GE Aerospace - Earnings Call - Q1 2011

Transcript

Speaker 12

Good day, ladies and gentlemen, and welcome to the General Electric First Quarter 2011 Earnings Conference Call. At this time, all participants are in listen-only mode. My name is Tom, and I will be your coordinator for today. If at any time during the call you require assistance, please press star followed by zero, and a conference coordinator will be happy to assist you. If you have experienced issues with the slides refreshing or if there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the call over to your host for today's conference, Trevor Schauenberg, Vice President of Investor Communications. Please proceed.

Speaker 9

Okay, thanks, Trevor. Good morning, everyone. Just on the front page, just to give you an overview, I think another good quarter for the company. Just to summarize some of the highlights, you know, despite the general volatility, our environment continues to improve and get better. We had the strong top-line performance, and the leading indicators are getting better. We had industrial revenue growth of 8%, 5% industrial organic revenue growth, 12% international growth with Brazil up, Australia, China, and India. Infrastructure orders were up in the quarter and had real strength in both equipment and services. Earnings growth continues. Operating EPS is up 55%. GE Capital had a really good quarter, as did healthcare, transportation, and aviation. Energy infrastructure had lower first half, but we expect growth to resume in the second half. For our execution, the GE balance sheet continues to be very strong.

The GE Capital portfolio transformation is ahead of plan at $82 billion of cash on the company's balance sheet. We're executing a capital allocation plan kind of in line with what we've talked about with investors in the past. We announced our third dividend increase this morning, up 50% since the second quarter of 2010. We bought back $2.3 billion of stock since we restarted our buyback. We've either closed or announced substantial transactions, really in our energy business, one small one in our healthcare business. We continue to execute on our capital allocation plan. From an order standpoint, we had strong orders in the quarter, up 13% overall and 10% organically. Our sprint goals across the board and backlog grew to a record of $177 billion. Worth pointing out, we had strength in both equipment and services. Pricing appears to be stabilizing.

Most importantly, large-scale turbine core activity is increasing. We did see solid orders growth in the first quarter. From an execution operations standpoint, like I said in December, we're investing more in research and development, about 12% more than the first quarter of 2011. This is producing more new products, and that's helping to drive our orders growth. From a margin standpoint, we're down year-over-year. This is primarily in our energy business due to two primary factors: Wind Turbine pricing and Acquisition Revenues at lower margins. Overall, material deflation continues, and we should see deflation for the year. Through the year, our margins will strengthen quarter by quarter. That's really the story from an execution and operations standpoint. From a cash standpoint, we're on track for $12 billion-$13 billion of CFOA for the year.

For the quarter, our results are impacted by the NBC transaction and working capital growth to support equipment sales through the year. Overall, GE's balance sheet remains very strong with $82 billion of consolidated cash and $15.5 billion of cash as a parent. Our real story of strong capital, liquidity, and just strength in the balance sheet, I think that the things we talked about with investors in the past, that all remains intact in the first quarter. We're really happy about that. From a capital allocation standpoint, we really are seeing balanced and disciplined capital allocation, and that remains an important part of our overall strategy. As we said last year, we wanted to redeploy capital from NBC Universal to fast-growth energy investments. With Converteam, Dresser, Wood Group, Wellstream, and Lineus, our major transactions are done for 2011.

Meanwhile, we continue to emphasize growing the dividend as reflected by today's increase, our third in the past nine months. We're focused on reducing our share count in 2011 and retiring the preferred equity by October of this year. GE Capital has very strong tier-one ratios, and we really have done, I think, an outstanding job, Mike Neal and the team, of strengthening GE Capital coming out of the financial crisis. We feel good about our capital allocation plan. I think in the quarter, we've executed on the things we said we were going to do for our investors, and this positions us, I think, for good long-term growth as the year goes on and into 2012. I'll turn it over to Keith to go through the first quarter operations.

Speaker 0

Okay, thanks, Jeff. I'm going to start with the first quarter summary. For the quarter, we had continuing operations revenue of $38.4 billion, up 6%. Industrial sales at $22 billion were down 6%, and the difference is created by NBC U. Our pre-tax gain that we have from the result of selling majority stake to Comcast is included in revenue, but that also means we only had one month of NBC U's sales from 2011 because it closed at the end of January. I'll describe the gain on the next page, but a better indicator of our industrial revenue performance is on the right side. You can see we had $20.8 billion of industrial segment revenue, and that was up 8%. Financial services revenue of $13.2 billion was up 3%. For operating earnings, which excludes our non-operating pension expense, we earned $3.6 billion, which was up 58%.

For operating earnings for sale, we earned 33%, a sense percent in the quarter, up 65%. As Jeff covered, we delivered $1.7 billion in cash from operating activities, which was down 34%, principally driven by NBC U. For taxes, as we covered with you in January, we have a couple of large items that increased our tax rate for the first quarter. First, there's the large shift on NBC U, which I'll cover on the next page. The GE rate ex-GE Capital, 68% for the quarter. Excluding the NBC U gain, the GE rate was 22%, which is in line with the low to mid-20s range we gave in January. The second big factor that affects taxes in the quarter is that the GE Capital tax rate has also gone up as we've expanded pre-tax income.

The $800 million increase in tax expense is all explained by the tax on the $2.1 billion increase in GE Capital pre-tax income in the quarter, year-over-year. On the right side, you can see the segment results. I'm going to go through each business in more detail than these several pages. Industrial segment revenue was up 8%. Segment profit was up 1% with all segments growing except energy. GE Capital had a very strong quarter driving the overall results. One other point on the memo on the bottom left, we said that we would communicate the amount of NBC U earnings every quarter. I'm not going to go into any details on the result. Comcast is going to cover that in their upcoming earnings call. However, for the first quarter, excluding the gain on sales, GE included $93 million of pre-tax income from NBC Universal.

Before I get into the businesses, I'm just going to cover some of the other items that affected the quarter. First is the NBC U gain. As we said previously, we expected a small after-tax gain when we closed the NBC U transaction. As you all know, we closed at the end of January. There was a gain of $400 million after-tax on the NBC U transaction. The pre-tax gain on our sale of NBC U was $3.6 billion, and that reflects Comcast's new ownership of NBC U and our receipt of $2.2 billion in cash and a 49% investment in the new JV. Because the JV is structured as a partnership, the taxes are recorded separately from the investment that we hold.

We had a very high tax rate on the transaction, $3.2 billion of tax expense, reflecting both our low historic tax basis in the NBC U assets and the recognition of deferred tax liabilities on our 49% investment in the JV. If you look down below on the page, partially offsetting that gain, we had $0.02 of after-tax charges in Corporate related to restructuring and other charges. We had some slight downsizing in Energy, Aviation, and Healthcare, and we also had some capital defleeting. By business, just to give you the details of the charges on a pre-tax basis, Energy was $66 million, Aviation was $66 million, Healthcare was $44 million, Capital was $58 million, Corporate was $48 million, and HMBS was $11 million. We also had $0.01 of after-tax deal-related costs that we took at Corporate. Those are related to the Energy deals that we had.

The NBC U gain was a little higher than we expected, and $0.01 of that gain fell through to operations. One other point on the quarter, not on the page, we did have six more days in Q1 2011 versus Q1 2010 based on our fiscal calendar. We really don't have as much of a flow portfolio as we used to without Plastics and NBC Universal. However, if you look at the impact on our service businesses, on the flow businesses in GE Capital, and on Home and Business Solutions, we had roughly $0.01 positive from the additional days. On the other hand, we also had about a half a ton of negatives related to the disruption in Japan. Japan's going to be covered by Jeff later in the pitch. NBC U gained $0.04 in the quarter and partially offset by the other items.

For the business results, I'm going to start with GE Capital. Mike Neal and the team delivered another quarter, demonstrating significantly improving results. A revenue of $12.3 billion was up 3%. That includes the impact to the Guarantee sale. We announced back in November that we were disposing of our Guarantee stake, and we estimated we'd have a $300 million after-tax profit on that. We announced that it was going to close in the first quarter. If you adjust for the Guarantee sale, which in revenue was about $700 million, revenue would have been down about 2%, which was in line with our framework. Pre-tax earnings at $2.3 billion in the first quarter were up $2.1 billion. They were within $50 million of the total pre-tax for all of 2010, so a significant improvement in pre-tax. Net income of $1.8 billion was up $1.3 billion.

We did have the benefit of the $300 million after-tax with the Guarantee gain, but even without that, GE Capital had a great quarter. We had $940 million of after-tax, lower credit costs and margin impairments year-over-year. Our volume was up 19%, mostly driven by the commercial business, which was up 56% from last year. We had $10.4 billion of volume in the quarter. Our consumer volume was up 9% over last year, and the new business margins remained strong. The overall portfolio margin was 5.1% in the first quarter. As Jeff said, our capital ratios are strong and continue to improve. We continue to see broad-based improvement in our asset quality metrics. I want to go through some of the business results that you can see on the bottom left. First is consumer. Our consumer business continued to deliver very strong results in the quarter.

We ended the quarter with $147 billion of assets, which was down 7%, driven by the continued run-off in our mortgage and our auto businesses. In the first quarter, our U.S. retail assets were up 7%. Consumer net income of $1.3 billion was up 120%. That included the gain from Guarantee. Excluding the Guarantee gain, net income of $940 million was up 65%, driven by $400 million of lower credit costs. Our U.S. retail finance business earned $545 million, up 88%, also driven by lower credit losses as the portfolio performance continues to improve. Without including anything for the Guarantee gain, our global banking business earned $281 million in the quarter, up 77%, also driven by lower credit losses. In the quarter, U.K. home lending earned $53 million, the sixth consecutive quarter with positive pre-tax on net income.

Commercial real estate, our commercial real estate business is still facing losses, as you can see, but we're seeing early signs of improvement. We lost $358 million in the first quarter, but that was $45 million-$50 million better than last year's first or fourth quarter. In the first quarter, we had $55 million of after-tax credit losses and $315 million of after-tax margin impairments. During the quarter, we sold 113 properties for $1.3 billion with $28 million of gains. Our assets are down 14% year-over-year and down 2% from year-end. We're seeing some early signs of increased liquidity for quality properties. We're seeing stabilizing rents and some places with rising occupancy. Overall, on average, some improvement in the debt portfolio, 1%-2% in values in the quarter. Better than last year, but still challenging. Our commercial lending and leasing business also had another strong quarter.

Earnings of $554 million were up 139% from last year. The results there were driven by lower losses and higher core income from pricing and fees. It's pretty broad-based. America was up 81%. Europe was up 24%. Asia was up 90%. GE Choice continues to have a good performance. The earnings of $306 million were down 3% from last year. The portfolio continues to be in strong shape with $16 million in non-earnings and zero aircraft on the ground. Energy Financial Services, $112 million, which was down 27%, driven by lower gains year-over-year. Overall, a really strong quarter for GE Capital. Next is asset quality. In the interest of time, I'm not going to go through all the detail here. On the left side, you can see our delinquencies continue to improve across all the portfolios.

Non-earning assets declined by $500 million overall, and our coverage on reserves to non-earnings was basically flat. On the right side, you can see our write-offs at $1.7 billion were greater than our new loss provision of $1.3 billion. Reserves came down by $400 million. Overall reserves ended the quarter at $7.6 billion, and the coverage was down five basis points to 2.42% as the portfolio performance continues to get better. Next, I'm going to shift to energy. Over to industrial. Energy orders of $7.3 billion in the quarter were up 17%. Orders were up 10% organically with equipment up 10% and services up 10%. The thermal orders of $730 million were up 57%. We had orders for 27 gas turbines versus 10 in the first quarter of last year. The orders priced for thermal were down 6%.

We had strong aero orders of $387 million that were up over 100%. We had wind orders of $930 million that were down 22%. We had orders for 327 units this year versus 494 last year, and the orders priced for wind was down 3%. Service orders of $3.9 billion were up 15%, driven by strong power gen services on measurement control systems and digital energy. In the quarter, revenues of $7.8 billion were up 9%. That's 4% organically, driven by the higher volume. Renewables revenue was up 31% to $1.1 billion. We shipped 366 wind turbines versus 349 last year, but the growth came from more 2.5 MW units, so we had some mix impact there. For thermal, the revenue was down 15%.

We shipped nine fewer gas turbines, 32 this year in the first quarter versus 41 last year, and service revenues of $3.7 billion were also up 9%. Statement profit was down 9%. The benefits that we received from the higher volume were more than offset by lower price on wind, and we had $115 million of higher programs and global investments. We also had a small benefit of $29 million for the result of Dresser and Wellstream in the quarter. On the bottom on the right, you can see oil and gas. Orders for the business were up 7%, driven by equipment orders up 11% and service orders up 3%. Wellstream added 4 points to the orders in the first quarter. Order share are also lumpy on a quarterly basis. We had strong growth in petrochemicals and refineries and strong growth in drilling and production, both up over 60%.

That was partially offset by lower orders in both turbomachinery and the natural gas segments. Revenues of $1.8 billion in the quarter were up 12%, driven by the growth in equipment up 17% and the good strong services up 6%. Segment profit of $199 million was up 4% as the benefits of higher volume and deflation were partially offset by negative foreign exchange and higher program investments. Overall, we expect energy to continue to be down in the second quarter, and then we will see energy returning to growth in the second half of the year. Now, we don't have the businesses split in the technology infrastructure anymore, so I'll cover them separately. We'll start with aviation. Aviation market remains strong in the quarter. Orders of $5.1 billion were up 14%. Commercial engine orders of $1.2 billion were up 111%, driven by GE90, CFM International, and small commercial.

That was partially offset by military engine orders of $600 million being down 36%, principally driven by less funding on the Joint Strike Fighter. The equipment orders price was down 0.4%. We ended the quarter with a backlog of $20.4 billion, up 3% versus last year. In the quarter, service orders of $2.8 billion were up 14%, driven by strong spares. In the quarter, our commercial spare parts orders were $25.4 million per day. That was up 32%, and that was partially offset by military services, which were down 1%. Revenue of $4.4 billion was up 5%, driven by the equipment up 3% and services up 7%. Segment profit of $841 million was up 5%. That was driven by the higher volume.

It’s driven by positive pricing, and that was partially offset by no repeat of the first quarter $10 million service franchise fee with TechSell that generated $74 million last year. As we go through the year, R&D and launch costs are going to continue to ramp up in the second, third, and fourth quarter. On the right side, transportation had a very good quarter. The market continued to improve. Domestic rail volumes were up 5%. Parked locomotives were down 5% from year-end. The orders of $938 million were flat, but that included one multi-year locomotive order last year for almost $300 million that didn’t repeat. Service orders were very strong in the quarter, $500 million up 25%. Our equipment backlog closed at $4.1 billion, up 40% over the last year. Our revenues of $900 million were up 18%, driven by higher volume. Equipment revenues were up 12%.

We shipped 30% more mining and off-highway vehicle units, and locomotive revenues were about flat. Service revenues were up 23% on the strong part sales. Segment profit of $157 million was up 37%, reflecting the higher volume and the stronger services. Next is Healthcare. The Healthcare team delivered another quarter of positive growth while they continue to reinvest. Orders of $4.1 billion were up 9%. Equipment orders of $2.1 billion were also up 9%, driven by healthcare solutions up 10%. We saw a strong growth in healthcare solutions. Just to go around the world a little bit, Eastern Europe and the Middle East were up 37%. China was up 18%. India was up 41%. In the developed world, Europe was up 2%, and America was about 5%. Service orders in the quarter were up 9%, and the equipment backlog of $3.9 billion ended up 6% versus last year.

Revenue of $4.1 billion was up 10%, pretty broad-based. If you go by product, ultrasound was up 21% in the quarter. Devices were up 13%. CT was up 13%. MR was up 3%. Life sciences were up 15%. X-ray was up 6%, and services were up 8%. Segment profit of $531 million was up 7%. That was driven by the higher volume. It was driven by positive productivity. That was partially offset by negative price and about $50 million of higher investments in new products. Finally, on the right side, you can see HMBS. We had revenues of just under $2 billion. They were up 3%. We had strong revenue growth in intelligent platforms. The revenue was up 19%. Lighting was up 6%, and appliances was down 1% in the quarter. The segment profit in the segment was up 4%.

We continue to see lower pricing and a pretty heavy discounted bid. Lighting continued to benefit from our prior restructuring. For the year, we still expect HMBS to be about flat as we ramp up, again, more new product investments. With that, let me turn it back to Jeff.

Speaker 9

Thanks, Keith. I thought I would give you a brief update on Japan, where I visited two weeks ago. You know, our first priority is to support our people through humanitarian efforts and offer technical support to our customers. We're doing all of those things. We're also providing substantial power generation equipment to help meet the country's needs in 2011 and 2012. Financially, as Keith mentioned earlier, we experienced about a $50 million negative earnings impact in the first quarter in healthcare, energy, and capital. Going forward, we see limited supply chain and market impacts for the year. I'd say it's more or less in balance. You know, it may impact Thai yen, but overall results probably won't be impacted for GE for the year. You know, again, we're very focused on helping Japan recover and rebound and rebuild. Our teams are working diligently to support our customers in Japan.

Now to update the 2011 operating framework. Industrial is about as planned with energy, as Keith said, turning positive in the second half of 2011. We really believe with acquisition integration, and we're really encouraged by an increase in gas turbine code activity. We think those factors give us good momentum for our energy business as we get to the second half of 2011 and go into 2012. GE Capital, as Keith reviewed, is improving rapidly, really in every dimension. Corporate is about as planned. For 2011, we really see very solid operating earnings growth, CFOA between $12 billion and $13 billion, mid-single-digit industrial organic growth. I would say after the first quarter, we're even more confident in the 2011 operating framework for GE and the outlook going forward. To summarize again some of the high points of the quarter, I think capital allocation is key for GE.

We've announced our third dividend increase in the last nine months, up 50% in that time period. The buyback and dividend take priority as we get to the second half of the year. I think we've executed a good acquisition strategy as we redeployed capital from NBC Universal into the energy business. We plan to redeem the preferred shares in the fourth quarter. Very solid GE Capital earnings growth. The higher margins, we're having good asset growth in target segments. Losses are declining, and the balance sheet is safer and stronger. I think we're in really good shape for accelerating industrial earnings growth. It's positive in 2011, accelerated in 2012. All the precursors are in place: good equipment orders, backlog growth, good service orders, and international growing double digits. We're investing to build a competitive advantage. R&D is in place.

I think the new products that we're launching are showing up in our increasing order rates. The global growth of 12% says we're participating in the perks of the world that are expansion growth. The strategic acquisitions in energy and healthcare, I think, really position those businesses well for the long term. That core cover, let me turn it back to you, and we can take some questions.

Speaker 12

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone. If your question has been answered or you wish to withdraw your question, please press star two. Our first question comes from the line of Julian Mitchell with Credit Suisse. Please proceed.

Speaker 10

Yes, thanks. I was intrigued by the commentary on, you know, it definitely sounds like a better outlook for your gas turbines than what you were thinking as recently as December or January. Could you give a little bit more color, sort of by region, what you're seeing? I think last year you had 96 gas turbine orders globally. Could you give a sense of, you know, given we're now in late April, what your view is on gas turbine orders for this year?

Speaker 0

The outlook does feel a little better. If you remember at the end of the year when we met and talked about what the outlook was going to be, we had about 112, 113 gas turbines last year in shipment. We said we'd be down about 10. Today, the team is working on looking at opportunities to maybe be at least flat and put some more in the production schedule if we could to be prepared for the growth that we're seeing, some incoming orders, activity, inquiries, and things like that that we're working on. Obviously, the Middle East has been very strong for us. It continues to be strong. We had one order in the quarter out of the orders we had for gas turbines in the U.S. I think that that's an activity that has to pick up as we go forward.

Clearly, as Jeff said, we're really trying to help our customers in Japan. There's an awful lot of capacity that's out, and they're trying to put as much power in place as they can to prepare for the summer and also to deal with the fact that they've got to replace a lot of power. I think the team is cautiously optimistic about it, but the outlook is good. We've ramped up the PSI, the outlook for production a little bit in the business. For 2011, it might be at least flat, maybe better, and 2012 should be better on top of that.

Speaker 9

I think, Julian, there's a confluence of maybe, you know, five factors that are going on more or less at the same time. One is, you know, clearly, global growth in the emerging markets. The second is the need to provide more infrastructure as part of the Japan rebuild. The third is lower natural gas pricing overall. The fourth would be whether wherever the environmental standards end up in the U.S. I think the fifth is, you know, and this will be decided by our customers, not by us, is where does the long-term capacity get added vis-a-vis coal and nuclear gas as people add new blocks of power going forward. I think all those things, you know, make us a little bit more bullish on the gas turbine market.

Speaker 10

Thanks. Just a quick follow-up. The pricing environment, I guess now it's a little bit better in terms of a year-on-year decline on the thermal pricing in Q1 versus where you were in Q4. We saw one of your global peers today. They're joint venturing the boiler's business with someone in China. How do you see sort of the competitive landscape? Is there much change you can see, or do you think that as volumes recover, pricing will naturally pick up in the order intake in the second half as well?

Speaker 9

Yeah, that's been the historic pattern. You know, Julian, I think it's, you know, energy tends to be a later cycle, you know, recovery item. The pricing you saw last year was really what played out in the first quarter. That's historically been the pattern of, you know, I would say price activity.

Speaker 0

It's all supply and demand. I mean, I think right now we're still dealing with a place. The global capacity was pretty strong, and that today, I think the demand situation has changed.

Speaker 9

One of the strengths of our energy business is the supply chain and our sourcing and things like that. I think that we're flexible, we're fast, and we do a good job on deflation.

Speaker 10

Great. Thanks.

Speaker 0

Okay, thank you.

Speaker 12

Our next question is from the line of Bob Cornell with Barclays. Please proceed.

Speaker 0

Morning, Bob.

Speaker 9

Hey, Bob.

Speaker 0

Bob's on another call.

Speaker 12

Bob, your line is open.

Speaker 0

Okay, I'll be back in about a minute.

Speaker 12

Our next question is from the line of Terry Darling.

Speaker 9

Morning, Terry.

Speaker 3

Good morning, Jeff. Hey, just wondering if we could clarify, just taking a couple of questions on the Guarantee gain. Was that in your operating framework before? We just didn't know exactly the timing. Is that the right way to frame it?

Speaker 9

Sure. Last year when we announced the transaction in November, we actually put out a press release that said we were going to have about a $300 million asset type change. We thought it would close in the first half. When we knew it was going to close in the first quarter, we announced that. I think it's been part of what we've had in the framework all along. We had $300 million asset types that said, and then that business had about $60 million of earnings a quarter that we won't have anymore as we go forward.

Speaker 3

Perfect. Okay. That's helpful. Just coming back to the comment on energy margins, I think I thought I heard Jeff indicate that should improve throughout the year. Keith, I think I heard you say down in Q2, up in the second half. Maybe you were talking profit dollars and Jeff was talking % margins. Could we just clarify that?

Speaker 9

I was talking total company, Terry. As the margin rates tend to.

Speaker 0

First quarter is the lowest.

Speaker 9

The first quarter always is the lowest for us, total company. I think Keith was talking more just the energy. I think the direction, the gap that we saw in energy quarter over quarter, that profile is driven by factors that will continue through the year. The renewal pricing, the higher investments in programs and global growth, and then the dilution from the acquisition. That profile is pretty similar as you go through the year for energy itself.

Speaker 3

Okay. Shifting over to aero, I wonder if you can talk about any update on the profile of R&D and implications for margins for aero overall. Got a lot of pieces in the mix there with the aftermarket getting a little better. Maybe you can just break some of those pieces down and talk about military too.

Speaker 0

The profile for R&D for aviation R&D plus launch costs has not changed for us for the total year. We do expect to have that ramp up as we go through the year. The R&D actually was less in the first quarter year-over-year than last year based on some timing issues. Through the year, we expect to see a ramp-up of the GEnx, obviously. We ship 13 GEnx in the quarter. As you know, the 787 should be certified and delivering in the third and fourth quarter. The 747 with the GEnx on it is already just about through all of its certifications. That's the engine that's on the plane is still finalizing. Those are going to ramp up, and R&D is going to ramp up as we ramp up on the Catalyst engine and the LEAP-1B.

I think as you go through the year, you're going to see continued reinvestment in aviation. The offset is the strength of services. We feel pretty good about it. You know, we were looking for when are you going to see it last year based on utilization improving, revenue faster miles, and freight faster miles up. You can see that in the order rate up 30%. We feel pretty good about that order rate, and the outlook from the team is that that should continue to be strong for us.

Speaker 3

Could you just refresh us on what that year-over-year increase in aviation R&D is now expected at?

Speaker 0

On R&D itself, it's supposed to be up, I think, about just one second. For the total year, it's supposed to grow about 15%-20% to about $1.7 billion.

Speaker 3

Okay, great. Lastly.

Speaker 0

Somewhere in that range.

Speaker 3

Just lastly, obviously, nice to see that stronger performance at GE Capital. Jeffrey, can you comment on the potential that better performance pulls forward the confidence in the GE Capital dividend back to parent and implications for buyback and additional dividend increases from a timing standpoint?

Speaker 0

We're obviously feeling pretty good about the progress in GE Capital. You can see the capital ratios, you can see the pre-tax earnings growth, and you can see some stabilization in real estate. I think all those signs are good. There are some uncertainties we have, as you know, the Fed will transition to be our regulator in the summer here. I think the team feels good about it. We've made a lot of progress. We think we're going to be above what the levels of capital are required for all the different criteria. That isn't exactly finalized, as you know, as well. We have to transition to a new regulator. Our objective is to, as you know, at a minimum, pay a dividend in 2012. If we could work on that earlier than that, obviously, we would love to do that.

Right now, the only thing we have in the plan is that we'll restart the dividend from capital in 2012. Obviously, the progress continues to be pretty strong. I think it was also encouraging when we thought what the banks were able to do this year between the dividends and the buyback based on their capital and stress case plans. We're going to work on that.

Speaker 9

The only thing I would add to that, Terry, is look, I think the major transactions we've signed on doing, we've done. Dividend and buyback, I think, take a higher priority as I look at the rest of the year. I think that's the way I would, that's the perspective we had. We like the deals we did. We think they were opportunistic and strategic and help our energy business. I think what Keith said, we feel really great about where GE Capital is positioned. I think progress in the second half of the year will tend towards dividend and buyback.

Speaker 3

We'll look forward to it. Thank you.

Speaker 9

Yep.

Speaker 12

Your next question comes from the line of Scott Davis of Morgan Stanley. Please proceed.

Speaker 7

Hi. Good morning, Scott. I want to switch gears and talk a little bit about Healthcare and a couple of things. I think you said that R&D was up $50 million in the quarter. I know you know for the year, so clarification on that. Maybe we can talk about why R&D needed to come up in this business. My understanding was that there was a bit of a pullback in the arms release, if you will, that would require less R&D spend, you know, with health events and issues. Am I reading things wrong?

Speaker 0

All right. First, let me clarify. We did have about $50 million of increased spending year-over-year in new product launches. About $30 million of that was related to our home health joint venture with Intel. That's a new business we've gone into, and also investments in our solutions business, the consulting business that we're growing and providing a lot of help to hospitals as they manage the need to lower their costs and become more efficient. About $30 million of that there, and then about $20 million in total NPI for new products. We launched about 45 or 50 new products in the quarter. We have just really ramped up R&D globally. Omar Ishrak has got control of the entire business, and he's got a terrific model where we have breakthrough technology, and then we flow that down through the product line.

We're trying to make sure we have products at every price point, and we participate in these global emerging market growth opportunities. I think, in some cases, a couple of years ago, we were behind in MR. We've caught back up, and we've got a great position in CT. Today, I think the team really likes the position we have across the entire product line.

Speaker 9

Scott, I would just add to what Keith said to say, look, we expect this business to have operating profit rate expansions for the year. Productivity cost, you know, our share position is good for improving. I fully expect healthcare to have operating profit rate expansion in Q2 through 4Q.

Speaker 0

Totally agree.

Speaker 7

To be honest, what you said this quarter, is that what you mean?

Speaker 0

I thought.

Speaker 9

Yeah, absolutely.

Speaker 0

Yeah, I mean, I would say double-digit plus operating profit growth and expanding margin rates in Healthcare.

Speaker 7

Okay. I totally understand. It's early days of Japan and the strategy details, but you know, it's a fairly large market overall. I think it's a fairly important part of your overall mix, if memory serves me right. What do you hear from the local guys? Is there going to be money diverted from spending on things like healthcare for the rebuilding effort? Does it not change? Is there any sense at all of direction, or is it just too early?

Speaker 0

Scott, I just think it's too early. We don't have anything to, you know, if you go back to the Kobe earthquake, right? There was more stimulus put into the overall economy in Japan after that. I just think it's too early to tell what the impact is going to be.

Speaker 7

Okay. Last question, Keith, some of your competitors, I think as competitors, I don't think they're taking write-downs on their fleets. I mean, to reflect a couple of changes, obviously new aircraft, it's efficient, higher oil prices. It's kind of increased the asset on the craft. Any of the GE Capital portfolio as you see right now pretty much marked to market?

Speaker 0

Absolutely. You know, we basically have to do our appraisals every year, and we have to adjust, and you see us take impairments when we go through those reviews if we need to based on current views of asset values or specific customer situations. I did see that there was a write-down on the A320 family for ILSC. I think it might be interesting to take a look at the differences in how companies depreciate equipment. Most companies depreciate aircraft in a straight line over 25 years to a 15% residual. We assume a 20-year life to 90% of our average appraised value, which results in an annual depreciation percent that's higher than what a lot of competitors have. We feel pretty good about our values. We did look at what they did, and we absolutely feel good about where we are at GE Capital.

Speaker 7

Very helpful. Thanks, guys.

Speaker 0

Thanks, guys.

Speaker 12

Your next question comes from the line of Steve Munsell of JP Morgan. Please proceed.

Speaker 14

Hi, good morning.

Speaker 0

Hey, Steve.

Speaker 9

Hey, Steve.

Speaker 14

Can you just talk a little bit more about the outlook for gas turbines in the U.S.? You're talking about only having one order there and a lot of the activity in the Middle East. When you talk about the geriatric quotation activity, can you maybe give us some parameters that are around, you know, I know quotation activity is a high-level comment, but is there any way to tell us what kind of the magnitude is in the activity globally? Is it 50/50 U.S.? I'm just curious, is it a plan that your customers in the U.S. are pursuing there?

Speaker 0

No, I don't have any specific numbers on quote activity in the U.S., Steve. I think what we're basically looking at is the dynamics have really changed subsequent to the disaster and crash in Japan. You see people canceling their plans to continue development of new nuclear plants. Clearly, coal has issues from an environmental perspective and is challenging from a cost and technology perspective to be competitive. We've put a lot of renewable energy into the system, especially in the U.S., but globally. With gas prices where they are, that's a challenge to make that as economic as it needs to be for financing. You come back to what's going to be the power of choice. It's going to be gas, and we think we're well positioned there.

We still have reserve margins here in the country, but as you look at retirements and replacement and then new economic growth, we think the outlook is going to be pretty good. I don't have specific order quoting numbers, and I don't know even if I had them, whether I did anything with them.

Speaker 14

I guess I could talk specific, but just in general, is it, you know, are you all, it sounds like you are seeing a pretty nice uptick in dialogue with your U.S. customers. I guess that's more of the question at a high level.

Speaker 9

Yeah, I think that's right. The other thing I would say, Steve, is I think we could see a nice increase in gas turbine demand, even with the U.S. demand not being anywhere close to 50% of it, really.

Speaker 0

Totally. You look at Russia, you look at.

Speaker 9

We still have a lot of other stuff going on. You know, Iraq phased through Russia, as Keith said. There's more interest in China today in gas turbines.

Speaker 0

Saudi Arabia needs power.

Speaker 9

It is all that kind of activity that we're seeing as well.

Speaker 14

Okay. One other question, this is just in the news the other day, there was a lot of mapping, but the board reset the comp package, I guess, talking about operating cash flow with a minimum of $55 billion over a four-year period. I think there was something about outperforming the S&P 500 as well. I'm just curious as to the methods that you want to take away from that because the operating cash flow number, I think, over a four-year period is only really up modestly from where we are today. Outperforming the S&P 500, even if you think about GE stock as kind of a comp versus the S&P 500 as opposed to more and more of the industrial peers, like the other guys in our sector.

I'm just kind of curious as to the message or at least things that you would like to have us take away from that change.

Speaker 9

You know, Steve, I think what we did is we reverted back to kind of the formula we had in place since 2003, which really set two benchmarks. One was an S&P performance, and the other one was a CFOA growth target. I believe in performance shares. I think it's a good way for CEOs to be compensated. That's really what it says. I think we'll continue to give you a framework that can spell out what we think we can do. We want the company to outperform.

Speaker 0

Is it a team target that we have to?

Speaker 9

It's a team target.

Speaker 0

All we did was took out the 2010 cash flow.

Speaker 14

Right. Okay, thanks.

Speaker 12

Your next question, from the line of Jason Gursky with Citi, please proceed.

Speaker 11

Morning.

Speaker 0

Morning, Jason.

Speaker 11

You've addressed several of the issues related to Japan, including commercial real estate. I've seen the release related to the channeling law. Has there been any indication that there could be any potential liability related to the disaster in Japan? Is there anything else in finance that we should think about, maybe losses creeping up over time or anything else?

Speaker 0

Yeah, I think on the channeling law, it's really clear and has been written about by a lot of different people. I think all the things we've said in the past still hold true today. We haven't seen any indications that anything would counter that, mainly because I think it is so clear. On the other exposures, as you said, we put a little bit up for property damage in Japan, $15 million, and then some reserves, $15 million in the CLL business. Other than that, we really haven't seen any direct impact. We've got real estate, we've got commercial loans and leases, we've got aviation in there. We did a pretty good review of our portfolio with the team. On Shinsei, on Grey Zone, we have seen elevated claims as part of the Takeuchi bankruptcy.

As everybody knows, those claims really started to decline after the bankruptcy period closed, and they continued to decline in April. Right now, the trend on claims looks pretty good. However, we're going to have to see how they normalize in Q2 and Q3. It's obviously hard to determine what are some of the events that throw some of those claim declines in this period, given some of the challenges in Japan. Right now, the trend looks pretty good.

Speaker 11

Okay. You've done a fair amount of time talking about better opportunities for gas turbine, given new TA regulations, Fukushima, and everything else. Has there been any change in sentiment since the TA regulations came out since the Fukushima disaster related to renewables? Potentially also, whether you have some new opportunities perhaps for the offshore wind turbine launch, particularly in Europe?

Speaker 0

All positive. I think, you know, we're investing a lot in wind, obviously. We're shipping a lot of 2.5 MW units, which are a good value proposition. We're doing a lot globally. We're investing a lot in wind, and we think the business has a future. Right now we're dealing with just the decline in the U.S. market and the change in margins that we got in that market. Overall, we're very committed to it. I think you must have seen recently our investments in solar, the announcement that we're going to build a very large solar plant here, and we have the highest efficiency in the marketplace for infill solar. Renewables is a big part of the business. I think it's going to be a part of our portfolio.

We're investing a lot in it, and we're just kind of weathering this decline in the shipment of a very profitable U.S. backlog and then the replacement of that in the wind business.

Speaker 11

Great. Thank you very much.

Speaker 0

Yep.

Speaker 12

Your next question comes from the line of Bob Cornell with Barclays Capital. Please proceed.

Speaker 9

Bob, you're back.

Speaker 8

Glad to meet you, bud.

Speaker 9

You go get a cup of coffee or something?

Speaker 8

Nope. You know, actually, you know, GE Capital had a great quarter, but maybe you just take a minute and go through the reserve walk. I mean, we went by that pretty quickly in the summary. It looks like it's still rare for a greater than a new provision. That is a big reason why reserves came down, I wonder. You know, maybe just give us a view over the balance of the year, Keith, and what would you expect there? Of the year next to R&D, the numbers are good. Should we expect sequential earnings growth out of GE Capital?

Speaker 0

First on the reserves. I think the profile will continue where you see write-offs higher than the new credit cost provisions. If you look at the percent of the new credit cost provision, somewhere around 1.45%, that goes back to what I would call a more normal historic level, Bob. I think that's probably a good indicator of what we could expect going forward as long as the portfolio continues to demonstrate improvements in delinquency and non-earning. I think that dynamic will continue if you look at provisions, new provisions for loans is at somewhere around that level. The other dynamic that you have is impairments coming down. That's going to depend upon how we see the market for the real estate equity book. As I said, we've seen some positive indicators there. Year-over-year, it's obviously down quite a bit.

I think the outlook is pretty good for improvements in profitability driven by lower credit loss issues. You see it in the fourth quarter. You see it in the first quarter. I don't see any reason why that wouldn't continue. For the total year, how do we feel about it? Obviously, if you look at GE Capital's results, they're better. You take out Guarantee, and even if you normalize for not having Guarantee's earnings going forward, you're going to see a terrific performance out of GE Capital this year. As Jeff said, we feel very confident about our framework.

Speaker 8

Is there any seasonality in that business? I don't recall. Obviously, you had these tremendous ups and downs the last couple of years. In a normal year, what kind of seasonality would be? The first quarter, typically the low point of the year. What can we expect in the trend rate over the course of the year?

Speaker 0

You know, we used to have a big bump in the third quarter, but I think we've really normalized and are pretty, pretty level. I don't, I can't think of one thing that's really popped out as a seasonality item today in GE Capital.

Speaker 8

Yeah, the second question for me, when I was trying to answer the question earlier when I got off on mute about the joint strike fighter engine. I mean, you're going to continue to work on that engine for a while. You know, what is sort of the GE view, you know, of that engine? You know, what might you continue putting the development of that engine? I understand it's nearly complete. You know, what's the outlook there?

Speaker 9

Look, Bob, I think the engine is 85% complete. We're going to keep a small team in place to continue to work on development and see where we go in the 2012 budget cycle. Our basic thesis remains the same, which is this saves $20 billion over the life of the program. It's enjoyed bipartisan support for a lot of years. It's a program that's been over budget, and this is one of the ways to get competition back in the game.

Speaker 0

Our engineers will, I mean, you model an engine in the bold jurisdiction program, which is over budget, not our engine. It's really, we're going to keep the team together.

Speaker 8

Team together. Okay, thanks, you guys.

Speaker 9

Great. Thank you, Bob.

Speaker 12

Your next question comes from the line of Shane O'Callaghan with Nomura. Please proceed.

Speaker 9

Hey, Shane.

Speaker 4

Morning, Jeff.

Speaker 0

Morning, Shane?

Speaker 4

Hey, on E&I, we're getting kind of close to the target here. What's the plan if you get to it pretty soon? Do we start to ramp up on CLL, or do we strengthen the business further? Where do you go from there?

Speaker 0

We feel pretty good about the progress here, but we have a plan to continue to run off the ready assets and grow the green assets. You can see the runoff of the ready assets is happening faster than we thought. We've had more success with this position. I think that's been very positive and maybe given us a little more room for growth on the CLL side even earlier than we thought. Our investment in the green assets, the growth in CLL volume, the growth in the consumer volume have been very strong. We're not planning on going below the $440 million target for 2012. We plan on getting there in an orderly way. I don't see any change to it.

Speaker 4

Okay. To learn for real estate, Keith, the last couple of quarters, you've been able to sell a decent amount of properties at kind of a small gain. Could we see some of the opposite, maybe some opportunistic sales of other pieces, losses? How do you think about winding that down and opportunities now that things have stabilized?

Speaker 0

That's on the economics, really. You know, if we believe we've got value in the property, we're going to do what we need to get that the most effective value. I think our hits on that have proven out over and through this cycle. I would not anticipate large-scale to significant losses in the real estate business. We believe in our properties and our values. We feel like we're going to be able to recover them on the equity side, and that's coming true. We're also reducing our basis, obviously, with depreciation and write-offs. We feel pretty good about the outlook. I, you know, we'll be opportunistic, but I don't see big-scale significant losses.

Speaker 4

Okay, just last one. I don't know if I missed it, but tax rates by the pieces for the rest of the year?

Speaker 0

You know, we haven't really given much of a report there. I think if you look at the rates in the first quarter, the GE rate as checks was 22% ex-EMBCU gain. You know, I wouldn't expect the rate to be higher than that for the year. You know, there are some, as we go through the year, other opportunities that teams are working on that may bring that down slightly. We'll be around the 20%, I would say, for the year would be the estimate today. On the GE Capital rate at 18% in the quarter, I think you're going to be in the mid-teens for GE Capital as you go forward. We had a pretty high tax on the Guarantee gain. Other than that, the higher profile of GE Capital was a normal rate on the pre-tax earnings.

Our benefits, our structural benefits were a little under $400 million, which is probably the run rate for the year today.

Speaker 4

Okay, great. Thanks a lot.

Speaker 0

Yep.

Tom, we've had several requests to keep this to an hour. We'd be able to ponder this more if you'd like to take everyone's comfort with kind of one question. We'll wrap up within five minutes here.

Speaker 12

Your next question comes from the line of Steve Winoker with Sanford Bernstein. Please proceed.

Speaker 9

Good morning, Steve.

Speaker 6

Good morning. I'll keep it to one. Covered a lot of ground. China, give us some sense if you could for what you're seeing, impact on there given some of the macro-energy complex decelerating, what you're experiencing there, and maybe overview of that.

Speaker 9

You know, the overall revenues were up 12% in the quarter. What I would say, Steve, is that the healthcare business saw a pretty normal quarter with growth close to 20%. I think it was like 18%, something like that.

Speaker 0

A little higher.

Speaker 9

A little higher. Aviation's got an outstanding backlog, and that, you know, I think is pretty secure. You know, we won a lot of business last year, which will play through. Like I said earlier, the 12-5-year plan is really, really emphasized as the environmental investing. I think we're going to see some good opportunities in our energy business as we go through next year as well. Top line, I think, was 12% revenue growth, and we don't see anything to suggest it should be less than that as we go through the year.

Speaker 6

Okay, thanks, sir. Thank you.

Speaker 12

Your next question comes from the line of John Hutto of Bank of America. Please proceed.

Speaker 9

Yeah.

Speaker 0

Hey, Johnny.

Speaker 9

Morning, Johnny.

Speaker 0

Hey, Johnny.

Speaker 1

Just a quick clarification. There wasn't a retracting optic to the Guarantee Bank then, was there?

Speaker 0

Not in GE Capital, no. The only retraction was on the page I covered on other items in the corporate side. A little bit of that was in Capital, but we covered it on that page.

Speaker 1

Yeah, okay. I just wanted to make sure there was nothing else.

Speaker 0

Yeah.

Speaker 1

My question is the upcoming stress test with the Fed. How do you guys think about your real estate book? I'm just sort of trying to think if what could be a landmine is the fact that you sell these embedded losses in your real estate book that's not really accounted for the same way as, say, the banks do. Could that be some sort of a source of pressure that they would say, "Look, just write this down and, you know, kind of all systems go," type of thing? How do you think we should think about it?

Speaker 0

I don't think so. I think you could think that we have been doing stress tests a couple of times a year. We do have regulators who are regulated by the Office of Thrift Supervision and the FDIC. We do stress tests 2x a year. We have to basically think through and be comparable to what the banks go through with their formal stress tests. I would say that we've been through it a couple of cycles now, and we feel pretty good about the process we use and the stress that we put our portfolio through to make sure that we have enough capital and enough liquidity. The only difference is that, obviously, as you say, the new regulator. We've had a lot of input. We're dealing with a lot of third parties who are obviously industry experts.

We've hired people from the industry to help us with this who are on our team directly, who are industry and regulatory experts. I don't think that that's something different that could be dramatic as we go forward here.

Speaker 1

Right. Thanks, Keith.

Speaker 0

All right, John.

Speaker 12

Our next question comes from the line of Chris Glynn with Oppenheimer. Please proceed.

Speaker 5

Thanks. Just a lot on the.

Speaker 0

Good morning.

Speaker 5

Yes. Good morning. A lot on the glass currency. I'm just switching over to wind quickly. Any thoughts on, you know, what you're seeing in market share, why they're taking advantage of the downturn and maybe weren't afraid to use price? Then thoughts on an eventual recovery shaping up there?

Speaker 9

I think as the WEA data came out in January, I believe, we had about 50% market share in the U.S. and then, you know, smaller in Europe than the rest of the world. I'd say in the first quarter, a lot of our deals are in places like Brazil, Canada, things like that. You know, what I've always thought, Chris, is that we really do have the lowest cost and the highest reliability in the industry. I included in there the Chinese competitors. It gives us a lot of strategic flexibility when we look at the space. Even as the market goes through cycles, I think we approach it from a position of strength.

I don't think we have anything in mind today, but, you know, if you just look at the landscape, we've always had a philosophy of having broad fuel capabilities so that we don't have to, you know, we're in nuclear, we're in coal, we're in gas, we're in wind, we're in solar, we're in a lot of different things. I like our position on gas turbines and wind turbines. I think it's going to play out over the next 3-5 years that those two will have a good future.

Speaker 0

I think the one thing you see happening in our wind business is we're becoming better globally. We had such a terrific position in the U.S. market. Today, with the market where it is in the U.S., we are really competing effectively globally, and that's going to make us a better business. The second thing, obviously, is the offshore wind business, which is going to grow. We're investing, and we should have a significant position there as well. As we said earlier, we like our position in wind, and we like the outlook for the business. It's just we're working towards this backlog that was pretty lucrative, but the margins on the new orders are lower.

Speaker 5

Got it. Thanks a lot.

Speaker 0

Yep.

Speaker 12

Your next question comes from the line of Nigel Coe with Deutsche Bank. Please proceed.

Speaker 9

Good morning, Nigel.

Speaker 10

Yeah, thanks. Hi, guys. Sorry to interrupt, but I know I have to keep this really quick. Jeff, I thought the timing of the dividend announcement was interesting. I just wanted to hear, what is the message you want to convey with that dividend increase? Secondarily, you know, are we into an era of opportunistic dividend increases, or is your intention to go back to a sort of an annual December announcement?

Speaker 9

You know, Nigel, look, I think what we want to convey is just the confidence in the company, first and foremost, and the fact that, for a broad base of investors, the dividend is important. We think that's a good message to send today. Good confidence in the company. The fact that, you know, we've, I think, really effectively redeployed the capital from NBC U. The focus is really on dividend buyback now and insisting on the broad importance of the dividend. I think where we're going to is going to be, you know, we want the dividend to be an effective payout ratio, a good yield, very reliable. Over time, we're going to get back to an annual dividend increase that we do that investors can count on. We'll just see how that plays out.

I think overall, I think, Nigel, I want it to be confidence in the company.

Speaker 2

Right. Thanks.

Speaker 0

Just to be quick, Nigel, I think we have time. We'll run over, so we'll take one more question and then dive from the mountains at the end.

Speaker 12

Thank you. Our final question comes from the line of Dean Jay with Citi. Please proceed.

Speaker 13

Thank you. Good morning, everyone.

Speaker 0

Good morning, Dean.

Speaker 13

Hey, just to stay on the topic of capital allocation, we got the message on a focus on dividends and buybacks, acquisitions basically done for 2011. How about the vestiges? I know that this before, but Jeff, you said this is the best portfolio you've had since you've been CEO. Are there opportunities for further portfolio reshaping?

Speaker 9

You know, Dean, I just don't see it right now. I think what we want to do is run the portfolio, the capital does, you know, the infrastructure capital portfolio we have, did very well, execute well in 2011, get positioned for simultaneous industrial and financial service growth in 2012. In that portfolio, generate a lot of cash and have a lot of optionality around what we do from a capital allocation standpoint. I think we're going to generate a lot of good cash flow this year. I think a lot of people have asked about the capital dividend and that, you know, our expectation is that capital restores its dividend at some point, and that provides additional cash over time. I just want to, we want to execute this play with excellence, and our investors will benefit from that.

Speaker 13

Great. Thank you.

Speaker 0

Great. Thank you, everyone. Just a couple of housekeeping announcements here. The replay of today's webcast will be available this afternoon. We'll be distributing our quarterly supplemental schedule for GE Capital also later today. Here are a couple of announcements. Next week, on Wednesday, April 27, is our 2011 Annual Shareholders meeting. It's Salt Lake City, and we hope to see you there. On May 18, Jeff will be presenting at the annual EDG conference. That'll be the next big presentation. Our second quarter 2011 earnings webcast will also be held on July 22 for your calendars. Finally, we will be hosting a GE Energy meeting with special emphasis on oil and gas later this year on September 20 in the afternoon. We'll provide you more details regarding the meeting logistics at second quarter earnings, but we do expect to hold this meeting in the New York area.

As always, join and I will be available to take your call.