Good day, ladies and gentlemen, and welcome to the Baker Hughes First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mrs. Alondra Oteyza, Director of Investor Relations. Ma'am, you may begin.

Thank you, Vince. Good morning, everyone, and welcome to the Baker Hughes first quarter 2017 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 and 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, 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, Alondra, and good morning and thanks for joining us today. I'm going to cover three topics this morning. I will discuss our first quarter results and the market dynamics we observed during the quarter. Then I will share our perspective on the industry and highlight how our new product introductions are targeted at optimizing well construction, production, and recoveries in this market environment. And finally, I will provide an update on the GE Oil & Gas transaction and how this combination will uniquely position Baker Hughes for the future. Starting with our first quarter results, we increased our adjusted EPS by $0.26 from the fourth quarter and achieved our third consecutive quarter of positive adjusted profit from operations. Turning to the top-line, we saw solid growth in our North America onshore well construction business, particularly in our leading rotary steerable and drill bit offerings, reflective of our strong franchise in these product lines. This growth was more than offset by the deconsolidation of our North American onshore pressure pumping business, lower international revenue, which is related to non-reoccurring fourth quarter product sales, seasonality and price deterioration, and also spending declines by customers in the Gulf of Mexico. Adjusted EBITDA grew $43 million sequentially for an EBITDA margin of 14%, and looking year-over-year, in spite of a revenue decline of 15%, EBITDA increased by $200 million. Looking more closely at the market trends in the first quarter, the ramp-up in North America has been more robust than many had expected. Along with this growth, we've had to work through the challenge of supply chain tightness, with labor and materials cost inflation impacting select product lines and basins. In addition, while we have seen signs of service capacity absorption in select product lines in some North American basins, there is still…

Thanks, Martin. Good morning, everyone. Starting with our first quarter 2017 results, revenue for the quarter was $2.3 billion, down 6% sequentially. During the quarter, we grew our North America onshore business, particularly in the well construction product line. This growth was more than offset by the deconsolidation of our North America onshore pressure pumping business, lower revenue internationally, and reduced activity in the Gulf of Mexico. On a GAAP basis, the net loss for the quarter was $129 million, or $0.30 per share. Negatively impacting our results were $114 million of adjusting items, or $0.26 per share, which included the impairment and restructuring charges of $83 million after-tax, related primarily to severance and asset impairment, and merger cost of $31 million associated with the GE transaction. The adjusted net loss, excluding these adjusting items, was $15 million, or $0.04 per share, for the quarter. Adjusted operating profit before interest and tax for the quarter was $91 million, a sequential improvement of $70 million. Despite a decline in revenue, profitability increased sequentially, driven mainly by $84 million of bad debt recoveries in Ecuador, which stem from receiving government-backed bonds in exchange for outstanding receivables that had been previously reserved, and a $42 million benefit from no longer consolidating the North America onshore pressure pumping business. These were partially offset by the impact of reduced revenue internationally, mainly from higher margin year-end sales not repeating and continued pricing deterioration, and also reduced activity in the Gulf of Mexico. Free cash flow was a negative $174 million for the quarter compared to $610 million in the fourth quarter of 2016. This was driven mainly by $415 million tax refund in the U.S. in the fourth quarter and an annual compensation related payments in the first quarter. Now let us take a closer…

Thank you, Kimberly. At this point, I'll ask the operator to open the lines for 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 that being said, Vince, could we have the first question, please?

Yes, ma'am. Our first question is from Byron Pope of Tudor, Pickering. Your line is open. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.: Good morning.

Good morning, Byron. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.: Good morning. Martin or Kimberly, just to help us frame North America with BJ now deconsolidated, can you just size for us on a – just the size of U.S. land versus Canada versus Gulf of Mexico? Clearly, Gulf of Mexico was the biggest headwind in Q1 and some follow through in Q2. But, could you just help us size those different businesses? Just trying to get a feel for the mix within North America, again, with now that the North America land pressure pumping business is no longer consolidated.

Yeah, Byron, good morning. So, if you look at it, we said in the notes – prepared remarks that approximately 25% of our business is chemicals. If we then look at it, it's about 60% is U.S. land and the remaining is Gulf of Mexico. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.: Okay. That's helpful. And then on the international side, Martin, I think your commentary with regard to pricing is similar to your primary competitors. And is it confined to a few geo markets and customer types or is it more broad-based? And just curious if you can provide some incremental color as to what's driving this what seems to be renewed pricing pressure on the international side.

Byron, I wouldn't say it's renewed. And I'd say the intensity, if you will, of negotiations and tenders has been pretty consistent. But what you do have is a roll-through now of renewals on contracts, which is starting to impact the bottom-line. And as you heard Kimberly say, we had some restructuring charges, some of that was in the Eastern Hemisphere to get the top-line and the cost structure better aligned as these previously agreed-upon discounts roll through. As to severity by region, obviously, where you've seen some of the more striking turndowns, given the nature of the fields or the economics for our customers, what comes to mind particularly is the continent of Africa, parts of Latin America, then the severity is pretty dramatic, frankly, simply because there is not enough work in some cases for the number of suppliers that have traditionally been there. So it's a bit of a street fight. But I wouldn't say necessarily it's gotten any worse, I think, from – but from a numbers perspective you're starting to see the manifestation of some of these prior agreements come into play. The other thing that I'm not sure is fully understood, and I want to be careful how I say this, Byron, but these aren't necessarily take-or-pay agreements. These are agreements and they are contracts. But – you've been in this business a while, as you see activity start to rebound in some of these places with so much capacity coming back out, just like the customer community engages their suppliers to try to get the costs in line, the service community is pretty doggone good as well at reengaging with the customers to make sure that even in the middle of, so to speak, contracts and agreements, we'll reengage to make sure that we're getting the fair price relative to the market. So these things can – they can change pretty quickly as well. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.: Thanks for the color. I appreciate it, Martin and Kimberly.

You bet.

Thank you. Our next question is from James West of Evercore ISI. Your line is open.

Hey. Good morning, Martin. Good morning, Kimberly.

Good morning, James.

So, Martin and Kimberly, you kind of both alluded to in the North American land market, I guess, some challenges as the ramp-up has occurred. I think it's pretty well understood by us, the challenges in the fracking business and what's happened there. But as we think about directional drilling and other product lines or completion tools, where you guys have a huge position and a market leading position, what are – outside of, say, just pure labor, what are the bottlenecks that you're starting to run into now? Is it supply chain? Is it getting motors? I mean, what's causing that?

No, it's a good question, James. As you well know, while the pressure pumping business has a, let's say, greater command or demand of people and logistics and freight, a directional drilling crew still needs vehicles, it still needs 18 wheelers to move equipment, crew still need hotel rooms, inflationary pressure on bonuses and day rates, and so forth. So it's – on a percentage of revenue basis, I don't have the numbers at the finger of my tips relative to when we were consolidating pressure pumping. But no business line right now in North America, and particularly in a couple of the more active basins, is immune from cost inflation and it's something that we're working to manage, manage aggressively, both internally as well as reengaging with the customers to try to get some uplift.

And I'll just add to that. If we look at, for example, on supply chain, where obviously reductions had to take place both internally, as well as externally, from suppliers, you see over time starting to kick-in. Also on some of the raw materials, for example in chemicals, those are tied to oil prices. So you see a bit of cost coming in there. Copper, prices are going up. And in areas like cutters for drill bits also, where we've seen obviously a significant uptick in that area. So that's a particular area in drill bits, where both on the labor side, as well as the supplier side, we're seeing some constraints.

Okay. And then, I guess, the follow-up there is how long until – or is it happening now, were you able to push through these inflationary pressure to your customers via pricing?

It's happening now. I'd say March was maybe where we started to get some better visibility to a couple of the key product lines, getting more price, as well as the...

Okay.

...customer accepting more push-through. But, James, it's – price isn't about just covering our inflation, internal inflation. It's...

Sure, you won that price, for example (33:10), yeah.

Absolutely.

Yeah, okay. Very helpful. Thanks, guys.

Thank you.

Thank you. Our next question is from Sean Meakim of JPMorgan. Your line is open.

Hey. Morning.

Good morning, Sean.

So, Martin, I was hoping that you touch on artificial lift, as we're seeing completions now start to catch-up to drilling activity in U.S. onshore. I was curious how that's translating into onshore sales of artificial lifts. Kind of where you're seeing – what regions you're seeing traction for your product specifically?

Good question, Sean. In light chemicals, it's – if you're sitting down with an asset manager or a drilling completion manager, as his portfolio of wells are starting to come online, then the conversation intensely shifts to, all right, let's put these wells on production, what's the best approach. And I characterize – I mentioned this bifurcation. There's certainly a push for productivity focus, as well as some customers are more efficiency-focused, depending on the economics in their own unique situations. And when I say efficiency, these would be artificial lift systems that are more traditional in scope, lower upfront costs, something like a gas lift, maybe a rod lift. Your more productivity focused customers are more ESP driven. They have a profile when they look at the decline curve. Do they start with ESPs? How far can that ESP take them? And then do they have a backup plan to put rod lift on the curve? Obviously, when we buckle up with GE Oil & Gas, that will help the conversation. So, obviously, the West Texas area is showing the strongest near-term growth, yet we're seeing, believe it or not, pickup in the Bakken as well as in Colorado. So it's for us naturally, the oil basins, but it's led by the West – by West Texas.

And last cycle, operators who are inclined to put lift on as soon as they are completing a well, is there bit more of a gap this cycle, less incentive...

Yes.

...getting them right away? Okay.

This uptick has been, I think, a little bit more – a little steeper, as well as the ability to get these wells completed in a timely fashion. I think you guys have reported the increase in the delay between finishing the drilling and getting it online as the DUCs have – seems to have increased in number. So, yes, this one is a little bit more delayed. But I think the customers, as these wells start to come online, their focus from drilling and completions is going to shift to optimization and getting as much drainage and recovery as they can. And that really puts something like an ESP that can be adjusted in – it's really the best solution and not to say anything against rod lift and certainly having that in our portfolio going forward will give us a much better solution or offering to the customer to maximize that recovery per well.

Got it, that makes sense. And just to tie in little more just the same product line with different application, we're seeing some offshore FIDs this year, mostly for tiebacks, sounds like some more will be coming. Can you talk about the potential there in terms of deploying ESP technology and there is some of these tieback opportunities for perhaps some subsea boosting systems?

Yeah. So we've had – given the engineering that goes into a Baker Hughes Centrilift ESP, it's started for offshore applications. And now that we've – the world attention has kind of moved to these unconventionals and so forth, we've obviously broadened our portfolio to make that offering. But our core business in ESPs continues to be offshore applications. And we are encouraged by, as you say, the number of – kind of attention being shifted back to the brownfields and the tiebacks. And I would say subsea boosting as well as horizontal applications, lot of these tiebacks, just don't have the reservoir pressure that they used to have. So we're looking at dual ESPs, we're looking at horizontal ESPs to be put into the surface flow line infrastructures. And obviously, the GE Oil & Gas strong presence in subsea design and engineering separation power, to the degree that we can work with GE Oil & Gas at this stage in terms of managing the regulatory issues we've identified and have been approached by a couple of these customers to kind of engineer a comprehensive solution between Baker Hughes and GE Oil & Gas, and to the degree that we feel comfortable having those conversations, at this stage prior to the merger closing, we're engaging.

Very interesting. Thank you, Martin.

Sure. Thank you.

Thank you. Our next question is from Jud Bailey of Wells Fargo. Your line is open.

Thank you. Good morning.

Good morning, Jud.

Question – Martin, you touched on in your comments that the bifurcation you're seeing for directional drilling systems – or drilling overall in the U.S. high-end versus kind of more conventional motor, is there a way you could help us think about or sizing – well, if I were to look at your portfolio, your revenue mix, however you want to frame it, like what percentage of your business is now dedicated towards high-end? I would imagine it's still relatively small, but we're trying to think about the mix you guys have and help us size up maybe the growth opportunities as you see that market continue to evolve.

Yeah, and that's a tough one to answer, Jud, because depending on who you talk to, and depending on their portfolio and depending even on the customer defining high-end, I got to be honest, some people will say that what they are doing is high-end and the rest of us would scoff, but let me see if I can answer it this way. If I go back to what the customers' needs are and there're certainly a – there's a customer community out there that is looking for efficiency above all else. And there is a more, let's say, higher profile operator that is also looking to maximize the recovery and the production to the lifecycle, and I'd say that's probably by nature a little bit more longer-term focused player, more sophisticated in its in-house engineering, has more comprehensive plans about the way they complete the well, the way they put it on artificial lift, do they have on electrical grid or they're going to go to some kind of power to lift or gas to lift, and in that segment where that engineering discipline is pretty hefty inside, we're seeing some phenomenal ambitions around lateral lengths, multi-laterals, sliding sleeves or OptiPort 100, 200-stage type of discussions, pretty sophisticated artificial lift. So, on a percentage basis, let me just see if I can – I'd say that the drill bits are the fastest growing conversion, whether it's Kymera or TerrAdapt, followed by rotary steerables, which in our total drilling profile, may be 25% of the strings, but certainly on a margin basis probably 80%. That's the sector that's sold out. That's the sector we're seeing pricing gains coming. Certainly the performance justifies our higher prices. In my prepared remarks, over 7,300 feet in one day is unimaginable up in the…

Yeah, no, the market is moving very quickly and so that color is very helpful. Thank you for that. My follow-up is meant for Kimberly. You gave us some revenue guidance for international and North America. Could you maybe help us think about how margins would look in each, North America and international, and maybe if you're willing to take a step further, how to just think about maybe incrementals in the North America business in the back half of the year, assuming we continue to see growth and hopefully some pricing kind of come through?

Yeah. So we're not really giving any color or guidance on the overall margin for North America or internationally. What I will say is, as we noted before in international, we do expect to see some ongoing pricing deterioration, and we'll expect that to offset some pockets of growth that we expect to see onshore. And obviously, we have the uptick in Europe. Also, we have continued to focus on cost reductions. As you saw in Q1, we had some additional charges that we took for restructuring, as we look at those markets and determine where we need to take some additional costs out going forward. And a lot of this really depends on how the markets develop. If we look at the incrementals for North America, a few things affecting that, obviously, cost inflation, the mix that we have, Gulf versus on land. And we all need to keep in mind also that the chemicals, you don't see the same amount of incrementals going through as you do on the rest of the business. So we need to keep that in mind. And then also artificial lift is picking up, but it does lag the rig count. So there are some items there with regards to incrementals. And when I look at the fact that we will have cost inflation, we're also continuing to look at opportunities to get cost out, not only of the organization, where I think we've done a lot of work, but now really on supply chain and the manufacturing of the products, and whether it's by engineering solutions or working with suppliers. And I think this is where we have a real opportunity when we combine with GE to make some big steps with regards to some of those costs going forward.

Okay, great. I appreciate it. I'll turn it back. Thank you.

Thank you. Our next question is from David Anderson of Barclays. Your line is open.

Great. Thanks. So, Martin, you highlighted the 3% growth in North America, it was a little bit lower than we were expecting this quarter, and only kind of modest growth in U.S. – in North America in second quarter. I was wondering if you can kind of expand a little bit more on that. At the beginning, you kind of broke down that business, but in the past you said like 50% of that business is going to be tied to the rig count, a quarter is going to lag, and the remaining is going to be tied to oil prices. Can you just kind of walk through those buckets as you see them progressing right now? I mean, it sounds like – well, I guess, kind of imply – will there be a big kind of step-up in revenue in the back part of the year, sort of this demand that we're kind of waiting to come through here?

Look, we certainly expect the top-line to grow going forward, given the activity forecast we see in North America. The exposure to Baker Hughes, though, in the Gulf of Mexico is pretty substantial. And that, obviously, had an activity decline, as well as a mix shift between not only the activity decline, but also kind of the movement of some rigs from the deeper waters on to the shelf. If we move on land for the U.S., we're encouraged that, just like the previous question, the percentage of the drilling business that will move towards rotary steerables can only increase, given the fact that the lengths that our customers continue to try to pursue. And there is another subtle, I think, element to this, is that the barriers here – and I think there were some notes written on this, some good notes over the last couple of weeks, that length for length's sake isn't going to necessarily continue to produce the results. We're getting into some interference issues, boundary issues, which means that as our customers are drilling these, the ability to land the well spot-on increasingly means that a rotary steerable with some formation evaluation instrumentation in the string is increasingly critical. So, we're starting to see a shift from just blow and go these holes down as fast as you can, which is certainly a big part of the efficiency gains. But we're going to have to be very careful working with our customers, and our customers primarily, to make sure that these things are drilled as efficiently as possible. So I would say that you're going to see a strong ramp-up in the high-end mix of the drilling side of the business, but we're also investing to make sure we backstop and take our fair share…

So, Martin, towards the beginning of your remarks, you just mentioned that kind of Gulf of Mexico continues to be the headwind. Just kind of curious, I mean, do you think second quarter is a bottom here on the Gulf side. And just kind of secondarily, you'd mentioned some tender wins and be in the right places offshore. What does that mean to Baker Hughes, be in the right places offshore?

No, a great question. What it means is that, is this an operator, and the ones that we won, the operators are large position holders, their company profile means that they have to make the Gulf of Mexico work. They have to the engineer some of the cost out. They're excited by – in one of the big contracts, they're excited by the buckling up with GE Oil & Gas, who is also a currently large provider. So over the three, five-year term of that contract, we have it now in our portfolio, not for what the next couple quarters will deliver, but what...

Okay.

...GE and us will be able to do to together. So I'm not willing to call a bottom on the Gulf.

Okay.

But we should hopefully be near it.

God, I hope so. Right. Thank you.

We did too.

Thanks, David.

Thank you. Our next question is from Angie Sedita of UBS. Your line is open.

Thanks. Good morning, guys.

Hi, Angie.

Hi, Martin. So could you give us an update on the progress on the asset-light model and the opportunities that you're seeing both internationally and the U.S. and just some color there?

I can, Angie. Thanks. Yeah. We kind of coined that term this time last year and we had two key elements of that. First was, taking a look at the North American business as it relates to the capital intensity of at that time our largest product line, pressure pumping. We worked through the summer and the fall. We deconsolidated that. This is our first quarter of not having that capital intensity. We love the arrangement we made. We love the CSL guys that they're really competing head-on. The business is growing strongly. No capital calls on us, which we love. And, I mean, I had somebody say to me the other day, it's pumps for hire now. The disaggregation on that business continues. I think that business, in particular, is going to be owned by the independent service companies. Local always wins, whether it's the Bakken or the South Texas. And these guys play local. They have a price point that is shocking and they're winning. So we love having 47% of a great business. Moving to the alternative business models, where we said that every product line and every basin, including North America, has to win. Let me tell you, Angie, there is not a country in the world, including the U.S., that isn't all about local value, and some are more aggressive than others. But in my 30 years in this business, everything else being equal, Angie, and it's not always technology that wins, frankly not always, which isn't good for us all the times, it's not always price that wins. But let me tell you, local always wins and I don't care where that is. It can be the Bakken or it could be in the Congo, and we signed up three really nice contracts last quarter. We had a huge sale this quarter for a local provider in Asia. Our pipeline is stacked and full. Now, I want to be honest and frank, though, as well. I mean, a lot of these new startups are challenged. I mean, there is no market in the world that's great right now, not for the big guys, not for these little startups. But in terms of the relationships we're building the ability for them to be putting Baker Hughes products into the market, once they get their feet under them, it's looking – it's definitely the right move and it's looking good. So we couldn't be more happy with the way that business is going to evolve.

Right. That's helpful. And then on the international pricing, everybody is seeing these challenges on the pricing side, but how long do you think this pricing continues? Does the pricing pressures and the rebidding continue throughout 2017 or do you see potentially an end in sight?

I think the end is in sight, Angie. I think we're going to experience some of these roll-throughs. It's still pretty aggressive. But I think the second half the conversations are going to kind of wane around pricing. And as I said, certainly on the land side of the international markets, it's waning now. The offshore not yet, but I think the 2017 will – the end of 2017 will be the – the worst will be over.

Right. Okay, great. Thanks. I'll turn it over.

Okay, folks. Listen, thanks, Angie. I want to make some closing comments. First, I want to thank everybody for being with us, but a couple of key points. First, on the markets. The international markets we think have reached bottom in terms of activity, but pricing pressure will linger as activity improves in the second half of the year. In North America, we continue to see growth and some positive pricing trends in certain basins on some certain – or specific product lines. The second point I want to make is that our portfolio is very well-positioned to capitalize on these market dynamics. The chemical business is gaining share and is positioned to grow with increased North American production growth. The artificial lift business, which does lag the rig count, is seeing increased demand. Key product lines in our D&E portfolio are absolutely sold out and we're gaining pricing momentum. We have the most comprehensive completion offering of anyone in the business, and yet we still have some pretty incredible launches in later half of this year that we'll tell you about when those happen. And the asset-light strategy that Angie just asked about, whether it be the deconsolidation of the North American pressure pumping business or the new channels to market predominantly international are gaining traction and are going to improve our capital returns and continue to grow our margins. And then the final point I want to talk about is the GE deal. Every element of the Baker Hughes strategy that we've laid out for you over the last 12 months is enhanced and accelerated by the buckling up with GE Oil & Gas. New product development is going to be accelerated via access to the technology, breadth and depth within the GE store. Supply chain synergies will continue to fuel product, cost reductions. Our go-to-market strategy will leverage the capabilities of a full stream service sector company with unparalleled geographic access. And finally, and I think most importantly, and where the customer community is certainly heading is that Baker Hughes will be uniquely positioned to drive the digital transformation, if not revolution, so badly needed in the upstream oil and gas sector. So that's our call for the quarter. I want to again thank everybody for joining us. Bye.

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