General Electric Company (GE) — Q3 2020 Earnings Call Transcript

Thanks, Brandon. Good morning and welcome to GE's third quarter 2020 earnings call. I'm joined by our Chairman and CEO, Larry Culp; and CFO, Carolina Dybeck Happe. Before we start, I'd like to remind you that the press release and presentation are available on our website. Note that some of the statements we're making are forward-looking and are based on our best view of the world and our businesses as we see them today. As described in our SEC filings and on our website, these elements can change as the world changes. With that, I'll hand the call over to Larry.

Steve, thank you. Good to be here with you and Carolina in the same room for an earnings call for the very first time. Good morning, everyone. I'm encouraged by our progress in the third quarter. Despite the ongoing effects of the COVID-19 pandemic on our year-to-date results, we're building momentum across GE. And our top-line remains pressured, but our actions are driving an improved profitability and cash performance. In the quarter, Industrial revenue was down 12% organically. This was largely driven by aviation and healthcare, renewables and power were all up. Industrial margin was 5.6%, an organic contraction of 310 basis points year-over-year. Notably, all segments returned to positive territory for the first time in two years. Adjusted EPS was $0.06 down year-over-year but up sequentially, and Industrial free cash flow came in at a positive $500 million. Our sequential improvement was largely driven by better working capital and earnings. While positive and a good sign, we have plenty more work to do here. Let me focus on orders down 28% organically for a moment. Over 75% of this pressure was driven by aviation, as well as part of healthcare, the places it hurt us by the pandemic. In power and renewables some pressure results from our actions to be more selective in our commercial activities, and some is timing, where we should see stronger conversion in the fourth quarter. Despite this, our backlog remains a real strength at $384 billion. 80% is in services where we enjoy a healthy margin. And while services are hurting in the near-term, they have a long multi-year time horizon and keep us close to our customers. By business, at Aviation and GECAS, we're managing these businesses aggressively and saw sequential improvement. Aviation is on track to deliver more than $1 billion of cost and $2 billion of cash action this year. In Healthcare, we delivered strong margin and cash performance. While pandemic-related demand has moderated, we saw scan data and PDx orders approach pre-pandemic levels. We continue to see CapEx pressure in private healthcare markets and we're planning cautiously there. As you’ll recall, Power and Renewables were our turnaround story that started the year, improved operational discipline and cost out actions are starting to show. In the quarter, both delivered solid organic margin expansion, Power more than 700 basis points, Renewables more than 200 basis points. So clearly, our markets are by and large stabilizing. But to underscore the obvious, stability is not yet recovery. We still acknowledge that the full duration, magnitude and pace of this pandemic across our end markets, operations and supply chain is uncertain. That said, based on what we see today, and the actions we've taken, we expect fourth quarter Industrial free cash flow of at least $2.5 billion with positive contributions from all segments. But how much more? Really depends on how Aviation fares through the quarter. And importantly, the momentum we're building should help us deliver positive Industrial free cash flow in 2021. Moving to Slide 3. From day one we've known this would be a game of inches. This is still true today. We're focused on three areas where we're making real progress. First, we're continuing to strengthen the businesses. As a team, we've been engaged on what matters most, the safety of our employees, taking care of our customers and communities and accelerating our lean transformation. At the same time, we're focused on what we can control in the near-term, driving better operational execution and further optimizing our cost structure. Our more than $2 billion of cost and $3 billion of cash actions started to play out in the quarter, now 75% complete with our decremental margins, for example, improving sequentially from 44% to 32%. Second, we're solidifying our financial position. Since the beginning of 2019 we’ve decreased debt by $25 billion. We've continued to maintain strong liquidity and flexibility, exiting the third quarter with $39 billion of cash. Carolina will provide more details in a moment. And third, we're driving long-term profitable growth even in the current environment. Lean continues to be the strongest common denominator across GE and this is what builds the foundation for sustainable growth. We're picking up the pace, deploying lean to drive safety, quality, delivery and cost improvement in terms of both productivity and cash generation. For example, this quarter we held our second lean week event virtually at Gas Power. With more than 1,000 participants across 10 countries in function, we identified dozens of delivery and cost improvement opportunities. We're also continuing our efforts to run GE differently, moving the center of gravity closer to where the action is. We talk about GE as four industrial segments, but we drive operational improvement at much deeper levels within the organization. You'll recall that we split Gas Power in Power Portfolio within the Power segment, this is working well for us. We're now simplifying other segments in similar ways to enhance visibility and raise accountability. For example, we're changing the way we manage P&Ls within Healthcare Systems, ranging from LCS to MR to ultrasound, where we are integrating production and product management to improve delivery. Similarly, we're now transitioning grade from one to six operating P&Ls. Importantly, this is not only a cost out initiative, but a way to ensure we're using the right processes, tools and resources to improve execution. This quarter, we held strategy reviews with each business, planning for the long-term. These discussions focus on how we put ourselves in the best possible footing to play offense, how we win with our customers and for our shareholders. What was evident is that our businesses are focusing or setting more impactful objectives designed to deliver profitable growth. Examples include ensuring our gas turbines remain competitive at the top of the power dispatch curve, as well as launching next-generation software platforms in our healthcare imaging businesses. The quality of our strategic thinking was much improved versus a year ago. Now, we have to execute. So let's get into the details on the COVID-19 dynamics at both GE Aviation and GECAS. On Slide 4, you'll see GE/CFM departures, which drives our service business much more so than RTKs. As a reminder, we track departures by region and by platform, daily. With the third quarter overlapping with much of the summer travel season in the Northern Hemisphere, we saw GE/CFM power departures generally improve. We've seen this plateau to down 40% in October versus our January baseline as we exit these typically higher traffic months. We expect the market recovery will continue to be correlated with departure trends across regions and fleets. China's departure levels are just below the January baseline. And we're watching load factors there carefully. The Americas have remained relatively flat through the quarter but it's shown some improvement in October versus July. In Europe, some improvement in July and August has reversed in September and October. In aggregate, the near-term outlook remains quite fluid. And while there's been improvement from the April lows, we're now seeing stabilization at current levels. At GE Aviation, our military business remains resilient. But commercial aviation is clearly challenged. Under our new CEO John Slattery's leadership, we're progressing on the difficult actions to scale this business for the new market reality. Notably, these actions drove the sequential cash improvement in the quarter. Looking at these trends we're seeing through October commercial shipments and shop visits are still down 50% year-over-year. Services are critical to the recovery of aviation; we generate much of our cash here, especially within narrow bodies which are more than 40% of our historical revenue. We typically have good line of sight into demand for about six weeks out at our internal jobs. But we have less visibility into external shop visits. We're working with our customers to forecast shop visits as utilization recovers, supporting our operations and supply chain. We made an important organizational move in Aviation Services, with Russell Stokes returning to Aviation as CEO of that business. Russell will lead our Aviation Services business in a new role integrating both our commercial and operations teams. Shifting to GECAS, similar to Aviation, our performance continues to be correlated with the market. As we said last quarter, 80% of our customers have requested deferral, and we've approved about 60% of those. At the end of the third quarter, this deferral balance was approximately $400 million. And importantly, we collected about 85% of what we've invoiced thus far. We ended the quarter with 29 aircraft on the ground, up from 17 in the second quarter out of a fleet of more than 950. We're actively working customer-by-customer through restructurings, and in some cases, repossession. And our commercial team is remarketing aircraft. We're also taking action to navigate through this volatility. Let me share with you two examples. We announced Kalitta Air to operate a 37 aircraft fleet as the launch operator on our 777 passenger to freighter cargo conversion program, which features the GE90 powered largest ever twin-engine freighter. We’ve partnered before and we're teaming up again this time with PIMCO to launch a $3 billion venture that provides airlines with financing to help upgrade their fleets at a critical time. This essentially also enables us to acquire new and young, fuel-efficient aircraft that we can continue providing our customers with the aircraft they need. We continue to plan for a steep market decline through the fourth quarter and a likely multi-year recovery. Long-term the aviation market has solid fundamentals, and we're committed to a safe return to flight post-COVID. We're working with our customers and industry partners to ensure engineering and operational readiness. With that, Carolina will provide further insights on the quarter.

Thanks, Larry. Diving into the quarter. Our results are better sequentially, but remain challenged overall. This is particularly true in Aviation, our segment hit hardest by the pandemic. So the recovery and path forward would look and feel different with each business, market conditions are stabilizing. We're also driving impact with our cost out actions. Year-to-date, we've reduced headcount by more than 15,000 or 8%. And we expect to reach about 20,000 or 10% by year-end, and we're seeing operational improvement, especially in Power and Renewables. Looking at our consolidated results, which I'll speak to on an organic basis. Orders were down 28%. On the services front, Aviation remains the most pressured while Power and Healthcare were each flat. Backlog was relatively flat year-over-year and sequentially with puts and takes between segments. Profitability in our backlog remains attractive as the majority is in services. Industrial revenue was also down but to a lesser extent in orders down 12%. Despite the difficult environment, all segments delivered revenue growth, except Aviation. And all Industrial segments delivered positive profit in the quarter. Our countermeasures continue to accumulate with a more immediate effect in Healthcare, where the margins expanded 260 basis points. In our longer cycle businesses, results improved after second quarter lows, but at a more measured rate. Turning to EPS. Let me highlight three differences between continuing and adjusted. On restructuring, we spent $200 million in the quarter. For 2020, we still expect to spend more on restructuring versus prior year, with most of the benefits accruing in '21. We also reserved $100 million for legacy SEC matters. And on the impairment charge, this was related to our recent decision to exit the new build coal power market within Steam. Excluding these items as well as gains, mark-to-market, and non-operating benefits, adjusted EPS was a positive $0.06. Turning to cash. We generated $500 million of Industrial free cash flow in the third quarter. Excluding BioPharma results, it’s a $200 million improvement year-over-year. Notably, Healthcare delivered strong cash flow conversion due to improved inventory turns, better collections, and reduced CapEx. At a high level, cash flow benefited from positive earnings plus D&A across all segments, and all businesses were up sequentially. We’ve seen modest improvement in working capital driven by management actions and what I'll call stabilizing volume levels, particularly in payables, where we used $600 million of cash on working capital. This is roughly $1 billion better sequentially than year-over-year. Looking at the dynamics. For receivables, we saw higher billings. This is typical in our second half and even more true this year due to the broader economic environment. However, there are clear signs of improvement due to better daily management, such as company past dues declining 3 points sequentially and sequential improvement in DSO. Inventory was a source of cash. As we apply lean here, we expect it will be a greater source in the future. On my recent trip to Renewables, visiting onshore wind, I’ve noticed how this has transitioned multiple warehouses to a pool-based business. This reduced service inventory by $50 million and counting. Payables stabilized from prior quarters as we cleared the payment cycle of pre-pandemic material purchases. As sales volumes recover, we expect further benefits here. Progress was a use of cash as outflows from shipments outpaced inflows from new orders and milestone payments. This was primarily driven by Renewables and Aviation. Contract assets were limited in impact, and other operating flows were primarily driven by non-cash items in net earnings. This includes the mark-to-market impact from our Baker Hughes position and non-cash benefit costs. We're also carefully scrutinizing our CapEx spend, down $220 million in the third quarter versus prior year. Year-to-date, Industrial free cash flow is a negative of $3.8 billion. The drivers include lower earnings, ex-dispositions, payables related to the commercial aviation decline, progress due to higher deliveries and lower orders in Power and Renewables, and reduced factoring. With our typical seasonality, we expect the fourth quarter to be our most significant quarter for Industrial free cash flow. As Larry said, we're targeting at least $2.5 billion. Sequential improvement will continue to come from earnings growth, reduced inventory and stabilizing progress. Taking a step back, building a path to sustainable cash flow rests largely on continuing to drive self-help across the businesses. We realized 75% of our cash actions to-date and the remainder is coming in the fourth quarter, and we're positioning Aviation to emerge stronger when the market recovers. Taking a broader view of working capital and looking for additional opportunities. Inventory, just over 2 times today, is an area we can improve our consistency and performance.

Carolina, thank you. Our transformation of GE is accelerating. In September, we introduced a new purpose statement for the company. We arrive to the challenge of building a world that works. This is more true than ever as we continue to deliver for our customers and tackle the world's biggest challenges, from precision health to the safe return to flight to the energy transition. Climate change is undoubtedly a massive challenge and one where the technology advancements we deliver for our customers will play an important role. We've also been reducing greenhouse gas emissions from our own facilities since 2004, and we met our most recent goal for 2020 early, reducing our emission by 21%. Now we're strengthening our sustainability pledge by committing to be carbon neutral in our facilities and operations by 2030. Our strategy to achieve this is threefold: first, we'll boost our operational investments over time to achieve energy efficiencies; second, smart power sourcing will enable us to reduce our emissions from the grid; and finally, we'll use lean practices to eliminate energy waste. Separately, we announced that we will pursue an exit from the new build coal power market. This decision highlights the interplay we are seeing between decarbonization, market dynamics and our own business strategy. Taking a step back, as I reflect on 2 years in at GE, what gives me confidence in GE's future are our fundamental strengths. In what continues to be a difficult operating environment, our team continues to show humility, transparency and focus every day. Looking across GE, we continue to build on our legacy of innovation, leading with technology. This was evidenced by some big wins in the quarter. Gas Power was awarded a large equipment contract with Taiwan Power Company featuring the 7HA.03, which optimally balances power output efficiency and maintainability. Additionally, renewables finalized the supply contract with Dogger Bank for what will become the world's largest offshore wind farm. In Healthcare, we introduced a number of AI-enhanced products to make our customer workflows more efficient, including our Vivid Ultra Edition and cardiovascular ultrasound. And Aviation received certification from the U.S. FAA for the GE9X, the world's most powerful commercial engine and designed to be the most fuel-efficient GE has ever built. And at the same time, our technologies are uniquely capable of helping solve the climate change challenge. We're raising the bar in reducing carbon emissions and increasing efficiency. We're delighted that Gas Power's 7HA turbines will supply the first purpose-built hydrogen-burning power plant in the U.S. By 2030, the plan is expected to run on 100% hydrogen. And there's no company with the scale of GE's global reach, brand, talent and long-term customer relationship. In all, we're encouraged by our progress amidst a challenging backdrop. We remain focused on the long term, not only in terms of our ability to perform, but to realize our purpose in the full potential of GE. With that, Steve, go to questions.

Thanks, Larry. Before we open the line, I'd ask everyone in the queue to consider your fellow analysts again and ask just one question so we can get to as many people as possible. Brandon, can you please open the line?

Appreciate all the detail here. Since free cash flow is the primary operating metric that we're focused on. I'd love to hear from Carolina a bit more about the goals on inventory. You mentioned 2 turns. What's the target? How much more can you go? And then maybe, Larry, you can contribute on the thoughts on rationalizing CapEx. I know there are trade-offs that you're making every day here in terms of not wanting to compromise growth opportunities coming out. But where does the CapEx stand in that thought here?

Thanks, Deane. To understand working capital better, it's important to take a step back. I will look at the full year so far and then discuss the opportunities, as they are closely linked. This is a key focus area for us, and there is still much to accomplish. We have several significant factors affecting our cash flow, particularly in Aviation and Renewables. Starting with receivables, our cash flow this year has been impacted by a $2 billion decrease in factoring alone. We have utilized $5.1 billion so far, out of which $2 billion is directly related to the reduction in factoring. This is due to lower volume and some decisions we made. However, we are making progress on Days Sales Outstanding (DSO), especially in Power, Renewables, and Healthcare, although we are experiencing some pressure in Aviation. There is a significant opportunity to improve our underlying DSOs in all areas. A good example is in gas, where Scott and his team have managed to improve overdue accounts and reduced their daily associates by over 10 days. We expect further improvements across the board, balancing growing sales with factoring. Regarding inventory, typically at this point in the year, it significantly impacts working capital as we build inventory over the first three quarters and deliver heavily in the fourth quarter. This year, we began by building inventory in the first quarter, but COVID-19 hit, and we have been working hard to reduce this inventory, which is not easy in a long-cycle business. We have considerable room for improvement, as our turns are at 2. All segments can enhance their performance here, and Aviation is also striving to reduce inventory size due to the changing demand landscape. Lean practices will play a crucial role in our improvements; while it won't be a quick fix, it represents a substantial opportunity. The most significant working capital pressure we have faced so far is with payables, particularly in Aviation. We have been paying suppliers for higher material costs in the first half of the year, while substantially reducing input costs in the second and third quarters to align with lower demand, especially in Aviation. Accounts are beginning to stabilize, but I anticipate further improvements as we see end markets recover. This year has brought notable pressure on progress. Cash flow from progress represents the difference between collecting payments on new orders and milestones versus executing deliveries. In Renewables, we have delivered record onshore wind volumes, which means we've used up progress faster than we've collected on new orders. Power is experiencing similar pressure, and Aviation is facing demand levels that are significantly lower. Addressing these challenges requires a business-by-business and piece-by-piece approach. The biggest opportunities currently lie in receivables and inventory, along with improving linearity. This means not just evaluating performance at the end of the quarter or year, but maintaining a stable view throughout the year. There's still much work ahead, with numerous opportunities for improvement.

Deane, I want to briefly discuss capital expenditures. It's essential that we never find ourselves underinvesting in innovation, safety, or quality. However, a significant advantage of a true lean transformation at GE is that it allows us to have a more focused and critical approach to our capital considerations. This means not just identifying when we need capital but also determining how to address that need effectively. For instance, I visited a facility last week where it was evident that we may not have had enough oversight on the team's capital management during a specific project. We seemed to be evaluating success through other metrics. By adopting this more strategic philosophy, we can potentially reduce our spending. At the same time, we will actively seek opportunities to invest wisely in new products and technologies while also improving safety and quality across our operations.

I wanted to follow up on your comment about receivables. Note 4 showed considerable activity in that area. You mentioned that factoring was a challenge last quarter, and perhaps it was a challenge throughout the year. Could you clarify that? Additionally, the message in July did not convey much confidence about achieving positive free cash flow in the second half, and the information regarding options pricing indicated little improvement through August. What changed in September that made a significant difference? Or were you just being more cautious at the end of July? I'm curious about the cash flow trends you mentioned for the quarter, as it seems like there's been a notable shift at the end of the quarter considering those factors.

Steve, why don't I start with the factoring? In the quarter, our factoring balance is slightly up, $8.1 billion versus $7.7 billion in the previous quarter and with penetration basically flat. But year-to-date, it's almost $2 billion decrease. And that's when you look at the working capital of $5 billion usage, $2 billion of that is decreasing factoring, and we expect to continue to do so.

Steve, I would say that what we've been dealing with, given the COVID dynamics, is a host of uncertainties with the passage of time, have become less so. I think our last public comments suggest that we thought the second half would be positive. We never talked about a specific number with respect to the third quarter. And again, given the progress on the $2 billion of cost actions, the $3 billion of cash actions, I think what was a very strong quarter on the part of our Healthcare business, and the lack of any further deterioration of note in Aviation allowed us to put the quarter that you see here, the $500 million of free cash together. I mean I would just add, I think we're encouraged by the turnarounds at both Power and Renewables. We came into the year knowing that 2020 was going to be an important year for both businesses to demonstrate traction in that regard. And whether you look at the sequential improvements, whether you look at the year-on-year margin expansion or the setup, particularly for our Gas Power business going into next year when we think we'll be cash flow positive, I just think there's a lot of progress in those businesses despite some of the timing dynamics that we've seen, particularly with respect to outage execution, again, more back half loaded than first half loaded. So it's a game of inches. We've never been in a more challenging environment. But I think as the year has played out, certainly, as the fall here has played out, we're, again, encouraged by what we see from the businesses broadly. But are taking little for granted.

So maybe we can talk a little bit about inheritance taxes. That's part of the bridge from 2020 to 2021. Can you just maybe talk about an update as to where that stands? Sure.

Nicole, I think we used that phrase from the early days when I joined the company, just to describe some of the things, some of the legacy issues that we were wrestling with. But we don't talk about those dynamics the same way internally. And I think we need to start talking about them in the way that is more aligned with how we're running the business. So you've got a better sense of those things that we have control of versus those that are running off. We've talked previously about those headwinds decreasing from $4 billion last year to $2 billion next year and a host of issues like legal pension, supply chain, finance, recourse factoring and, of course, restructuring. I think as we come in here to the fourth quarter, I think we're doing better in 2020 than we thought. And we know next year's restructuring cash is going to be higher given the announcement around the new build coal exit and some of the additional Aviation actions. So I think the lift next year is going to be a little less than what we thought, but on balance over the two years in line. I think as we go forward, let's think about three things. One, restructuring, which we're going to continue to evaluate on expected returns. I think those are very much within our control. Carolina mentioned factoring, right? Better part of $2 billion year-to-date of a headwind from a factoring reduction. Those are actions that I think are largely within our control. And then the other items that should come down over time, whether it's some of the UK and Alstom-related pension dynamics, and some of the legal settlements that are a little harder to predict. But I think on balance, it's part of the setup for us to deliver positive free cash flow in '21.

It's encouraging to see the progress you're making, particularly regarding free cash flow. I understand there's a lot of emphasis on the $2.5 billion target for the fourth quarter. Larry, you typically take a conservative approach when setting targets. As you consider the fourth-quarter number, I'm trying to gauge how much is within your control, such as your higher-margin businesses and the cash restructuring actions you have planned. I'm interested in clarifying how much is already manageable internally versus what assistance you may require from the market to achieve over $2.5 billion in the fourth quarter.

Sure, Joe, I appreciate your feedback on my operating model. We're focused on building and improving at GE. When we mention at least $2.5 billion for the fourth quarter, we mean that the cost and cash actions we have discussed will come into play. I expect to see sequential improvement in profit across three of the four segments. Renewables, however, is likely to remain relatively flat. Once we fully implement the $2 billion in cost reductions, that should also contribute positively to our cash flow.

Yes. And I would add to that, the comment on working capital then. We have typical Q4 seasonality that holds this year as well, especially from Power and Renewables. And then we have our own management actions. So I see for the fourth quarter really benefits on the working capital, primarily coming from continued inventory reduction and a lift from payables as the volumes start to normalize, although on lower levels. We expect to see sequentially improved progress collections or basically less of a drag, especially with Gas Power and Renewables, more than offsetting the Aviation pressure. I think on receivables, we have a headwind just because of the sort of Q4 sequential growth, but we continue our collections work. So that one will also depend a bit sort of collections versus factoring.

And Joe, I would just add that when you ask about the market, some of the things that are outside of our control, I'd really say we're going to look to do the best we can across the board. Probably have a little bit more variability or uncertainty at Aviation, right? Departures is an important measure for us. We'll see how that plays out. I think we mentioned in our prepared remarks, external shop businesses where we don't have as much visibility compared to what we have with respect to our own activity. Shipments out of the airframers, triggers our AD&A obligations, our working capital dynamics there that could go against us. And I think we've shared before that we have past due, particularly on our military business. We're not happy with that. We can clear some of that. That will be helpful. If we don't, obviously not. So a few things that are still in play. But I think, again, between the cost and cash actions, earnings, working capital that Carolina highlighted, we think at least $2.5 billion is the right outlook at this point, given what we know and don't.

So I guess, we've called cash quite well here. So let's move on to power. I think you mentioned, Larry, that the pipeline of activity and potentially orders in 4Q looks pretty good in Power. So maybe just talk about what you're seeing there. And on Gas Power services, I think you said sort of flattish to maybe slightly down in Gas Power services. I'm wondering, as we go into 4Q and as we start getting some significantly easier comps there, do you think that we are moving into kind of growth mode back of power services? And maybe just give us some indication of how the moving pieces there are tracking?

Sure. Compared to last year, the Gas Power segment had more orders at the beginning, but we expect more orders towards the end this time. Some of the successes we've mentioned should lead to orders in the fourth quarter, which was what we were hinting at when discussing conversion. We foresee a market of 25 to 30 gig over time, and while that may fluctuate, we feel optimistic about pending orders and our pipeline as we near the end of this year. In terms of services, as of late October, the situation hasn’t changed much. Utilization has remained stable, which is reflected in our CSAs. As Carolina mentioned, we've encountered some pressure, largely due to COVID. Regarding upgrades, we need to refine our product roadmap, and we've encountered challenges in the Middle East linked to oil price fluctuations. Additionally, there are transactional factors at play. What excites me most, and we've mentioned our strategic reviews, is the recent changes in the Gas Power team’s leadership. Scott has revamped the services team, and we now have new leaders in vital roles. I felt encouraged by their commitment to returning to core principles. We need to enhance our execution, both operationally and in our transactional business, which also applies to upgrades, even though that may be more challenging. Recently, I had a valuable field trip where I visited a CSA site and a transactional site. It was interesting to observe how the work varies based on those transactions. We need to demonstrate that we can better serve our customers, and if we can start driving some growth in this business, we believe we can convert that into positive results. That is our goal for the upcoming quarters.

Maybe just wanted to circle back on to working capital, I'm afraid. So look, this year, it looks like it's maybe a $4 billion headwind on cash. Last year it was about $3 billion. So it’s sort of $7 billion cash out over 2 years. Given everything you talked about earlier in this call, should we expect a very material tailwind there next year? And perhaps more specifically, in Aviation, it's puzzling in a way on the outside, but working capital has been a headwind there, whether the market is very good or very bad. And you've seen 3 years in a row of working cap headwinds to Aviation. Given we've got 2 months to go until next year, what can you tell us about your expectations for Aviation working capital next year? I'm assuming some of these supplier terms that are written and so forth start to become a bit easier next year.

Yes. Well, thanks for the question. No, you're right. We've had a significant use of working capital. Of course, the reality is that you have to take working capital into context with the business and how it's growing or not growing, right? So it's been a significant shift this year from the beginning of the year with strong growth and then sort of the rest of the year in many places working on reducing to the new level. If we look at next year, again, specifically for Aviation, a lot will depend on how the top-line develops in Aviation, right? Because that also shows on the receivable side and also the level of DSO. We are working, and John Slattery and the team are working very hard on improving our collections and the processes to the collections. So I would say, on the receivable, it's really a function of where the top-line will be as well as our efforts in factoring, plus underlying improvement on the DSO. On the inventory side, having started with a strong growth trajectory and now working to take it down. There's clearly more to do on the inventory side for the term in Aviation, and they are working on it. And it's not a quick fix. So we expect to see improvement next year on the inventory to sort of come to the new lower level. Then on the payable side, I mean this year, payable for Aviation sort of took the big adjustment on lower levels. So it's been a big drag for Aviation this year in payables. But going forward, with sort of a stabilization of the situation, we would expect the payables also to be a positive. Progress, well, it's a little bit a mix of how much goes out and how much comes in, right? So it's very dependent on the order situation, but it’s just not going to be for us a big drag as it is this year. And you remember, we had the big MRO order also from military that we got in progress this year, which is sort of going to be used next year. So I would say that's all four of them. So good opportunities, both on inventory and receivables, but also on payables, more as a function of the situation and progressing sort of more market dependent.

Just a question on Aviation. You had lower charges around long-term service agreements in the third quarter compared to the first half. How much of the CSA book has been renegotiated, given lower schedule size? And sort of a broader question, and I think Larry sort of talked about working with customers, how do you work with your customers to keep them from sort of going to the third parties in this environment, in Aviation?

So Andrew, starting with the CSA charges, they are lower than we anticipated. In the second quarter, we thoroughly reviewed all our CSA contracts considering the ongoing situation with COVID and our future expectations. We accounted for a $600 million charge due to the impact of COVID. In this quarter, we experienced some effects, but these were due to higher costs arising from CSA margin reviews, totaling around $100 million. However, this does not alter our previous outlook on the CSAs. It's crucial to remember that these models are very long-term, involving bottom-up modeling that estimates future billings against future service costs over 15 to 20 years. With this in mind, we are aware of the current situation and are closely monitoring utilization trends and potential bankruptcies, but we have not observed any changes that would affect our estimates from the second quarter, which is why there are no additional impairments recorded in the third quarter.

Andrew, with respect to how we serve and how we compete, I would just add that it's important for everyone to remember that we have an active network of partners that do shop visits for the airlines that we supply into, right? We don't do all that work in our own shops. So that support continues. I think part of what we wanted to do having Russell slide over to Aviation, take on that more broadly defined Aviation services business is to make sure that we are synchronizing better what we do from a repair and overhaul perspective with the commercial side of the business. So whether it be helping carriers execute different scopes, be it providing better delivery to our third parties, managing green time as everybody is as we work through cash conservation with the airlines. That's just a set of daily operational issues that, that business has managed. They manage well over really decades. I think we're seeing particular pressure here today, but encouraged by what we see already with Russell and the team managing through the COVID period here.

Thank you. We're out of time at this point. We will now turn it back to Steve for final remarks. Thanks, Brandon. Thanks, Larry, Carolina, and everybody for dialing in. As always, my team and I will be available for follow-up. I know we're past the hour. But appreciate you staying with us and look forward to speaking with you. Thanks very much, everybody.