Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Baker Hughes Co (BKR, Financial) delivered outstanding second-quarter results with strong operational performance across the company.
- The company achieved a 46% year-over-year EPS growth and a 25% increase in EBITDA.
- Baker Hughes Co (BKR) secured significant contracts, including a $3.5 billion order in IET and major offshore topside contracts in Latin America.
- The company saw record new energy orders of $445 million during the quarter, trending towards the high end of the year's new energy guidance range.
- Baker Hughes Co (BKR) maintained a strong balance sheet with $2.3 billion in cash and a net debt to EBITDA ratio of 0.9 times.
Negative Points
- Global upstream spending outlook for the year was revised slightly lower due to North American softness.
- North American market expected to decline in the mid-single digits year-over-year due to lower-than-expected first-half rig activity.
- Economic uncertainty and volatility in oil prices could impact future performance.
- Free cash flow for the quarter was $106 million, indicating a need for stronger performance in the second half of the year.
- Challenges in Latin America, particularly rig reactivation delays in Mexico, affected performance.
Q & A Highlights
Q: You had really strong margins in both segments. Could you elaborate on the drivers from here, such as cost initiatives or operational enhancements?
A: Lorenzo Simonelli, Senior Non-Executive Independent Director: We started restructuring in 2022, taking out $150 million in costs and streamlining processes. In IET, we are adopting a lean mindset, increasing automation, and improving supply chain efficiency. In OFSE, we focus on cost competitiveness, service delivery improvements, and profitable growth. We expect margin expansion to continue, aiming for 20% in OFSE by 2025 and IET by 2026.
Q: You raised your EBITDA guidance by 5% this year. Could you walk through the drivers pushing this higher?
A: Nancy Buese, Chief Financial Officer: The increase is driven by stronger revenue expectations and margin upgrades in IET. We expect IET revenues to increase by about 20% this year, driven by GTE and Industrial Solutions. On the margin side, we expect 2024 IET margins of 16.2%, up 120 basis points from last year. OFSE remains unchanged but strong.
Q: How is the installed base translating to Gas Tech Equipment services growth? Can we expect mid-teens growth annually?
A: Lorenzo Simonelli, Senior Non-Executive Independent Director: The installed base provides long-term visibility and confidence in sustained growth. We see it as a razor, razor blade model, where equipment sales lead to long-term service revenue streams. This provides a sustainable growth outlook for the company.
Q: Can you talk about which international markets you have good visibility on for growth?
A: Lorenzo Simonelli, Senior Non-Executive Independent Director: We see strong growth in offshore markets like Suriname, Namibia, Guyana, and Brazil. The Middle East also remains a growth area. We expect positive but decelerating growth internationally, with opportunities in mature asset solutions and brownfield projects.
Q: Can you elaborate on Baker Hughes' role in behind-the-meter and off-grid solutions?
A: Lorenzo Simonelli, Senior Non-Executive Independent Director: We have gas turbine technology beneficial for off-grid solutions, especially for data centers and other sectors requiring continuous power supply. Our portfolio includes NovaLT turbines, steam cabins, SMR solutions, and larger-scale solutions like net power. We see this as a tremendous growth opportunity.
Q: What are the key drivers for hitting the high end of your free cash flow guidance range?
A: Nancy Buese, Chief Financial Officer: Free cash flow is lumpy quarter-to-quarter, but we are confident in our 45% to 50% conversion target for the year. Key drivers include timing of collections, down payments, and continued operational improvements. We remain focused on returning 60% to 80% of free cash flow to shareholders.
Q: Can you discuss the underlying drivers of non-LNG growth in Gas Tech and the setup for the IET order book?
A: Lorenzo Simonelli, Senior Non-Executive Independent Director: Non-LNG growth is driven by onshore/offshore production and gas infrastructure. We expect robust orders in the second half, aiming for $12 billion to $12.5 billion in orders for the year. LNG opportunities will also return, contributing to sustained growth.
Q: How do you see gas infrastructure orders progressing over the next year?
A: Lorenzo Simonelli, Senior Non-Executive Independent Director: We see significant growth potential in gas infrastructure due to increasing energy demand and lower carbon intensity. Projects like Master Gas System 3 and Hassi R’Mel are examples, and we expect similar opportunities globally.
Q: Can you provide a quick recap of the key technologies driving New Energy orders?
A: Lorenzo Simonelli, Senior Non-Executive Independent Director: Our portfolio includes compression pumps, valves, instrumentation, condition monitoring, and sequestration analysis. About 50% of our New Energy orders are in CO2-related projects, with CCUS being a key theme. We are uniquely positioned to capitalize on these opportunities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
