Baker Hughes : Fourth Quarter 2022 Earnings Conference Call Prepared Remarks

Baker Hughes Fourth Quarter 2022 - Earnings Conference Call Prepared Remarks

Fourth Quarter 2022 - Earnings Conference Call Prepared Remarks

Jud Bailey Baker Hughes - VP of Investor Relations

Thank you.

Good morning everyone, and welcome to the Baker Hughes Fourth Quarter 2022 Earnings Conference Call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Nancy Buese. The earnings release we issued earlier today can be found on our website at bakerhughes.com.

As a reminder, during the course of this conference call, we will provide forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and website for a discussion of the factors that could cause actual results to differ materially.

As you know, reconciliations of operating income and other GAAP to non-GAAP measures can be found in our earnings release.

With that I will turn the call over to Lorenzo.

Lorenzo Simonelli Baker Hughes - Chairman & CEO

Thank you, Jud. Good morning everyone and thanks for joining us.

I would like to start off by highlighting a couple of changes for this earnings call. For the first time, we are hosting our earnings call from Florence, Italy, where we will host our Board meeting later this week and welcome over 2,000 customers and industry experts next week at our Annual Meeting. We will also be using a presentation during this webcast, which has also been published on our investor website, that we will reference over the course of our prepared remarks.

As you can see on slide 4, we were very pleased to end 2022 with solid momentum across our two business segments. In the fourth quarter, we saw continued margin improvement in our OFSE segment and an extremely strong level of orders for IET, which was driven by multiple awards across different end markets.

2022 was an important year for Baker Hughes on a number of fronts. Strategically, we took a large step forward in re-shaping the company as we announced a formal restructuring and re- segmentation of Baker Hughes into two business segments. This kicked off a major transformation effort across the organization, including key executive management changes, which will fundamentally improve the way the company operates.

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Baker Hughes Fourth Quarter 2022 - Earnings Conference Call Prepared Remarks

Operationally, our performance for the year was mixed. During the first half of the year, we experienced multiple headwinds across our organization, as well as a number of operational challenges. While our performance improved over the second half, we still have more work to do and are focused on various initiatives to improve shorter-term execution and meet the longer-term financial objectives we laid out at an investor conference last September.

Commercially, orders performance in LNG and New Energy hit new highs and are poised to remain strong into 2023. In 2022, we booked almost $3.5 billion in LNG equipment orders, our highest ever, and booked over $400 million in New Energy orders, showing over 50% growth versus 2021.

Although not yet back to previous historical levels, orders for our offshore-exposed businesses also accelerated. Within OFSE, SSPS booked over $3 billion in orders in 2022, representing 36% growth versus 2021. In IET, Onshore/Offshore Production recorded equipment orders of almost $1.9 billion in 2022.

We are also seeing improvements in our industrial segments with Industrial Technology orders of $3.3 billion in 2022, up 6% year-over-year.

As we look ahead to 2023, we expect order momentum to continue across both OFSE and IET despite what is likely to be a mixed macro environment.

Turning to slide 5, in 2023, the global economy is expected to experience some challenges under the weight of inflationary pressures and tightening monetary conditions. Despite recessionary pressures in some of the world's largest economies, we maintain a positive outlook for the energy sector. With years of under investment now being amplified by recent geopolitical factors, global spare capacity for oil and gas has deteriorated and will likely require years of investment growth to meet forecasted future demand.

For this reason, we continue to believe that we are in the early stages of a multi-year upturn in global activity and are poised to see a second consecutive year of solid double-digit increases in global upstream spending in 2023. In addition to strong growth in traditional oil and gas spending, we also believe that the Inflation Reduction Act in the US and potential new legislation in Europe will support significant growth opportunities in New Energy in 2023 and beyond.

We also remain positive on the near term and long-term prospects for the natural gas and LNG investment cycle. Near term, we believe that the likely reopening of China, combined with Europe's need to refill gas storage supplies, will play a critical role in keeping global gas and LNG markets tight. Longer-term, we remain optimistic on the structural growth outlook for natural gas and LNG as the world looks to lower emissions and displace the consumption of coal.

While cost inflation and higher interest rates slowed the pace of new LNG FIDs in 2022, we are seeing progress on a number of fronts. We continue to expect significant growth in new project sanctions in 2023, with elevated activity levels likely continuing into 2024. Following 36 MTPA of LNG FIDs in 2022, we continue to expect to see an additional 65 to 115 MTPA of LNG projects reach FID in 2023.

Just as important as the near-term outlook for LNG orders, we are now gaining visibility into new project opportunities that are developing towards the middle of the decade. Most notably, we are seeing progress on a number of brownfield initiatives and advancements in new modular concepts that is likely to extend the current wave of activity several more years.

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Baker Hughes Fourth Quarter 2022 - Earnings Conference Call Prepared Remarks

Turning to slide 6, given this macro backdrop, Baker Hughes is intensely focused on four key areas in 2023 in order to drive future value for shareholders.

First, we are well positioned to capitalize on the significant growth opportunities that are building across both business segments. These opportunities reach across the entire OFSE portfolio, as well as in IET, most notably in LNG, Onshore/Offshore Production, and New Energy.

Second, we remain focused on optimizing our corporate structure and transforming the Baker Hughes organization to drive improvements in our margin and returns profile. While we are still in the early stages of this process, we are increasingly confident in driving at least $150 million of cost-out by the end of 2023 as well as structural changes that will simplify the organization and enhance our operational efficiency.

The cost-out and integration initiatives we are undertaking over the next 12 to 18 months will play a key role in hitting our EBITDA margin targets of 20% in OFSE and IET over the next two to three years, and delivering Return on Invested Capital of 15% and 20%, for OFSE and IET respectively.

Third, we continue to develop our portfolio of new energy technologies. We have been particularly active over the last few years acquiring and investing in multiple new technologies around hydrogen, carbon capture, clean power, and geothermal. We are now transitioning more towards the incubation of the existing portfolio. This will enable our new energy portfolio to achieve its full commercial potential, with a particular focus on high impact technologies like NET Power and Mosaic.

Finally, we will continue to focus on all these initiatives and while also generating strong free cash flow and returning 60% to 80% of this to shareholders through a combination of share buybacks and dividends.

In 2022, we increased our dividend for the first time since 2017. Going forward, our goal is to continue to increase shareholder returns with an emphasis on continuing to grow the dividend as the IET business experiences broader structural growth in revenue and earnings.

Turning to slide 7, I will provide an update on each of our segments.

In Oilfield Services and Equipment, the outlook remains promising with growth trends shifting more in favor of international and offshore markets, while North America activity levels off. Importantly, the team continues to execute well as supply chain pressures moderate and the pricing environment remains favorable.

Geographically, the Middle East retains the most promising outlook with activity scheduled to increase in multiple countries this year and likely next year. In Latin America and West Africa, offshore activity is driving growth in several countries and creating opportunities across our diverse portfolio. In North America, visibility remains limited given the current oil and gas price environment, and generally expect range bound activity from current levels over the course of 2023.

Within our OFSE product lines, we have seen strong growth for Well Construction, driven by opportunities across our drilling portfolio, and for CIM, where our completions portfolio continues to see solid improvement.

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Baker Hughes Fourth Quarter 2022 - Earnings Conference Call Prepared Remarks

In Production Solutions, we saw strong volume growth and margin improvement in our chemicals business throughout the year as supply chain constraints continue to ease and profitability normalizes. For 2023, we expect further improvement in our chemicals business as margin levels normalize back to historical levels and our Singapore plant becomes fully operational.

Our legacy OFS segment executed well in the fourth quarter, and we were pleased to see them achieve 19.6% EBITDA margins, and 20% when normalizing for the impact of Russia.

In SSPS, order activity remains strong as offshore activity continues to pick up. Importantly, we saw good order traction in both subsea trees and Flexibles in the fourth quarter. After a record year in 2022 in Flexibles orders, we expect another strong year in 2023 as well as a significant increase in subsea trees awards.

We also continue to make progress on integrating SSPS into our OFSE segment, as well as restructuring the business to drive better profitability and returns. After a thorough review of the SSPS business, Maria Claudia and her team are finalizing plans to rationalize approximately 40% to 50% of the manufacturing capacity in Subsea Production Systems. These steps will be in addition to the cost savings gained from removing management layers and will largely come into effect in 2024.

For 2023, we expect OFSE to deliver double-digit revenue growth and solid improvement in margins as activity increases in multiple regions, inflationary pressures subside, we execute our cost-out program, and pricing remains favorable in most key markets.

Moving to IET, the fourth quarter generated record orders driven by multiple awards in LNG and multiple awards in Onshore/Offshore Production. Operationally, IET continues to navigate challenges in Gas Tech Services, as well as challenges in different parts of the supply chain, ranging from chips and circuit boards to gas engines, castings, and forgings.

Orders during the fourth quarter for Gas Technology illustrate the breadth and depth of its portfolio.

In LNG, we saw continued progress across our world-class franchise. During the quarter, we were pleased to be awarded another major order to provide an LNG system for the second phase of Venture Global's Plaquemines project. This order builds on an award in the third quarter of 2022 for another power island system.

Furthermore, this follows an award in the first quarter of 2022 for the first phase of Plaquemines and a similar contract for VG's Calcasieu Pass terminal in 2019, which are all part of a 70 MTPA master supply agreement.

In Onshore/Offshore Production, IET booked contracts for five different projects in Latin America and Sub-Saharan Africa worth almost $900 million on a combined basis. With these awards, IET maintains its leadership in the FPSO market by providing power generation systems, compression trains and pumps that totals more than 30 aeroderivative gas turbines, two steam turbines and 20 compressors of various sizes.

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Baker Hughes Fourth Quarter 2022 - Earnings Conference Call Prepared Remarks

On the New Energy front, we were pleased to book an order from Malaysia Marine and Heavy Engineering to supply CO2 compression equipment to PETRONAS' Kasawari offshore carbon capture and sequestration project in Sarawak, Malaysia. The project is expected to be the world's largest offshore CCS facility, with capacity to reduce CO2 emissions by 3.3 MTPA.

Baker Hughes will deliver two trains of low-pressure booster compressors to enable CO2 removal through membrane separation technology, as well as two trains for reinjecting the separated CO2 into a dedicated storage site.

Orders in our Industrial Technology business continue to perform well with strong traction this quarter across Inspection and Pumps, Valves and Gears. In our Inspection business, we achieved significant commercial wins in the recovering aviation industry, including a record deal for visual inspection services in the Latin America region, as well as a number of orders for advanced ultrasonic testing systems with different customers in Asia Pacific.

In addition to solid growth in orders, we were pleased to see some signs of operational improvement in our Industrial Tech businesses, led by volume and margin increases in Condition Monitoring and Inspection. We expect this positive momentum to continue into 2023 as the chip shortage and supply chain issues start to abate and backlog convertibility recovers.

As we enter 2023, IET has a record backlog of $25 billion and a robust pipeline of new order opportunities in LNG, Onshore/Offshore, and New Energy, and we now expect IET orders in 2023 between $10.5 to $11.5 billion. Despite the supply chain challenges we are closely monitoring for both Gas Tech and Industrial Tech, we are well positioned to execute on this backlog to help drive significant revenue growth in 2023 and 2024.

While 2022 presented some unique challenges to Baker Hughes, it was also a pivotal year for us strategically and accelerated a number of changes in the organization. As we look at 2023 and beyond, I feel confident in the structural changes we are executing and our positioning to capitalize on the multi-year upstream spending cycle, the unfolding wave of LNG investment, and the acceleration in New Energy opportunities.

Across our entire enterprise, Baker Hughes is focused on significantly improving our margins and financial returns and meeting our customers' needs in a quickly changing energy landscape. Achieving these goals will require acute focus across the entire organization, as well as the depth and scale of global resources and engineering talent.

The culture of this company is unique in its diversity, its inclusiveness, and its principles, as well as its ability to adapt to change. Our team is focused on taking energy forward, transforming the way we operate, and achieving the margin and return targets we have laid out to help drive best- in-class shareholder value and returns.

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

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