貝克休斯 (BKR) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE Company, First Quarter 2018 Earnings Call.

(Operator Instructions) And as 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, Saundra.

Good morning, everyone, and welcome to the Baker Hughes, a GE Company, First Quarter 2018 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.

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

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

In addition, we adopted several new accounting standards this quarter, mainly relating to revenue recognition and pension cost and benefit presentation.

All prior period financials have been updated to reflect these new standards.

Please review our filing from April 5 for recasted financials.

Similar to prior quarters, all results discussed today are on a combined business basis as if the transaction closed on January 1, 2016.

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

Thank you, Phil.

Good morning, everyone, and thanks for joining us.

On the call today, I'll give an overview of our first quarter results, my perspective on the market and how our company is delivering results in the current environment.

I will also give you an update on the integration and our progress on synergies.

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

We delivered $5.2 billion in orders and $5.4 billion in revenues in the first quarter.

Both were in line with our expectations.

Adjusted operating income in the quarter was $228 million.

We saw improvements in our Oilfield Services business, more than offset by declines in our long-cycle businesses.

Free cash flow in the quarter was $226 million.

We made significant progress on the improvement actions we laid out last year.

Earnings per share for the quarter were $0.17 and adjusted EPS was $0.09.

We remain committed to the top-tier shareholder returns.

Since closing the deal, we have returned over $1.6 billion to shareholders.

Now I'd like to take a few moments to discuss the overall market dynamics.

In the oil market, we see global demand rising at a steady pace, driven by an improved GDP outlook for the United States and Europe.

In Asia alone, strong economic growth is expected to add nearly 1 million barrels per day of demand in 2018.

On the supply side, U.S. production grew to more than 10 million barrels per day with first quarter average production up 7% versus the fourth quarter of 2017, driven mostly by shale.

OPEC and Russia have committed to production cuts through the end of 2018.

We have seen a draw on U.S. crude inventories that have pulled stocks closer to the 5-year average.

These factors have resulted in a market equilibrium, which we expect will keep crude prices relatively range-bound in 2018.

This recent price stability has resulted in a customer spend forecast that shows solid year-over-year growth for our short-cycle businesses, particularly in North America, where operators continue to grow rig count and well counts.

Internationally, we are seeing signs of activity increasing in certain geomarkets, though these remain competitive.

The offshore market remained subdued in the first quarter.

However, we expect activity to increase through the year.

While we expect our E&P customers to grow upstream investments, we continue to see them focus on capital discipline and limiting their CapEx spend to within their operating cash flows.

We are seeing this both internationally and with a large independence in the United States.

We see the global energy mix shifting more to gas over the coming decades.

Consumption is expected to grow more than twice as fast as any other fossil fuel through 2040 at roughly 1.5% per year.

As part of this dynamic, we expect LNG demand to more than double to 500 million tons per annum by 2030, growing at a pace of 4% to 5% per year.

We saw demand growth well above that projected pace in 2017 as global imports grew 11% or nearly 30 million tons versus 2016.

Import volumes rose again significantly in the first quarter with global imports up 9% versus the first quarter of 2017.

The increasing demand for LNG, coupled with the lack of recent project final investment decisions, points to the LNG supply-demand balance tightening.

Market data suggests that new LNG capacity is required in the early to mid-next decade to meet demand, which should translate to project FIDs for which we are well positioned.

While our outlook for LNG is becoming increasingly positive, we did not see any project FIDs in the first quarter.

We expect projects will begin to move as we progress through 2018.

Now I'd like to share some highlights from the first quarter.

Our priorities in Oilfield Services remains unchanged.

We're focused on gaining share in key markets and product lines and delivering best-in-class services to our customers.

We're also committed to improving our operating margins by executing on the synergies we laid out and improving efficiency throughout our operations.

We made great progress on these priorities in the first quarter with key wins in artificial lift and wireline and continued momentum for our well construction product lines.

We secured a large 5-year contract for 100% of Kinder Morgan's ESP work in 4 Permian Basin fields, displacing competitors in 3 of these fields.

This award not only solidifies our leading position in artificial lift but also demonstrates our continued commitment to grow in the Permian.

In the Gulf of Mexico, a large international oil company awarded us the openhole and cased hole wireline services on all its rigs, displacing a competitor.

This award was due to our strong operational performance in 2017.

We also displaced the competition with our drilling services product line on all this customer's deepwater rigs in the Gulf of Mexico after drilling one of the fastest wells in the field to date.

In West Africa, our Upstream Chemicals product line was awarded a 3-year $100 million contract with a major oil company for a large mature field.

We displaced the competitor who had managed the field for the past several decades.

This award was based on the strong performance of our Upstream Chemicals product line for this customer in other regions and builds on our strategy for international expansion in chemicals.

We also made significant progress on our automation strategy in well construction by setting another record in the Marcellus Basin.

Our MWD engineers and directional drillers performed a completely remote drilling operation from the customer's office.

In this operation, we drove the longest extended-reach single run ever recorded, a total of over 20,000 feet in just 8 days.

Based on our performance and longstanding relationship with the customer, we won an additional multiyear award, including Oilfield Equipment, displacing multiple competitors.

In our Oilfield Equipment segment, we're providing our customers with innovative commercial models that serve their needs while maintaining focus on technology, systems design and project cost.

Let me give you a few examples of how we're delivering for our customers.

In the first quarter, BHGE, together with McDermott, was selected for BP's Tortue Field Development offshore Mauritania and Senegal.

The initial contract is a FEED study for SPS and SURF in a 4-well development.

Our technical leadership in large-bore gas and high-pressure, high-temperature applications, combined with our partnership approach with McDermott, were instrumental in securing this award from BP.

We also secured our latest integrated fullstream win combining our Oilfield Equipment and Oilfield Service capabilities.

BHGE was selected by, Chrysaor, a leading independent E&P company in the U.K., as preferred service partner and main provider of oilfield services and equipment for subsea wells in the Armada Area.

Chrysaor is another example of our competitive advantage in our ability to partner with customers and design novel commercial solutions that allow projects to move forward.

We have a proven track record of implementing and executing on new commercial models that align our incentives with our customers and enable us to deliver better outcomes.

For example, we now have nearly 2 years of operating history in our partnerships with Diamond Offshore Drilling and Transocean Limited, where we developed a new service model for offshore drilling equipment.

Our customers have realized meaningful performance improvements.

Diamond has experienced a significant reduction in subsea nonproductive time, achieving less than 0.75% over the last 6 months, while Transocean awarded BHGE with a performance bonus at the end of 2017.

This shift from traditional transactional relationships benefits all stakeholders and is driving industry-leading reliability.

Lastly, on OFE, I am pleased to announce that this week, we have been awarded the subsea equipment contract by Chevron for Phase 2 of the Gorgon Project in offshore Western Australia.

We will supply 13 subsea trees and other subsea equipment, including manifolds, wellheads and production control systems.

The Gorgon development is one of the largest natural gas projects in the industry today.

BHGE has been a key partner since the early concept phase of this multistage development.

And we continue to drive efficiencies together with Chevron and its partners.

In our Turbomachinery & Process Solutions segment, we laid out 4 strategic priorities over the next 24 months.

First, we will maintain our position in the LNG and capture the significant growth opportunities in the market.

Second, we will optimize and maintain our service capability when outage schedules and transactional services pick up.

Third, we will expand into underpenetrated markets, such as the industrial space.

And fourth, we will simplify the structure of the business and drive cost out.

Rod and the team are aggressively executing on these priorities.

Over the last few years, we have continued to invest in technology to drive differentiation and value for our customers.

We introduced the LM2500+

G5, the LM6000 PF+ and launched the LM9000 gas turbine last year.

These technologies allow us and our customers to operate longer between service events, reduce emissions and deliver more power, which lower our customers' total cost of ownership.

We secured some key commercial wins in the quarter.

In Norway, we were awarded a $65 million contract to provide turbomachinery equipment to the Johan Castberg field.

As part of the award, we will provide 2 LM2500+

G4 gas turbine generators, coupled with 2 electric generators.

This technology will be preassembled into 3 modules specifically designed for FPSOs, which will help Statoil reduce the number of interfaces at the installation site, simplifying the engineering, execution and construction phases.

In North America, we secured an award to provide gas turbine and compressor equipment to an important customer for the first 2 phases of a large gas pipeline project.

We will install 3 of our PGT25+ aeroderivative gas turbines and 3 of our PCL 802 centrifugal compressors for this customer.

And we will provide all planned and unplanned maintenance for 18 years.

We also continued to gain traction with our lower megawatt NovaLT family of equipment, securing an award to provide 4 LT16 gas turbine-driven compressors for a pipeline project in Central Asia, building on the success we have already seen in this product line.

As I shared on our last earnings call, we are focused on optimizing the cost base of the business.

In the first quarter, we began this process by rationalizing TPS's regional structure.

We are also driving lower product and service cost by looking at everything from product design to manufacturing to installation.

We believe these cost-out actions will create a better and more profitable franchise and position us well for the future.

In our Digital Solution segment, we are gaining traction with our customers on our software offerings.

And our Measurements and Controls business are solidifying their position as technology leaders.

Let me highlight a few examples from the first quarter.

As we continue to focus our software offerings on analytics, we announced a partnership with NVIDIA to use artificial intelligence and advanced computing to help the oil and gas industry reduce operational cost and improve productivity.

The partnership combines our portfolio with NVIDIA's computing power to significantly advance image recognition capabilities in the industry, disrupting conventional modeling techniques.

Using algorithms, oil and gas companies can scale data modeling quicker and optimize their operations as conditions change.

We are also gaining traction with our Predictive Corrosion Management software.

We signed an agreement with an Asian refinery to enable real-time analysis of ultrasonic thermal and thickness measurements.

This will enable our customer to materially lower inspection costs going forward.

We see the growing corrosion management market as one particularly well suited to predictive applications.

Our software offering enables repeatable accurate measurement of piping wall thickness and temperature and reduces inspection cost.

In our Measurements and Controls product lines, we continue to strengthen our technology leadership position, selling across a number of end markets beyond just oil and gas.

In our Inspection Technologies product line, we saw double-digit growth in CT sales in Asia, including the first deployment of our CT technology for a major Japanese auto manufacturer.

We offer one of the only products in the world to conduct industrial CT scans at scale.

Our systems are capable of inspecting complex manufactured parts to ensure cracks and other structural anomalies are detected faster and easier than traditional methods.

Our Speedscan CT system, which is several hundred times faster than a conventional system, can be applied throughout industrial segments.

Turning now to integration.

We have made tremendous progress over the first 9 months as a combined company.

In the first quarter of 2018, we delivered $144 million of synergies.

Our total year commitment of $700 million remains firmly on track.

We are making excellent progress on rooftop consolidation with an additional 25 locations closed in the first quarter.

We have more facility consolidations planned for 2018 as we shift from reducing office locations to larger operational facility combinations.

One of the early focus areas in bringing our 2 companies together was to integrate and optimize our respective artificial lift businesses.

We have made significant progress on this to date.

At the end of 2017, we completed an extensive assessment of our ESPs that included the market evaluation of customer preferences, product performance and total cost of operation of the ESP system.

We now have a set of new offerings that have rolled out to customers in the first quarter.

The result of the effort is a portfolio of ESPs that is the most advanced and most complete in the market, offering the highest level of reliability and efficiency in the industry.

We also began optimizing our manufacturing footprint.

And we expect to complete this consolidation by midyear.

Finally, our priorities for 2018 remain unchanged.

We are focused on growing market share, improving margins and generating more cash.

With that, let me turn the call over to Brian.

Thanks, Lorenzo.

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

As Lorenzo mentioned, we delivered a strong orders quarter.

Orders were $5.2 billion, up 9% year-over-year.

We grew orders in all segments, led by Turbomachinery, which is up 10%.

Oilfield Equipment grew orders 5% and Digital Solutions was up 3%.

Quarter-over-quarter, orders were down 8%, driven by typical seasonality across our portfolio.

Backlog for the quarter ended at $22.2 billion, up $1.2 billion versus last quarter.

The growth was primarily due to the impact of adopting the new revenue recognition accounting standard.

Service backlog ended at $16.8 billion, up $1.1 billion or 7%, with long-term service agreements in Turbomachinery driving the increase.

Equipment backlog ended at $5.4 billion, up 1%.

Going forward, we will report remaining performance obligations, or RPO, a requirement under the newly implemented revenue recognition accounting standard.

RPO represents orders which meet specific contractual criteria and have not yet converted into revenue.

RPO for the first quarter was $21.3 billion.

Revenue for the quarter was $5.4 billion, down 7% sequentially, driven primarily by typical seasonality across all of our segments.

Year-over-year revenue was up 1% as we saw continued growth in our short-cycle businesses, Oilfield Services and Digital Solutions, but declines in our long-cycle businesses, Turbomachinery and Oilfield Equipment.

Operating loss for the quarter was $41 million.

On an adjusted basis, operating income was $228 million, which excludes restructuring, impairment and other charges of $269 million.

Adjusted operating income was down 20% sequentially as the growth in Oilfield Services was offset by seasonal declines in our other segments.

Year-over-year adjusted operating income was down 19%, driven by Oilfield Equipment and Turbomachinery, partially offset by Oilfield Services and Digital Solutions.

Corporate costs were $98 million in the quarter, down 38% versus the first quarter of 2017.

Depreciation and amortization for the quarter was $388 million.

D&A was slightly lower than we expected due to purchase accounting adjustments we booked in the quarter.

Next, on taxes.

In the first quarter, we had a tax credit of $86 million, which includes a positive $124 million impact driven by the U.S. tax reform.

This has been excluded from our adjusted earnings per share.

Excluding this impact, our first quarter tax expense was $38 million.

Earnings per share for the quarter were $0.17.

Adjusted earnings per share were $0.09.

We delivered strong free cash flow in the quarter as the improvement actions we previously highlighted have started to yield results.

Free cash flow in the quarter was $226 million, which included $100 million of restructuring and deal-related cash outflows.

We generated over $100 million of cash from working capital.

As you may recall, I outlined several improvement areas on working capital during our third quarter 2017 earnings call.

On accounts receivable, we are focused on increasing our pace of collections and reducing cycle time.

In the quarter, accounts receivable generated $125 million of operating cash flow.

We also continue to make progress on inventory management.

Despite our typical first quarter buildup, our inventory balance is down versus when we closed the deal.

While there's still much more we can do, I am pleased with the improvements we have implemented so far.

Gross CapEx for the quarter was $177 million.

Net proceeds from disposals of assets were $108 million in the quarter, driven by increased asset sales as part of our ongoing integration efforts.

Next, I wanted to give you an update on our progress in executing our capital allocation strategy.

In the first quarter, we repurchased both Class A and Class B shares on a pro rata basis for a total of $500 million.

Since closing the deal, we have now returned over $1.6 billion to shareholders, we executed $1 billion of share buybacks and have paid over $600 million in dividends.

Now I'll turn to the segment results.

In Oilfield Services, market conditions continue to improve.

In the first quarter, we saw 5% sequential increase in U.S. land rigs.

However, the U.S. offshore market was down 21% quarter-over-quarter.

The U.S. completed well counts slowed versus the fourth quarter, driven by industry-wide supply chain challenges.

With drilling activity outpacing completions, the drilled but uncompleted well count continued to rise.

Given the commodity price backdrop, we expect to see North America completions start to pick up in Q2.

Internationally, rig count was up slightly with small increases in the Middle East and Latin America.

Revenue for our OFS business was $2.7 billion, down 4% versus the fourth quarter of 2017.

North America revenue was $1.1 billion, flat versus the prior quarter, as growth in our drilling-related product lines was offset by declines in artificial lift and pressure pumping in the Gulf of Mexico.

Internationally, revenue was $1.6 billion, down 6% sequentially, primarily due to the non-repeat of year-end product sales.

We saw the largest declines in Latin America and Asia Pacific, partially offset by growth in our drilling services product line in Europe and Sub-Saharan Africa.

Operating income was $141 million, up 39% sequentially, driven by our strong progress on synergies, solid incremental margins in drilling services and lower depreciation and amortization.

These improvements were partially offset by seasonal volume declines, most notably in completions and artificial lift.

Our outlook for Oilfield Services is unchanged.

We expect volume improvements as we move through the year with strong incremental margins.

As Lorenzo mentioned, our overall synergy expectation for 2018 is unchanged.

Next, on Oilfield Equipment.

The business performed in line with our expectations but continues to operate in difficult environment.

Orders in the quarter were $499 million, up 5% year-over-year.

Equipment orders were down 5% year-over-year primarily due to the timing of flexible pipe orders, which was only partially offset by increased equipment orders in our subsea production business.

Service orders were up 18% versus last year, driven by increased activity, particularly in the North Sea, and slightly improved aftermarket activity in our Rig Drilling Systems business.

Revenue was $664 million, down 7% versus the prior year.

This was driven by lower subsea production equipment revenue and continued volume softness in our Rig Drilling Systems business.

These declines were partially offset by growth in North American surface pressure control.

We still expect the large equipment orders we won in 2017 to begin to convert into revenue in the second half of 2018.

Operating loss was $6 million, which was unfavorable year-over-year.

This decline was driven primarily by continued volume pressure across the business and lower productivity but was lessened by cost-out and synergy execution.

We continue to execute on structural cost and product and service cost reductions as we position the business for the future.

Overall, the OFE business will continue to be challenged in the second quarter, but we expect it to improve as volume increases in the second half of this year.

Our technology and solutions position us well for upcoming customer FIDs.

Moving to Turbomachinery.

The business continues to operate in a mixed environment with muted activity in both upstream production and LNG.

We are focused on the priorities Lorenzo mentioned.

And we are executing within the framework we have previously communicated.

Orders in the quarter were $1.5 billion, up 10% year-over-year.

Our orders performance was broadly in line with our expectations with no FIDs for LNG in the first quarter.

Equipment orders were up 23% year-over-year, driven by activity improvements in the onshore and offshore segments.

Service orders were up 4% versus the prior year, driven mainly by an increase in upgrades.

Transactional services were up 1% year-over-year.

Revenue for the quarter was $1.5 billion, down 11% year-over-year.

Equipment revenue was down 9% as a result of lower gas turbine and generator volumes.

Service revenue was down 13% with both contractual and transactional services lower due to fewer outages.

We did see revenue growth in upgrades.

Operating income was $119 million, down 53% year-over-year.

The decline was driven by lower volume and negative services mix as well as lower cost productivity.

We incurred slightly higher-than-anticipated costs in the quarter to position the business for future commercial wins.

Overall, we expect TPS to perform in line with the framework I laid out on the fourth quarter earnings call.

We continue to expect TPS margin rates to improve as we progress to the second half of 2018, benefiting from higher-margin backlog and the cost-out initiatives.

We are confident in and continue to invest in our strategic positioning and anticipate capturing market opportunities as they arise.

Next, on Digital Solutions.

The business had a strong first quarter, driven by increased activity in the oil and gas end market, which was partially offset by continued pressure in the power generation sector.

Orders were $649 million, up 3% year-over-year, driven by solid growth across oil and gas and industrial end markets.

In Inspection Technologies, activity increase in the global automotive space as well as in the electronic sector in China.

Our pipeline in Process Solutions business saw significant growth in pre-commissioning orders.

This growth was partially offset by declines in our controls business primarily due to lower overall activity in the power generation sector.

Sequentially, orders were down 7%, driven by typical seasonality.

Revenue was $598 million, up 4% year-over-year.

The volume increase was driven by pipeline in Process Solutions and Inspection Technologies, partially offset with lower volume in our controls business.

Regionally, we saw increased volume in Asia, the Middle East and Latin America, offset by declines in both Europe and North America.

Operating income was $73 million, up 16% year-over-year.

The improvement was primarily due to better productivity across the portfolio and synergy realization in our pipeline business, which were partially offset by negative product mix.

We expect the oil and gas markets to continue to improve throughout 2018 and for the power end market demand to remain muted.

As we have previously stated, we expect sequential revenue and margin improvement in Digital Solutions over the course of 2018, driven by both seasonality and operational improvements.

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

Thanks, Brian.

Overall, we've made a lot of progress in the quarter.

I'm encouraged by our performance on the synergies and the key commercial wins we've secured.

The macro outlook is favorable, and we continue to position the company for further growth and profitability.

Let me reiterate that our priorities are unchanged.

We are focused on executing to deliver on our commitments on share, margins and cash.

Phil, now over to you for questions.

Thanks.

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

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

Looks like you guys are delivering well on the synergies, cash flow and looks like commercial intensity is up, so all good on those fronts.

I wanted to ask first about the offshore, and particularly your subsea business, with Tortue coming in and sources, I think, indicating more projects to be awarded here in the near term, how do you see that business evolve?

And it appears to me like we're starting to -- you finally see the pickup in that business.

And Lorenzo, if you could comment on what kind of an outlook you have there and if I'm right that the pickup is now underway.

James, and as we've mentioned before, we like the position we have within the subsea and our subsea portfolio today.

Regarding the market, we're coming off a very low base of 2016 and 2017.

And we do expect 2018 to be up, but it's still going to be at about half the levels that we saw in 2013.

We are coming off the back of some good project awards, as you mentioned, BP Tortue, which really leverages also the key technology that we have on the large-bore gas and high-pressure, high-temperature applications.

And then as I mentioned in the commentary, we've been awarded Gorgon with Chevron, which really is extending the long-term partnership we have with Chevron on a critical project out there, the Gorgon Project, which is going to be continuing to build on the relationship.

We're going to be supplying 13 subsea trees, other subsea equipment, manifolds, wellheads and production control systems.

So we're seeing project activity start to pick up.

We like where we're positioned and still some way to go, but we feel encouraged.

Okay, great.

And then maybe just a more broader question as a follow-up.

On the international outlook, Brent, over $70 here.

It seems to me the IOCs, the NOCs are becoming much more constructive on their views for the market.

And I wanted to understand how you guys are thinking about the international business, especially given your desire to regain market share or gain market share, also balancing that with improving margins.

But it seems like the international business, the recoveries now is in early stages, but it's now underway.

James, so on the international markets, and if you break it down, so overall, we expect the year to be relatively flat with pockets of certain activity as you look at the regions.

Pricing will remain competitive.

And our focus on margins comes through with the synergies.

If you break down the regions, in the Middle East, we do -- we don't really see that much material growth in the first quarter.

We expect some more activity in the back half of 2018 with some pricing pressure.

Our strategy continues to be really to gain some share there in the region.

If you look at Latin America, there's political economic instability in some countries.

We see modest growth through the year, weakness in Venezuela, partially offset with increase in Argentina.

So international again relatively flat through the year.

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

So Lorenzo, maybe you could talk a little bit more about the opportunity set for Baker GE in LNG, given your very clear leading market share, I believe, at, what, 85%, 90% on the compression side, and maybe the size and scale of that opportunity set, revenue per MTPA and timing of the awards.

So Angie, let's -- I'll take a start at looking at the marketplace.

And if you look at some of the activity that's taking place, we've mentioned the demand that's been increasing over the course of '17 of LNG.

And we see expected demand to double for LNG of 500 million tons per annum by 2030.

So the outlook remains positive over the long term.

And when you look at also the project activity, to get ready for that, we do start to anticipate final investment decisions in the back half of 2018 going into 2019.

We continue to like our position from the TPS business.

We've been investing heavily in new technology.

I've mentioned some of those would be LM6000.

You've got the LM2500, the LM9000.

And we continue to work very closely with our customers.

So we feel that this is an industry and space that we've got an opportunity to continue to improve upon and feel positive about the outlook going forward as these final investment decisions come through.

I would say we didn't see any final investment decisions in the first quarter.

And again, we see those coming through second half '18, beginning of '19.

Helpful.

And then Brian, maybe as a follow-up to that, can you talk a little bit more about TPS margins, how you think about TPS margins going into the back half of the year, in part driven by LNG awards in 2017, cost-cutting and maybe a little return on the transactional side?

And then thoughts into '19, I think you're thinking that potentially we could be back into the mid-teens on TPS from 8% today.

Yes, Angie, you reiterated a couple points here that we highlighted in the 4Q '17 earnings call that in the medium term, we'd be around the levels we were in the fourth quarter and do expect to see a pickup here in the second half with the visibility we have into the backlog and what we see coming through the services portfolio.

If you roll this forward into 2019, we have said that we did see us getting back to mid-teen rates.

And there's a couple of things that really drive that.

First is we talked to you about the cost-out, the $200 million of cost-out that we're driving in the business.

That's clearly going to impact margin rates.

You get a full year impact as we roll into 2019.

So self-help there is a big piece of that recovery.

On the services side, we've got good line of sight into both the transactional and contractual service outage schedules and the types of outages that are there.

And that's favorable for margin rates.

As we look out into 2019, we'll start to see some of that in the back half of this year.

And then finally, you highlighted the LNG market.

With some FID starting to pick up late this year and early next year, we should start to see in the back half of next year some revenue starting to come through associated with those since we are the long-lead items in those projects.

So that's really the dynamics that we see playing out for 2019 to get the margin rates back up in the mid-teens in TPS.

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

Wanted to follow up on TPS and specifically ask about kind of LNG, the services business.

You've noted that's been a bit of a drag and has not really -- it has been a bit of a disappointment, I guess, the last few quarters.

I wonder if you could talk about your visibility on service activities starting to improve and maybe comment on, is there any opportunity for some sort of catch-up effect?

Because as best we can tell, that business has been relatively flattish while capacity has been growing.

Could you help us think through the growth trajectory on LNG services and to the extent you're seeing any visibility that could ultimately play out this year and into '19?

Yes, sure, Jud, I'll give you some color on that.

So if you look at services, it's a big part of the business today.

And you're right, it has been relatively flat.

And we talked about some of the reasons there in terms of safety stock going down, destocking as well as the outage timing in the installed base.

If you think about services in total, we install the equipment and then the equipment operates.

So there's generally a lag before you start to see a lot of the service calories come through.

A lot of that depends on where the equipment is, how it's being operated.

So we have a large installed base that are under contractual services agreements.

And we have pretty good visibility into the types of outages that are going to happen and the calories that come along with those.

The LNG contracts are typically 10- to 20-year service contracts.

And the way you think about those is year 1, you have some positioning of parts and installation.

And then again, depending on where the equipment is operated, you start to get into service events 2, 3 years out but major service events 4 or 5 years into the life cycle and that follows through the rest of the lifecycle of the LNG plant.

So if you go back and look at where we've been in the LNG build cycle, primarily we're starting to enter a phase really early next year where you start to see some larger service events that will come through and they bring more revenue and more calories with them as well.

In addition to the visibility we have into these outages, we've been driving productivity in these contracts, both for our customers and for ourselves.

So as we progress through these contracts, we can make them more profitable and provide better output for our customers as well.

So that's another tailwind in the services portfolio.

So with the LNG build that's happened over the last few years, service calories will pick up sooner.

The LNG that we expect to start coming in late this year, early next year, you'll see the benefits from the service revenue a few years after commissioning.

So in terms of the outlook, it's consistent with what I just said with Angie, we've got good visibility into 2018 and into 2019 and expect to pick up there.

Okay.

And then if I could follow up and maybe try to maybe ask about some numbers, maybe -- I mean, should we think about LNG services?

I mean, is it reasonable to think they could grow mid- to high single digits?

Can we see double-digit growth at some point?

I'm just trying to think about how to figure out the magnitude of the growth as some of the stuff that you're talking about plays out.

I think that the best indicator there is if you could go back and look at our installed base growth in LNG, and that cycle really started early part of this decade.

And there's good data out there on when plants were commissioned and started running.

Our services growth roughly will track to that with a lag.

And again, I wish I could tell you it's exactly 2.5 years, you start to see it.

But it really depends on where the equipment is operating, the type of equipment.

But there's generally a lag versus the installed base in MTPA growth, okay?

All right, I appreciate that.

And my second question, if I may, is free cash during the quarter was above our estimate, I think largely due to lower restructuring.

Can you help us think about free cash flow as we go over the next few quarters?

And then the things we obviously will have visibility on are going to be cash restructuring charges and probably working capital.

I assume free cash flow grows.

But maybe you could help us think about the progression over the next couple of quarters.

Jud, just to kick it off here, we're really pleased with the progress we've made on the cash flow.

And we stated in the third quarter 2017 call, the improvements we were going to make on operations.

You're seeing those come through.

The team is fully focused on it.

And you can see the results bearing fruit.

More to do as we work through the year and you can expect those operational improvements.

We did have some good results, as I highlighted earlier, on working capital, specifically around receivables.

You did point out our restructuring spend was about $100 million in the quarter.

If I look at that going forward, as I said earlier, the bulk of the expense will be through here in the second quarter.

Some ongoing costs will flow into the second half but relatively small versus what you see in the first half year.

Typically with all these projects, the expense precedes the cash as people exit, as we close down facilities, exit product lines and those kind of things.

You will see an uptick in the restructuring cash here in the second and the third quarter, again trailing off in the second half of the year.

And from an overall working capital and free cash flow generation standpoint, look, we talked to you about it in the third quarter earnings call.

It's a big focus for the leadership team here.

We've started to make quite a bit of progress.

Inventory levels are down versus when we closed the deal.

And we usually have a spike-up in the first quarter.

But we still managed to generate cash since we closed the deal on inventories.

So we're happy with the progress but some more work to do.

I think there's some opportunities there as we go through the rest of the year.

And then from a CapEx standpoint, we were a bit low this quarter.

One is, I talked about, we're driving some integration activities and we sold some properties that generated some proceeds.

And then you see we had an inventory build in the first quarter.

And a lot of that will flip over to CapEx as we deploy those tools to drive the revenue growth.

And our next question comes from the line of Sean Meakim with JPMorgan.

Lorenzo, you noted in your prepared comments, the plan for 2018 includes taking market share, improving margins and generating more cash.

Obviously, synergies are a big part of the mix.

But leaving aside the synergies, you've been pretty vocal about you're trying to be aggressive on some of these larger projects out there, take advantage of the broader scope of the combined companies.

Just oftentimes, the interplay between share gains and margins can be in conflict.

So I was just hoping to get a little more clarity from you of how you prioritize top line growth via market share versus driving margins at this point of the cycle and the point at which the companies are coming together through the integration.

Yes, Sean, just to reframe again our strategy, and if you take a step back, when we combined the businesses, it's really a way in which we approached the market by offering new commercial propositions.

And I think you're starting to see that.

We mentioned Chrysaor, which is again another award of fullstream.

We are combining the capabilities that we offer across Oilfield Equipment, across Oilfield Services.

And that is really a new offering that didn't exist in the marketplace before.

We brought the capabilities.

And you've seen those coming through.

Also we've got, aside from the synergies, again new product introductions that we are developing into the marketplace.

You've seen those.

We're utilizing 3D printing capabilities, new technologies, lean, which are going to be able to put us in a position where we're at a better cost base from a product standpoint.

So you look at the premise of the way the strategy was laid up.

And we're executing to that strategy.

And that's how we're able to gain share and also return the margin and profitability and obviously generate cash.

So I feel very good about the way in which we're executing towards those.

Okay, fair enough.

And then just one point of clarification.

On the Tortue project, is it fair that the contract that we have today is just with the FEED as opposed to we still need to see the EPCI work be allocated?

Is BP obligated to use BHGE for the EPCI work?

Or is that still up for debate, depending on how things progress?

Yes, Sean, just to clarify, the initial contract is the FEED study for the SPS and also for the SURF in a 4-well development.

And our next question comes from the line of Bill Herbert with Simmons.

I came on late to this call, so you may have answered this question.

So I get the mix shift in revenues on TPS with regard to LNG-driven service agreements.

Could you provide us with some commentary and expectation on your transactional services?

Your installed base is growing, but the unit spend is declining, margin of safety is eroding.

And so the spring continues to coil.

What's your expectation for that business starting to inflect into revenue generation?

Yes, Bill, we have talked about that a little bit.

But to reiterate, with the visibility we have with the outages in the contractual services space as well as what we see from the installed base on transactional services, we do see that picking up in the second half of the year into 2019.

We did see a slight increase year-over-year, which is a good sign in transactional services.

But just so you know, it's difficult to predict exactly when the customers are going to decide to buy the inventory they need for an outage.

So we're constantly working with them.

There can be some movement between 1 quarter and another.

But generally, if you look at the installed base growth over the last few years and where things are in the service cycle, it should be a general tailwind.

And again, you could see some quarter-on-quarter movement, but the macro is pretty good for that.

And our next question comes from the line of Timna Tanners with Bank of America Merrill Lynch.

So I really wanted to ask about the uses of cash, the really strong buyback performance in the first quarter.

I believe that leaves you with about $2 billion left authorized.

I just wanted you to refresh, if you could, if that pace is sustainable.

And again, we have a pretty high forecast for further free cash flow generation.

Even beyond this current authorization, any further thoughts on cash use?

Yes, Timna, look, we like the strategy we have communicated to return 40%, 50% of net income to shareholders.

We do have plans to increase the free cash flow conversion.

So we like the free cash flow outlook here.

In terms of what we've done, we launched the share buyback program in November and it bought back $1 billion of stock in 4 months and have returned $600 million to shareholders in dividends, so pretty solid results there in terms of returning cash to shareholders.

I think the stock, where it is today, is still an attractive investment.

We continue to work with the board on the pace of our buyback.

And you should expect us to continue to execute here.

But you're right.

We do have $2 billion of authorization left and remain committed to our stated objectives here of returning cash to shareholders.

Okay.

And then if you wouldn't mind, just eyeballing your second quarter EBITDA, current consensus is about 15% trajectory, and given the seasonality and what you just laid out, I just wonder if it were possible for you to say high level if that seems like a reasonable progression.

So Timna, again we don't really talk about the consensus out there.

We're committed again to what we see from a trend perspective in the industry.

You've got North America activity that is improving.

This is a story of short-cycle business that sees some tailwind, given the activity in the industry, so positive momentum if you think about the Oilfield Services, the Digital Solutions.

When you look at the longer-cycle businesses, you're really looking at the back half of the year on the Oilfield Equipment and also TPS as some of these larger projects' final investment decisions come through.

Yes, so Timna, basically our outlook for the year is unchanged at this time.

And I think Lorenzo summarized the dynamics in the product companies pretty well.

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

Back on Turbomachinery, if I could.

Lorenzo, you talk about the significant demand, that 500 million tons by 2030, over the next many years.

You guys have talked in the past about your revenue potential in Turbomachinery being somewhere between $30 and $70 per ton.

And when we look back historically, it looks like on the equipment side that it has historically been closer to about $25 a ton.

And I'm just wondering, are we missing the service component of that?

And is the service component what really gets the revenue potential in the $30 to $70 range?

And I'm just trying to gauge this because we can all have opinions of what the FID rate is going to be over the next couple of years.

But I just want to make sure that we're judging the revenue potential over the next couple of years in the same correct way.

Yes, Jim, I think we really have to take a step back.

And we really need to look at this from a perspective of project-by-project.

And the revenue opportunity is going to vary a lot depending on the technology and the scope that we're actually playing with on the project.

So the type of compression, the driver equipment, it's going to really dictate what the revenue potential is.

Are we using a large heavy-duty gas turbine, an electric motor?

So I think as we go through this, from a revenue opportunity perspective, we've got to go scope-by-scope on each of the projects.

That's the best way to do this.

It's a wide range as you go through.

And you actually look project-by-project.

Okay.

And does the -- when we're trying to model this, is it both the equipment and the follow-on service?

And I know the service has a great tail.

And that's always been a fabulous part of GE.

But how soon, I guess, does the service component part really kick in?

You guys have talked about awards and work done last year that the service starts to kick in.

And I just wonder, what kind of delay are we looking at generally on some of these projects before service revenues really start to ramp up?

Yes, Jim, when the projects are commissioned, you get a little bit there around installation and some initial spares provisioning.

But you start to see material service work really come in, in the 3- to 4-year range, again depending on the type of equipment, depending on the size of the project and where it's actually operating.

So there is a lag there, like I said earlier, and it tends to be 3 to 4 years.

And then there are other cycles that are spread out over the 15- to 20-year life of the contract.

So that's a rough guide.

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

Just a question on some of the international markets.

You started to see a lot more lump-sum turnkey contracting models out there.

It's not something Baker has traditionally been very active.

And I was just wondering if you could talk about your appetite for going after this type of work and how you assess the risks and opportunities of this model.

Dave, and as you mentioned, lump-sum turnkey, LSTK, they've actually been around for a number of years.

And so you can go back in time and see where they've been tried before and then changes that have been applied, in Latin America right now, I think you're seeing a number of activities in the Middle East.

And when we look at it, it's really a question of taking project-by-project and looking at the returns.

And that's the most important aspect here is the returns.

We also think that LSTK is only one model.

We think it's important that we continue to look at new innovative contractual structures that are positive for our customers and ways in which we can work with them in looking at what we've discussed with applying our potential leasing, potential other services.

And that's the way in which, as the industry continues to evolve, there's going to be different models that come through.

Yes, Dave, if I look at it, I think we've got the capability in-house to execute on LSTK projects.

We understand the history both within Baker and within some of the competitors who have a larger portfolio of that.

But we think that the model needs to change.

And we think the customers understand that, just given the history here.

But they think we've got the capabilities.

And the one thing that I want to make sure you understand is that we'll be selective and we're going to balance the risk and reward here to make sure that we achieve adequate returns for the company if we're taking on incremental risk.

Brian, what did you mean by that, that the model needs to change?

What did you mean by that?

Yes, look, I think if you look at some of the historical performance here, there have been things in place that have not made it beneficial for the customer.

And there have been some that have been loss-making here.

And I think sitting down with the customer and looking at the contractual nature, how we interact, how we work together, things that are dependent upon them to make the contract work, I think constructive dialogues there in how you contract and how you operate on a daily basis is what I'm talking about here.

So it's got to be a much more collaborative relationship.

And I think key customers understand that.

And our last question for today comes from the line of Chase Mulvehill with Wolfe Research.

Lorenzo, a question for you.

When we think about the full separation, the potential full separation, Baker Hughes from GE, from a strategic and operational standpoint, what are you doing or what needs to be done to prepare for this potential full separation?

And look, as you know, the GE CFO, earlier on this year, restated at a conference that there is nothing anticipated from GE at this stage.

And we have everything in place with regards to running the business.

And we're committed to what matters most, delivering for our customers and for our shareholders.

We've got -- the majority of the value-creation opportunity is within our control, BHGE.

So we're going through the aspects of integration.

We've got the synergies in place.

And we feel good about we have in hand what we need going forward.

Okay, all right.

That's helpful color.

I guess, turning to the subsea market a little bit.

How do you see the subsea market evolving over the next few years?

Do you see more of your customers requesting kind of more integrated model?

And then maybe comment what you're seeing in the market today on pricing.

So I think it's still an open area for discussion.

We're clearly seeing some increased activity and also different models that are being applied.

You've seen the recent wins that we've also indicated.

We do think that the offshore market and subsea deepwater is necessary from an industry segment perspective in the long term.

And so pricing remains challenging.

And we're looking at different models.

And I think it's going to be playing out over the course of the next 12, 18 months.

And that does conclude today's Q&A session.

And I would like to return the call to Mr. Lorenzo Simonelli for any closing remarks.

Thanks a lot.

Thanks, everybody, for joining us.

I just wanted to mention this is the third quarter as BHGE.

And we're making great progress on all the strategic priorities that we've laid out.

We've mentioned the share, we've mentioned the margin and also returning the cash generation and cash to our shareholders.

The environment is positive.

We see some tailwind.

And we're remaining focused on our key priorities.

I also want to give a shout-out to all the employees, all the hard work that they've endured during the integration.

We're making good progress, and thanks for joining us today.

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

This does conclude the program, and you may all disconnect.

Everyone, have a great day.