GE Aerospace - Earnings Call - Q2 2011

Transcript

Speaker 1

Good day, ladies and gentlemen, and welcome to the GE Aerospace Second Quarter 2011 Earnings Conference Call. At this time, all participants are in listen-only mode. My name is Chanel, and I'll be your conference coordinator 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 experience issues with the slides refreshing or 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 program over to your host for today's conference, Trevor Schauenberg, Vice President of Investor Communications. Please proceed.

Speaker 6

Thank you, Chanel. Good morning and welcome, everyone. We're pleased to host today's Second Quarter 2011 Earnings Webcast. Regarding the materials for this webcast, we issued the press release early this morning, and the presentation slides are available via the webcast. Slides are also available for download and printing on our website at www.ge.com/investor. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. For today's webcast, we have our Chairman and CEO, Jeff Immelt, and our Vice Chairman and CFO, Keith Sherin. Now I'd like to turn it over to our Chairman and CEO, Jeff Immelt.

Speaker 3

Great, Trevor. Thanks. Good morning, everybody. Just to start off, you know the company had another strong quarter. 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 induced 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. wind market, and the slow European economy. Our 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. Our earnings were up substantially. The only drag was energy, which should improve in the second half of 2011.

Our balance sheet was very strong, with $91 billion of cash and a tier 1 common ratio of 10.4%. Lastly, we continue to make progress on our capital allocation plan, with a big step in the third quarter as we retire the Berkshire Hathaway Preferred. In addition, we will likely close the Converteam acquisition in the quarter. You know, we're executing well, and we feel good about the quarter. Orders were a real highlight. They were very strong, a big highlight, growing 24% with real strength in every segment. This actually comes off a good quarter in the second quarter of 2010, when orders also grew by 8%. Organic orders' growth was 17%, and energy orders were particularly strong. We had some big wins: Renault in Brazil, Wheatstone in Australia, and others.

We recorded $27 billion in commitments at the Paris Air Show, most of which will turn into orders in subsequent periods. Our healthcare orders and growth regions expanded by more than 20%. Transportation had outstanding global wins in mining. We ended the quarter with a record high backlog of $189 billion. We've made investments in growth over the past couple of years, and they're paying off. We're seeing a 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 up 35%, and ASEAN up 22%. Global markets industrially remain a source of strength for GE. Services remain strong, with revenue growth up 14%.

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 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. A 1.6-megawatt wind turbine is gaining share in North America. We have a broad array of product launches in healthcare. Between now and year 2012, we'll have a major launch in every appliance product. 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 to $13 billion of CFOA for the year. Working capital has grown by about $2 billion year to date to support our second half 2011 equipment backlog.

This will reduce by at least $1 billion as we end the year. As I said earlier, we ended the quarter with a record $91 billion of cash. As I mentioned earlier, we plan to retire the Berkshire Hathaway Preferred shares by the end of the third quarter. We remain committed to attractive dividend growth and reducing our share count over time. Margins declined in the quarter. The decline was primarily in energy and really driven by significantly lower margins in the wind market. Also contributing to lower margins were heavier R&D spending and acquisitions. We expect margins to improve in the second half of 2011. Going forward, we'll be managing through several factors. Wind margins have 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 % of revenue to be flat to lower in 2012 versus 2011. Service margin growth will continue. Acquisition integration is trending ahead of plan. Energy equipment orders' pricing should improve by the end of next year. If I compare where we are today versus our December framework for 2011, we expect industrial revenue to be higher. We expect margins to be slightly lower. Our expectation of industrial profit growth in 2011 is unchanged. Finally, we expect margins to expand in 2012 versus 2011. With that, let me turn it over to Keith, who's going to give us an update on financial performance.

Speaker 0

Jeff, thanks a lot. I'm going to start with the second quarter summary. We had continuing operations revenue of $35.6 billion, which was down 4%. As you can see from the notes on the bottom of the page, we were 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%. That was also impacted by NBC. I think the best way to think about industrial revenue is to look over on the right side on the segment revenues. Industrial segment revenues of $23 billion were up 10%. 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%. We delivered $0.34 a share of operating EPS, up 17%. Jeff covered the cash flow of $4.4 billion.

That was also impacted by NBC, but we're on track for our total year outlook. For tax rates, the tax rates in the second quarter were in line with the framework that we outlined in the first quarter. The second quarter year-to-date rate, you can see, was 41%, driven by the NBC 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. We continue to expect the GE tax rate for 2011, excluding the NBC gain, generally consistent with the second quarter rate. For GE Capital, the tax rate of 18% for the second quarter was consistent with the expectation of a high teens rate for the year, up from 2010 as pre-tax continues to improve in financial services. On the right side, you can see the segment results.

Industrial revenues were up 10%. Segment profit was down 3%, driven by energy. I'm going to cover the details of each of these businesses in a few pages. For GE Capital, segment profit doubled in the quarter, leading to the overall segment profit up 18%. Before I get to the businesses, I'll just start with the other items page. On the positive side, we resolved some commercial items. We had a $0.01 after-tax benefit, and we recorded that at corporate. Offsetting that, we also had $0.01 after-tax for restructuring and other charges, mostly related to the energy acquisitions. 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. We closed the exit of our Singapore consumer book in April. That resulted in a $300 million gain.

That was partially offset by a $100 million loss on the disposition of our Australia and New Zealand mortgage book. The net was a $0.02 after-tax benefit in discontinued operations and $7 billion overall reduction in investment. Overall, not much activity in continuing ops in Q2 and other items. I'm going to start on the businesses with GE Capital. The good news here is GE Capital continues to improve. We've gone from having many pages over the last several quarters to cover GE Capital down to one page today. The additional information is all in the supplemental charts that we posted this morning. We've just tried to consolidate this, but all the data that we've been giving is in the supplements. For the quarter, revenue of $11.6 billion was down 1%. 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. That's driven by lower credit costs, lower impairments, partially offset by the lower assets. You can see our tier 1 common ratio went up to 10.4%. Our leverage was down a full point year over year. On the right side, our asset quality metrics continued to improve. 30-day delinquencies were down everywhere except mortgage. That's up slightly, mostly because of the declining asset base. Total mortgages were down $6 billion, ex the impact of foreign exchange from the beginning of the year. We continue to run off that book. Down in the bottom right, in terms of dynamics, we had a very strong volume quarter. Margins were strong at 5.3%. Our non-earnings and losses were better. Reserve coverage remained strong.

I'll just cover a couple of highlights from the businesses on the left side. First is consumer. 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 improved by over 100 basis points. 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. UK home lending earned $44 million in the quarter. It's the seventh consecutive quarter of positive earnings.

Our UK home lending assets declined $1.7 billion year over year. We realized 115% again on the mortgages that we liquidated in the second quarter above the marks that we'd 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, which 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. 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. We are seeing signs of increased liquidity.

If you look at the sales of quality properties, we're seeing stabilizing rents and occupancy on average in the portfolios 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. Slight improvements, but we're all still focused on returning this business to profitability. Commercial lending and leasing also had another strong quarter, with earnings of $701 million. They were up 124% from last year. Those results were also driven by lower losses and impairments. The CLL had a good volume quarter. They did $10.8 billion of volume, up 33%. America's net income was up $260 million, and Europe's net income was up $40 million. GCAS had another strong quarter, with 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 quarter, with earnings of $139 million, up 10%, driven by lower marks and credit costs. Overall, in GE Capital, a very 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. I'm going to show you more details about that on the next page. 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. Main drivers were wind and aero derivatives.

We had orders for 667 wind turbines versus 248 in Q2 2010. We had orders for 41 aeroderivative units versus 16 units last year. Partial offset was thermal. We had orders for 41 gas turbines versus 42 last year, but last year included the larger rack deal. We had 25 Ninees in one quarter in one order. Overall, orders price for energy was down 2.5%. That was driven by wind order pricing down 7% and thermal order pricing down 10% in the second quarter. Service orders of $4.9 billion were up 10%. Revenues of $8.1 billion were up 1%. That's driven by the acquisitions, partially offsetting all the lower volume. Thermal revenues of $2.0 billion were down 12%. That was principally driven by five fewer steam turbines. 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 PowerGen Services up 7%. Segment profit of $1.3 billion was down 24%. It's driven by the lower wind volume and the lower wind pricing. Explains almost all the variance. Next is oil and gas. This business is experiencing tremendous growth. We're getting growth organically. We're getting growth from our recent acquisitions. We had a little bit of a benefit from the weaker dollar in the revenue line. Orders of $2.9 billion were up 45%. 19 points of that growth came from the deals of Wellstream and Wood Group. We also had nine points of translation from FX. 17% order growth organically for the oil and gas business. Equipment orders of $1.8 billion were up 41%. We had strong growth in turbomachinery from a large LNG order in Australia.

Service orders of $1.1 billion were up 52%, driven by upgrades in places like Qatar and Canada. Total oil and gas orders price was positive. It was up 2.1% in the quarter. Revenues of $2.5 billion were up 39%. There's a similar impact from exchange and deals as there was with orders. You end up about 10% organic revenue growth. Segment profit of $333 million was up 14%. We had benefits from the higher volume. We had benefits from the acquisitions. We had benefits as we had material deflation in the business that was partially offset by lower pricing and some negative impact of the foreign exchange. This is the toughest quarter of the year for energy infrastructure. As we also said at EPG, we're going to be growing in the second half in energy.

Let's go to the next page and look at the framework for the first half, second half for energy. I think it's important to look at the energy results in more detail to see the dynamics of what's been a drag in the first half of the year and how we see the improvements coming in the second half. What we put here, the top half of this chart shows the energy infrastructure op profit. It compares the first and second halves of 2010 and 2011. On the left side, you can see our op profit of $2.9 billion was down 14% in the first half. On the right side, you can see we expect the op profit to be higher in the second half versus last year's second half. We're going to get growth in the second half. The main driver for this performance is going to be volume.

What we did, we put the unit numbers for GE Energy alone on the box on the bottom of the page. If you look at the left side, you can see the volume declines that this business has had to deal with in the first half of the year. Wind turbines were down 26%. Gas turbines were down 11%. Steam turbines were down 59%. Aero was down 14%. On the right side, you can see how dramatically those dynamics change in the second half. Wind turbines will be up 16%. Gas turbines will be up 33%. Steam turbines will be up 80%. Aero will be up 23%. Overall, this volume is going to be up a little more than 17% in the second half. 90% of the equipment that we're showing here is already in firm orders in the backlog. What does this mean for margins?

Jeff showed you the pressure we had in the first half. If you look at the top on the left side in the middle, you can see the first half margins were down 3.8 points. That was driven by the wind volume and the pricing that I mentioned. On the right side, with all this additional volume, we expect margins to be better than the first half, but still lower than last year's second half when we were up over 20%. To wrap this up, we had a tough first half in energy. The second quarter is the low point for the business. With the strong volume profile that we've got and the benefit of the acquisitions, we expect to resume growth in the second half and beyond. Let me move on. Next is aviation. The aviation market remained 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%. Jeff mentioned the success the team had with $27 billion of wins at the Paris Air Show. None of those announced wins are in these orders. Those wins will turn into orders when we get purchase orders from the airframe. There's usually 12 to 24 months before delivery. This industry's got a very strong equipment outlook. Equipment orders price was up 1.6%. 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%. That was partially offset by military services, which were down 10%. We had revenue of $4.7 billion.

It was up 11%, driven by equipment, up 2%, and services, very strong, up 21%. We only shipped four GEnx engines in the quarter. That volume will ramp up in the second half as both the 787 and the 747 will be certified before the end of the year. Segment profit of $959 million was up 9%, driven by volume and services, partially offset by higher investments in R&D and engine programs. On the right side is transportation. The transportation business had another strong quarter 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%. 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%. Service revenues were up 76% on strong part sales and higher customer service agreement revenue. Segment profit here was also very strong, $178 million, up seven times over last year, driven by that higher volume and the continued improvement we see in services. Flip to the next page is healthcare. 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%. The pressure point was Europe. Europe was down 3%, but down 14% excluding the impact of the weak U.S. dollar.

That gave us some pressure in the quarter. Service orders were up 10%. Total orders price 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%. That was driven by both equipment and service, both about that level. Just by product line, it's pretty broad-based. Ultrasound was up 12%. Clinical devices were up 20%. CT was up 11%. MR was up 7%. Life sciences were up 7%. X-ray was flat. Services were up 9%. 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. 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%. They had a good quarter. Lighting revenue was up 7%, and appliances were down 12%. Overall here, the results in this segment were driven by appliances. The domestic market in the quarter was down 10% in units. We also saw material inflation, and some of the tough comparisons versus last year were driven by the non-repeat of the government incentive programs we had last year in the first half. There were incentives to replace your appliances with more energy-efficient products. We're also continuing to do a lot of investment here in the new product line. New product programs were up $20 million in the quarter. With that, that's a run-through the businesses. Let me turn it back to Jeff.

Speaker 3

Great, Keith. Thanks. You know, going back to the 2011 operating framework, the framework remains intact and highly achievable. We expect to see positive earnings growth in our industrial businesses. Revenue growth in the second half should be very strong. As Keith said earlier, energy infrastructure earnings will grow in the second half. Capital earnings will continue to grow with higher margins, lower losses, and real estate firming. Our expectations for corporate for the year are unchanged. We're going to see solid double-digit operating earnings growth for the year. We're confident in our total year framework for both earnings and CFOA. We feel great about the 2011 operating framework. We think it's highly achievable. Lastly, just the earnings growth outlook as we think about the remainder of this year and into the future in 2012. I think the outlook remains very strong. I reviewed this with you at EPG.

We see momentum building for 2012. We see the key factors around GE Capital continuing to improve. Our balance sheet strength and liquidity remain high. On the industrial side, healthcare and transportation earnings should continue to grow. I think we should have solid growth in aviation and energy next year. A couple of ways to reflect. The American order in aviation really signals the return to equipment purchases of the U.S. airlines. I think that's very significant. I'd point out the energy orders fee of almost 40% in the quarter. That's largely with the U.S. still not participating. I actually think we're at the beginning of a very positive energy and aviation cycle. When I look at how our businesses are positioned, we also have a full year of acquisition impact in energy. Our margins should improve in 2012.

In 2012, we should have both solid organic growth and expanding margins. Finally, we'll retire the preferred shares, which will provide an EPS lift for 2012. We like our portfolio. We like the GE outlook. Trevor, with that, I'll turn it back to you.

Speaker 6

Great. Thanks, Jeff. Thanks, Keith. Chanel, I think we're ready to open up the lines and head over to questions.

Speaker 1

Great. Ladies and gentlemen, if you'd like to ask a question on the phone lines, please key star followed by one on your touch-tone telephone. If your question has been answered or you'd like to have your question be removed, please key star followed by two. Again, that is star one to ask a question. Your first question comes from the line of Dean Drake with Citi Investment Research.

Speaker 4

Thank you. Good morning, everyone. Hey, Dean.

Speaker 3

Hey, Dean.

Speaker 4

Hey, we'd 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.

Speaker 0

I'll start and then let Jeff follow. You know, Dean, basically, if you look, we're working our way through that last wave of the very profitable U.S. bubble that we had. 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. You see the orders in the second quarter and the V we had. You know, we're seeing a lot of global activity. They're at lower margins than that previous U.S. high-priced backlog, but the volume's going to be pretty good. The last thing I'd say is that there's a program in place where the government obviously gives some benefits to wind 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.

I think that, 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 2012 here in the U.S. I think we're starting to have discussions with customers about some of that activity. You know, I think you're still going to face margin pressure in the second half from wind. I think you've seen this quarter is, as I said, the worst of it. With that, Jeff, I don't know if you have anything to add on the wind market.

Speaker 4

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. We're going to gain market share probably in that activity. Dean, what I would say in Canada, Australia, a bunch of other places in the world, the wind wave, if you will, is just taking off. I think from a unit standpoint and from a pricing standpoint, we're going to see a little bit better performance.

Speaker 0

The business has gone from extremely high margins, over 20%. It will be down in the, you know, between high single digits to low teens in this period. It's been a tremendous performer for us. It's had an incredible amount of economic results it's generated for us. It is going through a period here where it's resetting. As I said, I think the second quarter's the bottom of that. There will still be additional pressure as we go through the second half of this year.

Speaker 4

Great, it's like.

Speaker 0

We've taken that into account when you look at the forecast we gave you on that page on first half, second half, Dean.

Speaker 4

Got that. I'd get some additional color on the aviation side. You touched on this in the remarks, you know, important wind from the American order decision in Boeing on re-engining. If you could comment on some of the activity and orders coming out of the Paris Air Show. I did hear some grumblings that there might have been some discounting on the service contracts. If you take it 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?

Speaker 0

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 A320neo. We came out of that air show with a more than 50% share, a very strong performance. We liked the orders that we got. I'm sure that the competitors liked the orders they got. The launch is a tough process. We've been disciplined about our approach. I think we do use everything that is available to us to compete. Our team feels that the economics that we have on these launch orders are as good as we've had on any launches. 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, this is the third application for the LEAP-X engine. We've got a sole source position. I believe that you're going to see that aircraft in service well into the 2020s. That is a tremendous opportunity for the aviation team. We're committed to it. That investment that we've been making into LEAP-X technology for the last several years has really proven itself. You can see it now with the sole source position on the C919 in China. We're competing effectively on the A320neo. 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.

Speaker 4

I would add, Dean, maybe a couple of macro comments on aviation. Just to piggyback 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 really have to like where we are on 787, 777, and narrow-body. You've got to like not just for a quarter, but for a decade where we are at number one. I look financially for aviation, guys. Look, we've got the higher R&D in 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 profits steadily through this cycle while launching these new engines.

I think we've got the business positioned both strategically and financially exactly where we want it to be positioned for our investors. That's why I think we like the business. Great. Thank you.

Speaker 0

All right, Dean.

Speaker 1

Our next question comes from the line of Steve Tuiza of J.P. Morgan.

Speaker 2

Hi, good morning.

Speaker 0

Hey, sir.

Speaker 2

Good morning, Steve. I didn't quite get the, I guess I didn't quite understand your answer to Dean's question about discounting spares. On top of that, when you look at aviation, last cycle they hit, like, a margin that was above 20%. With all the kind of moving parts here, I understand there's development expenses and all that kind of stuff. Can you get back to north of a 20% margin in aviation over the next, let's say, three to five years?

Speaker 0

Look, let me answer the first point. There was no unusual discounting of spares, which was anything other than we would have done anywhere to win any of those orders. I think, you know, we have a big business. We have a very profitable service business. We have incredible relationships and long-term contracts with our customers. There was no crazy stuff that the team did to get those orders. I just want to be clear on that.

Speaker 2

Perfect. Thank you.

Speaker 0

If you look at the margins in aviation, I think they're extremely strong. Obviously, they're powered by the incredible install base we built over the last 15 years. I think right now, the first half, they've been very strong. In the second half, they may be a little lower than what we saw in the first half. This is a business that's got tremendous girth. I mean, 40% of the engines still haven't even come in for their first shop visit. We're winning market share on new orders, which is going to continue to build our advantage in the install base over the next 10 or 15 years. I think, as Jeff said, the R&D amount is in the run rate.

We told you about that last year, a year ago at the air show, what we're going to have to deal with to launch the GEnx engine and to do the development we needed to be competitive on the A320 and on whatever happened in the 737 world and what we were doing in China. I think all that's out there. It's in the run rates. We've got a tremendous franchise. I think this business has the opportunity to have a very high margin for a sustained period of time based on an install base and the tremendous service franchise we have.

Speaker 2

I mean, 20 is not like a good, you know, kind of mid-cycle target?

Speaker 0

I don't know.

Speaker 3

You know, Steve, look, I think that margins should be able to grow during this time period. Services are going to be very strong during this time period. I think that's a great target for this team. I'm not giving you a forecast of what the margins are.

Speaker 2

We're not, I'm not going to hold you. Just want to get an idea of, you know, when you're booking all these great orders. Clearly, you know, it's a boomer over the next several years. I just, you know, the leverage is always a hot button issue. I just wanted to have an idea of where that's going. You know, the energy margin in the second half, I mean, you know, it's going to be above 15%, but it's going to be below 20%. You know, you could fly a 737 through that range.

Speaker 0

With our engine on it.

Speaker 2

It's obviously going to be a hot button issue here in the second half. Can you give us any more directional idea of where within that range? Should we think about the midpoint? I know this is going to be something that over the next couple of quarters people will be looking at very closely. I just want to have kind of the right bar.

Speaker 0

You know, I think I'm not going to pick a margin number here. Obviously, we gave you the direction. I think September 20th, you may know, we've got a separate review, which is just going to be focused on the energy business. We're going to do that at Croneville. I think at that point, maybe the team will give you a little more look at the dynamics of what the equipment volume is going to do in the second half and how we feel about the mix between equipment and services. They're going to continue to be pressured on the dynamics that you saw in the first half here. The wind business is going to continue to be a drag. We're going to continue to have the acquisitions, which are terrific for us. They're fantastic. As you go forward, we will continue to improve the margin rates of those acquisitions.

That's a drag in the second half. On the offset, they're going to have tremendous volume. I showed you that. I think we've laid it out. We're going to have better margins than we had in the first half. They're not going to get any, you know, we were down a little worse in the second quarter than the first quarter. That will not continue in the second half.

Speaker 2

I mean, one last one. It seems like things are getting better here in the second half. Is there any reason why your earnings would be down quarter to quarter from second to third quarter? It seems like things are just continuing to get better. I'm wondering if there's anything, any one time or anything like that why earnings would be down because the street shows down earnings from second quarter to third quarter.

Speaker 0

Down earnings. I think GE Capital, if you look at GE Capital on a run rate, I'm not sure what the street is quarter to quarter. I think for us in GE Capital, we made $1.655 million. If you look going forward at that, there's a couple of things that occur in the third quarter that we've got to take into account. One, we have our normal impairment review at GCAS. We'll have to see how that comes out. Consumer business, we had a real benefit in delinquencies in the second quarter. Historically, there's an increase in delinquencies in the third quarter in that consumer business. We'll have to see how that plays out in the market. Those would be the two biggest dynamics that I would think about.

Speaker 2

Okay, thanks a lot. Appreciate the details.

Speaker 1

Our next question comes from the line of Julian Mitchell with Credit Suisse.

Speaker 5

Hi, thanks.

Speaker 0

Hey, Julian.

Speaker 5

Hey, my first question was on the oil and gas margins. Those were down, I guess, a couple of hundred points in the first half year on year. Could you maybe split out what's driving that in terms of how much things like acquisitions are weighing on that? If you think in the second half, you get the same year-on-year trend on the margins?

Speaker 0

Yeah. You know, on oil and gas in the quarter, 50 basis points of the decline was driven by acquisitions. Organically, I think the largest driver is the fact that we had a negative value gap in the quarter, close to $30 million. Pricing and deflation were a negative in total. If you look, the order price index for oil and gas turned positive. That was the first time since the second quarter 2010. We're still obviously dealing with a negative price from the prior periods in the quarter. I think the acquisitions are going to continue to be dilutive to the margins. Obviously, oil and gas has two of the bigger acquisitions affecting them. We'd probably expect about 50 to 75 basis points in the third quarter and fourth quarter related to those deals. Organically, we're going to have to see how we do with the value gap.

I think pricing is going to be less negative in sales. It depends on the timing of how fast that orders price works through the backlog, Julian.

Speaker 5

Okay. Thanks. On the energy business, you mentioned the price declines in Q2 on wind and thermal. How do you sort of expect to manage that? I guess the volume pickup is substantial from here, which you highlighted in the slide. You can't really do much on the headcount or capacity side. Is your assumption just that pricing will naturally get better in 2012 after a six or nine-month lag versus volumes turning?

Speaker 3

We always go through a formal process on quoting and then backlog and then revenue, right? When we look at the quoting today, the pricing is actually trending up on the turbines. I think there's always a time lag on that as you go through it. At the same time, we're doing material productivity, 2% to 3% material productivity, and we're still aiming to get some deflation in there as well.

Speaker 0

Plus our service business.

Speaker 3

The service business is extremely strong. I think the way you've got to think about it, Julian, is there's a time lag to the pricing that takes place. That always is the way it goes. I'd say we're seeing the early indicators of it turning. That's going to take some time. Services, actually, the pricing is improving and the margins are improving. That's a good thing. We're going to drive productivity and material pricing and things like that at the same time. I think you put all those things together. We really believe that earnings for energy are positive in the second half, and they're positive in 2012 versus 2011.

Speaker 5

Thanks. Lastly, on healthcare, you guys, as well as Philips, have had surprisingly good order growth in the U.S. in the last three or four months. I just wondered if you thought that was a symptom of something broader in terms of the need after three or four years of underinvestment. There's a couple of years of catch-up spend, or if you expect that order growth to tail off from here.

Speaker 3

You know, Julian, I think it's not really a boomer, I wouldn't say. I think it's, you know, what our expectation is for the U.S. is steady market, you know, in the low to mid-single-digit type of growth. If it does better than that, we'll be pleasantly surprised. I'd say, you know, counterbalancing that a little bit is Europe, where you still have a big public spend market in Europe. That's, you know, that was probably slightly worse than we thought. You know, the two of them kind of balance each other out.

Speaker 0

The growth in the developing world and our investments in products and distribution are paying off. You can see those in the numbers in healthcare. I think that's going to be the strength, continuing to be the strength for the rest of this year and probably next year and beyond here. Jeff described how we thought the U.S. and Europe will play for us.

Speaker 5

Okay. Thanks.

Speaker 0

Thanks.

Speaker 1

Our next question comes from the line of Jeffrey Sprague of Vertical Research.

Speaker 2

Thank you. Good morning, everyone.

Speaker 3

Hey, Jeff.

Speaker 2

Hey, good morning. Just one more on energy, and then I'll shift gears. Keith, you gave us the price on orders. Can you give us a price on revenues and how that played out in the quarter?

Speaker 0

Yeah. I'm just going to have to find it here. What else you got?

Speaker 3

You want to do your second question first, Jeff?

Speaker 2

Sure. I'm actually wondering on GCAS. I mean, you guys have demonstrated that the accounting there is maybe a bit more conservative than some of the other guys that took some impairments six months back or so. Given that the orders have been so dramatic on the neo and now kind of this big bump on 3.7 re-engine, does that change the landscape of valuations on older narrow bodies dramatically? Have you guys worked through that yet?

Speaker 0

Yeah, we thought about it. Obviously, we thought about it on the A320. You know, GCAS has continued to refresh their fleet year after year. If you look, we do have exposure to, you know, a minimal amount of exposure. We've got the newest fleet. Our average age is something like seven years. We've thought through how do you—the toughest planes right now are clearly the 737 classics. We're really continuing to make sure we've got the appropriate valuations on those. I think we're going to continue to have to look at that. I think the team has worked through it, looked at what we think the implications are based on previous transitions from one technology to the next. They feel good about their valuations. As I said, we're going to go through the review of aviation valuations again in the third quarter.

We'll have to see if there's any change to that. Clearly, over time, Jeff, when these planes finally are put into service and they're 10% to 15% more fuel efficient, you're going to have a residual value impact on the planes. It will transition in over this period between now and 2015, 2016, and 2017 when these new, more fuel efficient planes come into the market. We have been more conservative, as you said, on how we do depreciation and how we view the residual value on our aircraft versus some of the competitors that we've read about. I think we're going to have to continue to take it into account. We've obviously thought about that as we've put investments into these engines and programs and also purchased planes in GCAS.

Speaker 2

If you're still looking for that other answer.

Speaker 0

Yeah, no, selling prices. If you look in the quarter on renewables, selling prices were down 11.7%. On gas turbines, on thermal, selling prices were down 1.9%.

Speaker 2

Right. Finally, if I could, on R&D, I guess you implied it's kind of fully baked. Don't you have a further step up now on the American wind on aero R&D?

Speaker 3

You know, Jeff, we really don't. I think the LEAP-X is kind of in the run rate, and we had anticipated that, the application increase that'll go into the LEAP-X, right? You'll have a little bit more in the LEAP-X.

Speaker 0

You're going to come back to the GEnx.

Speaker 3

Yeah, the GEnx is kind of crescent and is heading on the other way down. That's how I think about it.

Speaker 0

We're kind of almost done with the GEnx. To your point, as we do each application, you get charges to certify and stuff like that. They kind of offset each other. We will have a higher R&D, but as a % of sales, certainly in aviation, we don't expect it to be greater than the growth in revenue. That's for sure.

Speaker 2

Great, thanks a lot.

Speaker 0

All right, Jeff.

Speaker 1

Our next question comes from the line of Blaire Shoor with Nomura.

Speaker 2

Good morning, guys.

Speaker 0

Hey, Chan.

Speaker 2

Hey, you know the wind orders in the quarter were really good. The comparison was particularly easy this quarter. They get tougher. I mean, are you still expecting wind orders to be up in the second half year over year? Or was this a particularly strong quarter for some reason?

Speaker 0

No, our outlook is that the wind orders are going to continue to be pretty good.

Speaker 2

Okay.

Speaker 3

Our pipeline is pretty strong. As Keith Sherin mentioned earlier, some of that is going to go to the Americas.

Speaker 0

Yeah, our outlook is that they're going to continue to be up, not maybe as up as you said. The second quarter comparison was easy. Our expectation is they'll continue to be up.

Speaker 2

are the lead times on these orders at this point?

Speaker 0

It's a pretty flexible supply chain. I don't know when the last time someone would have to place an order to get it put into service before the end of 2012. I don't know. I'm guessing six to nine months.

Speaker 3

Probably pretty good.

Speaker 0

Six to nine months would be the latest, probably.

Speaker 2

Okay, you're continuing to generate some modest gains in commercial real estate in the UK piece, which, I mean, how encouraging is that? Does that give you any hope of accelerating the wind downs there and the remixing of the asset mix at GE Capital?

Speaker 0

It is obviously better than the outlook that we've had over the last couple of years. I think the stabilization has been very positive. The funds flow into high-quality properties has been very positive from both pension funds, insurance funds, and some global investors. We're going to have to see when it crosses over into other broader asset classes, the more mid-market office and things like the warehouse and some of the multifamily space. It has been encouraging. It hasn't turned into a complete step function change on the valuation on our equity book yet. Certainly, the trends are good. Having the embedded loss go down by $1 billion in the first half is positive. That's based on not only the work we're doing with depreciation and also impairments, but also not having further declines from a valuation perspective in the marketplace.

Occupancy was up a point in the quarter for us. Rents have stabilized. I think we'll have to see how the environment plays out over the next several months and year. At least we've stabilized, and we feel pretty good about the progress the team has made in that portfolio.

Speaker 2

Okay, thanks, guys.

Speaker 0

Great. Thanks.

Speaker 1

Our next question comes from the line of Steve Winoker with Sanford Bernstein.

Speaker 2

Good morning.

Speaker 3

Hey, Steve.

Speaker 0

Hi, Steve. How are you?

Speaker 2

Good. First question around, I'd like to dig in still to the pricing and material deflation question on energy, but more broadly. You guys are still getting material deflation despite the year-on-year commodity changes elsewhere and what we're seeing across your industries. How should we think about that value gap, particularly given the pricing and the backlog? How long can you maintain that?

Speaker 0

We are seeing material deflation. We'd expect to have over $300 million in material deflation for the year. We're going to have some inflation on labor. The pricing has gone from a positive of a couple hundred million last year to a negative of somewhere between $500 million and $600 million, $700 million. The value gap is negative. Our expectation in 2011 is that it's negative. It's driven by the negative pricing. Our objective is that that will level off as we go through 2012. As Jeff said, we're putting out quotes today that are better in pricing than what we're seeing in orders today. They come in in the next six months or so into orders, and then it takes another nine months, 12 months to get those orders into sale. I think we're just going to have to work through this backlog.

We've anticipated that when we put together the framework we have for 2011. We've anticipated what we know today for what we put together for the framework for 2012. We've got to get more material deflation. We've got to continue to do a good job of sourcing from low-cost countries. We've got to simplify our products and get them to a lower cost point from a variable cost perspective. We've got to be efficient in our investments on the base cost side. Our whole team is focused on the value gap, and that's what we're going to be working on.

Speaker 3

You know, Steve, as I said earlier, I'd like to manage the place to get positive margin rate growth in 2012. The way we're going to do that is good volume, try to keep the value gap no worse than '12 versus '11, good services, margin enhancement, and R&D as a % of revenue cresting, right? Those are the key levers. That's what Keith went through. That's how we'd like to run the place. We've got to do our operating plans and stuff like that. That's how I plan to kind of manage the team.

Speaker 2

Are you seeing increased competition from what you, you know, if you think about relative to the last cycle, we've seen maybe a little bit reinvigorated European competition, not to mention Chinese and other competitors attempting to break into the mature economies. Are you seeing any change on that front at this point?

Speaker 3

Look, I think we've got good, you know, we respect our competitors, you know, but I think if you look at what we've done, let's pick our big aviation. We've launched the GEnx and now the LEAP-X. You know, we've really, I think, reestablished our leadership in aviation. In energy, you're seeing the new large frame Flex 50 and soon to be Flex 60. They're going to have the highest efficiency, most flexible gas turbines in the market. The number of products we have has grown substantially. I think, you know, Steve, look, we respect our competition. I think we come at this cycle with more weapons than we've probably ever had. I think that's where the investment has gone.

Speaker 2

Right. I guess I would say, if you think about the upcoming gas cycle as it comes and even the wind cycle on the state mandates, would you expect to be able to get to the same share levels that you had in the last upturn?

Speaker 3

Here's what I would say is we have about a 50% share of the gas turbine business today. I certainly don't anticipate it going down, you know. I think that's, you know, we plan to play hard. On wind, wind is kind of a different story. We're always going to have high market share in the U.S. and lower market share in the rest of the world.

Speaker 2

Okay. Keith, can you maybe address the tax rate a little bit in terms of your expectations for the progression there, considering where you came out in the quarter?

Speaker 0

Yeah. If you exclude the impact of the NBCU high tax in the first quarter, our expectation is that we're going to have a tax rate for the E-capital in the low 20% range. For GE Capital, we'd expect to have a high teens tax rate as their pre-tax profitability has improved. The structural benefits have kind of stabilized out at, I don't know, somewhere around $350 million a quarter or so. There are uncertainties that we have. We've got the 2005, 2006, and 2007 audit that's under review to be closed. If that got closed, that could provide us with benefits that would be maybe beyond those amounts I have. Obviously, any legislative changes that occur, usually they would be prospective. I don't imagine they would hit us this year. We're anticipating somewhere in the range of what we saw in the second quarter for the year.

Speaker 2

Okay. Great. Thanks, guys.

Speaker 0

Yep.

Speaker 1

Our next question comes from Jason Gursky with UBS.

Speaker 2

Good morning.

Speaker 3

Hi, Jason. How are you?

Speaker 2

Pretty good. I believe that the Federal Reserve took over as regulatory GE Capital earlier this month. Any takeaways or surprises from the first couple of weeks? Do you have any greater clarity on what, if anything, you know, might change there with the new supervision?

Speaker 0

You are right. The Fed has become our consolidated regulator in July. We have had a few preliminary meetings with them, Mike Neal and his leadership team, Dave Naison, our Head of Regulatory. We have had information requests, and we will share information with them. It is so early, Jason. I think we are going to be completely open and cooperative and give them access to everything they need. We look forward to working with them. It is too early to say anything about the Fed. We are as prepared as we could be. I am sure it is going to be different than the environment we have been in. We are not a bank, and we are going to have to learn to report more like a financial bank. That is going to be a challenge. It is just too early. We have just really just begun.

Speaker 2

Okay. Commercial lending and leasing, it sounds like originations continue to be quite strong. You've got pretty broad exposure across small and mid-sized businesses. Given the increasingly uncertain macro environment, the debt ceiling debate, what's going on in Europe, have you seen kind of a change in sentiment among your customers or change in their needs or levels of loan demand as a result of the increasingly uncertain macro environment?

Speaker 0

Hard to connect the dots between that and some of the volume we see. I mean, I think the environment's been really tough in the U.S. and Europe for the last two years. Everything related to providing financial products to customers has been tough. For a while, they had a lot less access to credit. Now there's more access to credit, but it's still challenging. I'd have a hard time saying that there's a direct connection between the uncertainty and the debates in Washington or the crisis in Europe and the business we're seeing. I think on a relative basis, things continue to improve in our outlook. Our backlog is up in CLL. Our volume is strong. It's the first quarter we had actually collections equal originations in total, even though we've been running off the red assets. The green assets grew, and the pricing is pretty firm.

For us, the environment feels good and getting better. I agree there's a lot of uncertainty for that customer base. I guess it's going to depend on how all these things get resolved as to when people have the confidence to even invest further. For us, I think it's good and getting us slightly better.

Speaker 2

Okay, thank you.

Speaker 0

Yep.

Speaker 1

Our next question comes from the line of Terry Darling of Goldman Sachs.

Speaker 2

Thanks, Steve.

Speaker 3

Hey, good morning.

Speaker 2

Hey, Keith. I'm wondering if maybe we could see if you have an update on the all-in EPS impact from acquisitions this year, which presumably is dilutive. I'm wondering if you have an updated number there. You did mention you felt like the integrations were going well there. I'm wondering if there's an update on what you think the range on EPS accretion for 2012 might be.

Speaker 0

Yeah, I think the best thing I would say is let's see if we can give you an update of that in September at the energy meeting. I think it's less than $500 million pretax for the year right now. That excludes the amounts that were taken at corporate. I think that's the amount about pretax. We'll give you an update at the energy meeting.

Speaker 2

Okay. In terms of the integration process, does that at this point directionally lead you to be more encouraged about what you're seeing from a synergies perspective there, or is it still early days?

Speaker 0

Yeah, I think the teams have, you know, the acquisitions that have closed, we feel very positive about. Everyone is a little bit above what the pro forma was for what we expected this soon. We're pretty good at acquisitions, right? We've got our processes. We send in our teams. We've got a lot of integration plans. We do a 100-day checklist. We've got a lot of formal reporting. We have a lot of additional resources that go in. I think everything from our perspective on oil and gas energy deals is a little bit above pro forma right now. We like the businesses we bought. They obviously fit with GE Aerospace well. They've got good teams, good technology, and they're off to a good start. Orders are good.

Speaker 2

Okay. Keith, I'm wondering if you could also maybe continue the kind of puts and takes on GE Capital, you know, beyond the third quarter, where you talked about some of the issues that probably mean GE Capital EPS in the third quarter off a little bit, which is normal seasonally. I guess I'm trying to balance the other pieces. Losses are coming down, but the asset base is shrinking. On the other side of the coin, maybe you can comment on new business margins. In 2012 overall, I know you're thinking up. I'm wondering if you've got any more color in terms of magnitude of up based on how those puts and takes are shaping up for you.

Speaker 0

Jeff puts two pluses on top of the bar.

Speaker 2

That's 10% plus growth?

Speaker 0

I'd say, you know, look, I think if I gave you some of the things in the third quarter, obviously, the business continues to improve. We had $1.4 billion of write-offs in the quarter. That's about 1.8% of financing receivables. We had $800 million of provision. That's only 1.05% of financing receivables. I think the provision, that brought the reserve balance down about $550 million. Our coverage is good at 2.3% in line with the asset improvements. The $800 million provision, I think that's lower by about $150 million if you look in the supplementals from some recoveries we've had where the amounts that we recovered were greater than the book value that we had. That shows up actually as a reduction in the provision. Plus, we did have some reserve in the quarter, about half of that, $150 million.

If you put that together, you're probably going to look at over time, if you go back to 2003 through, I don't know, 2007, you're probably dealing with a 1.2%, 1.3% type of provision that you should be dealing with. That would be a more normalized thing. We're getting close to normal. I think the only thing that's really not normal yet is real estate. That's got a lot of room for improvement. That's going to provide a lot of money's growth.

Speaker 3

That's what I was going to say, Terry. You know, your bluebird here is real estate, really. I think we've seen a benefit from more liquidity. If you had a combination of some employment improvement plus liquidity, that's going to get a lot better, a lot faster. I think that's really the upward swing on GE Capital.

Speaker 0

You know, the ones, obviously, in the first quarter, the size of our guarantee gain doesn't repeat. I think that's the one thing that you would clearly look at just as a one-time item here, Terry.

Speaker 2

You did have a lot of originations in the quarter. I mean, where are margins on new business at this point? Have they come off a little bit of where the highs were last year? Are we still running hot there? What's happening at the margin with that?

Speaker 0

We're still above a 2. You know, we've had a very solid performance. Mike Neal and the team have been incredibly disciplined on pricing. Our objective is to get our returns up. They've been very disciplined, and they've continued to have very good margin. They're not as high as the peak, but they're still very strong.

Speaker 2

Lastly, and I hope relatedly, you know, pace of buyback in the second half. Obviously, you've got the Buffett preferred. You spent $1 billion or so in the first half of the year. Looks to be scoped to go higher than that in the second half if you wanted to. You know, maybe you could just comment on pace of buyback given the overall GE mosaic in the second half.

Speaker 0

I think, you know, just the preferred, just to be clear, you know, that's $3.3 billion. We'll retire 20% of what we did in 2008 in the fourth quarter in one swoop here when we retire that preferred. That is the priority right now. We'll continue to do the buyback and we'll continue to be opportunistic around the buyback.

Speaker 3

You know, Terry, I would just add what I said at EPG. We've got plenty on our plate from an acquisition integration standpoint. You know, our near-term emphasis is going to be dividend growth and buyback.

Speaker 2

Great, thank you.

Speaker 0

Great.

Speaker 2

Thanks, Terry. Hey, Chanel, we've hit our time. We have a lot of companies reporting today. Let's take one more here because we still have one or two in the queue.

Speaker 1

Okay, sure. Your next question comes from John Inch of Merrill Lynch.

Speaker 2

Thank you. Good morning.

Speaker 5

Yeah, good morning, guys. Hey, Keith, just so I'm clear in terms of your commentary around provisions, the provisions are down a lot at Capital year over year, which was sort of expected. It's kind of a positive data point. Are we at that stasis today in terms of the trajectory? Would you still expect absolute dollar downward trajectory given your commentary?

Speaker 0

I'm sorry. On just the loss provision?

Speaker 2

Yeah.

Speaker 0

Yeah. I mean, I think, as I said, if you look in the quarter at $800 million and 1.05%, that's a little lower than what our historic amount would be pre-crisis. It's got two things in it in the quarter that we have to think about the dynamics. I'm not saying exactly what they're going to be going forward. First of all, in the consumer space, we continue to see a very strong performance in asset quality. The delinquency decline was greater than we've seen previously from the first quarter to the second quarter in the portfolio, and that resulted in lower provisions.

Speaker 2

Got it.

Speaker 0

Second thing is in the quarter, we had about $150 million of recoveries that were greater than our asset value that showed up as a reduction in the provision and also some reserve releases. It was about split 50/50. That as a one-timer reduced the provision in the quarter a little lower than you normally would have seen.

Speaker 2

Okay. That makes sense. Keith, the businesses that you've been divesting in Capital, which is part of the plan, what kind of a headwind does that create, though, in 2012 because of the absence of the contribution benefit of the earnings that you're not going to realize next year? Is there a way to size that at this juncture?

Speaker 0

You know, I think the biggest one is Guarantee. Obviously, that was just on the gain alone was $0.03, and then, you know, they're making $50 million a quarter.

Speaker 2

Yeah.

Speaker 0

Beyond that, I think the range would be up to another $0.015 to $0.02, maybe. It depends upon what we get done in the second half here. That would be a range for you.

Speaker 2

That makes sense. Maybe just lastly, could you guys comment on what's happening with respect to Japan broadly, but then Japan as it pertains to your thermal business? You're hearing they're certainly ordering a lot of your product. I mean, what's been the impact? Maybe you could size that for us.

Speaker 0

We had about $600 million in the quarter of orders in Japan. Thermal was half of that, but that was energy orders.

Speaker 2

Yeah.

Speaker 0

Our derivative was very strong. I think, you know, Jeff, you could talk about what you see as the outlook there for additional. We didn't have a big impact in the supply chain. We didn't have a big impact in country.

Speaker 1

itself, in the quarter. I think the orders were good, other than that, I'll.

Speaker 6

Yeah, I think, John, there's going to be another wave of thermal orders. You know, it's kind of like this is the summer of 2011, then we'll get ready for the next summer of 2012 and 2013. My hunch is that there'll be another wave of thermal orders.

Speaker 1

Great. Thank you.

Speaker 6

Thanks, John.

Speaker 1

Thanks, John. Thanks, everyone. We're going to wrap the call today. The replay of today's webcast will be available this afternoon. We'll be distributing our quarterly supplemental data schedule for GE Capital later today, probably a little earlier around noon today. I have some announcements regarding upcoming investor events. As Keith mentioned, we're going to be hosting our GE Energy investor meeting on September 20 at our Crotonville facility in New York. We'll provide more meeting logistics and information upcoming in August. Our third quarter 2011 earnings webcast will be on October 21. As always, we'll be available today to take your questions. Thank you, everyone.

Speaker 3

This concludes your conference call. Thank you for your participation today. You may now disconnect.