General Electric Company (GE) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome back to the UBS Global Industrials and Transports Conference. We're halfway through the second day here. I'm Markus Mittermaier, I'm the multi-industrial analyst here at UBS, and I'm delighted to have Carolina Dybeck hopping with us, SVP and CFO at General Electric. Carolina, thank you so much for being with us.

Thank you, Markus. It's great to be here. I know we had a busy one half. Let me tell you, it's been a busy start to the year for all of us.

I can't imagine. And I think you have some opening remarks, and I'll hand over to you in a second. I just want to remind the audience that you can ask questions, and please type those in into little window hat you have in front of you, and I'll ask them for you, trying to make this as interactive as possible. And with that, Carolina, over to you. Thanks so much.

Thanks. Well, let me start by saying that our transformation to become a more focused, simpler and stronger high-tech industrial company is accelerating. We've made a lot of progress over the last several years, including the AerCap-GECAS combination. We're pleased that the AerCap shareholders approved the deal recently, and that the DOJ has completed its review in the U.S. So upon close with AerCap, it will drastically simplify our reporting structure. We're going from 3 columns to 1 column of financials, and it enables us to significantly reduce debt by more than $70 billion over 3 years. And due to our strong liquidity position, we were able to act opportunistically, further progressing our deleveraging plan. So we announced results of our debt tender yesterday, and it's an upsize from our original expectation. Using cash on hand, we repurchased $7 billion of debt, bringing our gross debt difference to $50 billion since the end of 2018. At the same time, we're continuing to run the businesses better and shifting towards more offense. Earlier today, we announced that one of our grid joint ventures will acquire SPX Transformer Solutions business, enhancing its position as a key player in the growing power transformation market in the Americas. So recently, we finished our second quarter operating reviews. Our teams are really picking up the pace on lean implementation and embracing a more-than-centralized business model. From those reviews, we are seeing how lean is driving cross-functional work and better problem solving. Let me share you an example on cash management. So here, we're getting back to basics on billings and collections. Historically, about half of our billings happened in the first 2 months of the quarter, and the other half in the third month, partly driven by the timing of our deliveries. Overall, too back-end loaded. And we have become too reliant on quarter-end billing and subsequent factoring. Now we're increasing end-to-end accountability with our commercial, operations and finance teams, all working together to deliver and bill earlier in the quarter, so that linearity improves as well as collections profile. This also is going to have a positive impact on quality and cost and most importantly, happier customers. We're seeing early signs of improvement. For example, DSO has improved 2 days in the first quarter. And this is one example of how we further strengthen our operational cash management muscles. Over time, this translates to more sustainable and linear free cash flow, setting us up to drive organic growth through targeted investments in our deal and commercial presence. So let me share how this is playing out at the businesses. At Aviation, we're planning for the market recovery, which we expect to be in the second half of 2021. We're closely tracking departures, which are trending down about 38% versus '19 levels. In the second quarter, we're expecting margins to be sequentially lower, driven by continued COVID-related pressures and unfavorable contract margin reviews, a process we complete every quarter. However, our guide of low double-digit margins for the year remains unchanged. At the same time, we're encouraged by customer wins like IndiGo, one of the largest in silicons history. In Healthcare, we've had 3 quarters of outstanding performance with margin expansion and cash generation. We're really encouraged by this strength, and we continue to invest aggressively, with digital being a critical component. The Vscan Air ultrasound product is a good example, a portable, lower-cost device that provides full body scans. In addition to our organic investment, we also closed 2 acquisitions, Prismatic Sensors, which is primarily in photon counting technology using deep silicon-based detectors; and Zionexa, an FDA-approved PTE (sic) [ PET ] imaging agent, with the pipeline of agents that complement our PDx. At Renewables, we're playing a critical role in the energy transition while improving our margin and cash performance. We've had our best operating reviews yet in onshore wind and grid this quarter, which makes us confident we're on our way. Recently, we were also selected for the third phase of the Dogger Bank offshore wind farm, the largest in the world upon completion. At Power, we recently announced Scott Strazik as the new CEO of the entire segment, managing all 4 businesses. Gas Power represents about 3/4 of the total segment. And so far, in the second quarter, our planned outages are playing out as expected this quarter. And for the full year, Gas Power is still on track to achieve high single-digit margins. Currently, like most companies, we are seeing inflationary pressures, and we have several levers at our disposal to help offset them over the long term. We're actively managing commercial terms, and we're growing cost actions and getting better price where we can. So in summary, despite some market volatility and the factory wind down, we're having a solid start to the year, are set up well to deliver on our 2021 commitment and profitable growth for the long term. Thank you for letting me share those thoughts, and back to you, Markus.

Thanks so much, Carolina. You already mentioned a lot there, and I'll come back to some of this, I think, as we go through the discussion.

But maybe in retrospect, I think you probably couldn't have picked a more interesting time to take on the CFO role at GE. If we think a year ago, a lot has happened and a lot has changed. And I think you alluded to some of the changes that you made in the finance function, but maybe I can start here. What are those key changes that you made in finance? And what are the signposts that we should monitor from here? And later on, we go into more discrete items, but let's maybe start at the more higher level.

So Markus, yes, I would say it's probably hard to imagine a more challenging environment to join as CFO than in this setup. But I would say that we've taken a lot of important steps, both before I joined, but also since I joined. I talked about reducing our debt. Now we're down to $50 billion reduction, right, with the current announcement today. We simplified the portfolio, Baker, biopharma, lighting, and now the aircraft transaction really becoming an industrial. I would also say, on the business side, we're really setting the company up for a strong rebound after the pandemic. And we took action fast when it hit. So of course, this is helping us accelerate this transformation. And if I look at what I saw then in finance specifically, I would start by saying that I'm really, really impressed by my team and all the members of my team and to be here and have the opportunity to lead these fantastic teams. There are many things that we are doing well. But in the spirit of lean, there's also opportunity to continue to improve. And I would say in finance, with our priorities, they are there to support the GE transformation. And we're focusing really on deeper operational visibility and actionability as well as a greater focus on cash flow. So I would say we're working on getting the right data at the right level and at the right frequency to our business leaders so that we can drive right decisions. And if you look at what that means, so first, the right data. So we're looking at the P&L in a much more granular way, right, and making sure that we can take decisions based on that because that's really harnessing the insights. And we've talked about working capital and how we have updated the working capital definition so that we better work with operationalized improvements. And we talk about operating KPIs like DSO, DPO, material throughput time, inventory turns and so on, to really make sure we drive underlying improvements. But also the frequency of the data is important. And we talk about lean, we talk about daily management. And also in finance, it's important that we make sure that there is financial data that's relevant on a much more frequent basis than what we've had before. And I would say the third one, it sort of ties into the decentralization, I would say. I'll admit to the one of the drivers behind us having now almost 30 P&Ls compared to the segments, right? So of course, it's also finance job to make sure that we have those P&Ls in the whole package, not only on segment level but basically 30 different businesses. And the question is sort of, so how do we get there from finance? Well, we work with lean and automation to drive process improvement, just like the rest of GE. And that's how we can better support the business leaders. And I'm really proud to say that I know that everyone in finance is now working on some part of our priorities to improve. And how we're going to see the improvement going forward, when we're going to see it in improved cash flow, improved margins, right? We have the same measures for us as for the rest of the business, and we're a team that works cross-functionally to make sure that we deliver on that.

Great. Excellent. So there was a lot there, and you mentioned the move from, I think, 5 to the 30 P&Ls, getting that greater visibility. If I look at some of the -- also the numbers that you mentioned earlier, the debt tender, for example, yesterday, right? Sort of like I think the original plan was $2 billion. You ended up at $7 billion. Then I think you took the revolving credit facility down from $20 billion to $10 billion. So if I look at this, is your ability to plan at a more discrete level and your confidence on cash flow and projecting, is that higher? And the need to run the business on a day-to-day level of cash need, is that significantly lower now that allows you to make these steps on debt tender, et cetera?

Yes, it's all sort of part of the scene, right? So by improving the visibility in the businesses, being closer to the business, it also gives us a better visibility of what's coming, right? So yes, that is improving. I would also say that stopping factoring is also -- well, discontinuing the majority of the factoring program, it's also a big enabler, right? Because what happens is then you actually go back to the basic operational muscles of billings and collections. But I can give an example of what we mean by that. Someone said to me, "What do you mean with that? How does that actually work?" So we do the reviews in the businesses, usually in 1 of those 30 P&Ls or business units, right? And we were looking at their linearity rather than nonlinearity and how they were attacking that to improve that. So basically, across financial teams, so it was commercial operations and finance, we're looking at where they were. So currently in that business, we bill about 20% in the first month of the quarter, 30% in the second month of the quarter and then 50% in the third month of the quarter, right? So that's really back-end loaded. And there, we're targeting a 10% improvement, so basically reduce 10% in month 3 and have it much earlier on, preferably in the first month, but just not in the third month. So how do you get there? Well, they were talking about we need to bill faster. We need to bill more frequently. What does that actually mean? Well, that means we need to deliver faster to our customers. So their operation comes in, right? And we need to have our customers sort of having schedules with us on this. So the partnership that we had through the different parts of our organization was really what maybe have happened. And I have seen improvements already on linearity because it's also not something we started at the same time as we decided on reducing factoring, but we worked for a bit longer than that, right? And I'm really encouraged already by what we've seen, for example, in Gas, Power and in Healthcare, right? So a very concrete example of how we improved linearity, but also how that is really not only a cash flow. So the outcome is better linearity on cash flow or earlier cash flow, but it's also improving the quality. It's also improving cost, and it's also getting us to better or happier customers, as I mentioned in the beginning. But that's also why it is so, so important.

Great. Okay. That's -- I think that's great color sort of like at the depths of the operation on how to ultimately get to the target of free cash flow, right? And let's maybe switch to that because, I think, at earnings, Larry outlined that $7 billion number, right, by 2023-plus. He used, I think, an 8% free cash flow to sales ratio on 2019 revenues just as an estimate. How does that split in your thinking between the segments and corporate? And what working capital trends do we expect?

Markus, thanks for asking. So I think this one is so, so important. That -- they're sort of -- we've talked about high single digits margin, right? Cash. When we talk about how we get there through the years, a part of that is improving working capital. But when we talk about overall that number, that really, really is about profitable growth, right? It's really, really about the profitability of the business. It's an -- I would say it's as simple as take it business by business. You start with Aviation, and we talk about coming back to '19 levels of both revenue and margins and cash conversion, right, which basically means that if we take the operating profit, that would be mean at least $6 billion of operating profit and a cash conversion of, say, more than 90%, right? So $6 billion and a 90% cash conversion. Healthcare. Now in our guide, in our current guide, we talked about an improvement of 25 to 75 bps of [ OMX ]. That already includes investing in R&D and in commercial excellence, right? So basically, what we're saying here is that we've been at the back with them being $3 billion to $4 billion of operating profit. And at the more normalized cash conversion, it should be around 100%, so you get that one. For Renewables, all-in. We talked about being operating profit positive as of 2022. And then Power, and that's the whole segment Power. We talked about Gas Power previously, with Services growth and cost out and getting to high single-digit margin this year and 90% free cash conversion next year. But what we also say now is that Power as a segment, the whole segment, would be $1 billion to $2 billion of operating profit and also with a high cash conversion of, say, 90%. And then on top of that, yes, we do have corporates, which will continue to shrink cost-wise, which should be, let's say, about $1 billion of cost. So if you take all of that together, and let's only talk about operating profit, you get to more than $10 billion operating profit, but then also having gone through the deleveraging that we talked about, basically, that would leave us with less than $1 billion for interest. And then the tax on that, we assume that you convert at 90%, you get -- you basically get to the high single-digit free cash flow margins. So I think that it's really, really important to see that, that is sort of how we saw the businesses and the talking getting to that number. On top of that, we'll continue to work on operational improvement and using it to offset, I would say, the natural working capital needs that will come from growth. But this is really how we get to this number. We've also talked about, I mean, spending less on restructuring and on legal, which will also come sort of on top of that. So that's why it's so important to see that the longer-term goal is basically about converting healthy organic growth to profit and net profit to cash and then being effective on working capital.

Great. Okay. That's very helpful. So maybe let's unpack that kind of segment by segment, and I want to start with Aviation, if I may. If we think about the recovery trajectory here, obviously, it's hard to estimate the exact pattern here quarter-by-quarter or month-by-month. But ultimately, could you update us on current trends on the commercial side? It's obviously dependent on vaccinations. Any color you can give us here by region would be great.

Yes, definitely. And I would say we continue to see the significant differences in different regions. And we are also looking at what does that mean for narrow-body versus wide-body splits. But if you look at the geographies, so global departures, as I mentioned in the beginning, is down 38% versus '19 level, right? And so it's up slightly in April and May versus March. But I would say, broadly speaking, it's also been ticking up slightly positive in the last weeks. And if we look at the different geography spend, so clearly, China, strong, nearly back to '19 levels, North America, carriers are talking about adding summer capacity, I would say, especially on domestic routes, right? The areas which are a bit tougher is, let me say, Asia, excluding China. That's also an area which has, I would say, the biggest percentage of total border closures. You also have India in this area. I would say, in Europe, there are some recent improvements. I'm sure that has something to do with summer holidays. We are now down at 66, but it's better than 75, which was just a couple of weeks ago, right? LatAm, still down 39% versus '19. And I would say, for us, well, what we are saying is that we have no overall change to our outlook. We're still planning for flat departures in the first half compared to exit at the 2020 exit rate, and we also expect the total year shop visits to be flat year-over-year.

Okay. Got it. And then if I think about free cash flow, maybe over the medium term, is it fair, as we think through that recovery, that cash flows recover faster and develop faster than top line, just given the higher CSA portion that you have on new engine platforms like the LEAP, for example?

So I think we should start by just again saying that we're confident we'll get back to '19 levels. So both revenue margin and cash, but exactly how we get there will depend on the market recovery. You asked also about the near term or the short term. Well, the shop visits and therefore, the revenue lags departures because the departures is what drives billing and cash. So that's why cash recovers faster than the operating profit. And part of that is driven by the CSA utilizations that you talked about. There's also a mix impact to that. If we talk about CSAs, you can say that even within CSAs, we have different types of contracts or different types of billing structure. So 2 different types we have there, basically what we call popular and restored. So popular, that's air, but really, we'll bill depending on their flight hours, so they're suggesting as the engines are flying. The restored is also based on hours flown, but it's really only collected between shop visits. So that's sort of when you do the calculation, and that's when you're billed for that time. And if we look at our split, about 75% of our CSA fleet is billing, although it's a bit different between different product lines. And when it comes to CSA penetration in itself, it also varies by product line. I would say it's typically higher on new programs because it's earlier on in the engine's life cycle. And that's true for the LEAP as well, right? We've talked about, on average, about 60% of the LEAP fleet on the CSA versus our overall portfolio, which has around 30%. So those are sort of the dynamics that go into calculating what the overall numbers will look like. So there are many different dynamics here that go into to the calculation. But what's really, really most important is just depends on the recovery in the aftermarket, so everyone getting back to flying as soon as possible.

Yes. Okay. So thanks for that. I think there was actually a lot of granularity in that answer, so I appreciate that. Maybe last...

I think I knew, Markus, since I know you are that granular in your model.

We try. We try. So last question on the recovery and that near term because I know it's difficult to just project. But maybe I'll ask a question another way around and say, okay, compared to 2019, what level of aviation traffic would you have to have to get back to 2019 cash flows? I know it might be an impossible question to answer, but if you look at it that way, like how much do we have to get back in terms of traffic to kind of hit 2019 levels on cash flow?

Well, I would start by saying that if you take mix out of the equation, you sort of -- you would -- we expect to be back to the departure levels to 100% of what they were before COVID, right? but there are some variables within that. So I mentioned narrow-bodies and wide-bodies. So for example, with narrow-bodies, we expect them to come back faster, right? We talked about being back to '19 levels in 2023. And for the wide-bodies, we said that we expect them to continue to lag and probably not until '24. And this is obviously for the larger engines, which means more content than shop visits. Then overall, we also have growth in military that we expect to continue. So that's why, in total, we can say that the shop visits and the revenue back to around 2023 levels. If you talk about the, I would say, the free cash flow, I just mentioned, right, that, that would come back first, depending on [indiscernible] and the billings, but also the margin then on the top line would come slightly after that. I would say that impacting sort of the basics, what we have done on top of that to improve faster to that level is we worked a lot with the cost side, right? We took out $1 billion of cost in Aviation last year, and we're planning to take out -- we already are taking out more this year, right? So that will be part of offsetting the pressure that we see, depending on the mix, how it comes back and also the fact that when we transition sort of to more newer models. That's a bit of a margin, right? You mentioned it both with the LEAP, but also with the 9X entry. So that's how we'll get -- that's basically how we get back. But exactly when and how that happens, I don't think anyone knows that right now.

Yes. Yes. And speaking about the mix, obviously, the CFM56 is very important here. That's one of the core cash flow generators here in the aftermarket for the coming years. Relatively young fleet. So what I'm wondering about, how should we think about shop visit dynamics here from the airlines going forward? Because I'd assume that those engines that are on a long-term service agreements from GE probably have their shop visit booked at some point. So at what point -- or maybe asked differently, what's capacity like for shop visits in 2021 second half and 2022? And at what point is there maybe short capacity of remaining slots? How do you look like in terms of bookings versus capacity of shop visits?

I'm glad we're talking about it, if we will have capacity to handle coming back in service, right, rather than the other side. If you just start maybe with the visibility. So the visibility and the scheduling is very dependent on the demand and utilization profiles, right? So the dynamics are also different if it's internal shop visit versus external, so about half are internal and half are external. So for the external shop visits, that's less visible to us, but we work with all of our partners just to make sure that they have materials. We can sort of see part of that by the material that they need. But it also depends on what the inventory levels they have, right? On the internal shop visits, of course, it's much better visibility, and especially the, I would say, the engines that's coming on CSAs because that's pretty planned, right? How far out can we see? I would say, we have some visibility, 6 months out, better 3 months out, but we don't know exactly which plane [indiscernible] probably 6 to 8 weeks out. And on top of that, I would say that it's not only -- or it's important to mention also that it's not sort of our, and with GE, I would say, fan capacity because of the open network model that we have, basically customers can service the engines that at not only different facilities around the globe, but they can also decide to go GE Safran or third party. I would say, for the next 3 months, a lot of slots are filled because customers are clearly preparing for demand ramp, but we still have some surplus capacity just to make sure that we can serve all our customers. That can change, depending on how our customer behavior changes, right? If I look at 2022, clearly sort of monitoring the trend, but also making sure that we have the labor capacity to match the demand. I would say the shop capacity is there, but you also need the people sort of to be there and to be able to sort of make sure that we ramp so that we can support our customers whenever they are willing to have shop visits. And of course, depending on how the ramp comes back, if that comes back, it's going to be super important for the airlines to be in front of the [indiscernible] recovery with aircraft that are serviced, right? So I would say that we sized our business, as we said, in the beginning of the pandemic, continue to size our business based on the market reality, and we are really thoughtful about the recovery. But we're preparing to support our customers now as the markets recover.

Okay. Great. And maybe last question on Aviation for now, on margins and incrementals. And how should we think about that going forward? You mentioned earlier, obviously, a mix impact from the launch of the 9X on the OE side and still LEAP. I suspect -- I don't know, but I suspect that on the 9X, learning curve might be less steep, the benefits there than what you had on the LEAP. So how should we think about that going forward?

And first of all, Markus, I'm really happy we're starting to talk about incrementals and no longer about decrementals. It's a much, much more pleasant situation to be in. And I commented on the second quarter lower margins. I would just say that the second quarter margins commentary is really because of the COVID-related pressures that we still see and the unfavorable contract margins reviews that we have, right, especially now Q2, it's still in COVID. But important is that for the full year, low single-digit revenue growth and low double-digit margins stands, right? And you asked, so how do we look at that going forward quarter-by-quarter? I guess each quarter will vary a bit. Of course, you have the year-over-year comp, but it also depends on how the recovery comes into the results as we talked about the shop visits, the mix, also scope, and then engine deliveries on top of -- we talked a lot about services, what about the engine deliveries? So all of that will have an impact on our margins. Of course, the margins are very dependent on the pace of service recovery. And you talked about the cost curve or what about the new programs? I would say that without going into any specifics. But if you compare LEAP, you can say that lower volumes means a slower learning curve, although it has a lot of new exciting technologies. And large engine, larger losses, and the margins are impacted as a result of that. I would say that we're really excited about the 777X and the 9X engine. And long term, we're all confident that it's going to be a really successful program for decades to come.

Great. Okay. Maybe I'll switch to Power real quick. So you've mentioned already, and you've been guiding for high single-digit segment margins on the Gas Power side with a 90% cash conversion in 2022, on these high single-digit margins. You've announced that on the steam side, there's obviously a restructuring program going on, where, at some point, I suspect that with some sort of ultimate fixed cost adjustment coming out of that program, whenever you're ready to communicate that. So against the background of all that you do on the gas and on the steam side, between the fixed costs out and the mix shift to services, the reduction on the turnkey exposure, is there any reason why I shouldn't think that this goes back to double-digit margin, the overall business?

I'll say first things first, you want to get to -- we've talked about $1 billion to $2 billion of operating profit for the Home segment, right? And if you look at the different pieces here, so we have gas still on path to deliver the high single-digit profit this year, continuous momentum both on lean and more disciplined underwriting and cost out. And we talked about high conversion already of cash flow in 2022. You mentioned steam. Yes, that's a big undertaking, and we're working through that exit. Also steam, if we look at steam sort of post restructuring, we would expect that to be 2/3 services, right? So that's going to be a good place. Power conversion, on track to be profitable this year, and also new categories that I think we're already now 90% of services. And I would say that overall, what we see continues to improve is we -- sort of lean taking hold. So it's not only the big restructuring programs, but also a lot of the continuous improvement that is happening. And that's also how we get to the number. But Markus, we have to walk before we run, right? So we'll get there first, and then before we get there, we'll talk about the future when we're almost there, okay?

Okay. Great. We'll be watching. And then maybe on renewables. You've mentioned already sort of the trajectory towards positive free cash flow here next year. What are the moving pieces in that number also in terms of progress payments on the Haliade, et cetera?

So I think when we look at renewables overall, I think what is super important is that what we're focusing on is to make sure that we are having end-to-end profitable growth and profitable projects, right? And that's for sort of onshore wind, but all the projects there. We are seeing a really good uptake also on offshore wind. So we expect both onshore wind and offshore wind to have good progress payments. But I have to say that it all really -- I was going to say, it starts and ends with profitable projects end-to-end. And that's where our main focus is. You will see the progress payment be lumpy as they sort of come in, and they can -- depending on exactly when they can, but the most important part is really making sure that we are comfortable in the businesses. And if you look at onshore wind, I would say we're on a really good way there. I mentioned that we had great operating reviews, and we're really focusing here on the underwriting, but also increasing service penetration and improving the profitability, especially on the international side. So about grid, we're targeting breakeven in 2022. And really, it's about -- I would say, grid today is 6 different operating units as it as probably accountability and even more of decentralization than before. We see it in renewables on the cash flow side. Also working capital, you talked about progress, but we've also seen improvements in inventory and receivables. And so the combination of all that is really how we expect to get to positive free cash flow for renewables.

Okay. Great. And then I guess we'll look for longer term how that profit pool develops, but maybe that's a separate discussion in more detail on renewables at a different point. I'm just watching the time here. We have 10 minutes to go, and client questions coming in. So maybe on Healthcare, there's a question around elective surgery volume. What you see in that business? What are trends in imaging in your main regions?

So if we start with the elective surgery, it's clearly positive momentum now as the vaccine continues to roll out, right? So we'd see the volumes are stabilizing, obviously positive trends. I would say, globally, the scans are above but COVID -- sort of pre-COVID baseline, right? So that's really good to see. And I mean we expect recovery to continue momentum in Q2 and continue to increase in the second half. We're also focusing here on the growth that we have, both on product innovation, but also services, and an even stronger, I would say, commercial execution in support of our installed base. The other one was on imaging trends, also positive. It's in here, we are above pre-COVID levels, with both China and U.S. improving sequentially. So also strong improvement here.

Okay. Great. And then one question that does come up here and there with investors is around the longer-term strategic orientation of that business. We know one of your large European peers has listed that asset -- or their asset separately. How are you and Larry thinking about that longer term?

I would say for us in Healthcare, like with the other businesses, we are focused on running the business as good as possible, and by having -- increasing our margins, improving free cash flow, I would say as -- by running the business better, driving -- and with that, I mean driving organic growth and inorganic growth and -- at good margin and good cash conversion. I would say that creates a lot of value for us, and it also creates strategic optionality.

Okay. Clear. And maybe last one on near-term free cash flows. Any sort of further comments that you can give us for the second quarter here in terms of year-over-year? How would you dial us in here for the quarter?

For the second quarter specifically?

Yes. Yes, second quarter.

Yes. So I would say the most important part is that we expect sort of improvement from earnings, so better earnings. And that's really a combination of the cost-out actions that we have taken, but also the recovery that we're just talking about in Healthcare, right? We talked about PDx, it was really hard hit last year, and that's high margin coming back well. On top of that, we also expect working capital to improve. We talked about how we're working to improve underlying processes. So we expect that to continue to pay off. On top of that, we do have, I would say, a couple of non-repeats from last year. So -- but payables last year, we had both the pressure on the payables last year, especially in the second quarter where we significantly cut the input by paying the overdues there. So that's not going to happen this year. So there's some positive effect in comparing. On the other hand, we had the military programs that we received last year in the second quarter, which we don't have this year. So that's going to be a negative year-over-year comp. On top of that, it's probably one that is a negative for our cash flow, it's higher D&A. I would say that's very good because at least our customers are delivering to their customers. And there is some slight timing also on tax payments. So last year, we paid taxes in the third quarter, and sort of the second one, we do that in the second this year. That will have some effect on the second quarter specifically. And back on cash flow, I would also maybe just make the comment again that we've talked about ignition margins. That, of course, they're going to be significantly better than Q2 last year, but that it's sequentially pressured still from COVID and the CSA reviews that we talked about. But there's no change overall for the margins or for the cash for the full year.

Okay. Great. And before I go on longer-term topics around offense, et cetera, what you've been talking about more recently. Just a couple of maybe -- housekeeping is the wrong word. But on some of these overhangs that you've removed, factoring. What I keep getting from clients in conversations is why does GE need it? Like what's the right number? Is $2 billion the right number going forward? Could that go to 0? Could it maybe go up again? How do you think about the need for factoring, right?

I would start by saying we have a big onetime strategic decision to exit the majority of factoring programs in conjunction with the AerCap transaction. And I think that's the important step. We also expect that, that step really drives the focus on billings and collections over time then to reduce the minimum cash needs. I would say, going forward, $2 billion, considering our size, $2 billion of factoring, and it's basically off book. I would say that, that is an efficient source of alternative funding. But I do look forward to next year, we will be a simpler, more focused company and talking about the businesses and not about factoring.

Right. Exactly. Exactly. There's one more question here from the audience that I want to make sure we get to. It's around ESG. And the question here is, I think the E, the environmental part is relatively well understood. What about the societal and governance part? Could you briefly comment on that?

Look, of course, that's important for us as well. And I think that goes hand-in-hand with our values. And sort of we talk about the way that we want to work with humility and transparency and in everything we do that comes across. So that's very near and dear to my heart and to everyone's hearts. So that's also very important for us.

Okay. Got it. And then I know we only have a few minutes left here. What I wanted to get to is sort of you mentioned bolt-on M&A, you mentioned recently you want to play offense again. What does that mean, playing offense going forward? Because it seems like you are changing the narrative here a little bit.

I would say, first and foremost, when we talk about playing offense, it's about focusing and fueling organic growth. It's both investing in our products and the services that we have. And I would say Healthcare is one example where we talked about it. We actually do both, right, both the organic and smaller inorganic growth there. You take Healthcare, and Kieran was talking about this as well. We launched 40 NPIs just in 2020, and we expect to have 70 NPIs this year. And almost 40% of the orders that we got last year come from new products, and with that, all new products that are introduced within the last year. And then inorganically, we had Zionexa and Prismatic that I mentioned. So they are really good examples of, I would call, bolt-on acquisitions. And you can do different type of acquisitions, right? So we have sort of the bolt-on, but you also have the -- sort of the larger ones, and then you have the ones that are adjacent. So I think the focus now is on organic growth and the bolt-on inorganic part. But I would say that over time, we talked about -- earlier today, we talked about how we get to that high single-digit free cash flow. I think what's important is also that when you have that kind of cash flow, how do you deploy capital smartly across your business, right? And that is a question that comes more and more into our discussions and is more and more in our mind. It's more and more what we're focusing on. And also the Board started to think about capital allocation motto, what we talked about coming back to competitive dividend and buybacks and then, of course, the redeployment of capital back into the businesses that I mentioned earlier on.

Great. Carolina, I'm afraid we're at the end of time here. Would have been nice to get more questions in here from the audience. But thank you very much for your time, really appreciate it. And good luck for the rest of the day. I know you still have some meetings ahead of you. Thank you very much.

Thanks, Markus, and thank you so much for having me. And keep up the good work. Bye.

Thank you. Yes. Bye-bye.