GE Aerospace

Good day, ladies and gentlemen, and welcome to the first quarter 2022 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 during today's question and answer session. If you have a question, please tell 01 please note it is 01 no longer star 1. 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 Relations. Please proceed.

Thanks, Brandon. Welcome to GE's first quarter 2022 earnings call. I'm joined by Chairman and CEO Larry Culp and CFO Carolina Dybeck-Hoppe. Keep in mind 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. I'd like to start by addressing the devastating war in Ukraine. The GE team stands proudly with the people of Ukraine. As we shared last month, we have suspended our operations in Russia, with the exception of some essential activities, primarily in health care. We've also made a multimillion dollar contribution through philanthropic commitments and medical equipment to assist those who have been directly impacted by the events. I'm inspired by the more than 50 GE employees in the surrounding regions who have opened the doors of their homes to Ukrainian refugees and have volunteered their time to help with other refugee efforts. Now, let me turn to our results starting on slide two. I'm proud of how our team drove improved services, orders, and cash as we managed through increasing challenges in the first quarter. Orders were up 13% organically, which strengthened both services and equipment. And we saw a double-digit growth in aviation and power. Revenue was up slightly, driven by growth in higher margin services in all segments. We saw continued momentum at aviation, with revenue up double digits. This, however, was largely offset by supply chain constraints in all segments, especially healthcare and aviation, U.S. policy uncertainty driving lower onshore wind North American deliveries at renewables this quarter, and continued selectivity at power. In particular, selectivity, being more disciplined about what we sign up for, taking a closer look at the margins we underwrite, and not competing everywhere continues to be a critical element of our strategy at power and renewables. We're focusing on business that's aligned with our long-term growth and profit objectives. As you've been hearing from many other companies, we're operating in a challenging macro environment. Collectively, supply chain issues, the Russia-Ukraine war, and China COVID impacts adversely affected revenue in the quarter by about six percentage points. I'll provide more detail shortly on these factors, and more importantly, the actions we're taking to mitigate them. Adjusted operating margin expanded 110 basis points driven by higher services mix and continued cost out. Both aviation and power margins improved substantially, while healthcare and renewables were meaningfully pressured due to both inflation and supply chain shortages. Strong services growth and margin expansion led to an adjusted EPS of 24 cents, up 85% year-on-year. Free cash flow was roughly negative $900 million, as expected, given our seasonality. This was driven by receivables, an inventory bill for the second half, and supply chain constraints. Importantly, though, this was a $1.7 billion improvement, excluding discontinued factoring. Overall, services are recovering across our portfolio. Our total orders are strong, and our cash generation continues to improve. Excuse me. Turning to slide three. At our investor day in March, we discussed some of the key risk factors that drove the range in our outlook. Since then, we're experiencing increased pressure from inflation, renewable energy, and the Russia-Ukraine war. We're also watching two evolving areas, namely additional supply chain pressure and recent COVID impacts in China. We're holding the outlook range we shared in January and working through these pressures I just outlined. But given the fluidity around the duration and magnitude of these factors, we're trending toward the low end of that range. Carolina will run through the dynamics by business shortly, but let me spend a moment on renewables. As Scott Strasek shared last month, our financial results here have been unacceptable, but they are fixable. First, continued U.S. policy uncertainty, along with higher prices, has reduced near-term demand in our profitable North America onshore wind business. Second, inflationary pressures are impacting GE with higher material and logistics costs. Third, proven and new leadership with Scott and Philippe Perron is transforming the business fundamentals, largely using their gas power and power conversion playbooks in their new roles. This all starts, of course, with what's in our control. We need to run the business better, and that's something we know how to do. We're using lean to improve safety and quality, and product cost. We're taking an even harder look at our cost structure to size the business for the new realities. We're now managing the business in a more decentralized manner, closer to our customers, as well as improving our own execution. We're being more selective on deals internationally with our price and market focus on defined geographies where we've identified product fit, services opportunities, and an ability to execute. This is already yielding improved order pricing, which was up high single digits in the quarter in our onshore international business. These actions won't materialize in our results right away, but we do expect renewable energy to return to being a profitable growth business over time. And rest assured, this is a business that's critical to the energy transition, thus one position for long-term growth. More broadly, in all of our businesses, we're driving growth, price, and cost out. We're growing our more profitable services businesses, reconfiguring our supply chains, and leading with innovation while increasing R&D spend. We're also raising list prices and price floors, and in services, we're utilizing escalation clauses in our agreements. And we're focused on sourcing and productivity to reduce cost. Power, for example, continues to deliver profit in cash supported by price escalation in our CSAs and improving steam business, a disciplined underwriting strategy, and operational improvements, despite the fulfillment challenges. And we're embedding lean deeply across GE, changing the way we work for the better. You've heard me talk about the core principles of lean before, which is all about serving the customer, eliminating waste, and prioritizing ruthlessly. Earlier, I mentioned six points of pent-up revenue we need to work through to execute on the demand we're seeing, especially in aviation and healthcare. Let me give you a few quick examples of what we're doing to manage through the well-documented supply chain challenges out there. We hosted our investor day at Gemba, showing up close how Lean is transforming the company. Many of you saw at our aviation facility in Greenville how our team performs complex machining operations and detailed inspections on high-pressure turbine blades. Here, we're focused on reducing the site's blade delivery lead time. The team has used lean to improve the plant layout and create standard lines, improving part flow. These actions have reduced lead time by more than 10 days, and we're targeting an additional 10-day decrease. Through this work, overall inventory has been reduced as well. Our military business is also making progress. For the T700 program, we've improved first-time yield in key lines by about 40%, and shipments increased more than 35% sequentially. This supported high single-digit revenue growth at military in the quarter, with more improvement to come as we apply these learnings to other engine programs. At healthcare, our ultrasound team shifted part of their work cadence from make to stock to make to order. This has simplified planning and execution, optimized infrastructure cost, and reduced lead time by 30%. Importantly, the team has also increased inventory turns by 50% since 2019, removing the muda, or the waste, in the system. And while lean is always important, it's during these dynamic times that lean really contributes and differentiates us in the eyes of our customers. In turn, as we make these kinds of continuous operational improvements, we better serve our customers and set ourselves up to reinvest for growth, driving innovation across GE where we have significant impact with our customers. Just looking at what we market, sell, and service today. At Renewables, we completed the Traverse Wind Energy Center with Invenergy recently. This is the largest wind farm constructed in North America in a single phase, and it's powered by more than 350 of GE's two-megawatt platform turbines. At Aviation, we're developing technologies for the future. We've recently reached two key engine milestones. Our adaptive cycle XA100 with the second engine to test fired up in March, and our first T901 engine tested successfully in March as well, achieving max power with performance matching our pretest predictions. We're also introducing new products like Healthcare's Edison Digital Health Platform. Powered by AI, this platform will aggregate data from multiple sources and vendors to help reduce staff burdens and improve the delivery of care. And at the same time, we'll continue to complement these organic investments with inorganic activity to improve our growth potential, whether with an acquisition like BK Medical or a sale, as seen this quarter with part of Steam Power's nuclear business. In summary, we're taking action in this difficult environment to serve our customers while investing in tomorrow's innovation. We're using lean principles to improve our results and our culture. We're confident this work is improving our operational and financial performance while fortifying our competitive positions around the world, ultimately unlocking further potential across our company. And with that, Carolina will provide further insights on the quarter.