Q2 2022 General Electric Co Earnings Call
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If you experience issues with the slides refreshing or there appears to be delays and the slight advancement. Please sit at five on your keyboard to refresh as a reminder, this conference is being recorded I would now like to turn the program over to your host for today's conference, Steve Winokur, Vice President of Investor Relations. Please proceed.
Seat.
Thanks, Cheryl welcome to GE second quarter 'twenty, two earnings call I'm joined by Chairman and CEO , Larry Culp, and CFO Carolina diabetic copper keep in mind that some of the statements. We're making are forward looking and 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 may change as the world changes with that I'll hand, the call over to Larry.
Thanks, Steve Good morning, everyone.
<unk> delivered a strong second quarter with growth in orders revenue and profit as well as positive free cash flow.
Aerospace with the key driver and services remain a bright spot for performance.
While this remains the toughest operating environment.
I am proud of how the <unk> team is taking action to deliver.
I'll start this morning with an update on our plans to launch our strong franchises as three independent investment grade industry leaders.
It's now been 259 days.
As we shared this intent we're on track and making good progress.
Just last week, we unveiled the new branding of our three companies.
Aerospace GE healthcare and GE for Nova, which will comprise our portfolio of energy businesses, including renewable energy power and digital.
The names leverage Ge's multibillion dollar global brand and deep customer Trust.
Giving us competitive advantage in our end markets.
We also achieved several key milestones on the healthcare spin, which will go first in early 'twenty three.
We plan to file our confidential form 10 shortly.
Our team submitted its request for a private letter ruling to the IRS and important step to achieve tax free spin off.
We completed consultation with our European works Council, allowing us to move forward with a number of critical employee actions globally, including adding key talent and supported the new company.
We announced that health care will trade on the NASDAQ.
And I am excited about the board, we're assembling for GE healthcare and look forward to sharing more with you soon once finalized.
We're focused on building out our leadership team broadly to support the success of each of the Standalone businesses.
Im thrilled to now be leading a very talented team at aerospace, including John Slattery, who has been named Chief Commercial Officer, Russell Stokes now, leading commercial engines and services Amy.
Amy <unk>, leading military systems, and Rahul Guy who will join US next month is the business as CFO .
And just last week, we announced Eric Grey as the new CEO of GE gas power part of GE renewable.
I am thankful for how the dedicated GE team has strengthened our financial and operating performance, while advancing we spinoff plans.
And I am confident in our path to create three companies that will be well positioned for long term growth.
So now, let's turn to our results on slide three.
I am encouraged by the order revenue and profit growth and positive free cash we delivered this quarter, despite continuing macro pressures.
Orders were up 4% supported by growth in both services and equipment.
Aerospace led the way up 26%.
Revenue was up 5% growing in three of our four segments.
Aerospace was up double digits as the market recovery continued healthcare and power were both up mid single digits.
This was partially offset by renewables down double digits, reflecting lower U S volumes, resulting from the PTC exploration as well as the businesses International selectivity strategy.
Our higher margin services remained a bright spot up double digits led again by aerospace.
Collectively supply chain and macro pressures adversely affected revenue by about five percentage points this quarter, but eased slightly versus the previous quarter.
Adjusted operating margin expanded 380 basis points, driven largely by higher services growth.
And our focus on pricing with aerospace and power sources of strength.
Health care is stabilizing but still face a supply chain challenges and renewables remains difficult.
Adjusted EPS was up significantly driven largely by aerospace.
Free cash flow was roughly $200 million.
And improved slightly year over year due to better adjusted earnings.
This was offset by higher working capital tied to an inventory build as we prepare for the second half ramp as well as worked through the supply chain issues.
Overall this was a strong quarter for GE with orders revenue profit and cash all growing.
Notwithstanding.
<unk> is still uncertain about the external environment companies like GE are facing at the moment.
We continue to trend towards the low end of our 2022 outlook on all metrics except cash.
Working capital will be pressured as we protect customers from the impact of supply chain challenges as well as the timing of renewable energy related orders, which together are likely to push out approximately $1 billion of free cash flow into the future.
So fundamentally a timing dynamic at work.
We're just starting our annual strategy and budgeting cycle for 2023.
We still expect to deliver significant year over year improvement in both profit and cash but below our prior view.
With the world evolving so quickly we have to see how the next six months unfold and expect to provide you our 2023 outlook and the usual timeframe at fourth quarter earnings.
Turning to slide four starting with aerospace and healthcare while demand remains robust delivery has been a challenge for us for the industry broadly and for our suppliers.
What differentiates US is our lean foundation, which we built over the last several years.
In aerospace the industry is experiencing an unprecedented ramp as the pandemic eases coupled.
Coupled with labor and material shortages.
The team and I spent.
<unk> with our airframe or an airline customers at the Farnborough Air show just last week talking about the need for predictability and stability across the entire ecosystem.
We need to do better to deliver for our customers and.
In quality and delivery are our top priorities.
Let me take a couple of minutes on the actions that we're taking.
Starting with OE on the left chart, you can see material issues trending either from our suppliers of our four of our own making that are impacting production flow and ultimately delivery.
We recently allocated an additional 20% of our existing engineering team to help solve these issues faster.
We're seeing impact moving parts, along but we need to do more and quickly.
And we will.
We're partnering with our suppliers holding <unk> at points of impact in their shops to help them reduce setup time eliminate constraints optimize transportation.
And improve overall flow to us.
This is leading to increased supplier throughput as much as 30% or more in some cases.
Overall, we're seeing signs of improvement with engine output up sequentially.
In services, we use workshops to measure how often we need to interrupt a shop visit due to a lack of resources.
Primarily from delayed repairs castings forgings or labor constraints.
The curve was beginning to bend in May and June , reflecting our efforts to ramp labor and improve overhaul cycle time.
Last month, we held kaizen events at multiple GE sites around the world.
John Russell, Amy and I were all in Wales, and our GE Aerospace MRO facility, where we overhaul both the CFM 56, and <unk> 90 engines.
As we work to improve turnaround time for a steep.
<unk> 56 ramp the kaizen focus on increasing overhaul capabilities from three to four engines per week.
What I saw across our seven kaizen teams in Wales with lean inaction, a clear focus on waste elimination and continuous improvement.
For example operators on my team shared with me, how they spend 45 minutes searching for parts for.
What is often a 60 minute operation.
By removing this waste we improved turnaround time at Wales.
By three to five days about a 5% reduction.
These examples are everywhere at GE each one further increases the efficiency of our operations and improves our pace of delivery to customers.
In healthcare, we continue to broaden and strengthen our supplier base and address inflation through price and cost actions.
One way, we monitor supply dynamics is through red flags, which identify the lines at risk of a shortage if not replenished within 10 days.
The chart indicates our efforts are starting to yield improvements, but again, we need to do more.
For example, responding to the COVID-19 related factory shutdown in Shanghai, Our Pdx team took fast action and we were able to operate at full capacity within 10 weeks.
In the interim our Cork, Ireland Pdx team used a kaizen to increase capacity in the first step.
Producing contrast media solutions, which help doctors better image patient.
They reduced cycle time by over 20% lifting capacity by about 5 million doses annually critical in a shortage.
Examples like these support our confidence for higher output in the second half and in 2023.
The actions, we're taking not only helped clear todays backlogs.
Build what our customers want.
<unk> shorter cycle times going forward.
Looking at GE for notebook.
In renewables, it's been a disappointing first half and we're working intensely focused on stabilizing the business.
We're working with fundamentals with Scott and his team leveraging the power playbook that has delivered improved profitability and increased cash over the last three years.
First given the U S political environment, we're taking a more conservative view of the market for the time being.
You've heard us talk about sizing gas power for 20 to 30 gigawatt market in renewables, we're taking a similar strategy assuming GE onshore wind output of about 2000 turbines per year.
One key difference in onshore.
We arent sizing ourselves to the market, we're sizing ourselves based on our refocused efforts on select geographies, where we believe we can grow and grow profitably.
Lean and Decentralisation are core to the strategy.
Empower our first step was to decentralize, removing headquarters and other layers and driving full accountability closer to the customer.
Using lean team has implemented are alive outage program that many of you saw firsthand.
In Greenville last March.
At renewables, we're embedding similar principles, starting with reorganizing grid into three panels and integrating horizontal functions such as commercial and services vertically into the businesses.
Next scope selectivity stronger commercial underwriting and a focus on pricing has enabled power to reduce risk and offset rising costs.
Returning to price escalation and our long term service agreements where appropriate.
And we are updating our project cost estimates more frequently to reflect our current reality.
In renewables, while it won't be enough to offset the significant inflation pressure, we are making progress our pricing has substantially improved and onshore while continuing our focus on deal flow activity.
Additionally, we are growing our higher margin businesses, such as grid automation, which delivered double digit orders growth.
In power, we continued to invest in gas and steam services productivity, while focusing on product cost competitiveness.
At renewables, we've introduced several new products, which we are working down the cost curve.
These are larger more innovative technologies that need to be industrialized for large scale production.
We're also proactively deploy improvements to our fleet that will enable long term reliable performance from these high tech products.
Fixed costs.
Frankly, a misnomer in my view because nothing is really fixed is another critical element here.
Over three years, we cut these costs and gas by approximately $1 billion.
Based on international selectivity, and a smaller north American market, we're taking a harder look at our renewables cost structure.
Which we expect will yield significant savings.
We know from our power experienced that these actions that renewables won't yield results immediately.
But with this playbook.
We expect the business to return to profitable growth over time.
Combined with power progress and enhanced profitability and cash we're excited about the future for <unk>.
Moving to slide six while driving operational improvements across our businesses. We're also focused on better serving our customers and innovating for the future.
A few recent highlights at aerospace our joint venture with Safran and CFM International was selected by Delta to deliver 200, CFM leap <unk> engines to power its new fleet of Boeing 737, 10 aircrafts with options for up.
To 60 additional engine.
Qatar Airways also signed an agreement for installed in spare leap <unk> engines to power the airlines New fleet of $25 780 710 aircraft.
In healthcare, our recently announced partnership with Medtronic is enabling personalized care with the integration of two of Medtronic continuous monitoring solutions with our precision monitoring platform.
These capabilities allow clinicians to have access to real time reliable patient insight.
And our power we celebrated the first HLA gas turbine order in Vietnam the.
98 O two combined cycle power plant is expected to improve the reliability and stability of the energy grid to support renewables penetration there.
We're also developing new products with innovation supported by our continued investment in R&D.
For example, digital announced the first solution, resulting from its Opus one solutions acquisition distributed energy resource management system.
Designed to help utilities keep the grid safe secure and resilient, while enabling energy affordability.
So in summary, I have great confidence in the actions, we're taking and our path forward to drive sustained profitable growth.
With that Carolina will provide further insights on the second quarter.
Thanks, Larry.
Moving into the results.
Turning to slide seven I will share the highlights from the quarter on an organic basis.
Orders were up 4% and revenue up 5% with growth led by aerospace.
On a sequential basis adjusted revenue improved $1 6 billion or 10% a significant step up reflecting progress toward our second half ramp.
Services revenue was a particular strength in the quarter as we delivered double digit service revenue growth compared to last year.
Leading the way up 47%.
Equipment declined 6% driven by renewables.
Healthcare and power equipment revenues were bright spots at health care up 5%, despite supply constraints and power up 18%, reflecting strong aero derivative shipments yet.
Year to date organic growth was 3%.
Both quarter and year to date leasing can five points of pressure from supply chain disruption COVID-19 impact in China, and the Russia, Ukraine Board, we would like to contributing roughly one point of impact yet to date.
On adjusted margin in both aerospace and power still expansion.
Overall as a result of the actions, we're taking focus on pricing drove more than 100 basis points of margin expansion in the quarter.
Services mix, particularly in aerospace contributed favorably. We also saw improved contract margin reviews. Once the remarks with strength from contractual escalation and engine utilization.
Reductions were more than 150 basis points of year over year benefit largely of restructuring savings and some timing related corporate benefit.
Partially offsetting these improvements was approximately 200 basis points of margin headwinds from inflation and logistics costs net of sourcing actions.
In aerospace and power the net impact of price cost and inflation was positive Tim Scannell, showing both took steps to address cost and price, but it wasn't enough to offset inflation.
Lastly, adjusted EPS was up about 56.
We're about two five times driven by profit growth popular interest expense from our debt reduction actions.
About 50 incentive earnings with timing related that we either do not expect to repeat.
<unk> expected in the third quarter.
Continuing EPS was negative primarily driven by the unfavorable mark to market impacts from our Baker Hughes and <unk> position.
In total we delivered a strong quarter marked by revenue up to mid single digits significant profit growth and margin expansion.
This results in our focus on execution gives me confidence that we will achieve the low end.
Full year gross profit and EPS outlook, even in the tough environment.
Year to date, we have delivered more than one third of our EPS guidance in line with typical seasonality.
Moving to cash.
Generally that $200 million of free cash flow driven by strong adjusted earnings which was positive excluding the mark to market impact previously mentioned.
Despite a limited impact on free cash flow in the quarter supply chain challenges are contributing to inventory pressure later delivered on billings.
First on working capital dynamics.
None of US was a use of cash driven by billings from sequential revenue growth and also pressured by later deliveries in the quarter.
This was partially offset by collection strength, where we saw a seven day DSO improvement year over year.
Inventory up across all businesses with a large use of cash.
A portion of this is typical building for the second half volume growth leads to inventory and accounts payable growth mid teens or is it.
Outpacing disbursement.
This quarter, however supply chain challenges also contributed to an elevated inventory level across inputs and outputs in.
Inputs to appreciate by the impact of inflation and additional purchases needed to support second half deliveries for customers.
<unk> fulfillment challenges led to higher inventory.
Progress was a source of cash mainly due to aerospace connections on equipment orders to support production.
<unk> assets was a use of cash.
We saw continued strength in aerospace utilization, resulting in higher billings.
By service revenue in aerospace and positive marks.
In the second half, we expect free cash flow to be significantly greater than the first half due to higher collections on our revenue growth and this person was in line with the first half inventory build.
However, supply chain constraints are delivering delaying deliveries and pushing collections to the funding period.
So as a result much of the third quarter free cash flow is likely to shift to the fourth quarter by late fourth quarter delivered.
A higher receivable balance at the end of the year to be collected in 2023.
Combined with lower progress payments from our renewable energy orders, we expected to result in a deferral of about $1 billion plus free cash flow out of 2022.
Turning to the business.
Aerospace delivered a very strong quarter as the commercial market continued to recover.
Orders grew across the board up 26% in both commercial engines and services up substantially reflecting continued robust customer demand.
Revenue was up.
Given by significant growth in commercial services men shop visits 14% higher year over year and continued strength in spare parts sales.
Apply constraints, including material availability negatively impacted revenue by nine points, primarily commercial engine.
Military growth was driven by services.
But engine deliveries slowed due to temporary setbacks, specifically into 700 shipments we expect tangible improvements in the second half.
<unk> engine revenue was down slightly and supply chain disruptions continue to impact delivery.
Total engine shipments were down 7% largely due to <unk> and X production when leap shipments were up 7%.
Segment margin expanded by almost 15 points.
Mainly driven by commercial services growth.
OE shipments as well as actions improving pricing structures to address inflation and our performance.
Tomorrow alone drove over eight points of improvement given the negative <unk> lost yet.
For the total year, largely due to China firsthand slowdown, we now expect shop visits to be in the high teens range.
So expect lower commercial engines revenue trending below 20% growth year over year due to continued supply chain challenges.
However, we continue to expect more than 25% commercial services growth from ongoing strength in spare parts sales and that more than offset the lowest shop visit volume and OE volume.
Therefore, we still expect to achieve greater than 20% growth and three eight to $4 8 billion of operating profit for the year.
Moving to healthcare.
Market demand remains solid.
And inflation challenges continue to impact the market.
Underlying customer orders indicate continued commitment to investment and we are encouraged by signs that supply chain pressure is in the second half of this year.
Continued to monitor hospital investment plan and procedure activity.
Second quarter orders.
It grew 1%, but that was against a tough comparison to the second quarter of last year, when orders, 11% as well as the impact from Covid in China.
Orders increased mid single digits in services, partially offset by a slight decline in equipment orders.
<unk> continued to be challenging through the second half.
Revenue in the second quarter was up 4% with mid single digit growth in equipment and low single digit growth in services.
Both let's driven by imaging ultrasound and HTS services and it was offset by the continuing supply chain constraint, including those related to Covid impact in China.
Recall that fulfillment challenges started in the second quarter of 2021, and when excluding supply chain impact in both periods revenue growth would have been 5% this quarter, highlighting how we proactively manage sourcing and logistics.
Covid in China impacted growth in both equipment and pdx revenue in China broadly, we opening in early June and our Shanghai Pdx facility fully operational our equipment in pdx revenue in China is expected to rebound in the third quarter.
Segment margin was impacted by material and logistics inflation with some sequential improvement.
Net of sourcing action margins contracted about 300 basis points year over year, but were up about 200 basis points sequentially.
We are making progress the price sales positive for the first time in recent history.
Looking ahead healthcare is focused on driving cost reductions and implementing lean through supply chain excellence to deliver for customers and address cost and price structure as we work to offset inflation and logistics pressure.
Theyre also prudently investing in future innovation ending at high return differentiated technologies.
Our commitment to R&D investments is demonstrated by the double digit year over year increase this quarter.
For example, we launched volatile extra 22, our most advanced ultrasound yet.
Additionally, our women's health portfolio has AI powered two and on a proprietary architecture to unlock new imaging and processing power achieving higher resolution detailed images and scanning flexibility, revealing final Anthony <unk> <unk> and <unk>.
In addition, our inventory levels are elevated as we prepare for an anticipated ramp in orders fulfillment in the second half of 2022.
As Larry mentioned, we're making good progress on the health care space.
Have an opportunity to impact both patients and customers at Heska transitions into an independent public company.
Looking at the full year order demand remains solid and we are expecting mid single digit revenue growth, while closely monitoring customer order activity.
Due largely to inflation pressure, we now expect 2022 operating profit to be about $3 billion.
Slightly below our prior outlook.
Turning to renewables.
Orders were down due to continued pressure from onshore North American market dynamics, and the selectivity and international impacting both equipment and services to Repower upgrades.
Partially offsetting this with grid and hydro, which won a large order for the update of the type of hydropower plants.
<unk> had orders growth across all businesses, including significant growth include automation.
Revenue declined with roughly two thirds of the decline from Nova onshore wind North America deliveries.
The remainder of the decline was primarily driven by onshore wind international as planned.
Grid and onshore services, excluding repower those were up low single digits, reflecting our focus on driving growth in this business.
Segment margin declined significantly, although up 160 basis points sequentially.
Roughly half the year on year decline was the result of volume reductions in our most profitable market U S onshore.
The remainder of the decline, let's get roughly equally between net inflation pressures across our businesses and higher than expected new product cost and onshore internationally as we take measures to improve durability across our fleet.
This was partially offset by great where margins improved from higher volume and benefits from prior restructuring actions and we also recovered costs associated with legacy hydro projects of about $70 million.
In summary, we knew coming into this year that renewables will be challenging.
Offshore wind is a long term investment in an industry is still not at full maturation.
A critical part of the energy transition, it's why we're making good progress today.
Our priority is onshore wind, but many pressures are converging.
The ongoing paralysis in Washington, with the PTC exploration is hitting our most profitable markets.
<unk> demand.
This is coupled with additional inflationary pressures and flip to ability to accident.
For 2022 due to this dynamic we no longer expect to step up profit in the second half.
Clearly we have more work to do here, we are taking swift actions to turnaround this business running our power playbook.
Given the strength of our portfolio and the fundamental importance of renewable energy in the energy transition we remain confident that we will drive profitability over time.
Moving to power.
With the market yield of gas generation and utilization remained resilient growing low single digits.
Despite higher gas prices and availability challenges gas remains a fuel of choice on the dispatch curve around the globe to meet the growing electricity demand.
We continue to expect the market for gas generation to grow low single digits over the next decade.
Orders were down in the quarter, largely reflecting uneven equipment order profile, we've seen quarter to quarter.
Services declined due to Noah gases the outages in line with our multiyear technology cycle.
Importantly power orders grew low single digits in the first half of the year driven by equipment strength in the first quarter.
The team remains focused on disciplined underwriting and backlog quality.
Revenue was up mid single digits, primarily driven by margin accretive Aero derivative strength shipping 14 more units versus last year.
Services revenue was flat, we delivered strong transactional services growth in gas and power conversion, which was offset with the expected lower gasoline outage volume.
Segment margin reached high single digits in the quarter and expanded 30 basis points.
At gas power margins remain resilient from improving price structure to address inflation and error equipment and transactional services volume growth.
It has offset the mixed headwind.
<unk> margins improved significantly due to continued focus on productivity as well as project and legal charges from last year that didn't repeat.
We're focused on expanding our services opportunity and expect Hyacintha outages next year in the second half. We continue we expect more growth at <unk>.
And <unk> delivered its ramp alongside the continued strength of transaction services and the improvement at spin.
Power is set up well to grow profit in 2022.
We are reaffirming our outlook for low single digit revenue growth and margin expansion.
Sure.
Finally, a moment on Cortlandt adjust.
Adjusted corporate costs decreased over 50% versus last year, and 65% year to date.
We saw lower functions and operations costs from some timing benefit in addition to lower elimination.
Given the favorability in the first half we now expect corporate costs of below 1 billion for the year.
While excluded from our adjusted results insurance net income was approximately 140 million. This was down year over year as Covid favorability subsides and James continued to normalize.
As we have previously disclosed early this year aligned with the industry, we plan to adopt the gap <unk> accounting standard.
A transition adjustment is being applied retroactively to the beginning of 2021.
As a result, we expect the negative equity impact of about 7% to 8 billion after tax.
Using January 21 rates.
This is driven primarily by the lower discount rate.
Using 32020 to it.
The transition adjustment would be four to 5 billion taking effect in the first quarter of 2023.
Also embedded in this estimate is the one $5 billion to $2 billion after tax equity impact primarily from adopting the mtc first principles approach, which complements the LTI and incorporates a more granular modeling assumptions.
The first principles models that are considered an industry best practice and allow for additional transparency driven by refined modeling that improves cash projections.
Importantly, we do not expect any additional cash funding needs as a result of these changes currently.
We will finalize our safety results in the first quarter of 2023.
Also currently expect our margin to remain positive and will report results in the third quarter of this year, we've provided more info on this in the 10-Q that we filed today.
In discontinued operations, our runoff Polish deep edge mortgage portfolio ended the quarter with a gross balance of about $2 1 billion and this quarter. We recorded charges of about $200 million, primarily driven by unfavorable results for bank in ongoing litigation with borrowers.
This brings the total litigation reserves related to this metric to approximately $1 billion.
Stepping back.
Despite the volatile environment, we are pleased by the progress we made this quarter we.
We delivered order revenue and profit growth and positive cash.
This gives me confidence in achieving the outlook for 2022 that we've shared today.
Now Larry back to you.
Thanks Carolina.
And by the way happy birthday.
Wrapping up on slide 13.
We sit here today I hope you see what we see.
<unk> is a stronger more customer centric company with lean and decentralization at the center of everything we do we've made significant progress across delivery price and cost driving lasting improvements.
The actions I outlined earlier are helping us manage pressures today.
And most importantly positioning our businesses for sustainable long term growth.
Looking ahead, our story is simple.
We have leading innovative franchises poised to accelerate in critical growth sectors the world needs.
We're advancing the future of flight.
Precision health and the energy transition.
And our solid financial and operational foundation keeps us on track with our plan to launch three companies each with greater agility more focus and future growth opportunities.
I am excited about what's ahead I'm confident <unk> is positioned to create value.
Steve with that let's turn to questions.
Before we open the line I'd ask everyone in the queue to consider your fellow analysts again and ask one question. So we can get to as many people as possible. Cheryl can you. Please open the line.
Yes, Thank you ladies and gentlemen, if you wish to ask a question. Please press star one on your telephone. If your question has been answered or you wish to withdraw your question. Please first zero to.
Our first question comes from Dan Trang from RBC. Your line is now open.
Thank you good morning, everyone.
Good morning, Good morning, Dave.
Couple of free cash flow clarification questions first how much of that $1 billion pushout is.
Supply chain versus the renewable waters.
What's the reset 2022 guide.
What does this mean for that previous place holder for 'twenty, three $7 billion, plus thanks, and happy birthday Carolina.
Well. Thank you. Thank you Dan that was a lot of questions on <unk>.
Cash would take them step by step so to start with the $1 billion of.
Working capital push out that we have mentioned today, it's really two sides that is timing I would say a combination of inventory versus receivable from the businesses and then about one third.
Progress in the business and the dynamics from renewable.
So that's the split of the $1 billion and then you asked about the guide for 2022 free cash flow and what does that mean then.
So.
What I would say is that if we start with what we talked about today 1 billion about $2 billion of push outs.
To what we've talked about before so we could take them segment by segment. It really meant that in aerospace, we expect to be down due to the supply constraints.
Healthcare similar so basically I would say pending flat due to the supply constraints on deliveries.
For renewables.
And here, we are already in the first quarter I talked about that we expected.
So it would be below our original guide, but still better than last year now we have additional pressure so about a third.
Added to the renewables number or reduce from renewables number.
And then for power, we have conviction in the existing outlook and corporate we also expect to land in the existing guidance.
So that's overall the 2022 impact of the changes in the free cash flow guide.
And Dean on 'twenty, three if I may.
You know well, we're just starting our annual strategy and budgeting cycle that will take us through the next several months I think as it pertains to 'twenty three we're still of the view that we're going to deliver significant year over year improvement.
In both profit and cash.
But as we said earlier below the prior view that we've expressed.
And perhaps stating the obvious with with so much in flux right now.
Round the world I think it's going to be important for us to see how the next six months unfold.
At this point expect to provide our outlook on 23 in the usual timeframe at earnings at fourth quarter earnings.
That said given the way we've talked about 23 in the past and the underlying improvement driver.
Drivers I don't think they've really changed since March relative to the strong tailwind that we see in aerospace broadly both in services and in new units clearly post pandemic spending by health care providers and something that is critical to the health care story.
I think the energy transition all the more given events in Ukraine are going to play to GE strength, we just need to work through some of these near term issues that we've highlighted in the prepared remarks and.
In renewables.
Yes, so what that means basically is that we still expect to see.
The same drivers as we shared in March, but we wanted to in the volatility.
Talk about and we do expect earnings to the bigger contributor in the sort of the 2023 improvement it.
It will start off a lower 2022 base, but it will still be the main.
Part of improvement for 2023.
And if I look at them seeing earnings at the Big improvement part then on top of that we have.
Usually we have the delta between depreciation amortization and capex that you'd have.
$1 billion of amortization, that's noncash and then you add to that the working capital part and we do expect to continue to focus on improving the efficiency and we expect working capital to continue to be a source of cash and that will be helped by what I. Just mentioned listing 23 by the two thirds of the $1 billion of pushout.
Well I would say our more conservative view of the U S onshore wind market creates more uncertainty about when we get the progress parked and possible restructuring to.
So overall, we still expect a significant improvement on profit as well as free cash flow for 2023.
The next question comes from Julian Mitchell from Barclays. Your line is now open.
Hi, Good morning, and best wishes Carolina, maybe just wanted to focus my question around the sort of operating profit.
Second half.
So I think yes.
Saying you're at the low end, so sort of 6 billion our full year adjusted op profit is the new guide.
That implies I think about three.
$3 4 billion second half.
<unk>.
Versus $2 6 billion in the first half so you've got about $800 million increase.
Half on half I suppose is my point was just maybe you could confirm that and then I was just trying to understand that step up in profit in the context of the revenue step up because I guess your old revenue guide of 76 billion, we have a very big implied sort of revenue increase.
Billy and also in the second half half on half I'm, assuming that number is lower but maybe help us understand the sort of revised revenue guidance for the year.
And how we're thinking about the half on half step up what kind of operating leverage we should expect and what price cost is doing in the back half.
Julia and thank you for the congratulations I won't reveal my age here, but thanks anyway.
So on the profit so no your math is absolutely right.
Let me start by saying that for us.
Analysis is that the second half is really noted so we have more than 100% of free cash flow in the second half.
So 80% of net income in the second half.
<unk> 'twenty, one as a reference point, so it's not uncommon and we do expect to see strong sequential improvement in growth and so as that continues to accelerating through the year.
If I look at the different businesses and what you commented on with the profit we do expect to say about.
$800 million of profit growth.
Compared to what we saw in the first half and I would just start by saying, we expect to see improvements in all segments, but excluding renewables.
So if you start with aerospace we do expect to see strong growth from OE deliveries, which is actually driving a mix headwind and we expect that to be effective by the shop visits and the services strength that I mentioned earlier today.
On the shelf care side.
We also expect the supply chain constraints to improve in Houston, our backlog there. So we expect healthy growth in the second half as well and the combination of pricing taking hold.
I would say, while we continue to invest for the future growth. We also expect good profit.
From health care and on the margin improvement there for power I would say.
It's already in the backlog, but the second half deliveries both of gas turbines and Aero derivatives are already planned for the second half and we see strong transactional services growth as well.
Also getting power also existing pilot also getting price here.
So I would say when we look at our low end.
Range.
Really the majority of that depends on our own ability to deliver we've talked about sort of two thirds high convictions and one third debt.
That's interesting and that holds what we have done now though is we've taken a.
More conservative view on on renewables and therefore, we don't no longer expect to see compression in the year for renewables.
So overall.
The numbers are right and most of that depends on our own ability to deliver you also asked about what about price cost.
We're happy to say that we had positive price in all the segments in the quarter and we do expect that to continue to improve through the year.
We also continue to expect to deliver on our $2 billion of cost out for the full year.
That said we are also seeing.
As everyone is inflationary pressure on them in the first half.
But we do expect depending on loan side give us the short cycle, a little bit of a different impact.
Essentially in the second half.
But still working to mitigate mitigate that so that's overall how it gets.
To the low end of our range.
Our next question comes from Joseph Ritchie from Goldman Sachs. Your line is now open.
Thanks, Good morning, everyone and happy birthday Carolina, albeit some transplant later.
Yes.
My question is.
And Farhan.
Larry maybe yes.
Yes, it's interesting that slide four when you are talking about the progress.
Youre, making across both aviation and healthcare.
I'm just curious like as you think about the margin trajectory for both of those segments can.
Can we start to underwrite.
Something closer to a high teens margin in the aviation business and then maybe just talk about the trajectory of the healthcare margins from here.
Well Joe Thanks for.
Flagging.
That page I think what we were trying to do.
Just.
To help everybody understand that despite some of these supply chain challenges you don't need us talking about that macro it's well documented it's really about at least for us, but what are we going to do and I think in both instances.
In aerospace and healthcare, we're making some good progress.
We just need to make more of and I think as we do that we'll not only unlock some of this pent up organic growth, we talked about 500 basis points overall from a quarter.
But particularly in services and aerospace and just health care broadly.
That's going to be I think not only good growth, but highly accretive growth with respect to margins I think both businesses are marching towards 20% as we said earlier.
With respect to the.
'twenty three and beyond we're really now.
In the throes of our Strat plan process with each of the businesses.
Can imagine a lot of opportunity in aerospace that we need to work through healthcare similar but different in that they are preparing for the spin, but I think later on in the year.
When you speak with Pete and Helmut as they get ready.
It will be clear that margin expansion and strong cash conversion.
Very much an important part of their story I think first and foremost they wanted to demonstrate outsized growth and we think we're going to be well positioned both in terms of commercial execution and the innovation investments to do that and hopefully that cash conversion can be re it can be reinvested both organically and inorganically.
But I think in both instances youre going to see nice margin expansion as we move forward as to when we hit.
20%.
Give us a little bit of time and give you an updated view later this year.
The next question comes from Steve Tusa from Jpmorgan. Your line is now open.
Yes.
Hi, good morning.
Good morning.
And happy birthday.
The first half to second half on <unk>.
On health care.
One point to go into something close to one eight just can we get a little more granularity on that and then the follow up would just be how do you actually see the cash and.
Net earnings for third quarter, how does that split between third and fourth it with a little more precision.
So if you start with the healthcare partner in the health care margins.
Because what youre asking is available the confidence in improving the second half.
I would say what we saw that clearly is that we get good orders, but we still have fulfillment.
It's just and inflation continues to pressure and that's why we now expect the profit dollars to be slightly below our prior guidance of $3 billion in that in the mid single digit top line growth.
And I would say for the second half with what we're seeing we are seeing fulfillment and pricing improved meaningfully and we expect that to continue.
And of course, the combination of that will help with the significant margin expansion in the second half.
I commented on sales pipe.
In the prepared remarks earlier was the first time, we flipped positive in recent history, we've talked about how we've had that the orders analysis come through in sales and we expect it to continue.
To improve through the year as well as getting.
Getting deliveries out in parallel, but also taking access and the team is working really hard on implementing more noon and centralization to drive it up and cost out.
Sort of early stages of that but we expect to see more of that to take hold in the second half.
I'd say that at the same time, we are investing in R&D and in commercial activities to really drive.
The growth for the future.
Then you had a question on the third quarter.
Margin.
Is there any other quarter in general third quarter, So what we're seeing so.
I will start with the headlines I would say.
Third quarter top line would be trending in mid single digits.
We would expect to be down year over year and free cash flow, we would expect the better than previous quarter, but down year over year, and you can take that little bit into the context of the second quarter beat I mentioned this morning that we had some timing impacts of some of the.
So the improved second quarter will impact the third quarter.
The nonrecurring benefit we also expect higher aerospace deliveries OE deliveries, so that's going to be a headwind from profit and margin and then.
Typical seasonality empower.
The second point do we have the CSA outage and we have a bit lower margin outages in the third quarter. So overall, that's why we get there on <unk> and.
And I would say on free cash flow. So it's a combination you have sort of the impact on the second quarter the positive impact on the second quarter, but also what happens in the third quarter.
Okay.
The OE deliveries moving out we also expect to have a bigger impact on a.
<unk>.
And then I would say finally.
And commented on this morning is that we do through the impact of the supply constraints.
Which is basically leads to sort of orders coming up later in the quarter, which means the second quarter deliveries pushed out into third third into the fourth in the fourth into the beginning of next year, which also puts pressure on working capital you can expect to continue to say that in the third quarter and Thats why we expect cash flow to this quarter.
Over quarter, but down year over year.
The next question comes from Andrew <unk> from Bank of America. Your line is now open.
Good morning, Good morning, Larry Happy Birthday Carolina.
Good morning, Hi, under I guess, I should I guess I shouldn't really be greedy and follow my.
<unk> colleagues competitors.
Ask five questions, but I'll stick with one.
On supply chain, specifically in aerospace aviation.
How do you solve the issue, Wisconsin things, both near term, but it also assume thats more of a structural issue for aviation in the longer term, particularly with the.
A leap ramp up but also <unk> being in the news.
What's your perspective from near term and longer term sort of dealing with.
Casting supply chain, thanks, a lot.
Andrew I would say that right.
Can just open the aperture a bit relative to the question. It's important that everybody understand that the supply chain challenges in the aerospace industry.
Are far broader than any one commodity at the moment I mean, we see that not only in our own supply chains, but particularly in the wake of Farnborough and the conversations we have there with the air framers and others.
This is something that we're grappling with with broadly.
I've had an opportunity just in the four weeks that ive been in harness at aerospace.
With a number of the Ceos and their teams of our of our core forging and casting suppliers.
Here again, Andrew no silver bullet.
This is a ramp that's going to I think have us all very much on our toes I think what we're trying to do is make sure that first and foremost our signaling.
Two the vendors it is crystal clear and consistent as we possibly can I think over time, we've sent.
Many signals often mixed signals and it's really tough for them to operate accordingly, I think similarly, both have indicated there are a number of ways in which we can collaborate.
Around design.
Let alone capacity additions.
We'll serve every body and ultimately our end customers better. So there is a lot of work to do it will be a multiyear task to ramp as the industry is clearly poised to ramp.
But that's a high class problem, where I come from and one we're very keen to tackle with.
Our supplier partners and service of our airframe or customers and that's exactly what we're going to do.
The next question comes from Scott Davis from Melius Research. Your line is now open.
Hey, good morning, everybody.
Good morning, Scott.
I can't think of a worst way to spend your birthday than I am to talk to talk to us but anyways.
Okay.
I hope Larry let you leave early today, let's put it that way but.
Sorry, yes, I haven't really talked much about FX I mean, the dollar has gone through the roof here and I know.
Aero stuff, especially in U S dollars in U S dollars talk to us about the headwinds you have in the other.
Their businesses.
Yes.
Yes so.
Yeah, I would say on an FX.
For us.
Our reported sales were 2% so we had a negative.
Topline from kind of the same pile on.
The profit and EPS, it's really an immaterial impact.
For Us this is mainly a translation.
Because on the transaction side, and you were sort of commenting on that Scott.
Much of our global sales are really U S. Dollar denominated aerospace no exception and then with the longer projects that we have where we have FX exposure we.
Actively manage that and hedge against those.
And so I would say if you assume the same rates stay for the full year, we would expect a similar impact for the full year. So about three on the top line and small on the bottom line.
When it comes to the different businesses.
Well, it's the ones that are more.
Outside of U S based impacted <unk> healthcare and renewables.
In different ways.
The impacted by the translation impact, but overall, it's a small one.
For the business that I mentioned.
The next question comes from Andrew <unk> from Citigroup. Your line is now open.
Good morning, everyone happy birthday care leader.
Hey, Andy.
Maybe you can give us a little more color into some of the actions you're taking on renewables in terms of the fixed cost takeout. You mentioned do you end up taking a bigger restructuring at some point and then you mentioned you no longer expect to step up in profit in the second half 'twenty. Two does that mean, you expect to add significant losses in the second half as you took in the first half at the <unk>.
Do you still think you can achieve your target of approaching breakeven in renewables.
In 2003 or at some point in 'twenty three.
Andy I think what we had indicated.
Back in April is that we.
Would see another approximately $400 million op profit drain in the second quarter.
Unfortunately, it played out and just that fashion, but we thought we'd see second half.
A reduction in that drain.
Approximately 601 second half again thats not happening.
Unfortunately.
I break it down really due to three drivers all of which we've touched on one just as more conservative posture in the face of the realities in Washington relative to demand convertible demand here in 'twenty to the inflationary pressures that that had been well discussed and the <unk>.
<unk> durability investments that we indicated we're going to make here as well.
So I think youre going to see a second half that resembles the first half more than we would like but we are working through that.
We will talk again about.
Targets for 'twenty three later.
This is still a business that we have confidence in even though we may have a lull in demand here in the short term whether it be energy security, whether it be climate, there will be demand for this business in the U S and broadly in attractive markets.
Over the medium to long term and I think we're well positioned to play there. It's important that everyone remember that while we talk about renewables as a segment.
We've got three different dynamics within the segment.
We've got Orange offshore wind, which is a growth play for us we knew that would be an investment over the next.
Several years grid, which is rapidly approaching breakeven and it too has a role to play in the energy transition.
How long it takes to get to breakeven again, and we'll talk about it in more detail later, but most importantly.
We are going to deal with the fixed cost and so called fixed cost in the business.
But thats just one plank of the plan right. We've got to do a much better job in terms of modularity and designed to not only improve quality and delivery, but frankly to bring down unit costs.
What we've talked about in terms of.
Selectivity and price is really important here, we cant chase every order and we need to continue to make substantial improvement with respect to capturing value for what we deliver.
The decentralization of renewables in the segment and even within the businesses and something that will help not only I think reduce costs, but more importantly, improve our execution day in day out and that's against the backdrop don't like we did a few years ago with gas, where we're just going to take a more conservative view.
For planning purposes of volume.
<unk> that this lull in the market again will be short lived so theres a lot going on there remains some time to work through it but given what's got and team did in gas and power broadly over the last several years I think we have again confidence that we will run a similar set of plays.
To get not.
Not only to breakeven too but far.
Far more respectable returns in that business.
Cheryl we're going to make time for one more last and hopefully brief question.
Thank you. Our final question comes from Josh Poker Winski from Morgan Stanley . Your line is now open.
Good morning, all thanks for fitting me in.
Hey, Josh had us.
So to keep us Steve happy I'll keep it brief here on my end just on the aviation ramp here. They are kind of a little later to the party on supply chain, maybe versus some of these chip oriented businesses like like health care whats the confidence from here in terms of maybe the the ability to ramp sequentially, you talked a little bit about that in the context.
I think Andrew Robin's question, but.
Maybe with shop visits as well, where you had some issues in the first quarter I think relative to plan.
And related to that how.
How long can the spares dynamics sort of offset whatever gap, it's forming there. Thanks.
Well Josh.
A couple of things there, let me try to cut through it.
What matters most is the customer.
And for sure the spares and the aftermarket helps us financially at a time like this but we don't want to have that in any way dilute our focus on shortening cycle times and improving on time delivery rate, we know our major airframe or customers need more ends.
<unk> from us than we have provided and that will be the case for the foreseeable future. So we need to ramp again in a predictable reliable stable way.
That's what they want more than anything so at the Bacon plan the rest of their assembly operations Accordingly.
And Thats.
That's where we're focused so.
There are a whole host of things that we've touched on here relative to our own operations.
Which we're driving in terms of improving yields improving capacity and the like and the same thing applies in the supply base.
The distinction Josh I would draw with semi is the semi didn't have the dramatic downturn that this industry and I say the industry saw with Covid and then dramatic spring back.
So when the industry was turned down to such a degree right and we can talk about this commodity by commodity I would argue you see a similar dynamic with some of the pilot shortages that we hear about some of the operating challenges.
The airports are going through this is an industry that was was really mothball that is working very hard to to come back to.
Ultimate.
Leisure and business travel demand and we're very much a part of that industry and have our version of those challenges, but we're on it.
Great Larry any final comments before we ramp you bet, Steve I know, where I know were tight here, but is it close I appreciate everybody staying at overtime with US we delivered a strong quarter. The actions, we're taking to improve delivery price and cost performance are building meaningfully stronger businesses GE and our.
Planned spins are on track.
We appreciate your interest in GE your investment in our company and your time today.
Steve and the entire IR team stand ready to assist as you consider GE and your investment processes.
Okay. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
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