Baker Hughes Co. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Key Awards and Developments: In Gas Technology Equipment, secured additional FPSO orders and contracts for centrifugal compressors. Gas Technology Services booked over $600 million of contractual service agreements year-to-date. New energy orders totaled $287 million during the quarter, with year-to-date orders at $971 million. Climate Technology Solutions received a large award for zero emissions technology. OFSE had strong order momentum in Brazil and brownfield activity, with digital advancements like Leucipa and CarbonEdge.
• Market Outlook: Structurally growing energy demand, with natural gas as a key growth driver. LNG demand expected to grow significantly by 2040. Oil demand expected to moderate, with focus on brownfield developments. Decarbonization technologies, including CCUS and hydrogen, are seen as critical for net-zero goals.
• Margin Improvement: Both segments making progress toward 20% EBITDA margins. IET is leveraging backlog conversion, cost efficiencies, and industrial automation. OFSE is benefiting from pricing, cost efficiencies, and supply chain improvements, with SSPS performance reaching record levels.

Segment Performance

• Industrial and Energy Technology (IET): Third quarter EBITDA was $528 million, up 31% year-over-year. EBITDA margin reached 17.9%, a 2.9 percentage point increase year-over-year. Orders for IET were $2.9 billion during the quarter, with year-to-date orders at $9.2 billion. Revenue for the quarter was $2.9 billion, up 9% versus the prior year, led by growth in Climate Technology Solutions and Gas Technology Services. The installed base for Gas Technology is expected to grow 20% by 2030, driving structural growth in aftermarket services.
• Oilfield Services & Equipment (OFSE): EBITDA was $765 million, up 14% year-over-year. EBITDA margin was 19.3%, a 2.3 percentage point increase year-over-year. Revenue for the quarter was $4 billion, with strength in flexible pipe systems, surface pressure control, and artificial lift. The segment is on track to achieve its 20% margin target for 2025, driven by cost efficiencies and productivity enhancements.

Guidance

• Full year EBITDA guidance midpoint remains unchanged. IET EBITDA outlook is increased to a midpoint of $2 billion, driven by robust backlog conversion and strong margin performance. OFSE's EBITDA midpoint is updated to $2.87 billion, with margin strength offset by lower second half OFS revenues. Fourth quarter EBITDA guidance: total company expected to be approximately $1.26 billion midpoint, with IET at $590 million midpoint and OFSE at $750 million midpoint.

Risks

• Potential external market volatility, including fluctuations in oil and gas prices. Supply chain issues that could impact project timelines. Geopolitical uncertainty in regions like the Middle East, which could affect upstream spending and operations.

Q: David Anderson with Barclays inquired about the interconnectivity between equipment and services in IET.

A: Lorenzo Simonelli discussed that Gas Tech Services generates recurring revenue streams, with service revenue accounting for nearly 50% of IET's EBITDA. The installed base of gas technology equipment is expected to grow 20% by 2030, driving structural growth in services over the next decade, particularly from LNG and FPSO projects.

Q: Scott Gruber with Citigroup asked about the cadence of margin improvement.

A: Nancy Buese explained that margin improvement is driven by self-help initiatives, including corporate cost reductions and segment-specific efforts. IET's EBITDA margin reached 17.9%, up 2.9 percentage points year-over-year, while OFSE's margin was 19.3%, up 2.3 percentage points. Both segments are on track to reach 20% margins by 2026 and 2025 respectively, with ongoing process improvements and supply chain optimizations.

Q: Stephen Gengaro with Stifel questioned revenue growth relative to the IET installed base.

A: Lorenzo Simonelli stated that revenue growth should outpace the 20% increase in the installed base due to higher pricing, mix improvement (e.g., higher LNG mix), advanced service solutions leveraging digital capabilities, and upgrade opportunities for existing equipment.

Q: James West with Evercore ISI asked about IET orders and income surpassing OFSE.

A: Lorenzo Simonelli noted confidence in 2024 IET orders within the $11.5 billion to $13.5 billion range. 2025 order outlook is positive with robust activity across segments. Both segments are expected to continue growing, with a focus on margin accretion and long-term value creation.

Q: Saurabh Pant with Bank of America inquired about IET revenue rebound.

A: Nancy Buese mentioned that Q3 revenue miss was due to timing-related supplier and vessel delays, but confidence in the backlog remains high. IET year-to-date revenue is up 30%, and margins are increasing, with confidence in executing the $12 billion GTE backlog.

Q: Marc Bianchi with TD Cowen asked about IET book-to-bill and backlog conversion.

A: Lorenzo Simonelli stated that 2025 order activity is robust, with RPO levels remaining high, and confidence in converting backlog at the same pace as previous years, driven by ongoing market momentum and project pipelines.