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GE warns earnings to drop again this year

General Electric, the US industrial group, has said it expects adjusted earnings to fall as much as 23 per cent this year, continuing their decline before starting a recovery next year.

The company also said in a presentation on its outlook for 2019 that it expected a net cash outflow from its industrial operations of up to $2bn.

The projection gave a sense of the challenge facing Larry Culp, the new chief executive who took over in October after GE was hit by a barrage of problems including continuing costs for insurance businesses that it sold more than a decade ago and a sharp downturn in the market for gas turbines for power generation.

The projected earnings were below the average of analysts’ forecasts, which had suggested they could be slightly above the 65 cents per share reported for 2018. The company is now projecting adjusted earnings per share of 50-60 cents this year.

However, GE held out the prospect of “meaningfully better” performance next year and in 2021, with organic growth in earnings and positive free cash flow from its industrial operations.

Mr Culp told analysts on a call that GE was cutting costs, particularly in corporate overheads and in the power division, to improve performance, but warned investors not to expect rapid changes.

“Our businesses can be much better cash generators over time, and that’s where I see the upside at GE,” he said.

“But let me remind you, this is a game of inches, every single day.”

The prospect of free cash generation from GE’s industrial operations next year contrasted with the views of some of the more bearish analysts, who had suggested there could be a second year of cash outflows.

Deane Dray, an analyst at RBC Capital Markets, described the prospect of positive industrial cash flow next year as “the biggest positive disclosure” in the announcement.

GE shares dropped initially in pre-market trading after the announcement, but then recovered, rising about 3 per cent to $10.32 in morning trading.

The company expects its revenues from its industrial operations to grow by “low to mid” single digits per cent this year, excluding the impact of disposals, and some modest margin improvement of up to 1 percentage point.

However, at the level of earnings per share, it expects those increases to be offset by higher tax and interest charges and the impact of selling businesses, including the locomotive and mining equipment division that was merged with Wabtec, and assets sold by GE Capital, the financial services arm.

Cash flows are expected to deteriorate markedly this year, to an outflow of up to $2bn from an inflow of $4.3bn in 2018, because of factors including restructuring costs and the timing of payments for wind turbines.

But by 2020 and increasingly into 2021, the company expects those factors to diminish and cash flow to turn positive again.

The power division, which reported a loss of $808m last year, has been a particular focus for Mr Culp.

This year, the division’s cash outflow is expected to worsen, as it continues to work through a backlog of unprofitable contracts. The company plans to cut $800m from its costs over the next two years, with the aim of generating free cash flow in 2021.

Mr Dray wrote in a note: “We believe that having Mr Culp draw the line in the sand today with his targets and vision for the turnround should bolster the bull case.”

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