Morning, everyone. Welcome back to the J.P. Morgan Industrials Conference for day two on the aerospace and defense track. We are very grateful and pleased this morning to kick it off with GE. And probably don't need introductions here, but we have Larry Culp, CEO, Rahul Ghai, CFO, and we have Steve Winoker and Blaire Shoor from Investor Relations as well. We're going to kick it off. I think, you know, Larry's gonna give us maybe a brief overview with some, you know, some key points to reinforce from last week's Investor Day, and then we'll go into Q&A. So, Larry and Rahul, welcome, and over to you.
Great. Seth, thank you. Thanks for having us, and good morning, everyone. As you may know, we were here in New York last Thursday. We had the entire team for our Investor Day, and it's three weeks as of yesterday morning that we'll be at the exchange, ringing in both GE Aerospace and GE Vernova as standalone companies. So we took advantage of the, the opportunity last week to really let the team tell the story about where GE Aerospace is today and where we're going in, in the future. As many of you may have seen, GE Aerospace is a $32 billion business, a leader in propulsion and a number of related product categories. We operate and we will report in two segments.
Our commercial engines and services segment is a $24 billion business, an outstanding franchise, and our $9 billion defense and propulsion technologies business is strong in its own right. Obviously, it has a strong defense or military orientation and a number of other critical technologies in the propulsion space. We had our leadership for both businesses to walk through, with those that were in the audience and those that were dialed in, the various competitive advantages, the product positions, and the like that set those businesses up, we think, really, really well. But what we tried to do was explain the future, really, using a strategic framework that we've talked about before that we refer to as today, tomorrow, and the future. And that's relevant to each of our businesses. And with respect to today, it's all about service.
It's all about readiness, given the demands that both the airlines and, frankly, militaries around the world are pushing, are putting on us with respect to utilization of existing assets. That's the beauty of this business. We're 70% in the aftermarket. We're close to the product. We're close to the customer on a day-in, day-out basis. We like that. But as you've heard us perhaps reference previously, given the supply chain challenges, while we're making progress, we need and will make more over the course of this year and going into next. When we talk about tomorrow, it's really about modernizing and expanding the fleets that our customers have around the world. And we're staring at a tremendous amount of backlog, today, both on the commercial and on the military side. A new narrowbody order probably doesn't get delivered until 2030, 2031 at this point.
Obviously, our engines are on many of those airplanes. So we have a significant ramp, which will pull on that same supply chain, both within our own operations and with suppliers and their suppliers. And that really is, I think, the battleground for us operationally right now. And as if that wasn't enough, when we talk about the future, we're really talking about next-generation propulsion in particular. None of us really know when the next narrowbody will come to market, be that 2035, 2040. But as we have in the past, we are already working today on the critical technologies that will be required for that next step function in efficiency and sustainability. You may have heard us talk about our RISE program, revolutionary innovation for sustainable engines. That's really at the heart of a $2 billion R&D spend this year. We make progress.
We update customers on the technical milestones. But we feel really good about what is percolating in that regard, even though it is a long ways off. That's really the strategic framework we shared with everyone. We also talked about a financial framework, both with respect to reiterating the guide for this year, which was intact last week. I'll report that it's still intact. But as we talked a little bit about 2025, we really then went out and talked about where do we see ourselves in 2028. So on a five-year look, we think we're on a path after next year to be on a slightly slower growth trajectory, but still in the high single-digit range. Again, largely a function of utilization of today's fleets and the expansion of tomorrow's.
We should see good profit growth off of that in the low double-digit range. And we circled an approximately $10 billion op profit outlook number for 2028, which would be a nice step up from our, roughly $6 billion, here. And that requires a lot of progress, a lot of work, but I think it's, certainly, work that we can do and progress that we will deliver. We'll see good cash conversion on that. We're north of 100% conversion currently. Think that will be the case again here in 2024. But for 2028, we talked really around 100% recognizing their puts and takes five years out. We also took advantage of the session last week, especially in the wake of some recent board actions, to share our capital allocation framework. And we see approximately $35 billion of capital available to be deployed in the business.
As you would expect for a business like ours, the first order of business is organic, both in the form of R&D and CapEx. But we're going to have ample proceeds to manage from there. We talked about a very strong bias toward returning capital to shareholders, talked about returning 70%-75% of available capital to shareholders over time, girded by a $15 billion stock buyback authorization, the board action just a week or so ago, in addition to a significant step up of our dividend, which will start somewhere in the 30% of net income range. That leaves a little bit for M&A, and we simply reiterated that the first order of business again will be organic investments. But there will be things we think we would want to add to our technology stable, in and around propulsion, other product categories that we are in.
But we're really going to take a strategy first, operational value add second approach in pursuing M&A that is return, return enhancing for our, our business. So all in all, it was a good, good session. Really proud of the work the team put in to pull all that together, let alone in sharing that with, with those that were interested. A little bit more work to do, Seth, to get us to the 2nd of April, but we're really excited about that. And both at Aerospace and at Vernova, not unlike Healthcare, it's been a long journey. We, we've been at this for three years. The transformation of GE's been going on for even longer, but we're less than three weeks away from being in a position where we can put much of this one-time work aside. We can not spend really any time on the past.
You're going to have three businesses on a go-forward basis that are wholly focused on the future. And again, I can't tell you how excited we are about that. And with that, maybe we'll, go to your questions.
Excellent. Very good. Well, we'll go into Q&A then. I'll start off maybe at a pretty high level. You know, it's been striking how quickly demand for air travel has recovered from COVID. You know, everybody knows we're back to 2019 levels and growing. But you know, within the industry, the demand has recovered, but the industry has really struggled to ramp back up. I think GE kind of stands out now in terms of you know, both relative level of execution and relative financial strength. I guess, you know, do you feel like that gives GE some opportunities to kind of shape the industry over the coming years? And if so, how do you think about doing that?
Well, I think all of us appreciate just how devastating the pandemic was to the industry, particularly here in the U.S. We're not the only business, of course, that has really had to build back, after being dialed down to almost zero. For a heavy manufacturing business and services business like ours, that has been hard. And it's still hard. Seth, again, it's a glass, in my view, that's half full. But we have work to do, and we're chasing a moving target, given the airlines and the airframers want more from us, virtually every year. I'm not complaining. Rather have that challenge than others. But nevertheless, it's challenging. There have been struggles.
But I think what we're going to try to do is continue to operate very much in the way that we have, keeping safety and quality at the top of the agenda. We talked a good bit about that last week as well with investors, and then make sure we're doing all we can to serve. And if we can serve the airlines, if we can serve our military customers as they look to increase readiness and utilization, as they look to expand and modernize, I think that's the way that we'll shape the industry. There are some critical shaping moments, be it just for example, one of the safety initiatives we announced two weeks ago, our Aviation Supply Chain Integrity Coalition, to make sure some of these borderline counterfeit parts don't make it into the aftermarket.
We've brought a number of people together, Boeing, Delta, to name two, to really put forward an industry-wide effort to make sure that the aftermarket doesn't have that sort of exposure. Longer term, we talked a little bit about, a little bit about RISE. I think we're the view that the next generation single aisle, not unlike the last, will in large part be shaped by what's available in terms of underpinning propulsion technologies, to the extent we, we make the progress that we intend to. That will be another shaping moment, I think, with respect to, product strategy on the back of the airframers. So there's a lot to do. But again, I think we, we look at, at it as more servicing as opposed to shaping the, the trajectory of the industry.
When you think about RISE and you think about what the timeframe might be for a platform to emerge that's powered by RISE, kind of how do you think about that right now?
Well, I think it's out there, right? And I don't want to divulge any private conversations we've had with the airframers, and that's an ongoing dialogue, as you might imagine. But I don't think anyone's really in a rush to bring forward the next platform. So when I reference 2035, 2040, I'm just reiterating what I think, Dave and Guillaume and their teams have talked about publicly.
And then maybe to follow on the safety and quality topic a little bit, you know, we've all spent a lot of time this year focused on, you know, events at Boeing and, you know, reading about additional FAA scrutiny. You know, do you see more FAA oversight coming for, you know, for the entire industry? And, you know, to the extent that it does, how do you think about the way that that might impact GE from here?
Well, I suspect, given if nothing else what the FAA themselves have said, what the president put forward in the budget proposal earlier this week, we are going to see a bigger and more active FAA. GE Aerospace, for a long time, has worked closely with the FAA, EASA, and other regulators around the world. We think that that is a good, they're a force for good. They help us. We'd like to think we help them ensure that the flying public is 100% confident every time they step on board, right? So will that influence what we're doing? I'm sure hard to necessarily project what that means. But again, given the relationship and the ongoing dialogue we have with the FAA, if standards are high and they are so enforced, we welcome that, right? Because we push ourselves very much in that way.
A lot of our lean transformation, what we framed last week as Flight Deck, our proprietary lean operating model really is geared toward that old Toyota mantra of SQDC, safety, quality, delivery, and cost in that order. I think that would dovetail quite well with what we've already seen from the FAA, from a safety management system and from a quality management system, let alone everything else that could come forward.
Okay. Well, very good. Maybe, maybe taking in a little bit more, I thought, you know, one of the things that was striking from last week, the question came up about what's changed most from, from last year. And, you guys talked about increased confidence in the LEAP. And, and so, you know, maybe this would be a good time. There, there's a lot of different targets for the LEAP in terms of, in terms of production, in terms of, you know, breaking even on a new engine, in terms of profitability in the aftermarket. Maybe you can kind of level set everyone where we are, in those various dimensions.
Sure. Well, maybe I'll take that off and Rahul, jump in here. You know, I think with the LEAP, what is probably most important is just to remind everyone that we are sole source underwing on the 737 MAX, and we enjoy to date a program win rate on the NEO of north of 70 or north of 60%. It's higher in the last year, right? So we have a, I think, a compelling value proposition that customers have really responded to. And you see that in the win rates and in turn in the backlog. When we talk about the confidence that we have, I've always been confident. I think we've always been confident in the platform.
We knew that we would have some early stage teething pains, as is typical with any new engine. Not that customers accept that, not that we do. We were pleased to see the progress that we've been able to make with a number of the product enhancements that have been put into production. What our engineering leadership laid out last week was the fact that we will put in the next major improvement in the LEAP-1B this year, a high pressure turbine blade improvement that will really bring our durability up to CFM56 levels. That's really, I think, the benchmark that understandably customers have in mind, right? If you're going to buy a new plane to replace an old one or to fly side by side, you want that in-kind performance.
And that really then sets us up to take that. We'll put that into production this year on the 1A, the Airbus version of the engine, and then the Boeing version will be implemented next year. So at that point, we think we will have in production. You'll still have to go back and address the installed base, capability that is very much in line. It's that, so those technology milestones that are part of the confidence. Rahul, what would you add?
So that leads us, Seth, to the financial change in trajectory that we are seeing, right? It's the market share that leads us to doubling the installed base between 2022 and 2025, and then doubling again between 2025 and 2030. You know, by the time we get to the second half of this decade, we'll have more LEAP engines flying than CFM56. So it's a huge step up in volume. And you combine the installed base with the improvements in the product enhancements that have led to improvement of reliability, durability, and then where the engine is in its lifecycle, entering the service phase of its lifecycle, that leads us to generating profit on the services business this year. And the program breaking even next year, and then OE in 2026, and then we go from there.
So as we get, you know, the charts that we put out last week, basically reference the fact that by the time we get to 2028, you know, LEAP is approaching CFM56 levels of profitability, right? And that's a combination of just engine performing as we expected, the price improvements we've been, you know, put in place, and the, the volume that we have flying. So with 10 years into service, you know, LEAP is delivering as much profit or getting to that point as its 30 plus year old predecessor. So that just speaks to the, the potential that this program has over time. So that's what, you know, that's what you heard from us last week.
Excellent. And then maybe looking at CFM56 and, you know, that being kind of the legacy engine, but a legacy engine that I think is, you know, probably going to be with us for some time. Talked about shop visits peaking around the mid-decade timeframe. But when we think about the, you know, after that kind of peak, to what extent are we talking about a peak versus, you know, kind of more of a plateau-ish type level of shop visits? And then, you know, the potential for price increases and work scope as well. And, you know, maybe a little bit about the role that CFM56 will continue to play beyond 2025.
Before you do that, when we talk about legacy, when you say legacy, the image you may have is of an old product, ready to be put out of service. We talk about the fleet. I think it's 45% of the fleet hasn't seen its first shop visit yet. So we have this incredible installed base, but it's still very youthful. It's young in with respect to where many of those engines are in the engine lifecycle. So didn't mean to interrupt, but I just, I don't want anyone thinking that this is, an engine you'd find at an antique shop or something along those lines.
No, that's correct, Barry. So, Seth, you're correct. I mean, what we put out last week was that, you know, we do see shop visits growing between 23 and 25, right? And they are higher than what we had projected maybe a year ago, right? And the big reason for that is that the engine is flying more because it's so useful, than we had expected. I mean, if you look at last year, the departures for CFM 56 were kind of in line with the overall growth in the market. So CFM 56, you know, that's maybe not something we would have expected going in, but that's what's out there. And the engine is just expected to fly longer.
Now, as we get into 2025, 2026, 2027, we are expecting that with the, with the increase in the new deliveries, you know, some of the CFM 56 engines begin to retire. But that is all contingent on the ramp that we will see from OE. And we've been wrong on this before. As I said, you know, you know, between 2023 and 2024, our power projections on CFM 56 utilization have increased. So is that possible that that continues? Yes, absolutely. But, you know, as we were laying this thing out, we did project the fact that, you know, by the time we get to 2028, the revenue for 2020 for CFM 56 is more like the way we have it in, in 2023. So it kind of steps down from 2025, but that is contingent on everything else that happens on the OE side of the market.
Right, right. The other part of the, I guess, the eventual ramp up in new engine production leading to retirements is that it brings kind of, you know, used material into the market. And so how did you think about that in terms of your, you know, your profit outlook for CFM56 and, you know, the level of used material that might be in the market as we move into the second half of the decade?
Yeah, no, that's absolutely correct, Seth. And if you look at the charts that we put out there, you would notice that, you know, if you look at the change in the installed base versus the change in profit, you'll see a bigger step down in profit, then you'll see a step down in installed base, because that's what we are expecting, that there'll be some used material that'll be out there. Now, it has been at a very, very low rate right now. I mean, it's hard to find CFM56 used material in the market, just given the fact is that engine is just flying longer. So the number of parked aircraft is like half of where they were a year ago. So there is not a lot of used material in the market, but we've built that in, into the projection.
So if you look at the charts, you'll notice that, you know, you were seeing a step down in profit that is at an accelerated base versus the installed base.
Okay. Just, you know, last, I guess, Thursday evening, kind of working through the model with the new segmentation data that you guys gave us and noticed that, you know, in the commercial engine segment, you know, we're going to see the margin rate coming down year-over-year in 2024. And if you could talk a little bit about what's driving that, you know, what are the profitability headwinds in 2024? And then there's an expectation that that margin rate is going to expand. I think some of those, you know, some of those mix headwinds that are out there don't necessarily go away. So as we move beyond 2024, what changes?
Yeah. So, Seth, just to maybe clarify 2024 first. So when we spoke, when we gave guidance for 2024 at the total company level, we spoke about a $700 million-ish profit growth for 2024, which is on top of more than $1 billion of profit growth that we delivered last year. So we're seeing an increase in profit in 2024. But we did speak about the overall margins for the company being flat to 2023. And the way the margins are working is we're seeing incremental benefit from volume. We're seeing incremental benefit from price cost favorability. We're seeing value from all the productivity initiatives that we're putting in place. But that's getting offset by the mixed headwinds that we are facing. And the mixed headwinds are coming from two main areas.
One, the ratio of spare engine growth to installed engine growth is lower in 2024. So the spare to install engine ratio is unfavorable relative to 2023 in 2024. So that mix shift within LEAP deliveries is creating a little bit of a margin headwind. And the other part is that we are launching 9X this year. And given that these are the initial units that we are launching, that is unfavorable to our mix as well, combined with a step up in R&D that we are expecting this year to support introduction of 9X, RISE that Larry spoke about, and improvements in LEAP durability. So those were the two, between the mix and the step up in R&D, we're expecting about 2 points of margin headwind.
As you go through the list of things I've said, most of these things manifest themselves in our commercial business, right? So that is where, Seth, you saw the step down in the commercial margins, just because a lot of these things are in commercial. But even with that, the profits in the commercial business are growing, you know, for $500 million or so. So from a dollar perspective, we're still seeing the growth, except that, yeah, the margin is stepping down. Now, as we move forward into 2025, as we said, the improvements in, you know, we just spoke about the improvements in LEAP profitability, you know, that helps us turn the trajectory here on, you know, on CES margins and continues to drive CES profit.
While we see R&D expenses and investments continue to grow, we expect them to grow more in line with the revenue growth. So it's not unfavorable to margins. So that's, you know, it's the leap. It's, you know, the step up in R&D investments at the rate of the revenue growth and all the productivity initiatives that we're putting in place. So I think that helps drive continuous profit and margin expansion in CES.
Okay. Excellent. And then maybe one more question for now about the commercial business. The wide-body growth forecast in the mid-single digits, I believe, Culp. You know, there's pricing in there. There were a number of wide-body aircraft delivered kind of late in the last decade. Is there, I guess, you know, how should we think about that growth rate? What's kind of holding that back and what might have to happen or for there to be upside to that?
Well, that's a question we've gotten more than a few times in the, in the last week. I think there are folks who were soft circling, maybe areas where we were a tad conservative. That being one. And I, I think our response is simply, we, we see some of the other numbers that, that people have talked about relative to wide body growth. However, you, you need to remember that the freight market is under pressure, at least that's our assumption for, for this year. That's part of why you see a mid-single digit top line number on our wide body exposure rather than not. And I think the other is really the dynamic with the GEnx where the product has performed better than we had anticipated, thus longer time on wing, good for the customer, good for us.
But to the extent those shop visits are pushed out, those rev rec events are pushed out. There's a little bit of a revenue headwind as a result. If there's more business to be had there, of course, given our exposure, we'll be happy recipients of it. But those are probably the two major reasons why we were happy with the mid-single digit number in the deck.
Okay. Excellent. So the flip side, we talked about the pressure in 2024 on the CES margin, but in the defense and propulsion technology, it seems like the company's looking for some nice margin expansion in that business. So maybe you could talk about some of the drivers there, particularly, you know, when I look at other places in my defense coverage, that there's been a lot of margin pressure in recent years.
Yeah. Well, I would say, you know, again, step back. This is a $9 billion segment for us. I think people, that number sneaks up on folks. We've got an $11 billion backlog there. We've had a pretty good run here with respect to the order book. We've had a book to bill in the 1.2 range. But our deliveries have not been good, right? So part of, I think, what we have conviction in from a top line perspective is continued progress in the supply chain. We talked about that earlier, right, that will allow us to make better use of that backlog. And I think in doing so, we should see better productivity along with that. That certainly helps. And we see that on the commercial side as well. I mean, there's locked up productivity.
There's locked up inventory in the fits and starts that we go through, given shortages that we may incur, by way of our supply base. Anything you'd add there?
The only thing I'll add, Seth, is that Riccardo, who runs our propulsion and additive technologies business, he spoke about two areas of investment that we are making in that segment. One is to develop the next generation of turboprop engine that will also have wide application in the unmanned areas. And the other part is additive, which is critical to the future of the business. And we're still making the investments, but the rate pace of investments is not as the same as as last year. So just the shift, just given where we are in the phase of development of those technologies, that's also helping along with, you know, volume and productivity that Larry mentioned.
Yeah. Yeah. Okay. And then maybe keeping with that business, another thing that I thought was interesting was, the growth rate expected there was above, I think, the growth rate that you're looking for, for kind of the defense budget overall, and on a multi-year basis. And so, you know, what kind of underlies the ability of that business to grow faster than the market over the next, you know, 4-5 years?
Yeah. Well, let's see what the market does right here in the end. I think it's just hard to imagine, given the world that we live in, that we're going to be looking at ongoing CRs and 1% increases in spending. That said, again, on the back of an $11 billion backlog, right, our book to bill being what it is, the exposure we have with the Apaches and the Black Hawks, the modernization there, let alone all of the sixth gen combat activity that we're involved in. I think we feel very good about the near- and medium-term, as well as the longer-term potential here. Those are the assumptions that went into what you saw, obviously, north of that low single digit number that others would talk about.
Okay. Excellent. I guess maybe moving back to the commercial business, question I had about the LEAPs. I think we'll probably see maybe the initial customers reach the end of their initial CSA agreements, or maybe we're seeing some of that now, or we'll see it in the near future. And so for those customers going forward, is the plan to move this installed base more in the direction of time and materials contracts, rather than having people on power by the hour plans? And, you know, how do you think about that in the new population of engines as well?
Well, I think with respect to the CSAs that have been written to date, they still have a ways to run. So, here we sit, March of 2024, you're probably talking the early 2030s before they are up for renewal. But to your second question, which I think is really the critical one, longer term, not unlike the CFM56, we see third parties playing a significant role in the servicing of the LEAP installed base. That will be an open network. That's always been a structural design of our aftermarket services. It's a good thing for us because we avoid capitalizing that entire base.
And at the same time, it really creates, if you will, competition, which customers enjoy, right, depending on where they are with a particular engine, where they operate in a particular part of the world, they're going to have choices as to what they do with that next shop visit, any of that, repair and overhaul activity. So we'll see how that plays out. But that's, I think, the intent that we have to replicate the open network we enjoy with the CFM56, with the LEAP. But that's a, you know, that's a decade in the making.
Right. Okay. Excellent. Maybe I know we're inside of two minutes here. So maybe I'll make sure we get to kind of zoom out to a bigger picture question before we close. And that's kind of, you know, about M&A. And you had kind of, you know, you had a placeholder in the capital deployment plan for M&A. You know, you talked about it being focused. And maybe if you could talk a little bit more about, you know, what that focus means. Does focus mean propulsion, or does focus move outside of propulsion? And then maybe about some of what your requirements would be looking at M&A.
Yeah. I think that what has always served us well is a simple framework where you start with strategic fit, you go to the operational value add, and then you look at real cash on cash returns. I think that's a framework that will help guide us as we think about opportunities. You know, they might be in the supply chain. They might be in related technologies like the small bolt-on we did with Innoveering last year in the hypersonic realm. I don't think our M&A appetite will be limited to propulsion per se, but we underscored the word focus because we didn't want anyone thinking that we're going to be all over the place trying to be an all-singing, all-dancing aerospace company.
I think we really want to be in the best sectors where we can lead and generate real value for our customers and real returns for our investors. I think if you pencil out the capital that we suggested we could spend, it's probably $8-$9 billion. So call it $2.5-$3 billion a year. That's really not all that much, given our market capitalization, let alone our revenue base. And I think what the two of us want to do, given that we bring a lot of experience, is just make sure that we're smart about this, that we retain the license to reinvest inorganically to complement what we do organically, and that will take time. And if for some reason we don't end up spending that much money, I think you see our bias, right, with respect to returning capital to shareholders.
Excellent. Okay. Without, you know, I could keep doing this all day, but we're at time. So, Larry and Rahul, thanks very much for being here. We really appreciate it.
Thank you.
Thank you, Seth.
Thanks, everyone.
Thank you.