General Electric Company (GE) — Q2 2025 Earnings Call Transcript

Thanks, Liz. Welcome to GE Aerospace's 2025 Investor Update and 2Q '25 Earnings Call. I'm joined by Chairman and CEO, Larry Culp; and CFO, Rahul Ghai. Today, we will be sharing an update on our second quarter 2025 results, financial guidance for 2025, and outlook for 2028, followed by a Q&A session. As usual, many of the statements we're making are forward-looking and based on our view of the world and our businesses as we see them today. As described in our SEC filings and website, those elements may change as the world changes. Additionally, Larry and Rahul will speak to total company and corporate financials as well as our guidance and outlook on a non-GAAP basis. With that, I'll hand it over to Larry.

Thanks, Blaire, and we appreciate everyone joining us today. The GE Aerospace team is guided by our purpose: to invent the future of flight, lift people up, and bring them home safely. At any given moment, nearly 1 million people are flying with GE Aerospace technology under wing. That is a significant responsibility that our 53,000 employees carry with great pride. We use FLIGHT DECK, our proprietary lean operating model to continuously improve safety, quality, delivery, and cost—always in that order—as we strive to provide unrivaled customer service and deliver our roughly $175 billion backlog. Before we dive in further, I want to acknowledge the tragedy of Air India flight 171. We extend our heartfelt sympathies to the families and loved ones of those who lost their lives. Since June the 12th, our focus has been and remains on supporting our customers and providing technical support to the regulators. While we were looking forward to a broader update with you in Paris, Rahul and I are here today to share our second quarter results and our increased outlook. We'll create additional opportunities later this year to share more of the operational details we expected to cover with you in Paris. Turning to the next slide. Safety is and always will be foundational to everything we do. Through decades of experience, learning, and continuous improvement, we've built our Reactive, Proactive, and Predictive safety processes. GE Aerospace was the first manufacturer to have a Safety Management System, or SMS, accepted by the FAA. We established our SMS a decade before the agency proposed requiring it. The system encourages our employees to report safety concerns voluntarily and ensures that they are thoroughly evaluated. SMS, together with our Quality Management System, is the foundation of our safety culture, while our approach to continuous improvement helps us drive safety up the value chain. FLIGHT DECK further standardizes our own processes to support safety investigations, leading to identifying corrective actions faster. We're also enhancing engine inspections to begin at the part level, extend through manufacturing, and continue into the aftermarket. And now we're deploying AI-enabled tools to further improve inspection accuracy and consistency, helping to predict potential safety threats. Everyone at GE Aerospace owns safety, and we never compete on safety. Turning to Slide 5. GE Aerospace is an exceptional franchise. As a global aerospace leader in propulsion, services, and systems, we're well positioned to benefit from favorable long-term market trends across both commercial and defense. Our Commercial Engines & Services business, or CES, is servicing and growing the industry's most extensive commercial installed base. We're proud to be underwing on 3 out of every 4 commercial flights, demonstrating our unmatched scale and scope across the world's most successful and innovative aircraft platforms. Our Defense & Propulsion Technologies business, or DPT, powers two-thirds of all U.S. military combat and helicopter fleets. DPT offers both the leading defense programs of today while developing mission-critical technology for the future. Let's take a closer look at GE Aerospace today. As the industry's largest and growing engine fleet, our business model is highly resilient, largely due to our balanced exposure across narrow-body, wide-body, regional, and defense platforms. CES has more than 49,000 engines in service and growing. In 2024, we delivered a particularly strong year with $27 billion of revenue, growing 13%, with robust services demand and performance supporting higher profit. About half of our revenue comes from narrow-body platforms, while wide-body represents 35%. In DPT, we have more than 29,000 engines in service. 2024 was a solid year with nearly $10 billion in revenue, up 6% and profit up double digits. Our Defense & Systems business accounts for roughly two-thirds of DPT revenue, including over 70% of revenue from U.S. customers and around 30% internationally. Propulsion & Additive Technologies represents the remaining one-third with exposure to commercial programs and localized European defense capabilities. Notably, 70% of our total revenue comes from recurring, predictable, and highly profitable services, including three-quarters of CES revenue and more than half of DPT revenue. This represents a significant growth opportunity as our commercial installed base continues to grow at a low single to mid-single-digit compounded growth rate through the end of the decade. Services also enable us to live the customer experience and strengthen our relationships, seeing and hearing their needs firsthand while shaping our product road maps to ensure alignment with their future priorities. Turning to Slide 7. Given macroeconomic dynamics, we're watching demand near-term. This quarter, departures grew nearly 4%, in line with our expectations. For 2025, we're still planning for low single-digit departures growth, taking a more conservative view on the second half. Broadly speaking, we support promoting free and fair trade, including the duty-free environment that has long fueled the U.S. aerospace sector, leading to more than 1.8 million U.S. jobs and a $75 billion annual trade surplus. We commend the administration for the U.S.-U.K. trade deal, eliminating tariffs on the aerospace sector, and view this deal as a strong framework for future trade agreements. Longer term, GE Aerospace is operating from a position of strength. Our robust orders over the last several quarters have increased our commercial services backlog to now over $140 billion supporting growth for years to come. Across the commercial sector specifically, we see strong fundamentals. Air traffic growth is expected to outpace global GDP, especially in Asia Pacific and the Middle East, and new aircraft builds and airline expansions remain healthy, supporting the growth of our installed base. On the defense side, we see solid momentum globally towards modernization and localization. Domestically, we're pleased the reconciliation package includes funding for key defense propulsion initiatives with more than $1 billion for sixth-generation aircraft programs. Internationally, we're expecting faster growth than in the U.S., largely in response to rising global tensions and the evolving geopolitical landscape. Overall, we expect the market to grow at a mid-single-digit compounded growth rate through 2028, reaffirming our strong trajectory. Moving to Slide 8. Our vision is clear: to be the company that defines flight for today, tomorrow, and in the future. For today, we're ramping up services and equipment to support our customers' fleets while fulfilling strong demand for new engines. For tomorrow, we're expanding capacity and capabilities to deliver on while growing our backlog. This includes expanding our supply chain and service networks and investing in technologies to further enhance engine performance. And for the future, we're building the technological foundation that will define the future of flight across both commercial and defense. FLIGHT DECK is a systematic approach to running our company, translating strategy into outcomes while advancing our culture.

Larry, thank you, and good morning, everyone. Starting with the results, we had a strong second quarter, with improvement across all key metrics. Orders were up 27%. Revenue was over $10 billion, up 23%, with CES growing 30% and DPT, up 7%. Profit was $2.3 billion, up over $400 million or 23%, driven by services volume and price, which supported margins reaching 23%. EPS of $1.66 was up 38% from profit growth, a favorable tax rate, lower interest expense, and a reduced share count. Free cash flow was $2.1 billion nearly doubling over last year. Looking closer at our businesses, CES delivered an excellent quarter, with demand remaining robust. Orders for services were up 28% and equipment was up 26%. Continued demand combined with material input improvement drove meaningful revenue growth. Service revenue was up 29%, with spare parts revenue up more than 25% from higher volume and price. This included strong CFM56 shop visit growth and higher LEAP third-party shop visits. Internal shop visit revenue grew more than 20% from higher output, increased work scopes, and price. This included LEAP internal shop visit volume growth of over 20%. Equipment revenue grew 35%, with spare engine ratio down sequentially and year-over-year as expected. Profit was $2.2 billion, up 33%, primarily from services volume. CES margins expanded 50 basis points to 27.9%. Moving to DPT, higher output supported a solid quarter. Orders were up 24% year-over-year with defense book-to-bill of 1.2x. Revenue grew 7%, with Defense & Systems up 6% and Propulsion & Additive Technologies up 9%. Profit was roughly $360 million, up 5% on a tough compare. Volume, productivity, and price more than offset self-funded next-gen investments and inflation. Margins declined 20 basis points to 14.1%. At the midyear mark, we've delivered high teens revenue growth, $1 billion of operating profit growth, and nearly $800 million of higher free cash flow. Given the strength of our first half results and our expectations for the remainder of the year, we are raising our 2025 guidance across the board. We now expect total revenue growth of mid-teens, up from low double digits. With the absence of reciprocal tariffs in China thus far, we currently see reduced risk for spare engines and spare part deliveries and material availability is improving, supporting higher spare parts growth. Therefore, we are increasing revenue growth expectations for commercial services to high teens and commercial equipment to high teens to 20%. This supports total CES revenue growth of high teens. Our DPT expectations are unchanged from mid- to high single-digit revenue growth. For total operating profit, we now expect to be in a range of $8.2 billion to $8.5 billion, up $350 million at the midpoint versus our April guide from improved services outlook. And we now expect adjusted EPS of $5.60 to $5.80, growing over 20% at the midpoint year-over-year, reflecting higher operating profit and a reduced tax rate. Additionally, as we shared in April, heightened tariffs are resulting in additional costs for us and our supply chain. We are continuing to make progress on our operational plans to reduce the impact. Assuming that reciprocal tariffs are implemented after the current pause, we still expect the net impact of tariffs to be roughly $500 million in 2025, which we are offsetting through cost controls and pricing actions. We now expect free cash flow to be in a range of $6.5 billion to $6.9 billion, up from $6.3 billion to $6.8 billion, driven by our improved profit outlook. With this raise, we expect to grow operating profit by over $1 billion for the second year in a row with free cash flow conversion remaining solidly above 100%.

Pulling this all together on Slide 27, as Rahul just walked you through. Our operating performance and robust commercial services outlook underpins our increased guidance of sustainable revenue, earnings, and cash flow growth. 2024 was a strong year with approximately $1 billion more in operating profit than we had originally expected at the start of the year. In 2025, we're again performing ahead of our expectations and raising guidance across all key metrics. Compared to our 2024 Investor Day outlook, this represents an increase of more than $1 billion in operating profit. Importantly, we expect this momentum to extend into 2028 with operating profit growing more than $3 billion and free cash flow growing over $1.5 billion versus '25. We're also leveraging our strong balance sheet and free cash flow generation to support mid-teens EPS growth. With respect to capital allocation, our principles remain the same. First, we will invest in the business to support growth in current and future programs. Next, we have a bias towards returning cash to shareholders and expect we'll return more than 100% of free cash flow to shareholders through 2026. Last year, we shared plans to return roughly $19 billion of cash to shareholders between '24 and '26, between dividends and buybacks. Now subject to Board approval, we're increasing that to $24 billion, including about $19 billion of buybacks and roughly $5 billion of dividends at roughly 30% of net income. This is 20% higher than what we discussed a year ago. Beyond 2026, we expect to return at least 70% of free cash flow annually through a combination of dividends and buybacks. Finally, we're open to opportunistic bolt-on M&A with a high threshold for strategic, operational, and financial fit. We believe this balanced and disciplined approach best supports our goal of compounding long-term shareholder returns. And to close, on Slide 29. Our strong operational and financial foundation supports our increased outlook and our sustained competitive advantages will propel us to new heights. We have a diversified fleet of preferred platforms across the narrow-body, wide-body, and defense sectors. What we do and how we do it matter, front and center are safety, quality, delivery, and cost, always in that order. Our services and technology offer industry-leading operational reliability, including greater efficiency, extended time on wing, and faster turnaround times. We serve the industry's largest fleet of 78,000 engines with unrivaled customer service and flight support. This keeps us close to our customers through decade-long life cycles, building meaningful relationships and making us the partner of choice. Our talented engineering teams continue to develop breakthrough innovation to support our existing fleet and advance next-generation technology. And finally, FLIGHT DECK supports us in delivering results and lasting value for our customers and shareholders. So we're still far from reaching our full potential, yet we couldn't be more optimistic about our path ahead. We appreciate you joining us for this extended call on both the quarter and our revised outlook.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Rahul, the high end of the 2025 guide implies second-half EBIT nearly $500 million lower than the first half. But over the last 2 years, the second-half EBIT has actually been trending around $400 million higher than the first half. So your guide essentially has nearly $1 billion spread versus the seasonality you've demonstrated over the last few years. I understand there's this GE IMEX headwind this year, but it is a very stark difference versus typical earnings cadence. So just wondering if you can reconcile that second-half EBIT decline for us.

Yes. Scott, let me address this and Larry can add his thoughts. So Scott, we are having a strong year, having raised our revenue growth expectations from low double digits to mid-teens. This represents approximately a $900 million increase in revenue at the midpoint, along with a $350 million midpoint increase in profit compared to April. Our second quarter performance surpassed our expectations. The $350 million profit increase is attributed to our outperformance in the second quarter and the raised expectations for the second half of the year. We anticipated a strong start to this year and aimed for a more consistent performance than we had in 2024, especially given the operational ramp-up in the second half, including projected 9X shipments which we expect will create a couple of million dollars in headwinds compared to last year. We also expect a lower spare engine ratio in the latter half. Additionally, corporate expenses typically rise in the second half, which is evident in the comparison of first-half corporate expenses to our projections for the entire year. There’s also a projected increase in R&D expenses between the first and second halves. Our expectations regarding these factors remain consistent with what we outlined in April. However, we are exercising some caution due to the departures Larry referenced, which will affect our spare part sales expectations in the second half. Nevertheless, we anticipate mid-teen services revenue growth in that period. Overall, we should still see strong year-over-year profit growth in the second half at the midpoint of our guidance. We are feeling more optimistic about the year compared to our outlook in April, and it looks like we are on track for over $1 billion in profit growth, potentially reaching up to $1.25 billion at the high end.

I wanted to discuss two assumptions. The first is the pricing expectation from 2024 to 2028, which suggests growth in the low single digits. What does that mean for the period from 2026 to 2028? It appears to indicate no pricing changes. Additionally, regarding the retirement increase to 3% to 4%, could you provide some background? For the past ten years, the CFM56 has had a rate of about 1.5%. Have there been any previous periods where you observed a similar rapid increase in retirement rates?

Myles, maybe I'll speak to price and Rahul can take retirements. I think if you just step back for a moment, I think you know well, our pricing philosophy we make significant investments in next-generation platforms, obviously, provide a lot of value to our customers while taking on considerable risk. So we really try to price more broadly with appropriate returns around those commitments in mind. I think the way we've looked at price here is really to have price more than offset inflation in '25 between what we're doing in CES services, call it up at a mid-single-digit level on a net basis. That includes spare parts, right? Where in some instances, we might do a little bit better than that. It's really dependent on which program we're talking about. But I think as we look forward, we're probably looking at something on a mid-single-digit basis at a gross level low single digit on a net basis, at least with respect to spare parts. But also keep in mind that as we move past launch, I think Rahul touched on this in his prepared remarks. We anticipate to see better pricing dynamics. And fundamentally, it's all about moving beyond launch, right? LEAP is well into the life cycle now, but it does take time to see that fall through. Typically, call it, 8 years thereabouts post an agreement to really see that in the P&L. So a lot of volume here, work scope expansion in a number of areas, a little bit of price. That's how you get to that double-digit top line number that we're looking at between now and '28.

Yes, I can discuss retirements. Myles, you're correct. The last couple of years have seen very low retirements. Even this year, for the first six months, retirements for CFM56 have been below where we were in 2024, and if I recall correctly, 2024 was also below 2023. So, the trend has been very low. However, as the fleet ages, we would expect retirements to increase, and that has been our expectation. We have been wrong about this before, but ultimately, it depends on new aircraft deliveries and the expected growth in departures. We assume that both Airbus and Boeing will meet their stated goals over the next few years, approximately 3 to 4 years. Adding up the expected deliveries from Airbus and Boeing suggests a 6% to 7% increase in the installed base growth, which stands at around 19,000 to 20,000 narrow-body aircraft currently in operation. For departures, we estimate an increase of about 3% or so, in the low single digits, which leads us to a ratio of around 3% to 4%. We don't have exact figures for that number, but we want to ensure everyone understands our fundamental assumptions as we project CFM56 shop visits, since that drives the expected shop visit numbers.

Could you provide some insight on the profitability of the LEAP aftermarket? It has significantly contributed to the CES performance thus far this year. You mentioned that profits would align with the 2030 timeframe, which, according to the revenue categories you've shared, suggests margins similar to those of the CFM56. Can you elaborate on the margin profile for the LEAP across the assays and external factors and how that is expected to evolve from now until 2028 and 2030?

Yes, we are very pleased with LEAP's progress. We are hitting our key milestones for LEAP in terms of both financial and operational performance, and the share has exceeded our expectations. Financially, we are on track for the program to break even this year, and we anticipate OE will break even next year as well. We expect the installed base to increase threefold. The key drivers of LEAP service profitability include the growth in LEAP shop visits, which will help us make better use of our fixed investments in MRO shops, leading to improved profitability. Additionally, we are seeing mid-single-digit growth and low single-digit pricing discipline in CLP, which will further contribute to profitability from new shop visits. We also expect about 30% of shop visits to come from the external aftermarket channel by 2030, increasing our spare parts revenue. Lastly, we have initial work underway on repairs that will also benefit profitability. Altogether, we are observing good progress in LEAP service profitability for 2025, which is expected to continue improving, reaching profits comparable to CFM56 margins and dollars by 2030. The LEAP service margins should approach our overall service margins during that timeframe.

I would like to continue discussing that topic because I need clarification on whether you meant the profitability of LEAP services would be similar to the overall service profitability or specifically the CFM56. Additionally, considering you are in the early stages of performance restoration and shop visits, how can you be confident in projecting what you currently know five years out to ensure you reach margins comparable to those of the CFM56?

Yes. So Doug, to clarify my earlier comment regarding service margins, when Sheila inquired about them, we mentioned that LEAP service margins should align with overall service margins, rather than specifically those of CFM56. So they should be close to the overall service margin levels. Additionally, looking at the trajectory, I can start, and then Larry can add in. Part of this relates to the improvement in LEAP durability. The enhancements we've observed over the past few years are significant, and we are on track to meet our targeted milestones. Notably, LEAP-1A durability has now reached CFM56 levels for all the units we are currently shipping and overhauling in our MRO shops. Furthermore, for GE90 or GEnx, 60% to 70% of those fleets are under long-term service agreements, and the profitability from those programs exceeds our overall service profitability. We have sufficient experience with these agreements to manage them effectively. Our approach is conservative, and with enhancements in durability, we feel more confident now than we did a few years ago. Larry, do you have anything to add?

Larry and Rahul, nice quarter and good presentation. I wanted to ask a question about the new HPT blades and the LEAP-1A and LEAP-1B. That should result in better margins on both just through spare part sales but also by extending the time on wing for the CSA contracts. So I'm just wondering how long are you expecting it to take to retrofit the roughly 9,000 plus LEAPs that are already delivered? And then as those retrofits happen, should we expect you to be booking favorable contract margin views as those retrofits ramp up?

Scott, maybe just a couple of key markers here. Again, we received certification for the durability kit for the LEAP-1A late last year. I think Rahul mentioned in his prepared remarks. We're now fully in production both with new make and in the aftermarket. We're not going to go out necessarily and try to upgrade everybody overnight. That will be a multiyear process as the field of engines come in for their next shop visits. So think years, not months in that regard. But clearly, as we talk about the LEAP installed base growing by what, a factor of three between now and 2030, all of those days will be covered. We updated the outlook here for the durability kit for the LEAP-1B thinking about early next year, we'll go through a similar process and feathering that in both with respect to new make and in the aftermarket. And again, with respect to the fleet that's out there, upgrade those as they come in. So you put that together, I think we are, again, encouraged with the outlook here in part because of the improved durability performance. We know that's top of mind for customers. But in turn, we also are going to have a more producible blade. That is going to help us. It's already helping us on the LEAP-1A, deliver better output. So part of the services revenue number even in the quarter here, up 29% is a function of improved supply chain performance to include, but not limited to the new HPT blade.

I wanted to ask about the margin trends as we move into next year, especially considering the decline expected in the second half. Looking ahead to 2028, we anticipate that margins will be higher than this year and last year, but there may be a starting point in the latter half of this year that is significantly lower. How can we approach bridging that gap from the second half of this year through 2026 in order to reach our goal in 2028?

Yes, Seth. As we look ahead to 2026, we're experiencing significant momentum coming out of 2025. We've raised our revenue and profit expectations, partly due to improvements in our supply chain and a better macro environment than anticipated in April. This positive trend should carry into 2026. Specifically, regarding our commercial equipment segment, our backlog extends for several years, and as Larry mentioned, we are essentially sold out through the end of the decade, so we do not anticipate major disruptions. We plan to continue enhancing our engine output and improving shipments. On the commercial services side, while there is some uncertainty, the situation feels more favorable than it did three months ago. Importantly, our core growth strategy remains intact even in a fluctuating economic climate. We are witnessing growth in our LEAP installed base and an increase in LEAP's share of cycles, nearly 6 points compared to 2023. The number of engines coming off wing is expected to rise in both 2025 and 2026, independent of the cycles that are currently flying; this is a positive indicator. We're also expanding the wide-body work scopes and applying a mid-single-digit price increase, which boosts our confidence in achieving growth targets for our service business in 2026. Regarding DPT, we have a steady business with a $20 billion backlog, which is promising as well. Although the economy may influence factors, overall, we're optimistic. In terms of the second half of 2026, I wouldn’t focus too heavily on one quarter or half-year since various factors can affect performance. As previously noted, corporate expenses will be more concentrated in the second half, and R&D will increase between the first and second halves. Similarly, 9X shipments are scheduled for the second half rather than being evenly distributed throughout the year. Therefore, when considering projections for 2026, it's more effective to look at the full year for a normalized perspective before moving forward.

Obviously strong CES order growth in the quarter, but you still do have that conservatism in the second half of the year that you talked about. Is that informed by behavior changes from airlines or your conversations with customers? Or are you just erring on the side of caution? And then similar question as MAX and LEAP deliveries ramp up, are you hearing any fleet planning changes in terms of retirements from your customers?

Gavin, regarding the first question, I don't think we have a significantly different outlook for the second half compared to what we had 90 days ago. In the second quarter, departures were consistent with the first quarter, showing a 4% increase, which we monitor closely. For the full year, we anticipate a low single-digit increase, indicating a somewhat stable or slightly improved second half. I think our comments align with what you're hearing from the airline industry, so I might consider our stance a bit conservative. Regarding skyline, we haven't observed any changes in customer behavior, whether it's concerning our work with Boeing on the MAX and wide-body platforms or with Airbus on the neo; those backlogs remain solid. We're focused on the annual production increases. We haven't noticed any significant developments on that front either. When you combine all of this, it supports a more optimistic outlook for 2028. The foundational platforms are expected to be in service for a longer duration, whether in the narrow-body or wide-body segments. We recognize that there is considerable demand to meet and momentum building as FLIGHT DECK aids in improving our delivery capabilities.

It seems like since the Paris Air Show, the discussion around RISE has changed. It really doesn't seem like you all feel much more confident in the technology and in the program. And in fact, your competitors are trying to say, no, no, no, that won't work. And it really just seems like there's flags getting put in the ground. So I guess, broadly, what makes you all feel so good about RISE today? And if it doesn't end up being an unducted fan, is there a ducted option?

Ron, we're really looking forward to putting the full team on stage in Paris. I think everybody understands why we adjusted that original plan and are here in an abbreviated form. I'm glad you think we planned to flag. It was a flag we planned several years ago at the air show. But we were going to be as full-throated in Paris as hopefully we are today with respect to our confidence and our optimism about the RISE development program, technology development program, this is a reminder for everybody, and in particularly, open fan architecture. Why? To your first question, do we feel so good about it? I think it's really a combination of all the progress that we're making in the labs. Again, I'll underscore technology development. But we now have over 350 program tests at the module subsystem level, right, that is not only focused on that propulsive efficiency gain, and we talk so much about. But also durability, and to be able to, again, leverage everything that we've done, not only in predecessor wide-body platforms, but narrow-body here as well, I think it just sets us up to have confidence to go with this architecture. More to come, right? This is a multiyear effort, ground test, flight test, all of that. But then I think when you combine that with what we're hearing from so many in the industry, right? Who understands the pivot to relying more on propulsive than thermal efficiency. We had Mohamed Ali, who runs technology and operations up on stage in Toulouse just a couple of months ago, right, talking about the joint work we're doing with Airbus in that instance and their own thoughts around what that next-generation narrow-body is going to require in the latter part of the next decade. So we're all in, Ron, on open fan, not to be strident about it, but really to just make sure that we're making the investments today and all the underlying technology components that are going to deliver on that next-generation narrow-body propulsion platform that the industry will need.

I wanted to ask a couple of questions on the OE side of things. I guess, first of all, starting with 9X, the production rate assumptions that are underlying your loss forecast on the 9X, if you can give us some detail there, what you're assuming for LEAP deliveries out in 2028? And then how much you think better LEAP profitability on the OE side and GEnx profitability can offset some of that incremental 9X headwind?

Okay. I'm taking notes here, David, as I'm trying to answer the question. There are a few there. I think you start it on the 9X and thus the 777X. Maybe is context, right, we're excited to be underway. We have started shipping engines to Boeing and are working with them, as you would imagine, on EIS. I think we're encouraged by what we hear from customers, right, witnessed the 60% win rate versus competition. We've got over 1,000 engines now in backlog. So the market really wants to see this platform, this engine come forward. We know that at EIS, it will be the most tested engine really in the company's history. We've got over 30,000 cycles behind us now, 8,000 endurance cycles. So I mean that's a significant test regimen. And again, leveraging what we've learned, particularly in hot and harsh environments, we've got over 1,600 dust ingestion tests that are behind us. So we continue to learn and iterate there. I think we're on our second generation of both the HPT blades. And the CMC nozzles. So a lot happening in this regard. Rahul, maybe you can hit some of the modeling assumptions? But we're excited to be underway, and I think this is going to be a winning platform in the marketplace. Yes, absolutely. Regarding the losses, Larry mentioned some of the underlying trends. We shipped our first engines to Boeing last year and are increasing our shipments to them in the latter half of this year. These initial shipments come with the highest losses, so we anticipate a profit headwind of a couple of hundred million dollars in 2025, which aligns with our previous expectations. We are working to reduce costs and expect to cut around 30% of expenses by the time we reach the 50th unit, and another 30% by the time we reach the 250th engine. After that, we expect to move past our peak losses, which we anticipate will occur a year after the platform enters service, projected for 2026. Looking ahead to our guidance for 2028, while the losses per engine will decrease, the growth in volume means we expect losses to be a few hundred million dollars higher in 2028 compared to 2025. Overall, we believe the program will become profitable as we move into the 2030s, which outlines our expectations for the LEAP trajectory.

I was wondering if you could elaborate on the state of the supply chain. You guys have given us good updates in the past, how that's progressing? Where the bench points still are? And also, if you could just comment on your expectations of gross inflation over the supply chain inflation over the forecast period?

Sure. I believe the insights we've shared today about our performance, both in terms of output and input, show that we are optimistic about our progress with FLIGHT DECK and the new organizational structure we implemented earlier this year. This includes positive trends from our suppliers. I recall a year ago when we struggled to meet volume demands and faced significant delivery inconsistencies. This made it challenging to scale operations, particularly without clear visibility and certainty. That’s why we highlight the 10% improvement from the first to the second quarter in the volume we’re receiving from our key suppliers. When we refer to our critical suppliers, we mean 12 companies across 18 locations consistently meeting their commitments at about a 95% rate, which greatly simplifies our operations. However, what excites me most is not captured in these numbers. We see daily how our supply chain, engineering, and quality teams are collaborating more effectively, allowing us to tackle technical challenges with greater speed and depth while also setting higher expectations for both immediate and long-term solutions, which we extend to our suppliers. I hope others perceive that GE Aerospace has become a more constructive and collaborative partner. We aim to be their top customers because we recognize that we cannot support the airlines and manufacturers without the best supply base. Thus, there are many indicators confirming we are heading in the right direction. Nonetheless, we must achieve more in the second half of the year than we did in the first half and strive for greater accomplishments next year compared to this year. This is an ongoing focus, and it's essential not to assume the supply chain issues are resolved, though there are many signs of progress.

To address your question about inflation, Gautam, it closely relates to what Larry mentioned regarding the ongoing increase we need from our suppliers. We anticipate the material delivery situation to stay constrained and do not expect an immediate improvement. The ramp-up required for both the original equipment and aftermarket sides is significant, particularly considering the high expectations set by Boeing and Airbus. They forecast an increase in total aircraft output of 50% to 60% over the next three years. Along with the necessary growth in the aftermarket and defense sectors, we foresee the supply chain remaining tight, which will contribute to a heightened inflationary environment compared to what we have experienced before. Therefore, we do not expect any relief from the conditions we've seen over the past couple of years, and we anticipate a consistent situation going forward. As we discussed our profit drivers for 2028, we believe the pricing strategies we outlined this morning will offset inflation, forming the foundation for our projected profits in 2028.

Larry, I want to just go back to some of the comments that you made about the international defense outlook. And I think you used the word localization maybe in your words. So just kind of curious how you think the company is going to participate in the growth of European defense budgets that we're likely to see over the next decade? Do you need to find additional partners to take advantage of this growth? Do you need to make some investments either organically or inorganically in the region to assure that you are local enough in the views of the Europeans to take on some of this new work?

I believe that regarding Europe, especially, the optimism we have about defense growth is fundamentally centered within Defense & Systems. It will mainly involve our current programs across various sectors, including rotorcraft, combat jets, and trainers. The increased budgets are likely to align well with our existing footprint. This is somewhat similar to what we've seen with the F110 agreement. Additionally, international contracts often have better pricing structures, resembling commercial agreements more closely, which benefits us in terms of revenue and margin. While we are unable to physically showcase our capabilities today due to the virtual format, it’s important to highlight Avio Aero, our defense presence in Italy, which has a strong relationship with the Ministry of Defense and is involved in key programs like the Eurofighter, Eurodrone, and GCAP. This will be a focal point for us moving forward. We are certainly open to exploring other partnerships and arrangements, but we are also satisfied with our current positioning, both in the U.S. and with Avio. Considering the backlogs that both Rahul and I have mentioned, we anticipate a favorable growth trajectory even before we secure any major new orders from our customers in Europe or elsewhere.

Yes. I wanted to ask about the 15% higher revenues associated with narrow-body services through 2028. Just curious if you could parse that out a bit. Specifically from a couple of angles. One, sort of sounds like much of that is CFM56. And I'm wondering if you've seen within that any fundamental change in airline spending, like greater percentage of engines seeing a second or third shop visit? Or how much of this is really just supply chain unlock and better turnaround times and your ability to obviously get better flow-through.

Yes, that's a great question, Ken. Let me take a moment to provide some context before focusing on narrow-body. This morning, we improved our services outlook by around $4 billion compared to our expectations in March of last year. This improvement stems from two main factors: first, we've enhanced our growth expectations from high single-digit to double-digit growth, starting from a higher baseline in 2024. Together, these factors contribute to about a $4 billion increase in services revenue from where we stood last March, indicating a broad-based improvement, which includes both narrow-body and wide-body aircraft. Now, regarding the narrow-body sector, there are two key drivers for the positive outlook. Firstly, we have seen 600 more shop visits for CFM56 engines from now until 2028 compared to last year, which indicates fewer aircraft retirements and airlines extending the lifespan of their fleets. Even lessors are noting that they are renewing leases at rates of about 90% to 95%, up from just 30% to 40% a few years back. Consequently, these fleets are remaining in service for a longer period. Additionally, we're witnessing an increase in the LEAP installed base, contributing positively to our outlook as well. Thus, the narrow-body segment comprises improvements from both CFM56 and LEAP engines. The same positive trends are evident in the wide-body sector. For instance, we noted a rise in GE90 shop visits, increasing by 100 visits, alongside growth in the GEnx installed base. Overall, the situation mirrors what we're experiencing in narrow-body services. This comprehensive improvement in outlook accounts for the additional $4 billion in revenue compared to March, leading to an overall increase of about $8 billion in services revenue anticipated by 2028, which will drive profit growth.