General Electric Company (GE)

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General Electric Company (GE)

Q3 2009 Earnings Call

October 16, 2009 8:30 am ET

Executives

Trevor Schauenberg – VP, Investor Communications

Jeff Immelt - Chairman and CEO

Keith Sherin - Vice Chairman and CFO

Analysts

Steve Tusa - JP Morgan

Scott Davis - Morgan Stanley

Jeff Sprague – Citi Investment Research

John Inch - Merrill Lynch

Christopher Glynn – Oppenheimer

Steven Winoker – Sanford Bernstein

Terry Darling – Goldman Sachs

Jason Feldman – UBS

Bob Cornell – Barclays Capital

Nigel Coe - Deutsche Bank

Daniel Holland – Morningstar

Presentation

Trevor Schauenberg

We are pleased to host today’s webcast. Regarding the materials for this webcast we issued the press the press release earlier this morning and the presentation slides are available via the webcast. The slides are also available for download and printing on our website at www.GE.com/investor. We will have time for Q&A at the end of the presentation.

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.

For today’s webcast we have our Chairman and CEO, Jeff Immelt, and our Vice Chairman and CFO, Keith Sherin.

Now I’d like to turn it over to our Chairman and CEO, Jeff Immelt.

Jeff Immelt

Going to the first page on the overview I think GE had another solid quarter. The global environment is improving but we’re expecting a gradual recovery. For the quarter we earned $2.5 billion, $0.22 per share, down 51% really driven by Capital Finance. I think the good news is the industrial segment profit was up 4%, Infrastructure, Media and C&I all had positive earnings. Capital Finance was positive at $263 million down 87% basically driven by favorable tax credits as expected. We had aggressive cost out we had another $0.05 per share of restructuring and other charges in Q3.

I think particularly noteworthy was solid execution in the quarter. We had cash flow of $4.4 billion. Our year to date CFOA is now $11.5 billion up 1% and we’re positioned for greater than $15 billion of industrial CFOA for the year. We’ve got lots of cash on the balance sheet; we had really substantial margin expansion up 260 basis points. Our infrastructure orders declined by 18% but backlog increased and we had good orders growth sequentially. Capital Finance reserves continued to expand in the quarter. We’re still investing in the long term. Our R&D spend is tracking to be higher in ’09 versus ’08. We did several small acquisitions and we continue to invest in the long term growth of the company.

The environment has definitely improved in the third quarter. We had a couple factors as we entered the year, a dramatic financial crisis, that’s definitely better. The credit markets are improving. Pricing on new lending is attractive. Losses still remain high. Keith will go through that in a bit here.

We expected a difficult recession. I think that’s really bottomed. We see signs of life. The appliance market improving sequentially, orders strengthening, scatter pricing at NBC better, delinquencies are leveling off. There’s still a lot of excess capacity and we’re going to deal with high unemployment. There is global growth. The emerging markets remain relatively strong and there’s growth out there to be had. The environment definitely improved in the third quarter.

Earlier in the year we set out on some key priorities to execute as we went through this recession. The first one was to stabilize Capital Finance. We think our funding is well ahead of plan, our capital ratios are improving, we’ve got good margins, and we’re going to work through a difficult real estate cycle. All the other businesses in GE Capital are profitable except for real estate and that’s the one we’re really going to have to work through.

We wanted to outperform in a touch economy by focusing on backlog and services, getting global market share, expanding margins, and that’s really performing as expected. We wanted to strengthen the balance sheet through strong cash generation and to maximize financial flexibility. We’d say that’s much improved versus where we were in previous this year.

Turning to GE Capital, we really have made significant progress to make GE Capital safe and secure. We’ve shown this chart to you on a repetitive basis this year. On long term debt funding we basically have pre-funded almost all of 2010, we feel great about that. Our commercial paper at GECS is really at our goal of $50 billion. Our leverage continues to decline. In the fourth quarter ’08 we were at $7.7:1 leverage we’re now $5.7:1 billion. All of our ratios have improved. Our Tier 1 common ratio is now at 7.5%. Importantly the equity at GECS has increased to $71 billion.

We’ve been able to shrink GE Capital ahead of plan. We now are putting out there an even more reduced balance sheet plan for the fourth quarter. This has a negative impact on GE Capital revenue but we think it’s really consistent with our strategy and approach. So strong execution through the crisis ahead of plan on all metrics.

Looking at the Industrial side I think some good news in that our backlog grew by $5 billion in the third quarter. If you look at equipment, our orders improved about $700 million sequentially quarter over quarter. Our service orders were up 3% driven by strength in Energy with Smart Grid and our backlog in services grew by $5 billion. We think that the trend on orders, particularly equipment orders will be up sequentially from the third quarter again in the fourth quarter. When we look at our backlog and what’s in our funnels. We really do look at the second quarter as potentially the low spot on equipment orders.

Keep in mind that these results don’t include some big commitments we received in Energy in Kuwait and aircraft engines with American Airlines. I think when you look at a total backlog of $174 billion that should give our investors I think some comfort in terms of the visibility we’ve got for the future.

We continue to focus on Industrial revenues. Last December we set out some key initiatives and key priorities as we went through this year. The first one was to protect backlog. The backlog is up $4 billion versus the beginning of the year. Cancellations remain extremely low and again we think this is a great job done by our commercial teams. We wanted to focus on growth in emerging markets and this shows you some progress we’re making in China, India, and Eastern Europe. We’re winning big orders in the Middle East and we continue to think that emerging markets represent real strength for the company going forward.

We’re launching more new products in 2009. Our R&D spend is up. We feel good about our share position overall. We’re extending product lines, we’ve got big initiatives in healthcare and clean energy, we’ve got some new product launches that are gaining hold and growing our adjacencies. This continues to be a big focus.

The stimulus really hasn’t shown up yet. We expect to ramp up in the fourth quarter and 2010. You’ll see in the fourth quarter some wind commitments coming out of the stimulus. We have more orders in the funnel on Smart Grid. Healthcare IT we expect to pick up in Q4 and some big global rail projects that are funded by other governments we’re quite encouraged about as well.

I think importantly the services model remains in tact because services is solid. The backlog of CSAs continues to grow, our margins continue to expand. We had nine new aviation CSAs in the quarter. Healthcare is growing as service business in China and India. Oil and Gas service backlog has grown and even in Transportation we’re seeing some of the segments have some upward trends. Total backlog is at $174 billion it’s a record high. We’ve got good visibility on those backlog orders and we feel good about how we’re positioned.

We’ve continued to execute well in 2009 and we think we’re well positioned for 2010. Our margins grew by 260 basis points in the quarter up to 16.3% and they grew across all the major segments. We had contribution margin rate expansion, a positive value gap of price versus cost, service margin expanded. Keep in mind that we did have 100 basis point expansion by no repeat of the Olympics but even without that this was excellent performance by the teams. We’re on track for growth for the year.

Read the rest of this transcript for free on seekingalpha.com