GE Aerospace (GE) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the General Electric First Quarter 2011 Earnings Conference Call. [Operator Instructions] My name is Tom, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Trevor Schauenberg, Vice President of Investor Communications. Please proceed.

Thanks, Tom. Good morning, and welcome, everyone. We're pleased to host today's first quarter 2011 earnings webcast. Regarding the materials for this webcast, we issued a press release earlier this morning, and the presentation slides are available via the webcast. The slides are also available for download and printing on our website at www.ge.com/investor. Due to the holiday tomorrow, we are reporting one day early, and we recognize this is a very busy earnings day for analysts and investors. To manage time constraints, we'll move through the presentation fairly quickly and we would appreciate if you could limit the questions to 1 per person during the Q&A period. As always, elements of this presentation are forward-looking . They 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.

Thanks, Trevor. Good morning, everyone. Just on the first page, just to give you an overview, I think another good quarter for the company. Just to summarize some of the highlights. Despite the general volatility, our environment continues to improve and get better. We had strong top line performance, and the leading indicators are getting better. We had industrial revenue growth of 8%, 5% industrial organic revenue growth, 12% international growth, with Brazil up, Australia, China and India. Infrastructure orders were up in the quarter, and had real strength in both equipment and services. Earnings growth continues, operating EPS was up 65%. GE Capital had a really good quarter as did Healthcare, Transportation and Aviation. Energy Infrastructure had lower first half but we expect growth to resume in the second half. A solid execution, the GE balance sheet continues to be very strong, and the GE Capital portfolio transformation is ahead of plan. And $82 billion of cash on the company's balance sheet. And we're executing a capital allocation plan kind of in line with what we've talked about with investors in the past. We announced our third dividend increase this morning, we're up 50% since the second quarter of 2010. We bought back $2.3 billion of stocks since we restarted our buyback, and we've either closed or announced substantial transactions really in our Energy business, one small one in our Healthcare business, so we continue to execute on our capital allocation plan. From an order standpoint, we have strong orders in the quarter, up 13% overall and 10% organically. Our strength was across the board, and backlog grew to a record of $177 billion. It's worth pointing out some of the positive trends in energy. We had strength in both equipment and services, pricing appears to be stabilizing and most importantly, large gas turbine quote activity is increasing. So we did see solid orders growth in the first quarter. From an execution and operations standpoint, like I said in December, we're investing more in research and development, about 12% more in the first quarter of '11. This is producing more new products, and that's helping to drive our orders growth. From a margin standpoint, we're down year-over-year. This is primarily in our Energy business due to 2 primary factors: Wind turbine pricing and acquisition revenues at lower margins. Overall, material deflation continued, and we should see deflation for the year. And through the year, our margins will strengthen quarter-by-quarter. So that's really the story from an execution and operations standpoint. From a cash standpoint, we remain on track for $12 billion to $13 billion of CFOA for the year. For the quarter, our results are impacted by the NBCU transaction and working capital growth to support equipment sales through the year. Overall, GE's balance sheet remains very strong, with $82 billion of consolidated cash, and $15.5 billion of cash at the parent. So a story of strong cash flow, liquidity and just strength in the balance sheet. I think that the things we've talked about with investors in the past, that all remains intact in the first quarter and we're really happy about that. From a capital allocation standpoint, we really are seeing balanced and disciplined capital allocation, and that remains an important part of our overall strategy. As we said last year, we wanted to redeploy capital from NBC Universal to fast growth in our Energy investments. And with Converteam and Dresser and Wood Group, Wellstream and Lineage, our major transactions are done for 2011. Meanwhile, we continue to emphasize growing the dividend as reflected by today's increase, our third in the past 9 months. We're focused on reducing our share count in 2011, and retiring the preferred equity by October of this year. And finally, GE Capital has very strong Tier 1 ratios, and we really have done, I think, an outstanding job. Mike Neal and the team have strengthened GE Capital coming out of the financial crisis. So we feel good about our capital allocation plan. I think in the quarter, we've executed on the things we said we were going to do for our investors, and this positions us, I think, for good long-term growth and as the year goes on and into 2012. So with that, I'll turn it over to Keith to go through the first quarter operations.

Okay. Thanks, Jeff. I'm going to start with the first quarter summary. For the quarter, we had continuing operations revenue of $38.4 billion, it was up 6%. Industrial sales of $22 billion, were down 6%, and the difference is created by NBCU. Our pretax gain that we have from the result of selling a majority stake to Comcast is included in revenue, but that also means we only had one month of NBCU sales in 2011 because we closed at the end of January. So I'll describe the gain on the next page, but a better indicator of our industrial revenue performance is on the right side. You can see we had $20.8 billion of Industrial segment revenue, and that was up 8%. Financial Services revenue of $13.2 billion was up 3% for operating earnings, which excludes our non-operating pension expense. We earned $3.6 billion, which was up 58%, and for operating earnings per share, we earned $0.33 per share in the quarter, up 65%. As Jeff covered, we delivered $1.7 billion of cash from operating activities, which was down 34% principally driven by NBCU. And for taxes, as we covered with you in January, we have a couple of large items that increased our tax rate for the first quarter. First, there's a large tax on NBCU, which I'll cover on the next page. The GE rate, x GE Capital, 68% for the quarter. But excluding the NBCU gain, the GE rate was 22%, which is in line with the low- to mid-20s range we gave in January. The second big factor that affects taxes in the quarter is that the GE Capital tax rate has also gone up, as we've expanded pretax income. The $800 million increase in tax expense is all explained by the tax on the $2.1 billion increase in GE Capital pretax income in the quarter year-over-year. On the right side, you can see the segment results. I'm going to go through each business in more detail in the next several pages. Industrial segment revenue was up 8%. Segment profit was up 1%, with all segments growing except Energy, and GE Capital had a very strong quarter driving the overall results. One other point on the memo on the bottom left, we said that we would communicate the amount of NBCU earnings every quarter. I'm not going to go into any details on the results. Comcast is going to cover that in their upcoming earnings call. However, for the first quarter, excluding the gain on sales, GE included $93 million of pretax income from NBC Universal. Before I get into the businesses, I'm just going to cover some of the other items that affected the quarter. First is the NBCU gain. As we said previously, we expected a small after-tax gain when we closed the NBCU transaction. As you all know, we closed at the end of January. There was a gain of $400 million after tax on this NBCU transaction. The pretax gain on our sale of NBCU was $3.6 billion, and that reflects Comcast's new ownership of NBCU, and our receipt of $6.2 billion in cash, and a 49% investment in the new JV. Because the JV is structured as a partnership, the taxes are recorded separately from the investment that we hold. So we had a very high tax rate on the transaction of $3.2 billion of tax expense, reflecting both our low historic tax basis in the NBCU assets and the recognition of deferred tax liabilities on our 49% investment in the JV. If you look down below on the page, partially offsetting that gain, we had $0.02 of after-tax charges in corporate, related to restructuring and other charges. We had some slight downsizing in Energy, Aviation and Healthcare, and we also had some capital defleeting. By business, just to give you the details of the charges. On a pretax basis, Energy was $66 million, Aviation was $66 million, Healthcare was $44 million, Capital was $58 million, Corporate was $48 million, and H&BS was $11 million. We also had $0.01 of after-tax deal-related costs that we took at corporate. Those are related to the Energy deals that we had. So the NBCU gain was a little higher than we expected, and $0.01 of that gain fell through to operations. One other point on the quarter, not on the page but we did have 6 more days in Q1 '11 versus Q1 '10 based on our fiscal calendar. We really don't have as much of a flow portfolio as we used to without Plastics and NBC Universal. However, if you look at the impact on our service businesses, on the flow businesses in GE Capital, and on Home & Business Solutions, we had roughly $0.01 positive from the additional days. On the other hand, we also had about $0.005 of negatives related to the disruption in Japan, and Japan's going to be covered by Jeff later in the pitch. So NBCU gained $0.04 in the quarter, and partially offset by the other items. For the business results, I'm going to start with GE Capital. Mike Neal and the team delivered another quarter demonstrating significantly improving results. Our revenue of $12.3 billion was up 3%. That includes the impact of the Garanti sale. We announced back in November, that we were disposing of our Garanti stake, and we estimated we have a $300 million after-tax profit on that, and then we announced that it was going to close in the first quarter. So if you adjust for the Garanti sale, which in revenue was about $700 million, revenue would've been down about 2%, which was in line with our framework. Pretax earnings of $2.3 billion in the first quarter were up $2.1 billion. They were within $50 million of the total pretax for all of 2010, so a significant improvement in pretax. Net income of $1.8 billion was up $1.3 billion. We did have the benefit of the $300 million after-tax of the Garanti gain. But even without that, GE Capital had a great quarter. We had $940 million of after-tax, lower credit costs and margin impairments year-over-year. Our volume was up 19%, that was mostly driven by the Commercial business, which was up 56% from last year. We had $10.4 billion of volume in the quarter. Our consumer volume was up 9% over last year, and the new business margins remain strong. The overall portfolio margin was 5.1% in the first quarter. As Jeff said, our capital ratios are strong and continue to improve, and we continue to see broad-based improvement in our asset quality metrics. So let me go through some of the business results that you can see on the bottom left. First is Consumer. Our Consumer business continued to deliver very strong results in the quarter. We ended the quarter with $147 billion of assets, which was down 7%, and that's driven by the continued run-off in our Mortgage and our Auto businesses. In the first quarter, our U.S. retail assets were up 7%, and consumer net income of $1.3 billion was up 120%. That included the gain from Garanti. Excluding the Garanti gain, net income of $940 million was up 65%, driven by $400 million of lower credit costs. Our U.S. Retail Finance business earned $545 million, up 88%, also driven by lower credit losses, as the portfolio performance continues to improve. And without including anything from the Garanti gain, our Global Banking business earned $281 million in the quarter, up 77%, also driven by lower credit losses. In the quarter, U.K. Home Lending earned $63 million, the sixth consecutive quarter with positive pretax and net income. Commercial Real Estate. Our Commercial Real Estate business is still facing losses as you can see, but we're seeing early signs of improvement. We lost $358 million in the first quarter, but that was $45 million to $50 million better than last year's first or fourth quarter. In the first quarter, we had $55 million of after-tax credit losses, and $315 million of after-tax margin impairments. And during the quarter, we sold 113 properties for $1.3 billion, with $28 million of gains. Our assets are down 14% year-over-year and down 2% from year end. And we're seeing some early signs of increased liquidity for our quality properties. We're seeing stabilizing rents and some places with rising occupancy. Overall, on the average, some improvement in the debt portfolio, 1% to 2% in values in the quarter, so better than last year but still challenging. Our Commercial Lending and Leasing business also had another strong quarter. Earnings of $554 million were up 139% from last year. The results there were driven by lower losses and higher core income from pricing and fees. It's pretty broad-based. The Americas were up 81%, Europe was up 24%, and Asia was up 90%. GECAS continues to have a good performance. The earnings of $306 million were down 3% from last year. The portfolio continues to be in strong shape. We had $16 million in non-earnings and 0 aircraft on the ground. And Energy Financial Service earned $112 million, which was down 27%, driven by lower gains year-over-year. So overall, a really strong quarter for GE Capital. Next is asset quality. In the interest of time, I'm not going to go through all the detail here. On the left side, you can see our delinquencies continued to improve across all the portfolios. Our non-earning assets declined by $500 million overall, and our coverage on our reserves to non-earnings was basically flat. On the right side, you can see our write-offs at $1.7 billion were greater than our new loss provision of $1.3 billion. So reserves came down by $400 million. Overall, reserves ended the quarter at $7.6 billion, and the coverage was down 5 basis points to 2.42%, as the portfolio performance continues to get better. Next, I'm going to shift to Energy, over to Industrial. Energy orders of $7.3 billion in the quarter were up 17%. Orders were up 10% organically. With Equipment, up 10% and Services, up 10%. The thermal orders of $730 million were up 57%. We had orders for 27 gas turbines versus 10 in the first quarter of last year. The orders price for thermal was down 6%. We had strong Aero orders of $387 million. They were up over 100%. And we had wind orders of $930 million that were down 22%. We had orders for 327 units this year versus 494 last year, and the orders price for wind was down 3%. Service orders of $3.9 billion were up 15% driven by strong power gen services and measurement control systems in digital energy. In the quarter, revenues of $7.8 billion were up 9%. That's 4% organically, driven by the higher volume. Renewables revenue was up 31% to $1.1 billion. We shipped 366 wind turbines versus 349 last year but the growth came from more 2.5-megawatt units, so we had some mix impact there. For thermal, the revenues were down 15%. We shipped 9 fewer gas turbines, 32 this year in the first quarter versus 41 last year. And service revenues of $3.7 billion were also up 9%. Segment profit was down 9%. The benefits that we received from the higher volume were more than offset by lower price on wind, and we had net $115 million of higher programs and global investments. And we also had a small benefit of $29 million for the results of Dresser and Lineage in the quarter. Bottom on the right, you can see Oil & Gas, orders for the business were up 7% driven by equipment orders up 11%, and service orders up 3%. Wellstream added 4 points for the orders in the first quarter. Orders here are also lumpy on a quarterly basis. We had a strong growth in petrochemicals and refineries, and strong growth in drilling and production, both up over 60%, and that was partially offset by lower orders in both Turbomachinery and the Natural Gas segments. Revenues of $1.8 billion in the quarter were up 12%, driven by the growth in equipment, up 17% and good strong services, up 6%. And segment profit of $199 million was up 4%, as the benefits of higher volume and deflation were partially offset by negative foreign exchange and higher program investments. So overall, we expect Energy to continue to be down in the second quarter, and then we will see Energy returning to growth in the second half of the year. Now we don't have the businesses split in the technology infrastructure anymore, so I'll cover them separately. We'll start with Aviation. Aviation market remained strong in the quarter. Orders of $5.1 billion were up 14%. Commercial engine orders of $1.2 billion were up 111%, driven by GE90, CFM and Small Commercial, and that was partially offset by military engine orders of $600 million, being down 36%, principally driven by less funding on the joint strike fighter. The equipment orders price was down 0.4%. We ended the quarter with a backlog of $20.4 billion, up 3% versus last year. In the quarter, service orders of $2.8 billion were up 14%, driven by strong spares. In the quarter, our commercial spare parts orders were $25.4 million per day. That was up 32%, and that was partially offset by military services, which were down 1%. Revenue of $4.4 billion was up 5% driven by the equipment, up 3% and services, up 7%. Segment profit, $841 million was up 5%. That was driven by the higher volume, it's driven by positive pricing, and that was partially offset by no repeat of the first quarter '10 service franchise fee with Texoil that generated $74 million last year. And as we go through the year, R&D and launch costs are going to continue to ramp up in the second, third and fourth quarter. On the right side, Transportation had a very good quarter. The market continued to improve. Domestic rail lines were up 5%, parked locomotives were down 5% from year end. The orders of $938 million were flat. But that included one multiyear locomotive order last year for almost $300 million that didn't repeat. Service orders were very strong in the quarter of $500 million, up 25%. And our equipment backlog closed at $4.1 billion, up 40% over last year. Our revenues of $900 million were up 18%, driven by higher volume. Equipment revenues were up 12%. We shipped 30% more mining and off-highway vehicle units, and locomotive revenues were about flat. Service revenues were up 23% on the strong parts sales. And segment profit of $157 million was up 37%, reflecting the higher volume in the stronger services. Next is Healthcare. Our Healthcare team delivered another quarter of positive growth, while they continue to reinvest. Orders of $4.1 billion were up 9%. Equipment orders of $2.1 billion were also up 9%, driven by Healthcare Solutions, up 10%. We saw a strong growth in Healthcare Solutions. Just to go around the world a little bit. Eastern Europe and the Middle East were up 37%, China was up 18%, India was up 41%. And then in the developed world, Europe was up 2% and the Americas were up 5%. Service orders in the quarter were up 9%, and the equipment backlog of $3.9 billion ended up 6% versus last year. Revenue of $4.1 billion was up 10%. It's pretty broad- based. If you go by product, ultrasound was up 21% in the quarter; devices were up 13%; CT was up 13%; MR was up 3%; Life Sciences were up 15%; X-ray was up 6%; and services were up 8%. And then, segment profit of $531 million was up 7%, and that was driven by the higher volume, it was driven by positive productivity, and that was partially offset by negative price and about $50 million of higher investments in new products. And finally on the right side, you can see H&BS, we had revenues of just under $2 billion. They were up 3%. We had strong revenue growth in intelligent platforms. Their revenue was up 19%, lighting was up 6% and appliances was down 1% in the quarter. The segment profit in the segment was up 4%. We continue to see lower pricing and pretty heavy discounting in the appliance market. Lighting continued to benefit from our prior restructuring. And for the year, we still expect H&BS to be about flat as we ramp up, again, more new product investments. So with that, let me turn it back to Jeff.

Great, Keith. I thought I would give you a brief update on Japan where I visited two weeks ago. Our first priority is to support our people through humanitarian efforts, and offer technical support to our customers and we're doing all of those things. We're also providing substantial power generation equipment to help meet the country's needs in 2011 and '12. Financially, as Keith mentioned earlier, we experienced about a $50 million negative earnings impact in the first quarter in Healthcare, Energy and Capital. Going forward, we see limited supply chain and market impacts for the year. I'd say, it's more or less in balance. It may impact timing but overall results probably won't be impacted for GE for the year. Again, we're very focused on helping Japan recover and rebound and rebuild, and our teams are working diligently to support our customers in Japan. Now to update the 2011 operating framework. Industrial is about as planned, with Energy, as Keith said, turning positive in the second half of '11. We really believe that acquisition integration, and we're really encouraged by an increase in gas turbine quote activity. We think those factors give us good momentum for our Energy business as we get to the second half of '11 and go into 2012. GE Capital, as Keith reviewed, is improving rapidly, really, in every dimension. And corporate is about as planned. So for 2011, we really see some very solid operating earnings growth. CFOA, between $12 billion and $13 billion, mid-single-digit industrial organic growth. And I would say after the first quarter, we're even more confident in the 2011 operating framework for GE and the outlook going forward. So just to summarize again some of the high points of the quarter. I think capital allocation is key for GE. We've announced our third dividend increase in the last 9 months, up 50% in that time period. The buyback and dividend take priority as we get to the second half of the year. I think we've executed a good acquisition strategy as we redeployed capital from NBC Universal into the Energy business, and we plan to redeem the preferred shares in the fourth quarter. Very solid GE Capital earnings growth, higher margins, we're having good asset growth in target segments. Losses are declining, and the balance sheet is safer and stronger. I think we're in really good shape for accelerating industrial earnings growth. It's positive in 2011, should accelerate in 2012. All the precursors are in place, good equipment orders, backlog growth, good service orders and international growing double digits. And we're investing to build competitive advantage. R&D is in place. I think, the new products that we're launching are showing up in our increasing order rates. The global growth of 12% says we're participating in the parts of the world that are experiencing growth, and the strategic acquisitions in Energy and Healthcare, I think, really position those businesses well for the long term. So that's an update on the quarter. Trevor, let me turn it back to you, and we can take some questions.

Thanks, Jeff and Keith. Tom, I think we're ready to open the lines for questions now.

[Operator Instructions] And our first question comes from the line of Julian Mitchell with Credit Suisse.

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

Well, look, Julian, I'd say that the outlook does feel a little better. If you remember at the end of the year when we met and talked about what the outlook was going to be, we had about 112, 113 gas turbines last year in shipment. We said we'd be down about 10. Today, the team is working on looking at opportunities to maybe, be at least flat, and put some more in the production schedule if we could to be prepared for the growth that we're seeing some incoming orders, activity, inquiries and things like that, that we're working on. Obviously, the Middle East has been very strong for us and continues to be strong. We had one order in the quarter out of the orders we had for gas turbines in the U.S. So I think that, that's an activity that has to pick up as we go forward. And clearly, as Jeff said, we're really trying to help our customers in Japan. There's an awful lot of capacity that's out, and they're trying to put as much power in place as they can to prepare for the summer, and also to deal with the fact that they've got to replace a lot of power. So I think the team is cautiously optimistic about it but the outlook is good. We're ramping up the PSI, our outlook for production a little bit in the business. And for 2011, it might be at least flat, maybe better, and 2012 should be better on top of that.

I think, Julian, there's a confluence of maybe, 5 factors that are going on more or less at the same time. One is clearly, global growth in the emerging markets, the second is the need to provide more infrastructure as part of the Japan rebuild. The third is lower natural gas pricing overall. The fourth would be wherever the environmental standards end up in the United States. And then I think the fifth is -- and this will be decided by our customers, not by us, is where does the long-term capacity get added vis-a-vis cold nuclear gas, as people add new blocks of power going forward. So I think all those things make us a little bit more bullish on the gas turbine market.

Thanks. And just a quick follow-up, the pricing environment, I guess it's now -- it's a little bit better in terms of the year-on-year decline on thermal pricing in Q1 versus where you were in Q4. But we saw one of your global peers today, they're joint venturing the boilers business with someone in China. So how do you see sort of the competitive landscape? Is there much changing for you or you think that as volumes recover, pricing will naturally pick up and the order intake in the second half as well?

That's been the historic pattern, Julian. I think it's -- Energy tends to be a later cycle recovery item. And so the pricing you saw last year was really what played out in the first quarter, and that's historically been the pattern of, I would say, price activity. The good news is...

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

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

Great. Thanks.

Okay. Thank You.

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

Just wondering if we could clarify, just taking a couple of questions on the Garanti gain, was that in your operating framework before, and we just didn't know exactly the timing? Is that the right way to frame it?

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

Perfect. Okay, that's helpful. And then just coming back to the comment on Energy margins, I think. I thought I heard Jeff indicate that, that should improve throughout the year. And then, Keith, I think I heard you say, down in 2Q, up in the second half, maybe you were talking profit dollars, and Jeff was talking percent margins, but could you just clarify that?

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

The first quarter is the lowest.

First quarter is always the lowest for us, total company. And I think Keith was talking more just Energy.

And I think the direction, the gap that we saw in Energy quarter-over-quarter, that profile, it's driven by factors that will continue through the year. The renewals pricing, the higher investments in programs and global growth, and then the dilution from the acquisitions. That profile is pretty similar as you go through the year for Energy itself.

Okay. And then just shifting over to Aero, I wonder if you'd talk about any update on profile of R&D and implications for margins for Aero overall. You've got a lot of pieces in the mix there, with the aftermarket getting a little better, maybe you can just break some of those pieces down, and talk about military too?

Well, the profile for R&D for Aviation, R&D plus launch costs has not changed for us for the total year. We do expect to have that ramp up as we go through the year. The R&D actually was less in the first quarter year-over-year than last year, based on some timing issues. But through the year, we expect to see a ramp-up of the GEnx, obviously. We shipped 13 GEnxs in the quarter. As you know, the 787 should be certified and delivering in the third and fourth quarter. And the 747 with the GEnx on it is already just about through all of its certification testing. Engine is done and the plane is still finalizing. And so those are going to ramp up, and R&D is going to ramp up, as we ramp up on the TechX and the LeapX. So I think as you go through the year, you're going to see continued reinvestment in Aviation. But the offset is the strength of services. We feel pretty good about it. We were looking for when are you going to see it last year based on utilization improving, our revenue passenger miles, and freight passenger miles up. And you can see that in the order rate up 30%. We feel pretty good about that order rate, and the outlook from the team is that, that should continue to be strong for us.

And then Keith, could you just refresh us on what that year-over-year increase in Aviation R&D is now expected at?

For Aviation, it's just on R&D itself, it's supposed to be up, I think about, just one second.

For total year.

For the total year, it's supposed to grow about 15% to 20% to about $1.7 billion.

Okay. Great. And then last...

Somewhere in that range.

Just lastly, obviously, nice to see that stronger performance at GE Capital. And Jeff or Keith, I wondered if you could comment on the potential that, that better performance pulls forward the confidence in the GE Capital dividend back to parent, and implications for buyback and additional dividend increases from a timing standpoint?

We're obviously feeling pretty good about the progress in GE Capital. You can see the capital ratios, you can see the pretax earnings growth, you can see some stabilization in real estate. So I think all those signs are good. There are some uncertainties we have, as you know. The Fed will transition to be our regulator in the summer here. So I think the team feels good about it. We've made a lot of progress. We think we're going to be above what the levels are of capital that are required for all the different criteria, but that isn't exactly finalized, as you know as well. And then we've got to transition to a new regulator. So our objective is to, as you know, at a minimum, pay a dividend in 2012, and if we could work on that, and earlier than that, obviously, we would love to do that. But right now, the only thing we have in the plan is that we'll restart the dividend from Capital in '12. But obviously, the progress continues to be pretty strong. And I think it was also encouraging when we saw what the banks were able to do this year between the dividends and the buyback based on their capital and stress case plan. So we're going to work on that.

And the only thing I would add to that, Terry, is look, I think the major transactions we had planned on doing, we've done. And so dividend and buyback, I think take a higher priority as I look at the rest of the year. So I think that's the way I would -- that's the perspective we have. We liked the deals we did. We think they were opportunistic and strategic, and help our Energy business. But again, I think what Keith said, we feel really great about where GE Capital is positioned. And I think priorities in the second half of the year will tend towards dividends and buyback.

We'll look forward to it. Thank you.

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

I want to switch gears and talk a little bit about Healthcare, and a couple of things. I think, Keith, you said that R&D was up $50 million in the quarter. Now maybe you meant for the year, so some clarification on that? And then maybe you can talk about why R&D has had to come up in this business? I mean, my understanding was that, there was a bit of a pullback in the arms race, if you will, that would require less R&D spend with Healthymagination, is that -- am I reading things wrong?

First, let me clarify, we did have about $50 million of increased spending year-over-year in new product launches, about 30 of that was related to our Home Health joint venture with Intel, so that's a new business we've gone into. And also, investments in our Solutions business, the consulting business that we're growing, and providing a lot of help to hospitals as they manage the need to lower their costs and become more efficient. So about $30 million of that's there. And then about $20 million is higher NPI for new products. We launched about 45 or 50 new products in the quarter. So we have just really ramped up R&D globally. Omar Ishrak has got control of the entire business, and he's got a terrific model where we have breakthrough technology, and then we flow that down through the product line. And we're trying to make sure we have products at every price point, as we participate in these global emerging market growth opportunities. So I think in some cases, a couple of years ago, we were behind in MR. We've caught back up, and we've got a great position in CT. And today, I think the team really likes the position we have across the entire product line.

But, Scott, I would just add to what Keith said to say, look, we expect this business to have operating profit rate expansion for the year. Productivity cost, our share position is good to improving, and I fully expect Healthcare to have operating profit rate expansion in 2Q through 4Q.

I totally agree.

You mean an expansion beyond the 7% you showed this quarter, is that what you mean, Jeff?

Yes, I mean...

Absolutely.

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

Okay. I totally understand. Okay, I know it's early days of Japan and the tragedy is there but that's a big part -- it's a fairly large Healthcare market overall, and I think it's a fairly important part of your overall mix, if memory serves me right. But what do you hear from the local guys? I mean, is there going to be money diverted from spending on things like Healthcare for the rebuilding effort, does it not change? I mean, is there any sense at all of direction or is it just too early?

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

Okay. And last question, Keith, some of your competitors and GECAS competitors, ILC, et cetera, have taken write-downs in their fleets to reflect a couple of changes. Obviously, new aircraft that's efficient, higher oil prices that's kind of up, increase the obsolescence of some of the craft. I mean, is the GECAS portfolio as you see right now, pretty much mark-to-market?

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

Okay, very helpful, thanks guys.

Thanks, Scott.

Your next question comes from the line of Steve Tusa with JPMorgan. Stephen Tusa - JP Morgan Chase & Co: Could you just talk a little bit more about the outlook for gas turbines in the U.S.? So you're talking about only having one order there, and a lot of the activity's in the Middle East. When you talk about it, the actual quotation activity, could you maybe give us some parameters around -- I know quotation activity is a high-level comment. But is there any way to tell us what kind of the magnitude is in the activity globally? So is it 50-50 U.S.? I'm just curious as to the plans of your customers in the U.S., what you're seeing there?

No, I don't have any specific numbers on quote activity in the U.S., Steve. I mean, I think what we're basically looking at is, the dynamics have really changed subsequent to the disaster and tragedy in Japan. You see people canceling their plans to continue development of new nuclear plants. Clearly, coal has issues from an environmental perspective and it's challenging from a cost and technology perspective to be competitive. We've put a lot of renewable energy into the system, especially in the U.S. but globally, and with gas prices where they are, that's a challenge to make that as economic as it needs to be for its financing. And so you come back to what's going to be the power of choice, it's going to be gas. And we think we're well-positioned there. We still have reserve margins here in this country, but as you look at retirements and replacement and then new economic growth, we think the outlook is going to be pretty good. I don't have a specific order quoting numbers, and I don't know even if I had them, whether I'd tell you what they were. Stephen Tusa - JP Morgan Chase & Co: Right, I guess, not specifics but just in general, is it -- are you -- it sounds like you are seeing a pretty nice uptick in dialogue with the U.S. customers, I guess, that's more of the question at a high level?

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

Totally, you look at Russia, you look at...

You just have a lot of other stuff going on. Iraq, Phase 2, Russia, as Keith said. There's more interest in China today in gas turbines.

Saudi Arabia needs power.

So it's all that kind of activity that we're seeing as well. Stephen Tusa - JP Morgan Chase & Co: Okay. And then one other question, this is just in the news the other day, the only reason why I'm asking. But the Board reset the comp package, I guess, talking about operating cash flow at a minimum of $55 billion over a 4-year period. And then I think there was something about outperforming the S&P 500 as well. I'm just curious as to the message that you want us to take away from that. Because the operating cash flow number, I think, over a 4-year period is only really up modestly from where we are today. And then outperforming the S&P 500, is that the way we should think about GE stock as kind of a comp versus the S&P 500, as opposed to more of the industrial peers, like the other guys in our sector? I'm just kind of curious as to the message or at least the message that you would like to kind of have us take away from that change?

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

Those were the same targets that we have...

Those were the same targets that we had in place...

All we did was took out the 2010 cash flow. Stephen Tusa - JP Morgan Chase & Co: Right. Okay, thanks.

Your next question comes from the line of Jason Feldman with UBS.

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

Jason, I think on the channeling law it's really clear, and been written about by a lot of different people. And so I just, I think, all of the things we've said in the past still hold true today, and we haven't seen any indications that, anything that would counter that, and mainly because I think it is so clear.

On the other exposures, as you said, we had -- we put a little bit up for property damage in Japan, $15 million and then some reserves, $15 million in the CLL business. But other than that, we really haven't seen any direct impact. We've got real estate, we've got commercial loans and leases, we've got Aviation there and we did a pretty good review of our portfolio with the teams. On Shinsei, on the Grey Zone, we have seen elevated claims as part of the Takefuji bankruptcy as everybody knows. Those claims really started to decline after the bankruptcy period closed, and they've continued to decline in April. And right now the trend on claims looks pretty good. However, we're going to have to see how they normalize in Q2 and Q3. But it's obviously hard to determine what are some of the events that drove some of those claim declines in this period, given some of the challenges in Japan. But right now, the trend looks pretty good.

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

Well, positive. I think we're investing a lot in wind, obviously. We're shipping a lot of 2.5-megawatt units, which are a good value proposition. We're doing a lot globally. So we're investing a lot in wind, and we think the business has a future. I think right now we're dealing with just the decline in the U.S. market and the change in margins that we had in that market. But overall, we're very committed to it, and I think you must have seen recently our investments in solar. The announcement that we're going to build a very large solar plant here and have the highest efficiency in the marketplace for thin film solar. So renewables is a big part of the business. I think it's going to be a part of our portfolio, we're investing a lot in it, and we're just kind of weathering this decline in the shipment of the very profitable U.S. backlog and then the replacement of that, in the wind business.

Great, thank you very much.

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

Actually, GE Capital had a great quarter, but maybe you could just take a minute and go through the reserve walk. I mean, you went by that pretty quickly in the summary. It looks like, you say the write-offs, I think, greater than the new provisions. And that's a big reason why reserves came down, I wonder. But maybe just give us a view over the balance of the year, Keith, and what we should expect there. Other than [ph] x Garanti, the numbers are good. Should we expect sequential earnings growth out of GE Capital?

Well, just first on the reserves, I think the profile, we'll continue where you see write-offs higher than the new credit costs provisions. If you look at the percent of the new credit cost provision, it's somewhere around 1.45%. That goes back to what I would call more normal historical levels, Bob. So I think that probably is a good indicator of what we could expect going forward, as long as this portfolio continues to demonstrate improvements in delinquency and non-earning. So I think that dynamic will continue. If you look at provisions, new provisions for losses, it's somewhere around that level. The other dynamic that you have is the impairments coming down, and that's going to depend upon how we see the market for the real estate equity book. And as I said, we've seen some positive indicators there. And year-over-year, it's obviously down quite a bit. So I think the outlook is pretty good for improvements and profitability, driven by lower credit losses. You see it in the fourth quarter, you see it in the first quarter, and I don't see any reason why that wouldn't continue. For the total year, how do we feel about it? Obviously, if you look at GE Capital's results, they're better. You take out Garanti, and even if you normalize for not having Garanti's earnings going forward, you're going to see a terrific performance out of GE Capital this year. As Jeff said, we feel very confident about our framework.

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

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

And second question from me. When I was trying to ask a question earlier when I was on mute about the joint strike fighter engine. I mean, you're going to continue to work on that engine for a while. But what is sort of the GE view of that engine? And might you continue funding the development of that engine? I understand it's nearly complete, what's the outlook there?

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

Our engine actually has been the model engine in the whole joint strike fighter program, which is over budget, not our engine. So it's really...

So we're going to keep the team together.

Okay. Thanks you, guys.

Great. Thank you, Bob.

Your next question comes from the line of Shannon O'Callaghan with Nomura.

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

We feel pretty good about the progress here, but we have a plan to continue to run-off the red assets and grow the green assets. And you can see the run-off of the red assets is happening faster than we thought. We've had more success with dispositions. I think that's been very positive and maybe given us a little more room for growth on the CLL side even earlier than we thought. And our investments in the green assets, the growth in CLL volume, the growth in the consumer volume have been very strong. So we're not planning on going below the 440 ENI [Ending Net Investment] target for 2012. We plan on getting there in an orderly way, and I don't see any change to it.

Okay. And on the Commercial Real Estate piece, I mean, in the last couple of quarters, you have been able to sell a decent amount of properties at kind of a small gain. Could we see some of the opposite of maybe, some opportunistic sales of other pieces at losses? Or how do you think about winding that down and opportunities now that things have stabilized?

It depends on the economics, really. If we believe we've got value on the property, we're going to do what we need to get the most attractive value. And I think our headset on that has proven out over and through this cycle. I would not anticipate large sales at significant losses in the Real Estate business. We believe in our properties and our values, we feel like we're going to be able to recover them on the equity side, and that's coming through. We're also reducing our basis, obviously, with depreciation and write-offs. And we feel pretty good about the outlook. So we'll be opportunistic, but I don't see big sales at significant losses.

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

Well, we haven't really given much of a forecast there. I'd say if you look at the rates in the first quarter, the GE rate x GECS was 22%, x the NBCU gain. I wouldn't expect the rate to be higher than that for the year. There are some -- as we go through the year, other opportunities the teams are working on that may bring that down slightly, but we'll be around the 20%, I would say, for the year would be the estimate today. And on the GE Capital rate at 18% in the quarter. I think you're going to be in the mid-teens for GE Capital as you go forward. I mean, we had a pretty high tax on the Garanti gain. And other than that, the entire profile of GE Capital was a normal rate on the pretax earnings and our benefits, our structural benefits were a little under $400 million, which is probably the run rate for the year today.

Okay, Great. Thanks a lot.

Your next question comes from the line of Steve Winoker with Sanford Bernstein. Steven Winoker - Sanford C. Bernstein & Co., Inc.: I'll keep it to one. You've covered a lot of ground. China, give us a sense, if you could, for what you're seeing, the impact, you've given some of the macro, Energy complex decelerating, what you're experiencing there and maybe overview? Thanks.

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

A little higher.

A little higher. Aviation's got an outstanding backlog. And that, I think, is pretty secure. We won a lot of business last year, which will play through. And like I said earlier, the 12th Five-Year Plan really emphasizes environmental investing. So I think we're going to see some good opportunities in our Energy business as we go through next year as well. So top line, I think was 12% revenue growth, and we don't see anything that seems to suggest it should be less than that as we go through the year. Steven Winoker - Sanford C. Bernstein & Co., Inc.: Okay, thanks.

Good. Thank you.

And your next question comes from the line of John Inch with Bank of America.

Just as a quick clarification, there wasn't a restructuring offset to the Garanti banking, was there?

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

Yes, okay. I just wanted to make sure there was nothing else. The upcoming -- so my question is the upcoming stress test with the Fed, is there -- I mean, how are you guys thinking about your real estate book? I mean, I'm just sort of trying to think if -- what could be a land mine is, the fact that you sell these embedded losses in your real estate book that's not really accounted for the same way as, say, the banks do. Could that be some sort of a source of pressure that they would say, "Look, just write this down" and kind of all systems go type of things? Or how do you think we should think about it?

I don't think so. I think you should think that we have been doing stress tests a couple of times a year. We do have regulators, we're regulated by the Office of Thrift Supervision, in the FDIC. And we do, do stress tests 2 times a year, and we do have to basically think through and be comparable to what the banks go through with their formal SCAP tests. So I would say that we've been through it a couple of cycles now, and we feel pretty good about the process we use and the stress that we put our portfolio through, to make sure that we have enough capital and enough liquidity. But the only difference is that obviously, as you say, it's a new regulator. But we've got a lot of input. We're dealing with a lot of third parties, who are obviously, industry experts. We've hired people from the industry to help us with this, who are on our team directly, who are industry and regulatory experts. And I don't think that, that's something different that could be dramatic as we go forward here.

Right. Thanks, Keith.

Our next question comes from the line of Chris Glynn with Oppenheimer. Christopher Glynn - Oppenheimer & Co. Inc.: Thanks. Just one on the gas turbine side, just switching over to wind quickly. Any thoughts on what you're seeing in market share-wise there, taking advantage of the downturn, I know you weren't afraid to use price, and then thoughts on an eventual recovery shaping up there?

Well, I think as the AWEA data came out in January, I believe, we had about 50% market share in the U.S. and then smaller in Europe, and the rest of the world. I'd say in the first quarter, a lot of our deals were in places like Brazil, Canada, things like that. What I've always thought, Chris, is that we really do have the lowest cost and the highest reliability in the industry. And I include in there the Chinese competitors. So we have -- it gives us a lot of strategic flexibility when we look at the space, and so even as the market goes through cycles, I think we approach it from a position of strength. I don't think we have anything in mind today. But if you just look at the landscape -- and we've always had a philosophy of having broad fuel capability, so that we don't have to -- we're in nuclear, we're in coal, we're in gas, we're in wind, we're in solar, we're in a lot of different things. I like our position in gas turbines and wind turbines, and I think it's going to play out over the next 3 to 5 years that those too will have a good future.

I think the one thing you see happening in our Wind business is we're becoming better globally. We had such a terrific position in the U.S. market. But today, with the market where it is in the U.S., we are really competing effectively globally and that's going to make us a better business. And the second thing, obviously, is the offshore wind business, which is going to grow, and we're investing and we should have a significant position there as well. So as we said earlier, we like our position in wind and we like the outlook for the business. It's just we're working our way through this backlog that was pretty lucrative but the margins on the new orders are lower. Christopher Glynn - Oppenheimer & Co. Inc.: Got it. Thanks a lot.

And your next question comes from the line of Nigel Coe with Deutsche Bank.

Trevor, we're over an hour here, so I'll keep this really quick. Jeff, I thought the timing of the dividend announcement was interesting. And I just wanted to know, what is the message you want to convey with that dividend increase? And then secondarily, are we into an era of opportunistic dividend increases, or is your intention to go back to sort of an annual December announcement?

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

Great, thanks.

Our final question comes from the line of Deane Dray with Citi.

Just to stay on the topic of capital allocation, we got the message, focus on dividends and buybacks, acquisitions basically done for 2011, how about divestitures? I know I've asked this before and, Jeff, you said this is the best portfolio you've had since you've been CEO. But are there opportunities for further portfolio reshaping?

Deane, I just don't see it right now. Again, I think what we're -- what we want to do is run the portfolio, the capital and thus, the infrastructure capital portfolio we have, get very well -- execute well in '11, good position for simultaneous industrial and financial service growth in '12 in that portfolio, generate a lot of cash and have a lot of optionality around what we do from a capital allocation standpoint. So I just -- I think, we're going to generate a lot of good cash flow this year. I think a lot of people have asked about the capital dividend. Our expectation is that capital restores its dividend at some point, and that provides additional cash over time. And so I just want to -- we want to execute this play with excellence, and our investors will benefit from that.

Great. Thank you.

Thank you, everyone. Just a couple of housekeeping items and some announcements here. The replay of today's webcast will be available this afternoon. We will be distributing our quarterly supplemental schedule for GE Capital also later today. And here's a couple of announcements. Next week, on Wednesday, April 27 is our 2011 Annual Shareholders Meeting in Salt Lake City. We hope to see you there. On May 18, Jeff will be presenting at the annual EPG conference. So that will be the next big presentation. Our second quarter 2011 earnings webcast will also be held on July 22, for your calendars. And then finally, we will be hosting a GE Energy meeting with special emphasis on Oil & Gas later this year on September 20 in the afternoon. We'll provide you more details regarding the meeting logistics at second quarter earnings but we do expect to hold this meeting in the New York area. And as always, Joanne and I will be available to take your calls and questions today. Thank you, everyone.

Ladies and gentlemen, this concludes your conference call. Thank you for your participation today. You may now disconnect.