Q4 2022 General Electric Co Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the General Electric fourth quarter 2022 earnings Conference call.
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My name is Liz and I will be your conference coordinator today.
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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.
Thanks, Liz welcome the GE its fourth quarter and full year 2022 earnings call I'm joined by Chairman and CEO , Larry Culp, and CFO carabiner divert cava 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 web.
Those elements may change as the world changes as a reminder, GE completed the separation of our health care business. This month.
Health care will report separately on January <unk>. So while included in our 2022 result, we're focusing today's commentary primarily on GE aerospace and GE for Nov, our portfolio of energy businesses. Our remarks will also be simpler and shorter today, reflecting the company. We are now and will move.
Quickly to Q&A.
I'll now hand, the call over to Larry.
Thank you and good morning.
Everyone.
2020 to Mark the beginning of a new era, where GE following four years of strategic and operational transformation.
We successfully separated GE healthcare and a spinoff distributing approximately 80%.
Shareholders on January 3rd.
We strengthened our foundation retiring an additional $11 billion of debt, bringing our total debt reduction.
Over $100 billion.
Since 2018.
We continue to improve our operations.
Further embedding lean and decentralization to better serve our customers.
And today, excluding <unk> healthcare services.
Which are both higher margin and more resilient.
Presented even larger part of our portfolio about 60% of revenues and 85% of our backlog.
We finished the year strong delivering record revenue growth margin expansion and better cash generation.
<unk> Aerospace aerospace led the way as we executed on an unprecedented ramp.
Within <unk> power delivered with continued stability in das and we took significant actions to position renewable energy for future profitability.
External catalyst like U S climate legislation and the European focus on accelerating electrification are increasing investment in new de Carbonization technologies.
This progress has positioned us to create industry, leading investment grade independent public company.
Thanks to our team's high quality work, our plans to launch <unk> and GE aerospace are progressing well.
We're filling key leadership positions for both.
And we're preparing for two standalone businesses.
We will share more details with you, including our ongoing progress and timeline for the plan, even though the spin at our Investor Conference in March.
I could not be more proud of how the GDP manage through a challenging external environment to deliver for our customers and partners in 2022.
Alright, thanks to everyone.
And before I turn the call over to Carolina.
A moment of reflection.
Just two weeks ago I, along with many of our leadership team attended a memorial service for our exemplary.
<unk> Board member and former U S Secretary of Defense Ash Carter.
Ash was a remarkable leader.
Credibly humble and clear headed.
We miss him and his Sage counsel.
Yeah, Caroline clearly and it will take you through our results.
Thanks, Larry.
Turning to slide six.
Speak to the key drivers of our performance I will do it on an organic basis and including healthcare.
In the fourth quarter top line momentum continued orders grew significantly across all segments.
Revenue was up 11% with services such as <unk>.
By segment revenue, Erica power and healthcare was up double digits, driven by market demand price realization and improving delivery.
Partially offset by renewables largely due to lower volume, resulting from USA and.
And our heightened commercial selectivity.
Adjusted margin expanded 290 basis points.
Power was particularly robust offset the renewables.
Overall, our price and cost out actions outpaced inflation.
Revenue and profit growth resulted in over 50% EPS growth.
Free cash flow was $4 3 billion, primarily driven by strong earnings and improved working capital.
Accounts are a source of cash except receivable, which as expected was a youth from revenue growth.
Moving to the fully yet.
Orders were up 7% with 22% growth in our space and 30% growth in pilot.
Services orders were up 12% supporting profitable growth in 2023.
Revenue was up 6% largely driven again by aerospace up 23%.
More broadly higher margin services.
Double digit.
When total placement revenue decreased 4%.
Collectively supply chain headwinds and macro pressures impacted our performance by about four points.
Importantly margin.
And free cash flow.
Mr Kent to improve year over year and finished in line or above the most recent outlook we shared in October .
Adjusted margin expanded 160 basis points led by aerospace empowered.
Services gross pricing.
The $1 5 billion of coastal to access there will be improvement.
This was partially offset by inflationary pressures, especially at our shorter cycle businesses and pressure from renewable.
Operating profit growth and debt reduction.
Yes.
More than 50% for the full year.
Free cash flow was $4 8 billion.
With 2 billion, 80% improvement.
Driven by earnings and reduce debt.
In 2022, working capital was a source of cash accounts payable progress collections and contract assets all contributed to the solid performance.
Now a moment on corporate.
In 2020, we ended the year with $1 2 billion of cost.
Continued to reduce cost in 2022, including a few hundred million dollars of market rate, let's say of ability.
We now have a smaller leaner cost structure in 2023, we expect costs of about $600 million roughly half of the 2021. This time.
Free cash flow.
We expect to improve significantly given our progress with debt reduction and lower costs.
We continue to execute our restructuring plan and reduce our cost structure post the healthcare spin.
Pitching a fit for purpose standalone structure.
Aerospace and so even though Bob.
Stepping back we are encouraged by our improved volume and pricing and our significant cost out actions exiting the quarter.
This will help us drive continued growth in 2023.
Now back to you like to discuss our business currently to think you.
Starting with aerospace I am six months.
Leading this business and my conviction is even higher today that we have a premier franchise with highly differentiated product and technology positions.
And leading positions in attractive commercial and military sectors.
Entering 2022, our priority was delivering on the significant.
Both across both engines and services for stability and predictability are critically important for our customers.
It starts with the right team.
We have a balance of unparalleled experience and fresh perspective with nearly half our leaders new to their roles. This year.
We're also driving two major operational changes.
First.
Is accelerating our progress with lead to improve operating rigor and delivery.
Take supply chain, where we've seen real improvement with more to come.
Our team of Terawatt produces leak turbine center frame and started 'twenty two with about 50 pieces delinquent.
Working through multiple kaizen implementing flow standard work and daily management team's lean actions increased output over 20% and improved productivity by about 10%.
And today they are on schedule.
With our 2023 demand will need to continue to use lean in this way to deliver for our customers.
The second is decentralisation for.
For example, in our commercial engine business, we're increasingly running our product lines as their own P&L in line with how our customers work with us.
More cross functional collaboration and real time closer to the customer helps make us better.
Turning to the quarter, both orders and revenue were up over 20% equipment.
Equipment orders were robust.
Now with almost 10000 leap engines in backlog.
Commercial services and equipment revenue grew about 30% and military revenue was up about 20%.
In services internal shop visits were up 25% and external part sales.
We're up more than 20%.
And equipment commercial units were up nearly 30% with leap unit up almost 50%.
Looking sequentially, both internal shop visits and commercial units were about flat.
Military units were up 10%.
While material availability continues to be a challenge.
Put across engine and services.
We're using our lean tools to help accelerate sequential improvements are key for us this year.
Fourth quarter margins were above 18% slightly better than we expected although down year over year.
Higher volume and price were more than offset by negative mix.
Driven by increased commercial equipment shipments continued investment to support the business growth and other cost pressures.
While still net price cost positive, we expect inflation will continue to be challenging.
In 2023.
For the year revenue was up 23% driven by commercial sales with internal shop visits up over 20%.
Profitability and cash were solid margins were 18, 3% up 440 basis points year over year.
Services growth and positive price costs more than offset the impact of increased investments and negative engine mix from higher leap deliveries.
Free cash flow of $4 $9 billion was driven by earnings and working capital as we shared last quarter total in your a DNA flow came in close to zero versus last year, a $5 billion of pressure.
Looking ahead today, GE and CFM departures are close to 90% of 19 levels and we expect to be back to 19 levels. Later this year.
And 23 internal shop visits are expected to grow about 20% and external spare part sales are expected to increase.
With commercial engine is growing at about 20% in services at high teens to about 20% plus military growing at a high single digit rate. We expect total aerospace revenue to be in the mid to high teens.
And we expect leap engine deliveries to grow about 50% in 'twenty three.
We also expect to deliver profit of $5 three to $5 $7 billion and higher free cash flow.
Aligned to current airframe or aircraft delivery schedules.
<unk> is expected to be about a half a billion dollars outflow in 2023.
We're laser focused on supporting our air Framers Airlines and lessors as they ramp post pandemic.
Today that means providing stability and predictability for our customers.
Keeping our current fleet buying and growing our new fleet.
All the while continuing to continuing to invest in technologies that will define the future of white.
Notably we're encouraged by the momentum in military with our next generation technology, including the <unk> 100 engine for the F 35.
Yesterday 100 offers cutting edge capabilities needed to ensure continued U S air superiority.
The adaptive engine transition program received a strong show of support recently Premier League 50 bipartisan members of Congress, who wrote in support of continuing the program, which includes our engine with $286 million of funding included in the 2023 omnibus Appropriations Bill.
Overall GE aerospace is an exceptional franchise with a bright future as a standalone industry leader.
Turning to the <unk> burn over portfolio power delivered a solid performance this year, and we're making real progress running a similar strategy at renewables.
The demand drop due to the PTC lap significantly impacted our renewables results in 2022.
The inflation reduction act is a real game changer for us and the industry going forward.
In fact, we began to see a rebound in demand this quarter with renewables orders up 7%.
Sure orders in North America more than doubled our very encouraging signs.
But unlocking the full potential of the IRA will hinge on how quickly the administration moved through implementation.
Meanwhile, lower volumes and inflationary pressures continue to weigh on our performance.
Fourth quarter revenue was down 13% due to onshore.
And margins contracted as inflation and lower volumes offset pricing and productivity gains.
Full year free cash flow declined over half a billion dollars due to lower earnings.
So while we await clarity on the IRS rules, Scott and the team are controlling the controllable taking action and we saw progress in that regard this quarter.
Grid business that loss close to $400 million in 2021 was profitable for the first quarter since 2018, reflecting our restructuring and selectivity efforts.
Orders also grew significantly.
And onshore we're executing a restructuring with.
With our head count decreasing almost 20% sequentially, which will deliver savings in 2023.
Our strategic sourcing actions are onshore and our focus on reducing product.
It will improve product costs, despite continued inflationary pressures.
Across the businesses orders and sales pricing continued to improve.
With our selectivity strategy building, a more profitable backlog and pipeline.
Service orders and revenues, excluding Repower group.
There is certainly more work to do in the next six months will remain challenging.
But we are acting with urgency in 2023, we expect mid single digit growth.
Significantly better profit and flat to improving free cash flow.
Taking it by the businesses.
Onshore, we expect more than 50% orders growth in North America. This year.
And based on the orders we have in hand, we're confident of delivering over 2000 units globally with North American volume more than doubling in the second half versus the first half of the year.
We also expect a significant step up in profit driven by lower warranty and related reserves better price and restructuring benefits.
With the significant orders growth comes roughly $3 to $4 billion of cash down payments this year.
This includes <unk> 5 billion of cash linked to large <unk>, we've won which we expect to convert to orders later this year.
These are strong customer commitments, but given the project size and complexity timing could shift somewhat across quarters.
And offshore.
We expect to more than double revenue from about half a billion dollars in 2022.
However, our margins on the first tranche of Hollywood ex projects will be challenging.
Between typical new product margins and inflation, resulting in rising losses.
Associated with the delivery growth and limited down payments. We also expect cash will be significantly pressured in 2023 and offshore.
Mostly a timing dynamic.
And at grid, given our robust orders growth we expect continued.
The actions, we've taken on price or.
Or are expected to offset inflation pressures and we continue to make progress, including our small.
Our smaller cost structure and productivity.
Taken together this will enable grid to deliver a modestly profitable year in 2023.
Overall im confident were seeing operating improvements throughout the year and renewables.
And key external catalysts like the IRA will help improve our longer term economic profile here.
Moving to power, we've significantly improved power as demonstrated by our continued profit and cash growth.
We are well positioned for continued services growth with our expanded fleet.
We've now shipped 110, H as with roughly 80 units.
Providing a reliable source of cash growth in the future as our highest utilization assets in the fleet.
Looking at the quarter.
Power demand remained robust orders grew in all businesses and revenue was up double digits, largely driven by continued aero derivative momentum at gas power.
Services were also solid with orders and revenue up again, driven by gas transactional services.
Margins expanded over 700 basis points, driven by significant gas volume favorable price cost and productivity gains.
Similar to aerospace, we expect inflation will remain challenging through 2023.
Moving to the full year orders were up double digits, but importantly, we're not taking our eye off of activity.
With disciplined underwriting.
In line with our outlook revenue was up low single digits led by services.
<unk> expanded 300 basis points, enabling power to achieve high single digit margin for the year.
And our free cash flow improved significantly across both gas and steam.
Gas service billings were strong as fleet utilization grew low single digits.
Looking to 2023 for power, we expect low single digit revenue growth driven by gas power services.
Shipment revenue will grow as we deliver more H as despite the newbuild wind down its Steve.
And we anticipate.
Year over year.
At gas, both equipment and services volume as well as productivity gains and price should help offset rising inflation pressure.
We expect lower free cash flow year over year.
Continued earnings growth and strong services collections are offset by disbursement.
We expect free cash flow conversion to remain solid.
Stepping back our existing technologies and the GE <unk> portfolio will play an important role in the energy transition.
The strategic imperative to electrify and Decarbonize. The World is a challenge that these businesses with their vast installed bases were made to meet.
Let's turn now to the overall GE outlook for 2023.
We're expecting organic revenue growth in the high single digit range.
$1 60 to $2 for adjusted EPS, which includes about $4, 2% to $4 8 billion of adjusted profit.
And a range of three 4% to $4 $2 billion for free cash flow.
Underpinning this outlook.
Is the higher services concentration in our portfolio as well as our confidence in the strength of GE Aerospace is the worldwide commercial aviation industry Airlines and air Framers alike continues its post pandemic recovery.
We also anticipate military revenue growth, thus, yielding significant profit growth for GE aerospace in 'twenty three.
For <unk>, we expect low to mid single digit growth and profit of negative 600 to negative $200 million.
Including improvement at both businesses.
On cash we expect.
That's a slight improvement there.
This is driven largely by better profitability in planned down payments in onshore where timing could shift across quarters with some offset from offshore increasing deliveries.
Across GE, we expect continued operational improvements to deliver higher earnings and improved working capital management and.
In turn this will help us drive higher free cash flow for GE in 'twenty three.
We're looking forward to sharing more during our March 9th Investor Conference at GE Aerospace and Cincinnati by then hopefully home of the Super Bowl champion Bangles really youll hear more detail from our leadership teams about both GE aerospace and <unk>.
Please come see us.
To close on slide eight I hope you see what I see.
Strong results.
A simpler story and an exciting future.
At GE aerospace continuous improvement is our mantra and our results reflect our team our technology and our portfolio's unique positioning as the industry's largest and youngest fleet.
At G burn overpower is delivering solid earnings and cash.
While we are setting up renewables to drive longer term profitable growth.
We're moving forward with our plans to launch two independent investment grade industry leaders that.
That are well positioned to create long term growth as we shape the future of flight and lead the energy transition.
And I'm confident that we'll unlock greater value for our customers and our shareholders in the year ahead.
Now we're ready for questions Steve.
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. We ask that you. Please save any GE healthcare questions until their earnings call next week. What is can you. Please open the line.
Ladies and gentlemen, if you wish to ask a question. Please press star one one on your telephone.
Wish to withdraw your question or your question has already been answered. Please press star one one again.
Our first question comes from Joe Ritchie with Goldman Sachs.
Good morning, everybody and congrats on executing the spin.
Thanks, Joe.
Yes.
My question is really going to be focused on this free cash flow bridge for 2023.
And specifically on the segments I'm curious you talked about aviation free cash flow being up versus 22.
I know that you throughout the the $500 million impact in <unk>, but the rest of GE aviation free cash flow grow consistently with with earnings in 2023, and then Mike kind of second question on the segment is just around renewables and what her.
Are you anticipating.
The large payments in the second half of the year and what impact that has to the free cash flow in 2023. Thank you.
Okay, Joe So a couple of questions. So let me start with the free cash flow guidance for 2023 for the whole the whole company.
So if we look at that rate.
2022 numbers I would guess.
Granted four eight new jumping off point, excluding healthcare.
$3 1 billion.
Basically we are assuming that.
Mid point of our guidance, we will improve free cash flow with about $700 million.
And the majority of that comes from building up profit.
The midpoint, it's about $1 2 billion.
Billion of improvement in profit.
Add to that lower interest couple hundred million dollars of tailwind and then some working capital improvement despite the high single digit growth.
A couple of things that are partially offsetting that.
The headwinds from <unk> that you mentioned about half a billion restructuring cash out as well as higher cash taxes as we make more money. So taking all together, we expect earnings to the biggest driver of improvement and continue to benefit from our working capital management and overall desperately have confidence.
And our total free cash flow guide.
You also asked about the segments specifically.
On aerospace if you look at aerospace clearly the improvement in profit is a big driver in aerospace improved free cash flow.
When it comes to working capital and you what Larry said about the really strong growth that we're expecting to see of course working capital with depression.
And also part of inventory from that kind of growth, but we do expect that the combination of profit growth and capital management.
More than offset the MBNA headwind of half a billion. So it will improve cash also for aerospace.
And then if you look at the Lenovo businesses.
We basically expect it to be flat to slightly improving on.
Cash as well.
And here you have power plants. It downloads, we expect renewables to two.
Okay.
Yes.
Downpayments, Joe that you were asking about.
I think we said in our formal remarks that that should be at the 3% to $4 billion range. Some of those are for orders as they progress and orders to come many of which we have been selected for but again the timing here until the IRS finalizes the rules.
The tax rules for developers.
Could have a little bit of movement, that's what we were trying to flag.
In the formal remarks, so it'll be back loaded.
And in that regard, but we will have much greater linearity and aerospace is currently projected.
Our next question comes from Josh Vogel Minsky.
With Morgan Stanley .
Paul.
So.
Just wanted to follow up here on renewables. It looks like there is some op profit improvement not maybe all the way back to what folks were perhaps expecting just wondering if you could parse what's getting better like selectivity.
Grin of price costs versus what's still kind of a more material headwinds this year.
Yeah. Good morning, No I think if you look at renewables, we think profitability will be significantly better if.
If I break it down it grid, we're really encouraged by the improvements the team has put in place I think thats, what yielded the profitable quarter here in the fourth but more importantly set them up to be profitable.
In 2023 right. This is a business that people had given up on a few years ago and particularly in Europe , we've seen tremendous interest really across the grid portfolio.
In line with this accelerated electrification that's underway. So I think that's all good and they begin to contribute.
In the new year, I think from an onshore perspective little to Joes question, a moment ago on cash the same thing applies to profitability I think the first half is going to continue to be challenged much in the way that 2020 to have but as we work our way through the year, we would expect to see volume, we will see higher quality volume is a function of that selectivity.
And we can really see better pricing.
And our order book compared to our revenues and our <unk> compared to our orders and in our pipeline. We've talked about that before I think that really is a sign that the industry is transitioning in anticipation of the IRA.
To one where.
Volumes maybe.
Capacity may be challenged by demand and that'll be that'll be good overall, but there's a whole host of things that we need to do operationally I think we talked on the last call about improving our produce ability.
And the robustness of what we do in in manufacturing at the same time, we have taken some structural cost actions really the only place in GE, where that's.
The case with.
Nearly 2000 of our associates and.
In transition here as we look to get the renewables business onshore in particular in better shape for what lies ahead and then for offshore because we are going to double revenue, we're going to need to recognize the losses that go with the Hollywood ex early on here, so grid much better onshore wind in transit.
A bit of a timing dynamic with with offshore and you put that together and that's really what gives you the renewables guide for 'twenty three.
Our next question comes from Julian Mitchell with Barclays.
Hi, good morning.
Just wanted to ask about.
Cash flow sort of through the year and also the uses of cash.
Cash that's something maybe refreshing to talk about for the first time in a few years, but on the on the cash flows through the year.
When we think about the seasonality I think you had sort of free cash was minus 900.
First quarter, a year ago, how do you see the sort of the cash flow moving this year. It sounds like renewables might be a very big headwind in the first half and then and then swings in the second and so any color on the GE somewhat free cash as we go through the year.
And then maybe more for Larry your sort of thoughts on capital deployment. There is starting to be some optionality now so GE, partly because of the improving cash flow.
It's mostly been debt reduction understandably for a few years, but maybe just help us understand your priorities on cash use.
Yes, Julian let me take the first part of that question answer finality and on.
How is that happening through the year in 2023.
Maybe let me just start with the first the first quarter.
We are expecting.
<unk> of 10% to 15.
In the first quarter, so actually better linearity.
Than we've seen before in 2020 on cash we still expect cash to be negative also in the first quarter as the new jumping off point is the negative one two so we expect it to be significantly better than that but still negative as a typical seasonality.
So his analogy in general I would say, we don't expect material changes to our seasonality. We are still sort of heavy second half noted both our revenue and profit and on cash actually even more backend loaded now that we are excluding health cattle.
So expect lower volume in the first half and ramping in the second half sort of renewable sequentially growing through the year and sort of aerospace sequentially growing further renewables significance at the first half to second half ramp and powered more of that.
Typical outage seasonality related states that have launched <unk>, an even larger.
<unk> also have them equipment deliveries in the second half.
And I would finish by saying that improving operational linearity is a key priority for us and I can't even more to do.
Julian I would say with respect to capital allocation you are right. The boardroom conversations are fundamentally different than they were.
Just a few years ago right, we've now reduced our debt load by $100 billion.
Really pleased with the way health care is spot and has traded here you can look at that effectively as a $30 billion dividend to shareholders.
So we have a lot of options and I would say all options are on the table. However.
Job one remains.
The completion of what we announced the transformation back in November of 'twenty, one right, we want to make sure more than anything that we're setting up both aerospace and for Nova.
And the way that we describe them so as we work through.
A number of if you will more tactical considerations that overarching strategic objective, we will continue to be foremost in mind, but no doubt about it it's a different conversation and it's a much more enjoyable conversation to have and then where we were back in 18 and 19.
Our next question comes from Andrew <unk> with Bank of America.
Hi, yes, good morning.
Good morning.
Sure.
Just a couple of questions I think on.
Sure.
First I think there is a lot of talk in the industry about.
Wind.
To structurally change the contract right because the overall industry is just not in particularly good shape.
So question, one where are we in conversations with large customers who seem to want more capacity.
That's sort of the contract terms are not really helping the industry make any money.
Or are we in structural renegotiating the contract structure.
The second question just on power overall more traditional power but.
Focus is on profit growth not revenue growth.
What are the key levers you have folks in 'twenty three.
Guidance seems to suggest modest margin expansion are there any headwinds in gas and services that are you facing in 23. Thank you.
Andrew I'll take the first part of that clearly to perhaps.
Can jump in on the second part.
I would say that.
You'll see I think in the press.
More discussion offshore then you do onshore relative to renegotiation given that some of the ppas that are in place in the wake of the inflation that is.
Ron over every every part of our economy makes those more more challenging arrangements.
We're just really starting in our offshore business.
So we see a little bit of that but frankly not a lot.
Given given our.
Relatively small position.
The way you see those dynamics playing out for Ross.
Again in the wake of the IRI in particular here in the U S.
Is that.
Customers really want what we referred to as workhorse products.
I think the.
The technical spec one ship.
Arms race is.
Saying that is quickly a dynamic that's quickly fading here and customers want to make sure that they know they can get.
Units onshore in particular over the next several years that they can count on both in terms of performance and delivery.
That in turn is.
Bleeding not to renegotiations, that's not the nature of the business, but as we look at new business.
The reason, we're seeing better better pricing.
I think that the industry is going to need to work it.
Through that so that there will be a new equilibrium. The carats offered by the IRI are incredibly helpful. In that regard at least we anticipate that they will be once the IRS rules are finalized.
And that in turn is why I think you'll see us step up.
In volume over the next several years.
And presumably convert these better as sold price levels into real margins in real cash.
Okay.
Power.
To just start by saying looking at where we landed the year. The team delivered $1 2 billion of profit and seven 5% of all margin really getting to high single digits.
Quite syndicate month.
And same thing on that for 2023.
For power, we have a couple of positive they have more outages they talked about 'twenty, two being a low CSA outage and 20 favorably higher since the outages. So that's good we also have.
Aero derivatives growing but we do expect to have.
Mix equation.
What's been delivered.
Well as inflation, so price cost power, having had a big price the impact in 2022, when you lap that in 2020.
Being pressured by the inflation coming through in the P&L being such a long cycle.
Okay.
So overall, we expect earnings growth.
And on the cost side also strong services collections, but offset by distributions put down.
On the cash side, but still very high cash conversion number.
Yeah.
Our next question comes from.
Nigel Coe with Wolfe research.
Yes.
Hello can you hear me.
You can go ahead Nigel.
Good morning.
Line just went.
First of all thanks for all details around the sofa I did want to go back to the.
Offshore losses, and cash outflow in 'twenty three.
Wondering how do you see that that curve.
<unk> I don't know if you want to quantify it in 'twenty three in terms of the headwinds facing but how do you see that progressing in 'twenty four 'twenty five and maybe just given the magnitude of the losses in <unk> and 'twenty three renewables in total obviously.
Still confident in the bridge back to 'twenty four profit.
I don't know if we got.
All of that let me speak to the offshore dynamic.
I think what we're going to see in 'twenty three as pressure.
We've talked a little bit earlier about the doubling of revenue the dynamics with the Hollywood X being new and how that Rev. Rec will lead to.
Op profit pressure.
From a cash dynamic will also see disbursements as those projects move forward.
We should see some milestone payments some of which will be.
Backend loaded as well and they too have a little bit of timing.
Yeah.
Variability around them, we need to execute in order to see that in in 'twenty three as opposed to 24.
But as we as we look forward I think what we've.
Gotten from customers is a lot of good feedback relative to where we go next with the evolution of the Hollywood acts and Thats, where our product teams and our engineering teams are focused.
I think the timing of when we see the next tranche of orders is such that it's going to be potentially more a 'twenty four than a late 'twenty three dynamic and that too will create some of that pressure.
That is not atypical for a business that is effectively in startup mode.
You were otherwise, but again I think given what we're seeing in grid and what we should see.
And onshore once we have clarity with the IRS that'll help buffet us in many respects, but when you look at <unk> overall.
For that free cash flat to slightly improving guide that's really what we're.
What we're referring to.
I think with respect to profitability no no change in expectation.
Again, if we get the volume that I think everyone anticipates coming here in the North American market, our best market, where we're seeing healthier pricing coupled with better execution from a manufacturing.
Our manufacturing from a cost perspective.
Good being profitable and onshore or offshore rather coming along we are we should do that in 'twenty four we need to do that next year and when you say that cash.
Profit will then turn into cash and then also the timing that we've talked about on working capital with the progress on payments and more of that happening in 2024.
Our next question comes from Jeff Sprague with vertical research partners.
Hey, Thank you good morning, everyone.
Good morning, Jeff Good morning.
Just sort of a multi parter for me if I could I'm sorry.
Just first on on renewables I, just do want to confirm that the free cash flow guide includes the expectation of the $3 billion to $4 billion of payments.
But my my larger question is really.
How we think about normal conversion going forward.
Kind of the implied free cash flow conversion on the guide here today for 'twenty. Three is 180 190, 200% or so relative to net income right. So.
How do we expect that to normalize over time, and maybe you could provide just a little bit more color.
On that bridge from net income to free cash flow currently and have you started walking us through the delta a little bit, but still just kind of the absolute difference between the two.
It'd be interesting to bridge. Thank you.
Sure Jeff So just talk with you all right as Larry mentioned earlier this morning in our guide for renewable.
And the $3 4 billion of payments.
And the free cash flow.
When you talk about free cash flow conversion.
I always talk about cash, but it's important to stay right where it comes from so broadly speaking, we do expect to operate at more than 100% free cash flow conversion for the next few years.
And why is that a couple of different parts.
First part depreciation and amortization being higher than Capex.
And then I'll talk more about the working capital opportunity and tightening as well.
But with the depreciation and amortization.
An important distinction, we expect depreciation to be largely in line with the Capex. So basically continue to invest instead of the amortization that makes a difference and now that we are excluding healthcare, it's about $600 million.
Defense and we would expect that to continue for years.
And on working capital I would say that.
A couple of different parts that we can do continue to see opportunities in improving our working capital management, especially after you get the depression that we spend on the supply chain. So we see opportunities both to improve DSO and inventory turns on receivables and inventory.
But also when we look at progress in contract assets.
We expect both to be forces given where we are.
Cycle.
Finally on <unk>, it's not working capital, but it's also dry eye and this year, we're expecting negative half a billion of flow.
And we've had a couple of positive <unk>. So for the next couple of years you can expect that.
Pressure, but over time, we would also see that normalizing.
Overall, we do see opportunity to continue to improve.
And we'll continue to work that but for now we're focused on growing earnings.
Our next question comes from the line of Chris Snyder with UBS.
Thank you.
Turn the conversation over to the aerospace business and specifically margins.
Understand their general Flatlining of margins in 2023, given the mix towards equipment.
I guess my question is how long should we expect these mix headwinds to persist should we model margins higher coming out of 2023 and is there anything keeping the segment up from returning to the 21% level achieved in 2018 2019. Thank you.
While we are delighted to talk about aerospace.
Let me, let me jump in and we had a very strong finish as you saw margins up to nearly 19%.
Chris as you know.
This leap dynamic.
And frankly mix overall will be a pressure for us in 'twenty three I think as we look at margins next year, rather this year, we would expect they would be flat, but the revenue growth will give us an opportunity to drive profit growth up call it 15%.
I'd call out two things in 'twenty three one we do expect new units.
A grow more rapidly than services.
Headwind in and of itself and then the leap dynamic both within services and within new units.
We will create.
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The mix pressure that I suspect will remind folks about through the course of the year.
That said I don't think we look at 18% is some sort of.
Ceiling that we cannot peers. We continue to have I think a lot of optimism about the leap program and the opportunity to improve margins.
Both with new units and in the aftermarket as we go forward program is still very much a young one.
I think at the same time, we know price cost.
Has it been as challenging but it has been challenging at aerospace we will do a better job I'm sure as we go forward and our lean efforts I think very much is in its infancy youll see that both in the P&L and I think in the cash flow statement. So I don't think this is necessarily a 'twenty three and done dynamic.
That said our expectations would be as we go forward all in to continue to drive top line growth profit dollar growth.
And margin expansion at aerospace.
We have we have time for one more question.
Our next question comes from Deane Dray with RBC.
Thank you and good morning, everyone.
Hey, Dan.
First is a follow up to Jeff's free cash flow question, Larry When you joined GE, you talked about an initiative to kind of smooth out the free cash flow cadence for the year trying to avoid that historical hockey stick and look theres still some seasonal impacts you.
Can't get away from like scheduled outages that.
That will impact the fourth quarter, but has there been progress is that still something thats an initiative here in terms of smoothing out free cash flow and then I had a follow up macro question.
And I would say that there has been progress.
There is still a lot more to do and we talk about it when you hear us use the word linearity.
Right gets back to lean 101, we just want to make every hour of every day count every day every week every week or every month and there is still a bit of a dynamic. Some of this is some of this as are our customers.
Where we migrate toward quarter end, we migrate toward year end.
I'm encouraged by the progress and I think more people today understand how we can be more linear.
If you look at just the reviews, we've had the first three weeks of this year at aerospace right.
We're looking at how we have started this year.
We started this month vis vis December vis vis January a year ago. Those are the sort of operating cadences, which really helped us in that regard so.
Pleased but we're not done.
Appreciate that and then just given the uncertain macro can you cite any changes any meaningful changes in demand indicators that you're looking at whether it's quote activity front log.
Anything that you could share here this morning.
We're looking at just about everything that we can obviously in aerospace we're watching.
Not only departures bookings and everything that can proceed that the only thing that we have seen and this is in our proprietary view Dean is obviously freight has softened here is the short cycle economy has done the same.
I think with respect to.
For Novo, we look at utilization and gas and when we can see what's happening in real time.
Even in Europe , we've been encouraged I think by the utilization of the gas fleet.
That said, we don't want to suggest that that we're immune.
With 60% of revenue now and services tied to those real time dynamics, we're watching.
Carefully but.
We wouldn't be guiding a high single digit topline number this year, if we werent confident that our positioning both with the aerospace recovery in the energy transition sets us up to to do well here in 'twenty three.
That's great really helpful. Thank you.
Thanks, David.
Final comment.
Steve we've covered a lot of ground here. This morning, I would just wrap up with.
The group, saying that.
2023, really I think was a historic year for 'twenty, two rather was a historic year for US we finished.
Very strongly displant spins are advancing we couldnt be I think more thrilled with how things have played out for healthcare, but more importantly, we're excited about what lies ahead certainly appreciate everybody taking the time today to join US your interest in our company and your investment in GE and again, we hope to see many of you in March.
In Cincinnati.
Thank you everybody.
Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating.
May now disconnect.
The conference will begin shortly to.
Two reasons lower Johan during Q&A, you can dial one one.
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