Highlights From GE's Q1 Conference Call: View the 2010 Framework as Achievable With Upside Potential

April 16, 2010 2:33 PM EDT
General Electric Co. (NYSE: GE) reports Q1 EPS of $0.21, 5 cents better than the analyst estimate of $0.16. Revenue for the quarter was $36.6 billion, which compares to the estimate of $37.10 billion.

Highlights From GE's Q1 Conference Call:

  • (Jeffrey R. Immelt, Chairman and CEO) Our environment continues to approve, we saw some encouraging signs in places like revenue pass through miles and losses declining in GE Capital.
  • We think the 2010 framework remains achievable based on how we're going in GE Capital. We see earnings growth for the balance of 2010 and we might do more restructuring to position for the future.
  • We continue to invest in research and development and restructuring and we really think this quarter is a pretty good testament to our ability to grow earnings and dividends in 2011 and beyond.
  • Long-term debt funding is in great shape. We've funded about eight billion dollars year to date.
  • The funding costs are low and we feel very good about how we're positioned here.
  • Our commercial paper is on track. Leverage, particularly -- Keith will go through the impact of FAS 167, is declining. Our capital structure is very strong.
  • The impact of the GE Capital corporate, some of the FX pluses and minuses that changed over time. If you put in those factors, we stand at 516 billion dollars today.
  • We reduced 22 billion dollars in the last quarter. And we're on track I think for a number that we used to talk about as being 400 billion of about 440 billion as we go through this changes.
  • It boils down to about 20 or 25 billion dollar reduction per year and we feel like that is in great shape and we're making good progress towards those goals. We had 17.1 billion dollars in orders, the backlog is stable.
  • The equipment is heading towards easier comps. Service really would have been flat except a couple one time orders in traps takings last year. We've got a strong pipeline of commitments.
  • A lot of new orders are coming from outside the United States, a strong pipeline of commitments. 1.2 billion dollars Iraq order that is moved through their process.
  • Margins were healthy in the quarter. We had expanding margins exiting the Olympics. Our service margins across the company expanded by 250 basis points and NBC because the Olympics was margins overall. A lot of that is driven by a positive value gap.
  • We're holding price in backlog. We're seeing positive new order pricing on the index and still getting deflation and we think this will positive value gap will continue into the future.
  • We're launching offshore win, new healthcare products, energy efficient products and transportation and appliances and again a great pipeline of products as we go forward in the future.
  • And cash flow remains on track. We're on track for 14 to 15 billion dollars for the year.
  • We've got 70 billion dollars cast on the balance sheet, more than 10 billion of cash on the parent and as I said, we're on track for 13 to 15 billion dollars for full year cash flow from operating activities.
  • (Chief Financial Officer) We had continuing operations revenues of 36.6 billion, down 5%.
  • Our industrial sales of 23.5 billion were down two percent, a little less than the average because the financial services revenues were down more at 13.2 billion down 9% reflecting some of the dispositions we did last year plus the continued shrinkage that we have.
  • We earned 2.3 billion dollars of net income which was down 18%.
  • In terms of taxes, the consolidated rate for the first quarter is 15% for the company, that's up from a neglect 12% in 2009, since we don't have a repeat of last year's first quarter decision where we agreed to permanently reinvest some prior year earnings, that was 700 million dollars one time benefit last year that doesn't repeat.
  • Our instrumental businesses had 2.9 billion dollars a segment profit. You can see that's down 4% from last year, similar to our Q4 results.
  • NBC was down driven by the Olympics.
  • GE Capital earned 600 million dollars down 41% but with positive pre-tax income and better credited profile.
  • We had a 380 million dollar reserve increase in the quarter on the four discontinued operations.
  • (GE Capital) Revenues at 12.3 billion were down 10% driven by the Penske disposition last year. We no longer consolidate that and get the revenue. Segment profit of the 607 million was down 41%, but we more than offset the impact of 750 million dollars one time positives last year from tax credits on that gain.
  • The consumer business earned 593 million dollars in the quarter, that was down 20%. US business had an excellent quarter. Tax credits were down 530 million dollars year over year on consumer and those were mostly offset by lower credit losses of about 375 million and 100 millions of lower cost.
  • Our North American retail finance business earned 293 million dollars up 70%. That's driven by lower credit losses. Banking earned 183 million dollars, that was basically flat, down two percent.
  • Our UK home lending business earned 43 million dollars in Q1 which was another positive sign and we earned a little over 100 million dollars in Australia in the quarter. Real estate had a loss of 400 million dollars in the quarter.
  • We had 137 million dollars of after-tax credited losses on our debt books and 386 million of aftertax marks and impairments driven by our equity book.
  • Commercial, the commercial lending and leasing business had a good quarter. COL earned 232 million. That was down 3%.
  • Energy financial services also had a great quarter driven by 80 million of higher gains from the gains of some gas rights.
  • As we previously disclosed we put 31 billion of assets on the balance of 11, that was split about 18 billion of commercial assets and 13 billion dollars of consumers assets.
  • 30 day plus delinquencies for equipment are down 10 points. It's driven by the Americas. Delinquency was down 18 points in the America's and in Europe and Asia about flat.
  • We had 700 million dollars of declines in CLL with G cas offset by a 400 million increase in real estate, so we continue to see non earnings go up in real estate offset by non earning declines.
  • Real estate delinquencies did go up 75 basis points in the quarter a little under 5%, non earnings were up 500 million dollars including 167.
  • That was driven by a 43 basis points decline in North America retail delinquencies. Mortgage delinquencies rose 23 basis points driven by an increase in our Australia and New Zealand portfolios.
  • The real positive in mortgages comes in the UK. You can see the 30 day delinquencies declined 65 points in the quarter and we continue to realize net gains.
  • Next an update on reserves coverage. Reserves ended the quarter at 9.5 billion dollars and coverage increased at 2.61%. Here's where you do see some impact of the 167 consolidations
  • For the US consumer we now have a few quarters of improving data. Our entry into losses at very low levels, historic low levels. Delinquencies are approving and we comment to see the book decline a little bit.
  • Global banking remains stable, losses are in line with fourth quarter view. UK mortgage continues to stabilize.
  • Overall, though, if you think about the metrics around delinquencies, reserve coverage, everything appears to be heading in a positive direction here for GE Capital.
  • NBC. If you look for the quarter, revenues 4.3 billion were up 23%, a profit of 199 million was down 49%. You can see over on the right side if you adjust for the impact of the Olympics revenues were flat last year and segment profit was up one percent.
  • The ratings were up 14%. We had about 18 million dollars of revenue and as we said previously we thought the loss would be somewhere around 250 million dollars in the quarter, in the end the sales were better. We had a loss of 223 million on 100% basis or 194 million at the GE level.
  • In the quarter, cable continued its leadership performance, revenues of 1.2 billion were up 3% and segment profit was up 4% led by entertainment. USA had its 15th straight quarter as number one. Bravo posted 18th consecutive ratings growth, Oxygen had its highest ratings quarter every and even on the cable news the revenue for non profit was flat in the quarter, pretty good performance on this environment. CNBC continued its lead in business news, and NBC had a few milestones.
  • We're seeing some really good recovery in the ad market. Local ad market was up 10% in Q4, local ad market was up 15% in the first quarter, scatters up over 20% on both the network and on cable leading into the up front and that's a really good outlook as we go into the up front.
  • We did a lot of shuffling in the lineup in the first quarter. You may not realize it but we are reprogramming at 10 p.m. Ratings up 45%. And Jay 11 know is back at late night. Lots of progress heading into the mid May here.
  • The box office results did fall short of our expectations but that was partially offset by less secretary quarter prepromotion for movies. DVDs had a good quarter. We had five million units.
  • Parks also had a good quarter highlighted by the opening of universal in Expect More, Pay Less. We had slightly lower attendance in the two parks but that was offset.
  • Digital constant to have highlights. We remain the number two video sight.
  • Aviation: Q1 $4.5 billion, down 12% year-over-year, major equipment orders of 2.billion were down 20%. One billion dollars of military order, military orders down about 9. The backlog ended the quarter at 19.8 billion flat with Q4 and down 9% from last year.
  • Service orders were down 3%. Commercial spare parts orders were 19.3 million per day, which was report down 11, but if you adjust for the 2009 order which we also covered last year, they would be up about 1%. Military service orders down about 8%.
  • We sold the times microwave business and we had a gain in our ATI service business. This year in Q4 we had a gain from a service licensing facility in China.
  • Healthcare, the healthcare team had another strong quarter, orders of 3.8 billion were up 5% and equipment orders were up 8%. Diagnostic imaging orders up 10% in the quarter. For total orders EMEA up 7%. Asia was up 20%, China, 28%, India was up 54%. The US was flat.
  • We saw equipment orders up 2%, service orders up 3% and US equipment orders definitely slowed.
  • Transportation, this business continues to be impacted by a really tough environment. Orders, 936 million were flat. We had strong equipment orders, 440 million, those were up 290 million dollars driven by orders internationally.
  • So flat overall equipment service. Revenues of 766 million were down 35%. That's driven by the equipment being down 50%.
  • We shift sensitive 9 locomotives this year in the quarter, versus 183 last year, and service revenues. Segment profit of 115, that was down 47%, driven by the lower volume and higher than MPI spending and we are obviously will be positive as we reduce the slack in the system and all the parts.
  • Next is energy. Revenues of 8.7 billion were down 5% and with strong margin expansion you can see the business results on the bottom left, both positive for energy and gas and I'll cover energy first. Energy orders of 6.2 billion, they were down 15% versus last year.
  • Thermal orders of 500 million, down 56%, we had orders for 10 gas turbines versus 18 last year and the Iraq order was for additional 25 gas turbines so that's important for backlog. Within orders of 1.2 billion, we had order for 494 wind turbines versus 724 last year and a couple of positives on orders, derivative orders up 17%.
  • We shipped 41 gas turbines versus 42 last year and win units were down from 433 last year and service revenues were flat. So segment profit was up 12. That's driven by a positive value gap. We had over 200 million price in the energy business and 100 million dollar of deflation which more than offset the impact at a lower volume.
  • Oil and gas, noticeable and the oil and gas team had another strong quarter. Order of 2 billion were up 8%, equipment orders of 1.1 billion were up one percent and service orders why up 19% driven by our expansion of our long-term service contracts growth in countries like Nigeria, Asia and Egypt.
  • Lighting had a good quarter for us. It was driven by the restructuring benefits that we invested in last year. We also had strong global demand and some positive price. Revenue was up 10% and lighting made about a 30 of the profit in the quarter.
  • Appliance revenue was down 4%, retail sales were flat, we continue to see a challenge in multi
    family housing.
  • (CEO) So we would view the 2010 framework as achievable with upside potential. The earnings growth for the remainder of 2010 will be there so the company, you know, will show earnings growth over that time period and we may do more restructuring and financial asset sales as we look forward to the future.
  • (Q&A) What's your outlook there and do you think you know 1Q looks like a low here? On the equipment side in if I can? (A) I would say, Chris, that, you know, again, Iraq is a substantial order, you know, healthcare looks pretty good. We think the aviation cycle, you know, similar to what you hear from other people improves as we go through the year. Energy, we always pack commitments into orders. You know I think the error derivatives and the inbox tend to be industry leaders from an energy standpoint. Transportation, you know, there was probably 5,000 local motives market at the end of last year. There's more like 4,000 parked now. We've got lots of global demand there. You basically haven't seen any impactof stimulus in the company. You know, a lot of the smart grid orders were pushed from first quarter to second quarter because there was confusion around the tax payment. So I think those are yet to be had. So I think the profile for the balance of the year is going to be positive. (A) I think if you look at the pace of change on order, going back through the last several quarters you can see. Second quarter last year was down 42% on equipment, third quarter last year was down 32%, fourth quarter was down 14, this year we were down 10. So I think the pace and the comparisons support continued gradual improvement and as you know, they're lumpy. We've going to have big orders to drop into quarters. But I think overall the trend is continuing.
  • Just looking at the cash on hand, the improvements of capital and some of the complimentary, just from my prior question. Do you think that could cause dividend increase to be pulled forward into 2010? (A)I just can't comment on stuff like that. I think we have a strong intent to create financial flexibility, we've got good option Al, we've got a set of priorities as a management team and as a board in terms of how we look at it, you know. I think what Keith said in February there is a dividend increase in your future and I'll just leave it at that.
  • Can you maybe Keith give us a little more sense of what's going on at shin say bank? I mean, the -- I mean, I guess the confidence that you fenced in these losses with the charge that you took. (A)Sure. I think as you know, we closed this in the third quarter of '08 and, you know, we have a loss agreement with shin say, but the economy's been terrible and there have been a lot of different changes in the legislation. For example in the legislation lenders in the consumer finance base are no longer going to be allowed to give loans who have greater than 30% debt to income and that will go into effect at the end of June of 2010. That's been known for 18 months but it's getting close. There have been some changes from a regulator perspective where customers who files a claim are no longer flagged in the credited bureau system and so that, you know, does that change the behavior of claims? And so we've seen a pickup in the last several months in terms of the overall claims severity. The number of claims have gone gown. The average is higher than what was in our model. So what I would say is we update, what's the sharing with shin say, what's left, and we added 380 million dollars to the reserves this quarter. We still have not used up the amounts that we established for the potential liability when we formed this transaction with shin say so there's amount left from the original deal that's still there and in addition to that we booked up 500 million dollar so our books a little different than competitors. We are no longer -- we capped everybody in the book at 18%, we have not been doing gray zone since June of last year. We're in runoff mode. We reduced and blocked a lot of the accounts from even getting additional loans. So I think what I can say is there's been volatility, it's higher than what we thought, we booked an amount that we think is consistent with what we think the liability will be but we've got to watch what happens over the next several months.
  • As a follow up, just on the cash balances you guys have been building, are you still anticipating the need to put 2 billion dollars of cash into GE Capital in 2011 or is that something that may be given your experience is looking a little bit less necessary? (A)I think we originally had that estimate when we were looking at the December outlook for capital around 2 billion dollars. I think if you look at that time way the map looks on the income maintains agreement it should be less about that. If you look at the so 10% of that is 400 million. In the quarter, GE Capital made 200 million dollars of pre-tax earnings. So if you just did it on a quarterly basis the payment for the first quarter would be 200 million dollars. I don't know what will happen annually from a pre-tax and from an interest but that gives you an order of magnitude what it would be. So we think it's going to be less than the 2 billion dollars, but we have to see what happens with the rest of the year and whether we have additional restructuring.

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