GE Aerospace

Good day, ladies and gentlemen, and welcome to the General Electric third 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 the 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 third 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, and 10-Q are available on our website. 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 that we'll be hosting a Healthcare Investor Day on Monday, December 2nd, in conjunction with the RSNA Conference in Chicago. Additionally, we've provided the upcoming earnings dates in the appendix. With that, I'll hand the call over to Larry.

Steve, thanks. Good morning, everyone, and thank you for joining us. I'll start off with some thoughts on our performance and our strategic priorities. Then Jamie will cover the quarter in detail before I wrap with our updated outlook. Overall, our third quarter results reflect one more quarter's worth of progress in our multi-year transformation of GE. Orders were down 1% organically year over year due to tough comps at power and lower leaf orders at aviation in part due to the 737 MAX grounding. We ended with backlog of $386 billion, up 14% year over year. This comprises equipment of $80 billion, up 4%, and services of $306 billion, up 17%. We delivered strong industrial segment organic revenue growth of 7%, with growth across all businesses except power, where gas power was up but power portfolio was down. We also delivered adjusted industrial operating margin expansion of 130 basis points, driven by healthcare, and better controls of power relative to last year. While margins are down 130 basis points organically year-to-date, we continue to expect to hit our full year margin expansion target. Industrial free cash flow turned positive, generating $650 million in the quarter, though down $500 million from a year ago. This is ahead of our expectations, largely driven by continued power stabilization and better than expected progress on the supply chain finance transition. We're raising our industrial free cash flow outlook again today, which I'll cover in more detail later. There were a few significant developments in the quarter, including a number of deleveraging actions that I'll talk to shortly. We ceded majority control of Baker Hughes, which resulted in a pre-tax loss of $8.7 billion. We completed our annual insurance premium deficiency test, resulting in a pre-tax charge of $1 billion, mostly driven by the low interest rate environment. And finally, we completed our annual goodwill test, recognizing a non-cash impairment charge of $740 million at Hydro, a renewable energy business we acquired from Alstom. So, a number of steps to mitigate risk and clean up the GE portfolio. But make no mistake, we still have work to do. At Power, we're focused on daily management, improving transactional services, and cost-out initiatives. At Renewable Energy, we're focused on the significant delivery ramp, turning around hydro and grid, and overall better project execution. Across these two businesses, as well as corporate, we're investing in restructuring, and our expected cost savings remain on track. We're also moving the center of gravity from corporate to the businesses, a notable cultural shift for GE. Moving to slide three, we're doing what we said we would do. In 2019, we've been hyper-focused on our two strategic priorities. First, we're improving GE's financial position, and we've taken a number of actions on this front in the quarter. At industrial, we sold a portion of our Baker Hughes stake for approximately $3 billion of proceeds, and we exited Wabtec, bringing in another $1.6 billion. Year-to-date, we've collected $9 billion of proceeds, and at capital, we announced the PK Air finance sale. We started putting that cash to work with a $5 billion industrial debt tender, and we recently announced important but difficult changes to our U.S. pension plan that will reduce our industrial net debt by $4 to $6 billion. Second, we're running our businesses better with an eye toward unlocking the value that clearly exists in GE's portfolio. On that front, at power, we continue to see signs of stabilization due to better project discipline and execution. Specifically at gas power, organic revenue was up 3%, and we hit a major milestone with our 100th HA turbine order in the quarter. We reduced reported fixed costs 9% year to date as we right-sized the business for our market realities. At renewable energy, we're well-positioned to capitalize on the energy transition. Orders and revenues were up double digits again as we delivered approximately 1,400 turbines and repower kits in a quarter. We're seeing strength in international orders and order pricing continues to improve. We signed the first commercial deployment of the Halyard X and our largest Cypress order to date. At Aviation, we have a strong global franchise with an installed base of nearly 70,000 engines. Service revenues in the quarter were up 7% and we expanded our win rate on aircraft engine selection to 62% on the A320neo. While we are managing the portfolio renewal, we are still on track to deliver 20% segment margins this year. And CFM is working closely with Boeing and our carrier customers to ensure the safe return to service of the 737 MAX. In healthcare, we're operating at the center of precision health. We're driving new innovation, enabling our customers to improve patient and operational outcomes. For example, we received the industry's first FDA clearance to embed AI apps on a medical device for triage in our critical care suite this quarter. We also continue to expand margins, which were up 90 basis points organically, driven by both volume and cost productivity. I'd like to take a moment here to mention GE Digital. This business remains within the GE family, a growing and important P&L in its own right within corporate, which will serve customers in power, grid, oil and gas, and select manufacturing industries. Under the new leadership of Pat Byrne, the team is refining its focus to leverage GE's first mover investments in industrial software and analytics to be an important contributor to our customers' digital futures. During the quarter, a couple of changes in the way we're operating really began to take root. And while their impact is not yet visible to investors, I'm optimistic that it will be over time. First, our lean transformation is underway. One of the most pleasant surprises for me has been that once I began to talk more about lean, especially after our leadership event in Greenville in June, A flood of people deep in the organization began reaching out, raising their hands, looking to help. I was at our Lynn, Massachusetts military engine plant recently and heard operators following an action workout talk passionately about how lean triggers cultural change and greater accountability. A different lean event recently at our MR production facility in Florence, South Carolina, teams identified $50 million of potential savings in just four days. And lean goes well beyond manufacturing. GCAS, for example, is using lean to reduce turnaround time when transitioning an airplane from one lesser to another, which will save our customers money and improve our on-time delivery. The opportunities at GE are endless, which is why the second change, our strategy reviews, is so important. This quarter, we held sessions with each of our businesses designed to answer two fundamental questions. What game are we playing? and how do we win? These were multi-day sessions, not fly-bys, with robust debates about strategy and priorities aimed at growing our top line, expanding margins, generating cash, and delivering innovation and customer satisfaction for our customers. Over time, our lead action workouts will be targeted to our strategic objectives and will channel the interest, the enthusiasm, and skill that exists within these walls right now toward driving improved and sustainable results. So in summary, the hard work continues. And from the inside, I'm seeing the improvements I wanted to see when we started on this path a year ago, improvements that will yield long-term results for all of GE's stakeholders. Jamie, I'll turn it over to you.