Q3 2022 Baker Hughes Co Earnings Call

October 19, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Good day, ladies and gentlemen, and welcome to Baker Hughes Company third quarter 2022 earnings call. At this time all participants are in a listen only mode. Later, we 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. Jud Bailey, Vice President of Investor Relations, Sir you may begin.

Thank you good morning, everyone and welcome to the Baker Hughes third 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 Baker Hughes Dot Com as a reminder, during the course of this conference call. We will provide forward looking stay.

These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review, our SEC filings and website for a discussion of the factors that could cause actual results to differ materially as you know reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release with that I will turn the call over to Lorenzo.

Thank you Jonathan good morning, everyone and thanks for joining US we were generally pleased with our third quarter results with strong performance in RFS, while GPS successfully managed multiple challenges. We also saw strong orders performance with continued momentum in our fee as well as GPS as I am.

Mentioned during our second quarter earnings call. The macro outlook has grown increasingly uncertain global economy is dealing with the strongest inflationary pressures since the 19 seventies.

Rising interest rate environment, and sizable fluctuations in global currencies.

Despite these economic challenges, we remain constructive on the outlook for oil and gas and believe that underlying fundamentals remain supportive of a multiyear upturn in global upstream spending.

Operators around the world have shown a great deal of financial discipline, which we expect to translate into a more durable upstream spending cycle, even in the face of an unpredictable commodity price environment.

And your market, we expect continued price volatility as demand growth likely cell phones under the weight of high interest rates and the inflationary pressures. However, we expect supply constraints and production discipline to largely offset any demand weakness.

This should support price levels that are conducive to driving double digit upstream spending growth in 2023.

And the natural gas and LNG market prices remained elevated as a multitude of factors increased tensions on an already stressed global gas market Euro.

Europe searching demand for LNG has re directed cargoes from other regions and created an exceptionally tight global market that could get even tighter in 2023.

This situation has resulted in record high LNG prices, but has also slowed down switching from coal to gas and some developing countries.

We believe that significant investment is still required over the next five to 10 years to ensure natural gas its position as a key part of the energy transition. However, while the current price environment is attractive for new projects. This is also a pivotal time for the industry with price related demand destruction occurring and some mark.

<unk> and LNG developers facing inflationary pressures and higher cost of capital for new projects.

As a result, we believe the landscape may be shifting in favor of established LNG players with the scale diversity and financial strength to navigate the risks and uncertainties.

Those with brownfield projects and projects that utilize faster to market modular deadlines, maybe particularly advantaged in the coming years.

On the new energy front recent policy movements in Europe , and the United States are likely to help support a significant increase in clean energy development.

In the U S. The inflation reduction act should be particularly impactful and accelerating the development of green hydrogen.

<unk> and direct air capture.

While we have not changed our expectations for the ultimate addressable market sizes in these areas.

Practice tax incentives could accelerate development ahead of previously expected forecast. We also believe that the bill will create favorable economic conditions for our portfolio of new energy investments.

Given the dynamic macro backdrop Baker Hughes is focused on preparing for a range of scenarios and executing on what is within our control.

Last month, we announced the restructuring and re segmentation of the company into two reporting segments, our FSC and IEP phase III segmentation will simplify and streamline our organizational structure with at least $150 million of cost out and a 25% reduction in the executive management team.

These changes will sharpen our focus improve operational execution and better position Baker Hughes to capitalize on the quickly changing energy markets.

This new structure will elevate new leadership, while also creating better flexibility and economies of scale across the two business segments.

Accordingly, we expect these changes to increase shareholder value and improve the long term optionality and growth opportunities for Baker Hughes.

Markets and customers continue to evolve.

In parallel we continue to invest in Baker Hughes portfolio through early stage, new energy investments and tuck in M&A.

In addition to the investments in early stage technologies like mosaic net power and Haf Global earlier this year, we announced several strategic acquisitions in the first quarter that will complement our current portfolio and enhance our strategic position.

Perhaps the most notable is the recent acquisition of the power generation Division of brush group, which positions us well to participate more directly in electrification.

Avid transactions also include the acquisitions of quest integrity, and access ESP, which enhance our inspection capabilities and broadens our ESP technology portfolio.

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

And oil field services, we remain optimistic on the outlook for the sector with growth trends now clearly shifting more in favor of the international markets. The team continues to execute well as a caption net pricing increases and supply chain pressures gradually moderate.

Internationally growth continues to be led by Latin America, West Africa, and the Middle East and all of these markets offshore activity is noticeably strengthening while our drilling services and completions business are well positioned to win.

In Latin America, Brazil offers the best combination of visibility and growth in the region, while Mexico and Guyana are also improving.

Similarly in West Africa, we are seeing offshore projects move forward in multiple countries in the region and the Middle East, Saudi Arabia, and UAE are exhibiting the best near term growth that is expected to continue into 2023 and beyond.

Looking ahead, we expect continued growth through the end of this year and double digit international growth in 2023.

In North America pricing across our portfolio remains firm.

Drilling and completion activity are beginning to level off after significant growth over the last two years.

Although the U S market will be more dynamic and dependence on oil prices. We generally expect solid activity levels through the end of this year, we have an opportunity for modest growth in 2023, driven by public operators.

Operationally, our RFS business is executing well and remains on track to achieve our target of 20% EBITDA in the fourth quarter of 2022.

Over the course of the year, we have generated solid margin improvement across multiple product lines, including drilling services completions artificial lift and wireline.

Importantly, a key driver of margin enhancement has been the continued improvement in our production chemicals business. After several difficult quarters impacted by supply chain and inflation chemicals has now generated sequential margin rate improvement for two consecutive quarters.

Although margin rates are not yet back to prior levels. We have a line of sight to fiber increases and expect to be at more normalized levels in 2023.

Moving to TTS the third quarter represented another solid performance in orders, we remain on track to generate $8 billion to $9 billion in orders in 2022 and in 2023.

Operationally TPS navigated several challenges and delivered solid results. Despite further pressure on the euro and continued market pressure on GPS services.

The primary growth driver for GTS continues to be LNG, where multiple projects are expected to move forward for <unk>.

In 2022 and 2023.

Although inflationary pressures and rising interest costs have slowed progress on some projects, we remain comfortable with our expectation of 100 to 150 MTA reaching.

By the end of 2023, including the fatty one MTA that has reached yesterday.

During the quarter, we were pleased to be awarded another order by new fortress energy to support their fast LNG facilities project.

NSC will deploy Baker Hughes is technology, a various offshore projects across the globe.

This represents the first order we have booked with new fortress since the second quarter of 2021, and we have now received seven MTA a foster LNG orders.

Additionally, we were awarded in order to deliver power generation equipment for a major LNG project in North America.

During the quarter. We were also pleased to announce a new service contract for the maintenance and monitoring of turbo machinery equipment operations at Eni, let Carl LNG, which is the first deepwater floating LNG facility operating off the coast of Mozambique.

This new service agreement builds on an existing Karl F. LNG contract awarded to Baker Hughes in 2017.

As part of the scope Baker Hughes will fully leverage its growing digital capabilities by providing remote monitoring and diagnostic services as well as a suite of other services based on Bentley, Nevada system, one technology.

Outside of LNG Cps received an additional award to supply 12 electric motor driven compresses to support gas processing facility Aramco to flora unconventional gas project.

This order follows a similar award last quarter, bringing the total to 26 compressor train supplied to the <unk> project.

We also continued to grow our collaboration with air products, securing contracts to supply advanced high pressure ratio compressor technology, but the net zero hydrogen energy complex in Edmonton, Alberta, and a steam turbine generator for the green ammonia process at the Neon Green hydrogen project in Saudi Arabia with these.

Awards from Air products, New energy orders, so far this year total over $170 million.

We still expect new energy orders for 2022 to be around $200 million.

Next on oilfield equipment growth in the subsea and offshore markets continues to trend positively and should maintain solid order momentum over the next couple of years.

So another record orders quarter in the flexible business with over $1 billion in orders year to date the.

The flexible team continued winning in Brazil, as well as in China, retaining incumbency with key customers.

Despite these positive order trends, we remain disappointed with the underlying profitability for OSB as we highlighted in our strategy update last month, we have announced several actions to rectify these issues, including an initial $60 million in cost savings from removing management layers and integrating multiple functions and capabilities.

<unk> with Oss.

Beyond the cost out program, we expect to drive further margin improvement by right sizing osp's facilities footprint addressing supply chain efficiencies and leveraging the shared engineering resources across the border.

Organization.

As a part of this process, we are well into the wholesale reassessment of the subsea equipment business, which will drive out cost and the time of the appropriate size and scale for this business. We have already identified multiple facility rationalization opportunities and feel increasingly confident about the ability to improve profitability in this <unk>.

We expect to provide an update on the strategic review of Sps and the first half of 2023.

Finally in digital solutions order activity remained resilient in the first quarter, but the operating environment continues to be challenged by the ongoing disruption to supply chains for chips and electrical components during.

During the quarter.

Nevada secure the multi year SaaS agreement expanding its existing scope to deliver plant wide software across our customers' entire installed base in Europe .

The solution brings together our system one cloud based software advanced analytics powered by <unk> as well as services and enterprise trading.

This project marks the first award with Yogurt Alliance and demonstrates the potential to drive growth through differentiated digital and hardware offerings.

On the operational side, while we have seen some improvement in availability of chips timing of delivery and the size of allocation remains uncertain, which is restricting our team's ability to effectively and efficiently execute on backlog.

For the aspects we control the team has acted moving to qualify additional suppliers as well as redesigning circuit boards to utilize more standardized chips.

Beyond addressing the supply chain issues. We also recently announced the combination of the <unk> portfolio with GPS to create industrial and energy technology. We are in the early stages of removing functional layers and integrating the portfolio with GPS, which we expect to generate initial cost savings of at least $50 million.

By the end of 2023.

We expect significant commercial and technological benefits from closer integration and believe that <unk> will be uniquely positioned to enable more reliable efficient and lower carbon solutions across the energy and industrial complex.

<unk> 2022 has presented some unique challenges for Baker Hughes and driven several important decisions to better position the company for an evolving energy landscape as.

As we head towards 2023, while we are preparing for a volatile environment. We are confident that we can navigate these challenges with the support from our recent corporate actions and our world class team.

We are intently focused on improving our operational execution capitalizing on the multiyear upstream spending cycle and the unfolding wave of LNG.

<unk>.

Before I turn the call over to Brian I'd like to make an announcement about our executive leadership team.

After many years with the company and six years as our CFO , Brian Worrell will be leaving Baker Hughes in 2023.

Brian has not only been our CFO , but also a key leader driving our strategy as well as our separation from GE.

I would like to thank Brian for the instrumental role. He has played in the formation and transformation of Baker Hughes.

Replacing Brian effective November 2nd will be Nancy Veazey, who has over 15 years of public CFO experience in the mining and energy sectors and more than 30 years of finance and accounting experience. We believe that Nancy is experienced in multiple sectors will be instrumental as we continue to transform.

All aspects of Baker, Hughes and increase shareholder value.

With that I'll turn the call over to Brian .

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

Orders for the quarter were $6 1 billion up 3% sequentially, driven by OFC and Oss, partially offset by a decrease in digital solutions and TPS.

Year over year orders were up 13% driven by increases across all four segments. We are pleased with the orders performance in the quarter. Following strong orders in the first half of the year remaining performance obligation was $24 7 billion up 1% sequentially equipment <unk> ended at $9 1 billion up 3% sequentially.

And services <unk> ended at $15 6 billion flat sequentially. Our total company book to Bill ratio in the quarter was one one and our equipment book to Bill in the quarter was one three.

Revenue for the quarter was $5 $4 billion up 6% sequentially driven by increases across all segments.

Year over year revenue was up 5% driven by <unk> and digital solutions, partially offset by lower volumes in TTS and OFC.

Operating income for the quarter was $269 million.

Adjusted operating income was $503 million, which excludes $235 million of restructuring impairment separation and other charges. The restructuring charges in the third quarter were primarily driven by cost reduction projects for the recently announced reorganization as well as global footprint optimization and our own.

S and OSP businesses.

Adjusted operating income was up 34% sequentially and up 25% year over year, our adjusted operating income rate for the quarter with nine 4% up 190 basis points sequentially.

Year over year, our adjusted operating income rate was up 150 basis points.

Adjusted EBITDA in the quarter was $758 million up 16% sequentially and up 14% year over year. Adjusted EBITDA rate was 14, 1% up 120 basis points sequentially and up 110 basis points year over year.

Corporate costs were $103 million in the quarter for the fourth quarter, we expect corporate cost to be flat compared to third quarter levels.

Depreciation and amortization expense was $254 million in the quarter for the fourth quarter, we expect D&A to increase slightly from third quarter levels.

Net interest expense was $65 million.

Tax expense in the quarter was $153 million.

GAAP loss per share was <unk> included in GAAP diluted loss per share was up $50 million loss from the net change in fair value of our investment in <unk> AI, which is recorded in other non operating loss.

Adjusted earnings per share was 26.

Turning to the cash flow statement free cash flow in the quarter was $417 million for the fourth quarter, we expect free cash flow to improve sequentially, primarily driven by higher earnings and seasonality as we highlighted in the second quarter, we still expect free cash flow conversion from adjusted EBITDA to be below 50% for the year.

Year.

In the third quarter, we continued to execute on our share repurchase program repurchasing $10 7 million Baker Hughes class a shares for $265 million at an average price of $24 79 per share.

Before I go into the segment results I would like to remind everyone that we will be changing our reporting structure in the fourth quarter to the two business segments OFC and IEP.

Which went into effect on October one.

Although we will go from four reporting segments to two our aim is to provide more transparency across the different businesses.

Going forward, we will be reporting total OFC revenue operating income and EBITDA. We will also provide tier two revenue disclosures across the four business lines of well construction.

<unk> intervention and measurement production solutions, and subsea and surface pressure systems.

We will provide a geographic breakout of OFC revenue into four regions North America, Latin America, Middle East Asia, and Europe , Cif Sub Saharan Africa, we will be reporting total IEP revenue operating income and EBITDA. We will also provide tier two revenue disclosure across the fixed.

This line of gas Tech equipment gas Tech services condition monitoring inspection industrial pumps valves and gears and other.

During the fourth quarter, we will provide three years of restated historical financials in this format.

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

Starting with oilfield services revenue in the quarter was $2 8 billion up 6% sequentially International revenue was up 4% sequentially led by increases in the Middle East Asia Pacific and Latin America, partially offset by lower revenues in Russia, Caspian and Europe .

North America revenue increased 10% sequentially with low double digit growth in North America land.

Operating income in the quarter was $330 million up 27% sequentially operating margin rate was 11, 6% with margins, increasing 190 basis points sequentially.

Year over year margins were up 380 basis points. The higher margin rate was primarily driven by increased pricing and higher volumes, partially offset by cost inflation.

As we look ahead to the fourth quarter underlying fundamentals continue to improve with strong growth prospects internationally, but with North America activity leveling off.

For the fourth quarter, we expect a solid sequential increase in Oss revenue and still expect EBITDA margin rates between 19% and 20% depending on timing of completing the sale of our Russia business.

Although it is still early I would like to give you. Some initial thoughts on how we see the Oss market in 2023.

In the international market, we expect continued broad market growth spread across virtually all geographic regions.

Overall, we believe that total international DNC spending is likely to increase in the low to mid double digits on a year over year basis, while global macro risks could negatively impact oil prices and therefore activity in some areas. We would expect the longer cycle nature of international spending can still drive double digit growth in most scenarios.

In North America, there's far less visibility and market dynamics will be more dependent on oil prices that being said, we expect public operators to modestly add to their 2022 exit rates, while private operators could modestly decrease or increase activity depending on a number of factors as a result, we believe this type of.

<unk> level will translate into North America, D&C spending growth in the mid to high double digits in 2023 with.

With this type of macro backdrop, we would expect to generate solid double digit revenue growth in <unk> in 2023.

EBITDA margin rates for the full year should be in line with and potentially higher than the Oss fourth quarter 2020 to exit margin rate.

Moving to oilfield equipment orders for the quarter were $874 million up 21% year over year, driven by a strong increase in flexible as well as SPC and services, partially offset by a decrease in Sps and the removal of subsea drilling systems from consolidated results.

Revenue was $561 million down 7% year over year, primarily driven by Sps and the removal of Sds, partially offset by growth in flexible STC and services.

Operating loss was $6 million down $20 million year over year, primarily driven by lower volumes from Sps in the quarter and the removal of Sds.

These lower operating margin rate was primarily driven by lower volume cost inflation and lower cost productivity.

For the fourth quarter, we expect revenue to be flat to slightly higher sequentially with operating income still below breakeven due to cost under absorption following the suspension of recent contracts.

Looking ahead to 2023, we expect continued recovery offshore as activity in several basins is set to further strengthen we expect mid to high single digit growth in OSP revenue driven by backlog conversion and growth in subsea services, we expect operating income for the year to be around breakeven with any potential up.

Side, driven by the timing of our cost out and restructuring efforts.

Next I will cover turbo machinery orders in the quarter were $1 8 billion up 5% year over year equipment orders were up 13% year over year supported by liquefaction equipment Awards for NFC and an award for power generation equipment for a major LNG project in North America.

Service orders in the quarter were down 1% year over year, driven by lower contractual services orders, partially offset by an increase in upgrades.

Revenue for the quarter was $1 4 billion down 8% versus the prior year equipment revenue was down 17% driven by lower backlog conversion and foreign currency movements.

Services revenue was flat year over year.

Primarily driven by increases in transactional services and upgrades offset by a decrease in contractual services and foreign currency movements.

Operating income for TPS was $262 million down 6% year over year operating margin rate was 18, 2% up 40 basis points year over year, driven by favorable services mix and productivity on equipment contracts, partially offset by cost inflation.

For the fourth quarter, we expect another strong orders quarter and still expect TPS orders in 2020 to be in the 8 billion to $9 billion range. We expect a double digit increase in TPS revenue in the fourth quarter 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 due to a higher equipment mix compared to the fourth quarter of 2021.

Looking into 2023, we expect continued strength in TPS orders in the $8 billion to $9 billion range supported by LNG and onshore offshore production.

We expect TPS revenue to grow in the low 20% range in 2023, driven primarily by equipment backlog conversion. However, similar to this year revenue growth will also be impacted by any project movements in backlog as well as foreign currency movements.

On the margin side, we expect operating income margin rates to decline modestly in 2023 due to higher equipment mix as well as a step up in R&D spending in our Cts Nia in growth areas to drive new technology commercialization.

Finally in digital solutions orders for the quarter were $547 million up 5% year over year, we saw improvement in oil and gas and transportation end markets, partially offset by lower power and industrial orders.

Sequentially orders were down 10% with all end markets lower.

Revenue for the quarter was $528 million up 4% year over year, driven by higher volumes across all digital solutions product lines sequentially.

<unk> revenue was up 1% driven by higher volume and Nexus controls and Si partially offset by lower volume in Bently, Nevada.

Operating income for the quarter was $20 million down 22% year over year, largely driven by lower cost productivity and cost inflation as we continue to work through electronic shortages, partially offset by higher volume sequentially.

Sequentially operating income was up 11% driven by higher volumes for.

For the fourth quarter, we expect to see strong sequential revenue growth and a strong increase in operating margin rates.

Looking into 2023, we expect <unk> revenues to increase mid single digits, which assumes revenue growth from backlog conversion improvement as chip shortages ease and energy markets remain robust this will be partially offset by expected declines across all our industrial businesses due to likely global economic weakness.

We expect these volume increases to drive solid growth in operating margins.

Lastly, and before we move to Q&A I would like to thank Lorenzo and the Baker Hughes team for all their support over the years. This company has come a long way since the merger with GE oil and gas and is in great financial condition with a strong balance sheet and outstanding Finance team Baker Hughes is well positioned to execute on the continued transformation into a leading edge.

Energy Technology company.

It has been a pleasure to work with all of you.

With that I will turn the call back over to John .

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

And thank you do you have a question at this time. Please press Star then the one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue press. The pound key we ask that you limit yourself to one question and one follow up and one moment for our first question.

And our first question comes from James West from Evercore. Your line is now open.

Hey, good morning, Lorenzo Brian Jud.

Hi, James Hey, James.

And Brian as a fellow tarheel sad to see depart Baker Hughes. Thanks for your help.

And hard work all these last several years, putting the companies together.

Great. Thanks, James now see you down in Chapel Hill, it's been down.

Exactly.

And looking forward to it.

So lorenzo.

Curious as you think about the.

The cycles here, obviously, there is a bit of uncertainty in the market but.

Oil and gas hasn't seen much of a capital formation cycle and so it looks to me like we're in for several.

Several years of significant growth.

Particularly in the international and the offshore markets as you highlighted in your prepared remarks, but I wonder if you could expand a little bit further on that and kind of where your customer conversations your customer activity, what youre seeing there in terms of the outlook as we go into 'twenty three and beyond.

Yes sure James.

As I mentioned in the prepared remarks overall outlook is constructive and.

It's definitely not free from volatility and challenges as you've seen in the continued supply chain constraints.

And likely global economic weakness in the broader industrial activity, but if you look at Baker Hughes.

Energy Technology company, we feel we're very well positioned going into 2023 and as you look at the two reporting segments, let's maybe kick off where you started on the oilfield services and equipment again, we see a multiyear upturn in global upstream spending and double digit upstream spending growth in 2023 as you look at offshore as you look at it.

International market, we've seen Latin America come back again in the middle East with the Saudi as well as UAE. So we feel good that it is a multi year upstream.

Uptick as we go forward and then as you look at the industrial and energy technology, We continue to see the LNG up cycle. We've mentioned before the 100 to 150 <unk> over the next two years Cps remains on track to generate $8 billion to $9 billion in orders in 2022, and 2023 and as you look at.

Some of the new recent regulations on the new energy front, we see policy movements in Europe , and the USA that are likely to help support the.

And accelerate some of the clean energy development. So again market from an energy technology perspective is constructive and then our announced restructuring provides at least $150 million of cost out.

<unk> I'll focus improves operational execution and better positions us to capitalize on the quickly changing energy market so heading into 'twenty three.

While we are preparing for the volatility we're confident we can migrate piece and we've got the market backdrop.

Okay.

Great and maybe if I could dig in just a follow up on the clean energy side, I know, you and I and the path of kind of debated.

Hydrogen versus Ccs and kind of how that would play out does the IRA Bill.

The significant benefits to both quite frankly.

Change any of your thinking on kind of the timelines or.

Carbon capture and for hydrogen or green hydrogen and the development of those two markets.

Yes, sure James and then as you look at the inflation reduction also in conjunction with the.

Ali our past investment in infrastructure jobs.

Jobs Act it provides significant investments and incentives for the deployment of critical Decarbonization technologies.

We think that again, it will be particularly positive for green hydrogen CCU S and direct pack capture you mentioned on hydrogen in the act establishes a new production tax credit for free dollars per kilogram from green hydrogen and blue get up to $1 per kilogram. So we think that these.

Tax credits will be a significant factor in attracting capital and I can tell you the customer discussions have actually intensified since the passing of the inflation reduction Act and we see a number of projects that are looking to see how they proceed likewise on carbon capture and also <unk>.

The Bill makes a meaningful improvement on what was already out there from the 45 Q, it's increasing to $85 per metric ton for geologic storage and 180 per metric ton for direct air capture. So again. These advances in particular have seen more conversations around direct air capture and as you know we bought.

Investments from a technology standpoint in that area and we see an increase in our conversations with our customers. So if we look at.

New energy again for 2022, we've already seen now orders at 170, and we feel good that we're going to end at the 200 or above for 2022.

Got it thanks.

And thank you.

And one moment for our next question.

And our next question comes from Chase Mulvehill from Bank of America. Your line is now open.

Hey, good morning, everyone, Hey, Jay Good morning, Jason.

Hey, Brian .

Just sad day really hate to see you go I know I speak for everybody and youre going to be deeply missed.

Body of Baker, everybody on Wall Street, So so really hate to see you leave.

But hopefully we can.

So grab a drink or something before you before you get out of there.

Definitely chase.

Yeah.

Yes.

We'll take a question often.

Ask you about capital allocation.

Obviously, you kind of continue at the same pace of buybacks about $2 65 in that range every quarter.

You step into 2023 free cash flow conversion is going to get better.

Obviously.

If you look at the base business. It is going to continue to get better.

So free cash flow could continue should continue to expand.

And you should have some excess cash that you have to decide what to do with whether it's a special dividend.

Whether it's increasing the base dividend, whether it's continuing with the pace of buybacks. So how should we think about capital allocation.

As we kind of go forward.

Yes Chase look no real change in terms of how we think about financial policies and that philosophy here in terms of returning capital to shareholders. We are.

Still committed to returning 60% to 80% of our free cash flow back to shareholders through both dividends and stock repurchases. As you pointed out we've had a healthy buyback program. This year, we've already exceeded that level for this year in the first nine months as we bought back about $727 million.

Worth of shares and there is there is more to come in the fourth quarter and if you combine that with our annual dividend payout of about $735 million, we'll likely return over.

Around 1 billion and a half or more to shareholders. This year and as you pointed out we've had a pretty strong track record since coming together and forming the new Baker Hughes in 2017, So look right now I see our stock as an attractive use of our free cash flow buying that back.

As you know we have not increased the dividend.

In some time and I think.

Going forward looking at a combination of dividend increases over time as well as a stable consistent buyback program is the right way to think about it ultimately I believe this is an attractive shareholder return policy and Youll see us continue to use a combination and fluctuate.

The buyback really.

As as we can to continue to generate strong free cash flow. So we've listened to what investors have been saying and taken that feedback and I think this combo is the right way forward for Baker Hughes, especially given the strength of the portfolio and our free cash flow generation in the past as well as what it looks like going forward.

Alright, it makes sense.

As a follow up question, maybe this one's for Lorenzo.

On the subsea business the Sps business, obviously flexible has been pretty strong.

That may be the.

Subsea tree business has been maybe a little bit softer obviously, you've had a different strategy.

Past.

Potentially.

Looking at alternatives for the business, but you look at into the first half of next year.

Potentially announced a new strategy or ultimately what youre going to do with this business. So when we think about this business and what you could potentially do with it could you just lay out some of the options of kind of what's your.

Exploring.

Potential go forward for this business.

Yes sure Jason.

As we've stated we are doing a wholesale reevaluation of our Sps business, which is underway.

Already identified.

Multiple facility rationalization opportunities, we feel increasingly confident about our ability to improve the profitability in this business and we are evaluating a range of options that includes a smaller more focused strategy that could be a good balance.

But the two major other players and we look to complete this analysis and the update you at the first part of 2023, so feeling good about the progress.

We've got the synergies that are clearly visible and looking to move to profitability, yes, Jay the only thing I'll add here is just remember there are multiple parts of this business and we've got an incredibly strong flexible pipe systems franchise here, that's doing incredibly well with record orders you know sort of two quarters in a row. So it is it is it bifurcate.

<unk> strategy.

And the portfolio here and I am encouraged by what we're seeing so far.

With the changes that we've recently made to look forward to updating you guys more as we as we start to execute a little more.

Okay perfect sounds good I'll turn it back over.

And thank you.

One moment for our next question.

And our next question comes from.

Jerome from JP Morgan Your line is now open.

Firstly, Brian we wish you the best as you depart Baker Hughes, but I appreciate all the support you've provided to the sell side over the years great.

Great. Thanks Aaron.

A couple of questions first.

On the LNG side, you guys have recently.

About a dynamic where some of your services work was being pushed up by LNG customers just given the strength.

In global LNG prices I guess my first question is is this lost revenue for Baker or is there, perhaps a catch up in terms of maintenance work in 2023.

Perhaps lorenzo could you frame the longer term opportunity.

Installed base of LNG rises what does what could this mean for bakers services segment for LNG.

Arun I'll start out we did start to see some push outs in LNG as well as some of the transactional service outages.

As well just given the higher commodity prices and then our customers. Obviously you wanted to capitalize on that.

This is not lost revenue for Baker Hughes.

Look everything that.

Has started to push out we'll see some of that coming in likely in the fourth quarter based on the schedules that I've seen but largely all of that will happen in 2023, the big thing that we're working through with customers right. Now is will there be things in 2023 that likely push out a little bit but look.

It is it is not lost lost revenue and should be a tailwind for services going forward I mean look I would anticipate sitting here today that there should be elevated services revenues in 2023 as operators do look to catch up.

On the maintenance and just to add look for CSA as it's generally a three to six month window that they can move things around contractually as you know we have guarantees associated.

Associated with those so to keep those in place there is a window there on the transactional side they have a little more flexibility, but it is a bit of a risk in terms of running things in excess of recommendations and those sorts of things. So in the past I've actually seen when those types of service things get pushed out where we at.

Actually get more revenue because unexpected things happen. So again this is a longer cycle business and and what I see here is revenue definitely coming in and not lost revenue and then I'll, let Lorenzo comment on the longer term outlook with the massive increase in installed base that we're saying, yes, Arun as you look at the future again LNG outlook.

Positive as I mentioned.

The 100 to 150 M Tpa of LNG <unk> over the course of the next two years, we're comfortable that that's coming through and also see more pipeline of projects going into 'twenty, four and 'twenty five already this year <unk> seen fatty one MTBE LNG projects, you've seen us announce the Plaquemines Cheniere Corpus Christi.

As you look at the future our installed base by 2025 goes up about five 5% and that's good for the services as Brian mentioned that comes in after that so in installed base growing and that's 2025 and beyond is positive for our business.

Great.

A follow up.

You reiterated your 100 to 150 <unk> Tpa outlook over the next couple of years, you did mention how youre seeing some impacts.

From inflation and financing.

Challenges you can think about driftwood and so I just wanted to see if you could put that into context or do you expect some of the brownfield opportunities to offset some of these chat.

Challenges we've seen.

Yeah again.

I acknowledge that the environment has become more challenging in particular for some of the independent developers as you mentioned cost inflation supply chain bottlenecks and.

Generally I'd say, we'd see the landscape maybe shifting in favor of more established LNG players those with the scale diversity financial strength and better place to navigate the risks and uncertainties also brownfield projects and projects that utilize the fastest to market modular design.

Particularly advantaged in the coming year. So it is plausible that some projects change pace the.

The build cycle becomes more smoother and more prolonged but again I feel confident in the 100 to 150 M. Tpa over the course of the next two years.

Thank you very much.

Okay.

And thank you.

And one moment our next question.

And our next question comes from Marc Bianchi from Cowen. Your line is now open.

Thank you.

I wanted to start with digital and <unk>.

And get a better understanding of where you see those margins going.

If we can get it looks like maybe revenues getting back to that $600 million level here in the fourth quarter.

And.

Perhaps margins are still quite a bit below where they were if we go back a couple of years. What do you think is needed to get those margins back to where they were in 2019 and kind.

Kind of.

How.

Likely is that in 'twenty three.

Yes.

<unk> Mark I'd say, if I look specifically into 2023, I would expect <unk> revenues to increase in the mid single digit range, which assumes revenue growth from backlog conversion improvements as we start to see some of the chip shortages ease in energy markets remain.

Robust.

I do think we may see a bit of a pullback in terms of.

Orders and revenue from some of the industrial businesses due to the likely economic weakness. So balancing all of that I don't see the margins getting back to those 19 levels next year, just given the level of conversion that we'll have in the level of output I mean look while electronics or stabilized.

Right now.

Sure.

I don't see them getting markedly better.

Next year is so we're gonna be hampered probably by output and that obviously impacts cost absorption and the ability to drive margin growth. There. We are doing a lot on the cost side to continue to take costs out but there is there is no reason that this business should not be back to those levels.

Or higher once we get some of these supply chain issues completely.

Lately behind us so the long term outlook is still.

It's still pretty good but right now it is a supply chain story in terms of being able to get the electronics and the chips through so we can get so we can get output, but one thing I will say and Lorenzo highlighted this when he talked about it we've worked on a lot of things to to redesign we've done engineering programs, we are resourcing.

From new supplier, so everything that's within our control I have to give the team credit they have been executing on and as the global demand situation changes I think you'll see some improvement there.

Okay Super and I'll, just echo what others have said, Brian . Thanks, So much for your time.

We're going to Miss you.

Next question for you bet next question for Lorenzo.

You announced this.

Sure Jen acquisition.

From brush I'm, just curious you mentioned in the report.

<unk> remarks in the press release like how should we think about the contribution from that business in 'twenty, three and 'twenty four and then sort of what's the longer term opportunity.

Yes look we're very excited to bring <unk> to the Baker Hughes portfolio, and we see it playing an important role as it enhances our electromechanical capabilities within industrial and energy technology. If you look at <unk>, it's been a trusted supplier for many years has provided us with significant portion of the electric motors that we procure for various applications.

Locations and we see electrification playing a critical role in the Decarbonising process within the upstream oil and gas sector as well as industrial sector. So it's going to be an important part of the value chain that we wanted to address now that brush. It in house, we can work together to shape. The next generation of electric Motors you look at this.

Specific applications of oil and gas power supply LNG distributed power and long that also duration energy storage. So if we've got a holistic view of solutions across the LNG spectrum covered from the technology perspective, and brush adds to that and it's called facilities located in U K check for <unk>.

<unk>, Netherlands, and it's going to allow us to leverage its presence in eastern Europe to continue diversifying as well so feel good about the future elements and its contributions to the company and I would say specifically looking at 2023, Mark I would expect revenue should be around the 200 million dollar Mark and if I if.

I look at EBITDA, its probably in the $40 million to $50 million range, but remember the first year of an acquisition you've got integration costs as well as some increased amortization and depreciation in there. So that that level is probably going to be in the $35 million to $40 million range. So youre looking at the operating income level relatively small.

<unk>.

But definitely some strong EBITDA and once you get through the integration and some of those early purchase accounting things Youll have some very nice margins coming through there. So we're really excited to have this technology in house now.

Very good thank you so much.

And thank you.

And one moment our next question.

And our next question comes from Neil Mehta from Goldman Sachs.

Okay.

Thank you, Brian it's been a pleasure working with you here.

The first question is.

Is more modeling specific.

<unk> different components for Q guidance by segment, but I thought it would be helpful. If you could put it all together and go segment by segment and help us think through key key modeling.

Components as we think about the sequential into next quarter.

Yes.

I take a step back and look at look at that fourth quarter, our overall starting with.

Starting with.

Oss International would expect some pretty strong growth prospects for fourth quarter.

North America, I'd say activity is leveling off here towards the end of the year end and that should really result in solid sequential increase from a revenue standpoint, I'd say in the mid single digit range and look as I said EBITDA margin rates.

Should be between 19% and 20% and the only reason they're not.

Our firm at the 20% is just the timing of the sale of the Russia business, which we expect to happen within the quarter and the timing of that and and how that plays out Neil will be the swing there, but look Maria Claudia and the team have done an outstanding job in <unk> and <unk>.

Clearly have line of sight to that 20%, especially as chemicals continues to improve as they have done the last couple of quarters.

On <unk> revenue will be flat to slightly higher sequentially based on what I see from our backlog conversion.

Still be below breakeven levels due to the cost under absorption given the suspension of the contracts that we talked about primarily really in Russia.

That had come through switching gears, a little bit turbo.

Given where we are from an equipment conversion standpoint, I would expect revenues to be up double digit.

In the fourth quarter on a year over year basis, and services should show strength as well.

But margin rates will likely be modestly lower on a year over year basis due to the higher equipment mix that we talked about compared to the fourth quarter of 2021, and then digital digital solutions look we've been growing backlog in that business.

<unk> heard me talking to Mark's.

Question, There I would expect to see strong sequential revenue growth given the backlog and.

And what we.

What we see.

Coming through here in operating income.

A strong increase in operating margin rate, so, adding all of that up and the moving pieces.

It looks to be in line with how folks are thinking about the quarter from an overall standpoint.

And based on what I, what I see out there today, so no no real significant change here, but.

Not a lot of moving pieces that the team is managing and getting through it.

Yes that was Super Super helpful. And then the only other question I had was just around FX and maybe you could just talk about with the move in the Euro has meant for the business and just how sensitized.

The model to changes in FX as well.

Yes look I mean, I think what we've seen recently I think we'll all agree that the change in the Euro exchange rate, we haven't seen anything like that in in a long time and.

If I take a step back and look at it from a revenue standpoint, the year over year.

Impact.

Was about 200, and roughly $200 million of year over year revenue pressure in the bulk of that was in and turbo machinery at about $120 million $20 million sequentially and turbo it was odd.

Around $50 million or so so that gives you a perspective on the top line and from a translation standpoint, obviously you have lower income in euros. So youll have lower income in dollars coming from that but remember we do hedge economically and some of those hedges are actually those hedges were in the money.

Given where everything everything moves so the net impact at the overall Baker level is as much less than that but you will see some.

Potential choppiness in the segment result says is FX does move around but largely manageable at the at the bottom line you see the bigger impact in revenue.

Perfect. Thanks, Keith.

Thanks Neil.

And thank you and one moment our next question.

And our next question comes from Dave Anderson from Barclays. Your line is now open.

Hi, Dave.

Hey, how are you. So in the release you mentioned that the two fast track LNG projects for new fortress.

You've also been supplying modular compression compressor trains with venture global.

I'm just wondering it would seem that your technology.

Aside from any kind of financial considerations of your customers, but I would think this technology can enable a larger build out or at least a quicker build out of LNG liquefaction or you've been talking about the 100 150, and the overall 800 million ton per annum figure for ultimate size. So my question is do smaller faster LNG trains potentially push that number higher.

Presumably we're thinking 'twenty four 'twenty five but could you just talk about how that market could potentially change in your favor.

Yes, definitely Dave and again I mentioned, we feel good about the LNG outlook and we stayed at the 100 to 150 and also mentioned that as you look at projects going forward brownfield projects as well as those that utilize the fastest market modular design are likely to be particularly advantaged in the coming years.

As we look at it we've always said, we're going to have a complete time.

Solution offering for LNG and definitely be aspect of foster LNG and modular is gaining traction right now and they could lead to more players coming into the field as you look at different gas reserves that are being found then also look to capitalize on those as the need for energy continues.

Say right now still the outlook is 800 million tons by 'twenty fatty I wouldn't go off that at this time and we will continue to monitor the situation yes.

I would just add that I think having that in the portfolio is very helpful. And if you think about what Lorenzo mentioned, if it's fast if its modular if it stick build if it's large frame Baker Hughes has that in the solution set so.

We're well positioned there and I think ultimately having the fast LNG offering as well as the modular can certainly help alleviate some of the pressure you see in global markets and could ultimately lead to more to more demand I think it's just kind of too early to call that right now just given the volatility we're seeing.

But it's definitely I think a tailwind overall for Baker.

That's what I was getting at.

And just sort of sticking on the equipment side you also talked about the 26 compressor trains for the <unk> basin.

Saudi and if I also just kind of take into account. The <unk> drilling relationship you have there I was wondering if you could help us sort of understand bakers opportunity in the middle east on the equipment side versus the <unk> side.

Normally we would have thought the Oss will be still the bigger business.

Bigger growth prospects, but.

But where does equipment sit in there because I wouldn't have necessarily thought that would've been a huge business, but now you can kind of really start to see that growing alongside the Oss. So could you just frame that for us a little bit.

Yeah.

Yes, Dave as you look at our equipment presence again, we've got a long history in the middle East Bowfin.

And Saudi as well as other countries with regards to both offshore and onshore from our power generation and.

Again, the compression standpoint, so again, we look at the prospects of that business being very positive going forward and again, we like the positioning we have both.

Sides of the business, there and both have considerable growth going forward.

Thank you.

And thank you.

And that was our last question I would now like to turn the call back over to Lorenzo Simonelli for closing remarks.

Great. Thank you to everyone for joining our earnings call today before we end the call I wanted to leave you with some closing thoughts overall, we were pleased with our first quarter results with strong performance in Oss GPS successfully managing multiple challenges and strong orders performance in both OSP and TPS Baker Hughes continues to execute on our <unk>.

Time strategy and while we are preparing for a volatile environment. We are confident that we can navigate these challenges with the support from our recent corporate actions and a world class team.

I want to also again, thank Brian for his leadership support and friendship and wish him well in his future endeavors. I also look forward to welcoming Nancy to the Baker Hughes team on November 2nd.

Thank you for taking the time and I look forward to speaking with all of you again soon.

Operator, you may now close out the call.

Ladies and gentlemen, thank you for participating ladies and gentlemen, thank you for participating program. You may all disconnect everyone have a great day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Yes.

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference Mr. Jud Bailey, Vice President of Investor Relations, Sir you may begin.

Thank you John good.

Everyone and thanks for joining US we were generally pleased with our third quarter results with strong performance in RFS, while TPS successfully manage multiple challenges. We also saw strong orders performance with continued momentum in OFC as well as TPS.

As I mentioned during our second quarter earnings call the macro outlook has grown increasingly uncertain.

Global economy is dealing with the strongest inflationary pressures since the 19 seventies, a rising interest rate environment and sizable fluctuations in global currencies.

Despite these economic challenges, we remain constructive on the outlook for oil and gas and believe that underlying fundamentals remain supportive of a multiyear upturn in global upstream spending.

Operators around the World has shown a great deal of financial discipline, which we expect to translate into a more durable upstream spending cycle, even in the face of an unpredictable commodity price environment.

This should support price levels that are conducive to driving double digit upstream spending growth in 2023.

And the natural gas and LNG markets prices remained elevated as a multitude of factors increased tensions on an already stressed global gas market Euro.

Europe searching demand for LNG has re directed cargoes from other regions and created an exceptionally tight global market that could get even tighter in 2023.

This situation has resulted in record high LNG prices, but has also slowed down switching from coal to gas and some developing countries.

<unk> and LNG developers facing inflationary pressures and higher cost of capital for new projects.

As a result, we believe the landscape may be shifting in favor of established LNG players with the scale diversity and financial strength to navigate the risks and uncertainties.

Those with brownfield projects and projects that utilize faster to market modular deadlines, maybe particularly advantaged in the coming years.

On the new energy front recent policy movements in Europe , and the United States unlikely to help support a significant increase in clean energy development.

In the U S. The inflation reduction act should be particularly impactful and accelerating the development of green hydrogen.

The U S and direct air capture.

While we have not changed our expectations for the ultimate addressable market sizes in these areas.

Given the dynamic macro backdrop Baker Hughes is focused on preparing for a range of scenarios and executing on what is within our control.

Last month, we announced the restructuring and re segmentation of the company into two reporting segments OFC and IGT. This re segmentation will simplify and streamline our organizational structure with at least $150 million of cost out and a 25% reduction in the executive management team.

These changes will sharpen our focus improve operational execution and better position Baker Hughes to capitalize on the quickly changing energy markets.

This new structure will elevate new leadership, while also creating better flexibility and economies of scale across the two business segments.

Accordingly, we expect these changes to increase shareholder value and improve the long term optionality and growth opportunities for Baker Hughes as our markets and customers continue to evolve.

In parallel we continue to invest in Baker Hughes portfolio through early stage, new energy investments and tuck in M&A.

Perhaps the most notable is the recent acquisition of the power generation Division of brush group, which positions us well to participate more directly in electrification.

Avid transactions also include the acquisitions of quest integrity, and access ESP, which enhance our inspection capabilities and broadens our ESP technology portfolio.

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

Internationally growth continues to be led by Latin America, West Africa, and the Middle East and all of these markets offshore activity is noticeably strengthening.

While our drilling services and completions business are well positioned to win.

In Latin America, Brazil offers the best combination of visibility and growth in the region, while Mexico and Guyana are also improving.

Looking ahead, we expect continued growth through the end of this year and double digit international growth in 2023.

In North America pricing across our portfolio remained firm while drilling and completion activity are beginning to level off after significant growth over the last two years.

Operationally, our RFS business is executing well and remains on track to achieve our target of 20% EBITDA in the fourth quarter of 2022.

Over the course of the year, we have generated solid margin improvement across multiple product lines, including drilling services completions artificial lift and wireline.

Importantly, a key driver of margin enhancement has been the continued improvement in our production chemicals business.

After several difficult quarters impacted by supply chain and inflation chemicals has now generated sequential margin rate improvement for two consecutive quarters.

Although margin rates are not yet back to prior levels. We have a line of sight to fiber increases and expect to be at more normalized levels in 2023.

Moving to TPS. The first quarter represented another solid performance in orders, we remain on track to generate $8 billion to $9 billion in orders in 2022 and in 2023.

Operationally TPS navigated several challenges and delivered solid results. Despite further pressure on the euro and continued market pressure on GPS services.

The primary growth driver for TTS continues to be LNG, where multiple projects are expected to move forward for <unk>.

In 2022 and 2023.

Although inflationary pressures and rising interest costs have slowed progress on some projects, we remain comfortable with our expectation of 100 to 150 M Tpa, reaching.

By the end of 2023, including the fatty one MTA that has reached the yesterday.

During the quarter, we were pleased to be awarded another order by new fortress energy to support their fast LNG facilities project.

NFC will deploy Baker Hughes is technology for various offshore projects across the globe.

This represents the first order we have booked with new fortress since the second quarter of 2021, and we have now received seven MTA a fast LNG orders.

Additionally, we were awarded in order to deliver power generation equipment for a major LNG project in North America.

This new service agreement builds on an existing Karl as LNG contract awarded to Baker Hughes in 2017.

Outside of LNG Cts received an additional award to supply 12 electric motor driven compresses to support gas processing for Saudi Aramco before unconventional gas project.

This order follows a similar award last quarter, bringing the total to 26 compressor train supplied to the <unk> project.

Awards from our products on new energy orders, so far this year total over $170 million.

We still expect new energy orders for 2022 to be around $200 million.

Next on oilfield equipment growth in the subsea and offshore markets continues to trend positively and should maintain solid order momentum over the next couple of years.

So another record orders quarter in the flexible business with over $1 billion in orders year to date the.

The flexible team continued winning in Brazil, as well as in China, retaining incumbency with key customers.

<unk> with Oss.

Beyond the cost out program, we expect to drive further margin improvement by right sizing rfps facilities footprint addressing supply chain efficiencies and leveraging the shared engineering resources across the border.

Organization.

We expect to provide an update on the strategic review of Sps and the first half of 2023.

During the quarter.

Nevada secure the multi year SaaS agreement expanding its existing scope to deliver pop wide software across our customers' entire installed base in Europe .

The solution brings together our system one cloud based software advanced analytics powered by <unk> as well as services and enterprise training.

This project marks the first award with Yogurt Alliance and demonstrates the potential to drive growth through differentiated digital and hardware offerings.

For the aspects we control the team has acted moving to qualify additional suppliers as well as redesigning circuit boards to utilize more standardized chips.

By the end of 2023.

<unk> 2022 has presented some unique challenges for Baker Hughes and driven several important decisions to better position the company for an evolving energy landscape as.

We are intently focused on improving our operational execution capitalizing on the multiyear upstream spending cycle and the unfolding wave of LNG.

Yes.

Before I turn the call over to Brian I'd like to make an announcement about our executive leadership team.

After many years with the company and six years as our CFO , Brian Worrell will be leaving Baker Hughes in 2023.

Brian has not only been our CFO , but also a key leader driving our strategy as well as our separation from GE.

I would like to thank Brian for the instrumental role. He has played in the formation and transformation of Baker Hughes.

All aspects of Baker, Hughes and increase shareholder value.

With that I'll turn the call over to Brian .

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

Orders for the quarter were $6 1 billion up 3% sequentially, driven by OFC and Oss, partially offset by a decrease in digital solutions and TPS.

And services <unk> ended at $15 6 billion flat sequentially. Our total company book to Bill ratio in the quarter was one one and our equipment book to Bill in the quarter was one three.

Revenue for the quarter was $5 $4 billion up 6% sequentially driven by increases across all segments.

Year over year revenue was up 5% driven by <unk> and digital solutions, partially offset by lower volumes in TTS and OFC.

Operating income for the quarter was $269 million.

S and <unk> businesses.

Adjusted operating income was up 34% sequentially and up 25% year over year, our adjusted operating income rate for the quarter was nine 4% up 190 basis points sequentially.

Year over year, our adjusted operating income rate was up 150 basis points.

Adjusted EBITDA in the quarter was $758 million up 16% sequentially and up 14% year over year. Adjusted EBITDA rate was 14, 1% up 120 basis points sequentially and up 110 basis points year over year.

Corporate costs were $103 million in the quarter for the fourth quarter, we expect corporate cost to be flat compared to third quarter levels.

Depreciation and amortization expense was $254 million in the quarter for the fourth quarter, we expect D&A to increase slightly from third quarter levels.

Net interest expense was $65 million income.

Income tax expense in the quarter was $153 million.

GAAP loss per share was <unk> included in GAAP diluted loss per share was up $50 million loss from the net change in fair value of our investment in <unk> III AI, which is recorded in other non operating loss.

Adjusted earnings per share was 26.

In the third quarter, we continued to execute on our share repurchase program repurchasing $10 7 million Baker Hughes class a shares for $265 million at an average price of $24 79 per share.

Before I go into the segment results I would like to remind everyone that we will be changing our reporting structure in the fourth quarter to the two business segments OFC and.

Which went into effect on October one.

Although we will go from four reporting segments to two our aim is to provide more transparency across the different businesses.

Going forward, we will be reporting total OFC revenue operating income and EBITDA. We will also provide tier two revenue disclosures across the four business lines of well construction completion intervention and measurement production solutions and subsea and surface pressure systems, we will.

I'll provide a geographic breakout of OFC revenue into four regions North America, Latin America, Middle East Asia, and Europe , Cif Sub Saharan Africa, we will be reporting total IEP revenue operating income and EBITDA. We will also provide tier two revenue disclosure across the fixed business.

Lines of gas Tech equipment gas Tech services condition monitoring inspection industrial pumps valves and gears and other <unk>.

During the fourth quarter, we will provide three years of restated historical financials in this format.

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

Darling with oilfield services revenue in the quarter was $2 8 billion up 6% sequentially International revenue was up 4% sequentially led by increases in the Middle East Asia Pacific and Latin America, partially offset by lower revenues in Russia, Caspian and Europe .

North America revenue increased 10% sequentially with low double digit growth in North America land.

Operating income in the quarter was $330 million up 27% sequentially operating margin rate was 11, 6% with margins, increasing 190 basis points sequentially.

Year over year margins were up 380 basis points. The higher margin rate was primarily driven by increased pricing and higher volumes, partially offset by cost inflation.

As we look ahead to the fourth quarter underlying fundamentals continue to improve with strong growth prospects internationally, but with North America activity leveling off.

Although it is still early I would like to give you. Some initial thoughts on how we see the Oss market in 2023.

In the international market, we expect continued broad market growth spread across virtually all geographic regions.

<unk> level would translate into North America, D&C spending growth in the mid to high double digits in 2023.

With this type of macro backdrop, we would expect to generate solid double digit revenue growth in <unk> in 2023.

EBITDA margin rates for the full year should be in line with and potentially higher than the Oss fourth quarter 2020 to exit margin rate.

Moving to oilfield equipment orders for the quarter were $874 million up 21% year over year, driven by a strong increase in flexible as well as FTC and services, partially offset by a decrease in Sps and the removal of subsea drilling systems from consolidated results.

Revenue was $561 million down 7% year over year, primarily driven by Sps and the removal of Sds, partially offset by growth in flexible STC and services.

Operating loss was $6 million down $20 million year over year, primarily driven by lower volumes from Sps in the quarter and the removal of Sds.

These lower operating margin rate was primarily driven by lower volume cost inflation and lower cost productivity.

Looking ahead to 2023, we expect continued recovery offshore activity in several basins is set to further strengthen we expect mid to high single digit growth in OSP revenue driven by backlog conversion and growth in subsea services, we expect operating income for the year to be around breakeven with any potential <unk>.

Upside driven by the timing of our cost out and restructuring efforts.

Service orders in the quarter were down 1% year over year, driven by lower contractual services orders, partially offset by an increase in upgrades.

Revenue for the quarter was $1 4 billion down 8% versus the prior year equipment revenue was down 17% driven by lower backlog conversion and foreign currency movements.

<unk> revenue was flat year over year.

Primarily driven by increases in transactional services and upgrades offset by a decrease in contractual services and foreign currency movements.

With this revenue outlook, we expect TPS margin rates to be moderately lower on a year over year basis due to a higher equipment mix compared to the fourth quarter of 2021.

Looking into 2023, we expect continued strength in TPS orders in the $8 billion to $9 billion range supported by LNG and onshore offshore production.

Finally in digital solutions orders for the quarter were $547 million up 5% year over year, we saw improvements in oil and gas and transportation end markets, partially offset by lower power and industrial orders.

Sequentially orders were down 10% with all end markets lower.

Revenue for the quarter was $528 million up 4% year over year, driven by higher volumes across all digital solutions product lines sequentially revenue was up 1% driven by higher volume and Nexus controls and <unk>, partially offset by lower volume and Bently, Nevada.

Sequentially operating income was up 11% driven by higher volumes for.

For the fourth quarter, we expect to see strong sequential revenue growth and a strong increase in operating margin rates.

We expect these volume increases to drive solid growth in operating margins.

Energy Technology company.

It has been a pleasure to work with all of you.

With that I will turn the call back over to Jack.

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

And thank you if you have a question at this time. Please press Star then the one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue press. The pound key we ask that you limit yourself to one question and one follow up and one moment for our first question.

And our first question comes from James West from Evercore. Your line is now open.

Hey, good morning, Lorenzo Brian Jud.

Hi, James Hey, James.

And Brian as a fellow tarheel sad to see depart Baker Hughes. Thanks for your help.

And hard work all of these last several years, putting the companies together.

Yeah, great. Thanks, James now see you down in Chapel Hill at the being down.

Perfect looking forward to it so.

So lorenzo.

Curious as you think about the.

The cycles here, obviously, there is a bit of uncertainty in the market but.

Oil and gas hasn't seen much of a capital formation cycle and so it looks to me like we're in for.

Several years of significant growth.

Particularly in the international and the offshore markets as you highlighted in your prepared remarks, I Wonder if you could expand a little bit further on that and kind of where your customer conversations your customer activity, what's youre seeing there in terms of the outlook as we go into 'twenty three and beyond.

Yes sure James.

As I mentioned in the pre prepared remarks overall outlook is constructive and it's definitely not free from volatility and challenges as <unk> seen in the continued supply chain constraints.

And likely global economic weakness in the broader industrial activity, but as you look at Baker Hughes.

As an energy technology company, we feel we're very well positioned going into 2023 and as you look at the two reporting segments. So, let's maybe kick off where you started on the oilfield services and equipment again, we see a multiyear upturn in global upstream spending and double digit upstream spending growth in 2023 as you look at offshore as you look at it.

International market, we've seen Latin America come back again in the middle East with the Saudi as well as UAE. So we feel good that it is a multiyear upstream.

Uptick as we go forward and then as you look at the industrial and energy technology, We continue to see the LNG up cycle. We've mentioned before the 100 to 150 <unk> over the next two years GPS remains on track to generate $8 billion to $9 billion in orders in 2022, and 2023 and as you look at.

Some of the recent regulations on the new energy front, we see policy movements in Europe , and the USA that are likely to help support and accelerate some of the clean energy development. So again market from an energy technology perspective is constructive and then our announced restructuring provides at least a $150 million of cost out.

It sharpens, our focus improves operational execution and better positions us to capitalize on the quickly changing energy market, so heading into 'twenty three wawa.

While we are preparing for the volatility.

Confident we can migrate these and we've got the market backdrop.

Okay.

Great and maybe if I could dig in just a follow up on the clean energy side, I know, you and I and the path of kind of debated.

Hydrogen versus Dcs and kind of how that would play out does the IRA Bill.

The significant benefits for both quite frankly.

<unk> any of your thinking on kind of the.

Timelines or.

Carbon capture and for hydrogen or green hydrogen and the development of those two markets.

Yes, sure James and that as you look at the inflation reduction Act also in conjunction with the Alere.

Ali our past investment in infrastructure jobs.

Jobs Act it provides significant investments and incentives for the deployment of critical Decarbonization technologies.

We think that again, it will be particularly positive for green hydrogen.

<unk> and direct pack capture you mentioned on hydrogen in the act establishes a new production tax credit for free dollars per kilogram from green hydrogen and blue get.

To $1 per kilogram. So we think that these tax credits will be a significant factor in attracting capital and I can tell you the customer discussions have actually intensified since the passing of the inflation reduction Act and we see a number of projects that are looking to see how they proceed likewise on carbon capture.

And also <unk>.

The Bill makes a meaningful improvement on what was already out there from the 45 Q, it's increasing to $85 per metric ton for geologic storage and 180 per metric ton for direct air capture so again.

<unk> in particular have seen more conversations around direct air capture and as you know we bought the investments from a technology standpoint in that area and we see an increasingly conversations with our customers. So.

We look at new.

New energy again for 2022, we've already seen now orders at 170, and we feel good that we're going to end at the 200 or above for 2022.

Got it thanks.

And thank you.

And one moment for our next question.

And our next question comes from Chase Mulvehill from Bank of America. Your line is now open.

Hey, good morning, everyone, Hey, Jay Good morning, guys, Hey, Brian .

Just sad.

Sad day really hate to see you go I know I speak for everybody and youre going to be deeply missed.

Body of Baker, everybody on Wall Street, So so really hate to see you leave.

Hopefully we can yes.

Grab a drink or something before you before you get out of there.

Definitely chase.

Yeah.

I guess I'll.

We'll take a question often.

Ask you about capital allocation.

Obviously, you kind of continue at the same pace of buybacks about $2 65 in that range every quarter.

Step into 2023 free cash flow conversion is going to get better.

Obviously.

If you look at the base business. It is going to continue to get better.

So free cash flow could continue should continue to expand.

And you should have some excess cash that you have to decide what to do with whether it's a special dividend.

Whether it's increasing the base dividend, whether it's continuing with the pace of buybacks. So how should we think about capital allocation.

And as we kind of go forward.

Yes Chase look no real change in terms of how we think about financial policies and that philosophy here in terms of returning capital to shareholders. We are.

Still committed to returning $60 to 80% of our free cash flow back to shareholders through both dividends and stock repurchases as as you pointed out we've had a healthy buyback program. This year, we've already exceeded that level for this year in the first nine months as we bought back about $727 million.

Worth of shares and there is there is more to come in the fourth quarter and if you combine that with our annual dividend payout of about $735 million will likely return over.

Around 1 billion and a half or more to shareholders this year and any.

As you pointed out we've got a pretty strong track record since coming together and forming the new Baker Hughes in 2017, So look right now I see our stock as an attractive use of our free cash flow buying that back.

As you know we have not increased the dividend.

In some time and I think.

Going forward looking at a combination of dividend increases over time as well as a stable consistent buyback program is the right way to think about it.

Ultimately I believe this is an attractive shareholder return policy and Youll see us continue to use a combination and fluctuate the buyback really.

Alright, it makes sense.

As a follow up question, maybe this one's for Lorenzo.

On the subsea business the Sps business, obviously flexible has been pretty strong.

That may be the.

The subsea tree business has been maybe a little bit softer obviously, you've had a different strategy in the past kind of potentially.

Looking at alternatives for the business, but you look at into the first half of next year.

Exploring.

Potential go forward for this business.

Yes sure Jason.

As we've stated we aren't doing a wholesale reevaluation of our STS business, which is underway.

Already identified.

But the two major players and we look to complete this analysis and update you at the first part of 2023, so feeling good about the progress we.

We got the synergies that are clearly visible and looking to move to profitability and chase. The only thing I'll add here is just remember there are multiple parts of this business and we've got an incredibly strong flexible pipe systems franchise here, that's doing incredibly well with record orders you know sort of two quarters in a row. So it is it is a.

<unk> strategy.

And the portfolio here at <unk>.

Courage by what we're seeing so far.

With the changes that we've recently made to look forward to updating you guys more as we as we start to execute a little more.

Okay perfect sounds good I'll turn it back over.

And thank you.

One moment our next question.

And our next question comes from.

Jerome from Jpmorgan. Your line is now open.

Firstly, Brian we wish you the best as you.

Baker Hughes.

All the support you've provided to the sell side over the years great.

Great. Thanks Aaron.

A couple of questions first.

On the LNG side, you guys have recently.

About a dynamic where some of your services work was being pushed up by LNG customers just given the strength.

In global LNG prices I guess my first question is is this lost revenue for Baker or is there, perhaps a catch up in terms of maintenance work in 2023 and <unk>.

Perhaps lorenzo could you frame the longer term opportunity.

Install base of LNG rises what does what could this mean for bakers services segment for LNG.

Arun I'll start out we did start to see some push outs in LNG as well as some of the transactional service outages.

As well just given the higher commodity prices and then our customers. Obviously you wanted to capitalize on that.

This is not lost revenue for Baker Hughes.

Look everything that.

Has it started to push out we'll see some of that coming in likely in the fourth quarter based on the schedules that I've seen but largely all of that will happen in 2023, the big thing that we're working through with customers right. Now is will there be things in 2023 that likely push out.

A little bit but look at it is it is not lost lost revenue and should be a tailwind for services going forward. I mean look I would anticipate sitting here today that there should be elevated services revenues in 2023 as operators do look to catch up.

On the maintenance and just to add look for CSA is it's generally a three to six month window that they can move things around contractually as you know we have guarantees.

As positive as I mentioned.

The 100 to 150 M Tpa of LNG <unk> over the course of the next two years, we're comfortable that that's coming through and also see more pipeline of projects going into 'twenty, four and 'twenty five already this year, you've seen Friday, one MTP LNG projects you have.

Seen us announce the blackmun's Cheniere Corpus Christi.

Because you look at the future our installed base by 2025 goes up about five 5% and that's good for the services as Brian mentioned that comes in after that so in installed base growing and that's 2025 and beyond is positive for our business.

Great. So maybe a follow up.

You reiterated your 100 to 150, and then Tpa outlook over the next couple of years, you did mention how youre seeing some impacts.

From inflation and financing.

Challenges you can think about driftwood and so I just wanted to see if you could put that into context or do you expect some of the brownfield opportunities to offset some of these chat.

Challenges we've seen.

Yeah again.

I acknowledge that the environment has become more challenging in particular for some of the independent developers as you mentioned cost inflation supply chain bottlenecks and.

Generally I'd say, we'd see the landscape maybe shifting in favor of more established LNG players with the scale diversity financial strength and better place to navigate the risks and uncertainties also brownfield projects and projects that utilize the fastest to market modular design.

Particularly advantaged in the coming years. So it is plausible that some projects change pace the build cycle becomes more smoother and more prolonged but again that feel confident in the 100 to 150 MTA over the course of next two years.

Thank you very much.

Yeah.

Okay.

And thank you.

And one moment our next question.

And our next question comes from Marc Bianchi from Cowen. Your line is now open.

Hey, Thank you.

Yes.

I wanted to start with digital and.

And get a better understanding of where you see those margins going.

If we can get it looks like maybe revenues getting back to that $600 million level here in the fourth quarter.

And.

Perhaps.

<unk> margins are still quite a bit below where they were if we go back a couple of years. What do you think is needed to get those margins back to where they were in 2019 and.

Kind of.

How.

Likely is that in 'twenty three.

Yes.

Mark I'd say, if I look specifically into 2023, I would expect <unk> revenues to increase in the mid single digit range, which assumes revenue growth from backlog conversion improvements as we start to see some of the chip shortages ease in energy markets remain.

Robust.

I do think we may see a bit of a pullback in terms of.

Now.

I don't see them getting markedly better.

Next year, so we're going to be hampered probably by output and that obviously impacts cost absorption.

And the ability to drive margin growth. There we are doing a lot on the cost side to continue to take cost out but there is there is no reason that this business should not be back to those levels or higher once we get some of these supply chain issues completely completely behind us so the long.

Term outlook is still.

It's still pretty good but right now it is a supply chain story in terms of being able to get the electronics and the chips through so we can get so we can get output, but one thing I will say and Lorenzo highlighted this when he talked about it we have worked on a lot of things to to redesign done engineering programs, we are resourcing.

From new suppliers, so everything that's within our control, but I have to give the team credit they have been executing on and as the global demand situation changes I think youll see some improvement there.

Okay Super and I'll, just echo what others have said, Brian . Thanks, So much for your time.

We're going to Miss you.

Next question for you bet next question for Lorenzo.

You announced this.

Power Gen acquisition.

From brush I'm, just curious you mentioned in the prepared remarks in the press release like how should we think about the contribution from that business in 'twenty, three and 'twenty four and then sort of what's the longer term opportunity.

Yes look we're very excited to bring brushing to the Baker Hughes portfolio and we see it playing an important role as it enhances our electromechanical capabilities within industrial and energy technology. If you look at <unk>, it's been a trusted supplier for many years has provided us with significant portion of the electric motors that we procure for various.

Applications.

And we see electrification playing a critical role in the Decarbonising process within the upstream oil and gas sector as well as industrial sector. So it's going to be an important part of the value chain that we wanted to address now that brush. It in house, we can work together to shape. The next generation of electric Motors, you look at the specific applications.

The oil and gas power supply LNG distributed power and long also duration energy storage. So if we've got a holistic view of solutions across the LNG spectrum covered from the technology perspective, and brush adds to that and it's called facilities.

<unk> U K, Czech Republic, Netherlands, and it's going to allow us to leverage its presence in eastern Europe to continue diversifying as well so feel good about the future elements and its contributions to the company and I would say specifically looking at 2023, Mark I would expect revenue should be around 200.

Dollar Mark and if I, if I look at EBITDA, its probably in the $40 million to $50 million range, but remember the first year of an acquisition you've got integration costs as well as some increased amortization and depreciation in there. So that that level is probably going be in the $35 million to $40 million range. So youre looking at the operating income.

A relatively small.

House now.

Very good thank you so much.

And thank you.

And one moment for our next question.

And our next question comes from Neil Mehta from Goldman Sachs.

Thank you, Brian it's been a pleasure working with you here.

The first question is.

Is more modeling specific.

<unk> different components for Q guidance by segment, but I thought it'd be helpful. If you could put it all together and go segment by segment and help us think through key key modeling.

Components as we think about the sequential into next quarter.

Yes.

I take a step back and look at look at that fourth quarter overall, starting with.

Starting with.

Oss International would expect some pretty strong growth prospects for fourth quarter.

<unk> should be between 19% and 20% and the only reason they are not.

Firm at the 20% is just the timing of the sale of the Russia business, which we expect to happen within the quarter and the timing of that and and how that plays out Neil will be the swing there, but look Maria Claudia and the team have done an outstanding job in <unk> and <unk>.

Clearly have line of sight to that 20%, especially as chemicals continues to improve as they have done the last couple of quarters.

On <unk> revenue will be flat to slightly higher sequentially based on what I see from our backlog conversion.

We will still be below breakeven levels due to the cost under absorption given the suspension of the contracts that we talked about primarily really in Russia that if that had come through switching gears a little bit.

<unk>.

Given where we are from an equipment conversion standpoint, I would expect revenues to be up double digit in the fourth quarter on a year over year basis and services should show strength as well.

You heard me talking to Mark's.

Question, There I would expect to see strong sequential revenue growth given the backlog and.

And what we.

What we see.

Coming through here in operating income.

A strong increase in operating margin rate, so, adding all of that up and the moving pieces.

It looks to be in line with how folks are thinking about the quarter from an overall standpoint.

And based on what I, what I see out there today, so no no real significant change here, but.

A lot of moving pieces that the team is managing and getting through.

The model to changes in FX as well.

Look I mean, I think what we've seen recently I think we'll all agree that the change in the Euro exchange rate, we haven't seen anything like that in a long time and.

If I take a step back and look at it from a revenue standpoint, the year over year.

Impact.

Was about 200, and roughly $200 million of year over year revenue pressure in the bulk of that was in and turbo machinery at about $120 million $20 million sequentially and turbo it was around $50 million or so so that gives you a perspective on the top line and from a translation.

<unk> standpoint, obviously, you have lower income in euro so youll have lower income in dollars coming from that but remember we do hedge economically and some of those hedges are actually those hedges were in the money just given where everything everything moves so the net impact at the overall Baker level.

<unk> is as much less than that but you will see some.

Potential choppiness in the segment results as FX does move around but largely manageable at the at the bottom line you see the bigger impact in revenue.

Perfect. Thanks, Keith.

Thanks Neil.

Yeah.

And thank you and one moment our next question.

And our next question comes from Dave Anderson from Barclays. Your line is now open.

Hi, Dave.

So in the release you mentioned the two fast track LNG projects for new fortress.

Also in supplying modular compression compressor trains for venture global.

Wondering it would seem that your technology.

Aside from any kind of financial considerations of your customers, but I would think this technology could enable a larger build out or at least a quicker build out of LNG liquefaction or you've been talking about the 100 150, and the overall 800 million ton per annum figure for ultimate size. So my question is do smaller faster LNG trains potentially push that number higher.

Presumably we're thinking 'twenty four 'twenty five but could you just talk about how that market could potentially change in your favor.

Yes, definitely Dave and again I mentioned, we feel good about the LNG outlook.

We stayed at the 100 to 150 and also mentioned that as you look at projects going forward brownfield projects as well as those that utilize the fast to market modular design.

Likely to be particularly advantaged in the coming years as we look at it. We've always said, we're going to have a complete time.

Solution offering for LNG and definitely the aspect of foster LNG and modular is gaining traction right now and they could lead to more players coming into the field as you look at different gas reserves that are being found and also look to capitalize on those as the need for energy continues I would say right now still.

The outlook is 800 million tons by 'twenty fatty I wouldn't go off that at this time and we will continue to monitor the situation yes.

I would just add that I think having that in the portfolio is very helpful. And if you think about what Lorenzo mentioned, if it fast if its modular if it stick build if it's large frame Baker Hughes has that in the solution set so.

But it's definitely I think a tailwind overall for Baker.

That's what I was getting at.

And just sort of sticking on the equipment side you also talked about the 26 compressor trains for the <unk> basin.

Normally we would have thought the Oss will be still the bigger business.

Bigger growth prospects, but.

But where does equipment sit in there because.

Wouldn't have necessarily thought that would've been a huge business, but now you can kind of really start to see that growing alongside the Oss. So could you just frame that for us a little bit.

Yeah.

Yes, David if you look at our equipment presence again, we've got a long history in the middle East Bowfin.

And Saudi as well as other countries with regards to both offshore and onshore from our power generation and.

Again, the compression standpoint, so again, we look at the prospects of that business being very positive going forward and again, we like the positioning we have both.

Sides of the business, there and both have considerable growth going forward.

Okay. Thank you.

And thank you.

And that was our last question I would now like to turn the call back over to Lorenzo Simonelli for closing remarks.

On our long term strategy and while we are preparing for a volatile environment. We are confident that we can navigate these challenges with the support from our recent corporate actions and a world class team.

I want to also again, thank Brian for his leadership support and friendship and wish him well in his future endeavors. I also look forward to welcoming Nancy to the Baker Hughes team on November 2nd Thank.

Thank you for taking the time and I look forward to speaking with all of you again soon.

Operator, you may now close out the call.

Ladies and gentlemen, thank you for participating ladies and gentlemen, thank you for participating in the program you may all disconnect everyone have a great day.

Q3 2022 Baker Hughes Co Earnings Call

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