Good day, ladies and gentlemen, and welcome to the General Electric Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Shaquana, As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Trevor Schromberg, Vice President of Investor Communications. Please proceed, sir.
Thank you, Shaquana. Good morning, and welcome, everyone. We're pleased to host today's Q3 webcast. Regarding materials for this webcast, we issued the press release as well as the presentation slides at 6:30 this morning, which is something new for us. Slides are available for download and printing on our website at www.g.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 and our Senior Vice President and CFO, Jeff Bornstein. Now I'd like to turn it over to our Chairman and CEO, Jeff Immelt.
Great, Trevor. Thanks, and good morning, everyone. Look, GE had a good 3rd quarter in an improving environment. Our orders grew 19% with great balance. Our growth markets were up 22%, U.
S. Was up 18% and Europe up 17%. Earnings per share was up 18% ex unusual items. Industrial earnings were up 11% with 6 of 7 segments growing 4 by double digits. Capital continues to execute on our strategic objectives.
Earnings were up 13%, while our financial position continued to strengthen and we had $0.04 of uncovered charges in the quarter and no industrial gains. Operations were very strong. Margins grew by 120 basis points behind strong value gap, performance and simplification. Our industrial cost outreached $1,000,000,000 through the Q3 and we're significantly ahead of our plan. And CFOA is up 5% operationally.
This includes a $3,900,000,000 dividend from GE Capital year to date. We returned about $14,000,000,000 to investors year to date, well on our way to our $18,000,000,000 goal. And at the same time, we continue to invest in strategic acquisitions like Avio and Lufkin. So, overall, this was a good quarter for the GE team. Orders were a highlight for the quarter.
Overall growth was up 19% with strength in equipment and services. Every business grew and backlog reached $229,000,000,000 Equipment orders grew 32% with strength across the board and orders price was flat. The orders profile is very encouraging. Services was up 5% with real strength in Powergen Services and Aviation Commercial Spares. Total orders in the U.
S. And Europe were both robust and 7 growth regions had double digit orders growth. These include Australia, Canada, Middle East, North Africa and Turkey up 17%, Africa up 18%, Russia up 51%, China up 18% and ASEAN up 100%. Power and Water had a solid orders performance with growth of 19%. And note this number did not include any orders from Algeria.
Those will be booked in the Q4 in 2014. Orders growth and backlog supports business expansion in Q4 and through 2014. We're making progress on our strategic growth initiatives. Growth market revenues were up 13% with 6 of 9 regions up double digits. Remains a key strength for the company due to our geographic diversity and strong share position.
Services grew by 7% with margins up 60 basis points and aviation spare shipments grew by 25%. Last week, we had our 2nd Mines and Machine Summit where we announced 14 new service offerings in analytics and software. Our industrial Internet orders should exceed $500,000,000 for the year. And we continue to drive our technical advantage. We announced 8 gigawatt heavy duty gas turbine win in Algeria.
We'll launch 50 healthcare NPIs for the year and we're gaining share. The LEAP engine is ahead of schedule and the G9X recorded its first order and is well positioned for the Boeing 777 launch. We have the only locomotive to meet the Tier 4 standard and we continue to launch new appliance products with strong acceptance in retail and contract channels. So with a strong backlog and good growth initiatives, I think we're well positioned for solid organic growth in the Q4 in 2014. On margins, look we're encouraged about our progress.
GE's margins grew by 120 basis points in the quarter and are up 40 basis points year to date. 5 of 7 businesses grew margins in the quarter at all or flat or up for the year excluding the impact of acquisitions. Our results are programmatic and sustainable. Our value gap is positive 6 $60,000,000 year to date and will continue to grow. We've achieved our $1,000,000,000 simplification goal in only 3 quarters and will drive substantial upside for the year.
And there'll be no industrial gains in this quarter. Our pound water had a solid quarter with improved mix, strong value gap and good simplification efforts and they should sustain this momentum into the Q4. So on track to achieve our 70 basis points goal, our results in service margins, value gap and simplification are accelerating and all businesses should have positive margin growth in Q4. And we still have a slight hedge in our plan. And on cash, we had a solid quarter.
For cash, our industrial CFOA has grown 5% year to date ex the NBCU deal related taxes, which show up in CFOA. We're still targeting to receive up to $6,500,000,000 of GE Capital dividends paid to the parent. We remain on track to achieve our $14,000,000,000 to $17,000,000,000 of CFOA goal for the year. We have significantly higher revenues in Q4 than Q3 driving higher CFWA by year end. And our balance sheet remains extremely strong with $87,000,000,000 of consolidated cash.
Our capital allocation remains disciplined and balanced. Year to date, we've returned $13,900,000,000 to investors in dividends and buyback. Meanwhile, we've invested $8,600,000,000 in acquisitions that will improve our long term growth rate. We're on track to return $18,000,000,000 to investors in 2013. And now over to Jeff to review operations.
Thanks, Jeff.
I'll start with Q3 total results. Revenue from continuing operations of $35,700,000,000 was down 1% from last year. Industrial sales of $25,300,000,000 was up 2% driven principally by oil and gas and aviation, partly offset by power and water as you can see on the right side of the page. GE Capital revenues were down 5% to 10 point $7,000,000,000 on much lower investment. Operating earnings of $3,700,000,000 were down 3% and operating earnings per share were flat at $0.36 That includes $0.02 for the Avio acquisition charges and $0.02 of restructuring in the quarter.
We also no longer have earnings from the MVCU JV, which was $0.02 in the Q3 of 2012. I'll cover these items on the next page. Continuing EPS of $0.32 includes the impact of non operating pension and net earnings per share includes discontinued operations, which I'll also cover on the next page. As Jeff said, CFOA year to date was $7,800,000,000 with solid industrial performance and $2,000,000,000 of GE Capital dividends were paid in the quarter. The GE tax rate in the quarter was 20% and the GE Capital tax rate was 0.
GE Capital continued to have benefits associated with loss recapture in real estate and tax efficient asset reductions. In the Q2, we said that we expect the GE Capital tax rate to be in the mid single digits for the year, but that could be lower depending upon IRS resolutions that could happen in the Q4, as well as expected dispositions in the Q4, which could impact tax rates. On the right side of the page, segment results were positive. Industrial segment profit was up 11% with 6 of 7 industrial segments improving. GE Capital also had a positive quarter growing earnings 13 percent versus 2012.
I'll cover all the segments in more details on the following pages. So for one time items, in total, we had $0.04 of charges in the quarter, dollars 0.02 related to Abeo as we discussed in September. Abeo had a number of pre existing contractual arrangements with GE Aviation and U. S. GAAP requires us to record the fair value impact of effectively settling those pre existing contracts.
We also had an inventory fair value adjustment in the quarter. These resulted in $0.02 charge. Going forward, we'll benefit from the efficiency that Avio has achieved over time. We also had $0.02 of restructuring and other charges as we continue to take actions to reduce our cost structure. This was $0.01 higher than we had originally planned for the Q3 as we continue to identify attractive projects that will lower footprint.
On the right side of the page, we included a walk from reported to adjusted operating results. In the Q3 of 2012, we earned $0.36 which included $0.02 of income related to NBC. In the Q3 of this year, we earned $0.36 but as discussed that included $0.02 of the Avio related charges and $0.02 of restructuring. If you adjust for those items, operating EPS is $0.40 in Q3 of 2013 versus $0.34 in Q3 of 2012 up 18%. For discontinued operations, we had an $82,000,000 after tax impact in the quarter, driven by GE Money Japan.
We booked $79,000,000 of additional reserves to reflect ongoing claims related to Grayzone. We ended the quarter with $527,000,000 in total reserves. There were really no material change in WMC in the quarter with a very slight reserve adjustment. On the bottom of page is a summary of our operating EPS and the industrial MVC gains and restructuring with $0.02 of restructuring charges in the 3rd quarter that brings our year to date to a net zero impact between the 1st quarter gain and year to date restructuring. So with that, I'll begin covering business results and we'll start with Power and Water.
Orders of $5,900,000,000 were up 19%. European orders were up 9% led by Renewables and Water. However, PGS was down 18%. Equipment orders were 37 percent higher at $3,000,000,000 Thermal orders were $886,000,000 down 15%. The business had orders for 27 heavy duty gas turbines in the quarter versus 29 a year ago.
Renewable orders were strong, up over 100 percent to $1,200,000,000 with continuing strength in the U. S. Distributed power was also strong with orders of $700,000,000 up 62% driven by aero demand. Service orders were up 4% to $2,900,000,000 up 7% excluding Europe. Despite continuing European softness, PGS orders were up 8% to 1,800,000,000 dollars and we booked 15 advanced gas path upgrades versus 4 a year ago.
Overall, orders pricing was down 80 basis points driven by equipment down 2.9%, partially offset by services, up 1.4%. Thermal OPI was down 1.4% and wind was down 1.2%. Revenue of $6,500,000,000 was down 10% driven by lower volume. Equipment revenue was down 13% on lower gas and wind We shipped 22 gas turbines versus 35 in the Q3 of 2012 and we shipped 407 fewer wind turbines down 40%. This was partially offset by distributed power strength, up 44% with 76 unit deliveries versus 48 a year ago.
Service revenue of $2,800,000,000 was down 5% driven by PGS down 6%. Higher AGP volume was offset by lower new unit spares. Segment profit of $1,289,000 was up 9% in the quarter. The improvement was driven by positive value gap and distributed power strength and better cost performance. SG and A was down 10% in the quarter and margins improved 3 30 basis points.
Oil and Gas orders were $4,400,000,000 up 4%. Equipment orders were $2,300,000,000 up 3%. We saw strong turbomachinery orders growth up 17% led by a large midstream LNG order in Russia and Lufkin orders of $243,000,000 partially offset by Subsea down 41%. Subsea orders tend to be very lumpy and are up 17% over the last 12 months. Service orders grew 6% in the quarter, drilling and surface was up 21%, subsea up 27%, partially offset by measurement and control down 8%.
Total backlog was up 35% versus prior year and orders pricing was down 20 basis points with year to date remaining positive and up 70 basis points. Revenue of $4,300,000,000 was up 18%, up 9% ex acquisitions. Equipment was up 19%, driven by Subsea up 16% and drilling and surface up 13%, offset by measurement and control down 3% in the quarter. Measurement and control was a disappointment in the quarter as we saw continued softness in the market. Service revenues grew 18% with strength in global services up 13%, Subsea up 43% and Drilling and Surface up 23%.
Segment profit of $519,000,000 was up 11%, that's up 7% ex acquisitions, primarily driven by higher volume and a strong value gap. Margins were down 90 basis points on a reported basis, down 30 basis points excluding the impact of Lufkin in the quarter. This is lower than expected primarily driven by a softer measurement and control market and there were some project delays. So with that, we'll talk about Aviation and Healthcare First Aviation. Aviation had another really strong quarter.
Orders of 7 point $8,000,000,000 were up 51 percent with equipment orders up 92%. Commercial engine orders were $3,800,000,000 up 4 times led by $1,600,000,000 of CFM orders, up 9 times including $1,400,000,000 of LEAP orders. G90 orders were $1,200,000,000 also up 4 times. Military orders continued their expected weakness down 30%. Service orders of $2,700,000,000 were up 9%.
Commercial service orders were up 15%. The average daily order rate for commercial spares was $24,000,000 up 9% in the quarter. Our fleet utilization year to date is up 3.1% and overhauls in the quarter were up 23%. Military service orders fell 6% as flight hours continue to decline and destocking continues across the military. Orders pricing in the quarter was up 1.9% with improvements in both equipment and service.
Revenue of $5,400,000,000 was up 12%, up 10% excluding Avio. Equipment revenue was 10% higher. We shipped 2 73 military engines, up 12%. We also shipped 559 commercial engines in the quarter, up 8%, including 26 Gen X engines. Service revenues were 14% higher driven by strong spare parts sales of $25,900,000 a day, which was up 25%.
Military service revenue was down 17%. Segment profit of $1,100,000,000 was up 18% driven by strong volume and value gap with sales price up 3%. Margin rates improved 100 basis points versus last year and were up 70 basis points excluding Avio. Just as a note, Avio helped margins and Lufkin was a hurdle margins in the quarter. So overall acquisitions were about a 10 basis points drag in the quarter on segment margins.
Next is Healthcare. Orders in Healthcare of $4,700,000,000 were up 2%. Equipment orders were up 6% to 2,700,000,000 dollars Developed markets were up 1% driven by strong U. S. Equipment orders up 8%.
Europe was flat. Japan was down 24%, down 6% excluding the effect of FX. Emerging markets were up 14% driven by China up 33%, Latin America up 28%, partially offset by Asia Pacific down 16%. Just a little bit on modality. HCS was up 5%, MR was up 13%, CT down 8% and ultrasound was very strong up 14%.
Life Sciences was up 10%, diagnostic guidance up 5%. So pretty good strength across the modalities. Service orders of $1,900,000,000 were down 4%. Revenue of $4,300,000,000 was flat driven by growth markets up 5% led by China up 13%, offset by developed markets down 2%. Both the U.
S. And Europe were up 2% offset by Japan. Segment profit of $665,000,000 was higher by 7% as cost productivity from our restructuring efforts more than offset lower price. Margin rates expanded in the quarter 110 basis points. Moving on to transportation, orders of $1,600,000,000 were up 34%.
Equipment orders were up 65% driven by a large North American locomotive order for 2 75 units deliverable in 2014 and mining really continues to be soft. Service orders were 8% higher driven by solid growth in locomotive services, partly offset by very weak demand for mining parts. Revenues of $1,400,000,000 were flat year over year. The strong service growth of 17 percent was offset by equipment revenue down 14%. Locomotive shipments were approximately flat with the 3rd quarter, deliveries of 147 compared to 146 a year ago.
Operating profit of $306,000,000 was up 15% with margins better by 300 basis points. The improvement was principally driven by positive value gap and services growth. Energy Management. Orders of $2,000,000,000 were up 16% with strength in power conversion up 19%, digital energy up 23% and intelligent platforms up 16%. Backlog of $4,600,000,000 is up 29% versus prior year.
Despite the order strength, operations were disappointing in the 3rd quarter. Revenues were down 3% driven by digital energy down 27% on weak meter demand and some project execution. As a result, op profit was down 57% to $18,000,000 Positive value gap was more than offset by the negative volume leverage. And Home and Business Solutions had a very strong quarter driven by appliances. Housing starts were up 19% with single family better by 16%, multifamily up 27%.
Revenues of $2,100,000,000 were higher by 7% led by an 11% increase in appliances, partly offset with a 1% decrease in lighting. Segment profit of $77,000,000 was up 28%. Appliances op profit was up 73% driven by positive value gap and productivity, partly offset by lighting. Margins improved 60 basis points in the quarter. Next, I'll cover GE Capital.
GE Capital revenue was $10,700,000,000 down 5% driven by lower assets. Assets were down 7% or $40,000,000,000 year over year. Net income of $1,900,000,000 was up 13% from prior year, primarily driven by lower losses, better portfolio performance and higher tax benefits, which more than offset lower assets and gains. We ended the quarter with $385,000,000,000 of ending net investment, down $39,000,000,000 from last year and down $7,000,000,000 sequentially. Our net interest margin increased 22 basis points versus the Q3 of 12% to 5% and was flat with the 2nd quarter.
Volume was up quarter with
new business ROI over 2%. And our Tier 1 common on a Basel 1 basis improved
to 11.3% driven by reduction in assets and that's after paying $2,000,000,000 of dividends in the quarter. On the right side of the page, asset quality trends continue to be strong with delinquency rates stable to improving across the portfolio. In addition, non earning assets totaled $6,400,000,000 down $1,900,000,000 versus Q3 of 2012. We have substantially completed all our debt issuance for 2013 at $32,000,000,000 and we've reduced our CP balance to $33,000,000,000 ahead of the plan to bring down CP by $35,000,000,000 by year end. Liquidity was very strong ending in the quarter at $76,000,000,000 up $7,000,000,000 from the 2nd quarter.
Now to walk through segment performance. CLL, the commercial lending and leasing business ended the 3rd quarter with $170,000,000,000 of assets, down 5% from last year, driven by a reduction of non core assets of $5,000,000,000 as well as $4,000,000,000 in our core book, primarily from asset sales, including the Fleet Canada franchise real estate transactions we've spoken about. On board core volume in Americas was up was 2% higher than the Q3 of 2012 and new business returns remain attractive at about 2% returns on investment despite continued excess liquidity in the market. Earnings of $479,000,000 were down 15% driven by lower assets and impairments in our corporate aircraft portfolio in the Americas business. Asset quality was stable.
Consumer segment ended the quarter with $136,000,000,000 of assets, flat with last year. Net income of $889,000,000 was up 19%, primarily driven by lower losses as a result of not repeating the reserve modeling changes that we implemented last year in this quarter and in the Q1 of this year. Lower losses were partially offset by no repeat of the $80,000,000 gain on a partial sale of our interest in the Thai Bank in the Q3 of 2012. The U. S.
Retail business earned $665,000,000 in the 3rd quarter, up 50% from last year, again largely driven by not repeating the reserving change and on strong asset growth of 11 percent in the quarter. Our current European business earned $111,000,000 in the quarter. The real estate team had another very solid quarter. Assets ended the quarter at $40,000,000,000 down 28% and down $2,000,000,000 sequentially. The equity book is down 27% from a year ago to $16,000,000,000 Net income of $464,000,000 was up more than 2 times versus 2012 and that was driven by lower losses and marks as well as impairments as well as higher tax benefits.
The business sold 77 properties with a book value of $2,100,000,000 for about $100,000,000 of gains in the quarter. That's down slightly year over year. The business originated $1,800,000,000 of debt volume in the quarter with an average ROI of 2.3% and asset quality continues to improve with 30 day delinquencies and 141 basis points, 68 basis points lower sequentially. In the verticals, GECAS earned 173,000,000 dollars that's down 31% driven by higher impairments as part of our annual impairment review. Impairments were $55,000,000 higher in 2013 at $190,000,000 The impairments were principally driven by valuations on cargo aircraft specifically MD-11s.
Overall, the portfolio is in great shape with only 10 MD-eleven freighters remaining in our fleet with a value of about $150,000,000 and we ended the quarter with 0 delinquency and no aircraft on the ground. EFS earnings were up 14% to $150,000,000 driven by higher operating income. The overall GE Capital continues to perform well. Its results were in line with our strategy. And as we look ahead to the Q4 in terms of runway, I expect the business to earn around $2,000,000,000 plus or minus in line with the Q3 and adjusting for impairments in GECAS, which should not repeat and some tax benefits.
We're currently on we're working on a number of transactions in the 4th quarter, most notably the sale of our remaining interest in Bay, the Thai bank and the IPO of our Swiss consumer business. At this point, we expect that any benefits from these transactions will largely offset with continued portfolio repositioning, but they could impact the tax rate in the quarter and the year. With that, let me turn it back to Jeff.
Great, Jeff. Thanks. We really have no material changes to the 2013 operating objective framework. Our industrial earnings will expand by double digits in the second half and we're on track for solid growth in the year. We have no change to our expectations in GE Capital.
We continue to originate business at high returns while repositioning our capital portfolio and earnings growth remains solid in GE Capital. Corporate costs reflect our Avio adjustment that Jeff described earlier and we continue to see good opportunities for restructuring and have positioned these efforts to continue. Cash and revenues remain on track. We should see earnings growth accelerate in the 4th quarter with more volume and lower cost. And with the large backlog and improving margins, we feel good about 2014.
We'll have several communication sessions with investors in the 4th quarter. In November, Keith and Jeff will update our portfolio and business strategy at GE Capital and give you a sense for our long term goals and simplification across the company. And in December, I'll give you a strategic update for GE and our outlook for 2014. So we look forward to those sessions. So in summary, we're making progress on our investor objectives for the year.
Our industrial earnings grew by double digits in Q3 and we expect a stronger Q4. Strength is broad based and we expect Power and Water to be a key contributor going forward in the Q4 and into 2014. We grew margins by 120 basis points in the quarter and we expect to hit 70 basis points for the year. In the event we have any gains in the Q4, we expect them to be applied to restructuring. GE Capital continues to strengthen and we're on track for up to $6,500,000,000 of cash to be returned to the parent.
We expect organic growth of at least 5% in the 4th quarter for the Industrial segments and we have solid momentum in Growth Markets, Services and NPI and we have more favorable comparisons in Power and Water. So we're on track and we're on track to return substantial cash to investors this year. So the team executed well in the quarter and with a strong backlog and expanding margins investors should be confident in GE's future. So, Trevor, with that, let's turn it over to you and take some questions.
Great. Thanks, Jeff. I know there's another earnings call coming up. So, Shaquana, let's open the phone lines.
Yes, sir. And your first question comes from the line of John Inch representing Deutsche Bank. Please proceed.
Good morning, everyone. Hey, John. Good morning, guys. So the fact that we did $100,000,000 more restructuring this quarter, do you anticipate more restructuring in the Q4? I realize Jeff you just said if there were gains you would offset that.
But how does that pertain to your plan? And how are you thinking about the restructuring opportunity?
Well, maybe why don't I start
and then Jeff turn it to you. But I we continue to have good opportunities for restructuring throughout the company. And I would expect us to do some in the Q4. But again, I think if we have gains, we expect those to be offset with restructuring.
Okay. I don't have a lot to add to that. I think that's right. I think that the more we get deeper into the simplification effort, we just see increasing numbers of opportunities to take cost out of the company and make the company faster and more customer centric. So I think we will do restructuring in the Q4.
And as Jeff said, more likely than not will reflect the gains in the quarter we expect as well.
And Jeff Hornstein, you've been at this for a little bit of time now. Are you as you said, are you finding more opportunity? Or is it still a little early in the process before you would care to comment? Terms of cost out, sorry.
Yes. So I would say around the simplification effort, I think every day we identify more opportunities to do what we do smarter, more shared services, a smaller manufacturing footprint, rationalizing capacity, executing our functions in a more consolidated way. So I would say the lift is growing with time and we are in the early innings of the simplification effort in this company. So I am quite emboldened with what we can accomplish over the next few years.
Just I want to go back
to the
Q4. It's still I mean you guys had great results this quarter. It still is a pretty big V though in terms of and I think the delta is really expectations around power shipments. Is that I mean is that really still on track? Or it just looks like it's a very high contributive quarter versus even historical years, although you did put up the big margins this quarter.
Just is anything you can say to us about the Q4? I don't know progress to date or what you're seeing or anything like that?
Well, I think power was obviously a big contributor in the Q3. We were ahead a little bit on aero derivatives and we the 4th quarter ramp for power and water, I think we feel very good about. I mean, when we think about units for the Q4, the large units, gas turbines, etcetera, most of that is in backlog, better than 95% of it. So I think we feel very good about how we feel power is moving into the 4th quarter. And we've derisked the 4th quarter a little bit with the outperformance here in the 3rd quarter.
John, so we've got I think you start at 40% and not 36%. So you go from 40% and march from there. We typically get a lot more revenue in Q4 than Q3. It's typical for us to get 300 basis points on margin Q4 versus Q3. And power and water is very back end loaded as we've always said.
So you got a bunch of stuff that really I think a little bit better in GE Capital. I think you got a lot of stuff that says we're kind of ready for a very strong 4th quarter.
Perfect. Thanks very much.
Your next question comes from the line of Scott Davis representing Barclays. Please proceed.
Hi. Good morning, everybody. Hey, Scott. I wanted to get a sense when I look at the results, one of the things that really stands out to me was the power and water orders, particularly excluding Algeria. I mean, up 37%.
I mean, I really wasn't aware that anybody in the world was buying a gas turbine right now or distributed power for that matter. So can you give us a little granularity to help us understand where geographically these orders are coming from and just a little help here? Yeah.
So when you look at orders in the quarter geographically for we'll start with gas turbines. In the research in the resource rich regions, we were 18 units in the quarter versus 22, so down 4 there. Middle East, we're down 10 units from 11 to 21. A little bit better in Asia, we were flat 5 units versus 5 units year over year. Most of the order strength really for Power and Water has been around our aero derivatives units have been very strong and our wind units have been incredibly strong.
So in the Q3, we had 4.77 orders in the developed markets on wind that's up 3.90 units and that explains most of the strength around wind and the balance is really aero.
I'd say, Scott, if you look at Q4, we expect power and water orders to be at the high end of the range of what we've talked about. So my hunch is that the orders will be closer to the 115 and the 100 and a lot of that's Middle East. So we'll book some of the Algerian orders in Q4. We've got some big orders in Saudi, some nice orders in Russia, couple in Africa, Coupland Brazil. And on the aeroderivative market, we're seeing pretty good growth in places like Canada, Middle East.
So you just got to be I think it's the GGO and the investment we've made in emerging markets, I think, has really helped us collect the orders.
Okay. That's very helpful. And lastly, guys, I mean, there's Jeff, the big theme of the year really for your conversations has been simplification. You put a couple of sentences on that in the annual report last year. And we you were able to sell the other half of NBC, which I think helps a lot.
But we haven't seen a lot of other portfolio actions. I mean, what's holding you back? The Wall Street Journal reported that there's chatter around spinning off the credit card business, but we haven't seen any announcements there. Is this stuff all just being vetted at present and we're likely to see some announcements in the next couple of months? Or is there maybe you can just help us understand what's going on?
Scott, these things always take a little bit of time, but we're still planning staged exits of the value maximizing platforms at GE Capital. We've got big meeting set November 15 with Keith and Jeff. I think there'll be more clarity at that time on the capital side. And we continue and the rest of the company continue to look at ways to make the company kind of more streamlined and more effective. So I but you're going to see those in good time.
I think we just want to be thorough in our planning and you'll get a lot more details soon.
Okay. Very helpful. Thanks guys and congrats on the margin line.
Great. Thanks. Thanks Scott.
Your next question comes from the line of Nigel Coe representing Morgan Stanley. Please proceed.
Yes. Thanks. Good morning.
Hey, Nigel.
Yes. Hi. Just going back to Power and Water, I mean that was obviously the big driver of upside this quarter and congratulations on the margins there. But $100,000,000 of EBIT growth year over year with sales down $200,000,000 I understand price gap was a big benefit as well as simplification. But just want to confirm that with services down 5%, that's a negative mix and big volume deleverage on gas and wind, I just want to confirm that 3Q was a good run rate for 4Q and beyond?
Well Nigel what I'd say is I'd say the 3rd quarter was slightly better than even what I had thought just by a little bit, but a little bit better. We had better mix. So when you have more aero derivatives and less wind that's a mix adder. And then we've got the simplification efforts what Jeff said with margins or with value gap and with SG and A down 10%. That really it's a much leaner organization.
And then when you look at Q4, you're going to get kind of a bow wave of more wind business. Air derivatives are still pretty strong. Heavy duty gas turbines are still pretty strong. And I think what you're going to see in Q4 is revenue growth, op profit growth and margin growth. So what you're going to see in Q4 in Power and Water, I think is pretty typical of what you're going to see I think going forward in the business into 2014.
Okay. Okay. Understood. And just obviously you broke apart the old NG business into I guess 2.5 segments Power and Water, NG Management and a little bit on Oil and Gas.
Are we seeing the
benefit of that simplification through here? Or is it more the construction actions you're taking year to date?
Oh, gosh. I would say Nigel, as we took out the layer, we got 100 of 1,000,000 of dollars of benefits as we did that. So I think that's that was just a starting point. And then inside each business, we're look we're committed to getting SG and A as a percentage of revenue down to a world class best in class level. And we're on our way.
We make good progress, but we're not where we want to be yet. So you've seen some of that benefits for sure show up in the businesses, but we've got a ways to go yet.
Okay. And just finally going back to the Jeff Borenstein's comments on BAY. If that creeps into 4Q, obviously the intention is to offset that restructuring. That could be a pretty meaningful gain. So I'm just wondering, do you have pipeline opportunities already set to absorb that kind of gain?
And maybe any color in terms of the focus areas from here for that kind of restructuring action?
Yes. I mean, we're constantly in flight on the value maximizing and the Red Book and GE Capital, non core book that we've talked about. So the gain could be sizable. We expect that it will be quite profitable for us. And we're working a list of items to position the portfolio for how we want to take it forward.
So I think the team has got a pipeline of stuff that working.
Thanks very much.
Nigel, the point Jeff made earlier, I think on both I mean, we still have to see how the Swiss IPO goes and Bay, but we could have gains in both of those. Yes.
Okay. Great. Thanks.
Your next question comes from the line of Julian Mitchell representing Credit Suisse. Please proceed.
Hi. Thank you.
Hey, Julian.
Hi. So just on the margin performance again. I mean the overall industrial margin was up as you say 120 bps. Services was up 60 bps. So that means equipment was up 160 bps 170 bps of flat revenues.
When you're thinking about the mix going forwards or well the mix in your equipment backlog today and what that means for revenue going forwards, do you think that kind of equipment margin growth is sustainable? Because obviously you'll have a lot of mix hit coming into that equipment margin from wind and so on in the next sort of 6 months.
Yes. I think what I would say right now is that we are running ahead of the game on value gap. We're through 3 quarters of the year, we're almost $700,000,000 of value gap. We expect that to continue to accelerate into the 4th quarter. On simplification and restructuring, Jeff talked about the fact that we're at the $1,000,000,000 growth through the Q3.
We expect that to continue and accelerate into 4th quarter. So I think on the cost side of the equation, we've got enough levers that we're working very dramatically to deal with the fact that we're going to have more equipment shipments as we move into the Q4. And I think those cost opportunities are going to accelerate into 2014.
Got it. Thanks. And then within oil and gas, 18% revenue growth, but much more subdued profit growth and obviously the margins were down. I guess what's behind the confidence that the margins in Oil and Gas year on year will be up in Q4 because you had a pretty good margin in Q4 last year and you're coming off of Q3 where the margin was down year on year?
Again, I would say we did have some execution issues in the 3rd quarter getting the backlog out, getting it out at the cost structure was supposed to go out. We expect that we're going to improve on that in the Q4. We got a volume lift in the Q4 versus the Q3. We expect to with all the cost actions and the value gap we've created in the business over the 1st 3 quarters, we expect to get some leverage on that in the Q4. So I think we feel pretty good about the fact that we'll grow margin rates in the Q4 in oil and gas.
They will not grow to the levels we thought they would for the year. And that's really mostly about the M and C business. We came into the year thinking the business was going to grow something like 16% or low single digits. And that's a real mix challenge for us. But we're trying to get it done with better execution in the shop better execution on the cost structure.
Got it. Thanks. And lastly very quickly just U. S. Your gas turbine aftermarket business gas fired, halogen consumption is down 9% or 10% year to date.
What are
you thinking about your U. S. Gas Services business sort of looking out from here?
The orders were pretty good. We can probably get back to you with that, but
But I could tell you.
Do you
have a Jeff?
Yes. Just give me one second. Yes. I would tell you what Jeff's getting at. The coating activity in North America is actually higher now in gas turbines than we've seen in a while.
So I think we're kind of guardedly optimistic on at least on the unit side for 14. Okay.
I think in the U. S, we've pretty strong. I think we're up 8% PGS in the U. S. In the Q3.
So there's still some strength in the U. S. As we said, Europe was top down 18% on services related to heavy duty gas turbine. But sequentially that's a bit of an improvement from where we were in the 1st and second quarter. I think really what's driving us here in the 3rd Q4 in North America around PGS growth is our advanced path upgrades.
We did 15 in the Q3 versus 4 a year ago. We expect to do more than that in the Q4. And that's very good business for us at very high margins. So I think we see a way forward here around services.
Great. Thank you.
Your next question comes from the line of Joe Ritchie representing Goldman Sachs. Please proceed.
Hi. Good morning, everyone.
Hey, Joe.
So I just wanted
to just tackle this margin question a little differently. If you look at the 4Q, you've got to in order to hit your 70 basis point target, margins have to expand by about 170 basis points and the comp is a little bit tougher. It did about 17.3% last year. And so can you help me understand across each of these different industrial segments, which segments do you think are going to be above or below that 170% number? And is it going to be disproportionately skewed towards power and water getting much better?
Joe, I can start and then maybe Jeff kicks in. But I think we see pretty broad based expansion in Q4. Power and water expands, but it's not the biggest driver. And we've got every business up a bit and a couple of maybe 3 or 4 businesses up 100 basis points plus. I don't know Jeff you want to
Well, let me go back to the framework we set for people. So we described the businesses in 1 of 3 ways. We said the businesses we thought would grow margins for the year better than 70 basis points, those that would grow 0 to 70 and those that we expected to be flat. I think if we relook that framework today, we'd say oil and gas is clearly going to grow margins less than the 70 basis points. We thought they would do better than that.
And Energy Management, I would say, is on a trend today to grow margins between 0 and 70 basis points, not the greater than 70 basis points we thought. In contrast to that, I think transportation is going to be much stronger than what we originally said. We originally thought they'd be flat. We think they're going to grow margins pretty substantially for the year. And then we have a shot here.
We'll see how appliance strength looks in the Q4, but the appliance business actually may push through the 0 to 70 category to better than 70. So I think when you and Aviation Healthcare as well in Power and Water are going to be right about where we said they would be. So I think those are really the changes, is better than, yes, a 0 to 70 improvement.
Okay. No, that's helpful color. And I guess, a follow-up to that is, I know that you booked a big Algeria order and there's some short cycle
Joe, Joe, Joe, Joe, Joe, we didn't book the Algeria order
in the quarter.
Right. It's going to book. It's going to come through orders in 4Q, but it's also book and ship on the aeroderivatives. I think there are 26 aeroderivatives that are going to book and ship in 4Q. My
I think the Power and Water is almost all in backlog.
Yes. So what I'd say is on the unit side, gas turbines, wind turbines, more than 95% of what we'll do in the Q4 is in backlog today. Our service business runs 50% to 60% backlog and that's kind of where we sit today. I think we have within that we have very good line of sight to what we're going to do on the AGPs in the quarter. So I think we're largely in pretty good shape.
We'll probably do about 70 distributed power units in the quarter and we're in reasonable shape on those 2. They tend to be a little bit shorter cycle. So I think we have pretty good visibility.
Okay, great. Thanks guys.
Your next question comes from the line of Stephen Wembower representing Sanford Bernstein. Please proceed.
Thanks. Hey, Wynbauer.
Hey, I've been called worse.
Is that you Wynbauer?
That would be me, right? As I said, I've been called worse and not only by you guys.
Never by us.
So two things I'd love
to dig into. The first one is this pricing versus cost value gap. What was the shipping price index, the industrial price index for shipments overall in the quarter?
Do you have that? Yes.
Give me one second, Steve.
Yes. Why are you doing that? My real my question here is this has been such a tremendous tailwind across the businesses. And as we look out and we look at the sustainability based on the order pricing over time and I start staring into next year and relative to commodities, just question is, I know you guys say you feel good about it, but maybe give us a little more confidence about what drives your conviction that you can continue to create a value a positive value gap there as we look out longer term past the Q4?
Well, we're still Steve, we've got to do detailed business plans. I think the for 2014, but we've been running positive OPI on pricing on orders. I think we expect across most of the businesses that's going to continue. And the early reads I've got, across most of the businesses that's going to continue. And the early reads I've gotten on direct material deflation for next year and material productivity, but direct material deflation for next year is still pretty favorable to us.
So I think this year I don't know last year we were $350,000,000 something like that on value gap. This year we're at $660,000,000
Just under $700,000,000 Just under $700,000,000 Right.
So a higher number than that. I think Steve we're going to be positive again next year and that'll be something I'll give you more flavor for in the outlook meeting in December.
Steve the selling price index in the quarter was 70 basis points positive.
Okay, great. And then another question. So when you think about Avio and some of the capital deployment and I guess the pricing the $0.02 charges you sort of fair market value the pricing on GAAP. I mean, how does that did that change your view of the financial metrics for the deal originally? And how do you think about that?
Maybe also broader context on oil and gas and some of those that M and A that you now got a lot more track record now behind you. How are you thinking about that, Jeff, in terms of performance relative to your original expectations?
Well, let me give Jeff the Avio question.
Yes. So what I'd say Steve on Avio is I think part of those fair value adjustments tell you is the business was actually more profitable than what we thought we were buying when we finally got in there to see a lot of the detail. Because of antitrust constraints, we couldn't see a lot of detail around parts of their Aviation business. So the adjustments were larger than we expected initially, but they're larger for all the right reasons, meaning the margins on the parts particularly G90, they've gotten a ton of productivity over the last number of years since they've been in G90 program. So that will work well with us or for us going forward.
I think the Avio is kind of a unique accounting convention given their supplier relationship with us. I think that's all goodness that's going to come back to us. So this is actually I think good helpful. And on the oil and gas stuff, look we like the places that we're in and the deals we've done. So but I think there's 2 different things.
Yes.
Sorry. Go ahead, Steve. I'm sorry.
No, I just was trying to
get a sense of the financial metrics also as you look back on the track record for the oil and gas deals a couple of years ago.
Look, I think when we do reviews with our Board, if you look at the deals we've done in starting in 2011, 2012 and 2013 versus deal case, we're still running ahead on those.
Okay. Great.
Thank you. Great. Thanks, Steve.
Your next question comes from the line of Deane Dray representing Citi Research. Please proceed.
Thank you. Good morning, everyone. Can we go back to get some color on the order pricing on power and water equipment coming in negative in the quarter and also in slightly negative in oil and gas? Just put this in context, is there any change in the competitive environment? Is there some FX impact?
Because it does break a streak of some of the positive pricing that you've had.
Yes. I don't think I don't know. As it relates to Power and Water, I don't think there's a huge trend change here. I think thermal pricing on units was just under 7% down. I think it's an extraordinarily competitive market globally.
I don't think anything's really market globally. I don't think anything's really changed there. Those dynamics haven't changed. On wind, it really is a bifurcated world. In the U.
S, we've gotten really good price over the 1st 6 months of the year. And we feel good about where we're going with our U. S. Wind. Internationally, it's more competitive around price and wind in the quarter on OPI was down 130 basis points.
TGS was services was better. It was up 1.4% on thermal. And then oil and gas, we got 2 specific dynamics going on. We had a really profitable order that we took in the Q3 of 2012 in the U. S.
Around an LNG facility that we didn't repeat. And we had the big Russian Yamal order here in this quarter that was not nearly as profitable as that as well. And that really drove oil and gas OPI down in the quarter. We expect oil and gas OPI in the 4th quarter to get back to a positive and we expect it to be positive for the year on a year to date basis.
Great. I like that last point you made. And then just thinking about the Q4, Jeff, you said that you're tracking well for solid organic revenue growth. The slide says you're biased towards the low end of the range, but clearly you've got more momentum here. And I your comment that you've got a slight hedge so that in the plan, so more contingency.
How has that contingency changed let's say versus the Q1? Because you certainly look like you've got a lot more buffer in hitting these margin targets today versus where we were in the Q1?
I think Dean we it's about the same hedge we had at the end of the second quarter. And then for us on the revenue side, basically you've got the whole the company, ex Power and Water, which has operated pretty well all year. And what you're going to see in Q4 is just a more normal run rate for Power and Water. So that's really if you think about the range we had on the page and how I talk about the business going forward, really the only difference is Power and Water. And so you're going to see a more normal quarter for Power and Water from a revenue standpoint and that should carry forward into next year.
Great. Thank you. Great.
Your next question comes from the line of Steve Tusa representing JPMorgan. Please proceed.
Hey, good morning.
Hey, Steve. How are you doing?
Not too bad. So I think you said 5% industrial revenue growth as you were exiting the slide deck before Q and A for the Q4. Is that that's organic?
Yes. That's the expectation around 5% for Q4.
Okay. So for the year you
guys are going to end up around flat for the year to up 1, 0% to 1% type of thing?
We'll take we'll be at the low
end of the range in there Steve.
Okay. Okay. And then I'm just curious as to ultimately there were some moving parts here with the slide you gave in
the Q1 on Power and Water. I think
it was slide 5, where you guys laid out the first to the second half and you kind of underperformed a bit in the second quarter on pure profit of $1,100,000,000 versus $1,300,000,000 You had $2,900,000 for the second half. Maybe could you just tell us where you're going to be relative to that $2,900,000
for profit for Power and Water?
Yes. Steve, Yes. Steve, I don't know yes, we're not I don't think we're going to guide on that.
I mean, you're obviously going to be above
it though, right, I would assume?
Yes. I don't think I can give you an answer on that. I don't think we don't provide guidance. I don't think I can give you that number. Here's what I'd say about Q3 to Q4 is the way I would think about it and Power is a piece of this construct is we'll end the Q3 here on an adjusted basis of $0.40 a share.
We typically get a big order a big volume ramp from Q3 to Q4. Last year that was $0.08 This year we've got a bigger ramp volume wise going from Q3 to Q4. We're going to do that with a much better cost structure than what we did last year Q3 to Q4. More value gap, We're ahead of the curve on SG and A and cost savings. That's going to give us additional incrementals, additional volume leverage as we move from 3rd to 4th quarter.
So Power and Water is a piece of that framework. They're a big piece of it because they have a very large volume ramp in the 3rd Q4. And I think we feel very good about the construct that we have around that. And all of that should help us achieve the 70 basis points for the year.
And Steve, Power and Water is going to have positive revenue, positive op profit and then positive margins in Q4.
Yes, right.
It's going to perform well.
Steve, the last thing I would add is if you go back the last 7 years, 5 of the last 7 years, we've grown margins from 3rd to 4th quarter better than 2 50 basis points. And 4 of the last 7 years, we've grown to more than 3 10 basis points from 3rd quarter to 4th quarter.
So Yes, yes, clearly. And then just on the distributed power stuff, I didn't quite again kind of going back to that slide where you had aero of 100 units. It sounds like you're dramatically kind of outperforming. Was First of all, could you just maybe talk about where the distributed power stuff came from this quarter? And is this a timing issue for this year?
Or is that pure upside this year relative to what you expected in the Q4? Because I know there was a big bunch of a big group of distributed power stuff coming in the Q4. It seemed to come a bit early.
Again, Steve, a lot of the stuff it's pretty global business. I'd say there's more opportunities in the Middle East and Asia and places like that. I would say there was some more in the Q3 than what we expected and but I still expect them to have a good solid growth in Q4 as well. But I would say we had we probably at the end of the day had a few more aerogreatives in Q3 than we originally expected.
Okay. Thanks a lot.
Okay, Steve. Thanks.
Your next question comes from the line of Shannon O'Callaghan representing Nomura. Please proceed.
Good morning, guys.
Hey, Shannon.
Hey. So just in terms of the restructuring and gains in the Q4, it sounds like you might go ahead
and do some restructuring.
If you do, you'll have some gains in industrial. But as it plays into the 70 basis points, right, the restructuring is in corporate, the gains are in the segments. Is that all gravy on top of that? There's none of that sort of baked into getting to the 70?
So, Shan, the way that I talked about it today and the way we're planning is the 70 is without gains. So basically, the intent is to use the gains we have to do additional restructuring.
Okay. But yes, like I said restructuring, we pull out the line. I know there weren't any in the quarter, but there's not in
the quarter. If we have them, right?
Yes. Okay.
And then just on the framework, the high single digit to low double digit operating earnings, back at EPG, you also used to show that that translated to double digit EPS growth. And now no one's sort of there in terms of consensus. I mean, is there is this double digit part of the equation sort of not on the table anymore? Mean, I know it still says high single digits, double digit operating earnings, but it doesn't seem like we're getting there on the EPS basis. Is that kind of off the table at this point?
I mean, look, we don't give guidance anymore, okay? So let's start with that. And again, I think you've got some stuff in Avio and stuff in corporate. But I would when you look at industrial and capital, I actually view those exactly the same way we've looked at them when I was at EPG.
Okay. All right. Thanks guys.
Shaquana, we're running up against another earnings call. So why don't we take one more question here?
Yes, sir. Your next question comes from the line of Chris Birchellen representing Oppenheimer. Please proceed.
Hi. Thanks for fitting me in.
Hi, Chris.
Hi. So last year late in the year things got a little variable out there in the economy customers taking delivery. So if we look at your backlog, wondering what the key variables are in terms of how backlog execution could play out? And just for example, I think from health care orders, it would seem we'd be seeing positive growth there by now.
Yes. Look, Chris, I'd give you a view. I actually think the backlog is pretty firm. I don't think there's commercial issues really. I think what Jeff talked about like in oil and gas is stuff that we could have executed better on.
So I kind of we're not seeing a lot of we're not seeing really any kind of variability in the marketplace in terms of customers pushing back on deliveries.
Great. Thanks.
Great. Why don't we wrap up today? Thank you everyone for attending. The replay of today's webcast will be available this afternoon on our website. We will be distributing our quarterly supplemental data for GE Capital later this morning.
I have some announcements regarding the upcoming investor events. On Friday, November 15, we'll host a GE Capital Investor Meeting in Norwalk, Connecticut. This meeting will begin at 10 a. M. We hope to see you there.
2nd, our Annual Outlook Investor Meeting with our Chairman will be held in New York City again on Wednesday, December 18. We'll send out a little more information closer to that date. And then finally, our Q4 2013 earnings webcast will be available on Friday, January 17. As always, we're available today to take your questions. Thank you, everyone.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.