General Electric Company (GE) Earnings Call Transcript & Summary

Good morning again to everybody. We're very excited to keep the 8th Annual Crédit Suisse Industrial Conference moving along. With us right now, we have GE. They're going to be presenting on the digital business. We're very excited to have Pat Byrne, who is the CEO of GE Digital, also the Vice President of Lean Transformation. And then we also have the Investor Relations team here as well. So I'd like to give a thank you to everybody for joining us. And with that, I'm going to turn the presentation over to Pat for some opening remarks.

Thanks very much, John. Well, it's great to be here. Really excited to be able to discuss with you the digital work at GE. Let's move to the first slide. The thing I wanted to cover today is really 2 topics, they're really related, but they are separate. The first one is talking about the GE Digital business, which is the software business that we are in selling to customers. So this is commercially available software. You'll see some of the screen shots there on the left-hand side. We also have digital initiatives within GE. This is where we're using digital technologies to improve how we're executing part of our own business transformation, and those are related to lean, and I'll cover that in just a minute. So those are the 2 topics for today. Our goal at GE is putting industrial data to work to tackle really the toughest challenges. Let's just jump in then into the GE Digital business. So first, starting with the industry trends. The most important in, really, industry trend driving us is really the energy transition: decarbonization, digitization, decentralization, democratization. It's really what's happening to the energy industry. But really, overall, digital technologies, of course, are accelerating in the midst of COVID. And frankly, digital technologies have moved way beyond pilots in industrial applications, and are very much focused on business outcomes for customers. Those that are outlined in the middle. Customers are looking for hard ROIs on these business outcomes. GE brings a number of key strengths. We have really deep industrial domain expertise. We have over 100 years of industrial design, manufacturing and operations experience of some of the most important critical assets that always have to be running all the time at very high levels of performance. And then we have a lot of experience, for example, domain expertise in the grid. In manufacturing, we have deep domain expertise. We have the ability to deploy at the point of impact. It's a global company. So our ability to really get in there with customers, enabling their business transformation at the point of impact is really a significant leverage point for us. And then we've done large-scale deployments across the largest grid operations, power plants and power plant networks that are very large scale, and we have proven technology. That's really what we bring to these market opportunities. Next slide. So GE Digital is about $1 billion business, $1 billion software and services business. I'll talk about what segments we're in, in just a minute. What we really do for customers is captured in the middle of this slide, helping people operate, analyze and optimize business processes that are dependent upon critical assets. And that's really where we're focused. Our contributions are focused on really the most important problems we're solving in these areas in these vertical markets. That's where we're focused. It's an organization where this highly technical, over 1,000 engineers, many Phds, digital twin blueprints that are really based upon our knowledge of how these assets operate. This is really what we bring in a sketch of what the business is. Next slide. So just to do a little bit deeper dive into these vertical cycles. I wanted to mention that one of the key things we have done is we have pivoted the business from being a platform [indiscernible] really being focused on these vertical market solutions. So we've really taken our platform work and really focused it. And we focused it in these four markets. And this is in order of the size of the business that we have. So our largest business, and I'll cover some of the specifics there, is in grid. We're selling here to grid utilities in the telecommunications industry. So think about this as the core operating system used by grid operations. These are some of the products that we bring, both in transmission and in distribution. Outage management, is some of the key things that we bring. Power generation, oil and gas. We manage that together because they have a similar sets of go-to-market challenges and priorities, similar set of technology we'll bring. Principally, the asset performance management and operations performance management software suites. Again, this is about critical assets that have high utilization. In manufacturing, we're really focused on in the process hybrid and some discrete manufacturing and the water utilities. Here, we're bringing automation, historian, manufacturing execution systems, again, a very focused set of solutions that enable our customers' business process. And then our aviation business, really just added to the digital portfolio. And here, we're really focused on flight analytics. Again, a domain, we have a lot of experience with. So that's the outline of this $1 billion business. Next slide. So I wanted to [ cam ] for just a minute on the energy transition. So this is our single largest market opportunity. And the single -- it's where our largest businesses are, and it's where we think that there's very exciting opportunities. In fact, critical opportunities for digital transformation is in the energy transition. The energy transition is really about more and more renewables online. Now electricity still has to operate 24/7, always beyond and always be inexpensive and outages will happen as a result of weather conditions or those sorts of things. And so the ability of the -- to run the grid, to operate the grid, to manage these assets is -- digital plays a big role. And I wanted to focus in on what we call problems worth solving. This is where we're over the target. This is the targets we're focused on in these vertical markets. So in the area of generation, we're really focused on the fact that this is now no longer, for example, in power generation, no longer base log, there's peaking. The wind doesn't always blow and the sun doesn't always shine, but electricity always has to be on. So whether you've got a gas turbine or a wind turbine or solar, how the grid operates and how those assets operate under those conditions requires a great degree of visibility as well as flexibility. In the transmission area, our software, our AEMS software, is really focused on -- and helping orchestrate that combination of gas power assets, for example, and renewables -- and renewable assets, and have an environment, a digital environment that allows that field to operate with high levels of stability. And then over in ADMS, what really done is we've taken our distribution management system and combine it with outage management systems. And what this allows then is really the ability to operate in a highly secured and dependable way and recover, for example, from disruptions. This is the most comprehensive set of software offerings enabling the energy transition. And we have market-leading customers here, market-leading products and significant business. Next slide. So this is an outline of where we are right now. This is -- as I mentioned, it's $1 billion business. Grid business is our largest business, followed by power generation, oil and gas, manufacturing and aviation. In the past, this business has been about $1 billion but losing money. We've improved the profitability meaningfully. We've really applied lean to the business to improve our margins, accelerate our growth, improve our customer experience, improving the free cash flow of the business. In 2021, we anticipate mid single-digit growth in the business. And we have about 40% recurring revenue and improving in the business. And we're really targeting these problems we're solving to drive growth in the markets that we're focused on. Next slide. So now what I wanted to do is transition to digital at GE. So that's GE Digital, now digital at GE. So here, the focus is, how do we use digital technologies inside of GE operations? Whether it's manufacturing or service operations, how do we utilize digital in those? And I'm going to focus on the renewables business. It's one of GE's largest businesses. So -- and really 2 parts of the story. One is, what are we doing today? And then the other one is, where are we investing on some breakthroughs? So this is all about using digital technologies to enable the services business in renewables. So again, we're talking about tens of thousands of wind turbines that are really in many, many countries, oftentimes at distant locations. And so the role of digital to enable the services business is really very critical. And three things we're focused on. Transactional growth. This is where we're using digital to enable transactional part sales, repair revenue, where, for example, we're able to offer a self-perform package with digital technologies that allows a wind turbine operator to be able to do self-performing services using our technologies. Improving productivity. This is really about how do we look at the areas where the service organization is utilizing their labor and their assets in ways where we can apply digital technologies to improve how they perform. For example, helping using digital technologies to accelerate troubleshooting. Using digital technologies to plan how the day -- the digital plan of the day for those service operators. Using digital technologies to automate the inspection, and I'll talk about that in just a minute. These are places where the productivity of that service workforce is key to the profitability of that business and the customer satisfaction of that business. And then lastly, risk reduction. This is really a place where we can standardize contractual reporting processes to make sure that we're not only compliant but reporting on a regular basis. And what this really allows us to do is improve the performance of our fleet. So these are things we're doing today with digital technologies, and it's really great work, and we're very proud of it. Now what I'd like to do is to turn to where we focused in just one particular area, a peak into the future, the next slide. So here, we're looking at how do we focus on digital inspections? And really, the key problem that we're focused on is how to create frequent, accurate artificial assisted digital inspections to reduce wind turbine blade failures. Blades on wind turbines have different failure mechanisms. Some of them cost not very much to fix. Some of them can be at the extreme, could be catastrophic. And so the ability to understand what those failure mechanisms are and to do predictive analytics to be able to inspect it, capture those inspection reports digitally and then using AI to evaluate those and use those to predict wind turbine blade failure mechanisms. Therefore, we can intervene, we can lower our cost, we can improve reliability. The reason why it's a lean plus digital is because we're really using lean approaches, for example, the value stream of how these turbines are -- how the inspection works, literally with the people in the field to be able to understand where could we automate and use digital technologies to improve how the service organization operates. So we anticipate that this will really help us in evaluating wind turbine blade failures in the future, and we're very excited about it. So that's a peak into just in the renewables business. I just picked one of the businesses where we're doing digital transformation. That's digital at GE. Let's move to the next slide, and I think I'll wrap up. We're really excited about what we're doing at digital. We're really very focused on the future opportunities, these key problems we're solving with our customers, the opportunities that those represent in bringing our capabilities to bear with our customers and then also using us inside of GE to improve how we're operating every single day to serve our customers better across our business. John, that's really what I wanted to cover, and maybe we could turn now to questions and answers.

Great. Thank you for that comprehensive overview and some new slides for us to pick over here. I guess, maybe just as a first question, particularly around like digital twins and GE Digital, I mean, we hear other companies doing similar things, whether it's Rockwell, whether it's Emerson, whether it's Siemens. You touched on it a little bit, and I'm not asking you to go like, competitor by competitor, but what truly differentiates what GE is doing versus some of those other really well capitalized and strong competitors as well?

Yes. So a key thing that we're doing is we're focused on these vertical markets. So we think we're best-in-class in these vertical markets that we're focused on. We're not trying to compete in other markets. It's these markets. The breadth of our solution and the integration of our solution across that industrial workflow. The deep understanding not only of the assets but of the business process, the actual operation of those assets, that would be a second thing. And the third one is our knowledge of the physics. The digital twins that we have, the fact that we actually know about these assets and how they operate and how they fail. Digital twin is sort of a generalized term. In our case, it really does mean a level of engineering depth to it that allows these predictive analytics to be highly effective at helping manage these critical assets. But those -- that integrated workflow, the deep understanding, the ability to really be deep in this vertical market, that's the center point of where we're focused.

Great. And then I'd love just to spend a little bit of time on a particular solution you offer within digital, and this is really around APM, right? So Asset Performance Management. You had the little call out there, leader in the space. It's a very crowded and competitive space. So I guess my question is, how do you protect your market share and your installed base? Because it seems like people are trying to attack you in that market where you are the leader. Right? So maybe a little bit more around that product and how you differentiate there as well.

Yes, sure. And some of the things I just said, John, it really apply here. Our -- the digital twins that are underneath our APM have really decades of engineering that go into how those operate. But I think the key advantage that we bring is the ability to integrate our, not only with depth, but also integrate into that workflow of what is really like to run a power plant. And utilizing -- this is not about software. This is about business transformation using digital technologies. So it isn't about buy this piece of software, and will all of a sudden solve all your problems. Our ability to embed this with our expertise at the point of impact and implement with strong service offerings -- one of the ways we look at this is time to value. What is -- how do we shrink the time to value? We think we have a competitive advantage in time to value from the time that the software turns on to the time that it's actually delivering value, operational value of saving O&M costs, of being able to predict failures. We report every week within the company. We are reporting APM cost savings from our customers. And it's driven by these, again, a focus on hard ROI and business outcomes in these workflows. So yes, it's a crowd -- again, this is a phrase that APM is used to mean a lot of different things. In our case, we really do believe our competitive advantage is very strong within our -- certainly within our installed base, but also with other assets that are part of that balance of plan.

Great. And then on your slide, you talked about a mid-single-digit growth rate for next year. I guess, can you maybe help us understand that? I would have thought it would have been a higher growth rate, right? As we think about -- we hear all these companies adopting digital. Maybe that has to do with the sales cycle or where we are on that, but maybe help us understand that mid-single-digit growth a little bit?

Yes, sure. So there's different pieces to the business. The grid software business, our largest business, the market is a mid-single-digit growth marketplace. That's how fast that market. It is a large installed base. Most utility operators have a distribution management system, a transmission management system. And so it's really adding functionality and doing upgrades to that installed base. There are some, of course, some new players as well. There's other parts that will be growing double-digit in the portfolio. But overall, we think that, again, we're coming out of a period of where the business has been flat. So we're now very focused on what are these pumps and how we're executing commercially. And we've improved how that execution looks. We anticipate that the growth rates will continue to accelerate.

Great. When you go to the GE Digital website, you talk -- there's a lot of information around this Edison platform, and I think that's where you're kind of monetizing some of these applications that you're selling to customers. But maybe can you help us understand what is the Edison platform, the monetization mechanism and a little bit more color around that.

Yes, sure. So the Edison platform is for our health care business. So first of all, it's for our health care business. The health care business is -- the digital business within health care is managed within the health care portfolio. So the overall health care business. But let me give you a sketch of what Edison is. So Edison is really a set of software applications and working with the GE equipment. So think about this as selling with the equipment and on top of the equipment. And so it's focused on not only the health care devices we have, but also the IT systems that those devices integrate with. There's specific applications, for example, an AI assisted advanced visualization. So the -- an image can be enhanced with AI. That's a specific application. And to answer your question, that's monetized as a software application. So think about this as a platform that is enabling all the information systems and the equipment to be pulled together into one data set and then applications that sit on top of that. One other one to just mention is the clinical workflow orchestration. Again, you're trying to integrate it. So you're integrating across the clinical workflow and orchestrating that is a real [Audio Gap] how the health care system executes. Those are a couple of applications. So think about it as a platform connected to the equipment, connected to the IT system and applications sit on top of it.

Great. And then you had that slide where you talked about, right, the -- I guess, the depth of the organization you have within GE today. But I'm sure you have conversations with Larry around make, buy, partner. We're seeing a lot more partnerships in this digital space amongst industrial players. So how do you think about that kind of, I guess, 3 way equation?

So I think -- one thing is that the underlying cloud platform we're built on, we're not building our own underlying cloud platform. We use Azure and AWS for the underlying cloud platform. So -- and different businesses have different uses of those, but we're building our platform services on top of those commercially available. Then there are go-to-market partnerships. And we have a number of go-to-market partnerships where we're looking at the adjacent solutions. For example, the design tools used for designing assets. We're collaborating with companies that are -- that really have that design software that then helps those assets under operation when they're under operation, take advantage of that design information. So think about that as an integrated workflow. And then we have a number of partnerships that are go-to-market partnerships where we're leveraging somebody else's sales organization to get to a specific customer set. For example, the oil and gas marketplace or in the petrochemical industry or some parts of the grid market where it's a geography that we're focused on with connecting to go-to-market partners. But I think there will be a continuing evolution of the digital landscape as they're stitching together these enterprise solutions. And we would anticipate continuing to expand that set of partners we collaborate with.

Great. I also want to touch a little bit on your other title here, right, as Vice President of Lean Transformation. So I guess maybe the question is what does a lean transformation really mean to GE as an organization? And then us, on the outside looking in, how should we measure progress, right, that you're making on this initiative?

So the heart of lean is continuous improvement. That's the heartbeat of lean. It's not perfection. It's getting better every single day. And so -- and the focus of lean is eliminating waste in every part of your business to serve customers better. So what we've done -- and it isn't just manufacturing. We're focused in our service organization, in our procurement organization, in our sales organizations and our marketing organizations, applying lean. The core of lean is really good problem-solving so that you continually improve and take waste out of the system. You identify waste and you take it out of the system. So that's what we're doing. And we're deploying it in all the businesses. So we have a small corporate team that I lead, but most of the lean resources are out in the business. We're [ at least ] a company with 170,000, 180,000 people across the organization. And so the -- in each of those businesses, we have teams working -- operating teams running these businesses using lean. And so that's what it means. What it means is eliminating waste. Where we're going to focus? The first place we focus is safety, making sure that we're keeping our employees safe. And where really the first place you want to see the impact of lean is in improved cash generation. The -- it's the first place you focus lean is, for example, on inventory or accounts receivable, accounts payables. So improved cash generation. And the reason you focus that is inventory fundamentally is a result of a bunch of other decisions that are made, forecasting decisions, manufacturing decisions. And so it's a key place to focus eliminating waste. So that -- so safety, cash flow, the next place you'd expect it to see it is in improved margins, especially in improved contribution margins, the margins that are the midline margin of the business. But also in operating margin expansion as we improve how we operate, how labor is utilized, how materials are utilized, how well the operations run, how much waste we have in the system. So that would be the sequence of the kinds of payback you'd anticipate from lean. And we're making really good progress. Really, the lean journey started out in a very significant way, as Larry joined a couple of years ago, and we're making really good progress across the business and seeing these kinds of results.

Great. And then maybe if I can sneak one more in here while we have another minute left. But you provided that renewables example. And I guess, as we're trying to think about our models, where does the value, that margin expansion, where does it reside? Does it sit with GE Digital? In corporate? Or does that actually sit with the renewable business they're capturing that margin, enhanced margin?

It's in renewables. Yes. Yes. So this is an initiative focused on using digital technologies with lean, with the renewables team. And all that is focused on enabling the renewables business to operate and execute more effectively.

Great. Well, with that, I'd like to wrap it up. I'd like to say thank you to you, Pat, and to the GE team for being here with us. And we really do look forward to continuing the dialogue around this. It gets very interesting and it's something us, as industrial analysts, need to keep ramping up on. So appreciate your time, and thank you very much.

Well, thank you. It's been a pleasure.

Excellent. Take care. Be well.