General Electric : GE 4th Quarter 2022 Earnings Transcript

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EDITED TRANSCRIPT

Q4 2022 General Electric Co Earnings Call

EVENT DATE/TIME: JANUARY 24, 2023 / 1:00PM GMT

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JANUARY 24, 2023 / 1:00PM GMT, Q4 2022 General Electric Co Earnings Call

CORPORATE PARTICIPANTS

H. Lawrence Culp General Electric Company - Chairman & CEO

Carolina Dybeck Happe General Electric Company - Senior VP & CFO

Steven Eric Winoker General Electric Company - VP of IR

CONFERENCE CALL PARTICIPANTS

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 Joshua Charles Pokrzywinski Morgan Stanley, Research Division - Equity Analyst

Julian C.H. Mitchell Barclays Bank PLC, Research Division - Research Analyst Nigel Edward Coe Wolfe Research, LLC - MD & Senior Research Analyst

PRESENTATION

Operator

Good Day, ladies and gentlemen, and welcome to the General Electric Fourth Quarter 2022 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

Thanks, Liz. Welcome to GE's Fourth Quarter and Full Year 2022 Earnings Call. I'm joined by Chairman and CEO, Larry Culp; and CFO, Carolina Dybeck-Happe.

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.

As a reminder, GE completed the separation of our HealthCare business this month. GE HealthCare will report separately on January 30. So while included in our 2022 results, we're focusing today's commentary primarily on GE Aerospace and GE Vernova, our portfolio of energy businesses. Our remarks will also be simpler and shorter today, reflecting the company we are now, and we'll move more quickly to Q&A.

I'll now hand the call over to Larry.

H. Lawrence Culp General Electric Company - Chairman & CEO

Steve, thank you, and good morning, everyone. 2022 marked the beginning of a new era for GE, following 4 years of strategic and operational transformation. We successfully separated GE HealthCare in a spin-off, distributing approximately 80% to GE shareholders on January 3. 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 GE HealthCare Services -- which are both higher-margin and more resilient, represented an even larger part of our portfolio, about 60% of revenues and 85% of our backlog.

We finished the year strong, delivering revenue growth, margin expansion and better cash generation. GE Aerospace led the way as we executed on an unprecedented ramp. Within GE Vernova, Power delivered with continued stability at Gas, and we took significant actions to position Renewable Energy for future profitability.

External catalysts like U.S. climate legislation and the European focus on accelerating electrification are increasing investment in new

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JANUARY 24, 2023 / 1:00PM GMT, Q4 2022 General Electric Co Earnings Call

decarbonization technologies. This progress has positioned us to create industry-leading,investment-grade, independent public companies.

Thanks to our team's high-quality work, our plans to launch GE Vernova and GE Aerospace are progressing well. We're filling key leadership positions for both, and we're preparing for 2 stand-alone businesses. We'll share more details with you, including our ongoing progress and time line for the planned GE Vernova spin, at our Investor Conference in March.

I could not be more proud of how the GE team managed through a challenging external environment to deliver for our customers and partners in 2022. My thanks to everyone.

And before I turn the call over to Carolina, a moment of reflection. Just 2 weeks ago, I, along with many of our leadership team, attended a memorial service for our exemplary GE Board member and former U.S. Secretary of Defense, Ash Carter. Ash was a remarkable leader, incredibly humble and clear-headed. We miss him and his sage counsel.

Now Carolina will take you through our results.

Carolina Dybeck Happe General Electric Company - Senior VP & CFO

Thanks, Larry. Turning to Slide 3. I'll speak to the key drivers of our performance, I'll do it on an organic basis and including GE HealthCare.

In the fourth quarter, top line momentum continued as orders grew significantly across all segments. Revenue was up 11%, with services up 13%.

By segment. Revenue at Aerospace, Power and HealthCare was up double digits, driven by market demand, price realization and improving delivery. This was partially offset by Renewables largely due to lower volume resulting from U.S. PTC lapse and our heightened commercial selectivity. Adjusted margin expanded 290 basis points. Power was particularly robust, offsetting 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 improving working capital. All accounts were a source of cash except receivables, which, as expected, was a use from revenue growth.

Moving to the full year. Orders were up 7%, with 22% growth in Aerospace and 13% growth in Power. Total 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 were up double digits, while total equipment revenue decreased 4%.

Collectively, supply chain headwinds and macro pressures impacted our performance by about 4 points. Importantly, margins, EPS and free cash flow all significantly improved 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 and Power. Robust services growth, pricing, plus almost $1.5 billion of cost-out actions drove improvement. This was partially offset by inflationary pressures especially at our shorter-cycle businesses and pressure from Renewables.

Operating profit growth and debt reduction drove EPS up more than 50% for the full year. Free cash flow was $4.8 billion, up over $2 billion or over 80% improvement, driven by earnings and reduced debt. In 2022, working capital was a source of cash as accounts payable, progress collections and contract assets all contributed to the solid performance.

Now a moment on corporate. In 2021, we ended the year with $1.2 billion of costs. We continued to reduce costs in 2022, including a few hundred million dollars of market-driven favorability. We now have a smaller, leaner cost structure. And in 2023, we expect costs of about $600 million or roughly half of the 2021 baseline. Free cash flow, we expect to improve significantly given our progress with debt reduction and lower costs.

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JANUARY 24, 2023 / 1:00PM GMT, Q4 2022 General Electric Co Earnings Call

We continue to execute our restructuring plans and reduce our cost structure post the HealthCare spin, setting up fit-for-purpose,stand-alone structures for GE Aerospace and GE Vernova. Stepping back, we're 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, Larry, to discuss our businesses.

H. Lawrence Culp General Electric Company - Chairman & CEO

Carolina, thank you. Starting with Aerospace. I'm 6 months in 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 growth across both engines and services, where stability and predictability are critically important for our customers. This 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 2 major operational changes. First is accelerating our progress with Lean to improve operating rigor and delivery. Take supply chain, where we've seen real improvements with more to come.

Our team in Terre Haute produces LEAP turbine center frames and started '22 with about 50 pieces delinquent. Working through multiple Kaizens, implementing flows, standard work and daily management, the team's Lean actions increased output over 20% and improved productivity by about 10%. And today, they are on schedule. With our 2023 demand, we'll need to continue to use Lean in this way to deliver for our customers.

The second is decentralization. For example, in our Commercial Engines business, we're increasingly running our product lines as their own P&Ls, in line with how our customers work with us. More cross-functional collaboration in real time closer to the customer helps make us better.

Turning to the quarter. Both orders and revenue were up over 20%. Equipment orders were robust, now with almost 10,000 LEAP engines in backlog. Commercial services and equipment revenue grew about 30%, and Military revenue was up about 20%, and services internal shop visits were up 25% and external part sales were up more than 20%. In equipment, commercial units were up nearly 30% with LEAP units up almost to 50%.

Looking sequentially, both internal shop visits and commercial units were about flat, but military units were up 10%. While material availability continues to be a challenge, our output across engines and services, we're using our Lean tools to help accelerate sequential improvement, a 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/cost 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-year AD&A flow came in close to 0 versus last year, $0.5 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. In '23, internal shop visits are expected to grow about 20% and external spare part sales are expected to increase. With Commercial Engines growing at about 20% and 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 '23. We also expect to

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JANUARY 24, 2023 / 1:00PM GMT, Q4 2022 General Electric Co Earnings Call

deliver profit of $5.3 billion to $5.7 billion and higher free cash flow. Aligned to current airframe or aircraft delivery schedules, AD&A is expected to be about $0.5 billion 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 flying and growing our new fleet, all the while continuing to invest in technologies that will define the future of flight.

Notably, we're encouraged by the momentum at Military with our next-generation technology, including the XA100 engine for the F-35. The XA100 offers cutting-edge capabilities needed to ensure continued U.S. air superiority. The Adaptive Engine Transition Program received a strong show of support recently from nearly 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 stand-alone industry leader.

Turning to the GE Vernova portfolio. Power delivered a solid performance this year, and we're making real progress running a similar strategy at Renewables. While the demand drop due to the PTC lapse 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%. Onshore orders in North America more than doubled, a very encouraging sign. But unlocking the full potential of the IRA will hinge on how quickly the administration moves through implementation.

Meanwhile, lower volumes and inflationary pressures continued 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 $0.5 billion due to lower earnings.

So while we await clarity on the IRA rules, Scott and the team are controlling the controllable, taking action. And we saw progress in that regard this quarter.

Grid, a business that lost close to $400 million in 2021, was profitable for the first quarter since 2018, reflecting our restructuring and selectivity efforts. Orders also grew significantly.

At Onshore, we're executing a restructuring with our headcount decreasing almost 20% sequentially, which will deliver savings in 2023. Our strategic sourcing actions at Onshore and our focus on reducing product variants will improve product costs despite continued inflationary pressures.

Across the businesses, orders and sales pricing continue to improve with our selectivity strategy yielding a more profitable backlog and pipeline. Service orders and revenues, excluding repower, grew. There's certainly more work to do and the next 6 months will remain challenging, but we're 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 business. 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 2,000 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 this significant orders growth comes roughly $3 billion to $4 billion of cash down payments this year. This includes $0.5 billion of cash linked to large tech selects 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.

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