GE Aerospace

Good day, ladies and gentlemen, and welcome to the General Electric second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. My name is Brandon, and I'll be your conference coordinator 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 proceed.

Thanks, Brandon. Good morning and welcome to GE's second quarter 2019 earnings call. 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, supplemental, and 10-Q are available on our investor website. We now file our 10-Q in concert with our earnings, a practice we began in October 2018. Note that some of the statements we're making 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. Please note, third quarter earnings will be the morning of Wednesday, October 30th. With that, I'll hand over the call to Larry. Steve, thanks.

Good morning, everyone, and thank you for joining us. I'll start with some thoughts on our second quarter performance and our strategic priorities. Then Jamie will cover the quarter in greater detail before I wrap with an overview of our renewable energy business and our outlook. Let me begin by reiterating that 2019 remains a reset year for GE. We made some progress in the first quarter, and that continued in the second quarter. I'll remind you, though, that our own actions and market dynamics may not always follow a straight line, but I will draw your attention to those elements that are most important for GE's results today and tomorrow. First, our year-to-date performance is ahead of our outlook in several areas. We have not planned for perfection, meaning we have planned conservatively to cover market and execution risks, specifically within our power business. At the halfway point, our performance at power is better than expected, including better project execution, orders, and working capital management. Restructuring spend is also lower. Accordingly, we are raising our outlook for organic growth, adjusted EPS, and industrial free cash flow, which we now expect to be negative, a billion dollars to positive a billion dollars while holding our margin guidance. This is progress, but let me be clear. Even with this mid-year increase, we recognize that our revised free cash flow range includes negative territory. Over time, as our operational improvements take hold, we continue to expect significantly better cash results. Now, looking at quarterly results, we saw top line strength orders were up 4% organically due to strength in renewable energy and oil and gas. We ended the quarter with backlog of $369 billion, up 11% year on year. This is comprised of equipment of $85 billion, up 4%, and services of $312 billion, up 13%. Services continue to be our most profitable part of the portfolio and a key differentiator with our customers. We are focused on growing and continuously improving these services across GE, which contributed to just over half of our revenues in the quarter. Industrial segment revenue was up 7% organically, driven by growth in each segment except power. Adjusted industrial operating margins contracted 300 basis points organically due to significant declines in renewables, power, and to a lesser extent, aviation. But this is not a surprise. While the makeup may be slightly different in total, this is in line and not out of range with our full year margin outlook. We separated grid solutions out of power for better strategic alignment. We moved the higher margin grid software business into digital and the lower margin grid equipment and services business into renewables. This put the spotlight on the equipment and services business, triggering a $744 million non-cash goodwill impairment and we wrote down the entire goodwill associated with this portion of the business. Jamie will talk to this in more detail in a few minutes. Our adjusted industrial free cash flow was a negative $1 billion, down $1.3 billion from the prior year. This was at the high end of our quarterly outlook, largely driven by improved execution of power, fulfillment timing, and better orders of renewables, as well as lower restructuring. Looking to the second half, we need to continue executing in power and renewables, especially on projects, delivery, cost, and service. We are taking actions to deliver, and at our upcoming strategy reviews, we will begin to roll out Hush and Connery, or policy deployment, the best method I know to bridge strategic intent with operating priorities deeply in a business. And, of course, we are monitoring, managing, a number of watch items, including trade and tariffs, the 737 max grounding, lower interest rates, and our annual insurance premium deficiency and goodwill testing due for the third quarter. Let me cover our two strategic priorities for 2019 in a bit more detail. First, with respect to improving our financial position, we monetized part of our 25% ownership in Wabtec, which was oversubscribed, delivering $1.8 billion in cash proceeds. We still hold an approximate 12% stake that we will monetize over time. We are also making progress on the biopharma sale, which will deliver about $20 billion of cash proceeds. At GE Capital, we continue to make the business smaller and simpler, completing approximately $2 billion of asset reductions year-to-date and moving $4 billion of aircraft lending receivables to help for sale. We ended the quarter in a solid liquidity position with just under $30 billion of cash at industrial and capital combined, excluding VHGE. Next, on strengthening the businesses. At power, we're seeing early signs of stabilization as we've been focused on improving daily execution. At gas, power orders were up 28% organically, bringing our total gas turbine units orders to 35 in the first half, and we are right-sizing the business for market realities, reducing fixed costs by an additional 10% in the quarter. At Renewable Energy, orders and revenues were up double digits as we execute on our steep production ramp. In the first half, we delivered approximately 1,500 turbines and repower kits, and in the second half of the year, we expect to approximately double the number of deliveries. At Aviation, We announced record wins at the Paris Air Show, which contributed to sequential backlog growth of 9%. And as it relates to the 737 MAX, we are working closely with Boeing to actively manage production while the fleet remains grounded. In healthcare, profit margins expanded 80 basis points organically. In our first collaboration with Roche, we released the Navify Tumor Board 2.0, which integrates the tumor board with our medical image viewer, allowing radiologists and medical professionals from other cancer care disciplines to use the same dashboard for patient care. To support our businesses, we need the right combination of direction and leadership. We made a number of new hires, including a digital CEO, a CFO at the Power Portfolio, and regional healthcare CEOs in China and the US and Canada. We also appointed Manish Palawala, the current CFO of Healthcare, to lead GE's operational transformation, driving operating rigor and lean management across the company. Monish reports directly to me. Russell Stokes decided to jump in and lead the power conversion turnaround himself. In addition to looking after the power portfolio, Russell's bringing a greater operational focus to a business in turnaround mode. And with Monition's new capacity, we brought more than 100 GE leaders to Greenville for a week-long lean action workout in June. As I've mentioned, a reemergence of lean in all we do represents a major improvement opportunity in manufacturing and throughout the various functions at GE. What does this exactly mean? It's really about the way we are going to work, the most important being hyper-focused on the customer and seeing GE through the customer's eyes. especially regarding our quality and delivery performance. Let me give you a couple of lean examples. In healthcare, we recently value streamed after a billing cycle, looking at the to and the from, seeing five days of cash cycle reduction opportunity, and that wouldn't be a permanent end state. With automation and better governance of our billing processes, we've already improved by a day and see an opportunity to take full advantage of the five-day opportunity on the value stream map. At power, as a direct result of our Greenville workout, we installed one single-piece flow line for our HA turbine buckets, successfully connecting 15 machines and six independent processes. Due to this improvement, we reduced the work in progress inventory from approximately 1,200 pieces to 65. Now, I know these examples may seem small. They are. But I think they're indicative of the opportunities we see across the entire company. In summary, we're on our way. But these are two quarters in what will undoubtedly be a reset year. I'm encouraged cautiously by what we've accomplished, but there's much more to do. Before I hand it over to Jamie to go through the quarter in greater detail, I expect that most of you have seen today's announcement regarding Jamie's and our initiation of a search for a new CFO. With the stabilization beginning to take hold, this is the right time for a change. I want to take this opportunity to thank Jamie for her many contributions to the company, both as CFO and previously as a GE business leader. Jamie has been instrumental in working with the board and me to develop our portfolio strategy, furthering our efforts to make GE a more focused industrial company, and spearheading our deleveraging plan during an incredibly challenging period. I'm grateful for her willingness to support us through this transition. Jamie, I'll now turn it over to you.