Q2 2021 General Electric Co Earnings Call
[music].
Good day, ladies and gentlemen, and.
Welcome to the General Electric second quarter 2021 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.
Slide refreshing or there appears to be deletion. Despite advancement. Please hit F..5 on your keyboard to refreshed.
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 Winokur, Vice President of Investor Relations. Please proceed.
Thanks, Brandon welcome.
<unk> GE second quarter 2021 earnings call I'm joined by Chairman and CEO, Larry Culp, and CFO Carolina Dieback Hopper 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.
<unk> as the world changes with that I'll hand, the call over to Larry.
Steve Thanks, and good morning, everyone.
Overall, we delivered a strong second quarter and first half performance and we are encouraged by the early signs of a recovery.
Looking at the numbers on slide to recall that the second quarter of 2000.
<unk> was challenging as we navigated the full negative effects of the pandemic, while we recognize that many are still facing continued challenges with new COVID-19 spikes and variance we're seeing our businesses returned to growth this quarter.
Orders were up 30% organically with growth across all segments and services.
Services were up 50%.
Industrial revenue grew in 3 of our 4 segments, we saw strength in healthcare and in services overall.
And healthcare and renewables in total as well as in power services revenue was back to levels similar or better to 2019.
Notably aviation commercial services were up substantially.
Substantially.
And we are beginning to benefit from the market recovery.
Our adjusted industrial margin expanded 1000 basis points organically with year over year expansion across all segments and sequential expansion in all segments, except aviation, where we took a non.
Cash charge largely related to 1 customer contract.
We expect aviation margins to expand for the rest of 'twenty 1.
<unk> will cover this in more detail later.
Adjusted EPS was up significantly with all segments contributing.
<unk>.
Non continue factoring programs, primarily driven by improved earnings and working capital.
We're encouraged by our second quarter cash performance and we're raising our full year industrial free cash flow outlook to 3.5% to $5 billion.
While our outlook for organic revenue growth margin expansion and adjusted EPS.
<unk> remains unchanged.
I'll take a moment here to speak to the dynamics at aviation.
Fundamentals are improving there was a sizable uptick in departures this quarter with even greater momentum in June and July.
Unsurprisingly departure trends continue to vary by region North.
<unk> continues to improve with Canada now picking up the pace.
Europe has accelerated with departures now 40% below 19 levels.
China dipped down to 6% below 19 levels due to increased Covid cases, and government restrictions, while Asia Pacific ex China has been more tepid due to border closures.
North America, and the spread it spreading COVID-19 variant.
Importantly, though about 2 thirds of our CFM departures are concentrated in regions.
With improved trends.
We're seeing a stronger recovery in narrow body fleets versus wide bodies.
Freight continues to outperform passenger traffic.
While green.
Clothes utilization continues to impact us we expect this to lessen in the second half.
Shop visit volume and scope improved slightly sequentially.
We anticipate continued sequential volume growth and scope expansion through the year.
Looking ahead, we are still expecting 21 departures to be up about.
<unk> <unk> percent year over year, and down 30% versus 2019 with customer behavior, driving departure and shop visit trends.
I am confident in our path to recovery in aviation, we're using lean to improve our operations and our cost structure.
And no business is better positioned than GE.
About 20 Asian to support our customers through the up cycle.
With the largest and youngest engine platform with more than 37000 commercial engines and more than 60% of our fleet not yet having a second shop visit our platform will generate value for decades to come.
Overall.
But we're building momentum across GE, evidenced by the significant margin expansion and positive free cash flow this quarter.
And importantly, we continue to believe the improvements underway are built on stronger fundamentals.
And thus are sustainable.
Turning to slide 3 we're making tremendous progress.
In our journey to become a more focused simpler stronger high tech industrial.
This quarter, the <unk> and Aercap combination achieved some key milestones.
Aercap shareholders approved the transaction the U S Department of Justice concluded its review.
And yesterday, the European Commission cleared the transaction.
Overall, we expect to close by year end.
Broadly speaking this combination serves as a significant catalyst, enabling us to focus more time talent and capital on our 4 core industrial franchises aviation healthcare renewables and power.
It also allows us to accelerate our deleveraging plan.
With our actions post closing our gross debt reduction will be more than $70 billion since the end of 2018.
At the same time, we've been strengthening our operational foundation.
This starts of course with the team.
We've implemented new learning and development programs such as leadership in action.
And our business in frontline leadership courses to equip GE leaders at all levels to drive our lean transformation.
This quarter. We also made some leadership changes that complement our existing.
<unk> of GE talent.
First is the retirement of Kieran Murphy, who will be stepping down as president.
President and CEO of GE healthcare at the end of the year.
Over his high impact 30, plus year career, Kieran is embodied candor and transparency and consistently delivered for our customers.
So I'm excited to welcome Pete Arduini, who will join us from Integra Lifesciences, where.
Where he served as CEO for almost a decade.
Earlier in his career Pete in fact worked at GE healthcare for nearly 15 years.
<unk> proven track record of driving growth across complex businesses combined with his respected leadership style.
Makes him well suited to lead the important work at GE healthcare.
Second.
Second is the retirement of offshore wind CEO, John Lavelle after a 40 year career with GE.
John has positioned the business for success, leading the GE team that will help install the first large scale U S offshore wind farm.
We're excited to appoint Jan <unk> as the new CEO.
With yards prior industry experience.
He is well prepared to lead our offshore business to $3 billion in revenue by 2024.
We also promoted Scott Scott <unk> from gas power CEO to CEO of all of GE power.
Scott and his team, which now includes Valerie Marcelo <unk>, who was recently appointed as steam power.
We will continue to run power is for discrete business unit's managing from the bottom up.
Our <unk> team has been at the heart of driving our transformation forward building momentum through lean and embracing a more decentralized business model.
This quarter it was good.
It was really good to spend more time with our teams where I saw and heard countless kaizen examples and more broadly how lean is being used to improve safety quality delivery and cost across GE.
1 example that stood out was from offshore wind, where we have a global presence across 35 countries.
In the first half of 'twenty 1.
Through good lean problem solving and daily management, we realized about $150 million of year over year savings and sourcing and logistics as well as through better execution on installation and commissioning.
Cycle times.
Now a decentralized decentralization goes hand in hand.
And with lean.
This means managing not only the 4 industrial segments, we report, but the nearly 30 business units under them.
And our operating reviews I continue to see how our teams are managing our operating P&L at a more granular level.
We're having more meaningful operating reviews and in turn driving actions across high.
In high priority opportunities.
The stronger foundation is enabling us to play more offense. The first priority of course is organic growth, we are improving our team's abilities to market sell and service the products we have today.
There are many recent wins across G, but let me highlight 2.
The impact aviation CFM secured a new agreement with indigo to provide 620 of our fuel efficient leap <unk> engines with a multi year service contract. This is 1 of the largest deals and CFM history.
In renewables, we finalized the contracts for the world's largest offshore wind farm Dogger Bank.
In the third installment will supply 87, Hollywood X turbines, the most powerful offshore wind turbine built today.
We're also bolstering our offerings with new product introductions and future Tech innovation to serve our customers and lead our industry into the future.
At Health care for example, we launched accelerates.
RSV and AI enabled virtual radiology solution that provides simplified workflows better data access and more time with patients.
At power, we're supporting Australia's energy transition with plans to supply of <unk> 5 gas turbine capable of operating with a blend of hydrogen and natural gas at the <unk>.
<unk> power station.
This adds to our experience on more than 75 gas turbines worldwide using hydrogen and associated fuels for power generation.
From time to time, we will augment our organic efforts with inorganic investments.
<unk>, a recent health care acquisition.
<unk>, whose molecular imaging agent aims to provide more targeted treatment for metastatic breast cancer patients.
<unk> further demonstrates our commitment to precision health, enabling more personalized diagnosis improved treatment and decision, making and ultimately better clinical outcomes.
All in all our transformed.
Is accelerating.
We're fortifying our competitive positions globally, and unlocking further upside potential in profitable growth and cash generation.
With that Carolina will provide further insights on the quarter.
Thanks, Larry.
On a quarterly performance reflects continued progress.
And our transformation.
During a recent operating reviews, we're gaining traction with increased brand loyalty across our financials.
Our final terms are providing more insightful faster analysis, which is driving better outcomes.
Looking forward, we're focused on building, even deeper visibility and accountability.
<unk> partnering cross functionally to unlock margin expansion and improving working capital management to generate more cash flow.
Now looking at slide 4 I'll cover.
Highlights on an organic basis.
In the quarter, we returned to growth on the top line health care and services overall.
<unk> strong in particular services continues to keep us close to our customers and represent more than half of our orders and revenue.
Total orders were up 7% sequentially and aviation and power were up more than 40% year over year.
Services orders were up 50%.
Western Europe, and aviation Diebold, and gas power and healthcare grew double digits.
Revenue was up across aviation healthcare and renewable power.
<unk> was flat as expected, we continued to reduce turnkey scope and gas power and exit new unit co at spin.
We also see.
We have a mix shift towards higher margin services with total services revenue growing 15%.
Notably aviation commercial services grew 50%, reflecting a recovering market, but we're still well below 19 levels.
Healthcare in total and gas power services remain bright spots.
With growth above 2019.
Nick adjusted industrial margins improved sequentially in all segments, except aviation.
<unk> declined I'll speak to this shortly year over year margins expanded 1000 basis points with all segments expanding.
About half of.
This improvement was driven by non repeat of Covid charges and the other half was driven by our lydon efforts cost productivity and mix shift to services.
Regarding inflation, we are seeing pressure. However, it's a mixed story by business, our shorter cycle businesses feel the impact earlier.
But our longer cycle businesses are more protected given extended purchasing and production cycle.
Our services business falling between.
Across the board, we're driving cost countermeasures and utilizing price in Princess and escalation features in our contracts to help mitigate this pressure.
In our.
Title project businesses, we manage cost performance versus our original as sold margins.
We utilize lean to reduce cost and cycle times to execute delivery.
In the second quarter, our countermeasures actually drove a slight net deflation impact on margin.
Looking forward to the second half.
'twenty, 1 and into 'twenty, 2 although inflation pressure is likely to increase particularly in aviation and renewables, we expect the net inflation impact to be limited.
Finally, adjusted EPS was up 9% year over year about 3 quarters of this improvement came.
<unk> from our industrial segments.
As we walk from continuing to adjusted EPS, we need to exclude the positive Baker Mark to.
The negative impact of significant higher cost restructuring program.
Non operating expenses, primarily pension and desktop their cost.
Worth noting.
Our reverse stock split takes effect as a market open August 2nd.
What about your line is number of shares outstanding with companies of our size.
Overall, we're encouraged by our broader earnings performance, especially the underlying margin improvement and we are well positioned to achieve.
Our 'twenty 1 outlook for margin expansion and EPS.
Moving to cash.
In the second quarter industrial free cash flow was positive 388 million up $2.5 billion year over year on a reported basis or up 2 billion excluding discontinued factory.
For our programs in both years. The majority of this improvement was driven by cash earnings with all segments growing earnings.
Underpinning our solid quarterly performance versus our earlier expectation was to hire aviation orders and in turn higher progress collections.
Lower it in it.
Factoring as well our strengths at healthcare empower.
We've made good progress exiting the majority of our factoring program in the second quarter. This was a big step forward to becoming more operational and getting back to basics on billings and collections for context currently about half of our billings.
In the final months of the quarter driven in part by the timing of deliveries.
Far too backend loaded and inconsistent with the lean principles of flow and level loading.
Our turns across commercial operations and finance are working to deliver earlier to our customers and in turn bill and collect.
A press earlier in the quarter.
Overtime this will help us generate more linear cash flow.
The discontinuation of factoring was a $2.7 billion impact, which was adjusted out of free cash flow.
For the remainder of 'twenty, 1 the impact will be roughly a billion.
Take between the third and the fourth.
Quarters.
Going deeper on working capital.
This was a source of cash of $260 million this quarter.
Despite increased volume, we saw significant year over year improvement.
Largely due to operational enhancements.
Looking at the flows in the quarter I'll speak to capital this visible.
We are a source of cash driven by DSO improvement across all segments.
Our imaging in life care solutions business in the U S. In Canada. For example, our turns are using lean and automation to better manage contract deliverable built customers more accurately and faster and thereby generate cash quicker.
If it's already improved DSO by 7 days.
Inventory was a use of cash largely driven by onshore wind inventory build for the second half deliveries as well as fulfillment and execution challenges.
Overall inventory turns improved from 2.4 to 2.6% sequentially.
Holly with higher volume.
There's much more to do.
We continue to manage our capital investments with focus on profitable growth.
On the second quarter Capex spend was down sequentially, our investments in new product programs increased.
Overall in the.
First half on a reported basis cash flow was negative $457 million.
$3.8 billion improvement year over year.
After rebase lining for discontinued factoring programs and the Biopharma sale, we saw a $3.2 billion improvement.
So while there is more to do.
Our near term working capital improvements are taking hold even as we grow together with higher earnings. This is beginning to drive more sustainable and linear free cash flow.
And based on our <unk> performance. We're now confident that we can deliver free cash flow in the range of $3.5 billion to $5 billion for the year.
Our prior outlook of 2 and a half to 4 and a half.
Turning to liquidity and leverage on slide 6.
We ended the quarter with 22 billion of cash and recently refinanced our backup credit facility.
Due to our improved financial position and cash linearity.
So repeat quarterly Nick we reduced the facility size from 15 to 10 billion and extended the maturity date to 2026 at attractive pricing.
We also continued to take meaningful actions on our deleveraging plan completing 7 billion debt tender.
This brings.
With gross debt, which currently includes pension to a reduction of 53 billion since the end of 2010.
Additionally, we continued to derisk the pension.
In the UK as of January 2022 will implement the proposed pension freeze.
As mentioned previously with.
I wouldn't expect any further funding requirements for the GE pension plan at least through the end of the decade.
Stepping back we have a clear path to achieving and less than 2.5 times net debt to EBITDA over the next few years.
Moving to our business results, which I'll speak to.
On an organic basis.
First on aviation as Larry said, we're starting to see improving fundamentals associated with the commercial market recovery across services and OLED production.
The market's sequential improvement met our expectations with GE CFM departures content down.
<unk> about 27% versus 19.
While departure trends continue to vary by region, we still expect the global recovery to accelerate in the second half.
Orders were up year over year.
Both commercial engines and services were up substantially year over year.
Key commercial wins this quarter.
<unk> include Indigo southwest and United driving momentum in fact, since the beginning of 'twenty, new wins have now outpaced canceled orders.
Military orders were down largely due to timing of new orders and a tough comp versus last year. When you will recall we received.
Our military at home.
Revenue was up 10% commercial services was up 50% with operational improvement.
Shop visit volume trended better than our expectations up over 30% and overall scope was up slightly sequentially broadly.
We're seeing higher concentration of narrow body visits, which typically have lower revenue our.
Spare parts were up double digits year over year and sequentially.
This was partially offset by unfavorable CSA contract margin reviews, what's the Mars, where revenue is adjusted to reflect negative margins.
Based on cost incurred to date.
Military continues to be impacted by internal and external supply chain issues with output expectations falling short this quarter. We're.
We're seeing some improvement as we use visual management and standard work and also other tools to solve problems in real time.
We're working to fully resolve the issues.
We're now targeting mid single digit revenue growth for the year.
But our high single digit target remains in place through 'twenty 5.
Segment margin expanded significantly year over year down sequentially margin was impacted.
And noncash contract margin review charges of approximately $400 million.
About 2 thirds of this was related to 1 contract in the loss position in this contract continued COVID-19 driven utilization contract specific dynamics and operating behavior increased our estimated.
By the knock visit costs.
While were across our service portfolio the loss contract designation resulted in the accelerated recognition of all future forecasted losses into 2 acute.
Excluding this aviation margins would have been leveled up low double digits.
Quarterly.
<unk> are part of our normal process and we will continue in the second half for Q through for Q3, we expect margins to expand sequentially.
Our team continues to align fixed cost and our organizational profile to market realities.
We are maintaining our low double digit margin guide for.
Quarterly 1 supported by a second half recovery, however, based on the cinema and military dynamics. We now expect full year revenue growth to be about flat versus 'twenty. This is a temporary issue and we remain encouraged by the underlying fundamentals of our business.
Moving to health.
<unk> market fundamentals are improving and the team delivered another impressive quarter.
Starting with the market global procedure volume grew mid single digits for the fourth consecutive quarter.
Europe, China, and Japan with solid markets due to government spending assigned of interest.
Cary and expectations for better quality of care and patient outcomes.
But markets also grew in the U S across key customer as recovery momentum continues.
Demand remains robust and with that backdrop orders were up double digits year over year and versus second quarter <unk>.
And up 20%, excluding the Ford ventilator partnership last year.
Healthcare system orders were up 7% with double digit growth in imaging and ultrasound.
This offsets a decline in life care solutions lapping higher demand for COVID-19 related equipment, However, and Fayetteville.
Chris up double digits versus second COVID-19 piece.
<unk> orders were up almost 50% year over year following a depressed second quarter 'twenty and also up versus second COVID-19.
Revenue was also up double digits with <unk> up 6% and <unk>.
The ASP of almost 50%.
All of our regions delivered double digit growth with China up high teens.
The teams worked across the supply chain to help mitigate industry wide supply shortages related to electronics and residence, which impacted growth this quarter.
Segment.
<unk> expanded 460 basis points year over year and significantly versus second COVID-19 ex biopharma.
Margin continues to be driven by profitable growth cost productivity through lean and prior periods restructuring at.
At the same time, we're accelerating our growth inverse.
<unk> Martin, particularly in digital and AI enabled applications with increased spend planned for the second half.
And we'll continue to evaluate inorganic investments to complement this such as iron Exxon.
Based on our first half, we now expect organic margins expand more than 100 basis.
Estimates for the year.
This will be influenced by how quickly we can ramp certain growth investments. However, our medium term expectations remain 25% to 75 basis points expansion.
Our investment ramp will support continued innovation and help us drive higher revenue growth overtime.
Points on into renewable we're continuing to lead the energy transition growing new generation lowering the cost of electricity and modernizing the grid with a focus on new product platforms and technologies that enables profitable growth and cash generation over time.
Looking at the market.
In onshore wind, we still expect the U S market to decline in the near term before stabilizing.
We're watching the potential U S production tax credit extension closely.
A blanket long term extension likely result in near term uncertainty because it pushes out investments.
[noise] investment efficiency.
What could be <unk>.
This may impact, our second half orders profile and positive free cash flow outlook for the year.
In offshore wind global momentum should continue through the decade.
The recent U S federal approval of the Vineyard wind project.
Supported by our Hollywood X represents meaningful progress for the U S market.
And as the global energy transition accelerates and government stimulus increases the grid will need to be upgraded and more actively managed.
Orders grew mid single digits, where onshore services.
So then doubled as Repower orders increase which will convert to second half deliveries.
This was partially offset by lower onshore equipment orders due to <unk> dynamics.
While both onshore and offshore equipment orders are lumpy, we expect them to increase significantly in the second half versus first half.
As more revenue was up 9% driven by higher equipment revenue offset by lower services and reported equipment was up 12% on a 2 year view versus <unk>.
In onshore equipment was up year over year on higher International unit deliveries when services were down on fewer repower upgrades the obsequent.
Chile and services ex Repower grew double digits again.
Segment margin, while still negative improved more than 500 basis points as we drive towards segment profitability over time.
Onshore was profitable in the quarter and year to date.
This was driven by continued cost.
And volume leverage that more than offset mix and other headwinds such as lower margin on new products, which typically improves over product lifecycle in grid cost productivity was offset by elevated restructuring.
Looking ahead, we're focused on our operational priorities, including.
<unk> cost reductions to help offset increased medium term headwinds from the market inflation and new technology and platform transition.
Yes.
Moving to power.
The term performed very well with operational improvements across the business, particularly at gas powered.
Looking.
At the markets Global gas generation grew low single digits, while Jamie gas turbine utilization continued to be resilient with megawatt hours growing high single digits.
Encouragingly outage starts were up 50% year over year and up mid single digits versus <unk> 19 for the.
The year, we expect the gas market to remain stable with gas generation growing low single digits.
The dispatch of our fleet is well positioned with upgraded machines and the growing hedges backlog.
Outside of gas markets remain mixed.
Power orders were up significantly driven.
Power equipment. This quarter, we booked 12 heavy duty gas turbines and 35 Aero derivative orders.
L M that will complement variable renewable powered by providing distributed fast response power to help deliver grid stability.
Orders were also.
Also up in gas power services.
In power conversion and nuclear.
Power revenue was flat with gas power declined when power combustion group gas.
Gas power was down slightly largely driven by equipment were similar to last quarter, we had lower turn.
Turnkey scope project.
We also shipped 6 fewer heavy duty gas turbines.
Gas power services was up significantly across both surface and transactional portfolio, primarily due to higher outages and services growth is trending better than our initial outlook.
Power conversion was up.
With its highest quarterly sales level since third quarter Edson.
Stephen was down slightly services returned to pre COVID-19 levels.
Total power margins expanded roughly 900 basis points and improved sequentially.
Gas power has.
Has stabilized through right sizing the cost structure, improving underwriting and operating better with Lou <unk>.
Margins were positive largely driven by service and equipment mix and lower cost now.
Now Q3 is typically our toughest service quarter with lower activity compared to the spring and the fall outages Susan.
Which are in the second and fourth quarter respectively.
But we are confident in our high single digit margin outlook for the year.
<unk> was negatively impacted by Covid in India, which drove work stoppages and delayed project execution.
We're on track with the planned exit of Newbuild Covid.
Just over half of the planned 600 to 700 million cash action from restructuring.
Project goes up we're really liked in the first half.
Once the exit is complete the student we'd be 2 thirds services.
Overall power is on track to deliver the outlook targets and high single.
Operating margins over time.
Moving to capital on slide 8.
Continuing adjusted earnings were positive $28 million, a significant improvement year over year. This was primarily driven by lower marks in impairment as well as higher gains of 3 F N.
Better performance at insurance and the.
Generation of preferred dividend payments, which are analogy industrial obligation.
At insurance, we saw positive investment results and lower claims continue however, favorable claims trends due to COVID-19 are slowing in certain parts of the portfolio.
And in fact enabled $1.1 billion of orders supporting customers at renewable and gas Inc.
Including third party financing.
Based on our first half we expect to reach the background of our earnings outlook of negative 700 to negative $500 million.
Within discontinued operations.
Asia Capital reported a loss of approximately $600 million, primarily due to the recent decline of Aercap stock price, which is updated quarterly.
Moving to corporate.
Costs were up slightly given the variable nature of EHS and other and the elimination of activity importantly.
Functional cost and operations were better.
In the first half total costs were down more than 20% as we improved functions and operations and digital operation moving.
Moving forward our cost our focus on boost centralization and lunar processes continues which will drive cost and.
Cash improvement.
For the year, we're on track for the 1.2 to $1.3 billion of cost.
In all we delivered a strong quarter.
Encouraged by the work underway at aviation the ongoing strength in health care and our progress at renewables.
Empower.
Now Larry back to your Kieran.
Thanks, we turn to slide 9.
I'm incredibly proud of <unk> performance in the second quarter.
As you've seen in orders and revenue returned to growth operating margin expanded across all segments.
We generated positive free cash flow.
Importantly, aviation is showing the early signs of a recovery and we are clearly building momentum across our businesses.
Combined this gives us the conviction to raise our free cash flow.
Free cash flow outlook to 3.5% to $5 billion for the full year.
So I hope you see what I see.
A transformation that is accelerating.
<unk> is becoming a more focused simpler stronger high tech industrial.
And our efforts and impact extend beyond GE, we've always felt a heightened sense of responsibility when it comes to creating.
A more sustainable future.
We recently released our annual sustainability report.
This month with shares how we're tackling the world's biggest challenges through innovative solutions developing the future of flight.
Advancing precision health.
And leading the energy transition.
For example, the CFM Rice program that we've announced with Safran demonstrates our shared vision for the future of flight as we target reducing fuel consumption and carbon emissions by more than 20% versus today's most efficient engines.
So as we rise to the challenge of building a world that works.
Serving customers in vital global markets will stay focused on profitable growth and cash generation, which im confident will lead to high single digit free cash flow margins.
Over the next few years.
Steve with that 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 1 question. So we can get to as many people as possible Brandon can you. Please open the line.
Ladies and gentlemen, if you wish to ask a question.
1 on your phone keypad. If your question has been answered or withdraw your question E mailed the pound sign.
And from Citigroup, we have Andy Kaplowitz. Please go ahead.
Good morning, guys.
Hey, good morning, Andy again.
So your industrial free cash flow result was good in the quarter and that looks like it is helping you to be able to raise your industrial free cash flow guidance. So could you give us some more color where our cash is it been trending better than your expectations. It looks like aviation healthcare scene ahead, and then could you also talk about the.
Differences between your performance and cash flow and earnings as you. Obviously you didn't raise your EPS forecast for the year, despite the significant raising cash guidance.
And that would be my pleasure. So let me start with the second quarter.
And what happened in the second quarter, when we were talking to you.
You mid quarter that we were expecting around negative 400 million in free cash flow for the quarter. While that was the target. We thought was achievable. We clearly came in much better than we were able to do much better and where did that come from but it's a combination both power and healthcare continued to be strong both.
On profit and cash.
Vision, we saw cash come in much better and that was really twofold, 1 park with the new orders with progress payments that Ken and on the other hand, we had left in it because our customers didn't ship as many aircraft as expected and therefore, we paid out.
It isn't it.
So with that bids you can say that basically we're rolling that into our updated free cash flow guide rights can be raising it from 2.5 to $4.5 to 3 and half to 5 and if you do the midpoint that you basically said that cash rolling through.
Half of that.
The improvement comes from earning and half comes from working capital and other offsets.
And if we then compare with what happened on earnings. So clearly on earnings. We also saw the improved strengthening from a power and healthcare.
And we had underlying envision as expected.
We also had in the quarter.
<unk> charge of 400.
And that's a noncash charge. So if you take our guide for EPS is 15 to 25.
We are now obviously ruling in the results of the second quarter, including that noncash charge.
To that number that said, we do expect to be in the better part of that range for the full year. Thanks to the good momentum that we're seeing in the business is both on aviation recovery and the other businesses strengthening there.
Operational performance.
From Goldman Sachs.
Joe Ritchie. Please go ahead.
Hi, good morning, everyone.
Good morning Joseph.
So it's a 2 part question for me because Theres a lot of focus on aviation margins. This quarter I really wanted to ask about the contract margins and also green time utilization.
On the contract margin reviews, I know that you guys do these quarterly.
Jeff I remember last year. When you were doing your impairment test did you really made a concerted effort to look at the 20% of your portfolio that was high risk. So I'm curious as you kind of think about the.
The expectation for low double digit aviation margins for the rest of the year and just wondering what confidence do you have that you won't take another.
But barge on the contract Martin reviews, and then any other color that you can provide us on green time utilization impact for the second half and into 2022.
Yeah.
So let me start with the Newmar and the margin and I think stepping back aviation service margins are.
Another attractive.
And what we have in this quarter was a loss contract and Thats very rare you have about 200 CSA contracts in our portfolio and they're only a couple of them arent.
And we're not expecting that to repeat.
I mean, the length of the contract is around 15 to 20 years.
And the processes.
As we have a rigorous and the controls are working and it's really cross functional efforts, where because they are under operations.
Commercial are working together to update the estimates with actions from last year.
And then making a calculation for what the margin should be.
So in this quarter.
This 1 contract as that turned into a loss making contract with technical happens then is that you don't only.
Update history to that new margin.
Also pull forward all the expected or possible losses that you would have going forward on that contract into the second quarter and that's why it had such.
The big impact in the quarter with almost 300 from that.
But I would say, though is that more importantly is how we're working to improve how we operationally do our services. So we're working to reducing turnaround time, we're working to get the engines back to our customers faster and lowering the cost.
Most of our overhaul. So if you think about that that brings us to lower costs lower cash and happier customers. So that's operationally, what's really important for us.
And then your question was what about this going forward. So when we look into the second half.
As we've said, we do expect the purchase to improve and if you look.
At the aviation margin in the second quarter, excluding the <unk> impact it would have been 11% plus low double digits.
Low double digits and Thats why were holding the low double digit.
Margin.
And I would say when we look at the second half, which will impact the second half we talk about shop.
Visit volume day makes the scope and we do expect that day.
So visit trend will move favorably for US and then we'll continue to have the quarterly same our process.
Yes, Joe just to add what currently to said with respect to Green time and that clearly is 1 of the variables are the only 1.
That sits between the departure trends and what we see with respect to shop visit activity.
So I think our view is that we will continue to see strong year over year.
Shop visit numbers I think we will see a gradual continuation of the improvements.
Sequentially as well.
John that suggests a number of these.
Impediments like Green time fade with time, but they don't disappear I think as we work through the second half. So sequentially. We think we're going to see a continued gradual improvement. We think we will currently and I just said.
See some slight.
Slight improvement with respect to scope.
All good we're obviously watching some other variables here like adult ovarian but at this point I think we're a we're optimistic about the second half performance in aviation services.
From Bank of America, we have Andrew <unk>. Please go ahead.
Hi, guys good morning.
Good morning, Andrew.
Just a question on aviation can we just talk about.
Shop services versus spares services are up 50% spares up 15%.
Talk about your serviceable parts dynamic.
Nick perhaps driving picked up and more importantly.
How do you expect this to develop over the next 18 months, Brian how should we think about the shape of the aftermarket recovery incorporating best used serviceable parts phenomenon. Thank you.
Well Keith.
Keep in mind, when we talk about.
While we use the word spares.
And a couple of different context, but primarily spare engines are really a function of fleet planning.
And given where folks are at this point both in terms of activity and cash conservation I think in part that's why you see the.
Spares recovery, perhaps being a bit more muted than the strong bounce back we're seeing in shop visits.
And are we talking about green time earlier, I'd say U S. M is another 1 of those variables.
That sits between a direct 1 for 1.
Transfer from departures.
To our activity.
That said I think that we haven't seen much by way of USF to date I think as we play forward through the second half of this year and into next year I think we're anticipating that that will be.
A growing but still a modest headwind for us. So we maybe you trade at a little less.
Screen time for a little bit more U S M, but keep in mind as well uhm doesn't happen to GE aviation we're in active.
Consumer user of <unk> as well so it will help us in some respects.
Lower our costs with respect to the delivered services, we provide our airline customers.
Customers. So a number of dynamics there, but certainly 1 that we have an eye on as well as we think about that.
The back half and maybe more importantly, 'twenty 2.
And from Jpmorgan, we urge Keith please.
Please go ahead.
Hey, good morning.
Good morning student method.
Thanks for all the details.
Just a question on the receivable side and in note 4 on the unconsolidated receivables activity for the first half I think it's been about $5 billion, it's kind of consistent with what you did in the first quarter is that number.
Been running kind of $10 billion to $12 billion I think over the years is that number going to be.
Consistently in that range and then secondly, just on this charge.
Can you just give us some color as to like what type of engine is it is it narrow bodies and should we expect kind of the same at safran if that's the case.
Okay.
First with the.
Question there.
I think it's important.
Important when we look at.
To put that in context, with our volume and obviously looking at it excluding factoring so that we can see what traction are really getting a what I would do that though because that's the best way of measuring how we are improving or not.
On.
Our underlying.
For months on working capital management, and when it comes to with visible and so we have actually improved significantly compared to a year ago I would say on the working capital metrics is not the 1 that is moving.
Well, let's move move the phone.
Of course, you have Cincinnati.
<unk> volumes in the different businesses, but but that's how I would look at it to look at attraction.
Very happy to say that that positive trend.
<unk> has developed over last year with all the work we put into it and I do believe that now with factoring soon all out of the game that would help us drive billing.
With land collections earlier in the quarters and therefore also improve overall the business, though so.
So good improvement there but.
Probably even more opportunity going forward on that topic.
And the other question you had was.
On the chart.
Steve Martin.
On the <unk>.
It was a narrow body.
Oriented contract that we.
Crude up in the quarter with respect to the second part of that question regarding Safran rule will leave their reports to academic report later in the week.
From Barclays, We have Julian Mitchell. Please go ahead.
Hi, good morning.
Just wanted to perhaps switch the focus to renewables for a second.
Understand that there was a lot of headwinds already from sort of legacy projects and so forth and aspect.
Such as grid and hydro, but also on the wind side. It seems there is more cost pressure.
And maybe some project revaluations going on as well as some of your peers.
So I just wondered if you could give us an update on how comfortable you are with that trajectory of profitability expansion at renewables.
And how much more concerned you are about cost headwinds in that business this year and into next.
Good morning, Yeah when.
When we talk about renewables.
I'll just start by saying that we're proud with the improved margin improved 520 bps year over year in renewables.
But we're looking at renewable to really look at the different pieces, it's a bit like you're dead right. So starting with onshore wind. This is the second quarter, where we are positive for full onshore wind and that's a significant improvement compared to last year and we expect to be positive.
In 2021 for the full year and in.
Second half, we will see where we expected the services come back even more including more repower and we will continue our journey to take more cost out.
Offshore wind that's more of the investment for the future I would say youll see more of that in our numbers beginning 2022.
Grid and grid.
We're continuing.
Turnaround and we saw good momentum in that with the better cost out we saw better project execution, we are being tougher in having been selectivity and the restructuring is progressing.
As planned here.
If you take all of that together you get to that 520 bps improvement year over year.
And it also gives us comfort that we will be positive in 2022.
Just building on that momentum of operational improvement, we're cautious of inflation and we're watching the PTC dynamic and how that would impact us, but we do see good tailwind from growth.
Increased services and digital as well as our cost reduction.
But.
Okay.
From Wolfe Research, we have Nigel toy. Please go ahead.
Thanks, Good morning, everyone.
John.
I've got a question on progress collections.
But I do want to just clarify something on your come from.
Action from the factory.
Just to confirm.
So the important thing is the amount outstanding Ryan it's the balance outstanding.
Thank you.
$6.6 billion on Jan 123 billion at the end of June So just confirm that.
The Bill metric, we should be focused on here and then on the on the progress that has been a $1.3 billion of headwinds.
In the first half of the year, just wondering how you see that developing in the second half of the year recognizing that there is some volatility with renewables, but whats your plan for the second half on progress.
Yes.
Hi, John.
And on the AR factoring you're right that's exactly how to look at it we started the year with almost $7 billion in.
Factored receivables, we took 800 of that out in the first quarter you saw us take another $2.7 out now and we have about $1 billion to go until year.
And then we'll end with around 2 billion, which is what we've talked about right.
So that's how you get to those numbers, so you're absolutely correct.
When it comes to program.
If you look at the quarter this year.
You have to compare it to progress.
Progress last year, because we sort of look at the Delta had progress last year with including the big.
And military progress payment that we got.
Which obviously didn't repeat now in the quarter. This quarter, we had a lot of deliverables in renewables.
So basically taking down progress and Thats really why it was negative compared to the deliverables.
For the rest of the year, well that will depend a bit.
And that mix.
Of the PTC, because we've talked about that the biggest variable for our guide.
The cash gains of $3.5 to 5.1 of the big part there is the PTC dynamic and if that will change our customer behavior. So that they will.
Push out orders that we were expecting to be played.
Before year end to 2 next year and the other 1 on progress will obviously be also depending on aviation and how that plays out over the second half of the year.
From vertical research, we have Jeff Sprague. Please go ahead.
Thank you and good morning, everyone.
On the day.
Hi, Jeff Good morning.
Another 1 just below cash flow and factoring here just make sure we have all this squared away.
Just totally the <unk>.
Consolidated receivables facilities.
Can you just give us a sense of what kind of volumes you will run.
1 that this year.
Just kind of on an all in basis.
As that facility isolated to us so it's actually a source or a use of cash flow in 2021 versus 2020.
And also just.
Why continue with that.
Through that facility.
Factoring is driving the behavior, you don't like kind of the factor and forget sort of behavior.
What is it about maintaining this.
<unk> facility why does it makes sense in that particular business.
We're running through this facility.
Thank you.
Yeah.
Hi, Jeff So on factoring I would say that the important part is to taking it down to a reasonable level.
What we are talking about is ending this year with our revenues.
$2 billion of factoring and Thats.
Okay long term securitization and that is part of normal doing business and that's similar to what other peers are doing so I would say that is an effective part of financing and reducing risk and instead of using it for the Wright prism, while all the rest we're taking out to make sure that we focus on the core which is really the.
Basic and pushing billings up earlier into the quarter youre not going to get that money automatically by the end of the quarter is going to be much more motivated to start let's start billing and collecting earlier in the quarter.
From RBC capital, we have deemed Gary. Please go ahead.
Thank you and good morning, everyone.
Good morning, Jamie Hey, since it's such a big <unk>.
Sector wide headwind I wanted to ask about the supply chain pressures and I think you called out twice or 2 areas military aviation and in health care and health care residence in electronics. So that's pretty much what were expecting but could you size for us.
Yeah.
Missed revenues or would they be deferred revenues and for carolines at the increase in inventory is that for buffer stock.
Or also to anticipated increased demand.
What's the mix there.
Dean I think if.
If you look at what we have been wrestling with.
Some semiconductors like so many in.
Other commodities on a spot basis.
I think the vast majority of.
FX are basically.
In our backlog today now past.
Customers.
Right.
So I don't think were going to try to frame that size wise, but it did have a I.
I would say modest impact on our revenues and our cash this quarter and we really want to make sure that we're doing all we can both with the vendor base and frankly.
Student processes to clear that we don't like the foregone revenue more importantly were relate with the customer in a number of instances.
I think as we.
Look at business that we might have lost I am not sure. We can really pinpoint a particular orders that went elsewhere because our lead.
Good times.
Have been pushed again, because I don't think this is an isolated GE dynamic.
But we're working hard to make sure that.
That doesn't happen to the extent, we can avoid it in the second half so it's.
It's a day to day battle.
It's tactical form oriented.
And then it is strategic on balance.
But the teams are hard at it as you can imagine.
On a daily basis.
Yes, and on your inventory question.
I would say a couple of things.
Within inventory 1 part is volume build for renewable and delivering expected to be in the second half.
Right.
Also have I would say a bit too much inventory still because of the fulfillment elastically Hudson.
We talked about it in aviation, but Theres also some stretch in health care.
Overall, we are improving the turns and inventory as well, but it is getting tougher.
The challenges on the supply chain side, so more work to do.
Even in this environment.
And from UBS, we have Markus <unk>. Please go ahead.
Yes, hi, good morning, Robert.
Good morning, Chris.
Nick.
Good morning, Jeff the coupon on power.
You may I, if I may.
Paula services you mentioned is now again about 2019 levels, how should we think about that if that's sort of a catch up on outages from last year or is it already reflecting the strong inflows that we had in 2017 to 19, those coming off warranty and then finally.
You know you mentioned that once the Stephen restructuring is done that revenue stream would be 2 thirds services any indication of sort of what we should expect in terms of margin. Thank you.
Okay.
Marcus I think you've got a pretty good handle on what we're seeing in gas services right. We've got 2 quarters here in a row now.
It had been positive clearly the comps a year ago that were working against are fairly easy, but if you go back to 19.
We're up against 19 levels for a number of the reasons that you highlighted we do know the second half.
Given the way Covid played out last year, we will present some tougher.
Comps, but I think we're encouraged by both what we saw with <unk> and the transactional activity as we look to the second half.
I think in all likelihood going to do better than that low single digit revenue guide that we talked about for services.
And that'll be more of first half.
Bruce.
Tougher will be the second half, but we do see I think.
Higher outages with the contractual business.
Business I think the teams on the transactional side.
Our are doing a better job day in day out we had higher backlog coming into the year I liked.
Then infusion improvements that we're seeing largely by by way of lean.
And in turn I think as we put more emphasis on the top youre also seeing that flow through to the bottom which is part of the reason we're seeing the strong margin improvements in gas and power broadly not only year over year, but again.
The exit with respect to the.
The comparison versus 2019 were.
For the segment I think the margins are up now over 600 basis points.
Versus the second quarter 2019, so we know that this is never going to be a high growth business for us, but certainly it's a business.
We can run better and can be a a stable business for us and I think you see that shaping up here in 'twenty 1.
Joanna.
<unk> restructuring, so I would start by saying that valve in Hudson, we're doing a really good job.
In this big transformational.
And on the other side.
That's why we mentioned.
Okay.
Named Ed services business.
Let's say that a good place to be and what the margins would be well I would just say that service margins.
<unk> to be strong and we expect them to be strong from its slightly lower than gas that we say where that where that ends.
Thank you and we have reached the end of our time today, we'll now turn it back to Steve <unk> for closing remarks.
Thanks, everybody. Appreciate your time now you have a very busy earnings day, my team and I stand ready to help take care.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
[music].
[music].
Yeah.
[music].
[music].