06/25/2019 | Press release | Distributed by Public on 06/25/2019 13:37
Steve Winoker, GE's head of investor communications, provides investors an update following the Paris Air Show. For important information about our forward-looking statements, please see here. Read Winoker's letter below:
As part of our commitment to having an investor feedback loop and keeping our investors updated on the latest at GE, I thought it might be helpful from time to time to share my perspective on notable GE news, in addition to our regular updates on upcoming events and presentations.
With that in mind…
This past week my team and I joined our GE Aviation and GECAS colleagues at the Paris Air Show (PAS). We hosted an Investor Day (with more than 150 investors) to focus on our $30.6 billion GE Aviationbusiness, which continues to see solid commercial and military growth, and our aircraft finance business, GECAS, which has a large, diverse asset base.
Our collective GE team held hundreds of meetings with customers and investors and announced $55 billion in customer winsin three days! The energy among customers, employees, and investors felt electric. It made me proud and excited to be part of GE … and glad that I decided to take the opportunity to come here a short five months ago.
Our business and engineering leaders spoke with investors on a range of topics - from how we think about new products like the GE9X; to exciting developments around avionics and additive; to how we are growing specific segments of our business (like military, where we revised our outlook up by $0.4B to $8.3B in 2025); to using Lean to reduce waste and more.
While in Paris we also visited the finance leadership of our businesses headquartered in Paris for some internal meetings.
Below are some highlights along with the top 10 questions (and our answers) I heard during the visit and afterward. As always, feel free to reach out with any questions, comments or suggestions. Next up, we will be reporting Q2 earnings on July 31.
Thank you for your continued interest in GE.
La Compagnie's A321neo jet powered by a pair of LEAP engines. Image credit: GE Reports.
Some key news from the Paris Air Show:
Amazon partnered with GECAS to lease an additional 15 Boeing 737-800 converted freighter aircraft to its fleet. Image credit: GE Reports.
Some key themes from ourGE Aviation and GECAS Investor Day presentationwith GE Vice Chairman and GE Aviation President & CEO, David Joyce and GE Capital President & CEO Alec Burger:
Want to hear more? The event presentation and replay are available on our investor website.
The GE9X on wing of the Boeing 777X at a Boeing assembly facility. Image credit: Boeing.
Top ten questions (and our answers) that we received from investors following our GE Aviation and GECAS Investor Day presentation:
No, far from it. We're winning based on the value customers see in our products and services, including GE technology, reliability and service levels over the long lives (decades!) of critical products.
As Joyce referenced throughout his comments, our focus on engine performance for our customers has made the difference. I have said it before and will say it again - we are not chasing share for share's sake. Our employees are pursuing profitable growthwith our customers and investors in mind. This is true across our businesses.
2. How exposed is GE Aviation's service business to a decline in CF34 and CF6 engines?
Our total regional (CF34) and CF6 programs made up just under a third of our shop visits last year. More importantly, our total shop visits are growing from ~5,500 to ~8,000 over the next 10 years. We are still shipping these engines AND we have plenty of growth in other engines, such as the GE90, CFM and others. Growth in profitable services [from the current portfolio and the larger engines that will replace the current portfolio over time] should more than offset any implied mix issues.
3. What makes the GE Aviation's services model unique?
Our Aviation team (and our customers) could take up pages on just this topic. We have an extensive, global network of service shops, aviation expertise, and technical capabilities focused on the highest levels of customer service. And we have greater flexibility of offerings for our customers, ranging from rate per flight hour to material/part sales to mature fleet transitions.
In other words, we let the customer choose what is best for them in terms of economics, service levels etc. and we make it happen. Just this week as an example, we signed rate per flight hour agreements with AirAsia and Color Guizhou and Envoy expanded its TrueChoice service agreement to cover its entire fleet of CF34-8E engines.
4. How should we think about working capital at GE Aviation?
Working capital moves with growth in the business operations. This will fluctuate year to year based on where we are in programs ramping up and down. For example, programs ramping up would show up in our paying suppliers more, building inventory levels ahead of shipments and then receivables rising on increased sales and progress collections increasing (ahead of building the engines) as we take in new orders on the equipment.
But comparing averages to peers is less meaningful here as we have dozens of programs across our Aviation business that layer on top of one another with programs that are in all different stages - ramping up, steady, and ramping down.
More importantly, working capital improvement through the cycle in Aviation and elsewhere across GE will come from continuing to drive Lean operating practices across the business, impacting inventory, receivables, and payables among other areas. For example, in Aviation, inventory turned at 4.6x in 2018, which is up 0.5 turns vs. 2017 and a continued area of focus.
5. Does GE Aviation get charged appropriate amounts of GE corporate expense?
Yes, Aviation gets charged appropriately for shared costs. While there are many items that impact net corporate expense and cash, of the ~$(1.2)B in net corporate expense in 2018, the majority of the retained cost comes from GE Digital, GRC, and Corporate functions & activities that are not specific to Aviation. Similarly of the $(1.2)B in corporate FCF, this number included about half a billion related to Corporate restructuring that has little to do with Aviation. The larger ~$7B number we reference as managed costs (which includes the $1B above) at Corporate includes costs like IT and various shared services such as payroll - all of which is pushed down to the businesses based on their usage.
On tax and interest, Aviation's book and cash taxes have been in the low to mid 20s range over time. The segments also directly incur about half the Industrial interest expense. Recall too that we are continuing to work down our industrial leverage to our target <2.5x net debt/EBITDA.
La Compagnie's A321neo jet powered by a pair of LEAP engines is capable of flying nonstop across the Atlantic from Paris to Newark, New Jersey, on a single tank of fuel, a task that typically required much larger airplanes in the past. Image credit: GE Reports.
6. When we calculate $4.2 billion of GE Aviation free cash flow, should we subtract the investment in intangibles line?
No. We define FCF as CFOA less capex that we provided at our Outlook in March. This is the same as net income plus depreciation and amortization less changes in working capital/contract assets/other operating cash flow items and capex (which we included in the detail for Aviation this past week and Power in March).
Some investors have questioned the roughly half billion dollars of one-time investment in intangibles in 2018. Most of that was an equity buy-out of financial (not commercial) partners-where we offered equity in an engine program years ahead to reduce our launch risk. That cash came in through financing cash flows and the (NPV positive) buyout of those same stakes went out through investing cash flows. None of it came in or out through operating cash flows. These were financial partner stakes.
Bottom line: GE Aviation is a business with strong free cash flow generation and a conversion rate in the high 80s. We expect to see cash generation stick within our guidance ranges over time, unless we decide to pick up new investments or something else changes materially in the environment.
7. Tell us more about the component you are re-designing for the GE9X; why are you doing this now?
One of the last tests we do on the engine is what we call the block test, where we configure the engine to run way outside of its normal operating range for extended periods of time at extremely high thrust and high temperatures. We do that because we want to ensure the margins of design in the engine for the durability of the engine in the field.
During that test, we discovered that we had wear on one of the components inside the front of the compressor that was higher than we had anticipated. As a result of that, we pressed the pause button to redesign that component before we fly with Boeing. This is not atypical for a new engine program and we remain on plan to have the engine certified by the end of the year.
8. Moving onto Renewable Energy … are we under-investing, especially outside the U.S.?
We've tried to be clear that cash flow in Renewable Energy will be negative this year and margin enhancement is a few years out. We have a lot of units to ship this year. As we've said before, we also have legacy projects to manage that are impacting margins, and we have invested in offshore wind as a new platform.
But this is our fastest-growing business-and a critically important one. We have been investing in renewable energy technology for nearly two decades, investing ~3 to 3.5 percent of sales in R&D since 2016 and acquiring LM Wind in 2017. We launched the 5MW Cypress onshore wind turbinein 2018 and the Haliade-X offshore wind turbinein 2018. We received the first order for Cypressthat will be installed in Germany later this year.
While the U.S. is an important market to GE where we have solid positioning, we expect more international growth thanks to our Cypress and LM Wind investments. And in 2021, with the cycle driven by the U.S. wind production tax credit largely complete, we expect volume from international onshore wind and offshore wind to offset the expected U.S. onshore wind decline.
We expect launch costs to decline in Offshore, achieving profitability in the early 2020s. And we have a diversified portfolio with margin expansion in our core onshore business, cost and operational improvement opportunities, plus upside from Services growth.
Finally, we're already integrating grid technologies into our renewable offerings to offer more local and integrated solutions for customers … and will continue to look for ways to remix and rebalance our portfolio to serve our customers better over time.
9. What's the impact of the recent increase in China tariffs to Aviation?
We haven't broken this down publicly by business, and it's a fluid situation, but we've shared that at this point we estimate the impact of tariffs across all GE businesses to be somewhere between $400M to $500M, with another $100M at risk if we see tariffs extended to all remaining imports.
GE is well-positioned to mitigate the impact of these tariffs. We have established a deep global footprint and supply chain, which gives us perhaps more flexibility than others. But China is an important market for us; GE Aviation's commercial business has sold into the Chinese market for more than 30 years. It's a critical market that cannot be ignored, and our presence there provides American jobs. We'll continue to advocate for open markets and fair competition across the globe.
10. Are you telling us what we need to know about these businesses?
Since joining GE in January, I've been struck by the commitment across our teams and leaders to improve disclosure and enhance transparency, providing information as we have it in the clearest possible way to our investors.
We've made strides already, including simplifying our 10-K, posting our 10-Q concurrent with earnings, and disclosing cash flow by segment for the year. We're trying to be responsive to what's on your mind - and as always, please feel free to share your feedback so we can continue to improve.
I hope this context is useful. I'll continue to strive to keep you informed on the things that matter to you. As always, I welcome your input and feedback, both positive and constructive.
Thank you for your continued interest in GE.
With JJ Foley (left) and Brigid Tobin (right) from GE's investor communications team in front of the GE9X at GE's chalet. Image credit: GE.