Telefonaktiebolaget LM Ericsson (publ) Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 21, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you very much for standing by, and welcome to the SLB Earnings Conference Call. At this time, all participant lines are in a listen only mode. Later, there will be an opportunity for your questions. As a reminder, this conference is being recorded. I would now like to turn the conference over to the SVP of Investor Relations and Industry Affairs, James McDonald.

Operator

Please go ahead.

Speaker 1

Will be available.

Speaker 2

Thank you, Leah. Good morning, and welcome to the SLB Second Quarter 2023 Earnings Conference Call. Today's call is being hosted from Paris, France following our Board meeting held earlier this week. Joining us on the call are Olivier Lapuche, are

Speaker 3

in the line with our

Speaker 2

Chief Executive Officer and Stephane Biguet, Chief Financial Officer. Before we begin, I would like to remind all participants Some of the statements we will be making today are forward looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected are in these statements. I therefore refer you to our latest 10 ks filing and our other SEC filings. Our comments today may also include non GAAP financial measures.

Speaker 2

Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our Q2 press release, which is on our website. With that, I will turn the call over to Olivier.

Speaker 4

Thank you, James. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I will cover 3 topics. I will first review a few of our financial highlights from the quarter. Next, I will discuss the positive momentum we are seeing in the international and offshore markets.

Speaker 4

And third, I will share the exciting progress we're making in digital before concluding with our outlook for the Q3 and the full year. Stephane will then provide more details on our financial results and we will open for your questions. Our 2nd quarter results continue to demonstrate the strength of our portfolio and our strategic positioning in the most attractive, accretive and resilient market globally. This is translating to financial performance. And we closed the first half of the year with solid growth across revenue, will be in the range of $1,000,000,000 in the range of

Speaker 3

$1,000,000,000 in the range of $1,000,000,000 in

Speaker 4

the range of $1,000,000,000 International revenue continued strong growth momentum, increasing 21% year on year as we captured broad growth across all divisions and geographic areas. 2nd quarter revenue increased by more than 20% year on year in 14 of our 25 international Geo Units. Most notably, Saudi Arabia, UAE, Mexico, Guyana, Brazil, Angola, Caspian and India all grew more than 30% over this period. This drove our highest year on year international incremental operating margin over the last 3 years, and it underscores the breadth of our portfolio that I continue to emphasize. SLB growth SAB Global reach shift us from regional fluctuation as we have recently seen in North America and give us the ability to seize opportunities wherever they arise.

Speaker 4

This is a truly firm share of our business and positions us for long term outperformance. Following the remarks I shared in our earnings release this morning, I would like to reflect on a few notable highlights from the quarter. And geographic grow revenue and expand margins secondarily. In North America, we continued to increase our revenue, highlighting our agility across the land markets and the expanded activity in the U. S.

Speaker 4

Gulf of Mexico solidly outperforming the rig count. Are focused on the quality of our revenue continues to support our margins. Secondly, we expanded our pretax segment operating margins. This was fueled by our strong international reporting leverage, increased technology adoption and positive pricing trends that stem from inflation driven contract adjustments and tight service capacity. And with higher earnings and improved working capital, our sequential cash flow from operations grew considerably and we generated free cash flow of nearly $1,000,000,000 during the quarter.

Speaker 4

I want to thank the entire SLB team for their hard work have an exceptional performance delivering value for our customers and our shareholders throughout the quarter. Now let me take a moment to touch on the macro environment. As we have projected for the past few quarters, the international and offshore markets continue to exhibit strong growth This is playing to the strengths of our business as international revenue represents nearly 80% of our global portfolio and Offshore comprises nearly half of that. As the growth rate shifts further toward international, these market conditions are driving the breadth, resilience and durability of this upcycle and creating new opportunities for our business. Let me describe where this is taking place.

Speaker 4

In the International Markets, the investment momentum of the past few years is accelerating. This is supported by resilient long cycle developments in Vienna, Brazil, Norway and Turkey will

Speaker 1

be in the next slide. Pollution capacity expansion in the Middle East, notably

Speaker 4

in Saudi Arabia, UAE and Qatar the return of exploration appraisal across Africa and the Eastern Mediterranean In the Middle East, this is resulting in record levels of upstream investment. From 2023 to 2025, Saudi Arabia is expected to allocate nearly $100,000,000,000 to upstream oil and gas capital expenditure, a 60% increase compared to the previous 3 years, have the investor attained maximum sustained production capacity of 13,000,000 barrels per day by 2027. Several other countries in the region have also announced matured increases in capital expenditure that extend beyond 2025. Furthermore, we continue to witness a broad resurgence in offshore driven by energy security and regionalization. Operators all over the world are making large scale commitments to ascent discovery, accelerate development times and increase the productivity of the assets.

Speaker 4

This is resulting in increased infill and tieback activity in major basins, new development projects both in Oil and Gas and support for new exploration. With this backdrop, we anticipate more than $500,000,000 in global FID between 2022 2025 with more than $200,000,000 attributable to Deepwater. This reflects an increase of nearly 90% when compared to 20 sixteentwenty 19. These FID investments are global, taking place in more than 30 countries, and we are seeing the results with new projects in offshore basins across the world. This is reflected in the many contract awards highlighted in the earnings press release, notably in Mexico, Brazil and Turkey.

Speaker 4

These contracts, in addition to many others, are building a strong foundation of activity outlook decoupled from short term commodity price volatility. Moving forward, we expect further growth to be led by accelerating activity in well construction, new opportunities for Reservoir Performance in Exploration Appraisal, will be in the next slide. In our business and industry as a whole, The increased adoption and integration of digital technologies remains one of the most significant opportunity for growth. Indeed, our industry generates massive amounts of data. And by capturing that information and turning it into trusted and actionable insights, we can make energy production more accessible, more affordable and more sustainable.

Speaker 4

This is a critical moment for our industry, and there are 3 digital trends concurrently shaping its future, clearly setting the path for a higher value, First, the adoption of cloud computing at scale. For geoscience workflows, This is supporting significant productivity gains for geoscientists and engineers across asset development teams. This is happening at a time where when our industry is compelled to accelerate the development cycle and derisk both subsurface and surface uncertainties. We continue to benefit from this trend in the adoption of our Delphi cloud based digital platform, delivered through a flexible and personalized Software as a Service, TAS, will be available in the next quarter. With the cumulative number of users in global customer organization growing 60% year on year to 5,400.

Speaker 4

As we shared in our earnings press release, Petrobras and Inapp are only just two examples of customers deploying Delphienterprise wide with the aim of are fundamentally changing how they work across the E and P value chain. 2nd, our industry is unlocking the power of data at scale. A single well can produce more than 10 terabytes of data per day. And this doesn't even begin to touch on the total amount of upstream data across exploration, development and production workflows. The adoption of open data platform across the industry is liberating data for artificial intelligence AI applications at large at scale.

Speaker 4

SLB is benefiting from and driving this strength to both data foundation and AI deployment. We are seeing early success with the commercialization of our enterprise data solution powered by Microsoft Energy Data Services. This offering delivers the most comprehensive capabilities for subsurface data in alignment with the emerging requirements of the OSDU technical standard. And we are witnessing tremendous success with our Innovation Factory, where we have developed more than 100 AI solutions with more than 80 customers have been successful since 2021, all of them with rich domain content in addition to generic AI capabilities. 3rd, digital operations are gaining in maturity, transforming the way operators develop and utilize assets.

Speaker 5

Will be in the

Speaker 1

range of 2nd quarters. From automation to autonomous

Speaker 4

operation across both well construction and production, we are clearly seeing an inflection in the deployment of digital operation with significant impacts on efficiency, carbon footprint and performance. Today, customers are accelerating the adoption of our neuro autonomous with Kuwait Oil Company and Petronas both using these technologies to reduce manual operations, while increasing performance, enabling drilling consistency and rig time savings. Similarly, our partnership with Cognite as a platform for unlocking access to production operations is gaining momentum in industry as exemplified with the current contract highlighted in our earnings release. Finally, we continue to deploy Delphi Edge Agora Technology to deliver real time insights directly within operation from connected hardware, where data is generated and processed with AI at the edge. We currently have more than 1400 connected assets deployed, are doubling year on year.

Speaker 4

SLB is positioned to fully harness this positive market condition as well as our technology and digital leadership to drive will be available on our journey to double the size of our digital business between 2021 are in 2020 5 and the trend I've just discussed are reinforcing our confidence in the outcome of our strategy execution. I will now describe how we see the rest of the year progressing. After a positive first half, we remain confident in our full year financial ambitions and a visibility into significant base load of activity that reinforces our 2023 full year forecast and our growth ambition beyond. We continue to expect year on year revenue growth of more than 15% and adjusted EBITDA growth in the mid-20s. Turning specifically to the Q3.

Speaker 4

We expect Rovi to grow by mid single digits in the international markets with all international geographical area growing secondarily, led by the Middle East and Asia. In contrast, will be slightly down. With our focus on the quality of revenue, harnessing operating leverage and further technology adoption, We expect global operating margins to further expand by more than 50 basis points sequentially. This resulted into the highest EBITDA margin we have seen in this cycle. I will now turn the call over to Stephane.

Speaker 5

Thank you, Olivier, and good morning, ladies and gentlemen. 2nd quarter earnings per share, excluding charges and credits, was $0.72 This represents an increase of $0.09 sequentially and $0.22 or 44 percent when compared to the Q2 of last year. We did not record any charges or credits during the current quarter. Overall, our 2nd quarter revenue of $8,100,000,000 increased 5% sequentially, are mostly driven by the international markets led by the Middle East and Asia. Sequentially, Our pretax segment operating margins increased 154 basis points due to the high quality international revenue, which resulted in strong incremental margins.

Speaker 5

This performance highlights the underlying earnings potential of our international business with new technology and high service intensity, particularly offshore, Accelerating margin expansion. Companywide adjusted EBITDA margin for the 2nd quarter were 24.2%. In absolute dollars, adjusted EBITDA increased 28% year on year. As a reminder, our ambition is for adjusted EBITDA to grow in percentage terms in the mid-20s for the full year of 2023. On a year to date basis, adjusted EBITDA has grown 35%.

Speaker 5

So we are on track to achieve this goal. 2nd quarter revenue increased 20% year on year, as international revenue was up 21%, are in the range of significantly outpacing North America revenue growth of 14%. The strong international growth was led by the Middle East and Asia and robust offshore activity. Pretax segment operating margins expanded 2 40 basis points year on year with significant margin growth in our core divisions. Let me now go through the 2nd quarter results for each division.

Speaker 5

2nd quarter digital and integration revenue of $947,000,000 increased 6% sequentially, with margins increasing 4 percentage points to 34%. The sequential revenue growth and margin expansion were primarily driven by higher digital sales following the seasonal low of the Q1. Year on year, digital and integration revenue decreased 1% and margins declined 6 percentage points are in the range of $1,000,000 due to the absence of exceptional exploration data transfer fees we recorded in the Q2 of last year. Growth in our digital products and services was strong, however, including More than 60% year on year revenue increase in our cloud and edge solutions. Reservoir Performance revenue of $1,600,000,000 increased 9% sequentially, While margins improved 248 basis points to 18.6%.

Speaker 5

These increases were primarily due to strong growth internationally, led by the Middle East and Asia. Year on year, revenue grew 23% and margins increased 396 basis points, Well construction revenue of €3,400,000,000 increased 3% sequentially, while margins of 21.8% increased 115 basis points, driven by strong measurements, fluids and equipment sales activity, will be

Speaker 4

available on the call as

Speaker 5

well as pricing improvements internationally. Year on year, revenue grew 25%, While margins expanded 424 basis points with very strong growth across all geographical areas and Systems revenue of $2,300,000,000 increased 5% sequentially, and margins expanded 2 74 basis points to 12%, Representing the highest margin since the formation of the division. The sequential revenue growth was led by the Middle East and Asia, partially offset by the absence of significant project milestones We reached last quarter in Europe and Africa. Year on year revenue increased 22%, While margins expanded 300 basis points, driven by higher sales of completions and surface production systems and the easing of supply chain and logistic constraints. Now turning to our liquidity.

Speaker 5

During the quarter, we generated $1,600,000,000 of cash flow from operations and free cash flow of 986,000,000 This represents a $1,250,000,000 increase in free cash flow over the same quarter of last year, which is largely due to improved working capital. We expect this performance to continue throughout the rest of the year. As a result, our free cash flow in the second half of the year will be materially higher than the first half. Our net debt reduced approximately $200,000,000 sequentially to $10,100,000,000 which is $900,000,000 lower

Speaker 1

will be recorded in the

Speaker 5

same period last year. Capital Investments, inclusive of CapEx and Investments in EPS Projects and Exploration Data were $622,000,000 in the 2nd quarter. For the full year, we are still expecting capital investments to be approximately $2,500,000,000 to $2,600,000,000 We continued our stock buyback program and repurchased 4,500,000 shares during the quarter For a total purchase price of $213,000,000 We continue to target to return $2,000,000,000 will be subject to our shareholders this year between dividends and stock buybacks. I will now turn will now turn the

Speaker 4

conference call back to Olivier. Thank you, Stephane. Ladies and gentlemen, I believe we are ready to open the floor to your questions.

Operator

Thank you. Our first question will come from the line of James West with Evercore ISI. Please go ahead.

Speaker 6

Hey, good morning. Good morning, gentlemen.

Speaker 4

Good morning, gentlemen.

Speaker 6

Good morning. So Olivier, we've Especially, you and I and Savan have spent a lot of time together in the last 18 months. If we go back to La Zurn and and then to the Analyst Day in New York City and recent events, we've become increasingly, I think all 3 of us are bullish on the cycle and the cycle's duration, especially. I wonder if you could comment on the duration aspect you see now as you travel around the world, you meet with your customers, you're talking to your customers, what are they saying about their drilling programs over the next several years. You obviously made some pretty bullish comments around Saudi, but more broadly with Your major customers, what are their expectations and how are they thinking about duration of There are upstream study in cycle.

Speaker 4

No, a very good question, James. I think you may have realize that recently we characterized the cycle as breadth, resilience and durability. And let me comment a bit further on durability. And there are are going to be in the 2 or 3 elements to this. I think, obviously, we did comment on the return of offshore where the first two are to flag it And to call for the return of offshore, and I think we have seen this international offshore resurgence materializing in The last 12 months and accelerating and in second half actually, the offshore rig count will be higher than the land We count increase.

Speaker 4

So this momentum is driven by the economics of offshore assets Well, the FID now the vast majority of FID are below $50 hence favorably positioned for FID. Also the geologic and the low carbon nature of most of the assets, accessibility to this resource and is both oil and gas. So offshore are having an resurgence that is translating into a very significant pipeline of FID and we see it across not only the IOCs are independent that are capturing this opportunity, but also the NOC that have placed a bet on offshore, as you can see from Brazil to Middle East Of the North Sea. So we see this happening at scale. We see also the emergence of a second leg are in the range of FID and future offshore expansion driven by exploration appraisal.

Speaker 4

Exploration appraisal is happening in many countries. There are many rounds of licensing rounds happening, a lot of exploration and appraisal is happening to find this next reserve and develop. So Offshore is there to stay and not only in 2024, 2025, but beyond as we can see and with the 2nd leg materializing. Beyond that, obviously Middle East has made a significant commitment of capacity expansion, both in oil of 4,000,000 barrels or so And in gas, for regional consumption, displacing oil for energy or for generating some blue Blue Ammoni or Blue Allogene Products as well as further expanding the NGL export in Qatar particularly. So the Middle East Capacity expansion is leading to, as we have been quoting, record level of investment are from this year onward and is not set to again stop in 2024 as the vast majority of this capital expansion are towards the second half will be in the range of 2027 or 2,030 for some of the target.

Speaker 4

So what you have seen lately and the feedback through the visits we have had Is that the duration of the cycle as we were characterizing a year ago is actually extending and is to be believed prolonging to the right. And with combination of offshore resurgence being very solid and Middle East being a CapEx expansion beyond the next 3 years.

Speaker 6

Okay. Okay. That makes a lot of sense. And then the maybe a follow-up, as we think about or as you think about, I guess, We agree on a long duration cycle. You can upgrade your revenue quality, either by choosing offshore over onshore or customers by customer.

Speaker 6

How are you thinking about that Quality of the revenue base that you're putting in place now and what are the main kind of drivers of that? I'm Assuming that you're looking for the highest return and highest margin, but what are the key metrics or key assumptions you have there?

Speaker 4

No, absolutely. I think we have been initiating the returns focused strategy a few years back. And I think we are getting The characteristic of the cycle that's favoring and accelerating our strategy as we get the opportunity to not only get a favorable mix That includes a bit more offshore Middle East explosion appraisal, but also higher at technology adoption, including digital, including fit technology, including transition technology, all combining to give are in a higher revenue quality, but I will not forget also the capital discipline That we have initiated as part of the strategy that is pushing us to high guide to the higher returns, will be in the range of higher margins contract as we move forward and make sure that we get the best return for the capital we deployed and also to put a clear threshold are on capital investment and capital strategy going forward. So the combination, as I said, of the Faber Blomix, the technology adoption at scale with some secular trends in digital And the capital discipline that we have used to execute our strategy are allowing us to create The revenue quality improvement and the high grading on every portfolio and every business line we have to drive margin expansion.

Speaker 4

And we have seen margin expansion increasing, And we will continue to pursue this as we move forward.

Speaker 6

Thanks so much, Olivier.

Operator

Our next question is from David Anderson with Barclays. Please go ahead.

Speaker 3

Great. Thank you. Good morning, Olivia. How are you?

Speaker 4

Good morning, Dave.

Speaker 7

So I was curious on the Middle East, Asia, it showed really impressive sequential growth during the quarter. I was wondering if you could talk a bit about what drove that. Was that just a reflection of the steady ramp up of projects in Saudi and other Middle East markets? And also, you mentioned a directional drilling contract in the release. Was that a discrete contract?

Speaker 7

And are you starting to see higher pricing on those types of contracts now?

Speaker 4

No, I think to be to stay very broad term, I think it's Middle East and Asia and there are Several Geo units, as we call them, that have been benefiting from very significant growth sequential and year on year As we commented, many of them are in the 30% basket, more than 30% basket growth year on year in that region, that area of cost. But indeed, in the GCC and the Middle East particularly, we are benefiting from 3 things. We are benefiting from the CapEx expansion program that have been initiated that have turned into an inflection into reactivity and spend activity to benefit from considering our market exposure. We have been renewing several contracts and either are in coaching or gaining market and strengthening our market position. And you have seen several announcement made.

Speaker 4

And this includes The service expansion contract more than, I would say, integrated contract. And finally, we have been benefiting from based on our performance From, I would say, pricing increment based on performance that are all combined, service contract expansion, reactivity increase and pricing, all combining to result into an incremental revenue year on year and sequentially that we believe will be on the continuum for the rest of the year.

Speaker 7

Okay. Thank you. And And if I could shift over to the D and I segment, could you provide some color on the non APS businesses and how they've been trending? I'm particularly interested in the digital solutions business And kind of really what you're seeing in terms of digital adoption of your customers. I'm not sure if you can provide any metrics or any examples, but just kind of curious kind of how some of your customers are using it kind of this year versus a year ago.

Speaker 7

Is there any way to kind of show us kind of or kind of explain to us kind of how that digital adoption is trending?

Speaker 4

Yes. I think as we keep saying, I think some of the digital success and digital business growth we are having today is a bit masked in our financial reporting results by the flat or declining EPS year on year that we have. So I think you have to look at it first on the financial overall result of this division. Secondly, I would say that as I described in my prepared remarks that there are are capturing and that we are exposed to that are happening in the industry, all of them under the secular trend of digital transformation in this industry. 1 on cloud computing, making the best out of cloud computing, scalable computing and elastic computing access that a cloud solution such as Delphi gives and hence accelerating productivity of the asset team from exploration to asset development.

Speaker 4

We are seeing it. You have seen the announcement of the Petrobras Award that is square into that category of using cloud capability to accelerate and enable productivity in the Geoscience team and quality of results for the asset development team. So that's one sector that and again, we measure it by either number of customers expansion or adoption of users, which you have seen are quoted in my prepared remarks at 60% growth year on year. The second aspect is unlocking data, the vast amount of data that our industry manipulates, stores, manage and structure data, unstructured data to try to unlock this And democratize, if you like, AI. So we are fortunate to have a cloud based solution, Delphi, that has AI domain capability embedded into it, and we use it every day to help our customer unlock and get get access to this AI capability.

Speaker 4

We have done that to Innovation Factory, 100 solutions deployed. So that's the second engine of digital growth, if you like, The data structure, data transformation and AI capability. And that's again, we are speaking about growing at above 50% for that sub segment of our digital offering. And last, and maybe the one that has the most growth potential that is untapped across the industry is digital operation. That's everywhere from well construction to producing assets, and that's why we deploy either are in the cloud offering in drilling automation or in surveillance of assets or we deploy at the edge, on the asset, at the pump some device and we call it Agora Edge solution, which have embedded AI at the edge do not need to round trip to the cloud to optimize these assets and give and we use it and consume it in our APS asset to enhance the performance.

Speaker 4

So We are seeing the benefit of all these at the same time. They are all going at a different pace, different adoption across the NOC, the independent or the IOCs. And it will be a long tail of growth that will clearly have a long durability will continue to be a factor of secular trend in our industry to extract efficiency, low carbon, productivity using this trend. So that's what we see, have multiple engines of growth across multiple horizons and with different technology where have leadership on most and a footprint that allows us to tap into 1500 customers for the long run.

Operator

And we will move on to the line of Arun in line of Arun Jayaram with JPMorgan Chase. Please go ahead.

Speaker 8

Yes. Good morning, Olivier. My first question is on offshore. You've highlighted how 85% of global offshore FIDs are now underpinned by oil prices at $50 or below, which is quite a bit below what we saw in the prior cycle, where we thought that you needed, call it mid-60s will price to kind of justify offshore developments, particularly deepwater. So I wonder if you could give some thoughts on what is driving, call it lower breakevens than we saw prior cycle.

Speaker 4

I will think there are several aspects to that. One, obviously, is the progress the industry at large has made in efficiency integration technology Performance at large that is getting the curve shifting to the left on drilling The cycle compressing on Subsea and the overall development cycle to be more derisked to digital. So technology integration performance at large has helped the operator and the service industry to deliver faster and to deliver at a lower total cost, the development of those assets. The second element I would think is that Exploration has been creating a portfolio of assets that can then be high graded. And then the quality of the resource, the higher quality of the geological play and lower carbon And better place that have a better production and recovery potential have also emerged and have been are more favorably primed and or we say, prioritized by our customers.

Speaker 4

So These customers have choice and they focus on the best and the most advantageous assets and the most advantageous geological basins. We have seen it from Brazil to Vienna and And we are seeking in the Middle East for some of the gas asset as well. So the 3rd, I think, dimension that is, I think, accelerating in my opinion is what is called Infrastructure Led Development or Infrastructure Led Exposure and Development, which make The returns on incremental oil incremental gas from existing hubs, from existing platform, Lower cost than in the past because the capability to infill tie back and expand from an existing platform, are getting a better return on existing infrastructure. Hence, we have seen a significant improvement and significant increase investment into this infill and tieback and iadex, as it is called, infrastructure led development, infrastructure led exploration. And that's these are this is another trend that is lowering the average cost of FID for incremental oil pool or additional gas.

Speaker 4

So you combine all of this, and you are getting better economics and better and sustained and higher durability for the long term offshore play.

Speaker 8

Great. Thanks for that. And just a follow-up. Olivier, we've been getting a few buy side questions on the update on your website regarding Russia. So wondering if you could just expand on what this means on a go forward basis for SLB?

Speaker 4

Simply said, I think Russia revenue represented approximately 5% of our consolidated revenue in the Q2 and the decision that we have made last Friday throughout remaining shipments to Russia from all SAB facility will not impact our financial guidance. So this decision will extend what you have seen as our previous ban on shipment from the location that we had in the United States, UK, EU Canada into Russia and we will continue to ensure that our remaining presence in Russia meets and exceeds all international assumptions.

Speaker 8

Great. Thanks a lot.

Speaker 3

Thank you.

Operator

And I apologize, we will go back to the line of Scott Gruber with Citigroup. Please go ahead.

Speaker 3

Yes, good morning. Good morning, Scott. Good morning, Andy. Yes. D and I margins snapped back nicely in 2Q.

Speaker 3

And in the past, you've talked about D and I as a mid-30s type margin business, at least near term. But in terms of thinking about the second half, can you build off at 34%, should we expect those to grind higher in 3Q and 4Q? And then more importantly, as we think about are in 2020 4 and given all the digital growth, do you think D and I margins could push into the high 30s, especially with Hopefully, some of the APS headwinds are abating.

Speaker 5

Hey, Scott. Stefan here. So yes, you've seen The DNI margins returning to levels we like in the mid-30s after the Q1 seasonal low. And just for clarification, this is almost entirely coming from digital because EPS ended up are somehow unexpectedly flat in terms of revenue. So really the entire Margin expansion from Q1 to Q2 is digital, which is good news.

Speaker 5

So can it go up Higher than 34%. Yes, potentially, you always have a you can have certain sales like exploration data, etcetera that come, but The mid-40s is a good goalpost for us with a few percentages up and down depending on exceptional sales.

Speaker 3

And we should still think about that in 2024 as well?

Speaker 4

Yes. 2024, I think the trajectory we've seen Digital is not set to slow down because I think as I explained multiple dimension and trends are concurrently shaping the future of our digital Success and I think we expect it to continue well into the beyond the cycle as we call it actually. And the accretive, I would say contribution of digital will over time, long time, be more and more accretive on the growth And more and more accretive on the margin.

Speaker 3

Got it. And then just a quick one on North America, Pretty impressive performance in 2Q with revenues up and the rig count in contrast to the rig count being down. Obviously, Gulf of Mexico is helping you guys. Is helping you guys. Are you also seeing continued growth in that Fit for Basin strategy and then Absolutely.

Speaker 4

Go ahead. Absolutely. I think that's what we call agility and fit strategy in the land part of the North America is being helping us to shield ourselves some of the macro trends. I think we believe that the lack of exposure to pressure pumping at scale And the fit for basin technology strategy in well construction has allowed us to continue to progress are going to be able to buffer some of the activity decline and expose us to actually a mix of performance that has been resilient in North America land and then complemented augmented, if I may, by the North America Offshore, where we have seen activity and revenue progression.

Speaker 3

Got it. I appreciate all the color. I'll take it back. Thank you.

Operator

Next, we go to the line of Kurt Hallead with Benchmark. Please go ahead.

Speaker 9

Hey, thank you. Good afternoon, everybody.

Speaker 4

Good afternoon, Kurt.

Speaker 9

So Tom, you guys put up A really impressive free cash flow number in the quarter. You indicated that free cash flow dynamics would obviously improve in the second half of the year. So I'm just kind of curious though, close to $1,000,000,000 of free cash flow in the quarter itself. Is this The dynamic now where you can continue to harvest that kind of cash and is that level of free cash flow something that you think could be sustainable As you go into the 3rd Q4 of this year.

Speaker 5

So, Luc, yes, we are also quite pleased with The free cash flow performance in the Q2, it's as I said, it's mostly improved working capital on top of the earnings, of course. And as you know, there is quite some seasonality in our cash flow and working capital. So we came out of a Seasonally low Q1 with quite a strong Q2. We again beat quarterly record on DSO for the Q2 and our inventory efficiency improved quite a bit as well. So it sets us are going to be quite well for the rest of the year.

Speaker 5

As you said, we always generate quite more cash in the second half. So The $1,000,000,000 level is a good starting point for Q3, Q4 and We'll take it from there, but we are slightly ahead of where we wanted to be and I think we can continue that way for the second half.

Speaker 10

All right.

Speaker 9

That's great. That's fantastic. And my follow-up, so Olivier, a lot of contract awards during the quarter, you discussed the emphasis on long term visibility on a number of these projects. It's easy for us on the outside to kind of look at what goes on with an offshore driller and look at their contract start date sometime in the future. Maybe a little bit more challenging to kind of connect those dots How a service company and at what point in time does a service company get slotted in for those projects.

Speaker 9

So just wondering For the benefit of everybody on the call and understanding where your visibility is coming from, at what point in time Do you guys think that the Schlumberger get hauled into an offshore drilling project, for example? And what gives you the conviction? And how can You can convey that conviction to the investor base and understanding that this cycle really does Is different and has longer legs than what we may

Speaker 3

have seen in the past?

Speaker 4

No. I think it's a mix. It's a mix of things we and you have seen many contracts, some of them have very long duration, more than 5 years or 7 years in recent award that we highlighted in April and this July. And I think it's 3 to 5 years is contract terms that we have and every contract you see are framework contracts that are being used to mobilize resource and to commit capacity across multiple years and this contract either start this year or start next year, hence they go well beyond 2025 and support the thesis of durability, duration beyond mid And secondly, I would say that you see also that we were announcing a few of the subsea award and we'll continue to see that in the second half. We quoted our total booking for Production Systems, which is the long cycle side of our business.

Speaker 4

So you have the contract I was are referring to service contract 3, 5, 7 years, many of them in Middle East and offshore, as you have seen. And then you have the bookings Be it in Subsea or be it in some of the large surface contract as you have seen in Qatar, Subsea as you have seen in different parts of the Americas and of Turkey. And this is typically 2 or 3 years out of booking. And we have been quoting $10,000,000,000 to $12,000,000,000 for the full year on the Pollution System, and we are confident that this represents 1 are in the range of 0.1 to 1.3 book to bill ratio. And this as we will exit 2023, we'll have this booking to fuel At least 2 years of growth going forward in our long cycle business.

Speaker 4

So you combine these and you get many of the elements of duration on international, Middle East and Offshore Markets.

Speaker 9

That's great. Really appreciate the color. Thank you.

Speaker 3

You're welcome. Thank you.

Operator

Our next question will come from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 10

Yes, good morning team. The first question is just around Morning, around Production Systems margins were really good there. So can you talk about how we Think about the margin trajectory and also tie that into any commentary you have around the Subsea, which has been a source of momentum.

Speaker 4

Yes. I think production system is, as I said, is an equipment, Mostly Product Equipment and Long Cycle and on which we had suffered from Some supply logistics constraints last year that we flagged, and we said that, Hans, as soon as these constraints will be behind us, will feel comfortable that the momentum on margin expansion will be matching what we have seen in the other core division that we have, And this is starting to materialize. Our ambition is not stopping at this margin. Our long term ambition is to continue to grow and expand are in line with the other core division as we believe that operating efficiency, including into this long cycle, manufacturing efficiency equipment that we are deploying across some offshore FPSO. All of these combined to give us the, I would say the confidence that this trajectory of margin expansion will not stop here and will continue to go.

Speaker 4

You have heard about the booking. I was commenting on this. It's a booking and margin expansion journey for PS going forward.

Speaker 10

Olivier, when we saw each other a couple of weeks ago, you had just spent a lot of time on the road, visiting a lot of customers in different regions. I wonder if you can just kind of go around the world talk about customer conversations, obviously name agnostic and what are you seeing in terms of different basins in terms of activity?

Speaker 4

I don't want to be too specific. Obviously, I think I will reflect more on the general sentiment. I think the general sentiment is that, 1st and foremost, Energy and capacity expansion still dominates the decision and the economics are seen as very favorable and outlook of the industry at large is seen as resilient. And you have seen it for many major reaffirming their 2,030 are in production volume and adjusting their strategy to make sure they maximize opportunity to either accelerate the gas transition or sustain their oil production and this will mean investment and we see that in all the engagement we have. And then the NOCs, be it in Americas, in Africa, Middle East or Asia are pursuing their two things, Either their pollution enhancement to make sure they continue to lift their pollution performance And then addressing energy security through their gas development typically.

Speaker 4

We see this everywhere, partly in Asia. So the customers are fairly focused on developing their gas assets, expanding and reverting some of the trends of declining oil production and to make sure they maximize the cycle, their participants to the cycle and the participation to the international pull supply pull that is happening. So it's broad. And as I commented during our I think commented that we are seeing also many newcomers that are expanding into deepwater, are in the exploration rounds that are across the globe in new territories or new countries, and this will attract more investment. This will attract if the geology are right, future FID.

Speaker 4

So it's in general driven by Energy and Security, full and international supply And IOC's commitment to sustain their position towards the end of the decade.

Operator

And next we go to a question from Luc Lamoine. Please go ahead.

Speaker 9

Hey, good morning. Olivier, impressive award with a 5 year contract with Petrobras for Delphi deployment across the organization, seeing if you can maybe talk about the opportunity for additional contracts with other NOCs or majors for enterprisewide Delphi and kind of the level of interest there.

Speaker 4

Yes. We typically do not speak ahead of any public announcements. The work we are doing on the ground to continue to prepare for further penetration of our existing customers. But yes, they are fairly advanced discussion with several customers to prepare for a transition and adoption of Delphi Cloud Solution, either for the geoscience workflow Or for some of the drilling operation, as I was referring to, or for some of the adoption of AI And unlocking the data. So we are seeing this.

Speaker 4

And yes, you will see you continue to see every quarter new announcements that will come are in the different the 3 different dimension and trends that I was highlighting. And you will see large contract in the future hopefully I'm materializing as well that we replicate the success we had with Chevron was the 1st very large enterprise deployment That many, many companies are looking towards and using to reflect some of their future opportunity they have with us. So that's happening at scale, and we are pleased with the progress. But again, it's a long journey, and it's one customer at a time, And it will take years and the cycle will be long and will be accretive for the long run.

Speaker 9

Okay. Got it. Thanks Olivier. Thank you.

Operator

And our next question is from Keith Mackie with RBC Capital Markets. Please go ahead.

Speaker 10

Hi, good morning and good afternoon, everyone.

Speaker 9

Good morning, Jason. Just wanted

Speaker 10

to first ask on the Subsea JV with Subsea 7 and ACR originally expected to close the end of next month. Can you just remind us of the key benefits of that transaction? Maybe give us an update on where you are in relation to closing? And if you expect any impact to the numbers or the way you might report the numbers in the Production Systems segment going forward would be helpful.

Speaker 4

Yes. First, I think we what we quoted at the time we announced the JV is that we expected this to close by Q3 this year, which is in 2 months from now. The progress we have made is that we have progressed towards obtaining the majority of the antitrust regulatory approval to move forward. We have progressed in our planning in conjunction with our future partners and we'll be communicating on this as soon as We can to give you the materiality and the timing and the materiality of this as we will consolidate. Now it will be consolidated into the PS and are going forward at the time we will announce the closing, and we will give you the detailed information about that when it will be announced and we'll give clarity on the way we will report it.

Speaker 4

So good progress across the differential addition Good progress, very good progress on the planning to prepare for the closing as well. So we are optimistic are in the near future.

Speaker 10

Thank you. Appreciate the comments. And one final question for Stephane just on the buyback. As free cash flow is set to increase in the second half of the year, should we expect any significant deviation from the $200,000,000 or so run rate You've set for the first half of the year or is that still a good number to put in our models?

Speaker 5

Look, the way you have to look at Keith is really on our commitment to return a total of $2,000,000,000 to shareholders and it's between dividends and buybacks. So yes, If you do the math, you will get the average level of buyback in the second quarter in the second half, sorry. But yes, it will continue, of course.

Speaker 10

Perfect. Thanks very much.

Operator

And ladies and gentlemen, that is all the time we have for I will now turn the conference back to the SLB leadership for closing comments.

Speaker 4

Thank you, Leah. Ladies and gentlemen, as we conclude today's call, I would like to leave you with the following takeaways. First, as our Q2 results clearly demonstrates, our market position, performance differentiation and technology leadership are fit for the cycle and we continue to drive our financial performance. 2nd, as upstream investments accelerate in the international and offshore markets, these regions will lead our growth with significant visibility into the second half of the year, we reaffirm our confidence in our full year financial targets. This is a compelling environment for our company.

Speaker 4

And today, we are more returns focused, disciplined and efficient than ever before. We could not ask for a better backdrop to execute our commitment to shareholder returns. Remain very confident in our strategy and fully trust the SLB team to continue delivering strong performance for our business. With this, I will conclude today's call. Thank you all for joining.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Telefonaktiebolaget LM Ericsson (publ) Q2 2023
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