Good day, ladies and gentlemen, and welcome to the Baker Hughes Company Third Quarter 2021 Earnings 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 would now like to introduce your host for today's conference, Mr. Jud Bailey, Vice President, Investor Relations. Sir, you may begin..

Thank you. Good morning, everyone, and welcome to the Baker Hughes Third Quarter 2021 Earnings Conference Call. Here with me are 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 some 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..

Hurricane Ida, COVID related impacts, supply chain constraints, and higher input costs in our production chemicals business. Despite these challenges, we remain focused on growing our margin rate through a combination of cost reduction and efficiency initiative, as well as pricing increases to offset higher cost.

As a result, we remain committed to driving OFS EBITDA margins to 20% level over 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 initiative. We still expect the order outlook for TPS in 2021 to be roughly consistent with 2020.

Importantly, the case for a multiyear growth opportunity beginning next year continues to improve. While we expect the majority of the order growth in TPS to be driven by LNG over the next couple of years, we anticipate that we will start to book more meaningful equipment orders related to hydrogen and CCUs in 2022.

In LNG, while we did not book any awards during the fourth quarter, we still expect to book 1 or 2 additional awards by the end of 2021.

Based on the pace of discussions with multiple customers and the positive fundamentals in the global gas markets, we still see the opportunity for an additional 100 to a 150 MTPA of awards over the next 2-3 years with a bias towards the upper end of that range.

For the non LNG segments of our TPS portfolio, we see multiple opportunities for continued growth. Most notably, our onshore-offshore production segment is poised to benefit from a strong project pipeline for FPSO awards, driven by a number of opportunities in Latin America.

In the third quarter, we were pleased to book 2 largest TSO awards in Brazil for power generation and compression equipment. Building on our recent success earlier in 2021 and in 2020. We have now booked 8 FPSO and offshore topside equipment awards so far in 2021, which follows 5 awards in 2020.

We also continue to see success in the industrial market, where TPS recently secured wins for our NovaLT industrial gas turbine technology in India and China. We are deploying our NovaLT turbines for power generation across several industrial segments, including electronics, ammonia production, and pharmaceutical manufacturing.

In carbon capture, TPS was selected to supply booster and export centrifugal pumps to the Northern Lights CO2 transport and storage project in Norway. This order highlights our CO2 pump injection capabilities and is the first CCUS award for our pumps product line.

For TPS services, we saw continued signs of recovery during the quarter with strong growth across transactional and contractual services, as well as our upgrade business. And we remain optimistic about the outlook for 2022.

Next on all field equipment, we remain focused on rightsizing the business, improving profitability, and optimizing the portfolio in the face of what remains an unclear long-term offshore outlook. Trends in our OFSE business remains somewhat mixed, despite Brent prices around $80.

We continue to see a strong pipeline of flexible or the opportunities, as well as improving market conditions in our international wellheads and services business. For industry-wide subsea trees, we continue to expect modest improvement in 2021, followed by some additional growth in 2022.

During the third quarter, we were pleased to be awarded a contract by Chevron Australia to deliver subsea compression manifold technology for the Jansz-Io Compression project in offshore Western Australia. This important win builds on our previous success for subsea equipment orders for Chevron 's Gorgon natural gas facility.

We recently completed the merger of our Subsea Drilling Systems business with MHWirth. We own 50% of the new, fully independent Company now called HMH. The merger is an excellent example of how we are transforming the core to ensure that we are making the right strategic decisions for Baker Hughes.

By combining the 2 businesses, HMH will have more capability and a more integrated offering. Customers are incredibly complementary about this enhanced model, and we look forward to seeing HMH succeed in the future. Finally, in digital solutions, we saw multiple challenges during the quarter.

Electrical component shortages, largely around semiconductors, boards, and displays, led to lower revenue conversion, as well as broader supply chain constraints that drove pressure in the quarter. We recognized that we have work to do in digital solutions to drive operating margins back to an acceptable level.

We are implementing changes across the business to drive operational improvements and ensure that we have the right team in place to take this business back to where it needs to be. Core to our strategy and DS is building out our industrial asset management platform.

This area of focus encompasses a range of digital services and products around asset performance, asset inspection, and emissions management.

As the world strive towards a net 0 target in the coming decades, enterprise level industrial asset management capabilities will be a key driver by enabling better operating efficiency, lowering energy consumption, and reducing emissions across multiple industries.

Today, we have a strong position in monitoring critical industrial assets across a range of different facilities. The next steps in our strategy will be expanding our presence to non-critical assets and developing software capabilities to allow us to cover the entire balance supply.

During the quarter, continued to expand its industrial asset management presence with a number of wins across multiple end markets. We were pleased to announce the strategic framework alliance agreement with SABIC for integrated asset performance management services.

This 5-year alliance includes the delivery of Bentley Nevada plant wide condition monitoring and machine asset protection services across over 1,200 assets at over 16 SABIC sites in Saudi Arabia.

The partnership with SABIC will deliver localized maintenance support and access to Bentley Nevada's growing suite of sensors, hardware, software, and engineering services, including the expansive, now Cloud enabled System 1 platform.

In Latin America, Bentley Nevada team secured a contract with a major Company to apply System One and condition monitoring solutions to 2 hydroelectric plants in a wind farm.

System One will deliver proactive asset management to more than 600 megawatts of power between the free power generation facilities, enabling safer and more reliable renewable energy.

Despite a more challenging quarter in parts of our portfolio, 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 are committed to evolving our Company with the energy markets while maintaining our prioritization on free cash flow, returns above our cost of capital, and return in capital to our shareholders. With that, I'll turn the call over to Brian..

Thanks, Lorenzo. I'll begin with the total Company result and then move into the segment details. Orders for the quarter were $5.4 billion, up 6% sequentially driven by TPS, OFS, and OFE, partially offset by a decrease in digital solutions. Year-over-year orders were up 5% driven by increases in OFE, OFS and DS, partially offset by a decrease in TPS.

Re main ing performance obligation was $23.5 billion down 1% sequentially. Equipment IPO ended at $7.6 billion, down 1% sequentially, and services IPO ended at $15.9 billion down 2% sequentially. The reduction in IPO in the quarter was primarily driven by foreign exchange movements.

Our total Company book-to-bill ratio in the quarter was 1.1 and our equipment book-to-bill in the quarter was 1.1. Revenue for the quarter was 5.1 billion, down 1% sequentially, driven by declines in TPS, OFE, and DS partially offset by an increase in OFS.

Year-over-year, revenue was up 1% driven by increases in OFS, TPS and DS, partially offset by a decrease in OFE. Operating income for the quarter was $378 million. Adjusted operating income was $402 million, which excludes $24 million of restructuring, separation, and other charges.

Adjusted operating income was up 21% sequentially and 72% year-over-year. Our adjusted operating income rate for the quarter was 7.9%, up 140 basis points sequentially, year-over-year, our adjusted operating income rate was up 330 basis points.

Adjusted EBITDA in the quarter was $664 million, which excludes $24 million of restructuring, separation, and other charges. Adjusted EBITDA was up 9% sequentially and up 21% year-over-year. Corporate costs were $105 million in the quarter. For the fourth quarter, we expect corporate costs to be flat compared to third quarter levels.

Depreciation and amortization expense was $262 million in the quarter. For the fourth quarter, we expect DNA to be roughly flat, sequentially. Net interest expense was $67 million. Income tax expense in the quarter was $193 million. GAAP earnings per share was $0.01.

Included in GAAP earnings per share 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 $0.16. Turning to the cash flow statement, free cash flow in the quarter was $305 million.

Free cash flow for the third quarter includes $40 million of cash payments related to restructuring and separation activities. We are again particularly pleased with our free cash flow performance in the third quarter following the strength we saw in the first half of 2021.

We have now generated almost $1.2 billion of free cash flow in the first three quarters of this year, which includes $210 million of cash restructuring and separation-related payments. For the total year 2021, we now believe that our free cash conversion from adjusted EBITDA will exceed 50%.

We are pleased to see the performance this year as we have worked hard to improve our working capital and cash processes. Our diverse portfolio of capital-light businesses and strong free cash flow performance provides the Company with flexibility and optionality when it comes to our broader capital allocation strategy.

Last year, this flexibility allowed us to be the only Company in our core peer group to maintain its dividend during the COVID crisis.

This year, our recovery from the industry downturn, coupled with our strong cash performance, enabled us to authorize a $2 billion share repurchase in July, which we began to execute on in early September and the third quarter, we repurchased 4.4 million Baker Hughes Class A shares for $106 million at an average price of just over $24 per share.

Going forward, our strong balance sheet and strong free cash flow capability provide us with attractive optionality to continue to return cash to shareholders and also invest in offerings related to energy transition.

More specifically, in addition to paying our dividend, we intend to repurchase shares on a consistent basis and deploy capital in the tuck-in M&A and technology investments on an opportunistic basis. Now, I will walk you through the segment results in more detail and give you our thoughts on the outlook going forward.

Starting with Oilfield Services, revenue in the quarter was $2.4 billion up 3% sequentially. International revenue was up 2% sequentially, led by increases in Latin America and the Middle East, offset by declines in Asia-Pacific and the North Sea.

North American revenue increased 3% with solid growth in North America land offset by declines in North America offshore due to Hurricane Ida disruptions. Operating income was $190 million, up 11% sequentially. OFS operating margin rates expanded 60 basis points to 7.9%, due to higher volume and lower depreciation and amortization.

Overall, OFS results were below our expectations in the third quarter due to several factors, but most notably Hurricane Ida and supply chain related issues that impacted both revenues and margins.

Our chemicals business with the most heavily affected from these issues, with some pricing increases offset by escalating input, freight, and logistics costs. As we look ahead into the fourth quarter, we expect to see solid sequential improvement in international activity and continued improvement in North America.

As a result, we expect sequential revenue growth for OFS in the fourth quarter in the mid-single digits. On the margin side, we expect stronger sequential margin improvement in the fourth quarter as some of the supply chain related headwinds abate and expected product sales lead to a more favorable mix.

As a result, we believe that operating margin rates could approach double-digits in the fourth quarter. Although it's still early, I would like to give you some initial thoughts on how we see the OFS market in 2022.

In the International market, we expect the continuation of a broad-based recovery with double-digit growth, a likely scenario across all geographic market. In North America, we have limited visibility next year due to the short-cycle nature of the market.

We believe that the region could experience strong double-digit growth if commodity prices remain at current levels. With this type of macro backdrop, we would expect to generate double-digit revenue growth in OFS in 2022. Margin rates should also see strong improvement at some of the recent supply chain and cost escalation headwinds normalized.

Moving to oilfield equipment, orders in the quarter were $724 million, up 68% year-over-year, and up 6% sequentially. Strong year-over-year growth was driven by subsea production systems and subsea services. As Lorenzo mentioned, orders this quarter were supported by a large contract from Chevron Australia for subsea compression manifold technology.

The sequential improvement was driven by an increase in orders in Subsea Drilling Systems and Subsea Services, partially offset by lower activity in SPS. Revenue was $603 million, down 17% year-over-year, primarily driven by declines in SPS, SPC Projects, and the disposition of SPC Flow, partially offset by growth in Subsea Services and Flexibles.

Operating income was $14 million, down 27% year-over-year, driven by lower volumes. For the fourth quarter, we expect revenue to decrease sequentially driven by the removal of SPS from consolidated OFE operations. We expect operating margin rate to remain in the low single digits.

Looking ahead to 2022, we expect a modest recovery in offshore activity driven by higher oil prices and capital deployment into low cost basins and projects.

We expect OFE revenue to be down primarily driven by the deconsolidation of SDS, but we expect OFE margins to be in the low to mid single digit range, driven by business mix and benefits from the recent cost out actions taken. Next, I will cover turbine machinery.

Ron and the team delivered another strong quarter with solid execution, and we are very pleased with the performance the TPS team has delivered this year. Orders in the quarter were $1.7 billion down 9% year-over-year. Equipment orders were down 33% year-over-year.

As Lorenzo mentioned, orders this quarter were supported by 2 large FPSO awards in Brazil for power generation and compression equipment. The year-over-year decrease was primarily driven by a large LNG order we received in the third quarter of 2020 from Qatar Petroleum.

Service orders in the quarter were up 31% year-over-year, driven by increases in transactional services, contractual services, and upgrades. Revenue for the quarter was $1.6 billion, up 3% versus the prior year. Equipment revenue was up 2%. Services revenue was up 4% versus the prior year.

Operating income for TPS was $278 million, up 46% year-over-year, driven by higher volume and continued execution on cost productivity. Operating margin was 17.8%, up 520 basis points year-over-year.

For the fourth quarter, we expect strong sequential revenue growth due to the continued execution of our LNG and onshore/offshore production backlog, as well as typical fourth quarter seasonality. As a result, TPS operating income should increase on a sequential basis with operating margin rates likely flat due to equipment project timing.

Looking into 2022, we expect double-digit order growth in TPS led by LNG opportunities. We also see a solid pipeline of opportunities in our onshore offshore production segment, along with growth opportunities in pumps, hydrogen, and CCUS.

Although we expect to see a strong increase in TPS orders in this environment, we expect revenue to be roughly flat or modestly up in 2022. This will depend on the growth of services, the pacing of equipment, project execution, and order intake early in the year.

On the margin side, we expect operating income margin rates to be roughly flat to modestly down, depending on the mix between equipment and service. Finally, in Digital Solutions, orders for the quarter were $523 million, up 6% year-over-year. We saw growth in orders and industrial and transportation.

Sequentially, orders were down 3% driven by declines in oil and gas and power. Revenue for the quarter was $510 million at 1% year-over-year, primarily driven by higher volumes in Process & Pipeline Services and Waygate Technologies, partially offset by lower volume in Nexus Controls and Bently Nevada.

Sequentially, revenue was down 2%, driven by lower volume in Bently Nevada, partially offset by TPS. As Lorenzo noted earlier, electrical component shortages and supply chain constraints lead to lower revenue conversion during the quarter.

DS also saw some COVID-19 mobility restrictions in Asia Pacific and the Middle East, and delays in plant outages as a result of Hurricane Ida. Operating income for the quarter was $26 million down 44% year-over-year, largely driven by headwinds from mix of volume, supply chain challenges, and higher R&D costs. Sequentially, operating income was up 3%.

For the fourth quarter, we expect to see strong sequential revenue and margin rate growth in line with the traditional year-end seasonality. Looking into 2022, we expect solid growth in revenue as supply chain constraints begin to ease and orders pick up across Digital Solutions. With higher volumes, we expect strong improvements in DS margins.

Overall, I am pleased with our continued strong free cash flow execution and TPS business performance. While we faced short-term challenges in our DS and OFS businesses, we are confident in our ability to execute in the fourth quarter and into 2022. With that, I will turn the call back over to Jeff..

[Operator Instructions] one follow-up. Our first question comes from James West with Evercore ISI..

Hey, good morning, guys..

Hey, James..

Hi, James..

So Lorenzo, TPS for 2022, I'm curious to hear your thoughts on both order rates, growth rates for that business. There's a lot of really positive momentum as you know in LNG and the natural gas in general, as you highlighted in your prepared comments.

I'd like to kind of hear your -- broad outlook for that business, as we go into next year because I think we should be -- and maybe even 23, we should be going to a major cycle for TPS..

Yeah, James, and we feel good about the TPS orders outlook, and we do expect, as was mentioned, that we'll see double-digit order growth in 2022. and a lot of that driven by the LNG opportunities. We've spoken about LNG before and as you look at the outlook for 2030, we increase the capacity requirement LNG to 800 MTPA.

And during the course of the next few years, we see projects of 100 to 150 MTPA being awarded, and we've got a bias towards the upper end of that and feel very good about the projects coming through. A number of customer discussions that have been ongoing and you've seen what's happening in the industry at the moment.

So we feel good about LNG with some large FID as well as small mid-size opportunities.

And then also in the other segments of our TPS business, when you look at the offshore-onshore production site, most notably with some of the FPSO s and a strong number of opportunities in Latin America coming through, continue traction on the services business, both transactional contractual.

And then as we go through '22 and beyond also, a continued pipeline of good growth opportunities for our pumps, valves, as well as the new energy markets of hydrogen and CCUS. So this is a good cycle for TPS and orders outlook positive..

Okay. Good to hear. And maybe leveraging of the -- that last statement you made on the new energy's business.

What are you thinking about growth there in '22 and '23 and beyond? Are you starting to mean business and now we're going through a period of everyday, there's announcement in hydrogen or CCUS, but are -- is this starting to translate now into concrete business, or is that still in the comm? How are we going to think about that, the new?.

Hey, James. We're definitely seeing the pipeline of opportunities getting more firmed up and you'll that seeing that even in 3Q we announced the selection of TPS to supply booster and exports centrifugal pumps to Northern Light CO2 transport and storage project in Norway.

So previously we've also made announcements around the linkage with that product. So you're starting to see the market mature and also the opportunities per market.

We look to 2022, we expect to see $100 to $200 million of orders from the new energy spaces and as we go forward during the course of the next 3 to 4 years, we think that it could be around 10% of our TPS orders coming from the new energy spaces and as we said before, by the end of the decade, we could have as much a $6 to 7 billion of orders in the new energy spaces.

So good traction. And as you know we're coming up to COP 26 and there's a lot activity and we think that with continued regulation and continued support and policies, this is going to be more firming up in the new energy space as we go forward..

Okay. Great. Thanks, Lorenzo..

Thanks..

Our next question comes from Chase Mulvehill with Bank of America..

Hey, good morning, everybody..

Hey, Chase..

Hey, Brian. So I guess first if we can just --.

Hey, Chase..

Hey, Lorenzo. Can we dig into the OFS a little bit? I mean, you gave us some color around supply chain friction and raw material cost inflation, hampering 3Q results. But could you maybe just expand a little bit on that? And I don't know if you want to quantify the impacts of each and maybe some of the timing of getting some of this stuff resolved..

Yeah, Chase, I'll give you some more color on that. Look, as I said, OFS revenues were up 3% sequentially in the quarter. North America land actually basically performed in line with overall market trends when you factor in the heavy influence of our oilfield and industrials chemicals business.

And international, we did see some increases primarily in Latin America,.

Russia, and the Middle East, that were offset by declines in some other areas due to some of the one-off factors that we talked about. So if I break it down and look at what was going on and what impacted revenue, a couple of things there. First, we did mention Ida, as well as some of the supply chain constraints.

So I'd say these 2 items cost us about 30 to $40 million in revenue during the quarter. Ida, obviously pretty straightforward as to what was going on logistics. We're impacted by this timing of some shipments, and some COVID related things, and a couple of our suppliers, and in a couple of factories that will come back, not anything lost there.

And then Asia-Pacific specifically was modestly down during the quarter really related to some COVID delays and mobility issues and that was about $10-15 million of that overall revenue impact.

And I'd say in the second area where we saw some impacts in the quarter, again, I think they are transitory or were around margin impacts related to some of the supply chain items that I talked about. Most notably, we saw some higher freight and shipping costs across several product lines that resulted in higher cost in the quarter.

We saw that particularly in lift and in the chemicals business. And while we have been pushing price increases, there is a delay in that coming through with some of the contracts and things that we have in place.

And I'd say, Chase, we -- as far as the COVID -related items go in factories and stuff, we have been working with the supply chain to build up inventory and safety stock to be able to handle that as we move forward. And then on the logistics front, we are starting to see that stabilize and ease a bit.

We saw a lot of capacity constraints, particularly in air as commercial aviation is well below pre -pandemic levels. You don't have as much room in the belly of planes with fewer flight. So as the U.S. opens up and more countries open up here, we're starting to see that creep back up and we've got a good plans to deal with that.

And look, I'd say the team mates made some really smart decisions here in the quarter on some of the product sales Chase, where we saw logistics cost increase. We worked with our customers to make sure we weren't impacting their timings and the team decided not to ship at some of these higher costs and expedited freight cost.

And did the right thing for customers and for shareholders in terms of delaying some of those shipments and getting the lower cost as we look here in the fourth quarter. So over it, on top of it, everybody is working on it and I think most of this is transitory.

We're still spending a lot of time on chemicals as they have some unique things going on in the supply chain, but feel good about OFS, and the margin trajectory we laid out over the short to medium-term here..

You mentioned chemicals here. So as a follow-up, maybe if we can just pull chemicals out and just talk about separately about some of the issues that were happening in 3Q.

You talked about some raw material cost, inflation, supply chain issues, freight, but maybe just hash that out and just lay out the path of getting chemicals, margins, and back up to where they were pre -COVID or maybe even above..

Yeah, Chase. I'd say the chemicals business actually had about a 100 bps drag on overall OFS margins in third quarter due to the input costs that we saw come through in some of the logistics challenges. And look, we have instituted multiple price increase s in the chemicals business.

But most of our large contracts have contractual price renegotiations every 3 to 6 months. And when we put some of these increases in place, it does take some time for them to roll through based on the contracts that we have. But spot prices have definitely been taken up. Given how quickly we saw increases for inputs like ethylene and propylene.

There is a bit of a delay in terms of getting that through to customers. The other thing in our chemicals business that's a bit unique for us is, we've been particularly impacted by our sizable presence in North America and our concentration of supply in the Gulf Coast.

About 75% of our supply chain rolls to the Gulf Coast, which has been impacted by several things this year. Earlier, the Texas freeze and then, obviously in August, Hurricane Ida, and about 10% of our North America chemical business is in the Gulf Coast. So that saw a drop here in the quarter as well.

So look, we've got some pretty good contracts in place, we've worked to diversify the supply base here in the short term. I'd also remind you that we started back in 2018 and I'm happy to say that in the early part of 2022, our factory in Singapore should be up and running.

That is going to be a natural margin accretion, Chase, as we have secured pretty favorable input costs there and are going to be closer to a lot of our customers in Asia, which will naturally cut down on logistics costs.

The Head of Supply Chain Maria Claudia is spending his time down in Sugar Land and working to make sure these things are smooth out here. So for us it really boils down to two things.

It's getting those price increases through which I feel good, we'll start to feel them coming, and we've worked hard on the supply chain to make sure that the logistics are squared away and we're working on the supply base as far as the input costs go. And I just note that typically the chemicals business is accretive to overall OFS margins.

They've done a great job through the first half of the year. We did see that flip in the third quarter here. And I do think it's transitory and as things start to normalize, that business, we'll see margin rates improve.

And again, Chase, we'll just reiterate that we feel good about the margin track that we laid out for OFS and being able to deliver on that 20% plus EBITDA here in the near to medium term..

All right. Perfect. Please, Brian, I'll turn it over..

Thanks, Chase..

Our next question comes from Neil Mehta with Goldman Sachs..

Good morning, Lorenzo team. The kick --.

Hi, Neil.

The kick-off question for me is around Digital Solutions. The operating margins have lingered in that 5% range for the last 3 quarters. You identified some supply chain concerns in the release.

How do you see the margin dynamics in the business moving in 4Q, especially with year-end sales and supply chain concerns? And when do you see some of those issues abating?.

Yes, Neil. Hi. Look, as we did say, we did see a few challenges in the quarter and I'd say the supply chain is primarily focused around electrical component shortages, largely around semiconductors boards and displays that led to really some lower convert ability in the quarter. And there's real tightness in supply in that market.

We did have a quality issue from one of our suppliers that came out late in the quarter. And with the tightness in the supply chain and in the supplier base, that typically could have been rectified within the quarter that is certainly had an impact and made some -- made some of the shipments slip out.

I'd say overall, the component shortages and a little bit around logistics and similar things we saw in Asia in OFS, we also saw in DS, roughly impacted the top line about 3% to 4% in the quarter. Look, we've been well aware of this, we've been taking preemptive steps to make sure we have got the right products to fulfill.

And I'd say the teams do daily production meetings on this and move things around accordingly. We have started to see that stabilize a little bit and it feel good that we've got what we need to deliver in the fourth quarter from a supply chain standpoint and we're obviously working on 2022 as we speak today.

Look, to get margins back up into the mid-teams, which is where they should be, it will require higher volume and more recovery from our biggest businesses like Bently Nevada, Nexus, and Waygate. And for fourth quarter in particular, we do see a strong sequential revenue in line with traditional year-end seasonality.

As I said, the supply chain constraints around electrical components is stabilizing, and the logistics, we've worked too similar to what we've done in OFS and have that lined up for the quarter as well. So look, we should see margin rate growth in line with the traditional seasonality as well.

And then for 2022, the team is working hard to make sure supply chain is certainly not an issue. And again, it comes down to getting those orders in the big businesses which we've got a really solid pipeline. And as we see the economy recover, we should see strength in those businesses, particularly in the industrial sector..

That's really helpful..

Neil, just to add, maybe. I think we have a good understanding of what we need to do at Digital Solutions.

And clearly it's an aspect of organizational changes, supply chain improvements, and also commercial intensity, besides Brian laid out going into 2022, those margin rates should improve and we see again Digital Solutions getting back to where it needs to be. So a big focus by myself and Brian on getting it back on track..

That make sense, Lorenzo.

I have got follow-up here in terms of, can you provide some incremental color on how the strategy of operating OFS and OFE and TPS and DS as more distinctly different group is going? And then how are you thinking about potential opportunities for maximizing shareholder value eventually if the long-term plan here that businesses are separated?.

one being the upstream Oilfield Services, and equipment side which has tailwind. But it's also a mature marketplace and then the emerging higher growth in industrial energy technology.

As you look at it, we also said it makes sense to keep it together and really run the full product companies as we do today, but it provides optionality as we go forward as well, and we'll always look at it from what's best for the shareholder return standpoint. There are benefits from a customer-based perspective.

There's also synergies from a technology standpoint, and we'll continue to run it on that basis and also continue to review what's best for the shareholders going forward.

So that's really -- the key-in focus was to try and to pick really the 2 growth areas that we have, one and more mature space, but then the evolving space of energy transition and also industrial applications for us..

Yes, Neil and I just add that, look, we're paying close attention to the market and ultimately that will dictate capital allocation in these businesses and how we invest. And we're starting to see the market evolve. and push for more integration between our offerings, which is a good thing.

We see multiple opportunities here, particularly in New Energy and in the digital space for the teams to work together across the portfolio. But clearly as the market evolves, there will be different capital allocation priorities for those two big areas.

And we'll keep you guys updated on how we think about and I just remind you that with the HMH deal that just closed, we've clearly demonstrated that we're willing to do things differently for the portfolio to increase overall returns and make these businesses successful in different markets..

Thanks team..

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

Yes. Good morning.

That's great, Scott..

Good morning..

I just wanted to to continue on the same amount of inquiry, I guess, asking it a little bit more directly.

I guess is if you do see proper value attribution for the industrial energy technology side of the business embedded within Baker stock, would you then be inclined to remain integrated? I mean, does that just the really the primary issue here?.

Yeah, Scott. Look, I think, again, we wanted to depict the optionality that we have and that's why we clearly laid out the 2 business areas. And ultimately, we think that it's a topic that investors and the market will decide as we go forward.

We see that there are synergies there today, as we mentioned before, on just the global scale, the customer base, and we'll continue to monitor as that evolves. What it provides for us is also differentiation in the marketplace. Again, we've got a portfolio that can really cut across the landscape of energy within these 2 different business areas..

Got it. And then just turning back to OFS, a few of your peers are starting to highlight selective areas of pricing gains, both domestically and internationally. Are you seeing pricing traction on discrete services, particularly on the international side where we just have less insight.

When contemplating the 20% EBITDA margin goal, How much pricing is required to get to that margin threshold, if there's much contemplated when putting forth that goal?.

I will pick it up here, Scott and then, generally speaking, we've been pushing pricing to offset the cost inflation and we've seen success in that outside of the chemicals business, which is, as Brian mentioned, going to take a little longer due to the way the contractual agreements work.

Where we're seeing the largest gains is in North America, also in some of the markets internationally. I'd say one area that remains competitive is some of the largest centers in the Middle East on the turnkey aspect. And again, we're being very much focused in how we price and looking to offset inflation..

I would just add to that even when you look at the path, the 20%, we're not counting on net price to get us there. It's really working hard to offset the inflation, particularly in chemicals as I've mentioned here. But again, we have -- we've been executing a lot in terms of improving margins in OFS. And I just remind you, again.

I mentioned the chemicals factory that's going to be starting in Singapore in the first half of the year. In addition to that, we have a lot of the initiatives that have been taking hold over the last 12 to 18 months, including remote operations.

We still are closing down some rooftops and we've got some supply chain moves where we're moving things closer to our largest customer base. So there's still some of the things, Scott, that we put into place that haven't fully matured and are fully reflected in the results yet.

And that will come through in the fourth quarter and into next year as we bridge over to that 20%+ EBITDA rate..

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

Thanks..

Our next question comes from David Anderson with Barclays..

Hey, good morning. A question on the mix of TPS revenue going into '22 and '23, in particular, on the pace of backlog conversion.

I guess I'm curious, is it fair to say the Aftermarket Services has been much slower to convert over the last couple of years and that should accelerate in the next couple of years? And then secondarily, the equipment side on backlog conversion, how does that compare to historicals? Is that normal? Can we just -- help me understand how you see those two components moving forward.

I heard your guidance on the TPS revenue and the orders, but just maybe a little bit more color on the mix between those two categories, please. Thank you..

Yes. Yes. David, look, I mean, Ron and the team have done an outstanding job this year, and I'd say from a backlog conversion standpoint, and I've seen this for almost 20 years now in TPS. Things can move around from a project timing step -- project timing perspective.

It's mostly customer schedules that move that with some moving forward and some being pushed back. I'd say what we're seeing right now is just typical movement across the backlog. Our actually capability and capacity to fulfill has certainly gotten better over the last few years. And so we can have that flexibility for our customers.

And so I'd say what you've seen this year is you've seen some projects move in, you've seen some projects move out, and just given the order cadence and how that cycle is -- has played out, that's really what's driven the uptake in what we see in equipment revenue for 2022. As far as services go, look, we saw a bit of a dip last year.

Contractual services has performed exactly in line with how we thought. We did see some movement in transactional services. And then we started to see an uptake and upgrades coming through this year and the tailwinds for services look pretty good for next year as well.

So while you may not see the same level of growth that you do in equipment because of the way the backlog is going to convert, we're pretty happy with the trajectory that we see in TPS services side, just break that down again. Contractual services have performed right in line with what we expected. Transactional orders are up this year.

We expect revenue to be up next year for that. And the upgrade cadence looks pretty good as well. So listen, overall, next year margins for both businesses within TPS are going to be strong. The overall margin rate is really going to depend on the mix of equipment versus services.

And the other thing I'd just add about the performance here is cost productivity has been outstanding this year, With how Ron and the team have been executing. I would expect that they would drive productivity next year.

Given everything we're seeing in the commodity markets, not prudent right now to count on it falling through at the same level, given some of the potential inflation that's coming through.

But I think we've demonstrated this year that that team can drive productivity and it's shown up in the margin rates and they are ahead of where we thought they'd be at this time, and I'm really pleased with that, and feel good about the outlook for next year..

That's great, Brian. Thank you very much. Lorenzo -- okay. Sure..

Just to add on the -- if you look at the LNG outlook that we indicated and the potential for the 100 to a 150 MTPA, and we're on the upper end of that. You're going to be increasing our installed base, which obviously, we're seeing an additional 30% of install base by 2025, which then gives us a good outlook for services as well going forward..

Absolutely, that's a great point, Lorenzo. Lorenzo, on a different subject. I was curious your views on offshore today. Are you starting to feel a little bit better about offshore? You've been kind of -- your outlook on offshore has been rather conservative. We saw a nice pickup of orders this quarter in OFE and Guyana and Australian.

Now we're starting to see a lot more coming out of Brazil. It's more than trees, just of course, but I was just wondering if you could maybe just kind of talk about how you're seeing that developed. Are you more optimistic for maybe the second half of 22% as off-shore start to coming and playing a greater role.

You had nice orders, but obviously we still kind of below where we normally should be..

Yeah, David. Clearly with the pricing where it is at the moment, there is some improvement. I'd say though it's still remains challenged than just when you look at the capacity that's still in the marketplace. And again, we don't see it going back to the levels of prior years still for another couple of years.

So yes, there is some improvement in particular around the wellhead business, also on the services side, when you look at flexible pipes. As you look at trees and awards on trees, again, some modest improvement in '21 and additional growth in '22. But it's still difficult to see it achieving the historic levels and those being sustained..

Thank you..

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

Thanks. Good morning..

Hi..

Hey, Lorenzo, back to your strategic options for IET versus OFSC, do you view the OFSC side as still overly complex competitively? Do you think that M&A is a key consideration in terms of improving market structure that needs to happen in -- on the mature side of the business? Do potential M&A synergies factor in to your calculus there, or are you really thinking more about optimizing value kind of an independent basis excluding market structure?.

As you look at the marketplace, clearly there's some big players, and we're really focusing on the optimization, improving the margin rates, and really the operational improvements within our upstream business. And as you look at some tailwinds, clearly demand is increasing and we do expect to get back up to 2019 demand level.

So we'll continue to evaluate the prospects on each of the businesses. And again, it's more a margin focuses, as we said before, for the OFSC business..

Okay. And then either Lorenzo or Brian, I was going to ask a follow-up on the near-term outlook for orders in TPS.

Just thinking, reconciling your full-year guidance for this year for orders to be fairly similar to last year, and yet you could have -- sounds like you could have materially more big LNG quarters in Q4 versus essentially none in Q3, which seems like that could tilt the scales to a positive year-on-year comp.

Am I thinking about that correctly or are there other pieces below the surface that would iron that out?.

Yeah, Ian, and just as you correctly state, we didn't book any LNG orders in third quarter. And as you know, there's a bit of lumpiness when it comes to LNG, their large-scale orders. And we do expect to book 1 or 2 additional awards in the fourth quarter.

Base on the current discussions we're having with customers and also some of the seasonality, as you look at TPS orders, we're likely be modestly up sequentially and flat year-over-year for the fourth quarter in 2021. And then as you go into 2022, again, we stated before, we expect double-digit order growth led by the LNG opportunities.

And there is some timing elements there, but feel very good about the 2022 double-digit orders expectation..

Indeed.

And I -- did I hear correctly you said that up to 10% of that could be for the new energy pieces next year verses a very low comp this year?.

No, not next year. It's as you look out to the next 3 to 4 years..

Okay. Thanks for clarifying that..

Yeah, we said about 100 to 200 for the new energy next year..

Thanks for fixed me on that. Appreciate it..

Yes..

Our next question comes from Marc Bianchi with Cowen..

Thanks. I wanted to start maybe on a higher-level question as it relates to the and IET division that you're talking about. There is some others in the business that are talking about integrating Subsea production systems and carbon capture offshore.

I'm curious if that -- how you see that opportunity and if that could perhaps become a limiting factor to eventually separating those businesses?.

Yeah, Marc, as we mentioned before, we see synergies that exist between the Oilfield Services equipment as well as the industrial energy technology. We're retaining the full product companies and in fact, we have synergies across the capabilities of CCUS.

As you know, from a drilling perspective, also from a storage reservoir understanding, as well as in the capture from the compression side. So we continue to look at it from a holistic basis as those opportunities arise..

Mark, I would say I don't think how the businesses worked together limit optionality in the long run. I mean, we've got tons of examples of partnerships across the industry today.

So again, we're going to be really focused on margins and cash and returns and the upstream business and IT, its growth, taking advantage of what's going on in the new energy space. And again, we'll look at overall shareholder return as we think about structure over the long term.

But where these businesses naturally work together, I don't think that's a hindrance to any structure going forward. And in fact, I think it could help in multiple structures..

Yes. Okay. Thanks, Brian. And Brian, on the share repurchase case, so about a 100 million in the third quarter but you didn't start, you didn't have a full quarter of having a program in place. Just curious when you actually started that in the third quarter, and if that would be reflective type of buyback versus what we could see going forward..

Look, we started up in September with the program and -- look if -- have continued to be active. And listen, our goal here is to continue to be in the market and from a capital allocation standpoint, we would like the dividend, we like the pace of buyback we've generated quite a bit of free cash flow and have excess cash to deploy in that space.

And we still have capital to deploy and the tuck-in M&A, and technologies that we talked about here. So from a buyback standpoint we'll continue to be in the market and look, we'll also be opportunistic if things change and we have an opportunity to do more. So that's the thing I like about our free cash flow capabilities.

It gives us some optionality here to continue to drive returns and we'll do that..

Great. Thanks so much..

All right. I think --.

Sorry. Go ahead..

No. I was just going to say I think that concludes the call. So I just wanted to thank everyone for joining the earnings call today and just leave you with a couple of thoughts. We're really pleased with the way the teams executed and continue to execute on our strategy over the course of the third quarter.

While we had some mixed results across OFS and DS, we're pleased with the strong operating and orders performance at TPS and a solid quarter of free cash flow. Looking ahead, we see a multiyear cycle in the OFS business and a multiyear growth cycle for TPS led by LNG and new energy initiatives.

So we're going to continue to execute our strategy through the 3 pillars of transform the core, invest for growth, and position for new frontiers.

And as I mentioned, the way we're thinking about the Company and our broader long-term strategy is evolving, we are starting to view our Company in the two broad business areas of Oilfield Services & Equipment and Industrial Energy Technology.

We feel Baker Hughes is uniquely positioned in the coming years to evolve with the energy markets and grow in the industrial space while maintaining a prioritization on free cash flow, returns above our cost of capital, and returning capital to shareholders. So thanks for taking the time and look forward to speaking to you again.

And Operator, you may close the call..

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day..