Good day, ladies and gentlemen, and welcome to the General Electric Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Shaquana, and I will be your conference coordinator today. If at any time during the call, you require assistance, please press star followed by 0 and a conference coordinator will be happy to assist you. If you experience issues with the slides refreshing or there appear to be delays in the slides 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, Trevor Schonberg, Vice President of Investor Communications. Please proceed.
Thank you, Shaquana. Good morning and welcome everyone. We're pleased to host today's Q2 webcast. Regarding materials for the webcast, we issued the press release earlier this morning and the presentation slides are available via the webcast. The slides are available for download and printing on our website at www.g.com/investor.
As always, elements in 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 a large group here. We have our Chairman and CEO, Jeff Immelt our Vice Chairman and new CEO of GE Capital, Keith Sharron and our new CFO for GE, Jeff Bornstein.
I'd like to turn over to our Chairman and CEO, Jeff Immelt. Great. Thanks, Trevor, and good morning, everybody. Look, on the first page, our environment improved slightly in the Q2. Our emerging markets remained resilient, while Europe stabilized.
Orders in the U. S. Were the strongest we've seen in some time with 20% growth. And overall, our orders grew by 4% and backlog increased to $223,000,000,000 Earnings were solid. Reported EPS was $0.36 but this included $0.02 of uncovered restructuring.
On a sustaining basis, it would have been $0.38 up slightly from 20 12 and year to date EPS of $0.75 up 6%. Operations were strong in the quarter. Margins grew by 50 basis points and we're on track for 70 basis points for 2013. Our simplification efforts have resulted in $470,000,000 of costs at year to date and we had a solid performance in cash. Our disciplined balanced capital allocation plan continues through the half.
We have returned about $10,000,000,000 to investors, well on the way to our $18,000,000,000 goal. As for M and A, we've completed Lufkin and Avio and Avio remains on track for a Q3 close. So all in all, a good quarter for operating and strategic execution. Our orders growth remained solid at plus 4%. And as I said earlier, backlog grew to 223,000,000,000 Performance was broad based.
We had services growth in 5 or 6 businesses. Orders growth accelerated in China, the U. S. And Europe. Aviation and Oil and Gas remained very strong with their combined backlog growing by $7,000,000,000 Let me give you a few of our other highlights.
Oil and gas orders grew by 24% with double digit growth in 4 or 5 segments. Aviation and commercial spare orders grew by 19%. Healthcare solutions equipment orders grew by 9% in the U. S. Energy management orders grew by 19%.
North American Power Generation Service orders grew by 24%. We still have a few headwinds like heavy duty gas turbines, but they're signs of strength. We continue to add price to backlog with orders pricing up 0.9% and we've now had positive orders priced for the past 6 quarters. This will contribute to a positive value gap in the second half of twenty thirteen and beyond. Organic growth was down 1% for the quarter, but it's really a wind turbine story.
Organic growth ex power and water grew by 5%. Growth markets expanded by 5% with 4 of 9 regions up by double digits. We continue to make progress in key regions like Russia, Africa and China. Our growth market position is a competitive advantage for GE. Services grew by 2% with broad based strength and we're encouraged by services in aviation, oil and gas and transportation.
Transportation services is a particular highlight with growth of 28%. We continue to be impacted by the sluggish European economy for gas turbine services and U. S. Sequestration impacted our military spares business. The service margins grew by 70 basis points and backlog grew to $166,000,000,000 We made solid progress across the company with our new product launches.
The Paris Air Show was very successful for GE with $26,000,000,000 in wins. We're gaining share in healthcare with robust product launches and are expanding service offerings with new software launches in aviation, power and healthcare. In the second half, revenue will be positively impacted by power and water shipment timing, specifically 70% of our gas turbines, wind turbines and distributed power products will be shipped in the second half. We had strong margin expansion with growth of 50 basis points. Every business grew in the quarter except for Home and Business Solutions and even in that segment appliances expanded while lighting lagged and we're on track for 70 basis points for the year.
Key margin execution drivers are within our control. Have one of the strongest value gaps in history as we generate both price and material deflation. We'll manage R and D to be flat for the year. We'll reduce SG and A by at least $1,000,000,000 We continue to execute multiple restructuring projects with attractive paybacks and we're in the process of completing our projects for 2013, while developing a pipeline of new ideas. A key driver for margin improvement in the second half is the power and water volume growth where we remain on track.
Overall margins were slightly better than we expected in the Q2 and that gives us more confidence going forward. Our cash execution improved in the quarter. Our 2nd quarter industrial CFOA was up 60% excluding the impact of MVC related taxes. In the quarter, we announced that GE Capital will pay up to a $6,500,000,000 dividend to the parent for the year. And we remain on track for our CFOA goals.
We've returned $9,900,000,000 to investors in the first half through dividends and buyback. This is well on our way to our $18,000,000,000 goal. Our announced deals with Lufkin and Avia will close in the second half, both fair and model are bolt on deals that are accretive to earnings. We end the quarter with a consolidated cash position of $89,000,000,000 with 19,000,000,000 dollars at the parent. This is a symbol of our financial strength and supports balanced capital allocation.
And now over to Keith. As you know, this will be his last call, but you'll see him again at GE Capital. And welcome to Jeff, my new partner. So Keith, over to you. Jeff, thanks.
I'll start with the 2nd quarter summary. We had continuing operations revenues of $35,000,000,000 that was down 4% from last year. Industrial sales of $24,600,000,000 are down 2% driven by Power and Water as you can see on the right side. GE Capital revenues of $11,000,000,000 are down 3%. Operating earnings of $3,700,000,000 were down 8%.
Operating earnings per share of $0.36 were down 5%. As Jeff said, that includes actually $0.03 of restructuring, which I'll cover on the next page, including the capital restructuring. And we also no longer have the MVCU earnings, which was 0 point 0 $2 in 2012 in Q2. Quarter. Continuing EPS includes the impact of non operating pension and net earnings per share includes the impact of discontinued operations, which I'll also cover in the next page.
As Jeff covered, the CFOA was 3,700,000,000 dollars including a very strong performance in Q2 from the industrial CFOA, plus $1,900,000,000 of GE Capital dividends back to the parent. For taxes, the GE rate of 17% for the quarter is below the 20% rate we previously communicated for the year. We had an audit resolution with the IRS in the quarter and because that's required to be recorded entirely in the quarter rather than spread over the year, it caused the rate to be lower in the quarter. We might have other audit resolutions during the year and depending on the outcome, we currently expect a rate of high teens to 20% for GE for the full year. The capital rate is down from our forecast because of larger benefits including the tax efficient foreign disposition transactions as well as the recapture of prior untax losses at real estate.
As we previously indicated, we do expect the GE Capital rate in the mid single digits for the year, but there could be some variability at GE Capital as well depending upon IRS audit resolutions and the tax on other possible dispositions. On the segment results. Total industrial segment profit was up 2%. Ex Power and Water, our industrial businesses grew their segment profit by 12%. Power and Water was down in the 2nd quarter.
However, the results were significant improvement over Q1. GE Capital earnings were down in the 2nd quarter in line with lower assets and we'll cover all the segments in more detail over the next several pages. Before I get to the businesses, I'll start with the other items page from Q2. At the top, in total, we had $0.03 of restructuring and other charges in the quarter, dollars 0.02 related to industrial and that's in the corporate line at the industrial reporting and $0.01 was in G Capital. We continue to reduce our cost structure by lowering our SG and A headcount.
We're rationalizing our footprint and this should be a nice tailwind for margins as we go into the second half. We also had a $0.01 charge in the quarter related to an impairment for an investment that we made in Brazil and that charge was also included in the corporate line. We had 2 one time benefits in the quarter. First, as I mentioned on the previous page, we had a favorable IRS settlement, which resulted in almost 4 points of lower GE tax rate in Q2 and in total contributed to a $0.01 industrial benefit. And second, in GE Capital, we exited our fleet platform in Canada, which resulted in a $0.01 benefit in the quarter and the benefit from this transaction was mostly tax related and contributed to a lower eCapital tax rate.
For discontinued operations at the bottom of the page, we had $122,000,000 after tax impact in the quarter. On WMC, we recorded 128,000,000
dollars of new
pending claims, so that's down significantly over the run rates that we've been seeing. And we added 47,000,000 of reserves in the quarter, resulting in a total reserve balance of $787,000,000 covering both pending and future claims. On Gray Zone, we booked $76,000,000 of additional reserves to reflect ongoing claims and we ended the quarter with $557,000,000 in reserves. On the bottom of the page is a summary of our operating EPS and our industrial gains and restructuring. In the Q1, we reported $0.39 of operating EPS and that included $0.04 of net benefit as the Q1 NBCU gain was greater than our industrial restructuring.
In Q2, we reported 0 point 3 $6 and that included a 0 point 0 $2 drag from industrial restructuring again in the corporate line and we expect to have at least $0.02 more of industrial restructuring in the second half. So for the total year, we don't expect the NBCU gain and restructuring to have any impact on EPS. So I'll move on to the businesses and let me start with Power and Water. Orders of $6,000,000,000 were down 1% and Europe remained challenging down 40%. Ex Europe orders were up 6%.
Equipment orders of $3,000,000,000 were down 5%. Thermal orders remained soft at $690,000,000 down 50%. We had orders for 24 heavy duty gas turbines versus 30 last year. We had a strong renewables quarter with orders of $1,400,000,000 up 55 percent. Distributed power orders of $700,000,000 were up 3% and service orders of $3,000,000,000 were up 2%.
Again, ex Europe services orders were up 13%, driven by the strong U. S. Power gen services, both outages and upgrades with orders up 29%. Overall for Power and Water, orders pricing was up 1.6%. Revenue of $5,700,000,000 was down 17 percent driven by lower volume.
Equipment revenue of $2,600,000,000 was down 30%. We shipped 19 gas turbines versus 31 last year and we shipped 3 51 wind turbines versus 7 26 last year. Service revenue of $3,100,000,000 was down 3%. PowerGen services revenue was down 1% in total, but up 14% ex Europe again driven by the strength in the U. S, which was up 20%.
Segment profit of $1087,000,000 was down 17% driven by the lower volume. SG and A costs were down 9% in Q2. Value gap was positive and margins increased by 10 basis points. So Q2 showed improvement over Q1 for Power and Water. If you look at the second half dynamics, as Jeff said, we've got a lot of volume and we expect Power and Water volume to be higher in the Q4 than the Q3.
Renewables will continue to improve, distributed power and services continue to improve and costs are going to continue to go lower. So our current outlook is to deliver the total year framework that Jeff covered on Power and Water at EPG. On the right side is Oil and Gas. Results in the 2nd quarter were very strong. Orders of $5,000,000,000 were up 24%.
Equipment orders of $2,800,000,000 were up 42%. We saw double digit growth across all the segments with turbomachinery up 74%, driven by U. S. Midstream LNG orders. Subsea was up 30%, driven by large projects in Indonesia and Angola.
Service orders of $2,300,000,000 were up 8%. We saw a nice growth in global services, up 14%, and we're making significant progress in growing our Subsea service business, which was up 44%. This was partially offset by measurements and controls, which was down 1%. While still down, this is up from the Q1 when M and C was down 23 down 13%, so some improvement in the market. Our backlog grew by $1,100,000,000 in the quarter $18,000,000,000 and orders pricing was up 80 basis points or 9th quarter of positive order price increases.
Revenue of $4,000,000,000 was up 9%. Equipment revenue of $2,000,000,000 was up 11%, driven by growth in Subsea and Drilling and Surface. And service revenues of $2,000,000,000 were up 6% driven by stronger global spare parts sales. Segment profit of $532,000,000 was up 14% as the benefits of higher volume, positive price and SG and A reductions more than offset higher program spending and drove 70 basis points of margin expansion. Next is Aviation.
The Aviation team had a strong quarter. Orders of $5,800,000,000 were up 4% with equipment orders of $3,200,000,000 up 7%. Commercial engine orders of $2,500,000,000 were up 1 percent, driven by $1,400,000,000 of CFM orders, including $670,000,000 of LEAP orders. Military equipment orders of $300,000,000 were down 72%, driven by no repeat of the Saudi F-one hundred and ten order last year, which was $890,000,000 Service orders of $2,600,000,000 were up 1%. Commercial service orders of $2,000,000,000 were up 11.
The 2Q average daily Spears order rate was $24,600,000 up 19% as we continue to see a nice rebound from the higher year to date GE fleet utilization. It's up 2.6% globally and as airline shop visits and parts restocking return to more normal buying behaviors. Military service orders were down 25% as we're seeing some impact from reduced flight hours and inventory management. Overall for aviation order pricing was up 2.5%. Revenue of $5,300,000,000 was up 9%, driven by equipment up 12%.
We shipped 5.96 commercial engines in the quarter, which was up 30 units or 5%. We shipped 33 Gen X units up from 27 last year. And we shipped 280 military engines, which were up 21 units or 8 percent. Service revenues of $2,600,000,000 were up 6%, driven by commercial services up 12%, partially offset by military services, which was down 6% on lower spare parts. Segment profit of $1067,000,000 was up 16%, driven by the strong value gap, pricing up 3.6 percent and also by higher volume and margin rates grew by 1.1 points in the quarter.
On the right side is Healthcare. Orders of $4,800,000,000 were up 2%. Equipment orders of $2,800,000,000 were up 4% and that's 7 points better than we saw in the Q1. Developed markets were up 3% with the U. S.
Up 5%. Europe was up 7%. Japan was down 26%, but it's down 8% excluding the impact of foreign exchange. Developing markets were up 8%, driven by China up 16%, Latin America up 4%, India up 1%. If you go by modality, MR was up 14%, CT was down 6%, Ultrasound was up 13%, Life was down 1%, and diagnostic guidance systems was down 5%.
Service orders of $2,000,000,000 were down 2%. Revenue of $4,500,000,000 was flat and again that's driven by the growth markets up 10% offset by the developed markets down 4%. Segment profit of $726,000,000 was up 5% as the benefits of restructuring and higher volume more than offset the impact of lower pricing and margin rates were up 80 basis points in the quarter. Next is transportation. Orders of $1,100,000,000 were down 23%.
Equipment orders of $444,000,000 were down 45% as we continue to see the impact of soft North American locomotive and global mining equipment markets. Service orders of $633,000,000 were up 7%, driven by locomotive services. Orders pricing was up 40 basis points and revenues of $1,600,000 were up 2% as the growth in signaling and parts more than offset lower equipment revenues, which were down 14%. We shipped 170 locomotives in the quarter versus 243 last year. Segment profit of $313,000,000 was up 11% driven by the positive value gap in services growth, which also drove margins up 160 basis points.
Energy Management had a strong quarter versus last year. Orders of $2,300,000,000 were up 19%, driven by digital energy up 24% and power conversion up 20%. We saw strong growth in digital meters and in the Marine segment in Brazil and China. Revenues at $2,000,000,000 were up 6%, driven by power conversion up 7%, partially offset by lower revenues in digital energy. Segment profit of $31,000,000 was up from $4,000,000 last year driven by the improved value gap and segment margins were up 140 basis points.
Home and Business Solutions had another positive quarter. Revenues of $2,100,000,000 were up 5% as 8% growth in appliances was partially offset by a 4% decline in lighting sales and segment profit of $83,000,000 was up 5 percent. Appliances was up 31% driven by positive pricing and lower program spending, partially offset by the results in lighting. Margins were flat for the quarter and we continue to see strength in housing. 2nd quarter housing starts were up 18% boosted by single family up strong double digits and multifamily starts up over 20%.
So with that, let me turn it over to Jeff Bornstein to cover GE Capital. Thanks, Steve. GE Capital revenue was just under $11,000,000,000 in the quarter, 3%, driven by lower assets, partly offset by higher gains. Assets were down 7% or $37,000,000,000 year over year. Net income was $1,900,000,000 down 9% from prior year, primarily driven by lower assets.
The higher gains were offset by losses, marks and impairments in the quarter. Tax benefits were essentially flat year over year with the rate down driven by lower pretax income on lower assets. We ended the quarter with 3 $91,000,000,000 of ending net investment. That's down $40,000,000,000 from last year and down $11,000,000,000 sequentially. Our net interest margin was up 18 basis points versus 2012 to 5% and flat with the Q1.
Tier 1 common ratio on a Basel 1 basis improved to 11.2% in the quarter, driven by the reduction in investment in the balance sheet and after paying $1,900,000,000 in dividends in the quarter. On the right side of the page, asset quality trends continue in the right direction with delinquency rates improving across the portfolio. The only exception being the seasonality we expect in our U. K. Mortgage business.
In addition, non earning assets totaled $6,600,000,000 that's down $600,000,000 from the Q1 and down $1,600,000,000 versus last year. CP ended the quarter at $36,000,000,000 well on its way to the $35,000,000,000 plan for the year and liquidity was very strong ending the quarter at $70,000,000,000 Now to walk through the segment performances of CLL, commercial lending CLL, commercial lending and leasing businesses ended the Q2 with $174,000,000,000 of assets. That's down 6% from last year, driven by a reduction of non core assets of about $7,000,000,000 $4,000,000,000 of lower core assets primarily driven by asset including the Fleet Canada disposition Keith referred to. On book core volume was 6% higher than the Q2 of 2012 and new business returns remained attractive at above 2% returns on investment. Earnings were stronger across all the regions and up 31% in total driven by the fleet disposition, asset sales, higher tax benefits in Europe partially offset by asset impairments.
Asset quality continued improving with delinquencies down 15 basis points versus last year and non earning assets were down 30% versus the Q2 of 2012. In the Consumer segment, we ended the quarter with $136,000,000,000 of assets, up 1%. Net income of 8 $28,000,000 was down 9%, primarily driven by the removal of reserve seasonality in our U. S. Retail business under the new modeling approach that we completed in the Q1.
We expect reserve coverage in the U. S. Retail business to be about the same in the Q3. The U. S.
Retail business earned $563,000,000 in the 2nd quarter, down $78,000,000 from last year, driven by the reserving change I just mentioned and partly offset with core growth. Asset growth in this business was strong at 9% and asset quality continues to set new benchmarks with 30 day delinquency down to 3.85%. Our core Europe business earned $149,000,000 in the quarter, which was essentially flat year over year. The real estate team continues to execute very well. Assets ended the quarter at $42,000,000,000 that's down 28% year over year.
Net income of $435,000,000 was up 2 times versus 2012 and that was driven by higher gains on the equity portfolio and higher tax benefits. The business sold 180 properties with a book value of $1,900,000,000 or about $200,000,000 in gains in the quarter. Asset quality continues to improve with 30 day delinquencies on the debt book at 2.1% and that's 6 basis points lower sequentially. The verticals, GCAS earned $304,000,000 that's down 1% down 1% with assets and down 3% driven by lower gains on aircraft sales and modestly higher impairments on aircraft held for sale. Returns remain very attractive on new volume.
EFS earnings were down driven by the impairment of a single asset in our energy book and modestly lower gains across the portfolio. For our total results, we did have roughly $300,000,000 of tax provisions in the GE Capital Corporate that partially offset the tax benefits in the segments to book to a total year expected rate of mid single digits. This along with the non repeat of the $200,000,000 of tax benefits from the BP Business Properties transaction in the Q2 of 2012 explains the higher corporate charge year over year. So overall, GE Capital continues to perform well. Its results were in line with our strategy to reduce the size of the business.
And as you look forward to the Q3 with the loss of earnings from shrinking assets and adjusting for one time items, the normalized run rate for GE Capital is still in the range of $1,800,000 to $1,850,000 in earnings. So with that, I'll turn it back to Jeff. Great, Jeff. Thanks. As to the framework, we have really no change to the 2013 operating framework.
We're not planning for an improved environment for the balance of 2013, but execution levers are in our control, a solid backlog, good technology, strong cost control and disciplined capital allocation. In addition, we have a very diverse global footprint, which is well positioned for the macro tailwinds that are out there like in oil and gas. So again, as I said, no change to our 2013 operating framework. We still plan on solid investment earnings growth for the year, driven by expanding margins. Our 2nd quarter profile supports this growth.
GE Capital will have solid growth for the year and we have no change in our framework for corporate costs or cash. We still plan on double digit EPS growth for the year. So everything is consistent with what we said at EPG and we're well positioned to deliver for investors. And in conclusion, let me recap our status versus investor goals we set for the year. Our industrial earnings growth will improve during the year.
Power and water was a drag in the first half, but should have positive earnings growth in the second half. The other segments are executing. So we should see strong growth for total industrial in the second half. We plan to achieve 70 basis points of margin improvement for the year. The Q2 exceeded our expectations and the teams did a solid job on execution.
We expect to receive up to a $6,500,000,000 dividend from GE Capital this year. Organic growth will likely be at the low end of our 2% to 6% range for 2013. Again, the wind turbine cycle is a headwind, but we're well positioned for the future with a solid backlog. And the balance of our industrial businesses should grow in line with our 5% to 10% organic growth goal. We're on track to return $18,000,000,000 to shareowners through dividends and buyback.
So for GE, this is a solid quarter and we're on track for a good year. Now Trevor, back to you and we'll take some questions. Great. Thanks, Jeff, Keith and Jeff. Do you want to why don't we open up
the line to take some questions?
Yes, sir. Your first question comes from the line of Scott Davis representing Barclays. Please proceed.
Hi. Good morning, guys.
Hey, Scott.
Jeff, when you think about last quarter and the disappointing margins you put up, your confidence in the 70 basis points for the year seemed to be somewhat wavering and maybe it seemed like a reach goal. I mean putting up the 50 basis points this quarter, I mean does that indicate to you an increased confidence that you're going to see this back half of the year margin ramp, particularly given what you saw in value gap?
Yes. Scott, it really does. Again, I think the teams have been executing well. I would decompose a little bit the way we talk about margins. The value gap is on track to be significantly positive this year.
Our SG and A, our simplification efforts, I think are just gaining momentum. So that looks good. R and D, I think levelizes for the year, mix levelizes for the year. And the Power and Water units are in backlog. So Scott, I think as we execute that ramp, we feel pretty confident in the 70 basis points for the year.
We still have a slight hedge in the numbers and I just think we're building momentum.
Makes sense. And if I I know it's hard when you look at backlog and orders to just given the timing to figure out exactly when revenues are going to pull through. But when you really look at the order growth and the fact that you're getting I mean, you were down including wind, but excluding wind up 5%, you said. But you say in the slides not counting on environment improving, but the order book does imply that the back half of the year is going to have some unit volume tailwind. Am I reading that correctly?
Yes. It definitely does. Just given the way the wind Scott, like you know, just looking at the wind profile, if you look at Power and Water, it's going to strengthen in the second half. And the other businesses, I'd say are already demonstrating some nice momentum. So things like Aviation Spares, which were a drag last year, have turned into a tailwind this year.
Oil and Gas, I'd say 4 or 5 segments double digit orders growth even M and CS, I'd say better quarter. So if you just pick through 1 by 1, you're going to get some gathering momentum I think in the second half of the year. Okay.
And just clarification, the loss in Brazil, I assume that's the EBX, IG Batista investment?
Yes. That's right.
Okay. Okay. Fair enough. Thanks guys. I'll pass it on.
Thanks, Scott.
Your next question comes from the line of John Inch representing Deutsche Bank. Please proceed.
Good morning, everyone. Hey, John. Good morning, guys. So I just want to I have a couple of clarifications. So one, I just want to confirm, were there any gains that you would consider one time within the industrial segments that might have helped to the 50 basis points of margin this quarter?
We had a small disposition in Aviation, but it was immaterial, John. In total across the industrial segments, the impact of gains was 0.
And then the rise Keith or Jeff in the year over year corporate, I mean you did call out, right the asset impairment of $0.01 But was there any kind of an industrial reclassification in the way you look at the businesses that might have again, I'm sorry to be nitpicking, but may have helped the margins and then in turn you does that flow through the corporate line? Or I mean why again was the corporate up as much as it was?
There was no reclassification, but I can take you through corporate. If you look at the corporate second quarter number, it's $1,883,000,000 Remember, you got to take out the non operating pension, which on a pretax basis is $661,000,000 So we're at $1,200,000,000 in the quarter. There's really three things. We have $280,000,000 of pre tax restructuring in corporate, which is the $0.02 And again, that is for the year will be against the MVCU gain. We had the impairment of $108,000,000 in the corporate line.
And then the one the third thing that's not really related to corporate, but it just flows in that line is the GE Capital preferred dividend for $135,000,000 So if you take the Q2 and you get to a run rate, you're basically at the run rate we need to be about $3,000,000,000 for the year.
Okay. No, that makes sense. Keith, can I ask you about WNC in Japan? We're still taking charges for it. And just remind us that if I'm not mistaken wasn't there a statute of limitations in New York that prospectively kind of makes the run rate on WMC hopefully or you tell me sort of much lower kind of going forward?
And then maybe this is for Jeff. Is there not an opportunity to pay off these Japan liabilities sometime early next year? I'm just wondering what I realize it's still early, but Jeff what your thoughts are toward perhaps pursuing that kind of attack?
Sure. Let me I think I can start with both of those for you, John. On WMC, yes, the statute of limitations runs 6 years from the date of the securitization. We basically completed all the securitizations that came out of WMC have gone through that 6 year period now. And I think that's why you see a slowing of the additional pending claims.
And so we need to resolve these. We're in negotiation and discussion on the claims and we're going to work our way through that as you go through the second half of the year and we'll continue to update you. From a Japan perspective, there is a contractual discussion point in the Q1 with Shinsei and we will have a discussion with them and whether we can reach agreement or not remains to be seen. But there is an opening there in the Q1 that we'll be pursuing and negotiating with them.
Perfect. Thanks very much.
Thanks, Joe.
Your next question comes from the line of Jeff Brock representing Vertical Research Partners. Please proceed.
Thank you. Good morning, everyone.
Hey, Jeff.
Hey. Just first just back on kind of the question of games. You said it kind of netted out year over year in the quarter.
But can we just put
a finer point on what it actually was TransDigm and what other stuff you might have had?
Yes. The aviation TransDigm benefit was immaterial in the segment and I didn't say it netted out year over year. I said it was 0 in the quarter in segments.
So Okay. I thought it was a net I thought you said net neutral year over year.
No, no, no. In the quarter, the small benefit we got in TransDigm in Aviation, if you go to the segment profit level, it was 0 across the segment profits for the Industrial businesses.
Okay, great. And just shifting to power. So power price looked decent in the quarter. I just wonder
if you could give us
a little color around service price versus order price and what's driving that?
Sure. Power and water, if you look the equipment pricing was up 3.5% in the quarter. The service pricing was down 3 tenths and overall up 1.6%. Thermal and PGS was down 2.2% renewables was very strong up 11%. Those would be the biggest drivers.
And then just a little more color if
you could on just what's going on in service. Europe obviously weak sounds like it got a little less bad maybe. How do you see that plan over the balance of the year?
Yes. I think one bright spot in service certainly in the U. S, if you looked at the U. S. PGS, the orders were up 29%.
In the Q1, we talked about some advanced gas path upgrades. The team did a pretty good job executing in the quarter. They had about 12 of them in the quarter and that's a good sign for us in the U. S. Service business.
Revenues were up 20%. In Europe, PGS had a really challenging quarter, down 59 operating hours, we had reduced outages. It's U. K, Italy and Spain. So we're seeing some positive benefits of the fleet in the U.
S. And we're more than offsetting the drag that we have from the fleet in Europe right now in the PGS business.
Great. Thanks a lot.
Thanks, Jeff.
Your next question comes from the line of Steven Woonoka representing Sanford Bernstein. Please proceed.
Thanks and good morning. Hey, Steven. Hey, just first a quick clarification again that on that corporate versus segment impact restructuring and other charges, those $0.03 was any of that in corporate or was it all in the segments?
No. If you go to the corporate line, you adjust for the non operating pension out of the $1,200,000,000 there's $280,000,000 of restructuring. On a pretax basis, that's industrial. There's another penny that's in capital in corporate. So out of the $0.03, dollars 0.02 dollars is in industrial and $0.01 is in capital.
But that $2.81 is counted in the it's part of that $1.883 right?
Yes, it is.
Okay. So that was at corporate. Okay.
Right. And so was the NBCU gain in the Q1 and we said the restructuring will be in corporate through the year. Right. Pete, that's it. Because I want to make sure everybody gets that right.
On the NBCU gain Sure. So in the Q1, we had the NBCU gain. We made a set of decisions to lower our cost structure in the company. From an accounting perspective, you have to actually complete all the actions to book the accounting charge to reflect the downsizing that you're doing. And so not all that could happen in the Q1.
We have additional work to do to identify and complete the projects. So we had $0.04 of restructuring in the Q1 against the MVCU gain and that left a net of positive $0.04 in that first quarter EPS. In the Q2, we had a naked $0.02 after tax of industrial restructuring. And in the Q3 and the Q4, we'll probably have another penny at least each quarter. So that for the year, Steve, basically, it's a 0.
It's in the corporate line. In the Q1, it was a net positive. In the 2nd quarter, it's a net drag. In the 3rd and 4th quarter, it will be a slight net drag.
Okay, great. Okay. Yes, it does a lot. Thanks. Good.
And then on the a little more clarification on the GE Capital side, guys, since we have a lot of GE Capital horsepower there now. Just the CRE It's always good before I think. No, no, no, no. It's always good, right? The commercial real estate gains, the $200,000,000 you talked about, we continue to see an environment where you're getting these every quarter.
I mean, how as you run down that book, what's your visibility to that going forward? And how long and sustainable it is?
Yes. So we did have $200,000,000 in the quarter. And the team has done a pretty good job as we've reduced that book down to about $17,000,000,000 of investment of doing that as profitably as possible. It is going to get progressively more difficult to generate the same level of gains unless we continue to see improvement in the markets where we're selling these assets. We've been very focused in the U.
S. That's where the recovery has been the biggest, the fastest. We're seeing some signs of life in Europe in Northern Europe and the U. K. And France, but there's still a long way to go there and Japan is a little bit better.
So I think there still will be the opportunity to generate gains whether we'll be able to generate them as we move down the next $17,000,000,000 at the same rate, I think remains to be seen. I think that's going to be a little bit of a challenge.
Okay. And then on the provision side, they were at least a little lower than I was expecting. Maybe just comment on how you were thinking about the amount of provisions in the quarter?
Well, I think provisions came in about where we thought they would be. They were up about $300,000,000 year over year, dollars 200,000,000 of that was associated with our retail business in the U. S. And when we went to that reserve model change that we completed in the Q1, one of the outcomes of that is we removed the seasonality that we historically had had in the Q2. And so that didn't repeat year over year.
And then we added $100,000,000 of reserves in CLL principally in our U. S. CLL business. So I think provisions came in just about where we expected them. They were down sequentially because we made that final change in the retail we've observed in the Q1, which was like $600,000,000 So that's why they sequentially look lower.
Okay. And maybe just sneak one last thing for Jeff. Energy Management and Intelligent Platforms, does that continue to be a targeted growth area both sort of acquisitively and organically?
Well, it is organically, I would say, Steve. The look, there's been commentary about the transactions. And even though we don't like to specific talk about companies, I would say when you guys think about what I've what we've outlined in terms of the priorities for the company, the one transaction that's been rumored really doesn't fit our screen as to the kinds of places we're going to put capital. So is that a good way to answer your question, Steve?
It couldn't be more direct. Thanks, Jeff. I'll pass it on. Thanks.
Okay, Steve. Thanks.
The next question comes from the line of Deirdre representing Citi Research. Please proceed.
Thank you. Good morning, everyone. And best wishes to Keith and to Jeff there any consequences regarding capital requirements reporting and so forth?
Yes. I don't we have been in preparation for this day for the better part of 2 or 3 years. We've had the Fed with us for the last 2 years. We have been running in parallel all of the processes you've seen the major banks running whether that's stress testing, preparing ourselves with a recovery plan and working early innings on a resolution plan. So I don't think incrementally it is anything that we won't be able to deal with.
I think our capital is in very, very good shape. I think our processes are improving every day. So I don't think it's a margin that the designation is going to mean all that much to the business.
Great. And then for Jeff Immelt on at EPG, there was
a lot of focus
about prospects for a staged exit of a business and how the proceeds would be used for buybacks and changing of GE's earnings mix. And can you give us any update as to where that process stands?
Yes. I'd say notionally, Deane, we're still on track for what I talked about at EPG. Again, I don't think we're quite ready to talk detailed specifics, but you'll be hearing from us in due time. But the notion, the strategy that we outlined at EPG is still on track.
Great. Thank you. Thanks.
Next question comes from the line of Nigel Coe representing Morgan Stanley. Please proceed.
Thanks. Good morning.
Hey, Nigel. Good morning, Nigel.
Yes. First of all, Jeff and Keith, congratulations
on your new roles.
Thank you.
Just wanted to go back to the price cost benefit this quarter, the value gap of $293,000,000 How does that compare to the plan? And given that pricing and orders is improving, the back of the pricing improving raw material environment remains pretty benign. How does that develop over the balance of the year?
Well, you've seen our pricing on orders quarter after quarter, 6 quarters of positive OPI across the company. That's coming through in revenue. This quarter, we had 1% positive price in sales. I think that continues. I think we've put it in the backlog and with the OPI strong on the new orders coming in, I think you're going to continue to see pricing.
I think the change that we've seen year over year has been a big improvement in deflation. Last year at the half, we had close to $60,000,000 of inflation. And this year, we've got significant deflation. So I think we expect that to continue. We do a lot to lock in our purchases on a forward buy basis.
And so we're feeling pretty good about the value gap. Jeff talked about it. I think that's going to be as we show on the margin chart a significant contributor to us getting to the 70 basis points this year. And as you listen, as we go business by business, we talked about the value gap in just about every one of the segments being a positive contributor. So the teams have been focused on pricing.
They're focused on delivering projects at the margins we quote are better and the sourcing deflation has been positive for us this year. So you think it's going to be about this is going to be better than our plan. And I think that's where the source of our hedge is going to come from.
Okay. So you think of a point or more of margin benefit in the back half of the year from price inflation. And then obviously the Power and Water margins were pretty incredible given the sharp decline in revenues. And you called out the price study gap obviously and with then mix. And I'm wondering to the extent to which you benefited from some of these hot part upgrades on the gas turbines versus what you might characterize as regular MRO work on the in store fleet?
Well, it was a positive for us. I mean, if you look at the service business, it was actually up slightly on our profit. So the net benefit of everything they did, whether it's the part sales or the upgrades and outages in the quarter, gave them a little lift. And so I think it's a positive we're up on op profit even with the revenue being down a little bit. So services versus equipment was a benefit certainly in the Energy segment.
And then a quick one on the GE Capital dividends, dollars 1,900,000,000 in the quarter, dollars 6,500,000,000 for the full year. How do you expect that to phase over the balance of the year?
Yes. We've got that loaded in evenly over the 3rd Q4. So another $1,500,000,000 in the 3rd and $1,500,000,000 in the 4th is the assumption today.
Great. Thanks a lot.
That's for the specials.
For the specials.
For the specials. And then 30% of Rx. Yes.
Your next question comes from the line of Shannon O'Callaghan representing Nomura. Please proceed.
Good morning, guys.
Good morning, Chad. Hey, Chad. Hey, Chad.
Hey. So I just want to update on sort of gas turbine order expectations for the year. I mean, I think you've been talking about 120, 130. We're only at 32 here in the first half. Is that still the target?
And if it is, what are the things sort of where
do those orders come from? Shannon, my hunch is that the overall market is not going to be quite as strong as we initially expected. So my hunch is that the order for the year will be between something like $100,000,000 $115,000,000 in that range. And again, so they come in buckets. I'd say there's still a fair amount of activity in the Middle East.
China and Asia aren't bad. We expect U. S. To be better this year than last, but at a small level. Europe pretty sluggish.
Africa okay. But they tend to come in buckets. But my hunch is that's where the orders will come in. I mean, you
have pretty good visibility into those. Are there some lumpy things kind of in 2 ways as you get there?
Yes, we do. I think we have a pretty formal process we go through on booking orders and stuff like that. So we kind of see had what I would say is pretty good visibility there.
And then just on these in the U. S. On the Advanced Gas Pass upgrades, I know you had talked about I think they got pushed out of 1Q and you're expecting them in 2Q. Was that was all of that kind of recognized in 2Q? Or is there more of this to come in the second half?
How do those work?
Yes. There's still more to come in the second half. And again, it's always between when we book the order and the revenue, but I think it's we've got something like $50,000,000 going Keith for the year. We have a goal of $50,000,000 for the year. We did 2 in the Q1, dollars 12 in the second.
We've got 8 in the backlog and we've got a number that are working. So yes, I think there's a lot in progress. What we talked about in the 2nd quarter, we had 3 of them that were working that slipped and 2 of those actually booked in the 2nd quarter and then in addition another 10. So I think the team has made a lot of progress there and they're positioned probably for the Q1 2014 outages as you look at where they go. So they'll be in the second half later in the second half of the year we think Nigel or Shannon sorry.
Okay.
All right. Great. Thanks guys.
Thanks, Shannon.
Your next question comes from the line of Julian Mitchell representing Credit Suisse. Please proceed.
Hi, thanks.
Hi, Julian. Hi, Julian.
Hi, morning. I just had a question around the simplification on the cost cutting. You had sort of €474,000,000 of cost cutting savings in Q2. It looks like there wasn't much back in Q1 at all. Back in the Q1, you talked about the majority of the cost savings coming in the second half.
So I'm just trying to square away, you've got €500,000,000 of savings already in the first half. If you talked before about €1,000,000,000 or so, is that €1,000,000,000 number for the year a lot higher now? Because I guess you should again, for the Q1 you should be getting most of the cost saving benefit in the second half.
Yes. We had actually $200,000,000 in the Q1 Julian. So that's how you get to the $4.68 or whatever at the half. We're targeting at least $1,000,000,000 And we have an intense focus in this company around simplification. There's a regular rhythm.
Everybody's engaged. We're reducing P and Ls. We're putting things in centers of excellence. And we're going to look at more restructuring projects as we go into the second half here. If we have good returning projects, we're going to continue to evaluate those.
Good momentum. I'd be disappointed if it wasn't above $1,000,000,000 and we've got a good backlog of projects.
Okay, great. And then within the services overall, the just total company that orders were much better in Q2 than Q1. You talked about revenues being obviously at the bottom end of the 2% to 6% range. Is that solely on equipment? How is your view on the services revenue outlook for the year changed, particularly given the big improvement in orders sequentially?
The goal for services is still around 5% for the year and that's the focus we have on it. So I think the mix is still mainly equipment driven on the total revenue.
Got it. Thanks. And then lastly, just any color you could provide on Europe. You'd mentioned right at the beginning that it felt like a better quarter. Obviously, power is still bad, but just what you're seeing generally from
your customers there? We had,
obviously, a big improvement in Europe in
the orders. Remember, the Q1 is down 17%, the Q2 we're up 2%. And it was mix. We talked about power being tough, but the positives, oil and gas was very strong. Oil and gas orders were up 37% in the quarter.
A lot of those were up in the Nordic. We have a great position in oil and gas in the North Sea. Aviation was up 26 percent. It was a mix of both equipment orders as well as service orders. We've seen a rebound of services in the Europe.
Pull services were up about 15% for aviation and healthcare had a nice turnaround. So, the Power and Water was down, but some encouraging signs in some of the other industrial businesses here. Overall, up 2% versus 17% is a significant improvement obviously for us. Yes. Just another nuance on I'd say the most short cycle business we have in Europe is healthcare and they had the first positive orders fee I'd say in a couple of years probably 3 years.
3 years. 4% up. That's a decent but Drew, I'd echo what Keith said earlier on the power gen usage side. It's still pretty weak in Europe, but it just seems to have net net and the GE world anyhow stabilized in Q2.
Great. Thanks.
Your next question comes from the line of Andrew Obin representing Bank of America. Please proceed.
Yes. Good morning.
Good morning.
Good morning.
Good morning. Good morning.
Good morning.
Good morning. Just a question on rising interest rate impact at JACC. How should we think about the second half given the funding mechanism? And when do you think we'll see impact, if any? Well, Andrew, I'd say, first of all, we've issued about $28,000,000,000 of debt year to date in addition to $1,000,000,000 preferred we talked about.
So $29,000,000 total against the total year plan of $30,000,000 to $35,000,000 So most of our borrowing in the year is done. Fortunately, we're able to get out a little ahead of what's happened to benchmark rates in the last couple of months. Long term generally higher interest rates have historically been good for GE Capital as well as most banks. Margins tend to expand. Spreads tend to expand visavis benchmark rates.
So I would say generally I think on a longer term trend basis higher rates are better for the business, better for the business. I think from a liability perspective, we're in great shape. We run a match funded book. So our short term change in interest rates really shouldn't impact us much, because our variable assets are matched with variable debt and our fixed assets with fixed debt. So we should be in pretty good shape.
And just a question on healthcare. Just surprised how strong equipment orders were in North America in the quarter. And at the same point, CMS released 2014 proposed Medicare hospital outpatient payment regulations and those seem pretty bleak. And how should we think about, A, the positive surprise in healthcare this quarter? How sustainable it is?
And where do you think the business is going given where the regulations are going? I'd say, Andrew, look, I think our product line is pretty good right now and our positioning is pretty good. We're not counting on the U. S. Market in health care to be super robust.
And look, I think on the outpatient side, there's been pressure on reimbursements for a long time. So we're pretty cognizant of where it goes there. But I'd say the U. S. Market feels like it's growing flattish to maybe up a couple of points and I don't see that changing that much.
So this quarter for you, it's market share again you think? You never know until you see the NEMA data, but it seems like a better run rate for us this quarter. And then we'll see when we get to market data. It's usually a lag of a couple of weeks. But I think and then outside U.
S. And the growth markets were up 10% and that's a decent profile for the healthcare guys. Thank you very much. Thanks, Andrew.
Your next question comes from the line of Steve Cooper representing JPMorgan. Please proceed.
Hey, thanks for the meeting. Appreciate it. Hey, Steve. How are you? Good.
The orders price in power and water was 1.5%. The industry seems like it's obviously in relatively tough shape. Can you just walk through what drove that?
Well, I went through some of the pieces. If you looked at it for equipment, thermal was down 5.5%. So that's more in line with what you're seeing in the softness in the thermal market. But the renewables was up 12%. So I think those were the 2 biggest pieces.
Distributed power was about flat.
What's driving that renewables dynamic? And I guess just pricing generally, are you with obviously volumes down to across your business maybe Jeff you can just from a macro perspective, but pricing holding in there. Is this a you're kind of making a conscious choice to kind of walk away from some business? Does it really kind of not matter what the price is? It's more about kind of the level of activity that's out there?
And that's just more of a macro question, I guess.
Well, in the wind business, we've got tremendous new product introductions and we're delivering value to our customers. So I think that's the biggest piece of the thermal or the renewable price index performance for us in 2013. Okay. Steve, it's really kind of product by product. I'd say our service pricing is still pretty good and that shows up in service margins.
Your reference on the power gen market, it's a tough market. So you're seeing pressure there. Aviation, the pricing has been really pretty good, same way as locomotive behind product performance. So it's kind of a mix business by business. But I think on the input cost side, we're not seeing any inflation really.
And so we see a favorable trade, let's say, in the short term between our ability to sustain decent pricing in our market versus incoming inflation.
Okay. And then just one last question on the power and water services stuff. Clearly, good news that some of these upgrades and service work is coming through. Is that just kind of like the delayed reaction to the significant increase in gas utilization last year? And if that is the case, I mean is this something you have a line of sight on in the 2014?
Or is this kind of a pent up demand being released this year as they kind of switch back to coal perhaps? And then you've got a little bit of a tougher comp next year. How do
we think about that? My sense Steve is that the power gen service piece ought to be pretty stable between 2013 2014. We've got a decent backlog of these advanced gas pass. We do have some turnarounds next year that are going to be helpful. So I view this as the ability to kind of have stable growth in the PowerGen service side.
It's really good economics for the customer. We're developing additional new product upgrades for them that give them better efficiency and operating performance and we can demonstrate those economics. So it's not really related to just whether they've run a little more from a cost of gas perspective. It's really about over the long term, what's the value of that asset for them.
How many did you do last year?
This is a new product introduction. So there have been upgrades through the periods, but this is a specific More significant.
Okay. Great. Thanks.
Great, Steve. Thanks. All right, Steve.
Your next question comes from the line of Jason Feldman Your next question comes from the line of Jason Feldman
representing UBS. Please proceed. Good morning. Hey, Jason. At Healthcare, you called out the translation impact of the yen on the Healthcare business in Japan.
More broadly, have you seen any kind of competitive implications of the move in the yen either in healthcare, energy or any of the other businesses?
We really haven't. A lot of our a lot of things we do are in aviation and stuff like that are dollar trades anyhow. But we haven't seen the Japanese companies becoming more competitive if that's what you mean. And one of the advantages we have is we also make things in Japan and have a supply chain in Japan. So we're pretty naturally hedged as these things go on from a cost position standpoint.
Got it. Also at health care, health care seems to be the segment where pricing has been most stubborn. And I certainly understand particularly in North America and Europe, it's been a challenging market. But what do you see as needing to change before that improves? Is that something that's possible anytime in the kind of near to medium term?
It's kind of an this is kind of a historical thing. The Healthcare business is a little bit on the electronics cost curve. Kind of half of it's physics and half of it's electronics. So and you have a fairly rapid new product standpoint. So, healthcare kind of grows at Centimeters rate even when we show kind of the way we look at price, it shows some erosion, but that's usually offset by sourcing and by margin on new products that are replacing the old ones.
So it's kind of a unique character in our portfolio.
Okay. Got it. Thank you very much.
Great. Thanks.
There are no further questions at this time. Mr. Jean West, do you have any additional remarks?
Yes. I'll just wrap quickly. Thank you everyone for joining the call today. The replay of today's webcast will be available this afternoon on our website. We'll be distributing our quarterly supplemental data for GE Capital as we always do soon today.
Our Q3 2013 earnings webcast will be held on Friday, October 18. As always, we'll be available to take your questions today. Thank you, everyone.
This concludes your conference call. Thank you for your participation.