Welcome to the General Electric First Quarter 2017 Earnings Conference Call. [Operator Instructions].My name is Ellen, 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.

Thank you. Good morning, everyone, and welcome to GE's First Quarter 2017 Earnings Call. Presenting first today is our Chairman and CEO, Jeff Immelt; followed by our CFO, Jeff Bornstein. Before we start, I would like to remind you that our earnings release, presentation and supplementals have been available since earlier today on our website at www.ge.com/investor. Please note that some of the statements we are making today are forward-looking and are based on our best view of the world and our businesses as we see them today. As described in our SEC filings and on our website, those elements can change as the world changes. And with that, I will turn it over to Jeff Immelt.

Thanks, Matt. GE had a good quarter and a slow growth in a volatile environment. While the resource sector is challenging, we had the strongest Oil & Gas orders in 10 quarters. We saw global growth accelerating, while the U.S. continues to improve. Since the beginning of 2017, I visited China, Africa, Latin America and Southeast Asia. All are stronger than last year. With orders growth of 10%, we've seen attractive environment for GE overall. EPS was $0.21 for the quarter. Excluding the impact of uncovered restructuring, industrial EPS was up 15% and verticals grew by 20%. Organic revenue was up 7%, our strongest quarter in more than 2 years. Segment operating profit grew by 15% organically, and total industrial profit was up 20%. Margins are expanding, and our cost-out programs are accelerating. Our cash performance was worse than we expected to start the year with CFOA of $400 million and negative industrial CFOA. We had several one-timers and grew working capital on the first quarter, which we expect to turn around in the second quarter and be on plan for the year. We executed on our portfolio goals. The water sale exceeded our expectations and should produce a $2 billion gain and $2 billion of cash. GE Capital has exited PRA supervision, completing its pivot. This is an incredible accomplishment for the team. Two years after we announced our GE Capital strategy, our actions are largely complete. And Baker Hughes is on track for a midyear close. We're off to a strong start and are reconfirming our framework for the year. We're exceeding our goals for organic growth in margins. We expect to hit our goal for $1 billion of structural cost-out. And our plan is to be on track for cash and capital allocation for the year. Orders…

Thanks, Jeff. As Jeff said, we had a strong quarter on orders, revenues and margins. However, our industrial CFOA was at $1.6 billion usage of cash, about $1 billion below our expectations. We expect to see most of this come back over the remainder of the year, and we see no change for our outlook for the year of $12 billion to $14 billion of industrial CFOA. Walking the left side of the page. Industrial net income plus depreciation in the quarter was $1.5 billion. Working capital was a use of $1.3 billion. This was about $700 million higher usage than our expectation. The miss was mainly driven by power and renewables, partially offset by better performance in our Healthcare business. Receivables was a benefit of $200 million, about $400 million less than our plan. Operationally, we've seen improvement in collections. However, we didn't collect on a number of accounts in the quarter that we expected to. In Aviation, which historically has not had issues with past dues, we missed by about $200 million on 5 customer accounts, which will clear in the second quarter with no issue. In Power, we didn't collect on several delinquent accounts in top regions around the world, but we expect to collect these throughout the rest of the year, including in the second quarter. Inventory was a use of $800 million, about $100 million worse than we expected. Most of the businesses were right on the plan. The miss was driven by softness in the U.S. Healthcare market, particularly around ultrasound and LCS. But we expect to work off this inventory over the remainder of the year. Payables were a use of $400 million, roughly as we expected. This was driven by payments of fourth quarter purchases that were significantly higher than the new…

Thanks, Jeff. We are reconfirming our 2017 operating framework and we should meet all of our goals for operating EPS. We're off to a good start on organic growth and margins. The goals for industrial operating profit and structural cost-out are in sight. Despite a slow start, we plan to hit $12 billion to $14 billion of industrial CFOA for the year. We believe that capital dividend should be $6 billion to $7 billion for the year. Dispositions are on track. We're on track to return $19 billion to $21 billion to investors through dividend and buyback. So to recap, we had 10% orders growth, 7% organic growth, 130 basis points of margin expansion and 20% organic industrial operating profit growth, and a commitment to hit CFOA for the year. So this is a good start. Matt, now for some questions.

Thanks, Jeff. With that, let's open it up for questions.

[Operator Instructions]. The first question is from Scott Davis with Barclays.

I wanted to talk about the cadence of the cost out. I'd get to like a $230 million number in 1Q. I think that's what you said. I would assume, if you did that every quarter, you get to your $2 billion pretty -- on a kind of steady cadence. But the point is you commented that, that would ramp a little bit faster through the year. So how do you think about that $2 billion? Is that something that comes out steady over 2 years? Or is that something where you can front-end load a fair amount of it?

Yes, okay.

And just on that, if you can give a little bit of color on how much of that cost-out is really from last year's restructuring versus new cost initiatives.

Yes. So what we're talking about is structural cost or base cost, so fixed cost exclusive of variable cost. We talked about $2 billion of cost out, $1 billion each in '17 and '18. So the goal this year is to take $1 billion of that base cost out. If you go to the supplement, we do a walk-through in the first quarter. So in the first quarter, those costs year-over-year were down about $75 million. Now beneath that, we took out over $375 million of those costs. And that was partly offset by a couple hundred million more as we expected a higher digital spend year-over-year and just wage inflation of about $80 million. So good underlying performance there. It's going to accelerate over the year because we take an enormous number of actions here in the first quarter across all of the businesses and corporate. We talked about the effort around horizontal IT, which, we think, is worth $250 million in the year, what we just announced around the tax -- corporate tax team and that transition to PWC. We've kind of taken a number of headcount actions, both at corporate and across the businesses here in the first quarter. So we expect that to grow over the course of the year. The other reference points I'd give you is when we talk to the outlook meeting, we talked about 500 -- a goal of $500 million with which we had $1.7 billion kind of pipeline against. Against that original plan, the first quarter were $200 million better than that original plan, so that gives us confidence that we're on track for the higher plan of $1 billion for the year. So I think you'll continue to see a better performance here in the second quarter. And then I think you'll see a real acceleration in the second half of the year. To answer your question on restructuring from prior year, so within this bucket of cost, I said we took out $375 million before digital and the effect of EOP -- effect on wages. About $174 million of that $375 million was from prior-year restructuring actions.

But I would say, Scott, having a good 130 basis point of margin with a lot of the structural cost totally kick in makes us feel good on the 100 basis point goal for the year on margins.

Right. And I know you're focused on the base fixed cost. On the variable cost, how does that play into the next several quarters?

So as we talked about -- let's go back to what we said at outlook. At outlook, we talked about a goal of 100 basis points of margin improvement. And we said 50 of that was going to come from everything we're doing around restructuring, et cetera. Then the incremental cost plan was going to deliver the next 50 basis points. If you look at gross margins in the quarter, we were better by 90 basis points. So gross margins is all products and service cost. So that's a good down payment against delivering the total year margin.

And I would say, again, on gross margin, Scott, we built in kind of a negative mix, vis-à-vis, the LEAP and things like that. And we still can more than offset that with other strong programs we've got in the company.

The next question is from Jeffrey Sprague with Vertical Research Partners.

Could we just explore a little more what's going on in Alstom? There was a comment about you're taking a different profile there. It was unclear what you meant by that. And it also sounds like one of the JVs got consolidated in the quarter.

Yes. Expand on your first -- I'm not sure I understood your first question, Jeff. Okay. So let me just talk about the JV, and then I'll let Jeff talk about the first part of your question. When we did the Alstom acquisition, as part of that, we acquired an interest in the JV in the steam space in India. And we were a minority shareholder. So we spent a little bit of -- an insignificant amount of money to actually gain control of ship -- or control of that JV in India. So in the steam space, it's around steam equipment. It largely services India.

And then Jeff, the comment I made is the profile of Alstom was always very highly skewed towards their last quarter. It's going to take a while to get that normalized on the kind of the GE time frame just based on some of the EPC work and project work they do. So that was the comment that I made.

Yes. I don't think that the profile is materially different than our own business. We have a lot of long-term contracts, 81 long contracts that's [indiscernible] we're really building against those here in the first quarter. Those will hit billing milestones over the course of the year. And like our own equipment businesses, the Alstom equipment businesses will improve on cash performance throughout the year.

The next question is from Andrew Kaplowitz with Citi.

So obviously, order growth inflected pretty possibly in the quarter. And we know you have your management incentives in line toward delivering significant cash flow. So why isn't cash better? Why not maybe you're going to sacrifice some orders from difficult customers if you have to for better cash or maybe pressure suppliers even harder to generate more cash? I guess, the question I'm trying to figure out is whether your issues are transient and cyclical, which, we think, they are or sometimes, people think they're structural, especially in Power. How would you answer that question?

Well, when you look the first quarter performance, we talked about being $1 billion lower than our expectations, $700 million of that in working capital. And within that $700 million, $400 million really is related to receivables. Our receivables performance actually was pretty good in the quarter. Our collection, in fact, was better year-over-year. We did factor $1.3 billion last versus the first quarter of last year, but we expected to do that. It was really around the accounts I talked about. In Aviation, which we had a couple of hundred million of past dues that we don't normally experience in Aviation, those are already clearing here in the second quarter. And then some big past dues in the Middle East in our power business that are on schedule. They -- we will collect the majority what we expect to collect in the first quarter. We'll do that in the second quarter. Then we had a small kind of $100 million kind of miss in inventory versus our own expectations. Interestingly, across most of the businesses hit their inventory expectation. And our inventory performance year-over-year was $700 million better than the first quarter of last year. That's important because when we think about our working capital, we talked about $3 billion-plus of working capital improvement in the year to get to $12 billion to $14 billion, a big part of that is driven by inventory. Last year, we're really helped by progress in AP. This year, it's about receivables and inventory. So getting off to a $700 million better outcome year-over-year on inventory is good. But it was $100 million less than we thought it would be and that was all about Healthcare in North America. And that will liquidate -- that's mostly timing around sales and orders. So we're…

The next question is from Steve Tusa with JPMorgan.

So when you look at the noncash earnings from contract assets, how is that reported in the margin bridge? And then on the restructuring, with the $800 million of restructuring and other, is there anything in there that's not pure payback kind of headcount restructuring? And if so, what's the volume of that? I think you had a disclosure in your 10-K around that -- around the breakout of restructuring.

Well, no, Steve, the $800 million of restructuring in the quarter is just that. It's restructuring. So it's projects with paybacks. So -- and they are very much structured. When I say structure, I mean headcount and site capacity-related. So I'll give you some detail around it. $800 million of restructuring. About $500 million of that is really related to workforce capacity, okay, $500 million of $800 million. We got about $300 million, roughly, that's associated with plant capacity, consolidating footprint, et cetera. And then on -- the balance to get to $1 billion charge in the quarter is $200 million of BD. And that's really all Baker Hughes, water, industrial systems and some of the digital acquisitions we closed in the quarter. So to answer your question, $800 million is all investment with payback. Ask your first part of your question again.

Okay. It's on the contracts.

Yes. So contracts in the quarter are -- so on the CSA contracts, which is, I think, what you're talking about, CSA contracts in the quarter were up $1.4 billion year-over-year. $800 million of that increase was associated with contract updates, okay? And that's versus $500 million a year ago. So it's higher by $266 million year-over-year. Of the about $300 million, it's up year-over-year, a little more than half of that is in power. And most of that is associated with updates of part cost when we change standards every year. So for the contracts that were under review in the first quarter, if we change the standard on the part cost and deliver against that contract for the future, we did that update. And then there's a small update for escalation that's mostly around our Aviation business. We update it once a year on escalation within the service contract. That part of long-term contracts that are revenues versus billing, so outside of contract updates was $600 million in the first quarter. And that's really where we've incurred shop visits, outages. We've incurred cost against those service contracts ahead of actually billing the hours or the events associated with it. So that's mostly timing. And some of that will come back over the course of the year, as we actually bill against the utilization or bill against an outage or a shop visit. So I would say that's mostly timing. That's the $1.4 billion increase that you see in contracts year-over-year.

The next question is from Julian Mitchell with Crédit Suisse.

Just one other quick question on the -- back to the cash flow. So Jeff Bornstein, I think you'd called out that $400 million of industrial CFOA in the first half of last year. Was the implication that we should assume the first half of this year is around the same level? And then also, my follow-up would just be on the contract assets piece. You've had outflows last year of about $4 billion in cash. It's about $4 billion out this year. Before that, in 2014 and '15, it was more like $1.5 billion to $2 billion per year. So I just wondered, with GE today, as you look out beyond this year, what's the normalized contract assets cash outflows we should expect annually?

So let me take part 2 first. So yes, we expect the contract drag on cash flow for the year to be roughly the same, '16 versus '17, as you said, at about $3.9 billion. I think you got a number phenomena that's going on. We're investing like crazy in productivity and cost-out. Whether that's additive, value-engineering, driving these plant closures, restructuring, all of this finds its way into lower cost. When we get lower cost, the cost to execute against our contracts improves. And when they improve, the accounting has to account for that and where it changes our view on the ultimate profitability of these contracts. That's one method in where it's hugely focused on that. And I think you want to focus on to that, that's all future cash, future economics, et cetera, on a go-forward basis. We're not pulling future profit for it. That is not what we're doing. We're just restating what -- where we are in the contract from inception to date. The second part is where the long-term service agreements that protect our install base, and our penetration continues to improve. When you look at the attach rate on the H turbine, on the LEAP engine, the population and our backlog around this contract is growing substantially and has over the last number of years. And so there's a volume factor associated with it as well. What was the first part?

I think on the -- I think it's the half we expect CFOA to be roughly comparable...

So yes. What I would say on the half, we think CFOA is going to be sequentially much better in the second quarter than the first. And we would expect year-over-year CFOA to be better to the half, equal or better to the half.

And the next question is from Shannon O'Callaghan with UBS.

So power equipment orders up 25% in the quarter when gas turbines were down about 50%. I mean, it seems to support this shift you've been talking about from gas turbine sales to power island sales and the expanded scope. You also have pretty easy comps in Alstom. So I'm just -- I just want a little color on the sustainability of that kind of equipment order strength in power despite kind of a weaker gas turbine outlook.

Look, I think, Shannon, we look at the total gas turbine market probably being roughly flat year-over-year. We do think this increase content is kind of here to stay. So it's our expectation that, that continues through the year. And then I think, at the end of the day, we've got a decent competitive position in steam. We don't have any false expectations about that market, but we will pick up some orders there as well.

Just to give you a little bit of color. So -- and I talked about it earlier. We laid a 2 big steam turbine island orders in the quarter, which is usually positive. We were much stronger on arrow units in orders in the quarter. We were up 20 year-over-year on arrow derivatives. And we took 10 more HRSG orders out of Alstom in the quarter than we did a year ago. And as you mentioned, we're down 13 gas turbines. So a little broader strength in just about gas turbine.

The next question is from Andrew Obin with Bank of America Merrill Lynch.

Just a question in terms of progression of organic growth through the year, how much of first quarter growth was pulled from the fourth quarter '16 shortfall and whether any orders or revenues pull from the second quarter and the rest of the year?

Again, certainly, there was going to be some spillover from Q4 into Q1. I still think 3% to 5% is the right way to peg the year. We're encouraged about how the first quarter started. And I would say, Andrew, business outside the U.S. is incrementally better than we had expected, I think, when we lined up the year. So I think there's some macro drivers that are also important in terms of our ability to capitalize on the year. And then I think 10% orders growth is a nice bellwether for investors to reinforce, I think, what our guidance is for 2017.

The only thing I'd add to that, Andrew, is at year-end, we talked about power, that we had some short ships as we expect at gas turbines, both arrows and units. We expect -- as we said on the call, we expect those to close here in 2017. We think those are good projects. Those did not close in the first quarter. So to answer your question, the orders performance you saw on the first quarter, particularly around power that we talked about from year-end, those units are not in the first quarter.

That was our final question. I'll turn it back to you, Matt, for any closing remarks.

Thank you. The replay of today's call will be available this afternoon on our Investor website. We remind you that next Wednesday, we'll be holding our Annual Shareholder Meeting in Nashville, North Carolina. And Jeff, you're going to speak at EPG Conference on May 20. With that, Jeff?

Great, Matt. And I would just spike out, I think people were very encouraged by first quarter performance, 10% orders growth, 7% organic, 130 basis points of margin. I think a solid cash profile for the year. So I think, Matt, off to a great start. I think very encouraged by 2017.

Great. Thanks for joining today.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.