WHEN: Today, Monday, November 12, 2018
WHERE: CNBC's "Squawk on the Street"
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with GE Chairman and CEO Larry Culp and CNBC's David Faber on CNBC's "Squawk on the Street" (M-F 9AM – 11AM) today, Monday, November 12th. The following is a link to video from the interview on CNBC.com: https://www.cnbc.com/video/2018/11/12/watch-cnbcs-full-interview-with-general-electrics-larry-culp.html.
All references must be sourced to CNBC.
DAVID FABER: Welcome back to "Squawk On The Street." I am David Faber at GE's headquarters in Boston. Very nice to be here and of course, nice to have Larry Culp, the company's Chairman and CEO, with us. Thank you for being with us.
LARRY CULP: Good morning.
FABER: And for having us here.
CULP: Good morning, David, and welcome to Boston on Veterans Day.
FABER: Yes, that's right. Let's get right to it, Larry, in terms of Friday and the action on the stock price, what may be the reason why – we're very welcome and happy you are willing to talk to us, but a well regarded analyst Stephen Tusa -- who's followed the company for some time, and been typically right in terms of the direction of the stock -- came out on Friday with the new report in which he basically says, I mean a lot of things, but to cut to some of the key ones: $100 billion in net liabilities he sees at Ge, roughly speaking, currently for a company that's generating negative free cash flow, even after the dividend cut, with deteriorating fundamentals. A) Is he getting any of that wrong? And B) if he isn't, what do you tell investors to keep them in the stock?
CULP: RIGHT. Well, David, I think if we look at the last two weeks, right, clearly the stock has been under pressure. No doubt about that. I think when we announced on our earnings call that we were taking take the dividend down to four cents a year, we didn't do anything positive for our retail shareholder base, and they had been exiting the stock, I think, as a result. And, at the same time, we took another unpopular decision, but one that was straightforward and that is to take guidance off the table, given the fact that we didn't really have I think the confidence and conviction that we would want, particularly around our power business, as we look toward the end of the year. That didn't do much for our institutional holders. But I think if you step back from all of that and given the way the stocks traded, I think we'd make those same decisions today because those were the right decisions to make sure that the company is facing forward and dealing with the fact that we do have a lot of leverage. I think we all agree in that regard. But we have a number of options to bring that leverage down overtime and the company is very committed in doing that.
FABER: Yeah, i mean that was a focus to a certain extent of the conference call that took place 11 days ago or where ever we are roughly. And it is also was the focus of Mr. Tusa, though. It wasn't necessarily about liquidity as much as it's what he thinks is success of leverage at GE. And you seem to agree, although the numbers may differ a bit. But what can you do, particularly when it is not just the amount of debt but it's also the fact that IBITA and free cash flow is not going up?
CULP: Right, right. Well a couple of things here, David. One, I think that's an important distinction that you just made relative to liquidity verses leverage. Two weeks ago, folks were I think understandably asking the liquidity question. I think we've put that to rest given the fact we've got 20 billion of cash. We have a robust here too CP program and $40 billion of bank lines. We've only tapped two. But I think that gives us a foundation.
FABER: You've only tapped two of the 40 billion available to you.
CULP: Yes, so that gives us a foundation to really talk to the leverage. And again, whether it's an equity analyst, whether it's the rating agencies -- witness the downgrades, or what we've said ourselves, we need to bring the leverage down. And I think we've got plenty of opportunities through asset sales to do that. In the last six weeks, marks my sixth week on the job, I've heard from a lot of people across our markets, people who have interest in GE assets. And I think that's confirmation that we have quality franchises and frankly that we have options.
FABER: Are you going to quicken the pace of asset sales at this point? Is there a sense of urgency?
CULP: Very much a sense of urgency, David. But as John Wooden, the famous basketball coach said, "be quick but don't hurt." And I think that's the mindset that we have. When we look at healthcare for example, a tremendous franchise, we talked in June about an IPO there where we'd take 19.9% of the proceeds as cash. We have flexibility, we have options there. We could preserve our tax-free spin status while selling up to 49.9%. So there's a lot of cash there, given some of the estimates of value that are out there. We're tracking very well with the closure of our merger with LabTech, with our transportation business. We'll end up with just under 10% of that business in equity. Another option there. And Baker Hughes. A lot of people have talked about Baker Hughes. A $28 billion market cap company as of Friday's close. We own 62.5% of that company. So lots of options just in those three to generate real cash to bring that leverage down.
FABER: Right. On Baker Hughes, why not just move -- why not accelerate that now? People had been focused on it. I know the price of oil are all over the place. I know it may not be the best time from a valuation perspective. But when you referenced it on the conference call, you still use the word, "several years," I think is what I saw here in terms of exiting that position. Why not get moving on that sooner?
CULP: Well, I think we're going try to look at everything and all of our options again with a sense of urgency. What we are not going to talk with great specificity about certain opportunities, certain paths, because we'd rather talk about what we've accomplished after the fact then negotiate in public.
FABER: What should we think about in terms of leverage then? What should investors be focused on? You mentioned, obviously it's a focus for you. You mentioned a couple of markets that are reacting to it. You see the s-spreads have widened as well. Does that concern you?
CULP: Well, I think there are a number of ways to look at our leverage levels. But let me be absolutely clear: we have no higher priority right now than bringing those leverage levels down. It's important to strengthen the balance sheet, it's important for our investors, the rating agencies, everybody with an interest in the future of this company. Not to mention the fact that it is tough for our businesses to play offense as often as they should organically and inorganically with the balance sheet and the shape that it is in.
FABER: Another of the contentions made by Mr. Tusa, and some other investors to be fair, is that fundamentals continue to deteriorate, not in aviation, not in healthcare but in power. And I mean in the numbers that Tusa had in terms of your potential earnings, I know you're not giving guidance – 35 cents a share in 2019 and 41 cents a share in 2020. When you see or hear those numbers, does it make you shiver?
CULP: No. It is a cold morning here in Boston but I haven't shivered yet. Because we are working hard with the power team to get better grounding in our reality and we aim to run that business differently. I don't have the conviction to offer up numbers for the fourth quarter let alone '19 but we will in time, right. And that's very much what this week's about, it's what this last week -- six weeks have been about, in terms of getting closer to opportunity and challenges in that business. The unfortunate thing there, David, is we probably held on -- with the benefit of hindsight -- held on too long to a too robust revenue outlook for the year. We're going to fall short of that. That hides a lot of the progress the team has made in terms of cost reduction. We've taken out over 700 million of cost in that business this year. We reduced our facility footprint by 20%. Good things to doing a manufacturing business. But it is not enough.
FABER: Has power bottomed?
CULP: Has power bottomed? We're getting close. We're getting close.
FABER: You're getting close. Will you know when you are there?
CULP: We will know when we're there. Right. Because like any business facing both cyclical and secular pressures, it's a little bumpy on the way down, somewhat unpredictable, but I think we have a good line of sight, we can have a good line of sight in this business. We have $94 billion of backlog, for example. That should give us, I think, the potential to run this business not only better but with better visibility.
FABER: And I've mentioned of course, you were the director as of April, you've been in the CEO job, as you pointed out, just about six weeks.
CULP: Six weeks.
FABER: Have you, though, in your mind diagnose of what the issues were at power so you can effectively deal with them and get to the bottom quickly and potentially start to pave the way forward?
CULP: David, I have done this long enough to know that there are always things you may not know. But I feel pretty good today that we've got line of sight on the issues that we can manage to improve the performance of the business and address the risk inherent in it. One of the things we are going to do that we announced on the earnings call is really stop managing the business at a consolidated power level and really run the seven discrete P&L's on their own bottoms. We have a big power organization. Consumes about 300 million dollars of costs per year. And when you are managing at a consolidating levels, it really robs you the visibility relative to revenue, cost and cash opportunities, business by business by business. So as we do that, we're going be able to address the specific issues in each business, and our gas franchise and in other businesses within the power segment.
FABER: Have you been bringing in new people? Do you need to continue to change up personnel?
CULP: The team is going to continue to evolve. I have said on the earnings call and I will say it again today, I have been impressed with the people on the GE team. They're smart, they're talented, they're passionate, and I think they've got an above average level of grit and resilience given what they've been through. But that said, we are bringing in new people, we have in GC, Mike Holston from Merck who joined us earlier this year; Tom Timko, our new controller, from General Motors, is a tremendous addition to the team. We brought in a number of outside advisors who are helping. And there will be other changes as well as we evolve the organization. Some folks perhaps who are here today who will be in different roles. Others who will be promoted as we complement their strengths and their skills with folks from the outside.
FABER: Did the Austin deal break power or was power already on a road that might have ended not well?
CULP: David, it's a hard one to answer. But I think if you step back and look at the hand Russell Stokes and his team were dealt a little over a year ago, I think there are three things in play. First, the secular and the cyclical pressures as we go through the energy transition in that space. And then again, the way we restructured and the way we had been running this business. Those things, relative to market, are our reality, we need to embrace them in order to change them. But in terms of our own operation, we have a lot in our control as a former GE Chairman once said, we can control our destiny in that regard. And that's what we aim to do.
FABER: You know, a little more than a year ago, I sat with your predecessor Mr. Flannery not -- right around the corner here, we didn't do it in this exact spot, he talked about sort of having a handle on power. What gives you the confidence, given you experience that you have the handle on?
CULP: Well, I have run businesses from over 25 years. From the shop floor, from the lab from the customer sights. So I take a bottoms up approach. I could be wrong but I have a lot of confidence of what we can do to stabilize power and then drive a better performance in terms of the top line, the bottom line, and most importantly, David, in terms of the cash generation of that business. We have seven billion dollars of cost in that business today. Our inventory returns are only 4x. Plenty of opportunity to run that business better.
FABER: Now you do you have two other business that we tend not to speak as much because they're doing fine. Aviation of course which everyone calls the jewel to a certain extent and health care. You just had alluded to the plan for health care in terms of potentially taking 19.9% of it public at some point. You've said the plan is intact, the one that the board agreed with and came to back in June of this year. Is there a chance the plan will change?
CULP: Well, what I would say, David, is that I think the strategic intent that we announced in june stands today. And I believe deeply in what we said then and what we reiterated two weeks ago. The plan basically has two strategic pillars. The first, deleveraging. And we've talked about how important it is. The second is we want to run the company differently. We want to be a more detraditionalized business, focused more on the discreet businesses like aviation and healthcare and less on corporate. The details as to how we get there, 19.9% of healthcare or something more, maybe something in one of the other businesses. We have lots of options. So those detailed tactical implementation decisions are under review. And gonna we're be smart about how we faze and sequence those moves. But they all serve the strategic intent that again is a constant.
FABER: And what about aviation? Does it just stay? Can it not be potentially removed? Is there not an opportunity in some way perhaps to break out or monetize a bit of it to show some value and raise some equity?
CULP: Well, there are lots of opportunities here. And I wouldn't dismiss anything once and for all. I think that would be foolish. But there is no question as you said a moment ago, aviation is our crown jewel. David Joyce, our Vice Chair, and his team have done a tremendous job with that business. Have I think tremendous runway going forward, so we wouldn't say no for all time for various options. But options along the line of what you just described, not high on our list.
FABER: So you know, your customers in aviation sign up for long-term agreements, they need to know you're going to be there to service all those jet engines and everything. Are you hampered at all in the marketplace by a deteriorating credit rating and by perhaps the longer term concerns of some of those customers?
CULP: David, the customers I've talked to could not be supportive. They certainly understand we're under a lot of scrutiny, we receive a good bit of criticism. But when I talk to them, what they ask me is "What can I do to help? At the operating level, you're performing well for us. We need Ge. Ge is important to our business. GE is important for the country. If there is anything that we can do, let us know." In terms of our degree freedom from an operating perspective, the businesses are up and operating without any challenge in that regard. And that's been a pleasant finding.
FABER: You know for many years for following and actually being an employee of the company as well. The conglomerate model was lauded -- it was seen as a positive. In other words, the performance of one business actually in some ways helped the others. It would seem to me now to be going the other way. You have two strong businesses you have one weak business, and I wonder can you retain and attract the talent you need and maintain morale when in some ways you seem to not be able to say, "Well, if you do great in aviation, you are going to do great to GE." Because you are attached to the power business and GE Capital and long-term liabilities and things we don't know about that conceivably could impact your future.
CULP: Right. David, there is no question that with the stock where it is and the criticism that we've received that the employees feel that, right. More so in the U.S. than outside of the U.S. But again I think what I have seen is a level of commitment, a level of grit and resilience to fight, to continue to serve customers, to be a part of the mission that we have and to serve the greater GE. Nobody is happy with where we are today. They want their company to be on better footing and that's what we're working to do every single day.
FABER: Can you attract the people you need to and keep the people that you want to keep as well in that environment?
CULP: Well, we have to prove that out. I have been encouraged by the response i have gotten from folks that I have reached out to, the folks that have basically contacted me directly. Not everybody is going to be attracted to a challenge like this, particularly given where we are today. But the people that we want frankly David are – because they don't scare easy. They're up for the fight and they're ready to fight and win.
FABER: You know, that brings me to you. You are 37-year-old CEO and 14 years later, great track record at Danaher. Compounding of revenues of the stock price, many people would look and say -- what are you doing this for? Why would you take this on given you had a strong reputation, you would made plenty of money it would seem – not to be presumptuous. What would motivate somebody to do this?
CULP: Well, David, I think it was not an easy decision -- to join the board, frankly, let alone when the board asked me to consider becoming Chair and CEO to take this on. But I think the decision points in both instances were driven by the same logic. I think first and for most, I know having looked at the company for a long time, GE is important. What we do in terms of aviation and healthcare and energy, it is important and frankly this company matters, particularly to the United States. This is a challenge of a lifetime given where we find the company today and that's certainly worth doing as well. But more than anything, I think I go back to the annual meeting in April, my first board meeting, where I began to see GE shareholders and GE employees and pensioners, people who have been working for the company second or third generation, all very unhappy with where we are but again committed to the company, can't wait to see the company be in a better place. And I thought if I can be helpful, if I could serve those people, that'll be a good thing doing at 55.
FABER: But you're going to be at potentially for a long time. There's no magic bullet here. It is not like we're all -- you're going to wake up tomorrow and suddenly have it all figured out and the stocks going to be double. It is going to take, if you are even right, a long period time to turn this giant around, isn't it?
CULP: Exactly. And that's the beauty of having 14 years in the chair in a prior role and being 55. I've got, I think, the energy and the runway to do what it takes here. It's been six weeks, it's been a great six weeks, frankly, it's been energizing. But we did not get where we are in six weeks so it is going to take a while. And I am signed up to do that.
FABER: Finally, Larry, you know, when it comes to the stock itself and I hear from a lot of people as you might expect in the halls of 30 rock as well, fellow colleagues who owned GE and have for many years and they're obviously disappointed, but when you talk to other potential investors, they still feel sort of uncomfortable because of the unknown. And that comes back to GE Capital. Long-term liabilities. Long-term care liability, for example. Can you give people comfort? Do you feel like as having been a director since April and CEO for the last six weeks that you know where all the liabilities are and that the numbers are the numbers with no surprises?
CULP: David, I think that if you look at capital, our intent there is clear. We know have too debt overall. We have too big a Ge Capital business which is why we've been materially shrinking that business down 25 billion this year. That work will continue. We've got a number of great assets there and it is important that people remember. We've got assets that match the liabilities. It is a match book set up. Specific to insurance we took a big charge last year as we trued up our --
FABER: -- Which scared the heck out of people to be fair.
CULP: -- I think there was nobody who heard that news did not have their breath stop for a moment, right, again, a big number. But in terms of what we are doing there, no issues of capital gets more attention: in our management meeting, with our discussions with outside actuaries, frankly at the board meeting. I can't think of a board meeting this year where we haven't spent a good amount of time on managing that insurance obligation. And as we go forward while it is not a liquidity pressure in the short term, we know we need to tend to that and overtime we're fully committed to exploring every option that we can to manage that liability and derisk it for the GE shareholder.
FABER: And finally, Larry, this idea of a large shareholder or somebody coming in to help you in terms of an equity check and giving confidence, is that a possibility or is that not something that's on the table?
CULP: Well, the stock is on sale today. And I am sure people are buying it here at the market is open. But we have no plans for an equity raise, David. I think that as conditions change in the future we might come back and reconsider that. But we are very keen to deleverage. We think we have a path by way of the asset sales to do that. And that's the plan we're going to work.
FABER: Larry, very much appreciate you having us in today.
CULP: Thank you, David.
FABER: Larry Culp, the Chairman and CEO of GE.
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