General Electric Company (GE) Earnings Call Transcript & Summary

Larry Culp from GE. Larry really needs no introduction, but he is the Chairman and CEO of GE. He joined the GE Board of Directors in April 2018, joined GE as -- he became CEO in October 2018. And prior to GE, Larry served as President and CEO of Danaher from 2000 to 2014. We're going to keep this fireside chat format. So I'm going to come over to you now, Larry.

And I'm just going to sort of start out with a very big picture question. And just basically, you've been in the helm of GE for 1.5 years. Where do you think you've had the most positive impact on the business? And what's still the biggest challenge in your mind going forward? And thank you for being here by the way.

Well, thanks for the invitation, Andy. And thanks, everyone, for joining us this afternoon. What I really think about that, maybe at a couple of levels, Andy. I'd say, first and foremost, if I look back over the last 16, 17 months, I think we've made real progress in just restoring the confidence and trust in GE, both inside and outside of the company, right? The company has had a number of challenges over the last couple of years. But at its core, it's still a pretty special place. And we need to make sure we prove that to our employees. We need to make sure we prove that to customers, investors and the like. And I think we have made progress thus far in that direction. We've done that both in terms of doing what we said we were going to do with respect to the deleveraging, right? $7 billion of reduction on the Industrial side. We've got the net debt-to-EBITDA ratio at a point now where we can see a 2.5 target within sight, post the BioPharma close. Capital has seen $27 billion of asset sales as well, down 7 last year. From a debt perspective, we've got that leverage rate where we want it to. And that really, I think, begins to remove the leverage question from the GE conversation. I'd say, similarly, we have made real progress in improving and strengthening the businesses. We said we're going to focus, first and foremost, in Power last year. And we did that. We ended up with a better cash performance in that business. But I think more importantly, what I see, month in, month out, in my time with both Scott Strazik and the Gas Power team as well as Russell Stokes and the Power Portfolio team, suggests that this can be a contributor, and the breakeven is simply going to be a waypoint, not a goal for us. Aviation clearly had a good year despite the tragedies with the 737 MAX. Healthcare is a good business that post BioPharma, we're going to grow, I think more effectively, more consistently. And clearly, Renewables is the battleground for us in many ways in 2020, much as Power was last year. So a lot of work to do. But I think having done what we said we were going to do, both with respect to the balance sheet and the way we're running the business, suggests we're moving in the right direction but still, Andy, a lot to do.

Got it. So last March, you had your last outlook call. And I was struck by your confidence around future cash flow potential. And you talked about cash -- I think you did $4.8 billion back in 2018 and that you could more than double that cash flow as a percent of sales as you go out over a few years. So now you've been in the seat for 1.5 years, so how is your confidence level to sort of get to that longer-term target?

Right. Well, I didn't make that comment a year ago relative to the percentage yield on a whim, right? But I think as people were trying to figure out not only the short term but the long term, it was a helpful way without certainly a date on the calendar to frame what was possible. If I was confident then, I'm exponentially more confident today in our ability to do that. I think, again, you start with the core of this business, leadership positions and important global -- growth markets. Hard to start from a better place than that. We have a number of cash drags today, some of them were inheritance taxes from past acquisitions, some underwriting that is far more disciplined today that will put cash pressure on us. Restructuring, clearly, that will fade with the passage of time. And again, just the earnings potential and the cash potential in this business give me, I think, conviction that we can do a lot better. It's one thing to lay that out on a piece of paper. There's a lot of hard work required to do that. And that's really where our lean agenda comes into play, right? We're trying to change the fundamental way we run the business. It's easy to say let's focus on cash. It's easy to say let's change our incentive comp system and put more emphasis on free cash flow. But it would be like asking me or paying me to dunk a basketball, I still couldn't do it. You could pay me all the money in the world, I still couldn't do that.

You're taller than me. You have a shot.

Right. But you probably have more vertical.

No, I don't know. I'm an analyst, remember?

So what do we do, right? We've got to change the way we think about every aspect of the business and really embed processes in our daily work to have more of that operational orientation that in time should deliver better cash.

So a good follow-up question to that is focusing on GE Power, right? So you talked about the potential you can see that it can improve, right? And so when you started, you talked about getting the cost structure to 25-, 30-gigawatt market. But the market in 2019 was actually 40 gigawatts. So maybe you can talk about, as we look into 2020 and beyond, has it been -- I know it's very hard work, but has it been easier than you thought because the market has been a little more conducive? And then on top of that, you mentioned last quarter that services was the strongest of the year. So it seems like things are setting up a little better for you in Power. So maybe talk about the Power cash potential as you go out over a few years.

Right. Well, I think what we've said is that Power was better last year than we had anticipated. Part of that was a function of a better order book, a good thing. And part of it, frankly, was just we had planned somewhat conservatively given the inherent risks in the business and what we saw during the course of '18. So as much as we were pleased to see a better order book as a function of a better market in '19, frankly, I think we were just as encouraged by the fact that the team demonstrated better control of the different variables in the business, witness the cash performance. That said, cash will be better in '20 in Gas, but it's still going to be negative. So there are no celebrations just yet in that regard. But that said, if you just break down where we tend to lose cash, again, upfront: underwriting. We're trying to be far more disciplined in terms of what we sign up for. Part of that is a function of scope. There's a much smaller percentage of our order book currently in turnkey projects, which can induce or can create risk over the life of a project. We think we're certainly getting better pricing and trying to be more disciplined in that regard as well. As you go through the execution of the new equipment book, we can be much better from a quality, from a cost perspective in how we manufacture product. And that's a good bit of where the lean efforts kick in. These are complex projects, often a long way from home, the same daily management rigor that we apply in our factories needs to be applied to those job sites. So regardless of what we signed up for, we deliver on it, if not better, right, rather than have that be a risk during the life of that project. And in terms of services, while we were, Andy, encouraged by a number of things that we saw at year's end, both in terms of the volume and price on certain aspects of the service book, I think if Scott were here, and I'm with Scott tomorrow for an operating review, I'm sure Scott will continue to acknowledge we need to do more, right, to grow that business. It will never be a mid- to high single-digit grower, but we think we can generate growth there, and that should be good margin, good cash as well. Couple all of that with a fairly predictable runoff in the legacy obligations in Gas Power and more broadly in Power, we think we can have a positive margin, positive cash business over time. But we need a little bit more time to lay in those improvements.

I just want to key in, Larry, on something you said there about fairly predictable projects. And again, I cover the engineering and construction space, and everybody wonders if you can predict this stuff. Like have you been able to sort of get comfortable with the turnkey aspect of Power?

Well, I think it's -- what I'm really referring to is more of a relative improvement than an absolutest view on that, right? It's just the nature of the work, as you well know, it carries with it risk. You want to make sure you are paid for taking that risk, and you're doing all you can to mitigate. So a good bit of what we have done, not only in Gas Power but in the Power Portfolio as well as Renewables where these dynamics all apply, is to make sure that both from an underwriting perspective and from a project execution perspective, we're sharing best practices going on the outside for expertise and insight so that we are doing all that we can to bring that down. What I was really referring to in terms of what's predictable, though, Andy, are some of the inheritance obligations that we have largely from Alstom. Some are, if you will, project-based, but others aren't. And as we look at those obligations, what we thought was going to happen, the checks we were going to need to write in 2019 more or less played out as anticipated at year-end. We don't think '20 is going to play out too differently either from what we were thinking even a year ago. So that helps us. But anything we can do to reduce that spend, rest assured, we will.

Got it. And so I think it's a good transition to talk about when we're talking a little bit about the power markets, if we back up and talk about global markets for a second. Obviously, GE is a very global company, a lot going on in the world right now. Any sort of comments you'd give us about coronavirus impacts, supply chain impacting any of the businesses in particular. Can we talk about that now?

Sure. Sure. Well, I think that what's happening is an unfortunate tragedy. We have 18,000 associates in China. We're trying to do all we can to support them and their families as the country works through what's happening with the coronavirus. From a business perspective, we're focused both on the supply chain and on the sell side, if you will, with respect to our businesses. We're really back a second week here after the New Year. Most of our facilities were shut for the New Year, as you would imagine. Some of our Healthcare facilities were opened, though, given some of the urgent demand for certain products and our desire to help where we could. I think it's early with respect to the recovery of the supply chain. This is a province by province, city by city decision. Our 3 facilities in Hubei province are still shut. Our other facilities are open but at different staffing levels. Plenty of buffer stock in the system in the near term for it really to be a challenge in getting everybody back. I think the supply chain dynamics, to the extent that there are any, and I suspect there will be, that will come a little later here in the spring. We've certainly seen in Aviation, our biggest business in China, see real pressure just given the cancellation of flights and the lower flown miles. Healthcare certainly has seen pressure as well, a little bit of that urgent demand, but we've seen a little bit of a downtick there as well. So when we've talked about the quarter and our thoughts on the quarter, that incorporates what we think will happen here in the first quarter of the year. I think the second quarter is really where the supply chain challenges are likely to manifest themselves. And I think at this point, Andy, it's just too early to call given none of us know just how quickly everybody will be getting back to work.

Got it. And look, I will acknowledge there's another conference that you were at earlier this morning. So in that context...

We were lost on our way over here. I'm sorry.

Yes. I understand. Just a quick waypoint. But you made a comment around the negative $2 billion for Q1 and free cash. Do you think you can sort of make that back as the year goes on? Is that still the goal? And how do you do that?

Sure. Well, let me answer the first question. There is no change to our full year outlook in terms of a $2 billion to $4 billion free cash flow from GE. And that really is not off a base of the $2.3 billion that we generated last year because we're going to say goodbye to our BioPharma business here later in the quarter. We won't see the Baker Hughes dividend either. So it's closer to a little over $1 billion in terms of an apples-to-apples basis for coming into '20, so a significant 2 to 4x step-up. So that incorporates what we said earlier today relative to the first quarter being likely a negative $2 billion, plus or minus, number from a free cash perspective. GE has always been back loaded. I think the year-on-year decline you'll see here in the first quarter is fundamentally driven by the 737 MAX and the delays at Boeing. But I think as we see that situation hopefully return to more normal course business later this year and we continue to see the improvements in Power, we know Renewables will be a bit of a drag for us, but even with the MAX, we think Aviation will be even or better than a year ago. Healthcare adjusted for BioPharma should contribute, and corporate will be less of a drag this year. So you put the moving pieces together, a little more of a challenging start but not that much more challenging under the circumstances. And we think as we go through the year, it'll just be more back-half loaded but fundamentally within our control.

So I want to open up to the audience in a second, but let me follow up on the Aviation business for a second. Like it has continually defied, I think, more cautious and bearish expectations and continually outperformed. Maybe you can talk about sort of what are the characteristics that have allowed that business to continue to outperform, whether you look at aftermarket, even with the MAX issues, the cash was still modestly above the year before. So -- and taking that thought process, why shouldn't we think that continues over the next couple of years?

Well, I wouldn't want to dissuade you from thinking that, that will continue, right? That, in many respects, is job 1 at GE: continuing to nurture and grow the Aviation franchise. I think if you just step back, and I don't mean to dismiss some of the bearish comments you're alluding to, but we have a strong leadership position and a global growth market with a really nice balance between multiple OE platforms and a long-term, high-backlog service component. That's a good setup in any industry, right? And when you add to that a team that has managed this business effectively over a long period of time, you should expect better-than-average results. And we don't take any of that for granted, right? We've got to compete for every new engine platform order. We have to compete for every next shop visit. We can always improve how we run the business, be it from a cost or from a cash perspective. So there's a lot, I think, to build on here. And as we look at the future of GE Aviation, I think we feel very confident that, that $4-plus billion cash flow level, once we get through some of the near-term challenges with MAX, is going to continue to grow and be sustainable.

Great. And then one more before we go to the audience. So just kind of doing the opposite. So you have a couple of businesses, whether it's Power Conversion or Grid, Onshore Renewables is good but not great. Like, why do you think it's been more difficult to tackle these businesses? And when would you want to give us the all clear sign? Is there a time frame that you could tell us when you think you could get your arms around these businesses?

Yes. Well, I would argue we have our arms around them. And each one of those businesses is in a different place. We'll pound the table when the brackets are off the cash flow numbers, right? Until then, we have to prove to you. But if you look at each one of those businesses, take Power Conversion for example, this is a business that will burn cash in 2020, so don't get too excited, but at a far lower level than it was a year ago. And I think the way the team has really reset the way they're running the business, this is a business like other GE businesses that we were running primarily on a global basis despite the fact it can be very regional. So we've really tilted the way we're running that business. Looking at regional P&Ls, the teams have a lot more autonomy, a lot more responsibility. As part of that, we've taken out a good bit of the overhead in that business and getting in, again, through some of the lean tools into driving improvements in what our customers see in terms of quality and on-time delivery performance. I think they're just started. But if you look at the as-sold margin rates in that business versus where we were a year ago, there's been a significant step-up. It probably doesn't matter to your model yet given the size and given the fact that it's a negative performer. I think Russell Stokes and the team are doing a very good job. They're on their way. Grid, different dynamic. We moved Grid from Power to Renewables. That took a little bit of time to get the new team squared away, but we've got a new CEO, a new CFO, a new supply chain leader, going to run a similar play in Renewables and in Grid specifically in 2020. So those are the sorts of things where, again, I think we are on our way, but these are big, global, long-cycle businesses. Change does not come overnight, but I think we know what we need to do. We just need the time to see it through.

Got it. Questions from the audience? Any questions?

So after the closing of BioPharma, which is expected to close in Q1, you have significantly completed your plan to deleverage this asset disposition plan. So the question is, what's next for you from a portfolio perspective? Is this the milestone to stop playing offense with the portfolio? So maybe give us some thoughts about that.

Well, I don't want to count chickens before they hatch, but we are going to be in a very different place here soon, right? And once we get the $20-plus billion of proceeds from BioPharma, that will allow us to work through the industrial actions we've talked about in terms of repaying the intercompany debt to capital, tending to some of the pension actions that we highlighted at the end of last year and really bring us down from that 4.2x net debt-to-equity -- net debt-to-EBITDA ratio to something well within the 2.5x target that we've set. Is it time to play offense yet? It's getting closer, right? I don't think that even with the progress on the numerator that we want to get ahead of ourselves, as Andy was poking out a little while ago, we need to show that both Power and Renewables can be better performers for us. We need to work through some of these near-term challenges in and around the 737 MAX. I think as we do that, and the denominator is fortified as well, we're going to be able to play offense. And that is something that this management team and this Board is very keen to do, rest assured. But I think we're going to not try to get ahead of ourselves. At times, you might think we're being a little conservative. But again, we want to make sure we strengthen this company and pursue any and every option possible to maximize the underlying value in GE.