Welcome to the General Electric update conference call. (Operator Instructions) I would now like to turn the program over to your host for today’s conference, Trevor Schauenberg, Vice President of Corporate Investor Communications.
Trevor A. Schauenberg
JoAnna Morris and I are please to host today’s call. You have the press release from this morning. The slides that we’ll be walking through are available on our website at www.ge.com/investor. If you don’t see it, please refresh. You can download or print to follow along.
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.
We’ll be reviewing the GE press release that went out earlier today and have time for Q&A at the end. Also please note that as the quarter comes to a close, we are entering the quiet period and we will not be able to address all the specifics regarding our third quarter earnings on this call. We will address significantly more detail regarding third quarter on our earnings call on October 10. Today we have our Chairman and CEO, Jeff Immelt, and our Vice Chairman and CFO, Keith Sherin, here to discuss our press release.
Now I’d like to turn it over to our Chairman and CEO, Jeff Immelt.
Jeffrey R. Immelt
In light of the unprecedented market volatility, we thought it was important to give our investors an update on what we’re seeing and the proactive steps we’re taking to keep the company safe.
First, GE’s performing well in a tough environment. Our Industrial segment earnings should be up between 10% and 15% in the quarter, excluding Consumer & Industrial. Our Financial Services earnings will earn in excess of $9 billion in 2008, really dramatically outperforming their peers. And the company remains financially strong. Our total earnings will be approximately $20 billion in 2008.
We think it’s important to take proactive steps to be even safer in this environment. Keith will outline with you some dramatic steps we’re taking to strengthen the liquidity profile and reduce leverage inside the company, and these are the steps that are expected of a Triple A rated company.
Our GE Capital and Financial Service business model remains strong. We’ve got a great cost base. We’re a senior secured and diversified lender. We’re match-funded. We’ve never been a trader or a market maker. I think the results this year prove that the general framework that we’ve got for GE Capital remains very strong. We expect to see higher losses in loss provisions and lower gains as the economy evolves.
Lastly, the GE dividend is secure for investors. The Board has approved management’s plan to maintain the current dividend through ‘09 even in these relatively uncertain economic times at $1.24 a share. That’s roughly a 5% yield. So really the steps we’re taking and that we’ll outline today I think strengthen GE for the long term and really improve the overall operations and running of the company.
If you look, the next page we’ll go through is just a quick update on the environment that we’re in.
If you look today on the top left in the Energy infrastructure businesses, we just have continued strong demand. This business is benefiting from the high price of fuel. It’s benefiting from the need for more resources to satisfy demand; it’s benefiting from the need to improve energy efficiency around the world. And we’ve got a great global supply chain that’s been able to more than offset inflation, which is the one pressure point we see in that portfolio. But the strength of the company today on the Industrial side is certainly driven by energy, and oil and gas, and the other businesses in John Krenicki’s area.
And on the Technical Infrastructure side, we continue to see tremendous global growth. We’ve got a great install base and that give us a nice services aftermarket. We get great customer productivity with our Service Solutions, and they love that. They love that we take the maintenance off their hands and how to manage the equipment off their hands. We give them a predictable cost stream and guaranteed efficiency and productivity.
And on the right side, the negative here, we’re watching the airlines. The fact that oil’s come down from $140 a barrel down to around $105 has really helped tremendously. But that’s the one area that you’ve got to watch.
On the Media side, we had a tremendous experience in the quarter with the Olympics. I thought the whole NBC team did a fantastic job of showing those Games and using all the different avenues we have to highlight that content. The cable business continues to be extremely strong. We are seeing pressure in the local ad market like we saw in the second quarter. And clearly the economy, as some sectors of the economy has pressure that hurt some of the national advertising like in the auto segment. But overall they’re still performing where we said they were.
And in Financial Services, the positives for us are certainly pricing. Today, when you have capital to put to work, you can get a significant premium to your cost of funds, and you can enter into investments at low risk levels, low loan-to-values, and senior secured positions at high returns. The Triple A is significantly a competitive advantage for us.
We’re going through a normal credit cycle here. We’ve said that. We’ve got a great portfolio; our measurements and delinquencies and asset quality are all very strong. But as the economy continues to have strain, as consumers have pressure, if delinquencies rise, we’re expecting to put up more provisions. We are doing that. That’s in our forecast. And we’re going to have lower gains from asset sales, and we’ve said that. And those are a big part of what we’re going to talk about today.
So this is a pretty tough environment. I think the long cycle, global nature of our infrastructure business is a fantastic strength we have and a real competitive advantage. And we’re taking the steps we need to given the current Financial Services environment.
Jeff mentioned the proactive steps we’re taking as a Triple A. This is what investors should expect from a Triple A. We’ve got unprecedented financial market volatility. And if you look at the last three weeks and the events that have happened in the financial markets, you have to agree they’re unprecedented.
It starts three weeks ago with Fannie and Freddie. You end up following that up with significant turmoil in the investment banking world, Lehman Brothers. Then you have problems with AIG. And now you’ve had the two preeminent investment banks become national, federal bank agencies under the Fed. So this has just been unprecedented the last three weeks. And in an environment like that, we’ve performed pretty well.
You’re going to see the Industrial forecast that we have. They’ve continued to perform in a very strong manner, driven by the infrastructure businesses, as I said. And Financial Services, we’re going to have great relative outperformance, but it is a tough market. And I think at the end of the day when you look at this environment, our conclusion was this is going continue to be challenging. A smaller and more focused Financial Services enterprise in this environment is better for investors.
So the priorities that we have undertaken here in the last few weeks and we’re outlining today start with maintaining a strong liquidity position. That starts with our commercial paper programs and our liquidity plans. We have great CP programs. We go direct to investors, so we’re not going through brokers. We run the program in 11 currencies.
About two-thirds of the CP business is in the U.S., the rest is global; it’s spread across many countries. We have had no issues funding ourselves. Even in the last 10 days where you’ve had some significant disruptive days, we continue to see a flight to quality. We’re funding on average at LIBOR less 25, and usually below the Fed funds rate when you get to the absolute dollar amounts.
So in this environment, though, we think it’s prudent to reduce our absolute CP balances. We’re going to end the third quarter under $90 billion from over $100 billion of CP at the beginning of the year. I think it’s important to recognize that our average maturity is 61 days, so there’s quite a spread in the rollover of CP.
We’re also going to continue to bring CP lower. We’ve announced today that our new target is 10% to 15% of the GE Capital debt, which is somewhere around $550 billion, a little below that. So we’re going to have another $10 billion or so lower CP balance in the fourth quarter in our current plan that we’ve outlined for you.
We also have lots of other funding sources. We do have deposits. We have CDs. The deposits and CDs are up to $43 billion at the end of the third quarter. That’s up $20 billion since the beginning of the year, and we can take that higher. We’ve got a tremendous access to other sources here. And with our strong collections and originations management, we’ve built this plan not needing to issue any long-term debt in the fourth quarter. I think that’s just a prudent place to be given the financial markets.
Previously we’ve communicated that we completed $70 billion of long-term debt out of our total-year plan of around $80, and now we’re saying we’re done for the year. We may be opportunistic, but we don’t need to do any more long-term debt this year.
The second part of the plan is to strengthen the balance sheet. We’re cutting the dividend from GE Capital up to GE from 40% to 10%. We’ve done this previously when we were lowering our CP balances in the early 2000s. That enables us to put more capital into GECS as they continue to grow and with the additional capital and with our mix management in GE Capital, reducing our emphasis on some higher leverage products.
We’re going to take the GECC leverage, which is about 7.2 to 1 at the end of third quarter down to 6:1 by the end of 2008. So I don’t think there’s anything urgent here, but I think this is just a prudent place to be. We’ve got low leverage. We’ve got very good asset quality in the portfolio, and we’re just going to reduce the leverage over time in a measured way. I think it’s a smart thing to do to just strengthen that in a measured way.
At the same time, we’re suspending the GE buyback. Through the third quarter, we had repurchased about $3.5 billion of GE stock, but we’re going to be able to use that flexibility from our cash flow to be able to continue to strengthen GECS, as I talked about, and also help us just to have a cushion at the Industrial parent, which enables us to be flexible and also participate in M&A that we plan on doing over the next 18 months. So I think that’s a good move for flexibility and strengthening GE Capital.
The third piece is to take action to have a smaller, more focused Financial Services business. One thing that’s obviously been on investor minds is the size of our commercial real estate portfolio. We have a fantastic real estate portfolio. It’s very high quality. The delinquencies on the book are 0.27% of assets, so it’s performing very well. But the size is something investors have expressed concern about, and for us it’s around $90 billion today. We’re going to take that down to below $80 billion in 2009, and we’re going to continue to remix the business.
We’ve put a significant amount of capital to work at very low loan-to-value debt, senior secured debt positions, at great returns. I think that’s been a tremendous thing for us to do to take advantage of the market opportunities that we’ve seen this year. And we’re going to continue to de-emphasize equity. We are not underwriting, originating new equity here. We’re going to continue to downsize that as we bring this portfolio down under $80 billion.
I mentioned we’ll reduce the use of higher-leverage products. I think we use as an example global mortgages on book. I think there’s an opportunity here to do less of those, and to free up the capital based on the leverage to do more of the commercial finance activity that is in our core businesses.
So overall, we’re going to shrink the portfolio and change the mix. It’s not going to be dramatic in terms of asset size. Basically, we’re going to take the total assets from somewhere around $680 billion in ‘08, and it’ll probably be somewhere around $650 billion in ‘09. But you’re going to have a big positive mix impact while you also de-emphasize the size of GE Capital.
So this is a proactive approach we’ve taken. It makes GE even safer. And third quarter is fully funded, and there’s no long-term debt issuance required in the fourth quarter, which is a nice, strong statement about our cash flows and liquidity management.
Now, how are we performing in this environment overall? It’s obviously a pre-announcement of the quarter. We’ll go through all the details on the October 10 conference call, as Trevor said. But here are the themes.
Industrial is delivering solid results. We continue to benefit from our global position. You’re going to see the third quarter orders, our estimates today on the long cycle, are going to be over $13 billion, up 10%. That’s from incredibly high levels. So we’re going to continue to be building a backlog here at very high order levels.
The Services business is as strong as it’s been, $9.2 billion of orders, up 14%, great double-digit and good across the board in the portfolio. And as you see, the flow business is down, and really that’s driven by appliances. We’ve continued to experience very tough results in the C&I business, and that’s driven by housing and the consumer, obviously, mostly in the U.S. Third quarter performance overall should be excellent, with earnings up 10% to 15%.
And on the right side, if you look at the revised guidance, basically the pressure versus expectations here in Financial Services is driven by the market volatility. As we’ve said, the last three weeks have been really challenging in capital markets. We love the opportunities that we put our capital to work at, at higher margins.
We’re more than recovering any cost of funds increase in the business that we put out. As we said through the second quarter we had about a 45 basis point positive spread over any change in funding rates in our commercial finance business, and that’s continued through the third quarter. I’ll get the exact numbers as we close the books here.
We’re going to have continued relative outperformance. And even with a tougher than expected environment, we’re going to earn over $2 billion in our Financial Services business in the third quarter, which is a terrific performance. And the other thing that you may not be aware of, the dispositions do provide us with a lot of flexibility.
We closed our GE Money Japan transaction with Shinsei on September 22, and we have $5.4 billion of proceeds that went in the bank. And we expect to close the GE Money European asset sale with Santander shortly, which will be about $4 billion of net proceeds. So we’re outperforming in a tough environment, and we’re taking the steps we need to in order to maintain a safe profile.
Next is the revised framework for 2008. On the left side you can see with the revised guidance we expect the total company results to be about $187 billion of revenue, about $20 billion of net income, and on an EPS range that converts to $1.95 to $2.10 a share. On the right side, you can see the split for both the third quarter and the fourth quarter by our Industrial businesses and our Capital Finance business.
We do expect to see continued strong performance in the Industrial businesses, up 10% to 15% in the third and fourth quarter. We expect to see continued pressure in the Capital Finance business, down about 25% in both quarters. And then you can see what that does for the year and for the earnings range, which I’ve said.
So our Industrial businesses are driven by the business model: global technology positions; great equipment backlogs; and tremendous install base that give us a predictable, high-margin service revenue.
On the Financial Services side, we are going to see an impact, continued impact, from lower gains. Our real estate business is down, as we’ve said. We previously guided that we’d have about a $1.5 billion to $1.7 billion of earnings in real estate. I would say that we’re certainly tiering towards the low end of that guidance today.
And we’re going to have higher delinquencies. Especially today we’re seeing it in the consumer side, not so much in the commercial side, but we do expect that going forward. And as you have higher delinquencies, we will put up higher provisions. We do have some mark-to-market pressure in the third quarter, and that’s been a function of the capital markets and the volatility we’ve seen.
And at the end of the day, as you go forward, we are going to be a little smaller and a little more focused, not dramatic, as I said, but that will impact the earnings growth profile. And then finally, C&I has been very tough. So we’ve reframed 2008 to reflect the current environment and total year down to a $1.95 to $2.10 based on that outlook.
So that was our view of 2008, and we’re not going to give any guidance today on 2009. But I think we recognize that that is a key question that investors are asking: “Okay, what does this mean for us as you go forward?” I thought, as we put this together, the best way to do it was with a framework for how we’re thinking about 2009 and the factors that we think are going to impact us. So if you look at the industrial businesses, we think we’re going to have continued strong growth.
The global position we have, there’s still an awful lot of infrastructure, economic activity around the world based on commodities and demographics in emerging markets. We have a tremendous infrastructure backlog, over $55 billion of equipment backlog, over $120 billion of service backlog. And so we think with the strength in energy and oil and gas as the primary drivers here, we expect to see double-digit results continue as we go forward.
And then for the financial businesses, I think, it’s pretty clear that there are a number of factors here. I think lower assets more focused is probably a drag as you go forward. We certainly expect the credit cycle to continue to be challenging, and as we said, higher delinquencies result in higher loss provisions as you deal with the economic impact in your book. We’re getting benefits from pricing, and we’re certainly going to have benefits from restructuring and cost-out.
We haven’t gone through our detailed business plans obviously, but I think these are the factors you ought to think about. And probably when you look at our range here that we look at as thought for ‘09 for Financial Services, you have to look that we’re going to have slightly tougher comparisons in the first half of ‘09 versus the current amounts of earnings that we see in these businesses today.
So we’re planning for a continued tough environment. I think while we’re not giving any ‘09 guidance, this is the best view based on what we know today. And obviously we’re going to talk more at the third quarter call and into the fourth quarter as we prepare for the December outlook meeting.
The last thing I want to cover was a short topic, a couple comments about capital allocation. The benefit of the GE business model is we have really strong financial flexibility because we generate a lot of cash. If you look at our estimates today, based on these revised forecasts, we’re going to have over $23 billion of cash from our net income and our working capital management programs and some small amount of dispositions. And that gives us the financial strength to protect our dividend to shareholders. The Board has approved our plan to maintain the dividend at the $0.31 a share per quarter through 2009.
As part of our capital strengthening, we’ve suspended the buyback to both fund the Financial Services and build a cushion in Industrial. And that leaves us the ability to lower the leverage ratios in GE Capital while also being able to take advantage of M&A opportunities on the Industrial side. So we have more flexibility here. And our growth is funded. We’re able to do the capital expenditures we need in the Industrial company which on a company of over $100 billion of industrial revenue is very capital efficient, about $3 billion to $3.5 billion of plant and equipment.
So our 2008 annual dividend remains at the $1.24, and we continue to have really great financial flexibility, driven by we’ve got tremendous industrial cash flow over top of the Financial Services businesses, which have a very strong position. That protects our investor dividend while at the same time strengthening GE Capital.
So let me turn it back to Jeff.
Jeffrey R. Immelt
Just a couple thoughts as we conclude. The first one is on the portfolio. This is a very strong and valuable company, with 50% of our earnings in really infrastructure-type businesses. These are long-cycle, product and service oriented, deep technology leadership, globally positioned. And I think as we head into the cycle that we’re heading into now, these businesses give us very high visibility on success and what we can expect in the next few quarters and years.
Our Media business, NBC Universal, which is 10%, is highly diversified, more globalized, content-based, and I think again very well positioned in the cycle and with some real excellent execution and leadership in that business as well.
And 40% Financial Services, with global origination, diversified risk, and deep domain. This is a business that we think will outperform in this cycle and be well positioned as the economy turns to provide good earnings growth. So we really do like the way the company looks. We think we are very well positioned in this cycle.
The Industrial portfolio is solid. We’re playing offense in Financial Services. We’ll be smaller, but more profitable, and I think well positioned to capitalize on any market dislocations that can occur. So we like the way the company looks.
So just a recap. Revising third quarter and total year guidance to reflect current financial services market conditions. I think what Keith described, we’ve never seen really a time of volatility like we’ve seen in the last month or so. But I think the fact that we’re so committed to the dividend and have made that strong commitment, I think shows you the immense confidence we have in the company.
The Industrial business’s fundamentals remain strong: Triple A rated; global growth; infrastructure; huge backlogs of both product and service; strong free cash flow; and great service revenues. The Triple A is a key priority for GE. We’ve always said that we would manage this proactively. That’s what we are doing now; that’s confirmed by the rating agencies. It helps us have access to the capital markets. It lowers our borrowing costs. It’s a validation for both equity and debt investors, and it really does sync up with our operating disciplines on how we run the company.
So we believe we’re doing what investors expect from a Triple A rated company. We’re maintaining strong liquidity positions by reducing reliance on CP, strengthening balance sheet by reducing leverage and resizing Financial Services to about 40% of the company’s earnings. We’re running the company for the long term, and we feel like we’ve really positioned the company to be successful in this cycle.
So Trevor, let me turn it over to you, and we’ll take some questions.
Trevor A. Schauenberg
That wraps up our presentation for today. We’ll take questions.
(Operator Instructions) Your first question comes from Jeff Sprague - Citigroup.
Jeff Sprague - Citigroup
But it’s unclear really what has driven the revision in GE Capital, whether it’s the marks, whether it’s the move on provision, whether it’s a change in the tax rate. Can you give us any color on that? Obviously the quarter has not closed, but those are some big swingers obviously in the results.
I think on the charts we do try and lay that out without specific numbers on the changes from our previous guidance to today, Jeff. But in terms of categories, the largest category that is on the page, we have mark-to-market pressure, we say its $300 million to $500 million in net income pressure. I think that’s the biggest change versus the previous expectations.
The categories that we’re dealing with in there are mark-to-markets on equity securities and preferred positions we hold in companies that we’re having to mark in the quarter. We also have some retained interest from our securitizations that you have to deal with on the mark in there. And then we have the warehouse, where we have assets for sale. We have about a $2.5 billion, $3 billion warehouse. And those get marked to market every quarter, so that’s the biggest piece.
We do have some lower gains in the real estate business. Again, we have not closed the quarter and I don’t have a number for real estate yet. That’s going to have an impact, we anticipate. And then the third category is higher provisions in the quarter, as we have delinquencies in the GE Money business principally. So those are the three things. We’ll get the specific numbers, but the biggest piece would be the mark-to-market versus guidance.
Jeff Sprague - Citigroup
So I guess given that this thing that we’ll all struggle with is that the hit here in the quarter is really associated with the market disruptions, largely, still doesn’t get into maybe what the credit cycle ultimately means for provisions and questions of GE Capital tax rate and things like that.
Can you give us a sense of what you think the provision ratio goes to over the course of the cycle? You characterized it as a normal credit cycle that feels somewhat abnormal obviously how tough things have got. But directionally, any thought on where the provisions actually go?
I don’t have a specific number for you today. I think in the guidance that we’re looking at we’re talking about continued pressure on losses in the next year period of another $1 billion after tax across the portfolio could be in those ranges that we talked about, Jeff. So we’re already seeing the credit pressure on the consumer side. You’re running into levels that you’re back to some of the worst economic periods we’ve had before on delinquencies.
And I think what we would anticipate is that you’re going to see more pressure on the commercial side. We haven’t seen it yet. We’re seeing just slight upticks in delinquencies here and there for specific industries, but I think our expectation is that for 2009, for planning based on this environment, is you’re probably going to have additional pressure on the commercial side. And our forecasting obviously has not been good.
The way we’ve come up with the framework for you to think about it, though, is if you look at what our actual earnings are on a dollar basis, in the second, third, and we’ll show you a range for the fourth quarter, I don’t know why those would be. We’ve given you the factors of the plusses and minuses. I think you’ve got to start with that run rate of where we are today to look going forward, and be able to predict what you think it’s going to be. And I think we’re going to have higher provisions, and that’s the magnitude I think we’re going to be seeing.
Jeff Sprague - Citigroup
Jeff, is the idea of any new equity still off the table? Someone like a Mubadala all the sudden does some new equity as opposed to buying the stock in the new market. Is that type of thing open for discussion in any type of permutation? Maybe not just them but others?
Jeffrey R. Immelt
Jeff, we just don’t see it right now. Again, we feel very secure about how the funding looks and the strength of the company and the strength of the balance sheet. Cash flows are great. The liquidity profile has been strong; it’s now stronger. Leverage is better. And so we really believe in our business model and feel secure that we’re well-positioned here.
Your next question comes from Deane Dray - Goldman Sachs.
Deane Dray - Goldman Sachs
The idea is if we’ve got a $0.05 range for the third quarter, $0.43 to $0.48, could you just give us a sense of what assumptions you’re making that you would hit the low end of the range versus the high end of the range? We got a week to go in the quarter I know that a lot of transactions are pending. But just to give us a sense of what might take you to either the higher or lower end?
I think the higher end of the range comes from actually closing all the transactions that are currently in process and not having any surprises in mark-to-markets in the close or at the end of the quarter. The low end of the range says nothing that we’re contemplating in the next couple of days and it also has a little room for any volatility, unforeseen volatility that we don’t expect in the close.
So we have a significant amount of real estate transactions still to go. We have to see what equity markets do. They create volatility in the mark-to-markets on that portfolio, and we go through. We actually don’t do our marks on whether its commodities or some currency issues in the company that they don’t get done until after you get through the end of the quarter.
So I think we’ve tried to give ourselves protection against nothing happening that we think is going to happen in the next couple of days, and an unforeseen thing happening over the weekend and in next week as we consolidate and close. That’s why we’ve put the range together the way we did it, Deane.
Deane Dray - Goldman Sachs
And then just to clarify on the funding outlook near term. That was clear that you don’t need any further funding in 2008. Ten days ago, you had said you had done $70 billion of an expected $80 billion. How about the idea of pre-funding some of the obligations in 2009 and how aggressive might you be over the near term?
I think right now what we’ve planned on for 2008 is that we do not need to do any long-term debt based on what we have here, and I think that’s a prudent way to think about it because of some of the choppiness in the debt markets. For 2009, we built this plan. We have $67 billion of long-term debts, maturities, in GE Capital next year. And the base plan is built on being able to redo about $60 billion of that. But if things are a little worse, we can manage our collections and originations and do significantly less than that.
And if things are better, we wouldn’t anticipate going above the $60 billion right now, because that’s in balance for us right now on being able to bring our CP down to that 10% to 15% range, and also not needing to even issue all the same amount of debt as what matures next year. So I think we’ve got a conservative plan we put together here, and we’re prepared. If it were tougher in the long-term debt markets, we don’t need to do anywhere near that amount in next year if we had to.
Your next question comes from John Inch - Merrill Lynch.
John Inch - Merrill Lynch
In the short term, Keith, are you going to be tapping any of your backstop? I think you’ve got about $62 billion of bank lending facilities. Does any of that get tapped based on the disruption of CP markets?
Absolutely not, if you look how do we run the place? We’ve got a commercial paper program that’s broad and deep. The commercial paper market is $1.6 trillion. And if you look at our 61-day maturities, you really don’t have any near term pressure of any magnitude. We have about $15 billion of cash liquidity that we keep in GE Capital, and that you can see on the balance sheet at the end of second quarter.
We have over $20 billion of marketable securities with a significant piece of that pool that we can obviously repo if necessary. We have tremendous collections flexibility here. We have $120 billion of committed maturities in the next 12 months out of our loans and leases. And finally, we have $650 billion of assets, and we have securitization platforms on every single asset class, real estate, aircraft, commercial loans and leases, credit cards. And that’s not a source of liquidity today, but obviously if it had to be you could that.
And then finally as you mentioned, we do have $62 billion of bank lines, we have over 70 institutions in there. They’re all Double A or better, there are no MAC clauses, but we absolutely do not have any anticipation that we would be using those.
John Inch - Merrill Lynch
Keith if you look at provisions within commercial finance, can you remind us again where they are today as a percent of loans? And if you were to, say, look at prior recessions, where would they have to go based on that assessment or analysis? And maybe what’s different about the commercial book versus other recessions?
I’m going to defer that to the earnings call, because I don’t have the provision numbers for the third quarter. We don’t have the balance sheet. And I’ve got to defer that if I can, John. And I’ll tell you what we will cover it on the earnings call for sure on the 10th. I just want to give you good data.
John Inch - Merrill Lynch
Have the circumstances, Jeff, caused you to perhaps rethink or consider the prospects of spinning out GE Capital? Or would it be just too complicated a transaction? Or how are you thinking about that?
Jeffrey R. Immelt
There’s clearly a lot going on in the financial markets and stuff like that. But I think if you step back, there’s always going to be a place for a very disciplined and well-run financial company, which is what GE Capital is. We have excellent cost of funds. We have 10,000 originators. We originate to our own balance sheet.
Through this cycle where banks, investment banks, have written off more than $500 billion, we haven’t had exposure to any of these things. And so fundamentally, we’re going to go through ups and downs, and we think that Triple A is incredibly important. But we believe that the structure of GE Capital remains very strong. And at the end of the day, earning $9 billion in Financial Services this year is a pretty good proof statement of that.
I think we’re at a period here where Financial Services obviously isn’t in vogue. But it’s such a substantial part of this economy and the global economy, and it’s going to come back. And people need access to capital, and we provide that. And I think we’ve got competitively advantaged positions, and this cycle isn’t going to last forever. I think this is a hell of a set of businesses with good competitive positions.
Your next question comes from Nicole Parent - Credit Suisse.
Nicole Parent - Credit Suisse
I just wanted to clarify the $300 to $500 million in mark-to-market pressure, that’s over and above the $270 million that you booked in the first quarter?
Yes, they’re different periods and different marks, yes.
Nicole Parent - Credit Suisse
With respect to the preferred positions that you mentioned in response to Jeff’s question, we still have FGIC preferred sitting out there. Should we expect an impairment charge to come in the third quarter?
Nicole Parent - Credit Suisse
Do we have any color in terms of where non-performers are up, delinquencies, and then maybe comparisons between U.S. versus international and what your view is for the international markets given the spillover from the U.S.?
Yes, we’ll give you all that at the earnings call. Again, I don’t have that as we haven’t even closed yet. But what we’re seeing is we’re seeing a continued uptick in the delinquencies on the consumer side and a slight uptick on the commercial side. On the global side it’s in the secured mortgages on the money portfolio as the themes of what you’re going to see in the next two weeks.
Nicole Parent - Credit Suisse
And any update or should we wait for the quarter in terms of investment securities with CMBS, investment securities by monolines, just unrealized losses?
Yes, I’d wait till the quarter. I don’t have those yet. I don’t think there’s been a dramatic change on that line, but I’d wait till the quarter. I do not have those marks yet, Nicole.
Nicole Parent - Credit Suisse
I thought it was interesting, you talked about resizing GE to be back to 60-40 industrial-financial. Given the C&I either spin or sale, modest asset sales, could you maybe update us when you think about timing of private label credit card, timing of C&I? What else might be on that list? Because I think when you articulated the asset movement ‘08 to ‘09, it didn’t seem that huge.
Well, you’re right. I think right now we’re still working on the C&I spin. We said that would be in the first half of next year, we don’t have any change to that.
On PLCC, clearly we said in the second quarter call that it was a challenging environment to find someone who wanted to take responsibility for there’s over $30 billion of assets in the private label credit card. That hasn’t gotten any better in the last three weeks, I can tell you. So our plan is based on we’re going to run that. We have the ability to run it. It is a good business.
And over time we’re looking at other options, but I think that right now we don’t anticipate that we would be selling that to one party in one transaction. I think there may be other ways for us to downsize it and combine it with our retail sales finance business and run it as we go forward here until you get to a different period where someone may have more capacity to be able to take some of those books, take the whole portfolio possibly. So our plan is built on continuing to have PLCC right now, and we’re still looking at our options, Nicole.
Your next question comes from [Bob Cornell] - Barclays Capital.
[Bob Cornell] - Barclays Capital
When you went through the difference between the new guidance and the prior guidance, you touched on the marks and the provision and so forth, lower real estate gains. You didn’t mention much in the way of differential prospect on the Industrial side. So how much of the revised guidance is Financial Services related, and you mentioned C&I obviously, but how much of the difference in guidance is Industrial?
I think this is substantially all Financial Services. C&I is a pressure point, certainly on the Industrial. Ex C&I, we’re pretty close to the ranges of what we gave you before. This is a story about Financial Services taking us out of our previous range.
Jeffrey R. Immelt
Bob, if you just look just at the order rates we’re expecting in the infrastructure businesses in Q3, off of some fairly substantial growth in the past, that service order is up double-digit and equipment order is up double-digit. It says there’s still decent strength there.
[Bob Cornell] - Barclays Capital
You gave a pretty broad range for capital finance for next year, and I understand that the quarter hasn’t even closed yet. I heard the comment about you haven’t put the marks to bed fully yet, but you have a pretty broad range of down 10, down 30. Could you go into a little more color with regard to just the thinking around that range? You don’t have on the list of impact factors further mark-to-markets. You will have had this year somewhere in the $600 million, $700 million this year. So maybe a just a little more of the thinking, understanding that it’s preliminary with more to come?
Well, I’ll go through the factors again. I think the starting point that if I were a financial analyst looking at these results, I’d say what are the actuals that this business is delivering today? And we’re somewhere around $2 billion of earnings. And that does include some pressure from mark-to-markets. I don’t think all those repeat, but I don’t think it’d be prudent for us to plan 2009 without having some room for mark-to-markets or impairments.
Clearly, I think on a credit cycle basis, you’re going to have additional pressure. We’re planning for higher provisions, and we’re expecting higher delinquencies. Based on the outlook we see, I think that’s a prudent thing for us to be doing. I think in terms of the shrinking and downsizing a little of the GE Capital, I think that does have some impact on earnings. As I said, in terms of absolute dollars, it’s not dramatic, but you’re probably going to see a mix shift from some of the global consumer higher leverage assets into some of the more commercial core assets. And then finally, you’re going to get a benefit from the pricing on the new business that we put in.
In terms of the swing, that’s probably still being pressured by the run off of very high margin business, on a five-year average portfolio duration across the capital assets. We’re still seeing an offset to some of that pricing from runoff of high volume business that gets to the end of its term. Then you got a benefit from restructuring and cost-out, which we haven’t finalized in any way, shape, or form.
So I’d start with what are the actual earnings of this business today and what are these factors? I look at the first half of 2008. It obviously wasn’t perfect, but it was at higher levels than what we’re seeing today. And that’s how you end up with, if things are better, right now basically this would at the low end of the range, you’d assume you didn’t sell any real estate. At the high end of the range, you’d assume you had capital markets open up again you were able to sell real estate properties at a gain.
Low end to high end is a difference in how do you feel about the economy and the credit cycle? I think that gives you a pretty broad range. So those are the factors today, Bob. I think we’re pre-announcing the third quarter. We haven’t gone through any of our normal planning cycle for the business commitments for next year, but obviously clearly we’ve spend a lot of time with Mike Neal and his team to put together what we see as the framework for the environment we see today.
Your next question comes from Christopher Glynn - Oppenheimer.
Christopher Glynn - Oppenheimer
Just maybe a comment on what specifically the change at the margin is lately on the originations front? And what are you telling your team of 10,000 originators out there?
Today, we continue to see in the commercial side around 40 basis points improvement on the net margin over the cost of funds. We have done a lot of pricing across the businesses through the second quarter and into the third quarter. We’re telling our originators that the asset growth is up 18% through the second quarter on a business that has its own generated capital to probably grow about 12%.
That we’ve done tremendous deals, we’ve taken advantage of the marketplace. We were able to close the CitiCapital deal and the Merrill Lynch deal. And that we’re going to make sure we’re self-funded through the rest of the year. We’re prioritizing the core leases and loans, as I said, the verticals. And we’re de-emphasizing some of the higher leverage products, like global mortgages.
So we’re being very targeted with our underwriters. We have a lot of great long-term customer relationships, and we are in business. We’re going to underwrite and originate over $40 billion in the fourth quarter, and we’re just going to be very focused about how we do it. And we’re going to make sure that we’re getting a good return on every dollar of capital we put out.
Christopher Glynn - Oppenheimer
And then on the framework front that was really helpful for ‘09 just from what you see here, a very loose answer is fine. But some of the frameworks into 2010 in terms of the timing of the run-off of the volume business and the higher spread business, assuming that things return to normal on the macro level?
Jeffrey R. Immelt
Chris, looking out there, you got to like our Industrial businesses, with big backlogs, strong competitive positions, well-positioned globally. I think if you think about the company in ‘10, which is really just Infrastructure and Media. And then, look, Financial Services is going to return at some point. And if history is framework for the future, typically as these things evolve, Financial Services comes back in a very robust way.
And we’ll have the opportunity to play in some distress deals and things like that. And that ought to be good when you look at the future. But again, I think the of your nature question is, we run the company for the long term, we run company to play through these cycles, we run the company to be able to be safe and secure, and we think that’s what we’re all about.
Your last question comes from Steve Tusa – JPMorgan.
Steve Tusa – JPMorgan
Is there anything technical that keeps you from splitting up these businesses and getting rid of a larger percentage of GE Capital? And not just in tax leakage and that kind of value destruction, but is there anything technical here that wouldn’t allow GE Capital to run on its own as a standalone entity?
I think technically obviously that’s a transaction that you could probably put together. I think it would be tremendously complex and take a significant amount of time, but I don’t think there’s any technical impediment. I think you have got to think realistically about with the state of capital markets, the amount of capital required to have that business operate on its own, and just generally the complexity of doing something like that.
But I think we go back to strategy, I think, Steve, first, which is, as Jeff said, we’ve got competitively advantaged positions, significant positions in sectors of the financial services industry that are very strong, and we like them. I think these are businesses you want us to be in. And we’re going to continue to provide capital to those businesses.
And financial services is not going to be out of favor forever. It’s a significant part of the economy, and we’ve just got to work our way from here to there. So I don’t think that the answer to it is there’s anything really technical. I’d say it would be one of the most complicated things I could imagine doing. And it’s not something we’re working on.
Steve Tusa – JPMorgan
And then resizing the Financial Services business, the 40%. I don’t know if you gave specifics around that. Is that just because it’s not growing, or it’s declining, or is there something else, some other transaction explicit in moving that percentage down?
No, we’re not counting on some sale or something. I think if you just do the math, though, we continue to have very strong Industrial earnings growth. And the forecast that we have for Financial unfortunately we’re getting to the 60-40 based on Financial becoming a smaller part because of its earnings profile, not because we’ve sold some big piece or anything like that. I think it’s a better place for us to be strategically, but it’s not based on some assumption of any disposition that would materially change the GECS profile.
Steve Tusa – JPMorgan
Could you give a little more specifics around provisioning? What are you assuming for a year-over-year increase in provisioning for this year? And then how do we think about that, the dynamics and provisioning for next year?
I mentioned some factors about it. But I think we’ve deferred most of that to the earnings call, Steve, and I think we’ll give you a good view of where we are in the businesses and what previous ranges are based on other economic cycles and delinquencies and what the range could be. And we’ve tried to assume in our range that we showed you in our framework for ‘09 that we’ve got quite a spread there based on things staying the way they are or things getting worse.
Steve Tusa – JPMorgan
The private label credit card is that in the guidance or is that out of the guidance?
It is in the guidance. We did mention that right now our plan assumes that we’re going to continue to run that. We are still looking at some strategic options, but it’s in the guidance that we’re going to run that.
And there are no further questions at this time.
Trevor A. Schauenberg
I’m glad we were able to cover everyone’s question at this time. I’d like to thank everyone for their time today and remind you that the materials will be available on our site all day. The replay will be available this afternoon, and as always Joanna and I will be available to take your questions. Thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!