GE Aerospace

Good day, ladies and gentlemen, and welcome to the General Electric second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. My name is Brandon, and I'll be your conference coordinator today. If at any time during the call you require assistance, please press star followed by zero, and a conference coordinator will be happy to assist you. If you experience issues with the slides refreshing or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Steve Winokur, Vice President of Investor Communications. Please proceed.

Thanks, Brandon. Good morning and welcome to GE's second quarter 2020 earnings call. I'm joined by our Chairman and CEO, Larry Culp, and CFO, Carolina Divex-Happa. Before we start, I'd like to remind you that the press release and presentation are available on our websites. 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. We, like many others, had a challenging second quarter that the GE team met head-on. executing well operationally while we took actions to further de-risk our company. I want to thank all of my GE colleagues who are working tirelessly to serve our customers, our communities, and our company. Now, as we expected, our financial performance declined across the board in the quarter. The sharp deceleration caused by COVID-19 that we experienced in March continued through May. But we started to see some early signs of improvement in June and July. Nonetheless, we remain cautious going into the second half given the uncertainty associated with the pandemic. Now taking our second quarter results by business, at aviation and GCAS, many of the drivers we saw in March, airlines conserving cash, not flying the planes they have, limiting maintenance spend, and deferring orders are still relevant today. We're aggressively managing these businesses with cost and cash actions, and partnering closely with our customers on a daily basis. I'll provide more color on this shortly. In healthcare, we continue to have elevated demand for COVID-19 related products. However, procedure deferrals are still affecting other products, including those in our high margin pharmaceutical diagnostics business. Despite these volume and mixed pressures, our team held margins flat in the quarter. In power and renewables, outages pushed from the first to the second half and field mobility constraints impacted projects. To offset those pressures, we continue to improve the cost structures of these businesses. Carolina will discuss these segment results in detail later. With this backdrop, we saw revenue down 20% organically due to lower volume across all businesses. Recall that some of our shorter cycles higher margin businesses, like services and aviation and gas power, as well as healthcare, are more heavily impacted by COVID-19. Combined, their revenue is down three times that of the rest of GE Industrial. Despite this, our backlog remains a great strength at $381 billion, with about 80% in services. While services are hurting in the near term, they have a multi-year time horizon and keep us very close to our customers. Industrial margin was negative, and decremental margins were 44%. Our adjusted EPS was a negative 15 cents down significantly year over year. This was largely driven by lower volume at our shorter cycle higher margin businesses and impairment charges related to COVID-19 at aviation and GCAS. And industrial free cash flow came in above the guide we provided in May at a negative $2.1 billion. Better, but obviously still negative. This was largely driven by working capital improvement, primarily led by better than expected collections across the company. While this reflects improved operational execution, we have plenty more work to be the lean company we want to be. So clearly, this was a tough quarter. And the COVID-19 dynamics continue to evolve with global cases rising. We acknowledge that the full duration, magnitude and pace of this pandemic across our end markets, operations and supply chains is still unknown. The macroeconomic environment could deteriorate further before it recovers. That said, based on what we see today and the actions we've taken, sequential improvement in earnings and cash in the second half of 2020 is achievable. And we expect a return to positive industrial free cash flow in 2021. Moving to slide three, we're focused on what we can control in the near term while positioning the business for the long term. Importantly, the near term still starts with our COVID-19 response. Our top priorities remain the safety of our employees and our communities, serving our customers in these critical moments, and preserving our strengths. Here's how we're operating today in three core steps. First, embracing reality. The current environment is what it is. So we're further optimizing our cost structure, and as mentioned before, we're targeting more than $2 billion of cost actions and $3 million of cash actions this year. Second, redefining winning. For example, we've shifted our focus from margin expansion to decremental margin improvement. Our businesses also adjusted their priorities for 2020. Let me share a recent case that spans healthcare and aviation and illustrates the point well. Our team stood up patient care monitor production at our power and avionics manufacturing facility in Cheltenham. They use lean to deliver 300 units per week with quality and efficiency, achieving the necessary 13-minute average production time. This certainly wasn't on healthcare or aviation's priority list at the beginning of the year, but it's a priority today and a job well done. Third, we're executing our plan. We haven't lost sight of accelerating our transformation. For example, in gas power, the team is leveraging lean problem solving. in the new production introduction process for the third generation of the HA turbine, the 7HA.03. This allows us to drive efficiencies and solve potential problems earlier than ever, focusing on both the present and the future. This quarter, we also announced some important changes to our team, complementing our strong existing bench of GE talent. First is the retirement of GE Vice Chairman and Aviation President and CEO David Joyce. Over David's remarkable career, his leadership established GE Aviation as the world's foremost aircraft engine franchise. I personally thank him for his 40 years of service to our company. It was not easy to find a worthy successor to David, but I'm very excited to welcome John Slattery, a proven leader with extensive global commercial aviation experience, to our team. Pat Byrne, who recently celebrated one year with GE as our Digital CEO, was recently named Vice President of Lean Transformation. Additionally, two GE veterans were appointed to key leadership roles. Nancy Anderson was named Chief Information Officer, and Mike Barber was appointed Chief Diversity Officer, as we take steps to drive further inclusion and diversity. To support that effort, we've also named diversity officers across all of our businesses, in addition to Mike, to drive that accountability. Together, these leaders, both those new and those well-known to GE, will play critical roles in GE's operational and cultural transformation. In terms of de-risking the balance sheet, we prioritize maintaining liquidity in this environment, exiting the quarter with $41 billion of cash. We also proactively extended near-term maturities, and we continue to reduce debt. Since the beginning of last year, we've reduced debt by $22 billion. Concurrent with today's earnings, we're launching a program to fully monetize our Baker Hughes position over approximately the next three years. Executing this program in a patient and disciplined manner allows us to divest a substantial non-core asset, redeploy capital, enhance our financial flexibility, and strengthen our balance sheet. We also continue to focus our portfolio, recently completing the sale of GE Lighting. Now I'll give you a deeper dive on GE Aviation and GCAS, given the severity of COVID-19's impact on commercial aviation. On the left side of slide four, you'll see departures, which drives our services business much more so than RPKs. We track departures by region and by platform daily, and what we're seeing in July suggests continued improvement globally. GE and CFM traffic has rebounded off of a low of down 76% in April from the January baseline to down 43% in July. While we're seeing some improvement in aggregate, it varies by region as countries reopen. China has gone from being down over 70% to now being down 9%, which is obviously encouraging. In contrast, Europe is down 45% and has been rebounding since the beginning of July. The Americas are also down 45%, and we're getting better until very recently. This recovery will continue to be correlated with departure trends across global fleets and per aircraft, which ultimately impact the pace of shop visit growth. If we look at GE Aviation and the trends we're seeing through July, commercial units are down 50% year-on-year. In services, shop visits are down 55%, and CSA billings are down 60%. Services are critical to the recovery of GE Aviation as we generate a lot of cash here, especially within narrowbodies, which are more than 40% of our revenue. On the other hand, our military business remains strong, with unit growth up 10% year over year. Our teams are not standing still, carrying half of the $2 billion in cost reductions and two-thirds of the $3 billion of cash actions for all of GE. This has improved incremental margins slightly with further progress expected in the second half. Shifting to GCAS, similar to our peers, we continue to see elevated deferral requests from about 80% of our customers. To date, we've granted approximately 60% of short-term deferrals based on a thorough review process. Importantly, we're starting to see customers pay on these deferral plans. At quarter end, we had 17 aircraft on the ground. We have a daily operational dashboard that allows us to closely monitor developments, ensuring that customer by customer, we have line of sight on where we may have repossession or restructuring exposure. We're also actively managing our skyline to better align with customer demand and the airframers' production schedules. Our GCAS portfolio is also more diverse today than prior downturns. While approximately 60% of our fleet exposure is in narrowbody aircraft, our widebody aircraft make up less than 30%. and the remaining balances in regional jets and cargo. The wide body asset class has been hit hard during the pandemic, but we're being strategic around future placements and programs like cargo conversion help extend the life of these aircraft. For example, we recently delivered a prototype to Israel Aerospace as part of a partnership to convert 15 of their 777 passenger jets to cargo. We're planning for a steep market decline this year, and likely a slow multi-year recovery. Long-term, though, the aviation market has solid fundamentals, and we're committed to protecting the future of this business and our leadership position within the industry. And with that, I'll pass it to Carolina.