Good day, ladies and gentlemen and welcome to the General Electric Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Brandon, 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 Communications. Please proceed.

Thanks, Brandon. Good morning, and welcome to GE's second quarter 2019 earnings call. I'm joined by our Chairman and CEO, Larry Culp; and CFO, Jamie Miller. Before we start, I'd like to remind you that the press release, presentation, supplemental, and 10-Q are available on our investor website. We now file our 10-Q in concert with our earnings, a practice we began in October 2018. Note that some of the statements we're making are forward-looking and are based on our best view of the world and our businesses as we see them today. As described in our SEC filings and on our website, those elements can change as the world changes. Please note third quarter earnings will be the morning of Wednesday, October 30. With that, I'll hand over the call to Larry.

Steve, thanks. Good morning, everyone, and thank you for joining us. I'll start with some thoughts on our second quarter performance and our strategic priorities. Then Jamie will cover the quarter in greater detail before I wrap with an overview of our Renewable Energy business and our outlook. Let me begin by reiterating that 2019 remains a reset year for GE. We made some progress in the first quarter and that continued in the second quarter. I'll remind you though that our own actions and the market dynamics may not always follow a straight line, but I will draw your attention to those elements that are most important for GE's results today and tomorrow. First, our year-to-date performance is ahead of our outlook in several areas. We have not planned for perfection meaning we have planned conservatively to cover market and execution risks specifically within our Power business. At the halfway point, our performance at Power is better than expected including better project execution, orders and working capital management. Restructuring spend is also lower. Accordingly, we are raising our outlook for organic growth, adjusted EPS and Industrial free cash flow, which we now expect to be negative $1 billion to positive $1 billion while holding our margin guidance. This is progress, but let me be clear, even with this mid-year increase we recognize that our revised free cash flow range includes negative territory. Over time, as our operational improvements take hold, we continue to expect significantly better cash results. Now looking at quarterly results, we saw top-line strength. Orders were up 4% organically due to strength in Renewable Energy and Oil & gas. We ended the quarter with backlog of $369 billion up 11% year-on-year. This is comprised of equipment of $85 billion up 4%; and services of $312 billion…

Thanks, Larry. I'll start with the second quarter summary. Orders were $28.7 billion, down 4% reported, but up 4% organically with strength in equipment, primarily in Renewables and Power. Services orders were up 3% organically, driven principally by Renewables and Oil & Gas. Consolidated revenue was down 1% with Industrial segment revenues flat on a reported basis and up 7% organically. The biggest driver of growth was the renewable onshore wind ramp, which was up 80% in the quarter. Year-to-date, Industrial segment revenues are up 6% organically. Adjusted Industrial profit margins were 7.6% in the quarter, down 260 basis points year-over-year reported and down 300 basis points organically. As Larry mentioned, this is driven by significant declines in Renewables and Power and to a lesser extent Aviation, which I'll cover shortly. Net earnings per share was $0.01 loss, which includes income associated with discontinued operations for GE Capital. And GAAP continuing EPS was negative $0.03 and adjusted EPS was $0.17. In the quarter, the IRS completed their routine audit of our 2012 and 2013 U.S. income tax returns. We had previously reserved for tax uncertainties associated with these filings that were resolved decreasing unrecognized tax benefits. This had a $0.06 impact in continuing earnings and a $0.04 impact in discontinued operations, which were in our 2019 plan though not in the second quarter as the specific timing was unknown. Walking from GAAP continuing EPS of negative $0.03. We had $0.03 of losses, primarily from the partial sale of our Wabtec stake, unrealized mark to market of our remaining equity as well as a held-for-sale mark on BHGE's reciprocating compressors business. On restructuring and other items, we incurred $0.03 of charges principally in corporate and Power. Non-operating pension and other benefit plans were $0.05 in the quarter. Lastly, we took a…

Jamie, thanks. Given the recent alignment, we thought it would be helpful to spend a few minutes on Renewable Energy. It's comprised of four different businesses: onshore, offshore, Grid Solutions' equipment and services business and hydro. Strategically and operationally, we think it makes sense to have these four under the same umbrella, as there are substantial revenue and cost synergy opportunities. That said, they're each at different stages. In onshore, where we have the number one position in the U.S. we've launched the Cypress which has received its first launch orders. In offshore, we're in development mode, as we build our global presence and prepare to launch the Haliade-X, the world's largest wind turbine. While Grid Solutions and hydro are difficult books of business, we're working through complex projects in improving our daily execution. Now looking at our quarterly segment profit and margins. The four largest headwinds to margins were legacy Alstom projects, challenging onshore project execution in the Asia Pacific region, depreciation related largely to the onshore ramp and our NPIs and higher R&D spend. As you can see, combined, these were an impact of approximately 1,400 basis points. We're working very hard to offset these with strong volume and cost productivity, but there's more we must do. In June, I spent a week with our Renewables leadership team. I left these meetings confident that we can grow this business profitably as legacy items run-off. We're taking action to improve operations. We're running our commercial efforts differently with tighter pricing controls led by the CFO. We're seeing traction as evidenced by positive pricing in the quarter, the first positive pricing we've seen in 10 quarters, and we believe pricing is stabilizing. We're also reducing cost, and improving on-time delivery. In all, this can be and needs to be a…

Thank you.

With that, we'll open the line.

In the interest of fitting as many people as possible into Q&A on a busy earnings day as I know, we’d ask that everyone limit themselves to one questions. With that, Brandon please open the line.

Thank you. [Operator Instructions] And from Vertical Research, we have Jeff Sprague. Please go ahead.

Thank you. Good morning, everyone. And best of luck to JoAnna and Jamie. Thanks for all the help over the years.

Good morning, Jeff.

Good morning.

Hi, Larry. Just on cash flow to begin. Just thinking about Power cash flows, right? You've introduced flat in your guidance, right? We went from down to flat to down. I don't know where other people were at, but it was kind of my expectation that down in 2019 meant something equivalent or even worse to what we saw in 2018, negative $3 billion or so. Now that you've introduced flat it actually suggests we were kind of off the mark somewhere else in what we thought the segment cash flows might track at. I just wonder if there's something to be gleaned there? Is maybe Healthcare on the lighter side, or is it Aviation on MAX? And if you do manage a flat result here in Power in 2019 does it still hold that you'd expect Power cash flows to be down in 2020?

Jeff, I think what we would say with respect to Power is that we have seen the stabilization that we referenced right with respect to the order book, which has been encouraging the improvements on both expense and cash performance, but we're going to include that potential for the year-on-year number to be flat, but it's still a flat to down range, right? There's still a lot of variability here. To the extent that we are improving the range by $1 billion for the year, I think, it is appropriate to look at that and say that the bulk of that is coming out of the Power performance. There is some benefit from both the lower restructuring activity and the interest of course offset by MAX. But the reason we're maintaining that $2 billion range is because we're -- we still have work to do in Power, right? That's where we have the better part of the risk here. I'd say with respect to the other segments, clearly as we've indicated we're -- all eyes are on MAX, but broadly, we're really not offering up much by way of change in 2019 for the rest of the segments. With respect to 2020, it's probably too early to really comment on any change in trajectory. But what we've said earlier in the year back in March on balance holds.

And from JPMorgan we have Steve Tusa. Please go ahead.

Hi. Good morning.

Hey, Steve. Good morning.

Congrats and best wishes to Jamie and JoAnna as well. On this -- just following up on this free cash flow guidance by segment. What is the kind of -- now that you're halfway through the year roughly the free cash flow for Healthcare embedded in the guide? Is that -- you said down. It was $3 billion last year. Should we think something in kind of that like $2.5 billion range, or is it -- is there kind of a range to put around that to help us with?

No. I think with respect to Healthcare for purposes of today Steve no change in the Healthcare outlook from earlier in the year.

From Bank of America we have Andrew Obin. Please go ahead.

Yes. Good morning. Can you hear me?

We can Andrew. Good morning. Go ahead, please.

Good morning. Also want to echo Steve's comments. Best wishes to Jamie and JoAnna. We'll miss you both. Just a question on Aviation. Free cash flow drag on Aviation $400 million. What has gotten worse? And the number seems to be quite a bit higher than what Safran is saying. And just want to confirm that $800 million in the second half is part of the free cash flow guidance.

Yes. So a couple of things. It was $300 million in the second quarter. In the second half, we do see that ramping to $400 million to the -- in each quarter while the plane is grounded. You know, remember LEAP volume is planned to ramp in the second half and that's really what that relates to is just simply that volume uptick in the second half. And then in terms of the overall outlook certainly we are monitoring that. It is embedded in the frame we talked about this morning though of the negative 1 to 1.

From Barclays we have Julian Mitchell. Please go ahead.

Hi. Thanks. Good morning. And wish also Jamie and JoAnna all the best. Maybe a question around Renewables. Help us understand, I guess, what kind of magnitude of EBIT loss for the year we should expect after a $400 million loss in the first half. And understood that the number is affected by the insertion of the grid business, which is loss-making. Maybe help us understand how your assumptions for the base renewable division ex-grid have changed if at all since March?

Yes, Julian, it's Jamie. When you look at Renewables in total with Grid included, I would just say -- repeat what I said in my prepared remarks, which is really that we expect our operating margin to be negative for the year. What we had said on legacy Renewables that it would be about breakeven in operating margin. And when you look at that there are certainly things we're monitoring there with respect to onshore wind deliveries, project execution and other elements that Larry and I both talked about on the call. And I think there could be a little bit of pressure to that zero for the full year but we see it hovering right around there.

From Melius Research we have Scott Davis. Please go ahead.

Hi. Good morning, guys.

Hi, Scott

Good morning.

Good morning.

I'll be the fifth person to wish Jamie and JoAnna well but it's been a lot of years.

Thank you.

Particularly JoAnna thanks for your help over the years. It's been again a long time. But I wanted to go back to Power if you guys don't mind. And can you help us maybe Larry and Jamie get some granularity around this 2.5% margin number? I mean, what lingering impact of kind of cost of quality -- and I'll throw in like just crappy project execution in there and any other variable that you want to toss in there. Is there such a thing as kind of normalized if you fix this crap margin number that you could point to, or any granularity at all to help us bridge down to that 2.5%? Thanks.

Yeah. Scott I think that, if Scott Strazik and his team were here, they would acknowledge fully that there's improvement potential throughout this business, right? And I just look at what I saw last week when we were in Atlanta for the operating review -- the July operating review. It was a stark contrast from a year ago. With respect to new units, it's a competitive space. We're in some challenging geographies. But just in terms of the way the team today is looking at what we call the strike zone in terms of the deals that we want to pursue versus those that we don't, right, we're laying in a global level of standard work. So we've got everybody looking at opportunities through the same lens. They were being sober about cost and contingencies. That's what sets up some of that project execution that you referred to a moment ago. And they're really driving in deeply to get to root cause, to understand where we've had some of these issues, be it around the selection of an EPC in and around the scope or the scheduling that we commit to the terms and conditions of course. And I just think that while there is a good bit still to work through, we're writing a better book of business for the future. Hard to put a basis points contribution over time on that, but I think that's serious because that in turn is what sets up the project execution itself, right? Once we've won, we've got to see things through. And I've been really encouraged by the project review board the team's put in. We're getting in early in the life cycle of these commitments. It's a cross-functional effort really looking at what can go wrong and how do we…

And Scott just to add a little bit to that, in the second quarter, we had just over $100 million of charges related to margin erosion in projects. I think what we're really looking at is few surprises this year. In the second half, certainly, we're monitoring all the different areas, but the operational actions that Larry talked about are really giving us a much deeper level of visibility into the project economics and the timing of our cash and the various actions we have to take. And you probably remember last year in the second half we took significant charges at Power well over $1 billion. And when we look into the second half of this year that's how we'll really measure our own performance is not repeating those and certainly not repeating those to the same degree we had.

From Gordon Haskett, we have John Inch. Please go ahead.

Good morning, and congrats JoAnna and Jamie.

Hey.

Good morning, everyone.

Good morning, John.

Good morning, John.

Good morning, guys. So I want to put a finer point around the MAX just so that I'm understanding what you're saying. So the flat guide of -- I'm sorry the down one -- I'm sorry, let me take a step back. The MAX is going to drag kind of $1 billion to $1.1 billion. Is that in your number? And then you are sort of flattish number or the up number territory for next year. Does that assume the MAX is flying? And then does Boeing make you whole when it starts to fly? There's a comment that it makes customers or suppliers whole. Does it also make you whole so you get all of this money back in terms of what the drag is?

Yeah, John. The impact I talked about before is in our guide. And when the aircraft starts delivering again on -- when Boeing delivers the airframers, we will get paid for those engines. It's just a delay in cash timing.

From Wolfe Research, we have Nigel Coe. Please go ahead.

Thanks. Good morning. And thanks Jamie and JoAnna. Good luck with your next stage. And I'm glad that JoAnna made a scene on the guide up by the way before she goes on. So on the -- just want to kind of pick up the thread on the MAX here. So I mean Boeing's put out the possibility that rate could come down further from 42. Can you just maybe give us -- I'm not looking here for decimal points, but if you could give us some sense on how that influences the free cash flow outlook and also the margin impact. So I'm assuming that there would be some margin pressure if we have less variable contribution from engine production. So any sense on how that would impact free cash flow and earnings from rate reduction on the MAX? Thank you.

Nigel, at this point as I think we've all communicated we're at a lower level of production than we thought we would be at this point in the year for obvious reasons. And all we're really trying to signal with the $400 million of cash pressure here in the back half -- $400 million per quarter is -- what is likely to happen if we do not see a return to service. So we just tried to simplify that without getting into trying to get ahead of Boeing or the FAA or other regulators with respect to when the plane is going to return to service, and again really refraining from any commentary in terms of what could change in terms of our trajectory going into 2020. But clearly we're doing all we can to support Boeing and our carrier customers to facilitate a safe return to service for the MAX.

And from RBC Capital Markets we have Deane Dray. Please go ahead.

Thank you. Good morning, everyone, and my congrats to JoAnna and all the best to Jamie. I was hoping to ask a couple of macro questions if I could. You all would be one of the only industrials not to comment or complain about some short cycle pressures and where and how might that be manifested in the results today. Some comments on geographies especially China. It looked like Healthcare did better there. And then true us up on tariffs, $300 million to $500 million was the last update?

Dean, I think as we went through the reviews here in July right looking back to the second quarter, looking ahead to the second half there wasn't a lot of finger pointing at short cycle pressure. We certainly saw bits of the business that didn't perform at the top line in the way that we would have liked. I think the Healthcare revenues were a little soft in the U.S. and in China. I think we touched briefly on the gas service business. But I think we really look at that more frankly as a function of our own execution as opposed to short cycle pressure that we can point to. I think we want to be vigilant but clearly going into the second half with the backlog and the visibility that we've referenced a few times here I think we felt good enough to tick up the revenue guide to that mid single digit range. With respect to China, as I mentioned I was there as part of a two-week trip to Asia. I would say that the embrace of GE is strong at the customer level. At the government level, GE is seen as a key partner. We signed as you may have seen; I think an important offshore wind commitment in Guangdong province while we were there. As you would expect we had some key meetings with our Gas Power partner Harbin. I do think having partners is going to be key going forward in China. And I'm glad we're partnered up with Harbin. But the trade tensions there are real. And you don't have to look past today's headlines to have that, I think is a watch item. And how that plays out for our book of business in China, how it plays out more broadly for all of us is a bit unclear. I think we've tried to take in some of that pressure into account in the back half here. But we flagged it just given it's a variable, good bit outside of our control.

And just on China tariffs the impact in the second quarter was $90 million net and really no change. I think we've said $400 million to $500 million of net impact for this year and that's about what we still see, mostly in Healthcare and Renewables.

Thanks Steve.

From Citi, we have Andrew Kaplowitz. Please go ahead.

Good morning guys, best of luck, to JoAnn and Jamie.

Good morning.

Good morning.

Obviously, good improvement in execution in Power, but maybe you could talk about the markets, pretty strong orders so far, above your expectations. Is that more a result of your teams getting their act together, or are you seeing some improvement in some of the major regions that you do business regions of North America, Middle East Asia?

Well, I think the team is doing a better job, certainly, but again, it's very early right. Whether we're talking about the top line, the bottom-line the cash, I don't want to -- I don't want any of this to sound like we are claiming victory. I think Scott and the team are focused again on a high-quality book of business. The share numbers will be what they are. But I think over time what we want to do is, partner with the right customers, in and around the opportunities that allow us to create value for them. And in turn value for our shareholders over the life cycle of that commitment. Clearly, as you well know the gas business is different region by region. But I would just share briefly. Whether it was in Japan, whether it was in Singapore, obviously in China, on this last trip I visited, a site under construction in Malaysia, there's a lot of keen interest in adding gas capacity as they work through, not only their own underlying economic growth but the energy transition. So, we're bullish on that part of the world, with respect to the gas business. We need to be better in terms of the book of business. We need to be better at project execution back to Scott's question. And then, all of the details inherent in sustaining a good service business over the life cycle of those installations.

From Deutsche Bank, we have Nicole DeBlase. Please go ahead.

Yeah. Thanks. Good morning and best wishes to Jamie and JoAnna. So I guess, I want to focus a little bit on GE Capital. It's been a source of upside versus expectations year-to-date. Do you still expect GE Capital to generate a $500 million to $800 million loss for the full year? And I guess what's driving the delta between one half and two half performance if so?

Yeah. So, GE Capital's continuing net income for the first half was $46 million negative $89 million in the quarter. A lot of that is helped by timing of asset sales. In the second quarter we had EFS gains. The GECAS elements were also more first half loaded. When you look at the quarter in particular lower interest expense, the tax audit resolution those things helped us. And when you pull back and look at first half/second half. I think you're going to still be impacted by timing. So, we are first half loaded on gains. You'll see that come back a bit in second half. In the third quarter we do our loss recognition testing for insurance. In addition, we have our GECAS impairment testing. And the timing of this tax resolution in the second quarter we did not expect that in the second quarter. We really expected that in the second half. So, we still expect to be within that negative $500 million to negative $800 million, absent the LRT probably at the higher end of that. But on the LRT, we'll update you in the third quarter when that's complete.

From Credit Suisse, we have John Walsh. Please go ahead.

Hi. Good morning.

Good morning, John.

Good morning.

And I'll echo everyone's well wishes for Jamie and JoAnna. Appreciate the help. So I guess, maybe following off of Andy's question on Power. I mean I think you're clearly making good progress in Power right around what you can control within GE. You've made investments right on H-frame for kind of more baseload power. But as I look at the market, right, I mean battery storage rate is a potential technology disruption there particularly around peakers. And I don't want to go specifically down that road necessarily, but as you're focusing on improving the margins, can you talk to what you're doing to also play offense, particularly within Power whether it's around your R&D investments or other investments the business is making to prepare for technology shifts that will continue to happen over time?

Sure, sure. Well, I would say, you probably see it in a few areas, John. I think that clearly as we see the transition from coal and nuclear to other sources -- cleaner more efficient sources, gas is a beneficiary in that, right? So we're just again trying to make sure that we're plugged in country-by-country, customer-by-customer, where we can be part of that. You're right in certain places, gas will be used differently, and that will shape our product road map in terms of the types of upgrades that we offer as well as the new unit NPI journey over time. I'd also say that, with respect to storage and other opportunities that we might have, tucked away ever so discreetly on the Renewables page in the prepared remarks is a reference to hybrids, where what we've done is we've put our solar inverter in our battery storage efforts. And these are small they're nascent, but they really are our opportunities to play here in the renewables, because we see opportunities in and around the wind business, particularly to lever our technology installed base in a broader way. We don't talk a lot about that. We had a good session with the team last week looking at some of the second half investments that we're going to make there, and hopefully over time that will be more significant. But I would really say big picture making sure we've got a best-in-class gas business during the energy transition while continuing to invest largely in our onshore and offshore wind businesses is the way we are positioning ourselves for the energy transition.

Brandon, we have time for just one more given we’re pass the top of the hour. So let’s take our last question please, one more.

Our last question from Goldman Sachs we have Joe Ritchie on line. Please go ahead.

Thanks. Good morning, and congratulations Jamie, JoAnna.

Good morning, Joe.

Good morning, Joe.

And so, thanks for fitting me in. And just I guess my one question. You guys monetized your stake or a portion of your stake in Wabtec this quarter. Can you just remind us of any of the restrictions or plans that you have for your remaining stake both in Wabtec and for BHGE?

So from a Wabtec perspective, there is a restriction that lasts into this fall. And on the Baker Hughes side, we are free to sell down at anytime those subscriptions that we have at this point. But we continue to expect an orderly process with both.

And no further questions at this time. Mr. Winoker, closing remarks?

No. I think we're good and available for calls with our team. Thanks everybody.

Thanks everyone.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.