Welcome to the General Electric third quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the program over to your host for today’s conference Trevor Schauenberg, VP of Investor Communications.
Joanna Morse and I are pleased to host today’s call. Hopefully you have the press release from earlier this morning and the slides we’ll be walking through are available on our website at www.GE.com. 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 will be reviewing the GE press release that went out earlier today and have time for Q&A at the end. For today’s webcast we have our Chairman and CEO, Jeff Immelt, and our Vice Chairman and CFO, Keith Sherin.
Now I’d like to turn it over to our Chairman and CEO, Jeff Immelt.
On the overview page clearly to everyone the environment remains very volatile. The global financial system is tough. We see consumer confidence falling, unemployment up again last week but we still see pockets of strength in infrastructure and media and we see that in both orders and our relative performance.
The performance we announced this morning is completely in line with what we talked about at the September 25th announcement. At that time we really put out three guideposts if you will. We said Financial Service earnings would be about $2 billion they came in at $2 billion. We said that Infrastructure/media segment earnings would grow between 10% and 15% and they grew at 12%. We said we would deliver earnings in the range of $0.43 to $0.48 and we delivered $4.5 billion or $0.45 of continuing earnings. We view this performance to be right in line with that announcement.
We’ve also taken a lot of actions so we’ll go through in more detail to improve our capital finance position. Reducing leverage and improving liquidity and raising new equity at the parent. We really think the company is well positioned to perform regardless in whatever economic environment that we see in the future.
On the second page, really talk about our strategy. We continue to execute despite the environment from a portfolio standpoint we’re able to complete several transactions in the quarter including the sale of GE Money in Japan. We continue to work on our swap of Santander. We’re running PLCC to hold but we’ll continue to evaluate options. We closed the Citi Commercial Finance deal which will add to earnings and has already started that in 2008.
We announced a partnership with Mubadala and closed the Weather Channel investment. Our C&I spend process is still ongoing and we still believe we’ll have several options for that business.
From an operational standpoint, we continue to restructure to improve our cost position. Our cash performance was very strong in the quarter with Industrial CFOA growing 5% year to date. NBCU had its first double digit profit growth in three years.
I think our growth was particularly impressive in this environment. Our industrial organic growth was up 10% that’s one of the highest numbers we’ve had in the last few years. The total orders excluding C&I were up 9%. We grew backlog in both equipment and services by more than 25%. Our global industrial growth grew 20% and we believe that the Beijing Olympics were a huge success. All in all we end the third quarter with $170 billion of backlog and infrastructure. We think that’s quite a good performance to have in the quarter.
On the next page we’ve done a lot of work in the last couple weeks to risk reduce the company which we think is just the sound way to run the company in the midst of all the financial turmoil we’re seeing. I want to just walk our investors through that this morning. I think it begins with just the fact that we’ve got a stronger company today. We’ve exited some weaker industrial business. We’ve dramatically improved the industrial portfolio and infrastructure and media over the last few years and we think that is strategically very important.
We’ve diversified globally over the last few years and today 55% of our revenue comes outside the United States. We’ve divested Mortgage Services, FGIC, the bond insurance business, primary insurance, mortgage insurance, re-insurance, mortgage distribution and our Japan consumer finance business which we really think strengthens our Financial Service position.
What we talked about on September 25th was proactively protecting the Triple A. We’re on that pathway to reduce leverage to 6:1 by then end of ’09 and the CP to 10% to 15% of debt will occur by the end of ’08. We won’t require any long term debt in fourth quarter ’08. Our collections are outpacing our origination right now and we’ve growth our retail deposits up to $43 billion which again we think is another important funding source.
We accelerated our liquidity plan and we have clear protection now if the CP market remains under duress we really see the CP market improving right now. We’ve had no problems with our own CP but I think we just taken this issue off the table for investors. The $15 billion equity offering gave us more cash and now the back up lines plus cash are greater than CP.
We believe that the moves of the Federal Reserve made to make a window available for A-1/P-1CP gives the whole industry protection if the market shuts and we think that’s good for the entire market. We continue to increase our reserves to reflect a higher loss environment. Our reserves are up $800 million and Capital Finance versus third quarter ’07 and we’re planning for more in the fourth quarter and ’09.
We really believe we’ve aggressively risk reduce the company in this volatile market and our Board had approved the management plan to maintain the GE dividend through 2009. We think that gives our investors some real strength looking at the current markets.
To tee up the third quarter key performance metrics then I’ll turn it over to Keith. The growth continued to be a pretty solid performance. Orders up 9% ex. C&I, revenues up 11% and assets up 11%. Our earnings per share at $0.45 continuing. We’re in line with what we talked about on September 25th. Our returns are solid a little bit weaker because of Financial Service earnings. Our margins, if you take out C&I but more importantly the Olympics. The Olympics were a lot of revenue without a lot of margin are roughly flat year over year in the infrastructure space.
Our cash performance, as I said, is very strong. It should continue that way throughout the rest of the year. We think this is a good in line solid performance in a very tough environment.
Now I’ll turn it over to Keith for detail.
Let me start with the third quarter results on the left side is the summary of continuing operations. We obviously had a very strong top line quarter driven by our Industrial businesses; revenues of $47 billion were up 11%. Industrial sales of $28.9 billion were up 17%. Financial Services revenue of $18 billion were up 2%.
We earned $4.5 billion of net income which was down 12% and on earnings per share we delivered the $0.45 from continuing which was down 10%. On net earnings per share which includes discontinued operations we delivered $0.43 the negative variances because if you remember last year we had the plastics gain in discontinued ops and obviously we didn’t have any comparable to that this year in disc ops.
Cash flow, I’ll cover more in a few pages. Jeff mentioned Industrial cash flow up 5% a very good performance year to date. In the quarter the consolidated rate came in at 11% which was flat with last year. On a consolidated basis there’s no change. The GE rate came in higher at 29% that’s up about four points and the GECS rate came in negative 29% in third quarter and that’s largely a result of revising our GECS earnings down for the year.
That’s resulted in a seven point decline in our total year rate for GECS, our estimate is now negative 4% for the year and that drove the negative 30% in the third quarter. For the total year our guidance is now a rate of approximately 15% and that’s in line with our rate for the third quarter.
On the right side you can see the business results. We had real strength in the Energy Infrastructure segment. I’m going to go through all the details of these in few pages. We were slightly below expectations in Technology Infrastructure but still earned $1.9 billion up 2%. We’re above expectations in NBC double digit quarter as Jeff said. Overall Industrial ex. C&I was up 12%.
Capital Finance earned slightly over $2 billion and C&I had another challenging quarter based on what they’re seeing and housing and retail. The results are completely in line with our pre-announcement that we made the 25th.
Next is Orders, we’ve revised this page to include the orders in Energy Infrastructure and Technology Infrastructure and I’ll talk about flow in a minute. On the left side is equipment for the quarter. We had $13.5 billion of orders, it’s up 5%. I always say the orders are lumpy on a quarterly basis and that continues to be true. Clearly the Energy business had another great quarter up 21% driven by wind and aero-derivatives. I’ll cover more details on those on the business pages.
Oil and Gas was down slightly. We had some slippage. Aviation very strong military orders and again tough comparisons there really sold out based on the backlogs at Airbus and Boeing. Transportation also had some tough comparisons versus some big orders they had last year. As I go through the business pages I’ll do some more on orders. We did see some slippage versus our earlier 3Q estimate in both Oil, Gas and Healthcare so there’s some timing here. Overall these are very strong absolute orders level and our backlog was up $8.5 billion versus a year ago.
On the right side you can see Services. In the quarter we had $9.3 billion of orders that’s up 16% and it’s just broad based across all our businesses; Energy, Aviation, Healthcare, very strong Transportation, very strong. We ended the quarter with $116 billion of customized service agreement backlog which is a great asset for us.
Flow orders are not on the page, however, C&I had about $2.5 billion of orders and that was down about 5% in the quarter. Overall Infrastructure orders $23 billion up 9%, great Services orders, a great backlog position including Equipment and Services the order were up $28 billion in the last 12 months up 20%.
Let me start with Energy Infrastructure, the business had a great quarter. Revenues of $9.8 billion were up 32%. Segment profit of $1.4 billion was up 31%. Let me start with Energy, Energy revenues of $7.4 billion were up 38% and you can see the segment profit was up 36%. Energy just continues to see incredibly strong global markets.
If you look at orders for Energy the total orders of $7.9 billion they were up18%. Equipment orders were up 21%. Thermal orders were basically flat at $2 billion. We received orders for 33 gas turbines including seven in the US in the quarter. Wind orders were up 50% to $2.3 billion and today our wind commitments are $14 billion it’s up 90% from a year ago.
Aero orders were up 73%, Jenbacher orders were up 50%. Nuclear orders were down, we didn’t have a repeat of last years Entergy order and service orders were up 14% so very broad strength in our global markets. The total equipment backlog now is $24.9 billion up 36% from year ago and orders pricing was up 8% for equipment and 4% for services in the quarter.
Revenues were up 38% that’s driven by the Equipment revenue. Equipment revenue was up 61% and Service revenue was up 10%. You get mix issue here in terms of margin but great, great growth in the install base. Thermal was up 66%. We had five more gas turbines and better mix. Wind was up 70%. We delivered over 1,000 units in the quarter and that was up over 340 units. That drove the segment profit up 36% coming from the great wind and gas turbine volume.
If you look at Oil & Gas they had a very strong quarter, the total orders at $2.1 billion were up 4% that was driven by Services which was up 36%. Equipment was down 12%. The backlog is very strong at $8.4 billion up 19% and revenues were up 11% driven by the Services growth up 27% and [inaudible] also up 5%. Op profit was up 29%. This comes from the great services leverage here as a business that had more services revenue than equipment and eight points of the growth is from the Hydro acquisition which is off to a great start.
If you look overall, the Energy Infrastructure business had just a very strong backlog position driven by incredibly broad global demand.
Next is Technology Infrastructure. Revenues of $11.5 billion were up 9% and segment profit of $1.9 billion was up 2%. You can see the business results on the bottom left side of the page and let me start with Aviation. Revenues of $4.8 billion were up 14% and segment profit of $830 million was up 13%. Orders in the quarter were $5.6 billion still up 1% and with the airframe manufacturers basically sold out into 2011 or 2012 we expect Aviation orders to cool off here.
Equipment orders were $2.9 billion still a great level down 8%. Service orders were $2.7 billion were up 15%. Even with the equipment order being down we still added to our backlog because of the large absolute level of orders that we’re getting here. Revenues in the business were up 14% and that’s driven by equipment revenues up 27%. We ship 539 commercial engines up 15% and 184 military engines up 67%.
Services revenues were up 3% for the quarter driven by spare parts sales which were up 11% offset by services adjustments for aircraft utilization. If you look at segment profit that was up 13% again driven by strong engine volume and productivity partially offset by the lower services margin. We were impacted about $65 million from the fleet adjustments that we discussed in the second quarter call were Airframers, airlines are using aircraft differently and reducing some of their fleet and that had us to a tune of about $65 million pre-tax in the quarter.
The next business here is Healthcare and if you look, Healthcare had revenues up 3% and segment profit down 8%. The results were impacted by last years revenue recognition adjustment we footnoted that here without the impact of the shipment changing our revenue recognition to delivery point from shipment the segment profit would have been down about 1%. Orders were up 9%, Global DI was up 5% so again pretty good strong growth internationally. DI was up 15% partially offset by the US orders down about 6%.
If you look, services were up 8% in Healthcare which was a nice, again broad cash flow stream for us. Overall revenue in the quarter was up 3% that was driven by equipment being up 1%. Again it’s the same as the mix of orders. International was up 20%, Europe was up 20%, Asia was up 12% and Americas was down again. We continue to see softness in the US Healthcare market it started last year in 2007 with the reimbursement changes. It’s continued with the general hospital CapEx program caution given both the hospital markets and also some pressure that we see in capital markets.
Overall, revenue was about $200 million short of our original guidance for Q2 and as a result the op profit for Healthcare was down 8%, down 1% after the AK impact but we do continue to see price pressure here and we see great strong international market growth only partially offsetting the pressure that we see in the US market.
Finally in Tech Infrastructure Transportation, revenues of $1.2 billion were up 13% and op profit was up 1%. We had very strong orders growth $1 billion of orders were up 6% that was driven by services up 34%. Equipment orders were down $150 million driven by fewer locomotives partially offset by a very strong growth continues in off highway vehicles the orders were up 300% and we still ended the quarter with over 1,900 units in the backlog.
Revenues were up 13% that was driven by global locomotive line. We’re up two times on global locomotive to 78 units in the quarter and off highway vehicles revenue was up 21% and service revenue was up 9%, a good global story and a good service story. Op profit was up 1%. We are getting the benefits of the higher volume but that was substantially offset by the global growth investments we’re making.
It is about $25 million that we have put into the business supporting new engineering for marine engines, for Indian and European locomotives that we’re working on orders as well as expanding some capacity. Overall a mixed environment in Technology Infrastructure but segment profits still up 2%.
NBCU is next, they had a very strong quarter, revenues of $5 billion up 35% clearly revenues include a little over $1 billion of Olympic revenue so excluding Olympics revenue the revenue would have been up about 8%. That’s driven by a strong film slate, strong cable revenue, partially offset by lower local station revenue. The segment profit came in at $645 million up 10% that was again driven by strong results in cable, the network and film partially offset by the Olympics in the quarter. The Olympics were actually a loss in the quarter that you present them.
Starting on the left side, the Network was about flat in revenue and down about 5% in segment profit ‘x’ the Olympics. We had strong profit growth in Entertainment driven by positive pricing and lower costs so making sure that we’re making margin on what we put on the air. News remains number one across the board with Today, Meet the Press and Nightly. We are seeing continued softness in the local media that was down about $40 million.
On the Entertainment & Info. Cable a great story continues here. Cable continued to deliver great results. The segment profit was up 24% and it’s coming from both Entertainment and Information Cable. USA was number one for the ninth straight quarter with a great lead over number two. Bravo and USA were both up 20% in the quarter. MSNBC had another great quarter, the fastest growing news channel in primetime driven by politics. CNBC had a very strong quarter. We may not like the message but the content delivery has obviously been strong and that’s the best performance ever in business day total viewers.
On the right side, Film had a great third quarter, segment profit was up 40%. We did have the benefit of timing of some of the advertising and promotion for the third quarter movies fell in the second quarter but we also had great box office success. One example is Mamma Mia which has grossed over $500 million worldwide and is on track to be the best performing Universal Studios movie ever. The Parks, flat in the quarter but still at a very high level. We saw higher spending offset some attendance softness in both California and Florida.
Finally, the Olympics performance was a great job by the team. It was the most watched Olympics in history and ratings exceeded the pre-event estimates by over 20%. Overall a very strong quarter for NBC and the eighth consecutive quarter of earnings growth and back to double digit which is terrific.
One page on Industrial Operations, the left side is the operating profit. Clearly the reported results are down. We’ve got a 13.7% margin in the quarter and there are really two big impacts. If you adjust for the Olympics which is a lot of revenue and negative margin in the quarter and you also adjust for the drag from C&I which is just having a very tough cycle here. The op profit on the rest of the businesses were flat for the quarter.
The dynamics continue to be driven by shipping more equipment than services if you look at the total Infrastructure businesses we shipped 2 ½ times the revenue from equipment which only 2 ½ times faster than services revenue was up 25% for equipment and 10% for services. We partially offset that mix impact which is again a good news story because we’re building and install base with productivity and we’re pricing ahead of inflation.
On the right side is the Industrial CFOA, we delivered $11.3 billion of CFOA which is our industrial net income plus deprecation plus we have $2 billion of additional cash from working capital and that’s while supporting 15% Industrial growth third quarter year to date. Our third quarter ’08 working capital turnover is over 18 times today versus 10 times in 2004.
Finally, we continue to use lean everywhere in our factories to make sure we’re driving down cycle times and help us to be more efficient on that. We continue to operate with intensity in a tough environment and we’re focused on making sure we’re pricing ahead of inflation and delivering cash.
The cash in total for the company on the next page is $13.6 billion at CFOA. Overall the cash is down because we don’t have any special dividends from insurance dispositions this year but we do have the Industrial CFOA up 5% through three quarters and I just went through those details. On the right side is the normal cash balance walk.
You start; add the cash flow that we have year to date to the beginning balance less the dividends we paid year to date. We repurchased $2 billion of stock so far this year and our plant and equipment reinvestment so far this year has been $2.3 billion. We’ve closed a few acquisitions; Hydro and Whatman and we closed the Weather Channel in the third quarter. We ended the quarter with $3.5 billion of debt now.
With the cash raise we’ll have an additional $15 billion of cash and we’re on track for the total year Industrial CFOA of $17 billion in total CFOA of about $19.5 billion.
Next is Capital Finance and as you know beginning in the third quarter we put money together with Commercial Finance and we put the verticals GECAS and Energy Financial Services back into Capital Finance so you get a full look at the Financial Services businesses here. In the third quarter Capital Finance earned $2 billion in net income, was down 33% in line with our pre-announcement of saying we’re going to earn about $2 billion.
Assets of $622 billion, they’re up 12% from a year ago however, they’re down about 1% from Q2 to Q3. We are seeing an impact as we’ve tightened our origination and really focused on where we’re allocating capital based on returns. Risk, separate results for the business as you can see on the bottom left and I’ll cover the couple of businesses here.
I’ll start with Money, GE Money had assets of $209 billion they were up 6% year over year however assets dropped from $221 billion in the second quarter to $209 billion in the third quarter down 5% driven by the volume declines from higher pricing and other underwriting changes that we’ve been making.
Net income of $790 million was down 16%. Basically the Americas down 28% from higher loss provisions, I’ll definitely cover more detail on that. Europe was down 22% driven by lower redemption income in the UK. Asia was up 1%. I’ll cover details on delinquencies on both Commercial and Consumer in a few pages.
Real Estate is the next business, ended the quarter with assets of $89 billion which are up 23% over last year that’s driven by the investments we’ve been making in senior secured debt at high returns. I’ll show you the numbers on that sequentially if you look Real Estate is down $2 billion in assets from the second quarter. Again we’ve capped off our Real Estate business just based on size today and we’re continuing to downsize the portfolio and we will continue to do that through 2009.
Net income of $244 million was down 62%. Basically we realized lower gains on sales of properties from a year ago. We still sold in the quarter $2.6 million of assets and the portfolio quality remains very strong. We have 0.19% of receivables on earnings so basically hardly any properties not in earnings status. Our 30 delinquencies are only 0.6% of average net investments flat with last years. The portfolio is very strong.
Through the third quarter with the earnings in the third quarter our Real Estate business has earned $1.2 billion in net income and based on our revised guidance that we gave on the 25th we’d expect the total year to be around $1.3 to $1.5 billion net depending on how the property market goes in the fourth quarter.
Next is Commercial Lending and Leasing, the earnings of $394 million were down 56%. This business was significantly impacted by the recent upheaval in the financial markets over $400 million of the negative marks we had in the quarter were marks and impairment were in this business and I’m going to cover the details of that on the next page.
Finally the verticals, if you look, the verticals delivered solid results. GECAS was up 4%. Again here’s another portfolio, the quality remains very strong, and 30 day delinquencies are 0.13% of financial receivables. We have three aircraft on the ground at the end of the quarter; they’re all new narrow bodies which we expect to be putting it back out on lease very soon. Energy Financial Services had another strong quarter as we continue to see very strong demand for energy generation and distribution assets so a pretty good story there.
In the next few pages there’s been a lot of discussion about G Capital and in the next few pages I want to basically cover four topics. First, we missed our original estimates in Financial Services by $0.07 and I want to take you through the details of what happened versus our original financial projections. Second, we are still in business, we continue to originate at high margins and we expect pricing to remain robust so I’m going to show you what are we originating and what the margins look like.
Third, we’ve taken proactive actions and we have dramatically improved our liquidity situation, I’m going to show you where we stand on liquidity. Fourth, our portfolio remains robust. We’ve got a great portfolio. We’ve stuck to our risk management but we are going to see a credit cycle here. We’re going to see higher delinquencies, we’re already seeing those. As we have higher delinquencies we’re going to put up more loss provisions. What I want to take you through is how do we see the portfolio quality and what do we see as the potential future loss impact as we go forward so I’ll take you through these four sections.
First is the third quarter results versus the second quarter guidance, we all have been living this environment but the third quarter had extraordinary financial volatility by any measure. We had Fannie Mae, Freddie Mac, Lehman Brothers, WaMu, AIG, and we were impacted by that volatility. We had $533 million of negative marks and impairments in the quarter.
If you look at the right side I’ve broken those out by a couple categories. The first category is Investment Impairments; we have $43 billion of assets and investment securities mostly from our insurance run off business and also our guaranteed investment contracts. We’ve listed the largest items that impacted us here including the WaMu bonds; those were impaired the Thursday night after our pre-announcement. The volatility did not stop the day we did a pre-announcement it’s continued.
We also reached an agreement with FGIC to restructure our preferred investment resulting in a $97 million after tax loss and if you remember we already wrote off our common stock. We had quite a few marks in the Investment Impairment category.
The second category is Mark-to-market of our publicly traded equities. The main write down there came from our equity stake in Genpact which was down a lot in the quarter; $154 million of the $173 million was just that one investment alone. Finally, we also impaired some assets in GECAS, we do an impairment review annually and if there were ever a big change in cash flows you’d have to do it in the quarter it occurred. That’s a relatively small amount for that portfolio, its a little bit better actually than the impairments last year.
The last category we had some derivative marks that went through the P&L basically ineffectiveness and other stand alone hedges that get marked through the P&L every quarter.
Our third quarter earnings, if you look on the left side the other two things that hit was we had higher losses in GE Money, this is principally in the Americas. Our original forecast that we laid out for the Americas as $600 to $800 million of additional loss provisions in the business. We added $250 million of provisions in the quarter in total that’s about $100 million over the original plan and our revised guidance today would say we’re thinking about $800 million to $1 billion of provisions this year for the losses in the Americas based on delinquencies and where we are.
Finally, we had lower assets sales, principally Real Estate but in total GECAS was off $0.07 from our original Q2 expectations and it’s driven by these three factors. Even with that our third quarter earnings were in line with what we said on the pre-announcement. We are $2 billion net in capital and that’s a pretty good performance in this tough environment.
Let me go to the second point which is we’re in business, what are we originating and how are the margins. This page covers the Commercial Finance originations that we’re doing in the third quarter. Overall in Commercial Finance we originated $21 billion of volume and you can see the majority of that volume is split on the left side between the top which is Capital Solutions leasing and financing spreads so this is our mid-market business.
We did $6 million of origination in the third quarter. The spreads are up 56% so this is a gross price that customers are paying us less our cost of funds on a match funded basis margin are up 56 basis points in the quarter and you can see they’ve continued to climb through the year.
The second piece is Corporate and Real Estate debt. We’ve done $10 billion of debt in the third quarter at 27% ROEs. We continue to see very strong low loan to value opportunities with high returns on equity and we’re investing money there. Our originators are out there and we are in business. We are trading volume for price in every business. The Real Estate debt originations of $4 billion that was a 25 ROE, we basically shut off the equity originations expect for where we have previous commitments.
Capital Solutions the volumes down 25% and we are getting price and fees everywhere so there are places where we’re not underwriting. If we don’t have the returns we’re not putting the capital there but there is still an awful lot of business being done. We’re going to continue to be opportunistic on originations. We think the attractive pricing is obviously going to continue for the foreseeable future here.
The fourth quarter outlook is pretty similar in terms of what we’re going to originate. We’re still in business funding a lot of high return stuff over $20 billion in Commercial Finance alone in the quarter and the fourth quarter looks to be about the same.
Third point that I want to cover about Capitals Liquidity, Jeff talked about it, I mentioned it, and the numbers are on the left side. We ended the third quarter with $88 billion of Commercial paper. Our commitment was to bring CP under $90 billion in the third quarter and down to $80 billion by the end of the year and we’re going to do that.
In the middle, the left side is the long term debt maturities through the fourth quarter ’09. Over the next 15 months we have $81 billion of long term debt maturities and you can see the timing. We’ve already said that we don’t need to do any long term debt in the fourth quarter. I’ll talk about the future going forward but you can see the good news is these are spread out and they’re pretty level loaded and they’re actually back end loaded into the second half of ’09.
The third category is other sources of funding. We’ve got $43 billion of Retail funding today and we’re going to be able to continue to grow that. If you look at the right side there are some themes about how we’ve been thinking about liquidity in the last few months. It starts with Triple A, this is an advantage for us we know it, it’s been confirmed by the rating agencies and from the Board of Directors through the leadership team and to every employee we’re committed to run the company as a Triple A and it’s certainly serving us well.
The second thing is debt markets have been volatile but we are still funding ourselves without any issues. If you look at CP in fourth quarter ’07 the average cost of our Commercial paper program where we had higher balances was about 5%. In the third quarter ’08 the average cost was 2.5% and that’s the same average cost for the last couple of weeks. It’s been a challenging global market but we have been able to fund ourselves and the funding costs have actually come down versus what we were dealing with a year ago. I think that’s a positive.
We do have more protection today if the CP market remains under stress, Jeff talked about it. We had a liquidity plan that said we were going to get our bank lines plus our cash equal to our CP by the end of the year. After our earnings call last week, the pre-announcement we said that may not be fast enough and we went right to work on well how do you accelerate that and that’s why we did the equity offering and we’ve accelerated. Today our bank lines plus our committed cash are greater than our CP and that’s a great place to be.
We also had the Retail sources to grow funding. I mentioned the number but we’ve grown our deposits $20 billion since the beginning of the year and we can do more. In our banks we have two banks that we use in the US that are funded in both Commercial and Consumer assets with deposits. On long term debt we can proactively manage the long term debt maturities by working our origination and collections equation.
As you know we’ve already said we don’t need to do any of the long term debt redemptions in the fourth quarter so we’ve got $15 billion of long term debt that matures that’s by being very disciplined on origination versus collections. Obviously if we ended up in a situation where you had to do less long term debt in 2009 we could continue to work that originations versus collections equation.
Finally, I think a significant point on Tuesday this week the Fed announced the CP funding facility for highly rated CP issuers. Under this facility the details are still being worked out but clearly GE and GE Capital could issue if necessary CP to the facility in amounts up to our outstanding August 2008 which is over $60 billion for GE Capital Corp and over $10 billion for GE. This is again another step that the Fed has taken. We’re very supportive of it, we think its positive and our team is working with the Fed to make sure all the mechanics are in place to help support the confidence of our investors.
We’ve got a very strong position here. If you step back and look at the actions we’ve taken over the last three weeks we have proactively and dramatically improved our liquidity situation in one of the most challenging markets ever seen. We feel great about where we are today.
Fourth topic is the quality of the portfolio. The question everyone wants to know is what’s the potential for future loss impact and I’m going to walk you through pieces. I’m going to start with the portfolio. At the end of the third quarter we had $413 billion of Commercial assets and $209 billion of Consumer assets. On the Commercial side we’re very diversified. Our risk management policies outline delegations of authority and concentration limits for every asset class and every investment we make.
We’ve got very broad spread of risk, 72% of the Commercial exposures are $100 million each, and 60% are under $50 million. Our largest exposures basically if you look at the top 20 exposures they’re to the airlines and railroads and a couple power plants. All of them are senior and secured and collateralized by the assets. There’s no unsecured exposure in the top 20 of any size.
Our diversification and our risk management has served us well. If you look at the 10 year average loss have been 0.3% the highest over that 10 year period was 0.9%. We’ve got a conservative model. We do not originate to sell. We originate to hold. We don’t have any SIVs, we don’t have any CDOs, we’ve never sold CDS, and we don’t have any exposure to counter parties on that from things that we write because we don’t do that business.
On the right side is the Consumer, we’re also very diversified. We have over $100 million accounts and we’ve responded early to the tougher environment we’ve seen. I went through the mortgage portfolio at the last call. These mortgages are not US. Our underwriting has been strong. We have an average loan to value of 75% that’s updated every month based on the market. Everything that we did that was underwritten over 80% has mortgage insurance on it globally. Seventy nine percent of the portfolio is outside the US so it’s very global book.
We’ve tightened underwriting and collections early in the cycle. Our mortgage reserves are up 20% since the end of last year. We just don’t have any write offs data, it’s less than $100 million of mortgage write offs because we’re senior and secured. We’ve got mortgage insurance on the highest risk exposure positions and we’ve been very conservative about the amount of loan to value that we’ll underwrite. It’s something we’re watching.
The delinquencies are up clearly and we’ll work our way through it but if you remember we’ve been through there before in the UK we had the delinquencies up over 18% in the early 2000s and minimal losses based on our underwriting. Really happy to say we exited Japan successfully $5.4 billion of sales proceeds were realized in the third quarter. We’ve got a very seasoned risk team. We’ve got a very disciplined set of policies and risk management infrastructure. We’ve consistently outperformed the benchmark.
We’re not immune to a deteriorating credit cycle, I’ll take you through that next but we really like the starting point of the diversification and the quality of the portfolio.
How are we performing is next on the left side are the Commercial delinquencies you can see the 30 day past due amounts on receivables are up to 1.61%. That’s up 26 basis points. One adjustment in here we acquired a business in Japan, Sanyo Finance Lease and just that business alone adding it to our book added a 10 basis points to the overall delinquencies. Really on a comparable basis we’re up only 16 basis points versus last year.
We have seen some softness in our mid-market European lending and leasing business about six basis points of the delinquencies from that. We have seen some softness in business properties as there’s lot of small properties under $3 million generally the loan size. People are just conserving cash so we’ve seen some increase in delinquencies here in the US.
Our non-earnings are up 21 basis points versus the second quarter up. There are two specific transactions in the verticals both are senior and secured. One is SemGroup went into a bankruptcy and we’re very well collateralized there and the other we have some planes that we got back where we have senior debt and we’re cross collateralized on three more planes that they’re going to get back that more than secure our position. On the $309 million we don’t think we have any loss exposure.
Cap Solutions is up a bit again that’s a lot of small accounts that are delinquent and we’re just going to have to manage through collections and make sure we’re managing our collateral and as I said the Real Estate books in really good shape. The portfolio in the Commercial side continues to be in excellent shape but we’re seeing some early signs of pressure and we’ll be all over it.
On the right side are the Consumer delinquencies we have seen these rise. Obviously they’re up 128 basis points versus a year ago. You look it’s up a bit versus the second quarter so we’re seeing sequential increases as well. It’s driven by two basic things, one is the UK mortgage book the delinquencies are up to 17.8% that’s up a point over the second quarter 16.8% so that’s a big driver of delinquency. Again, we don’t have losses in that book because of our position but delinquencies are up.
The second thing is North America, our North American receivables the delinquencies on 30 days are up to 6.2% up from 5.6% in the second quarter and that contributes 34 basis points to the total year over year. While we have these rising delinquencies we’re also putting up more loss provisions. The loss provisions are up 34% in the quarter year over year. North America, as I said, we put up $249, $250 million up $560 million year to date and to the total year estimates is up $800 million to $1 billion included in our guidance.
The loss provisions are growing faster across the globe than our write offs for the fourth consecutive quarter here. This is going to continue. We do see more pressure on the consumer book. We’re adding to the provision in line with the delinquency and loss experience we have and we expect this to continue. If you look in the third quarter alone we had pre-tax losses of $451 million higher than the year over year but we had higher reserves by $762 million so we’re putting up more provisions than the losses we’re experiencing and we’re ready for the future here.
If you look at the third quarter year to date loss provisions they’re up $1.3 billion and that’s going to continue as we go into the fourth quarter next year.
I’ve given you the portfolio mix, I showed you where we are in credit performance and how do you think about the losses going forward. This chart shows our GE Capital loss percent to average net investment back to 1991. If you look on the left side of the chart the 20 year peak was the ’90-’91 recession we ended up with credit losses of 2% and you can see the split between GE Money and Commercial what those losses rose to.
In the middle I’ve written down some facts about 2008. Today we’re estimating that we’re going to end the year at 1.2%. We were below 1% through the second quarter and we’ve got a big increase in the third quarter and a big increase in the fourth quarter that will get to about 1.2% and you can see it’s driven by GE Money. We continue to see very strong performance in Commercial but we’re increasing our provisions there.
That guidance for the year for 2008 would include up to $6.6 billion of pre-tax provision losses so this is a big number and it will be a big increase over last year. The 2009 framework that we talked about we gave you a range of down 10 to down 30 for GE Capital as a way to think about next year basically within that range that would enable us to have $7.5 to $9 billion of pre-tax losses off the $6.6 billion this year.
So $6.6 billion this year will be a big increase several billion dollars over last year and next year could be $7.5 to $9 billion and that would bring our total credit losses somewhere between 1.4% to 1.7% which would be very close to the peak and I think that’s important because when you look down on the left what’s different about the portfolio from ’90-’91 to day is dramatic.
In ’90-’91 we had very limited geographic diversity we were very US focused. We had $8 billion of LBO exposure with $200 million average exposure to each of them. We had 28% consumer exposure was secured. We were a very large mortgage and bond insurer. We were concentrated in our Real Estate portfolio. We were very heavy 25% of our Real Estate portfolio at the time was in New York City. We had very high loan to values with an average loan of $100 million and we’re big in single family residential and development lending.
In 1991 25% of the losses we experienced in that 2% were from the LBOs and we don’t have anything near any position anywhere near like that today which is a great place to be. Today the portfolio is different. We’ve got a big global mix, 69% of the exposures are under $100 million as I said we’re 58% of the consumer business is secured. You have a real mix issue while the assets have grown dramatically that secured book has a dramatically different loss profile.
We’ve exited all the insurance businesses which have helped tremendously. The diversified Real Estate portfolio is much better, 50% global and 70% average loan to value with a $12 million average loan size. This is just a dramatically better portfolio but it’s not immune. We’re going to see more pressure and I think we’re going to have higher losses and we’re planning for them. If you look at that framework it’s substantially takes into account very challenging economic scenario on the high end of the loss range and better than that scenario on the low end.
We don’t know that the economy is going be as we go forward to 2009 exactly but I think the guidance range that we’ve given and the loss estimates that we are prepared for substantially protect you in terms of how you think about GE Capital Risk going forward.
The last page I have is to switch gears and look at the fourth quarter outlook. Guidance by the segments are on the left side. Energy Infrastructure remains strong. We’re guiding about 15% up I think the issues is you’ve got to think that we’re going to have tougher comparisons. Energy was up 38% last year in the fourth quarter these are great earnings levels that this business is at. We’re going to continue to ship a lot of equipment but the comparisons get a little tougher.
Technology Infrastructure up 5% to 10% driven by strength in Aviation and Transportation. We’re forecasting Healthcare to continue to be challenging. NBC Universal up 0% to 5%. We’re cautious on the outlook here I think you’ve got to look what the local stations are doing, we’ll have to see what the national advertising does. Great strength in cable and we’ve got a pretty good performance in film outlined. Capital Finance continuation basically of the third quarter run rates put you in that range. Finally, C&I remains challenged.
On the right side is the total no change from the September 25th earnings guidance expect for on EPS you have to account for the dilution from the additional equity offering. We’re on track for the revised 9/25 guidance adjusted for dilution and let me turn it back to Jeff.
On the next page I just wanted to spend a little bit of time just thinking about the future. Really just zeroing in on infrastructure and how you might think about it just given all the volatility that’s going on the world today. Infrastructure is about 50% of GE’s earnings in 2008. The service portion of the Infrastructure earnings is about 70% of that total. We have lots of high margin service businesses that really drives how we think about this business.
I would say left to its own it’s poised for substantial future growth just based on the backlog because the products drive energy efficiency, we’ve got high tech products and we’ve got great global demographics if you will. You’ve got to include the risk of things that are going on in the world today. Clearly on the equipment side that might be financing or pressure on demand. On the services side we’ve seen a little bit of it in Aviation with planes being parked, driving usage and retirements.
We try to think and do our planning based on the fact that there’s more risk just given what’s going on in the broad environment. What I would point out is we’ve got a good leadership team that’s thinking a lot about the volatility of the marketplace and we really have working today I’d say four or five major mitigants that we’re working real time.
The first one is we have big backlogs and then those backlogs are contract protections but we have several products that are in oversold positions which give us I think some buffer for volatility. The second one is just services itself. Services is a fundamental and core to most of our customers. It is more resilient in economic volatility and it’s very high margin. We like the positioning there.
The third thing I would point out is that unlike previous cycles we have a very broad global diversity and that’s not just in specific countries it’s in every country. We’re well positioned in Eastern Europe and the Middle East and Brazil and China and India. We’ve got great diversity and lot of our backlog is just in areas that have great sovereign support where the country needs the power, the country needs the water, great government backstop there.
The fourth think I’d point out is that we’ve experienced over the last four or five years dramatic inflation in raw materials. We buy either directly or through our suppliers somewhere between $15 to $20 billion of raw materials they are driven by steel, nickel, aluminum, things like that. We expect to see some opportunities there as the pricing softens that can help us bugger our margins. Actually our customers like these products because they drive energy efficiency because they drive environmental protection and so we’re just thinking through trying to plan for any eventuality.
We see the risks but we’re also trying to plan mitigants that I think are going to allow us to outperform in any environment that we see going forward in the future.
To summarize, the environment is volatile but GE is executing. We delivered on our third quarter ’08 continuing earnings commitment of $4.5 billion or $0.45 a share. We’re confirming the total outlook including dilution of $1.92 to $2.07 a share. The company is poised to earn about $20 billion in 2008. We’ve done a lot of work to protect our Financial Service franchise that Keith went through which we’ll still earn in excess of $9 billion in 2008 I think which will look good compared to our peers.
We’re going to return $13.5 billion to investors in 2009 through dividends. We really believe that the dividend is safe and we’re making great plans to protect that.
We built strong infrastructure and media franchises which wet think our positioned to outperform through this cycle. We’re running GE in a very disciplined way. I think we’re well prepared for the environment we’re in.
Trevor with that I’ll turn it back to you for questions.
Let’s turn it over to questions from our audience.
(Operator Instructions) Your first question comes from Bob Cornell – Barclays Capital.
Bob Cornell – Barclays Capital
You went through the outlook for the Finance business for next year but the guidance is down 10% to 30% maybe you could give us a little more color around that and maybe focus as well on what tax rate is embedded in that number.
We haven’t changed anything that we said back on the 25th. We’re saying that we think we’re going to have an environment here where we’re going to be very disciplined on origination. We’re going to be shrinking the book a little bit and remixing from some of the higher leverage products to lower leverage products so you’re going to see some impact of that. We’re going to get a benefit from the new volume that we’re putting on with higher pricing. We’re going to get a benefit from lower costs.
We’re going to be under pressure from higher loss reserves which I think I’ve outlined pretty, in a detailed way for at least as good a forecast as we can give today. We probably still have lower gains. We’re not counting on any gains in the Real Estate business in 2009 and those are basically the four or five factors that we’re going to have to think about; losses, impairments year over year, less gains, higher margins from the new originations, lower costs, and what kind of volume are we going to see in total.
I think those are the factors that we’re dealing with. I think if you have a really tough economy you’re going to be at the low end of that range. If the economy is not as bad as what everyone is predicting today I think you get for the better side of that range. I really don’t think we’re going to see the maximum level of losses that we’ve outlined here but our view is that there’s a concern about it and the guidance framework that we’ve given you we ought to be taking that into account and making sure that people understand that we can handle a significant increase in provisions based on a tougher environment and that’s in our range.
Bob Cornell – Barclays Capital
I was there in ’91 and you guys grew the income in the period despite the real estate and the LBO. Getting back to the tax issue, you had the revision of the tax rate for the year maybe just go into what drove that then again what’s the thought on the capital tax rate for ’09?
As we close the third quarter and you look at the fourth quarter we had to lower the GECS income forecast. That’s had a dramatic impact, a lot of that income that we lowered was high taxed income like from the US and when you drop that high tax income you drop your tax rate. The rate was negative in the quarter because we have to adjust the first half rates so that they reflect the new estimate for the total year. The second quarter year to date GECS rate was 3% a positive slight rate and now we’ve got to get to a negative rate of 4% for the total year because of all those loss of high tax income.
You end up with a catch up kind of in the quarter that results in a 30% negative tax rate for GECS. I think another way to think of that is that basically GE pays GECS for the tax losses it generates in the US. While GECS earns income in lower tax jurisdictions they have less high tax income in the US and those tax losses benefit GE in total as a system and that’s why GECS is getting basically a tax benefit in the quarter is because they have losses that GE is able to use and that creates earnings in GECS and it offsets the tax liability in GE.
It’s one of the benefits of having the whole portfolio together. For 2009 we didn’t give in 2008 separate tax rates for GE and GECS I think you could look at 2009 in a varied low tax rate for GECS in the low single digits at best and a consolidated tax rate for GE in total of 15% is kind of what we’re forecasting today. I don’t have a breakout between GE and GECS but I don’t anticipate the GECS rate going high.
One other thing you may have seen I the recent Congressional activity was that the active financing exception was extended for another year. That will bring that out effectively through 2009 and then you wouldn’t see an impact if that were to go away until after 2011 for us. That was one other item that came out in the last couple weeks that was positive.
Bob Cornell – Barclays Capital
What did you say about the fourth quarter capital tax rate?
The fourth quarter capital tax rate would be in line with our total year estimate today which would be around a negative 4%. You have to book to the estimate you have for the whole year and that’s where we would be.
Your next question comes from Scott Davis - Morgan Stanley.
Scott Davis - Morgan Stanley
The one thing that’s a little bit different between ’91 and today is that in ’91 you were able to buy distressed assets and had a fair amount of liquidity maybe a little bit more than you have today. Is there anything you can do to take advantage of this cycle and not just like the rest of us I guess be a victim to it?
Obviously we think there is. I think when you look at the originations budget that we have where we’re doing over $20 billion a quarter in Commercial Finance we ought to use that in the most effective way possible. Clearly we did that earlier in the year with the Citi Capital acquisition and the Merrill Capital acquisitions those have been performing really well for us. We got great earnings out of them so far. I think you just have to prioritize out of there the capital you have and that’s over $20 billion a quarter on the Commercial side and how you put that to work.
I think we do have capital, we are planning on originating, we are planning on continuing to invest in our Commercial Finance businesses and we’ve got to see what opportunities are available. The couple places that we’ve kept off would be global mortgages on the consumer side and then commercial real estate globally we just basically have said there are still a lot of great business to be done there but we’ve capped off on the size and so we’re going to bring that down over time.
Those would be the two main places that we’re probably no continuing to originate broadly but everywhere else it’s a function of having capital and allocating it to highest returns.
Based on what I can see we’re doing as much originating out there as anybody else right now I think it’s just a tight market and pricing; risk is being reset, the pricing is being reset and I think we come through this either in the fourth quarter ’09 or in the future with a better business model.
Scott Davis - Morgan Stanley
On the notion of pricing when you hit the mid point where your asset base you think about the $600 billion where more than half of it is priced at these very high 30% ROEs and the other half certainly priced lower. When do you reach that cross over point?
It varies by business depending upon how much new origination we put on at these rates. It’s somewhere in the second half of ’09, late ’09 and early ’10. It’s a whole portfolio swing.
Scott Davis - Morgan Stanley
You didn’t go into any detail on the Santander swap what’s holding that up?
You’ve got to get regulatory approvals in the countries and my sense is that still will likely happen in Q4.
Scott Davis - Morgan Stanley
But no indication Santander is looking to do something different?
It still makes sense strategically.
Scott Davis - Morgan Stanley
In the financials it looks like GE Capital tangible book sell from $30 billion to $25 billion and maybe I’m calcing it wrong but none the less is there anything?
The one item in there you may see is the CTA account, the Cumulative Translation Account on foreign exchange as those dollar rates have been very volatile at the end of the quarter you may have less overseas equity translation but there hasn’t been any change from any losses or the earnings growth that we had and we actually, in the third quarter, left the extra capital in by cutting the dividend to 10%.
Scott Davis - Morgan Stanley
Wouldn’t the capital injection help raise that tangible book value also or does that stay at the parent?
No, the reduction of the GE capital dividend up to the parent does help the tangible. The money we raised in the equity offering is staying at the parent and is in the liquidity pool for safety. Capital down in there.
Your next question comes from Deane Dray - Goldman Sachs.
Deane Dray - Goldman Sachs
Could you discuss what you were saying today the implications of the credit market conditions on the Industrial businesses. One of the ideas here or the points you see the backlog is up very impressively 20%. That’s a net number what are you seeing in terms of cancellations or push outs any color in priority by the Industrial businesses would be helpful.
If you look across the Infrastructure businesses we had a total of less than $30 million of cancellations in the quarter. I would call that normal. We haven’t seen anything in the Energy business. We had less than $30 million, some of that was in Oil & Gas. We have no cancellations basically in Aviation. We’ve had no CSA termination. I think when you say how are you seeing the impact from credit I’d say you saw it in the Healthcare business certainly hospitals are talking about funding and whether they’ll continue with some of the projects that they may have had on the drawing board or delay them based on their ability to get funding. We’ve seen some of that.
In the long cycle infrastructure businesses we haven’t seen any yet. I think you’ve seen it on the Financial Services side clearly on ability for people to finance asset sales and that’s very solidly, obviously in the run rate. We’re cautious about it, we’re watching it but I think a lot of what we have certainly in the long cycle business is in the near term backlog of projects that are already well underway and already have their financing.
A lot of them are driven by global governments and sovereigns who are going to finish these projects based on need to get more energy extraction or oil and gas distribution. In the near term you feel pretty good about that backlog. I think you’ve got to be cautious about it and you’ve got to make sure you’re aware and thinking about it but we haven’t seen it yet.
Deane Dray - Goldman Sachs
Specifically on the Healthcare side, how much would you say the earnings shortfall there was hospital CapEx freezes versus the ongoing deficit reduction reimbursement issues?
I think it’s hard to tell. I think it’s got to be some probably but I just think the market had been moving through the first half of the year was down 5% already. My hunch is it’s probably in that range and that’s a lot of DRA and maybe some capital.
Some pieces of the $200 million came from people deferring projects.
I think the good news is the global demand was on par in Q3 with Q2 and I think that’s really the strength of that business right now.
Deane Dray - Goldman Sachs
As you work through this period of volatility in both your businesses and the markets broadly might there be a change in the practice of giving quarterly guidance. We all know there are a number of the big multi-industry companies that just provide annual guidance. Could you foresee a scenario where GE follows that pattern provides annual guidance on a go forward basis and walk us through the way you’re thinking about that today?
I think it’s a great time to be having that thought process going on inside the company. Right now I think our plan is to talk to investors, see where the environment goes and talk about it more in December vis-à-vis how we look at 2009 and going forward. We’re studying a lot, we’re thinking about it and I think whatever we end up doing we want to make sure it’s investor friendly and reflects the way the people that own the stock would like to see us talk about the company going into the future.
Your next question comes from Christopher Glynn – Oppenheimer.
Christopher Glynn - Oppenheimer
In terms of the commentary on the Triple A really talking about the commitment to keep it rather than saying you’re not at all worried about it. I don’t know if I’m reading too much into that but just basically I look at you continuing to originate, maintaining the shareholder dividend that would be a pretty strong commentary that you’re simply not worried about it.
I’m not worried about it but I want to make sure everyone understands we’re operating the company to be a Triple A. It’s obviously a very high rating; it’s something that a lot of companies don’t have. We’re committed to it and that means that we’re going to take proactive steps like cutting the GECS dividend and strengthening the leverage ratios and reducing our reliance on CP. At the end of the day if we had to raise cash to rid a perceived liquidity issue we did it.
That’s what I mean by it, it’s not something I’m worried about. We want to make sure we run the company to be a Triple A and we’re confident about that. Obviously it’s something that you have to make sure you’re protecting your bond holders with the actions you take and we think we’ve been very proactive and very consistent on doing that. When I talk about committed to running the Triple A it isn’t because I’m concerned about it, it’s because the philosophy of how we run the company from the Board of Directors through the leadership team on down.
Christopher Glynn - Oppenheimer
A little more on the funding, talk about the backup capacity for the Commercial Paper does the government actions really remove any prospects of having it tap the credit lines to current thinking? On the long term less than a year for next year could you talk a little bit more about how you feel around that?
When you look our liquidity plan one of the objectives we had was to get to the fourth quarter, end of the fourth quarter and have our cash plus our bank lines be greater than our CP. Obviously with the equity raise we build that cash cushion so we could say that we have that today. If you look at steps that are available to you number one we’ve got our great broad CP market we haven’t had any trouble funding ourselves. We feel like the actions we’ve taken and the actions the Fed put in place actually give the CP market even more confidence about us and that we’ve seen that.
We continue to fund ourselves at very low rates without any issues. I think that we have the bank lines for a reason, they’re there for protection. They’re committed, they’re Double A institutions or better there are over 70 people in that bank line. We have bilaterals and have syndicated bank line. They’re there for protection. The Fed facility I think is there for protecting CP investors and our customers. I think it’s a very positive and in the event that gave our customers more liquidity I think that would be available to us and would probably be certainly a priority in front ever going to the bank lines if you ever had to.
We’ll have to see what happens as we go forward here. We don’t plan on using any of those but if we were to do it in order I would say that that Fed facility is a great liquidity facility for our customers. I think it’s a very big positive and we’re working to make sure we know how it works and have access to it and could use it if we wanted to.
I think we thought it was smart to have suspenders on suspenders on suspenders in this cycle. I would say the first thing is Triple A, what Keith talked about and even with all this volatility we have never had issues in the CP market rolling our paper. We’ve got a lot of investor support so that’s kind of phase one. Phase two I think was getting more cash inside the company so that we accelerated our liquidity plan and just took that off the table with cash plus bank lines being greater than CP.
I think phase three has been the work that the Fed did that really protects the whole market and so far as GE is a part of that market I think that’s another great signal. I think our investors have to feel really great about those lines of defense. I think we’ve taken some big issues off the table for investors. That’s what we really wanted to do.
I think that rolls into your long term debt point too. I think if you look at, we put a liquidity plan together and an origination plan together so we did $70 billion of long term debt this year, we had an original plan to do $80 billion. We’re not going to do that last $10 billion in long term debt in the fourth quarter we’re going to manage originations and collections with real tightness and as a result we’re going to be able to bring the CP down to around $80 billion at the end of the year and not have to do any long term debt in the fourth quarter.
I think as you roll into 2009 you can see we’ve got $66 billion of maturities in 2009 and right now our plan was that we issue about $60 billion which will be a down from the last several years dramatically. There will be a shrinkage of GE paper out in the marketplace. We anticipate being able to do that. In the event that you had more stress that continues into the first quarter here around long term debt markets we would continue the management of originations versus collections that we’re doing in the fourth quarter into the first quarter in the same way.
We have obviously a lot of flexibility to be able to deal with those first quarter maturities or even to lower the total maturities that we refinance next year in the long term debt markets. I think we’re being very prudent about it. We’re planning for really tough scenario here and if the debt markets are open we’ll be more opportunistic about making sure we take advantage of some of that.
We’ve got real retail strength as well as so we’ve got new pools of financing which we think we can grow pretty substantially.
Your next question comes from Nicole Parent - Credit Suisse.
Nicole Parent - Credit Suisse
I don’t think I heard anything on OEC shipments kind of where we are relative to where we thought we’d be at this point and what the outlook is for the remainder of the year?
We are shipping out of OEC; I’ll have to dig out a good number here. If I look we had $56 million of orders in the quarter so that was a good sign. We’re shipping 9900s and overall we had 395 units of about $15 million in the quarter. I think the OEC guys are up and running they continue to ship, we continue to get positive orders in the marketplace and that should be better in the fourth quarter.
Nicole Parent - Credit Suisse
With respect to the infrastructure risk that you articulate I think we appreciate the color on that. As you look at the equipment orders in the quarter up 5% you did acknowledge some slippage to the fourth quarter in oil and gas. Could you maybe give us a sense of as you look at this business how you put your arms around cancellations versus push outs?
We haven’t seen any cancellations yet. I think if you look at what we’re trying to do as we came to the end of the third quarter we had about six deals in the oil and gas business that they had originally put in their forecast. The average deal was about $45 million slipped into the fourth quarter. We had one order of about $150 million slipped into the fourth quarter from a national oil company and we think we’re going to get that in the fourth quarter.
I think more of it was timing. We’ll have to see as we go into the fourth quarter whether other orders are impacted by financing. I think it’s a concern and it’s something we’re watching. We have not seen it yet.
Nicole Parent - Credit Suisse
On the income statement, corporate and eliminations was meaningfully lower in the quarter you did just put out the restatement, what’s in there, why was it so low in the quarter and how should we think about it in the fourth quarter and the run rate for ’09?
In the third quarter if you look at this year you have to go back to what we did last year. If you remember we had the big plastics gain in disc ops and we did $0.05 after tax of restructuring in continuing ops in corporate. If you look year over year we had a big charge last year in corporate and we don’t have that this year. I think that’s the biggest driver.
If you look this year in corporate on a run rate ex. the comparison we had about $200 million of restructuring in the quarter in corporate which is down from last year and we had about $100 million from the sale of a warranty business in corporate which was something that was a drag in the second quarter to the same amount then in the third quarter we sold it and reversed the drag from the second quarter.
Those are the biggest items. I think you ought to deal with $200 million expense going forward on a run rate.
Nicole Parent - Credit Suisse
You mean on a quarterly basis?
Yes, on a quarterly basis.
Nicole Parent - Credit Suisse
How do you think we should think about what kind of company GE is over the next three years should we think about it as a Triple A company, should we think about it as a growth company, should we think about it as an infrastructure company, maybe give us your perspective on how you would articulate the vision for the company?
I would say I think we remain committed to being an infrastructure media and financial service company. I think as we come through this it will be more global than inside the United States probably 70% of our industrial earnings will be in services, long cycle services protected by technology. We’ll continue to be a high performance execution company.
In Financial Services I think we kind of consolidate around the places where we have the most obvious competitive advantage and that is commercial finance everywhere, verticals everywhere and in emerging market consumer and commercial business. Infrastructure, media, financial services, global, high tech, very focused on services and financially strong.
Your next question comes from John Inch - Merrill Lynch.
John Inch - Merrill Lynch
The 6:1 leverage target, maybe I wasn’t clear on this before, I thought the target was going to be the end of ’08 but the slides say the end of ’09.
It was always the end of ’09 and it includes the benefits from the hybrid financing that we did over the last several years.
John Inch - Merrill Lynch
You’ve given us your expectation of the losses does that suggest still I think you had articulated before you thought all of capital was going to face incremental provisioning that would run through he P&L like $1 billion next year. Is that still the number; is it probably a bit higher?
That was in the middle of the range after tax. If you look at what I outlined today that’s still right in the middle of the range on an after tax basis. It could be a little higher on the high end of what I gave you today and it could be a little lower at the low end.
John Inch - Merrill Lynch
Was there anything else added to disc ops in the quarter out of curiosity?
The only thing in disc ops in the quarter we did exit Japan that was the last quarter of the operating results of the Japan operations and that’s what’s in there I think is like $115 million so that is completed and done now.
John Inch - Merrill Lynch
From a financial standpoint it seems apparent that there’s really no need to think about cutting the dividend. I’m just thinking strategically the dividend is such a high yield wouldn’t it make sense in this environment to possibly look to a cut just to preserve capital even further or how should we be thinking about that do you think?
We’ve obviously given a lot of thought to the dividend and when you look at the changes we made these are temporary changes that we’re making around GE Capital to strengthen the balance sheet, they’re not permanent changes. We do believe that we will continue to have a very solid financial services business that at the end of ’09 when you look in ’10 we’ll be able to come back to having a dividend that’s higher than 10% out of GE Capital.
We’ve got very solid industrial businesses generating a lot of cash flow if you start with either the industrial net income of $11 to $12 billion we are getting $2 billion on average out of working capital the last several years even if you put $1 billion in for that. We have employee plans and we do have some GECS dividend that comes out the 10% you’re talking about $17 or $18 billion against a $13.5 billion dividend.
We feel like in 2009 it is protected. We do not need the cash that we raise to pay the dividend in any way. It obviously is a high payout ratio but as we look into 2010, 2011 we’ve obviously thought through that and we think we get the payout ratio back down to the low 50% by 2011. I think this is a thing that we feel strongly about. We’ve obviously looked at our Industrial cash flow. We do get some cash flow out of GECS it’s not zero. We feel like we’re in a position to protect that dividend even in a very tough environment.
Your next question comes from Jeff Sprague – Citi Investment.
Jeff Sprague – Citi Investment
To explore a little bit more the reframing of the business model a little bit. Clearly you’re enjoying some great spreads here but as you think about the reliance on wholesale funding markets going forward does that change your growth priorities in the business? Clearly you’re trying to drive the CD business to drive some deposits into the equation but if feels like your cost of capital actually had got a clear upward bias certainly the equity raise was costly.
When you wrap that all together and think about the total aggregated cost of capital for the business does it cause you to reevaluate certain vertical markets within financial services that you want to play in?
The biggest thing that we’ve got to deal with are the global consumer assets that are very high ROE with low amounts of equity and a lot of leverage. The mortgage book is a classic example. We’ve got $70 billion of global mortgages on book. We like the asset category and everything but as you go forward that is not a priority for us obviously because it puts a strain on the wholesale funding model.
I think if you look as Jeff said the core of Commercial Finance is something that we can excel in, we’ve got a great competitive position with our distribution that’s not something that other people have been able to replicate. We’ve got great domain knowledge with our risk management and underwriting whether it’s in GECAS or energy financial services those are very strong competitive advantages for us.
Those are obviously all lower leverages in terms of relying on a wholesale financing model. I think the main place that you’re going to have to back off on are the global consumer assets that have very high leverage and clearly we’ve got to make sure we price for risk and price for our cost of capital there’s no question about and today that is not an issue. Everything has been re-priced for risk and you’re getting a return above even that incremental cost of capital.
I think it’s a remixing of the business in some ways back to more what the core GE Capital has been and that’s the path we’re on.
Who knows how long it lasts but even with maybe potentially slightly higher cost of capital you can price for it in the market and so the bias on our returns I think will continue to go up over that time period. I don’t think that will last forever but maybe it lasts for a couple years and I think that makes the business attractive.
The other piece is clearly what we’re doing around liquidity. I think in a wholesale funding model you want to change your reliance on those commercial paper markets and we’re doing that. We have the Commercial paper down to about $75 billion next year with the $20 billion cash flow injects just against that. Just the Commercial paper alone will be below the bank lines by that point in time.
I think that’s the other piece that you have to change as you look at this wholesale funding model. Less reliance on the high leverage products and a different framework in terms of where you’re getting that money in the marketplace.
Jeff Sprague – Citi Investment
I’m trying to think if there’s a strategic nuance in holding this liquidity pool at the parent. Implicitly it de-leveraged GE Capital if it was pushed down; it sits there instead as liquidity pool at the parent. Is there some particular strategic reason you are holding it at the parent level?
It gives us maximum flexibility.
Jeff Sprague – Citi Investment
Right now is probably not the best time to do anything dramatic with the portfolio I’d guess but if you were going to say spin out GE Money some day you would think it would clearly need a capital injection it would appear?
Sure, it would, clearly on a stand alone basis it would need it. We’ve had that conversation before I think these are very challenging markets. Ultimately long term what we do with it our intent wasn’t to signal anything negative strategically it’s just that is the place putting a cash pool at the corporate level allows us to execute the plan we said in GECS which we’re going to do. If there are any hiccups in that we’ve got protection and safety. We needed it for liquidity not for capital and at the end of the day we have the most flexibility by keeping that pool at corporate.
Ultimately obviously with some strategic transaction like a spin or something creating a separation where you need more capital then you may have more flexibility for something like that as well.
Jeff Sprague – Citi Investment
It does seem like the tone has changed when oil prices were really spiraling up people were saying projects were predicated on $40 and $50 oil and now that it’s coming down we’re king of hearing the oh by the way its more like $80. People are getting a little more cagy about the economics of projects. Are you feeling a real reevaluation of where the CapEx might go in oil and gas looking out not even just Q4 but the next year or two?
A couple things have happened in the oil and gas markets. First of all there’s been so much demand on the resource system, right, the supply chain system the EPCs are basically full. There’s been cost inflation. Projects are basically the things you’re doing today are out already one to two or three years so I think that that naturally would have people say what do I need to do with this next project and when do I start it.
The encouraging thing is for us if you look at all the demographics around oil the easy to get oil and gas has been gotten. The reserves are depleting, there is not a decline in demand for global fossil fuel in the economies of the world. We’re going to have to explore in tougher places and we’re going to have to get oil and gas from other resources like in Canada and maybe other places.
Claudi Santiago runs the business was recently at a conference early September and he talked about $68 billion of visible opportunities that he’s working on with the national oil companies and with the opportunities around the world. It’s not a number that we’re going to get as orders but it’s just an indication that there is a tremendous amount of demand out there that you’ve got to plan for more than the third quarter of 2009.
One thing that helps us and helps our customers is the potential for some deflation in these raw materials. That more than anything else has been a little bit of the bottle neck particularly in oil and gas. For us if you got a 10% decrease in steel or aluminum or the other things we buy that’s meaningful financially. I think some of our customers are in the same position.
Jeff Sprague – Citi Investment
As it relates to project cost you mean?
Your next question comes from Steve Tusa - JP Morgan
Steve Tusa - JP Morgan
You guys still sold a decent amount of real estate, I think it was $2.6 billion and I think it was $2.8 billion last quarter. You mentioned the $500 million of GE Financing as you move more towards debt. Is there a comparable number this quarter to the $500 million?
It was less than $100 million.
Steve Tusa - JP Morgan
Of seller financing?
Your next question comes from Nigel Coe - Deutsche Bank.
Nigel Coe - Deutsche Bank
Services is the big driver of profitability for infrastructure and service orders were up mid teens this quarter and last quarter a similar amount. Is that strength surprising you? Is it just a function of the install base increasing over the last couple years coming through and how sustainable is that rate of growth in light of CapEx pressures?
I think you’re going to see double digit services here for a while. There are two main things going on. One is the install base growth, there’s half of the CFM mix generation engines haven’t even come in for an overhaul yet and they’re out there flying. The other thing is we’ve had a great amount of business on upgrades. If you think about it if you can take an asset they’re using out there and either get more productivity or more fuel efficiency you’re going to invest in it. It’s cheaper than doing a whole replacement cycle.
We’ve seen a tremendous business in that on everything in oil and gas to aviation and energy. I think you’re going to see the install base effects coming in for more overhauls just based on usage and then you’re also continue to see a lot of great upgrade business because of the economics associated with the fuel efficiency or more extraction or more distribution from having a higher capability piece of equipment there.
Those are the two things that are driving the services for us and I think you’ll see double digits I don’t know if you’ll see them continue at these high levels but double digits for the future is what we have forecast.
Nigel Coe - Deutsche Bank
Does that mean services revenue rate of growth accelerate in terms of revenues rather than orders next year?
Nigel Coe - Deutsche Bank
On C&I you said the appropriation of spin still continues but given that the point of maximum pain seems to be about now for this business is there an odd one for keeping that in the portfolio and just work it out.
What I would say is we don’t have to do anything. We still think the strategy behind the C&I spin makes sense and we couldn’t do it in this market but if markets improve we’ll take a look at it. The last part is I would say the appliance business remains highly desirable by lots of people on a global basis. I think we still have lots of people that are interested vis-à-vis maybe pieces of C&I as time goes on. I think we’ve got lots of strategic options that we can, we don’t have to do anything in a quick way I would say.
Nigel Coe - Deutsche Bank
On the tax rate, the GE Capital tax rate, it sounds like as long as interest spreads continue to narrow in the short term in North America and as loss provisions continuing rising in North America it’s unlikely GE Capital tax rate will increase?
Certainly in the fourth quarter I don’t see it increasing. We said we’re going to have a negative 4% estimate for the year and that’s what we think the fourth quarter will be right now. For next year I think we’ll be in the low single digits is my only thing I could think of I don’t see it being in the negative rate next year but again I don’t have any of the planning done and the only forecast we’re going to give on ’09 for the total rate would be a consolidate rate of 15%.
We’re coming up on 90 minutes of discussion, great discussion today. I’d like to turn it over to Jeff Immelt for some final comments.
Thanks everybody. Two points I want to make. First is just to recap all the proactive things we’ve done to I think substantially risk reduce the company from protection of Triple A. I think the equity raise that generated cash that I think accelerated the backup lines in cash being greater than CP takes that risk off the table. I think ultimately that the making Fed window available to the industry I really do think, this volatile economic time we’ve done a good job of protecting the company and risk reducing the company.
The second point I’d make is really the strength of the business model. We like the way that our infrastructure business sets up in this environment. Again it is, there are going to be risks as it pertains to the financing and usage but we have a lot of big mitigants to that risk in terms of our global spread, our technology, the high margin service business and just our ability to operate to get deflation to execute to generate cash.
We think all those are going to be positive for investors and so we’re going to go into some choppy weather. I think on the global economy but the company is set up to outperform our peers in this environment and that’s how we’re executing the company and that’s how we’re running the company today.
I know we were long today but I think it was important to go through this level of detail.
Thank you again everyone for your time today. The material from our webcast will be available on our site and the replay will be available this afternoon. As always, Joanne and I will be available to take your questions today. Thank you again.
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