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spk08: Good day, ladies and gentlemen, and welcome to the General Electric third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator today. If you experience issues with the webcast 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.
spk15: Thanks, Liz. Welcome to GE's third quarter 2023 earnings call. I'm joined by Chairman and CEO Larry Culp and CFO Rahul Ghai. 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. Over to Larry.
spk09: Steve, thank you and good morning, everyone. Before we start, I want to reiterate that the GE team stands firmly with our employees, customers, and all those impacted by the brutal Hamas attacks on Israel in the subsequent war. Our priority has been the safety of GE employees in the region. We're doing everything possible to support them and their families. Last week, GE announced a half a million dollar contribution to help with the humanitarian efforts for the many people in Israel, Gaza, and the surrounding areas impacted by these horrific events. Terrorism has no place in our society. And like so many, I'm devastated by the loss of lives, violence, and suffering of innocent people. Turning to the quarter, GE delivered a very strong performance and we're raising full year guidance again. GE Aerospace continues to experience rapid growth, driven by robust demand and solid execution, largely in commercial engines and services, another significant quarter for the team. Our fleet of 41,000 commercial engines and 26,000 rotorcraft and combat engines continues to expand as we work to define the future of flight. Today, we're navigating a still challenging supply chain environment to deliver for and support our customers. Year-to-date, commercial engine deliveries are up 30%. Across GE and Safran's MRO shops this quarter, we've improved LEAP quick-turn shop visits over 30% year-over-year and sequentially. For tomorrow, we're building our backlog and sales pipeline during unprecedented industry growth. Recently Air Canada ordered 36 GENX-1B engines plus four spares. Building on GENX's rich history, it's the fastest selling high thrust engine with over 50 million flight hours. For the future, we're investing in R&D and developing next generation technologies. For example, we're advancing full system testing for our hybrid electric systems at our electric power center in Ohio. We're also collaborating with industry partners in NASA on an eco-demonstrator program to measure sustainable aviation fuel impact on the environment, particularly high altitude emissions. And our growth opportunities extend beyond commercial. In defense, we're pleased the U.S. Army has accepted the first two T-901 flight test engines for the future attack reconnaissance aircraft prototypes. The T-901 will also upgrade the U.S. Army's Apache and Blackhawk helicopters providing 50% more power, reduced lifecycle costs, and lower fuel consumption. And we've been selected for development work on the cockpit voice and flight data recorder systems for the future long-range assault aircraft program. Next-generation programs like these demonstrate how GE's rotorcraft programs enable the military and our allies to take on more challenging missions today and in the future. And we're pleased to see Congress recognizing this important work by including funding for advanced engine development, like the XA-100, in both the House and Senate Fiscal Year 24 defense appropriation bills. However, even with these strong results, we're far from satisfied. Through our lean transformation, we're making real progress, improving flow and eliminating waste. For example, our team in Pune, India, has increased output of high-pressure turbine manifolds by three times. But we need to do more, as do our suppliers, given the pace of demand for both aftermarket services and new engine deliveries. There are pockets of improvement now. Material input increased double digits sequentially, supporting spare parts delivery, which was up significantly year over year. We're working within our own plants and in partnership with our suppliers to deliver sequential improvements in output and turnaround times day by day, week by week. Over to GE Vernova, where performance is strengthening pre-spin at both renewable energy and power. Customers continue to invest in the energy transition, driving meaningful demand for our products and services. BRID and now Onshore Wind were both profitable this quarter, and we expect improved performance from here. BRID customers are increasing their infrastructure investments globally to connect renewables and improve reliability. Here to date, orders remain strong at more than three times revenue and with higher margins, which will support profitable growth through the decade. We've also increased selectivity, streamlined cost, and rationalized our industrial footprint, tracking toward full-year profitability at GRID. I really like the way the GRID team is using Lean to drive this turnaround and to deliver profitable growth. For example, across power transmission's 14 sites globally, we've reduced lead time by roughly 15% year-to-date, and we're targeting a 20% reduction by year-end. Now at Onshore, our strategy to focus on fewer markets, pivoting more toward North America, where GE Vernova is the market leader, is working. And we're relying more on our workhorse products, now representing 70% of equipment volume this quarter. These shifts are translating to 700 basis points of higher margins in backlog this year. We're still driving cost out, fewer layers, reducing headcount, and empowering leaders closest to the operators. Finally, we're improving fleet reliability. We're now halfway through our enhancement program in the field and expect to be roughly 60% complete by year end. As expected, offshore wind remains difficult this year. with losses of roughly a billion dollars in 2023. Next year, we expect offshore will have similar losses, but substantially improved cash performance. So it's a tough $6 billion backlog that we're working our way through, which we expect to largely complete over the next two or three years. Meanwhile, we're making operational progress with rising availability on the 800 installed megawatts of our six megawatt platform. Electricity is now being produced at Dogger Bank, and we recently had the installation of our first Hollyodex turbines at Vineyard Wind. Looking forward, we've expanded Vicka Bates' role to CEO of the entire wind business to leverage our progress in onshore and offshore. We're taking a similarly disciplined approach to writing new business, like we've done over at GAS onshore and grid, with increased rigor on pricing, terms, geographic exposure, and other risks. All in all, given power's continued strength and with our two largest businesses in renewables, grid and now onshore delivering, plus our plan for offshore, we're highly confident in successfully spinning off GE Vernova early in the second quarter. Across GE, I'm pleased with how we're operating as a simpler, more focused business at both GE Aerospace and GE Vernova. Another strong quarter, but plenty more to do. My thanks go out to the team for their dedication and commitment to serving our customers. It's been nearly two years since we announced our intention to create three independent, investment-grade industry leaders, and now we're closing in on the final step. Today, we announced plans to spin off GE Vernova and launch GE Aerospace in the beginning of the second quarter of 2024. Both will be listed on the New York Stock Exchange with GE Vernova as GEV and GE Aerospace carrying forward under GE. We've made some important hires and promotions to ensure we have the best teams leading these businesses forward. At GE Aerospace, we've completed the functional leadership team, naming our heads of corporate affairs, human resources, legal, and treasury with experienced leaders from inside and outside GE. At GE Vernova, we added seasoned public company CFO Ken Parks. As I mentioned a moment ago, Vicka Bate is now CEO of the wind business. We've also further simplified and strengthened our balance sheet by redeeming the remainder of our preferred equity and selling a portion of our air cap shares for $2.7 billion of proceeds. Our balance sheet is well positioned to support the launch of two investment-grade companies. And we're approaching some key spin milestones. GE Vernova will file a confidential Form 10 shortly, with the initial public filing expected in the first quarter. Soon, we'll announce each company's board of directors. And in early March, GE Vernova and GE Aerospace plan to hold investor days. Building on our success at GE Healthcare, we're exactly where we want to be at the end of October for both GE Aerospace and GE Vernova. Now over to Rahul for more detail on our results.
spk12: Thank you, Larry. Turning to slide four, I'll speak to the quarter on an organic basis. Overall, we delivered meaningful growth across our headline metrics. Orders were up double digits, with services up 15%, driven by commercial aerospace, and equipment up 22%, with growth in all segments. Revenue increased 18%, benefiting from strong market demand, improved execution and pricing. Aerospace was led by commercial services and engines. Renewables was led by grid and offshore, and power from heavy-duty gas turbines and aero derivatives. All segments contributed to adjusted margin expansion of 760 basis points. This included the absence of last year's wind-related charges and the benefits of volume, price, net of inflation, and productivity, and continued investments in growth. Adjusted EPS was 82 cents, up almost $1 year-over-year. Excluding last year's wind-related charges, adjusted margin still expanded 400 basis points, and EPS was up 59 cents, or more than triple what we delivered last year. we generated $1.7 billion of free cash flow, up roughly $1 billion, largely driven by earnings. Working capital was a positive $400 million flow, driven by disciplined receivables management, while inventory remained inflated due to continued supply chain challenges. Year-to-date, free cash flow was $2.2 billion, up $2.5 billion, reflecting higher earnings, reduced working capital, and improved linearity. Switching to corporate, results improved significantly due to energy financial services gain on sale from investments and higher interest income. Also, as we prepare to reduce costs, as we prepare to become the standalone businesses, for the year, we now expect expenses in the $500 million range. At insurance, we completed our annual review of liability cash flow assumptions under the new accounting standard. This resulted in an immaterial adjustment to earnings, indicating claims experience is consistent with our models. Given GE Aerospace's strength and GE Vernova's improvement, we are raising full year guidance and now expecting revenue growth of low teens up from low double digits Adjusted EPS of $2.55 to $2.65, up 40 cents at the midpoint, largely from improvement in operating profit that we now expect to be in a range of $5.2 to $5.5 billion. And free cash flow of $4.7 to $5.1 billion, up $550 million at the midpoint, largely from higher earnings and lower AD&A outflows. Now, spending a moment on each business, starting with GE Aerospace. Demand remains robust, with GE and CFM departures growing mid-teens year over year. Orders were up 34%, with strong growth in both equipment and services. Revenue was up 25%, led by commercial engines and services, up 29%, and defense growing 8%. Profit grew over $400 million, or more than 30%. Notably, margins expanded 120 basis points to reach 20.4%. Higher services, volume, and pricing net of inflation more than offset investments and adverse mix. In a commercial business, services strength continued to drive profit. With services revenue up 31% from volume, pricing, and heavier work scopes. External spare parts were up more than 35%, and internal shop visits grew 2%, with supply chain constraints impacting growth. Commercial engines revenue grew 23%, with LEAP deliveries up 12% year over year. We are now planning for a 40% to 45% increase in LEAP deliveries this year, down from our 50% target at the beginning of the year. We now expect OE revenue to grow low to mid-20s and services revenue to be up mid to high 20s for the year. In defense, book-to-bill remained strong this quarter, again greater than 1 and 1.3x year-to-date, highlighting the strong demand environment and quality of our franchisees. Revenue grew high single digits with strength in services and EdisonWorks offsetting lower unit deliveries. Based on GE Aerospace's year-to-date strength, we are raising revenue growth to the low 20s and profit to be about $6 billion, up roughly $1.2 billion year-over-year, with free cash flow growth trending better than prior expectations. Moving to GE Vernova. Lean, along with better underwriting, selectivity, and productivity, is delivering stronger results we mentioned earlier at grid and now onshore. At renewables, orders grew again, up 3% this quarter and up more than 80% year-to-date to nearly $18 billion. Grid orders increased over 50% this quarter. And while primarily an equipment business today, we're starting to grow grid services that was up double digits this quarter. In onshore, North American equipment orders for the quarter were up nearly 40%, and year-to-date are up more than 2.5 times over prior year. The IRA continues to be transformative, establishing multi-year U.S. demand visibility for future growth. Internationally, onshore orders were down meaningfully, but at better margins, consistent with our strategy of greater selectivity. Revenue grew 14%. Grid increased with double-digit growth at each business. At onshore, North American equipment growth was more than offset by lower repower and international equipment. At offshore, revenue more than tripled year over year and grew sequentially with higher nacelle output. Profit improved from our turnaround efforts. Excluding last year's elevated reserve, renewables margin still expanded roughly 600 basis points, driven by continued price and productivity. Onshore and grid margins expanded due to price and productivity, and grid margins also benefited from additional volume. For the year, renewables now expects low double-digit revenue growth. We are maintaining the guidance for significantly better year-over-year profit with onshore and grid improvement, more than offsetting the offshore pressure. Turning to power, we delivered solid year-over-year revenue growth and margin expansion with seasonally lower outages. Equipment orders grew slightly as higher heavy-duty gas turbines more than offset lower aero-derivative units. Services declined slightly as high single-digit growth in gas transactional services was offset by aero-derivative and steam services. For the year, we still expect total services orders to grow low single digits. Revenue grew 9%, largely on price and higher scope on heavy-duty gas turbine and aero-derivative equipment. Services grew again, up low single digits. Profit grew roughly 60%, with 200 basis points of margin expansion, driven by higher volume, pricing, and productivity. which more than offset inflation pressure. Year-to-date, power orders have grown low single digits, revenue mid-single digits, and margins have expanded over 100 basis points. This was led by services including higher gas utilization, up low single digits, benefiting from a continued coal to gas switching. We also shipped nine HA units this year and now have more than 47 gigawatts of installed capacity. continuing to extend our HA services billings to $1 billion by mid-2020s. In the fourth quarter, Power is well positioned for sequential profit growth from seasonally higher services volume. For the year, Power continues to expect low single-digit revenue growth with better year-over-year profit. Taken together, for GE Vernova, we are now expecting high single-digit revenue growth and profit improvement of over $800 million year-over-year at the midpoint. We are raising the low end of our profit guidance, driven by both renewables and power, and now expect negative $300 million to negative $100 million of operating profit, as we continue to expect flat to slightly improved free cash flow. Overall, we are really encouraged, proving with grid and onshore that we can deliver better results. This, combined with Power's continued strong performance, will drive meaningful profit and cash flow improvement at GE-Vernova next year. And with that, let me turn it back to Larry.
spk09: Rahul, thank you. To summarize, GE Aerospace grew rapidly again. At GE-Vernova, renewables improved sequentially and Power continued to perform well. Overall, a very strong quarter for GE, one that gives us confidence and thus allows us to raise our full year guide. More importantly, we're poised to launch two innovative global service-focused industry leaders in less than six months. I'm proud of our team and even more excited for what lies ahead. Steve, let's go to Q&A.
spk15: Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask one question so we can get to as many people as possible. Liz, please open the line.
spk08: Ladies and gentlemen, if you wish to ask a question, please press star 1 1 on your telephone. If you wish to withdraw your question or your question has already been answered, please press star 1 1 again. Our first question comes from the line of Scott Doishley with Deutsche Bank.
spk13: Hey, good morning. Good morning. Rahul, is the lower-leap delivery guide a function of softer, narrow-body deliveries at the air framers, or is this more related to challenges to your own production ramp-up? And then how should we think about the impact of 2024? Thank you.
spk12: Let me start, and Larry, I'm sure, can add here. It's primarily a function of our own supply chain challenges that we are having internally. As we look at our supply chain environment, while we're working extremely hard, we are seeing an improvement in total material inflow, the supplier delinquencies still remain high. Actually, we're up sequentially about 25% from 2Q to 3Q. So that is impacting our output on the other end. And, you know, for next year, we're still expecting 40% to 45% improvement in LEAP deliveries from where we end this year.
spk08: Our next question comes from a line of Nigel Koh with Wolf Research.
spk01: Thanks. Good morning. Morning, Nigel. Just one question. Hi, guys. So I think, Larry, you mentioned offshore losses of about a billion this year. I think you mentioned similar next year. Is there still a pathway to break even to profit for renewables next year?
spk09: Yeah, you know, I would say, Nigel, that We're really pleased overall with renewables. Again, with onshore turning profitable in the quarter, with grid now profitable two quarters in a row, with the prospect of being profitable, I think, for the full year, that's really, I think, sets us up very well. But offshore will be difficult. That's what's behind those underlying numbers for this year and for next. I do think we're making the operational progress that we talked about, both the six megawatts and the new uh, projects, uh, with Darger bank and with vineyard, but it is a problematic financial profile. We'll work our way through the $6 billion, uh, backlog over the next couple of years as we, as we indicated, I think with the progress and the momentum we've got in grid and with onshore with power as well, we've got, uh, we, we should deliver sequential improvement in profitability, uh, from here, but offshore will be, uh, will be difficult. I think what we're encouraged by, though, is that the application of what we've done in the other businesses around selectivity is really relevant here. We know the industry is ready for a reset. You've seen that in the comments from a number of folks, New York State over the last couple of weeks as well. So we think we can make a much better business with offshore wind, but we're staring at some challenges that we need to address here in the fourth quarter and in 24 for sure.
spk08: Our next question comes from the line of Seth Seidman with JP Morgan.
spk04: Hey, good morning, everyone. Morning. Good morning. So I wonder maybe, Larry or Rahul, if you could talk about the aftermarket expectations. You said mid to high 20s this year. Maybe kind of how that's changed or if it's changed between internal shop visits and spares and then kind of how we interpret the big sequential growth in spares during the quarter? Is that a new sustainable level? Was that driven by pre-buy ahead of a price increase? Is it driven by the price increase itself? Maybe just to level set expectations on aftermarket.
spk12: Yeah. So let's start with the second part of the question first. Seth, and we'll go back to where you started. So on the spare part revenue, spare part revenue was up about 35% or more than 35% this quarter. I would say three main things, volume, pricing, and increased work scope. Volume growth continues from mid-teens departures in the quarter, and then stronger departure growth in the first half, which leads to volume in the third quarter. And also keep in mind that it's less of a challenge to kind of ship, you know, spare parts versus completing a shop visit or an engine. So that also helps with shipping spare parts when the volume is strong. The second part, I would say, going back to pricing, we implemented a high single digit price increase this quarter. Now we had pulled forward the price increase from the fourth quarter to the third quarter. So we got a couple of months of incremental price in the quarter. And then combine that with what Larry's been pushing for the last 12 to 18 months is just very, very strong pricing discipline. So it's not just about implementing a price increase. It's also about managing the implementation of that price increase. So I think we're doing a better job of that. The last thing I would say is the work scopes have been heavier, both on the narrow bodies and on the wide bodies. So wide bodies, you know, they're coming back to kind of second shop visits and Narrow bodies is primarily a phenomenon of customers kind of trying to constrain spending in challenging times, especially in China last year. So now as they're a little bit more cash, the departure is growing, their work scopes are increasing. So I would say those are the three main levers of higher spare parts growth in the quarter, which was more than 35%. I would not attribute any of that to pre-CLP buy-ins. Now, as you look forward to the first part of your question between spare parts growth and shop visits, the spare parts, I would say, are strong. We expect kind of mid-20s growth in the fourth quarter here, which will be in line with where the departures are. Shop visits, I think, for the year, we're in that kind of low teens to mid-teens category. I think that's what we are thinking right now, given how challenging supply chain has been. And shop visits were up a couple of points in the third quarter. So we think for the year, we're kind of in the low teens to mid teens range.
spk08: Our next question comes from the line of Julian Mitchell with Barclays.
spk11: Hi. Good morning. Morning. Morning, Julian. Morning. Maybe just my question around renewables and sort of fully understand the – Offshore backlog, but maybe just wanted to focus on a couple of other things one was Are you seeing any shift in the kind of new orders or new equipment orders picture in renewables? Just because it seems a tougher environment for project development and financing In general across different industries. Just wondered if your perspective on that had changed for the coming quarters and And sort of allied to that because of the working capital dynamics of renewables with customer advances and so on, any thoughts around sort of, you know, what level of cash balance Venova should have upon spin and sort of any mix of GE versus external financing for that or funding for that cash balance?
spk09: Sure. Well, to start with, I think what we have seen through the course of the year, again, particularly with onshore and grid, is just incredibly healthy demand despite the rate environment. Obviously, the incentives here, the incentives in Europe, the push with respect to the energy transition at large really has kept us Very busy, so no change really whatsoever with respect to our commentary in that regard. I think as we look into the fourth quarter, as we look into 24, any one project can move for various reasons, but I think we continue to be quite optimistic about the underlying demand that we see in those businesses. We know offshore has its own dynamics. Again, to the reset comment I made a moment ago, But by and large, I think we're feeling very good about the demand environment. Right.
spk12: And just to add to that, Julian, not only is the demand environment good, but as Larry kind of mentioned in his prepared remarks, we are seeing better pricing and the selectivity, the strategy that, you know, Scott, Larry, Vic, or everybody's been pushing come through. Our grid backlog margins were up about three points and onshore backlog margins were up about seven points in the quarters. So that should obviously help with the turnaround efforts in 2024. So strong demand environment, good pricing on the renewables orders. Now, switching to your second question on the cash balance, first and foremost, we do expect both Brnova and Aerospace to be investment grade at spin, right? So that's kind of priority number one. And as we announced back in September that we do expect that we're no longer spin in a net cash position. So we're working through our framework on exactly what that number looks like. Obviously, what we want to do is we want to make sure that both companies have enough operating cash at the time of spin. In addition, what will also happen is, as you probably noticed in our 10Q, we have about $2 billion of restricted cash. And most of that is with Vernova right now, as we think about where that cash balance is. So as we think about the cash balances at SPIN, it'll be the restricted cash for both businesses, plus the operating needs of that business. And there's enough cash on the balance sheet at GE to make sure that this happens. And we definitely don't need to tap into any external markets to make sure that both companies have enough cash at SPIN. And we'll give you an update as we get closer to SPIN.
spk08: Our next question comes from the line of Sheila Caillou with Jefferies.
spk00: Thank you. Good morning, Larry and Raul. Good morning. And Steve. Maybe if I could ask about aerospace margins, you know, same as last quarter, very good, 19.4 year-to-date, above 20% in the quarter, just helped lift the guide up, which still implies a sequential step down in Q4. you know, the OE mixed headwind with the 450 leaps in the fourth quarter to hit the 1650 is, I guess, a lot of it. Do you still expect 250 basis points of OE headwind this year? How does that filter into 24 and the break even by 26? Thank you.
spk12: Okay. It's a multi-part question, Sheila. I'm going to try to remember everything. If I forget, just please jump in here. So, you know, you're right. I think we had a good quarter, you know, 25% revenue growth $400 million of profit growth, 120 basis points of margin expansion in the quarter, continue to give us confidence to raise the year. So what we did in the quarter, as you saw in the guide, we raised the guide for the year by about $500 million of revenue, slightly more than $250 million of profit. So about a 50% drop for the incremental revenue. Obviously, now part of that is the higher services revenue, lower OE revenue that you referenced. So, you know, as you kind of think about now what the fourth quarter looks like, as you go from third quarter to the fourth quarter, there is about $200 million of incremental OE revenue. And even though services revenue is still strong, kind of mid-teens, it is a lower sequential growth, just given the timing of the spare parts shipment. So that's impacting the quarterly margin dynamic to a little bit. But, you know, having said all that, we're still expecting kind of low 20% revenue growth in the year for GE Aerospace, or a billion two to billion three of profit, you know, close to a point of margin expansion as we end the year. So it'll be a really, really good year. Now, as you pointed out, you know, LEAP delivery is a little bit lighter than we had initially expected. Still a pretty substantial ramp in the fourth quarter we're expecting. based on the revised guidance that we just provided, we expect about a 15% growth from 3Q to 4Q and a pretty big ramp year over year. Now, some of the LEAP deliveries have pushed out into 24 and 25. So as we think about the outer year margins, we had guided about a point of margin headwind from LEAP between 23 to 25. So now that would just be marginally higher, just movement of LEAP engine shipments from 23 to 24. I don't know if I covered all the questions.
spk08: Our next question comes from the line of Dean Dre with RBC Capital Markets.
spk02: Thank you. Good morning, everyone. Good morning, Dean. I was hoping we could get some comments on the upside in free cash flow this quarter and the progress that you're making and having free cash flow more linear through the year. Looks like that's working. And any comments on the dynamics we should expect for free cash flow in the fourth quarter? Any puts or takes?
spk09: Well, Dean, thanks for noticing, right? To be up a billion dollars in the quarter year over year, to be at, what, 2-2 here year to date, this was the time of the year in years past where we were kind of holding our breath, waiting for all the cash flow in the year to come in in the fourth quarter. I think what you see again is a much more linear approach to running the business coupled with obviously uh steady demand through the course of the year both at arrow and across vernova so much of what we've tried to do in moving away operationally from the the year-end dynamics let alone the quarter-end dynamics i think has uh borne some fruit but we are far from a uh shall i say a a perfectly level-loaded business at both aerospace and vernova but we know as we continue to make progress there will not only be the positive cash effects that you're pointing at but frankly there's a lot of cost we think we can pull out over time as well as we drive greater linearity and have less month and quarter and year-end sprints which we know we can do but we rarely do efficiently
spk15: Yeah, and for the fourth quarter, just on that number question, just take the 47 to 51 midpoint, subtract our year date number that Larry mentioned, Dean, you end up with a few billion.
spk08: Our next question comes from the line of Andy Kaplowitz with Citigroup.
spk07: Good morning, guys.
spk09: Good morning, Andy.
spk07: Larry, could you give us more color in how you're thinking about the defense business at this point? It was up high some of the digits in the corner. It does seem like you're having a better year this year. Have you turned the corner toward better operating performance in that business? Could you talk about the budgeting environment for that business moving forward?
spk09: Well, Andy, I would say that we have made some progress, but we are far from satisfied. You clearly saw the high single-digit growth in the quarter and now year-to-date. I think we'll be in that zone for the year. But the supply chain challenges that we've talked about, which has made some of our equipment shipments somewhat lumpy, both with respect to our internal process yields and our material availability from our suppliers, is still job one in this business, right? I think if you look at what we've done inside of our own shops, we're really encouraged by the process improvements that we've been able to lay in. If you look at some of the delays that are a function of quality internally, in the third quarter, we were at our lowest level in the last two years. Still plenty to do, but that's a lot of progress. We're adding capacity, not only in production, but in our test cells, particularly up the road here in Lynn. And we have put even more people into the field with the supply base. Rahul mentioned earlier some of the delays that we have seen in terms of on-time performance by our suppliers, and that covers an array of commodities, be it just general raw materials, castings, forgings, valves, and the like. There's a lot of work to do to create that flow that Dean and I were talking about a moment ago. I think in terms of the top line environment, again, really encouraged by the progress that we're seeing with FARA. I think we are heartened by what the Congress is poised to do with respect to continuing to support the XA100. And we know as we look forward, just given the dynamics in the world, there's going to be plenty of opportunity for us both on rotorcraft and in combat to continue to grow this business. And it's a business we don't talk a lot about. It may be a bit overshadowed by commercial, but that's not the way we're operating today. And I think as we get ready for the Vernova spin, there'll be more time and attention paid externally on defense. And I think the team is very much looking forward Doing a lot of good work, plenty of opportunities, but we need to execute better, and again, we need our suppliers hand-in-hand in that effort.
spk08: Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners.
spk14: Thank you. Good morning, everyone. Good morning. Good morning. Hey, could we just talk a little bit more about cash flow and kind of what you're thinking into next year? The spirit of my question, Larry or Raul, is we're still dealing with kind of a sizable difference between actual free cash flow and adjusted free cash flow. I think some of this is warranty and other things working through the system. Can you just elaborate a little bit on you know, the factors and the disconnect, and can we get maybe a normalization of these factors as we think about the independent companies in 2024?
spk12: Yeah, let me kind of, let's just spend maybe a minute on our free cash flow here. So, you know, first, as you look at our cash for the year, it's a really good year. I mean, we're going to generate, you know, $4.9 billion of free cash at the midpoint up from $3.1 billion that we did last year. And a lot of that is coming from earnings growth. Clearly, that is a huge contributor. And, you know, that is helped by kind of lower interest payments. But if you look at our working capital performance continues to be really strong this year. I mean, you've seen our year-to-date numbers. You've seen, you know, even as you project that into the fourth quarter, we are doing an exceptional job managing our day sales outstanding. So despite our you know, top line revenue growth, we are still expecting that overall our AR balance will be neutral, Jeff. And the reason I say that, it just kind of shows the opportunities that the business has for continued improvement. And then, you know, progress payments, contract assets continues to be a positive as well, given the strong growth environment. The path I want to anchor on is a little bit around inventory. Given the supply chain challenges that we are having, inventory, as you will see from our queue, was up substantially in the quarter. Now we're expecting it to come down slightly as we get into the fourth quarter, but it will still be a substantial inventory build by the end of the year. And as we look forward into 2024 and 2025, that should start getting liquidated with improved supply chain performance. So that is where... I would say that is what gives us the confidence that this will be a continued good cash flow story. Now, as you look, you know, overall, we'll be at about 160% plus of free cash flow to net income. Part of that is amortization. But even if you take amortization out, it's still 130%, you know, 130% free cash flow performance. So it's still very, very strong. Now, on your question on, you know, between, I think most of that adjustments below the line are related to spin-related adjustments. I don't think there's anything... and insurance and SPIN-related restructuring costs and expenses. And some of that will obviously continue as we go into 24 and maybe even a little bit into 25. But after that, at least the SPIN and the restructuring costs should end.
spk06: And the insurance is not a big number.
spk08: Our next question comes from the line of Andrew Obin with Bank of America. Hi.
spk10: I didn't hear. I assume it's me. Good morning. Good morning. Okay. So just a question on onshore wind capacity. How close are you to the maximum capacity in onshore wind? I think in the past we've shipped over 1,000 turbines in a quarter, but there have been capacity reductions. just trying to understand how close you are to maximum throughput at this point.
spk09: With respect to onshore, Andrew? Yes.
spk10: Yeah.
spk09: You know, I would say that when you look at the backlog that we have and with what's in the sales pipeline, I wouldn't say that we are sold out, but there is a a limit to what we're going to be able to deliver in 24 and 25. And I think our customers are mindful of that. It's a little bit why we have seen, I think, the level of activity thus far this year with an eye to not only deliveries this year, but 24 and 25. I'm always hesitant, Andrew, to talk about capacity, particularly in a business like this, as truly being fixed because there's so much underlying process improvement that can unleash capacity. It's not strictly a function of, if you will, fixed capital investments that we've made. Not that we would be averse to that, but I think we wanted to really pare down the overall cost structure, not strictly an effort focused on manufacturing capacity, and really put ourselves in position to grow off a lower cost base do that in ways that will allow delivery to be an advantage, and then gradually, smartly, add any fixed capital that we might need. If you look at the underlying performance that the onshore wind team has delivered here in the third quarter, will deliver in the fourth quarter, deliver in 24 and beyond, you see all that coming home, which we're pleased to see, of course.
spk06: Try to get a couple more in, Liz, if we can squeeze it.
spk08: Our next question comes from the line of Joe Ritchie with Goldman Sachs.
spk03: Hi, good morning, guys. Hey, Joe. Joe. And so just a – sorry for the multi-part question, but I guess just on the timing of the spin, early 2Q or the beginning of 2Q, so is it right to expect it ahead of 1Q earnings? And then secondly, on the profitability dynamics in both onshore and offshore wind, you know, I'd love to hear any more details around the type of profitability you expect to exit on onshore wind this year. And then also with offshore, it seems like you're shipping more this year. And so that seems to be a good sign that you're getting through more of your unprofitable backlog. Any comments around that would be helpful as well.
spk09: Sure. I think to your first question, Joe, the answer is pretty simple. Yes, we should be in a position to bring forward Vernova ahead of our typical earnings announcement timeframe early in the second quarter. I would say with respect to onshore wind, again, a lot of improvement. It will be a profitable second half, not unfortunately a profitable full year. We've got a shot at doing that at GRID, as I mentioned earlier. But I think as we look at 24 and onshore, we should be in the low single-digit range. Obviously, the intention is we go through the budget cycle here in November and December to see if we can't put together a credible plan to do better. But that's the way I would think about it, just given the back half momentum that we'll have entering into next year.
spk12: And Joe, just to kind of complete that picture on renewables total, we, you know, as Larry said, we expect at least onshore to be at least kind of low single digit margins. Grid would be kind of mid single digit range. Offshore, as Larry said in his prepared remarks, you know, it kind of, you know, we expect kind of similar levels of losses next year. But if you put all that together, it's still a pretty significant improvement year over year on both profit and then, you know, even more so on cash. So that's what we're expecting. So we won't be too far off from the framework that Scott laid out at Invest Today for the renewables business.
spk09: And Joe, just to make sure we're clear about the shipments, the progress that you're seeing at Dogger Bank and Vineyard, operationally, I think we're pleased to see that. I know our customers are to see those initial installations and the initial generation of power. However... That progress is what triggers the revenue recognition, which in turn carries the losses. So that's a little bit of what is operationally encouraging but financially difficult to work our way through. So just wanted to clarify that point.
spk15: Liz, let's make time for one last question.
spk08: This question comes from the line of Chris Snyder with UBS.
spk05: Thank you. I'm assuming you can hear me. I wanted to follow up on aviation margins, which continue to outpace expectations. So I understand the mix headwinds are coming through maybe a bit more muted as the service business is doing better. But it also sounds like price costs and just efficiency continues to work in the company's favor. Can you talk about some of the company-specific actions that have been boosting or helping segment margins outside of just mix? And does the current strength you're seeing change the way you think about the 20% target for 2025?
spk06: Thank you.
spk12: So, you're right. I mean, there's lots of really good stuff happening in the company. You know, the price is clearly a positive for us. It was a positive. We were price-cost positive in 22 in aerospace. We'll be price-cost positive in 23 in aerospace. not only at the overall company level, but even at commercial and at defense. So the business is doing really well on kind of getting the price increases and managing the inflation. We've made progress on productivity as well. So that's the other part, not to the extent that we would have liked, but it is progress. And we are encouraged by even the underlying progress on productivity that is currently sitting in our inventory numbers that will roll through next year. So there is positive momentum on productivity. So all that is a positive. And as you think about kind of the 20% margin number for 2025, obviously, you know, that's still at the end of 2023. So it's a couple of years away. But as you think about where we're going to end the year to 2025, you know, we're going to end the year, call it a $6 billion of profit. We said between, you know, call it, between $7.6 and $8 billion of profit for 2025. So we still have a billion-ish of profit growth every year between 2024 and 2025. So that's a mid-teens profit growth, which is pretty good. And the benefits of volume, price, productivity will be partially offset by this leap headwind that we spoke about. We start shipping 9X as well. So 9X, that's going to create some incremental pressure. And then we'll continue to invest in R&D. So that's the construct to get to the 20% margins.
spk15: So, Larry, any final comments?
spk09: Steve, thank you. Just to close, appreciate everybody's time today. Obviously, very strong performance so far this year. A lot of progress toward the launches of both GE Aerospace and GE Vernova. And frankly, I've never been more confident in our company's future. We appreciate your time today and your investment and support of our company.
spk08: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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