Q2 2024 Earnings Summary
- Strong Services Growth Driving Increased Profitability: GE's Commercial Engines and Services (CES) reported services orders up 36% in the second quarter, indicating robust demand in the aftermarket ( ). This momentum is expected to drive services growth higher in the second half, with overall mid-teens growth projected, supported by increased shop visits and spare parts demand ( ). As a result, GE is raising profit expectations for the full year by $150 million to $200 million, demonstrating increasing profitability ( ).
- Extended Life of CFM56 Engines Enhances Aftermarket Revenue: Airlines are extending the lives of older aircraft and engines, leading to sustained utilization of GE's CFM56 engines, which is expected to sustain higher shop visits for an extended period ( ). GE anticipates that peak shop visits projected for 2025 will plateau for another couple of years before declining, with third and even fourth shop visits occurring ( ). This prolonged demand boosts the aftermarket revenue stream and signals strong future cash flows.
- Innovative Technology Development with Growing Customer Interest: GE is making significant progress on its RISE (Revolutionary Innovation for Sustainable Engines) program, particularly with the open fan engine technology aiming for a 20% improvement in propulsive efficiency and emissions reduction ( ). Customer interest in RISE is growing, especially among airline CEOs focused on sustainability. This positions GE well for future growth as the industry shifts towards more sustainable solutions ( ).
- Significant supply chain constraints are impacting GE's ability to deliver new LEAP engines, with deliveries lower than expected and challenges at 15 supplier sites accounting for 75% of delivery issues. This has led to disappointing new unit deliveries and lower equipment revenue.
- Original Equipment (OE) volume was weak, with Q2 LEAP engine deliveries down by 70 units compared to Q1, contributing to a decline in equipment revenue by 11%. Despite efforts, the ramp-up in new engine output has been slower than anticipated.
- Airlines extending the life of older engines due to delays in new engine deliveries may reduce the demand for new engines, potentially impacting GE's future sales. Additionally, airline profit warnings could signal a future slowdown in demand impacting GE's business.
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LEAP Engine Delivery Outlook
Q: Why are LEAP deliveries lower, and what's the new outlook?
A: LEAP engine deliveries were lower than expected due to supply chain challenges, particularly in April and May. GE is adjusting its full-year LEAP delivery outlook to be between flat and up 5%, which is lower than previously anticipated but still represents modest growth. They are focused on improving deliveries and expect a healthier, more stable, higher exit rate by the end of the year. -
LEAP Profitability Timing
Q: Has the LEAP breakeven timing shifted due to lower volumes?
A: The timing has not shifted; GE still expects the LEAP engine to be profitable in 2024 and the program to break even in 2025. LEAP services are performing better than originally thought, and they are making progress on durability improvements. -
Supply Chain Constraints
Q: What details can you share on supplier bottlenecks?
A: GE is working collaboratively with 9 suppliers across 15 sites that are causing delays. Two-thirds of these sites have nearly doubled their sequential outputs, but challenges remain. They emphasize deep problem-solving to unlock constraints and increase capacity. -
CES Margin Improvement
Q: What drove the strong CES margins despite lower LEAP deliveries?
A: Despite weaker original equipment volume, CES margins improved due to strong service revenue recovery and heavier work scopes in shop visits. Services growth led to an increase in profit expectations for the full year by $150 million to $200 million at the midpoint of guidance. -
Inventory Management Strategy
Q: How are you managing inventory levels amid supply chain issues?
A: GE has seen significant inventory growth in the first half, about $1.2 billion, which is $0.5 billion higher than the first half of last year. They are not slowing down suppliers who are performing well but view inventory as an investment to ensure a predictable ramp. They expect inventory growth to slow in the second half. -
Services Growth Outlook
Q: Can services growth accelerate next year?
A: Services orders grew mid-30% in Q2 and are expected to continue growing. GE anticipates services growth to be higher in the second half than in the first half, projecting mid-teens growth consistent with future years. -
Impact of Airline Profit Warnings
Q: Any effects from recent airline profit warnings?
A: GE has not seen any impact on its business from airline profit warnings. Services orders were up 36% in CES in Q2, and spare parts backlog is around 90% filled for Q3. Demand remains strong in both aftermarket and new engines. -
Extending Life of Older Engines
Q: Are customers increasing shop visits for older engines?
A: Yes, airlines are extending the lives of older CFM56 engines, leading to higher shop visits and potential third or fourth overhauls. This is expected to benefit GE's aftermarket volume and scope. -
RISE Program Development
Q: What's the progress on the RISE engine program?
A: Customer interest in the RISE engine program is growing. GE completed significant tests, including a successful first ingestion test with the open fan blade and over 250 component-level tests. They aim for a 20% improvement in propulsive efficiency and emissions reduction. -
Second Half Outlook
Q: How will the second half shape up in terms of growth?
A: GE expects year-over-year growth to be similar between the first and second half, with higher growth in Q4 as services and original equipment ramp up. Margins will be higher in Q3 versus Q4 due to shipment impacts. They've had a better start to Q3, with July engine shipments significantly higher than in April.
Research analysts covering GENERAL ELECTRIC.