GE Aerospace

Good day, ladies and gentlemen, and welcome to the General Electric Fourth 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, Dean Winokur, Vice President of Investor Communications. Please proceed. Thanks, Brandon. Good morning and welcome to GE's fourth 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 and presentation 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 will hold an investor call on Wednesday, March 4th, to provide more detail on our 2020 outlook. With that, I'll hand the call over to Larry. Steve, thanks.

Good morning, everyone, and thank you for joining us. I'll begin with an overview on our performance and progress today. on our execution against our strategic priorities. Jamie will cover the financials in more detail, and then we'll turn to our expectations for 2020. Starting on slide two, you'll find a snapshot of our fourth quarter and full year results. Overall, the fourth quarter marked a strong close to the year as we met or exceeded our financial targets in 2019. Orders were down 3% organically in the quarter as positive growth in aviation and healthcare was more than offset by declines in power and renewables. Notably, aviation's double-digit orders growth was driven by our newly formed Arrow Derivatives JV between GE Power and Baker Hughes following deconsolidation. Excluding that JV, aviation's orders were up 1%. For the year, total company orders closed up 1% organically. We ended 2019 with backlog of $405 billion, up 15% year-on-year, This comprises equipment of $79 billion, up 2%, and services of $326 billion, up 19%, representing approximately 80% of our backlog. We delivered industrial segment organic revenue growth of 4.6% in the quarter and 5.5% for the full year, with all segments posting positive growth. Our service businesses, which represent about half of our industrial revenue in the quarter and the year, continue to be a differentiator with our customers and a key driver of profitability. Our adjusted industrial profit margin expanded 410 basis points and 390 basis points organically in the quarter driven by aviation and power. For the year, margins expanded 60 basis points and 10 basis points organically driven by power and health care, with aviation margins closing above 20%. We generated industrial free cash flow of $3.9 billion in the quarter and $2.3 billion for the full year. This came in ahead of our most recent outlook as power outperformed expectations, and we saw continued strength in aviation. As I reflect on the year, we've come a long way since my initial visits as CEO with each of the businesses in late 2018. Aviation and healthcare are clearly exceptional franchises, delivering profitable growth for the year with runway to go. In aviation, the business was able to grow free cash flow versus prior year despite the $1.4 billion of cash headwind from the Boeing 737 MAX grounding. At healthcare, we operate at the center of precision health. As Karen and team outlined for many of you in December, Growth has and will continue to be driven by innovative solutions and our digital capabilities, resulting in products such as the Revolution Maxima CT scanner, which we launched at RSNA. At Power, we're proud of our progress in stabilizing gas power, but we have more to do. In Power Portfolio, while there were puts and takes, we gained better line of sight into these businesses. For example, power conversion showed signs of operational improvement this year, such as better on-time delivery at their facility in Brazil. In renewables, our full-year results were more mixed. Reflecting on each of the businesses here, in onshore wind and LM, earnings and cash trends improved through 2019 as we delivered on a steep ramp to meet customer demand. In offshore wind, we're still in investment mode as we build our global presence and prepare to launch the Hollyott X next year, the world's largest wind turbine. The focus in both grid solutions and hydro is simply on the turnaround. We're working through complex projects, improving our underwriting framework, and focusing on daily execution in both our factories and in our field service organization, as well as taking cost reduction measures. Last week, I was in Paris for operating reviews with each of these businesses, and this reinforced my conviction that we can and will improve our performance in renewables. And in GE Capital, we delivered positive earnings driven by better operations, tax, and gains as we continue to simplify the GE Capital portfolio. So while 2019 was year one in our multi-year transformation, I'm encouraged by the evidence of momentum I see across GE. Stepping back from the quarter, we made substantial progress on our priorities in 2019, as outlined on slide three. First, on improving our financial position, we moved with speed on a number of deleveraging actions, which set us up to achieve our deleveraging targets in 2020. At industrial, we reduced net debt by $7 billion, ending the year at a net debt-to-ebit ratio of 4.2, down from 4.8 a year ago. We used the proceeds from our Wabtec and Baker Hughes sales to pay down debt, including a $5 billion debt tender. In 2020, we expect to close BioPharma for about $20 billion of net proceeds and achieve our leverage target of less than 2.5 times. At capital, we reduced debt by $7 billion, ending 2019 with a debt-to-equity ratio of 3.9, down from 5.7 in 2018. We expect to close 2020 below our leverage target of less than 4 times. We also completed approximately $12 billion of asset reductions this year, bringing our two-year total to $27 billion, which surpasses our $25 billion target. Our deleveraging progress will allow us to focus more of our time and energy executing on our other priority, which is strengthening our businesses. It's no secret that power has been our focus over the last year, and across the board we are improving execution. In gas power, we're building backlog with lower risk, as evidenced by zero turnkey projects booked. in the fourth quarter. We're underwriting the business financials with more conservative commercial assumptions, with our 2020 equipment plan now 100% in backlog. And we're right-sizing the business for today's market through a reduction in fixed costs by 15% in the quarter and 10% in the year versus 2018. But to be clear, we're still on a multi-year journey at Gas Power to deliver a more reliable contribution to GE Industrial's overall performance. As I've shared with you before, even our best businesses can be stronger, including healthcare, where we see opportunity to drive faster healthcare systems growth post the biopharma sale. This year, healthcare systems grew revenue 1% organically, and we expect low to mid-single-digit growth going forward. We'll do this through targeted increases in R&D and prioritizing programs with the highest returns, as well as better execution on our safety, quality, delivery, and cost reduction efforts. For example, during my recent visit to Duke, France, where we produced our Sensograph Pristina mammography machines, I met with our teams using lean principles such as value stream mapping and daily management to improve both our supply chain and our commercial performance. Investing in restructuring has also been an important effort in 2019, especially across power renewables and corporate, as we reorient our cost structure for the future and move the center of gravity to our operating businesses. While cash and expense were lower than our original outlook this year, due to a mix of timing, attrition, and better execution, our expected cost savings remain on track. At corporate, for example, our core functional costs were down 8% in the year. This was a result of our actions to shrink costs as people, processes, and accountability are moved to the segments. The team made solid progress on headcount reduction with roughly 2,500 people this year, resulting in real corporate cost savings. While we're not finished with restructuring, better margins and returns will also be the result of improved underwriting discipline, stronger execution in both the factory and the field, shifting our business mix more toward services, and launching accretive new products. This year, much of our substantial progress was in areas less visible to those of you on the outside of GE. This starts with how we run the company on a daily basis. We're in the early days of a lean transformation, developing leaders capable of identifying and solving problems alike, establishing standard work, and embracing our values of candor, transparency, and humility. Our strategic conversations are being woven throughout the year in an ongoing sequence of operations, talent, and budget reviews. This type of rigor and prioritization is changing how we work. As I travel to our businesses, I see real momentum building, which is only partially evident in the numbers we're sharing with you today. For example, earlier this month, David Joyce and I were in Ohio at our Aviation Component Service Center, which repairs complex parts used to service our customers' engines, witnessing lean principles firsthand. The results were impressive, a 14-day improvement in our turnaround time that will positively impact customers and our bottom line. Moreover, we were so impressed by the operators there, motivated, passionate, expert at using lean tools to improve their daily work. I'm excited to go back. So in summary, I'm heartened by our progress in 2019, and I do believe we enter the new year with momentum. There's still plenty of work to do, but we're changing the way we work together with a firm eye on delivering better results and ultimately a stronger culture. I just want to take a moment to thank all of those on the GE team listening for their grit, their resilience, and clear sense of ownership as we've driven the change we have over the last year. I'm looking forward to more. And with that, I'll turn it over to Jamie.

Thanks, Larry. Starting with the fourth quarter summary, orders were $24.9 billion, down 3% organically, with growth in aviation largely from aero orders, as well as healthcare, offset by declines in power and renewables. Equipment orders were down 10% organically, while services were up 6% organically. Consolidated revenue was $26.2 billion, down 1% in the quarter. Industrial segment revenue was up 4.6% organically, with equipment revenue up 7% and services revenue up 2% in organic growth in all segments. The biggest drivers of growth were aviation equipment and services, renewables equipment driven by onshore wind, and power services. For the year, industrial segment revenue was up 5.5% organically. Adjusted industrial profit margins were 11.3% in the quarter, up 410 basis points reported. The majority of margin accretion was driven by better operational rigor. and the non-repeat of about 800 million of charges we took in gas power last year, and higher volume in aviation services. All segments other than renewables expanded margins in the quarter. For the year, we saw significant margin expansion in power and health care, but declines in renewables and aviation. Fourth quarter net EPS was 6 cents, continuing EPS was 7 cents, and adjusted EPS was 21 cents. Walking from continuing EPS, we had $0.08 from gains in our remaining stake in Baker Hughes, which we measure at fair value each quarter. On restructuring and other items, we incurred $0.03 of charges related to restructuring and M&A costs across our segments, principally in power. Next, we incurred a $0.07 charge for deal taxes related to the biopharma transaction based on preparatory internal restructuring ahead of the expected close in the first quarter. Non-operating pension and other benefit plans were 10 cents in the quarter, which includes about $600 million of additional expense this quarter associated with the pension freeze we announced in October. Excluding these items, adjusted EPS was 21 cents in the fourth quarter. Moving to cash, we generated industrial free cash flow of $3.9 billion for the quarter, $800 million lower than prior years. Income depreciation and amortization totaled $1.5 billion, down $200 million net of goodwill impairments versus prior year. Working capital was positive $1.6 billion. Similar to last quarter, accounts receivable was a usage of cash driven by the impact of the max grounding and reductions in long-term receivables and other factoring program levels. The max grounding was a negative $400 million working capital cash flow impact in the quarter. All other working capital accounts were a source of cash, driven by lower inventory from higher seasonal volume and cash collections on new orders and project milestones. The supply chain finance transition was a usage of cash in the quarter as anticipated, but less than originally planned. For the year, we completed negotiations with over 80% of the large suppliers and anticipate completing the transition in 2020 with results better than our original outlook. Contract assets were a source of cash of $400 million, in part driven by billings from a CSA contract termination and cash received on converting a customer to a CSA contract at aviation. Other CFOA was $1.1 billion, which includes restructuring cash usage, accrued discount and allowance payments in aviation, and non-cash items offset in net income. We also spent about $700 million in gross capex driven by aviation. For the year, industrial free cash flow was 2.3 billion, down 2 billion versus prior year. The most significant driver of the decrease was in working capital due to the max grounding and the reduction in certain receivable monetization programs. While there were many puts and takes, the 2.3 billion was ahead of our expectations due to strong performance in power, which carried forward from the first half, largely driven by collections at gas and steam power, and partially the timing of project disbursements, lower restructuring of about $800 million driven by the items Larry mentioned earlier, lower impact from the supply chain finance transition, and aviation performance where strong cash collections and services, including a fourth quarter parts distribution deal for a legacy engine program, and timing on discount and allowance payments helped more than offset the $1.4 billion headwind from the max grounding. Moving to liquidity on slide six, we ended the fourth quarter with $17.6 billion of industrial cash, up approximately $1 billion sequentially, largely driven by positive free cash flow of $3.9 billion. This was offset partially by the $2.5 billion equity contribution to GE Capital as planned and the $1 billion intercompany loan repayment, where we have about $12 billion left to go in 2020. In line with our ongoing goal to reduce our reliance on short-term funding, average short-term funding was $4.3 billion this quarter, down from $10.4 billion in the fourth quarter of 2018. And peak intra-quarter short-term funding was $4.7 billion, down from $14.8 billion last year. Overall, our liquidity position remains strong, with over $17 billion in industrial cash, and we continue to have access to $35 billion in bank lines, and this will step down in 2020 as we complete the biopharma transaction and take other deleveraging actions. Next on leverage on slide seven, we're improving our financial position and reducing our leverage. As Larry shared, we reduced net debt by $7 billion, ending the year with leverage of 4.2 times, down from 4.8 times at year-end 2018, This was achieved through the $5 billion debt tender and the $1.5 billion intercompany loan repayment from GE to GE Capital and a higher cash balance at year end. We expect to achieve our industrial leverage goal of less than 2.5 times net debt to EBITDA in 2020. We also announced comprehensive U.S. pension actions, which will reduce our net debt by $5 to $6 billion when completed. As you may recall, as of the third quarter, we were estimating a potential increase to our global pension deficit of approximately $5 billion. Ultimately, this deficit increased by only $900 million versus the prior year. Year over year, the key drivers were pressure from the lower discount rate, largely offset by higher year-end asset returns, and the completion of the pension freeze and lump sum offerings. We have substantial sources to delever and de-risk our balance sheets. To date, we have received $9 billion of proceeds from our Wabtec and Baker Hughes sales. We are on track to close Biopharma in the first quarter, and we'll continue to sell down our remaining stake in Baker Hughes in an orderly fashion. Post the Biopharma close, we will execute on the previously announced 2020 deleveraging actions that you see on the right. We'll contribute $4 to $5 billion to our U.S. pension. which we expect will meet the estimated minimum ERISA funding requirements through at least 2022. We will also repay the remaining intercompany loan of $12 billion from GE to GE Capital, which will be used to pay down 2020 GE Capital debt maturities. Finally, we will repay approximately $1 billion of maturing industrial debt. As we've previously said, While our industrial leverage target will be less than two and a half times net debt to EBITDA, we also evaluate other measures, including gross debt to EBITDA, and we will ultimately size our deleveraging actions across a range of measures to ensure we are operating the company with a strong balance sheet. We will evaluate additional potential actions based on their deleveraging impact, economics, risk mitigation, and our target capital structure while also monitoring key risks. Over 2019 and 2020, we expect that our total cash-to-leveraging actions will be in the range of $30 billion. Next on power, for the quarter, orders of $4.5 billion were down 28% organically. Power portfolio orders were down 55% organically, largely driven by the non-repeat of a large steam equipment order in fourth quarter 18. Gas power orders were down 8% organically. down 49% organically, largely driven by the non-repeat of a large turnkey order in fourth quarter of 18. We booked 3.7 gigawatts of orders for 22 gas turbines, including three HA units and one aero derivative unit. Gas power services orders were up 12% organically, with transactional and contractual services up on higher volume, as well as commercial and utilization improvement, while upgrades were down. This was the strongest quarter of services growth in 2019. Backlog closed at $85 billion, down 2% sequentially and flat versus prior year. Gas power, representing $71 billion of segment backlog, was up 3%. Revenue of $5.4 billion was up 5% organically, with gas power revenue up 9% and power portfolio revenue down 4%. Gas Power shipped 21 gas turbines, including 5 H units and 3 aero derivative units, versus 22 turbines in the fourth quarter of 2018, which included 3 H units and 8 aero derivative units. We helped our customers achieve commercial operation on over 20 units this quarter, which translates to almost 4.5 gigawatts of new power added to the grid. Gas Power Services' revenue was up, driven by transactional and contractual revenues, which were up on a robust fall outage season and improved commercial performance, upgrades were down in line with our guidance on continued market dynamics. Operating profit was $302 million, up $1.1 billion, and reported segment margin was 5.6%, an increase of more than 2,000 basis points. This was largely driven by better operational rigor and stronger processes at gas power, as we did not incur charges related to projects, product, and fleet utilization that we experienced in the fourth quarter of 2018, as well as we had improved volume. We also continued to reduce gas power fixed costs, which were down 15% versus the prior year. For the year, organic revenue was down 1%, reflecting a decline in power portfolio, reported segment margin was 2.1%, and free cash flow was negative 1.5 billion. While we have more to do, the team has laid a stable foundation by baselining the business to new market realities and driving operational improvements. Next on renewable energy, orders of $4.7 billion were down 10% organically due to the non-repeat of large deals at hydro and grid solutions. Equipment orders were down 7% and services orders were down 22% organically. Onshore wind orders were flat as international strength offset a decline in North America, and notably, new order pricing in onshore wind continues to stabilize. Overall, backlog of $28 billion was flat sequentially and up 16% year over year. Revenue of $4.7 billion was up 4% organically, mainly driven by onshore volume. Total equipment revenue was up 3% organically as onshore wind marked record deliveries in the quarter of 1,553 total turbines of repower kits, with roughly two-thirds of these in the U.S., while services revenue was down 22% organically. Operating profit of negative $197 million was down $176 million, and reported segment margin was negative 4.1%, a contraction of 360 basis points. Positive volume was more than offset by headwinds from project execution, particularly in grid, pricing, tariffs, and increased R&D investment. Importantly, Onshore was profitable for the third consecutive quarter and full year. Looking at the full year, organic revenue was up 11%, reported segment margin was negative 4.3%, and free cash flow was negative $1 billion. Renewables free cash flow was impacted by lower earnings offset by progress collections, which were less of a headwind in 2019 than we expected. We anticipate that progress collections will be a headwind in 2020 as we execute on heavy PTC delivery volume that exceeds inbound collections. As Larry noted, renewables is a key operational focus for the team. At Aviation, orders of $10.7 billion were up 23% organically, with equipment orders up 40% organically. This was primarily driven by the aero derivatives JV. Total orders, excluding aero derivatives, were up 1% organically, as commercial engine orders were down 33% due to LEAP orders, down 63%, while services orders were up 12%. Backlog grew to $273 billion, up 8% sequentially and up 22% versus prior year, primarily driven by long-term service agreements. Revenue of $8.9 billion was up 7% organically. Equipment revenue was up 13% organically, driven by sales of 420 LEAP 1A and 1B units, up 41 from last year, partially offset by CFM units down 74%. We shipped 675 units this quarter, down 11% from prior year. Services revenues were up 3% organically due to commercial services, also up 3%, reflecting higher external shop visits and a more favorable mix of shop visits. Total military sales were up 13% organically with 227 engine unit shipments, up 32% with growth in development programs. Operating profit of $2.1 billion was up 19% organically on approved volume, price, and net productivity, offset by negative mix. Reported segment margin of 23% expanded 260 basis points versus the prior year, driven by commercial aftermarket strength. As in prior quarters, this was partially offset by the CFM to LEAP transition, which was a 60 basis point drag. and the passport engine shipments, which were a 70 basis point drag in the quarter. For the year, organic revenue was up 9%, segment margin was 20.6%, and free cash flow was $4.4 billion. Looking at health care, we finished in line with what we shared with you at our investor day in December. Orders of $5.9 billion were up 3% organically. Equipment orders were up 4%, and services were up 2% organically. On a product line basis, healthcare systems orders were up 1% organically, driven by growth in life care solutions, services, and ultrasound, partially offset by imaging, largely due to market dynamics in China. In the U.S. and Canada, healthcare systems was up 1% organically, boasted by solid growth in imaging and ultrasound. Life sciences orders were up 10% organically. Backlog was $18.5 billion, up 2% sequentially and up 6% versus prior year. Revenue of $5.4 billion was up 1% organically. Healthcare systems revenue was flat organically with equipment down, offset by services growth. Operating profit of $1.2 billion was flat organically and reported segment margin was 21.9%, up 10 basis points. This was driven by volume and cost productivity. offset by tariffs, price, and program investments. For the year, organic revenue was up 3%, with healthcare systems up 1%. Segment margin was 19.5%, and free cash flow was $2.5 billion. On GE Capital, continuing operations generated net income of $69 million, up $27 million versus the prior year, excluding the prior year tax reform impact of 128 million. The favorability was driven by lower marks and impairments and interest expense, partially offset by lower gains, tax benefits, and operations. For the year, continuing operations generated adjusted net income of 139 million, up 455 million versus the prior year, excluding the impact of tax reform and the insurance annual premium deficiency test. Capital ended the quarter with $102 billion of assets, excluding liquidity, down $7 billion sequentially, primarily driven by lower GCAS, WCS, and EFS assets. GCAS completed the sale of substantially all of the PK Air Finance business, and we expect the remaining assets of that to be sold in the first half of 2020. Capital completed asset reductions of approximately $8 billion in the quarter for a total of $12 billion in 2019. Including the $15 billion in 2018, we exceeded the $25 billion asset reduction target previously communicated. In addition, WMC concluded its Chapter 11 case in the quarter, and as of year end, GE Capital has no further liabilities to WMC. Capital finished the quarter with $19 billion of liquidity. which was up $8 billion sequentially, primarily driven by disposition proceeds of $7 billion and the capital infusion of $2.5 billion, partially offset by debt maturities of $2 billion. We remain focused on de-risking GE Capital, including improving its leverage profile. Capital's debt at year-end was $59 billion, down by $1 billion sequentially, primarily driven by debt maturities, partially offset by the intercompany loan repayment of $1.5 billion. We ended 2019 with the capital debt to equity ratio at 3.9 times. With the anticipated repayment of the intercompany loan, this ratio will increase throughout 2020, but we expect to end 2020 at less than four times. Discontinued operations generated a net loss of $63 million, up $29 million versus the prior year driven by WMC, DOJ, and other litigation reserves in 2018. As we look to 2020, insurance will complete its annual statutory cash flow test in the first quarter, and we also expect lower earnings from GE Capital, primarily driven by lower asset sale gains, a smaller earning asset base, and other non-recurring items. But we still expect capital to break even by 2021. Moving to corporate, adjusted operating costs were $600 million in the quarter, up versus prior year, due to higher intercompany profit eliminations and increased remedial costs relating to existing environmental health and safety matters. For the year, adjusted operating costs were $1.7 billion, up $400 million versus the prior year, largely led by the same drivers, as well as the non-repeat of intangible asset sales. This was in line with our revised corporate outlook from the previous quarter. Importantly, Our core functional costs were down 8% in the year as we moved the center of gravity from corporate to the businesses. And with that, I'll turn it back over to Larry.