Good day, ladies and gentlemen, and welcome to the General Electric 4th Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Brandon, and I'll be your conference coordinator today. As a reminder, this conference is being recorded. I I would now like to turn the program over to your host for today's conference, Steve Winoker, Vice President of Investor Communications.
Please proceed.
Thanks, Brandon. Good morning, and welcome to GE's 4th quarter 2020 earnings call. I'm joined by our Chairman and CEO, Larry Culp and CFO, Carolina Diebeck Hoppe. Before we start, I'd like to remind you that the press release and presentation are available on our website. 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 can change as the world changes. Please note that we will hold an investor call on March 10th to provide more detail on our 2021 outlook. With that, I'll hand the call over to Larry.
Steve, thanks, and good morning, everyone. It's hard to think of a tougher year than 2020. However, our team performed, and the 4th quarter marked a strong free cash flow finish to the year. Starting with our results snapshot on Slide 2, industrial free cash flow came in at $4,400,000,000 in the quarter, $500,000,000 higher than last year. This was largely driven by better working capital and improved renewables and power orders.
For the year, we generated positive free cash flow of $600,000,000 or $300,000,000 excluding biopharma in the Q1. Despite the weakness in aviation, healthcare drove our performance, delivering $2,900,000,000 of free cash, and power and renewables continued to improve. Orders were down 3% organically in the quarter. While down, this was a considerable improvement from the 2nd and third quarters. In 3 of our 4 segments, orders were in fact up, notably equipment orders at Renewables and Power were up double digits.
For the year, orders were down 17% with 95% of this pressure aviation related. Despite this, our backlog remains the strength at $387,000,000,000 with approximately 80% geared towards services where we have higher margins. Industrial revenue was down 14% organically and 13% for the year. Services were down 22% this quarter, driven by the aviation aftermarket despite some moderation, outages and upgrades in power and power upgrades in renewables. While services may fluctuate quarter to quarter, especially as we've seen during the pandemic, they create a multiyear backlog of profitable business and importantly, keep us close to our customers, and we expect to grow in 2021.
Industrial margin was 6.4% this quarter and 3.4% for the year. While this was an organic contraction on both measures, We saw sequential improvement through the year due to our more than $2,000,000,000 of cost actions. Adjusted EPS was $0.08 for the quarter $0.01 for the year, which includes an impact for the restructuring recast of $0.02 for the quarter $0.05 for the year. Carolina will expand on this momentarily. In all, Momentum is growing across our businesses.
As 2020 progressed, we significantly improved GE's profitability And cash performance despite a still difficult macro environment, we're encouraged by the significant free cash flow growth this quarter. We came into 2020 with a clear game plan at GE. We were expecting strong performance from aviation and healthcare, While executing our turnarounds at power and renewables, we all know how the story goes. The COVID-nineteen pandemic hit and it hit us hard, But our battle tested team embraced the new realities and moved on. This is best evidenced by the meaningful progress on our priorities.
Looking at Slide 3. 1, we strengthened our businesses. This started first with what matters most, protecting the safety of our employees and taking care of our customers and our communities. At the same time, we remain focused on what we can control. We continue to build our world class team at all levels, With new leaders joining our existing strong bench of GE talent, and these leaders are playing a critical role in GE's operational And cultural transformation.
In support of our transformation and better results, we executed more than $3,000,000,000 of cash actions. This enabled strong free cash flow generation in the quarter, bringing us again into positive territory for the full year. Specifically at Gas Power, we delivered positive cash flow 1 year ahead of our commitments due to our cost measures and operational improvements. And we saw traction across our other businesses. For example, all three power portfolio businesses generated profit growth this quarter, the first time in 2 years.
2, we continue to solidify our financial position. Despite the ongoing market uncertainty, our liquidity remains strong, bolstered by our free cash flow performance. We exited the quarter with $37,000,000,000 of cash. You'll recall that in early 2020, we completed the sale of our biopharma business for $20,000,000,000 This cash enabled us to accelerate our balance sheet deleveraging efforts. And since the beginning of 2019, we've reduced external debt by $30,000,000,000 And 3, we are building our foundation for long term profitable growth.
This starts with GE's purpose, Rising to the challenge of building a world that works. We're leading in some of the world's most important markets, the energy transition, precision health And we're passionate about delivering for our customers while tackling the world's biggest problems. We're seeing this as we help customers decarbonize through leading technology across wind, gas, power generation And modernizing the power grid with digital and automation solutions. And this really came to life in healthcare this year, where we were on the front lines responding to the exponential increases in demand in certain products due to COVID-nineteen. And we're keeping our sights on the long term.
Healthcare launched more than 40 new products, including the Meural Virtual Care solution, which provides a complete view of patient status across a care area, Hospital or system. And we announced that we acquired Prismatic Sensors, which has photon counting technology, a huge leap forward And the quality of limit images that can be captured on a CT. So, as we play more offense in 2021, Our team is energized about making our purpose a reality every day. Now lean is how we will do this across GE and the real unfinished business. In the last 2 years, we've laid the groundwork, establishing our Kaizen Promotion Office and introducing lean fundamentals across the company.
Now we're picking up the pace, scaling lean company wide with an eye towards operational and financial impact problem solving and daily management to reduce quality defects by 25%. This helped drive savings that enabled the business to grow operating profit by 60% in 2020. As this team shows, you can apply lean in any part of the business, not just in manufacturing. One of our key leadership behaviors is delivering with focus, which means ruthlessly prioritizing where we can add the greatest value. Two key opportunities for GE are aftermarket services and digital, often working in tandem to transform what we can do for our customers on a daily basis.
For example, our renewables and digital teams are working together to develop AI enhanced wind turbine inspections to reduce blade failures. In turn, earlier detection will help improve safety as well as reduce repair time and cost. These advances are possible due to our ongoing commitment to investing in innovation. We also had some major product Launches this year with the Hollyadex wind turbine and the GE9X engine receiving certifications. Both machines are leaders in their own rights, offering incredible Power output and efficiency.
So 2020 is certainly a year none of us will ever forget for its challenges, But even more so for how the world rose to meet them. At GE, I'm proud of the way we persevered in the face of great uncertainty, And we're set up well for the year ahead. With that Carolina will provide further details on our quarterly results.
Thanks, Larry. Broadly speaking, I'm also pleased with how we're progressing on our priorities. We're becoming more operational, we're deepening our focus on cash flow, And we're using lean and automation to improve speed, quality and scale. And you've started to see evidence of this in our margin and cash flow numbers. I'll share some examples with you today.
Turning to Slide 4. Larry covered our consolidated results, so let me provide some additional color on our earnings performance. First, we made some notable reporting enhancements. This better aligned with how we operate our businesses and will help us drive improvements. They also further enhance transparency and disclosure quality.
For particular note, we now include restructuring expense, expect for significant and higher cost programs In adjusted EPS and in our segment results, this will drive accountability in managing costs and benefits at the businesses. The restructuring recast was an impact of $0.02 in the quarter $0.05 for the year. 2nd, We're still managing through significant market volatility. Aviation continues to heavily impact our overall performance, pressuring our top line and our industrial profit, But we saw progress in our other businesses. This quarter, while overall industrial margins was down 3.50 basis points, Excluding Aviation, margin expanded 3 40 basis points, reflecting swift actions and strong executions on our cost programs.
As planned in 2020, we reduced Structural headcount by more than 20,000 or 11%, and that's ex dispositions. 3rd, Looking at continuing to adjusted EPS, much of this difference came from the steps we've taken to improve our financial position and operations. There were a couple of main drivers. This includes our Baker Hughes mark and $124,000,000 of restructuring expense tied to the significant high cost programs. I'd also point out debt tender costs, additional biopharma related tax benefits and the remaining $100,000,000 to close out the SEC matter.
In all, as our actions took hold, we saw improving results to close this difficult year. Moving to cash. We generated $4,400,000,000 of industrial free cash flow this quarter, well above our expectations coming into the quarter. This is up $500,000,000 year over year, but it's also Expiopharma up $900,000,000 All businesses delivered positive cash flow, largely driven by better working capital management. Cash flow benefited from positive earnings.
Healthcare earnings were strong again this quarter And together with Power and Renewables were enough to offset aviation's decline. You'll see that there are puts and takes between earnings and other CFOA. As seen in prior quarters, non cash items such as the Baker Hughes mark to market impacted earnings, but not cash, and they were offset in other CFOA. Consistent with how we run the business, we've strengthened our working capital definition, broadening it to include current contract assets and other current items, Well, our free cash flow definitions remain unchanged. This quarter, working capital was the biggest driver of our free cash flow.
A source of cash at $3,400,000,000 this was significantly better sequentially and year over year due to Seasonal volume and continued operational and financial process improvements. While we're seeing improvements across the board, Inventory and payables were the net contributors to cash flow this quarter. Looking at the dynamics, receivable Naturally pressured from the higher seasonal volume in 4th quarter, we also reduced short term factoring by $1,200,000,000 this quarter, Bringing the total factoring balance down to $6,800,000,000 Partially offsetting this was strong collections, resulting in a further decline in past dues and retros. Renewables was a standout this year, implementing a standard operating rhythm using lean to reduce its CSOs and its past dues by more than 25%. On inventory, we released $1,600,000,000 across all businesses through higher deliveries driven by seasonality and more rigorous material management.
For example, Healthcare's MRG is implementing a real pull system in production. So far, this has improved on time delivery by roughly 15 points and increased inventory turns by half turn. Payables were also a benefit as volume increased this quarter. Progress collections were a net $1,000,000,000 inflow. This was driven by cash collected from large orders closed in renewables and strong milestone deliveries, partially offset by Aviation and Power.
Contract assets, a net $800,000,000 of inflow, this was due to aviation CSA collections, including quarterly flight hours, annual minimum We're still carefully optimizing our investments to drive returns aligned with our long term objectives. We held CapEx flat sequentially. In 4th quarter, this represents a reduction of more than 50% year over year, and for the year, this is down 31%. But importantly, we continue to invest in high return and strategically important projects. For the year, industrial free cash flow was 600,000,000 All businesses, except Aviation, improved cash flows and ended the year stronger than they began.
Total Power generated positive free cash flow, including Gas Power as we made faster progress on our fixed cost reductions and working capital improvements despite the negative cash flows at Power Portfolio. HealthCare delivered an impressive free cash flow of $2,900,000,000 while overcoming a $1,000,000,000 headwind from the foregone cash flows of biopharma. This was driven by higher earnings, primarily from the pandemic related demand, cost actions and better working capital. Free cash flow at renewables was negative $600,000,000 but a $300,000,000 improvement year over year despite the impact of the PTC cycle. The focus on inventory management is paying off, and we had strong progress from orders and milestone execution.
Aviation free cash flow turned positive this quarter and was nearly breakeven for the year, enabled by our significant cash actions. Stepping back, our trajectory to sustainable cash flow growth rests largely on self help. I'm confident we're focused on the right areas, operational cash drivers that improve working capital, increasing our frequency of our operating rhythms And more linear cash flow generation throughout the quarters and the year. For example, all lenders have action plans to run their businesses linear with lower inventory levels. In aggregate, our focus and actions to improve working capital are starting to pay off.
Moving to the segment results, which I'll speak to on an organic basis. First on Aviation. GE and CFM departures were down approximately 48% this quarter versus our January 'twenty baseline. Due to the resurgence of COVID-nineteen cases and further travel restrictions, the commercial aftermarket, which is critical to our recovery, showed some sequential improvement. Orders were down 40% year on year, but up more than 50% sequentially.
Commercial Services Included a $1,900,000,000 order from the Aeroderivative joint venture formation. This was just under half of the total orders decline in dollar terms. Aviation backlog stands at $260,000,000,000 down 5% year over year, yet flat sequentially. The largest driver was commercial engines as unit shipments and cancellations outpaced orders. Cancellations were about 400 units, Primarily by 1B this quarter, significant, but for context, our ending LEAP backlog still stands at more than 9,600 engines.
Revenue decline continued to moderate, down 34% this quarter, while revenue was up nearly 20% sequentially. Commercial engine revenue was down 47% as we shipped 309 fewer engines year over year. Commercial services revenue was down nearly 50%. This was driven by lower spare parts sales and shop visits. Charges for long term service agreements were approximately $150,000,000 this quarter, roughly a third is COVID related.
While customer demand remains strong in military, revenue was flat, showing 4th of our expectations. This was due to continued supply chain challenges Flowing shipments. Segment margin, 9.6%. Margin expanded sequentially, driven by the cost actions and improved volume in commercial markets, despite more than $100,000,000 of continued higher costs due to lower production rates. Decremental margins this quarter were 48%, up sequentially.
This was due to continued volume pressure and a tough Margin comp of 23% from the Q4 in 'nineteen. So for the year, Aviation margin of 5.6% We realized savings of more than $1,000,000,000 of cost $2,000,000,000 of cash actions. This work continues in 'twenty one. Moving to Healthcare. The team delivered another strong quarter.
The Healthcare Systems market remained dynamic with elevated demand in COVID-nineteen related equipment, offset by softer demand for non pandemic products. Regionally, public health care markets such as Europe and China have been stronger than private markets, particularly U. S, India and Latin America. For the 2nd consecutive quarter, global procedure volumes were relatively stable with some regional variability as care providers postponed elective With that backdrop, Healthcare orders continued to improve, up 1%. In Healthcare Systems, orders grew 1%.
Europe was up low double digits and China up low single digits. Services saw consistent growth, up low double digits as we continue to provide critical support to our customers. In PDX, demand continues to recover to pre pandemic levels and orders were down 1%, but up slightly sequentially. Health Care revenue was up 6%. Health Care Systems was up 7%.
LCS had solid execution, Delivering a record number of ventilators, non pandemic related volumes were also positive as we converted imaging backlog and ultrasound orders this quarter. From a regional perspective, we saw strong growth in Europe and China. This year, China revenue was more than $2,000,000,000 and up 11% in the quarter alone. U. S.
Revenue was more than $6,500,000,000 up 2% for the year, including the U. S. Government ventilator order. PDX revenue, slightly down 1%. The segment margin was up 310 basis points this quarter and 190 basis points for the year.
While we continue to invest in new products, the team reduced structural costs. Headcount was down roughly 1200 this quarter, and the business maintained tighter control over discretionary costs. For the year, revenue was up 4% with Healthcare Systems up 5% and the margin was 17%. Our team delivered operational improvement and has headroom for more with an eye toward continued margin expansion. Turning to power.
Our team continued to make operational progress, particularly in cash generation. Starting with the market. Despite global electricity demand and gas based power generation declining this quarter, GE Gas Turbine Utilization, As anticipated, we saw significant orders improvement. Gas power equipment order more than tripled with H. A.
Wins in Asia and securing 45 to 50 heavy duty gas turbine shipments in 2021. Service orders grew 7% With double digit growth in transactional and low single digit growth in CSA. While upgrade decline moderated from earlier in 2020, Down single digits. For the year, service orders were down 3%. Power portfolio orders were down 27%, largely driven by steam equipment.
As we exit newbuild coal, this trend of limited steam equipment activity has continued. And as we execute backlog and rightsize the business, we expect this to flow through the financials. We ended with slightly higher backlog as growth in Gas Power more than offsets declines in Power Portfolio. Gas Power backlog of $66,000,000,000 grew roughly $700,000,000 sequentially, driven by strong equipment and transactional services book to bill. Revenue was down slightly this quarter.
In Gas Power, revenue was down 3%, largely driven by services down 10%. We saw lower discretionary spend on upgrades and narrower scope of outages. For the year, we executed about 90% of our pre COVID outage plan. Offsetting this was equipment revenue up double digits. We shipped 28 gas turbines this quarter, Up 7 units year over year for a total of 51 heavy duty shipments in 2020.
And we commissioned 4 gigawatts of power to the grid, including 6 HE units. In Power Portfolio, revenue was up 5%, primarily driven by steam equipment project execution. Our power portfolio team performed about 95% of their pre COVID outage plan. Segment margin of 6% was up 40 basis points. A double digit reduction in gas power fixed costs was partially offset Negative revenue mix between equipment and services and some one time non cash charges, including for specific customer credit events.
In Power Portfolio, as Larry mentioned, all 3 businesses generated profit. Power conversion was a particular standout. Better execution led to margin expansion of 10 points year over year. For the year, power revenues were down 5%, but the team held margins at 1.5%. We offset pressure from lower services volume and onetime noncash charges, Such as an underperforming joint venture for global aero derivative packaging by reducing headcount by roughly 3,300 and decreasing power fixed costs.
Turning to Renewables. Our progress continues. This year, Onshore Wind delivered record volumes despite the pandemic. Offshore Wind received full certification for both its 12 13 Megawatts Kalyad X. And grid and hydro, our turnaround showed improved results.
Starting with the market. Onshore wind growth was designed by international demand. Offshore wind continued to be supported by solid secular growth trends, And we've built a robust Halyard X pipeline with total commitments of 5.7 gigawatts. Orders were up 32% year over year, representing the 1st quarter of growth since the Q3 in 'nineteen. This was driven by onshore wind with large equipment orders in North America and offshore wind with its first Halyard X order of 95 units From the Dogger Bank Wind Farm in the U.
K, this double digit order growth brings our backlog to a record high of $30,000,000,000 And importantly, at better margins, we remain focused on underwriting discipline and better project selectivity. Revenue was down 7%, driven by onshore wind. Specifically, new units and repower upgrades were down 27% As our deliveries were more heavily weighted in the prior quarter due to the PTC dynamics, this was partially offset by growth in Offshore Wind and Hybrids. Segment margin was slightly negative this quarter, though up 2.90 basis points year over year. It was driven by cost productivity, Better pricing in Onshore Wind North America and improved project execution.
At Grid, Profit, while negative, improved significantly, driven by our restructuring actions and better project execution. For Renewables, revenue was up for the year and while the segment margin improved, it was still negative. Moving to GE Capital on Slide 7. We ended the year with $103,000,000,000 of assets, excluding liquidity. Continuing operations generated an adjusted net loss of $24,000,000 this quarter.
This was down year over year, primarily driven by lower gains at TCAS and EFS and higher taxes, partially offsetting lower EFS impairments and positive marks on the insurance investment portfolio. At RECAS, our team continued to work customer by customer through restructurings and in some cases repossessions. At year end, the outstanding deferral balance was approximately $400,000,000 This was down slightly sequentially, both as a function of limited new deferrals as well as collections. Importantly, we've collected around 84% of what we've invoiced to date. And out of a fleet of more than 900 aircraft, we ended the year with 27 aircraft on ground.
This quarter, GKS generated a profit of $120,000,000 That's down $94,000,000 year over year, driven primarily by the disposition of the PK Air in 2019 and market conditions. For the year, JAKKS generated earnings of $50,000,000 excluding the 2nd quarter goodwill impairment. Equipment lease impairments in the year totaled $542,000,000 $45,000,000 in the quarter. Going forward, we continue to monitor credit risk as further credit deterioration could result in additional airline failures Turning to insurance. The business generated net income of $112,000,000 This was largely driven by increases in the unrealized gains in the investment securities portfolio and in mark to market adjustments and realized gains.
As it relates to the pandemic and adjusting for what we believe is timing related, In our LTC block, we continued to see reductions in new claims and higher policy terminations. In our Run of Life business, We still saw higher claims due to higher mortality. In our restructured settlement block, we also saw higher mortality resulting in lower claims. Insurance will complete its annual statutory cash flow test in the Q1 of 'twenty one. As expected, GE provided a capital contribution to GE Capital of $2,000,000,000 in line with the required annual insurance statutory funding for 2020.
As we said in the Q3, we expect an additional contribution from GETG Capital in 2021 to meet its existing insurance statutory funding requirements In light of the uncertain environment, further 2021 contributions depend on GE Capital's performance, including GK's operations and the Insurance CFT results. Shifting to corporate. Our focus on decentralization continues. We're driving more accountability to the segments and continue to resize the core in favor of the business This quarter, adjusted corporate costs were $443,000,000 down 23% year over year. Functional costs and operations improved as we saw further reduced headcount, which was down 13% for the year.
Digital saw significant traction on profit and cash flow as the business improved operations and optimized its cost structure. Moving to Slide 8. We continue to improve our financial position despite the uncertain external environment. We ended the year with about $37,000,000,000 of total cash, more than $23,000,000,000 at GE and $13,000,000,000 at GE Capital. We also maintained $20,000,000,000 of credit lines.
And through a series of actions this year, we reduced near term liquidity needs Through 2024 by $10,500,000,000 We also continued to enhance our cash management operations, targeting more linear cash flow, lower factoring and less restricted cash. As a result, we reduced intra quarter borrowings by 3.6 1,000,000,000 in 2020 or approximately 75% less year over year. Expanding on cash flow linearity. One focus area for our businesses has been improving the end to end cycle of order fulfillment, billing and collection. In our Healthcare System Equipment business, for example, standard work is helping us level load the number of deliveries from the 3rd month in the quarter Earlier in the quarter, smoothing out deliveries and collections.
This is also reducing inventory and improving factory productivity. These types of operational improvements have reduced our industrial cash needs to below $13,000,000,000 on a go forward basis. And this creates greater capacity to delever the company. However, we'll continue to hold elevated cash levels through this period of uncertainty. Turning to debt reduction.
We made strong progress in 2020, reducing external debt by $16,000,000,000 And our industrial net debt ended at $32,000,000,000 down $16,000,000,000 in 20 20 and down $23,000,000,000 from 20 19. We also continue to derisk and actively manage our pension. In 2020, we decreased our pension deficit by 2,300,000,000 The combination of strong asset returns at 17.6 percent and recent actions such as the $2,500,000,000 pension prefunding More than offset the impact of low interest rates. Based on our current assumptions, we won't need to make contributions through 2023 to the GE pension plan. In terms of leverage levels, Industrial ended with a 5.9x net debt to EBITDA ratio due to lower EBITDA, reflecting pandemic related pressure.
We remain committed to achieving our industrial leverage target of 2.5x net debt to EBITDA over time. At Trinity Capital, we ended 2020 with a debt to equity ratio of 3.4, and we expect to remain below our 4x debt to equity target. In closing, our team has made meaningful progress this year. I'm encouraged by results we're seeing from the many, many changes underway. We'll continue to build on this momentum in 2021.
Now, Larry, back to you.
Carolina, thank you. Turning the page to 2021, We're planning to provide a full outlook for the company, including detailed segment information during our March investor call. But today, we'll share an overview for the total company in 2021. Moving to slide 9, we're expecting organic growth in For industrial operating margin, dollars 0.15 to $0.25 for adjusted EPS in a range of $2,500,000,000 to $4,500,000,000 for industrial free cash flow. Of course, there are a number of key assumptions underpinning Our plan for the year.
1st is the lost cash and earnings from dispositions, largely biopharma, which again generated nearly $300,000,000 in cash $400,000,000 in profit in the Q1 of 2020 and the continued reduction of Baker Hughes dividends, which represented more than $250,000,000 of cash flow in 2020. 2nd, Vaughan Aviation, where the impact of COVID has been most acutely felt and our level of uncertainty is still the greatest. Starting with the market, our plan assumes departures remain close to 4th quarter levels in the Q1 and we begin to see the commercial aviation market recover in the second half. That said, we fully acknowledge the pace of the recovery remains dependent on containing the spread of the virus, Effective inoculation programs and government's collaboration to encourage travel. At GE Aviation, we continue to expect the engine aftermarket recovery to lag departure trends across regions and fleets, particularly around quarantine requirements.
And given that we generate a significant portion of our cash in Commercial Services, the recovery of the aftermarket remains critical. So our full year plan assumes aviation revenue is flat to up year over year. And as a reminder, since the full effect of the virus was not felt Until late in Q1 of last year, we will be lapping a tough comp. Looking across our other segments, in Power, we anticipate Continued progress at gas power, with some offset in power portfolio as we exit newbuild coal. Overall, we expect equipment revenue will be down, Driven by oner over scope with less turnkey volume.
We're also planning for growth in our higher margin services revenue. In Renewables, we're focused on improving operational execution and driving structural cost out. This will help us expand margins and improve cash. At Healthcare, we expect continued strength in Healthcare Systems as our new products and commercial efforts drive growth and PDX to recover. While we expect cash conversion to remain solid, it will be lower than 2020.
And at Capital, we expect earnings to be better. At each business, we're further accelerating cash performance and cost management with restructuring remaining elevated. So in aggregate, we have a positive trajectory going into 2021 despite areas of volatility and the continued challenges in aviation. We're focused on delivering on our commitments and I'm confident that our continued efforts will build a stronger and more focused GE. Turning to slide 10.
As we all know, 2020 was a year like none other. I'm truly proud of the GE team and their remarkable I hope you can see that in the face of great uncertainty, we continue to strengthen our businesses and deliver for our customers. And as we move through the second half, our businesses had a strong free cash flow finish to what was a challenging year. Momentum is growing across our businesses. We've continued to evolve our culture by embracing lean while preserving the strengths that have defined GE throughout its history.
And I'm excited about the opportunities that lie ahead, how we will continue to lead the energy transition, help our customers deliver precision health and define the future of flight. As our multiyear transformation accelerates, we'll unlock upside potential with better cash generation profit and growth. And ultimately, we expect that our industrial businesses over time a world that works. With that, Steve, let's go to questions.
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. Brandon, can you please open the line?
Thank And from JPMorgan, we have Steve Tusa. Please go ahead.
Hi, guys. Good morning.
Hey, Steve. Good morning.
Good morning.
Congrats on the strong finish on cash. Just curious on this GE Capital change. When did that start and is there any impact on kind of working capital trends? I'm just kind of trying to figure out how you mentioned that the transactions remain on kind of an arm's length basis, But how does this kind of change that the dynamic around working capital at all?
Hey Steve, just for clarity, You mean the change in how we account for it on equity basis?
Yes.
That we just announced today? Okay.
Okay. Yes. Well, that is really to sort of simplify the way we show how GE Industrial is performing and how GE Capital is performing. That's the only change that we do there. I would say, though, that looking at the reporting changes that we have done in the quarter or at year end, there are a couple of significant ones.
And the most significant is really The restructuring recast in moving responsibility for not only the sort of execution, but also the cost as well The benefits to the businesses. So I would say that's the biggest and most important one. And also, when we're talking about The working capital definition and the broadening working capital definition, that is really to more align It's how we really run the business internally and operationally to drive improvements in working capital to show that also in the external reporting and the classified balance sheet really Goes with
that. Got it. And the
last one was on R and D, right? You saw that as well. It's really showing that as a standalone line to increase As far as the end, I'd highlight that.
Yes. Just a follow-up, will you be growing assets at GE Capital on a core basis Outside of insurance in 2021?
No, we're planning to keep that flat.
From Wolfe Research, we have Nigel Cooley. Please go ahead.
Thanks. Good morning. Just want to dig into your cash outlook for 2021. At the midpoint, dollars 3,500,000,000 you You'll be converting over 100% on your adjusted earnings outlook. So just wondering just in terms of Port Stokes, what are you assuming in
So why don't I to your point there, why don't I sort of explain how we can walk to the midpoint of The guide. So we're guiding for $2,500,000,000 to $4,500,000,000 of free cash flow in 'twenty one with the midpoint there of the $3,500,000,000 right? So you would have to start by rebaselining the numbers from 2020. So you take out the biopharma, disposition biopharma and the health care COVID demand, And that really gets you to roughly 0 as the starting point. And then I would say you have cash earnings.
It's about onethree that gets you to the midpoint of our range With all the businesses planning for structural cost out and here we have both the normal course of strengthening the business That's the business around, but also the carryover from the COVID 2020 actions. And on top of that, also the low single digit organic growth We're talking to, right, primarily in Healthcare, Renewables and Aviation. The remaining twothree are driven by net working capital improvements. It's including the factoring tailwind that we talked about, and it's partially offset by other items such as the non repeat of military in aviation that we've called As well as higher AD and A payments from higher aircraft deliveries really pushed out.
Nigel, I would just add that I think what you see coursing through both the cash earnings and frankly the working capital improvement Both the improvements that we're trying to drive commercially with respect to just better upfront opportunity identification, better underwriting, Pricing terms and the like all the way through that upfront cycle, but also operationally, right? Be it in terms of cost, be it quality and delivery, that's helping us both in the income statement, but also obviously on the balance sheet. And I think when When you look at the 4th quarter numbers, you see some encouraging evidence that while it's still early innings for us with respect to the lean transformation, We're seeing some nice results, and that will just feed on itself. That will build momentum, and that is something that we're looking forward to contributing In that bridge into the 'twenty one numbers.
From Vertical Research, we have Jeff Sprague. Please go ahead.
Thanks. Good morning, everyone. Just kind of a 2 part question, if I could. Just share if you could a little bit of the restructuring variance embedded in what you just told us on cash flow. And then Also Carolina, just picking up from what you said, if 1 third of the earnings One third of the cash flow is from earnings next year.
That would kind of imply your underlying conversion is 65%, 70% or so. Is that What your underlying free cash flow conversion should be once we kind of normalize out of this thing?
Okay. So we start with the first question then on restructuring. So we have the recast, right, that we now include Basically, we're moving the responsibility out into the segments, and we're also including it in the EPS and therefore in the recast. So if you look at the quarter, for example, You have a $0.02 of effect of that on our numbers. So from you go from $0.08 to $0.10 and $0.05 for the full year.
And if we look at the restructuring, we basically, we delivered on the $2,000,000,000 of cost that we committed to, but also the 3,000,000,000 of cash as we promised. And you do have a carryover effect of that going into 2021. It's about
From UBS, we have Markus Sitterbauer. Please go ahead.
Yes. Hi, good morning, everybody.
If I could maybe double click specifically on the power free cash flow guidance. So it seems that you are clearly about a year ahead Of targets here on fixed cost that on that cash trajectory, you're guiding flat next year. Can you maybe just double click here, particularly 12% down on the gas power services side, how much sorry, 12 And Dan, on the fixed cost side on the gas power side, you have down on services, but should we assume that there's no catch up on that side next year? And And specifically on steam and the exit of newbuild coal, is there something that in that fixed cost base you can address going forward? And how should we then think about that maybe over the medium term if PENNY one is flat, how do you think about that over the medium term?
Marcus, let me take a swing at that. I think you have the basic architecture in hand. The segment will be flat, but it really masks 2 underlying dynamics, right? You're spot on with respect to the Improvement at Gas Power, I don't think we could be more pleased with the progress the team is making there. Clearly, a competitive market, No question.
But in terms of controlling what we can control, both again the better underwriting upfront with respect to equipment, The continued market acceptance of the all of that, I think, is in our favor. Services has been a challenge. We've talked about that, I think, through the course of 2020. A little bit of Little bit of light there relative to the order book in the Q4, but I think we really know the onus is on us to continue to drive Better performance in all aspects of the service portfolio there, be it CSAs transaction and upgrades. Upgrades was particularly pressured for us in 2020.
We know CSAs is a function We know CSAs is a function of the utilization a little bit better. So, I think when you put all of that commercial and operational activity on top of the restructuring, where we've taken $1,000,000,000 of cost out at Gas Power, You get the early arrival of that positive free cash performance in 'twenty as opposed to 'twenty one. And we really move from here with A team that I think has proven that we can control controllable And deliver better results with this book of business. I think when you talk about power portfolio, you put your finger on steam. We're going to be restructuring as we exit coal, newbuild coal.
That is a significant undertaking. It is early in that effort And that will be a cash pull on us in 'twenty one and probably to a So when you put it all together, as you saw on the slide in the appendix, It will be roughly flat in 2021. We'll be looking to drive gas as best we can, But we need to see the new coal exit through and we'll do that as thoroughly and as thoughtfully as we can.
Yes. And just to comment on gas power specifically, because we've talked a lot about the restructuring with the COVID related restructuring, but It's really an achievement from the Gas Power team with the Scotton team. So achieving positive cash flow in 2020, a year ahead of plan, really basing on what Larry talked about, almost $1,000,000,000 of fixed cost out in the last 2 years. And then also, Basically, I would say rebalancing our relationship with our partners and suppliers and Significantly, structurally increasing DPO as well as significantly strengthening the processes that we see on DSOs and how we both build, collect, including OverUsed, that's really gotten us to a positive cash flow already in 2020. So
And just to come back, Jeff, to your second part of your question About the question of whether that number that you calculated for this year is an ongoing number or not, Carolina, why don't you take a minute to Back on that in terms of free cash flow conversion longer term?
Yes. When we look at free cash flow conversion longer term, we still need to we need to acknowledge that If we look at the earnings guidance also for next year, we still have elevated levels of restructuring and we have Elevated levels of pension and legal and so on. So there is still significant room to improve Our earnings and then also the structural process improvements that we are driving through the business on the working capital. So it's a
And from Bank of America, we have Andrew Obin. Please go ahead.
Hi, yes. Good morning.
Good morning, Andrew.
Hi. On aviation, one of the questions we're getting is that I think plane retirements this year have been Below average because I think airlines did not really go bankrupt. But how do you see one of the questions we get is sort of plane retirements And usable service materials availability into 2021, how do you account for this in your forecast for your baseline forecast for
Andrew, you're exactly right. I mean, the way we look at retirements in 2020, just Interestingly, compared to 2019, we actually saw fewer aircraft retire last year than we did the year before. But I think we're going to see that uptick in 2021, in all likelihood, here in the back half as volumes Return and the deliveries out of both of the major airframers pick up. So we're assuming We will see that retirement transition. And at the same time, while there's been a little bit of a bid ask spread with respect to Parting out some of those planes.
We're anticipating that we'll see a little bit more of that USM effect as we get into the second half At a time when we should see a return to volume activity, I think people need to appreciate that USM cuts both ways for us. We've been a major user of USM given the nature of our CSA obligations over time. So It will take a little while for that market to begin to really kick in. There is a lag, of course, from the time a plant is retired to the time that we would see it in But I think as we look out over the next several years, again, not trying today to pin A particular time in which we see a return to normal volume activities, from our perspective, we anticipate deliveries to outpace retirements And that will be a net effect positive for us at Aviation. The other dynamic worth noting there, of course, When we look at the dynamics for our fleet today, when we highlight the fact we've got a very young fleet, What we really mean by that is we've got a little over half of the CFM56, 5B and 7B fleet, they haven't seen their first shop visit, right?
So they're still early in their life cycle. Three quarters of that same fleet have yet to see their second shop visits. So they'll typically see 3 during the course of a normal useful life. Our major economics happen in and around the first and second. So as these planes come back online, That green time is used.
Demand puts additional pressures on the fleets. Those are the catalysts that we're really watching for
From Melius, we have Scott Davis. Please go ahead.
Hi, good morning Larry and Carolina. Good morning, Scott. I was hoping a little bit of a nitpicky question, but what's left in corporate that You guys plan on parsing out to the businesses, if you can be somewhat specific. I mean, is there still R and D that's done at a central level or is everything being kind of build out already? I'll just leave it there.
Yes. Well, there are a couple of things in place, Scott, and I'd rather talk about that internally before we talk about it externally. But in effect, what you've seen in the last couple of years really is not only the reduction of the core Through absolute reductions, but also the movement of a number of the traditional corporate functions that had been at the center in some form Out into the businesses. There is still a fair bit of activity. You're Referencing there specifically the Global Research Center where we have a shared facility.
That's really not part in a major way of that corporate net number that you see there, right? Businesses are paying their way By and large in that regard, also keep in mind, we've got a number of P and Ls in what we call corporate, principally The digital business, our $1,000,000,000 software business, some of those businesses are more independent than of the portfolio. Others are operationally linked. So we'll continue to work to improve those businesses. And if there are situations where They can work more closely or better with the businesses under a different roof, we'll do that.
But I think We'll continue to look for opportunities, but they will be on balance more modest in scale and scope than what you've seen in the last couple of years.
From RBC Capital Markets, we have Deane Dray. Please go ahead.
Thank you. Good morning, everyone. A couple of questions on aviation. It was announced last week, one of the major airlines said They were restarting deferred engine overhauls and just would like to hear how you expect to Flex aviation capacity back up to meet this normalized demand. And then any color on the supply chain challenges you mentioned in aviation?
Thanks. Sure. Well, Dean, it's probably most helpful to just frame kind of What we did and where we are, right? We didn't bring that activity level down to 0. We tried to Resized it in a way that embrace this harsh unfortunate near term reality, but gave us a little bit of room just because Back to Andrew's question, a number of dynamics that are hard to know in the short term with absolute certainty, be it the retirement dynamic, How fleets are going to manage green time, just even in the short term, how folks are going to flex around the COVID effects as we saw In July August and then in the other direction here in the Q1.
So as an operational matter, I think What John Russell and the team are prepared for is a number of scenarios where when we see that recovery, We'll leverage some of the, if you will, the excess cost that is still there because again, we didn't take it to the bone, but also We have laid in place plans that will give us an opportunity to ramp back effectively from J. Rice:] From a safety, from a quality, from an on time delivery perspective, but also to have the right cost structure along the way. But we will be dealing with limits, right, in terms of our shop visit capacity In a particular window, and then that's part of the conversation we're already having with customers, as they begin to think about the second half of 'twenty one, They want to make sure that they have their fleet in tip top ready to go condition. So A lot that we're working through there. Clearly, our supply chain has been through a roller coaster right there along with us.
I mean, it was a year ago. I mean, literally, right now, when we're talking about not only continued volume ramps, but A new introduction clearly at Boeing with the MAX and then literally weeks later, we're talking about slamming on the brakes. Part of what you saw in the Q4 is a little bit better inventory performance because the lead times and the cycle times in Aviation tend to be longer than they are But we are working as closely as we can with the supply base to help them do what we're doing, and that is work J. Rice:] We'll work through the near term here where we have these volume pressures, but also be ready for, again, a number of scenarios by which we see A return toward more normal volumes.
From Morgan Stanley, we have Josh Pokrzywinski. Please go ahead.
Hi, good morning, Larry.
Good morning, Ken and Blair.
Hey, Josh.
Just on Aviation, maybe a Two part question, but Mary, you mentioned expecting a lag in terms of the recovery in your shop visits Versus what the market traffic is, doesn't look like it's happening today, but I get that that's a phenomenon that develops over time. Just given so much of the Free cash flow performance at the corporate level is working capital and not earnings. I mean, how much of The range is really dependent on aviation as a market because it doesn't seem like there's a ton of volatility or expectation in the forecast that Aviation core performance is really driving that and maybe that's a lag or something else, but am I interpreting that right?
Josh, I would say that if we clearly to wash you through kind of the walk to the midpoint, As if GE was a business as a whole, the slide in the back of the earnings presentation where we look at cash flow by business, I think it's really meant to capture the fact that the bulk of the range is going to be made up By what happens at Aviation and that will largely be a function of what happens in the market, particularly the aftermarket. There's a bit of renewables In the range there as well, but I think what we've seen through the course of 2020 is that, Fortunately, when all was said and done, our power businesses were able to work their way through the pressure and the uncertainty. We had a number of orders of renewables that came in at the end of the year, and we didn't know they were going to be there until they were there. And unfortunately, they were. But clearly, this will be a year of climate broadly, and that will be a good thing for our renewables business.
And I think healthcare, while we won't convert at the exceptionally high levels the team did and credit to them in the back half of last year, Healthcare, I think we've got good line of sight on. So when you look at that range, I think the bulk of it again is really a function of aviation. I like the way we're executing. We can always do better. But that said, it will really be a function of what happens in the end of the market.
And I think what we try to do here is Provide a framework that isn't assuming some sort of out of consensus early
From Goldman Sachs, we have Joe Ritchie. Please go ahead.
Thanks. Good morning, everybody.
Good morning, Joe. Good morning, Eric.
So I'm going to apologize upfront for the 2 part question, but I wanted to first ask a question to Carolina To maybe just bridge us a little bit given the reporting changes, bridge the EPS guide for 2021 versus What you reported in 2020? And then my second question for Larry, just from a portfolio perspective, arguably there's never been a better time To divest assets that you don't want longer term, how are you thinking about that for 2021?
So let me start with the EPS question. It is really focusing in on the restructuring, right? So I commented in the beginning that we have restructuring in the EPS now and that the effect of that for the full year is around 0.05 Sam, we do expect to have, I would say, roughly the same level of restructuring in 2021, Right. So you don't have an effect from elevated or changed restructuring levels when you compare 'twenty to 'twenty one when we do the walk on the EPS?
I would say with respect to portfolio evolution and capital allocation, Joe, I take your point relative to the market dynamics. They are remarkable. But that said, I don't think any of our businesses are close to optimizing their underlying performance. And again, Clearly, pressure and some uncertainty here in the very short term, particularly around Aviation. But I think what we want to do in 'twenty one It's built on the momentum that we think we clearly demonstrated last year, continue to pursue our strategic intent across the 3 major areas that we've talked about.
And over time, we're going to be open to ways to deliver value, maximize value at GE, but we still have a lot to do still a lot in front of us. And I think that's the way
From Barclays, we have Julian Mitchell. Please go ahead.
Hi, good morning. Maybe just the first question around or my only question really around the Look for power portfolio, Larry. It seems like looking at the slides, that's one of the few areas where The cash performance remains very, very difficult in 2021. Maybe just help us understand the moving pieces within that. And you assume that by the time you get to the end of this year, you have really sort of cleaned the deck and those businesses have a shot at Positive cash flow in 2022.
Yes, I would say that I think we talked a little earlier about the makeup, Encouraged by what we saw in 2020 of power conversion, Losing less money is different than making good returns, but you've got to work your way through that and the Power conversion business is doing that. Our nuclear business is smaller, sub 1,000,000,000 in size, but fundamentally stable. The action, To your question, Julien, really centers on the steam business. And again, exiting the new Build coal business, which has largely a European base, is going to be a multiyear effort. We're in the very early stages of that.
So that's really the primary cash pull on Power Portfolio and, I would say, in the segment In 2021, and given the way that plan will inevitably play out, we'll be talking about this At least in the 1st part of 'twenty two as well. But I think we've got our arms around that. Again, it'll All of that will mask a lot of the momentum that Scott and the team have built, but
we'll keep you posted.
It is what it is, but when we get to the other side, I think that segment is going to be a much better contributor for us.
And that's all the time we have. At this point, we will now turn it back to Steve Winoker for closing remarks.
Thanks, everybody. I'm going to actually I'd like to come back to a question that was raised earlier on the call About our reporting GE Capital as an equity method investment within the GE Industrial column of our financial statements. And I'd like to be clear, I think we'd all like to be clear that it has No impact whatsoever on working capital or any individual transactions. It was done simply to simplify reporting and make That column more reflective of GE Industrial earnings as investors have been requesting. So I want there to be no ambiguity on that front whatsoever.
Thank you. And ladies and gentlemen, this concludes your conference. Thank you for your participation today. You may now disconnect.