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General Electric Company (NYSE:GE)

Q1 2014 Earnings Conference Call

April 17, 2014 8:30 a.m. ET

Executives

Jeffrey R. Immelt – Chairman and CEO

Jeffrey S. Bornstein – Senior Vice President and Chief Financial Officer

Rod Christie – Vice President, Subsea Systems

Matthew Cribbins – Vice President, Investor Communications

Analysts

Scott Davis – Barclays Capital

Deane Dray – Citigroup

Steve Tusa – JPMorgan

Jeff Sprague – Vertical Research Partners

John Inch - Deutsche Bank

Julian Mitchell – Credit Suisse

Steven Winoker – Sanford C. Bernstein & Company

Nigel Coe – Morgan Stanley

Operator

Good day ladies and gentlemen, and welcome to the General Electric first quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. My name is Ellen. 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.

Matthew Cribbins

Thank you, Ellen. Good morning, and welcome, everyone. We are pleased to host today’s first quarter webcast. Regarding the materials for this webcast, we issued the press release and presentation earlier this morning 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; our Senior Vice President and CFO, Jeff Bornstein, and our Vice President, Subsea Systems, Rod Christie. We listened to your feedback and thought we’d try something new. To drive a more strategic discussion on the call, we’ll be inviting business leaders to participate to talk about their business, markets, new product introductions and major initiatives. We’ve asked Rod to join today to talk about Subsea.

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

Jeffrey Immelt

Thanks, Matt, and good morning everybody. The GE team had a good quarter and have also been improving environment. The U.S gets a little bit better every day. Europe is improving. The growth markets continue to expand and will provide growth during the year, even with volatility. We had strength across most of our portfolio as global infrastructure markets remained solid. We continued to benefit in energy, oil and gas and aviation sectors and we saw some improvement in the demand for credit. At the same time we encountered a few headwinds in the quarter. Weather impacted our appliances business, but improved in March. Transportation was impacted by mining inventory corrections and the U.S healthcare market continued to experience volatility. Some of this improved as the quarter progressed.

Our execution was strong. Industrial segment growth was up 12% above our 10% goal. Organic growth was up 8% above our 4% to 7% goal. Margin growth was 50 basis points and we’re on track to meet our goal of 17% margins by 2016. Our capital earnings and cash were in line with our expectations for the year. We returned $2.4 billion to investors in dividends and buyback and announced $2 billion bolt-on acquisitions. And finally, we submitted our SEC filing Synchrony, the RFS spinoff. This is an important step as we head for our 70% industrial goal. We delivered $0.33 of operating EPS at 9%, excluding the impact of NBCU gains in 2013 restructuring. This is the kind of quarter GE investors should like. The environment was not perfect, but we were able to deliver strong results due to the breadth of our portfolio.

Orders were flat overall. Backlog grew to $245 billion and orders pricing was up 0.4 points. While equipment orders can be lumpy, service orders, things like aviation spares, tend to be a good gauge of the underlying economy and we saw broad strength in our service businesses with four of six segments up double digits. Six of nine growth regions grew orders by double digits in the quarter. Equipment orders were down in aviation and oil and gas versus tough comps in 2013. We have a great backlog in position in each market and feel good about the long term growth. In transportation we see a strengthening market for North American locomotives and we won a very large order for kits for South Africa. I wanted to point out two other factors on orders. First we see the pipeline building so we feel good about growth during the year. And second, we have grown backlog by $29 billion from the first quarter of 2013 with growth in every segment. This fortifies our ability to hit goals this year and in the future.

The company executed well in the first quarter. Industrial operating profit growth of 12% is a good start to the year. Organic growth was up 8%. Growth markets continue to provide momentum with five of nine up double digits and 7% growth overall. We made great progress in services with aviation spares up 22% and 17 Advanced Gas Paths, up from two last year. Equipment revenue grew by 12%. Our products are winning in the market with excellent growth in power, oil and gas, and aviation. For instance we are well positioned throughout our gas turbine product line, extending to the H turbine which has more than 61% efficiency and more than 400 megawatts of output. Our Revolution CT just received FDA approval and should drive positive growth for the year.

Europe grew by 14% in the first quarter. So we’re starting to get stabilization in that market as well. Our target is to grow margins this year. We’re off to a good start. This is our fourth consecutive quarter of expansion with 50 basis points of growth. We’re driving simplification throughout the company and our restructuring efforts are paying off. We generated about $250 million of structural costs out of the quarter and value gap had a positive 50 basis point impact on margins. We’re gaining traction with our Fast Works initiative which is improving R&D efficiency. Mix was a headwind, but our productivity programs more than offset. Finally, we expect broader business participation in the future Healthcare, Energy Management, and Appliances & Lighting should have positive margin and operating profit expansion for the rest of 2014 based on improving markets and restructuring.

Our CFOA is off to a good start and on track for the year. We generated $1.7 billion, up from 4200 million from last year. The company has substantial financial strength, with $87 billion of consolidated cash and close to $12 billion at the Parent. As you know, we issued $3 billion of debt in the quarter. GE Capital remains in great shape, with a Tier 1 common ratio of 11.4%. Meanwhile Commercial Paper was in a very low level of $25 billion. The total ENI of $374 billion was down 7%. We’ve allocated capital in a disciplined and balanced way. We continue to invest in plant and equipment to grow the company globally. Our dividend is up 16% year-over-year. We plan to reduce the float in 2014 and we’re on track to reduce share count to 9 million to 9.5 million shares by the end of 2015, including the retail spend.

We will continue to bolt-on acquisitions like the three we announced so far this year. Our targets remain $1 billion to $4 billion, but we have gone above on opportunistic deals that have excellent values, strong synergies, fit our growth strategies and are immediately accretive. For instance, Avio was above our range and accretive to investors. At the same time we plan for about $4 billion of dispositions this year.

Now I’ll turn it over to Rod Christie who runs our Subsea business as Matt said earlier. We plan to review an important segment or initiative each quarter. As the year goes on, we plan to cover topics like heavy duty gas turbine technology, Healthcare and Life Sciences, China or other important operating initiatives or organic growth opportunities. So now I’ll turn it over to Rod.

Rod Christie

Thanks, Jeff. So starting on the left side of the page, I want to give you a flavor of how we see the long term prospect for oil and gas industry before we drill into the Subsea sector specifically. The forecast is for global oil and gas demand to continue to grow through 2018, with oil mainly driven by the ongoing industrialization and emerging economies and the rise of living standards, while gas emerges across mainly all of the economies as a cleaner fuel source. In addition to the increasing demand, the other dynamic to consider here is well decline rates on existing operations of around 3% to 4% onshore and 6% to 10% offshore. The combination of both these factors makes ongoing investment necessary to develop new reserves and enhance the recovery in existing assets.

Moving to the top right of the page, we see these dynamics driving 4% and 2% CAGRs in production rates for oil and gas respectively through 2018. The expectation is for stronger growth in Subsea and unconventional production. Translating all of this into total industry spend, we expect to see continued growth as high NOCs and independents work to recover more hydrocarbons from existing assets and bring on new reserves to meet the growing demand.

With respect to Subsea sector, the expectation for long term development of deep water reserves is supported by the robust activity we see in drilling in front end engineering design through the cycle. Given this expectation, our Subsea Systems business is well positioned to serve customers with both technology and life-of-field services across the globe. Our extensive capabilities enable us to provide everything from discrete components to full Subsea production systems. We’re also uniquely placed against our competitors and that we can leverage technology from other GE businesses and run joint technology program specific to the critical need.

To give you a couple of examples here, we cooperate with GE’s monitoring and controls business in the area of Subsea integrity management and leverage their sensory and diagnostics technology specifically developed for our own space. We’re also running a joint technology program with GE’s power conversion business for Subsea power and drive. This really enables us to develop value added solutions under one roof wherever the core competency actually exists inside GE.

Likewise, GE gives us the ability to scale up. As many of you be aware, localization is often a mandatory requirement on our industry. When we move into new geographies, it’s not unusual to find other GE businesses are already there. Usually it is either Power and Water or another oil and gas business. This means we can leverage their relationships, their knowledge and potentially their footprint. Additionally, we’ve been working with GE’s global growth and operation team to accelerate development in countries like Nigeria, and Angola where we can benefit from their high level relationship and the back office support to get things up and running very quickly.

Today, we’re present in all the major deep water basins around the world such as Brazil, sub Saharan Africa, Asia and Australia while still retaining significant capability around both the UK and Norwegian continental shell. Our experience in extreme cold water and long step out capabilities for controls and propeller solutions position as well for future activity, a sector that’s going to require really no topsides and has the added complexity really of an icebound environment. So three years ago, a major Subsea industry survey took feedback from 135 customers and ranked each supplier against the top priorities of the subsea oil and gas operators.

The chart on the left of this page details how GE was rated against our competitors back in 2012. As you can see, we performed well in the key areas like EHS, reliability and technology. However we were mid pack when it came to on time delivery. And in fact really none of the suppliers are performing consistently to acceptable level in this critical requirement. This is one of the main risks to both the supplier and the customer in this industry. And a significant number of large-scale Subsea developments experienced both schedule and cost overrun. Given that he timing and carrying costs for initial CapEx outlay on these projects, the key driver in overall returns, we have focused investment to differentiate performance around cycle and on time delivery. As of today, we offer a suite of structured products that offer modular customization to our customers.

So let me expand a little bit on modularization. What that really means is we can provide exactly what a customer wants. So we do it with less engineering and less supply chain risk as we use a standard module to do so. We’ve also completed significant process reengineering to drive speed and transparency across our business operations. We’ve created a global project COE that interfaces directly through all of our sites and suppliers, and supports our project teams wherever they’re operating in the world.

To underpin this, we’ve also invested in an integrated IP infrastructure, enables us to scale the organization though industry cycles without losing either capability or impacting our operational excellence. The final piece of this jigsaw really has been the investments we’ve made in creating new capacity and unlocking latent capacity in a number of our factories. Today using lean manufacturing disciplines, we’ve increased capacity for trees, controls, well heads and manifolds. In general, we’ve been able to realize capacity increases between 30% and 100% in our existing facilities and have commissioned new capacity in Indonesia and Brazil. And sure we feel we’re very well placed to take on new commitments.

Growth in the deep water oil and gas sector looks strong over the long term and we feel very confident about our competitiveness of both our existing product line and the technologies we have in development. The investments we’ve made in capacity and capability also put us in a great position for our customer wherever they operate in the world.

Just to give you some context on the evolution of the Subsea System Business. In 2011 we were executing a handful of small projects and two Subsea production EPC projects, the largest of which was around $600 million. Today we’re executing 8 EPC projects, the largest of which exceeds $1.3 billion. The programs we’ve undertaken to structure our products, lean out supply chain and project operations are yielding results in cycle time reduction and cost reduction. And we expect to see further benefits come from these as we drive these deeper into our business.

Just to give you some context here, 1Q revenue we saw 37% increase year-over-year and a 3x increase in both margin and in rate. On top of this, our global footprint really makes us take local and capable in the main deep water basins today and GE’s reach means we can move quickly and at scale in any of the developing geographies. Overall we really feel very good about the fundamentals of this business and it’s -- really have to say that I’m very excited about the way this moves in the future.

So with that, I’ll pass it over to Jeff.

Jeffrey Bornstein

Great. Thanks Rod. I’m going to start with operations in the quarter, then we’ll move through the segments.

We had continuing operations revenues of $34.2 billion, down 2% from the first quarter of 2013. Industrial sales of $24 billion were up 8% and GE Capital revenues of $10.5 billion were down 8%. Operating earnings of $3.3 billion were down 18% and operational earnings per share of $0.33 were down 15%, principally driven by NBC as Jeff mentioned earlier.

On the next page, I’ll take you through more detail on the normalized EPS work versus last year. Continuing EPS of $0.29 includes the impact of non-operating pensions and net earnings per share of $0.30 includes the impact of discontinued operations. We had $12 million benefits in the quarter in discontinued operations with no material impact from WMC. Pending claims at WMC declined to $4.5 billion, reflecting $1.2 billion of resolutions, with reserves declining in line with expectations. New pending claims in the quarter were negligible.

As Jeff said, first quarter CFOA was $1.7 billion, with industrial cash flow of $1.2 billion and received 500 million of dividends in GE capital. The GE tax rate for the quarter was 24% and the GE Capital rate was 9%. For the year we’re still expecting the GE rate to be around 20% and the GE Capital rate to be in the single digits. On the right side, you can see the segment results. And as Jeff mentioned, performance was mixed by business, but overall pretty good with industrial segment revenues up 8% and operating profit up 12%. GE Capital earnings were flat in the quarter on lower assets.

Now I’ll take you through the dynamics of each of the segments on the pages that follow. And first on the other items page, I’ll start with adjusted EPS walk. So last year as you recall we had operating EPS of $0.39 in the first quarter. This included $0.10 of gains and income from NBC that was offset by $ 0.04 of industrial restructuring and other items. We also had a $0.05 gain at GE Capital from the sale of 30 Rock that was offset by other charges as well. That walk gets you to an adjusted operating EPS of $0.33 last year. This quarter we had $0.03 of industrial restructuring and other items. Making the same adjustment for ‘14 gets you the $0.36, and that’s up 9% on an adjusted basis. That’s how we’re thinking about operating performance in the quarter.

On the right side as I mentioned, we had $0.03 of charges related to industrial restructuring other items as we continue to invest in simplification to improve the company’s cost structure. The spend was broad based with projects in every business and corporate. We’re executing more than 150 projects at average about a year and a half payback. The projects relate to everything from manufacturing footprint reduction, service shop consolidations, SG&A actions and exiting low margin product lines, primarily in developed markets. We’re continuing to work through timing of European work council approvals. And on the positive side some of the projects are coming in below our regional cost estimates with no downgrade in benefits.

For the year, we still anticipate $1 billion to $1.5 billion of restructuring, with about 60% of that in the first half. And we’re still planning on delivering more than $1 billion industrial costs out for the year. As we told you in November, we expect to have some dispositions in our industrial portfolio in 2014 and we’re currently working on a transaction related to a non-core asset that may result in a small gain likely in the second quarter, potentially in the third quarter.

Now I’ll take you through each of the segments, starting with Power and Water. Orders of $5.7 billion were up 9%. Equipment orders of $2.6 billion were down 3%, driven by renewables down 13%. That was partially offset by distributive power, which was up 9% and thermal was up 3%. Wind orders totaled 422 turbines versus 584 in the first quarter of ‘13. Our view of wind orders for the year has not changed. We still expect strong growth. We took orders for 31 gas turbines in the first quarter of this year versus eight a year ago. Service orders were $3.1 billion, higher by 23%. The growth was primarily driven by PGS up 32%, up 43% ex Europe. The business had orders for 17 EGPs versus two a year ago as well as a large $330 million upgrade order in Japan. Europe continues to be very, very soft.

Backlog in power and water continued to grow, with equipment higher by 18% and services by 2% year-over-year. OPI in the quarter was negative 40 basis points driven by equipment. Revenue in the quarter of 5.5 billion was up 14%. Equipment revenues were up 41% driven by wind shipments of 646 units, 345 units higher than the first quarter of 2013 and thermal was up five gas turbines, shipping 17 versus 12 a year ago. We shipped all but one wind turbine associated with blade quality from the fourth quarter. Service revenues were down 5% as AGP performance was offset by weakness in Euro. Segment operating profit was 24% higher on strong volume and simplification benefits, partly offset by negative mix associated with wind. SG&A in the quarter was down 9% year over year. The wind blade quality issues in the quarter were negligible. Margins expanded for the quarter 120 basis points.

Next is oil and gas. Oil and gas orders for the quarter of $4.6 billion were down 5% with equipment orders down 17% and service growth of 11%. Equipment orders were down versus tough comparison to last year when orders were up 24%. Subsidy equipment was down 62% principally on timing. As we’ve commented previously, orders in oil gas tend to be very lumpy on a quarterly basis. And as Rod shared with you, we expect subsidy orders to be up double digits for the total year.

We continue to see good growth in Turbomachinery solutions, up 16% in the quarter and two large wins in the US LNG space. And Downstream technology was also strong, up 48%. Service orders of 2.2 billion were higher by 11%, led by Turbomachinery, up 22% and downstream technology solutions up 20%. That was partly offset by MNC which was down 7%. Backlog continues to grow in oil and gas with equipment up 15% and services up 4% versus prior year. Orders pricing was better by 140 basis points in the quarter. Revenue was up 27% up18% ex-Lufkin. And subsidy was up 37%, Turbomachinery up 25%, downstream solutions up 24% and drilling and surface was up 13%, while MNC was down 4%. We expect MNC to be flat for the total year.

Operating profit was strong in the quarter, up 37%, up 28% ex-Lufkin. The growth is driven by volume, value gap base cost productivity in the absence of the FX charge we had last year in the first quarter. This was partly offset by negative mix on lower MNC volume. Our operating profit rate improved 80 basis points in the quarter both with and without Lufkin.

So turning to the next page on aviation, just some context here. Air travel continued to grow strongly. Global revenue passenger kilometers grew 6.9% through February compared to 5.2% a year ago with a particular strength in the Middle East, Asia, Europe and China. Through February, freight growth was up 3.6% versus 1.4% a year ago and that growth was driven by Latin America, Europe and the Middle East. Orders in the quarter of $5.5 billion were down 17% as expected, driven by equipment orders down 38% to $2.4 billion.

The first quarter of 2013 we had $1.4 billion of CFM LEAP launch orders and two large China G 90 orders. Commercial engine backlog ended the quarter at $21 billion. That’s 68% higher versus last year. The military equipment orders of $421 million were up 44% driven by demand for CT7 engines. Services orders were $3.1 billion, up 10%. And commercial service orders were up 12%, driven by strong commercial spare parts, up 17% to $29.7 million a day. Military service orders were up 18% driven by spare parts, up 19% on strong demand for T700 spares. Orders pricing was strong at 2.6% for the quarter.

Revenue of $5.8 billion was up 14%, up 10% ex Avio. Equipment revenue was higher by 14% on strong price and shipments of 646 commercial engines versus 596 last year. We shipped 70 GEnx engines versus 41 a year ago and military revenues were down 3% on 31 fewer engines in the quarter. Service revenue $2.9 billion was up 14% driven by commercial up 18% and military down five. Commercial spare shipments were $28.5 million a day. That was up 22% versus last year. Operating profit of $1.1 billion was up 19%, 14% ex Avio on strong value gap in volume. Margin rates improved 90 basis points, 80 basis points ex Avio. Avio continues to perform very well, an overall good execution in the aviation business in the quarter.

Next on healthcare; the first quarter in the US was soft. Hospitals and clinics appear to be delaying purchases and responses to the ACA. Patient inflows, outpatient visits, ER, surgeries procedures were all down 1% to 1.7% in a quarter. Preliminary NEMA data suggests the U.S market was down single digits excluding one big VA bulk order from several years ago. Our NEMA orders were down 2%. So we believe we actually gained share in the quarter a point or two. As a result of these dynamics, healthcare’s first quarter was softer than we expected.

Orders of $4.2 billion were down 1% driven by the U.S down 4%, offset by continued strength in emerging markets, which were up 10%. China was up 13%, Latin America was up 10%, and the Middle East was up 47%. Europe was also strong, up 4%. Equipment orders of $2.3 billion were flat and HCS emerging market orders were higher by 13%, offset by the U.S down 12%. Life science orders were up 1% in the quarter. Service orders were $1.9 billion, and they were down 2% in the quarter.

First quarter backlog was $16.3 billion, which was up 7% versus prior year, and order pricing was down 1.5%. Revenues of $4.2 billion were down 2% with equipment down 2%, and services down 3%. Operating profit of $570 million was down 4%, driven by negative value gap, offset by strong base course management. SG&A in our healthcare business was down 9% in the quarter. The business expects the U.S softness to probably persist in the second quarter, but expect to continue to gain share and deliver earnings growth through the year.

So with that we’ll move to transportation. Transportation had a solid execution quarter given their environment. In terms of domestic activity, car loads were up 1% in the first quarter, driven by intermodal traffic which was higher by 3%. Coal volume continues to be soft. It was down 1%, but petroleum products and petroleum were higher 6.5%. Orders for the quarter were $2.4 billion. That was up over 100%, led by equipment orders up four times. We had orders for 259 locos, and 299 loco kits, versus 80 locos last year and 25 kits a year ago. We received a large order from South Africa for 233 kits, and had order is for 176 locos in the U.S.

Service orders were down 18% due to weak mining and no repeat of the large Amtrak signaling order we had in the first quarter of last year. Order price index was flat and backlog was 6% versus the first quarter of ‘13.

Revenues for the quarter were down 14% as we anticipated. Equipment was down 20%, driven by mining off-highway vehicles down 76%, partly offset by locomotives up 23%. We shipped 178 locos versus 143 a year ago. Service was down 7% on weaker mining parts demand.

Op profit was down 24%. Very strong cost and productivity performance was more than offset by volume and mix. Margins were down 230 basis points in the quarter.

On energy management, the business continues to be a work in progress. We made a lot of gains in restructuring and resizing the business around its cost structure and footprint, were offset by sales softness in marine startup execution. Orders were $2.2 billion. That was down 1%. Digital energy was up 20% on a large domestic meter order, and Industrial Solutions was up 1%. This was offset by power conversion down 16%, with no repeat of first quarter ‘13 Brazilian drillship orders we took.

The business did continue to build backlog in all its segments, with a total up 17% year-over-year to $4.9 billion. Revenue was down 4% in the quarter, with digital energy down 20%, industrial solutions down 3%, and power conversion down 2%. Operating profit was $5 million in the quarter. That’s down from $15 million a year ago. Despite the poor performance, we continue to get restructuring benefits and reduce SG&A cost. This was more than offset by negative volume and execution challenges. We expect this business to improve its results throughout the year, particularly in the second half.

Appliances and Lighting; Appliances and Lighting had a challenging quarter as well. Appliance revenues were down 3%. The appliance market was down 4% through February, but was much stronger in March to end the quarter flat year-over-year. Housing stock stats were soft, with single family down 8%, offset by multi-family strength, up 9%. Lighting revenue was down 4%. Our traditional channels in lighting were down 9%, partially offset by LED growth, up 33%. Segment profit of $53 million was down 33% in the quarter. Appliance op profit was down 2%, with higher price offset by lower volume and negative productivity. And lighting op profit was down 44%, driven by strong material depletion, more than offset by productivity price and foreign exchange. For both businesses, the last two weeks of March and the first week of April were much stronger. We expect them to be back on track in the second quarter.

Next I’ll cover GE Capital. Revenue of $10.5 billion was down 8%, primarily from non-repeat of the 30 Rock sale last year. Assets were down 3% or $18 Billion year-over-year. Net income of $1.9 billion was flat to prior year, as lower losses and impairments offset reduced gains, lower earning assets and tax benefits.

ENI ended the quarter at $374 billion. It was down $28 billion or 7% from last year, and down $7 billion sequentially. Noncore ENI was down 16% to $52 billion versus last year.

Net interest margins decreased 11 basis points from 2013 to 4.9%. This slight improvement in business margins was offset by the cost from carrying higher levels of cash.

GE Capital’s liquidity and capital levels continued to get stronger. We ended the quarter with $75 billion of cash and reduced our commercial paper borrowings to $25 billion in the first quarter. That’s nine months ahead of our year-end target. Our Tier 1 common ratio on a Basel 1 basis improved 23 basis points sequentially, with 32 basis points year-over-year to end at 11.4%. On the right side of the page, asset quality trends continue to be stable.

I’ll walk through the segment performances. The commercial lending and leasing business ended the quarter with $175 billion of assets, flat to last year. On book core volume was $8 billion dollars, down 2% as we continued to stay disciplined on pricing and risk hurdles, with continued excess liquidity in the market. New business returns remained reasonably strong at about 1.8% ROI. Earnings of $564 million were up 42% as a result of not repeating the specific impairment we had last year in the first quarter as well as from asset sales.

The consumer segment ended the quarter with $132 billion of assets, down 3% from last year. But we were up 8% in North American retail finance business. Earnings of $786 million were up 47% as a result of not repeating $300 million impact from the reserve modeling changes we implemented in the first quarter of 2013.

North American Retail Finance earned $590 million in the quarter. That’s up 54%, again largely driven by not repeating the reserving changes and on strong asset quotes of 8% year over year.

Real Estate had another solid quarter. Assets at $38 billion went down 11% versus prior year and $1 billion dollar sequentially. The equity book is down 29% from a year ago to $13 billion. Net income of $239 million was down 65%, primarily from not repeating the 30 Rock gain. In the current quarter, we sold 165 properties with a book value of $1 billion for about $117 million in gains. The debt business earned $120 million in the quarter and originated almost $2 billion of volume at attractive ROIs.

In terms of verticals, GECAS earned $352 million up 1% as higher core income offset the impact of lower assets which were down 8%. New volume was $1.5 billion, 36% higher year-over-year with very attractive returns north of 3% ROI’s. We ended the quarter with zero aircraft on the ground.

EFS had a solid quarter, with earnings up 84% to $153 million driven by strong core income in gains, partially offset by impairments. The team continues to perform well here. As we look forward to the second quarter, we expect to run rate for GE Capital to be around $1.8 billion of earnings.

So with that I’ll turn it back to Jeff.

Jeffery Immelt

Great, Jeff. Thanks. Finally on the framework; look, we’re reaffirming the framework for the year. We feel good really about our progress on the industrial side and we think -- which you saw in the first quarter in terms of organic growth. Solid organic growth and good margin expansion should continue in the second quarter and throughout the year. Capital is on track for its plan and CFOA remains on track as well with the framework. There is a lot going on in corporate and you understand our goals for restructuring. We’ll give you frequent updates on our progress. And look, with underlying EPS up 9% in the quarter and strong industrial segment profit growth, we think we’re off to a good start.

So Matt let me turn it back over to you and let’s take some questions.

Matthew Cribbins

Thanks, Jeff, Jeff and Rod, Ellen why don’t we open it up for questions?

Question-and-Answer Session

Operator

(Operator instructions). Our first question is from Scott Davis with Barclays. Please go ahead.

Scott Davis – Barclays Capital

Hi, good morning, guys.

Jeffrey Immelt

Hey Scott.

Scott Davis – Barclays Capital

The 8% core growth is a pretty big number. How do you think about the sustainability of those levels? It's probably about 2x the sector overall. And then I want ask a follow-up on margins. But let's just talk about core growth first.

Jeffrey Immelt

Jeff, you want to start?

Jeffrey Bornstein

Yeah, Listen I think we’re very happy with the level of growth in the quarter. Reflects a lot of the order activity we had in 2013. As we said the short cycle businesses were definitely impacted by weather in the first quarter. We expect Industrial Solutions, Appliances and Lighting to get better as we move in the second quarter in the year. We’re still on framework. We expect organic growth for the year to be between 4% and 7% and I think we’re pleased that we are off to a strong start here.

Jeffrey Immelt

Scott I would just add, I think wind always adds a little bit of noise plus or minus around each quarter. It was more on the plus side this quarter. And like I said at the outlook meeting in December, we have an internal plan that adds up to more than the range and that’s how we run the businesses and that’s -- I think we still believe in the framework for the year. But we have an internal plan that adds up to more than that.

Scott Davis – Barclays Capital

Okay, fair enough. 50 bps of margins, just back of the envelope, 8% core growth should kind of get you there already. But you also talked about having value gap and cost-out. Is there any way to parse out the 50 bps and how you guys think about it via fixed-cost coverage from the volume leverage and the cost-out, how (indiscernible) break down to the 50 bps?

Jeffrey Bornstein

Mix was a bit of a head win for us in the quarter, more than 100 basis points in the quarter. That’s the strength and wind, the strength you heard Rod talk about with 37% sales growth in Subsea while MNC volume was down 7%. Mix for us in the quarter was about 100 or 120 basis points of headwind. And that was offset with strong value gap, a little bit of favorability in R&D, but principally by simplification. We had 160 basis points of favorability and structural cost and getting at delivering on both the structural cost initiative and delivering on the restructuring investments we’ve made. And that was partially offset by base cost inflation that generally reflects increases in salaries. I think we feel very good about the construct in the quarter. It’s more or less how we thought about the year and what we described to you at yearend. We know that we are going to grow equipment and revenue faster than services this year. And so mix will be an item for the year. We have to deliver on simplification, overcome that and grow margins.

Scott Davis – Barclays Capital

That's helpful. Just a quick clarification, guys. I haven't heard you mention 8 series turbine in a long time. Do you actually have a commercially viable product at this point?

Jeffrey Immelt

Yeah. I think Scott this is – we’ve gotten a couple of commitments and we’re in the process of rolling that out as we speak. We think this is going to be a great product at really a good time.

Scott Davis – Barclays Capital

Perfect. Okay. Thanks, guys.

Operator

The next question comes from Deane Dray with Citi research

Deane Dray – Citigroup

Thank you. Good morning, everyone. Jeff, I was hoping you could expand on your comments on the bolt-on acquisition outlook. You all have been operating on a self-imposed investor-friendly range of -- it was $1 billion to $3 billion and then got inched up for Avio, $1 billion to $4 billion. And you are clearly signaling a willingness to go a bit higher than that for the right acquisition. That's the same language you used when you -- just before you got Avio. So maybe you could expand for us; how much higher above $4 billion? What applications or markets look interesting? It likely sounds like you've got something close.

Jeffrey Immelt

Yeah, I wouldn’t read too much into it, Dean other than this is the way we answer the question typically from the standpoint of, we do the vast majority of our acquisitions in that range. People ask if you saw something that was strategic added to the growth rate, bolt-on, well priced secretive. Would you go above that? And clearly when we did Avio that was $4.2 billion and we had one to three type of range. It’s typically the way we answer the question in investor meetings and at the outlook meetings and things like that. Again I think we have discipline on capital allocation. We’re committed to dividend growth, the buyback that we talked about, but if we saw unique value in the marketplace like we did with Avio, we would do transactions like that.

Deane Dray – Citigroup

Great. That makes lots of sense. And then since we have Rod on the call today, I would love to hear from you about -- if you could frame for us how much of the portfolio you have in place today. The whole idea that GE was able to take a lot of the proceeds from NBC and very quickly add some strategic assets into Oil & Gas and then you would stop and see how is the portfolio? Where are the gaps? From your perspective, how much of your portfolio do you have today in order to be effective? Are you half? Do you have three-quarters? I’m not asking you specific gaps, but maybe just frame for us how complete the portfolio is.

Rod Christie

Sure. I think when I look at the portfolio that we had today for Subsea, we feel very good about it. We can compete pretty much anywhere that we choose to. I think what you’ve seen over the last six months around us moving more into the Subsea power and processing really gives you an idea of the brands that we can bring from GE broadly. So our conversion, total machinery, water, realize it’s a step into those spaces. So at this point in time, I feel very good about where we are and anything going forward is really a discussion about internal versus external with a bit more scale. So it’s really about timing. So very similar to what Jeff had talked about with if we see something that looks very attractive to us then potentially, but we don’t feel like there’s any major method in this point in time.

Deane Dray – Citigroup

Great, thank you.

Operator

The next question is from Steve Tusa with JPMorgan.

Steve Tusa – JPMorgan

Hey, good morning?

Jeffrey Immelt

Hey Steve. How are you doing?

Steve Tusa – JPMorgan

Good. Can you maybe just talk about -- you talked about the 50 bps continuing throughout the year. Anything you guys have -- I guess every company has become kind of seasonal with bigger quarters in the back half of the year. Anything lumpy in the second quarter that we need to be aware of, whether it's timing of some of these Advanced Gas Path stuff or Wind that we have to consider when thinking about the second quarter?

Jeffrey Immelt

I don’t think so, Steve. I don’t think Jeff said he was carrying the 50 basis points all year, but thank you for that. We’ll have slightly higher restructuring charges in the second quarter. I said we’re still on track for the 1 to 1.5 and we’re going to spend 60% of that spend on the first half of the year. So the second quarter will be a little bit bigger than the first quarter. We will ship more GEnx engines in the second quarter than we shipped in the first quarter. But other than that, not a lot of -- I did mention that we’re working on one disposition. Not sure whether that’s going to be second or third quarter quite yet, but it’s not that a big a deal. Other than that I don’t have a lot of other items to call out for.

Steve Tusa – JPMorgan

Okay. And then just on the organic growth calc, can we get the contribution from the deals and then ForEx, or negative from ForEx for the quarter, total deals, revenue contribution, and then ForEx? I know they are in the back of the supplement or whatever, or in the press release, but just the data.

Jeffrey Bornstein

Yeah. Sure, Steve. Reported revenue, up 8%. Acquisitions added 2 points. Dispositions had a 1.4 point impact, but then foreign exchange was half a point and that’s how you go from 8 to 8.

Steve Tusa – JPMorgan

Okay. All right. That's great. Thanks.

Operator

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

Jeff Sprague – Vertical Research Partners

Thank you. Good morning, everyone.

Jeffrey Immelt

Hey Jeff. How you doing?

Jeff Sprague - Vertical Research

I’m doing great, and you?

Jeffrey Immelt

Good.

Jeff Sprague - Vertical Research

Just a question on the industrial balance sheet, I guess dovetailing with maybe opening the aperture a little bit on deals. You did do the $3 billion debt raise on the industrial balance sheet. How would you size that relative to the capacity that you have? You teased us a little bit in December with some juice there. Is $3 billion the number or is it something larger than that?

Jeffrey Bornstein

The $3 billion was in the context of the capital allocation plan that we put together for 2014. And we saw the first quarter where markets was very opportunistic. We issued the $3 billion. We were immensely oversubscribed and we’re very pleased with the rates that we took the $3 billion at, well inside on after tax basis our dividend yield. That’s how we size it within the context of our capital allocation game plan for the year. We’re constantly reevaluating the capital allocation game plan with the team and the board, and we’ll continue to do that.

Jeff Sprague - Vertical Research

But that’s roughly the comfortable number relative to the cost commitments to capital and everything?

Jeffrey Bornstein

No. It's the relevant comfortable number within the context of the capital allocation plan we pulled together for the year.

Jeff Sprague - Vertical Research

Okay. And then, can you just size for us the gains that you have in CLL and energy financial services?

Jeffrey Bornstein

Yeah. So, CLL we did sell about 18,000 boxcars per diems, meaning daily rental boxcars in the quarter that was worth a little north of $100 million. We did sell some private equity investments that we do reasonably routinely and just a little bit of Volcker driven the first quarter. That was a much smaller gain. And then energy finance, it's pretty routine for us. We had about, I don’t know, $150 million of gains associated with properties that we sold in energy finance in the first quarter.

Jeff Sprague - Vertical Research

Right, thank you very much.

Operator

The next question is from John Inch with Deutsche Bank.

John Inch - Deutsche Bank

Thank you. Good morning everybody.

Jeffrey Immelt

Hey John.

John Inch - Deutsche Bank

Good morning guys. Jeff, could we flesh out a little bit of the playbook for energy, the energy management business? It looks like you guys made a leadership change there. How are you thinking about really just the portfolio? And maybe Jeff Bornstein you’ve gotten into further the restructuring, how that kind of maybe compliments that segment or your focus on it, just something that might provide us a little bit more color.

Jeffrey Immelt

John, here’s the way I look at it. First from a technical standpoint, there are pieces of the energy management business that are great fits for the rest of the company, like power conversion. As Rod said, that’s a great complement to oil and gas, and some of the things we’re doing. So technically these are industries we understand and can compete in. Our relevant competitors have margin rates that are 10% plus. Some of that’s scale, and some of that’s our own complexity.

What Jeff Bornstein said today is that we’re committed to restructure, and that’s going to provide some big margin lift in that business. And then I just think we can execute better, Mark Begor is a guy that’s well known inside the company of being a great recruiter and an extremely experienced operator, turn around guy and he is in place, and we’re hiring people from the industry. My intent is to run this business and make it better and make it accretive to investors and drive earnings in it.

Could there be a couple of segments in there that had long term fits for GE? Could be. We’ll sort that out and be very tough minded about it, but this segment can do better than what you’re seeing right now. And that’s our commitment to you, is to make it better both from a cost standpoint, and from a market standpoint.

Jeffrey Bornstein

So just on that front, I’d just add that they actually -- you can't see it in the results yet. It's getting eaten up in operations, but we are making progress in restructuring. We had close to a $25 million of benefits in restructuring in the first quarter, and we expect that to accelerate throughout the year. There is some progress here. Our manufacturing delinquencies are down 50% versus yearend and so, we are making progress. I understand -- completely understand you can't see it in the results yet, but our expectations are this business is going to improve dramatically from an operating earnings perspective over the balance of the year.

John Inch - Deutsche Bank

Okay. That was my other part of the question here. So sequential improvement and it sounds like Jeff Immelt, there’s no reason this business can't be running at double digit margins. Is that fair?

Jeffrey Immelt

Look, everybody -- I think John everybody else, unlike our other businesses where our margins are ahead of our peers, this is one where we trail our peers and we can do better.

John Inch – Deutsche Bank

Can I just ask about the Oil & Gas business for a second? There’s a broad level of concern in the industry about flattish CapEx budgets for the integrateds and obviously just the global economy is still not particularly helpful. Price of oil doesn't seem to be going anywhere. Maybe you can provide a little bit more color, given that you featured Oil & Gas on the call. How does that context of these big integrated companies with flat if not even maybe declining CapEx budgets, how does that dovetail with your own business and why is your own business either more or less impervious to that?

Jeffrey Immelt

Rod, why don’t you take a crack?

Rod Christie

Sure. I think -- and I’m going to talk specifically about what I’m seeing in Subsea today. Really what I see is a lot more frontend engagement. So customers aren’t -- the customers that I’m talking to aren’t really looking at dialing back the number of projects. They’re looking at how do they get better capital efficiency. So we’ve seen more frontend engagement around technology, the selection of that technology configuration and how can we deploy with less risks, shorter cycle and potentially at a lower cost. So in many cases what I thought about with the structuring our product really played to that. We’ve taken cycle out, which obviously means a shorter carrying period for any capital investment in the Subsea area from my perspective. So I think most of the customers are looking to continue to drive as many of the projects as they can. It’s making it much easier for us from our point of view of actually early engagement, early dialogue, early engineering so we can take more risk out.

Jeffrey Immelt

John, can I -- I’d add to that. The reinforcement of the way we build our oil and gas business by really invest very specific segments that have faster growth rates than the industry itself. Things like Subsea, turbo machinery and the LNG train, some of our downstream technologies. We really are in the places where there’s going to be a lot of capital continue to be spent.

John Inch – Deutsche Bank

Okay. So looking at Shell's CapEx deployment is not really the correct proxy, in other words, is what you are saying?

Jeffrey Immelt

Exactly, yeah.

John Inch – Deutsche Bank

Thanks very much.

Operator

The next question comes from Julian Mitchel with the Credit Suisse. Please go ahead.

Julian Mitchell – Credit Suisse

I just had a couple of questions on the margin bridge. I think, firstly, value gap was maybe what, about a $100 million tailwind in Q1? Just wanted to check that. And back in January you had talked about a $200 million tailwind for the year in value gap. Is that still the case or have you updated those assumptions?

Jeffrey Bornstein

No. I think that’s what we guided at yearend, that we expected the value gap for the year to be $100 million to $200 million. In the quarter you’re not too far off the mark here in terms of value gap. I think what you’ve got to bear in mind is within our value gap this quarter power and water was negative, but not extraordinarily negative. And we expect price, particularly in thermal to be much tougher as we work through the backlog for the balance of the year. So you’re correct. The framework was up to $200 million and you’re not far off the mark on the impact in the quarter.

Julian Mitchell – Credit Suisse

Okay. And then just on the mix effect, can you just remind us, I guess, what the view is now on wind deliveries for the year and how much more those are ramping up in the back half?

Jeffrey Bornstein

Yeah. So, no change on the framework that I gave you at yearend on wind deliveries. I said that we’d do about 3,000 units and that’s still what we expect to do. In terms of first half, second half, it’s a little bit heavier weighted to the second half of the year. We’ll do I don’t know about 1,800 of those 3,000 in the third and fourth quarter.

Julian Mitchell – Credit Suisse

Lastly just quickly, and I guess for Jeff Immelt. On the divestments in Industrial, you talked a little bit about that in the slides. Also in the annual report there was some kind of a commitment or comment around targeting a minimum 10% margin for the Industrial businesses. I just wondered what -- was that equipment plus service combined, and what the timeframe for that 10% minimum threshold was? Because I guess you have some businesses that have never been at 10%.

Jeffery Immelt

I think Julian, what I would focus on is the $4 billion number. I think it’s our expectation that -- we’re more active on the divestiture front this year and try to leave it at that. We continue to be tough minded around the portfolio and I would expect our divestures to be a little bit more active this year than they were last.

Julian Mitchell – Credit Suisse

Great. Thank you.

Operator

The next question comes from Steve Winoker with Sanford Bernstein.

Steven Winoker – Sanford C. Bernstein & Company

Just, Rod, while I've got you here -- and I really appreciate the focus in on the business unit during the call. I guess one of the primary debates around Subsea is that production tree order trend starting to rise again in 2015. You addressed your mixed benefit. But this emerging capital discipline by the majors I guess is a real question of even in those more attractive sub segments, to what extent do you think that risks the growth and to what extent also are you seeing the outlook for production tree pricing deteriorate in any way?

Rod Christie

If you look at the forecast this year for trees overall globally it’s down, but you have to look at the mix between Brazil and the rest of the world. Brazil is a large buy for a large commitment made for trees in 2013. The rest of the world demand actually increases slightly year-over-year and then you see the total demand back up again or forecast to go back up again in ‘15. But the other thing that you really see is the projects have got larger, so things have got lumpier. You look at the total number of projects that are going for development into the future, there’s less projects but more tree count per project. So I think again the early engagement pre-feed activities and feed activities are really going to be critical to driving some of the efficiency in this area from capital deployment.

Steven Winoker – Sanford C. Bernstein & Company

Okay. And the pricing, outlook for pricing?

Jeffrey Bornstein

I think we still feel that pricing -- the demand for the future is still increasing. So it’s really about delivery cycle at this point in time.

Steven Winoker – Sanford C. Bernstein & Company

Okay. On Healthcare, the pricing in Healthcare. I guess, Jeff, how should we think about this? Do you see this as any kind of structural change in the industry? Is this a function in the Americas, in North America, of the transition we’re all going through in hospitals? And can you maybe give us some color on how we should think about this?

Jeffrey Immelt

Steve, I think that’s a good question. I’d say first, if you look outside the U.S, the markets are all normal with Europe bouncing back and the growth markets still pretty strong. I think it’s too soon to say on just the impact of the Affordable Care Act. There’s just so damn much going on in the U.S healthcare market right now. We’re thinking about the next couple of years as being flood to up slightly. So, we are not really thinking much about robust growth and more industry consolidation of hospital systems, more integration between insurers and hospitals. So there’s just a ton going on in the industry. At the same time when you launch a new product like the Revolution CT like we’re launching in the second quarter, it’s going to build a huge backlog. It’s going to have positive growth. And so with all the stuff that’s going on in the industry, when you have new technology, you still can differentiate yourself and you still get good growth and good margins. I think we’re just wait and see and watch how the industry evolves.

Steven Winoker – Sanford C. Bernstein & Company

Okay. And I can I just sneak one in for Jeff Bornstein? Or maybe it’s two, I suppose. But this tax rate that we got this quarter, should we think about that us more normalized now? And also were the orders -- have those Algerian orders come through yet in the official order numbers?

Jeffrey Bornstein

Yes. The tax rate -- I think what I said was we still expect the industrials tax rate to be about 20% and we still expect the GE Capital tax rate to be single digits in the year. I don’t think our view of taxes has changed at all for the total year. The Algerian units and the mega deal are in our orders book.

Jeffrey Immelt

But I think, Steve, if you look at heavy duty gas turbine orders, I think we said in December what, 125 or something like that. I think we are tracking at least to that. This is a slightly improving market is what I would say, broadly speaking.

Jeffrey Bornstein

I want to clear up one thing before we move on to the next question. On energy financing I think Jeff Sprague asked me on gains and energy finance. I think I said 150. It was 120. That’s about 60 higher year over year. That was partly offset by about $100 million of increased higher requirements this year versus last year so I just wanted to make sure that was clear.

Matthew Cribbins

We know everyone has a busy morning. Ellen, why don’t we take one more question?

Operator

Thank you. Our final question comes from Nigel Cole with Morgan Stanley.

Nigel Coe – Morgan Stanley

Thanks. Good morning and thanks for fitting me in. Jeff, you mentioned the H frame, which is obviously a very important product. You mentioned two commitments. Were they US commitments? And then dovetailing on the back of your comments about a gradually improving market, what are you seeing in the US right now in terms of the front-log for 2015 and 2016?

Jeffrey Immelt

The answer I think to the first question is, No and the answer to the second question I think is just slow improvement in the US, starting with Peakers. We haven’t seen big demand for base load units yet but a ton more interest in the US than we’ve seen in the last few years. That’s the way I would describe it Nigel.

Nigel Coe – Morgan Stanley

Okay. Okay, great. Moving on to GECAS, assets are down by about 10% from early last year. And I’m wondering; what do you think is the right level for assets in GECAS? Is there a longer tail of decapitalization within GECAS going forward?

Jeffrey Bornstein

The GECAS business order magnitude is roughly the size over to the context of GE capital and company but it’s probably going to be long-term, plus or minus. They’ll continue to originate, they’ll continue to grow. I talked about their volume in the first quarter being very strong year over year at very attractive returns so they’ll continue to be very active and write new business. At the same time they’ll continue to prune the portfolio they have and that allows them, it creates the capacity for them to continue to be in the market and right volume. Assets year over year I think were flat for GECAS so…

Nigel Coe – Morgan Stanley

I think they’re down 8% year over year but I can check that. Then just, Jeff, on the -- you mentioned $1.8 billion run rate for GE Capital for the quarter going forward. That is actually slightly above the $7 billion placeholder for the year. Do you think there is more of an upside bias to that $7 billion at this stage?

Jeffrey Bornstein

No. I think we’re still kind of in that $7 billion framework. Given the number of items to go here, we’re still planning on doing the initial IPO of retail so you lose 20% of those earnings. We’ll still continue to invest in that business to create the stand along capability around risk and governance. That will come at some cost. We’ll still do the GECAS, iron fervency are in the third quarter. I think that we’re still focused on the $7 billion framework that Keith shared with you in November.

Nigel Coe – Morgan Stanley

Understood. Thank you very much.

Jeffrey Immelt

Great. Thanks, thanks everybody.

Matthew Cribbins

Thank you. The replay of today’s webcast will be available this afternoon on our website. We’ll be distributing our quarterly supplemental data for GE Capital later today. I have some announcements regarding upcoming investor events. Next Wednesday, April 23 is our 2014 annual share owners meeting in Chicago. We hope to see you there. On Wednesday may 21, Jeff Immelt will present the 2014 EPG conference and finally our second quarter 2014 earnings webcast will be on Friday July 18. As always we’ll be available today to take questions. Thank you.

Operator

This concludes your conference call. Thank you for your participation today. You may now disconnect.

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