General Electric : GE 2nd Quarter 2023 Earnings Transcript

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EDITED TRANSCRIPT

Q2 2023 General Electric Co Earnings Presentation

EVENT DATE/TIME: JULY 25, 2023 / 11:30AM GMT

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JULY 25, 2023 / 11:30AM GMT, Q2 2023 General Electric Co Earnings Presentation

CORPORATE PARTICIPANTS

H. Lawrence Culp General Electric Company - Chairman & CEO, GE Aerospace CEO

Carolina Dybeck Happe General Electric Company - Senior VP & CFO

Rahul Ghai General Electric Company - GE Aerospace CFO

Steven Eric Winoker General Electric Company - VP of IR, GE Aerospace VP of IR

CONFERENCE CALL PARTICIPANTS

Andrew Alec Kaplowitz Citigroup Inc., Research Division - MD and U.S. Industrial Sector Head Andrew Burris Obin BofA Securities, Research Division - MD

Christopher M. Snyder UBS Investment Bank, Research Division - Analyst

Deane Michael Dray RBC Capital Markets, Research Division - MD of Multi-Industry & Electrical Equipment & Analyst Jeffrey Todd Sprague Vertical Research Partners, LLC - Founder & Managing Partner

Joseph Alfred Ritchie Goldman Sachs Group, Inc., Research Division - VP & Lead Multi-Industry Analyst Julian C.H. Mitchell Barclays Bank PLC, Research Division - Research Analyst

Nigel Edward Coe Wolfe Research, LLC - MD & Senior Research Analyst Robert Michael Spingarn Melius Research LLC - MD

Seth Michael Seifman JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst Sheila Karin Kahyaoglu Jefferies LLC, Research Division - Equity Analyst

PRESENTATION

Operator

Good day, ladies and gentlemen, and welcome to the General Electric Second Quarter 2023 Earnings Conference Call. (Operator Instructions) My name is Liz, and I will be your conference coordinator today. (Operator Instructions) 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 Winoker, Vice President of Investor Relations. Please proceed.

Steven Eric Winoker General Electric Company - VP of IR, GE Aerospace VP of IR

Thanks, Liz. Welcome to GE's Second Quarter '23 Earnings Call. I'm joined by Chairman and CEO, Larry Culp; and CFO, Carolina Dybeck Happe. GE Aerospace CFO, Rahul Ghai, who will also assume the role of GE CFO in September, will join us for Q&A.

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.

Over to Larry.

H. Lawrence Culp General Electric Company - Chairman & CEO, GE Aerospace CEO

Steve, thank you, and good morning, everyone. The GE team turned in another strong quarter with double-digit growth in orders, revenue, operating profit and cash supported by services strength, robust market demand and the lean transformation within our more focused businesses. In the first half alone, earnings have now surpassed our full year 2022 results.

GE Aerospace is growing rapidly as we execute on the ramp for our customers, and GE Vernova is strengthening pre-spin with record orders and improving profitability at Renewable Energy and continued margin expansion at Power.

Based largely on year-to-date performance and expectations for continued strength in the second half, we're raising full year guidance today. Big picture, there's a clear sense of progress, passion, and purpose within our businesses. This was particularly evident to me when I was in France last month. At the Paris Air Show, GE Aerospace shared our bold vision to define flight for today, tomorrow and the future during meetings with customers, suppliers, and investors. CFM's RISE demonstrator program drew a lot of excitement as it aims to reduce fuel consumption and CO2 emissions by at least 20% compared to today's most efficient engines.

I also saw our GE Vernova team for our Onshore Wind and Grid operating reviews, where we discussed opportunities and challenges with

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JULY 25, 2023 / 11:30AM GMT, Q2 2023 General Electric Co Earnings Presentation

equal candor and transparency. We focused on how we grow these businesses profitably by applying real lean at the point of impact to drive results. We're also seeing lean's impact in our Offshore Wind facility in Saint Nazaire, where the team has reduced cycle times to assemble nacelle roofs by nearly 50% through multiple kaizens. So, while it's still early, I'm encouraged by examples like this across GE Vernova.

Day in, day out, we're increasingly operating as GE Aerospace and GE Vernova. Two industry leaders with large installed bases, where services represent about 70% of GE Aerospace revenue and about half of GE Vernova revenue. In addition to attractive economics, services keep us close to our customers. We understand the issues they're wrestling with and how our technology is performing, which shapes our future roadmaps. And with our businesses executing, we're advancing towards their launches as independent investment-grade companies next year.

When I reflect on how far we've come, it always starts with the team. So a big thank you to the entire global GE team. There's a lot to be excited about as we look forward to the rest of this year.

Before I turn it over to Carolina to take you through our results in detail, let me take a moment to welcome Rahul to his additional role as GE CFO this fall. Since joining GE Aerospace last year, he has quickly become an impactful and influential member of our GE Aerospace leadership team. And so, with our final spin approaching sometime in early '24 and Rahul assuming the CFO job September 1, this is Carolina's last earnings call. She has been a trusted strategic partner through significant deleveraging, improving our operating results and building the financial foundation for our 3 independent companies. We're deeply grateful for her many contributions. So on behalf of the entire GE team and for me personally, Carolina, thank you.

Carolina Dybeck Happe General Electric Company - Senior VP & CFO

Thanks, Larry. It's truly an honor to be part of GE's ambitious transformation, and I'm incredibly proud of the work this team has done to build lasting value. And a special thank you to our Finance and DT teams for their extraordinary efforts.

Now turning to Slide 3, which I'll speak to on an organic basis. In the second quarter, we delivered double-digit growth across all headline metrics. Orders increased 58%, up in all segments. Equipment was up significantly, led by Renewables. This includes 2 large HVDC projects with TenneT at Grid and higher-margin orders at U.S. Onshore Wind.

Aerospace also up with solid Defense engine orders. Services was up 21% with growth in all segments, largely driven by commercial aerospace strength. Revenue increased 19%, with both equipment and services up. Also here, Aerospace led the way as LEAP engine deliveries nearly doubled and services grew. Renewables also grew, led by Onshore Wind and Grid with improved pricing.

Adjusted margin expanded 160 basis points, driven by volume, price, and productivity. This was partially offset by mix, inflation, and investments. Taken together, adjusted EPS was $0.68, nearly double what we delivered last year, driven by profit growth in all segments and meaningful deleveraging. Free cash flow was $415 million, more than double what we delivered last year, driven by earnings growth.

Looking at the flows, we reduced working capital from the first quarter. Given the sequential revenue growth and preparation for large second half deliveries, receivables and inventory were a use of cash. This was more than offset by progress payments and contract assets with utilization-driven billings.

At both GE Aerospace and GE Vernova, we're implementing weekly cash management and already seeing some linear progress. Importantly, our first half free cash flow underscores these efforts, up $1.5 billion year-over-year. This includes $0.5 billion lower working capital than in 2022.

Now a moment on Corporate. Adjusted costs were up year-over-year, primarily driven by non-repeat of 2022 timing benefits. We're preparing for stand-alone cost structures, with functional headcount down 10% year-to-date. And for the year, we continue to expect expenses in the $600 million range. We also continue to simplify and strengthen the business foundations prior to the launches of GE Aerospace and GE Vernova. This quarter, we partially monetized our GE HealthCare stake. And today, we announced that we will call the remainder of the outstanding GE preferred stock in September, further simplifying our balance sheet and reducing financing costs.

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JULY 25, 2023 / 11:30AM GMT, Q2 2023 General Electric Co Earnings Presentation

And we took actions to reduce our exposure to legacy liabilities. As we've disclosed for some time, our runoff Polish mortgage portfolio, Bank BPH, has been subject to ongoing litigation along with other Polish banks. We approved the adoption of a settlement program. And associated with that, we recorded a charge of $1 billion in discontinued operations. Importantly, no incremental cash contributions from GE are required in connection with the charge as the current cash balances at Bank BPH are adequate.

Overall, we're very pleased with our spin progress and first half, which includes adjusted EPS up more than three times compared to a year ago. So given the strength of GE Aerospace and the improvement at GE Vernova, for the full year, we're now expecting revenue growth in the low-double-digit range, up from high-single-digits; $2.10 to $2.30 of adjusted EPS, up from $1.70 to $2.00, and that includes $4.7 billion to $5.1 billion of operating profit. and finally, we now guide for a range of $4.1 billion to $4.6 billion for free cash flow, up from $3.6 billion to $4.2 billion.

And on that happy note, back to you, Larry.

H. Lawrence Culp General Electric Company - Chairman & CEO, GE Aerospace CEO

Carolina, thank you. As many of you saw at the Paris Air Show, GE Aerospace showcased industry-leading solutions for both commercial and defense across propulsion, systems, and services. Our teams are delivering for customers, both in services and by growing our large, young fleet of 41,000 commercial engines and 26,000 rotorcraft and combat engines.

Today, we're partnering with airframers, airlines, and lessors to drive stability and predictability as they ramp. For tomorrow, we're growing and optimizing our next generation of engines. This quarter, for example, our defense team signed a historic MOU with Hindustan Aeronautics Limited to produce jet fighter engines for the Indian Air Force. And while our commercial business secured major deals with Riyadh Air, Jet2 and more. For the future, we're developing next-generation technologies like RISE, hybrid electrics and sustainable aviation fuels.

As a result of our efforts to embed lean and empower those closest to the action, I'm seeing greater intensity, discipline, and focus. For example, as we discussed in June, while supply chain and inflation challenges persist, we're using a lean tool called plan for every part to implement pull and improve delivery. Sustaining lean efforts like this helped us increase sequential engine deliveries by 35% in the second quarter, including a 40% improvement in T700 from a 25% reduction in lead times.

Looking at the market, departures have almost returned to pre-COVID levels. This rapid growth was evident in our quarterly results. Orders were up 37% with strength in commercial services and defense. Revenue was up 28% with equipment growing at double the services rate. Profit improved close to $350 million or nearly 30%. Margins contracted 30 basis points organically. Volume, pricing net of inflation, productivity were offset by unfavorable mix, increased investments and the non-repeated positive contract margin adjustments last year.

Once again, Commercial Engines and Services was particularly robust with 32% revenue growth. Commercial engines revenue grew 35% with LEAP deliveries up over 80% year-over-year and over 10% sequentially. We're on track for 1,700 LEAP deliveries this year. As expected, the LEAP spare engine deliveries ratio was higher than 2022, but we expect this to normalize in the second half, remaining roughly in line with 2022 for the full year.

Commercial services revenue also grew over 30%. Internal shop visits increased over 10%, and external spare parts were up over 40%. For the year, we now expect Commercial Engines revenue to grow mid-to-high 20s and Commercial Services to grow above 20%.

Defense improved this quarter, delivering significant growth. Orders more than doubled. Engine output increased with units up over 70% year-over-year. Through the first half, we delivered double-digit revenue growth, and we're on track for at least high-single-digit growth this year.

Looking ahead, we're constantly innovating here as well. Our XA100 is the only engine tested and ready to ensure the U.S. maintains air superiority this decade. This engine is the most cost-effective option to meet the needs of the U.S. warfighter for decades to come. We're

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JULY 25, 2023 / 11:30AM GMT, Q2 2023 General Electric Co Earnings Presentation

pleased the House has recognized the importance of this program by including funding in the National Defense Authorization Act and in the House Appropriations Committee defense bill. We'll be closely watching the Senate as it considers legislation this week.

Based on our first half strength, we're raising revenue growth to high-teens to 20% and operating profit to $5.6 billion to $5.9 billion, up roughly $1 billion year-over-year at the midpoint, and we expect free cash flow to be even stronger year-over-year, in line with our increased profit expectations.

Moving to GE Vernova. We continue to see long-term growth tailwinds driven by the need for more sustainable, affordable, resilient energy along with energy security. And we're encouraged by the team's progress as they use lean to strengthen operations, driving toward a significant inflection in 2024. This quarter, Renewables demonstrated continued improvement. Market demand drove record orders, led by Grid with 2 more large HVDC projects. Even excluding these projects, Grid orders were up over 40%. As expected, we also recognized a large U.S. offshore order, which was included in our backlog forecast at our March Investor Conference.

Onshore Wind was strong again, led by North American equipment growing more than threefold. We serve many of North America's largest developers, and the IRA incentives are helping grow orders significantly this year. Revenue grew 27% organically, driven by higher equipment deliveries across both Wind and Grid. And Offshore revenue tripled year-over-year as we increased nacelle production-with June the highest month to date. Importantly, profit improved year-over-year and sequentially for the second consecutive quarter driven by price and productivity improvements, primarily at Onshore and Grid.

Going deeper into each business. At Onshore, the progress continued. First, we're seeing the impact of enhancing our underwriting rigor and focusing on select markets with fewer product offerings.

Second, we're driving price to manage inflation. As we've seen the past 4 quarters, equipment margins on new orders are coming in higher than current margins, especially here in the U.S. This will help drive improved profitability going forward.

Next, we're improving reliability through our fleet enhancement program. And as of July, we're almost 30% complete, and we expect to be more than halfway done by year-end. Our cost rationalization continues with Onshore headcount down roughly 30% year-over-year. At Offshore, we're improving on the Haliade-X learning curve in reducing cycle times to deliver for our customers as we work through our initial projects.

And finally, in Grid, the top line grew double digits in all businesses with significant margin expansion from volume, price, and productivity. Grid was profitable this quarter and remains on track to turn profitable for the full year.

Looking ahead, we're raising our full year Renewables revenue growth forecast to high-single digits, and we're expecting some sequential profit improvement in the second half, driven by Onshore Wind and Grid.

Turning to Power. Power continues to deliver solid results and reliable earnings and cash flow, providing critical support for future growth at GE Vernova. And at the same time, our multiyear decarbonization efforts continue. Just this month, the Province of Ontario announced we'll work together on the planning and licensing process for 3 more potential new small modular reactors there using our BWRX-300 design.

Looking at the market, GE gas turbine utilization grew at a low-single-digit rate this quarter. Orders grew high single digits with strength from Gas Power transactional services. Revenue declined slightly largely due to Aeroderivative shipment timing. Services, however, continued to grow, and we had higher HA deliveries. This provides stable baseload power to the Grid now and generates future services growth. Power delivered continued profit growth and margin expansion. Price, productivity, and higher contractual outage volume on heavy-duty units more than offset inflation.

Overall, in the first half, Power revenue grew mid-single-digits organically and margins expanded, led by Gas Power services. For the year, we continue to expect low-single-digit revenue growth. And given our second quarter performance, we now expect Power's profit to be even better versus 2022.

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