General Electric Company (NYSE:GE) Q4 2022 Earnings Call Transcript

General Electric Company (NYSE:GE) Q4 2022 Earnings Call Transcript January 24, 2023

Operator: Good day, ladies and gentlemen and welcome to the General Electric Fourth Quarter 2022 Earnings Conference Call. 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 Winoker, Vice President of Investor Relations. Please proceed.

Steve Winoker: Thanks, Liz. Welcome to GE’s fourth quarter and full year 2022 earnings call. I am joined by Chairman and CEO, Larry Culp and CFO, Carolina Dybeck Happe. Keep in mind that some of the statements we are making are forward-looking and based in 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. As a reminder, GE completed the separation of our healthcare business this month. GE Healthcare will report separately on January 30. So while included in our 2022 results, we are focusing today’s commentary primarily on GE Aerospace and GE Vernova, our portfolio of energy businesses. Our remarks will also be simpler and shorter today, reflecting the company we are now and we will move more quickly to Q&A. I will now hand the call over to Larry.

Larry Culp: Steve, thank you and good morning everyone. 2022 marked the beginning of a new era for GE, following 4 years of strategic and operational transformation. We successfully separated GE Healthcare in a spin-off, distributing approximately 80% to GE shareholders on January 3. We strengthened our foundation, retiring an additional $11 billion of debt, bringing our total debt reduction over $100 billion since 2018. We continue to improve our operations, further embedding lean and decentralization to better serve our customers. And today, excluding GE Healthcare Services, which are both higher margin and more resilient, represented even larger part of our portfolio about 60% of revenues and 85% of our backlog. We finished the year strong, delivering revenue growth, margin expansion and better cash generation.

GE Aerospace led the way as we executed on an unprecedented ramp. Within GE Vernova, power delivered with continued stability at gas and we took significant actions to position renewable energy for future profitability. External catalysts like U.S. climate legislation and the European focus on accelerating electrification are increasing investment in new decarbonization technologies. This progress has positioned us to create industry leading investment-grade independent public companies. Thanks to our team’s high-quality work, our plans to launch GE Vernova and GE Aerospace are progressing well. We are filling key leadership positions for both and we are preparing for two standalone businesses. We will share more details with you, including our ongoing progress and timeline for the planned GE Vernova spin at our investor conference in March.

I could not be more proud of how the GE team managed through a challenging external environment to deliver for our customers and partners in 2022, my thanks to everyone. And before I turn the call over to Carolina, a moment of reflection. Just two weeks ago, I, along with many of our leadership team attended a memorial service for our exemplary GE Board member and former U.S. Secretary of Defense, Ash Carter. Ash was a remarkable leader, incredibly humble and clear headed. We miss him and his stage counsel. Now, Carolina will take you through our results.

Carolina Dybeck Happe: Thanks, Larry. Turning to Slide 3, I will speak to the key drivers of our performance. I will do it on an organic basis and including GE Healthcare. In the fourth quarter, top line momentum continued as orders grew significantly across all segments. Revenue was up 11%, with services up 13%. By segment, revenue at Aerospace, Power and Healthcare was up double-digits, driven by market demand, price realization and improving delivery. This was partially offset by renewables largely due to lower volume resulting from U.S. PTC lapse and our heightened commercial selectivity. Adjusted margin expanded 290 basis points. Power was particularly robust, offsetting renewables. Overall, our price and cost-out actions outpaced inflation.

Revenue and profit growth resulted in over 50% EPS growth. Free cash flow was $4.3 billion, primarily driven by strong earnings and improving working capital. All accounts were a source of cash, except receivables, which as expected, was a use from revenue growth. Moving to the full year, orders were up 7%, with 22% growth in Aerospace and 13% growth in Power. Total services orders were up 12% supporting profitable growth in 2023. Revenue was up 6%, largely driven again by Aerospace, up 23%. More broadly, higher margin services were up double-digits, while total equipment revenue decreased 4%. Collectively, supply chain headwinds and macro pressures impacted our performance by about 4 points. Importantly, margins, EPS and free cash flow, all significantly improved year-over-year and finished in line or above the most recent outlook we shared in October.

Adjusted margin expanded 160 basis points led by Aerospace and Power. Robust services growth, pricing has almost $1.5 billion of cost out actions drove improvement. This was partially offset by inflationary pressures especially at our shorter cycle businesses and pressure from renewables. Operating profit growth and debt reduction drove EPS up more than 50% for the full year. Free cash flow was $4.8 billion, up over $2 billion or over 80% improvement, driven by earnings and reduced debt. In 2022, working capital was a source of cash as accounts payable, progress collections and contract assets all contributed to the solid performance. Now, a moment on corporate. In 2021, we ended the year with $1.2 billion of costs. We continued to reduce cost in 2022, including a few hundred million dollars of market-driven favorability.

We now have a smaller, linear cost structure. And in 2023, we expect costs of about $600 million or roughly half of the 2021 sales line. Free cash flow, we expect to improve significantly given our progress with debt reduction and lower costs. We continue to execute our restructuring plans and reduce our cost structure post the healthcare spin, setting up fit-for-purpose, standalone structures for GE Aerospace and GE Vernova. Stepping back, we are encouraged by our improved volume and pricing and our significant cost-out actions exiting the quarter. This will help us drive continued growth in 2023. Now back to you, Larry, to discuss our businesses.

Larry Culp: Carolina, thank you. Starting with Aerospace, I am 6 months in leading this business and my conviction is even higher today that we have a premier franchise with highly differentiated product and technology positions and leading positions in attractive commercial and military sectors. Entering 2022, our priority was delivering on the significant growth across both engines and services, where stability and predictability are critically important for our customers. This starts with the right team. We have a balance of unparalleled experience and fresh perspective with nearly half our leaders new to their roles this year. We are also driving two major operational changes. First is accelerating our progress with Lean to improve operating rigor and delivery.

Take supply chain, where we have seen real improvements with more to come. Our team in Terre Haute produces lead turbine center frames and started €˜22 with about 50 pieces delinquent. Working through multiple kaizens, implementing flows, standard work and daily management, the team’s Lean actions increased output over 20% and improved productivity by about 10%. And today, they are on schedule. With our 2023 demand, we will need to continue to use Lean in this way to deliver for our customers. The second is decentralization. For example, in our commercial engines business, we are increasingly running our product lines as their own P&Ls, in line with how our customers work with us, more cross-functional collaboration in real time closer to the customer helps make us better.

Turning to the quarter, both orders and revenue were up over 20%. Equipment orders were robust, now with almost 10,000 LEAP engines in backlog. Commercial services and equipment revenue grew about 30% and military revenue was up about 20%. And services internal shop visits were up 25% and external part sales were up more than 20%. In equipment, commercial units were up nearly 30% with LEAP units, up almost 50%. Looking sequentially, both internal shop visits and commercial units were about flat, but military units were up 10%. While material availability continues to be a challenge, our output across engines and services, we are using our Lean tools to help accelerate sequential improvement, a key for us this year. Fourth quarter margins were above 18%, slightly better than we expected, although down year-over-year.

Higher volume and price were more than offset by negative mix driven by increased commercial equipment shipments, continued investment to support the business growth and other cost pressures. While still net price cost positive, we expect inflation will continue to be challenging in 2023. For the year, revenue was up 23%, driven by commercial sales with internal shop visits up over 20%. Profitability and cash were solid. Margins were 18.3%, up 440 basis points year-over-year. Services growth and positive price costs more than offset the impact of increased investments and negative engine mix from higher LEAP deliveries. Free cash flow of $4.9 billion was driven by earnings and working capital. As we shared last quarter, total in-year AD&A flow came in close to zero versus last year, $0.5 billion of pressure.

Looking ahead today, GE and CFM departures are close to 90% of €˜19 levels and we expect to be back to €˜19 levels later this year. In €˜23, internal shop visits are expected to grow about 20% and external spare part sales are expected to increase. With commercial engines growing at about 20% and services at high-teens to about 20% plus military growing at a high single-digit rate, we expect total aerospace revenue to be in the mid to high-teens and we expect LEAP engine deliveries to grow about 50% in €˜23. We also expect to deliver profit of $5.3 billion to $5.7 billion and higher free cash flow. Aligned to current airframe or aircraft delivery schedules, AD&A is expected to be about $0.5 billion outflow in 2023. We are laser-focused on supporting our airframers, airlines and lessors as they ramp post pandemic.

Today, that means providing stability and predictability for our customers keeping our current fleet flying and growing our new fleet, all the while continuing to invest in technologies that will define the future of flight. Notably, we are encouraged by the momentum at military with our next-generation technology, including the XA100 engine for the F-35. The XA100 offers cutting-edge capabilities needed to ensure continued U.S. air superiority. The Adaptive Engine Transition Program received a strong show of support recently from nearly 50 bipartisan members of Congress who wrote in support of continuing the program, which includes our engine with $286 million of funding included in the 2023 Omnibus Appropriations bill. Overall, GE Aerospace is an exceptional franchise with a bright future as the standalone industry leader.

Turning to the GE Vernova portfolio, power delivered a solid performance this year and we are making real progress running a similar strategy at renewables. While the demand dropped due to the PTC lapse significantly impacted our renewables results in 2022, the Inflation Reduction Act is a real game changer for us and the industry going forward. In fact, we began to see a rebound in demand this quarter, with renewables orders up 7%. Onshore orders in North America more than doubled a very encouraging sign. But unlocking the full potential of the IRA will hinge on how quickly the administration moves through implementation. Meanwhile, lower volumes and inflationary pressures continue to weigh on our performance. Fourth quarter revenue was down 13% due to onshore and margins contracted as inflation and lower volumes offset pricing and productivity gains.

Full year free cash flow declined over $0.5 billion due to lower earnings. So, while we await clarity on the IRA rules, Scott and the team are controlling the controllable, taking action and we saw progress in that regard this quarter. Grid, a business that lost close to $400 million in 2021 was profitable for the first quarter since 2018, reflecting our restructuring and selectivity efforts. Orders also grew significantly. At onshore, we are executing a restructuring with our headcount decreasing almost 20% sequentially, which will deliver savings in 2023. Our strategic sourcing actions that are onshore and our focus on reducing product variance will improve product costs despite continued inflationary pressures. Across the businesses, orders and sales pricing continue to improve with our selectivity strategy yielding a more profitable backlog and pipeline.

Service orders and revenues, excluding repower, grew. There is certainly more work to do and the next 6 months will remain challenging, but we are acting with urgency. In 2023, we expect mid single-digit growth, significantly better profit and flat to improving free cash flow. Taking it by the businesses. Onshore, we expect more than 50% orders growth in North America this year. And based on the orders we have in hand, we are confident of delivering over 2,000 units globally with North American volume more than doubling in the second half versus the first half of the year. We also expect a significant step up in profit driven by lower warranty and related reserves, better price and restructuring benefits. With this significant orders growth comes roughly $3 billion to $4 billion of cash down payments this year.

This includes $0.5 billion of cash linked to large tech selects we have won, which we expect to convert to orders later this year. These are strong customer commitments, but given the project size and complexity, timing could shift somewhat across quarters. In offshore, we expect to more than double revenue from about $0.5 billion in 2022. However, our margins on the first tranche of Haliade-X projects will be challenging between typical new product margins and inflation resulting in rising losses. Associated with the delivery growth and limited down payments, we also expect cash will be significantly pressured in 2023 in offshore, mostly a timing dynamic. And at Grid, given our robust orders growth, we expect continued growth. The actions we’ve taken on price are expected to offset inflation pressures, and we continue to make progress, including our small €“ our smaller cost structure and productivity.

Taken together, this will enable grid to deliver a modestly profitable year in 2023. Overall, I’m confident we’re seeing operating improvements throughout the year in renewables and key external catalysts like the IRA will help improve our longer-term economic profile here. Moving to Power. We’ve significantly improved power is demonstrated by our continued profit and cash growth. We’re well positioned for continued services growth with our expanded HA fleet. To date, we’ve now shipped 110 HAs with roughly 80 units COD, providing a reliable source of cash growth in the future as our highest utilization assets in the fleet. Looking at the quarter, power demand remained robust. Orders grew in all businesses and revenue was up double digits, largely driven by continued aero derivative momentum at Gas Power.

Services were also solid with orders and revenue up again driven by gas transactional services. Margins expanded over 700 basis points driven by significant gas volume, favorable price cost and productivity gains. Similar to Aerospace, we expect inflation will remain challenging through 2023. Moving to the full year, orders were up double digits, but importantly, we’re not taking our eye off selectivity with disciplined underwriting. In line with our outlook, revenue was up low single digits led by services. Margins expanded 300 basis points, enabling power to achieve high single-digit margin for the year, and our free cash flow improved significantly across both gas and steam. At gas service, billings were strong as fleet utilization grew low single digits.

Looking to 2023 for Power, we expect low single-digit revenue growth driven by Gas Power services. Equipment revenue will grow as we deliver more HAs despite the new build wind down at team, and we anticipate year-over-year. At gas, both equipment and services volume as well as productivity gains and price should help offset rising inflation pressure. We expect lower free cash flow year-over-year, continued earnings growth and strong services collections are offset by disbursements, but we expect free cash flow conversion to remain solid. Stepping back, our existing technologies in the GE Vernova portfolio will play an important role in the energy transition. It’s the strategic imperative to electrify and decarbonize the world is a challenge these businesses with their vast installed bases were made to meet.

Let’s turn now to the overall GE outlook for 2023. We’re expecting organic revenue growth in the high single-digit range, $1.60 to $2 for adjusted EPS, which includes about $4.2 billion to $4.8 billion of adjusted profit and a range of $3.4 billion to $4.2 billion for free cash flow. Underpinning this outlook is a higher services concentration in our portfolio as well as our confidence in the strength of GE Aerospace is the worldwide commercial aviation industry, airlines and airframers like continues its post-pandemic recovery. We also anticipate military revenue growth, thus yielding significant profit growth for GE Aerospace in €˜23. For GE Vernova, we expect low to mid-single-digit growth and profit of negative $600 million to negative $200 million, including improvement at both businesses.

On cash, we expect flat to slight improvement. This is driven largely by better profitability and planned down payments in onshore where timing could shift across quarters with some offset from offshore increasing deliveries. Across GE, we expect continued operational improvements to deliver higher earnings and improved working capital management. In turn, this will help us drive higher free cash flow for GE in €˜23. We are looking forward to sharing more during our March 9 Investor Conference at GE Aerospace in Cincinnati by then, hopefully, home of the Super Bowl Champion Bangs, where you’ll hear more detail from our leadership teams about both GE Aerospace and GE Vernova. Please come to see us. To close on Slide 8, I hope you see what I see: strong results, a simpler story and an exciting future.

GE Aerospace continuous improvement is our mantra, and our results reflect our team, our technology and our portfolio’s unique positioning is the industry’s largest and youngest fleet. At GE Vernova, Power is delivering solid earnings and cash, while we’re setting up renewables to drive longer-term profitable growth. We’re moving forward with our plans to launch two independent investment-grade industry leaders that are well positioned to create long-term growth as we shape the future of flight and lead the energy transition. And I’m confident that we will unlock greater value for our customers and our shareholders in the year ahead. Now we’re ready for questions. Steve?

Steve Winoker: Thanks, Larry. We ask that you please save any GE Healthcare questions until their earnings call next week. Liz, can you please open the line?

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Q&A Session

Operator: Our first question comes from Joe Ritchie with Goldman Sachs.

Joe Ritchie: Good morning, everybody, and congrats on executing the spin.

Larry Culp: Thanks, Joe. Thank you.

Joe Ritchie: Yes. So my question is really going to be focused on this free cash flow bridge for 2023. And specifically on the segments, I’m curious you talked about Aviation free cash flow being up versus 22%. I know that you threw out the $500 million impact in AD&A, but did the rest of GE Aviation free cash flow grow consistently with earnings in 2023? And then my kind of second question on the segment is just around renewables. And what are you anticipating for the large payments in the second half of the year and what impact that has to the free cash flow in 2023? Thank you.

Carolina Dybeck Happe: Okay, Joe. So a couple of questions. So let me start with the free cash flow guide for 2023 for the whole company. So if we look at our 2022 numbers that we just printed 4.8%. New jumping house point, excluding healthcare, is $3.1 billion. So basically, we are assuming that the midpoint of our guide, we will improve free cash flow with about $700 million. And the majority of that comes from growing of profit. Midpoint is about $1.3 billion of improvement in op profit. You add to that lower interest, a couple of hundred million of tailwinds and then some working capital improvement despite the high single-digit growth. A couple of things that are partially offsetting that, the headwinds for AD&A that you mentioned, about $0.5 billion, we have a restructuring cash out as well as higher cash tax since we made more money.

So taking all together, we expect earnings to be the biggest driver of the improvement. We continue to benefit from our working capital management. And overall, that’s what leaves us confident in our total free cash flow guide. You also asked about the segments specifically and on aerospace. So if you look at aerospace, clearly, the improvement in profit is a big driver in aerospace improved free cash flow. When it comes to working capital, mind you, what Larry said about the really strong growth that we’re expecting to see. So of course, working capital will be pressured receivables and also partly inventory from that kind of growth. But we do expect that the combination of profit growth, working capital management will more than offset the AD&A headwind of $0.5 billion.

So we will improve cash also for aerospace. And then if you look at the Vernova businesses, as Larry said, we basically expect it to be flat to slightly improving on cash as well. And here, you have power would be slightly down where we expect renewables to improve.

Larry Culp: Down payments, Joe that you were asking about, I think we said in our formal remarks that should be in the $3 billion to $4 billion range. Some of those are four orders as they progress and orders to come, many of which we have been selected for. But again, the timing here until the finalizes the rules, the tax rules for developers could have a little bit of movement, and that’s what we were trying to flag in the formal remarks. So it will be back loaded in that regard, but we will have much greater linearity in aerospace as Carolina suggested.