GE Aerospace

Thank you. Thank you.

Thanks, Brandon. Good morning and welcome to GE's first quarter 2020 earnings call. I'm joined by our chairman and CEO, Larry Culp, and CFO, Carolina Dibakapa. 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. With that, I'll hand the call over to Larry.

Steve, thanks. Good morning, everyone. We hope you and your families are healthy and safe. Our thoughts are with all of those affected by this global pandemic. We recognize this is a very difficult and challenging time for everyone. On behalf of GE, I want to express our gratitude to those on the front lines in the medical community, many of whom were privileged to call our customers, working tirelessly to protect all of us. Thank you. When we last spoke during our Outlook call in March, we were encouraged by the continued strength in aviation and healthcare and the progress made in power and renewables. In the eight weeks since, the world has fundamentally changed. As we all know, the COVID-19 pandemic evolved rapidly, hitting hard and hitting fast. While this is an earnings call, our goal today is to provide you with the most current and relevant information we have, and as always, to be as open and transparent as we possibly can. So forgive us if we run a little long today. The COVID-19 dynamics at GE, like the economy at large, are fluid and still evolving, but clearly challenging in the near term. With that, I'll start with our response to COVID-19, Carolina, who is joining our earnings call for the first time, will cover the financials. Then I'll wrap with a more in-depth view of our current operations. Moving to slide two, during this unprecedented time, we're focused on three areas. First, the health and safety of our employees and our communities. We established a COVID-19 task force that is working to ensure we're doing everything in our ability to protect the health and safety and aligning with various government directives and medical advisories in real time. To that end, we've encouraged those employees who are not directly performing customer-facing essential jobs to work from home wherever possible. But given the mission-critical work we do at GE, not everyone can stay home. I'd like to acknowledge our employees out in the field and in our factories for their unwavering dedication as they continue to deliver for our customers, supporting essential services like hospitals, power generation, airlines, and national defense. We're ensuring they have what they need to do their job safely. This includes temperature screenings, face coverings and gloves as necessary, and physical distancing, all keeping with national, state, and local guidelines. I'm also inspired by the support that our employees have shown each other. We recently established an employee relief fund, and more than 75 senior leaders across GE have contributed portions of their salary to support those affected by this crisis. Our second priority is continuing to serve our customers. In healthcare, we're ramping production of critical medical equipment used to diagnose and treat COVID-19 patients, including respiratory CT monitoring solutions, x-ray, anesthesia, and point-of-care ultrasound product lines. Already, our team has doubled production of ventilators and plans to double again by the end of June. Healthcare's digital and AI solutions are helping hospitals remotely monitor multiple patients at once and automate rote tasks so clinicians can spend more of their precious time focused on life-saving work. Across all of our businesses, we're in constant communication with employees, customers, suppliers, and governments to maintain business continuity without disruption. Our third priority is preserving our strength. First and foremost, sound liquidity is crucial, and solidifying our balance sheet remains a key focus. With the recent closing of the biopharma transaction, we've received $20 billion of net proceeds. This provides GE with optionality to protect our company and remain flexible. And importantly, we've retained a $17 billion leading healthcare business at the center of an ecosystem striving for precision health. Preserving our strength in a time like this also requires a different operating model. Here I draw on my experience as a CEO managing through 9-11 and the global financial crisis. There are three steps in this model. Embrace reality, redefine winning, and execute the plan. Easy to say, hard to do. Starting with embrace reality, this is necessary in a time like this when so much has changed and remains uncertain. For us, it means recognizing that we're facing significant headwinds in aviation, and we may be for a while. We wish it were otherwise, but that's not our reality. Next, redefine winning. We came into 2020 with a plan that defined winning as profitable growth, margin expansion, and cash generation. Now, we need to adjust to the altered environment to focus and inspire our team. Let me share some ways we're doing this. While safety has always been a top priority for GE, COVID-19 has reshaped our safety agenda. In terms of our financial priorities, improving our cash generation and decremental margins in the second half are key focus areas. And in healthcare, we clearly didn't come into the year expecting to increase our ventilator production fourfold, but we will. And finally, execute the plan. We're moving with speed, discipline, and intensity to improve our cost structure and targeting more than $2 billion of cost actions and more than $3 billion of cash actions. And this is where Lean is particularly relevant, from daily management to traditional Kanban systems, which help reset inventory levels, to new problem-solving tools we're rolling out across GE. Let me share a recent example from Gas Power. In our Greenville facility, the team used Lean to cut the distance that a single part travels during production from three miles – yes, three miles – to a mere 165 feet, flashing the time it took to make that part by 42%. These are the sort of operational efficiencies that are more essential than ever in this environment. So that's our approach here. We're facing the pandemic head on while continuing to execute our long-term strategy for GE. Moving to slide three, you'll find a snapshot of our first quarter results, and Carolina will take you through this in detail. But first, a few top line thoughts. As I noted, we entered the year with momentum. However, as COVID-19 continued to spread globally, and I'm not going to sugarcoat this, we got hit hard in some of our highest margin parts of our best performing businesses. This is especially true at aviation services, where COVID-19 caused a rapid decline in commercial aviation demand, and even essential travel became difficult in the second half of March. A similar situation also transpired at power services, where travel restrictions caused by COVID-19 impacted our field personnel. And across all of our businesses, we started to see some project fulfillment and execution issues. At the same time, healthcare performed well due to urgent demand for our products used in the fight against COVID-19. Taking a step back, about 80% of our roughly $400 billion backlog is in services, which have a long time horizon. And while services have been hurt in the near term, those capabilities remain one of our greatest strengths. They keep us close to our customers with deep strategic relationships, especially through periods of volatility. So in the spirit of embracing reality, let me frame for you what we're seeing right now at a high level, and then I'll do a deeper dive after Carolina reviews the first quarter. In aviation and at GCASP, Airlines are conserving cash, not flying the planes they have, limiting maintenance spend where they can, and all the while deferring orders in many places. No one can predict when and how leisure and business travel will resume, but the reality is likely it's not soon. So we're redefining winning from margin expansion in 2020 to improving our decremental margins this year, which requires we aggressively adjust our cost structure. That's what winning looks like for aviation, and they're moving forward with a comprehensive plan. To be clear, we'll get back to targeting those 20% operating margins post-pandemic. In healthcare, we've been on the front lines, combating COVID-19 since the early days in Wuhan. This is fundamental to our mission. While we've seen demand surge for certain products, other products, including those in our high margin pharmaceutical diagnostics business, have been negatively impacted as multiple procedures are deferred. Healthcare is likely to rebound faster than aviation, but we're still fast-tracking additional cost-out actions, targeting an incremental $700 million since Karen and the team spoke with you in December. In power and renewable energy, the impact of COVID-19 has been more limited to date. Specifically at power, we're experiencing outage delays and restrictions in field service travel and we're monitoring new unit orders and services. To offset this, we're further right-sizing the cost structure, and in power, we already reduced headcount by 700 in the first quarter. Now, clearly across GE, there are a number of large variables that are unknown at this point, including the full duration, magnitude, and pace of recovery across our end markets, operations, and supply chains. We're also monitoring how the resulting interest rate environment will impact pension obligations and our runoff insurance business. So let me tell you what we do know. The second quarter will be the first full quarter with pressure from COVID-19, and we expect that our financial results will decline sequentially before they improve later this year. The bottom line is we have some challenging times ahead, but this too shall pass. I'm confident the underlying reset we took over the last 18 months to focus GE's portfolio and instill a greater focus on customers and lean, give us a running start for what we face today. Moreover, I see in our response to COVID-19 signs of how we're moving faster to change GE for the good. More lean work to help reduce inventories in the face of demand challenges in aviation. Travel restrictions spurring on the use of remote digital technology to complete field work and renewables. and more capital discipline across the board. With new leaders assimilating faster and with real impact, healthcare comes to mind. So all of this in combination with the planned actions we'll discuss later are accelerating our transformation of GE. With that, I'll turn it over to Carolina. But before I do, let me say how pleased I am to have her on board. In two short months, it's clear we share the same perspectives of embracing reality and operational bias reaction and executing with speed.

Thank you, Larry. I am proud to join my first earnings call as CFO of GE and help lead this company forward. As you noted, we're operating in unprecedented times. I've been focused on, first, keeping our financial position strong and safe with a keen eye on leverage and liquidity, as well as cash flow and capital disciplines. While GE's actions over the last couple of years have put us on stronger footing ahead of this situation, we will do more. Second, working with our businesses to take the right action, not only to help mitigate the impact of COVID-19, but to serve customers better, operate smarter and more efficiently, and integrate lean more holistically. While Larry and I are focused on the near term, we're also managing for the long term. We're working together to reduce complexity at GE, to build a lean culture that delivers sustainable earning and cash flow generation. Today, my intention is to take you through our results in detail and provide context that help you see what I see across the businesses. With that, let's turn to slide four. This was a challenging quarter for us as the macro environment rapidly deteriorated. Taking it from the top, first quarter orders were down 3% organically or down 4x biopharma. Growth in power and healthcare was offset by double-digit decline in aviation and renewables. Both equipment and service orders were down low single digits. I'll cover this by business shortly. Industrial revenue was down 5% organically, or down 6% ex-biopharma, with equipment revenue flat and services down 9%. Both aviation and power services were adversely impacted in the quarter due to COVID-19. Adjusted industrial profit margins were down 450 basis points organically. Most of the dilution came from aviation and renewables, with the aviation impact mostly driven by COVID-19. Now let's discuss the EPS walk, starting at continuing EPS of $0.72. There was a $0.75 gain, primarily related to the $11.1 billion after-tax gain from the biopharma sale, which also included $0.01 of tax benefit in geocapital. This was partially offset by a $4.6 billion after-tax loss on our remaining Baker Hughes stake, which we measure at fair value each quarter. On restructuring and other items, we incurred $0.02 of charges. This is principally related to the reduction of aviation's U.S. workforce. Lastly, non-operating pension and other benefit plans were $0.06 ahead within the quarter. Excluding these items, adjusted EPS was $0.05. As described earlier, our earnings performance was materially impacted by COVID-19 and other market dynamics. This was primarily in aviation and G capital, with negative marks and impairments in both GCAS and insurance, as well as higher credit costs. We estimate the first quarter industrial operating profit impact from COVID-19 roughly 700 million. Drivers included lower aftermarket sales, project delays, and supply chain constraints. This impact is higher than anticipated at the March outlook call, reflecting the rapid global progression of the pandemic, while our prior forecasts largely reflected the slowdown in China. Our focus on addressing this pandemic is global. We're targeting more than $2 billion of cost out this year. While this may not affect the full impact, we're rapidly addressing both cost and cash and making our businesses more agile and customer-focused over time. I can tell you from my experience that as this program builds momentum and the company leaders begin to see how powerful results can be, they tend to extend beyond their stated goals. With just what I have seen so far, I'm encouraged that we can have some of that same experience at GE. Moving to cash. As many of you know, the first quarter is typically low for our free cash flow. This year we're impacted by our usual seasonality, but also COVID-19, especially in aviation. Industrial free cash flow was a use of 2.2 billion, 1 billion worse than prior year. But notably, excluding aviation, each industrial business improved free cash flow versus last year. Turning to the key drivers in the quarter. Starting with net earnings. If you exclude the biopharma gain and the mark-to-market on our Baker Hughes investment, income depreciation and amortization totaled 700 million. That's down 900 million versus prior year. Next, working capital, negative 2.6 billion for the significant use of cash, down 1.1 billion. Let me take it through the main factors. First, we had a net inflow in accounts receivable, driven by a seasonally lower volume in gas, power, and renewables. Second, we had an outflow in accounts payable, driven by a lower volume in aviation and higher disbursements related to prior year material buys in renewables. We increased inventory to support an expected second and third quarter volume ramp in onshore wind, and shop output declined in aviation. Fourth, progress collections. They were a use of cash as new orders and milestone payments were more than a theft by burndown of prior progress payments in power and renewables. Lastly, we also spent about 600 million in gross capex. We're on track now to reduce 25% of our capex spend this year. For cash flow in total, we estimate the first quarter impact from COVID-19 was around $1 billion, the majority of which was felt in aviation. As we look forward, we expect continued free cash flow pressure. We're targeting more than $3 billion in cash action. However, over time, we know that each business can be a better cash generator as we improve execution. Moving to slide six, we continue to strengthen our balance sheet. the largest milestone in the quarter was closing Biopharma. With 20 billion of profit, we ended the quarter with 33.8 billion of industrial cash, up approximately 16 billion sequentially. TA Capital ended with 13.5 billion of cash, down approximately 5.3 billion sequentially, driven by contractual maturities. We continue to hold a liquidity balance covering 12 months of G-debt maturities. We've recently taken actions to enhance and extend our liquidity and pay down debt. On April 17, GE entered into a three-year, $15 billion syndicated revolving credit facility. This was a planned refinancing of GE's prior $20 billion syndicated revolver credit facility, including bilateral agreements we expect to have in the range of $20 billion in total credit line access going forward. Following the sale of BioPharma, we also improved our liquidity profile in April We reduced our near-term debt maturities by issuing 6 billion in GE debt in April, and subsequently tendering for 4.2 billion of debt. We plan to use the remaining 1.8 billion of proceeds to further debt reduction, and the combination of transactions will therefore be leveraged neutral. Following this, GE Industrial has no debt maturities in 2021, 1.9 billion of maturities in 2022, and 900 million in 2023. At GE Industrial, we reduced debt by approximately $7 billion. We reduced commercial paper use by $1.1 billion in the quarter, and we paid $6 billion of the intercompany loan from GE to GE Capital in April, using proceeds from Biopharma. At GE Capital, we reduced debt by $4 billion. So we reduced external debt by $10 billion year-to-date, including $4.7 billion of maturities in the quarter, and an additional $5.4 billion of 2020 maturities tendered in April, offset by GE's $6 billion repayment of the intercompany loan. Our financial policy goals remain. Maintaining a high cash balance, achieving less than 2.5 times net debt to EBITDA at GE Industrial and less than four times debt to equity at GE Capital. A credit rating in the single A range and reinstating a dividend in line with peers over time. We remain committed to achieving our leverage targets, but we now expect to achieve those targets over a longer period than previously enough due to the impact of COVID-19. Next, on slide seven, we'll discuss industrial segments results. Starting with aviation. As you've noted, our first quarter results were materially impacted. Orders were down 13% organically with both equipment and service orders down. Equipment orders were down 27%, primarily driven by commercial engines business due to the max grounding and the COVID impact. Services orders were down 4%, primarily driven by commercial services, partially affected by military, which won new fighter and helicopter service orders from the U.S. DOD. Service orders were stronger than revenues due to the military orders, which were up 60% year over year. Backlog of $273 billion was flat sequential and up 22% versus prior year, primarily driven by long-term service agreements. This included roughly 200 LEAP 1D unit order cancellations in the quarter. Revenue was down 11% organically. Equipment revenue was down 17%. We shipped 472 commercial install and spare engine units this quarter, down 37% versus prior year. Sales of 272 Deep 1A and 1B units were down 152, and CFM 56 units were down 98 units. Service revenue was down 8% due to commercial services down 11%. This was driven by lower spare part shipments and lower shop visits from the impact of COVID-19. Total military revenue was down 7%, with 146 engine unit shipments down 9%. And this was driven by supply chain fulfillment dynamics and inbound material partly affected by the advanced programs growth. Operating profit was down 39% organically, primarily on lower volume and negative mixed pressure in commercial services from the impact of COVID-19 and lower spare engine units. Segment margin contracted 650 basis points organically, This was primarily due to COVID-19 impacting our commercial businesses in both engines and services. The continued 737 MAX grounding, the non-repeat of prior year favorable contract adjustments, and the first full quarter of revenue from our aero-derivative business now that we have deconsolidated Baker Hughes. To add a bit more color, COVID-19 represents just over half of the year-over-year margin difference. 737 MAX timing, considering install and spare engine volume and supply chain excess costs represent additional 20% of demand. Moving to healthcare, which performed well. Orders were up 9% organically. Equipment orders were up 14% and services were up one. Healthcare orders, excluding via pharma, were up 6%, driven by a surge demand related to COVID-19. This was partially upset by delays in procurement and lower demand of products less related to COVID-19. Examples like MR and intervention in healthcare systems, as well as contrast media and nuclear tracers in pharmaceutical diagnostics. Life sciences orders were up 10%. Backlog was 17.4 billion, down 6% sequentially and down 3% versus prior year due to the sale of marijuana. So excluding biopharma, backlog was up 1% sequentially and 4% versus prior year. Revenue was up 2% organically and 1% excluding biopharma. Healthcare systems revenue was up 2% with services and 3% with equipment flat. Life sciences was up 4%. Operating profit was up 10% organically. Segment margin expanded 140 basis points organically or 30 basis points excluding biopharma. This was driven by volume and cost productivity, offset by price and logistics pressures from COVID-19. Next, on power, we had mixed results with equipment top-line strength offset by challenges in services. Orders were up 14% organically. Gas power orders were up 8%, with equipment orders up 37%, largely due to one turnkey order. We booked 2.2 gigawatts of orders for nine gas turbines. Gas power service orders were down 3% with contractual services down and transactional upgrades roughly flat. Power portfolio orders were up 27% with strong equipment and services orders in steel and power conversion. Backlog closed at $85 billion, flat sequentially and down 1% versus prior year. Gas backlog was $71 billion, flat sequentially. Revenue was down 12% organically, largely driven by services. In gas power, revenue was down 12%. Gas power equipment revenue was up 4% organically on higher-hedged turbine mix. We shipped seven gas turbines versus nine gas turbines in the first quarter of 2019. We helped our customers achieve commercial operations on over 32 units, translating to almost 4.7 gigawatts of new power added to the grid. Gas power services revenue was down 19% organically. as outages and transactional sales pushed out of the quarter due to COVID-19, and we had lower revenue on higher margin upgrades. Despite this, services would still have been down in the quarter. This was driven by supply-based constraints on hot gas parts and outage costs overall, pressuring our CSA margin rate. Power portfolio revenue was down 12%. This was driven by lower volumes across the subsegments. In steel, We had lower services backlog convertibility. In nuclear, the decline was driven by outage timing. And in power conversion, we refined our sales perimeter, focused on higher margin market segments. Operating profit was down 239 million, and segment margin contracted 570 basis points organically. While gas power fixed costs were down 9% sequentially and 16% versus prior year, This was more than offset by lower service volume and additional costs from COVID-19 disruption. Next, on renewables. Continued revenue growth was more than offset by fulfillment and execution issues impacting profitability. Orders were down 11% organically. Equipment were down 11% as we cycle a stronger US PTC. And services were down 23%. A positive spot in the quarter was international orders, which were up 11%. Backlog of 26.5 billion was down 4% sequentially, but up 5% versus prior year. Revenue was up 28% organically. This was mainly driven by onshore wind, up 60%. Onshore equipment revenue was up 81%, with the new unit turbine deliveries of 731, more than double prior year, and repower kit deliveries of 219, up 40%. Onshore services revenue, excluding the power kits, was up 15%. Onshore order pricing index continues to stabilize at 1%, in line with recent trends. Grid revenue was down 8%, mostly due to site closures and delayed milestones driven by COVID-19. Operating loss was down $115 million. This was driven by the supply chain disruptions due to COVID-19, fulfillment delays, and the non-recurrence of the non-cash gain from an offshore wind contract termination in the prior year. This was partially affected by higher onshore wind volume. Segment margin contracted 210 basis points, mainly driven by the same items mentioned above, and the range of execution issues we're fixing at grid and hydro. Moving to slide eight, starting with GE Capital. In the quarter, adjusted continued operations generated a net loss of $118 million. This excludes the impact of the capital loss tax benefit utilized against biopharma gains, resulting in $88 million of earnings. Compared to prior year, which excludes the U.S. tax reform benefits, continuing net earnings was unfavorable by $154 million. This was due to negative marks and impairments at GCAS and insurance, lower gains and lower earnings from a smaller asset base. This was partially offset by lower excess interest costs and SG&A. We ended the quarter with 101 billion of assets, excluding liquidity. This was down 1 billion sequentially, primarily driven by GCAS due to asset sales, depreciation and collections, partially offset by new volume. Insurance assets were flat sequentially as the decrease in unrealized gains driven primarily by higher market rates was offset by the annual insurance capital contribution. Supply chain finance assets were down as our suppliers continued to migrate to MUFG. As noted earlier, capital ended the quarter with 13.5 billion of liquidity. Capital also ended with 54.5 billion of debt, which was down 4.5 billion sequentially, driven by debt maturity. These continued operations generated a net loss of 164 million, which was unfavorable versus prior year by 200 million. We still plan to provide the required support to GE Capital in line with insurance statutory funding. Next, just like our businesses, corporate needs to adjust to our new reality, and we are continuing to take additional structural actions to rationalize costs and reduce the size at corporate. Looking at the quarter, adjusted corporate costs were 374 million, 8% higher, but that's primarily due to higher intercompany profit eliminations, which were partially offset by better digital performance from contingent cost reduction actions. Functions and operations were 25% lower, primarily driven by GE Digital's improvement. You can see from Digital's performance that the focused cost reduction programs are gaining traction. We continue to right-size our functional costs across GE and push more accountability into the divisions. Larry and I are conducting cost and cash reviews of each of the businesses with fresh eyes in the current environment, so you can expect that there will be more to come. Stay tuned. I have spent most of my career in leadership at lean, decentralized companies. Fundamentally, I believe companies outperform when they have a structure that empowers businesses to take the right actions quickly. This type of structure is critical to respond to situations like we have today with COVID-19. but also to be prepared to pivot to growth. We're working toward this goal and there will be more to come. With that, back to you, Larry.

Carolina, thank you. There's no question that COVID-19 is putting real pressure on our businesses. Given that so much has changed, and this quarter will be our first full quarter with pressure from COVID-19, I'd like to spend some time here discussing second quarter trending based on what we're seeing through the month of April. So starting with aviation on slide nine. Of all of our industrial segments, this business is feeling the impact of the pandemic most severely. The rapid contraction of air travel has resulted in a significant reduction in demand as commercial airlines suspend routes and ground large percentages of their fleets. We'll cover commercial services and engines on the next two slides in detail, but on the other end of the spectrum, demand for our military business remains strong. To that end, we rebalanced some of our capacity to meet this increased demand. To offset some pressure in the commercial business, we're taking several steps that, while painful, preserve our ability to adapt as the environment continues to evolve. We've previously announced $500 to $1 billion in costs and cash actions and we've now increased this, targeting more than $1 billion in cost actions and more than $2 billion in cash actions. This will be achieved through different initiatives, some of which have been completed, others in flight as we speak. These include a 10% reduction in aviation's total U.S. workforce and furloughs impacting 50% of its U.S. maintenance, repair, and overhaul facilities and new engine manufacturing. We'll continue to monitor and potentially extend as required. We're also focused on reducing the discretionary and CapEx spend and optimizing working capital. I know aviation's decremental margin through this pandemic is top of mind for investors, and Carolina touched on the main dynamics impacting our margins in the quarter. While we expect our commercial revenues and profits will continue to be down in the second quarter, our expectations are that the cost actions we're undertaking will improve decremental margins in the back half of the year. While there are many uncertainties, I expect that we will exit the year with a much lower decremental margin than what you saw in the first quarter. So make no mistake, driving improvement here is our number one focus. As we think about the full year, we're tracking travel restrictions, carrier and passenger behavior, disease countermeasures, and freight demand, all of which will impact aircraft departures and revenue passenger kilometers. While we're seeing an unprecedented decline in 2020, we're taking action, and David and the team are working proactively with our customers to navigate through this crisis. So spending a little more time on commercial services, which represented $3.3 billion of revenue in the first quarter, let's go to slide 10. As you can see on the left side, departures across the full industry were strong in the first quarter before rapidly declining in mid-March. As we look at it this week, focused on the GE and CFM fleet, global departures are down approximately 75%. Roughly 60% of the CFM fleet is parked today. In line with this, we're also seeing significant headwinds in global shop visits, which were down low double digits in the first quarter, as airlines defer short-term maintenance, and we expect this trend gets worse before it gets better. with some potential to moderate in the latter half of the year, depending on the variables just outlined. Based on what we're seeing through the month of April, in the second quarter, we're seeing shop visits down roughly 60% and CSA billings down roughly 50%. Additionally, we expect a significant reduction in utilization is likely to continue to pressure our CSA margins. That said, when the aviation industry recovers, and it will recover over time, GE is well positioned with the largest and youngest installed base of all engine manufacturers. Additionally, roughly 62% of our GE CFM fleet has seen one shop visit or less, and this will generate demand upon recovery. We have more narrowbodies that are 10 years or younger than the narrowbody installed base of the rest of the industry. And when we see a pickup in air travel demand, we expect narrowbodies will recover most quickly. Overall, it was a challenging quarter and we're expecting additional pressure here in the second, but our cost actions will alleviate some of the pressure in the second half of 2020. Moving to commercial engines, which represented $1.5 billion of revenue in the first quarter, in light of COVID-19, air framers are producing at a lower rate. Based on what we're seeing through the month of April, In the second quarter, we see installed engines down roughly 45% and spare engines down roughly 60% year-on-year, attributable to the delivery deferrals in addition to the already planned lower production rate on the 737 MAX. In the near term, we're right-sizing production capacity and actively managing the supply base. We have very strong relationships with the airframers, and an attractive value proposition is evidenced by a multi-year backlog. As you'll see on the right, we have strong positions, sole source on two of the biggest new engine entrants, and a 65% win rate on the other. While we acknowledge there's pressure on near-term demand for new aircraft, these stats demonstrate that customers see the value of GE technology. We're taking the right actions to be well-positioned for the post-pandemic world. Moving to healthcare, which consists of healthcare systems and PDX. In the second quarter to date, we're seeing increased demand for vital medical equipment in the diagnosis and treatment of COVID-19 within healthcare systems. Now, these product orders, including ventilators, have increased one and a half to two times versus pre-pandemic levels. But at the same time, we're seeing reduced demand for other diagnostic products as certain procedures are deferred or canceled around the world. To be clear, these other diagnostics are still essential and often associated with saving lives. in areas including oncology and cardiology, but are currently deprioritized. PDX is a similar story. This is a high margin business made up of contrast agents and nuclear tracers associated with procedures that are being deferred or canceled right now. Several HCS product lines and most of PDX is down as much as 50% versus pre-pandemic levels. While these dynamics vary by country, there appears to be a pattern emerging as geographies experience different stages of the virus. Taking China, for example, as hospitals come back online, we're seeing a ramp in previously deferred procedures and increased demand for our equipment and consumables. Healthcare is accelerating its planned transformation to expand margins post-biopharma by reducing headcount, fixed costs, discretionary spend, and marketing spend, prioritizing R&D, deferring CapEx, and optimizing working capital. Looking forward, we're most focused on the following indicators for healthcare, hospital admission and occupancy rates, an increase in non-COVID-19 procedures, changes in hospital CapEx budgets, government spending on healthcare broadly, and development of COVID-19 tests, treatments, and vaccines. Based on our experience in China and the market in April, we expect to be down in the second quarter with potential recoveries. afterwards. COVID-19 has highlighted the need to build and truly invest and scale a new digitized infrastructure and quickly. We're committed to our investments in our digital Edison platform and solutions like neural virtual care solution, which allows one clinician to remotely view numerous ventilated patients simultaneously, helping to expand their capacity while reducing their risk of exposure. As our digital healthcare journey continues, we're at the center of an ecosystem striving for precision health. I'm very proud of the work our team is doing to combat COVID-19. Moving to power on slide 13. We'll talk to the current trending in the second quarter to date and dynamics of gas power and power portfolio. Starting with gas power equipment, while we're monitoring and managing supply chain disruptions, as of today, we still see a path to 45 to 50 gas turbine deliveries this year. But our orders profile and therefore cash down payments worth several hundred million dollars are likely weaker due to IPP pressures in the U.S. and Mexico as we expect that deal financing will become harder through the year. Additionally, with oil price pressure impacting Middle East and SSA investment, including demand for new LNG, we are expecting a longer road to normalization. Ultimately, we're sticking to our strategy of securing a lower risk margin accretive backlog with disciplined execution. In services, approximately 20% of planned averages are shifting from the first half of this year due to COVID-19 field labor constraints. We're also seeing pressure on upgrades, primarily in the Middle East, where low oil prices are impacting customer budgets. We are seeing GE gas turbine utilization in the US up mid-single digits due to low gas prices and the shift from coal, but utilization globally is down low double digits due to lower electricity demand. Within power portfolio, our steam business is most impacted. Factory closures pressured our steam operations, including one facility in Wuhan, which was closed for approximately eight weeks in the first quarter. Today, we're back up to more than 70% of capacity. The global supply chain has also been disrupted by the shutdown in India, driven by government restrictions. Overall, we're seeing about 30% of outages shift from the first half of this year to the second half, with another 10% to 15% pushing into next year. Our power businesses are taking several measures to offset these pressures. In the first quarter, we reduced headcount by 700%. notified approximately 1,300 contractors, implemented a hiring freeze, and in line with the demand profile, we are taking even further actions. This will serve to reduce fixed costs in 2020 and drive benefits in 2021. Looking forward, we're tracking a number of items, including timing of our gas turbine new order closure, service outages and volume, fleet utilization as the energy mix, and fuel prices are impacting each region differently, supplier impacts, and project execution, billing milestones, and customer collections. We're targeting to have our accelerated cost-out measures drive organic margin expansion despite these demand changes. Moving to slide 14 on renewables, there was a limited impact of COVID-19 in the first quarter, and our disappointing results continue to be largely about improving executions. As we've said, we think about renewables in three distinct operating pools. Starting with onshore wind, while we continue to deliver at record levels in the Americas, we are seeing supply chain disruption at our LM wind facilities, and we're monitoring key commercial milestones, such as permitting and financing, which could potentially cause timing delays. In offshore wind, certification for our industry-leading turbine, the Hollywood X, remains on track. We're also on plan to start delivering on our 80-unit, 6-megawatt commitments to EDF. After completion of this project in 2021, we expect to start shifting production to the Hollyot X. We're also monitoring financial closure of 2020 deals. Grid and hydro, our two turnarounds, are impacted by supply chain disruptions, with over half of our grid facilities now operating below full capacity. And at grid automation, we're also impacted by lower demand. book-to-bill order conversion. Across all three of these pools, we're increasing cost out in restructuring, and we've identified several hundred million dollars of additional actions. Longer term, a lower cost structure will benefit renewables. Relating to the global supply chain, we're focused on the safe reopening of our plants globally, and then optimizing the workforce and plant load levels. Looking forward, we're expecting a larger impact from COVID-19 in the second quarter, And by business, we're tracking 20 and 21 demand impact on progress collections and potential site delays in onshore wind, the risk of financing delays associated with deals at offshore, project site delays at grid and hydro, and the backlog at grid. On slide 15, within GE Capital, our GCAS and insurance businesses are where we are feeling the largest impacts, so I'll keep my comments focused there. GCAS is better positioned today than in previous downturns, with better asset quality, less customer concentration, and more geographic diversity. That said, we're preparing for elevated repossessions and redeployments, as well as lease restructurings, and we've had approximately 80% of our customers seek short-term deferrals. As you may have seen, we've agreed with Boeing on a rebalancing of our 737 match order book. Second, at insurance, Market and rate volatility is impacting the current value of our investment portfolio and reinvestment yields. Therefore, we're deploying capital to capture market dislocation investment opportunities. We're closely monitoring how this volatility will impact insurance this year. And similar to the industrial segments, we're implementing incremental cost and cash actions. Looking forward, we continue to expect higher impairments and lower asset sales at GCAS and insurance. Our seasoned teams are working closely with our customers to navigate through this period. So to close, our priorities are clear. We rapidly mobilized our team in the face of COVID-19, with our top priority being the health and safety of our employees. And overall, the priorities we reviewed with you at the outlook call remain intact. We're facing into our near-term realities while continuing to manage GE for the long term. When the world is facing the worst pandemic in a century, our team is rising to the challenge with humility, transparency, and focus. We continue to deliver value for our customers, enabling air carriers to transport essential goods, supplying vital healthcare equipment, and keeping the lights on. And while there are many unknowns, there will be another side. Planes will fly again. Healthcare will normalize. and modernized, and the world still needs more efficient, resilient energy. At the same time, we're embracing this new reality. We're redefining winning, and we're executing our plan. The costs and cash actions we've taken you through this morning are a major result. These moves will ultimately allow us to accelerate our multi-year transformation to make GE a stronger, nimbler, and more valuable company, and I am confident that GE will emerge stronger. With that, Steve, let's go to questions.

Great. Before we open the line, I'd ask everyone in the queue to consider your fellow analysts again and ask one question and a follow-up so we can get to as many people as possible. Brandon, can you please open the line?

Yes, thank you, sir. We'll now begin the question and answer session. If you have a question, please press star 1 on your telephone keypad. If you'd like to be removed from the queue, please press the pound sign or the hash key. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please press star 1 on your telephone keypad. And from Vertical Research, we have Jeff Sprague. Please go ahead.

Thank you. Good morning, everyone. Hope everyone is well. Thanks for all the great details. Good morning, Jeff. Good morning. I was hoping you could provide a little bit of color on how you kind of view the asset quality of the contractual service agreements and the like. There's a lot of assets there. Obviously, there's at least a temporary impairment of cash flows. How does that test work? Have you done it yet? And are you close to any particular thresholds there that we should be thinking about?

Jeff, I think if we look at the service backlog, right, broadly just under $325 billion for the company, the vast majority of that $234 billion is in aviation. I suspect that's where you're most focused. We go through those backlog reviews and the CSA reviews on a regular basis, right? What we've done here over the last, we call it the last seven, eight weeks, is really tighten and quicken the review process that we do with the businesses, both at Aviation and at GCAS. What we're trying to do is make sure we've got the latest and, if you will, most accurate information possible with respect to customer risk given everything that's going on. So we do that on a regular basis. We did that at the end of the first quarter in closing, much as we do every quarter. Clearly, we've got a fluid situation, and I think the modest charges that we took, the modest changes in the first quarter, clearly are going to play out as we go through the course of the year. We can't really scope that for you today, If you look at the CSA book in aviation, for example, as we went through the mechanics of the future billings, the future costs related to those billings, based on the information at the time, it was really just a $100 million adjustment, non-cash, of course, which is why you see a little bit of the earnings cash dynamic. Certainly, as we go forward, we're going to be updating those bills those adjustments, and again, we would expect that we would see more of that given what the airlines are doing with their planes. But I think it's important to keep in mind, again, these are 10- to 15-year agreements, as you know, and those adjustments are taken in the context of that particularly extended time period.

Great. Thanks for that. And just as a follow-up, if I could, I know you don't want to get real precise on guidance, but, you know, you are pointing us to a further decline in cash flow in Q2, which isn't surprising, quite frankly. But could you bracket that at all for us, what we should expect for Q2? And, you know, any high-level thoughts on how the year plays out from the cash standpoint?

Yeah, Jeff, I think that we took guidance off the table a few weeks back and didn't want to take an attempt at framing formal guidance here today in light of all that has flew and all that is still evolving here. And I think the tack we took was really to try to share as much with you as we possibly could in terms of the April detail, business by business, and acknowledge that we're going to see a more challenging second quarter here given the full impact of COVID and the like. But beyond that, I think that's really where we are. We know we've got to get to work on the cost and the cash actions. That's why you see us doubling that activity in aviation, stepping it up elsewhere around the company. So the $2 billion of cost, the $3 billion of cash will clearly help us later on in the year as those actions take root. But for today, I think that's really what we're – that's what we know, and that's what we're comfortable sharing. Great.

Thanks.

Best of luck, Larry. Thanks.

From Morgan Stanley, we have Josh Pokerswinski. Please go ahead. Josh, your line is open. It might be on mute. Josh?

Josh, you might be on mute.

Josh, are you there? Why don't we... Brandon, let's move on and come back to Josh. Okay.

Sure. Next question we have from Bank of America. We have Andrew Olden. Please go ahead.

Yes, good morning. Can you hear me? Yep.

Hey, Andrew.

Yeah, just a question. Thank you so much, and good luck to everybody. So run rate minus 60% in terms of shop visits, 5% on CSAs. Do you think you continue to trend at this level in the second quarter, or is there more downside?

Andrew, I think you're referring to page nine in the slide deck.

Yeah, the aviation.

I think this is what we're seeing here. Yeah, I think this is what we're seeing right now. and given what the carriers have said publicly what they're doing, we think these are good, likely near-end run rates to share with you. Again, we're not trying to offer up a definitive view as to the next several quarters, but this is what we're seeing right now in the second quarter for sure.

And my follow-up question on spare engine sales, I think minus 60%. Have we lost these or will these come back when the situation normalizes? Maybe you can give us some sort of framework how to think about spare engine demand over the next couple of years. Thank you so much.

Andrew, we were ramping spares with both the LEAP 1A and the LEAP 1B as the narrowbody market was taking off. Typical early in the life of an engine activity. We are clearly seeing that soften, not necessarily going to zero as preparations are being made for the return to service of the MAX, right? I don't think that opportunity is lost, but I think like much of what we're seeing in aviation broadly, it will be pushed out for a few years. And again, I don't think we're taking a definitive view as to what year, what quarter things get back to, if you will, a normalized 2019 level, but we recognize the discussions out there about this being a multi-year recovery, gradual, slow recovery. I think we're embracing that reality, and that applies really across the portfolio, both on the OE side as well as the aftermarket, spares included.

Thank you very much for all the detail, and stay safe.

Thank you. From Belious Research, we have Scott Davis. Please go ahead.

Hey, good morning, guys, and welcome, Carolina.

Thank you.

Larry, any – good morning, Larry. Any way to think about the cost actions as it relates to kind of structural versus more kind of pandemic short-term related?

Sure. Well, I would say, Scott, as you well know, that when we're in a mode like this, you're moving as quickly as you possibly can. almost anywhere that you can. So if you look at what we've announced at aviation, the doubling of those activities today, the broadening across the company, if you look at the tally today, there is a decidedly short-term bias there that Carolina and I are going to be working with the CEOs over the coming weeks to transition to a more permanent action. If you look at What we did in aviation, for example, in terms of the temporary lack of works, that was a way to quickly adjust our cost structure in that business on a variable basis to these shockingly fast changes in demand. You might categorize that as temporary. We need to work through the changes on a more permanent basis that are required in light of the length of the recovery that we're looking at. We have confidence in these numbers that we're sharing today, the $2 billion of costs, the $3 billion of cash. There's a bit of a tactical bias today just given how fresh this is, but we will be leaning in toward making more of them permanent, recognizing that at the end of the day there will be a bit of a mix, be it headcount-related, discretionary spend on the cost side, in addition to some of the working capital, and certainly the CapEx reduction that Carolina referenced, the 25% reduction year on year. So a lot going on, and by no means is these headlines today the end. It's very much a work in progress.

Okay. That's helpful, Larry. And we think the $20 billion kind of came to you pretty much about perfect timing, but Does that money just sit on the balance sheet pretty much as is for the year, or is it just such a big number that you can start to parse some of it out, thinking in terms of whittling down some of the debt that you can manage?

Well, it did come at a good time. There's no question. That's why we put the emphasis in the biopharma setup on certainty. We want to take the market risk off the table relative to thinking through the healthcare options. Carolina, anything you want to add relative to managing liquidity versus leverage right here?

I think it's important to acknowledge that The world is different now compared to before COVID, and it's very important for us. Of course, leverage is important, but liquidity is very important. And we end the quarter with 47 billion cash, right? And that's really to cover 18 billion of D&G capital long-term debt maturities now through 21. And actually, after the April actions, we are down to 13 billion of maturities for 2021, almost all of that in capital. And I would also say, We expect to have around $20 billion in total credit lines going forward, and that's really in line with our risk appetite. We have the new $15 billion three-year RCF that I mentioned, and $5 billion will be on the $20 billion credit line. And I think we just said that we really intend to maintain a high level of cash, I would say, to maximize flexibility. And that's why we're taking these actions also to de-risk our balance sheet and basically prudently manage our liquidity in these very challenging external environmental time.

That makes sense. And thank you, and good luck to you guys.

Thank you.

Thanks, Scott. Be well.

And let's try Josh Borkers-Winsky again from Morgan Stanley. Please go ahead, sir.

Hi, guys. Can you hear me this time? Yes.

Yes.

Clearly, Josh, good morning. Awesome. And hope everyone is as well to echo earlier comments. Larry, can you just give us a sense, and I know you guys have data going back eons in aviation, how the impact of retirements and cannibalizations kind of make more of a U-shape versus what the air traffic may look like. Is there a natural lag between when folks start flying again and when shop visits can happen just as a function of kind of using up some of the run time on otherwise idled assets?

Well, Josh, certainly we have revisited the history. The team is well-versed in what we have seen in years past. I'm not sure we've seen anything kind of on par with this. But there's no question that there's going to be a bias on the part of some as some of these fleet reductions play out to retire some of the older aircraft and that will factor into the aftermarket, much like some of the dynamics around green time and how here in the short term folks try to preserve cash, carriers try to preserve cash in their business. So I'm not sure that there is necessarily an exact model that captures what all the carriers and aggregate are going to do here, a model that offers great precision. I think we do know that this that the combination of these factors is going to create pressure for us here in the short term. I think what's most important for our business really is cycles, much more so than revenue passenger miles. And as we see schedules come back, as we work our way through the pandemic, that will put us back on, I think, better footing. But here in the short term, I think we're acknowledging that we're going to see shop visits and CSA billings take on some real pressure due to the downturn.

Understood. Thanks. I'll leave it there.

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

Thanks, Josh. Hey, guys. Good morning.

Hey, Steve. Good morning.

In early March, you guys had that slide that showed $2 to $4 billion in free cash flow guidance, which is obviously off the table, but you also... talked about things growing in, you know, 21 and 22 and, you know, off that kind of $3 billion base. I think, you know, most research and numbers I saw were kind of in that, you know, $6 billion range of free cash flows, the kind of growth off of that level. Are we still, like, are the out-year numbers still at all legit or is that, you know, are you kind of withdrawing that long-term outlook as well?

Steve, I think we have admittedly been focused on taking the right actions, both the cost, the cash, the balance sheet actions here in the short term in the face of this unprecedented pandemic. We've taken guidance off for the year. We're not putting it back on today just given the undue uncertainty of it all, right? So I don't – I don't think we're trying to get out any further than that. I appreciate the question, but I think for purposes of today, we're really just trying to frame for folks what we're seeing. But that said, however long it takes us to work through this, I think we feel very good about our ability to come out stronger and get back on a positive cash flow growth trajectory. Got it. Carolina, anything else? you would add to that?

Well, no, I think it's important to acknowledge that by taking out costs now and part of it being structural, that gives us sort of, as well as mitigating the decrementals, that helps improving the incrementals. The outer years, I mean, that will depend on the recovery on the industries as well. So that's, I would say, what would be possible to speak to today.

Right, and I guess how much on that structural loss side? Yeah, go ahead.

Yeah, just one other point I think worth mentioning. I think what we're acknowledging here is that assistance played out in March and what we're seeing already in April. It really is hitting us from a mixed perspective hard. Our highest margin businesses are really feeling it here. I would think that on the recoveries, we would see it swing the other way. When we get back and come off a bottom, we should have positive mixed effect really across the board, particularly in aviation and healthcare. Your second question, Steve, is relative to the cost actions and how much permanent, how much not permanent?

Yeah, I know. I guess how much is that going to cost you? I mean, like, you know, to come up with $2 billion to $3 billion of cost in cash, you know, you've done – you cut your restructuring last year pretty significantly and you did a couple hundred million in the first quarter. I mean, most companies kind of one for one. How much is this stuff going to cost you this year on a cash basis?

Yeah, I think what we have said – previously we were going to be down off of last year from an expense and from a cash perspective. I think we're probably going to end up more or less in line, right? Keep in mind that some of the cost actions like furloughs don't carry a restructuring charge with that, right, because they aren't permanent. So part of what we're trying to do is squeeze out some of the temporary costs. But all the while, if we can – We can make more structural moves. We want to make sure we've got room to do that. But I'd say right now assume that it would be relatively flat year on year. But as Carolina indicated in her remarks, we want to try to do more if we can.

Great. All right. Thanks a lot. Best of luck, guys.

Thanks, Steve. From UBS, we have Marcus Mittermeier. Please go ahead.

Hi. Good morning, Larry, Carolina, and Steve. Let me maybe follow up on the... Marcus, good morning. Hey, good morning. Within the year, so in your 10Q, you referenced the YASA numbers of 48% RPK reduction. And I know, obviously, flight hours and RPKs are two different stories, but is that sort of a kind of scenario that you're playing through internally? And I'm just trying to get a sense what that would mean if we look at our sort of like 19... aviation cash as a baseline sort of like where, you know, on that type of scenario, we could end up particularly, you know, looking at sort of what you've mentioned in your prepared remarks that you have, I think, 62% of engines still ahead of shop visit one, which arguably are the engines that are on the narrow bodies coming back first because they're probably the youngest in the fleet. Just trying to get a sense for within the year how you're thinking about that.

Well, I think that given what we highlighted relative to the April experience and the near-term projection of that, there's no question that we're going to continue to see the pressure on cash at aviation that we've seen here of late. And that will be undoubtedly our biggest headwind.

No, sure, but, you know, we heard sort of the numbers that you said, but did you do sort of internal stress tests around where you could end up, or is that just something that you say is too early to comment?

No, no, no. There's plenty of planning for, again, an extended – slow down here. We're embracing this reality to the fullest extent possible. We are not expecting this to bounce back in the near term. So we flag in the queue the IATA numbers. We also reference others. You see it in our own departure data here in April, right? We are way down. That has a direct feed in the shop visits, CSA billings, and the like. So we're adapting to this new environment and confident that it will recover so we're marcus we're simply not trying to uh uh assume that the the pressure abates anytime soon witness the uh the cost and the cash actions that we're taking sure okay no i appreciate that and maybe as a follow-up quickly on on the capital side do you anticipate um

any change in the capital support there for insurance in particular? You referenced that a little bit in the prepared remarks. I think $2 billion is sort of the current number. How are you thinking about that at the moment?

On the parent support to capital and on the insurance, let's take a step back then. So in 19, the capital had an infusion from... GE of $4 billion, right? And the estimate for this year is $2 billion on insurance funding. And those $2 billion, you know, that's significantly lower than the year before. We estimated that the parent will need to support roughly in line with this. Some variables are still open, and that depends on GE Capital itself, right? The GE Capital earnings, the LR2s. the capital ending assets, liquidity levels, but basically it's about $2 billion as it looks now. And I would also say going forward, anticipating a follow-up, we do continue to anticipate further funding, and that will be, again, through a combination of GE Capital itself, with their asset sales, liquidity, and their future earnings, and on top of that, possible capital contributions from GE.

Thank you. From Cohen & Company, we have Gautam Khanna. Please go ahead.

Yeah, thank you. Good morning, guys. Good morning. Two questions. So at aviation, it sounds like you guys acknowledge that on the way up, the spares business, the aftermarket, the $15 billion commercial, aftermarket business will lag ASM growth because of, a younger fleet emerging, a surge of used serviceable material and the like, part outs, and obviously lower spares provisioning as the OE rates come down 30% to 50%. I guess the first question is, when do you anticipate aviation free cash flow getting to break even? Is it even possible before calendar 22 in that type of environment? And then I have a follow-up.

I'm not sure we would buy into the premise per se, right? I mean, we are a cycles business much more so than any other indicator, and those cycles are going to have to come back before the passengers do. As you indicated, the age of the fleet will help us over time. There could be some short-term headwinds. But we'll see how that plays out. I think what we're acknowledging here is that we've been hit from a free cash perspective in our biggest and best cash generator at aviation, but we're really not getting into much more in terms of the free cash generation forecast on a multi-year basis. It's just too soon. There's just too many moving pieces for us to be that forward-leaning at this point. We wish we could be. It's just not where we are.

Just to follow up, obviously 2020 is a tough year. We're going to have some cash burn. 2021, unclear, but certainly doesn't seem like in aviation we're going to have a strong recovery. Any So as we emerge from this, we're going to have more leverage. And I guess the question is, you guys have made some asset sales to deleverage. What else besides cost reduction can you do to get the balance sheet better faster? Is there any other things that you guys are exploring or that you might explore that's different than what you've done over the past year? Thank you.

Well, I'm not sure I would say that there's a lot that is – no, please, Carolina.

Well, I was going to say that to do things that we haven't done in the last couple of years.

Yeah, well, I would just say at a high level, we are committed to our deleveraging target of less than two and a half times on the industrial side. And I think you've seen us make a lot of progress year to date, which I hope underscores the seriousness of that objective, both on the GE side, right? I think it's $7 billion of debt reductions in the quarter, and that capital, I think it's up to $10 on a year-to-date basis, given some of the things we did in April. Clearly, it's going to take us a while longer here to hit those targets, like I suspect most companies But in terms of doing anything new or different, I think we're going to continue to try to run these businesses as best we can, be as disciplined as we can on the capital front, be smart and thoughtful relative to some of the other obligations like pension, as you've seen us, relative to the plan design and some of the settlement options. So I'm not sure they're necessarily new plays per se, but we'll continue to look at every and every option available to continue to strengthen the company, strengthen the balance sheet, bring those leverage levels down in the face of COVID-19. Carolina, I'm sorry, I jumped in there. Anything to add there?

I would just add to the leverage comment also the liquidity. At times like this, you do look at the liquidity, and I think it's important to say that we really want to maintain a high level of cash to maximize the flexibility. Okay. And you have seen the de-risking activities that we have made to sort of push out the debt in the further years. So we keep optionality.

Thank you.

Yeah. But I think to that, I mean, it's just important for us all to remember we ended the quarter with $47 billion of liquidity on the back of the biopharma action and some of the other things that we have done. So we'll continue to be nimble and flexible mindful of our obligations and our reality.

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

Hi, good morning. Maybe just a question. Good morning. Maybe just the first question around the working capital dynamics in the free cash flow at aviation. I guess there's a lot of industrial businesses where when you get this rapid sales downdraft, you get a working capital cash offset to an extent and then it reverses whenever the sales come back. Could you just update us on how you see the working capital cash impact at GE Aviation sort of in the early stages now in this downturn, what you would expect to happen to working capital when things recover? And if there's any major difference on the cash dynamics of the power by the hour type service relative to the ad hoc spares activity in aviation.

Yeah, with respect to working capital, I think our primary challenge is really inventory at aviation, right? We came into this year knowing we were going to have to adjust to a different schedule with the MAX, chasing the step up at Airbus with the 320neo, while dealing with a good bit of past due on the commercial side, both OE and aftermarket, while having pretty good military demand to contend with. That all gets reset here. And one of the real pressures we saw from a cash flow perspective was in inventory at aviation in the quarter. So that's where we're going to be most focused, trying to make sure that we reduce the delinquencies, adjust to the reduced production schedules, the lower aftermarket requirements, while continuing to take care of the military business So that's a complex supply chain undertaking, but the team, as you can imagine, is keenly focused on using some of the lean tools, working with our supply base to make sure that we not only take the cost out of the business, but bring those inventory levels down in light of current demand.

But should we expect – so I guess I understand – I'm sorry, Julian. Yeah.

The second part of your question, I may have missed that.

Yeah, so I was trying to understand, I guess, you know, in aviation you have the drop in EBITDA in a downturn and the recovery in EBITDA in the early part of the upturn. I was just trying to understand on works in capital, is that cash impact counter-cyclical or is it – pro-cyclical, so you're getting a working capital outflow through the downturn as well as the EBITDA decline.

I understand the high-level dynamic there that you're alluding to. I think right now the simple reality of aviation, given the pressures and the cross-currents, is that it is a negative and we need to work to improve it. How much of a tailwind could it be kind of at this point in the cycle? I think it's too early to tell. We've got to get on the improvement path first, Julian, to be able to take that potential and deliver it in the financials as a reality.

Thank you. And then my second question was just around the operational issues. So I think it sounds like the cost out tailwind should build through the year. But in Q1, you had some operational issues in power on the service side, you know, steep decrementals, even with the fixed cost down 16%. Renewables, the margins were down despite a big revenue increase. So I guess what's the conviction that operational inefficiencies will not swallow up a lot of these cost savings over the balance of the year?

Well, I think you have to take it business by business, right? If you look at what happened in power, clearly the push out by customers because of their own site restrictions and by us on the back of the travel restrictions, really pushed a lot of high-margin revenue out of the quarter and probably out of the first half. That was on top of some cost pressures of our own making, which we need to improve upon. But I think in power, I believe that the team is doing a very nice job working off the so-called inheritance taxes, driving real cost improvements. You see that in the headcount reductions here in the first quarter. And as we get to a more normalized service environment, I think you'll continue to see that turnaround continue to take flight. I think in renewables, Julian, it's a different dynamic. Yes, we had phenomenal revenue growth in the quarter, doubled the onshore revenue, turbine deliveries here in the U.S. Got a little bit better price, got about a point of price, which is encouraging to see, but it is by nature a very low gross margin business, so the growth isn't high calorie, unfortunately. We had a few, what we think are one-offs, but they're not one-offs until they go away permanently, cost and execution issues. All the while, the turnarounds in hydro and grid are I think, moving forward, but it's early days. And they have a number of inheritance taxes that will take a few years to work through. So I think the cost actions that we have talked about today will accelerate those turnarounds in power and renewables. They're dealing with different dynamics in the respective businesses. And that's really why I think I have the confidence to say that you should expect a detrimental margin sequentially to improve that the restructuring and the cost actions should present themselves in improved decrementals in the back half. But we've got work to do to make that happen. Great. Thank you.

From Wolf Research, we have Nigel Coey. Please go ahead. Thanks, Julian.

Thanks. Good morning, everyone. And Karina, great to see you on board. So look, we appreciate all the color in the slides and the additional color in the queue. So Larry, is it now a base case that industrial free cash flow will be negative and maybe just address the risk of significant cash burn this year? Or is there enough on the cost out and the working capital side to maybe mitigate some of that pressure and keep industrial free cash relatively steady?

I think what we're trying to share this morning, Nigel, is that probably three things. One, we've been hit hard and fast here, right, in some of our most important, highest margin businesses, be it aviation and services particularly, gas power services, PDX in health care. We think that that gets worse before it gets better, particularly here in the second quarter with a full effect. It's uncertain as to how things play out from here. We're going to acknowledge that uncertainty, hence the pulling of the guide, but we're not going to sit back and hope that it all passes. We're not going to take the view that we've got a sharp V-bounce coming hence the $2 billion of cost actions we've talked about and the $3 billion of cash actions. We're going to do everything we possibly can to control our destiny here without impairing the long-term value and the long-term trajectory of our company. So we're telling you what we know today. We wish we knew more, but that is really the state of play right now and the approach, the headset that we're taking to it.

Okay, I appreciate that, Larry. Thanks. And then, you know, I thought one of the real highlights of the quarter was the underlying strength of the healthcare margins, you know, even ex-biopharma, especially given some of the headwinds you're facing there. So we're seeing strength in small equipment and pressure in big iron. How does that mix look, though? When you look at the mix on smaller, you know, patient monitoring equipment, et cetera, versus the big iron, how does that equipment mix play out to the margins?

Well, we certainly, I think the key thing to keep in mind, Nigel, is the big iron certainly got hit. The lower ticket, the lower price points, be it patient monitors, ventilators, and the like, certainly got quite a boost. But it's a small part of of the business. So there was a little bit of mix there, but not a lot. It was really more a function, frankly, of the team doing a nice job more broadly, recognizing that absent biopharma, we needed to tend to the core cost structure in all its form in the HCS business. We've been growing health care BioPharma leading the way. We got some good margin support from that business the last several years. Well, now as we think about the $17 billion core, the teams really, I think, put their sights the last couple of quarters on growing that business, growing it with accretive margins, and it's really the cumulative effect that I think you see a bit here in the first quarter before we got hit. We got hit a little bit later, not as much, You'll see more of that, unfortunately, here in the second quarter. But I think you've got a team who thinks that, like many other MedTech companies, they can grow low to mid-single digits over time and put more digital into the mix. Better costs, that should give us the opportunity to grow with accretive margins along the lines of what Karen laid out in December. And I have no less conviction about their ability to do that today than we did when we made that presentation today. Again, mindful that we've got some gyrations here in the near term to deal with.

Right. Okay, thanks, Larry. Good luck.

Thanks, Nigel. Hey, Brandon, we are at the bottom of the hour. So, Brandon, we're at the bottom of the hour, so we can just take one more question.

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

Thank you. Good morning, everyone. Wishing everyone good health and add my welcome to Carolina.

Thank you.

Good morning, Dean. Good morning. Just two questions, both aviation. A lot of discussion about structural cost out. And, Larry, be interested in how have you balanced the structural cost out in aviation with RIFs and balancing the RIFs and furloughs versus how you might be compromising the ability to bounce back when it does ramp back up. So that's the first question. And then the second one, just to make sure I heard it correctly, did you quantify the leap cancellations in the quarter? I know there's delivery deferrals. Our experience in 2008 was that you did not see many outright engine cancellations because customers would lose that nonrefundable deposit. So what's the expectation here in terms of engine cancellations? That's it for me. Thank you.

Dean, maybe I'll take the first part of that and perhaps Carolina can take the second. I think we are mindful, ever mindful, that there will be a recovery, right? And we want to be well positioned for it because it's going to be very good business for GE for four decades. But I think we are really trying to, again, embrace our reality and take the the cost actions in the aftermarket business, and more broadly at aviation, mindful that we've got a period of time here of an unknown duration, but it's not going to be measured in months, right, where that business is going to be under considerable pressure. So after a period of time as the aftermarket has grown as it has the last decade, this is going to give us an opportunity to rethink, to consolidate, all the while mindful of our obligations to customers, the nature of how the footprint has changed, the changes that are probably still coming. So there are a number of variables. It's very much a work in progress as well, but I think we've got line of sight to build on some of the temporary action to take permanent action to make sure that we have a lean cost structure with adequate capacity to come out of the downturn here, well-positioned to perform both for customers and for investors.

Thank you. We'll now turn it back to Steve Winokur for closing remarks.

Do you want me to answer the question on the second question?

Go ahead, Carolina. Go ahead, Carolina.

Yeah, you were right, because I actually mentioned that in my notes there, that in our backlog, which was flat sequentially and at 22% versus prior year, that did include roughly 200 Loop 1B unit order cancellations in the quarter. I would say the progress refunds are very small so far. But on top of that, we also saw GCAS, right? So we have GCAS cancellation of 69 aircraft in April. So that will be reflected in the second quarter aviation backlog.

Great. Thanks, everybody. I know it's a long call and a busy day, so if you need more, just reach out to us, and best of luck.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for joining, and you may now disconnect.