General Electric (GE) Presents at Credit Suisse 4th Annual Industrials Conference (Transcript)

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General Electric Company (NYSE:GE)

Credit Suisse Industrials Conference Call

December 01, 2016 02:00 PM ET

Executives

Steve Bolze - President & CEO, GE Power

Analysts

Julian Mitchell - Credit Suisse

Julian Mitchell

Thanks everyone. So, it’s my pleasure to introduce Steve Bolze, in charge of GE’s power business. Steve’s going to talk for 15-20 minutes and then will do questions.

Steve Bolze

Perfect. Thank you. And pardon my voice, at least I have one a little bit today. But, what I’d like to go through is what’s going on with the power business at GE. What I’d say is in many ways, it’s been a transformational year for GE, particularly so in our power business. I’d say, there are three key areas that have really been the most transformational, one of which is Alstom integration, which is well underway, which you will see, the HA is proceeding very well. I’ll talk through that. And I’d say the third of which is the investments that are playing through on services and digital, and how that’s positioning us for growth.

So, just as a reminder, our power business is about $28 billion of annual revenue for GE in 2016. It represents today about one-third of the world’s electrical generation with our customer base. So, it’s big part of the world’s power; it’s a diverse mix. And one of the things you have noted earlier this year is with the announced transaction with Baker Hughes, we will be announcing -- or we will be selling our water business later in 2017. So, that’s our power franchise.

If you think about what we do and how we differentiate ourselves for our customers, it’s really in these three areas. One is differentiated products and solution services, one of which is global presence and talent, and one of which is digital capability. And as far as just highlights, what I would say is the Alstom acquisition, well underway. I would say, as I go around the world, and about 70% of our revenue is outside the U.S., strong customer acceptance on the rational of these two companies being together. And you all know about our global footprint and capabilities but the integration and synergies are well on track. Expanded capability is what we’ve got there in terms of scope, in terms of our steam business, which we’ll talk through, and then service upgrades. And last of which is big ongoing opportunities for margin enhancement and vertical integration, in-sourcing, and you see the Brilliant Factory work from GE and digital coming through. So, very much a more valuable business than it was a year ago and also well-positioned to lead.

Now, stepping back and looking at the environment that we participate in, I was just recently at the World Energy Congress in Istanbul, just a perspective on the markets. I’d say, it’s a dynamic market but it’s characterized by slow growth. But within that slow growth, there are pockets of growth. And I’d say areas that we see right now are in pockets of Latin America; we see it in Sub-Saharan Africa; we see it in spots of Asia, but there are places to win in a slow growth environment. Energy demand continues to grow at 2% to 3% a year. Obviously, the parts of the world are more so than others, particularly in the developing regions. And still remember, today, 1.2 billion people in the world do not have any electricity access, so still a lot of demand.

The right hand side of this chart lays out where the terawatt hours of power come from today. So, you see very much today is centralized power. But the point I’d note here, even by 2025, a lot of the power in the world, over 85% will still be centralized. And you see the role that gas, coal play. And also while renewables is a big growth area, gas is actually the single biggest area of new power in the world. The other area that comes up, if you talk about the global power ministers of the world, is the impact of efficiency. That’s coming out of the COP21 standards as people are focusing on how to reduce their carbon emissions footprint, the big opportunity for our business stepping forward, as well as continuing to get more out of the installed based through services, and our digital investments have really positioned us well given more productivity solutions.

So, talking about gas on this next page. The gas outlook, people always ask me about this. It’s largely a flat market in terms of gas new units, but it’s heavily switching towards H-class machines. You see roughly 32% of the market has been H-class, we see that growing to close to 46% and closing around 50%. So, people are buying larger units. And if you think about how GE wins with a customer in this space, it’s really four key areas, it’s capital cost efficiency or dollars per kilowatt; it is footprint size, you want it to be smaller; third of which is flexibility, which gives you responsiveness to respond in cycles with renewables; and fourth of which is efficiency.

What we have with the HA technology right now is the best hours per kilowatt, the best power density, our operating flexibility is now at industry leadership, and you saw the world record performance announced earlier this year with EDF at our plant in Bouchain in France, which is 62.2% combined cycle efficiency, which is the highest of any plant in the world.

Now, if we step through what Alstom brought to GE, it really strengthened our gas franchise. On the left hand side of this chart, you see a typical gas plant. That’s what our customers buy. And the blue represents where GE has historically been strong, the gas turbine, some of the control areas, some of the steams in the areas. What we’ve got from Alstom is a much bigger presence on the total plant. Many cases, we used to be 20% of an order transaction for a gas plant; now, we’re close to 60%. The value of this is tremendous, in terms of almost half a point more efficiency performance, in terms of what we did and guarantee the customers. Cycle times in determining [ph] how we deliver, it’s very important to certain customers in terms of emergency power situations and our virtual plants and module areas really helped us there. And third of which is more scale for volume and product cost out.

By the way, each of the business areas in power are on track for their synergies. Our overall target within GE was $1.1 billion of synergies this year; power was $777 million, and we’re on track to meet if not beat that. Gas power array is significant on their track there and you see the expanded offering and improved performance coming through for customers.

And HA platform, we launched this about 18 months ago. This platform is coming to market. We have 17 units that we’ve delivered through the third quarter; 25 will be the number for this year, that’s what we’re on track for. And when we talk about total margins being positive, that’s on the unit side. And in the third quarter, we were positive; and for the total year, we’ll be positive. And for a product scale investment like this to be positive, in its really first year of introduction is a good thing. I would say all of both our 50 hertz and 60 hertz units are now tested, and the returns for 2017 will be better because we already see the product cost position is better for the units in backlogs that will ship in 2017. You see the numbers there that we should be estimated to exit this year with for next year. And when you think about the HA, it’s not just the gas turbine but it’s the steams, the generators and the boilers that makes up the total plant. So, the HA platform, what I would tell you is it’s the right product at the right time in the market and it is delivering.

This next one is our steam business. It’s one that some of you that were at our recent investor visits through Belfort and Baden, you heard a presentation from Andreas. He joined us from Alstom. This is largely the Alstom-based business that we acquired but we also put our steam business from GE in it. We now have GE closed to a $3 billion equipment steam business and the associated service business is with our services business. But what’s interesting about this is roughly 30% of the world’s power is coal, so therefore steam power; and 30% of the world’s steam turbines is now GE; and 30% of the world’s boilers is now GE; and 50% of the steam turbines and all nuclear plants are GE. So, in terms of servicing, efficiency and such, this is the offering we have and that we’re very happy with the technology.

If you think about how this business is positioned to win, it’s really two key areas, the first of which is the most efficient coal plant technology. You see this one listed here at EnBW. This is at 47.5% thermal efficiency; that’s the highest of any class of any steam plant in the world. You see that rolling through in the some of the big wins, you saw also from us earlier this year. On the other side, something that investors always worry about is the project execution capability here. It was very strong within the steam business and portfolio within Alstom, and you can see here the team just received the award from Asian Power for the Tanjung Bin project in Malaysia for the execution of that project. So, we’re happy with the technology here. But not only does it play for new units, it plays for services, which is where I want to go to next.

One of the core reasons why we made the investment of capital allocation in Alstom was for the service portfolio. Now, it gave us much stronger presence in the plant but it also gave us broader access to install base. If you think about the plant, the blue there is again is where historically GE was strong in services. And by the way, the combined service business now, if you look at the red, that’s where Alstom added strength. So, not only in gas for the Alstom units, but also much bigger in generator stream, boilers, total plant capability and also other OEM, which is non-GE and Alstom. We have now launched this year, less than now one year -- we are little over one year in integration, but the Fleet360 is our total plant optimization service solution to our customers, and this is already having big impact.

Now, our services business within power is about $16 billion of revenue and it represents a large part of our profitability. If you think about how we win in the marketplace, it’s through services technology. Now, a lot of you know, we are focused significantly on providing upgrades to our installed base. We have a continuing, very robust program for Advanced Gas Paths, AGPs; last year 104 were shipped; we’re on track do the 135 to 150 this year. But, this program is broadening GE. Paul McElhinney talked about this when you all were at -- those that were there in Baden. We have broader upgrades for non-F-class machines, we have that also covering the combustion systems, the compressors, the flange-to-flange units and now the steam units.

If you look at the right hand side, this is how we are together with Alstom and GE coming together. We can now provide more gas upgrades for the Alstom gas from the facilities. In some cases, we are already under contract at two points of efficiency and extended life. Steam turbine upgrade area is an area of big focus for the historical Alstom business but within GE that’s expanding. You’d see the total plant solutions there. And I’m going to come back and talk a little more about what Predix is doing for our installed base because we are starting to see some big wins on that side. So, the service technology continues to expand.

And when you think about where we take the business, this is one of the key reasons why we bought Alstom. We got 50% more installed base in a single investment, basically 50 years of installed base in one investment. If you look at our investment mix of installed base, it shifted there from just GE. You see GE and Alstom together, so very nice diversified. And you see -- look at the opportunity that exists in the market, outside of GE and Alstom units, it’s bigger than the existing GE units. So, we have a much more capable service business, large installed base and it’s expanding for the total footprint.

Now, in addition to the three core businesses, cost competitiveness is a key focus within power. We have talked to you historically about SG&A, which is cut down in the legacy business from 12% to 9%; that drove about $460 million of cost out to the operating line. Obviously, we went up a little when Alstom came in, to 11% of our sales and we’ll be working that down as we complete our restructuring. Product cost is really the bigger entitlement area as we go forward for margin accretion. I just pulled one example here. This shows you our product cost reduction curve for the last introduction of the 7F.O5 gas turbine versus how we are launching now the new HA. You can see that when the H was launched, the first unit was already at 10% less cost than the dollars per kilowatt in the F. And now today, our 10th unit shipping from the HA is already at the cost position of the 1,000th F machine.

So, we are starting to see the benefits from the should cost work, our combined centers of excellences which is suppliers, product management, manufacturing, engineering all looking together, and this is a big margin accretion opportunity as going forward, and it’s enabled even more so by the Digital Thread.

Now, at the sometime, we are investing globally in our operations. To compete in this business, you have to be local. And some of these are our historical factories but we do have factories all over the world. This matters to win. And the three things I’d just highlight here, different from some of the previous discussions, one of which is our Dammam, Saudi Arabia facility, has now made its first heavy duty F-class machine that is now shipped. Korea has now joined us because of the Doosan acquisition for the boilers that’s now part of GE. And the third piece is the Algeria facilities are coming up. So, we’ll be able to continue to position for that large market opportunity. So, this is all about being local, high-quality and cost competitive.

And as we look to the future, one of the areas is driving more variable cost productivity. And this is really where all of the investments from GE on additive and advanced manufacturing come in. On the left hand side, you see our new additive advanced manufacturing facility in Greenville, South Carolina. It is right next to our largest single heavy duty manufacturing plant of the world. So, we are already scaling up our first additive parts that are operational. And this technology is going to be well into the H-class.

If you look at the right hand side, Digital Thread. This is really more productivity enabled by some very large ERPs and simplifying our IT systems. In 2016 alone, this is $250 million dollars of productivity, and we are connecting the whole enterprise here. So, these are big investments. This is about capturing that next level of margin accretion going forward.

Now, the area I wanted to kind of close in on is really the last big area of transformation. But in my 23 years in GE and roughly 17 years in the energy industry, this is the biggest transformation that’s happening in the industry right now and will be over the next 20 years. This was really the topic of my keynote discussion at the World Energy Congress back in Istanbul. This is some work here that was done by the World Economic Forum. The $10 trillion of value can be unlocked by getting at digital and industrial coming together for more productivity in the industry.

The view is that more than 75% of the unplanned downtimes can be avoided. There is more than 3 to 4 points -- or 3% to 4% of all electrical generation that never makes it to the consumer and industrial; it’s lost in transmission. And there are a lot of new business models coming up here. So, tremendous opportunity for more productivity in the space. In terms of the Power Digital offering, and you hear about the industrial internet, this is all about better outcomes for our customers.

If you look at the left hand side of this chart, with hardware and software coming together, we are working with our customers on existing units getting to 5% better starting reliability, 10% less startup fuel, 1% more total plant availability, 1% more efficiency. These are big numbers for the installed base units and for our customers. And when you look at now applying this to our service backlog, our service backlog in power is $60 billion, only a small piece of that today is digital. But what we went through in terms of our contractual service model, multi-year models is where we’re going to deliver outcomes.

And I thought the best example I could give for you is this next one in the case study at HUBCO. HUBCO is a Pakistan facility. And this is really a great case example of the power of the digital industrial impact and with one of our customers.

In this case, we took Predix, we took the Digital Twin, we took understanding of a -- by the way, this is an Ansaldo plant. We went in there and we applied all of the thinking, and we’re talking about four points more efficiency out of the same plant today. If you look at that, it’s also a case example of using not only Predix, but Asset Performance Management, APM; outage optimization, this is the first major deployment of NeuCo, a smaller company acquisition we did in Boston, and you see how that four points breaks out.

What’s also we did here, this is the first example where we experimented with the new business model. As opposed to just selling subscription as a service, we actually guaranteed an outcome. And in this case, four points of efficiency over a 10-year period is worth $240 million to the customer. We will share in that savings. If we sold this under the prior model of license only, this would have probably been less than $15 million. There is tremendous value for our customers here. What’s nice about this one too, HUBCO is a subsidiary of Engro. Engro as a company in Pakistan is deploying Predix now across parts of their fleet, as well as in their operations for fertilizer, for food and other industrial businesses. These products scale not only in power, but across the industrial franchise.

And the chart I’d leave you with on Power Digital is the same chart I used recently, and we talked about it Minds and Machines is this is real and is happening. Just within the power business, the power business is close to 40% of the entire revenue of GE’s digital franchise. And within that, a big chunk of that is our software enabled AGPs, but what I show you here is our pipeline of our services, our software oriented business within that number. We have this year -- we are going to be at $500 million of software only orders in power that were driven by digital, and you see the first half numbers there. This is growing over 50%. This is good margin business, and those customers on the right, the majority of those were not with us as digital customers just a year ago. And you heard the announcement recently from Exelon, largest utility in U.S. is going to take Predix and scale it across their gas, coal and renewables and nuclear franchise.

So, just to come back to where I started, it’s really been a transformational year for us. But this is all about building a new GE Power business with Alstom and GE together. You know what the numbers were last year. This year with Alstom, we will go double-digit, both top and bottom-line. The legacy business will grow single digits this year, as we have discussed. You see what the margins rates look like there, attractive. And what I’d sum it up is it’s a great high return business within the Company, some clear competitive advantages in terms of technology leadership, globalization, services, digital, simplification and culture. And I would say the other of which is if we look at our capital allocation within the power business over the course of the last number of years is good returns on our investment and we’re positioning the business for not only the short but the long-term.

So, with that, thanks for the time. And Julian, I’ll open it up for you and questions.

Question-and-Answer Session

Q - Julian Mitchell

Thanks, Steve. Maybe, I guess firstly, talk a little bit about the AGPs. That’s an area we get a lot of questions on ourselves. The confidence in that 135, 150 number for the very short-term, and also I guess if you could try and scale -- you talked about the overall size of services, but then you talked about upgrades. Roughly what percent of your services revenue is upgrade specific activity, versus say long term?

Steve Bolze

I would say this, on the AGP side, the AGPs, we did 104 last year; we’ll do between 135, 150; I think we’re 86 through the third quarter. Yes, they’re a lot in the fourth quarter but we know where they are, we know what we’ve got to do. So, I would also say as why has there been so much AGP growth is because it’s a very good return on investment for our customers. The 7F or 60 hertz AGPs are very good investment returns for our customers. Therefore, they’re deploying them across their fleets. So, I’d say yes, I feel good about the 135, 150.

Your discussion on larger upgrades, I’m not going to get into how much of our revenue is that. But what I would tell you is AGPs are really -- I’ve historically talked about more on the F fleet, but you could apply them to the Bs and the E class which are the smaller units. The other thing is we have a lot of update programs going for the combustion system. People have to do that given the emissions issues today, also have to upgrade your compressors, which allows you get more life and output. And the other of which people are getting into is a lot of the F units that were put in during the “U.S. bubble”, are approaching towards their end of rotor lives. Those are now coming up to major upgrades. And then you see people doing what’s called, Julian, flange-to-flange where they literally take open units up, take the whole rotor compressor out and put a new one in. And in top case, they get 2, 3 points of efficiency. So, this upgrade program is a same philosophy we’re applying to Alstom units, same philosophy we’re thinking about as we think through how we proceed at other OEMs.

Julian Mitchell

Alstom, cost synergies, you sound very comfortable with. Revenue synergies, I think initially were targeted at about $200 million that’s sort of total Alstom inclusive of grid and so forth. Now, you’ve had it for about a year, how you’re thinking about the revenue synergy number?

Steve Bolze

What I would say is the Alstom integration is really getting traction. I would say to your point, the cost is how we built this synergy model. That’s well on track. I think we said $1.1 billion this year, $1 billion to $3 billion by 2020. I think it’s $2.5 billion by 2018 and power is $1.7 billion of it. And I can tell you, we’ll hit our synergies this year, maybe exceed, probably exceed. And then, we have good line of sight going in 2018. So, cost is straightforward, to your point. The revenue: We always said revenue synergies would be an upside.

What I would tell you this is already in 2016 in power, we have $85 million of revenue synergies. So, we are already seeing it coming into the business. A lot of revenue synergies, everybody knows, as you go through these deals, when you get an order, you got to get it to flow through, the backlog and out. So, I think if we use this year as an indication, we are starting to get some. It was always positioned to be incremental, but as we look forward over the next two or three years, it’s happening. I would say that $200 million is reasonable number across the GE portfolio. And I would say in the power business, the area that we are getting them the most, one is selling them what’s called the steam turbine and lead generators, [ph] the bottoming cycle with the combined cycle gas, number one. Number two is selling more services to existing contracts we had. And the third of which is really as we start to think about of our three to five-year period, how we expand on the other OEM. So, I think right now, we feel pretty good about the revenue synergies; it’s starting to happen, I think it’s positioned to expand that.

Julian Mitchell

Within other OEM work, Alstom was somewhat unusual in the emphasis they placed on that type of activity. You now have with Alstom the biggest installed base in thermal power by a distance. So, is there a danger that as you try and get the other OEM work up, the industry and aftermarket gets dragged into some kind of price war on aftermarket?

Steve Bolze

Julian, I understand the concern. I would say a couple things, one of which is customers, kind of while we have a certain portion of the world installed base with our customers, when you go to a customer, it could be a higher level. And I would say customers are pushing us to get involved with servicing on GE equipment, number one. Number two is not only did Alstom do it, and they had a very sizable business to do that, so do others. So, it’s not like this is a capability that customers are looking for. But I would say that third thing is we are focused on a point of differentiation and it’s really going to be technology. So, how do you apply an AGP or an upgrade like thinking, not only to GE equipment and Alstom equipment, but anybody’s equipment. And there is a lot of our programmed investment that’s going in this, how we are able to do that. But, we want to have points of differentiation. And I think over time, you will see us be able to do that on even the higher technology on anybody’s installed base. What I would say is that we are expecting this to be a slower ramp up in some of our other business areas, because we got to make sure we do it right, but it’s a $600 million business for us this year.

Julian Mitchell

Got it. And then, you touched on the more project type work that Alstom has brought. You have looked through the backlog that they brought for about a year now. How comfortable do you feel with the state of execution of that backlog and how has GE managed that transition to that EPC type activity?

Steve Bolze

We did an investor call November last year. And we talked about when we closed, we had about 18 billion of the backlog. That is power but also grid, renewables et cetera. And about, call it, 25%, 30% of backlog is in power. I would say that the backlog in power has largely played out as expected. We knew everything -- not everything is perfect, but I would say, it’s largely played out as expected, number one. Number two is we brought in and we built up a projects management office within GE. We hired a person named Carl Rau who did that for Bechtel many times in his career and put a big focus on this because we recognize there is risk. What I’d say is in power, we were concerned about the steam portfolio, some of the gas portfolio and extended scope but it’s largely played put as expected. And I would say, Julian, I would say, we’ve turned around and said this is now an added capability we have. Because when you bid some of these plant offerings in the world, they want you to take more projects.

Now, at the end of the day, not everybody wants to go as far as turnkey but to make it into a consortium or what’s the broader equipment package, but we see it right now, it’s largely played out as expected and we’ve built the new capability in the Company.

Julian Mitchell

If you look at the -- you provided those maps on a typical gas, typical steam plant and what Alstom brought to you. Some of it, the equipment that they’ve brought include things like boilers where I guess most of you in this room would probably assume the margin profile in the long run is lower OEM service, vis-à-vis a gas turbine. How does GE think about the very long run margin profile of power? Do you think that you will able to drag up those non-IGT product margins to the same level as the IGT margins have been?

Steve Bolze

I would say this is our margin rates in aggregate in GE, you saw on the charts where we’ve been around 20% for long time. If you look at boiler work, if you look at kind of steam work and things like that, it is a lower margin rate than gas, but it’s still good. Number two is what we worry. Having boilers as part of the GE portfolio, you do more of a total plant optimization. That’s why you saw the HUBCO example, 4 points of efficiency. We could not have done that if we just looked the gas turbine or steam turbine. Same thing if we bid a new HA plant. The 62.2% at Exelon or at EDF is not where we started -- stopping, we’re keeping going. It’s giving us a really viewpoint into where we can increase our equipment business. I would say back to the margin rate of our total power business, we took a dip this year because Alstom came in. What we said out at synergies to improve it in services and gas, I think that’s happening. I think we’ll always be above the GE average because of scale, service portfolio, because of digital; we just got to run the right balance in the long-term.

Julian Mitchell

And I guess Jeff Immelt has talked firm-wide about this 50 bps plus gross margin improvement per year. If you strip out Alstom and you look at the base business, you had a headwind this year with HA, maybe $300 million or something EBIT hit; that goes away next year. So, should you be running at well do you think that 50 bps increase on the base business?

Steve Bolze

What I would say is we -- the gross margin focus on the Company is one of the highest I’ve been in -- seeing in the Company since I’ve been here for 23 years. I would say, within power, Julian, you’re right, we did take a headwind this year with the HAs going through. We are seeing the units profitable in the third quarter; they’ll be profitable as we look at the total year. As we look at next year, we will see margin rate increase next year because of that. I would say listen, this is a big ongoing opportunity for us. A lot of it is -- the cost is in direct material, it’s sourcing. And I would say the other piece is I showed you on the chart some of the impacts we’re having on product costs on the HA. That is spreading out within the whole portfolio, steam, generators et cetera. So, I think we’ve got to work through some of the mix dynamics with services and equipment and Alstom and such. But given the focus on gross margin rates and product costs, you’ll definitely see an increase, because of the HA next year and then we just got to sort through the rates with mix.

Julian Mitchell

I don’t know if there are any questions in the audience. If not, for now, one more from me would be around free cash conversion, it’s something people are sort endlessly fascinated by. In power specifically, where is that conversion roughly and maybe you can talk about Alstom because that’s sort of pollutes the headline number? And how much scope do you think there is for that cash conversion to improve?

Steve Bolze

I would say this, Jeff Bornstein said, our CFO, we’re at 85% of free cash flow conversion of the Company; we power are below that. What’s driving that below that right now is one is a heavy investment cycle in the HA. One of that is also the restructuring we’re doing with Alstom. Those are two key drivers.

Now, Jeff has also said that we’re trying to get to and we are committed to get to 95% free cash flow conversion. We are a key part of getting there within the power system. The key tracks to get there, one, we are working through the restructuring. So, those are costs that do not repeat over time obviously. We get the benefits from that in cash conversion. Two of which is the HA investments start to come down. And I would say the third of which is the backlog of new business. That’s how you get progress collections. And by the way, we talked about projects. Our backlog in our projects oriented business is now up close to over 40% this year. So, we’re building backlog that gives you progress collections. So, it’s a combination of things but some of the headwinds go away, restructuring, HA, you get more cash and progress from backlog.

And I’d say the last of which is this Digital Thread investment is getting us more line of sight between the order and the execution. And by the way, a lot of the cash can be tied up in inventory or also in the supply chain with suppliers. And as we work cycle time, my counterpart in Alstom was Philippe Cochet, he is now driving productivity and global supply chain excellence in Digital Thread for the Company. So, those are the steps we have to walk through and will be a key part of the Company to get to 95%.

Julian Mitchell

And on equipment manufacturing, you had -- the competitor is maybe a little bit behind on efficiency of steam and gas turbine in terms of efficiency rates. Are you seeing much of a reaction on price or do you think price deflation has been pretty stable in recent years?

Steve Bolze

I would say is what we’re seeing is -- and we’ve discussed it when we go through our quarterly calls is we’re seeing it fairly stable right now. I think we’ve shown 1% to 1.5% of positive price for the last two, three quarters, that will move around on a little bit based on what on books. But I would say it’s stable. You definitely need differentiation to drive price, and because there still is excess capacity in the industry. But we’re seeing a bit of -- we’re seeing stability, we’re seeing a little bit of left obviously, mostly driven by the HA.

Julian Mitchell

And water business is on the way out, where are we sort of in that sale process, expressions of interest?

Steve Bolze

To be clear, water is a good business and people recognize that. The interest in the water business has been very good. What I would say is it’s a business that is profitable but it also is a business that we made a decision when we did Baker Hughes for capital allocation that it was better to sell the water business. It’s a good team; it’s a great platform but very good interest and it makes good EBITDA. So, I think it should be a good capital allocation move for GE; it will also be a good move for the business because at the end of the day, it also needed more scale; to play in the market, it needed more scale. That’s where we were headed. And so, as we get the final proposal back, we can tell you little bit more about how that’s coming together.

Julian Mitchell

We had one question.

Unidentified Analyst

[Question inaudible]

Steve Bolze

I’d say great point. I think the distributed power space, our definition of that point of use, it’s close -- it could be oil and gas drivers, it could be smaller units, it could be units that are used for combining heat and power, it could be units that are off grid, especially places like Indonesia, some of those kind of markets. I would say is this, our distributed power business, we define it as largely reciprocating engines, so that was Jenbacher or Waukesha. I would say that’s over a $1 billion business. But also when people talk about distributed power, they talk about the smaller and megawatts of the gas turbine business. So that represents almost 25% of our heavy duty gas turbine business. So, if you look at that distributed power is growing and why is point of use off grid power. And we see that’s an area of potential future more investment because it’s -- while it’s more capital cost typically for the power, it’s better megawatt sizes for the application. You can have reciprocating ranges 5 megawatts to 10 megawatts to some of them go up as high as 100 megawatts. So, we do see it as good space, they’re good return businesses for us, good return on total capital, but I think it’s an opportunity that we’re constantly looking for is there something that fits to allow us to scale that.

Unidentified Analyst

[Question inaudible]

Steve Bolze

What I would say is that particularly if you’re talking about the gas market in Egypt and things that, what I would say is it’s largely a flat market, if you look at total gigawatts. But you need to drive differentiation. And the big transactions always get a ton of attention, right? You’ve got to be careful in project execution that’s why we talk about projects. What I would say is this is that we do a lot of business in Egypt. If we go back over the last 10 years, I have been in this role, Iraq was big one year, Algeria was big one year, Saudi was big one year. You’re always going to have a little of that. That’s why I always tell people to look at kind of positions over two and three years because it rolls. What I would just say is that you need differentiation in technology, more and more you need local footprint, you need financing more, and you need very strong project execution. And I would say right now, particularly in the larger H class units that’s where the market is looking for more of that and GE has got the right product at the right time.

Now, same point back to distributed power. Egypt also bought quite a bit of it, distributed power like applications, a lot of our trailer mounted and gas derivative F-class machines, but at the same time, you’ve just got to make sure what’s that right sales cycle.

Julian Mitchell

I know Steve, you touched on the Middle East and how sort of it rolls; that’s a very big piece of -- Middle East and Africa I think is about a third of just under of the pro forma power revenue. How do you think about sort of the five-year outlook or three-year outlook there? Do you think it’s going to be stable, or you actually think there can be growth even with the lower run rate oil price?

Steve Bolze

Julian, what I would say is for this, Middle East if I exclude Africa is kind of flattish, but it’s still one of our biggest markets, just like the U.S. is one of our biggest markets. What I would say is Africa, particularly Sub-Sahara Africa, Latin America, China, we are seeing growth. So, you are always going to see it move a little bit. Now, when you go back to your question on the Middle East, where is it headed, oil prices are at a little different spot, clearly. What I would say is there is still a significant demand for power. I was in the Middle East region a month ago, I went to Saudi Arabia, Kuwait, Dubai and Abu Dhabi, and what I would say is that they need more power. And the timing of that might shift a little bit. What I would say is that that need doesn’t go away. However, the discussions with the customers around financing or differentiation, or by the way, localization, localization is very important, particularly across the Middle East. So, I think those were -- that’s how you have to -- that’s quite frankly some of the moves you have to make to grow in a slower growth market. But I would say Middle East will continue to be one of our biggest markets as with the U.S. and it’s a good long-term place.

Julian Mitchell

Thanks. I think we are out of time unless there is anyone else. Thank you.

Steve Bolze

Thank you very much.

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