General Electric Company (NYSE:GE) Q3 2021 Earnings Conference Call October 26, 2021 8:00 AM ET
Larry Culp – CEO
Steve Winoker – Vice President of Investor Relations
Carolina Dybeck Happe – CFO
Conference Call Participants
Julian Mitchell – Barclays
Nigel Coe – Wolfe Research
Jeff Sprague – Vertical Research Partners
Deane Dray – RBC Capital Markets
Steve Tusa – JP Morgan
Joe Ritchie – Goldman Sachs
Andrew Obin – Bank of America
Markus Mittermaier – UBS
Unidentified Analyst – Analyst
Joe O'Dea – Wells Fargo
Nicole DeBlase – Deutsche Bank
Andy Kaplowitz – Citigroup
Good day, ladies and gentlemen, and welcome to the General Electric Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is John, and I'll be your conference coordinator today. [Operator Instructions]. As a reminder, this conference call is being recorded.
And I would now like to turn the program over to your host for today's conference, Steve Winoker, Vice President of Investor Relations. Please proceed.
Thanks, John. Welcome to GE's third quarter 2021 earnings call. I am joined by Chairman and CEO, Larry Culp; and CFO, Carolina Dybeck Happe. 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 may change as the world changes.
With that, I'll hand the call over to Larry.
Steve, thanks and good morning, everyone. Our team delivered another strong quarter as orders, margins and cash improved. While the aviation market is showing continued signs of recovery and contributed to the quarter, our focus on continuous improvement and lean is driving broader operational and financial progress.
At the same time, we're managing through significant challenges that we'll discuss further today. Starting with numbers on Slide 2, orders were robust, up 42%, with growth in all segments in both services and equipment, reflecting continued demand for our technology and solutions and better commercial execution. Industrial revenue was mixed. We saw a continued strength and services up 7% organically. Aviation improved significantly benefiting from the market recovery. Equipment was down 9% organically, largely due to supply chain disruptions, the forward ventilator comparison in healthcare, and as expected, lower power equipment.
Adjusted industrial margin expanded 270 basis points organically, largely driven by operational improvement in many of our businesses, growth in higher-margin services at Aviation and Power, and net restructuring benefits. Adjusted EPS was up significantly driven by Industrial. Industrial free cash flow was up $1.8 billion, ex discontinued factoring programs due to better earnings, working capital, and the short-term favorable timing impact of aircraft delivery delays. Overall, I'm encouraged by our performance, especially at Aviation. Let me share what gives me -- gives us confidence there.
First, our results reflect a significant improvement in near-term market fundamentals. Departure trends are better than the August dip and have recovered to down 23% of '19 levels. We expect this acceleration in traffic to continue as travel restrictions lift and vaccination rates increase. Our results also reflect operating improvements. For example, at Aviation's overhaul shops, our teams have used lean to increase turnaround time by nearly 10% and decrease shop inventory levels by 15% since the fourth quarter of 2020. These improvements are enabling us to get engines back to customers faster and at a lower cost. No business is better positioned than GE Aviation to support our customers through the coming upcycle.
We're ready with the industry's largest and youngest fleet, while we continue to invest for the next-generation with lower carbon technologies, such as the CFM RISE program. This platform will generate value for decades to come.
We're also clearly navigating headwinds as we close this year and look to 2022. We're feeling the impact of supply chain disruptions in many of our businesses with the largest impact to date in healthcare. Based on broader industry trends, we expect Company-wide pressure to continue at least into the first half of next year. Our teams are working diligently to increase supply by activating dual sources, qualifying alternative parts, redesigning and requalifying product configurations and expanding factory capacity.
We're also focused on margins as we deploy lean to decrease inventory and costs, as well as implement appropriate pricing actions and to reduce select discounts. Our C team – our CT team in Japan, for example, has been experiencing higher customer demand. So we're making our production even more efficient to help offset the challenge of delayed inputs. The team used value stream mapping, standard work, and quarterly Kaizens to reduce production lead time once parts are received, by more than 40% from a year ago. And there's line of sight there to another 25% reduction by the end of the year. While this is a single example within healthcare, taken together with other efforts and over time, these add up.
At renewables, we're encouraged by the U.S. administration’s commitment to offshore wind development. However, in Onshore Wind, the pending U.S. production tax credit extension is creating uncertainty for customers and causing much less U.S. market activity in preparation for 2022.
As we've shared a blanket extension, while a well-intended policy has the unintended consequence of pushing out investment decisions. In our business given the lag between orders, and revenue, the impact will continue through the fourth quarter and into '22. This environment, along with inflation headwinds picking up next year, makes renewables ongoing work to improve cost productivity even more urgent.
Given these puts and takes, we now expect revenue to be about flat for the year, driven by changes to some of our business outlooks, which Carolina will cover in a moment. Importantly, even with lower revenue, we're raising our margin and EPS expectations, underscoring improved profitability and services growth, and reflecting our strengthened operations. And we're narrowing our free cash flow range around the existing midpoint.
Looking further out to next year, as our businesses continue to strengthen, we expect revenue growth, margin expansion, and higher free cash flow despite the pressures that we're managing through currently. We'll provide more detail as usual, during our fourth quarter earnings and outlook calls.
Moving onto slide 3. Challenges aside, our performance reflects the continued progress in our journey to become a more focused, simpler, stronger, high-tech industrial. The GECAS and AerCap combination is a tremendous catalyst, enabling us to focus on our industrial core and accelerate our deleveraging plan.
Just last week, GE and AerCap satisfied all regulatory clearances for the GECAS transaction and we're now targeting to close November the 1st. We'll use the proceeds to further reduce debt, which we now expect to reach approximately $75 billion since the end of 2018. This is enabling GE to look longer-term even as we execute our deleveraging. As we accelerate our transformation, lean and decentralization are key to improving operational results.
This quarter, we hosted our global Kaizen week in each of our businesses with over 1,600 employees participating. John Slattery, the CEO of GE Aviation; and I joined our military team in Lynn, Massachusetts for the full week, while our business CEOs joined their teams across the globe. Lynn is fundamentally about going to Gemba, where the real work is done. And is best learned in operations, where you can see it, touch it, smell it firsthand. And in Lynn, we were there to serve those closer to the work, our operators. Our mission was to improve first-time yield on mid frames, a key sub assembly of the military engines we produce in Lynn, whose stubborn variability has been directly and negatively impacting our on-time delivery.
By the end of the week, we had improved processes for welding and quality checks on mid-frame parts, improvements that we're convinced will help us reach our goals for military on-time delivery by the middle of next year, if not earlier. And we can improve our performance on the back of these changes for years to come.
There are countless other examples of how our teams are leveraging lean to drive sustainable, impactful improvements in safety, quality, delivery, cost, and cash. They reflect how we're running GE better and how we're sustaining these efforts to drive operational progress and lasting cultural change. Our significant progress on deleveraging and operational execution sets us up well to play offense in the future.
Our first priority, of course, is organic growth. That starts with improving our team's abilities to market, sell, and service the products we have. There are many recent wins across GE this quarter, but to highlight
one, our Gas Power team delivered, installed, and commissioned four TM 2500 aeroderivative gas turbines in only 42 days to complement renewable power generation for California's Department of Water Resources during peak demand season. These turbines, using jet engine technology adapted for industrial and utility power generation, start and ramp in just minutes, providing rapid and reliable intermittent power, helping enhance the flexibility and sustainability of California's grid.
And we're bolstering our offerings with innovative new technology that serves our customers and leads our industries forward. For example at Renewables, our Haliade -X offshore wind turbine prototype operating in the Netherlands, set an industry record by operating at 14 megawatts. More output than has ever been produced by any wind turbine. From time-to-time we'll augment our organic
efforts with inorganic investments. Our recently announced acquisition of BK Medical represents a step forward, as we advance on a mission of precision healthcare. Bringing BK's intraoperative ultrasound technology together with the pre, and post operative capabilities in our ultrasound business creates a compelling customer offering across the full continuum of care, from diagnostics through surgical, and therapeutic interventions, as well as patient monitoring. Not only does BK expand our high performing $3 billion ultrasound business, but it also is growing rapidly with attractive margins itself.
We expect the transaction to close in '22, and I'm looking forward to welcoming the BK team to GE. All told, we hope that you see that GE is operating from a position of strength today. We delivered another strong quarter and we're playing more offense, which will only accelerate over time. We're excited about the opportunities ahead to drive long-term growth and value. So with that, I'll turn it over to Carolina who will provide further insights on the quarter.
Carolina Dybeck Happe
Thanks, Larry. Our results reflect our team's commitment to driving operational improvement. We're leveraging Lean across GE and our finance function. In addition to Kaizen Week that Larry mentioned, over 1,800 finance team members completed a full waste workweek, applying Lean, and digital tools to reduce non-value added work by 26,000 hours, and counting.
For example, at renewables, our team streamlined, and automated account reconciliations, into Company settlements, and Cash applications. This type of transactional Lean saves up time. So we can focus more on driving higher-quality, faster operational insights, and improvements, helping our operating teams run the businesses more efficiently. Looking at Slide 4, I'll cover on an organic basis. Orders were robust, up 42% year-over-year, and up 21% sequentially on a reported basis building on revenue momentum heading into '22. Equipment and Services in all businesses were up year-over-year with strength in Aviation, Renewables, and Healthcare.
We are more selective in the commercial deals we pursue with a greater focus on pricing in an inflation environment, economic turns and cash. Together with targeting more profitable segments like services, we're enhancing order quality to drive profitable growth. Revenue was up sequentially with growth in services driven by Aviation and Power but down year-over-year. Equipment revenue was down with the largest impact in Healthcare and power. Overall, mix continues to shift towards higher margin services, now representing half of the revenue. Adjusted Industrial margins improved sequentially, largely driven by Aviation services.
Year-over-year, total margins expanded 270 basis points driven by our Lynn efforts, cost, productivity, and services growth. Both Aviation and Power delivered margin expansion, which offset the challenges in-house care and renewables. Consistent with the broader market we are experiencing, inflation pressure, which we expect to be limited for the balance of '21. Next year, we anticipate a more challenging inflation environment. The most adverse impact is expected in its onshore ring due to the rising cost of transportation and commodities such as steel and [inaudible 00:13:59] impacting the entire industry. We are taking action to mitigate inflation in each of our businesses.
Our shorter-cycle businesses felt the impact earliest, while our longer cycle businesses were more protected, given extended purchasing and production cycles. Our Service business is full in between. Our terms are working hard across functions to drive cost countermeasures and improve how we bid on businesses, including price escalation. Finally, adjusted EPS was up 50% year-over-year, driven by industrial. Overall, we are pleased with the robust demand evidenced by orders growth and average year-to-date margin performance. While we're navigating headwinds caused by supply chain and PTC pressure, this has impacted our growth expectations.
We're now expecting revenue to be about flat for the year. However, due to our continued improvements across GE, we are raising our '21 outlook for organic margin expansion to 350 basis points or more and our adjusted EPS to a range of $1.80 to $2.10. Moving to Cash. A major focus of our transformation has been strengthening our cash flow-generation through better working capital management and improved linearity. Ultimately, to drive more consistent and sustainable cash flow. Our quarterly results show the benefits of these efforts. Industrial free cash flow was up 1.8 billion X discontinued factoring programs in both years.
Aviation, Power and Heathcare all had robust free cash flow conversion in the quarter. Cash earnings, working capital, and allowance and discount payments for AD&A driven by the deferred aircraft delivery payments contributed to the significant increase. Looking at working capital, I'll focus on receivables. We saw the largest operational improvement. Reservable were a source of cash up 1.3 billion year-over-year ex the impact of discontinued factoring, mainly driven by Gas Power collections. Over all, strengthening our operational muscles in billings and collections is translating into DSO improvement, as evidenced by our total DSO, which is down 13 days year-over-year.
Also positively impacting our free cash flow by about 0.5 billion in the quarter was AD&A. Given the year-to-date impact and our fourth-quarter estimate aligned with the current airframe or aircrafts delivery schedule, we now expect positive flow in '21, about 300 million, which is 700 million better than our prior outlook. This year's benefit will reverse in 2022. And together with higher aircraft delivers scheduled expectations, will drive an outflow of approximately 1.2 billion next year. To be clear, this is a timing issue.
You'll recall that we decided to exit the majority of our factoring programs earlier this year. In the quarter, discontinued factoring impact was just under 400 million which was adjusted out of free-cash flow. The fourth-quarter impact should be under $0.5 billion, bringing our full year factoring adjustment to approximately $3.5 billion. Without the factoring dynamics, better operational management of receivables has become a true cross-functional effort.
Let me share an example. Our Steam Power team recently shifted to this from a more siloed approach. Leveraging problem-solving, and value stream mapping, they have reduced average billing cycle time by 30% so far. So only two quarters in more linear business operations, both up and downstream are starting to drive more linear billings, and collections.
While we have a way to go more linear business operations drive better, and sustainable free-cash flow. Year-to-date is continuing factoring across all quarters free-cash flow interest 4.8 billion year-over-year. In each of our businesses, our terms are driving working capital improvements, which together with higher earnings, make a real and measurable impact. Taking the strong year-to-date performance, coupled with the headwinds we've described, we're narrowing our full-year free cash flow range to 3.75 billion to 4.75 billion. Turning to slide 6, we expect to close the GECAS transaction on November 1st. This strategic transaction not only details our focus on our industrial core, but also enables us to accelerate our debt reduction with approximately 30 billion in consideration.
Given our deleveraging progress, and cash flow improvement to date, plus our expected actions and better partial performance, we now expect a total reduction of approximately 75 billion since the end of 2018. GE will receive a 46% equity stake in one of the world's leading Aviation lessors, which we will monetize as the Aviation industry continues to recover.
As we've shared, we expect near-term leverage to remain elevated, and we remain committed to further debt reduction in our leverage target over the next few years. On liquidity, we ended the quarter with 25 billion of cash. We continue to see significant improvements in lowering these cash [inaudible 00:19:17], currently at 11 billion down from 13 billion.
In the quarter, [inaudible 00:19:23] decreased due to reduced factoring and better working capital management. This is an important proof point that we are able to operate with lower and more predictable cashness trading opportunities for high return investments. Moving to the businesses, which I'll also speak to on an organic basis. First on Aviation.
Our improved results reflect a significantly stronger market. Departure trends recovered from August is early, but the pickup that began in September is continuing through October. Better departures and customer confidence contributed to higher shop visits and spare part sales than we had initially anticipated. The impact of green time utilization has also lessened.
We expect this profited trance will continue into the fourth quarter. Orders were up double-digits. Both commercial engines and services were up substantially again, year-over-year. Military orders were also up reflecting a large Hindustan Aeronautics order for nearly 100 F414 engines along with multiplism and hundred orders. For revenue, commercial services was up significantly with strength in external spares, shop visit volume was up over 40% year-over-year and double-digit sequentially, given overall scope slightly improved. We continue to high concentration of narrow-body and regional aircraft shop visits.
Commercial engines (ph) was down double-digits with lower shipments. Our mix continues to shift from legacy to more NPI units, specifically loop and lower production risks. Next, also navigating through material fulfillment constraints amplified by increased industry demand, which impacted deliveries. Military was down marginally. Unit shipments were flat sequentially, but up year-over-year. Without the delivery challenges, military revenue,
growth would have been high single-digits this quarter. Given this continued impact, military growth is now expected to be negative for the year. Segment margin expanded significantly, primarily driven by commercial services and operational cost reduction. In the fourth quarter, we expect margins to continue to expand sequentially, receiving our low double-digit margin guide for the year.
We now expect '21 shop visits to be up at least mid-single digit year-over-year versus about flat. Our solid performance, especially in Services underscores our strong underlying business fundamentals after commercial market recovers. Moving to Healthcare. Market momentum is driving very high demand while we navigate supply chain constraints. Government and private health systems are investing in capital equipment to support capacity demand, and to improve quality of care across the markets.
Building on a 20-year partnership, we recently signed a five-year renewal to service diagnostic imaging, and biomedical equipment with HCF Healthcare, one of the nation's leading providers of healthcare. Broadly, we're adapting to overarching market needs of health system efficiency, digitalization, as well as resiliency, and sustainability. Against that backdrop, orders were up double-digits both year and versus '19, with strength in healthcare systems, up 20% year-over-year, and PDx high single-digits. However, revenue was down with a high single-digit decline at HCF more than offsetting the higher single-digit growth we select PDX. You'll recall that last year, the Ford ventilator partnership for about 300 million of Life Care Solutions revenue. This Comp negatively impacted revenue by 6 points. And thinking about the industry-wide supply shortages, we estimate that growth would have been approximately 9 points higher if we were able to fill all orders.
And these challenges will continue into at least the first half of '22. Segment margin declined year-over-year, largely driven by higher inflation and lower life care solutions revenue. This was partially offset by productivity and higher PDx volume. Even with the supply chain challenges, we now expect to deliver close to a 100 basis points of margin expansion as we proactively manage sourcing and logistics. Overall, we're well-positioned to keep investing in future growth, underscoring our confidence in profit and cash flow generation. We're putting capital to work differently than in the past, supplementing organic growth with inorganic investments that are good strategic fit. These are focused on accelerating our precision health mission like BK Medical.
And we're strengthening our operational, and strategic integration muscles. At Renewables, we're excited by our long-term growth potential, supported by new technologies like HalioDx, and fibrosis, and our leadership in energy transition despite the current industry headwinds. Looking at the market since the second quarter, the pending PTC expansion has caused further deterioration in the U.S. onshore market outlook. Based on the latest [inaudible 00:24:36] forecasts for equipment and repower, the market is not expected to decline from 14 gigawatts of wind installments this year to approximately 10 gigawatts in 2022. This pressures orders on cash in '21. In offshore wind, global momentum continues and we're aiming to expand our commitment pipeline through the decade and modernizing the grid is a key enabler of the energy transition.
And we saw record orders driven by offshore with the project-driven profile will remain uneven. This leads to continued variability for progress collections. Onshore orders grew modestly driven by services and international equipment, partially offset by lower U.S. equipment due to the PTC dynamics. Revenue declined significantly. Services was the main driver largely due to fewer Onshore repower deliveries. X-repower onshore services was up double-digits.
Equipment was down to a lesser extent, driven by declines in the U.S. onshore and grid. This was partially offset by continued growth in international onshore and offshore. For the year, we now expect revenue growth to be roughly flat. Segment margin declined 250 basis points. Onshore was slightly positive, but down year-over-year. Cost reductions were more than offset by lower U.S. repower volume, mixed headwinds as new products ramp and come down the cost curve, as well as supply chain pressure. Offshore margins remain negative as we work through legacy projects and continue to ramp HalioDx production. At grid, better execution was more than offset by lower volume. Due mainly to the PTC impact, we now look -- we now expect Renewables ' free-cash flow to be down a negative this year. Looking forward, while we are facing headwinds, we're intently focused on improving our operational performance, profitability, and cash generation. Moving to Power, we're performing well.
Looking at the market, global gas generation was down high single-digits due to price driven gas-to-coal switching. Yes, you heard me right, gas-to-coal switching. However, GE gas turbine utilization continues to be resilient as megawatt hours grew low single-digits. Despite recent price volatility, gas continues to be a reliable, and economic source of Power generation. Over time as more baseload COO comes offline and where the challenges of intermediate renewables power customers continue to need gas. Through the next decade, we expect the gas market to remain stable with gas generation growing low-single-digits. Orders were driven by Gas Power Services, aero, and steel each up double-digits.
Gas equipment was down despite bookings six more heavy-duty gas turbine as timing for HS remain uneven across quarters. We continue to stay selective with disciplined underwriting to grow our installed base. And this quarter we booked orders for smaller frame units. Demand for aeroderivative p ower continues. For the year, we expect about 60 unit orders up more than 5 times year-over-year. Revenue was down slightly. Equipment was down due to reduced turnkey scope at Gas Power and the continued exit of new build coal at [inaudible 00:28:02].
Consistent with our strategy, we are on track to achieve about 30% turnkey revenue as a percentage of heavy-duty equipment revenue this year. Down from 55% in 2019, a better risk return equation. At the same time, Gas Power shipped 11 more units year-over-year. Gas Power Services was up high-single digits trending better than our initial outlook due to strong seasonal volume. We now expect Gas Power services to grow high-single digits this year. Lynn services was also up. Margins expanded year-over-year, yet we're down sequentially due to outage seasonality.
Gas power was positive and improved year-over-year driven by services growth and arrow shipments. We remain confident in our high single-digit margin outlook for the year. Still this progressing through the new bids coal exit and by year-end, we expect our equipment backlog to be less than a billion compared to 3 billion a year-ago. Power conversion was positive and expanded in the quarter. Overall, we're encouraged by our steady performance. Power is on track to meet this outlook, including high single-digit margins in 23 plus. Our team is focused on winning the right order, growing services, and increasing free cash flow generation.
Moving to Slide 8. As a reminder, following the GECAS close in the fourth quarter, we will transition to one column reporting and rolling the remainder of J Capital into corporate. Going forward, our results, including adjusted revenue, profit, and free cash flow will exclude insurance. To be clear, we continue to provide the same level of insurance disclosure. In all this simplifies the presentation of our results as we focus on our industrial core. At Capital, the loss in continuing operations was up year-over-year, driven primarily by nonrepeat of prior year tax benefit, partially offset by the discontinuation of the preferred dividend payments.
At Insurance, we generated 360 million net income year-to-date, driven by positive investment results and Klimt's steam favorable to pre - COVID level. However, this favorable trend climbs are slowing in certain parts of the portfolio. As planned, we conducted our annual premium deficiency tests, also known as the Loss Recognition Test. This resulted in a positive margin with no impact to earnings for a second consecutive year. The margin increase was largely driven by higher discount rates reflecting our investment portfolio realignment strategy with higher allocation towards select growth assets, claims cost curves continue to hold. In addition, the teams are preparing to implement the new FASB Accounting Standard consistent with the industry.
And we are working on modeling updates. Based on our year-to-date performance, Capitals still expects a loss of approximately 500 million for the year. In discontinued operations, Capital reported a gain of about 600 million, primarily due to the recent increase in air cap stock price, which is updated quarterly. Moving to Corporate. Our priorities are to reduce functional and operational costs as we drive linear processes and embrace decentralization. The results are flowing through with costs down 7 digits year-over-year. We are now expecting corporate costs to be about a billion for the year. This is better than our prior 1.2 to 1.3 billion guidance.
After you see, Lean and decentralization aren't just concept. They are driving better execution and culture change. They are supporting another strong quarter, and they are enabling our businesses to play more often, and ultimately, they're driving sustainable long-term profitable growth. Now, Larry, back to you.
Carolina, thank you. Let's turn to Slide 9. Our teams continued to deliver strong performance. We are especially encouraged by our earnings improvement, which makes us confident in our ability to deliver our outlook for the year. You've seen today that our transformation to our more focused, simpler, stronger, high-tech industrial is accelerating.
We're on the verge of closing the GECAS - AerCap merger, a tremendous milestone for GE. Stepping back, our progress has positioned us to play offense. We just wrapped up our annual strategic reviews with nearly 30 of our business units. This compliment our quarterly operating reviews, but have a longer-term focus as we answer two fundamental questions: what game are we playing, and how do we win it. These reviews were exceptionally strong this year across the board with the most strategic and cross-functional thinking we've seen in my three-years. Enabling us to drive long-term growth and value across GE, while delivering on our mission of building a world that works.
We're positioned to truly shape the future of flight with new technology for sustainability and efficiency, such as the recent catalyst engine launch, the first clean sheet turboprop design entering the business and general aviation market in 50 years. Touching a billion patients per year, we're delivering more personalized and efficient care through precision health and combining digital and AI within our products, including our new cloud-based Edison True PACS to help radiologists adapt to higher workloads and increase exam complexity with improved diagnostic accuracy. Through our leadership in the energy transition, we're helping the world's the trilemma of sustainability,
affordability, and reliability from launching new tech platforms at Renewables, such as the HalioDx in Cypress to our recently announced flexible transformer project with the Department of Energy, to growth in the world's most efficient gas turbines. To be clear, we still have work to do. And as we do it, we're operating increasingly from a position of strength, serving our customers and vital Global markets with a focus on profitable growth, and cash generation. Our free cash flow will continue to grow towards the high single-digits percentage of sales level, and we have an opportunity to allocate more resources on capital deployment to support GE's growth over time. Steve, with that, let's go to questions.
Thanks, Larry. Before we open the line, I'd ask everyone in the queue to consider your fellow analysts again and ask one question so we can get to as many people as possible. John, can you please open the line?
Thank you. And our first question is from Julian Mitchell from Barclays.
Hi, good morning.
Carolina Dybeck Happe
Good morning, Julian.
Good morning everyone. Maybe my question would just be around free cash flow. So you've mentioned that free cash flow would be up in 2022. I just wanted to make sure is that sort of comparable with that $3.75 billion to $4.75 billion guide for this year, or is that sort of apples-to-apples once you roll in what's left of capital into the cash flow for this year? And a related question is, you talked on Slide 9 about the high single-digit cash flow margin over time. Just wanted to make sure there's no -- that does not mark a shift from the sort of 2023 plus timeframe you've mentioned before. Thank you.
Carolina Dybeck Happe
So Julian, maybe let me start then. You talked about the 2022 remarks that we made. Like-for-like, we expect industrial free cash flow to step up. We expect our business earnings to improve. We expect that through top line growth and margin expansion that will turn into profit, which we then believe -- well, which we then we'll say go to cash, right?
Then if you look a little bit outside of earnings, we do have a couple of significant cash flow items to think about. We have mentioned the supply chain headwinds that we think will continue into next year. So that will hamper both on the profitability, but also on inventory. And then we have the headwind of AD&A. We talked about that in this year, it's going to be more positive, but it's going to be a big headwind in next year. And this is really only a timing effect because of when customers expect to deliver the aircrafts, right?
And overall, my last comment on industrial side would be, if you look at working capital, with that growth in mind, we will need some working capital to fund the top line growth, right? But on the other hand, we also expect to continue to improve working capital management, for example, in receivables, and to some extent also to inventory. Within that, we do see improvement in linearity as possible as well. So that's like-for-like on the Industrial side.
If we then add the consolidated capital of basically what's left of capital then consolidated in like-for-like, we expect it to also increase. And the increase on top of that would mainly been driven by the lower interest that we will see from debt reduction. So we are confident in the overall growing trajectory, both investor like-for-like as well as including capital.
I would say just to the second question, the simple short answer is no change whatsoever relative to our expectations with respect to high single-digit free cash flow margins, right? When we talk about that, let's just take for simplicity sake 8% on a revenue base akin to where we were in 2019, right? That pencils out on an $85 billion to $90 billion revenue base to say $7 billion of free cash. That's really going to be on earnings, lower restructuring spend, and better working capital management story.
Clearly, from a profit perspective, that's going to be an Aviation-led dynamic healthcare right in behind it, and then we still anticipate that we turn Power profitable, and we get a couple of billion dollars of profit from Power. You deduct, call it, $1.4 billion for corporate, but you get close to it, let's call it, $10 billion of op profit, convert that to net of interest and taxes at 90%, you get that same $7 billion figure. So we think we're on our way, but again, the short answer is, no change.
And our next question is from Nigel Coe from Wolfe Research.
Thanks. Good morning, everyone.
Good morning, Nigel.
Carolina Dybeck Happe
Good morning, Nigel.
Great. Thanks for detail on the AD&A next year, $1.2 billion. Just - I just want to confirm that -- I seem to expect some help from progress collections in Aviation next year, assuming we're in a recovering order environment. But the real question is on the insurance testing in 3Q, and I know this is a GAAP, not a STAT test, but I think the 10-K color and an 11% surplus. So I'm just curious, Carolina, what does that mean for future cash payments going forward? At what point does the service become so large that that could have some good news for cash-in going forward?
Carolina Dybeck Happe
Thanks for the question, Nigel. Yes, so it is a factor. So we did do the testing on the LRT, and we had good news I would say as expected. And when you have a positive margin that means no charge to the P&L, and the margin was 11% positive, which is significantly higher than what we have seen. It was mainly driven by the discount rate increase. It increased from 5.7% to 6.15%. And I would say that increase was really driven by asset allocation and really our plan to increase the amounts allocated to growth assets, where we’re going from 9% to 15%. The other variables had, like morbidity, mortality, inflation in premium, they were a small impact. We're really happy with that. And your question then on top of that sort of for the CFT, so the CFT or the cash flow testing, that is what decides if there is a need to add cash to the insurance. I would say like this, it's not one-to-one.
The variables are similar to LRT, but they are used under moderately adverse conditions. I would say the modeling will happen beginning of next year as usual. We will look at our investments portfolio realignment and the changes factored into that model. We also look at the future cash flow, but it could have some adverse effect because we're using more granular assumptions. But I would say overall, the good news from the LRT bodes very well for the CFT, but it's not one-to-one.
And our next question is from Jeff Sprague from Vertical Research Partners.
Thank you. Good morning, everyone.
Good morning, Jeff.
Carolina Dybeck Happe
Hello. Hope everybody is well. Larry or Carolina, can we talk a little bit more about price cost? I think your message on the pressures into the first half are pretty clear, but kind of this kind of question of kind of cost in the backlog, so to speak, that needs to work its way through the system. I wonder if you could just kind of size this a little bit for us or put it in the context of what you're actually capturing on price, say, on current orders. Maybe what kind of the price/cost total headwind or tailwind is in 2021 versus what you're kind of expecting in 2022 based on what you can see in the backlog?
Carolina Dybeck Happe
So Jeff, why don't I start and then Larry, you can jump in.
Carolina Dybeck Happe
If we start with inflation, I just want to reiterate that of course we hit by inflation, but it's a bit different depending business by business. We have the shorter cycle businesses like healthcare, where we are feeling the impact faster than the longer cycle like Power and we have sort of Services in between. On the longer cycle ones, they are more protected because of the, I would say, the extended purchasing and production cycles.
We are seeing the main pressures on commodities like steel, but also logistics pressure is increasing, right? Specific to 2021, we have felt inflation, but so far we've been able to offset it, and we expect the impact for the full year to be limited in '21, the net impact. For 2022, we do expect to see significant pressure, and I will say top of list priorities for next year. And we're taking both price and cost countermeasures.
I think that's right and as you would imagine in an environment like this, we're really working the value add, value engineering the more traditional cost action aggressively. We're working with the supply basis feverishly as we can, both on availability and on costs. That said, as Carolina was alluding to on the price side, we're doing all we can in the shorter-cycle businesses, it's a little easier, say in Heathcare, where we've got more like-for-like, we can see those price actions. We're beginning to see some early traction.
Their services is a bit mixed but where we have opportunity, say, on spares and within the escalation frameworks, within some of the longer-term service agreements, we're obviously going to get what we can there. You spoke to projects. I mean, that's a little bit more bespoke, but it -- while it's difficult to measure price like-for-like, we are managing the margins with some of the longer-term procurement efforts that Carolina alluded to.
Just more broadly on the backlog, and what's important to remember when you look at what is what? 380 billion of backlog, 70% of that's in Aviation. Virtually all of that is in Services. So certainly a competitive space, but between the catalog, pricing dynamics and some of the escalation protection, we think we're we're well-positioned, but we take nothing for granted there outside of Aviation, the backlog is also in services where similar dynamics apply. But again, limited pressure net-net in '21, building headwinds for us next year, we've got time to work, both the cost and the price counter measures. And as Carolina said, I don't think we've got a higher priority operational here in the short term than those two.
And our next question is from Deane Dray from RBC Capital Markets.
Thank you. Good morning, everyone?
Good morning, Deane.
Like to get some more comments if we could on the Aviation Aftermarket visibility, that 40% up year-over-year and shop visits Similar to what your competitors have announced. Just talk about visibility, the wrap on departures, and your capacity. I know there had been some cuts. Do you have the capacity to handle all this? I know Lean is helping and then a related question, what kind of R&D investments are you making today or you're planning for to help the airlines hit their carbon neutral goals by 2050?
Again, I would say with respect to the aftermarket, I think you highlighted some of the keys for us. Very pleased with the shop visit activity being up 40% in the third quarter better than we had anticipated. I think we were calling for up 25%. We will see sequential improvement. It's not going to be as pronounced year-to-year here in the fourth quarter. Probably it's going to be up call it 30. In October thus far, we're off to a good start in terms of underlying activity. All of that has been coupled with, I would say robust spare part demand from third-party providers. If that coupling up, if you will volume and value that are going to set us up for a pretty good second half here and going into next year.
We're working through supply chain challenges here, bit material, bit labor, as we are everywhere else. I think we're positioned here, at least as best we can see. I'm glad you highlighted the lean improvements, rather than just throwing a lot of bodies and a lot of capital under the bridge, we really are trying to work the process, we also [inaudible 00:47:11] from the team and services understand that very well, which is why we highlighted some of the turnaround improvements that we did in our formal remarks.
You go back to, I guess what was technically the second quarter, but middle of June, John Slattery in concert with our partners at Safran announced the CFM RISE program, which really is a multi-generational technology investment program to make sure we're on a path be it with sustainable aviation fuels, be it hybrids, being hydrogen to be in a position to maintain the industry leadership this business has enjoyed for decades. So there's a lot to come. We're going to be spending and we're going to be spending smartly in and around those areas to launch technologies that ultimately transition into product programs as our airframe or an airline customers deem appropriate. So a lot going on short term and long term but again, we really like where Aviation is particularly with departure trends and the outlook here in the near-term.
Our next question is from Steve Tusa from JP Morgan.
Hi, guys. Good morning.
Good morning, Steve.
Carolina Dybeck Happe
You mentioned the sequential margin increase in the Aviation. I think the revenues were a little bit weaker this quarter. For fourth-quarter, I think they're implied guidance. I know it's a wide range and you guys haven't really updated in a while. Gets me to a midpoint of $1 billion for 4Q. You just had a nice sequential increase from 2Q to 3Q. Is that the right number. And then as a follow-up to that for next year with a billion 5 headwind as AD&A normalizes, what mechanically -- what's the math that can overcome that kind of headwind for Aviation to grow free cash?
Carolina Dybeck Happe
Okay, so if we start with the Aviation and the margin and you talked about margin going into the fourth-quarter. So what we are seeing, and I think an important add on the third quarter is that we say shift clearly towards services. So in the third quarter we had 20% growth of services while equipment was down. These better makes also tilt toward external [inaudible 00:49:37] to see the drop-through. And Larry talked about higher shop visits of 40% up year-over-year. We also saw the strong third-party sales up around 30. For the fourth quarter, we have this [inaudible 00:49:53] as you know, that we don't expect it to be as high for the fourth quarter.
So we could expect to continue from the third quarter into the fourth quarter with the sequential improvement and overall that's how we get to our low double-digit margins for 2021. We haven't specifically said exactly what the profit is in the fourth quarter for Aviation, but with all those pieces you piece it together. For 2022, you asked about Aviation free cash flow. I would say a couple of things. You're right on the AD&A. It is a timing issue, so we'll have a big headwind next year on the AD&A side.
But what we do see is we expect to return to fly to continue. So we will expect to see basically utilization being driven, which means more hours flown which means higher billings on our [inaudible 00:50:44] You know the cash comes before the profit, so we do expect to have really good uptick on services and the cash flow. So basically on the CSS side. Then, yes, AD&A will be a headwind, but on top of that, we also have the profit that we will see from more shop visits. So overall, the mix of that gets us to a positive place. I think it's mainly the services, and the CSS, but it is a big positive.
And our next question is from Joe Ritchie from Goldman Sachs.
Thank you. Good morning, everyone.
Maybe just sticking with free cash flow for a second and thinking about the 4Q implied guidance. Typically, 4Q is your seasonally strongest quarter. The step-up from 4Q to 3Q seems to be a little bit seasonally weaker than what we've seen in prior years. So I'm just curious if any puts and takes that we need to be aware of as we kind of think about the sequential bridge for free cash flow, 3Q to 4Q Thank you.
Carolina Dybeck Happe
Joe, let me let me answer that. So I think it's important to take a step back. And if we look at jumping off point for 2020 for free cash flow for the full-year, the free cash flow, excluding factoring and biopharma, we were on 2.4 billion in 2020. If you take a midpoint of our guide now and you add back the factoring, you get to 5 billion for this year. So just to put in perspective, we're going from last year, 2.4 to midpoint of 5 billion this year. So we're doubling the cash flow for 2021. We're also seeing linearity improvements in 2021, which is part of the reason the fourth quarter not being as unlinear as it has been before.
After the range that we have, they're basically two main areas that bring us uncertainty. One is on the supply chain challenges and the other one is the PTC pressure that we then expect to impact progress. Well, that's what's exactly meant for the fourth quarter. Well, we'll have higher sequential profit and we expect to see free cash from the market improving and some of the usual seasonality. But it would still be down year-over-year. The supply chain challenges you'll see some earnings, but also through inventory. It's going to be lot stack and wave that isn't going out. And then for the full-year fourth quarter last year, you remember we had big Renewables progress of a billion so we don't expect that to happen this year.
And then I also previously talked about the Aviation settlements and Cares Act as positive one-offs in fourth quarter last year. To take that all together, that's how you get to the fourth quarter, and importantly, how we get to 5 billion of jumping off points or free cash flow this year, which is really important proof point and step to our high-single-digit fee margin journey that Larry talked about a little while ago.
And the next question Andrew Obin from Bank of America.
Yes. Good morning.
Carolina Dybeck Happe
Just a question, longer-term -- long-term care seems to be in better shape, power stabilizing. Once we consolidate Balance Sheet, that's a lot easier and there is a path for delivering. Back when your spoke a lot about strategic optionality, but sort of -- COVID, I think focus shifted elsewhere, but it seems to be coming back. Can you just talk about where we are about -- thinking about strategic optionality and putting in historical context what you guys said about Heathcare, what you guys said about long-term care, renewables, etc. I know it's a broad question, but whatever you can share with us, thank you.
Sure. Sure. Andrew, let me let me take a swing at that. I would say that again, we're really pleased with the progress on both the deleveraging and the operational improvements. We still have to close the transaction, worked through the follow-on debt reductions, but to be in a position to have line of sight now on what will be a cumulative approximately $75 billion debt reduction over the last 3 years allows us, I think, to look at the Balance Sheet and begin to think about playing more offense and take advantage of the strategic optionality that we have been looking to build and grow.
That goes hand-in-hand with the underlying improvements, some of which I would argue you see in these numbers, others, like what I saw on the shop floor and Lynn a few weeks back, you don't see yet, but which I think gives us confidence that more improvements in terms of top line, bottom line and cash are forthcoming. And all that really does is, I think allow us to both invest in the business more aggressively, organically and inorganically. That's why we were so excited about the BK Medical transaction, admittedly small, but the strategic logic behind it, the value-add operationally, our $3 billion high-performing ultrasound business will generate.
And the high single-digit returns we think we will have in time that's what we should be doing more of in concert with what we're going to do organically. All of that really sets us up, I think, Andrew, to be in a position to really realize the full potential of these wonderful businesses in the GE portfolio. There are host of ways that could play out over time. But first things first, we've got some business here with the GECAS and AerCap merger to work through. We've got these operating challenges to navigate through the fourth quarter and going into next year. But I really do think we're increasingly operating from a position of strength. I like where we are, in time we will realize the full value of these businesses.
Our next question is from Markus Mittermaier from UBS.
Hi. Good morning everyone.
Morning. Hi. Maybe a question on Power. Could you update us on the steam Power restructuring progress and any view on the potential impact here on the cost base for that business. And is that anything that changes how you view that business given the French government's push, recently investment push in nuclear and renewable source that really separate in your business on the steam side, between coal and nuclear. Thank you very much.
Carolina Dybeck Happe
Hi, Markus. Let me start by talking to the restructuring then. First of all, Instron, which is now part of the Power Segment and also run by Scott. We have Valerie and her team working through the restructuring there. I would say they are on track, it's a big restructuring. We do expect margins to turn in 2023 and basically have the restructuring to temper down by them.
And then the business is going to be 2 third services going forward at a significantly lower overhead cost, which is what you were alluding to. So we see good traction but we're still in the middle of it. So again, it would take time until 2023, but then we'll have a very different business with the high service element and lower overheads.
Markus, I think the other part of your question was really with respect to the steam generators for nuclear applications. As you will appreciate, our focus continues to be on running that business as well as we can for our customers. Recently, we did acknowledge that we are in discussions with EDF regarding a potential transaction. If there's an opportunity to create value, we'll certainly pursue it. But if you step back for a moment, I think we are of the view that nuclear overall has an important role to play in the energy transition. We know the French government is strongly of that view.
They aren't alone. I was in the UK last week where we had similar conversations, particularly in and around advanced nuclear technology, particularly in the case of the small modular reactors, which we know can provide carbon-free, dependable baseload, and flexible capacity as we move forward here. So we've got a lot of capabilities in and around nuclear, really the whole nuclear life-cycle. So we don't talk a lot about it, but it is part of the Power framework for the energy transition and one we'll continue to manage as best we can going forward.
And our next question is from Joe O'Dea from Wells Fargo.
Hi, good morning, everyone.
Carolina Dybeck Happe
Hi. I wanted to ask on PTC and how you're planning for that and what your base case assumptions are, what you're thinking about in terms of important dates on the timeline. You talked about the step-down in installs expected next year, how temporary that is or what you're seeing, how much kind of persistent pressure it can put on the install market.
Joe, let me take that. I think with respect to the U.S. market for onshore wind, we do see a step down here going into '22, probably stepping down from say, 14 to 10 gigawatts. It's not yet set in stone because these conversations are active and underway in Washington given all the legislation under review that run up to COP26 and the like. I think what we are incorporating in our commentary here today, Is a more pessimistic perhaps, but updated view relative to the very near-term. So in the absence of those incentives in the short term, we're going to feel pressure both on new unit orders and in repowering. So some of that impacts cash, some of that impacts margins relative to repowering installations this year.
The good news is, this is all part of a long-term extension given the administration's commitment to the energy transition, to the role of both onshore and relatedly offshore wind in that transition. So if you take the decade long view, the impetus or the imperative for us is really to manage these businesses better, to generate better margins, operating margins. But in the short term, we've got some additional pressures, just given the reduction in demand that will follow the uncertainty around the tax incentives. And they hit us hard because North American market the U.S market, is clearly the best onshore wind market for us on a global basis.
And our next question is from Nicole DeBlase from Deutsche Bank.
Thanks. Good morning.
Good morning Nicole.
Carolina Dybeck Happe
Good morning Nicole.
I was hoping to dig into the supply chain challenges a little bit here. And I know it's become a little bit spread across a lot of your businesses, you mentioned that becoming challenged Aviation as well. But Larry, are you seeing any signs of abatement there? We've heard a few companies talk about the view that August and September where the pinnacle of supply chain challenges and things might be easing a little bit, we would love to hear what GE is saying.
Nicole, I've talked to some of those CEO s. Some of those CEOs are friends of mine. I'm not sure we're yet it a place where we would say that things are stable. We may have line of sight, we may have improvements in one commodity or in one business, but almost without fail. The next day, a commodity, a supplier, a logistics provider that we thought was good for the next 6 weeks or the next 6 months, offers up a revision to that outlook.
So I think I've used a phrase I probably shouldn't, but I'll repeat it and it really is [Inaudible 01:03:23] playing whack-a-mole. By business, by commodity, by geography, it just seems like every day there's new news to battle with. I couldn't be more pleased with the way our team is navigating all of this, both in terms of availability and cost. We've got new procurement leadership in a number of businesses. We're really trying to make sure that we are true to our lean imperative of safety, quality, delivery, and cost in that order. We don't want to have a short-term band aid that costs us long term. But it really is a tactical, muscular endeavor right now that we're working our way through.
You've heard others, you've heard some of the key suppliers talk about electronic components are likely to be at least a 2, 3 quarter challenge, maybe longer. That's important for us in certain businesses and certainly in some of our higher-margin businesses. But we're working through it. It's probably more challenging than I've ever seen in my career. But we'll work our way through it. Things will level out in time, and I think that given this was an area where we wanted to strengthen our operational capabilities, while it's more challenging in the short-term, will be better for medium and long term.
Hey, John, we only have time for one more question. Could you please proceed with what's going to be our last question?
Yes. And our final question is from Andy Kaplowitz from Citigroup.
Good morning, guys. Just slipped in.
Good morning Andy.
Larry, can you give a little more color into how you're thinking about Heathcare revenue margin going forward? I know you mentioned that growth could've been 9 points higher. Obviously, very strong orders despite the weaker revenue. So to get those nine points back in '22 and/ or does the backlog you're building give you confidence in the stronger than usual revenue environment in '22?
Andy, for sure. And it's not our style to try to build back a better headline here. But that's 9 points of real pressure given the supply chain issues that Nicole was just probing us on. And again Carolina mentioned that the Ford ventilator effort a year ago for the HHS was a significantly tough [inaudible 01:05:48]. But if you look at the 19% orders growth, if you look at what's happening both in the public and the private spheres. Plus what we're doing increasingly, both from a commercial and from a product perspective, we talked about the opportunity to take this business from a low-single-digit grower in the mid-single-digit range to grow margins in the 25 to 70 basis points over time. I've got more conviction about our potential to do that than I did a year ago.
Just off a UK trip where I had some quality time with a number of our business leaders over there, our PDx business in particular, lots of good things going on. We've got a CEO transition here in the offing that we're excited about Karen Murphy is doing a heck of a job with that business. Pete Arduini coming in is very much committed to those types of expectations. He's certainly coming because he's excited about the potential that he sees across the GE Healthcare portfolio. So we wish it weren't as Mike you have a camouflaged headline here, given the supply chain issues, we'll work through it and just feel like this is a strong business that will get stronger over time.
Larry, we're out of time, but any final comments?
Steve, I know we're over, but let me just -- if I may to take a moment to thank our employees and our partners around the world for what are truly extraordinary efforts here given the pandemic and the recent challenges. My thanks go out to everybody. We're operating from a position of strength today. I also want to thank our investors for their continued support. We certainly appreciate your interest, your investment in our Company, and your time today. Steve and the IR team, as always, stand ready to help and assist in any way possible as you consider GE in your investment processes.
Thank you. Thanks, John.
Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating and you may now disconnect.