General Electric Company (GE) Earnings Call Transcript & Summary

Good morning. My name is Brendan Luecke, and I cover U.S. multi-industrials at Bernstein. In light of the upcoming spin at GE, Doug Harned, our aerospace and defense analyst, will be co-moderating today's session. We're thrilled to be hosting again, Larry Culp, CEO and Chairman of General Electric. Since taking the helm at GE, Larry has driven an ambitious transformation at the firm to create 3 public pure plays, all the while controlling the controllable in a very tough environment. It's been quite the story. Larry, it's fantastic to have you back at SDC again this year. Thank you so much for joining us.

Brendan, thank you. Doug, good to be here. Good morning, everyone. Thought what we would do is maybe just give you a quick update on where things are at GE today and then get to Q&A. You'll hear us talk about where we are today as a new era at GE and I think that's true. That's not hyperbole. We really are here today operating day in, day out as GE Aerospace and GE Vernova. These are 2 businesses that have a storied past, but I think more importantly, an exciting future ahead of them, both will go forward off a $30 billion base. So we do not lack for scale despite the 3-way spins. And as you may have heard us talk before, each has a bold vision for its future. At Aerospace, we talk about shaping the future of flight, not for the faint of heart. At GE Vernova, we talk about how we lead the energy transition, how we'll help electrify and decarbonize the world. Those are ambitious visions that we have for each of the businesses. Quite fortunately, it's very much in sync with what we do today, day in, day out all around the world. Now those 2 businesses like our GE Healthcare business at spun in early January, share a common GE heritage. What does that mean? It means a lot of things all the way back to Thomas Edison and it really is those roots in innovation and technological leadership, which we think have defined this company over time and will continue to be at the core of all we do day in and day out for our customers. GE has operated around the world for the better part of a century. So we have a global reach. We have a brand. We have a network. We have relationships in each of our businesses that really are fit for purpose when you talk about things like shaping the future of flight, let alone leading the energy transition. And because of the nature of what we do in these long-cycle businesses, those installed bases have grown, we've supported them such that in aerospace, 70% of our revenues today come in services. And that number is approximately 50% at GE Vernova. In addition to the attractive economics that you would associate with a large service component, those relationships keep us close to our customers day in, day out. We know what they're wrestling with. We know how our machines are performing. We take that information and shape the road maps for the future. So we're excited about where we're headed. As you've seen since we were together at this conference a year ago, we've just continued quarter in, quarter out to drive better performance. We were pleased a month ago with the first quarter results that we shared, the lifting at the bottom end of our range for 2023 a year where we believe, again, we're going to see strong revenue, profit and cash flow growth, all the while making sure that we are making good progress in preparations for the spins, which today are still very much on track for some time early next year. It will be the second step again because Healthcare went in January quite successfully. And we know, first and foremost, that we need to prepare ourselves operationally for the separation. Healthcare was a little easier in that regard, the operational work that we need to do separate Vernova and Aerospace is underway. We've kept that to a small group. One of the lessons learned from Healthcare, less than 10% of the people on the GE team today are working exclusively on the spins. The rest of us are trying to run the business as we would want. That running the business involves a good bit of our lean transformation to make sure that we're making every day count. And it's easy to let the day slip away in a long-cycle business. But a lot of what you'll hear us talk about in terms of daily management, structured problem-solving, flow and Kaizen is really all rooted in making sure that we are as disciplined and as efficient an operator with safety, quality, delivery and productivity in mind for you, our investors and our customers as we possibly can be, and we're far from perfect. But when I'm out with the teams on a regular basis, I see progress. It's the cumulative effect of that progress, coupled with our technological leadership that I think bodes very well for the future. Now of course, we couldn't contemplate these spins a few years ago given our leverage levels. And since we were together at this conference a year ago, we've improved dramatically the deleveraging of the company. We're now over $100 billion mark in terms of debt that is by the boards now. So we can really look forward with an eye toward playing offense again, as we prepare for the separation of GE Venova and GE Aerospace. So that's the view at a high level. If I go down a notch, should I just talk about the businesses for a moment. At GE Aerospace, we really are a propulsion and services leader, the world over. One quick fun fact. We were underwing for 3 billion commercial passengers last year. And that's not a responsibility that we take lightly. Now much of that is rooted in what we refer to as our commercial engines and services business, which is about $20 billion of the GE Aerospace revenue, 70% again, in that instance coming from services. We have an enviable position in the narrowbody space with both of the major airframers with our legacy CFM56 engine and now our new platform, the LEAP engine, we're exclusive on the Boeing 737 MAX, and we have over 50% share with the Airbus A320 family. A lot happening there, particularly around LEAP, an engine that has a 7,000 strong installed base today, an installed base, we think will double between now and 2025 because of the ramp happening at both Boeing and Airbus. You've heard about the supply chain challenges we may get into those a little bit later. We're making progress every day such that we think we're going to have a 50% increase in LEAP deliveries this year up to 1,700 units. But it's a daily battle, but it's a battle, I think, that the team is winning all the while making sure that we're continuing to support our narrowbody business, both narrow and wide-body traffic is close to 2019 levels now. We're really excited about not marking ourselves to the pre-pandemic period. But I think next year talking about just regular [ old ] growth. And we've got those opportunities in the widebody space for sure, given our GE90 or GEnx and coming soon, our GE9X platforms. So there's a lot there. And the way we break that down within the company is really to think about what we need to do today, what we need to be prepared to do tomorrow and where are we going longer term. And to the supply chain topic, it really is about making sure that we're supporting the airlines to the fullest extent possible. They want as much lift as they can possibly muster. They're in a demand sweet spot like none of us can remember. And from a service perspective, the growth that you hear us talk about in terms of high teens to 20% aftermarket growth is really rooted in making sure that we're providing the services, the parts and everything else required to keep those engines running so that those planes are in the air. It's a high-class challenge, but it is a challenge given all the post-pandemic operating issues that you've heard from, I'm sure every company that you invest in or consider. With respect to tomorrow, we know we have an enviable backlog, particularly in the narrow-body space, right? You hear about the major airframers selling slots into the latter part of this decade now. We've got line of sight on a significant ramp, again, particularly with LEAP. Everything that we're doing to satisfy both the airframers and the airlines that stand behind that backlog is really geared toward making sure that we can reliably and safely step up over the next several years. Again, a daunting operational challenge, but one we wouldn't trade for the world, all the while recognizing that the engines that we support today and that we're manufacturing for tomorrow are going to be replaced in time by new technology given the sustainability mandates that every industry is facing. And that's where you'll hear us talk about our RISE efforts with new technologies around open fan architectures, in particular, but also making sure that from a technology perspective, we're investing in every domain that we should be at hybrid electrics, be it sustainable aviation fuels, be it ultimately hydrogen fuel aircraft. So the GE Aerospace continues to lead technologically in the way this business has for decades. I shift quickly to GE Vernova. When we talk about GE Vernova, again, we're talking about decarbonizing and electrifying the world. Here, we have tremendous benefits of incumbency because our technology generates 1/3 of the world's electricity today. What does that really mean? It means, again, the world over GE is known, GE is a respected valued partner. And given how daunting in this instance, the energy transition can be for our customers, they're looking to us to help them navigate what is clearly an uncertain path going forward. I think since we were together last at this conference, we've been buoyed by the way the public discussion with respect to the energy transition has evolved very much, in our view, on point with the view we've had for some time, and that is we can't solve for one dimension. We can't simply solve for sustainability, even though it is of critical importance. The trilemma is real, right? We need to solve for energy security and energy reliability. And at the same time, we need to be mindful of affordability. And solutions that don't consider all 3 of those dimensions probably aren't solutions. We were really encouraged with the way things played out in Washington last year. Much has been written about the Inflation Reduction Act. I won't belabor the point, but it gives our customers tremendous certainty with respect to incentives and government support particularly as it pertains to wind. And we already see in our onshore wind business, significant visibility in the form of orders, commitments and other indications of interest that give us a planning horizon in that business, unlike any that we've ever seen. And that's a market space that's important to our underlying performance and ultimately, the spin of GE Vernova. Those government policy moves in addition to the corporate frameworks really do give us a backdrop here for GE Vernova that we think is pitch perfect for this business to spin sometime early next year. We think about GE Vernova as our GE Power, Energy, Renewables businesses, they'll come together under the Vernova roof. At GE Power, we really are talking about our gas turbine business here. not unlike it's aerospace, cousin, a strong aftermarket play here, 70% of revenues in the aftermarket. This was a business when I joined the company back in fall of 2018, a number of people suggested, Larry, you can't give it away. Remarkable turnaround on the part of this team, a $2 billion free cash flow generator this year. This may not be the highest growth business in the GE Vernova portfolio, but it is solid, bedrock, strong cash generation, important role to play will give us, I think, opportunities to reinvest and strengthen those customer relationships at the same time. At renewables, we really are working in 3 different areas: onshore, offshore, wind and grid. I mentioned the Inflation Reduction Act earlier. There's a lot to this self-help story at onshore wind. The inflation Reduction Act really does give us that demand backstop the customers, and we were looking for, but there's a good bit of self-help here. I mentioned SQDC earlier. From a safety and quality perspective, we've evolved our product road map such that we're not trying to bring a new turbine to market seemingly every 6 to 9 months. Customers have really embraced our workover strategy. We can come down the learning curve from a quality, from a cost perspective. As a result, that bodes well. And in addition, we've just gotten into our fixed cost structure rather dramatically our headcount in that business is down 20% from where it was just last summer. So there's a lot that gives us the optimism that you've heard us perhaps express elsewhere, a tough first half in onshore wind in 2023 and but remarkably -- markedly better performance in the second half of this year with an eye toward profitability in '24. We know offshore is in its infancy as we work through our initial backlog of our Haliade-X offshore wind turbine all the while positioning ourselves, I think well with everything required in the Grid. This again was a business a lot of people suggested we give away. We shrunk it with our selectivity strategy to go after the business where we could play, win and do so profitably. And I think we're on path here to not only have a profitable business. But now, especially in Europe, you may have seen a couple of big HVDC orders from TenneT, one of the major grid operators in Central Europe, really looking to make sure that all of renewables being brought online are able to be successfully integrated into the grid. So a lot going on, a lot still to do, but I think we're excited about where we're going to be tomorrow, let alone early next year when we've got 2 industry-leading investment-grade GE companies out there. So with that, we'll go to Q&A.

Excellent. Thank you so much, Larry. So it's been quite a journey. I'd love to take a quick look back to kick things off. So our first question for you. In COVID fading in the rearview mirror, we'd all love to forget it, but we're still living through some of the aftereffects economically. What are your 2 or 3 biggest lessons having led the firm through this crisis?

I'm not sure it's something that we learned or knew. But one of the things I learned as a CEO early on the dot-com crisis and then in the great financial crisis. You've got to embrace that reality, particularly as a CEO because it's not -- it's not something the organization will beat you to, right? They -- the organization needs to be led and going in and just embracing that reality, getting the team wrapped around the idea that this could really be rough, may well be rough. Controlling what you can control and just keep moving forward while offering employees, customers, a ray of hope with respect to what's possible, helping them believe that we'll get through this. I mean we all remember some rather dark days back in March and April of that year. I think the GE team had not necessarily been without tests in the recent past. It's a resilient group. It's a resilient group as I've ever seen. Our lean work really helped us focus on problems rather than finger pointing. And we just kept moving forward. Next time around, I hope we don't see a pandemic again, but when we're in crisis, we're in a period of pitch uncertainty, I really think that simple idea of just embracing that reality and moving forward controlling, which you can is just the best way through.

It's got to be good coming out of the cruising.

We'll take it. We'll take it.

Yes. I just -- I am going to tie this in the aerospace a little bit. But I remember 4 years ago, you just come to GE, we were here. And I had a CEO asked me to ask you -- another CEO asked me this. Why the hell did you take this job? So here we are 4 years later. Now you're looking at a slightly different job with aerospace. So how do you think about that in terms of the way you manage aerospace going forward relative to what it was under the broader GE umbrella.

Yes. I'm so glad that I took this job 4.5 years ago, Doug, not anticipating all that came, but it has been an absolute joy every step of the way. It's interesting. I've been dual-hatted for almost a year now. And when I went in late last June to run aerospace, there were a host of reasons why. I think it was the first week it dawned on me, been a long time since I ran a business. I don't want to scare anybody. But -- you go back to the late '90s, I had group responsibilities at Danaher. I was CEO there for what better part of 14 years. And I've said publicly, I'll say it again this morning. As CEO of a multiline business, where you have CEOs reporting to you is a different job than it is when you're running a monoline business, and you've got a number of functional VPs coming at you. I won't tell you which is the better job, but I'm sure there may be some other CEOs that I know here who will speak to that. So I have to go back into that operating company mode, Doug, right? Not looking to try to micromanage everything, GE Aerospace, as you well know, big complex business. I've got to make sure we've got a great team. We're clear on strategy. We've got our daily, weekly, monthly, quarterly cadences laid in. It wasn't as if I haven't been doing that for the last 20-some years, but I have really more than anything been helping CEOs and leadership teams do that. So a level down, it's a bit more hands on, but it's a blast because you get to know the people better, you get to know customers intimately. It's just different than when you're managing a portfolio, managing a group of CEOs.

It's interesting to think about the difference between the two because one of the goals that you all have said is to have 20% margins for Aerospace in 2025. And that seems like one of those sort of top-down leadership goals. But when you think about it, how do you think about the path to get there, given the different pieces of GE Aerospace, cost inflation, pricing, it's the complex problems to solve.

Well, you'll hear us talk about lean and you'll hear us talk about decentralization. And I think both of those are key levers here. But rest assured, Doug, when we talk about, as we did in March on Investor Day, that 20% op margin target for aerospace in '25, more importantly, $2 billion of op profit growth between now and then, the significant growth rate. That's not something that Larry Culp, GE CEO, dropped in on the aerospace team or that I came up on my own as the aerospace CEO. We were really -- we put the team in the room and just looked it straight in the eye what are we willing to commit to, to investors who are going to come visit us for a day, as many of you may have in March, right? What sort of aspiration should we be willing to take public as we think about telling our own story to investors as GE Aerospace in the not-too-distant future. And I think we saw that we're going to have tremendous volume, that the lean and the decentralization efforts are going to really help reduce cost. Our price cost equation, given the way we price, particularly in the aftermarket with inflation protection like our escalators and the like, help us in that regard. But the real offset will be the mix pressure that we see, particularly from LEAP and I think increasingly later in the decade from the 9X. New engines early in their life cycle, aren't nearly as lucrative both from an OE perspective and in the aftermarket as their predecessors are. So it's a good bit of everything. But what we've done to operationalize that, Doug, is to make sure we know what we need to do from a narrowbody perspective, what we need to do from a widebody perspective, with the defense and systems teams need to do as well. All the while making sure our engineering, our supply chain, our finance teams are locked in as tightly as possible.

No. I mean, to get there, you mentioned it in your opening remarks, I mean clearly, the supply chain has been a huge issue. But last year, both Airbus and Boeing pointed to you, they pointed to Pratt & Whitney as a constraint on their output engine availability. It seems to have stabilized somewhat. And we hear other things being the bottlenecks now. But how do you -- when you look forward, how do you see the balance of having to deliver the OE engines demanded by Airbus and Boeing? Spare engines needed by some of your customers and spare parts, which absolutely are critical. How do you play that balance?

Well, again, it really gets back, Doug, in the most fundamental of ways to just good core lean principles applied on a daily basis. It wasn't that long ago where we were really focused on a quarter. And you can still see, I think, some of that lack of linearity in our operations. But there's no way we're going to drive the ramp that we're driving here, be it on the OE side, be it in the aftermarket without making good use of every single day, whether it's the first or the last day of the quarter. And that's a different mindset. But that's not just something we can talk about from the CEO's bully pulpit, what does that mean to operationalize that? So we get excessively granular literally plant by plant to make sure we're clear on how much we need to do every day. We use our Kaizens to make sure we're driving better productivity that we're making use of scarce labor, be it in shrinking the turnaround time as we did just last week in our -- one of our core repair facilities. We take the same effort to our supply base and often to our supplier's supplier just to make sure that as much as we can, we've got a reliable ramp from here, but it's hard, right? This is an industry, I think what you've seen over the last year, right, is a recognition. This isn't one company or another, it's not one commodity or another. It's an industry-wide post-pandemic phenomena. And it really requires that level of discipline, that level of intensity operationally that we're trying to bring. I think when you look at the improvement that we're driving with our commercial engine output, particularly in LEAP. In this environment, you don't bring anything up 50% year-over-year without some underlying process improvements. But that's just 2023, right? As you know, Doug, we've got backlog for as long as the eye can see we'll be ramping for a while. We can debate at what rate, but it's still a ramp, our shops, our suppliers, their suppliers, need to be at their best. And that's what we're trying to deliver. That's what we're trying to achieve on a regular basis.

Do you have a sense -- I mean, castings have certainly been an issue over time. If you look at the situation today, where do you see the issues still in the supply chain? And can you give us a sense how far out -- how long it will take to be back to normal?

Yes. Why don't -- I'm not quite sure what normal is going to look like.

It's sort of like 2019 kind of...

Well, I think we -- it wasn't as interesting perhaps in 2019. I think we were all huffing and puffing trying to keep pace with a pretty good clip. And that was before we had the structural impact of the pandemic. Everything that we see would suggest this is going to be a daily battle for the foreseeable future. So when you hear some of our customers talk about this not normalizing this year, perhaps towards the latter part of next year. We're working hard to make it happen sooner -- but if it were the latter part of 2024, that would not surprise me. Again, you mentioned castings, I wish it was one commodity. We wish it was one vendor. We could all go in not as GE Aerospace, but as an industry and go solve that. But if you look at our screens and we look at this on a weekly basis, by product family, we go to the part level, the part, the supplier, the facility. It's everywhere. It's everywhere. And it's not just heavy capital fixed investment that is lacking. In many instances, it's labor. Sometimes it's just arms and legs, sometimes it's frankly experience that left perhaps in early retirement programs, pre-pandemic that didn't necessarily come back. And when you replace a 58-year-old with a 28-year-old. You have a different capability on the floor in that instance. It's not bad, but in the near term, it's disruptive. And that's just gritty and as wonky as that is, Doug, I think that's what we're all working our way through.

Well, you mentioned on the margin and the question of the 20% margins. A very important part of that is clearly the aftermarket business given the high amount of profitability. There's been a real issue across the industry in terms of inductions for shop visits. The 58-year-old being replaced by the 28 years has affected the time it takes to the shop, is it done?

Yes.

So if you could free up labor constraints, parts constraints, I would expect you could drive that aftermarket revenue up higher, that would be much better for margin. I mean how do you think about that in terms of -- like over the next year, what's the path to get that MRO work even higher than it's growing now?

Well, we are really working with the suppliers to ramp their production, production that tends to feed both our new engine lines and our aftermarket repair shops. So what we were talking about a moment ago applies. And at the same time, when we talk about these lean improvements, these Kaizens to drive out the waste in our processes. And I'm here to admit, there is waste in our processes. We can really bring down that turnaround time, right, that in the door, out the door time. We've had some strong results just last week in one of our major repair facilities, where over the last year, you can see we've reduced the turnaround time anywhere between 20% and 50%. Now that's in the ideal state, that's when we have all the parts. So we've got to work the supply base, again, oftentimes helping them with their own suppliers. We're going into the smallest of machine shops to run similar activities all the while making sure that our processes don't have any waste or at least to have as little waste and as little friction as possible. Again, I wish there was a silver bullet here. We haven't found it yet.

Well, one of the challenges with new engines is durability. I mean, it's a normal problem with the new engine, LLPs coming a little sooner those sorts of things. So the LEAP has not had, at least in our view, has not had quite the time on wing that all your customers would like yet. Now some of the things that's maybe it's too detailed, like HPT Shroud, fuel, some of these things, it appears you really have very well addressed. But can you give us a sense for like where you are today in terms of time on wing in a kind of neutral environment, in a harsh environment? And where do you expect to be able to take that with the LEAP?

Well, there's a lot there. Doug, you're exactly right to draw that distinction between the performance of a LEAP engine apples-to-apples withCFM56, right? We've got a model in the CFM56 that is really at the end of its maturity curve, the LEAP still very much in its early stages. And customers like what they have today with the CFM56, and they want anything that comes online either to replace or augment the 56 fleet to be at that level. And that's not where we are today with the LEAP engine. That said, I think that when you look point-to-point in the life cycle with where we are today with LEAP versus where the CFM56 was at a similar point in its life cycle, we're much further ahead. We're much further ahead from a durability, from a utilization perspective. And that's what we would have expected. That's all part of managing a long-cycle business. But again, customers don't care about that, particularly in a moment like this, right? They want what they enjoy today with the CFM56. So our fleet leaders are in approximately 10,000 cycles. We've got a road map. You mentioned a couple of improvements around the Shroud, for example, that we're going to lay in systematically over the next several years to drive those performance improvements, again, particularly with an eye towards durability. So we get the LEAP on par with the 56, if not better. But that's a multiyear effort. One that we understand, one that we're making progress towards. But again, we just can't. We can't make that happen overnight as much as we would all like it to be.

Is your competitor on the A320 has had some challenges with theirs, at least that we have seen to be a little more challenging than with the LEAP. Do you see the potential over the long term to gain share because you're able to address these problems more quickly?

Well, I won't speak to competition, Doug. I think that the sheer fact that we're sole source [ underwing ] on the MAX that we have in excess of 50% share when customers can choose on the neo suggests that we've got an enviable market position today, again, given the backlog, both with new units and aftermarket plenty of work to do to sustain that. And that's really where we're focused. If customers who haven't had GE [ underwing ] want to come and have a conversation perhaps that they haven't in the past, we would welcome that.