Q2 2020 General Electric Co Earnings Call
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Good day, ladies and gentlemen, and welcome to the General Electric second quarter 2020 earnings Conference call. At this time, all participants are going to listen only mode, but its 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 at a conference. According.
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I would now like to turn their program over to your host for today's conference, Steve Winoker, Vice President of Investor Communications. Please proceed.
Thanks, Brandon Good morning, and welcome to GE second quarter 2020 earnings call Im joined by our Chairman and CEO, Larry Culp and CFO Catalina diabetics happened before we start I'd like to remind you that the press release and presentation are available on our website note that some of the statements were making are forward looking and are based on 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's changes with that I'll hand, the call over to Larry.
Steve. Thanks, Good morning, everyone. We hope you and your families are healthy and safe.
We like many others had a challenging second quarter that the GE team met head on executing well operationally, while we took actions to further de risk our company.
I want to thank all of my colleagues, who are working tirelessly to serve our customers our communities and our company.
Now as we expected our financial performance declined across the board in the quarter.
Sharp deceleration caused by Cobot 19 that we experienced in March continue through May.
But we started to see some early signs of improvement in June and July.
Nonetheless, we remain cautious going into the second half given the uncertainty associated with the pandemic.
Now, taking our second quarter results by business at Aviation Angie cast many of the drivers we saw in March Airlines conserving cash not flying the planes they have limiting maintenance spend and deferring orders are still relevant today.
We are aggressively managing these businesses with cost and tasha actions and partnering closely with our customers on a daily basis.
Provide more color on this shortly.
In healthcare, we continue to have elevated demand for cobot 19 related products. However.
Procedure deferrals are still affecting other products, including those in our high margin pharmaceutical diagnostics business.
Despite these volume and mix pressures.
Our team held margins flat in the quarter.
In power and renewables outages pushed from the first to the second half and field mobility constraints impacted projects to offset those pressures we continue to improve the cost structures of these businesses.
Early to will discuss these segment results in detail later.
With this backdrop, we saw revenue down 20% organically due to lower volume across all businesses recall that some of our shorter cycle higher margin businesses like services and aviation and gas power as well as healthcare are more heavily impacted by cobot 19.
Combine their revenue was down three times that of the rest of GE industrial.
Despite this our backlog remains a great strength at $381 billion with about 80% in services.
While services are hurting in the near term they have a multi year time horizon and keep us very close to our customers.
Industrial margin was negative and detrimental margins were 44%.
Our adjusted EPS was a negative 15 cents down significantly year over year. This was largely driven by lower volume at or shorter cycle higher margin businesses and impairment charges related to cobot 19 at aviation Angie cast.
And industrial free cash flow came in above the guide we provided it made a negative $2.1 billion better.
But obviously still negative.
This was largely driven by working capital improvement, primarily led by better than expected collections across the company.
While this reflects improved operational execution, we have plenty more work to be the lean company, we want to be.
So clearly this was a tough quarter and the Kobin 19 dynamics continue to evolve with global cases rising.
We acknowledged that the full duration magnitude and pace of this pandemic across our end markets operations and supply chains is still unknown.
The macro economic environment could deteriorate further before it recovers.
That said based on what we see today and the actions we've taken sequential improvement in earnings and cash in the second half of 2020 is achievable.
And we expect to return to positive industrial free cash flow.
And 2021.
Moving to slide three we're focused on what we can control in the near term while positioning the business for the long term.
Importantly, the near term still starts with our Kobin 19 response, our top priorities remain the safety of our employees and our communities.
Serving our customers in these critical moments and preserving our strengths.
Here's how we're operating today in three core steps first embracing reality.
The current environment is what it is so we're further optimizing our cost structure and as mentioned before we're targeting more than $2 billion a cost actions.
And $3 million of cash actions this year.
Second redefining winning.
For example, we've shifted our focus for margin expansion to decremental margin improvement.
Our business has helped also adjusted their priorities for 2020.
Let me share recent case, it spans healthcare and aviation and illustrates the point well our team stood up patient care monitor production at our power in avionics manufacturing facility and Shuttling Ham.
They use lean to deliver 300 units per week with quality and efficiency, achieving the necessary 13 minute average production time.
The certainly wasn't on healthcare or Aviations priority list at the beginning of the year, but it's a priority today and a job well done.
Third we are executing our plan, we havent lost sight of accelerating our transformation for example, and gas power. The team is leveraging lean problem solving in the new production introduction process for the third generation of the ha turbine.
The seven ha Dot Oethree. This allows us to drive efficiencies and sold potential problems earlier than ever focusing on both the present in the future.
This quarter, we also announced some important changes to our team complementing our strong existing bench of GE talent.
First is the retirement of GE, Vice Chairman and aviation President and CEO David Joyce.
Over David's remarkable career his leadership established GE aviation is the world's foremost aircraft engine franchise.
I personally thank him for his 40 years of service to our company.
It was not easy to find a worthy successor to David but I'm very excited to welcome John Slattery, a proven leader with extensive global commercial aviation experience to our team.
At burn, who recently celebrated one year with GE as our digital CEO was recently named Vice President of lean transformation.
Additionally to GE veterans, we're pointing to key leadership roles.
Nancy Anderson was named Chief Information Officer, and Mike Barber was appointed Chief Diversity Officer, as we take steps to drive further inclusion and diversity to.
To support that effort. We've also named diversity officers across all of our businesses. In addition to Mike to drive that accountability.
Together these leaders both those new and those well known to GE will play critical roles and GE is operational and cultural transformation.
In terms of de risking the balance sheet, we prioritize maintaining liquidity in this environment exiting the quarter with $41 billion or cash.
We also proactively extended near term maturities and we continue to reduce debt.
Since the beginning of last year, we've reduced debt by $22 billion.
Concurrent with today's earnings were launching a program to fully monetized, our Baker Hughes position over approximately the next three years.
Executing this program and a patient and disciplined manner allows us to divest a substantial noncore asset.
Redeploy capital enhance our financial flexibility and strengthen our balance sheet.
We also continue to focus our portfolio recently, completing the sale of GE lighting.
Now I'll give you a deeper dive on GE aviation LNG Cas given the severity of koby nineteens impact on commercial aviation.
On the West slide on the website, a slide four you'll see departures, which drives our services business.
Much more so than RP case.
We track departures by region and by platform Daily and what we're seeing in July suggest continued improvement globally.
GE and CFM traffic has rebounded off of a low of down 76% in April.
From the January baseline to down 43% in July.
While we're seeing some improvement in aggregate it varies by region as countries reopened.
China has gone from being down over 70% to now being down 9%, which is obviously encouraging.
In contrast, Europe was down 45%.
It has been rebounding since the beginning of July.
The Americas are also down 45% and we're getting better until very recently.
This recovery will continue to be correlated with departure trends across global fleets and per aircraft, which ultimately impact the pace of shop visit growth.
If we look at GE aviation and the trends, we're seeing through July commercial units are down 50% year on year.
In services shop visits are down, 55% and CFA billings were down 60.
Services are critical to the recovery of GE aviation as we generate a lot of cash here, especially with the narrow bodies, which are more than 40% of our revenue.
On the other hand, our military business remains strong with unit growth up 10% year over year.
Our teams are not standing still.
Carrying half of the 2 billion dollar.
And cost reductions and two thirds of the 3 billion dollar cash actions for all of GE.
This is improved decremental margin slightly with further progress expected in the second half.
Shifting to GE cast similar to our peers, we continue to see elevated deferral requests from about 80% of our customers to date, we granted approximately 60% of short term peripherals based on a thorough review process.
Importantly, we are starting to see customers pay on these deferral plans.
At quarter end, we had 17 aircraft on the ground.
We have a daily operational dashboard that allows us to closely monitor developments, ensuring that customer by customer. We have line of sight on where we may have repossession or restructuring exposure.
We're also actively managing our skyline to better align with customer customer demand and the airframers production schedules.
Our gas portfolio was also more diverse today than prior downturns, while approximately 60% of our fleet exposure is a narrow body aircraft are wide body aircraft make up less than 30% and the remaining balances in regional jets and cargo.
The wide body asset class has been hit hard during pandemic, but we're being strategic around future placements and programs like cargo conversion help extend the life of these aircraft.
For example, we recently delivered a prototype to Israel aerospace as part of a partnership to convert 15 of their triple seven passenger jets to cargo.
We're planning for a steep market decline this year.
And likely a slow multiyear recovery.
Long term, though the aviation market has solid fundamentals and we're committed to protecting the future of this business and our leadership position within the industry.
And with that I'll pass it to Carolina.
Thanks, Larry.
Hi, imply an I'm heading into mouse.
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Everything Adsense, so far reinforces my conviction that we at the two to make you still on that.
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No.
So the very challenging quarter, which is evident in our financial results.
The same plurality is at the broader macro environment impacted on our businesses.
Jason and Jessica let hardest hit inline with what we expected to make them.
Orders were down 35% organic it all segments down double digits, others, and healthcare, which has been tickets apps on the back over 600 million of demand for certain told did mention product.
That's helpful upped, the here, but down 5% sequentially.
Our backlog provides us with visibility as it spans over 15 years and normally covers more than 80% and revenue.
Let's turn revenue, but also down but to a lesser extent than orders.
To put them on chemicals.
This was largely driven by aviation commercial engines and side.
Both the more than 50%.
In addition to some shorter cycle businesses, such as today now turn to 8%.
And so our equipment will slightly better.
Okay delivered more heavy duty gas turbine and wind turbine despite issues moving people and goods and cross still busy.
The bright spots in profitability came mostly from sense help I.
Well the counter measures are taking hold faster in healthcare.
Our results I'd business, we expect similar improvement so twentytwenty.
In addition, military delivered strong results despite supply chain disruptions.
Corporate we continue to decentralize and reduce cost overall.
Hey, continuing the second half.
I will now talk to the difference between continuing and adjusted EBITDA.
Some of the ticket adjustments include restructuring normal operating benefits and unrealized mark to market engine Thats helpful. Thank you.
In addition, we have two other items.
First item.
Thank you sense of goodwill as amid the charger attributed to two businesses.
It's additive business bidding aviation.
Second is LNG kept business.
We now have no Goodman remaining capital.
Second item two cents, some onetime costs inside so the multiple debt tender executed.
Yes, so help extend our near term debt maturity.
Comment on restructuring.
We spent 460 million this quarter up about 800 million Nvidia and about 200 million sequentially.
Is mostly attributable to aviation.
Twentytwenty, we expect spend more on restructuring expense and cash earlier.
The benefit somebody spend come through the remainder of 29%.
This is a good thing so we expect sustainable returns from a leaner company.
As Larry mentioned, we are targeting more than 2 billion of actual Pennsylvania for cash taxes. This year.
Realize more than one sir todays and you'll see suddenly result in the second half.
In total we expect one side, so one has to be structural cost outs.
Which annualizes to one another half to 2 billion.
Moving to test.
The tougher macro environment also negatively impacted say Tesco.
So the underlying dynamics are different in a few way less society.
Then the dynamics I note that I'd say test for the quarter excludes biopharma ecosystem test generated 300 more it's collected.
So biopharma is an important drivers of the year over year reduction.
And remember listen continue so the first quarter of Twentytwenty one.
At the high level question, what can be impacted by middle of cash cycle.
Also puts and take on working capital.
This is a big focus area as we have opportunities for improvement.
On slide six.
So, let's just outflows moving in this week in markets that this wasn't a big swing factor as it was affected by nolet monetize Wilson.
His name program, but we expect continued momentum here.
Inventory seamlessly with a slight positive, but given the volume decline, we've seen led to manage inventory better a big opportunity and then.
Cable.
Significant use of cash in the near term.
And with the markets, especially as you said.
As we expected that comes with some benefit here some slippage.
Progress payments when new club, we have inflows from our military business bidding a Nielsen.
It was offset outflows in power and renewables.
Outside of working capital there with you favorable timing items the largest mobile so point 5 billion of these terms and announcement on Miller shipment levels.
Well the first hall, our free cash so was negative slipped on keeping them for the quarter. It was negative 2.1 billion.
The second quarter was more volatile and disciplined the normally to slow costs.
End market dynamics, especially in commercial aviation.
Unpredictable and vessel the outlook for the rest of the yes, it's on second.
I will focus on weight on cash flow generation.
Working capital Provence, Jeff beginning to that improvement and Lynn.
Great.
For example gap pilot is implemented table management and standard work with regional accountability to track to Nixon.
This has improved over and payment by almost 20%.
And we would say more benefit so my guess excellence together. We expect this was my best answer questions. They Tesco in the second health.
Moving to slide seven.
We continue to strengthen our Benson and prioritize liquidity Nikkei environment.
We ended the quarter with approximately 41 billion of total cash.
This has been an indication that 60 billion a key capital.
On top of the we have planned to be NIM of credit line.
Hi, good executed several actions this quarter to enhance our liquidity.
So looking at a hospital again, a long term debt between industrial and GE capital.
This proceeds were used to reduce near term debt maturity by 10.5 billion.
This excess when the leverage neutral by the end up 21.
Following those investments has no remaining debt maturity in Twentytwenty and Twentytwenty won some capital has 5 billion over many debt maturities in 23 billion Twentytwenty Latin.
State financial position happens overtime.
At the beginning of Twentytwenty decreased.
By 9.1 billion.
Since the start of mindful decreased.
22 billion.
As Larry mentioned will now start to fully monetized. Thank you.
Orderly straightforward program over approximately three years.
You plan to use the.
So far the deleveraging.
On the financing policy goals remain unchanged.
We remain committed to achieving our deleveraging target.
However, this is Doug.
Expects to exceed those targets over longer period than previously announced due to the impact totaled 19.
So moving to the segment results.
First on aviation Larry has already provided you with some context on the market. So I'll dive into the results.
Orders were down significantly we have declined north of 80% in both combustion engines and services.
So context airlines have slowed or decides new engine orders and elective maintenance on existing cost.
I would orders were supported by our military business.
They had an impressive plus 60% growth rates.
Mainly driven by equipment and new development daughters.
Hello batch of evaluation stands at 250 billion.
This is up 6% year over year due to higher USA commitment, but down 15 billion sequentially.
This is largely driven by a reduction in our commercial services backlog of 12 billion.
This effect, both nova utilization of customer fit and customer specific adjustment.
In addition, but to Miss a degree we had cancellations of commercial engine orders.
This includes 795 music, London and 22 in nine axis.
Significant but for context.
Ending backlog still has more than 10000, plus and London unit.
600.
Hi units.
Revenue was down more than 40%.
The decrease in equipment revenue was driven by commercial engine as we shipped 400 answering fewer units.
This is partly due to the seven to seven Max grounding of silver production.
This was offset slightly by military let's shift 61 more units year over year.
Please turn now represents 26%.
Yes, and revenue, becoming a larger portion of the business versus pandemic.
As expected commercial services expands the decline down from six to eight defense.
This is Jim to know if that person sub business and charges.
Segment margin was negative 15.5%.
Lets heavily impacted by restructuring charges Directv limited to covert mentioned.
These charges included approximately 600 million related this is a contracts.
Reflecting lower engine, you can't Wilson anticipated customers infrastructure and contract modification and higher bad debt expense.
Without these charges margin would have been negative 1.5%.
Currently there was another 200 million subtypes and expenses from another production.
We're making progress here on the more than 1 billion on cost and 2 billion of cash EPS.
During the quarter, we reduced the Nielsen head count by 11% over 5400 people.
Our plan it shows a 25% headcount reduction globally.
The incremental margin improved sequentially from 62 to 59.
Excluding the covenant in charges this would have been 48%.
We have no executed 30% of the cost and 40% or the cash collections.
Based on this momentum in the second house.
Thank you again, so aggressively repositioning GE aviation so can continue to serve customers and just one better than market recovers.
Yes.
Moving to healthcare.
Turning delivered in a tough market and pivoted quickly attempts can you shifted from the team Chris is just to urgent Cobiz 19 related cat.
To support customer healthcare dedicated engineered to ensure that and installation and uptime of biocatalyst product sales.
It also moved quickly to deploy new product yield for example.
Just one condition can monitor seven patients.
Reducing commissions bias exposure and preserving keep it.
I would give the ECS business declined due to lower procedure volumes, particularly in Europe and India.
But when April difficult to the extol sequential growth in May and June as procedures increased.
And going forward expect next to recover alongside procedures.
We continue to ups for pressure given by regional outfit.
With that backstop healthcare system orders increased 3% organically.
We saw strong demand for covanta related equipment.
It was partially offset by other product line with less Carlson to quoted mountain.
I would pandemic related demand included a resi 700 million dollar whether some of the newest department of health and human services for 50000 ventilation.
In partnership with sport, we started to ship this quarter with the balance converting the third quarter it.
Revenue was down 4% organic you.
This is a total of two cycle.
Elevated covenants in demand.
Which was not enough to offset declines in today and product less correlated to covert mentioned peanuts.
Organically today, so down 2% and overall et cetera.
Importantly, said segment margin will flatten from 1%.
Okay. Thank you.
This insight significant headwinds from a shift away from higher margin product line.
Disruptions and logistics and the potential.
Offset this with cost savings, including roughly 600 headcount reductions.
Okay continues to focus on margin expansion.
An eye on serving urgent covidien teammates why prioritizing investments for future growth.
We're continuing to implement changes.
Engineering processes.
Greater efficiency and R&D prioritization.
In the second house, we're targeting $700 million of cost reduction.
Moving on to pilot.
Inventories pandemic is segment has been a turnaround Johnny.
How is quickly performance largely reflect commercial challenges related to covenants.
And this was partially offset by accelerated turnaround action.
Starting with a markup.
Little bit electricity demand declined mid single digits, that's both gas and electricity generation and GE gas turbine UTI ambition or is there.
We saw improvement year over year in June.
And we saw alethia, they being improved in the context.
Total power orders were down so those equipment and services equipment orders were down 84%.
Orders activity was impacted by constraint customer budgets and access to financing to the oil prices and economic slowdown.
This is especially true in death pellet.
Over the remainder of the current pipeline, so Jeff Probst equipment orders when we expect service orders to remain challenged.
In power, we exited the quarter with Miller backup.
Specifically Adele pellet back to was 66 billion down 4.7 billion sequentially.
Putin delivers more out of the backlog than what we added two new orders.
They also revised estimates extra work and upgrades.
And our long term service agreement, which drove almost half of the sequentially the cotton.
[noise] gas power equipment revenue was up double digits.
Thanks.
We shipped 25 gas turbine units, including site into content as an initiative this club.
Jeff Power service revenue was down double digits.
This was driven by an outage shifts and we could commercial convention.
In transactional and updates.
Well the Consummately, 20% of our first half plant outages at least that jumps.
Jeff pilot study performed outages in 31 country.
It's in Commission project, adding slip from three gigawatt of pilot typically adobe.
Based on our currency, we still expect to deliver 45 to 60 heavy duty gas turbine shipment in twentytwenty and execute 95% on the outages that we plan for the year.
Power portfolio revenue was down double digits.
We think about this is treated.
Spent approximately 25% less first Paul plant outages shifted to the second half.
What about 5% of those outages scheduled.
Hello conversion.
Continues to show underlying sequential operational improvement and new Kid non regulated service business remained stable.
Segment margin of negative 1.2%.
In fact, 390 Bips organically.
Primarily due to the decline in our highly profitable service volume and.
Some charges. This include approximately hundred million related to an underperforming joint venture, so Gilbert and derivative packaging and 50 million quality reserve on the power conversion product line that would have exited.
We continue to take cost actions across pilot, which include structure. It has it has helped reductions in this quarter.
Tyler had a positive operating profit this quarter, the fixed costs down 13% year over yet.
That's a new above our turnaround efforts are driving underlying operational improvement.
Both the project execution and more post out.
However, a quarterly performance continues to the challenge just to covert mentioned.
Starting with the market.
Onshore wind market growth continue to be supported by international demand and the newest extension of the production tax credits.
Well the U.S. government loans is an addition is yet to the two this is eligible projects that started in 2016 17, which now has five this takes into commercial operation.
In offshore wind, we're working towards certification of our industry, leading 12 megawatts Hum yet thanks.
And building a large pipeline of due to capture secular growth through the decades.
Orders were down seven cents defense organically, primarily driven by the ULA onshore wind and with.
Before this pushed to the second half and due to financing and permitting delays related to cover the engine.
Indications suggest that this are genuine delays resin customization.
Actively monitoring.
The team also continues to be more selective on muted.
Question growth, no, but setting the stage for profit and cash in the future.
International onshore wind was a bright spot with orders up over 30%. Despite some delays in Europe as well.
Revenue was up slightly again Kim.
Onshore Lincoln delivered nearly 1200, new units and we piloted in line with Omega item.
We expect the risk to increased sequentially again in the third quarter.
We have been hydro revenues were down 10, mostly driven by Cobot mentioned, you noted for payment delays and execution issues.
I would agree then hydro factory, a now operating at approximately 90% capacity.
The new of US overland is operating at 96%.
Segment margin of negative, 5.6% with operating profit down slightly.
This was driven by supply chain as we're seeing a disruption currency headwind and quality related costs.
It really it was partially offset by better onshore lean price.
That cost a mix improved club project execution and accelerated cost out.
We're making progress on our turnaround.
We saw sequential profit improvement in onshore wind and English reduced employee head count by 600 and contracted by 500 this quarter.
This oncology steps forward on the Pos towards positive margin on free cash flow.
Let's say capital continuing operations generated a net loss of 522 million this quarter.
This excludes the impact of the Zika goodwill impairment of 836 million after tax.
On the Dave on cost of hundred 19 million.
Listen to tendering approximately 10 billion effect.
We ended the quarter with 101 billion of assets excluding liquidity.
Sequentially. This is slightly higher rates, primarily driven by the unrealized gain insurance.
Partially offset a g. cast aircraft impairment.
It typically conclude our annual aircraft portfolio impairment review in the third quarter.
I think the lives of Cobiz mounting pressure on Mrs. Zika company that risk attribute this quarter.
Analyze the just portfolio based on our customers for the business slumped.
Those customers the highest perpetrator represented about 20% of our aircraft operating list book.
Review, including a significant reduction in rail and extended downtime. This resulted in an impairment of 292 million to attack.
Then finalize our annual review of then type of soda in the third quarter.
We anticipate some pressure on our test those assumptions. In addition, we continue to monitor the credit risk deterioration.
Moving to our insurance business, earning so higher.
So everson of Mark to market adjustment unrealized gains.
Financial markets recovered this quarter.
It sent some variability in our lives unplanned paper.
We believe this is driven by Covidien too and this resulted in the lower insurance loss this quarter.
On the long term care block listening, though when you Karen and higher terminations than expected.
We believe policyholders are delaying entering care facilities are being carried to their home.
For Lifelock mid single digit cytokines, and we believe this is driven by higher mortality from Covidien Jim.
It is too early though that who will continue sense for these short term volatility given the long term nature of our insurance.
During the process of converting our annual reserve adequacy review in the third quarter.
Capital ended the quarter, the 4.2 times debt to equity.
We are committed to achieving a debt to equity target of less than four times overtime.
We still plan to provide the required pan fundings in Twentytwenty line that insurance that funding.
We anticipate funding and the future capital is for the capital through a combination of asset sale liquidity to Chinese firms and the capital and kept them conditions.
At corporate our focus remains on decentralization.
Corporate and its operating units continue to reduce headcount, which is down 400 sequentially in the corporate.
Excluding these position about 14000 headcount has interest but outcome corporate or exited from.
In total this has reduced corporate head count by more than half it can.
Some cost reductions spacing in the unit apart as they rightsize then for people to function.
We're also using to increase our efforts to simplify and ultimate processes at corporate.
Several million plus what some home.
This includes the close process, where we continue to shorten the cycle and increased the quality.
Also to a new order to delight.
I'm excited to work with them, India, especially.
In the quarter adjusted corporate costs were down 66%.
Which really comes down to Hansel effective there was continued improvement into digital operational and cost structure, we have no assumption on cost and lowering your reserves related to legacy adjust issues.
Well, we can make progress on reducing corporate expense per instrument that we have some offsets in our number this quarter for the remainder of Twentytwenty, we expect the quarterly adjusted corporate costs to be roughly in line with the first quarter.
We have more of our to do.
Overtime.
We'll take five further actions to reduce costs as we couldn't lending Blair organization.
Does that help us back to you Larry.
Currently the thanks in summary, this was without a doubt an exceedingly challenging quarter.
But I hope when we look back on this quarter will remember it is one where we rose to a challenge of historic uncertainty and difficulty.
To embrace our reality head on.
And drive better operational execution, while taking actions to de risk the company.
Better earnings and cash performance in the second half are achievable based on what we see today and the aggressive actions we've taken.
As currently to said, we do have work to do.
And the environment is still fluid.
It remains a game at inches.
I have no doubt, we're accelerating g.'s transformation for the long term, though we're increasing our focus on lean and taking action on the factors within our control that coupled with our fundamental strengths. Our exceptional team are leading technologies and our global reach give us confidence in our ability to unlock the potential across GE today.
So with that Steve Let's go to Human Act.
Great. Thanks, Larry Catalina before we open the line I'd ask everyone in the queue to consider your fellow analysts again and ask one question. There are quite a number of people today lined up and that way, we can get to as many people as possible brand and can you. Please open the line.
Yes, ladies and gentlemen, if you'd like to ask a question at this time. Please fill star one and your telephone. If your question has been is hurt or you wish to withdraw your question. Please press the pound side.
And from Wolfe Research, we have Nigel Coe. Please go ahead.
Yeah. Thanks, Good morning, everyone I'm wondering Nigel one Larry I'm wondering.
Want to Korea, I Love, Steve I'll keep it took just one question not one question with five pounds.
So.
Obviously aviation is very fluid situation, but.
What's your perspective is two to the low points clearly the departures trends suggest the is that's a very encouraging trend, but I'm curious if you just give some perspective on the scope for U.S. and.
Spare parts, you spare parts to provide a headwinds into the back half of the and the perspective on shelf that's.
Relative to the Chinese so into queue. Thanks.
Okay, well not Nigel you touched on a number the variables.
Within the industry on top of those that are a function more directly from from Coburn 19 that make the first part of the question so challenging to answer and to work through course inside the company and inside the industry I think our view is that.
We are encouraged by the sequential improvement we've seen broadly.
Around the world, but we're still down over 40% from a departures perspective, China being down high single digits is encouraging they were first Dan and first out perhaps that suggests.
Some of the the potential from from here, but I think by by no means are we suggesting that things yet.
Meaningfully easier from here at least in the short term I think this is going to continue to be a challenging environment as.
Governments and the public sort through how to reactors broadly to the case trends it'll be a different dynamic country to country.
But.
With respect to those things within our control.
And we're trying to make sure that we continue to push.
Safety first within our own operations doing what we can to help align the industry around a safer turned to flight.
Operationally.
Hi, this amount of focus is as you well know on on cost and cash preservation all the while looking for those opportunities two quick in the cycle time, whether shop visit to improve productivity. So we're not only reacting to this unprecedented headwind, but they're working through.
The dynamics that will really dictate how well we perform in the second half and 21 and and beyond you mentioned USM clearly as.
The carriers make decisions with respect to how they want to transition those.
Planes that are parked a into retirement status. We saw some of that I suspect we will see a more of that over the next couple of years, we think we're well positioned to want to participate given a bit USM.
Is a source of material for our see assays that has been for route for many years. So we'll have to see how this plays out it again I don't think we're looking for anyone to do us any favors I don't think we have a different posture than than anyone else in the industry. These are these are difficult times and commercial aviation, but we'll work through that all the while.
Doing what we can to continue to.
Feed a strong and growing military aviation within within our company.
[noise] from Barclays. We have Julian Mitchell. Please go ahead.
Hi, good morning.
Maybe good morning, My question would just be around the free cash flow.
You talked about an improvement there in the second half.
Which I think you'd always see seasonally anyway, but maybe just if I could try and frame that scale of improvement.
First our free cash flow was down about four in the HOS billion year on year.
Second half of last year, you did about four and a half billion.
So if we take your comments on improvement and that base number four and a half billion.
Should we expect free cash flow to be positive then in the second half.
Hi, Carolyn a hair, yes, we do have as you point out at this analysis in the second half of the year. So so that we expect to say well, it's a big in the different year compared to a more normal year.
For us.
The second haul it would be a communism, obviously all of our cash earning.
But then we also have working capital dynamics that you mentioned, if I look so that I would bet on receivable side, we expect to see improvement it puts a lot of work into post with a focus on there.
So with help already in the second quarter, and we expect to see more of that in the second Hall.
Also have the Boeing.
And then spend and we believe that monetization would be less lessening impact.
Talking about payable here.
Expand the toy so basically by purchasing significantly lower volumes versus paying old purchases.
It creates a hole in the working capital so that's a tailwind gradually.
Better into the third quarter and then within.
Gradually bettering the third quarter, but in the fourth quarter I would say that at the tipping the volume stabilizes.
Inventory.
We worked hard I've been it's what we've been able to better execution, there and how you do have softened the seasonality anything about right.
And then on the progress.
We've been is that we will then.
Also had the in the second half because that was made to depend on.
It is an order right.
And to other point, but like I mentioned earlier, our cash countermeasures. The 3 billion of cash when two thirds of that we expect to come into second half to sort of moved into some of the comments that I had and we also see continued underlying improvement.
So best seller.
FFO estimate from him.
And we also believe as you said that could come back to post can catch though than in the 21 based on what we sit today.
[noise] from JP Morgan, we have Steve Tusa. Please go ahead.
Hey, guys good morning.
Good morning.
On a.
Maybe just asking that question.
It is a different way you mentioned the $500 million of I think got deferred discount payments.
In the quarter that would have gone out the door. I guess was was the comment can you maybe get clarity on on that account I think other cash flow was was relatively strong and then just all in when you kind of mix. All this stuff and all these dynamics I think you off at a 700 million dollar early defense payment I don't know how that kind of trends in.
The second half the L. progress Dick can you get to positive in total in the second half I think that was Juliens question.
All in.
All in well founded in a Ah, yes, well to 500 billion.
In the second quarter, you can think about that dynamic basically thats.
Thank you asked the aircraft our shift.
You you left payout the discounts right. So it does depend on how the aircraft are under leveraged.
And then.
You also talked about the progress payments on a from military yes, we did get pro listened to some military.
I would say bit earlier than expected difficult apart of the comments that we had between our.
Estimates and where we landed but overall the comments, but then there is on the working capital.
What they are and also the comment on on results so that there's bound.
Yes, Carol I think I think clearly just laid it out we.
We've got work to do again I think what we're saying this morning is that.
We came in better than we thought in the second quarter, obviously, a lot of good work.
We certainly had a a benefit from the lower production.
Schedules with the with the Airframers, but I think as we look at the second half were out we're going to drive sequential improvement we're going to do the best we possibly can and will allow we'll see where we end up at the end of the at the end of the beer.
From Bank of America, Andrew Obin. Please go ahead.
Yes, hi, good morning.
Good morning, Andrew.
The July comment on aviation on trends are based on his unit volumes, but I tend to have some factors that might hurt pricing as well I think Honeywell highlighted to you is materials competition on shop visits et cetera.
So what do you expect to meaningful difference between volume declines in revenue decline and the second half in aviation once you put all these factors together.
And our I'm not sure that.
We would go there today I think I think what we're focused on clearly is the.
Trajectory.
Around shop visits we've got better visibility today, the third than we do in the fourth.
With respect to our own shops as you know, we when we talk about shop visit some of that activity.
He has performed within our own.
Facilities.
But there's other volume that we support through a material supply into a in the third parties. The do they do similar work. So there are a raft of factors.
And in play here, but again I think given what we see today, we continue to believe the the principal pressure that we're all under is how the carriers are going to.
Operate and maintain the existing fleet there other dynamics that we havent talked about such as such a screen time that that are realities that that we need to embrace realities, we need to help our customers manage so it's going to I think it's going to be challenging for us for us and for really everybody in the industry until we have.
[noise] better visibility on a on a sustained trajectory that said, we continue to take the actions internally.
Not only on the call, but caution cash front, but also operationally to drive the the lean implementation, so that we're reducing cycle time, and reducing delinquencies and and past dues to make the most of this.
Cobot period.
Yes, we have Marcus Mittermeier. Please go ahead.
Yes, hi, good morning, everyone.
Good morning, maybe on a Marcus and good morning, good morning.
On the one of the half to 2 billion structure cash that you from took two in the prepared remarks.
Would you say that structural obvious yet the 2020 sort of volumes or dare I say us we bercow steps back to sort of like maybe to 19 volumes at some point how should we think about Buck and then how would you can model the net benefits of all this over the next couple of quarters.
Sure.
Yes, Mike as you are losing an important.
An important area FRE and this is.
The cost and the cash accent.
So.
With our cost untouched accent is that 2 billion of cost and 2 billion I'll catch accident in the year rice plenty plenty and basically that 2 billion of cost flows through the task and then additionally, cash accent and like topics and other working capital Park.
Now that we have worked through for the way. We are now would we consider is that but all of those 2 billion art structuring call out.
And lastly, actually Annualizes, Dupont and a half to 2 billion.
And we do thing of course, the biggest cycle that isn't aviation, but also in.
Parts into other parts of the business and we think that chose structural cost out and I mean basically changing the way we didn't think I mean to think about its part of the whole lean transformation is to change the way to do things that we do them in a better way and therefore also have.
The.
A question when I was taking the cost outs, so that they would not come back.
Even with the volumes improving.
Okay, helping our.
Decremental margins now, but they also expecting that to help our incremental margins App markets comebacks, it's all younger.
The markets I would just add did.
I think what Carolina is frame well there is the.
The efforts that are underway right behind that we are continuing to look for opportunities inefficiencies and that's just the nature of of Kaizen really right with the passage of time you see more you can do more you build that momentum so.
As.
We continue to look to just drive efficiency overall, but at same time deal with these these these headwinds you should expect us to Ah.
Root out as much.
Cost as we can and to preserve and generate as much cash as possible, but in terms of the hard targets for today.
Hey, currently is laid that out.
From Citigroup, we have any capital its please go ahead.
Good morning, guys.
Good morning.
On the line Colin I, just wanted to follow up on the detrimental margins, particularly in aviation.
You mentioned you were at 48% in aviation, excluding the charge and you only delivered 30% of your cost action. So far so when you talk about the runway for improvement how much more do you have here in because your decremental have a chance and getting down into the 30% to 40% range as you go into the second half for the year here.
Andy I would say that.
There's a lot less in flight pardon the pun with respect to.
Improving the cost structure in aviation.
What we've clearly been hit hardest from a volume perspective and in turn on a margin perspective in in services.
I don't think that the sequential improvement that we.
See in the second half is going to take us into a zone that starts with a three but I think we will be in his own with a with a four with the third.
Quarter, showing us some modest improvement and I think we'll see even more in the in the fourth.
[noise] from RBC capital markets, we have Deane Dray. Please go ahead.
Thank you good morning, everyone.
Good morning date.
Hey, maybe we get some more color on the Baker Hughes exit plan, just a little sense of the structure I'm, just not clear whether you locking into a price or is that subject to market pricing during the next three years.
Well, the and I think what we wanted to add to highlight today is.
We're going to take the next step toward full monetization here, we're going to do it over a multiyear period as a as you saw and the program.
At a high level is basically.
Designed to enable us to sell our shares.
Basically the v. lap over call. It. The next the next three years. We think this makes sense in this environment clearly we started the monetization of Baker back on the fall of 18, nearly two years ago, but.
But this allows us.
To be I think still patient and disciplined while we dot divest. This this non core.
Piece of the portfolio that sets us up clearly to redeploy that capital and I think we're excited about the enhanced financial flexibility that it will give us.
Yes, I would just add to that they said.
Technically recorded coalesced structured for retail and it's really that you sort of go quarter by quarter, but you're not bound by it but that's how the planned work and by that you. Once again, so the average share price of them back period.
From vertical research, we have Jeff Sprague. Please go ahead.
Thank you good day everyone.
Hey, Jeff Wonder, if we could just hey, Larry good morning.
Our neighborhood get a little more little more color on a g. Cas and the process there.
As you indicated just.
Customer events dictated you had to take some actions in in the second quarter.
Can you give us some idea of what percent of the portfolio was was impacted by that and.
You know some maybe order of magnitude of what we should expect.
The.
You know the residual value assessment in Q3 for GTS.
Yes, so I just thought then with the second quarter impairment.
Basically given where we thing in the market.
We decided to to make.
A risk based approach in the second quarter in the third quarter would have the big one but in the second quarter, we decided because of what's happening in the markets. So look it's a thought by looking at our customers and choosing the ones that we sense, but highest lists.
And that.
Basically from back then we took their assets and we.
I looked at where tested significantly lower utilization and possible repossession and not getting funding from from governments right and with that.
We could see that's roughly 300 million Wallace.
The impairment and if it takes I think perspective to the whole portfolio that was around 16, and our whole portfolio or anything.
Just one stackable woman in total so those 292 pre tax.
Nothing patent for the second question and then if we then look at the third quarter I would say that.
That's a little bit different that's basically looking at the whole balance of our portfolio I think building. The 20, we've we've reviewed.
And here, we have a fully annual impairment review I wouldn't bore you with the do that but I can tell me very good tent and a very thorough process I. We have two different appraisals on each aircraft. That's incorporated after all the assumption around these companies and then those cash flows et cetera. So.
It's a much bigger poster.
But I would say, we do anticipate pressure on our cash flow assumption.
And the value sort of to them for possible elevate repositions and prolonged recovery.
For the industry and we continue to monitor credit lease can patents I would go over there.
Larry.
Yeah, I think you covered it well we thought that we would take a quite an early look at that highest risk portion of the portfolio roughly 20% as a as you said Carlita and then we'll just run through our normal course process here in the third quarter and we'll update folks later.
I'm pleased that we pull that forward given the environment that we're in I think that's very consistent with our our effort to be.
Transparent and on top of these things.
But but more work to do normal course here in the third.
[laughter] from Gordon Haskett, we have John inch. Please go ahead.
Good morning, everybody.
Hey.
Morning, guys Marine warning currently on welcome.
So im just going back to kind of the cancellation discussion that you guys talked about are Carolina, you mentioned I think with elite means there are mounting 737, Max cancellations and I'm just curious if youre as an GE around the hooked up to repay any of the down payments or progress payments. You may have received any of its size does that risk for us.
And you know by Extrapolation do you think any of your aviation previous progress payments are at risk just given the aviation environment due to cope it and what you're seeing.
If I look at what they have done on progress on 10th Elizabeth.
For for every day, so let's start by looking at that.
Progress to make some balance that we have right, it's 5.5 billion and if liability basically.
Dependent to us.
This is largely a commercial ended and the largest question about it.
Okay.
And I would say that the second quarter producers Panther basketball, and we're not expecting significant.
Impacting the second half.
If you think about how the slow way.
Our risk is sort of limited to lease on slowdowns capitalism and.
And of course, we coordinate with both SMS and our customers since the situations are picking units.
And I wouldn't say that the calculations it has done but the airframe and moved on negotiating your times if the SMB Greer three funko, but also did answer.
But they will try it to fund.
[laughter] from release research, we have Scott Davis. Please go ahead.
Thanks, Good morning, everybody.
Got it Scott.
Hi, good morning.
If we kinda isolate the businesses I mean aviation power renewables had.
Rob.
Macro health care, a little bit more stable is there is the healthcare business cash flowing at levels you would find.
Consistent with profits.
Scott I think Weve I think we're pretty pleased by and large with.
Healthcare's performance just given the.
That makes the dynamics there right both from a from a top line perspective.
We had if you just look at orders for example.
We have positive orders NHC, yes.
Despite all the other downdrafts.
Largely a function of the coated products, giving us that that backfill clearly pdx was was way down.
But the team did a really nice job with that volume mix pressure to really respond quickly little easier in a shorter cycle business like health care.
To add to take the cost actions that we did that allowed us to add to hold the op margins flat and we had decent.
We had decent cash performance there I think as we get into that the second half.
It really is we think about the recovery from here.
Despite the pressures aviation folks are going to.
Need to remember that we got a good health care business, it's going to get better both in terms of the macro environment and our operation and management of it.
As well as the other turnarounds that are underway in both power and and renewables. So thats really a large part of the self help story. In addition to what we've talked about.
In addition to what's happening and the way we're managing it aviation.
And I'll just add to comment on health care, because you have to remember that mean those biopharma. So basically we had 300 million, though at Tesco every quarter from from Biopharma. That's all the can knock on the pits as of this quarter. So you have to sort of take that into consideration when you look at.
As Ken.
[noise] from Oppenheimer, we have Christopher Glynn. Please go ahead.
Hey, Thanks, good morning.
[noise] money.
We said, Jeff book value coming a little in the quarter and you have some threeq you processes underway longer term I guess accounting adjustment, maybe 2022 for insurance just wondering.
In terms of asset sales, what's the market and what's the scope of.
Remaining potential asset sales.
Where you'd expect to ready market to sell that book you know, what's the state of play with asset sales.
Yeah, I would say, Chris with with where we are today, particularly on the heels of the Biopharma.
Transaction with 41 billion of cash and I think with lots within our control operationally to improve performance from here.
We're not spending a lot of time on on additional asset sales right. I think we know we've got to bring these leveraged.
Numbers down Weve remained committed to our financial policy in that regard no change just going take us a little while longer both on the industrial side and to a lesser degree on the capital side.
But we're going to move forward with this portfolio with the aim of creating as much value as we can overtime.
<unk> from credit Suisse, we have John Walsh. Please go ahead.
Hi, good morning, everyone.
Hey, John.
Morning.
So there's a lot of puts and takes as it relates to kind of cash flow good guys and and bad guys. You did make this comment that you think industrial free cash flow was up in 2021.
China, just wondering if there's any way to frame the order of magnitude. If we were kind of to remove any kind of volume lift just from some of the timing around restructuring cash bio pharma inheritance taxes et cetera, if we already start Paul.
As it of before anything else or if we're all of those items aggregate to something negative and we need that volume lift.
To come through in health cash into next year.
Okay. So so let me do that but as you said there are lots of good guys and bad guys and puts and take that.
We say we returned to positive free cash, though in industrial free cash flow in 2021, and that's based on what is it today.
So in addition to some gradual improvement in end markets, namely a number of items that gave us confidence.
For the first and very important one is that we deliver our twentytwenty cool and test access right. So annualizing, one and half to 2 billion of structural cost out it's close to the free cash though.
And then as you mentioned they also have the reduction has impacted.
Looking back.
On the power power side.
Okay deferred monetization by what had to do that with the basically a 1 billion.
Yes improvement in 21.
And.
Then on the basis is gaining traction.
I would say power, it's more of the continued turnaround story right close down I hit the floor planning when universe also turnaround Gleeson hydro that's a perfect execution have the holiday calendar I was just on go on the international markets that I mentioned in my previous comment.
Healthcare.
Early signs of better trends.
Improvements through the quarter and here we also have.
Program, where we are working on improving our fixed cost and bottles and margin expansion activity. There's not much in preserving activities that will help margin expansion and I think this is super important.
Operationally sound.
They're working into new customers and let them take hold and the whole company because that improves both the margin and the profit but also the working capital.
We've just so I'm just off the sort of are gaining traction there anyway. So that's another thoughts over time.
Commercially.
Larry maybe you want to comment on that.
Well as I mentioned earlier, but we just think that they're going to be opportunities.
Admits that.
The pressure.
The moment really across the portfolio to want to smartly create new programming.
And products, you see that particularly in a in health care right now given given the way the teams responded around not only the ventilator.
Patient monitor opportunity, but the way frankly, we've been able to deploy some of the digital products and.
In a more meaningful way.
Then we might have otherwise despite all the time and money that we have put into the digital health care effort. So.
You are currently I think you I need you covered it.
It's really about sequential improvement from here again the environment.
Remains challenging but with respect to those things that are with in our control.
We think healthcare as well position to lead the turnarounds and powered renewables continue and.
Expecting them, a multiyear recovery and aviation.
Hey, Brandon we only a we're past the hour we have time will fit and one more in the queue I recognize or more folks and we'll get you afterwards, but just one last one please.
It from Morgan Stanley, We have Josh Pokrzywinski. Please go ahead.
Hi, good morning, everyone.
Josh.
Morning.
Where it should help us out with maybe a a cadence element in terms of that aviation recovery over multiple years.
What would you expect to be kind of the normal lag between.
Departure gross and shop visits obviously, there's a lot of elements of.
Maximizing green timing you assignment retirements audit factors at work, but what is normal look like so we can always try to understand the baseline for some of those other moving parts.
Yeah.
Josh I'm not sure.
We really have a.
A a working definition of normal if you will right. If we went back and we look at the way. This has played out for Ross.
Overtime right, whether it be 911 the crisis so army.
Every time.
That we've seen these sources pressures the dynamics have been different every time out so I think the best too.
We can share today is that is the airlines are working through what this means not only in terms of there there.
They are fleet plans and their cash there on cash preservation efforts their maintenance.
Programs going forward.
Well continue to have B b under some pressure in a in services I just don't think there's any really any any two ways about it so despite the.
Improvement in departures in that sequential uplift I think we're mindful that this is going to continue to be challenging force.
In 2020 and that won't be the end of it.
Brendan we are we are out of time.
This point, so I wanted a lot.
Thank everybody then we're going to have two to move on but again, we'll be available for follow up questions as needed.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
Yes.
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