General Electric Company (GE) Earnings Call Transcript & Summary

Good morning, everyone, and welcome. My name is Andy Kaplowitz. I am the Head of Global -- U.S. Industrial Research at Citigroup. Very excited to have everyone with us today. We are starting off great here this morning with Chairman and CEO, Larry Culp from GE. I've gotten to know Larry over the last couple years. Larry's led a new and dynamic GE, already a lot of significant improvement. I know we're going to hear some really good things from Larry today. Larry, it's been, what, 2.5 years now as Chairman and CEO? Goes by fast, doesn't it? I know you have some opening remarks, so I'm going to turn it over to you.

Andy, good morning. It's good to be with you. It's not Miami, but we'll make do today. No, you're right, time does fly. It will be 2.5 years here at the end of the first quarter. It was October 1, 2018, if you can believe it. It has flown by, but it's been an honor to be on this team. And it's been, frankly, great fun to be doing the work that we do here. Obviously, it'd be great to get into Q&A, but maybe just a couple of comments at the outset here. We put our annual report out on Friday, which is really maybe the last time we look back and can now turn our attention fully to the future, '21 and beyond. But it was a really good opportunity, I think, to put a bow on what was clearly a challenging year, and frankly, highlight and thank the tremendous efforts put forward by the GE team. I just -- it wasn't off from the earliest days, really in Wuhan, when our health care workers were going into hospitals, our service techs to make sure those CT scanners, which were really the first line of defense, were up and operating under, obviously, extreme duress. But really through the pandemic, couldn't have been more proud of the GE team. We're clearly not out of the pandemic as unfortunately we all know. But onward, and here we sit in 2021, I think we're well positioned to deal with what may come at us, largely as a function of what we did last year. You know well that once the pandemic hit, we went through a number of fairly quick and dramatic changes at the company, $2 billion of cost actions, $3 billion of cash actions to make sure we could weather the storm. And I think that, in addition to the lean work that we had been doing, really enabled us to come through certainly in the back half to finish strong. You saw the full year free cash flow number in positive territory; slightly, but still positive. Pleased to see that. More importantly, the work that undergirded that is where I think I take my most -- the most of my optimism as we move forward. Clearly, that also played a part in how we have been deleveraging. While we're not done, we can look back over the last 2 years at $30 billion of debt reduction. That's real money where I come from. And I think it just bodes well for the future of the company. As we sit here in the first quarter of '21, you heard a little bit about our frame for the year at earnings. Looking forward to having everybody with us on the 10th of March to talk through outlook in more detail. I would just remind everybody that our seasonality in the first quarter, which is typically our weakest quarter of the year, still a likely dynamic here this year, particularly given we had 2 good months a year ago before COVID hit. In addition, we had the biopharma business with us in the first quarter last year. So from a cash perspective, we'll be negative again in the first quarter, but importantly, better than we saw in 2020. If we turn to '21, Andy, you and I were talking before we went live here, we're in the midst of our first quarter operating reviews. And so far, it's really been encouraging to see how lean is seeping in, in a material way deep into the GE operations really around the world. Lots of stories we can get into later if you'd like. But maybe if I just quickly go around, we had aviation in yesterday. Clearly still depressed, the departure decline year-on-year, well documented. We've got a close eye on Europe, given that's where lockdowns are most pronounced. But there are signs that people are keen to make sure they know where our shop visit capacity is, as they prepare to return, maybe not to normal operations later this year, but certainly to put more planes back up in the air. You saw the Scandinavian order. Very pleased to see that sign of carriers investing in future fleets. All good from that perspective. But we're not assuming any rapid bounce-back in aviation, as you know. Healthcare did bounce back nicely in the back half of last year. Comes into '21, I think, with that momentum, over 40 NPIs, a good bit of activity with our Edison digital platform. So a good bit happening there. We've got them in today. In fact, we'll start that review when we finish up here. Power was in last week. Just really encouraged by what we've seen in Gas Power. You will recall at earnings, we talked about the work that they've done to bring in a better cash performance in '20, a year ahead of time. A lot of structural cost reductions on top of better underwriting and execution in the field. Still a lot of opportunity to improve, and you'll hear, I think, a good bit about that on the 10th. And on the other side of power, we're going through a number of changes, probably the most important is our exit out of the new coal built space. That will, in our Steam business, trigger restructuring, that will take us not only through '21 but into '22. So that will be a little bit of a drag on us, but I think it's the right thing to do, and we'll position that business on a far stronger foundation as we move forward. And we saw a real strong finish to the year in Renewables, clearly in onshore wind and offshore wind, in addition to the progress I think we're making with the turnarounds at Grid. And at hydro, nice order there that was announced earlier this week with Luxcara. Will position us to be the provider of the largest onshore wind farm in Europe, interestingly. Let me call that Carolina effect, right? SAS, Luxcara, we've got a lot going on in Sweden ironically, as Carolina comes in on her 1-year anniversary. But when we are together on the 10th, Andy, I hope what you see are a host of examples, not for show but really how lean is, again, seeping into the bedrock, driving impact with respect to performance across this company. And ultimately, not only will it impact performance, it will shape our culture. We're excited about what that means, particularly given the work that we have in front of us, be it around the energy transition. I think we know that we have an enviable position with respect to Renewables, particularly in on-and-offshore wind. A lot of conversation here just the last couple of days given what's happening in Texas. We know the Grid is going to be particularly important as we work through a different generation mix. We like the opportunity we have to play there, particularly in the digital space. And gas is still going to have an important role to play for decades to come. We have a much improved gas business, well positioned to help in that regard. And here again, just I think it was last week, we announced an important order in Colorado Springs, coal-to-gas transition part of the local utility making a shift in concert with their net-zero agenda. So those are the sorts of opportunities which I think are just tailor-made for General Electric. We talk a lot about Precision Health, talked about the digital Edison platform earlier. There's just a lot that we can do there. And if COVID has taught us anything, we need to have a more modern, more personalized health care system as we move forward. We like the opportunity that we have to play there. And the future of flight clearly is where aviation has always been, and that will certainly be, I think, the case going forward. A lot of engine platforms have been developed over time with an eye toward efficiency, cost savings and the like. Read that as sustainability going forward. And again, I think as we look to Paris and other commitments that the industry has made, GE intends to lead in that regard. So when you put those strategic opportunities together with the way we're looking to improve the operating cadences within the businesses, we're excited about the future, have real confidence that we can deliver high single-digit cash margins on this business while building a world that works. Andy, that's kind of what's on my mind this morning. Let's get into Q&A.

Excellent. So Larry, I was going to start a little differently, but you mentioned lean quite a few times. And the interesting thing is when I talk to companies, a lot of companies mention lean, but at the same time, I look at you as someone who really embraces it and has changed the culture of GE. So maybe we could talk about that a little bit in terms of where you think we are on the lean journey. When do you think -- I know you'll never declare victory, Larry, but what does victory look like in lean for GE?

Yes. Well, Andy, I think a lot of people talk about lean, talk about business systems, and frankly, oftentimes, it's just, if you will, BS as opposed to a business system. And the folks aren't willing to put in the hard work to really drive down, listen to the voice of the customer, root out waste at every instance, and do that on an integrated enterprise-wide basis. When you do that, you really do set yourself up to instill the leadership behaviors we talk a lot about at GE today around humility, around transparency and around focus. The last thing I would submit to you this morning is that we have changed the culture of the company. But I do think working in this way not only drives better results but ultimately it does embed those values deeply in the organization. What does victory look like? I'll give you an example of something I saw last week that just did my soul good. We were sitting with the Gas Power team and we were talking about how we do a better job in the field for our customers when we are performing an outage. And we got into something -- forgive me, this is going to sound very weedy, but the team was talking about how we put parts in a crate and ship them to a job site and how they are then unpacked so that the team in front of the customer can do its work. Historically, the factoring is done what it thought was -- what it thought made sense and the team in the field just may do. I saw this last fall when I visited an outage myself. Getting those teams to talk together, they could see that there was a host of opportunities to do better by the team in the field, who, in turn, would serve the customer better, opportunities to root out a lot of waste, just in the form of the packaging that we use and the way we put the parts in the crate in the factory so that that is easily accessed in the field. We need a million of those examples. But when we're doing that detailed work at Gemba, with an eye towards serving the customer, rooting out waste and doing that to link functions which, in many instances, historically have defined success in their own silos rather than on an enterprise-wide basis with the customer in mind, that tells me that we're moving in the right direction.

Very helpful. So one of the things, Larry, it's interesting, you did speak yesterday, I will acknowledge that. So when you spoke to...

What?

My peer asked you about sort of how you play offense, which I want to ask you, and I think I can relate it to what we're talking about here, right? Because you talked about selling and innovation and R&D. And so it's funny because you think of GE as a very innovative R&D-focused company, but you've been focused on paying down debt and the cost side and all that kind of stuff. So maybe you could elaborate on some of those comments yesterday about what you can do with innovation, what you can do with selling, and what that means for revenue growth and margins going forward?

Right. Well, Andy, I would say that, and you can go back to Edison, and this is a company that has always been about technology. That hasn't stopped, right, even during COVID, even during the last couple of years as we've been working on deleveraging and going through other change, 40 NPIs at Healthcare. The introduction of the Haliade-X and now Cypress, new platforms within Renewables. What we're doing with the HA platform in gas, right, relative to not only world-class efficiency, but running hydrogen, let alone the refresh in aviation with LEAP and the 9X, the catalyst. So there's a lot going on in that regard. I think when you hear us talk about playing offense, what we really want to do is change a little bit of the conversation internally but also remind people of what's always made this company great and where we're going to serve and win in the future. A little hard to do going through the changes that we've -- or the challenges we've had the last couple of years, right. So we wanted to be crystal clear with everybody, we need to deleverage. And with $30 billion of progress the last couple of years, we're on our way, but we're not done. Likewise, a lot of what we're trying to do from a lean perspective is rooted in driving day in, day out safety, quality, delivery, cost and cash improvements. That's the foundation. If all of that's not right, the day-to-day, the balance sheet, what we want to do in terms of being out with customers with today's offerings, bringing on new products this year, investing in breakthrough technologies that drive Haliade, that drive LEAP in the future, it's a shaky foundation. So I think what you've seen us do is fortify the foundation, work still to do, so we can not only talk a bit more credibly about some of those great investments and those breakthroughs, but frankly do more of it. And that's ultimately what we want to do, all the while making sure that everyone understands that when we say offense, it's first and foremost about organic, right, rather than inorganic. Thrilled to be in a position to put a little bit of money to work in Healthcare late last year with the Prismatic Sensors acquisition, fortifies the Healthcare technology portfolio. I know a number of people inside the company, at least, think that when we say playing offense, we're going to go do a lot of lateral, big M&A. That's not the agenda, right. Organic first, and then we'll do some bolt-ons when we can, where it makes sense.

And we know your guidance for this year, the low single-digit growth. But like when you step back, Larry, and when you are playing offense, can this company deliver consistent mid-single-digit growth?

Well, Andy, we're going to just take it one step at a time. We would clearly want to be an above-average grower, right. We need to be mindful that with over half the revenue base in services, services sometimes are not going to necessarily grow at an accelerated rate, but there's a lot of opportunity here. I think the guidance for '21 is really rooted in the fact that we know while we have momentum and all those new products that I mentioned, better execution, we also still have the overhang of a pandemic, right? And that creates near-term pressure, some uncertainty. But given what we know and don't, we think we can be in that low single-digit range in '21; rest assured, aspiring to do better. But not only growth for growth's sake, right, but quality growth, meaning margins and cash that go along with that.

Got it. So you mentioned services, Larry, obviously. I think the number is 80% of the backlog is geared towards services at GE. And when I looked at Q4, Industrial Services were still down pretty significantly in revenue. Power has had a bit of a harder time. So like when you step back, is 2021 the year -- I mean, I understand the pandemic's impacting aviation in particular. But is 2021 the year that you can sort of turn around services in general? So as you said, services becomes relatively consistent even if it's not a fast grower, a consistent grower over time. And how do you do that?

Yes. Well, Andy, I probably wouldn't talk about our services portfolio broadly and use the word turnaround, frankly. Aviation is the service business that matters most. And as we've seen the airlines conserve cash, taking planes out of service, being very clever about green time and the like. We've certainly seen that impact the industry, let alone the Aviation Service business. We do think, though, that when we get to the other side of the pandemic, vaccinations and the like, lockdowns are being lifted, those planes are going to fly again. And we're going to be well positioned with the youngest narrow-body fleet in the world, right? So as people get back in the air, that's going to be a good thing for our business. We've got a new leader in our services portfolio, Russell Stokes. A lot of change going on there to make sure we have a cost structure for today and capacity for tomorrow, not only to complete those shop business, but again, to delight the customer and to have that be good business for the GE shareholder. We don't have as much service business in Renewables and Healthcare as we do in Aviation and in Power. But those are good businesses that we're simply trying to grow, but again, I wouldn't use the word turnaround. In Power, particularly in Gas Power, that's where we've been challenged. And the good news is that the CSA book has been solid. Utilization has been relatively consistent the last couple of years. Where we've really had pressure, it's been in upgrades, which we thought was going to turn in '20. Didn't because of the COVID-induced pressure on oil prices, and in turn, what that meant to Middle Eastern budgets. And frankly, our transactional business has been maybe the turnaround that's been toughest to move. But it's examples like the one I showed -- shared earlier, weedy, forgive me, but it's the day-to-day improvements in the field around the world that are going to position us to grow that transactional book in '21, I think we're going to do that. On the other side of Power, we have fundamentally, our Steam business with a sizable service portfolio. But with all of the dislocation in the coal space, what we're doing in services has really been, I think, swamped by that. So we're going to go deal with that strategic decision to exit, restructuring to follow. I think that will set us up to have a more focused service play in that business, and in turn, we should drive better results. So maybe a little bit of a -- clearly a turnaround in Power and Services, but not in the other 3, in my view.

Larry, I guess I'd be remiss given the weather in the U.S. these days, like I look at Texas and I feel like GE gas turbines have been highly utilized in the U.S, if I look at 2020, yet services weren't that great. I mean do you think we just got behind the eight ball and need to sort of ramp up services in '21? I mean that's what sort of befuddled me, right, is that the market looks like it wants to turn, but it hasn't.

Well, but keep in mind, the market is multidimensional. And in terms of utilization, that's been relatively stable. I mean we know we've got an energy transition going on. It's highly unlikely to bring it back to the glory days in gas, either in terms of new turbine production. We think that 25, 30 gigawatts trend line is going to hold. It will be up some years, down others, but that in the near-term here is probably a good basis. Where we saw pressure within upgrades, more ex-U.S. than not. And in the transactional business, where we don't have a long-term customer commitment, we're out there fighting for every bit of business that we can. And we just haven't been at our best the last couple of years. Improvements to come. I think what I take from what's happening down in Texas and the discussions around ERCOT is that we really do have a trilemma, if you will, with respect to the energy transition. A lot of talk here early in the year around climate, Paris sustainability, all good. We have a role to play. We like that, right? Just now with Bill Gates being on book tour. He's got a new book out, talking a lot about climate, but also climate relative to economic development. So we have that element of the challenge. And I think what's happening in Texas just speaks to reliability and how we can't take reliability for granted. So you put those 3 factors on the table, this is a complicated problem to solve. But again, at GE, we think our position in Renewables, our position in Grid, our position in gas give us an opportunity to talk to stakeholders around the world, customers as well and be part of that solution.

I think I want to ask you about energy transition because you're sort of alluding to it and sort of GE's positioning in energy transition as we move forward. A lot of talk about hydrogen. Obviously, it's still early. Maybe you could sort of remind us how you're positioning the company for the future. Obviously, you've got the Haliade-X, which is really interesting stuff. So as you look over the next sort of 3 to 5 years, what does energy transition look like for GE?