Good day, ladies and gentlemen, and welcome to the General Electric Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Jeanette, and I will be your conference coordinator today. As a reminder, this conference is being recorded. I will now turn the program over to your host for today's conference, Matt Kribbons, Vice President of Investor Communications.
Please proceed.
Good morning, and welcome to our Q2 earnings call. We issued the press release, presentation and supplemental earlier this morning on our website at www.ge.com/investor. 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. Please interpret them in that light. For today's webcast, we have our Chairman and CEO, Jeff Immel and Senior Vice President and CFO, Jeff Bornstein.
Now I'll turn it over to Jeff Immel.
Thanks, Matt. The team had a strong quarter in a slow growth and volatile environment. We're executing both organic growth and cost initiatives. Specifically, industrial EPS grew by 18% and earnings at the combined at the combination of industrial and the capital verticals, which is the way we think about GE going forward, grew by 19%. Organic growth and earnings performance was very strong.
Orders were up 13%, revenue was up 5% and profit would have grown by 11% organically. Our operations were strong. Margins organically. Our operations were strong. Margins expanded by 70 basis points with gross margins up 60 basis points and industrial CFOA grew by 79%.
Our oil and gas business met expectations for the quarter for orders, revenue and profit. Organic profit was up 5% and we continue to grow margins despite a tougher environment. We ended the half with our goals on track. Meanwhile, we have a number of portfolio actions underway. GE Capital Asset sales were robust and we will achieve $100,000,000,000 of deals closed in 2015.
We still expect the Synchrony split to take place by the end of this year. Appliances and Alsom are in the middle of regulatory reviews, but we still expect both deals to close by the end of the year. We remain committed to doing good deals for investors. In all, we're confident enough in our performance to raise the low end of our range for our industrial guidance to $1.13 to $1.20 EPS. So overall, we had a very good quarter.
Orders were very strong, up 8% or 13% organically. We saw solid growth in both equipment and service. Orders pricing was up slightly and we grew backlog to a record $272,000,000,000 Power and water was up 22% behind strength in power gen products and wind. We now have won 61 technical selections for the H Turbine, up 8 in the quarter. Oil and Gas had solid equipment orders in Turbomachinery and Downstream, consistent with expectations.
Power conversion orders grew by 33% as we're winning big in renewable energy markets. Aviation had large orders growth in LEAP and GNX, and meanwhile spares order rates grew by 33%. Healthcare HCS equipment orders grew by 6% in the U. S. As that market continues to rebound.
The U. S. Was particularly strong, but we also saw growth in many parts of the world. The U. S.
Was up 10%, Europe up 4% and growth markets up 2%. Up 4% and growth markets up 2%. First half industrial Internet orders were $1,900,000,000 up 83%, and we expect total software and solution orders for the year of $6,000,000,000 up 30%. Service growth was robust at 7% ex FX and backlog reached $200,000,000,000 for the first time. Our strong backlog and orders position GE to achieve our long term organic growth targets of 5%.
Organic revenue was up 5%. Growth was broad based with 6 of 7 segments up. A real highlight was the $19,000,000,000 of commitments at the Paris Air Show. For the first half, U. S.
Revenue grew by 3% and 4 of 9 growth markets were up and China grew by 12%. We had some excellent performances in service. Power gen service was up 9%, aviation service was up 6% and transportation service was up 6%. We're gaining share in healthcare with U. S.
Healthcare HCS equipment revenue growing 16%. We closed a big healthcare deal in Kenya worth more than $200,000,000 and international Locos grew by 128 percent with big wins in Brazil and South Africa. A few adjacencies were particularly strong. Wind grew by 49% and LEDs grew by 77% and our power conversion business is innovating in solar and wind energy recording $300,000,000 in orders in those markets alone. We have a strong pipeline of products and services that are winning versus competition.
And we're having success in software and analytics. We launched GE's digital wind farm providing customers with up to 20% more capacity. We announced a major collaboration with BP for asset monitoring in oil and gas and we closed another Class 1 railroad that will utilize GE's movement planner in a deal worth more than $100,000,000 Margins expanded with 70 basis points of growth. Gross margins were up 60 basis points with strength in value gap and productivity. We're making progress broadly with 5 of 7 segments having margin growth.
Simplification continues to deliver results and our SG and A targets are on track. First half margins were up 100 basis points and service margins were particularly strong, up 130 basis points year to date as the impact of our analytical tools are being felt. Equipment margins meanwhile are up 30 basis points year to date. So we're running the company well. Cash is a good story.
Industrial CFOA is up 79% year to date and free cash flow is up 54%. We did not receive a capital dividend in the quarter, but we're hopeful to get an additional dividend to the parent in the year. As we've said, our asset sales are ahead of plan and GE Capital has substantial strength to remain safe and secure. We expect to complete the Synchrony split by the end of 2015. And at the current stock price, our share of Synchrony is worth about 24,000,000,000 dollars The balance sheet is very strong with $17,000,000,000 of cash at the parent and our cash generation is on track for the year and we remain committed to our capital allocation plans.
Now over to Jeff to review the businesses. Thanks, Jeff. I'll start with the 2nd quarter summary. We had revenues of $32,800,000,000 which were up 2% in the quarter. Industrial revenues including corporate were up 1% $26,900,000,000 You can see on the right that the industrial segments were flat on revenue for the quarter, but up 5% organically.
Industrial operating plus verticals EPS was $0.31 which was up 19% year over year. That's driven by industrial up 18% and the verticals up 25%. The operating EPS number of 0 point including the consumer segment, headquarter runoff and other exit related items, which I'll cover in more detail shortly. Continuing EPS of $0.24 includes the impact of non operating pension and net EPS of negative 0.13 dollars includes the impact of discontinued operations. The total disc ops impact in the quarter was negative $3,700,000,000 which included a $4,300,000,000 non cash charge related to moving the majority of our GE Capital CLL business to held for sale.
We disclosed this earlier in the month. Partly offsetting the charge was income associated with CLL and real estate. This charge was included in the total $23,000,000,000 GE Capital estimated exit impact that we communicated in April, but earlier than we originally planned based on accelerated sales activity. As Jeff said, we had a strong performance on cash with CFOA for the half up $3,900,000,000 or 17%. Industrial CFOA was $3,500,000,000 at the half, which was up 79%.
In the Q1, we had $450,000,000 of GE Capital dividends and we did not receive a dividend from GE Capital in the 2nd quarter. The consolidated tax rate for the quarter was 27%. The GE rate was 21% in line with guidance we provided. The GE Capital reported rate was 45% driven by tax charges associated with the exit plan and the vertical tax rate in the quarter was 6%. On the right side, you can see the segment results.
As I mentioned earlier, Industrial segment revenues were flat on a reported basis, but up 5% organically, reflecting 5 points of headwind from foreign exchange. Foreign exchange was $1,300,000,000 drag on Industrial segment revenue and about a $215,000,000 impact on Industrial segment's op profit. Despite this headwind, Industrial segment operating profit was up 5% and organically the Industrial segments were up 11%. GE Capital vertical earnings of $531,000,000 in the quarter were up 19%. Before we get into the traditional pages, I wanted to first walk the different elements of our earnings for the quarter so the dynamics are clear given all the moving pieces of GE Capital.
Starting with the first column on the left and working down, industrial operating net income was $2,600,000,000 and vertical income was $500,000,000 for a total industrial plus verticals operating earnings of $3,200,000,000 The GE Capital Consumer segment earned $459,000,000 during the quarter, which is comprised of $463,000,000 for Synchrony, offset by our non strategic global consumer portfolio. We incurred $772,000,000 of costs driven by exit related tax and restructuring charges, headquarter runoff, operating expenses, excess interest and preferred quarter. As a result, total operating earnings were $2,800,000,000 Including non operating pension costs, continuing earnings were $2,400,000,000 In discontinued operations, you can see the 4,300,000,000 dollars held for sale charge for CLL as well as the impact of CLL real estate earnings in the quarter. Adjusting for these items, net earnings for the quarter were negative $1,400,000,000 In the center and far right columns, you can see the associated EPS impacts and the variance versus prior year. Next on industrial other items in the quarter, we had $0.03 of charges related to ongoing industrial restructuring and other items as we continue to drive the cost competitiveness of the company.
Charges were about $400,000,000 on a pre tax basis and $280,000,000 after tax. About 40% of that related to restructuring oil and gas as we continue to execute on an aggressive cost out program in that business. We also had $0.03 of gains in the quarter, primarily related to the NBCU settlement that we disclosed in June. We also had a small gain related to a disposition in oil and gas. Both of these transactions were booked in corporate.
On a pre tax basis, gains and settlements totaled about $500,000,000 but given the high tax rate on these transactions, the after tax impact was $295,000,000 in the quarter. As you're aware, we are expecting gains in the second half from the appliances and signaling transactions. We expect gains and restructures to be balanced on an EPS basis for the year. We've increased our expected restructuring from about $0.09 to about $0.12 due to the higher gains we expect in the year and additional attractive restructuring opportunities we see. Now I'll go through the segments starting with Power and Water.
Orders of $7,800,000,000 were up 22% in the quarter, up 27% ex foreign exchange. Equipment orders were higher by 29% with distributed power up 68%, thermal was up 25% and renewables higher by 24%. Distributed power was driven by domestic orders for LMS-one hundred units from 2 customers. Reciprocating engines for gas compression remained weak and were lower by 37%. In thermal, we booked 18 gas turbines versus 10 last year, including an H turbine in Korea.
This brings our H units to 17 in backlog and an additional 44 technical wins. Renewables orders totaled 888 wind turbines versus 715 a year ago. Our 2 new NPI products, the 2.0 and the 2.3 Megawatt platforms received additional orders for 200 units in the Q2 of this year. We also launched the digital wind farm software solution featuring a new 2 megawatt modular turbine connected to the industrial Internet and built on our Predix platform. This application will drive up to 20% more annual energy production for our customers.
Service orders were up 17% on strong PGS growth in ASEAN and the Middle East, North Africa and AGP orders were 39 versus 19 last year. Revenues in the quarter were higher by 8%. Revenues were higher by 15% organically. Equipment revenues were up 10% driven by renewables up 53% on shipments of 806 wind turbines versus 510 last year, partially offset by distributed power down 20% on lower turbine and engine shipments and thermal down 3%. We shipped 24 gas turbines, 3 higher than Q2 of last year, but with reduced scope and a mix of more 7Fs and 9Fs.
Service revenues were up 6% with PGS up 9% on higher installations, strong upgrades including AGP sales of 26 versus 19 last year. Operating profit in the quarter was up 8% reported and up 14% organically. Growth was driven by volume, price and base cost productivity more than offsetting h turbine ramp costs, negative mix driven by wind and distributed power and foreign exchange. Operating margins in the quarter were flat at 18%. The framework for power and water remains intact.
We expect 100 to 105 gas turbine orders and shipments, 3000 to 3,200 wind shipments and AGP upgrades of 90 to 100. Distributive power we think will remain challenging for the year. Next on oil and gas, the business performed as we expected in the 2nd quarter on orders and revenue and performed slightly better than we expected on operating profit. I'll start with orders. Orders were down 20% reported and down 11% organically.
Equipment orders were down 14% and flat organically. Turbomachinery was higher by 40% driven by new LNG orders and downstream was higher by 53% from strength in Sub Saharan Africa and the Middle East. The strength in turbomachinery in downstream were offset by subsea, which was down 48% on tough comparisons and surface was down 31% on weak North American demand. Service orders in the quarter were down 26% and down 20% organically. Turbomachinery and Subsea were down 36% 30% respectively.
M and C was down 22%, principally driven by the Wayne disposition and the softer market. Downstream was up 23%. Revenues of just under $4,100,000,000 were down 15% reported and down 4% organically, driven by foreign exchange and the Wayne disposition. Equipment revenues were down 20% reported, down 8% organically, principally driven by Turbomachinery down 20% or 7% organically and Surface down 24%. M and C was stronger by 10% organically and Service revenues were down 9%, but up 1% organically.
Operating profit was down 12% to $583,000,000 in the quarter, but was up 5% versus last year organically. Foreign exchange translation was $115,000,000 headwind in the quarter. Margins grew 40 basis points and were up 140 basis points organically. The business executed well delivering on manufacturing productivity, positive value gap and executing structure. Through the first half, oil and gas revenues were down 12% reported and down 2% organically.
Operating profit was down 9% reported, but was up 8% organically. Margins improved 40 basis points reported and 120 basis points organically for the half. The business team is ahead of their plan to take out $600,000,000 of cost this year. The framework we laid out for you at EPG of operating profit down 5% to 10% reported and down 0% to 5% organically is unchanged. Next up is aviation.
Global air travel continues to grow robustly. Passenger traffic grew 6.3% year to date through May with strength in both domestic and international travel. Most regions saw strength and airfreight volumes grew 4% year to date. Aviation had a very strong orders performance in the Q2 with $7,600,000,000 of orders, up 30%. Equipment orders grew 37% to $4,000,000,000 driven by commercial engine orders growth of 71%.
GE90 and 9X orders of $2,000,000,000 were higher by 12 times with key orders from United, Korean Air, Qatar and ANA. GNX orders were higher by 3 times. Commercial engine backlog grew 43% in the quarter to $29,000,000,000 Military equipment orders were down 31%, more or less as expected. Service orders were up 23% with commercial spares up strongly at 33% or $37,900,000 a day and military service orders were up 73%. Services backlog ended at $107,000,000,000 up 7%.
Revenues in the quarter of $6,300,000,000 were up 3% with commercial equipment higher by 7%. The business shift 86 Gen X engines versus 75 a year ago, which includes 15 units delayed from the Q1. Military equipment was lower by 12%. Service revenue was up 6% and commercial spare parts higher by 30% and military was higher by 15%. That was partially offset by lower commercial time and material shop visits.
Operating profit was 6% higher than the Q2 of 2014, driven by strong value gap and base cost productivity. Margins expanded 60 basis points in the quarter. The aviation team continues to deliver operationally and win commercially as they execute on multiple new product introductions. At this year's Paris Air Show, we announced $19,000,000,000 of orders and commitments. LEAP testing and performance remains on track and the first LEAP installed engines will go into service in mid-twenty 16.
On healthcare, orders of $4,700,000,000 were down 3%, but up 4% organically. Orders in the U. S. Grew 3%, Europe was down 13%, but up 7% organically. Japan was up 12% organically with Africa higher by 40%.
Offsetting these strong organic results were the Middle East down 6% driven by Saudi and China down 7% on continued tenders. In terms of business lines, healthcare systems orders were down 3% reported, but up 3% organically. U. S. Imaging and ultrasound were up strongly at 8% with MRI higher by 17% and ultrasound up 7%.
Japan was up 1% and up 19% ex the impact of the yen. Africa was up 42% on a large Minister of Health deal in Kenya and China was soft. It was down 9% in the quarter. Life science orders were down 2% reported, but up 7% organic with bioprocess continuing to grow up 13% organically. Revenues in the quarter were down 3%, up 3% organically.
Healthcare Systems revenues were up 3% organic and Life Sciences grew 8% organic. Operating profit was down 3% reported, but up 2% ex foreign exchange. Volume growth and productivity was partially offset by foreign exchange and price. Margin rates were flat in the quarter. While the U.
S. Market continues to grow, Europe appears stable. We believe we continue to take share in most the markets we operate in. China remains a challenge with slow tenders, but we do not think there's an underlying demand problem. We really like the outlook and the growth trajectory for the bioprocess business within life science.
Next up is transportation. Rail volumes were down 1 0.8% in the 2nd quarter with carloads down 7% driven by coal, petroleum and agriculture and that was partially offset by a 4.4% increase in intermodal traffic. Rail volumes for the half were essentially flat with last year. Transportation orders were down 5% in the quarter, driven by lower equipment orders down 19%, partly offset by 6% growth in services. Locomotive orders in North America were lower by 99 units, partly offset by strong international orders.
Service strength was driven by $115,000,000 order for Movement Planner and our solution software business and very good spare parts demand. Backlog grew 32% year over year to $21,000,000,000 Revenues were up 9%, principally driven by equipment growth of 13% and services higher by 6%. We shipped 191 locomotives in the quarter versus 165 in the Q2 of 2014. Operating profit was up strongly at 23% driven by higher locomotive and parts volume, strong productivity, partly offset by mining mix and Tier 4 ramp costs. Margins improved in the quarter 2 60 basis points versus last year.
We currently have 18 preproduction Tier 4 units in revenue service with customers and we will begin shipping our first production units this The launch remains on track. In Energy Management, orders were $2,000,000,000 in the quarter, up 5%. Orders were higher by 13%, excluding the effects of FX. The business saw strength in power conversion higher by 33%, partly offset by digital energy down 5% and industrial solutions down 6%, but roughly flat organically. Strength in power conversion was driven by higher penetration of renewables market where the business has grown its share 50% in the last year.
This was partially offset by weakness in oil and gas related marine space. Backlog grew 10% to $5,500,000,000 in the quarter. Revenues of 1,800,000,000 dollars were down 5%, but up 4% organically. Organically power conversion was higher by 13%, digital energy up 2% and industrial systems was down 2%. Operating profit was up 19% versus last year and up 40% organically.
Growth was driven by strong productivity more than offsetting foreign exchange. Margins improved 90 basis points in the 2nd quarter. Through the first half, Energy Management operating profit is up 49% reported and up 96% organically. Finally, with appliances and lighting, revenue was up 5% in the quarter with appliances up 7% on strong volume and lighting was up 2%. The U.
S. Appliance industry units were higher by 6% with retail up 5% and contract up 12% on robust housing starts. In lighting revenue growth was driven by LED, which was up 77%, partially offset by a 17% decline in traditional products. LED now accounts for 36% of lighting revenue, up 15 points from last year. We believe we're on track for approximately $1,000,000,000 of LED revenue in 2015.
Operating profit was higher by 62% in the 2nd quarter driven by higher volume and strong productivity. As has been reported, the U. S. Antitrust authorities have filed suit to challenge the sale of GE appliances to Electrolux and we plan to vigorously defend the transaction in court. We expect the trial to begin in the Q4 and our goal remains to close this deal this year.
We are confident the transaction is good for customers and consumers and that acquiring the GE Appliances brand would help Electrolux compete in an increasingly global and intensely competitive industry. And finally, I'll cover GE Capital. As I discussed earlier, our vertical business has earned $531,000,000 this quarter, up 19% from prior year on strong performances across aviation, energy and healthcare. Portfolio quality is stable and GECAS finished the quarter with only 1 aircraft on the ground. The verticals generated $2,200,000,000 of volume in the quarter, up 4% and 80% of the GECAS volume and commitments were powered by GE CFM equipment.
Energy Finance arranged deals in the quarter that will fund over 180 GE wind turbines. Working down the page, consumer earned $459,000,000 during the quarter, down 3% driven by Synchrony's minority interest. Our share of the Synchrony earnings was $463,000,000 In the quarter, the Synchrony team filed for separation with the Federal Reserve and we continue to target year end subject to regulatory approval. As in prior quarters, CEO, Margaret Keane will host Synchrony's earnings call later today. Corporate generated $772,000,000 charge in the quarter, driven by exit related tax and restructuring charges, headquarter runoff operating expenses, excess interest and our preferred dividend of $160,000,000 in the quarter.
Discontinued operations ended the quarter with a $3,700,000,000 loss. Results were driven by our commercial lending and leasing business as the majority of that business was moved to discontinued operations in the Q2 as you will have seen from our 8 ks published in early July. As part of accelerating our timeline, we recognized $4,300,000,000 held for sale loss, which includes the write off of $8,000,000,000 of goodwill. This charge is included in the $23,000,000,000 total cost construct we shared with you in April. On an economic basis, we expect the CLL portfolios to generate a gain versus our tangible equity.
Other earnings from discontinued operations were $582,000,000 for the quarter and are primarily driven by CLL operations. Overall, GE Capital reported a $3,500,000,000 loss and we ended the quarter with $179,000,000,000 of ENI excluding liquidity. That's down $124,000,000,000 from the prior quarter. Our liquidity levels remain strong and we ended the quarter at $85,000,000,000 including $14,000,000,000 attributable to Synchrony and our Basel III Tier 1 common ratio was 11.4 percent. That's up 80 basis points from the first quarter.
We expect this ratio to continue to improve as we dispose of risk weighted assets. In terms of portfolio sales, the team continues to make good progress. During the quarter, we signed deals representing approximately $23,000,000,000 of E and I, bringing our year to date total to $68,000,000,000 There continues to be strong interest in our portfolios and we have $80,000,000,000 of additional E and I in the market currently. By year end, we are on track to close $100,000,000,000 and signed between $120,000,000,000 $150,000,000,000 in total. We expect to be largely complete with our exit plan by year end 2016, a year earlier than our original plan that we shared with you in April.
At the bottom of the page is the 2015 dividend matrix we shared with you on April 10 when we announced the GE Capital exit. We are operating the business through the process at 14% Tier 1 common. As I discussed earlier, we ended the quarter at 11.4 percent Tier 1 common. We expect to improve the ratio to 14% or better by year end as we close the $100,000,000,000 of estimated deals. Overall, Keith and the GE Capital team delivered a strong operational quarter and remained focused on delivering on the portfolio transformation.
With that, I'll turn it back to Jeff. Thanks, Jeff. We have a few adjustments to the 20 15 operating framework. We're increasing the low end of the range with new expectations of $1.13 to $1.20 So far this year, organic growth and margin expansion are trending towards the high end of our expectations and we expect this to continue. We're still planning for our transactions to close by the end of the year.
The verticals will remain on track for $0.15 EPS and the accounting around capital exits are consistent with our plan. Think it's likely that the Synchrony split occurs this year. GE Capital Asset sales closings are tracking towards $100,000,000,000 of E and I, and we expect signings in excess of that number. Free cash flow is on track for $12,000,000,000 to $15,000,000,000 and we're hoping to expand the GE Capital dividend based on faster asset sales. And just for perspective, appliances represents about $2,000,000,000 of the disposition cash.
We've showed a range of $10,000,000,000 to $30,000,000,000 of cash returned to investors. Our capital allocation plans are on track. And if Synchrony occurs this year, we will be at the high end of this range. So the GE team is executing. Despite managing a substantial portfolio pivot, our operating execution remains excellent.
We're gaining momentum towards our long term goals and going forward, we can give strong industrial EPS growth while returning significant cash through dividends and buyback. And we've created a premier industrial company well positioned to win in this environment. So Matt, let's take some questions.
Thanks, Jeff. I'll now turn it over to the operator to open up the phone lines for questions.
Our first question comes from Scott Davies with Barclays.
Hi, good morning guys.
Hey, Scott.
Happy Friday summer. Hopefully, we can all go home a little early and this earnings release is relatively easy to get through versus the past. So thanks for that. I wanted to ask a couple of questions and first one just related to oil and gas. When you take your the order book and pricing in that order book and you push it forward to whatever the typical backlog of that is, let's say, it's 6 months or so, can you hold margins when you get to that timeframe?
How does that mix shift look? I'm just trying to get a sense of how you even think about modeling a down 20 plus percent order book in that business?
Well, Scott, I'll start and then let Jeff also add some perspective. I think our expectation always was that we could hold margins as we went through this process. And you've seen that so far this year. There's I think going into the cyclicality in oil and gas there were a number of I would say inefficiencies already in the industry. So I think there's was good there were good productivity opportunities from the start.
We'll take out $600,000,000 ish of cost this year. That'll be more next year. So we've been able to do a good job on cost. And I think the combination of those things and the kind of mix of businesses we have, I think gives us a perspective that we should be able to hold our margins going forward despite a more challenging market. Yes.
The only thing I would add is that $1,000,000,000 cost out target for 2016 is absolutely critical to BAM. There's no question that although we've not repriced any of the existing order book, there's no question that new orders are going to be challenging from a pricing perspective. That's why all the work around restructuring product service cost is so critical in terms of profitability and operating margins. So the team has executed ahead of plan. We feel really good about their ability to execute on that cost roadmap that we've laid out with them.
Okay. That's helpful. And then as a follow-up just on asset sales, I mean, you made a commentary and said that things are ahead of plan. I mean, volume is certainly ahead of plan. But can you give us a sense of pricing and how and I know some of the stuff hasn't happened yet, but indications of interest and such and you're probably in various stages of price discovery, but give us a sense of really where pricing is coming in versus your expectations?
Yes. So if you think about it in terms of deals that Keith and the team have signed, right now we're roughly excluding real estate, we're about 5% a little over 5% ahead of the fair values we used on the April 10 call, the baseline if you will for the Hubbell. So, so far, I think we're doing better on price than that baseline. Having said that, because we're accelerating the sales of these portfolios and franchises, that means the earnings that we're going to enjoy over what we thought the whole period was going to be is shortened. And so right now, I would say that those two things more or less offset each other, better on price for what we've signed so far, but we're selling them quick and we'll earn less as a result of not owning them as long as we thought.
We can live with that.
So still on track for the 3rd part. Yes. Still on track. Yes.
Yes. No, I get
it. Okay.
Thanks guys and good luck.
Great. Thanks Scott.
Next question comes from Stephen Winoger with Bernstein.
Hey, thanks and good morning, guys.
Hey, Steve. Hey, so I just want to
make sure I understand a little bit how you're thinking about the one time items and restructuring offsetting the gains. On the NBCU gain side, what drove that this many years later? And how do you think about that from an accounting or maybe a reporting perspective in terms of comparison with Lake and other things that you treated in discontinued operations versus putting this one in continued op? I just want to understand the logic there.
Well, it was a result of an agreement when the initial JV was set up. It had a lifespan that spanned many years. And in the Q2, we and Comcast agreed to settle that arrangement if you will. It was $450,000,000 in the quarter as we talked about about $0.03 after tax. The accounting around it has it in continuing operations.
The accounting doesn't push it into discontinued operations. So it's just a function of how the accounting works.
So okay. But the why would Lake have been in disc ops but not this?
Because we moved the whole Lake operation into disc operation to discontinued operations and NBC as a result of this JV operation that was in continuing ops and we just settled it. And it's always been there. Okay.
All right. Fair enough. Next question, what is the transaction that we're talking about? I know you can't comment a lot in appliances and Alstom. If they do not close by the end of the year, how would that affect the operating framework that you've laid out quantitatively?
Yes. So here's how I think about it. I mean, generally speaking, if we didn't close Alstom, the impact in 2015 would be pretty de minimis. It would not have that big an impact. I think we told you that we were expecting Alstom net of everything to be about $0.01 a in the year.
So on appliances, obviously, we the framework included the gain associated with appliances. And we'd pick up a couple more quarters of earnings than we had anticipated that would have offset part of that. And then we'd relook at what we're doing around restructuring. Right now, we're talking about $0.12 of restructuring and we'd rethink about whether we're going to do $0.12 of restructuring. So that's how we're kind of that's how we're thinking about the framework for the year.
Okay. And on that topic, Jeff, I know you set expectations for how you were thinking about potential concessions with Alstom at EPG and you guys were on the table this week on that front. And you can't disclose the detail, but can you let us know how consistent what you provided is with your prior commentary?
So Steve, again, we're constrained on what we can say. I think the proposal is confidential and it doesn't it's not final really until the commission evaluates to make a decision. What I would say is that we proposed a remedy that addressed their concerns while preserving really the strategic and economic rationale that I reviewed with you guys in the past. And look, we still like the deal for the company and more news as the process goes on. But we like the deal and it's consistent with the things that economically that we've talked about as the rationale for the deal.
Okay. Thanks. I'll hand it on.
The next question comes from Shannon O'Callaghan with UBS.
Good morning.
Good morning, Shannon.
Hey, can we go through a little bit more on these margin drivers? They moved a decent bit from what they were in the Q1. The mix got a lot more negative. I think GEnx was a good part of that. And then value gap and cost productivity got a lot better.
Can you just run through kind of what moved those things relative to
what we saw last quarter?
Yes, sure, Shannon. So as you know, mix was actually a good guide in the Q1. It was negative here in the Q2, 70 basis points for the half. It's negative 10 basis points. As we said in the Q1, we expected mix to turn around a little bit here in the Q2.
And in fact, you're correct. Part of that is the higher Gen X shipments and it's also a function of higher wind shipments and lower distributed power quarter to quarter. So that's what happened on the mix line. Value gap got substantially better. Value gap in the Q2 was about $193,000,000 It's $221,000,000 for the half.
So up substantially from $28,000,000 of value gap in the Q1. And we continue to deliver cost productivity on product and service. And so the Q2 we had 60 basis points of margin improvement in the gross margin line and then 70 basis points at our profit. So the net of simplification and other inflation added 10 basis points below gross margin. So that gave us a first half of 70 basis points improvement in the gross margin line and 100 at our profit.
So those are really the dynamics. I think mix turned around like we thought it would versus an extremely strong Q1 and value gap got substantially better.
And how should we think about these different dynamics playing out for the rest of the year?
So I think what we said earlier in the year is that we thought mix would be plus or minus for the year. And I think we still feel like based on backlog and what we expect order shipments to look like for that to be roughly correct. I said value gap for the year would be roughly as it was in 2014. 2014 was about $300,000,000 We're a little ahead of that run rate here through the half. We'll see how that plays out.
Price has been pretty good actually both in Power and Water and Aviation. So that's how I don't think the framework has changed materially from what we told you earlier in the year.
Okay. And then just on assessing this 2015 capital dividend, we got the $100,000,000,000 of sale assumptions and 14% Tier 1. Is there something else that could move that significantly off of being a $1,000,000,000 dividend plan for the year for capital?
Well, I think that we're hopeful that as we move through and Keith and the team close these $100,000,000,000 of transactions that that 11.4% Tier 1 common rate is going to move to 14% and beyond. And for them to be in a position to dividend us money this year, we need to be above the 14%. We have a few other moving pieces we're working. We have a stress test we got to do, etcetera. But we're hopeful that we can outperform the $500,000,000 certainly they've given us so far.
And we gave you a range here of $500,000,000 to $7,000,000,000 in April 10 and I think we're kind of still in that range.
And is there a time when you make that decision or is it based on the timing of asset sales?
It's based on the timing of asset sales and more likely than not would be late Q4.
Okay. All right. Thanks a lot.
The next question comes from Deane Dray with RBC Capital Markets.
Thank you. Good morning, everyone.
How are you doing?
Doing real well. Thanks. Hey, just going back to the Alstom deal and I know there's sensitivities here, but can we talk about the plan B? If you do have to walk away from a compromised deal, is it clear that you would put all that deal capital right into buybacks?
Dean, I'm just not going to go there. I think we like this deal. It's our intention to really close the deal. And that's really where our stand is. So let's just leave it at that.
Sure. I appreciate that. And then just move it the focus over to geographical for a moment. And I don't know, it just struck me as ironic that this quarter the growth markets were the laggards. And maybe you can comment on that in particular the 2%.
Healthcare was weak in China, but that doesn't seem to be a longer term trend. But just kind of parse through the dynamics on the growth markets.
So let's see Dean. I'd say the if I just gave you a kind of half to date the on China, the orders were up 15% and the revenues up 12%. That's kind of, let's say, first half twenty fifteen versus first half twenty fourteen. And then if you looked at some of the growth regions from a standpoint of orders, I'd say Latin America and Middle East, North Africa, those places are hanging in there. We're certainly seeing pressure in places like Russia and ASEAN countries.
But I'd say the strength is the diversity of the portfolio. And it's our expectation for the year that these are kind of ex FX, probably high single digits, mid to high single digits on the growth regions for the year. Yes. I would just add, Jeff, that we're kind of in the cycle now where the developed markets are stronger
than that.
So in the U. S, in the second quarter, we were up 10% on orders. I talked about Japan being up ex FX up very strong up 86%. And Europe was actually up 4% ex the effects of exchange. So the developed markets seem to be getting a little bit stronger and the developing markets are certainly much more mixed.
I'd say mixed. Yes.
Great. Thank you.
Thanks, Ian.
The next question comes from Jeff Sprague with Vertical Research.
Thank you. Good morning, gentlemen.
Hey, Jeff.
Hey. Just a couple of questions. Just on the additional restructuring, I was just wondering what it is you might be targeting. And I guess specifically thinking about the quarter, it sounds like only about 40% of the restructuring spend is actions that might have some kind of payback as opposed to mortality and other kind of loose ends cleanup. Is that correct?
And how do we think about that going forward?
Yes. So we think we have a number of opportunities to increase the amount of restructuring we do to get ourselves positioned for 2016 and beyond, particularly around competitiveness. As I said earlier, if for some reason we didn't close appliances, we may take a harder look at that. Of the restructuring we spent in the quarter, about $140,000,000 of that was in oil and gas and we see very good paybacks around that. All the projects we're working on today are all inside of the 1.5 year payback kind of benchmark that we've shared with you over time.
The nature of the restructuring has changed pretty dramatically though. There's about less than a third of what we're doing today is SG and A related and more like 70%, 75% of it is product and service as we really focus on gross margins and product and service cost competitiveness. So I think we're on track to invest at very good returns in restructuring this year and they're critical to delivering not only the year, but setting us up to deliver on 2016 and beyond.
And has the mortality hit just a one time adjustment? I thought that was more of an ongoing change in pension costs?
Yeah. It's a change for the year that we planned out in restructuring and other charges. It's about $40,000,000 in the quarter pretax. So it's $20,000,000 after tax. It's not a big item.
And then just switching gears. Oil and Gas Services, the weakness in orders there, what's actually driving that? It's a little surprising that's weaker than equipment orders. Do you see people pulling back on OpEx as opposed to CapEx or some other timing noise there in the quarter?
Yes. Some of it's timing. Services across the board were pretty challenged here in the quarter. I would say the biggest driver as you would probably expect has been service. I'm sorry, surface.
Orders were quite weak around pressure control, well performance solutions. Lufkin was down 40% in the quarter. So that's really where the challenge is. But each one of the businesses had a challenge around service in the quarter.
Great. Thank you.
The next question comes from Julian Mitchell with Credit Suisse.
Hi. Thank you. I just wanted to ask around the PGS orders. I think they were very strong up 17% or so. You called out what's going on in some of the emerging markets, but maybe give some more color on thermal power services in the U.
S. And Europe what you're seeing?
Again, excellent work on the AGPs. I would say, Julian, continues to be robust. I think just the overall mix and usage around gas turbines is high as there's incremental shift from coal. So those remain 2 big drivers, I think, of Power Gen Services. And I would say DP Services, despite the new unit being softer in distributed power, the distributed power service business has done very well in terms of upgrades and service performance.
So I think they had another good quarter and are pretty well positioned for the rest of the year. Yes. I'll just do a quick run through. Service is up 17% as you referred to. Jeff talked about 39 AGPs in orders in the quarter.
That's up 20% versus last year, very strong. But distributed power services were up 27% and regionally orders were very strong and the Middle East were up above 60% and Asia and China the combination of Asia and China and India was up 38%. So very strong in the quarter. And we have we like where the business is heading for the year as well.
Thanks. And oil and gas, fairly disparate collection of assets and backlog length and so on. You sound pretty confident on the earnings outlook for this year for that segment. How much of the balance of the second half sales and earnings are in your backlog as of now?
Yes. So at the moment in total about 67% of sales in the 3rd Q4 are in backlog. As you would expect like subsea and drilling were closer to 85% in backlog, TMS much higher downstream technology about 80% backlog. So the business has got the biggest and closest to a flow business is surface. Service got about a third of their second half revenue and backlog.
So we think we're in pretty good shape here for the balance of 2015. Again, I would go to the mix of businesses. Turbomachinery and Downstream continue to be reasonably strong. Surface, as Jeff said, is the most challenged. So I think the mix of businesses helps give us a little bit more visibility than maybe some others.
Thanks. And just very quickly, Healthcare. Should we think profits are maybe flat this year rather than seeing growth? I think they were flat in the first half.
No. I think organically, earnings are definitely going to be up. And we expect a team with restructuring and the fact that the U. S. Market is doing better.
We expect earnings growth in the second half even without FX.
Great. Thanks.
Thanks.
The next question comes from Nigel Coe with Morgan Stanley.
Thanks. Good morning.
Hey, Nigel.
Just want to continue with the oil and gas theme. Pricing this quarter was actually better than last quarter down 1.2 versus down 1.4. I'm just wondering, do you feel that the boundaries on oil and gas are now more defined? Do you feel more confident in where this goes in the second half of the year? And are you confident you can maintain price deflation in this kind of zone?
Look, I still think Nigel the industry is forming, right? So I think there's still volatility around oil price. I think we've taken a lot of costs out. I think everybody's learned how to compete at lower prices for oil. So I'm very confident in our ability to execute on the cost side.
I would say the repricing is still de minimis. So I don't we're not seeing massive headwind from that. And I just think it's one of those that we're going to have to continue to give you updates on kind of where the market is. But I just think we can manage our way through this.
Okay. Julian alluded to the Healthcare margins, and I'm wondering what is holding back the margins. We've seen a positive mix in Life Sciences. Obviously, there's a lot of work on G and A. So I'm wondering, are we seeing here a negative mix as developed markets outperform emerging markets?
Well, these guys have how much FX is in
the healthcare number, Jeff?
More than $100,000,000 isn't it? Yes. FX in Healthcare was $40,000,000 of translation in the quarter. Okay. And that's why the organic benefit in the quarter.
Now I think what we have going on in Healthcare is they've got a real price challenge. Price sequentially is down over a point. They continue to get base cost productivity. Where we need them to focus is on product and service margins. So it's not necessarily a mix issue.
You're absolutely right. Life science and bioprocess continues to grow. What we need to get at is product and service costs within the core HCS business. And that's what we're focused on driving.
Okay. Okay. And then just a final one. Obviously, Alstom, there's not a lot you can say there, but it's in the press that there's a deadline for your proposals and you've already made proposals. Are we still working towards the mid August timeline for a decision?
Or is that being pushed back to later in the quarter?
I think the timeline right now is in early to mid September, I believe, is where the timeline is, Nigel. And I think that's probably a pretty good timeframe.
Okay. I'll leave it there. Thanks.
Yes.
The next question comes from Andrew Obin with Bank of America Merrill Lynch.
Yes. Good morning.
Hey, Andrew.
Just more oil and gas. So what are you hearing about your customers on oil and gas side? Are you getting pressure requests to be the consolidator of the supply chain? Just seems that people broadly want to deal with people with real balance sheets and people who can survive the storm.
Look, Andrew, I think that's there's a certain amount that I think is going to be in play in that regard. I don't think that is a recent phenomenon. I think that started back several years. And so there remains in the oil and gas business a real opportunity to drive better system efficiency between suppliers and the IOCs and the NOCs. And we look at this cycle as a good opportunity for us to drive efficiency.
Okay. And just a follow-up question. Looking at your organic growth rates and order growth rates and compare them to what we're seeing Look, in our world, technology matters.
Look, in our world, technology matters. And so if you look at the aviation business, if you look at locomotives, if you look at gas turbines, if you look at healthcare, we have a great lineup of technologies that are quite robust. And in the end, that's the way you can gain good market position and margins at the same time. And then on the service side, I think our analytics are starting to play through both from a pricing standpoint and also from a productivity standpoint. So that's another example of technology and what it can drive.
So I think
So you look at it as a payoff on your investments over the past couple of years
many years?
I definitely do. Thank you.
Great, Jeff. A few quick items before you wrap up. The replay of today's webcast will be this afternoon on our website. We'll hold our Q3 2015 earnings webcast on Friday, October 16. And as always, we'll be available later today for questions.
Jeff? Great. Thanks, Matt. Again, I think you guys see the portfolio taking shape and the hard work we've done, but I really want to call out the great execution by the GE team in the quarter. I think margins, organic growth, cash, GE Capital Portfolio repositioning, the GE team really did a great job of execution in the quarter.
So Matt, back to you. Great. Thanks. Thanks everybody.
This concludes your conference call. Thank you for your participation today. You may now disconnect.