Q1 2021 General Electric Co Earnings Call
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David.
Good day, ladies and gentlemen, and welcome to the General Electric first quarter 2021 earnings Conference call. At this time all participants are in listen only mode. My name is John I'll be your conference coordinator today at any time during the call you require assistance with Chris Burden Bureau, I'm, sorry Star followed by zero and a conference coordinator will be.
Be happy to assist you if you experience issues with the site refreshing or there appear to be delays in site advancement Liza F. Five on your keyboard to reflect.
As a reminder, this conference is being recorded I would now like to turn the program over to your host for today's conference B Winokur, Vice President of Investor Relations. Please proceed.
Thanks, John Good morning, all and apologies for the delayed due to technical reasons, we had to switch to a backup line was choppy for a lot of investors and we wanted to make sure everyone could hear.
I am joined today for our first quarter 2021 earnings call 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 with that I'll hand, the call over to Larry.
Keith banks and good morning all.
Despite continued challenges in aviation and its still difficult comparison to last year. The first quarter marked a solid start 2021.
I'm confident this sets us up well to deliver on our 21 commitments and profitable growth for the long term.
Looking at the first quarter numbers on slide two.
Orders were down 8% organically, primarily driven by aviation services and power equipment.
It was partially offset by continued strength in health care Ameren Noble's lowest growth in power services.
Seeing better performance in our shorter cycle service businesses.
Aviation service orders were up 6% organically in the quarter.
Our backlog stands at $833 billion remains a strength with approximately 80% geared toward services, where we have higher margins.
Industrial revenue was down 10% organically services continued to be a main focus as they were down 14%, while services may fluctuate quarter to quarter, especially as we've seen during the pandemic, we still expect growth in services this year.
Ex aviation industrial revenue was up 1% organically.
Adjusted Industrial margin was five 1% up 110 basis points organically, notably.
Notably we saw organic expansion year over year.
With three of our four business is improving as our cost actions 2020 continue to take hold.
Adjusted EPS was <unk> with the majority of business is improving offsetting aviation.
Earlier will provide more color shortly.
Industrial free cash flow was a negative $845 million.
<unk> was up $1.7 billion ex biopharma, driven by better earnings and working capital.
In all we're seeing continued progress, especially on margins and cash flow and we believe these improvements are sustainable.
As we look to the second quarter, we expect industrial free cash flow growth of similar magnitude to what we saw this quarter.
Despite ongoing volatility as the world fights through the pandemic.
The guidance, we provided a month ago remains.
<unk>.
Turning to slide three.
A lot we're doing day in and day out to build momentum across G. Shared last month, we agreed to combine <unk> with aercap, marking a significant catalyst in our journey to focus G E on its core for industrial businesses.
Our renewable energy aviation healthcare and.
And each business is critical to the global markets they serve.
This transaction enables us to further strengthen the company for the long term a closing, bringing our total debt reduction to more than $70 billion over the last three years, while drastically simplifying E and a number of ways, including our financial reporting.
All the while we've been fortifying Ge's Foundation. This starts first with our resilient and passionate team they have been instrumental in driving our lean transformation forward and I'm grateful for their service.
As we scale lead across the company, we're working to deliver safety quality delivery and cost improvements as well as high quality growth.
One recent example comes from digital services in renewables.
We heard from our customers that are quote cycle times and responsiveness needed improvement.
Our lean kaizen event reveal multiple systems and inconsistent processes in the way.
Through value stream mapping, we develop standard work to decrease cycle time by 70%, enabling us to bid for and win more business. This has already led to more than $70 million of backlog growth opt.
Opportunities like these for high impact deployment of lean are bound throughout our company.
We're coupling lead with a significant decentralisation effort. This means managing not just the four segments, we report, but the nearly 30 businesses underneath them where the work.
He has done.
This combination of lean and Decentralisation is maximizing value for our customers, while increasing accountability at the business level.
Even though it's still early in our journey, we're seeing tangible operational and financial results for.
For example at a recent operating review with power conversion I was thrilled to see how the team strategy has come together optimizing their operations through lean and redefining their market focus. This has led to double digit order growth in the quarter.
And three consecutive quarters of organic margin expansion.
The stronger foundation sets us up to spend more time playing offense.
Our first priority is investment to drive organic growth efforts.
We're improving our team's abilities to market sell and service the products we have today.
And at the same time, we are strengthening our offerings with new product introductions.
As you May have seen recently, we've had some major wins across the portfolio in renewables, we were selected to supply more than 530 turbines, the north central wind energy facilities in Oklahoma.
The largest onshore wind project in <unk> history.
At Aviation CFM secured leap engine and service agreements from southwest Airlines.
Scandinavian Airlines to power 100, Max and 35, <unk> hundred 20 Neo aircrafts.
Meanwhile, at Health care, we've launched new ultrasound solutions to be scanned and venue the industry's first AI offering for cardiac imaging.
These innovations are supporting clinicians who need fast reliable insights at the point of care now more than ever.
And while we're continuing to invest in technology and innovation to serve our customers and to lead our markets in the future.
Defying our competitive position globally is of Paramount importance.
Over time, we will look to augment our organic efforts with inorganic investments that accelerate the implementation of our strategy and create real value for customers and investors alike.
So as we think about what we're playing for.
It is the long term.
Building a world that works.
A G E R technology and expertise across critical markets enable us to lead along with our customers and creating a more sustainable future.
Our renewables and power businesses sit at the heart of the energy transition.
Our opportunities were on full display last week during Earth week.
In renewables, we've held the number one position in North America onshore win two years running.
And this is the fastest growing source of new power generation capacity.
At gas power, playing a vital complementary role and Decarbonize decarbonising at scale.
As customer shift from coal to gas.
And as we modernize the power grid with digital and automation solutions, we have an opportunity have an even bigger impact.
In health care, we're at the forefront of the precision health Revolution, we have a leading position in many imaging modalities and we're growing our digital and AI capabilities.
Which will enhance the personalization of diagnostics and therapeutics.
Taken area like cancer screening, our solutions are improving patient outcomes, helping clinicians rule out false positives and stream lining workflows for providers and payers alike.
And as we look to the future flight no business is better positioned than our aviation business.
In the near term our focus is getting people back into the air safely and as the market recovers from COVID-19, we're well placed with the largest and youngest engine platform with more than 37000 commercial engines and more than 60% of our fleet that has not yet had a second shop visit.
Underscoring the value our platform will generate for decades to come.
As we tackle the world's most complex challenges. We're also passionate about delivering for our customers across our vast global installed base.
It's our services that keep us close to our customers day in day out and create a significant source of recurring revenue.
By staying true to our purpose and our customers will unlock further upside potential and growth profit and cash generation, leading to high single digit free cash flow margins over the next few years.
Stepping back on a positive trajectory in 2021 and beyond.
We're focused on delivering on our commitments and I'm confident that our continued efforts will build a stronger and more focused G E.
With that Carolina will provide further insights on the quarter.
Thanks, Larry.
As you mentioned our decentralization effort continues now with financing is playing a critical role in developing and supporting a more granular operating view of our nearly 30 day and.
And we're building landscape to ensure the processes for setting up a truly lean and automated.
We're also deepening our focus on cash.
<unk> our operational muscle.
Specially seeing this with billings and collection and we're really driving services growth.
Hey components unlocking improved profitability for example, as they execute contract were more focused on cost productivity and standard work I'm confident this improved discipline will translate into improved results.
Turning to slide four before we dive into the results of two items.
With the announcement of Aercap and Jacobs combination Jacobs has moved to discontinued operations. As a result, we booked a day one not something on our financials have been recast to reflect this transfer the depreciations choosing on the portfolio going forward and it changes to earnings associated with Jacobs in disc ops will primarily be driven by.
The aercap the stock price.
Second we are planning to transition our quarterly backlog disclosures.
Remaining performance obligation niches or RTL, starting in the second quarter.
These changes will simplify and streamline our reporting further aligning our key metric to those commonly used across our sector and reducing unnecessary extra work.
Now, let me provide some color on the quarter on an organic basis.
Looking at the topline recall.
Our business is only partially felt the impact of the pandemic in the first quarter of 'twenty aviation continues to be challenged managing from market volatility, which has weighed on our overall performance.
Industrial revenue was down 10% this quarter largely driven by services. However, Victor aviation revenue was up 1% with focusing on improved services growth across the portfolio.
Healthcare equipment and services continue to the strength, we saw increased demand as global procedure volumes recover to pre pandemic, Kevin when power declined and renewables was roughly flat. This was largely driven by our increased focus on profitable growth.
<unk> include reducing turnkey scope and gas powered exiting new coat empower portfolio and increasing project selectivity in renewables.
Next industrial margins expanded 110 basis points.
Our renewables and healthcare all contributing.
Ex aviation margins expanded 450 basis points.
A couple of standouts, one gas power services with double digit revenue growth and significant margin expansion and this was supported by better performance in our transactional and sensor portfolio.
Until health care margin expansion. This was driven by better volume and cost productivity due to our immune efforts and expense management.
They also continued to set sustainable benefits from our cost actions, including reduced head count of roughly 23000 year over year. They are on track to realize the incremental $1 billion of benefits in 2021.
Finally, adjusted EPS for two cents in the quarter. This reflects four cents of improvement year over year ex biopharma driven in roughly equal parts by industrial and capital performance.
As we walked from continuing to adjusted ADESA when it takes given the positive data mark as well as the negative impact of significant high cost restructuring programs and nonoperating expenses primarily pension.
Overall, we're encouraged by our industrial margin improvement.
Moving to cash.
Industrial free cash flow was negative 845 million use of cash and a decline from the fourth quarter, which we expect seasonally.
With what we said earlier in the quarter. However, we saw significant progress across a number of our businesses with cash flow at $1 4 billion year over year and ex Biopharma up $1 7 billion driven by earnings and working capital improvement.
Looking at earnings they were down year over year on a reported basis. However, as I mentioned, our net earnings were up excluding the impact of Biopharma Bacon with adjusted industrial organic profit up 18%.
Moving to working capital. This was a use of 900 million. This quarter, we're seeing progress across the board with payables and inventories contributing the most of the improvement looking at the flows within the quarter receivables were sourced from highest seasonal collections and daily management and also reduced short term.
Factoring, which negatively impacted our free cash flow by $800 million.
Our focus on stronger billings and collections continue it two days of DSO improvement for example in aviation services within our CSA portfolio, we're using value stream mapping and daily management and have improved billing timeliness by 15%.
Inventory was a use of cash of $700 million. This was largely driven by renewables is expected to support second half volume.
Inventory remains a key focus area for all lenders.
Take our health care business, where we're improving by half a turn year over year. When I recently visited our team in life cancellations. They showed me how they're hosting conry project reduced inventory by more than 5% already this quarter.
Delivering cost savings.
We're continuously sharing learnings across T to inspire and accelerate further improvement.
David for the use of 400 million is all seasonally lower volume in power and aviation and it was a significant improvement year over year.
The address was also a use of 400 million as deliveries outpaced collection contract assets was flat as deliveries of SAP collection.
So working capital without the 800 million impact of the factoring reduction would have been close to flat this quarter and year over year working capital flow was $1 6 billion better.
So overall a significant improvement.
We carefully optimizing our capital investments to drive long term growth.
Capex spend was up 18% sequentially, yet down 37% guarantee yet.
They've increased rigor in our investments by focusing on high return and strategically differentiated technologies, including the halyard exit renewable Anthony <unk> capacity expansion in health care.
In all our efforts to improve working capital are taking hold and we see additional opportunities near term overtime sustainable free cash flow generation will mainly come from profitable organic growth combined with higher margins and longer term efficient capital deployment.
Turning to liquidity and leverage on slide six we've continued to solidify our financial position is.
This quarter, we reduced debt by approximately 4 billion our liquidity is strong and we have ample additional liquidity sources for future deleveraging actions.
This includes proceeds from the Jacobs transaction positive cash flow and monetizing our remaining stakes in Baker in Aercap.
Post transaction close we expect to reduce debt significantly, bringing our total reduction to more than 70 billion at the end of 2018.
Additionally, we do not anticipate any further funding requirement for the day, a pension plan in the foreseeable future.
And by that I mean, the end of the decade.
This is due to a $2 5 billion pre funding in 2020, our investment portfolio performance as well as the recently enacted American Rescue Plan Act.
Since the beginning of 2019, we reduced our factoring balance by 8 billion, bringing it down to about 6 billion at quarter end.
Effective April 1st with discontinued the majority of our factoring programs.
As I talked about an outlook will exclude the related cash flow impact going forward, which we expect to be between three and a half and 4 billion. The majority of this one day felt in the second quarter.
Combining this with three and a half to $4 billion with the 800 billion reported cash impact in the first quarter from the normal course activity Institute of four to 5 billion range of cash that we described last month.
If you apply the same logic and cancel out the factoring effect from our discontinued programs in 2020. After we have been signing for Biopharma and COVID-19 related volume in health care, you get to re baseline free cash flow of about positive $2 4 billion in 2020.
Our 2021 reported free cash flow range of two and a half to $4 5 billion includes the impact of the negative 800 million factoring in the first quarter.
Excluding the full year impact from factoring the majority of our cash flow improvement in 2021 pumps from earnings.
As we reduce our reliance on factoring we will continue to focus on further improvement on our core billings and collections capabilities, leading to better cash performance over time and there is no change to our view for the outlook, where the improvement is driven by our underlying operating performance.
Due to us, reducing factoring as well as better managing working capital and cash our quarterly catchment have decreased more than 4 billion in a year a significant improvement.
In <unk>, we expect <unk> net debt to EBITDA or less than two five times over the next few years and maintain a strong investment grade rating.
Moving to our business results, which I'll speak to on an organic basis.
First on Palo Alto.
Now in gas power and power portfolio to continue to make progress, we're especially encouraged by the growth in gas power services.
Overall power remains on track to deliver their financial commitment for the yen.
Looking at the market global electricity demand grew 3% this quarter driving to a gas turbine utilization and since they're building up high single digits.
Orders declined 12% in the quarter at.
At gas power equipment orders were down 50% driven by the non repeat of a large turnkey order.
Evan we booked 18 turbines up nine and notably service orders were up 11% with contractual and transactional growth.
This was driven by higher outages and stronger commercial performance compared to the pandemic related disruptions last year.
Power portfolio orders were down 16% as we expected driven by our planned exit of the Newbuild co business. Aspen. This was partially offset by double digit growth in power conversion.
Backlog of seven to 8 billion decreased year over year, largely driven by timing of equipment orders and contractual service commitment gas power accounts for roughly 80% of this backlog.
Revenue was down.
Gas power was down 2%. This was driven by equipment down 25%, we had significantly lower turnkey scope project is anticipated and at the same time, we shipped more heavy duty gas turbines this quarter uptake and the commission three six gigawatts of power to the grid, including three.
H a units.
As you heard from Scott that outlook, we've been more selective on turnkey projects and we're transitioning to more equipment project, which is better risk return equation over time.
Many fold improvement in services revenue up 13% due to strong transactional vacuum execution and higher outages.
Power portfolio revenue was down 9% driven by Stephen offsetting the power conversion and nuclear with both up.
Segment margin was negative, but improving by 110 basis point Gary.
<unk> power margin was positive and expanded significantly this was largely driven by positive mix from higher margin services volume and reducing fixed costs.
Power portfolio margin contracted but largely driven by strong project execution and unfavorable legacy project arbitration resolution.
We're progressing through our planned exit of Newbuild cone and concluded our European works Council consultations this quarter.
Both power conversion and new to expanded margins operational improvements continued.
Turning to renewables.
We're playing a leadership role in the energy transition while building a profitable growth business.
We.
To improve operational execution and scale offshore wind and we remain on track for our full year commitments.
Starting with the market.
In onshore wind, we're expecting the U S market to slightly decrease this year, while robust growth continues to provide us.
In offshore wind the strong market trends are expected to continue through the decade and broadly speaking grid is positioned to gain momentum as the energy transition accelerated and government stimulus in cases.
Now on Dakota border.
Orders grew double digits in onshore offshore and grid solutions all up.
But the biggest driver following launch edge condensate system all day.
Onshore wind services, including more than 120 Repower units increased significantly.
<unk> is building momentum with more <unk> orders expected in the second half.
Revenue was flat with equipment revenues growth up high single digit offset by a significant decline in services.
In onshore wind equipment was higher with more than 760 units delivered.
Services were down as we did not deliver any repower upgrades.
We have a digital services were up significantly excluding repower.
Also in growth was driven by continued execution on a day F. Six megawatt TPG project in France.
Did decline due to day selectivity and commercial execution.
Segment margin, one negative improved by 310 basis points in onshore wind margin improved significantly driven by cost productivity and execution, partly offset by product mix, Ingrid tossed out more than offset incremental restructuring expenses.
Next on aviation Arity.
Ericsson continues to position the business for the rebound despite current market challenges.
That's the aviation end market recovers, which we believe will begin in the second half we expect to deliver on our 'twenty, one outlook revenue growth margin expansion and better cash generation.
Jason affirm the purchase went down 40% year over year in line with our guidance and outlook.
We're encouraged that March departure levels improved significantly versus January and February at regional pressures continue, especially in Europe and Asia ex China.
Orders were down more than 25% with commercial services down more than 40% some improvement sequentially and commercial engines down less than 10% supported by multiple large orders, including one for 'twenty two in IMAX ended.
Deviation backup.
At about 260 billion down slightly sequentially, the largest drivers by commercial engines and services with approximately 400, Nick one day calculation for context, our lip unit backlog stands at more than 9200 engine.
The revenue decline was driven by commercial engines.
Double down double digits and commercial services down 40%.
Commercial services, so lower spare parts sales and lower shop visits.
Although dynamics vary by engine and region shop visits were broadly in line with our guided outlet in military revenue was flat due to favorable equipment mix. Despite 50 lower unit shipments overall engine deliveries remain pressured primarily rotorcraft and our team continues to address the supply chain channel.
Yes.
Segment margin contracted to approximately 13% primarily driven by commercial services, However, decrementals improved to 19% and margin expanded sequentially as our cost actions continue to take hold.
On track to realize the incremental half billion of benefit in 2021.
Moving to health care, we're excited about the progress we're sitting in the 10 strong performance shows how implementing linen and decentralization is driving real results.
Overall market fundamentals are also improving for the third consecutive quarter global prestigious volumes were up double digit.
Demand for non pandemic products was solid as government stimulus drove strong order growth in China, India and Japan.
Kneeland demand for pandemic related products began to normalize.
We're seeing elective procedures return to pre pandemic levels, but there is still much for us to do to support our customers.
Many are running at reduced capacity and have patients waiting longer than usual with screening fitments and procedures.
With that backdrop health Tech orders continued to improve.
Health care system orders were up 5% with the equipment and services growth.
Imaging and ultrasound improved double digits, both year over year and compared to the first COVID-19, Anthony tea grew across all regions by Lifecare solutions orders that went down as pandemic related demand softened.
The X demand continued to recover with orders up 7% driven by city screening for cardiac disease, Anderson oncology and neurology screening returning to pre pandemic levels.
Healthcare revenue was also up health care system up 7% across business day. So.
To highlight.
Amtrust on demand with high with growth across most regions and all product lines and life care solutions grew again this quarter.
<unk> revenue was up 7% with elective procedures returning to pre pandemic levels.
Segment margin expanded an impressive 270 basis points.
Driven by profitable growth and continued cost reduction and we still invest for growth, especially in imaging ultrasound and Lcs.
Moving to slide eight.
At capital adjusted continuing operations generated a net loss, which was half of last year's loss. This was primarily driven by insurance and tax cost.
Offset by lower F S skin.
Additionally, we continue to see a positive <unk> trend and strong investments result versus last year. When we had the pandemic related Martin and impairments as well.
J capital assets, excluding cash went out on a 6 billion sequentially driven by the <unk> transaction and lower factoring.
Within discontinued ops to collapse.
Jacobs had a net loss of $2 6 billion, which includes the loss on sale of <unk> 8 billion from the Aercap transaction offset by about $200 million of earnings.
With a collections progress on previously granted deferrals and we ended the quarter with 20 aircraft on ground.
We managed to levels fluctuate throughout 2021 due to the continued market volatility.
We previously noted ongoing litigation related to our run of Polish mortgage portfolio.
Quarter, we recorded charges of approximately $300 million.
This is based on the rising number of borrower lawsuits filed and expected to be filed in the future as well as higher discount rates.
We expect upcoming decision of the European Court of Justice and the Polish Supreme Court to have an impact on the litigation landscape for Polish banks, including our runoff punish mortgage business.
Moving to corporate.
We remain focused on linear processes and decentralization.
If I compare the adjusted corporate costs with when I started a year ago, we are down almost 50%.
Most notably here in Ireland, sanction costs and operations, which improved over 40%.
And digital and focusing on driving growth and improved profitability with a strong performance from great software this quarter.
Taking a step back maryann I recognize the positive sustainable impact that Lou will create a J, we are picking up the pace and while it's still early we're building momentum with measurable impact this quarter as ipsen. This is becoming more visible at corporate as well as significant the transfer.
Formed how we operate moving more work to the businesses and further streamlining the remaining corporate function.
And we have an increased focus on strategy capital allocation research talent and governance.
Now, let it back to you Gary.
Thanks.
Go to slide nine.
In summary, this quarter was a solid start to 2021.
So our team are making measurable in sustainable progress and we're set up well to deliver on our 2021 commitments that we shared with you in March.
Since joining G E. One of my top priorities has been instilling greater focus throughout the organization.
The G cash transaction announced last month marks an important step forward in making G E. A more focused simpler and stronger industrial company. One that's even better positioned to serve the needs of our customers in the world with leading technologies and strong service capabilities across our installed base.
Because we are building a world that works.
We're also creating a more sustainable future leading in the energy transition driving more integrated and personalized healthcare and enabling smarter and more efficient flight.
I hope the business examples we've shared today helped abate the real operational and cultural changes underway GE.
There are many steps big and small happening across our company right now that make me excited about the future.
We remain focused on growth profit and cash generation and I'm confident in our ability to drive value.
For the long term.
David with that let's go to questions.
Thanks, Larry and before you open the line I'd ask everyone in the queue to consider your fellow analysts again and ask just one question. So we can get to as many people as possible. John can you. Please open the line.
Yes, and our first question is from Markus <unk> from UBS.
Yeah, Hi, good morning, Larry currently landscape.
Good morning, Ryan.
Morning, maybe I'll start with the bigger picture question Hilary.
Can you talk more and more about playing offense and playing for the long term here and it is a bring this back to free cash flow I know that you have.
Kind of guide to spending 23 up high single digit free cash flow margins, but.
Your most a lot of headwind early intervention at the pension headwind is gone potentially now to the end of a decade.
Factoring headwind I think you know even if you look at it.
The near term here the fortify guide that the all reflected I think you know the spend.
Near term impact is probably 800 million left but the fact that I think you kind of implicitly increase yes.
Cash flow guide today, unless I'm misinterpreting that but if I if I if I take it most of the long term right then I look at sort of remove Edwin.
And tears in a lot of your business being significantly above that high single digit free cash flow margin. How do you think about the portfolio and the target in the long term.
Marcus.
A couple of comments there let me just level set I think what we're trying to do today is reiterate that what we said about a month ago or so.
At the G cast.
Ounce meant with respect to our outlook for this year in terms of free cash potential.
Two and a half to four and a half that's intact.
Right. So so so no no intention to change that as Carolina highlighted we did have $800 million.
Bacterin discontinuation pressure in the first quarter that were not adjusting for but we do want to flag. It for you because it's akin to what we will adjust for.
Formally.
The rest of the year now that we have.
Formally discontinued the factoring program.
But I think the issues.
Ask you about the longer term.
There's no question that.
We feel confident today.
About our potential to deliver on that that high single digit free cash flow.
Margin.
In 'twenty, three or a hopefully shortly thereafter.
And we're really talking about.
You take the midpoint it added a tall at 8% on a let's say the 19 revenue base.
Somewhere in the $85 billion to $90 billion range I guess is to a $7 billion free cash number.
I think given the way we are running the businesses better today at least compared to what I saw when I walk into and out years ago.
The opportunities I think we have clearly frame in front of us.
Around the energy transition around precision health around the future of flight.
And as you highlight is correlated noted a number of them.
The headwinds are.
Will dissipate over time be it some of the restructuring in power via pension I mean at what terrific news areas Forest. In addition to the the interest step down and the likes so theres a lot of things that we're working on that were encouraged by there are a number of things that are going to dissipate over time.
And you put all that together, while we've got plenty of work to do so there's no declaration of victory here I think we're just trying to underscore our continued confidence that we can deliver on those numbers over time.
Really we need aviation to come back.
We're encouraged by a number of the signs there.
The U S clearer.
Clearly are coming back China above where they were a year ago, let alone 19 at this point, so that's encouraging but certainly other parts of the world as you well know Ara are still fighting this this horrible pandemic.
It creates a little bit of the volatility that we referred to but all in we continue to believe the Asian aviation recovery is more a matter of when not if and again with that 37000 strong our narrow body fleet out there the youngest in the industry, we think we're well positioned to serve.
And to deliver results for our investors.
As that occurs.
Our next question is from Julian Mitchell from Barclays.
Hi, good morning.
Just wanted to try and clarify that Q2.
Industrial free cash flow comment.
So it's the point that when you're talking about the year on year improvement we should expect.
Of that I, suppose $2 1 billion base, we should be thinking about a sort of 1.7 billion increase ex biopharma I just wanted to make sure which sort of comparison point and we were using.
And also.
John.
You know maybe allied to that.
Any comments around how satisfied you are with the progress on aviation profitability, you already hit adult low double digit margin in Q1.
And that was the guide for the year.
Okay. So let me start with the question on the second quarter free cash flow. So what I mentioned was that we saw the improvement year over year to your point of $1 seven excluding biopharma of free cash flow and we do expect to see similar improvement in the second quarter.
So that that's the right way to look at it.
Julian Good morning, with respect to aviation you're right. The the 12.8% op margin plant in a quarter is a is good all things considered but but organically down 200 basis points from where we were a year ago.
Yeah.
I think the topline little softer than we had anticipated primarily a function of services getting off to a slightly slower start.
And you know frankly.
We continue to be challenged I think we mentioned this in our prepared remarks on the military side of the house just in terms of of deliveries.
So we have some past due backlog bear that we that we need to clear which will be helpful. As well. So as we go through the year I think you'll see the cost efforts from last year play out clearly the comps get easier as we get a better mix of business with service is coming back we clear those issues and in military.
And the military side of the business you should continue to see us improve the margins from here, but again, we're a we really need that that overall market recovery to play out as we.
We believe it will largely in the second half beginning in the second half.
Thank you.
Our next question is from day to Tusa from Jpmorgan.
Hey, guys good morning.
Good morning, Steve running.
So just a follow up on Julians question can you just give us.
The base of what the factoring headwind actually was last year in the first quarter.
In the second quarter on an absolute basis.
And and then for the year.
So are we is the 800 million you did in the first quarter plus the three and a half to four and the second is that how you get to the four to five.
Or is that is a part of the four to five still the Conn after second quarter, It's just a.
It's a bit confusing I think an 8-K with all this would be would be helpful. But just if you could be specific about the first quarter impact absolute impact in 'twenty in the second quarter absolute impact in 'twenty than we can kind of figure out what the basis is.
Tony says now maybe left let US go back to outlets that outlook, we said that we would add basically discontinue the majority of our factoring programs right and we talked about that the impact.
Part of that would be at two 5 billion on our cash flow right.
So what you're saying is the 800 million of reduction that we have in the first quarter, that's still in our numbers because it's before we technically discontinued so you'll have that 800, and then we expect to queue through four killed debate three and a half to 4 billion. The majority of that in the second quarter. If you take that.
Together you get four three to four eight for the full year and that's been in line with the four to five that we had at outlook.
And what is the liquidity and where what what is the year over year impact of these of COVID-19 because there we're talking about absolute free cash flow impact versus year over year impact sometimes.
Don't know people talk about the impact being year over year versus absolute what what is kind of the year over year impact.
Yeah exactly and that's also why we were talking about it we talked about the impact in 2021, and that's also why we're helping you to re baseline 'twenty 'twenty reduced sort of on the factoring noise and if you do that we talked that outlook about 2020, starting at $600 million, you'll rebased that for you talked about the <unk>.
COVID-19 and they talked about Biopharma to zero. If you then take out the equivalent Youre get a positive free cash flow of $2 4 billion for 'twenty 'twenty and your question specifically on the first quarter and the first quarter. In 2021, you obviously have the headwind of 800 that you saw in our numbers.
That didn't mentally Jeff before and then the equivalent of last year's reduction of those programs is about a billion right. So if you do the comparison there those are the numbers for the first quarter.
Our next question is from Andrew <unk> from Bank of America.
Jeff and just general.
Not to talk too much about factoring bread.
One 7 billion of improvement you expect in industrial free cash flow in second quarter co. Just can you walk us through how much weighted factoring a drag or going away and how much of the year over year improvement is earnings driven versus other working capital improvement and if you could just give us directional color by sector.
<unk>.
As to what drives the year over year improvement that would be great as well. Thank you.
Hi, Andrew So if we start with with improvement for second quarter. What we are saying is that we expect improvement to be roughly in line to the improvement that you saw in the first quarter and that's under reported on a reported basis right.
When it comes to the composition of that we expect a healthy part of that to the profit.
Profit improvement, but also working capital implemented.
Our next question that turns decorate Greg from vertical research partners.
Thank you good morning.
We're agile.
Good morning, all Yeah, let me just kind of.
Join the free cash flow question Party here.
Yes, my question would be with.
With the type of visibility that yours, you have on Q2 at this point the year range actually feels kind of wide now right certainly looking about looking at kind of historical patterns.
Maybe just a little color on what the big variances are in the back half right I know youre going to have.
787, Andas and progress payments moving around like what what are the really big.
And of the swing factors or cushion items that that may be define the lower end of that range for the year.
Yes, let me.
Let me, let me take that day here at the outset.
I'm not sure I would buy into your premise.
That we've got the visibility.
John.
The you're suggesting that we do I think the range that we have today.
In line, obviously with the range that we've we've shared since early in the year.
Here's what we know and what we don't know clearly.
We're waiting for aviation to begin to snap back that is an important swing factor for us and I think we've been consistent talking about that I don't think there's much of a historical co president in in that business given the way the pandemic is ravaging.
Various parts of the world and in turn both leisure and business travel.
Clearly, we have a new administration.
Doing a lot of good things medium to long term here to help ionic fuel, our renewables business and it in and the growth there.
The order book as it often is is back loaded.
In onshore and offshore.
And we are we as our customers do need to have I think better visibility with respect to number of funding programs tax.
Policy changes and regulatory approvals that will have a real impact on our on orders and in turn down payments in in that business. So I don't want them.
Les out a long list, but there are a number of moving pieces here and given the nature of our business as you well know.
Number of orders are often large and they carry with them significant cash impacts when they happen and negative effects when know when they do so I think what we're going to do going forward is what we've what we've done here. The last several years tell you. What we know tell you what we don't think we're mindful that the factory in <unk>.
Amir.
Creates some noise here, but again as we've said a couple of times.
No change to the effect four to five as we we discontinue to factoring programs and operationally. We are we feel good about the two and a half four and a half if we can get that get.
To get to the high end of that range, great. If we can do better we will but it's a long term game here and that's the way we're gonna played out.
Our next question is from Nigel Coe from Wolfe Research.
Nigel agile your livestock.
Let's come back to Nigel then John.
Our next question is from Deane Dray from RBC capital markets.
Good morning, everyone.
Good morning, Nathan Hey, there's a lot of angst right now across the industrials about Boston.
Boston inflation supply chain disruptions I did see.
In the appendix them on a military aviation.
Sided supply chain pressures, but just broadly where are the pinch points.
Is it.
It represented a particular headwind for the second quarter for the balance of the year and any update there would be helpful. Thanks.
Sure Daniel Youre touching on a couple of different things, let me, let me try to take them in order from a price cost perspective.
Or a number of moving pieces, we're clearly seeing.
Some price pressure.
Not unlike what you've heard about elsewhere alert about Alex resins certain metals.
But I think we've also been able to mitigate that in the first quarter to effectively a awash number of things that we do normal course.
From a from a cost management perspective, let alone.
Going after price, where we can.
I think where we're seeing supply issues.
Articulately or in and around where we're seeing a little bit better growth interestingly enough not surprisingly healthcare, probably being number one renewables being the other and again chips resins and the like I think right now it's more isolated.
Or the nuisance would be maybe an understatement, but I think we're working through that and presumably have that captured in the in the in the guide that we're reiterating today.
With respect to mill.
Military that's a little bit of a different challenge right. That's not a price cost play that's not a discipline displayed a supply chain disruption issue given the snapback.
There are a number of things that we need to do a better job of inside of our own facilities.
We need help from our supply base. There so that we've got a smoother more consistent flow into and out of into through and out of the.
The manufacturing processes. So we're working on that that's not going to be something that we declare a victory on here in the second quarter, but rest assured we're spending a lot of time.
Working those issues with our customers in mind first and foremost so hopefully that gives you a little bit of a color for what's happening operationally.
These are the challenges when you get us.
Or.
Economic recovery and we're we're glad to see these challenges because it suggests that that better times are on the way.
Our next question is from Nigel Coe from Wolfe Research.
Hi, Good morning can you hear me.
We can literally Nigel good morning, Ken.
That's good news.
I'm not sure what happened there thanks, Ken.
So I wanted to ask a question on insurance Auto AG cast as long way to you to sort of making the balance sheet lot simpler.
Insurance answered the next logical step and I'm wondering if some of the improvements we're seeing in claim experience, obviously more equity buffer there rising rates whether that means a insurance is even close to being on the table at this point.
Nigel I would say that Oh.
A number of those trends clearly are encouraging and helpful. Here in the very near term I'm not sure that we are quite ready today to suggest that.
All of that means that we could do something.
Along the strategic dimension.
With insurance I think will continue to.
Manage.
Premium I think we'll manage claims let alone the investment portfolio.
As thoughtfully as we can as long as that runoff liability is in our hands, but.
But I do think that <unk>.
Given that the the curves have more or less played out as we remodel them a few years back clearly you've got the COVID-19 effects.
He is in a very different place today I'm optimistic.
That will continue to explore.
Strategic options in and around insurance and we'll see what happens I don't want anyone to the bank on that as a dead server.
But by the same token I think what you've heard us say for some time is we're very keen to focus on our core for industrial businesses.
Insurance is not inside that perimeter.
So if and when we have an opportunity to do something smart creative and strategic around insurance, but rest assured we'll get better full attention.
And our next question is from Jackpot worsens Keith from Morgan Stanley.
Okay.
Hey, good morning, guys.
Right John Ang.
Just Larry and co.
John back to a comment I think he made on outwork about shop visits in aviation and maybe not using that as a single point metric.
That scope is also an important factor.
Just given that your comment earlier that aviation is kind of an important swing factor in the second half how are you seeing that scope or kind of dollar per shop visit evolve is that trending within your expectations and any any trend line. There that we can point to that say that things are getting sort of better or worse says the walden.
Appraisals.
Well I think the expectation Josh is bid.
Things will get better in terms of not only if you will volume of shop visits, but scope or the value of a shop visit that that said.
There are different types of shop visits right some of which we perform some of which we don't I think we've got better visibility clearly when we're doing all the work I think that is playing out as we would have anticipated you well know a number of cross currency pressures there in the in the short term is as airlines.
Battle COVID-19.
We've got less visibility on our on the channel side of things and I think we clearly see signs that over the last several quarters. The number of our partners have brought inventory levels down that doesn't necessarily mean, a scope reduction on the part of the shop visit being performed but it does have an <unk>.
On effect relative to the value for us in the very near term, but like any distribution of third party related business I've ever seen you see those behaviors are in the downturn and then you get a.
The lift off that base and that is part of what I think we will see as part of what we are assuming we will see as we are as we see the snapback in shop visits going.
Going forward with that all needs to play out again number of encouraging signs in certain markets.
The us and China, China first amongst them.
But clearly some some signs in places like India like the rest of Asia Pac parts of Europe.
That that are of concern and need to stabilize before they improve.
Our next question comes from Andy Kaplowitz from Citigroup.
Hey, good morning, guys.
Good morning, good morning, Andy standing there.
Could you give us a little more color into how you're thinking about execution in health care I know you send your outlook call that youre only going to increase of Chem margin for the year by 25 to 75 basis points, but as you said, it's up 270 basis points organically. So did you for instance, not increase R&D yet as much as you thought are you seeing just better mix and I.
Militarily, maybe are a bit worried about supply chain, but could that margin focus that you have and health care end up being quite conservative.
And Andy I would say that.
Credit to the team, we have really three quarters here running where.
Despite a choppy somewhat unpredictable top line given the pandemic they've.
They've done a heck of a job on margins and cash right and I just think that is a function of the while the lean work we've talked about.
That's probably our operating segment, where we have push decentralization the furthest to date and I do think we're seeing some early early results there.
No question that they've gotten off to a good start Wright orders up 5%, let's remember, though is a bit of a.
Dickens dynamic right two cities pandemic related products.
Well off where we were a year ago, but the core imaging and ultrasound Fran.
Franchises from an orders perspective are up over 20% year on year in the first quarter.
It gives you a little bit of a sense of the play there and that's really where precision health happens.
With due respect, it's not ventilators and patient monitors they have a role to play.
But it really is in and around D T ultrasound and the.
Core imaging products.
I think as we go forward.
While we are encouraged by the 270 bps, if we are getting our markets.
Nap back.
More than we would have anticipated and if we see that being sustainable. In addition to the operating improvements we're going to make I think what youll see US do Andy is frankly try to temper.
The margin expansion this year and look to put more money back into the business.
In no way does that suggests we have not been funding those opportunities that we have wanted to but you have to follow really the history of the last couple of years right. We're prepping for an IPO, we've pulled that off.
So biopharma Bachelor distraction getting back to basics headlong into a pandemic, where really I think getting into calmer water and health care, which gives us.
As an opportunity now that I think we're proving we can deliver on margins and cash to drive growth put more money into it but make sure. Those are good investments be it in sales force additions being in digital be it a new products right. So we're not going to call that today, but don't be surprised if we continue to see good top and bottom line performance.
<unk>.
What we call off some of the outsized margin improvements so that we're putting that back into the business and have a good 21, but also a good 22, a good 23 in a business that I think more people are going to appreciate as a real value driver for <unk> going forward.
John We were late at this point why don't we take one last question and then we'll call it and follow up with everybody else offline.
And we have a from Scott Davis from Melius research.
Hey.
Good morning, everybody. Thanks for fitting me in.
Lori Scott Scott.
We you know you guys talk a lot about lean and you talk about the turnaround talk a little bit less of a price.
How how and I guess, it's different in every business I'm sure, but how.
How are you going about changing Canada historic bidding process.
And how big of a.
Importance I mean, I know you did mention price a few questions ago, but how important is price too.
Particularly net price to the turnaround in things like renewables.
Well I.
In her in renewable Scott if we just if we just.
Focus there.
When we talk about selectivity.
That really is about price and margins.
But also about terms and conditions, which I think of is really if you roll.
Risk that isn't necessarily modeled but can come back and of course through and wreck. The P&L if we're not careful.
So a good bit of what you see happening in onshore wind.
And I think increasingly in grid.
Is a little less of a and.
Our pursuit of the top line with more of a balanced approach to go after the business, where we're well positioned.
We can serve and make a little bit of money.
Hopefully a little bit more money over time.
But also have a are less.
Have a better risk profile right to make sure that we're in the geographies. We're in the applications, where we have a we have higher confidence towards that price. The way. It is in health care, obviously, but if you go through our rod.
Our deal review process that you would see that selectivity.
In those two areas and renewables is very much the same process. We are driving across the organization now there are plenty of things that we'll do in the short term price, where we can surcharges a number of our long term contracts across the company have inflation based escalators in them, which helps us.
In an environment like the one we may see play out here in the next couple of years, but we're really just again trying to.
Pursue the quality business across the portfolio, where we can serve the customer well and do that in a way that drives margins and cash for our investors.
John I think we're going to have to call. It at that point she want to everybody I want to thank you for your patience at the at the beginning of the call My team and I stand ready to help clarify your questions. I know, there's some complexity that people are trying to work through on a factoring which we've tried to clarify.
But where available to help really get it Donna and fine tune it for everybody. Okay. So look forward to speaking to you and have a great day.
Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.
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