General Electric's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.18.13 | About: General Electric (GE)

General Electric Company (NYSE:GE)

Q3 2013 Earnings Conference Call

October 18, 2013, 8:30 am ET

Executives

Trevor Schauenberg - Vice President, Corporate Investor Communications

Jeff Immelt - Chairman of the Board, Chief Executive Officer

Jeff Bornstein - Chief Financial Officer

Analysts

John Inch - Deutsche Bank

Scott Davis - Barclays

Nigel Coe - Morgan Stanley

Julian Mitchell - Credit Suisse

Joe Ritchie - Goldman Sachs

Steven Winoker - Sanford Bernstein

Deane Dray - Citi Research

Stephen Tusa - JPMorgan

Shannon O'Callaghan Nomura

Christopher Glynn - Oppenheimer

Operator

Good day, ladies and gentlemen, and welcome to the General Electric third quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. My name is Shaquana, 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, Trevor Schauenberg, Vice President of Investor Communications. Please proceed sir?

Trevor Schauenberg

Thank you, Shaquana. Good morning and welcome, everyone. We are pleased to host today's third quarter webcast. Regarding the materials for this webcast, we issued the press release as well as the presentation slides at 6:30 this morning, which is something new for us. Slides are also available for download and printing on our website at www.ge.com/investor.

As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light. For today's webcast, we have our Chairman and CEO, Jeff Immelt and our Senior Vice Chairman and CFO, Jeff Bornstein.

Now, I would like to turn it over to our Chairman and CEO, Jeff Immelt.

Jeff Immelt

Great, Trevor. Thanks and good morning, everyone. You know what? GE had a good third quarter in an improving environment. Our orders grew 19% with great balance. Our growth markets were up 22%, the U.S. was up 18% and Europe up 17%.

Earnings per share was up 18% ex-unusual items, industrial earnings growth 11% with six or seven segments growing all by double digits. Capital continues to execute on our strategic objectives. Earnings were up 13%, while our financial position continued to strengthen and we had $0.04 of uncover charges in the quarter and no industrial gains.

Operations were very strong. Our margins grew by 120 basis points behind strong value gap performance in simplification. Our industrial cost out reached to $1 billion through the third quarter and we are significantly ahead of our plan and CFOA is up 5% operationally. This includes a $3.9 billion dividend from GE Capital year-to-date.

We have returned about $14 billion to investors year-to-date, well on our way to our $18 billion goal. At that the same time, we continue to invest in strategic acquisitions like, Avio and Lufkin, so overall this was a good quarter for GE team.

Our orders were highlight for the quarter. Overall growth was up 19% with strength in equipment and services. Every business grew and backlog reached $229 billion, equipment orders grew 32% with strength across the board and orders price was flat.

The orders profile is very encouraging. Services was up 5%, with real strength in power gen services and aviation commercial spares. Total orders in the U.S. and Europe were both robust and seven growth regions had double-digit orders growth.

These include Australia, Canada, Middle East, North Africa and Turkey, up 17%. Africa up 18%, Russia up 51%, China up 18% and ASEAN up 100%. Power & Water had a solid orders performance with growth 19%, and though this number did not include any orders from Algeria. Those will be booked into fourth quarter in 2014. Orders growth in backlog supports business expansion fourth quarter through 2014.

While we are making progress on our strategic growth initiatives, growth market revenues were up 13% with six of nine regions up double digits. This remains a key strength for the company due to our geographic diversity and strong share position. Services grew by 7% with margins up 60 basis points and aviation spares shipments grew by 25%.

Last week, we had our second Minds and Machines summit, where we announced 40 new service offerings in analytics and software. Our industrial Internet order should exceed $500 million for the year and we continue to drive our technical advantage. We announced 8-gigawatt, heavy duty, gas turbine wind in Algeria.

We will launched 50 healthcare NPIs for the year and we are gaining share. The LEAP engine is ahead of schedule and the GE9x recorded its first order and is well positioned for the Boeing 777 launch. We have the only locomotive to meet the Tier-4 standard and we continue to launch new appliance products with strong acceptance in retail and contract channels. With a strong backlog and good growth initiatives, I think we are well positioned for solid organic growth in the fourth quarter in 2014.

On margins, look, we are encouraged about our progress. GE's margins grew by 120 basis points in the quarter and were up 40 basis points year-to-date. Five of seven businesses grew margins in the quarter and all are flat or up for the year, excluding the impact of acquisitions.

Our results are [problematic] and sustainable. Our value gap is positive $660 million year-to-date and will continue to grow. We have achieved our $1 billion simplification goal in only three quarters and will drive substantial upside for the year and there will be no industrial gains in this quarter.

Our Power & Water had a solid quarter with improved mix, strong value gap and good simplification efforts and they should sustain this momentum into the fourth quarter. So on track to achieve our 70 basis points goal. Our results and service margins, value gap and simplification are accelerating and all businesses should have positive margin growth in fourth quarter and we still have a slight hedge in out plan.

On cash, we had a solid quarter. For cash, our industrial CFOA has grown by 5% year-to-date ex the NBCU deal related taxes which show in CFOA. We are still targeting to receive up to $6.5 billion of GE Capital dividends paid to the parent. We remain on track to achieve our $14 billion to $17 billion CFOA goal for the year. We have significantly higher revenues in fourth quarter than third quarter driving higher CFOA by year-end and our balance sheet remains extremely strong with $87 billion of consolidated cash.

Our capital allocation remains disciplined and balanced. Year-to-date, we have $13.9 billion to investors in dividends and buyback. We have invested $8.6 billion in acquisitions that will improve our long-term growth rate. We are on track to return $18 billion to investors in 2013.

Now over to Jeff to review operations.

Jeff Bornstein

Thanks, Jeff. I will start with third quarter total results. Revenue from containing operations of $35.7 billion was down 1% from last year. Industrial sales of $25.3 billion were up 2% driven principally by oil and gas and aviation, partly offset by Power & Water, as you can see on the right side of the page. GE Capital revenues were down 5% to $10.7 billion on much lower investment. Operating earnings of $3.7 billion were down 3% and operating earnings per share was flat at $0.36. That includes $0.02 for the Avio acquisition charges and $0.02 of restructuring in the quarter. We also no longer have earnings from the NBCU JV which was $0.02 in the third quarter 2012. I will cover these items on the next page.

Continuing EPS of $0.32 includes the impact of non-operating pension and net earnings per share includes discontinued operations which I will also cover on the next page. Adjusted CFOA, year-to-date, was $7.8 billion with solid industrial performance and $2 billion GE Capital dividends were paid in the quarter. The GE tax rate in the quarter was 20% and the GE Capital tax rate was zero. GE Capital continued the benefits associated with loss recapture in real-estate and tax efficient asset reductions.

In the second quarter, we said that we expect the GE capital tax rate to be in the mid single-digits for the year but that could be lower depending upon higher IRS solutions that could happen in the fourth quarter as well as expected dispositions in the fourth quarter which could impact tax rates.

On the right side of the page, segment results were positive. Industrial segment profit was up 11% with six of seven industrial segments improving. GE Capital also had a positive quarter growing earnings 13% versus 2012.

I will cover all the segments in more details on the following pages. So for one time items, in total we had $0.04 of charges in the quarter, $0.02 related to Avio as we discussed in September. Avio had a number of preexisting contractual arrangements with GE Aviation and U.S. GAAP requires us to record the fair value impact of effectively settling those preexisting contracts.

We also had an inventory fair value adjustment in the quarter. These resulted in $0.02 charge. Going forward, we will benefit from the efficiencies that Avio has achieved over time. We also had $0.02 of restructuring and other charges as we continue to take actions to reduce our cost structure. This was $0.01 higher than we had originally planned for the third quarter as we continued to identify track the projects that will lower structural cost and rationalize our footprint.

On the right side of the page, we included a walk from reported to adjusted operating results. In the third quarter of 2012, we earned $0.36 which included $0.02 of income related to NBC. In the third quarter of this year, we earned $0.36 that, as discussed that included $0.02 of the Avio related charges and $0.02 of restructuring. If you adjust for those items, operating EPS is $0.40 in third quarter of '13 versus $0.34 in third quarter of '12 up 18%.

For discontinued operations, we had an $82 million after tax impact in the quarter, driven by GE Money Japan. We booked $79 million of additional reserves to reflect ongoing claims related to gray zone. We ended the quarter with $527 million in total reserves. There were really no material change in WMC in the quarter, with a very slight reserve adjustment.

On the bottom of the page is a summary of our operating EPS and the industrial NBC gains and restructuring, with $0.02 of restructuring charges in the third quarter, that brings our year-to-date to a net zero impact between the first quarter gains and year-to-date restructuring.

With that I begin covering our business results and we will start with Power & Water. Orders of $5.9 billion were up 19%, European orders were up 9%, led by renewables and water. However PGS was down 18%.

Equipment orders were 37% higher at 3 billion. Thermal orders were 886 million, down 15%. The business had orders for 27 heavy duty gas turbines in the quarter versus 29 a year ago.

Renewable orders were strong, up over a 100% to $1.2 billion with continuing strength in the U.S. Distributed power was also strong with orders of $700 million, up 62% driven by aero demand.

Service orders were up 4% to $2.9 billion, up 7% excluding Europe. Despite continuing European softness, PGS orders were up 8% to $1.8 billion and we booked 15 advanced gas path upgrades versus four year ago.

Overall, orders pricing was down 80 basis points driven by equipment, down 2.9%, partially offset by services, up 1.4%. [Thermal] was down 1.4% and wind was down 1.2%. Revenue of $6.5 billion was down 10% driven by lower volume. Equipment revenue was down 13% on lower gas and wind volume.

We shipped 22 gas turbines versus 35 in the third quarter of 2012, and we shipped 407 fewer wind turbines, down 40%. This was partially offset by distributed power strength, up 44% with 76 unit deliveries versus 48 a year ago.

Service revenue of $2.8 billion was down 5% driven by PGS down 6%. Higher AGP volume was offset by lower new unit spares. Segment profit of a $1, 289 billion was up 9% in the quarter. The improvement was driven by positive value gap and distributed power strength and better cost performance.

SG&A was down 10% in the quarter and margins improved 330 basis points. Oil and gas orders were $4.4 billion, up 4%. Equipment orders were $2.3 billion, up 3%. We saw a strong turbomachinery orders growth of 17% led by a large midstream LNG order in Russia. The Lufkin orders of $243 million, partially offset by subsea down 41%. Subsea orders tend to be very lumpy and are up 17% over the last 12 months.

Service orders grew 6% in the quarter, drilling and surface was up, 21%, subsea up 27%, partially offset by measurement and control, down 8%. Total backlog was up 35% versus prior year and orders pricing was down 20 basis points with year-to-date remaining positive and up 70 basis points.

Revenue of $4.3 billion was up 18%, up 9% ex-acquisitions, equipment was up 19% driven by subsea, up 16%, the drilling and surface up 13% offset by measurement and control down 3% in the quarter.

Measurement and control was a disappointment in the quarter as we saw continued softness in the market. Service revenues grew 18% with strength in Global Services, up 13%, subsea up 43% and drilling and surface up 23%.

Segment profit of $519 million was up 11%. That's up 7% ex-acquisitions, primarily driven by higher volume and a strong value gap. Margins were down 90 basis points on a reported basis, down 30 basis points excluding the impact of the Lufkin in the quarter. This was lower than expected primarily driven by a software measurement and control market and there were some project delays.

With that we will talk about the aviation and healthcare. First aviation. Aviation had another really strong quarter orders of $7.8 billion were up 51% with equipment orders up 92%.

Commercial engine orders were $3.8 billion, up four times led by $1.6 billion of CFM orders, up nine times including $1.4 billion of LEAP orders. GE90 orders were $1.2 billion also up four times. Military orders continued their expected weakness, down 30%.

Service orders of $2.7 billion were up 9%, commercial service orders were up 15%. The average daily order rate for commercial spares was $24 million, up 9% in the quarter. Our fleet utilization year-to-date is up 3.1% and overhauls in the quarter were up 23%.

Military service orders fell 6% and flight hours continue to and de-stocking continues across the military. Orders pricing in the quarter was up 1.9% with improvements in both equipment and service. Revenue of $5.4 billion was up 12%, up 10% excluding Avio. Equipment revenue was 10% higher. We shipped 273 military engines, up 12%. We also shipped 559 commercial engines in the quarter, up 8% including 26 GenEx engines. Service revenues were 14% higher driven by strong spare part sales of $25.9 million a day which was up 25%. Military service revenue was down 17%.

Segment profit of $1.1 billion was up 18% driven by strong volume and value gap, with sales price up 3%. Margin rates improved a 100 basis points versus last year and we are up 70 basis points excluding Avio. Just as a note, Avio helped margins and Lufkin was a hurt on margins in the quarter. So overall acquisitions were about a 10 basis points drag in the quarter on segment margins.

Next is healthcare. Orders in healthcare of $4.7 billion were up 2%. Equipment orders were up 6% to $2.7 billion. Developed markets were up 1% driven by strong U.S. equipment orders up 8%. Europe was flat, Japan was down 24%, down 6% excluding the effect of FX. Emerging markets were up 14% driven by China, who are up 33%, Latin America up 28%, partially offset by Asia-Pacific down 16%.

Just a little bit on modality. HCS was up 5%, MR was up 13%, CT down 8% and ultrasound was very strong, up 14%. Life Sciences was up 10%, diagnostic guidance up 5%. So pretty good strength across the modalities.

Service orders of $1.9 billion were down 4%. Revenue of $4.3 billion was flat driven by growth markets up 5% led by China who are up 13%, offset by developed markets down 2%. Both the U.S. and Europe were up 2% offset by Japan. Segment profit of $665 million was higher by 7% as cost productivity from our restructuring efforts more than offset lower price. Margin rates expanded in the quarter 110 basis points.

Then moving onto transportation. Orders of $1.6 billion were up 34%. Equipment orders were up 65% driven by a large North American locomotive order for 275 units deliverable in 2014 and mining really continues to be soft. Services orders were 8% higher driven by solid growth in locomotive services probably offset by very week demand for mining parts. Revenues of $1.4 billion were flat, year-over-year and strong service growth of 17% was offset by equipment revenue down 14%.

Locomotive shipments were approximately flat, with the third quarter deliveries of 147 compared to 146 a year ago. Operating profit of $306 million was up 15% with margins better by 300 basis points. The improvement was principally driven by positive value gap in services growth.

Energy management. Orders of $2 billion were up 16% with strengthened power conversion up 19%, digital energy up 23% and intelligent platforms up 16%. Backlog of $4.6 billion is up 29% versus prior year. Despite the order strength, operations were disappointing in the third quarter, revenues were down 3% driven by digital energy down 27%, on weak media demand and some project execution. As a result, our profit was down 57% to $18 million. Positive value gap was more than offset by the negative volume leverage.

Home and business solutions had a very strong quarter driven by appliances. Housing starts were up 19% with single family better by 16%, multi-family up 27%. Revenues of $2.1 billion were higher by 7% led by an 11% increase in appliances partly offset with 1% decrease in lighting. Segment profit of $77 million was up 28%. Appliances, our profit up was up 73% driven by positive value gap and productivity, partly offset by lighting. Margins improved 60 basis points in the quarter.

Next I will cover GE Capital. GE Capital revenue was $10.7 billion, down 5% driven by lower assets. Assets were down 7% or $40 billion year-over-year. Net income of $1.9 billion was up 13% from prior year, primarily driven by lower losses, better portfolio performance and higher tax benefits, which more than offset assets and gains. We ended the quarter with $385 billion of ending net investments, down $39 billion from last year and down $7 billion, sequentially.

Our net interest margin increased 22 basis points versus third quarter of '12 to 5% and was flat in the second quarter. Volume was up 6% in the quarter with new business ROI over 2%, and our Tier 1 common on a Basel 1 basis improved to 11.3% driven by reduction in assets and that's after paying $2 billion of dividends in the quarter.

On the right side of the page, asset quality trends continue to be strong with delinquency rates stable to improving across the portfolio. In addition, non-earning assets totaled $6.4 billion, down $1.9 billion versus third quarter of 2012.

We have substantially completed all of our debt issuance for 2013 at $32 billion and we have reduced our CP balance at $33 billion, ahead of the plans bring down

CP by $35 billion by year end. Liquidity was very strong ending the quarter at $76 billion, up $7 billion from the second quarter.

Now to walk through our segment performance, CLL, the Commercial Lending and Leasing business ended the third quarter with a $170 billion of assets, down 5% from last year driven by a reduction of non-core assets of $5 billion as well as $4 billion in our core book, primarily from asset sales, including the fleet Canada, our franchise real estate transactions we spoke about.

On book core volume in Americas was up, was 2% higher in the third quarter of 2012 and new business returns remain attractive at about 2% returns on investment, despite continued excess liquidity in the market. Earnings of $479 million were down 50% driven by lower assets and impairments in our corporate aircraft portfolio in the Americas business. Asset quality was stable.

Consumer segment ended the quarter with $136 billion of assets, flat with last year. Net income of $889 million, was up 19%, primarily driven by lower losses as a result of not repeating the reserve modeling changes that we implemented last year in this quarter and in the first quarter of this year.

Lower losses were partially offset by no repeat of the $80 million gain on the partial sale of our interest in Thai bank in the third quarter of 2012. The U.S. Retail business earned $665 million in the third quarter, up 50% from last year, again, largely driven by not repeating the reserving change and on strong asset growth of 11% in the quarter. Our core European business earned a $111 million in the quarter.

The real estate team had another very solid quarter. Assets ended the quarter at $40 billion, down 28% to down $2 billion, sequentially. The equity book is down 27% from a year ago to $60 billion.

Net income of $464 million was up more than two times versus 2012, and that was driven by lower losses and marks as well as impairments, as well as higher tax benefits.

The business saw 77 properties with the book value of $2.1 billion for about a $100 million of gains in the quarter. That's down slightly year-over-year. The business originated $1.8 billion of debt volume in the quarter with an average ROI of 2.3% and asset quality continues to improve with 30 day delinquencies at a 141 basis points, 68 basis points lower, sequentially.

The verticals GECAS earned $173 million. That's down 31% driven by higher impairments as part of our annual impairment review. Impairments were $55 million higher in 2013 at a $190 million. The impairments were principally driven by valuations on cargo aircrafts, specifically MD-11s.

Overall, the portfolio is in great shape with only 10 MD-11 freighters remaining in our fleet, with the value of about $150 million and we ended the quarter with zero delinquency and no aircraft on the ground. EFS earnings were up 14% or $150 million driven by higher operating income.

Overall GE Capital continues to perform well. It's results were in line with our strategy. As we look ahead to the fourth quarter in terms of run rate, I expect the business to earn around 2 billion plus or [minus] the third quarter and adjusting from impairments of GECAS which not repeat and some tax benefits. We are currently working on a number of transactions in the fourth quarter, most notably the sale of our remaining interest in Bay, the Thai bank and the IPO of our Swiss consumer business.

At this point, we expect that any benefits from these transactions will largely offset with continued portfolio repositioning, but they could impact the tax rate, quarter and the year.

With that, let me turn it back to Jeff.

Jeff Immelt

Jeff, thanks. We really have no material changes in the 2013 operating objective framework. Our industrial earnings will expand by double-digits in the second half and we are on track for solid growth in the year. We have no change for expectations in GE Capital. We continue to originate business at high returns while repositioning our capital portfolio and earnings growth remain solid in GE Capital. Our corporate cost reflects our Avio adjustment, as Jeff described earlier, and we continue to see good opportunity for restructuring and our positioning offers to continue. Our cash and revenues remain on track.

We should see earnings growth accelerated in the fourth quarter with more volume and lower costs and with a large backlog in improving margins we feel good about 2014. We have several of our communications sessions with investors in the fourth quarter. In November Keith and Jeff will update our portfolio and business strategy of GE Capital and give you a sense for our long-term goals and simplification across the company. And in December, I will give you a strategic update for GE and our outlook for 2014. So we look forward to those sessions.

So in summary, we are making progress on our investor objectives for the year. Our industrial earnings grew by double digits in third quarter and we expect a stronger fourth quarter. Strength is broad based and we expect Power & Water to be a key contributor going forward in the fourth quarter and into 2014. We grew margins by 120 basis points in the quarter and we expect to hit 70 basis points for the year. In the event we have any gains on the in the fourth quarter, we expect them to be applied to restructuring.

GE Capital continues to strengthen and we are on track for up to $6.5 billion of cash to be returned to the parent. We expect organic growth of at least 5% in the fourth quarter for the industrial segments and we have solid momentum in growth markets, services and NPI and we have more favorable comparisons in Power & Water. So we are on track and we are on track to return substantial cash for investors this year. So the team executed well in the quarter and with a strong backlog and expanding margins investors should be confidence in GE's future.

So Trevor, with that, let's turn it over to you and take some questions.

Trevor Schauenberg

Great. Thanks, Jeff. I know there is other earnings call coming up. So Shaquana, let's open the phone lines.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Inch representing Deutsche Bank. Please proceed.

John Inch - Deutsche Bank

Good morning, everyone.

Jeff Immelt

Hey, John.

John Inch - Deutsche Bank

Good morning, guys. So the fact that we did $100 million more restructuring in this quarter, do you anticipate more restructuring in the fourth quarter? I realize, Jeff you just said if there were gains you would offset that but how does that pertain to your plan and how are you thinking about the restructuring opportunity?

Jeff Immelt

May be why don't I start and Jeff, I will turn it you, but we continue to have good opportunities for restructuring throughout the company and I would expect us to do some in the fourth quarter but, again, I think if we have gains, we expect those to be offset with restructuring.

John Inch - Deutsche Bank

Okay.

Jeff Bornstein

I don't have a lot to add to that. I think that's right. I think the more we get deeper into the simplification effort, we just see increasing numbers of opportunities to take cost out of the company and make the company faster and more customer centric. So I think we will do restructuring in the fourth quarter and as Jeff said more likely than not we will reflect the gains in the we expect as well.

John Inch - Deutsche Bank

And Jeff, one of thing you have been at this for a little of time now. As you said, are you finding more opportunity or is it still a little early in the process before you would care to comment? If there is a -

Jeff Bornstein

I think -

John Inch - Deutsche Bank

Passed out. Sorry

Jeff Bornstein

Yes. So I would say around the simplification effort, I think everyday we identify more opportunities to do what we do smarter. More shared services, a smaller manufacturing footprint, rationalizing capacity, executing our functions in a more consolidated way. So I would say, the list is growing with time and we are in the early innings of the simplification effort in this company. So I am quite emboldened with what we can accomplish over the next few years.

John Inch - Deutsche Bank

And just I want to go back to the fourth quarter. You guys had great results this quarter. It still is a pretty big V, though, in terms that, and I think, the delta is really, the expectation is around power shipments. Is that really still on track or it just looks like it's a very high contributive quarter versus even historical years, although you did put up the margins this quarter? Just is there anything you can say to us about the fourth quarter? I don't know progress to date or what's you are seeing or anything like that?

Jeff Immelt

Well, I think power was obviously a big contributor in the third quarter. We are ahead a little bit on derivatives and the fourth quarter ramp for Power & Water, I think we feel very good about. When we think about units for the fourth quarter, the large units gas turbines, et cetera, most of that is in backlog, but it is 95% of it, so I think we feel very good about how we feel power is moving into the fourth quarter. We de-risk the fourth quarter little bit with the out performance here in the third quarter.

Trevor Schauenberg

John, I think you started 40 and set at that 36, so you go from 40 in March from there. We typically get a lot more revenue in Q4 than Q3. It's typical for us to get 300 basis points on margin Q4 versus Q3, and Power & Water is very backend loaded as we have always said, so you have got a bunch of stuff that really - little bit better in GE Capital, I think you have got a lot of stuff that says we are kind of ready for a very strong fourth quarter.

Operator

Your next question comes from the line of Scott Davis representing Barclays. Please proceed.

Scott Davis - Barclays

Hi, good morning everybody. I wanted to get a sense, when I look at the results one of the thing that really stands out to me was the Power & Water orders, particularly excluding Algeria. I mean, up 37% I really wasn't aware that anybody in the world was buying a gas turbine right now or distribute power for that matter, so can you give us a little granularity, help us understand, where geographically these orders are coming from and just a little help here.

Jeff Immelt

Yes. When you look at orders in the quarter, geographically, for we will start with gas turbines. In the resource-rich regions, we were 18 units in the quarter versus 22, so down four there. Middle East, we were down 10 units from 11 to 21. A little bit better in Asia, we were flat five units versus five units year-over-year.

Most of the order strength really for our Power & Water has been around our aeroderivatives units. It has been very strong and our wind units have been incredibly strong. In the third quarter, we had 477 orders in the developed markets on wind. That's up 390 units and that explains most of the strength around wind and the balance is really Aero.

Jeff Immelt

I would say, Scott, if you look at Q4, we expect Power & Water orders to be at the high end of the range of what we talked about. So my hunch is that the orders will be clean in the 100 and a lot of that's Middle East. So we will book some of the Algerian orders in Q4. We have got some big orders in Saudi, some nice orders in Russia, couple in Africa, couple in Brazil and on the aeroderivative market, we are seeing pretty good growth in places like Canada, Middle East. So you have just got to be - the GGO and the investments we have made in emerging markets, I think has really helped us collect the orders.

Scott Davis - Barclays

Okay, that is very helpful. And lastly guys, Jeff, the big team in the year really for your communications have done simplification, you have put a couple of sentences on that in the annual report last year and you were able to sell the other half of NBCU, which I think helps a lot, but we haven't seen a lot of other portfolio actions. I mean what's holding you back? The Wall Street Journal reported there was chatter around spinning of the credit card business, but we haven't seen any announcements there. Is this stuff all just being embedded at present and we are likely to see some announcements in the next couple of months? Or is there - maybe you can just help us understand what's -

Jeff Immelt

You know, all these things always take a little bit of time but we are still planning staged exits of the value maximizing platforms of GE Capital. We have got a big meeting set November 15, with Keith and Jeff. I think there will be more clarity at that time on the capital side. And we continue and the rest the company continue to look at ways to make the company more streamlined and more effective. So you are going to see those in good time. I think we just want to be thorough in our planning and you will get a lot more detail soon.

Scott Davis - Barclays

Okay, very helpful. Thanks guys and congrats on the margin line.

Jeff Immelt

Great, thanks. Thanks, Scott.

Operator

Your next question comes from the line of Nigel Coe representing Morgan Stanley. Please proceed.

Nigel Coe - Morgan Stanley

Yes, thanks, good morning.

Jeff Immelt

Hey Nigel.

Nigel Coe - Morgan Stanley

Yes, hi. Just going back to Power & Water, I mean that was obviously the big driver, obviously, this quarter and congratulations on margins there, but $100 million of EBIT growth year-over-year with sales down $7 million, I understand price gap was a big benefit as was simplification. But just want to confirm that with surface down 5%, that's a negative mix and big volume deleverage on gas and wind, I just want to confirm that 3Q was a good run rate for 4Q and beyond?

Jeff Immelt

Well, Nigel, what I would say, the third quarter was slightly better than even what I had thought just by little bit, but a little bit better. We had better mix. So when you have more aeroderivatives and less wind, that's a mix adder. Then we have got the simplification efforts, which Jeff said with margins or with value gap and with SG&A down 10%, that really - it's a much leaner organization. Then when you look at Q4, you are going to get kind of ball wave of more wind business, aeroderivatives is still pretty strong, heavy duty gas services are still pretty strong. I think what you are going to see in Q4, is revenue growth, our profit growth and margin growth. So what you are going to see in Q4 in Power & Water, I think it's pretty typical of what you are going to see I think going forward in the business into '14.

Nigel Coe - Morgan Stanley

Okay, understood. Obviously, you broke the parts of your energy business into two and half segments, Power & Water, energy management and oil and gas. Are we seeing the benefit of that simplification through here or is it more restructuring actions that you are taking year-to-date?

Jeff Immelt

Okay. So I would say, Nigel, as we took out the layer, we got hundreds of million of dollars of benefits as we did that. So I think that was just a starting point and then inside each business, look, we are committed to getting SG&A as a percentage of revenue down to a world-class, best-in-class level and we are on our way. We made good progress but we are not where we want to be yet. So you have some of those benefits, for sure, show up in the businesses but we have got a ways to go yet.

Nigel Coe - Morgan Stanley

Okay, and just finally going back to Jeff Bornstein's comments on BAY. If that creeps into 4Q, obviously the intention is to offset that with the restructuring. That could be a pretty meaningful gain. So I am just wondering do you have a pipeline of opportunities already set to absorb that kind of gain, and maybe any color in terms of the focused areas from here for that kind of restructuring action?

Jeff Immelt

Yes. We are constantly in flight on value maximizing and the [red book] and GE Capital non-core book that we have talked about, so the gain could be sizable. We expect it will be quite profitable for us and we are working on list of items to position the portfolio for how we want to take it forward, so I think the team has got a pipeline of stuff they are working.

Jeff Bornstein

Nigel, the point I have made earlier I think on both, I mean we still have to see how the Swiss IPO goes, but we could have gains in both of those.

Operator

Your next question comes from the line of Julian Mitchell representing Credit Suisse. Please proceed.

Julian Mitchell - Credit Suisse

Hi. Thank you. Just on the margin performance, again. I mean, the overall industrial margin was up as you say 120 bps, services was up 60, so that means equipment was up 160 bps, 170 bps of flat revenues.

When you think about the mix going forward, the mix in your recurring backlog today and what that means for revenue going forward. Do you think that kind of equipment margin growth is sustainable, because obviously you have a lot of mix hit coming into that equipment margin from wind and solar in the next sort of six months?

Jeff Immelt

Yes. I think, what I would say right now is that we are running ahead of the game on value gap. We are two, three quarters of the year, we are almost $700 million value gap. We expect that to continue to accelerate into the fourth quarter. On simplification and restructuring, Jeff talked about the fact that we are at the $1 billion through the third quarter. We expect that to continue and accelerate into fourth quarter.

I think on the cost side of the equation, we have got enough leverage that we are working very dramatically to deal with the fact that we are going to have more equipment shipments as we move into the fourth quarter and I think those cost opportunities are going to accelerate into 2014.

Julian Mitchell - Credit Suisse

Thanks. Then within oil and gas, 18% revenue growth much more subdued profit growth and obviously the margins were down. I guess, what's behind the confidence that the margins in oil and gas year-on-year will be up in Q4, because you had a pretty good margin in Q4 last year and you are coming after off the Q3 where the margin was down year-over-year?

Jeff Bornstein

Again, I would say we did have some execution issues in the third quarter, getting the backlog out, getting it out into cost structure was supposed to go out. We expect that we are going to improve on that in the fourth quarter, we got a volume lift in the fourth quarter versus the third quarter, we expect to with all the cost actions and the value gap we have created in the business over the first three quarters, we expect to get some leverage on that in the fourth quarter.

I think, we feel pretty good about the fact that we will grow margins rates in the fourth quarter in oil and gas. They will not grow to the levels we thought they would for the year and that's really mostly above the M&C business. We came into the year thinking the business is going to grow something like 16% or low single-digits and that's a real missed challenge for us, but we try to get it done with better execution in the shop, the better execution on the cost structure.

Julian Mitchell - Credit Suisse

Got it. Thanks. Lastly, very quickly just U.S. gas turbine aftermarket business gasified power gen consumption is down 9% or 10% year-to-date. What are you thinking about your U.S. gas services business sort of looking out from here?

Jeff Immelt

The orders were pretty good. We can probably get back to you with that, but I can tell you. Do you have it, Jeff?

Jeff Bornstein

Yes. Just give me one second.

Jeff Immelt

I would tell Jeff - in that coating activity in North America is actually higher now in gas turbines than we have seen in a while, so I think we are kind of optimistic at least on the unit side for '14.

Jeff Bornstein

I think, in the U.S. we have been pretty strong. I think, we are up 8% PGS in the U.S. in the third quarter. There is still some strength in U.S. As we said, Europe was top down 18% on services related to heavy duty gas turbine, but sequentially that's a bit of an improvement from where we were in the first and second quarter.

I think really what's driving us here in the third and fourth quarter in North America, our PGS growth is our advanced - have upgrades, we did 15 in the third quarter versus four a year ago. We expect to do more than that in the fourth quarter. And that's very good business for us at very high margin. So I think we see a way forward here around services.

Julian Mitchell - Credit Suisse

Right. Thank you.

Operator

Your next question comes from the line of Joe Ritchie representing Goldman Sachs. Please proceed.

Joe Ritchie - Goldman Sachs

Hi, good morning, everyone.

Jeff Immelt

Hey, Joe.

Joe Ritchie - Goldman Sachs

So I just wanted to tackle this margin question little differently. As you look at the 4Q, you have got to - in order to hit your 70 basis point target margins, you have to expand by about 170 basis points and the comp is a little bit tougher. You did about 17.3% last year. So can you help me understand across each of the different industrial segments, which segments do you think are going to be above or below that 170 number and is it going to be disproportionately skewed towards Power & Water getting much better?

Jeff Bornstein

Joe, I can start and then maybe Jeff kicks in, but I think we see pretty broad based expansion in Q4. Power & Water expands but it's not the biggest driver and we have got every business up a bit and a couple, maybe three or four businesses, up 100 basis points plus. I don't know if Jeff if you want to.

Jeff Immelt

Well, let me go back to the framework we have set for people. So we described the businesses in one of three ways. We said the businesses we thought would grow margins for the year better than 70 basis points, those that would grow 0 to 70 and those that we expect to be flat. I think if we relook that framework today, we would say oil and gas is clearly going to grow margins less than 70 basis points. We thought they would do better than that. And energy management, I would say, is on a trend today to grow margins between 0 and 70 basis points, not the greater than 70 basis points we thought.

A contrast of that, I think transportation is going to be much stronger than what we originally said. We originally thought they would be flat but we think they are going to grow margins pretty substantially for the year. Then we have the a shot here, we will see how appliance strength looks in the fourth quarter but the appliance business actually may push through the 0 to 70 category or better than 70. And aviation, healthcare, as well as Power & Water are going to be right about where we said they would be. So I think those are really the changes, which is better than this 0 to 70 improvement.

Joe Ritchie - Goldman Sachs

Okay. No, that's helpful color. And I guess a follow up to that is, I know that you booked a big Algeria order and there is some short cycle.

Jeff Bornstein

Joe, we didn't book the Algeria order in the quarter.

Joe Ritchie - Goldman Sachs

It's going to book. It's going to come through orders in 4Q but it's also booking ship on the aeroderivatives. I think there were 26 aeroderivatives that you are going to book and ship in 4Q. My question is based on what you either already have an backlog today or what you know is going into backlog in 4Q, how much more do you have to do to get to the margin targets that you set out?

Jeff Immelt

I think the Power & Water is almost all in backlog.

Jeff Bornstein

Yes, so what I would say is, on the unit side, gas turbines, wind turbines, more than 95% of what we will do in the fourth quarter is in backlog today. Our services business runs 50% to 60% backlog and that's kind of where we sit today. I think we have, within that we have very good line of sight to what we are going to do on AGPs in the quarter. So I think we are largely in pretty good shape. We will probably do about 70 distributor power units in the quarter and one of the reasons we will shape on those, as they tend to be a little bit shorter cycle. So I think we have pretty good visibility.

Joe Ritchie - Goldman Sachs

Okay, great. Thanks guys.

Operator

Your next question come from the line of Steven Winoker representing Sanford Bernstein. Please proceed.

Steven Winoker - Sanford Bernstein

Thanks.

Jeff Bornstein

Hi, wind power.

Steven Winoker - Sanford Bernstein

Hey, I have been called worse.

Jeff Bornstein

Is that you, wind power?

Steven Winoker - Sanford Bernstein

That will be me, right. As I said, I have been called worse, and not only by you guys.

Jeff Bornstein

Never better than us.

Steven Winoker - Sanford Bernstein

So two things I would love to dig into. The first one is just pricing versus cost value gap. What was the shipping price index? The industrial price index for shipments overall in the quarter?

Jeff Immelt

Do you have that? Yes.

Jeff Bornstein

Give me one second, Steve.

Steven Winoker - Sanford Bernstein

Hey, while you are doing that? My question here is, this has been such a tremendous tailwind across the businesses and as we look out and we look at the sustainability based on the order pricing over time, when I start steering into next year. Relative to commodities, just question is, I know you guys say you feel good about it, but maybe give us a little more confidence about what drives your conviction that you can continue to create a positive value gap there as we look at longer term past the fourth quarter.

Jeff Immelt

Steve, we got to do detailed business plans for 2014, but we have running positive OPI on pricing on orders. I think, we expect across most of the businesses that's going to continue and the early reads I have gotten on direct material deflation for next year and material productivity, but direct material deflation for next year is still very favorable for us. Last year, we were $350 million, something like that on a value gap. This year, we are at $660 million.

Jeff Bornstein

Just under $700 million.

Jeff Immelt

Just under $700 million, but on the way to the higher number than that, I think, Steve, we are going to be positive again next year and that will be something I will give you more flavor for in the Outlook Meeting in December.

Jeff Bornstein

Okay. The selling price quarter was 70 basis points positive.

Steven Winoker - Sanford Bernstein

Okay. Great. Then another question, so when you think about Avio and some of the capital deployment and I guess the pricing the $0.02 charge that you sort of fair market value, the pricing on GAAP. I mean, did that change your view of the financial metrics for the deal originally and how do you think about that?

Maybe also broader context on oil and gas and some of those M&A that you now got a lot more track record now behind you, how are you thinking about that, Jeff, in terms of performance relative to your original expectations?

Jeff Immelt

Well let me give Jeff the Avio question now.

Jeff Bornstein

Yes. What I would say, Steven, Avio is, I think what part of those fair value adjustments tell you is the business was actually more profitable than what we thought we were buying when we finally got in there to see a lot of the detail, because of antitrust constraints, we couldn't see a lot of detail around parts of our Aviation business.

The adjustments were larger than we expected initially, but they are larger for all the right reasons, meeting the margins on the parts, particularly GE90, they have got a ton of productivity over the last number of years, simply for GE90 program, so that will work well with us or for us going forward.

Jeff Immelt

The idea was kind of unique accounting convention given their supplier relationship with us. I think that's all goodness that's going to come back to us, so this is actually I think good, helpful. On the oil and gas stuff, we like the places that we are in and the deals we have done, so but I think they are different things. Go ahead, Steve, I am sorry.

Steven Winoker - Sanford Bernstein

I just was trying to get a sense of the financial metrics also as you look back on the track record for the oil and gas deals a couple of years ago?

Jeff Immelt

Look, I think when we do reviews with our board, if you look at the deals we have done starting in 2011, 2012 and 2013, versus deal case, we are still running ahead on those.

Operator

Your next question comes from the line of Deane Dray representing Citi Research. Please proceed.

Deane Dray - Citi Research

Thank you. Good morning, everyone. Can we go back to get some color on the order pricing on Power & Water equipment coming in negative in the quarter and also slightly negative in oil and gas?

Just put this in context. Is there any change in the competitive environment? Is this some FX impact, because it does break a streak of some of the positive pricing that you had?

Jeff Immelt

Yes. I don't know. It relates to Power & Water. I don't think there is a huge trend change here. I think, thermal pricing on units was just under 7% down I think it's an extraordinarily competitive market globally. I don't think anything has really changed there. Those dynamics haven't changed.

On wind, it really is a bifurcated world. In the U.S., we have got really good price over the first six months of the year. We feel good about where we are going with our U.S. wind. Internationally, it's more competitive around pricing and wind in the quarter on OPI was down a 130 basis points.

PGS services was better. It was up 1.4% on thermal. Then oil and gas, we got two specific dynamics going on. We had a really profitable order that we took in the third quarter of 2012 in the U.S. around an LNG facility that we didn't repeat and we had the big Russian, the Yamal order here in this quarter that was not nearly as profitable as that as well. And that really drove oil and gas OPI down in the quarter. We expect oil and gas OPI in the fourth quarter to get back to a positive and we expect it to be positive for the year on a year-to-date basis.

Deane Dray - Citi Research

Great, I liked that last point you made. And then, just thinking about the fourth quarter, Jeff, you said that you are tracking well for solid organic revenue growth. The slides, as you are biased towards the low end of the range, but clearly you have got momentum here and I would liked your comment that you have got a slight hedge in the plans for more contingency. How does that contingency change, let's say, versus the first quarter? Because you certainly look like you have got a lot more buffer in hitting these margin targets today versus where we were in the first quarter.

Jeff Immelt

I think, Deane, it's about the same hedge we had at the end of the second quarter and then, for us on the revenue side, basically you have got the whole company, ex-Power & Water, which has operated pretty well all year and what you are going to see in fourth quarter is just a more normal run rate for Power & Water. So that's really, if you think about the range we had on the page and how I talk about the business going forward, really the only difference is Power & Water. And so you are going to see a more normal quarter for Power & Water from a revenue standpoint and that should carry forward into next year.

Deane Dray - Citi Research

Great. Thank you.

Jeff Immelt

Great.

Operator

Your next question comes from the line of Steve Tusa representing JPMorgan. Please proceed.

Stephen Tusa - JPMorgan

Hi, good morning.

Jeff Immelt

Hey, Steve. How are you doing?

Stephen Tusa - JPMorgan

Not too bad. So I think you said 5% industrial revenue growth, as you were exiting the slide deck before Q&A through fourth quarter?

Jeff Immelt

Yes.

Stephen Tusa - JPMorgan

That's organic?

Jeff Immelt

Yes. That's the expectation around 5% for Q4.

Stephen Tusa - JPMorgan

Okay. So for the year, you guys are going to end up around flat for the year to up 1%, 0% to 1% type of thing?

Jeff Immelt

Well, we think we will be at the lower end of the range in there, Steve.

Stephen Tusa - JPMorgan

Okay, and then I am just curious as to, ultimately there were some moving parts here with the slide you gave in the first quarter on Power & Water, I think it was slide five where you guys laid out the first and the second half and you kind of underperformed a bit in the second quarter on pure profit $1.1 billion versus $1.3 billion. You had $2.9 billion for the second half. Maybe could you just tell us where you are going to be relatively to that $2.9 billion for profit for Power & Water ?

Jeff Immelt

Yes. Steve, I don't know. I don't think we are going to guide on that.

Stephen Tusa - JPMorgan

I mean you are obviously going to be above it though, right, I would assume?

Jeff Immelt

Yes. I don't think I can give you any answer on that. I don't think - we don't provide guidance. I don't think I can give you that number. Here's what I would said about third quarter to fourth quarter is the way I would think about it, and power is a piece of this construct, is we will end the third quarter here on an adjusted basis at $0.40 a share. We typically get a big volume ramp from third quarter to fourth quarter. Last year that was $0.08. This year we have got a bigger ramp volume wise going from third quarter to fourth quarter.

We are going to do that with a much better cost structure than what we did last year third quarter to fourth quarter. More value gap. We are ahead of the curve on SG&A and cost savings. That's going to give us additional incrementals, additional volume leverage as we move from third to fourth quarter.

So Power & Water is a piece of that framework. They are a big piece of it because they have a very large volume ramp from third to fourth quarter and I think we feel very good about the construct that we have around that and all of that should help us achieve the 70 basis points for the year.

Jeff Bornstein

Steve, Power & Water is going to have positive revenue, positive gross profit and positive margins in Q4.

Stephen Tusa - JPMorgan

Yes, right. Thanks

Jeff Immelt

It is going to perform well.

Jeff Bornstein

Steve, the last thing I would add is, if you go back to last seven years, five in the last seven years we have grown margins from third to fourth quarter better than 250 basis points. In four of the last seven years we have grown to more than 310 basis points from third quarter to fourth quarter, so.

Stephen Tusa - JPMorgan

Yes, clearly. And then just on the distributed power stuff. I didn't quite, again going back to that slide where you had aero of 100 units. It sounds like you are dramatically kind of outperforming. Could you just maybe talk about where the distributed power stuff came from this quarter and is this a timing issue for this year, or is that pure upside this year relative to what you expected in the fourth quarter, because I know there was a big group of distributed power stuff coming in the fourth quarter seem to come a bit early?

Jeff Immelt

It's pretty global business. I would say there is more opportunities in the Middle East, and Asia and places like that. I would say there was some more in the third quarter than what we expected, but I still expect them to have a good solid growth in Q4 as well, but I would say, we probably at the end of the day, had a few more aeroderivatives in Q3 than we originally expected.

Operator

Your next question comes from the line of Shannon O'Callaghan, representing Nomura. Please proceed.

Shannon O'Callaghan Nomura

Good morning, guys. Just in terms of the restructuring and gains in the fourth quarter, it sounds like you might go ahead and do some restructuring. If you do, you will have some gains in industrial, but as it plays into the 70 basis points, right? The restructuring is incorporated, the gains are in segments. Is that all gravy on top of that? There is none of that sort of baked into getting to the 70?

Jeff Immelt

Shannon, the way that I talked about it today and the way we are planning is the 70 is without gains, so basically the intent is to use the gains we had to do additional restructuring.

Shannon O'Callaghan Nomura

Okay, but like I said restructuring (Inaudible) I know weren't any in the quarter, but it is not in the quarter.

Jeff Immelt

If we have, right?

Shannon O'Callaghan Nomura

Yes. Okay. Then just on the framework, the high single-digit to low double-digit operating earnings, back at EPG, you also used to show that that translated to double-digit EPS growth and now no one sort of there in terms of consensus. I mean, is this double-digit part of the equation sort of not on the table anymore?

I mean, I know it's still high single digits to double-digit operating earnings, which doesn't seem like we are getting there on, on the EPS basis. Is that kind off the table at this point?

Jeff Bornstein

Look, we don't give guidance any more. Okay? So, let's start with that. Again, I think you have got some stuff in Avio and stuff in corporate, but when you look at Industrial and Capital, I actually view those exactly the same way we have looked at them when I was at EPG.

Jeff Immelt

Shaquana, we are running up against another earnings call, so why don't we take one more question here?

Operator

Yes, sir. Your next question comes from the line of Christopher Glynn, representing Oppenheimer. Please proceed.

Christopher Glynn - Oppenheimer

Hi. Thanks for fitting me in. Last year late in the year, things got a little variable up there in the economy, customers taking delivery. If we look at your backlog, I was wondering what the key variables are in terms of how backlog execution could play out? Just for example I think, from healthcare orders it would seem would be seem positive growth there by now.

Jeff Immelt

Yes. Chris, I will give you a view. I actually think the backlog is pretty firm. I don't think there is commercial issues really, I think what Jeff talked about like in oil and gas is stuff that we could have executed better on, so we are not seeing really any kind of variability in the marketplace in terms of customers pushing back on deliveries.

Jeff Immelt

Great. Why don't we wrap up today. Thank you everyone for attending. The replay of today's webcast will be available this afternoon on our website. We will be distributing our quarterly supplementals data for GE Capital later this morning.

I have some announcement regarding the upcoming investor events. On Friday November 15th, we will host a GE Capital Investor Meeting in Norwalk, Connecticut. This meeting will begin at 10 am. We hope to see you there.

Second, our Annual Outlook Investor Meeting with our Chairman will be held in New York City, again on Wednesday, December 18th. We will send a little more information closer to that date. Then finally, our fourth quarter 2013 earnings webcast will be available on Friday, January 17th. As always, we are available today to take your questions.

Thank you everyone.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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