Q2 2022 Baker Hughes Co Earnings Call
Speaker 3: Thank co.
Speaker 4: Good day, ladies and gentlemen, and welcome to the Baker Hughes Company second quarter 2022 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. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Judd Bailey, Vice President of Investor Relations. Sir, you may begin.
Speaker 5: Thank you. Good morning, everyone, and welcome to the Baker Views Second Quarter 2022 Harding's Conference Call. Here with me are our Chairman and CEO , Lorenzo Simonelli, and our CFO , Brian Morrell. The Arne's release we issued earlier today can be found on our website at bakerhews.com. As a reminder, during the course of this conference call, we will provide four looking statements. These statements are not guarantees of future performance and involve a number of risk and assumptions. We are going to involve a number of risk and assumptions.
Speaker 5: Please review our FCC filings and website for discussion of the factors that could cause actual results to differ materially. As you know, reconciliations of operating income and other gap to non- GAAP measures can be found in our earnings release. With that, I will turn the call over to Lorenzo.
Speaker 6: Thank you, Judd. Good morning, everyone, and thanks for joining us. Our second quarter results were mixed as each product company navigated a different set of challenges ranging from component shortages and supply chain inflation to the suspension of our Russian operations.
Speaker 6: While OFS and TPS are managing through the current situation fairly well, OFS and MDS have both experienced more difficulty.
Speaker 6: As we look to the second half of 2022 and into 2023, the oil markets face an unusual set of circumstances and challenges. On one hand, the demand outlook for the next 12 to 18 months is deteriorating as inflation arose, consumer purchasing power, and central banks aggressively raised interest rates to combat inflation.
Speaker 6: On the other hand, due to years of under-investment globally and the potential need to replace Russian barrels, broader supply constraints can realistically keep commodity prices at elevated levels, even in a scenario of moderate demand destruction.
Speaker 6: As a result, we believe the outlook for all prices remains volatile, but still supportive of relatively strong activity levels as higher spending is required to reorder the global energy map and likely offset moderate demand destruction in most recessionary scenarios.
Speaker 6: In the natural gas market, the redrawing of the energy map is having an even greater impact. With sustained high prices, a frenzy of off-take contracting activity, and a growing pipeline of major LNG projects that seem likely to reach FID.
Speaker 6: There's been a significant increase in long-term LNGOT take agreements in the US, totaling over 35 MTPA during the first half of 2022. The US has been a significant increase in long-term LNGOT take agreements in the US, totaling over 35 MTPA during the first half of 2022.
Speaker 6: For comparison, yesterday LNG contracting activity is three times greater than the average annual U.S. contracting volume going back to 2015.
Speaker 6: This sharp increase reflects the growing importance of natural gas and LNG as governments rebalance their priorities between sustainability, security and affordability.
Speaker 6: We believe that solving this energy trilemma will be another long-term positive for natural gas.
Speaker 6: This theme will continue to grow in importance as countries around the world face acute energy shortages and are working to avoid industrial interruptions in certain sectors of their economies.
Speaker 6: Overall, we remain very positive on the Outlook's financial gas.
Speaker 6: We also believe that a significant increase in natural gas and LNG infrastructure investment is required over the next five to 10 years in order to make natural gas a more affordable and reliable, base load fuel source that can be paired with the intermittent renewable power sources.
Speaker 6: Against the sunset and macro backdrop, BAKers users preparing for all scenarios and will continue to execute on our long-time strategy.
Speaker 6: If commodity prices remain resilient, as we expect, our portfolio is well positioned to benefit from a strong LNG cycle and a multi-year upstream spending cycle.
Speaker 6: We will also continue to invest in our energy transition and industrial initiatives. While also returning 60 to 80% of free cash flow to shareholders.
Speaker 6: However, if the global economy experiences further turbulence and commodity price volatility, we believe our balanced portfolio of short and long cycle businesses will enable us to generate peer leading free cash flow and allow us to maintain that policy of returning cash to shareholders. The global economy is not a policy of returning cash to shareholders.
Speaker 6: In addition to a strong backlog that affords cash low visibility, we have best in class balance sheet that allows us to invest opportunistically even through shared buybacks or tracking investment opportunities. Even through shared buybacks or tracking investment opportunities.
Speaker 6: In EVA scenario, fake-as-use is well positioned to create value for shareholders. We are really very passionate about this chain. We are not pushing for a single profit. Especially future, colored target updates. Thank you.
Speaker 6: From an operational and strategic perspective, we were active over the first half of the year. We were active over the first half of the year.
Speaker 6: executing on a number of exciting tuck-in acquisitions and new energy investments such as Mosaic, NetPower, and HIF Global.
Speaker 6: which position us in key technologies for the future.
Speaker 6: We have also been focused on setting up internal commercial structures like CTS and IAM, which will help us to capitalize on the opportunities in the energy transition and industrial areas.
Speaker 6: In addition to these initiatives, our time is increasingly focused on optimizing and formalizing our operations around two core business areas of OFSE and IET. Around two core business areas of OFSE and IET.
Speaker 6: As the energy markets continue to evolve, it is becoming clearer that aligning across these two core areas make strategic sense.
Speaker 6: We are focusing on ways to simplify our process and systems.
Speaker 6: with a distinct focus on productivity and efficiency across our operations.
Speaker 6: As we look to drive additional synergies between both TPS and DS and OFS and OFC.
Speaker 6: We believe that this will be a significant area of opportunity for Baker Hughes as we look to further streamline our organization and position it for the future.
Speaker 6: Now I'll give you an update on each of our segments.
Speaker 6: In all field services, activity levels continue to trend positively in both the international and North America markets, and net pricing is being achieved across multiple product lines.
Speaker 6: We also see improving visibility for growth in some key areas into 2023 and beyond.
Speaker 6: In international markets, broad diversified growth continues, with recent strengths in Latin America, West Africa, and the Middle East.
Speaker 6: We expect growth in most international markets to continue, with the strongest increases likely to come from the Middle East over the second half of the year and into 2020 free.
Speaker 6: Producers in the region are committed to an orderly increase in production and are beginning to execute drilling plans to improve both oil and natural gas production capacity in the region. And natural gas production capacity in the region.
Speaker 6: In North America, activity and pricing remains strong, with the RIC Count continuing to track above our expectations.
Speaker 6: We expect continued modest growth in the rig count in the coming months. But the outlook for 2023 will be dependent on the broader macro factors and oil prices.
Speaker 6: Operationally, I'm pleased overall with the progress made by the OFS team during the second quarter in navigating the challenges related to Russia, as well as supply chain constraints and inflation.
Speaker 6: During the second quarter, the suspension of our OFS operations in Russia accelerated quicker than anticipated, as we moved closer to reaching an agreement to sell our OFS operations in the country.
Speaker 6: Outside of the impact from Russia, our OFESTS business executed well in the second quarter with improvements in our production chemicals business.
Speaker 6: After being weighed down for several consecutive quarters by supply chain and inflationary impacts, chemicals saw a sequential increase in margin and has line of sight to further increases in the coming quarters.
Speaker 6: Going forward, we expect to continue to drive margin improvement despite the cost headwinds from the suspension of our operations in Russia.
Speaker 6: Moving to TPS, the second quarter represented another solid performance in orders, where we remain on track to generate 8 to 9 billion dollars in orders in 2022, with an optimistic view of 2023.
Speaker 6: Operation TPS performed well, despite some revenue impacts from the suspension of operations in Russia, as well as some project shipment delays across both equipment and services.
Speaker 6: We continue to believe that we are at the beginning of another constructive LNG cycle, particularly for US projects.
Speaker 6: Including the FID to VCHI's Glackenman's phase 1 at the end of May and Shania's FID of Corpus Christi stage 3 in June , we continue to expect 100 to 150 MTPA of LNG FIDs over the next 2 years. We have additional FIDs in 2024 and 2025.
Speaker 6: During the second quarter, we were pleased to be awarded an order to provide seven mid-scale LNG trains to support the Stage 3 expansion project of Sinear's Corpus Christi Liquid Faction facility.
Speaker 6: Each train is comprised of 2 electric motor driven compressors, producing approximately 1.5 of LNG, totaling 10.5 of production capacity.
Speaker 6: This award builds on the strong relationship between Baker Hughes and Shinez since 2012, as we currently provide all liquefaction equipment with Shinez Corpus Christi and Saben Pass projects. Shinez Corpus Christi and Saben Pass projects.
Speaker 6: Outside of LNG, the TPS team booked an important gas processing ward in Saudi Arabia to supply 14 electric motor driven compressors for the Jafura unconventional gas field project.
Speaker 6: The largest non-associated gas field in the country.
Speaker 6: Baker Hughes is leveraging its local compressor packaging facility in Modon to deliver the equipment and support the Kingdom's in-country total value add program.
Speaker 6: Also during the quarter, TPS booked an award from Tolorian to provide electric powered, integrated, compressed-aligned technology, and turbo machinery equipment for a natural gas transmission project in southwest Louisiana.
Speaker 6: The project is expected to supply upwards of 5.5 billion cubic feet of natural gas daily, with virtually no emissions.
Speaker 6: ICL zero emissions is landmark technology that lowers the carbon footprint of a key segment of the natural gas supply chain and is already reducing the climate footprint of pipeline projects in many regions that deliver vital gas supplies.
Speaker 6: This order marks the first time Baker Hughes will install its ICL decarbonization technology for pipeline compression in North America.
Speaker 6: During the quarter, CPS's CTS organization continues to support the growth of the hydrogen economy.
Speaker 6: TPS secured a contract with Air Products to supply advanced syngas and ammonia compression technology for the production of green ammonia for the NEOM carbon-free hydrogen and ammonia facility in Saudi Arabia.
Speaker 6: This sort of builds on our hydrogen collaboration framework with air products and leverages back-and-use broad experience and references to playing singa and ammonia from presses.
Speaker 6: Next on oilfield equipment, we are encouraged to see improving demand trends across the different business areas. However, we remain disappointed with the overall level of profitability of the business and are executing on further actions to drive additional cost out and improve operations across the portfolio.
Speaker 6: At a macro level, trends in the subsidy and offshore markets continue to improve and should have solid autumn momentum over the next couple of years.
Speaker 6: Despite recent commodity price volatility, we believe that a solid pipeline of deep water opportunities will continue to develop across a few key markets. Cris almost a two-fold windward supply arrest? will try to lift positive satellite by Child Project Control Control Control Control Control Control Control Control Control Control Control Control Control Control Union Government intersection kink PAU Centred? K-1 1 pin sec 2 k?? $mile 0 1???? 2 1 1 3 1 2 3 4 1 4 1 4 m 5 M 2 1 2 1 e 2 l 4 L len e m 5 s ???? 3 m s ho 4 5 1is 2 1 V 9 you
Speaker 6: Importantly, we continue to see OFE gain momentum outside of Brazil with its offshore flexible pipe technology, securing several large contracts with multiple customers across the Americas and the Middle East.
Speaker 6: OSE will provide flexible pipe systems and services, including risers, flow lines, and jumpers, to improve oil recovery and help to extend field life and profitability.
Speaker 6: OSE booked their highest order ever in Flexibles in the second quarter.
Speaker 6: and over $600 million in flexible orders for the first half of the year in 2022, also a record.
Speaker 6: While activity and project awards are improving offshore, we recognize that we have work to do at NOSE to drive operating margins back to an acceptable level.
Speaker 6: We are driving continued actions across the business to improve operations, while also ensuring we have the appropriate resources in place to take this business forward. We are driving in place to take this business forward.
Speaker 6: We're also in the final stages of planning more integration between OSE and OFS, driving more efficient cost management across certain parts of the OFSE business area globally. We're also in the final stages of planning more efficient cost management very closely. We're very closely.
Speaker 6: Finally, in digital solutions, while order activity was strong in the second quarter, the business continues to be hampered by supply chain challenges, mainly electronic shortages, as well as inflationary pressures.
Speaker 6: During the quarter, DSO continued interest for its condition monitoring systems and services in the industrial sector.
Speaker 6: Bentley Nevada secured a contract to upgrade the machinery protection systems for critical machines at a steel plant in the Middle East.
Speaker 6: The contract includes Bentley Nevada's latest orbit 60 system, which will provide the customer reliable protection and will enable advanced condition monitoring without additional hardware spent.
Speaker 6: CS also gained traction with its emissions management portfolio of technologies.
Speaker 6: Following an MOU signed in February , the S secured a contract with Petro Safe for the first deployment of Flair IQ technology for refining operations in Egypt.
Speaker 6: The deployment will be implemented at the APC refinery in Agnesongar, supporting Egypt's low-carbon strategy and tackling emissions in the sector as the country prepares to host Ochange Group as we start with their. number. number.
Speaker 6: We also recently reached an agreement for the sale of our Nexus controls product line to generate electric.
Speaker 6: G will continue to provide baking hues with G Mark's control products currently in the Nexus Controls portfolio.
Speaker 6: and Baker Hughes will be the exclusive supplier and service provider of such G-Products for its oil and gas customers control needs.
Speaker 6: The transaction is expected to close in the second quarter of 2023.
Speaker 6: As we have mentioned in the past, we continue to make strategic and operational changes across the S, including recent leadership changes and invent innovative during the quarter.
Speaker 6: We are also conducting a review of the broader DS portfolio.
Speaker 6: Taking actions to ensure we have the right business composition to serve our customers and driver times.
Speaker 6: As we move forward, there is clearly more work to do. We are committed to driving better performance, profitability and returns for the DS business.
Speaker 6: Before I turn the call over to Brian , I'd like to spend a few moments highlighting some of the achievements from our corporate responsibility report that was published at the end of the second quarter.
Speaker 6: This report provides an expanded view of our environmental, social and governance performance and outlines our corporate strategy and commitments for a sustainable energy future.
We again lowered our emissions footprint and expanded our emissions reporting.
We achieved an 8% reduction in our scope one and two carbon emissions in 2021, versus 2020, and a 23% reduction in 21 compared to 2019 baseline.
We also expanded reporting of scope-free emissions across our value chain to include emissions from several new categories.
I'm also pleased to say that in 2021, we launched Carbon Out. An internal company-wide initiative to take carbon out of our operations and meet our pledge to achieve a 50% reduction emissions by 2050 and net zero emissions by 2050. …
We clever expanded our programs and processes to embed diversity, equity, and inclusion into our operating process.
We launched the Global Council in 2021 to increase accountability on this strategic priority, and we updated our process to evaluate and reconcile pay equity across the company.
Overall, BECA used this successfully executing on its vision as an energy technology company and to take energy forward. Making it safer, cleaner, and more efficient for people and the planet.
Our corporate responsibility report demonstrates our progress in many of these areas.
Baker Hughes is well positioned to drive energy efficiency gains to meet global energy demand and support broader decarbonization objectives.
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 $5.9 billion, down 14% sequentially, driven by TPS and OFE, partially offset by an increase in digital solutions and OFS.
Year over year, orders were up 15% driven by increases across all four segments. Year over year, orders were up 15% driven by increases Year over year, orders were up 15% driven by increases
We are pleased with the order's performance in the quarter following strong orders performance in the last two quarters.
Remaining performance obligation was $24.3 billion, down 6% sequentially. Equipment RPO ended at $8.8 billion, down 11% sequentially. And services RPO ended at $15.5 billion, down 3% sequentially. The decrease in the RPO was driven by the suspension of our operations in Russia and foreign currency exchange movements.
Our total company book to bill ratio in the quarter was 1.2, and our equipment book to bill in the quarter was 1.2.
Revenue for the quarter was $5 billion, a 4% sequentially, driven by digital solutions, OFS, and OFE, partially offset by lower TPS volumes.
Year over year, revenue was down 2% driven by decreases in OFE and TPS, partially offset by increases in OFS and digital solutions.
Operating loss for the quarter was $25 million.
Adjusted operating income was $376 million, which excludes $402 million of restructuring, impairment, separation, and other charges.
Included in these charges was $365 million related to the suspension of our operations in Russia. As I will explain in a moment, our Russian activities were either prohibited under applicable sanctions or unsustainable in the current environment.
Adjusted operating income was up 8% sequentially and up 13% year-over-year. Our adjusted operating income rate for the quarter was 7.5% of 20 basis points sequentially. Year-over-year, our adjusted operating income rate was up 100 basis points.
Adjusted EBITDA in the quarter was $651 million, up 4% sequentially and up 6% year over year. Adjusted EBITDA rate was 12.9% up 100 basis points year over year.
Our adjusted operating income and adjusted EBITDA margins were largely impacted by the suspension of our Russia operations during the quarter and foreign currency exchange movement.
Corporate costs were $108 million in the quarter. For the third quarter, we expect corporate costs to decline and be more in line with first quarter levels.
Depreciation and amortization expense was $275 million in the quarter. For the third quarter, we expect DNA to decline roughly $5 million sequentially as a result of the impairments taken in the second quarter.
Net interest expense was $60 million.
Income tax expense in the quarter was $182 million.
Gap diluted loss per share with 84 cents.
Included in gap deluded loss per share are $426 million of losses related to our OFS business in Russia due to its classification as held for sale at the end of the second quarter.
Also included was an $85 million loss from the net change and fair value of our investment in ad-moc drilling and a $38 million loss from the net change and fair value of our investment in C3 AI, all of which are recorded in other non-operating loss. All of which are recorded in other non-operating loss.
Adjusted earnings per share, where 11 cents.
Turning to the castle of statement, free cash flow in the quarter was $147 million. Free cash flow in the quarter was impacted by lower collections, which are largely timing related, as well as a build and inventory as we get ready to execute on our large order backlog. Turning to the castle of statement, free cash flow in the quarter was impacted by lower collections, which are largely timing related to lower collections, which are largely timing related by lower collections, which are largely timing related
For the third quarter, we expect free cash flow to improve sequential rate, primarily driven by higher earnings and seasonality.
We now expect free cash flow conversion from adjusted EBITDA to be below 50% for the year due to lower cash generation from Russia.
In the second quarter, we continue to execute on our share repurchase program, repurchasing 6.7 million bakeries used class A shares for $226 million at an average price of $34 per share.
Before I go into the segment results, I would like to give you an update on our Russia operations, how these impacted our second quarter results, and how the current situation factors into our forward outlook.
As I mentioned earlier, our OFS business in Russia was classified as help for sale at the end of the second quarter. During the second quarter, we took the step to suspend our Russia OFS operations to ensure compliance with all sanctions.
As a result, our OFS Russia revenue declined 51% sequentially to approximately $60 million in the second quarter, leading to meaningful cost under absorption as we maintained our full cost base.
Looking ahead, we are required to maintain our operating costs in the country until we reach a resolution for our Russian operations.
In TPS, we have suspended work on equipment and service contracts in Russia. As a result, these projects have been removed from RPO and second quarter revenue was impacted by roughly $160 million, but with minimal impact to TPS operating margins.
For the full year, we estimate that TPS revenue will be impacted by approximately $400 million, but again with minimal impact to TPS margins in 2022.
In OSE, we have suspended all equipment and service contracts in Russia. OSE will be impacted by lower volume and cost under absorption over the next few quarters due to the removal of these projects from RPO.
Now I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward.
Starting with oil-filled services, revenue in the quarter was $2.7 billion of 8% sequentially. International revenue was up 8% sequentially led by increases in sub-Saharan Africa, Latin America, Europe and the Middle East, partially offset by lower revenues in Russia-Caspian.
North America revenue increased 9% sequentially with low double digit growth in North America land.
Operating income in the quarter was $261 million of 18% sequentially. Operating margin rate was 9.7% with margins increasing 80 basis points sequentially driven by price improvements and productivity, partially offset by impacts from Russia and cost inflation. Operating margin rate was 9.7%
Year over year, margins were up 240 basis points. Excluding Russia, OFS operating margin rate was 10.3% and OFS EBITDA rate was 18%.
As we look ahead to the third quarter, underlying energy fundamentals continue to improve and we expect to see growth in both international and North American activity as well as continued improvements in pricing.
For the third quarter, OFF's revenue should increase sequentially in the mid-single digit range. With this revenue framework, we would expect our margin rate to increase by approximately 50 to 100 basis points sequentially, which assumes that we will continue to carry between 25 to 30 million of cost per quarter related to Russia.
For the full year 2022, we continue to see an improving outlook across most major markets.
In the international markets, we expect the continuation of a broad-based recovery with industry-wide activity growth in the mid-double digits.
In North America, we expect continued activity increases with the broader markets that should experience strong growth at a 50% or greater.
Given this macro backdrop, we would expect OFS revenue to increase in the mid-double digits in 2022.
We expect EBITDA margin rates to increase over the next two quarters and to be between 19% and 20% in the fourth quarter depending on timing of the resolution of our Russia business. 22% and 20% in the fourth quarter depending on timing of the resolution of our Russia business.
Moving to oil-flow equipment, borders for the quarter were $723 million, up 6% year-over-year, driven by a strong increase in flexibles and services, partially offset by a decrease in SPS, and the removal of sub-sejourling systems from consolidated results.
Revenue was $541 million down 15% year-over-year, primarily driven by SPS, SPC, and the removal of SDS, partially offset by growth in services and flexibles.
Operating income was negative $12 million, down $40 million year-over-year, primarily driven by lower volume in the quarter. OFE's lower operating margin rate was primarily driven by lower volumes in SPS and some operational challenges on certain projects. And some operational challenges on certain projects.
Although OSE has had to navigate some challenges this year, the current level of performance is unacceptable. And as Lorenzo mentioned, we are evaluating additional ways to drive cost-outs and better operating performance, which includes more integration across OFS and OFE.
For the third quarter, we anticipate revenue to be approximately flat to down low single digits sequentially, depending on the timing of backlog conversion. We expect operating income to be below breakeven due to cost under absorption following the suspension of contracts related to Russia.
For the full year 2022, we still expect a recovery in offshore activity and project awards, which should help drive a double-digit increase in orders.
We expect OFE revenue to decline double digits, primarily driven by the deconvalidation of FDS, and OFE margins to be below break even. And OFE margins to be below break even.
Next, I will cover turbine machinery.
Orders in the quarter were $1.9 billion, up 23% year over year. Equipment orders were up 38% year over year, driven by a gas processing award in Saudi Arabia and an order for Sunir's Corpus Christi Stage 3 expansion.
Service orders in the quarter were up 14% year-over-year, driven by installation orders and growth in contractual and transactional services, partially offset by a decrease in upgrades.
Revenue for the quarter was $1.3 billion, down 21% versus the prior year.
Equipment revenue was down 30% driven by changes in project schedules and foreign currency movements.
Services revenue was down 11% year-over-year, driven by a decrease in upgrades, transactional services, and Russia-related impacts during the quarter, offset by a contractual services.
Operating income for TPS was $218 million, down 1% year-over-year. Operating margin rate was 16.8%, up 330 basis points year-over-year. Margin rates in the second quarter were favorably impacted by higher services mix.
Overall, the TPS team has navigated multiple headwinds as the year has unfolded, including Russia-related impacts, foreign currency movements, and the challenging supply chain environment. Despite these headwinds, we still feel confident in the full-year operating income outlook relative to our expectations at the beginning of the year.
For the third quarter, we expect revenue to increase mid-single digits on a year-over-year basis, driven by higher equipment volume from planned backlog conversion. With this revenue outlook, we expect TPS margin rates to be moderately lower on a year-over-year basis, depending on the ultimate mix between equipment and services.
For the full year, we still expect TPS orders to be between $8 and $9 billion driven by increasing LNG awards.
We now expect revenue growth to be roughly flat to up low single digits versus 2021. The lower revenue growth versus expectations earlier in the year by the suspension of operations in Russia, the depreciation of the euro versus the dollar, and some modest changes in project execution schedules. We expect revenue growth to be roughly flat to up low single digits versus 2021.
On the margin side, we now expect operating income margin rates to be slightly higher on a year-over-year basis, depending on the mix between services and equipment.
Finally, in digital solutions, orders for the quarter were $609 million up 13% year-over-year. DS continues to see a strengthening market outlook and delivered growth in orders across oil and gas and industrial in market.
Sequentially, orders were up 7% driven by higher industrial and power orders. As oil and gas end markets finally start to recover, the DS orders are now at the highest level since the 4th quarter of 2019.
Revenue for the quarter was $524 million of 1% year over year, driven by higher volumes in PPS and Wage 8, partially offset by lower volume in Bentley Nevada and Nexus controls.
sequentially revenue with up 11% driven by higher volume in PPS, and Lina Vada and Nexus controls partially offset by lower volume in PSI.
Operating income for the quarter was $18 million, down 28% year over year, largely driven by mix, inflation, and lower productivity. Sequentially, operating income was up 21% driven by higher volume.
Overall, DS continues to be affected by both chip and electronic component availability shortages, negatively impacting the convertibility of our backlog and our ability to drive higher versions.
As Lorenzo mentioned, we continue to make strategic and operational changes across DS designed to improve performance as evidenced by recent leadership changes and the recently announced sale of Nexus Controls to GE.
For the third quarter, we expect to see low single digits sequential revenue growth and a slight increase in operating margin rates.
For the full year, we expect DS revenue growth in the mid-single-digit range and operating income margin rates to average in the mid-single digits for the full year. For the full year, we expect DS revenue growth
With that, I will turn the call back over to Judd.
Thanks, Brian . The operator, let's open the call for questions. The operator, let's open the call for questions.
If you'd like to ask a question, please press star then 1. We ask that you please limit yourself to one question and a follow-up.
Our first question comes from James West with Evercore. Your line is open.
Hey, good morning guys.
And I just emergencyified.
So, Lorenzo Bryan, I'd love to just kind of flush out Russia. It's obviously been a lot of noise the last two quarters and something you guys are working to resolve. I'd love to... I'd love to...
kind of hear how you're thinking about the ultimate resolution here to Russia, whether it's your management buyout or outright sale, or, and then also kind of when we should expect kind of the numbers to, you know, I know you have it held for sale now, so they're a little bit out of the income statement, but when we should expect to see the numbers from Russia, you know, no longer be something we even need to talk about. Just kind of the final last flush that you will hunt on the right situation.
Yeah, James, look, you're right. There's been a lot about Russia over the last couple of years. And just to frame it up for you, when I step back and take a look at the full year, there is going to be some impact on operations. Obviously due to disruption and the suspension of our operations, but also just as you point out, just managing through this and the time commitment from dealing with the complexities of the current environment. So at the beginning of the year, we were expecting around $300 million of EBITDA for Russia.
this year. And you know, the RUSH and operations are generally quite accretive to our overall mix really due to the risk premium of operating there as well as some business mix, primarily in GPS services as well as in some OFS product lines. And look, we did generate some level of this EBDI in first quarter and quite a bit less in the second quarter. So when I think through the rest of the year, you know, the OFS is the largest product line that we have in Russian and we will...
of the year that should be done. We'll try to get it done sooner if we can. But I will point out that Maria Cloudia and the team have been able to offset some of the negative impacts from Russia in other areas across the world. And so, you know, they've done a nice job there and really their overall outlook hasn't changed versus our first quarter earnings call. So offsetting a lot of that Russia impact in other parts of the world. The biggest negative impact.
For Russia this year is likely an O. F. E. where, you know, some of the the contracts that were quite profitable profitable and sizable have now come out of the backlog. And as, you know, it takes time to get costs out of the business to to be able to deal with that. So that's where you'll see the biggest impact. And then, you know, TPS, like I talked about earlier, you'll see some revenue impact there. But roughly margin impact is is de minimus. You might see some movement across quarters in terms of timing of how.
highlighting that with the weakness in the Euro versus the dollar relative to our original plan, we'll have about two to three hundred million dollars of revenue pressure to be clear. Our costs are coming down as well, but the actual translation of income from Euro to dollars is going to be slightly lower. So that kind of rounds out how we're thinking about Russia in the full year there. So like I said, manage below for the long term.
Okay, that's very helpful. It may be just a quick follow up for me on the overall OFS business. We're at this stage, I think in the cycle where we're going through some of the tipping point, lots of countries, lots of national companies trying to ramp activity so they can ramp production into an under-spot market. So I guess maybe Lorenzo Ryan, are you?
Are you in agreement with that that there is a somewhat of an inflection point underway? And then, then, then, like, narrowly, kind of, where do you expect to see the most benefit from that in the second half and as we enter 200 passenger, 300 members of ????ikka, more or less? Yes. Yeah, I deaths. Yeah. What ihnen? What? 33.
Yeah, James, and again, as you say, and based on our conversations with our customers, internationally, we continue to expect a broad-based recovery, all major geographies really growing and growing up to double digits. As we look at Middle East, that could be one of the strongest markets in 2022 with a lot of that coming through and the second half, as we stated before, you've seen their capital budgets increase.
We also see strength in Latin America, led likely by Brazil and Mexico. And then also as we look at North Sea and Asia Pacific continuing to see solid growth in 2022. Not as strong as Middle East or Latin America, but still solid growth. And lastly, West Africa should see pretty good growth off a low base. As you look at North America, again, activity and pricing remain strong. The rate count continuing to track above our expectations.
We expect continued activity increases with the broader market sector experience, strong growth of 50% or greater. So again, as you look at the rest of 2022, barring any, again, big changes from a recessionary outlook perspective, we remain constructive.
Okay, very helpful. Thank you.
Our next question comes from Chase Mulvihill with Bank of America. Your line is open.
Thank you, everybody. Thank you. Hey, I guess the first question, you mentioned a couple of times about business realignment and opportunities to better stream on the organization. And ultimately, unlock more synergies. It seems like it's really between TPS and DS, and it also own the OFS and OFE side. So Lorenzo, I don't know if you could spend some time here, just kind of expand on exactly what you're doing here, and then make them maybe.
help us understand the potential financial impact of some of these synergies. Yeah, sure Chase, and you know, as we think about when we formed the company back in 2017, running it across four product companies made the most sense based on the size of each business, the outlook at the time. As you know, the businesses run relatively independently of each other with separate leadership and other supporting functions, finance, communications, technology. For more information visit tej Aero A
As we've evolved, the energy markets have evolved also and the outlook of some of the businesses have changed quite a bit. And so we think that there's the opportunity to manage them differently as well. And as you've seen over the years, we've made a couple of divestments, made some of them smaller. And so we conducted a broader portfolio review that could lead some further changes. And as a result, we think there are multiple ways we can drive more alignment between TPS and DS.
as well as OFS and OFE that can drive synergies between the businesses. Also, you'll recall that last year we started saying we were evaluating our corporate structure across the two broad business areas of IET and OFSE, and we've been conducting an exhaustive and deep analysis. So as part of this exercise, we've been looking at a number of organizational structures that could make sense. So, you know, in summary, you know, we've got several things that we're evaluating. We think there are synergies as we go forward to drive better productivity.
and efficiencies across the organization and we know what needs to be done. Yeah, hey Chase, on the financial side I'd say it's probably, it would be a bit premature for me to give you a range at this point.
there's definitely opportunity there and we see synergies. You know, we're still working through that. I feel good about where we are and what we'll be able to drive there. And you know, I talked about earlier some more synergies with OFE and OFS as we look to make OFE more profitable. So look, we'll update you guys when we feel like we've got a solid number that we can talk with you about.
Okay, all right, perfect. Follow up, just want to pivot over to Europe and the energy crisis there. It seems like there's a lot of worries around winter and soaring energy prices and the potential for some rationing of supply in the winter. So really, I guess maybe two questions for you. Number one is, could you help us understand your European manufacturing exposure and how energy is?
You know, your manufacturing footprint is across Europe . And then number two, you know, what steps are you taking to mitigate the potential power rationalization that could happen in the winter in Europe this year? Yeah, Chase. And I'll cover both of them as we go through this because generally we don't see a major risk to operations imminently, but we're continuing to monitor the situation carefully and also putting in place contingencies in the event of disruptions or
We've got enough contingencies in place as we go forward and it shouldn't be a major factor. Yeah, and Chase, I'd say the one other thing that we've been working on for quite some time, so it's not like we just started today, is we've been working with our supply base, and we've actually shifted some supply out of Europe for energy intensive supply, like castings and forgings, and where we still have that supply in Europe . We are working with the supply base to make sure we understand. We are working with the supply base to make sure we understand.
you know, what risk is there and I have to give kudos to the supply chain team for working through that for, you know, the last the last few quarters.
Very good to hear. Thanks for all the color. I'll try to deliver.
Our next question comes from Ron Jairam with JP Morgan. Your line is open. Your line is open.
Yeah, good morning. My 1st question is just on LNG. You guys continue to highlight 8 to 9 billion of inbound orders.
in TPS for 2022. I was wondering if you could talk about visibility in the second half and into 2023 and if you're seeing more interest in some of the modularized solutions that you have put forward with Venture Global.
Yeah, definitely a rune and look at you. Think about the leading edge indicators for LNG. They remain extremely positive and based on our conversations with customers, the pipeline of opportunities has continued to grow since the first quarter call. If you look at overall growth in projects, we are seeing an audible trend towards modular LNG designs as well as fast LNG concepts. And given the success that we've demonstrated with venture global and the speed to market of the modular ramp,
from a long-term perspective. So overall, we still feel comfortable with the 100 to 150 MTPA of FIDs over the course of the next two years and also continuing FID activity in 24, 25. Just to frame it up this year so far, we've already booked 27 MTPA with the awards of VG Placcom and Shinnere, Corpus Christi Stage 3 and also some other small award for NFE. So for the year, feel good about the 8 to 9 billion of orders to TPS.
And also looking out into 2023, again, consistent with what we said before, feels good about $89 billion of orders for TPS. It feels good about $89 billion of orders for TPS.
Great. And maybe one from Brian . I'm trying to better understand within DS.
maybe the disconnect between some of the order strength that you talked about and just overall profitability converting that those orders into into cash flow.
Yeah, Roon, the biggest thing we have going on in DS right now that's preventing us to be at the levels of conversion that we would normally be is really around chip and component shortages. So that's really impacting convertibility of the backlog and negatively impacting delivery schedules as well as our ability to drive more productivity with more volume flowing through the business. We did see a little bit of pressure from cost.
on time delivery from our suppliers of electronics and chips to us. And it's been stable at that 60 percent for some time. The problem is the P80 confidence interval, in terms of the lateness, is more than double from third quarter of last year, from 11 days to 25 days. So, on top of that, lead times have gone up by two and a half times. So planning and working through that volatility is really what's been pushing the team a bit in terms of things being laid into the factory. We've been running engineering programs.
So, team is all over it, working it a lot. We're just in the mix of what's going on in the broader industry here. And I'd say working everything we can in our control. The good news, as you point out, is demand is pretty strong. Orders are back up to high levels. We're not seeing any cancellations. Customers really want the product and services. So, everybody is on deck to work the supply chain issues with the electronics.
all over it, working it a lot. We're just in the mix of what's going on in the broader industry here. And I'd say working everything we can in our control. The good news, as you point out, is demand is pretty strong, orders are back up to high levels. We're not seeing any cancellations. Customers really want the product and services. So everybody is on deck to work the supply chain issues with the electronics. Okay, thanks a lot, Brian .
Our next question comes from Mark Bianchi with Cohen. Your line is open. Your line is open.
Thank you. I think if I've got my math correct here, it seems like...
fourth quarter could be sort of bracketing consensus depending on what happens with OFS in Russia. Maybe if you could comment on you know whether that that conclusion is correct and what gives you confidence in kind of that that significant increase from third quarter to fourth quarter.
Yeah, Mark, look, your math is certainly in the right ballpark for what we see as a potential for fourth quarter. I'd say a couple of things that underpin our view of the quarter. OFS is quite strong. Even with the Russian implications, you saw the performance in the quarter was pretty solid. We see pretty strong growth there, especially internationally where we've got obviously a
or any significant issues coming from customers that would impact that delivery schedule today. And look, those things really offset the weakness, really, and OFE because of the Russia contracts being suspended and coming out of our POs. So look, we understand what's got to happen, the teams are aligned to get it done, but it's not outside the realm of what we've seen before in terms of the jump in.
Yeah, I mean, again, it basically comes down to the mix between equipment and services. You're right. You'd usually do see an uptick in fourth quarter because of the services mix coming in strong. Just given the timing of what was laid out from a schedule in the backlog, and then some of the pushes that have come out of this quarter into later in the year, we are anticipating a pretty large equipment number in the fourth quarter that will mitigate some of that upside that you see from a stronger service.
Iím Scott Gruber with CIDI.
Yes, good morning. I wanted to turn back to digital. Brian , you mentioned how your efforts at managing a tight supply chain will begin to bear fruit here. But are you also seeing the supply chain itself improve? We're starting to hear about more general chip availability. Are you seeing improvement in the availability of the chips that you order? If so, is there a line of sight to seeing a normalization of delivery timing in digital?
and standardized some things so there's more availability and would anticipate a better overall environment in this space in 23. When I look at, you know, sort of your question around broader supply chain, you know, and really not only in DS but outside of DS, things have, you know, been relatively stable. But there's definitely some tension in the system in a, you know, in a couple places. I'd say that the biggest challenge for us
continues to be in chemicals where we're seeing shortages and especially chemicals. Commodity chemicals are pretty stable now and I'd say almost back to normal in terms of how we're planning and operating there. You know, you continue to see pricing, you know, for metals like copper, steel, nickel, stabilizing and some have actually gone down, but are still elevated versus 21, but manageable. And look, we've been working price hard to make sure we can offset that. And then you know, I talked a little bit about what was going.
And as I said, we've moved some supply to other parts of the world where we already had supplier set up and worked with for a long time. But diversifying that to get at some of those impacts. So, stabilizing, I think is the right term there and just back to the chips where we think we'll see some relief in the second half, but looking forward to a better twenty three.
Got it. And turning to the service side of TPS, you're just giving out high LNG prices have been, have you seen much deferral of maintenance within TPS? And if you are seeing this a bit, how long could this last? I'm asking because obviously LNG prices could sustain at a very high level through the winter. I'm curious if there is a drag on.
on service demand in TPS, could that actually extend into 23, or is this just not possible from an operational risk perspective?
Yeah, definitely. And again, on the contractual side, again, we're seeing the anticipation of the outages and the customers continuing with the contractual side on transactional services. Customers are looking to defer the maintenance, as you say, to produce the higher commodity prices. That's just being deferred though, and they will have to catch up. So that comes in later on. And again, as you go through the actual cycle, you'd see that normalizing itself.
Yes, got just to add one thing on the contractual services side. You have to remember with the guarantees that we have in place in the bonus mallet structure. The changes in schedule really have to happen with an uncertain window, especially around life-limited parks and inspections and things for those, you know, guarantees to continue to hold. So yes, while prices are high and you're going to have to have some outages, it's definitely the right risk call to make sure the...
you know, equipment is maintained and is running because again, an unplanned outage is much worse than planned outage. So look, we work proactively with customers on the schedules, but we haven't seen any significant movements there. And it's that the contracts are pretty good from that regard. And it's that the contracts are pretty good from that regard.
That appreciate the call. Thank you.
Our next question is,
Your line is open. Okay. We'll start with Goldman Sachs.
Thank you, team. I know we're at the top of the hour, so I'll be quick here with two questions. The first is, what is your latest thoughts around return of capital? The company did buy back stock in the second quarter at a higher price than where we are right now, but of course you have to weigh that return of capital with a slightly lower free cash flow outlook that you talked about on the call and economic uncertainty. So any color there? And then the second question is,
Just your latest thoughts on closing the sum of the parts gap and whether it makes sense to be a combined business or to ultimately break the businesses apart. So two strategic questions. Thank you.
Yeah, I'd say first on capital allocation, look, our intention to return 68% of our free cash flow back to shareholders through dividends and buybacks is unchanged. And, you know, during the first 6 months of the year, we have bought back 462M dollars of our share. So roughly about 75 dollars per month. We talked about what the average price was. It did be the WAP in the quarter. So, you know, happy about that. And I would say that
you know, will probably continue roughly at the same level that you've seen here in the third quarter as the final tranche of, you know, the GE sell down happens. And then as we've said, consistently, we'll once that is done, we'll take a step back and relook things for, you know, free cash flow, we talked about the impact of, you know, Russia in the quarter, but fundamentally, no real change to the free cash flow generation capabilities of the portfolio. So I, again, I see this as a short term discontinuity, something that we can manage through long term, so no real change.
I always talked about the scale and size of the combined organization and how that's a positive for growth and profitability. The current environment that we're operating in certainly makes us appreciate the scale, diversity, and financial strength of the company. So look, we'll continue to weigh the benefits around scale with our customers, the same customer base, technology, overlap that drive a better cost or competitive position. And obviously the...
and free cash flow for shareholders is what's going to drive the decision.
Thank you.
That's all the time we have for questions, like to turn the call back over to Lorenzo Seminelli for Closet Mark.
Thanks and thanks to everyone for joining our earnings call today. Just before we end, I want to lead you with some closing thoughts. Despite some of the challenges this quarter, we continue to reign optimistic on the outlook across both of our core business areas, given the need for energy sustainability, security and affordability. And affordability.
As Baker Hughes, we continue to execute on our long-term strategy. Our portfolio is well positioned to benefit from a strong LNG cycle and a multi-year upstream spending cycle.
We'll also continue to invest in our new energy transition, activities and industrial initiatives, we'll also return in 60 to 80% of free cash flow to shareholders. So thanks a lot for the time and look forward to speaking to you all again soon. Operating you may close the call.
Thank you, the session, thank you, the session, you may now have everyone have a great day.
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