General Electric Company's (GE) Management Discusses at William Blair Growth Stock Conference (Transcript)

| About: General Electric (GE)
GE) Management Discusses At William Blair Growth Stock Conference - Slides' target='_blank' rel="nofollow">View slideshow

General Electric Company (GE)

William Blair Growth Stock Conference Call

June 14, 2016 3:50 PM ET

Executives

Lorenzo Simonelli - President and CEO, GE's Oil and Gas

Matt Cribbins - Vice President, Investor Communications

Analysts

Nick Heymann - William Blair

Unidentified Participant -

Presentation

Operator

Nick Heymann

Okay. Good afternoon. My name is Nick Heymann. I am the research analyst here at William Blair who covers General Electric, done that for many years. I am acquired to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest by visiting our website at www.williamblair.com. Joining us today from General Electric is Lorenzo Simonelli, Senior Vice President of General Electric and President and CEO of GE's oil and gas business; as well as Matt Cribbins, Vice President of Investor Communications. Before assuming his current position, he has headed GE's oil and gas business in 2014. Lorenzo was President and CEO of GE transportation. He joined GE's financial management program back in 1994 and grew up in Florence which for many years serves ironically as the headquarter for GE's oil and gas business. Global energy markets have experienced one of the most pronounced downturns since the second half of 2014 in recent memory, has presented a lot of significant challenges for the energy market participants in 2015 and again this year. But it also ironically has provided numerous opportunities for future growth. Lorenzo and his team have worked very diligently and by the end of this year look to reduce the cost base of GE oil and gas by roughly $1.4 billion off of the sales this year would be some place in the $13.5 billion to $14 billion range. So that's a remarkable 10% of sales that will be taken out in terms of cost in just two years. For the best companies with challenge comes opportunity and without a significant further recovery in oil prices, Lorenzo and his team are working to build out a significant aftermarket service business for GE's oil and gas customers by the end of this decade. Simultaneously, he is also working to be able to develop actual insights that can be provided to enhance the return on invested capital of GE's oil and gas customers with the use of GE's Predix, and this is going to be very transformational in terms of the value that the business can offer beyond just servicing and maintaining their customers' equipment. Lastly, he is also spearheading a big change to develop seabed and commercialize seabed processing. And this could be a dramatically new way to more efficiently lower the cost to recover deepwater oil later this decade or early next decade. All these factors contribute actually in a tough environment quite an exciting outlook for a very important component of GE. We think that here with the remarkable story of tenacity, perseverance, and innovation as well as growth is Lorenzo.

Lorenzo Simonelli

Thank you very much, Nick. What a great introduction. So it's a pleasure to be here this afternoon, and what I thought I’d do is really take a step back and maybe just walk you through what is GE oil and gas, and it is one of the newest businesses from a GE perspective. We really entered into the space 20 years ago. So what does GE oil and gas look like today. We are really an incredible force within the oil and gas industry, and I'd say unique from the perspective that we provide equipment and services of extreme technology across all of the areas from the upstream, the midstream, and also the downstream. And as Nick already mentioned, we also offer the digital solutions that allow our customers to have information and capability across each of the different element of the ecosystem of oil and gas.

In 2015, about 40,000 employees and $16.5 billion. And this has been really a growth through acquisitions and organic strategy by GE over multiple years, as we've mentioned, starting out in 1994 with the acquisition of Nuovo Pignone. And as we know, the oil and gas industry is going through a challenging time. I am not here with my crystal ball to tell you anything differently than what the external world has already told us, but we do believe strongly in the long-term future and vitality of the industry. When you look at trends such as population growth, energy needs, we think that the oil and gas industry is one that GE needs to be in. And the reason why we invested into GE oil and gas wasn't because of the oil price, it was really because of the macro trends that we saw from an energy consumption perspective and also the ways in which the industry actually resembles some of our other GE businesses.

When you look at it from an aviation perspective, the regulation front is increasing. When you look at from a power perspective, the technology that's required; and as we look at the long term, we see gas being a winner within the long term, and that's why we got 50% of our oil and gas business that’s actually gas focused. And we will see the recovery happen over the course of the next few years. Don't know the exact timing, but again we do see this thing a cyclical industry, and we know cyclical industries well. We've been through the power bubble in the past. We've been through the aviation bubble before. And we will come out of this one stronger as well. And those are the steps that we are taking from a GE perspective is really executing on what we control and then staying focused from the long-term nature of the growth that we see in a continuous basis in all the aspects of the oil and gas sector.

And when we think about GE's presence, this is why GE oil and gas is important and why we benefit from an aspect of being part of GE and why we are unique in the industry. We have the capability of going out for the GE Store, and when we think about that, that means we are able to take the 50,000 engineers, the technology that we have within healthcare, within our energy connections business, the large motors, aviation material capability, and bringing it into projects. What you see here on the pages, an example of the way in which a subsea project comes to life by bringing the GE Store to our customers, nobody else can do that. We are able to take the material capability of aviation, the power electronics, we are able to take the large motors and make these large complex projects become a reality, and that is what we are doing on a continuous basis and the benefit that we have of integrating and packaging for our customers across the full stream of the ecosystem of oil and gas.

I think this is important to put it into reflection what we are doing as we focus on this downturn which is really focusing on how we can differentiate and how we can add value to our customers going forward. And in addition, you’ve heard a lot about digital. I wanted to break it down into a simple aspect. What we provided the world from an industrial perspective is the first industrial operating system. I’ve had a couple of breakout sessions already and there are a lot of questions around what does it mean. What does it mean to be digital big data? And there are lots of slogans, internet of things, big data. What we are providing the oil and gas industry is an opportunity to take all of these information flows and allow better outcomes. Reduction in unplanned outages, being able to provide preventative maintenance, reducing cost, increasing productivity, increasing production, and across the value stream of the oil and gas industry, that's what we are able to do by introducing Predix as an operating platform but then also providing capabilities of application from top of that. And it's easy to say it but how do you make it real. The proof is in the pudding. It's really having examples that you can point to where we’ve gone out and produced better outcomes for our customers by applying digital. And I wanted to share with you how we bring this to life and how we are able to actually introduce Predix which essentially is the gathering of data points to provide a better outcome for our customers in specific examples. If you look at production optimization, in Kuwait we actually have electrical submersible pumps where we gather the information, we look at the water cut, we look at the oil, we look at the reservoir, we are able to take that data and provide production optimization to the field. On the wells that we manage, 2% to 5% increase in production. But it's not just on the wells that we are looking at. It's also as you look at asset performance management. One of the best benefits we have is a large installed base whether you think of the gas turbine, the compressors, this large installed base is got of lot of data. And if you look at QGC for example, we are able to provide reliability uptime guarantees of 99.9%, which then enables us to provide the customer great outcome from a production perspective, and also reduce any unplanned downtime and cost warranted with that. We’ve got a project that we are undertaking with BP from an offshore fuel platform perspective. And we are also monitoring pipeline at Columbia pipeline 15,000 miles of pipeline. This is how you take Predix; you take data and make it real. And yesterday, we also announced a partnership with Technip around LNG. This is where you are now designing and building the capability of data and analytics from the start. In this relationship, we are able to design in to new projects already all the sensors, how are we going to capture the data, and then that diagnosis how it leads to a better outcome for our customers. This is the way in which we are going to be differentiating ourselves going forward within the industry by really having an ecosystem of data gathering to provide a better outcome. And this makes it real for our customers as well. So not only by bringing the GE Store from a technology perspective of the equipment that we can package, but also by being able to provide the digital enhancement of Predix and providing data driven outcomes.

In addition, we are doing what's already been described as the cost cutting initiative. Now Nick already mentioned the $1.4 billion that we committed between 2015 and 2016. We are on course to do that. You saw the results in 2015, and we've also made a commitment in the first quarter to take that up from the $1 billion that we set in 2015 to $1.4 billion. And we are doing that through the traditional rooftop consolidations. The tradition of discretionary spending that we are reducing. But we are also utilizing digital within our own factories. Being able to reduce the cost of transferring equipment between the factories, looking at logistics costs, looking at the transfer of information in Talamona and Florence are two such factories where we are embedding the digital capabilities of Predix to enhance our capabilities and reduce our cost footprint.

So not only the traditional side of cost cutting but also taking what we've taken externally to our customers and bringing it internally in-house as well as the digital thread is the way we communicate it.

In addition to the aspects of productivity from a just cost reduction perspective, we are going to our customers and providing them better products, products that come in at a lower cost point. This is an example of an onshore product where we've been able to take out 50% of the cost. And you do that for your traditional deflationary elements of going out to your supply chain. You also look at the way in which you can redesign, reengineer the product. This is how we make our customers competitive in a low oil price environment, and this is what we are introducing to the market place to continue to penetrate and gain share, and that's why we feel as the industry starts to rebound we can come out stronger. And we are embedding this not only into our products but also across every element of the projects that we execute.

It's important when you think of the oil and gas industry not to just look at it from an equipment standpoint or a specific service that you are offering. We are involved in large complicated projects that start from a field engineering perspective; design all the way to the installation, the commissioning, and we are working with our customers on that full value chain to be able to look at ways in which we can enhance and take out costs, take out redundancies by standardizing the product such as our Nova LT gas turbine, our DVXT subsea tree, but then also collaborating with the customers who rail track which is a way in which they can see the same information on project deliveries, milestones on a continuous basis, so So we can take out the redundancies of third party inspectors, and actually work together to have the best outcome at a good cost point for the projects to be executed. And this is yielding results. You've seen that the industry has been working on taking anywhere from 25% to 35% out of projects; this is how they get there. It's like collaborating with the supply base and we are one of their largest suppliers and partners and working partnering with them to make sure that we provide the GE store to make this capable.

I wanted to also mention the aspect of services which when we are looking at new projects being down. We know that CapEx spend is down. So how do we make sure that we continue to build a strong service portfolio and also differentiate through new commercial innovation? We've actually grown our service backlog. As you look at the service backlog is up in the first quarter by 16%. And how we've done that is by introducing new innovative contractual service agreements into the industry. Diamond Offshore in the first quarter of 2016, the first time that there is contractual service agreement on blowout preventer. Now that's a great annuity for us over the long term. It's also a great outcome for the industry who better than us to manage the outcomes on the blowout preventer when we build it; we got the data that we are capturing on it. And we are able to provide guarantees relative to our ability and the availability of the equipment.

In addition, as you look at Shanare announcing a contractual service agreement for sub -- and the gas turbine, the LNG trains that out there and on Petronas, the first floating LNG. So as we look at environment where CapEx and project is down, we are out there gaining on the installed base, mining the installed base, capturing that service stream which is an annuity that helps us make sure we manage the volatility of the industry. And very important that we continue to do this and that's why it's a key focus for us as we go forward.

I mentioned product innovation. We haven't stopped the technology advancement into new product. You can see on the flexible side a new composite flexible which being introduced which provide enhanced capabilities as you go to deepwater. Again, reducing from a weight perspective, enhancing the flexibility for the end customer and also making it at better cost outcome for them as they execute the project. And you can see also the analytics that we are providing on BOP control system.

As we start to see this industry recover, we are positioned with the best product innovation and the data analytics to be able to give a good outcome at a low cost environment. And we know that we've got to continue to innovate. And that's why we test out the investments that we've made in new technology. And we protected what's core from an engineering perspective as we've gone through this cycle. So it's important as we come out of this we come out stronger and that's one of the ways we are doing this.

So I wanted to really wrap it up just and giving you an overview of GE oil and gas and we are focused on what we can control. I'd loved to be here saying that everything is going to be fine. And I can name when the recovery is going to be. We are going to manage through the cycle that we are in by focusing on what we control. By making sure that we've got the cost reduction in place that we are focusing on partnership with our customers, that we've got innovation from a product perspective and that we are looking at the full value stream from a project perspective with our customers. And most of all that we are bringing to GE Store into an industry that again we think is healthy for the long term. And through the GE Store and also through GE digital we are able to differentiate better than anybody else in the industry with the capabilities that we can provide. And that allow us to be confident in the outlook of coming out of this cycle stronger. We know that 2016 revenue will be down 15% to 20%, operating profit down slightly and we manage through this and likely done in other cycles in a disciplined approach come out stronger.

So thank you very much and I look forward to the questions, Nick.

Question-and-Answer Session

Operator

[Operator Instructions]

Nick Heymann

Are there any questions in the audience? Yes.

Unidentified Participant

Pricing in the industry and for GE, do you think it is stabilized at all?

Lorenzo Simonelli

So if you look at pricing it is definitely there has been price erosion that's taken place and we have seen that be in the range of 2% to 4% for the year. And it's competitive landscape out there. We haven't seen the outlook change from that percentage range so far.

Unidentified Participant

With the access for the financial business, are you still financing some of these major projects -- [Technical Difficulty?]

Lorenzo Simonelli

No. So you mentioned a great point, one of the capabilities that we have through the GE Store is still financing and energy financial services is still part of GE and in fact as we go out with our capability we also offer customer support from a financing perspective when necessary. We work not only within our own financing but also with ECAs and also third party financing and we packaged them together so the projects can forward.

Unidentified Participant

[Question inaudible]

Lorenzo Simonelli

So as you look at the overview of GE oil and gas and you can break it offset, we are in all of the segments you have got on the upstream about 33% and you got the midstream about 33%, 15% on the downstream and then auxiliary the remainder is just about 15%. And when we look at the industry we think the first that we will come back is on the upstream and in particular the unconventional side which is the onshore. The project site of the subsea deepwater will take longer. However, we still believe and as you saw from the industry outlook that is a necessary area that we are still play a part as we go forward. But it won't come back as fast. So in our portfolio diversification we feel good that we are actually be well balanced to take advantage of what comes back quickly. And then also be ready for the longer term.

Unidentified Participant

[Question inaudible]

Lorenzo Simonelli

So we work with our customers and many of them are doing the calculations. What I'll say we look at the decline rate that is happening within the industry. We look at the expected demand that's out there for the resource. And that says the deepwater projects will be necessary to actually fuel the demand. So from a standpoint of recovery of the depletion rate you will start to see the deepwater projects come back and our customers really saying on this 2019, 2020 period that's when we'll start to see some of that activity.

Unidentified Participant

[Question inaudible]

Lorenzo Simonelli

So on the upstream it's 33%, you got midstream on 33%, downstream 15% and then digital services and the auxiliary just about 15%.

Unidentified Participant

[Question inaudible]

Lorenzo Simonelli

So if you look at when I mentioned the price aspect that was GE oil and gas level and that's what we look at from an entirety perspective so

Unidentified Participant

[Question inaudible]

Lorenzo Simonelli

Sorry, yes. Apologies I misunderstood. I thought you say price. On CapEx standpoint where we've seen the biggest reduction has been on the upstream side to begin with and most significantly in 2015 it was on the onshore site. Now as we are looking at 2016 it is more on the drilling and the subsea projects. You are seeing some push out of the LNG projects. Downstream has remained relatively robust. There is some impact from just spending cost, from discretionary spending cut and digital has remained is in line again it's slightly down. But the big impact it has been on that upstream side.

Unidentified Participant

[Question inaudible]

Lorenzo Simonelli

No. No. What I said was that the first that you will see come back is on the onshore side and if you look at deepwater projects we still think that they will come back. But they will be delayed in the coming back.

Nick Heymann

Could you talk a little bit, Lorenzo, about where you are in this effort to bring processing from the surface to the bottom and in turn what are the resources you might need or how close you are been able to test these components and then really the challenges ahead in terms of trying to offer this an integrated system and what can that bring to the customer to transform the market?

Lorenzo Simonelli

So, Nick, I think and it's a great question. What you are really looking towards the subsea processing. And we think that there is a play especially with some of the fields that are further offshore where there is going to be productivity, if you take the processing instead of building a facility and having to have it all onshore or having on a platform on water actually taking a subsea will be cost effective and you got customers such as Statoil they call it subsea factory. So we see this being an area that is continuing to be developed and we've got this definitive product that we are introducing on the subsea side. The packaging of it still to be seen as the projects comes forward. And I think it's an area that we are continuing to invest in. As the deepwater projects come back we think this will play a role. It won't be in every project though. So again it will play specific role and deepwater if you look at the industry trend it is going to be about 15% of the actual resource.

Unidentified Participant

Do you see LNG playing a key role in the future? And is going to get off the ground as per --

Lorenzo Simonelli

So and one of the change you may have seen that we are strong believers in gas and also we believe that LNG is going to be a fuel that continuous to grow over the long term. If you look at the current environment, you got a number of projects that are coming on stream which clearly say there is a lot of supply that will be there initially. That needs to be absorbed over the long term, LNG is from a hydrocarbon perspective very flexible and one of the cleanest taking the natural gas into LNG application. So we still very confident that over the long term LNG will over --

Nick Heymann

Could you talk a little bit about how right now the state of where the aftermarket service is done? Most of this done by the customers themselves and enhances the oil and gas profile for self service is much like the airline in the 60s and 70s where is today almost all of the servicing of aircraft is done by the engine manufactures and is that similar parallel at all to your oil and gas scenario today and with the constraints that they face from a cash flow standpoint and the desire to improve return on capital you actually have a very facilitative opportunity to be able to help build out your aftermarket service business for your oil and gas.

Lorenzo Simonelli

Nick, if you look at some of the characteristics that we liked about the industry when we came into it. Technology requirements continue to improve. And we are a technology driven business. And also the aspect of regulation continues to increase as well. So there are many characteristics that are following similar to what you've seen in aviation. And that bode well for company like ourselves that can also the technology -- can also offer the required working capital and affect these to help our customers. In the case of oil and gas, there are also a lot of smaller third parties that are conducting services as well as the customer. And we think there is an opportunity to really go in and work closer with our customers to help them aggregate that service complexity, make it simpler and also help them to gain more productivity by working with us.

Unidentified Participant

You talked about your view in light of the recent installation affecting -- your view on the integration of equipment provider or service or service provider and how that impact the benefit for our business? [Technical Difficulty]

Lorenzo Simonelli

So I think you are obviously referring to FMC technique deciding to come together as one. And there was an earlier joint venture that they created call Fortis as well which was more on the engineering and consulting side. I think it's still something that's go to play out in the industry. We have our own pre consulting and precede joint venture with McDermott as well io, we do not specify what equipment is necessitate and we think it's important to really work with our customers and allow them the freedom to take what is the best technology and capability and so far that's what we've seen. And when necessary there will be projects that require ETCIC and in other case it will be independent. So I think we will see how the industry evolves. We are well positioned though because we actually have the partnerships. We are able to participate in project consortiums when necessary. And so we benefit from really being able to play in both. We don't think it's necessary to have the joint forces such as FMC and Technique.

Unidentified Participant

[Question inaudible]

Lorenzo Simonelli

So you saw the uniqueness of our portfolio. And what we've been able to do over the course of the 20 years is really put together a full stream capability across all of the areas. So is there necessity to have to buy something? No. We really are going to be opportunistic and look at what's available. And also make sure that it meets the requirement from a GE return perspective to go into it. And we are very confident that also organically we've got what it takes for the product innovation to continue to grow. But we remain opportunistic within the financial returns.

Operator

Nick Heymann

Okay. Lorenzo, I think we are actually out of time. We are going to have a breakout session downstairs at south B. But we've got tight schedule as GE got get on the road. Lorenzo, thank you very much.

Lorenzo Simonelli

Thank you very much. Appreciate it.