Baker Hughes Earnings Call Insights: Margin Progression and International Top Line Growth Rates

Baker Hughes Inc. (NYSE:BHI) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Margin Progression

James West – Barclays Capital: Martin, in your comments, your prepared comments, a lot of commentary around North America, also in Peter’s comments as well. Some of it, I guess, negative, some of it Baker Hughes specific, positive. As we think about an environment where you are introducing new technologies, you are getting an improving customer mix. You do see the Gulf of Mexico being a good driver of growth. Yet, U.S. land rig count down, maybe completions are up in that scenario, still pricing challenges and pricing weakness spreading out. How should we think about margin progression kind of off of this fourth quarter level, is that below? Are we stuck in this kind of single-digit range or should we kind of bounce back off this as we go through the year as some of the positives in your mix and in your business come through?

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Peter Ragauss – SVP and CFO: I will answer first and maybe Martin can supplement that. But we think the Guam is going to progress nicely. We have got good share positions there. We have had a 30% increase in revenues last year and that revenue should continue to move forward in the Guam. Canada of course bounces around with seasonality. Should be up in Q1, should be down sharply in Q2 and second half looks like second half of last year. So that leaves you with two other variables which are the pressure pumping business in U.S. land and our other product lines in U.S. land and our products lines seem to be holding up in U.S. lands. Haven’t had much pricing pressure there yet, so that’s been pretty good and we expect the rig count to continue to improve throughout the year. So those product lines right now look like they are pretty stable and pretty good. I think the big variable is what happens in pressure pumping, whether or not pricing continues to decline and outpaces our cost savings. We are expecting guar costs to improve further into Q1 and they did improve in Q4. So that’s good, but pricing has been much eating up those savings in recent quarters. So that’s the big volatility and we are not going to try to make a call on that right now.

James West – Barclays Capital: So Peter, do you think that given that the rig count – you just said the rig count to improve, that your greater than, I guess, your peers exposure to the spot market for pressure pumping, is would it be a net positive or is that a net negative for you?

Martin S. Craighead – President and CEO: James, this is Martin. We do expect, as Peter said, the rig count to improve from here on out slightly, more towards the back half of the year than the early part. But on a year-on-year our average it’s down. In terms of the pricing, we have been and continue to be probably still a little bit more exposed to the spot market and that price environment is continuing to weaken. It’s not – I don’t think it has found bottom yet. I think it’s a tough thing to call. The flip side of that is we are, I don’t think we have as much price decline opportunity versus let’s say an operator or service Company that’s got still, more of a contract mix. So with the year-on-year decline in the rigs, a little bit more pricing softness in that particular product line, it’s – as Peter said, it’s a little difficult to say exactly where it’s going to end up.

International Top Line Growth Rates

Bill Herbert – Simmons & Company: Martin, with regard to your international commentary here it sounds like EAC and MEAP up or expected to be up, reasonably nicely in 2013 in Latin America, probably down year-over-year. If I heard you correctly, you said Andean, Mexico, everything but Brazil, only partially offsets the declines in Brazil. So when you – how does that distill into an overall international top line growth rates for 2013? Is it high single digits with kind of EAC and the Middle East, Asia Pacific, up maybe high single low double and Latin America, down low single? Is that about right?

Martin S. Craighead – President and CEO: Yeah, I’d say that’s pretty reasonable, Bill.

Bill Herbert – Simmons & Company: Then we didn’t talk much about margins. You were flat year-over-year in 2012. Historically, we’ve talked about kind of the current environment, which is mostly sort of volumetric driven, very selective pricing and hopefully some mix opportunities as well; distilling into, call it, 20% to 25% incremental margin environment internationally. Is that what we should assume for 2013?

Martin S. Craighead – President and CEO: Yeah, it might be a bit better than that, but I think that’s a reasonable number from here on now.

Bill Herbert – Simmons & Company: Last one from me; Peter, year-end product sales, I think Q4 2011 we witnessed kind of the $50 million contribution quarter-on-quarter. Was that roughly in the ball park for this fourth quarter or was it a bit better than that?

Peter Ragauss – SVP and CFO: In terms of contribution margin?

Bill Herbert – Simmons & Company: No, in terms of top line fourth quarter versus third quarter.

Peter Ragauss – SVP and CFO: No, it better than that. I would say, much of the sequential improvement in revenues internationally was year-end product sales, and it’s pretty much spread across the three regions, pretty strong. I think we said in our remarks in Africa and Russia, strong in Asia Pacific and strong in Latin America. So, therefore we would expect that to reverse out into Q1.

Bill Herbert – Simmons & Company: Sure, so on the $178 million revenue improvement quarter-on-quarter, call it at least 50% of that was year-end product sales on pretty high incrementals?

Peter Ragauss – SVP and CFO: Yeah, more than 50%.

A Closer Look: Baker Hughes Earnings Cheat Sheet>>