Q4 2020 General Electric Co Earnings Call

January 26, 2021

[music].

Good day, ladies and gentlemen, and welcome to the General Electric fourth quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. My name is Brandon and I'll be your conference coordinator today, if at any time during the call you require assistance. Please press star followed by zero and a conference coordinator will.

Be happy to assist you if you experienced issues with the slides refreshing or there appears to be delays in the slide advancement. Please hit F. Five on your keyboard to refresh and as a reminder, this conference is being recorded.

I'd now like to turn the program over to your host for today's conference Steve would occur Vice President of Investor Communications. Please proceed.

Thanks, Brandon Good morning, and welcome to Ges fourth quarter 'twenty 'twenty earnings call I'm joined by our Chairman and CEO, Larry Culp, and CFO Carolina Dieback Hopper 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. We're 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 changes. Please note that we will hold an investor call on March 10th to provide more detail on our 2021 outlook with that I'll hand, the call over to Larry.

Thanks, and good morning, everyone.

It's hard to think of a tougher year than 2020.

However, our team performed in the fourth quarter marked a strong free cash flow finish to the year.

Starting with our results snapshot on slide two industrial free cash flow came in at $4 $4 billion in the quarter half a billion dollars higher than last year. This was largely driven by better working capital and improve renewables and power orders.

For the year, we generated positive free cash flow of $600 million, where $300 million, excluding biopharma in the first quarter.

Despite the weakness in aviation healthcare drove our performance delivering $2 $9 billion of free cash in power and renewables continued to improve.

Orders were down 3% organically in the quarter, while down this was a considerable improvement from the second and third quarters.

Three of our four segments orders were in fact up notably equipment orders that renewables and power were up double digits.

For the year orders were down 17% with 95% of this pressure aviation related.

Despite this our backlog remains a strength at 387 billion with approximately 80% year towards services, where we have higher margins.

Industrial revenue was down 14% organically and 13% for the year.

Services were down 22% this quarter driven by the aviation aftermarket.

Despite some moderation outages and upgrades and power.

And power upgrades in renewables.

While services may fluctuate quarter to quarter, especially as we've seen during the pandemic. They create a multi year backlog of profitable business and importantly, keep us close to our customers.

And we expect to grow in 'twenty one.

Industrial margin was six 4% this quarter and three 4% for the year. While this was an organic contraction on both measures we saw sequential improvement through the year due to our more than $2 billion of cost actions.

Adjusted EPS was <unk> <unk> for the quarter and a penny for the year, which includes an impact for the restructuring recast of <unk> for the quarter and five for the year Carolina will expand on this momentarily.

In all momentum is growing across our businesses as 2020 progressed, we significantly improved ge's profitability and cash performance, despite a still difficult macro environment.

We're encouraged by the significant free cash flow growth. This.

This quarter.

We came into 2020 with a clear game plan at GE, we were expecting strong performance from aviation and healthcare, while executing our turnarounds at power and renewables.

We all know how the story goes.

The COVID-19 pandemic hit and hit Us hard.

But our battle tested team embraced the new realities and moved on.

This is best evidenced by the meaningful progress on our priorities.

Looking at slide three.

One we strengthen our businesses.

Started first with what matters, most protecting the safety of our employees and taking care of our customers and our communities.

At the same time, we remain focused on what we can control we continue to build our world class team at all levels with new leaders, joining our existing strong bench of GE talent.

And these leaders are playing a critical role in Ge's operational and cultural transformation.

In support of our transformation and better results, we executed more than $3 billion of cash actions.

This enabled strong free cash flow generation in the quarter, bringing us again into positive territory.

Full year.

Specifically at gas power, we delivered positive cash flow one year ahead of our commitments due to our cost measures and operational improvements and.

And we saw traction across our other businesses for example, all three power portfolio businesses generated profit growth this quarter. The first time in two years.

Two we continue to solidify our financial position.

Despite the ongoing market uncertainty our liquidity remained strong bolstered by our free cash flow performance, we exited the quarter with $37 billion of cash.

Youll recall that in early 2020, we completed the sale of our Biopharma business for $20 billion. This cash enabled us to accelerate our balance sheet deleveraging efforts and since the beginning of 2019, we've reduced external debt by $30 billion.

And three we're building our foundation for long term profitable growth.

It starts with Ge's purpose.

Rising to the challenge of building a world that works.

We're leading in some of the world's most important markets the energy transition precision health and the future of flight and we're passionate about delivering for our customers while tackling the world's biggest problems.

We're seeing this as we help customers decarbonize through leading technology across wind gas power generation and modernizing the power grid with digital and automation solutions.

And this really came to life and health care. This year, where we were on the front lines responding to the exponential increases in demand in certain products due to COVID-19.

And we're keeping our sites on a long term health care launch more than 40, new products, including the Bureau virtual care solution, which provides a complete view of patient status across a care area hospital or system.

And we announced that we acquired prismatic sensors, which has photon counting technology a huge leap forward in the quality of limit images that can be captured on a C T.

So as we play more offense in 2021, our team is energized about making our purpose a reality every day.

Now a lean is how we will do this across GE and the real unfinished business.

In the last two years, we've laid the groundwork establishing archives and promotion office and introducing lean fundamentals across the company.

Now, we're picking up the pace scaling lean companywide with an eye towards operational and financial impact.

Through safety quality delivery cost and cash improvements.

In digital grid for example, our team used problem solving and daily management to reduce quality defects by 25%.

This helped drive savings that enabled the business to grow operating profit by 60% in 2020.

Is this team shows you can apply lean in any part of the business not just in manufacturing.

One of our key leadership behaviors is delivering with focus which means ruthlessly prioritizing where we can add the greatest value.

Two key opportunities for GE, our aftermarket services and digital often working in tandem to transform what we can do for our customers on a daily basis.

For example, our renewables and digital teams are working together to develop AI enhanced wind turbine inspections to reduce blade failures.

In turn earlier detection will help improve safety as well as reduced repair time and cost.

These advances are possible due to our ongoing commitment to investing in innovation.

We also had some major product.

Launches this year with a <unk> wind turbine and the GE <unk> engine, receiving certifications both machines are leaders in their own rights offering incredible power output and efficiency.

So 2020 is certainly a year none of us will ever forget for its challenges, but even more so for how the world rose to meet them.

At GE I am proud of the way, we persevered in the face of great uncertainty.

And we're set up well for the year ahead.

With that Carolyn will provide further details on our quarterly results.

Thanks, Larry.

Broadly speaking I'm also pleased with how we're progressing on our priorities. We are becoming more operational we are deepening our focus on cash flow and were using lean and automation to improve food.

Quality and scale.

And you've started to see evidence of this in our margin and cash flow numbers I will share. Some examples with you today.

Turning to slide four.

We covered our consolidated results. So let me provide some additional color on our earnings performance.

First we made some notable reporting enhancements.

This better aligns with how we operate our businesses and will help us drive improvements.

It also further enhanced transparency and disclosure quantity, but.

A particular note. We now include restructuring expense expect significant and higher cost programs in adjusted EPS and in our segment results.

This will drive accountability in managing cost and benefit at the businesses.

The restructuring costs with an impact of <unk> in the quarter and five for the year.

Second we're still managing through significant market volatility aviation continues to heavily impact our overall performance, finishing at the top line and our industrial profit, but we saw progress in our.

The other businesses.

Quarter, but overall industrial margins was down 350 basis points.

Excluding it isn't.

Excluding aviation margin expanded 340 basis points, reflecting swift actions and strong execution on our cost program.

As planned in 2020, we reduced structural head count by more than 20000, or 11% and that's ex disposition.

Third looking at continuing to adjusted EPS.

This difference came from the steps, we've taken to improve our financial position and operations.

A couple of main drivers. These include Hello, Baker, Hughes, Mark and $124 million of restructuring expense tied to the significant high cost programs I'd.

I'd also point out that tender costs.

Additional biopharma related tax benefits and the remaining 100 million to close out this is Matthew.

In all access took hold we saw improving results to close this difficult year.

Moving to cash.

Generated $4 4 billion of industrial free cash flow this quarter, well above our expectations coming into the core day. This is up $500 million year over year and is also ex biopharma up $900 million.

All businesses delivered positive cash flow largely driven by better working capital management.

Cash flow benefited from positive earnings healthcare earnings were strong again, this quarter and together with power and renewable.

The offset aviation decline.

I will say that there are puts and takes between earnings and other CFO essent.

As seen in prior quarters noncash items, such as the Baker Hughes Mark to market impacted earnings, but not cash and they were affected in others.

Consistent with how we run the business with strengthens our working capital.

Initial broadening it to include current contract assets and other current items.

Free cash flow definition remain unchanged.

This quarter working capital was the biggest driver of our free cash flow.

A source of cash at $3 4 billion. This was significantly better sequentially and year over year due to seasonal volume and continued operational and financial process improvement.

While were seeing improvements across the board inventory and payables, but the net contributors to cash flow this quarter.

Looking at the dynamics receivable naturally pressure from the higher seasonal volume in fourth quarter.

Reduced short term factoring by one 2 billion this quarter, bringing the total factoring balance down to $6 8 billion plus.

Partially offsetting this was strong collections, resulting in a further decline in passengers and dsos.

Renewable for the standout this year implementing our standard operating rhythm using lean to reduce its dsos and its past dues by more than 25%.

On inventory, we released $1 6 billion across all businesses through higher deliveries driven by seasonality and more rigorous material management. For example, healthcare Martin is implementing a real pull assistant in production. So far this has improved on time delivery by roughly 15 points and ink.

Inventory turns by a half time.

Payable, but also benefit as volume increased this quarter.

Collections were a net 1 billion inflow. This was driven by cash collected from large orders closed in renewable and strong milestone deliveries, partially offset by aviation and pallet.

Contract assets and net $800 million of inflow and this was due to aviation CSA collection, including quarterly flight hours annual minimum contract requirements and other items.

We're still carefully optimizing our investments to drive returns aligned with our long term objectives.

We held Capex flat sequentially in fourth quarter. This represents a reduction of more than 50% year over year and for the year. This is down 31%, but importantly, we continued to invest in high return a strategically important project.

For the year industrial free cash flow was $600 million all businesses, except aviation improved cash flows and ended the year stronger than they began.

Total power generated positive free cash flow, including gas powered estimate faster progress on our fixed cost reductions and working capital improvement. Despite the negative cash flows of power portfolio.

Healthcare delivered an impressive free cash flow of $2 9 billion, while overcoming a 1 billion headwind from the foregone cash flows of Biopharma.

This was driven by higher earnings.

Primarily from the pandemic related demand cost actions and better working capital.

Free cash flow at renewables was negative $600 million at the three.

$300 million improvement year over year, despite the impact of the business cycle.

Focus on inventory management is paying off and we had strong progress from orders and milestone execution.

Aviation free cash flow turned positive this quarter and was nearly breakeven for the year enabled by our significant cash action.

Stepping back our trajectory to sustainable cash flow growth rests largely on self help.

I am confident we are focused on the Wright area operational cash drivers that improved working capital increasing the frequency of our operating rhythms and more linear cash flow generation throughout the quarters and the year for.

For example, all leaders have action plans to run their businesses leaner with lower inventory levels.

In aggregate, our focus and actions to improve working capital is starting to pay off.

Moving to the segment results, which I'll speak to on an organic basis.

First on aviation.

And CFM departures were down approximately 48% this quarter versus our January 'twenty baseline.

Due to the resurgence of COVID-19 cases, and further travel restrictions.

The commercial aftermarket, which is critical to our recovery showed some sequential improvement.

<unk> were down 40% year on year, but up more than 50% sequentially.

Commercial services was down more than 50% year over year with commercial engines down 21%.

It's important to recall that the fourth quarter of <unk> included a $1 9 billion order from the Aero derivative joint venture formation. This was just under half of the total orders decline in dollar terms.

Aviation backlog stands at 260 billion down 5% year over year, yet flat sequentially. The largest driver was commercial engine unit shipments and cancellations outpaced orders.

Cancellations were about 400 units, primarily by one day this quarter significant but for context, our ending backlog still stands at more than 9600 engines.

Revenue.

The client decline continue to moderate down 34% this quarter, while revenue was up nearly 20% sequentially.

Commercial engine revenue was down 47% as we shipped 309 fewer engines here over yet.

Commercial services revenue was down nearly 50% this was driven by lower spare parts sales and shop visits.

Charges for long term service agreements were approximately $150 million this quarter roughly a third of Covid related.

While customer demand remains strong in military revenue was flat showing sort of our expectations.

This was due to continued supply chain challenges are filling shipments.

Segment margin nine 6% margin expanded sequentially driven by the cost actions and improved volume in commercial markets.

Despite more than $100 million of continued higher cost due to lower production rates.

Decremental margins this quarter were 48% up sequentially.

This was due to continued volume pressure in a tough margin comp of 23% from the fourth quarter investment.

So for the year. It is in margin of five 6% was supported by significant counter measures.

We realized savings of more than 1 billion of cost and 2 billion of cash actions.

This work continues in 'twenty one.

Moving to healthcare the team delivered another strong quarter.

Our health care systems market remain dynamic with elevated demand and COVID-19 related equipment offset by softer demand for non pandemic product <unk>.

Regionally public health care markets, such as Europe, and China have been stronger than private market, particularly U S. India Latin America for.

For the second consecutive quarter global procedure volumes were relatively stable with some regional variability as care providers postponed elective procedures due to COVID-19 spike.

With that backdrop healthcare orders continued to improve up 1%.

In healthcare systems orders grew 1% Europe was up low double digits in China up low single digits.

Services saw consistent growth up low double digits as we continue to provide critical support to our customers.

In Pdx demand continues to recover to pre pandemic levels and orders were down 1%, but up slightly sequentially.

Healthcare revenue was up 6% healthcare systems was up 7% Lcs had solid execution delivering a record number of ventilators.

Non pandemic related volumes were also positive as they converted imaging backlog in ultrasound orders this quarter.

From a regional perspective, we saw strong growth in Europe and China. This.

This year, China revenue was more than $2 billion and up 11% in the quarter alone.

U S revenue was more than six 5 billion up 2% for the year, including the U S government ventilate drawdown per.

<unk> revenue slightly down 1%.

The segment margin was up 310 basis points, this quarter and 190 basis points for the year.

While we continue to invest in new products the team reduced structural costs.

Head count was down roughly 1200, this quarter and the business maintain tight control over discretionary costs.

For the year revenue was up 4% with healthcare systems up 5% and the margin was 17%.

Our team delivered operational improvement and has headroom for more with an eye towards continued margin expansion.

Turning to power.

Our team continued to make operational progress, particularly in cash generation.

Starting with the market.

Despite global electricity demand and gas power generation declining this quarter.

Gas turbine utilization and therefore, our CSA billings Brazilians increasing mid single digits.

Driven by our technology, and commercial positioning and higher growth gas David regions.

As anticipated we saw significant orders improvement gas power equipment ordered more than treatment with hitch a win in Asia, and securing 45 to 50 heavy duty gas turbine shipments in 2021.

Service orders grew 7% with double digit growth in transactional and low single digit growth in since day one.

Upgrade decline moderated from earlier in 2020 down single digits for the year service orders were down 3%.

Power portfolio orders were down 27% largely driven by steam equipment.

As we exit Newbuild coal this trend of limited drilling equipment activity has continued and as we execute backlog and rightsize. The business. We expect this to flow through the financials.

We ended with slightly higher backlog as growth in gas powered more than offset declines in power portfolio gas.

Gas power backlog of $6 to 6 billion grew roughly 700 million sequentially driven by strong equipment and transactional services book to Bill.

Revenue was down slightly this quarter.

In gas power revenue was down 3% largely driven by services down 10%.

Lower discretionary spend on upgrades and narrower scope of outages.

For the year, we executed about 90% of our pre Covid outage plan.

Setting this was equipment revenue up double digits.

We shipped 28 gas turbines this quarter up seven units year over year for a total of 51 heavy duty shipments in 2020.

And we commissioned four gigawatts of power to the grid, including six <unk> units.

Units.

And power portfolio revenue was up 5%, primarily driven by steam equipment project execution.

Our power portfolio performed about 95% of their pre Covid outage plan.

Segment margin of 6% was up 40 basis points, a double digit reduction in gas power fixed costs was partially offset by negative revenue mix between equipment and services and some one time noncash charges, including for specific customer credit event.

In power portfolio as Larry mentioned, all three businesses generated profit.

Power conversion was a particular standout better execution led to margin expansion of 10 points year over year.

For the year power revenues were down 5%, but the Tim held margins at one 5%.

We offset pressure from lower services volume and onetime noncash charges, such as an underperforming joint venture for global Aero derivative packaging by reducing head count by roughly 3300 and sequencing power fixed costs.

Turning to renewable.

Our progress continues.

Onshore wind delivered record volumes despite the pandemic.

Offshore wind versus full certification for both its 12 and 13 megawatts Hollywood.

And grid and hydro our turnaround showed improved results.

Starting with the market.

When growth was sustained by international demand.

<unk> continued to be supported by solid secular growth trends.

And we've built a robust talent pipeline with total commitments of $5 seven gigawatts.

Orders were up 32% year over year, representing the first quarter of growth since the third quarter and 19.

This was driven by onshore wind with large equipment orders in North America and offshore wind with its first Hollywood X order of 95 units from the Dogger Bank wind farm in the U K.

This double digit order growth brings our backlog to a record high of $30 billion and importantly at better margins.

We remain focused on underwriting discipline and better project selectivity.

Revenue was down 7% driven by onshore wind, specifically new units and Repower upgrades were down 27%.

Our deliveries were more heavily weighted in the prior quarter due to the <unk> dynamics. This was partially offset by growth in offshore wind and hybrid.

Segment margin was slightly negative this quarter, though up 290 basis points year over year.

It was driven by cost productivity.

Better pricing in onshore North America, and improved project execution.

At grid.

While negative improved significantly.

Driven by our restructuring actions and better project execution.

For renewable revenue was up for the year and wireless segment margin improved it was still negative.

Moving to capital on slide seven.

We ended the year with $103 billion of assets, excluding liquidity continuing operations generated an adjusted net loss of $24 million this quarter.

This was down year over year, primarily driven by lower gains at Jacobs, and <unk> and higher taxes.

Nearly offsetting well.

Impairments and positive marks on the insurance investment portfolio.

Our team continued to work customer by customer through restructuring and in some cases repossession.

At year end the outstanding deferred balance was approximately 400 million. This was down slightly sequentially, both as the function of limited new differ as well as collection.

Fortunately, we've collected around 84% of what at Investor Day.

And out of a fleet of more than 900 aircrafts. We ended the year with 27 aircraft on ground.

This quarter Jacobs generated a profit of $120 million.

It's down $94 million year over year, driven primarily by the disposition of the peak in 2019 and market conditions for.

For the year Jacobs generated earnings of $50 million, excluding the second quarter goodwill impairment.

Equipment lease impairments, India totaled $542 million and $45 million in the quarter.

Going forward, we'll continue to monitor credit risk of further credit deterioration could result in additional airline failures over and above those that we have considered in our reviews.

Turning to insurance the business generated net income of $112 million this quarter.

This was largely driven by increases in unrealized gains in the investment securities portfolio and in Mark to market adjustments and realized gain.

As it relates to the pandemic and adjusting for what we believe is timing related.

Our LTC block, we continued to see reductions in Ukraine and higher policy terminations.

In our runoff life business.

We saw we still saw higher claims due to higher mortality.

And our restructured settlement block, we also saw higher mortality, resulting in lower claim.

Insurance will complete its annual statutory cash flow test in the first quarter of 'twenty one.

As expected day provided a capital contribution to GE capital of $2 billion in line with the required annual insurance statutory funding for 2020.

As we said in the third quarter, we expect an additional contribution from GE capital in 'twenty, one to meet its existing insurance statutory funding requirement of approximately 2 billion.

In light of the uncertain environment further 2021 contributions depends on GE capital's performance.

<unk> operations and insurance if day results.

Shifting to corpus.

Our focus on decentralization continues.

We're driving more accountability to the segments and continue to resize the court in favor of the business units.

This quarter adjusted corporate costs were $443 million down 23% year over year.

Functional costs and operations improved as we saw further reduced head count, which was down 13% for the year to a digital saw significant traction on profit and cash flow as the business improved operations and optimize its cost structure.

Moving to slide eight.

We continue to improve our financial position despite the uncertain external environment we.

We ended the year with about $37 billion of total cash.

More than 23 billion and $13 billion at GE capital.

We also maintained 20 billion of credit lines.

And through a series of actions this year, we reduced near term liquidity needs through 2024 by $10 5 billion.

We also continued to enhance our cash management operations targeting more linear cash flow lower factoring and less restricted cash as.

As a result, we reduced intra quarter borrowings by $3 6 billion in 2024.

Approximately 75% year over year.

Expanding on cash flow linearity.

One focus area for our businesses has been improving.

The end to end cycle of order fulfillment billing and collection.

And our health care system equipment business. For example, standard work is helping us level load the number of deliveries from the third month in the quarter earlier in the quarter smoothing out deliveries and collections.

This is also reducing inventory and improving factory productivity.

These types of operational improvements have reduced our industrial cash needs to below 13 billion on a go forward basis.

And this creates greater capacity to Delever the company.

However, we will continue to hold elevated cash levels through this period of uncertainty.

Turning to debt reduction, we made strong progress in 2020, reducing external debt by $16 billion and.

Our industrial net debt ended at 32 billion down $16 billion in 'twenty and down $23 billion from 19.

We also continued to derisk and actively manage our pension.

In 2020, we decreased our pension deficit by $2 3 billion.

The combination of strong asset returns at 17, 6% and recent actions such as the $2 5 billion pension pre funding more than offset the impact of low interest rates.

Based on our current assumptions, we won't need to make contributions through 2023 to the pension plan.

In terms of leverage level.

Industrial ended with a five nine times net debt to EBITDA ratio due to lower EBITDA, reflecting pandemic related pressure.

We remain committed to achieving our industrial leverage target of two five times net debt to EBITDA over time.

A junior capital we ended 2020 with a debt to equity ratio of three four and we expect to remain below our four times debt to equity target.

In closing our team made meaningful progress this year I am encouraged by the results we're seeing from the many many changes underway will continue to build on this momentum in 2021 now.

Now Larry back to you.

Gary Thank you.

Turning the page to 2021, we're planning to provide a full outlook for the company, including detailed segment information.

During our March Investor call.

Today, we'll share an overview for the total company in 2021.

Moving to slide nine we're expecting organic growth in the low single digit range for industrial revenue organic.

Organic expansion of 250 plus basis points for industrial operating margin.

15 to 25 for adjusted EPS.

And a range of two 5 billion to $4 5 billion for industrial free cash flow.

Of course, there are a number of key assumptions underpinning.

Our plan for the year.

First is the lost cash and earnings from dispositions largely biopharma.

Which again generated nearly $300 million in cash and 400 million in profit in the first quarter of 'twenty.

And the continued reduction of Baker, Hughes dividends, which represented more than $250 million of cash flow in 2020.

Second on aviation, where the impact of Covid has been most acutely felt in our level of uncertainty is still the greatest starting with the market. Our plan assumes to purchase remained close to fourth quarter levels in the first quarter and we begin to see the commercial aviation market recover in the second half.

That said, we fully acknowledge the pace of the recovery remains dependent on containing the spread of the virus effective inoculation programs and governments collaboration to encourage travel.

<unk> aviation, we continue to expect the engine aftermarket recovery to lag departure trends across regions in fleets, particularly around quarantine requirements.

And given that we generate a significant portion of our cash in commercial services the recovery of the aftermarket remains critical.

So our full year plan assumes aviation revenue was flat to up year over year.

And as a reminder, since the full effect of the virus was not felt until late in the first quarter of last year, we will be lapping a tough comp.

Looking across our other segments and power, we anticipate continued progress at gas power with some offset in power portfolio as we exit Newbuild coal.

Overall, we expect equipment revenue will be down driven by a narrower scope with less turnkey volume.

We're also planning for growth in our higher margin services revenue.

In renewables, we're focused on improving operational execution and driving structural cost out that will help us expand margins and improve cash.

At healthcare, we expect continued strength in health care systems, as our new products and commercial average drive growth.

In pdx to recover.

While we expect cash conversion remains solid it will be lower than 2020.

And at capital, we expect earnings to be better.

At each business, we are further accelerating cash performance and cost management with restructuring remaining elevated.

So in aggregate, we have a positive trajectory.

Going into 2021, despite areas of volatility and the continued challenges in aviation, we're focused on delivering on our commitments and I am confident that our continued efforts, we will build a stronger and more focused G.

Turning to slide 10.

As we all know 2020 was a year like none other.

I'm truly proud of the GE team and their remarkable resilience.

I hope you can see that in the face of great uncertainty, we continue to strengthen our businesses and deliver for our customers.

And as we move through the second half of our businesses had a strong free cash flow finished.

To what was a challenging year.

Momentum is growing across our businesses, we continue to evolve our culture.

By embracing lean while preserving the strength that have defined GE throughout its history.

And I am excited about the opportunities that lie ahead, how we will continue to lead the energy transition.

Help our customers deliver precision health.

And define the future of flight.

As our multi year transformation accelerates will unlock upside potential with better cash generation profit and growth.

And ultimately we expect that our industrial businesses over time should generate high single digit free cash flow margins while.

Rising to the challenge of building a world that works.

With that Steve Let's go to questions before we open the line I'd ask everyone in the queue to consider your fellow analysts again and ask one question. So we can get to as many people as possible Brandon can you. Please open the line.

Ladies and gentlemen, if you would like to ask a question at this time. Please star one telephone keypad. If your question has been answered or you wish to withdraw your question. Please first step outside.

And from Jpmorgan, we have Steve Tusa. Please go ahead.

Hey, guys good morning.

Good morning.

Congrats on the strong finish on cash.

Just curious on this on this GE capital changed.

When when did that start and is there any impact on <unk>.

Kind of working capital.

Trends.

I'm, just kind of trying to figure out how you mentioned that the transactions remain on kind of an arm's length basis.

But how does this kind of change that the dynamic around working capital at all.

Hey, Steve just for clarity you mean, the change in how we account for it on an equity basis, Yes, we just announced today okay.

Yeah.

Okay, Yeah, well that is really to simplify the way we show how <unk> industrial.

Industrial is performing and how J capital is performing that's the only.

That's the only change that we do there.

I would say, though that looking at the reporting changes that we have done in the quarter or at year end. There are a couple of significant volume and the most significant is really.

The restructuring recast in moving responsibility for not only the.

Sort of.

Execution, but also the cost as well as the benefits to the businesses. So I would say that that's the biggest and most important one and also when we're talking about working capital definition and broadening working capital definition that is really to more align with how we really run the business internally and operationally.

Drive improvements in working capital to show that also in the external reporting and the classified balance sheet really goes it goes with that.

Got it and then last one was.

It was on R&D right you saw that our sales really showing that as a standalone line to increase transparency and highlight that.

Just to follow up will you be growing assets at GE capital on a core basis outside of insurance in.

2021.

No we're planning to keep that flat.

From Wolfe Research, we have Nigel Coe. Please go ahead. Thanks.

Thanks, Good morning.

Just wanted to dig into NPL.

Alright, great.

At the midpoint.

You be converting over 100%.

On your adjusted earnings outlook, So just wondering.

What are you assuming in terms of moving.

Capital benefits.

Progress collections any detail that'd be helpful. Thanks.

So.

Why don't I to your point, there why don't I sort of explained how we could work to the midpoint of the guide. So we're guiding for $2 5 billion to $4 5 billion of free cash flow in 'twenty, one with a midpoint there of the three and a half right. So you would have to start by Rebase lining the numbers from 2020, So you take out the.

Biopharma is positioned Biopharma and health care Covid demand and that really gets you to roughly zero as the starting point and then I would say you have cash earnings its about a third that gets you to the midpoint of our range with all the businesses are planning for structural cost out and here. We have bought both the normal course of strengths.

The business that the business alone, but also the carryover from the Covid 2020 actions and on top of that also the low single digit organic growth that we're talking to Wright, primarily in healthcare renewable and aviation.

The remaining two thirds are driven by networking capital improvement, including the factoring tailwind that we talked about and it's partially offset by other items such as the non repeat of military.

In aviation that we've called out.

As well as <unk>.

A D and E payments from higher aircraft deliveries.

Really pushed out.

And Nigel I would just add that I think what you see coursing through both the cash earnings and frankly, the working capital improvement.

Both the improvements that we're trying to drive commercially.

With respect to <unk>.

Better upfront opportunity identification better underwriting.

Pricing terms and the like all the way through that that upfront cycle, but also operationally.

Right.

In terms of cost quality and delivery that is helping us both.

In the income statement.

But also obviously on the balance sheet and I think when you look at the fourth quarter numbers.

You see some encouraging evidence that while it's still early innings for us with respect to the lean transformation, where we're seeing some nice results and that will just feed on itself that will build momentum and that is something that we're looking forward to contributing.

In that bridge into the 'twenty one numbers.

From vertical research, we have Jeff Sprague. Please go ahead.

Thanks, Good morning, everyone.

Just a kind of a two part question if I could.

Sure if you could a little bit of the restructuring variance embedded in what you just told us on cash flow and then also currently and it just picking up from what you said if.

One third of their earnings.

One third of the cash flows from earnings next year that would kind of imply your underlying conversion is $65, 70% or so is that what your underlying free cash flow conversion should be once we kind of normalize out of this thing.

Yeah.

Okay. So let's start with the first question then on on restructuring.

We have the the recast strides that we now include risks basically with moving the responsibility out into the segments and we're also including it.

In in the Aps and therefore in the recast. So if you look at the quarter. For example, you have a <unk>.

The effect of that on our numbers. So you go from eight to $10 five for the full year.

And if you look at the restructuring we.

Basically we delivered on the $2 billion.

Cost that we committed to but also the 3 billion.

Excuse me of cash.

As we promised and you do have a carryover effect of that going into.

2021, its about half a billion that will then flow into the numbers and.

And improve their earnings next next year.

From UBS, we have Markus Mayer. Please go ahead.

Yes, hi, good morning, everybody, if I could maybe David speak specifically on the power free cash flow guidance, but it seems that youre clearly about a year ahead off of targets Jan sixth call Scott on webcast trajectory.

Adding slot next year can you maybe too.

Take care, particularly on.

And down on the on the.

Gas power services by how much.

It's tough to pin down on the on the fixed cost that on the gas side you have down on the on services.

Should we assume that there's no catch up on that side next year, and then specifically on the scheme and the exit of Newbuild cone and you said something about indices cost base you can address going forward and how should we then think about that maybe over the medium term and how do you think about that over the medium term.

John.

<unk>, Let me let me, let me take a swing at that.

I think you have the basic architecture in hand, the segment will be flat, but it really masks to underlying dynamics right.

Youre spot on with respect to the improvement at gas power I don't think we could be more pleased with progress the team is making there.

Clearly a competitive market no no question, but in terms of.

Controlling what we can control both again.

At our underwriting upfront with respect to equipment.

Continued market acceptance of the H J.

All of that.

<unk> is in our favor services has been a challenge we've talked about that I think through the course of 2020, a little bit of a little bit of light there relative to the order book in the in the fourth quarter, but I think we really know the onus is on us to continue.

To drive.

Better performance in all aspects of the service.

Portfolio, there or be it the <unk> transaction and upgrades upgrades was particularly pressured for us and 'twenty. We know CSA is is a function of utilization a little bit.

A little bit better. So I think when you put all of that commercial and operational activity on top of the restructuring where we've taken $1 billion of cost out at gas power you get the early arrival of that positive free cash performance in 'twenty as opposed to 'twenty, one and we really move from here with.

Team that I think is has proven that we can control the control controllable and deliver better results with with this book of business I think when you talk about power portfolio you put your finger on steam.

<unk>.

We're going to be restructuring as we exit.

Coal Newbuild coal that is a significant undertaking it is it is early in that effort and that will be a.

Our cash pull on us in 'twenty, one and probably to a lesser degree in 'twenty two as we execute on that so.

When you put it all together as you saw on the slide in the appendix.

It will be roughly flat in 'twenty, one we'll be looking to drive gas as best we can but we need to see the new coal.

Is it through and we will do that as thoroughly and thoughtfully as we can.

Yeah, and Jeff just to comment on on gas power, specifically, because we've talked a lot about the restructuring with the COVID-19 related restructuring, but it's really an achievement from the gas powertrain with Scott and team. So.

Achieving positive cash flow in 2020, a year ahead of plan really basing on what Larry talked about almost a billion of fixed cost out in the last two years and then also basically I would say rebalancing, our our relationship with our partners and suppliers.

Suppliers and significantly structurally increasing detail as well as significant.

Strengthening the processes that were still on.

Dsos and how we both build collect including overdose, that's really gotten us to a positive cash flow already in 2020, it's a strong achievement there.

And just to come back Jeff to your second part of your question.

The question of whether that number that you calculated for this year is an ongoing number are not currently no. One wanted to take a minute to come back on that in terms of free cash flow conversion longer term.

Yeah, when we look at the free cash flow conversion longer term, we're still we need to acknowledge that if we look at the earnings guidance also for next year, we still have.

Elevated levels of restructuring and we have.

Elevated levels of pension and legal and so on so there is still significant room to improve.

Improve.

And then also the structural process improvements that we're driving through the business on the working capital so with healthy cash conversion, but it will take a little bit longer than than next year.

And from Bank of America, we have Andrew <unk>. Please go ahead hi.

Yes, good morning.

Good morning, Andrew.

Hi.

Aviation one of the questions. We're getting is that I think planned retirements. This year has been.

Although average because I think airlines did not really go bankrupt.

But how do you see again on one of the questions. We get is sort of planned retirements and.

Here's the whole service materials availability.

Into 'twenty, one how do you account for this in your forecast or your baseline forecast for aviation in 'twenty one.

Andrew Youre exactly right.

The way, we look at retirements in 'twenty, just interestingly compared to <unk> 19, we actually saw fewer.

Aircraft retire last year that we did the year before but I think we're going to see that uptick in in 'twenty one.

In all likelihood.

Here in the back half as volumes return and.

The deliveries out of both of the major air Framers pick up so we're assuming that we will see that that retirement.

Transition.

At the same time, while theres been a little bit of a bid ask spread with respect to departing out.

Some of those planes, we're anticipating that we'll see a little bit more of that U S. M effect as we get into the second half.

At a time when we should see a return to volume activity and I think people.

Need to appreciate that uhm cuts both ways for us where.

We've been a major user of <unk>, given the nature of our CSA obligations.

Over time so.

It'll take a little volume for that market to begin to really.

Kick in there is a lag of course from the time a plane is retired at the time that we would see it in the U S market.

But I think as we look out over the next several years again, not trying to day to pin a particular time in which we see a return to normal volume activities from our perspective, we anticipate deliveries to outpace retirements.

And that will be.

Net effect positive for us at.

At aviation the other dynamic worth noting there of course.

When we look at the dynamics for our fleet today, when we when we highlight the fact, we've got a very young fleet, we're really well.

But we really mean by that is we've got well over half.

Of the CFM 56.

5 billion 70 fleet they haven't seen their first shop visit right. So they're still early in their lifecycle.

Michael <unk>.

Three quarters of that same fleet have yet to see their second shop visit. So we'll typically see three during the course of a normal useful life are major economics happen in and around the first and second so as these are these planes come back online that green time is used demand puts additional pressures on the <unk>.

Fleets that.

Those are the catalyst that we're really watching for relative to the beginning of the recovery and the return to let's just say 19 levels in our commercial after market business there in aviation.

From Melius, we have Scott Davis. Please go ahead.

Hey, Good morning, Larry Carolina.

Good morning, Scott.

I was hoping a little bit of a Nick nitpicky question, but whats left incorporate that you guys plan on parsing out to the to the to the businesses.

It can be somewhat specific I mean is there still.

R&D that's done at the central level or is everything.

<unk>.

Build out already I will just leave it there.

Yes, well.

There are a couple of things in play Scott and I'd rather.

Talk about that internally before we talk about it externally.

But in effect.

What <unk> seen in the last couple of years really is not only the reduction of the core through absolute.

Reductions, but also the movement of a number of the traditional corporate functions that had been at the center in some form out into the businesses.

There is still a fair bit of activity.

You are referencing there specifically the global Research Center, where we have a <unk>.

<unk> facility, that's really not part.

In a major way of that corporate net number that you see there right. The businesses are paying their way by and large in that regard also keep in mind, we've got a number of p&l's.

And what we call corporate principally the digital business are 1 billion dollar.

Software business.

Some of those businesses are more independent than of the of the portfolio others are.

Operationally linked so we'll continue to work to improve those businesses and if there are situations where.

They can work more closely or better with the businesses.

Under a different group will do that but I think.

We will continue to look for opportunities, but they will be on balance more modest in scale and scope and what you've seen in the last couple of years.

From RBC capital markets, we have Deane Dray. Please go ahead.

Thank you good morning, everyone.

Hey, a couple questions on aviation that was announced last week one of the major Airlines said they were restarting deferred engine overhauls and just would like to hear how you expect to flex aviation capacity back up to meet this normalized demand and then.

Any color on the supply chain challenges you mentioned in aviation.

Sure.

It's probably.

Probably most helpful to just frame kind of what we did and where we are right we didnt.

We didn't bring that that activity level down to zero, we tried to.

Re size it in a way that.

Embrace this as harsh unfortunate near term reality, but gave us a little bit of room just because.

Back to Andrew's question, a number of dynamics that are hard to know in the short term with absolute certainty be it the retirement dynamic.

Fleets are going to.

Managed green time, just even in the short term how folks are going to flex around.

The COVID-19 effects as we saw in July and August and then in the other direction here in the first quarter. So.

As an operational matter I think what John Russell and the team are prepared for a number of scenarios, where when we see that recovery.

We'll leverage some of the if you will the excess cost that is still there because again, we didn't take it to the bone but also.

We have we've laid in place plans that will give us an opportunity to.

Ramp back effectively from a from a safety from a quality from an on time delivery perspective, but also to have the right cost structure.

Along the way.

But we will be dealing with.

A limit right.

In terms of our shop visit capacity in a in a particular window in and that's part of the conversation we're already having with customers as they begin to think about the second half of 'twenty one they want to make sure that they have their fleet in tip top ready to go condition.

A lot of.

Not that we're working through there are clearly are our supply chain has been through a roller coaster right. There along with US I mean, it was a year ago literally right now when we're talking about.

Not only continued volume ramps, but a new introduction clearly at.

At Boeing with the Max and then literally weeks later, we're talking about slamming on the brakes part of what you saw in the fourth quarter.

A little bit better inventory performance, because the lead times and cycle times in aviation tend to be longer than they are in some of the other businesses, but we are working as closely as we can with our supply base to.

To help them do what we're doing and that has worked through the near term here, where we have these are these volume pressures, but also be ready for again, a number of scenarios by which we see a return toward a more normal volumes.

Yeah.

From Morgan Stanley, we have cash Poker's Witzke. Please go ahead.

Hi, Good morning, Gary Good morning.

Hey, Josh just.

On aviation, maybe a two part question, but yeah, Mary you mentioned expecting a lag in terms of the the recovery in your shop visits versus what the market traffic and it doesn't look like that's happening today, but I get that that's a phenomenon that develops over time.

Just given so much of the free cash flow performance at the corporate level is working capital and earnings.

I mean, how much of the range is really dependent on aviation as a market because it doesn't seem like there's a ton of volatility or expectation in the forecast that kind of aviation core performance is really driving that and maybe that's a lag or something else, but am I interpreting that right.

Josh I would say that if we <unk> to walk you through kind of the walk to the midpoint.

As if GE was a business as a whole the slide in the back.

The earnings presentation, where we look at cash flow by business I think it's really meant to capture the fact that the bulk of the range is going to be made up.

By what happens at aviation and that will largely be a function of what happens in the market, particularly the aftermarket there's a there's a bit of renewables.

In the in the range, there as well, but I think what we've seen through the course of 2020.

Is that.

Fortunately when all was said and done.

Power businesses, we're able to work their way through the the.

Pressure and the uncertainty.

We had a number of orders of renewables that came in at the end of the year and we didn't know they were going to be there until they were there and unfortunately, they were but clearly.

This will be a year of climate broadly and that will be a good thing for our renewables business.

And I think health care, while we won't convert at the exceptionally high levels. The team did in credit to them in the back half of last year Health care I think we've got good line of sight on.

So when you look at that range I think the bulk of it again is really a function of aviation I like the way. We're executing we can always do better but that said it will really be a function of what happens in the end of the market and I think what we've tried to do here is.

Ill provide a framework that isn't assuming some sort of out of consensus early spy.

Spiked recovery in aviation that will be.

In a word foolish.

From Goldman Sachs, We have John Ritchie. Please go ahead.

Thanks, Good morning, everybody.

Good morning, Joe.

Kevin I apologize upfront for the two part question, but I wanted to first ask a question to Carolina to maybe just bridge us a little bit given the reporting changes.

Can you bridge the EPS guide for 2021 versus.

What you reported in 2020, and then my second question for Larry.

Portfolio perspective, arguably theres never been a better time.

To divest assets.

Don't want longer term, how are you thinking about that for 2021.

Yeah.

So let me start with the first question and then really focusing in on the restructuring right. So I commented in the beginning that we have a restructuring in the past now and that the effect of that for the full year is about five cents.

We do expect to have.

I'd say roughly the same level of restructuring in 2021.

So you don't have an effect from from elevated or changed restructuring levels. When you compare 'twenty to 'twenty one when we do the walk on the death.

I would say with respect to portfolio evolution and capital allocation Joe.

<unk>.

I take your point relative to the market dynamics.

Uh huh.

They are remarkable but that said I don't think any of our businesses are close to.

Optimizing their their underlying performance and again clearly pressure and some uncertainty here in the very short term, particularly around aviation, but I think what we want to do in 'twenty one is.

Is build on the momentum that we think we clearly demonstrated last year continue to pursue our strategic intent.

Across the three major areas that we've talked about and overtime.

We're going to be open to ways to deliver value maximize value at GE.

But we still have a lot to do still a lot in front of US I think that's the way at the at the end of the day that we will do right by shareholders customers and other stakeholders.

From Barclays, We have Julian Mitchell. Please go ahead.

Yeah.

Hi, Good morning, maybe just a first question around on my only question really around the outlook for power portfolio.

Larry It seems like I'm looking at the slides that's one of the few areas, where the cash performance remains very very difficult in 2021.

Maybe just help us understand.

Moving pieces within that and you assume that by the time you get to the end of this year, you have really sort of clean the deck and in those businesses have a shot at positive cash flow in 'twenty two.

Yes, I would say that.

I think we talked a little earlier about the makeup.

Encouraged by what we saw in 2020 of power conversion.

It's <unk>.

Losing less money is different than making good returns, but you've got to work your way through that and power. The power conversion business is doing that our nuclear business is smaller.

<unk> 1 billion in size, but fundamentally stable the action.

To your question Julien really centers on on the steam business and again.

Exiting.

The new <unk>.

Build coal business, which has largely a European base is going to be a multiyear effort.

We're in the very early stages of that so that that's really the primary cash poll on power portfolio and I would say in the segment.

In 'twenty one.

And given the way that plan will inevitably play out we'll be talking about this at least in the first part of 'twenty, two as well, but I think we've got our arms around that again, it'll it'll all of that will mask a lot of the momentum that Scott and the team have built.

Right.

We'll keep you posted it is what it is but when we get to the other side I think that segment is going to be.

Much better contributor for us.

And that's all the time, we have at this point, we will now turn it back to Steve Whitaker for closing remarks.

Thanks, everybody I'm gonna actually I'd like to come back to a question that was raised earlier on the call about our reporting GE capital as an equity method investment within the GE industrial column of our financial statements and I'd like to be clear I think we'd all like to be clear that has no impact whatsoever on working capital or any individual.

It was done simply to.

Simplify reporting and make that call it more reflective of GE industrial earnings as investors have been requesting so I want there to be no.

No ambiguity on that front whatsoever. Thanks, everybody for participating we look forward to your follow up calls and wishing you a good start to 2021.

Thank you and ladies and gentlemen. This concludes your conference. Thank you for your participation today you may now disconnect.

[music].

Good day, ladies and gentlemen, and welcome to the General Electric fourth quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. My name is Brandon and I'll be your conference coordinator to day, if at any time during the call you require assistance. Please press star followed by Zero and then conference coordinator will be happy to assist you.

If you have experienced issues with the slides refreshing or there appears to be delays in the slide attachment.

On your keyboard to refresh.

As a reminder, this conference is being recorded I would now like to turn the program over to your host for today's conference Steve would occur Vice President of Investor Communications. Please proceed.

Thanks, Brandon Good morning, and welcome to Ges fourth quarter 'twenty 'twenty earnings call I'm joined by our Chairman and CEO, Larry Culp, and CFO Carolina diabetic Hopper before we start I would like to remind you that the press release and presentation are available on our website note that some of the statements. We're making are forward looking and are based on our best view of the world.

Steve Thanks, and good morning, everyone.

It's hard to think of a tougher year than 2020.

However, our team performed in the fourth quarter marked a strong free cash flow finish to the year.

Starting with our results snapshot on slide two industrial free cash flow came in at $4 $4 billion in the quarter have $1 billion higher than last year. This was largely driven by better working capital and improve renewables and power orders.

For the year, we generated positive free cash flow of $600 million, where $300 million, excluding biopharma in the first quarter.

Despite the weakness in aviation healthcare drove our performance delivering $2 $9 billion of free cash in power and renewables continued to improve.

Orders were down 3% organically in the quarter, while down this was a considerable improvement from the second and third quarters.

Three of our four segments orders weren't backed up notably equipment orders that renewables and power were up double digits.

For the year orders were down 17% with 95% of this pressure aviation related.

Despite this our backlog remains a strength at $387 billion with approximately 80% year towards services, where we have higher margins.

Industrial revenue was down 14% organically and 13% for the year services were down 22% this quarter driven by the aviation aftermarket.

Despite some moderation outages and upgrades and power.

And power upgrades in renewables.

While services may fluctuate quarter to quarter, especially as we've seen during the pandemic. They create a multiyear backlog of profitable business and importantly, keep us close to our customers.

And we expect to grow in 'twenty one.

Adjusted EPS was <unk> <unk> for the quarter and a penny for the year, which includes an impact for the restructuring recast of two cents for the quarter and five for the year Carolina will expand on this momentarily.

In all momentum is growing across our businesses as 2020 progressed, we significantly improved ge's profitability and cash performance, despite a still difficult macro environment.

We're encouraged by the significant free cash flow growth. This.

This quarter.

We came into 2020 with a clear game plan and GE, we were expecting strong performance from aviation and healthcare, while executing our turnaround at power and renewables.

We all know how the story goes.

The COVID-19 pandemic hit and hit Us hard.

But our battle tested team embraced the new realities and moved on.

This is best evidenced by the meaningful progress on our priorities.

Looking at slide three.

One we strengthen our businesses.

Started first with what matters most to protecting the safety of our employees and taking care of our customers and our communities.

At the same time, we remain focused on what we can control we continue to build our world class team at all levels with.

With new leaders joining are resisting strong bench of GE talent.

And these leaders are playing a critical role in Ge's operational and cultural transformation.

In support of our transformation and better results, we executed more than $3 billion of cash actions. This enabled strong free cash flow generation in the quarter, bringing us again into positive territory for the full year.

Specifically at gas power, we delivered positive cash flow one year ahead of our commitments due to our cost measures and operational improvements.

And we saw traction across our other businesses for example, all three power portfolio businesses generated profit growth this quarter. The first time in two years.

Two we continue to solidify our financial position.

Despite the ongoing market uncertainty our liquidity remained strong bolstered by our free cash flow performance, we exited the quarter with $37 billion of cash.

And three we're building our foundation for long term profitable growth.

This starts with Ge's purpose rising to the challenge of building a world that works.

We're seeing this as we help customers decarbonize through leading technology across wind gas power generation and modernizing the power grid with digital and automation solutions.

And this really came to life and health care. This year, where we were on the front lines responding to the exponential increases in demand in certain products due to COVID-19.

And we're keeping our sites on a long term health care and watch more than 40, new products, including the Bureau virtual care solution, which provides a complete view of patient status across a care area hospital or system.

And we announced that we acquired prismatic sensors, which has photon counting technology a huge leap forward in the quality of limit images that can be captured on a C T.

So as we play more offense in 2021, our team is energized about making our purpose a reality every day.

Now lean is how we will do this across GE and the real unfinished business.

In the last two years, we've laid the groundwork establishing archives and promotion office and introducing lean fundamentals across the company.

Now, we're picking up the pace scaling lean company wide with an eye towards operational and financial impact.