GE Aerospace

Good morning, and welcome to the third quarter 2020 General Electric Company earnings conference call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, during which you can dial star 1 if you have a question. Please note this conference is being recorded, and I will now turn it over to Steve Winokur. You may begin, sir.

Thanks, Brandon. Good morning, and welcome to GE's third 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 filing and on our website, these elements can change as the world changes. With that, I'll hand the call over to Larry.

Steve, thank you. Good to be here with you and Carolina. in the same room for an earnings call for the very first time. Good morning, everyone. I'm encouraged by our progress in the third quarter. Despite the ongoing effects of the COVID-19 pandemic on our year-to-date results, we're building momentum across GE. Our top line remains pressured, but our actions are driving an improved profitability and cash performance. In the quarter, industrial revenue was down 12% organically. This was largely driven by aviation, as healthcare, renewables, and power were all up. Industrial margin was 5.6% and organic contraction of 310 basis points year-over-year. Notably, all segments returned to positive territory for the first time in two years. Adjusted EPS was 6 cents down year-over-year, but up sequentially. And industrial free cash flow came in at a positive $500 million. Our sequential improvement was largely driven by better working capital and earning. While positive and a good sign, we have plenty more work to do here. Let me focus on orders down 28% organically for a moment. Over 75% of this pressure was driven by aviation, as well as part of healthcare, the places hit hardest by the pandemic. In power and renewables, some pressure results from our actions to be more selective in our commercial activities, and some is timing. where we should see stronger conversion in the fourth quarter. Despite this, our backlog remains a real strength at $384 billion. 80% is in services where we enjoy healthy margins. And while services are hurting in the near term, they have a long multi-year time horizon and keep us close to our customers. By business, at Aviation and GCAS, we're managing these businesses aggressively and saw sequential improvement. Aviation is on track to deliver more than a billion dollars of cost and $2 billion of cash action this year. In healthcare, we delivered strong margin and cash performance. While pandemic-related demand has moderated, we saw scan data and EDX orders approach pre-pandemic levels. We continue to see CapEx pressure in private health care markets, and we're planning cautiously there. As you'll recall, power and renewables were our turnaround stories at the start of the year. Improved operational discipline and cost-out actions are starting to show. In the quarter, both delivered solid organic margin expansion, power more than 700 basis points, renewables more than 200. So clearly, our markets are, by and large, stabilizing. But to underscore the obvious, stability is not yet recovery. We still acknowledge that the full duration, magnitude, and pace of this pandemic across our end markets, operations, and supply chain is uncertain. That said, based on what we see today and the actions we've taken, we expect fourth quarter industrial free cash flow of at least $2.5 billion, with positive contributions from all segments. But how much more really depends on how aviation fares through the quarter. And importantly, the momentum we're building should help us deliver positive industrial free cash flow in 2021. Moving to slide three. From day one, we've known this would be a game of inches. This is still true today. We're focused on three areas where we're making real progress. First, we're continuing to strengthen the businesses. As a team, we've been engaged on what matters most, the safety of our employees, taking care of our customers and communities, and accelerating our lean transformation. At the same time, we're focusing on what we can control in the near term, driving better operational execution and further optimizing our cost structure. Our more than $2 billion of cost and $3 billion of cash actions started to play out in the quarter, now 75% complete, with our decremental margins, for example, improving sequentially from 44% to 32%. Second, we're solidifying our financial positions. Since the beginning of 2019, we've decreased debt by $25 billion. We continue to maintain strong liquidity and flexibility, exiting the third quarter with $39 billion of cash. Carolina will provide more details in a moment. And third, we're driving long-term profitable growth, even in the current environment. Lean continues to be the strongest common denominator across GE, and this is what builds the foundation for sustainable growth. We're picking up the pace, deploying lean to drive safety, quality, delivery, and cost improvement in terms of both productivity and cash generation. For example, this quarter we held our second Lean Week event virtually at Gas Power with more than 1,000 participants across 10 countries in function. We identified dozens of delivery and cost improvement opportunities. We're also continuing our efforts to run GE differently, moving the center of gravity closer to where the action is. We talk about GE as four industrial segments, but we drive operational improvement at much deeper levels within the organization. You'll recall that we split gas power and power portfolio within the power segment. This is working well for us. We're now simplifying other segments in similar ways to enhance visibility and raise accountability. For example, we're changing the way we manage P&Ls within healthcare systems, ranging from LCF to MR to ultrasound, where we are integrating production and product management to improve delivery. Similarly, we're now transitioning grid from one to six operating P&Ls. Importantly, this is not only a cost-out initiative, but a way to ensure we're using the right processes, tools, and resources to improve execution. This quarter, we held strategy reviews with each business, planning for the long term. These discussions focus on how we put ourselves on the best possible footing to play offense, how we win with our customers and for our shareholders. What was evident is that our businesses are focusing. They're setting more impactful objectives designed to deliver profitable growth. Examples include ensuring our gas turbines remain competitive at the top of the power dispatch curve, as well as launching next-generation software platforms in our healthcare imaging businesses. The quality of our strategic thinking was much improved versus a year ago. Now we have to execute. So let's get into the details on the COVID-19 dynamics at both GE Aviation and GCaTS. On slide four, you'll see GE CFM departures, which drives our service business much more so than RPKs. As a reminder, we track departures by region and by platform daily. With the third quarter overlapping with much of the summer travel season in the northern hemisphere, we saw GE CFM power departures generally improve. We've seen this plateau to down 40% in October versus our January baseline as we exit these typically higher traffic months. We expect the market recovery will continue to be correlated with departure trends across regions and fleets. China's departure levels are just below the January baseline, and we're watching load factors there carefully. The Americas have remained relatively flat through the quarter, but have shown some improvement in October versus July. In Europe, some improvement in July and August has reversed in September and October. In aggregate, the near-term outlook remains quite fluid. And while there's been improvement from the April lows, we're now seeing stabilization at current levels. At GE Aviation, our military business remains resilient, but commercial aviation is clearly challenged. Under our new CEO, John Flattery's leadership, we're progressing on the difficult actions to scale this business for the new market reality. Notably, these actions drove the sequential cash improvement in the quarter. Looking at these trends, we're seeing through October, commercial shipments and shop visits are still down 50% year over year. Services are critical to the recovery of aviation as we generate much of our cash here, especially within narrowbodies, which are more than 40% of our historical revenues. We typically have good line of sight into demand about six weeks out at our internal jobs, but we have less visibility into external shop visits. We're working with our customers to forecast shop visits as utilization recovers, supporting our operations and supply chain. We made an important organizational move in aviation services with Russell Stokes returning to aviation as CEO of that business. Russell will lead our aviation services business in a new role, integrating both our commercial and operations team. Shifting to GCAS, similar to aviation, our performance continues to be correlated with the market. As we said last quarter, 80% of our customers have requested deferrals, and we've approved about 60% of those. At the end of the third quarter, this deferral balance was approximately $400 million, and importantly, we've collected about 85% of what we've invoiced thus far. We ended the quarter with 29 aircraft on the ground, up 17, up from 17 in the second quarter, out of a fleet of more than 950. We're actively working customer by customer through restructurings and in some cases repossession. And our commercial team is remarketing aircraft. We're also taking action to navigate through this volatility. Let me share with you two examples. We announced Kalita Air, who operate a 37 aircraft fleet, as the launch operator on our 777 passenger-to-freighter cargo conversion program, which features the GE90-powered largest-ever twin-engine freighter. We've partnered before, and we're teaming up again this time with PIMCO to launch a $3 billion venture that provides airlines with financing to help upgrade their fleets at a critical time. This venture also enables us to acquire new and young fuel-efficient aircraft so we can continue providing our customers with the aircraft they need. We continue to plan for a steep market decline through the fourth quarter and a likely multi-year recovery. Long-term, the aviation market has solid fundamentals and we're committed to a safe return to flight post COVID. We're working with our customers and industry partners to ensure engineering and operational readiness. With that, Carolina will provide further insights on the quarter.