Q1 2025 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Baker Hughes Company First Quarter 2025 Earnings 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, Mr. Chase Mulvehill, Vice President of Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to Baker Hughes first quarter earnings conference call. Here with me are our Chairman and CEO, Lorenzo Simonelli; and our CFO, Ahmed Moghal. The earnings release we issued yesterday evening can be found on our website at bakerhughes.com.

We will also be using a presentation with our prepared remarks during this webcast, which can be found on our investor website. As a reminder, we will provide forward-looking statements during this conference call. These statements are not guarantees of future performance and involve a number of risks and assumptions. Please review our SEC filings and website for the factors that could cause actual results to differ materially.

Reconciliation of adjusted EBITDA and certain GAAP to non-GAAP measures can be found in our earnings release. With that, I'll turn the call over to Lorenzo.

Thank you, Chase. Good morning, everyone, and thanks for joining us. Before getting into the results, I would like to welcome Ahmed to the earnings call as our new CFO. Ahmed brings extensive experience and a deep understanding of the Baker Hughes portfolio.

He will collaborate with me and the broader executive team to advance our strategic priorities with a clear focus on profitable growth and sustained margin improvement. Now let me start by providing a quick outline for today's call. I will begin by providing our thoughts on the macro environment before discussing our strong first quarter results. I will then highlight key awards and technology developments announced during the quarter.

After this, I will briefly speak to our outlook before handing the call over to Ahmed, who will provide more details on our financial performance, walk through the potential tariff impacts to our business and provide further detail around our outlook. Ahmed will then hand it back to me for a quick recap before we open the line for questions. Now let's turn to our macro outlook. Starting on Slide 4. The global economy has started cautiously this year due to ongoing geopolitical tensions, uncertainty around trade policy and tariffs, China's slower growth rate and lingering inflationary pressures.

Specifically for Baker Hughes, we continue to monitor the evolving landscape closely and are taking proactive steps to mitigate the potential impact of changes in trade policy, particularly tariff rates. Broadly speaking, our strong weighting to international markets, along with a diversified, localized supply chain and established competitive position helps reduce our overall financial exposure. Later during the call, Ahmed will provide more detail on the potential implications for Baker Hughes. Turning to oil markets.

There are several factors driving downward pressure on oil prices. As announced earlier in the first quarter, OPEC+ has now begun executing its plan to return 2.2 million barrels per day of previously idled oil production to the market. Subsequently, oil prices saw increased volatility stemming from elevated tariff uncertainty that's affecting global GDP and oil demand. With the softening macro backdrop, we now expect global upstream spending to be down by high-single digits in 2025, including a mid- to high single-digit decline internationally and a low-double digit decrease in North America.

Excluding Mexico, international upstream spend is expected to fall in the low- to mid-single digit range. These expectations assume a stabilization of oil prices around the current levels and tariffs hold at the current 90-day pause rates. A sustained move lower in oil prices or worsening tariffs would introduce further downside risk to this outlook. The prospects of an oversupplied oil market, rising tariffs, uncertainty in Mexico and activity weakness in Saudi Arabia are collectively constraining international upstream spending levels.

Amid broader market softness, we see pockets of resilience in key international markets like Brazil and several countries in the Middle East and Asia Pacific. In North America, discretionary spending delays are extending into the second quarter, driven by ongoing uncertainty. Additionally, recent oil price volatility presents potential downside to second half activity, particularly in U.S. land. While second half visibility remains limited, we expect to outperform the broader North American market supported by our production weighted portfolio.

On natural gas, we see a more positive outlook. Long-cycle gas-levered projects in LNG, gas infrastructure and data centers continue to make progress towards FID. Rising gas-fired power demand underscores a long-term shift in market fundamentals and affected by near-term macroeconomic volatility. To this point, natural gas demonstrated the strongest increase in demand among fossil fuels in 2024, led by a significant increase in power consumption.

According to the IEA, gas demand increased by 115 bcm or 2.7% compared with an average of 75 bcm annually over the past decade. Strong gas fundamentals remain positive for LNG contracting trends. Wood Mackenzie reports that 15.5 MTPA of long-term LNG offtake contracts were signed in the first quarter, following a record 81 MTPA last year. These statistics highlight consumer confidence in long-term global LNG and natural gas demand.

In the U.S., the repeal of the LNG permitting moratorium and the administration's stated goal of increasing U.S. LNG exports has led to an improvement in orders for U.S. LNG projects. We have now booked around $1.7 billion of orders for U.S.

LNG projects over the past two quarters. Given this positive backdrop, several key LNG customers in the Gulf Coast are indicating plans to further expand capacity beyond 2030. This offers greater clarity regarding the potential increase an installed capacity above the anticipated 800 MTPA by the end of the decade. I would now like to address our outlook given the current macroeconomic environment. We have a clear view of the near-term direct impact that tariffs will have on our business and are actively implementing a number of mitigation actions.

However, the ongoing and dynamic trade negotiations between the U.S. and its trading partners, and the uncertainty regarding the eventual status of tariff rates and other trade policies across key markets, introduce a high degree of variability. Given this backdrop, we are providing our second quarter guidance along with a framework for our 2025 outlook, which Ahmed will cover in more detail later. As we evaluate the path forward, it is important to recognize the different dynamics across our segments. OFSE is facing a wider range of potential outcomes driven by reduced upstream spending, tariff-related cost inflation, and exposure to more cyclical markets limiting visibility beyond the current quarter.

IET offers greater visibility and is well positioned in this environment, supported by a healthy equipment backlog, substantial recurring revenues, and strong operational performance, underscoring the strength and balance of our portfolio. We remain confident in our strategy. Our focus is on the areas within our control, driving productivity, executing with discipline and accelerating our efforts to be a leaner, more efficient company. Turning to our first quarter operational performance on Slide 5. We delivered strong results maintaining the trend of meeting or exceeding the midpoint of our EBITDA guidance for the ninth consecutive quarter.

We also set new first quarter records for revenue and our adjusted measures of EPS, EBITDA and EBITDA margin. Adjusted EBITDA of $1.04 billion increased by 10% year-over-year led by IET, where EBITDA has increased by at least 30% for five consecutive quarters. Industrial & Energy Technology experienced a solid start to the year booking $3.2 billion of orders with segment backlog reaching another record level of $30.4 billion. Excluding LNG equipment, orders totaled a robust $2.7 billion.

During the quarter, we generated free cash flow of $454 million and returned a total of $417 million to shareholders. Our strong first quarter results reflect our commitment to profitable growth and continuous margin improvement. Solid operational execution and transformation progress are driving structural margin improvement with our adjusted EBITDA margin expanding by 140 basis points to 16.1%, including gains across both segments, even as a softer upstream market weighed on OFSE. Turning to Slide 6. We are witnessing strong commercial momentum across new and existing markets.

This was reinforced by the record attendance at our recent Annual Meeting in Florence, Italy which brought together over 2,300 customers and delegates from 85 countries. Importantly, we had representation across industrial and energy ecosystems. Including participants from mining, steel, cement, industrial power generation and data center markets. Following several customer engagements at this event, we booked multiple data center awards, marking our entrance into this market and further expanding IET's industrial reach.

Of the 35 Nova LTs booked during the quarter, 22 will be utilized to power data centers. This amounts to more than 350 megawatts of power for this high growth market. In March, we signed an agreement with Frontier Infrastructure to develop large scale CCS and power solutions for data centers including the development of behind-the-meter gas-fired power generation that will utilize on Nova LT turbines. This partnership will leverage technologies and services across Baker Hughes by providing CO2 compression, industrial gas turbines, digital monitoring solutions, well construction and completion services.

We also secured an order from Turbine-X Energy, one of Baker Hughes network of authorized packages in North America. The scope includes Nova LT gas turbines gears and power generation technology for microgrid solutions to power data centers. In gas infrastructure, we secured an award in North America for two pipeline compression stations, which will provide feed gas to a Gulf Coast LNG facility. This award includes a total of 10 gas turbines and 10 centrifugal compressors.

Generally, we see growing opportunities in North America for gas infrastructure driven by LNG capacity expansion along the Gulf Coast and AI-led demand for gas pad data centers. We also received an award to supply our Nova LT gas turbine and a pipeline compressor for a gas boosting station in the U.K. This equipment order is part of National Gas Transmission's broader investment to enhance the U.K.'s gas infrastructure, ensuring energy security and reducing overall emissions. In LNG, we secured an order for a liquefaction train in North America.

We will provide four main refrigerant compressors driven by LM6000 gas turbines and four expander compressors. We also sign key strategic framework agreements with NextDecade and Argent LNG, growing our pipeline of potential orders. For NextDecade, the scope includes equipment for five additional trains totaling 30 MTPA of liquefaction capacity at the Rio Grande LNG facility. This will be complemented by contractual services agreements for these equipment packages.

Argent LNG has selected Baker Hughes to provide liquefaction, power solutions, and related aftermarket services for its proposed 24 MTPA LNG export facility in Louisiana. Importantly, the project will employ Bakers Hughes nimble modularized LNG solution driven by the LM9000 gas turbine, while also utilizing our iCenter and Cordant digital solutions. Including NextDecade and Argent, we now have LNG supply agreements in place for over 120 MTPA. This provides visibility for potential LNG equipment orders into the latter part of this decade.

In Gas Tech Services, we experienced a record quarter for upgrade orders increasing by 167% year-over-year as many operators look to drive efficiencies, reduce emissions, and extend the life of their gas infrastructure projects. This was the largest order quarter for upgrades in the history of the company. In the Middle East, we received a significant upgrade award to support one of the world's largest gas processing plants. The scope includes the upgrade of two existing gas turbines to drive new compressors and the supply of a third compression train to support production expansion.

Separately, the team is partnering with SONATRACH to deliver an upgrade solution to support the modernization of a key compressor station in Algeria. Turning to Oilfield Services & Equipment. We experienced sustained commercial momentum through market uncertainty during the first quarter. Petrobras continues to leverage our innovative solutions to help unlock Brazil's vast energy supply.

During the quarter, Baker Hughes received a major integrated completion systems order across multiple deepwater fields in Brazil. In Mature Assets Solutions, OFSE received an award from SOCAR in Azerbaijan to expand deployment of Leucipa to all wells in the Absheron and Gunseli fields including those with non-Baker Hughes electric submersible pumps. We also signed a multi-year frame agreement with Equinor to provide plugging services on the Norwegian continental shelf. As part of this agreement, Baker Hughes' Mature Assets Solutions team will lead the integrated plug and abandonment campaign, managing the planning and execution across the North Sea's Oseberg East field.

Across the Baker Hughes Enterprise, we are capturing increasing commercial synergies between OFSE and IET. Through our early engagement on gas infrastructure, CCUS, geothermal and data center projects. Looking out to horizon 2, our pipeline of enterprise-wide opportunities continues to grow as customers seek solutions to address their energy efficiency and decarbonization needs. In addition to the previously mentioned Frontier agreement, we booked two orders that highlight commercial synergies across the enterprise.

OFSE was awarded a multi-year contract to provide integrated coiled tubing drilling services on the Margham Gas storage project in Dubai. This award was facilitated by IETs existing customer relationship with Dubai Supply Authority who previously ordered ICL compressors for the same project. We are also observing this commercial trend offshore. In OFSE, we received a significant multi-year award from ExxonMobil Guyana to provide specialty chemicals and related services for FPSOs, which complements our IET scope that includes power generation and compression equipment previously awarded.

Moving to new energy. We booked $238 million of orders and maintain our 2025 order target of $1.4 billion to $1.6 billion. During the quarter, we booked an award to supply three electric motor-driven CO2 compression trains and gearboxes for a CCS project in Northwestern Europe. We also made progress on several new energy technology developments.

In geothermal, we have been selected by the U.S. Air Force and the Department of Defense to explore the development of utility scale geothermal power. During the quarter, we also announced the joint development and collaboration agreement with Hanwha for the development of a new small-scale turbine for ammonia applications. The new ammonia turbine will be suitable across shipping, FPSO, and gas infrastructure markets.

Overall, we had a positive start to the year from a commercial and technology engagement perspective and remain confident in our IET orders guidance range this year. We are building strong order and technology pipelines that extend beyond our traditional oil and gas markets, providing additional life cycle growth opportunities that further enhance our earnings durability. Baker Hughes is well positioned to deliver sustainable growth and long-term shareholder value, and we're excited about the future as we advance into the next phase of our journey. With that, I'll turn the call over to Ahmed, who will provide more details on our quarterly results, tariff exposure and guidance.

Thanks, Lorenzo. I'll begin on Slide 8 with an overview of our consolidated results, and then speak to segment performance before providing details of our exposure to evolving trade policy and tariffs. I will also provide a quick summary of our outlook before handing it back to Lorenzo for final comments. As Lorenzo mentioned, orders got off to a solid start to the year, booking $6.5 billion for the total company and included $3.2 billion in IET.

Adjusted EBITDA increased by 10% year-over-year to $1.04 billion, driven by strong IET revenue growth and continued margin expansion across both segments. GAAP diluted earnings per share were $0.40, excluding adjusting items, earnings per share were $0.51, an increase of 19% when compared to the same quarter last year. We generated free cash flow of $454 million for the quarter. For the full-year, we continue to target free cash flow conversion of 45% to 50% with a normal weighting towards the second half of the year.

Turning to capital allocation on Slide 9. Our balance sheet remains in a very strong position, ending the first quarter with cash of $3.3 billion, a net debt-to-EBITDA ratio of 0.6x and liquidity of $6.3 billion. Our next debt maturity is not until December 2026, and S&P recently upgraded our long-term credit rating to A. We returned $417 million to shareholders in the first quarter. This included $229 million of dividends and $188 million of share repurchases.

We remain committed to returning 60% to 80% of free cash flow to shareholders. I will now highlight the results for both segments, starting with IET on Slide 10. During the quarter, we booked solid IET orders of $3.2 billion. This included $510 million for LNG equipment, $104 million for data centers, and record gas tech service upgrades of $272 million. Book-to-bill was 1.1x, resulting in IET RPO of $30.4 billion that reached a new record.

This RPO level and a structural growing installed base provides significant revenue visibility for IET over the coming years. IET revenue increased by 11% year-over-year to $2.9 billion, led by a 20% increase in gas tech equipment and 114% growth in Climate Tech Solutions, partially offset by Gas Tech Services. EBITDA growth significantly outpaced segment revenue, increasing 30% year-over-year as margins expanded by 240 basis points to 17.1% despite mixed headwinds. This performance was driven by a strong margin expansion in Gas Tech Equipment supported by productivity from project closeouts.

IET continues to benefit from the lean strategies being adopted across operations that are driving structural margin improvement. Turning to OFSE on Slide 11. OFSE revenue in the quarter was $3.5 billion, down 10% sequentially as we experienced enhanced seasonal weakness across many international markets. Economic and tariff uncertainty to start the year resulted in customers delaying discretionary spending primarily impacting direct equipment sales. In international markets, revenue declined 11% sequentially, driven by a significant slowdown in activity in Mexico.

Rig activity in Mexico declined sequentially by 52%, now down 72% from 2023's peak levels. Excluding Mexico and SSBS, international revenue was down 7% sequentially, more aligned with typical seasonal declines. In North America, revenue declined 5% sequentially, driven by seasonal weakness in offshore. North America land was down 3% as strength in drilling services and drill bits were offset by lower revenue across most other businesses.

OFSE EBITDA margin rate was 17.8%, improving 80 basis points year-over-year, even with segment revenue declining by 8%. This is a testament to the team's hard work to structurally change the way we operate. Due to the previously mentioned Mexico weakness and delays in discretionary customer spending, segment EBITDA of $623 million was between the low and midpoint of our guidance range. Turning to Slide 12. I want to walk through our outlook and how the current environment could impact performance.

I'll begin by outlining the potential tariff impacts to Baker Hughes then walk through our full-year framework and conclude with detailed guidance for the second quarter. While the situation remains fluid, we have been conducting comprehensive scenario planning exercises and continue to develop and implement mitigation strategies to manage through this period of volatility. In our OFSE segment, our strong international presence provides us a degree of protection against tariff impacts, since approximately 80% of segment revenue is derived from markets outside the U.S. Domestically, we benefit from our broad U.S. manufacturing footprint and a resilient local supply chain.

However, we do expect some cost headwinds tied to imports from China, Germany, and the U.K. We also sourced some oilfield components and chemicals from Canada and Mexico, a portion of which qualify under USMCA provisions. To reduce reliance on these imports for OFSE, we have been working with U.S. supply chain partners to increase domestic sourcing. Additionally, we have engaged with customers on cost recovery initiatives which have led to encouraging outcomes to date.

Within IET, we have identified three areas of tariff exposure. First, a portion of Industrial Tech's U.S. volumes exported to China may be impacted by new trade policies. Second, we supply critical equipment to U.S. projects from our facilities in Italy, although this backlog has limited exposure due to existing contractual terms. Third, we anticipate modest impact from steel and aluminum tariffs as well as U.S.

China trade activity. Similar to OFSE, we're deploying several mitigation strategies within IET including exploring domestic procurement alternatives to reduce input costs and optimizing our global manufacturing footprint. We expect these actions combined with continued productivity gains will largely offset the tariff-related impacts. After accounting for these offsets across both segments, we estimate a net EBITDA impact in the range of $100 million to $200 million.

This assumes current tariff rates supplied during the 90-day pause period continue for the remainder of 2025. Beyond direct impacts, we are also monitoring secondary effects such as more cautious customer behavior and the potential for broader economic weakness. Factors that remain difficult to quantify. A further swing of customer spending could affect our more economically sensitive areas, such as direct sales and transactional services in OFSE and Industrial Tech in IET. Turning to our 2025 outlook.

We used this tariff outline to help shape our framework for the full-year. As visibility on trade policy and the broader market dynamics improve, we will provide further updates as we progress through the year. In IET, we believe our diversified portfolio, substantial IET backlog and sizable aftermarket services business provide earnings and cash flow stability during this period of uncertainty. In the current environment, IET's lean mindset and process-driven culture should continue to deliver structural margin improvement even in the face of higher input costs.

As we balance our current view, we believe the IET EBITDA guidance range communicated in January remains achievable. In OFSE, visibility beyond the second quarter remains limited. If oil prices and tariffs hold at current levels, we expect global upstream spending to decline in the high-single digit range for 2025. Under this scenario, we believe OFSE margins will still improve year-over-year driven by cost efficiency and continued execution of transformation initiatives. As this framework illustrates, our 2025 outlook reflects pressure from market sensitive elements of OFSE, while IET is expected to deliver strong growth compared to last year.

Turning to second quarter. We expect total revenue of $6.3 billion to $7 billion and total EBITDA of approximately $1.04 billion to $1.2 billion. This guidance assumes we can partially offset tariff impacts through abatement opportunities, contractual pass-throughs and other mitigation strategies. It also assumes tariff levels remain consistent when compared to the current 90-day pause scenario.

For IET, we forecast EBITDA of $520 million to $580 million on revenue of $3.0 billion to $3.3 billion, led by growth in Gas Tech Services. The major factors driving this range will be the pace of backlog conversion in GTE, the impact of any aero derivative supply chain tightness and volume levels in Industrial Tech. For OFSE, we forecast EBITDA of $600 million to $700 million on revenue of $3.3 billion to $3.7 billion, implying further margin improvement on flat sequential revenue. We expect results to reflect a less pronounced seasonal recovery in both international and U.S. markets due to ongoing macro uncertainty and recent oil price weakness.

Factors driving the range include execution of our SSPS backlog, the impact of near-term activity levels in North America and international markets and the pace of activity in Mexico. In summary, we are pleased with the company's operational performance during the first quarter. OFSE margins remained resilient despite upstream market softness, while IET margins continued progressing towards 20%. Although our outlook is tempered by macro and trade policy uncertainty, we remain focused on elements we can control, continuing to streamline operations and drive efficiencies that will benefit us well beyond the cycle.

With that, I'll turn the call back over to Lorenzo.

Thank you, Ahmed. Our strong first quarter results demonstrate the progress we've made in transforming our operations and streamlining the organization. This has created a solid foundation to further optimize margins and enhance returns even in a challenging environment. Looking beyond near-term macro uncertainty, we continue to believe in the structural growth of global energy demand, an outlook that underpins our strategy and anchors Baker Hughes long-term value creation.

The world needs more energy with fewer emissions and we see natural gas playing a fundamental role in achieving this dual objective. To conclude, thank you to the entire Baker Hughes team for yet again delivering outstanding results. As we continue our journey to take Baker Hughes and Energy forward, we remain committed to our customers, shareholders, and employees. With that, I will turn the call back over to Chase.

Operator, we can now open up for questions.

[Operator Instructions]. Our first question comes from Arun Jayaram with JPMorgan. Your line is open.

Yes, good morning. My question is regarding guidance. We appreciate the fact there's a lot of uncertainty associated with tariffs and OPEC+ plus policy. It makes sense to us Lorenzo, you shifted to a hybrid pragmatic approach to the guide with the explicit guide for 2Q.

I guess my question is you've highlighted $100 million to $200 million of tariff impacts this year. I know that you had on the fourth quarter call, had a guidance range of $4.7 billion at the low end, $4.95 billion at the midpoint. I was wondering if you could highlight any confidence you have Lorenzo, Ahmed around, call it the low end of the guide, if we factor in some of the tariff impacts and the fact that IET looks largely intact?

Yes, hi Arun and thanks, appreciate the question, an important topic, and we'll break it down into really, I'll start off and then let Ahmed maybe walk you through the framework, and then also specifically respond to the question, and I'll come back at the end because I think it's important that everybody is clear on what we're saying here. As I noted in my prepared remarks, the global economy has experienced a cautious start driven by the ongoing geopolitical tensions, some of the trade policy and tariff uncertainty, slower growth in China and persistent inflationary pressures. So far in the second quarter and also what you saw with our good results in first quarter, we've not experienced a material impact to volumes or activity levels.

We do recognize though there's growing uncertainties around the trade policy and tariffs that's creating some uncertainties for our customers as well as for Baker Hughes. So as a result, we've got less visibility into the second half of the year across our more economically sensitive businesses, such as drilling and completion service lines, U.S. land, short-cycle oilfield services and international and the GDP like Industrial Tech businesses. So given the wide range of potential outcomes on the trade policy and tariff outcomes and their impact, we thought it was important to provide a framework that allows you to look at 2025. And once there's greater clarity in the external environment, we intend again to provide formal full-year guidance ranges for the company.

And I'll pass it to Ahmed to give a little bit more detail on the aspects of the framework.

Yes. Arun, let me just start by talking through the framework itself. So I'll start with the key points around tariffs. Under the current set of trade policies, we understand the direct implications for our business and have been implementing as you heard several mitigation actions.

So after accounting for those potential offsets across both segments, we estimate a net EBITDA impact in the range of what we mentioned of $100 million to $200 million, which includes both direct costs as well as revenue-related impacts. And I'd say just over half is attributed to IET. And the primary factor behind that range is actually the timing and effectiveness of our mitigation actions. So the estimate assumes the current tariff levels are in effect during the 90-day pause period and remain in place through year-end.

And as a result, our estimate doesn't really include the secondary effects from tariffs like lower oil prices, broad economic weakness, which could ultimately have a larger impact on our results than just the direct inflationary cost pressures. But of course, the trade policy and the tariff environment worsens, then we'll need to reassess and likely adjust the estimated impact accordingly. So how this translates to the segments? So I'll start with IET.

IET is reasonably well positioned to manage through this environment while tariff-related cost inflation, we expect it to impact the segment of force, the effect is largely concentrated in the Industrial Tech side of the segment. And at this stage, we assume that continued productivity gains that you've seen in Gas Tech are expected to offset much of that inflationary pressure within the Industrial Tech side of the house. And also in Industrial Tech, which accounts for just as a reminder, about a quarter of IET revenues, we could face potential headwinds from slowing GDP growth in addition to the inflationary pressures that we've talked about.

But taking all of that into account, we continue to view our 2025 total year IET EBITDA guidance range of $2.2 billion to $2.4 billion as achievable. So then you go on to OFSE and ultimately OFSE, as Lorenzo mentioned, faces a broader range of outcomes, which limits the visibility beyond the current quarter, so second quarter. Now we expect North American upstream spending to decline in the low-double digit range and international spending to decline by mid- to high-single digits. But despite that deterioration in the overall market, we remain focused on optimizing cost structure, eliminating duplication to protect margins.

And you've seen us do that even as market conditions soften. Now as to your last question about holding the $4.7 billion EBITDA level for the year. We believe that we could approach that EBITDA level if the tariff-related impacts land towards the lower end of that $100 million to $200 million range and oil prices stabilize and tariffs hold at the current 90-day pause rates.

So Arun, maybe just to conclude, because I think this is a very fluid situation and everybody is approaching this differently. I just wanted to maybe add a couple of quick points here. And the hybrid model that we've laid out is really to provide a lot of transparency. And if you look at the conclusion on the IET side, we said our guidance ranges are still achievable.

On the OFSE side, it's more of a framework, given some of the higher level of our uncertainty. Ultimately, we believe there's still a path for our full-year results to approach the low end of our guidance range, and we'll continue providing updates being transparent and also clearly managing the fluid environment that we're in. So I appreciate the question, Arun.

Thank you. Our next question comes from Stephen Gengaro with Stifel. Your line is open.

Thanks, good morning everybody. So after three strong years, very strong years of IET orders, you're off to a good start in 2025. And you had those significant data center orders as well. Can you talk about the opportunity for Baker on the data center side? And maybe also share thoughts on how you think the macro could impact the IET order flow this year?

Definitely, Stephen, and thanks. IET did have a solid start to the year for orders, booking $3.2 billion in the first quarter, as you mentioned. And with our LNG equipment, IET orders still totaled $2.7 billion, which continues to demonstrate the depth and versatility of the IET portfolio. For the full year, we're sticking to the guidance that we laid out at the beginning of the year to be in the range of $12.5 billion and $14.5 billion.

We continue to feel good about the LNG outlook and the data center opportunities, which are gaining momentum. I think as you look at highlight during the first quarter, record levels of also Gas Tech Services upgrades, a trend that looks like it will continue. And we're really not seeing customers pull back from LNG gas infrastructure or the data center projects. And we're staying very close to them and monitoring things.

Just to highlight on the LNG momentum. During the quarter, we booked an order for liquefaction equipment in North America, also book to gas infrastructure order for feed gas compression from a major U.S. LNG operator. And we expanded our relationship with NextDecade to cover five more trains at Rio Grande and signed an agreement with Argent LNG to support their proposed 24 MTPA facility.

So over the past two quarters, we secured $1.7 billion in LNG orders and that speaks to our leading position in LNG and reinforces the positive outlook for the year and the growing confidence we have in LNG orders that's supported by long-term equipment supply agreements with strategic operators, including Venture Global and NextDecade. So as you look at overall, we've got a growing number of LNG customers, and we have supply agreements in place for over 120 MTPA of LNG and we've seen a good increase in offtake agreements and equity investments by LNG players, which further strengthens our confidence on the outlook for this year and beyond.

So as you look at 2025 and also 2026, again we feel good about the 100 MTPA of FIDs that make us reach the 800 MTPA by 2030. And we also think we'll surpass that 800 MTPA as we go beyond 2030. So LNG continues to be good. On data centers, I think a great example of what we've discussed before, really showcasing IET's expanding reach in industrial areas and the divestiture of the portfolio. And looking at external factors, we continue to see a strong pickup in demand as you look at McKinsey, they see U.S. data center energy demand by 2030, that's increasing at 23% CAGR rate. And we're continuing to see strong interest and the capability that we have across the Baker Hughes portfolio given OFSE and IET to provide decarbonization solutions and power generation.

And the great example is Frontier Infrastructure that we announced, which again provides the development of large scale CCS and power solutions for data centers and it's their first development, end-to-end solution, turbine CO2 storage, well design construction. So we feel good that that's going to continue. And the enterprise-wide solutions we can provide are a key differentiator. As you look at Nova LTs, the industrial gas turbines that we have, booked over 350 megawatts across multiple customers during the quarter.

And we have multiple use cases for data centers, not just baseload, but also bridge to back up temporary power and for gas power generation, our focus is on the 150-megawatt range or below, and that really suits well the Nova gas turbines as well as being able to provide our subsurface to surface geothermal solutions in the 5 megawatt to 80 megawatt range. So we're continuing to increase the capacity of the Nova LT, and we're seeing good traction with our customers. And over the next three years, we expect to book at least $1.5 billion of orders in data center equipment, and long-term, we think data centers could be a meaningful growth driver for IET as well as overall for the enterprise solutions we have and also reoccurring aftermarket services over the rest of the life of the equipment.

So data centers is a key area of focus. Thanks, Stephen.

Thank you. Our next question comes from Scott Gruber with Citigroup. Your line is open.

Yes, good morning. And I appreciate all the tariff color. Can you just provide some more color on the mitigation initiatives that you're undertaking? I imagine some levers can be pulled fairly quickly.

Some are probably longer dated, especially if you're shipping manufacturing locations. How much mitigation is embedded in the $100 million to $200 million impact? And is there an ability to squeeze that figure lower over time, assuming a status quo and [indiscernible] in the tariffs? Thanks.

Yes, hi Scott. So look, I'll start with one thing to keep in mind is just reinforcing that we have a strong international mix in the company, and it's not just from a customer perspective, but also from our global supply chain footprint. And that naturally limits our exposure to direct U.S. tariffs. But for context, we purchased roughly $14 billion in direct and indirect materials annually.

Of that, we imported less than 5% into the U.S. and under 2% comes from China. So and if you last remember, this global footprint served us well during the last round of tariffs implemented in 2018. So as we mentioned in the prepared remarks, we've taken proactive steps to develop mitigation strategies, and that's what's helping reduce the net impact down of direct tariffs to the $100 million to $200 million range. So as an example, we've established a centralized coordination hub with leaders from many different functions of supply chain, legal, commercial, government relations, tax, just to name a few, where we're monitoring developments and acting quickly to implement things and also adjust as things evolve.

And so when you really double click into the actual mitigation, there are really two aspects that we're working through. First, there's the direct sourcing costs tied to imports into the U.S., most of which come from places like I mentioned, Germany, U.K., China, Canada, and Mexico. So in that, we're taking, I would say, three specific actions that reduce that gross exposure. First, we're leveraging the global supply chain manufacturing footprint to better align with end markets.

So we make sure we have the right things in the right places, obviously. Second, we're utilizing free trade agreements and expanding beauty drawback programs where they're available. And third, I'd say is, understanding and utilizing our contract mechanisms where pricing increases and surcharges offset some of that where possible. So that's around the direct sourcing cost.

The second piece we're working through is assessing the actual potential revenue exposure and that will mainly relate to U.S. exports to China. So think about our IET Industrial Tech business, so at the moment, we're not seeing any mitigation success here, but we do see opportunity over time to backfill China imports with locally sourced volumes. Now as for Italy, exposure there is limited due to our contractual terms where customers typically take ownership of the products in Italy. So everything I've said is focused on the direct tariff impact, but then the potential secondary effects are difficult to quantify as we've said at this point, but we're monitoring them quite closely, and they would show up in the more transactional side of the business.

So OFSE and parts of Industrial Tech. But in summary, as I step back and look at this with our diversified portfolio, the global supply chain footprint I've talked about the IET backlog, the aftermarket business, it really provides us a strong foundation for us to navigate in this type of environment and still deliver the earnings and cash flow in this environment.

Thank you. And our next question comes from Saurabh Pant with Bank of America. Your line is open.

Hi, good morning Lorenzo and Ahmed.

Hi, Saurabh.

Good morning.

Lorenzo and Ahmed, maybe I want to pivot a little bit and talk about OFSE. I know revenues were down 10%. You talked about enhanced seasonal weakness, delayed discretionary spending rate. But if you can just walk us through the key moving pieces keeps your market and how they are moving and how should we think about them going forward through the rest of the year?

And ultimately, what does that mean for your 20% EBITDA margin target for this year? If you can step us through that Lorenzo and Ahmed, that would be perfect.

Sure, Saurabh. I'll kick it off with sort of as we see the marketplace. And as I mentioned earlier, we started to see some revenue softness in Q1 and that was mainly due to deferral of discretionary spending, particularly on the international side. Separately, Pemex put a pause on contracting activity in Mexico.

And just to give you a sense of that scale, rig activity there was down 52% sequentially that's now a 72% drop from peak levels in 2023. Outside of Mexico, we saw sharper seasonal declines in places like sub-Saharan Africa, Asia Pacific, Argentina, Brazil. Saudi remains relatively flat quarter-over-quarter. We continue though to see a shift in focus from oil to gas activity. North America, we saw revenue come down 5% sequentially, mostly tied to offshore seasonality.

Land was down slightly and largely in line with our expectations. So looking ahead, we've revised our outlook given the recent trade policy uncertainty and oil price volatility. And when we first gave our view on global upstream spending Brent was sitting in the mid-$70 range, but now down to the mid-60s. So based on where we see things stand, we expect global upstream spending to be down high-single digits this year and breaking that down, international upstream spending expected to decline mid- to high-single digits.

North America, expecting a low double-digit decline. And all of this assumes oil prices stabilize around current levels and that the tariffs hold at the current levels under the 90-day pause. Obviously, if that changes on the pricing or the tariffs, then there'll be some potential further downside we have to anticipate and that's the market outlook that we see, and I'll pass it over to Ahmed on the 20%.

Yes, Saurabh. So on the margin question. Look, I'd like to step back and just remind everyone of the margin progress OFSE has made over the past few years. So when we introduced this 20% target back in September of '22. OFSE margins were below 15%.

And in the second half of last year, margins averaged about 19.5%. So there's clear progress that reflects the work the team has been doing on structural improvements, and we remain focused on what we control, and we're still committed to the 20% margin milestone. But however, we didn't envisage an environment where upstream spending would be down nearly 10% after a year of flattish levels. So for the second quarter, we still expect margins to improve sequentially by 80 basis points, reaching around 18.6%.

And we're starting to see, and we saw some of that come through already of a portion of the benefits from the restructuring actions we announced in the fourth quarter of last year. So most of the benefits will show up in the second half and should provide some of that insulation on further margin uplift. And driving that measured margin expansion in the real in this environment is a real testament to the transformation that work that we've been doing. But that said, the ultimate pace of improvement will depend on, as Lorenzo said, how tariffs play out and how the broader upstream environment evolves.

I think, Saurabh, you can just look at it from a standpoint of we're focused on the elements we control that margin accretion that we've seen also in the first quarter for OFSE, that 20% is what we're continuously aiming for. And we're going to execute what's in our control and continue to drive the transformation as we've laid out and continue that progression.

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

Thanks. Good morning, Lorenzo and Ahmed. Quite similar vein on the IET side, just interested in margin progression here on some of the variables you're thinking about as you look at your target. So better pricing and improved efficiencies seem to be really showing up in the first quarter results.

So what drives expansion from here? Is it just more efficiency gains from faster backlog conversion? And do you still hope to -- do you still expect to hit 18% margin this year and 20% next year in light of the headwinds with tariffs and potentially maybe even service is slowing down a little bit in this environment? Thank you.

Yes. Hey Dave, how are you? So look, I would say looking ahead, we do expect second quarter margins to increase again. The sequential increase, though will be more modest compared to revenue for a few reasons.

First, we had some project closeouts in the first quarter that helped margins. So that's part of the natural flow of ARPU and as we execute through that. Second is when you look at the Industrial Tech business and what we mentioned about tariffs, you find that there will be some modest margin pressure on that side as we go through. So and then lastly, from a sequential standpoint, the risk on China and U.S. trade volume that we highlighted within Industrial Tech, and that business carries high gross margin.

So any reduced volume there could impact overall IET margins. So we've tried to capture our best estimate for how those reduced high margin IET volumes and higher tariff costs will impact second quarter. So that is in the second quarter guide. And then when you look out actually into the second half of the year, we still anticipate year-over-year margin progression.

But we anticipate that pace of improvement will be a little bit more measured as you compare it to the first half. So second half of this year to second half of '24, of course. So if you look at our January IET guidance ranges, our EBITDA margin midpoint was 18%. So this is a level we still think it's achievable, it reflects the net tariff impacts that we have laid out today, which will be mostly offset, as I mentioned, by execution of two things really: higher margin Gas Tech Equipment backlog as well as the productivity across the portfolio that the teams have been driving and you've seen go through.

So then stepping back and looking at overall for 2025, we feel good about how the business is executing and still believe the full-year EBITDA guidance range is achievable based on what we're seeing today. And then when you actually look at 2026, obviously, a lot can happen between now and then. But based on everything we're seeing, what we know, the visibility we have and focusing on what we can control, the path to reaching 20% EBITDA margin is still there.

And Dave, remember, I mean, we've laid this out as a journey, and we've showed how the installed base is increasing year-over-year and as you look at the progression and also what we said from maintaining the IET guidance for the year and also that 20% margin rate for '26 still being achievable at this stage.

Thank you. That was our last question. I will hand you back to Mr. Lorenzo Simonelli, Chairman and Chief Executive Officer to conclude the call.

Thank you to everyone for taking the time to join our earnings call today, and I look forward to speaking with you all again soon. Operator, you may now close out the call.

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