GE Aerospace

Good day, ladies and gentlemen, and welcome to the General Electric fourth quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. My name is Brandon, and I'll be your conference facilitator today. If at any time during the call you require assistance, please press star followed by zero, and a conference coordinator will be happy to assist you. If you experience issues with the slides refreshing or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Steve Winokur, Vice President of Investor Communications. Please go ahead, sir.

Thanks, Brandon. And good morning and welcome to GE's Fourth Quarter Earnings Webcast. I'm joined by our Chairman and CEO, Larry Culp, and CFO, Jamie Miller. Before we start, I'd like to remind you that the press release, presentation, and supplemental have been available since earlier today on our investor website at www.gecom.com. Please note that some of the statements we're making today are forward-looking and are 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 can change as the world changes. And now I'll turn the call over to Larry.

Thank you, Steve. Good morning, everyone, and thank you for joining us. Our comments are going to be a bit longer than usual this morning to help you understand where we are and where we're going. But rest assured, we'll leave as much time as we can for questions at the end. First, I'd like to start by welcoming Steve to the GE team. I've known him for over a decade. Steve's already had positive impact here at GE, and I'm sure he'll do the same for you, our investors, going forward. I'm here today because I believe in GE. There is no company on earth with the scale of GE's global reach, brand, talent, and long-term customer relationships. We have leading technology in key infrastructure markets with high barriers to entry and strong aftermarket streams. We're poised to capture recurring revenues on a global installed base of almost 70,000 engines, more than 77,000 gas turbines and air derivatives, more than 40,000 onshore wind turbines, and more than 4 million healthcare systems. In short, GE matters. We've identified clear opportunities to improve our performance, and we are working to address them at root cause. We have the right portfolio strategy, and I'm confident the company is capable of gaining profitable share and creating long-term value for our shareholders. So let me cover where we stand on providing an outlook. Then I'll address some of the company changes, followed by updates on our results, the balance sheet, capital, and power. Jamie will take you through more details on the quarter, and then I'll wrap with some metrics and comments to help you frame the outlook for 2019 before Q&A. Let's start with the outlook because investors want to know how we expect to perform financially, and you should expect it to come from a place of reality. Simply put, the how much is important, but the how is far more fundamental. We have good line of sight in most of our businesses today, including aviation and healthcare. For the industrial portfolio in total, we will provide you with our outlook for organic growth, and we'll do so directionally on operating margins and free cash flow. We will give you a more detailed outlook in the near term, but not today. For power, we are resetting the baseline. We are reviewing every single project and contract and digging deeper to understand costs and benefits with respect to restructuring, market and commercial execution, improvement opportunities, legacy project issues, and our service operations. We are gaining more meaningful insight into the paths for near and long-term earnings and cash potential of this business. This work takes time, especially with a new structure and leadership team. In the spirit of providing you with all the information we have as soon as we have it, I'll speak to what I have found over the last 120 days. We are executing against the key priorities we laid out in June and again in October. Simply put, deleveraging the balance sheet and strengthening our businesses, starting with power. Remember, beyond power, it's important to recognize the underlying strengths in our businesses, where the story is about enhancing our competitive advantage and delivering for customers and shareholders. With respect to delevering, we've taken the following actions. We reduced the quarterly dividend, retaining $4 billion per year, accelerated the sale of a portion of our BHGE ownership stake, raising $3.7 billion and changed the structure of our transaction with Wabtec, enabling us to retain an incremental $2 billion stake. We're demonstrating our seriousness and the flexibility with respect to our decisions to recut the BHGE and Wabtec deals in particular. We closed distributed power for $2.8 billion of net cash in the quarter. For the year, we signed or completed completed substantially all of our $20 billion industrial asset sale plan, which had targeted roughly $10 billion in proceeds. We also announced the sale of ServiceMax in the fourth quarter. We completed $8 billion of capital asset sales and other actions in the quarter, bringing our total for the year to $15 billion, which were executed at book value or better. We are more than halfway through the total $25 billion capital asset sale program, which we expect to complete this year. Today, we have announced that we've reached an agreement in principle with the United States Department of Justice to settle the Faria investigation of WMC. GE will pay the United States a civil penalty of $1.5 billion, consistent with our reserve recorded for this matter in the first quarter of last year. We've taken the following actions to strengthen our businesses. In 2018, our corporate headquarters cost was $1.2 billion, down $400 million from $1.6 billion in 2017. We have begun transferring a significant portion of headcount and activities that were previously managed at corporate to the segments or to third parties, with over 6,500 full-time employees transferred to date. we're confident that as we move more activity and headcount closer to those that are directly accountable, we will see additional savings. Good examples include the recently announced agreement with GENPAC around our global operations activities and the de-layering and reorganization of our global growth organization. Our changes in power follow a similar approach. We have $1.6 billion of cost at power headquarters. and expect to reduce that amount by $300 million for the headquarters overhead functions. And as we distribute the remaining cost to the business units, we expect that they will find additional savings over time. We announced this week that we will be layering the headquarters levels at renewable energy. And yesterday announced that we are bringing GE's grid, solar, and storage assets into that business, creating an end-to-end offering for renewables customers as the demand for renewable power generation and grid integration continues to grow globally. We're strengthening our senior team. We've brought in fresh eyes that are already having an impact. We're combining new perspectives from strong external talent, proven GE leaders with domain expertise and entrepreneurial spirit, next-gen thinkers, as well as leaders with deep customer relationships. From a governance perspective, Paula Reynolds joined our board of directors, bringing extensive experience in both the energy and insurance industries. The majority of our directors now are new since 2017, and I'm finding the board deeply engaged in all matters of our business. Our audit committee also announced that they will move forward with a tender process for the appointment of GE's independent audit firm. And finally, we announced our plan to combine the digital businesses into an independently operated IIoT software business, with employee equity, a separate board, and the ability to raise capital and operate like a startup. We're on the precipice of something great, rooted in 100 years of domain and hardware expertise and grown out of our digital DNA over the last several decades. As my friend Jim Collins, of good to great fame, might say, it's a start. But we have much more work to do. So let me now share with you how I've talked with our team about how we will do it. Number one is managing first and foremost for operational performance. Preparing for the earnings call, my first month on the job, showed me that we often start with corporate and bring in the business leaders, including the CEO, later. We turned that around this quarter, holding operating reviews first and then preparing for this call. Those reviews were tightly focused on how we can do and how do we get better, more so than how do we explain what just happened. Let me give you an example. Previous P&L reviews focused on revenue, contribution margin, and base cost, and then, of course, operating profit. The same high-level framing I saw in the boardroom. No more. We now get into much more operating detail, volume, price, mix, material, and labor productivity, overhead, and operating expenses, like R&D, sales and marketing, and G&A, all of which are critical to understanding and then improving the business. The second is a focus on putting our customer at the center of all we do. Over the past few months, I've spent time with our customers in China, the Middle East, Europe, and here in the US. I've learned that what they value is not always aligned with how we measure our own performance. Take quality. When I ask about quality internally, I often hear about our cost of quality, which measures our issues rather than how the customer experiences us. We're shifting our perspectives so that we understand and measure ourselves the way customers do and work backwards from there. The third area is having fewer and more impactful priorities. GE has ambition like no other company I've ever seen. And that's mostly a good thing, but we need to focus our attention to more of the things that matter most so we can move them the furthest. At a company level, we've committed to the two priorities I mentioned earlier, deleveraging the balance sheet and strengthening the businesses starting with power. I'd now like to address some of the areas of importance that are high on my priority list. First, our high-level financial results. We ended the year with adjusted EPS of $0.65, GAAP EPS of negative $2.43, and industrial free cash flow of $4.5 billion. Our backlog stands at $391 billion, up 5% year-on-year, with equipment at $89 billion, up 4%, and service at $302 billion, up 5%. For the fourth quarter, our industrial free cash flow was $4.9 billion. While cash flow was negatively impacted by the weakness in power, we were encouraged by the strong cash generation in the other businesses. We delivered adjusted EPS of 17 cents and GAAP EPS of 8 cents. Jamie will take you through all this in more detail in a moment. Next to the balance sheet, as I've stated already, we are reducing our debt levels both at industrial and GE Capital. We know full well that our shareholders own all debt obligations across GE. But these are two distinct sets of businesses with different financing needs and different capital structures. And therefore, we analyze their leverage separately. In industrial, we are targeting a net debt to EBITDA ratio of less than two and a half times over the next few years. Our healthcare, transportation, and BHGE separations can provide sources of roughly $50 billion toward that goal. Our healthcare team continues to prepare for public-company separation, and that is progressing very well. We expect to monetize up to just under 50% of our healthcare business. I talked earlier to the GE Transportation merger with Wabtec and the amended terms to increase our cash proceeds and we will sell down our remaining 50% ownership in BHGE in an orderly manner over time, building on the actions we took in November. Overall, our liquidity position remains strong with $16.8 billion of industrial cash and funding lines of $40 billion. Now on capital, we are targeting a debt-to-equity ratio of less than four times by 2020. In 2018, we paid down Capital's external debt balance by $21 billion, and we executed $15 billion in asset sales at book, more than half of our $25 billion asset disposition program. Capital ended the year with $124 billion of assets, including $15 billion of liquidity, in line with our goal to materially shrink this business. To be clear, we have no plans to sell GCASP. We expect to contribute approximately $4 billion of parent support in 2019. We've listened to you on the insurance front and we're preparing increased disclosures in line with peers, which will be available with our 10K release. Jamie will cover some of that detail shortly. And then finally on power, let me share with you the root causes of our underperformance as I see them today and the actions we're taking to address each one. First, as I said last quarter, we were late to embrace the realities of the secular and cyclical pressures in the business. Recent data suggests that the market for new generating capacity is settling in to the 25 to 30 gigawatt range for the foreseeable future. We continue to believe gas will play an important role in global electrification, but we have to resize our cost structure, our capital expenses, and our supply chains to this new reality now. As a result, last year we reduced headcount by 10,000 or 15% in the business, consolidated our footprint by 30%, and took out $900 million of base cost, exiting at a billion-dollar lower run rate. Embracing market reality means a more appropriate revenue outlook, one that is further grounded in the reality of our $92 billion backlog, rather than in the hope of new orders not yet won. Second, power faces a number of non-operational headwinds, and we expect a high watermark in this regard this year. These include legal settlements and legacy project erosion, principally driven by the Alstom acquisition. There is also the runoff of the effects of past long-term receivables factoring and other programs. Over the next few years, these effects should come down substantially. Third, we need to execute better. Running power better means improved daily management in how we sell, make, and service our products. Let me give you a few examples. We had separate teams of managers commissioning new plants, owning the warranty period, and overseeing the services contracts after the warranty. Now we present one face to the customer who is accountable for the best long-term economic answer both for the customer and GE. We've put the sales organization under one leader with deep domain expertise and are coordinating better on contract negotiations. We now have more experienced people owning negotiations and responsible for project cost. We performed risk assessments of our existing 400 equipment contracts to identify cost and execution risks. We also performed a similar assessment on the 750 CSA contracts to identify price and utilization risk. We have overhauled our commercial underwriting processes to set more realistic commitments and returns from the start. This is hard work, but I'm encouraged by the Powers team's dedication to proactively address these issues at their root cause. Fixing power will take time, and in turn it will take time for the changes we're making to our daily operations to be reflected in our financial results. But we are improving, and I'm confident that those changes will come. As I've met with customers around the world, I've really been struck by their sentiment. They're rooting for us. They want us to succeed, and they want to know how they can help. So in summary, we're taking action, taking action on the priorities we laid out to you, deleveraging our balance sheet and strengthening our businesses, starting with power. Jamie will now take you through the detailed financial results.