General Electric Company (GE)

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General Electric (GE)

Q2 2011 Earnings Call

July 22, 2011 8:30 am ET

Executives

Trevor Schauenberg - Vice President of Corporate Investor Communications

Keith Sherin - Vice Chairman and Chief Financial Officer

Jeffrey Immelt - Executive Chairman, Chief Executive Officer and Member of Public Responsibilities Committee

Analysts

John Inch - BofA Merrill Lynch

Terry Darling - Goldman Sachs Group Inc.

Jason Feldman - UBS Investment Bank

Steven Winoker - Sanford C. Bernstein & Co., Inc.

Shannon O'Callaghan - Nomura Securities Co. Ltd.

C. Stephen Tusa - JP Morgan Chase & Co

Jeffrey Sprague - Citigroup

Julian Mitchell

Deane Dray - Citigroup Inc

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the General Electric Second Quarter 2011 Earnings Conference Call. [Operator Instructions] My name is Chanel, and I'll 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, Chanel. Good morning, and welcome, everyone. We're pleased to host today's second quarter 2011 earnings webcast. Regarding the materials for this webcast, we issued a press release early this morning and the presentation slides are available via the webcast. Slides are also available for download and printing on our website at www.ge.com/investor.

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.

Jeffrey Immelt

Great, Trevor. Thanks. Good morning, everybody. Just to start off, the company had another strong quarter. Leading indicators are positive with infrastructure orders up 24%. I think that's a really good sign. Strength was broad based with expansion in many of our end-use markets.

Our global growth was especially strong. There remain a few sources of volatility, but they are well known. It's housing in the U.S. and the impact on appliances, the U.S. wind market and a slow European economy.

Earnings growth continues to rebound with operating EPS of 17%. Growth was pretty broad based including Aviation, Healthcare, Transportation, Oil & Gas and Capital. In fact, Capital continues to be very strong. Our earnings were up substantially. The only drag was Energy, which should improve in the second half of '11.

Our balance sheet was very strong with $91 billion of cash and a Tier 1 common ratio of 10.4%.

Lastly, we continue to make progress on our capital allocation plan with a big step in the third quarter as we retire the Berkshire preferred. In addition, we will likely close the Converteam acquisition in the quarter. So we're executing well, and we feel good about the quarter.

Orders were a real highlight. They were very strong, a big highlight, growing 24% with real strength in every segment. This actually comes off a good quarter in second quarter of '10 when orders also grew by 8%.

Organic orders growth was 17%, and Energy orders were particularly strong. We had some big wins: Renova in Brazil, Wheatstone in Australia and others. We recorded $27 billion of commitments at the Paris Air Show, most of which will turn into orders in subsequent periods. Our Healthcare orders in growth regions expanded by more than 20%. Transportation had outstanding global wins in mining, and we ended the quarter with a record high backlog of $189 billion.

Now, we've made investments and growth over the past couple of years, and they are paying off. We're seeing a great response to John Rice's leadership of our global growth organization. Global orders grew by 23% with growth markets up 21%. Every business had double-digit growth. Highlights included China, up 32%; India, up 91%; Australia, up 35%; Latin America, up 45%; Russia, up 23%; Africa, plus 35%; and Asia, up 22%. So global markets, industrially, remain a source of strength for GE.

Services remain strong with revenue growth up 14%, and we're seeing good growth across all the businesses and CSA backlog is in an all-time high at $139 billion.

New product launches are working. The LEAP-X is now a great success with the Boeing 737 re-engine partnership, an important strategic step. We're seeing broad customer interest in the new gas turbine Flex 50, which offers both record-high efficiency and grid flexibility. Our 1.6-megawatt wind turbine is gaining share in North America. And we have a broad array of product launches in Healthcare. And between now and year-end '12, we'll have a major launch in every appliance product. So based on this, we think our organic growth rate should accelerate in 2011 and 2012.

Cash remains on track. We remain on track to generate $12 billion to $13 billion of CFOA for the year. Working capital has grown by about $2 billion year-to-date to support our second half '11 equipment backlog. This will reduce by at least $1 billion as we end the year.

As I said earlier, we ended the quarter with a record $91 billion of cash, and as I mentioned earlier, we plan to retire the Berkshire preferred shares by the end of the third quarter. We remain committed to attractive dividend growth and reducing our share count over time.

Now margins declined in the quarter. The decline was primarily in Energy and really driven by significantly lower margins in the wind market. Also contributing to lower margins were heavier R&D spending and acquisitions. We expect margins to improve in the second half of 2011. And going forward, we'll been managing through several factors.

Our wind margins have declined substantially between 2010 and 2011, but will stabilize. We expect deflation and lower material costs to continue throughout 2011. We expect R&D investments, as a percentage of revenue, to be flat to lower in 2012 versus 2011. Service margin growth will continue. Acquisition integration is trending ahead of plan. And Energy equipment orders and pricing should improve by the end of next year.

So if I compare where we are today versus our December framework for 2011, we expect industrial revenue to be higher, we expect margins to be slightly lower and our expectation with industrial profit growth in 2011 is unchanged. Finally, we expect margins to expand in 2012 versus 2011.

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