Lorenzo Simonelli: And Chase, I firstly start by saying we’re really pleased with the progress we made in 2022, which was a significant increase from 2021. And as we look at 2023, again, we believe we can achieve around $400 million of new energy orders. And we’re seeing the early stages of development within CCUS, hydrogen. They are likely to be lumpy. But as you said, there’s been legislation that has come into place. And the Inflation Reduction Act in the United States is helping to firm up that outlook, if anything starting to pull forward some projects. We do anticipate that Europe may bring in some legislation to help spur the energy transition as we go forward. So over the next three to four years, the new energy content should be around 10% of our Gastech orders.
And as we stated previously, we believe by the end of the decade, new energy orders should be in the range of $6 billion to $7 billion. And if you think about the middle of the decade, new energy representing about 10% of our Gastech orders and then accelerate through the balance of the second half of the decade. So direction of trial is clear. We’ve got the investments in place into the new tech and feel good about the way in which the market segment is really creating on the back of some of the legislation.
Operator: Our next question comes from Arun Jayaram with JPMorgan.
Arun Jayaram: My first question is on your IET EBITDA margin guide for 2023. Nancy, you posted a 16.8% EBITDA margin in 2022. The midpoint of the guide is 15%. So I was wondering if you could walk through what’s driving the margin change this year? And then how you see margins moving towards that 20% 2025-2026 guide over time?
Nancy Buese: If we look at the full year IET guidance, it would apply about a 200 bps decline in margin rates from ’22. And so, the real drivers are around the equipment mix is it continues to move up and the step-up in R&D around our new energy efforts. So on mix, you can see by our ’22 results and our ’23 guidance that equipment orders are going up. And in ’22, Gastech revenue was 50% equipment and this year, it’s likely to be 65% or higher. R&D, as we’ve been communicating, we’re stepping up our effort there, about $50 million to $75 million as we look to commercialize some of the most promising technologies that include things like Met Power and Mosaic. And I think for the longer term, we would really reaffirm the margin levels that we previously indicated.
Lorenzo Simonelli: And Arun, just to add, and I think we’ve maybe mentioned this before, as we go through a big equipment build, it’s actually a good thing for our business. Our installed base is increasing close to 30%. And then in the later years, we’ll get the service calories associated with that. So it’s a factor of the longer cycle nature of this business, but we feel confident in the next two to three years to be able to take the margin rate back up to, as we said, to 20% EBITDA rate, and that’s driven by the services starting to come through after the equipment flow through.
Arun Jayaram: And my follow-up is, Lorenzo, I believe you mentioned that the plan is to rationalize 40% or more of your subsea capacity. I was wondering if you could provide more details on this plan? And which markets do you plan — or which markets will be focused markets on a go-forward basis for Baker?
Lorenzo Simonelli: We did mention that we’ve been restructuring our SSPS business, and Maria Claudia and the team have been undergoing a strategic review. We are still in the early stages of that. But as we look at the subsea tree capacity, we’re really going to be decreasing, rationalizing our production capacity by 40% to 50% and also outsource some of the basic machining. You can imagine from a cost perspective, we’re in some relatively high cost countries. And so it’s an opportunity for us to be able to rationalize capacity back to Asia, also Latin America and that machining was typically done in the UK. So we’re continuing to look at how we go forward, and we feel good about the savings being achieved on top of the broader $150 million cost out effort that included about $60 million from OFSE.
So still early days and we’ll see this come through in 2024. But the team has got a good handle around how to take the strategy going forward for the SSPS business, and it’s on the backdrop of an improving outlook for offshore.
Operator: Our next question comes from Dave Anderson with Barclays.
Dave Anderson: Lorenzo, just one question for me. You made a significant management change recently in the IET business. And I was wondering if you could just kind of talk about the management changes you made there. And you’re bringing in somebody from the outside in and just kind of what you’re trying to achieve with this change? Are there certain KPI targets you’re targeting, is there a new philosophy you’re trying to instill in this part of the organization? It’s obviously a big part of Baker Hughes and I’d just like to hear some more — some of your thoughts on that.
Lorenzo Simonelli: And I think as we continue to evolve Baker Hughes, and as you saw from the announcement we made in September and moving to the two business segments, we continue to look at the future of how the growth of both the IET segment and OFSE is going to take place. And in discussions with Rod and also how we are growing in the space of digital services, industrial and also climate technology solutions, it’s not a one year journey, it’s a multiple year journey. And bringing Ganesh was maybe sooner than anticipated, but we found a great talent that can help us drive the growth going forward, comes from an experienced background of having built digital solutions at an enterprise level. Also knows well the climate technology solutions space.
And if we look at where the growth is in the second half of the decade, we said it’s around the new energy and also the industrial asset management. So great candidate at the right time. And Rod is staying with us and helping with the transition and then he will be moving on. But very happy with the new structure. And as you look at the changes we’ve made overall, it’s all with the contemplation of, again, how we’re moving forward for the next three years, the plan that we laid out in September and achieving the 20% EBITDA across the two segments.
Operator: Our next question comes Marc Bianchi with Cowen.
Marc Bianchi: I wanted to ask first about the guidance for first quarter in 2023. It seems to imply a steeper slope of improvement throughout the year than we typically see. I was curious if you could talk about your confidence in that progression and maybe how much traction we might see in the second quarter?
Lorenzo Simonelli: Look, the confidence is there. And I think what we’ve mentioned before is we’ve got a large equipment mix that flows through in the first quarter. And so that’s obviously impacting the EBITDA rate. But as we go forward, we’ve got the backlog at hand, so the visibility is there. Also, if you look at our IPO on the Gastech services at $13.6 billion, we’ve got how that rolls out as well. So I actually think this is pretty normal, the way in which we are seeing the profile of the year just based on the way in which the equipment and the longer cycle projects are converting. So we wanted to make sure that we gave that visibility but feel confident with the outlook for the year and then also the cost out that’s going to be achieved with the $150 million transformation being annualized by the end of the year.
Marc Bianchi: And then following up on the prior discussion around orders for ’23. Nancy, I think I heard you say that you expected LNG orders to be down year-over-year, but the macro outlook that you guys have has a near doubling of LNG FID at the low end. So maybe you could just kind of talk to that a little bit, if you could.
Lorenzo Simonelli: Yes, maybe — and again, it’s an aspect of the lumpiness of the way some of the orders come through. I think as we go through this, again, the focus is on the total orders of the $10.5 billion and the $11.5 billion and the elements within there will shift. I think, again, as you look at LNG from the FIDs and the MTPA that’s going to be sanctioned, probably will be up versus 2022 and 2023.
Operator: Our next question comes from Connor Lynagh with Morgan Stanley.
