Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr.

Jud Bailey, Vice President of Investor Relations. Sir, you may begin..

Thank you. Good morning everyone, and welcome to the Baker Hughes second quarter 2021 earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Brian Worrell. 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..

Thank you, Jud. Good morning everyone and thanks for joining us. During the second quarter, we generated strong free cash flow, booked several key awards, and took a number of positive steps in our journey to grow our new energy businesses.

At a product company level, TPS, once again, delivered solid orders and operating income, while OFE booked a solid orders quarter and OFS continued to improve margins. As we look to the second half of 2021 and into 2022, we see continued signs of global economic recovery that should drive further demand growth for oil and natural gas.

Although, we recognize the risks presented by the variant strains of the COVID-19 virus, we believe that the oil price environment looks constructive, with demand recovering and operators largely maintaining spending discipline.

In the natural gas and LNG markets, fundamentals are equally as strong, if not better than oil, as a combination of outages and strong demand in Asia, Latin America, and Europe have driven third quarter LNG prices to levels not seen since 2015. Although, hot weather in Europe and the U.S.

has contributed to solid demand improvement and lower gas storage levels, structural growth continues unabated in Asia, with Chinese LNG imports up almost 30% in the first half of 2021 versus the first half of 2020.

Given the strong pace of current growth and the increasing demand for cleaner sources of energy, we maintain our positive long-term outlook for natural gas and LNG. Outside of traditional oil and gas, the momentum for cleaner energy projects continues to increase around the world.

In the U.S., Europe and Asia, various projects around wind, solar, and green and blue hydrogen are moving forward, as well as a number of carbon capture projects. For example, so far this year there have been 21 CCUS projects announced and in the early stages of development compared to 19 CCUS projects announced in 2020.

During the second quarter, we continued to build on a key pillar of our strategy to position for some of these new energy frontiers. Our team has moved quickly and decisively in selected areas to establish relationships and build a strong foundation for future commercial success.

Our approach has been one of collaboration and flexibility, which is reflected in the number of agreements we reached in the second quarter, ranging from early stage partnerships and MOUs to more immediate investments, commercial agreements, and tangible orders for Baker Hughes.

Most recently, we announced a collaboration with Samsung Engineering for low to zero-carbon projects utilizing hydrogen and CCUS technologies.

As part of the collaboration, we will work with Samsung Engineering to identify joint business development opportunities for Korean energy and industrial customers, domestically and abroad, to help reduce their emissions.

Baker Hughes will look to deploy compression and NovaLT gas turbine technology, as well as flexible pipes for transportation in hydrogen.

In CCUS, we will be providing reservoir studies, well construction services, flexible pipes, condition monitoring solutions, and certain auxiliary solutions, such as carbon dioxide compression and liquefaction for key industrial assets.

Another example of our early-stage partnerships is the collaboration agreement we reached with Bloom Energy on the potential commercialization and deployment of integrated, low-carbon power generation and hydrogen solutions.

This partnership will allow Baker Hughes to work with Bloom Energy across a number of areas, including integrated power solutions, integrated hydrogen solutions and other technical collaborations. Bloom Energy is a leading clean energy player with solid oxide fuel cell technology in natural gas and hydrogen and a growing electrolyzer presence.

Through this agreement, we will gain further insights into fuel cell and electrolyzer technologies, where Bloom has key offerings today, and explore how we can integrate and utilize our world-class gas turbine and compression technology alongside these solutions.

We were also very pleased to announce an MOU with Borg CO2, a Norwegian carbon capture and storage developer, to collaborate on a CCS project to serve as a hub for the decarbonization of industrial sites in the Viken region of Norway.

Borg’s industrial cluster approach provides a great opportunity for Baker Hughes to test and scale our wide ranging CCUS portfolio, including our Chilled Ammonia Process and our Compact Carbon Capture solution. This builds on our MOU with Horisont Energi for the Polaris carbon storage project in Norway announced last quarter.

During the quarter, we also announced a 15% investment in Electrochaea to expand Baker Hughes' CCUS portfolio with power-to-gas and energy storage solutions.

Baker Hughes will combine its post-combustion carbon capture technology with Electrochaea's bio-methanation technology to transform CO2 emissions into synthetic natural gas, a low-carbon fuel capable of being used across multiple industries.

Lastly, during the second quarter we were extremely pleased to finalize our collaboration with Air Products, a global leader in hydrogen, to develop next-generation hydrogen compression and accelerate the adoption of hydrogen as a zero-carbon fuel.

As part of the collaboration, Baker Hughes will provide Air Products with advanced hydrogen compression and gas turbine technology for global projects. This includes NovaLT 16 gas turbines and compression equipment for their net-zero hydrogen energy complex in Alberta, Canada.

We will also provide advanced compression technology, using our high pressure ratio compressors for the NEOM carbon-free hydrogen project in Saudi Arabia. Through these two projects with Air Products, Baker Hughes will provide equipment on the world’s largest blue and green hydrogen projects.

As you can see from all of these recent announcements, we feel confident in the momentum we are building in both the CCUS and hydrogen spaces, and believe that we have a differentiated technology offering that positions us as a leader in these areas. Now, I will give you an update on each of our segments.

In Oilfield Services, increases in activity levels became more broad-based during the second quarter and the outlook for the second half of the year continues to improve. Internationally, we have seen a pick up in activity across multiple regions over the last few months, including Latin America, Southeast Asia, and the North Sea.

Looking at the second half of the year, we expect stronger growth across a broader range of markets, most notably in the Middle East and Russia. Based on discussions with our customers, we expect international activity to gain momentum over the second half of the year and lay the foundation for growth in 2022.

In North America, strong second quarter growth was evenly distributed between our onshore and offshore business lines. Given the strength in oil prices and bid activity, we expect to see additional growth over the second half of the year.

While we expect to capitalize on the growing improvement in global activity levels, we are committed to being disciplined through this up-cycle, with a focus on profitability and returns.

This includes maintaining focus on our various cost reduction and operating efficiency initiatives, as well as navigating the inflation in supply chain costs, a situation that our team is managing well. As a result, OFS remains on track to achieve our goal of 20% EBITDA margins in the medium term. Moving to TPS.

The outlook continues to improve, driven by opportunities in LNG, onshore/offshore production, pumps and valves, and new energy initiatives. While the order outlook for TPS in 2021 should be roughly consistent with 2020, we are growing increasingly confident that a multiyear growth opportunity will begin to emerge in 2022.

Underpinning this framework is the strength that is developing in multiple parts of the TPS portfolio and the diversification of the business, which has commercial offerings in several end markets with high growth opportunities.

In LNG, we booked two awards during the second quarter with gas turbines and compressors for Train 7 at Nigeria LNG and liquefaction equipment for New Fortress Energy’s first FAST LNG project.

Following these two orders, we still expect one or two more LNG awards in 2021 and see a strong pipeline of opportunities that should produce a step-up in LNG activity in 2022 and beyond.

For the non-LNG segments of our TPS portfolio, we were pleased to book awards in the Middle East and Asia-Pacific in our Refinery and Pipeline and Gas Processing segments. TPS also secured a key industrial win with our NovaLT 12-megawatt gas turbine technology in the Middle East for a combined heat and power application.

We continue to see our NovaLT range of gas turbines gain further traction for lower megawatt industrial applications. For TPS Services, we are beginning to see real signs of recovery and remain optimistic about the outlook for 2021 and 2022.

In the second quarter, we experienced strong growth in service orders, which grew year-over-year due to the significant upgrade awards across multiple regions and for various applications including pipeline, offshore, and solutions to support customers' operational decarbonization efforts.

We also saw further improvements in transactional service orders as customers continued to increase spending.

In our contractual services business, TPS maintained strategic long-term relationships with LNG customers, achieving a major milestone by securing a six-year services contract extension in North America for a key producer, building on the success we saw in the first quarter.

Our TPS Services RPO now stands at close to $14.1 billion, which is up almost 10% year-over-year. Next, on Oilfield Equipment, we remain focused on rightsizing the business, improving profitability, and optimizing the portfolio in the face of what remains a challenged long-term offshore outlook.

While Brent prices are near $70 and FID activity is beginning to pick up, we continue to expect only a modest improvement in industry subsea tree awards in 2021, followed by some additional growth in 2022.

However, we continue to believe that it will be difficult to achieve and sustain 2019 order levels in the coming years, as the deepwater market becomes increasingly concentrated into low cost basins and upstream spending budgets for many larger operators are reallocated to other areas.

However, one deepwater area that we expect to benefit from this environment is Brazil, where the pre-salt reserves are viewed as attractive by a number of IOCs. This quarter, our Flexibles business signed an important frame agreement with Petrobras for a number of pre-and-post-salt fields offshore Brazil.

In the first half of 2021 and including the two contracts we were awarded in the first quarter, Petrobras has contracted Baker Hughes to provide up to 370 kilometers of flexible pipe. This is larger than the volume of flexible pipe awarded by Petrobras to Baker Hughes in 2019 and 2020 combined.

Finally, in Digital Solutions, we were pleased to see orders continue to recover, despite a challenging operating quarter. Year-over-year growth in orders was led by strong performances in our industrial and transportation end markets.

We saw continued traction in industrial end markets in the second quarter, which represented over 30% of DS second quarter orders, as we continue to grow our presence in this key area. During the quarter, DS continued to expand its industrial asset management presence with a number of wins across multiple end markets.

Bently Nevada secured a contract with a large corrugated paper manufacturing company for its condition monitoring and protection solutions to optimize production and reduce maintenance costs.

We were also pleased to see the recently acquired ARMS Reliability business secure some industrial asset management orders during the quarter, including a subscription for its OnePM software to be deployed by a global chemicals customer with initial rollout in China and Chile.

The deal will include software and consulting services to develop the customer's equipment reliability strategy library, driving the deployment of best-in-class asset reliability strategies and real-time alignment for its assets. We are also having success integrating some of our emissions management solutions with our Bently Nevada business.

This quarter, DS secured a Flare.IQ contract with bp, marking the first time Flare.IQ will be used in upstream oil and gas. This contract builds on our partnership with bp to measure and reduce their emissions across their global flaring operations.

Flare.IQ will be embedded into bp’s existing System 1 condition monitoring software from Bently Nevada, requiring no additional hardware for the customer.

Before I turn the call over to Brian, I would like to spend a few moments highlighting some of the achievements from our Corporate Responsibility Report that was published at the end of the second quarter.

This report provides an expanded view of our environmental, social, and governance performance and outlines our corporate strategy and commitments for a sustainable energy future. For 2020, we achieved several notable milestones in our CR Report. First, we continued to advance our reporting around sustainability and climate related disclosures.

This year, we included new reporting frameworks from the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures. Second, we again lowered our emissions footprint and expanded our emissions reporting.

We achieved a 15% reduction in our Scope 1 and 2 carbon emissions compared to 2019, and we reset our base year from 2012 to 2019 to account for corporate changes in line with the greenhouse gas protocol. Importantly, we also expanded our reporting of Scope 3 emissions to include new categories.

And third, we made significant improvements in HSE performance and engagement during 2020. We increased our number of perfect HSE days to 200, reduced our total recordable incident rate by 18%, and conducted more than 1 million HSE observations and leadership engagements globally.

Overall, Baker Hughes is successfully executing on its vision to become an energy technology company and to take energy forward, making it safer, cleaner, and more efficient for people and the planet.

Our Corporate Responsibility Report demonstrates our progress in many of these areas, while our second quarter results illustrate our progress towards our financial and strategic priorities.

We believe that Baker Hughes is uniquely positioned in the coming years to deliver sector leading free cash flow conversion, while also building one of the most compelling energy transition growth stories.

We will also continue to evaluate our portfolio in order to drive the best financial returns and create the most value for shareholders as the energy markets evolve. With that, I will turn the call over to Brian..

Thanks, Lorenzo. I will begin with the total company results and then move into the segment details. Orders for the quarter were $5.1 billion, up 12% sequentially driven by OFE, OFS, and TPS, partially offset by a decrease in Digital Solutions.

Year-over-year, orders were up 4%, driven by increases in TPS and Digital Solutions, partially offset by decreases in OFE and OFS. Remaining Performance Obligation was $23.8 billion, up 3% sequentially. Equipment RPO ended at $7.6 billion, up 1% sequentially and services RPO ended at $16.2 billion, up 3% sequentially.

Our total company book-to-bill ratio in the quarter was 1.0 and our equipment book-to-bill in the quarter was 0.9. Revenue for the quarter was $5.1 billion, up 8% sequentially, with increases in all four segments. Year-over-year, revenue was up 9%, driven by increases in TPS and DS, partially offset by decreases in OFE and OFS.

Operating income for the quarter was $194 million. Adjusted operating income was $333 million, which excludes $139 million of restructuring, separation, and other charges. The restructuring charges in the second quarter primarily relate to projects previously announced in 2020.

We expect to see restructuring and separation charges taper off through the second half of the year. Adjusted operating income was up 23% sequentially and $229 million year-over-year. Our adjusted operating income rate for the quarter was 6.5%, up 80 basis points sequentially. Year-over-year, our adjusted operating income rate was up 430 basis points.

Adjusted EBITDA in the quarter was $611 million, which excludes $139 million of restructuring, separation, and other charges. Adjusted EBITDA was up 9% sequentially and up 38% year-over-year. Corporate costs were $111 million in the quarter. For the third quarter, we expect corporate costs to be slightly down compared to second quarter levels.

Depreciation and amortization expense was $278 million in the quarter. For the third quarter, we expect D&A to be roughly flat sequentially. Net interest expense was $65 million. Net interest expense was down $9 million sequentially, primarily driven by one-time interest on tax credits.

Also slightly reducing interest expense in the second quarter was the repayment of our U.K. short dated commercial paper facility. For the third quarter, we expect interest expense to be roughly in line with first quarter levels. Income tax expense in the quarter was $143 million. GAAP loss per share was $0.08.

Included in GAAP loss per share is a non-recurring charge for a loss contingency related to certain tax matters. Also included are losses from the net change in fair value of our investment in C3.AI. These charges are recorded in other non-operating income. Adjusted earnings per share were $0.10. Turning to the cash flow statement.

Free cash flow in the quarter was $385 million. Free cash flow for the second quarter includes $62 million of cash payments related to restructuring and separation activities. We are, again, particularly pleased with our free cash flow performance in the second quarter following the strength we saw in the first quarter.

We have worked hard to improve our billing and cash collection process and have also updated the company’s incentive structure with an increased focus on free cash flow, and we are pleased to see the performance so far this year.

We have now generated $883 million of free cash flow in the first half of the year, which includes $170 million of cash restructuring and separation related payments.

For the total year, we believe that our free cash conversion from adjusted EBITDA should be around 50%, given the capital efficiency of our portfolio and the winding down of the restructuring and separation costs. Now, I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward.

In Oilfield Services, the team delivered a good quarter in an improving market environment. OFS revenue in the quarter was $2.4 billion, up 7% sequentially. International revenue was up 6% sequentially, led by increases in Asia-Pacific, Europe, and Latin America. North American revenue increased 11%, with solid growth in both our U.S.

land and offshore businesses. Operating income was $171 million, up 20% sequentially, and margin rate expanded 80 basis points to 7.3% due to higher volume and lower depreciation. While we continued to execute on our cost out program in the second quarter, this was partially offset by mix and cost inflation in some areas.

Although, we have moved quickly to pass inflation on to our customers, there is a timing lag relative to the increase in costs. As we look ahead to the third quarter, we expect to see strong sequential improvement in international activity and continued improvement in North America.

As a result, we expect sequential revenue growth for OFS in the third quarter to be similar to the second quarter. On the margin side, we expect the sequential increase in operating margin rate to solidly exceed the improvement in the second quarter due to more favorable mix and better cost recovery.

For the full year 2021, our industry outlook remains largely intact, with second half activity in North America modestly better than previously expected. Overall, we still expect our OFS revenue to be down slightly year-over-year, with North American revenues roughly flat and international revenue down mid single digits.

On the margin side, we continue to expect strong growth in operating income and margin rates on a year-over-year basis. Moving to Oilfield Equipment. Orders in the quarter were $681 million, down 3% year-over-year and up 97% sequentially.

Strong year-over-year growth in Subsea Services and Flexibles orders was offset by declines in SPC Projects and Subsea Production Systems. The sequential improvement in orders was driven by an increase in orders in SPS, along with several orders in Flexibles outside of Brazil.

Revenue was $637 million, down 8% year-over-year, primarily driven by declines in Subsea Drilling Systems, and the disposition of SPC Flow, partially offset by growth in Flexibles. Operating income was $28 million, which is up $42 million year-over-year.

This was driven by increased volumes in Flexibles, as well as productivity from our cost out programs. For the third quarter, we expect revenue to decrease sequentially driven by lower SPS and Flexibles backlog conversion. We expect operating margin rate in the low single digits.

For the full year 2021, we believe the offshore markets will remain challenged, as operators reassess their portfolios and project selection. We expect OFE revenue to be down double-digits on a year-over-year basis due to the lower order intake in 2020 and a likely continuation of a lower order environment in 2021.

Although, revenue is likely to be down in 2021, we expect to generate positive operating income as our cost out efforts should continue to offset the decline in volumes. Next, I will cover Turbomachinery. The team delivered another strong quarter with solid execution. Orders in the quarter were $1.5 billion, up 15% year-over-year.

Equipment orders were up 8% year-over-year. As Lorenzo mentioned, orders this quarter were supported by LNG awards for Nigeria LNG Train 7 and for New Fortress Energy’s FAST LNG project. We were also pleased to book a number of non-LNG awards, specifically in our Refinery and Petrochemical, and Industrial segments.

Service orders in the quarter were up 20% year-over-year and up 15% sequentially, primarily driven by increases in upgrades and transactional services. Revenue for the quarter was $1.6 billion, up 40% versus the prior year. Equipment revenue was up almost 90% year-over-year, as we continue to execute on our LNG and onshore/offshore production backlog.

Services revenue was up 14% versus the prior year. Operating income for TPS was $220 million, up 48% year-over-year, driven by higher volume and continued execution on cost productivity, partially offset by a higher equipment mix. Operating margin was 13.5%, up 70 basis points year-over-year.

We continue to be very pleased with the TPS margin rate improvement, particularly as our equipment revenue mix has increased from 36% to 48% year-over-year. For the third quarter, we expect revenue to increase modestly on a sequential basis based on expected equipment backlog conversion.

With this revenue outlook, we expect TPS margin rates to improve modestly on a sequential basis. For the full year 2021, we expect TPS to generate strong double-digit year-over-year revenue growth, driven by equipment backlog conversion and growth in TPS Services.

Despite a higher mix of equipment revenue, we now expect TPS margin rates to slightly improve year-over-year. Finally, in Digital Solutions, orders for the quarter were $540 million, up 16% year-over-year. We saw strong growth in orders in industrial and transportation, offset by declines in power.

Sequentially, orders were down 2% driven by declines in power and oil and gas, partially offset by improvements in transportation and industrial. Revenue for the quarter was $520 million, up 11% year-over-year, primarily driven by higher volumes in PPS and Waygate, offset by lower volume in Nexus Controls.

Sequentially, revenue was up 11%, driven by a higher order intake in the first quarter of 2021. Operating income for the quarter was $25 million, down 39% year-over-year, largely driven by costs related to a legacy software contract that we do not expect to repeat. Sequentially, operating income was up 3% driven by higher volume.

For the third quarter, we expect to see strong sequential revenue growth and operating margin rates back into the high single digits. For the full year 2021, we still expect modest growth in revenue on a year-over-year basis, primarily driven by a recovery in industrial end markets.

With lower margins in the first half of the year and higher volumes over the second half, we expect DS margin rates to be in the high single digits on a full year basis. Overall, we delivered a solid quarter and continued strong free cash flow.

While we faced challenges in our DS business, we are confident in our ability to execute as the rest of the year unfolds. With that, I will turn the call back over to Jud..

Thanks, Brian. Operator, let's open the call for questions..

Thank you. [Operator Instructions] Our first question comes from Chase Mulvehill with Bank of America..

Hey, good morning. Lorenzo, early in your prepared remarks, you talked about a looming new order growth cycle in the TPS segment that you get underway next year.

Could you maybe just take a minute and provide some details around kind of really what's driving this revised, more positive outlook for TPS, as we get into next year?.

Yeah. Definitely, Chase. And then as you mentioned, for TPS, we see several avenues of growth developing as we go forward. And really it's for a prolonged growth cycle of orders and EBITDA. As you look at the near term to medium term, it's really going to be LNG and the orders that we've seen, you can also see the small awards we book this year.

We still see some other, maybe one or two small projects being awarded this year. But as we go forward, the next two to three years, we see a step-up in LNG order opportunity has been highlighted by the increasing demand and also what we announced previously for the long-term outlook of LNG out to 2030.

Then, as you go longer term, also the next five to 10 years, we expect to see significant growth around our energy transition initiatives, most notably hydrogen CCUS, but also in areas like valves, integrated power as the clean energy ecosystem continues to evolve.

And I think if you look at recent announcements with our product that was given, we see some near term opportunities for hydrogen, and those will actually be additional awards over the course of the next two to four years as a fast way, but continuing through the rest of the decade.

And CCUS, you looked at our announcement with Borg and Horisont Energi, and we're in a number of active collaborations with our customers across several geographies of increasing opportunities around CCUS. And lastly, our Service business, it's got solid growth potential for the next 10 years.

When you look at the installed base, as well as the upgrade opportunities, I think, with LNG growing about -- our installed base drove by about 30% by 2025 with the increasing tonnage of LNG.

And then you look also going forward with what we announced our TPS Services RPO now standing at $14.1 billion, which is up from $13 billion a year ago, so good signs of continued growth on the services side..

Awesome. Awesome. Appreciate the additional color there. Seems like the TPS has got a nice future ahead of it. Maybe if I can transition in over to buybacks and ask Brian about buybacks. In our numbers you have in excess of $1.3 billion of free cash flow after dividend through the end of next year.

Your net debt to EBITDA is going to be sub one at the end of next quarter.

So, Brian, I kind of asked you the question, why not do a buyback to help partially offset the continued drag on your stock from GE continuing to kind of selldown their stake?.

Yeah. Hi, Chase. Yeah. Look, we are pleased with our free cash flow generation this year and the outlook going forward. As I mentioned, the teams have done a great job in changing a lot of processes. And so, look, our view really on capital allocation hasn't really changed.

But as you pointed out, the pace of our free cash flow is improving, particularly as restructuring is winding down over the rest of this year. So that's a big capital allocation action that won't be repeating there. So, it leaves us, I think, in a position to have quite a bit more optionality.

We're primarily focused on investing in areas where we see the ability to grow offerings and new frontiers like energy transition and digital, as well as some interesting places in industrial technologies. And you've seen some of those examples, like C3.AI, compact carbon capture, and more recently, ARMS Reliability.

And look, I'd say, beyond some small scale acquisitions and investments in some of the new energy frontiers, share repurchases can certainly be an attractive piece of the capital allocation portfolio view and the pace that we're generating free cash flow certainly gives us more optionality to evaluate that and continue to look at ways to return -- value to shareholders.

So, look, we will keep you guys updated as we're evaluating that. And it's good to have this flexibility..

All right. Thanks, Brian. Look forward to hear more about that. I'll turn it back over..

Thank you. Our next question comes from James West with Evercore ISI..

Hey. Good morning, Lorenzo, Brian and Jud..

Hi, James..

Hi, James..

So, Lorenzo, you highlighted it a couple of times in your prepared comments and also to the last question, but the service orders for TPS up nicely year-over-year.

Could you maybe expand a bit more on that, what that means for the margin profile of that business, what that's signaling for the future of TPS? And I agree with what Chase -- the commentary has made, that there's a bright future here, and really want to kind of understand exactly what we're looking at..

Yeah. James, so, I'll start off with the outlook on the activity side, and then I'll let Brian jump in on the margin side, because we're definitely seeing improvements across the whole TPS service business. And it's really driven by some of the positive macro backdrop.

Some of the improving outlook we're seeing with customers reengaging with us on service equipment across our installed base, following 2020, there was disrupted, of course.

And now we're seeing strong growth in upgrades, with recovery across regions and various applications, pipeline, offshore, solutions also to support our customers on the operational decarbonization efforts with the upgrades that we can provide them.

And you saw that double-digit growth in transactional services in the quarter as customers are returning to normalize spending levels. And also, we've got a solid CSA revenue stream that's been resilient.

So, overall, we think we could be reasonably back closer to a 2019 type level in 2022, with the continued upgrade and transactional activity continuing strongly as we go forward..

Yeah. And James, on the margin front, I'd say, it's certainly a positive backdrop as service grows for TPS overall. And Rod and the team are doing a great job in driving productivity in the services portfolio. And as Lorenzo mentioned the installed base is growing particularly in LNG.

So, I think that is all a pretty positive backdrop for what the business can deliver..

Sure. Sure. Right. Okay. Well, you guys made a lot of moves in new energies this quarter. You have been doing that for several years now, revisiting the portfolio. One of the things that caught my eye that we haven't really discussed is the Electrochaea investment, the CCUS plus bio-methane technologies. I'd love to hear a bit more about that.

And what the outlook -- what the investment is, what the outlook is? What's going on with that transaction?.

Yeah. James, I think it's part of our strategy, as we said, to develop our portfolio for energy transition. And we're very pleased with the Electrochaea investment, a 15% investment, which really allows us to expand our whole portfolio around power-to-gas and energy storage solutions. We'll have a seat on the board of Electrochaea.

And we're really going to combine our post-combustion carbon capture technology with Electrochaea bio-methanation technology to transform CO2 emissions into synthetic natural gas. And this is maybe an area that we haven't discussed much before, but we really see synthetic natural gas as being applicable to multiple industries.

And Electrochaea's technology allows CO2 recycling into grid quality, low-carbon synthetic natural gas, which helps to drive decarbonization and hub for base sectors such as transportation and heating. So, it's going to be a great task, suite of our capability that we're providing.

And again, we see this being applicable to power and industrial plants and again, it's increasing our portfolio of applications..

Got it. Thanks, Lorenzo. Thanks, Brian..

Thank you. Our next question comes from Scott Gruber with Citigroup..

Yes. Good morning..

Hey, Scott..

Good morning, Scott..

Brian, one for you on inflation. You mentioned that you're pushing through price increases to offset inflation. There are a couple of questions.

One, are customers feeling -- willing to accept the price increases across the portfolio? Are there some puts and takes we should be thinking about? And B, based upon the time lag, when the price increases catch up with inflation that we've seen thus far..

Yeah. Scott, look, I'd love to tell you that customers -- all customers say, yeah, sure, go ahead and pass on price increases. But look, they clearly understand what's going on in the commodity markets. We have some contractual arrangements that allow us to pass those along and we're having discussions in places where it's not so clear.

And look, we have seen some traction there and started to see some pricing power come back across the portfolio, not everywhere, but we're certainly seeing that capability. We did get some price in the second quarter, but as I'd mentioned, it takes a little while longer for some of that to kick-in versus the inputs that are coming in.

So, look, I'd say over the course of this year, we'll continue to push that and try to make sure that the price increases are offsetting as much of the inflation as possible. The one thing I would point out too, is that, look, we've got a global supply chain. We've got pretty good contractual arrangements in place.

And it's been working with our suppliers as we started to see this coming through to mute some of the impact. This year, obviously, we have some hedges in place as well, and look, really focused on looking at 2022 and making sure we're securing things for next year as well.

So, I'd say, it's great collaboration with the sourcing and the commercial teams in working through this, but feel good about the actions that we've taken..

Got it.

And then, based upon your efforts there and your activity outlook, how you're thinking about the timing of when you could get back to the 20% EBITDA margin in OFS?.

Yeah. Look, I -- listen, Maria Claudia and the team are continuing to do a great job in executing on all the restructuring and cost out and transformation initiatives that the team has been driving there. And you've seen that come through in the results here in the first half with the margin rate improvements that the team has posted.

They're working hard to offset some of this inflation, like we talked about here. I'd say, with the backdrop we see in volume for the second half of this year into 2022, I could certainly see us hitting that 20% rate sometime next year in any given quarter and be really well set up, as we execute in 2022 and exit the year.

But I think that the team is doing a really good job of managing cost and driving productivity. And I think, we're still on a really good trajectory here..

Got it. Appreciate it. Brian, thank you..

All right. Great. Thanks, Scott..

Thank you. Our next question comes from David Anderson with Barclays..

Hey, good morning. It's sort of follow-up on Scott's question there, on that 20% margin.

So, maybe not timing, but maybe how do you get there? I mean, is it pricing you're talking about operating leverage, or is there a component of mix here is required to get to that 20%? You've talked about a couple of integrated drilling and well services contracts, which I assume are more accretive than traditional services.

So, is that another component of care, maybe just kind of talk about that mix of what that has to do? What do we have to see to get to that 20%?.

Yeah. David, look, we're not counting on a significant mix shift to be able to deliver that level of margin, sure. If some of the product lines that have higher margin rates get more tailwinds that will certainly help, but we've taken the approach of driving improvement across the entire business. We've done a lot around remote operations.

We've multi-skilled the workforce to be able to deploy them in different ways, and more effectively, we've made massive changes inside the supply chain and in our service shops. And you've seen us take a lot of costs out with the restructuring and so a lot of those process improvements and cost out are going to continue.

And that's really what's going to drive the margin rate. The actions have already been launched. And the team is certainly executing on those. Now, the pricing that we were talking about here is really to offset some of the inflation that we're seeing. So, we're not counting on any pricing increases to drive that margin improvement.

But if we can get those pricing increases to stick and hold inflation levels down, I think that could provide some upside. So, it's been a fundamental change in how that business is operating, how Maria Claudia and the team are leading it, and how we're allocating capital.

And that's really what's driving the improvement here, and we're making it fundamental and long-lasting..

Great. Thanks for the insight there, Brian. Kind of a different question. Lorenzo, sort of a bigger picture. We're starting to get more generalist investors back into the space here. People are starting to look and people starting to buy into, the cycle start to pickup. Now, Baker Hughes has a very different business portfolio of than your peers.

So, I was just wondering, maybe you could just talk about kind of over the next two to three years, maybe helping people understand what parts of your business do you think are going to have more pronounced growth and margin expansion.

Really, I guess, what I'm asking, what parts of the business do you expect outperform over the next two, three years as the cycle accelerates? I guess, I'm just sort of thinking about your four segments and how you sort of see them kind of progressing here..

Yeah. David, if you look at it from a macro picture, and again, you look to the response given on the TPS cycle, that's really taking place here with the opportunity of LNG in the next few years, also the energy transition opportunities.

And in our last call, we mentioned the addressable market of hydrogen by 2040 being $25 billion to $30 billion and CCUS being $35 billion to $40 billion for Baker Hughes. So, clearly as you look at the macro picture, the long-term growth prospects of our TPS business look very solid.

Also in the short-term, with the continued rebound in some of the upstream and also the production side, Oilfield Services continuing to perform well. So, short-term, you'll see that pickup and longer term the TPS business continues to have a good future..

Great. Thank you very much..

Thank you. Our next question comes from Ian Macpherson with Piper Sandler..

Thanks. Good morning..

Hi, Ian..

Brian, you -- hi, good morning. Brian, you gave us the 50% free cash flow conversion from EBITDA for this year, and then that you are overcoming the cash restructuring charges headwind. But also on the other hand, year-to-date, you've had favorable working capital.

So, when we net those out or try to normalize for those looking into next year, is 50% free cash flow conversion from EBITDA a sustainable area, or would you point higher or lower than that when we normalize working capital and remove -- substantially remove the cash restructuring items?.

Yeah. Ian, as you know, it's really early to predict exactly what's going to happen next year. But what I would say is our goal, and what I think the capability of this portfolio is to generate free cash flow conversion at 50% level or higher.

I think if you look at next year, probably the biggest variable that -- you probably know that you pointed out is really working capital, so as we're early in the cycle for OFS and the working capital intensity will really be driven by that pace of growth.

And then, if I step back and look at some of the other factors for next year, look, we'd expect to see EBITDA continue to grow on higher revenues. And the continued focus around productivity, CapEx in absolute terms will be higher, but as a percent of revenue should be in the same range as it's been the last couple of years in that 3.5% to 4% range.

Taxes will likely be higher, because of the refunds that we've gotten this year. And then, you pointed out restructuring and separation charges will go away. And so that's roughly $200 million, which should contribute to material improvement in free cash flow.

So, that 50% level is certainly what this portfolio is capable of and we're going to keep driving it higher..

Understood. Thanks, Brian. Lorenzo, I was going to ask a separate follow-up regarding portfolio optimization. I would imagine that we've seen some more OFS, smaller OFS mergers and transactions recently.

And I wonder if the improvement in oilfield fundamentals has opened a window wider for further -- any further disposals within the OFS or OFE portfolio that might be more achievable now than they looked a few quarters ago..

Yeah. Ian, I think, our focus is on creating shareholder value and what's best for our shareholders longer term. So, we're running the company today, really to execute on the three pillars of our strategy, transform the core, invest for growth and also new frontiers.

And we're going to be looking at margin accretion and continuing to allocate capital accordingly. I think as we look forward, it's going to require from an energy transition perspective, scale, brought an extensive customer reach and sizable R&D. So, technology spending going into that. We think our current footprint provides for that.

I think when you look at overall, it's becoming apparent that the new growth -- energy growth opportunities in TPS are significant where -- when you look at the OFC business, it's a more of a mature business..

Certainly. Well, I'll stay tuned to that. Thank you both for all the insights today..

Thank you. Our next question comes from Marc Bianchi with Cowen. .

Thank you. I first want to ask about OFS, the outlook in 2022, there's -- one of your peers reported the other day and said that they expect mid-teens compound annual growth over 2022 and 2023. I'm just curious, how you're looking at that outlook.

And what you think specifically in 2022?.

Yeah. Just -- maybe let's start off with the international outlook. And again, we do see a solid step-up in growth internationally over the second half of the year. So far this year, we've seen strong recovery in Latin America and North Sea, Southeast Asia.

The Middle East has somewhat lagged, but we expect incremental, stronger activity over the course of the second half and into 2022, as well as in Russia being bigger contributors to the second half as well. So, we've been somewhat more conservative in forecasting international activity.

I think, you know, that it really depends on how some of the regions come back. Right now, we think growth in the second half of the year could be in the high single digits or low double-digits on a year-over-year basis. And we expect that momentum to continue into 2022, with solid growth opportunities.

North America, we generally expect the rig count to continue to trend the level higher over the second half, maybe adding an additional 50 rigs also by the end of the year. So that would imply a modest improvement in the first quarter and fourth quarter.

When you look at 2022, again, we anticipate solid growth with the prices holding at the range they are now.

But similar to this year, we expect some of the privates to be active and at these prices, but some of the public E&Ps also will continue to be only increasing their spending mostly, if they continue to adjust some of their operating cash flow to some of the other areas of capital spending..

Got it. Thanks for that Lorenzo. And shifting over to -- you have these two awards with Air Products and they've got very large projects that they're pursuing. But they don't come on stream until I guess neon is 25. And this thing in Canada, the blue hydrogen is 24.

Do those projects need to be up and running for the flood gates to kind of open on these types of awards? Or could we see more from Air Products for Baker Hughes over the near-term?.

I think it's fair to say that we're seeing a number of discussions with customers and partners continuing to gain momentum. It's great to have achieved the announcement with Air Products. And again, when you look at those orders combating, we expect it to be in the near-term.

And I think that, again, as these projects start to get on the go, you'll see others also follow as well. So, we're focused on enabling the technology. And with Air Products, we're going to be on the largest blue and green hydrogen projects that are out there at the moment, providing our best technology..

Yeah. Marc, and I would just add, actually in terms of bid activity and inquiries with customers over the last six months, they're up 2X what we were seeing in the fourth quarter of last year. So, activity levels have definitely increased. I expect to continue to see that to increase.

And look, exactly when they'll turn into orders, it's a bit tough to say right now, but there's a lot going on..

Got it. Thanks very much guys..

Thanks Marc..

Thank you..

Our next question comes from Arun Jayaram with JP Morgan..

Yeah. Good morning. Lorenzo, a number of announcements on the ET front during the quarter. I was wondering if you could maybe talk about some of the competitive in CCS, your views on Baker's position.

And maybe just as a follow-up, could you talk a little bit about the scope of the Borg project? And how do these initial projects in CCS lineup? Could these be accretive to your margins, assuming good execution?.

Yeah. Personally, I think -- I feel very good about the positioning that we're developing around CCUS. And if you look at it from a value chain perspective, we really go across the board of CCUS from the initial identification of where CO2 can be sequestered all the way to the transportation and also the compression capability.

We've also developed multiple solutions for CCUS, you've seen in the past. We've got the Chilled Ammonia Process. We've got the mixed salt. We've also got compact carbon capture. So, we're providing the different solutions, because there's no one solution that's going to be for everybody.

And like in LNG, we want to be able to provide capabilities for small, medium and large scale as they get undertaken. Specifically on Borg, the Borg MOU announcement allows us again to really play at the forefront of capturing and storing up to 650,000 tons of CO2 emissions annually. And they're going to be utilizing our technology to do that.

And we're also going to be able to see an industrial cluster approach. That's a great opportunity for us, because we think those industrial clusters are going to continue to imagine elsewhere in the world as well. So, Norway is at the forefront there and we're at the forefront with both CO2 and also Norwegian and likes..

Great. And just my follow-up is just on Digital. It sounds like just the margin miss -- this quarter is driven by a one-time legacy contract.

And so, maybe you could outline, do you still feel good about trending towards perhaps get low double-digit margins as we go through the year on Digital?.

Yeah. When we -- we do feel good about the volume recovery we're seeing in quite a few of the end markets, particularly on the industrial side of DS. And we were disappointed in the margin rate, which was really a function of project delays for this legacy software contract.

And just to clarify, this legacy software contract goes back several years and isn't associated with our C3.AI partnership. And so, this resulted in some higher cost and not revenue here in the quarter. And that was the biggest driver.

I will note there was a little bit of incremental costs we had in the R&D front in DS this quarter related to some strategic areas like the ARMS Reliability acquisition that we did earlier in the year. And some -- the acceleration of some work we were doing around emissions management.

And I'd say, looking ahead into third and fourth quarters, I don't expect the overall level of costs in DS to be at the levels that you saw here and the second quarter.

So, we do think the business is going to be back on track to generate higher margins, with the volume growth that we're seeing and cost levels back to lower levels to support those higher margin rates..

Great. Thank you..

Thanks Arun..

Our next question comes from Stephen Gengaro with Stifel..

Thanks. Good morning, gentlemen..

Hi, Steve..

Hi, Steve..

I was curious, you've talked a lot about -- you've done a tremendous amount on the energy transition front.

And I was curious, if you could talk more about the collaborative relationship you have with Bloom?.

Sure, Stephen. We're very pleased to be collaborating with Bloom on a number of customer engagements, which really are going to come to the forefront of the course of the next two to three years on really looking at the way in which we can provide integrated power solutions and also the way in which we can provide integrated hydrogen solutions.

So, I think you may know that Bloom Energy is a leading player in solid oxide fuel cells, and really it enables us to provide our technology of lightweight gas turbine technology within their proficient solid oxide fuel cells to really enable integrated power solutions for customers that are looking to be independent of the grid.

We've got the NovaLT gas turbine. So, we're looking at opportunities of combining there. And then on the integrated hydrogen solutions, they've got increasing portfolio on electrolyzer cells that can produce a 100% clean hydrogen.

And with our compression technology, we think we can provide a really efficient production and also transport of hydrogen and usage. Again, with our a 100% NovaLT gas turbines that can run on hydrogen and our compression capability. So, it's an evolving space there, and we think a lot of good opportunities as the energy transition continues..

Very good. Thank you..

Our next question comes from Connor Lynagh with Morgan Stanley..

Yeah. Thank you. I was wondering, if you could just discuss some of the trends you're seeing in OFE, obviously nice inflection in orders in the quarter here.

Based on that and what you're seeing right now, obviously, you're anticipating a step down in the third quarter, but would you say that the direction of travel beyond that seems to be higher? And I'm wondering, if you could just characterize the big end markets within that business?.

Yeah. If you look at -- again, OFE and we've mentioned this before, we continue to see the outlook for the offshore segments challenged. We do expect modest improvement in the industry of awards during 2021 and some additional growth in 2022, but we still think it's going to be difficult from a tree perspective to get back to the 2019 order levels.

We are seeing some strength on the composite Flexibles as you saw from the Petrobras frame agreement. Also some international [indiscernible] business, which is good and Subsea Services is coming back. But again, if you look at -- overall, I think it's a subdued growth trajectory for OFE..

Understood. At the same time, you guys have obviously taken a lot of action on costs.

So, is there a sort of target that we should think of similar to the 20% EBITDA margin target in OFS? How do you think this business's earnings power should be in this lower activity environment?.

Yeah. Connor, OFE is done a great job in terms of taking cost out, restructuring their infrastructure to deal with the lower industry volume that we're seeing. I'd say just given the mix of the portfolio and where things are, we talked about the business at these volume levels being high single digits from an operating income rate standpoint.

I think, if you roll forward, you see some incremental growth come in Flexibles, some other things beyond tree growth around manifolds and the onshore business doing better.

You could get higher than that, but right now, based on the trajectory of the industry, right now, I'd say, in the near term -- near to medium term, expect high single digit operating income rate..

Okay. That's helpful. Thank you..

Ladies and gentlemen, this concludes the Q&A portion of today's conference. I'd like to turn the call back over to Lorenzo for any closing remarks..

Yeah. Thank you very much, and thanks to all of you for joining our earnings call today. I just wanted to leave you with some closing thoughts. Very pleased with the second quarter results. We generated another quarter of strong free cash flow and so good levels of performance across a number of our product companies.

We also see a multiyear growth opportunity developing in our TPS business, driven by the LNG and new energy initiative. As we continue to execute on our strategy of becoming an energy technology company, we'll maintain our discipline and prioritize free cash flow and return.

We'll also continue to evaluate our portfolio in order to drive the best financial results and create the most value for our shareholders as the energy markets evolve. So, thanks for taking the time. Look forward to speaking to you again soon. And operator, you may close the call..

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