GE Aerospace - Earnings Call - Q4 2011

Transcript

Speaker 3

Good day. Ladies and gentlemen, and welcome to the General Electric Fourth Quarter 2011 Earnings Conference Call. At this time, all participants are in listen-only mode. My name is Chanel, and I will 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 appear 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 5

Thank you, Chanel. Good morning and welcome, everyone. We're pleased to host today's Fourth Quarter 2011 Earnings webcast. Regarding the materials for this webcast, we issued the press release earlier this morning, and the presentation slides are available. Slides are 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, Jeffrey Immelt, and our Vice Chairman and CFO, Keith Sherin. I'd like to turn it over to our Chairman and CEO, Jeffrey Immelt.

Speaker 4

Great, Trevor. Good morning. Thanks. Let's finish here with real strength. We had the best order results in history. Many of our key end-use markets are showing momentum, like commercial real estate and aviation. The emerging markets continue to be very strong. There are a few challenged markets like Europe and appliances, but on balance, we have a positive outlook. Company operations were strong. EPS grew by 11%. Organic growth was 5%. CFOA and liquidity were very strong. GE Capital exceeded all of their performance goals and ended with a very strong tier one common ratio. We're executing a balanced capital allocation plan. We increased the dividend again in the fourth quarter. Overall, the dividend grew by 21% in 2011. Our buyback for the year was $5.4 billion, including both common shares and the Berkshire Hathaway preferred.

Finally, we end 2011 with confidence that we could deliver on our 2012 double-digit earnings framework. Overall, a good quarter. Orders grew by 15%, which was up 9% organically. We had fairly broad-based strength. A particular note, energy orders were up 23%. Thermal orders were up 88%, and we had orders for 50 heavy-duty gas turbines in the quarter. Orders in the emerging markets grew by 26%. We end the year with $200 billion of backlog and had an equipment book-to-bill ratio of 1.23 for the quarter. These numbers certainly support a 5% to 10% organic growth goal for 2012. Our investments in growth are paying off. First, on the global front, we had a 25% expansion in our industrial growth market revenue. Our expansion was broad-based, with most businesses and most regions experiencing strong growth. Services grew by 14% and expanded margins.

We had strong growth across all businesses, and we ended the year with $147 billion of service backlog. We increased R&D by 16% in 2011, resulting in multiple new product launches. In healthcare, we launched leadership products in MR, ultrasound, and interventional. Energy is growing in both the heavy-duty gas turbine market with the Flex 50 and 60, but also in the distributed energy products with solar and waste heat recovery. Aviation has positioned the LEAP-1A to win and had the H-80 turboprop launch to penetrate new segments. Rail is picking up global orders. We're launching a full range of appliance products in the next six quarters. Overall, our organic growth should continue. We made progress on margins in the quarter. We're up 250 basis points versus third quarter 2011. Most of our negative rate versus fourth quarter 2010 is explained by acquisitions and R&D investment.

Looking forward, we still feel good about a 50 basis point improvement in 2012. We have good productivity programs in place. We're making structural improvements, and our global and R&D investments are in a run rate. We see energy pricing stabilizing as we move through 2012 and into 2013. Margins are an important focus for our leadership team, and we think we'll make progress in 2012. In cash, we had very good, very strong cash performance. CFOA was $5.5 billion in the fourth quarter. That's a record quarter. This led to total CFOA of $12.1 billion for the year. Our working capital performance was very strong in the fourth quarter. Consolidated cash was $85 billion at year-end. Our capital allocation plan was in line with expectations. We grew the dividend twice in 2011.

We completed nearly $12 billion of acquisitions and bought back $5.4 billion of stock, including the Berkshire Hathaway preferred. Overall, you know, cash and capital allocation were either equal to or better than planned, and we feel good about that performance. We continue to strengthen GE Capital liquidity. We're prepared for 2012 maturities by having a substantial amount of cash on hand. We've already issued $5 billion of long-term debt, so we're off to a good start. Our tier one common ratio is 11.4% for GE Capital Corporation and 9.9% for JEX. On a Basel III basis, we compare favorably to the banks. We ended 2011 with $445 billion of ending net investment ahead of our plan. As a result, we're resetting our ending net investment goal for 2012 to between $425 billion and $440 billion. We will continue to grow on high-return segments.

Our expectations for GE Capital earnings are unchanged for 2012. At the same time, we expect to have lower debt issuances for the year. Looking forward, we've achieved a focused, high-margin, safe GE Capital, a financial service business that can grow and win in this marketplace. With that, I'll turn it over to Keith to go through operations.

Speaker 2

Thanks, Jeff. Good morning, everyone. I'm going to start with the fourth quarter summary. We had continuing operations revenues in the quarter of $38 billion. They were down 8%. Industrial sales of $26.7 billion were reported down 7%. However, if you look at the notes at the bottom of the page, excluding the impact of not having the NBCU revenues last year, GE's industrial sales were up 11%. Financial services revenues of $11.6 billion were down 9%. That was driven by our lower assets year over year, mostly. Operating earnings of $4.1 billion were up 6%, and operating earnings per share of $0.39 were up 11%, reflecting the benefit of retiring the preferred shares. Continuing earnings per share includes the impact of the non-operating pension, and net earnings per share includes the impact of discontinued operations.

That reflects a $0.02 charge this year, which I'm going to cover on the next page, and also on a comparison basis, the non-repeat of the net $0.06 of gains we had last year in discontinued operations. Cash for the year of $12.1 billion was very strong. We had a great fourth quarter in the total year, and Jeff covered that. For taxes in the fourth quarter, our tax rates were 15% for GE, excluding GE Capital. The GE Capital rate was 4%, and those rates include about $0.03 of benefit from our IRS audit resolution for the years 2006 and 2007. I'll go into a little more detail on that on the next page. Those amounts put us right in line with our third quarter outlook for tax rates for GE and GE Capital. The consolidated GE rate ended the year at 29%.

The GE rate, excluding GE Capital, was 38%, and that includes the impact of the NBCU gain from the first quarter. If you exclude that, the GE rate was 19% for the year. That's up two points over last year. The GE Capital rate for the year came in at 12%, and that rate's up significantly from 2010 as a result of our significantly higher pre-tax income. As you look forward for 2012, I would estimate our GE rate to be somewhere in the low 20% range and the GE Capital rate to be somewhere in the mid-teens range for 2012. On the right side, you can see the segment results. Industrial revenues were up 10%. Industrial segment profit was up 2%. That was driven by transportation and aviation. You can see energy was flat, and that's a big improvement versus the three-to-year-to-date results.

Healthcare was down slightly, and Home and Business Solutions continue to be negatively impacted by the housing market. Down the bottom, GE Capital had another strong quarter with earnings up 58%. I'm going to go into each of the segments in more detail on a few pages. Before I get to the businesses, I'll start with the other items page. As we mentioned during third quarter, we were in negotiation for final resolution of the 2006-2007 tax years with the IRS. We did reach a resolution on several tax matters for those two years. That resulted in $0.03 of benefit in the fourth quarter. In terms of geography, $0.01 of that was in industrial, and $0.02 of that were recorded in GE Capital. Overall, a $0.03 benefit at the end of the year from that resolution. We also had some one-time costs in Q4.

We had a little more than $0.02 related to restructuring. We reduced the cost structure in Energy, Healthcare, and GE Capital. We also had almost $0.01 of one-time costs related to this year's acquisitions as we've had throughout the year. If you look at where these were recorded, the charges were recorded at Corporate on an after-tax basis. We had $78 million in Energy, $58 million in Healthcare, $28 million in GE Capital, and then Aviation, HMBS, Transportation, and Corporate all had about $15 million of restructuring as we work on lowering our cost base as we go into 2012. On the bottom of the page, we did an update on gray zone reserves in the fourth quarter. While the claims have declined significantly from the peak that we saw in the first quarter of 2011, we did see an uptick in September. We saw declines in October through December.

Based on the 2011 activity, we've updated our long-term claims reduction assumption. We had set this at 4% in the third quarter of 2010, and we reduced it this quarter by about a point. If you include the current claim severity as well as the claims assumption adjustment, it resulted in a $243 million addition to the reserves in the fourth quarter. We end the year with $692 million in reserves, and we expect the claims to continue to decline. The December claims were down, and we will have to obviously monitor and communicate where we are in gray zone going forward. The trends feel good based on where we are at the end of the fourth quarter.

One other point that is not on the page, as we discussed in the first quarter earnings, we did have six more days in Q1 2011 versus Q1 2010, and that's just based on our fiscal calendar. That helps us by about $0.01 EPS in the first quarter. In the fourth quarter, we had the opposite effect. We had six fewer days in the fourth quarter of 2011 versus 2010, and that impact was about $1 billion of lower revenue and about $0.01 less EPS in the fourth quarter. We also absorbed that impact. Next, I want to cover two reporting updates for you. On the left side, we're in the process of merging GE Capital Services into GE Capital Corporation so that we end up with one SEC registrant for financial services.

Basically, the current reporting for GE Capital Services will become the going forward reporting for all of GE Capital Corporation. Those results at GE Capital Services will be the segment GE Capital that we use with investors. That will be what Mike Neal and the team run. There won't be two organizations. We think that's a big simplification. It will be effective for the first quarter earnings, and we're going to file an 8K today outlining this merger. There is no change in the fourth quarter or how we're reporting GE Capital until the first quarter. Going forward, we'll have one consistent financial services entity. I look forward to getting to just that reporting GE Capital and having it be the total enterprise. On the right side, we completed an internal reorganization in October.

We moved the responsibility for the measurement and controls business run by Brian Palmer over to Dan Heintzelman in the oil and gas business. You can see the financial size here: $4 billion of revenue, $600 million of op profit on a total year basis. The details of this move are in the supplemental materials that we released this morning. We moved this business because it reflects the customer alignment for the MNCS business. It's much more aligned with the oil and gas base. It's going to give us more scale in the solutions business for oil and gas. There is no change to the overall energy infrastructure segment. This is just between energy and oil and gas within the segment. Today, on the results that we'll show you, I'll give you both before and after so you can clearly see this impact.

Two organization changes, and I'll move on to the business results. First is energy infrastructure. The fourth quarter was a mixed performance. We had a terrific orders quarter, as Jeff talked about, and I'll give you more details. Revenue was also very strong, but it was less than our September forecast. We had some wind units, and we had some equipment installations push into 2012. We also had some impact that was worse than we expected in September from the stronger dollar. Segment profit, while it was significantly better than the first three quarters, was slightly less than the growth we expected, and I'll cover that by business. I'm going to cover the details for energy and oil and gas on the new basis as I just covered. You can see that down in the bottom left. However, the pre-reorganization basis is also shown on the bottom left.

As I said, the supplemental data has all the details. What I'm going to go through now is on the basis with MNCS moved into oil and gas. I'll start with energy. We had another quarter of great orders growth. Orders of $11 billion were up 19%. Equipment orders at $6 billion were up 33%. They're even up 24%, excluding the impact of the acquisitions. Renewable orders at $2 billion were up 53%. We had orders for 1,023 wind turbines versus 477 a year ago. Thermal orders of $1.9 billion were up 88%. We received orders for 50 gas turbines versus 29 last year. That's a great quarter for gas turbines. Equipment orders price was down 4.4%. Renewables pricing was down 4.9%. Thermal pricing was down 12.5%. If you look at the combined thermal and power gen services orders price impact, it was down 5.5% as service pricing was flat.

Service orders in the quarter of $5 billion were up 6%. When you look at the top line, revenue in $9.2 billion was up 11%. That's driven by the strong volume we had and the acquisitions benefit. Organic revenue in energy was up 6%. Equipment revenue of $5 billion was up 15%. That was driven by renewables. $1.6 billion was up 15%. We shipped 688 wind turbines versus 592 last year. That was a little short of our goal if you look at what we put out for the third quarter as we expected for the total year. We had some slip. Invoquer revenue was up 57%. Aero revenue was up 14%. That growth was partially offset by thermal revenues of $1.3 billion. It was down 3%.

We had a higher volume of gas turbines, 33 this year versus 18 last year, but that was more than offset by having lower balance of plant revenue, items that are produced by other parties that we don't make, but we include in the project, and also the lower pricing. Service revenue of about $4.1 billion was up 7%. For the quarter, segment profit of $1.7 billion was down 3% as the benefits of the higher volume and material deflation were more than offset by lower pricing and negative unit mix. While being down 3% is a great improvement over the third quarter year-to-date result of down 20%, the main drag continued to be our wind business, which accounted for $41 million of the $44 million year-over-year op profit decrease. I'll cover some more of the dynamics on the wind business for 2012 on the next page.

For oil and gas, orders of $4.7 billion were up 34%. Equipment orders of $2.4 billion were up 40%, driven by the acquisitions plus strong refinery and petrochemical orders. Service orders of $2.3 billion were up 29% on strong drilling and production activity. Oil and gas orders price index was a positive 0.2 in the quarter. Revenue of $4.1 billion was up 38%, again driven by the impact of the acquisitions. Excluding acquisitions, the revenue was up 6%. Segment profit of $630 million was up 12%. That's driven by the acquisitions plus strong volume, partially offset by negative productivity across the business. Overall, when you look at energy infrastructure, a significantly improved earnings profile as we exit 2011. I thought it'd be helpful to give you a little more detail on the energy plan for 2012. On this chart, we ended the year with $6.7 billion of op profit.

Our plan is to grow double-digit in 2012, and you can see the drivers on the right side. First, we have an incredibly strong equipment backlog. Energy equipment orders of $25.5 billion were up 39% last year. We're planning on double-digit growth in the equipment deliveries, and you can see the huge growth in wind and aero volume down on the bottom left that's in the business plan for 2012. For services, our service orders were $22.8 billion, up 9% for 2011. Our service backlog stands at $50 billion, so we should expect a good service this year in energy. We've invested a lot in new products and in growth. We've peaked in terms of our program and growth investments as a percent of revenue, though that's not going to be a drag on margins for energy. We'll get a full year of the acquisition earnings.

Those four factors more than offset the price pressure that we already have in the backlog and that we've talked about quite a bit. The energy teams worked through the toughest part of the earnings cycle, mainly driven by the 2011 wind margin declines. We're looking forward to delivering double-digit earnings growth in 2012. Next is aviation. The aviation team had another solid quarter in the fourth quarter. Orders of $6.9 billion were up 18%. Commercial engine orders of $3.3 billion were up 67%, driven by the GE90. Military engine orders of $402 million were up 53%, driven by foreign military orders. Equipment orders price was up 1.9%. We ended the quarter with a backlog of $22.5 billion, up 12% versus last year. Service orders of $2.7 billion were down 9%. Military services were down 41%, driven by the lower F110 spares.

Commercial services were up 1%, driven by higher overhaul activity, partially offset by a lower spares rate. The fourth quarter spares order rate was $22.3 million a day, down 11%. That reflects the aggressive purchasing that we saw in the third quarter in advance of the November price increase. If you look at the total year average daily order rate for our spares, it was $24.7 million, up 13% over 2010. The teams feel very confident about the current spares rate and how they're doing in the marketplace commercially. Revenue of $4.9 billion was up 2%, driven by equipment up 3% and services up 2%. We shipped 518 commercial engines in the quarter. That was down seven engines from last year, but revenues were up 10% on more GE90 units. We shipped 34 GEnx units in the quarter. Segment profit of $850 million was up 4%.

That's driven by the strong volume and the positive value gap in the business. On the right side, transportation. The transportation team continued delivering strong results in the fourth quarter. Orders of $1.2 billion were down 11%. That's driven by the tough comparisons. Equipment orders of $500 million were down 43% because of no repeat of last year's $550 million multi-year order. The order is still in the backlog, but it's a tough comparison. Service orders of $739 million were up 57%. That's driven by the growth in our long-term service agreements. Orders pricing for transportation was up 1.2%. Revenue in the quarter of $1.5 billion was up 43%, driven by all the strong volume. We shipped 210 locomotives domestically versus 86 in the fourth quarter of last year. We shipped 48 international units versus 30 last year. Mining revenues were also up almost 40% on higher volume.

Service revenues were up over 30% on strong long-term agreement performance, and segment profit of $226 million was up more than 200%, driven by all that strong volume and the services delivery. Next is healthcare. We did see a slowdown in the developed markets in Q4 for healthcare. Orders of $5.2 billion were flat. Equipment orders of $3.2 billion were up 1%. Diagnostic imaging overall globally was down 2%. Clinical systems was up 5%. Life sciences was up 3%. If you go by geography, U.S. equipment was down 7% and non-U.S. equipment was up 6%. Here are some of the pieces. Europe was down 13%. That was the toughest market. China was up 29%. India was up 20%. Latin America was up 6%. Service orders of $2.1 billion were down 1%. The total orders price for the business was down 1.9%. Revenue of $5.2 billion was up 1%.

That was really driven by the emerging markets, which were up 16%, partially offset by the declines in Europe and the U.S. Segment profit of $953 million was down 5% as the benefits of the higher volume and productivity were more than offset by negative pricing and the continued investments we're making in the new business like Intel Home, Health JV, and also new products. On the right side of the page, HMBS had another tough quarter. Revenues of $2.2 billion were down 4%. Segment profit of $82 million was down 41%. These results were driven by appliances. The domestic market was down 12% in units in the quarter. We gained 0.7 of a point a share in the quarter, but the inflation we saw was only partially offset by pricing, resulting in the overall segment profit decline. Lighting revenues were down 1%, driven by Europe.

Intelligent platforms revenues were up 4%, driven by strong software growth. Let me shift to GE Capital. Mike Neal and the capital team had a really good quarter. Revenues of $10.7 billion were down 9% in line with our annual shrinkage plus the impact of the fewer days. Pre-tax and after-tax earnings continue to rebound. On the right side, asset quality metrics showed continued improvements or stability. We had $49 billion of volume in the quarter, which was up 13% from Q3. Margins came in at 5.4% for the year. We continue to beat our ending net investment targets. There is a lot more information about GE Capital in the supplemental charts on reserve coverage and non-earnings that we posted this morning. Just a few highlights by business. I'll start with consumer. You know, the consumer business had another positive earnings quarter.

We ended the year with assets of $139 billion. It was down 6%. Net income of $575 million was up 5%, and that was driven by the improved credit costs. U.S. retail finance had a great quarter. They earned $463 million, which was up 29%, driven by some acquisitions. We added some portfolios and also lower credit costs. The U.S. retail finance volume was strong. It was up 3% over last year, and it was up 14% versus the third quarter. For Europe, we had net income of $111 million. That was down 35%, but it was driven by not having the Guarantee earnings that we used to have since we sold our stake there. We also had $63 million of after-tax impairments on our Greek bonds, and that brings the net book value of our Greek holdings down to about $74 million. Our U.K.

home lending business earned $89 million in the quarter. Good performance on asset quality. 30-day delinquencies were down 97 basis points versus Q3. Our owned real estate stock was down to 461 houses, and that's the lowest we've had since 2005. On the houses that we did repossess and sold, we realized 115% of the carrying value on our sales in the fourth quarter. Pretty good marks in valuation. Next is real estate. Commercial real estate had another quarter with significant improvements over last year. Assets of $61 billion were down $12 billion, or 16% versus last year. They were also down $4 billion, or 6%, versus the third quarter. We continue to work this book down. The business ended Q4 with $153 million of losses after tax. That was $256 million better than last year.

During the quarter, we incurred $64 million of after-tax credit costs and $168 million of after-tax marks and impairments. During the quarter, a bright spot, I'd say, we sold 157 properties for $1.9 billion, realizing $132 million in after-tax gains. As you see in the press, there is more liquidity in the commercial real estate market, and our business is benefiting from that. As Jeff mentioned on the front page, our unrealized loss on the equity portfolio is down to $2.6 billion. The outlook is that real estate is going to continue to deliver strong improved performance in 2012. Commercial lending and leasing also had another strong quarter. Assets of $194 billion were down 4% due to the runoff of some non-core assets and dispositions. Net income of $777 million was up 37%. That's driven by lower losses and higher core income.

America's net income of $570 million was up 42%. It's driven by lower credit costs, and that's their best quarter that they've had in four years. Europe and Asia were both down a bit, driven by lower assets. GE Capital Services, GE Capital Services fourth quarter is actually better than it looks. You can see here, net income of $315 million is reported down 27%. That included the impact last year of $167 million in tax benefits from the IRS settlement we had last year in the fourth quarter. There were no such benefits allocated to GE Capital Services this year. If you look on a normalized basis, net earnings would have been about 19% up, driven by continued improvements in core margin. Asset quality remains strong here. We ended the quarter, ended the year with two aircraft on the ground. Another good year for GE Capital Services.

Energy Financial Services also had a strong quarter. Earnings of $110 million were up 234%, driven by higher core income and higher gains. Overall, another very strong performance by GE Capital. Let me turn it back to Jeff.

Speaker 4

Hey, great, Keith. Thanks. For 2012, we're confirming our earnings framework. Strong orders and rebounding margins support double-digit industrial growth. Better margins, improving commercial real estate, and lower losses support double-digit capital growth. Corporate cost and CFOA are in line with our December meeting. Industrial organic growth is well-positioned to expand by 5% to 10%. Capital revenue will be below our December meeting based on lower E&I. We close the year with momentum towards these results and goals that we have for 2012. To conclude, we're positioned, I think, for strong execution in 2012. Organic growth looks solid with a $200 billion backlog. Margins are improving, fueled by productivity programs and cost actions. Our industrial returns will exceed 15%.

We're positioned to deliver on the two areas most important to investors: double-digit industrial earnings growth with higher margins and double-digit capital earnings growth with the goal of restarting the GE Capital dividend to GE. It was a good quarter. Could have been even better. That's encouraging for 2012. I like our momentum. We feel good about where we are and what we can get done in 2012. Trevor, with that, let's

Speaker 5

Thanks, Jeff.

Speaker 4

That's a review.

Speaker 5

Thanks, Jeff and Keith. Chanel, we're ready to take questions now.

Speaker 3

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 Scott Davis from Barclays Capital.

Speaker 2

Hi. Good morning, guys.

Speaker 4

Hey, Scott.

Speaker 5

Good morning, Scott.

Speaker 2

Guys, can you talk about your confidence in your margin guide in energy? You've been talking about 50 basis points, but you put up a pretty big fourth quarter, which raises the base for 2011. You also raised your gas turbine shipments from 130. You were at 128 last quarter, now you're saying 137. Your mix shift is turning a little bit more negative, and your base is higher. Just talk about that 50 basis points because that's a pretty big movement in our model.

Speaker 5

I think I'll take a shot at it and let Jeff also add to it, Scott. If you look at the drag that we've had in energy this year and the drag that we've had for the whole company, it's been driven by our investments in R&D and global. As we've said, we've taken that, and we've got it in the run rate, and that's not going to continue to be a drag. That was, for the fourth quarter, it was 0.9 of a point on the whole company. For energy, it was a similar result. The second drag that we've had in 2010 that you'd expect to where the acquisitions, we've acquired these companies. We've only started to really integrate, and we don't have a full year. That was 0.5 of a point of drag on the company in the fourth quarter.

Our expectation is that we continue to get improvements in those acquisitions. We've got a lot of people working on both the top line and the operating synergies. That is another factor that we've got to work. Finally, the one drag that was just on the whole company all year long was wind. On the total year, it was 0.8 of a point for the whole company. As you can see, our wind expectation is that we're going to have a significant amount of volume. It's certainly not going to be an operating profit dollar drag like we saw in 2011. It was close to $700 million of operating profit drag dollars in 2011 on this business. We don't expect anything like that. We expect actually to have an improvement in the wind performance in 2012. We're going to have to work the mix issue associated with that.

There are a lot of good factors. The services business has an incredible backlog. We've got to execute in the businesses like the oil and gas business on large projects and make sure we don't have any cost of quality issues or things like that. The whole team is focused on it. It's important to us. It's important to investors. We have some good factors that don't repeat from 2011 that were headwinds that don't repeat as headwinds. We need to execute. There's no question about it, Scott.

Speaker 2

That's helpful. Just as a follow-up, Keith, for you, I'm calculating out about $10 billion of potential dry powder you'll have in 2012 to either buy back stock or do deals or, you know, dividend, whatever you guys decide. My first question is, does that $10 billion pass your sniff test? Have your priorities to deploy that cash changed at all since your analyst day in December?

Speaker 5

I think 2012, we expect to have growth in cash flow from our industrial businesses. You know, we ended the year at $12 billion. We expect that to grow in 2012. We already have increased the dividend for 2012, as you saw. Our expectation is that we're going to have a balanced capital allocation plan between buyback and M&A. We're going to look at opportunities and see what we do. I think to get to a number like you're talking about, we really do need, first of all, the capital dividend. We would expect that over time, we're going to get excess capital out of capital, not just the 45% earnings. You know, we have to get some of that. Our other thing I would say is, right now, we're still planning on keeping about $8 billion of cash at the parent.

We ended the year a little bit above that number just from a safe and secure and how we manage the company for all sorts of unforeseen risks. I'd factor that into your math. We expect to have a good cash year and have a good capital allocation year. I think we'll have available cash in line with what we said in December. You know, we've got a $200 billion backlog. We don't need really, we don't need acquisitions. I wouldn't look for us to do a big acquisition. We've got a pretty full pipeline of new products, and I think the emphasis on dividend, reducing the float over time, those take a very high priority.

Speaker 2

Okay. Good luck, guys. Thank you.

Speaker 5

Thanks, Scott.

Speaker 3

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

Speaker 2

Hi. Good morning.

Speaker 5

Hey, Steve.

Speaker 0

Good morning, Steve.

Speaker 2

You guys gave us the service margin of 28.5%. I think you've given us kind of a number that's close to that in the past. I don't know what that margin refers to. There's a lot of different numbers that you refer to when you say margin. You know, backing into what the equipment margin is kind of gets me to a low single-digit number. Is that, you know, is that correct, the way to look at it?

Speaker 5

Yeah, equipment margins are in that range.

Speaker 2

Historically, how high have those margins gotten? Obviously, exclude the gas turbine bubble. They have been higher historically, correct?

Speaker 5

If we can get to those kind of levels, the incremental margin associated with the gas turbine business was fantastic, you know, back in the late.

Speaker 2

I guess excluding that, though.

Speaker 5

I think if we, you know, right now, you're looking at a thermal business that is, you know, the market actually is pretty good globally. You know, with 50 gas turbine orders in the fourth quarter, it is pretty good. There is still excess capacity. I think if you see a tightening in that market, you know, you're going to be able to get incremental margins on the equipment side. I think that's going to be a good factor for us. Right now, you're still seeing, obviously, price erosion when you look at the orders price index that we have. The commitment levels that we're seeing are starting to stabilize. I think Jeff said, you know, that'll roll into the end of 2012 and into 2013 at much better margins for us from an equipment perspective.

Speaker 2

Scott, we ought to get improving equipment margins as part of the 50 bps improvement in 2012 versus 2011. Right. Longer term, you've got $60 billion-ish of revenue that's really sitting there dramatically kind of under earning at this stage, given the level of volume you're doing.

Speaker 5

I think there's another, you know, if you look, there's another factor maybe to think about is aviation. You know, we're really in the early launch phases around the GEnx, and that will continue to improve as well. We got to get up to the run rate in terms of the number of engines. Clearly, the launch engines are the worst ones in terms of cost plus price. We're going to work our way into a different place in aviation, and GEnx will be probably one of the bigger factors.

Speaker 2

Right. One more question, just on consumer, you know, was kind of down sequentially. Is that just, is that some Europe headwind kind of flowing through? I know the provision was also up a little bit on the GE Capital income statement.

Speaker 5

I think the main thing in the quarter for consumer that I think about was the Greek bond impairment was in the consumer segment.

Speaker 2

Okay, because delinquencies, you know, non-earnings all kind of continued to head in the right direction.

Speaker 5

Yeah. I think the main point we had in the quarter, if you do 3Q to 4Q, would be the Greek bonds. The asset quality performance was good, and you do put up a little bit of provision as we had asset growth, Steve, through 3Q to 4Q.

Speaker 2

Great, thanks a lot.

Speaker 5

Yep.

Speaker 3

The next question comes from Stephen Winoker of Sanford Bernstein.

Speaker 2

Good morning.

Speaker 0

Hey, Steve.

Speaker 2

Just the first question on the reorganization of Jackson JEF into GE Capital. When you think about how the Fed is looking at, or when you think about how you would think about sort of what makes sense in terms of the right entity, we've talked about the difference in coverage and reserves for JEF versus JEX. Is there any reason to believe this wouldn't make it more likely that JEX would be the entity to look at as opposed to JEX?

Speaker 5

I think all we're doing is it's sort of a reverse merger, Steve. If you look at what we're doing, we're putting GE Capital Services back under GE Capital Corporation. The total now will be GE Capital Services. If you look at our current reporting, when you see things like tier one capital at 9.9% for GE Capital Services, going forward, that will be 9.9% for GE Capital. We're going to have one entity, and it's going to be the top level, but we're going to call it GE Capital.

Speaker 2

This essentially removes even the possibility that GE Capital would have been something that regulators might have considered.

Speaker 5

That's right. I think at the end of the day, our expectations were, and it hasn't been finally decided, were that the total financial services assets of the company would be regulated. This isn't something the Fed made us do, but I think it does simplify everything and make it clearer for investors.

Speaker 2

Okay. You said this is not something that was based on input from regulators?

Speaker 5

That's correct. No, this goes back almost 20 years, Steve. I think it just simplifies it for our equity investors and for our bondholders.

Speaker 2

Okay. You talk about lower debt issuance. Can you quantify that a little bit?

Speaker 5

We have to see how we go through the year. You know, we give a range of $425 million to $440 million. As we go through the year, you know, we'll look at the composition. You know, will we be able to, you know, I want to see how the long-term debt markets look. We want to look at CP. We'll look at alternative funding. You know, it's going to depend upon those factors. If you got all the way down to the $425 million, you'd expect to have a combination of lower CP and long-term financing. The margins, Steve, are still good. The earnings power is still good. I think what we've said to you guys is we've got more than $70 billion of what we call red assets. The market in the U.S. is healthy, you know, for that kind of stuff.

I think that's we're just confident that in our earnings power and the E&I progress, I think is a good thing for investors.

Speaker 2

Okay. Maybe just one final one. Fifteen months ago or so when you took the last Shinsei reserve, I think we all asked the question of how do we know that that was the right number and that that was sort of it? We talked about frequency and severity. How do we know that this is the right number and that this is it?

Speaker 5

It is our best estimate. You're right. We're dealing with a tale of a liability here that's got a lot of volatility. I think the Takafuji bankruptcy wasn't something that we foresaw when we put up that reserve 15 months ago. This is our first adjustment in 15 months. We've done a lot of statistical analysis, and we've got a dedicated team on the ground managing these claims. It is our best estimate as of today based on the information we have on both claims volume and severity. We're just going to have to continue to watch it. I think.

Speaker 2

The claims volume is heading down.

Speaker 5

The claims volume is going down. December was better than what we had forecast a little bit, but it's just such a long-tail liability, and we're just going to have to watch it.

Speaker 2

Okay, great. Thanks, guys.

Speaker 5

Thanks, Steve.

Speaker 3

Your next question comes from Nigel Cole from Morgan Stanley.

Speaker 1

Hey, good morning.

Speaker 5

Hey, Nigel.

Speaker 1

Hey, Nigel. Hi. You talked about, okay, you talked about some push-outs in energy. I think mainly in winds. Can you maybe just quantify that versus September plan? Is there any evidence that there's more push-outs?

Speaker 5

From September when we laid out the energy goals and where we were heading into the year, I would say there's a number of factors that affected our energy revenue. We had about $400 million that I would put in the push-out category. About half of that is wind. We had wind units in Canada that didn't get to revenue that we thought we were going to get that will come in 2012. We also had some push-outs on installations for about another $200 million. There's about $400 million of things that we didn't record that we thought we were going to and that moved into the next year. We had about $200 million from FX from the beginning of the quarter. The dollar was much stronger than we thought. That impacted it a little bit versus our September estimate.

We had some weakness in our industrial systems business, more than we thought, probably another $100 million. Those are kind of the things that we see versus where we were in September in the energy business.

Speaker 1

Okay. That's really helpful. On the energy pricing, it looks like it's ticked down again versus 3Q. I think 3Q was down 1.8%, and last quarter was down 4.4%, I think you said, Keith.

Speaker 5

Say the numbers you had again?

Speaker 1

Yeah, I think it was $1.8 billion last quarter on energy equipment orders pricing.

Speaker 5

Yep. Yep.

Speaker 1

This quarter was 4.4.

Speaker 5

That's correct.

Speaker 1

Does that make the goal of keeping energy margins flat next year more difficult?

Speaker 5

We have considered that in what we put together as our plan. I think the team does have to manage through that margin pressure, as we showed you on the chart for 2012. We are going to have to have good execution on inflation and deflation and global sourcing. We have to grow our service business, and we have to have good cost of quality and execution on our projects. I mean, we have factored that in. Our guys, when we put the plan together, that's not worse than what they were expecting. It is pressure, obviously, in 2012, and we think we've accounted for it.

Speaker 1

Okay.

Speaker 5

This is a big deal, getting energy to go positive margins, just like Scott said and like you said. I mean, this is something the team is really focused on.

Speaker 1

Sure. Finally, obviously, you're limited in what you can say about the Fed review. It sounds like they're set off understanding the business and understanding the funding model. Can you maybe give some color in terms of where they're focusing right now?

Speaker 5

Sure. They've been with us for around six months now, the Fed. Without any specifics, they're working on the things you'd expect them to be working on. They're looking at our risk systems and risk teams, our risk models. They're looking at our capital levels. They're looking at our liquidity and our liquidity risk management. We're working cooperatively with them. We're in a dialogue. They know we'd like to restart the dividend, and we have a process going on to review what they need to be able to help make a decision on that. It's going at their pace, I would say. It's a lot of work. It's a ton of oversight, and we're committed to working constructively with them. At the end of the day, as soon as we can give you more information about that, we will. Our macro benchmarks look pretty good.

When you look at our tier one capital ratios and things like that, I think we're pleased with how we finished the year. We're pleased with the operating results of GE Capital. Ultimately, that's the proof of the pudding, ultimately. That's what we want to focus on. We're in a process that we just don't control. We're working as hard as we can, and we'll give you as much as we can when we can.

Speaker 1

Great, thanks a lot.

Speaker 5

Yep.

Speaker 3

Our next question comes from Julian Mitchell at Credit Suisse.

Speaker 1

Thanks a lot. My first question was, you know, in terms of the energy business, you and Alstom have both had decent orders in that for the December quarter. Their outlook's fairly positive for March as well. Looking at your gas turbine volumes, you had an acceleration and a decline in thermal pricing in Q4 versus Q3. I wondered if there's a sense in which, although on the surface, sort of infrastructure projects are going ahead, you're actually finding that there are some delays going on. You priced maybe slightly more cheaper than normal just to make sure you got decent volumes in Q4 in terms of order intake. I think your thermal pricing was down in Q3 on the order side about 7 or 8%, and now it's down around 12%.

Speaker 5

You know, Julian, some of this is just geographic mix of where the orders come from. I think Dowdy tends to be slightly lower priced, and there were some big orders there in the quarter, stuff like that. Again, I go back to what we've said in the past, which is, first we start with commitments, then we go to orders. I'd say the pricing and commitments seem to be stabilizing. That tends to be the leading indicator of pricing. I think the difference between Q3 and Q4 is as much mix-driven as it is any more intensity in the marketplace. As Keith said earlier, there's a lot of interest. There's a lot of interest in gas turbines really on a global basis. Of the 50 orders that we took in Q4, I think only two were in the U.S., something like that.

I mean, we haven't even really seen much out of the U.S. yet. I'd say the commitment is a good leading indicator for 2013. What we're seeing in 2012 is no different than what we really expected.

Speaker 1

Okay. Thanks. Secondly, on healthcare, the profits are down there. I was intrigued to see the U.S., the comments around the U.S. being fairly weak. I guess Philips said the U.S. was good for them, obviously, with a very weak Europe, though. How confident are you that healthcare profits can grow in 2012, given you've got quite a high revenue growth base from the first half of 2011? Obviously, there's sort of persistent price deflation just by nature in the healthcare market.

Speaker 5

You know, when you look at the market in Q3, which is the last time we really have NEMA data, it was, I think, flat to up a couple of points. We gained a couple of points a share, 3 points a share in Q3. We haven't really seen the market data yet in the U.S. Our expectation for the U.S. market is kind of flattish in 2012, and that's kind of what we're building, have built our plan around. We're going to restructure Europe, which has already begun. We've got excellent emerging market revenue growth, which I think is both profitable and kind of fuels the earnings. Life sciences, strong. Our target for healthcare is revenue in the single-digit range and earnings in the single-digit range for next year. We didn't see anything as we closed the year that says that shouldn't be where the goals remain.

Speaker 1

Okay. Thanks.

Speaker 3

Our next question comes from Shana O'Callahan from Nomura.

Speaker 2

Good morning, guys.

Speaker 5

Hey, good morning, Shana.

Speaker 2

Can I ask you to fill out the, I guess, the 50 gas turbines orders a little more? You said a big Saudi, very little U.S. Maybe just a little bit more how that shakes out and what you're seeing in the different global markets. Do you expect that mix to change in 2012?

Speaker 5

Boy, it's incredibly spread out, Shana. We had four in Australia, one in Canada, four in China, one in Colombia, six in Egypt, five in Iraq, one in Japan, one in Korea, two in Russia, 13 in Saudi Arabia. It's just spread out. It's global activity, and you know, our teams are covering it. I think, Shana, gas is really the fuel of choice. I would say that with more confidence today than even in the past. The U.S. hasn't really started yet. You know, someday there's going to be a U.S. market.

Speaker 2

Okay. How about just a little bit more on Europe? You mentioned seeing more weakness in December. What's the pace of weakening that you're seeing? Are you seeing things accelerate to the downside? Maybe a little color on what you're seeing over the last six weeks or so.

Speaker 5

I think that the one that you really saw directly was in healthcare. You know, Europe was soft. Our orders in healthcare were down 10% in the fourth quarter. Our revenues were down 7%. You know, that's consistent with the framework Jeff talked about in healthcare. When you're dealing with governments and reimbursements and austerity programs, you know, that's probably what we expect to see. Across GE Capital, we actually had pretty good performance. Our asset quality metrics across Europe, across both commercial and consumer businesses, improved in the quarter on delinquency, 30-day delinquencies, and non-earnings. The team there continues to do a good job managing their books. I think healthcare is the one we saw a little. We saw a little bit in industrial systems. I don't think Europe was really worse than what we expected.

I think we're, you know, we're preparing for a recession, and that's what we expect. I think encouragingly, it looks like there's more liquidity in the market now than there probably was even 30 days ago. We'll see how it all shakes out. We're ready for, you know, a tougher environment.

Speaker 2

Okay, thanks, guys.

Speaker 5

Yep. Thanks.

Speaker 3

Our next question comes from Dean Drey with Citi Investment Research.

Speaker 2

Thank you. Good morning.

Speaker 0

Hey, good morning, Dean.

Speaker 2

Hey, I was hoping we could circle back to the newer lower target for E&I at GE Capital. I know that's welcome news on a risk management standpoint. You hinted about it in the December meeting. The fact you're not lowering any of the framework for GE Capital suggests that some of this progress on cutting the balance sheet there would come from the non-core assets. Jeff, you hinted at it and said there's a more open or willing market for that. Could you just take us through where the cutting and the reduction might come from in the timeframe?

Speaker 5

You know, first, Dean, I would say that revenue for capital in 2012, again, with lower E&I, will probably be down. You know, it's always hard to forecast revenue in GE Capital, but that's the one correction I'd make. I think earnings, we think, are still on track. One of the big ones is what Keith talked about in commercial real estate. I mean, there's just a lot more liquidity for commercial real estate. I think the guys were down for the year almost more than $10 billion in E&I for the year. You could see that very well in commercial real estate. There are just some other portfolios that are small in the U.S. that we think are going to be able to whittle away at the red assets. At the same time, incoming margins remain good. We've got a good origination team.

We think we can grow where we want to grow and continue to execute on the red asset plan. The plan we laid out, Dean, as Jeff said, was to lower the red assets. If you look at 2011, our ending net investment on a reported basis was down $26 billion. It's down $32 billion if you include things that end up getting transferred into discontinued operations and is taken out of the original number. $32 billion last year of shrinkage, $27 billion of that came from what we considered red assets. We still got $80 billion of red assets. I think the team is going to continue to run that off, and we're going to continue to invest in the green assets.

Just based on the fact that we're $20 billion ahead of plan on the ending shrinkage plan, our reality is probably in 2012 we're going to be smaller.

Speaker 2

Great. Is there any change in the expected contribution from GE Capital to earnings? Still that 30% to 40% and likely at the lower end?

Speaker 5

I'd keep it there for now. Yeah. I mean, the fourth quarter was about 40%. That's where we are right now on a run rate kind of. You have to see how we do in 2012, but we're not changing that target. I'd keep it there for now. I come back, Dean, and say the strategic priority, job one for the GE team in 2012 is to grow the industrial earnings more than 10%. That, in the end, is kind of a laser-like focus that we've got. I like the backlog we have to do it with.

Speaker 2

Great. Just last question for me is on cash flow. It's a bit stronger than what we were looking for in the fourth quarter. We'd expect a little bit more of a working capital build. Were the push-outs the reason you didn't have to do that? Or just true that up for us if you could.

Speaker 5

Your expectation came with the fact that through three quarters, we had built some inventory, and we had a little more working capital than we wanted in our plan. The teams did a great job in the fourth quarter drawing down that inventory. Our working capital used for the year was only $700 million on double-digit revenue growth, and we increased our turnover by a tenth of a point. The teams did do a good job in working capital. I think it was a, you know, we were behind at the end of the third quarter year to date, and we caught up and actually exceeded where we were expected to be in the fourth quarter. Progress was down a little over a billion dollars, and we only used $700 million of working capital while growing the industrial business 14%. It was a pretty good year.

Speaker 2

Great. Thank you.

Speaker 5

Yep.

Speaker 3

Our next question comes from Terry Darling with Goldman Sachs.

Speaker 2

Thanks. Good morning.

Speaker 5

How are you?

Speaker 2

I wanted to just continue down this path of changes to the 2012 outlook at the margin relative to December and maybe start over on the capital side. Keith, I wonder, did the pre-provision performance at capital in the fourth quarter, how did that perform versus your expectations?

Speaker 5

Capital came in a little better than we wanted in total. I don't have any specifics around pre-provision that came to mind in getting ready for today, Terry.

Speaker 2

Okay, in terms of the deltas.

Speaker 5

Is there anything specific you're looking for?

Speaker 2

No, just in terms of the deltas for 2012. I mean, beyond the faster turnover of the red assets, areas for upside to the capital framework, I'm curious about.

Speaker 5

Sure. If you look, there really hasn't been a change in the fourth quarter on that. As Jeff said, the only change would be we'll probably have the revenue be a little lower. You look at the margins, they are good. We're going to have continued significant improvements in real estate. That's our expectation. Losses will be slightly better. They're close to the run rate. Those would be some of the bigger drivers that we expect in 2012.

Speaker 2

Okay. I'll take a shot at this, one more shot at this energy horse here. You know, the lower U.S. natural gas prices impact on your short-cycle oil and gas business. I know it's not a big part of the company, but pretty high margins there. What are you seeing in terms of that risk element?

Speaker 5

No, I haven't seen anything specifically. The lower natural gas prices make it an attractive fuel, obviously.

Speaker 2

I'm thinking more on the drilling side.

Speaker 5

The drilling and production, we've had tremendous service orders that I saw in the quarter. I didn't see anything unusual on the equipment side.

Speaker 2

On the equipment side, that's helpful.

Speaker 5

We are still working on integrating everything we did with Wood Group. That gives us a much more presence on the land-based drilling and production. I didn't see anything unusual in the order base.

Speaker 2

Okay. Just a couple of points of clarification. On your comments on the Fed review, obviously, tough to characterize, but I guess can one interpret that as timing perhaps has shifted a little further out in terms of when you might anticipate things coming to a conclusion there? Is that fair?

Speaker 5

What did we want? We wanted to do the dividend starting with the year. As a result of being with the Fed, we haven't been able to do that. It's really just something we don't control. I really haven't ever laid out a timing, and they haven't given us a timing. We just are going to continue to work with them. Our goal is to do the dividend in 2012. We haven't changed that goal, and we think we're going to be able to achieve what we said. The timing is we haven't given one, and it hasn't changed for us. We're just working with them constructively.

Speaker 2

Okay. Lastly, any other items you want to call out for people to note with regards to the 1Q year-over-year comparisons? You called out the days issue. That's pretty clear. Anything else that you want to call out there? For instance, you saw only $0.03 restructuring in 4Q. You're talking about a range of $0.03 to $0.04. Do you have a heavier restructure in the first quarter of 2012 over 2011? Any other items like that you want to call out?

Speaker 5

I think if I look at first quarter of 2011, I don't see anything unusual in this year's first quarter of 2011. If you look at last year, you got to remember we had the NBCU gain. In capital, we had the large gain from the Guarantee sales. I think those are things that we're working through comparing to. In this year, I don't have anything that I would call out.

Speaker 2

Okay, thanks very much.

Speaker 5

Thanks, Terry.

Speaker 3

Our next question comes from Jeffrey Spratt from Vertical Research.

Speaker 2

Thank you. Good morning, everyone.

Speaker 5

Hey, good morning.

Speaker 2

Just a little more detail on energy pricing if we could. Jeff, could you elaborate a little bit on your comment about things firming up in commitments? When would you expect price on orders to inflect? Do you think that is a second half 2012 event?

Speaker 5

Jeff, I think when we look at commitments, the pricing is stabilized. That tends to be, let's say, anywhere from a 6-month to an 18-month cycle. I think the lead indicator suggests that the equipment pricing, as it goes into orders, is going to start stabilizing. It goes from orders to revenue. That's not necessarily a different scenario than what we've talked about in the past, I don't think.

Speaker 2

Right. Keith, I may have missed it, but can you give us the price and revenues in the quarter in energy, thermal, renewables, all in?

Speaker 5

The total was down 1. I don't have the split between the pieces. The total for energy selling price was 1% down.

Speaker 2

All right.

Speaker 5

For the company, it was a half a % down in total.

Speaker 2

Okay. All right. That's all from me. Thank you.

Speaker 5

All right, thanks.

Speaker 3

Our next question comes from Christopher Glynn at Oppenheimer.

Speaker 5

Thanks. Good morning. Hey, Chris.

Speaker 2

Good morning, Chris.

Speaker 5

Looking at, you know, through the initial resumption of GE Capital dividend, but noting the E&I targets coming down, is it reasonable to expect that future GE Capital payout ratio could be well above the historical payout ratios? Our goal that we've laid out is that we'd like to have GE Capital pay the same % of its earnings that GE pays to its shareholders. We're at about a 45% payout ratio, and that would be our goal. Sometimes in the financial services world, the discussion is that there's a 33% or 30% payout ratio at the banks, but there's also buybacks on top of that. GE Capital doesn't have that equivalent of a buyback. I think that's a reasonable expectation. That's what we're working on, is to start with 45% of GE Capital's earnings back to the parent, which would be above historical.

The second thing that I think that, you know, we're thinking about is as we shrink GE Capital, as we built up the capital base, we have excess capital, we believe, on top of whatever the target of capital that regulators are going to require for tier one for a very large, important financial institution. We haven't formally been notified that we're a CIFI. We aren't under anybody's Basel framework yet, but we're reporting like we will be. We believe we have capital levels that will, you know, exceed what the targets are that the banks will be held to. Our objective is as we shrink GE Capital is to dividend that excess capital back to the parent. Over the next several years, that could be several billions of dollars. That's our goal. We'll have to see how we do as we work with the Fed, but that's our goal.

Speaker 2

Okay. Next question. The answer might be obvious, but I'll ask it anyway. Are you buying any properties in commercial real estate?

Speaker 5

We're not buying any properties. We have done some debt investing, but we're not buying any properties. We're running the equity book down.

Speaker 2

Okay. Lastly, with the double-digit earnings framework for both capital and industrial, are you biased to one exceeding the other or too close to call?

Speaker 5

No bias. We want to execute well and have a good year.

Speaker 2

Great. Thank you.

Speaker 5

All right, Chris.

Speaker 3

Our next question comes from Jason Feldman of UBS.

Speaker 2

Good morning.

Speaker 5

Hi, Jason.

Speaker 2

On the energy service front, earlier this year, the federal court stated the CASPER rules, which we had expected to shift more fuel switching from coal to gas. Does that impact your outlook on the service side at all for this year?

Speaker 5

I couldn't tell you. I am not familiar with that. I'd have to get back to you on that, Jason. I do think the gas power is running harder. There's no doubt about it. I don't know that that specific change is material in the way we think about financials for the year.

Speaker 2

Okay. You know, balance of plant revenues come up when we're talking about the energy margins. I think the last two quarters, the last quarter, it was a bit of a headwind or maybe more than a bit of a headwind. This quarter, it sounds like on a year-over-year comp basis, it actually helped you. Can you give us a little bit more quantification of how much of a difference that made? Is that just kind of volatility that we just have to live with given the nature of the business?

Speaker 5

The only thing I have is that we were about $100 million lower on balance of plant in the quarter. Obviously, there was no margin really associated with that. It did help the margin rates a little bit, but it also contributes to lower revenue. That's the only number I had.

Speaker 2

Okay, thank you.

Speaker 5

Okay.

Speaker 3

Our next question comes from the line of Brian Lambert of Landmark & Company.

Speaker 5

Hi, Brian.

Speaker 2

Hey, Brian. Thank you very much. Hey, guys. Good morning. Two questions. The first one is, you know, with respect to the merger of GE Capital GEC. You're not a company that tends to let things play for like 20 years. Until recently, there was a reason to have that structure. Just touch on what operational and/or tax benefits have gone away, you know, with going from two to one, two structures to one. The second part is, you know, how much cost out do you think you can get to offset the $300 million of additional spending you need to do in the new financial world?

Speaker 5

Let me start with the first one. There was a good logic for GE Capital Services. We had a broker-dealer, Kidder Peabody, and we had significant insurance operations, both what is now Genworth that we call JEFA and also ERC. The insurance operations, the reinsurance operations, and Kidder Peabody were originally under JEX on the other side of the ownership, and then GE Capital Corporation was on the other side as part of the assets of GE Capital Services. The point is that over time, as we sold all the insurance businesses, as we got out of Kidder and the broker-dealer, really, the difference between JEX and JEK is almost insignificant. We have about $30 billion of investment securities, and we'll have the GE Capital team, Mike Neal and Jeffrey Bornstein and Bill Cary and those guys manage that now.

There's an insignificant change in our tax outlook as a result of this merger. It is just a collapse of two SEC registrants. Over time, it had a purpose, and today it has less of a purpose and actually just provides kind of confusion. In terms of cost, the GE Capital team's done a great job on SG&A. You

Speaker 3

Our SCA was actually down in 2011. It's despite the fact that we're investing like crazy in the regulatory side. They're getting good productivity in their back office, and they continue to do a good job managing their costs.

Speaker 5

In terms of collapsing two into one, is there a significant incremental cost to come out once the two structures go away?

Speaker 3

No, I think it's really, you know, in some of the accounting consolidation and reporting, it'll simplify their life. There's not a big cost structure at GE Aerospace.

Speaker 5

O-okay.

Speaker 3

Yep.

Speaker 5

Just the last question. You know, with aerospace, you called out some pre-buy in the third quarter, which is not something I'd really heard about from other aerospace players. I mean, just kinda looking at it simplistically, are you suggesting that there's a good $250 million of pre-buy in the third quarter on the aerospace side?

Speaker 3

It would have been orders for spare parts. I don't think that would have showed up in their cash flow yet. They're ordering. We report our average daily order rate. I can't tell you what the timing of when they actually took that was, but there was a, it was $29 million a day or something, $27 million a day in the third quarter of 20%.

Speaker 5

Mm-hmm.

Speaker 3

We didn't expect it to be that high. Basically, they're just, you know, getting in advance of our November price increase. In terms of when they actually took that material, that's not something I have.

Speaker 5

Okay.

Speaker 3

The prices in the third quarter were nowhere near as high as that. It really would have been ordering.

Speaker 5

Okay. Thank you very much.

Speaker 3

Yep. Brad, thanks.

Speaker 4

Our next question comes from John in support of Bank of America.

Speaker 5

Oh, thank you. Good morning, guys.

Speaker 3

Hey, John.

Speaker 2

Good morning.

Speaker 5

Hey, Keith. Just to clarify, do any of the quarters in 2012 have this day's issue as it pertains to the comparison versus 2011? I'm just going back to Terry's question.

Speaker 3

I asked the same question yesterday, and I've been assured that we're on a normal calendar comparison in 2012.

Speaker 5

Yeah. Okay.

Speaker 3

Happy to report, John.

Speaker 5

Right, no, that clears up that. Back to the restructuring. I want to split hairs. I thought the fourth quarter was maybe going to be $0.03 to $0.04. You did $0.02. Does that imply that there is sort of front-loaded restructuring this year? Maybe, Keith, if you could scope out what your thoughts are vis-à-vis restructuring in Europe. I know you talked about healthcare restructuring, but is half of this going to be Europe, front half? Anything you could maybe call out.

Speaker 3

Sure. I would say, first of all, what we talked about in December, we have a category restructuring and other charges. That was going to be about $0.03, and that's $0.03 to $0.04, and we did $0.03. It's not that we really pushed anything out. You know, we work with the teams on what projects can they identify that have a good payback, and can they execute? We ended up with the projects we identified. I would say over half of the projects that we funded in the fourth quarter are related to Europe.

Speaker 5

Mm-hmm.

Speaker 3

In healthcare and energy, if you look at going forward in 2012 in our plan, on a normal quarter, we're somewhere around $100 million of restructuring a quarter. Our plan is kind of built assuming that type of run rate. If we have more good projects, we may pull some in. We reserve the right. Just based from a planning and how we talked about that $3 billion of cost in the corporate line, that's how you should think about it, John.

Speaker 5

Okay, kind of linearly spread throughout the year then.

Speaker 3

Yeah.

Speaker 5

Lastly, Keith, the provisions for the capital were relatively flat sequentially. What's been happening to provisions in Europe? Maybe you could give us just an—I didn't see it in the supplemental. What was the ending asset, the financial asset base in Europe? I think it was $132 billion or something in the third quarter.

Speaker 3

I think Europe was down a little bit. I don't have the exact number. We'll get it to you. I don't separate provisions by region. I have it by business. Provisions were, if you look, reserves came down about $300 million. Some of that was write-offs greater than provisions. Some of that was FX, and provisions were flat in Europe.

Speaker 5

The question is really, you're not really seeing incremental losses associated with those provisions.

Speaker 3

Actually, no.

Speaker 5

Right.

Speaker 3

Like I said, the asset quality was actually better. The only thing in Europe that was unusual, I would say, was the two things. One is the Greek bonds, and the second thing, we put up some money in Hungary for mortgages.

Speaker 5

Right. Thanks very much, guys.

Speaker 3

Thanks, John.

Speaker 4

We have no more questions, so I'll turn it back over to you, Trevor.

Speaker 0

Thanks, Janelle. Five wrap-up comments to close here. The replay of today's webcast will be available this afternoon on our website. We will be distributing our quarterly supplemental data schedule for GE Capital later today. Two announcements to make. First, we'll host our global growth investor meeting on March 6 and 7 in Rio de Janeiro, Brazil. We hope you can join us. We'll have a full agenda that we'll be getting out next week on that, and it's pretty packed, so we hope to see everybody there. Second, our first quarter of 2012 earnings webcast will be on April 20. As always, we'll be available to take your questions. Thank you very much.

Speaker 4

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.