General Electric Company (GE) Earnings Call Transcript & Summary

All right. So I think we're ready to get underway. It's my pleasure to have here Larry Culp, Chairman and Chief Executive of GE. As a reminder, for that QR code, please take the time to scan it. Send me any questions, but also complete the audience response survey questions, and we'll disseminate the results of those in due course. So getting to it, Larry, thank you so much for being here, maybe open up with any initial remarks before Q&A.

Sure. Sure, Julian. Thank you, and thanks for having us. A lot happening at GE. I appreciate everybody's interest in what we're up to at the company. You probably saw just a couple of weeks ago, we put out our annual report in our 10-K, really the best way to cap what was in many respects a historic year for GE, really pleased with the progress in so many ways. We know financially, it was a strong bottom line year from an earnings, from a margin perspective, and certainly, from a cash flow view. But I think beyond the numbers, what we were able to do strategically with the GECAS AerCap merger, and in turn, the consolidation of GE Capital in turn, what that allowed us to do with respect to the deleveraging now in excess of $87 billion of debt retired. That doesn't happen overnight. Lot of good work in that regard. We'll continue to reshape the portfolio. You saw the announcement with respect to our steam nuclear business just a couple of weeks ago, putting that with our French customer EDF a better home for that business, frankly, gives us an opportunity to focus on some other areas so that strategic reshaping will continue. But I also think that when you look at what we're doing operationally, that's really what undergirds not only the financial performance, but I think the trajectory for the company going forward. We talk a lot about lean. That's a critical part of the transformation of the company, in addition to just running in a more decentralized manner, right? We report in 4 segments, but it's really the 30 P&Ls the lie underneath, which is where the action is. And that's really the point of impact. And if that doesn't all come together in the way they did in 2021, we're not in a position in turn to do what we announced in November with respect to the spin, both with health care and power and renewables. Very excited about that move. Obviously, a decision the Board took in concert with management, a lot of deliberation. But the response we got then and certainly subsequently gives us every confidence that that's the right path going forward with these 3 individual businesses. So when we come into 2022 with a lot to do, certainly, first and foremost, we want to have another strong year financially. And in our earnings call just a month ago, I think you heard us lay out a framework for us to drive strong top line growth, have that flow through from a margin earnings and a cash perspective in a high-quality way. We put out a reminder to that effect on Friday, you may have seen. I wanted to make sure, as we did at earnings, that everyone understood that the supply chain and the supply -- these price cost issues are real, and we'll see that. We're seeing that as we speak here in the first quarter, early in the first half before our counter measures take full effect, but no change. No change in the environment, no change in what we see internally in that regard. And we have been out over the last 3 weeks, we've had operating reviews with 3 of the 4 businesses. We'll head to Cincinnati tonight to be with Aviation the next couple of days and just are really, I think, quite encouraged by what we see in the businesses. It's early. And this is a company that tends to deliver easily 60% or more of its financial results in the back half. But the way we start the year, I think is important. I had 2 weeks with Scott Strazik. Scott, as you know, runs our power business, has picked up responsibility for renewables as we bring what we call Energy Co together. I think the progress we've made in Power and Gas Power, and by extension, in steam and in power conversion, continues to be strong. Clearly, the turnaround in gas power is something I think everybody appreciates between the exit of new build in the coal space and the EDF transaction team becomes primarily a service play, which will be a nice enhancement to that segment. Power conversion, a business, $1 billion in size is really executed, I think, almost a classic turnaround here. So we'll be in the low maybe even the mid-single-digit op margin range in 2022. It's relevant because we've got that team taking on some additional responsibilities in renewables. So a lot of what you've seen us do in power, I think, does play, it is relevant in renewables. We know we've got pressure in onshore wind in the absence of the demand we would have hoped to have seen in '22, given the lack of renewal of the production tax credit. That complicates some of these price cost issues. Steel and logistics have really pinched us where it hurts most in our North American onshore wind business. But we're going to work our way through that. Certainly, internationally, that's been a tough space for us. And you've heard that from competition as well. That needs to be something we take better command of in terms of our upfront underwriting. We need to be more selective. We need to be more disciplined, let alone manage the price cost dynamics, again, steel and logistics principally. And we'll do that. And I think when you look at what we should see in the first half versus the second half. Clearly, there's, call it, $600 million plus or minus $1 billion of incremental operating profit as a result of the countermeasures that we should see there in the second half of this year. Grid is a business that is really going to be, I think, well positioned in the energy transition. Changing the generation mix is one thing. We've got to deliver it. That's where the grid business, I think, is well positioned. We need to run that business as well, better than we have. We're close to breakeven now. A lot of good progress in that regard. but there, again, we can and should do a better job in terms of what we sign up for upfront, where Scott taking on responsibility for that business, I think, will give us an opportunity to accelerate that progress. Philippe Piron, who's run power conversion has just picked up responsibility for grid and a good bit of what we've done in PC, I think, will be something we can transfer and run at grid. And there's a little bit of strategic opportunity there with respect to microgrids that we're going to explore in earnest. Offshore wind will come along, right? We got $7 billion of commitments there. We know that has an exciting future ahead of it. But we've got our work cut out for us. Clearly, Julian, here in the first half, given the absence of the production tax credit and some of these price cost issues. We were in Florence, South Carolina just yesterday with our health care business, and just -- that team is ready to go, probably still a year out relative to the spin. But the way Pete Arduini, the new CEO, has come in -- come back really because he started his career with us. He's hit the ground running. We've got a number of other changes of foot there. Just organically, both from a commercial and from an innovation perspective, lots of levers to play. On top of, frankly, robust demand that we can't keep up with right now. But again, in different ways, supply chain challenges, we think, we increasingly clear as the year progresses. And I know we'll talk a good bit about aviation, but we said in earnings and we reiterate today, high confidence that we've got a 20% top line growth opportunity here, both in the aftermarket and with new units as we see all of us returning to flight witness the crowd in the room, we just see that in addition to what our major air framework customers are telling us about their own production ramps. So a lot to do, lot to do operationally, which really is job one at GE here in 2022 while we get ready for the spin. So we talk about that every day because we don't want anyone to think the spins are more important than delivering 2022. But we're excited about the progress over the last several months with respect to the spins. Early health care a little bit further out than the other 2 businesses. It's proven to be a talent magnet, if I can go that far. Excited about having Scott Reese come over from Autodesk to run GE Digital. That's important because he is an outstanding leader in the -- from the software world. Will help us, I think, realize the full potential of that business, also gives us an opportunity to move Pat Byrne over full time to look after onshore wind, given the issues I just mentioned a moment ago. Pete Arduini again, new in role. He's just brought in Betty Larson, from BD, a new leader in HR, critical, in addition to Frank Jimenez, will be the new General Counsel for us as we prepare to launch. Frank Jimenez is from Raytheon. So a number of outstanding leaders we're excited to have on the team to complement the team that we've got as we get ready, again, for health care to be that leader in precision health, in diagnostics and therapeutics and in monitoring, pulling all the levers organically. And then hopefully, doing a steady stream of what we did last summer with BK Medical, these bolt-on acquisitions that enhance the overall profile of the company. We know aviation is poised. This is a multiyear run. I think that awaits us both in the aftermarket and from a new unit perspective. But we're going to make sure we're ready for what comes next. So you may have seen the announcement we made earlier this week at Airbus relative to a hydrogen demonstrator. We also recently announced a program with NASA relative to high-grade electric propulsion. And that all comes on the heels of what we did with Boeing and United just a few months ago with respect to staff. We don't know how that plays out. I'm not sure any of us do. But rest assured, we think about an independent GE Aviation. The mission is clear. We want to continue to lead in the next generation of propulsion, as we have over the last several. And again, the energy transition, the feedback on the announcement has been strong. I think our customers are very keen to have us keep everything together because they know the answers to their own energy transition challenges are uncertain. And the opportunity here for us to go forward with a strong on and offshore wind position, gas. And yes, gas has a role to play here in addition to all that we can do both in terms of hardware and software with the grid, I think sets up that business well. We need to run certain aspects better. I mentioned that earlier. But all of these businesses really, I think, are going to go forward true to our purpose today of building a world that works. That will manifest itself in a lot of different ways. But I think importantly, for shareholders, one manifestation is going to be at least $7 billion of free cash flow in '23. So Julian, I don't want to run on, lot's going on at GE, come off of 3 weeks on the road, excited about what we're doing. But we know we've got a lot of work ahead and we're on it.

Perfect. Thanks, very much on that, Larry. And maybe circling back to one of the things you said earlier about delivering on 2022. And you had that update on Friday. Just trying to understand sort of did anything change or deteriorate versus what you'd expect in recent weeks? And those issues that were flagged in the Friday update, what's the sort of pace of improvement dialed into your guidance through this?

Yes. Well, to be clear, it was not an update. So if I went there, we were reiterating what we thought we had made clear and stated explicitly. I don't think we were convinced that everybody heard us, so we just wanted to get up on the soapbox and shout it a little louder. But no change in message and nothing new relative to what we had said just what less than 4 weeks prior. I think as we look at the first half, second half, it's important to remember that we are, for better for worse, a backloaded business, right? Working hard to change that. A lot of what we do from a lean perspective is aimed at trying to smooth the year out and smooth the months within a quarter out. But that's unfinished business. But just last year, we had, what, 60% of our earnings in the back half. I think '19 was profiled similarly. So we're going to see that again, but for different reasons, right? These price cost pressures that we referenced at earnings and rereferenced on Friday are real. I'm sure you've heard that from every company on this stage, and there are a few more to come. Our countermeasures there, both in terms of just buying better redesigns in certain instances are lagging the effect that we feel on the inbound invoices. So as we go through the year, we're going to bring on board new suppliers. We're going to have redesigns that get us off the spot buy market, get us out of some of those more onerous situations and at the same time, we're developing some better pricing muscle. Now we can't do that everywhere and we don't have to. Some of our projects, our longer-term business have escalators in them. Our service contracts, in many instances, have similar mechanisms. So we get price just as normal course in those situations, but there's a little bit of short-cycle exposure, where we've got opportunity to try to share some of this challenge. And I would argue that when you look at the order indices that we look at and then turn the backlog, we're making progress. I wish we were further along. As we go through the year, that progress upfront will build. And in turn, we should see more of it in what we're able to run through the P&L. And all of that's related, but I think separate from the supply chain issues. We've talked about our health care business. Health care is not the only business, but we'll see 300 or 400 basis points of revenue pressure here broadly on the company because we just can't get everything that we need to fulfill the backlog. And it really hurts in health care a bit because of a short cycle, a bit because demand is so darn robust, right, be it public, be it private spending, we see that coming into our order book. We know we've got an aging installed base that needs to be upgraded, let alone a number of new use cases. And that's all before we drive some of the commercial improvements that Pete and the team are working on. So there's a number of things that have to play out. It is what it is in this environment. But I think, again, I would just reiterate, after 3 weeks on the road, I have as much, if not more, conviction than we had in earnings. That we know what we have ahead of us in 2022 a lot of self-help measures in motion. And as the year goes on, I think that will be more evident to those.

Perfect. And then maybe taking a step back, free cash flow improvement is key to a lot of what's going on at GE. A few years ago, investors were worried that the conversion was kind of too low from net income. Now the opposite concern is it's too high somehow. So maybe just to try and help people understand what's going on. You have a $2 billion delta of free cash above net income this year. What's driving that? And then when you look out to 2023, you've talked about the $7 billion plus. What kind of conversion is going alongside that?

Sure, sure. Well, Julian, as you know, and forgive me, I grew up in a neighborhood for 25 years where high cash conversion was considered a good thing. And I still believe that, right? I joined the company 3.5 years ago, that wasn't as hyper-focused on cash in all its forms. I think when you look at where we are today, it's important to realize that we do have about $1 billion of a gap here largely because of the amortization, right, which is there today, it will be there tomorrow. CapEx and depreciation, fundamentally in line. We're not managing it that way. I still think we can be more efficient with our CapEx, but that's a different conversation, right? So as we go forward, particularly at this point in the cycle, we know we have inventory opportunities. And I will not apologize to anyone for my zealotry on this topic. At the heart of a lean transformation, and that's what we're doing at GE, you've got to get it right with respect to your material flows. Where a lot of waste is, where a lot of cash is that's where you ultimately impact the customer with short lead times and highly reliable on-time delivery. You get that right, a lot of other good things follow. You don't, right? So we've got opportunity. We're less than 3 turns today. If you think about a turn at GE, that's probably what, almost $4 billion of free cash. We're never going to apologize for that. In addition, as we think about getting out of our factoring program and anyway from outsourcing receivable management to GE Capital, it becomes an opportunity, right, to do more than just chase past dues. But really think about terms rather than, if you will, factoring it and forgetting it. And that's all before we talk about the nature of some of our service businesses where, given the long-term nature of the contracts, we will get paid. I mean we'll get cash receipts before we'll see some of that activity go through the P&L. And when you've got an aviation business positioned where it is in the early stages of a recovery, your cash receipts are going to run ahead of earnings for a little bit. And again, I think that's an attractive part of the GE model. But all of that, again, is table setting. We want to drive strong top line growth. We want to expand margins at the same time and be an earnings-driven company, complemented by all those cash adders. And as we move forward, have 3 companies that are not only investment grade that have smart capital allocation strategies in place tailored to their circumstances. Capital allocation strategy is academic if you don't have the balance sheet to make decisions and put them into action. And that's really, I think, what we've done not only with the $87 billion of leveraging, but what we're doing in changing the operating model and driving not only an earnings-driven cash flow stream going forward, but complementing that with smart but not excessive investments in working capital and CapEx.

And you mentioned capital allocation. And I think the delevering has opened up more optionality on cash usage. How likely is it that we could see GE do a large acquisition or is it a case of don't overload the businesses, they've got to get everything set up for spin?

Well, it's a welcome change in the boardroom, Julian. Let me tell you to go not that long ago from worrying about all that we're worried about to really having an array of options on the table. I don't think we're strictly looking at acquisitions, right? As we opened up as we did what I like 2 weeks ago, with the Board, the array of options that we have from a capital allocation perspective, there's a lot that we can do. A large acquisition in '22, I think at this point, I wouldn't rate that as a high probability. If for no other reason, then we want to make sure we get the spins out and comfortably with investment-grade capital structure, right? That's job one. But I would also, at the same time, say, don't be surprised if we rerun the BK Medical way in 2022. We were really excited to have an opportunity to bring that company to GE, in large part because it fits so well with what we're doing in ultrasound. It might be one of the best businesses we have within health care. And to do that, I think, at a reasonable valuation. It's a good investment, strong strategic fit. But as importantly, it's a rep, right? The health care team gets to go through the process of identifying, going through the strategic rationalization, diligence, integration. It's early. We're a little bit ahead of schedule in that regard. But if we can do a few of those, but the point you made, Julian, is an important one. We're never going to do, regardless of how healthy the balance sheet is. First things first, if a team is consumed with the day job right? And you might argue in renewables, by and large, that's what '22 is going to be about. We really aren't going to ask them to do anything incremental or inorganically.

And in general, it's a very buoyant or has been a very buoyant M&A environment. I'm sure the split news or spin news generated some sort of incoming interest from other parties about GE's assets. How appealing is some kind of alternative exit route for asset separation?

Well, I would say, I think I got a lot more calls in the fall of '18 when folks thought we might not make it than necessarily the fall of '21 when it was obvious that we would. Julian, I would say that we wouldn't rule anything out, right? I mean this is a Board that has been, I think, focused consistently on value creation. That said, there is a plan of record in place that we feel very good about. We might be able to complement it with a few bolt-ons along the way, but I think we're focused on the things that I've just highlighted. And we'll see how things play out.

And I think one thing that you've been very keen on throughout your career is small corporate cost center, push the cost into the businesses and accountable for that. The corporate costs this year at GE is still pretty large on a cash basis of $1.5 billion plus. Where does that number? Where should that end up?

Yes. Well, it's -- there are a lot of reasons you want a small center, right? And the cost is but one. I think what we have found over the last several years is really managing from the bottoms up just drives a much greater degree of accountability. And in many respects, you could argue that a decentralized approach that we have been implementing is really what you see in the spins, right? What we announced in November in many respects, is a logical extension of that strategy. Not planned in that regard but we feel strongly about it and all the more so given what we've seen in the last 90 days or so. That said, if you think about $1 billion of corporate costs today, I think we've shared publicly that as we think about 3 independent companies, they're all going to bring, hopefully, that frugal small center mindset to bear. So we'd say that you're probably talking, I don't know, $150 million to $200 million roughly per center, so multiply that by 3. So that suggests that we've got another step down. And that's a good thing. Takes us a little while, not only because of the cost, but that cost is rooted in a whole host of corporate functions that were built to serve a larger and even more complex GE. So it's work it's easily done. It just takes a while to, if you will, replumb much of that infrastructure. But as we do that, we'll only set the businesses up to go on their own, but we'll bring some costs out of that pool as well.

And then maybe switching to aviation specifically. You've got that 20%-plus revenue growth aspiration for this year. Maybe any color around commercial aftermarket expectations within that and also military where there have been a lot of issues for 18 months or so, where do we stand on that front?

Yes. Well, let's take it in pieces. I think it's fundamentally coincidental that when we talk about 20% growth in Aviation this year, it's 20% in the aftermarket, it's 20% in new units, right? So we know as we sit here today, departures globally versus '19 levels, down 20%. U.S. almost back to where we were at that time. Europe is down by 1/3. I think China is down just under 18%. So witness all of us here, right? We're poised and we know that particularly with the CFM56 fleet, we're going to see a lot of shop visit activity. We're already seeing those sequential improvements as we speak. So unless something happens with the next variant that throws this recovery into jeopardy, we think that's really an execution challenge for us as opposed to demand. There are many people in the room have already heard both our major airframer customers talk about their production expectations for '22 and '23. We think we're well aligned, particularly on the narrow-body side of things. And that is what yields the 20% top line growth there. Could the aftermarket be better, we'll see. But I think for now, we'll stand by what we said in late January in earnings. Our military business, terrific franchise. We're underway when peace keepers are in harm's way. We have some process issues, Julian, simply stated. These are not supplier issues. So we're not going to point the finger at anybody other than folks in the mirror. But I think what the team has done, to their credit, I'm really proud of them. We haven't tried to muscle our way through this to just get some engines out a little bit more every quarter. Again, in the spirit of the lean transformation have said, if we've got process capability issues, we need to drill the root cause. We need to fix at root cause. And if it takes a while, it takes a while, we'll stop. So I know there's some who are anxious about what's happening. That's what's happening. So we're going through some of these process improvements, and I can go on and on. I won't. But I think as you look at -- as we look at the leading indicators relative to the bottlenecks and some of the other pinch points in our own facilities, our yields are up. In many respects, there are many instances when yields are up considerably. Our flow is improving. And as we think as we work our way through the year, this will be less of an issue and we'll clear the backlog. Most importantly, be in a position where we've got more reliable on-time delivery and shorter lead times for the customers.

And then when we look at Aviation free cash flow, very good year last year. This year, you've guided for it to be down a little despite the big aftermarket uplift. So any sort of context there?

Yes. I think that the key thing to remember is we think about the year-on-year cash flow performance in Aviation is our AD&A, our aircraft delivery payments are a little bit out of whack. I think we all know that particularly with one of our customers, there has been, let's just say, some volatility in deliveries. So it was a bit of a tailwind last year. It's a headwind for us this year. If we didn't have that dynamic, we would be up for the very reason you just cited. So I think people who understand GE, who understand our aviation business know that, that's a little bit of a timing dynamic. It's neither good nor bad, but there are going to be moments where it creates a little bit of noise. But I think as we get the MAX and the -- primarily the MAX on a more normal production and delivery schedule, we'll be talking about this a lot less.

And if you look at sort of operating margins in Aviation, you have that sort of up to 20% medium-term place somewhat at high end of the range. You already did a high teens margin second half of last year. What kind of -- what keeps that ceiling at?

Well, I wouldn't -- I don't think -- I hope we've never framed that as a ceiling, right? But I'd much rather deliver on a midterm target than necessarily raise that until we've demonstrated we can do that. That's just me, maybe it's wrong, but that's me. But that said, we know that as we talk about the new unit ramp, we're going to have some mix pressure. Early in, let's say, the lease life cycle, those new units are still money losers for us. Not outrageous, but we're probably not breakeven on the LEAP until, call it, 2025. Okay. So That's helpful. Clearly, the -- some of the other supply chain issues that we've talked about. You look at the military example, we know we've got overheads that we aren't the leading as we work through some of those issues. But that's really the primary issue. But longer term, if we are positioned to do better, all the while continuing to invest in hybrids and hydrogen and in SAS, so we'll do that. But I think at this stage, we've got that target out there, and we'll work our way forward to do so in a way that's ultimately sustainable.

Perfect. And I know we're almost out of time. So please, if you have any time to pull up that audience response survey, please have a go at that. And maybe, Larry, just touching on the portfolio, Aviation will be the sort of the core of what's left post the 2 spins in 3 years' time. When you look at the Aviation business itself, do you worry that it's 2 engine and commercial focus? And is there a need for some kind of rebalancing or greater balance in other non-engine products or towards the military side in the long run? And also Aviation will have that long-term care insurance within what's left. What's the sort of appetite to try and whittle down that long-term care business for?

Yes. Well, let me take those in reverse order. I think we're open for business. There's appetite from an LCC perspective. And I think that even with the latest news we had in the 10-K, I suspect we're closer to whittling down, as you said. And that may be in pieces, maybe in whole. But until that happens, it's on us to manage smartly. And I think you've seen us do that both from an asset and from a liability perspective. I love the fact that GE Aviation is the world leader in commercial propulsion full stop. I think that's a beautiful thing. It's not the only thing that we do. We clearly have got military business, a better part of $4 billion in size that we're going to run better on a go-forward basis. Our systems business, a couple of billion dollars there as well outside of propulsion. But I don't envision us trying to manage the portfolio in a way that investors could, right? If there are good businesses for us to be in, where we can apply our skills and drive returns, we'll do that, right? We won't try to be all things to all people. But with respect to aviation and aerospace, I think we'd be open to that. But first things first, I want to make sure we see our way through this recovery, through the launch of a GE that's aviation-centric. And that's what we're going to do in the next couple of years.

Great. Well, thanks very much, Larry, for your time here and catch up at the Investor Day.

Thanks, Julian. Thanks, everyone. Bye-bye.