General Electric Company Q4 2008 Earnings Call Transcript

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General Electric Company (NYSE:GE) Q4 2008 Earnings Call January 23, 2009 8:30 AM ET


Trevor Schauenberg – VP, Investor Communications

Jeff Immelt - Chairman and CEO

Keith Sherin - Vice Chairman and CFO


John Inch - Merrill Lynch

Nicole Parent - Credit Suisse

Jeff Sprague – Citi Investment Research

Bob Cornell – Barclays Capital

Nigel Coe - Deutsche Bank

Scott Davis - Morgan Stanley

Jason Feldman – UBS

Steve Tusa - JP Morgan

Terry Darling – Goldman Sachs


(Operator Instructions) Welcome to the General Electric Fourth Quarter 2008 Earnings Conference Call. I would now like to turn the program over to your host for today’s conference Trevor Schauenberg, VP of Investor Communications.

Trevor Schauenberg

Joanna 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 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.

Jeff Immelt

The first page just kind of summarizes the environment. The environment remains very difficult. Credit losses continue in financial services. The financial service industry is still under stress. Those are still tough. Just like we described in December recession and growing unemployment continues just like we saw at our year-end meeting.

Two things that are mitigants, deflation is out there and we’re seeing that in our raw material purchases. As the governments around the world fund a stimulus a lot of these are in the GE sweet spot of clean energy and healthcare IT. A few things better but the environment in total is very tough.

What I thought I’d do before we dig in is just talk about how we’re running the company and our focus on doing a great job on the things we control. There are just six areas that I would cover.

The first one is all of the management processes have been accelerated and intensified. We’ve changed the way the operating leaders and the cadence with which they meet, we’ve outlined a capital board structure that reflects our strategy. We’ve got compensation tools for our team that reflect earnings and cash flow. We’ve got a very strong and engaged management team dealing with this incredible environment that we’re seeing.

We’ve diversified and protected our revenues. Services and service business model remains robust. Our global diversity you saw orders like the one in Iraq we’re going around the world to pursue the growth that’s out there. We’ve continued to invest in R&D and content and we retain the ability to finance our backlog into finance growth as it appears to be important.

We’ve increased our cash focus. About $48 billion of cash on hand at the end of the year, very strong working capital, and CFOA results. We did the equity raise and our collections were ahead of origination so we’ve got lots of cash on the GE capital balance sheet.

We’re executing the plan we outlined on December 2 with the financial services business model towards a smaller more focused business. We exited some product lines at the end of the year. We think we’ve dramatically risk reduced financial services.

We’ve really attacked our cost structure. We’ve taken $5 billion of costs out. We’ve done a lot of restructuring in Q4. Deflation is accelerating and we’ve got fewer people and less spending.

We’ve positioned ourselves for the stimulus that are being offered on a global basis. Every country in the world is doing stimulus of some kind. We think renewables and Smart Grid and Healthcare IT are good fits for the company.

We’ve got very focused execution on the things we can control. This is how we’re really driving the company in this incredible environment. The rest of the presentation basically covers four things.

First is to go back to the December meeting and talk about the results you’re seeing today and what we did to prepare for 2009. We’ll talk about liquidity and cash plan and then we’ll go back to the framework that we outlined both in Capital Finance and with our Infrastructure and Media businesses and outline how we’re driving the earnings to be on track or consistent with the framework we laid out in December.

With that I’ll turn it over to Keith and talk us through those points.

Keith Sherin

I’m going to start with how we completed ’08 and positioned ourselves for ’09. The first thing that I wanted to highlight was a checklist of what we outlined in December. Starting with revenues $183 billion they were a little less than what was forecast at the end of the year. It was driven by the stronger dollar and some lower financial services revenue.

Second, restructuring and other charges, we said we would be at the high end of the $1 to $1.4 billion after tax. We actually came in at $1.5 billion. I’ll cover in a few charts. We delivered $1.78 per share including the impact of the preferred shares. We delivered $18 billion in net income and we were slightly above our industrial cash flow outlook. I’ll cover more detail on all these as we go through the charts this morning.

The next page is the key measurements that we report every quarter. For growth, total orders were down slightly but very strong absolute levels in this environment. I’ll have a whole page on that. For industrial sales we had 7% growth which was pretty good in this environment. Good organic growth industrially and capital finance had assets down 2% which is what you’d expect with the actions we’re taking.

We delivered the EPS we said, $0.37 excludes the affects of the preferred dividend, $0.36 including the affects of the preferred dividend in line exactly with the way Jeff laid it out in December. Our returns were at 14.8%. We finished the year with margins down a point consistent with the way we operated all year. The industrial cash flow finished the year strong as I said $16.7 billion up 5%.

I’ll start with a summary of the fourth quarter. On the left side a summary of continuing operations, revenues of $46.2 billion down 5%. In total you can see the mix is driven by growth in the industrial sales up 7% and continued declines in the financial services revenue with actions we’re taking to refocus GECS. We earned $3.8 billion in net income which was down 44%. For earnings per share we earned $0.36 right in line with our December forecast. That includes the $1.5 billion of after tax restructuring and other charges that we took in the fourth quarter.

Total cash flow from operating activities was $19.1 billion and industrial cash flow is $16.7 billion up 5%. I’ll cover more on the cash in a few pages.

On the bottom left are our tax rates for the quarter and the year. I’ll cover a full page on tax rates with my next charge but let me describe the summary here. First, the tax rate came in exactly as we expected in December. The consolidated rate for the quarter is -56% and that rate arise from a large tax benefit which is a credit on significantly reduced pre-tax income for the quarter. You can see its all driven by GE Capital with the industrial rate at 25% for the year.

The consolidated lower pre-tax income includes the impact in GE Capital higher loss provisions, impairments and also the restructuring that we did in the fourth quarter. For GE Capital the rates a positive because we’re dividing that tax benefit, or credit, into negative pre-tax income resulting in a favorable rate. One key point here is that our industrial earnings enabled us to use these GE Capital tax losses. That’s one of the benefits of having the financial and the industrial company together. I’ll cover the size of the fourth quarter impact on the next page about taxes.

On the right side you can see the business results. I’ll cover business by business in a few pages but you can see our industrial business ex C&I were up 3% in the quarter in line with our 0% to 5% forecast in December. That was driven by the double-digit growth in energy. GE Capital Finance earned a little over $1 billion in line with the December guidance. Overall the segment profit was down 25% and the difference between segment profit and the total results reflect the restructuring which is about $850 million after tax year over year higher in the fourth quarter that drives you down to the total net income.

Next is more information on taxes, specifically for GE Capital. On the left side is a tax walk going from the fourth quarter of ’07 to the fourth quarter of ’08. The fourth quarter ’07 rate was about 1% in GECS and that’s the $30 million impact that’s listed on the left bar. To compare to the fourth quarter of ’08 as you walk across we had three categories that impacted the tax.

We had higher losses and impairments of about $2.6 billion which generated a $900 million tax benefit. We had restructuring and lower income like less US real estate gains which reduced high tax jurisdiction income by about $2.3 billion. That also created a tax benefit that was about $800 million. Third, we made an election in the fourth quarter to permanently reinvest about $1 billion of prior year overseas lower tax earnings. That resulted in about $400 million of one-time benefits. In total for the quarter that’s a $2.1 billion benefit.

On the right side it’s the framework of how you think about capital taxes for 2009. I tried to list the biggest drivers. First, we’ll have higher loss provisions in ’09 and I’ll cover a lot about losses in a few pages. That would lower the tax rate. Second, the plan does include less restructuring so that will raise the tax rate. Finally, the plan includes lower global benefits and lower one-time items which will also raise the rate. In 2009 the GE Capital tax framework does anticipate that we’re going to have less one time benefits than we had in 2008. It does anticipate a higher tax rate but it’s still a negative rate as I talked about in December.

Next is a summary of the restructuring and the other charges that we took in the fourth quarter. On the bottom half of the page are the restructuring loss provision charges that we talked about in December. We said we’re going to evaluate $1 to $1.4 billion. Jeff said we’d be at the high end of the rate. We came in at $1.5 billion. As I said, in the middle we funded $1 billion of after tax charged to take costs out of the company. We’re completing projects with a little over one year paybacks and we’re reducing our cost structure in every single business as you can see listed here.

We’ve also funded incremental reserve provision in GE Capital. To talk about reserves for a second, you can see we added an extra $0.5 billion. Our reserves are primarily calculated based on statistical models. We use historical losses, historical recoveries, we use delinquency data and as we saw an up tick in delinquencies in the fourth quarter we took a comprehensive look at all our reserve models.

These charges that we added here reflect updates to get the most recent loss experience, to get changes in recovery experience and to get updates on loss severity assumptions. It was about $300 million in the consumer business and about $200 million in commercial.

On top of the restructuring and reserves and other charges we also had marks and impairments in the quarter. You can see we had about $700 million after tax and we’ve listed the categories here. About $500 million of these were in GE Capital services and about $200 million were in our industrial business. On top of the $1.5 billion restructuring we also had about $700 million in marks and impairments that reduced our income in the fourth quarter. We had a lot of charges in the quarter and the $1.5 billion really helped to position us for a better 2009.

For all of 2008 we recorded $1.5 billion of after tax restructuring and other charges. This excludes the fourth quarter loss provisions in GE Capital but it does include restructuring that we did throughout 2008 in addition to what we did in the fourth quarter. We had about $0.5 billion throughout the year that also will help reduce our cost structure for 2009. Those actions that we did on reducing our workforce and simplifying our organization and reducing the number of layers they’re going to deliver about $1 billion of benefit in 2009 from the cost out activity.

In addition, we also exited a substantial amount of non-strategic assets during 2008. We exited our corporate card business, our partnership marketing group business, the Japanese consumer finance business and we also executed the consumer asset swap with Santander. Overall we exited $14 billion of assets in 2008 and we completed the Santander swap already in the first two weeks of 2009 for another $8 billion. So, $23 billion of reduction in assets from these business exits and we’ll get ongoing benefits from not having most of these operations in 2009 and beyond.

I think both the cost out restructuring and the business exits that we were able to accomplish help us to prepare for this tough environment that we’re dealing with.

The next section is really talking about liquidity and cash plan and giving an update where we are in funding the company and with cash flow. Let me start with liquidity. First, we beat our commercial paper reduction target. We ended the year at $72 billion, that’s down $29 billion in 2008 and down $16 billion in the fourth quarter alone.

The CP market is in better shape. We have strong demand, rates are very low. Our backup lines plus our cash exceed our CEP balances. We haven’t used the CPFF since it opened in November. We’ve had a very good response in the marketplace from commercial paper. We’re going to continue that reduction in 2009, our targets to get down to $50 billion by the end of the year and we have every ability to do that with our plan that we’re executing.

The second thing we did was we demonstrated our ability to manage our originations and collections. Our teams reduced our ending net investment by $22 billion on top of the changes that are coming from foreign exchange so that’s actual business reductions. We still originated $48 billion in new book volume in the fourth quarter.

A good job of managing collections and originations to help us to get to the size we need to be to meet our leverage targets I’ll cover on the next page. We also closed the year with $36 billion of cash in GE Capital and that was up from $13 billion at the end of the third quarter.

The third thing on liquidity that I think is really important is we were successful at growing our retail funding sources. CDs and deposits were up $25 billion in 2008 consistent with our December target. We’re really in great shape here on liquidity and ahead of schedule with the GE Capital actions.

In addition to liquidity we also lowered our leverage and we substantially pre-funded 2009. We ended 2008 with 7:1 leverage in GECC. We did infuse $5.5 billion of equity from GE in December and that offset the leverage impact we saw in equity in GE Capital from the strong dollar reducing our equity as we translated our overseas investments. That was offset by the ENI reduction I showed you on the previous page and the equity infusion that we put and got us to the 7:1 leverage which was our commitment.

On the right side we’ve already issued $29 billion of long-term debt in GE Capital against our plan for the year $45 billion so we’ve completed 64% of our 2009 needs. That puts us in an excellent position as we think about the rest of the funding we need for the rest of 2009, very strong shape.

There’s total cash, if you look at GE in the fourth quarter year to date we had $19.1 billion of CFOA. That’s down because we didn’t have any special dividends from insurance dispositions in 2008 and we had some in 2007. We also lowered the GE Capital dividend to 10% in the second half of the year. Industrial cash flow was up 5% for all of 2008 and was about $700 million higher in the fourth quarter than in our plan.

On the right side in the cash balance walk we started the year with $6.7 billion we added the cash flow from the left side. We paid our dividends $12.4 billion in 2008. We did the equity issuance and out of that equity issuance we contributed $5.5 billion down to GECS. In the first half of the year we had some stock buyback about $3.2 billion so that’s the $8.7 billion reduction. We had $3 billion for plant & equipment and software investment. We closed a few acquisitions and debt was down slightly.

We ended the year with $12.1 billion of cash at GE. If you add the GECS cash of $36 billion the consolidated cash balance is $48 billion at the end of the year versus $16 billion at the end of third quarter. A tremendously safer and more secure liquidity position and we feel great about where we are here.

The next section is talking about the GE Capital results and also the position and the framework for 2009. I’d like to start with the page that we had in prior pitches. We used this in December to talk about GE Capital Finance. We said we’d make about $9 billion, we made $8.6 billion. We have a plan and a framework to make about $5 billion in 2009. I’ll show you how we’re going to do that.

Our focus is threefold. First, we want to manage through this incredibly challenging financial cycle in a safe and responsible way. I’ve covered what we’ve accomplished on funding and I’ll give you an update on the credit cycle in a few pages. Second, we’re repositioning GE Capital. Jeff said we’re talking about changing strategically where we’re going to be smaller more focused diversified funding core finance company. I’m going to cover the numbers for that on the next couple of pages.

Our third focus is to continue to support our customers through new origination we did $48 billion in the fourth quarter. Our plan is for $150 to $200 billion in ’09 and we’re continuing to focus on the mid-market, the verticals, and the consumer lending. A challenging year but strong relative performance and let me go through the details.

First are the numbers for fourth quarter for Capital Finance. Mike Neal and his team delivered what we outlined in December. Revenues of $14.8 billion were down 17%. Segment profit of $1 billion was down 67%. Assets in GE Capital Finance were down 2%. The separate business results are on the bottom left, overall a really tough quarter in a very tough environment.

First let me start with GE Money. Assets at $185 billion were down 12% year over year driven most by foreign exchange. They were down 3% from the third quarter as new volume declined in all the products as we’ve tightened underwriting globally everywhere. Net income of $832 million was down 14% driven by the higher reserve provisions that we took mostly in the Americas, $660 million. Also we didn’t have a repeat of a gain we had in ’07 about $150 million from sales of Durante shares. Both of those items were offset by the one time tax benefit which I mentioned earlier most of that showed up in GE Money.

Next is real estate, assets of $85 billion were up 8% year over year as we invested in the debt portfolio early in the year. Debt as a percent of total assets is up to 57% of the portfolio but the assets were down 4% from the third quarter was we’ve dramatically tightened up underwriting on everything obviously to do with real estate. The business reported a $60 million loss in the quarter that was down over $660 million from last year and it was mainly driven by fewer gains in the quarter.

We did sell $1 billion of properties in the fourth quarter for a positive gain but that was about $400 million less than we realized last year in gains. In addition we had about $200 million of impairments and marks in the business. The portfolio is still in good shape. We have a 1% delinquency rate and while the equity gains are down we fully expect to more than recover investment over asset hold periods. I’ll cover more on real estate in a few pages.

Next is Commercial Lending and Leasing. You can see we also split out Capital Solutions. We had a really tough quarter in our Corporate Lending business. This is where we were hardest hit by the turmoil that we’re seeing in the financial markets. We had an earnings decline of over $400 million from the mark to markets in equity securities. The largest was Genpac from $96 million. We had almost $400 million in incremental loss provisions that we put into the business in the quarter and we had lower gains of about $150 million.

Finally, the verticals they had a solid performance in the fourth quarter. GECAS was down 5% that’s from a one-time tax charge of about $25 million but the portfolio quality remains in great shape. We ended the year with one aircraft on the ground and almost no delinquencies. Energy financial services had another great quarter with earnings up 24%, overall a tough quarter given the neighborhood and in line with our expectations.

Let me go through a little bit about the portfolio quality and credit losses and reserves on the next couple of pages. First is delinquency and non-earnings assets on the left side are the commercial data. We saw an increase in the commercial delinquencies and non-earnings in the fourth quarter. We’re seeing pressure across most of the portfolio. We’re up 56 basis points from third quarter on the delinquency rate. Capital Solutions drove most of that that was 38 basis points of the increase. Healthcare Financial Services had some of the increase.

We also saw an increase in non-earnings. Non-earnings were up 37 basis points up almost $700 million versus third quarter and it’s driven by senior secured loans. We do expect significant recovery. This is where our senior secured positions are so important. In the quarter we had nine accounts that were greater than $30 million that was all the rest of the non-earnings that went in were less than $30 million.

That represented about $450 million of exposure but our expected loss is less than $60 million. On the accounts that went into non-earning were senior secured, that’s about a 13% net exposure but our overall commercial reserves to non-earnings is 53%. I think we’re going to see non-earnings; we’re going to see delinquencies rise. The senior secured position diversification is so important.

On the right side is the consumer data. We continue to see deterioration in the consumer portfolio during the quarter in both the mortgage and the non-mortgage books. I thought it’d be better to break out mortgage and non-mortgage because the loss dynamics are so different. The two biggest pressure points we have on both delinquency which is on the left size and the right side is non-earnings are in North American consumer business and UK home lending. I tried to break that out down on the bottom.

Total delinquencies for the consumer business were 108 basis points versus the third quarter. The North American business accounts for 64 basis points of that increase and the UK accounts for about 29 basis points. Total non-earners were up 62 basis points and again North America accounted for 17 of that and UK accounted for 28 basis points of that increase. We are also being impacted by lower volume as we have less volume going in. We don’t’ have new accounts going in that are current and you end up with a higher percentage just by the math.

The mortgage loss rates are rising but they really remain low. Our non-mortgage book has low non-earnings 1.76% you can see that. Despite the mortgage non-earnings at 5.57% the mortgage loss rates are low. Fourth quarter write offs were $109 million, 0.67% of the financing receivables. Our current portfolio loan to value is at 76%. We underwrote in the businesses where we have less than prime business with mortgage insurance at everything over 80% loan to value. We also have the insurance coverage.

UK where we have our biggest book you can see that the reposition stock was flat versus the third quarter ’08. That’s about a little less than 1,000 houses that we’ve repossessed. Despite the business being our biggest portfolio it’s really a small number of properties that we actually get to repossession with because of the way we’ve underwritten the credit and because of the mortgage insurance. Overall we expect both the commercial and the consumer delinquencies to continue to get worse in 2009 but we’re well reserved for this. I’ll cover that on the next page.

Here’s an update from the December 2 meeting. We showed you our credit losses and our reserves. We updated for the fourth quarter actuals here and we’ve given you our current view of 2009. On the top are credit losses. In the fourth quarter the losses came in higher, our provision. It was driven by write offs and reserves strengthening.

We incurred $7.5 billion for the total year. We’ve increased our forecast for 2009 from what was previously $9 billion up to $10 billion. We also increased the reserves in the quarter by $700 billion and by $1.1 billion for the year while having write offs up $2 billion. We’ve done a lot of strengthening in this portfolio.

The reserves ended at $5.3 billion in line with our forecast adjusting for the impact of FX and some of the business exits we did in the fourth quarter. As I mentioned, our US consumer and UK mortgage businesses are the pressure points. On the top right are some of the stats about that. If you look at the US Card & Sales Finance our US consumer business we increased reserves by $0.5 billion in the fourth quarter.

For the year that took us up to about $1.3 billion which allowed us to have the coverage rate up 178 basis points to 6.15% of financing receivables. That is a really good reserve for this book. Reserves to non-earnings are covered 2.25 times. We’ve really increased reserves in North America reflecting the delinquencies. Our changes in underwriting we can see a benefit on new accounts rolling into delinquency but we’re still seeing a lot of pressure on the consumer and the US book obviously.

On the mortgage book we increased our coverage rate of 56% to 0.64%. We really have significantly less losses here being a senior secured lender with insurance. The reserves to non-earnings are about 11.5% and our average loan to value across the entire portfolio is at 76% now. When you look I think we’ve dramatically increased our provisions. We’ve also upped our loss estimates for 2009 based on the environment we see. This is a tougher loss environment that we’re planning for than we showed you on December 2.

If you look at the next page I thought I’d be helpful to go back to the GE capital framework we discussed in December and on the right side I’ll talk about some of the trends in the businesses and how you think about 2009 which is everyone’s question.

At this time we don’t have any changes to the overall framework on the left side but I do what to share some movement within the ranges and give you can update. We ended the year with $8.6 billion of earnings in Capital Finance. We don’t really have any change to the range for what we think is going to happen between the asset declines and changes in the portfolio, still $0.0 to $1 billion down. We don’t have any change in our estimates of gains. We’re going to be down $1.4 to $1.8 billion.

For losses we ended the year, as I said, with higher losses in reserves. We are planning for a slightly higher loss experience around $10 billion versus the $9 billion. That would take you close to the middle of this range. On SG&A we see more up side in the cost actions that we launched so we expect at least to be at the high end of the range on SG&A and possibly better. That will accelerate through the year. Finally on tax benefits they will be down in 2009 but probably near the lower half of the range based on our 2008 close still down significantly though versus 2008.

All in all a more conservative loss assumption for ’09 offset by SG&A and a little bit of tax. This is what the teams are operating to.

On the right side, when you look at the major segments of GE Capital it would be helpful to just give you some of the dynamics. I’ll start with real estate. We continue to increase our debt mix versus equity but were conservatively planning the real estate team at break even to a potential loss of $0.0 to $0.5 billion loss. That’s driven by a lower gain assumption especially in the first half and some increased impairments.

You can see we’ve moved from an embedded gain last year at the end of the year in the 10-K we reported about $3 billion and this year when we do the 10-K we’re expected to report an embedded loss of somewhere around $4 billion pre-tax. Within that we did sell $2 billion of gains in 2008 and then the rest is the change in the market dynamics. Selling those properties and realizing those gains is a pretty good performance in this market.

Another thing I wanted to talk about when you think about the $4 billion of embedded losses in real estate we are an operator of these assets. We have the ability to hold for the long term. The assets from an accounting perspective are carried at historical costs. We test them for impairment under FAS144 impairment for long live assets, it’s reviewed every single quarter, but they are not mark to market. We’re not a trading RE. If you look at this equity book we have here we generate about $1.7 billion in net operating income from these properties.

We also record depreciation annually on the properties we own that lower our basis about $1.2 billion per year. We originated these properties to hold them. We put them on our balance sheet. We work on value creation, lease up, and property improvements, manage the property over time. We’ll hold these properties for five years or more. I think the portfolio is in pretty good shape.

Low delinquency, the market conditions are what they are but we’ve underwritten these with good quality underwriting and we like the supply and demand characteristics of the markets we’ve invested in and we’re prepared to hold these properties through this cycle.

GE Money we’re expecting higher losses. You can surely see that in the consumer business for the first and second quarters at least. We’re going to continue to shrink the book at we remix the commercial. We expect them to be down in ’09 versus ’08. For commercial loans and leases we expect another challenging year with the loss pressure that we’re seeing being offset by the SG&A actions were really dramatically impacting the cost structure here globally. We do have a good market position. All the new underwriting we’re doing is extremely improved margins.

For the verticals we’re really well positioned on GCAS. All of our placements for 2009 are committed and solid and EFS also looks like it’s prepared for another strong year so they should be a positive contributor. We’re planning on a tough year in a tough environment. The team is operating within the $5 billion framework for 2009 and that’s what they know they have to execute on.

Let me switch now and go to Infrastructure and Media. I’ll start with the orders. In the quarter we feel very good about this. On the left side is major equipment. For the quarter we had orders of $13.4 billion that was down 11%. You can see that energy was flat, the thermal business was up 1%, and wind was up 5%. Oil and gas was down 19%, down 9% when you adjust for FX given the global nature of their business and we did see some push outs in the oil and gas business.

Healthcare you can see was down 6%, life sciences was up strong, surgery was up favorably obviously with the OEC orders and shipments and DI was down 14%. Aviation had some tougher comparisons. Last year the fourth quarter was up 66% but even with the orders down 26% that still allowed them to grow their backlog at a high absolute level order was more than the sales.

For transportation you can see equipment orders were down 48% in the quarter and 59% for the year. We do anticipate fewer locomotive deliveries in the ’09 framework and I’ll cover the ’09 framework for all these businesses in a few pages. If you look in total for the year we had $54 billion of equipment orders. We ended the year with $51 billion backlog that was up 6%. We continue to see pretty strong global activity out there. I’ll cover some more on the orders as I go through the different businesses.

On the right side are services. In the quarter we had $9.8 billion of orders that was up 2%. Energy was flat; we had strong orders in Power Gen offset by a non-repeat of some nuclear fuel order which are always impact from a timing perspective. They come in, they’re large and lumpy. Oil and gas was up 2%, very good upgrade position. The short cycle was down slightly in the oil and gas business. Aviation had a very good quarter up 9% both in military and commercial. The spare order rate was $21.9 million a day up 6% over last year.

If you look at the total service orders for the year, $37 billion it’s a fantastic business. We ended 2008 with $121 billion in customized service agreements backlog that was up 11%. The total orders for the quarter at $22.8 billion down 6% but total order for the year were $89.8 billion up 5% and we grew the backlog in total including equipment service by $15 billion in 2008. There’s still an awful lot of economic activity out there in the infrastructure businesses.

I’ll start from a business perspective with the Energy Infrastructure team. Revenues of $11.4 billion were up 21%. We had $2 billion of segment profit up 11%. Let me start with the energy business. The orders in energy as I said were flat at $8.7 billion but that’s a strong absolute level of orders. For the fourth quarter the equipment orders in that number were $5 billion and they were flat.

We received orders for 70 gas turbines in the fourth quarter which is a good absolute order number. Only six gas turbines are about $200 million of the 55-unit rack order that we announced in December, the $3 billion orders including this number so we still have another $2.8 billion from that order that will come in. What we require is we need a signed contract; we need non-refundable cash before we’d include it in orders. We’ve announced that we have the agreement but it hasn’t flowed into these order numbers yet so that’s still another indicator of the economic activity that’s out there.

Wind orders were up 5% in the quarter to $4 billion a little over 930 turbines versus about 900 last year. Aero orders were up 86% to about $700 million. The offset to all those is that nuclear orders were down about 90% to $18 million so not a lot of activity there on the equipment side. Fourth quarter service orders were flat. Energy services were up 9% offset by the nuclear services which were down about 55% due to fuel reload timing.

Total backlog at $24 billion was up 14% and order pricing was up 5.5% so very strong continued order activity for the energy business. Revenues in the quarter were very strong up 29% driven by the growth in power generation that was up 48%. The service revenues were up 3%. The thermal business had a great quarter the revenues up 76% on strong volume we had 2 more gas turbines, five more team turbines, 17 more generators. Then there was a little more balance of plan which is more third party supply material at lower margins but a lot of revenue.

Wind was up 29% on more units. They had 988 units in the quarter up 168 units. The service revenues were up 3% as I said; facing tougher comparisons versus last year’s business had big orders in transactional parts and big revenue.

For energy the op profit was up 15%. That was driven by all that strong volume that I just covered in power generation, partially offset by some lower services op profit that was down about 10% in the quarter. We had higher inflation in the F-Fleet overhaul costs. Energy also had a $30 million drag from net terminations in the nuclear and wind business. Negatives in the nuclear and a few positives in wind and aero.

The next business, oil, and gas, they had another strong quarter and they had a great year. Total orders of $1.9 billion were down 11%. As I said, we saw some impact from lower prices in the economy. We did have about $275 million of cancellations in the oil and gas business but that didn’t have any impact on operations, the net position we had in cash offset any exposure we had. We also were impacted by the strength of the dollar ex FX even including cancellations orders were flat.

Revenues were down 4%, equipment was down 13%, and services were up 14%. Impacted by FX the strong dollar revenues were up 6% on local currency basis. The positive, equipment service mix in the oil and gas business resulted in the great op profit performance with growth of 22%. Double-digit growth in the energy business and continued great global economic activity for us.

Next is Tech Infrastructure, revenues at $12.6 billion were up 1%. Segment profit at $2.5 billion was also up 1%. You can see the business results again on the bottom left. Let me cover a few highlights of each of the businesses. In aviation very good quarter, orders in the quarter were $5.3 billion that was down 12% that’s what you’d expect with the airframer backlog sold out into 2011 or 2012. We knew we were going to have tougher engine comparisons versus some of the orders we had last year.

The fourth quarter commercial engine orders were $1.5 billion so we’ve still got a lot of activity even though that’s down about 40%. Military orders were pretty strong they were only down 4% and service orders were up 9%. Even with the tough comparison we grew our equipment backlog. Year over year the equipment backlog was up 9%.

Revenues of $5.2 billion were up 2% that was driven by higher military shipments up 78% partially offset by fewer commercial engines which were down 14% and the commercial services revenues were up 4% and that delivered op profit of $1.2 billion up 21% driven by pricing ahead of inflation and good service productivity.

Healthcare, revenues were down 3% and segment profit was down 9%. This is the final quarter I’m happy to say, impacted by last year’s revenue recognition adjustment. Without that impact segment profit as you can see with the footnote we’ve got on the chart would have been up about 8%. Orders in healthcare were down 4%. Equipment was down 6% and services were up 1%. We continue to see pressure in the DI business. DI was down 14% driven by more pressure in the US, orders were down about a little under 30% and international was up 8% in local currency.

In the quarter, revenue was down 3%. We had some growth in life sciences that was up 13%. We had good growth in surgery from the OEC business shipping. We had 1% growth in services and that was offset by DI which was down 2%. Clinical systems was down 9% and medical diagnostics was down 6%. A mixed picture in healthcare, op profit down 9% driven by the negative price versus inflation and last year’s revenue recognition adjustment.

In the Transportation business here in the tech infrastructure revenues of $1.4 billion were up 20%. We had a lot of international locomotive volume. We had growth in our wind gearbox units. That was partially offset by fewer North American locomotives. Op profit was down 16% because of the cost impact to developing this North American locomotive. We’ve got a new platform and we also had higher commodity costs that impacted the business. For the year the transportation op profit was up about 3%.

A mixed environment in Tech Infrastructure but exactly what we said we were going to see when we met with you in December.

Next is NBC. NBC the team delivered the results in line with the expectations. In the fourth quarter revenues of $4.4 billion were down 3% and segment profit was down 6%. It’s a little tougher profile than most of 2008. We had continued strong performance cable that was more than offset by the pressure we’re seeing local markets.

Cable had another great quarter. Revenues were up 11%, op profit was up 22%. It’s strong everywhere, USA continues its number one streak. Bravo, SciFi and USA were all up double digits. MSNBC had a tremendous quarter up 37% with great coverage of politics in the quarter and CNBC was up 14% and is doing a fantastic job in business news.

The next category is broadcast which if you look at the network and our TV production operation they had a strong quarter with positive profit growth but local media had a tough quarter. Revenues down 25% and operating profit was down 55% driven by the economy and you’re seeing that in local advertising. The TV studio partially offset that. They continue perform, we’re getting a lot of good revenue and margins from owned content like House and Heros and 30 Rock and NBC News continued to have a great quarter, strong number one with Meet the Press, Today and Nightly News.

We’re excited about the change in broadcast model with the agreement to have Jay Leno go on at 10:00pm and that will start in the next season which will be after September. Overall op profit for the broadcast was down about 50% driven by the local performance.

On the right side, Film & Parks had a mixed quarter. Op profit was down about 7%. We did have six new releases in the fourth quarter versus four in ’07 so that advertising and promotion drag with the new releases hurt us a little bit year over year. That was partially offset by very strong DVD sales up 20% from hits like Mamma Mia.

We’ve had a pretty good quarter overall in the content quality. We’ve got some good Oscar nominations from the team at Universal and we congratulate them on that. The parks had a mixed performance. Per cap spending was pretty strong, attendance was mixed. We were up 4% in California, down 4% in Orlando which is pretty good given the environment that we’re seeing.

On Digital and cost and other, hulu continues to perform, get great recognition and good growth. We continue to take a lot of actions here to reduce costs; the team will continue to do that. In the fourth quarter we reached an insurance settlement for the final settlement on the impact of the fire that we had in Hollywood. That benefit of about $225 million was offset by $215 million of write-downs on some of our investments in NBC like Shop NBC and our investment in ION. A solid performance in a tough environment.

I want to cover a couple of charts about the Industrial business model. I think it’s relevant in this environment and it reinforces the message that we gave in December. There are really five factors that Jeff outlined in December that position us to outperform in a tough environment.

First is our position in infrastructure. We start 2009 with a $51 billion equipment backlog. We’re incredibly well positioned to be a part of the global stimulus and that entire world is putting stimulus packages together and we’re going to be aggressively pursuing things that we can help governments create jobs and improve their economic activity and also improve their infrastructure. We’re well positioned there. Certainly from a clean environment and renewable energy perspective and healthcare we’ve got a great position.

Second, global diversity. We ended 2008 with 53% of our industrial revenues outside the US. Despite the slowdown there are pockets of global growth. You can see it that we continue to benefit from large orders in the middle east. I mentioned the Iraq orders. We also had in the fourth quarter $1 billion order in Saudi Arabia. Healthcare in China in the fourth quarter was up 33%. As Jeff said, they were enacting stimulus. Our global position really enables us to take advantage of market activity anywhere that’s available in the world.

Third, our terrific service position. We benefit from a huge install base. In a tough environment customers tend to extend their asset lives and that’s good for our services business. At $9 billion of services in the fourth quarter with high margins and that continues to grow. We’ve got a great customized service agreement backlog that gives us a long lasting relationship with our customer in an environment like this that’s really important.

Fourth, value gap margin. We expect to drive pricing in excess of inflation in 2009. We’ve got a positive tail wind developing in inflation. Our equipment services mix is also going to turn positive in 2009. I think we’ve got a lot of factors here on this page. The fifth point is cost control which I’m going to cover on the next page.

Jeff mentioned how we’re operating the company. We’ve got an intense focus on costs with the operating council and our focus at the GE Capital Board. On the operations side for industrial the entire global sourcing team energized to get material deflation. We expect our direct material to be down a couple billion dollars this year. We’re seeing that across the board as commodity prices have come down and as the environment has gotten tougher.

Every single team in this company has a headcount base cost target. The restructuring that we funded in the fourth quarter really helped us to get going on these actions. They will help us to deliver about $1 billion of incremental benefit year over year in ’09. In addition, that’s a big part of how we get our base costs down from $44 to $41 billion.

Every team in the company has a program to reduce indirect costs. That’s a part and the indirect is a subset of the base cost but we’re expecting sourcing deflation of around 7% and in many places better than that. As we reduce our headcount from the cost actions that also helps to reduce our indirect cost spending. The connection between employment and indirect are direct. We’re really taking aggressive cost actions across the company.

With that let me go back to the framework for ’09. I thought I’d recap on the 2009 operating framework. This is what we gave you in December. I have a few comments to make about it. Revenues we said would be flat to down 5%. You can see that we’ve got industrial growth and continued financial services shrinkage that hasn’t changed.

For the industrial segments we expect the segment profit to be up 0% to 5%. We have many strengths that I just went through the five points including our great backlog, our position in infrastructure, our service business, our focus on costs and even with the tough economy and the financial crisis we should be able to deliver this.

I thought I’d give you some of the unit assumptions that we have in our framework maybe to help you model. For energy in ’08 we had about 188 gas turbines, in ’09 we’re expecting to be about flat with that somewhere around 185. For wind we had about 3,240 turbines in ’08, we expect that in the framework we have that at about 2,800 turbines that’s down about 14%. In transportation we had 861 locomotives in the year in ’09 in our framework we’re counting on about 600.

In aviation we had about 2,156 commercial engine deliveries in ’08. That actually in the current rollup and the framework is 2,200 engines based on the airframer production schedule and our share. On the military side we had about 746 engines and we’re counting on about 925 which are contracted with the government. That gives you a little bit of help on how you think about 0% to 5% and what we’re thinking about on these long cycle infrastructure businesses.

On Capital Finance we said we’ve have about $5 billion. I went through the operating performance factors; the team is totally focused on it. We know it’s a tough environment and we’ve got a lot of execution to hit that. We’ve given you the framework on how we’re thinking about it.

Finally on corporate cost and C&I that’s going to be flat. We’re going to have less restructuring. We’re going to have a little higher pension costs. One update on pension, if you look at the cloud on the right side there our US principal pension plan the assets were down 28%. We were impacted by asset recurrences just like everyone else was. Last year with assets down 28% we ended the year with about $1 billion deficit in principal US plan. There are no funding requirements for ’09. The funding requirements are a little different than just the difference between you book assets and liabilities.

On the funding requirement calculations were 109% over funded at the end of the year and we don’t anticipate that you’d have any funding in ’09. We’ll have to see what happens with discount rates and asset returns in 2009 and 2010 to see a little further out. The 2009 expense will be up slightly from ’08 as we showed you about $300 million versus $200 million. Not a big impact there.

Overall no change to the framework for 2009 from December. I thought it would be good to give you a few of the updates on where we were and let turn it back to Jeff.

Jeff Immelt

I want to recap on capital allocation and want to spend some time dwelling on something that’s received a lot of attention and speculation. We’re planning for a really tough environment. The recession is tough, financial services crisis is worse. We had 12 financial service companies downgrade in the fourth quarter, GE put on negative outlook by S&P. We’re prepared for a really tough environment.

What I would say is that we really have prepared the company to perform in this environment. We hit or beat every cash and liquidity commitment since the crisis began. Our industrial CFOA is very strong at $16.7 billion versus $16 billion plan. We generated $5.3 billion of industrial cash flow in Q4. We end the year with very strong positions in cash, CP reductions ahead of plan, 64% of the debt is pre-funded, and leverage is down to 7:1.

From a capital liquidity cash flow standpoint I think we’re in great shape. Our management attention is very focused. The operating council, the GECS drives results. The GE capital team has really done a great job of executing and responding to this environment. We’ve increased the cadence of our meetings. We’ve aligned compensation around cash. I think the team is very focused and engaged. The plan is realistic. I think we adjusted in line with the environment. We’re reflecting the environment. We’re increased loss reserves and I feel very confident that we fully reflected what we expect in this environment.

The key thing is to maintain our discipline. We believe that the dividend represents a good shareholder return in this environment and we continue to run the company to the triple A. We have a lot of cash, we’re improved the liquidity, our priorities remain the same. I think we’ve really reflected a balanced plan in GE Capital. Our priorities for 2009 are just in line with our December outlook which is to grow the company organically, maintain the GE dividend, and execute on our financial services plan that we’ve outlined at the December 2 meeting.

To summarize, I think we’ve completed 2008 in line with the December meeting. We’ve earned $18 billion the GE Capital business earned $8.6 billion and capital finance infrastructure and media were at 3% in line with expectations. We executed on liquidity and cash plan that we’ve outlined, very significantly and have executed and preformed really across the board. We’ve reduced the ending net investment by $46 billion in Q3 and 64% of our ’09 debt funding levels are completed.

We’re not changing the 2009 financial framework in terms of how we look at the company and how we’re running it, we’re running the company with intensity. We’ve got shorter cycle processes, we’ve diversified revenue streams, we’ve increased cash flow, we’re changing the financial service business model, we’ve aggressively lowered costs, and we’re positioned for stimulus.

We believe that the company is positioned for a very tough environment and set to perform.

Trevor let me turn it back to you.

Trevor Schauenberg

We’d like to turn it over to the Q&A now.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Inch - Merrill Lynch

John Inch - Merrill Lynch

If we look at capital it strikes me that perhaps one of the biggest sources of pressure within the markets would be the equity portion of you real estate book. I understand your comments vis-à-vis accrual accounting and how you book that stuff. Then you do have this embedded loss. Where I’m coming from is given what’s happened with commercial real estate markets and the pressure these industries are under could you describe how we should be thinking about prospective losses or write downs in that business looking ahead. How long can you hold these levels without having to take a much bigger hit?

Keith Sherin

The thing that you have to recognize is the way I described it this morning. We invest in these properties to hold them for the long term. We don’t mark them to market. We do have the ability to run them. We collect operating income from the tenants. We invest and improve the properties. Our whole period on this equity book is going to be five plus years. We’ve underwritten every single property from a supply and demand characteristic to make sure that we’ve got a high quality asset in a place that’s going to have good supply and demand characteristics.

In the short term if you have to deal with the rent decrease or a vacancy issue we can weather that. We include that in our assumptions. We use third party data for our rent growth assumptions. We look at our occupancy based on the market and our actuals. We inflate our expense growth in our forecast. We use sales comps for cap rates. We use third party data. The discount rates are set by third parties. I think we’re really very diligent on how we look at what the value of the properties are going to be, what’s the long term prospect for the property with rent growth and inflation and cap rates.

We have the ability to hold these. I think you’re going to see continued pressure in the commercial real estate market obviously from the impact of unemployment and the general economy and we forecast that into how we’ve looked at what this book is going to be. I think you can see further declines from an actual fair value mark to market versus this book but we have the ability to hold these properties for the long term and we intend to do that. When we put the plan together for ’09 we were expecting $0 to $500 million loss for real estate.

Included in that we’re going to make $500, $600, and $700 million from the debt portfolio. We’ll lose a similar amount on the equity portfolio in total because we have operating income but that’s offset by carrying costs in this depreciation which lowers the basis. It’s important that we’re lowering the basis every year by $1.2 billion. Overall we’ll probably have a couple hundred million of impairments is the way we looked at 2009. Not a big number and its based on the current market, our estimates of what the future will look like based on our best assumptions for 2009 and 2010 and beyond.

We’re prepared to weather the storm. It’s not too dissimilar if you look after 9-11 with GCAS. 9-11 with GCAS we had a lot of airlines under stress but we have good assets. The airplanes have a lot of value and we had the ability to weather that storm and as you look at what we’ve been able to do since 9-11 we’ve been able to not only recover those asset values but we’ve been able to put the whole business back into position where we had substantial gains. That’s what we are, a long term investor. We’re a buy and hold investor, we fix up the properties and we have the ability in the balance sheet to weather this temporary storm in commercial real estate even if its going to be a couple year period.

John Inch - Merrill Lynch

Given the higher provision of $1 billion, as you guys look at the world are you still sticking by your assertion you do not need to raise additional equity capital?

Jeff Immelt

I really look at the cash position in the company today and the strength of our cash flow and things like that. I can’t see a scenario in which we would have to raise additional equity capital. We’ve executed on all of the capital planning, liquidity planning, and cash flow strength. We have navigated this very well and we’ve got high levels of cash and liquidity right now.


Your next question comes from Nicole Parent - Credit Suisse

Nicole Parent - Credit Suisse

I’m trying to reconcile the 3% industrial organic growth that you guys are targeting for 2009 with the great color you gave us on the unit deliveries for ’09 and also the order numbers for the fourth quarter. Maybe elaborate on oil and gas you talked about a push out in the quarter, equipment orders down, service strong, transportation orders are up 50%, units forecast for 2009 is down 30% and with healthcare with diagnostic imaging down 30% help us think about how the components get you the kind of growth that you’re talking about.

Keith Sherin

I think you’re going to have to look the backlog, the orders in the fourth quarter don’t really reflect what we have as the backlog that’s shippable for 2009 although it does obviously indicate from the absolute high levels that we’ve been realizing these order a slowdown versus those. If you go business by business I think energy is really well positioned for a good year. I think we’ve got a very strong backlog on the power generation side. The wind side we’re forecasting and in the framework we have it down 14%

I think there’s quite a bit of stimulus that may help us to influence that whether it affects ’09 or ’10 we’ll have to see. A renewable portfolio standard as well as a change of the production tax credit to be actually a refund really does change the dynamics of the market for that business so I think they’re well positioned.

In oil and gas we’ve seen those push outs. We do have a very good backlog. The good news about the equipment we don’t make a lot of money on the equipment margin as we ship those units. It’s important to build the install base. The service business is growing nicely. In oil and gas it’s going to be a similar profile of fourth quarter where you have less equipment shipments but from a total growth you’re dealing with a lot better service margin and you have enough equipment shipment business to make sure you don’t have a cost problem in your business model.

From aviation I think we got pretty good unit forecast. We’ll have to see how the backlog holds when you look at will financing and will the capital markets sustain the total airframe production schedules that they have. We’ve tried to hedge back what we think might happen based on the financial markets but we have a tremendously strong backlog here from an equipment perspective based on the share we gain and the service business based on the install base growth feels pretty good.

We’ve taken in aviation, as you know we saw in the summer last year airlines globally announced about 1,500 planes that were going to come out. We’ve taken that into account in our forecasting both for what it means maybe for airlines taking new planes as well as for what it means in overhauls in the install base. With oil coming down to $40 a barrel that’s helped things actually. We’ve had less pressure than we actually thought we’d have by the fourth quarter last year. We were impacted about $200 million in the service business in all of ’08 from those push outs and we think a similar number is likely in ’09.

For healthcare it’s going to be a tough business. At the end of the day we’ve got to do a better job with costs. We’re taking a lot of costs out of the cost structure. We’ve got many product lines there, as you know, that will help us from an equipment perspective. We’ve got to do a better job with the surgery business and that’s up and running obviously and will give us some tailwind into 2009. We’re obviously watching that DI market.

The one other positive in there is going to be stimulus including things like in China where you’re getting a lot of local benefit to hopefully help the local healthcare markets. We’re seeing that globally. That’s one positive that we’ve got to watch in healthcare.

Transportation is going to be down there’s no question about it. You’re going to see lower North American locomotives. We’ve got a lot of global orders we’re chasing but they’re going to have to do a good job with service and they’re going to have to do a good job with the adjacencies like the wind turbine business which helps them because they do the gear boxes.

We’ve taken that all into account when you look at the framework of 0% to 5% for industrial. It’s going to be a tough equipment world there’s no question about it. The teams have built their plans for 2009 based on that environment.

Jeff Immelt

The service business is very strong. The backlog is very strong. That’s $8 billion in industrial for earnings right there. If you go back to the December meeting our orders are really in line with what we thought. We have very little sell and install that’s required for 2009 and very robust service backlogs. That’s the key to this year.

Nicole Parent - Credit Suisse

A follow up on real estate, I think you said you sold $1 billion at a profit could you give us a sense of what the dollar amount of that profit was and was it in line, better or worse that your expectations.

Keith Sherin

We sold about $1 billion of properties; we had about a $50 million net gain on those sales. It was in line with the expectation of a terrible market in the fourth quarter. It’s less than we wanted if you wanted to go back to the second quarter or third quarter but it was in line with what we thought we were going to get when we entered into the fourth quarter here in the environment that we saw.

Nicole Parent - Credit Suisse

On transportation, you mentioned you were investing in the international platform what was the dollar amount of that investment just so we can normalize an exit run rate for the full year.

Keith Sherin

About $40 million associated with the platform. We developed a locomotive for North Africa. We had an order for about 80 units in Egypt. We haven’t completed shipping all those units but it’s about $40 million of costs. We did get a follow in order for Libya for about 15 or 18 units. It’s a growth area for us and the investment we think will pay off.


Your next question comes from Jeff Sprague – Citi Investment Research

Jeff Sprague – Citi Investment Research

Can you walk us a little bit through what happened with equity? Sequentially the equity balance is down about $7.5 billion obviously despite a capital raise and net income that’s greater than the dividend. I’m sure some of its pension but its hard to put my arms around what’s going on there.

Keith Sherin

If you go from third quarter we had about $112 billion of equity. In the fourth quarter we ended the year with about $105 billion of equity. We had a little change in the unrealized loss on investments of about $800 million. We had a negative from the change in the value of cash flow hedged about $1 billion. Currency really hit us. The stronger dollar translating over half our assets in financial services overseas and US and the GE Industrial assets that are overseas hurt us about $7.5 billion.

Have about $14 billion from the benefit plans that’s mostly pension, the surplus. That went to a deficit we had $15 billion increase from the equity issuance and we have $4 billion increase from the earnings. We paid our dividends. At the end of the day the equity issuance that we did was kind of offset by the benefits plans then we had a decline in equity from foreign exchange.

Jeff Sprague – Citi Investment Research

The GE Capital walk slightly adjusted from the beginning point at $8.6 million but it appears that you’re losses, you’re now expecting a $2.5 million delta based on the $10 billion credit losses you’re talking about for ’09, but you didn’t change that loss headwind of $1.3 to $2 billion.

Keith Sherin

It’s probably a difference between pre-tax and after tax. If you look at the reserve levels and the credit loss provision its pre-tax and the net income walk on GECS the $8.6 million down to the $5 million that’s an after tax number.

Jeff Sprague – Citi Investment Research

Your comment about the tax is we should be more in the middle of that range $1 to $2 billion credit?

Keith Sherin

Yes, I’d say probably somewhere near the lower end of the range than the top end of the range. We have obviously a lot of work going on on taxes to make sure we get that but that’s got some volatility.

Jeff Sprague – Citi Investment Research

The lower end of the range meaning bigger credit?

Keith Sherin

No, I meant the lower end of the range less the credit closer to the $1 billion down than the $2 billion down.

Jeff Immelt

We’ve been able to have the GE capital guys step into a lot in the fourth quarter. I don’t think that should be underestimated the reserves strengthening, the restructuring that’s gone on to take the costs out. I would say that the cost plan we could probably do even better than. I think we’ve done a nice job in Q4 to get positioned for 2009 and all the actions we’ve taken I think make the $5 billion more achievable.

Jeff Sprague – Citi Investment Research

You characterize deflation as positive, maybe we got good deflation here for a while with some of these raw mat costs coming down. Do you see any evidence of the dark side of deflation where its really catching up on your ability to achieve price in the marketplace or you’re getting people evaluating their plans and reconsidering CapEx and other things.

Jeff Immelt

We’ve gone through a cycle if you go through the last couple years. Our pricing in the beginning lagged inflation and then our pricing was better than inflation. Our pricing for instance in businesses like energy was very positive in the fourth quarter. We tend to sell longer than we buy in many of our businesses. I view that as net positive.

I also think that projects got cancelled because of inflation that now might get more attention. This is more positive than negative vis-à-vis what we can expect for 2009 from a value gap standpoint.


Your next question comes from Bob Cornell – Barclays Capital

Bob Cornell – Barclays Capital

If you look at the fourth quarter for financial services the op profit before provisions was $1.572 billion down from $4.7 billion last year. If you start from that level and you annualize that number you’re looking at $6 billion of op profit in ’09 and then you’re looking at $10 billion of provisions next year. You’re starting out, if you just extrapolate the quarter that this was reported you’re looking at a meaningful loss next year.

To the extent you can, obviously that doesn’t count the cost savings and so forth. Is it possible to take the current number and extrapolate into ’09 and maybe help us with that walk?

Keith Sherin

A way to do it if you look at GE Capital the total GE Capital services you had about $1.5 billion pre-tax loss in the quarter. I would start with the restructuring; we had $700 million pre-tax in the fourth quarter that’s above any run rate. I’d add that back. If you look at the loss provisions we had $3.1 billion of loss provisions in the quarter. Clearly even at a ten rate I’m only averaging for quarters and I’m not picking a quarter I’m just saying the average for the year that would be $2.5 billion versus $3.1 billion going at the ten rate. That’s $600 million higher in the fourth quarter than that run rate.

Our mark to markets and impairments in the quarter we had $1.2 billion pre-tax of mark to markets in impairments. Even if I said the total year 2009 was going to be the same mark to market impairment levels as we had in 2008 you know we had marks in the first quarter and the third quarter that would be about $1.6 billion pre-tax total year. That would be less than the fourth quarter another $800 million in the fourth quarter. It was a very heavy quarter for us on marks and impairments for GE Capital.

Lower costs we got over $2 billion of lower costs year over year you’re talking about $0.5 billion. I can get you back up to over $1 billion of pre-tax income then for the year you roll that out $4.5 billion on pre-tax then this year for the total year you obviously had tax credits of about $2.4 billion for the whole year. With that walk that we’re giving you say the tax credits, the one times and other things don’t repeat at that same level even if you’re $1 billion less of tax credits you have $1.4 billion you’re still close to on the total GE Capital a higher number than the $5 billion you could get yourself up to $5.5 to $6 billion.

Imprecise macro numbers off the fourth quarter but I think it’s consistent with the framework we’ve laid out to get to $5 billion for GE Capital Finance for 2009.

Bob Cornell – Barclays Capital

We’d have thought that GE might give us some thought about the first quarter maybe in terms of a percent of the earnings that might appear in the first quarter is that possible in this call?

Keith Sherin

We said we’re not going to give quarterly EPS guidance and I think we’re sticking to that. We’ve given you the framework for ’09. People just have to build their own model. You can look at what the percent of the year is historically, you can look at run rates that we have by business, and you can do your own modeling about how costs benefits come in based on restructuring and things like that. We’re not giving any guidance on the first quarter.

Jeff Immelt

We did update the framework and the updated framework says based on backlog, order rates, cost out, productivity and industrial we still think 0% to 5% is solid for the year. Keith just gave you a walk on Capital Finance. The framework is something that we want to stick with and we did update that today and we still think based upon what we’re seeing still looks okay.


Your next question comes from Nigel Coe - Deutsche Bank

Nigel Coe - Deutsche Bank

A follow up on the FX. Of that $7.5 billion how much came within GE Capital?

Keith Sherin

If you look at GE Capital’s equity on its own its about $6 billion from FX so if you look at GE Capital ended third quarter about $56 billion of equity, ended the year at $53 billion basically the $6 billion of change from currency translation was offset by the $5.5 billion contribution we put in from the parent.

Nigel Coe - Deutsche Bank

On the balance sheet reserve for the losses currently running below the loss provision in the P&L. If you’re expecting a $10 million of losses in 2009 why wouldn’t the balance sheet reflect that $10 million?

Keith Sherin

What we have to do is we have to have losses reflect what’s the embedded loss in the portfolio and it’s very statistically driven. If you look at the fourth quarter provision of 3.1 it’s probably a little higher on a run rate. The provision that we have for losses is exactly what we need based on what’s embedded in the current book. Unfortunately we can’t book losses for things that we think might happen in the future. For example, our loss estimate of $10 billion has an average assumption of over 9% unemployment but that’s not where it is today. I can’t book losses for things that I’m forecasting in the future but I am anticipating it and how I put my framework together.

Nigel Coe - Deutsche Bank

On the commercial real estate I want to clear that up, the carrying value of the real estate is the intrinsic value i.e. the discounted rental income that you’re recognizing, is that correct?

Keith Sherin

Carrying value is the book value offset by annual depreciation.

Nigel Coe - Deutsche Bank

So long as the intrinsic value i.e. discounted by the rents holds that value even if there’s a large gap between intrinsic and market value then you still wouldn’t feel pressure to write down.

Keith Sherin

The actual FAS144 test is not on a discounted cash flow basis, it’s on discounted future cash flows. We do test for the fair value and that’s how we come up with our embedded loss that we’ve talk to you about today. The actual accounting test is on discounted cash flow.


Your next question comes from Scott Davis - Morgan Stanley

Scott Davis - Morgan Stanley

I’m trying to understand a little bit, you’ve talked a little bit about the statistical models and your reserve levels and not being a finance guy you look back at 2002-2003 your reserve coverage was a lot higher. Given how dire this crisis has been so far how do you tweak these models to make them realistic?

Keith Sherin

We have a significant amount of work going on on it. If everyone goes back to 2000 levels the business prior to 2001-2002, I don’t know exactly when the change was made based on accounting requirements had kept a loss provision of 2.63 year in and year out. The accounting change where you had to reflect the embedded loss in your book and as a result as the portfolio quality improved and delinquencies went down and we had a very good period from a credit perspective that went down to what the actual embedded loss was.

The change in loss reserves going back to historic time is really driven by a different requirement from a loss provisioning perspective. If you look at where we are today we have done a complete study in the fourth quarter based on the delinquencies we saw and based on the pressure that everybody has on it. Obviously we’d be crazy not to be putting a ton of resources on it, making sure we get it right. The entire team is focused on getting it right.

We look at our statistical models, we look at historic loss rates, and we look at an updated in the fourth quarter for more recent loss experience based on delinquency rates. We increased provision by over $0.5 billion after tax based on that study. I think we’re really trying to make sure we’re current and getting it right but we’re in a terrible credit environment, we’re going to see more pressure from the consumer, we’re going to see more pressure from the commercial, we’re anticipating it. The provisions are going to have to increase as we see that materialize.

We’re trying to forecast the worst environment that we see today and that’s going to be reflected in higher loss provisions as we go forward. It’s just the way the math is going to work in the formulas.

Scott Davis - Morgan Stanley

I’d be helpful if you just refresh our memory on what percent of assets have to be mark to market versus the long lived assets.

Keith Sherin

In total the majority of our book and financing receivables and those have to reflect the fair value based on the embedded loss. The vast majority of our assets are financing receivables and they have a reserve provision which I’ve shown you that results in a net realizable value based on the fair value of the receivable less the reserve that you have for your embedded loss.

The actual mark to market assets in the book is somewhere around $10 billion. That flows directly through the income statement. We have another $45 billion of asset in our insurance portfolio, in our Trinity short term guaranteed investment contract portfolio. Those are mark to market through other comprehensive income.

The vast majority of this book are financing receivables and then the other category would be the long lived assets like the real estate equity book and equipment leased to others some of the operating leases in the GCAS portfolio things like that that are held at historical costs and tested for impairment.

Scott Davis - Morgan Stanley

I know we talked a lot about this in December but can we talk about the dividend rational. It’s clearly not supporting your stock. The stock is yielding almost 10%, your debt at about 7% so you have a cost of equity that’s extraordinarily high given your cost of debt. Can you talk a little bit about, the capital markets are telling you something but does that play into your decision whether to keep the dividend, does it not?

Are you waiting to see what kind of unemployment rates we’re sitting on in six months before you make a more longer term decision? Maybe talk through what the thought process and also just what the Board has been discussion since your update in December.

Jeff Immelt

The results that we got in the quarter were what we thought we would get when we had the December meeting. The cash flow was actually stronger so our cash position is actually improved today versus even where we were in December. The overall capital inside the company cash inside the company is almost $50 billion. Our industrial cash flow for the quarter was $5.3 billion. We feel good about the liquidity and the cash plan inside the company.

The question is how do you use that capital and use that cash for investing in the future so we’re not starving the businesses, we’re reinvesting back into the long term growth of the company. It’s just been our feeling that the dividend is a good return to investors in this moment of uncertainty. We’re not straining in order to pay it. In other words, we’ve got lots of cash and lots of free cash flow and lots of capital inside the company and it’s been the judgment that this has been the most investor friendly use of this capital.


Your next question comes from Jason Feldman – UBS

Jason Feldman – UBS

If I’m reading the slides right you’re showing that the reserves you’re expecting to increase about $2 billion into ’09. The provisions are only going up about $2.5 billion. Am I missing something or are you basically only expecting write offs to increase $500 or $600 million next year?

Keith Sherin

The provisions include the write offs and reserves.

Jason Feldman – UBS

If the provisions are up $2.5 billion.

Keith Sherin

Write offs were up $2 billion this year. We really had a massive acceleration of write offs. With the provision up $3 billion the write offs up $2 billion I think you’re seeing those at a run rate that’s more reflective certainly on the consumer side then probably going to accelerate on the commercial side, yes.

Jason Feldman – UBS

You expect a deceleration in the rate of growth of the write offs?

Keith Sherin

On the consumer side.


Your next question comes from Steve Tusa - JP Morgan

Steve Tusa - JP Morgan

A question on the reserves, I noticed that you didn’t really change the mix much of consumer and commercial and its kind of hard to read on the bar chart. Commercial looks actually, this is on the credit losses, looks actually flat relative to ’08. Looking at some of the loss statistics and what you guys have said about the corporate credit cycle is that conservative enough or does that increase again in 2010. If you could talk about the dynamics around the commercial side because it looks like, once again most of the provisioning is coming from consumer.

Keith Sherin

Total allowance was up about $400 million from the third quarter in the commercial business it was up $600 million year over year. We’re stepping into the commercial allowance as well. The difference is that we’re senior secured and you’re going to see a slower loss cycle on the commercial side. On the consumer side obviously we’re already seeing it on the delinquencies in the US book specifically. I think the mortgage book has a slower and more delayed loss response. Yes, we’ve stepped up on the commercial side based on broad pressure in the economy, higher delinquencies, and higher non-earnings.

Steve Tusa - JP Morgan

Am I right that you’re saying that basically the ’09 rate is about in line with ’08 because you stepped up so much in the fourth quarter?

Keith Sherin

I think both are going to be up in 2009. Maybe the bar chart doesn’t show it I’ll have to get you some better numbers on it. Both are clearly going to be up in 2009. When you take the provision up to $10 billion you’re going to see three quarters of that’s in the consumer side the increase and probably a quarter in the commercial side.

Jeff Immelt

From the December 2 meeting we’ve taken the loss provisions up $1 billion. Stepped into some of it in the fourth quarter and taken the estimates up for next year then the $5 billion walk haven’t changed the dynamic around losses. I think we feel like we’ve been pretty conservative. I don’t think there’s any reason not to be conservative as we estimate these losses. We’re in the credit cycle; we’re been in this business for a long time. We underwrite differently than the banks, we’re senior secured. I think we’ve done a lot to step into a very tough environment.

Keith Sherin

The bar chart, the bars haven’t been updated for the increase so the number at the top of the bar, I apologize for that.

Steve Tusa - JP Morgan

Commercial is actually higher than what that bar chart shows.

Keith Sherin

The bar chart is related to the December 2, we didn’t change the bar we just updated the number for the total losses.

Steve Tusa - JP Morgan

The mark to market you said this year how much did you have in mark to market $1.6 billion?

Keith Sherin

On a pre-tax basis.

Steve Tusa - JP Morgan

That applies to everything basically other than your receivables base like $200 billion in assets is that number we should be thinking about?

Keith Sherin

I’d be a lot less than that. Some of the impairments obviously on the $200 billion are not financing receivables. A lot of the impairments that we took this year are on public equity securities. We had a couple billion dollars that’s down to about $1 billion the amount that is sitting there in that category. We’ve had definitely a lot of marks that we’ve taken that have reduced the basis of a lot of public securities that we had.

Steve Tusa - JP Morgan

This goes back to cash flow and on the industrial side, you guys have some pretty solid working capital targets to generate the cash is there anything, a lot of companies are pulling out all the stops to conserve cash. Is there anything that you guys are doing maybe you could talk about what you’re doing on your payables maybe or GE Capital whether its rebate programs to accelerate balance reductions at your customers. Could you talk about how you’ve changed those policies to batten down the hatches? I know all companies are doing that stuff I’m just curious how you guys are going about that.

Keith Sherin

We’ve got an operating council as Jeff said the focus is on margins and on cash. When you look at cash we’ve got specific targets for every single business around inventory. We’re using lean throughout the company to drive inventory down, to get our cycle times down. We’re using the same techniques around our receivables. We’re working diligently to reduce our past due receivables across the company to change our terms where we’ve got too much extended terms versus the margin we get on the equipment.

We do have a discount program with GE Capital where suppliers can get paid early by taking a discount, that’s got a good ROE on it. We are working on a supply base to try to extend our payable terms by about four or five days. Every element of working capital is being intensely worked on here across this company.

The thing on working capital the environment change actually helps us on, as you know we had high single digit, double digit revenue growth in the industrial business for the last three years now we’re going into a tougher environment we’re not going to need as much working capital. That’s going to help us a lot from a cash flow perspective in 2009 in addition to all the actions we’re doing from the operating council.

Steve Tusa - JP Morgan

What are normal payable terms just at high levels?

Keith Sherin

About 55, 60 days.

Jeff Immelt

The point I’d make is we’ve done a lot here to be able to control our own destiny. We’ve taken the costs out, we have for the last year been driving real cash programs. Some of that showed up in the fourth quarter. We’re running the place with intensity and the fact that we’ve got almost $50 billion of cash and liquidity and strong programs demonstrates that we’ve done the right actions to better weather this cycle.

Steve Tusa - JP Morgan

How much of your backlog ships in 2009?

Keith Sherin

A little over half.

Jeff Immelt

The chart in December really shows.

Keith Sherin

$26 billion of the $50 billion.


Your last question comes from Terry Darling – Goldman Sachs

Terry Darling – Goldman Sachs

Coming back to the value gap discussion you had mentioned you’re expecting $2 billion of raw material savings in ’09 in your forecast. I’m wondering if you can give us the net number there which would lead us to ask you about price assumption that context.

Keith Sherin

We’re going to expect to see positive price in 2009. A lot of that obviously is already in the backlog. We haven’t given out a number what the dollar amount is but between the two what we said in December and Jeff outlined what we expect margins to grow and we had a number of tailwinds that were going to help us. We got price in the backlog; we had originally when we came into the fourth quarter ’08 businesses looking at about a little bit of inflation. We’ve been working with the sourcing teams to actually turn that into deflation.

We’re talking about a big part of that direct material drop to be from deflation that we’re going to get from the supply chain as work through the year and as the global economy slows and people are going to be really chasing the commodity supplies.

Terry Darling – Goldman Sachs

In terms of the shift here where profit starts to outperform revenue on the industrial side should we be expecting that shift to occur in the first half or more in the second half?

Kevin Sherin

I don’t have a breakout of that. I think we’re going to have to work on that. I think you’re going to see equipment versus services all year long turn into more of a services revenue growth versus equipment. I don’t know exactly the pace by quarter.

Jeff Immelt

The services versus equipment will probably be flip flop in the first half of the year. The value gap I think is pretty solid right now. The restructuring actions get feathered in as the year goes on. You’ve got some that will happen in the first half and some that will happen in the second half is the way I would say it.

Terry Darling – Goldman Sachs

In terms of the additional restructuring you have a number we ought to be thinking about in terms of building into the additional restructuring number we could talk about in terms of building into the numbers at this point?

Keith Sherin

We had this year about $1.5 billion after tax and next year we’re including in the framework about $0.5 billion after tax.

Terry Darling – Goldman Sachs

No update there at this point?

Keith Sherin

$1.5 to $0.5 billion.

Trevor Schauenberg

I’ll turn it over to Jeff Immelt for final comments.

Jeff Immelt

In a very tough environment we delivered results that were consistent with what we talked about in December, earned almost $4 billion in the quarter and $18 billion for the year. The highlight of the quarter is the strong industrial cash flow and the strength of the balance sheet particularly with the cash on hand on the balance sheet. The framework for 2009 we have no change to and that’s what we talked about in December.

Lastly, I want to go back to a point which I think was part of Scott’s question that we think given the strong operating performance of the company and the framework and the strong capital position that we still believe that supporting the dividend and doing it without straining, doing it just by controlling our own destiny and by executing with excellence that is the best use of capital and capital allocation.

We run the company to be a triple A. We’ve supported and have on hand lots of cash and lots of capital and we’re really running the place controlling our own destiny with real excellence and focus. Thanks for your attention.

Trevor Schauenberg

I appreciate everyone’s questions and their time today. A replay will be available this afternoon on our website. Our next earnings call for the first quarter will be held on April 17. As always, Joanne and I will be available to take your questions today. Thank you very much for your time.

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