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GE Jumps as CEO’s Vision of ‘Reset’ Year Eases Cash-Flow Fears

Richard Clough

(Bloomberg) -- General Electric Co. jumped as new boss Larry Culp pledged a rebound in cash flow next year after a “reset” in 2019.

Although the company could burn as much as $2 billion this year in the effort to restore its battered balance sheet, the chief executive officer vowed “significant improvement” in free cash flow from GE’s manufacturing businesses over the next few years.

“I don’t want to oversimplify -- there’s a lot of work to do,” Culp said in an interview after GE revealed its 2019 forecast. But the company is increasingly confident that many of the recent headwinds “will lessen as we go forward.”

The comments eased investor fears that Culp stoked last week when he warned that the company would post negative industrial free cash flow this year as it tries to revive the ailing power business. While both cash and profit will remain weak in 2019, the upbeat longer-term view suggested that less than six months into his tenure, the CEO sees a path to recovery.

“GE remains a battleground stock, but we believe that having Mr. Culp draw the line in the sand today with his targets and vision for the turnaround should bolster the bull case,” Deane Dray, an analyst at RBC Capital Markets, said in a note to investors. The prospect for a cash-flow recovery was “the biggest positive disclosure.’’

GE rose 2.7 percent to $10.29 at 12:23 p.m. in New York. The shares gained 32 percent in 2019 through Wednesday, recovering a portion of last year’s 57 percent loss, the worst annual decline since at least the early 1970s.

The turnaround still faces hurdles, including $25 billion in borrowing that matures in 2020.

“Simply put, we have too much debt,” he said.

What Bloomberg Intelligence Says

General Electric’s credit ratings and outlook may be at risk following the company’s 2019 guidance, which is below consensus and will likely lead to missed rater expectations. Ratings companies anticipate positive free cash flow. -- Joel Levington, credit analystClick here to view the research

As a part of its deleveraging plan for this year and next, GE is considering buying back debt through a tender offer, though it didn’t specify the amount. The company has only about $1 billion coming due this year and doesn’t plan to issue new debt, which could be used to refinance outstanding obligations, until 2021.

Culp still hasn’t shaken the cash woes that have plagued GE throughout its slump. The industrial free cash flow of zero to negative $2 billion that the Boston-based company projected for this year falls well short of the $4.5 billion generated in 2018.

Power Drain

The drain will be most pronounced in the power business, where cash flow will be worse than last year’s $2.7 billion outflow. Cash flow will also drop in the renewable-energy and health-care units, GE said. The figure will be little changed in the jet-engine operation.

Still, the cash outlook is better than some had feared, John Walsh, an analyst with Credit Suisse, said in a note. Investors keep a close eye on industrial free cash flow, which is considered an indicator of the health of GE’s nonfinance businesses.

Fixing power is a top priority for Culp, who has already split the business in two and brought back former GE executive John Rice to run the gas operations. The company is dismantling the power-unit headquarters and expects a 20 percent reduction in costs over the next two years.

The business, which makes and services gas turbines, has struggled with a range of problems, from poor management, to technical issues, to falling demand for gas-fueled power. GE also made an ill-timed acquisition of Alstom SA’s energy business, which contributed to a $22 billion charge last year.

Return to Health

Culp has said it will take several years to return the business to health. While cash flow will still be down next year in GE Power, the company expects improvement and a return to positive territory in 2021.

GE expects to spend $2.4 billion to $2.7 billion this year on restructuring. With the power-unit overhaul, the company is targeting cuts in indirect and corporate costs rather than a massive consolidation of its footprint.

Adjusted earnings will be 50 cents to 60 cents a share this year, GE said. Wall Street had been anticipating 67 cents, according to the average of analysts’ estimates compiled by Bloomberg.

This year will be “challenging,” Culp said, but there’s reason to think there’s a recovery ahead. “That’s the picture we painted today.”

--With assistance from Molly Smith.

To contact the reporter on this story: Richard Clough in New York at rclough9@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson, Susan Warren

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