General Electrics, Inc. (
2013 Electrical Products Group Conference Call
May 22, 2013 11:00 AM ET
Jeff Immelt - Chairman and CEO
Deane Dray - Citigroup
If I could ask everybody to take their seats that would be
fantastic. So, obviously, Jeff Immelt doesn't need any
introduction. Thrilled, as always, to have you here. Thank you for
sponsoring lunch. I also want to remind everybody that even with
Jeff, we'll be accepting buy side questions by BlackBerry, or sell
side, if you want to do it that way too anonymously. And I can
always be shot on the side. All right. Thanks, Jeff.
Great, Steve. Thanks. Good morning, everybody. It's great to be
back to my favorite resort in Florida. I just want to say that at
the offset. I'm thrilled to be here once again. Same themes you're
going to hear from us, portfolio value, industrial growth, smaller
GE Capital, good capital allocation, you're going to hear that
through the presentation today.
I'm afraid I'm not going to have a lot of late breaking news on
the economy that's going to be different than what you've heard. We
see the US getting a little bit better every day. And merchant
margins for us continue to be very strong. I would say a good blend
of countries, and China is good for us so we see good growth there.
Europe and Japan, we're not counting on much.
I thought I'd give you a little bit more color on Europe. I
think we see second quarter being better than first quarter. Places
like the Nordic regions continue to be strong, but Western Europe
is quite tough. So we're not counting on anything great out of
Europe this year or next, and we're kind of planning accordingly.
So that's the lay of the land, I'd say, from a global economic
We have no real change to the framework that we've got for the
company from the first quarter call. We adjusted Power & Water
after the first quarter, but all the businesses are really
performing per expectations. Aviation and Oil & Gas continue to
be super strong. Healthcare and Transportation have great strength
outside the United States. Energy Management and Home &
Business Solutions are going to see margin accretion during the
year, and Capital continues to be solid. So that's kind of the
portfolio and how it's performing.
We don't have any change to the framework for our earnings or
our EPS for the year. We see us getting good solid growth in both
of those. No change on cash. We still expect to have a good year in
cash. And we said in the first quarter call that our organic growth
will be at the low end of the range. No change to that.
We think risks and opportunities are more or less balanced for
the year. And the way we try to keep a buffer for ourselves is by
running our cost play even harder, and having a lot of cash and
being able to do more buyback if that's a choice we want to make.
So that's kind of the way we look at where the year is.
The strategy of the company is unchanged. We have a big
industrial company, a value-creating GE Capital for big
imperatives, technology services, globalization, simplification.
That's how we run the place. We laid out five goals for the year.
Three of them are in great shape. Right now we've got to push
harder to achieve better industrial growth, and that's what we plan
to do. But these are the five goals that we've got for the
leadership team and how we kind of pay people and how we manage it
for the year.
I want to spend a little bit of time just going into a little
bit more detail on the portfolio itself. We've talked about in
year-end wanting to get Industrial earnings to 70%, always
prioritizing dividends, having a strong payout, at a great dividend
payout. We continue to invest in our Industrial growth.
We'll probably do about $10 billion of acquisitions. Between
CapEx and R&D, we spend about $10 billion here in Industrial.
On an ongoing basis, we think acquisitions are $3 billion to $5
billion. Our long-term goal is to grow our Industrial earnings 10%
and have high returns. Last year our Industrial return was a 16%
grow over time.
And in Financial Services, we've set a target to get GE Capital
down to $300 billion to $350 billion by the end of 2014. And that's
going to create excess cash in GE Capital, and we're going to use
that excess cash to buy back stock. We'd like to get our share
count down to 9 billion to 9.5 billion shares by the end of 2015.
So that's kind of the way we think about the portfolio and creating
When we were in the crisis, we painted kind of what I would call
Phase 1 for GE Capital to get down to $440 billion of ENI. We had
some principals. I think what we're saying to investors today is
that we've kind of got the next phase outlined getting the
portfolio down to - or getting the ENI down to $300 billion to $350
billion of ENI, continue to do one-off of non-core assets to
basically look at some staged exits of value-maximizing platforms.
So we're going to do that.
And we're going to continue to grow the core. We have a great
core franchise in GE Capital of kind of midmarket lending, where we
have strong number one positions, good returns. And so when you
think about Capital over the next few years, it's going to be
smaller, lower ENI, but still high returns. We'll get gains on
sales as we transition these assets. We'll do staged exits of the
assets over time, where a lot of the optionality is in our
And GE Capital is super strong financially, right? Our Tier 1
ratios are high. Our liquidity is strong. Our risk management is
excellent. So this is the way to think about GE Capital over the
next few years, smaller, probably exiting a few of the value
maximizing portfolios over that time period and still extremely
profitable extremely valuable and extremely strong franchise.
Industrially, we want to continue to grow the Industrial
business. Our long-term goals are to grow organically 5% to 10% and
expand margins. I think if we think about the next couple years,
some of the keys are to continue to grow our Service business,
having good positive earnings growth in Power & Water by
Getting the most out of Aviation and Oil & Gas that have
these huge backlogs of higher pricing to manage those, getting some
of our underachieving businesses to do a better job from a margin
and performance standpoint and to continue to drive costs. So
that's how I think about the Industrial franchise going
Technology is always a big deal for us. We think it's a core
competency. We continue to invest in R&D and launch new
products. We use technology as ways to gain and solidify market
share in industries like Power & Water and Aviation, fill
product gaps organically.
So I think we've developed more skill set to be able to fill key
product gaps organically versus doing acquisitions. And drive
margins, we've invested a lot from a research standpoint R&D
standpoint, in manufacturing. And we add tremendous value to our
acquisitions. I think people that went to the Offshore Oil &
Gas Conference last week saw a lot of the technology that we're
applying to the Oil & Gas segment that's come from other parts
We've got, I think, real scale and capability from a global
standpoint. We think our growth market revenues will be up double
digits this year. We'll see double-digit growth both in the
resource rich parts of the world and also in Asia, and we continue
to invest in capability. We continue to invest in customer
relationships and partnerships. We manage risk, and we leverage
cost where it's good places to invest. So, again, we view this as a
GE core competency just like we do technology.
I think growth markets, you guys have heard me talk about this
for the last decade. We've invested a lot in the run rate of the
company to be able to run a play in 160 countries around the world.
We've got a big chunk of the leadership team in these regions.
We've got 200 factories and service centers, 15 technology
centers. And we're a partner of choice in most of the countries
around the world, and we think this builds competitive advantage
for our investors. We think it allows us to diversify our earnings
mix in key markets like healthcare and transportation, add
A business like Power Conversion at Converteam had a $50 million
run rate in Brazil before we acquired them. We took $500 million of
orders last year. When we do a deal like Lufkin, Lufkin has a
factory in Romania and one in Argentina. We can blow these places
out when we go in and get a new beachhead. So it allows us to do a
We're doing a lot in shared services and multi-modality sites to
drive our cost structure. And we can innovate in these regions. We
have great customer Innovation Centers around the world, three
Global Research Centers. So this is about scale, and it's about
really driving good performance in our growth regions.
And Services continues to be a big imperative for the company.
We've got a massively big backlog. We continue to drive iterations.
I'd say we've tried to transition our business from a capability
standpoint from going from a break-fix model to one that did
long-term contractual service agreements. And today, our Service
business is all about driving customer outcomes and more
productivity for both our customers and for us, and we've done a
lot on that.
We look at having high capture rate on new products. So when you
look at things like GEnx or LEAP-X, the capture rate of long-term
service agreements on these engines is extremely high, driving
dollars per installed base which we drive and accomplish by driving
a lot more installed base value and then driving incremental
productivity. So we'll get $1 billion of productivity in our
Service business and we think our margins will continue to
Now we accomplish this because we invest in it and we invest in
it consistently. And I'll talk a little bit about some of the
things we're driving from an analytic standpoint but we're really
trying to enrich our contractual service agreements.
And when I think about investing in analytics, I always think
about driving more contractual service agreement productivity and
profitability first. So we drive margins back into our installed
base. We add more value. If you do a contractual service agreement
for 10 or 15 or 20 years, you've got to be adding value into that
each and every year and that's what we do.
And we run a $4 billion software company inside GE that's
totally outside our service agreements. And so we think analytics
are one of the key ways to do that. If you can improve time-on-wing
by doing a better job of modeling how an engine fails or how it's
being run, that's worth billions of dollars for our customers.
One point of fuel burned on just the GE installed base is worth
$2 billion of margin to our airline customers every year. These
Advanced Gas Paths we're putting back into the utility CSA model
drives three points of efficiency each year.
So when you think about why Services are valuable through the
economic cycles, this is the way we can add value. Now if you look
at our business this year, all of our Service businesses will have
positive earnings this year and we're counting on Power & Water
being flat but the rest of them will have either double-digit or
single-digit earnings. We'll generate 100 basis points plus of
Service margin this year and we'll grow backlog. So Service is
critical to us. We invest in it and we want to continue to grow in
And in simplification, GE is both a cost play and a cultural
play. We're going to get SG&A as a percentage of revenue down
to 15% by 2014. We'll be down 150 basis points this year. We'll go
from 17.5% down to 16%. We're doing a lot of work in terms of
shared services, reducing P&Ls, reducing layers. We're taking
20% of the structural costs out of Europe.
We're reducing ERP systems, things like that. So we're doing a
lot on the structure. But at the same time, we're kind of
redoubling our efforts in terms of market intensity and speed
inside the company. We've got lots of process improvement work
that's going to be at the heart of this. So we think driving
long-term costs down and simplification and driving speed in the
culture is really critical.
What we try to do at each EPG is kind of go through and single
out the things that are of most interest to you in the context, so
we, here's where we went in 2012, kind of an update on where we
stand in 2013 and I think the four things that are on your mind as
we talk to you, margins, Power & Water cycle, where Oil &
Gas is going and capital allocation for the company. So I'm going
to go through each one of those in more detail.
Our margin plan this year is backend loaded to get the 70 basis
points. This is not an atypical GE pattern. This year looks a lot
like 2006 and 2010 in terms of the profile. The second quarter is
trending in line with our expectations today in terms of
And I think the way to think about this is we've got Power &
Water profiled for the second half. We've got line of sight on the
units we need to accomplish this in the second half. But the other
buckets are already in pretty good shape. We're running a big
positive value gap.
Our Service productivity is strong. Our simplification is
gaining momentum. So those levers are going to continue to be
strong, and we see a good line of sight to the Power & Water
units as we look at the second half of the year. And these are
probably the six big productivity drivers that we look at in terms
of how to think about the company.
Value gap was negative in 2011, was positive in 2012. 2013 will
be even more positive from a standpoint of value gap. We've got
pricing already in the backlog, and a lot of the businesses that
we're in, we're calling the Power & Water OPI to be about flat.
Healthcare down a little bit, but the other ones are very strong.
And we just see great improvements in Aviation and Oil & Gas in
terms of the backlog. Transportation, we've done a lot on our
supply chain to drive better value gap, and this is very important
for the business.
We're doing a lot in Manufacturing. I showed the Aviation
example, but a lot in terms of new manufacturing devices. So added
manufacturing is going to be a big part of the future engines. We
talk about a fuel nozzle, but there'll be other parts, what we call
CMCs. So these composites. This is proprietary GE technology. We
own the manufacturing. We're the only guy that's going to be doing
this. And this drives big fuel and capability and a lot of patents
We've built lower cost sites in our Aviation business and we've
captured more of the supply chain. So deals like Avio and some of
the other deals, we're just driving these four things. And the way
to think about this from an investor's standpoint is we'll probably
have 20% more content in the engines that we're launching in the
second half of the decade versus what we've had in the past. I
think that's just a way to improve margins and gain more
competitive advantage as time goes on.
And we continue to do process improvement. Subsea is a key place
where we have to get the margins up vis-à-vis how we run the
business. We've had a team called Winning in Subsea that's 50
people, 30 of them from the audit staff, 16 projects, and these are
working on deals as quoted, as delivered. And so we think we'll
get, we'll really double the op profit rate in this business over a
couple years and that's the kind of work that we've got to continue
to get done.
So that's margins. On Power & Water, this has been kind of a
long cycle that's playing out but I'll just give you a couple
pieces of context. One is we'll ship this year more or less the
same units we shipped in the late 1990s and we'll make 10 times
more money. So as we've built the installed base of a decade ago,
we've really built out a great Service business. We've built out a
diversified portfolio. It's a high return business. And so if you
look back, I think we've done the right things around the Power
& Water business over time.
And then when you look forward, we're kind of forming, I would
say, a bottom. We're getting the PTC kind of re-normalized into the
business and we just think we can run the business without these
big spikes in the PTC.
And fundamentally, we've built a gas turbine business so that
any unit growth in the United States is going to be upside as you
think about where we go from here. So right now, we're thinking
about positive earnings in 2014 on a very good base with a high
margin business and a high return business, and we don't have a
hangover of a big solar exposure or nuclear exposure or other
investments that I think create headwind for the business as we
Now gas turbines are important. We see that gas, over time, the
gas blend continue to increase vis-à-vis the total power generation
or the large scale power generation in the world. And the way to
think about this is to think about it region by region in terms of
where you could see growth. We see demand in the resource-rich
regions but you have to hustle for it. The big deal in the resource
rich regions this year is in Algeria. We think we're in the lead
position. We believe this is a deal we're going to win. This is 8
gigawatts, 8.5 gigawatts, guys. This is not small, right? But
you've got to win the resource-rich regions in the countries that
are buying and we've done a pretty good job of that.
Asia, I personally think Asia is going to continue to be a solid
growth market. You're going to get demand in Korea and China is
converting more coal to gas. We think we can participate in that
growth. US, it's tough to do worse than six units. Maybe that's the
best thing I can say about the US. But you're going to get a cycle
in the US. There's 60 gigawatts of coal retirements.
Over time the reserve margin is going to go down. We see some
orders and some interest right now in some IPPs and other units in
the United States. And then we're just not counting on Europe and
Japan for much growth.
So the way you think about this is if you look back a couple
years, we've averaged about 115 shipments a year. We think if you
look out over the next five or six years, the average is going to
be more than that. And our product line is quite robust, from 1
megawatt up through 300-plus megawatt. GE is going to have
competitive products, efficient products in that entire basket. So
that's kind of how we see it. But look, this is not an easy market,
but there's units out there to be had. And we're going to win more
than our fair share as these take place over time.
And then this is kind of the way we look at the mixture of
different drivers, gas turbines we're not counting on much in the
next few years. We think Services, a good backlog profitable
backlog will be about flat this year, up a little bit next. PTC,
the way that PTC is written is it'll spread units in 2013 and 2014.
2013 will probably be a little bit better than we thought. 2014
will be probably a good solid year. And then Distributed Power and
Nuclear and Water, these will all be reasonably good volumes and
opportunities as time goes on. So that's kind of the way we think
about the Power & Water business in the cycle we're in
Oil & Gas is a good story. Oil & Gas we continue to
grow. We like investing in. We think we've invested in the right
segments in the Oil & Gas business, and we like our position in
subsea and LNG and measurement and controls. We think we're in the
right places. And we think we've got good solid margin headroom, if
you look at Oil & Gas in the next few years. So we think just
getting more product standardization, building out the service mix,
doing a better job of upfront pricing, doing a better job on
acquisition integration. We're going to get a step up in Oil &
The thing that attracted us to Oil & Gas 10 years ago is
still the thing that attracts us today. Our customers' need for
technical intensity is growing. We think this opens up more of a
competitive position for GE. And when you just walk around the
chart, you see subsea integration, some big opportunities
A lot on blowout preventers, ways you can do better sensing and
better technology around that. LNG, we did an acquisition a couple
weeks ago on LNG with a leading company that does mini-LNG. So we
think this is a space that could grow as people do fuel conversions
or in other countries. So this gives us a window on future
technology. And this is the place where the industrial Internet and
sensing and technology is really important in terms of where you go
in the future. So we think Oil & Gas can be a very positive
aspect for us.
And last on capital allocation, we've kind of got a core capital
allocation case, which reflects the NBC and the CFOA and stuff like
that over the next couple years. And then we'll get - as we
continue to reduce the size of GE Capital, you're going to get
special cash on top of that, $20 billion or $30 billion probably on
top of that as you think about it.
And kind of the way we think about GE Capital in particular is
the GE Capital dividend is going to go towards the GE dividend, but
the special dividends we get from GE Capital are going to go into
buyback, right? And that's kind of the way we framed the way we
think about the company going forward.
So if you go to the right-hand side, we spent about $4 billion
here on CapEx. We'll continue to do that. Dividends in line with
earnings. So we like growing our dividend. We like having a good
payout. Buyback, we'll do $10 billion this year, and our
expectation is by the end of 2015 to lower the share count to 9
billion to 9.5 billion shares.
And then bolt-on acquisitions, we'll probably do about $10
billion this year, and on an ongoing basis, we'll do $3 billion to
$3.5 billion of acquisitions. So this kind of fits the balanced and
disciplined capital allocation point that I made earlier, with just
maybe a little bit finer edge on what we'll do as we reduce the
size of GE Capital. So that's kind of the way to think about where
we are there.
Acquisitions, we still have a good pipeline of acquisitions. We
like our discipline of $1 billion to $4 billion and generating good
returns. And we try to do acquisitions where there's multiple ways
to win when we approach the acquisitions that we do. We've done or
announced two big ones in the last, let's say, six months. Lufkin
in Oil & Gas.
The way we looked at Lufkin is when we acquired the Wood Group,
we had a submersible pump, but to be a player in the enhanced oil
recovery space there's more segments than just the submersible
pump. So Lufkin was on our game board as being able in one shot to
fill in a lot of the other spaces. And then there's multiple ways
So it opens up our geography. It opens up opportunities to work
on supply chain. And Lufkin had a Gear business where GE was
already a customer. So we think there's a supply chain value here
as well. So we view this one as kind of a way to invest and have
multiple ways to generate a good return for investors.
Similarly, Avio, this was a supplier of ours, where we already
had a backlog with the company, we think it gives us complementary
skills, allows us to execute on our supply chain strategy. So we
like what Avio stands for as well. So these are two deals that
ought to add a couple cents to our earnings next year, already in
place, but I think they're typical of the kind of deals that we
like to do.
And lastly I just thought, as you think about the company going
forward, you're going to get good solid earnings growth in the
Industrial. I think you're going to get managed from a contextual
standpoint, we're going to be thoughtful about what we do in GE
Capital. We're going to do things in staged exits and things like
that, but ENI is going to go down in that place. We're going to up
the buyback, and so the buyback is going to be positive. We're
going to continue to pay good dividends and grow dividends in line
with earnings. We're going to reduce corporate costs, right?
And then when you think about the way the GE leadership team is
compensated, our long-term incentive plan, there's really four key
metrics. One is growing EPS. So the EPS has to grow. We have to
generate a lot of cash both from operations and doing smart
The Industrial earnings percentage has to grow. And ROTC has to
grow. So those are the four. EPS has to grow, cash has to grow,
industrial percentage has to grow, returns have to grow. And we
picked these four because they work together. Let's say these as
metrics work together. So it's important that we grow EPS while
we're changing the Industrial mix, right? So you want to be
You want to be strategic. You want to have that context so that
you're always doing the right things for investors and things like
that. So those two go together. And you want to be able to generate
a lot of cash, but you want to do it with high returns, right?
So you want to make sure from an investor's standpoint that
you're not encouraged to do anything other than disciplined capital
allocation vis-à-vis where we go. So we'll have a lot of cash.
We'll apply it well. Our goal is to grow our earnings while
changing the mix at the same time. So there's no lay-down case that
says, gosh, I can do something that's very disruptive to investors.
You do it in a smart and intelligent way.
And in my performance shares, I'll have a third metric, which is
GE's being in the top quartile on margins and returns versus a
basket of 20 industrial companies, including both our competitors
and other highly respected industrials, like Honeywell, Emerson,
people like that. So we basically - I think we've got you covered
from a financial standpoint. Our guys will earn money as we're
doing the things that I think are most important to GE investors
and that's how we think about going through this kind of
So with that, Steve?
Great. Thanks, Jeff. We have a number of - great. We have a
number of buyback questions in. But let's start with one on the
sell side, and then I'll go to the first buy side.
Thanks, great. So, Jeff, just on the ending target...
I remember the good old days when we had control over our own
destiny. We could call on, now you're just holding us down,
I'm sorry. We want the real answers coming.
I've got to talk to the other members of the CEO union after
this meeting to make sure we defend our rights.
Are you trying to say you wouldn't have chosen me, Jeff?
You can fly us all into a different resort, if you'd like.
Okay. No. No. No. I would admit it's too much to ever speak.
Okay. So on the ending target, obviously, implies at least one
chunky disposition. I think we all know which one we're talking
about. Do you think you can accomplish that kind of disposition in
the current M&A environment for financials?
Oh, look. I didn't come here today to name any one of them. But
I think a couple comments. I'd say, look, I think it's a great -
the capital markets are very receptive to IPOs or a lot of
different technologies today. So I think you basically have as good
a setting as you could possibly have.
And the other comment I'd make is, look, the strength of GE
Capital in the end is really secured lending, connected to the
core, highly distributed. So I'd say when we think about the
portfolio, we think the timing is good to be thinking
strategically. We think there's a lot of techniques to do it.
Whatever we decide to do, there's a lot of techniques to do it in a
Jeff, we have a question from the buy side here. You can see why
on this one, it's anonymous. Okay. So, appreciating no formal
guidance, lots of estimates around $2.00 in 2015. And given
strategic options around PLCC, how do you feel about that? And I
would add, obviously, in light of your buy back commentary.
You know, again, I'm not going to predict 2015 guidance. We
think EPS is going to continue to grow and we're going to be able
to do it in the context of having a higher Industrial mix and share
count being lower.
Jeff, one of the main points of your annual letter this year was
admitting that GE has become too complex and really promising
shareholders that you could simplify it and such and I think we've
seen some examples.
But how do you take a company like this that's inherently
complex, continue to think about doing bolt-on acquisitions, which
in some ways adds complexity - it doesn't decrease the size of the
company in any way, how do you get there without having major
carve-outs, and let's just say for the sake of argument, another
NBC type sale and continuing to get the portfolio down to a very
simple, if you will, core? How do you execute on that, I guess, is
Scott, again, I think - just to give you a context in the letter
and how I think about it, I think to be successful today you've got
to be in 150 countries. We're in markets that are highly regulated,
things like that. I think what we have tried to do industrially is
shrink the portfolio around things that are - so we sold NBC. We
We're basically in a high tech, global sale and service type of
model industrially. And then in Financial Services, I think our
idea is to be closer to a commercial finance core and then run the
company with fewer layers, better IT, no orphans, things like that.
I think that's how we see the simplification initiative working
inside the company.
I think we feel like the footprint is pretty close to what's
manageable and we need to continue to benchmark ourselves against
peers. It's not saying I wouldn't contemplate things like that as
time goes on but I think we've - with NBC, Plastics, Insurance,
we've basically sold half the company in a decade. That should show
you that we're willing to take on those things as time goes on.
Jeff, another question from the audience here. Can Power
business margins improve in 2013 if the European Service business
So, basically what I'd say, Steve, is what we're looking at now
is more or less margins being roughly flat in Power & Water
this year. And I think the way you've got to think about that is
we're taking a ton of cost out of the business. So the rest of the
Power & Water Service business is quite strong.
We're not counting on Power & Water Service in Europe
necessarily getting remarkably better as the year goes on and we
still think we'll do okay from a margin standpoint. And just the
equipment, the number of units first half, second half drives an
incredible amount of change between the first and second half.
There's a follow-up here. So now has the European Power business
So, again, we're not counting on the European Power business
necessarily improving. We think the utilization of power plants is
going to stay sluggish this year. We think the demand for new units
is maybe only in the distributed power. Not in the big frame units.
So we're really not counting on Europe getting better.
Just to be clear on the EPS outlook or how you're thinking about
it - you did mention in your pitch there will be a lot of gains
generated. Are gains part of the earnings construct going forward
as you're looking to replace some of these earnings that would come
I'd say not necessarily, Jeff. Again I think as we get further
on the plans, we like to use gains for restructure I'd say
industrially, 100% gains will go into restructuring, anything we do
industrially; in Capital, it just depends on as time goes on we can
use it to offset other things.
So I would count on us basically using the principal offsetting
most of the gains with restructuring and I don't contemplate a lot
of that falling through. But it does allow us as we get gains, it
does allow us to eliminate headwinds as time goes on. I think
that's important as well.
Just another service question. Are we seeing any weakness in the
US? I mean it's not been a stark but it looks like there's a little
fuel shift back towards coal in the US and is there any tension on
We haven't seen it yet, Jeff. Our Service business in the US in
the first quarter was up a couple percentage points. It was a much
better performer. Really the story was Europe and we haven't seen
that yet in the US. And don't expect it.
Again, we've got a pipeline of 52 Advanced Gas Paths, right? So
that's the interplay. It's just, guys, when you're in a CSA, an
investor shouldn't expect that these are like static agreements.
These are dynamic agreements. Every year - we've been working on
these every year and the best part about a CSA is your interests
and the customer's interests are aligned. So there's a lot of
levers, there's a lot of ways to create value inside a CSA. So you
got - in the US, you've probably got, of the 52 Advanced Gas Paths,
you've probably got 40 of them in the US, something like that.
Are you thinking of the 30% - 70% mix, which obviously is an
intermediate term target? Do you get there firstly by mixing down
to $325 billion of ENI at the end of 2014? And are you thinking of
that kind of as a long-term place holder? Because as obviously as
various cycles kick back up, in theory, unless you actually start
to then grow Capital, it's going to continue to mix down.
Look, Jeff or John, I would say is we like GE Capital. In other
words, the GE Capital in the commercial finance space, we have
competitively advantaged space. We're generating new - underwriting
new business at 2% ROI or above. You've got very strong competitive
positions. So we're going to grow that space. The goal is to have a
good and growing Industrial business, a good growing Capital
business. I think it's just a new starting point, if you will.
And to manage the dilution? Because obviously some of the stuff
could be a little chunky.
Is your thought process, you're going to do your best with share
repurchase or is there some other sort of lever you, you can
Look, again, the way I would think about it is you're going to
get good solid Industrial earnings growth. You're going to get
staged exits so we can manage the dilution over time. You're going
to get gains that are going to allow you to do offsets and you're
going to be able to buy back a lot more shares.
So you're going to have a more valuable company that's still
growing its EPS in an effective - in a strong way in a competitive
way and you're going to have a lot of cash optionality. I think
that's the way I look at the company; a more valuable company.
Deane Dray - Citigroup
Hey, Jeff, just following up on that last point you made
regarding the ability to dividend up, you said between $20 billion
and $30 billion in special dividends out of Capital. Now, we're
trying to do the math here on this in terms of - it would be help
on some of the timing of this because you're now giving up some
more insight into share count come in lower than what you had
previously guided. So is the $20 billion and $30 billion all
predicated on these staged exits or are there additional?
It's going to happen over time, Deane. In other words, you're
going to continue to be smaller. You're going to have excess cash
and you're going to have other ways to think about capital
allocation as time goes on as part of the IPO process or other
processes like that but these are all things that we need to go
through with our regulators and these are all things that require
us to be in sync with how our regulator looks at the Financial
Service business and things like that.
Yeah, Jeff, so in terms of the decision to move forward with
staged exits, was that driven by your view of market receptiveness
at this point in time or just where you saw GE is in its
evolution-wise, sort of put a target on timing?
Again, I think it's - we never wanted, as we were going through
the financial crisis and even today, we never really thought about
wanting to do anything we couldn't complete on our own. And I think
when you look at the capital markets today, these are all things we
can complete on our own if we need to. And I think on the strategic
side, we just like - we think the company has - these are great
assets, fantastic, but we believe our commercial finance assets are
very strong and very consistent with our competitive advantage so a
little bit of both.
In terms of just this - back to the dilution question and your
commitment to grow EPS, I mean does this mean you'd like to grow
EPS high singles to doubles but in a year where you complete stage
1, that might not be the case, so you're committing to it still
being positive in the year, being better next...?
Again I'd still think about staged exit but my sense is that if
you go back to our long-term incentive plan, that has EPS growth
consistently every year. That's kind of what the intent is and
we've got a lot of optionalities about how we do this and the
timeframe that we do it. But again, I think the idea is excess cash
applied towards reducing the share count. That's how we think about
When's the next milestone for the LEAP-X engine?
So we've got kind of three iterations of the LEAP-X that are
being developed. One for the C919 and one for A320neo and one for
the MAX. And so we're getting, you know, we're gearing up for the
first kind of full frame tests and I think we're on track and we're
kind of ahead of where we were with the GEnx and so our
anticipation is to go to rig test probably by the end of this year.
I would like to look at the margin discussion from a slightly
different angle. In the presentation, there was the slide of
SG&A expense going down by about 100 basis points this year. If
you look at the first quarter 10-Q, SG&A expense was up 130
basis points. There is two parts to this question. One is, first of
all, how do you see SG&A going down through the year? And are
there certain things in the first quarter that maybe made it higher
than it should've been relative to the year such as
The SG&A margins were all the restructuring numbers went and
the pension numbers were both in there, so it's kind of a false -
it's a little bit of an apples and oranges. It's on the same basis
- kind of $200 million.
Okay. And second is that again if you look at 70 basis points in
segment operating margin improvement for the year, 100-plus basis
points coming out of SG&A, it implies a lower gross margin for
GE with a positive value gap - what am I missing? What's the
Again, I don't know specifically. I think we've got probably
more Equipment mix in the second half of the year than Service mix
in the second half of the year. But I don't - I think you're going
to get good Service productivity. We ought to be positive on the
value gap and we'll get SG&A, as well. So I'll have - maybe
I'll have Trevor or somebody get back to you on that.
As we think about nat gas cycle in North America, you know we're
moving towards exporting natural gas, which might have implications
for nat gas prices long term. Do you guys care? Where do you make
more money? In Oil & Gas, if we export nat gas, does it offset
the fact that maybe we get fewer turbines in North America? How
should we think about optionality for you guys?
I don't think we're that smart, really, to be honest with you. I
think, on LNG terminals we make money. On kind of - with like
Cheniere and people like that. So we see that as having value
content. I don't think it impacts one way or the other. You know
gas pricing is so subdued right now that it's still a pretty good
trade on coal to gas or some of the others.
So I don't think that the gas price, even if we export, will get
so high it will turn off the demand creation for natural gas on
that side. So I'd say we're more or less indifferent on the whole
exporting. None of this ever happens as fast as anybody thinks it
will, anyhow. So that's what I think about it.
Jeff, as a follow-up to some of these questions, I mean the plan
is pretty clear. The cadence isn't necessarily as clear, but is
there a risk that you're moving too slow?
And what I mean by that is that we've got this big liquidity
window that's open now, if you wanted to spin off appliances and
lighting, if you wanted to sell out a major business or exit a
bigger portion of the real estate portfolio, for example, the
equity stake. I mean is there a chance that you're moving too slow
and you need, and there is a window open now that, that if you
miss, it may make it very difficult to hit your $300 billion, $350
billion ENI, and may put you in a tougher situation? Do you think
Well, what I would say, Scott, I think it's a fair question. You
know I would say, if for whatever reason, we miss an opportune
window on behalf of investors, that's my fault. You guys would have
every right to say, you made a wrong call. I don't think we have,
because I think, particularly in Financial Services, putting things
for sale with the assumption that a bank would buy has been a
fool's journey. So the only way you've been able to think about
this is by thinking about IPOs. So the market I think is open. If
we miss it, that's on me. Okay? Yeah.
Just on the Services business, I think almost all of your profit
in Q1 was Service or all of it. So that's I guess the main margin
driver for the year. Your Services revenues were down in Q1. The
orders were down in Q1. So how comfortable do you feel that
Services can reaccelerate from here? And which businesses are you
seeing that in?
So if you go back to the one page on Service, we'll have of the
six big Service businesses, we've got growth in five of them. So
very strong, very solid. And again, Power & Water in Europe was
the one outlier. You've got to remember in Service, we've got a
massive backlog of Service that sometimes skews where the orders
Things like spares in aviation are quite strong, right? So our
spares order rate is very healthy. Our Oil & Gas orders are
good, and will continue to be good in the Service arena. So again,
I think we view Service as a mid single digit grower, and - from a
revenue standpoint and a good margin enhancement. And I think
Europe - run rate in Europe in Power & Water was the negative
in the first quarter. But we still think we'll have a decent year
in the Service business.
So unless we have another - we do. Is that a hand up in the
back? Yeah. Let's take one more.
At the December meeting, I got the impression you were leaning
in personally on the Energy Management business. What kind of was
your take on where to take that business going forward?
Well, look, I think it's a very fragmented business, segmented
business. And one where we have historically underachieved our
competitors. And it's a place where it's very kind of conducive to
linking up with other GE businesses, like Oil & Gas and Power
& Water and things like that. So I would say our main priority
is power conversion in the business right now to take the asset
we've got in Converteam and grow it faster.
And we still see good opportunities for margin enhancement in
just about every other corner of the business. So there's no reason
why - that's a place where everybody else in the place does a
10%-plus operating profit. We do 2%. Look, some of the best
acquisitions that a company like GE can do are by fixing businesses
that don't work well, and the way I would look at this from an
investor's standpoint is there's tremendous value that you can
create just by running the place a little bit better. And that's
what the intent is.
Jeff, do you want to make any wrap-up comments? And before you
do, reminding everybody that Jeff and GE have kindly sponsored a
lunch following with management.
You guys, good? I think that's it, guys.
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