GE Aerospace

Good day, ladies and gentlemen, and welcome to the General Electric Second Quarter 2021 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 device 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 Relations. Please proceed.

Thanks, Brandon. Welcome to GE's second quarter 2021 earnings call. I'm joined by Chairman and CEO Larry Culp and CFO Carolina Dybeck-Hoppe. 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, and good morning, everyone. Overall, we delivered a strong second quarter and first half performance, and we're encouraged by the early signs of the recovery. Looking at the numbers on slide two, recall that the second quarter of 2020 was challenging as we navigated the full negative effects of the pandemic. While we recognize that many are still facing continued challenges with new COVID spikes and variants, we're seeing our businesses return to growth this quarter. Orders were up 30% organically, with growth across all segments, and services were up 50%. Industrial revenue grew in three of our four segments. We saw strength in healthcare and in services overall. In healthcare and renewables in total, as well as in power services, revenue was back to levels similar or better to 2019. Notably, aviation commercial services were up substantially as we're beginning to benefit from the market recovery. Our adjusted industrial margin expanded 1,000 basis points organically with year-over-year expansion across all segments and sequential expansion in all segments except aviation, where we took a non-cash charge largely related to one customer contract. We expect aviation margins to expand for the rest of 21. Carolina will cover this in more detail later. Adjusted EPS was up significantly with all segments contributing. Industrial free cash flow was up $2 billion, ex-discontinued factoring programs, primarily driven by improved earnings and working capital. We're encouraged by our second quarter cash performance, and we're raising our full-year industrial free cash flow outlook to $3.5 to $5 billion, while our outlook for organic revenue growth, margin expansion, and adjusted EPS remains unchanged. I'll take a moment here to speak to the dynamics at Aviation. Market fundamentals are improving. There was a sizable uptick in departures this quarter with even greater momentum in June and July. Unsurprisingly, departure trends continue to vary by region. North America continues to improve, with Canada now picking up the pace. Europe has accelerated with departures now 40% below 19 levels. China dipped down to 6% below 19 levels due to increased COVID cases and government restrictions, while Asia Pacific, ex-China, has been more tepid due to border closures and the spreading COVID variant. Importantly, though, about two-thirds of our CFM departures are concentrated in regions with improved trends. We're seeing a stronger recovery in narrowbody fleets versus widebodies, and freight continues to outperform passenger traffic. While green time utilization continues to impact us, we expect this to lessen in the second half. Shop visit volume and scope improve slightly sequentially. We anticipate continuing sequential volume growth and scope expansion through the year. Looking ahead, we're still expecting 21 departures to be up about 20% year-over-year and down 30% versus 2019, with customer behavior driving departure and shop visit trends. I'm confident in our path to recovery in aviation. We're using lean to improve our operations and our cost structure. And no business is better positioned than GE Aviation to support our customers through the up cycle. With the largest and youngest engine platform with more than 37,000 commercial engines and more than 60% of our fleet not yet having a second shop visit, our platform will generate value for decades to come. Overall, we're building momentum across GE, evidenced by the significant margin expansion and positive free cash flow this quarter. And importantly, we continue to believe the improvements underway are built on stronger fundamentals and thus are sustainable. Turning to slide three, we're making tremendous progress in our journey to become a more focused, simpler, stronger high-tech industrial. This quarter, the GCAS and AIRCAP combination achieved some key milestones. AIRCAP shareholders approved the transaction. The U.S. Department of Justice concluded its review. And yesterday, the European Commission cleared the transaction. We expect to close by year-end. Broadly speaking, this combination serves as a significant catalyst, enabling us to focus more time, talent, and capital on our four core industrial franchises, aviation, healthcare, renewables, and power. It also allows us to accelerate our deleveraging plan. With our actions post-closing, our gross debt reduction will be more than $70 billion since the end of 2018. At the same time, we've been strengthening our operational foundation. This starts, of course, with the team. We've implemented new learning and development programs, such as Leadership in Action in our business and frontline leadership courses, to equip GE leaders at all levels to drive our lean transformation. This quarter, we also made some leadership changes that complement our existing bench of GE talent. First is the retirement of Karen Murphy, who will be stepping down as President and CEO of GE Healthcare at the end of the year. Over his high impact 30 plus year career, Kieran has embodied candor and transparency and consistently delivered for our customers. I'm excited to welcome Pete Arduini who will join us from Integral Life Sciences where he served as CEO for almost a decade. Earlier in his career, Pete in fact worked at GE Healthcare for nearly 15 years. Pete's proven track record of driving growth across complex businesses combined with his respected leadership style makes him well-suited to lead the important work in GE Healthcare. Second is the retirement of Offshore Wind CEO John Lavelle after a 40-year career with GE. John has positioned the business for success, leading the GE team that will help install the first large-scale U.S. offshore wind farm. We're excited to appoint Jan Karisgaard as the new CEO With Jan's prior industry experience, he's well prepared to lead our offshore business to $3 billion in revenue by 2024. We also promoted Scott Strasick from Gas Power CEO to CEO of all of GE Power. Scott and his team, which now includes Valerie Margolet, who was recently appointed as Steam Power CEO, will continue to run Power as four discrete business units, managing from the bottom up. Our GE team has been at the heart of driving our transformation forward, building momentum through lean and embracing a more decentralized business model. This quarter, it was good. It was really good to spend more time with our teams, where I saw and heard countless Kaizen examples, and more broadly, how lean is being used to improve safety, quality, delivery, and cost across GE. One example that stood out was from offshore wind, where we have a global presence across 35 countries. In the first half of 21, through good lean problem solving and daily management, we realized about $150 million of year-over-year savings in sourcing and logistics, as well as through better execution on installation and commissioning cycle times. Now, decentralization goes hand in hand with lean. This means managing not only the four industrial segments we report, but the nearly 30 business units under them. In our operating reviews, I continue to see how our teams are managing our operating P&Ls at a more granular level. We're having more meaningful operating reviews and, in turn, driving actions across high-impact and high-priority opportunities. This stronger foundation is enabling us to play more offense. The first priority, of course, is organic growth. We're improving our team's abilities to market, sell, and service the products we have today. There are many recent wins across GE, but let me highlight two. At Aviation, CFM secured a new agreement with Indigo to provide 620 of our fuel-efficient LEAP 1A engines with a multi-year service contract. This is one of the largest deals in CFM's history. At Renewables, we finalized the contracts for the world's largest offshore wind farm, Dogger Bank. In the third installment, we'll supply 87 Hollyadex turbines, the most powerful offshore wind turbine built today. We're also bolstering our offerings with new product introductions and future tech innovation to serve our customers and lead our industries into the future. At Healthcare, for example, we launched Acceleris V, an AI-enabled virtual radiology solution that provides simplified workflows, better data access, and more time with patients. At Power, we're supporting Australia's energy transition with plans to supply a 9F.05 gas turbine capable of operating with a blend of hydrogen and natural gas at the Tolowara B Power Station. This adds to our experience on more than 75 gas turbines worldwide using hydrogen and associated fuels for power generation. From time to time, we'll augment our organic efforts with inorganic investments. Take Xyanexa, a recent healthcare acquisition whose molecular imaging agent aims to provide more targeted treatment for metastatic breast cancer patients. Xyanexa further demonstrates our commitment to precision health, enabling more personalized diagnosis, improved treatment and decision making, and ultimately better clinical outcomes. All in all, our transformation is accelerating. We're fortifying our competitive positions globally and unlocking further upside potential and profitable growth in cash generation. With that, Carolina will provide further insights on the quarter.