GE Aerospace

Good day ladies and gentlemen and welcome to the General Electric second quarter 2022 earnings conference call. At this time all participants are in a listen-only mode. My name is Cheryl and I will be your operator for today's call. 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 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, Cheryl. Welcome to GE's second quarter 22 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 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.

Thanks, Steve. Good morning, everyone. GE delivered a strong second quarter with growth in orders, revenue, and profit, as well as positive free cash flow. Aerospace was the key driver, and services remain a bright spot of performance. While this remains the toughest operating environment I've seen, I am proud of how the GE team is taking action to deliver. I'll start this morning with an update on our plans to launch our strong franchises as three independent investment-grade industry leaders. It's now been 259 days since we shared this intent. We're on track. and making good progress. Just last week, we unveiled the new branding of our three companies, GE Aerospace, GE Healthcare, and GE Vernova, which will comprise our portfolio of energy businesses, including renewable energy, power, and digital. The names leverage GE's multibillion-dollar global brand and deep customer trust, giving us competitive advantage in our end markets. We also achieved several key milestones on the healthcare spin, which will go first in early 23. We plan to file our Confidential Form 10 shortly. Our team submitted its request for a private letter ruling to the IRS, an important step to achieve tax-free spinoff. We completed consultation with our European Works Council, allowing us to move forward with a number of critical employee actions globally, including adding key talent in support of the new company. We announced that GE Healthcare will trade on the NASDAQ, and I'm excited about the board we're assembling for GE Healthcare and look forward to sharing more with you soon once finalized. We're focused on building out our leadership team broadly to support the success of each of the standalone businesses. I'm thrilled to now be leading a very talented team at Aerospace, including John Slattery, who has been named Chief Commercial Officer, Russell Stokes, now leading commercial engines and services, Amy Gowder, leading military systems, and Rahul Gai, who will join us next month as the business's CFO. And just last week, we announced Eric Gray as the new CEO of GE Gas Power, part of GE Vernova. I'm thankful for how the dedicated GE team has strengthened our financial and operating performance while advancing these spinoff plans. And I'm confident in our path to create three companies that will be well-positioned for long-term growth. So now let's turn to our results on slide three. I'm encouraged by the order revenue and profit growth and positive free cash we delivered this quarter despite continuing macro pressures. Orders were up 4%, supported by growth in both services and equipment. Aerospace led the way, up 26%. Revenue was up 5%, growing in three of our four segments. Aerospace was up double digits as the market recovery continued. Healthcare and power were both up mid-single digits. And this was partially offset by renewables down double digits, reflecting lower U.S. volumes resulting from the PTC expiration, as well as the business's international selectivity strategy. Our higher margin services remained a bright spot, up double digits, led again by aerospace. Collectively, supply chain and macro pressures adversely affected revenue by about five percentage points this quarter, but eased slightly versus the previous quarter. Adjusted operating margin expanded 380 basis points, driven largely by higher services growth and our focus on pricing, with aerospace and power sources of strength. Healthcare is stabilizing but still faces supply chain challenges, and renewables remains difficult. Adjusted EPS was up significantly, driven largely by aerospace. Free cash flow was roughly $200 million and improved slightly year over year due to better adjusted earnings. This was offset by higher working capital tied to inventory build as we prepare for the second half ramp, as well as work through the supply chain issues. Overall, this was a strong quarter for GE, with orders, revenue, profit, and cash all growing. Notwithstanding, much is still uncertain about the external environment companies like GE are facing at the moment. We continue to trend toward the low end of our 2022 outlook on all metrics except cash. Working capital will be pressured as we protect customers from the impact of supply chain challenges, as well as the timing of renewable energy related orders, which together are likely to push out approximately a billion dollars of free cash flow into the future. So fundamentally, a timing dynamic at work. We're just starting our annual strategy and budgeting cycle for 2023. We still expect to deliver significant year-over-year improvement in both profit and cash, but below our prior view. With the world evolving so quickly, we have to see how the next six months unfold and expect to provide you our 2023 outlook in the usual timeframe at fourth quarter earnings. Turning to slide four, starting with aerospace and healthcare. While demand remains robust, delivery has been a challenge for us, for the industry broadly, and for our suppliers. What differentiates us is our lean foundation, which we've built over the last several years. In aerospace, the industry is experiencing an unprecedented ramp as the pandemic eases, coupled with labor and material shortages. The team and I spent time with our airframer and airline customers at the foreign borough air show just last week talking about the need for predictability and stability across the entire ecosystem we need to do better to deliver for our customers and quality and delivery are our top priorities let me take a couple of minutes on the actions that we're taking starting with oe on the left chart you can see material issues trending either from our suppliers or of our own making, that are impacting production flow and ultimately delivery. We recently allocated an additional 20% of our existing engineering team to help solve these issues faster. We're seeing impact, moving parts along, but we need to do more and quickly, and we will. We're partnering with our suppliers, holding Kaizens at points of impact in their shops to help them reduce setup time, eliminate constraints, optimize transportation, and improve overall flow to us. This is leading to increased supplier throughput as much as 30% or more in some cases. Overall, we're seeing signs of improvement with engine output up sequentially. In services, we use work stops to measure how often we need to interrupt a shop visit due to a lack of resources, primarily from delayed repairs, castings, forgings, or labor constraints. The curve was beginning to bend in May and June, reflecting our efforts to ramp labor and improve overhaul cycle time. Last month, we held Kaizen events at multiple GE sites around the world. John, Russell, Amy, and I were all in Wales at our GE Aerospace MRO facility, where we overhauled both the CFM56 and GE90 engines. As we worked to improve turnaround time for a steep CFM56 ramp, the Kaizen focused on increasing overhaul capabilities from three to four engines per week. What I saw across our seven Kaizen teams in Wales was lean in action, a clear focus on waste elimination and continuous improvement. For example, operators on my team shared with me how they spend 45 minutes searching for parts for what is often a 60-minute operation. By removing this waste, we improved turnaround time at Wales by three to five days, about a 5% reduction. These examples are everywhere at GE. Each one further increases the efficiency of our operations and improves our pace of delivery to customers. In healthcare, we continue to broaden and strengthen our supplier base and address inflation through price and cost actions. One way we monitor supply dynamics is through red flags, which identify the lines at risk of a shortage if not replenished within 10 days. The chart indicates our efforts are starting to yield improvements, but again, we need to do more. For example, responding to the COVID-19 related factory shutdown in Shanghai, our PDX team took fast action and we were able to operate at full capacity within 10 weeks. In the interim, our Cork, Ireland PDX team used a Kaizen to increase capacity in the first step of producing contrast media solutions which help doctors better image patients. They reduced cycle time by over 20%, lifting capacity by about 5 million doses annually, critical in a shortage. Examples like these support our confidence for higher output in the second half and in 2023. The actions we're taking not only help clear today's backlogs, but build what our customers want, more predictable, shorter cycle times going forward. Looking at GE Vernova in renewables, it's been a disappointing first half, and we're working intensely focused on stabilizing the business. We're working the fundamentals with Scott and his team leveraging the power playbook that has delivered improved profitability and increased cash over the last three years. First, given the U.S. political environment, we're taking a more conservative view of the market for the time being. You've heard us talk about sizing gas power for a $20 the 30 gigawatt market, and renewables were taking a similar strategy, assuming GE onshore wind output of about 2,000 turbines per year. One key difference in onshore, we aren't sizing ourselves to the market. We're sizing ourselves based on our refocused efforts on select geographies where we believe we can grow and grow profitably. Lean and decentralization are core to this strategy. In power, a first step was to decentralize. removing headquarters and other layers, and driving full accountability closer to the customer. Using Lean, the team has implemented our live outage program that many of you saw firsthand in Greenville last March. At Renewables, we're embedding similar principles, starting with reorganizing grid into three P&Ls and integrating horizontal functions such as commercial and services vertically into the businesses. Next, scope selectivity. stronger commercial underwriting, and a focus on pricing has enabled power to reduce risk and offset rising costs. We're turning to price escalation in our long-term service agreements where appropriate, and we're updating our project cost estimates more frequently to reflect our current reality. In renewables, while it won't be enough to offset the significant inflation pressure, we are making progress. Our pricing is substantially improved and onshore, while continuing our focus on deal selectivity. Additionally, we're growing our higher margin businesses, such as grid automation, which delivered double-digit orders growth. In power, we continue to invest in gas and steam services productivity while focusing on product cost competitiveness. At Renewables, we've introduced several new products, which we are working down the cost curve. These are larger, more innovative technologies that need to be industrialized for large-scale production. We're also proactively deploying improvements to our fleet that will enable long-term reliable performance from these high-tech products. Fixed costs, frankly, a misnomer in my view, because nothing is really fixed, is another critical element here. Over three years, we cut these costs in gas by approximately a billion dollars. Based on international selectivity and a smaller North American market, we're taking a harder look at our renewables cost structure which we expect will yield significant savings. We know from our power experience that these actions at renewables won't yield results immediately. But with this playbook, we expect the business to return to profitable growth over time. Combined with power's progress and enhanced profitability in cash, we're excited about the future for GE Vernova. Moving to slide six, while driving operational improvements across our businesses, We're also focused on better serving our customers and innovating for the future. A few recent highlights. At Aerospace, our joint venture with Safran, CFM International was selected by Delta to deliver 200 CFM LEAP-1B engines to power its new fleet of Boeing 737-10 aircraft, with options for up to 60 additional engines. Cutter Airways also signed an agreement for installed and spare LEAP-1B engines to power the airline's new fleet of 25 737-10 aircraft. At healthcare, our recently announced partnership with Medtronic is enabling personalized care with the integration of two of Medtronic's continuous monitoring solutions with our precision monitoring platform. These capabilities allow clinicians to have access to real-time, reliable patient insights. And at power, we celebrated the first HA gas turbine order in Vietnam The new 9HA02 combined cycle power plant is expected to improve the reliability and stability of the energy grid to support renewables penetration there. We're also developing new products with innovations supported by our continued investment in R&D. For example, Digital announced the first solution resulting from its Opus One Solutions acquisition, distributed energy resource management system, designed to help utilities keep the grid safe, secure, and resilient while enabling energy affordability. So in summary, I have great confidence in the actions we're taking and our path forward to drive sustained profitable growth. With that, Carolina will provide further insights on the second quarter.