GE Aerospace Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

There are 11 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to the General Electric Second Quarter 2022 Earnings Conference Call. At this time, all My name is Sheryl, and I will be your operator for today's call. The slides are refreshing or there appears to be delays in the slide advancement. Please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded.

Operator

I would now like to turn the program over to your host for today's conference, Steve Winoker, Vice President of relations, please proceed.

Speaker 1

Thanks, Sheryl. Welcome to GE's Q2 'twenty two earnings call. Participants are joined by Chairman and CEO, Larry Culp and CFO, Carolina Diebeck Hoppe. Keep in mind that some of the statements we are making are forward looking

Speaker 2

participants are welcome to listen only and based on our best view of the world

Speaker 1

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. With that, I'll hand the call over to Larry.

Speaker 3

Thanks, Steve. Good morning, everyone. GE delivered a strong 2nd quarter with growth in orders, revenue and profit as well as positive free cash flow. Aerospace was the key driver and services remain a bright spot of performance. While this remains I'll provide an update on our plans to launch our strong I'll start this morning with an update on our plans to launch our strong franchises as 3 independent investment grade industry leaders.

Speaker 3

Participants are now on track and making good progress. Participants are in the same store.

Speaker 2

Just last week, we unveiled the new

Speaker 3

branding of our 3 companies, GE Aerospace, GE Healthcare and GE Vernova, The names leverage GE's multibillion dollar global brand and deep customer trust, giving us competitive advantage in our end markets. Participants are in the same store. We also achieved several key milestones on the healthcare spend, which will go first in early 2023. Participants are ready to file our confidential Form 10 shortly. Our team submitted its request for a private letter ruling to the IRS, participants are in the process of executing on our financial results.

Speaker 3

We completed consultation with our European Works Council, allowing us to move forward with a number of critical employee actions globally, including adding key talent in support of the new company. Participants are ready to take questions. We announced that GE Healthcare will trade on the NASDAQ and I'm excited about the Board we're assembling for GE Healthcare participants are ready to support the success of each of the stand alone businesses. I'm thrilled to now be leading a very talented team in Aerospace, participants are in line with their names, including John Slattery, who has been named Chief Commercial Officer Russell Stokes, now leading Commercial Engines and Services participants are joining us today, Amy Gowder, Leading Military Systems and Rahul Gai, who will join us next month as the business' CFO. And just last week, we announced Eric Gray is the new CEO of GE Gas Power, part of GE Vernova.

Speaker 3

Participants are in the line with our expectations. We are pleased to announce that our 2019 results are in the Q1 of 2019. All

Speaker 2

participants are in the range of $1,000,000,000. So now let's turn to our results on Slide 3.

Speaker 3

I'm encouraged by the order revenue and profit growth and positive free cash participants were pleased with the results we delivered this quarter despite continuing macro pressures. Orders were up 4% supported by growth in both services and equipment. Aerospace led the way, up 26%. Revenue was up 5%, growing in 3 of our 4 segments. Aerospace was up double digits as the market recovery continued.

Speaker 3

Healthcare and Power were both up mid single digits And this was partially offset by renewables down double digits, reflecting lower U. S. Volumes resulting from the PTC expiration as well as the business' international selectivity strategy. Our higher margin services remained a bright spot, up double digits, participants are led again by Aerospace. Collectively, supply chain and macro pressures adversely affected revenue by about 5 percentage points this quarter, but eased slightly versus the previous quarter.

Speaker 3

Adjusted operating margin expanded 380 basis points, Adjusted EPS was up significantly, driven largely by Aerospace. Free cash flow was roughly $200,000,000 participants will be prepared for the 2nd half ramp as well as work through the supply chain issues. Overall, this was a strong quarter for GE with orders, like GE are facing at the moment. We continue to trend toward the low end of our 2022 outlook on all metrics except cash. Working capital will be pressured as we protect customers from the impact of supply chain challenges as well as the timing of renewable energy related orders, Which together are likely to push out approximately $1,000,000,000 of free cash flow into the future.

Speaker 3

So fundamentally, a timing dynamic at work. Participants are ready to begin. We're just starting our annual strategy and budgeting cycle for 2023. We still expect to deliver significant year over year improvement in both profit provide some cash, but below our prior view. With the world evolving so quickly, we have to see how the next 6 months unfold and expect to provide you our 2023 outlook in the usual timeframe at 4th quarter earnings.

Speaker 3

Turning to Slide 4, starting with Aerospace and Healthcare. While demand remains robust, delivery has been a challenge for us, for the industry broadly and for our suppliers. What differentiates us is our lean foundation, which we've built over the last several years.

Speaker 2

Participants are

Speaker 3

in the industry. In aerospace, the industry is experiencing an unprecedented ramp as the pandemic eases coupled with labor and material shortages. All participants are in the same period. The team and I spent time with our airframer and airline customers at the Farnborough Air Show just last week talking about the need for predictability and our profitability across the entire ecosystem. We need to do better to deliver for our customers and quality and delivery participants are in the range of our top priorities.

Speaker 3

Let me hit a couple of minutes on the actions that we're taking. Starting with OE, participants are in the same store. On the left chart, you can see material issues trending either from our suppliers of our or of our own making that are impacting production flow and ultimately delivery. Participants are ready to

Speaker 2

take questions.

Speaker 3

We recently allocated an additional 20% of our existing engineering team to help solve these issues faster. Participants are seeing impact moving parts along, but we need to do more and quickly and we will. We're partnering with our suppliers holding Kaizens at points of impact in their shops to help them reduce setup time, eliminate constraints, optimize transportation all participants are in a position to improve overall flow to us. This is leading to increased supplier throughput as much as 30% or more in some cases. Overall, we're seeing signs of improvement with engine output up sequentially.

Speaker 3

In services, we use workstops participants are ready to measure how often we need to interrupt a shop visit due to a lack of resources, primarily from delayed repairs, castings, forgings or labor constraints. The curve was beginning to bend in May June, reflecting our average to ramp labor and improve overhaul cycle time. Participants are in the line with our Q1 results. Last month, we held Kaizen events at multiple GE sites around the world. John, Russell, Amy and I were all in Wales provide a brief overview of our GE Aerospace MRO facility, where we overhaul both the CFM56 and GE90 engines.

Speaker 3

Participants are ready to take questions. As we work to improve turnaround time for a steep CFM56 ramp, the Kaizen focused on increasing overhaul provide some additional capabilities from 3 to 4 engines per week. What I saw across our 7 Kaizen teams in Wales was lean in action, participants have a clear focus on waste elimination and continuous improvement. For example, operators on my team shared with me how they spend 45 minutes searching for parts all for what is often a 60 minute operation. By removing this waste, we improved turnaround time at Whales by 3 to 5 days, participants are about a 5% reduction.

Speaker 3

These examples are everywhere at GE. Each one further increases the efficiency of our operations all participants are in the range

Speaker 2

of $1,000,000,000 and $1,000,000,000 in the quarter.

Speaker 3

In Healthcare, we continue to broaden and strengthen our supplier base which identify the lines at risk of a shortage, if not replenished within 10 days. The chart indicates our efforts are starting to yield improvements, But again, we need to do more. For example, responding to the COVID-nineteen related factory shutdown in Shanghai, our PDX team took fast action and we were able to operate at full capacity within 10 weeks. In the interim, our Cort Ireland PDX team used a Kaizen to increase capacity in the first step of producing contrast media solutions, participants have reduced cycle time by over 20%, lifting capacity by about 5,000,000 doses annually, are critical in a shortage. Examples like these support our confidence for higher output in the second half and in 2023.

Speaker 3

The actions we're taking not only help clear today's backlogs, but build what our customers want, more predictable shorter cycle times going forward. Participants are ready to begin. Looking at GE Vernova, in Renewables, it's been a disappointing first half and we're working intensely participants are focused on stabilizing the business. We're working the fundamentals with Scott and his team leveraging the power playbook that has delivered improved profitability participants

Speaker 2

are in the range

Speaker 3

of $1,000,000 and increased cash over the last 3 years. 1st, given the U. S. Political environment, we're taking a more conservative view of the market for the time being. You've heard us talk about sizing gas power for 20 to 30 gigawatt market.

Speaker 3

Participants are taking a similar strategy assuming GE onshore wind output of about 2,000 turbines per year. Many of you saw firsthand in Greenville last March. At Renewables, we're embedding similar principles, starting with reorganizing grid

Speaker 2

participants are ready to take questions.

Speaker 3

Next, scope selectivity, stronger commercial underwriting and a focus on pricing has enabled Power to reduce risk all participants are in the range of $1,000,000 and $1,000,000,000 and $1,000,000,000 in our long term service agreements where appropriate, and we're updating offer project cost estimates more frequently to reflect our current reality. In renewables, while it won't be enough to offset the significant inflation pressure, we are making progress. Our pricing is substantially improved in onshore, while continuing our focus on deal selectivity. At Renewables, we've introduced several new products, which we are working down the cost curve. These are larger, more innovative technologies that need to be industrialized participants are ready for large scale production.

Speaker 3

We're also proactively deploying improvements to our fleet that will enable long term reliable performance from these high-tech products. Fixed costs, frankly, a misnomer in my view because nothing is really fixed, is another critical element here. Over 3 years, we cut these costs in gas by approximately $1,000,000,000 Based on international selectivity participants are in a smaller North American market, we're taking a harder look at our renewables cost structure, which we expect will yield significant savings. Participants are ready to take questions. We know from our power experience that these actions at renewables won't yield results immediately.

Speaker 3

But with this playbook, participants are ready to take questions. We expect the business to return to profitable growth over time. Combined with Power's progress and enhanced profitability and cash, we're excited about the future for GE Vernova. Moving to Slide 6. While driving operational improvements across our businesses, we're also focused on better serving our customers and innovating for the future.

Speaker 3

A few recent highlights. At Aerospace, our joint venture with Safran, CFM International was selected by Delta to deliver 200 CFM LEAP-1B Engines participants are ready to power its new fleet of Boeing 7 3710 Aircraft with options for up to 60 additional engines. Qatar Airways also signed an agreement for installed and spare LEAP-1B engines to power the airline's new fleet of 25 7 3710 aircraft. At Healthcare, our recently announced partnership with Medtronic is enabling personalized care with the integration of 2 of Medtronic's continuous monitoring solutions provide an update on our precision monitoring platform. These capabilities allow clinicians to have access to real time reliable patient insights.

Speaker 3

Participants are in the same period. In the power, we celebrated the first gas turbine order in Vietnam. The new 9HA02 combined cycle power plant is expected to improve the reliability and stability of the energy grid to support renewables penetration there. We're also developing new products with innovation supported by our continued investment in R and D. For example, Digital announced I'll provide the first solution resulting from its Opus 1 Solutions acquisition, distributed energy resource management system designed to help utilities keep the grid safe, secure and resilient while enabling energy affordability.

Speaker 3

Participants are in the position to deliver sustained profitable growth. With that Carolina will provide further insights on the Q2.

Speaker 4

Thanks, Larry. Diving into the results. Turning to Slide 7, I'll share the highlights from the quarter on an organic basis. Orders were up 4% and revenue up 5% participants are participating with growth led by Aerospace. On a sequential basis, adjusted revenue improved $1,600,000,000 or 10%, a Significant step up, reflecting progress toward our second half ramp.

Speaker 4

Services revenue was a particular strength in the quarter equipment declined 6%, driven by renewables. Healthcare and Power Equipment revenues were bright spots, with Healthcare up 5% despite supply constraints Both quarter year to date, this includes 5 points of pressure from supply chain disruptions, COVID impact in China And the Russia Ukraine war with the latter contributing roughly one point of impact year to date. On adjusted margin, points of margin expansion in the quarter. Services mix, particularly in Aerospace, contributed favorably. We also saw improved contract margin reviews or CMRs with strength from contractual escalation and engine utilization.

Speaker 4

Cost reductions were more than 150 basis points of year over year benefit, largely restructuring savings and some timing related corporate benefit. Partly offsetting these improvements was approximately 200 basis points of margin headwinds from inflation and logistics costs, net of sourcing actions. In Aerospace and Power, the net impact of price cost and inflation was positive. Healthcare and Onshore Wind both took steps to address cost and price, driven by profit growth plus lower interest expense from our debt reduction actions. About $0.15 of earnings were timing related that we either do not expect to repeat the impact from our Baker Hughes and AerCap positions.

Speaker 4

In total, we delivered a strong quarter marked by revenue up to mid single digits, significant profit growth and margin expansion. These results and our focus on execution give me confidence that we will achieve the low end of full year Moving to cash. We generated $200,000,000 of free cash flow, driven by strong adjusted earnings, which was positive excluding the mark to market impact previously mentioned. Despite a limited impact on free cash flow in the quarter, supply chain challenges are contributing to inventory pressure and later deliveries and billings. 1st, on working capital dynamics.

Speaker 4

Preservatives for the use of cash driven by billings from sequential revenue growth and also pressured by later deliveries in the quarter. This was partially offset by collection strength, where we saw a 7 day deal so improvement year over year. Inventory up across all businesses all the large use of cash. A portion of this is typical. Building for the second half volume growth leads to inventory and accounts payable growth with material resets participants are participating in the quarter.

Speaker 4

This quarter, however, supply chain challenges also contributed to elevated inventory levels across inputs and outputs. Inputs were pressured by the impact of inflation and additional purchases needed to support second half deliveries for customers. Production. Contract assets was a use of cash. We saw continued strength in aerospace utilization, resulting in higher billings, due to higher collections on revenue growth and disbursements in line with the first half inventory build.

Speaker 4

However, supply chain constraints participants are delivering are delaying deliveries and pushing collections to the following periods. So as a result, much of the 3rd quarter free cash flow is likely to shift to the 4th for the quarter, while late 4th quarter deliveries would leave a high receivable balance at the end of the year to be collected in 2023. Combined with lower progress payments from renewable energy orders, we expect this to result in a deferral of about $1,000,000,000 of free cash flow out of 2022. Turning to the businesses. Aerospace delivered a very strong quarter participants are fully reflecting continued robust customer demand.

Speaker 4

Revenue was up, driven by significant growth in commercial services with shop visits all participants negatively impacted revenue by 9 points, primarily in Commercial Engines. Military growth was driven by services, While engine delivery slowed due to temporary setbacks, specifically in T700 shipments, we expect tangible improvement in the second half. Commercial engine revenue was down slightly as supply chain disruptions continued to impact deliveries. Total engine shipments were down 7%, Largely due to lower GE and X production, while LEAP shipments were up 7%. Segment margin expanded by almost 15 points, CMR alone drove over 8 points of improvement, given the negative CMR last year.

Speaker 4

For the total year, lower commercial engines revenue trending below 20% growth year over year due to continued supply chain challenges. However, we continue to expect all the lower shop visit volume and OA volume. Therefore, we still expect to achieve greater than 20% growth And €3,800,000,000 to €4,300,000,000 of operating profit for the year. Moving to Healthcare. Market demand remains solid, while supply and inflation challenges continue to impact the market.

Speaker 4

Underlying customer orders indicate continued commitment to investment, and we're encouraged by signs that supply chain pressures will ease in the second half of this year. Participants are ready to take questions. 2nd quarter orders all participants grew 1%, but that was against a tough comparison to the Q2 of last year when orders increased 11% as well as the impact from COVID in China. Orders increased mid single digits in services, partially offset by a slight decline in equipment orders. Comparisons continued to be challenging through the second half.

Speaker 4

Revenue in the 2nd quarter was up 4% with mid single digit growth in equipment and low single digit growth in services. Participants are participating in the Q2 of 2020 When excluding supply chain impact in both periods, revenue growth would have been 5% this quarter, highlighting how we proactively manage sourcing and logistics. COVID in China impacted growth in both equipment and PDX revenue. With China broadly reopening in early June and our Shanghai PDX facility are fully operational. Our equipment and PDX revenue in China is expected to rebound in the 3rd quarter.

Speaker 4

Segment margin was impacted by material and logistics inflation with some sequential improvement. Net of sourcing actions, margins contracted about 300 basis points year over year, but were up about 200 basis points sequentially. We are making progress with price and sales positive for the first time in recent history. Participants are ready to take questions. Looking ahead, Healthcare is focused on driving cost reductions and implementing lean through supply chain actions to deliver for customers and address cost and price structures participants are ready for the Q2.

Speaker 4

For example, we launched Volison Expert 22, our most advanced ultrasound yet. This latest addition to our women's health portfolio participants have ai powered tools and our proprietary Lyric architecture to unlock new imaging and processing power, achieving higher resolution detailed images and scanning flexibility, revealing fine anatomy in 2 d, 3 d and 4 d with ease. In addition, our inventory levels are elevated as we prepare for an anticipated ramp in orders fulfillment in the second half of twenty twenty two. Participants are ready to take questions. As Larry mentioned, we're making good progress on the healthcare spin.

Speaker 4

We have an opportunity to impact both patients and customers Looking at the full year, order demand remains solid, And we're expecting mid single digit revenue growth, while closely monitoring customer order activity. Due largely to inflation pressure, we now expect 2022 operating profit to be about $3,000,000,000 slightly below our prior outlook. Turning to Renewables. Orders were down due to continued pressure from onshore North America market dynamics and the selectivity in international, impacting both equipment and services repower upgrades. Partially offsetting this were Grid and Hydro, which won a large order for the upgrade of the Itayfo hydro power plant.

Speaker 4

Grid had orders growth across all businesses, including significant growth in Grid Automation. Revenue declined with roughly 2 thirds of the decline from lower Onshore Wind North America deliveries. Participants are in the range of $1,000,000,000. The remainder of the decline was primarily driven by Onshore Wind International as planned. Grid and Onshore Services, excluding RePower, segments were up 160 basis points sequentially.

Speaker 4

Roughly half participants are in the range of $1,000,000,000. The year on year decline was a result of volume reductions in our most profitable market, U. S. Onshore. Participants are in the range of $1,000,000,000.

Speaker 4

The remainder of the decline was split roughly equally between net inflation pressures across our businesses and higher than expected new product cost in Onshore International as participants will be able to take measures to improve durability across our fleets. This was partially offset by GRIP, where margins improved from higher volume and benefits from prior restructuring actions, And we also recovered costs associated with legacy hydro projects of about $70,000,000 In summary, we knew coming into this year that renewables would be challenging. Offshore wind is a long term investment in an industry participants are still not at full maturation. Grid, a critical part of the energy transition, is where we're making good progress today. With the PTC, expiration is hitting our most profitable market, impacting demand.

Speaker 4

This is coupled with additional inflationary pressures and fleet durability actions. For 2022, due to these dynamics, participants are in the second half. Clearly, we have more work to do here. Participants are taking swift actions to turn around this business, running our power playbook. Given the strength of our portfolio and the fundamental importance of renewable energy in the energy transition, we remain confident that we will drive profitability over time.

Speaker 4

Participants are now ready for questions. Moving to power. Starting with the market. Global gas generation and GE utilization remained resilient, growing low single digits. Despite higher gas prices and availability challenges, gas remains a fuel of choice on the dispatch curves around the globe participants are ready to meet the growing electricity demand.

Speaker 4

We continue to expect the market for gas generation to grow low single digits over the next decade. Orders were down in the quarter, largely reflecting the uneven equipment order profile we've seen quarter to quarter. Services declined due to lower gas sales outages, in line with our multiyear technology cycle. Importantly, Power orders grew low single digits in the first half of the year, driven by equipment strength in the Q1. Participants

Speaker 2

are in the line with

Speaker 4

our expectations. Revenue was up mid single digits, We delivered strong transactional services growth in gas and power conversion, which was offset with the expected lower gas usage volume. Segment margin reached high single digits in the quarter and expanded 30 basis points. At Gas Power, margins remain resilient from improving price structure to address inflation and aero equipment and transactional services volume growth. This helped offset the mix headwinds.

Speaker 4

Participants are still in line with the expectations. Margins improved significantly due to continued focus on productivity as well as project and legal charges from last year that didn't repeat. Participants are focused on expanding our services opportunity and expect higher CSA outages next year. In the second half, we continue we expect more growth as H Class and aero deliveries ramp alongside the continued strength of transactional services and the improvement at Sten. Power is set up well to grow profit in 2022, we are reaffirming our outlook for low single digit revenue growth Finally, a moment on corporate.

Speaker 4

Adjusted corporate costs decreased over 50% versus last year participants are expected to be in the range of 65% year to date. We saw lower functions and operations costs from some timing benefits in addition to lower elimination. Given the favorability in the first half, we now expect corporate costs of below $1,000,000,000 for the year. Well excluded from our adjusted results, insurance net income was approximately $140,000,000 This was down year over year as COVID favorability subsides participants continue to normalize. As we have previously disclosed early this year, aligned with the industry, we plan to adopt the GAAP LDTI accounting standard.

Speaker 4

Participants are being applied retroactively to the beginning of 2021. As a result, we expect a negative equity impact of about $7,000,000,000 to $8,000,000,000 of the tax using January 2021 rates. This is driven primarily by the lower discount rates. Using June 30, 2022 rates, the transition adjustment would be €4,000,000,000 to €5,000,000,000 taking effect in the Q1 of 2023. Also embedded in these estimates is the €1,500,000,000 to €2,000,000,000 after tax equity impact primarily from adopting the LTC's first principles approach, participants are in the range of the LDTI and incorporates a more granular modeling assumptions.

Speaker 4

The first principles model are considered an industry best practice participants are ready to take questions. Importantly, we do not expect We also currently expect our LRT margin to remain positive, and we'll report results in the Q3 of this year. We've provided more info on this in the 10 Q that we filed today. In discontinued operations, Our runoff Polish BPH mortgage portfolio ended the quarter with a gross balance of about $2,100,000,000 And this quarter, we recorded charges of about $200,000,000 primarily driven by unfavorable results for banks in ongoing litigation with borrowers. This brings the total litigation reserves related to this matter to approximately $1,000,000,000 Stepping back.

Speaker 4

Despite the volatile environment, we are pleased by the progress we made this quarter. We delivered order, revenue and profit growth and positive cash. This gives me confidence in achieving the outlook for 2022 that we've shared today. Now, Larry, back to you.

Speaker 2

Participants are

Speaker 3

ready to take questions. Thanks, Carolina. And by the way, happy birthday. Wrapping up on Slide 13. As we sit here today, I hope you see What we see, GE is a stronger, more customer centric company.

Speaker 3

With lean and decentralization at the center of everything we do, participants are ready to take questions. Looking ahead, our story is simple. We have leading innovative franchises poised to accelerate in critical growth sectors the world needs. All the financial and operational foundation keeps us on track with our plan to launch 3 companies, each with greater agility, more focus and future growth opportunities. Participants are ready to take questions.

Speaker 3

I'm excited about what's ahead and confident GE is positioned to create value. Steve, with that, let's turn to questions.

Speaker 1

Before we open the line, I'd ask everyone in the queue to consider your fellow analysts again and ask provide one question so we can get to as many people as possible. Sheryl, can you please open the line?

Operator

Yes. Thank you. Our first question comes from Deane Dray from RBC. Your line is now open.

Speaker 1

Participants are ready for questions. Good morning, Deane. A couple of free cash flow clarification questions. First, How much of that $1,000,000,000 push out is supply chain versus the renewable orders? Participants are ready to take questions.

Speaker 1

What's the reset 2022 guide? And what does this mean for that previous placeholder for 2023, the $7,000,000,000 plus? Participants are ready. Thanks, and happy birthday, Carolina.

Speaker 4

Well, thank you, Jim. That was a lot of questions participants are on cash. We'll take them step by step. So to start with, the €1,000,000,000 of working capital push out that we mentioned all prepared remarks are really 2 thirds that is timing, I would say, combination of inventory versus receivable from the businesses. And then about onethree is progress in the PTC dynamics from Renewables.

Speaker 4

So that's the split of the €1,000,000,000 Then you asked about the guide for 2022 free cash flow and what does that mean then per business. So what I would say is that If we start with what we talked about today, dollars 1,000,000,000 about $1,000,000,000 of push out compared to what we've talked about before. Participants are

Speaker 2

in the range of

Speaker 4

2nd quarters. So if we take them segment by segment, it really means that in Aerospace, we expect to be down due to the for the quarter, Healthcare, similar. So basically, I would say, trending flat due to the supply constraints here on deliveries. For Renewables and here, we already in the Q1 talked about that we expected to sort of be below our original guide, but still better than last year. Now we have additional pressure.

Speaker 4

So about onethree is added to the renewables number or reduced from renewables number. And then for Power, we have conviction in the existing outlook and Corporate, we also expect to land in the existing guide. So that's overall the 2022 impact of the changes in the free cash flow participants are ready to take the time to

Speaker 2

take the time to take the time to take the

Speaker 3

time to take the time

Speaker 2

to take

Speaker 5

the time to take the time to

Speaker 3

take the time to take the time to take the

Speaker 2

time to take the time to take

Speaker 3

the time to take the time to take the time to

Speaker 2

take the time to take the time to take the time to take the time to take the provide a quick

Speaker 3

update on our strategy and budgeting cycle that will take us through the next several months. I think it pertains to 2023, We're still of the view that we're going to deliver significant year over year improvement in both profit and cash. Participants are in the same period, but as we said earlier, below the prior view that we've expressed. And perhaps stating the obvious, with so much influx right now around the world, I think it's going to be important for us to see how the next 6 months unfold. And at this point, expect to provide provide an outlook on 2023 in the usual timeframe at earnings, at 4th quarter earnings.

Speaker 3

All participants That said, I mean, given the way we've talked about 2023 in the past and the underlying improvement drivers, I don't think they've really changed since March relative to the strong tailwind that we see in Aerospace broadly both in services and in new units, Clearly, post pandemic spending by health care providers is something that is critical to the health care story. And I think the energy transition all the more given events in Ukraine are going to play to GE strengths. We just need to work through some of these near term issues that we've highlighted in In the prepared remarks, in Renewables.

Speaker 4

Yes. So what that means basically is that we we still expect to see the same drivers as we shared in March, but we're monitoring the volatility, as Larry spoke about. And we do expect earnings participants are going to be a bigger contributor in the sort of the 2023 improvement. It will start off a lower 2022 base, but it will still be the main part of improvement for 2023. And if I look at then seeing earnings at the big improvement part, then on top of that, we have As usual, we have the delta between depreciation, amortization and CapEx.

Speaker 4

You'll have, what, dollars 1,000,000,000 of amortization. That's noncash. And then you add to that the working capital part. And we do expect to continue to focus on improving the efficiency, and we expect working capital to continue to be participants are in the range of $1,000,000,000 of push out. Well, I would say our more conservative view of the U.

Speaker 4

S. Onshore wind market creates more uncertainty about when we get the progress part and possible restructuring it. Overall, we still expect a significant improvement on profit as well as free cash flow for 2023.

Speaker 2

Participants are ready for questions.

Operator

The next question comes from Julian Mitchell from Barclays. Your line is now open.

Speaker 2

Participants are ready for questions.

Speaker 6

Hi, good morning and best wishes, Carolina. Maybe just wanted to focus My question around the sort of operating profit for the second half. So I think You're saying you're at the low end, so sort of $6,000,000,000 of full year adjusted op profit is the new guide. That implies, I think, about $3,400,000,000 of second half op profit versus $2,600,000,000 in the first half. So you had about $800,000,000 increase I'll Half on half.

Speaker 5

I suppose my point was that

Speaker 6

in the just maybe you could confirm that. And then I just want to understand that step up in profit in the context of The revenue step up, because I guess your old revenue guide of $76,000,000,000 you have a very big all implied sort of revenue increase, dollars 8,000,000,000 or so in the second half, half on half. I'm assuming that number is lower. But maybe help us understand the sort of revised revenue guide for the year and how we're thinking about the half on half step up, what kind of operating leverage we should expect and what price cost is doing in the back half?

Speaker 4

Participants are ready. Julien, thank you for the congratulations. I won't reveal my age here, but thanks anyway. So on the profit. So no, your math is absolutely right.

Speaker 4

Let me start by saying that for us, Our seasonality is that the second half is really loaded. So we have more than 100% of free cash flow in the second half And so 80% of net income in the second half, taking 2021 as a reference point. So it's not uncommon. And we do expect to see Strong sequential improvement in growth, and so that continued to accelerating through the year. If I look at the different businesses and What you commented on with the profit, we do expect to see about €800,000,000 of profit growth compared to what we saw for the first half, and I would just start by saying we expect to see improvements in all segments, but excluding Renewables.

Speaker 4

So if you start with Aerospace, participants are in the same store. We do expect to see strong growth from OE deliveries, which is actually driving a mixed headwind, and we expect that to be offset by the shop visits participants are in the services strength that I mentioned earlier today. On the Healthcare side, we also expect the supply chain constraints to improve, And you've seen our backlog there. So we expect to see healthy growth in the second half as well. And a combination of pricing taking hold, I would say while we continue to invest for the future growth, we also expect good profit from Healthcare and on a margin improvement there.

Speaker 4

For Power, I would say it's because it's already in the backlog. But the second half deliveries, both of gas turbines and aero derivatives, are already sort of planned for the second half, And we see strong transactional services growth as well. And we're also getting power also getting price here. So I would say when we look at our low end range, really, the majority there depends Our own ability to deliver. We've talked about sort of 2 thirds high convictions and 1 third that's supply chain restraints, and that holds.

Speaker 4

What we have all participants are in the year for Renewables. So overall, the numbers are right, and most of that depends on our own ability to deliver. Participants You also asked about what about price cost. We're very happy to see that we had positive price in all the segments in the quarter, participants are ready to continue to improve through the year. We also continue to expect to deliver on our €2,000,000,000 costs out for the full year.

Speaker 4

That said, we are also seeing, as everyone, inflationary pressures. We saw them in the first half, all participants are in the same period. But we do expect, depending on long cycle versus short cycle, a little bit of a different impact of inflation in the second half, I'll But still working to mitigate that. So that's overall how we get to the low end of our range.

Operator

All participants are ready. Our next question comes from Joseph Ritchie from Goldman Sachs. Your line is now open.

Speaker 3

Participants are ready.

Speaker 7

Thanks. Good morning, everyone, and happy birthday Carolina.

Speaker 2

Hope you

Speaker 7

have some sun planned later.

Speaker 2

Good morning, Joe. I guess

Speaker 7

my question is participants are ready. Larry, maybe just, it's interesting that Slide 4, when you're talking about the progress, that you're making across both aviation and health I'm just curious like as you think about the margin trajectory for both of those segments, can we start to underwrite I'll provide you with a high teens margin in the Aviation business. And then maybe just talk about the trajectory of the Healthcare margin from here.

Speaker 3

Participants are ready. Well, Joe, thanks for flagging that page. I think what we're trying to do was just help everybody understand that despite some of these supply chain challenges, you don't need us talking about that macro. It's well documented. It's really about, at least for us, what are we going to do.

Speaker 3

And I think in both instances, in Aerospace and Healthcare, We're making some good progress that we just need to make more of. And I think as we do that, we'll not only unlock some of this pent up organic growth. We talked about 500 basis points overall from the quarter, But particularly in Services and Aerospace and just Healthcare broadly, that's going to be, I think not only good growth, but highly accretive growth. With respect to margins, I think both businesses are marching toward 20%. As we said earlier, with respect to 2023 and beyond, we're really now participants are in the throes of our strat plan process with each of the businesses.

Speaker 3

As you can imagine, a lot of opportunity in Aerospace all participants are ready to work through healthcare similar but different in that they're preparing for the spin. But I think later on in the year participants are ready. It will be clear that margin expansion and strong cash conversion are very much an important part of their story. I think 1st and foremost, they want to demonstrate outsized growth and we think we're going to be well positioned both in terms of commercial execution and the innovation investments to do that. Hopefully that cash conversion can be reinvested both organically and inorganically.

Speaker 3

But I think in both instances, you're going to see nice margin expansion As we move forward as to when we hit 20%,

Speaker 1

give us a little bit

Speaker 3

of time and we'll give you an updated view later this year.

Operator

All participants are ready. The next question comes from Steve Tusa from JPMorgan. Your line is now open.

Speaker 8

Participants are ready.

Speaker 3

Good morning. Good morning, Tim.

Speaker 8

And happy birthday. All participants The first half to second half on Healthcare, that 1.2% going to something close to 1.8%. Just Can we get a little more granularity on that? And then the follow-up would just be, how do you actually see the cash and earnings participants are ready for Q3. How does that split between 3rd and 4th with a little more precision?

Speaker 4

So if we start with the Health Care part and the Health Care margins, because what you're asking is really what's the confidence in improving the second half. I would say what we saw clearly is that we get good orders in, but we still have fulfillment issues and the inflation continues to pressure. And that's why we now expect the profit dollars to be slightly below our prior guide, so $3,000,000,000 and that on a mid single digit top line growth. And I would say for the second half, with what we're seeing, we are seeing fulfillment and pricing improve meaningfully, and we expect that to continue. And of course, the combination of that will help with significant margin expansion in the second half.

Speaker 4

I commented on sales price In the prepared remarks earlier, it was the first time we saw positive in recent history. We've talked about how we've had that in orders, and now we see it come through in sales. Participants are in the range of 2.5% to 3% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4%. In parallel, we're also taking actions, The team is working really hard on implementing more LUN and decentralization to drive redundant costs out. Investing in R and D and in commercial activities to really drive the growth for the future.

Speaker 4

Ben, you had a question on the Q3 margins as well. In general, 3rd quarter. In general, 3rd So what we're seeing. So I would start with the headlines. I would say 3rd quarter top line participants will be trending in mid single digits.

Speaker 4

ETFs, we would expect to be down year over year. And free cash flow, we would expect Better than previous quarter, but down year over year. And if you take that little bit into the context of the 2nd quarter bit, I mentioned this morning that we had some timing impact. So some of the EPS is sort of improved. The 2nd quarter will impact the 3rd We have the sort of the nonrecurring benefits.

Speaker 4

We also expect to see higher Aerospace deliveries, OE deliveries, so that's going to be a headwind from profit and margins. And then with the typical seasonality in Power, in the Q2, we have the CSA outages, and we have a bit lower margin outages in the Q3. So overall, that's why we get there on EPS. And I would say on free cash flow. So it's a combination.

Speaker 4

You have sort of the impact on the second quarter, the positive impact on the second quarter. But also what happens in the 3rd quarter And then I would say finally, what we are and commented on this morning is that we do see the impact of the supply constraints, Which basically leads to sort of orders going up later in the quarter, which means the 2nd quarter deliveries pushed out in the 3rd, 3rd into 4th and 4th into the Beginning of next year, which also puts pressure on working capital. So you can expect to continue to see that in the 3rd quarter. And that's why we expect cash flow to be slightly up quarter over quarter but down year over year.

Operator

The next question comes from Andrew Obin from Bank of America. Your line is now open.

Speaker 9

Yes. Good morning. Good morning, Larry. Happy birthday Carolina. Good morning, Andrew.

Speaker 9

Hi, Andrew. I guess I should really be greedy and follow my colleagues, competitors I'll ask 5 questions, but I'll stick with 1. On supply chain, specifically in aerospace aviation, all participants How do you solve the issue with cappings both near term, but it also seems it's more of a structural issue for Aviation in the longer term, particularly with, a, Leaprampa, but also NJAD being in the news. What's your perspective near term and longer term sort of dealing with casting supply chain?

Speaker 5

Thanks a lot.

Speaker 3

Participants are ready. Andrew, I would say that if I can just open the aperture a bit relative to the question, it's important that everybody understand that the supply chain challenges in the aerospace industry all Are far broader than any one commodity at the moment. I mean, we see that not only in our own supply chains, but particularly in the wake of Farnborough And the conversations we had there with the air framers and others, this is something that we're grappling with broadly. I've had an opportunity just in the 4 weeks that I've been in harness at Aerospace to sit with a number of the CEOs and their teams of our core forging and casting suppliers. Here again, Andrew, no silver bullet.

Speaker 3

This is a ramp that's going to, I think, have us all very much on our toes. What we're trying to do is make sure that 1st and foremost, our signaling to the vendors is as crystal clear and as consistent as we possibly can. I think over time we've sent many signals, often mixed signals and it's really tough for them I'll provide you with a question and answer session. I think similarly, both have indicated there are a number of ways in which we can collaborate around design, let alone capacity additions that will serve everybody and ultimately our end customers all Better. So there's a lot of work to do.

Speaker 3

It will be a multiyear task to ramp as the industry is clearly poised to ramp, but that's a high class problem where I come from and one we're very keen to tackle with Our supplier partners in service of our airframer customers and that's exactly what we're going to do.

Speaker 2

Participants are ready for questions.

Operator

The next question comes from Scott Davis from Melius Research. Your line is now open. Participants are

Speaker 2

ready. Good morning, Scott.

Speaker 3

Good morning,

Speaker 4

Scott. I can't think of

Speaker 5

a worse way to spend your birthday than having to talk to us. But anyways, I hope Larry lets you leave early today, I'll put it that way. But, Larry, you haven't really talked much about FX. I mean, the dollar has gone through the roof here. And participants are in U.

Speaker 5

S. Dollars. Talk to us about the headwinds you have in the other businesses

Speaker 4

Yes. I would say on FX, for us, Our reported sales were 2%. So we had a negative 3 points top line from currency. Well, on the profit and EPS, it's really a material impact. For us, this is mainly a translation impact

Speaker 2

because on the

Speaker 4

transaction side, and you were sort of commenting on that And you were sort of commenting on that yourself, Scott, that much of our global sales are really U. S. Dollar denominated. Aerospace, no exception. And then with the longer projects that we have, where we have FX exposure, we actively manage that and hedge against those.

Speaker 4

So I would say if you assume the same rates stay for the full year, we would expect a similar impact for the full year. Participants are about 3 on the top line and small on the bottom line. When it comes to the different businesses, yes, the well, it's the ones that are more participants are impacted. So you see Health Care and Renewables in different ways, but they would both be impacted by the translation But overall, it's a small one for GE for the reasons that I mentioned.

Operator

All the next question comes from Andy Kaplowitz from Citigroup. Your line is now open.

Speaker 10

Good morning, everyone. Happy birthday, Carolina.

Speaker 1

Hey, Andy. Hey, Andy.

Speaker 10

Larry, maybe you can give us a little more color into some of the actions you're taking on renewables in terms of the fixed cost takeout you mentioned. Do you end up taking a bigger restructuring at some point? And then you You mentioned you no longer expect to step up in profit in the second half 'twenty two. Does that mean you expect as significant losses in the second half as you took in the first half? All participants are ready to take questions.

Speaker 10

As the market stands today, do you still think you could achieve your target of approaching breakeven in renewables in 2030 or at some point in 2023?

Speaker 3

Andy, I think what we had indicated back in April is that we but we thought we'd see second half a reduction in that drain approximately 600 first to second half. Again, that's not happening, unfortunately. I'd break it down really due to 3 drivers, all of which we've touched on. One just as more conservative posture in the face of the realities in Washington relative to demand, the convertible demand here in 2022, the inflationary pressures that have been well discussed and the fleet durability Investments that we indicated we're going to make here as well. So I think you're going to see a second half that participants will talk again about targets for 2023 later.

Speaker 3

This is still a business that we have confidence in. Participants are in the short term, whether it be energy security, whether it be climate, there will be demand for this business in the U. S. And broadly in attractive markets over the medium to long term and I think we're well positioned to play there. It's important that everyone remember that while we talk about renewables as a segment, we've got 3 different dynamics within the segment.

Speaker 3

We've got offshore wind which is a growth play for us. We knew that would be an investment over the next or over several years. Grid, which is rapidly approaching breakeven and it too has I think a role to play in the energy transition. How long it takes us to get to breakeven? Again, we'll talk about it in more detail later.

Speaker 3

But most importantly, we are going to deal with provide the fixed costs, the so called fixed costs in the business, but that's just one plank of the plan, right? We've got to do a much better job In terms of modularity and design to not only improve quality and delivery, but frankly to bring down for unit costs, what we've talked about in terms of selectivity and price is really important here. We can't chase every order And we need to continue to make substantial improvement with respect to capturing value for what we deliver. The decentralization of all of renewables as a segment and even within the businesses is something that will help not only I think reduce costs, but more importantly improve our execution day in, day out. And that's against the backdrop, something like we did a few years ago with gas, where we're just going to take a more conservative view for planning purposes of volume mindful that this lull in the market again will be short lived.

Speaker 3

So there's a lot going on there. We're going to need some time to work through it. But given what Scott and team did in gas and power broadly over the last several years, I think we have again confidence that we'll run a similar set of plays to get not only to breakeven to but provide more respectable returns in that business.

Speaker 1

Cheryl, we're going to make time for one more last and hopefully brief

Operator

participants. Thank you. Our final question comes from Josh Pokrzywinski from Morgan Stanley. Your line is now open.

Speaker 1

Good morning, all. Thanks for fitting me in. Hey, Josh. Hi, Josh. So to keep Steve happy, I'll keep it brief here on my end.

Speaker 1

Just on the aviation ramp here, they're kind of a little later to the party on supply chain maybe versus some of I'll talk a little bit about that in the context of, I think, Andrew Obin's question. But maybe with shop visits as well, where you had I'll issues in the Q1, I think, relative to plan. And related to that, how long can the spares dynamic sort of offset whatever gap is forming there. Thanks.

Speaker 3

Well, Josh, I a couple of things there. Let me try to cut through it. What matters most is the customer. And for sure the spares and the aftermarket helps us financially At a time like this, but we don't want to have that in any way dilute our focus on all Shortening cycle times and improving on time delivery, right? We know our major airframer customers need more engines from us than we have providing and that will be the case for the foreseeable future.

Speaker 3

So we need to ramp again in a predictable, reliable, That's what they want more than anything so that they can plan the rest of their assembly operations accordingly. And that's where we're focused. So there are a whole host of things that we've touched on here relative to our own operations, which we're driving in terms of improving yields, improving capacity and the like and the same thing applies I'll provide you with the supply base. I think the distinction, Josh, I would draw with semi is that semi didn't have the dramatic Downturn that this industry and I say the industry saw with COVID and then the dramatic spring back. So when the industry was turned down to such a degree, right, and we can talk about this commodity, that commodity, I would argue you see a similar dynamic with some of the pilot shortages that we hear about and some of the operating challenges the airports are going through.

Speaker 3

This is an industry that participants are working very hard to come back to meet ultimate leisure and business travel demand and we're very much a part of that industry and have our version of those challenges, but we're on it. Participants are ready.

Speaker 1

Great. Larry, any final comments before we wrap?

Speaker 3

You bet, Steve. I know we're tight here. But as we close, appreciate everybody staying into overtime with us. We delivered a strong quarter. The actions we're taking to improve delivery, price and cost performance are building meaningfully stronger businesses at GE And our planned spends are on track.

Speaker 3

We appreciate your interest in GE, your investment in our company and your time today. Steve and the entire IR team stand ready to assist as you consider GE and your investment processes.

Speaker 2

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
GE Aerospace Q2 2022
00:00 / 00:00