General Electric Company Q2 2026 Earnings Call | Aerospace Backlog Scaling Drives Margin Boost

The GEPACE team continues to execute with discipline and focus with our customers at the center of everything we do. Our 57,000 employees remain committed to our purpose, inventing the future of flight, lifting people up, and bringing them home safely. I like to open by saying CFM International is supporting our customer Ryan and assisting with the investigation into flight 1879. Safety is our top priority at all times and our thoughts are with the passengers, pilots and crew who were on board. The second quarter marked another quarter of significant growth driven by robust commercial services. Overall orders up 17% with those up at least low double digits. Revenue increased 24% with CES up 27% and DPT up 16%. Operating profit grew 18% with both segments up at least high teens and EPS increased 22% and free cash flow grew 43% with conversion over 140%. These results close out an exceptional first half with orders up 49%, revenue up 27%, EPS growing 24% and cash flow increasing 31% with 115% conversion. Flight deck is helping us drive the operational improvements which underpin the significant output increases with the first half commercial services revenue up 32% and total engine deliveries up 31%. We remain focused on advancing what matters most to our customers delivering on demand and our backlog of over billion while investing in both current and next gen technologies to improve time on wing and cost of ownership. Given the strength of our first half and momentum for the remainder of the year, this morning we're raising our 2026 guidance across the board. I like to thank the entire GEPA team and our supplier partners for working so well together to deliver for our customers.

To slide flight deck continues to strengthen our operational capabilities in safety, quality delivery and cost always in that order with demand increasing for the F1 engine at our site in L Massachusetts we used flight deck to reduce overall production 60% saving over 50% over quarter. In I was bra with teamma our largest MRO site where I saw how we used flight deck to reduce 56 final assembly lead time by nearly 50%. Actions like this have improved total shop visit turnaround times by about a week since the end of 2025. And just last week we h three with GKN a top supplier fan cases and other key components to break constraints tied to rate performance we worked collaboratively together to create detailed visual work instructions increase capacity and implement 3D inspection. AI force multiplier flight deck across our turb airil for example recently ran several to improve the demand to simplify and then using AI to automate the process we cut the number of demand signals in processing time by 90% across 190sucing the number of demand signals we send our suppliers helps focus their efforts leading to priority supply material input increasing double digits sequentially and year over year again in the second quarter this supports commercial services revenue up 32% in the first half including record internal shop visit output in the second quarter and first half engine deliveries up 31% including LE engines up 41%. We are also expanding capacity to growing aftermarket demand for LE the installed base expected to more than double between now and last week we celebrated with MTU the grand opening of their new maintenance facility in worth which recently inducted their first LEAP 1 engine. All in we're making meaningful progress with flight deck and while there's always more to do we delivered substantial improvement in the first half and our teams remain focused on meeting customer expectations.

To slide. While the environment remains dynamic aftermarket demand has been resilient first half quarters were roughly flat but we have not observed any changes in customer behavior we expect a gradual modest departure growth in the second half and combined with our commercial services backlog roughly billion we remain well positioned for services growth in 2026 and beyond. Demand continues to be robust relief our fastest growing platform is demonstrated by Coba Airlines recently selecting up to 120 LEAP 1B engines to power their growing fleet of 737 MAX aircraft. In addition priorities for our customers we achieved a major milestone certification for the LEAP 1B durability kit including the upgraded HPT blade this is expected to deliver approximately a twofold improvement in time on wing with full MRO and new cutover expected early next year at the same time we're improving lead turnaround time days overing and reach nearly zero grounded LE powered aircraft due to engine our customers neediable. We are also advancing the future of flight through the NASA electrified power train flight demonstration EPFD project we recently ground tested megawatt class hybrid electric demonstrator. This represents a major milestone in understanding hybrid electric flight by bringing together advanced engines, electrical power systems and controls. We've also expanded our relationship with Beta Technologies who joined the EPFD project last year to advance the modification of the EPFD aircraft. We're looking forward to this plane being part of the flying display at the Farnborough Air Show next week. With defense, we continue to support robust demand for our services and products both domestically and with all partners while advancing next gen technologies. We announced agreement with Turkish aerospace industries to provide F404 engines for his here advanced jet trainer program. NRCP7 engines were selected to power the UK Ministry of Defense's new medium helicopter program. We completed an assembly readiness review for the XA102 adaptive cycle engine. A critical milestone that moves the program from design into assembly test. This builds on the progress of the XA1 and validates that the XA102 engine design manufacturing process and supply chain are progressing and on schedule. And we continue to strengthen our position in the fast growing collaborative combat aircraft or CCA market with our suite of products. Both the G1500 and the GE426 achieved significant milestones to move to preliminary design review, bringing them closer to eventual flight on small and medium CCA respectively. We look forward to sharing more exciting wins and updates at the Poro Air Show next week.

Thank you and good morning everyone. Gospace delivered another strong quarter mark growth across all key metrics. Orders up 17% with CES up 18% and DPT up 12%. Revenue increased 24% marking fifth consecutive quarter of at least 20% growth. CES was up 27% and PPT grew 16%. Operating profit was 2.7 up 18% driven by services and price as expected margin decreased 130 basis points to 21.7% from install engine growth, investment and inflation. EPS was 2 up 22% increased operating profit lower tax rate and redeem count free cash flow was 3 billion up 43% from high earnings a nearly 200 million reduction in working capital and abna including year over year favorability from tariff. Conversion was over 140%. Results built on the strong first quarter with year to date revenue up 27% operating profit up nearly 800 million largely driven by strong growth in commercial services and free cash flow up over billion. Going deeper on 22% EPS growth score increase in operating profit grow 31 or over 85% of the improvement. Growth in profit was partially offset by corporate low income and increase in intercompany elimination. The rest of the EPS growth was driven by lower tax rate and reduction in share count. Tax rate decreased 2 points to 16.7% primarily tax planning and tax legislation. Share count was down 24% 2% previously announced capital allocation. Turning to CES in the second quarter orders grew 18% services were up 22% and up 34% in the first half equipment was up 7% as some orders shift to revenue grew 27% services 26% internal shop revenue grew 25% from high volume including LE internal shops up over 50% and wide body MRO spare sales increased over 25% from improved material availability that helped us fulfill strong customer demand growth. And spinquy which shipments that been delayed to material availability constraint grew 20% sequentially in the second quarter. Work scopes to be favorable for LE and wide body programs and remain stable for CFM56. Equipment revenue grew 30% deliveries up 26% including LE up 24% wide body deliveries up 30% with GX up significant. Operating profit was 2.7 billion up 20% from high services volume and price as expected margins were down 160 basis points to 27.3% from install engine growth including G9X investment and inflation. So CES has delivered a very strong first half with orders growth of over 50% revenue growth of 30% including services up 32% and operating profit of 5 billion up approximately 900 million here over here. In DPT orders increased 12% defense book to was one in the quarter and 1.7 in the first half total backlog was over 30 billion up roughly 5 billion since the start of the year. Revenue grew 16% defense and systems revenue was up 12% driven by growth in both services and equipment with engine deliveries up 7%. Propulsion and technologies grew 23% growth AV arrow. Profit grew 18% and margin up 30 basis points to 13.8% increased volume and price partially offset by mix investment and inflation. In the first half DPT delivered solid results with orders growth of 40% revenue growth of 17% and operating profit of around 900 million up 17%.

Moving to guidance on slide 10. Our first half exceeded expectations and strength into as we are guiding the we are over revenue to grow high teens up from prior outlook of low double digits. Expect CES growth of around 20% up from prior outlook of mid-teens. We now expect commercial services to grow low 20s up from mid teens. Commercial services 2024 given the sustained demand environment and existing delinquencies entering third quarter with more than 95% of spare parts revenue in backlog similar to second quarter engines already off wing and the pipeline of planned in the third quarter exceed visit guide over 40%. This provides us ample visibility into demand to fulfill outlook for 2026. We now expect commercial equipment to grow around 20% up from mid to high with LE deliveries up high from 15% previously and we expect growth of low double digits up to. Operating profit to be a range of 10.55 to 10.75 billion with improvement in both segments. CES operating profit is now expected to be in a range of 10.25 to 10.35 billion up 400 million at the high end of the prior guide. Driven by around elemental services volume partially offset by equipment growth. We expect DPT profit to be the range of 1.6 to 1.7 billion up 50 million at the midpoint versus the prior guide reflecting drop through from higher revenue. Expectations for corporate cost and eliminations remain unchanged at 1.2 to 1.3. Taken together we are raising EPS guidance to a range of $7.65 to $7.85 up 35 cents at the midpoint from the high end of the prior guide. This reflects higher profit combined with a lower tax rate which we now expect to be below 16.5% for the year. We are also raising our free cash flow guidance to 8.9 to 9.1 billion up 650 million from the prior guide high and better working capital performance. Overall 2026 is shaping up to be another strong year with high revenue growth and around 1.5 billion of profit and free cash flow growth building on the momentum the business has had in the last few years. With that back to you. Thanks we proud of the progress we made in the first half it reflects the strength of our leadership positions across commercial and defense and the continued focus of the G Aerospace team to deliver for our customers. Our performance is underpinned by our sustained competitive with the industry largest fleet of 80,000 engines and growing and more than 2.3 billion flight hours we operate across decades long life cycle that unmatched scale keeps us close to our customers making us the partner of choice. Our field experience which enables continuous improvement in time on wing and cost of ownership outcomes our customers value most. We offer the best performing products under wing across narrow body wide body regional and defense supported by deep technology expertise and a growing services network. 3 billion annual R&D investment of over 1 billion world engineering and manufacturing teams are advancing technologies to improve durability efficiency and turnaround times while building additional capabilities for our defense customers through developing innovative technologies and partnering with disruptors to move at pace. Through flight deck our strategy safety quality delivery and cost in that order. Overall we confident in our path ahead the Gospace team is points to deliver exceptional value to our customers and our shareholders. With that go to questions.

Good morning. There's no question that the environment remains dynamic and you know as we look at where we are as we said in our prepared remarks I think we feel very good about our position here largely on the back of customer behavior which hasn't changed. We've seen service orders continue to be robust. Park aircraft particularly the CFM 56 is actually declined since the beginning of March. Whole highlight of the fact that we've got our MRO footprint really oversubscribed at this point in a significant way. As much as we're pleased with the delivery increases, our spare parts delinquencies are up unfortunately. So I think on the back of that and I don't suspect hear much different in Farnborough we do expect to return to more modest departure growth in the second half we saw relatively flatish performance little bit of the uncertainty that kept us holding the guide 90 days ago. But we think that will begin to return to a more normal environment through the back half going into 27 clearly at a more robust level. So I think all in all as we sit here midyear demand could evolve from here but it's been far more than maybe many of us would have expected. I think the data very much was let's all remember that as we saw in the pandemic the demand will return to more normal conditions probably sooner than we would have otherwise anticipated and potentially at a more pitched level. Therefore, let's continue to be prepared for that. And that's really I think what we're saying in our conversations with our customers that's what we're preparing for not only with respect to the back half of 2026 but as we get ready for 2027.

Well, if I take those in in reverse order, I think we've made a tremendous amount of progress on the supply chain side, right? There's no way you have a print like this otherwise thrilled to see not only nine consecutive quarters with double digit increases from our critical suppliers but maybe more importantly the underlying work the deep technical collaboration and joint problem solving that we see under I mention GKN we could have mentioned a number of folks that are really working with us in ways that are materially better than a few years back hope we a better we and that is unlocking unleashing capacity busting bottlenecks that otherwise would constrain us I won recite some of the demand numbers that we've shared but as we think about the back as we think about 27 and frankly beyond it's much more supply side challenge than it is demand not that we would ever take the demand environment for granted but we know despite this morning's news we need to have a bigger better second half that's where our focus there no victory laps here in July today and as we get ready for next year that is very much the mindset I think if we just focus on services for a moment we no longer term that in addition to that backlog that we talked about 170 billion commercially the installed base should continue to grow gradually every year at a low to mid single digit rate that's definitely the way we see things through the decade from both work and price mention that earlier and to the extent that we can continue to make the progress with flight deck we think we're going to reduce that overdue delinquent backlog which is a nice kicker over the next several years not only from a revenue perspective but as Miles earlier question it should help us from a working capital and cash flow perspective so We know with LE becoming a larger part of the installed base eclipsing the CFM56 we know we get the GEnx GX doubling between now or really between 24 and 30 that installed base with our growth platforms is definitely going to grow work scope we believe is a structural tailwind largely as a function of the natural aging of the installed base and we'll get a little bit of price here and there as we move forward. So, I think we said earlier this spring summer no reason 27 should diverge from that double digit commercial services growth medium term outlook even if we go into next year will clearly be a higher drumming off point than we imagined. Again the environment is dynamic we're mindful of that. with our backlog with that framework algorithm in place and just the overall tone we hearing from customers we feel very good about where we are at this point.

I would never suggest anyone under appreciates what we do in the value of the franchise. I'll leave that to others to make that assessment. There's no doubt I think in our minds that we would play April all over again in the same way that we did. We did not know at that time when the conflict was still fresh. What our customers would do? Perhaps we know more definitively that that lesson from the pandemic that we touched on a few times over the last several months which was certainly in the air Rata that we need to make sure we are prepared for the other side of the uncertainty has really played out right and again lots of different data points here speak to the resiliency of demand I think given the uncertainty just given the headlines that we would have been well served with investors to to get out with early bump in the guide. But here we sit midyear. We know how the market has responded to the uncertainty to the dynamic conditions that are clearly out there. All the while we continue to do what we do right from an execution perspective not taking anything for granted but also knowing that with the backlog with demand remaining robust that we needed to continue to invest we need to continue to procure we need to continue with our flight deck work so think we play it the same way all over again and are thrilled to see the resiliency and demand and expect that that gives us helps give us a little bit of a lens on how the second half is likely to evolve.

David I would just may step back on the durability kit for a moment whether it be at ITA few weeks ago whether it's a recent customer survey that we've done I think we're encouraged some of the feedback we getting internally we said one of our priorities for the year is to be more customer driven really see ourselves as our customers do that sounds obvious but it really helped us I think see some areas of opportunity certainly improving durability and time on wing front and center I think from a LEAP 1A perspective we now have over 40% of the fleet equipped with the durability kit and the performance has been quite good we talked about this being the unlock for a doubling of time on wing putting us in line with the CFM56 really encouraged in that regard now we have certification for the LEAP 1B durability kit so that will give us the opportunity through the back of this year to really work through the industrialization and give us a full cutover both with respect to the aftermarket and new really in 2027. It really won't be something that will trigger an acceleration of work. I think we've talked in the past that the fleet retrofits really will be a multi-year effort. Those engines are due to come in for their first shop visit on a relatively predictable schedule. I don't think you're going to see many engines come in early for the durability kit. So really in the early 2030s until we can look at both the LEAP 1A and LEAP 1B fleets as being fully retrofit. But again certification a big step will work through the industrialization encouraged by the 1A field performance and over the next several years will I think be in a much better place in this regard.

Sure well again in many respects being on the wide body side being on the narrow body side it really is a function of the natural aging of the installed base you think about the growth platforms on whether it the LE the GEnx we're really moving from that quick turn that early check up check in to the first performance restoration shop visit with some of the older platforms you look at the GE90 for example 70% of that installed base has yet to see shop visit which has a significant step up in workscope so we have I think real direct visibility we obviously need to plan our own capacity airlines need to work through the removals and any third party work that may be required I think that is really why we talk about this now when you look at the CFM56 even obviously the legacy narrow platform it's still a relatively young fleet and we argue with a lot of life left in it you know there fewer long term service agreements on those engines than we would see in the wide body segment But 30% of that fleet hasn't seen the first shop visit. 23rds haven't even seen the second shop visit. So we think about CFM56 as the older platform it is. But as we work through the next several years I think we'll see those engines come back and again that structural support that tailwind will be helpful.

Well teaser is the teaser Ron and if I answer that question it's no longer a teaser I think you you you know as well as anybody that as much as we talk about open as one of the critical building blocks of the RISE technology development program hybrid electric is one of those four key pillars. I think on the defense side the same thing applies and that's very much the reason for the investment the collaboration with Beta right the turbogenerator program we think has a real fit with a number of defense applications that we can work on together. So more to come over the weekend and early next week but I think both on the commercial and on the defense side you're going to see electrification hybrid electric being a more important part of our electrical portfolio technology portfolio as we move forward. See you there.

There's no there's no question right whether it be cost ownership whether be time on wing we we've heard those concerns loud and clear I think what I was encouraged by and also some of the recent customer feedback that we got is I think people see us here in the short term doing all that we can to support them. We've got LEAP AOGs, aircraft on the ground down to near zero at the moment. Despite the fact that the durability kit is not fully installed. And we're doing that through a combination of making sure we've got adequate spare engine coverage in the field. reducing the turnaround times. I mention that as well in our in our shops and everything that we're doing is to make sure that we are avoiding having that asset in a non-revenue situation. longer term there's no question that customers love the engine they love the fuel efficiency and what they see in LEAP i think the order book is a point in that regard but we need to make sure that in addition to those short term measures that we are both the LEAP 1A and the LEAP 1B getting that durability kit in place supporting the retrofit of the installed base as quickly as we can so that the issues that you referenced become a thing of the past as soon as possible. So not in any way declaring victory here. We understand where our customers are in this regard but again I think we're encouraged by the state of play and the tone today. Much better I would submit than it was a year ago. But unfinished business.

Anything you want add? No, I mean I I think I think you said it right. We do not have a demand problem. We touched on that a number of times through the course of the call. 170 billion of services backlog CFM 56 retirements low. Our shop visit outlook probably trending now through the high end of that 23 to 2400 range this year and next. We mentioned the fact that we're oversubscribed here in 26 from an internal shop visit perspective. So it's largely going to be about continuing the progress and the real progress I think we've seen here in the first half with this chain. And that is very much the order of the day we get ready for second half 2027.

Thank you it may be just in closing our priorities remain clear deliver for our customers improve time on wing and lower cost of ownership flight deck is helping us turn those priorities into measurable results we have more to do but are confident in our path ahead in long term value creation.