GE’s CEO Tells Investors Cutting Debt Comes First in Revamp

(Bloomberg) -- General Electric Co.’s new boss wants to reassure shell-shocked investors that he knows just how tough the past year has been -- and that he has a plan to turn things around.

In his first annual shareholder letter, Chief Executive Officer Larry Culp outlined his priorities as he tries to pull the iconic manufacturer out of a tailspin. After a chaotic 2018 marked by “weak execution,’’ Culp said he is looking to revamp the company’s power business, rebuild the diminished dividend and reduce debt.

“We are putting GE on firmer financial footing,” he said in the letter, which was released late Tuesday along with the company’s annual report. “Simply put, we have too much debt and we need to reduce it thoughtfully and soon. Once we put our balance sheet in a healthier place, we’ll be in a better position to play offense across all our businesses.”

Culp is attempting to regain investor confidence as GE tries to recover from one of the worst slumps in its 127-year history. The new CEO, who took the helm in October after the surprise ouster of John Flannery, has sought to improve financial transparency, reduce risk, boost cash and reshape the portfolio. He highlighted those priorities with a deal this week to sell GE’s bio-pharmaceutical business for $21.4 billion.

Investors have cheered the recent moves. The shares rose 2.5 percent to $10.66 on Tuesday, bringing this year’s gain to 46 percent -- the best performance on a Standard & Poor’s sub-index of U.S. industrial companies.

‘Radically Change’

That’s a big turnaround from last year, when cash shortfalls and weak demand for gas turbines helped drag the shares down 57 percent.

This will be “a year of change” for GE’s ailing power-equipment business, said Culp, who has already announced a reorganization of the unit. GE is looking to cut costs, improve operations and increase the accountability of the division.

“If we want to run more empowered and accountable businesses, we need to radically change how we operate across GE,” Culp said.

The CEO also said he intends to restore the dividend to “a level in line with our peers” when the company is on firmer footing. Culp slashed the payout to a penny a share in October.

Insurance Reserves

Investors have also kept a close watch on GE’s insurance operations, which have bedeviled management as the company has struggled to get its arms around lingering issues with a defunct long-term care business.

GE said last year that it would have to put $15 billion into loss reserves for the policies, resulting in an accounting probe by the U.S. Securities and Exchange Commission. The company later disclosed a Justice Department investigation into its finances as well.

The Boston-based company contributed $3.5 billion to the reserves last year and $1.9 billion this year, Culp said.

GE also reviewed investment-management strategies for its insurance portfolio last year, engaging external parties and hiring a new chief investment officer, according to the annual report. The company expects to add more investment managers and diversify its holdings in that business into asset classes including private equity, senior secured loans and infrastructure debt.

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