貝克休斯 (BKR) 2018 Q2 法說會逐字稿

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

(Operator Instructions) 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, Sondra.

Good morning, everyone, and welcome to the Baker Hughes, a GE Company Second 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'll 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 non-GAAP to GAAP measures can be found in our earnings release and on our website at bhge.com under the Investor Relations section.

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 will give a brief overview of our second quarter results.

Then, given that we have just celebrated the 1-year mark as BHGE, I will provide a summary of what we've accomplished as a combined company over the past 12 months.

I will then share some perspectives on market dynamics and highlight some of our key achievements in the quarter and how our company is delivering results in the current environment.

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

In the second quarter, we delivered $6 billion in orders and $5.5 billion in revenues.

Both were in line with our expectations.

Adjusted operating income in the quarter was $289 million.

We are seeing continued improvements in our Oilfield Services and Digital Solutions businesses while our longer-cycle businesses are positioning for the future.

Free cash flow in the quarter was negative $22 million and included $110 million of restructuring and deal-related cash outflows.

Earnings per share for the quarter were negative $0.05, and adjusted EPS was $0.10.

We remain committed to top-tier shareholder returns.

Since closing the deal, we have returned over $2.3 billion to shareholders.

Now I'd like to take a few moments to review our progress over the last year as a combined company.

12 months ago, we formed BHGE, a company that spans the oil and gas value chain.

For our customers, we leverage leading technology, global scale and an integrated offering to provide fullstream solutions through the cycle.

For our shareholders, we are differentiated investment opportunity with a clear plan to generate synergies and drive shareholder returns.

From the outset, we have had 3 clear priorities: growing market share, increasing margin rates and delivering strong free cash flow.

Over the past year, we have made progress on each of these priorities.

To drive share gains, we have revamped our sales processes and incentives and are equipping our teams with the right tools to win.

We are pushing the teams to be closer to our customers and are driving accountability up and down the organization to meet our objectives.

We continue to invest in leading technology that will enable our customers to achieve better productivity and make us more successful commercially.

By strengthening our commercial position in the Middle East and North America, we are gaining momentum with key wins in these 2 critical regions.

We have introduced new and innovative commercial models, resulting in a number of fullstream awards like Twinza, Siccar Point and W&T Offshore that demonstrate the differentiated value of our portfolio and what it can bring to customers.

One of the focus areas for our margin rate improvement priority is to increase profitability in our Oilfield Services segment.

Year-over-year, OFS margins are up more than 550 basis points.

Our focus in synergies is driving significant improvements in this business.

Going forward, we expect to increase margin rates as we benefit from an improving market and work through the remainder of our synergy programs.

In 2018, BHGE has already delivered more than $330 million of synergies, and we are well on our way to achieving the $700 million target for the year.

On cash flow, we are improving our processes in order to drive best-in-class cash conversion.

We ended our factoring program and have enhanced working capital controls.

Additionally, we have overhauled incentive structures from the leadership to the commercial teams to align employee outcomes with shareholder value.

In the first half, we delivered $204 million of free cash flow, which included $210 million of restructuring and deal-related outflows.

I'm also proud to say that we have accomplished all that while maintaining a relentless focus on HSE with more than 150 Perfect HSE Days since closing the deal.

I'd like to spend a moment thanking our BHGE employees for their incredible commitment over the past year.

This team has put a lot of time, heart and soul into creating the new Baker Hughes, working tirelessly through the integration and executing on our priorities.

I'm very proud of the team's achievements over the last year.

We know there's more work to do, and we remain committed to continuing this journey together.

Now I'd like to spend a moment on the market environment.

We continue to see positive momentum for our shorter-cycle businesses of OFS and Digital Solutions.

North American production is growing as operators grow rig and well counts.

The U.S. rig count increased 8% in the quarter while the Canadian spring breakup drove overall North America rig count down consequentially.

Year-to-date, U.S. onshore operators have added more than 120 rigs.

In the Permian, despite current uncertainty around takeaway capacity, the rig count grew 9% versus the first quarter, and operators have added 75 rigs year-to-date.

Given our portfolio mix, we do not expect the current uncertainty to impact us materially.

Internationally, our outlook remains unchanged.

We have seen positive signs in a number of geomarkets in the second quarter.

Our outlook for the long-cycle businesses of OFE and TPS is becoming more constructive.

OPEC has announced a balanced move, implying modest production increases.

Overall, we feel that there are encouraging signs that will lead to a more positive environment, where customers can move ahead with larger project final investment decisions.

The combination of our short- and long-cycle businesses positions us well for a balanced growth trajectory that captures near-term upside but, importantly, extends well into the future as the next wave of customer projects comes into view and as we mature our fullstream model.

With that, let me share some highlights of the second quarter.

In Oilfield Services, we remain committed to gaining share in the key markets and product lines.

In the second quarter, we saw strong performance in North Sea, Sub-Saharan Africa and Asia Pacific markets.

From a product line perspective, completions and artificial lift both showed strong growth.

And in North America, our drilling services business grew revenues well in excess of rig count.

I am particularly pleased with the strong quarter we had in the North Sea, including a number of significant wins with key customers.

Equinor awarded BHGE an integrated well services contract to support a significant portion of Equinor's drilling and well construction activities in the Norwegian Continental Shelf.

BHGE secured a large scope in the award and will be the main drilling and well service provider for the 8 rigs developing Troll, Oseberg and Grane, 3 of the most prolific and active fields in the Norwegian Continental Shelf.

BHGE's exceptional performance on the integrated Johan Sverdrup project, where we delivered the first 8 wells 8 months ahead of schedule, was a critical factor in the most recent award.

We believe this integrated award is at the leading edge commercially and will influence customer behavior in key basins around the world.

BHGE was also selected to provide integrated well construction services for a 12-well drilling program for another major operator in the North Sea.

Both of these awards were based on BHGE's proven track record of driving down costs on integrated projects in the region.

As I mentioned, our drilling services product line had a very strong quarter in North America.

In the Permian, our drilling services team reduced the number of average drilling days for a key customer by nearly 20%, setting Delaware basin drilling records for both medium and long lateral sections.

We were able to displace a competitor and were awarded 100% of the drilling work on 6 rigs, based on our superior performance and market-leading technology.

As I stated on our first quarter earnings call, we remain committed to expanding our international presence in our chemicals product line.

We had a great win in upstream chemicals, securing a multimillion dollar contract for flow assurance technology in the Sub-Saharan Africa region, displacing our competitor.

And in downstream chemicals, we were awarded free sole-source contracts, capturing market share in both North America and Norway.

In our Oilfield Equipment segment, Neil and the team had a very strong quarter commercially.

It was the largest orders quarter since 2015, winning significant subsea production awards across 6 different projects.

Our book-to-bill ratio in the quarter was 1.7.

We were very pleased to be awarded the subsea equipment contract by Chevron for Phase 2 of the Gorgon Project in offshore Western Australia, one of the largest natural gas projects in the industry today.

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

We were also pleased to be awarded a separate 5-year contract to provide well completion equipment and services from our OFS segment.

Another significant award in the quarter was for the Shwe gas field, which is a continuation of our successful technical partnership with McDermott.

In its highly competitive project, we were awarded the EPCIC scope, which covers SURF and SPS for an 8 subsea well development as well as the brownfield modifications to tie back the new subsea facilities to the existing Shwe platform.

BHGE will supply the SPS scope, including 8 medium water horizontal Christmas trees, 8 subsea production control systems, distribution equipment and subsite controls.

These latest contracts are a clear sign of BHGE's leading gas technology and ability to compete and win big projects with a collaborative partnership approach.

In our Turbomachinery & Process Solutions segment, we remain committed to our strategic priorities: LNG leadership, services capability, growth in the industrial space and cost out.

As you know, we operate in 5 segments within TPS: upstream production, LNG, pipelines, downstream and industrial.

Today, I will focus on the first 2, which are the largest drivers of the TPS business.

Our upstream production business is one of the key pillars of our TPS segment.

We are a leading provider of compression trains for gas gathering, boosting and reinjection and power generation equipment for oil and gas production facilities.

These solutions are primarily deployed in large conventional oil fields with associated gas, both in greenfield projects and brownfield expansions.

On and offshore production represents approximately 30% of TPS equipment revenue through the cycle.

It also drives a significant portion of our aftermarket services revenue from its global installed base of nearly 3,000 gas turbines and compressors.

Approximately 70% of this installed base is onshore with strong presence in the Middle East, Europe and Latin America.

Our activity in the Middle East dates back 50 years, and this region is a core market for our onshore production business.

The offshore business is anchored by a long heritage in the North Sea as well as a strong presence in West Africa and Brazil with FPSOs.

The largest installed base of on and offshore production units is a key driver of our transactional services business.

As we have discussed on prior calls, over the last few years, we have seen a significant slowdown in these transactional services as customers run operations with lower safety stock.

We continue to believe the current level of spend per unit is unsustainably low and have seen the first signs of activity improving.

In the second quarter, we had some key wins in our on and offshore production segment.

After having won the compression equipment for the Sepia FPSO in Brazil in the first quarter, this quarter, we secured the gas turbine award for the Mero 1 FPSO, the first in the Libra field.

This will be the largest FPSO in the country at 180,000-barrel per day capacity.

LNG is an area of strength for us, and we were very pleased to be awarded the turbomachinery equipment for the third train at Cheniere's LNG facility in Corpus Christi, consisting of 6 gas turbines and various compressors.

This project represents the first FID on a new liquefaction capacity in the United States since 2015 and the fifth order for BHGE equipment for Cheniere through Bechtel.

This award builds on the unparalleled technology experience and partnership established between Cheniere, Bechtel and BHGE.

We were also selected by GLS to provide our LNG technology and services for the Main Pass Energy Hub, currently in development offshore Louisiana.

We will work collaboratively with GLS as they continue to work towards Final Investment Decision.

This is a very significant milestone for us and further proof that our LM9000 gas turbine is a key technology component to increase power output with a smaller footprint.

As I noted earlier, the on and offshore production and LNG segments are the largest drivers for TPS, and it is important to understand their respective growth trajectories.

Our outlook on LNG remains positive.

And as additional projects are sanctioned, we expect LNG orders to start to pick up in the second half of 2018, which will drive revenue growth in 2019 and beyond.

We expect on and offshore production orders to ramp in 2019 as more large projects are sanctioned and offshore spend returns to more normalized levels.

We expect these orders to start generating revenues in 2020.

We see these multiple growth trajectories as an advantage for our balanced portfolio.

Lastly, on TPS, as we discussed previously, we expect $0.2 billion of annualized cost-out by 2019.

As you know, we began this process by rationalizing TPS' structure.

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

We are on track with these cost actions and expect these to materialize and to improve TPS margins in 2019.

In our Digital Solutions segment, we are seeing increased interest from our customers in our sensor, inspection and software offerings.

We also continue to gain traction with our Predictive Corrosion Management software and recently announced a strategic alliance agreement with SGS for the joint deployment and commercialization of our technology.

SGS is the largest player in inspection services and provides visual inspection and nondestructive testing for large industrial assets.

This makes SGS a perfect complement to BHGE's inspection technologies product line.

This alliance will enable us to increase the pace of adoption of Predictive Corrosion Management, not only in oil and gas but also other industrial sectors.

Overall, Digital Solutions had a strong first half of the year, delivering 300 basis points of margin expansion during the first 6 months of 2018.

Lastly, in late June, GE announced their intention for a full separation from BHGE in an orderly fashion over the next 2 to 3 years.

We will continue to work with GE as they evaluate the timing and structure of their exit.

Critically, under any scenario, we will retain the technology, capabilities and infrastructure we need to accomplish what matters most: delivering for our customers and for our shareholders.

We are focused on our execution and on achieving the synergies from the merger of our 2 companies.

As I said earlier, our synergy targets remain intact.

We had a tremendous amount of progress in our first year as BHGE and have seen some great wins from our team, but we know there is more work to be done.

Our priorities for 2018 remain unchanged.

We are focused on growing market share, improving margins and delivering strong free cash flow.

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

Thanks, Lorenzo.

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

We delivered another strong commercial quarter with orders of $6 billion, up 9% year-over-year.

The growth was driven by our upstream businesses.

Oilfield Equipment was up 30%, and Oilfield Services was up 13%, partially offset by Turbomachinery, down 4%, and Digital Solutions, down 6%.

Quarter-over-quarter, orders were up 15% with Oilfield Equipment up over 100%.

Remaining performance obligation, or RPO, was $20.9 billion, down $0.4 billion or 2% sequentially, driven by the effect of foreign exchange.

Equipment RPO ended at $5.5 billion, up 1%.

Services RPO ended at $15.4 billion, down 3%.

Our book-to-bill ratio in the quarter was 1.1.

We are very pleased with this result.

Both Oilfield Equipment and Turbomachinery had a book-to-bill ratio above one, an important step in rebuilding backlog in our longer-cycle businesses.

Revenue for the quarter was $5.5 billion, up 3% sequentially, driven by our shorter-cycle businesses of Oilfield Services and Digital Solutions.

Oilfield Services was up 8%, and Digital Solutions was up 11%, partially offset by Oilfield Equipment, down 7%, and Turbomachinery, down 5%.

Year-over-year, revenue was up 2%, driven by Oilfield Services, up 14%, and Digital Solutions, up 7%, partially offset by Oilfield Equipment, down 9%, and Turbomachinery, down 13%.

Operating income for the quarter was $78 million.

Adjusted operating income was $289 million, which excludes $211 million of restructuring, impairment and other charges.

Adjusted operating income was up 27% sequentially and up over 100% year-over-year.

Our adjusted operating income rate for the quarter was 5.2%.

Compared to the same quarter last year, our adjusted operating income rate is up over 300 basis points.

This is a clear indicator that we are making progress on our goal to expand margin rates, specifically in Oilfield Services.

There is more work to do, and we expect to see further improvements in total company margin rates as our longer-cycle businesses return to better activity levels and we continue to deliver on our synergy plans.

In the second quarter, we delivered $189 million of synergies.

Corporate costs were $98 million in the quarter, flat sequentially and down 9% year-over-year.

Depreciation and amortization for the quarter was $392 million.

As anticipated, we finalized the purchase accounting in the second quarter.

Next, on other nonoperating income, we had a credit of $43 million in the quarter.

This was primarily driven by a gain on a business sale in our Turbomachinery segment, which has been excluded from our adjusted earnings per share.

Separately, this week, we announced that we signed an agreement to sell our natural gas solutions product line.

NGS is part of our Turbomachinery segment and provides industrial products, such as gas meters, chemical injection pumps and electric actuators.

The transaction includes the transfer of approximately 500 employees and 4 manufacturing sites.

We expect the deal to close within the second half of 2018.

These dispositions are in line with our strategy to further focus the portfolio on core activities.

Tax expense for the quarter was $62 million.

Loss per share for the quarter was $0.05.

On an adjusted basis, earnings per share were $0.10.

Included in both EPS and adjusted EPS is a negative impact of $34 million from our equity stake in BJ Services.

The loss in the quarter is mainly attributable to adjustments required to properly reflect equipment repair and reactivation costs in the BJ Services financial statements.

BJ Services finalized their 2017 audit in early May this year, and the adjustments were identified as a result of the work the team performed together with their auditor.

There is no cash impact to BHGE, and we do not expect further adjustments like this in the future.

Free cash flow in the quarter was negative $22 million, which includes $110 million of restructuring and deal-related cash outflows and $161 million of net capital expenditures.

Working capital for the quarter was negative $116 million, primarily driven by our inventory build to support revenue growth in the second half of the year.

As Lorenzo mentioned, in the first half of 2018, we generated $204 million of free cash flow, which includes $210 million of restructuring payments.

We are focused on optimizing our working capital, and we will continue to invest in restructuring spend to the second half of 2018 as we execute on our synergy programs.

We remain on track for strong free cash flow conversion in the year.

Lastly, we repurchased $500 million of common stock in the quarter, consisting of approximately $187 million of Class A common shares and approximately $313 million of Class B common shares.

This brings our total share repurchases since we announced the authorization to $1.5 billion.

Next, I will walk you through the segment results.

In Oilfield Services, market conditions continue to improve.

We saw an 8% sequential increase in the U.S. rig count with solid growth both on and offshore in the second quarter.

U.S. completed wells were up 7%, showing the first significant signs of a pickup since the fourth quarter of 2017.

The Canadian spring breakup drove total North America rig count down 7% sequentially.

The international rig count was flat quarter-over-quarter with pockets of growth in Africa, the Middle East and Asia Pacific offset by declines in Latin America and Europe.

Revenue for OFS was $2.9 billion, up 8% versus the first quarter of 2018.

North America revenue was $1.2 billion, up 7% versus the prior quarter as drilling services and fluids both substantially outgrew the rig count.

Our pressure pumping product lines saw significant volume growth in the Gulf of Mexico.

Internationally, revenue was $1.7 billion, up 8% sequentially.

We saw increases in all regions, especially in the North Sea, driven by substantial growth in completions and drilling services.

The Asia Pac and Sub-Saharan African geomarkets also delivered solid growth, driven by the completions, artificial lift and chemical product lines.

Operating income in the quarter was $189 million, up 34% sequentially, driven by our continued progress on synergies, higher volume and better cost productivity across several product lines, partially offset by the non-repeat of the onetime benefit from lower depreciation and amortization we recognized in the first quarter.

Our outlook for Oilfield Services remain positive.

We expect sequential volume increases in the second half as the market continues to improve.

We expect incremental margins on the base business to be in line with historical averages and in addition to benefit from further synergies.

However, as we go through the second half of the year, we expect modest offsets for material cost inflation.

Next, on Oilfield Equipment.

Orders in the quarter were $1 billion, up 30% year-over-year, the largest OFE orders quarter since the first quarter of 2015.

Equipment orders were up 38% year-over-year, driven by wins in our subsea production systems business, which included Gorgon Stage 2 and the Shwe project, as well as several other important awards, specifically in the North Sea.

The successes in the quarter are a clear demonstration of the strength of our OFE product offerings and the variety of commercial and partnership models that we are able to offer to our customers.

Service orders were up 10% versus last year, driven by increased activity, particularly in the North Sea.

We expect the orders booked this quarter to start to convert into revenue in 2019.

Revenue was $617 million, down 9% versus the prior year.

The decline was driven by lower subsea production equipment and rig drilling systems revenue.

These declines were partially offset by continued growth in our surface pressure control business, particularly in North America.

Operating loss in the quarter was $12 million, which was unfavorable year-over-year.

The loss was primarily driven by continued volume pressure across the business and lower cost absorption, which were only partially offset by cost-out and synergy execution.

As we expected, the first half was challenging for our Oilfield Equipment business with low volume.

We expect modest improvements in the second half as more recent projects start to generate revenue.

Specifically, in the fourth quarter, we expect better margins driven by more cost absorption.

We remain confident in our positioning on a number of significant new FIDs that we expect to be awarded in the second half of the year.

Moving to Turbomachinery.

Our outlook for the business is improving with a more positive macro environment.

Orders in the quarter were $1.5 billion, down 4% year-over-year.

Equipment orders were down 29% year-over-year, primarily driven by the non-repeat of the large FLNG order we booked in Mozambique in the second quarter of last year.

Service orders were up 15% versus the prior year, driven mainly by an increase in transactional services.

This is a positive sign, and we expect some of these orders to convert in the second half of the year.

Revenue for the quarter was $1.4 billion, down 13% year-over-year.

Equipment revenue was down 24%, driven by decreases across all segments, specifically in onshore and offshore production.

Service revenue was down 4% year-over-year.

Operating income for Turbomachinery was $113 million, down 7% year-over-year.

The decline was driven by lower volume as well as lower cost productivity.

Included in operating income is a onetime charge of $30 million to remediate quality issues specific to one of our long-term equipment projects.

We expect to make final shipments, which will be a significant amount of revenue, on this project in the third quarter.

Additionally, in the third quarter, we expect improvements from slightly better volume and do not expect the $30 million onetime charge to repeat.

In the fourth quarter, we expect significant improvements in our TPS business driven by better equipment mix, higher transactional service revenue and year-end volume growth.

We also expect to realize benefits from our cost-out program.

Next, on Digital Solutions.

The business had a strong second quarter and continues to see growth in both the oil and gas and the industrial end markets.

Orders were $637 million, down 6% year-over-year.

We saw double-digit growth in both the inspection technologies and measurement and sensing product lines, which was more than offset by declines in Bently Nevada and controls.

Sequentially, orders were down 2% as the decline in the pipeline and process solutions business more than offset growth in the other product lines.

Revenue was $662 million, up 7% year-over-year and 11% sequentially.

Revenues grew across most of our products and end markets, especially in Europe, North America and China.

Activity in the power market remains subdued.

Revenue growth was also favorably impacted by achieving a significant execution milestone on a large software deal.

We don't expect this impact to repeat at the same level in the second half.

Operating income was $96 million, up 56% year-over-year and 33% sequentially, driven by better volume, cost productivity and synergy benefits in our pipeline and process solutions business.

For the second half of 2018, we expect the industrial and oil and gas end markets to continue to improve and for the power market to remain a headwind.

We expect year-over-year growth on volume and margins, driven by improved product mix, seasonality and a strong focus on operational performance.

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

Thanks, Brian.

Our outlook on the market is favorable, and we continue to position the company for further growth and profitability.

Over the last 12 months, we have made a tremendous amount of progress, and we are excited about the future.

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, Sondra, let's open the call for questions.

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

Lorenzo, it looks like you had a busy quarter, hopping around the road signing contracts.

This order momentum and the order cadence was very impressive both in the Oilfield Services, but also Equipment business.

Is this a cadence that can be kept up for the rest of this year?

Or are we at that inflection point where we can continue to see the orders continue at this type of pace?

James, thanks.

And as you said, we had a strong 2Q from an orders perspective, and we're pleased with what each of the business units was able to achieve.

And maybe let's break it down into the business units and take it one by one to begin with.

If you look at OFS, we feel good about the momentum there and the short-cycle activity in North America continuing, so pickup there.

If you look at from the OFE perspective, again, that's the strongest quarter we've had since 2015 with the announcements of Gorgon and Shwe wins.

And we feel very good about the improving visibility to projects in the future with the commodity pricing being rate bound, which is helping our customers decide on the larger FIDs.

So as we looked at, in particular, some of the gas-oriented projects, we feel good about the positioning we have with the technology in our portfolio, both on the OFS side and the OFE side segments.

So on the OFE side, feeling good about the long-term prospects there.

TPS, again, continuing to feel constructive on the outlook of LNG and feeling good about the prospects there.

I went to the World Gas Conference and spoke to many of the customers.

You've got LNG demand that continues to increase.

So when you look over all at the longer-cycle businesses of OFE and also TPS, we feel that the projects are going to be coming into play in second half '18, beginning of '19.

And we feel positive with the outlook there, and short cycle continuing to be positive.

Okay, great.

And then specific to LNG, I was down there in D.C. at the Gas Conference as well.

And it seemed to me that we're pulling forward a lot of LNG projects that maybe were supposed to go in '19 or '20, but they seem to be coming on faster.

Is that the sense that you're getting, that we're getting a bit of a pull-forward here for LNG?

Again, James, you have to look at the overall market demand, and we continue to expect LNG demand to double to about 500 million tons per annum by 2030, so growing at a pace of 4% to 5%, more closer to [5%] a year (corrected by company after the call).

And based on that growth, yes, you're starting to see a lot of projects being discussed.

At the World Gas Conference, many of the customers talking about project activity internationally as well as in North America.

You saw that we were able to indicate the Cheniere Corpus Christi train three during the quarter, which is the first LNG in North America in some time.

So again, as you look at the activity second half '18 and '19, and we think that LNG market is a good outlook.

Great.

And then maybe just a final last one for me, a smaller -- really, for Brian probably here.

On the TPS margin, at 8%, but we had a $30 million kind of onetime charge, so more like 10%.

Is that your starting point as we think about some improvement in margin in 3Q and 4Q?

Yes, James.

You've got the right math there.

It's about a 2-point drag on margins.

So the base business was closer to 10%.

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

So a little further up -- follow-up on TPS.

So based on your commentary in your prepared remarks on the orders book on transactional services, do you feel a little bit more optimistic about the revenue outlook for the second half of 2018?

Or are you a little light on revenues in Q2?

But has your full year revenue and margin outlook changed for TPS?

Yes, Angie.

No change to the full year revenue and margin outlook for TPS.

If you break it down a little bit, we -- for the last 5 quarters, we've had positive orders growth in TPS equipment.

It was negative this quarter because that large FLNG order we booked last year in Mozambique.

So that's a really good setup for what we had that's going to convert here in the second half of the year.

We've got good visibility into the equipment backlog, and we see better mix coming through that backlog, specifically, in the fourth quarter.

Also, from a top line perspective, if you remember, last year, each quarter, we had negative orders V in services.

For both the first quarter and the second quarter of this year, we've had positive orders V in services.

And specifically, on transactional services, we were up 15% in the second quarter and 8% for the half combined.

So those orders will start to convert in the second half, and that's also good for margin rates as we go into the second half.

The other thing to think about from a margin perspective is Rod and the team have been executing on the cost-out that we talked about earlier in the year, so we expect to see that pickup in the fourth quarter.

And then with the normal year-end volume ramp that we've experienced in that business, that's also good for cost absorption and volume leverage.

So no change to the overall year.

Okay.

That's perfect.

That's what I wanted to hear.

And then on the sale of NGS for $375 million, maybe you could talk a little bit about the logic behind the transaction.

Is there other noncore business opportunities for sale?

Just the thoughts there.

Yes.

Angie, we continue to execute our strategy which includes looking at potential dispositions to further focus on our core activities.

If you look at the NGS business, it was part of our TPS segment.

You mentioned sale announced earlier this week.

That's exactly that.

It's a small business unit that was noncore and will do very well with its new owners.

The sale is anticipated to close in the second half.

And we'll continue to invest in higher growth areas.

And as we go through, we'll continue to execute this strategy of looking and focusing on what's core.

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

A question for Lorenzo or Brian, maybe if you could talk a little bit about the growth in OFS margins.

I assume what we've seen so far in the last few quarters has been primarily cost synergies, if you could confirm that.

And then help us think about as you execute the rest of the cost synergies, our assumption is still that you're seeing most of that in OFS.

If that's the case, how do we think about OFS margins progressing over the back half of 2018?

Yes.

Sure, Jud.

We are pleased with where we are from a margin standpoint in OFS.

It was one of the key tenets of the deal and a key priority as we close the deal and have been executing roughly 550 basis points since the second quarter of last year.

And to your point, we have executed a significant amount of synergies, and most of them do come through in OFS.

Incrementals are still very strong.

We delivered 23% in the quarter, and that's despite the non-repeat of the D&A catch-up we had last quarter.

So I feel good about the core incrementals of the business.

I mean, you look at history, the core incrementals on the base business have been between 20% and 25%.

We would expect that to continue, and the synergies would be on top of that as we continue to execute on the synergies.

Earlier, I did mention some modest headwinds around material inflation.

That's really limited to a couple of places in the business, where we have petrochemicals and oil as an input and then also in a couple of places where we use nickel and steel.

So it's not broad-based inflation.

It's in a couple of places and don't expect that to be a significant impact.

So -- but we're confident in what we laid out in terms of the margin progression in OFS, like the way the team under Maria Claudia are performing out in the field, taking cost out, and feel good about where we are for the rest of the year.

Okay.

And if I could follow up on that as I kind of take all that in is thinking about OFS margins getting to double digits, like 10% or so by the fourth quarter.

Is that still a reasonable expectation if I kind of add all that up?

Yes.

It's -- you put all the synergies that got in with the incremental margins and the volume that comes through, it's certainly reasonable.

And our next question comes from the line of Scott Gruber with Citigroup.

Lorenzo, I think in the prepared remarks, I heard you state that Baker would retain key technology IP post separation from GE.

There's been a bit of debate on this in the marketplace.

Can you just provide some more color on the key technologies, particularly within Turbomachinery, where Baker holds the IP and those were -- the IP will be retained by GE and implications for operations post separation for any agreement that's needed with GE.

Scott, so thanks for the question.

I think maybe taking a step back and maybe just to bring some history, if you look at what GE actually announced, it's completed its strategic business review and confirms that it's going to separate BHGE over the next 2 to 3 years in an orderly fashion.

As you know, BHGE has already been operating as an independent company over the last 12 months.

So we're prepared and will continue to deliver to our customers the technology and all the capability that's required to execute in the oil and gas industry.

And there's agreements in place to ensure that there's a seamless separation, and we're going to work with GE as they evaluate the timing and the structure of the separation.

In relation to the agreements that we have in place today, they're across the technology and infrastructure and they're on an arms-length basis already.

And I think it's important also to remember, when you look at Baker Hughes as well as GE Oil & Gas, we've been in the industry for many decades, and we have all the capability that's required to execute within BHGE.

So BHGE will remain and if -- today and will remain going forward the channel for GE technology and, specifically, for gas turbines and aeroderivatives in the oil and gas space.

So we're going to continue to work on an arms-length relationship with GE on technology, and we have everything we need within BHGE.

Got it.

And I wanted to turn to OFS.

We heard from Schlumberger, really, the first signs of kind of an optimistic tone on pricing and pricing momentum building within oil services, and that outlook was for an acceleration of pricing improvement in '19, given a trend towards full utilization of people and equipment.

What are you seeing today within international markets with regard to pricing within Oil Services?

And as you look to deploy people and equipment on newly won tenders, kind of where will you sit from a utilization standpoint on labor and equipment heading into next year?

Yes, Scott.

We see -- again, the international activity, as you know, it's different than North America.

It is very much contract-based, so it remains competitive from a pricing perspective.

We do see pickup in some of the international markets from a perspective of activity level.

So we think there's going to be some modest opportunities for recovery and improvement there.

And again, we feel that, overall, the industry continues to recover as we go into 2019.

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

I was just wondering if you could just talk about some of the LNG orders going forward.

We saw the Cheniere orders.

I'm just kind of curious, was that Cheniere award a good proxy for the size of equipment orders as we think about it going forward?

Is there anything -- I guess I'm asking, is there anything unusual at Cheniere that may have less or more equipment or maybe pricing was a little less?

Just trying to get a sense as we're going forward how that should compare relative.

Dave, just on LNG and then -- firstly, on Cheniere, it's a great win for BHGE, and it is the first FID in some years here in the United States.

It is also the fifth order for similar equipment for Cheniere Energy through Bechtel and BHGE.

And I think -- again, it just shows the confidence and also the heritage that we have within the LNG space.

I think -- as you know, the size and scale differs from project by project.

And so it's difficult to just take one and call it as the same base.

But from an average perspective, you can look at this as being a good project and a proxy of different types of projects.

If you look at LNG going forward, again, we see the trends positive and the overall market demand continuing to be strong.

As we've mentioned before, there's going to be an LNG demand that doubles to 500 million tons by 2030 and, as I referenced, some of the customer activity at the World Gas Conference in Washington.

Internationally, as well as domestically here, you've got a number of customers that are going through decision points of FIDs, and we see a strong outlook as you look at the back half of 2018, 2019 relative to these projects moving forward.

So we've got a lot of experience here, and we're looking forward to it.

Yes, Dave.

One thing to think specifically about with Cheniere is this is an add-on to a project that's already existing there.

So there's a lot of the infrastructure and a lot of equipment that can be utilized.

Volume might actually be lower on this, but execution is much more straightforward, since it's virtually a repeat of what we've done there before with some obvious tweaks.

But anyway, that's how I think about it, specifically to Cheniere.

So in other words, because it's an add-on, maybe the revenue is a little bit lower but the margins are higher.

Is that fair to say?

Yes.

Execution, yes, is much more straightforward on this.

We've done things like this before.

Yes.

And I guess shifting to more of a short-cycle question.

Internationally, you had said earlier that you're strengthening your commercial positioning, particularly in the Middle East.

And I'm wondering, is that -- I think there's a reference to sort of rebuilding kind of the legacy Baker Hughes business that had been shifted to a more of an asset-light model in kind of -- in prior years.

So I guess I'm just kind of wondering, a year into the merger here, where are you in that process relative to kind of where you want to be?

I mean, is that kind of -- are you kind of rebuilding on certain elements there?

Is there a particular service or product line or region that might take a little longer?

Can you just give us an update of your progress in that part of the business?

Yes.

Dave, if you look at what we've mentioned all along, there's been a commercial intensity focus through the integration, and that has been really rebuilding within the Oilfield Services, and it's regaining some of the presence that we have in some of the key regions and basins.

You've seen some of the award announcements, and we feel good about the processes that we put in place.

There's been a complete revamp of the way in which we're incentivizing our sales force, making sure that there's accountability, that there's focus on the customers.

And you're seeing early wins, and we're continuing.

The focus is there from a standpoint of the commercial intensity.

So we are not looking at a asset-light type of model anymore.

There is an aspect of continuing to play the full spectrum, leveraging the larger footprint of the combined company at BHGE.

And we feel good about the progress being made, and we'll continue on that front.

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

So on TPS, the orders grew 3% sequentially, perhaps that's maybe a little less than one would've expected, given some of the big wins that you had during the quarter.

Can you maybe give us a little more of a breakdown of the order mix and how pricing for these awards is looking relative to what you're realizing through the P&L today?

Yes.

So if you take a look at it from a pricing perspective, no real moves there or anything to raise any flags over.

The team executed in the quarter, and we're pleased with where they ended up.

As I pointed out versus last year, and that's really the way they're going to look at this business, from an Equipment standpoint, we had the large FLNG order in Mozambique last year that makes that comparison a little bit tougher.

And then the other thing I'd reinforce here is the transactional orders volume increase.

We saw that up quite a bit versus both last year and sequentially.

If you look at services, total services versus the prior quarter, up 11%.

So again, that's a strong indicator for conversion in the second half.

And then we've got really good outlook and line of sight into what we think orders are going to do here in the second half.

And so Brian to clarify, you'd say that -- how would you characterize pricing going into the backlog today versus what's coming out today?

Yes.

Look, as I said, if I look at overall, I'm not seeing any significant pricing moves on what we're booking, what we're booking right now.

Obviously, it depends on the market, depends on geography and application.

But what I'm seeing right now is in line with what we expected.

And our next question comes from the line of Kurt Hallead with RBC.

So Lorenzo, maybe start off with a question for you, and it kind of dovetails with maybe some of the earlier commentary.

Pickup until about this quarter, baker Hughes-GE had maybe a slightly more muted kind of viewpoint of the international progression as it related to Oilfield Services.

So what do you think has transpired here over the course of past maybe 3 to 6 months to provide you with much greater conviction to now come out and say we feel really good about the dynamics?

And in that context, what kind of visibility do you have into, say, some Oilfield Service-related projects going out into next year?

What kind of discussions are you having with your customer base?

Yes, Kurt.

And as you said correctly, there's definitely more of a positive sign in some of our geomarkets.

It's always -- too early to say everything will shake out in 2019, but you're seeing indications, continued momentum in the Middle East, where activity has continued to improve.

And then also, as you look at the North Sea, which is a key area of activity where we've historically had good share, we're seeing pockets of activity pick up there.

You heard about the Equinor award, obviously, that we spoke about.

And then you also look at pockets of activity in Latin America continuing to be discussed.

So as I go around and also speak to the customers and as you look at people starting to firm up their plans for 2019, you are starting to hear more about CapEx increases and projects moving forward.

Again, it's going to vary by customer segment, but overall, there's a sense of, again, positive direction there.

Okay, that's great color.

And then maybe for Brian on the margin front as it relates to TPS.

If I did hear the -- one of the earlier responses to a question earlier, you said the second quarter baseline margin for TPS was around 10% today.

Did I hear that correctly?

Yes, you did.

With the onetime charge that we had, that had about a 2-point impact on the margin rates, so around 10%.

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

Just a couple of clarifications because all the good questions have already been asked by my smarter associates.

Which segments have the most noncore divestiture potential?

We've heard that TPS may be selling some of the compression equipment manufacturing.

You already sold -- you noted -- is there anything out of the sale of the natural gas solutions in Oilfield Equipment?

You've got the old Hydril business that's been slow.

Is there any one segment that has more noncore than others?

And over the next couple of years, no time frame given, how much do you expect really just broadly to realize from the sale of noncore assets?

Jim and -- maybe just to clarify, and again, the strategy here is, really, we like, overall, our business setup in BHGE.

There are some small elements here that are noncore, and we continue to have a strategy where we'll look at these.

But I'd say it's minimal, and we like the position we have and the focus of the company going forward.

The way I think about it is we got a clear framework.

We're focused on returns and improving ROIC, and we continue to evaluate that in light of the portfolio and how we're performing and where we're investing.

So that's the way I think about it.

Okay, that's helpful.

And one of the things that you all focus on is the free cash flow generation, and obviously, it's been muddied these days by the effects of the synergy efforts that'll continue, which are clearly positive long term.

Do we see any of those synergy or severance costs really coming through after this year's?

Will '19 be a clear year for cash flow generation?

And do you have any targets in terms of free cash flow yields?

Or any targets you could share with us or just maximize as much as you can?

Sure, Jim.

If you think about the restructuring charges that we have to generate the synergies here, as we've said before, heavier, from a cash standpoint, clearly, this year.

There might be some that goes into next year, but it would be relatively small.

And then -- I say looking at 2019, obviously, depending on how the market plays out, how things go, we don't have big restructuring plans for 2019.

But we've always got to look at our cost structure and make sure we're competitive there.

And in terms of targets, as we've laid out, we are driving the business to get to 90% free cash flow conversion.

As I've said before, we -- it's a journey.

We're making a lot of improvements.

Some core fundamentals and core metrics around our working capital performance are improving, but we still have some work to do there.

So we're still committed to a strong free cash flow.

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

My first question, on the pace of the synergies here, you had a very strong delivery of synergies in the second quarter.

And you -- it seems like you expect some continued improvement in the back half of the year.

Can you talk a little bit about the pace of incremental synergies in the second half?

And when would we expect to get any kind of an update on your overall targets?

Yes.

We did execute an incremental $45 million of synergies in the quarter.

We're pleased with the pacing of the synergies.

About $10 million of that was related to revenues, so $35 million of costs.

And so what I'd say, Marc, is look, we're in line with our plan here to deliver the $700 million this year and are working a strong funnel for 2019.

So no real update to the aggregate number, but feel good about where we are and how the teams are executing.

Okay.

Is it fair to conclude that the incremental synergy is added in the second half or at a smaller absolute number than what we saw in the first half?

Yes.

I'd say if you look at it, they might be slightly smaller.

But again, if you look at the ramp-up to the total $700 million, they're not going to be too far off of where we were in the second quarter.

And that does conclude today's Q&A session, and I'd like to return the call to Mr. Lorenzo Simonelli for any closing remarks.

Thanks.

Just a couple of quick points here.

I just want to thank everybody for joining us today.

Also, we are celebrating our first 12 months, so I'm proud of what we've achieved.

And I do want to thank everybody for all the hard efforts, all the employees as well as for yourselves in joining us.

And our outlook is becoming more positive, and we remain focused on our priorities, which, as we've said, is making sure we gain share, growing, also, margin and free cash flow.

So thanks a lot.

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.