Highlights From GE's Q2 Conference Call: Strength was Broad Based with Expansion in Many of Unused Markets

General Electric (NYSE: GE) reported Q2 EPS of $0.34, $0.02 better than the analyst estimate of $0.32. Revenue for the quarter came in at $35.63 billion versus the consensus estimate of $34.72 billion. Shares are basically flat on the session.

Highlights From GE's Q2 Conference Call:

• (Jeffrey R. Immelt, Chairman and Chief Executive Officer) 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 unused markets.
  
• Our global growth was especially strong. There remains 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. win market, and the slow European economy.
  
• Earnings growth continues to rebound with operating EPS up 17%. Growth was pretty broad based including aviation, healthcare, transportation, oil and gas, and capital. In fact capital continues to be very strong. 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 cash and a Tier 1 common ratio of 10.4%.
  
• Lastly, we continue to make progress on our capital allocation plan with the big step in the third quarter as we retire the Berkshire preferred.
  
• Orders were a real highlight. They were very strong, 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 we'll 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 in growth over the past couple years, and they're paying off. We're seeing 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 Ossian [ph] 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 at an all-time high at $139 billion. New product launches are working. The LEAP-X is now a great success with the Boeing 737 (NYSE: BA) 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.
  
• Now margins declined in the quarter. The decline was primarily in energy and really driven by significantly lower margins in the wind market.
  
• Win margins had 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.
  
• (Keith S. Sherin, Vice Chairman and Chief Financial Officer) We had continuing operations revenue of $35.6 billion, which was down 4%, but as you can see from the notes on the bottom of the page, we're impacted by not having any consolidation of the NBC revenues. Excluding the impact of NBC, GE revenues were up 7%.
  
• Industrial sales of $23 billion were down 6%. Obviously that was also impacted by NBC. And I think the best way to think about industrial revenue is to look over the right side on the segment revenues. Industrial segment revenues of $23 billion were up 10% and that doesn't have any impact from the sale of NBC.
  
• Financial service revenues of $12.4 billion were down 1%. Operating earnings of $3.7 billion were up 18%, and we delivered $0.34 cents a share of operating EPS, up 17%. Jeff covered the cash flow of $4.4 billion.
  
• The second quarter year-to-date rate you can see was 41% driven by the NBCU gain in the first quarter. If you look at the second quarter, the GE rate of 21% was consistent with our expectations that we laid out in that first quarter call.
  
• Industrial revenues were up 10%. Segment profit was down 3% driven by energy.
  
• So legal and deal fees and other non-repeat items from purchase accounting were also recorded at corporate. We also had two transactions recorded in discontinued operations in the quarter.
  
• And that was partially offset by a $100 million loss on the disposition of our Australia New Zealand mortgage book. The net was a $0.02 after tax benefit in discontinued operations and $7 billion overall of reduction in investment. So overall, not much activity in continuing ops in Q2 in other items.
  
• For the quarter revenue of $11.6 billion was down 1% and that's in line with our Ending Net Investment being down 2%. You can see the pre-tax earnings were up three times over last year. Net income of $1.655 billion was up two times over last year.
  
• Our Consumer business had another very strong quarter. We ended Q2 with $146 billion of assets. That was up 3%. Net income of a little over $1 billion was up 57% driven by lower credit losses.
  
• The U.S. Retail Finance business had a great quarter. They earned $588 million, up 51%. That's driven by lower loss provisions as our delinquencies improve by over 100 basis points. And the Retail business in the U.S. had a good volume quarter. The volume was up 8%.
  
• Global Banking earned $310 million, up 17%. That was driven by lower credit losses partially offset by the loss of the Garanti income in Turkey.
  
• In U.K., Home Lending earned $44 million in the quarter. It's the seventh consecutive quarter of positive earnings. Our U.K. Home Lending assets declined $1.7 billion year-over-year, and we realized 115% again on the mortgages that we liquidated in the second quarter above the marks that we have taken on valuation.
  
• For Commercial Real Estate we're still facing losses, but we are seeing signs of stabilization. We lost $335 million in the quarter, but that was $190 million better than last year and $23 million better than Q1. In Q2 we had $92 million of credit losses and $339 million of marks and impairments. And during the quarter we sold 129 properties for $1.6 billion with $26 million of gains. Our assets are down 17% year-over-year excluding the impact of the weak dollar, and they're down 5% from the first quarter.
  
• If you look at the sales of quality properties, we're seeing stabilizing rents and occupancy on average and the portfolio is up. Our unrealized loss at the end of the year was $5.1 billion. It's down to $4.1 billion at the end of the second quarter. So slight improvements, but we're all still focused on returning this business to profitability.
  
• Commercial Lending and Leasing also had another strong quarter. Earnings of $701 million, they were up 124% from last year. Those results were also driven by lower losses and impairments. CLL had a good volume quarter. They did $10.8 billion of volume. It was up 33%. America's net income was up $260 million and Europe's net income was up $40 million.
  
• GECAS had another strong quarter, earnings of $321 million up 11%. The team funded $1.9 billion of volume with strong margins and we ended the quarter with two aircraft on the ground both in the process of being redeployed. Energy financial services also had a good quart, earnings of 139 million up 10% driven by lower marks and credit costs. So overall in GE capital, a strong quarter.
  
• Next is energy. Energy had a mixed set of results in the second quarter. The second quarter is going to be the toughest quarter we see in energy, and I'm going to show you more details about that on the next page. But first I'll go through the two businesses.
  
• For Q2 on the positive side, we're seeing great orders growth. Orders of 9.9 billion in energy were up 24%, 16% ex-acquisitions. Equipment orders of 5 billion were up 42%, and 29% ex-acquisitions. The main drivers were wind and arrow derivatives. We had orders for 667 wind turbines versus 248 in Q2 '10. We had orders for 41 arrow derivative units versus 16 units last year.
  
• Overall, orders priced for energy was down 2.5%. That was driven by wind arrow pricing down 7% and thermal ordering pricing down 10% in the second quarter. Service orders of 4.9 billion were up 10%, and revenues of 8.1 billion were up 1%. That's driven by the acquisitions partial offsetting all the lower volume.
  
• Thermal revenues of 2.0 billion were down 12%, and that was principally driven by five steam turbines and wind revenues of 630 million were down 46% in the quarter. We shipped 269 wind units in the quarter versus 511 last year.
  
• Service revenues of 4.4 billion were up 8% ex-the acquisitions driven by Power Gen services up 7%. And segment profit of 1.3 billion, it's down 24% and it's driven by the lower wind volume and the lower wind pricing.
  
• Next is oil and gas. This business is experienced tremendous - experiencing tremendous growth. We are getting growth organically, we're getting growth from our recent acquisitions, and we had a little bit of benefit from the weaker dollar in the revenue line. Orders of 2.9 billion were up 45%.
  
• Nineteen points of that growth came from the deals Wellstream and Wood Group, and we also had nine points of translation from FX. So 17% order growth organically from the Oil and Gas business.
  
• Equipment orders of 1.8 billion were up 41%. We had strong growth in turbo machinery from a large L&G order in Australia. Service orders of 1.1 billion were up 52% driven by upgrades in places like cutter in Canada. And total oil and gas orders price was positive, it was up 2.1% in the quarter. Revenues of 2.5 billion were up 39%, and there's a similar impact from exchange in deals as there was with orders. So you end up with about 10% organic revenue growth.
  
• Segment profit of 333 million was up 14%. We had benefits from the higher volume.
  
• Let me move on next to Aviation. The aviation market remains strong in the quarter. Orders of $5.3 billion were up 37%. Our commercial engine orders of $1.6 billion were up 78%. That was driven by GE90 and CFM. Military engine orders of $389 million were up 87%. And Jeff mentioned the success of the team had with $27 billion of wins at the Paris Air Show. None of those announced wins are in these orders.
  
• Equipment orders price was up 1.6%, and we ended the quarter with a backlog of $20.9 billion, up 9% versus last year. Service orders of $2.7 billion were up 14% driven by strong spares. The commercial spare parts orders were $23.9 million per day, which was up 18%, and that was partially offset by military services, which were down 10%.
  
• Transportation business had another strong business in Q2. Orders of $1.4 billion were up 19%. Equipment orders of $835 million were up 5%. Service orders of $534 million were up 50%, and the equipment backlog closed at $4.2 billion, up 26% over last year. Revenues of $1.2 billion were up 74% driven by higher volume. We shipped 40% more locomotives to our U.S. customers and almost five times more international locomotives driving those equipment revenues up 72%.
  
• The Healthcare team delivered another quarter of positive growth with continued reinvestment. Orders of $4.7 billion were up 9%, equipment orders of $2.6 billion were also up 9% with DI up 6% and clinical systems up 14%.
  
• The U.S. equipment was up 7%, and non-U.S. was up 10%. Some of the growth globally: China was up 25%, India was up 15%, Latin America was up 34%, and the pressure point was Europe. Europe was down 3% but down 14% x the impact of the weak U.S. dollar. So that gave us some pressure in the quarter.
  
• Service orders were up 10%, and total orders priced was down 1.3% for the business. We ended the quarter with equipment backlog of $4 billion, up 8% over last year's amount. Revenue of $4.5 billion was up 10%.
  
• So segment profit of $711 million was up 8% driven by higher volume and productivity partially offset by the negative price and $44 million of higher investments in new products. And on the right side, Home and Business Solutions had a challenging quarter. Revenues of $2.2 billion were down 4% and segment profit was down 26%. In Intelligent Platforms revenue was up 19%.
  
• Lighting revenue was up 7%, and Appliances went down 12%.
  
• (Q&A) Would love to hear some color around the assertion on the renewables that we could be reaching the bottom both on the demand as well as pricing. Just what sort of indications, quote activity, et cetera? (A) Well, I'll start and then let Jeff follow. Deane, basically if you look, we're working our way through that last wave of the very profitable U.S. bubble that we had. And you can see the margins and the pricing was really brutal in the quarter. On the other hand, you're starting to see a lot of order activity. And you see the orders in the second quarter and the V we had. And we're seeing a lot of global activity. They're at lower margins than that previous U.S. high priced backlog, but the volume is going to be pretty good. And the last thing I'd say is that there's a program in place where the government obviously gives some benefits to win installations. It's the production tax credits that are in place through 2012. I think the wind farms would have to be installed and operating before the end of the year. And I think that, you know, depending upon how people view the probability of that being agreed to and extended in the future, you may see some pull in the wind business to put those units in place before the end of '12 here in the U.S. So I think we're starting to have discussions with customers about some of that activity. So, I think you're still going to face margin pressure in the second half from wind, but I think you've seen this quarter is as I've said the worst of it. And with that, Jeff, don't know if you have anything to add to the wind market. (A) I think it's highly likely that we get a lot more volume in the U.S. over the next 18 months. You know, we've got the 1.6 megawatt, which is the highest performing unit. So we're going to gain market share probably in that activity. And then, Deane, what I'd say is in Canada, Australia, bunch of other places in the world, the wind wave if you will is just taking off. So I think from a unit standpoint and from a pricing standpoint, we're going to see a little bit better performance. (A) The business has gone from an extremely high margins over 20%, and it will be down in the, you know, between high single digits to low teens, you know, in this period. So it's been - it's been a tremendous performer for us. It's had an incredible amount of economic results that it's generated for us, but it's going through a period here where it's resetting. And as I said, I think the second quarter is the bottom of that, but there will still be additional pressure as we go through the second of this year. We've taken that into account when you look at the forecast we gave you on that page on the first half, second half, Deane.
  
• Got it. And then if I can get some additional color on the aviation side. And you touched on this with the remarks. Important win from the American order, decision Boeing on re-engining. And just if you comment on some of the activity in orders coming out of the Paris Air Show, I did hear some rumblings that there might have been some discounting on the service contracts. But just if you take us through, has there been any change in the total economics on these engine orders between what you're expecting on the equipment sale versus service? (A) Well, I'd say the outlook is very good. We went into the Paris Air Show having spent a few months where the CFMI team had not really taken a lot of orders on the A320 Neo, and we came out of that air show with more than 50% share, a very strong performance. We like the orders that we got. I'm sure that the competitors like the orders they got. You know, the launch is a tough process, but we know we've been disciplined about our approach. I think, you know, we do use everything that is available to us to compete. And our team feels that the economics that we have on these launch orders are as good as we've had on any launches and we feel great about it. I would add one thing that's a little bit of a real positive here in the last week obviously with the American order. When you take a look at the decision by Boeing to re-engine and we're in a partnership with Boeing on that, you know, this is the third application for the LEAP-X engine, and we've got a sole source position, and I believe that you're going to see that aircraft in service for well into the 2020s. And that is a tremendous opportunity for the aviation team. We're committed to it, and that investment that we've been taking into LEAP-X technology for the last several years has really proven itself, and you can see it now with the sole source position on the C919 in China. We're committing effectively on the A320 Neo, and now we're going to have a sole source on the next generation of the 737 when Boeing finally approves that at their board level. (A) I would add, Deane, maybe a couple macro comments on aviation just to piggy-back on what Keith said. If you're an investor and you sit back and just game board commercial aviation from wide body to narrow body to regional jets and you look at the position GE has not just for a year or two but for a decade, you've got to like our position. You know, you really have to like where we are in 787, 777, and narrow body. And so you've got to like not just for a quarter, but for a decade where we are, number one. And then I look financially for aviation guys, look, we've got the higher R&D and the run rate. We've got the engines coming down the learning curve. We've got all this service revenue coming through. We're going to be able to grow our aviation operating profit steadily through this cycle while launching these new engines. And so I think we've got the business positioned both strategically and financially exactly where we want it to be positioned for our investors. And that's why I think we like the business.

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Walmart (WMT) PT Lowered to $130 at UBS on Investment Narrative's Competing Dynamics
• Vireo Growth completes acquisition of C21 Investments
• Deutsche Bank monitors UK auto sales as Chinese exports grow