GE Aerospace (GE) Q4 2014 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the General Electric Fourth Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Larissa 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, Matt Cribbins, Vice President of Investor Communications. Please proceed.

Great, thank you. Good morning, and welcome everyone. We are pleased to host today’s fourth quarter webcast. Regarding the materials for this webcast, we issued the press release, presentation and GE Supplemental earlier this morning on our website at www.ge.com/investor. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. For today’s webcast, we have our Chairman and CEO, Jeff Immelt; our Senior Vice President and CFO, Jeff Bornstein. Now I’d like to turn it over to our Chairman and CEO, Jeff Immelt.

Hey thanks, Matt. Good morning everybody. Look, we still see the global environment as generally positive with a lot of volatility. GE had a strong fourth quarter with some elements better than we indicated in December. Operating EPS was $0.56, up 6%, led by industrial EPS which grew by 23%. Orders grew by 3%, which was 5% organically and our backlog expanded to a new record. Industrial organic growth was up 9% and margins expanded by 50 basis points. Our initiatives continued to deliver results. Industrial CFOA was $7.2 billion, up 64% reported in the quarter or 30% ex the 2013 NBCU taxes. Capital’s quarter was consistent with our expectations. The US continued to strengthen as in Asia. Some businesses are seeing more momentum like aviation, healthcare. Our oil and gas team executed well despite volatility. Their underlying performance was revenue flat and earnings up 6%. And we believe that our diverse and integrated model worked for investors in the quarter as it will in 2015. We delivered on our key commitments for the year. Industrial segment profits grew by 10%, driven by 7% organic growth and 50 basis points of margin expansion. GE Capital reduced ENI by $17 billion in the hit to earnings plan. CFOA was in the middle of the range at $15.2 billion. Free cash flow was $11.2 billion, up 6% for the year. Our capital allocation choices were in line with expectations. On the M&A front, Alstom should be a financial and strategic driver. Appliances were well priced and done a good point of cycle, and the Synchrony spin will result in a substantial reduction in GE shares. We are executing a valuable pivot at GE, one that improves our business mix while delivering EPS growth and expanding returns. Now for orders, total orders grew by 3%, which is pretty good in the environment. As I said, organically this is 5% in total with 3% in equipment and 8% growth in services. Orders grew by 7% for the year. We had strengthened services which was up 6% in the quarter and 10% for the year, and we grew backlog by $17 billion year-over-year. Power and water had a solid quarter but comps were impacted by the huge Algerian deal in 2013. Without that, orders were up 13% in the quarter and we now have 15 H orders with another 30 technical selections. Oil and gas orders were down 4% organically, consistent with our expectations. Turbo machinery actually saw orders grow by 16% in the quarter. Aviation orders grew by 15% and they end the year with a record backlog. Aviation commercial spares grew by 37% in the quarter. Importantly, the US healthcare equipment orders grew by 17%, demonstrating renewed strength in our biggest market. Our success with the tier 4 locomotive continues. We took 1355 orders in 2014 and are positioned for record shipments in 2015. The US was strong with orders growing by 18% in the fourth quarter, following a 25% growth in the third quarter. And growth markets were mixed. For instance, Middle East, North Africa was negative in the quarter due to the Algerian order I talked about earlier but was up 20% for the year. And Asian growth market orders grew by 21%. We closed 2014 with a backlog of $261 billion and in December we called out a 2015 organic growth range of 2% to 5% and we still feel good about this range. For execution, our team really executed well in the quarter with organic growth up 9% and margins up 50 basis points. For the year, industrial segment profit was up 10% with 7% organic revenue growth and 50 basis points of margin enhancement. Our initiatives are driving growth ahead of our peers. Our product lineup is quite strong. The H turbine is winning in the market. Our aviation wins are huge with 79% LEAP share to date. The tier 4 continues to win. Our healthcare products are gaining share in CT, MR and ultrasound. Aviation commercial spare shipments grew by 24% and power gen services grew revenue by 14%. As I said earlier, growth market revenues expanded by 7% in ‘14 with five of nine regions growing. Also to update on a few of our adjacencies. Life sciences grew earnings by 15% for the year. Water hit a 10% operating profit rate in the quarter with 26% earnings growth for the year. And we won the Boeing 777X on-board computing system. This is a huge win and positions GE as a tier 1 avionics supplier. Margins continue to be good story, up 50 basis points for the year. Simplification and services again are the big drivers. We hit 14% of structural cost as a percentage of sales for the year with another $1.2 billion of costs out. And corporate costs ex gains/restructuring and NBCU declined by more than $900 million. We’re seeing the impact of analytics on service productivity. Service margins grew by 270 basis points in the quarter and we have momentum in every business, and with an intensifying focus on gross margins and product costs, we are on track for another year of margin growth in 2015. Now on the cash for the quarter. our industrial cash grew by 64% to $7.2 billion. This is consistent with our expectations for the quarter and the year. We finished the year by shipping a tremendous amount of volume and our teams did a great job on working capital which reduced by $2 billion in the fourth quarter. Free cash flow for the year was $11.2 billion, up 6%, and the GE Capital dividend was $3 billion, below the $6 billion they delivered in 2013. We ended the year with substantial liquidity and financial strength. GE Capital ended the year with tier 1 common ratio of 12.7%, substantially above the regulatory guidelines. We returned about $11 billion to investors in dividends and buyback and we remain on track for $12 billion to $15 billion of free cash flow and dispositions in 2015. We will allocate our capital in line with the discussion we had in December. Our priority is to execute on Alstom, fund organic growth and continue to grow the dividend. Remember that Synchrony at the current pricing should return $18 billion to $20 billion to investors in the share exchange. In any environment where we have an uncertain macroeconomy, it's important to talk about execution. In 2014, in our performance, you can see the tangible results of how we are running GE. Our underlying business has significant operational momentum, supported by the changes to how we are running GE day-to-day, with more transparency and more accountability. This was an excellent execution quarter for the team and now Jeff will give you the business details.

Thanks Jeff. I will start with the fourth quarter summary. We had revenues of $42 billion, up 4% a quarter. Industrial sales of $31 billion were up 8%. And GE Capital revenues of $11.5 billion were up 4%. Operating earnings of $5.6 billion were higher by 4%. Operating earnings-per-share of $0.56 were up 6% with industrial EPS up 23% and GE Capital EPS down 17%. Continuing EPS of $0.52 includes the impact of non-operating pension. The net EPS includes the impact of discontinued operations. We had $0.01 impact in discontinued operations this quarter associated with WMC. This was driven by reserve increase of $142 million to reflect WMC’s current assessment of its loan-loss exposure based on recent settlement activity and negotiation. WMC ended the quarter with $809 million of reserves, flat with fourth quarter of ’13. As Jeff said, CFOA for the year was $15.2 billion. We had industrial CFOA of $12.2 billion and received $3 billion of dividends from GE Capital. In the quarter, industrial generated $7.2 billion of CFOA, up 64% on a reported basis and up 30%, excluding the impact of NBCU taxes from last year. The GE tax rate for the quarter was 13%, bringing the year-to-date rate to 17%. In the quarter we benefited from the passage of the extenders bill and deductions from higher restructuring and impairments. The GE Capital tax rate was 5% for the quarter and 2% for the year, consistent with the low single digits estimate that we previously communicated. On the right side, you can see the segment results. Industrial segment revenues were up 6% reported and up 9% organically, reflecting about two points of headwind from foreign exchange and one point from acquisitions and dispositions. Foreign exchange was approximately $600 million drag on industrial segment revenue and about a $180 million impact on op profit for the quarter. Despite this headwind, industrial segment operating profit was up 9%. GE Capital earnings were down 19%, primarily driven by lower gains and tax benefits associated with the Swiss and BAY transactions in the fourth quarter of last year. I will cover the dynamics of each of the business segments in a couple of pages. First, I will start with the other items page for the quarter. We have $0.04 of restructuring and other charges at corporate, over $0.02 of that related to ongoing industrial restructuring and other items as we continue to take actions to improve the industrial cost structure. At $353 million pretax, this was approximately $75 million higher than the planned and reflects the acceleration of some restructuring opportunities from 2015. We also had a $217 million pretax charge for an impairment related to strategic investment in the energy space. This investment has underperformed in the market but we continue to expect that to be long-term value in the asset. In November of 2013, I reviewed with investors our plan to invest $1 billion to $1.5 billion in restructuring to accelerate the repositioning of our industrial cost footprint and position us to grow earnings through the pivot in 2015 and ’16. On the bottom of the page is the profile of those restructuring and other charges that we took in 2014 by quarter and the $0.01 gain associated with the Wayne disposition. For the total year, net charges were $0.11 per share or $1.7 billion pretax. I’ll give you an update on industrial cost dynamics. On SG&A, we've made a lot of progress. We ended the year with 14% SG&A to sales which is down almost 2 points from 2013. This was driven by a combination of cost-out efforts in the industrial segments and corporate. For the year we took out $1.2 billion of structural costs, in line with the $1 billion plus we’ve been communicating with you. On the bottom left, you can see industrial segment gross margins, excluding corporate. For the year, segment gross margins were down 80 basis points, which is driven entirely by negative mix as we grew equipment revenues faster than services, particularly in wind, GEnx and thermal. As we discussed at the December outlook meeting, Dan Heintzelman, Jamie Miller and I are driving a focused initiative to improve industrial gross margins to an intense focus on product cost. Similar to our programmatic approach around SG&A, we are targeting to improve gross margins by 50 basis points in 2015. On the right side, you can see the corporate operating costs. The bar graph excludes gains, restructuring and NBCU operations from 2013, so you can see our true operating expenses. We’ve taken significant actions on corporate costs with about $950 million reduction for the year. This includes functional headquarter cost improvements, lower global and growth spend, operating pension and retiree health cost improvements and non-repeating charges in 2013, principally the EBX charge we took in the second quarter of 2013. The focus on reducing corporate costs will continue into 2015 and we expect corporate costs to be about $2.3 billion to $2.5 billion for the year. We will continue to reduce corporate costs but this will be partly offset by higher pension expenses as Jeff outlined during the outlook meeting in December. Now going to the segments and start with power and water. Orders in the fourth quarter totaled $9.5 billion, down 8%. Orders were higher by 13%, excluding the Algerian mega deal in the fourth quarter of last year. Equipment orders were down 12%, driven by thermal down 62% as a result of a difficult comparison to last year's 270% increase, including Algeria. We had orders for 41 gas turbines in the quarter, flat with last year excluding the Algerian deal. In the fourth quarter, we received an order for 2 H turbines bringing units and backlog to 15 Hs and we’ve been selected for another 30 units on projects and are bidding in additional 61 units as we speak. Total gas turbine order count for the year finished at 105 units, representing 18 GW of power. Partially offsetting thermal’s orders decline was [indiscernible] which was higher by 66% and renewables was up 47% in the quarter. Distributed power equipment growth was driven by turbines, up over a 100%, partly offset by a decline in engines. The turbine strength was attributed to a large win in Egypt consisting of 20 trailer-mounted units, 14 LM6000s and some balance of plant. The 20TMs and six of the 14 LMs converted to sales in the quarter. For the year, DP recorded orders for 167 turbines versus 174 in 2013. Renewables equipment orders were up 47%, reflecting orders for 1251 turbines. The US was up 16%, including a 138 safe harbor units associated with the PTC extension. And we saw a significant growth in Latin America, the Middle East and in regions we took no orders in the fourth quarter of ’13, including China and India. Service orders were down 2%, also driven by no repeat of the Algerian deal. Excluding Algeria, service orders grew 9% on strong transactional upgrades and outages. AGPs in the quarter were 26 versus 25 last year, bringing the total year AGP count to 80. Power and water revenues of $9.4 billion in the quarter were up 22% with very strong equipment revenues up 37% and service revenues up 7%. Equipment revenue was driven by strength in thermal, up 64% with sales of 44 gas turbines versus 28 last year and renewables up 20% on 206 more wind turbines and DP up 33% in the quarter. Operating profit in the quarter totaled $2.1 billion, up 13% versus fourth quarter of ’13 and earnings were driven by higher volume and cost productivity, partially offset by negative value gap, principally price and unfavorable mix of higher equipment sales versus services. SG&A in the quarter was down 12% year-over-year and margins in the quarter were down 190 basis points. As you look into 2015, we expect to continue to grow services, including upgrades and we anticipate a flat gas turbine market but expect to gain share. We are planning for wind to deliver 3000 to 3200 units and distributed power will continue to be pressured as we look into ’15. Next, oil and gas. Oil and gas orders at $4.9 billion were down 10% in the fourth quarter. Excluding the effects of FX and the Wayne disposition, orders were down 4%. Notwithstanding the volatility of oil prices in the fourth quarter, we believe the relative impact was modest with more impact expected in 2015. Equipment orders of $2.5 billion were down 15% reported, down 9% organically. The subsea orders were down 38% with no repeat of large fourth quarter of last year orders with Petrobras and ENI. Downstream technology orders were down 46% driven by a large Shell order in the fourth quarter of last year in our distributed gas solutions business, partially offset by strong growth of 7% in the downstream products platform. Measurement and control equipment orders were up 6% organically as we continue to see improvement in end flow and process markets. Drilling and surface orders were down 2% with drilling down 72% as expected, partly offset by 7% growth in our surface business. Turbo machinery was up 60% on natural gas orders in North America, the Middle East and in Russia. Service orders were down 4% but up 1% organically. The TMS orders were down 10% on lower installations in the quarter, partly offset by 6% organic growth in M&C, downstream technology growth of 16% and drilling and surface higher by 11%. For the year, total orders were flat with backlog up 1%. Oil and gas revenues in the quarter of $5 billion were down 6% reported and flat organically, driven by three points of FX and three points of disposition impact. Equipment revenues were down 5%, with subsea down 10% but flat excluding exchange. M&C was higher by 3% organically and downstream technology and drilling and surface were up 10% and 11% respectively. Service revenues were down 6% primarily driven by TMS, down 11% and M&C down 5% but M&C was up 12% organically. Operating profit in the quarter was higher by 1% versus the fourth quarter of last year and up 6% organically driven by strong value gap and cost productivity offset by the effects of foreign exchange. Margins expanded 110 basis points in the quarter and 100 basis points for the year. As we outlined in December outlook meeting, 2015 will be a challenging year for our oil and gas business. [indiscernible] and the team are focused on executing on the cost-out actions to offset volatility and deliver on their commitments. Next up is aviation. Aviation demand continues be strong with revenue passenger kilometers November year-to-date up 6.1% on international routes and up 5.3% on domestic routes. Freight growth was 4.4% November year-to-date. Orders for aviation were strong, up 15% in the quarter. Equipment orders of $4.4 billion were higher by 8% and service orders grew 25%. Equipment orders were principally driven by commercial engines. GEnx orders of $1.2 billion were up 23% on large orders from American and Air France. GE90 orders were up 2.5 times to $900 million in the quarter and LEAP and CFM recorded $1.2 billion of orders. Our total win rate for the LEAP since launch is now at 79% on narrow-body aircraft. Military equipment orders were down 59% driven by the slow military environment. Service orders up 25% were driven by strong commercial space orders, at $35.6 million a day, up 37% and stronger military spares. Orders for total year 2014 grew 8% and backlog grew 7% for the year to $134 billion. Revenues in the fourth quarter were higher by 4% to $6.4 billion driven by commercial equipment revenues up 8%, services up 3% and military equipment down 3%. Commercial spares were strong up 24%. We shipped 77 GEnx units in the quarter and 287 for the year. Leverage and operating profit were strong with 12% growth in volume and positive value gap, partly offset by mix and higher R&D. Op margins improve 140 basis points in the quarter. Overall the aviation team had a strong quarter and a year and we expect strong performance to continue into 2015. Next is healthcare. Healthcare had a better quarter than the headline results would suggest. Orders were up 1% in the quarter but up 4% excluding foreign exchange. And the US was quite strong, up 9%. Latin America and China were both up 2%, offset by Europe down 1% but up 5% organically. Japan was down 23% driven by the consumption tax and reimbursement reform and the Middle East was down 26%, mostly driven by Saudi. Healthcare system orders were down 3% but up 2% organically, driven by US imaging and ultrasound equipment orders which were up 12% in the quarter. We saw growth across most modalities with particular strength in CT, up 22% from our new revolution CT introduction and ultrasound up 15% from a new [indiscernible] on product in the women’s health diagnostic space. This was offset by softer orders in Japan, Russia and the Middle East. China orders were up 2% reflecting delays in government tenders we've seen over the last several quarters. Life science orders up 13%, driven by a bioprocess of 60% on very strong demand in the US and Europe, offset partially by core imaging, down 7%. Revenues of $5.1 billion were flat but higher by 3% ex foreign exchange and HCS revenues were down 3% but up 2% organically and life science revenues were up 9% and up 6% organically. Operating profit was down 4% but was up 1% organically. The strong cost execution, including 5% lower SG&A, was more than offset by price and foreign exchange. Looking forward we expect the US market to continue to improve. Although final industry figures have yet to be published we believe we are winning share in key modalities. And China should grow modestly as we look into 2015. The business will continue to drive structural product costs out as we move forward. Next, transportation which had a strong orders quarter up 62% with equipment orders up 107% and services higher by 19%. In 2014 transportation had its strongest orders year ever at $9.6 billion, up 89%. Locomotive orders in the quarter were 284 units versus 70 last year driven by North America where we took orders for 235 additional tier 4 compliant units. For the total year 2014 we received orders for 1355 tier 4 compliant locomotives. Backlog for the year grew 43% to $21 billion with equipment higher by 148% and services higher by 22%. Carloads grew strongly in North America, up 4.4% in 2014 led by intermodal up 5.4%. Commodities, including agriculture, were up 3.7% and petroleum was up 12.5% for the year. In the fourth quarter, petroleum volumes continued to grow, up 16% year-over-year. Revenues in the quarter were up 8%, driven by locomotives up 8%, services up 14% partly offset by mining, down by 31%. For the total year, revenue was down 4% largely driven by mining. Operating profit in the quarter was up 13% on higher locomotive volume, material deflation and cost productivity, partly offset by lower mining volume. The transportation team has executed well and has positioned the business to capitalize on the new tier 4 requirements in 2015. Next, energy management which earned more in the fourth quarter than they earned in the entirety of 2013. Orders in the quarter were down 2% largely driven by softer marine orders and power conversion which was down about 16%, partially offset by digital energy up strongly at 17% and industrial solutions up 5%. Backlog grew 9% to $5 billion. Revenues were down 2% but up 2% organically. Power conversion revenues grew 6%, digital energy grew 1%. Industrial solutions was down 6%. Operating profit of $113 million was higher by 2.5 times on strong value gap and cost execution. For the year we earned $246 million of operating profit, up 124%. Execution continues to improve and we expect substantial improvements again in 2015. In appliances and lighting, revenue in the quarter was up 5%. Appliance revenues were up 8% driven by strong volume. And industry core units were up 8% with both retail and the contract markets up 8% as well. Lighting revenues were down 1% on lower traditional product demand which was down 15% and more than offset the strong LED lighting growth of 72% in the quarter. LED now makes up 27% of lighting revenues up from 16% in the fourth quarter of last year. Operating profit of $180 million was up 32% in the quarter and margins expanded by 160 basis points. Next, I will cover our GE Capital. GE Capital’s revenue of $1.5 billion was up 4% primarily from lower marks and impairments. Net income of $1.9 billion was down 19% principally driven by lower gains and tax benefits, including those related to last year’s portfolio exits including the Swiss and BAY Bank transactions, partially offset by lower credit cost, marks and impairments. ENI excluding liquidity of $353 billion was down $17 million, 5% from last year and down $2 billion sequentially Nonstrategic ENI was down 12 billion to 132 billion or 8% versus last year. Net interest margin in the quarter at 5% was essentially flat. GE Capital’s tier 1 common ratio on a BASEL 1 basis remains in a strong position and ended the year with 12.7%. This is up approximately 60 basis points from the third quarter and 150 basis points year-over-year. Our liquidity levels are strong ending the quarter at $76 billion. This includes $13 billion attributable to Synchrony. Our commercial paper program remains stable at $25 billion and we had $10 billion of long-term debt issuance for the year. Excluding the activity related to Synchrony, in 2015 we have already used for 7 billion of long-term debt as part of our total year plan of around 20 billion. Right side of the page, asset quality trends continue to be stable with significant improvements in our mortgage portfolio driven primarily by the – half a billion dollar non-performing loan portfolio in our UK home lending business. We generated a small gain during the quarter and the move of our Hungarian bank to held for sale. We expect to complete the exit of the Hungarian during the first half of 2015. In terms of segment performance, commercial lending and leasing business ended the quarter with a $172 billion of assets, down 1% to last year, largely driven by foreign exchange. Global on-book volume was $12 billion, down 10%. However we continue to see strengthening in the US largely in equipment financing with volume up 4%. New business returns in both lending and equipment were largely in line with the first three quarters of the year. Earnings of $549 million were up 109% driven by lower marks and impairments. In 2014, the CLL business earned $2.3 billion, up 16%. The consumer segment ended the quarter with $136 billion of assets, up 3% from last year with earnings of $1.1 billion down 45%. Our share of Synchrony earnings was $451 million, down 3% driven by minority interest and partially offset by core growth. Consistent with last quarter as a now publicly traded company, CEO Margaret Keane and the team will host their own investor call later this morning. Separation efforts remain on track. Excluding Synchrony, assets were down 17% as we continue to reduce our presence in nonstrategic portfolios. Earnings excluding, Synchrony, were $686 million, down 57% driven by the non-repeat of gains in and benefits recorded last year for the Swiss and Bay transactions, partially offset by $594 million gain associated with the sale of the Nordics consumer platform. Just as a reminder, as a result of the accounting guidelines, roughly half that gain was recognized in prior quarters as tax benefits and GE Capital corporate, these benefits were reversed in the fourth quarter and again was taken in the consumer segment resulting in a net gain in GE Capital of $300 million in the fourth quarter. In 2014 the consumer segment earned $3 billion, down 30%. In real estate assets of $34 billion were down 11% versus prior year. The equity book is down 35% from a year ago to $9 billion. Net income of $299 million was up 134% driven by higher gains and portfolio earnings partially offset by higher impairments. In the current quarter, we sold 350 properties from our real estate equity book with a book value of about $2.1 billion for a $328 million gain. In 2014, the real estate business earned $1 billion, down 42% on lower gains. In the verticals, GECAS earned $218 million, up 207% driven by lower impairments partially offset by lower gains and lower assets. Overall the portfolio is in great shape and we finished the quarter with zero delinquencies and three aircraft on the ground. New volume remained strong at $2 billion, up 50% with attractive returns in line with the first three quarters of the year. For the year, GECAS earned $1 billion, was up 17% from prior year. The Milestone acquisition continues to progress and we expect to close during the first quarter of 2015 pending regulatory approvals. Energy finance earned $111 million, down 5% in the quarter in line with lower assets. EFS’ volume was up 31% year-over-year at a very attractive return. In 2014 EFS business earned $401 million, down 2%. Overall Keith and the team continued to execute the portfolio strategy and delivered solid operating results. As we look forward to 2015 we expect GE Capital would generate about $0.60 on an EPS basis as Jeff discussed last month during the annual outlook meeting. We expect GE Capital to earn approximately $1.5 billion in the first quarter of the year. Lastly, I wanted to spend a minute and talk about the framework for 2015 and cover four points. On the left you have our segment outlook as Jeff shared in December. Overall there is no change to that framework. On the right side, first positively we're seeing strength in the US healthcare market. Orders were strong, up 9% and equipment orders were up 17% with particular strength in imaging and ultrasound. Orders have been on a positive trend in the US since the first quarter of 2014 and after the final fourth quarter results we're more encouraged that this trend will continue into 2015. Second is aviation which we feel is stronger. Spares orders grew 25% in 2014 and we are targeting high single-digit growth in 2015. Revenue passenger kilometers and freight miles continue to be strong and low Jet A should be a meaningful positive for our customers in this space. When you think about currency, we plan 2015 assuming a stronger dollar but we’ve seen some continued strengthening since the December meeting. Assuming the euro at today's rates for the entire year, foreign exchange would have a modest impact, about a penny a share, so very manageable in the context of the total company. In December, we also outlined our expectations for oil and gas with the backdrop of oil at $60 to 65 a barrel. Since then prices have fallen further. When we planned the year we relied on multiple scenarios, including a further fall in oil prices. Lorenzo and the team are laser focused on executing against their backlog and their costs. The team is reducing employment, executing restructuring and simplification projects to materially reduce their cost structure, all predicated on a tougher scenario. Additionally across the company we expect to realize some incremental benefits in direct material and other logistical and variable costs as a result of lower fuel costs. Oil and gas represented about 15% of our industrial segment earnings in 2014. We believe that within the context of the company portfolio the potentially tougher oil and gas scenario is manageable and consistent within our framework. With that, I would like to pass it back over to Jeff.

Thanks, Jeff. We remain comfortable with our framework for 2015. We expect the industrial EPS of between $1.10 and $1.20 behind solid organic growth and margin expansion. Corporate costs will be substantially lower. Remember we funded $0.11 of uncovered restructuring in 2014. In 2015 we will offset restructuring with gains. In addition, we should have the impact from six months of Alstom. Capital results are on track with Synchrony timing the main variable. Free cash flow and dispositions are on track for the $12 billion to $15 billion we spoke about in the year. And again cash return to investors depends on Synchrony timing but it would be substantial if we do the split this year. So closing the year and since the outlook meeting, the GE world remains balanced. There are always puts and takes in the global economy. For instance, the US is quite strong which has a positive impact in businesses like healthcare and aviation and the price of oil has declined even further since December. Our job is to manage the company through volatility and while we see the potential for risk to oil and gas based on current oil prices, we are aggressively working offsets through cost actions and positive opportunities elsewhere in GE. We are also seeing stronger momentum in several other businesses. In total this demonstrates the strength of our portfolio approach. Looking back in 2014, out of eight industrial businesses, three beat their plan, three met their plan and two missed their plan. But together we did what we set out to do growing core earnings by 10%. In addition, let me give you more insight to the plan I gave you in December. We have an internal plan that is above the midpoint of the range I gave you. The business results that delivered that plan are embedded in our team’s new incentive compensation for the year. In other words, our leaders achieved their IC when we hit an EPS that is above the midpoint of this range. Now I want you to have transparency on how we think about the world and manage our team. Our targets encompass a thoughtful approach to the environment in a broad range of macro dynamics. So let me reiterate. We feel comfortable with our framework. 2015 is an important year for the company and we plan to deliver for you. And now Matt, back to you and let’s take some questions.

All right. Thanks, Jeff. We will take your questions now.

[Operator Instructions] Our first question comes from Scott Davis with Barclays.

Hi, good morning, guys. Thanks for the color. This is a better presentation than we've seen in a while, so thanks for that. I know this is going to be really tough to answer, but it's going to be really important for us to try to ring-fence the oil and gas profit downside. Is there some sort of scenario analysis you could share with us or at least a sensitivity that -- hey, if we are off 35% on upstream, what kind of profit drop you'll see on that?

This is Jeff. Scott, the way we thought about it particularly when we went through it in December with you is we evaluated multiple scenarios, including a general expectation at that point that we’d be down 0 to 5% but we evaluated scenarios that we’re down beyond that, on lower oil prices. And when we talked about the range with you, of the $70, $80, in total dollar -- 20 industrially we included in that our view of what those downside scenarios are. So I think you got to step back and look at it – oil and gas is 15% of our segment earnings in industrial being down beyond 5% I think is manageable within the context of the industrial portfolio. And I think importantly Lorenzo and the team are like laser focused on driving the cost and the productivity in their business and the programs they launched were the programs needed to support a lower downside scenario than what we even talked about in December. So I think we feel reasonably comfortable -- as comfortable as you can be that within the context of what we've shared with you that we can manage it inside the portfolio, our industrial portfolio.

I think Scott, I would add to what Jeff said, just to say, I think any time in our world we have multiple hedges and we have the hedge inside the oil and gas business driven by the cost action they are taking, we have other upside of what lower oil prices mean inside the company. And there is businesses inside the company that are doing better as we close the year. And so I really -- I think we've envisioned different scenarios for oil and gas and we still feel quite comfortable on the way – the way we described the company in December.

Because there wasn't anything additional, I don't think, that was said on the call on Alstom, and there was a bit of a price adjustment we saw in the quarter; I think it was something like $700 million or something. Can you give us a sense -- and I know you are probably five months away from close here. But can you give us at least some sense of your confidence in the asset? And given the new world, that the offsets -- I mean, we've got a better euro environment for Alstom; but on the other hand you've got some North Sea oil headwind. So can you give just a better sense of your confidence of the puts and takes of that transaction, and maybe a little color around the $700 million adjustment?

Yes, why don’t I start with the adjustment and then Jeff can give you some color on the company. So effectively what we -- there were several points within the contract that we are open to negotiate post the signing. We made a couple of adjustments, it's about €250 more that we will pay at closing. Part of that was a payment we’re making at our request. We wanted to strike the legal entities -- we want to restructure it and buy into, we wanted to change a bit for our benefit long-term in terms of taxes and otherwise. And so part of that €250 million was a payment to ask them to close differently from a legal entity perspective than what was originally contemplated. The second was we originally agreed to about a five year use of the Alstom brand, we extended that in this agreement to 25 years, that was about $85 million associated with that, and there were other very small items. I think you will hear Alstom talk about €400 million, they are counting about a $100 million of interest that they contemplated owing us on cash that they used over the course of the year. We never modeled that, we never counted that. So we see it is about a $250 million euro adjustment to the purchase price but we get a lot of long-term value as a result of that legal entity restructure.

So I would say Scott, there are always puts and takes, their grid business is reasonably strong, I’d say the renewables business is consistent with -- and also reasonably strong, I'd say the power business is in a flat market kind of the same market we see. Clearly the euro devaluation helps the purchase price and other than that the puts and takes are pretty consistent with how we kind of underwrote the business going in. So their year-end is in March and we don't expect -- we don't really have a change in closing date. We still expect -- we still for the purpose of the plan, plan on July first for everything more or less.

Thank you. The next question comes from Nigel Coe from Morgan Stanley.

So, Jeff, you talked about a pretty limited impact from the dollar on your plan. But I'm just wondering maybe if you could just address how the strong dollar and the weak oil price could impact the broader emerging market demand for infrastructure. I wonder are you seeing any backlog or project deferrals as a result of that?

So I will start. There is multiple dimensions of those obviously. My comment was at about 1.50 and 1.60, we’ve opened up softer than that this morning. It’s about a penny a share. I mean we do hedges – we are not a 100% hedged, we hedge all our transactional exposure to the extent we can, we do -- we are subject to some translation and we do very short-term hedging around earnings in a quarter. So there will be some volatility associated with currency but I think my point was that in the context of the company we're not at a point yet where we think it's something that's not manageable across our portfolio. We do have natural hedging, we have the ability in some of our businesses to move our manufacturing base globally which allows us to take advantage of changes in currency and in a couple of our businesses where that matters we are actively looking at our build plan for the year to make sure we take as much advantage of that as possible. I would in the short run here we've seen very little that I am aware of, very little impact on our order performance as a result of currency. That may play out more in 2015 but through fourth quarter of this year we've seen very little of that.

And I would say on – you had a multi – both currency and oil price, I think if you took a tour around the world, look, our biggest market is still the US. The US had orders of 25% in the third quarter and 18% in the fourth quarter. So I would always start by reminding people that actually the US is the best we've seen since the financial crisis and then what we call rising Asia, Nigel, which is really China, India, ASEAN, stuff like that, those are actually quite positive for us right now from a order standpoint. And then the resource rich countries I think are going to be mixed, depending on what your cost position is and things like that. So we still I would say on an underlying basis see pretty good underlying demand in the Middle East but clearly places that are marginal producers like Iraq or Venezuela things like that. Those are going to be places that we’re not counting on much business in 2015. So it’s kind of a mixed bag. And in Europe – Europe for us is flattish, I’d say if you look at the organic and if the stimulus increases European demand, that’s a good thing for us.

And then just switching to the mix in 2015, and obviously tremendous margin expansion on services in 4Q, how does the 150 bps look between service and OE in ‘15? And how does the mix shake out on the 2% to 5% between OE and service?

I think if you look at in the 2014 I would say product margins were flattish and service margins were up. And look, we described to you guys -- we described to our investors in December kind of an extremely intense focus on gross margins and product costs. And so our expectation is that delivers in 2015, so we’re looking to get some OE margin enhancement in ’15 along with the continued service enhancement, and then Jeff, do you know on the revenue mix?

Well I will just say on the revenue mix, equipment service would be a little less impactful next year than it was in ’14. That's our plan. I think the gross margin focus that we have going, which is particularly centered on product service cost is driving at the OE market –

Thank you. The next question comes from Deane Dray with RBC Capital Markets.

Hey, a couple questions. First for you, Jeff Immelt, a macro strategic question regarding balancing your framework priorities. And then I've got one for Jeff Bornstein about truing up on tax and restructuring benefits. So, to start on the macro question, you're pretty clear you're in a volatile environment. But I'd love to get an update on how you are balancing the framework priorities. You've got longer-term big mix changes and could be near-term disruptive to the organization; and then meanwhile you're on an EPS framework with a cadence of earnings, quarterly earnings. And I've always called it a bit like trying to change a car tire going down the highway at 55 miles an hour. So how are you balancing these big mix changes versus earnings expectations for 2015?

The best way I can describe it, Deane, is since I would say -- since 2013 inside the company or even longer we've been kind of talking about it executing around this kind of mix shift that we’ve described to investors. I think Jeff earlier in the presentation talked about the investments we've made in restructuring in 2014 to kind of set us up for 2015 and beyond which again everybody in the leadership team is on. So the way I’d look at this, Deane, is on the industrial side I think the teams – their world is in front of them, their incentives are in, they know exactly what they need to do. We’ve got Alstom coming in, appliances going out and that is that team is laserlike focused between Dave Joyce and Lorenzo and Steve Bolze and those guys know exactly what they need to do in this environment. At GE Capital, look, we’re just going to make it smaller if we can as time goes on. We’re going to execute on Synchrony and that’s what the Capital team is doing. And so I think you got to look at it in terms of every team knows exactly what they're pieced of how we need to execute here. There is no – absolutely no confusion on industrial side and financial services we’re just going to look for opportunities to continue to make it smaller. We talked about 75:25 as a goal but we’ve really run the place, with that as an output function and an input function. We run the place to execute well on our businesses and we think 75:25 is the output.

And then for Jeff Bornstein, maybe you can true us up on the tax outlook for 2015 and restructuring benefits that should carry in, and anything unique about the first-quarter tax?

Sure. So industrial tax, we think is going to be the core rate, it will be what it has been which is high teens. We will do the appliance transaction, that will be a high tax transaction which will bump the rate up to low 20s for next year. And I think that's consistent with what we’ve communicated. The plan will probably be higher in the early part of the year, lower in the latter part of the year on industrial tax. On restructuring, same discussion, that we’re going to do restructuring next year. It is critical to delivering on everything we’ve talked about. We've assumed the gains, the appliances of signalling transaction happen midyear, we will do restructuring in the first half of the year before those gains manifest themselves. But we still believe that for the total year our restructuring and gains, and to some degree the impact of mortality are all going to offset, we’re not going to be doing today anyway naked restructuring.

What's the carryforward of restructuring benefits in 2015 from actions in 2014?

What we’ve got to now make up in our cost roll is about $500 million. We will get an incremental benefit for new restructuring we do in ’15, as you know we’ll get partially depending on where we execute those projects. But the carry through from, I would say both ’13 and ‘14 is about $500 million for 2015.

Thank you. The next question comes from Steven Winoker with Bernstein.

Hey, could you just give us a better sense of the detail around the gains that happened within GE Capital in the quarter? Just the major gains including -- as well as the real estate side, but across the whole business. And did the Norges thing come through all that?

So I will start with Norges. So we did close Norges. The impact in the quarter was just over $300 million. The headline impact in the segment reporting in retail was a full 600 million, and that’s partly because we did the tax accounting earlier in the year that recognized the tax benefits for about half the gain. We reversed that in the fourth quarter and the full effect of the disposition took place in the fourth quarter in the retail segment. So within the fourth quarter about $300 million, $600 million for the year. In addition, I talked about we sold the nonperforming loan portfolio in our UK home lending business about a half billion dollars at a very small gain associated with that about $20 million but a big deal for our UK portfolio. I talked about $2.1 billion of real estate sales in the quarter that led by Japan multifamily that we sold, that specifically was about 229 million, and the total real estate gains for quarter were closer to $330 million. And that made the bulk of where GE Capital gains were in the quarter.

And then just maybe pausing on the order price profile for the quarter and the trend line in some of these. I know we've talked about oil and gas a little bit; it was down 20 basis points and power and water down 70. Are you seeing pressure in the existing backlog at all in terms of any kind of renegotiation activity happening? And also, currency, are you also feeling any pressure? We talked about currency a little bit, but are you feeling any pressure to use pricing to make up for any of the segments, whether it's power, healthcare, or lighting, where you might have broader international competition, any of that coming through? And then healthcare I guess as part of that same thing, which is -- I know this is the business model, to be down every quarter and take costs down by more. But that can't be a good thing for too long. So maybe some thoughts on that too.

Steve, here is what I would say. I would say most of the pricing impact that we see in the fourth quarter is more mix driven than anything else. For instance, in power you’ve got -- most of the heavy duty gas turbine action is in the edge, that really is not in the base yet but those are higher price bigger units, little more competitive scenarios but not a lot to talk about. Oil and gas, we really haven't seen it yet, nor have we seen – there are some initial letters and stuff like that on pricing but no real action. I think that's all -- again I don't think we’ve seen it in the fourth quarter. We haven't seen it yet but this is early days. So I think there is going to be – there’s still going to be chatter out there. So I don't really take all the stuff that's happened necessarily in the fourth quarter as what's going to happen throughout the rest of ’15. I just think we have to be ready on all fronts and I would say no conversation all around currency and anything along that yet. We will see how that plays out. In terms of healthcare, look, I think you’re right. This has been the historical business model but I also think kind of what we are doing with, Steve, with Jeff and Jamie, Dan Heintzelman is we’re ripping apart the critical axis is gross margins across each one of these businesses. And I think in healthcare managing the pricing is going to be a key part of how we get enhanced gross margin improvement in that specific business.

Thank you. The next question comes from Steve Tusa from JPMorgan.

Just to make one thing clear, what were the impairments in the fourth quarter? Total gains of $650 million in GE Capital, what were the impairments?

Hold on one sec, I will get it for you. What’s your next question, Steve and I will run that down?

My next question would be another detail question. Lufkin specifically in artificial lift, we've seen some varying reports on inventory destocking. I think PCP yesterday talked about their oil and gas business, implied down like 50% to 60% in some of their -- on a quarterly run rate basis, showed some destocking. Did you guys see destocking in your artificial lift business, the Lufkin business?

Not yet, Steve. Look, when you look at like revenues in the quarter were up mid single digits in Lufkin. Orders were kind of down mid-single digits. So not enough to read into. Again a lot of this I think is – and oil and gas is yet to play out. But I would say the fourth quarter was pretty much inside of our expectations for Lufkin.

And then just one last question just on cash. Jeff, just philosophically around the dividend, you guys are bumping up against an 80%-ish type of payout ratio on the free cash when it comes to the dividend. I mean, there is a pretty significant -- it's a big dividend relative to your free cash flow. Is that dividend viewed -- I mean, is there a fine line here given obviously the location of cash makes it a little bit complicated as far as moving things around and being able to pay that? Would you -- is there a fine line as a percentage of free cash flow that you don't mind going over industrial free cash flow and paying the dividend? I mean is it -- and as far as growth, do you view the dividend, it's a must-grow over time? I'm just trying to get my hands around how much you defend that dividend.

Look, Steve, you’ve got $16 billion of cash on the balance sheet right now. We’re going to do Alstom this year. You are still sitting on top of a substantial excess cash in GE Capital. Look, I view the dividend as being key. We have choice -- we have capital allocation choices we make. We’re going to continue to grow our free cash flow as time goes on and we’re comfortable with where we are right now.

I’d say listen, we’ve been running at slightly about a 50% payout ratio. I think long-term we expect to be slightly less or to about 50% payout ratio. So as we work through the pivot, through 2016 we’ve made a conscious decision that we are going to run a little harder to our target payout ratio but the dividend as Jeff said is certainly a priority for us and very important to our retail base.

And I would add, Steve, just one – just something that I just want to make sure people don't forget and that is, look, the Synchrony transaction is effectively going to be at $20 billion buyback that whenever we execute that, so that's a big – another big capital allocation choice, it's just going to be executed in a different way but that’s quite meaningful to our investors as well.

Sure, and the impairments?

Yes, impairment. So as you would expect impairments year-over-year were down substantially about $550 million. You recall in the fourth quarter of last year within CLL, we took the moment of charge and we took a little – we took the second charge on business aircraft and then the big item in the fourth quarter of last year was the GECAS aircraft impairment. So year-over-year impairments were better by $550 million pretax. But in the quarter we really didn't have a lot of big impairments, we had one big impairment on a real estate property domestically for just under $100 million pretax and that was really about it of consequence.

The next question comes from Jeff Sprague from Vertical Research Partners.

Hey, just a couple quick ones. I know we are running tight on time. Could you just reconcile the comment on Lufkin orders down mid single digit versus drilling orders down 72%? I know, obviously, there is a little bit more but that's a little bit of difference there. But that sounds like a fairly sizable disconnect.

Yes, look, I am just looking at fourth quarter orders, Jeff.

Yes, so we report Lufkin separately from drilling and surface. Drilling and surface orders were up 4% in the quarter. So identical to what you would expect in this environment and Lufkin was down 6% in the quarter. So I would say generally if you look at the – as I went through the script, if you look at the orders for oil and gas in the quarter, they are not necessarily what you would expect in this environment. The things you would be -- think would be stronger, including downstream and the surface related stuff, turbo machinery, were good to slightly down and the things you think would be most impact, the upstream stuff was a little stronger in the quarter year over year. So I think we’re way too early – you are not yet seeing an impact on behavior with our customer in the current order rate. That’s to come in 2015.

You did say drilling down 72%, is that right?

No.

Drilling was down, surface was up. So drilling POPs were down substantially but surface was up. We report it as drilling and surface.

And I know the H price is not in the index, but can you give some color on how that's pricing versus expectation?

Well, it’s not in the index, I would say without giving away any real competitive information I would say sequentially pricing is improving, order to order.

And then just one really quick one on FX. Is the $0.01 headwind or so that you are talking about for 2015 now incremental to what you were thinking previously? And the reason I ask is you had $0.02 in Q –

Yes, Jeff. So what I was trying to say was when we did the framework in December, if you look at that versus I did that math, 115 and 116, the move from December to 115 to 116 for us meant that we were working with a penny headwind that we would figure out.

But again I would come back to, there is other mitigants to a lot of those stuff.

I am not changing guidance in any way. I am not changing –

We’re trying to give you guys the pieces because I think that’s – we want you to know how we think about it but there's a lot of other things inside the company that we use – just like we did in Q4.

The next question comes from Andrew Obin of Bank of America

Hey, just a question, two questions. The first, part of the reason for creating oil and gas was actually to deliver to national oil companies in an environment like this. Could you share some of the conversations that you are having with these customers? And how are you guys positioning versus the competition? And are you seeing that your structure is actually making a difference? From the outside, how do we know that it does make a difference?

Well, look, I would say again there is not one-size-fits-all but I think clearly the national oil companies look differently at this cycle than some of the integrated oil companies do. So I would just say in the case of a company like Saudi Aramco they are going to continue to produce and there is a number of strategies that are associated with that, similarly to a company like Petronas and things like that. And then there's other places that are in more stress. So look, I would just echo back, Andrew, to some comment I made in December, we like the oil and gas business, we like how we are positioned in it and we think these cycles give us an opportunity to pick up market position similar to what we did in the aviation business and the power business and other businesses. But sort of going through private conversations with customers, I can just say that we still think with a lot of the NOCs, or a certain segment of the NOCs there’s still potentially going to be some good business to be done in 2015.

And just to follow up, what's the latest strategic thinking on energy management and the progress that they are making?

Look, I think we're in a pretty good – we’re in a pretty good strategic position. This is a business where Alstom adds some competitive capability and scale and our pathway has to be one that gets us to margins that are more competitive with the ABBs and the other players in this industry and that's -- and we can accept nothing less. So I think the way I look at it right now, Andrew, to win, we expect margin accretion and earnings growth year after year in this business and here's one where the ceiling is very high in terms of what we should be able to do in this business.

Thank you. Next question is from Shannon O'Callaghan with UBS.

Hey, maybe first for Jeff Bornstein. When you think about driving this thing from down 80 bps gross margin this year to up 50, how do you see that phasing through 2015 numerically? And also where are you and Dan and Jamie at in terms of what you're doing to drive that?

So right now, Shannon, we're doing very deep dives with each business and basically I hate to get too tactical but basically we’re starting with the outcome and building back the project decks from there. So on every element of product and service costs, direct material, inflation deflation direct material usage, warranties, scrap, operating cost per hour of our different facilities, every labor etc. building the project decks that support delivering at each of the segment levels, their share of gross margin improvement at the segment level. And that's where we are today. Jamie in parallel with that is continuing to drive and support the businesses with the ERP which is a big part of giving them visibility and driving our ability to consolidate etc. So we're in the process right now of building very detailed action oriented plans that have every dollar of cost between sales and the gross margin line owned by somebody with a plan. So that's where we are today. I would say this is going to accelerate throughout the year. We’re early in the process now but I am quite confident if we get out of the way we have programmatically around SG&A I think we can make a big difference here and I think there's a lot of opportunity, as Jeff said earlier particularly around original equipment margins.

And then in terms of just the US healthcare strength, can you give us a little more color there? What are you hearing from customers and where do you really think that market is and decision-making is at this point?

So Shannon, the only two data points I can give you is just kind of what we saw which was pretty good -- we don't have the market data yet, so we don't know share and things like that. But we have good products and good activity and we got to believe that we gained a little bit of share. And I would say the other data point I can give you is conversational which is – as I see hospital CEOs when I travel the circuit, you just get a lot more positive in terms of their ability to know what the next few years are going to be like to do their planning, to do their growth plans and things like that and that didn’t exist let’s say 24 months ago. So we’re guardedly optimistic but it's too early to call it a trend I would say.

Thank you. Our final question comes from Julian Mitchell with Credit Suisse.

Hi, thanks. Just on the healthcare business, you talked about how the Q4 performance was something of a blip. But I guess the profit drivers down, price and FX probably persist through the whole of this year. So maybe talk a little bit about why you're so confident that healthcare earnings are going to rebound.

Again I would say, Julian, on the comment you made this is – as Jeff went through in his presentation that there is always going to be concerned about FX and stuff like that in this business. Nonetheless the US is just a big powerful driver of healthcare profitability mix, things like that. And so when I look at 2015 that in addition to momentum we’ve got in life sciences and stuff like that, I think that offsets all the other let’s say headwinds we might see in terms of FX and otherwise.

Julian, I’d just add, I didn’t, if you took it that way, I apologize. I didn’t mean describe the healthcare performance as a blip. But what I meant to say was organically the performance was better than headline, when you think about the impacts of FX. So and I completely agree with Jeff, I mean when you – the developed markets feel like they are getting stronger for healthcare we’re going to have challenges and some – Russia or some of the emerging markets. But the bulk of our percentage wise -- the US is still the biggest single market we have in healthcare and we feel much better about the strength there than we have in the past.

And then just the gross margin up by 50 bps. What are you including for price or for value gap in there? Because I guess value gap was a decent tailwind in 2014. Do you think it's flattish this year?

I think in our working construct for the year, we expect value gap to be roughly what it was this year. So we ended this year at about $300 million net value gap and $300 million value gap. And our expectation is that that will likely be what 2015 look like. End of Q&A

There are no further questions at this time. Mr. Cribbins, do you have any additional remarks?

Yes, thank you. Before wrapping up, just a couple of quick announcements. The replay of today's webcast will be available this afternoon on our website. We will be distributing our quarterly supplement for GE Capital later today. On Friday, April 17 we will hold our first quarter 2015 earnings webcast.

Great. Matt, I just want to reiterate as we close. The framework we’ve got for ‘15 really has a ton of strength and thoughtfulness in it in terms of the scenarios that we’re seeing globally. So I would just echo that and just reiterate we talked about the new compensation plan that the leaders have inside the company, that really has each and every business aligned to deliver right in a very effective way for our investors as we go forward, Matt. So I would just make those two points in closing.

Thank you. And as always we will be available later today for questions.