Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- GE Aerospace (GE, Financial) delivered double-digit growth across orders, operating profit, and free cash flow in Q2 2024.
- The company secured significant commitments from major airlines, including Turkish Airlines, National Airlines, Japan Airlines, and British Airways.
- The LEAP-powered Airbus A321XLR was certified by the European Union Aviation Safety Agency, marking a milestone for the narrow-body engine.
- GE Aerospace (GE) announced a $1 billion investment in MRO facilities to increase capacity and reduce turnaround times.
- The company raised its full-year profit and cash guidance, reflecting strong performance and confidence in future growth.
Negative Points
- New engine output was down 20% sequentially, impacting revenue.
- Supply chain constraints remain a significant challenge, with 80% of material input shortages tied to 9 suppliers across 15 sites.
- Despite improvements, some supplier sites are still constraining output, affecting the company's ability to meet demand.
- Lower engine deliveries led to an 11% decline in equipment revenue for the CES segment.
- The company had to adjust its full-year LEAP output expectations to flat to up 5%, lower than initially projected.
Q & A Highlights
Q: Given the slower ramp on narrow-body programs and durability issues on the geared turbofan, are CFM56 customers considering increasing the work scope of their third shop visits or even doing a fourth shop visit?
A: (H. Lawrence Culp, CEO) The CFM56 remains a workhorse with consistent utilization. We expect it to have a longer life in many fleets, benefiting our aftermarket in terms of volume and scope. (Rahul Ghai, CFO) We anticipate peak shop visits to plateau at 2025 levels for a few more years, with extended leases indicating higher shop visits.
Q: Can you comment on the 15 supplier sites and nine suppliers causing delays in parts, and what types of products are involved?
A: (H. Lawrence Culp, CEO) Three-quarters of delivery challenges are rooted in these 15 sites. We've adopted a collaborative problem-solving approach, which has shown significant improvements in many areas. However, we still need more progress from some suppliers to meet demand.
Q: CES margins were impressive despite lower LEAP deliveries. What drove this improvement, and how do you see the second half progressing?
A: (Rahul Ghai, CFO) Strong services revenue and improved shop visit mix drove CES margins. We expect continued services growth and have adjusted our OE revenue outlook, leading to higher profit expectations for the full year.
Q: Can you explain the lower LEAP shipments in the quarter and the outlook for the rest of the year?
A: (H. Lawrence Culp, CEO) April was challenging, and May didn't recover as expected. However, July has shown improvement. We now expect LEAP deliveries to be flat to up 5% for the year, with a focus on achieving a higher exit rate by year-end.
Q: How do you see the progression of equipment revenue in the second half, given the need for a significant increase to meet guidance?
A: (Rahul Ghai, CFO) We expect higher year-over-year growth in the fourth quarter as both services and OE ramp. July has shown a better start, with significant improvement in material inputs, allowing for sequential progress.
Q: How are you managing inventory given the supply chain constraints and lower LEAP projections?
A: (H. Lawrence Culp, CEO) We're calibrating with suppliers to ensure a predictable ramp without unduly turning down those performing well. (Rahul Ghai, CFO) Inventory growth has been significant, but we expect it to slow down in the second half, reducing the headwind.
Q: Can you provide more detail on the remaining supplier sites causing bottlenecks?
A: (H. Lawrence Culp, CEO) The common denominator is the need for better collaboration and problem-solving. Regardless of commodity or geography, we need to unlock constraints and increase capacity through granular operational detail.
Q: What's your confidence in airframers and their broader supply chain catching up with deliveries?
A: (H. Lawrence Culp, CEO) We're focused on what we can manage and have high confidence in our updated guide and LEAP delivery outlook. We continue to work closely with our customers to meet demand.
Q: Can you provide an update on the RISE program and customer acceptance?
A: (H. Lawrence Culp, CEO) Customer interest in RISE and the open fan engine remains strong. We've made significant progress in component and module level tests, and airline CEOs are keen on our sustainability efforts. The 20% step-up in propulsive efficiency and emissions reduction is well-received.
Q: What are your latest thoughts on LEAP breakeven timing given current volumes and resource deployment?
A: (Rahul Ghai, CFO) LEAP is expected to be profitable in 2024 and breakeven in 2025. Services are performing better than expected, and we are on track with durability improvements, positioning LEAP for profitability.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
