Baker Hughes Company — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, ladies and gentlemen, and welcome to the Baker Hughes Company First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.
Thank you. Good morning, everyone, and welcome to Baker Hughes First Quarter Earnings Conference Call. Here with me are Chairman and CEO, Lorenzo Simonelli; and our CFO, Nancy Buese. The earnings release we issued yesterday evening can be found on our website at bakerhughes.com. We will also be using a presentation with our prepared remarks during this webcast, which can be found on our investor website.
Thank you, Chase. Good morning, everyone, and thanks for joining us. We are pleased with our solid first quarter results as we continue to build on the momentum from last year and shape our company. The resilience of our order book and margin progress in both OFSE and IET put us on a path towards achieving our full year guidance and overcoming external volatility. Overall, EBITDA margins continued to demonstrate strong year-over-year growth, increasing by 100 basis points. The margin upside was attributed to IET, where both Gas Tech equipment and Industrial Tech demonstrated strong performance.
Thanks, Lorenzo. I'll begin on Slide 10 with an overview of our consolidated results and then speak to segment details before outlining our second quarter outlook. We are very pleased with our first quarter results above the midpoint of our EBITDA guidance. Orders remain solid as the diversity of IET's end markets continue to support a strong level of orders. We continue to make progress on driving operational improvements across the business to enhance margins and returns, highlighted by the consistent improvement in EBITDA margins and ROIC. We remain confident in our full year guidance that points to another strong year for Baker Hughes.
Thank you, Nancy. Turning to Slide 18. 2024 is off to a strong start for Baker Hughes, highlighted by our strong margin performance in both OFSE and IET. Our continued focus on commercial enhancements and cost efficiencies are driving structural improvement in both segments underlying margins. With these transformational efforts gaining momentum, we remain on track to achieve our 20% margin targets for both segments.
Thanks, Lorenzo. Operator, let's open the call for questions.
[Operator Instructions] Our first question comes from the line of Scott Gruber from Citigroup.
So your IET margins were quite strong despite a headwind from more equipment revenues, which is great to see. And Lorenzo, you walked through the multiple drivers. Looking at 2Q, IET guidance is above our forecast, but you did list the full year. So can you walk through how you think about those margin drivers continuing? How do you think about the impact on the second half for IET? Are there reasons to believe the normal seasonality may be a bit more muted for both revenues and margins in the second half? Or is the high end of the range for full year revenues and EBITDA will be more likely now for IET?
Yes, Scott, first of all, very strong quarter for the company. And as you said, led by also IET, but overall, very pleased by both segments. And IET, a very strong, solid quarter. And as we've said, we've been committed to our journey on IET towards the 20% EBITDA, and you're starting to see some of those levers coming through as you look at first quarter and as you look at the rest of the year, again, you've got strong backlog conversion in Gas Tech equipment.
Got it. And then turning to the production side of OFSE. We recently saw one of your big competitors moved to enhance their position. How do you see the market evolving for the production vertical where you have a strong position? Does the growth rate for production start to rival the growth rate for drilling and completion spend in '25 and beyond? And how do you think about the competitive dynamics in the market? Your team was quite excited by your production optimization solutions at your annual meeting?
Yes, Scott, it's a very good point. And for us, what's happening from the external perspective and the dynamics doesn't change the strategy, and we've been firmly focused on a strategy around production solutions for some time. As you know, from the comments that I made at the annual meeting, 70% of the world's production comes from mature assets. And a mature asset being a well that's produced 50% of its reserves or has been in production for over 25 years. And when we look at the future, there's a tremendous focus on improving that optimization.
Our next question comes from the line of Arun Jayaram from JPMorgan Securities LLC.
Lorenzo, I want to start with the Saudi MSC reduction. I wanted to get your perspective on the potential impacts to Baker from the changing mix of activity with the higher mix of onshore versus offshore. And perhaps you could just comment on the gas side of the equation with higher infrastructure spend chemicals and new energy spend, what that means for Baker as we think about rest of this year and into next year?
Yes, Arun. We remain confident in the international market outlook. We expect E&P spending to be up high single digits this year. And as we look at, in particular, the MSC reduction, as we said in the last call, we don't anticipate any real changes. And in fact, when we look at Saudi, we see it as opportunities outside of just the upstream area given our presence. As you know, natural gas production is set to grow by 60% through 2030, and it's going to benefit our IET business. You saw the announcement that was made in 1Q relative to the Master Gas System 3, the pipeline project. There's going to be more opportunities down the road.
Great. That's helpful. Maybe a follow-up, maybe for Nancy. Nancy, I want to get your take on some of the puts and takes around the 2Q guide. It looks to be about 3% above our model and it looks like just slightly better margins. And so just wondering if you could talk about some of the puts and takes and just the fact that you kept the back half, maybe a follow-up to Scott's question, the full year is the same. And are you getting a little bit more confidence on the full year outlook given what's transpiring in the first half of the year?
Yes, happy to take that one. So on Q2, I'd really say the strength in our guide for that quarter highlights our differentiated portfolio. And we've really been talking about how that's helping us to frame up more durable earnings and strong free cash flow generation and growth. Our midpoint for EBITDA guidance in Q2 really represents about 16% year-over-year growth, and that's about 20% EBITDA growth in the IET business. So there are a lot of good drivers there. We've talked about the really robust backlog levels that are driving the Gas Tech equipment acceleration and much higher margins in the backlog as we convert as we've been signaling. And then we're also seeing broadening strength across Industrial Tech.
Our next question comes from the line of Dave Anderson from Barclays.
I was wondering if you could talk a little bit about the non-LNG side of the IET Gas Tech equipment order side. I think you made a couple of comments on there, you talked about is these have tripled this quarter and you expect to be up 50% this year. Could you kind of dig into that a little bit about where that's being driven from? I know we had an offshore side, which tends to be a little lumpier. I know you had the MGS3 award in there, but could you just sort of talk about the mix of that non-LNG business, please?
Definitely, Dave, and thanks for the question. Obviously, we've spoken a lot about LNG, and we will, I'm sure, in the future. And I think at times, we don't get a lot of time to talk about the non-LNG sector, and it's a very important part of our portfolio, and it's very expensive as well in the equipment and solutions that play across a number of end markets, including the upstream, midstream, refining, petrochemical, as you look at the pipelines and various industrial and other end markets. And it's really the versatility of our equipment that not only goes into LNG but goes into these other end markets. And 1Q was evident of that. And as you said, tripled in 1Q versus prior year.
And Lorenzo, sort of expanding upon that, I'd like to dig into maybe a little bit of what's going on in Saudi here. You touched on here a bit. Obviously, we saw the award we saw this quarter. But I'd be curious if you could talk about how you're differentiated versus your competitors on both the IET side and the OFSE side. On the IET side, you're talking about displacing oil-driven power in the Industrial side of the natural gas. And so that seems like an enormous opportunity in Saudi, but it seems like it's a very unique opportunity for really just Baker. And then if I flip over to the OFSE side, one thing you've really done differently than others is manufacturing in country, could you talk to that a little bit about how that's a key initiative in the Kingdom and how that gives you an advantage?
Yes, Dave, thanks. And I know that you and the team also had the chance to tour the region and also visit the Kingdom. And that's true. We focused a lot on localization. And as I mentioned, we've just recently opened our chemicals facility on new Petrolite. We've also got wellheads that are manufactured. We've also got compressors. And as we look at drill bits and across the Kingdom, we focused on localization to support not just the Kingdom, but also support the region and outside of the region through capability close to our customers. And that's been a strategy of focus.
Our next question comes from the line of James West from Evercore ISI.
Lorenzo, I wanted to touch back on carbon capture because it sounded like there was a bit of a shift in your tone there with respect to projects starting to move forward and to scale. So I want to know, one, is that accurate? Two, have you seen any change or have you put any change in your CCUS strategy? And how about an update on your kind of commercialization of some of the newer technologies in carbon capture?
Yes, definitely, James. And as we look at what's happening, and we've been discussing for some time, the continued increasing demand for energy and the realization that we need in all of the above approach to the energy transition, it means there's a shifting focus towards emissions rather than the fuel source. And that puts the forefront CCUS. And as you know, we've been playing and participating in CCUS for many decades. But we've also been investing in CCUS capabilities. And so as we go forward, we think CCUS is going to be a first mover.
Great. And then maybe a follow-up on the all of the above comment. Lorenzo, wouldn't you have relationships with all the major tech companies, and they're trying to scale data centers and that's being supercharged by AI. It seems to me that renewable deployment is not going to be able to keep up with that. So we're going to have to go towards some type of fossil fuels, and it sounds like gas is the one they're targeting. But all of these data center providers beginning to at least acknowledge that reality that for some period of time, we're going to have to build out potentially is more gas infrastructure to support this because the power generation needs are running well ahead of renewable or cleaner fuel sources?
Yes, I'd agree with you that there's a growing realization that there's a growing demand for energy, and that's being driven by some of the data centers. And look, AI provides huge benefits both internally and also from an external perspective to us internally to drive optimization for our customers, but also externally to drive growth for our equipment and the services that we provide. And that's why we like the ready gas turbines that go on natural gas today, but then can switch to hydrogen, that's also why we like the solutions that we're offering with regards to other clean power solutions. And as we talk to our customers, that's what they're looking for.
Our next question comes from the line of Luke Lemoine from Piper Sandler.
The IET orders you had in 1Q put you on a nice pathway to hit the midpoint of the annual guide with GTE being the largest component. I'm sure most of the durability resides here. And you talked about some of the LNG awards outlook within GTE. But can you just talk about some of the puts and takes within the annual order guidance for IET?
Yes, I'll kick it off here, Luke. And we remain very confident in the orders range that we provided for 2024. If you look, we started the year very positive from the orders front, booking over $2.9 billion of orders, including large awards, again from Aramco, but also from Black & Veatch for Cedar LNG. And LNG equipment will still be a portion of the orders outlook as we go through the year. And again, it was significant last year. But it's also outside of LNG. It's onshore/offshore production. It's the gas infrastructure and also coupled with the new energy.
Okay. And then Nancy, on getting to the 20% margins next year, there were some finer points, but the broad buckets had kind of been on productivity cost, price volume. Could you just refresh us on the drivers here and maybe the confidence around the individual pieces?
Absolutely. We absolutely remain confident in hitting those 20% EBITDA margins, and you're starting to see some traction with a lot of the activities that have been done in the segment and continuing actions. And we do still see strength in international markets this year. We're also maintaining our outlook for high single-digit E&P CapEx. So those are good drivers as well. I would also just note that hitting that margin target does not require an acceleration of growth compared to where we already are. So that's all baked into it.
Thanks, everyone, for joining the call today, and look forward to speaking to everybody soon. And I think, operator, you can close the call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.