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General Electric Company (GE)

Q4 2009 Earnings Call Transcript

January 22, 2010 8:30 am ET


Trevor Schauenberg – VP, Investor Communications

Jeffrey Immelt – Chairman and CEO

Keith Sherin – Vice Chairman and CFO


Bob Cornell – Barclays Capital

Steve Tusa – JP Morgan

Terry Darling – Goldman Sachs

John Inch – Banc of America/Merrill Lynch

Steven Winoker – Sanford Bernstein

Nigel Coe – Deutsche Bank

Jeff Sprague – Citigroup

Lee Rosenbaum – Loomis Sayles

Jason Feldman – UBS


Good today, ladies and gentlemen, and welcome to the General Electric fourth-quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. My name is Noelia and I will be your conference coordinator today. (Operator instructions)

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, Vice President of Investor Communications. Please proceed.

Trevor Schauenberg

Thank you, Noelia. Good morning and welcome, everyone. We are pleased to host today's webcast. Regarding the materials for this webcast, we issued the press release earlier this morning and the presentation slides are available via the webcast. Slides are also available for downloading and printing on our website at We'll have time for Q&A at the end.

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 would like to turn over to our Chairman and CEO, Jeff Immelt.

Jeff Immelt

Great, Trevor. Thanks and good morning, everyone. On the first page, which is the overview page, I would make just a couple points that will tee up our presentation for the quarter.

First, the GE environment has improved. We've seen orders strengthening, service orders grew by 14%. Our delinquencies have stabilized, nonearnings are down, so the world we look at really has improved and we're looking forward now into 2010. The GE business model has performed in the fourth quarter. The things we've talked about in the past in terms of how we are running the company I think really did achieve and perform on plan in the fourth quarter.

Services grew nicely. Our margins and cash flow performance were very strong. We won a lot of the big global orders and the capital finance metrics are either at plan or better than plan as we end the year. The 2010 framework we talked about in December is achievable and balanced we think. The outlook for Capital Finance is improving.

We've got high visibility in our backlog and margins, and again our service revenue is very strong. And we've done a substantial amount of restructuring over the past few years and a lot of those benefits will carry over into 2010 and beyond.

So, we think that really gives us a real sense that the 2010 framework is very solid. We are positioned for growth in 2011 and beyond. We think that losses in Capital Finance will stabilize in 2010 and start to decline. The infrastructure visibility again is very high. And by the end of 2010 and during the year, we should have $25 billion of cash at the GE parent that we can use to keep the company safe and secure and also have ample opportunities to create shareholder value.

And we've just taken a lot of strong actions to position the company for the future. The portfolio is simpler and stronger. Our R&D investments increased in 2009, so we have lots of new products. We are very well positioned globally, so I think we accomplished a lot in the quarter and feel pretty good about how we finished the year.

On the next page, just some results versus the December outlook meeting. I'm not going to go through all of these, but on the left-hand side, here are some of the key things we talked about in December versus how we finished, and we are at or above plan -- or at or above outlook on virtually all the metrics. There are some encouraging signs, orders strengthening, service is very strong. We are able to do more restructuring in the fourth quarter than we originally thought.

Cash and margin levels at near -- margin performance at near record levels, losses stabilizing and high margins on new lending. And there's still some cautious areas. We're still very cautious about commercial real estate and there is excess capacity, high unemployment. So, we are cautious about certain areas, but as we finished the year, we did see some encouraging signs.

Now, there are four areas of execution that we have talked about as we went through 2009 in a very difficult economy and I want to recap each one of those. The first one is the focus on keeping GE Capital safe and secure. And really, we are ahead of plan on virtually all the metrics that we've talked about. We are fully funded for 2010 and we've done $4.4 billion of funding in 2011 at attractive spreads. So we feel great about our funding performance.

Commercial paper is below $50 billion. We are again ahead of plan there. Our leverage reduced in the quarter and again ahead of plan there. Our common -- tier 1 common ratio continues to improve. We have lots of GECS equity. We are very strong and getting stronger in terms of balance sheet strength. And our ending net investment is ahead of plan at $472 billion, so really strong execution by the GE Capital team.

From an orders standpoint in the slow economy, very important to get the orders that are out there. We saw a good bump quarter-over-quarter, a $3.7 billion improvement quarter-over-quarter. Our total orders were only down 3% versus the fourth quarter of last year, which was still a pretty good quarter for the company.

From an equipment standpoint, we are seeing a pretty good bounce back as we went through 2009 and we think equipment orders should be positive for the year of 2010 versus 2009. Services were very strong. I mean, a 14% service fee was as good as any quarterly service fee we had even pre-crisis, so we feel great about how our services are positioned.

Our backlog is at record levels. A lot of that is driven by service, but again at or ahead of plan. And we won a lot of the big deals. Our Oil & Gas business won a lot of the big global deals in Australia. Healthcare, we really saw good strength across all geographies. About 60% of our orders are global. It's a very diverse global framework. Subiya from Kuwait, Australia, India, you really go across the board and we saw pretty good order strength in the fourth quarter. And we are increasing our backlog going into 2009 -- going into 2010.

The third area of execution was on margins and what we did here is we broke out our infrastructure in Consumer & Industrial margins and then total Industrial, which includes NBCU. We did that really for two reasons. One is that our focus going forward is going to be Infrastructure and C&I, with the Comcast -- announced Comcast deal.

And the second one is just the Olympics tend to distort what we are doing. And I think what you see here is very good margin accretion both in the fourth quarter, total year. And also in Infrastructure and C&I, we see margins improving again in 2010. And the basic is we've got the dynamics of margin enhancement really are working and really are repeatable and I will just recap those. We've done lots of restructuring. It has enabled us to really take lots of structure out of the company. We've closed more than 400 facilities. Our headcount is down and these benefits will carry over into 2010 and beyond.

The second point is that our services are growing faster than equipment, which has a nice mix impact. At the same time, the margin in our service business is also improving. So that's really a double tailwind, if you will.

Our contribution margins have grown and are growing. Our pricing is reasonably stable and deflation is accelerating, so that adds to our value gap improving in 2010. We have had disciplined execution around discretionary costs. Our indirects are down 16% and so those are the things that have helped our margins expand.

At the same time, we've continued to invest in R&D. Our R&D investment grew 7% in 2009. It's planned to grow 15% to 20% in 2010, so we have lots of high-margin new products coming into the pipeline as well. So, we think the margin story is very good and very good compared to our peers in 2009.

Lastly on cash, which was a big focus area for the year, we started 2009 with a target of $14 billion to $16 billion on Industrial CFOA. We actually beat the plan with $16.6 billion of CFOA. The teams did a great job of reducing working capital by more than $3 billion. And so, where that leaves us right now between GE Capital and the GE parent, we have $72 billion of consolidated cash on the balance sheet. We've got $8.7 billion of cash at the parent. If you add in the announced dispositions of security and the Comcast JV, that's an additional $10 billion.

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