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

Good morning and welcome to today's webcast. I'm here with our Chairman and CEO John Flannery; CFO Jamie Miller; and GE Power CEO Russell Stokes. Before we start, I would like to remind you that the press release, presentation, and supplemental have been available since earlier today on our investor website at www.ge.com/investor. Please note 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.

Thanks, Matt. Before I start in on the quarter, I'd like to take a moment to step back and review where we stand and the progress we've made in just a short time. You've heard a lot from us since I became CEO in August. I recognize that the news we've shared in that time, specifically around Power and Insurance, has been tough. We are moving very quickly to tackle these issues and we are doing so in the context of running our businesses for the long-term. Our responsibility is to reshape this company and ensure that GE matters as much in the next century as it has in the past one. And as I take stock today, I feel good about the progress we are making and especially good about the strength of our team. We have a long way to go, but the mission is clear and we are moving forward together as one team with a single purpose. The backbone of our recovery is stronger execution. Back in November, we laid out a new vision for the future, the foundation of which was improved execution, an obsession with cash generation and capital allocation, a more focused digital and additive strategy, and a rapid reshaping of the portfolio to become a simpler, more nimble organization. Today, I'm proud to report that this organization is responding and we are beginning to show progress against each of our key initiatives. The teams have stepped up and embraced the challenges. And in this quarter, we are beginning to see the signs of what they can accomplish when called upon to pursue common goals and drive improvement. We have a lot to work on, but we also have a lot to work with. The team and I are as convinced as ever…

Thanks, John. Before I start with consolidated results, I want to remind you of some of the changes to our reporting metrics in 2018 that we discussed in November. First, on EPS, this is the last quarter that we report Industrial plus Verticals EPS. In addition to GAAP earnings, we will report an adjusted EPS number, which is total continuing operations excluding Industrial gains, restructuring, and non-operating pension expense. On cash, we will move to reporting free cash flow as opposed to CFOA. And lastly, two changes related to the adoption of the new revenue recognition accounting standard. As of January 1, 2018, our contract asset balances will be adjusted to reflect the new standard, resulting in a lower asset balance and lower earnings going forward. This doesn't change anything related to our cash balances or cash flows. We will provide restated 2016 and 2017 quarterly information on a basis consistent with the new accounting. We are still in the process of finalizing the newly restated financials and we will provide them to you shortly after we file the 10-K. Related to the accounting standard change is also a move to reporting remaining performance obligations, or RPO. RPO is a new GAAP measure and we will report RPO in the first quarter once it is implemented. Additionally, you may have noticed that our earnings press release has a new format. We believe it's more substantive and more easily digestible. We will continue to re-look at all of our communications formats and data that we provide to investors with the goal to continue to increase standardization and transparency. So you will likely see more changes as we move throughout 2018. Next, on consolidated results, fourth-quarter revenues were $31.4 billion, down 5%. For the quarter, Industrial plus Verticals EPS was negative $1.23,…

Thank you, Jamie. On November 13, I shared with you that we had a significant opportunity to improve the way we run the Power business. I spoke of fixing operating misses, the prioritization of cash performance, in line with a focus on income. And I outlined our return to driving a more holistic services capture of dollars per installed base versus pursuing upgrades and productivity in our contractual portfolio. I am confident in what I said in November. And I will talk in more detail about what we are doing to move the business forward. But let me first walk you through the results for the fourth quarter and the impact on total year. Starting with a view on orders, our orders in the quarter were down 25%. Equipment orders of $5.3 billion were down 24%, driven by GPS being down 63%, primarily on lower combined cycle turnkey scope. In the quarter, gas turbine orders were up 1 unit at 24 versus 23 units in prior year, with the increase driven by nine H units versus eight in the prior year. Total-year gas turbine orders were 75 units, which is down 9 versus prior year. Aero units were also lower, with 3 units ordered in the quarter versus 24 last year, with total-year units at 46, down 33 versus prior year. In December, we noted that the market was softer than expected, with Mccoy comments indicating that the industry could be heading for the lowest gigawatt year since 2002. We announced a 12,000-person reduction and a commitment to right-size our global manufacturing footprint. We believe that total gigawatts awarded will be even softer than we thought in December, coming in below 35 gigawatts in 2017. And still anticipate, though, roughly a 50% share of the market in 2017. We are…

Things, Russell. I am going to wrap up with the 2018 framework. There's no change to our industrial EPS or free cash flow guidance. Capital earnings will be lower due to the portfolio actions we are taking. Aviation and Healthcare are well positioned to deliver in 2018. Power markets continue to be tough, but we will manage this tightly. We are targeting free cash flow of $6 billion to $7 billion. Jamie mentioned we had some progress payments move into 2017. At the same time, we are focused on improving working capital and reducing CapEx. We are making progress on cost and cash. We are strengthening our balance sheet and ended the year with $11 billion of GE Industrial cash. Russell and the team are focused on fixing Power and they have the support of the company behind them. Aviation and Healthcare had excellent performance in 2017 and are well positioned for 2018. We’re running the businesses better and simplifying the portfolio. So with that, Matt, I will turn it back over to you.

Thanks, John. With that, let's open up the call for questions.

[Operator Instructions] Our first question is from Steve Tusa with JPMorgan.

Hi, guys. Good morning. So I have two questions. First one, with the lower base and profit, there is a lot moving around here. I think the prior segment guide was in kind of the $13 billion to $14 billion range on segment profits. And I guess Power specifically was going to be down 25%. What are you looking for next year with regards to those two metrics? And then as a follow-up, the contract asset guidance of negative $3 billion next year in free cash flow. Has that changed at all relative to what we've seen here in the fourth quarter and your approach to project selectivity?

So Steve, when you look at the 2018 segment outlook, we had laid that out for everyone back on November 13. Really, there is no change to how we are thinking about Industrial. So however you had thought about it before, the only thing to adjust really is how 2017 ended. The second piece of that to think about is last week on the Insurance call, we talked about with the GE Capital actions GE Capital would be about breakeven next year. And that's the other thing to think about as you work through that. Now on the contract assets piece, no change to how we thought about 2018. We still expect that to consume working capital of about $3 billion. Contract assets were roughly flat in the fourth quarter. But that is something that while we are pleased to see that and we have implemented a number of different controls on that, we are not starting to see that really take hold yet. So we don't expect to see that goodness or that shift really start to flow in 2018 yet.

So then how are you guys maintaining guidance if GE Capital is a little lighter and your base performance in 4Q was obviously on a segment profit basis below where I think most of us were expecting it because of Power?

So Steve, on that one, just a couple of thoughts here. One: we did in the fall really leading up to November a very detailed review of the businesses, deep dive into the businesses, as I shared with you. And really came up with a number of different scenarios for each business. And on the back of that work, that is how we indicated the range of $1 to $1.07. We thought that reflected the reality of the business franchises as well, but also allowed for some room for contingency in that context. So GE Capital and Power definitely put pressure on that model, but I'd say we also see strength in Aviation, strength in Healthcare, opportunity for more cost-out. And then the last thing I would just say is you can count on us for transparency, obviously. But we have a team that's dedicated to working through the issues and solving our issues and not mailing all of them right back immediately to investors. So we feel comfortable we can deliver this range in ‘18.

The next question is from Andrew Kaplowitz with Citi.

Hey, good morning, guys.

Good morning.

Morning.

John or Jamie, can you give us more color about the cash dynamics you saw in the fourth quarter? What ultimately do you think your teams did differently to deliver the better execution on the cash in the quarter? And can you talk about why progress collections were stronger than expected? Was it just timing? And does the fourth quarter's cash performance give you more confidence that you can deliver on your cash generation expectations in 2018 despite a weaker dollar business?

Sure, I will walk you through the pieces of the fourth-quarter cash flow and can comment on your questions as I go through it. So first, working capital helped us by about $3.9 billion in the quarter. A good chunk of that was inventory, about $2.2 billion of inventory. We really saw strength across the board across the businesses as just fourth-quarter shipments were liquidated and things moved through. On progress, a lot of that is billing and milestone payments. But we did see, as we mentioned earlier, some accelerated progress into the fourth quarter. Some timing that we didn't expect. That was about $1 billion. When you look operationally in terms of receivables, we did see past dues drop by about 4 points. And the team has done very good work there. We saw some of that movement throughout the year, but a nice drop in fourth quarter. We expect that work to continue as we go into 2018. And then on contract assets, I mentioned before that really the deferred was flat. Some of the controls that we're implementing are things like just really making sure that we are much tighter on our underwriting, not only how we think about the strike zone around returns, but importantly how the cash profile really looks on these contracts going out several years. Look, when you look at why it was flat in the quarter, a lot of that had to do with lower shop costs coming through at Aviation, which really pulled through just less revenue and a little bit on timing of revenue and billing. So while we are not seeing the effect of these controls yet, we do expect to see this over the next couple of years. Look, I'm happy with what we've done on inventory. I think the finished goods burn-down was really favorable. Good work on AR. But we have a lot more work to do and I think also a lot more opportunity here. Turns were flat for the year on inventory. And then on contract assets, I'm pleased with it. But again, more work to do here and expect to see more.

Andy, the other thing I would say here is just working the cash flow is 1,000 different variables. It requires a lot of visibility and a lot of execution, and that's really where we are investing our time and effort. So it really involves everyone in the Company, from the front end, the terms, how we are interacting with customers, how we are performing on project execution, how we manage the inventory, how we do billing. So we are just -- I had quite a good team in Healthcare running this process and it's just a highly mechanical deep dive into seeing the moving pieces, many, many moving pieces. The other thing I would say, just for perspective. As I mentioned in the opening remarks that this is our number one focus. As we go into 2018 for our pay structure for the teams, our incentive structures for the team, as we said before, we had numerous incentives before. We have two in 2018. One of those is free cash flow. So the Company is focused and incentivized around cash flow.

Thanks, John,

The next question is from Jeff Sprague with Vertical Research.

Hi, thanks. Just two things. First, just back to the 2018 guide. So if I'm just understanding what I heard correctly, relative to the November outlook, where on an adjusted basis you are expecting Industrial profit to be up 2% to 7%, it does seem like it's tough to get to your guidance on that, right? So we take where we've exited 2017, mark it down $2 billion dollars or so for rev rec, and then grow that 2% to 7%. Doesn't seem like it gets you there. It seems like there's something below the line. I don't know what I am missing. Maybe you could give us a little color on what you actually think Industrial segment profit is going to be in 2018.

Yes, Jeff, the thing I would probably point you to is that Power in the fourth quarter had a very tough quarter. And when you look at where we thought 2017 would land versus where it did, it was substantially lower there. Now, when you really deconstruct the fourth quarter for Power, there were really two or three main themes there. One of which is just sort of one-time adjustments and some non-repeat items. Another was the impact of market, as we saw aero units and AGPs lower than we expected. Another was really around operations and execution. And as Russell and the team have come in, first, the one-time items piece of it, which is about $850 million, about half of that was a charge for slow-moving and obsolete inventory that we took. We obviously don't expect that to repeat as we get into next year. The other piece of that $850 million was non-repeats from 2016. The market piece of it, we saw a tough market in the third and fourth quarter across both the aero business and AGPs. Now, we do expect that to levelize a bit more as we get into 2018 back up. We saw a second half here down. And then on the operations and execution, and Russell can give more color on both of these. Project cost overruns in PowerGen, Grid, and a little bit in Power Conversion. And then the transactional services piece of it, just with higher field costs and an unfavorable mix. Now second half of the year in 2017 was tougher on services. On all of these areas, I mean, Russell is putting some very important stabilization activity in place. And we expect to see that Power stabilize a bit more and be above 2017 as we get into the year. But Russell, maybe you want to give some color on that.

That's right, Jamie. I mean, the market dynamic within the quarter was $550 million. Lower aero units at 3 and 17 versus 31 in fourth quarter of 2016. We had lower services upgrades, so that came in at 25 versus 62, down 37. And then there was softness in the market related to Power Conversion that we have been navigating throughout the year. Jamie is right. On execution, we continue to just do everything we need to run the business better. We dove deeply into projects and we are working through cost overruns and adjustments that we needed to take in those projects, as we were nearing the conclusion of a number of legacy contracts. Truing up costs with partners on deals that were underwritten back in the 2013, 2014, 2015 timeframe. Had critical milestones that we were able to hit. They gave us better confidence around what those real estimates are going to be. And feel that we can navigate through that better as we go forward with some of the disciplines and controls we are putting in place. Jamie talked about the transactional services element that was in there. So it continued to be softer than what we would like. But I mentioned that Scott and the team have done a really nice job of going out, looking at the field, finding all of our installed assets, and working to understand the outages associated with those assets in the field. Back in October, we had visibility to only 28% of those outages. We actually can see 70% of those now, which is why we think that versus the 2017 run rate, there is a $1 billion, $2 billion opportunity for us to be able to go chase. And even with those pressures, we did have good cost performance at $230 million of favorable cost in the quarter.

You know, Jeff, one other thing I would just clarify. Just to be clear, what you had modeled for 2018 is probably roughly similar to what you ought to be modeling now. The thing that changed was 2017, not the 2018 element of the November 13.

And Jeff, one other thing I would add. Again, we ran obviously a number of scenarios for each business. I would just point out, again -- I will talk about Power in a second. But very strong outlooks in Healthcare and Aviation. Those businesses are really performing well. And I would say when you look at Power, it's obviously the focus point of this whole discussion. This is a very important franchise. It's going through a very difficult period, but we still have a strong franchise here. We have 50% share in the high-end technology. We have got a large installed base; a third of the world's electricity. So there is plenty to work with. It's clearly the new unit market is soft. But as we look -- all the analyses we do show a 0 to 2% ongoing growth in the coming decades for electricity from gas power. So there's opportunity in this business in the franchise itself. And as Russell laid out, there is basically four things to do to get that on track in terms of rightsizing the manufacturing footprint, working the cash and the inventory and the project execution, maximize the value of that installed base, as he walked through. That is still a very valuable asset. And then lastly, improving really the management capability and bandwidth and processes. And Russell is all over that. We have made obviously a lot of changes in the management structure of that business. So it’s a lot of work. We said ‘17 issues would carry into ‘18 in Power. But it is still a good franchise and an important business and we’re going to make the most of that.

The next question is from Steven Winoker with UBS.

Thanks. Good morning, all. John and Jamie, could you maybe frame -- help us frame the downside a little bit here? On the liability side and reserving, maybe just what do you do on WMC in the quarter? How do you see changes there or in some of the other disclosed liabilities that we've seen quarter by quarter? And just give assistance for that level of reserving that you are operating and kind of the window of sensitivities around it.

So Steve, I will talk you through GE Capital and just WMC and other things we monitor there. We've got WMC and we have got some other trailing obligations around GE Capital, some of which are litigation-related, some of which are just indemnities from the assets we sold. Ex-WMC, we hold reserves on that of about $700 million. That will play out over the next year or two. I think that those reserves are in the right place. When you look at WMC itself, there is a couple of components here. One is the reps and warranties lawsuits that we've disclosed in the past. We think we are fully reserved there at $400 million. The FIRREA investigation that's being conducted by the DOJ, that was also -- I think we got pretty good disclosure out there on that as well. We have not yet had substantive discussions with the Justice Department. We are early in the process there, so I really don't want to speculate on that one.

And you didn't raise that out all in the quarter? The reserves?

No, we didn't.

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

Hi, guys. Good morning.

Morning.

Morning, Andrew.

Yes. Just a question in terms of the impact of oil price on your business. And I think the question is twofold. I would've expected sort of better Water dynamic at Baker Hughes. But then also looking at your exposure to energy-rich regions, what does that do for your ability to collect better in 2018?

So first on Baker Hughes, they have a call at 9:30 where Lorenzo and Brian will take you through that. When you look at the oil-rich regions, I'd say a couple of things from a finance perspective. One is we did see some order uptick across some of our businesses in those regions in the fourth quarter. In terms of the ability to collect and really work through some of the other more operational issues, I think this can be a favorable thing for us in ‘18. In Oil & Gas in particular, it's really a longer-cycle business here. So when you think about the recovery, while we are starting to see some activity in oilfield services, turbo machinery solutions, things like that over time should benefit.

Just a follow-up if I can. What about divestitures? How does that figure in your EPS outlook?

When you look at the divestitures -- so we moved some of those to held for sale this quarter. We have got about -- well, we've got a handful of business and product sales, smaller ones, that are in the process right now. The value and proceeds estimate on that right now is in the $4 billion to $5 billion range based on today. There should be no impact to 2018 for free cash flow and EPS, just based on timing of when we see that come through. You know about Baker Hughes and Transport and IS. Everything else that we are working through, it's probably about $500 million of free cash flow. But that's really more of a ‘19 thing.

Andrew, I would just add just in terms of the activity level around those smaller dispositions that good level of interested, very active, pricing looks good. So we like what we've seen so far on that.

Our next question is from Scott Davis with Melius Research.

Hi. Good morning, guys.

Hey, Scott.

Morning.

If I was to look at one part of our model that we're probably a little bit insecure of, I should say, it's just around price in Power. And you're taking costs out, but are you comfortable at least that deflation in Power -- and I don't just mean on the OE side. I think we've seen that for 15 years. But on the service side, are you comfortable that that has stopped as the rate of change? Or maybe just Russell could fill us in on where we stand there. Thanks.

Yes, so we continue to work through the assessments on what's happening in the transactional side of the business. So we've been paying attention, I would say, to it holistically around total margin performance. There is an element of price that we have acknowledged that we felt up to now, just given that we did not have the level of attention that we should have had on that portion of the business. We also acknowledged in the past cost overruns around some of the execution that had taken place as well. I feel with the exercise that Scott and the team that is working through that we ought to be able to see things stabilize. And actually look at how we provide a better set of product offerings to be able to support the transactional fleet as we go forward. But that is still a work in progress.

So Russell, I mean, one of the things that -- your competitors have always said that GE is a little bit tough on price. And maybe you guys had made some decisions in the past that weren't economic. Is that something that has materially changed under your watch? You are going into projects and contracts with more discipline?

So across the board, we are implementing much more disciplined underwriting practices. There is a new strike zone governance process that we are managing with myself and our CFO as well on the different levels of deals that we are willing to go do from a price, terms and cash performance. The process is definite tighter than I would say than it was in the past. And we believe that that is going to be good for us in the long-term.

Our next question is from Gautam Khanna with Cowen and Company.

Yes, I was wondering if you could just expand on the nature and the scope of the SEC investigation into contract assets, and whether - how far along you are in that interval review of the fidelity of that balance right now?

Sure. I can comment on that one. So this is a space, CSAs, that I've spent a ton of time on over the years. This is something that at the Company level we have really exhaustively reviewed it. We've got a deep finance team, a deep controllership team. And as the SEC has started to take a look at this, I would tell you its very early days. As I have come into the role, I mean, just like John, I am going through a very deep review on pretty much everything in finance. Look, there is nothing here that I am overly concerned about. But look, if I see something, we will deal with it. But I don't see anything at this point.

And to your point, it's early days. Just to follow up --

Early days in the process with the SEC, yes.

Okay. And to follow up on an earlier question on GE Capital and potential liabilities not reserved for. I'm just curious -- to the extent that there is any exposure, maybe it's on some of the residual WMC or what have you, where is it? Where would we possibly have some exposure that maybe isn't fully reserved for now. Just because the charge that you talked about last week that was going to hit us in Q4 and did was bigger than we expected. I'm just curious -- you've kind of gone through everything or have you? I mean, are we still in the discovery mode of some of the liabilities from years back that could actually bite us?

I think we've got a good inventory of what we see. And as we've gone through this, I think our reserves are appropriately set. I think what will play out over the next year or two is really the work with FIRREA and the Department of Justice. And look, as that plays out, we will see where that goes. If we need to take additional actions in GE Capital, we will take them. But it's really too early to speculate at this point on how that could land.

Our next question is from Joe Ritchie with Goldman Sachs.

Hey. Good morning, guys.

Hey, Joe.

Jamie, I wanted to ask you a question. Early, you made reference to the better cash flow in 4Q partly being related to some timing. It sounded like some receivables timing in 4Q. So I'm just curious. As it relates to the 1Q cash flow number -- last year, I think you guys were down about $2 billion to $2.5 billion of free cash flow. Is the expectation then for 1Q that it should be then worse than it was last year partly because of this timing?

I don't expect it to be worse than last year. I actually expect it to be better than last year. I think what you are going to see, though, is a bit of a push around progress timing. If you remember, we were really hit by progress coming into 2017 in the Renewables business. And that should be a non-repeat going into ‘18. So that should be helpful to us. Having said that, with the timing of progress between fourth quarter ‘17, first quarter of ‘18 that we saw with Power and Aviation, that's going to swing back around. So I do expect it to be negative, but not nearly as bad as last year.

Got it. That's helpful. Thank you.

Just beyond that, that whole cash thing. Obviously, with orders and deposits and things, those things move around in a discrete manner. What we're really focused on is driving the machine behind our inventories and our supply chains and our commercial terms. So these will move around a little bit based on discrete orders. But what we are really tracking is how are we doing on managing the overall machine, if you will.

Got it. And John, on that point, there's been no change then to the $2 billion or so in working capital improvements that you are expecting in 2018?

That's correct. In fact, I expect it should be slightly better than that.

And our final question comes from Robert McCarthy with Stifel.

Good morning, everyone. The first question is just on the raise in the effective tax rate for modeling purposes in the out years for Industrial. How does that affect how you are thinking just conceptually about cash, CFOA, and Industrial free cash? How much of a potential headwind could that be in the out years?

I think over the next several years, the impact of the transition tax should be quite small. We are modeling mid- to high-teens tax rate over the next couple of years, really as we've got credits and other losses and deductions that will continue to carry us through. As we get out into the 2020s, that rate will moderate into the low 20%s. In terms of the cash modeling, for the near term, we don't expect a significant shift in that profile.

But over the longer term, obviously, that's a structural headwind?

Over the longer term, I think we have to see what our tax positioning is. Look, I think it's hard to speculate at this point three to four years out on that one.

Thank you, John. Before we wrap up, I would just like to thank everyone for joining today. Reminding that a replay of today's call will be available this afternoon on our investor website. John? To you.

Great, Matt, thanks. I'd just wrap up by saying there is really three thoughts as I look at the quarter and then move ahead into 2018. One is, as we said, we are deeply focused on running every asset that we own in a more effective manner. So back to basics on costs, cash, capital allocation, people, project execution. And I think you saw signs of that in Q4. I'd call the green shoots on that in Q4, and that's really the core focus of the business into 2018. We did talk in November about focusing on Power, Aviation, and Healthcare. We really like the franchises we have in all three of those. I will do whatever it takes really to make sure that those businesses are positioned to flourish in the future, have the right resources, have the right investment flexibility. And we are looking at any option we need to think about in that context. And we are really thinking about not just how they flourish in 2018, but 5 years from now, 10 years from now, 20 years from now. What is the best outlook for those businesses that we can create for our customers, for our teams. And when we have that right, obviously, it will work for the shareholders. And then the last thing I really just want to say is to the best part -- I've got almost six months under my belt as CEO. The best part has been just watching our GE team up close. It's an incredibly passionate team about our businesses, about serving the customers, about each other. And I would say most importantly, in the context of 2017 into 2018, it's a deeply competitive team. And it has a will and a deep desire to be a winner. And so when I look at the overall picture for GE, I always come back to that. I always come back to the strength of the 300,000 employees and I would just say as we head into 2018 and go into battle in 2018 with that team and with the strength of the businesses, I'd just close saying I'm confident we can do this. So thanks for your time and we will see you in the future. Thanks.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. Good day.