GE Aerospace (GE) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the General Electric Third Quarter 2012 Earnings Conference Call. At this time all participants are in a listen only mode. My name is Chanelle and I will be your conference coordinator 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.

Thank you, Chanelle. Good morning, and welcome, everyone. We are pleased to host today’s third quarter 2012 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 on our website at www.ge.com/investor. As always, elements of the presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. For today’s webcast we have our Chairman and CEO Jeff Immelt; and our Vice Chairman and CFO Keith Sherin. Now I’d like to turn over to our Chairman and CEO, Jeff Immelt.

Great. Trevor, thanks. Good morning, everybody. Look, we had a good third quarter in a challenging environment. Europe is tough; Asian resource risk countries are okay and U.S. had packets of growth but still some uncertainty. Revenue growth was good in the environment with organic growth up 8% in the quarter and 10% year-to-date. We finished the quarter were $203 billion of backlog. Earnings were solid growing at 13%. Both industrial and capital had double-digit earnings growth in the quarter. Every industrial business had positive earnings growth for the first time since the third quarter of ‘05.And our simplification efforts are yielding results with corporate costs ahead of plan. Margins grew by 70 basis points consistent with our expectations. CFOA is up 63% year-to-date and we’ve repurchased $3 billion of stock. Importantly in this environment we remain on track for our 2012 framework. For orders, orders were 21.5 billion, just in context for orders, factoring in some of the big items. They were up 4% ex-wind and excluding the impact of foreign exchange. Orders pricing was positive for the quarter and year-to-date. The down cycle and wind is as expected and gas turbine orders were fairly strong. We saw about $1 billion of orders push out from third quarter to fourth quarter and our backlog position is strong as we enter the fourth quarter and facing into 2013. Our key growth engines remain on track. In fact every industrial business had positive organic growth in the quarter. Growth markets expanded by 9% including in China, up 23%, Africa up 22% and Latin America up 21%, we expect six of nine growth regions to have double-digit order growth at ‘12. We had the highest services backlog in our history with expanding margins. And we’ve launched successful products including the Flex 60,…

Thanks, Jeff. I’m going to start with the third quarter summary. We had continuing operations revenues of $36.3 billion. That was reported up 3% ex-FX. Revenues were up 6%. Industrial sales of $24.7 billion are up 7%, 10% ex-FX. GE Capital revenues of $11.4 billion were down 5% as we continue to reduce our assets. And our operating earnings of $3.8 billion were up 10%. Operating earnings per share of $.36 were up 13%, and you can see the 13% excludes the impact of last year’s third quarter preferred stock redemption commitment, which you’ll remember was an 8% reduction in equity, obviously not having a repeat of that results in the huge fees here. So operating EPS is up 50%, continuing and net EPS are 43% and 50%. Continuing EPS includes the impact of non-operating pension and net EPS includes the impact of discontinued operations, which I’ll cover on the next page. As Jeff said, year-to-date cash of $10.7 billion was up 63% including the dividends from GE capital. And for taxes, the GE rate, 21% is consistent with the low 20s rate we forecast in the first two quarters, and the year-to-date rate is 22%. The 4% GE Capital rate’s consistent with the mid single-digit rate that we forecasted at the end of the second quarter and we continue to expect to finish the year with a mid-single digit GE Capital tax rate. On the right side, you can see the segment results with total Industrial segment profit up 11%, and it’s great to have all five industrial segments delivering positive earnings growth. GE Capital also had another strong quarter with earnings up 11% so overall, a strong segment growth quarters. I’m going to cover each of these segments in more detail in a minute. Before I get into…

Great, Keith. Thanks. Look, on the operating framework we really have no material changes for the 2012 operating framework. We are on track for double-digit earnings growth in total and for Industrial and Financial Services earnings. Our outlook for the Industrial segments remained in line with our September meeting. You can see in the corporate cost line that our simplification efforts are working and sustainable and we are lower estimate for the year to $2.8 billion based on third quarter performance. CFOA is on track and industrial organic revenue growth has been about 10% year-to-date. We expect it to be about 10% for the year. We believe that capital revenue will decline about 10% based on the E&I reduction ahead of plan so total revenue for the entire company will be up about 3% in 2012. So to summarize, let’s recap the big factors for investors and how we performed against those objectives. Industrial earnings growth results remain positive. This is fueled by good organic growth and momentum in margin enhancement. And you know as I said earlier the simplification efforts really are generating results. We’re executing our plan with GE Capital making a smaller, more profitable, and restoring dividend to the parent. We have returned a $8.4 billion to investors year-to-date through dividend and buyback. We are executing a balance capital allocation plan of growing dividends in line with earnings, value-creating buybacks and bolt-on acquisitions in the $1 billion to $3 billion range. The GE team continues to execute in a volatile environment. We expect to continue to outperform in 2012 and 2013. Now back to Trevor for questions.

Great. Thanks, Jeff. Thanks, Keith. Chanelle, why don’t we open the phone lines for questions?

(Operator Instructions) Our first question comes from Scott Davis with Barclays. Scott Davis – Barclays: Hi. Good morning, guys.

Hey, Scott.

Good morning, Scott. Scott Davis – Barclays: One of the things when we try to kind of model out margins and sustainable margin expansion going forward, I mean can you help us understand if there’s any way to think about the 70 basis points? How much of that was value gap? How much of that is kind of from past restructuring? Any way to carve that up a bit?

Sure. If you look in the third quarter, Scott, value gap was about $50 million drag actually in the quarter. That was two-tenths of a point of drag. Mix, equipment versus services and other mix, was about a half point of drag, 120 million or so. And cost out is the real driver here. It’s over $500 million. It’s 1.4 points of improvement and it’s across the board. It’s lower variable costs. Its better base cost performance with this volume and it’s simplification efforts are starting to kick in. So I think I don’t have it relative to prior restructuring as you asked, but I think that’s a good framework for the third quarter. It’s great that the margins have turn positive here. And our expectation is that this margin improvement will continue in the fourth quarter and will increase obviously from the third quarter level to get us to our goal of the total year.

We still think value gap, Scott, will be positive for the year. It’s been up more than $100 million year-to-date before Q3.

So for the total year, it will be slightly positive.

So for the total year, it’ll be positive and I expect it’s going to be positive again in 2013 as well. Scott Davis – Barclays: Okay. That’s helpful. Jeff, going back to kind of your beginning remarks on the macro view, I mean, it seems that looking at some of the results from your peers that things have degraded a bit in the last couple months. I mean, when you’re thinking about your planning scenarios for really 2013, because I’m guessing you’re in our process now, what are the – such a wide range of outcomes out there, I mean, what are you guys planning for? And how do you – and I don’t know how you want to comment on it, whether you dial it down by region and what kind of GDP assumptions or whether you just want to talk about it more subjectively, but what do you plan for I guess?

Well, Scott, I think you’ve got to have a pretty – you’ve got to factor in a number of different scenarios. I think most people are assuming that the fiscal cliff gets resolved in some way, and I don’t think we’re alone on that one. And then I think just when I look at orders in our growth regions, we’ll have six growth regions that have double-digit orders growth for the year. Six of nine. That’s pretty good, Scott. That’s – that gives me some comfort when I look at the resource rich and rising Asia, and so we still see decent opportunities in China. We still see decent opportunities in the Middle East and Latin America, Russia, places like that. And then Europe’s going to be a grind. Europe’s going to be – we’re not assuming that Europe gets any better. So I think we’re kind of looking at 2013 being kind of like 2012 with the big variable being the fiscal cliff and we’re ready if it doesn’t go through, but we’re kind of making the same assessment most people do, that somehow it gets result. Scott Davis – Barclays: Okay. That’s helpful. Thanks, guys. I’ll pass it on.

Great. Okay, Scott. Thanks.

Our next question comes from Steve Tusa, JPMorgan. Steve Tusa – JP Morgan: Hey. Good morning.

Hey, Steve. Steve Tusa – JP Morgan: Energy Infrastructure, now I guess up 10% for the year. What was the expectation prior to this? It seems like that’s – that the growth slows pretty materially in the fourth quarter. Is that timing around Wind or something like that?

Yeah, there’s another obviously large chunk of revenue in of Wind in the fourth quarter. That’s – it is a drag on us. I think that’s probably the biggest factor for us. I mean, we still expect Energy to be up double-digit for the year. Year-to-date, they’re up about 12% and for the total year, it’ll be up 10% and they’ll be up in the mid-single digits in the fourth quarter here for us. Steve Tusa – JP Morgan: Right. And so how does that kind of make you feel heading into next year, I guess outside of wind and the trends there? And also I guess you talked about orders pricing being up 8% year-to-date, but it’s going to come in flat, which means you’re going to have a pretty tough orders number, orders pricing number, in the fourth quarter. Does that change the views at all that you presented at the Investor Day several weeks ago?

No, just to clear up this. It’s 0.8% year-to-date through the third quarter and we’re saying we expect it to be flat or slightly positive, so I – it’s not a big change for the – there’s no change in the fourth quarter, and that’s our total year estimate that we stuck to, Steve. So no, I think if you go by business, you’ve got to feel great about Oil and Gas. We continue to build backlog. Our orders our strong. We had some orders slip even in the quarter. The outlook is very strong for next year as we head into the fourth quarter. For Energy itself, you feel great about the move to gas around the world. It’s certainly helping us in terms of our service outlook and we’ve got to continue to fight for every order they have been in the gas turbines side. We’re going to have – we think we’ll have growing megawatts of gas turbines sold in the outlook.

Yeah, Steve, at the end of September, we kind of said Power and Water would be up in 2012 and flat in 2013 and it would be up really double digits ex-Wind in 2013. I think we still that’s true.

True. That’s the forecast.

We think Oil and Gas would be up double digits this year and next. We still think that’s true. And we think Energy Management would be up double digits in 2012 and 2013, and we still think that’s true. So I think it’s pretty consistent with what we said at the infrastructure day. Steve Tusa – JP Morgan: Okay. And then in Aviation, the service revenues were only down one but the service orders were down double digit. What’s going on there and this timing around the price increase that pulled forward and some business last year. Can you maybe just talk about what you’re seeing as things stabilized on the spare stuff or maybe just give a quick update there?

Yeah, I think spare’s outlook seem to stabilize, going from the third quarter. In the second quarter the spare’s rate was 20.6. In the third quarter it’s 22. Our outlook in the fourth quarter is similar to that. So right now in the third quarter you’re dealing with the biggest negative variance year-over-year and we’re kind of laughing ourselves on that. Our expectation is that at some point revenue past your miles are still positive year-over-year. Freight is down slightly. But at the end of the day, with all of these flights going on cycles occurring, there’s going to be a pent-up demand for service here and we expect that to be positive for 2013. So in the fourth quarter, we’re not counting on that. We’re counting on the spares orders to be about where they are today and we think that will be a positive in 2013 as I said. Steve Tusa – JP Morgan: Okay. Great. Thanks.

All right, Steve.

Thanks.

Our next question comes from Nigel Coe with Morgan Stanley. Nigel Coe – Morgan Stanley: Good morning.

Hey, Nigel.

Hi, Nigel. Nigel Coe – Morgan Stanley: Yeah, so aviation margins just about the prior gain where we’re obviously very strong, can you maybe talk about how the GEnx, you know, the learning curve on GEnx is impacting the comparisons?

In the quarter, there’s a couple factors going on around GEnx. First of all you have just a few lower units so that’s a little bit positive year-over-year. We had 28 units last year, 25 this year. And then on a margin per unit, we continue to see good improvement. We’re on track for our cost reductions as we come down the learning curve and the other thing is we’re moving into better commercial arrangements as we get out of those launch orders for the GEnx shipments. So I think it’s on track. It’s positive. In the fourth quarter we’re going to have a big increase in shipments here and we’re going to go up. The total year we’re expecting somewhere around 125 shipments I think on GEnx engines so you’re going to have – and in third quarter they’re down a little. In the fourth quarter we’re going to go from about 35 last year to close to 60 this year. Nigel Coe – Morgan Stanley: Okay. But as the combination margins materially on the GEnx this last year?

Yeah, I think the learning curve is down substantially, Nigel, and what Keith said is that the original launch orders are usually the most negative from a CM rate to the combination of those two things I think builds every year. So that gets better in 2013.

You’re probably seeing 10% improvement in margins year-over-year ‘11 to ‘12. Nigel Coe – Morgan Stanley: Okay. And then switching to Thermal energy service, I think that was up 1%, what about that number being impacted by deferrals on some of their retro maintenance pedals because of the low gas price?

If you look at the actual business in Q3 had revenue I think kick up 11 and earnings up 15 or something like that?

Yes. Service, PGS, Power Gen services.

Yes. So the run rate is not – it’s still a little bit lumpy but the run rate’s not bad and then on the ongoing order rate was up 1% and we still think that some of those are really based on how hard the units are running and that unwinds itself. And then in Europe, we have a relatively big install base in Europe and that has to a certain extent the opposite issue. It’s not running. But I think in the U.S., there’ll be decent growth as time goes on.

I think the performance in the quarter, Power Gen services was...

Pretty good.

15 was a pretty good quarter. Nigel Coe – Morgan Stanley: Right. And then just finally, you mentioned you called out a couple of order deferrals push out into 4Q. To what extent is that just normal lumpiness in the business into an extent you think that’s been impacted by some concerns around the macro?

Well, I just think you’re always going to have some of that with the large orders we’re dealing with. I mean there was really nothing on the Asia aviation orders other than just timing of approvals and it just didn’t happen in the quarter that we originally estimated it. I think that some of the oil and gas orders those involved a lot of parties with large engine energy contractors and government approvals and so I think that may be more typical that you’re always going to have something pushing around but for us over $1 billion seem to really push out of the quarter. There were other orders that pushed that seemed like normal quarterly things for us but there were over 1 billion that we would’ve called out as pushing out. Nigel Coe – Morgan Stanley: That’s great. Take you very much.

Thanks, Nigel.

Our next question comes from Steven Winoker with Sanford Bernstein. Steven Winoker – Sanford Bernstein: Thanks, and good morning.

Hey, Steve.

Hey, Steve. Steven Winoker – Sanford Bernstein: Hey. Can I just switch over to GE Capital first. Just help me understand again, you mentioned the Thai gains, what other gains were in there and how much again was that Thai gain? And were there any other gains baked into the GE Capital reporting numbers as sort of a normal course of business?

Yeah, the Thai gain was $80 million from the sale of some of our shares in BAY. We also had the gains in real estate that I talked about from selling properties. And we had one other gain that was over $50 million in the quarter. It was the sale of the pipeline in EFS so in the EFS results that was the large driver of the earnings year-over-year. Steven Winoker – Sanford Bernstein: Was that 15 or 50?

It’s supposed to be the ones – 58. Steven Winoker – Sanford Bernstein: Oh, 58. Okay.

58, after-tax gain. Steven Winoker – Sanford Bernstein: Okay. And then was there – there wasn’t anything – I had heard something about Irish mortgage bank there’s nothing on that?

I don’t have anything on Irish mortgage. I think it was closed. The deal that we previously announced. Steven Winoker – Sanford Bernstein: Okay. Great. And then the consumer reserve I just saw it go up from $3.1 billion to $3.4 billion. I’m looking at the credit metrics you are showing in the supplemental, I’m sorry, in the regular. I don’t – I’m not quite sure I see the connection. Can you just give me some color for the overall increase in reserving and provisioning and what was driving some of that?

Sure. As I mentioned on the reserves in Consumer, we did update the reserve practice for some more granular segmentation loss types. Essentially what we are doing is we’re doing a more detailed look at to determine the period of time from the loss event to the write-off, the incurred loss period it’s called. So we did some of that work in the third quarter. The incurred loss period was a little longer using that segmentation. It increased our reserves about $200 million in the U.S. Retail Finance business in the quarter. Outside of that, we had the normal seasonality, which did contribute and we had asset growth, which contributed to reserve growth quarter-over-quarter and also year-over-year on asset growth. So if you look though in total assets were up 10 on retail finance, volumes up 10. The charge-off rate are down, Steve. They’re down 24 basis points year-over-year, 36 basis points quarter-over-quarter. Delinquencies are down 36 points year-over-year. So the fundamentals of this business are still very good. It really is a detailed segmentation of the portfolio that added a couple hundred million dollars to the reserves as opposed to anything to do with asset quality Steven Winoker – Sanford Bernstein: Okay. And any impairments on GECAS?

Yeah. In GECAS we had impairments. The total number is about 135 after tax in the quarter. I think in general I would say that some classic 737s were in there. Some A320s, old A320s, older A320s as well as 50-seat regional jets are probably the three things that would make up that number. Steven Winoker – Sanford Bernstein: Okay. And last, let me just sneak in one industrial question. On the 29 gas turbines, what countries, and I know a gross number, any cancellations or deferrals of just the turbine side too?

Yeah, there were no cancellations in the quarter. In terms of where the turbines were, there were quite few from Saudi Arabia. Hang on one second here. Steven Winoker – Sanford Bernstein: I’m mostly interested in the U.S.

I have zero in the U.S. We had 5 in China, 8 in Saudi, 2 in Algeria, 2 in Turkey, 7 in Iraq, 2 in Egypt. Steven Winoker – Sanford Bernstein: Okay. All right. Thanks, guys

Yep.

Thanks, Steve.

Our next question comes from Andrew Obin with Bank of America Merrill Lynch. Andrew Obin – Bank of America Merrill Lynch: Good morning.

Morning.

Hey, Andrew. Andrew Obin – Bank of America Merrill Lynch: A question on GE Capital, as we look at ROI on new business, what’s the sequential trend by business within GE Capital?

Well, I will give you a few of them. If you look at the Americas for the Commercial business, second quarter was 2.4, third 2.3. If you look at Asia, and CLL, 1.9, 1.9. If you look at Asia consumer 3.6, 3.4. If you look at Europe CLL was 2.1 in the second quarter, it’s 1.7 in the third quarter. If you look at retail for us in the U.S. 4.7 in the second quarter, 5.3. So overall, as I showed you, the net interest margins were up 50 basis points and our new business ROIs are still hanging in there on new business volume. Andrew Obin – Bank of America Merrill Lynch: All right. Sure. And just also on GE Capital, as you extract more capital out of GE Capital, what should we expect for the pace of share buybacks relative to what we saw the quarter?

Well, we like the buyback pace in the quarter over $2 billion, a little over $2 billion. Our objective as we said is to continue to prioritize the dividend and grow that in line with earnings. We continue to have that point, the buyback and our objective is to retire the shares that we shipped before the financial crisis over the next several years. And we’re doing a pretty good job on getting after that. And the cash from GE Capital obviously is a big help, so if we can continue to get the cash – although this year we’ve already gotten all the special dividends, now we get the regular dividend on earnings. That’s going to help us a lot with the buyback. And based on the market, we’ll see what happens in the fourth quarter. We expect to retire somewhere between 125 and 150 million shares this year. Andrew Obin – Bank of America Merrill Lynch: Thank you very much.

Yep.

Thanks.

Next question comes from Deane Dray with Citi Research.

Hey, Deane. Deane Dray – Citi Research: Thank you. Good morning, everyone. Hey, just a clarification first just on the headlines coming up about the revenue guidance, total revenue guidance going from 5% to 3%. So we already – you told us that GE Capital revenues are down, maybe there’s some FX, but just if you could parse out for us what the delta is?

That was the big…

It’s really GE Capital. Deane Dray – Citi Research: Okay. That...

And I don’t know if anybody’s really forecasting FX.

Yeah.

Obviously FX had a big impact on us in the quarter; certainly industrially. But the change on the framework that we showed you was what Jeff said. The GE Capital total year revenue’s going to be down closer to 10 than 5. And we would have thought that was worth updating. Deane Dray – Citi Research: Good. Just want to make sure because there’s a couple of headlines out there and that clears that up. And then on the cash flow, you said there was some equipment build in the third quarter; that gets resolved. What’s the business? And any color there regarding the size?

Sure. Obviously, we’ve built up some working capital to support our fourth quarter shipments. You look at – it’s mostly in energy. Energy’s working capital bill was $1.3 billion through the third quarter. And we’re expecting a big fourth quarter in terms of deliveries. If you look at the profile last year third quarter to fourth quarter, we had a big revenue increase between the quarters. We also had a significant increase in cash flow between third quarter and fourth quarter. Fourth quarter will be our biggest cash flow period for the year. And we’re expecting a profile similar to last year; a little higher than last year in terms of cash coming out of Industrial in the fourth quarter. Deane Dray – Citi Research: And progress on the red assets at GE Capital?

I don’t have a specific number. I know in total we’re down about $6 billion. How much? $6 billion on quarter-over-quarter. Yeah. There’s about $70 billion on balance sheet today on the red assets. So in the quarter, we felt great about it. You look at the runoff we had. I can just give you some numbers on some things that are down year-over-year. U.K. Home Lending’s down $1 billion Deane, France is down $1.5 billion, Poland’s down $1.3 billion, Spain’s down $1 billion. Those are all non-core assets that we’re running off here in a pretty good pace. Deane Dray – Citi Research: Great. Just last question from me is maybe some commentary regarding the debt issue for the parent because that certainly doesn’t happen often and it’s never a better time to issue debt when you don’t really need the financing. But just give us a context of $7 billion; you did it in three consoles use of that proceeds?

Yeah, it kind of goes back to the first question about what you think about the environment. I mean as we look forward, we have a $5 billion debt in GE that matures February and so we decided that we really didn’t want to be trying to replace that debt in an environment where the fiscal cliff may be a disruptor or not. So we decided to go in the fourth quarter. We like the rates. As you said, we did $7 billion. We’ll have a big-interest savings if you look on that debt. We’ll probably have annual savings around $70 million at the rates that we did that debt at with a mix of 5, 10 and 30 years as you know. So we decided to get that out of the way. We know we have to do; we didn’t want to do it in a disrupted environment. We like the rates where they are. It creates a savings for us. Now we do have a little higher interest cost in the fourth quarter because of that, but for us it just seems like the right thing to do. Deane Dray – Citi Research: That’s real helpful. Thank you.

Deane? Deane, are you clear on the revenue point? Deane Dray – Citi Research: Absolutely.

I just want it clear to everybody. Good. Deane Dray – Citi Research: Yeah, appreciate it. Thanks.

Great.

Our next question comes from John Inch with Deutsche Bank. John Inch – Deutsche Bank: Thank you. Good morning.

Hey, John good morning.

John. John Inch – Deutsche Bank: Hi, guys. Keith, maybe a question for you. It’s really on the buffet and warrants. With your stock price sort of where it is, I’m wondering what are you thinking of in terms of possibly, maybe buying them in advance? And if you don’t do that is very dilutionary impact kind of on a net basis of this that provides for headwind that maybe we should be thinking about?

Yeah, John, if you think about it, the dilution is on amounts above $22.25. John Inch – Deutsche Bank: Right.

And it’s de minimis. We’d love to have the stock to go up to $25.25. That would be less than $400 million of dilution. I think its 135 million shares that you’re talking about the dilution on. So I’m thrilled that we’re in the money on them. And yet we’re going to have to deal with the dilution, but I don’t think it’s a big deal for investors. John Inch – Deutsche Bank: Okay. That clears that up. With zero U.S. gas turbine orders, can you just remind us, what is your sort of latest thought toward the timing of a U.S. gas turbine cycle recovery? Years and maybe you could blend that in with them with a little bit of pricing kind of what you are seeing on the pricing side that sort of thing?

John, I would just go back to what Steve basically said in September. We think there is activity right now that’s going on that’ll turn into commitments next year. So I think as you go into 2013 and into 2014, those commitments will go into orders. And I think that pace will grow as each year goes by. So we’re seeing quoting activity right now. We expect to book some orders next year and we think that’ll grow over time. I think the good news is that gas is the fuel of choice, and as new capacity comes in, it’s going to be gas turbines. John Inch – Deutsche Bank: So if the trajectory holds, presumably the price though, doesn’t start to meaningfully kick in until what, 2014? If the timeline...

Look, I think the good news, John, is that we’re – we’ve been kind of firming a bottom right now. So I think you could see some positive OPI into 2013, not great, but some positive, just because I think we’ve been trying for the last period of time. So I think that will start improving and then I think it accelerate as time goes on. John Inch – Deutsche Bank: Just lastly, Jeff, with the cash and the cash position in pretty robust shape, what are your thoughts toward maybe upping your M&A spend targets? Just even given the macro sluggish environment that might be perhaps prompting more companies to consider selling or make more properties available. What are your thoughts here?

I go back, John, to our disciplines. I think dividend in line with earnings. We think the dividend is really important. Continuing to buy back stock with an eye on getting back to 10 billion shares at some point and the $1 billion to $3 billion. So if we see a good acquisition in that range that meets our hurdle rates, we’ll go for it. But it’s not burning a hole in our pocket and we don’t think we need it to do what we need to do in 2013. John Inch – Deutsche Bank: Thanks very much.

Thanks.

Thanks, John.

Our next question comes from Shannon O’Callaghan with Nomura. Shannon O’Callaghan – Nomura: Good morning, guys.

Hey, Shannon. Shannon O’Callaghan – Nomura: Hey. So just back on the re-segmentation of the U.S. retail business, what was the thought process behind making that choice? And then the extra provision in the quarter, was that a sort of the catch-up? Or what’s the sort of normalized annual hit to earnings relative to the way you used to segment it?

Yeah, I think we’re going through a process in the retail finance business to take a look at our reserve practices and our segmentation relative to industry standards. In the quarter, we did a couple of factors. We did aged accounts and we did fraudulent accounts. I mean, we’re basically trying to identify individual events and then go back and say how long is the incurred loss period for that type of event? And there will be – there are other categories we’re still looking at: if people pass away, if people reach settlements, if people have bankruptcies. So we’re basically trying to segment that book into very detailed and more conservative, realistically more conservative, look at reserve positions based on when the incurred loss period actually started. So I think in the quarter, there’s no more to come from those categories. I think we’re going to continue to look at these other categories. To us, we’re just trying to make sure that we’re in line with industry practices and it’s something that we’re going to do through fourth quarter and first quarter I believe. Shannon O’Callaghan – Nomura: Okay. Any so any estimate of sort of what the more conservative method is in terms of a dollar amount on the earnings impact for a year?

I don’t. I’d say the one thing I’d look at is if I think about the outlook from third quarter to fourth quarter, I think retail finance probably has an outlook that’s similar in the fourth quarter to what they had the third quarter. Shannon O’Callaghan – Nomura: Okay.

Even though they’ve had this one-time thing, I think if you look at the outlook, it’s probably going to be – based on volume growth and based on whatever we’re doing with reserves, our outlook is probably close to what we had in the third quarter. Shannon O’Callaghan – Nomura: Okay. And then just Energy into 4Q, I mean, can you give us a little more feel on the number of sort of wind turbine units and the pressure you’re expecting? I mean, the margin this quarter was like 13.6% for sort of the pure Energy business. You normally have this seasonal uptick, but you’ve got this pressure. Can you maybe gauge where you see those going?

I gave you the total number, if the total year’s going to be up 10%, you look at where we are third quarter to date, I think you can get a pretty good estimate of what we think the margin is for Energy for the fourth quarter. I don’t have the exact dollars but that math’s pretty clear. Shannon O’Callaghan – Nomura: And what are you thinking for wind turbine units?

It’s 750 or so units.

It’s 700, yeah.

So 750 or so units.

Yeah. Shannon O’Callaghan – Nomura: Okay. All right. Thanks, guys.

Our next question comes from Jeff Sprague with Vertical Research Partners. Jeff Sprague – Vertical Research Partners: Thank you. Good morning, guys.

Good morning, Jeff. Jeff Sprague – Vertical Research Partners: Hi. How are you doing?

Hi, Jeff. Jeff Sprague – Vertical Research Partners: Good morning. Thanks. I just want to drill a little farther into power service if we could. Just some color on what you are actually seeing your customers do? So you’re running at higher utilization, I wonder if there’s some dynamic though that we are running more base load as opposed to kind of the peaking cycles and that’s – is that playing into what seems to be softer order there than I guess we would all guess given kind of the trends in the business right now?

I think you heard from some of this from Steve Bowles in the infrastructure meeting, Jeff. You know basically you’re absolutely right. I mean people are running the gas turbines a lot more and they are running them as base load. And that is ultimately good news and I think the idea is going to be you’re going to have either sooner maintenance needs or maybe there will be a little deeper overhaul when you get into repair these units when they do have an overhaul. But Steve’s message was that these were going to pull in, running these things at full base load power at this point is maybe pulling overhauls by three months, six months in the out years. These overhauls are pretty well scheduled based on times the units will run. So I think it is a positive. I think it’s all positive. But I think it’s a little further out there but right now they are definitely running gas turbine units a lot more on the running of this baseload.

Jeff, we said I think in September that we expected good earnings growth from Power Gen services in 2013 and we don’t see anything that changes that assessment. Jeff Sprague – Vertical Research Partners: Yeah, I thought the comment actually was flattish for 2013 on services, no?

Flattish overall for the Power and Water business.

Yeah flattish for the Power and Water business, but for services we expect growth. We expect wind to be negative. Jeff Sprague – Vertical Research Partners: As we get closer to the wind down turn is it actually playing in a way you thought in terms of the magnitude of drop next year?

Jeff, it is. I think we expect revenues will be down, probably 40% something like that next year and we have always said that it would be about $0.03 of headwind next year. And that really assumes kind of no market in the US. There is some discussion about whether or not there is a production tax credit as you do some kind of tax deal at the end of the year. And if there is one I think that would be good for the business but it’s not something we are counting on. Jeff Sprague – Vertical Research Partners: And then finally, just thinking about cash flow, I mean it does look like a challenge in Q4. The idea of the working capital draws is understandable. But does that cash flow forecast does it also predicated on particular order strength in the fourth quarter that would drive deposits or progress payments? Is that any part of it?

Not really, Jeff. I think progress remains a headwind. It’s an unusual year just because the spike in wind and stuff like that so this is just been an unusual year from that standpoint. But we see the working capital levers for cash...

They’re pretty similar profile to last year the fourth quarter. I think the one difference is you have the wind progress coming down and we factored that in, Jeff. We don’t have any replenishment in the wind progress in the forecast and basically we are shipping that in the fourth quarter. So I think we take that into account but it’s a big fourth quarter and we have to execute. Jeff Sprague – Vertical Research Partners: All right. Thank you very much.

Yep.

Thanks, Jeff.

Our next question comes from Julian Mitchell with Credit Suisse.

Hi, Julian. Julian Mitchell – Credit Suisse: Hi.

Good morning. Julian Mitchell – Credit Suisse: Good morning. Firstly, on Aviation, I wanted to follow-up on your comments around some push-outs at some Asian carriers. And also, in the segment profit growth, I mean you call out the value gas and productivity driving up EBIT year-on-year. I just wanted to check what the latest thoughts were on R&D, you know around the headwinds there in light of the Leap 1a and 1b designs being frozen. Are you still on track for R&D to stop moving flat to down in 2013?

Yeah, we are on track for the R&D. If you look at the margins in the quarter, stronger pricing was a big part of it and cost productivity with the other part that aviation got and we expect those two factors to continue. If you look at R&D and Aviation itself, it was up about, it was down about 7% and it’s holding steady around 5% of revenue. So as a percent of revenue as we said we don’t expect this to continue to be a drag. We’ll see what happens as we get into 2013 but we like the position we are in those engines. We’ve gone to design freeze on two of the three versions of LEAP and we’re on track for the design freeze on schedule for the third version. Julian Mitchell – Credit Suisse: Thanks. Just the comments around some of the push outs on the OE parts?

The push outs? Yes. Julian Mitchell – Credit Suisse: Yes.

Yeah, it’s purely – my understanding of it is purely a signature approval and it’s not someone wondering whether they’re going to take these planes. So we’re highly confident that these orders are going to happen in the fourth quarter and it’s two customers and it’s about $500 million now. Again if you remember last year in the fourth quarter I think equipment was up 20 plus percent.

We had huge orders quarter.

Huge order quarter in aviation so, yeah again, with these backlogs we’re going to have that type of lumpiness but these orders it’s not like someone worrying about their fleet planning or anything. Julian Mitchell – Credit Suisse: Got it. And then just second on healthcare, the picture of the past 12 months has been very good growth in emerging markets, Europe very weak, in the U.S. kind of hanging on. Looking at the U.S. equipment order trends last couple quarters, I mean is there – are you worried about starting to rollover? I mean maybe six months from now the numbers are looking down kind of high single digit that sort of rate as you’re looking at U.S. healthcare specifically?

I don’t see that, Julian. I think it’s around flat and it’s going to continue to be around flat and there’s nothing that our guys see that suggest it’s getting materially worse as time goes on. I just think it’s a tough market but it’s not like Europe. Julian Mitchell – Credit Suisse: Okay. Thanks.

Yup.

Great. Chanelle, we have – I want to finish up by 9:30 because of some other earnings calls. Let’s take a couple more than close out.

Will do. Our next question comes from Jason Feldman with UBS. Jason Feldman – UBS: Good morning.

Hi, Jason. Jason Feldman – UBS: Just wanted to follow-up on the aviation aftermarket. You talked about expectation of improvement next year. Wondering if you have any sense of what kind of impact you had this year from the earlier and normal retirements of younger planes, the cannibalization for parts and whether you expect that to continue or whether you’ve really haven’t seen much of that?

That’s been part of our run rate and analysis for the business already to take a look at where new serviceable parts going to come from. I think the biggest impact that we’ve had this year really has been on the wide-body. It’s the CF6 is down. It’s down by overhauls and freights and it’s really a maintenance pressure on us while this CFM products and the GE90 products are both up so on the more prevalent install base narrow body growth that we’ve had you starting to see those engines come in for overhaul. Certainly the GE90 and the 777 you’re seeing those engines coming for overhaul and we’re just seeing a push out. I think a lot of its freight. I think some of it are in Europe and some of the older applications that CF6 is on and we’re really having to deal with that more than cannibalization on the narrow body product. Jason Feldman – UBS: Okay. Thanks. And briefly on capital, we’ve heard a lot this earning season about CapEx kind of being pushed out. You certainly alluded to the fiscal cliff and whatnot. Have you seen any impact on CLL loan demand or is there still efficiently few competitors that you’re still able to originate as much as you want there?

We said the commercial volume is down about 5%. I think the bigger part of that is it’s uncertainty. It’s people not willing to spend because they have a more certain environment around whether it’s taxes or healthcare or social cost or things like that and just the general backdrop in terms of confidence so I think we have seen some of that. We are seeing nice volume on the equipment side in the CLL business but on the CapEx side I’d say that’s been soft.

Soft, yeah. Jason Feldman – UBS: Great. Thank you.

Next.

And our final question comes from Brian Langenberg with Langenberg Investments. Brian Langenberg – Langenberg Investments: Hi, guys.

Good morning, Brian. Brian Langenberg – Langenberg Investments: Good morning. About the 300 million of restructuring you did, can you just layer that around the segments like how much impact there was in each of the industrial segments?

Sure. If you look at it by business, I will give you after tax numbers. Energy was 50. Healthcare was 27. GE Capital is 25. HNBS was 17. Aviation was 16. And about 100 was associated with the planned exit. Brian Langenberg – Langenberg Investments: Okay, great, all right. I will follow up for later but thank you very much.

Great. Just before we wrap up I want to give some thoughts about the company going forward. With all the volatility in the environment I think our Aviation business, we’re winning in the marketplace with a massive backlog. Oil and Gas is a fast-growth market with a lot of opportunity for expansion. I think our Power and Water business is really well-positioned for a gas cycle. Healthcare remains a diagnostic leader with a great growth market foundation. Our Transportation business is well-positioned for growth based on new technology and global expansion. Energy Management has room to grow. And our Consumer businesses will benefit from an improving housing cycle. GE Capital is smaller, stronger and more competitive. And we’re operating the company well with large backlogs, I think, successful acquisitions, expanding margins and substantial cash. So from an investor standpoint, while the environment is volatile, I think our path for growth and execution is very well understood by the team. And we think this quarter demonstrates that and we think we feel good about how we’re positioned for the fourth quarter and 2013. So Trevor thanks, and have a good day.

Great. Thanks, Jeff, a couple of items just to close out the day. A replay of today’s webcast will be available this afternoon. We’ll be serving our quarterly supplemental data schedule for GE Capital later today. I do have some announcements of some upcoming investor events. First, on Wednesday, December 12, Steve Bolze, our President and CEO of GE Power and Water, will host a plant tour at our manufacturing facility in Greenville, South Carolina. More details will be sent in the coming weeks about that. Second, our annual outlook meeting investor meeting with our Chairman CEO will be held in New York City, likely to be at 30 Rock again, will be held on Monday, December 17. We’ll send out more information regarding that event. And finally, our fourth quarter 2012 earnings webcast will be held on Friday, January 18. Thank you everyone. As always, we’ll be available today to take your questions.

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