Good day, ladies and gentlemen, and welcome to the General Electric Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Christine 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 GE’s second quarter earnings webcast. I’m joined by our Chairman and CEO, John Flannery; CFO, Jamie Miller; and our new Head of IR Todd Ernst. 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 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 will turn the call over to John Flannery.

Thanks, Matt. The second quarter was an important one for GE. We’ve described 2018 as a reset year; and in the quarter, we made significant progress on that journey. At an overall Company level, we laid out our path to a simpler and stronger GE by announcing our broad portfolio of strategy going forward to drive shareholder value. The core of GE will consist of our Aviation, Power and Renewables businesses. We also announced our plans to move our Healthcare, BHGE and Transportation businesses out of the GE core to enable and pursue more focused growth strategies as standalone companies. We made significant ongoing progress on our tactical priorities. We have now closed the sales of Industrial Solutions and Value-Based Care. We also announced the merger of our Transportation business with Wabtec and our sale of Distributed Power. This essentially completes the announcement or actual closing of our target of $20 billion of dispositions. We moved on this with deliberation but with an eye for value as well. We are materially shrinking the size of GE Capital with planned asset reductions of $25 billion over the next two years. We continue to take out structural costs. We’ve achieved $1.1 billion in cost out through the first six months, and we are on track to exceed our goal of $2 billion. We also announced changes in our operating model that allow us to take out an additional $500 million plus at Corporate by 2020. The aviation market continues to be very strong. We had a strong orders quarter and a good week at the Farnborough airshow with $22.6 billion of wins. The biggest challenge we face continues to be working through the turnaround of our Power business. The market continues to be difficult with softness in orders putting pressure on our…

Thanks, John. On the consolidated results, second quarter revenues were $30.1 billion up 3% reported. Industrial revenues were $27.7 billion, up 4% reported with the industrial segments also up 4% but down 6% organically. For the quarter, adjusted EPS was $0.19, down 10% from the second quarter of 2017. The industrial businesses delivered $0.21 of EPS, down 9%, driven by continued softness in Power, partially offset by strength in Aviation and Healthcare. GE Capital contributed negative $0.02 in the quarter, which I’ll cover later in the GE Capital results. Continuing EPS was $0.08 and included $0.15 of costs related to restructuring and other, non-operating pension and benefit costs, and tax charges related to the planned separation of GE Healthcare. It also includes $0.05 of gains and other marks, which I’ll cover in more detail on the next page. Net EPS of $0.07 includes discontinued operations. Adjusted industrial free cash flow was $258 million for the quarter, down by about $100 million from prior year. I will walk through more details on our cash performance on the next couple of pages. The reported GE tax rate was 39%, which was higher than previously expected due to the approximate $200 million tax charge to restructure our operations related to the planned separation of GE Healthcare. The adjusted industrial tax rate was 18%. On the right side of the segment results, industrial segment op profit was down 4%, driven by double-digit declines in Power, Renewables and Transportation, partially offset by solid growth in Aviation and Healthcare. Industrial operating profit, which includes Corporate, was down 11%. Through the half industrial segment op profit was down 3%. Next, I will go through a walk of earnings per share. Net EPS was $0.07 including losses and discontinued operations of $0.01 related to trailing cost from the…

Thanks, Jamie. In summary, we see continued strength in Aviation, Healthcare and corporate costs in the second half. This will offset pressure in Power. Renewables, Transportation and Oil and Gas should be about as expected. Cost out was $1.1 billion in the first half, on track to be better than $2 billion target. We are aggressively reviewing all cost out opportunities for the second half. We are targeting GE Capital earnings to be breakeven for the total year due to portfolio actions. We expect the second half to be better than the first half. GE is on a multiyear transformational journey, and the path forward is clear. Overall, we feel good about our execution. We see strength across the majority of the portfolio. We remain focused on implementing the broad macro strategic changes we outlined in June, while making sure our micro execution in each business continues to improve across the Company. And 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 comes from Scott Davis of Melius Research. Please go ahead.

Great. Thanks, operator. Good morning, guys and gals. The Power business, it continues to get a bit worse it seems, and the news flow just continues to get worse. I guess, the question is, the original restructuring plan, when you look at it now, is it enough, and can you get enough? With the agreements that you have with the French government, is it even possible to take out enough capacity to get close to matching up supply and demand on that?

So, Scott, let me just start out saying, it’s clearly our top priority, is managing through and fixing our issues in the Power business. So, we’re working that intensely, in total sense of urgency. The market is challenging, but we need to work through that. It’s going to be a multiyear fix, I think with some volatility. This is not something that’s going to move straight line quarter-to-quarter. But, let me take it in three pieces really, one is just the market; two is now we’re fixing it; and then, just as we look into ‘19 and beyond. I’ll start with market. So, we’re looking basically 50% down last two years, we’re planning for this to stay at those levels. So, we’re not looking for any rebound there. On the installed base side, the industry is not going way. I think, if you look at every forecast, recent forecast, Bloomberg and others that the amount of electricity generated by gas turbines will increase. So, we think there is something substantial to build around it longer term here, and our strategy is to restructure the business and maximize the value. We’ve got five basic things, Scott, in the plan here in terms of addressing this. One is rightsizing the footprint and the base cost. I think, the team made good progress on that. We’re about 550 and $560 million of cost out in the first half; we’ll be ahead of the target on $1 billion out. Then maximizing value of installed base, again, we’ve gone through that with you before, but we continue to make progress and thinking, improving our visibility, improving our commercial execution, sales incentives pricing controls. So, I think the team -- we’ve got execution and quality and then liquidated damages and in cycle time. Selling core --…

Just quickly, you guys haven’t really given us a number yet on what you think the run rate corporate expense is, once all the Healthcare spend and Transportation, once it all occurs. I mean, what -- do you have a sense of how much it takes in pure dollars of sense to run a company like GE from a corporate perspective?

Yes, Scott. From a corporate perspective, so, for this year, we’re looking at between 1.2 and $1.3 billion of corporate. Back on June 26th, we announced both externally and internally a number of changes to our corporate structure. First, was really decentralizing a lot of what is done at corporate today, and both moving folks to the businesses as well as a number of headcount reductions. I’d say, the second thing is we had historically run a lot of things centrally here at corporate as well, and that is all getting pushed out to the businesses, things like global growth, things like ventures, things like IT and other shared services. So, as you look at that, part of that as well was to announce at least $500 million in incremental cost out over the next two years. And those are auctioned; we’re in the process of really laying out the execution for that right now. And that really starts now and into the second half.

I’d just add, Scott, on that just as a matter of philosophy. I’m deeply committed to philosophy that the corporate center should be significantly smaller and really focused only on governance, on talent, on capital allocation strategy. So, a radical resizing of what it’s been in the past.

Thank you. Our next question is from Andy Kaplowitz of Citigroup. Please go ahead.

John and Jamie, can you give us some more of an update on GE Capital in a sense that -- you mentioned some smaller impairments in EFS, you give us more color on those, and you said you still expect the GE Capital to be breakeven for the year with the decent ramp up in the second half. Has visibility decreased at all in that our targeted, give your results in 2Q, or do you still see a nice ramp in second half gains to get you there, and I assume no new update in WMC at this point?

Yes. So, on GE Capital, we’re targeting roughly breakeven. That really hasn’t change from our earlier conversations. That could vary based on the timing of asset sales. We do expect fourth quarter tax planning benefits like we had in the past, and assets sale gains. I think, one important thing to note in the first half versus the second half is, as we’ve begun the process of asset sales and we’re doing pricing discovery, we often have to take marks or impairments on specific assets where there may be a loss on sale, but those gains we have to differ until the actual sale happens. And so, that gain portion of it really flushes through in the second half. We will also see lower excess interest cost. You saw we had a number of debt maturities in the first half. So, still targeting roughly breakeven for GE Capital, but again, timing of some of that could vary, and that’s a rough guide. On WMC, I would say, at this point, really not change to what we talked about before.

Thank you. Our next question is from Jeff Sprague of Vertical Research. Please go ahead.

Just two quick ones for me; first on the restructuring in 2018. I was wondering how much of the $2.7 billion you would label as actual kind of cost out restructuring relative to write-offs, the GE Healthcare charge and the like. And then the second question, I was just wondering on looking at the Aviation margins -- sequentially, pretty significant drop on sequential spares growth and a little bit of lift in LEAP volumes but not materially. So, just trying to get a better handle on how aviation looks for the year. Jamie, I think you said up 15% in OP. Is that correct and kind of what’s the revenue trajectory associated with that? Thank you.

Yes. So, let me start with the restructuring, and I’m going to talk about restructuring, including Baker Hughes GE. So, restructuring for the year at this point, we expect to be about $3.2 billion. That includes about $500 million of Baker Hughes GE. When you really break that down, of that 3.2, we see roughly 2.6 being related to headcount reductions, site closures, other facility exits, things like that. We do have a heavier run rate of what I’ll call BD and transaction-related costs this year. Just as you know, we’ve announced our $20 billion of dispositions. We are working through the other portfolio changes. So, we do see things like carve out audits, transaction fees and other things rolling through there as well. So, that’s that piece of it. Just shifting to Aviation for a minute. Let me start with -- for the full year, we expect Aviation to have positive margin uplift, and that’s consistent with the 15-plus op margin discussion we’ve had before. But just looking at second quarter in particular, we saw a couple of things here. So, first, sequentially, we had 64 more LEAP engines in second quarter versus first quarter. But if you look at second quarter year-over-year that ramp was really 3 to 4x. So, that was really a significant pull and really impacted margins in the second quarter. When you start to look at the second half, LEAP continues to come down the cost curve. So, while volume continues to ramp up, we’re seeing a nice benefit continuing in terms of the cost piece of it. On the services side, we are seeing some higher turnaround times in our shops, just given the volume ramp and which is resulting in higher shop costs. We saw some of that in the second quarter. The team is taking very specific action on that. And we expect some of that services pressure to continue in the second half, but not at the same level. Remember, we’ve got a very strong spares rate we’re seeing right now, and we expect that to continue. But bottom line is, when you put all that together, we expect full-year margins to go up. But second quarter definitely has some shifting, especially with that year-over-year comparison in LEAP.

And I’d just add just as a macro comment on the Aviation business overall. This continues to be an extremely strong asset. I think, if you look at markets conditions, they are extremely good in commercial, extremely good in -- freight frankly picking up, good in military. We have a very strong team. The team is working through the LEAP launch well. David went through that at the Farnborough show this week in terms of our delivery schedules and being on track with our delivery schedules that are on track, coming down the cost curve as well on a per unit cost. So, we’ve got I think a good market, a very strong franchise. We continue to clearly outperform on the orders and with customers, and a very strong team running that business with a great execution track record. So, when I step back and look at our portfolio of businesses, this one remains a premium business with a very good and visible long-term outlook.

Our next question is from Andrew Obin of Bank of America Merrill Lynch. Please go ahead.

I guess, I have two questions, one related to Farnborough and other one related to Power, both on services. There was a quote on Bloomberg from one of your colleagues I think, one of your aftermarket folks about some sort of MRO sharing arrangement with Boeing, it was fairly vague, but I’m just trying to understand is that the direction you’re going. And second, if you could just provide more color as to when you guys think transactional business is going to bottom in terms of revenues. Thank you.

I’m not familiar with the comments Andrew on the Boeing MRO strategy. So, that sounds off point to us, but we’ll follow-up with you on that one. On the transactional services business, I assume you are referring to the Power side of things. And I would just say, it’s a longer cycle process. So, you are dealing essentially with coverage of our installed base and coverage of outages. So, our first step obviously has been trying to drive visibility into our installed base, that’s upto about 90% right now from quite low levels. We’ve got about 80% of those sites with commercial processes and commercial bids being worked on. So, this is something that’s going to unfold over the next several quarters. But, I think the tactical steps upfront around visibility, commercial intensity, sales incentives, the building blocks if you will of something that can unfold over the next several quarters, the team feels good about what they’re doing there. So, it will take some time but it’s an opportunity for us. Margin rates were up I think about 400 basis points on the CM line and transactional. So, we got some work we can do on pricing and product quality and things. But, it will take several quarters I think for this to unfold.

And Andrew, I would just add on the transactional piece of it. We did see lower core volume in the quarter with fewer outages. But, the other piece just take into consideration is that upgrades were down close to 50% year-over-year, as well.

Our next question is from Steve Tusa of JP Morgan. Please go ahead.

I just want to thank Matt for all the help over the years. He was extremely diligent with us. So, I really appreciate his help. So, thanks, Matt. So, just two questions. The first one on Aviation just to kind of clarify. And I think you’ve made a lot of comments on the call about third quarter, fourth quarter. Given that seasonality has probably changed a little bit with the new accounting, it’s a little bit unclear how we’re supposed to kind of think about Aviation seasonally. Would you expect it in the third quarter to be down, flat or up relative to the second quarter from a profit perspective at Aviation?

Yes. We see the second half with the volume -- sorry, we see strong services continue; we see third quarter being up versus second quarter sequentially.

Third quarter being up versus second quarter. Okay, great. And then on the restructuring side, so $2.6 billion is -- how much of that is actual headcount?

I don’t have that split with me. We’ll have to follow up with you after that. But of that $2.6 billion, Steve, all of that relates to investment spend we make against headcount reduction, site and facility closure, and other costs out actions.

Thank you. Our next question is from Nicole DeBlase of Deutsche Bank. Please go ahead.

So, I guess two questions for you. The first is just a high level question. If you could just kind of comment a little bit on the work you’ve done around potential impact from all of the tariff activity that’s been thrown around over the past few months, and if there is risk to your guidance associated with that? And then, the second thing is just thinking about the Power ramp in the second half of the year. How much of that improvement is underwritten by restructuring actions that have already been taken? I’m just trying to get a sense of the risk if we see further deterioration in the top-line?

Okay, Nicole. Let me take the China tariff situation, and then Jamie can follow up on the Power thing. I think, just on the -- let me give you some context really on our business in China first and then how we see this unfolding. So, we import about $29 billion of goods globally into the U.S., about 10% of that comes from China. And our business in China, we do about $7 billion, little over $7 billion of revenue in China, and the majority of that is in our Aviation and Healthcare business. If you go and look at the actual tariffs, the $50 billion that are announced and implemented and $200 billion announced but not implemented yet. I would say, we look at it sort of a gross and a net basis. So, it could be $300 million to $400 million at a gross level before any mitigating factors are taken there. And there are some significant mitigating factors. The first is what’s called duty drawbacks. And these are basically credits for any components and things that we would import from China and ultimately reexport as part of the gas turbine, or an MRI machine or an aircraft engine. And that’s a significant amount of what we import. So, we think that could mitigate half or more of what the tariff picture is there. And then obviously over time, we also can adjust our supply chain in response to some of these issues if that’s what made sense. So, I’d say, we don’t see a major impact yet financially, certainly not on our ‘18 guidance. But that said, we are a company that’s built for fair and open trade that’s obviously a subject of debate and discussion. I think that’s what you’re seeing right now. We’re supportive of a fair and open trade. We have a massively global business in every sense, both customers, supply chains, everything. So, in our view right now as we hope and we expect that ultimately these matters reach a sensible negotiated conclusion, and we think that’s really in the best interest of all parties involved. So, we’re watching this carefully. But, I think the financial parameters of this, we’ve got a good handle on. And then, Jaime, do you want to comment on Power question?

Sure. So just looking at Power first half, second half, I think when you start to look at the second half, one thing to keep in mind is that the fourth quarter of 2017, we had $600 million of one-time items with some inventory write-offs and some other things last year. So, you have to think about that in the comparison first. In the second half, we do see lower gas turbine units, year-over-year. Services, as John mentioned, we do expect to start to see that pick up here in the second half, as the results of Scott’s efforts really start to take hold. Cost out, you asked about, we have a $1 billion cost out program in Power this year. For the first half, we’ve seen about 560, $565 million of cost out already. We expect to see at least that same amount in the second half. But fourth quarter is our biggest quarter. We’ve got the volume being lower, the services ramp coming through, the cost out coming through. And one other thing just to remember on volume is that of our gas turbine volume, about 90% of that is already in backlog. And then, just when we look at the aero units for the second half, we have a very strong pipeline there, but that can be a bit lumpy too.

Our next question is from Julian Mitchell of Barclays. Please go ahead.

So, just a couple of quick questions. One is on the second half free cash flow of about $7.5 billion. Within that portion, how much is really coming from working capital versus the sort of 2 to $2.5 billion outflow in the first half, and I guess how much of that is Power? And then, secondly, you talked a lot about the structural cost out. You had about a $1 billion out or more in the first half firm-wide, but your industrial EBIT is still only flattish year-over-year. So, I guess I’m trying to get a sense of the urgency around the magnitude of stepping up the cost plan, because maybe not that much of it is dropping through to the bottom line.

Let me walk you through the second half on the free cash flow and then maybe I’ll touch a little bit on the cost out element, and John may comment as well. So, for the second half on free cash flow, we do see higher earnings across all of the businesses, as we got a very strong volume second half, as you see. With respect to working capital, we see about $3 billion of inventory liquidation coming through in the second half. Really with the shipment profiles we’re seeing across Aviation, Power and Renewables, we continue to expect progress drag at Power but we also expect that to be largely offset by Renewables second half collections as we really start to see that PTC cycle in ‘18, ‘19 and ‘20 ramp. On contract assets, we had usage in the first half of about $900 million. We expect the usage to be higher in the second half, but lower than the $3 billion usage we had previously planned. So, that’s a little bit there. Just talking about the structural cost piece of it, so $1.1 billion out year-to-date, we still expect the $2 billion plus for the year. When you look at the $1.1 billion and where we’re seeing some shifting in the industrial margin, we are seeing lower volume impacting our margins, primarily at Power that was about $600 million, we’re also seeing mix also affect the margins element, primarily LEAP there, and some FX. So, it is being offset in terms of what you see right now in your operating margins, but again expect the strong half -- the second half as well on both cost control and cost out.

Julian, I’d just say, on the cost side of things, a couple of things here. One is, the cost out initiatives will never end. If we have headwinds in other parts of the business, as Jamie mentioned, that are eating it up, we just have to do more. So, we are looking constantly and aggressively at everything on the cost side of things. So, I think a sense of urgency and our knowledge of the need to execute on that is front and center. I continue to see additional opportunities I think in corporate. We have also gone through with our teams this whole notion of decentralizing corporate, pushing down if you will, or eliminating activity at the corporate level, I expect that’s also happened at the Tier 1 levels in the Power business and the Healthcare business, et cetera. So, I think there’s more to go there. But, this is a self-help execution story for us and the cost is a huge part of that.

Our last question is from Steven Winoker of UBS. Please go ahead.

I’ve got just two quick ones. First one is, I know, you guys give us adjusted EPS guidance of a $1 to $1.07, but I think most companies that we cover, tend to give us a GAAP number as well, especially considering all the moving parts around restructuring and everything else. Is there a way you could give us a sense of what that implies from your perspective on GAAP? And then, the second question is around just pricing and the order book, particularly around wind and on the equipment side and Power.

So, let me start with the pricing discussion for a minute. Pricing from a Power perspective, as you see, I mean, the market is very soft right now. We’re expecting a flattish market for the next couple of years on Power and there is a lot of over capacity in the market. As you would expect, we’re seeing continued price pressure on equipment in many markets. I would say on the services side, we’re seeing pricing being relatively stable in transactional services. You saw that come through in the first half with orders and revenue on transactional services up 5%. When you start to look at Renewables, a couple of dynamics here. First, we’re still feeling the effects from the European auction environment. So, pricing does continue to be challenging, but we’re seeing it moderate, and we saw that this quarter. As we move into what should be a very strong volume couple of years, we expect that to help the pricing element as well.

I’d just add on the -- with respect to the adjusted earnings topic in general, that’s something I’d ask Jamie and now Todd as he’s coming in here to look at. I understand your point, and I would say expect an update on that later this year.

Thank you. Just as a reminder, John, before you wrap, replay of today’s call will be available this afternoon on our investor website.

Great. Thanks a lot, Matt. And I, as Steve noted earlier, do want to thank you really for just the tremendous job in this role. You’ve led us through a lot change and movement in the Company and have always been responsive and service oriented to our investors and analysts. So, thank you for an incredible effort and performance there. And we welcome Todd Ernst as well. So, Todd, the baton is passed to you. We have every expectation you will build on that great work. So, I would just finish really by saying, this is really the one year anniversary, if you will, for me. And as I reflect back, really much progress has been made at the Company. If I look back, I see obviously -- we’ve spent a lot of time working on a very clear strategic direction, positioning the portfolio so that the businesses can thrive, delevering the Company, decentralizing the management approach. So, strong progress on the strategic direction of the business. Good ongoing progress on our tactical execution items. The $20 billion of disposition, cost out, the team continues execute on the day to day things we need to advance things, and a lot of change. Change at the top of the Company in terms of the leadership team, changes in our Board, changes in the culture of the Company, so a lot has happened in 12 months. As we stand today and just say we look forward and say, the path is clear. This is really a pivot point for us that this is an execution story going forward. We know what we need to do. We know where we want to go. We know what our strengths are and they are significant. And we know what our issues are, and some of those are significant. So, we’re focused on execution going forward. And I’d say, the team is clear where we’re headed, they know what they need to do, they know where they can contribute, they are excited about the path we’re on. In different pieces of the Company up here, different roles to plays, but there is a confidence in the future. And I’m personally certain we’re on the right path. So, as we said, it’s a multiyear journey, but I’m highly confident in the direction we’re. And it’s up to our team to execute and I’m confident in our ability to do that. So, that said and Matt thanks again for a great performance.

Thank you.

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