General Electric Company's Management Presents at Stifel Industrials Conference (Transcript)

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General Electric Company (NYSE:GE) Stifel Industrials Conference May 16, 2016 9:00 AM ET


Beth Comstock - GE Vice Chair, Business Innovations


Robert McCarthy - Stifel Nicolaus

Robert McCarthy

All right. We're back everybody. Rob McCarthy here, your friendly neighborhood Stifel industrial analyst. It is our pleasure and honor today to have Beth Comstock here. She is a GE Vice Chair, one of three with the Company. She has been with the Company for a very long time. I won't date everyone, but -- and has been Chief Marketing Officer for more than a decade. She has been instrumental in driving some of the critical initiatives of the Company including FastWorks, the overall GE branding including GE Store and is also responsible now for Current, which involves not only the energy efficiency and related technologies around storage lighting, but in also the over the horizon in terms of GE Ventures. So, it's our pleasure today. She is going to run through some slides and then we are going to open it up for some questions.

Beth Comstock

Thanks, Rob. Thanks for having me. So, I’ve a lot to say today. I will try to limit it, but I thought it would be easier to channel it through a few slides just to set the stage. It is a period of a lot of acceleration and transformation at GE. And I’m very excited, but let me give you a little bit of the backside on the story.

First of all, we talk -- Rob mentioned that we talk about the GE store. This is the idea that we've rallied around that the sum is greater than the parts and this idea of the embedded intellect, the culture, what we’re doing to share technology and digital capabilities, is something we take very seriously. It is partly where I sit in terms of the organization and the kind of teams I work with. But it's a way to think about the unique value of GE.

Every one of our business is expected to give some sort of capability or technology to the store and in return be able to get something out of it. And I’m going to bring to life a story today of how something like our oldest business, the lighting business is using the GE store to build a whole new value proposition for the Company, our customers, and investors. So I think it's important to understand that as a backdrop.

Now what do I do, why am I bringing you this perspective? As Rob mentioned, I focus a lot on sort of what's next, what’s new across the GE landscape. A lot around culture, a lot around what’s happening in the markets and there have been three critical elements of that that we’ve driven over the past 15 years that I want to take a minute to explain. Simplification, if you hear Jeff Immelt in any form, you can't talk to him for more than two minutes without him talking about simplification. It's driving the Company, it's what happens when you're in a 150 countries around the world with the number of businesses and employees we’ve. If you’re careful you get slow, you get bureaucratic and that isn't a winning value proposition for our customers or our shareowners.

So we’ve been on a journey, especially in the past three to five years to be much more agile, faster, speed, to be much more like a startup. Why is that important? Because our customers expect that there is incredible change happening in the marketplace right now, and our customers need to be ready for it and we need to serve them better.

So frankly with a lot of our global activities and some of the new technologies we were getting into, we were worried that we were going to be a bit bureaucratic. So we instituted a real mandate to get simpler, get rid of layers in the organization, get rid of need for certain approvals, just allow the Company to move at market speed.

Second, innovation. If you know anything about GE, we’ve this amazing technical heritage and technical -- just technical depth that I think is unparalleled. It is I’d say the cornerstone of our GE store. You go to any of our global research centers, we have the world's most amazing engineers and scientists.

What we’ve done over the past 15 years and this is where I’ve played a role is also said that knowing what's happening in the market and early market development is also important. While we're innovating tech forward, we also have to see what the trends are, what the opportunities are, increasingly it's not just the technology, it's what's the business model. How do we combine those technologies for new offerings, how do we create new ways to -- for customers to have savings or benefits and digitization is allowing us to do that in a much faster way.

One of the levers that we're using is something we call GE Ventures. It’s partnering with startup. Yes, we're doing some small amount of equity investing in some of these startups. But equally important is the cultural impact where we're using partnerships with these startups to round out our offers, to help us get simpler, faster and I'll give you a couple of examples of these, but to partner for growth.

The other thing we've done is started to bring in more entrepreneurs who are serving in residence for some of GE's business offerings, our digital offerings that bring in entrepreneurial mindset, if you will, as a coach working with our traditional GE business leaders, and that all wraps up to something we call FastWorks. It really is the cultural mandate. Are we moving faster, are we getting feedback from our customers at an early stage to know whether we're spending money in the right way.

I'd like you to think of FastWorks, as really it's building on lean startup methodology out of Silicon Valley. But mostly it's an imperative to get customer feedback quickly, test learn and move forward. From a capital allocation perspective, what you should feel great about is it allows us an earlier window to explore more ideas faster, to say no to things faster so that we're getting more throughput in our new products, new business ventures, and taking more of an entrepreneurial approach. So that’s kind of the cultural backdrop.

Now let me apply it. So last October we announced that we were taking our 140-year-old business GE Lighting and rebooting it and what we did is we separated the business, we have a consumer business and a commercial lighting business.

Thank goodness for the arrival of LED technology, because it has allowed us to take our lighting business and turn it into an energy as a service business. That and the investment GE has been making over the past five years and what we call the industrial Internet and specifically in a platform in cloud offering called Predix.

So let me use Current as an example, because I think it speaks to what I said up in the earlier page. It’s a way to take something as old as GE and show how we're transforming it into a new model of revenue, value creation, margin generation, and also I think it's a great example of what other GE businesses are going to be doing as we entered the digital age and as we start to scale up with Predix. So for about 18 months using our Venture's team, we incubated this idea where we said you know LEDs are an interesting Trojan horse into a building setting.

LEDs if you’re familiar with the technology, it allows you to embed sensors and controls into the hardware. So that suddenly a dumb fixture becomes something very smart, intelligent, a sentient -- a sentient entity, one light fixture can connect to another, connect to another before you know it, you’ve a mesh network in any kind of a setting. At the same time we were hearing from our customers that they were demanding more -- they wanted more operational flexibility in energy management and they wanted access to more renewable technologies.

So for about 18 months we incubated this concept within GE Ventures and out the other end came Current, a base of LED technology about a $1 billion worth of revenue of LEDs sales to commercial and industrial customers. We also brought on board a model we've been incubating about an integrated solar offering that would allow customers renewable energy on-site and more flexibility about the amount of energy they could generate on-site.

We’ve been incubating new models in storage and we had a long-standing renewable technology in electric vehicle charging. You put those altogether, you start to connect the light fixtures, the jet power generation through our software platform called Predix, you start to be able to analyze the data, capture a lot of data, bring the insights of GE's incredible Predix capabilities with artificial intelligence, data connectivity, simulation and we're able to start to offer new models of sort of business exchange with our customers. Probably the most significant one is really that light fixture becomes an energy gateway. More and more of our customers want flexibility and we were seeing this. We were seeing that if you wanted to save energy and have solar power on your rooftop, the fastest way was to install a solar system, but the fastest way to get the energy reduce in the shortest amount of time was through LED technology. It lowers about 50% of your energy usage through lighting just by putting new light fixtures in.

So we started to incubate these new models and at the same time realized that our value proposition to big customers, say J.P. Morgan, where we’ve just done -- announced a pretty revolutionary deal where we are taking the LED capabilities, solar power, and others across their entire real estate fleet. We realized it started to be a different value proposition with our customers. They wanted to understand how to operate their business differently. It was as much about the operation, it was about energy savings, it was about new applications that we could create for the future. So Current was born. We launched it about last October, about eight months ago. And this is what we bring to customers. We think the pain points we’ve discovered after incubating this is we can reduce our energy costs, as I mentioned.

LEDs is the first way to do that. The second is more and more companies, as I mentioned, want to produce power on-site or they want the back up if they need it. They want the resiliency. They want to shift their usage, their utilities are saying especially during peak demand time -- they have to scale back on your energy usage right now. They want some ability to control that destiny. Over time storage will become much more of a capability to do that. It's still early, I’m happy to go into that. But what I’m talking about largely is just demand response. The utility need some help with their commercial and industrial partners, their customers in easing that flow of energy between the commercial and industrial and what the utility needs. We think this is an opportunity for Current.

And finally if you’ve got sensors and controls in your solo unit, your lighting fixtures, over time your storage, suddenly we can start to see not only how you're using energy, how you’re deploying it, but you suddenly have a really smart infrastructure in place that allows you to layer on other applications not even related to energy. Let me show you what I mean.

So when I talk about energy as a service, this is looking -- this is really the strategy that a company like Current has, but I want you to think about this as a new startup being incubated in GE with the DNA of our oldest business and the DNA of our newest business in the digital. This is a journey for Current, but every one of our businesses are going to have to go through a similar journey. Wave one is just connect my stuff. Where is it? I want to know it's connected, I want to know how it's performing. We call that asset performance management. Where is my stuff? How is it doing?

Wave two is once I get a pattern of usage and access to other data and other applications I can start to create service, savings, benefits for my specific use case. Ultimately for current wave three is when the data allows us to create more dispatchable energy and creative, if you will, almost a marketplace for dispatchable energy. Everyone will come to a wave three differently. That applies to the specific one for Current.

The other thing I want you think about is that with our investments in GE at Predix, which is our -- as I said, it's our industrial Internet platform and cloud service. Its industrial scale. It's built for the most amazing sets of data. Think of the use of a jet engine, one terabyte in just the average flight of a jet engine. Now imagine a fleet. Imagine the entire airline business. We're talking industrial scale data. So if you're a business like Current and your customer like J.P. Morgan, the ability to tap into the analytics, the cyber security, the machine learning that GE is investing in industrial scale, we think its unparalleled.

The other thing that Predix does is it has an open architecture. Meaning that other that -- GE can't provide every service. We need to partner with a number of different players to provide the service and end use application for any specific customer use case. I will real quickly go through the slide. Basically here is how you it works. You connect your stuff. That's what happened at the bottom, it's largely hardware, a few IT systems that you see there, you go through the Predix intelligent enterprise data cloud, that where you’re getting all access. You’re integrating all the data across the system. The user gets to input some information, their business systems, there is external data that's coming in.

Then what Current, in this case, it could in other GE cases be our rail business, our aviation business, but let's talk about the lighting and energy service business that is Current. What Current does is it creates a layer of operational intelligence. It allows the business to integrate energy through asset management, have grid services, and also do basic equipment management and control.

At the same time, in addition to what GE is doing with our applications, we’ve a number of partners. For example, Wipro who might be bringing in specific applications at this -- that a customer wants, point inside is a partner that looks at inventory for retail. So GE brings a suite of offers that are core to what it knows how to do and allows other partners to plug in their unique functionality.

Finally, what this mean for the customer? How do we unlock value? So, I’m going to take -- imagine a large box retailer, we thought it would be helpful to break it down for you. What’s their need, they -- in this particular case, they want energy management solution. They really need to get a handle on managing their energy across all of their retail footprint. What we will help them put in place is a hardware, software service network, not all of it comes from GE, but a lot of it starts with GE. To the customer they want to save more in their operations and they want additional insights from that data. So what GE does is we will start with as I said the LED fixtures and in many cases solar or combined heat and power. We apply it, connect through Daintree Networks, a company we've acquired for their sensor and control. Partnering with a company like Tridium, which together those two companies connected something like two billion endpoints, whether it's through the HVAC system or other parts of a building, to connect all of those pieces of operation into one data set. It's put through the Predix platform and a lot of insights are generated for energy usage and other applications, which I am happy to go into.

And so, if you’re a big-box retailer for just 300 stores, what we're offering you is a two-year payback. You put the hardware in, the energy savings alone, pays for the system in two years and we’ve future proofed you with a constantly upgradable intelligent system that’s constantly upgraded and open for others to put applications in. This is a big departure from old energy management systems in the past where they were closed and you constantly had to pay for the upgrading. We think the offering is we’re future proofing.

So that’s a bit of how we're working and I think -- hopefully I’ve shared you with you in a really brief period of time taking something as old as GE, even older than GE actually and being able to transform it with the application of controls and sensors into hardware, connecting it to other pieces of power generation equipment, applying it to a new customer base for us going direct to the commercial and industrial sector, offering them energy as a service through a gateway of hardware that connects them to we think an unassailable platform of insight, analytics. And along the way we’ve had to transform the way we work at GE. Take something old, make it new again. Hopefully in the next four years we will generate $5 billion of revenue and margin rate that's comparable to what you see in software from something that was kind of a demoed [ph] light fixture, 140 years old from the past. So that's the story.

Question-and-Answer Session

Q - Robert McCarthy

Well, thanks, Beth. That was a great overview of Current. I think the first question that comes to my mind is -- and we can't answer it today obviously, but I think for investors' mind, is we could discuss the factors around it, I suppose, which is Current, do think it's core or non-core for GE? And how do you -- you can't answer the question explicitly today, because you guys are in the business until you’re not in the business. But could you talk about the factors about what are the advantages and scale advantages of being part of GE and then perhaps what are some of the advantages of being a standalone entity?

Beth Comstock

Well, we’ve set it up to be somewhat -- at least more independent than most of, one, it’s an organic play, so we’re investing and so they need to move it at very fast pace. So we talk about the startup within GE. I think it also gives us some discipline that it could standalone, if GE decided that was the path to go. But right now I think for all the reasons I said, if we're retooling this as an energy as a service business for the commercial and industrial, our utility customers they want to be part of that energy -- the demand generation and the demand response flow. They need somebody who can help organize the commercial and industrial customers. For GE, it rounds out another piece of that entire value chain. If you think about the energy value chain for GE really from energy fuel generation through power, through renewable, through energy connections and now and end use case of commercial and industrial I think you could argue if this scales the way we hope that well, it's another piece of a value chain and a customer base that GE knows a thing or two about, given its commercial and industrial. We’ve used our former GE Capital, many of those sales people to come in and help us. They’re very good at a consultative sell to the CEO or the CFO of a business, so that allows us to call on this new customer base. So I think if you’re the leadership of GE, think this is an interesting play for the future. Its early.

Robert McCarthy

Right. And on that point, obviously a recent acquisition GE did do was the Daintree Networks and you did speak to it in your presentation. But maybe you can just expand upon, I think the two Jeff's on the call suggested it was kind of a classic make versus buy decision, but what does it bring and what does it bring not only to Current but also to Predix?

Beth Comstock

Yes. So, across GE there's a lot of activity around sensors and controls. Obviously if you’re going to connect a thing to Predix, it has to have to a sensor. And in the LED space, especially more for buildings, we had done a lot on the city side in developing some of the controls through light grid. We hadn't done as much as fast on some of the building applications. And So Daintree just allowed us speed to get into some of the building examples I mentioned. It’s a control base system. They bring connectivity to more than just a light fixture. So they also help us connect to things like HVAC. So, we're able to get a footprint of connectivity and a control capability that sped up our efforts by two years. Yes, we could have done it, but we need some partners [multiple speakers]. We think it was about one to two years of speed that we were able to acquire. And I think when you look at Predix for GE, you will see that model through our kind of venture partnerships with the software center. We've invested in companies like Pivotal, which have been very helpful in sort of cloud based applications, we've invested in companies like Enbala on the energy side which do demand response. So the ability to use some of these startup capabilities and embed them in our offers, it just really helps us move faster.

Robert McCarthy

That makes sense. I mean, we open it up for questions from the audience if anybody has any questions for Beth. Okay.

Beth Comstock

I [indiscernible] take a while to …

Robert McCarthy

That’s all right. Maybe we can just talk about the legacy business in lighting, or maybe just typify how much of the lamps business now, what percentage of sales is lighting, any kind of details there? Because what you are managing right now is a decline curve to a certain extent and you’ve seen other multi-industrial companies basically -- where like punt the portfolio basically -- whether through IPO spins, sales, whatever the case may be, effectively exiting the business, you’re still there. So could you talk about how you’re managing a decline curve while investing this innovation?

Beth Comstock

Right. Well, we basically split our lighting business in two. So we’ve a commercial business, LED business. About 50% of that is -- of the lighting is LED. So there is still is some more old technology. And then you have a …

Robert McCarthy

And that would be with the lamps?

Beth Comstock

That was -- and then you have a -- largely consumer business on the other side and some global. And we've announced that we would expect there needs to be some restructure, we haven't announced an amount, but I think there is some things that will -- you will likely to expect will be some sort of restructuring against that. And what you’re left with is largely a consumer business. LEDs are growing incredibly fast. It's -- in the consumer side, I think it's only about a 20% penetrated market. It's expected to be something like 80% by 2020. There is a lot of growth in the core hardware …

Robert McCarthy


Beth Comstock

… but similarly on the consumer side, the opportunity is going to be connected smart home. And GE has made its future really on the commercial side, so I think we’ll have to see how that plays out for GE going forward.

Robert McCarthy

Could you talk a little bit perhaps about GE Ventures? I mean, I think you’ve a $200 million of a portfolio there that you’re kind of investing in over the horizon type technologies. What kind of businesses, what kind of opportunities are you kind of looking there?

Beth Comstock

Yes, it maybe we didn’t name it very well.

Robert McCarthy

Yes, yes.

Beth Comstock

… I’m a brand person. You think I could have done that better, but I think the idea is a small part of what we do is equity investments and they tend to be early seed stage or later growth stage. We look -- but mostly it’s the partnering for commercial applications to incubate new businesses ala Current. And I'll give you a couple of examples, but we look at partnerships, our investments in four key areas, healthcare, energy some of the kind of energy things we're talking about here, advanced manufacturing and I have really a lot of passion for that and then digital would be the areas. And I will give you a couple of examples. One example, we've announced in the Life Sciences space where it's still emerging, it’s still a growing organic small part of GE on the healthcare side, but a very exciting growth area. We launched something a couple of weeks ago called Vitruvian Networks, and it's basically taking some core IP from GE, keeping a small ownership stake we've partnered with Mayo Clinic to basically create the manufacturing, if you will, for Life Sciences of immunology -- immunotherapy and that’s something where we’ve a small stake and in. We see it as an entrepreneur outside to run it. We’re doing something similar with Digital Health Data from wearables. Again, incubated outside GE, find a great founder, there is a connectivity through a customer. That's a good example. Another example would be how we’re working in advanced manufacturing, a company like Rethink Robotics, which is doing manufacturing line robotics, we invested in them and we're deploying their robots in some of our manufacturing lines around the Company. So often we will plug it in or we will do steps -- incubate something outside the mother ship.

Robert McCarthy

Not to raise a dirty word within GE, but GE Capital, so GE Capital, obviously there is an opportunity in some of the ventures you’re looking at with Current to perhaps use the balance sheet to help, I don’t know, fund, overhaul some of lighting and then share in the benefits or whatever the case may be. Do you think GE Capital in some select verticals will have a role with Current in maybe funding some of the growth?

Beth Comstock

GE Capital will definitely have a role in some of our industrial sectors. And I think along with the data and analytics what often comes with that is some financing, because people want more operating expenditure flexibility. They don’t want the upfront CapEx. They want more of that OpEx model and so between digital and finance -- so we’re deploying Current in solar, they’re helping -- we’re deploying capital in Current for something like solar where they're doing power purchase agreements. In Current that we’ve an offer where if a company would rather finance it and pay themselves we have that, but every customer is different. You know some customers want that flexibility, others don't, depends on how they account for things. You know GE Capital, we will continue to invest in financing aircraft leasing, some of the power generation development opportunities. But I think we will see some use of the balance sheet in these limited industrial spaces.

Robert McCarthy

Right. But to be clear, not a lot, yes, [multiple speakers] in the scope of GE as a whole, I guess, thinking about energy storage, I mean that’s an area that definitely some investors are getting very excited about over the longer term, but perhaps you could talk about GE's kind of position in the marketplace there?

Beth Comstock

So, like we did with solar, I think in the early days of solar we took a position really more in the hardware and with solar we’ve come to appreciate more of the integrated system wrapped in software and capabilities like GE's inverters, which come out of our power conversion business. It's a similar look at solar. I think solar is -- it's storage, I can't -- solar is similar to what’s happening in -- what happened in -- storage is similar to what happened in solar. I can't speak very well. So, solar is not yet, right, I mean, storage is not yet. Solar is happening, but they follow with similar cost and performance curve is what I’m trying to say. So, we expect storage to really take off in the next five to seven years, customers want it. It gives them the resiliency, the backup that they need to control their destiny. The technology is not there yet, but the cost curve is coming down and the performance is doubling. And in the past five years, you’ve seen the cost curve to go down by 50% and the performance is more than doubled in storage. That mirrors what happened in solar over of a similar period of time. So what we're doing is, we're basically playing the role of an integrator, putting the complete system together. The software and the connectivity to Predix and the ability to tap into a broader energy management system, we think is the differentiator. And with storage, right now we're doing utility, scale applications, some grid scale applications, and ultimately we’ve housed it within Current, we expect to do some at the CNI site. And I -- that similar path at solar went on, which is why I can't say solar for storage.

Robert McCarthy

And then just maybe finally, in terms of thinking about kind of the messaging around GE coming up in San Ramon, kind of what are your thoughts without stealing the thunder of what’s going to happen there? What are kind of the key messages across the Company do you think in terms of Predix, GE Store, FastWorks, because I think investors right now believe that GE is a rock solid company, high quality, very defensive in a downturn. I don’t know how they feel about whether there is truly a change to much more of a digital company going forward. So, I guess, kind of this is an opportunity for you to say what is the digital bull faces on GE right now?

Beth Comstock

Well, I mean, I think if you look at all the models, They haven't really even factored in the upside that digital is going to bring and we’re just beginning to see it unfold. It’s why I like Current as an example when you start to see the upside opportunity. It's pretty exciting if you extrapolate that, the culture is changing. It's about agility, it's about speed, it's about understanding that I can offer a service, not just a saying, we had to bring in the right kind of capability. We’ve hired thousands of software developers, artificial intelligence data analytics people, so we’re able to attract the right kind of capabilities. I spent a lot of time with the front end, the sales teams of the Company and we're able to hire who we want, and they're able -- they feel like GE is this incredible laboratory, this incredible platform for them to solve these really meaty problems. And so, the fact that we’re able to hire the people I think should give people comfort and that these models like this are starting to scale. You can look at transportation, you can look at energy with our digital wind offering, our digital power plant, very similar stories. So, I think you should feel comfortable in the next five years. Our projections, we said $15 billion of impact from digital, it's productivity, it's sales through Predix, it's sales of specific offers from digital software. We feel good about that.

Robert McCarthy

Perfect. We will leave it there in the interest of time.

Beth Comstock

Thanks, Rob.

Robert McCarthy

Thank you very much for taking the time.

Beth Comstock

Thank you.

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