Q3 2021 General Electric Co Earnings Call
Good day, ladies and gentlemen, and welcome to the General Electric third quarter 2021 earnings Conference call.
At this time all participants are in listen only mode. My name is John and I'll be your conference coordinator today 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 your experience is with the slides for freshmen or there appears to be delays in the slides that advancement. Please.
On your keyboard to reprice.
As a reminder, this conference call is being recorded.
And I would now like to turn the program over to your host for today's conference.
<unk> Vice President of Investor Relations. Please proceed.
Thanks, John and welcome to Ge's third quarter 2021 earnings call I'm joined by Chairman and CEO, Larry Culp, and CFO Carolina divert copper 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 under.
Our website those elements may change as the world changes with that I'll hand, the call over to Larry.
Thanks, and good morning, everyone.
Our team delivered another strong quarter as orders margins in cash improved while the aviation market is showing continued signs of recovery and contribute to the quarter, our focus on continuous improvement and lean is driving broader operational and financial progress.
At the same time, we're managing through significant challenges that we'll discuss further today.
Starting with the numbers on slide two orders were robust up 42% with growth in all segments in both services and equipment, reflecting continued demand for our technology and solutions.
And better commercial execution.
Industrial revenue was mixed we saw continued strength in services up 7% organically AVR.
Aviation improved significantly benefiting from the market recovery.
<unk> was down 9% organically largely due to supply chain disruptions. The Ford ventilator comparison in health care and as expected lower power equipment.
Adjusted industrial margin expanded 270 basis points organically largely driven by operational improvement in many of our businesses growth in higher margin services at aviation and power and net restructuring benefits.
Adjusted EPS was up significantly driven by industrial.
Industrial free cash flow was up $1 8 billion.
Discontinued factoring programs due to better earnings working capital and the short term favorable timing impact of aircraft delivery delays.
Overall, I am encouraged by our performance, especially at aviation.
Sure what gives me it gives us confidence there first our results reflect a significant improvement in near term market fundamentals.
Departure trends are better than the August dip and have recovered to down 23% of 19 levels. We expect this acceleration in traffic to continue as travel restrictions lift and vaccination rates increase.
Our results also reflect operating improvements for example, with aviation overhaul shops. Our teams have used lean to increased turnaround time by nearly 10% and decreased shop inventory levels by 15% since the fourth quarter of 2020.
These improvements are enabling us to get engines back to customers faster and at a lower cost.
No business is better positioned than GE aviation to support our customers through the coming up cycle, we're ready with the industry's largest and youngest fleet. While we continued to invest for the next generation with lower carbon technologies, such as the CFM rise program.
This platform will generate value for decades to come.
We're also clearly navigating headwinds as we close this year and look to 2022.
We're feeling the impact of supply chain disruptions in many of our businesses with the largest impact to date in health care.
Based on broader industry trends, we expect companywide pressure to continue.
At least into the first half of next year. Our teams are working diligently to increase supply by activating dual sources qualifying alternative parts redesigning and re qualifying product configurations.
And expanding factory capacity. We're also focused on margins as we deploy lean to decrease inventory and costs as well as implement appropriate pricing actions.
And to reduce select discounts.
Our team our CP team in Japan for example has been experiencing higher customer demand. So we're making our production even more efficient to help offset the challenge of delayed inputs.
The team used value stream mapping standard work in quarterly <unk> to reduce production lead time once parts are received by more than 40% from a year ago and there's line of sight there to another 25% reduction by the end of the year.
While this is a single example, within health care taken together with other efforts and over time these add up.
At renewables, we're encouraged by the U S administration's commitment to offshore wind development.
However in.
In onshore wind.
The pending U S production tax credit extension is creating uncertainty for customers.
In closing much less U S market activity in preparation for 2022.
As we've shared a blanket extension, while we're winning well intended policy.
The unintended consequence of pushing out investment decisions.
In our business given the lag between orders and revenue the impact will continue through the fourth quarter and into 'twenty two.
This environment, along with inflation headwinds picking up next year makes renewables ongoing work to improve cost productivity, even more urgent.
Given these puts and takes we now expect revenue to be about flat for the year driven by changes to some of our business outlooks, which <unk> will cover in a moment.
Importantly, even with lower revenue, we are raising our margin and EPS expectations, underscoring improved profitability and services growth and reflecting our strengthened operations.
And we're narrowing our free cash flow range around the existing midpoint.
Looking further out to next year as our businesses continue to strengthen we expect revenue growth margin expansion and higher free cash flow. Despite the pressures that we're managing through currently.
We will provide more detail as usual during our fourth quarter earnings and outlook calls.
Moving on to slide three.
Challenges aside our performance reflects the continued progress in our journey to become a more focused simpler stronger high tech industrial.
The <unk> and Aercap combination is a tremendous catalyst, enabling us to focus on our industrial core and accelerate our deleveraging plan.
Just last last week, GE and Aercap satisfy all regulatory clearances for the G cash transaction.
And we're now targeting to close November <unk>.
We will use the proceeds to further reduce debt.
Which we now expect to reach approximately 75 billion.
Since the end of 2018.
This is enabling <unk> to look longer term, even as we execute our deleveraging.
As we accelerate our transformation lean and decentralization are key to improving operational results.
This quarter, we hosted our global Kaizen week in each of our businesses.
With over 600 employees participating.
John Slattery.
The CEO, Jay Aviation and I joined our military team in Lynn, Massachusetts for the full week, while our business Ceos joined their teams across the globe.
Lean is fundamentally about going to gamba.
Real work is done and.
And as best learned in operations, where you can see it touch it smell it firsthand.
And in land, we were there to serve those closer to the work our operators.
Our mission was to improve first time yield on mid frames, our key sub assembly of the military engines, we producing Lim who's stubborn variability has been directly and negatively impacting our on time delivery.
By the end of the week, we had improved processes for welding and quality checks on mid frame parts.
Improvements that we're convinced will help us reach our goals for military on time delivery by the middle of next year, if not earlier and we can improve our performance on the back of these changes for years to come.
There are countless other examples of how our teams are leveraging lean to drive sustainable impactful improvements in safety quality delivery cost and cash they reflect how we are running GE better and how we are sustaining these efforts.
To drive operational progress and lasting cultural change.
Our significant progress on deleveraging and operational execution sets us up well to play offense in the future.
Our first priority of course is organic growth this starts with improving our team's abilities to market sell and service the products we have.
There are many recent wins across GE this quarter, but to highlight one.
Our gas power team delivered installed and commissioned for tier 2500 Aero derivative gas turbines and only 42 days to complement renewable power generation for California's department of water resources during peak demand season.
These turbines using jet engine technology adapted for industrial and utility power generation start and ramp in just minutes, providing rapid and reliable intermittent power, helping enhance the flexibility and sustainability of California's grid.
And we are bolstering our offerings with innovative new technology that serves our customers and leads our industry forward.
For example at renewables, our Hollywood ex offshore wind turbine prototype operating in the Netherlands set an industry record by operating at 14 megawatts more output than has ever been produced by any wind turbine.
From time to time will augment our organic efforts with inorganic investments.
Our recently announced acquisition of BK medical represents a step forward as we advance our mission of precision health care.
Bringing became intra operative ultrasound technology together with the pre and post operative capabilities in our ultrasound business creates a compelling customer offering across the full continuum of care from diagnostics through surgical and therapeutic interventions as well as patient monitoring.
Not only just BK expand our high performing 3 billion ultrasound business.
But it also is growing rapidly with attractive margins itself, we expect the transaction to close in 'twenty, two and I'm looking forward to welcoming the <unk> team to GE.
All told we hope that you see that GE is operating from a position of strength today, we delivered another strong quarter and we're playing more offense, which will only accelerate over time. We're excited about the opportunities ahead to drive long term growth and value.
So with that I'll turn it over to Carolina, who will provide further insights on the quarter.
Thanks, Larry our results reflect our team's commitment to driving operational improvement.
We're leveraging gain across.
Our final function in addition to causing weak that Larry mentioned over 1800 finance team members completed a full wastewater quake applying new digital tools to reduce non value added work by 26000 hours and counting.
For example at renewables, our 10, streamline and automate that account reconciliations intercompany settlements and cash application.
This type of transaction fees up time, so we can focus more on driving higher quality faster operational insights on improvement, helping our operating teams run the businesses more efficiently.
Looking at slide four I'll cover on an organic basis.
Orders were robust up 42% year over year and up 21% sequentially on a reported basis.
Building on revenue momentum heading into 2002.
Equipment and services in all businesses, but up year over year with strength in aviation renewables and healthcare.
We are more selective in the commercial deals we pursue with a greater focus on pricing in an inflation environment economic terms and cash together with targeting more profitable segments like services, we're enhancing order quantity to drive profitable growth.
Revenue was up sequentially with growth in services, driven by aviation and power, but down year over year.
<unk> revenue was down with the largest impact enhance empower.
Overall mix continues to shift towards higher margin services now representing half of the revenue.
Adjusted industrial margins improved sequentially, not only driven by aviation services year over year total margins expanded 270 basis points, driven by our lean efforts cost productivity and services growth.
Both aviation and power delivered margin expansion, which offset the challenges in healthcare and renewables.
Consistent with the broader market, we are experiencing inflation pressure, which we expect to be limited for the balance of 'twenty. One next year, we anticipate a more challenging inflation environment. The most adverse impact is expected in onshore due to the rising cost of transportation and commodities such as steel <unk>.
Impacting the entire industry.
We are taking action to mitigate inflation in each of our businesses our.
Our shorter cycle businesses felt the impact earliest well our longer cycle businesses, we're more protected given extended purchasing and production cycles. Our service business. This fall in between.
Our teams are working hard across functions to drive cost countermeasures and improve how we bid on businesses, including price escalation.
Finally, adjusted EPS was up 50% year over year driven by industrial.
Overall, we're pleased with the robust demand evidenced by orders growth and obviously yet to date margin performance.
We are navigating headwinds caused by supply chain and PTC pressure.
Impacted our growth expectations, but are now expecting revenue to be about flat for the year. However, due to our continued improvements across the.
We are raising our 'twenty, one outlook organic margin expansion to 350 basis points somewhat and our adjusted EPS to a range of $1 80 to $2 10.
Moving to cash.
And a major focus of our transformation has been strengthening our cash flow generation through better working capital management and improved linearity ultimately to drive more consistent and sustainable cash flow and our quarterly results show the benefits of these efforts.
Industrial free cash flow was up $1 8 billion ex discontinued factoring programs in both case aviation power.
One had robust free cash flow conversion in the quarter cash earnings working capital and allowance and discount payments or <unk> driven by the different aircraft delivery payments contributed to the significant inputs.
Looking at working capital and focus on the sustainable.
First of all the largest operational improvement.
Notable source of cash up $1 3 billion year over year ex the impact of these containment factoring mainly driven by gas powered connections.
Overall, strengthening our operational muscles in billings and collections is translating into DSO improvement.
Evidenced by our total DSO, which is down 13 days year over year.
Also positively impacting our free cash flow by about half a billion in the quarter was a DNA.
Given the year to date impact and our fourth quarter estimate aligned with the current airframe aircraft delivery schedule. We now expect positive so in 'twenty, one about $300 million, which is 700 million better than our prior outlook.
Tcf benefit will reverse in 2022, and together with higher aircraft deliveries scheduled expectation will drive an outflow of approximately $1 2 billion next year. So we can this is a timing issue.
You'll recall that we decided to exit the majority of our factoring programs owned at this yet.
In the quarter discontinued factoring impact was just under $400 million.
Which was adjusted out of free cash flow the fourth quarter impact should be under half a billion dollars, bringing our full year factoring adjustments of approximately $3 5 billion.
Without the factoring dynamics better operational management <unk> has become a true cross functional effort.
Let me share an example, Howard Stern powertrain recently shifted to this from a more siloed approach leveraging problem solving and value stream mapping they have reduced average billing cycle time by 30% so far.
So only two quarters being more linear business operations, both up and downstream are starting to drive more linear billings and collections.
While we have a way to go more linear peanuts business operations, better and sustainable free cash flow.
Year to date ex discontinuing factoring across all quarter free cash flow increased $4 8 billion.
Yeah.
In each of our businesses our turns are driving working capital improvements, which together with higher earnings make a real and measurable impact taking.
Taking the strong year to date performance coupled with the headwinds. We've described we're narrowing our full year free cash flow range to $3 75 billion to $4 75 billion.
Turning to slide six.
We expect to close the <unk> transaction on November 1st.
This strategic transaction not only deepen our focus on our industrial core, but also enables us to accelerate our debt reduction with approximately $30 billion in consideration.
Even our deleveraging progress and cash flow improvement to date, plus our expected actions and better Paso performance. We now expect a total reduction of approximately 75 billion since the end of 2018.
Gee will retain a 46% equity stake in one of the world's leading aviation metrics, which we will monetize at the aviation industry continues to recover.
As we've said, we expect near term leverage to remain elevated and we remain committed to further debt reduction our leverage target over the next few years.
On liquidity, we ended the quarter with 25 billion of cash we continue to see significant improvements in lowering piece cast needs currently at $11 billion down from $13 billion in the quarter taken its decreased due to reduced factoring and better working capital management. This is an important proof point.
We are able to operate with lower and more predictable cash needs, creating opportunities for high return investments.
Moving to the businesses, which I'll also speak to on an organic basis.
First on aviation.
Our improved results reflect a significantly stronger market departure trends recovered from August it's early but the pickup that began in September is continuing through October better purchase and customer confidence contributed to higher shop visits and spare parts sales than we had initially anticipated.
The impact of Green time utilization has also methods.
We expect these positive trends will continue into the fourth quarter.
Orders were up double digits, both commercial engines and services were up substantially again.
Military orders were also up reflecting a large hindustan aeronautics order for nearly 100 and 404 engine along with multiple to 700 orders.
So revenue commercial services was up significantly with strength and external effects shop visit volume was up over 40% year over year and double digit sequentially overall scope slightly improved we can.
Continued high concentration of narrow body and regional aircraft some visits.
Commercial engines was down double digits with lower shipments.
Our mix continues to shift from legacy to more NPI unit specific unit and lower production rates.
But also navigating through material fulfillment.
Amplified by increased industry demand, which impacted deliveries.
Military was down marginally unit shipments were flat sequentially, but up year over year.
Without the delivery challenges military revenue.
Growth would have been high single digits. This quarter. Given this continued impact military growth is now expected to be negative for the year.
Segment margin expanded significantly primarily driven by commercial services and operational cost reduction in the first quarter, we expect margins to continue to expand sequentially.
Our no double digit margin guide for the year.
Now expect 'twenty, one shop visits to the.
Mid single digit year over year, unless it's about flat.
Our solid performance, especially in services underscores our strong underlying business fundamentals after commercial market recovers.
Moving to healthcare market momentum is driving very high demand, while we navigate supply chain constraints government and private health system are investing in capital equipment to support capacity demand and to improve quality of care across the market.
Building on a 20 year partnership we recently signed a five year renewal.
This diagnostic imaging and biomedical equipment with HCA healthcare, one of the nation's leading providers of healthcare.
We are adapting to overarching marketing of health system efficiency Digitization.
This resiliency and sustainability.
Against that backdrop, <unk> orders were up double digits, both year and versus 19 with strength in health care systems up 20% year over year, and pdx up high single digits.
However, revenue was down to the high single digit decline at HCS more than offsetting the high single digit growth slipped to <expletive>.
You'll recall that last year, the Ford ventilator partnership was about $300 million of Lifecare solutions revenue.
This comp negatively impacted revenue by six points.
And thinking about the industry wide supply shortages, we estimate that growth would have been approximately nine points higher if we were able to fill orders.
And this challenges.
We will continue into at least the first half of 'twenty two.
Segment margin declined year over year, largely driven by higher inflation and lower life care solutions revenue. This was partially offset by productivity and higher pdx volume.
Even with the supply chain challenges, we now expect to deliver close to 100 basis points of margin expansion as we proactively manage sourcing and logistics.
Overall, we are well positioned to keep investing in future growth underscoring our confidence in profit and cash flow generation.
We're putting capital to work differently than in the past supplementing organic growth with inorganic investments that are good strategic fit. These are focused on accelerating our position health mission <unk> medical and we're strengthening our operational and strategic integrations.
Afternoon, we're excited by our long term growth potential supported by new technologies, like <unk> X and Cypress and our leadership in energy transition. Despite the current industry headwinds.
Looking at the market since the second quarter. The pending patent extension has caused further deterioration in the U S onshore market outlook.
On the latest woodmac forecast for equipment and Repower. The market is not expected to decline from 14 Gigawatts of wind installments. This yet approximately 10 gigawatts in 2022, this pressures orders and cash in 'twenty one in offshore wind global momentum continues and were aiming to expand our commitment pipeline.
Through the decade.
And modernizing the grid is a key enabler of the energy transition.
And we saw record orders driven by offshore with the project driven profile will remain uneven.
Two continued variability progress connection.
Onshore orders grew modestly driven by services and international equipment, partially offset by lower used equipment due to the fitness is dynamic.
Revenue declined significantly.
Services was the main driver largely due to fewer onshore repower deliveries ex Repower onshore services was up double digits.
Equipment was down to a lesser extent driven by declines in the U S onshore and grid. This was partially offset by continued growth in international onshore and offshore for the year. We now expect revenue growth to be roughly flat.
Segment margin declined 250 basis points.
Onshore was slightly positive, but down year over year cost reductions were more than offset by lower U S. Repower volume mix headwinds as new products ramp and come down the cost curve.
Our supply chain pressure.
<unk> margins remain negative as we work through legacy project and continued to ramp Hollywood X production at grid better execution was more than offset by lower volume.
Do you mainly to the PTC impact we now we now expect renewables free cash flow to be down a negative this year.
Forward when we are fencing headwinds, we're intently focused on improving our operational performance profitability and cash generation.
Moving to power, we are performing well.
Looking at the market global gas generation was down high single digits due to price driven gas to coal switching yes, you heard me right gas to coal switching.
However.
The gas turbine utilization continues to be resilient with megawatt hours grew low single digits.
Spite recent price volatility gas continues to be a real.
Liable and economic source of power generation.
Overtime as more base load coal comes offline and with the challenges of intermittent renewables pilot customers continue to need gas.
For the next decade, we expect the gas market to remain stable with gas generation growing low single digits.
Orders were driven by gas power services Arrow.
It's up double digits.
Gas equipment was down despite booking six more heavy duty gas turbine as timing for each instrument uneven across quarters.
We continued to stay selective with disciplined underwriting to grow our installed base and this quarter, we booked orders for smaller frame units.
Demand for Aero derivative power continues for the year, we expect about 60 unit orders up more than five times year over year.
Revenue was down slightly equipment was down due to reduced turnkey scope at gas power and the continued exit of new built.
Consistent with our strategy, we are on track to pitch it about 30% turnkey revenue as a percentage of heavy duty equipment revenue this year down from 55% in 2019, a better risk return equation.
At the same time gas power shipped 11 more units.
Yes.
Gas power services was up high single digits trending better than our initial outlook due to strong sales volume, we now expect gas power services to grow high single digits. This year.
Student services was also up.
Margins expanded year over year, yet, but down sequentially due to outage seasonality gastar was positive and improved year over year, driven by services growth in Aero shipments.
We remain confident in our high single digit margin outlook for the year.
<unk> is progressing through the Newbuild coal exit and by year end, we expect our equipment backlog to be less than 1 billion compared to $3 billion a year ago.
Power conversion was positive and expanded in the quarter.
Overall, we're encouraged by our steady performance power is on track to meet its outlook, including high single digit margin in 'twenty three plus.
Our team is focused on winning the right order Boeing services and increasing free cash flow generation.
Yes.
Moving to slide eight.
As a reminder, following the <unk> close in the fourth quarter, we will transition to one column reporting and wrote in the remainder of GE capital into corporate going forward, our results, including adjusted revenue profit and free cash flow will exclude insurance to be clear. We continue to provide the same level of insurance disclosures.
This simplifies the presentation of our results as we focus on our industrial Corp.
At capital the loss in continuing operations was up year over year, driven primarily by a non repeat of prior year tax benefit partially offset by the discontinuation of the preferred dividend payment.
At insurance, we generated $360 million and net income year to date, driven by positive investment results and clean stay favorable to pre COVID-19 levels. However, this favorable claim trends us filling in certain parts of the portfolio.
As planned we conducted our annual premium deficiency test also known as the loss recognition testing.
This resulted in the positive margin with no impact to earnings for a second consecutive year.
The margin increase was largely driven by higher discount rate, reflecting our investment portfolio realignment strategy with a higher allocation towards select growth assets.
Claims cost cuts continued to hold.
In addition, the teams are preparing to implement the new FASB accounting standard consistent with the industry and we're working on modeling updates.
Since the merger yet to date performance capital still expect a loss of approximately $500 million for the year.
In discontinued operations capital reported a gain of about $600 million, primarily due to the recent increase in Aercap stock price, which is updated quarterly.
Moving to corporate.
Our priorities are to reduce functional and operational cost as we drive leaner processes and embraced decentralization.
The results are flowing through with costs down double digits year over year.
We are now expecting corporate costs about 1 billion for the year. This is better than our prior one two to $1 3 billion guidance.
As you can see NIM and decentralization arent just concepts.
Our driving better execution and cultural change they are supporting another strong quarter and they are enabling our businesses to play more offense and ultimately they are driving sustainable long term profitable growth.
Now let me effective.
Currently the thank you, let's turn to slide nine.
Our teams continued to deliver strong performance, we're especially encouraged by our earnings improvement, which makes us confident in our ability to deliver our outlook for the year.
You have seen today that our transformation to a more focused simpler stronger high tech industrial is accelerating.
We're on the verge of closing the <unk> aercap merger, a tremendous milestone for GE.
Stepping back our progress has positioned us to play offense.
We just wrapped up our annual strategic reviews with nearly 30 of our business units. These.
These complement our quarterly operating reviews, but have a longer term focus as we answer two fundamental questions. What game are we playing and how do we win.
These reviews were exceptionally strong this year across the board with the most strategic and cross functional thinking we've seen in my three years, enabling us to drive long term growth and value across GE, while delivering on our mission of building a world that works.
We're positioned to truly shape, the future of flight with new technology for sustainability and efficiency such as the recent catalyst engine launch the first clean sheet Turbo prop design entering the business in general aviation market in 50 years.
Touching 1 billion patients per year, we're delivering more personalized and efficient care through precision health and combining digital and AI within our products, including our new cloud based Edison true packs to help radiologists adapt to higher workloads and increased exam complexity with improved diagnostic accuracy.
Through our leadership in the energy transition, we are helping the world tackle the trilemma of sustainability affordability and reliability for launching new tech platforms that renewables, such as the <unk> X and Cypress.
Through our recently announced flexible transformer project with the department of energy to.
The growth in the world's most efficient gas turbines.
To be clear, we still have work to do and as we do it we're operating increasingly from a position of strength.
Serving our customers and vital global markets with a focus on profitable growth and cash generation.
Our free cash flow will continue to grow.
Towards the high single digits percentage of sales level.
And we have an opportunity to allocate more resources on capital deployment to support Ge's growth over time.
Steve with that let's go to questions.
Thanks, Larry before we open the line I'd ask everyone in the queue to consider your fellow analysts again and ask one question. So we can get to as many people as possible. John can you. Please open the line.
Thank you and our first question is from Julian Mitchell from Barclays.
Hi, good.
<unk>.
Morning.
Good morning, everyone. Maybe my question would just be around free cash flow. So you had mentioned that free cash flow would be.
2022.
Just wanted to make sure is that sort of comparable with that $3 75 to 475 billion guidance. This year or is that sort of apples to apples. Once you roll in what's left of capital into the cash flow for this year.
And a related question is you talked on slide nine about the high single digit cash flow margin over time, just wanted to make sure Theres no that does not market share from the sort of 2023 plus timeframe you'd mentioned before thank you.
Hey, Julien.
Let me start then.
You talked about the 2022 months that we made.
Like for like we expect industrial free cash flow to step up we expect our business earnings to improve we expect that through top line growth and margin expansion that will turn into profit, which we then believe that we will seek to cash right then.
And then if you look a little bit outside of earnings. We do have a couple of significant cash items to think about we have mentioned.
<unk> headwinds that we think will continue into next year, so that will hamper both on the profitability, but also on inventory.
And then we have the headwind of <unk> talked about that in DCF is kind of somewhat positive, but it's going to be a big headwind next year and this is really only a timing effect because of when customers.
They can deliver the aircraft right.
And overall my last comment on industrial side would be if you look at working capital with that growth in mind, we will need some working capital to fund the topline growth right, but on the other hand also expect to continue to improve working capital management for example in receivable.
And to some extent also to inventory.
Within that we do see improvement in linearity as possible as well so that's like for like on the.
Industrial side, if we then add.
The consolidated capital or basically what's left of catheter and consolidated in like for like we expect it to also increase.
And the increase on top of that would mainly be driven by the lower interest that we would see some of that production.
We are confident in the overall growing trajectory most industrial like for like Atlanta, including.
Capital.
I would say just to the second question.
Short answer is no change whatsoever relative to our expectations with respect to high single digit free cash flow margins right, when which when we talk about that.
Let's just take.
For simplicity sake, 8% on a revenue base akin to where we were in in 2019, right that pencils out of $85 to $90 billion revenue base to say $7 billion of free cash that's really going to be an earnings.
Lower restructuring spend.
And better working capital management story clearly from a.
From a profit perspective, that's going to be an aviation led dynamic.
Healthcare right right.
Behind it and then we still anticipate that we turn power profitable and we get a couple of billion dollars of profit from power did not call it $1 billion for corporate.
But you get you get close to let's call. It $10 billion of op profit convert that net of interest and taxes and 90% to get to that $7 billion figure.
We think we're on our way, but but again the short answer is no change.
And our next question is from Nigel Coe from Wolfe Research.
Thanks, Good morning, everyone.
Good morning.
Great. Thanks for the detail on the next year. The one two so thats what I confirm that.
Yeah.
Seem to expect some some help from progress collections in aviation next year Siemens.
We are in a recovering order environment, but the real question is on the insurance.
Testing in <unk> and I know this is a capital stack test.
I think the 10-K Cola and then 11% surplus.
Just curious Kevin.
What does that mean for future cash payments going forward at what point does it does.
<unk> has become so large that that could have some good news for cash and going forward.
Thanks for the question, yes. So it is the fact that we did do the testing on the <unk> and we had good news I would say as expected and we have a positive margin investments no charge to the P&L and the.
Margin was 11% positive which is significantly higher than what we have seen it was mainly driven by the increase in EBIT from five 7% to $6 15, and I would say that increase was really driven by academic medicine, and we've increased the amount allocated to growth assets, let me come from nine to 15.
The other valuable pad like morbidity and mortality and placing a premium data small impact and we're really happy with that.
And your question then on top of that for the for the finished goods.
So thats the.
The cash flow testing that a bit.
Yes.
The ad.
Cash too.
Right.
I would say, it's not one to one.
The variable part.
In the letter.
But they are used under modest adverse conditions.
The Montney will happen beginning of next year as usual.
We look at our investment portfolio realignment and the changes into that model.
If you look at the future cash flow, but it could have some adverse effects to consider using more granular assumptions, but I would say overall the good news from the adolescent bodes very well for us but.
But it's not one to one.
And our next question is from Jeff Greg from vertical research partners.
Thank you good morning, everyone.
Hey, Jeff Hi, Jeff Jeff.
Hello Hope everybody is well.
Larry Our Carolina can we talk a little bit more about price cost I think your message on the pressures into the first half are pretty clear, but kind of this.
Had a question of kind of cost in the backlog so to speak that needs to work its way through the system.
I Wonder if you could just kind of size this a little bit for us or put it in the context of what you're actually capturing on price say on current orders.
Maybe what kind of price cost.
Total headwind or tailwind as in 2021 versus what Youre kind of expecting in 2022 based on what you can see in the backlog.
So Jeff why don't I start and then Larry you can dump here.
If we start with inflation.
Just want to reiterate that of course, we are hit by inflation, but it is a bit different depending business by business.
Have the shorter cycle businesses like hence why we are feeling the impact faster than the longer side, if I could like power and <unk>.
And for the services in between.
On the longer cycle.
We're more protected because of the I would say the extended purchasing and production cycle.
We are seeing demand pressures on commodities like steel, but also logistics pressures increasing right.
Specific to 2021.
We have felt inflation, but so far we've been able to offset it and we expect the impact for the full year to be limited.
The net impact.
Our 2022, we do expect to see significant pressure and I would say, it's top of our list of.
Our priorities for next year.
And we're taking both price and cost countermeasures.
Countermeasures.
Yes, Jeff I think Thats right.
You would imagine in an environment like this.
We're not only working.
The value add value engineering, the more traditional cost actions aggressively.
Working with the supply base is feverishly as we can both on availability and on on cost that said.
As currently it was alluding to on the price side, we're doing all we can in the shorter cycle businesses, it's a little easier.
In health care, where we've got more like for like we can see those price actions. We're beginning to see some early traction there services is a bit mixed.
Where we have opportunity say on spares.
And within the escalation.
Frameworks within some of the longer term service agreements, we're obviously going to get get what we can there you spoke to projects I mean, that's it's a little bit more bespoke, but while it's difficult to measure price like for like we are managing the margins with some of the longer term procurement efforts that Carol.
Lino alluded to just just more broadly on the backlog.
It is important to remember when you look at.
What was what 380 billion of backlog.
70% of Thats in aviation virtually all of that is in services, So certainly a competitive space.
But between the catalog pricing dynamics and some of the escalation protection, we think we're well positioned but we take nothing for granted there outside of aviation. The bulk of the backlog is also when services were similar.
<unk> applied.
But again limited pressure net net in 'twenty, one building headwinds force next year, we've got time to work both the cost and the price countermeasures and as Carolina said I don't think we've got a higher priority operationally here in the short term than those two.
And our next question is from Deane Dray from RBC capital markets.
Thank you and good morning, everyone.
Good morning Deane.
I'd like to get some more comments, if we could on the aviation aftermarket visibility that 40% up year over year on shop visits.
Similar to what your competitors have announced just talk about visibility the rap departures and your capacity I know there had been some cuts do you have the capacity to handle all of this I know lean is helping and then a related question.
What kind of R&D investments are you, making today.
Are you planning for to help the airlines hit their carbon neutral goals by 2050.
Dan I would say with respect to the aftermarket.
<unk>.
I think you highlighted some of the keys for us right.
Very pleased with the shop visit activity being up 40% in the third quarter better.
Than we had anticipated I think we were calling for up 25%. We will see sequential improvement is not going to be as pronounced year to year here in the fourth quarter, probably its going to be up call. It 30.
In October thus far were off to a good start in terms of underlying activity. All of that has been coupled with I would say robust spare part demand from third party providers. So right is that coupling up if you will volume and value that are going to.
We're working through supply chain challenges here be it material be it labor as we are everywhere else I think we're positioned here at least as weak as best we can see I am glad you highlighted the lean improvements rather than just Boeing a lot of bodies and a lot of capital into the breach. We really are trying to work the process Russell Stokes from the team in.
Services understand that.
Very well.
Why are we highlighted some of the turnaround improvements that we did in our in our formal remarks.
You go back to I guess, what was technically the second quarter, but middle of June.
John Slattery in concert with our partners at Safran announced the CFM rise program, which really is a multi generational technology investment program to make sure. We're on a path with sustainable aviation fuels.
Be it hybrids being hydrogen to be in a position to maintain the industry leadership. This business has enjoyed for decades. So theres a lot to come we're going to be spending.
And we're going to be spending smartly in and around those areas to launch technology that ultimately transition into product programs.
As our airframe or an airline customers deem appropriate.
A lot going on short term and long term, but again, we really like where where aviation is particularly with the departure trends and the outlook here in the near term.
And our next question is from Steve Tusa from Jpmorgan.
Hey, guys good morning.
Wondering if Dave Nathan.
You mentioned the sequential kind of margin increase in the aviation I think the revenues were a little bit weaker this quarter for fourth quarter, I think you kind of implied guidance.
Kind of a wide range and you guys haven't really updated in a while.
It gets me to kind of a midpoint of a $1 billion for <unk>.
We just had a nice sequential increase from Q2 to <unk> is that.
Kind of the right number and then.
As a follow up to that for next year with a $1 five headwind as a DNA normalizes.
What mechanically like whats the math that.
Can overcome that kind of headwind for aviation to grow.
Free cash.
Okay. So if we start with that.
Aviation and the margin and you talked about the margin going into the fourth the fourth quarter right. So what we are seeing and I think an important add on the third quarter is that Mrs shift key ended towards services rights into third quarter, we had 20% growth of services, while equipment was down. So this better mix also tilt.
Towards external.
Release would make you say the drop through rate.
And Larry talked about higher shop visits of 40% up year over year.
We also saw the strong third party sales upfront.
For the fourth quarter, we have this seasonality as you know.
Also don't expect it to be as high for the fourth quarter and expect to continue sort of from the third quarter into the fourth quarter with the sequential improvement and overall, that's how you get to our low double digit margins for 2021. They haven't specifically said exactly what the profit is in the fourth quarter for aviation with all those pieces.
Instead of piece it together.
For 2022, you asked about aviation free cash flow.
So I would say a couple of things.
You're right on the DNA. It is a timing issue. So we'll have a big headwind next year on the D&A side, but when we do see is we expect to return to flight to continue so we will expect to see.
Physical utilization being driven which meant more our stone, which means higher billings on our CFS.
The cash comes before the profit. So we do expect to have really good uptick on <unk>.
Services and the cash flow, so basically understand the sell side.
They are yes, <unk> will be a headwind, but on top of that we'll also have the profit that we source from.
More shop visits so overall the mix of that gets us to a positive place I think it's mainly the services and the.
That is the big part of them.
And our next question is from Joe Ritchie from Goldman Sachs.
Thank you good morning, everyone.
Hey, Joe.
Just sticking with free cash flow for a second and thinking about the <unk> implied guidance.
<unk> <unk> is your seasonally strongest quarter.
Step up from <unk> seems to be a little bit seasonally weaker than what we've seen in prior years. So I'm just curious if any any puts and takes that we need to be aware of.
Kind of think about the sequential bridge for free cash flow <unk>. Thank you.
Joe Let me, let me answer that so I think it's important to take a step back.
And if we look at jumping off point for 2020 free cash flow for the full year.
Free cash flow excluding.
Factoring and Biopharma, we learned $2 4 billion in 2020, if you take our midpoint of our guide now and you add back the factory you get to $5 billion for this year just to put in perspective, we're going from last year to four two midpoint of $5 billion. This year, so a doubling the cash flow for.
<unk> 2021, we are also seeing linearity improvement in 2021, which is part of the reason the fourth quarter nothing F.
Linear as it has been before.
After the rains that we had basically two main areas.
Being FSS in day, one and the supply chain challenges and the other one is the PTC pressure that we then expect to impact progress. So what does that executive for the fourth quarter.
We have highest sequential profit and we expect to see free cash from the market improving and some of the usual seasonality, but it will still be down year over year the supply chain challenges.
Earnings, but also through inventory right, that's going to be a lot second with that isn't building out.
And then for the full yet.
Fourth quarter last year, you remember, we had big renewables progress on billions and we don't expect that to happen. This year and then I've also previously talked about aviation Mac settlements in cares Act as positive one offs in fourth quarter last year, if you take that altogether.
And then get to the fourth quarter and importantly, how we get to 5 billion jumping off points all free cash flow this year.
Really important proof point in step to our high single digit margin journey that Larry talked about mid <unk>.
And our next question is from Andrew <unk> from Bank of America.
Yes, good morning.
Good morning Ana.
Just a question.
Longer term again, our long term care seems to be in better shape power stabilizing.
Once we're consolidated balance sheet, that's a lot easier and there is a path for delivering.
Back when you spoke about a lot about strategic optionality, but it sort of was COVID-19.
<unk> focus shifted elsewhere, but it seems to be coming back can you just talk about where we are about.
Thinking about strategic Optionality and sort of putting in a historical context. What you guys said about health care. What are you guys said about long term care renewables etcetera, I know, it's a broad question, but whatever you can share with us. Thank you.
Sure sure Andrew Let me, let me take a swing at that.
I would say that again, we're really pleased with the progress.
On both the deleveraging and the operational improvements we still have to close the transaction worked through the follow on debt reductions.
But to be in a position to have line of sight now on what will be a cumulative.
Approximately $75 billion debt reduction over the last three years.
Allows us I think to look at the balance sheet and begin to think about playing more offense and take advantage of the strategic option Ality that we have been.
Looking to build and grow.
That goes hand in hand, with the underlying improvements some of which I would argue you see in these numbers others like what I saw on the shop floor and Lynne a few weeks back you don't see yet, but which I think gives us confidence that more improvements in terms of topline bottomline and cash are forthcoming and all of that really does I think allow us to.
Both invest in the business more aggressively organically and Inorganically. That's why we were so excited about the BK medical transaction admittedly small, but the strategic logic behind it the value add operationally.
Our $3 billion high performing ultrasound business will generate and the high single digit returns. We think we will have in time.
That's what we should be doing more of in concert with what we're going to do organically all of that really sets us up I think andrew to be in a position to really.
Realize the full potential.
Of these wonderful businesses in the GE portfolio, there are a host of ways.
That could play out over time.
But first things first right. We've got some business here with the G cash and Aercap merger two to work through we've got these operating challenges to navigate through the fourth quarter and going into next year, but I really do think we're increasingly operating from a position of strength I like where we are.
And in time, we will realize the full value of these businesses.
Our next question is from Markus Schmitt or major from UBS.
Hi, good morning, everyone.
Good morning.
Good morning.
Morning, Hey, maybe.
Maybe additional color could you update us on the empower restructuring progress and any view on the potential impact here on the cost base for that business and is that anything sort of like that changes how you view that business given the French government push recently investing in nuclear.
And the new stuff.
Really separate in your business on the steam side between coal and nuclear thank you very much.
Hi market, let me start by talking to the restructuring them at first of all.
Instead, which is now part of the power.
Segment and also run by Scott, we have veterinarian heartened working through the restructuring there.
I would say they are on track, it's a big restructuring we.
We do expect margins to turn in 2023, and basically have the restructuring two to Tampa.
Tampa down by them and then the business is going to be two thirds services moving forward at a significantly lower overhead costs, which is what you are what you are alluding to them. So we see good traction that we are still in the middle of it. So again it will take time until 2020.
But then would have a very different business with the highest service element and lower overheads.
Mark I think the other part of your question was really with respect to the.
The steam generators for nuclear applications. As you will appreciate our focus continues to be on running that business as well as we can for our customers.
Recently, we did acknowledge that we are in discussions with EDF regarding a potential transaction.
If theres an opportunity to create value, we'll certainly pursue it.
But if you step back for a moment.
I think we are of the view that nuclear overall has an important role to play in the energy transition. We know the French government is strongly of that view they arent alone in the U K last week, where we had similar conversations, particularly in and around advanced nuclear technology, particularly in the case of the small modular reactors.
Which we know can provide carbon free dependable base load and flexible capacity as we move forward here. So we've got a lot of capabilities in and around nuclear really the whole nuclear lifecycle. So we don't talk a lot about it but it is part of the power.
Our framework for the energy transition and one we will continue to.
To manage as best we can going forward.
And our next question is from Joe Odea from Wells Fargo.
Hi, good morning, everyone.
Good morning, Doug Good morning, Joe.
Hi, I wanted to ask on PTC, and how you're planning for that and what's your kind of base case assumptions or what youre thinking about in terms of important dates on the timeline you talked about the step down in installs expected next year.
Temporary that is or what youre seeing how much kind of persistent pressure it can put on the install market.
Joe Let me let me, let me take that I think with respect to the U S.
Market for onshore wind.
We do see a step down here going into 'twenty, two probably stepping down from say 14 to 10.
Gigawatts.
It's.
Not yet set in stone because these conversations are active and underway.
In Washington, given all the legislation.
To review the run up to Cop 26, and the like.
What we are incorporating in our commentary here today is a more pessimistic perhaps.
But updated view relative to the very near term so in the absence of those incentives in the short term, we're going to feel pressure both on new unit orders and in Repowering. So some of that impacts cash some of that impacts.
Margins relative to.
Repowering installations this year the good news is.
This is all part of a long term extension given.
Given the administration's commitment to the energy transition to the role of both onshore and Relatedly offshore wind.
And that transition. So you can take the decade long view.
The impetus or the imperative for US is really to manage these business is better to generate better margins operating margins, but in the short term we've got some additional pressures just given the the <unk>.
Reduction in demand that will follow the uncertainty around the tax incentives and they hit us hard because the north American market. The U S market is clearly the best onshore wind market for us.
On a global basis.
And our next question from Nicole the blades from Deutsche Bank.
Yeah. Thanks, Good morning, good morning, Nicole.
I was hoping to dig into that supply chain challenges a little bit here.
I know.
It's kind of become a little bit spread across a lot of your business as you mentioned not becoming targeting in aviation as well, but Larry are you seeing any signs of abatement. There. We've heard a few companies talk about the view that like August and September were at the pinnacle of supply chain challenges and things might be easing a little bit what would love to hear what GE is doing.
The call I've talked to some of those CEO some of those Ceos are friends of mine.
Sure.
I'm not sure we're yet at a place where we would say.
The things are stable.
We may have line of sight, we may have improvements in one commodity or one business.
But almost without fail. The next day right a commodity supplier a logistics provider that we thought was good for the next six weeks in the next six months.
Offers up a revision to that.
That outlook.
So I think I've used a phrase I, probably shouldnt, but I'll repeat it.
Really is akin to play whack, a mole right by by business by commodity by geography. It just seems like every day.
There's new news to Balliwick I couldnt be more pleased with the way our team is navigating all of this both in terms of availability and cost.
We've got new procurement leadership in a number of businesses.
Really trying to make sure that were true to our lead imperative of safety quality delivery and cost in that order.
We don't want to have a short term band aid that cost us long term.
But it really is a tactical muscular endeavor right now that we're working our way through you've heard others you've heard some of the key suppliers talk about.
Electronic components are likely to be at least two to three quarter challenge, maybe maybe longer that's important for us in certain businesses and certainly in some of our higher margin businesses.
But we're working through it.
It's probably more challenging if not more challenging than I've ever seen in my career.
But we'll work our way through it things.
Will level out in time.
But given this was an area, where we wanted to strengthen our operational capabilities, while it's more challenging in the short term, we will be better for it.
Medium to long term.
Hey, John we only have time for one more question could you. Please proceed with the what's going to be our last question.
Yes, and our final question is from Andy Kaplowitz from Citigroup.
Hey, good morning, guys just slipped in there.
Good morning, Ed.
Larry can you give us a little more color into how youre thinking about health care revenue and margin going forward. I know you mentioned that growth could have been nine points higher and you're obviously, a very strong orders. Despite the weaker revenue. So do you get those nine points back in 'twenty, two and or does the backlog Youre building gives you confidence in a stronger than usual revenue.
The environment in 'twenty two.
Andy for sure right.
It's not our style to try to.
<unk> built build back.
A better headline here, but thats nine points of real pressure given the supply chain issues that Nicole was just.
<unk>, it's on and again he currently to mention that.
The Ford ventilator effort, a year ago for the HHS.
Significantly tough tough comp, but if you look at the 19% orders growth. If you look at what's happening both in the public and the private spheres, plus we're doing increasingly both from a commercial and from a product perspective, we've talked about the opportunity to take this business from a low single digit grower in.
Mid single digit range to grow margins in the <unk>.
25% to 70 basis points over time, I've got more conviction about our potential to do that.
And I did a year ago, just off a UK trip, where I had some quality time with a number of our our business leaders over there our pdx business in particular lots of good things going on.
Got a CEO transition here in the offing.
<unk>.
There were excited about Kieran Murphy has done a heck of a job with that business Pete arduini coming in is.
Very much committed to those types of expectations. He is certainly coming because he is excited about the potential bdcs across the GE healthcare portfolio.
I wish it werent as.
Mark do you have a camouflage.
Headline here given the supply chain issues.
We'll work through it and just feel like this is a strong business that will get stronger over time.
Larry we're at time at any final comments, Steve I know, we're over Brian Let me just if I may to take a moment to thank our employees our partners around the world for what are truly extraordinary efforts here given the pandemic and the.
The recent challenges.
My Thanks go out to everybody, we're operating from a position of strength today.
I also want to thank our investors for their continued support and we certainly appreciate your interest.
Your investment in our company and your time today.
Steve and the IR team is always stand ready to help and assist in any way possible as you consider GE and your investment processes.
Thank you thanks John.
Thank you ladies and gentlemen that concludes today's conference. Thank you for participating and you may now disconnect.
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