SLB N.V. (SLB) Earnings Call Transcript & Summary

Good morning. My name is Sarah, and I will be your conference operator today and would like to welcome everyone to the SLB Investor Call. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to James R. McDonald, Senior Vice President of Investor Relations and Industry Affairs. Please go ahead.

Thank you, Sarah. Good morning, and welcome to our conference call following SLB's announced agreement to acquire Kelvion earlier today. Joining us on the call are Olivier Le Peuch, Chief Executive Officer; and Stephane Biguet, Chief Financial Officer. Before we begin, I would like to remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. For more information, please refer to our latest 10-K filing and other SEC filings, which can be found on our website. With that, I will turn the call over to Olivier.

Thank you, James. Good morning, ladies and gentlemen. Thank you for joining us. Earlier today, SLB announced an agreement to acquire Kelvion, a global provider of thermal management and heat exchange technologies. This transaction marks an important milestone for SLB and accelerates our ambition to become an industrial technology partner to the data center industry. Kelvion adds scalable, energy-efficient and reliable thermal management technologies to our rapidly growing data center solutions business, addressing critical heat dissipation challenges and next-generation infrastructure. The combination will deepen our technology portfolio, expand our addressable market and strengthen our position across the physical infrastructure required to scale AI. Over the next few minutes, I will discuss the market opportunity we are pursuing, how Kelvion advance our path towards more integrated data center infrastructure solutions and how this acquisition will enable us to continue scaling both our offerings and the global reach of this business. Stephane will then discuss the financial profile of the transaction, and we will open the line for your questions. Let's begin. AI is driving the most significant infrastructure investment cycle in our lifetime. Demand for the computing capacity required to scale AI continues to accelerate with clear visibility to continued growth. This investment cycle is being fueled by hyperscalers, AI companies, cloud providers, enterprises and governments building sovereign AI capabilities. But converting this demand into operating capacity is increasingly shaped by the physical requirements of AI infrastructure. As computing architectures become more powerful, they concentrate greater capacity within each rack, creating larger and more consolidated loads. Thermal management is therefore becoming a critical enabling technology for next-generation computing infrastructure, including high-density data center and AI factories. Increasingly, the ability to bring new capacity online depends on cooling technologies and the broader systems required to move it through and ultimately out of the facility. This has resulted in cooling technology, including becoming one of the fastest-growing markets in the build-out of AI infrastructure. In this context, our customers require a partner who can integrate and optimize these critical infrastructure systems. By combining our specialized engineering with high-value manufacturing adjacencies, we can industrialize complex technology and deploy them reliably at scale. That is a strategic driver behind this acquisition. Over the past few years, SLB has established a differentiated data center solutions business by applying our strengths in engineering, modular manufacturing, supply chain execution and project delivery. We initially entered this market by providing manufacturing services, off-site fabrication and modular infrastructure to hyperscale customers, building on relationships established through our digital business. Since then, we have expanded our offering into data center design, engineering and system integration and broaden both our customer base and geographic reach. A key element of our differentiation is our modular approach, which enables infrastructure to be manufactured, assembled and tested before it reaches the customer site. This modular approach can reduce on-site construction complexity and accelerate time to operation by up to 40%. In less than 3 years, we have established a right of play in this industry. Our cumulative deliveries are expected to exceed 2 gigawatts globally by the end of 2026, with revenue increasing at a compound annual growth rate CAGR exceeding 90% between 2024 and 2026. And this is only accelerating with our data center solutions business on track to exit 2027 at an annualized revenue run rate exceeding $2 billion. As we move forward, our expanded role in design and system integration creates a scalable modular platform for adding critical technologies and delivering more integrated infrastructure solutions. And thermal management is a natural next step on our path to being recognized as an industrial technology partner to the data center industry. This acquisition of Kelvion significantly advanced this strategy by adding critical thermal management technologies to our modular infrastructure offering, increasing our content per megawatt and unlocking higher margin growth globally. This broadens our high-value portfolio, creates efficiency and integration capability for customers and directly expands our total addressable market across the fast-growing infrastructure markets. For more than [indiscernible] Kelvion has developed heat exchange and thermal management technologies, which are key for modern energy and industrial applications. Technologies perform critical function across the data center cooling system, transferring heat through and ultimately out of the facility. Importantly, Kelvion is already a leader in this area. Data centers are its largest and fastest-growing end market with revenue expected to reach between $1.2 billion and $1.3 billion in 2026, representing more than half of the company's total revenue. Beyond data center, Kelvion has established position in key energy and industrial markets, including heat pumps, renewable, carbon capture and processing solutions where thermal management plays an increasingly important role in efficiency, reliability and performance. Underpinning these positions are scaled manufacturing capabilities, deep engineering and application expertise and established customer relationships across Europe and the United States. These capabilities are highly complementary to what SLB has already built. Together, they expand our addressable market, strengthen our position across the physical infrastructure required to scale AI and advance our ability to deliver more integrated solutions to meet customers' needs across the data center infrastructure value chain. This combined platform also creates a natural pathway into several attractive adjacencies. This includes expanded access to the power market through partnerships for behind-the-meter generation as well as opportunities across geothermal and decarbonized power, building on established carbon solutions offering and digital asset management software capabilities. Ultimately, this positions SLB to participate in a total addressable market expected to exceed $150 billion by the end of the decade, representing more than 20% of the broader data center market, excluding IT and semiconductor. Let me now describe 4 key areas of strategic fit that make this transaction compelling for our company and our customers. First, the acquisition expands our technology portfolio and strengthens our position across the data center infrastructure value chain. Kelvion heat exchanger, air cooling equipment and heat rejection technology give us a broader position across the data center cooling system. This critical technology works in tandem with both traditional and liquid direct-to-chip cooling to meet the increasing thermal management challenges of data centers. Modern GPUs are already pushing rack loads beyond 100 kilowatts, while recently announced chip architecture are expected to approach 1,000 kilowatts. These higher density workloads will require cooling technology at a greater scale, making thermal management a critical enabler of next-generation AI infrastructure. By combining Kelvion's thermal management expertise with SLB engineering and digital capabilities, we can deliver more integrated cooling solutions, accelerate innovation and improve thermal efficiency across the facility, leading to higher throughput of compute cycles or tokens to be processed by use of energy. Second, this transaction gives us the ability to embed thermal management more directly into our modular infrastructure offering. Rather than treating cooling as a separate system to be later, we can bring Kelvion's technology and application expertise into the design phase alongside SLB's engineering and modular manufacturing capabilities. This creates a more coherent infrastructure architecture with better alignment across performance requirements, configuration choices and deployment timing. For customers, that means faster execution, improved efficiency and greater confidence in system reliability as AI workloads continue to scale. This is particularly relevant to engineering design work for next-generation modular AI factory architecture. A key example is our collaboration with NVIDIA, where SLB will serve as a modular design partner for NVIDIA DSX AI factories. Through this work, we are applying our engineering and industrialization capabilities at the design stage to improve quality and reliability, reduce cost and lead times and enable rapid and flexible scaling. Bringing Kelvion's thermal management technologies and application expertise into this process will allow us to optimize not only how the infrastructure is modularized and fabricated, but also how cooling is integrated into the architecture from the outset. Third, this transaction creates significant opportunity to scale the combined offering globally and establish a larger and more durable growth platform to meet customers' evolving needs. Kelvion's proven technology capabilities and market position complement SLB's existing data center solution portfolio, strengthening our high-value technology stack in the AI infrastructure value chain and broadening our participation across customers and geographies. Strategically, Kelvion accelerates our organic growth, significantly expands our addressable market and has the potential to more than double our revenue opportunity per gigawatt of delivered capacity. Finally, Kelvion brings an established position across energy and industrial applications, which are benefiting from structural tailwinds and where thermal management is critical to performance, efficiency and reliability. This market provides a diversified earnings base while creating opportunity to expand Kelvion's technology through SLB global customer relationships and operating footprint. Based on strategic fit and capabilities, Kelvion will become part of our new Energy and Industrial business led by Gavin Rennick, President of New Energy and Industrial. This is where our Data Center Solutions business is managed as well as other related offerings, including carbon capture and storage and geothermal solutions. Overall, this transaction represents an exciting and deliberate next step in our data center strategy, opening new growth opportunity for SLB and our stakeholders. Before I hand the call to Stephane, I want to recognize the Kelvion team and what they have built. Kelvion's culture is built on technology and innovation, values that SLB shares. And we look forward to welcoming our new team members to SLB following the completion of the transaction. I will now turn the call over to Stephane, who will discuss the financial profile and transaction.

Thank you, Olivier, and good morning, ladies and gentlemen. As you have seen, SLB has entered into an agreement to acquire Kelvion from Apollo Managed Funds, the majority owner, and funds advised by Triton, which holds a minority interest. Under the terms of the agreement, SLB will pay approximately $3.4 billion in cash and will assume approximately $0.7 billion of debt. The transaction is expected to close in the first half of 2027, subject to customary closing conditions and regulatory approvals. We intend to finance the transaction using existing cash balances and debt. Today, I will cover 4 financial elements of the transaction. First, Kelvion's financial profile; second, the synergies we expect to generate; third, the impact on SLB's financials and growth profile; and fourth, our capital allocation priorities and continued commitment to returns to shareholders. Let me begin with Kelvion's financial profile. Kelvion brings immediate scale, strong earnings and a high-growth trajectory. In 2026, Kelvion is expected to generate between $2.3 billion and $2.4 billion in revenue with adjusted EBITDA expected to reach between $350 million and $400 million. Kelvion's data center business, which consists of OEM products for heat exchange, heat rejection and recovery as well as modular data center infrastructure is expected to account for approximately 55% of total revenue in 2026. This is Kelvion's most profitable and fastest-growing end market with revenue expected to increase by more than 50% from 2025 to 2026. The remainder of Kelvion's business consists of thermal management solutions serving energy, power and other diversified industrial end markets as well as a growing and highly profitable services business. Demand visibility is strong across data center and industrial markets, highlighted by total H1 2026 bookings of $1.5 billion, a 43% year-over-year increase. Moving now to expected synergies and our financial ambition for the future. We expect to realize approximately $120 million in annual EBITDA synergies within 3 years following closing, with about 60% achieved in the second year. Approximately $70 million of these synergies are expected to come from cost savings and the remainder from incremental revenue opportunities. Cost synergies will come primarily from supply chain efficiencies, manufacturing optimization, G&A savings and in-sourcing of supply for Kelvion equipment in SLB's process technologies and other existing business lines. Revenue synergies will come primarily from expanding access to Kelvion's technologies across SLB's existing customer base and introducing them into new geographies, particularly in Asia and the Middle East. We also see opportunities to incorporate Kelvion's technologies into SLB's modular infrastructure offering and to expand their application across adjacent energy and industrial markets. Both cost and revenue synergies will be enabled by combining Kelvion's thermal management expertise with SLB capabilities in modeling, advanced manufacturing methods, AI-assisted design and digital tools. With that in mind, we have laid out a road map to rapidly scale the combined data center business and have established some financial ambitions for the future. First, we expect the transaction to be accretive to both earnings per share and free cash flow per share in the first 12 months following closing. As a starting point, on a pro forma basis for 2026, SLBs and Kelvion data center businesses are expected to generate more than $2 billion in revenue and approximately $300 million in adjusted EBITDA. Both businesses are seeing unprecedented levels of customer orders. Combined data center bookings in the first half of 2026 increased by more than 130% compared to the first half of 2025, resulting in a combined book-to-bill ratio of 1.8x for the first half of 2026. Considering this growth profile, visibility in bookings for the rest of 2026 and into 2027 and the anticipated impact of synergies, we expect the combined data center businesses to generate revenue of $4.5 billion to $5 billion and adjusted EBITDA of $700 million to $800 million in 2028. To provide appropriate visibility into our progress towards these ambitions, we intend to combine Kelvion's data center results with those of SLB's existing Data Center Solutions business and report the consolidated financial results as soon as practically feasible following the close of the transaction. We will determine the appropriate timing for this reporting change as part of our integration planning activities. Let me now move to the last item I want to discuss today, capital allocation. In short, this transaction does not change SLB's capital allocation priorities. We will continue to provide our core divisions with the appropriate level of capital expenditures to support the underlying market growth we expect in 2027 and beyond. Likewise, we will continue to support the secular growth we see in our digital business. Investments in our Data Center Solutions business, now augmented by Kelvion, will be fully funded by cash flows generated by the business. These investments will not affect the capital allocated to our core divisions of digital. Both SLB and Kelvion participate in the high-growth data center value chain through capital-light business models that deliver strong free cash flows and returns on capital employed. Capital expenditures are focused primarily on manufacturing capacity and associated equipment, while customer contracts typically include payment milestones aligned with cash expenditures. Regarding the impact of the transaction on SLB's balance sheet, the associated debt financing and assumed debt will increase leverage. However, we will remain within our previously stated full cycle target of up to 1.5x net debt to EBITDA, consistent with maintaining a strong investment-grade profile. And finally, this transaction does not change our commitment to deliver more than $4 billion in total returns to shareholders in 2026 between dividends and share repurchases. In addition, we are establishing $4 billion as a floor for total returns to shareholders in 2027. We will provide a more precise amount as we progress through our annual planning cycle for next year. Together, these commitment reflects our confidence in SLB's cash flow outlook and our ability to invest in growth while maintaining a strong balance sheet and returning value to shareholders. To conclude, this is a strategically compelling and financially attractive transaction for SLB. It significantly increases our participation in the fast-growing build-out of data center infrastructure and positions us to accelerate earnings growth over the next few years through a low capital intensity business model. We expect the transaction to be accretive to both earnings per share and free cash flow per share in the first 12 months following closing, and it is being completed at a valuation we believe is attractive with a transaction multiple of approximately 11x estimated 2026 adjusted EBITDA before synergies and 8.5x after synergies. I will now turn the conference call back to Olivier.

Thank you, Stephane. Ladies and gentlemen, I think we'll be ready to open the floor for your questions.

[Operator Instructions] Your first question comes from James West of Melius Research.

Olivier, Stephane, congrats on the transaction.

Good morning.

Good morning, thank you.

So first question for me, Olivier, is that it looks like you're adding more to your modular offering. It also looks to me like the modular offering is clearly taking off as a key driver or a key part of the strategy here, keeping things modular, make it more simplified for the customers and then you're delivering more content yourself. Is that a fair statement that the customers are looking for kind of more of a one-stop shop? And then secondarily, if I could, your agreements or partnerships with companies like [ Ormont ] and Liberty and some others on the power side become also very interesting here because there could be some -- or could there be some integration with those partners as you look to scale the data center offering further as you kind of work with them and ultimately data center owners?

No. Thanks, James. Quite a complex set of questions here. So let me try to unfold it [indiscernible]. No, I got it. I think indeed, I think the ability we have to design, to manufacture, to deliver and to commission modular fabricated assembly, I think has been a cornerstone of our growth and I think has been distinctly differentiated. And I think we are seeing this has been underpinning the significant growth that we have seen for SLB over the last 3 years, 90% CAGR and a very rich set of opportunity and design contract award as well as capacity committed contracts in the future. But nevertheless, I think adding thermal management, adding a set of technology that are across not only the modular, but also the nonmodular solution for the data center significantly expands our right of play, significantly expand our TAM in the market and help us to not only combine this cooling technology into the modular offering and then drive on this wave of adoption, but also expand and give us opportunity to integrate and provide more system solution that includes thermal management optimization that includes fit engineering that combines modular and cooling into a solution that will achieve significant impact for the customer. So that's what we see the path forward. And I think the feedback we are getting and the early engagement we have, I think, indicates that this is where the customer are looking for value creation and is where they believe that SLB has differentiated engineering, technology innovation capability as well as combined with Kelvion's portfolio, unique ability to expand and create FEED solution for the market, modular at first, but also expanding and expanded and optimized. Now when it comes to power behind the meter or decarbonized solution through [indiscernible] or decarbonized gas to power using carbon capture in the future. We see it as an adjacency that we believe we will be able to leverage, providing alliance capability to the hyperscalers and to the key customers that would want to secure power provision as well as integrate the solution, modular solution and cooling solution at once. Hence, having partners, integrated partners that will provide end-to-end scope to our customers. So that we believe is an opportunity for adjacency growth into pulling through our core solution in geothermal, pulling through our carbon capture and diversifying our customer base going forward.

Your next question comes from Scott Gruber with Citigroup.

Congrats on the deal. So obviously, Kelvion appears to be a good fit within your broader strategy. But in order to maximize your capture of this expanding TAM in data center infrastructure, are there still other pieces that you would like to add to the portfolio? And would you look to M&A to do so?

I think our focus -- I think this was a very big step that we took in our strategy, very deliberate, very intentional. And I think this is a step up into our TAM. I think we'll focus for the foreseeable future into integration, successfully closing and leveraging the anticipated new offering, expanded offering to offer our customers the combination of both. And I think we believe that a combination of both, one plus one will equal more than two for our customers going forward. So that's our focus going forward. We have enough momentum. We have enough growth, enough [ roofline ] that we have access to substantiate a significant growth as you have seen in our targets -- financial targets announced this morning by Stephane.

That's great. And then your commercial momentum appears very robust in this space, especially after securing the Meta award in Canada and some work in Asia. And obviously, Kelvion [ showing ] help accelerate that effort. But I believe you're also piloting with another hyperscaler. Are you able to comment on that pilot and when you may be in a position to expand that into a full contract?

No, we don't comment on the [indiscernible] contract unless and until they are ready to come previously with us. So we have several engagements indeed. And I think Kelvion also has a lot of hyperscaler, colocator and AI factory customers that have provided them with significant capacity commitments. We have the same. So we'll continue to work with our customers, demonstrating our -- not only our fabrication -- prefabrication modular solution, but also our engineering design capability. And when they are realizing that we are adding now a very broad portfolio of heat exchange and thermal management solution from Kelvion, clearly, we will get more adoption. We'll get more TAM, we will get more market penetration across this customer base, joint customer base between Kelvion and SLB.

Your next question comes from Alexa Bruno with Goldman Sachs.

We wanted to touch on the long-term revenue opportunities. Can you talk a little about how much of that $150 billion TAM you can capture? And then is there a recurring revenue component from this offering?

I think our ambition is clearly to establish ourselves as an industrial partner and as a market leader to integrate the thermal management and modular solution to the market. We believe indeed that the total cumulative TAM at that time in 2030 will be approximately or in excess of $150 billion. Our ambition would be to capture quite a part share of this. And as you can see, our rate of growth to date in SLB has been 90% CAGR, more than 50% for Kelvion. We are announcing our 2028 target is already at 50% or more. And we believe this is -- will continue to accelerate going forward because I think we are seeing that the majority of our 2028 is already contracted. We have on top of it a rich opportunity set of pipeline with existing and future prospective customers. So I think this is a very exciting moment for us because I think the momentum we have gained put us on a trajectory to indeed have a visible market share position on this time that we are commenting.

That's helpful. And maybe just a follow-up. As you think about the international opportunity set and the geographic footprint this adds, are there any regions you're seeing key opportunities that we should be keeping in mind?

I think the dynamic is obviously at this moment, dominated by the U.S., which is investing at scale. And this is where we started our business. This is where we have established SLB modular manufacturing. But I think Kelvion has a very, very solid position in Europe where the market is acting and sovereign AI solutions are being developed. But more interestingly, I think the Asia market, I think, has the ambition as well as the Middle East market have the ambition to develop and have the soaring solution or get additional AI capacity using the energy solution in the region. So we see the combination of U.S. first, Europe as a foundation for the customer base of Kelvion and technology there and Asia and Middle East being the area where we believe our footprint, our current contract that we have won that will start the business there in Asia and Middle East will help us to develop and expand the reach of this solution. So it's in that order, I would say, U.S., Europe and then Asia and then Middle East.

Your next question comes from Carlos Escalante with Wolfe Research.

My question would be on -- it looks like the deal is purely complementary to what you're already doing on the data center front. So it would seem almost as if the overlap with your current business line is not a ton. And I say that wanting to really understand what are the underlying assumptions that go into the -- into your synergy target where roughly $50 million on annual EBITDA coming from revenue. Roughly how much of that -- or if you can state the inputs and assumptions to that number and maybe expanding on some of the prior questions. How you think that could benefit in the future with cross-selling opportunities?

Yes, Carlos, thanks for highlighting revenue synergies. As usual, we do try to be a bit conservative on revenue synergies as we start the integration process because they unfold a bit later. We will start with cost synergies and those cost synergies are procurement, indirect spend, logistics optimization, service center footprint and some G&A savings. So indeed of the $120 million, $70 million of it is cost. But again, $50 million in revenues at least within the 3 years, and then, hopefully, this will accelerate within that period or after that period where our revenue synergies will become more important. And Olivier, if you want to comment on the nature of those.

Yes. I think you are correct in saying this is complementary and complementary in many ways. I think the portfolio of customers of Kelvion is complementary to our customer portfolio. And as such, we create a pull-through of customers on both sides will be in a position to expand and explore opportunity with Kelvion's customer to modular manufacturing and modular solution that we are providing to the market as well as the [indiscernible] and us giving Kelvion's opportunity to expand into Asia or Middle East customer base where they are not so much operating today. But more importantly, I think the ability we have to co-engineer thermal management and cooling technology into the modular solution will not only reinforce and strengthen our modular solution offering, but also give the opportunity to accelerate the penetration of this as a solution, as a FEED solution to the market to create not only the impact of 40% lead time reduction, but also significant thermal efficiency and significant efficiency in deployment of this solution to the market. So it is customer synergy. It is including the region and across both SLB and Kelvion. And it is very importantly ability to co-engineer, design, innovate the cooling technology integration into the modular fabrication offering that we are putting to the market. So this is where we will create [ Kelvion ] synergy going forward.