Good day, ladies and gentlemen, and welcome to the General Electric First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Ellen. I will be your conference coordinator today. If you experience issues with the slides refreshing or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh.
As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Matt Cribbons, Vice President of Investor Communications. Please proceed.
Thank you, Alan. Good morning and welcome everyone. We are pleased to host today's Q1 webcast. Regarding the materials for this webcast, we issued the press release and presentation earlier this morning on our website at atwww.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.
Those elements can change as the world changes. Please interpret them in that light. For today's webcast, we have our Chairman and CEO, Jeff Immelt our Senior Vice President and CFO, Jeff Bornstein and our Vice President, Subsea Systems, Rod Christie. We listened to your feedback and thought we'd try something new. To drive a more strategic discussion on the call, we'll be inviting business leaders to participate to talk about their business, markets, new product introductions and major initiatives.
We've asked Rod to join today to talk about Subsea. Now I'd like to turn it over to our Chairman and CEO, Jeff Immel.
Thanks, Matt, and good morning, everybody. Hey, look, the GE team had a good quarter in a volatile, but improving environment. The U. S. Gets a little bit better every day, Europe is improving and growth markets continue to expand and will provide growth during the year even with volatility.
We have strength across most of our portfolio as global infrastructure markets remain solid. We continue to benefit in energy, oil and gas and aviation sectors, and we saw some improvement in the demand for credit. At the same time, we encountered a few headwinds in the quarter. Weather impacted our appliances business, but improved in March. Transportation was impacted by mining inventory corrections and the U.
S. Healthcare market continued to experience volatility. Some of this improved as the quarter progressed. Our execution was strong. Industrial segment growth was up 12% above our 10% goal.
Organic growth was up 8% above our 4% to 7% goal. Margin growth was 50 basis points and we're on track to meet our goal of 17% margins by 2016. Our capital earnings and cash were in line with our expectations for the year. We returned $3,400,000,000 to investors in dividends and buyback and announced $2,000,000,000 of ball and acquisitions. And finally, we submitted our SEC filing for Synchrony, the RFS spin out.
This is an important step as we head for our 70% industrial goal. We delivered $0.33 of operating EPS of 9% excluding the impact of NBCU gains in 2013 and restructuring. This is the kind of quarter g investors should like. The environment was not perfect, but we're able to deliver strong results due to the breadth of our portfolio. Now orders were flat overall.
Backlog grew to $245,000,000,000 and orders pricing was up 0.4 points. While equipment orders can be lumpy, service orders things like aviation spares tend to be a good gauge of the underlying economy. And we saw broad strength in our service businesses with 4 of 6 segments up double digits. 6 of 9 growth regions grew orders by double digits in the quarter. Equipment orders were down in aviation and oil and gas versus tough comps in 2013, but we have a great backlog and position in each market and feel good about their long term growth.
In transportation, we see a strengthening market for North American locomotives and we won a very large order for kits for South America or South Africa. I would like to point out 2 other factors on orders. First, we see the pipeline building, so we feel good about growth during the year. And second, we have grown backlog by $29,000,000,000 from the Q1 of 2013 with growth in every segment. This fortifies our ability to hit goals this year and in the future.
The company executed well in the Q1. Industrial operating profit growth 12% is a good start to the year. Organic growth was up 8%. Growth markets continue to provide momentum with 5 of 9 up double digits and 7% growth overall. We made great progress in services with Aviation Spares up 22% and 17 Advanced Gas Pass up from 2% last year.
Equipment revenue grew by 12%. Our products are winning in the market with excellent growth in power, oil and gas and aviation. For instance, we're well positioned throughout our gas turbine product line, extending to the H turbine, which has more than 61 percent efficiency and more than 400 megawatts of output. Our Revolution CT just received FDA approval and should drive positive growth for the year. Europe grew by 14 percent in the Q1, so we are starting to get stabilization in that market as well.
Our target is to grow margins this year and we're off to a good start. This is our 4th consecutive quarter of expansion with 50 basis points of growth. We're driving simplification throughout the company and our restructuring efforts are paying off. We generated about $250,000,000 of structural costs out of the quarter and value gap had a positive 50 basis point impact on margins. We're getting traction with our FastWorks initiative, which is improving R and D efficiency.
Mix was a headwind, but our productivity programs more than offset. Finally, we expect broader business participation in the future. Healthcare, Energy Management and Appliances and Lighting should have positive margin and operating profit expansion for the rest of 2014 based on improving markets and restructuring. Our CFOA is off to a good start and on track for the year. We generated $1,700,000,000 up from $200,000,000 last year.
The company has substantial financial strength with $87,000,000,000 of consolidated cash and close to $12,000,000,000 at the current. As you know, we issued $3,000,000,000 of debt in the quarter. GE Capital remains in great shape with a Tier 1 common ratio of 11.4%. And meanwhile, commercial paper was at a very low level of $25,000,000,000 The total E and I of $374,000,000,000 was down 7%. We've allocated capital in a disciplined and balanced way.
We continue to invest in plant equipment to grow the company globally. Our dividend is up 16% year over year. We plan to reduce the float in 2014 and we're on track to reduce share count to $9,000,000 to 9,500,000 shares by the end of 2015 including the retail spend. And we will continue to bolt on acquisitions like the 3 we announced so far this year. Our target remains $1,000,000,000 to $4,000,000,000 but we have gone above on opportunistic deals that have excellent value, strong synergies, filler growth strategies and are immediately accretive.
For instance, Avio was above our range and accretive to investors. At the same time, we plan for about $4,000,000,000 of dispositions this year. Now I'll turn it over to Rod Christie, who runs our Subsea business. As Matt said earlier, we plan to review an important segment or initiative each quarter. As the year goes on, we plan to cover topics like heavy duty gas turbine technology, healthcare and life sciences, China, and other important operating initiatives or organic growth opportunities.
So now I'll turn it over to Rob.
Thanks, Jeff. So starting on the left side of the page, I want to give you a flavor of how we see the long term prospects for the oil and gas industry before we drill into the subsea sector specifically. The forecast is for global oil and gas demand to continue to grow through 2018 with oil mainly driven by the ongoing industrialization in emerging economies and the rise of living standards. While gas emerges across mainly all of the economies as a cleaner fuel source. In addition to the increasing demand, the other dynamic to consider here is well decline rates on existing operations of around 3% to 4% onshore and 6% to 10% offshore.
The combination of both these factors makes ongoing investment necessary to develop new reserves and enhance the recovery in existing assets. Moving to the top right of the page, we see these dynamics driving 4% and 2% CAGRs in production rates for oil and gas respectively through 2018. And the expectation is for stronger growth in subsea and unconventional production. Translating all of this into total industry spend, we expect to see continued growth as IOCs, NOCs and independents work to recover more hydrocarbons from existing assets and bring on new reserves to meet the growing demand. With respect to the subsea sector, the expectation for long term development of deepwater reserves is supported by the robust activity we see in drilling and front end engineering design through the cycle.
Given this expectation, our Subsea Systems business is well positioned to serve customers with both technology and life of field services across the globe. Our extensive capabilities enable us to provide everything from discrete components to full Subsea's production systems. We're also uniquely placed against our competitors and that we can leverage technology other GE businesses and run joint technology programs specific to the critical need. To give you a couple of examples here, we cooperate with GE's monitoring and controls business in the area of subsea integrity management and leverage their sensing and diagnostics technology specifically developed for our own space. We're also running a joint technology program with GE's power conversion business for subsea power and drives.
This really enables us to develop value added solutions under one roof wherever the core competency actually exists inside GE. Likewise, GE gives us the ability to scale up. As many of you will be aware, localization is often a mandatory requirement in our industry. When we move into new geographies, it's not unusual to find other GE businesses are already there, users either power and water or another oil and gas business. This means we can leverage their relationships, their knowledge and potentially their footprint.
Additionally, we've been working with GE's global growth and operations team to accelerate development in countries like Nigeria and Angola where we can benefit from their high level relationships and the back office support to get things up and running very quickly. Today, we're present in all the deepwater basins around the world such as Brazil, Sub Saharan Africa, Asia and Australia, while still retaining significant capability around both the U. K. And Norwegian continental shelves. Our experience in extreme cold water and long step out capabilities for controls and for power solutions position us well for future activity.
A sector that's going to require really no topside and has the added complexity really of an ice bound environment. So 2 years ago, a major subsea industry survey took feedback from 135 customers and ranked each supplier against the top priorities of the subsea oil and gas operators. The chart on the left of this page details how GE was rated against our competitors back in 2012. As you can see, we performed well in the key areas like EHS, reliability and technology. However, we were mid pack when it came to on time delivery.
And in fact, really none of the suppliers are performing consistently to an acceptable level in this critical requirement. This is one of the main risks to both the supplier and the customer in this industry and a significant number of large scale subsea development experience both schedule and cost overrun. Given that the timing and carrying costs for CapEx outlay on these projects is a key driver in overall returns, we have focused investments to differentiate Performance Ground Cycle and on time delivery. As of today, we offer a suite of structured products that offer modular customization to our customers. So let me just expand a little bit on modularization.
What that really means is we can provide exactly what a customer wants, but we do it with less engineering and less supply chain risk as we use a standard module to do so. We've also completed significant process reengineering to drive speed and transparency across our business operations. We've created a global project CoE that interfaces directly to all of our sites and suppliers and supports our project teams wherever they're operating in the world. To underpin this, we've also invested in an integrated IT infrastructure, enables us to scale the organization through industry cycles without losing either capability or impacting our operational excellence. The final piece of this jigsaw really has been the investments we've made in creating new capacity and unlocking latent capacity in a number of our factories.
Today, using lean manufacturing disciplines, we've increased capacity for trees, controls, wellheads and manifolds. In general, we've been able to realize capacity increases between 30% 100% in our existing facilities and have commissioned new capacity in Indonesia and Brazil. In short, we feel we're very well placed to take on new commitments. Growth in the deepwater oil and gas sector looks strong over the long term and we feel very confident about our competitiveness of both our existing product lines and the technologies we have in development. The investments we've made in capacity and capability also put us in a great position to support our customers wherever they operate in the world.
Just to give you some context on the evolution of the Subsea Systems business. In 2011, we were executing a handful of small projects and 2 subsea production EPC projects, the largest of which was around $600,000,000 Today, we're executing 8 EPC projects, the largest of which exceeds $1,300,000,000 The programs we've undertaken to structure our products, we announced supply chain and project operations are yielding results in cycle time reduction and cost reduction. And we expect to see further benefits come from these as we drive these deeper into our business. Just to give you some context here, 1Q revenue, we saw a 37% increase year over year and a 3x increase in both margin and in rate. On top of this, our global footprint really makes us local and capable in the main deepwater basins today.
And GE's reach means we can move quickly and at scale in any of the developing geographies. Overall, we really feel very good about the fundamentals of this business. And it's really have to say that I'm very excited about the way this moves in the future. So with that, I'll pass it over to Jeff.
Great. Thanks, Rod. I'm going to start with operations in the quarter then we'll move through the segments. We had continuing operations revenues of $34,200,000,000 down 2% from the Q1 of 2013. Industrial sales of $24,000,000,000 were up 8% and GE Capital revenues of $10,500,000,000 were down 8 percent.
Operating earnings of $3,300,000,000 were down 18% and operational earnings per share of $0.33 were down 15%, principally driven by NVC as Jeff mentioned earlier. On the next page, I'll take you through more detail on the normalized EPS walk versus last year. Continuing EPS of $0.29 includes the impact of non operating pension and net earnings per share of $0.30 includes the impact of discontinued operations. We had $12,000,000 benefit in the quarter in discontinued operations with no material impact from WMC. Pending claims to WMC declined to $4,500,000,000 reflecting $1,200,000,000 of resolutions with reserves declining in line with expectations.
New pending claims in the quarter were negligible. As Jeff said, Q1 CFOA was $1,700,000,000 We had industrial cash flow of $1,200,000,000 and received 500 $1,000,000 of dividends from GE Capital. The GE tax rate for the quarter was 24% and the GE Capital rate was 9%. For the year, we're still expecting the GE rate to be around 20% and the GE Capital rate to be in the single digits. On the right side, you can see the segment results.
As Jeff mentioned, performance was mixed by business, but overall pretty good with Industrial segment revenues up 8% and operating profit up 12%. GE Capital earnings were flat in the quarter on lower assets. Now I'll take you through the dynamics of each of the segments on the pages that follow. And 1st on the other items page, I'll start with the adjusted EPS swap. So last year, as you recall, we had operating EPS of $0.39 in the Q1.
This included $0.10 of gains and income from NBC that was offset by $0.04 of industrial restructuring and other items. We also had a $0.05 gain at GE Capital from the sale of 30 Rock that was offset by other charges as well. That walk gets you to an adjusted operating EPS of $0.33 last year. This quarter, we had $0.03 of industrial restructuring and other items. Making the same adjustment for 'fourteen gets you to $0.36 and that's up 9% on an adjusted basis.
That's how we're thinking about operating performance in the quarter. On the right side, as I mentioned, we had $0.03 of charges related to industrial restructuring and other items as we continue to invest in simplification to improve the company's cost structure. The spend was broad based with projects in every business and corporate. We're executing more than 150 projects that average about a year and a half payback. The projects relate to everything from manufacturing footprint reductions, service shop consolidations, SG and A actions and exiting low margin product lines, primarily in developed markets.
We're continuing to work through timing of European Work Council approvals and on the positive side, some of the projects are coming in below our original cost estimates with no downgrade and benefits. For the year, we still anticipate $1,000,000,000 to $1,500,000,000 of restructuring with about 60% of that in the first half and we're still planning on delivering more than $1,000,000,000 industrial cost out for the year. As we told you in November, we expect to have some dispositions in industrial portfolio in 2014 and we're currently working on a transaction related to a non core asset that may result in a small gain likely in the Q2, potentially in Q3. Now I'll take you through each of the segments starting with Power and Water. Orders of $5,700,000,000 were up 9%.
Equipment orders of $2,600,000,000 were down 3%, driven by renewables down 13%. That was partially offset by distributed power, which was up 9% and thermal was up 3%. Wind orders totaled 4 22 turbines versus 584 in the Q1 of 2013. Our view of wind orders for the year has not changed. We still expect strong growth.
We took orders for 31 gas turbines in the Q1 of this year versus 8 a year ago. Service orders were $3,100,000,000 higher by 23%. The growth was primarily driven by PGS, up 32%, up 43% ex Europe. The business had orders for 17 AGPs versus 2 a year ago, as well as a large $330,000,000 upgrade order in Japan. Europe continues to be very, very soft.
Backlog in Power and Water continued to grow with equipment higher by 18% and services by 2% year over year. OPI in the quarter was negative 40 basis points driven by equipment. Revenue in the quarter of $5,500,000,000 was up 14%. Equipment revenues were up 41%, driven by wind shipments of 6 46 units, 345 units higher than the Q1 of 2013 and thermal was up 5 gas turbines, shipping 17 versus 12 a year ago. We shipped all but 1 wind turbine associated with the blade quality issue in the Q4.
Service revenues were down 5% as AGP performance was offset by weakness in Europe. Segment operating profit was 24% higher on strong volume and simplification benefits, partly offset by negative mix associated with wind. SG and A in the quarter was down 9% year over year. The wind blade quality issues in the quarter were negligible. Margins expanded from the quarter 120 basis points.
Next is oil and gas. Oil and gas orders for the quarter of $4,600,000,000 were down 5%, with equipment orders down 17% and service growth of 11%. Equipment orders were down versus a tough comparison to last year when orders were up 24%. Subsea equipment was down Subsea equipment was down 62%, principally on timing. As we've commented previously, orders in oil and gas tend to be very lumpy on a quarterly basis.
And as Rod shared with you, we expect subsea orders to be up double digits for the total year. We continue to see good growth in Turbomachinery Solutions, up 16% in the quarter and 2 large wins in the U. S. LNG space. And Downstream Technology was also strong, up 48%.
Service orders of $2,200,000,000 were higher by 11 percent led by Turbomachinery, up 22% and Downstream Technology Solutions up 20%. That was partly offset by M and C, which was down 7%. Backlog continues to grow in oil and gas with equipment up 15% and services up 4% versus prior year. Orders pricing was better by 140 basis points in the quarter. Revenue was up 27%, up 18% ex Lufkin and subsea was up 37%, turbomachinery up 25%, downstream solutions up 24% and drilling and surface was up 13%, while M and C was down 4%.
We expect M and C to be flat for the total year. Operating profit was strong in the quarter, up 37%, up 28% ex Lufkin. The growth was driven by volume, value gap, base cost productivity in the absence of the FX charge we had last year in the Q1. This was partly offset by negative mix on lower M and C volume. Our operating profit rate improved 80 basis points in the quarter both with and without Lufkin.
Turning to the next page on Aviation. Just some context here. Air travel continued to grow strongly. Global revenue passenger kilometers grew 6.9% through February compared to 5.2% a year ago with a particular strength in the Middle East, Asia, Europe and China. Through February, freight growth was up 3.6% versus 1.4% a year ago and that growth was driven by Latin America, Europe and the Middle East.
Orders in the quarter of $5,500,000,000 were down 17% as expected, driven by equipment orders down 38 percent to $2,400,000,000 The Q1 of 2013, we had $1,400,000,000 of CFM LEAP launch orders and 2 large China G90 orders. Commercial engine backlog China GE90 orders. Commercial engine backlog ended
the quarter at $21,000,000,000 at 16% higher
versus last year. And military equipment orders of $421,000,000 were up 44% driven by demand for CT7 engines. Service orders were up were $3,100,000,000 up 10% and commercial service orders were up 12% driven by strong commercial spare parts up 17% to $29,700,000 a day. Military service orders were up 18% driven by spare parts up 19% on strong demand for T700 spares. Orders pricing was strong at 2.6% in the quarter.
Revenue of $5,800,000,000 was up 14%, up 10% ex Avio. Equipment revenue was higher by 14% on strong price and shipments of 6 46 commercial engines versus 596 last year. We shipped 70 Gen X engines versus 41 a year ago and military revenues were down 3% on 30 1 fewer engines in the quarter. Service revenue $2,900,000,000 was up 14%, driven by commercial up 18% and military down 5%. Commercial spare shipments were $28,500,000 a day that was up 22% versus last year.
Operating profit of $1,100,000,000 was up 19%, 14% ex Avio on strong value gap and volume. Margin rates improved 90 basis points, 80 basis points ex Avio. Avio continues to perform very well, points ex Avio. Avio continues to perform very well and
overall good execution in the aviation
business in the quarter. Next on Healthcare. The Q1 in the U. S. Was soft.
Hospitals and clinics appear to be delaying purchases and responses to the ACA. Patient inflows, outpatient visits, ER, surgeries, procedures were all down 1% to 1.7% in the quarter. The preliminary NEMA data suggests the U. S. Market was down single digits excluding 1 big VA bulk order from several years ago.
Our NEMA orders were down 2%. So we believe we actually gained share in the quarter a point or 2. As a result of these dynamics, healthcare's Q1 was softer than we expected. Orders of $4,200,000,000 were down 1% driven by the U. S, down 4%, offset by continued strength in the emerging markets, which were up 10%.
China was up 13%, Latin America was up 10% and the Middle East was up 47%. Europe was also strong, up 4%. Equipment orders of $2,300,000,000 were flat. And HCS emerging market orders were higher by 13%, offset by the U. S.
Down 12%. Life science orders were up 1% in the quarter. Service orders were $1,900,000,000 and they were down 2% in the quarter. 1st quarter backlog was $16,300,000,000 which was up 7% versus prior year and order pricing was down 1.5%. Revenues of $4,200,000,000 were down 2% with equipment down 2% and services down 3%.
Operating profit of $570,000,000 was down 4% driven by negative value GAAP offset by strong base cost management. SG and A in our Healthcare business was down 9% in the quarter. The business expects U. S. Softness to probably persist in the Q2, but expects to continue to gain share and deliver earnings growth for the year.
So with that, we'll move to Transportation. Transportation is a solid execution quarter given their environment. In terms of domestic activity, carloads were up 1% in the Q1 driven by intermodal traffic, which was higher by 3%. Coal volume continues to be soft. It was down 1%, but petroleum products and petroleum were higher at 6.5%.
Orders for the quarter were $2,400,000,000 that was up over 100% led by equipment orders up 4 times. We had orders for 2 59 Locos and 299 Loco Kits versus 80 Locos last year and 25 kits a year ago. We received a large order in South Africa for 233 kits and had orders for 176 Locos in the U. S. Service orders were down 18% due to weak mining and no repeat of the large Amtrak signaling order we had in the Q1 of last year.
Order price index was flat and backlog grew 6% versus the Q1 of 2013. Revenues for the quarter were down 14% as we anticipated and equipment was down 20% driven by mining off highway vehicles down 70 6%, partly offset by locomotives up 23%. We shipped 178 Locals versus 143 a year ago. Service was down 7% on weaker mining parts demand. Our profit was down 24%, very strong cost and productivity performance was more than offset by the volume and mix.
Margins were down 2 30 basis points in the quarter. On Energy Management, the business continues to be a work in progress. We made a lot of gains in restructuring and resizing the business around its cost structure and footprint were offset by sales softness in marine start up execution. Orders were $2,200,000,000 that was down 1%. Digital Energy was up 20% on a large domestic meter order and Industrial Solutions was up 1%.
This was offset by power conversion down 16% with no repeat of Q1 2013 Brazilian drillship orders that we took. The business did continue to build backlog in all its segments with the total up 17% year over year to $4,900,000,000 Revenue was down 4% in the quarter with Digital Energy down 20 percent, Industrial Solutions down 3% and Power Conversion down 2%. Operating profit was $5,000,000 in the quarter. That's down from $15,000,000 a year ago. Despite the poor performance, we continue to get restructuring benefits and reduce SG and A costs.
This was more than offset by negative volume and execution challenges. We expect this business to improve its results throughout the year, particularly in the second half. Appliances and Lighting. Appliances and Lighting had a challenging quarter as well. Appliance revenues were down 3%.
The appliance market was down 4% through February, but it was much stronger in March to end the quarter flat year over year. Housing starts were soft with single family down 8%, offset by multifamily strength of up 9%. Lighting revenue was down 4%. Our traditional channels in lighting were down 9%, partially offset by LED growth up 33%. Segment profit of $53,000,000 was down 33% in the quarter.
Appliance op profit was down 2% with higher price offset by lower volume and negative productivity. And Lighting op profit was down 44% driven by strong material deflation more than offset by productivity price and foreign exchange. For both businesses, last 2 weeks in March and the 1st week of April were much stronger. We expect them to be back on track in the Q2. Next, I'll cover GE Capital.
Revenue of $10,500,000,000 was down 8%, primarily from non repeat of the 30 rocks sale last year. Assets were down 3% or 18 $1,000,000,000 year over year. Net income of $1,900,000,000 was flat to prior year as lower losses and impairments offset reduced gains, lower earning assets and tax benefits. E and I ended the quarter at $374,000,000,000 and was down $28,000,000,000 or 7% from last year and down $7,000,000,000 sequentially. Non core E and I was down 16% to $52,000,000,000 versus last year.
Net interest margins decreased 11 basis points from 2013 to 4.9 percent as a slight improvement in business margins was offset by the cost from carrying higher levels of cash. GE Capital's liquidity and capital levels continue to get stronger. We ended the quarter with $75,000,000,000 of cash and reduced our commercial paper borrowings to $25,000,000,000 in the Q1. That's 9 months ahead of our year end target. Our Tier 1 common ratio on a Basel 1 basis improved 23 basis points sequentially and 32 basis points year over year to end at 11.4%.
On the right side of the page, asset quality trends continue to be stable. Now I'll walk through the segment performances. The commercial lending and leasing business ended the quarter with $175,000,000,000 of assets flat to last year. Odd book core volume was $8,000,000,000 down 2% as we continue to stay disciplined on pricing and risk hurdles with continued excess liquidity in the market. New business returns remain reasonably strong at about 1.8 percent ROI.
Earnings of $564,000,000 were up 42% as a result of not repeating a specific impairment we had last year in the Q1 as well as from asset sales. Our consumer the consumer segment ended the quarter with $132,000,000,000 of assets, down 3% from last year, but we were up 8% in North American Retail Finance Business. Earnings of $786,000,000 were up 47% as a result of not repeating $300,000,000 impact from reserve modeling changes we implemented in the Q1 of 2013. North American retail finance earned $590,000,000 in the quarter, that's up 54%, again largely driven by not repeating the reserving changes and on strong asset growth of 8% year over year. Real estate had another solid quarter.
Assets at $38,000,000,000 were down 11% versus prior year and down $1,000,000,000 sequentially. The equity book is down 29% from a year ago to $13,000,000,000 Net income of $239,000,000 was down 65%, primarily from not repeating the 30 Rock gain. In the current quarter, we sold 165 properties with a book value of $1,000,000,000 for about 117 dollars in gains. And the debt business earned $120,000,000 in the quarter and originated almost $2,000,000,000 of volume at attractive ROIs. In terms of the verticals, GKS earned $352,000,000 up 1% as higher core income offset the impact of lower assets, which were down 8%.
The new volume was $1,500,000,000 36% higher year over year with very attractive returns north of 3% ROIs. And we ended the quarter with 0 aircraft on the ground. EFS had a solid quarter with earnings up 84 percent to $153,000,000 driven by strong core income and gains partially offset by impairments. So the team continues to perform well here. And as you look forward to the Q2, we expect the run rate for GE Capital to be around to be around $1,800,000,000 of earnings.
So with that, I'll turn it back to Jeff. Great, Jeff. Thanks. Finally, on the framework, look, we're reaffirming the framework for the year. We feel good really about our progress on the industrial side.
And we think what you saw in the Q1 in terms of organic growth, solid organic growth and good margin expansion should continue in the Q2 and throughout the year. Capital is on track for its plan and CFOA remains on track as well with the framework. There's a lot going on in corporate and you understand our goals for restructuring. We'll give you frequent updates on our progress. And look with underlying EPS up 9% in the quarter and strong Industrial segment profit growth, we think we're off to a good start.
So Matt, let me turn it back over to you and let's take some questions.
Yeah. Thanks, Jeff, Jeff and Rob. Alan, why
don't we open it up for questions?
Our first question is from Scott Davis with Barclays. Please go ahead.
Hi. Good morning, guys.
Hey, Scott.
The 8% core growth is a pretty big number. I mean, how do you think about the sustainability of those kind of levels? I mean, it's probably about 2x the sector overall. And then I want to ask a follow-up on margins. So let's just talk about core growth first.
Jeff, you want to start? Yes. Listen, I think we're very happy with the level of growth in the quarter. It reflects a lot of the order activity we had in 2013. As we said, the short cycle businesses were definitely impacted by weather in the Q1 and we expect Industrial Solutions appliances and lighting to get better as we move to the Q2 of the year.
We're still on framework. We think we expect organic growth for the year to be between 4% and 7%. And I think we're pleased that we're off to a strong start here. Scott, I would just add, I think wind always adds a little bit of noise plus or minus around each quarter. It was more on the plus side this quarter.
And like I said at the outlook meeting in December, we have an internal plan that adds up to more than the range and that's how we run the businesses. And that's I think we still believe in the framework for the year, but we have an internal plan that adds up to more than that.
Okay. Fair enough. And 50 bps bps of margins, just kind of a back of an envelope 8% core growth should kind of get you there already. But you also talked about having value gap and cost out. I mean is there any way to parse out the 50 bps and how you guys think about it via fixed cost coverage from the volume leverage and cost out?
How do you think it would break down the 50 bps?
Well, I yes. So mix was a bit of a headwind for us in the quarter, more than 100 basis points in the quarter. And that's the strength in wind, the strength you heard Rod talk about with 37% sales growth in Sub C, while M and C volume was down 7%. So mix for us in the quarter was about 100 basis points or 120 basis points of headwind and that was offset with strong value gap, a little bit of favorability in R and D, but principally by simplification. We had 160 basis points of favorability in structural cost and getting at delivering on both the structural cost initiative and delivering on the restructuring investments we've made.
And that was partially offset by base cost inflation that generally reflects increases in salary. So I think we feel very good about the construct of the quarter. It's more or less how we thought about the year and what we described to year end. We know that we're going to grow equipment and revenue faster than services this year. And so mix will be an item for the year.
We have to deliver on simplification to overcome that and grow margins.
That's helpful. And just quick clarification guys. I haven't heard you mention H Series turbine in a long time. Do you actually have a commercially viable product at this point?
Oh, yes. No, I think, Scott, this is we've gotten a couple of commitments and we're in the process of rolling that out as we speak. So we think this is going to be a great product at really a good time. Perfect.
Okay. Thanks guys.
The next question comes from Deane Dray with Citi Research.
Thank you. Good morning everyone.
Hey Deane. Good morning. Jeff, I was hoping you
could expand on your comments on the bolt on acquisition outlook. I mean, you all have been operating on a self imposed investor friendly range of it was $1,000,000,000 to $3,000,000,000 and then got hinged up for Avio $1,000,000,000 to $4,000,000,000 and you're clearly signaling a willingness to go a bit higher than that for the right acquisition. That's the same language you used when you just before you got Avio. So maybe if you could expand for us how much higher above $4,000,000,000 What kind of applications or markets look interesting? Is it likely sounds like you've got something close?
I wouldn't read too much into it Dean other than this is the way we answer the question typically from a standpoint of we do the vast majority of our acquisitions in that range. People ask if you saw something that was strategic, added to the growth rate, bolt on, well priced, accretive, would you go above that? And clearly, when we did Avio, that was 4.2 and we had 1.1 to 1 to 3 type of range. So it's typically the way we answer the question in investor meetings and at the outlook meeting and things like that. So again, I think we have discipline on capital allocation.
We're committed to dividend growth, the buyback that we talked about. But if we saw unique value in the marketplace like we did with Avio, we would do transactions like that.
Great. That makes lots of sense. And then since we have Rod on the call today, I would love to hear from you about if you could frame for us how much of the portfolio do you have in place today? The whole idea that GE was able to take a lot of the proceeds from NBC and very quickly add some strategic assets into oil and gas. And then you would stop and see how's the portfolio?
Where are the gaps? And from your perspective, how much of your portfolio do you have today in order to be effective? You have, you have 3 quarters. I'm not asking specific gaps, but maybe just frame for us how complete the portfolio
is? Sure. I think when I look at the portfolio that we have today for Subsea, we feel very good about it. We can compete pretty much anywhere that we choose to. I think what you've seen over the last 6 months around us moving more into the subsea perm process, it really gives you an idea of the breadth that we can bring from GE broadly.
So power conversion, turbomachinery, water, realize it's a step into those spaces. So at this point in time, I feel very good about where we are. And anything going forward is really a discussion about internal versus external with a bit more scale. So it's really about timing. So very similar to what Jeff had talked about with.
If we see something that looks very attractive to us then potentially, but we don't feel like there's any major miss at this point in time.
Great. Thank you.
The next question is from Steve Tusa with JPMorgan.
Hey, good morning.
Hey, Steve. How are you doing?
Good. Can you maybe just talk about you talked about the 50 bps continuing throughout the year. Anything you guys have I guess every company has become kind of seasonal with bigger quarters in the back half of the year. And anything kind of lumpy in the second quarter that we need to be aware of whether it's timing of some of these advanced gas pass stuff or wind that we have to consider when thinking about the
Q2? Yes. I don't think so, Steve. I don't think Jeff said he was carrying the 50 basis points all year, but thank you for that. We will have slightly higher restructuring charges in the Q2.
I said we are still on track for the $1,000,000 to $1,500,000,000 and we're going to spend 60% of that spend in the first half of the year. So the second quarter will be a little bit bigger than the Q1. We will ship more Gen X engines in the second quarter than we shipped in the Q1. But other than that, not a lot of I did mention that we're working on one disposition. Not sure whether that's going to be second or third quarter yet quite yet, but not that big a deal.
So other than that, I don't have a lot of other items to call out for you.
Okay. And then just on the organic growth calc, can we get the contribution from the deals and then ForEx or negative from ForEx for the quarter, total deals, revenue contribution and then ForEx? I know they're in the back of the supplement or whatever on the press release, but just the data.
Yes, sure, Steve. So reported revenue up 8%, acquisitions added 2 points, dispositions were had a 1.4 point impact and then foreign exchange was a 0.5 point That's how you go from 8 to 8.
Okay.
So 2
Okay. And then all right. That's great. Thanks.
Thanks, Steve.
The next question is from Jeff Sprague with Vertical Research Partners.
Thank you. Good morning, everyone.
Hey, Jeff. How are you doing?
I'm doing great. And you?
Good.
Just a question on the industrial balance sheet. I guess dovetailing with maybe opening the aperture a little bit on deals. You did do the $3,000,000,000 debt raise on the industrial balance sheet. How would you size that relative to the
capacity that you have, right? You kind of
teased this a little bit in $3,000,000,000 the number or is it something larger than that?
$3,000,000,000 was in the context of the capital allocation plan that we put together for 2014. And we saw the Q1 where markets were very opportunistic. We issued the $3,000,000,000 We were immensely oversubscribed and we're very pleased with the rates that we took the 3,000,000,000 dollars at well inside on an after tax basis, our dividend yield. But that's how we kind of size it within the context of our capital allocation game plan for the year. We're constantly reevaluating the capital allocation game plan with the team and the Board and we'll continue to do that.
But that's roughly kind of the comfortable number relative to the commitments cross commitments to capital and everything?
Well, no. It's the relevant comfortable number within the context of the capital allocation plan we've pulled together for the year.
Okay.
And then can you just size for us the gains that you had in CLL and Energy Financial Services?
Yes. So CLL, we did sell about 18,000 boxcars per diems, meaning daily rental boxcars in the quarter that was worth a little north of $100,000,000 We did sell some private equity investments that we do reasonably routinely and just a little bit of Voca driven the Q1 that was a much smaller gain. And then energy finance, it's pretty routine for us. We had about, I don't know, dollars 150,000,000 of gains associated with properties that we sold in energy finance in the first quarter.
Great. Thank you very much.
The next question is from John Inch with Deutsche Bank.
Thank you. Good morning, everyone.
Hey, John.
Good morning, guys. Jeff, could we flesh out a little bit of the playbook for energy the Energy Management business? I mean, it looks like you guys made a leadership change there. How are you thinking about really just the portfolio? And maybe as Jeff Hornstein you've gotten into further the restructuring, how that kind of maybe complements that segment or you're focused on it?
Just something that might provide us a little bit more color.
Yes. John, here's where I'd look at it. 1st, from a technical standpoint, there are pieces of the Energy Management business that are great fits for the rest of the company like power conversion. As Rod said, that's a great complement to oil and gas and some of the other things we're doing. So technically, these are industries we understand and can compete in.
Our relevant competitors have margin rates that are 10% -plus. Some of that scale and some that's our own complexity. What Jeff Bornstein said today is that we're committed to restructure and that's going to provide some big margin lift in that business. And then I just think we can execute better. Mark Begor is a guy that's well known inside the company as being a great recruiter and an extremely experienced operator turnaround guy.
And he's in place and we're hiring people from the industry. And my intent is to run this business and make it better and make it accretive to investors and drive earnings in it. Could there be a couple of segments in there that aren't long term fits for GE? Could be. We'll sort that out and be very tough minded about it.
But this segment can do better than what you're seeing right now. And that's our commitment to you is to make it better both from a cost standpoint and from a market standpoint. So just on that front, I'd just add that they actually you can't see it in the results yet. It's getting eaten up in operations, but they are making progress on restructuring. We had close to $25,000,000 of benefits in restructuring in the Q1.
And we expect that to accelerate throughout the year. There is some progress here. I mean, our manufacturing delinquencies are down 50% versus year end. And so we are making progress. I completely understand you can't see the results yet.
But our expectation is that this business is going to improve dramatically from an operating earnings perspective over the balance of the year.
Okay. That was my other part of the question. So sequential improvement and it sounds like Jeff, there's no reason this business can't be running at double digit margins.
Is that
fair? Look, everybody I think, John, everybody else, unlike our other businesses where our margins are ahead of our peers, this is one where we trail our peers and we can do better.
Can I just ask about the oil and gas business for a second? There's kind of a broad level concern in the industry about sort of flattish CapEx budgets for the integrated and obviously just the global economy is still not particularly helpful price of oil and seem to be going anywhere. Maybe you can provide a little bit more color given that you featured oil and gas on the call. How
does that context
of these big integrated companies with flat, if not even maybe declining CapEx budgets, how does that dovetail with your own business? And why is your own business sort of either more or less impervious to that?
Rod why don't you take the question? Sure.
I think and I'm going to talk specifically around what I'm seeing in Subsea today. Really what I see is a lot more front end engagement. So customers aren't the customers that I'm talking to aren't really looking at dialing back the number of projects. They're looking at how do they get better capital efficiency. So we see more front end engagement around technology, the selection of that technology configuration and how can we deploy with less risk shorter cycle and potentially at a lower cost.
So in many cases what I thought about with structuring our product really plays to that. We've taken cycle out which obviously means there's a shorter carrying period for any capital investment in the subsea area from my perspective. So I think most of the customers are looking to continue to drive as many of the projects as they can. It's making it much easier for us from a point of view of actually early engagement, early dialogue, early engineering, so we can take more risk out.
John, can I I'd add to that kind of the reinforcement of the way we build our Oil and Gas business by really invest very specific segments that had faster growth rates than the industry itself? So things like subsea, turbomachinery and the LNG train, some of our downstream technologies, we really are in the places where there's going to be a lot of capital continue to be spent.
Okay. So looking at Shell's CapEx deployment is not really the correct proxy in other words is what you're saying.
Exactly. Yeah.
Thanks very much.
Great, Tom. Thanks.
The next question comes from Julian Mitchell with Credit Suisse. Please go ahead.
Hi, thanks.
Hi, Julian.
Hi. I just had a couple of questions on the margin bridge. I mean, I think firstly, value gap was maybe about $100,000,000 tailwind in Q1. Just wanted to check that. And back in January, you talked about a $200,000,000 tailwind for the year in value gap.
Is that still the case? Or have you kind of updated those assumptions?
Yes. No, I think that's what we guided at year end. And we expected the value gap for the year to be CAD100 1,000,000 to CAD200 1,000,000 In the quarter, you're not too far off the mark here in terms of value gap. I think what you're going to bear in mind is within our value gap this quarter, power and water was negative, but not extraordinarily negative. And we expect price, particularly in thermal, to be much tougher as we work through the backlog for the balance of the year.
So you're correct. The framework was up to $200,000,000 and you're not far off the mark on the impact in the quarter.
Okay. And then just on the mix effect, can you just remind us, I guess, what the view is now on wind deliveries for the year and how much more those are kind of ramping up in the back half?
Yes. So no change on the framework that I gave you at year end on wind deliveries. I said that we would do about 3,000 units and that's still what we expect to do. In terms of first half, second half, it's a little bit heavier weighted to the second half of the year. We'll do, I don't know, about 1800 of those 3,000 in the 3rd Q4.
Got it. Thanks. And then lastly, just quickly, and I guess for Jeff Immelt. On the divestments in industrial you talked a little bit about that in the slides. Also in the annual report there was some kind of commitment or comment around targeting a minimum 10% margin for the industrial businesses.
I just wondered sort of what was that equipment plus service combined? And what the time frame for that 10% minimum threshold was? Because I guess you have some businesses that have never been at 10%. I I
think, Julien, what I would focus on is the $4,000,000,000 number. I think it's our expectation that we're more active on the divestiture front this year and kind of leave it at that. We continue to be tough minded around the portfolio and I would expect our divestitures to be a little bit more active this year than they were last.
Great. Thank you.
Thanks.
The next question is comes from Steven Whitaker with Sanford Bernstein.
Thanks and good morning everybody. Hey, Steve. Hey, just Rod, you got you here and I really appreciate the focus in on the business unit during the call. I guess one of the primary debates in around Subsea is that production tree order trend starting to rise again in 2015 and you addressed sort of your mix benefit, but this emerging capital discipline by the majors, I guess, is a real question of even in those more attractive sub segments, to what extent do you think that risks the growth? And to what extent also are you seeing the outlook for production tree pricing deteriorate in any way?
I mean, if you look at the forecast this year for trees, overall globally it's down. But I mean, you have to look at the mix between Brazil and the rest of the world. So Brazil was a large buy for or large equipment made for trees in 2013. So the rest of the world demand actually increases slightly year over year. And then you see the total demand back up again or forecast to go back up again in 2015.
The other thing that you really see is the projects have got larger. So things have got lumpier. You look at the total number of projects that are going for development into the future, there's less projects but more tree count per project. So I think again, the early engagement pre feed activities and feed activities are really going to be critical to driving some of the efficiency in this area from capital deployment.
Okay. And the pricing outlook for pricing?
I think we still feel that pricing the demand for the future is still increasing. So it's really about delivery cycle at this point in time.
Okay. On health Care, the pricing in Health Care, I guess, Jeff, how should we think about this? Do you see this as any kind of structural change in the industry? Is this a function in the Americas, in North America of the transition we're all going through and hospitals? I mean, can you maybe give us some color on how we should sort of think about this?
Yes. Steve, I think it's a good question. I'd say first, if you look outside the U. S, the markets are all normal with Europe bouncing back and the growth market is still pretty strong. I think it's too soon to say on just the impact of the Affordable Care Act.
There's just so damn much going on in the U. S. Health care market right now. We're kind of thinking about the next couple of years as being flat to up slightly. So we're not really thinking much about robust growth and more industry consolidation of hospital systems, more integration between insurers and hospitals.
So there's just a ton going on in the industry. At the same time, when you launch a new product like the Revolution CT like the launching in the Q2, it's going to build a huge backlog. It's going to have positive growth. And so with all the stuff that's going on in the industry, when you have new technology, you still can differentiate yourself and you still get good growth and good margins. So I think we're just going to kind of wait and see and watch how the industry evolves.
Okay. And can I just sneak one in for Jeff Borenstein or maybe it's 2 I suppose? This tax rate that we got this quarter, should we think about that as sort of more normalized now? And also with the orders have those Algerian orders come through yet in the official order numbers?
Yes. So the tax rate, I think what I said was we still expect the industrial tax rate to be about 20%, percent and we still expect the GE Capital tax rate to be single digits in the year. So I don't think our view of taxes has changed at all for the total year. The Algerian units on the mega deal are in our orders book. Well, I think Steve, if you look ahead of duty gas turbine orders, I think we said in December, what, 125 or something like that?
Yes. I think we're tracking at least to that. That's this is a slightly improving market
is what I would say, broadly speaking.
I want to clean one thing up before we move on to the next question. So on energy finance, I think Jeff Sprague asked me on gains and energy finance. I said I think I said $150,000,000 It was $120,000,000 That's about $60,000,000 higher year over year. That was partly offset by about $100,000,000 of increased higher impairments this year versus last year. So I just want to make sure that's clear.
Okay. We know everyone has a busy morning.
Alan, why don't we take one more question?
Thank you. Our final question comes from Nigel Coe with Morgan Stanley.
Thanks. Good morning and thanks for taking me in. Hey, guys. So Jeff, you mentioned the H Frame, which is obviously a very important product. You mentioned 2 commitments.
Were they U. S. Commitments? And then dovetailing on the back of your comments about a gradually improving market, what you've seen in the U. S.
Right now in terms of the frontlog for 2015 2016?
So the answer I think the first question is no. And the answer to the second question I think is just slow improvement in the U. S. Starting with peakers and we haven't seen big demand for base load units yet, but a ton more interest in the U. S.
Than we've seen in the last few years is the way I would describe it, Nigel.
Okay. Okay. Great. So moving on to GECAS. Assets are down by about 10% from early last year.
And I'm wondering what do you think is the right level for assets in GECAS? Is there a sort of a longer tail of decarbonization within GECAS going forward?
The GECAS business order of magnitude is roughly the size within the context of GE Capital and the company that it's probably going to be long term plus or minus. They'll continue to originate. They'll continue to grow. I talked about the volume in the Q1 being very strong year over year, very attractive returns. So they'll continue to be very active and write new business.
At the same time, they'll continue to prune the portfolio they have. And that allows them that creates the capacity for them to continue to be in the market and write volume. Assets year over year, I think are flat for GECAS. So
I think they're down 8% year over year, but I can check that. And then just Jeff on the you mentioned $1,800,000,000 run rate for GECAPPLE per quarter going forward. That takes you slightly above the $7,000,000,000 kind of place order for the year. Do you think there's more of an upside buy for that $7,000,000,000 at this stage?
No. I think we're still kind of in that $7,000,000,000 framework. You got a number of items to go here where we still plan on doing the initial IPO of retail, so you'll lose 20% of those earnings. We'll still continue to invest in that business to create the standalone capability around risk and governance. So that will come at some cost.
We'll still do the GECAS impairments here in the Q3. So I think that we're still focused on the $7,000,000,000 framework that Keith shared with you in November.
Understood. Thanks very much.
Great. Thanks. Thanks, everybody.
Thank you. The replay of today's webcast will be available this afternoon on our website. We will be distributing our quarterly supplemental data for GEA Capital later today. I have some announcements regarding upcoming investor events. Next Wednesday, April 23 is our 2014 Annual Shareowners Meeting in Chicago.
We hope to see you there. On Wednesday, May 21, Jeff Immelt will present at the 2014 EPG Conference. And finally, our Q2 2014 earnings webcast will be on Friday, July 18. As always, we'll be available today to take questions. Thank you.
This concludes your conference call.