GE Aerospace Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

Key Takeaways

  • GE delivered a very strong Q3 performance and raised its full-year guidance, led by Aerospace growth and Vernova’s operational improvements.
  • GE Aerospace posted ~25% revenue growth and >30% profit growth, expanding margins ~120 bps to 20.4%; commercial engines and services drove key gains and OE deliveries are set to rise 40–45% in 2023.
  • GE Vernova’s Grid and onshore wind businesses turned profitable, with orders >3× revenue and backlog margins up ~700 bps, while offshore wind is expected to incur ~$1 B in losses in both 2023 and 2024.
  • Free cash flow reached $1.7 B in Q3 (up ~$1 B YoY) and $2.2 B YTD, powered by stronger earnings and disciplined working capital management, despite higher inventory.
  • GE plans an early Q2 2024 spin-off of GE Vernova (ticker GEV) and GE Aerospace, each targeting investment-grade ratings and separate NYSE listings.
AI Generated. May Contain Errors.
Earnings Conference Call
GE Aerospace Q3 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the General Electric Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Liz, and I will be your conference coordinator today. If you experience issues with the webcast slides refreshing or there appears to be delays in the slide advancement, As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Steve Winoker, Vice President of Investor Relations.

Operator

Please proceed.

Speaker 1

Thanks, Liz. Welcome to GE's Q3 2023 earnings call. I'm joined by Chairman and CEO, Larry Culp and CFO, Rahul Gai. Some of the statements we're making are forward looking and based on our best view of the world and our businesses as we see them today. As described in our SEC filings and on our website, Those elements may change as the world changes.

Speaker 1

Over to Larry.

Speaker 2

Steve, thank you, and good morning, everyone. Before we start, I want to reiterate that the GE team stands firmly with our employees, customers and all those impacted by the brutal Hamas attacks on Israel in the subsequent war. Our priority has been the safety of GE employees in the region. We're doing everything possible to support them and their families. Last week, GE announced a $500,000 contribution to help with the humanitarian efforts For the many people in Israel, Gaza and the surrounding areas impacted by these horrific events, Terrorism has no place in our society.

Speaker 2

And like so many, I'm devastated by the loss of lives, violence and suffering of innocent people. Turning to the quarter, GE delivered a very strong performance and we're raising full year guidance again. GE Aerospace continues to experience rapid growth, driven by robust demand and solid execution, largely in commercial engines and services, Another significant quarter for the team. Our fleet of 41,000 Commercial Engines And 26,000 rotorcraft and combat engines continues to expand as we work to define the future of flight. Today, we're navigating a still challenging supply chain environment to deliver for and support our customers.

Speaker 2

Year to date, commercial engine deliveries are up 30%. Across GE and Safran's MRO shops this quarter, we've improved LEAP quick turn shop visits over 30% year over year and sequentially. For tomorrow, we're building our backlog and sales pipeline during unprecedented industry growth. Recently Air Canada ordered 36 GE NX-1B engines, plus 4 spares. Building on GE NX's rich history, It's the fastest selling high thrust engine with over 50,000,000 flight hours.

Speaker 2

For For the future, we're investing in R and D and developing next generation technologies. For example, we're advancing full system testing for our hybrid electric systems At our Electric Power Center in Ohio. We're also collaborating with industry partners and NASA on an eco demonstrator program to measure sustainable aviation fuel impact on the environment, particularly high altitude emissions. And our growth opportunities extend beyond commercial. In defense, we're pleased the U.

Speaker 2

S. Army has accepted the first two T901 flight test engines for the future attack reconnaissance aircraft prototypes. The T901 will also upgrade the U. S. Army's Apache and Black Hawk helicopters, providing 50% more power, reduced lifecycle costs And lower fuel consumption.

Speaker 2

And we've been selected for development work on the cockpit voice and flight data recorder systems for the future long range assault aircraft program. Next generation programs like these demonstrate how GE's rotorcraft programs enable the military And our allies to take on more challenging missions today and in the future. And we're pleased to see Congress recognizing this important work by including funding However, even with these strong results, we're far from satisfied. Through our lean transformation, we're making real progress, Improving flow and eliminating waste. For example, our team in Pune, India has increased output of high pressure turbine manifolds by 3 times.

Speaker 2

But we need to do more as do our suppliers, given the pace of demand for both aftermarket services and new engine deliveries. There are pockets of improvement now. Material input increased double digits sequentially, supporting spare parts delivery, which was up significantly year over year. We're working within our own plants and in partnership with our suppliers to deliver sequential improvements in output and turnaround times day by day, Over to GE Vernova, where performance is strengthening pre spin at both renewable energy and power. Customers continue to invest in the energy transition, driving meaningful demand for our products and services.

Speaker 2

Grid and now onshore wind We're both profitable this quarter and we expect improved performance from here. Grid customers are increasing their infrastructure investments globally to connect renewables and improve reliability. Year to date, orders remain strong at more than 3 times revenue and with higher margins, which will support profitable growth through the decade. We've also increased selectivity, streamlined cost and rationalized our industrial footprint, Tracking toward full year profitability at GRID. I really like the way the GRID team is using lean to drive this turnaround And to deliver profitable growth.

Speaker 2

For example, across Power Transmission's 14 sites globally, We've reduced lead time by roughly 15% year to date and we're targeting a 20% reduction by year end. Now at onshore, our strategy to focus on fewer markets pivoting more toward North America where GE Vernova is the market Leader is working and we're relying more on our workhorse products now representing 70% of equipment volume this quarter. These shifts are translating to 700 basis points of higher margins in backlog this year. We're still driving cost out, Fewer layers reducing headcount and empowering leaders closest to the operators. Finally, we're improving fleet reliability.

Speaker 2

We're now halfway through our enhancement program in the field and expect to be roughly 60% complete by year end. As expected, offshore wind remains difficult this year with losses of roughly $1,000,000,000 in 2023. Next year, we expect offshore will have similar losses, but substantially improved cash performance. So it's a tough $6,000,000,000 backlog that we're working our way through, which we expect to largely complete over the next 2 or 3 years. Meanwhile, we're making operational progress with rising availability on the 800 installed megawatts of our 6 megawatt platform.

Speaker 2

Electricity is now being produced at Dogger Bank and we recently had the installation of our first Hollyotics turbines at Vineyard Wind. Looking forward, we've expanded Vic and Bates' role to CEO of the entire wind business to leverage our progress in onshore and offshore. We're taking a similarly disciplined approach to writing new business like we've done over at Gas, Onshore and Grid. With increased rigor on pricing, terms, geographic exposure and other risks. All in all, given Power's continued strength And with our 2 largest businesses in renewables grid and now onshore delivering, plus our plan for offshore, we're highly confident And successfully spinning off GE Vernova early in the second quarter.

Speaker 2

Across GE, I'm pleased With how we're operating as a simpler, more focused business at both GE Aerospace and GE Vernova. Another strong quarter, but plenty more to do. My thanks go out to the team for their dedication and commitment to serving our customers. It's been nearly 2 years since we announced our intention to create 3 independent investment grade industry leaders. And now we're closing in on the final step.

Speaker 2

Today, we announced plans to spin off GE Vernova and launch GE Aerospace in the beginning of the Q2 of 2024. Both will be listed on the New York Stock Exchange with the GE Vernova as GEV And GE Aerospace carrying forward under GE. We've made some important hires and promotions to ensure we have the best teams Leading these businesses forward. At GE Aerospace, we've completed the functional leadership team, naming our heads of Corporate Affairs, Human Resources, Legal and Treasury With experienced leaders from inside and outside GE. At GE Vernova, we added seasoned public company CFO, Ken Parks.

Speaker 2

As I mentioned a moment ago, Vic Abate is now CEO of the Wind Business. We've also further simplified and strengthened our balance sheet Redeeming the remainder of our preferred equity and selling a portion of our AerCap shares for $2,700,000,000 of proceeds. Our balance sheet is well positioned to support the launch of 2 investment grade companies. And we're approaching some key spin milestones. GE Vernova will file a confidential Form 10 shortly with the initial public filing expected in the Q1.

Speaker 2

Soon, we'll announce each company's Board of Directors. And in early March, GE Vernova and GE Aerospace plan to hold Investor Days. Building on our success at GE Healthcare, we're exactly where we want to be at the end of October for both GE Aerospace and GE Vernova. Now over to Rahul for more detail on our results.

Speaker 3

Thank you, Larry. Turning to Slide 4, I'll speak to the quarter on an organic basis. Overall, we delivered meaningful growth across our headline metrics. Orders were up double digits with services up 15%, driven by commercial aerospace and equipment up 22%, with growth in all segments. Revenue increased 18%, benefiting from strong market demand, Improved execution and pricing.

Speaker 3

Aerospace was led by Commercial Services and Engines, Renewables was led by grid and offshore and power from heavy duty gas turbines and aero derivatives. All segments contributed to adjusted margin expansion of 760 basis points. This included the absence of last year's wind related charges and the benefits of volume, price, net of inflation and productivity, And continued investments in growth. Adjusted EPS was $0.82 up almost $1 year over year. Excluding last year's wind related charges, adjusted margin still expanded 400 basis points and EPS was up $0.59 Or more than triple what we delivered last year.

Speaker 3

We generated $1,700,000,000 of free cash flow, Up roughly $1,000,000,000 largely driven by earnings. Working capital was a positive $400,000,000 flow, Driven by disciplined receivables management, while inventory remained inflated due to continued supply chain challenges. Year to date, free cash flow was $2,200,000,000 up $2,500,000,000 reflecting higher earnings, reduced working capital and improved linearity. Switching to corporate. Results improved significantly Due to Energy Financial Services gain on sale from investments and higher interest income.

Speaker 3

Also, as we prepare to reduce costs, As we prepare to become standalone businesses, for the year, we now expect expenses in the $500,000,000 range. At Insurance, we completed our annual review of liability cash flow assumptions under the new accounting standard. This resulted in an immaterial adjustment to earnings, indicating claims experience is consistent with our models. Given GE Aerospace's strength and GE Vernova's improvement, we are raising full year guidance And now expecting revenue growth of low teens, up from low double digits adjusted EPS of $2.55 to $2.65 up $0.40 at the midpoint, largely from improvement in operating profit That we now expect to be in a range of $5,200,000,000 to $5,500,000,000 and free cash flow of $4,700,000,000 to $5,100,000,000 up $550,000,000 at the midpoint, largely from higher earnings and lower AD and A outflow. Now spending a moment on each business, starting with GE Aerospace.

Speaker 3

Demand remains robust With GE and CFM departures growing mid teens year over year. Orders were up 34%, With strong growth in both equipment and services, revenue was up 25%, Led by Commercial Engines and Services, up 29% and Defense growing 8%. Profit grew over $400,000,000 or more than 30%. Notably, margins expanded 120 basis points to reach 20.4 percent. Higher services, volume and pricing net of inflation more than offset investments and adverse mix.

Speaker 3

In our commercial business, services strength continued to drive profit, with services revenue up 31% from volume, pricing and heavier work scopes. External spare parts were up more than 35% and internal shop visits grew 2%, With supply chain constraints impacting growth, Commercial Engines revenue grew 23% with lead deliveries up 12% year over year. We are now planning for a 40% to 45% increase in fleet deliveries this year, down from our 50% target at the beginning of the year. We now expect OE revenue to grow low to mid-20s and services revenue to be up mid to high-20s for the year. In defense, book to bill remains strong this quarter, again greater than 1 and 1.3x year to date, highlighting the strong demand environment and quality of our franchisees.

Speaker 3

Revenue grew high single digits With strength in services and Edison Works offsetting lower unit deliveries. Based on GE Aerospace's year to date strength, We are raising revenue growth to the low 20s and profit to be about $6,000,000,000 up roughly $1,200,000,000 year over year, With free cash flow growth trending better than prior expectations. Moving to GE Vernova. Lean, along with better underwriting, selectivity and productivity is delivering stronger results we mentioned earlier at Grid and now Onshore. At Renewables, orders grew again, up 3% this quarter and up more than 80% year to date to nearly $18,000,000,000 Grid orders increased over 50% this quarter.

Speaker 3

And while primarily an equipment business today, we are starting to grow grid services that was up double digits this quarter. In Onshore, North American equipment orders for the quarter were up nearly 40% and year to date are up more than 2.5 times Over prior year, the IRA continues to be transformative, establishing multi year U. S. Demand visibility for future growth. Internationally, onshore orders were down meaningfully, but at better margins consistent with our strategy of greater selectivity.

Speaker 3

Revenue grew 14%. Grid increased with double digit growth at each business. At Onshore, North American equipment growth was more than offset by lower repower and international equipment. At Offshore, revenue more than tripled year over year and grew sequentially with higher nacelle output. Profit improved from our turnaround efforts.

Speaker 3

Excluding last year's elevated reserve, Renewables margin still expanded Roughly 600 basis points, driven by continued price and productivity. Onshore and grid margins expanded Due to price and productivity, and grid margins also benefited from additional volume. For the year, Renewables now expects low double digit revenue growth. We are maintaining the guidance for significantly better year over year profit With onshore and grid improvement more than offsetting the offshore pressure. Turning to Power.

Speaker 3

We delivered Solid year over year revenue growth and margin expansion with seasonally lower outages. Equipment orders grew slightly as higher Heavy duty gas turbines more than offset lower aeroderivative units. Services declined slightly as High single digit growth in gas transactional services was offset by aeroderivative and steam services. For the year, we still expect total services orders to grow low single digits. Revenue grew 9%, largely on price and higher scope on heavy duty gas turbine and aeroderivative equipment.

Speaker 3

Services grew again, up low single digits. Profit grew roughly 60% with 200 basis points of margin expansion, driven by higher volume, pricing and productivity, which more than offset inflation pressure. Year to date, Power orders have grown low single digits, Revenue mid single digits and margins have expanded over 100 basis points. This was led by services, including higher gas utilization, up low single digits, benefiting from a continued coal to gas switching. We also shipped 9 units this year and now have more than 47 gigawatts of installed capacity, Continuing to extend our Services billings to $1,000,000,000 by mid-twenty 20s.

Speaker 3

In the Q4, Power is well positioned for sequential profit growth from seasonally higher services volume. For the year, Power continues to expect low single digit revenue growth with better year over year profit. Taken together, for GE Vernova, we are now expecting high single digit revenue growth and profit improvement of over $800,000,000 year over year at the midpoint. We're raising the low end of our profit guidance driven by both Renewables and Power and now expect negative $300,000,000 to negative $100,000,000 of operating profit. As we continue to expect flat to slightly improved free cash flow.

Speaker 3

Overall, we are really encouraged, proving with grid and onshore that we can deliver better results. This combined with Power's continued strong performance We'll drive meaningful profit and cash flow improvement at GE Vernova next year. And with that, let me turn it back to Larry.

Speaker 2

Rahul, thank you. To summarize, GE Aerospace grew rapidly again. As GE Vernova renewables improved sequentially and Power continued to perform well. Overall, a very strong quarter for GE, one that gives us confidence and thus allows us to raise our full year guide. More importantly, we're poised to launch 2 innovative global service focused industry leaders in less than 6 months.

Speaker 2

I'm proud of our team and even more excited for what lies ahead. Steve, let's go to Q and A.

Speaker 1

Before we open the line, I'd ask Everyone in the queue to consider your fellow analysts and ask one question, so we can get to as many people as possible. Liz, please open the line.

Operator

Our first question comes from the line of Scott Deutschley with Deutsche Bank.

Speaker 3

Hey, good morning. Good morning.

Speaker 4

Rahul, is the lower LEAP delivery guide a function of softer narrow body deliveries at the air framers? Or is this more related challenges to your own production ramp up? And then how should we think about the impact of 2024? Thank you.

Speaker 3

Yes. Let me start and Larry, I'm sure, can add here. Just It's primarily a function of our own supply chain challenges that we are having internally. As we look at our supply chain environment, While we are working extremely hard, we are seeing an improvement in total material inflow. The supplier delinquencies Still remain high.

Speaker 3

Actually, we're up sequentially about 25% from 2Q to 3Q. So that is impacting our output on the other end. And for next year, we're still expecting 40% to 45% improvement in LEAP deliveries from where we end this year.

Operator

Our next question comes from the line of Nigel Coe with Wolfe

Speaker 5

Research. Thanks. Good morning.

Speaker 2

Good morning, Nigel.

Speaker 5

Just one question. Hi, guys. So I think Larry, you mentioned Offshore losses about $1,000,000,000 this year. I think you mentioned similar next year. Is there still a pathway to breakeven to profits for VENOVA Sorry, thoughts on Renewables next year?

Speaker 2

Yes. I would say, Nigel, that We're really pleased overall with Renewables. Again, with onshore turning profitable in the quarter, with grid now profitable 2 quarters in a row, with the prospect of being profitable, I think, for the full year, Back to being profitable, I think for the full year, that's really, I think sets us up very well. But offshore will be difficult. That's what's behind Those underlying numbers for this year and for next.

Speaker 2

I do think we're making the operational progress that we talked about, both the 6 megawatts and the new Projects with Auger Bank and with Vineyard, but it is a problematic financial profile. We'll work our way through the $6,000,000,000 backlog over the next couple of years as we indicated. I think with the Progress and the momentum we've got in grid and with onshore, with power as well, We've got we should deliver sequential improvement in profitability from here, but offshore Will be difficult. I think what we're encouraged by though is that the application of what we've done in the other businesses around selectivity It's really relevant here. We know the industry is ready for a reset.

Speaker 2

You've seen that in the comments from a number of folks, New York State over the last couple of weeks as well. So we think we can make a much better business with offshore wind, but we're staring at some Challenges that we need to address here, in the Q4 and in 'twenty four for sure.

Operator

Our next question comes from the line of Seth Seifman with JPMorgan.

Speaker 6

Hey, good morning, everyone.

Speaker 3

Good morning. Good morning.

Speaker 6

So I wonder, maybe, Larry or Rahul, if you could talk about The aftermarket expectations, you said mid to high 20s this year. Maybe kind of how that's changed or if it's changed between Internal shop visits and spares and then kind of how we interpret the Big sequential growth in spares during the quarter. Was that is that a new sustainable level? Is that

Speaker 3

Yes. So let's start with the second part of the question first, Seth, and we'll Go back to where you started. So on the spare parts revenue, spare parts revenue was up about 35% or more than 35% This quarter, I would say 3 main things: volume, pricing and increased work scope. Volume growth Continues from mid teens departures in the quarter and then stronger departure growth in the first half, which leads to volume in the third quarter. And also keep in mind that it's less of a challenge to kind of ship spare parts versus completing a shop visit or an engine.

Speaker 3

So that also helps With shipping spare parts when the volume is strong. The second part I would say going back to pricing, we implemented a high single digit price increase this quarter. Now we had pulled forward the price increase from the Q4 to the Q3, so we got a couple of months of incremental price in the quarter. And then combine that with what Larry has been pushing for the last 12 to 18 months is just very, very strong pricing discipline. So it's not just about implementing a price increase, It's also about managing the implementation of that price increase.

Speaker 3

So I think we're doing a better job of that. The last thing I would say is the work scopes have been heavier, Both on the narrow bodies and on the wide bodies. So wide bodies, they're coming back to kind of second shop visits. Narrow bodies is primarily a phenomena of customers kind of trying to constrain Spending in challenging times, especially in China last year. So now as there are a little bit more cash, the departure is growing, The work scopes are increasing.

Speaker 3

So I would say those are the 3 main levers of higher spare parts growth in the quarter, which was more than 35%. I would not attribute any of that to Now as you look forward to the first part of your question between spare parts growth and shop visits, Spare parts, I would say, are strong. We expect kind of mid-20s growth in the Q4 here, which will be in line with where the departures are. Shop visits, I think, for the year, we're in that kind of low teens to mid teens category. I think that's what we are thinking right now given How challenging supply chain has been and shop visits were up a couple of points in the Q3.

Speaker 3

So we think for the year, we've been kind of in the low teens to mid teens

Operator

Our next question comes from the line of Julian Mitchell with Barclays.

Speaker 7

Hi, good morning.

Speaker 3

Good morning. Good morning, Julian.

Speaker 1

Good morning. Maybe just my question

Speaker 7

around Renewables and sort of fully understand the offshore backlog, but maybe just wanted to focus on a couple of other things. One was, Are you seeing any shift in the kind of new orders or new equipment orders picture in renewables Just because it seems a tougher environment for project development and financing in general across different Shri, just wondered if your perspective on that had changed for the coming quarters. And sort of allied to that, Because of the working capital dynamics of renewables with customer advances and so on, any thoughts around sort of, what level of Cash balance, Venova should have, upon spin and sort of any mix of GE versus external financing for that or funding for that cash balance.

Speaker 2

Sure. Well, to start with, I think what we have seen through the course of the year, again, particularly with onshore and grid, is just Incredibly healthy demand, despite the rate environment. Obviously, the incentives Here, the incentives in Europe, the push with respect to the energy transition at large really has Kept us very busy. So no change really whatsoever with respect to our commentary in that regard. I think as we look into the 4th quarters, we look into 2024, any one project can move for various reasons.

Speaker 2

I think we continue to be quite optimistic about the underlying demand that we see in those businesses. We know offshore has its own dynamics again To the reset comment I made a moment ago, but by and large, I think we're feeling very good about the demand environment.

Speaker 3

Right. And just to add to that, Julian, not only is the demand environment good, but as Larry kind of mentioned in his prepared remarks, We are seeing better pricing and the selectivity, the strategy that Scott, Larry, Veko, everybody has been pushing come through. Our grid backlog margins were up About 3 points and onshore backlog margins were up about 7 points in the quarter. So that should obviously help with As through the turnaround efforts in 2024. So strong demand environment, good pricing on the renewables orders.

Speaker 3

Now switching to your second question on the cash balance. 1st and foremost, we do expect both Pernova And Aerospace to be investment grade at spin, right? So that's kind of priority number 1. And as we announced back in September We do expect that WANOVA will spin in a net cash position. So we're working through our framework on exactly what that number looks like.

Speaker 3

Obviously, what we want to do We want to make sure that both companies have enough operating cash at the time of spin. In addition, what will also happen is, As you probably noticed in our 10 Q, we have about $2,000,000,000 of restricted cash And most of that is with Vernova right now as we think about where that cash balance is. So as we think about the cash balance that's been, it will be the restricted cash for both businesses Plus the operating needs of that business and there's enough cash on the balance sheet at GE to make sure that this happens And we definitely don't need to tap into any external markets to make sure that both companies have enough cash at Spin. And we'll give you an update as we get closer to Sprint.

Operator

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Speaker 8

Thank you. Good morning, Larry and Rahul. And Steve, maybe if I could ask about Aerospace margins, same as last quarter, very good, 19.4 Year to date, above 20% in the quarter, just help lift the guide up, which still implies a sequential step down in Q4. The OE mix headwind with the 4.50 leads in the 4th quarter to hit the 16.50 is, I guess, a lot of it. Do you still expect 250 basis points of OE headwind this year?

Speaker 8

How does that filter into 2024 and the breakeven by 26? Thank you.

Speaker 3

Okay. It's a multi part question Sheila. I'm going to try to remember everything. If I forget, Please jump in here. So you're right.

Speaker 3

I think we had a good quarter, 25 percent revenue growth, quarter MLR of the profit growth, 120 basis points of margin expansion in the quarter continue to gives us confidence to raise the year. So what we did in the quarter as you saw in the guide, we raised guide for the year by about $500,000,000 of revenue, slightly more than $250,000,000 of profit. So about a 50% drop to for the incremental revenue. Obviously, now part of that is the higher services revenue, lower OE revenue that you referenced. So as you kind of think about now what the Q4 looks like as you go from Q3 to Q4, There is about $200,000,000 of incremental OE revenue.

Speaker 3

And even though services revenue is still strong kind of mid teens, it is a lower Sequential growth just given the timing of the spare parts shipment. So that's impacting the quarterly margin dynamic to a little bit. But having said all that, we're still expecting kind of low 20s percent revenue growth in the year for GE Aerospace About $1,200,000,000 to $1,300,000,000 of profit, close to a point of margin expansion as we end the year. So it will be a really, really good year. Now as you pointed out, LEAP deliveries are a little bit lighter than we had initially expected, still a pretty substantial ramp in the 4th quarter we Based on the revised guidance that we just provided, we expect about a 15% growth from 3Q to 4Q and a pretty Big ramp year over year.

Speaker 3

Now some of the LEAP deliveries have pushed out into 2024 2025. So as we think about the outer year margins, we had guided to about a point of margin headwind from LEAP between 23% to 25%. So now that would just be marginally higher just movement of LEAP engine shipments from 2023 to 2024. I don't know if I covered all the questions.

Operator

Our next question comes from the line of Deane Dray with RBC Capital Markets.

Speaker 6

Thank you. Good morning, everyone.

Speaker 3

Good morning, Dean.

Speaker 6

I was hoping we could get some comments on the upside in free cash flow this quarter and the progress that you're making in having free cash flow more linear through the year, looks like that's working. And any comments on the dynamics we should expect for free cash flow in the Q4? Any puts or takes?

Speaker 2

Well, Dean, thanks for noticing, right? To be up $1,000,000,000 in the quarter year over year to be at what 2.2 Here year to date, this was the time of the year in years past where we were kind of holding our breath, Waiting for all the cash flow in the year to come in, in the Q4. I think what you see again is a much more linear Approach to running the business coupled with obviously steady demand through the course of the year both at Arrow and across Vernova. So much of what we've tried to do in moving away operationally from the year end dynamics, let alone the quarter end dynamics, I think has borne some fruit, but we are far from a, shall I say, a Perfectly level loaded business at both Aerospace and Vornova, but we know As we continue to make progress, there will not only be the positive cash effects that you're pointing at, but frankly, there's a lot of cost We think we can pull out over time as well as we drive greater linearity and have less month endquarter and year end Sprints, which we know we can do, but we rarely do efficiently.

Speaker 1

Yes. And for the Q4, just on that number question, just take the 4.7 to 5.1 midpoint,

Operator

Our next question comes from the line of Andy Kaplowitz With Citigroup.

Speaker 6

Good morning, guys.

Speaker 2

Good morning, Andy.

Speaker 9

Larry, could you give us more color on how you're thinking about the defense business at This point, it was up high single digits in the quarter. It does seem like you're having a better year this year. Have you turned the corner toward better operating performance in that business? Could you talk about The budgeting environment for that business moving forward?

Speaker 2

Well, Andy, I would say that we have made some progress, but we are far From Satsify, you clearly saw the high single digit growth in the quarter and now year to date. I think we'll be in that zone for the year. But the supply chain challenges that we've talked about, which has made some of our Equipment shipment is somewhat lumpy, both with respect to our internal process yields and our material availability from our suppliers It's still job 1 in this business, right? I think if you look at what we've done inside of our own shops, we're really encouraged By the process improvements that we've been able to lay in, if you look at some of the delays that are a function of quality internally In the Q3, we were at our lowest level in the last 2 years. Still plenty to do, but that's a lot of progress.

Speaker 2

We're adding capacity, not only in production, but in our test cells, particularly at the road here in Lynn. And we have put even more people into the field with the supply base. Rahul mentioned earlier some of the delays that we have seen In terms of long time performance by our suppliers, that covers an array of commodities, Be it just general raw materials, castings, forgings, valves and the like, there's a lot of work to do to create that flow that Dean and I were talking about a moment ago. I think in terms of the top line environment, again, really encouraged by the progress that we're seeing with FARA. I think we are heartened by what the Congress is poised to do with respect to continuing to support the XA-one hundred.

Speaker 2

And we know as we look forward, just given the dynamics in the world, there's going to be plenty of opportunity for us both On rotorcraft and in combat to continue to grow this business. And it's a business we don't talk a lot about. It may be a bit overshadowed by Commercial, but that's not the way we're operating today. And I think as we get ready for the Vrnauba spin, there'll be more time and attention paid externally On defense, and I think the team is very much looking forward to that. Doing a lot of good work, plenty of opportunities, but We need to execute better and again, we need our suppliers hand in hand in that effort.

Operator

Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners.

Speaker 10

Thanks. Thank you. Good morning, everyone.

Speaker 2

Good morning.

Speaker 10

Good morning. Hey, could we just talk a little bit more about cash flow and Kind of what you're thinking into next year. The spirit of my question, Larry or Raul, is we're still dealing with kind of a sizable Difference between actual free cash flow and adjusted free cash flow, I think some of this is warranty and other things working through the system. Can you just elaborate a little bit on the factors and the disconnect and can we get maybe a Normalization of these factors as we think about the independent companies in 2024?

Speaker 3

Yes. Let me kind of let's just Spend maybe a minute on our free cash flow here. So first, as you look at our cash for the year, it's a really good year. I mean, we're going to generate $4,900,000,000 of free cash at the midpoint, up from $3,100,000,000 that we did last year. And a lot of that is coming from earnings growth.

Speaker 3

Clearly, that is a huge contributor and that is helped by kind of lower interest payments. But if you look at our working capital performance continues to be really strong this year. I mean, you've seen our year to date numbers. You've Even as you project that into the Q4, we are doing an exceptional job managing our day sales outstanding. So despite our Top line revenue growth, we are still expecting that overall our AR balance will be neutral, Jeff.

Speaker 3

And the reason I say that it just kind of shows that the business has for continued improvement. And then progress payments, contract assets continues to be a positive as well given the strong growth environment. The path that we're going to anchor on is a little bit around inventory. Given the supply chain challenges that we are having, inventory, as you will see from our Q, was up substantially in the quarter. Now we're expecting it to come down slightly as we get into the Q4, but it will be still be a substantial inventory build by the end of the year.

Speaker 3

So, and as we look forward into 2024 and 2025, that should start getting liquidated with improved supply chain performance. So that is where, I would say that is what gives us the confidence that this will be a continued good cash flow story. Now as you look, overall, we'll be at about 160% plus of free cash flow to net income. Part of that is amortization. But even if you take amortization out, It's still 130%, 130% free cash flow performance.

Speaker 3

So it's still very, very strong. Now on your question on between, I think most of that adjustments Below the line are related to spin related adjustments. I don't think there's anything and insurance And spin related restructuring costs and expenses. So and some of that will obviously continue as we go into 24 and maybe even a little bit into 2025, but after that at least the spin and the restructuring cost should end. And the insurance is not a big number.

Operator

Our next question comes from the line of Andrew Obin with Bank of America.

Speaker 11

Hi. It's I didn't hear you. I assume it's me. Good morning.

Speaker 1

It's Ron.

Speaker 2

Rob Anderson, good morning.

Speaker 11

Okay. So just question on onshore wind capacity. How close are you to the maximum capacity in onshore wind? But I think in the past, We've shipped over 1,000 turbines in a quarter, but there have been capacity reductions. Just trying to understand how close you are to maximum throughput at this point?

Speaker 2

With respect to Onshore, Andrew? Yes. Yes. I would say that when you look at The backlog that we have and with what's in the sales pipeline, I wouldn't say that we are sold out, But there is a limit to what we're going to be able to deliver In 2024 and 2025. And I think our customers are mindful of that.

Speaker 2

It's a little bit why We have seen, I think, the level of activity thus far this year with an eye to not only deliveries this year, but 202425. I'm always hesitant, Andrew, to talk about capacity, particularly in a business like this, as truly being fixed Because there's so much underlying process improvement that can unleash capacity, it's not strictly a function of, if you will, fixed Capital investments that we've made. Not that we would be averse to that, but I think we wanted to really pare down the overall cost structure, Not strictly an effort focused on manufacturing capacity and really put ourselves in position To grow off a lower cost base, do that in ways that will allow delivery to be an advantage And then gradually, smartly add any fixed capital that we might need. If you look at the underlying performance that The onshore wind team has delivered here in the 3rd quarter, will deliver in the 4th quarter, I think is poised, deliver in 'twenty four and beyond. You see all that Coming home, which we're pleased to see of course.

Speaker 1

Try to get a couple more in, Liz, if we can squeeze it.

Operator

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

Speaker 6

Hi, good morning guys.

Speaker 3

Hey Joe. Joe.

Speaker 6

And so just Sorry for the multipart question. But I guess just on the timing of the spin, early 2Q or the beginning of 2Q, so is it right to expect it ahead of 1Q earnings? And then secondly, on the profitability dynamics in both onshore and offshore wind, Yes. I'd love to hear any more details around the type of profitability you expect to exit on onshore wind this year. And then also with offshore, It seems like you're shipping more this year and so that seems to be a good sign, that you're getting through more of your unprofitable backlog.

Speaker 6

Any comments around that would be helpful as well.

Speaker 2

Sure. I think to your first question, Joe, the answer is pretty simple. Yes, We should be in a position to bring forward Vernova ahead of our typical earnings Announcement timeframe in early in Q2. I would say with respect to onshore wind, again, A lot of improvement. It will be a profitable second half, not unfortunately a profitable full year.

Speaker 2

We've got a shot at doing that at GRID, as I mentioned earlier. But I think as we look at 24 in onshore, We should be in the low single digit range, with obviously the intention as we Go through the budget cycle here in November December to see if we can put together a credible plan to do better. But that's the way I would think about it just Given the back half momentum that we'll have entering into next year.

Speaker 3

And Joe, just to kind of complete that picture on renewables Total, we as Larry said, we expect at least onshore to be at least kind of low single digit margins. Grid would be kind of mid single digit range. Offshore, as Larry said in his prepared remarks, we expect kind of similar levels of losses next year. But if you put all that together, It's still a pretty significant improvement year over year on both profit and then even more so on cash, right? So that's what we're expecting.

Speaker 3

We won't be too far off from the framework that Scott laid out at Investor Day for the Renewables business. And Joe, just to make sure we're clear about the shipments, the progress that you're seeing at Dogger Bank and

Speaker 2

Vineyard, Operationally, I think we're pleased to see that. I know our customers are to see those initial installations and the initial generation of power. However, Right. That progress is what triggers the revenue recognition, which in turn carries the losses. So that's a little bit of What is operationally encouraging, but financially difficult to work our way through.

Speaker 2

So just wanted to clarify that point.

Speaker 1

Please let's make time for one last question.

Operator

This question comes from the line of Chris Snyder with UBS.

Speaker 12

Thank you. I'm assuming you can hear me. I wanted to follow-up on Aviation Margins, which And so I understand the mix headwinds are coming through maybe a bit more muted as the service business is doing better. But it also sounds like price cost and just efficiency continues to work in the company's favor. Can you talk about some of the company specific actions that have been boosting or helping segment margins outside of just mix.

Speaker 12

And does the current strength you're seeing change the way you think about the 20%

Speaker 3

So, you're right. I mean, there's lots of Really good stuff happening in the company. The price is clearly a positive for us. It was a positive we were price cost positive in 2022 In Aerospace, we'll be price positive in 2023 in Aerospace, not only at the overall company level, but even at Commercial and at defense. So that the business is doing really well on kind of getting the price increases and managing the inflation.

Speaker 3

We've made progress on productivity as well. So that's the other part, not to the extent that we would have liked, but it is progress. And we are encouraged by Even the underlying progress on productivity that is currently sitting in our inventory numbers that will roll through next year. So there is positive momentum on productivity. So all that is a positive.

Speaker 3

And as you think about kind of the 20% margin number for 2025, obviously, that's still We're still at the end of 2023, so it's a couple of years away. But as you think about where we're going to end the year to 2025, we're going to end the year, call it, at $6,000,000,000 of profit. We said between, call it, between $7,600,000,000 $8,000,000,000 of profit for 2025. So we still have 1,000,000,000 ish of profit growth every year between 2024 2025. So that's a mid teens profit growth, which is pretty good.

Speaker 3

And the benefits of volume, Price, productivity will be partially offset by this LEAP headwind that we spoke about. We start shipping 9X As well, so Dyna, that's going to create some incremental pressure, and then we'll continue to invest in R and D. So that's the construct to get to the 20% margins.

Speaker 1

So Larry, any final comments?

Speaker 2

Steve, thank you. Just to close, appreciate everybody's time today. Obviously, very strong performance so far this year. A lot of progress toward the launches of both GE Aerospace and GE Vernova. And frankly, I have never been more confident in our company's future.

Speaker 2

We appreciate your time today and your investment and support of our company.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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