Q4 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the General Electric fourth quarter 2019 earnings Conference call. At this time all participants are in listen only mode. My name is branded and I'll be your conference coordinator today, if at any time during the call you require assistance. Please press star followed by zero and the conference coordinator, we'll be happy to us.
Thank you.
If you experience issues with the slides refreshing, where there appears to be delays in this slide advancement. Please hit five on your keyboard to refresh.
As a reminder, this conference is being recorded.
Now I'd like to turn the program over to your hosts for today's conference Steven Winoker, Vice President of Investor Communications. Please proceed.
Thanks, Brandon Good morning, and welcome to GE is fourth quarter 2019 earnings call I'm joined by our Chairman and CEO , Larry Culp and CFO , Jamie Miller before we start I'd like to remind you that the press release and presentation are available on our web sites note that some of the statements were making are forward looking and are based in our best view of the world and our.
Businesses as we see them today as described in our SEC filings and on our website those elements can change as the world changes. Please note that we will hold an investor call on Wednesday March 4th to provide more detail on our 2020 outlook with that I'll hand, the call over to Larry.
Thanks, Good morning, everyone and thank you for joining us.
I'll begin with an overview on our performance and progress on our execution against our strategic priorities.
Jamie will cover the financials in more detail and then we'll turn to our our expectations for 2020.
Starting on slide two you'll find a snapshot of our fourth quarter full year results.
Overall fourth quarter marked a strong close to the year as we met or exceeded our financial targets in 2019.
Orders were down 3% organically in the quarter as positive growth in aviation and health care with more than offset by declines in power and renewables.
Notably Aviations double digit orders growth was driven by our newly formed Aero derivatives JV between GE power and Baker Hughes following big consolidation.
Excluding that JV aviations orders were up 1%.
For the year total company orders closed up 1% organically.
We ended 2019 with backlog of $405 billion up 15% year on year. This comprises equipment up $79 billion up 2% in services of 326 billion up 19%.
Representing approximately 80% of our backlog.
We delivered industrial segment organic revenue growth of 4.6% in the quarter and 5.5% for the full year with all segments posting positive growth our service businesses, which represent about half of our industrial revenue in the quarter in the year continue to be a differentiator with our customers and a key driver.
Of profitability.
Our adjusted industrial profit margin expanded 410 basis points, and 390 basis points organically in the quarter driven by aviation and power.
For the year margins expanded 60 basis points, and 10 basis points organically driven by power in health care with aviation margins closing above 20%.
We generated industrial free cash flow of nine of $3.9 billion in the quarter and 2.3 billion.
For the full year. This came in ahead of our most recent outlook is power outperformed expectations and we saw continued strength in aviation.
As I reflect on the year, we've come a long way since my initial visits as CEO , which with each of the businesses in late 2018.
Aviation and healthcare are clearly exceptional franchises delivering profitable profitable growth for the year with runway to go.
In aviation the business was able to grow free cash flow versus prior year. Despite.
The $1.4 billion of cash headwind from the Boeing 737, Max grounding.
And health care, we operate at the center precision health.
As Karen and team outlined for many of you in December growth has and will continue to be driven by innovative solutions and our digital capabilities, resulting in products such as the Revolution Maximus Cts scanner, which we launched at Rs anyway.
At power, we're proud of our progress in stabilizing gas power.
But we have more to do.
In power portfolio, while there were puts and takes we gain better line of sight into these businesses.
For example, power conversion showed signs of operational improvement this year.
Such as better on time delivery at their facility in Brazil.
In renewables are for full year results were more mixed reflecting on each of the businesses here in onshore wind and LM earnings and cash trends improved through 2019 is we delivered on a steep ramp to meet customer demand.
In offshore when we're still and investment mode as we build our global presence in prepared wants to Holly IDEXX next year, the world's largest wind turbine.
The focus in both grid solutions and hydro is simply on the turnaround we're working through complex projects, improving our under underwriting framework.
And focusing on daily execution in both our factories in our and in our field service organization as.
As well as taking cost reduction measures.
Last week I was in Paris for operating reviews, which with each of these businesses and this rig reinforce my conviction that we can and will improve our performance in renewables.
Energy capital, we delivered positive earnings driven by better operations tax and gains as we continue to simplify the GE capital portfolio.
So while 2019, we hear one in our multiyear transformation.
I'm encouraged by the evidenced that momentum I see across GE.
Stepping back from the quarter, we made substantial progress on our priorities in 2019 as outlined on slide three.
First on improving our financial position, we moved with speed on a number of deleveraging actions, which set us up to achieve our deleveraging targets in 2020.
And industrial we reduced net debt by $7 billion ending the year at a net debt to EBITDA ratio of 4.2 down from 4.8 a year ago.
We used the proceeds from our web Tech and Baker Hughes sales to pay down debt, including a 5 billion dollar debt tender.
In 2020, we expect close Biopharma for about $20 billion of net proceeds and achieve our leverage target of less than two and a half times.
At capital, we reduced debt by $7 billion, ending 2019 with a debt to equity ratio of 3.9 down from 5.7 in 2018.
We expect to close 2020 below our leverage target of less than four times.
We also completed approximately $12 billion of asset reductions this year, bringing our two year totaled $27 billion, which surpasses our 25 billion dollar target.
Our deleveraging progress will allow us to focus more of our time and energy executing on our other priority, which is strengthening our businesses.
It's no secret the power has been our focus.
Over the last year and across the board we are improving execution.
In gas power, we are building backlog with lower risk as evidenced by zero turnkey projects booked.
In the fourth quarter.
We're underwriting the business financials with more conservative commercial assumptions with our 2020 equipment plan now 100% in backlog.
And were Rightsizing the business for today's market through a reduction in fixed costs by 15% in the quarter and 10% in the year versus 2018.
But to be clear, we're still on a multiyear journey at gas power to deliver a more reliable contribution to GE industrials overall performance.
As I've shared with you before even our best businesses can be stronger, including healthcare, where we see opportunity to drive faster healthcare systems growth post the biopharma sale.
This year health care systems grew revenue, 1% organically and we expect low to mid single digit growth going forward.
We'll do this through targeted increases in R&D and prioritizing programs with the highest returns.
As well as better execution on our safety quality delivery and cost reduction efforts.
For example, during my recent visit Dubuque, France, where we produce our sensor graft for Sina mammography machines.
With our teams using lean principles, such as value stream mapping and daily management to improve both our supply chain and our commercial performance.
Investing and restructuring has also been an important effort in 2019, especially across power renewables and corporate as we reorient our cost structure for the future and move the center of gravity to our operating businesses, while cash and expense were lower than our original outlook. This year due to a mix of timing attrition and better.
Execution, our expected cost savings remain on track.
At corporate for example, our core functional costs were down 8% in the year. This was the result of our actions to shrink costs as people processes and accountability, our move to the segments.
The team made solid progress on head count reduction with roughly 2500 people this year, resulting in real corporate cost savings.
While we're not finished with restructuring better margins and returns will also be the result of improved underwriting discipline stronger execution in both the factory and field.
Shifting our business mix more toward services.
In launching accretive new products.
This year much of our substantial progress was in areas less visible to those of you on the outside of GE.
The starts with how we run the company on a daily basis.
We're in the early days of a lean transformation developing leaders capable of identifying and solving problems alike, establishing standard work and embracing our values of candor transparency and humility.
Our strategic conversations are being woven throughout the year in an ongoing sequence of operations talent and budget reviews.
This type of rigor and prioritization is changing how we work as I travel to our businesses I still see real momentum building, which is only partially evident.
In the numbers were sharing with you today.
For example earlier this month, David Joyce and I were in Ohio, and our aviation component Service Center, which repairs complex parts used to service our customers engines witnessing lean principles first hand.
The results were impressive of 14 day improvement in our turnaround time that will positively impact customers and our bottom line.
Moreover, we were so impressed by the operators, they're motivated passionate expert at using lean tools to improve their daily work I.
Im excited to go back.
So in summary, Im heartened by our progress in 29 team and I do believe we enter the new year with momentum there's still plenty of work to do but we're changing the way we work together with a from eye on delivering better results and ultimately a stronger culture.
I just wanted to take a moment to thank all of those on the GE team listening for their grip the resilience and clear sense of ownership as we've driven the change we have over the last year.
Looking forward to more.
And with that I'll turn it over to Jamie Thanks, Larry.
Starting with the fourth quarter summary orders were 24.9 billion down 3% organically with growth in aviation largely from era orders as well as healthcare offset by declines in power and renewables.
Equipment orders were down 10% organically, while services were up 6% organically.
Consolidated revenue was 26.2 billion down 1% in the quarter Industrial segment revenue was up 4.6% organically with equipment revenue up 7% and services revenue up 2% inorganic growth in all segments.
The biggest drivers of growth for aviation equipment and services renewables equipment, driven by onshore wind and power services.
For the year industrial segment revenue was up 5.5% organically.
Adjusted industrial profit margins were 11.3% in the quarter up 410 basis points reported.
The majority of margin accretion was driven by better operational rigor and the Nonrepeat of about 800 million of charges. We took in gas power last year and higher volume and aviation services.
All segments other than renewables expanded margins in the quarter.
For the year, we saw significant margin expansion in power and healthcare, but declines in renewables and aviation.
Fourth quarter net EPS was six cents.
Continuing EPS was seven cents and adjusted EPS was 21 cents.
Locking from continuing S., we had eight cents from gains in our remaining stake in Baker Hughes, which we measured at fair value each quarter.
On restructuring and other items, we incurred three cents of charges related to restructuring and M&A costs across our segments principally in power.
Next we incurred a seven cents charge for deal taxes related to the Biopharma transaction based on preparatory internal restructuring ahead of the expected close in the first quarter.
Non operating pension and other benefit plans were 10 cents in the quarter, which includes about 600 million of additional expense this quarter associated with the pension freeze we announced in October .
Excluding these items adjusted EPS was 21 cents in the fourth quarter.
Moving to cash we generated industrial free cash flow of $3.9 billion for the quarter 800 million lower than prior year.
Income depreciation and amortization totaled 1.5 billion.
Down 200 million net of goodwill impairments versus prior year.
Working capital was positive 1.6 billion similar to last quarter accounts receivable was a usage of cash driven by the impact of the Max grounding and reductions in long term receivables and other factoring program level. The Max grounding was a negative 400 million dollar working capital cash flow impact in the.
Quarter.
All other working capital accounts, where a source of cash driven by lower inventory from higher seasonal volume and cash collections on new orders and project milestones.
The supply chain finance transition with a usage of cash in the quarter as anticipated, but less than originally planned.
For the year, we completed negotiations with over 80% of the large suppliers and anticipate completing the transition in 2020 with results better than our original outlook.
Contract assets, where a source of cash of 400 million in part driven by billings from a CFA contract termination and cash received on converting a customer to SC USA contract at aviation.
Other CFOA was 1.1 billion, which includes restructuring cash usage, a crude discount and allowance payments in aviation and noncash items offset in net income.
We also spent about 700 million and gross capex driven by aviation.
For the year industrial free cash flow was 2.3 billion down 2 billion versus prior year.
The most significant driver of the decrease was in working capital due to the Max grounding and the reduction in certain mounted receivable monetization program.
While there were many puts and takes the 2.3 billion was ahead of our expectation due to strong performance and power, which carried forward from the first half largely driven by collections at gas and steam power and partially the timing of project disbursements.
Lower restructuring of about 800 million driven by the items Larry mentioned earlier.
Lower impact from the supply chain financed transition.
And aviation performance, where strong cash collections and services, including a fourth quarter parts distribution deal for a legacy engine program and timing on discount and allowance payments helped more than offset the 1.4 billion headwind from the Max grounding.
Moving to liquidity on slide six we ended the fourth quarter was 17.6 billion of industrial cash up approximately 1 billion sequentially largely driven by positive free cash flow of 3.9 billion.
This was offset partially by the 2.5 billion equity contribution to GE capital as planned and the 1 billion intercompany loan repayment, where we have about $12 billion left to go in 2020.
In line with our ongoing goal to reduce our reliance on short term funding averaged short term funding was 4.3 billion this quarter down from $10.4 billion in the fourth quarter of 22018 and peak inter quarter short term funding was 4.7 billion down from 14.8 billion last year.
Overall, our liquidity position remains strong with over $17 billion in industrial cash and we continue to have access to 35 billion in bank lines and this will step down in 2020, as we complete the biopharma transaction and take other deleveraging actions.
Next on leverage on slide seven.
We are improving our financial position and reducing our leverage as Larry shared we reduced net debt by 7 billion ending the year with leverage at 4.2 times.
Down from 4.8 times at year end 2018.
This was achieved through the 5 billion dollar debt tender and the one and a half billion dollar intercompany loan repayment from GE GE capital and a higher cash balance at year end.
We expect to achieve our industrial leverage goal of less than two and a half times net debt to EBITDA in 2020.
We also announced comprehensive us pension actions, which will reduce our net debt by $5 billion to $6 billion. When completed as you may recall as of the third quarter, we were estimating a potential increase to our global pension deficit of approximately 5 billion.
Ultimately this deficit increased by only 900 million versus the prior year.
Year over year. The key drivers were pressure from the lower discount rate largely offset by higher year end asset returns and the completion of the pension freeze and lump sum offerings.
We have substantial sources to de lever and de risk our balance sheet to date. We have received 9 billion of proceeds from our web Tech and Baker Hughes sales. We are on track to close Biopharma in the first quarter and we'll continue to sell down our remaining stake in Baker Hughes in an orderly fashion.
Post the Biopharma close we will execute on the previously announced 2020 deleveraging actions that you see on the right.
Will contribute four to 5 billion to our us pension, which we expect will meet the estimated minimum Arista funding requirements through at least 2022.
We will also repaid the and remaining intercompany loan of 12 billion from GE GE capital.
Which will be used to pay down 2020, GE capital debt maturities.
Finally, we will repay approximately 1 billion of maturing industrial Doug.
As we've previously said.
While our industrial leverage target will be less than two and a half times net debt to EBITDA. We also evaluate other measures, including gross debt to EBITDA and we will ultimately size our deleveraging actions across a range of measures to ensure we are operating the company with a strong balance sheet.
We will evaluate additional potential actions based on their deleveraging impact economics risk mitigation and our target capital structure, while also monitoring key risks.
Over 2019 in 2020, we expect that our total cash deleveraging actions will be in the range of $30 billion.
Next on power.
For the quarter orders of $4.5 billion were down 28% organically tower portfolio orders were down 55% organically largely driven by the nonrepeat of a large steam equipment order and fourth quarter 18.
Gas power orders were down 8% organically.
Down 49% organically largely driven by the Nonrepeat of a large turnkey order in fourth quarter of 18.
We booked 3.7 gigawatts of orders for 22 gas turbines, including three ha units and one Aero derivative unit.
Gas power services orders were up 12% organically with transactional and contractual services up on higher volume as well as commercial and utilization improvement while upgrades were down.
This was the strongest quarter of services growth in 2019.
Backlog closed at 85 billion down, 2% sequentially and flat versus prior year gas power, representing $71 billion of segment backlog was up 3%.
Revenue of 5.4 billion was up 5% organically with gas power revenue up 9% and power portfolio revenue down 4%.
Gas power shipped 21 gas turbines, including five H units and three Aero derivative units versus 22 turbines in the fourth quarter of 18, which included three eight units and eight aeroderivative units.
We helped our customers achieve commercial operation on over 20 units this quarter, which translates to almost 4.5, given gigawatts of new power added to the grid.
Gas power services revenue was up driven by transactional and contractual revenues, which were up on a robust fall outage season and improved commercial performance upgrades were down in line with our guidance on continued market dynamics.
Operating profit was 302 million up 1.1 billion and reported segment margin was 5.6% an increase of more than 2000 basis points. This was largely driven by better operational rigor and stronger processes that gas power as we did not incurred charges related to projects prop.
Correct and fleet utilization that we experienced in the fourth quarter of 2018 as well as we had improved volume.
We also continue to reduce gas power fixed costs, which were down 15% versus the prior year.
For the year organic revenue was down 1%, reflecting a decline in power portfolio reported segment part margin was 2.1% and free cash flow was negative 1.5 billion.
Well, we have more to do the team has laid a stable foundation by Baselining, the business to new market realities and driving operational improvements.
Next on renewable energy orders of $4.7 billion were down 10% organically dude to the nonrepeat of large deals at hydro and great solutions.
Equipment orders were down 7% and services orders were down 22% organically.
Onshore wind orders were flat as international strength, offset a decline in North America, and notably New order pricing in onshore wind continues to stabilize.
Overall backlog of $28 million was flat sequentially and up 16% year over year.
Revenue of 4.7 billion was up 4% organically, mainly driven by onshore volume.
Total equipment revenue was up 3% organically as onshore wind marked record deliveries in the quarter of 1500 53 total turbines at Repower kits with roughly two thirds of these in the U.S., while services revenue was down 22% organically.
Operating profit of negative 197 million was down 176 million.
And reported segment margin was negative 4.1% a contraction of 360 basis points.
Positive volume was more than offset by headwinds from project execution, particularly in grid pricing tariffs and increased R&D investment.
Importantly, onshore was profitable for the third consecutive quarter and full year.
Looking at the full year organic revenue was up 11% reported segment margin was negative 4.3% and free cash flow was negative 1 billion.
Renewables free cash flow was impacted by lower earnings offset by project progress collections, which were less of a headwind in 2019 than we expected.
We anticipate that progress collections will be a headwind in 2020 as we execute on heavy PTC delivery volume that exclude exceeds inbound collections.
As Larry noted renewables is a key operational focus for the team.
At aviation orders of 10.7 billion were up 23% organically with equipment orders up 40% organically.
This was primarily driven by the arrows Aero derivatives JV.
Total orders and excluding Aero derivatives were up 1% organically as commercial engine orders were down 33% due to leap orders down 63%, while services orders were up 12%.
Backlog grew to 273 billion up 8% sequentially and up 22% versus prior year, primarily driven by long term service agreements.
Revenue of 8.9 billion was up 7% organically.
Net revenue was up 13% organically driven by sales at 420 leap one a and when be units up 41 from last year, partially offset by CFM units down 74%.
We shipped 675 units this quarter down 11% from prior year.
Services revenues were up 3% organically due to commercial services also up 3%, reflecting higher external shop visits and a more favorable in a more favorable mix of shop visits.
Total military sales were up 13% organically with 227 engine unit shipments up 32% with growth in development programs.
Operating profit of 2.1 billion was up 19% organically on improved volume price and net productivity offset by negative mix.
Reported segment margin of 23% expanded 260 basis points versus the prior year driven by commercial aftermarket strength.
As in prior quarters. This was partially offset by the CFM delete transition, which was a 60 basis point drag and the passport engine shipments, which were a 70 basis point drag in the quarter.
For the year organic revenue was up 9% segment margin was 20.6% and free cash flow was 4.4 billion.
Looking at Health care, we finished in line with what we shared with you at our Investor Day in December orders, a $5.9 billion were up 3% organically equipment orders were up 4% and services were up 2% organically on a product line basis healthcare systems orders were up 1% organically driven by growth in life care. So.
Solutions services, and ultrasound, partially offset by imaging largely due to market dynamics in China.
In the us in Canada healthcare systems was up 1% organically boasted by solid growth in imaging and ultrasound life Sciences orders were up 10% organically.
Backlog was 18.5 billion up 2% sequentially and up 6% versus prior year.
Revenue of 5.4 billion was up 1% organically healthcare systems revenue was flat organically with equipment down offset by services growth.
Operating profit of $1.2 billion was flat organically and reported segment margin was 21.9% up 10 basis points. This was driven by volume and cost productivity offset by tariffs price and program investments.
For the year organic revenue was up 3% with health care systems up 1%.
Segment margin was 19.5% and free cash flow was two and a half billion.
On GE capital continuing operations generated net income of 69 million up 27 million versus the prior year, excluding the prior year tax reform impact of 128 million.
The favorability was driven by lower marks and impairments and interest expense, partially offset by lower gains tax benefits and operations.
For the year continuing operations generated adjusted net income of 139 million up 450.
455 million versus the prior year, excluding the impact of tax reform and the insurance annual print premium deficiency test.
Capital ended the quarter with 102 million of assets excluding liquidity.
Down 7 billion sequentially, primarily driven by lower GE cast WCS and Fs assets GE cast completed the sale of substantially all of the PK Air Finance business expect.
And we expect the remaining assets of that to be sold in the first half of 2020.
Capital completed asset reductions of approximately $8 billion in the quarter for a total of 12 billion in 2019.
Including the 15 billion in 2018, we exceeded the 25 billion asset reduction target previously communicated.
In addition, WMC concluded its chapter 11 case in the quarter and as of yearend GE capital has no further liabilities to WMC.
Capital finished the quarter with 19 billion of liquidity, which was up $8 billion sequentially, primarily driven by disposition proceeds of 7 billion and the capital infusion of two and a half billion, partially offset by debt maturities of 2 billion.
We remain focused on de risking GE capital, including improving its leverage profile capitals debt at year end was 59 billion down by $1 billion sequentially, primarily driven by debt maturities, partially offset by the intercompany loan repayment of one and a half billion dollars.
We ended 2019 with the capital debt to equity ratio at 3.9 times.
With the anticipated repayment of the intercompany loan this ratio will increase throughout 2020, but we expect to end 2020 at less than four times.
Discontinued operations generated a net loss of 63 million up 29 million versus the prior year, driven by WMC DLJ and other litigation reserves in 2018.
As we look to 2020.
Insurance will complete its annual statutory cash flow tests in the first quarter and we also expect lower earnings from GE capital, primarily driven by lower asset sale gains a smaller earning asset base and other nonrecurring items, but we still expect capital to breakeven by 2021.
Moving to corporate adjusted operating costs were 600 million in the quarter up versus prior year due to higher intercompany profit eliminations and increased remedial costs relating to existing environmental health and safety matters.
For the year adjusted operating costs were 1.7 billion up 400 million versus the prior year largely led by the same drivers as well as the non repeat of intangible asset sales. This was in line with our revised corporate outlook from the previous quarter.
Importantly, our core functional costs were down 8% in the year as we move the center of gravity from corporate to the businesses.
And with that I'll turn it back over to Larry.
Jamie Thanks, before I move through our outlook I'd like to take a moment to acknowledge our CFO transition announcements since our last earnings call and recognize Jamie significant contributions to GE during her tenure.
She has been a trusted partner through an unprecedented period of change, including my own transition into the CEO role in near complete refresh of GE Board.
Portfolio moves to make GE are more focused industrial company and foundational shifts in our culture to drive greater rigor and transparency.
She has been instrumental.
In setting and spearheading our deleveraging plan and she will leave GE in a place where we are said to achieve those deleveraging targets in 2020.
I appreciate not only her many contributions across the organization, but also her personal support and partnership on behalf of all of US. Thank you Jamie.
From where I sit today I'm excited and confident in our efforts to build a stronger and more focus GE.
We're planning to provide you a detailed 2020 outlook by segment on our March 4th Investor call, but today I'll share our expectations for the total company.
So moving to slide 10, you'll find our targets on the right hand side.
We're expecting organic growth in the low single digit range for industrial.
Organic expansion of up to 75 basis points for industrial operating margins.
50 to 60 cents for adjusted EPS.
In a range of $2 billion to $4 billion for our industrial free cash flow.
There are a number of key assumptions underpinning our plan again this year.
First is the lost cash and earnings from dispositions, most notably Biopharma and Baker Hughes.
Our outlook assumes that the bio pharma sale closes in the first quarter and a reduction of Baker Hughes dividends in line with the orderly sale of our remaining stake.
For reference in 2019 for the full year Biopharma generated approximately 1.3 billion in cash and 1 billion five and profit.
While Baker Hughes dividends represented approximately 350 million of cash flow.
Second is that our plan is dependent on the 77 matches returned to service, which we are planning for mid 2020 in line with Boeing's commentary.
That said the situation remains fluid.
Looking across the segments renewables is the key operational focus for us in 2020, as we continued to deliver the onshore wind ramp.
Invest in offshore.
And turn around both grid and hydro.
This journey to improve earnings and cash at renewables will take time.
We are expecting continued improvement in power continued strength in health care in aviation and lower capital earnings compared to 29 team.
And at each business, we are enhancing operational rigor and cost management, which includes continued restructuring while non operational headwinds continue to diminish.
In summary, our results will be a byproduct of delivering on our commitments day in and day out in the environment in which we operate.
Despite areas of volatility in aggregate, we have a positive trajectory in 2020.
Moving to slide 11, where we've outlined our priorities for the year first solidifying our financial position building on the actions. We took in 2019 to achieve our leverage targets second continuing to strengthen our businesses over the near to medium term.
Critical to this will be operating differently as our lean transformation gains traction.
And third driving long term profitable growth, which I'm confident the GE team can deliver through innovative inefficient technologies.
And our global network.
Combined these strengths help us build upon our valuable install base that keeps us close to our customers, helping solve their most important problems.
And with that let's take your questions safe.
Thanks, Larry before we open the line to ask everyone in the queue again to consider your fellow analysts and ask one question in a follow up so we can get as many people as possible brand and please open the line. Thank you ladies and gentlemen, if you'd like to ask a question at this time. Please tell star wanted your telephone keypad. If your question has been answered you wish to.
To answer your question. Please press the pound sign or Heskey.
And from Bank of America, Andrew Obin. Please go ahead.
Yes. Good morning can you hear me here, yes can more and good morning, Yeah. Just wanted to start out by expressing my thanks to Jamie and best wishes going forward. Thank you your class Andrew.
So couple of questions I'll, just ask both of them together. So the first slot as Airbus has publicly indicated that they are making sizable adjustments on payables and 20 to 20.
And we understand engines as one of the biggest components. So how much if any of this is baked into your 20 to try to forecast and the follow up question is dynamic and power service is improving nice to see but what are you doing differently exactly for these my two questions. Thanks.
Andrew as you know well, we have an excellent relationship with with Airbus I was with them just last week in fact the.
The guide today relative to aviation is is what we want a message we want by design to keep it at a higher level of as you can imagine the of the primary puts and takes here are really going to be in and around the timing the assumptions with respect to Max but I think on balance.
We have work to do with our friends at Airbus, We're committed to and well provide more of an update in in March yeah, and Andrew as it relates to Airbus I can't comment on their aviation payables, what I can tell you if we talk to on the third quarter call about the impact of some of our timing of payment of discount.
And allowances back to the air Framers and it is across the board across multiple of our programs. There are puts and takes.
But we do see on that front you know some we saw head tailwinds in 2019, we do see some headwinds in 2020 and thats baked into how we're thinking about 2020.
Andrew Your second question, if I heard incredibly was about power services.
Correct.
Yeah, I would I would say we're doing a number of things are clearly.
Within within gas power, what we see is just better.
Commercial execution in and around the way we are.
Coordinating.
With our customers, they're both are outage schedule and our of our other CSC obligations I would say on the transactional side, which you see the team doing or which what I saw the team do through the course of the year is just better more regular.
Call patterns contacts.
Point forward planning with our customers. So that we are up in front of the opportunities due to sell into there and.
Installed base to the extent possible that commercial work is really coupled with what we're doing operationally.
To improve lead times to improve our on time delivery. So that we not only are well positioned to deliver on time and within budget scheduled outages, but the we have a better quick response capability. So.
I think is we look at the fourth quarter numbers. It's good to see the uptick that we did I think if you look at the year on balance.
Clearly suggests there's more work to do.
And I think team is fully committed to doing that in continuing the of the exit momentum here through 2020.
Thank you very much.
[noise] from Wolfe Research, we have Nigel Coe. Please go ahead.
Oh, Thanks, good morning.
Thanks.
I do want to Echo a unjust comments, thanks, Jamie good luck.
They miss by US I'm not sure you individually with us, but a good luck [laughter] show you won't Miss is call it doesn't show.
I do want to to touch on aviation disposable. The obviously the EBIT performance. This quarter was was very impressive I think it's a record quarterly performance anything unusual to factor in that lets think about some above but more importantly.
How do we think about the boundaries around the Max grinding. If it is production is grounded no through the year end, how do we think about the earnings and free cash impact the G.
You're not going up visor, let me, let us take those in reverse order you're exactly right.
In terms of the strong performance I would argue the strong performance for the full year than we saw in aviation. Despite the the Max headwinds, but as we look forward.
I think we're looking at a more complex.
Situation in and around the Max clearly priority. One here is safety I think our friends at Boeing have been Crystal clear, we're going to take the VIP A's lead here and we're trying to support both Boeing and the the epay to the of the fullest extent possible I think it if you look back before we look forward clearly we were.
Building engines, we were delivering to Boeing add at normal raised through 2019.
We're going to see our shipment rates fall roughly half over half of the 19 rate in entwine.
The clearly is going to be a bit of a gap here as a result relative to deliveries.
And in turn.
That drives some of the variability that you see in the guidance I think from an operating perspective.
What we're really dealing with our three things right, we could have a lower build profile, which in turn will challenges on the cost side.
We need to make sure that we are adjusting our cost structure accordingly, but also taking the long view because this will be a temporary all wall as a Boeing has indicated and we will be ramping up presumably later in the years, we want to make sure that.
Not only our teams, but our supply chains are prepared to to rebound.
With that mid year returned to service, we know we're going to see fewer spare engine deliveries folks were ramping through the back half of last year in preparation for return to service there'll be a bit of a wall there as well that will put a little bit of mix pressure on us obviously and I think we will continue to see fewer new orders, which are nice.
Source of cash worse at least until midyear, but if that mid year return services realized clearly, we're going to resume deliveries and that will be a positive from a cash perspective in terms of just the a our that will come in clearly a bit of an offset relative to process. Our progress liquidations. So a number of moving pieces.
This year, we're going to manage through this as as we always do but it's not simply the the set up that we saw last year, where we were building shipping delivering and seeing the receivables built many more moving pieces as we look ahead two to 2020.
And then thanks Larry.
Nigel with respect to your second question on.
Aviation.
EBITDA quarter over quarter, we saw strength in our aftermarket businesses that aviations the stronger profitability there year over year. We also benefited from the install spares next we had in the quarter. We had some variable cost productivity and all of that was somewhat offset by higher R&D and a little bit higher SGN AG.
Okay. Thanks very much.
Thanks Nigel.
From RBC capital markets, we have Deane Dray. Please go ahead.
Thank you good morning, everyone and my congratulations and goodbye to Jamie as well good morning. Thank you morning Jane.
Well I know, we're probably going to cover this on the March four call, but just some bigger picture thoughts on the you approach to guidance. This year you had said earlier.
Earlier that you are really not targeting NPS, specifically, it's more of an outcome and free cash flow was the targets just remind us.
How we might be seeing that an action this year and do you have a contingency number either implicit implicitly or explicitly.
And as part of this ranch.
Vein.
As you indicated at the beginning of that question, we'll get into a lot more detail on the fourth of March I think all we really wanted to do today quite frankly is.
Give everybody our best look at the fourth quarter.
And the quarter in the context of 2019.
We bought that given where we are in preparation for 2020, we could also share earlier this year than we did last year. The the broad con tours of our outlook for for the new year, you have that I think that again Max is probably the source of the greatest.
Volatility with the or range within that guidance.
Clearly operationally I alluded earlier to of renewables being a priority not that were done at power, but I think we've got momentum there.
We're clear work to do it renewables.
But but Dan your point I think you're spot on we're encouraged to look forward here to see a a low single digit the topline.
With everything going on we think we have the prospect for good margin expansion that that leads to the EPS range, but make no mistake.
This team the businesses are far more focused on sustainable cash flow generation and that's I think what you see in part in the two to four.
Billion dollars range for next year, I think you see evidence of that in the way that we are the way that we finished.
And but once you don't see in terms of the numbers will we see in all of our interactions with the businesses I think it's just a heightened level of disciplined upfront when we're talking about new business not only in terms of price, but but frankly.
Terms conditions scope everything that can go into making a new order via for equipment or service.
Positive in accretive or not I think the daily management that we talk about applies in our factories when we're building new equipment in the field when we are installing.
That same equipment in the context of projects, let alone what we do in terms of driving service quality and productivity. So when you put all that together in a long cycle business, they're going to be different ups and downs in the course of any one quarter, but again. This team is focused on on a much.
More sustainable higher level of free cash performance over the long term.
Got it and just as a follow up I could you expand on the point on renewables, where you're still in investment mode in wind specifically.
Sure.
The way I think about renewables one segment, but we've got if you will three different operating priorities in front of us our onshore business clearly is our most mature.
Business and in many respects is what drives the segment.
We are investing there, but as you look at the growth in onshore wind last year, how it's very healthy double digit level pleased with that we need to see that convert a more directly into margins and cash the investment reference I was making was really with respect to offshore wind right you've seen some.
Big numbers here in the last 90 days relative to some experts outlook for offshore wind. This is an area where we are an innovator we think with Hollywood acts we have an opportunity to bring gain an exciting technology to market in 2021 that will help improve our overall performance, but in the near term.
That is a a that's a that's an earnings and cash drag for us the third bit of renewables again. It really is the the legacy also some jvs in grid in hydro.
We had a full year of the JV performance consolidated in 19 that Didnt help our reported numbers were little bit behind I think where we would like to be in terms of executing on that turnaround which is why.
We put that front and center here in 2020 and get into that more detail if you'd like but those are the three pieces. The investment call out specifically, you then and around offshore wind in the Hollywood ex program.
Thank you.
Thanks, Dave Thank you Dave.
From Jpmorgan, we have Steve Tusa. Please go ahead.
Hey, Thanks, Good morning, good morning, and good morning.
Congrats on the good cash finished at the end of year.
Can you just give us a little bit of color on progress and what kind of intact that ultimately had a for 2019 and then also the $2.1 billion in corporate expense for for free cash flow that includes the Baker dividends. So it's Steve at higher than that kind of a core basis what goes into.
That number and then one more just on kind of the high level color you guys gave us a last March on 2020 and into 2021 commentary is that Ido considered to be sale now given you're going to kind of update that in March or how should we think about those those kind of that kind of high level guidance, Yes, Steve I'll answer your progress question.
But maybe you can repeat your second question I didn't quite catch that.
Slide 15, the corporate negative 2.1 area, Okay Yep Yep. Thanks, Yeah, I'm. So on progress for the year progress contributed 1.3 billion in working capital inflows renewables and aviation progress and power was up over the prior year as well.
When you look at corporate you that couple of Big drivers. There. One is just higher cash tax payments. The other is higher restructuring and corporate and year over year those with the two biggest drivers when you look out of that starts to temper and come back in line with our expense levels.
Steve I think with respect to the guidance again 30, some days were going to be in front of everybody. We saw with an update on how we're thinking about 20 and and the future. So I'm not sure how I would characterize.
That we can certainly speak to some of the the moving pieces in and around.
The growth and OMEX began to an earlier question for me very focused on on free cash and how we how we step up in in 2020, we think we can do that in aviation.
Recognizing some of the dynamics at a in and around the 737 Max I would also say we know we're going to be challenged in renewables and probably will see them.
Not improve their free cash performance, probably we'll see a step back in in 2020, but will take you through all the details and give you. The freshest latest consolidated view when we're together in early March.
Thanks, Steve.
From Us we have Marcus Mittermeier. Please go ahead.
Hi, good morning, everyone in the morning anything but from my side.
Yes on morning Marcus.
On the free cash flow guidance I appreciate that to get more detail on the on the front end loaded in March but just just high level looks like power came up significantly better than what we thought maybe maybe nine months ago, how the stuff.
Progress in that portfolio, Paul conversion tons around sort of how do you think about what's the what's the timeline I think just taken out significant cost on the gap.
Well its would be kind of think about us that something else on into two independent hit both local.
Mark as you're exactly right I mean, if we look at.
Where we finished versus.
Where we thought we might be back in March.
Power clearly.
Was the major driver of the outperformance they Jamie reference in her prepared remarks.
A better than anticipated a supply chain financed transition there, we clearly spent less in restructuring as well and again, despite the headwind with the Max aviation was able to do a little bit better.
You put all that together I think it suggests a better execution more broadly.
Again, I'd like to preserve some of the details.
As we go from 19 to 20.
And a full for the March update but much of what's happening in gas power is underway within the power portfolio. We've got three businesses. Their power conversion is but one call that roughly $1 billion CNL, where they have really grab the organization for.
Normally and are driving cost out improvements better quality better delivery performance smarter underwriting in power conversion, specifically, we saw really nice uptick and just the as sold margins and in that business I give Russell Stokes has jumped in not only looking after power portfolio of a powerpoint.
Version, specifically as CEO I'm, a lot of credit for the progress that they're making I think we do think power again will be a better as a segment next year from a from a cash perspective, but still not just on our positive.
Okay. That's very helpful. And then one quick follow ups, a thoughtful Jamie you already alluded will be a AIDEA needs within of the Ace and I think.
If I remember this is why the tailwind from 19 was about 800 million will view of what do you expect that this reversal completely in intermediates venue that spread out over open give you more than the year.
Yeah. So I mentioned on the third quarter call 800 million a favorability roughly that we had expected in 2019 and when we print the numbers. It was actually 500 million. So we did see some catch up there more than we expected in the fourth quarter and we do expect that to reverse fully in 2020 as a headwind.
Okay. Thank you very much.
Thanks Mark.
From Morgan Stanley , We have Josh Pokrzywinski. Please go ahead.
Hi, good morning.
Good morning.
Just a I guess first question and Larry you mentioned on a within the $4 billion or $2 billion to $4 billion range. The aviation is kind of the biggest source of a volatility or you know are spread within that I guess, how much of that volatility would you attribute to just timing around the Mac. So maybe the the cumulative number.
Over the next couple of years doesn't move around as much but what you're actually able to to capture in a in 2020 is there's maybe a bit more volatile.
Yeah, I think Thats, well said, Josh again, we don't want to get ahead of the folks and though if I know were are out here shortly.
But the first order business here in 2020 is a safe returned to service.
Neither Boeing nor nor GE is going to dictate that schedule that the epay we'll.
So again, given the building build profiles and returned to service date than deliveries thereafter, there are a lot of moving pieces here and I think we just want to embrace that reality share what share with you what we know and acknowledge that even though we're putting out a a range we could be in a number of different places within it.
Depending on how this plays out over time, but going forward I think we have real conviction in the leap engine.
Clearly Boeing is one to two.
Major customers for software that engine and I think going forward.
That should be a very healthy relationship and a very strong program for us how that plays out 21 and into the future. We'll we'll see again, we'll defer to our or colleagues at Boeing our customers at Boeing but.
But at this point feel like we're very much on the right track record.
And Josh I was going to add to that that when you think about.
Some of the factors Larry mentioned earlier, whether its unabsorbed overhead or the mix of installs and spares, particularly spares, but also even the timing of the return of the 1.4 billion impact we felt in 2019.
As this is now in midyear re entry into service you should expect that will feel more headwinds in the first half and more tailwinds in the second half as production rates really normalized so maybe that's the other factor to think about.
Yes, but again, John and I talk.
Josh I just want to do I want to be clear I think we just have a lot of respect for what's happening.
At Boeing today under under Dave's leadership, right clearly have put safety first real respect for the primacy of the FAA pulling the and on as they did a stop align takes a lot of guts.
I respect that I need to focus here couldn't be clear right. Recertification, then a return to service delivering the inventory then ultimately a new new production. It is complicated, but I think we see a a significant alignment.
At Boeing and certainly in a in partnership with us and others in the supply chain. So.
It is clearly an unfortunate tragedy that that occurred to tragedies to be specific but I think going forward, we'll all hopefully take the lessons here and build a a better stronger industry.
Understood appreciate that and then just quick follow up on the PTC extension that got announced in December does that change the the shape of the cash profile over the next year or two at all or are still kind of where we would have been otherwise.
No I think its little hard to say certainly we still expect the same level of hi, PTC deliveries in the us in 2020, which will be a progress collection drag for us is that liquidates, but the PTC extension into should help in terms of incremental new orders and some mitigating progress.
Elections, there on the inbound so we'll have to see a little bit how that market plays out, but we do expect some goodness there.
Thanks, Josh Thanks, Josh.
From vertical research, we have Jeff Sprague. Please go ahead.
Thank you good morning, everyone. Good morning, My Jeff.
Hey, just a couple items first back to the Max Larry that those that the parse words both the.
So your shipments to Boeing will be will become roughly in half I Wonder. If you are taking your production down that much has been commentary from arconic and others that.
There is difficult.
With these engine production rates and.
And then secondly on that returned to service relative to kind of production could be.
The two different items also given the new doing duct, what's in backlog et cetera.
Just to clarify your thinking on both of those I'd. Appreciate it you've you bet, Jeff I think what we're going to do.
Is and we were in the process is doing is bringing our production levels down.
Mindful of what's happening a boeing but we're not bringing that to US is zero, we very much if you will need to keep the lines were here.
As we prepare not only for the returned to service, but the the subsequent ramp and that that's a function of how we're going to manage our own teams and in turn suppliers I like our contact PCC and the rest.
I know there was a comment on somebody's coal relative to this dynamic that we.
We were going to be building more spare engines that isn't that is indeed, not the case just to make sure. We're on the same page, we will probably buildup I had a little bit as we go through the year to be prepared for whatever RAF late this year early next year awaits us we want to make sure.
Sure we are there in lockstep with Boeing but we do expect our spare engine deliveries with the one be to come down this year just as folks see this.
Pause.
Around the the return to service schedule.
And just the unrelated but this big.
The order with Baker does that come with growth in a significant deposits in the quarter and how does that impact the aviation cash flow at all it did not there was no progress on them in the quarter.
Thank you yeah. Thanks, Jeff.
From Barclays, We have Julian Mitchell. Please go ahead.
Hi, I'm, maybe a question on capital for a change so Jamie I heard your comments around the leverage level likely rising through this year you had the two and a half billion capital infusion in Q4.
What are you thinking about.
Further infusions from industrial to capital in 2020 and also any framing you can give for the commentary around lower caps learnings. This year. Thank you.
Yeah, so inline with what we said before we do still expect to have the GE to GE capital parents support in 2020, though it will be significantly lower than it was in 2019 to think about it as roughly in line with the insurance statutory funding we look at a lot of.
Different elements in our economic capital framework based on the risk profiles of what we see in our businesses and what's required to be held at our statutory insurance companies. So we do still expect something there and then with respect to capital earnings. The biggest couple of things to think about on 2020 are will have we just have a smaller asset base.
So we'll have lower earnings off of a smaller asset base and then secondly, 2019 benefited from asset sale gain which as we've concluded largely our asset sale program. Those just won't repeat as we get into 2020.
But as I mentioned before we still expect capital to be breakeven by the time, we had 2021.
[noise] from religious research, we have Scott Davis. Please go ahead.
Hi, good morning.
Good morning, Scott I'll Echo prior comments, Jamie best of luck to I'm sure. We'll we'll see you hopefully down the road. Thank you.
In any event I wanted to questions I wanted to ask Larry It's just that is there.
Somewhat of a potential positive impact.
Longer term on on yearly production lines and just the slowdown.
Allowing your time delaying things out maybe upgrade to maybe just.
Taking another look at processes and I, just figured out how to to get that kicked down the cost curve faster is that something real or not.
Scott.
I would.
Submit that it is very real a team I think.
Made real progress in that regard coming down the cost curve.
In in 2019.
But a slower pace here.
Will help us not only.
Tend to some delinquencies that we have elsewhere past dues, we have elsewhere across aviation, but I think will also allow us to drive more and better.
Lean principles into a all of our production operations lease and elsewhere.
But I think more broadly.
Scott what were most pleased by is again the clarity of the focus.
Safety first recertification in concert with the F.A. J.
Save returned to service.
Delivery in the inventories and then we'll RAF at a slower and lower rate just having that clarity goes a long way to help us best serve Boeing and our our airline customers.
Little bit of pause here helps but just that clarity goes a long ways. We think about the next couple of years and all that we can.
And should do with with Wi.
Okay.
I'm going to ask we have John inch. Please go ahead.
Good morning, everyone and good morning Ernie.
Thank you Hey, good morning.
Good morning, Larry morning's Steve.
You guys when all these numbers I'm going to ask warnings.
If the Max had never been grounded would your 2.3 billion of free cash flow have been 3.7, instead and if the Max had been producing and flying normally since Jan 120, what would your two to 4 billion of 2020 industrial guidance. What do you think that would have been in terms of the range.
So 2019, the 1.4 that we've talked about before is the.
The two our original expectation so yes that would have been higher.
And I, Yeah, I think with respect to 2020 Jive given all the moving pieces we've talked about.
A couple of times here during Q and I think we would probably not want to speculate on what might have been buying Jamie.
Gives you a pretty good jumping off point right just taking the two three and we printed the one for that was held off and then the growth. We would have seen there is was there deduct there relative to.
Maybe an offset in service very very hard to tell but I think if you just step back from the Max If you look at aviation for 2020, again I think that.
Outlook, Theres, probably flat to up from a free cash perspective mindful of all the moving pieces here in and around Max So I again, a strong franchise.
A number of other non Max related.
First with with real traction delivering real results.
Well, we'll be able to Max as as it comes but a lot more long term clearly this is going to be are a stronger cash generating business across the portfolio.
At brand and we're past the our can we just take one more question. Please yes. Our last question subsidy, we have Andrew Kaplowitz. Please go ahead.
Hey, Good morning, guys can you tell me now to help thank you. Thanks anyway. So.
Hi, Healthcare day in December you suggested that healthcare revenue in Q4 can be flat to slightly down and you came in just about flat have you seen any positive inflection healthcare systems either in the last summer delays you were seeing and are in China with the new leadership, you have there and as trade issues began to died down and how does.
The current Alaris complicate the outlook if at all for your China healthcare systems business in 2020.
Any I would say that is probably too early.
Two point to anything in these numbers today.
Within health care that suggests the how in China and ever here in this in the states have had positive impact yet but in terms of everything I have seen if you will behind the curtain the work they're doing a to retool their teams the a the commercial intensity and.
Discipline that they're bringing I'm really optimistic that the commercial execution that has caused us to underperform on a relative bases in 19.
He is on its way to being remedied and we should see improvement as we go through the the course of the year I was with the European team just last week in France Ah, that's a strong team as well in many respects more challenging market.
But we need to deliver on that not just talk about it with respect to Corona.
The Corona virus, obviously were rough disheartened and and sorry that it's it's happening.
It's a tragedy in its own right. Our our priority is on safety clearly of our team really across GE, a as you might imagine our health care team is really in the smack in the middle of this into hot and elsewhere.
Servicing our equipment I'm, certainly prioritizing new equipment deliveries.
Particularly to the two hospitals, we made a significant donation of patient monitors and ultrasound equipment to help.
Help the the care providers there so there's a lot going on and Fortunately, we we can be part of the solution there in China, but itself a real tragedy.
Thank you Mr. Winoker, we'll turn it back to you for closing remarks.
Thanks, everybody. Appreciate you taking the time I know, it's a busy earnings day and look forward. So following up afterwards take care.
Ladies and gentlemen, just conclude today's conference. Thank you for joining you may now disconnect.