Q2 2022 Baker Hughes Co Earnings Call

Speaker 1: You.

Speaker 3: 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 4: Thank you. Good morning everyone and welcome to the Baker Hughes second quarter 2022 earnings conference call. Here with me are our chairman and CEO Lorenzo Simonelli and our CFO Brian Worrell. The earnings release we issued earlier today can be found on our website at BakerHughs.com. As a reminder, during the course of this conference call, we will provide forward looking statements. These statements are not guaranteed to feature performance and involve a number of risks and assumptions.

Speaker 4: Please review our SEC filings in website for discussion of the factors that could cause actual results to differ materially. As you know, reconciliation of operating income and other gap to non- GAAP measures can be found in our earnings release. With that, I'll turn the call over to Lorenzo. Please review our SEC filings in the website for discussion of the factors that could cause actual results to differ materially.

Speaker 5: Thank you, Dr. Good morning, everyone, and thanks for joining us. Our second quarter results were mixed as each front company navigated the different set of challenges ranging from component shortages and supply chain inflation to the suspension of our Russian operations.

Speaker 5: While OFS and CPS are managing through the current situation fairly well, OFS and MDS have both experienced more difficulty.

Speaker 5: 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 5: On the other hand, due to years of underinvestment 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 5: 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 5: 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 5: It has been a significant increase in long-term LNGOFT take agreements in the US, totaling over 35 MCPA during the first half of 2022. The LNGOFT is a very significant increase in long-term LNGOFT take agreements in the US, totaling over 35 MCPA during the first half of 2022.

Speaker 5: For comparison, yesterday, LNG contracting activity is three times greater than the average annual US contracting volume going back to 2015.

Speaker 5: This sharp increase reflects the growing importance of natural gas and LNG as governments rebalance their priorities between sustainability, security and affordability.

Speaker 5: We believe that solving this energy trilemma will be another long-term positive for natural gas. We believe that solving this energy trilemma will be another long-term positive for natural gas. We believe that solving this energy trilemma will be another long-term positive for natural gas. We believe that solving this energy trilemma will be another long-term positive for natural gas.

Speaker 5: 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 5: Overall, we remain very positive on the Outlook's financial gas.

Speaker 5: We also believe that a significant increase in natural gas and LNG infrastructure investment is required over the next 5 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 5: Against this uncertain macro backdrop, Baker Hughes is preparing for all scenarios and will continue to execute on our long-term strategy.

Speaker 5: 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 5: 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 5: 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 our policy of returning cash to shareholders.

Speaker 5: In addition to a strong backlog that affords cash flow visibility, we have best-in-class balance sheets that allows us to invest opportunistically, either through share buybacks or tucking investment opportunities.

Speaker 5: In either scenario, Baker Hughes is well positioned to create value for shareholders.

Speaker 5: From an operational and strategic perspective, we were active over the first half of the year.

Speaker 5: Executing on a number of exciting tucking acquisitions and new energy investments such as Mosaic, NetPower, and HIF Global.

Speaker 5: which position us in key technologies for the future.

Speaker 5: We have also been focused on setting up internal commercial structures like CTS and IAM, which will help us to capitalize on opportunities in the energy transition and industrial areas.

Speaker 5: 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.lles

Speaker 5: As the energy markets continue to evolve, it is becoming clearer that aligning across these two core areas make strategic sense.

Speaker 5: We are focusing on ways to simplify our process and systems.

Speaker 5: with a distinct focus on productivity and efficiency across our operations.

Speaker 5: As we look to drive additional synergies between both TPS and DS and OFS and OFC.

Speaker 5: 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 5: Now I'll give you an update on each of our segments.

Speaker 5: In all field services, activity levels continue to trend positively in both the international and North America markets. And net pricing is being achieved because multiple product lines.

Speaker 5: We also see improving visibility for growth in some key areas into 2023 and beyond.

Speaker 5: In international markets, broad diversified growth continues with recent strengths in Latin America, West Africa, and the Middle East.

Speaker 5: 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 2023.

Speaker 5: 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.

Speaker 5: In North America, activity and pricing remain strong, with the Red Count continuing to track above our expectations.

Speaker 5: 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 5: 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 5: During the second quarter, the suspension of our OFS operations in Russia accelerated quicker than anticipated, as we move closer to reaching an agreement to sell our OFS operations in the country. As we move closer to reaching an agreement to sell our OFS operations in the country.

Speaker 5: Outside of the impact from Russia, our OFETs business executed well in the second quarter with improvements in our production chemicals business.

Speaker 5: 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 5: Going forward, we expect to continue to drive margin improvement despite the cost had wins from the suspension of our operations in Russia.

Speaker 5: Moving to TPS, the second quarter represented another solid performance in orders, where we remain on track to generate $8 to $9 billion in orders in 2022. We have an optimistic view of 2023.

Speaker 5: 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 5: We continue to believe that we are at the beginning of another constructive LNG cycle, particularly for U.S. projects.

Speaker 5: including the FID to Vichy's Blackamond Phase I at the end of May, and Shaneer's FID of Corpus Christi's stage free in June . We continue to expect a hundred to 150 MCPA of Ellen GFID's over the next two years with additional FIDs in 2024 and 2025. 2. Part and cathKevin's Church 5 at Orange Pu',

Speaker 5: During the 2nd quarter, we were pleased to be awarded an order to provide 7 mid scale LNG trains to support the stage free expansion project of Cheniere's Corpus Christi Liquefaction Facility.

Speaker 5: Each train is comprised of 2 electric motor driven compressors, producing approximately 1.5 of LNG, totaling 10.5 of production capacity.

Speaker 5: This award builds on the strong relationship between Baker Hughes and Shineas since 2012. As we currently provide all the refaction equipment for Shineas' Corpus Christi and Sabenpast projects. The Corpus Christi and Sabenpast projects.

Speaker 5: 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 fuel project.

Speaker 5: The largest non-associated gas field in the country.

Speaker 5: 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 5: Also during the quarter, TPS booked an award from Tellurian to provide electric powered integrated compressor line technology and turbo machinery equipment for a natural gas transmission project in Southwest Louisiana.

Speaker 5: The project is expected to supply upwards of 5.5 billion cubic feet of natural gas daily with virtually no emissions. The project is expected to supply upwards of 5.5 billion cubic feet of natural gas daily with virtually no emissions. The project is expected to supply upwards of 5.5 billion cubic feet of natural gas daily with virtually no emissions. The project is expected to supply upwards of 5.5 billion cubic feet

Speaker 5: 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 5: This order marks the first time Baker Hughes will install its ICL decarbonization technology for pipeline compression in North America.

Speaker 5: During the quarter, CPS's CTS organization continues to support the growth of the hydrogen economy. The CPS continues to support the growth of the hydrogen economy.

Speaker 5: TPS secured a contract with air products to supply advanced sing-ass and ammonia compression technology for the production of green ammonia for the Neom-Carbon-3 Hydrogen and ammonia facility and Saudi Arabia.

Speaker 5: This sort of builds on our hydrogen collaboration framework with air products and leverages back in here's broad experience and references to the hydrogen supplying syngath and ammonia compressors.

Speaker 5: 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 5: At a macro level, trends in the subsidy and offshore markets continue to improve and should have solid order momentum over the next couple of years.

Speaker 5: Despite recent commodity price volatility, we believe that a solid pipeline of deep water opportunities will continue to develop across a few key markets.

Speaker 5: importantly we continue to see OFE gain momentum outside of Brazil with its offshore flexible pipe technology securing several large contracts with more ult estimates of the Americas and the Middle East.

Speaker 5: OFE 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 5: OSP booked their highest orders ever in flexibles in the second quarter.

Speaker 5: And over $600 million in flexible orders for the first half of the year in 2022. Also a record.

Speaker 5: While activity and project awards are improving offshore, we recognize that we have work to do in OSE to drive operating margins back to an acceptable level.

Speaker 5: 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 5: 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. on Censusadd Cardinal over 200 sources.opp motivational postings. Right now, we're starting. Government between 525 each Pangriote to Blowup for more progress on the highway, in order to be more economical response, breeze PROCEDOira for the city, thanks a bunch of marketing industry there. We're focused on para taking part of the OFSE Business want get to the very closely.

Speaker 5: 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 5: During the quarter, DSO continued interest for its condition monitoring systems and services in the industrial sector.

Speaker 5: Bentley Nevada secured a contract to upgrade the machinery protection systems for critical machines at a steel plant in the Middle East.

Speaker 5: 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 5: CS also gained traction with its emissions management portfolio of technologies.

Speaker 5: Following an MOU signed in February , DS secured a contract with PetroSafe for the first deployment of FLARE IQ technology for refining operations in Egypt.

Speaker 5: The deployment will be implemented at the APC refinery in Adasondir, supporting Egypt's low-carbon strategy and tackling emissions in the sector as the country prepares to host COP 27 in November .

Speaker 5: We also recently reached an agreement for the sale of our Nexus controls product line to generate electric.

Speaker 5: G will continue to provide baking shoes with G Mark's control products currently in the Nexus Controls portfolio.

Speaker 5: and Baker Hughes will be the exclusive supplier and service provider of such G-Products for its oil and gas customers control needs.

Speaker 5: The transaction is expected to close in the second quarter of 2023.

Speaker 5: As we have mentioned in the past, we continue to make strategic and operational changes across the S, including recent leadership changes in Bentley Nevada during the quarter.

Speaker 5: We're also conducting a review of the broader DS portfolio.

Speaker 5: taking actions to ensure we have the right business composition to serve our customers and drive returns.

Speaker 5: 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 5: 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 5: This report provides an expanded view of our environmental, social, and governance performance and outlined our corporate strategy and commitments for a sustainable energy future.

Speaker 5: We again lowered our emissions footprint and expanded our emissions reporting.

Speaker 5: We achieved an 8% reduction in our scope 1 and 2 carbon emissions in 2021 versus 2020 and a 23% reduction in 21 compared to the 2019 baseline.

Speaker 5: We also expanded reporting of scope-free emissions across our value chain to include emissions from several new categories.

Speaker 5: I'm also pleased to say that in 2021, we launched CarbonOut, an internal company-wide initiative to take carbon out of our operations and meet our pledge to achieve a 50% reduction in emissions by 2030 and net zero emissions by 2050.

Speaker 5: We clever expanded our programs and processes to embed diversity, equity, and inclusion into our operating process.

Speaker 5: 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. And reconcile pay equity across the company.

Speaker 5: Overall, fake is used as 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.

Speaker 5: Our corporate responsibility report demonstrates our progress in many of these areas.

Speaker 5: Baker Hughes is well positioned to drive energy efficiency gains to meet global energy demand and support broader decarbonization objectives.

Speaker 5: With that, I'll turn the call over to Brian .

Speaker 5: Thanks Lorenzo. I'll begin with the total company results and then move into the segment detail.

Speaker 5: Fortress for the quarter were $5.9 billion down 14% sequentially driven by TPS and OFE, partially offset by an increase in digital solutions and OFE. a

Speaker 5: Year over year, orders were up 15% driven by increases across all four segments. Year over year, orders were up 15%

Speaker 5: We are pleased with the order's performance in the quarter following strong orders performance in the last two quarters.

Speaker 5: 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 and the increase in the RPO was driven by the suspension of our operations in Russia and foreign currency exchange

Speaker 5: 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.

Speaker 5: Revenue for the quarter was $5 billion, a 4% sequentially driven by digital solutions, OFS and OSE, 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. about the total loan eating schedule was $391 million. The only accident was that this apples fell vague yesterday. That is because of marc?? administrative payment. It was not just a good, but a good in-? escalation was delayedost 4 months. It was alreadyINSAnd and decreased and is Croatia physically ?enig Llakstraenfilaha So, now for details, Advanced broadcasting,

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. And the

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 of $651 million of 4% sequentially and up 6% year-to-year. Adjusted EBITDA rate was 12.9% of 100 basis points year-to-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 was 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 when 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 were 11 cents.

Turning to the cash flow 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 clock.

For the third quarter, we expect free cash flow to improve sequentially, 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 Bakers 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. This is an update on 24 studies.

As I mentioned earlier, our OFS business in Russia was classified as held 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 OSS Russia revenue declined 51% sequentially to a 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 dollars, 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 your 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 of 8% sequentially led by increases in sub-Saharan Africa, Latin America, Europe , and the Middle East, partially all set 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, up 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, OSF 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 market set to 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.

Moving to oil field equipment, borders for the quarter were $723 million, up to 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. OSE'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-out 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 break even 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 deconfalligation 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 upgrade.

Revenue for the quarter was $1.3 billion down 21% of 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 contractual services.

Operating income for TPS was $218 million down 1% year every year. Operating margin rate was 16.8% of 330 basis points year every year. Margin rates in the second quarter were favorably impacted by higher services mix. Operating impact 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 environments. Despite these headwinds, we still hold confident in the four-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 during by higher equipment volume from planned back-lot 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 off 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. And some modest changes in project execution schedules.

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 markets.

Sequentially, orders were up 7% driven by higher industrial and power orders. As oil and gas end markets finally start to recover, DS orders are now at the highest level since the 4th quarter of 2019.

Revenue for the quarter was $524 million of 1% year every year, driven by higher volumes in PPS and Wage 8, partially offset by lower volume in Bentley Nevada and Nexus controls.

Sequentially, revenue was up 11% driven by higher volume in PPS, Bentley Nevada, 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...

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. The average in the mid single digits for the full year.

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 one. 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.

Hi, James. Hi, Jay. Hi, Jay.

So, Lorenzo, Brian , 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...

kind of hear how you're thinking about the ultimate resolution here to Russia, whether it's a management buyout or outright sale or, and also kind of when we should expect kind of the numbers to, you know, I know you have a help 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 should talk about just kind of the, kind of the final last flush if you will hunt on the right situation.

where we were expecting around $300 million of EBITDA for Russia this year. And, you know, the Russian 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 TPS services, as well as in some OFS product lines. And, look, we did generate some level of this EBITDA 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...

You know, OFS is the largest product line that we have in Russian, and we will see cost under absorption there with virtually no revenue generation, roughly about 25 to 30Million dollars per quarter. That will remain in place until we get resolution of a transaction, whether it's an outright sale or management buyout, you know, look, we're continuing to work that and, you know, James, we're

a product line that we have in Russian, and we will see cost under absorption there with virtually no revenue generation, roughly about 25 to $30 million per quarter, that will remain in place until we get resolution of a transaction, whether it's an outright sale or a management buyout, look what continuing to work that. And James, we're, you know, and James, we're, you know,

working hard on things that are in our control and trying to get those done quickly for some of its out of our control so for planning purposes i'm thinking by the end of the year that should be done will try to get it done sooner uh... if we uh... if we can but i will point out that Maria cloudy i and the team have been able to offset some of the negative impacts uh... from russia in other areas um... across the world and so you know they've done a nice job there and really they're overall outlook hasn't changed

versus our first quarter earnings call. So off setting a lot of that Russia impact in other parts of the world. The biggest negative impact.

For Russia this year is likely in OFE, where some of the contracts that were quite profitable and sizable have now come out of the backlog. And as you know, it takes time to get cost out of the business to be able to deal with that. So that's where you'll see the biggest impact. And then TPS, like I talked about earlier, you'll see some revenue impact there, but roughly margin impact is diminimous. You might see some movement across quarters in terms of timing of how...

It's worth 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. That kind of rounds out how we're thinking about Russia in the full year there. 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. And so I guess maybe Lorenzo or Brian , are you in agreement with that, that there is a somewhat of an inflection point underway? And then secondarily, kind of where do you expect to see the most benefit from that in the second half and as we enter 2023?

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, North, sea and Asia Pacific continue to see solid growth in 2022. Not as strong as Middle East for Latin America, but still solid growth. And lastly, West Africa should see pretty good growth or for low base. As you look at North America, again, activity and pricing remain strong. The rig count continues to track above our expectations. And then...

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. Thanks guys.

Our next question comes from Chase Mulvihill with Bank of America. Your line is open. Thanks for your time.

Good morning everybody. Hey, I guess the first question, you know, you mentioned a couple of times about, you know, business realignments and opportunities to better streamline the organization and ultimately unlock more synergies. It seems like it's really kind of between TPS and DS and then also on the OFS and OFD side. So, Lorenzo, I don't know if you could spend some time here and just kind of expand on, you know, exactly kind of what you're doing here and then 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. And, as you know, the businesses run relatively independently of each other with separate leadership and other supporting functions, finance, communications, technology. In 2014, EG&E thought that the future ofave for collective infrastructures, to further update our Agile and partner initiatives. With that, our next company which is actually,

As we've evolved, the energy markets have evolved also, and the outlook for 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 to some further changes. And as a result, we think there are multiple ways we can drive more alignment between TPS and DS. In fact, bring some changes before we move back into this whole point. And let's take a quick dive into the Why do we see Homecoming IMG? How are the phoenix fibers illuminated by the candle? And how canritons be used with their properly directed spear?

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 IIT and OFSE, and we've been conducting an exhaustive and deep analysis. So as part of the text size, we've been looking at a number of organizational structures that could make sense. So, in summary, 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.

Perfect, perfect. Follow up. Just want to pivot over to kind of European, European energy crisis there. It seems like that there's a lot of worries around winter and soaring energy prices and the potential for some rationing of supply and the winter. So really, I guess maybe two questions for you. Number one is, could you help us kind of understand your European manufacturing exposure and how energy it?

intensive your manufacturing footprint is across Europe ? And then number two, what steps are you taking to mitigate the potential power rationalization that could happen in the winter in Europe this year?

Yeah, Jason, 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 power outages to facilities. Most importantly, we use most of the gas within our TTS business through the string tests. We've got a number of those scheduled during the winter and we're looking at ways to proactively manage that.

I think it's important to remember that we are considered a critical industry and as the designation we had during the pandemic period, we'll be protected in the events of any gas shortages. And so we feel that we've got enough contingency in place as we go forward. And it shouldn't be a major factor. Yeah, and Chase, I'd say the 1 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 what risk is there and I have to give kudos to the supply chain team for working through that for the last few quarters.

Very good to hear thanks for all the color. I'll turn it over.

Our next question comes from Ron Jiram with JP Morgan. Your line is open. Your line is open.

Good morning. My first question is just on LNG. You guys continue to highlight eight to nine billion inbound orders. We have inbound orders. We have inbound orders.

in TPS for 2022. I was wondering if you could talk about visibility in the second half and end of 2023. And if you're seeing more interest in some of the modular solutions that you have put forward with venture global.

Yeah, definitely a rune. And look as 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 a notable 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 design, this presents a growing opportunity. I think as you look at other indicators, just look at the activity on long-term supply agreements. I mentioned in the prepared remarks that we've seen over 35 MTPA contracted on the long-term agreements so far this year, and that's 3 times greater than the average for the entire year going back to 2015. Another good data point, Conoco agreeing to an investment in...

small award for NFE. So for the year, feel good about the 8 to 9 billion of orders for TPS. And also looking out into 2023, again, consistent with what we said before, feel good about 8 to $9 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've talked about in just overall profitability converting that those orders into cashflow.

Yeah, Arun, 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 inflation as well as a little bit of labor inflation, but we've been pushing through pricing increases to offset those pressures. And if I take a step back and look at what's happening with the chip and component shortages, we've been working this for some time. And our on-time delivery rate, particularly in Nevada, to our customers, we think trough to this quarter.

But to give you perspective, Arun, right now we're sitting at 60% on time delivery from our suppliers of electronics and chips to us. And it's been stable at that 60% for some time. The problem is the P80 confidence interval as in terms of the lateness is more than double from third quarter of last year, from 11 days to 25 days. So, you know, 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 put...

the core issue is in DS and once we are through that, you'll see the profitability of this business improve because it's at higher gross margins. 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...

what happens with OFS in Russia. Maybe if you could comment on, you know, whether that conclusion is correct and what gives you confidence in kind of that significant increase from third quarter, 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. One, OFS is quite strong. Even with the Russia 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 fourth quarter.

Okay, great. And then I guess just kind of zeroing in on TPS a little bit more for fourth quarter. It would appear that the margin rate is gotta be sort of flatish from third quarter to fourth quarter there, which to your point usually get a pretty strong improvement in the fourth quarter. Could you just unpack that a little bit for us?

Yeah, Mark, again, it basically comes down to the mix between equipment and services. You're right, you 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.

comes from Scott Gruber with City, your line is open.

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? And we're starting to hear about more, you know, general chip availability. Are you seeing improvement in the availability of the chips that you order? And it's so...

Is there a line of sight to see a normalization of deliberate timing and digital and when could that happen? Yeah, look, I see, you know, talking specifically about chips first. I haven't seen a lot of relief yet as we talked about here in terms of what was going on with late deliveries, but you know, we do believe based on what our suppliers are telling us and how we're working with them and what we're hearing from others that we should start to see some relief in the second half. A lot of that's driven by these programs that I've...

in the system in a couple places. I'd say that the biggest challenge for us continues to be in chemicals where we're seeing shortages and specialty 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 continue to see pricing 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 on in Europe with energy pricing and, you know, some availability around alloys and pig iron and how we've been diversifying supply-based there. And I'd say the big thing we're working through there, Scott, is just really around lead times and validity of quotes from suppliers. As we've got all these, you know, orders coming in or, you know, speccing out orders for TPS, we want to make sure that we're protected on that input cost side so we've tightened our order validity as well to deal with that.

It's just given how 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. So I'm curious if there is a drag 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 high 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 service beside you after.

with the guarantees that we have in place in the bonus mallet structure. The changes in schedule really have to happen with the certain window, especially around life-limited parks and inspections and things for those guarantees to continue to hold. So yes, while prices are high and you're gonna have to have some outages, it's definitely the right risk call to make sure the equipment is maintained and is running because again, an un...

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, what is your latest thoughts on return of capital?

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, you know, I 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 six months of the year, we have about back $462 million of our shares. So roughly about $75 per month. You know, we talked about what the average price was. It did be the draft in the quarter. So, you know, happy about that. And I would say that.

You know, we'll probably continue roughly at the same level that you've seen here in the third quarter as the final tranche of the GE sell down happens. And then as we've said consistently, once that is done, we'll take a step back and relook things for free cash flow. We talked about the impact of Russian, the quarter, but fundamentally no real change to the free cash flow generation capabilities of the portfolios. So again, I see this as a short term that's just got new to something that we can manage in the long term, so real change there from us.

from a capital allocation standpoint. And then look, in terms of the company and how we are structured, we've talked about some of the steps that we have taken to better align the businesses and drive some of the synergies there. As I said, we're working through that and I'll update you on those synergies that we see from some closer alignment. But look, we've always talked about the scale and size of the combined organization and how that's a positive for growth.

profitability. You know, the current environment that we're operating in certainly, you know, makes us appreciate the scale, diversity, and financial strength of the company. So look, we'll continue to weigh, you know, the benefits around, you know, scale with our customers, the same customer base, technology overlaps that drive a better cost or competitive position, and obviously the operational benefits of sharing infrastructure around the world and what that delivers for the

That's all the time we have for questions. I'd like to turn the call back over to Lorenzo Simonelli for closing remarks.

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. Thank you. Thank you.

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, while also returning 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. Operator, you may close the call.

Thank you. This does conclude the program. You may now ask everyone, have a great day.

The conference will begin shortly. To raise your hand during Q&A, you can dial Star One.

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