Hi Fellow investor,
I hope you and your family are staying healthy and safe. March was an important month for us here at GE as we continue our transformation into a more focused, simpler, and stronger industrial company.
As you may have seen, we talked about the strategic growth and improvement opportunities we see in each of our businesses during our 2021 Outlook webcast. We also announced the combination of our GECAS business with AerCap—a significant catalyst to focusing GE on our industrial core, making us simpler and easier to understand while reducing risk. Our CFO Carolina Dybeck Happe dug into more detail on what the deal—and the actions we take afterward—will mean for GE’s balance sheet at the Bank of America Global Industrials Conference last week.
As we have done several times following major updates, I wanted to share and address the most frequent “top 5” questions my team and I have been hearing over the last few weeks. These include:
- You are using significant resources to reduce your debt and factoring. Will you still be able to invest in innovation and other strategic opportunities?
- You told us you expect to reach high-single-digit industrial free cash flow margins* in 2023+. What do you expect will drive earnings growth to help you get there?
- What will your Aviation business look like post-pandemic? Will it be more profitable once it reaches 2019 levels of revenue?
- What are you doing to grow Services in your Gas Power business?
- You also announced GE might pursue a reverse stock split. Why are you doing this and what does it mean for shareholders?
You can find the detailed answers below.
Today Southwest Airlines announced the purchase of LEAP-1B engines to power 100 Boeing 737 MAX 7 aircraft. Southwest’s Chief Operating Officer Mike Van de Ven said, “the MAX aircraft, with CFM International’s LEAP-1B engines, enables exceptional operational efficiencies such as a 14 percent lower rate of fuel burn that reduces carbon emissions, quieter engines, which benefit the communities we serve, and excellent dispatch reliability to support our on-time operations.” Image credit: CFM International
As Larry said on our Outlook webcast, we’re well-positioned “to capture opportunities in our end markets, where we are leading the energy transition to drive decarbonization, precision health that’s more integrated and personalized, and a future of smarter, more efficient flight.” Our efforts to focus and improve our businesses will allow us to do more of just that. Today, for example, Southwest Airlines announced the purchase of CFM International’s LEAP-1B engines to power 100 737 MAX 7 jets, which are scheduled to begin delivery in 2022. Healthcare recently also unveiled Vscan Air, a new pocket-sized wireless ultrasound, and last week, Renewable Energy announced a contract to supply a 30-megawatt wind farm in Vietnam that can power the equivalent of 45,000 households. This is why GE exists, and I am excited about our future.
We look forward to discussing more during our first quarter earnings call, scheduled for April 27th at 8:00am EDT. I hope you find this useful, and as always, I welcome your feedback.
Best,
Steve
- You are using significant resources to reduce your debt and factoring. Will you still be able to invest in innovation and other strategic opportunities?
As Carolina discussed at Outlook and the BoA conference, our decisions to reduce debt and factoring will help to create a stronger GE with a much simpler capital and reporting structure. Importantly, across our industrial core, we will continue allocating and deploying capital to invest in innovation, commercial, and service opportunities. This will continue to equip our businesses to lead in the energy transition, precision health, and the future of flight.
Since the end of 2018, we have reduced debt and factoring by $37 billion. Building on these efforts, upon the closing of the GECAS transaction, we expect to reduce our total debt another $34 billion, bringing our total reduction to about $70 billion since 2018. Additionally, as Carolina pointed out, we will have the flexibility to further reduce debt and pension by an additional $25 billion or more. Combined with significantly improving earnings, our equity stakes, and lower minimum cash as we progress on our transformation, these cash sources and uses provide multiple paths for GE to reach our industrial leverage target of less than 2.5x net debt/EBITDA.
There are also several benefits to reducing the factoring balance. Most importantly, our Industrial businesses will continue to deepen their operational improvements around billing and collections, helping them generate cash more predictably. Additionally, lower factoring volume means we’ll also have lower associated interest expense.
Stepping back, we believe we will have ample excess cash to deliver on our deleveraging goals, while growing our businesses. We view the potential path we have laid out to meet our deleveraging goals as prudent, and we believe there are variables to unlock potential upside to reach our targets. All of these factors help support greater investment in innovation and offense as we play forward over decades to come.
- You told us you expect to reach high-single-digit industrial free cash flow* margins in 2023+. What do you expect will drive EBITDA growth to help you get there?
As we shared during our Outlook meeting, we see a path to HSD FCF margins by 2023+. The building blocks to accomplishing this goal are 1) growing earnings from top line growth, cost out, margin expansion and services mix, 2) improved working capital efficiency to help offset working capital usage from volume growth and 3) natural benefit from spending less on restructuring, legal and pension going forward.
Let me elaborate a bit on the first point. To achieve HSD FCF margins, we expect a majority of the cashflow generation to come from higher earnings. This will be accomplished through top line growth and margin expansion across our nearly 30 P&Ls.
- We expect industrial revenue to return to 2019 levels, with a bias towards our more profitable services businesses. The key driver to this growth is Aviation revenue aligned with the market recovery, beginning in the 2nd half of 2021, accelerating in 2022 and continuing into 2023. Additionally, we expect Renewables revenue to grow as Offshore wind ramps, and then continued progress in Healthcare and Gas Power.
- While we expect our revenue to return to 2019 levels, we expect better profitability vs 2019 from higher services volume and lower cost. We still see much opportunity for cost out, where we are focused on completing our restructuring actions in Power Portfolio and our Renewables turnaround businesses, in addition to shifting our focus to variable cost productivity across all of our businesses.
The combination of our volume growth back to 2019 levels and our margin expansion will result in higher EBITDA that in turn drives stronger FCF.
To the second point, with higher volume levels, we expect our working capital needs to increase, as we are in businesses that typically require working capital usage to support our growth. However, we expect to help offset the working capital usage through lean momentum. Every improved turn in total company receivables, payables, and inventory translates to ~$4-5B of FCF. Additionally, we expect progress collections and contract assets to be sources of cash in the future. As we continue our focus on operational improvements, we expect working capital to be an area of opportunity well beyond 2021.
Overall, the combination of our EBITDA growth, continued working capital improvement, and run-off of legacy cash items gives us confidence that we will reach our goal of HSD FCF margins by 2023+.
Looking ahead, we expect revenue and cash to recover faster than profitability. Over the next few years, as departures normalize to 2019 levels, we forecast margins to return to historical high-teens or in the low 20% range. The degree of margin recovery and ultimate expansion is determined by mix and other factors, including new product introduction mix and the impact of increased Used Serviceable Material (USM) penetration in our Services portfolio - both assumed in our 2021 and 2022 Aviation outlook. However, as John discussed during our Outlook presentation, we have been focused on what we can control, and resizing our cost base to fit the business needs, as shown with our $1B+ of cost actions taken in 2020 and an incremental ~$0.5B planned in 2021.
- What are you doing to grow Services in your Gas Power business?
Longer term, we see additional areas of opportunity. We expect electricity and gas demand to grow low-single digits over the next few decades, and our business should grow in a similar fashion. In HA, we have a valuable franchise that will serve as a clear catalyst for growth longer term as we service this fleet. Specifically, with 52 units in operation with over 800,000 operating hours and an additional 71 units to become operational by mid-decade, we see a substantial increase in outages and HA services revenue and billings.
- You also announced GE might pursue a reverse stock split. Why are you doing this and what does it mean for shareholders?
GE has nearly 9 billion shares outstanding, much higher than peer companies. In fact, out of companies in our size range in the S&P 500, we have the most shares outstanding and only 12 companies have more than 2.5 billion shares. We have undergone significant transformation over the years, but our share count doesn’t yet reflect how we have focused GE on our industrial core. The reverse stock split would put our share count and stock price more in line with companies like us, while keeping the value of our investors’ holdings the same.
The Board, which sets the dividend each quarter, expects to adjust GE’s dividend in line with the reverse split—meaning if the quarterly dividend per share is $0.01 today, the dividend per share following a 1-for-8 share reverse stock split would be $0.08. Similarly, the GE team’s stock options and equity-based incentives would also be adjusted proportionately to the reverse split. Shareholders will vote on the Board’s recommendation to authorize the reverse split at our annual meeting on May 4. Assuming the vote is approved, our Board would then have a year to decide whether to implement the reverse split during the next 12 months.
*Non-GAAP Financial Measure
We believe investors may find it useful to compare GE’s Industrial free cash flow* performance without the effects of cash used for taxes related to business sales and contributions to the GE Pension Plan. We believe this measure will better allow management and investors to evaluate the capacity of our industrial operations to generate free cash flows. For more information, please view our 2021 Investor Outlook Presentation.
For important information about forward-looking statements, please see here.