Q3 2020 General Electric Co Earnings Call
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Good morning, and welcome to the third quarter 2020 General Electric Company Earnings Conference call. My name is Brandon and I'll be your operator for today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session during which you can delstar. One if you have a question. Please note. This conference is being recorded.
And I will now turn it over to Steve Winoker you may begin Sir.
Thanks, Brandon Good morning, and welcome to GE third quarter 2020 earnings call Im joined by our Chairman and CEO, Larry Culp, and CFO Carolina diabetic Capa 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 big.
This is as we see them today as described in our SEC filings and on our website. These elements can change as the world changes with that ill hand, the call over to Larry.
Steve. Thank you good to be here with you and Carolina in the same room for an earnings call for the very first time.
Good morning, everyone I'm.
Im encouraged by our progress in the third quarter. Despite the ongoing effects of the COVID-19 pandemic on our year to date results we're building momentum.
Cross GE.
And our topline remains pressured but our actions are driving an improved profitability and cash performance.
In the quarter industrial revenue was down 12% organically. This was largely driven by aviation as healthcare renewables and power rollout.
Industrial margin was 5.6% and organic contraction of 310 basis points year over year, notably all segments returned to positive territory for the first time in two years.
Adjusted EPS was six cents down year over year, but up sequentially.
In industrial free cash flow came in at a positive $500 million.
Our sequential improvement was largely driven by better working capital and earnings.
While positive and a good sign we have plenty more work to do here.
Let me focus on orders down 28% organically for a moment over 75% of this pressure was driven by aviation as well as part of healthcare the places it hurt us by the pandemic.
In power and renewables some pressure results from our actions to be more selective in our commercial activities and some is timing, where we should see stronger conversion in the fourth quarter.
Despite this our backlog remains a real strength at $384 billion.
80% is in services, where we enjoy healthy margins.
And while services are hurting in the near term they have a long multi year time horizon and keep us close to our customers.
By business it aviation and GE cap, we're managing these businesses aggressively and saw sequential improvement aviation is on track to deliver more than $1 billion of cost and $2 billion of cash action. This year.
In healthcare, we delivered strong margin and cash performance.
While pandemic related demand has moderated we saw scan data and the Dx orders approach pre pandemic level.
We continue to see Capex pressure and private health care markets and were planning cautiously there.
As you will recall power in renewables, where our turnaround story at the start of the year improved operational discipline and cost out actions are starting to show.
In the quarter, both delivered solid organic margin expansion power more than 700 basis points renewables more than 200.
So clearly our markets are by and large stabilizing but to underscore the obvious stability is not yet recovery.
We still acknowledged that the full duration magnitude and pace of this pandemic across our end markets operations and supply chain is uncertain.
That said based on what we see today and the actions we've taken we expect fourth quarter industrial free cash flow of at least $2.5 billion with positive contributions from all segments.
But how much more really depends on how aviation bears through the quarter.
And importantly, the momentum we are building should help us deliver positive industrial free cash flow in 2021.
Moving to slide three.
From day, one we've known this would be a game of inches. This.
This is still true today.
We're focused on three areas, where we're making real progress first we are continuing to strengthen the businesses.
As a team weve been engaged on what matters. Most the safety of our employees, taking care of our customers and communities and accelerating our lean transformation.
At the same time, we're focused on what we can control in the near term driving better operational execution and further optimizing our cost structure, our more than $2 billion of cost and $3 billion of cash actions started to play out in the quarter now 75% complete with our decremental margins for example, improving sequentially from four.
84% to 32%.
Second we are solidifying our financial position.
Since the beginning of 2019, we decreased debt by $25 billion, we continue to maintain strong liquidity and flexibility exiting the third quarter with $39 billion of cash.
Sterling, who will provide more details in a moment.
And third we're driving long term profitable growth even in the current environment.
Leasing continues to be the strongest common denominator across GE and this is what builds the foundation for sustainable growth.
We're picking up the pace deploying lean to drive safety quality delivery and cost improvements.
In terms of both productivity and cash generation.
For example, this quarter, we held our second lien week event virtually at gas power with more than 1000 participants across 10 countries and function we.
We identified dozens of delivery and cost improvement opportunities.
We're also continuing our efforts to run GE differently moving the center of gravity closer to where the action is.
We talk about GE as for industrial segments, but we drive operational improvements at much deeper levels within the organization.
You'll recall that we split gas power and power portfolio within the power segment. This is working well for US. We're now simplifying other segments in similar ways to enhance visibility and raise accountability.
For example, we are changing the way, we manage pls within healthcare systems, ranging from Lcs down more to ultrasound, where we are integrating production and product management to improve delivery.
Similarly, we are now transitioning grade from one to six operating PNM.
Importantly, this is not only a cost out initiative, but a way to ensure we're using the right processes tools and resources to improve execution.
This quarter, we held strategy reviews with each business.
Planning for the long term these discussions focused on how we put ourselves in the best possible footing to play offer.
How we win with our customers and for our shareholders.
What was evident is that our businesses are focusing or sending more impactful objectives designed to deliver profitable growth.
Examples include ensuring our gas turbines remain competitive at the top of the power dispatch curve as well as launching next generation software platforms in our healthcare imaging business.
The quality of our strategic thinking was much improved versus a year ago.
Now we have to execute.
So let's get into the details on the COVID-19 dynamics at both GE Aviation energy Ken.
On slide four you will see GE, CFM departures, which drives our service business much more so than our teekays.
As a reminder, we track departures by region and by platform daily with.
With the third quarter overlapping with much of the summer travel season in the northern Hemisphere, we saw GE CFM power departures generally improve.
We've seen this plateau to down 40% in October versus our January baseline as we exit these typically higher traffic month.
We expect the market recovery will continue to be correlated with departure trends across regions and fleets China.
China's departure levels or just below the January baseline and we're watching load factors there carefully.
The Americas have remained relatively flat through the quarter, but have shown some improvement in October versus July.
In Europe, some improvement in July and August has reversed in September and October.
In aggregate the near term outlook remains quite fluid.
And while there has been improvement from the April Lowe's, we're now seeing stabilization at current levels.
At GE aviation, our military business remains resilient.
But commercial aviation is clearly challenge.
Under our new CEO, John Slattery leadership, we're progressing on the difficult actions to scale this business for the new market reality.
Notably these actions drove the sequential cash improvement in the quarter.
Looking at these trends were seeing through October commercial shipments in shop visits are still down 50% year over year survey.
Services are critical to the recovery of Aviations, we generate much of our cash here, especially with a narrow bodies, which are more than 40% of our historical revenue.
We typically have good line of sight into demand for about six weeks out at our internal jobs, but we have less visibility in to external shop visit.
We're working with our customers to forecast shop visits as utilization recovers supporting our operations and supply chain.
We made an important organizational move in aviation services with Russell Russell Stokes, returning to aviation as CEO of that business.
Russell will lead our aviation services business in a new role integrating both our commercial and operations team.
Shifting a g. cast similar to aviation our performance continues to be correlated with the market.
As we said last quarter, 80% of our customers have requested deferrals and Weve approved about 60% of both.
At the end of the third quarter. This deferral balance was approximately $400 million and importantly, we've collected about 85% of what Weve invoiced thus far.
We ended the quarter with 29 aircraft on the ground up 17 up from 17 in the second quarter out of a fleet of more than 950.
We are actively working customer by customer through restructurings and in some cases repossession.
In our commercial team has remarketing aircraft.
We're also taking action to navigate through this volatility.
We share with you two examples.
We announced Khalida air who operate a 37 aircraft fleet as the launch operator on our triple seven passenger to freighter cargo conversion program, which features the GE 90 powered largest ever twin engine freighter.
With partnered before and we're teaming up again this time with pimco to launch a $3 billion venture that provides airlines with financing to help upgrade their fleets at a critical time.
This venture also enables us to acquire new and young fuel efficient aircraft. So we can continue providing our customers with the aircraft they need.
We continue to plan for a steep market decline through the fourth quarter and the likely multiyear recovery long.
Long term the aviation market has solid fundamentals and we're committed to a safe return to flight postcode.
We're working with our customers and industry partners to ensure engineering and operational readiness.
With that Carolyn will provide further insights on the quarter.
Thanks, Larry.
Heading into the quarter.
Our results are better sequentially letterman challenged overall and this is particularly true in aviation segment hit hardest by the pandemic.
The recovery and portfolio would you consider defense at each business market conditions are stabilizing.
We are also driving impacted on a toss out accident year to date, we've reduced head count by more than 15000 person and we expect to reach about 20000 attempts by year end and we're seeing a prevention improvement, especially in power and value of them.
Looking at our consolidated results.
Chesapeake on organic visits.
Orders were down 28%.
On the services from aviation segment, the most passionate when palin healthcare each plant back.
Backlog was relatively flat year over year and sequentially with puts and take it to the segment profitability now that governments attractiveness in the joint isn't services.
Industrial revenue was also down but to a lesser extent in orders down 10%.
Despite the difficult environment, all segments delivered revenue growth, except it isn't.
And on industrial segments delivered positive profit into Quebec.
The counter measures continue to accumulate in the more immediate effect in healthcare, but the margins expanded 260 basis points.
In our longer cycle businesses results improved over the second point to note that more measured pace.
Turning to death.
Let me highlight sea defences between continuing and adjusted.
On the restructuring we spent 200 million in the quarter, but 2020, we still expect to spend more on restructuring versus prior year as most of the benefit to can you can do on.
We also received 100 million for legacy assets in Latin.
And from the impairment charge. This was related to our recent decision to exit the new bid code power market for instance.
Excluding these items as well as gain mark to market and on operating benefit adjusted EBITDA was a positive six cents.
Turning to cash.
We generated 500 million of industrial say Tesco in the second quarter, excluding by farmers on Cds.
200 million improvement year over year.
No to be healthcare delivered strong cash flow conversion to improved inventory turns better collections and reduced capex.
At a high level cash flow benefited from positive annexed customers across all segments and all businesses were up sequentially.
It's in modest improvement in working capital driven by management actions and model for stabilizing volume levels, particularly in payment.
When we used 600 million of cash and working capital. This is roughly a billion better sequentially and year over year looking.
Looking at the dynamic sort of suitable we saw higher building. This is typical in our second half and even more so this year due to the broader economic environment. However, on the Mrs and care signs of improvement due to better daily management, such as company past dues declining three point sequentially and sequentially implement this though.
Inventory was a source of cash that's the apparel and yet we expect it to be and greater source in the future.
Well my recent trip to renewable visiting onshore wind and on how the term transition multiple warehouses to pull that.
This reduced inventory by $50 million and counting.
Pavel stabilized from prior quarters, as we can't dependent cycle of Pip endemic material purchases assays.
Sales volumes with however, we expect by the benefits from.
Yes, well the use of cash outflows from shipments outpaced inflows from new orders and milestone payments. This was primarily driven by revenue but innovation.
Contract assets per limited impact and other operating FFO was primarily driven by non cash items and net earnings this intense to mark to market impact, our Baker Hughes physician and non cash.
Benefit cost.
We also carefully scrutinizing our capex spend.
Down 220 million in the third quarter versus prior year.
Yes to the industrial free cash flow is a negative 8.8 billion.
Drivers include lower earnings at this division payments related to the commission is in decline progress due to higher delivery and lower orders in power and renewable and ridges factoring.
I would typically seasonality, we expect the fourth quarter to be our most significant quarter for investors may question. The flows that you're targeting at least two and a half billion sequentially.
Sequential improvement will continue to come from earnings growth reduced inventory and stabilizing program.
Taking a step back building a path to sustainable cash largely on continued.
Continuing to drive sales have across the businesses.
Realized 75% of our Capex incident, and the momentum coming into fourth quarter, and the positioning of innocent too much stronger than the market recovers.
Taking a broader view of working capital and looking for additional opportunities.
Inventory depth of a two times today isn't that we can improve our consistency and performance.
Lastly, we expect our non of items and 11 reduction in factoring to defense over the next few years.
Actually has decreased by close to $2 billion.
Moving to slide seven.
We are making incremental process progress on strengthening our balance sheet the.
Dick one hour to access Leverages near term liquidity by 10, and a half billion.
We ended the quarter with 39 billion of total cash 24 at the age and safety at Janney capital as you know we're fully monetizing the remaining 5 billion stake and Baker Hughes over the next three years. This month. This is the first test business of 400 million.
In addition.
Reducing debt and evaluating liability management opportunities year to date, we adjusted EBITDA by $8.1 billion, including 500 million in the quarter related to the wind down of our commercial paper program. It's.
It's important to note that in addition to paying down debt and significantly reduced reliance on intra quarter borrowing.
Our industrial commercial paper program take that $20 billion intra quarter in 17 to ban of zero.
Year to date, we've paid down to it capital that 8.6 billion sequentially in the quarter.
David just stated we expect to achieve our leverage targets over time due to the impact of public content and our financial policy goes to remain unchanged.
So moving to our segment is that also state on an organic business.
In addition.
We're encouraged by our sequential improvement evidenced by positive margins, despite the challenging market conditions on the dimensions.
Orders were down more than 50% missile declines of up to 60% in both from us engine and collections activity.
Our backlog stands at $262 billion up 4% year over year.
Since the second quarter, we added to Allison and transactional services backlog well equipment backlog was found to be in sequentially driven by new orders and backlog question Justin.
Cancellations slowed significantly this quarter before about 100 leap one day count business.
Much lower than 800 us, though in the second quarter significant but for contact our ending backlog has nearly 10000 fleet, one and $1 billion.
Revenue was down nearly 40% year over year, but up 12% sequentially. So.
Commercial engine revenue was down we shipped 300 to five fewer engine for less than half over the prior year. This includes 200 to three left lithium that this.
This is partly due to the 77, Max downing selling product to them.
Professional services revenue was also down more than 55%.
This is due to lower spare parts than actual business.
Military revenue increased 7% driven by development and service volume.
Let me sum engine shipments at the quarter end to supply chain challenges.
Segment margin returned to positive territory.
Sequentially improvement was driven by the cost actions and lower commercial services charges.
This was partially offset by an impairment of roughly $100 million inogen in our consistent business related to commercial market decline.
Separately sensitizing cost by about 30% lower.
Sequentially, we still had approximately $120 million of excess cost due to lower production rates.
It is an assumption that around 70% of the more than 1 billion of cost and 2 billion of cash taxes.
But the business is really just a billion in cost savings.
We continue to expand our workforce reductions, bringing the year to date total to roughly 20%.
His efforts have improved our decremental margins to 43% of 59 in the second quarter.
Moving to healthcare we.
We delivered solid results, so better commercial and operational execution.
In healthcare systems order declines are moderating, particularly in public healthcare markets, where the government's on prioritizing investments in quality in excess.
Broadly deal with gas have now acos.
Fourth quarter baseline and we feel better sequential demand in imaging and ultrasound.
With that backdrop heska orders decreased 4%.
In healthcare systems orders declined 5%, we saw continued softness in imaging and I'll just on demand and significant to know in demand for pandemic going into today.
Predict recovery continued for this or down 2% versus 28% down into second quarter.
Other procedure volumes largely recovered to pre cobot nine to 11 and some variation by region.
Pesky revenue was up 10%.
About 300 million of revenue plus related to the delivery of the remaining vintages supported by the US Department of health and human services. During this revenue was up 8%.
The F. was up 10% for 4%, excluding indecision blending strong execution against pandemic going into clinic back.
Partially offset by lower demand for product left corner cognizant.
TDX revenue was down 2% to significant improvements sequentially.
Segment margin was up 260 basis points. This was driven by higher volumes improved cost productivity and instant introductions.
Gary just headcount by roughly 600 this quarter. The team is executing well on cost reduction slide prioritizing growth investments that are into flat to prior year.
Turning to pilot.
Our performance has been impacted by the timing of outages and the discretionary spending on upgrades to independently, particularly in the middle East. However, sequential improvement is driven by tough access and there's still significant opportunity for margin expansion.
On the market global electricity demand declined low single digits. However, gas based power generation remained resilient and gas turbine utilization was up mid single digits.
Overall orders for pressure equipment orders were down 35% largely driven by gas powered Alan Miller energy orders. However, we saw a significant improvement of no no orders in the second quarter and we expect as don't pipeline led to better equipment orders in the fourth quarter.
Service orders are expected to remain challenged due to customer budget constraints and lower discretionary spend.
We exited the quarter with newer backlog of non-GAAP power backup was $65 billion down 1.4 billion sequentially, primarily on lower orders due in part to timing ended selectivity.
Revenue was up 3%.
In gas power revenue was up 7%.
Our equipment revenue was up double digits, largely driven by extended scope shipments we shipped 11 gas turbines in the third quarter and we are on track to deliver 45 to 50 permitted to gas turbines. This yet.
Services revenue was down slightly largely driven by a continued decline in that business.
We saw some stabilization.
Typical outage this malady after the first half disruption.
And what was it today, we're still targeting to complete roughly 95% of the outage recently planned for the year.
Turning to power portfolio revenue was down 7% largely driven by significant project timing.
Segment margin turned positive ultra tough second quarter and expanded 760 business plan.
This was primarily driven due to better equipment project execution and the reduction of gas post close to 16%.
We also saw margin expansion across all three power portfolio businesses with the strongest performance in power conversion.
Because power were advancing on our cost actions, reducing headcount by roughly 600 this button.
Additionally, desktop utilizing lean tools to enhance NIM intimated pipe for outages.
As a result on time delivery almost two points better year over year.
And when you have on which has been the least impacted by the pandemic. We're encouraged by the test program.
Onshore wind delivered near record volume offshore wind signed its first talent supply contract with the prototype now operating at certain megawatt.
And our turnaround efforts at greed and hydro are continuing.
Starting with the market humans.
Humans production tax credits continue to support onshore wind in North America and also in building a robust pipeline to capture secular growth through the decades.
Orders were down 11% remember that this can be lumpy business.
Onshore wind down driven by tough comps to the 2009 to participate order volume and seminal to American Repower orders shifting to the fourth quarter.
Separately, there was a large six megawatts offshore wind order in 2019 that did not repeat.
We expect strong onshore wind order growth in North America for the fourth quarter.
And also in.
Recognize its first order for phase in of the Dogan button wind farm.
That said, despite expecting strong fourth quarter order growth, we are focused on underwriting discipline and selectivity to drive improved margins and cash flow.
Revenue was up 4% that's onshore wind delivered nearly 1500, new units and Republican.
5% year over year and 24% sequentially.
Delivering on such significant volume quite strong partnerships with other customers under new management to ensure safety and site readiness.
We also delivered our first Cypress unit and have more than 700 units in backlog.
Segment margin was positive that operational improvements taking hold margin expanded by 230 basis points.
Even by cost productivity, better pricing and volume in onshore and we North America. This.
This quarter, we reduced headcount by roughly 900.
However, encouraged by the positive margin, it's tiny and there's significant opportunity to improve product.
At GE capital, we recently announced the Denver, Ben catch our attrition will take on an expanded role as CEO here I'm excited to continue working closely with them in her new capacity.
Looking at the quarter, we ended with 101 billion of assets excluding liquidity sequentially. This was flat.
Continuing operations generated an adjusted net loss of 61 million.
I think as we generated a loss of $30 million, you'll recall that in the second quarter tickets from connected and accelerated impairment review of the mist get parked on the news.
About 20% of the total.
This quarter, we give conducted an annual portfolio impairment review, which incorporates third party president and uptick Tesco assumptions for the entire portfolio.
This resulted in a pretax equipment lease impairment of 160 million.
You did it take US now the impairment of approximately $500 million against our $29 billion equipment portfolio.
Going forward, we continue to monitor credit risk, we acknowledge that further market deterioration could result in additional evidence payers over and above those that we have posted in our it is.
Turning to insurance.
We generated positive earnings of $57 million, the financial markets continue to recover it interesting to unrealized gains in our investment securities portfolio and positive mark to market adjustments and realized gains.
The conducted annual premium deficiency test also known as the loss recognition test equipment. This has resulted in a positive margin of just under 2% of the contracts are not impacting earnings.
Slightly favorable claims experience and premium rate increases more than offset the discount rates headwind.
I will repeat Ken's comment on 2017 continue to hold and as a reminder, we completed our annual statutory cash flow test were significant in the first quarter of 21.
As it relates to the pandemic and continue to trend in Argentina on.
On the L. This good luck, we're seeing both the reduction in UK and higher terminations.
In our around the flight business, we're seeing higher tends to mortality in Yemen.
Structured settlement loss, we're also seeing higher mortality.
At GE capital, we ended the third quarter with four to one times debt to equity we remain committed to achieving a debt to equity ratio of less than four overtime.
As noted in the fourth quarter. It will provide pants funding to GE capital of approximately $2 billion in line with the rupiah annual insurance sector funding Twentytwenty.
Pan support levels are determined by looking across various metrics, including our internal economic capital framework.
In 21, we expect an additional contribution from GE to GE capital's smid, our existing insurance statutory funding requirement of approximately 2 billion.
In light of the uncertain environment better contribution as depend on the D. captive performance, including key.
This is on the issuance this year, though.
At corporate adjusted cost were down 9% sequentially cost and operations improve it.
Justin continues to optimize its cost structure now close to breakeven.
Corporate continued to reduce headcount down 400 sequentially and 10% year to date.
Test cost and other cost dropped.
Expect higher cost in the fourth quarter, primarily driven by the timing from the adjusted activity.
To wrap up with a final thoughts.
I'm, often asked well both my biggest surprise coming to.
One that comes to mind is the great and the commitment of my finest and.
So we have a lot to work with and a lot to do that.
Let me share how we're partnering with the businesses to drive better margin expansion and cash flow generation.
First we are becoming more operationally, we are prioritizing fewer important capabilities to help deliver better performance.
Examples include on time delivery as well as product and project.
They also changing how we manage this capex at the right level shows that the way the business is Ron.
And we're moving toward active true data management wherever possible.
Second we deepening our focus on cash flow this.
This includes working capital and the timing of billings and connections.
And too many quarters, a significant amount of our cash is collected in the last month, we even last week for the quarter.
And we're using lean and optimism tempered third quality and scale in our digital business picks up and over the last year, we've reduced the closing posted by 50%.
Although early in this journey, especially on working capital improvements I'm encouraged by the post and the progress we are making.
Larry back to you.
Currently the thank you.
Our transformation of GE is accelerating.
In September we introduced a new a new purpose statement for the company.
We rise to the challenge of building a world that works.
This is more true than ever as we continued to deliver for our customers and tackled the world's biggest challenges.
Precision health to the safe return to flight to the energy transition.
Climate change is undoubtedly a massive challenge and one where the technology advancements we deliver for our customers will play an important role.
We've also been reducing greenhouse gas emissions from our own facilities since 2004, and we met our most recent goal for 2020 early reducing our emissions by 21%.
Now, we're strengthening our sustainability pledge by committing to be carbon neutral in our facilities and operations by 2030.
Our strategy to achieve this is threefold first will.
Will boost operational investments over time to achieve energy efficiencies.
Second smart power sourcing will enable us to reduce our emissions from the grid and finally, we'll use lean practices to eliminate energy waste.
Separately, we announced that we will pursue an exit from the new build coal power market. This decision highlights. The interplay we are seeing between de carbonization market dynamics and our own business strategy.
Taking a step back desires.
As I reflect on two years in at GE, What gives me confidence in the future our fundamental strength.
In what continues to be a difficult operating environment. Our team continues to show humility transparency in focus.
Every day.
Looking across GE, we continue to build on our legacy of innovation, leading with technology. This.
This was evidenced by some big wins in the quarter gas power was awarded a large equipment contract with Taiwan Power company, featuring the seven AJ, Dato, three which optimally balances power output efficiency and manage maintainability.
Additionally, renewables finalized a supply contract with Dougherty bank for what will become the world's largest offshore wind farm.
In healthcare, we introduced a number of AI enhanced product to make our customer workflows more efficient, including our vivid Ultra addition, and cardiovascular ultrasound.
And aviation receive certification from the FAA for the Gtx Nine Act.
The world's most powerful commercial engine and designed to be the most fuel efficient GE has ever built.
And at the same time, our technologies are uniquely capable of helping solve the climate change challenge, we're raising the bar and reducing carbon emissions and increasing efficiency. We're delighted that gas power seven AJ turbines will supply. The first purpose built hydrogen burning power plant in the us.
By 2030, the plan is expected to run on 100% hydrogen.
And there is no company with the scale of GE global reach brand talent and long term customer relationships.
All were encouraged by our progress amidst a challenging backdrop.
We remain focused on the long term not only in terms of our ability to perform but to realize our purpose in the full potential of GE.
With that Steve Good question.
Thanks, Larry before we open the line to ask everyone in the queue to consider your fellow analyst again and ask just one question. So we can get to as many people as possible brand in can you. Please open the line.
Thank you Sir we'll now begin the question and answer session. If you have a question. Please press star one at your telephone keypad, if youd like to be removed from the queue. Please press the pound sign for the Heskey if you're on a speakerphone. Please pick up your handset first before dialing.
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And from RBC capital markets, we have Deane Dray. Please go ahead.
Thank you good morning, everyone. Appreciate all the detail here.
Good morning, Dave running then hey sets us free cash flow is the primary operating metric that we're focused on I'd love to hear from Carolina, a bit more about the goals are.
On inventory.
Mentioned two turns what's the target how much more can you go and then maybe Larry can contribute on the thoughts on rationalizing Capex I know there are trade offs that you are making every day here in terms of not wanting to compromise growth opportunities coming out, but where does the capex stand in.
And that thought there.
Thanks, Vince So let me start then on the working capital I think to better understand working capital sort of have to take a step back. So as I tried to look at it for the full year, So far and then I'll end with the.
The opportunities in front of one dose with the others. So it's a big focus for us and to start with is that we have a lot more to do.
I mean, there are several large moving pieces and our cash flow and that mostly around engineering of us. So if we start with recent events.
Year to date cash coming back to the impacted by 2 billion lower averages factoring alone right. So we've used 5.1, so far and 2 billion of that is mainly reducing frankly some of the lower volumes time was our decision.
And unlike that we are making progress on the dentists, though especially in power renewables in the Heska.
Let me say pressure in aviation.
But I do say that the big opportunity also going forward in improving.
We're on lane to that though.
Now with that in all areas and one. Good example is how gas is working with.
The scope and the team to fulfill Overdues and they have significant imaging center that in this house in more than 10 does that so there's more to come there in one area.
And then of course equal balance between.
The growing third.
And also factoring.
And moving to inventory.
I would say at this point of the yen typically our inventory is a significant working capital drag right because they build inventory for the first three quarters and then we deliver a lot in the fourth quarter. So so this year basically we started the year by building the first quarter and then cobot hitting and then working really hard to take inventory down.
And that's what we continue to do and it's.
It's not that does it to take down inventory fast in a long cycle business. So as that we have significant room to improve here.
Our turns are too and we can significantly improve that I would say all the segments and improved here and it is and it's looking to to significantly reduce the size of that because of the new new realities of the demand. So.
And I would say listen we continue to build a big role in improvement, it's not a quick fix but it's a big opportunity for us there.
I would say the most significant hunting captive precious so far it is dependent on.
And especially in aviation and simply put we've been paying our suppliers for higher material inputs in the first half while significantly reducing the input in second and third quarter to reflect the lower demand destination.
I mean, the accountant started to stabilize now but expect this to improve assets in Denmark.
In the end markets improve.
Lastly, this in a lot of pressure on progress so far this year right. So cash flow from progress is really just a difference between collecting payments on new orders and milestones pricing versus executing deliveries.
And renewables as you heard me say, we delivered record on showing volumes. So we've been focused softer than connections and new order.
And powers also pressured and of course, it isn't and put it into new different than though at the moment.
So so I would say focusing.
You'd have to do it business by business and plans by business and the biggest opportunity as it is now it's in receivables and an inventory.
I would also add to that is improving in everything so not the only thing added sort of end of quarter and end of the year, but having a more simple use through the year.
So a lot more to be done and not a possible improvement.
I think yes.
I would just add on Capex briefly we don't want.
To ever be in a position where were under investing in innovation.
Where I say safety or Roe or quality, but that said.
I think one of the beauties one of the benefits will get from a a true lean transformation at GE, we'll just to have a I think a sharper more critical lie with respect to how we think about capital more broadly Donnelly herms, a when we need capital, but then when we see a need how do we go about it right because there's so many others I was in a facility just last week.
For example.
I won't name the business element I'm talking about where it was clear that.
As we were tackling a particular project in that business that.
I'm not sure we had the the the shortest lead short leash.
On the team with respect to capital right. We were looking at other measures of success. So as we implement that philosophy more broadly I think we'll have an opportunity to spend less on the other hand of course, we're going to look for every opportunity. We can put the money to work smartly around new products around new technologies, let alone.
And enhancing safety and quality in our facilities and in our field operations.
Thank you.
From Jpmorgan, we have Steve Tusa. Please go ahead.
Hey, guys good morning.
Hey, Steve Good morning, good morning.
Just a quick follow up on that receivables comment in note four seem to have a lot of activity on that front, you said that the factoring was a headwind in the quarter, maybe was a headwind a year can you maybe clarify that and then also.
The messaging in in July was definitely not confident on positive free cash flow in the second half and.
You know the the messaging with with regards to the options pricing suggested that there was also not much improvement through August so I guess like what happened in timing wise in September they really kind of flip the switch on that or or was or what was it. Just you guys are just.
Incrementally cautious sitting there and kind of late July I'm, just kind of curious you talked about linearity of cash flow through the quarter and it just seems like this is kind of a a.
A big inflection here late in the quarter.
[noise] given some of those dynamics. Thanks.
So Steve why don't I start with the factoring.
In the quarter are affecting balance is flat to up well at frontline Bill.
The 7.7 in the previous quarter with penetration basically flat with year to date, it's almost 2 billion decrease.
That's when you look at the working capital of 5 billion usage two of that is decreasing.
Factoring we expect continued to do so.
Steve I would say that.
What we've been dealing with given the cobot dynamics is a.
Host of uncertainties with the passage of time.
Have become less so I think our last public comments suggested we thought the.
This the second half would be positive we never talked about a specific number with respect to the third quarter and again given the the progress on the 2 billion of cost actions for $3 billion of cash actions.
I think what was a very strong quarter on the part of our health care business and the lack of any further deterioration of note in aviation allowed us to to put the quarter that you see here the 500 million free cash together I would just downlink, we while we're encouraged by the the turnaround.
This is both power and renewables.
We came into the year, knowing that 2020 was going to be an important year for both businesses to demonstrate traction in that regard and whether you look at the sequential improvements whether you look at the year on year margin expansion.
Or the set up particularly for for our gas power business going into next year, when we think will.
It will be cash flow positive I think there is a lot of.
Progress in those businesses. Despite some of the timing dynamics that we've seen particularly with respect to outage execution again more around more back half loaded than another in first half loaded so.
It's a game of inches.
We've never been in a more challenging environment.
But I think as the year has played out certainly as the.
Paul Here is played out were.
Again encouraged by what we see from the businesses broadly, but are taking little for granted.
Thank you.
[noise] from Deutsche Bank, we have Nicole Deblase. Please go ahead.
Yeah. Thanks, Good morning, Larry Good morning Carlino.
Good morning.
So maybe we can talk a little bit about inheritance taxes.
That's part of the bridge from 2020 to 2021 can you just maybe talk about an update as as to where that stands.
Sure Nicole I think we use that phrase from.
The early days right when I joined the company just to.
Just describe some of the things some of the legacy issues that we were wrestling with.
But we don't talk about those dynamics.
Let the same way internally and I think we need to start talking about them in a way that is more aligned with how we're running the business. So you've got a better sense of those things that we havent rollout versus those that are that are running off right. We've talked previously about those those headwinds.
Increasing from 4 billion last year to $2 billion.
Next year.
And a host of issues right legal pension supply chain finance recourse factoring in of course restructuring I think as we come in here to the fourth quarter I think we are doing better and 2020 than we thought.
And we know next year's restructuring cash is going to be higher given the announcement around the new the new build coal exit and some of the the additional EBIAT aviation actions.
So I think the lift next year is going be a little less than.
What we thought but on on balance over the over the two years in in line I think as we go forward, let's think about three things one restructuring.
Which we're going to continue to evaluate on on expected returns I think those are very much within our control currently.
Currently the mentioned factoring right.
Better part of $2 billion year to date of a headwind from the factory reduction those are actions that I think are largely within our control and then the other items that that should come down over time, whether it's some of the.
The UK and now Alstom related pension dynamics into some of the legal settlements that are a little harder to predict.
But I think on balance, but support its part of the set up for us to deliver positive free cash flow and 21.
Okay. Thanks, we have from Goldman Sachs Joe Ritchie. Please go ahead.
Hi, good morning, everybody.
Hey, Joe Good morning.
So so guys look at that it's great to see the progress that youre, making just across the Anthony and specifically on free cash flow I know, there's been a lot of focus there.
But maybe just maybe just kind of focusing on on the two and a half billion dollar number for that for the fourth quarter. Larry Your ammo historically has been to be conservative when you said goalposts like that.
And as you kind of think about the four key number either.
I understand how much of it is within your control, whether it's your higher margin businesses, including the cash restructuring actions that you have coming through.
Just trying to understand exactly how much it is already within your control versus what you need help with from the market to get the tune outlay in Boston Park here.
Sure Joe.
Appreciate that feedback on my ammo, we're just trying to to build and improve here at GE, but when we say at least two and a half in the fourth I.
I think what we're saying is that again, we're going to see.
The cash cost and cash actions that Weve talked about previously played through I think we're going to see sequential improvement in in profit in three of the four segments.
I think renewables is likely to be more flattish in that regard right and as we get the $2 billion of cost fully implemented that should that should play through and be a cash flow benefit.
Yes, and I would add to that the comment on working capital that we have typically Q4 seasonality that hone this year, especially from power and renewable.
And then we have our own management access so I think for the fourth quarter and committed benefits on the working capital primarily coming from continued inventory reduction and lift from Paypal as the volumes start to normalize although in a note no 11.
Our.
We expect to sequentially improve progress collections, or basically esso drag, especially Jeff our revenue more than offsetting navigation pressure.
I think on recent events, we have a headwind just because of the of Q4 sequential growth, but but they continue island collections bark.
So that will also depend a bit sort of connection sources.
Thanks.
No I would just add that we.
Throughout the market some of the things that are outside of our control I'd really say.
We're going to look to do the best we can across the board probably have a little bit more.
Variability or uncertainty at aviation.
Right. The departures is an important measure for us.
We'll see how that plays out.
I think we mentioned in our prepared remarks external shop visits is where we don't have as much visibility.
Compared to what we have with respect to our own activity.
Shipments out of the Airframers triggers or 80 in a obligations.
Working capital dynamic there that could go to go against Us and I think we've.
We've shared before that we we have passed due basically on our military business, we're not happy with that we can clear some of that will be helpful. If we don't obviously not so a.
A few things that are still in play, but I think again between the the cost and cash and earnings working capital Carolina Hi.
Highlighted we think.
At least two and a half is the right outlook at this point, given what we know and don't.
Great. Thank you both.
From Wolfe Research, we have Nigel Coe. Please go ahead.
Yes.
Thanks, Good morning, Larry Good morning, Kevin.
Good morning Nigel.
I guess, we've kind of cash.
So let's move on to power I think you mentioned Larry.
That said that the pipeline of back activity and potentially orders.
Well Q looks pretty good and power. So maybe just talk about what you're seeing them.
On guesthouse services I think you said flattish to maybe slightly down and get asceticism, one thing I'd begun for Q.
Stuff getting this thing significantly easier comps that you think that we are moving into that kind of growth mode. Back then maybe just give us some indication of how the pieces that affect thanks.
Sure, Yes, I think that.
In contrast to last year gas power that was more front loaded from an orders perspective.
We'll see.
We will see things be more back loaded there I think some of the wins that we have referenced should convert into orders in the fourth quarter as we talked when we talked about the conversion that's what we were alluding to so.
So we we think.
What we're looking at a 25% to 30 gig market over time.
That will bounce around but I think as we exit this year, we're encouraged by what we see.
Both from a from a pending orders perspective and from a pipeline you.
With respect to services by.
Michael I would say the story is not wildly different here in late October utilization has been fairly consistent we see that being that read through to to see assays.
I encourage you to reference the the pressure we have seen I think a function of coated frankly on on upgrades at least in part.
We need to evolve the product roadmap, but we know we had some opportunities in the middle East for example that have just been pressured.
And then some given the.
Oil price dynamics.
And then there is the transactional dynamics, what I'm, probably most encouraged by them. We we referenced the strategic reviews, we were with the gas power team just a few weeks ago.
Scott has reset is that in services leadership.
So we have new leaders in.
In many of the critical roles.
I was just really encouraged by the way, they're getting back to some fundamentals we need to improve our execution, both operationally and commercially in the transactional book.
The the same thing applies with respect to upgrades, even though that will be tougher I had the opportunity to sort ratable field trip.
A few weeks ago I went to a CFA site and a transactional site fascinating to see how the differences.
In the work play out given the nature of those transactions. So we need to show you that we can take better care of our customers that we can get back to.
Driving a little bit of growth in this business and leverage the our best grower, but we think we can do better and we can get good conversion on that activity and that's that's what we aim to show you in the coming quarters.
Thanks, Larry.
From Barclays, We have Julian Mitchell. Please go ahead.
Thanks, Good morning.
Maybe just wanted to circle back on to working capital I'm afraid. So look this year. It looks like it's maybe a full billion headwind on cash last year was about 3 billion. So it's sort of 7 billion cash.
Cash out over two years.
Given everything you talked about earlier in this call should we expect.
A very material tailwind there next.
Next year and perhaps most specifically in aviation it's.
Its population going away on the outside that working capital has been a headwind there.
Whether the market is very good or very bad.
You've seen three years in a row of working cap headwinds aviation.
Given we've got two months ago till next year.
What can you tell us about your expectations for aviation working capital next year I'm, assuming some of the supply of terms that are written and so forth starts to become a bit easier next year.
Yeah, well thanks for the question.
No you're right we've had a significant use of working capital and of course that the validates that you have to take working capital into context with the business and how it's growing or not growing right. So so it's been a significant shift from the beginning of the year. This strong growth and then the rest of the year in many places working on on me.
Moving to the new level.
If we look at next year and again the specific if it is an often depend on how the topline develops innovation right because that also shows.
On the receivable side and.
So the level of this though we are working and John Slattery on the time are working very hard on improving our collections and the postal service to the connection.
I would say on the receivable, it's been a function of where the top line with the Atlanta.
Our efforts in factoring plus.
Plus underlying improvement on on the design itself on the inventory side.
Having started we had a strong growth trajectory and are willing to take it down there is clearly more and more to do on the inventory side for the termination and they're working on it and it's not a quick fix so we expect this improvement next year.
On the inventory.
To sort of come to the new new lower level.
Then on dependable side this year had been for it is that.
The big Big adjustment on on the 11th and it's been a big drag savings in this year, but going forward with it.
Possession of the situation.
Expect that payment to be a positive.
Progress, but it's enough.
The mix of how much goes out and how much comes in right. So it's very dependent on on the order situation.
Just something.
Yes. It is this year and you remember we had that big.
MRO order also from a military that we've got in front with the sandwiches.
We're going to be next year.
So I would say that that's all four of them.
Good opportunities both on inventory and receivables, but also on payments was the functional.
Of the situation and progressing.
For the full market dependent.
Thank you.
From Citigroup, we have Andy Kaplowitz. Please go ahead.
Good morning, everyone.
Good morning, Andy.
Larry So you've talked about positive cash flow for 2021, I know everybody sort of asking about it maybe if there is a finer point on the bridge into 2021, you've obviously got these cost actions and aviation you talked about the inherent in taxes is there any other sort of puts and takes that we talk about.
By Division.
Did have very strong cash in health care. So can you talk about the sustainability of that as you go into 2021.
Okay. Let me let me start then.
Right I guess is that mean earnings is going to be key driver and vendors to some gradual improvement in some of the end markets like in aviation and healthcare today.
A big Big part is our self help the 2020 cost and cash actions right. We talked about that that 2 billion this year and cash and ethical fencing in cash.
That annualizes to one and a half to 2 billion of structural cost out.
That goes down to the cash, though right. So that means that carryover for next year on that and we're working to increase.
That number 10%.
I talked about factoring factoring has been a significant headwind in 2020.
So we don't expect this to maintenance at the same level and Twentytwenty one.
Also the non defense on the impairments outflow as the market stabilizes.
Well help me, partially offset by by purpose.
And then we'll have and what we talked about like I mentioned on inheritance items within less of a lift from that and 21.
And I just.
I think we've got the line of sight to Carolina has been is talked about we're going to go through.
Detailed reviews with the businesses here.
And in November two.
Put a finer point on all of that but.
To me I hope, which the little bit here in the third quarter I think what we're.
Going to demonstrate in the fourth quarter is this operational.
Transformation is gathering momentum and a number of the things we talked about commercially.
Be it just.
Creasing visibility enhancing our win rate.
While being more selective turning that into a bit our underwriting and then ultimately execution, particularly in and around projects and power renewables all of that that the cumulative effect of those small wins again at a game of inches daily management I.
I think is.
What we aim to deliver here.
Thank you.
Thanks, Ed.
From vertical research, we have Jeff Sprague. Please go ahead.
Thank you good morning, everyone.
Good morning, Jeff said, we just hey, good morning, Larry Good to hear your voice, but to see the positive cash flow.
We just spend a minute on the FCC here.
Yes.
I guess a question that's kind of the basis on which you reserve a $100 million I mean do you have.
Visibility on that number.
At the same tenable.
Not book anything given the fact that this has now been formalized.
And just your comfort that that's kind of in the write the code of what the.
Total cost might be.
Hi, Jeff as we have disclosed we've been cooperating with assets on its investigation on on several legacy matters, and then related to insurance long term service agreements and the goodwill charge power in 2010.
We recorded a reserve in the third quarter of 100 million and we believe that that's appropriate under the circumstances and that to address all of the issues covered indecisiveness against them.
But that's based on some kind of historical analysis.
Fire situation I guess thats really the question.
Hi, good how you derive that number.
Jeff I would is currently early to set I think we're we're cooperating.
With the commission and I think we we take that that.
Reserve at that level, given our view on on what is appropriate given the circumstances and other than that we really are not at liberty to.
Say more publicly.
Okay. Thank you.
Thanks, Jeff.
Yes, we have markets that are buyer. Please go ahead.
Yes, hi, good morning, everyone.
Good morning, Mark markets, maybe Jeff.
Hi, Marty just on power free cash flow proceeds if we understand that if the moving pieces in the near term yet, but if you look at the uptick in light of specifically in that business. You provided a lot of had some friends clarity I think in the appendix on the gas side.
So I'm kind of intrigued by the exit on the new bids for on the steam side.
So how.
How much of your capital infrastructure in place in steam do you need.
Fixed cost I should say do you need to kind.
Kind of keep that business going I guess on the service side, if you're saying is exiting ultimately the newpage side. Because this is not really focused on on the fixed cost that you have within power on the steam side. So I'm just wondering how much upside that could be on the overall policies cost space here going forward. Thank you.
Mark this year, you're exactly right and when you think about the the steam business right. We've got.
Both if you will.
Capacity that serves the other coal new build market. In addition to the the nuclear business and a service platform that serves both markets I think that.
That's a that's a business that has been challenged.
Where we have not necessarily made all the progress we have made in gas power part of the announcement that we have signaled with respect to.
The new build exit with with respect to coal will allow us.
To.
Take more cost more fixed cost as you say I don't believe in fixed costs frankly, but the cost there that we can that we can lean.
Lean out and then we will continue to look for opportunities.
Throughout the rest of that portfolio. So the teams made progress.
Number of legacy dynamics in play, particularly in steam so.
We're not yet where we are in gas power, but working very hard and I think as we remix that business more toward services will shed that costs and it will be a better contributor.
To GE going forward, albeit one that is unlikely to have a.
Our robust topline growth trajectory.
From Bank of America, we have Andrew Please go ahead.
Hi, guys good morning.
Good morning, Andrew.
Just a question on aviation you have lower charges for a long long term service agreements in third quarter versus the first half how much of the CS April has been renegotiated given lower scheduled slides.
Sort of broader question I think Larry sort of talked about working with customers. How do you work with your customers to keep them from sort of going to the third parties in this environment and aviation.
So Andrew just to start with this is a charges.
The lower than expected, but I think we should keep in mind that in the second quarter, we really took an aggressive up at all or nothing to say contracts and.
In relation with May not happen, but what is happening with covance and our expectation is going forward.
We took a 600 million charge for potent impact.
In fact this quarter, we saw some impact but that was from higher cost coming out of the business end margin review and a 100, but that's no change to an airport costs on the outlook on this is that right.
I think it's important to remember this is a modest are really long term in nature, and it's really a bottom up modeling and it sort of estimated future billing rest as future cost to serve up to 15 to 20 years right. So.
So.
With that said we are mindful of the situation. We are of course monitoring this tangible events and trends and looking at.
Bankruptcies, frankly, but we haven't seen anything that is.
Yes, Thats changed our estimates for the second quarter and that's why we don't have any other impairments on the book in the third quarter.
Andrew with respect to how we how we serve and how we compete I would just add that.
It's important for everyone to remember that we have an.
And active.
Network.
Of partners that.
Do.
Shop visits for ROE.
For the airlines that are that we supply into right. We don't do all that work in.
In our own shops, so that that that support continues I think part of what we wanted to do having Russell slide already aviation take take on that that more broadly defined aviation services business is to make sure.
We are synchronizing better.
Better what we do from a repair and overhaul perspective with the other commercial side of the business, so whether it be helping carriers X.
Execute different scopes or be it providing better delivery to our third parties manner.
Managing Green time as everybody is as we work through cash conservation with airlines it.
No that's just a.
A set of daily operational issues that that businesses has managed to manage well over really decades.
I think we're seeing particular pressure here today, but but encouraged by what we see already with with Russell and the team.
Managing through the.
The cobot period here.
Thank you we have time at this point, we'll now turn it back to Steve for final remarks.
Thanks, Brandon Thanks, Larry Catalina and everybody for dialing in as always my team and I will be available for follow up I know, we're past the hour but.
But I appreciate you staying with us and look forward to speaking with you. Thanks very much everybody.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
Yeah.
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