General Electric Company (GE)
Q2 2010 Earnings Call Transcript
July 16, 2010 8:30 am ET
Trevor Schauenberg – VP, Corporate Investor Communications
Jeff Immelt – Chairman and CEO
Keith Sherin – Vice Chairman and CFO
Jeff Sprague – Vertical Research Partners
Julian Mitchell – Credit Suisse
Nigel Coe – Deutsche Bank
Terry Darling – Goldman Sachs
Steven Winoker – Sanford Bernstein
Bob Cornell – Barclays Capital
Chris Glynn – Oppenheimer
Steve Tusa – J.P. Morgan
Scott Davis – Morgan Stanley
Jason Feldman – UBS
John Inch – Merrill Lynch
Previous Statements by GE
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Good day, ladies and gentlemen and welcome to the General Electric second 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, sir.
Great. Thank you, Novalia. Good morning and welcome everyone. We are pleased to host today's second quarter 2010 earnings webcast. Regarding the materials for this webcast, we issued the press release earlier this morning and the presentation slides are available via the webcast. The slides are also available for download and printing on our website at www.ge.com/investor. 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 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.
Great. Trevor, thanks. Good morning, everyone. Just at the outset, I'd say I think the GE team had a really great quarter. Our environment continues to improve, media buying was strong, rail loadings were positive, revenue passenger miles were positive, losses have declined and credit demand is up, and equipment orders were positive. But we are still cautious in a few areas. We are working through a difficult commercial real estate cycle. After many quarters of decline, demand for electricity finally rebounded in the second quarter and we think that's encouraging. And as many people have written, we think this is a multi-speed recovery. So it's going to – the economy is going to strengthen at different paces around the world.
Our earnings growth resumes, we stated about that. EPS is up 15%. I think everyone likes what they see in GE Capital; the losses peak and earnings rebounding and we had strong performances at NBCU, health care, consumer, and energy.
The GE team's execution was very strong, increased margins, we are on track for $13 billion to $15 billion of full-year cash flow from operating activities and we had $74 billion of cash on the balance sheet at the end of the quarter. That gives us many positive capital allocation options ahead, and I would say, if anything, those options strengthened during the quarter given our strong cash performance. So I'm very pleased with the way we executed in the second quarter.
I always go through four operational updates on the company in general. The first one is with GE Capital. Really same as in the past, all the metrics are improving. I think the one I would point out on this page is the tier 1 common ratio at 8.1%, despite FX having an impact on equity. We think that's very positive and as the GE Capital earnings improve, that's only going to accelerate. And E&I, we are making progress, we announced the sale of BAC yesterday and we are well on our way towards the commitments we made on ending that investment. So we have very strong liquidity and very strong capital positions and those got better in the second quarter.
The second thing is how our commercial teams are performing, particularly in orders. This is our first quarterly orders growth since the third quarter of '08. Energy had 20% equivalent growth; tech, 14%; service had many bright spots compared to some one-timers last year like nuclear fuels. And the backlog is steady, it's up 12% quarter-over-quarter and pretty based strength. And so I think we feel good about where we stand. The backlog really is flat ex FX. We expect single-digit orders growth in the second half of the year. These are always tough to predict, given the lumpy nature. But when we look at our funnel, that's what we seek looking outward.
The third area is on operational improvement. We expanded margins in the second quarter, we had good performance overall; 70 basis points performance to 17.1%, which is I think – everyone would agree, I think good execution by GE; positive margins, really driven by a positive value gap from a price deflation standpoint. And we've done aggressive restructuring over the past two or three years and those cost savings are showing up in the bottom line and we think that's great.
We've done that while investing heavily in research and development, a significant increase of 14% year-to-date. We targeted to introduce 30% more products this year. We are funding adjacencies in areas like batteries and areas like that, and we are growing our global position. We really have a deep pipeline of leadership products. Like the GEnx and aviation and falling behind that is the TechX and the LEAPx who are filling up the product line.
We are launching two new gas turbines in the second half of the year. Multiple new healthcare, both from an information technology and also diagnostic imaging devices, increasing our locomotive advantage, launching smart appliances. So we really do have a deep pipeline and so we are investing in organic growth, while growing margin rates and we think that's a good sign for investors.
Lastly, good operational improvement in cash, solid cash flow in the second quarter, $6.3 billion year to date. Our CFOA advanced ahead of net income and depreciation. And again, in general, while we are seeing progress decline, our working capital is offsetting that, and so that's kind of the tail of the tape so for this year.
We have a very strong balance sheet with consolidated cash of $74 billion. You go down the walk, you see lots of free cash flow, which is a big part of the GE business model. It's just lots of cash available for capital allocation as we look at the year. So we continue to build the cash balance. We are on track for CFOA for the year. And I think the cash story and the balance sheet strengthening story is a very positive story for GE and our investors.
So with that, let me turn it over to Keith, and he will go through the operations.
Thanks, Jeff. I am going to start with the summary of the second quarter. For the quarter, we had continuing operations revenues of $37.4 billion, which were down 4%. The pieces [ph], industrial sales of $24.4 billion, were down 6% and that's right in line with our expectations.
If you go back to the second and third quarters of last year, we estimated that our equipment revenues could be down 10% to 15% in 2010 based on the orders profile we were seeing. In December be updated that to say that we thought our equipment orders – equipment revenue could be down 5% to 10% this year and through the first half, the equipment revenues are down 8%. So that's right in line with what we had as expectations.
Financial services revenue was $13.1 billion, down 2%. I'll show you more of that on the GE Capital page. We earned $3.3 billion of net income, which is up 14%; and for earnings per share, we earned $0.30 as Jeff said, which includes the cost of the preferred dividend, and the EPS results are up 15%. As Jeff covered, the total cash flow from operating activities was $6.3 billion year-to-date, which puts us right on track for our total-year estimate.
And for taxes, the consolidated tax rate for the second quarter is 21%. That's up from 7% in the second quarter of '09 mainly because of the improvement in highly-taxed pretax earnings principally at GE Capital. GE tax rate is in line with 2009 and as you look at the rest of the year, we expect the GE rate for the full year to be at somewhere in the mid-20s, a bit lower than we had in the second quarter due to the income mix between GE and GE Capital and some possible second half order resolutions that was talked about.
On the right side, one final point; the total GECS tax benefit I say on the chart that it is a lower benefit. The total benefit in Q2 was $570 million lower than last year's Q2. On the right side of the segment results, you can see our industrial businesses, ex media, had $3.6 billion of segment profit, which was down 2% from last year; NBC Universal had both revenue and profit growth and GE capital earned $830 million, up 93%.
Overall, segment profit was up 8% and with lower restructuring at the corporate level, partially offset by higher interest, the total earnings were up 14%. So it's great to be back delivering strong earnings growth.
Now before I cover the business highlights, here is the summary of the second quarter items that impacted our results. And as you can see, there were very few items to break out this quarter. First, as we continue to report, we had a total impact of $0.01 from restructuring and other charges. We continue to reduce our lighting cost structure. We had some restructuring of water, healthcare, and global banking. We had two gains in the quarter. We sold a portion of our CFM engine teardown business to Snecma and we realized a $77 million after-tax gain on that. And we had an environmental insurance settlement that occurred in the quarter for a $75 million after-tax gain.