Q3 2026 GE Aerospace Earnings Conference Call - GE AEROSPACE

Financial Performance:

• Total company revenue increased 18% to approximately $15.7 billion; CES revenue up 21%, DPT up 7%.
• Operating profit grew 30% to $3.0 billion; operating margins expanded 220 basis points year-over-year to 22.5%.
• EPS increased 36% to $2.25, driven by 20% operating profit growth and a reduction in share count.
• Free cash flow was $1.2 billion for the quarter; year-to-date FCF reached $6.7 billion with 105% conversion.
• CES operating profit was $2.9 billion (21% growth) with 27.9% margins; DPT operating profit grew 8% to $1.6 billion with 13.7% margins.
• Working capital was in use due to timing of service billings and increased receivables from airframers; net contract assets and liabilities provided a source of cash.

Guidance and Future Outlook:

• Raised full-year 2026 revenue guidance to 19-20% growth (previously high teens).
• Raised 2026 operating profit guidance to $10.9-$11.0 billion and EPS guidance to $8.00-$8.10.
• Raised 2026 free cash flow guidance to $9.1-$9.4 billion; tax rate outlook lowered to ~16% (previously >16.5%).
• Provided 2027 outlook expecting low double-digit growth in commercial services revenue.
• Anticipated 2027 CES operating profit growth driven by volume and price, with margins expected to remain flat against 2026 levels despite GE9X headwinds.
• Expects DPT to grow at high single digits in 2027 with slight margin expansion.

Business Segments and Product Lines:

• CES orders surged 58%; services orders up 23%, spare parts orders grew faster than total services.
• LEAP engine deliveries up over 40% in Q3, with total LEAP deliveries up 26% year-to-date; GE NX shipments nearly doubled.
• DPT secured a $2.9 billion, five-year contract for F414 engine support; Defense book-to-bill reached 1.0 in Q3 and 1.5 year-to-date.
• Announced acquisition of Consolidated Precision Products (CPP) to expand capacity for mission-critical castings and accelerate next-gen engine technology.
• GE9X: Delivering engines with upgraded mid-seal to Boeing; aiming for FAA certification by end of 2026.
• Launched world's first high-altitude hybrid electric flight with Beta Technologies; F-143 (formerly GEK-800) selected as second source for JASM missile program.
• XA-102 Adaptive Cycle Engine selected by U.S. Air Force for NGAP next phase.

Market and Competitive Landscape:

• Total backlog stands at over $170 billion, providing visibility through the end of the decade.
• Installed base of 80,000 engines with 2.3 billion flight hours; commercial narrow-body LEAP and wide-body fleets expected to double between 2025-2030.
• Airline departure growth remained positive in Q3 (+1%); wide-body departures particularly strong.
• CFM56 retirement rates trending lower than 2-3% previously forecast, now estimated at 1.5-2%; wide-body retirements negligible.
• GE9X order book exceeds 1,300 engines; Boeing inventory of engines growing as deliveries outpace aircraft shipments.

Risks and Challenges:

• Supply chain constraints continue to drive spare parts delinquency, though material inputs have grown for 10 consecutive quarters.
• Inflationary pressures and mix headwinds partially offset growth drivers (volume, price, productivity).
• GE9X certification timing remains a risk; expected to result in fewer unit recognition in 2026, though mitigated by mid-seal deliveries.
• Macro volatility and fuel prices remain a dynamic factor, though airline demand for maintenance and fleet longevity persists.
• LEAP engine work scopes remain early-stage with lower revenue per visit compared to CFM56, impacting short-term margin contribution.

Management Commentary and Tone:

• Tone was highly confident and optimistic, emphasizing "strong results," "momentum," and "well-positioned" status.
• Management highlighted the success of the "FlightDeck" initiative in improving delivery, reducing turnaround times, and increasing capacity.
• Emphasized a strategic focus on safety, quality, delivery, and cost, citing "near-zero" LEAP engine-driven grounded aircraft since summer.
• Reiterated commitment to long-term R&D ($3B annual) and strategic acquisitions to secure capacity and technology leadership.

Analyst Questions and Answers:

• Fuel Prices/Backlog: Management confirmed backlog and flown cycles drive 2027 growth; airlines are prioritizing readiness and avoiding retirements despite macro pressures.
• Wide-Body Shop Visits: Driven by strong fleet performance, low retirements, and transition of GE90/NX fleets to first shop visits; wide-body growth was strong but partially offset by LEAP's early stage and mix.
• Delinquency: Expected to persist due to strong demand but management aims to reduce it in 2027 via supply chain improvements; backlog remains healthy at ~95% in shop.
• CFM56 Retirements: Trending lower (1.5-2%) due to young fleet demographics (2/3 below 20 years old); step-up expected in 2027, but shop visit volume remains robust (~2,400 visits).
• 2027 Margins: Expected to hold steady in 2026 levels; 2028+ could see expansion as GE9X losses decrease and LEAP margins normalize.
• PowerGen/Used Material: PowerGen activity creates a positive revenue stream for spare parts due to lack of used material in the market.
• CPP Acquisition: Primary driver is capacity expansion for current and future airfoils; technology collaboration on enhanced cooling is in early stages (~3,000 endurance cycles).

Other Key Points:

• Historic orders at Farnborough Air Show included a >1,000 engine LEAP deal with IndiGo and a 300+ engine deal with Turkish Airlines.
• AI implementation at Selma MRO site reduced technical record processing time by 25%.
• LEAP engine turnaround times have improved by over two weeks since end of 2025.
• Corporate costs reduced by ~$160 million due to timing of accruals and cost management initiatives.
• Management reiterated that 9X losses are estimated at a $300 million headwind year-over-year through 2027.