Trunarounds are rarely simple, straight-forward affairs–especially when they involve a troubled conglomerate like General Electric. GE’s stock fell 6% Tuesday after its CEO warned that the company’s troubled power-generation business would continue to be a drag on its financials again in 2019.
“This is a multiyear turnaround in power. I don’t want to sugarcoat that in any way, shape or form,” CEO Larry Culp said at a JPMorgan investment conference, according to the Wall Street Journal. “There’s a lot of work. It’s a game of inches.” In the meantime, the power business will cause GE to post negative free cash flows this year, he said.
Positive cash flows are a sign that a company is able to finance itself through money generated by its core operations. When cash flows turn negative, companies often need to raise more money by issuing new equity or debt or by selling assets. GE posted a positive free cash flow of $4.5 billion last year.
Not only will the power business face “an even greater level of negative free cash” than it saw last year, Culp said, the effects of the financial drag provided by the unit will also “meaningfully lessen” cash flows in 2020 and 2021, while holding organic revenue growth in the “low to mid-single digits” this year.
In contrast to his predecessors at GE’s helm, Culp has spoken bluntly about the tough task GE faces in turning itself around. Culp has been trimming expenses, paying off debt, and selling off businesses, such as last week’s $21.4 billion sale of its biopharma unit to Danaher. But the power generation business, which saw revenue decline 25% last quarter, has been hurt by previous mismanagement and a longer-term shift from fossil fuels toward renewable energy.
Culp’s comments came during an interview with JPMorgan analyst Stephen Tusa, a longtime GE bear who earlier on Tuesday issued a note suggesting that GE’s aviation-leasing service may be facing declining earnings that are “masked by gains not disclosed in earnings reports or filings.”
Tusa asked Culp about the aviation unit’s financial health, named GECAS, at Tuesday’s investment conference. “This is a strong franchise we have… we think GECAS is making money,” Culp said, according to CNBC. “You’ve got a commitment from me and the senior team to continue to improve our disclosures. Full stop.”
GE’s stock closed closed down 4.7% at $9.89 a share Tuesday. While the stock has recovered 54% from its low point of $6.44 a share last December, thanks in good part to Culp’s turnaround efforts, it’s still worth about a third of its value three years ago.