General Electric Company (GE) Earnings Call Transcript & Summary

Hello. Good morning, everyone. I'm Kristine Liwag, Morgan Stanley's Head of Aerospace Defense Equity Research. Very excited to host our next panel of GE Aerospace with Rahul Ghai, CFO of GE. So welcome, Rahul.

Thank you, Kristine.

Before we get started, you guys know the drill -- for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representatives. So with that, maybe Rahul, I'll pass it on to you for some opening remarks.

Thank you, Kristine. Thank you for having us. Obviously, excited to be here. There's lots going on. As you guys know, GE Aerospace is a great franchise, one of the largest aerospace and defense fleets, 80,000 aircraft underwing right now 50,000 on commercial, on the fastest-growing in the world, 30,000 on defense. We power 2/3 of the U.S. combat aircraft. So a fantastic franchise. And it has been a very, very busy summer for us. Last time, most of us were together was at Farnborough. And prior to that, we reported our second quarter earnings. But we had a really good air show. We got about 1,800 new engine orders at Farnborough, including the largest ever aerospace order from IndiGo Airlines for the LEAP-1A engine that was a 1,000-plus engine order. And since then, we also got 100 engine order yesterday, engines and services from the Korean airlines. So really strong commercial momentum in the business. And making really strong strides on the technology side as well as we think about both the current gen and future generation of aircraft. First-ever hybrid electric flight at the commercial altitude that flew from U.S. to U.K. partnership with beta and with Boeing, but really excited about what our engineering teams have done on that front and what that can mean for our -- the future of aviation. And then last week, we announced our largest acquisition as GE Aerospace stand-alone company with CPP. 3 main drivers as we think about the CPP acquisition. First and foremost, -- it's about capacity expansion for ourselves, but more importantly, for the industry. We do think that with the technical expertise and the capital that we can bring, we will improve the delivery performance of CPP, expand the capacity that is out there, and then that helps us get our products on time, helps the DOW meet their objectives, which is absolutely critical at this point. Second, as we think about CPP, we announced a new airfoil that we have been working on for a while. It runs much cooler. And as we go back and think about the maverick blade that we introduced on LEAP, it took us a long time to bring that blade to market. And having the manufacturing know-how in-house will shorten that time to market and bring that capability to our customers faster. So that was a really important linchpin that we thought about, okay, how do we -- what do we do on the casting space. And as we worked our way through the strategic and the operational side on the value that we can bring, luckily for us, it works for our shareholders as well. We can add a lot of synergies through the expertise that we can bring about $200 million of synergies in year 3 doubling by year -- and with that, it will be EPS and free cash flow accretive in year 1 with double-digit ROIC a few years out. So very strong strategic operational and financial results from this transaction, which is exactly the framework we look at every time we look at M&A. And then talk a little bit about the environment that we are in. Good to see the air traffic growth resume after air traffic being down in the second quarter. Air traffic has been up here in July and in August, overall, and I'm sure Kristine will take us there in a minute or 2 as we think about the services outlook. But we are not seeing any change in fleet plans from the airlines. The parked aircraft remain really low from the airlines. The retirements are actually down year-over-year, down about 10% 26 over 25. So we're really not seeing any long-term change in fleet planes from the airlines. And our own engines that we have removed but not inducted, that is up 60% year-over-year as we sit here today, right, from this current numbers versus last year's numbers. So we feel good about our overall as we think about CES results for the year, CES should have a fantastic case. So sticking with services, we expect 20% plus growth on the services side just given back that we are seeing currently that's sitting outside plus the $170 billion backlog that exists in services over a multiyear period. And on the OE side, we continue to make strides. We expect LEAP deliveries to be up high teens year-over-year. On the widebody side, we've seen really good momentum. Our GEnx deliveries were up 50% year-over-year in the second quarter with higher growth on installs -- so Boeing, we were able to ship even more than 50% engines on a year-over-year basis and the momentum is continuing here into the third quarter. And then -- and on the defense side, we expect low double-digit growth with margin expansion in 2026. So overall, it should be a really good year for us, more than $15 billion of profit growth, 100% free cash flow -- so strong performance in 2016 and the momentum should continue into 2027 as well. On the services side, we've spoken to that we expect double-digit growth just given the algorithm that we have of installed base, pricing, work scopes, all that kind of sets us up for a run rate double-digit growth business. And just given the delinquency that we have right now that we're sitting on, maybe there's some incremental volume as we think about 2027. Obviously, we'll give a little bit more color on that as we get into October, and then Jan. But again, things look as good as they possibly can. I'm sure we'll get a little bit into the traffic growth and other things that we are seeing in the market. But we feel good. I think given the operational momentum that we have, given the value that flight deck is driving and given a $210 billion of backlog, we feel good about the long-term long-term delivery performance of the company.

Well, thank you, Rahul. And so I think in this conference, just for context, the past few days, I've heard from investors a lot more concern about commercial aerospace aftermarket, but as you discussed in your opening statement, you've got a robust operating order activity. Also, you've got $170 billion in commercial services backlog as of last quarter without these incremental orders you've talked about how shop capacity is oversubscribed and customers are resilient. But can you just peel back the onion a little bit with the volatility in air traffic, how is that actually translating into your business? And then how much buffer is there in terms of the unmet demand that is inherent in the system versus what you're able to meet? And how long does that buffer last if this environment if we're in a flattish RPK environment?

Yes, absolutely, Kristine. So just in terms of game, let me just build a little bit on what I had in my opening comments about what are we seeing externally. So if you look at the -- so what drives long-term services growth. The number of engines that are flying, clearly, that's one, growth in work scopes and pricing. Those are the 3 main drivers. So let's talk about what's happening on the installed fleet side. As I said, retirements are down 10% year-over-year so far through the last couple of weeks. Even for CFM56, which has been a lot of discussions that we've been having with investors, retirement rates are -- retirements are almost flat year-over-year through the first 9 months of the year, right, 8.5, 9 months of the year. And we expect, just given what we are seeing now and given that we're almost at the end of September, we think retirements will settle somewhere between 1.5 points to 2. It looks closer to 1.5 points right now is where we think now. As we -- Kristine as we gave 2026 guidance. Remember, we started by saying this could be -- when we gave '26 guidance last year, we said CFM56 retirements could be 3% to 4%, right? Beginning of the year, we took that down and said, okay, given what we're seeing, it's probably 2% to 3%. Right now, what we're seeing is somewhere between 1.5% to 2%. So CFM56 retirements are really low. And as we think about the future -- the long-term guidance that we've provided to investors what's been the basis of our 2027 and '28 numbers, we expect -- internally, we had expected retirements to get to 3% to 4%. Now we're not seeing that based on the current trends. And again, the precursor to retirements is the number of park aircraft. The parked aircraft is actually down year-over-year, right? If you look at the number of airlines that were popular aircraft, -- and the parked aircraft before they retire that is actually down on a year-over-year basis. So that is looking good as well. Now coming back and taking a little bit of an internal look on what we are seeing, -- as you pointed out, we had -- we've said in our -- when we reported results in July, we said we are 40% oversubscribed on shop visits for the year. And even now, as I said in my opening remarks, last week versus a year ago last week, the number of engines that we have removed but not inducted into our shops is up close to 60%. So that -- the engines continue to come off. And now as we fast forward that into 2027, we expect that engine removals will be up double digits, more than 10% in the first half of next year, which is the visibility that we have, and then we'll get into the second half. So overall, we're seeing stable trends. Yes, the traffic as growth has been slow over the last couple of months and obviously, second quarter was down that will work out over time, right? But as we look at the pent-up demand that is out there, that gets us through, obviously, 2026, but even as we look at 2027. So we've got -- we -- our long run trend for services growth is double digits. But given the delinquency that we have, given the pent-up demand that exists from the airlines, there could be incremental growth on services for next year.

That's very exciting despite all the uncertainties. So Rahul, maybe on CFM56, you touched on this. You've been taking down your expected retirement for the year. So when you think about that 1.5% to 2%, why is it so low versus your initial expectation of 3% to 4%. And when you think about how 30% of the CFM56 fleet haven't had its first service visit and 2/3 haven't had their second, how long is this CFM56 demand? And what's in your planning horizon? Because it seems like the program has just been performing much stronger with more demand than your initial expectations?

Yes. No, thank you for that question, Kristine. Listen, it is a great aircraft. And we'll talk a little bit about what we are seeing now as airlines think about what can we do with the aircraft and other customers. The demand that we potentially seeing outside the aviation industry for that platform. But just to step back, the retirement rates have been low. Ultimately, as you go back to cover and maybe even prior to that, I think what we are hearing from our customers is they were very, very quick to take capacity out, right? And once they took capacity out, they -- the market share became a huge challenge for them. So I think airlines are just being very deliberate about their plans for fleet today than they were maybe a few years ago, just learning from prior experiences. So I think that's what we are seeing for retirement, and it's a really well-performing aircraft. And given the durability performance that we've had, I think that is partially driving a lot of the stability that we see on the performance. And even if you think about the retirements, 80% our work on CFM56 comes from aircraft that are less than 20 years old. And if you look at the retirements that happen, that typically happen at aircraft that are more than 20 years old. So even as we think about the impact on retirements, that's obviously limited. And there have been lots of discussion on the work scope for CFM56. Now the work scopes in CFM56 have been very stable. And that's driven by 2 things. One, most of the aircraft that are coming in now need life-limited parts replacement because they kind of flow the number of cycles, they've flown. So that gives a little bit of stable. We've been able to drive that work scope expansion because the material availability has improved over time. So that has helped us fulfill that life limited part demand that we could not do a few quarters ago. And what we see now into the remaining 4 months of 2026 and into '27, we do expect the work scopes to be absolutely stable for CFM56 just given the need for replacement of life-limited parts. So that is what we are seeing. And then we've spoken about the 2,300 to 2,400 shop visits, which is higher than probably where we were maybe a year ago, we were expecting 2,300 shop visits for this year and for next year. We raised that expectation beginning of the year to 230 to 240 -- and as we're sitting here today, we think that number for this year and next year, probably closer to 2,400 than 2,300. And then on the used material side that you mentioned, even as retirements happen, that typically takes once you retire an aircraft, that takes 6 to 12 months for that material to show up. So even if retirements do pick up, there's a lag before the used material comes in, and that is not factoring in the demand that comes from the non-aviation sector that, as you know, I mean you cover some of those players in the industry. I mean, you close it than I am in some cases. But I mean we are seeing a lot of pull from the power gen sector to convert the CFM56 is into now providing power for their data center needs. And if you just look at what just 1 company ESTA has announced. They are talking about 100 engines next year. And that 100 engines is roughly a point of retirement. So if you think about retirements going up from 1.5% to 2% this year to maybe 3% or so next year, you pull that demand out you're back at 2%, right? So that will provide a little bit of cushion to the retirement. What that basically means for us is lack of used material in the market and be incremental spare parts sales. And FTA is just one of the companies that we are talking to. We're talking to several other players in the market. that are exploring similar plans. So we feel really good about the franchise. We think the revenue here is the work is stable, through '28 and then a little bit of revenue growth beyond '28 just given the pricing and the work scope changes that we'll see.

Yes. I think FTAI will take any incremental CFM56s that come out of service they said they'll pay $100 more than anybody. So with that Rahul, look, Switching to the LEAP engine, right? You've indicated that durability kids can approximately double leap on time on wing. And LEAP shop visits are still expected to grow roughly 25% annually through 2030. So as durability improved, especially with the Maverick additions and things like that, how should we think about the trade-off between fewer engine removals over its life versus higher work scope, material content, when these engines need to go into the shop, ultimately could better durability improve both customer economics and can that also improve GE's margin economics in the program?

Yes. No, I think it's a really good question focus to step back. We launched the durability kit, which included the new blade on Airbus last year. We're doing that with Boeing in the first quarter of next year, we certified. We're ramping up production. We'll introduce that into the fleet in first quarter of 2027. What that does is basically brings the LEAP durability at par with CF. What does that mean? It means 17,000 to 18,000 cycles in a neutral environment, 8,000 to 10,000 cycles in hot and harsh to convert that to what that means for us. It's just like a neutral environment and aircraft does not need or an engine doesn't need to go in for an overhaul for 8 years, 8 to 9 years. That's a really long time. You think about an airline, you're buying an engine and you don't need to bring it for a shop visit for 8 to 9 years. That's a really long time. So it just obviously helps a lot with their fleet planning and their ability to generate revenue. So that's what we're seeing. And at a good side, I mentioned the IndiGo order, Kristine, at the outset. And what IndiGo also did besides placing a 1,000-plus engine order with us, is also that they are -- they will set up their own overhaul shop, and they will service the engines. So the reason that statement is important is because it tells you that the airlines are getting more and more confident that they can underwrite the performance of the engine and they don't need us to underwrite the performance of the engine. So it just speaks to the confidence that the customers are now getting in this product. So it's a sea change from where we were just a couple of years ago, right? So that's a really good sign. And I think that takes us into what does that mean for us and our financial performance. A couple of things. One, with the durability kit, the time on wing for the LEAP is now absolutely in line with our financial models. So that is what we had underwritten. So that lines up with our financial model. So that's a really good step. So now where does the LEAP profit go from here. I think we've said that before that we expect lead profit to be at par with CFM56 by the time we get to 2030. What drives that? Obviously, the fact that we had LEAP installed base will be 2x between 25% to 30%. So we'll double the install base on the time we get to 2030 than just we were there maybe 1 or 2 ago. The repairs on LEAP, we're growing repairs on LEAP at more than 20% a year. So when we can repair a part that is less than half the cost of a new part and obviously also helps with the turnaround time because we don't need to stress the supply chain that is trying to support both new make and aftermarket. So volume growth and repairs will be a huge part. Then the third-party channel is growing as well. Last year, we did about 15% of the shop visits were done by third parties. On a -- if you look at the number of shop visits that we have sold, about 25% of the shop visits that are on a sold basis, are to external third party. So we expect that by the time we get to 2030, we -- about 1/3 or 30% of the shoppers will be performed by third parties. So that channel doubles as well. And obviously, as we're driving more shop visits we get to use our fixed capacity more. So it's really good progress on LEAP in terms of just the run rate that we are on in terms of durability. Now what does -- that does not factor in Kristine, as you go beyond 2030, 2 things. One, -- now we said that lead profit will equal CFM56 by the time we get to 2030. And the installed base of LEAP will the equal CFM56 that doesn't factor in any growth that the platform will see for the next whatever time between 2030 and the next-generation narrow-body, which is several years out. So if you look longer term, LEAP is going to be at least 2x the profit of CFM56. -- just based on the installed base growth, even if we do nothing else. And then the new airport that we announced last week with the CPP transaction, -- that is just what we do inside the company. That's just part of the DNA of GE Aerospace. If you look at CFM56, they're on the third-generation blade. And with this new air coil, that will be the third-generation blade on LEAP. And if you just look at the pictures, we would spend more time explaining to everyone what the technology does. But just if you look at the pictures on the current blade versus the new blade, if you look at the new blade has a lot more blue on it, which means it just runs much cooler. Now that improves the durability of their engine even further from where we are today. So that's positive. And then as we think about our margins, as I said, the current margins are in line with the durability that exists on the engines that we are selling today. Any improvement from this point on will be incremental to our long-term service margins or lead. So I think there's a lot more runway on LEAP than what we're currently seeing.

I just want to confirm. So basically, the announcement with a CPP airfoil blade that is not factored into your previous margin outlook. So when you talked about you were doubling CPP capacity through 2030, I mean 2030, there's a possibility that LEAP not only is it the same margin as the CFM56, but significantly more. Is that -- I just want to understand this?

Yes, absolutely. So I think the first part of your statement is correct, rise, we have factored in any improvement in air fall technology in the margins that we are recognizing today. We've not announced yet. Now to the second part of your question, we've not announced the timing of when we introduced the airfoil, we'll do that.

I was assuming 2030.