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General Electric Company (GE)

Q3 2010 Earnings Call Transcript

October 15, 2010 8:30 am ET


Trevor Schauenberg – VP, Corporate Investor Communications

Jeff Immelt – Chairman and CEO

Keith Sherin – Vice Chairman and CFO


Steven Winoker – Sanford Bernstein

John Inch – Bank of America

Shannon O'Callaghan – Nomura

Deane Dray – Citi

Christopher Glynn – Oppenheimer

Scott Davis – Morgan Stanley

Steve Tusa – JP Morgan

Terry Darling – Goldman Sachs

Julian Mitchell – Credit Suisse

Nigel Coe – Deutsche Bank Securities

Jeff Sprague – Vertical Research Partners

Bob Cornell – Barclays Capital



Good day, ladies and gentlemen and welcome to the General Electric third quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. My name is Novalia, and I will be your conference coordinator for 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, Novalia. Good morning and welcome everyone. We are pleased to host today's third quarter 2010 earnings web cast. Regarding the materials for this web cast, we issued the press release earlier this morning. The presentation slides are available via the web cast. The slides are also available for download and printing on our website at We will 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 web cast, 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

Great, Trevor. Good morning everyone. The team had a good quarter in an improving environment. The environment generally continues to get better. Some of the things we look at like media buying, credit demand, our losses are declining, equipment orders growing. I think those were all positives for GE.

We are seeing a slower recovery in a few areas. Commercial real estate is performing as expected in a tough cycle. As you know, in 2009 we had negative demand for electricity and that is slowly getting better, but has had an impact in our energy orders surely in ’09, and the appliances market was tougher as we went through the third quarter.

We had good earnings growth. EPS was up 32% and GE Capital -- really the team did a great job. You will notice, Keith will talk about in a second, GE Money, our discontinued operations reserves substantially increased. We believe that that reserve update fully addresses our Grey Zone risk. Execution is very strong, $78 billion of cash and equivalents, and operating margins grew in the quarter, ex NBCU. And we are doing what we said we will do on capital allocation. We had about $900 million of stock buyback. The dividend is growing by 20%, and we did a couple of what we think are value creating acquisitions. So we made progress in the quarter.

Going to the next page on GE Capital, no need to dwell on this page. I think all the metrics are fundamentally getting better, funding is in good shape. Commercial paper is way down, particularly versus where we were two years ago. Leverage has been reduced. If you look at our Tier 1 common ratio, it continues to strengthen and we are well positioned within the Basel III outline, and our ending net investment plan is on track. So we have very strong liquidity and capital positions on GE Capital.

You know, orders grew by 7%. It is the first time in two years that equipment and services orders grew at the same time. So we view that as good sign. Tech infrastructure orders up 33%. You know, it is really great. It showed strength really across healthcare, transportation and aviation. The backlog was stable. We had several big push outs in our oil and gas business that should come back to us in Q4. In places like healthcare, the emerging market orders were up substantially.

New order pricing was only down slightly. It was down about 0.8% in the quarter. So I think that is a pretty good sign for the quarter itself, and as we said in the press release, we think industrial revenue in the fourth quarter will be up sequentially, and roughly flat with where we were in the fourth quarter of ’09. So I think there is a lot of good news on the orders page that is going to help us as we go into the fourth quarter, and beyond into 2011, 2012.

We always talk about execution in both margins and cash, and I think the team has done a good job on both of these. Our operating profit rate grew by 40 basis points. That is excluding NBCU. Particularly strong performance by energy. We had a positive value gap of about $190 million, and a big chunk of that driven by material cost deflation. Our operating teams continue to do a good job. And at the same time, we absorbed the initial shipments of the GEnx engines, some of the launch cost, and that took place in the third quarter as well.

From an R&D standpoint, we are investing above 5% of our industrial revenue back into R&D. it is growing 21% year-over-year, again focused on product leadership, expanding our core technologies, and creating lower cost position. Just a couple of highlights. We have a strong position on the 787 launch. As that goes forward, that will pull a lot of GE Systems and engines with it. Very strong new NPI development in our energy business with new 7F, 9F, and a larger size Jenbacher engine. And our new investments are scaling in areas like battery, home health and solar.

So we are maintaining margins, while increasing investment in technology and absorbing some of the initial GEnx launch cost. Also from a cash standpoint, our cash performance was very strong in the quarter. We generated about $3.8 million in 3Q. It is cash flow from operating activities at 1.3 times net income and depreciation. And as expected, our progress balance continues to decline, offset by working capital improvements, and our working capital turns continue to get better.

On the right-hand side of the page, you can see the cash walk. Our consolidated cash is almost $80 billion, $78 billion. Again, we have announced the increase in the dividend and the buyback, and again our cash performance is in good shape. Last year, we said our framework for CFOA for the year was between $13 billion and $15 billion. We now think we are on track to be at the high-end of that range. So it will be somewhere between $14 billion and $15 billion as we finish the year in 2010.

So a good job of execution by the team, and now I will turn it over to Keith Sherin to go through the financial performance.

Keith Sherin

Thanks Jeff. I’m going to start with the third quarter summary, the summary for the quarter. We had continuing operations revenues of $35.9 billion, which were down 5%. Industrial sales of $23.6 million, which were down 6%. Industrial sales were in line with our expectations. If you look at the last 18 months of orders, we had said that industrial sales will be down and through the first half we were down 5%, the third quarter is down 6%.

Financial services revenue is down 2% as we continue to shrink the book, and we earned $3.2 billion in net income, which is up 29%, and for earnings per share we earned $0.29, including the cost of the preferred dividend, and earnings per share up 32%. As Jeff covered, the total cash flow from operating activities was very strong, $10.1 billion year-to-date putting us at the high end of our original range, and taxes were pretty steady in the quarter.

The consolidated tax rate for the third quarter is 9%. That rate is up from a negative 25% in the third quarter of ’09, mainly because of the improvement in pre-tax earnings at GE Capital. If you look the GE tax rate is flat with 2009 at 22%, and then on GE Capital, the rate for the third quarter goes from a large positive in 2009, where we had a large credit, to a negative in 2010. And the negative rate in 2010 reflects a net tax benefit or credit on $1.5 billion of higher GECS pre-tax income year-over-year.

We expect the GE rate for the full year to be in the mid-20s, excluding the NBCU disposition. And that will be a bit lower than in the third quarter year-to-date rate of 26% due to some likely audit resolutions that we are working on for the fourth quarter. On the right side of the segment results, our industrial businesses, ex-Media and $3.2 million of segment profit. It was down 5%. You can see NBC Universal’s operating results are down 15%, but the real results are better than the reported results. I will show you that and the details of the upcoming NBCU page. And GE Capital continues to demonstrate rebound. Net income of $870 million is up six times from last year. So overall segment profit was up 11%, and then with lower restructuring at corporate versus last year total earnings were up 29%.

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