GE sees hit to Q1 profit from coronavirus, return to positive cash flow for power business in 2021

Dive Brief:

General Electric expects a return to positive free cash flow for its power division in 2021, following years of negative numbers, the company said Wednesday on a conference call with investors to discuss its updated outlook for 2020.
GE expects a negative impact of $300 million to $500 million to its overall industrial segment's Q1 2020 free cash flow due to the coronavirus as well as a $200 million to $300 million hit to Q1 operating profits, with the brunt of the impact felt by the aviation division. The company declined to estimate coronavirus impacts beyond Q1.
Mitigating the impacts of coronavirus on GE's global supply chain will be a top priority for the renewable energy division in 2020, and the segment will be "a key focus" for GE overall, the company said.

Dive Insight:

GE has been pursuing a multi-year turnaround for its energy-related businesses. A report released last June by the Institute for Energy Economics and Financial Analysis said the company cost investors $193 billion from 2015 to 2018, when it focused too much on natural gas and underestimated the speed of the clean energy transition.

It's been working to address various challenges in its power-related businesses and sees positive trends in 2020 and 2021 for organic revenue growth, operating profit margin and free cash flow.

In October 2018, it announced a split of its power business into two parts, with one covering natural gas product and services business and the other covering steam, nuclear, power conversion and grid services. In January 2019, it restructured its renewable energy business, bringing its grid solutions and hybrid renewables work, which includes solar and storage, into the same division that develops its wind power and hydro offerings.

And while it still expects negative cash flow for its renewable energy division in 2021, it now sees a return to positive cash flow for its power division next year.

"Our cash performance in '19, while still negative, was significantly better than '18 and we are highly confident our '20 operating performance will position us well to return to the black in '21," Scott Strazik, head of GE's gas power business, told analysts on a conference call Wednesday.

Speaking about the factors driving the projected $2 billion improvement in cash flow for the power division by 2021, Strazik noted the billion dollar change from 2018 to 2019 "was primarily from project outflows coming down substantially, working our working capital down with inventory, and an improvement with supply chain, and also better underwriting rigor both on the new unit side and the services."

Strazik said the company is encouraged with its progress and its multi-year turnaround, "but not satisfied."

The overall power industry reported 39 GW of gas turbine orders in 2019, up from 29 GW in 2018, with GE's share increasing from 10 GW in 2018 to 16 GW in 2019. "This increase was driven by projects to replace coal and nuclear as well as LNG expansion globally, supporting our view that gas power will continue to play a critical role in the future energy mix," Strazik said.

For its renewable energy division, GE expects operating profit margin to improve significantly, but remain negative in 2020, with free cash flow down due to some wind production tax credit dynamics, division head Jérôme Pécresse said on Wednesday's call.

Though still expected to remain negative in 2020 GE expects much better free cash flow for its renewable energy unit in 2021, due in part to the expected turnaround of its grid and hydro components — a major focus for the division in 2020 that is being driven by operational improvements and other factors, Pécresse said.

Regarding coronavirus impacts, Pécresse said, "as of today we are on track to our quarterly forecasts. We continue the positive recovery of our supply chain in China."

Brooke Sutherland, a Bloomberg opinion columnist who covers deals and industrial companies, wrote Wednesday that making renewable energy a priority for the company "would have been unthinkable a year ago when the larger, troubled power division had just announced a $22 billion writedown and was facing deepening losses. It’s an encouraging sign that the business is seeing decent enough progress that [CEO Larry] Culp can divert his attention elsewhere."