General Electric Company (GE) Earnings Call Transcript & Summary

Great. Well, thanks, everyone, for joining. It's my pleasure to have now Larry Culp, Chairman and CEO of General Electric. I'll hand over to Larry for some introductory comments before the Q&A starts. [Operator Instructions]

Julian, thank you. Good to be with you, and good morning to the audience who's dialed in. Keen to get to questions, that's obviously always what's, I think, greatest interest. But let me just give you a little bit of an update on what we're seeing at GE here in the middle of the first quarter. You may have seen that we put our annual report out on Friday, couple of weeks after the fourth quarter earnings release. And I would just reiterate, I couldn't be, I think, more proud of the GE team in the way that we persevered through the pandemic and everything else that was waiting for us and it was thrown at us during the course of 2020. Just really pleased. And I think that gives me maybe the most encouragement about what is to come at the company. You know well, Julian, from a financial perspective, early on, we were hard at both cost reductions and cash actions to make sure we could weather the storm, I think that's what resulted in the positive free cash flow that we were able to register for last year. We were pleased with that. And on top of what we did in 2019, we have a 2-year span here where we have reduced leverage by the tune of $30 billion. So better operations, a better balance sheet and I think that is something that we're encouraged by as we come into 2021. Obviously, as most people who follow the story, know the first quarter tends to be our softest quarter of the year. Working against a comp where we had at least a couple of months a year ago with normal business, let alone the BioPharma business. So we'll see a little bit of pressure in that regard. I think we're encouraged from a cash perspective, we will, in all likelihood, be negative, but it will be up year-on-year. So it starts the year, not unlike what we were anticipating. So happy to close the book on 2020. We know as we get into the new year here, the pandemic is still very much in front of us. But again, I think we take some encouragement from the operating reviews that are underway, started last week. In fact, just walked out of a review with the Aviation team here today, Julian, to join you and just a lot of good, I think, examples of where our lean activity is gathering momentum with impact for customers and impact for shareholders. I mentioned Aviation, clearly, that's the business that we're most focused on here, GECAS as well. Departure is well documented, down nearly half year-on-year. I think in terms of what we can control, the year has started out fundamentally in line shop visits, things of that nature pretty much early on meeting expectations. And again, I would say that we see signs that the industry is preparing for the recovery. We announced -- I think it was just yesterday, a nice order for the LEAP-1A, in conjunction with a big order at Scandinavian. Very pleased to see that. But we're clearly going to watch what happens with COVID-19 as we look, particularly here in the first half, with respect to where the Aviation business and GECAS is going to land. We look at Healthcare, Healthcare clearly got hit early last year as well, but bounced back nicely. Exceptional cash flow performance in the second half of last year. But I think just as importantly, as we think about '21, 40 NPIs, largely in the back half, that gives us more value to provide customers. Certainly, our Edison platform continues to be a source of significant investment relative to the digital transition within Healthcare. So a lot of good things, I think, happening there. We were with the Power team last week. As you know, they've come in 1 year early relative to their positive free cash projections. But as we look at what's happening there, again, starting the year, I think, pretty much in line with what we had anticipated in terms of outages and gas turbine shipments. It's early, but a lot of good traction there. And again, Julian, I wish I could show a couple of slides from the review last week relative to the examples of how they're using lean to drive real business impact. We'll be with Renewables a little bit later on here as well, a nice finish to last year. The work at both grid and hydro continues. And even there, yesterday, we announced another big order, ironically in Sweden. We call this the Carolina effect with Lux Cara, which will give us the largest onshore wind installation in Europe, excited about that. So as we think about the setup for 2021, so far, I think, very much in line with our expectations. We're excited being with you and the rest of the group on the 10th of March to really talk about where we're going longer-term in more detail at our outlook meeting. But I think what you'll hear really is how GE is rising to the challenge of building a world that works, what it means for us to be in a position to lead in precision health care. We'll talk more about some of those NPIs, in Edison, for example, where GE is with respect to the energy transition. Clearly, as we think about what we're doing in wind and grid, key enablers, both onshore and offshore, to create sustainable and reliable energy. The grid is going to be a critical technical challenge where we think we can play an important role. And gas is going to be an important part of the energy mix, we think, for some time. You saw that with an announcement that we made just last week in Colorado Springs, a nice order to help the local utility continue their transition away from coal. And by the same token, we know longer term, our installed base of 80-plus turbines running hydrogen mixed fuel today gives us an opportunity as we think about a hydrogen economy to play a leadership role there as well. In the future, flight intersects in part with that energy transition, but every new platform that GE has ever come forward with, be it narrow bodies, be it wide bodies, has been largely about energy efficiency. That won't change as we think about the future of flight and everything the industry has pledged to do by 2050. So a lot going on strategically, again, lean, really driving not only better execution. Julian, I would argue, also driving the cultural transformation at GE at the same time so that those performance improvements really end up being sustainable. So a lot going on. It's early, but we're excited to hopefully see COVID fade here soon. And certainly put our fingerprints on those things well within our control at GE in 2021.

Okay. Thank you, Larry, for those introductory comments. I suppose following up on one aspect, Industrial free cash flow is always a sort of touchstone for the investment community, at least when looking at GE. Maybe give any extra color if you can on that sort of first quarter commentary that you've made. And I know that you and Carolina, in general, are working to smooth out that quarterly cash lumpiness at GE.

Right.

So maybe just an update on that. And also, I suppose, when you look at the cash flow guidance for this year, working capital improvement is shouldering a lot of that burden, that uplift. What's the conviction that the working capital comes through?

Well, let me take those in order, Julian, and make sure I hit on all those points. I think big picture, we would say we welcome an industrial investors focused on free cash generation, right? That's kind of the way I grew up, Carolina, likewise. And when you hear us talk about the potential for these businesses to generate a high single-digit cash flow margin, I think it's rooted in the quality of the businesses, on a go-forward basis, what we can do from a lean perspective and getting at some of those linearity, cash linearity dynamics that you talked about earlier. In terms of the first quarter, again, I think it's fundamentally nothing more than what we see typically at the start of a new year, particularly in light of some of those dynamics, be it biopharma. Certainly, aviation, still feeling the effects of COVID. But also a number of positives within our control, given what we've done from a restructuring and cash perspective. So a friendly reminder, nothing more, nothing less. As we think about the guide for 2021, I know a number of people to -- know of the working capital improvements, I think there's conviction there, right? A good bit of what we have done in the last couple of years is to make sure we're putting more emphasis on every element of working capital in as much a daily management approach as we possibly can, right? We want to move away from those quarter end sprints, those heroics that drive a good bit of that dynamic, not only at the end of the year, but certainly through the course of any 1 quarter. You've seen us bring down the cash needs in any 1 quarter in part because of that work. When you think about 1 of the core tenets of lean, you're really talking about not only daily management, but also single-piece flow. And to the extent that we can drive that sort of behavior in our operations, we think we're going to be a better cash generator and do it on a more level-loaded basis. Quick example, just coming out of the morning with the Aviation team, talking about how frequently we collect. With a quarter end approach, right, you might be running after receivables at one point in the period. We're getting into a more regular routine where we're, if you will, collecting all the time. And it's those sorts of examples that Carolina and the finance leadership team are driving in concert with the other business leaders, which I think have already shown impact at GE, and we're excited about that being part of how -- when we get back to a growth trajectory, working capital is not a drag for us as we move forward.

And you mentioned Aviation, some reviews this morning. And clearly, the swings in cash flow there have a huge effect on the overall Industrial cash flow. The old peak mentioned free cash was sort of $4 billion to $5 billion in a given year. To get back to that type of number, do you need to see passenger traffic get back to the old peak as well? Or can you get that cash -- a meaningful cash flow rebound in advance of passenger traffic, getting back to 2019?

Julian, I think we have a lot of confidence we can get back to 2019 levels, as you say, over $4 billion in free cash in Aviation. There are a host of ways the industry is going to come back and you can model this in a number of different computations, I suspect. But fundamentally, our view is the industry will come back, the commercial side of things. We're going to be in a leadership position as it does and when it does. Again, we talk about having the youngest fleet in the aftermarket, particularly with respect to narrow bodies. We think that positions us very well to help our customers return to flight, bring capacity back online, and that's been good business for GE traditionally. With the refresh of our product lineup, there's no reason that, that can't continue to be true. When you couple that with our military business and these operating improvements that we've talked about you get, in essence, the latter that gives us conviction that aviation can get back to those levels. And in turn, that is an important plank in the bridge to getting to those high single-digit cash margins that I mentioned earlier.

And one thing that you've mentioned a couple of times is GE going on to the offense this year. So perhaps sort of help us understand, what should we draw from that comment? Does it mean, for example, no major divestments, GE's had or what it has, it's going to be reinvesting across the board. Maybe just any update on the portfolio thoughts in that context?

Sure. Sure. Well, we -- when we talk about playing offense, be it with you and others in the market, let alone internally, we're really talking about, I'd say, at least 2 shifts and evolutionary moves that we're making here. One is being in a position to just talk more about strategy, talk more about commercial, talk more about technology investments, maybe than we have the last couple of years, not that we haven't been hard at it, right? But given what we've been focused on relative to the deleveraging and improving the operational foundation, I was very keen to make sure that we didn't undermine those efforts, thinking about, if you will, the -- often the more enjoyable parts of the job in terms of getting out, driving innovation, spending time with customers, really understanding need and delivering solutions to those needs. So it's a little bit of a shift, a little bit of an evolution, given the progress we have made operationally. The other dimension, though, is that we want folks to understand, particularly internally, that when we talk about playing offense, it starts with organic, not inorganic growth efforts. There's a time in place for the inorganic side of things. Julian, we did a small acquisition at the end of the year, Prismatic Sensors, gives us some interesting technology in health care. But I don't want the people in the company to think, okay, well, we're going to get back into an active M&A position until we have built on that operational foundation to do a better job out selling what we've got currently, evolving our new product repertoire effectively let alone continuing to invest long-term in market back, customer-driven R&D that is really going to fortify GE's competitive positions around the world. So we want our words -- we want our deeds rather than our words to do most of our talking, but that's really what you hear when you hear us use that expression.

That makes sense. And maybe on that portfolio point, any updated thoughts or comments around sort of how you assess the role of health care within the industrial side. And also at capital, the asset base still very, very large. It's been sort of derisked over time. But should investors expect, over the medium term, some broader sort of reduction just in the scale of capital?

Well, I would say that the answers that we have to both those questions, Julian, aren't fundamentally radically different today than they were 1 month ago, 6 months or even 1 year ago. I think that most people would look at the GE portfolio today, Aviation, Power, Renewables and Healthcare. And if you ask them, which of those 4 industrial businesses is less industrial than the others, people would focus on Healthcare. I think our attitude is, this is a very strong business that we believe can be even stronger. Operationally, commercially, from an innovation perspective, there's just a lot to do here. And we really do believe we sit at the heart of precision health care. And if COVID has taught us anything, it's the importance of being able to realize that vision, we think we have a critical role to play. So our focus is on making sure that's the strongest business possible. And over time, performance, as you well know, gives us strategic optionality that we may or may not tap into. We'll see how that plays out. But first things first, we want to strengthen that business. With respect to capital, you're right, we have brought down the size of capital. We have derisked it. It's a bit of a barbell a day between insurance, on one hand, the runoff liability and GECAS, which is clearly, a strong financial services business that has been impacted dramatically by COVID. I think you'll continue to see us look to derisk insurance but those liabilities, at least for the time being, are with us. And all the while, making sure we look to help GECAS navigate the near-term as aviation and the rest of the industry prepares for the eventual recovery. So 2 different dynamics there, and we're going to play those forward as we have of late.