貝克休斯 (BKR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE Company Third Quarter 2017 Earnings Call.

(Operator Instructions) And as a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Phil Mueller, Vice President of Investor Relations.

Sir, you may begin.

Thank you, Sandra.

Good morning, everyone, and welcome to the Baker Hughes, a GE Company Third Quarter 2017 Earnings Conference Call.

Here with me today are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell.

Today's presentation and the earnings release that was issued earlier today can be found on our website at bhge.com.

As a reminder, during the course of this conference call, we will provide predictions, forecasts and other forward-looking statements.

Although they reflect our current expectations, these statements are not guarantees of future performance and involve a number of risks and assumptions.

We advise you to review our SEC filings for a discussion of some of the factors that could cause actual results to differ materially.

In addition, we believe that using additional non-GAAP financial measures on a combined business basis will enhance the evaluation of the profitability of the company and its ongoing operations.

Also, reconciliations of operating income and other non-GAAP measures to GAAP measures, GAAP results, can be found in our earnings release and on our website at bhge.com under the Investor Relations section.

Because this is the first quarter of operations following our merger, we have prepared financial statements on a combined business basis as if the merger had been completed on January 1, 2016.

All prior year and quarter comparisons are to these combined business results.

With that, I will turn the call over to Lorenzo.

Thank you, Phil.

Good morning, everyone, and thanks for joining us today.

Before we begin with the quarter results, I would like to thank our team for what we have achieved in our first 90 days as a combined company.

As we said, this will be a journey.

Our current focus is on understanding and improving our core operations as we integrate.

I am particularly impressed with the progress and the speed of the integration since the creation of Baker Hughes, a GE Company on July 3. The combined business was fully operational on day 1. Thanks to the very detailed preparation and planning prior to closing.

I am more convinced than ever that the creation of BHGE combined the right companies at the right time.

Customer feedback continues to be very positive, and we are having constructive discussions about how our capabilities can improve project economics.

In this sustained, low commodity price environment, the need to drive productivity is critical for our customers.

Our new company has taken its first steps, and our message of partnership along the value chain is clearly resonating.

From upstream to downstream, we provide our customers a broad offering of solutions.

We are also driving a culture of safety for our customers, our employees and everybody else involved in our operations.

We have implemented the Perfect HSE Day process.

As you know, in our first quarter, as a combined company, we have already have to deal with a number of challenging environmental events such as Hurricanes Harvey, Irma and others.

Our thoughts go out to all those who were affected by these events, including many of our employees.

Turning to this morning's discussion, I will cover 3 topics.

First, I will give a brief overview of our operational results in the quarter.

Second, I will share our perspective of the industry and the market dynamics in our key segments and highlight some of the key achievements of the quarter.

Finally, I will give you some more detailed reports of the new company and the integration.

Brian will then review our financial results in more detail before we open the call for questions.

In the first quarter, we delivered $5.7 billion in orders and $5.4 billion in revenues.

We saw a sequential revenue growth in our shorter-cycle businesses and declines in our longer-cycle businesses, consistent with the view we have shared with you previously.

Adjusted operating income was $240 million.

We continue to see improved margin performance in our Oilfield Service business, partially offset by challenges in our longer-cycle businesses, particularly in our Oilfield Equipment segment.

Earnings per share were negative $0.24 and adjusted EPS was $0.05.

While I am pleased with the positive orders results this quarter, we still have a lot of work ahead of us in order to improve operating margins and cash generation.

Synergy execution is a critical component of that.

Our synergy plans are fully in place now and the teams are executing on them.

Further, in our first 90 days of operations, we have identified additional opportunities to improve productivity in the company and simplifying and reduced costs in our operating structure.

We are positioning the company for higher growth and profitability.

We know where we have to focus to deliver on our commitments.

Now it's up to us to execute.

Brian will go through the detail of the financial results, but I want to spend a few minutes on what we are seeing in the marketplace.

In our Oilfield Services segment, we continue to see growth driven by our well construction business lines in North America.

While North American rig count is more than 40% up year-to-date, we saw a deceleration in the quarter with the U.S. land rig count up 6% versus the second quarter.

While customers in North America are generally quite positive about the outlook, we expect activity to stay flat through the end of the year until the market has better line of sight into 2018 budgets and operators production hedge positions.

We continue to believe that our advanced drilling capabilities will differentiate us in the marketplace, where industrial well construction practices and servicing intensity per well continue to increase.

Our drilling services and drill bits businesses outpaced rig count growth in North America in the third quarter.

With our AutoTrak Curve high-build rotary steerable system, Talon high-efficiency PDC drill bits, tailored drilling fluids and enhanced solids removal techniques, we have helped operators reduce well costs and improve performance, particularly in the Marcellus and Utica.

We delivered a total of 100 wells, where more than a mile of footage was drilled in a 24-hour period.

This speaks to how far we have raised the bar in the industrial well construction arena in North America, where our rates of penetration metrics in drilling can now be quoted in miles per day rather than in feet per hour.

With the long laterals now the norm in every basin and longer more complex laterals being planned by our customers, our Drilling Services business is positioned for grow in the coming quarters as these more challenging drilling horizons come into play.

International activity in Oilfield Services remains muted with rig count flat year-to-date.

However, we are seeing signs of activity increase, both in the volume and size of tenders for new work as customers feel more confident about their operating costs and commodity price stability.

To that point, we were awarded a large multiyear integrated drilling contract with an important customer in the Middle East as well as 2 critical deepwater completion contracts in Latin America Offshore.

In our Oilfield Equipment segment, the subsea market continues to be very challenging.

Activity remains low and prices continue to be pressured.

We expect 3 awards in 2017 to be 150 to 170, up significantly versus 2016, but still 70% below peak levels seen in 2013.

As we previously communicated, we had a significant win in the quarter to support this Zohr Gas Field.

The win is a result of a productivity initiative using our digital tools across our design and manufacturing process to deliver the most cost-competitive products in the subsea market.

Our cross-sell assets and ability to develop local content were critical in securing the award and being part of Egypt's energy future.

During the quarter, we also announced what is the first demonstration of our ability to generate value for our customers through our full stream offering.

The agreement executed with Twinza Oil will provide support for an offshore development project in Papua New Guinea.

This business model is an exciting development for the industry, where the combination of capability between our Oilfield Equipment, Oilfield Services and Turbomachinery segments can provide a unique, high-productivity value proposition for our customers and commercial differentiation.

Despite these successes in the quarter, we continue to expect the subsea market to be very challenged in the short term with little sign of any significant recovery in 2018.

In our Turbomachinery segment, the LNG market continues to be oversupplied in the near term and with gas prices pressured in most markets.

The long-term value proposition for LNG remains positive, and we have an industry-leading portfolio in this segment with unsurpassed manufacturing and services capabilities.

Opportunities for growth in the short to midterm exists across the broader midstream and downstream segments in which we participate.

These include gas to power projects, stranded gas monetization, pipeline and surface compression to name a few.

Many of these applications require a range of turbomachinery equipment that is fit for purpose in terms of both cost and function.

To better serve this market, we have been expanding our NovaLT equipment application to serve anything from traditional oil and gas segments to the industrial sector.

I am pleased to say that earlier this year, we secured a contract to supply a cogeneration power plant with our 16.5-megawatt NovaLT gas turbine generator.

The plant will deliver electricity to our customers' facility in Malaysia and apply a waste recovery process.

This innovative approach will help increase energy efficiency and lower CO2 emissions by 54,000 tons per year.

In refining, large complex refinery should gain an advantage in a more competitive, oversupplied landscape.

However, costs and refining margins continue to move some projects to the right.

In the quarter, we won a critical contract in the Middle East to provide 7 compression trains, enabling our refinery plants to produce cleaner energy.

In petrochemicals, we see healthy end-market demand.

Cost advantaged supply bases continue to drive projects forward, particularly in North America and the Middle East.

Earlier this year, we won a deal to supply 3 large steam turbine-driven compressors for an ethylene production plant in North America.

In the Digital Solutions segment, we see end markets for our measurement and controls-based portfolio slowly returning to growth.

Nonoil and gas end markets continue to be robust, driven by aviation and industrials.

Oil and gas end markets are beginning to stabilize, and we expect them to return to growth over the medium term.

Our digital offerings in software and digital services continue to gain traction in the marketplace.

In end of quarter, we secured our largest ever award of approximately $300 million from an important international customer.

This long-term award includes a holistic asset performance management solution based on the GE Predix platform.

In the third quarter, we went live with our plant operations advisory program with BP in the Gulf of Mexico.

Our technology is performing 25 million calculations a day.

And together with our customer, we're focused on reducing nonproductive time.

Almost all of our customers are either evaluating or applying new solutions in this emerging digital space.

And I believe we are uniquely positioned from a portfolio perspective to help them make step changes in productivity for their businesses.

Lastly on integration, we have made significant progress over the first quarter as a combined company.

The organization is in place and all leadership positions have been staffed.

We have trained over 15,000 employees on changes impacting and their roles in the new company.

We had personal touchpoints with over 90% of our customers in the first 2 weeks after closing.

And in early September, we went live with our fully integrated commercial platform.

I've personally had the opportunity to engage with many of our most important customers around the globe and continue to update them regularly.

As you know, cost actions are underway as well.

We are taking restructuring actions wherever it is necessary.

We successfully consolidated over 20 facilities in the quarter and initiated an additional 40 for completion by the end of the year.

Overall, I feel we've made an incredible amount of progress in the third quarter.

I feel good about achieving the synergy targets we laid out.

We are still in the early days and just recently had our 100th-day anniversary.

We are on track and what I have seen so far is highly encouraging.

With that, let me turn the call over to Brian to go through our financial results.

Thanks, Lorenzo.

I'll start with the total company results and then go into the segment details.

We had a strong orders quarter at $5.7 billion, which is up 2% sequentially and 18% year-over-year.

Quarter-over-quarter, the increase in orders was driven by our shorter-cycle segments, Oilfield Services and Digital Solutions, as activity picked up in North America as well as the Middle East.

This increase was partially offset by headwinds in our long-cycle businesses with Turbomachinery and Oilfield Equipment down 11% and 5%, respectively.

The declines in these businesses were driven by strong comparisons in the second quarter and continued delays in customer spending.

Year-over-year, total orders grew 18%, albeit off a low base in the third quarter of 2016, and all of our segments showed growth.

Backlog increased from $20.6 billion to $20.9 billion in the quarter.

Both equipment and service backlog grew.

Equipment backlog ended at $5.7 billion.

The third quarter was the first quarter in over 6 quarters where our equipment backlog grew sequentially.

Equipment book-to-bill was 1.1, marking this as the second straight quarter with a positive book-to-bill ratio.

Service backlog was $15.2 billion and increased 1% sequentially.

Revenue for this quarter was $5.4 billion, which was down 1% sequentially and flat year-over-year.

Versus last quarter, our short-cycle businesses, Oilfield Services and Digital Solutions were up, driven by activity increases in both North America and the Middle East.

We saw sequential declines in our longer-cycle businesses, Turbomachinery and Oilfield Equipment as a result of lower 2016 order intake, which drove a lower opening backlog.

Year-over-year, the revenue increases in Oilfield Services and Turbomachinery were offset by the significant decline in Oilfield Equipment.

Operating loss in the quarter was $122 million.

On an adjusted basis, we delivered $240 million of operating income.

This excludes net restructuring, impairment and other charges of $203 million as well as merger and related costs of $159 million.

Adjusted operating income was up 105% sequentially.

As a reminder, when comparing our sequential results, we called out some nonrecurring charges in the second quarter.

In the third quarter, we had higher amortization expenses due to the impact from purchase accounting.

Even when adjusting for those items, operating income was up significantly, driven by strength in Oilfield Services, Digital Solutions and Turbomachinery, partially offset by continued softness in Oilfield Equipment.

Included in our reported and adjusted operating income is a negative impact of approximately $15 million as a result of supply chain-driven delays caused by Hurricane Harvey.

We expect the majority of that to come back to us in the fourth quarter.

Year-over-year, operating income was down 13%.

The increase in Oilfield Services was more than offset by declines in the other segments.

Next up, our taxes.

Tax expense for the quarter was $93 million.

While we were in an overall net loss position for the quarter, we generated income outside the U.S. and losses within the U.S. primarily due to the restructuring actions that we have taken.

Our foreign income was taxed, but because we have been in a net loss position within the U.S. for a period of time, we were unable to deduct these losses, thus driving the overall higher tax expense.

As we start to generate to earnings in the U.S. over time, we expect to benefit from the valuation allowances built up, including the ones from this quarter.

For 4Q, we expect taxes to follow a similar profile to this quarter.

Loss per share for the third quarter was $0.24.

On an adjusted basis, third quarter earnings per share were $0.05.

Free cash flow in the quarter was negative $405 million.

While we had anticipated a significant outflow for merger and restructuring-related activities, this quarter's performance was below our expectations.

First, let me give you some details and then I will give you some insights into how we're going to run things differently going forward.

As I said, merger and restructuring-related items had a significant negative impact of approximately $400 million in the quarter.

This was driven by accelerated incentive compensation payments as well as a lease buyout that were both triggered by the merger.

We had a significant amount of restructuring and severance payments as we execute to achieve our synergy targets.

In addition, we had a negative impact of approximately $200 million from the continued reduction in our receivables factoring programs.

Operationally, both accounts receivable and inventory performance were below our expectations and were mainly driven by our Oilfield Services business.

While some of that miss might be attributable to distraction from the integration, we are expecting significantly better performance in the next quarters from the team.

We've dedicated a senior leader to build out operational processes to deliver on our commitment of improved cash conversion.

In addition, we are integrating both reporting and operating mechanisms to drive more visibility into cash flow.

We expect fourth quarter operational free cash flow generation to be markedly better than in the third quarter.

Next, I'll walk through the segment results.

In Oilfield Services, the market continues to improve in North America, though we saw a deceleration in growth versus the second quarter and the rig count flattening since the end of July.

International activity remains muted.

In selected markets, we are seeing some signs of activity increases though.

The Oilfield Services business delivered a solid quarter.

Revenues of $2.6 billion were up 4% sequentially.

This quarter-over-quarter improvement was driven by the well construction product lines, particularly in North America land and in the Middle East.

The Completions business delivered double-digit growth sequentially with solid gains in Saudi Arabia, the Permian and the Rockies.

As Lorenzo mentioned, revenue growth for the drilling services and the drill bits business outpaced rig count growth in North America.

Regionally, increased activity in North America and the Middle East drove higher volume.

Revenues for North America were $1 billion, up 5% sequentially, driven by the onshore well construction business.

Drilling Services, drill bits, wireline and Completions all delivered double-digit sequential growth.

Internationally, revenue was $1.6 billion, up 3% sequentially, driven by the Middle East as the well construction credit lines delivered solid growth in a flat rig count environment.

Outside the Middle East, we saw revenue growth in Asia driven by Completions and Artificial Lift businesses and growth in Europe with Drilling Services, drill bits and pressure pumping.

These gains were partially offset by declines in both Latin America and Sub-Sahara Africa.

Operating income was $75 million, up $48 million sequentially and $115 million year-over-year.

The operating income for the quarter includes approximately $35 million of additional amortization as a result of purchase accounting.

Despite this, the business delivered strong incremental margins.

The increase in operating income is primarily driven by higher volume, cost-out efforts, favorable mix partially offset by Hurricane Harvey impact, which primarily was in the chemicals and Completions business.

In the near term, we expect the business to continue to perform in line with the markets in which we operate.

We view current market dynamics is favorable for our Drilling Services and the drill bits businesses as customers continue to drill complicated laterals.

And for our Completions businesses, North American operators begin to work down that drill bit uncompleted inventory.

As we continue to ramp up our synergy programs, we expect to drive additional operating margin leverage in the business.

Our OFE business, despite top line orders growth, continues to operate in a very difficult environment.

As Lorenzo mentioned, activity remains at low levels, with few signs of significant improvement in the short term.

Orders in the quarter were $760 million, up 45% versus last year and the equipment book-to-bill was 1.4, primarily driven by Zohr win.

The team is building on the success from last quarter with the Eni, Mozambique win.

In addition, orders increased in our flexible pipe systems business, which showed continued strength in the Brazilian market.

Services orders were also up 3% year-over-year, driven by increasing levels of activity in North America for the pressure control business through supporting its installed base.

Neil and his OFE team are focused on rebuilding the backlog.

Revenue was $600 million, down 28% year-over-year.

The decline in revenue was driven by lower Subsea Production System equipment project backlog, as well as continued market pressure in the rig drilling systems business.

We expect the large deals won in 2017 to start generating revenue in 2018.

Service revenues were up slightly, only partially offsetting the weakness on the equipment revenues.

Operating loss was $43 million, which was unfavorable year-over-year.

Foreign exchange movements negatively impacted operating income by approximately $30 million.

This was mainly driven by the strengthening of the Brazilian reais and the British pound versus the U.S. dollar in the quarter.

OFE has manufacturing bases in Brazil and the U.K. and is fulfilling long-term contracts with key customers in Sub-Saharan Africa and Brazil.

We consider the $30 million impact operational in nature, but do not expect the FX impact to reoccur at the same level going forward.

Even excluding the impact of FX, operating income was down year-over-year, driven by significant volume pressure and negative cost leverage.

In addition, we continue to see pricing headwinds in the pressure control and flexible pipe systems businesses, which were only able to partially offset with productivity and cost out.

Overall, we think the OFE business will continue to be challenged.

We expect to build backlog and compete for key deals.

However, as you've seen, customer spending in large projects continue to push out.

The team has been reducing costs and are prepared to operate in this environment.

Now moving to Turbomachinery & Process Solutions, the team delivered solid orders growth of 16% versus the prior year, despite continued challenges across its primary markets.

Total orders were $1.4 billion in the third quarter and equipment orders were up 79% year-over-year as we signed several large deals for gas compression equipment in the quarter.

The gas compression win rate remains strong and actually increased in the quarter.

TPS also saw modest improvements in the offshore business as well as some wins in the onshore business mainly in the Middle East.

There were no FIDs for LNG projects in the quarter.

Service orders were down 10% year-over-year, driven primarily by fewer upgrades as a result of lower customer spending and some softness in the downstream portion of the business.

In addition, the transactional service business was also down year-over-year.

Turbomachinery delivered revenues of $1.5 billion, up 2% year-over-year.

Revenue from equipment was down slightly year-over-year as a result of lower order intake in 2016.

Service revenues were up.

Contractual services, installations and transactional volume were up partially offset by lower activity in our downstream-related services.

Operating income for Turbomachinery was $210 million, down 19% year-over-year.

While service volume was up, lower margin rates in our equipment backlog more than offset the positive impact from higher service sales.

As the business is executing through a lower margin equipment project mix, primarily downstream projects, we expect equipment margins to continue to be at lower levels in the short term.

Overall, we expect the TPS business to continue its technology leadership and capture market opportunities as they present themselves.

In the short term, we expect the headwinds on service orders from customers spend delays and low LNG orders to continue.

Similar to prior years, we expect to see an increase in service volume in the fourth quarter, and we are focused on winning more work on the downstream and industrial sides of the business to offset challenges in upstream.

Next on Digital Solutions.

As reminder, this business operates in a few different end markets, across oil and gas, automotive, aerospace and power.

While we see some stabilization in the oil and gas end market, major project investments remain low.

In the third quarter, the Digital Solutions business delivered orders of $917 million.

This was up 43% year-over-year, driven by the large Predix deal with an important international customer that Lorenzo mentioned earlier.

Excluding this deal, orders were down slightly year-over-year.

The decline was mainly driven by the condition monitoring product lines partially offset by growth in other businesses.

Regionally, we continue to see a slowdown in large EPC projects in the Middle East and Europe, partially offset by strength in Latin America.

Revenue for Digital Solutions was $629 million, down 2% year-over-year.

We saw growth in our Inspection Technologies business, that was more than offset by Pipeline and Process Solutions.

Operating income was $87 million, down 20% year-over-year, driven by lower margin in the Pipeline and Process Solutions business as well as negative mix.

Overall, we expect Digital Solutions to continue to grow in the fourth quarter, in line with the typical seasonality, but off a lower base than the fourth quarter of 2016.

With that, Lorenzo, I'll turn it back over to you.

Thanks, Brian.

Overall, I'm pleased with the progress we've made in the quarter.

We closed the transaction and formed the brand-new company on July 3, and we hit the ground running on day one from an integration perspective.

Commercially, we secured several key wins in the quarter and booked $5.7 billion of new orders.

We are baselining operations.

And where we see a need for improvement, we're taking immediate action.

We're focused on margin improvements, better cash generation and delivering the best results for our customers.

We continue to position the company for growth and profitability, and we are focused on executing our strategy to deliver on our commitments on growth, margins and cash.

Actions are underway, and I feel optimistic about the future.

Phil, now over to you for questions.

Thanks.

With that, let's open up the call for questions, Sandra.

(Operator Instructions) Our first question comes from the line of James West with Evercore ISI.

So Lorenzo, I know the kind of 3 pillars you guys are focused on regaining some share, margins and free cash flow conversion.

And it's only been 100 days, I certainly get that.

But where do you think you stand in that process?

Are we at 10%, 20%?

I mean, what -- where are we in kind of getting to optimal results?

Thanks, James, and thanks for recognizing.

We're just celebrating our 100 days into this transaction that we feel is going very well and maybe just as a backdrop relative to the 3 strategic pillars you mentioned.

We remain very focused on what we control.

As you look at the external environment, oil inventories are still 20% above their 5-year averages.

When you look at the 3 pillars, let's take them one by one to begin with.

On growth, you look at the performance during the quarter, the third quarter.

You had drilling services and bits growing and outpace the rig count growth in North America, we feel good about that.

You look at the orders performance sequentially, it's the second quarter in a row where we've got positive orders.

You look at the year-over-year performance, up 18%.

On the book-to-bill, positive.

Critical wins, you look at the Zohr, which is a key win in Egypt from a subsea perspective.

Digital.

So we see good traction on the growth side, it's early days.

The market remains challenging.

But we're definitely focused from a commercial standpoint and getting out there and meeting with the customers has been a key aspect of the first 100 days and as you noted, during the course of the first 2 weeks, we met over 90% of the customers.

On margins, key focus here is on the synergies.

As you look at integration, it's on track.

I mentioned even in September that we're on track with what we've committed to for 2018 relative to the integration and the synergies.

You look at the sequential margins performance from a business segment perspective, Brian walked you through that and sequentially, 3 of the 4 businesses are showing positive performance.

We've got weakness in the OFE segment, which, again, it's part of the aspect of subsea and the industry continuing to be delayed in its recovery.

You look at the third pillar, cash, as Brian mentioned, it's a key area of focus for us.

During the course of the quarter, we had one-time deal-related items and restructuring.

However, from an operational perspective, it's an area that we need to continue to focus on.

It's one of the key areas I have as a focus on inventory receivables.

I'd say, we didn't perform where we wanted to in the third quarter, and it's something that we've addressed and we've got people acting upon it immediately.

So when you look at it, early days, but definitely a positive momentum.

We've got the team rallied and focused on the key priorities.

So thanks, James.

Okay.

Fair enough.

And then maybe just one follow-up or a little bit unrelated.

But the shareholder return strategy, I know you've seen our work on this net cash position.

How are you guys thinking now?

I know, again, it's still early days, but about dividend, share buyback type program?

Yes, James.

Just maybe to give you an update on capital allocation and 100 days in.

We mentioned in September that we are committed to a shareholder-friendly capital allocation plan that's going to be returning 40% to 50% of net income to shareholders.

We also mentioned we are going through that.

We've our board at the moment and it's part of the key strategic review that's being undertaken.

We've got a strong balance sheet that gives as the ability to drive buybacks and also inorganic actions.

And our capital allocation priorities are going to be aligned with creating significant shareholder value.

So we're going to take a balanced approach, and we want to make sure that we maintain the strong balance sheet as the industry continues to be volatile as we look at it going forward.

It's a challenging environment.

We did, as you know, in the third quarter, announce a dividend of $0.17 per share.

And we are reviewing that as we go forward with our team and also the board.

So we'll be giving an update as we go forward.

And our next question comes from the line of Ole Slorer with Morgan Stanley.

Congratulations on the 100 days.

So still early and the quarter kind of from a cash standpoint, I think, was a little noisy, a little light, even adjusting for the foreign exchange and a few other things.

So given that you have a better handle on the integration and the targets ahead, could you give us -- again back to the initiatives underway, I wonder whether you could give us an update on -- in this kind of -- let's assume, no improvement in the environment.

Well, I think, we all believe there will be one.

What is your current view on normalized margins for these businesses?

Could you, for example, get without any improvement in subsea which daily will come?

Could you get the equipment business into a profitable state as you think?

And if you could run through some of the initiatives, I know you have a huge focus going on, on CRM, for example, in Baker Hughes, in trying to implement some of the GE systems there.

So could you give us a little bit of an update there on your updated view on margins?

Okay, Ole.

To start out with the cash.

You're right.

It was a bit noisy this quarter given that it's the first quarter.

We had quite a bit of merger and deal-related costs as well as restructuring.

As I mentioned, that was about $400 million.

We took down our monetization program that impacted us by about $200 million.

But as I said, working capital did come in under our expectations from a cash flow perspective, and that was primarily driven by receivables in the OFS business.

We had a little bit of an inventory build as well.

So if I look at that going forward, the deal-related costs should definitely be declining here in the fourth quarter and into next year, we'll trail off.

We will continue to look at high payback restructuring only as we drive the synergies here.

So I'd expect the restructuring costs to continue.

And as I mentioned earlier, we have mobilized the team to look at how we can build stronger operating processes to drive better collections, better visibility, not only in OFS, but across the portfolio.

So I would definitely expect fourth quarter to be better operationally, some of that seasonality, others are some of the process changes that we're making here and then less one-time items.

And Ole, just -- sorry, go on, Ole.

Brian, I mean, these things are never done in overnight.

And yes, I think we all want you to aggressively go after low-hanging opportunities.

You mentioned, still a lot of infrastructure to be merged, which clearly comes with a cost.

But it strikes me that maybe the second quarter or the third quarter next year, is that sort of timing to when we should start to get more of a clarity on the underlying performance?

Yes, I think so, Ole.

By then, you'll have a lot of the structuring underway clearly, and we'll have full 3, 4 quarters here to get some of the operating processes in place.

But I think that's a realistic expectation.

Okay.

Lorenzo, sorry.

Just to address your question on the business segments and if you think about OFS, steady recovery in North America.

Decelerating, but still growing.

And internationally, we see some activity rising.

On the OFE subsea, at the moment, it's extremely low.

You've seen the activity level.

At the same time, we've won some major business as you look at our second quarter win relative to Mozambique.

And then also Zohr in the third quarter.

We are focused on cost outs.

And one of the key enablers that we were able to win the Zohr deal was by applying digital tools within our supply chain to really achieve cost competitiveness.

We see it as being a very important aspect of our business and offering for our customers going forward.

And so you should see, over the long term, continuing project execution excellence and margin improvement in that business.

And our next question comes from the line of Angeline Sedita with UBS.

I appreciate the granular details.

That was really very helpful.

So I guess I would start it off to follow-up on capital allocation and maybe you can talk about your optimal capital structure, given your underlevered balance sheet?

And then also maybe as far as capital allocation, talk about thoughts on M&A given the recent chatter we've had in the market on Subsea 7.

Okay.

Angie, I think when we talked earlier, we definitely have an opportunity here to relook the capital structure.

We are underlevered.

If you look at the balance sheet by a lot of metrics.

So we're working through that, as Lorenzo said, with the board here, and I'll update you guys once we've gone through that process.

But the metrics look good.

We continue to have a strong balance sheet.

And as I was talking with Ole, we've got plans in here to get the free cash flow into more of a steady state in line with what we talked about in early September.

So we'll keep you posted as we work through things with the board.

And Angie, just on the rumor that was out there relative to Subsea 7. I think, I've mentioned previously, our focus right now is really on the integration at hand, we've got our hands full.

We don't speculate on the aspect of rumors.

We see our OFE business, as I mentioned previously, well-positioned with the wins also that we've had.

And we partner with numerous EPCs out there, and we work with our customers really on what's the best outcome for themselves.

All right.

That's very helpful.

And then when you think through your strategy and how it could differ from the past for specifically Oilfield Services, can you talk a little bit about the strategy there?

Maybe potentially some rolling back of that asset-light model internationally?

And all things could change.

And how you look at the world versus how things were done in the past?

Yes, Angie.

If you look at our product portfolio, we feel very good about the combination that we have now.

When you put together Baker Hughes and also GE Oil & Gas, we have a suite of capabilities that we think is unique in the industry and enables us to work with our customers really to drive efficiencies.

When you think about going below the mud line from and above, we've got the combination of the lifting equipment, the drilling services.

We'll also have the digital capabilities to drive efficiencies and productivity.

That's the game changer here.

It's really to take the aspect of inefficiencies through silos and drive productivity.

In this environment, that's what our customers continue to ask us for is get us to the lowest-cost per barrel, give us the efficiencies.

And as we go forward, we're really working on well construction, we're working on the operating environments that are necessary within each of the workflows.

And that's going to be the strategy going forward.

And Angie, as we talked before, we've taken a look at some of the regions where the asset-light model was being contemplated.

And because of the infrastructure we have and our desire to really not have folks between us and our customers, dramatically reducing that asset-light model.

We're going to continue to evaluate the geographies in our profitability in our returns and make decisions based upon that.

But in general, that asset-light model is going away.

And our next question comes from the line of Jud Bailey with Wells Fargo.

I got a question.

Could you maybe comment a little more broadly on the TPS segment?

Obviously a big driver for Baker Hughes.

Could you talk a little bit about your outlook may be on orders and mix of orders as we look into 2018, understanding LNG is oversupplied at the moment?

But I think there's been some FID starting to move forward.

And what is your comments?

Or is it possible that orders could be up next year?

Or do you see it more flat or down at this point?

Yes, Jud, look, if you look at the TPS business and as you said rightly, LNG is a portion of it, but there's actually much more in there relative to the midstream and downstream when you look at pipelines, you look at also what we do from an offshore and onshore production.

And as you look at 2018, we should see better order activity.

And LNG remains challenging.

We see that more being from a 2 to 3-year perspective starting to come back as there is demand out there.

But we see the other segments continuing to pick up.

And then also as we go towards the transactional business on services, continuing to maintain a focus on the operating activities within our customers.

My follow-up is on the same segment, but it's on margins, and thinking about margins.

As service revenue grows, that should be supportive of margins.

Obviously, revenue is going to be under some pressure.

Could you talk us through how you're thinking about maybe the mix in revenue next year and how that could impact margins year-over-year for TPS?

Yes, Jud.

If you take a look dynamics right now in TPS, our revenues are up in the quarter 2% and operating income is down 19% and service mix was good and was certainly a tailwind, but it was more than offset by margins in equipment as we work through our backlog, which has got some negative mix, primarily driven by the downstream segment, which is not as profitable.

As I look into the next couple of quarters, I can -- I would expect that to continue that negative mix based on where the backlog is today.

But if you look, we actually had a book-to-bill of 1 in the quarter, equipment backlog grew.

So we're refilling that backlog and that should get better as we progress through the year.

On top of that, we have seen some headwinds in the transactional services business as operators are really conserving cash and OpEx.

And based on what we see, later in the year next year, that should turn as well.

And our next question comes from the line of Jim Wicklund with Crédit Suisse.

I'm looking at the Oilfield Services segment, and North America was up 4%.

I realize that you guys don't have the pressure pumping business directly anymore, just an ownership in BJ.

And while your operating income was great from $27 million to $75 million, it just strikes me that a 2.8% margin in the U.S., when we've got some of your peers reporting higher numbers, I'm just wondering how comfortable you guys are with the current consensus forecasts for EBITDA in Q4 with kind of the outlook you've given and with the biggest engine driver, North America Onshore, kind of having some fairly -- at least relatively, weak performance in the quarter.

Can you address any of that?

Yes, Jim.

If you take a look at OFS in North America, as you rightly pointed out, our portfolio is a bit different.

We don't have pressure pumping, and we do have the chemicals business, which is not directly related, obviously, to rig count and what's going on in North America land.

If you look at those businesses that are really rig count-driven, drilling services, wireline, drill bits, all up more than the rig count.

Strong performance in Completions as well.

And if you look at the incrementals here in this quarter, we had really strong growth in Drilling Services and Completions, and that's where we have higher margins.

As Lorenzo and I both mentioned, we see the market flattening, and really I don't think, in the fourth quarter, and Drilling Services won't be as much of a tailwind, but we do see some pretty strong growth in other product areas, where our margins are a bit lower.

And then we also will have some synergies that should be coming in, end of the fourth quarter and then into next year.

So when I put all that together, from a mix standpoint, from the market flattening a little bit, I would expect incrementals to be in line with historical averages.

But it is something that we're focused on.

And as we've talked about gaining share here and positioning the products from a cost perspective to drive higher margins.

Okay.

And can you talk about the equity income contribution from BJ?

Yes.

If you look at the quarter, it was a negative $13 million.

And as a reminder, we report BJ Services on a 1-month lag because they don't close as quickly as we do.

And look, from our position standpoint, we like our position in the business, we've got good visibility into what's going on there.

We work with Warren and the team, and where we need to do something commercially with pressure pumping, we can do that.

But BJ Services is in a mode of coming together and rebuilding that business.

And we're working closely with the team as they do that.

And our next question comes from the line of David Anderson with Barclays.

So just kind of a bigger picture question here.

Your business mix is quite a bit different than the other names in the space.

So I was wondering if we assume that oil prices remain range-bound over the next couple of years, can you talk about which parts of your business do you think will perform best?

I guess, in other words, which product lines do you think will still be able to grow even without the oil price and show margin expansion?

Dave, so good to speak to you again.

And as you look at the portfolio, yes, we are different and also we've got a good complement of the Oilfield Services side as well as you look at some of the longer-cycle businesses.

When you think about the price being range-bound, you look at the benefit that we're going to achieve through synergies and also a key focus of growth.

So the synergies will come through on the revenue side.

We've already indicated that by 2020, there's $400 million of EBITDA revenue synergies.

We feel good about those.

A lot of good conversations happening with the customers that will enable us.

As we look at the longer term, on the gas side, we see gas continuing to grow and also LNG returning.

And so when you think about our TPS business, that returning, again, mentioned previously, orders being growing again in 2018.

And you look at also the other segments, when you think about the downstream, the refinery, the petrochemicals, the pipelines, and then our Digital Solutions business.

As you think about the segment that's outside of also oil and gas, which is more aviation, industrial that continuing to pace with GDP.

So we have an opportunity to here, again, grow even in a range-based outlook.

And I was just wondering if you could just address, kind of looking into next year, kind of with respect to 2018 EBITDA, you recently indicated that you're comfortable with consensus numbers out there and so now with kind of the first quarter under your belt, are you still confident about hitting those numbers even if you don't see oil prices move up appreciably from here?

Yes.

So, Dave, if you go back and -- I was at your conference.

So if you go back to that September conference, I said that our view of the market in 2018 was consistent with how the market was looking at things.

And also, I said, that as we go forward, we won't be providing annual guidance right now.

We see things similar to everyone else in the industry.

And as you look at that, we are seeing things similar to others in the industry, continuing to be challenged on the OFE side with some pushouts on some of the projects.

We've seen a deceleration in the North America growth from the OFS perspective.

So we're staying focused on really what we control, the synergies, the integration, and we'll be providing more updates as we go forward.

And our next question comes from the line of Chase Mulvehill with Wolfe Research.

I guess, a quick question, if we're trying to bridge the gap, 3Q versus kind of 4Q consensus, if you can just kind of walk through the moving pieces as we think about the sequential change.

You've got the $15 million for the supply chain delays, we'll have some cost synergies, we'll have Digital Solutions, it should be up, in TPS, it should be up.

And so if we can kind of bridge the gap, I think there's $100 million kind of increase in 4Q?

Yes.

So to give you some perspective on that, a couple of things.

You did point out Harvey, the majority of that will come back to us in the quarter.

So that definitely should be helpful.

If you look, we have some normal seasonality in the Digital Solutions business.

So Digital Solutions is poised to grow here in the fourth quarter.

As I walked through with Jim, we feel good about our position in OFS and expect to see growth in OFS, as synergies come through, and we think we'll have some volume increases there.

And then TPS is poised to grow in the fourth quarter as well as we look at the backlog of equipment as well as services.

And we've got a lot of productivity lined up for that business as well.

So those are the big drivers and then synergies will start to ramp albeit, off of a lower base this quarter, we should see some improvements there in synergies.

Okay.

And then on the Oilfield Equipment, another sharp decline in margins here.

Are you ready to call the bottom in margins in Oilfield Equipment?

And if so, kind of how long do you think it'll be until we can kind of get back to break even there?

Yes, Oilfield Equipment is definitely continuing to be challenging.

In this quarter, in particular, we did have an outside FX impact.

So I don't expect them to repeat at that level.

So from that perspective, you should see margins get better quarter-over-quarter from that alone.

Calling a bottom, Neil and the team have really been focused on going after deals that make sense for us, and they've been taking a lot of costs out to deal with this volume decline.

So we feel good about the cost position.

They are working hard to drive profitability as we rebuild the backlog.

But I do think they will continue to be challenged.

So I wouldn't expect, other than this FX item, any appreciable increase in margin rates here as we look for the next few quarters.

And if we back out the FX, what was the clean margin on that?

Do you have that number?

The FX was around $30 million.

And our final question comes from the line of Marc Bianchi with Cowen.

I guess, just back to the '18 outlook, and I appreciate that you don't want to get specific on a number.

But just if I were to phrase it this way, as we look at consensus now about $3.5 billion of EBITDA, and you mentioned that you expect orders to be up.

Can you give us a sense of how much orders need to be up to kind of get to that level?

And I understand there's a lot of other variables.

But just try to give us a sense of the magnitude there?

So Marc, good to speak to you.

Let's maybe just break it down by business and go through it because if you just look orders -- it may be better to take it down a level and look at it by business.

As we look at the OFS business, we continue to see activity ramping up in North America and the Middle East, along with some recovery in the other international markets when you look at also the North Sea, Latin America.

So in 2018, even though North America has decelerated, you should still see some momentum there.

On OFE, we see that continuing to be pressured at this moment in time.

We should have better orders performance in 2018, but actually the revenue side continuing to be pressured.

TPS, we mentioned orders being positive in 2018.

And also from a revenues perspective, we should start to see the offshore, onshore production, the downstream area.

So if you look at FID, activity picking up, but we should see revenues essentially improving there.

And our DS business, you look at, again, improving there relative to the elements outside of also oil and gas from an aviation and industrial perspective.

So really 3 out of the 4 business segments seeing an opportunity here from revenue, which help us in 2018.

And that's sort of the landscape when you break it down by business segment.

Lorenzo, maybe on follow-up, as I look at the $3 billion of orders this quarter, can you break that down into how much was -- you had a few pretty large one-time benefits there.

I suspect some portion of that's recurring, if sort of the world stays at the level that it's at right now.

Can you help us break down that $3 billion in terms of recurring kind of one-time large order?

So I think that $3 billion is maybe an ex-OFS number.

It's, in total, for the business at $5.7 billion orders.

Yes, correct.

Yes, yes.

Sorry about that.

Got you.

Okay.

So again, the -- repeat the question relative to the $3 billion.

So -- if we have the $3 billion and which is largely the legacy GE portion of the business, so the backlog really driven businesses, how much of that $3 billion in orders is something that might be recurring versus something that's large and maybe one time?

Just to get a sense of what the baseline recurring number might be?

Now look, there's always going to be some lumpiness based on big orders that take place.

If you look at that $3 billion, you'd say Zohr is something that you'd highlight in there as a big order and then the digital, as we mentioned, close to $300 million with a big international customer.

And the one thing I would point out about that too is, while we had Zohr as a big order this quarter, we also had Eni, Mozambique last quarter and so the quarter-over-quarter, it kind of normalized.

And this concludes the Q&A portion of the call.

I will now turn the call back to Mr. Simonelli for final remarks.

Thank you very much.

And again, thanks to all of you for joining us this morning.

I just wanted to maybe close out.

So we're 100 days into this terrific new business that we've created.

I'm pleased with the progress we've made this quarter.

We've had several key wins in the quarter and booked $5.7 billion of new orders.

We're baselining operations.

And where we need improvement, we're taking immediate actions.

We know where we need to execute.

And we've been very open in having that discussion with you today.

We're focused on margin improvement, better cash generation and delivering the best results for our customers.

And that's what we're going to be doing going forward.

So thank you very much.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program, and you may all disconnect.

Everyone, have a great day.