Good day, ladies and gentlemen. And welcome to the General Electric Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Jason, 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.

Good morning, everyone, and welcome to GE’s Third Quarter 2017 Earnings Call. With us today are our Chairman and CEO, John Flannery; GE Vice Chairman and CFO, Jeff Bornstein and incoming CFO, Jamie Miller. Before we start, I would like to remind you that our earnings release, presentation and supplemental 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 now, I’ll turn the call over to John Flannery.

Okay, great. Thanks Matt. Good morning. Before we get into the results of the quarter, I want to give you an update on the review of the company we've been doing over the last 90 days. While the company has many area of strength, it's also clear from our current results that we need to make some major changes, with urgency and a depth of purpose. Our results are unacceptable to say the least. The first thing I'd say is the review of the company has been and continues to be exhaustive. The team and I performed deep dives on all aspects of the company and no stone has been left unturned. We are evaluating our businesses, processes, corporate, our culture, how decisions are made, how we think about goals accountability, how we incentivize people, how we prioritize investments in the segment and at the overall company level including global research, digital and additive. We've also reviewed our operating processes, our team, and capital allocation and how we communicate to investors. Everything is on the table and there have been no sacred cow. I'll give a more detail look at our investor meeting in November but at a higher level here the key things and actions you can expect in November. First, we are driving sweeping change and moving with speed and purpose. I am focusing heavily on the culture of the company. Our culture needs to be driven by mutual candor and intense execution, and the accountability that must come with that. We have announced changes to the team at the highest level to the company. We've made a series of senior level changes in our Power business. We announced last week that Ed Garden from Trian is joining the Board. Things will not stay the same at GE.…

Thanks John. Before I go through the results for the quarter, I want to share with you why we are transitioning my role as a CFO to Jamie. Although we are proud of many of the important changes made over the last few years, including reducing corporate structure, adding additive, restructuring GE capital, exiting appliances, integrating Alstom and establishing Baker Hughes GE, our operating performance is not been where it should be. Most recently Power emerged as a real challenge in terms of volume, profitability and cash flow. I've talked a lot about accountability inside the company and that sense of accountability has to start with me. We are not living up to our own standards or those of investors and the buck stops at me. John and I made this decision together and although leaving the incredibly hard working and dedicated finance team and the company, it's the hardest thing I have ever done in my 20 years with GE. I know it's the right decision for the company, myself and my family. John is driving a lot of change in the company and its culture. And it's the right time to change. I am excited for John to share more with your in November on the progress and thinking we've undertaken. Jamie will be great in the role and will bring a unique perspective to the job and to the company. First, I'll update on cash. You'll see that the page is different than how we've historically presented. We also provided another metric this quarter given the close of BHGE deal in July which more accurately reflects the cash available for GE to use. Let me take a minute to walk you through the left side of the page. Our reported CFOA was $500 million in the quarter…

Good morning. Hi, this is Jamie Miller. I am glad to be here and I am looking forward to working with all of you. I thought I take you through Transportation's results this morning but before I do that just a little bit of background on me. I actually spent most of my career outside of GE. I was a partner at PricewaterhouseCoopers, I led Investor Relations in much of finance at WellPoint now Anthem, and I joined GE nine years ago as GE's Chief Accounting Office. Since then I have been our Chief Information Officer and most recently the CEO of GE Transportation. And most of my career is in finance and I know GE and its businesses very, very well. I am happy to be back at corporate. I am happy to be working with John and really helping to revaluate and set a new course of GE. Picking up on Transportation, North American car load volume was up 3.8% in the quarter primarily driven by inter motor car load of 6.6% and commodity car loads of 1.1%. Part locomotives ended the quarter at about 4,000 units and we expect the market for new locomotives will continue to remain challenging. Orders of $1.72 million were up 54% on easy comparison primarily driven by strong volume and services both mining and locomotive transactional services. Backlog at the end of the quarter sits at $14.5 billion. Services backlog was impacted in the quarter by $3.1 billion by a termination notice received from a large North American customer. This contract covers 800 locomotives most of which are currently in service. And the termination while it had no financial impact on the quarter, we do expect to finalize our new service arrangement in the near future. And in the meantime we continue…

Thanks Jamie. I am going to wrap with the 2017 framework. For earnings, our estimate for industrial and vertical EPS is $1.05 to $1.10. This excludes any potential insurance adjustments or charges for asset held for sale that Jamie just mentioned. The key drivers versus or $1.60 framework of the following things. One, Power down significantly on lower services earnings and lower aero units. Second is higher restructuring and other charges over $0.45 for the year including the power conversion goodwill charge? And third lower earnings from Baker Hughes and plant and lastly lower buyback than we originally planed. As Jamie mentioned, cash will be approximately $7 billion for the year. Power alone will be lower than expected by $3 billion on lower earnings and higher inventory. Oil and Gas and Renewables were also come in lower than our plan. We expect substantially higher cash generation in 2018 driven by lower structural headwinds, things like tax and restructuring charges. A rigorous cost out plan and a substantial improvement in working capital. That said, obviously $7 billion of cash is significantly lower than the guidance and this performance is simply not acceptable. There needs to be real change and you should know that this team is committed to that. I am confident that we understand the issues and know the path forward. I look forward to going through our company outlook with you on November 13. And with that Matt I'll turn it back over to you.

Thanks John. We’ve got lot to cover. With that operator let's open up the call for questions.

[Operator Instructions] Our first question comes from Steven Winoker from UBS.

Thanks. Good morning, John, Jeff, Matt. Welcome to the new role, Jamie. John and Jeff, I'm sure investors appreciate the acknowledgment that 3Q showed unacceptable results. And I know you quickly mentioned in your upfront remarks, but I really have to start with sustainability of the dividend. Right now we're talking about $8 billion dividend, which gets me to something like an 88% payout ratio this year at the high end of guidance. And then more importantly on cash flow, we're talking about something like $7 billion of CFOA, as you mentioned, before CapEx of I think about $4 billion; which leads me to only about $3 billion of free cash flow before any GE Capital dividend, which you've now postponed due to the insurance actuarial review. So how is that level of dividend sustainable without jeopardizing the future growth of the company? And can you give us some sense of what you see as a sustainable payout ratio, may be something closer to 40% to 50%?

Steve, this is John here. Just a few things I'd say on dividend. First and foremost we still have some moving pieces in motion and we'll bring this altogether for you in November as we said earlier. I just go back from there to few thoughts. One is philosophy, managing for total shareholder return so there does need to be a balance of investing in growth organic and inorganic growth and the dividend payout. So it's a philosophy expect a balance. We will present this framework in November as we complete the 2017 and 2018 processes, serious processes we need to through as a team. The last thing I'd say is just as a frame of reference. The 2017 number of $7 billion cash position, cash flow is a not zip code we are going to remain in. We expect improvement in that cash flow substantially in 2018. There are some structural issues like tax and restructuring charges that will not recur, $2 billion of cost out would be cash, and it would be improvement in working capital. But bottom line I'd say total shareholder return will come back to you in November with the final assessment. I understand your question and we don't plan to stay at $7 billion cash flow generation number.

Steve, I'd just add to that. When you really think about 2017 to 2018 comparison, John mentioned first sort of the structural headwinds in 2017 I don't repeat. There is one time tax cost in Power of about $1 billion. We've got higher cash cost for restructuring at 2017. And we also had the PTC dynamics and the progress burn on renewable that we won't see again in 2018 so the structural piece of this is about $2 billion in 2017. When you think about 2018, we are going to get the benefit of more cost out, John talked about that right upfront and those actions have been taken throughout this year and will accelerate as we go into next year. We are also going to see some real working capital improvement. You know cash flow was hit this year by working capital burn. As we go into the next year that's really going to flip as we burned down that excess inventory build in both Power and Renewables. On a free cash flow front, we will have lower CapEx and software spend next year. And so there is headwinds here and I think you are going to -- you've seen that in the discussion earlier and I am sure we'll talk a little bit more about power, power, transportation and few others but the tailwind both the structural and the operational should really more than offset that as we get into 2018.

That's great, Jamie. I'll just add in the end here is we came out of the quarter with $8 billion of cash, $12.8 billion with Baker Hughes. We expect to go out of the year with about $8 billion of GE cash plus Baker Hughes. So and that's after we pay the dividend here in October and after we deal with the GE company maturity here in the fourth quarter of about $4 billion.

Right. So that covers it for this year, right, Jeff, then?

Yes.

Okay. So as a follow-up, John, I'd like to ask about this notion -- and I know you are going to go into more detail in November -- but just to start to think at a higher level of when GE earnings and cash flow hits when investors can think about as a trough, and by how much. When you start growing again, particularly in light of power's performance? And what I expect will be much larger restructuring actions taken and you've talked about beyond the $1.3 billion in fourth quarter. So, at this point of -- you're talking about 2018 having a lot of benefits that 2017 doesn't have. But how should investors get some certainty about when they can think that GE is in trough?

So, listen, I'd say -- I'd characterize this and think of 2018 as a reset year. As you know from the outset of the call, we have a lot of businesses performing well. We have significant issues in power, those will persist into 2018 and there are a lot of structural actions we need to take as a company. Cost out actions, capital allocation actions. Those will play out I'd say during 2018 and I'd look that as a reset year and a foundation for growth in cash and earnings and margins going forward into 2019 and beyond.

Our next question comes from Andrew Kaplowitz from Citi.

Hey, good morning, guys. I just wanted to follow up on Steve's question on power. When we step back and look at the entire business, obviously you've taken a reset here in guidance. And when you look at the business in terms of AGPs, aero units, just the total services, we know you don't want to give us specifics on 2018 yet, and you've already talked about expecting a tough 2018. But do many -- or really any of these shipments move into 2018? And how much cost out can -- how much can cost out help you stabilizes the business in 2018 and beyond?

Yes. I'll start. So as you would imagine we essentially have a team at Power and they are going very deep not just on structurally what's going on services and how we think about on a go forward basis. But also the structure, the cost structure of power itself. This is something we John and I have been on for last four five months. We don't have a cost structure that reflects the market that they are competing in. And we need to get out and they are deeply, deeply engaged and laying that out for 2018. That is critically important to getting the business stabilized and moving forward. I think one of the things they are trying to do is over the last three or four years I would say the amount of convertible short term volume that the business with whether it's AGPs or aero units et cetera has grown over time. And one of the things we are trying to do is get the business stabilized on what is their pragmatic look at volume not just in the fourth quarter but for 2018 that sets the business up for the long term. And I think that that's what the team is pulling together. They and John will share with you in November when they stand up. But I think we are focused on all the things you would expect us to be focused on power and team is really digging in.

Andy, just one other thing I'd add to that. We spend a lot of time in power. I have been there several times already. We had a lot of time with the teams. When I look at that business in that situation first overall I really put it into three basic thoughts. One is the macro situation. Two is our franchise and three is how we execute and how we run the business. The macro situation is challenged, it's a very dynamic industry, there is lot of disruption especially in North America, over capacity, utilization, and you guys all know the issues. So there is a lot going on in the industry but I think even on a number of scenarios that look at, there is going to be some growth 2%,3%, 1% there is a range of forecast of the electricity generation coming from gas power over the next 10 years. So you've got emerging market et cetera. So it's a challenged macro environment for sure. But there is a base there. Second is our position. This gets to the notion. We have strong franchises. We've got leading technology. We've got 50% share in H class, large and installed base 30% of the world's electricity of the machine. So macro is tough, franchise is really quite solid, the execution has been the issue here. As Jeff said, we just fundamentally did not see the change in the market and we kept an open throughout opposition if you will and did not take enough cost out quickly and we've been left with inventory that goes overly optimistic. So as I step back and look at from where we are today, Russell, the team, they really digging into the business. I see a lot of opportunity move forward in terms of cost out, margin rate et cetera. So it's an inherently good franchise in a tough market and we can run this better.

Our next question comes from Julian Mitchell from Credit Suisse.

Hi, thank you. Just a question I guess I am looking at power and the relationship of that to your commentary of significant CFOA improvement in 2018. Because I guess a lot of the CFOA shortfall this year is because of power, and you said there's, I think, $3 billion less cash than expected in that business. It's obviously a backlog business. I would guess the pro forma power backlog today, including energy connections, is $100 billion or so. And given that the power market will stay tough in 2018, how do you reconcile the significant overall firm-wide CFOA improvement with a very tough power market again in 2018 and maybe further out?

So I am going to start and then I am going to let Jamie trying to give her views on 2018. So I think it's a good question. We do have a big backlog that's an asset we believe not a liability. But if I were going to focus on three things from 2017 to 2018 in power, one is inventory. So we total for the company this year and $7 billion receive CFOA construct that Jamie talked about. A big piece, almost $2 billion of that is an under performance in inventory versus the working capital assumption we had for the year at $12 billion which is about $3 billion flow. And virtually all of that inventory is power. So where we are over optimistic planning both services and units inventory. That inventory is going to liquidate over time and we will get a big benefit we believe in 2018. Second is in 2017 we had about $1 billion of tax associated with restructuring between Hungary and Switzerland as part of the Alstom something. That cash outflow will not repeat next year. And then I think importantly the third leg if you will is a meaningful cost out which also equals cash. A meaningful cost out of the structurally and what's going on in power. We stay well underway on, we are not waiting to exercise these actions; we are taking these actions as we speak. And that also will be a contributor or better profile in 2018. Jamie you want to --

Yes. Jeff, I'd say you touched on the big item which is the tax piece, the higher cash cost this year for restructuring, more cost out really helping us as we get into 2018. And as you can imagine, John talked about the $2 billion plus, a big percentage of that is power. And then the working capital improvement. I guess I'd just say that so to we are going to take you through more detail views and all of 2018 on November 13. We've taken pretty pragmatic view towards this. And I think what you see in terms of us looking at the total year 2017 as well as how we are thinking about 2018 will be tampered as it relate to power. We do expect the condition that we are seeing to continue as we move into that but some of the structural stuff that underlies the cash flow should be a tailwind to offset that.

Next we have Jeff Sprague with Vertical Research Partners.

Thanks and good morning, everyone. There have been a couple elephants in the room leading up to today, and another one has been the contract asset account, which is also built upon numerous assumptions. As we sit here and listen to aggressive forecasts, unrealistic assumptions, et cetera, particularly in power, how do we get comfortable with what's gone on in that account? And have you guys actually been able to scrub through that yet?

Yes. I'll start and then Jamie will say -- so we have Jeff, we've been digging through that I'd say over the last six months. I think we are very comfortable with where we are. And I think you got to think about in power case in a number of buckets. The first is long term service agreement. And I want to be clear here in the third quarter with this performance, our productivity at CSA cum catch was actually down $45 million year-over-year. So it's a small contributor where we are year-over-year in the quarter but it's not the reason that we will way off where we thought we would be in the third quarter. The second is we've really grown long-term equipment agreement. Now this is 811 accounting, these are long-term contracts and generally anywhere from 12 to 24 months, where we build projects out and as we go along the way we incur cost, we rev rec on milestones and then there is also cash billing milestones. And they don't always line up on top one another. That has grown over the last two years, really is a function of two things. One is we added Alstom to the portfolio which had a more higher content of long term project. And as we build out the H units we've done a lot more full scope, much larger scope projects even if it were just content to the turbine island all the way through HRSG and the steam tail that we got with all Alstom, so the amount of this activity in the portfolio has grown. And as a result of that our 811 balance is particularly in power have grown. And so that cost if you will generally liquidates over 12 to 18 months. So we are higher this year by about $800 million than we originally forecast, almost all of that in power. But that will liquidate and turn to cash as we hit billing milestone over the next 12 to 18 months. Jamie you want to --

Yes. On contract assets, look I am deeply familiar with that model and I've only be here in Boston for a couple of weeks but I have gone through and sat through a number of the big reviews with the businesses. And I know the GE balance sheet very well. Look, there is nothing I've seen that gives me any indication on the accounting issue here. I think Jeff explained it pretty well in term of long-term contract equipment build we are seeing.

Last thing Jeff I'd say just if you try to synthesize the power situation I would say overly optimistic on the market. Aggressive inventory build in TM and AGPs and not taking the cost out. Those three things have sort of combined to lead to an earning shortfall and the cash pressure.

Next we have Scott Davis from Melius Research.

Hi, good morning, guys. John, it seems like you're making lots of changes at the management levels and direct reports and such. But what can we expect at the Board level? You could make an argument this current Board was kind of the Board that got GE to this bad spot. So how do you think about that -- changes in that regard?

So just a couple of things on that, Scott. One is as I said at the outset; we are looking at every single aspect of the company. Inside the company and outside and that includes the Board. So everything has been on the table. I'd add that the Board has given me a mandate to look at everything with on constraints. They have been fully supporting of making change. We announced recently that Ed Garden is joining the Board. I really look forward to that. I think that's going to enhance the dialogue at the Board level. I think a really robust dialogue to be between and the Board is the healthy dynamic that something I look forward to. And then the last thing obviously is referenced frequently Board is big at 18 people; there is no doubt about that. And that's one of the topics being discussed. So I put it in the bucket of all things being examined right now.

Next we have Andrew Obin from Bank of America.

Hi, guys, good morning. I just wanted a question on cash flow. We've been getting questions on intra-company receivables that were created when GE assumed debt from GE Capital. So first, is the timing of these receivables matched to the maturities of the debt assumed by the industrial company? Basically the question is could there be a timing shortfall? And finally, is there a risk that the assets rolling off GE Capital can't cover the size of their receivable, and you might need to put in more capital into GE Capital down the line, sort of crippling -- impacting industrial cash flow?

Andrew, there is no timing mismatch between GE and GE Capital. They are as opposed to going to external markets around some of the debt that we added this year. We gave our plan to increase net debt -- debt in the company $12 billion this year. Some of that we've gone externally, some of that we've taken from GE Capital by assuming existing external debt to GE Capital had on a fair value basis from coupon perspective. But there is no mismatch of receivables or timing between GE and GE Capital whatsoever. And we don't have any reason to believe that the $155 billion of assets that GE Capital has is not going to serve us, their outstanding debt. Based on maturities here, the cash flow and the earnings in the business, that the GE Capital with the excess liquidity and GE Capital was going to essentially run off year end 2019 and lot of that outstanding debt is essentially the fees in our liquidity pool. So I don't see issues with the either of those things.

Next we have Robert McCarthy from Stifel.

Good morning, everyone. I guess the question -- turning to the asset sales, as we have picked over the dividend quite a bit, is how do you think about kind of the what's on the chopping block, how you are thinking about it, how you are thinking about the cash generation of some of these businesses? Because despite the fact that you said at the outset that there isn't an existential question here with respect to GE, the fact of the matter is any asset sales that you're going to garner or that are going to be accretive or give a good valuation are probably some of the better cash- and growth-led assets of the company. So how do you get away from the fact that you might be selling businesses that ultimately leave you with a company with just structurally lower industrial free cash flow by definition?

So let me just for a background I grew up 20 years in the financial services business largely investing money. So this is sort of my background to look at where do we invest, what are the structural opportunities, what are the risk, what are risk adjusted returns we can expect. So as an orientation that's how I come and looking at our portfolio and how we allocate capital. We do a lot of the capital allocation inside the company if you will. NPI spending, P&E all those things we are looking at that very intensely. A lot of the capital the company is allocated that level. So we've got a very robust plan and we are implementing and looking at that inside businesses, between businesses, should we put more money in business unit one or two et cetera. So there is a deep analysis going in implementing inside the company. When I look outside the company and what our options are outside the company. They are just a number of businesses here we are really evaluating in that context. Can they compete? What's our competitive position? What's going on in the end markets? What are the returns on capital? How much capital do this each businesses consume? How much management bandwidth do these businesses consume? And as you start to array our entire portfolio which is large and complex and we want to simplify that. There are number of assets, some performing well, and some not performing well that we just don't want to stay with over time. They are good companies that might have a better home somewhere else. So it's a dynamic process, it's a return base process. And at the end of the day the exercise here is to really concentrate the economic firepower of the company on the areas that promises most substantial reward. There are a lot of areas we want to grow in additive and digital and things. So we want to make sure we are channeling the money to the highest return option. And that will be a dynamic and ongoing process always for me.

Next we have Deane Dray from - RBC Capital Markets.

Thanks. Good morning, everyone. I'd just like to follow up on Rob's question there; and John, your answer. You sized today a new disclosure, $20 billion in asset exits over 1 to 2 years. And maybe you can address the timeframe in terms of might you be moving quicker in these exits? And also you talked about other options being considered beyond that $20 billion. Can you frame for us, both in size and thematically, how you might be looking at these other options beyond the $20 billion?

I'd say on size and two things on timing just stick to the 1 to 2 years outlook. We've got a process going on right now, depending on the type of transaction and structure, the speed of that will move, if there are carve outs and things we have work we had to. So I wouldn’t change the outlook for that. With respect to broader than that, I'd go back to what I have said earlier which is dynamic process that I will do everyday while I am in this job, which is looking at all the portfolio and where we can create value and where we are competitive.. So I don't have a specific thing to share with you today. We will review, I have seen more depth in November but it's going to be an ongoing philosophy and mentality and rigor that make sure we are always investing in the right places.

Thank you. Next we have Nigel Coe from Morgan Stanley.

Thanks for question. Maybe John, just clarify the $20 billion. I'm a little bit confused. Is that $20 billion of sales, or is that estimated value of the asset sales you've identified?

It's rough estimate of asset value.

Okay, great. Fantastic. And then maybe Jeff or Jamie, you put out a $0.05 estimate for the impact of ASC 606. So can you maybe just mark us to market on where that sits right now? Thanks.

Yes. So I'll give you shot. We are not going to have a final number until we complete the year. So that just to lay that down. Jamie is going to share with you in November an estimate what we think the 605 to 606 impacts going to be 2017. I would say generally the last thing we told investors was we expect the 2018 to be about $0.05 impact on transition. We don't have final numbers here but I think that's going to be a larger impact. I don't know exactly how much but it could be between $0.05 and $0.08 or $0.05 and $0.10. And will that get closer to final when we move towards year end. The other thing I want to caution everybody on, once we convert the 606 on January 1st, those are the only books we are going to have. We are not going to keep two sets of books between 605 and 606. So the ability for Jamie and the team in 2018 to go back and tell you exactly what that transition impact is going to be for the year or any given quarter is only going to be a very rough estimate. We are not going to keep two sets of book.

So, look we will take you through this on November 13. I mean obviously there is a big fourth quarter focus area. The one thing I'd add to what Jeff said is the cum catch is still in the range of what we've been estimating before. And as we go through it we lay out both how we think you should think about margins on long-term equipment, margin on services and just how best to sort of gauge the 2018 to 2017 run rate views.

Great, thanks. I Jump before you wrap we just want to thank everyone for joining. Know we ran a little bit long but we wanted to try to get in as many question as we could. John to you.

Great. Thanks Matt. I'd finish where I started just saying we are deeply disappointed in today's results. They are unacceptable. That is crystal clear to the team here. We fundamentally have a collection of good franchises. We have to run them better. We know what the issues are. We know we need to do the fix them and I'd characterize this as largely a self help story here. And I'd just from here forward we reset the company for a better future. And on the behalf of myself and I know definitely all of the GE employees, we look forward to delivering for investors. This is a company we have deep pride in and you can count on us to deliver in the future. Thanks.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.