GE(GE) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Revenue impacted by lower output, but operating profit and free cash flow grew double-digit [10] - Operating profit was $1.9 billion, up 37% YoY, with operating margins expanding 560 basis points to 23.1% [15] - Adjusted EPS was$ 1.20, up more than 60% YoY, driven by increased operating profit and lower tax rate [16] - Free cash flow was $1.1 billion, up nearly 20%, driven by higher earnings [16] - Full-year profit and cash guidance raised, with operating profit expected to be$ 6.5 billion to $6.8 billion [24] Business Line Performance - Commercial Engines & Services (CES) saw profit growth of 21%, driven by 14% internal shop visits growth and improved pricing [10] - Defense & Propulsion Technologies (DPT) delivered profit growth of over 70% YoY, driven by services growth and profit improvement in Propulsion & Additive Technologies [10] - CES services revenue grew 14%, with mid-teens internal shop visit growth and improved pricing [18] - DPT revenue grew 1%, with Propulsion & Additive Technologies growing 16% [21] Market Performance - Air traffic trends remain positive, supporting services growth, with departures up 9% year-to-date [17] - LEAP engine deliveries down 29% due to supply chain constraints, but LEAP-powered Airbus 321XLR certified by EASA [8][18] - Defense sector remains resilient, with U.S. defense spending expected to grow low-single digits and international up mid-single digits [20] Company Strategy and Industry Competition - Focus on FLIGHT DECK operating model to improve safety, quality, delivery, and cost [13] - Investment of$ 1 billion in MRO facilities over the next five years to increase capacity and reduce turnaround time [14] - CFM RISE program advancing, with Open Fan design showing promise for reducing emissions and improving fuel efficiency [9] - GE Aerospace aims to grow operating profit to approximately $10 billion by 2028 [27] Management Commentary on Operating Environment and Future Outlook - Supply chain constraints remain a challenge, with 80% of material input shortages tied to nine suppliers across 15 sites [11] - Management confident in improving supply chain performance in the second half, with material input growth doubling sequentially in July [12][13] - Strong demand for both new engines and aftermarket services, with orders up 18% and services orders up 36% in CES [15][63] Other Important Information - GE Aerospace completed the sale of Electric Insurance and reached an agreement to sell the licensing business, resulting in proceeds of roughly$ 700 million [23] - Inventory growth of $1.2 billion in the first half, but free cash flow conversion remained strong at nearly 120% [56] Q&A Session Summary Question: CFM56 shop visits and extended life - CFM56 remains a workhorse of the industry, with utilization consistent YoY and potential for extended shop visits [30][31] - Shop visits for CFM56 expected to plateau at 2025 levels for a couple more years before declining [32] Question: Supplier bottlenecks and progress - Two-thirds of the 15 supplier sites showed strong improvement, with material flow more than doubling sequentially [34] - Management remains focused on resolving constraints at the remaining priority sites [12][35] Question: CES margins and second-half progression - CES margins improved due to strong services growth, pricing, and customer mix, with shop visits skewed towards time and material work [39][40] - Full-year CES profit guidance raised by$ 150 million to $200 million, with margins expected to remain flattish [41] Question: LEAP shipments and supply chain progress - LEAP shipments down 29% in Q2, but management expects flat to 5% growth for the full year [46] - July showed promising progress, with higher engine output and reduced variability [13][49] Question: Inventory and supply chain strategy - Inventory growth of$ 1.2 billion in the first half, but pace expected to slow in the second half [55] - Management focused on maintaining a predictable ramp and not penalizing well-performing suppliers [53][54] Question: RISE program and customer interest - RISE program, particularly Open Fan design, continues to gain customer interest, with over 200 hours of wind tunnel tests completed [71][72] - Customer conversations at Farnborough focused on sustainability and SAF compatibility [72] Question: LEAP breakeven timing - LEAP expected to be profitable in 2024 and breakeven in 2025, with services performance tracking better than expected [74] Question: Airline profit warnings and fleet planning - No significant impact on GE Aerospace's business from recent airline profit warnings, with strong demand for services and new engines [67][68]