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.

Thanks, Larry. I'll start with the second quarter summary. Orders were $28.7 billion, down 4% reported, but up 4% organically, with strengths in equipment, primarily in renewables and power. Services orders were up 3% organically, driven principally by renewables and oil and gas. Consolidated revenue was down 1%, with industrial segment revenues flat on a reported basis and up 7% organically. The biggest driver of growth was the renewable onshore wind ramp, which was up 80% in the quarter. Year-to-date, industrial segment revenues are up 6% organically. Adjusted industrial profit margins were 7.6% in the quarter, down 260 basis points year-over-year reported, and down 300 basis points organically. As Larry mentioned, this is driven by significant declines in renewables and power and, to a lesser extent, aviation, which I'll cover shortly. Net earnings per share was a one-cent loss, which includes income associated with discontinued operations for GE Capital, and GAAP continuing EPS was negative three cents and adjusted EPS was 17 cents. In the quarter, the IRS completed their routine audit of our 2012 and 2013 U.S. income tax returns. We had previously reserved for tax uncertainties associated with these filings that were resolved, decreasing unrecognized tax benefits. This had a 6-cent impact in continuing earnings and a 4-cent impact in discontinued operations which were in our 2019 plan, though not in the second quarter as the specific timing was unknown. Walking from GAAP continuing EPS of negative three cents, we had three cents of losses, primarily from the partial sale of our Wabtec stake, unrealized mark-to-market of our remaining equity, as well as a held-for-sale mark on BHGE's reciprocating compressors business. On restructuring and other items, we incurred three cents of charges, principally in corporate and power, Non-operating pension and other benefit plans were $0.05 in the quarter. Lastly, we took a $0.09 non-cash goodwill impairment charge. As a consequence of separating the two businesses in the grid solutions realignment, we were required to reallocate its goodwill based on the relative fair values of the equipment and services business and the software business. The remaining fair value of the grid solutions equipment and services business was below its carrying value resulting in the goodwill impairment, and there is no remaining goodwill associated with this business. Excluding these items, adjusted EPS was 17 cents in the second quarter. Moving to cash, adjusted industrial free cash flow was a usage of $1 billion for the quarter and $1.3 billion lower than the prior year. Income depreciation and amortization totaled $1.7 billion, down $400 million after adjusting for the non-cash goodwill impairment. Working capital was negative, primarily driven by accounts receivable, which was impacted by the timing of collections from Boeing related to the 737 MAX and organic sales growth. Inventory was also a usage of cash as we continue to build inventory for higher second-half shipments, principally in onshore wind and to a lesser extent aviation commercial engines. Contract assets were a source of cash of $100 million. Other CFOA was negative 800 million, primarily driven by cash taxes. We also spent about 900 million in gross capex, or 600 million ex-Baker Hughes GE, which is up slightly, driven by capacity investments in renewables and aviation. At the half, free cash flow was negative 2.2 billion, down 800 million. Many of the year-to-date cash flow impacts are the same as what we saw in the second quarter, including pressure from the onshore wind ramp, and 737 max grounding. Overall, in the first half, our cash generation is running ahead of our prior outlook. This is largely attributable to better-than-expected performance of power due to project execution and working capital improvements impacting both collections and disbursements, as well as lower restructuring cash costs across the segments from a mix of timing, attrition, and executing projects at lower costs. As previously discussed, the max was originally outside the scope of our planning, and year-to-date it impacted our cash flow by about $600 million, or $300 million per quarter. However, for the first half, improved performance at power, as well as better aftermarket sales, services billings, and timing of discount payments more than outweighed the cash flow pressure at aviation. In the second half, If the plane remains grounded, we anticipate a negative impact of roughly $400 million per quarter. Looking at the full year, recall our original 2019 guidance for industrial free cash flow was negative $2 billion to zero. That outlook reflected the potential for substantial variability period to period from our large global equipment-focused businesses, as well as numerous transition items that are difficult to forecast, such as the supply chain finance program transition, the anticipated settlement of legacy legal matters, restructuring, and the watch items Larry mentioned. However, the improvements in power, lower restructuring, and higher earnings, along with better visibility at the half, give us confidence to raise our full-year industrial free cash flow guidance to negative $1 billion to positive $1 billion. Moving to liquidity, we ended the second quarter with $16.9 billion of industrial cash, excluding Baker Hughes GE. As discussed, industrial free cash flow was a usage of cash of $1 billion, and we paid approximately $100 million in dividends in the quarter. We received $1.7 billion of cash net of taxes and fees related to the Wabtec transaction, and another $400 million from other dispositions. We contributed $1.5 billion of cash into GE Capital, which was used to fund the WMC settlement with the DOJ. All other items were a source of $400 million, which principally includes the reimbursement of cash owed to us from Wabtec and change in debt. In line with our ongoing goal to reduce reliance on short-term funding, average short-term funding needs declined from about $15 billion in the second quarter of 2018 to about $4 billion this quarter. As stated, our goal is to get to about $5 billion of short-term intra-quarter funding needs while we execute our deleveraging plan. But we potentially could see some fluctuation in these borrowing levels in subsequent 2019 quarters based on disposition timing. As it relates to our leverage targets, we expect to make significant progress toward our leverage goals by the end of 2020, despite the low interest rate environment. We continue to evaluate the best mix of options for deleveraging, considering economics, risk mitigation, and optimal capital structure. Next on power, orders of $4.9 billion were down 22% reported but up 2% organically. Gas power orders were up 27% reported, with equipment up 2.5 times and services down 13%. We booked 4.6 gigawatts of orders for 16 heavy-duty gas turbines, and four aero derivative units, which represent profitable growth and have lower execution risk. This was the second strong quarter of orders growth for equipment, which contributed to the gas power backlog, which is up 5% to $71 billion. That said, we're continuing to restructure for the new gas unit market at 25 to 30 gigawatts per year. Power portfolio orders were down 62% reported and down 32% organically, largely driven by steam power systems with no repeat of a large nuclear steam order in the second quarter of 2018. Power revenue of $4.7 billion was down 25% reported and down 5% organically. Gas power revenue was down 5% in line with our expectations. We shipped four heavy duty gas turbines and seven aero derivative units in the quarter versus seven and five respectively in the second quarter of 2018. We helped our customers achieve commercial operation on over 35 units and added almost eight and a half gigawatts of power to the grid. Gas power services revenue was down 13% with transactional revenues up more than offset by contractual services revenues down due in large part to the outage volume and mix in the second quarter. Power portfolio revenue was down 5% organically. Operating profit of $117 million was down 71% reported, and segment margins were 2.5% in the quarter, largely due to the impact of dispositions, volume, and lower productivity in power services. At Gas Power, we're making meaningful progress on our $800 million fixed cost reduction plan over the next two years. Variable cost productivity also continues to be an area of focus, and we reduced the net employee count at gas power by 1,000 versus the beginning of the year. We exited nine offices and two warehouses in the first half, and we are on track to decrease the number of offices by more than 25% and warehouses by more than a third by the end of 2020. At the half, orders of $8.6 billion were down 20% reported and up 7% organically. Revenue of $9.3 billion was down 24% reported and down 4% organically. Segment margins were 2.5%. Operating profit of $228 million was down 65% on a reported basis and 61% organically. We are only a few quarters into the power turnaround. We now expect full-year free cash flow to be flat to down instead of just down. while we are on track to deliver revenues down high single digits and positive segment margin. Next, I'll cover renewable energy. And as a reminder, the grid solutions equipment and services business is now included in renewables as a result of the realignment, and this is reflected in the results we posted today. For reference, grid solutions is roughly 25% of renewables revenues in the quarter. Renewables orders of $3.7 billion were up 35% reported and up 38% organically. Onshore wind orders were up 87%, mainly driven by the U.S., up two times. We have observed pricing stabilizing in line with our expectations. Revenue of $3.6 billion was up 26% reported and up 33% organically. Onshore wind sales were up 81% reported, mainly driven by strong equipment volume. The business generated an operating loss of $184 million, down $269 million versus prior year, and segment margins were negative 5%. A large part of this decline is due to higher losses in grid solutions, hydro, and offshore wind as we began fully consolidating these legacy Alstom JVs in the fourth quarter of 2018. In addition, we faced headwinds from higher losses on legacy contracts, challenging onshore project execution in Asia Pacific, increased R&D investment for the Cypress and Hollyot X, tariffs, and pricing. This was partially offset by cost productivity and strong volume. Onshore wind in the quarter and year-to-date was profitable. Our top priorities in the second half are quality and delivery. Based on the delivery ramp, we expect renewables to remain on track for the full-year guidance of double-digit revenue organic growth, and with the addition of grid solutions, we expect the margin rate to be negative in 2019. Next on aviation, where we celebrated 100 years as a business in July, orders of $8.6 billion were down 10% reported and 9% organically. Equipment orders were down 24%. driven by commercial engines down 34% on four significant GENX orders in the second quarter of 2018. LEAP orders were up 77% on 693 LEAP engines for both Boeing and Airbus airframers. Service orders grew 3%. Additionally, backlog grew to $244 billion, up 9% sequentially, driven in part by a portion of the $55 billion of wins announced at the Paris Airshow. Revenue of $7.9 billion was up 5% reported and 6% organically. Equipment revenue grew 5% driven by commercial engines, partially offset by military. We shipped 437 LEAP engines this quarter versus 250 in the second quarter of 2018, and CFM 56 engine shipments were down 65%. Military equipment was down due to timing of equipment deliveries. Service revenue grew 5% driven by commercial services. The spares rate was up 2% in the quarter driven by timing, and this brings our year-to-date spares rate to $28.5 million per day, up 10% in line with our high single digits, low double digits guide for the total year. Operating profit of $1.4 billion was down 6% reported on negative mix, partially offset by improved price. Segment margins of 17.6% contracted by 200 basis points reported in the quarter versus the prior year. The margin rate dilution as in prior quarters was driven primarily by the CFM to LEAP transition, which was 80 basis points, and the passport engine shipments, which was another 90 basis points. Additional headwinds included a bad debt charge on one customer in a challenging financial position and additional costs on the GE9X certification delay, as David shared with you at the Paris Air Show. There is no change to prior guidance. Looking at the year-to-date aviation results, revenue was up 9% organically. Segment margins were 19.2%. We're still on track to deliver high single-digit revenue growth and segment margins of approximately 20% in 2019. Looking at healthcare, orders of 5.2 billion were down 2% reported and up 3% organically, driven by equipment orders up 3% and services up 2%, with Europe up 5% and China up 9%, partially offset by the U.S., down 2%. On a product line basis, healthcare systems orders were flat organically, driven by growth in ultrasound and services, offset by imaging and life care solutions, largely due to U.S. order closure timing. Life Sciences orders were up 12% organically. Revenue of $4.9 billion was down 1% reported and up 4% organically. Healthcare systems revenue was up 1% organically with strong growth in Japan and Latin America, partly offset by pressure in China, the U.S., and the Middle East, particularly in imaging. Life Sciences was up 12% organically. Operating profit of $958 million was up 3% reported and 9% organically, and segment margins were 19.4%, up 80 basis points. Organic operating profit growth was driven by volume and cost productivity, partially offset by inflation, tariffs, and program investments. Cost productivity was driven by continued execution on design engineering, sourcing, and services productivity. Healthcare is on track to deliver the 2019 outlook, which includes biopharma, of mid-single-digit organic revenue growth and margin expansion. Moving to oil and gas, Baker Hughes GE released its financial results this morning, and Lorenzo and Brian will hold their earnings call with investors today following ours. On GE Capital... Continuing operations generated a net loss of $89 million in the quarter, which was favorable versus prior year, primarily due to timing of higher gains, including the sale of an EFS equity investment, lower impairments, lower interest costs, and the non-repeat of prior year asset liability management actions partially offset by lower base earnings due to asset reductions. We ended the quarter with $109 billion of assets excluding liquidity and up by $2 billion, sequentially driven by insurance investment activities and unrealized gains. GE Capital completed asset reductions of more than $500 million in the second quarter, totaling approximately $2 billion year-to-date, and is on track to execute approximately $10 billion of asset reductions in 2019. We also classified $3.6 billion of aircraft lending receivables as held for sale, which is not incremental to the $10 billion target and will offset asset growth in other capital businesses, which have a stronger alignment to support GE industrial growth. We remain committed to our strategy of shrinking the balance sheet and achieving a debt-to-equity ratio of less than four times by 2020. We finished the quarter with $12.5 billion of liquidity, which was down $3 billion sequentially, primarily driven by debt maturities. Activity in the quarter also included the $1.5 billion WMC payment to the DOJ, offset by the parent equity infusion to GE Capital of $1.5 billion. We still plan to contribute $4 billion in total to GE Capital in 2019, including $2.5 billion in the second half. We ended with $61 billion of debt, which was down by $2 billion sequentially, primarily driven by debt maturities. Discontinued operations earned $238 million, driven mainly by the resolution of the IRS audit for the 2012-2013 years, partially offset by charges related to the WMC bankruptcy and other trailing costs. WMC filed for bankruptcy in April and intends to file a Chapter 11 plan to complete an efficient and orderly resolution. As we look out to the second half, we expect lower earnings, driven by lower asset sale gains and lower base earnings. We will also perform our annual insurance premium deficiency testing, which is expected to be completed in the third quarter of 2019. At corporate, adjusted operating costs were $462 million versus prior year, primarily due to accruals for existing environmental health and safety matters. We are still targeting $1.2 to $1.3 billion of net retained corporate costs for the full year. However, we now expect to be at the high end of that range. Today, corporate managed headcount stands at about 12,000, down from our starting point of about 26,000 in mid-2018, with more than two-thirds of that reduction to date coming from internal transfers to the businesses and the remainder from outsourcing, restructuring, and attrition. The bottom line is, year-to-date, we have exited about 1,500 of corporate headcount with real cost out, most of which is reflected in the segment results. As we said last quarter, we have a long way to go on right-sizing corporate, but we continue to push control and accountability down to the segments and remain committed to reducing net retained corporate costs to less than $700 million by 2021. With that, I'll turn it back over to Larry.

Jamie, thanks. Given the recent alignment, we thought it would be helpful to spend a few minutes on renewable energy. It's comprised of four different businesses, onshore, offshore, and grid solutions, equipment and services business, and hydro. Strategically and operationally, we think it makes sense to have these four under the same umbrella as there are substantial revenue and cost synergy opportunities. That said, they're each at different stages. At onshore, where we have the number one position in the US, we've launched the Cypress, which has received its first launch orders. At offshore, we're in development mode as we build our global presence and prepare to launch the Hollyot X, the world's largest wind turbine. While grid solutions and hydro are difficult books of business, we're working through complex projects and improving our daily execution. Now, looking at our quarterly segment profit and margins, the four largest headwinds to margins were legacy Alston projects, challenging onshore project execution in the Asia-Pacific region, depreciation related largely to the onshore ramp and our MPIs, and higher R&D spend. As you can see, combined, these were an impact of approximately 1,400 basis points. We're working very hard to offset these with strong volume and cost productivity, but there is more we must do. In June, I spent a week with our renewables leadership team. I left these meetings confident that we can grow this business profitably as legacy items run off. We're taking action to improve operations We're running our commercial efforts differently with tighter pricing controls led by the CFO. We're seeing traction as evidenced by positive pricing in the quarter, the first positive pricing we've seen in 10 quarters, and we believe pricing is stabilizing. We're also reducing cost and improving on-time delivery. In all, this can be and needs to be a better business than it is today. We have a large backlog of projects to deliver and a healthy new product pipeline with solid returns coming over the next two to three years in both onshore and offshore. As we shared at our outlook call, we believe there's upside as we look to 2020 and 2021. This expectation remains. So moving to slide 10, let me first emphasize the broader dynamics we discussed in our 2019 outlook. They remain largely unchanged. This is still a reset year. We're focused on execution of power and returning the business to profitability. We see continued strength in our aviation and healthcare franchises. At Renewable Energy, we're focused on delivering through the cycle. Non-operational items remain a cash headwind with more expected in the second half of the year. However, as we evaluate our performance year-to-date, updated for the reality of today and our expectations for the rest of the year, we are confident in the revised outlook. You'll find our updated targets on the left side of the page. We've already discussed the change in free cash flow, which you now see as a negative billion to a positive billion dollars. On organic industrial segment revenues, we're up 6% year-to-date with a big second half ramp ahead of us in onshore wind and aviation. So now we're targeting mid-single-digit growth. On margins, our outlook is unchanged, up to 100 basis points. While we were down 190 basis points in the first half, we expect the primary driver of upside in the second half to be the non-repeat of some of the 2018 charges, particularly in gas power. On adjusted EPS, we are raising our guidance by five cents as we now have better line of sight to the total year profile, which includes some upside in interest. Lastly, on restructuring, While expected benefits remain unchanged, both expense and cash this year will be lower. This is driven by timing related to certain projects, attrition versus severance in some pockets that has allowed us to reduce cost and executing on some projects at a lower cost than initially planned. We will continue to invest, but only where the economics make sense. Looking at the second half, as we discussed earlier, we are continuing to monitor our watch list items. In summary, we made progress that we are encouraged about in the first half of the year, but it's early in a multi-year transformation. This is undoubtedly a game of inches. Across the organization, I see our team demonstrating candor, transparency, and humility. They're engaged and focused on continuous operational improvement to achieve better results. The cultural shift is beginning to take hold as we are running GE differently. I saw this in our second quarter operating reviews, during our lean week in Greenville, and most recently during a two-week tour in Asia. Looking forward, I'm confident in GE's long-term strengths. The size, the strength, and the nature of our installed base and vital markets where service and technology matter, and our strong recurring revenue streams from parts and services. This allows us to get close and stay close to our customers and continuously create value for them. Before we take your questions, I'd like to take a minute and thank Joanna Morris, who is retiring today after 42 years of faithful service. Many of you know Joanna well, and therefore you also know her countless contributions to both GE's IR efforts and the broader industrial sector since she joined the IR team in 1990. It goes without saying, Joanna has seen it all. Her dedication to GE and our investment community over her tenure has been tireless. We wish her all the best of luck in her retirement.

With that, we'll open the line. In the interest of fitting as many people as possible into Q&A on a busy earnings day, as I know, we'd ask that everyone limit themselves to one question. With that, Brandon, please open the line.

Thank you. And ladies and gentlemen, if you wish to ask a question at this time, please press star 1 on your telephone keypad. If your question has been answered or you wish to withdraw your question, please press the pound sign. And from Vertical Research, we have Jeff Spring. Please go ahead.

Thank you. Good morning, everyone, and best of luck to Joanna and Jamie. Thanks for all the help over the years. Good morning, Jeff. Good morning. Good morning, Larry. You know, just on cash flow to begin, just thinking about power cash flows, right, you've you've introduced flat in your guidance, right? We went from down to flat to down. I don't know where other people were at, but, you know, it was kind of my expectation that down in 2019, you know, meant something, you know, equivalent or even worse to what we saw in 18, you know, negative $3 billion or so. Now that you've introduced, you know, flat, it actually suggests, you know, we were kind of off the mark somewhere else. and what we thought the segment cash flows might track at. I just wonder if, you know, if there's something to be gleaned there is maybe healthcare on the lighter side, or is it aviation on max? And if you do manage a flat result here in power in 2019, does it still hold that you'd expect power cash flows to be down in 2020?

Jeff, I think what we would say with respect to power is that we have seen the stabilization that we referenced, right, with respect to the order book, which has been encouraging the improvements on both expense and cash performance. But we're going to include that potential for the year-on-year number to be flat, but it's still a flat to down range. There's still a lot of variability here. To the extent that we are improving the range by a billion dollars for the year, I think it is appropriate to look at that and say that the bulk of that is coming out of the power performance. There is some benefit from both the lower restructuring activity and the interest in Of course, offset by max, but the reason we're maintaining that $2 billion range is because we still have work to do in power. That's where we have the better part of the risk here. I'd say with respect to the other segments, clearly, as we've indicated, all eyes are on max, but broadly, we're really not offering up much by way of changing 19 for the rest of the segments. With respect to 20, it's probably too early to really comment on any change in trajectory, but what we said earlier in the year back in March on balance holds.

From J.P. Morgan, we have Steve Tusa. Please go ahead.

Hey, good morning. Hey, Steve, good morning. Congrats and best wishes to Jamie and Joanna as well. On this, just following up on this free cash flow guidance by segment, what is the kind of, now that you're halfway through the year, roughly the free cash flow for healthcare embedded in the guide? Is that, you said down, it was $3 billion last year. Should we think something in kind of that $2.5 billion range? Or is there kind of a range you can put around that to help us with?

No, I think with respect to healthcare, For purposes of today, Steve, no change in the healthcare outlook from earlier in the year.

From Bank of America, we have Andrew Obin. Please go ahead.

Yes. Good morning. Can you hear me? We can, Andrew. Good morning. Go ahead, please. Good morning. I also want to echo Steve's comments. The best wishes to Jamie and Joanna. We'll miss you both. Just a question on aviation, free cash flow, Dragon Aviation at $400 million. What has gotten worse and the number seems to be quite a bit higher than what Safran is saying and just want to confirm that $800 million in the second half is part of the free cash flow guidance?

Yeah, so a couple of things. It was $300 million in the second quarter. In the second half, we do see that ramping to $400 million in each quarter while the plane is grounded. You know, remember, volume is planned to ramp in the second half, and that's really what that relates to is just simply that volume uptick in the second half. And then in terms of the overall outlook, you know, certainly we are monitoring that. It is embedded in the frame we talked about this morning, though, of the negative one to one.

From Barclays, we have Julian Mitchell. Please go ahead.

Hi. Thanks. Good morning and wish also Jamie and Joanna all the best. Maybe a question around renewables. Help us understand, I guess, what kind of magnitude of EBIT loss for the year we should expect after a $400 million loss in the first half. And understood that the number is affected by the insertion of the grid business, which is loss-making. Maybe help us understand how your assumptions for the base renewable division X grid have changed, if at all, since March.

Julian, it's Jamie. You know, when you look at renewables in total, with grid included, you know, I would just say, you know, repeat what I said in my prepared remarks, which is really that we expect our operating margin to be negative for the year. What we had said on legacy renewables, that it would be about break-even in operating margin. And when you look at that, there are certainly things we're monitoring there with respect to onshore wind deliveries, you know, project execution and other elements that Larry and I both talked about on the call. And I think there could be a little bit of pressure to that zero for the full year, but we see it hovering right around there.

From Milius Research, we have Scott Davis. Please go ahead.

Hi. Good morning, guys.

Hey, Scott.

Good morning. I'll be the fifth person to wish Jamie and Joanna well, but it's been a lot of years.

Thank you.

Particularly Joanna. Thanks for your help over the years. It's been, again, a long time. But I want to go back to power, if you guys don't mind. And, you know, can you help us? maybe Larry and Jamie get some granularity around this 2.5% margin number. I mean, what lingering impact of kind of cost equality, and I'll throw in like just crappy project execution in there and any other variable that you want to toss in there. Is there such a thing as a, it's kind of a normalized, if you fix this crap, margin number that you could point to or any granularity at all to help us bridge down to that two and a half. Thanks.

Yeah. Scott, I think that if Scott Strasig and his team were here, they would acknowledge fully that there's improvement potential throughout this business, right? And if I just look at what I saw last week, When we were in Atlanta for the operating review, the July operating review, it was a stark contrast from a year ago. With respect to new units, it's a competitive space. We're in some challenging geographies. But just in terms of the way the team today is looking at what we call the strike zone in terms of the deals that we want to pursue versus those that we don't, right? We're laying in a global – level of standard work, so we've got everybody looking at opportunities through the same lens. I think we're being sober about cost and contingencies. That's what sets up some of that project execution that you referred to a moment ago. And they're really driving in deeply to get to root cause to understand where we've had some of these issues, be it around the selection of an EPC, in and around the scope or the scheduling that we commit to, the terms and conditions, of course. And I just think that while there's a good bit still to work through, we're writing a better book of business for the future. Hard to put a basis point contribution over time on that, but I think that's serious. Because that in turn is what sets up the project execution itself, right? Once we've won, we've got to see things through. And I've been really encouraged by the project review board the team's put in. We're getting in early in the life cycle of these commitments. It's a cross-functional effort, really looking at what can go wrong and how do we mitigate, but also what can we improve for the customer or for you, the shareholder. It's been helpful in managing handoffs and just getting the better daily management on the ground around the world. Now, we have a watch list of projects there, right? Probably, I think it's about 35 in number of projects where we really have to be in the weeds on a daily basis to get after this. But I think that combination... to me gives real encouragement that we can manage this business better with an eye toward margin expansion. Obviously the real game though is in services and there's just similar opportunities there, right? We're not great in terms of our on-time delivery of parts and service. We're probably somewhere in the 75, 80% range. Get to root cause, we can fix that. Just the way that we're managing the selling function, opportunities there in terms of our responsiveness. the specificity around what we do when we get a bid opportunity from a customer. So I don't think we're ready to say this is worth 50 bips, this is worth 200, but hopefully that gives you a little bit of a flavor of what we can do to manage the business in addition to the restructuring and the other cost-out efforts to drive margins and better cash over time.

And, Scott, just to add a little bit to that, you know, in the second quarter, We had just over $100 billion of charges related to margin erosion in projects. I think what we're really looking at is few surprises this year. You know, in the second half, you know, certainly we're monitoring all the different areas. But, you know, the operational actions that Larry talked about are really giving us a much deeper level of visibility into the project economics and the timing of our cash projects. and the various actions we have to take. And you probably remember last year in the second half, we took significant charges at power, well over a billion dollars. And when we look into the second half of this year, that's how we'll really measure our own performance, is not repeating those, and certainly not repeating those to the same degree we have.

From Gordon Haskett, we have John Hitch. Please go ahead.

Good morning, and congrats, John and Jamie. Good morning, everyone. Morning, guys. I want to put a finer point around the max, just so that I'm understanding what you're saying. So the flat guide of, I'm sorry, the down one, I'm sorry, let me take that step back. The max is going to drag kind of one to 1.1 billion. Is that in your number? And then you are, you know, you're sort of flattish number or the up number territory for next year. Does that assume the max is flying? And then does Boeing make you whole when it starts supply? It's commented it's made suppliers whole. Does it also make you whole so you get all of its money back in terms of what the drag is?

Yeah, John, the impact I talked about before is in our guide. And when the aircraft starts delivering again, when Boeing delivers to the airframers, we will get paid for those engines. It's just a delay in cash timing.

From both research, we have Nigel Cohn. Please go ahead.

Thanks. Good morning. And thanks, Jamie and Joanna. Good luck with you over our next stage. I'm glad that Joanna managed to see another guide up, by the way, before she goes on. Good morning, Nigel. Good morning. So I just want to kind of pick up the thread on the max here. So, I mean, Bowen's put out the possibility that rate could come down further from 42. Can you maybe give us, and I'm not looking here for decimal points, but if you could give us some sense on how that influences the free cash flow outlook and also the margin impacts. I'm assuming that there will be some margin pressure if we have less variable contribution from engine production. So any sense on how that would impact free cash flow and earnings from rate reduction on the max? Thank you.

Nigel, at this point, as I think we've all communicated, we're at a lower level of production than we thought we would be at this point in the year for obvious reasons. All we're really trying to signal with the $400 million of cash pressure here in the back half, $400 per quarter, is what is likely to happen if we do not see a return to service. So we've just tried to simplify that without getting into trying to get ahead of Boeing or the FAA or other regulators with respect to when the plane is going to return to service. And again, really refraining from any commentary in terms of what could change in terms of our trajectory going into 2020. But clearly, we're doing all we can to support Boeing. and our carrier customers to facilitate a safe return to service for the MACs.

From RBC Capital Markets, we have Dean Dre. Please go ahead.

Thank you. Good morning, everyone, and my congrats to Joanna and all the best to Jamie. I was hoping to ask a couple macro questions if I could. You all would be one of the only industrials not to comment or complain about some short-cycle pressures, and where and how might that be manifested in the results today? Some comments on geographies, especially China. It looked like health care did better there. And then drew us up on tariffs. $300 million to $500 million was the last update.

Indeed, I think as we went through the reviews here in July, looking back at the second quarter, looking ahead to the second half, there wasn't a lot of finger-pointing at short-cycle pressure. We certainly saw bits of the business that didn't perform at the top line in the way that we would have liked. I think the health care revenues were a little soft. In the U.S. and in China, I think we touched briefly on the gas service business, but I think we really look at that more, frankly, as a function of our own execution as opposed to a short cycle pressure that we can point to. I think we want to be vigilant, but clearly going into the second half with the backlog and the visibility that we've referenced a few times here, I think we felt good enough to tick up the revenue guide to that mid-single-digit range. With respect to China, as I mentioned, I was there as part of a two-week trip to Asia. I would say that the embrace of GE is strong at the customer level. At the government level, GE is seen as a key partner. We signed, as you may have seen, I think an important offshore wind commitment in Guangdong Province while we were there. As you would expect, we had some key meetings with our gas power partner, Harbin. I do think having partners is going to be key going forward in China, and I'm glad we're partnering up with Harbin. But the trade tensions there are real. And you don't have to look past today's headlines to have that, I think, as a watch item. And how that plays out for our book of business in China, how it plays out more broadly for all of us is a bit unclear. I think we've tried to take in some of that pressure into account in the back half here, but we flag it just given it's a variable a good bit outside of our control.

And just on China tariffs, the impact in the second quarter was $90 million net, and really no change. I think we've said 400 to 500 of net impact for this year, and that's about what we still see, mostly in health care and renewables.

Thanks, Dean. From Citi, we have Andrew Keplowitz. Please go ahead.

Good morning, guys. Best of luck to Joanna and Jamie. Morning. Good morning. Sorry, I'm sorry. obviously good improvement in execution and power, but maybe you could talk about the markets. Pretty strong orders so far above your expectations. Is that more a result of your teams getting their act together, or are you seeing some improvement in some of the major regions that you do business, regions in North America, Middle East, Asia?

Well, I think the team is doing a better job certainly, but again, it's very early, right, whether we're talking about the top line, the bottom line, the cash. I don't want any of this to sound like we are claiming victory. I think Scott and the team are focused, again, on a high-quality book of business. The share numbers will be what they are, but I think over time what we want to do is partner with the right customers and in and around the opportunities that allow us to create value for them and in turn, value for our shareholders over the life cycle of that commitment. Clearly, as you well know, the gas business is different region by region, but I would just share briefly whether it was in Japan, whether it was in Singapore, obviously in China on this last trip, I visited a site under construction in Malaysia there's a lot of keen interest in adding gas capacity as they work through not only their own underlying economic growth, but the energy transition. So we're bullish on that part of the world with respect to the gas business. We need to be better in terms of the book of business. We need to be better at project execution, back to Scott's question. And then all of the – the details inherent in sustaining a good service business over the life cycle of those installations.

From Deutsche Bank, we have Nicole Dupleis. Please go ahead.

Yeah, thanks. Good morning, and best wishes to Jamie and Joanna. So I guess I want to focus a little bit on GE Capital. It's been a source of upside versus expectations year to date. Do you still expect GE Capital to generate a $500 to $800 million loss for the full year? And I guess what's driving the delta between one-half and two-half performance, if so?

Yeah, so GE Capital's continuing net income for the first half was $46 million, negative 89 in the quarter. Yes, a lot of that's helped by timing of asset sales. In the second quarter, we had EFS gains. The GCAS elements were also more first half loaded. When you look at the quarter in particular, lower interest expense, the tax audit resolution, either those things helped us. And when you pull back and look at first half, second half, You know, I think they're going to still be impacted by timing. So we had a first half loaded on games. You'll see that come back a bit in the second half. In the third quarter, we do our loss recognition testing for insurance. In addition, we have our GCAS impairment testing. And, you know, the timing of this tax resolution in the second quarter, we did not expect that in the second quarter. We really expected that in the second half. So, you know, we still expect to be within that negative 500 and negative 800, you know, absent the LRT, probably at the higher end of that. But, you know, on the LRT, we'll update you in the third quarter when that's complete.

From Credit Suites, we have John Walsh. Please go ahead.

Hi. Good morning.

Good morning, John. Good morning.

And I'll echo everyone's well wishes for Jamie and Joanna. Appreciate the help. So I guess, you know, maybe following off of Andy's question on power, I mean, I think you're clearly making good progress in power, right, around what you can control, you know, within GE. You've made investments, right, on H frame for kind of more base load power. But as I look at the market, right, I mean, battery storage, right, is a potential technology disruption there, particularly around peakers. And, you know, I don't want to go specifically, you know, down that road necessarily. But, you know, as you're focusing on improving the margins, you know, can you talk to what you're doing to also play offense, particularly within power, whether it's around your R&D investments or other investments the business is making? you know, to prepare for technology shifts that will continue to happen over time?

Sure, sure. Well, I would say you probably see it in a few areas, John. I think that clearly as we see the transition from coal and nuclear to other sources, cleaner, more efficient sources, gas is a beneficiary in that. So we're just, again, trying to make sure that we're plugged in country by country, customer by customer, where we can be part of that. You're right, in certain places, gas will be used differently, and that will shape our product roadmap in terms of the types of upgrades that we offer as well as the new unit MPI journey over time. I'd also say that with respect to storage, and other opportunities that we might have tucked away ever so discreetly on the renewables page in the prepared remarks is a reference to hybrids, where what we've done is we've put our solar inverter and our battery storage efforts, and these are small, they're nascent, but they really are our opportunities to play here in the renewables because we see opportunities in and around the wind business particularly to lever our technology and install base in a broader way. We don't talk a lot about that. We had a good session with the team last week looking at some of the second-half investments that we're going to make there, and hopefully over time that will be more significant. But I would really say big picture, making sure we've got – A best-in-class gas business during the energy transition while continuing to invest largely in our onshore and offshore wind businesses is the way we are positioning ourselves for the energy transition.

Brandon, we have time for just one more given we're past the top of the hour. So let's take our last question, please. One more.

Our last question from Goldman Sachs. We have Joe Ritchie online. Please go ahead.

Thanks. Good morning, and congratulations, Jamie, Joanna.

Good morning, Joe. Good morning, Joe.

And so thanks for fitting me in. Just I guess my one question, you know, you guys monetized your stake or a portion of your stake in Wabtec this quarter. Can you just remind us of any of the restrictions or plans that you have for your remaining stake both in Wabtec and for BHGE?

So from a WABTEC perspective, there is a restriction that lasts into this fall. And on the Baker Hughes side, you know, we are free to sell down at any time. Those restrictions have lapsed at this point. But we continue to expect an orderly process with both.

And no further questions at this time. Mr. Winokur, any closing remarks?

No, I think we're good and available for calls with our team. Thanks, everybody. Thanks, everyone.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.