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Turning around GE's power unit will be a 'multiyear journey,' CEO says

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The General Electric logo above a trading post at the New York Stock Exchange in 2017.
Source: Associated Press

The fight to stabilize General Electric Co. and return it to profitability depends on successfully overhauling a power division that lost more than $800 million in 2018 after executives misjudged demand for the company's natural gas turbines, CEO Larry Culp said March 14.

As part of that effort, GE plans to cut costs in its power business by $800 million over two years while prioritizing financial discipline rather than stretching for volume growth in a market that is "substantially smaller today," Gas Power Division CEO Scott Strazik said on a conference call with analysts. Executives "know how we got here," he said, and "we know how to fix" the problems.

However, a turnaround will not happen quickly, Culp warned. "While this is a multiyear journey, 2019 is a critical step," he said.

In 2018, GE's attributable loss widened to $22.80 billion, or $2.62 per share, from $8.92 billion, or $1.03 per share, the year before. Adjusted EPS came in at 65 cents, compared with $1 the prior year.

GE expects the power division's free cash flow position to worsen in 2019 from the negative $2.7 billion it reported last year. For the broader company, 2019 free cash flow is expected in the range of zero to negative $2 billion, with adjusted non-GAAP earnings per share of between 50 cents and 60 cents. Culp expects its Industrial business to achieve free cash flow in 2020.

"The pace and the slope of the power turnaround is the biggest variable here over the next couple of years," GE Senior Vice President and CFO Jamie Miller said.

In addition to misreading turbine demand in the natural gas market, GE's power business is grappling with "legacy" legal obligations, some of which relate to the company's acquisition of Alstom SA's power and grid business in 2015, as well as years of "under management" that hurt performance, said Culp, who was named chairman and CEO in October 2018.

GE shares were up more than 3% near the end of the trading day on March 14.

Looking ahead, GE expects demand for gas turbines to be in the range of 25,000 MW to 30,000 MW annually, down from the 40,000-MW market executives reported seeing in October 2017.

"[The] new unit gas market is substantially smaller today," Strazik said. However, "gas power generation is growing in the developed world and globally as the existing installed base runs more because of coal and nuclear retirements and the need to levelize renewables," he said.

GE Renewable Energy was the leading supplier of turbines for new wind power installations in the U.S. in 2018. The company is now setting its sights on the offshore wind market, which has yet to gain traction in the U.S.

"[Offshore] is the fastest-growing energy segment and an area where we haven't been as active over time," Culp said. "We see it as a big opportunity."