Q1 2025 Baker Hughes Co Earnings Call
Good day, ladies and gentlemen, and welcome to the Baker Hughes Company First Quarter 2025
At this time, all participants are in a listen only mode. Later, we will conduct a question in answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.
Speaker Change: Oh, now like to introduce your host for today's conference, Mr. Chase Mulvehill, Vice President of Invest Relations, sir, you may begin.
Speaker Change: Thank you. Good morning everyone and welcome to Baker Hughes first quarter Ernie's conference call. Here with me are our chairman and CEO Lorenzo Simonelli and our CFO I'm in mobile.
Speaker Change: The earnings release we issued yesterday evening can be found on our website at Baker Hughes.com.
Speaker Change: We will also be using a presentation with our prepared remarks during this webcast which can be found on our investor website.
Speaker Change: As a reminder, we will provide forward-looking statements during this conference call. These statements are not guarantees of future performance and involve a number of risk and assumptions.
Speaker Change: Please review our SEC filings and website for the factors that could cause actual results to differ materially.
Speaker Change: Reconciliation of adjusted EBITDA and certain gap to non-GAAP measures can be found in our earnings release.
With that, I'll turn the call over to Lorenzo [inaudible]
Lorenzo Simonelli: Thank you, Chase. Good morning, everyone, and thanks for joining us.
Speaker Change: Ahmed brings extensive experience and a deep understanding of the Baker Hughes portfolio. He will collaborate with me and the broader executive team to advance our strategic priorities with a clear focus on profitable growth and sustained margin improvement.
Speaker Change: Now, let me start by providing a quick outline for today's call. I will begin by providing our thoughts on the macro environment before discussing our strong first quarter results. I will then highlight key awards and technology developments announced during the quarter.
Speaker Change: After this, I will briefly speak to our outlook before handing the call over to Ahmed, who will provide more details on our financial performance, walk through the potential tariff impacts to our business and provide further detail around our outlook.
Lorenzo Simonelli: Ahmed will then hand it back to me for a quick recap before we open the line for questions.
Now let's turn to our macro outlook.
starting on slide four.
Lorenzo Simonelli: The global economy has started cautiously this year due to ongoing geopolitical tensions, uncertainty around trade policy and tariffs, China's slower growth rate, and lingering inflationary pressures.
Lorenzo Simonelli: Specifically for Baker Hughes, we continue to monitor the evolving landscape closely and are taking proactive steps to mitigate the potential impact of changes in trade policy particularly
Lorenzo Simonelli: Broadly speaking, our strong waiting to international markets, along with a diversified, localized supply chain and established competitive position, helps reduce our overall financial exposure.
Lorenzo Simonelli: Tanning to oil markets. There are several factors driving downward pressure on oil prices.
Lorenzo Simonelli: As announced earlier in the first quarter, OPEC plus has now begun executing its plan to return 2.2 million barrels per day of previously idoled oil production to the market.
Lorenzo Simonelli: Subsequently, oil prices saw increased volatility, stemming from elevated tariff uncertainty that's affecting global GDP and oil demand.
Lorenzo Simonelli: With the softening macro backdrop, we now expect global upstream spending to be down by high single digit in 2025.
Lorenzo Simonelli: including a mid-to-high single-digit decline internationally and a low double-digit decrease in North America.
Lorenzo Simonelli: Excluding Mexico, international upstream spend is expected to fall in the low to mid-single
Lorenzo Simonelli: These expectations assume a stabilisation of oil prices around the current levels and tariffs hold at the current 90-day pause rates.
Lorenzo Simonelli: A sustained move lower in oil prices or worsening tariffs would introduce further downside risk to this outlook.
Lorenzo Simonelli: The prospects of an oversupplied oil market, rising tariffs, uncertainty in Mexico and activity weakness in Saudi Arabia are collectively constraining international upstream spending
Lorenzo Simonelli: Amid broader market softness, we see pockets of resilience in key international markets like Brazil and several countries in the Middle East and Asia-Pacific.
Lorenzo Simonelli: In North America, discretionary spending delays are extending into the second quarter, driven by ongoing uncertainty.
Lorenzo Simonelli: Additionally, recent oil price volatility presents potential downside to second half activity, particularly in U.S. land.
Lorenzo Simonelli: While second half visibility remains limited, we expect to outperform the broader North American market, supported by our production-weighted portfolio.
On natural gas, we see a more positive outlook.
Lorenzo Simonelli: Long cycle gas-leverd projects in LNG, gas infrastructure, and data centers continue to make progress towards FID.
Lorenzo Simonelli: Riving gas-fired power demand underscores a long-term shift in market fundamentals unaffected by near-term macroeconomic volatility.
Lorenzo Simonelli: To this point, natural gas demonstrated the strongest increase in demand among fossil fuels in 2024, led by a significant increase in power consumption.
Lorenzo Simonelli: According to the IAA, gas demand increased by 115 BCM or 2.7% compared with an average of 75 BCM annually over the past decade.
Strong gas fundamentals remain positive for LNG contracting trends.
Lorenzo Simonelli: With McKenzie reports that 15.5 MTPA of long-term LNG off-take contracts were signed in the first quarter, following a record 81 MTPA last year.
Lorenzo Simonelli: These statistics highlight consumer confidence in long-term global LNG and natural gas demand.
Lorenzo Simonelli: In the US, the repeal of the LNG permitting moratorium and the administration's stated goal of increasing US LNG exports has led to an improvement in orders for US LNG projects.
Lorenzo Simonelli: We have now booked around $1.7 billion of orders for USLNG projects over the past two quarters.
Lorenzo Simonelli: Given this positive backdrop, several key LNG customers in the Gulf Coast are indicating plans to further expand capacity beyond 2030.
Lorenzo Simonelli: This offers greater clarity regarding the potential increase in installed capacity above the anticipated 800 empty P.A. by the end of the decade.
Nancy Buese: Nancy Buese, Lorenzo Simonelli, Lorenzo Simonelli, Lorenzo Simonelli, Lorenzo Simonelli, Lorenzo
Lorenzo Simonelli: I would now like to address our outlook given the current macroeconomic environment.
Nancy Buese: We have a clear view of the near-term direct impacts that terrorists will have on our business.
and are actively implementing a number of mitigation actions.
Nancy Buese: However, the ongoing and dynamic trade negotiations between the US and its trading partners [inaudible]
Nancy Buese: and the uncertainty regarding the eventual status of tariff rates and other trade policies across key markets introduced a high degree of variability.
Nancy Buese: Given this backdrop, we are providing our second quarter guidance along with a framework for our 2025 outlook which Ahmed will cover in more detail later.
Nancy Buese: As we evaluate the path forward, it is important to recognize the differing dynamics across our segments.
Nancy Buese: OFSE is facing a wider range of potential outcomes driven by reduced upstream spending, tariff-related cost inflation and exposure to more cyclical markets limiting visibility beyond the current quarter.
Nancy Buese: IET offers greater visibility and is well positioned in this environment, supported by a healthy equipment backlog, substantial recurring revenues, and strong operational performance, underscoring the strength and balance of our portfolio.
We remain confident in our strategy.
Nancy Buese: Our focus is on the areas within our control, driving productivity, executing with discipline and accelerating our efforts to be a leaner, more efficient company.
Turning to our first quarter operational performance on slide five.
We delivered strong results.
Nancy Buese: Maintaining the trend of meeting or exceeding the midpoint of our EBITAR guidance for the ninth consecutive quarter.
Nancy Buese: We also sent new first quarter records for revenue and our adjusted measures of EPS, EBITDA and EBITDA margin.
Nancy Buese: Adjusted EBITDA of $1.04 billion increased by 10% year over year, led by IET where EBITDA has increased by at least 30% for five consecutive quarters.
Nancy Buese: Industrial and Energy Technology experienced a solid start to the year, booking $3.2 billion of orders with segment backlog reaching another record level of $30.4 billion.
excluding LNG equipment orders totaled a robust $2.7 billion.
Nancy Buese: During the quarter, we generated free cash flow of $454 million and returned the total of $417 million to shareholders.
Nancy Buese: Our strong first quarter results reflect our commitment to profitable growth and continuous margin improvement.
Nancy Buese: Solid operational execution and transformation progress are driving structural margin improvement with our adjusted EBITBA margin expanding by 140 basis points to 16.1%.
Nancy Buese: including Gained across both segments, even as a softer upstream market wade on OFFC.
Nancy Buese: Turning to slide six, we are witnessing strong commercial momentum across new and existing markets.
Nancy Buese: This was reinforced by the record attendance at our recent annual meeting in Florence, Italy.
Nancy Buese: which brought together over 2,300 customers and delegates from 85 countries.
Importantly, we had representation across industrial and energy ecosystems.
Nancy Buese: including participants from mining, steel, cement, industrial power generation, and data center markets.
Nancy Buese: Following several customer engagements at this event, we booked multiple data center awards, marking our entrance into this market and further expanding IIT's industrial reach.
Nancy Buese: Of the 35 Nova LTs booked during the quarter, 22 will be utilized to power data centers.
Nancy Buese: This amounts to more than 350 megawatts of power for this high-growth market.
Nancy Buese: In March, we signed an agreement with Frontier Infrastructure to develop large-scale CCS and power solutions for data centers.
Nancy Buese: including the development of behind-the-meter gas-fired power generation that will utilize on Nova LT turbines.
Nancy Buese: This partnership will leverage technologies and services across Baker Hughes by providing CO2 compression, industrial gas turbines, digital monitoring solutions, well construction and completion services.
We also secured an order from turbine ex-energy.
Nancy Buese: One of Baker Hughes' network of all-friess packages in North America.
Nancy Buese: The scope includes Nova LT, gas taverns, gears, and power generation technology for micro grid solutions to power data centers.
Nancy Buese: In gas infrastructure, we secured an award in North America for two pipeline compression stations which will provide feed gas to a Gulf Coast LNG facility.
Nancy Buese: This award includes a total of 10 gas turbines and 10 centrifugal compressors.
Nancy Buese: Generally, we see growing opportunities in North America for gas infrastructure, driven by a LNG capacity expansion along the Gulf Coast and AI led demand for gas-powered data centers.
Nancy Buese: We also received an award to supply a Nova LT gas turbine and a pipeline compressor for a gas boosting station in the UK.
Nancy Buese: Disequipment Order is part of National Gas Transmissions broader investment to enhance the UK's gas infrastructure, ensuring energy security and reducing overall emissions.
Nancy Buese: In LNG, we secured an order for a liquefaction train in North America.
Nancy Buese: We will provide four main refrigerant compressors driven by LM6000 gas turbines and four expanded compressors.
Nancy Buese: We also signed key strategic framework agreements with next decade and Argent LNG.
Growing up, Pipeline of Potential Orders
Nancy Buese: For next decade, the scope includes equipment for five additional trains totaling 30 MCPA of liquefaction capacity at the Rio Grande LNG facility.
Nancy Buese: This will be complemented by contractual services agreements for these equipment packages.
Nancy Buese: Argentellin G has selected Baker Hughes to provide liquefaction, power solutions, and related aftermarket services for its proposed 24 MTPA LNG export facility in Louisiana.
Nancy Buese: Importantly, the project will employ Baker Hughes nimble, modularized LNG solution driven by the LM9000 gas turbine while also utilizing our eye center and cordon digital solutions.
Nancy Buese: including Next Decade and the Argent. We now have LNG supply agreements in place for over 120 MTPA. This provides visibility for potential LNG equipment orders into the latter part of this decade.
Nancy Buese: In gas tech services, we experienced a record quarter for upgrade orders, increasing by 167% year over year, as many operators looked to drive efficiencies, reduce emissions, and extend the life of that gas infrastructure project.
Nancy Buese: This was the largest order quarter for upgrades in the history of the company.
Nancy Buese: In the Middle East, we received a significant upgrade award to support one of the world's largest gas processing plants.
Nancy Buese: The scope includes the upgrade of two existing gas turbines to drive new compressors and the supply of a third compression train to support production expansion.
Nancy Buese: Separately, the team is partnering with SonaTrack to deliver an upgrade solution to support the modernization of a key compressive station in Algeria.
Nancy Buese: Starting to all-field services and equipment, we experienced sustained commercial momentum through market uncertainty during the first quarter.
Nancy Buese: Petrobras continues to leverage our innovative solutions to help unlock Brazil's vast energy supply.
Nancy Buese: During the quarter, Baker Hughes received a major integrated completion systems order across multiple deep water fields in Brazil.
Nancy Buese: In mature-asset solutions, OFC received an award from Sakhar in Azerbaijan to expand deployment of Lucifer to all wells in the Ubershon and Goncelli fields.
including those with non-Baker Hughes electric submersible pumps.
Nancy Buese: We also signed a multi-year frame agreement with Equinole to provide plugging services on the Norwegian Continental Shelf.
as part of this agreement.
Nancy Buese: Baker Hughes' mature asset solutions team will lead the integrated plug and abandonment campaign, managing the planning and execution across the North Sea's Osberg East field.
Nancy Buese: Across the Baker Hughes Enterprise, we are capturing increasing commercial synergies between OFC and IET, through our early engagement on gas infrastructure, CCUS, geo-farmal, and data center projects.
Nancy Buese: Looking out to Horizon 2, our pipeline of enterprise-wide opportunities continues to grow as customers seek solutions to address their energy efficiency and decarbonization needs.
Nancy Buese: In addition to the previously mentioned Frontier Agreement, we book two orders that highlight commercial synergies across the enterprise.
Nancy Buese: OFSC was awarded a multi-year contract to provide integrated coil tubing drilling services on the Magham Gas Storage Project in Dubai.
Nancy Buese: This award was facilitated by IET's existing customer relationship with Dubai Supply Authority who previously ordered ICO compressors for the same project.
We are also observing this commercial trend of Saurabh Pant,
Nancy Buese: In OFC, we received a significant multi-year award from Exxon Mobil Guiana to provide specialty chemicals and related services for FPSOs.
Nancy Buese: which complements our IET scope that includes power generation and compression equipment previously awarded.
Nancy Buese: Moving to new energy, we booked 238 million dollars of orders and maintain our 2025 audit target of $1.4 to $1.6 billion.
Nancy Buese: During the quarter, we booked an award to supply free electric motor driven CO2 compression trains and gearboxes for a CCS project in Northwestern Europe .
We also made progress on several new energy technology developments.
Nancy Buese: In geothermal, we have been selected by the U.S. Air Force and the Department of Defense to explore the development of utility-scale geothermal power.
Nancy Buese: During the quarter, we also announced the Joint Development and Collaboration Agreement for the development of a new small scale turbine for ammonia applications.
Nancy Buese: The new ammonia turbine will be suitable across shipping, FPSO, and gas infrastructure markets.
Nancy Buese: Overall, we had a positive start to the year from a commercial and technology engagement perspective and remain confident in our I.E.T. Order's guidance range this year.
Nancy Buese: We are building strong order and technology pipelines that extend beyond our traditional oil and gas markets, providing additional life cycle growth opportunities that further enhance our earnings durability.
Nancy Buese: Baker Hughes is well positioned to deliver sustainable growth and long-term shareholder value, and we're excited about the future as we advance into the next phase of our journey.
Nancy Buese: With that, I'll turn the call over to Ahmed, who will provide more details on our court to the results, Karate Exposure, and Guidance.
Ahmed Moghul: Thanks, Lorenzo. I'll begin on slide 8 with an overview of our consolidated results and then speak to segment performance before providing details of our exposure to evolving trade policy and tariffs.
Ahmed Moghul: I will also provide a quick summary of our outlook before handing it back to Lorenzo for final comments.
Ahmed Moghul: As Lorenzo mentioned, orders got off to a solid start to the year booking $6.5 billion for the total company and included $3.2 billion in IET.
Ahmed Moghul: Adjusted EBITDA increased by 10% year-over-year to $1.04 billion driven by strong IET revenue growth and continued margin expansion across both segments.
Gap diluted earnings per share were $0.40 $0.50 per cent.
Ahmed Moghul: Excluding adjusting items, earnings per share were 51 cents, an increase of 19% when compared to the same quarter last year.
Ahmed Moghul: We generated three cashflow of $454 million for the quarter. For the full year, we continue to target free cashflow conversion of 45 to 50% with the normal weighting towards the second half of the year.
Turning to capital allocation on slide 9.
Ahmed Moghul: Our balance sheet remains in a very strong position, ending the first quarter with cash of $3.3 billion and not debt to either the ratio of 0.6 times and liquidity of $6.3 billion.
Ahmed Moghul: Our next step maturity is not until December 20, 26, and S&P recently upgraded our long-term credit rating to A.
We returned $417 million to shareholders in the first quarter.
Ahmed Moghul: This included $229 million of dividends and $188 million of share repurchases.
Ahmed Moghul: We remain committed to returning 60 to 80% of free cash flow to shareholders.
Ahmed Moghul: I will now highlight the results for both segments starting with IET on slide 10.
Ahmed Moghul: During the quarter, we booked solid IET orders of $3.2 billion.
Ahmed Moghul: This included $510 million for LNG equipment, $104 million for data centers, and record gas tax service upgrades of $272 million.
Book to Bill was 1.1 times.
Ahmed Moghul: resulting in IET RPO of $30.4 billion that reached a new record.
Ahmed Moghul: This RPO level and a structural growing installed base provide significant revenue visibility for IET over the coming years.
Ahmed Moghul: IET revenue increased by 11% year-over-year to $2.9 billion, led by a 20% increase in gas tech equipment and 114% growth in climate tech solutions partially offset by gas tech services.
Ahmed Moghul: EBITDA growth significantly outpaced segment revenue, increasing 30% year-over-year, as margins expanded by 240 basis points to 17.1%, despite mixed headwinds.
Ahmed Moghul: This performance was driven by a strong margin expansion in gas tech equipment supported by productivity from project closeouts.
Ahmed Moghul: IET continues to benefit from the lean strategies being adopted across operations that are driving structural margin improvement.
Turning to OFC on slide 11.
Ahmed Moghul: OFC revenue in the quarter was $3.5 billion, down 10% sequentially as we experience enhanced seasonal weakness across many international markets.
Ahmed Moghul: Economic and tariff uncertainty to start the year, resulted in customers delaying discretionary spending, primarily impacting direct equipment sales.
Ahmed Moghul: In international markets, revenue declined 11% sequentially driven by a significant slowdown in activity in Mexico.
Ahmed Moghul: Rig activity in Mexico declines sequentially by 52%, now down 72% from 2023's peak levels.
Ahmed Moghul: Excluding Mexico and SSPS, international revenue was down 7% sequentially more aligned with typical seasonal declines.
Ahmed Moghul: In North America, revenue declined 5% sequentially, driven by seasonal weakness and offshore.
Ahmed Moghul: North America land was down 3% as strength in drilling services and drill boots were offset by lower revenue across most other businesses.
Ahmed Moghul: OFC EBITDA margin rate was 17.8%, improving 80 basis points year over year, even with segment revenue declining by 8%.
Ahmed Moghul: This is a testament to the team's hard work to structurally change the way we operate.
Ahmed Moghul: Due to the previously mentioned Mexico weakness and delays in discretionary customer spending, segment EBITDA of $623 million was between the low and midpoint of our guidance range.
Ahmed Moghul: Turning to slide 12. I want to walk through our outlook and how the current environment could impact performance.
Speaker Change: I'll begin by outlining the potential tariff impacts to Baker Hughes and walk through our full-year framework and conclude with detailed guidance for the second quarter.
Speaker Change: While the situation remains fluid, we have been conducting comprehensive scenario planning exercises and continue to develop and implement mitigation strategies to manage through the spirit of volatility.
Speaker Change: In our OFC segment, our strong international presence provides us a degree of protection against tariff impacts since approximately 80% of segment revenue is derived from markets outside the U.S.
Speaker Change: Domestically, we benefit from a broad U.S. manufacturing footprint and a resilient local supply chain.
Speaker Change: However, we do expect some cost headwinds tied to imports from China, Germany and the UK.
Speaker Change: We also sourced some oil fuel components and chemicals from Canada and Mexico, a portion of which qualify under USMCA provisions.
Speaker Change: To reduce reliance on these imports for OFSE, we have been working with U.S. supply chain partners to increase domestic sourcing.
Speaker Change: Additionally, we have engaged with customers on cost recovery initiatives, which have led to encouraging outcomes to date.
Speaker Change: Within IET, we have identified three areas of tariff exposure. First, a portion of industrial tax U.S. volumes exported to China may be impacted by new trade policies.
Speaker Change: Second, we supply critical equipment to U.S. projects from our facilities in Italy, although this backlog has limited exposure due to existing contractual terms.
Speaker Change: Third, we anticipate modest impact from steel and aluminium tariffs, as well as U.S.-China trade activity.
Speaker Change: We expect these actions combined with continued productivity gains will largely offset the tariff related impacts.
Speaker Change: After accounting for these offsets across both segments, we estimate a net EBIDA impact in the range of $100 to $200 million.
Speaker Change: This assumes current tariff rates applied during the 90-day policy period continue for the remainder of 2025.
Speaker Change: Beyond direct impacts, we are also monitoring secondary effects, such as more cautious customer behavior and the potential for broader economic weakness.
Factors that remain difficult to quantify. Bye.
Speaker Change: A further slowing of customer spending could affect our more economically sensitive areas, such as direct sales and transactional services in OFSE and industrial tech in IET.
Speaker Change: Turning to our 2025 outlook. We use this tariff outline to help shape our framework for the
Speaker Change: As visibility on trade policy and the broader market dynamics improve, we will provide further updates as we progress through the year. [inaudible]
Speaker Change: In I.E.T., we believe our diversified portfolio, substantial I.E.T. backlog, and sizeable aftermarket services business provide earnings and cash flow stability during the period of uncertainty.
Speaker Change: In the current environment, IET's lean mindset and processed driven culture should continue to deliver structural margin improvement, even in the face of higher input costs.
Speaker Change: As we balance our current view, we believe the IEET EBITDA guidance range communicated in January remains achievable.
In OFC, visibility beyond the second quarter remains limited.
Speaker Change: If oil prices and tariffs hold at current levels, we expect global upstream spending to decline in the high single-digit range for 2025.
Speaker Change: Under this scenario, we believe OFC margins will still improve year-over-year driven by cost efficiency and continued execution of transformation initiatives.
Speaker Change: As this framework illustrates, our 2025 Outlook reflects pressure from market sensitive elements of OFSE, while IET is expected to deliver strong growth compared to last year.
Speaker Change: Turning to second quarter, we expect total revenue of $6.3 to $7 billion and total Ibadaf approximately $1.04 to $1.2 billion.
Speaker Change: This guidance assumes we can partially offset tariff impacts through abatement opportunities, contractual pass-throughs, and other mitigation strategies.
Speaker Change: It also assumes tariff levels remain consistent when compared to the current 90-day pause scenario.
Speaker Change: For IET, we forecast EBITDA of $520 to $580 million on revenue of $3.0 to $3.3 billion, led by growth in gas tech services.
Speaker Change: The major factors driving this range will be the pace of backlog conversion in GTE, the impact of any aeroderivative supply chain tightness and volume levels in industrial tech.
Speaker Change: For OFC, we forecast EBIDA of $600 to $700 million on revenue of $3.3 to $3.7 billion, implying further margin improvement on flat sequential revenue.
Speaker Change: We expect results to reflect a less pronounced seasonal recovery in both international and US markets due to ongoing macro uncertainty and recent all-priced weakness.
Speaker Change: Factors driving the range include execution of our SSPS backlog, the impact of near term activity levels in North America and international markets, and the pace of activity in Mexico.
Speaker Change: In summary, we're pleased with the company's operational performance during the first quarter. OFSE margins remained resilient despite upstream market softness while IET margins continued progressing towards 20%.
Speaker Change: Although our outlook is tempered by macro and trade policy uncertainty, we remain focused on elements we can control, continuing to streamline operations and drive efficiencies that will benefit us well beyond the cycle.
With that, I'll turn the call back over to Lorenzo [inaudible]
Lorenzo Simonelli: Thank you, Ahmed. Our strong first quarter results demonstrate the progress we've made in transforming our operations and streamlining the organization.
Lorenzo Simonelli: This has created a solid foundation to further optimize margins and enhance returns even in a challenging environment.
Lorenzo Simonelli: Looking beyond near-term macro uncertainty, we continue to believe in the structural growth of global energy demand.
Lorenzo Simonelli: An outlook that underpins our strategy and anchors, Baker Hughes's long-term value creation.
Lorenzo Simonelli: The world needs more energy with fewer emissions and we see natural gas playing a fundamental role in achieving this dual objective.
Lorenzo Simonelli: To conclude, thank you to the entire Baker Hughes team for yet again delivering outstanding results. As we continue our journey to take Baker Hughes and energy forward, we remain committed to our customers, shareholders and employees.
Speaker Change: With that, I will turn the call back over to Chase.
Operator, we can now open up for questions.
Speaker Change: To ask a question, please press star 11 on your telephone and wait for your name to be announced.
Do we draw your question? Please press star 1-1 again.
Speaker Change: In the interest of time, we ask that you please own yourself to one question. Please stand by while we compile the Q&A roster.
Thank you. Thank you.
Speaker Change: Our first question comes from Arun Jayaram with JP Morgan. Your line is up.
Speaker Change: Good morning. My question is regarding guidance. You know, we appreciate the fact there's a lot of uncertainty.
associated with tariffs in OPEC plus policy.
Lorenzo Simonelli: It makes sense to us, Lorenzo, you shifted to a hybrid called Pragmatic Approach to the Guide, with the explicit guide for 2Q.
I guess my question is you've highlighted.
1-200 million of tariff impacts this year.
Speaker Change: I know that you had on the fourth quarter call had a guidance range.
Impact and the fact that IET looks largely intact.
Yohairun and
Thanks, appreciate the question, an important topic and...
Speaker Change: We'll break it down into really, I'll start off and then let Ahmed maybe walk you through the framework and then also specifically respond to the question and I'll come back at the end because I think it's important that everybody's clear on what we're saying here.
Speaker Change: As I noted in my prepared remarks, the global economy has experienced a cautious start driven by the ongoing geopolitical tensions, some of the trade policy and tariff uncertainty, slow growth in China and persistent inflationary pressures.
Speaker Change: So far in the second quarter and also what you saw with our good results in fast quarter, we've not experienced the material impact of volumes or activity levels.
Speaker Change: We do recognize, though, there's growing uncertainties around the trade policy in tariffs. There's creating, you know, some uncertainties for our customers, as well as for Baker Hughes. So, as a result,
Speaker Change: We've got less visibility into the second half of the year across our more economically sensitive businesses, such as drilling and completion service lines, US land, short cycle, oil field services in international, and the GDP-like industrial tech businesses.
Speaker Change: So given the wide range of potential outcomes on the trade policy and tariff outcomes and their impact, we thought it was important to provide a framework.
that allows you to look at 2025 and once there's great a clarity in the external environment.
Speaker Change: We intend again to provide four more four-year guidance ranges for the company and I'll pass its wireme to give a little bit more detail on the aspects of the framework.
Speaker Change: Yeah, Arun, let me just start by talking through the framework itself, so I'll start with the key points around tariffs.
Speaker Change: You know, under the current set of trade policies, we understand the direct implications for our business and have been implementing.
as you heard several mitigation actions, so…
Speaker Change: After accounting for those potential offsets across both segments, we estimate a net EBITDA impact in the range of what we mentioned of $100 to $200 million, which includes both direct costs as well as revenue related impacts.
Speaker Change: and I'd say just over half is attributed to IEP. And the primary factor behind that range is actually the timing and effectiveness of our mitigation actions.
Speaker Change: So the estimate assumes the current tariff levels are in effect during the 90-day pause period and remain in place through year end.
Speaker Change: As a result, our estimate doesn't really include the secondary effects from tariffs, lower oil prices, broad economic weakness, which could ultimately have a larger impact than our results than just the direct inflationary cost pressures.
Speaker Change: But, of course, the trade policy and the tariff environment worsens, then we'll need to reassess and likely adjust the estimated impact accordingly.
Speaker Change: So, how this translates to the segment? So, I'll start with IET. You know, IET is reasonably well positioned to manage through this environment, while tariff-related costs—
Speaker Change: Inflation, we expect to impact the segment of force. The fact is largely concentrated in the industrial tech side of the segment.
Speaker Change: And at this stage we assume that continued productivity gains that you've seen in gas tech are expected to offset much of that inflationary pressure within the industrial tech side of the house.
Speaker Change: and also in industrial tech, which accounts for just as a reminder about a quarter of IET revenues. We could face potential headwinds from slowing GDP growth.
Speaker Change: in addition to the inflationary pressures that we've talked about. But taking all of that into account, we continue to view our 2025 Tollier IET EBITDA guidance range of $2.4 billion as achievable.
Lorenzo Simonelli: So, then you go on to OFSC and ultimately OFSC, as Lorenzo mentioned, faces a broader range of outcomes, which limits the visibility beyond the current quarter, so a second quarter.
Lorenzo Simonelli: Now, we expect North American upstream spending to decline in the low-double-digit range and international spending to decline by mid-to-high single-digits.
Lorenzo Simonelli: But despite that deterioration in the overall market, we remain focused on optimizing cost structure limiting duplication to protect margins, and you've seen us do that even as market conditions soften.
Lorenzo Simonelli: Now, ask your last question about holding the $4.7 billion EBITDA level for the year. We believe that we could approach that EBITDA level if the tariff related impacts land towards the lower end of that $100 to $200 million range.
Lorenzo Simonelli: and all prices stabilized and tariffs hold at the current 90-day pause rates.
Lorenzo Simonelli: So, Arun, maybe just to conclude because I think this is a very fluid situation and everybody is approaching this differently. I just want it to maybe...
Speaker Change: at a couple of quick points here. The hybrid model that we've laid out is really to provide a lot of transparency. If you look at the conclusion on the IAT side, we set our guidance ranges are still achievable.
Speaker Change: on the OFC side. It's more of a framework given some of the higher level of uncertainty.
Speaker Change: Three strong years very strong years of IEP orders Youre off to a good start in 2025, and you had those significant data center orders as well.
Speaker Change: Can you talk about the opportunity for Baker on the data center side and maybe maybe you could also share thoughts on how you think the macro could impact the <unk> order flow this year.
Speaker Change: Definitely Stephen and <unk>. Thanks.
Speaker Change: It did have a solid start to the year for orders booking $3 $2 billion.
Speaker Change: In the first quarter as you mentioned then without LNG equipment.
Speaker Change: Or there's still totaled $2 7 billion, which continues to demonstrate that.
Speaker Change: <unk> utility of the <unk> portfolio for.
Speaker Change: For the full year, we're sticking to the guidance that we laid out at the beginning of the year to be in the range of 12, 5% and $14 5 billion. We continue to feel good about the LNG outlook and the data center opportunities, which are gaining momentum I think as you look at.
Speaker Change: Highlights during the first quarter a record levels of also gas Tech services upgrades, a trend that looks like it will continue and we're really not seeing customers pull back from LNG gas infrastructure or the data center projects and we're staying very close to them and monitoring things just to highlight on.
Speaker Change: The LNG momentum during the quarter, we booked an order for liquefaction equipment in North America.
Speaker Change: So book to gas infrastructure order for feed gas compression from major U S. LNG, operator, and we expanded our relationship with next decade to cover five more trains at Rio Grande and signed an agreement with Argenta LNG to support the proposed 24 M Tpa facility. So.
Speaker Change: Over the past two quarters, we secured a $1 $7 billion in LNG orders.
Speaker Change: And that speaks to our leading position in LNG and reinforces the positive outlook for the year and the growing confidence we have in LNG orders that supported by long term equipment supply agreements with <unk>.
Speaker Change: Strategic operators, including venture Global next decade. So as you look at overall, we've got a growing number of LNG customers and we have supply agreements in place for over 120 M. Tpa of LNG and we've seen a good increase in offtake agreements.
Speaker Change: And equity investments by LNG players, which further strengthens our confidence on the outlook for this year and beyond so as you look at 2025 and also 2026 and again, we feel good about the 100.
Speaker Change: <unk>.
Speaker Change: <unk> that make us reach the 800 MTA by 'twenty Friday, and we also think we will surpass that 800 empty PAA as we go beyond 'twenty Friday, So LNG continues to be good on data centers.
Speaker Change: I think Great example of what we've discussed before really showcasing.
Speaker Change: Expanding reach in industrial areas and the diversity of the portfolio.
Speaker Change: And looking at external factors, we continue to see strong pickup in demand as you look at Mckinsey They see U S data center energy demand by 'twenty Friday, that's increasing at 23% CAGR rate.
Speaker Change: And we're continuing to see strong interest and the capability that we have across the Baker Hughes portfolio, given <unk> C&I <unk> to.
Speaker Change: To provide decarbonization solutions and power generation and the Great example is frontier infrastructure that we announced which again provides the development of large scale Ccs and power solutions for data centers and it's that fast development end to end solution turbines.
Speaker Change: Oh, two storage well design construction.
Speaker Change: So.
Speaker Change: We feel good that that's going to continue and the enterprise wide solutions. We can provide are a key differentiator as you look at <unk>. The industrial gas turbines that we have booked over 350 megawatts across multiple customers during the quarter and we have multiple use cases for data centers.
Speaker Change: Not just base load, but also bridge to backup temporary power and for gas power generation.
Speaker Change: Focus is on the 150 megawatt range or below and that really suits well, the nova gas turbines as well as being able to provide a sub surface to surface, Joe far more solutions and the 5% to 80 megawatt range. So we're continuing to increase the <unk>.
Speaker Change: Capacity of de Novo Iot and we're seeing good traction with our customers and over the next three years, we expect to book at least one $5 billion of orders in data center equipment and longtime we think data centers could be a meaningful growth driver for <unk> as well as overall for the.
Speaker Change: Enterprise solutions, we have and also reoccurring aftermarket services over the rest of the life of the equipment. So data centers is a key area of focus thanks Steven.
Scott Gruber: Thank you. Our next question comes from Scott Gruber with Citigroup. Your line is open.
Scott Gruber: Yes, good morning, and I appreciate all the tariffs color can you just provide some more color on the mitigation initiatives that youre undertaking I imagine some levers can be pulled fairly quickly somewhere probably longer dated especially if youre shifting manufacturing locations and how much mitigation isn't bad.
Scott Gruber: And the 100 to 200 million impact and is there an ability to squeeze that figure lower overtime assuming.
Scott Gruber: That is called environments of the tariffs. Thanks.
Scott Gruber: Yes, Hi, Scott. So so look I'll start with one thing to keep in mind is just reinforcing that we have.
Scott Gruber: Have a strong international mix in the company and its not just from a <unk>.
Scott Gruber: Customer perspective, but also from our global supply chain footprint and that naturally limits, our exposure to direct U S tariffs.
Scott Gruber: But for context, we purchased roughly $14 billion in direct and indirect materials annually.
Scott Gruber: After that we imported less than 5% into the U S and under 2% comes from China.
Scott Gruber: So and if you last remember this global footprint served us well during the last round of tariffs implemented in 2018.
Scott Gruber: So as we mentioned in the prepared remarks, we've we've taken proactive steps to develop mitigation strategies and thats whats, helping reduce the net net impact down of direct tariffs to the $100 million to $200 million range. So as an example, we've established a centralized coordination hub with leaders from many different functions to <unk>.
Scott Gruber: Supply chain legal commercial government relations tax just to name a few.
Scott Gruber: We're we're monitoring develops and acting quickly to implement things and also adjust as things evolve and so when you when you're really double click into the actual mitigation. There are really two aspects that we're working through first there is the direct sourcing costs tied to imports into the U S.
Scott Gruber: Most of which come from places like I mentioned, Germany, UK, China, Canada, and Mexico. So in that we're taking I would say three specific actions that reduced our gross exposure first we are leveraging the global supply chain manufacturing footprint to better align with end markets soon.
Scott Gruber: Make sure we have the right things in the right places obviously second.
Scott Gruber: We're utilizing free trade agreements and expanding duty drawback programs, where they are available and third I would say is understanding and utilizing our contract mechanisms.
Scott Gruber: We're pricing increases in surcharges offset some of that where possible.
Scott Gruber: So that's that's around the direct sourcing costs. The second piece, we're working through is.
Scott Gruber: Assessing the actual potential revenue exposure and that will mainly relate to U S exports to China, So think about our industrial tech business.
Scott Gruber: So at the moment, we're not assuming any mitigation success here, but we do see opportunity over time.
Scott Gruber: To backfill, China imports with locally sourced volumes now as for Italy exposure.
Scott Gruber: There is limited due to our contractual terms where customers typically take ownership.
Scott Gruber: After products in Italy.
Scott Gruber: So everything I've said is focused on the direct tariff impact, but then the potential secondary effects are difficult to quantify as we've said at this point, but we're monitoring them quite closely and they would show up in the more transactional side of the business, So OFC and parts of industrial Tech.
Scott Gruber: But in summary, as I step back and look at this with our diversified portfolio of the global supply chain footprint I've talked about the backlog the aftermarket business. It really provides us a strong foundation.
Scott Gruber: For us to navigate in this type of environment and still deliver the earnings and cash flow.
Scott Gruber: In this environment.
Scott Gruber: Thank you.
Speaker Change: And our next question comes from Rob <unk> with Bank of America. Your line is open.
Speaker Change: Hi, good morning, Laurent dynamic.
Speaker Change: Hi, good morning.
Lorenzo Simonelli: Lorenzo maybe I did want to pivot a little bit and talk about or if you see I know revenues were down 10% you talked about.
Speaker Change: Enhanced seasonal weakness delayed discretionary spending rate, though but if you can just walk us through the key moving pieces Keith your market and how they are moving and how should we think about them going forward through the rest of the year and ultimately what does that mean for your 20% EBITDA margin target for this year. If you can step us through that Lorenzo but that would be perfect.
Brian: Sure So Brian I'll kick it off with.
Speaker Change: Sort of as we see the marketplace and as I mentioned earlier, we started to see some revenue softness in Q1 and that was mainly due to deferral of discretionary spending.
Brian: Particularly on the international side separately.
Brian: Separately Pemex put a pause on contracting activity in Mexico.
Brian: And just to give you a sense of that scale rig activity there was down 52% sequentially.
Brian: That's now a 72% dropped from peak levels in 2020 free outside of Mexico.
Brian: We saw shoppers.
Brian: Sharp seasonal declines in places like sub Saharan Africa, Asia Pacific, Argentina, Brazil, Saudi remained relatively flat quarter over quarter, we continue though to see a shift in focus from oil to gas activity in North America, we saw revenue come down 5% sequentially.
Brian: Tied to offshore seasonality.
Brian: <unk> was down slightly and largely in line with our expectations. So looking ahead, we've revised our outlook given the recent trade policy uncertainty in oil price volatility.
Brian: And when we first gave our view on global upstream spending Brent.
Brian: Brent was sitting in the mid $70 range.
Brian: But now down to the mid sixties.
Brian: So based on where we see things stand.
Brian: We expect global upstream spending to be down high single digits, this year and breaking that down international upstream spending expected to decline mid to high single digits.
Brian: North America expecting a low double digit decline and all of this assumes oil prices stabilized around current levels and that the tariffs hold at the current levels under the 90 day pause obviously if that changes.
Brian: On the pricing or the tariffs then there'll be some potential downside, we have to anticipate and.
Speaker Change: That's the market outlook that we see and I'll pass it over to Ahmed on the 20% Yeah Zurab. So on the margin question look I'd like to step back and just remind everyone of the margin progress OFC has made over the past few years.
Speaker Change: So when we introduced this 20% target back in September of 'twenty two.
Speaker Change: <unk> margins were below 15%.
Speaker Change: And in the second half of last year margins averaged about 19, 5%. So there.
Speaker Change: There is clear progress that reflects the work the team has been doing on structural improvements.
Speaker Change: And we remain focused on what we control and we're still committed to the 20% margin milestone.
Speaker Change: But however, we didn't envisage an environment, where upstream spending would be down nearly 10% after a year of flattish levels. So for the second quarter, we still expect margins to improve sequentially by 80 basis points, reaching around 18, 6%.
And we're starting to see and we saw some of that come through already.
Speaker Change: A portion of the benefits from the restructuring actions, we announced in the fourth quarter of last year.
Speaker Change: So most of the benefits will show up in the second half.
Speaker Change: And should provide some of that installation on further margin uplift.
Speaker Change: And driving that measured margin expansion and the real in this environment is a real testament to the transformation work that we've been doing but that said the ultimate pace of improvement will depend on as Lorenzo said, how tariffs play out and how the broader upstream environment evolves.
Speaker Change: Thanks, Rob you can just look at it from a standpoint, we're focused on the elements we control that margin accretion that we've seen also in the first quarter for FSC that 20% is what we're continuously aiming for and we're going to execute what's in our control and continue to drive the transformation as we've laid out.
Speaker Change: And continue that progression.
Speaker Change: Thank you. Our next question comes from David Anderson with Barclays. Your line is open.
David Anderson: Thanks, Good morning, Lorenzo and honored.
Speaker Change: Similar to <unk>.
Speaker Change: Side is interested in margin progression from here on some of the variables you are thinking about.
Speaker Change: As you look at your target for better pricing and improved efficiencies seem to be really shrink in the first quarter results, but what drives expansion from here is it just more efficiency gains from faster backlog conversion and do you still hope to do you still expect to hit 18% margin. This year and 20% next year in light of the headwinds with tariffs and potentially maybe even services slowing down.
Speaker Change: But in this environment. Thank you.
Speaker Change: Yes.
Speaker Change: Hey, Dave how are you. So look I would say you know looking ahead, we do expect second quarter margins to increase again.
Speaker Change: The sequential increase though will be more modest compared to revenue for a few reasons first we had some project closeouts in the first quarter that helped the margins. So thats part of the natural flow of RPM.
Speaker Change: As we execute through that.
Speaker Change: Second is.
Speaker Change: When you when you look at the industrial Tech business and what we mentioned about tariffs you find that there'll be some modest margin pressure on that side as we go through so and then lastly from a sequential standpoint, the risk on China and U S trade volume that we highlighted within industrial tech and that business carries high <unk>.
Speaker Change: Margins, so any reduced volume there could impact overall margins. So we've tried to capture our best estimate.
Speaker Change: For how those reduced high margin volumes and higher tariff costs will impact second quarter. So that is in the second quarter guide.
Speaker Change: And then when you look out actually into the second half of the year, we still anticipate year over year margin progression.
Speaker Change: We anticipate that pace of improvement will be a little bit more measured as you compare to the first half. So second half of this year. The second half of 'twenty four of course.
Speaker Change: No.
Speaker Change: If you look at our January.
Speaker Change: Guidance ranges, our EBITDA margin midpoint was 18%. So this is a level, we still think it's achievable.
Speaker Change: It reflects the net tariff impacts that we have laid out today, which will be mostly offset as I mentioned by.
Speaker Change: Execution of.
Speaker Change: Two things really higher margin gas deck equipment backlog as well as the productivity across the portfolio that the teams have been driving and you have seen go through so so then stepping back and looking at overall for 2025, we feel we feel good about how the business is executing.
Speaker Change: And still believe the full year EBITDA guidance range is achievable based on what we're seeing today.
Speaker Change: And then when you when you actually look at 2026, obviously a lot can happen between now and then but based on everything we're seeing what we know the visibility we have and focusing on what we can control.
Speaker Change: The path to reaching 20% EBITDA margin is still there.
Speaker Change: And Dave remember I mean, we've laid this out as a Johnny M. We've showed how the installed base is increasing year over year and as you look at the progression and also what we've said from maintaining the guidance for the year and also that 20% margin rate for 26 still being achievable at this stage.
Speaker Change: Thank you that was our last question.
Speaker Change: I'll hand, you back to Mr. Lorenzo Simonelli, Chairman and Chief Executive Officer to conclude the call.
Speaker Change: Thank you to everyone for taking the time to join our earnings call today, and I look forward to speaking with you. All again soon operator, you may now close out the call.
Speaker Change: Ladies and gentlemen, thank you for participating in today's conference.
Speaker Change: This concludes the program you may all disconnect everyone have a great day.
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