' budgets evolve.
As a result, we remained focus on right sizing the business improving profitability and optimizing the portfolio.
The merger of our subsea drilling systems with MH worth to create HMH is an excellent example of how we're continuing to transform the OSV portfolio.
Finally in digital solutions overall market conditions are improving we experienced solid growth.
Across our industrial end markets through 2021 and are starting to see a pickup in markets that lagged, particularly the oil and gas transportation and aviation end markets. Additionally, the DS business continues to be impacted by the supply chain challenges and chip shortages that began earlier in the year.
During the quarter <unk> continued to secure important contracts with key customers for condition monitoring and industrial asset management solutions.
Bently, Nevada secured a contract with <unk> to enable digital transformation and improved asset reliability and efficiency.
The enterprise wide contract will enable data availability between the RF plant operations and the cloud across 23 sites using bently, Nevada latest system, one Evo asset management software.
Well in Nevada also secured a contract with a major oil company to deploy system, one asset management software as a standardized platform for enterprise wide conditioning monitoring across 28 facilities worldwide.
In addition, bently, Nevada secured a five year services agreement to support the operators digital transformation by providing maintenance services and supporting the customers go to move condition monitoring data out of its localized facilities network into a cloud environment.
Going forward do you guys will play an important role in the growth of our industrial franchise and the overall success of our strategy and industrial asset management.
Key to the build out of IAA M with the investments we executed in 2021 that I previously mentioned.
The acquisition of arms reliability earlier in the year and more recently the alliance we formed with <unk>.
<unk> complement our bently, Nevada assistance, one cloud enabled condition monitoring and protection platform and deliver on our strategy of expanding our presence to non critical assets and developing software capabilities to allow us to cover the entire balance of plant.
As the world strives towards a net zero target in the coming decades enterprise level industrial asset management capabilities will be a key driver by enabling better operating efficiency lowering energy consumption and reducing emissions across multiple industries.
Overall I am pleased with the progress we made in 2021 and navigating the many challenges presented during the year, while also executing on the commercial opportunities across our portfolio.
At the same time, we were able to convert almost 70% of our 2021 adjusted EBIT into free cash flow.
We returned almost two facets of this free cash flow back to shareholders and made good progress on transforming our company into an energy transition leader.
As we enter 2022, we expect to benefit from solid macro tailwind across both of our major business areas with cyclical recovery in our FSC and a longer time structural growth trends in LNG, new energy and industrial asset management, we look forward to further developing our corporate strategy.
Building on our commercial success and focusing on a range of capital allocation opportunities.
I want to conclude by thanking all of our Baker Hughes employees for their hard work and overcoming another year of challenges surrounding the pandemic and I look forward to their continued commitment to our success in 2022 and beyond.
With that I'll turn the call over to Brian .
Thanks, Lorenzo I'll begin with the total company results and then move into the segment details orders for the quarter were $6 7 billion up 24% sequentially driven by TPS digital solutions and <unk>, partially offset by a decrease in OSB year over year orders were up 28% driven by increases in TPS.
Digital solutions, and Oss and a decrease in OSB.
Gaining performance obligation was $23 6 billion up 1% sequentially equipment <unk> ended at $8 2 billion up 9% sequentially and services <unk> ended at $15 3 billion down 4% sequentially. We are pleased with our strong orders performance in the quarter, particularly in TPS, which provides.
The good level of revenue visibility into 2022 and beyond.
Our total company book to Bill ratio in the quarter was one point too and our equipment book to Bill in the quarter was one point for.
Revenue for the quarter was $5 5 billion up 8% sequentially driven by increases across all four segments.
Year over year revenue was flat driven by an increase in Oss and offset by decreases in TPS and OFC.
Operating income for the quarter was $574 million adjusted operating income was $571 million adjusted operating income was up 42% sequentially and up 23% year over year, our adjusted operating income rate for the quarter was 10, 3% up 200.
40 basis points sequentially, and up 190 basis points year over year.
Adjusted EBITDA in the quarter was $844 million up 27% sequentially and up 10% year over year. Adjusted EBITDA rate was 15, 3% up 130 basis points year over year, we're particularly pleased with the margin improvement in the fourth quarter, which was largely driven by increased productivity.
Higher pricing and mix all four of our segments experienced strong improvements in adjusted operating income and adjusted EBITDA rates sequentially.
Corporate costs were $106 million in the quarter for the first quarter, we expect corporate costs to be roughly flat with fourth quarter levels.
Depreciation and amortization expense was $273 million in the quarter for the first quarter, we expect D&A to increase slightly from fourth quarter levels.
Interest in the quarter was $95 million, which includes a make whole premium relating to the debt refinancing we completed during the fourth quarter, we expect interest expense to return to historical levels in the first quarter.
Income tax expense in the quarter was $352 million, which includes $103 million in charges that relate to liabilities indemnified under the tax matters agreement with general Electric these tax expenses are offset in the other nonoperating line of our income statement.
GAAP diluted earnings per share were <unk> 32.
Included in GAAP diluted earnings per share is a $241 million gain from the net change in fair value of our investment in AD not drilling and a $131 million loss from the net change in fair value of our investment in <unk> III AI. Both are recorded in other non operating income.
As a reminder, in 2018, we formed a strategic partnership with <unk> drilling and invested $500 million or a 5% stake in October 2021 add not drilling completed their IPO, which requires us to mark our investment to fair value since our investment is recorded as a marketable security on our balance sheet.
The change in fair value will be reflected in the other non operating income line on a quarterly basis going forward.
Adjusted diluted earnings per share were <unk> 25.
Turning to the cash flow statement free cash flow in the quarter was $645 million. The sequential improvement was driven by higher adjusted EBITDA strong cash collections and modestly higher proceeds from disposal of assets due to increased real estate sales we.
We also continued to execute on our $2 billion share repurchase program during the fourth quarter repurchasing $13 2 million Baker Hughes class a shares for $328 million at an average price just under $25 per share.
For the first quarter, we expect free cash flow to decline sequentially, primarily due to seasonality.
When I look at the total year 2021, I am very pleased with our financial results, particularly with regards to our free cash flow performance and broader margin rate improvements.
Orders for the full year were $21 7 billion up.
Up 5% driven by TPS digital solutions, and OSB, partially offset by Oss total company book to Bill was one one for the year.
Total year revenue of $20 5 billion was down 1% driven by declines in Oss and OFC, partially offset by increases in TPS and digital solutions.
Adjusted operating income of $1 $6 billion was up 52% in the year with total company adjusted operating income margins, improving 270 basis points, mainly driven by productivity improvements and TPS and cost out programs and productivity improvements in Oss.
Adjusted EBITDA of $2 $7 billion was up 14% in the year total company adjusted EBITDA rate improved 170 basis points in 2021.
Corporate costs for the year were $429 million for 2022, we expect corporate expenses to be approximately in line with 2021 levels.
For the full year, we generated $1 $8 billion of free cash flow free cash flow includes $175 million of cash payments related to restructuring and separation activities. Our strong free cash flow performance was driven by higher adjusted EBITDA, lower capex and increasing cash flow generated from working capital.
And a significant reduction in cash restructuring and separation charges.
Not included in free cash flow or over $200 million of proceeds from asset or investment sales during the year, which include the sale of a small portion of our <unk> AI stake and the proceeds we received from the formation of the HMH joint venture with ACA store.
As Lorenzo mentioned, we returned almost $1 $2 billion to shareholders through dividends and share repurchases and also deployed over $250 million in tuck in acquisitions and investments in the industrial and new energy sectors.
Our free cash flow in 2021 resulted in 68% conversion from adjusted EBITDA.
While our free cash flow conversion was positively impacted by the large cash generation from working capital. We believe that Baker Hughes should be able to generate free cash flow conversion at or above 50% on a multiyear through the cycle basis.
For 2022, we expect free cash flow conversion from adjusted EBITDA to be around 50% as working capital should be a use of cash due to expected revenue growth.
<unk> forward, we expect our strong balance sheet and free cash flow generation to continue to provide us with attractive flexibility and optionality to return cash to shareholders and invest in tuck in M&A and technology on an opportunistic basis.
Now I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward.
In oilfield services the team delivered a strong quarter.
<unk> revenue in the quarter was $2 6 billion up 6% sequentially International revenue was up 7% sequentially led by increases in sub Saharan Africa, The North Sea, Russia, and Latin America, North America revenue increased 4% sequentially with similar growth in both the land and offshore.
Markets over 55% of <unk> revenues in North America, where in our production related businesses of chemicals and artificial lift in the fourth quarter.
Operating income in the quarter was $256 million or 35% increase sequentially and a 210 basis point improvement in margin rate the.
The improvement in margin was driven by better operating productivity pricing gains in certain product lines and favorable product mix for the total year of 2021, Oss improved operating income margin rate by 320 basis points.
As we look ahead to the first quarter, we expect to see continued growth in international and North American activity offset by typical seasonal softness in the international markets. As a result, we expect our first quarter revenue declined modestly on a sequential basis, along with a modest decline in margin rates.
For the full year 2022, our expectations are largely in line with the view we shared in October on our third quarter earnings call in the international market. We expect the continuation of a broad based recovery with growth in the low to mid double digits in North America, we expect a continuation of the ramp up in activity levels.
And believe that the broader market could experienced strong growth in the 25% to 30% range with this type of macro backdrop, we would expect to generate solid double digit revenue growth in 2022, and Oss margin rates should also see solid improvement as some of the recent supply chain and cost escalation headwinds normalize.
And we remain focused on achieving 20% EBITDA margin rates by the end of 2022.
Moving to oilfield equipment orders in the quarter were $510 million down 9% year over year.
The reduction in orders was driven by Sps as well as the removal of subsea drilling systems from consolidated OSV operations as a result of the merger with MH worth.
These declines were partially offset by growth in services and flexible.
Revenue was $619 million down 13% year over year. The reduction in revenue was driven by the removal of Sds and lower volumes in Sps and SPC projects, partially offset by growth in services.
Operating income was $23 million, a 1% improvement year over year. This was driven by higher volume in services and cost productivity, partially offset by lower volume in Sps and the removal of STS.
For the first quarter, we expect a double digit sequential decline in revenue driven primarily by seasonality and lower backlog. We expect operating income to also declined sequentially with margin rates in the low single digits.
For the full year 2022, we expect a modest recovery in offshore activity driven by higher oil prices and capital deployment into low cost basins and projects, we expect OSP revenue to be down double digits, primarily driven by the deconsolidation of Sds, but we expect OSP margins to remain in the low to mid single digit range.
Driven by business mix and benefits from the recent cost out actions taken.
Next I will cover turbine machinery the team delivered another strong quarter with solid execution orders in the quarter were $3 billion up 62% year over year equipment orders were up $1 $1 billion year over year as Lorenzo mentioned earlier orders. This quarter were supported by an award to supply power.
<unk> for a major LNG project in North America in order for the Pluto train two LNG project and an award for a large scale LNG project in the eastern Hemisphere.
Service orders in the quarter were up 7% year over year, driven by growth in both contractual and transactional services, partially offset by lower volume and upgrades.
Revenue for the quarter was $1 8 billion down.
Down 9% versus the prior year equipment revenue was down 30% driven by the timing of our equipment backlog conversion services revenue was up 16% versus the prior year.
Operating income for TPS was $346 million up 4% year over year, driven by favorable mix from a strong volume quarter in services operating margin was 19, 5% up 240 basis points year over year, driven by higher services mix.
For the first quarter, we expect revenue to be roughly flat year over year with higher service revenues offsetting a decline in equipment revenue.
Based on this revenue outlook, we expect TPS operating income rates to increase slightly on a year over year basis.
For the full year, we expect TPS orders in 2022 to be roughly the same as 2021 driven by continued strength in LNG Awards. We also continue to see a solid pipeline and our onshore offshore production segment, along with opportunities in pumps valves and new energy areas.
We now expect solid revenue growth in 2022, driven by growth in services and strong orders growth in 2021 on.
On the margin side, we still expect operating income margin rates to be roughly flat year over year in 2022, depending on the mix between services and equipment.
<unk> in this framework is an expected increase in investments and R&D expenses that relate to our new energy and industrial growth areas.
Finally in digital solutions orders for the quarter were $605 million up 14% year over year.
Improvements in orders across most end markets, most notably in industrial transportation and oil and gas <unk>.
Sequentially orders were up 16% driven by seasonality in the oil and gas power generation and industrial.
Revenue for the quarter was $558 million flat year over year with higher volumes and wake eight reuter Stokes and PPS offset by lower volumes in Nexus controls.
<unk> and Bently, Nevada.
Sequentially revenue was up 9% with improvements across most product lines.
Operating income for the quarter was $51 million down 33% year over year, driven by headwinds from mix and higher R&D costs sequentially operating income was up 97%, primarily driven by higher volume.
For the first quarter, we expect to see modest revenue growth year over year supported by stronger opening backlog, we expect operating margin rates to be down slightly year over year, but to remain in the mid single digits for the full year, we expect solid growth in revenue our supply chain constraints begin to ease and orders pickup across digital solutions.
With higher volumes, we expect strong improvements in DS margins, which could approach double digits for the total year.
Overall, I am very pleased with the execution in the fourth quarter and the total year across all the key financials. We are confident in our strategy and our ability to continue to execute as we head into 2022 with that I will turn the call back over to Jud.
Thanks, Brian operator, let's open the call for questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key and we also ask that you limit yourself to one question and one follow up.
Our first question comes from James West with Evercore ISI.
Hey, good morning, guys.
Good morning, James.
Lorenzo.
We continue to make changes in the industrial energy technology part of your business.
You are increasingly becoming youre thinking about it and you've talked about this two different companies via the Oss business and in the industrial energy technologies business.
Talk a little bit about some do.
The business performed within.
Energy technology.
I'm curious as to how youre thinking about.
The separation of the two companies what the timeline could look like.
Sure.
If you're thinking about external rating.
Your initial thoughts on timeline.
Yes, James Thanks, a lot and as we've mentioned in the past we've been doing a lot of work on evaluating the optimal corporate structure for Baker Hughes as we continued to see the energy markets evolve and also the energy transition accelerate.
The process is going to take some time as we evaluate all the parts of the company, which includes everything from the best organizational structure, all the way down to details like Eagle entities and tax structure. So the NGO leads to develop the business or corporate structure that allows us to operate efficiently and accelerate growth in our key strategic areas and doing so in a.
That enhances our profitability and returns and increase shareholder value as you've seen from our prepared remarks, the formation of Cts climate technology solutions and industrial asset management groups are one of the first steps towards strengthening our focus around two strategic business areas of FSC and <unk>.
That we mentioned last quarter.
As we said last year as the energy markets evolve, we think operating around these two broad focus areas. It makes sense in terms of investment strategy et cetera, and we also said that aligning across the two broad business areas will actually help us give the most optionality longer term. So the work we've done only just reinforces our view.
Again, the company has strung together at this stage and we will continue to align across the two business areas continue to work and continue to update us on our progress in decisions, but it goes without saying we continue to operate the company for the best returns to shareholders.
Of course, absolutely.
And then maybe a unrelated follow up Lorenzo on TPS and you gave some good guidance on kind of expected orders over the next several years I'm just curious how we should think about.
2020 to the cadence of the orders and then what that means for growth in TPS as we get into 2023.
Sure James and I think importantly, I believe the order momentum we saw at the end of 2021 is likely to continue into 2022.
We've indicated over the past quarters that we're seeing in LNG cycle, beginning to accelerate and generally speaking LNG projects are beginning to be pull forward versus previous expectations due to the strong long term LNG fundamentals and also the improving environment to secure long term offtake agreements. So we also believe that the <unk>.
<unk> policy movement out of Europe .
Encouraging to see what would be <unk> in 2020 free maybe potentially be pulled forward into 2022 as well too as well. So there are a couple of large awards this year in 2022.
And also some small and mid sized awards that should be coming through and I think.
Though we are calling the TPS orders in 2022.
Flat to 2021, we believe that orders could potentially increase as we go through the year. So.
Specific areas of U S Middle East and Russia and for 2023, it's a little early.
But I think again the outlook is positive and we still see a lot of projects that we're discussing with our customers as you know we're very close on the LNG side.
So I think it's important to remember that LNG is a headline for TPS orders.
We also see a solid pipeline and our onshore offshore production segment, along with opportunities in pumps valves and we continued to see positive traction in the new energy front on the back of a strong order intake in 2021.
Okay got it thanks.
Our next question comes from Chase in logo with Bank of America.
Hey, good morning, everyone.
J&J.
Yes, so I guess I wanted to kind of dig it a little bit deeper and ask.
You're creating two new divisions.
The climate technology.
Our solutions in the industrial asset management divisions that you split out now and so I guess first kind of what was the catalyst for doing this and how do you think that.
Splitting yourself will impact how you run these businesses and then.
A related follow up there is just like do you plan to give us quarterly detail as to kind of attract the progression of these two new businesses.
Yes, great. Jason look we're excited to take this step formerly create Cts climate technology solutions and also I am industrial asset management that are both going to report into Rod and as we've mentioned before as the energy landscape continues to change we'll adapt our organizational structure.
Accordingly, and as we look at what we announced last third quarter last year within the two business areas of oilfield services equipment and <unk>.
We really see this as being one of the first steps and enhancing our capabilities to solve for customer request and as the market evolves. We think we're going to continue formalizing these groups.
Provides leadership accountability in two important growth areas. If you look at climate technology solutions.
Bring together four of our growth areas of hydrogen <unk> emissions management and clean integrated power solutions is going to continue to build on our product roadmap and commercial offerings as well as support the sale of products and solutions. We have in these areas today across Baker Hughes and as you look at industrial asset management. This is really going to bring together our digital.
Software and hardware capabilities across Baker Hughes to develop an integrated.
Am ecosystem that enables us to respond to what customers are looking for so it's going to be an interaction across the various product lines, both for Cts and I am in at this stage, we're not looking to change the reporting segments as we continue to develop in these two growth areas.
Okay perfect.
Follow up is really just kind of that same line of questioning and just kind of digging in a little bit more on the energy transition I mean, obviously in the fourth quarter you had a key.
Key hydrogen order with Neil and you had.
<unk> U S.
But could you talk about other opportunities that you see on the horizon It may be.
Also kind of hit all M&A opportunities you did he kona the hydrogen investment there so maybe highlight that in any other opportunities that you see.
Do some tuck in.
Acquisitions.
Yes Chase.
We were very pleased with the performance in 2021 for the New energy orders you cited the two in the fourth quarter, one for hydrogen and also <unk> with the Santos Cooper Basin, and we see those opportunities continuing we have given.
At 2022 outlook of between 100 $200 million, we think that we're on the higher end of that and its continued momentum with our customers on really helping them to achieve that net zero targets.
The <unk> investment that you mentioned again, it's another way in which we're expanding our portfolio of capabilities.
Stage company, which develops turquoise hydrogen production technology and its another solution that can really help our customers as we look at 2022 and beyond again, we still see the opportunity to create a new business through the energy transition that by 'twenty fatty is 6% to $7 billion.
We're actively building our portfolio to represent that through the small tuck in technologies and I see us continuing to do that.
Alright, perfect. Thanks, Lindsay I'll turn it back over.
Our next question comes from Scott Gruber with Citigroup.
Yes, good morning.
Got it.
Good morning.
It sounds like the supply chain issue may linger for you in tears here at least in the first half of the year.
Finally at the point, where we can see light at the end of the tunnel.
Are you able to identify a quarter when the supply chain issues.
Really just to have a limited impact on our reported financials or is that too early to call at this point.
Yes got it.
I'd say that you've got to look at it in a couple of fronts I'd say a lot of the supply chain disruptions that we were seeing in the third quarter primarily from logistics.
Some shortages.
Broadly and disruptions in shipments because of Covid have pretty much stabilized and we've we figured out ways to work with that through planning and different shipping routes and increasing some of our lead times and those sorts of things I'd say that that's pretty much stabilized where youre still continuing to see some.
Some disruptions are around around chips that primarily impacts digital solutions, a little bit in oilfield services and just to give you a perspective right now.
Pretty much all of about 90%.
<unk>.
Our suppliers are giving us one year lead times and we have all of our 2022 on order there and to give you a perspective, if I go back seven months that 90% was about 20% to 30%. So that's really what's going on.
In the industry. So we're planning for it we're working through it suppliers give allotments 60 to roughly 60 days out. So I'd say the teams are working incredibly well to make sure that has limited impact on our customers. So we're operating in this new normal.
The other area around supply chain is really particular to our chemicals business, where <unk> seen some inflation come through we had a supplier who had a fire that disrupted our.
Our supply and we've been working with them to get supply from other places that appears to be stabilizing as well.
Say, we'd anticipate the inflation.
And that space to be relatively stable here.
In the first quarter and so.
The chemicals business had about 150 basis point drag on <unk> overall in the quarter to give you a little bit of a magnitude of what we were seeing there but again.
I'd say were operating well in this new normal and I would expect things to continue to improve.
As the year progresses, but we've got plans in place to offset disruptions and as much inflation as we can.
Got it and then somewhat of a related question so supply chain issues.
On a managed better.
Sure.
The ease of the course of the year.
And markets are obviously recovering across most of the businesses and you're entering it seems to be the later innings of the restructuring efforts.
Maybe if we just kind of think high level here. It seems like there is convergence cost.
Those items such that Baker.
Baker Hughes is really hitting its stride over the course of the year.
So just putting the separation question to the side and if we just kind of think about that.
Where the board sits versus a couple of years ago.
Two businesses came together in the merger can you just kind of talk high level about kind of way.
The business stands today.
How to think about.
Cadence of profit.
Profit growth, obviously, we have the 20% target.
Oil services, but.
Yes.
Of your.
And your perspective on.
Today.
Performance standpoint.
And kind of where we go over the course of 2002 and into 'twenty three.
The convergence of what seems to be some pretty favorable factors from a tailwind perspective.
Yes sure Scott.
I think you know the last four years have been an interesting rollercoaster and I'm really pleased about the way in which we as a team and Baker Hughes has been focused on approaching it and also creating a good setting for 2022 and beyond we started out we have a lot of integrations restructuring the separation from GE.
Then another major restructuring to the curve at the downturn at the same time, we continued laying the groundwork for the energy transition pivot.
Pivoting to be an energy technology company.
The investment in <unk> disposing of unprofitable and non strategic operations and really continuing our strategy to transform the company across what we said with a free pillars transform the core invest for growth and also the new energy frontiers and.
Over the course of time, we continued to actively cut costs, we've invested in growth areas with over six transactions.
Small scale acquisitions are also new energy or industrial investments, we've created a good partnership network across multiple capabilities that are required for the future and we've always been optimistic on natural gas and the continued role that it plays in the energy transition and LNG. So I'm very excited about the macro environment for Baker Hughes and more.
Accordingly, how we're positioned as a company to capitalize on the LNG cycle, the upstream spending cycle and longer term growth for the new LNG opportunities I think.
And my tenure at least it's nice to see.
Macro tailwind across both of our two large business areas and Scott the only thing I'd add there to what Lorenzo says is.
<unk> seen how we've been running the company we've got a strong balance sheet. We believe we've had pretty shareholder friendly capital allocation.
To maintain the dividend.
During the latest.
Turmoil because of because of Covid and we will continue to run the company with a strong balance sheet and make sure we maintain the most flexibility and optionality as we look to increase returns.
Okay. Thank you.
Our next question comes from Arun Jairam with JP Morgan.
Yeah. Good morning, I had a couple of questions on TPS.
You guys booked nearly $3 billion of inbound orders this quarter $7 7 billion for the year I was wondering if you could comment on if you think the orders would be accretive to the margins you realized in 2021 and TPS.
Yes, Irene yet again very pleased with the strength, we're seeing in and TPS and look as I said overall for 2022 and expect margin rates to be roughly flattish in TPS, depending on the mix of equipment and services and that does include some of the increased expenditures in R&D.
Really associated with the new energy and industrial area, so kind of stepping back from that.
Can you can surmise that very pleased with the order book and the margins that are in the order book I think this year, we've demonstrated that we've been able to deliver strong productivity in an inflationary environment as we are executing as we're executing on these projects. So I'd say in general.
Like like where the order book is like where the order book is sitting.
Great and my follow up Brian you had mentioned how the strong inbound orders is driving more revenue visibility in TPS. This year next year.
We had been thinking about low single digit top line growth this year.
How is the.
The order strength influence in your thoughts about the top line.
You mentioned, the flattish margins, but I wanted to see if are we moving maybe to mid single digits or upper single digits in TPS.
Yes, yes, yes, Arun look based on where we're sitting today and the strength of orders that came in.
In 2021, and what we're looking at in 2022, as Lorenzo and I mentioned I would expect orders to be.
Flattish with the potential of being higher in 2022 across both equipment and services.
Say high single digit.
Range is quite reasonable for what we see in revenue growth.
In 2022 and <unk>.
Look.
I think based on the order profile, how the equipment backlog will convert what we're seeing in.
2022 order pipeline.
I would expect revenue growth in 2022, most likely it's sorry, 2023, most likely exceed 2022 growth. So look as we've talked about.
We've been seeing a strong set of tailwind in TPS.
It's continued throughout the year.
And where we're sitting today it looks pretty solid in LNG and as Lorenzo mentioned onshore offshore production and we're seeing a lot of activity and new energy orders as well that are going to provide more growth in the medium term.
Super helpful. Thanks.
Arun.
Our next question comes from David Anderson with Barclays.
Hi, Good morning, I was just wondering if you could talk a little bit about the tendering activity going on in the Middle East Lorenzo you talked about kind of the beginning of a multiyear.
Both phase in the Middle East has been a bunch of large awards you guys have been pretty selective.
I was wondering if you can just kind of talk about kind of maybe some of the dynamics youre seeing out there.
And would you expect to see more large tenders in the coming months and kind of your view on the pricing. Thank you.
Okay. Thanks.
On the international outlook.
Okay.
Based on conversations with.
We expect a broad based recovery.
All major geographies the overall international growth in the low to mid teens.
Unlike 2021 way or the middle East that lag, we believe it could be one of the strongest market.
Likely in the early stages of our growth cycle.
With that production capacity.
Thanks.
We also expect another strong year of growth in Latin America.
Elsewhere, we wont be rushed.
Volume growth.
It's not just the middle East Latin America.
Okay.
Okay.
Right.
We got some of the larger MSP.
Thanks.
Great.
Thanks.
We are very judicious in the way in which we.
Okay.
Okay.
The outlook.
Yes.
Great. Thank you.
Just kind of a separate subject.
You have a number of partnerships and investments.
You've just got involved in across some new energy spectrum, which I think all of them were going to fall into this new climate technology solutions group just.
Just kind of curious where you go from here a number of these are technologies that can take time to scale. So do you keep expanding your portfolio and keep kind of looking at the other technologies like <unk> and hydrogen or if you could give the other parts of clean tech with smaller investments or is there a point, where theres more sizable M&A opportunities out there I mean I'm just.
Kind of curious of kind of what that looks like and kind of the horizon is it just too early to even to be talking about M&A opportunities in this space.
I think it's a little early but I think as you look at our approach and it really resonates with what we're hearing from our customers is across oil and gas and also the other industrial segments. We saw customers are asking help me achieve a net zero roadmap wherever it would be the 25 target out to 2050 target that they have and that requires a car.
Compensation of different technologies, and what we're doing within our climate technology solutions group and why we stood it up is really to be able to respond to that customer request and walk them through the various technologies and capabilities. When you look at the investments we've made electro Kia.
It also frees see you look at the already in house chilled ammonia process. You mentioned also what we've done with Dakota, what we're providing is actually a capability to offer a roadmap towards those solutions and we'll continue to evaluate which solutions. We think are best for our customers, but we do want to be.
Like we are in other areas that we serve a provider of technology and capability to achieve the customer requests likewise on industrial asset management. If you think about the investments we've made both see free all agree arms were really developing an ecosystem of capability to respond to customers' requests.
And how do we drive less downtime, how do we increase efficiency and productivity and that requires the ability to sense have historical data on equipment and be able to offer the foundation of our platform towards customer. So both of these areas actually help us in our growth initiatives and are led by customer request.
Thank you. Our next question comes from Neil Mehta with Goldman Sachs.
Good morning team a couple of questions around capital allocation in the first one is on the buyback how are you thinking about the pacing of the buyback do you think it's reasonable to keep on the pace that we saw here in Q4, which is over $300 million and it looks like in the release GE selling ratably is it fair to.
To say at this pace there'll be out of the market by by the middle of this year.
Yes, Neil look.
We like what we've done so far from a buyback perspective since we started in September we purchased $17 2 million class a shares.
It's been about $434 million. So the price per share is just over $24 50.
We are planning right now to have a consistent buyback program with the ability to accelerate it if the conditions warrant an acceleration. So I'd say, if you think about sitting here today. Our plan right now is roughly through the first half of this year.
To keep.
Keep up the pace you've seen us since we started the program in that as you point out if GE continues to sell at the pace. They are selling at roughly coincides with them selling down the remainder of their stake and so I'd say look at that point in time, we'd reevaluate what the right levels are.
But I think from an overall stepping back and looking at capital allocation.
Once <unk> is out I think.
<unk> buybacks in the range of roughly $200 million to $300 million.
Annually is a good place to be at and then look I think we are uniquely positioned here.
To continue paying a strong dividend.
Have a pretty consistent buyback program and be able to do M&A.
Tuck in technologies or capabilities that we think are going to end.
Enhance our growth capabilities, so very pleased with the free cash flow generation.
We've been doing from a capital allocation point, so far in terms of recycling some of the proceeds from dispositions or.
Investment sales back into growth areas in the business.
And just to clarify $2 million to $300 million quarterly rate.
Yeah buybacks, yeah, yeah, yeah, Okay, great and then.
Then on the on the dividend.
Sitting here at this 18 cents a quarter level really since.
2017.
And the earnings power and the free cash flow generation of the business to get into the point, where you can get more aggressive around the dividend recognizing youre getting yields better than your large cap services peers, but it still.
Worse than the energy sector broadly how do you think about.
What the right time is to evaluate an increase in distribution around the dividend.
Tie that in with your comments around the buyback.
Yes, Neil just to just to clarify there.
$2 million to $300 million I was speaking more to once we've gone through this pace here in the first half will take a step back and look at buybacks, but I'd I'd say.
200 to 300 million was more annually after we get through here. The first half of the year is how I would how I would think about it in terms of in terms of evaluating the dividend look at it's something we're always taking a look at and discussing with our board in terms of the best way to return.
No.
Value.
<unk> shareholders.
I think we demonstrated during the downturn.
Even with all of that volatility maintaining the dividend was an important priority for us. So we're at we're at a level, where we don't want to get out over our skis because as you know that this industry can be quite volatile and we want to make sure.
We can be relied upon from an investor base.
On a consistent basis here, saying that though as we continue to generate strong free cash flow look at investment opportunities.
And.
The best way to continue to meet our return objectives.
Not out of the cards, but at this moment in time I'd say, we're happy with where it sits today, we will continue to update you for thinking changes.
Thanks team.
Ladies and gentlemen, this does conclude the Q&A portion of today's conference I'd like to turn the call back to Lorenzo for any closing remarks.
Thank you and thank you to everyone for joining our earnings call today before we end the call I wanted to leave you with some closing thoughts we're very pleased with the way the team executed during the fourth quarter and navigated through many challenges over the course of 2021 for the full year, we delivered growth in orders and operating margins and delivered record free cash flow.
Generation, helping us return of almost $1 2 billion to shareholders. Looking ahead, we're excited about the multi year growth opportunities developing across our portfolio and believe that Baker Hughes is well positioned to capitalize on the cyclical growth in upstream and longer time structural growth in LNG and new energy. Thanks.
For taking the time and I look forward to speaking with you. All again soon operator, you may now close out the call.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.