Yahoo Finance General Electric Company (NYSE:GE) Q1 2024 Earnings Call Transcript
General Electric Company (NYSE:GE) Q1 2024 Earnings Call Transcript April 23, 2024
General Electric Company misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.67. General Electric Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to the GE Aerospace First Quarter 2024 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. [Operator Instructions] 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 Aerospace's first quarter 2024 earnings call. I'm joined by Chairman and CEO, Larry Culp; and CFO, Rahul Ghai. Many 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 filing and website, those elements may change as the world changes. With the spin-off of GE Vernova successfully completed earlier this month, GE Vernova will report its results separately on April 25. While included in our consolidated first quarter results, we're focusing today's commentary and Q&A primarily on GE Aerospace. Now over to Larry.
Larry Culp: Steve, thank you, and good morning everyone. Welcome to our first earnings call as GE Aerospace, now a pure-play global leader in propulsion, services and systems. We're wholly focused on our aerospace and defense customers, serving the 900,000 passengers in the air right now with our technology under wing. It's an incredible responsibility for our teams globally and why we take safety and quality so seriously. We'll come back to GE Aerospace in a moment. But before we do, we'll talk about GE on a consolidated basis, which is how we operated for the first few months of this year. Just three weeks ago on April the 2nd, we completed GE Vernova spin and launched GE Aerospace, ringing the bell at the New York Stock Exchange after the successful spin of GE HealthCare last year.
It was a proud moment that we celebrated with our teams around the world. This marked a new beginning, following the completion of GE's multi-year transformation that strengthened our businesses both financially and operationally. Thanks to the GE team. We significantly improved our financial position, reducing debt by more than $100 billion since 2018 and enhanced our operational execution by embracing lean with a relentless focus on safety, quality, delivery and cost, in that order, to better serve our customers. Together, we built a strong foundation for our three independent companies that to date have increased shareholder value nearly fivefold. Now GE begins again, three industry leaders fit for purpose for the next century plus and ready to put their stamps on the world: GE HealthCare, GE Vernova and GE Aerospace, each carry forward GE's innovative spirit, customer focus and passion to build a world that works, fully focused on their respective missions to lead precision health, the energy transition and the future of flight.
None of this would have been possible without the important work of our teams. I want to express again my sincere gratitude to our incredible people whose unmatched passion and talent have made this achievement possible. Thank you. If we turn to Slide 4, we had an exceptionally strong last quarter as GE. In the first quarter, orders were up substantially in both GE Aerospace and Power. Revenue was up 10% organically with all segments contributing to the growth and equipment and services were up across both GE Aerospace and GE Vernova. Adjusted operating profit was $1.5 billion, up more than $600 million, with 300 basis points of organic margin expansion. This was largely driven by pricing and volume, which more than offset investments and inflation.
Adjusted EPS was $0.82, up more than 3x year-over-year. And free cash flow was $850 million, up more than 5x, or $700 million, driven by higher earnings and a continued reduction in working capital. In all a very strong performance for GE, reflecting real momentum at both GE Aerospace and GE Vernova. And now the day has come where we bring our full focus to GE Aerospace. Our commercial propulsion fleet is the industry's largest and youngest, thanks to our world-class engineering and services teams. And in defense, we're proud to be the rotorcraft and combat engine provider of choice, powering two thirds of these aircraft worldwide. A massive part of our business is aftermarket services, representing 70% of our $32 billion in revenue. Importantly, as we meet higher levels of demand today, services enable us to better understand how our technologies are performing, and we use that intelligence to help shape our future product road maps.
Turning to our performance. GE Aerospace had a solid start to the year. In the first quarter, we delivered double-digit revenue and profit growth as well as margin expansion in both businesses, with free cash flow doubling year-over-year. Overall, we have great confidence in our forward trajectory. We're raising our full year operating profit guidance and see a path to our $10 billion operating profit target by 2028. Turning to Slide 6, as you heard from us last month at our Investor Day, we are keeping our strategy simple, focused on today, tomorrow and the future with safety and quality first. Enter FLIGHT DECK, our proprietary lean operating model to ensure focused execution as a public company. Fundamentally, it’s a systematic approach to running our businesses to deliver exceptional value as measured through the eyes of our customers and it's the best way we know to operationalize flight safety at GE Aerospace in combination with our safety and quality management systems.
Starting with today, we're focused on service and readiness, keeping our customers’ fleet flying. We are experiencing a tremendous demand cycle for services as more people fly and fly more often. In the quarter, GE CFM departures were up low double digits, and we are revising our expectations upward for the year. The onus is on us to meet this demand, and with FLIGHT DECK, we are maintaining the highest standards of safety and quality with greater predictability and speed, easy to say, hard to do. A key priority in our services business is improving turnaround times to increase our shop visit output. We are making progress with LEAP, a significant driver of shop visit growth this year. For example, at our Malaysia site, our joint GE Aerospace and Safran team collaborated to produce average LEAP test sale hours by 30% per engine, and they are working toward a 50%-plus improvement by year-end.
As a result, the team has closed 95% of a 100-engine gap in test capacity so far while optimizing LEAP baseline test time, eliminating interruptions and reducing network variation. Actions like these are improving our shop turnaround time, which for LEAP was down approximately or down to approximately 90 days this quarter, a 10% reduction versus our roughly 100-day average last year. While there is more work to do, we are focused on getting engines back in the hands of our customers faster without compromising safety or quality. For tomorrow, we remain focused on delivering on the ramp. This quarter, total engine deliveries improved up 9% year-over-year, including defense up over 50%. However, these deliveries were short of our objectives due largely to continued material availability challenges.
Thus, we have intensified our efforts working with our suppliers to problem solve these issues. Here is where FLIGHT DECK is key. Currently, we can track about 80% of our largest delivery challenges back to 15 supplier sites. We're deploying more than 550 engineers and supply chain resources, up 25% from last year, working with them to improve quality and delivery performance. For example, we're problem-solving with one of our Tier 1 suppliers by going to Gemba at their most constrained supplier. We are shoulder to shoulder with them, leveraging FLIGHT DECK and working together to identify and break constraints such as labor shortfalls, manufacturing yield issues, identifying alternate material types for raw material shortages and improving flow and lead times.
As a result, that constrained supply recently improved output by more than 25% and is no longer pacing deliveries. We also recently announced we're investing more than $650 million in both our manufacturing facilities and our supply chain this year, reflecting our commitment to strengthening quality and increasing production to better support our customers' long-term needs. At the same time, both airlines and our defense customers are expanding and modernizing their fleets and choosing to do so with us, adding to our $150 billion-plus backlog and continuing to build our installed base of engines and services. At the Singapore Airshow, Thai Airways committed to powering its new wide-body fleet of Boeing 787 aircraft with our GEnx-1B engines.
The GEnx is now a cornerstone of the airline's long-term plan to open new markets and meet surging demand while working to achieve its environmental goals. American Airlines secured 85 new Boeing 737 MAX Jets, which will be powered by our LEAP-1B. And easyJet made a commitment for more than 300 LEAP-1A engines for its fleet of 157 A320neo aircraft. In our Defense & Propulsion Technologies business, we won a new order for F414 engines to power additional KF-21 fighter jets for the Korean Air Force, continuing to build our international business. And for the future, we are advancing the technology building blocks that will define the future of flight with more than $2 billion of R&D spending this year. For example, we're continuing to make progress with testing in our CFM RISE program.
We completed our first fan ingestion test with our full-scale RISE fan blade, and the results were extremely encouraging. On the defense side, in partnership with Sikorsky Innovations, our team is finalizing designs for a hybrid-electric power systems test bed with a 600-kilowatt electric motor. This will support Sikorsky's plan to build, test and fly a hybrid electric vertical takeoff and landing demonstrator with a tilt wing configuration. Altogether, we're running GE Aerospace with customer expectations front and center, while delivering breakthrough innovation that will further shape the future of flight. And FLIGHT DECK ensures we work as one team, utilizing one operating model, implement one strategy and ultimately yielding one culture.
This will help us to lead the industry forward and advance our vision to be the company that defines flight for today, tomorrow and the future. Now let me hand it over to Rahul.
Rahul Ghai: Thank you, Larry, and good morning, everyone. Larry, I fully share your enthusiasm as we embark on the next chapter of our journey as a standalone company. We will cover GE Aerospace's results on a standalone basis, the same as a full year guide. Also, for simplification, our results will be prepared on a reported basis, and we are limiting non-GAAP free cash flow adjustments to spin-related matters. Overall, GE Aerospace delivered a solid start to the year with all headline metrics up double-digits. Demand remained resilient. Orders grew 34% with similar growth rates in both Commercial Engines & Services or CES, and Defense & Propulsion Technologies or DPT. Revenue was up 15% from pricing, spare parts volume and an increase in wide-body and defense engine deliveries.
Operating profit was $1.5 billion, up 24% with margins up 140 basis points to 19.1%. The profit growth was driven primarily by price, growth in services volume and favorable mix. Profit and margins were up in both CES and DPT. Adjusted corporate costs and elimination, including prior GE corporate costs were $130 million, down more than 20% year-over-year. Post the GE Vernova spin-off, we expect to incur roughly $300 million for the remaining wind-down of GE corporate office and close to $250 million to set up standalone infrastructure for GE Aerospace. We will continue to adjust these items from earnings and cash. Free cash flow was $1.7 billion, doubling year-over-year with higher earnings and working capital improvements offsetting AD&A outflow.
Specifically, working capital was a source largely from strong collections and progress payments, while inventory was a headwind. The strength of our operational and financial fundamentals gives us confidence to return 70% to 75% of our available cash to investors. Earlier this month, we initiated a quarterly dividend at $0.28, a 250% increase. And at our Investor Day, we announced a $15 billion share buyback, a testament to the strength of our balance sheet. Through a new capital return framework, we are well positioned to create significant shareholder value while we continue to invest in growth, innovation and focused M&A. Now turning to CES and DPT results. Starting with CES, a $24 billion business with 70% of revenue generated from services.
As Larry mentioned, demand continues to be robust. For the year, we now expect departures to grow high single-digits. Total departures are off to a stronger start versus our prior expectation, growing 11% in the quarter with particular strength in China. We continue to expect departure growth to moderate throughout the year. We expect passenger traffic growth in high single-digit range for the year, a slight improvement. Narrow-body remains solid with increased CFM56 fleet utilization and significant LEAP growth. Further, we now expect freight demand to be up low single-digits versus a prior expectation of down mid single-digits. Heightened geopolitical conflicts have increased the need for air cargo and improved its relative economics. As a result, commercial momentum continues.
CES orders were up 34% this quarter. Both services and equipment were up double-digits, largely driven by strong demand for LEAP and spare parts across our platforms. Overall, customer dynamics remain positive with strong order books from both airlines and airframers. On narrow-body platforms, we won more than 300 LEAP-1B engines and a multiyear services agreement from Akasa Air. And on widebody platforms, recent key wins included 90 GEnx engines for Thai Airways, 16 GE9X engines for Ethiopian Airlines and 10 GEnx engines for LATAM Group. This improving demand backdrop underscores our confidence in our annual guide and longer-term outlook. Now looking at CES' first quarter results. Revenue grew 16% with volume up low double-digits and the remainder driven primarily by higher price.
Services growth of 12% was driven by pricing and strong spare part volume, which grew faster than internal shop visits that were up 3%, impacted by material inputs challenges. Equipment growth of 31% was driven by pricing and deliveries, which were up 2% with higher wide-body engine mix. LEAP shipments were roughly flat year-over-year given the supply chain challenges. As expected, spare engine shipments were down slightly. Profit was $1.4 billion, up 17% with margins expanding 10 basis points from pricing, spare part sales and mix. This more than offset higher inflation investments and a change in estimated profitability on long-term service agreements on a mature platform, which negatively impacted both services revenue and profit by roughly $200 million.
At CES, we are pleased with the strong start to the year, delivering significant growth and profit improvement. Turning to DPT, which includes both Defense & Systems and propulsion and additive technologies. This is roughly a $9 billion business, where services make up approximately 55% of the revenue. Looking at the sector broadly, national defense budgets are growing with U.S. spending expected to grow low-single digits and international spending up mid-single digits. Our defense customers’ ask of us is clear, support their readiness while delivering more and more predictably. Turning to our first quarter results. Orders were up 34%, underscoring strong demand and the quality of our franchisees with defense book-to-bill of 1.1x. Revenue grew 18%.
Defense unit deliveries grew by 45 engines on an easier compare. This combined with pricing and growth in classified programs, increased Defense & Systems revenue by 17%. Propulsion and Additive Technologies grew 19%, primarily from growth at Avio and Unison to support GEnx and LEAP. Profit was $250 million, up 26%, with margins expanding 80 basis points. Volume and pricing, net of inflation, more than offset investments and defense equipment mix. In all, improved delivery and pricing drove strong revenue and profit growth this quarter. Given our solid start and constructive outlook for rest of the year, we are raising our full year profit and cash guidance, as outlined on Slide 11. We continue to project at least low-double digit revenue growth.
In CES, we still expect revenue growth of mid to high teens. In services, we continue to expect mid-teens revenue growth with shop visit output growing faster than spare part sales. We are anticipating reduced LEAP output in the range of 10% to 15% growth, but continue to expect overall equipment revenue growth of high-teens from improving widebody mix. In DPT, we continue to expect mid to high single-digit revenue growth, primarily driven by equipment growth. Operating profit is now expected to be in a range of $6.2 billion to $6.6 billion, up from $6 billion to $6.5 billion previously. CES operating profit guidance is now expected to be in a range of $6.1 billion to $6.4 billion, up $100 million at the mid-point from favorable revenue dynamics.
DPT profit guidance is unchanged. In corporate, we continue to expect cost and eliminations of about $1 billion, including $600 million of corporate expenses and roughly $400 million of eliminations. We now expect margins to expand roughly 50 basis points for the year versus flat previously. Now as a standalone company, we are initiating adjusted EPS in a range of $3.80 to $4.05, up more than 30% year-over-year. This includes first quarter adjusted EPS of approximately $0.92, up more than 40% year-on-year. And on free cash flow, we expect higher profit to flow through to cash, delivering more than $5 billion with conversion well above 100% of net income. Overall, we are encouraged by the strong start and the market environment that gives us confidence to raise our performance expectations for the year.
Larry, back to you.
Larry Culp: Rahul, thanks. We’re clearly off to a solid start this year. If I close on Slide 12, this captures the essence of GE Aerospace and what we take forward with us. We have an excellent franchise, with sustained competitive advantages and a compelling value proposition. Our platforms are preferred by customers across narrow-body, widebody and defense. We’re aiming to provide industry-leading reliability and durability, prioritizing safety and quality first, then delivery, finally, cost. This means delivering unmatched time on wing and faster turnaround times for our customers. And we’re doing this across the industry’s largest and growing fleets. With our deep domain expertise and talent, commitment to innovation and capacity to invest, we’re poised to deliver the breakthrough technologies of the future.
And with FLIGHT DECK as our foundation to bring this all together, our team is poised to realize our full potential and deliver exceptional value for our customers and our shareholders. I’ve never been more confident in our path ahead as GE Aerospace. Before I pass it back to Steve for Q&A, I’d like to take a moment to recognize him and his many contributions to GE. As you know by now, today is Steve’s last call with us after more than five years with the company or put another way, after 22 earnings calls. His dedication and partnership leading the Investor Relations team and serving as a trusted strategic adviser to me and the rest of the leadership team here has been invaluable throughout our transformation. On behalf of myself and the entire team, Steve, we thank you and wish you the best of luck in your next chapter.
And I know Rahul would like to say a few words.
Rahul Ghai: Thanks, Larry. Steve, I want to personally thank you for your trusted advice and friendship, as I joined the company and as we executed the launches of GE Aerospace and GE Vernova. Your strategic and operating depth and your collaborative style have been instrumental in our transformation. And I know many on this calls and on the calls in the year past are appreciative of your responsiveness to their questions and the work you have done to simplify our financial disclosures while communicating our transformation with clarity and candor. We wish you all the best, and I’ll pass it back to you, in the spirit of making you work till the last day, for questions.
Steve Winoker: Larry, Rahul, thank you. I can’t go on just without at least one quick comment. It’s really been a true honor privilege and pleasure to serve with you and the rest of the teams at GE and GE Aerospace, a real master class for me. Thank you for always giving our investors and analysts a seat at the table. And I’m deeply grateful, proud of the teams and excited to see what comes next, and I know the futures of GE Aerospace, GE Healthcare and GE Vernova are bright indeed. So now 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. And if we have extra time, we’ll circle back around. We ask that you please save any GE Vernova questions until their earnings call later this week again. Liz, can you please open the line?
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