Business Breakdowns
· 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.
· Ramesh Narayanaswamy
[00:00:00] S1: GE goes back more than 100 years. It's a company that dates back to none other than Thomas Edison. For most of the previous couple of decades, GE was probably the very definition of a conglomerate, with a very diverse portfolio of businesses operating in industrials, in healthcare, and in financial services. But if you look at business history, there are very few things as reliable as a cycle of conglomeration and then deconglomeration. And under the time of Jack Welch and Jeff Immelt, their eras were defined by a focus on growth, on market share through acquisitions, and what I would call earnings-per-share management. A big part was played by GE Capital, which exposed a lot of leverage in the system, and the various businesses housed under GE were competing for capital, and there was no true business rationale for holding them together. Now all of that changed with the arrival of Larry Culp, who was really the first outsider CEO at GE. Culp was on the board at GE during the brief tenure of John Flannery, and he took over as CEO in October 2018. Now Culp, for those who follow industrials businesses, is a very well-known and proven operator and capital allocator, and had a fantastic performance—both operationally and stock price–wise—at Danaher, where he was CEO from 2000/2001 to circa 2014. So if GE needed to deconglomerate, then Larry Culp was the perfect choice.
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: Maybe you can detail some of the steps that he took in that deconglomeration. It goes beyond that in terms of how the operational execution has played out. What would you point to? Because I think the track record from Danaher was there to point to, but he certainly followed through with some of the execution on the GE side. [00:00:00] S1: In simple terms, I would say Larry brought the Kaizen-like lean manufacturing principles that he was so successful in implementing at Danaher to GE. To use a Japanese phrase, he walked the Gemba, as they call it: go to the place where the value is being added—the manufacturing floor, the shop floor—and really focus on very basic ideas of continuous improvement, problem-solving, and, more importantly, addressing the “don't shoot the messenger” culture, which was badly needed at GE, and also, crucially, focusing on the customer. I think I've heard Larry describe his philosophy as “common sense vigorously applied,” which is probably a good phrasing of what he did at GE. And for GE in particular, that meant simplification and deconglomeration and focus. So he spun off the healthcare assets as GE Healthcare, the power businesses as GE Vernova, focused on debt reduction, and what we are left with is just the aerospace assets. [00:00:00] S0: What do you think led him to sticking with the aerospace assets versus going with healthcare or Vernova? It's just an interesting choice. It might have just been market size, but do you think there's anything there in terms of what led him to continue on with this specific business line?
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: What do you think led him to sticking with the aerospace assets versus going with healthcare or Vernova? It's just an interesting choice. It might have just been market size, but do you think there's anything there in terms of what led him to continue on with this specific business line? [00:00:00] S1: If you go back in time to 2020, the board awarded Larry a one-time performance grant to incentivize him to stay. It was at the very high end of what you would normally see—something like $200 million in shares based on certain stock price targets. It was a little bit controversial at the time, simply because the share price was depressed given the fact that we were reeling from the pandemic. But it also aligned outcomes between management and shareholders. And similarly, a very similar grant was made in 2024, again tied to operating metrics but in smaller scale compared to the 2020 grant. As to why Larry decided to become CEO of GE Aerospace rather than Vernova or Healthcare, a couple of things I would point to. One might have been the fact that he was historically well versed in industrials businesses, so Danaher. And second, perhaps it was an implicit indicator of how strong aerospace was compared to their other segments. And he wanted to be the CEO of the crown jewel asset, so to speak.
· Ramesh Narayanaswamy, Matt Reustle
[00:00:00] S1: If you go back in time to 2020, the board awarded Larry a one-time performance grant to incentivize him to stay. It was at the very high end of what you would normally see—something like $200 million in shares based on certain stock price targets. It was a little bit controversial at the time, simply because the share price was depressed given the fact that we were reeling from the pandemic. But it also aligned outcomes between management and shareholders. And similarly, a very similar grant was made in 2024, again tied to operating metrics but in smaller scale compared to the 2020 grant. As to why Larry decided to become CEO of GE Aerospace rather than Vernova or Healthcare, a couple of things I would point to. One might have been the fact that he was historically well versed in industrials businesses, so Danaher. And second, perhaps it was an implicit indicator of how strong aerospace was compared to their other segments. And he wanted to be the CEO of the crown jewel asset, so to speak. [00:00:00] S0: You referenced some of the market shares that they have in this jet engine business. Can you just bring us back in time in terms of the origins of that industry, and that'll lead us on to how GE has captured the share and foothold that they have. But maybe go back in time. I have some sense of when jet engines came around. It was probably correlated to when airplanes came around, but maybe you can lay that out for us.