Barron's Streetwise - CEO Chat: General Electric's Larry Culp

Episode Date: July 9, 2021

GE's long-awaited turnaround is gathering momentum. Jack talks with the man at the helm. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. A company of this size and scale is not going to be changed, let alone transformed overnight. But I'm really proud of the progress this team has made in two and a half years. And I think I can see over the next several years, even more progress. Hello, and welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard,

that's Larry Culp. He's the CEO of General Electric. GE is one of those companies where everyone knows the name, but many people have lost track of exactly what they do. Is it washing machines, light bulbs, television? GE doesn't do any of that stuff anymore. With Larry at the helm for close to three years now, GE has narrowed its focus to four main businesses, power, aviation, healthcare, and renewables. It has divested some other businesses and used the cash to reduce debt and shore up its pension. And the stock price has begun responding. This episode is the fifth in a series of six chats I recently had with top CEOs, and we're putting them out as short episodes with limited narration,

two per week. We'll return with regular episodes next week. On to GE. GE has been talked about as a turnaround candidate for more than a decade. In 2018, its worst performing business, Power, burned through billions of dollars in cash. That year, GE brought in Larry Culp as CEO. He had led a successful transformation at another industrial company, Danaher. Larry quickly took a massive accounting write-down, which was a sign that GE was ready to face structural problems that it had put off for years.

structural problems that it had put off for years. It has since cut costs and debt and sold or exited biopharma, lighting, and coal-fired power businesses. The merger of its aircraft leasing business with Dublin-based Aircap freed up $30 billion, for example. GE has made settlements with regulators to remove the overhang of past subprime mortgage and power accounting practices, the power business is now generating cash. Aviation, GE's strongest business, was hit hard by the pandemic, but it's bouncing back now that long-distance travel is coming back. The stock has doubled since last summer. Maybe it's more than just a COVID reopening bounce. I asked Larry to walk me through what's happening in each of the four business segments, starting with power and aviation. A little over two and a half years ago, we knew that power was going to be ground zero relative to the transformation of GE, particularly our gas power business.

A host of operational challenges in that business, many of which, frankly, were self-inflicted, if you will. And what we've done is really put that team on a path to get back to operational basics. You hear us talk a lot about our lean transformation, probably have made more progress in our gas power business than we have anywhere else. A couple of years ago, our gas power business was a negative cash generator for us, now positive a year earlier profitability, put many of the legacy issues in the rear view mirror and be a steady performer force. In terms of aviation, a very different experience, of course, the last couple of years, two and a half years ago, far and away our best

performing business, a lot of wind at its back. and then the pandemic strikes, and no GE business was impacted more dramatically than we were last spring. But that was, in many respects, a blessing because it gave us an opportunity to revisit a number of the operational foundations at aviation, be it in manufacturing, be it in our service business as well. It's clear the aviation recovery is at hand. We think we're exceptionally well positioned. As the planes fly again, our service capabilities will be called into duty, and that will be good business for GE. So the other two of your core four businesses, renewable energy and healthcare. Now, of all the things that GE has been involved with over the years, from show business to washing machines, right? What makes these two special enough to be two of the four going forward for the new core GE?

Sure. Well, Jack, as you know, our history goes back over a century, back to Edison. And today, one of the most pressing challenges the world has is that of the energy transition. And our leadership position in wind, both onshore and an emerging position in offshore wind, is going to be an important part of that solution. When you couple that with our power business, particularly our gas business, and gas plays and will play an important complementary role to wind, we think we're part of the solution. And oh, by the way, within our renewables segment, we have our grid business. And as we think about how we make sure that we can bring renewables online and not suffer with respect to reliability or affordability, an upgraded grid

the world over is going to be an important problem for us to solve. And again, I think that's one that we're well positioned to play a leadership role in. We go to healthcare. In many respects, if the world's wrestling with the energy transition, we see post-pandemic that we're going to be wrestling with the next generation of what we call precision healthcare. And with our imaging footprint, where we touch a billion patients a year around the world, we think there again, it's not only a good business, it's a business that does well and has a welcome home in the GE portfolio. So when you look at all four of those businesses, different market dynamics across the three, but certainly opportunities as we go forward, be it the energy transition, be it precision

health, or in the case of aviation, the future of flight. How do you get buy-in? A new chief turnaround plan, but it's a company that, you know, everybody, boy, they've heard it before. They've talked about turnaround for years and you seem to have gotten it, right? You've gotten Wall Street's attention. Investors seem to be coming around to the story. But in those first days, how do you get buy-in from the employees and from the investors? Well, I think that what we did back in the fall of 2018 was ask a lot of questions and listen aggressively. That's an approach that I've used in other situations. It was really the only way for me to come in as the first outsider in the company's history and get my bearings. Yes, I was in the board for a few months, but that's a very different lens through which you see the business. And going

out and talking to a lot of people inside the company, outside the company, customers, investors, and the like, what you saw was a company with a lot of strengths, certainly some improvement opportunities to be sure, but a team, a resilient, greedy, more than capable team that loves this company, that wanted to make sure that we were tackling the problems that we have, be they self-induced or otherwise, but also playing to our strengths. And we've talked about a number of them here. I think my approach has been to make sure that we just take a step forward every day. A company of this size and scale is not going to be changed,

let alone transformed overnight. But I'm really proud of the progress this team has made in two and a half years. And I think I can see over the next several years, even more progress. Is the job getting any easier? There's a virtuous cycle where if you can improve the cash flow in a business,

then you've got some more money that you can put your hands on and invest in other areas to improve the returns of those businesses and so on. Are we at that point yet? Well, Jack, remember, again, I came in as an outsider. So early on, I didn't know anybody, didn't know the businesses, didn't know the vocabulary. So of course, with the passage of time, that gets easier. As that did, COVID-19 hits. And of course, none of us have ever dealt with a pandemic like we have the last year or so. But we are at a place where we're able to play more offense today. I think you see that really in the wake of the announcement we made earlier this year with respect to our combination

of our aircraft leasing business, GCAS, with AirCap. That positions us to take down at completion over $70 billion of debt. So we won't be talking about deleveraging the GE balance sheet much anymore. We hit earlier on a number of the operational efforts that are underway to improve our daily performance for customers and investors. And again, when you couple that opportunity up against what's happening in our three core markets, there's a lot that we can do going forward, which has us excited. Increasingly, we'll have investors excited as well. How are you doing with attracting and retaining talent? Are you able to get all the workers you need? And have you seen any effect? I would imagine once people start to kind of believe in the turnaround, right? You see the stock price

responding. Do you see a change in the attitude of workers over there? Is there a change in morale? What can you tell me about that? Jack, I really do sense a level of momentum, enthusiasm, commitment building here. Again, when I joined the team, the company was in a tough place, lots of barbs being thrown at the company, but the team was ready for the fight. And they proved that prior to COVID and certainly through the course of the pandemic. I think what I see today, particularly having the chance now to get out the last six weeks and conduct operating reviews by and large in person, which is far better than the video setup, is people see the momentum that they have generated. They see the early signs of progress.

They know that deleveraging is well on its way toward completion. And that just is momentum that feeds on itself. Again, a business of this size, the nature of the problems we solve for our customers, none of that happens overnight. But this is a team that's committed to continue to deliver for our customers. They've got pressing challenges in front of them. We can be part of those solutions, and we're excited about that. You've got to address some problems right away, but you can't stand still, you know, even in the businesses that are working well, right? You've got competition there. You've got to be thinking as a growth company. So where do you

see GE five, 10 years from now? What's kind of the long-term outlook or plan or ambition for what the new GE can become? Well, Jack, I think when you talk about five or 10 years down the road, what I would hope people would think of when they think of GE is that GE is a very well-managed business. And if we can do that and take full advantage of the opportunities we have in and around the future of flight, precision health in the energy transition, I think you're going to see a strong, high-performing, high-impact GE. I don't think that necessarily means that we have to become broader in our scope. I know a lot of people who think about GE think about GE playing offense inorganically or by way of M&A. We'll

certainly be in a position to do that last two quarters. In fact, we've had two small bolt-ons in our healthcare business that we're excited about. But just given the sheer scope, magnitude, and importance of the businesses that we're in today, we have a lot to do. And I would imagine that five or 10 years from now, we're going to be wholly focused on those opportunities still. You must have a pretty good read on the world economy. I mean, it has to be as good as anybody else's right now with your vast customer base. What does it tell you about economic growth once we get beyond this pandemic reopening phase? Is there good growth ahead? Well, Jack, I am optimistic that even once we

get past this initial post-pandemic period, that we are set up for a nice run of economic growth. I want to caveat, though, of course, with the view that there are lots of parts of the world that are still very much wrestling with COVID-19. We've seen that in India. We see that in Brazil, as you do, and others as well. But I think we're encouraged by what we see in our healthcare business. One of the most important things that we look at is clinical activity. And as you would imagine, in many places around the world, we're back to 19 levels or even in excess of activity in the first half of that year. Similarly, what we've seen in our power and in our renewables business has frankly been

very little impact from COVID. So they've continued to move forward very well. As you can appreciate, given all the energy and potential capital around the energy transition, particularly with respect to renewables in the U.S. and in Europe, we're seeing tremendous order activity and pre-order activity in and around our on and offshore wind businesses. Probably our best near-term economic barometer is in our aviation business, where literally every day we look at aircraft departures by aircraft platform, by region, so we know what's happening with those GE engines. Encouraged by what we've seen in the U.S. and in China, where we're getting back to those 19 levels, Europe has improved over the last three or four weeks nicely, but has a long way to go. I didn't ask you about green investing. I know there's

tremendous demand for investors, for companies that they view as sustainable companies. And I know GE has hands in fossil fuel businesses, but also renewable businesses. I presume you have a story to tell there. But is there anything that I have neglected to ask you that you'd like to add to our discussion for investors? Jack, there's a lot going on at GE. I wish we had an hour to talk about all of it, but with respect to ESG, in many respects, we're not chasing the ESG investor. We're working our strategy. But when you think about leading with respect to power generation, the future of flight and the role that sustainability will play there, let alone this next wave of precision health and how well we're positioned in that regard, we think that that is very much on strategy for GE today. And I think as we work through

the deleveraging, as we make more progress on our operational transformation, there'll be a fuller appreciation of how well we're positioned in that regard. But we need to earn that. That'll take some time, but that's okay. We're in it for the long run. Thank you for listening. Jackson Cantrell is our producer. Hi, Jackson.

Jack, if this podcast had four core businesses like GE, what do you think they are? Easy. First of all, deep voice gravitas. That's a core competency. All right. I don't even know if I can keep it to four. I mean, there's oversharing, there's banter, there's explaining hard thinking stock market stuff, and then there's big chief chats. That's like five, right? And home improvement tips. Home improvement tips. So that's six. We're basically a conglomerate. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple,

write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week.