General Electric’s (GE) CEO Jeff Immelt on Q2 2014 Results – Earnings Call Transcript

Source: Seeking Alpha

 

General Electric Company (NYSE:GE)

Q2 2014 Results Earnings Conference Call

July 18, 2014 08:30 AM ET

Executives

Matt Cribbins – VP, Investor Communications

Jeff Immelt – Chairman and CEO

Jeff Bornstein – SVP and CFO

Steve Bolze – VP, Power and Water

Analysts

Scott Davis – Barclays

Julian Mitchell – Credit Suisse

Nigel Coe – Morgan Stanley

Jeff Sprague – Vertical Research

John Inch – Deutsche Bank

Steve Tusa – JPMorgan

Joe Ritchie – Goldman Sachs

Deane Dray – Citi Research

Andrew Obin – Bank of America

Steven Winoker – Sanford Bernstein

Operator

Good day ladies and gentlemen and welcome to the General Electric Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. My name is Christine 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, Matt Cribbins, Vice President of Investor Communications. Please proceed.

Matt Cribbins – VP, Investor Communications

Thank you, Christine. Good morning, and welcome, everyone. We are pleased to host today second quarter webcast. Regarding the materials for this webcast, we issued the press release, presentation and GE supplemental earlier this morning 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; our Senior Vice President and CFO, Jeff Bornstein, and our Vice President Power and Water Steve Bolze. We’ve asked Steve to join today to talk about the Alstom deal.

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

Jeff Immelt – Chairman and CEO

Great, Matt, thanks, good morning everyone. GE had a good quarter in a generally improving environment. We saw a solid economic growth across most of our segments. Some economic indicators are really quite strong like rail loadings, revenue passenger miles, demand for commercial credit and appliance market strengthened during the quarter. Global markets were also generally positive.

GE ended the quarter with a record backlog of $246 billion. A particular highlight was the payback of our investments in technology. We recorded $36 billion of wins at the Farnborough Airshow, transportation is prospering because of our commitments to push ahead with the Tier 4 locomotives, healthcare is gaining share behind several big product launches, in oil and gas the same broad interest to new subsea innovations.

There are still a few tough markets like U.S. healthcare and mining but the economic trend is positive. At the half execution is in line with our key goals, industrial segment growth is up 10% with 6% organic revenue growth and margin expansion of 30 basis points.

We’re on track for $7 billion of capital earnings with the $3 billion dividend, capital allocation remains balanced and discipline, we’ve returned $5.9 billion to investors through dividends and buyback, we’re improving the GE portfolio as well. The Alstom acquisition will generate attractive growth and returns while helping GE to accelerate our achievement of 75% industrial earnings.

Retail finance remains on track for an IPO by the end of July. The GE team is executing both operationally and strategically. Orders grew by 4% with slightly positive pricing, backlog is at a record high as I said of $246 billion, up $23 billion from last year. This was the strongest service performance in several years with growth of 14%, aviation spares grew by 16% and power gen services grew by 13%. Most of our service businesses are expanding.

Transportation orders were up close to 40% overall and we positioned the business to succeed in the future. We experienced some equipment order push outs particularly in wind and oil and gas and subsea however our rolling four quarter equipment growth is up 7% and growth markets remain a highlight with 14% order expansion and growth in six of nine regions.

Our orders and backlog give us confidence in the second half and 2015. Our operating execution was good, we have 7% revenue growth in the quarter with 20 basis points of margin expansion. We are gaining share. Farnborough made a statement about GE’s position in aviation with $36 billion in wins. We won nearly 90% of all next gen narrow body announcements. As was reported earlier in the week, GE remained substantially ahead on the Tier 4 locomotive. We have 264 Tier 4 locos in backlog for 2015 and ‘16 with more on the way and this was zero in the first quarter, so our momentum is growing.

We have nine high efficiency large block H turbines in backlog with many more in the pipeline. In oil and gas, we sold the first 20k-psi drilling system to Maersk. We have $55 million backlog for the industry leading Revolution CT scanner. For the quarter, equipment revenue grew by 8% and service revenue grew by 5% and six of nine growth regions expanded in the quarter. In addition, a few of our adjacencies are performing quite well. Life Sciences had order growth of 10% while Water grew by 11% and we now expect $1.3 billion of productivity revenue for ’14, slightly ahead of our operating plan.

Simplification and value gap continue to drive margins; we are reducing the structural cost of GE. For the year simplification, value gap and R&D efficiency should continue to be positive. In addition, we saw nice margin turnaround in energy management and appliances and lighting while transportation and health care are growing margins despite tough markets. We will continue to be negatively impacted by equipment mix for the year but we are on track for solid margin improvement in 2014 overall with expansion in most of our businesses. And in the quarter, six of our seven industrial segments had earnings growth. So, really a good execution quarter.

Our capital allocation is in line with plan. Total CFOA is $3.4 billion, down 9% year-to-date, industrial CFOA is above last year’s total but below if you add back the impact of the NBCU taxes last year. CFOA is impacted by timing and long cycle orders in wind, driven by the lack of PTC clarity and in oil and gas. Additionally, we have more inventory for second half shipments, given the substantially higher organic revenue growth we expect in 2014 versus 2013.

We’ll see strong improvement in working capital in the third quarter and second half. As previously communicated, we expect the capital dividend to be about $3 billion in 2014. We ended the quarter with $87 billion of cash and we expect CFOA for 2014 to be in the $14 billion to $17 billion range as outlined in our 2014 framework. We have a similar first half, second half profile that we had in ‘13.

Capital allocation continues to be disciplined and balanced. We have raised the dividend by 16% for ’14; we have filed the red herring for RFS today, targeting a late July IPO. And this should raise roughly $3.1 billion at the midpoint price for 15% of the company. And we are targeting $4 billion of dispositions for the year.

In an important move for GE the Alstom deal is announced and signed targeting a 2015 close. This is an exciting opportunity for GE and our investors. By 2016, we expect this will add $0.06 to $0.09 per share and allow the company to have 75% of our earnings from industrial. The synergies and returns are excellent. And Steve Bolze is here this morning to give you an update on Alstom. So let me turn it over to Steve.

Steve Bolze – VP, Power and Water

Thanks Jeff. We’ve had a lot going on with respect to the Alstom transaction. And I wanted to update you on the deal, our revised structure and our execution plans.

As you recall from our initial announcement on April 30th, the acquisition of Alstom’s power and grid businesses would represent a largest single acquisition in GE’s history. At the time we said it was subject to several reviews including our discussions with the French government. Those discussions have led now to our revised offer. We are happy with the outcome and have the unanimous recommendation of the Alstom Board and the endorsement of the French government.

A key point that I would like to stress is the deal economics remain the same and the price did not go up. Our deal is $13.5 billion of enterprise value at 7.9 times EBITDA and Alstom still retains its transport business. We have however revised the initial deal structure in payment terms. We will be selling our signaling business to Alstom transport and creating three joint ventures. GE will have operational control in these joint ventures and Alstom will be investing about $3.5 billion for its stakes. I will give further details on the ventures in a moment.