Baker Hughes Company (BKR) Q4 2014 Earnings Report, Transcript and Summary

My name is Paulette, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Baker Hughes Fourth Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. [Operator Instructions]. Thank you. I will now turn the conference over to Mr. Trey Clark, Vice President of Investor Relations. Sir, you may proceed.

Thank you, Paulette. Good morning, everyone, and welcome to the Baker Hughes fourth quarter 2014 earnings conference call. Here with me today is our Chairman and CEO, Martin Craighead; and Kimberly Ross, Senior Vice President and Chief Financial Officer. Today’s presentation and the earnings release that was issued earlier today can be found on our website at bakerhughes.com. As a reminder, during the course of this conference call, we will provide predictions, forecasts, and other forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks and assumptions. We advise you to review our SEC filings for a discussion of some of the factors that could cause actual results to differ materially. Also, a reconciliation of operating profit and other non-GAAP measures to GAAP results can be found on our earnings release and on our website at bakerhughes.com under the Investor Relations section. And with that, I’ll turn the call over to Martin Craighead. Martin?

Thanks, Trey, and good morning. Let me start by saying that I am very pleased with our performance in the fourth quarter. We delivered strong results and a record year for Baker Hughes. I expect 2015 to be pivotal in many ways for our company and our industry, and I will provide you with our views on the market place later in the call. But first let me provide perspective on the prior year and the fourth quarter. We ended 2014 with a number of strategic initiatives which we communicated at our analyst conference in May. We plan to leverage our strength in well construction to grow share in deepwater and unconventional markets. And we wanted to establish differentiating positions in our well production and midstream product lines to technology development. We also outlined three financial targets; first, to raise margins in the western hemisphere targeting the midteens in North America by year’s end. Second, was to achieve double-digit revenue growth in the eastern hemisphere and third was to maintain capital discipline and deliver strong free cash flow. Achieving these performance objectives would require managing our business more efficiently and delivering on -- to convert innovations into earnings. That means leveraging our strength and technology development and our global supply chain to deliver differentiating new products and services which are designed to solve our customers three biggest challenges, efficient well construction, optimize well production and increased ultimate recovery. The cornerstone of this strategy is to accelerate new product development and to maximize returns early in the product lifecycle. One of the targets that we shared at our conference was to increase the revenue generated from products within the first 12 months after they have been commercialized. We set an ambitious target of $1 billion in revenue for the year a 20% increase over the prior year. During the year our global products and services group introduced more than 160 new products and services to the market. That means on average we brought a new solution to the market place every 55 hours. Now, let me share a few examples of technologies which are reshaping our industry and our financial performance. Among the most impactful innovations we have brought to market has been our ProductionWave solution, which integrates cutting edge artificial lift technologies with production chemicals and remote monitoring services to optimize production in the unconventionals. ProductionWave has come to market at the right time and at the right price point to become a true differentiator and today we already have approximately 5000 ProductionWave solutions installed in North America and a growing number of international markets. Not surprisingly, artificial lift was our fastest growing product line in 2014. FASTrak is also gaining momentum. This technology remains the world’s only commercially available service designed to reduce reservoir uncertainty and maximize ultimate recovery by analyzing and extracting samples while drilling. This services [Indiscernible] exploration markets with deployments in 13 different countries across each of our operating segments and is part of the reason why we’ve increased our share of drilling services in virtually every deepwater market around the world. SHADOW plug is another example of our recent technology breakthrough. By leveraging our strength and completion systems and material sciences, we created the world’s first large-bore plug which incorporates a disintegrating metallic ball. This innovation eliminates the need to mill out plug following well completion removing a critical barrier to achieving unlimited lateral lengths and expanding the possibilities of well construction altogether. Sales for SHADOW plug grew exponentially over the year, with four quarter sales exceeding the first three quarters combined. These are just a few of the innovations we placed some big bets on and these bets are paying off, creating value for our customers, differentiation for Baker Hughes and more than a $1 billion in revenue from new products. We also highlighted that our focus is squarely on execution and outcomes. In North America, we set out to completely to transform our largest product line our pressure pumping business. This is part of our multi-year initiative we put in place shortly after I became CEO. The plan included key investments to modernize our supply chain, deployment of new technologies to drive efficiencies at the well site and the relentless pursuit of contracts with larger, more efficient customers. Our North America results are a reflection of this plan in action. For the fourth quarter I am pleased to report that our U.S. pressure pumping margins were the highest they have been in three years. Taking a look at our international operations, we are also seeing the benefit of investments made over the last few years leading to significant contract wins in Brazil, Norway, Angola and the Middle East. At the same time we made the tough decision to exit some projects that weren’t generating satisfactory returns. In Iraq, we demobilized on a major contract this summer freeing up resources to be redeployed to more profitable projects in the region, contributing to better margins in our Middle East Asia Pacific segment and profitability in Iraq. In Libya, we shut down our onshore operations there and reorganized our North Africa geomarket allowing us to service the offshore market safely and efficiently from neighbouring countries. During the fourth quarter, North Africa margins were at their highest level since the geomarket was formed more than five years ago. In Venezuela, we altered our business model by partnering with local providers allowing us to maintain support for this vital oil producing country while at the same time significantly reducing our working capital exposure. Today, our receivables in Venezuela are less than 1% of our total receivables balance, a fraction of what it used to be only a couple of years ago. Across all of our international operations we are seeing increased earnings from investments made to modernize our infrastructure and enhance our global supply chain. During the fourth quarter we delivered the highest volume of year end product sales in the history of Baker Hughes. Our manufacturing, operations and supply chain teams all worked in concert to fabricate sale and deliver an unprecedented volume of completion systems, drilling assemblies, artificial lift products and wireline technologies to customers across Asia, Latin America and the Middle East. Compared to the previous year fourth quarter product sales increased nearly 20% a remarkable example of execution and a solid way to punctuate the end of a very positive year. We also grew our industrial segment and increased our capabilities to the acquisition of a complimentary pipeline services business, in alignment with our strategy to help customers optimize production; Baker Hughes has established a differentiating and very unique position in the midstream space with unmatched capabilities in process and pipeline services and downstream chemicals. By executing our strategy and managing our business more efficiently, we delivered on each of the performance objectives we set out to achieve for the year. We increased share in deepwater with major wins in Brazil, Angola and Norway. We strengthened our position in the unconventional with technologies like SHADOW plug and by transforming our pressure pumping business. We established a differentiating position in well production with ProductionWave and through acquisition; we’ve established a very unique position in the midstream market. We ended the year with 15% margins in North America and 20% margins in Latin America and in the East we achieved 12% growth over the prior year. We achieved these performance objectives while maintaining capital discipline and reducing our cash conversion cycle and delivered the highest free cash flow in the history of Baker Hughes and we converted these results into greater shareholder returns, we repurchased more shares and increased our dividend all while maintaining a strong balance sheet. But without a doubt, the most notable highlight of the year was secured late in the fourth quarter with the successful negotiation and signing of the merger agreement with Halliburton. We fully expect the closing of this transaction to deliver a premium to our shareholders in the near term and provide a long term opportunity to benefit from the future upside of the combined companies. We fully believe in the potential of the combined companies to better serve customers with a broad suite of products and technology and to create more opportunities for employees over the long term. Under the leadership of Mark and Belgacem our integration teams are developing plans for an efficient and thoughtful integration and I am very pleased with the progress todate. Until the transaction closes, our focus remains on execution and navigating the current market downturn. Late in the fourth quarter we began to see the first evidence the customers are pulling back activity has reflected in the North American rig count. This is the beginning of a trend which will continue to unfold in the weeks and months ahead. Later in today’s call, I’ll share my thoughts on what the near term outlook is for our industry, what we are doing to adjust our business accordingly and why I am confident that Baker Hughes has the right people, the right technology and the right strategy to remain strong in the months ahead. But first, let me turn it over to Kimberly Ross, who I am pleased to welcome to her first earnings call for Baker Hughes to provide additional details on the quarter. Kimberly?

Thanks Martin and good morning everyone. Today we reported revenues for the fourth quarter of $6.6 billion, a record for Baker Hughes and an increase of $385 million or 6% sequentially. Adjusted EBITDA for the fourth quarter was also a record at $1.450 million, up 22% sequentially. On a GAAP basis, net income attributable to Baker Hughes for the fourth quarter was $663 million or $1.52 per share. Adjusted net income excludes a $34 million before and after-tax gain or $0.08 per share resulting from the deconsolidation of a joint venture in North Africa. The effective tax rate on adjusted net income for the fourth quarter was 31.5% a reduction from the previous quarter due to the recent extension of the U.S. R&D tax credit and a more favourable geographic mix of sales. As a result, adjusted net income for the fourth quarter was $629 million or $1.44 per share, compared to the previous quarter, adjusted earnings per share increased $0.42 or 41% Taking a closer look at our results from operations, we posted record revenue in North America of $3.3 billion, up 5% sequentially. North America operating profit was $488 million and operating profit margin was 14.8% an increase of 270 basis points versus the prior quarter and in line with the goal we communicated a year ago. The increased profitability was attributed primarily to improved pricing and utilization in our U.S. pressure pumping business along with increased contribution from our Gulf of Mexico and Canadian geomarkets. In North American onshore, we maintained high activity levels throughout most of the quarter and saw increased demand for newly introduced well construction and well production technologies. As a result, the segment delivered record revenue across most product lines including pressure pumping, artificial lift, upstream chemicals, completion systems and drill bits. Offshore delays caused by low [ph] price in the previous quarter began to dissipate in November. When coupled with a large backlog of deepwater simulation activity, we saw a solid rebound in our Gulf of Mexico business for the quarter. Moving to international results, we posted revenue of $2.950 million, which is a 7% increase versus the prior quarter. Operating profit was $545 million, and operating profit margin was 18.4%, this represents an increase of 490 basis points compared to adjusted results in the prior quarter. Each of our international operating segments posted increased revenue and margins with the strongest incremental operating profit coming from Middle East, Asia Pacific. This segment remains our fastest growing business and delivered an impressive 13% topline growth sequentially, along with a 430 basis point increase in operating profit margins. Profitable growth was achieved through an exceptionally rich mix of year end product sales across the region along with record revenue in drilling services, artificial lift and pressure pumping. Completion systems also delivered record revenue and delivered a major well construction project on our integrated operation in Malaysia. We also saw positive contribution from Iraq which was profitable in the fourth quarter. We similarly posted record revenue in our Europe, Africa, Russia, Caspian segment along with an increase in operating profit margins of 410 basis points compared to adjusted results in the third quarter. This segment benefited from solid activity in our Angola, Continental Europe and Nigeria geomarkets along with strong year-end product sales across Africa and the Russian Caspian region. The region also profited from cost reduction measures taken in the previous quarter in response to activity disruptions in North Africa leading to higher margins. Strong margin improvement was also delivered in Latin America where we posted a 4% increase in revenue along with a 750 basis point increase in operating profit margins. This segment benefitted from record revenue in artificial lift as a result of exceptionally high year-end product sales particularly in the Andean region. Additionally, our drilling service product line delivered strong performance and secured additional share in Brazil, resulting in improved profitability for that geomarket. Our Latin America segment ended the year as our highest margin operation worldwide. This is a remarkable turnout for a business that was unprofitable only six quarters ago. For our industrial services segment, revenue for the fourth quarter was $377 million, which is a 13% increase sequentially. This increase includes a full quarter’s revenue contribution from the newly added pipeline services group which we acquired late in the third quarter. Industrial services operating profit margins were 6.1%, reflecting seasonal reductions in activity along with cost associated with the acquisition and integration of the new business. Looking at the cash flow statement and balance sheet, during the fourth quarter we generated $838 million in free cash flow, a record for Baker Hughes. We ended the quarter with a cash balance of $1.7 billion, which is an increase of $531 million or 44% over the prior quarter. Total debt for the quarter declined by $280 million or 6% sequentially to $4.1 billion and we ended the quarter with a debt to capital ratio of 18%. Capital expenditures for the quarter were $503 million. As we look ahead we see that market dynamics are evolving rapidly. Customer budgets are being reset, activity levels are declining and currencies continue to fluctuate. The further we look beyond the quarter, the greater the effect of clarity. As a result, we are approaching this year one quarter at a time. With that said, in North America for the first quarter we expect the U.S. onshore rig count will continue to drop as customers reduce capital spending. The average U.S. rig count in the first quarter is projected to be approximately 15% lower than the fourth quarter average. Additionally, we are seeing a growing inventory of wells drilled but not completed as some customers are electing to delay completions and defer production. In Canada, we would normally expect to see peak activity levels in the first quarter, however this year rig counts are expected to remain relatively flat until spring when activity normally drops sharply. As a result of the reduction in overall activity in North America, we project decreased demand for our well construction product lines. In general, well production product lines such as our artificial lift and production chemicals should be more insulated in the short term. Turning to international markets, we expect to see rig counts begin to slowly decline in some offshore – onshore and shallow water markets such as Continental Europe, Mexico, Australia, Iraq and the North Sea. International markets which should remain more resilient in the short term included merging unconventional plays like Argentina and deepwater markets such as Brazil and Angola. Nigeria is the exception where activity levels are likely to decline and remain suppressed until the upcoming election is concluded. In contrast to the declining activity predicted in many parts of the world, several Middle Eastern countries are expected to see a modest increase in activity in the near term. Also as a reminder, seasonal product sales which were exceptionally high in the fourth quarter are not expected to repeat in the first quarter of this year. In summary, in addition to a sharp drop in product sales we expect to see reduced well construction activity in most of our geographical operating segments in the first quarter with the highest declines in North America followed by our Europe, Africa, Russia, Caspian segment. These segments will see reduced volumes of work almost immediately and all markets may see pricing pressures at is worldwide demand for well construction services continues to compress. For Latin America we expect to offset some of the activity declines with an increased share of drilling services in Brazil. Similarly, activity declines in Asia Pacific will be partially offset by increased activity in parts of the Middle East. For our industrial services segment, we expect seasonal reductions in our process and pipeline services business resulting in a drop in revenue, margins however should improve modestly as acquisition and integration cost incurred in the fourth quarter are reduced. With respect to non-operational items, interest expense for the year is expected to be approximately $240 million and the effective tax rate should remain in the low to mid-30s excluding any discrete items. For 2015, our goal is to remain nimble and maintain a strong focus on asset utilization, working capital and returns. We plan to proactively adapt to changing market conditions by rightsizing our cost structure to reflect near term activity levels. While this work is still in progress based on current estimates we expect to undertake a workforce reduction of 7000 most of which to take place in the first quarter. As a result, we expect to book a onetime charge in the range of $160 million to $185 million for severance. Additionally, we are reviewing our operations for potential asset impairments such as facility closures. At the same time, we plan to increase a rig around the process of capital deployment. To that end, we expect to reduce capital expenditures by 20% compared to last year. We enter the cycle well positioned financially and strategically. At the same time we will continue to monitor market conditions closely, adapt with agility and remained focussed on returns, all while maintaining a strong culture of safety, compliance and control. At this point, I would like to turn the call back over to Martin. Martin?

Thanks, Kimberly. As Kimberly just mentioned our industry is clearly in the early stages of a down cycle. The same sort of cycle we enter once or twice a decade. As with past cycles, their early days are always marked with a high degree of uncertainty which customers will cut spending and by how much, how fast will rig counts drop and where and when we’re going to reach the bottom? And we don’t have precise answers to all these questions and no one frankly does, but we’ve been through this before and many times infact. What we’ve learned in the past is that when the market turns down, it turns swiftly. In each of the last three downturns dating back to the nineties we seen North American rig counts fall between 40% and 60% in the space of only 12 months. International rigs don’t tend to fall sharply but begin to drop steadily a couple of months after the first signs of weakness appear in North America. We see no reason to believe that this cycle is going to be any different, but we’ve navigated changing market conditions many times, both the down cycle and the eventual upcycle. The coming months are going to be challenging, but Baker Hughes is very well positioned financially and strategically to navigate the near term efficiently. We know that the key to success is to move quickly and decisively and to never lose focus on your customers or your core competency and for Baker Hughes our core is innovation. This industry can’t simply hope and wait for oil to climb back over $100 a barrel, instead we must adapt to a new reality of sustained lower commodity prices. A major element in this new reality will be technology and to that end we are continuing our investment in fundamental research and product development because the customers need for innovative new products is more critical than ever before. Today, our scientists and research engineers are focussed on redefining what is possible and reshaping the limits of the industries three fundamental challenges, lowering the cost of well construction, optimizing well production and increasing ultimate recoveries. We are exploring new uses for recent discoveries in nano technology to reduce the cost of an unconventional well. We are researching new sensors and new metallurgy capable of increasing production from ultra deepwater reservoirs. We launched a breakthrough new chemical product called JETTISON which removes oil from solids in the production stream reducing our customers refining costs and given the outstanding success of ProductionWave that I mentioned in my opening remarks we have greatly accelerated the research and engineering of a new product called LEAP, the same artificial lift concept we unveiled at our analyst conference. This technology has the potential to completely redefine production management in low rate wells and is the latest demonstration of our leadership in production enhancement solutions. These are just a few of the opportunities we’ve been working on and it demonstrates that our strategy transcends market conditions and supports our purpose to enable safe, affordable energy improving people’s lives. Longer term, the outlook for our industry remains strong. The worlds demand for energy will continue to climb and the supply of energy will continue to increase in complexity requiring greater service intensity and more advanced technologies. In the mean time we remain committed to our strategy focussed on execution, dedicated to safe reliable service and relentless in our pursuit of positive outcomes for the coming year. So with that Trey, let’s go ahead and take some questions.

Thank you, Martin. At this point, I’ll ask the operator to open the lines for your questions. To give everyone a fair chance to ask questions, we ask that you limit yourself to a single question and one related follow-up question. With respect to the pending business transaction with Halliburton, as I’m sure everybody can appreciate we are limited in what we can say while the regulatory approvals and other processes remain underway, therefore we will not be responding to the questions on this topic at this time. For additional information on this agreement, we direct you to the recent SEC filing for background on the deal, terms of the merger, and recommendations from our board and their advisors. With that being said, Paulette, can we have the first question please?

[Operator Instructions] And our first question comes from Jud Bailey from Well Fargo. Please go ahead.

Thank you. Good morning. And first, let me say congratulations on a great operational quarter.

Thanks Jud.

A question on just start on North America. Kimberly noted your expectation of about a 15% decline in the U.S. rig count. Martin, could you talk a little bit about what you are seeing in North America in terms of the pricing environment across your various business lines starting with pressure pumping and maybe some of the other business lines and how does that translate? How should we think about potential revenue declines sequentially in North America given the decline in activity and also pricing deterioration?

Right, okay Jud good morning. Well look, this is – this market is moving pretty quickly. You know we saw the rig count really start to decline in the latter part of Q4 and it’s been picking up a bit of a pace around 50 to 60 rigs a week. And I think the -- you know and it’s like almost any industry the first businesses to feel the most pressure will be your more capital intensive businesses. So in the pressure pumping world, you know we are starting to certainly have some serious discussions with the customers around bringing down the prices and helping them adjust their costs. You know and we look at around 4 to 5 rigs per frac fleet in terms of utilization. So, as those rigs start coming out, you know, there’s going to be some capacity brought on to the market. And there’s no doubt that product line is the first to witness it. And then it will cascade through the others and again I think from your perspective, the more capital intensive, generally the more pressure it’s going to come under first. But in terms of some of other ones, such as artificial lift and chemicals, make up a significant part of our North American portfolio. You know, I fully expect those to be not fully insulted, but more insulted if you will. And on the geographic basis, Gulf of Mexico would be the least to be -- little less to be affected, but some of the other higher cost basins like Bakken, the Mississippi Chat and even the Permian starting to see pressure, Jud.

Okay. So, would it fair to assume though with the pricing deterioration would it be fair to expect revenue declines greater than the activity decline in the U.S. markets to that 15%?

You know, I think – I’d say, yes at this stage, because it do have a – you kind of have a double hit. You have the activity declines and the revenue – decline trails that. But then you do also have an accelerating pricing discussion as well, again, depending on the basin and the product line. So, if you’re trying to model it I’d say that, yes, you might want to get ahead of that curve a little bit. But again, I just want to remind you that from a Baker Hughes portfolio, the breadths that we have and the heavy emphasis on the production side of the business and the customers increasing focus on getting every barrel out, while they are not drilling, plays very well to us and we will strategically use that and muscle that as much as we can to protect our share and our margins at North America.

Okay, great. And that actually kind of lead me to my follow-up question which is if you look at Baker Hughes today versus the last downturn in 2009, the Company has gone through a lot of changes from restructuring to the BJ acquisition and as you noted a nice new suite of products. How should we think about your decremental margins as we go to this downturn? I would assume they would probably not be a severe but I’d like to get your perspective on how you see your decremental margins relative to 2009?

Well, you know, your assumption is absolutely correct. There’s no way we would expect the decrementals to be as severe as they were in that downturn you referenced. And partly, we think it’s a bit of a different market, Jud, you know that was a worldwide economic recession and we saw across the broad customers react and certainly this is setting up to be a tough one. But we also have some customer communities, Middle East as well as some other select NOCs around the world and some possible markets that are going to be more insulted. And so I don’t think it will be as broad brushed. And secondly particularly as it relates to Baker Hughes we were absolutely in the middle, early stages of the geomarket reorganization and it was very difficult to navigate that market turmoil and also execute the reorganization. So, no way would we expect to have anywhere close to those kind of decrementals.

And if I could just add to that, you know, I mentioned in my opening remarks there about the fact that we will be working on cost reductions. So obviously we can’t fully offset any topline decline, but we will be working on trying to mitigate the impact as we rightsize the cost structure for the organization.

Great. I appreciate the color. I’ll turn it back.

Our next question comes from Byron Pope from Tudor, Pickering, Holt. Please go ahead.

Good morning.

Good morning, Byron.

Martin, you touched a bit on your outlook for couple of the deepwater theatres. I think you mentioned deepwater Brazil is a little bit unique for Baker Hughes given you’ve got the drilling services contract with better terms and conditions kicking in. And I think mentioned Angola is also being another geo-market where it should hold up reasonable well you all. How do you think about the deepwater Gulf of Mexico? Clearly you’ve rebounded in Q4 from the loop issues, but as you think about 2015 activity levels and deepwater Gulf particularly given how well positioned you are in the Lower Tertiary, just curious as to how you think that deepwater theatre in 2015?

I think of the three key deepwater basins, I think the Gulf of Mexico could be most stable. You obviously have a nice risk profile both I think subsurface as well as above the surface if you will. I think our customers are increasingly appreciating that. You know, as well I think the customer mix in the Gulf of Mexico has a little bit more of a steady tendency to it. So, now again, my comments are more related to the more deeper water. The shelf in the Gulf of Mexico is already starting to come under some pressure and I think part of that has associated with the customer mix. The other item I’d highlight as it relates to us, Byron is, our position with the floating capacity, the vessels, and you’re aware of those and we have a very large contract that we secured for a super major in the Gulf multiyear with some pretty nice terms and conditions and I got to take my hat off to the folks who run the Gulf business there. But secondly, the foresight to put a vessel like that is so unique in its capabilities. I think sets us up pretty well going forward whatever turmoil that Gulf should see. But of those three deepwater markets you’ve highlighted I’d tell you in my opinion that the Gulf of Mexico will be the most steady.

Okay. And then Martin, just unrelated follow-up as you think about 2015 growth generally speaking I can certainly appreciate the facts that you’re taking this quarter by quarter. But just thinking about the quarter that you just put up in Middle East Asia-Pac, clearly some of that’s product sales that go away in Q1 as you spoke to. But I still think about that Middle East, Asia-Pacific region is among the international regions is being probably the region that holds up the best if you will for Baker and I’m curious as to that if you think that’s a reasonable way to think about it?

You know again, the market conditions now withstanding. I agree with you but I’ll still tell you that the other two regions not to take absolutely anything away from the tremendous quarter that MEAP had. But if you look at the turnaround in Latin America and the margins that posted, I don’t expect. Again, the market conditions now withstanding, if we were still in $85, $90 oil which obviously we’re not, but in terms of the resuscitation of that business, I see it very sustainable, as well as ARC with Africa, and you know, again, albeit we have some serious challenges in Russia Caspian, the U.K. section and Continental Europe is really executing whether its drilling or wireline. But to your point, certainly the 13% sequential revenue growth MEAP and some very, very strong margins is a testament to the [Indiscernible] leadership and our position primarily in the Kingdom as well as some of the other Middle Eastern basins. And our Asia-Pacific group has done a really great job with regards to penetrating some key China markets. We have a very nice project in Malaysia that we talked about with PETRONAS that drove some nice numbers this quarter. So, I mean, across the board I think the international business is really, really starting to stand up and it’s a testament to the leaders, so we have running those businesses.

If I could just add just one thing, if we drill in a little bit looking specifically Q4 to Q1 though, I just want to highlight that there were very strong product sales in MEAP in Q4, that don’t repeat into Q1.

Great. Thanks, Martin and Kimberly. Appreciate it.

You’re welcome.

Our next question comes from James Wicklund from Credit Suisse. Please go ahead.

Good morning.

Good morning.

Martin, I’m very glad that you got to put up your own fabulous quarter and fabulous year while you were at the helm. You have proven your ambition and your capability and you made Baker proud. Congratulations?

Thanks, Jim.

My question has to do with international. International usually has more momentum than North America, which implies 2016 could be even weaker. And in all your conversation about decrementals and activity, I’m just curious to know what your longer term two to three-year outlook is for those markets? We’ve been increasing spending to keep production flat and understanding that there’ll be weakness in some international markets, but they are segmented enough that pricing isn’t it homogenous in the U.S. What is your outlook for international just over the next two to three years realizing you can predict oil prices, but just looking at potential activity and your ability to offset with more Malaysian type contracts, if possible the outlook?

Well, that’s a great and difficult question. Jim, I think I would come at it this way. Let me start with this. We have to accept the fact that when your customer community is struggling to produce a healthy return on its capital particularly the IOCs on the international front, its going to pose the challenge for the service community. And our customers have not been doing very well on that front. Secondly, on the other hand, the geological success as some of our key customers have reported over the last couple of quarters, over the last couple of years internationally hasn’t not been great either, so that doesn’t bode well for a increasing from the supply side. So we should eventually see some kind of balancing out of oil prices which will settle the market down, but when it happens and at what price is still very much up in the air and that kind of dictates what is going to mean for us. Again I go to the earlier comments I’ve made, as we sit around the world, this company has never been stronger, whether it’s the talent in place, whether it’s a portfolio, whether it’s the adherence to processes and controls, supply chain infrastructure, roofline whatever it is. So, whatever the market will throw to us over the next couple of years and you’re right on, it’s a very difficult thing to predict. This company is very well positioned to perform better than I think as any time in its history.

Okay. Martin, my follow-up is you guys spent a bunch of capital over the last several years to build out infrastructure in places like the Middle East, but internationally in general to be better able to compete on variable cost project. Is that we’re seeing in a lot of your numbers today?

I think so, absolutely. If you look at the business that we’re doing in Central Africa and the incrementals – we didn’t break that out, but it’s eye-popping, as well as Angola. And Jim, you’ve been with us a long time. You know the trials and tribulations we’ve had in that market. But the job that Alex and his team in Angola are doing in terms of share and margin. Nigeria, in spite of its challenges year-on-year is fantastic. You know, you’ve been to our Norway facility. It’s world-class. It’s right in line with the contract we picked up last year in the drilling and the completions contract which will kick-in later this quarter in early Q2. Brazil, had we not made the infrastructure investments that we’ve made over the last five years. This would be a very different company and this would have been a very different year for us.

Okay. Thank you very much and congratulations.

Thanks, Jim.

And our next question comes from James West from Evercore. Please go ahead.

Hey, good morning, Martin, Kimberly.

Good morning, James.

And congratulations on hitting all for 2014 targets, especially impressive on the free cash flow side.

Thank you.

I wanted to ask you question about technology introductions when you highlighted earlier a new product is introduced every 55 hours in 2014. In prior downturns we’ve seen some of the larger diversified companies kind of slowdown new technology introductions primarily because it’s harder to get paid for the new technology in a downturn. Do you think that strategy is something you would imply or employ excuse me, in 2015 or will you guys keep up the same very impressive cadence?

When you have a winning strategy, you run. And we’ve got some exceptionally cool things in the market, but we’ve got some really exciting and even cooler stuff in the pipeline for 2015, 2016. It’s a competitive weapon and it’s a competitive weapon not just because it’s cool. It’s a competitive weapon because our customers are challenged. Now it’s incumbent upon us to not only develop, but be able to market it successfully. And if you look at the – we put a $1 billion target out there. We delivered a little bit higher than that. That’s again I think its back to the leadership of Belgacem and GPS team, the global product and services to make sure that the products coming to market today are positioned probably as I said the ProductionWave has to have a price point given its mission to disrupt the rod lift business for whatever it is. And you got to have a salesforce that’s in tune and you got to able to make the value proposition. So I don’t see its pulling back at all, I mean we’re not going to have necessarily cash flows of the past couple of years, and we have to be very prudent, but our R&D engineering are at the bottom of the list I can tell you when it comes to a cost adjustments, It’s our core and we protect our core through the cycle.

Okay. Okay, good. And then this is unrelated question from me, on international are you seeing any kind of pricing declines at this point of – I know its pretty earlier on the international side, but have any of your customers come back to renegotiate?

Yes. The customers are having those discussions. So it starts pretty much with your bigger companies with pretty sophisticated procurement groups. But it’s in the early stages and its kind of – its hard to – at this stage while its easy to predict North America which basins, its little hard to say which region is going to be the most under pressure. I think it’s a still little earlier, I think we’ll have better clarity to that in the next quarter’s call, James.

Okay. All right, great. Thanks, Martin.

You’re welcome.

Our next question comes from Scott Gruber from Citi. Please go ahead.

Good morning, and congrats again on a great quarter. Martin you highlight your aim to manage the business on a quarterly basis and align cost structure with the near-term outlook for activity. But this is also an industry that has a habit of overshooting particularly in the U.S. so when you think about the decline in activity, do you start to identify certain rig count in the U.S. where you just say enough is enough, we’re not cutting our resources further because this is clearly an overshoot?

Absolutely. But it’s amazing how you can sit here today and have an opinion as where we think that overshoot might be. And as you change the environment your interpretations of what’s possible changes as well. So I don’t for a second believe that any one of us are very good at as you highlighted for 100 years this industry have not done a great job in being able to predict things. And I do get a bit of a feeling if you will that its – I don’t want to say it’s overdone, but I’d say there’s a bit of drama in the marketplace. The abruptness with the drop-off, it’s almost like the self confirming negative bias if you will, right. And so, I don’t know where these prices are going to land. But I do get a sense that it’s got a little bit more drama associated with it and maybe the normal appropriate economics would justify.

And just to add to that, you know, we obviously need to be very nimble during these times. And as we’ve gone through and look at where we’re going to be cutting costs, we have tried to be surgical in some areas to make sure, for example, Martin talked a bit about technology and making sure that we’re continuing to invest in those areas and really identifying areas where would we potentially need to cut more or where would we – where would be the first areas where we would add back resources if we see things turning on topline. So being nimble I think it’s going to be key and being surgical during this time and that’s how we’re approaching it.

Then Martin would you care to share the rig count number with us? Where we think the market should balance out as you look out into 2016 in the U.S.?

Yes. That’s would be my take on it. Right now, Scott, I’m tempted to kind of give you a guess, but we’re estimating that -- I have Trey here pointing out some numbers to me, but you know, I’m going to hold my powder dry on this. It’s still a pretty a big crapshoot, okay.

Here we’ll circle back later in the year then.

Okay. And I’m sure, we call Trey, who will probably give you the numbers, but I’m not going to do it.

Thanks.

You’re welcome. Talk -- Scott.

And our next question comes from Ole Slorer from Morgan Stanley. Please go ahead.

Yes. Thanks. And again, congrats with pretty unbelievably strong numbers.

Thanks, Ole.

So, you are reducing your headcount now with about 12%. That compares with 14% in your case in 2009 and 12% versus 14% in 2009 and 15% in 1999. So suggest that you’re preparing for a similar – roughly a similar downturn is that fair to say or are there is efficiency gains within the company, which means that the capacity is down less than what the numbers suggest?

I appreciate the comparisons that you’ve done over the various cycles. I would tell you this still. These are very, very difficult decisions, Ole. I mean, to us people like you and me have been through this – this is really the crappy part of the job and this is what I hate about this industry frankly is the – these brutal cycles that we have to go through. As to the percentages, this gets back to the earlier discussion. We’re very, very different company in terms of completion. We’re more people intensive than we’ve ever been, a lot of that has associated with the pressure pumping business which is a very people intensive business. So I think I would be cautious about looking at the relative percentages because its – we’re different company in terms of mix than we were in those previous downturns.

And if I can just add to that also, the cost reduction is not just about positions that will be reduced, but we’re looking across the board. So both direct and indirect costs, discretionary spending, consultant’s travel services, we’re working with our vendors with regards to pricing. So I think just looking at positions as a percentage is really just one piece of the equation. There are other costs that we will be having a go at really everything across the board we’ll be looking at in the organization.

Okay. And then, I understand. It’s a little different, but still I just wanted to have your response to that. Could you help us a little bit with how we should think about the first quarter? And you came out of this quarter with just extraordinarily high incremental margins, I mean, international EBIT – incremental EBIT margins of almost 90%. So, suggesting that there were some loss making contracts perhaps that rolled over and maybe some product sales, but something that’s difficult to extrapolate. Nevertheless you’re running very smoothly at the moment, but how much more is there as we’re going into the first, second quarter of prior loss-making contracts that or other activity that could roll off and give you some protection or is that already taken in charges after the third quarter?

So, I wouldn’t say there are that many loss-making contracts that will be rolling over. What I will say in general obviously there is a lack of clarity with regards to being able to predict what’s going to happen in the marketplace. So, we’re looking at this day by day and everyday we get more information. Many of our customers have not even provided their CapEx numbers yet. What we have seen so far if we look at North America specifically on the rig count, it very much is trailing. The rig count declines of 2009, but obviously we can see some changes versus what happened in 2009. I’ll remind you that quarter one tends to be a seasonal low point. I also mentioned in my comments that with regards to Canada we expected to be flat, which is slightly different than what we’ve seen in the past. So, obviously we’ve talked about the fact that we do expect to see some pressure on the topline. With that said, there are many things that we put in place with regards to some of the efficiencies, the utilizations, supply chain, and other things that will help offset some of that, but clearly not fully mitigate changes that we’ll see coming through in the marketplace.

So a steeper than normal downturn in the first quarter is obvious. But can you give us some more color on how to think about consensus numbers for the first quarter? Do you feel good about those despite coming after the fourth quarter with a stronger run rate?

No. We’re not going to give you anything additional there. I really don’t think that would be helpful quite frankly if I gave you something and they were wrong. That doesn’t really help you. There’s a lot of uncertainty right now still on what’s taking place in this dynamic market, so I’m just not sure that we can give you something that would be helpful.

Thank you anyway. Bye-bye.

Our next question comes from David Anderson from Barclays. Please go ahead.

Hi, good morning. So in your release you talked about proactive steps to manage the challenges and you talked about kind of headcount reduction. I was wondering if you could talk a little bit about how you navigating through your customer base North America. You’ve been doing a great job of building up the utilization throughout the year. I’m going to assume that fourth quarter you were largely at capacity. How do you expect that to play out? I know it’s a tough question over the next couple of quarters, but are you trying to keep the utilization as high as possible or I’m just kind of curious as you’re thinking as we head into this, Martin.

Yes, David. Let me just also remind you though that – I mean, the whole business doesn’t revolved around, I know, certainly it’s has been impactful to everybody’s numbers, the pressure pumping business, but it’s a multifaceted discussion. To your point on utilization obviously again, that’s around the – again, capital intensive business is like pressure pumping, wireline. But that’s kind of where it stops. So yes, utilization is extremely important next to price in that kind of business, that’s your biggest profit driver. And the discussions with customers they’re still looking for every bit of efficiency that they can achieve. And to the point – to the degree that we can bring a broader solution to the problems whether it’s the drilling and the completions and formation evaluation and all the way through the production cycle, we’re going to continue to do that for the purpose of keeping everything active. But as I’ve said earlier, four to five rigs per frac fleet is generally depending on the basin, what we see. And there’s no doubt as the quarters unfold here you’re going to see a capacity getting stacked, because it just doesn’t make any sense to keep it running. So, I don’t know if that answers your question, but that’s about the best I can do it.

Another thing you mentioned earlier was about the more capital intensive businesses are being the first to go and so I’m thinking about your artificial lift business, which would not fall into that category.

Right.

Are you seeing that CapEx shift with your customers yet, do you expect that to play out, I mean, this should be kind of one of your more defensive businesses in North America. Can you expand a little bit on kind of how those conversations are going? Have you seen that change yet?

No. We’re – if you will though, leading that conversation a bit to say, you know, let’s talk about bringing in a production solution for you in addition to the drilling and completions. So we’re purposely broadening the discussion as an offensive part of our marketing strategy. But you clearly correct, it’s the most defensive – it’s not even little bit overshadowed by our chemical business which is almost entirely an OpEx issue for our customers and not a CapEx issue.

And last quick question here. Lot of we’re hearing from the lot of E&Ps are looking for 15%, 20% some are even asking for 30% reduction service. Are you going back to – are you already having those discussions with your suppliers? And is there enough room in there to get to where E&Ps want to be? And it seems like when we talk 30% seems awfully higher, I’m not sure there’s enough in the system to get them what they want. Am I thinking correct?

You’re thinking correct. I mean, you just not going to get there and take your hats off to any customer, they’re going to obviously try to get as much as they can and there’ll be a point where just doesn’t make any sense. And like I say we’ll make those tough decisions. But obviously we have – we value the relationships we have with our partners in our supply chain and we’re working with them to help us to get some relief. And there is wiggle room in all those discussions as there is with us and our customers. But we’re working closely, it is what interdependence is all about with our customers to make sure that we’re aligned and we’re working to lower their cost, but at the same time what’s right for our business is first and foremost in my mind and we want to make sure that we do the right thing on behalf of Baker Hughes.

Great. Thanks Martin.

Paulette, we have time for one more question, please.

Thank you. And our last question comes from Brad Handler from Jefferies. Please go ahead.

Thanks, guys. Good morning.

Good morning

I guess I have some question of a similar vein of course. But as you talk about headcount reductions, I was trying to put that into perspective as you’re managing it quarter by quarter but presumably that’s not something that’s quarter by quarter, right.

Right.

So, what perspective does that give us on your vision of the downturn or does it right, I mean, obviously it must tell us something about how you’re positioning for now and in given everything else that you’ve got going in the organization?

So, the way we gone through the process is we’ve put together some estimates of what we would expect would happen in the activity as well as in pricing our topline and then working towards reductions to meet that priced [ph] business. When we say quarter by quarter we are getting new information every day, we’ll get more information and more clarity as we go through the quarters and to my point that we need to be nimble we’ll continuously be looking at this to make sure that we’re right sizing the workforce in line with what activity and pricing we are seeing in the market. So you know this is a fluid discussion, it’s not something that we say okay, we’ve taken this action and that’s it, that’s not it. We will continue to make sure that we are monitoring the activity level so we can flex up and down as quickly as possible to meet the needs of the business.

And David, let me just reiterate as Kimberley highlighted this before. You know this is – these are very very difficult called -- sorry these are very difficult challenges. And it’s – I know that’s what you know you guys focus on, it’s what the media focuses on but there is a lot of other costs in these companies our size that also gets extracted. So a lot of spending in areas that you know they were the first to go, and the very last to go are the people that worked for Baker Hughes. But you know like I said this is the industry and it’s thrown us another one of these downturns and we’re going to be good storage of our business and do the right thing, but these are never decisions that are done mechanically.

I understand and for if it is worth some clarification, it is only that I think as we all try to get some visibility into the business, it is something that you are offering us, right.

I understand.

It gives -- because Ole was giving percentages. But I certainly appreciate the other elements to it which are harder for us to grab onto. If I may with a follow up, perhaps just as many have noted and as you all have noted, strong year-end product sales were a part of your quarter and in some ways that is a very -- it strikes me as a very encouraging sign about 2015 as opposed to a number of players presenting their own uncertainty with weaker year-end sales. They seem to have gone out and done it anyway, right. But I don't want to read too much into that. So at the risk of it being an open-ended question, does it tell you something similar, does it tell you that there is really not that pulling in of expectations or how do you read the fact that there were strong year-end sales this year?

Well frankly I think our folks did a tremendous job in boosting our share position in what’s you know seasonal business. So I think our results were a bit outsized and that’s just you know our guys reach dug deep and really delivered. The second thing though is so while I give them credit, I also tell you that you know when you sell on the shiniest car on the lot sometimes that makes things a bit easier too, and if you look at it again the portfolio of products that we are bringing to the market and the appetite for the customers particularly in the eastern hemisphere to buy these going into the year end, I think it speaks volumes for what we are putting out there. So, as to its indication of the customers appetite I think it’s still too early to tell, Brad it’s still too early to tell. You know we just have to watch all segments of the business and like I said quarter by quarter we’ll get a better feel for what the year looks like once all of our customers report later this quarter early into next quarter.

Okay, very good.

Thanks Brad. Paulette, you may now close out the call.