Alondra Oteyza - Director of Investor Relations Martin Craighead - Chairman, President & Chief Executive Officer Kimberly Ross - Chief Financial Officer & Senior Vice President.

Judson Bailey - Wells Fargo Securities Kurt Hallead - RBC Capital Markets Angie Sedita - UBS Securities Sean Meakim - JPMorgan Securities James Wicklund - Credit Suisse Securities James West - Evercore Byron Pope - Tudor, Pickering, Holt & Co..

Good day, ladies and gentlemen, and welcome to the Baker Hughes Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I'd now like to introduce your host for today's conference Ms. Alondra De Oteyza, Director of Investor Relations. Ma'am, you may begin..

Thank you, Bridgette. Good morning, everyone, and welcome to the Baker Hughes second quarter 2016 earnings conference call. Here with me today is our Chairman and CEO, Martin Craighead; and Kimberly Ross, Senior Vice President and Chief Financial Officer.

Today's presentation and the earnings release that was 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 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. We advise you to review our SEC filings for a discussion of some of the factors that could cause actual results to differ materially.

Also, reconciliation of operating profit and non-GAAP measures to GAAP results can be found on our earnings release and on our website at bakerhughes.com under the Investor Relations section. And with that, I'll turn the call over to Martin Craighead.

Martin?.

Good morning, everyone, and thanks for joining us today. When we last spoke to you on May 3, we told you that we were focused on three objectives this year. First, we said we would reduce $500 million in costs by year-end by simplifying our organizational structure and rationalizing our operational footprint.

Second, we said that we would focus on our core strengths and product innovation while building broader sales channels for our products and technology. And third, we announced plans to optimize our capital structure by paying down debt and buying back shares, while ensuring we maintain financial flexibility.

In less than three months, we've moved with urgency and have made tremendous progress on all fronts. We restructured the company to remove significant costs and create a more nimble, efficient organization. Today, we are firmly on track to reach our savings targets.

We redesigned the customer facing areas of our business to better support our strategy of taking more new products to market faster and more efficiently. We fortified our full service business with enhancements to our operations and sales organization and we've laid the groundwork to build new sales channels for direct sales.

As Kimberly will describe, we've also made enormous progress on our capital structure in all three areas of focus. Today, I'll share more details about what we've accomplished so far, how we are executing in the market to better position the company for success and our view of the industry outlook including the opportunities we see for Baker Hughes.

But first I'd like to give you an overview of our second quarter financial results. Our performance in the quarter was impacted by continued reductions in customer spending and activity, trends driven not only by the price of oil, but the volatility of those prices and the lack of clarity on the future.

And looking back over the past few months, it's clear to me that the movement of oil prices has been driven more by one-off events such as temporary supply disruptions and not by changing the fundamentals underpinning supply and demand.

Therefore, I believe the industry will remain in a period of continued uncertainty at least through the end of this year until more foundational changes to supply and demand create a more stable environment for our customers to plan against.

As a result of the continued supply-demand imbalance globally, pricing for oilfield services continued to erode in the second quarter. In light of these conditions, we are aggressively removing costs from all areas of our business consistent with the commitment we outlined in early May.

As you can see from today's release, we implemented significant restructuring actions in the quarter to put us on track to meet our cost reduction targets. Regarding top line performance, our global sequential revenue was down 10% from the first quarter of the year versus a 19% decline in the global rig count during the same period.

The most severe revenue decline was in North America, but we continue to see softness in most regions of the world. In spite of a challenging environment, our revenue outperformed the current rig count trends.

While that is a positive, it is important to note that, in these market conditions, revenue is less tightly correlated to active drilling rigs as customers place more emphasis on completion and production related activities. Adjusted operating profit declined $209 million sequentially, as activity and pricing continued to pressure margins.

In addition, we recorded large provisions on receivables primarily related to Ecuador, which negatively impacted second quarter results. However, the cost reductions we implemented during the quarter will result in a positive impact on our margins for the second half of the year.

Now that we have flexibility to more closely align our costs with market conditions, we've taken aggressive steps to do so which would result in savings going forward. Since our investor call in early May, we've made other significant changes to the company. First, we restructured the leadership team and the resulting organizational design.

This resulted in workforce reductions that while difficult are necessary to align our cost structure to the market. However, we've been able to retain a strong core of talent and experience that's critical to our success today and going forward.

The resulting organization is more efficient, agile and intensely focused and our employees are energized about what we intend to accomplish.

The reorganization in addition to reducing costs more strongly aligns our company structure to supporting our overarching strategy, which is to take our technology to market faster and more efficiently through our full service model and a broader set of sales channels.

These actions demonstrate the breadth, depth and speed of change across the entire company. Let me walk you through some of the changes. Consistent with our decision to focus on our core innovation strength, we consolidated our products and technology organizations into one team under Art Soucy.

Art's primary mandate is to get more new products to market faster and to ensure that they are aligned with the market realities and corresponding commercial opportunities.

In this market, that means lower costs, it means lower cost fit for purpose products that are simplified and standardized, but also technically advanced products that bring leading-edge solutions to enable our customers to fundamentally reduce lifting costs.

To accelerate the pace of new product launches, Art is driving a collaborative product development process that integrates manufacturing and reliability engineering with the vast capability of our design team. This process reduces product cost and development lead times, all while improving the reliabilities.

In the second half of this year, Art's team is committed to launching 60 products, the vast majority of which were lower cost and optimized production for our customers.

For example, in the second quarter, we launched the Integrity eXplorer, an industry unique wireline service that is fast becoming the industry standard for accurate and reliable cement evaluation.

This disruptive technology is enabled by electromagnetic acoustic sensors that deliver precise evaluation of any cement mixture in all borehole environments.

When conventional technologies wrongly diagnose cement quality, operators are required to perform unnecessary remedial operations that cost them days of rig time and a lot of unplanned expenditures. Integrity eXplorer is the only product in the market that deploys this technology, and customer pull thus far has been exceptional.

In the next week, we will launch a new tiered artificial lift motor line, designed to drive operational efficiency, by improving reliability and lowering power consumption cost for our customers.

This motor line is applicable for 90% of our core market and the tiered offering provided with the reliability factors and power efficiencies our customers demand in both standard applications and in the harshest well environments.

Some of the motor technology upgrades include an enhanced insulation system that allows higher horsepower per rotor, a larger diameter shaft for higher torque ratings and a superior bearing system to minimize vibration.

In addition, we've optimized rotor and stator geometries and applied our proprietary motor winding technology to create the industry's highest temperature rated most efficient downhole induction motor for our core markets.

Next, to ensure we are capitalizing on the opportunities for that technology in the market, we consolidated and more tightly integrated our sales and operations teams under one global operations organization led by Belgacem Chariag.

In doing so, we restructured four regions encompassing more than 20 previous geo markets into one organization consisting of nine geo markets. The result is a flatter, simpler and more responsive structure that will allow us to operate more efficiently.

Global operations is responsible for both sales and operational execution which form the cornerstone of our operations in more than 80 countries. Belgacem's objectives are to achieve outstanding operational and HSE performance and increase both profitability and return on invested capital.

I want to emphasize that the full-service model will remain our predominant commercial focus around the world. However, we also see an opportunity to develop new channels for our products and technology beyond the traditional approach.

To that end, we created a commercial strategy organization led by Derek Mathieson, which is responsible for the long-range strategic planning for the company.

That remit includes developing a broader range of sales channels for our product innovations, it also includes developing other Baker Hughes businesses, such as our process and pipeline services business and our subsea production alliance with Aker Solutions to ensure they reach their full potential.

Turning to expanded channels, we are making good progress in muscling up on our direct sales business to local service providers. In essence, this means we will supply and grow a new set of customers beyond our traditional base.

The interest levels we've seen so far and the potential opportunities we've identified are strong indications that we're going down the right path with a strategy that is right for Baker Hughes and will differentiate us in the market.

Although it takes some time to build critical mass for the channels, we are focused on winning in the market in the here and now. Our customers are intensely focused on reducing costs, maximizing production and increasing recoveries. All of which align with our strengths and competencies.

Let me share with you how we're positioning Baker Hughes for the market opportunities we see today and on the horizon. We achieved some significant wins and milestones in the second quarter, where our technology and operational performance were cited as competitive differentiators.

It's clear from our customers that they are very glad to have Baker Hughes firmly rooted in the market doing what we do best. Several of these wins are cited in our release but in summary we achieved significant awards or work expansions for intelligent production systems in Brazil, coil tubing in the North Sea, and drilling services in Russia.

In addition, we secured a five-year contract for completion systems in Kazakhstan along with the three-year completions and wellbore intervention award in Southeast Asia. In India, we won a three-year drill bits contract, a five-year drilling services contract in Kuwait, and a three-year artificial lift systems contract in Oman.

We had numerous wins in upstream and downstream chemicals for contracts from customers ranging from North America to Europe, Africa, the Middle East, and Southeast Asia.

Our process and pipeline services business also earned a big win with a contract for Australia's Ichthys field, where we are currently pre-commissioning a new pipeline for service and we'll provide leak testing services for an additional 18 months for this liquid natural gas project.

Out of 11 major pre-commissioning projects being conducted worldwide this year, Baker Hughes will perform nine of them. In the Johan Sverdrup field in the North Sea, we are off to a great start on a large project for which we are providing drilling services, cementing, drilling fluids, and completions.

We started drilling two months ahead of schedule in March of this year and by the end of June, we had completed two batch drilling campaigns and drilled and completed the first three wells in record time. We've helped the customer reduce their budgeted well time by 50%.

I think it's also important to emphasize that when we define winning, we're not talking just about taking share. Our focus is on profitable growth and sufficient returns on capital investment.

We've conducted an analysis of the competitive dynamics, market opportunities and our own profitability performance spanning more than 200 product line geo combinations.

As a result of that review, we've begun the process of rationalizing certain product offerings in specific countries based on our objectives of profitable growth and return on invested capital. While these potential reductions represent less than 5% of our current revenue, they will have a positive impact on operating profitability.

The point I'd like to emphasize is at Baker Hughes product lines and geo markets will earn their right to be in our portfolio. Along a similar vein, the last time we spoke I provided our view of the U.S.

land pressure pumping market, and I outlined the first phase of our new plan for this business, consolidating in two target basins where the majority of activity and near-term growth is concentrated.

We continue to believe this is the right approach for Baker Hughes given the continued pricing pressure, capital investment requirements and the large number of competitors serving this market. The first steps of our plan are well underway with a new management structure in place, and operations consolidation taking place into those basins.

As we prepare for the final stage of our plan, we continue to retain much of the operating structure in North America for this business, while we evaluate our options to ensure we maximize shareholder value. I want to finish up with a bit more on the market outlook, and the opportunities we see for Baker Hughes.

As we said in early May, we don't expect to see a meaningful recovery in the second half of the year, and that's still the case. While we've seen production edge down, particularly in North America, that has been offset by additional production elsewhere.

While our customers have substantially slowed, reduced, or all together canceled a large number of exploratory and field development campaigns, I've yet to see an economic catalyst that will create a step change to demand, that would lead to materially higher oil prices. In addition, U.S.

crude storage levels are at record highs and there is a significant backlog of crude in the form of drilled, but uncompleted or so-called DUC wells. On the demand side, growth is only forecasted to be modestly higher than expectations at the beginning of the year.

In fact, the economic impact of recent events such as the Brexit vote leading to a stronger dollar and significantly weaker British pound has created more uncertainty and historically there's been a strong correlation between a strengthening dollar and a weakening oil price, which could continue to be an unfavorable headwind.

Many of our customers, I speak to are standing pat at today's oil prices. And yes, many say they will ramp activity as oil prices reach the $50 mark. However, like in past cycles, service sector costs will rise with increased activity and that will erode incremental cash margins for the operators.

Accordingly, I believe oil prices in the upper $50s at a minimum are required for sustainable recovery in North America. As we mentioned previously, in North America, we expect an initial increase in activity in the drilled, but uncompleted category, which today extends beyond 5,000 wells across the various basins.

While completion schedules for these wells are estimated to ramp up as oil prices recover, the pace and speed of the increase will vary widely across the available inventory based on the well's economics and a large number of DUCs are not economical at $50 oil prices.

Regardless, with our strength in the artificial lift and production chemical product lines, this expected activity is a near-term opportunity for Baker Hughes.

Despite a backlog of drilled but uncompleted wells to work through, we expect the North American rig count to increase modestly in the second half of 2016 driven by seasonal gains in Canada and a slight uptick in the U.S. market. I describe it as a slow grind upwards for North America.

Internationally, we expect rig counts to continue slight declines in most countries for the second half of 2016. However, it's not a one-size-fits-all outlook, as there are pockets of stability mixed with pockets of declines. Markets in the Middle East and Russia Caspian are expected to be more resilient and may experience modest growth.

The leading drilling and completions positions that we've built in these markets are likely to see the first surge in activity on the well construction side as conventional markets with lower lifting costs are the first to recover.

We expect deepwater activity to continue to decline; however, when this segment recovers, which we fully expect, we are well-positioned with a substantial footprint in deepwater markets such as the Gulf of Mexico, Brazil, North Sea and West Africa with leading positions in drilling and completion services.

In the meantime, with our customers focused on maximizing production, the new products coming out of our production chemicals business continues to drive market share gains in every deepwater basin. To sum it up, I want to emphasize that we're making great progress on meeting our cost objectives.

We've restructured the company to support our go-to-market strategy and we are executing on that strategy decisively and with a sense of urgency. And I'm very optimistic about our road ahead. Now let me turn it over to Kimberly..

goodwill impairment of $1.8 billion of which $1.5 billion related to North America and $311 million to our Industrial Services segment. Impairments and restructuring charges of $1.1 billion primarily related to impairments of fixed assets and intangibles, workforce reductions and contract terminations.

Inventory adjustments of $621 million related to writing off inventory. A charge for early extinguishment of debt of a $142 million related primarily to the premium on the bonds we repurchased. Merger and related costs of $78 million and $262 million for income taxes on these items.

These charges were partially offset by the collection of the merger termination fee of $3.5 billion and the reversal of a loss on firm purchase commitments of $51 million as a result of reaching a settlement this quarter.

On the other hand, non-adjusted from our results are before tax charges related to provisions for doubtful accounts of a $166 million, primarily in Ecuador and valuation allowances on indirect taxes of $45 million, largely in Africa.

These charges reflect the ongoing challenges our industry is facing and the restructuring actions we have implemented to align our business to these market conditions.

These actions are expected to result in an estimated $450 million of annualized cost savings with approximately two-thirds coming from compensation savings related to workforce reductions of 3,000 positions which were completed this quarter.

With the other one-third of the savings resulting from reduced depreciation and amortization expense associated with the impairment. While our cost reductions will continue in the second half of the year, the actions taken this quarter clearly puts us well underway to accomplish our annualized cost savings objectives of $500 million.

The effective tax rate for the second quarter was a negative 20%. Our income tax rate has remained and will continue to remain volatile between the quarters as a result of the geographic mix of earnings and certain discrete tax items. Our corporate costs were $29 million for the quarter, down $3 million sequentially.

We expect these costs to remain in the low $30 million for the rest of the year. Taking a closer look at our results from operations. In North America, revenue of $668 million decreased 18% sequentially against the backdrop of a 35% decline in the rig count.

The decrease in revenue was driven primarily by reduced U.S onshore activity and the seasonal spring break up in Canada. We continued to experience pricing pressure during the quarter, although prices in some markets have begun to reach bottom.

Adjusted operating losses for the quarter of $153 million improved sequentially by $21 million as the initial savings from impairments and restructuring actions more than offset the impact of reduced revenue. Moving to international results. We posted revenue of $1.5 billion which is a 9% decrease versus the prior quarter.

Our Latin America segment experienced the largest top line declines as revenue dropped 15% sequentially.

This is primarily driven by reduced offshore activity in Mexico where the offshore rig count dropped an additional 32% sequentially and reduced revenue in Ecuador, where we have substantially decreased activity with a local customer to avoid further collection risk.

In the Middle East, Asia-Pacific segment, revenue was down 9% sequentially, primarily as a result of weakening activity and pricing pressures in Asia-Pacific with the largest decline seen in Australia where the rig count declined 50% sequentially. Lastly, our Europe, Africa, Russian Caspian segment was down 5% sequentially.

Activity and pricing reductions primarily in North Africa, Nigeria, the UK, and Angola were partially offset by the impact of favorable exchange rates in Europe and Russia and increased activity in the North Sea.

International adjusted operating losses were $277 million with operating margins down 1,664 basis points sequentially, which includes a 1,050-basis point sequential impact from provisions for doubtful accounts, mostly related to Ecuador and valuation allowances on indirect taxes in Africa.

And although we are taking provisions for these receivables, we continue to aggressively pursue collections. For our Industrial Services segment, revenue for the second quarter was $273 million, up 11% sequentially. Industrial Services adjusted operating profit was $4 million with operating margins increasing 310 basis points sequentially.

The increase in revenue and margins was driven by the seasonal increase in activity in our pipeline inspection and maintenance business, partially offset by a 250-basis point margin impact from provision for doubtful accounts.

Looking at cash flow in the balance sheet; during the quarter we generated $3.6 billion in free cash flow, driven mainly by the collection of the $3.5 billion termination fee while restructuring activities of $135 million paid during the quarter were funded from operations.

At this time, the estimated net cash proceeds from the $3.5 billion termination fee have increased from $3 billion announced in May to approximately $3.4 billion as we are able to utilize more tax attributes than previously anticipated. We are also well down the path of our announced plan to optimize our capital structure.

First, we repurchased approximately 10.9 million shares on the open market totaling $500 million. This leaves $1 billion remaining under our previously announced intention to repurchase $1.5 billion of shares, which we will continue to execute.

Second, we have completed the purchase of $1 billion face value of outstanding bonds, which will result in $632 million in savings over the life of the bond. This represents $55 million of annualized interest savings, which will be above and beyond the $500 million cost reduction commitment.

Also, as a result of this transaction, our total debt for the quarter declined by $1 billion or 25% sequentially to $3 billion and we ended the quarter with a debt-to-capital ratio of 18%. As part of this transaction, during the quarter we recognized a loss on early extinguishment of debt of $142 million before tax.

Third, in early July, we successfully refinanced our $2.5 billion credit facility, which was set to expire in September for a new five-year term maturing in 2021. This untapped credit facility allows us to maintain additional financial flexibility, if the right opportunity arises.

After all this was said and done, we ended the second quarter with $3.9 billion of cash on the balance sheet. While not all of the cash is readily available, it provides us with ample liquidity to address the challenges and opportunities of the current market. Capital expenditures for the quarter were $70 million, down 19% sequentially.

During this downturn, we have been extremely disciplined in our capital deployment and going forward, we will continue to maintain the same rigor. As such, we expect our capital expenditures to range between $300 million and $400 million for the year.

At the same time, we continue to invest wisely in our core business to ensure we remain competitively well positioned while maximizing return on invested capital. I always say, it's not necessarily about how much capital we spend, but more about the returns we get for the capital investments we make.

Depreciation and amortization for the second quarter was $305 million, down 14% sequentially. The asset impairments recorded this quarter are expected to result in approximately a $160 million of annualized depreciation and amortization savings. To sum it up, we had a lot of moving parts this quarter.

So we've made great progress on the financial objectives we outlined in May. And while there is still work to be done, we are well positioned financially and strategically to manage through the challenges and to capitalize on the opportunities ahead.

We are committed to generating positive cash flows by proactively managing our cost structure, reducing our working capital and maximizing return on invested capital. And with that, let's go to Q&A, Alondra..

Thank you, Kimberly. At this point, I would like to ask the operator to open the lines for your questions. To give everyone a fair chance to ask questions, we ask that you limit yourselves to a single question and one related follow-up question.

With that being said, Bridgette, could I have the first question please?.

Thank you. [Operator Instructions] And our first question is from Jud Bailey with Wells Fargo. Your line is open..

Thank you. Good morning..

Good morning, Jud..

A question on the cost reductions, Alondra, you laid out kind of the source of the cost reduction on your way in terms of meeting your plan.

How much did you recognize in terms of cost savings in the second quarter, and how do we think about margins in the back half of the year, how quickly do you realize those savings and how do we think about margins progressing and where do we see the biggest impact from those cost savings?.

So, Jud, this is Kimberly. So, we got about one month of benefit in quarter two. So, obviously, we do expect to have further benefit coming through in quarter three and quarter four. And therefore, we would expect to see some margin improvements in the second half of the year due to the cost reductions that have taken place..

Okay..

Additionally, we'll continue to focus on some additional cost reductions, we still have some more that we're going to do in quarter three and some of those take a little bit of time, so they won't necessarily be a full quarter of it, but then we'd expect to start seeing more cost savings in quarter four from that initiative and we'll update you on that next quarter..

Okay.

So, would we expect by the fourth quarter that all that cost savings effectively will be in the results by the fourth quarter or would you still have a little bit of a lag there?.

No. We're on target. Well, we would not expect to see necessarily a full quarter's savings, but by the end of the year, we will see a run rate for the following year, the $500 million savings that we targeted..

Okay. Great. And then my follow-up, just kind of staying with that topic and Martin to think about what your commentary was on North America. I think you said your expectation was for a grind higher in the back half of the year.

With that as a backdrop for potential activity levels, how do we think about North American margins, I would imagine you should see a pretty notable step up in margins with some of the cost reductions and the volume increases should help? Can you help us think about how you could perhaps exit your North America margins under that scenario?.

I would say Jud that, yes, we expect the margins to finish strong in North America driven by strong incrementals given the cost reductions that are taking place. Of course, the biggest driver in North America is going to be activity levels which will drive our pricing environment.

But putting those aside, if you just want to look at our - of what we can control, so to speak, it's the cost removals driving some strong incrementals. So, we expect the margins to be much more improved than they are right now..

Do you think you can get close to breakeven?.

You tell me what oil prices are, what the rig count is, and I can give you - I can land the plane, but I can't - I am not going to go there right now..

Great. Thank you. I'll turn it back..

Our next question is from Kurt Hallead with RBC. Your line is open..

Hey, good morning..

Good morning, Kurt..

Hey.

I just wanted to follow up, you referenced 60 new products coming in the back half of the year and I just want to try to gauge what you think that could potentially generate from a revenue standpoint, maybe as a percentage of total revenue and maybe, kind of give us some kind of historical perspective on what new products generally represented from a revenue standpoint?.

That's a great question. If you remember Kurt in 2014 at the Analyst Conference, we put a $1 billion bogey out there. Obviously, it was a different environment in 2014 and we hit that. Last year, we didn't share with you, I don't think specifically, but a dramatically different market.

And the revenue from new products hung in very, very well as a percentage of total revenue.

I would put these 60 products in the remaining part of the year, an incremental revenue associated with those products, north of $0.25 billion I think, is a safe call depending on the product, the mix, where we are launching it, and the margin contribution on all of those is generally accretive..

That $0.25 billion would be within the first year of launch, is that a fair way to look at it?.

Yes, that is exactly right..

Okay. And then, my follow up is you mentioned based on your new strategy of focusing on only profitable areas where that might have an impact of like 5% on the revenue base.

And at the same time you are talking about direct sales and selling into some local competition? I'm assuming Martin, and maybe you can kind of clarify this, that whatever you're going to sell into these local players will more than offset that 5% revenue drop?.

Yeah. That's the plan. I can tell you one thing, it will sure as hell more than offset the margin drop and there is a timing issue.

We're in the process of weaving through that portfolio, we're engaged with that emerging customer set, I like where we are in the process in terms of laying the groundwork, staffing the teams, and we're having serious discussions with this emerging customer group in terms of what's the scope of their needs. This is a new opportunity for them as well.

We're building this business from the ground up. There's no rulebook on this, no one else is doing it like we plan to do it. I think the thing to keep in mind that this is a broader set of new customers in this space and we have every intension of having every one of them be a customer of Baker Hughes..

Right. Awesome, that's great and great to have you back on the conference call circuit..

Great to be here, thanks..

All right..

Our next question is from Angie Sedita with UBS. Your line is open..

Good morning, Angie..

Thanks. Good morning, guys. So, to go along with that prior question that Kurt just asked on the rationalizing of products cross certain countries and the 5% of revenues.

Can you talk about where you are in that process, is that still in the early stages or maybe even midway and talk about the timeline on that a little bit? And then, obviously there are some opportunities besides local oil service providers, can you talk about where you think, your other new channels could be for sales op?.

Yeah. So, timing-wise, Angie, I mean, we've just left home plate and I think, that's the best way to frame it. But as I've said, the interest levels, the type of dialogue, the enthusiasm confirms that we're on the right path.

And I'm sorry, the second part of your question?.

And then, as far as where you - how many other opportunities do you think you see in new sales channels besides the local oil service providers?.

Well, I think that pretty much sums up the - when we're talking about these new channels that is the category that I think they all fall underneath. But there's a whole different kind of mixture in that group.

And at the same time, let's remember that as I said in my prepared comments, our core business continues to be the biggest growth opportunity in so many ways, depending on what part of the world we're in.

The new products, the new organization, the new teams being able to peel out, if you will, some of the underperforming assets and double down on more of the stronger assets, we expect to see pretty strong uplift in the core business concurrent with these new market channels..

Perfect. Okay. Good color.

And then, as a unrelated follow up, maybe if you could talk a little bit about your thoughts on pressure pumping in frac regards to Baker and the industry overall and maybe walk us through, if you can, how much of Baker's equipment is cold stack versus warm stack, the CapEx to bring it back and just thoughts on overall frac attrition for the U.S.?.

Some of that's skating on the edge of competitive information, but let me put it this way. Of our total fleet, we probably have 20% active and then you could go through the various forms of cold stack, warm stack, hot stack.

The hot stack equipment could mobilize in days, you know the cold stacked, you're talking a lot longer period, months, very little money in terms of the hot stack to bring it back, but the cold stack you're well north of $150 million. So, it's a lot of capital and this is one of the issues that we have with that business..

And then thoughts on overall attrition in the industry? How much that come back fairly easy versus how much would need in total CapEx to come back?.

Well, that's a great question. It's hard to speculate Angie. If I look at the size and the scope of our franchise, our franchise in North America, I think it probably reflects the industry average. Given the cash-strapped nature of a lot of the independent players, they maybe cannibalizing a little bit more and not maintaining to the same level.

So, you could maybe make some of the numbers I gave you a little bit more bleak as an industry whole. But what it is to-date, does it really matter because there could be a lot more to come..

All right. Great. Thanks. I'll turn it over..

Our next question is from Sean Meakim with JPMorgan. Your line is open..

Hi, good morning..

Good morning, Sean..

So just not to focus too much on less than 5% of revenue. But I just was curious, we talked about businesses that don't meet your hurdles for profit and returns today..

Yeah..

Just curious if that contribution looked materially different during normalized activity, say 2013 or 2014?.

That's a good question and I can tell you that the decisions we're making today are based on the analysis work through different time periods. I don't want to be specific because I think that what we're doing is some really, really good rigorous evaluation.

But we looked at the businesses at the sharpest end of the stick under a variety of market conditions. We looked at a variety of risk factors. I mean a real portfolio of risk factors financially as well as operationally as well as commercially. We looked at collectability, we looked at cash flows.

We've got a real insight to these businesses that was the opportunity we had, while we were kind of in that purgatory time. So these are the decisions now that are on the - this is the information that is now on the table and this is the decision set that Belgacem and Derek, and Art and the team, all of us, Kimberly are working through..

So it'll be fair to say then as you think about normalized activity next cycle, having gone through the analysis, you'd expect that there's going to be, not necessarily just today, but in a normalized period of activity, improvement to the overall in terms of profitability and return..

That's the objective..

That's the idea..

That's exactly right. And remember as well, remember as well, Sean that the decisions to exit or to take something out is generally very small as I said in my comments, but it's converted into something with somebody else.

And that's going to not only drive our margins, it's going to drive the number one driver we have as a management team which is return on invested capital. Full stop..

Very helpful. And then I was hoping to touch on working capital. So, it looks like your DSOs got better in the quarter, but of course we had the big provisions for doubtful accounts.

I was hoping maybe Kimberly could give us a little more on the moving pieces and then in particular if you're seeing anything in terms of shifts in receivable collections from some of your large international customers?.

Yeah. So, as we said, obviously we had a bit moment both in receivables as well as in inventory and those were largely attributed to the write-offs or the reserves that we took on both of those. We did overall, we had nine days improvement of which seven days was essentially bad debt on the receivable side.

So we've continued to make progress on collecting the receivable. This is an area that we started last year being very focused on because at the end of the day, I would say a sale is not a sale if you don't collect on it, it's a gift and we're really not in the business of gifting..

Right..

So, we've really increased the discipline and having proactive discussions with our customers about collections. So, obviously there are many countries, especially when they're very dependent on oil that are struggling in today's environment.

We look at those, in some cases the future will look better when oil prices get better, in other cases we see that they might continue to have struggles.

And so, what I can say is even right down to myself is people are out talking to our customers and having a good sense about where they are and we obviously try to work with them as much as possible. But in some cases, we end up having to take provisions and our policy is based on a timeframe.

So, when we haven't been paid after a certain timeframe, then we take provisions on those receivables. So, not getting any easier right now, but I think we have a pretty good full-court pressed on it from our side. And even if we have taken a provision I should say, we will continue to work on collecting those funds.

So, it's not like it's been written off, we continue to work to collect..

Of course. Yeah, fair enough. Thanks a lot for the detail..

Our next question is from Jim Wicklund with Credit Suisse. Your line is open..

Good morning, guys..

Good morning, Jim..

Martin, I remember when the geo market structure was first being introduced at Baker Hughes and the comment was it was going to take a long time, measured in years, similar to what Schlumberger had gone through in adapting their geo market structure, you talk about the new design of your current structure and the implementation.

How long should it take to implement the change in management structure, design and population of the appropriate spots? How long should we expect it to be before you have the new organization, if you would, up and running?.

Well, let me look at my watch here. It's done. It's done. We've moved with....

Okay. So, we're not going to have to go through four years of every quarter gone is it done yet, it's already done. So, that's good..

It's done. Full stop, truly..

And....

The team moved with great speed. Sorry, didn't mean to interrupt you. The team moved with great speed. We knew who we wanted, who we didn't.

We knew where we wanted them, an enormous feeling of excitement with the organization, to stand things up in a different way, focus on winning and what we're winning with, to compete on our strengths, not defend our weaknesses and people are pretty charged up. So there's no timeframe on this one, we're locked and loaded..

Okay.

And Kimberly on that note, how long before - what quarter do you think we start to see the actual - not the cost savings you'll do the rest of this year, but sometime in 2017 and 2018 where we see the full benefit of that new management structure impacting the financial statements?.

Well, I'd like to think it's already starting, quite frankly with the streamlined organization that with my perspective on this is that we're making decisions very quickly. And we're able to push them down through the organization very quickly also.

This helps us with regards to standardization in some areas and obviously that helps get cost out as well as it helps us move faster and it takes risk out, right also if you can move faster and things are less complex. So I'd like to think that we're going to be seeing that sooner rather than later.

Obviously the full impact, we wouldn't expect to see this year, but I'm already seeing just how we're making decisions quicker and able to move up and down and through the organization a lot faster.

Even from my perspective, I now don't have to go out and try to change something with four different geo heads now I go straight to Belgacem or Art or we all get together, we make a decision and we can start communicating to the organization very quickly in a standardized fashion..

Okay. That's very helpful. And my follow-up, if I could. Over the last couple of years and going back probably two years or three years or four years now, Baker had gone on an expansion effort of building out infrastructure in international markets, so they could compete more on a variable cost basis against some of the bigger players.

And I just wonder now, if some of those might be considered stranded assets with the change in business model and is that true. And if so, I think you're pursuing an asset light model anyway. So it wouldn't be a surprise, but is that the case.

Are you going to have some redundant infrastructure in the international markets that you added just four years ago, five years ago?.

Well, yeah. Again, we're maintaining obviously a global footprint. But with that said, even within countries, we believe and we're seeing that there's some opportunities for optimization and obviously the business is strong also. So, we have been taking actions and shutting down facilities last year as well as this year.

We will continue to have some taking place in quarter three and then additionally what we'll be looking at next year is looking at some of the footprint around supply chain also.

So, I think this is one of those things that one should look at on a regular basis, but definitely right now considering the downturn and some of the changes that have taken place, really taking a close look at that.

And again, this goes to our analysis on return on invested capital also and really putting the rigor into, okay, how do we maximize the value of the assets that we have, where we want to exit, but then also how do we make sure that we have the least amount of bricks and motors to service the business in an optimal way..

Okay. Thank you all very much. I appreciate it..

Welcome Jim..

Our next question is from James West with Evercore. Your line is open..

Hey, good morning Martin, good morning Kimberly..

Good morning James..

Hi, James..

Martin, you talked about the new sales channels for direct sales.

And I'm curious, I guess, to one, have you had to add staff or is this a reallocation of staff? Two, is this the part of your sales force test or do they have the right tools to attack this new market? And how quickly can they ramp up the conversations with the new third-party competitors that are going to compete with your larger competitors in these markets where you are choosing to not be I guess, boots on the ground?.

I like the way these questions are starting to go because you can see, there is a learning curve for everybody in this industry as to the model that we are building here. There is a skill-set that's different from looking after the large NOC or an independent in North America. But that's a skill-set that we're growing our self.

I think it's going to be a competency that as this category emerges, we are going to have a competency that's very much oriented to this sector. It's a very technical but also very, very operations driven customer base.

Unlike a traditional customer James, like a Statoil or a Petrobras or a Devon, these are us, these are folks that have generally been in our industry. And so the conversations are much more about partnerships, it's about what their challenges are themselves in terms it could be anything around compliance, HSE, maintenance schedules.

So, you would see our sales people in this category be former types of heavy lifters within our operations. The timeframe on these is much longer than a transactional or tender type of thing. These are probably six month timeframes once the discussion start and these guys get our folks and get our equipment in place.

So I don't know if I answered your question or not, but that's kind of the color I can provide..

Okay. That's very helpful. And then, Martin obviously, you over the last couple of months have had, I'm sure not tons of customer conversations around, you're describing both a new strategy and then in more recent weeks probably with oil prices coming back down, has made perhaps some changed conversations or maybe not.

So I'm curious how those conversations on your strategy are going and also if there has been any change in the last couple of weeks with oil prices coming down in terms of your customer outlooks for the back half of this year?.

Okay. Let's take the first one, what are the customers saying. So you have a customer that says wait. You mean, I can have a Baker Hughes product, perhaps more opportunities to buy some of the best products and technology in my respective, the country I operate in or the basin I operate in. I mean customers love it.

As to the activity levels that I'm hearing from our customers, it's kind of as I said James, in the commentary. It depends where they are, it depends on the strength of the customer, the quality of their acreage and so forth.

I think, as Kimberly said internationally, it's a concerning environment, it's the cash flow, CapEx issue much more, it's a longer cycle nature of projects. I think until the view is more constructive, these guys are just going to - just sit tight. Now, I think the Middle East is maybe a little bit different than that.

It should be, at worst, flat to slightly up. And we have a large, very large OPEC customer there that just announced a very ambitious plan, to grow their production 30% by 2020. So, that aside, as far as North America, I don't subscribe to the whole full commentary that I think, gets thrown around a lot by your community.

And I think that the customers are going to need something that's coming and vectoring in on around $60 or high $50s just because certain costs on our side are going to go up.

And I just would feel a lot more confident that we see some stability well north of $55 before there is a lot of motivation for us to be bringing back capital into North America..

Okay. Very helpful. Thank you, Martin..

Okay. Thank you, everyone. We will take now one final question.

Bridgette?.

Thank you. And our next question is from Byron Pope with Tudor, Pickering, Holt. Your line is open..

Good morning..

Good morning, Byron..

Just got one question here, a lot of moving pieces in the Q2 results. And so, I'm just trying to think about base line operating margins for the three international regions in the context of the cost savings benefits that will kick-in in the back half of the year.

So, as it relates to the three international regions, is it reasonable to think that as we step through the back half of the year, that those operating margins for each of those three regions should trend higher sequentially as you move through the back half of the year just given the benefit of the cost reductions?.

Yeah. I mean, obviously we expect to continue to have some price pressures in some activities, but we have focused on the cost reductions. And therefore we do expect to see sequential improvement. In some parts of international markets it takes a bit longer to get costs out due especially if it involves people because of some of the labor processes.

And so, we'll continue to focus on that but the answer to your question is yes, we do expect to see sequential improvement in the margin as a result of cost savings..

Thanks, Kimberly..

Thank you. And I'm not showing any further questions. I'll now turn the call back over to Mr. Martin for closing remarks..

Thanks, Bridgette. Everybody listen before I sign off I want to leave you with a few key points to sum up what we discussed today. Number one, less than three months ago we made a series of very clear commitments to our stakeholders, including you.

And today's update strongly demonstrates that we're making very good progress on every one of them with decisiveness and speed.

Two, in the second quarter we made significant progress to both strengthen our competitive position and financial performance in our core full service business and we expect that that momentum to build as customer confidence in the market returns.

And three, while we see the market remaining challenging for the rest of this year and for the reasons that we outlined, with our strength and innovation, focus on operational performance and flexibility of our broader go to market's model, unique to Baker Hughes, makes us very well positioned for the opportunities that are available today and when the market around the world begins to recover.

So, with that folks I want to thank all of you for joining this morning. And Bridgette, you can now close the call..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may now disconnect. Everyone have a great day..