General Electric Company (GE: chart)
Q3 2008 Earnings Call
October 10, 2008 8:30 a.m., ET

Executives

Trevor Schauenberg – Vice President of Investor Relations
Jeff Immelt – Chairman & Chief Executive Officer
Keith Sherin - SVP, Vice Chairman, CFO

Analysts

Bob Cornell -- Barclays Capital
Scott Davis -- Morgan Stanley
Deane Dray -- Goldman Sachs
Christopher Glynn -- Oppenheimer
Nicole Parent -- Credit Suisse
John Inch -- Merrill Lynch
Jeff Sprague -- Citigroup
Steve Tusa -- JP Morgan
Nigel Coe -- Deutsche Bank

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the General Electric third-quarter 2008 earnings conference call. At this time, all participants are in listen-only mode. My name is Lauren and I will be your conference coordinator today. (Operator Instructions) If at any time during the call you require assistance please press * followed by 0 and a conference coordinator will be happy to assist you. If you are experiencing issues with the slide refreshing or there appears to be delays in the slide advancement please S5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today''s conference, Trevor Schauenberg, VP of Investor Communications. Please proceed.

Trevor Schauenberg

Thank you, Lauren. Good morning and welcome, everyone. JoAnna Morris and I are pleased to host today''s call. Hopefully you have the press release from earlier this morning, and the slides that we will be walking through are available on our website at www.ge.com. If you don''t see it, please refresh. You can download or print to follow along. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. We will be reviewing the GE press release that went out earlier today and have time for Q&A at the end. For today''s webcast we have our Chairman and CEO, Jeff Immelt, and our Vice Chairman and CFO, Keith Sherin. Now I would like to turn it over to our Chairman and CEO, Jeff Immelt.

Jeff Immelt

Thanks, Trevor, and good morning, everyone. Just on the overview page, clearly to everyone the environment remains very volatile. The global financial system is tough. We see consumer confidence falling, unemployment up again last week, but we still see pockets of strength in Infrastructure and Media, and we see that in both orders and our relative performance. The performance we announced this morning is completely in line with what we talked about that at the September 25th announcement. At that time we really put out three guideposts, if you will. We said financial service earnings would be about $2 billion; they came in at $2 billion. We said that Infrastructure and Media segment earnings would grow between 10% and 15%; and they grew at 12%. And we said we would deliver earnings in the range of $0.43 to $0.48; and we delivered $4.5 billion or $0.45 of continuing earnings. So we view this performance to be right in line with that announcement.

We have also taken a lot of actions that we will go through in more detail to improve our capital finance position, reducing leverage, improving liquidity, and raising new equity at the parent. So we really think the Company is well positioned to perform regardless or in whatever economic environment that we see in the future. On the second page, really to talk about our strategy we continue to execute despite the environment. From a portfolio standpoint, we were able to complete several transactions in the quarter, including the sale of GE Money in Japan. We continue to work on our swap with Santander. We are running PLCC to hold, but we will continue to evaluate options. We closed the Citi Commercial finance deal, which will add to earnings and has already started to add in 2008. We announced a partnership with Mubadala and closed the Weather Channel investment. And our C&I spin process is ongoing, and we still believe we will have several options for that business. From an operational standpoint, we continue to restructure to improve our cost position. Our cash performance was very strong in the quarter, with industrial CFOA growing 5% year-to-date and NBCU had its first double-digit profit growth in three years. I think our growth was particularly impressive in this environment. Our industrial organic growth was up 10%. That''s one of the highest numbers we''ve had in the last few years. The total orders, excluding C&I, were up 9%. We grew backlog in both equipment and services by more than 25%.

Our global industrial growth grew 20% and we believe that the Beijing Olympics were a huge success. All in all, we end the third quarter with $170 billion of backlog in Infrastructure, and we think that''s quite a good performance to have in the quarter. On the next page, we''ve done a lot of work in the last couple weeks to risk-reduce the Company, which we think is just a sound way to run the Company in the midst of all the financial turmoil we''re seeing and I want to just walk our investors through that this morning. I think it begins with just the fact that we have got a stronger Company today. We have exited some weaker industrial businesses. We have dramatically improved the industrial portfolio in Infrastructure and Media over the last few years, and we think that is strategically very important. We have diversified globally over the last few years and today 55% of revenue comes outside the United States and we have divested mortgage services, FGIC, the bond insurance business, primary insurance, mortgage insurance, reinsurance, mortgage distribution, and our Japan consumer finance business, which we really think strengthens our Financial Service position. What we talked about on September 25 was proactively protecting the Triple-A. We are on that pathway to reduce the leverage to 6 to 1 by the end of ''09; and the CP, to 10% to 15% of debt will occur by the end of ''08. We won’t require any long-term debt in fourth quarter of ''08. Our collections are outpacing our origination right now and we have grown our retail deposits up to $43 billion, which again we think is another important funding source. We accelerated our liquidity plan and we have clear protection now of CP, if the CP market remains under duress. I mean we really see the CP market improving right now. We have had no problems with our own CP, but I think we have just taken this issue off the table for investors. The $15 billion equity offering gave us more cash, and now the backup lines plus cash are greater than CP.

We believe that the moves that the Federal Reserve made to make a window available for A-1s/ P-1, CP gives the whole industry protection if the market shuts, and we think that''s good for the entire market and we continue to increase our reserves to reflect the higher loss environment. Our reserves are up $800 million in Capital Finance versus third quarter ''07, and we''re planning for more in the fourth quarter and ''09. So we really believe we have aggressively risk-reduced the Company in this volatile market, and our Board has approved the management plan to maintain the GE dividend through 2009 and we think that gives our investors some real strength looking at the current markets. Just to tee up the third-quarter key performance metrics, then I will turn it over to Keith. The growth continued to be a pretty solid performance, orders up 9% ex C&I, revenues up 11%, and assets up 11%. Our earnings per share at $0.45 continuing; we are in line with what we talked about on September 25. Our returns are solid, a little bit weaker because of Financial Service earnings. Our margins, if you take out C&I, but more importantly the Olympics, the Olympics are a lot of revenue without a lot of margin, are roughly flat year-over-year in the Infrastructure space and our cash performance as I said is very strong and should continue that way throughout the rest of the year.

So we think this is a good in-line solid performance in a very tough environment and now I will turn it over to Keith to take you through the details.

Keith Sherin - SVP, Vice Chairman, CFO

Thanks, Jeff. Let me start with the third-quarter results. On the left side is the summary of continuing operations. We obviously had a very strong top line quarter, driven by our industrial businesses. Revenues of $47 billion were up 11%. Industrial sales of $28.9 billion were up 17%. Financial Services revenue of $18 billion were up 2%. We earned $4.5 billion of net income, which was down 12%, and on earnings per share we delivered the $0.45 from continuing, which was down 10%. On net earnings per share, which includes discontinued operations, we delivered $0.43. The negative variance is because, if you remember, last year we had the plastics gain in discontinued ops; and obviously we didn''t have any comparable to that this year in disc ops.

Cash flow I''ll cover more in a few pages. Jeff mentioned industrial cash flow up 5%, a very good performance year-to-date. And on the tax rate, in the quarter the consolidated rate came in at 11%, which was flat over last year. So on a consolidated basis there was no change. The GE rate came in higher at 29%; that''s up about 4 points. The GECS rate came in negative-29% in third quarter, and that is largely result of revising our GECS earnings down for the year. That has resulted in a 7-point decline in our total-year rate for GECS. Our estimate is now a negative-4% for the year; and that drove the negative-30% in the third quarter. For the total year, our guidance is now a rate of approximately 15%, and that is in line with our rate for the third quarter. On the right side you can see the business results. We had real strength in the Energy Infrastructure segment. I''m going to go through all the details of these in a few pages. We were slightly below expectations in Technology Infrastructure, but still earned $1.9 billion, up 2%. We were above expectations in NBC, a double-digit quarter as Jeff said and overall Industrial ex C&I was up 12%.