GE Aerospace

Good day, ladies and gentlemen, and welcome to the fourth quarter 2021 General Electric Company 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 requesting or there appears to be delays in this 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 fourth quarter 2021 earnings call. I'm joined by Chairman and CEO Larry Culp and CFO Carolina Dyback-Hoppe. Keep in mind that some of the statements we're making are forward-looking and 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. Note that we plan to hold an investor event on March 10th in Greenville, South Carolina at our power and aviation plants to provide more in our 2022 outlook with an up-close look at our lean progress and innovation. We're covering a lot of ground today with the quarter, the year, our reporting changes, and outlook. so we will run a little long. Appreciate your patience, and we'll still make time at the end for Q&A. One quick note. I've been getting a number of questions this morning on the changes we're making and the relevance to consensus. Consensus is not comparable to our current numbers, given the changes we're about to walk through, most notably insurance, which was about 40 cents So with that, I'll hand the call over to Larry.

Steve, thank you, and good morning, everyone. 2021 was an important year for GE. We successfully navigated a dynamic environment, delivering solid margin expansion, EPS growth, and free cash flow. We focused our portfolio, significantly reduced debt, and strengthened our operating performance through lean and decentralization. We've remained on track to achieve our long-term financial goals, and we're confident about where we stand today and where we're headed. We enter 2022 with strength from this continued strategic, operational, and financial progress, thanks to the dedication and resilience of the entire GE team. We're seeing real opportunities for sustainable, profitable growth from near-term improvements in our businesses, especially as aviation recovers and our end market strengthens. With our transformation accelerating and significant momentum in our businesses, we're playing more offense through both organic and inorganic growth opportunities such as our recent healthcare acquisitions. It's this momentum that allowed us to announce in November one of the most important events in GE's history, creating three independent investment-grade industry leaders focused on critical global needs. We're supporting the recovery of the aviation industry today and creating a future of smarter, more sustainable, and efficient flight. We're developing precision healthcare that personalizes diagnoses and treatments, and we're leading the energy transition to drive decarbonization. These are big challenges, and our customers deserve and demand our best work. At GE, we're committed to creating value for all of our stakeholders and delivering on our purpose of building a world that works. Turning to slide three, we materially strengthened our business in 2021, and our balance sheet is in solid shape. We took a large step in the fourth quarter with the close of the GCAS air cap transaction, focusing GE on our industrial core and creating an industry leader and strategic partner to airline customers. Using the proceeds, we reduced debt by $25 billion, and we're now able to transition to a simpler reporting structure. I'll address our 2021 performance versus our outlook on the prior basis for ease of comparison. Then we'll bridge these results to our simplified reporting, which we'll use going forward. Let me briefly address the fourth quarter, and Carolina will provide further insights. We made good progress in the quarter, two highlights of which were orders in aviation and healthcare, up 22% and 7%, respectively. but our top line results were pressured by two dynamics that we believe are temporary. First, persistent supply chain challenges. This was most acute in healthcare, although the impact was felt in all businesses. And we're confident in our countermeasures that are underway, including both price and cost actions across GE. Second, we continue to drive commercial selectivity across the board with a particular focus in power and renewables. We're being more disciplined in the projects we choose to underwrite in the broader markets where we participate. This means lower volume with lower risk today, but better margins and less risk over time. Increased selectivity and supply chain headwinds each impacted revenue performance by about three to four points. Our focus on profitability and cash generation was evident this quarter. Industrial margins expanded 290 basis points organically, led by aviation and power services. and we delivered $3.8 billion of industrial free cash flow. Now looking at the full year, orders were up 12 percent organically with services growth in all businesses and up 12 percent overall, supporting faster growth in 2022. Industrial revenue was down 2 percent organically. Increased selectivity and supply chain headwinds impacted performance by three to four points and one to two points, respectively. Total equipment revenue decreased 8% organically, while higher margin services grew 4% organically, led by power and health care. We ended the year with strong profitability and cash performance, as margins, EPS, and free cash flow all exceeded our full-year outlook. Industrial margin expanded 390 basis points organically. Strong services growth, coupled with cost actions and restructuring benefits, drove improvements in three businesses, led by aviation. This was offset by supply chain headwinds across the company, renewable energy performance, and rising inflationary pressures. Solid margin expansion helped drive adjusted EPS up significantly to $2.12. And we delivered industrial free cash flow of $5.1 billion, driven by better earnings and disciplined working capital management. If you add back discontinued factoring Our business has generated $5.8 billion of free cash flow last year. Now, I recognize there are several definitions this quarter as we transition to reporting that reflects a simpler GE. But let there be no doubt, $5.8 billion best represents our operating performance for the year, and this is the number from which we'll grow in 2022 and going forward. Now, given the impact of renewables on our overall performance, I'd like to spend a moment talking through the business dynamics. Remember, we run this business by its parts. Offshore wind, pre-revenue and growing, grid solutions on its way to profitability, and while not a part of renewables results today, there's grid software, a profitable part of digital within corporate. Our largest business, though, is onshore wind, which is where I'll focus. First, demand will be there in onshore wind, is a critical component of the energy transition. We have leading products and a strong services franchise. But we do face near-term challenges, some structural, but many within our control. In the US, we're the market leader in profitable. While internationally, we've experienced continued challenges that we're addressing related to new technology ramps. And we're managing through the US production tax credit, or PTC, inflation and supply chain issues. So what are we doing? Scott Strasek is now leading our energy businesses and he'll run the same operational playbook he did at Gas Power. We're being more selective. It's okay not to compete everywhere, and we're looking closer at the margins we underrate on deals with some early evidence of increased margins on our 2021 orders. Our teams are also implementing price increases to help offset inflation and are laser focused on supply chain improvements and lower costs. We're making progress operationally. Turbine availability is increasing across the fleet, Our field teams are enhancing the customer experience with better design and testing and quicker responses to field issues. Core services was up double digits in 2021, and we expect growth to continue. Using Lean, the team lowered overall inventory by more than $300 million at year end. We do have work to do, and we're on it. With Scott and Pat Byrne now full-time leading on short the helm, We believe this will be a growth business that delivers high single-digit margins over time. Overall, our performance at GE was strong in 2021, underpinned by rising demand in aviation and healthcare. Our bottom line focus is paying off and enabling us to reinvest in growth. This sets us up well to deliver high revenue growth, margin expansion, and better free cash flow in the year ahead. Moving to slide four. GE today is operating from a position of strength. Lean principles are helping our teams increase their focus on customers, eliminating waste, and driving continuous improvement. This is leading to sustainable, impactful improvements in safety, quality, delivery, and cost. One recent example is what our gas power team did to dramatically improve the 7F turbine outage experience for our North American customers. By standardizing crews, optimizing material flow, and digitizing frontline field procedures, the team reduced outage cycle time by 30 percent, ultimately decreasing customer downtime. Our teams are scaling their learnings to more regions. In this quarter at PDX in Ireland, our team rearranged standard workflow and prep sequences in their main contrast media filling line, reducing turnaround time by 40 percent. This helps avoid unnecessary capital expenditures while significantly expanding our production capacity to reach more customers and ultimately more patients. These are just two of the many examples demonstrating the progress our businesses continue to make. Decentralization goes hand in hand with LEED. We continue to drive decentralization at every turn, P&L by P&L. And each of our three go-forward companies will carry that philosophy to drive better results. First and foremost, we're driving organic growth through innovation. In health care, for example, we've been investing in one of the fastest-growing ultrasound subsegments, the handheld market. Portable ultrasound is expected to become standard of care over time as it enables quick insights from routine exams with greater mobile flexibility. We launched our vScanAir, a pocket-sized wireless ultrasound, last year, and it's already reaching patients in more than 70 countries, contributing to strong handheld ultrasound revenue growth in 2021. Any gas powered this quarter, Guangdong Energy ordered two 9HA.01 gas turbines, which will be the first to burn hydrogen blended with natural gas in mainland China. We're also selectively complementing our organic growth with inorganic investments, becoming more active in the market as we've strengthened our financial position. Recently, GE Digital acquired Opus One, a company with advanced interoperable software and renewable energy planning capabilities that are highly complementary with digital network management and optimization portfolio. Together, we'll help customers integrate distributed energy resources at scale. This builds on other bolt-ons we've done lately, such as BK Medical, to expand our competitive capabilities. In addition to broadening momentum in our businesses, many of our end markets are improving. In aviation, we're encouraged by our performance, which reflects our actions. and a continued market recovery. While the current GE CFM departures are down 25 percent versus 19 levels, given recent volatility due to the Omicron variant, it wasn't a material impact in 2021. Shop visits once again were higher than we initially anticipated, and green time utilization continues to lessen. Along with our customers, GE remains confident in the recovery while actively monitoring the impact of travel restrictions. We're positioned to lead as the commercial aftermarket recovers and military grows, supporting the industry today and sustainability for the long term. At healthcare, order demand remains strong despite supply chain disruptions, which we expect to be with us through at least the first half of next year or 2022. We're encouraged that government and private health systems are investing in products and services to support future capacity and improve quality of care. We're also continuing to invest to meet rising demand from hospital providers while managing costs through operational improvements. The energy market remains dynamic. At renewables, the PTC expired at year's end, and the uncertainty is impacting onshore wind demand. Based on Woodmax's latest equipment and repower forecast, the U.S. market is expected to decline from 15 gigawatts of installations in 21 to approximately 10 gigawatts in 2022. We're monitoring policy proposals and see strong diverse interest in continuing tax credit for wind. In offshore wind, demand continues to significantly increase around the world. We have over seven gigawatts of Hollyadex commitments spanning across Europe, North America, and now Asia, including a recent 1.7 gigawatt commitment with our partner Mitsubishi in Japan. At gas, while global gas generation was down slightly for the year, GE gas turbine megawatt average grew high single digits, supporting stronger services and cash generation. We anticipate the 21 equipment market will be above 30 gigawatts. Overall, gas continues to be a reliable and economic source of power generation, and we see gas generation demand growing low single digits over the next decade. Our renewables and power businesses, including digital and grid, are playing a critical role in solving the trilemma of affordable, reliable, and sustainable energy to meet increasing energy demand and support customers in achieving their net zero ambitions. GE operates in mission-critical markets, each with global reach, profitably growing backlogs, and sizable install bases. Aftermarket services, which make up roughly 80% of our more than $400 million backlog and more than half our revenue, keep us close to our customers on a daily basis. So I hope that you can see that we're running GE better with a focus on driving innovation, sustainability, and growth in 22 and longer term. With that, I'll turn it over to Carolina for further insights on our results.