Building momentum amidst a still-difficult environment

My opening and closing remarks from GE's third-quarter 2020 earnings call today, edited and condensed for length. For more on GE’s second-quarter earnings, click here. For important information about forward-looking statements, click here.

I’m encouraged by our progress in the 3rd quarter. Despite the ongoing effects of the COVID-19 pandemic on our year-to-date results, we’re building momentum across GE.

Our topline remains pressured, but our actions are driving improved profitability and cash performance. In the quarter:

• Industrial revenue was down 12% organically. This was largely driven by Aviation as Healthcare, Renewables and Power were all up.
• Industrial margin was 5.6%, an organic contraction of 310 basis points year-over-year. Notably, all segments returned to positive territory for the first time in two years.
• Adjusted EPS was $0.06, down year-over-year, but up sequentially.
• And, Industrial free cash flow came in at positive $500 million. Our sequential improvement was largely driven by better working capital and earnings. While positive, and a good sign, we have plenty more work to do here.
• Let me focus on orders, down 28% organically, for a moment. Over 75% of this pressure was driven by Aviation as well as part of Healthcare – the places hit hardest by the pandemic. In Power and Renewables, some pressure results from our actions to be more selective in our commercial activities, and some is timing, where we should see stronger conversion in the fourth quarter.
• Despite this, our backlog remains a real strength at $384 billion. 80% is in services where we enjoy healthy margins. While services are hurting in the near-term, they have a multi-year time horizon and keep us close to our customers.

Now, by business…

• At Aviation and GECAS, we’re managing these businesses aggressively, and saw sequential improvement. Aviation is on track to deliver more than $1 billion of cost and $2 billion of cash actions this year.
• In Healthcare, we delivered strong margin and cash performance. While pandemic-related demand has moderated, we saw scan data and PDx orders approach pre-pandemic levels. We continue to see capex pressure in private healthcare markets and we’re planning cautiously.
• As you’ll recall, Power and Renewables were our turnaround stories at the start of 2020. Improved operational discipline and cost-out actions are starting to show. In the quarter, both delivered solid organic margin expansion – Power more than 700 basis points… Renewables more than 200.

So, clearly, our markets are, by and large, stabilizing. But to underscore the obvious – stability is not yet recovery. We still acknowledge that the full duration, magnitude, and pace of this pandemic across our end markets, operations, and supply chains is uncertain. That said, based on what we see today and the actions we've taken, we expect fourth quarter Industrial free cash flow of at least $2.5 billion with positive contributions from all segments. But how much more really depends on how Aviation fares through the quarter. And, importantly, the momentum we’re building should help us deliver positive Industrial free cash flow in 2021.

From day one, we’ve known this would be a game of inches. This is still true today. We’re focused on 3 areas where we’re making real progress.

First, we’re continuing to strengthen our businesses. As a team, we’ve been engaged on what matters most – the safety of our employees; taking care of our customers and communities; and accelerating our lean transformation.

At the same time, we’re focused on what we control in the near-term… driving better operational execution and further optimizing our cost structure. Our more than $2 billion of cost and $3 billion of cash actions started to play out in the quarter – now, 75% complete – with our decremental margins, for example, improving sequentially from 44% to 32%.

Second, we’re solidifying our financial position. Since the beginning of 2019, we’ve decreased debt by $25 billion. We’ve continued to maintain strong liquidity and flexibility, exiting the third quarter with $39 billion of cash.

And, third, we’re driving long-term profitable growth, even in the current environment.

• Lean continues to be the strongest common denominator, and this is what builds the foundation for sustainable growth. We’re picking up the pace… deploying lean to drive safety, quality, delivery and cost improvements – in terms of productivity and cash generation. This quarter, we held our second lean week event virtually at Gas Power. With more than 1000 participants across 10 countries and functions, we identified dozens of delivery and cost improvement opportunities.
• We’re also continuing our efforts to run GE differently, moving “the center of gravity” closer to where the action is. We talk about GE as four Industrial segments, but we drive operational improvement at much deeper levels within the organization. You’ll recall that we split Gas Power and Power Portfolio within the Power segment – this is working well. We’re now simplifying other segments in similar ways – to enhance visibility and accountability. For example, we’re changing the way we manage P&Ls within Healthcare Systems, ranging from LCS to MR to Ultrasound… where we are integrating production and product management to improve delivery. Similarly, we’re now transitioning Grid from one to six operating P&Ls. Importantly, this is not only a cost-out initiative, but a way to ensure we’re using the right processes, tools and resources to improve execution, quality and speed.
• This quarter, we held our strategy reviews with each business, planning for the long-term. These discussions focus on how we put ourselves on the best possible footing to play offense… how we win with our customers and for our shareholders. What was evident is that our businesses are focusing… they’re setting more impactful objectives, designed to deliver profitable growth. Examples include ensuring our gas turbines remain competitive at the top of the power dispatch curve… as well as launching next gen software platforms in our Healthcare Imaging businesses. The quality of our strategic thinking was much improved versus a year ago. Now, we have to execute.

. . . Our transformation of GE is accelerating.

In September, we introduced a new purpose statement for the company: “We rise to the challenge of building a world that works.” This is more true than ever as we continue to deliver for our customers and tackle the world’s biggest challenges from precision health to the safe return to flight to the energy transition.

Today, I’d like to spend more time on GE’s role in helping solve the global energy transition. Climate change is undoubtedly a massive challenge, and one where the technology advancements we deliver for our customers will play an important role. We’ve also been reducing greenhouse gas emission from our own facilities since 2004, and we met our most recent goal for 2020 early, reducing our emissions by 21%. Now, we’re strengthening our sustainability pledge by committing to be carbon neutral in our facilities and operations by 2030.

Our strategy to achieve this is threefold. First, we’ll boost operational investments over time to achieve energy efficiencies. Second, smart power sourcing will enable us to reduce our emissions from the grid. Finally, we’ll use our lean practices to eliminate energy waste.

Separately, we announced that we will pursue an exit from the new build coal power market. This decision highlights the interplay we are seeing between decarbonization, market dynamics and our business strategy.

Taking a step back, as I reflect two years in, what gives me confidence in GE’s future are our fundamental strengths.

In what continues to be a difficult operating environment, our team continues to show humility, transparency, and focus each day.

Looking across GE, we continue to build on our legacy of innovation, leading with technology. This is evidenced by some big wins in the quarter. Gas Power was awarded a large equipment contract with Taiwan Power Company, featuring the 7HA.03, which optimally balances power output, efficiency and maintainability. Additionally, Renewables finalized a supply contract with Dogger Bank for what will become the world’s largest offshore wind farm. In Healthcare, we introduced a number of AI-enhanced products that make customer workflows more efficient, including our Vivid Ultra Edition in Cardiovascular Ultrasound. And, Aviation received certification from the U.S. FAA for the GE9X, the world’s most powerful commercial aircraft engine and designed to be the most fuel-efficient GE has ever built.

At the same time, our technologies are uniquely capable of helping solve climate change – we’re raising the bar in reducing carbon emissions and increasing efficiency. We’re delighted that Gas Power’s 7HA turbines will supply the first purpose-built hydrogen-burning power plant in the U.S. By 2030, the plant is expected to run on 100% hydrogen.

And, there’s no other company with the scale of GE's global reach, brand, talent, and long-term customer relationships.

In all, we’re encouraged by our progress amidst a challenging backdrop. We remain focused on the long-term – not only in terms of our ability to perform, but to realize our purpose and the full potential of GE.

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