General Electric Company (GE)
Q2 2008 Earnings Call
July 11, 2008 8:30 am ET

Executives
Dan Janki - Vice President, Investor Communications
Jeffrey R. Immelt - Chairman & Chief Executive Officer
Keith S. Sherin - Vice Chairman & Chief Financial Officer

Analysts
Jeffrey Sprague - Citigroup
Deane Dray - Goldman Sachs
Nicole Parent - Credit Suisse
Robert Cornell - Lehman Brothers
John Inch - Merrill Lynch
Scott Davis - Morgan Stanley
Nigel Coe - Deutsche Bank
Stephen Tusa - J.P. Morgan
Christopher Glynn - Oppenheimer

Presentation

Operator
Good day, ladies and gentlemen, and welcome to the General Electric second quarter 2008 earnings conference call. (Operator Instructions) At this time all participants are only in a listen-only mode. My name is Lauren and I’ll be your conference coordinator today. If at any time during the call you require assistance please press * followed by 0 and the conference coordinator will be happy to assist you. If you are experiencing issues with the slide’s refreshing or if there appears to be delays in slides advancement please F5 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, Dan Janki, VP of Investor Communications. Please proceed.

Dan Janki
Thank you, Lauren. First of all, I would like to welcome everyone. Joanne and I are pleased to host today’s conference call. The press release went out this morning at 6:30 with our financial information. That along with today’s presentation and supplemental-financials, are available at our investor website at www.ge.com/investor. You can follow along via the webcast or you can download and print the information. Today’s presentation does contain forward-looking statements based on the world and economic environment as we see it today and it is subject to change. We will be going through today in the presentation, an update on second quarter operations and financial results and outlook on third quarter. To do that, we have our Chairman and CEO, Jeff Immelt, and our Vice Chairman and CFO, Keith Sherin. So, I would like to turn it over to Jeff to get us started.

Jeffrey R. Immelt
Great Dan thanks. Welcome, everybody. Just to go straight to the overview page, we believe we had a solid performance in a tough environment, delivering $0.54 per share in continuing operations in line with guidance. We are really driven by global revenue growth of 24% offsetting a sluggish U.S. economy and our long-term positioning of the company outside the United States has really benefited us in the second quarter of ’08. The industrial businesses I think actually did quite well. We had a gain on the JV of our Hitachi nuclear business in the second quarter last year, but if you take that away, the industrial earnings growth was actually fairly strong. Infrastructure leads the way and Keith will go through more details on that later, and healthcare and NBCU were in line or slightly better than expectations. If you look at our financial service earnings, I think particularly versus their peers, they were both above our own expectations and we believe compare favorably to the broader industry. Commercial finance was up 7%, GE Money down 9, and we’ll spend some time today just going through the business model of risk management, attractive origination, triple A funding, originating for our own balance sheet, and we’ll go through that in more details. As we said in the past, as we have gains, we’ll apply them to restructuring. We had about $300 million of gains on business dispositions in the quarter and we did about $400 million of restructuring. So, the business fundamentals remain strong and we are positioned for long-term growth. We remain on track for guidance for the year of 220 to 230, and again I think we executed well in a tough environment.

If you go to the next page, we continue to execute on our long-term strategy. We made several portfolio announcements in the quarter. First in GE Money, you read this morning we reached agreement on disposition of GE Money, including Lake. This was something that we talked about last year. Keith will give you more details. The private label credit card disposition is progressing. It’s a good business, fundamentally strong. Slower than we expected but we believe we’ll get it done, and we signed a Europe/Santander swap of one of their commercial finance banks, one of the commercial finance banks for some of our consumer assets in Europe. We announced the intent to explore distribution of consumer and industrial to our shareowners. Now, we talked about appliances in May. We’ve received great interest in our appliance business. A lot of the strategics are global buyers. This is a tremendous strategic opportunity for them to build a strong North American operation. However, it was our view that the total lighting and industrial business are very interwoven in the business and that a tax-free spin to our shareowners may be the best approach, and again we’ll go through that in a little bit more detail.

We closed the Hydril & Whatman transactions. These are sweet spots for our oil and gas and healthcare business and we’ll continue to do acquisitions like that. We remain opportunistic in financial services, closing the Merrill Capital deal and Citi will close in July, and we announced The Weather Channel investment with NBCU in the lead, so we continue to invest in our great media operations. We’ve had an initiative called growth as a process for four or five years. That pays dividends in a slow economy like this. Our total orders remain robust at up 8%; our equipment backlog, up 25%. I’d like to highlight just the strength in services, which I think has always been a big part of our business model, service revenues, up 18%; service orders, up 19%, CSA backlog, up 17%. This is high margin from the installed base and we think this bodes well for the future. Organic growth up 5% and industrial organic growth up 9% and as I said earlier, global revenue’s up 24%, now more than half of our overall revenues. From an operating standpoint, solid infrastructure margin expansion of 60 basis points. We continue to drive restructurings and we are on track for our cost goals for the year.

We’ll go through that in a little bit more detail, and our industrial cash flow from operating activities was up 5%, driven by working capital improvements. Just quickly, before I turn it over to Keith, some of the key operating performance metrics that we talked about, solid growth in orders, revenues, and assets. So, again even in a sluggish economy, we think our process capabilities remain very strong. Earnings that are on expectations, returns of 17.6%, margin rates of 16.4%, down 40 basis points from last year and again, infrastructure was up, healthcare and NBCU roughly on plan and we were really dragged down by consumer and industrial, and that’s really a pricing story as much as anything else. We did substantial cost-out work in C&I in the quarter, and cash on plan with a very strong balance sheet and solid triple A.

So again, we believe this is a solid performance in a difficult environment. I’ll now turn it over to Keith to kind of go through some of the details.

Keith S. Sherin
Jeff thanks. Let me start with two recent announcements. First, this morning we’re really pleased that we reached an agreement with Shinsei Bank to sell our GE Money business in Japan. Some of you may have seen the announcement. This includes the Lake personal loan business that we talked about selling last year. In addition to the personal loan business, we’ve expanded this transaction. It’s larger than the original announcement. We’ve included an additional $1.7 billion of mortgage and credit card assets and Shinsei is going to take over 1,100 branches, all our employees, all the assets and with that sale, with the additional assets and the complete sale, we recorded an additional $200 million of charge in disc-ops in Q2, and we anticipate this is going to close in the third quarter. So we’ve been working on this for quite a while. It’s terrific that the team was able to execute on lightening up on consumer assets in Japan in a pretty tough environment and Shinsei has got a win here. They really want to get into the consumer business and they’ve got a great platform and they really like the quality of the portfolio and the people and the systems and the team that they are getting. So, we are thrilled to have that signed up today.

On the right side, you’ve all seen the announcement on our intention to have as the primary focus on our business development the distribution of the C&I business to our shareholders. It’s going to be an efficient transaction for GE and shareholders. We believe shareholders are going to get upside from being able to participate in the benefits of the entire C&I business. It’s not really dependent upon M&A or equity market conditions. We will have some capital redeployment and it increases the overall company margins and long-term growth rate. So, we are targeting first half ’09 execution. We’re really pleased with the Shinsei agreement and we are starting to work on the C&I transaction.

Let me start with orders. We continue to have really strong absolute orders. On the left side, as we always show you, is major equipment. For the second quarter we had $13.7 billion of orders. That was up 4%. I’ve always talked about how the orders are lumpy on a quarterly basis but you can see some pretty good Vs here in aviation, energy.

Transportation had a $1.5 billion order last year that didn’t repeat but their outlook for additional equipment orders is very good, and absolute order levels at these amounts are very strong. The orders grew by 30% more than the shipments as we continue to build backlog. Just in infrastructure alone, the backlog now is over $50 billion. It’s up 29% just from the start of the year, so when you talk about how’s the global economy, I think when you look at these long cycle orders continuing to come in at these levels and exceeding shipments and building backlog, we feel like it’s pretty strong and continues to remain robust.

In the middle is, services. We had service orders of $9.5 billion, up 19%. It was a tremendous services quarter. You can see the breadth across all the businesses, up double-digit. Aviation was up 14. The commercial spares rate in the quarter was 18.6 a day, $18.6 million a day versus 18.4, up 1%. But the overhaul was up 31%, military services were up 24%, energy service orders were up 19%, just an incredibly broad service performance in the quarter and that bodes well for the future and it also reflects the installed base that we built, and on the right side, as you’d expect the flow orders of $4.1 billion were down 3%. Organically you can see appliances had a tough market. Retail was down 7%, contract was down 15% reflecting housing, and enterprise-solution was up 1%. So overall, orders continue to be driven by just great infrastructure demand and we continue to build more backlog.

Next is a summary of the second quarter. I’m going to then cover the industrial business and then follow with the financial business, but on the left side is the summary of continuing operations. We had very strong top line revenues of $46.9 billion. We’re up 11%. You can see it was driven by the industrial sales, which were up 15%. Earnings of $5.4 billion and earnings per share on a continuing basis of $0.54 with the effects of the buy-back were flat. Net earnings, which included the impact of the discontinued operations that I talked about to complete the exit of the Japan business were at $0.51, and overall down 2%. Our GE cash flow year-to-date is $9.3 billion. It’s down 20 and I’ll show you how that comes together in a few pages, and the industrial cash flow, as Jeff mentioned, $7.3 billion, up 5%. Basically we don’t have a repeat of the insurance dispositions from last year.

Now, the consolidated tax rate for the quarter came in at 16%, in line with the first quarter and the previous guidance for the year, and for the total year, our guidance remains in line with the 16% first half rate, about flat with last year, and on the right side, you can see the business results, a great performance in infrastructure. I’ll go through each of these in a few pages. Commercial finance was up 7%, better than guidance. GE Money was down 9% but also better than guidance and NBCU and healthcare came in about as expected, and we had a tough quarter in industrial products, driven by C&I and that was lower than expected. So overall, $7.6 billion of segment profit, up 7%, a very strong performance in this environment, next, a few items that were in the businesses, and in corporate around gains and restructuring. I’ll start with three points on the left side. First, there is no repeat of the 2007 Hitachi gain, which was $500 million after tax in corporate last year.

So, we’re comparing to that on the industrial side. Second, we do have about $0.03 of gains in the business segment results this year. There are four items: Garanti founder share gain is in GE Money at $89 million after tax. We sold 9% of Penske. We’re down to 51% ownership in commercial finance to Penske and that was $93 million in commercial finance. We formed a JV in Water with Pentair in a very nice strategic transaction. That resulted in a gain of $52 million. That’s in infrastructure, and we sold the Sundance channel at NBCU and that was about $61 million after tax. So those gains, the four gains that are in the businesses were more than offset by the restructuring and other charges of $400 million after tax, and the details are on the right side. We continue to work on the cost structure of the company, taking out costs in C&I and commercial finance and infrastructure. We continue to reduce our footprint and streamline our organizations, and we had some other items, including purchase accounting and a C&I extended warranty contract but overall we executed $0.02 more restructuring than we had planned, and this obviously continues to help us improve our earnings going forward.

Let me go into some of the industrial businesses. First is infrastructure. In the second quarter, the infrastructure results were really terrific; revenues of $17.6 billion, up 26%, segment profit, $3.2 billion, up 24%. You can see the key business results down the left side and in the box on the bottom left, you can see that if you look at the industrial businesses in the infrastructure segment without the verticals, the revenue is up 24 and the segment profit is up 29, nice leverage, so a good performance. Some of the business dynamics are on the right side and I thought what I’d do is go into more detail on aviation and energy. I’ll start with aviation. Our revenue is up 21%, segment profit up 10%. Pretty good orders, total orders of $5.4 billion were up 21% for aviation. Commercial engines of $1.6 million were down 8% but again, you’re dealing with some pretty tough comparisons for the GEnx wins last year and the GE 90 wins. Military engine orders were up 62%, driven by some Navy F18 orders. The product backlog continues to grow. Commercial engine orders for the quarter were 113% of the sales. So again, the book-to-bill was growing backlog, and we ended the quarter with $20.5 billion in backlog, up 22% from last year.