貝克休斯 (BKR) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Baker Hughes, a GE company, Fourth Quarter and Full Year 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, Daniel.

Good morning, everyone, and welcome to the Baker Hughes, a GE company, Fourth Quarter and Total-Year 2018 Earnings Conference Call.

We're hosting today's call from London after having just concluded our 20th annual customer meeting in Florence.

Here with me are our Chairman and CEO, Lorenzo Simonelli; and 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.

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 fourth quarter results, update you on our view of the market and take you through some of the highlights of the quarter.

Brian will then review our fourth quarter results and full year in more detail before we open up the call for questions.

In the fourth quarter, we booked $6.9 billion in orders, our largest order quarter in 3 years.

We delivered $6.3 billion in revenue.

Adjusted operating income in the quarter was $498 million.

The strength of our portfolio was evident in the fourth quarter.

Strong results in our Turbomachinery business offset the challenges in the OFS market.

Free cash flow in the quarter was $876 million, our best cash flow quarter as a combined company.

Earnings per share for the quarter were $0.28 and adjusted EPS was $0.26.

When I look at our total year results for 2018, I am pleased with how we executed on the priorities we set out.

I cannot thank our employees enough for their hard work and dedication to achieve our goals throughout the year.

For the total year, orders were $23.9 billion as we grew market share and rebuilt our equipment backlog.

We delivered $1.4 billion of operating income and generated $1.2 billion of free cash flow.

2018 was also a year of significant change for us.

We moved beyond the initial integration phase into the next chapter for BHGE as a combined company.

We saw the market environment change significantly as we progressed through the year.

And our majority shareholder announced their intent to exit their stake in our company.

We took a first step in this process in November by reducing GE's ownership to approximately 50.4%.

At the same time, we reached critical commercial agreements with GE that position our company for the future.

I will provide you more detail on these agreements later on.

Throughout this environment of change, we remain focused on our strategic and operating priorities.

We have made significant progress on each of these, and I will take you through the details on the call today.

Let me take a few moments to share our view on the market.

The fourth quarter was a reminder of the volatility in our industry.

Oil prices declined significantly with both Brent and WTI spot prices dropping nearly 40% and WTI declining for 12 consecutive sessions between October 29 and November 13.

U.S. production surprised the upside, and we saw Completions activity in North America, specifically in the Permian, drop significantly.

Uranium supply remains online, and Saudi Arabian oil production hit record highs in November.

Although OPEC agreed to cut 1.2 million barrels per day of production in December 2018 marked the first time since 2015 that crude oil prices ended the year lower than at the beginning of the year.

These macro factors are well known, so let me describe how these changes in the environment impact us and our outlook as we move into 2019.

The areas most impacted by the recent steep decline in crude prices are the more traditional transactional markets in the U.S. and Canada.

We expect the activity slowdown and pricing deteriorations in these markets in the first half of 2019 to negatively impact our well construction product lines.

We expect the market for artificial lift and production chemicals to remain stable.

Our international outlook for 2019 remains unchanged, with solid growth in key regions like the Middle East and the North Sea.

Our outlook for offshore is relatively unchanged.

Subsea tree demand for 2019 is expected to be around 300 trees.

We are watching the space closely as our customers evaluate their budgets in the current environment.

We are seeing a positive change in the LNG market.

Given the continued strong demand dynamics, likely project sanctioning is accelerating faster than we previously anticipated.

We now see an opportunity for considerably more LNG projects reaching FID in 2019.

Including the recently announced LNG Canada project, we see the potential for up to a 100 million tons per annum of new capacity to be sanctioned by the end of 2019.

Irrespective of commodity prices, we remain focused on gaining market share with our technology and our innovative solutions, running the company better to increase margin rates and improving cash generation.

Let me share some highlights of the year and the fourth quarter specifically with you.

In Oilfield Services, gaining share and being closer to our customers was our foremost objective in 2018.

I've spent a lot of time meeting with customers around the world.

I've been struck by how receptive our customer base is to our solutions and our value proposition.

They want Baker Hughes as a strong partner and solutions provider.

Throughout the year, we secured important wins, like Marjan in Saudi Arabia, Equinor in Norway, Qatar Petroleum and Kinder Morgan in the Permian.

Our North American OFS business grew 17% in 2018 versus rig count growth of 13%.

Internationally, we saw revenue growth of 9% versus rig count growth of 4% for the year.

Starting with international.

In the fourth quarter, we were awarded a large well services contract in Saudi Arabia for conventional fields where we will provide a comprehensive solution.

By integrating our products, services and capabilities into a single offering, we will help Saudi Aramco reduce time, cost and complexity while increasing efficiency.

We secured a number of long-term artificial lift contracts in Oman and Iraq.

These wins reinforce our position as the leading artificial lift provider in the Middle East.

In Latin America, BHGE signed a 4-year contract to provide drilling services, bits, fluids, cementing and completion solutions to a key customer in Colombia.

Through this award, BHGE will have a direct involvement in major drilling campaigns, including the ability to introduce new technologies as well as support conventional operations.

In North America, our leading drilling portfolio continues to set records.

In the fourth quarter, we helped customers such as Range Resources and Eclipse Resources set new drilling records in the Northeast with our leading technology.

We continued to demonstrate our ability to deliver world-class results on a consistent and sustainable basis.

Our contract wins, continued technology advancements and record-setting performance demonstrate the strength of our OFS portfolio.

Improving margin rates and running the business better was another critical objective for 2018.

In the fourth quarter, our OFS business delivered a margin rate of 7.3%, a 360 basis point improvement year-over-year.

Expanding our OFS margins remains a top priority for the team.

We are focused on improving service delivery costs, managing our assets more efficiently to drive high utilization and improving our product costs.

In Oilfield Equipment, we saw strong orders in the fourth quarter, rounding out a solid 2018.

As you know, our core focus in the year was to rebuild the backlog and set the business up for success in the future.

We executed very well on this plan.

We won a number of critical awards through the year, including Gorgon, Shwe and, at the beginning of the fourth quarter, ONGC 98/2.

This award, which includes 34 trees, represents the single largest subsea contract ever awarded by ONGC.

We were also awarded 4 trees in the North Sea by a major international customer as we built on our success with tieback projects in the region.

We were awarded a total of 77 trees in 2018, the highest total in 3 years.

The fourth quarter was the second quarter in 2018 that OFE saw orders over $1 billion, bringing total orders for the year to over $3 billion for the first time since 2015.

Our book-to-bill ratio for the quarter was 1.4, and our book-to-bill ratio for the full year 2018 was 1.2.

As mentioned previously, in the fourth quarter, we launched Subsea Connect.

Over 190 customers attended our launch event in Houston, and we have seen a lot of momentum in the last few months from customers and partners.

Subsea Connect improves the economics of offshore projects and has the potential to unlock an additional 16 billion barrels of oil reserves globally.

We are especially excited about our new Aptara TOTEX-lite subsea system.

It incorporates lightweight, modular technologies designed to cut the total cost of ownership in half.

We see Subsea Connect as an evolution of our BHGE portfolio and a clear path to strengthening our competitive position in the subsea space.

In Turbomachinery & Process Solutions, 2018 brought about the reemergence of the LNG market.

We saw the first new project sanctioned in North America in several years, with Corpus Christi Train 3 and LNG Canada moving forward.

In the fourth quarter, we secured the award to provide modular turbocompressor technology for LNG Canada's liquefaction plant in Kitimat, British Columbia.

This is the largest LNG project to achieve a positive FID globally since 2014 and the first large-scale LNG project to use modular liquefaction trains.

It is expected to deliver up to 14 million tons per annum of LNG with the potential to expand to 4 trains in the future.

Our LMS 100 aeroderivative gas turbine was selected to maximize efficiency and lower the carbon footprint of the project, a critical element of the final investment decision.

Also in December, Novatek selected BHGE's LM9000 driver technology for its Arctic 2 LNG project.

The agreement includes the supply of gas turbine compressors and generators for three 6.6 million tons per annum liquefaction trains and positions us very well for future expansions.

This is the first project to utilize our world-class LM9000 technology.

With the ability to start in a fully pressurized condition and 24-hour engine swap capability, the LM9000 can reach over 99% availability for best-in-class total cost of ownership.

The expected acceleration of LNG project sanctioning is good news for BHGE, and our teams are working closely with our customers to meet their scheduling requirements.

Given the acceleration, we are ramping up our efforts to meet customer needs for project engineering, configuration and testing.

While this ramp up will have an impact on our 2019 results, the underlying markets drivers are extremely positive for our Turbomachinery segment as we continue to secure major project awards.

Outside of LNG, pipeline demand in North America continue to grow through 2018, driven by the Permian production growth and associated capacity constraints, as well as Western Canada production growth.

We secured a number of key contracts throughout the year, including an important win in the fourth quarter to provide Turbomachinery equipment for the coastal gas link pipeline project in Canada.

As we've mentioned in prior quarters, we have been expanding our NovaLT gas turbine product line to serve both traditional oil and gas customers as well as the industrial sector.

In the fourth quarter, we won a pipeline award for our NovaLT 12 gas turbine for the Istrana project in Europe.

This is the first time the LT12 will be used for pipeline compression.

In addition, we will provide 2 modular preassembled NovaLT16 gas turbine trains for an FPSO in Malaysia.

These awards demonstrate the versatility of our NovaLT family of gas turbines.

In 2018, we have made significant progress on the priorities we laid out for TPS.

We continue to be at the forefront of technology and solutions for the LNG market.

Our service business is seeing signs of recovery and increased activity moving into 2019.

We are simplifying the business and gaining traction with our product lines in the lower megawatt range.

In Digital Solutions, 2018 was a very strong year for both our software offerings and our measurement and controls businesses.

Early in 2018, we launched a partnership with NVIDIA to use artificial intelligence and advanced computing to help the oil and gas industry reduce operational costs and improve productivity.

We also expanded our predictive corrosion management offering through a Strategic Alliance Agreement with SGS for joint development and commercialization of our technology.

In the fourth quarter, we extended our leadership in industrial IoT software deployment by securing several awards for Asset Performance Management solutions from downstream customers in North America, Europe and Latin America.

These solutions use data captured from industrial centers to enhance maintenance strategies for reduced asset downtime and drive improvement in reliability and efficiency.

Our industrial inspection offerings continue to gain traction in the fourth quarter, with strong growth in the aviation sector in Asia and in the automotive sector in Europe.

We had another solid quarter of synergy execution.

In 2018, we achieved approximately $800 million of synergies ahead of our target.

Our synergy targets for 2019 remain firmly on track.

Lastly, in the fourth quarter, we announced a number of commercial agreements for GE that position our company for the future.

The agreements focus on the areas where we work most closely with GE on developing leading technology and executing for customers.

First, we define the parameters for long-term collaboration and partnership with GE on critical rotating equipment technology.

Second, for our digital software and technology business, we will maintain the status quo as the exclusive supplier of GE Digital oil and gas applications.

Finally, we reached agreements on a number of other areas, including our Controls business, pension, taxes and intercompany services.

At the core of these agreements is our strategy to deliver a differentiated full stream portfolio, which we have enhanced through this process.

The agreements were finalized considering the eventual full separation from GE, and they preserve the important public shareholder protection we initially agreed.

We are very pleased with the resulting agreements and what they mean for BHGE.

They maximize value for us and provide certainty and long-term solutions for our customers, employees and shareholders.

In closing, we delivered a strong fourth quarter, finishing out a solid 2018 for BHGE.

As we look forward to 2019, we are positioning the company to navigate a dynamic macroeconomic environment, while remaining focused on our priorities of share, margins and cash.

Our core mission as a company is unchanged.

We will continue to deliver productivity solutions to the oil and gas industry through differentiated technology and innovative commercial models.

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

Thanks, Lorenzo.

I will begin with the fourth quarter and 2018 total company results and then move into the segment details.

Orders for the quarter were $6.9 billion, up 20% sequentially and up 21% year-over-year.

The fourth quarter was our largest orders quarter in 3 years.

We grew orders sequentially in all segments.

Oilfield Equipment was up 88%, Turbomachinery up 37%, Digital Solutions up 6% and Oilfield Services up 1%.

The year-over-year growth was driven by equipment orders in our longer-cycle businesses, which were up 44% versus the fourth quarter of 2017.

Overall, Oilfield Equipment was up over 100% and Turbomachinery was up 23%.

Remaining Performance Obligation, or RPO, was $21 billion, up $0.2 billion or 1% sequentially.

Equipment RPO ended at $5.8 billion, up 6%.

Services RPO ended at $15.2 billion, down 1%.

Year-over-year, RPO was flat with equipment up $0.4 billion, offset by services.

Our book-to-bill ratio in the quarter was 1.1 and our equipment book-to-bill was 1.2.

Revenue for the quarter was $6.3 billion, up 11% sequentially.

We grew revenue sequentially in all segments.

Turbomachinery was up 28%, Oilfield Equipment up 16%, Digital Solutions up 6% and Oilfield Services up 2%.

Year-over-year, revenue was up 8%, driven by Oilfield Equipment which was up 12%, Oilfield Services up 10% and Turbomachinery up 8%, partially offset by Digital Solutions down 4%.

Operating income for the quarter was $382 million, which is up 35% sequentially and $493 million year-over-year.

Adjusted operating income was $498 million, which excludes $116 million of restructuring and other charges.

Adjusted operating income was up 32% sequentially and up 75% year-over-year.

Our adjusted operating income rate for the quarter was 7.9%, up over 300 basis points year-over-year and 130 basis points sequentially.

We continue to make progress on our goal of expanding margin rates.

In the fourth quarter, we delivered $31 million of incremental synergies.

This brings our total year 2018 synergies to approximately $800 million, which is ahead of the plan we laid out at the time of the merger.

Approximately $650 million of these synergies are from costs and $150 million are from revenue.

Corporate costs were $110 million in the quarter, up 13% sequentially and up 21% year-over-year as a result of higher year-end accruals.

Depreciation and amortization for the quarter was $352 million, flat sequentially and down 17% year-over-year.

Tax expense for the quarter was $173 million.

This amount includes $17 million related to a true-up of the expected impact from the U.S. tax reform.

As you recall, we had booked our best estimate at the time the legislation was passed and communicated that we could have some minor adjustments to the initial estimate as we work through the details.

We expect our effective tax rate in the first quarter to be modestly higher than the fourth quarter.

As we have stated before, we expect our structural tax rate to be in the mid- to low-20s over time.

Earnings per share for the quarter were $0.28, up $0.25 sequentially and $0.21 year-over-year.

Included in earnings per share is a $168 million gain related to the previously announced sale of our Natural Gas Solutions business.

This gain has been excluded from adjusted earnings per share.

Adjusted earnings per share were $0.26, up $0.07 sequentially and $0.11 year-over-year.

Free cash flow in the quarter was $876 million, which included $111 million of restructuring, legal and deal-related cash outflows and $214 million of net capital expenditures.

Also included in free cash flow was a $300 million progress payment from ADNOC drilling as we highlighted when we announced the transaction earlier in the quarter.

Overall, we are very pleased with the cash performance in the fourth quarter.

We continue to improve our working capital processes and optimize our cash operations.

Year-over-year, we have improved our receivable days by over 15 days, our payable days have increased 8 days and our inventory turns are up 0.5 points.

We remain focused on our working capital processes to make sure we continue to deliver on our free cash flow conversion target.

We ended the year with $3.7 billion of cash on hand and in a net debt position of $3.4 billion.

This is a strong position especially after returning $3.3 billion of cash to shareholders in 2018 through buybacks and dividends.

We continue to see our balance sheet as a key strength and differentiator in this cyclical industry.

Next on capital allocation.

We executed a number of items this quarter in line with the strategy we previously outlined.

In November, we completed a secondary offering of 101.2 million BHGE shares owned by GE at an offering price of $23 per share.

The offering was significantly oversubscribed, and we are very pleased to have executed the transaction against the challenging equity markets backdrop.

Concurrent to the secondary offering, we repurchased 65 million shares from GE at the net offering price, which completed the $3 billion share repurchase authorization we previously announced in November 2017.

The average price for the total buyback program was $26.47 per share.

The secondary offering and buyback together reduced GE's ownership stake to approximately 50.4%.

Also during the fourth quarter, we closed the transaction with ADNOC purchasing 5% of ADNOC drilling for $500 million.

As I mentioned during the quarter, we received a down payment from ADNOC drilling to fund our initial working capital requirements.

Lastly, we closed the sale of our Natural Gas Solutions business, receiving proceeds of approximately $375 million.

When I look at the total year, I'm pleased with our 2018 financial results, and they reflect our consistent execution on the priorities we set out at the beginning of the year.

We booked orders of $23.9 billion, up 10% from 2017.

As I said earlier, this was critical for our longer-cycle businesses to enable revenue growth for 2019 and beyond.

For the total year, Oilfield Equipment grew orders by 23% and Turbomachinery grew orders by 12%.

Oilfield Equipment's total year book-to-bill ratio was 1.2 and Turbomachinery delivered a book-to-bill of 1.1 in the year.

Revenue for the year was $22.9 billion, up 5% from 2017.

We grew revenue in our shorter-cycle businesses as we focused on growing share and capturing market opportunities.

Our Oilfield Service business was up 12% and Digital Solutions was up 3%.

Total year adjusted operating income was $1.4 billion, up 62% from 2017.

We grew margins by over 220 basis points.

Operating income growth was driven by our shorter-cycle businesses.

Oilfield Services was up 169% and Digital Solutions was up 22%, partially offset by our longer-cycle businesses.

Overall, the results for each of our product companies are closely aligned with the framework we outlined at the beginning of the year.

Lastly, we generated $1.2 billion of free cash flow in 2018.

Despite growing revenue, working capital was a source of cash in the year, even when excluding the down payment from ADNOC.

This is a result of the optimization initiatives we have implemented, and we expect to continue to see benefits from these process improvements.

We spent $537 million on net capital expenditures in 2018 and we will continue to be disciplined in 2019 while investing for growth.

We still think that the right CapEx level for our portfolio is up to 5% of revenues.

Included in our free cash flow results are approximately $470 million of restructuring, legal and deal-related cash outflows.

As we have outlined, we expect materially lower restructuring related cash outflows in 2019.

As we move through the year, we will start to incur some of the cash outflows of the $0.2 billion to $0.3 billion related to the GE separation activities, which we outlined in November.

Overall, given our results in 2018, we feel good about our ability to generate strong free cash flow in 2019.

Next, I will walk you through the segment results.

In Oilfield Services, revenue for the fourth quarter was $3.1 billion, up 2% sequentially.

International revenue was up 3% versus the prior quarter, driven by strong growth in the Middle East and Asia Pacific.

North America revenue was up 2% sequentially, as growth in the Gulf of Mexico offset softness in the onshore markets, particularly in Canada.

We saw solid sequential growth in drilling services and artificial lift, while revenue in our completions-related product lines was lower due to the slowdown in the North America land market.

Operating income was $224 million, down 3% sequentially, as higher volume was offset by unfavorable product line mix and material cost inflation.

Despite the challenges in the market, OFS margins in the fourth quarter were up 360 basis points year-over-year.

As Lorenzo mentioned, in the first half of 2019, we expect our well construction product lines to be negatively impacted by activity slowdowns and pricing deterioration in North America.

We also expect continued headwinds from inflation and ramp-up costs.

Our international outlook remains unchanged as we expect the major contract wins in key regions like the Middle East and the North Sea to drive growth into 2019.

In the first quarter, we expect these impacts combined with typical seasonality to result in a more pronounced sequential decline in revenue and operating income versus prior years.

We still expect the first quarter to be up materially versus the first quarter of 2018.

For the total year of 2019, we remain constructive and expect sequential improvements in revenues and margins as we move through the year.

Next on Oilfield Equipment.

Orders in the quarter were just over $1 billion, up more than 100% year-over-year, and this was the second time this year our order intake exceeded $1 billion in a quarter.

Our successes in the year demonstrate the strength of our OFE products and the variety of commercial and partnership models we are able to provide to our customers.

In the fourth quarter, OFE equipment orders were up 177% year-over-year, driven by wins in our Subsea Production Systems business.

OFE's equipment book-to-bill was 1.7 in the quarter.

Service orders were up 6% versus last year, driven by increased activity in the Rig Drilling Systems and Flexible Pipe businesses.

Revenue was $729 million, up 12% versus the prior year, driven by increased volume in Subsea Production Systems, continued growth in our Surface Pressure Control business and modest improvement in Rig Drilling Systems, partially offset by lower revenues in Flexible Pipes.

Operating income was $12 million in the quarter, up $13 million year-over-year, driven by the increased volume and better cost absorption in Subsea Production Systems.

In 2018, our OFE business showed improvement in the second half of the year.

Looking forward to 2019, we expect the business to benefit from the higher revenue in SPS, partially offset by lower volume in Flexible Pipe Systems.

In the first quarter, we expect the OFE business to be slightly better than the first quarter of 2018.

Moving to Turbomachinery.

The team delivered a strong quarter in the fourth quarter.

Orders in the quarter were $2.1 billion, up 23% versus the prior year, driven by strong order intake across both equipment and services.

Equipment orders were up 52%, driven by LNG and our equipment book-to-bill was 1.4.

Service orders were up 2%, driven by contractual services, which were up 24% as well as higher upgrades.

Revenue for the quarter was $1.8 billion, up 8% year-over-year and the highest in 2 years.

The growth was driven by stronger services, which were up 14% with both higher transactional and contractual service revenue as we converted on our strong 2018 order intake.

Equipment revenue in the quarter was flat.

Operating income for Turbomachinery was $257 million, up 64% year-over-year.

The TPS margin rate in the quarter was 14.4%, up 490 basis points year-over-year.

The increase in margin was driven primarily by higher volume, better mix and productivity.

Our outlook for TPS improved as we progressed through 2018.

As Lorenzo mentioned, we are expecting significantly more LNG FIDs in 2019.

As a result, we are accelerating technology, engineering and growth investments to meet our customer demand.

We expect to spend an additional $75 million to $100 million on these investments in 2019 as we validate and test our latest technologies.

For example, the LM9000 solution.

We are confident that these actions will strengthen our leadership position through this cycle and going forward.

Specifically in the first quarter, we see revenues and margins roughly flat year-over-year as better margins in the core business are offset by higher spend on LNG applications.

Similar to the dynamics in our Turbomachinery business in 2018, we expect the second half of 2019 to be significantly stronger than the first half.

Next on Digital Solutions.

We finished a strong 2018 with another quarter of solid execution.

Orders for the quarter were $668 million, down 4% year-over-year.

Softness in the power end market impacted our Controls business, in line with what he had communicated previously.

Regionally, we saw growth in Asia as our automotive and consumer electronics businesses continue to gain traction.

Revenue for the quarter was $691 million, down 4% year-over-year, driven by the power market dynamics, which more than offset growth in our measurement and sensing and industrial IoT software product lines.

Operating income was $115 million, down 3% year-over-year, driven by lower volume.

For the total year, operating income was $390 million, up 22% year-over-year, driven by cost productivity and strong execution in our Pipeline and Process Solutions business.

As we move into 2019, we expect the power end market to remain soft and for our other end markets to continue to grow.

Specifically for the first quarter, we expect the business to be roughly flat year-over-year.

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

Thanks, Brian.

We are pleased with our 2018 results.

Despite the recent commodity price volatility, BHGE is well positioned to capture the benefits of a growing LNG market and a resilient international market, while navigating the challenges in North America.

Our priorities remain 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, Daniel, let's open the call for questions.

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

Lorenzo, clearly, you demonstrated the strength of the portfolio this quarter in what was a choppy environment in North America, but solid EPS, solid orders, solid cash flow.

I recognize that you guys just wrapped up your annual event in Florence with, I think, the top 1,500 or so clients of Baker.

What are they telling you about what we see as the 3 kind of major themes that are developing this cycle and that's the international growth, the rebirth of the offshore markets, and then, of course, the one you highlighted several times, but the LNG markets?

I'm curious to get that real-time feedback.

Yes.

Thanks, James.

And we're pleased with the way 2018 turned out.

And as you said, the Annual Meeting in Florence, we've got 1,500 of our customers there.

We had a theme about energy forward, and we had an opportunity really to focus on the new technologies and the products that we're providing our customers.

I'd say, the key things that came out were customers still talking a lot about productivity, about needing to focus on making ourselves as productive as possible, a lot of focus on the new technology.

As you look at the market, North America definitely more challenging.

We saw that happen during the course of the fourth quarter, and we'll see that continue in the first half of 2019.

International, we had a more conservative view than others and that remains unchanged.

We see still good opportunities and momentum in the Middle East as well as the North Sea.

And on the offshore, we remain relatively unchanged, expecting about 300 trees in 2019.

And we've got to see how that sort of pans out with some of the customers with their capital budgets that they're finalizing.

But as you point out, the one area where there is a lot of activity is LNG, and we've seen increased interest and also an opportunity for up to 100 million tons per annum to be sanctioned by year-end 2019, including LNG Canada.

So it was a great conference and really good to be with the customers.

Great.

And just -- maybe just to follow up on the LNG side.

So 100 million tons sanctioned likely this year.

What's your bull case scenario as we look out over the next 2, 3 years because looking at our numbers, we can get to probably 250 million, 300 million tons over the next couple of years.

How are you guys thinking about that playing out?

So James, we really look at it from an aspect of the longer-term growth.

And as you look out to 2030, there is an expectation of about 550 million tons per annum.

We see about 5% CAGR growth from now until 2030, driven by power generation and really consumption in some of the emerging markets, India, China.

The project sanctioning, hard to tell how it will evolve in all cases.

Again, there is a lot of activity in 2019.

That's why we've increased our view to the potential sanctioning of 100 million tons and then we'll see the step function as it happens going forward towards that 550 million.

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

I wanted to follow up on the TPS commentary.

Obviously, pretty positive improvement and sentiment there, 100 million MTPA this year.

Can you, Brian or Lorenzo, help us think about -- that would obviously imply a pretty substantial increase in TPS orders this year.

I don't know if you can help us think about the ramifications of that for the TPS business and perhaps the timing of those orders.

Is it more backend loaded?

Is it more evenly distributed?

And then how would we think about margins in that environment?

I think, Brian, previously you talked about an exit rate in the mid-teens.

Does this change that at all?

And helping us balance that against the incremental investment.

A lot of questions in there, but if you could help us think about how you're thinking about TPS in light of the stronger order outlook.

Yes, Jud, let's break it down, and clearly, we're seeing the LNG market be stronger.

And so what we're doing is clearly finishing off our products and getting the certifications in place.

We've got great capacity there, and we're aligned with our customers in what they need to go forward.

We expect TPS revenues to grow and earnings to grow in 2019, similar profile to 2018 with the second half of the year significantly stronger than the first half.

Yes, Jud, I mean, basically, the -- our general 2019 financial framework for TPS is unchanged.

We still expect services to continue to improve, both transactional as well as contractual.

The team is continuing to drive productivity.

And we will have some higher revenue come through for LNG that we've already booked, partially offset with lower equipment installs as we go through the year.

And to put it into perspective, the 100 million tons per annum roughly represents the MTPA that came to market between 2011 and 2014.

So as we've mentioned before, we have been protecting our capacity here, so we could deliver on what we saw as an increase in LNG demand here.

So it's really about the volume and the pace of how quickly that's coming in.

And that's really what's driving the incremental investment here.

This is basically redeploying resources into application engineering, getting ready for the customer projects that are coming, more testing and getting the new products ready for the solutions that we got to offer.

So long term is the great investment for BHGE.

Overall, we feel good about 2019, and the dynamics are generally playing out as we expected.

But obviously, increased volume in LNG and that outlook is much better.

And as Lorenzo mentioned, we expect the dynamics to be a stronger second half and I still see the opportunity for the mid-teens margin rate there.

Obviously, depending on the cadence of the incremental investment, which I would expect to be heavier weighted to the first half given what we're hearing from customers and when they want FID.

Okay, that's helpful.

And if I could just squeeze in just one follow-up and just a clarification.

You talked about Novatek selecting your technology for Arctic 2. That was not booked, though, in the fourth quarter.

I just want to clarify, that's still something that's not been FID-ed officially.

Correct?

Yes, that's right, Jud.

That has not been FID-ed yet and is not in our orders number.

And our next question comes from Bill Herbert with Simmons.

Lorenzo, with regard to your outlook, you and your peers are waxing understandably conservative with regard to first half of 2019 for Lower 48 and yet WTI is up 25% to 30% from the late December lows and were up 20% year-to-date, and it's probably going to witness the strongest gain in January in 35 to 40 years.

Coupled with that ongoing and significant frac cost deflation, collectively that yields better-than-expected E&P cash flows.

Do you think that the industry, in light of these developments, is waxing too conservative with regard to drilling and completion activities first half?

Or does that portend an even stronger set up for second half?

So I think you look at what happened over the course of October to December in 2018, and clearly, the market showed that it continues to be volatile.

And within North America, we saw the market react and we saw lower volumes and that's impacted the well construction product lines for us.

Obviously, we're not as exposed on the pressure pumping side.

But we do expect that to continue at least through the first half, as you mentioned.

There is some encouragement relative to the second half, and we'll see how that pans out.

We're staying close to our customers, but second half could be better.

Let's wait and see.

And can you remind us, you mentioned that your international outlook is largely unchanged?

What does that basically mean in terms of an expectation for the growth in E&P capital spending internationally for 2019?

Yes.

As we mentioned, our outlook for international remains unchanged and if you look at some of the wins that we announced in 2018, a lot of those were international with Equinor on the Norwegian Continental Shelf, Marjan in Saudi, also the Qatar Drilling.

So we'll be seeing growth there from those executions.

And our next question comes from Scott Gruber with Citigroup.

So want to stay on international side of OFS.

Certainly, the international growth in 2018 relative to the rig count growth was impressive.

You clearly have taken some share on the international side, which was a key initiative of the company post merger.

Are you satisfied with where the share will sit once these latest contract wins are fully realized?

Are you targeting additional share gains and how are you dimensioning the share gains in order to measure your performance?

Yes, Scott, just on the international side, clearly, there is a lot of activity in many countries.

And what we always said was there is an opportunity for Baker Hughes to come in and regain some lost territory there.

I think we made good progress in 2018.

The commercial intensity is there.

We've now got dedicated plans by salesperson.

We've got the accountability, that's going to continue in 2019.

And I think, again, you're going to continue to see us having the opportunity to gain share as well as accrete margin within the OFS business.

Great.

And just on the margins in OFS, they're a little lighter than we expected in 4Q.

Was that primarily driven by the completion slowdown in the U.S.?

What was the kind of trajectory in the business in the U.S. versus international?

Yes, Scott, if you take a look at fourth quarter, from a macro standpoint, we are more insulated than others, but clearly not immune to what was going on in North America.

Activity was lower in completion.

So we did see an impact there, but we do expect artificial lift and chemicals to continue to remain strong as they did in the fourth quarter.

Actually, one thing in the fourth quarter that we saw is pricing was softer in North America than we had expected and we did see that come through a bit.

But revenue was up 2% in NAM and international was up 3%.

Within North America, we did see the impact come through on the profit line of the completions mix.

Additionally, in OFS, we did have some lower international pressure pumping utilization and that obviously has an impact on margin rates.

So some market dynamics there that were giving us some pressure.

We did see more synergies come through.

So I was very happy with how Maria Claudia and the team executed on taking costs out of the business, but we did see some higher inflation come through on the material side.

And remember, we talked about it at the end of the third quarter on the call that we did have some higher ramp-up costs associated with those large international wins, as we position resources to start executing on those.

So we'll still have some of those ramp-up costs come through, but obviously you'll start to see margins come through on those later in 2019.

And our next question comes from David Anderson with Barclays.

I was just going to dig on the same subject on the OFS, but maybe dig down a level.

Could you just kind of talk about the artificial lift market, sort of look at international versus North America?

Perhaps you could at least first just give us a sense of the size of the 2 businesses, NAM versus international.

And then kind of talk about the dynamics you see, it seems like North American is going to get a lot -- has been getting a lot more competitive on that front, yet on the international side, you've talked about a number of wins over there.

We don't really hear about artificial lift being used.

I think it's still pretty new, maybe talk about the opportunities for the number of wells that could be addressed internationally?

So Dave, just clearly, the artificial lift market is very present in North America.

We do see it increasing also internationally, our mix tends to be around 50-50.

If you look at North America, we're not as impacted in the -- as the pressure pumping and also the completion side.

We think we'll be relatively stable as we go into 2019, and we are seeing internationally the opportunity to take some of our new capability, especially in ESPs and some of the new wells.

And if I could dig maybe -- slightly different subject on the TPS side.

LNG gets obviously all the headlines in there.

You also talked about a number of pipeline projects.

Can you talk about that part of the business, kind of the non-LNG part of the business?

I mean, how should we think about the prospects for those?

Can you talk about some of those end markets?

Do you see more of these pipeline projects?

And secondarily, is this lower technology equipment, I would assume it would be versus LNG?

And how did the margins kind of -- do we think about the margins a little bit?

Yes, thanks.

So the pipeline, clearly, is an opportunity for us.

We've got a strong presence there historically, and we see actually the opportunity growing.

There is a number of new pipelines that are going to be required across the globe.

You're seeing some of the activity in North America, also some of the discussions in Latin America and across Europe.

If you look at the technology, we've got a great new turbine line of the NovaLT, which is -- which applies to the pipelines as well as PGT25s and so we've got a very good presence.

It is slightly lower margin than the LNG space, but we see this as being one of our core strengths.

Our next question comes from Sean Meakim with JPMorgan.

I appreciate all the commentary on TPS and the moving pieces within the P&L.

I was hoping you can maybe also help us think through the impact of the cash flow in '19.

Just thinking about contract cash advances as some of these projects start to come in, what that conversion cycle may look like in this environment versus prior cycles?

Just trying to think about how that all -- how TPS will ultimately impact cash flow in '19?

Yes, Sean, if you think about it, in the cycle, what you will have specifically as it relates to LNG, we typically have down payments that come in for the large projects.

We do start to spend some money as we execute on those projects.

So I would actually expect in the cycle with the down payments that we're getting and the money that we would spend to be relatively neutral to slightly positive.

But if I look at TPS overall, I would expect them to have a strong free cash flow year next year, given the dynamics that we talked about with the services growth that we're anticipating with the -- some of the conversions with the orders that we booked this year on the equipment side, so relatively positive.

And for cash flow in general, for 2019, look, we'll benefit overall from higher net income coming through at the DHC level.

Do expect our working capital metrics to continue to improve, but we will have revenue growth there.

But again, processes, I think, are getting much better.

Lower restructuring cash outflows as well, but we may have some of -- we will have some at $200 million to $300 million we talked about from the GE separation costs coming through.

And we'll continue to invest up to 5% of our revenues in CapEx.

So we've been disciplined about investments this year.

We'll continue to be disciplined there.

But I think overall the backdrop with the operating process improvements that we've made and seeing that come through in our working capital metrics, as well as what we're seeing specifically in Turbomachinery, we feel good about our ability to generate strong free cash flow in 2019.

I appreciate that.

That's really helpful with respect to the cash flow.

And then just the comments from GE on their call earlier were consistent with prior comments, an orderly exit over time.

As you think about your stock and using that as being a good source of cash today, how do you think about -- is there a way to kind of marry perhaps share repurchase alongside GE's desire perhaps over time to again -- to exit its position at BHGE.

Just curious how you think about your own stock as a use of cash as free cash flow improves and then within the broader context of GE's long-term goals?

Yes, Sean, just maybe to take it back on the macro side.

Our capital allocation isn't changing and, again, GE has indicated that they will be exiting from BHGE.

We've always run BHGE as a strong independent public company, and we'll continue to do that.

We started the separation with the actions that were taken in November '18.

And their ownership is down to 50.4%.

As we look at our capital allocation though, again, we think we've got a good balance sheet and we'll continue to review it as we go forward, but we like where we are.

So I think, Sean, a couple of things to add there.

We do remain committed to returning 40% to 50% of our net income to shareholders over time, and there are obviously different ways that we can do that.

We do like our current credit rating and the strength of the balance sheet, especially with the volatility in this marketplace.

So we think that is a strength.

But we've got a lot of opportunity here with this free cash flow profile, with how we've outlined our capital allocation priorities.

So I think you should expect us to be prudent and take a step back and look at what's best for our shareholders here in terms of capital allocation, and we certainly consider what GE sell down means for that and take that into consideration.

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

If I could drill down a little bit from a different perspective.

You guys -- there has been a great deal of commentary around lump sum contracts that have been bid and awarded, particularly in the Middle East just in the industry over the last year.

And the Middle East is 1 of the 2 areas along with U.S. where you're working hard to regain market share.

We already talked about, and Gruber mentioned it, you beat us on revenue, but you missed us on margins.

You mentioned big awards in the Middle East and Latin America and all these things.

What percentage of these awards were lump sum turnkey projects?

And is that the beginning of the impact of Baker winning some of these highly competitive bids?

Is this going to be accretive to current margins?

And finally, if these projects are just really now ramping up, what kind of drag on OF margins could they be through '19 and '20 because these things have duration?

Could you just talk about those aspects of the business?

Yes, Jim, just maybe, clearly, there is a lot in that question.

And as you look at some of the comments we've had in the past, there is LSTK models that have been around for a long time.

We really haven't participated much in the LSTKs and our wins that we've done are from new commercial innovation and working closely with the customer.

If you look at the Marjan fields in Saudi Arabia, you look at the -- also the ADNOC drilling transaction, it's ways in which we've come with a new proposition and been able to use the breadth of our portfolio and the capabilities we have in the field.

And we feel good about the ramp up that's in place.

Again, it doesn't change our full capital allocation and framework of CapEx for the total year.

And we feel confident that we'll continue to be successful.

Yes, Jim, what I would say is if you look at some of these costs that we talked about, they're really ramp-up costs as we have won new business where we didn't have resources in place and needed to redeploy both people and assets there.

So that's the type of costs we're talking about.

I'd say, in general though, we have looked at the book of business that we have in the international market, what we think we're going to win, and all that is baked into the framework that we talked to you about in terms of how we think about OFS margins progressing during the year.

So we've certainly considered that in our framework.

And I think you'll see that we've been pretty disciplined in what we've been going after and the pricing that we've been putting forward in international markets, and we'll continue to do that.

So these kinds of projects are going to be ones where you can upsell on technology through the course of the project and then possibly even improve margins versus where they start, right?

Yes, we talked about it in terms of the traditional LSTK.

We need to be aligned with the customers, we talked with customers about alignment.

If they win, we win.

And the models that Lorenzo talked about are structured in such a way that if we perform and help them beat performance expectations, we get upside from that as well.

So we're trying to completely align with the customers in what they need to generate more profitability and better productivity, and we're structuring our contracts in a way that help us share in some of that upside.

And ladies and gentlemen, that concludes our question-and-answer session for today's call.

I would now like to turn the call back over to Lorenzo Simonelli for any further remarks.

Thanks a lot, and thanks for joining us today.

We're excited about 2019 and the future of our company.

We did just wrap up our annual customer meeting, lots of outstanding feedback from our customers and one of the items that was top of mind for the customers is really the climate change and also how they get ready for the environmental carbon footprint.

And I did want to point out that we're very conscious of that at BHGE.

We've got a whole new brand of products that have been released that focus also on emissions, the carbon footprint, and it's aligned with our customers, and it's a great business case around it.

And we also announced that BHGE is committed to reduce its carbon footprint by 50% by 2030, and also net 0 by 2050.

We think this is important for the industry, and again, it aligns with our customers, makes good business sense.

And again, we're going to keep on driving the energy forward motto as we compete in the industry.

Thanks a lot, and look forward to speaking to you soon.

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

This concludes today's program and you may all disconnect.

Everyone, have a wonderful day.