GE Aerospace

Good day, ladies and gentlemen, and welcome to the General Electric third quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. My name is John, 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 the conference coordinator will be happy to assist you. If you experience issues with the slides refreshing or there appears to be delays in the slides advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference call is being recorded. And 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, John. Welcome to GE's third 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 may change as the world changes. With that, I'll hand the call over to Larry.

Steve, thanks, and good morning, everyone. Our team delivered another strong quarter as orders, margins, and cash improved. While the aviation market is showing continued signs of recovery and contributed to the quarter, our focus on continuous improvement and lean is driving broader operational and financial progress. At the same time, we're managing through significant challenges that we'll discuss further today. Starting with the numbers on slide two, orders were robust, up 42 percent, with growth in all segments in both services and equipment, reflecting continued demand for our technology and solutions and better commercial execution. Industrial revenue was mixed. We saw continued strength in services, up 7 percent organically. Aviation improved significantly, benefiting from the market recovery. Equipment was down 9% organically, largely due to supply chain disruptions, the Ford ventilator comparison in healthcare, and as expected, lower power equipment. Adjusted industrial margin expanded 270 basis points organically, largely driven by operational improvement in many of our businesses, growth in higher margin services at aviation and power, and net restructuring benefits. Adjusted EPS was up significantly, driven by industrial. Industrial free cash flow was up $1.8 billion, ex-discontinued factoring programs, due to better earnings, working capital, and the short-term favorable timing impact of aircraft delivery delays. Overall, I'm encouraged by our performance, especially at aviation. Let me share what gives us confidence there. First, Our results reflect a significant improvement in near-term market fundamentals. Departure trends are better than the August dip and have recovered to down 23% of 19 levels. We expect this acceleration in traffic to continue as travel restrictions lift and vaccination rates increase. Our results also reflect operating improvements. For example, at aviation's overhaul shops, our teams have used lean to increase turnaround time by nearly 10% and decreased shop inventory levels by 15% since the fourth quarter of 2020. These improvements are enabling us to get engines back to customers faster and at a lower cost. No business is better positioned than GE Aviation to support our customers through the coming up cycle. We're ready with the industry's largest and youngest fleet while we continue to invest for the next generation with lower carbon technologies such as the CFM Rise program. This platform will generate value for decades to come. We're also clearly navigating headwinds as we close this year and look to 2022. We're feeling the impact of supply chain disruptions in many of our businesses with the largest impact to date in healthcare. Based on broader industry trends, we expect company-wide pressure to continue at least into the first half of next year. Our teams are working diligently to increase supply by activating dual sources, qualifying alternative parts, redesigning and requalifying product configurations, and expanding factory capacity. We're also focused on margins as we deploy lean to decrease inventory and costs, as well as implement appropriate pricing actions and to reduce select discounts. Our CT team in Japan, for example, has been experiencing higher customer demand, so we're making our production even more efficient to help offset the challenge of delayed inputs. The team used value stream mapping, standard work, and quarterly Kaizens to reduce production lead time once parts were received by more than 40% from a year ago. And there's a line of 20% to another 25% reduction by the end of the year. While this is a single example within health care, taken together with other efforts and over time, these add up. Renewables were encouraged by the U.S. administration's commitment to offshore wind development. However, in onshore wind, the pending U.S. production tax credit extension is creating uncertainty for customers and causing much less U.S. market activity in preparation for 2022. As we've shared, a blanket extension while a well-intended policy has the unintended consequence of pushing out investment decisions. In our business, given the lag between orders and revenue, the impact will continue through the fourth quarter and into 22. This environment, along with inflation headwinds picking up next year, makes renewables ongoing work to improve cost productivity even more urgent. Given these puts and takes, we now expect revenue to be about flat for the year, driven by changes to some of our business outlooks, which Carolina will cover in a moment. Importantly, even with lower revenue, we're raising our margin and EPS expectations underscoring improved profitability and services growth, and reflecting our strengthened operations. And we're narrowing our free cash flow range around the existing midpoint. Looking further out to next year, as our businesses continue to strengthen, we expect revenue growth, margin expansion, and higher free cash flow, despite the pressures that we're managing through currently. We'll provide more detail, as usual, during our fourth quarter earnings and outlook calls. Moving on to slide three. Challenges aside, our performance reflects the continued progress in our journey to become a more focused, simpler, stronger high-tech industrial. The GCAS and AIRCAP combination is a tremendous catalyst, enabling us to focus on our industrial core and accelerate our deleveraging plan. Just last week, GE and AIRCAP satisfied all regulatory clearances for the GCAS transaction, and we're now targeting to close November the 1st. We'll use the proceeds to further reduce debt, which we now expect to reach approximately $75 billion since the end of 2018. This is enabling GE to look longer term, even as we execute our deleveraging. As we accelerate our transformation, lean and decentralization are key to improving operational results. This quarter, we hosted our Global Kaizen Week in each of our businesses, with over 1,600 employees participating. John Slattery, the CEO at GE Aviation, and I joined our military team in Lynn, Massachusetts for the full week, while our business CEOs joined their teams across the globe. Lean is fundamentally about going to Gemba, where the real work is done, and is best learned in operations where you can see it, touch it, smell it firsthand. And in Lynn, we were there to serve those closest to the work, our operators. Our mission was to improve first-time yield on midframes, a key sub-assembly of the military engines we produce in Lynn, whose stubborn variability has been directly and negatively impacting our on-time delivery. By the end of the week, we had improved processes for welding and quality checks on midframe parts. Improvements that we're convinced will help us reach our goals for military on-time delivery by the middle of next year, if not earlier. And we can improve our performance on the back of these changes for years to come. There are countless other examples of how our teams are leveraging lean to drive sustainable, impactful improvements in safety, quality, delivery, cost, and cash. They reflect how we're rating GE better and how we're sustaining these efforts to drive operational progress and lasting cultural change. Our significant progress on deleveraging and operational execution sets us up well to play offense in the future. Our first priority, of course, is organic growth. This starts with improving our team's abilities to market, sell, and service the products we have. There are many recent wins across GE this quarter, but to highlight one, our gas power team delivered, installed, and commissioned four TM2500 aeroderivative gas turbines in only 42 days to complement renewable power generation for California's Department of Water Resources during peak demand seasons. These turbines, using jet engine technology adapted for industrial and utility power generation, start and ramp in just minutes, providing rapid and reliable intermittent power, helping enhance the flexibility and sustainability of California's grid. And we're bolstering our offerings with innovative new technology that serves our customers and leads our industries forward. For example, at Renewables, our Hollyod X offshore wind turbine prototype operating in the Netherlands set an industry record by operating at 14 megawatts, more output than has ever been produced by any wind turbine. From time to time, we'll augment our organic efforts with inorganic investments. Our recently announced acquisition of BK Medical represents a step forward as we advance our mission of precision healthcare. Bringing BK's intraoperative ultrasound technology together with the pre- and post-operative capabilities in our ultrasound business creates a compelling customer offering across the full continuum of care, from diagnostics through surgical and therapeutic interventions as well as patient monitoring. Not only does BK expand our high-performing $3 billion ultrasound business, but it also is growing rapidly with attractive margins itself. We expect the transaction to close in 22, and I'm looking forward to welcoming the BK team to GE. All told, we hope that you see that GE is operating from a position of strength today. We delivered another strong quarter, and we're playing more offense, which will only accelerate over time. We're excited about the opportunities ahead to drive long-term growth and value. So with that, I'll turn it over to Carolina, who will provide further insights on the quarter.