Business Breakdowns
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: Is there anything else besides those two lines that GE still has? [00:00:00] S1: They do have a defense and propulsion technologies business. So outside of their defense programs, something like 12–15% of the business is in propulsion technologies, which includes things like aircraft equipment businesses that go into both commercial and military applications. But overall, in terms of the revenue mix, commercial is overwhelmingly nearly 85% of revenues, and in terms of profitability even more pronounced. I would also add that they do report insurance revenues, which is a legacy part of GE given their intense transformation over the last few years. Less than 10% — now about mid-single-digit percent — of their overall revenues comes from insurance, though that is now in run-off. So it is not really a portion of the business where they're committing new capital. [00:00:00] S0: Just to give some scale around the revenue base today, how big are they from a top-line perspective? [00:00:00] S1: This year they'll report something like $40 billion in revenues, of which 75% is commercial engines and services and 25% is defense and propulsion technologies. Due to the difference in profitability, the commercial engine-services business is roughly 25% operating margins. The other businesses — defense and propulsion technologies — tend to be more like 11–12% margins. So in terms of earnings contribution, you're really looking at a commercial-engine franchise here in GE.
· Ramesh Narayanaswamy, Matt Reustle
[00:00:00] S1: This year they'll report something like $40 billion in revenues, of which 75% is commercial engines and services and 25% is defense and propulsion technologies. Due to the difference in profitability, the commercial engine-services business is roughly 25% operating margins. The other businesses — defense and propulsion technologies — tend to be more like 11–12% margins. So in terms of earnings contribution, you're really looking at a commercial-engine franchise here in GE. [00:00:00] S0: I assume that the way these cycles work, particularly with either replacements or new fleets coming out, you have pretty good visibility just in terms of backlog and deliveries for that revenue number and where it goes over the next couple of years. [00:00:00] S1: Absolutely. So if you look at how the aftermarket works, 70% of GE's revenues overall comes from services, which is very predictable. Spare parts revenues and services revenues from the install base. Typically engines are mandated to come in for overhauls and shop overhauls and shop resets, just from a safety and regulatory perspective. So this gives rise to an extremely predictable earning stream in the aftermarket, which also tends to be the more profitable earnings stream. [00:00:00] S0: And just on the backlog point, I understand it's a smaller percentage of revenue relative to services, but can you contextualize what backlog looks like now and maybe how that compares to history, and whatever framing that you think would be most effective?
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: And just on the backlog point, I understand it's a smaller percentage of revenue relative to services, but can you contextualize what backlog looks like now and maybe how that compares to history, and whatever framing that you think would be most effective? [00:00:00] S1: Absolutely. And the backlog is one of the more interesting underpinnings of GE's five- to ten-year outlook. Their current backlog is something like $175 billion on a headline basis; that's four and a half years-ish of revenues. But underneath that, there are a few nuances. So if you strip out just the commercial backlog, which obviously is the majority of the business, that's closer to six years. And within that, if you take out just the services element of revenues, which obviously is the key profit pool that GE Aerospace enjoys, that's closer to seven years. So we have a very unusually long backlog and visibility for GE. And to put it in context, this is not unusual in the supply chain. If you look at the airframers themselves, both Airbus and Boeing, with their current production rates, they are running at close to a decade's worth of backlog. So very strong visibility throughout the OE as well as the engine ecosystem. [00:00:00] S0: And relative to, let's say, five years ago, ten years ago, do those numbers in terms of four times current revenue, ten years of backlog for the airframers—is that meaningfully higher, lower, or in line with where they've been historically?
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: And relative to, let's say, five years ago, ten years ago, do those numbers in terms of four times current revenue, ten years of backlog for the airframers—is that meaningfully higher, lower, or in line with where they've been historically? [00:00:00] S1: I would say they're moderately higher than historical averages, but not substantially so. Aerospace generally has very long-term cycles, and that allows these companies to have significant backlogs and visibility in terms of how these engines are produced, because they need to tie in with the airframers in terms of their production. They're very closely knit in the supply chain. And secondly, because of the increasing prevalence of long-term service agreements, that has also ticked up in terms of how much the backlog gives you the visibility for. [00:00:00] S0: And for a business like GE, I can hear essentially—again, I'll use the simple numbers—somewhere in four to five times revenue in terms of backlog. So four years' worth looking out. Is that lumpy in terms of seeing major realization of backlog two years out, but maybe you have a slow year next year? Does the lumpiness drive anything, or is it realized pretty evenly over the course of those four years?
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: And for a business like GE, I can hear essentially—again, I'll use the simple numbers—somewhere in four to five times revenue in terms of backlog. So four years' worth looking out. Is that lumpy in terms of seeing major realization of backlog two years out, but maybe you have a slow year next year? Does the lumpiness drive anything, or is it realized pretty evenly over the course of those four years? [00:00:00] S1: That's a good question. On the services side of things, which is something like 70% of the backlog, you should see a fairly predictable, steady evolution of the burn rate, so to speak, of the backlog converting into revenues. On the OE side, that is somewhat lumpier, because that sort of ties into production rates at Boeing and Airbus. And if there are any issues in terms of either the supply chain or their production run rates, you will see some lumpiness. But given that both Boeing—since the sort of issues they've had in the last few years, it's been fixed—and Airbus have been on a pretty good rhythm, I would say both the OE and the services backlog today seem well positioned to have a fairly steady cadence over the next five to ten years. This is outside of things like pandemics and recessions, so to speak. So on a run-rate, normalized basis, we should be able to see a fairly steady growth of that revenue and earnings.
· Matt Reustle
[00:00:00] S0: Yeah, and calendar years, quarters shouldn't matter as much as they do sometimes in the markets. Many times investors will see through, but it's interesting to note and to hear nonetheless. Maybe we could do a revisit to the GE pure-play story. We captured it to some extent in the previous episode, but it's played out even more. We don't have to spend too much time on the origin stories of GE—we can hit on that. I want to talk a little bit about Larry Culp in particular and some of the moves that he's made. Do your best to just outline some of the key milestones and things that really were done that moved the Titanic around when it was struggling for so long.