7/26/2022

speaker
Cheryl
Operator

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.

speaker
Steve Winokur
Vice President of Investor Relations

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.

speaker
Larry Culp
Chairman and CEO

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.

speaker
Carolina Dyback-Hoppe
Chief Financial Officer

Thanks, Larry. Diving into the results. Turning to slide seven, I'll share the highlights from the quarter on an organic basis. Orders were up 4% and revenue up 5%, with growth led by aerospace. On a sequential basis, adjusted revenue improved $1.6 billion, or 10%, a significant step up reflecting progress toward our second half ramp. Services revenue was a particular strength in the quarter, as we delivered double-digit service revenue growth compared to last year, with aerospace leading the way, up 47%. Equipment declined 6%, driven by renewables. Healthcare and power equipment revenues were bright spots, with healthcare up 5%, despite supply constraints, and power up 18%, reflecting strong aeroderivative shipments. Year-to-date organic growth was 3%. Both quarter and year-to-date, this includes five points of pressure from supply chain disruptions, COVID impact in China, and the Russia-Ukraine war, with electric contributing roughly one point of impact year-to-date. On adjusted margin, both aerospace and power saw expansion. Overall, as a result of the actions we're taking, focus on pricing drove more than 100 basis points of margin expansion in the quarter. Services mix, particularly in aerospace, contributed favorably. We also saw improved contract margin reviews, or CMRs, with strength from contractual escalation and engine utilization. Cost reductions were more than 150 basis points of year-over-year benefit. largely restructuring savings and some timing-related corporate benefits. Partly offsetting these improvements was approximately 200 basis points of margin headwinds from inflation and logistics costs, net of sourcing actions. In aerospace and power, the net impact of price cost and inflation was positive. Healthcare and onshore wind both took steps to address cost and price, but it wasn't enough to offset inflation. Lastly, adjusted EPS was up about 56 cents, or about two and a half times driven by profit growth plus lower interest expense from our debt reduction actions. About $0.15 of earnings was timing related that we either do not expect to repeat or had originally expected in the third quarter. Continuing EPS was negative, primarily driven by the unfavorable mark-to-market impact from our Baker Hughes and AirCap positions. In total, we delivered a strong quarter marked by revenue up mid-single digits significant profit growth, and margin expansion. These results and our focus on execution give me confidence that we will achieve the low end of full-year growth, profit, and EPS outlook, even in a tough environment. Year-to-date, we've delivered more than one-third of our EPS guide, in line with typical seasonality. Moving to cash. We generated $200 million of free cash flow, driven by strong adjusted earnings, which was positive excluding the mark-to-market impact previously mentioned. Despite a limited impact on free cash flow in the quarter, supply chain challenges are contributing to inventory pressure and later deliveries and billing. First, on working capital dynamics. Receivables for the use of cash driven by billings from sequential revenue growth and also pressured by later deliveries in the quarter. This was partially upset by collection strength, where we saw a seven-day DSO improvement year-over-year. Inventory up across all businesses was a large use of cash. A portion of this is typical. Building for the second half volume growth leads to inventory and accounts payable growth, with material receipts outpacing disbursements. This quarter, however, supply chain challenges also contributed to elevated inventory levels across inputs and outputs. Inputs were pressured by the impact of inflation and additional purchases needed to support second half deliveries for customers. For outputs, fulfillment challenges led to higher inventory. Progress was a source of cash, mainly due to aerospace collections on equipment orders to support production. Contract assets was a use of cash. We saw continued strength in aerospace utilization, resulting in higher billings offset by service revenue in aerospace and positive CMRs. In the second half, we expect free cash flow to be significantly greater than the first half, due to higher collections on revenue growth, and this person is in line with the first half inventory bill. However, supply chain constraints are delaying deliveries and pushing collections to the following periods. So as a result, much of the third quarter free cash flow is likely to shift to the fourth quarter, while late fourth quarter deliveries would leave a high receivable balance at the end of the year to be collected in 2023. Combined with lower progress payments from renewable energy orders, We expect this to result in a deferral of about $1 billion of free cash flow out of 2022. Turning to the businesses. Aerospace delivered a very strong quarter as the commercial market continued to recover. Orders grew across the board, up 26%, with both commercial engines and services up substantially, reflecting continued robust customer demand. Revenue was up. driven by significant growth in commercial services with shop visits 14% higher year-over-year and continued strength in spare parts sales. Supply constraints, including material availability, negatively impacted revenue by nine points, primarily in commercial engines. Military growth was driven by services. While engine delivery slowed due to temporary setbacks, specifically in T700 shipments, we expect tangible improvements in the second half. Commercial engine revenue was down slightly, as supply chain disruptions continued to impact deliveries. Total engine shipments were down 7 percent, largely due to lower G and X production, while LEAP shipments were up 7 percent. Segment margin expanded by almost 15 points, primarily driven by commercial services growth, lower OE shipments, as well as actions improving pricing structures to address inflation and CMR performance. CMR alone drove over eight points of improvement, given the negative CMR last year. For the total year, largely due to China's first half slowdown, we now expect shop visits to be in the high teens range. We also expect lower commercial engines revenue, trending below 20% growth year-over-year due to continued supply chain challenges. However, we continue to expect more than 25% commercial services growth from ongoing strength in spare parts sales, That more than offset the lower shop visit volume and OA volume. Therefore, we still expect to achieve greater than 20% growth and 3.8 to 4.3 billion of operating profit for the year. Moving to healthcare. Market demand remains solid, while supply and inflation challenges continue to impact the market. Underlying customer orders indicate continued commitment to investment, and we're encouraged by signs that supply chain pressures will ease in the second half of this year. We continue to monitor hospital investment plans and procedure activity. Second quarter orders grew 1%, but that was against a tough comparison to the second quarter of last year when orders increased 11%, as well as the impact from COVID in China. Orders increased mid-single digits in services, partially affected by a slight decline in equipment orders. Comparisons continued to be challenging through the second half. Revenue in the second quarter was up 4%, with mid-single-digit growth in equipment and low single-digit growth in services. Growth was driven by imaging, ultrasound, and HCS services sales, and it was offset by the continuing supply chain constraints, including those related to COVID impact in China. Recall that fulfillment challenges started in the second quarter of 2021, And when excluding supply chain impact in both periods, revenue growth would have been 5% this quarter, highlighting how we proactively managed sourcing and logistics. COVID in China impacted growth in both equipment and PDX revenue. With China broadly reopening in early June and our Shanghai PDX facility fully operational, our equipment and PDX revenue in China is expected to rebound in the third quarter. Segment margin was impacted by material and logistics inflation, with some sequential improvement. Net of sourcing actions margins contracted about 300 basis points year over year, but were up about 200 basis points sequentially. We are making progress with price in sales positive for the first time in recent history. Looking ahead, healthcare is focused on driving cost reductions and implementing lean through supply chain actions to deliver for customers and address cost and price structures as we work to offset inflation and logistics pressures. We are also prudently investing in future innovation, aiming at high-return differentiated technologies. Our commitment to R&D investments is demonstrated by the double-digit year-over-year increase this quarter. For example, we launched Voluson Expert 22, our most advanced ultrasound yet. This latest addition to our women's health portfolio has AI-powered tools and our proprietary Lyric architecture to unlock new imaging and processing power, achieving higher resolution detailed images and scanning flexibility, revealing fine anatomy in 2D, 3D, and 4D with ease. In addition, our inventory levels are elevated as we prepare for an anticipated ramp in orders fulfillment in the second half of 2022. As Larry mentioned, we're making good progress on the healthcare spin, We have an opportunity to impact both patients and customers as healthcare transitions into an independent public company. Looking at the full year, order demand remains solid, and we're expecting mid-single-digit revenue growth while closely monitoring customer order activity. Due largely to inflation pressure, we now expect 2022 operating profit to be about $3 billion, slightly below our prior outlook. Turning to renewables. Orders were down due to continued pressure from onshore North America market dynamics and the selectivity in international, impacting both equipment and services through power upgrades. Partially upsetting this were grid and hydro, which won a large order for the upgrade of the Itaipo hydro power plant. Grid had orders growth across all businesses, including significant growth in grid automation. Revenue declined. with roughly two-thirds of the decline from lower onshore wind North America deliveries. The remainder of the decline was primarily driven by onshore wind international, as planned. Grid and onshore services, excluding repower, both were up low single digits, reflecting our focus on driving growth in these businesses. Segment margin declined significantly, although up 160 basis points sequentially. Roughly half The year-on-year decline was a result of volume reductions in our most profitable market, U.S. onshore. The remainder of the decline was split roughly equally between net inflation pressures across our businesses and higher than expected new product costs in onshore international, as we take measures to improve durability across our fleets. This was partially upset by grid, where margins improved from higher volume and benefits from prior restructuring actions. And we also recovered costs associated with legacy hydro projects of about $70 million. In summary, we knew coming into this year that renewables would be challenging. Offshore wind is a long-term investment in an industry still not at full maturation. Grid, a critical part of the energy transition, is where we're making good progress today. Our priority is onshore wind, where many pressures are converging. The ongoing paralysis in Washington with the PTC expiration is hitting our most profitable markets, impacting demand. This is coupled with additional inflationary pressures and fleet durability actions. For 2022, due to these dynamics, we no longer expect a step-up profit in the second half. Clearly, we have more work to do here. We're taking swift actions to turn around this business, running our power playbook. Given the strength of our portfolio and the fundamental importance of renewable energy in the energy transition, we remain confident that we will drive profitability over time. Moving to power. Starting with the market, global gas generation and GE utilization remain resilient, growing low single digits. Despite higher gas prices and availability challenges, gas remains a fuel of choice on the dispatch curves around the globe to meet the growing electricity demand. We continue to expect the market for gas generation to grow low single digits over the next decade. Orders were down in the quarter, largely reflecting the uneven equipment order profile we've seen quarter to quarter. Services declined due to lower gas CSI outages in line with our multi-year technology cycle. Importantly, power orders grew low single digits in the first half of the year, driven by equipment strength in the first quarter. The team remains focused on discipline underwriting and backlog quality. Revenue was up mid-single digits, primarily driven by margin accretive error derivative strength, shipping 14 more units versus last year. Overall services revenue was flat. We delivered strong transactional services growth in gas and power conversion, which was offset with the expected lower gas CSA outage volume. Segment margin reached a high single digits in the quarter and expanded 30 basis points. At gas power, margins remain resilient from improving price structure to address inflation and error equipment and transactional services volume growth. This helped offset the mixed headwinds. At steam, margins improved significantly due to continued focus on productivity as well as project and legal charges from last year that didn't repeat. We're focused on expanding our services opportunity and expect higher CSA outages next year. In the second half, we expect more growth as H-class and Arrow deliveries ramp alongside the continued strength of transactional services and the improvement at Steen. Power is set up well to grow profit in 2022 We are reaffirming our outlook for low single-digit revenue growth and margin expansion. Finally, a moment on corporate. Adjusted corporate costs decreased over 50% versus last year and 65% year-to-date. We saw lower functions and operations costs from some timing benefits in addition to lower eliminations. Given the favorability in the first half, we now expect corporate costs of below a billion for the year. Well excluded from our adjusted results, insurance net income was approximately 140 million. This was down year over year as COVID favorability subsides and claims continue to normalize. As we have previously disclosed earlier this year, aligned with the industry, we plan to adopt the GAAP LDTI accounting standard. The transition adjustment is being applied retroactively to the beginning of 2021. As a result, we expect a negative equity impact of about $7 to $8 billion after tax using January 2021 rates. This is driven primarily by the lower discount rates. Using June 30, 2022 rates, the transition adjustment would be $4 to $5 billion, taking effect in the first quarter of 2023. Also embedded in these estimates is the $1.5 to $2 billion after-tax equity impact primarily from adopting the LTC first principles approach which complements the LDTI and incorporates more granular modeling assumptions. The first principles model are considered an industry best practice and allow for additional transparency driven by refined modeling that improves claims projections. Importantly, we do not expect any additional cash funding needs as a result of these changes currently. We will finalize our CFT results in the first quarter of 2023 We also currently expect our LRT margin to remain positive and will report results in the third quarter of this year. We've provided more info on this in the 10Q that we filed today. In discontinued operations, our runoff Polish BPH mortgage portfolio ended the quarter with a gross balance of about $2.1 billion, and this quarter recorded charges of about $200 million, primarily driven by unfavorable results for banks in ongoing litigation with borrowers. This brings the total litigation reserves related to this matter to approximately a billion. Stepping back, despite the volatile environment, we are pleased by the progress we made this quarter. We delivered order, revenue, and profit growth and positive cash. This gives me confidence in achieving the outlook for 2022 that we've shared today. Now, Larry, back to you.

speaker
Larry Culp
Chairman and CEO

Thanks, Carolina. And by the way, happy birthday. Wrapping up on slide 13, as we sit here today, I hope you see what we see. GE is a stronger, more customer-centric company. With lean and decentralization at the center of everything we do, we've made significant progress across delivery, price, and cost, driving lasting improvements. The actions I outlined earlier are helping us manage pressures today, and most importantly, positioning our businesses for sustainable long-term growth. Looking ahead, our story is simple. We have leading innovative franchises poised to accelerate in critical growth sectors the world needs. We're advancing the future of flight, precision health, and the energy transition. And our solid financial and operational foundation keeps us on track with our plan to launch three companies, each with greater agility, more focus, and future growth opportunities. I'm excited about what's ahead and confident GE is positioned to create value. Steve, with that, let's turn to questions.

speaker
Steve Winokur
Vice President of Investor Relations

Before we open the line, I'd ask everyone in the queue to consider your fellow analysts again and ask one question so we can get to as many people as possible. Cheryl, can you please open the line?

speaker
Cheryl
Operator

Yes, thank you. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone. If your question has been answered or you wish to withdraw your question, Please press 02. Our first question comes from DeAndre from RBC. Your line is now open.

speaker
DeAndre
Analyst at RBC

Thank you. Good morning, everyone. Good morning. Good morning, Dean. I have a couple of free cash flow clarification questions. First, how much of the billion-dollar pushout is supply chain versus the renewable orders? What's the reset 2022 guide? And what does this mean for that previous placeholder for 23, the $7 billion plus? Thanks. And happy birthday, Carolina.

speaker
Carolina Dyback-Hoppe
Chief Financial Officer

Well, thank you, Dean. That was a lot of questions on cash. We'll take them step by step. So to start with, the $1 billion of working capital push-up that we mentioned earlier today, it's really two-thirds, That is timing, I would say combination of inventory versus receivable from the businesses. And then about one third is progress in the PTC dynamics from renewable. So that's the split of the one billion. Then you asked about the guide for 2022 free cash flow and what does that mean then per business? So what I would say is that if we start with what we talked about today, one billion, about a billion of push out compared to what we've talked about before. So if you take them segment by segment, it really means that in aerospace, we expect to be down due to the supply constraints. Healthcare, similar. So basically, I would say trending flat due to the supply constraints here on deliveries. For renewables, And here we already in the first quarter talked about that we expected to sort of be below our original guide, but still better than last year. Now we have additional pressures. So about a third is added to the renewables number or reduced from the renewables number. And then for power, we have conviction in the existing outlook and corporate, we also expect to land in the existing guide. So that's overall the 2022 impact of the changes in the free cash flow guide.

speaker
Larry Culp
Chairman and CEO

And Dean, on 23, if I may, as you know well, we're just starting our annual strategy and budgeting cycle. That'll take us through the next several months. I think as it pertains to 23, we're still of the view that we're going to deliver significant year-over-year improvement in both profit and cash. But as we said earlier, below the prior view that we've expressed, And perhaps stating the obvious, with so much in flux right now around the world, I think it's going to be important for us to see how the next six months unfold. And at this point, expect to provide an outlook on 23 in the usual timeframe at earnings, at fourth-quarter earnings. That said, given the way we've talked about 23 in the past and the underlying improvement drivers. I don't think they've really changed since March relative to the strong tailwind that we see in aerospace broadly, both in services and in new units. Clearly, post-pandemic spending by healthcare providers is something that is critical to the healthcare story. And I think the energy transition all the more, given events in Ukraine, are going to play to GE's strengths. We just need to work through some of these near-term issues that we've highlighted in the prepared remarks in renewables.

speaker
Carolina Dyback-Hoppe
Chief Financial Officer

Yes, so what that means basically is that we still expect to see the same drivers as we shared in March, but we're monitoring the volatility as Larry spoke about. And we do expect earnings to be a bigger contributor in sort of the 2023 improvement. It will start off a lower 2022 base, but it will still be the main part of improvement for 2023. And if I look at them, seeing earnings as the big improvement part, then on top of that, we have, as usual, we have the delta between depreciation, amortization, and capex. So you'll have, what, one billion of amortization. That's non-cash. And then you add to that the working capital part. And we do expect to continue to focus on improving the efficiency, and we expect working capital to continue to be a source of cash. And that will be helped by What I just mentioned, at least in 2023, by the two-thirds of the $1 billion of push-out, well, I would say our more conservative view of the U.S. onshore wind market creates more uncertainty about when we get the progress part and possible restructuring needs. So overall, we still expect a significant improvement on profit as well as free cash flow for 2023.

speaker
Cheryl
Operator

The next question comes from Julian Mitchell from Barclays. Your line is now open.

speaker
Julian Mitchell
Analyst at Barclays

Hi. Good morning, and best wishes, Carolina. Maybe just wanted to focus my question around the sort of operating profit for the second half. So I think you're saying you're at the low end, so sort of $6 billion of full-year adjusted op profit is the new guide. That implies, I think, about $3.4 billion of second half profit versus $2.6 billion in the first half. So you've got about an $800 million increase half on half. So my point was just maybe to confirm that, and then I just want to understand that step up in profit in the context of the revenue step up. Because I guess your old revenue guide of $76 billion you have a very big implied sort of revenue increase, $8 billion or so in the second half, half on half. I'm assuming that number's lower, but maybe help us understand the sort of revised revenue guide for the year and how we're thinking about the half on half step up, what kind of operating leverage we should expect and what price cost is doing in the back half.

speaker
Carolina Dyback-Hoppe
Chief Financial Officer

Julian, thank you for the congratulations. I won't reveal my age here, but thanks anyway. So on the profit, so no, your math is absolutely right. Let me start by saying that for us, our seasonality is that the second half is really loaded. So we have more than 100% of free cash flow in the second half and 80% of net income in the second half, taking 21 as a reference point. So it's not uncommon. And we do expect to see strong sequential improvement in growth, so that continues accelerating through the year. If I look at the different businesses and what you commented on with the profit, we do expect to see about 800 million of profit growth compared to what we saw in the first half. And I would just start by saying we expect to see improvements in all segments, but excluding renewables. So if you start with aerospace, We do expect to see strong growth from OE delivers, which is actually driving a mixed headwind, and we expect that to be upset by the shop visits and the services strengths that I mentioned earlier today. On the healthcare side, we also expect the supply chain constraints to improve, and you've seen our backlog there, so we expect to see healthy growth in the second half as well, and a combination of pricing taking hold, I would say, while we continue to invest for the future growth We also expect good profit from health care and on the margin improvement there. For power, I would say it's already in the backlog. But the second half deliveries, both of gas turbines and aero derivatives, are already planned for the second half. And we see strong transactional services growth as well. And we're also getting power, also getting price here. So I would say when we look at our low-end services, Really, the majority there depends on our own ability to deliver. We've talked about sort of two-thirds high convictions and one-third that's supply chain restraints, and that holds. What we have done now, though, is we've taken a more conservative view on renewables, and therefore we no longer expect to see PTC conversion in the year for renewables. So overall, the numbers are right, and most of that depends on our own ability to deliver. You also asked about what about price cost. We're very happy to see that we have positive price in all the segments in the quarter, and we do expect that to continue to improve through the year. We also continue to expect to deliver on our $2 billion of cost out for the full year. We are also seeing, as everyone, inflationary pressures. Saw them in the first half, but we do expect, depending on long cycle versus short cycle, a little bit of a different impact of inflation in the second half, but still working to mitigate that. So that's overall how we get to the low end of our range.

speaker
Cheryl
Operator

Our next question comes from Joseph Ritchie from Goldman Sachs. Your line is now open.

speaker
Joseph Ritchie
Analyst at Goldman Sachs

Thanks. Good morning, everyone, and happy birthday, Carolina. Hope you have something planned later. I guess my question is, good morning. Larry, maybe just, you know, it's interesting that slide four, when you're talking about the progress that you're making across both aviation and healthcare, you know, I'm just curious, like, as you think about the margin trajectory for both of those segments, you know, can we start to underwrite, you know, something closer to a high teens margin in the aviation business, and then maybe just talk about the trajectory of the healthcare margins from here?

speaker
Larry Culp
Chairman and CEO

Well, Joe, thanks for flagging that page. I think what we were trying to do was just help everybody understand that despite some of these supply chain challenges, you don't need us talking about that macro. It's well documented. It's really about, at least for us, what are we going to do? And I think in both instances, in aerospace and healthcare, we're making some good progress that we just need to make more of. And I think as we do that, we'll not only unlock some of this pent-up organic growth, we talked about 500 basis points overall from the quarter, but particularly in services and aerospace and just healthcare broadly, that's going to be, I think, not only good growth, but highly accretive growth. With respect to margins, I think both businesses are marching toward 20%. As we said earlier, with respect to 23 and beyond, we're really now in the throes of our strat plan process with each of the businesses, As you can imagine, a lot of opportunity in aerospace that we need to work through. Healthcare, similar but different in that they're preparing for the spin. But I think later on in the year when you speak with Pete and Helmut, if they get ready, it'll be clear that margin expansion and strong cash conversion are very much an important part of their story. I think first and foremost, they want to demonstrate outsized growth. We think we're going to be well positioned both in terms of commercial execution and the innovation investments to do that. And hopefully that cash conversion can be reinvested both organically and inorganically. But I think in both instances, you're going to see nice margin expansion as we move forward. As to when we hit 20%, give us a little bit of time and we'll give you an updated view later this year.

speaker
Cheryl
Operator

The next question comes from Steve Tusa from JP Morgan. Your line is now open.

speaker
Steve Tusa
Analyst at JP Morgan

Hey, good morning. Good morning. And happy birthday. The first half to second half on health care, you know, that 1.2 going to something close to 1.8, just can we get a little more granularity on that? And then the follow-up would just be how do you actually see the cash

speaker
Carolina Dyback-Hoppe
Chief Financial Officer

and earnings for third quarter you know how does that split between third and fourth with a little more precision so if you start with the healthcare part and the healthcare margins um because what you're asking is really what's the confidence in in improving the second half i would say what we saw that clearly is that we get good orders in but we still have fulfillment issues and the inflation continues to pressure And that's why we now expect the profit dollars to be slightly below our prior guide, so $3 billion, and that on a mid-single-digit top line growth. And I would say for the second half, with what we're seeing, we are seeing fulfillment and pricing improve meaningfully, and we expect that to continue. And of course, the combination of that will help with the significant margin expansion in the second half. I commented on sales price. In the prepared remarks earlier, it was the first time we saw a positive in recent history. We've talked about how we've had that in orders, and now we see it come through in sales. And we expect it to continue to improve through the year, as well as getting deliveries out. In parallel, we're also taking actions, and the team is working really hard on implementing more lean and decentralization to drive redundant costs out. Sort of early stages of that, but we expect to see more of that take hold in the second half. And I would say that at the same time, we are investing in R&D and in commercial activities to really drive the growth for the future. Then you had a question on the third quarter margins as well. Or you asked in general. In general third quarter. So what we're seeing. So I would start with the headlines. I would say third quarter top line would be trending in mid-single digits. ETFs. we would expect to be down year-over-year. And for cash flow, we would expect to be better than previous quarter, but down year-over-year. And if you take that little bit into the context of the second quarter beat, I mentioned this morning that we had some timing impacts, so some of the EPS sort of improved second quarter will impact the third quarter. We had sort of the non-recurring benefits, We also expect to see higher aerospace deliveries, OE deliveries, so that's going to be headwind from profit and margins. And then with the typical seasonality in power, in the second quarter we have the CSA outages and we have a bit lower margin outages in the third quarter. So overall, that's why we get there on EPS. And I would say on free cash flow, so it's a combination. You have sort of the impact on the second quarter, the positive impact on the second quarter, but also what happens in the third quarter with the OA deliveries moving out, we also expect to have a bigger impact on ADNA. And then I would say finally what we are And commented on this morning is that we do see the impact of the supply constraints, which basically leads to sort of orders going up later in the quarter, which means the second quarter delivery is pushed out into the third, third into the fourth, and the fourth into the beginning of next year, which also puts pressure on working capital. So you can expect to continue to see that in the third quarter. And that's why we expect cash flow to be slightly up quarter over quarter, but down year over year.

speaker
Cheryl
Operator

The next question comes from Andrew Obin from Bank of America. Your line is now open.

speaker
Andrew Obin
Analyst at Bank of America

Yeah, good morning. Good morning, Larry. Happy birthday, Carolina. Good morning, Andrew. Hi, Andrew. I guess I should really be greedy and follow my, you know, colleagues, competitors, you know, and ask five questions, but I'll stick with one. On supply chain, specifically in aerospace aviation, You know, how do you solve the issue with castings, both near term, but it also seems it's more of a structural issue for aviation in the longer term, particularly with, you know, a leap ramp up, but also NJD being in the news. You know, what's your perspective near term and longer term sort of dealing with, you know, casting supply chain? Thanks a lot.

speaker
Larry Culp
Chairman and CEO

Andrew, I would say that. if I can just open the aperture a bit relative to the question. You know, it's important that everybody understand that the supply chain challenges in the aerospace industry are far broader than any one commodity at the moment. I mean, we see that not only in our own supply chains, but particularly in the wake of Farm Bro and the conversations we had there with the air framers and others This is something that we're grappling with broadly. I've had an opportunity just in the four weeks that I've been in harness at Aerospace to sit with a number of the CEOs and their teams of our core forging and casting suppliers. Here again, Andrew, no silver bullet. This is a ramp that's going to, I think, have us all very much on our toes. I think what we're trying to do is make sure that first and foremost, our signaling to the vendors is as crystal clear and as consistent as we possibly can. I think over time we've sent many signals, often mixed signals, and it's really tough for them to operate accordingly. I think similarly, both have indicated there are a number of ways in which we can collaborate around design, let alone capacity additions, that will serve everybody and ultimately our end customers better. So there's a lot of work to do. It will be a multi-year task to ramp as the industry is clearly poised to ramp. But that's a high-class problem where I come from and one we're very keen to tackle with our supplier partners in service of our airframer customers. And that's exactly what we're going to do.

speaker
Cheryl
Operator

The next question comes from Scott Davis from Milius Research. Your line is now open.

speaker
Scott Davis
Analyst at Milius Research

Hey, good morning, everybody. Good morning, Scott. I can't think of a worse way to spend your birthday than having to talk to us. But anyways, I hope Larry lets you leave early today. Let's put it that way. Larry, you haven't really talked much about FX. I mean, the dollar has gone through the roof here. And I know like Aero stuff has been using U.S. dollars. Talk to us about the headwinds you have in the other businesses.

speaker
Carolina Dyback-Hoppe
Chief Financial Officer

Yeah, so I would say on FX, for us, our reported sales were 2%. So we had a negative three-point top line from currency. while on the profit and EPS, it's really a material impact. For us, this is mainly a translation impact, because on the transaction side, and you were sort of commenting on that yourself, Scott, that much of our global sales are really US dollar denominated. Aerospace, no exception. And then with the longer projects that we have, where we have FX exposure, we actively manage that and hedge against those. So I would say if you assume the same rates stay for the full year, we would expect a similar impact for the full year. So about three on the top line and more on the bottom line. When it comes to the different businesses, yes, well, it's the ones that are more outside of U.S.-based that are impacted. So you'd see health care and renewables in different ways, but they would both be impacted by the translation impact. But overall, it's a small one. for the reasons that I mentioned.

speaker
Cheryl
Operator

The next question comes from Andy Kaplowitz from Citigroup. Your line is now open.

speaker
Andy Kaplowitz
Analyst at Citigroup

Good morning, everyone. Happy birthday, Carolina. Hey, Andy. Larry, maybe you can give us a little more color into some of the actions you're taking renewables in terms of the fixed cost takeout you mentioned. Do you end up taking a bigger restructuring at some point. And then you mentioned you no longer expect to step up in profit in the second half. Does that mean you expect as significant losses in the second half as you took in the first half? And as the market stands today, do you still think you could achieve your target of approaching break-even in renewables in 2023 or at some point in 2023?

speaker
Larry Culp
Chairman and CEO

Andy, I think what we had indicated back in April is that we would see another approximately $400 million op profit drain in the second quarter. Unfortunately, it played out in just that fashion, but we thought we'd see second half a reduction in that drain, approximately 600 first to second half. Again, that's not happening, unfortunately. I'd break it down really due to three drivers, all of which we've touched on. One, just this more conservative posture in the face of the realities in Washington relative to demand, convertible demand here in 22, the inflationary pressures that have been well discussed, and the fleet durability investments that we indicated we're going to make here as well. So I think you're going to see a second half that resembles the first half more than we would like, but we are working through that. We'll talk again about targets for 23 later. This is still a business that we have confidence in. Even though we may have a lull in demand here in the short term, whether it be energy security, whether it be climate, there will be demand for this business in the U.S. and broadly in attractive markets over the medium to long term, and I think we're well positioned to play there. It's important that everyone remember that while we talk about renewables as a segment, we've got three different dynamics within the segment. We've got offshore wind, which is a growth play for us. We knew that would be an investment over several years. Grid, which is rapidly approaching break-even, and it too has, I think, a role to play in the energy transition. How long it takes us to get to break-even, again, Andy, we'll talk about it in more detail later. But most importantly... We are going to deal with the fixed costs, the so-called fixed costs in the business, but that's just one plank of the plan, right? We've got to do a much better job in terms of modularity and design to not only improve quality and delivery, but frankly to bring down unit costs. What we've talked about in terms of selectivity and price is really important here. We can't chase every order. and we need to continue to make substantial improvement with respect to capturing value for what we deliver. The decentralization of renewables as a segment and even within the businesses is something that will help not only, I think, reduce costs, but more importantly, improve our execution day in, day out. And that's against a backdrop, not unlike we did a few years ago with gas, where we're just going to take a more conservative view for planning purposes of volume, mindful that this lull in the market, again, will be short-lived. So there's a lot going on there. We're going to need some time to work through it. But given what Scott and team did in gas and power broadly over the last several years, I think we have, again, confidence that we'll run a similar set of plays to get not only to break even, but far more respectable returns in that business.

speaker
Steve Winokur
Vice President of Investor Relations

Cheryl, we're going to make time for one more last and hopefully brief question.

speaker
Cheryl
Operator

Thank you. Our final question comes from Josh Pokrowinski from Morgan Stanley. Your line is now open.

speaker
Josh Pokrowinski
Analyst at Morgan Stanley

Good morning, all. Thanks for fitting me in. Hey, Josh. Hi, Josh. So to keep Steve happy, I'll keep it brief here on my end. Just on the aviation ramp here, they're kind of a little later to the party on supply chain maybe versus some of these chip-oriented businesses like healthcare. What's the confidence from here in terms of maybe the ability to ramp sequentially? Talk a little bit about that in the context of, I think, Andrew Obin's question, but maybe with shop visits as well, where you had some issues in the first quarter, I think, relative to plan. And related to that, how long can the spares dynamic sort of offset whatever gap is forming there? Thanks.

speaker
Larry Culp
Chairman and CEO

Well, Josh, a couple of things there. Let me try to cut through it. What matters most is the customer. And For sure, the spares in the aftermarket helps us financially at a time like this. But we don't want to have that in any way dilute our focus on shortening cycle times and improving on-time delivery, right? We know our major airframer customers need more engines from us than we have providing, and that will be the case for the foreseeable future. So we need to ramp, again, in a predictable, reliable, stable way. That's what they want more than anything, so that they can plan the rest of their assembly operations accordingly. And that's where we're focused. So there are a whole host of things that we've touched on here relative to our own operations, which we're driving in terms of improving yields, improving capacity, and the like. And the same thing applies in the supply base. I think the distinction, Josh, I would draw with SEMI is that Semi didn't have the dramatic downturn that this industry, and I say the industry, saw with COVID, and then the dramatic springback. So when the industry was turned down to such a degree, right, and we can talk about this commodity, that commodity, I would argue you see a similar dynamic with some of the pilot shortages that we hear about, some of the operating challenges the airports are going through. This is an industry that was nearly mothball that is working very hard to come back to meet ultimate leisure and business travel demand, and we're very much a part of that industry and have our version of those challenges. But we're on it.

speaker
Steve Winokur
Vice President of Investor Relations

Great. Larry, any final comments before we wrap?

speaker
Larry Culp
Chairman and CEO

You bet, Steve. I know we're tight here, but in the close, appreciate everybody staying into overtime with us. We delivered A strong quarter, the actions we're taking to improve delivery, price, and cost performance are building meaningfully stronger businesses at GE, and our planned spends are on track. We appreciate your interest in GE, your investment in our company, and your time today. Steve and the entire IR team stand ready to assist as you consider GE in your investment processes. Thank you.

speaker
Cheryl
Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q2GE 2022

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