Baker Hughes Company (BKR) Earnings Call Transcript & Summary

[Audio Gap] fortunate to sort of see this transformation. If you take all the presentations over the last or years together, you'll literally see how Baker Hughes has transformed over the years. Today is no different. This morning, they, on their website, they publish the update on the Chart Industries guidance and the plan going forward. Lorenzo is going to walk through that presentation today. And at the end of it, I'm going to ask a few questions. Without any further ado, Mr. Lorenzo Simonelli, CEO of Baker Hughes.

Thank you very much. And maybe just to start off, I believe, a happy birthday, Dave. So for those of you that don't know, Dave is celebrating today and good morning, everyone. It's great to be back at the Barclays Energy and Power Conference. I'd like to thank Dave Anderson and the entire Barclays team for the invitation and the opportunity to present to everyone today. Over the past several years, we have repositioned Baker Hughes to a world where energy and industrial markets are becoming increasingly connected. Those dynamics are creative, attractive opportunities across our portfolio, and we believe they provide a strong foundation for long-term growth. This morning, I'd like to share how our transformation has positioned Baker Hughes to capture these opportunities. Why we see significant runway for Grove ahead and how the addition of Chart further strengthens our portfolio and our ability to create long-term shareholder value. Before we begin, I'd like to remind everyone that today's presentation includes forward-looking statements. Please refer to the disclosure on this slide for additional information. Baker Hughes sits at the center of a fundamental shift in the global economy. Energy demand is growing, power systems are becoming more complex, and the boundaries between energy, infrastructure and industrial markets are increasingly converging. As a result, customers are looking for partners that can help them improve reliability, productivity and efficiency across increasingly interconnected systems avenues for growth regardless of how the energy mix evolves. Our broad portfolio enables us to support customers across the life cycle of their assets, whether the priority is energy security, increasing power demand, industrial growth or decarbonization. Combined with chart, we now compete across an addressable market of more than $400 billion, strengthening our ability to create value across a wide range of end markets and investment cycles. What differentiates Baker Hughes is not simply the breadth of our portfolio, but our ability to connect capabilities across the energy and industrial value chain. Across OFC, IT and now Chat, we support customers from molecule extraction through transportation, processing, power generation and industrial consumption. That gives us a unique position at the intersection of energy production, infrastructure and industrial end markets. As customers increasingly seek integrated solutions that connect upstream production, energy infrastructure and industrial systems, Baker Hughes is exceptionally well positioned to meet those needs. This is reflected in our business mix. Today, approximately 60% of our revenue comes from infrastructure and industrial markets, underscoring how Baker Hughes has evolved and the broader role we play across the global energy ecosystem. Together, our capabilities create one of the industry's most integrated molecule to electron platforms and a strong foundation for sustained growth, durable cash generation and long-term shareholder value. Over the last several years, we have transformed Baker Hughes through disciplined execution, portfolio management and a relentless focus on our operational performance. In OFSE, we have built a stronger, less cyclical franchise by increasing our exposure to production and brownfield activity. As a result, OFS margins have improved by more than 600 basis points since 2017 and have remained resilient despite lower market activity, demonstrating the durability of the business through different market conditions. In IT, we continue to build strong momentum. We delivered record EBITDA margins of 18.5% in 2025, and we expect margins to exceed 20% in 2026. At the same time, RPO reached a record level of more than $37 billion at the end of the second quarter. This backlog provides strong visibility, expands our installed base and supports a growing stream of future services revenue. Together, these businesses have driven more than 600 basis points of adjusted EBITDA margin expansion since 2017 for the company reflecting sustained progress in execution, productivity and portfolio discipline. The key message for investors is that Baker Hughes today is fundamentally different than it was several years ago. We have consistently expanded margins, strengthened earnings durability and demonstrated our ability to generate strong cash flows across market cycles. Looking ahead, we see a clear path to 20% adjusted EBITDA margins by 2028, excluding the impact of chart supported by strong demand across energy infrastructure and industrial markets. We remain confident in delivering more than $45 billion of IT orders through the horizon period. Together, these milestones reinforce the strength of our portfolio and provide a powerful foundation for the next chapter of growth and longterm [Audio Gap] we are moving forward with deliberate pace and disciplined, focused on discipline [Audio Gap] this has driven more than 600 basis points of adjusted EBITDA margin expansion since 2017 for the company, businesses have driven more than 600 basis points of adjusted EBITDA margin expansion since 2017 for the company, reflecting sustained progress in execution, routes businesses have driven more than 600 basis points of adjusted EBITDA margin expansion in 2017 -- this has have driven more than 600 basis points of adjusted EBITDA margin expansion since 2017 for the company reflecting sustained progress in execution, productivity and portfolio discipline. The key message for investors is that Baker Hughes today is fundamentally different than it was several years ago. We have consistently expanded margins strengthened earnings durability and demonstrated our ability to generate strong cash flows across market cycles. Looking ahead, we see a clear path to 20% adjusted EBITDA margins by 2028, excluding the impact of chart. -- times and perhaps most exciting in what makes the chart acquisition unique are the commercial synergies. Together, Baker Hughes and Chart can offer customers a broader portfolio of technologies and a more integrated set of solutions across energy infrastructure and industrial markets. This strengthens our ability to deepen customer relationships, increase share of wallet and participate in a wider range of projects throughout the value chain. Customer engagement is already underway, and the early response reinforces our confidence that the combined portfolio can create meaningful growth opportunities well beyond what either company could achieve independently. As the chart on the right highlights, these value drivers provide a clear road map to expand Chart's EBITDA margin from approximately 17% in the second half of 2026 to 22% to 23% by the second half of 2028. Operational improvements and cost synergies are expected to drive meaningful structural margin expansion and stronger free cash flow, while commercial synergies and growth create additional opportunities through increased scale and operating leverage. We'll discuss the key factors supporting Chart's updated margin outlook in more detail later in the presentation. We have dedicated teams, established governance and a proven operating model already in place with clear ownership and disciplined execution, we are well positioned to deliver on the value creation opportunity ahead of us on operational enhancements because this is an area where Baker Hughes has a proven and repeatable track record. At Baker Hughes, our business system provides the framework that connects strategy to execution and drive sustainable performance improvement. We intend to bring this same operating model to chart. The journey begins with performance management. We will establish a clear KPI framework through visual management, scorecards and structured governance we create transparency, accountability and a common understanding of what success looks like. From there, we move into continuous improvement through disciplined daily management structured problem-solving and regular performance reviews, leaders and teams identify performance gaps, eliminate waste, remove barriers and sustain improvements that compound over time. The final element is strategy deployment. Here, we connect long-term business objectives to the work occurring across functions every day, priorities, targets resources and improvement initiatives are aligned so that the entire organization is working towards the same outcomes. What gives us confidence is that this is not a new playbook. We have successfully deployed the business system across Baker Hughes and have seen it consistently improve operational performance while instilling the processes, behaviors and operating discipline that drive sustainable results. As we deploy the business system at Chart, we believe it will create a culture of accountability, transparency and continuous improvement that enables stronger operational execution, increased productivity improved cash performance, enhanced customer responsiveness and sustainable margin expansion. Turning to cost synergies. We have a clear road map detailed execution plans and a high degree of confidence in our ability to deliver. Our opportunity comes from 3 primary areas. The first is the SG&A optimization. This includes eliminating consolidating systems, the supplier relationships and additional opportunities to optimize sourcing, inventory management and working capital. The third area is facility optimization. As we evaluate our manufacturing and services footprint, we see opportunities to improve capacity utilization and remove inefficiencies across the combined network. We have already executed $35 million of actions to date and remain confident in our path toward approximately $325 million of annualized cost synergies by year 3. Approximately 3/4 of those benefits are expected to be captured within the chart segment. Taken together, these initiatives provide a clear and credible path to achieving these cost synergies and are expected to be a key contributor to the 500 to 600 basis points of margin expansion over the next 2 years. While cost synergies are important, the commercial opportunities what makes this combination especially compelling. At its core, this transaction brings together 2 highly complementary portfolios to create a broader, more differentiated offering across the energy and industrial value chain. By combining Baker Hughes' strength in power generation, gas compression, flow control and subsurface technologies with Chart's leadership in thermal management, industrial compression, carbon capture and air and gas handling, we can solve a wider range of customer challenges with more integrated solutions. Equally important, the combination expands our ability to reach customers around the world. Our geographic footprints are highly complementary, creating new avenues to accelerate growth in key regions by leveraging each company's established customer relationships, commercial channels and market presence. The opportunity extends well beyond new equipment sales. Together, we will have a substantially larger installed base, providing a powerful platform to grow higher-margin aftermarket and life cycle services as we increase service attachment, digital enablement and long-term customer engagement, we see meaningful potential to enhance the quality, resilience and recurring nature of our revenue stream. Ultimately, this combination enhances our ability to participate in a larger portion of our customers' capital and operational spending, creating multiple pathways to accelerate growth across both equipment and life cycle services. One of the most compelling aspects of the transaction is how it expands our participation in some of the most attractive growth markets globally. By bringing together Baker Hughes on chart we are creating a broader technology portfolio that enables us to address a wider range of customer needs across gas infrastructure, geothermal, data centers, carbon capture, space, mining and industrial gases. These markets are benefiting from powerful secular tailwinds, including energy security, electrification and AI-driven power demand, industrial investment and decarbonization. Importantly, we are not entering these markets from scratch. Both companies already have established customer relationships, differentiated technologies and proven commercial position. That gives us a strong foundation from which to accelerate growth and realize the commercial benefits of the combination. As a result, our exposure to these high-growth end markets expand significantly, increasing our addressable opportunity by nearly 60% from approximately $36 billion today to roughly $57 billion by 2030. In short, this is not simply a larger company. It is a more capable company competing in larger markets with a broader set of solutions and a more differentiated position. Geo pharma is one of the clearest examples of the value of this combination by bringing together capabilities from all 3 segments we can deliver an integrated molecule to electron offering that spans the geothermal value chain from resource assessment and well construction through power generation, life cycle services and digital optimization. Chart heat exchanges, condensers and cooling technologies further enhance the offering, helping improve project performance and economics. More importantly, geothermal illustrates the broader rationale for this acquisition. We are not simply adding technologies. We are combining complementary capabilities to create integrated solutions that expand our participation across the value chain and strengthen our position with customers. As geo pharma continues to emerge as an attractive source of low-carbon baseload power, we believe this differentiated portfolio positions Baker Hughes to capture a larger share of the opportunities ahead. Data centers represent another area where the combination of Baker Hughes and chart creates a highly differentiated offering. The rapid adoption of AI and the continued expansion of digital infrastructure are driving unprecedented demand for reliable power, advanced cooling systems, water management and operational efficiency. As power density increases, customers are increasingly seeking integrated solutions that optimize performance across the facility rather than individual products. As we think about the data center opportunity, it's important to recognize that we already have significant traction in this market. Since 2025, IT has secured $4.2 billion of data center-related orders, including approximately $3.2 billion in the first half of 2026 alone. In addition, China Industries has booked approximately $600 million of data center orders over the past 2 years. This momentum reflects both the strength of demand for our solutions and our ability to execute and scale alongside our customers in one of the fastest-growing end markets globally. Together with Chart, our capabilities can provide a more complete data center solution to support critical elements of the infrastructure stack. Baker Hughes capabilities include on-site power generation, power conversion, and micro grid control solutions to maximize reliability and uptime. Chart adds critical cooling infrastructure, carbon capture and water treatment and recycling capabilities as well as LNG and hydrogen storage and backup fuel systems. By bringing these capabilities together, we can participate in a broader portion of the data center ecosystem while helping customers improve reliability, efficiency, water usage and emissions performance. The combination also creates opportunities to deepen customer relationships through digital technologies, services and life cycle support. Let me spend a moment on our updated 2026 guidance and specifically the assumptions related to the addition of chart. First, I want to emphasize that the underlying Baker Hughes business continued to perform well in line with our expectations. Both OFC and IT are tracking in line with our prior outlook. We are maintaining our guidance ranges for both segments. Our confidence in this outlook is supported by the momentum we're seeing across the company today. With first half 2 orders of $12 billion, record IoT IPO of $37 billion and resilient OFC performance provide [Audio Gap] reflect the addition of Chart and our latest view of how that business will contribute through the remainder of the year [Audio Gap] the practices, policies and procedures. As part of that work, we have completed a preliminary contract level review for Chart's backlog. Based on that review and the application of Baker Hughes backlog definitions, we expect to report backlog of approximately $3.6 billion at the end of the third quarter. We believe a portion of the change reflects timing-related factors, including order conversion and backlog classification rather than any significant deterioration in end market demand. In fact, we remain constructive on the underlying demand environment and the long-term fundamentals supporting the business, particularly in data centers, gap infrastructure, space and industrial gases. The chart, we expect revenue of $1.85 billion to $2.25 billion and EBITDA of $300 million to $400 million from the close date through year-end. At the midpoint, this implies approximately 17% EBITDA margin. Looking at the phasing of Chart's guidance, we expect approximately 55% to 65% of the segment EBITDA to be realized in the fourth quarter, reflecting both its mid-July close date and charts typical seasonal weighting towards the fourth quarter. From an operational standpoint, near-term chart margins are being impacted by the timing of LNG equipment volumes, soft hydrogen demand and the execution of several first-of-a-kind projects that carry lower margin profiles. In addition, the LNG mix is creating additional margin headwinds. Importantly, these factors do not change our confidence in the strategic value of the acquisition. In fact, we're already seeing encouraging commercial engagement between the Baker Hughes and Chart teams, particularly around data center infrastructure and broader gas infrastructure opportunities. While these commercial synergies are still in the early stages, they reinforce our conviction in the long-term value creation potential of the combination. We also see improving visibility towards an LNG order recovery as we move into 2027. And we remain confident in our ability to drive meaningful margin expansion through improved execution and synergy capture. Let me make 2 additional points on guidance. First, we now expect free cash flow conversion to be in the range of 40% to 45% for 2026. This is entirely attributable to acquisition-related items including higher cash interest expense, transaction and closing related costs and cash integration spending associated with the Chart acquisition, all of which were excluded from the prior guidance. Second, the D&A outlook presented here excludes intangible amortization impacts related to the transaction. We will provide appropriate disclosures as those amounts are finalized. Overall, we are encouraged by the momentum across the company. OFSC and IT continue to perform well. We are taking decisive actions to improve execution at Chart. Integration efforts are off to a strong start and we remain highly confident in the long-term earnings, cash flow and synergy potential of this combination. As we conclude, I want to leave you with these 3 points that underscore why we are increasingly confident in Baker Hughes long-term value creation opportunity. First, Baker Hughes today is a fundamentally different company than it was just a few years ago. Our portfolio is increasingly weighted towards infrastructure and industrial markets with greater exposure to higher growth, less cyclical end markets. As a result, we're building a business with greater earnings durability and stronger cash generation and increasing alignment with long-term growth trends. Second, we believe this evolution is still in its early stages. The acquisition of Chart further accelerates our shift towards higher-quality industrial and infrastructure end markets, expanding our technology portfolio, strengthens our position in attractive industrial markets and creates new opportunities to scale enterprise solutions across border customer value chains. As we execute our integration plans and capture synergies and we expect our industrial and infrastructure mix to continue increasing over time. Third, our priorities are clear. We remain focused on delivering our Horizon 2 commitment through disciplined execution and business system excellence. At the same time, we're accelerating the Chart integration and focusing on capturing synergies and driving meaningful expansion for the combined company. Just as importantly, delivering remains deleveraging remains a key horizon 2 priority, and we're committed to strengthening the balance sheet through cash generation and disciplined portfolio management. When you step back -- the investment thesis is straightforward. Global demand for energy, infrastructure and industrial solutions continues to grow, and Baker Hughes is uniquely positioned at the intersection of these markets with expanding capabilities a growing enterprise solutions pipeline of $10 billion and increasing exposure to attractive industrial and infrastructure markets, we believe we're building a higher quality business with greater earnings durability stronger cash generation and significant long-term value creation potential. Thank you for your time today. I appreciate your interest in Baker Hughes, and I look forward to your questions.

Thank you, Lorenzo. So we only have time for probably 1 question here. If we could just kind of look at the chart guidance you just put out there on the margins. So our margins were 17% now, and you're targeting -- was that over 3 years -- was that -- and can you just maybe just talk through some of the puts and takes and what some of the assumptions are if they're going into that margin expansion?

Sure. And maybe let me take the 2026 view that we provided first. And as you look at the underlying business and the end industries, we still feel very good about the mod trajectory. . As we look at the book-to-bill, we still see a book-to-bill above one as we look at the second half. And I just need to remind you that the outlook excludes the stub period. We closed the transaction July 15. So it reflects what happens after July 15 with regards to the second half, you'll see an adjustment in the IPO. And again, we expect RPO to be $3.6 billion roughly by the end of the third quarter. And that's really a realignment of the methodologies that's been provided in the past from chart to the methodologies that we apply at Baker Hughes from accounting policies and also the way in which we track the RPO. Again, not an end market view, but more a methodology change to align with the integration that we're conducting. As you think about revenue, we see about $2 billion, just over $2 billion of revenue, which when you take out the stub period is really very much in line with consensus view that was out there. From a margin perspective, again, we had the first quarter, which was underwhelming from that, and we see that improving in the second half you said, an average of 17%, which really is based on the backlog that we have that's converting. And we see also the opportunity to continue to to improve on the integration synergies and the momentum of the business going forward. So second half is a profile at about 17%. Then as you look at the breakdown, probably about 40% in third quarter, 60% in fourth quarter given the seasonality and on the margin outlook, 17% to 22% to 23% really grounded by 3 major areas. The first is the cost synergies, a lot of confidence and $325 million cost synergies. Again, the team is obviously going for more, and we feel very confident by the back half of 2028, we'll be at that aspect of cost synergies to get us to the 3%. Then you've got the operational excellence, the discipline around the business system. We've proved it within Baker Hughes and what you've seen from the margin accretion that we've achieved there. We're going to be applying the same playbook to chart now and seeing the same results take place. And then as you look at the commercial synergies and also the backdrop of the positive tailwind we're seeing the industries. But we can provide in addition from the aspect of integrated solutions and the capabilities of a broader spectrum. Our addressable market is going up and customers have been very receptive. So again, we feel good about the trajectory of where we're taking from 17% up to the 22%, 23%. And obviously, we won't stop there.

I would imagine you want -- Lorenzo Simonelli, CEO of Baker Hughes. Thank you so much.

Thank you very much Fantastic. Thanks.