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, I will be your conference coordinator today. If at any time during the call you require assistance, please press star followed by zero and a conference coordinator will be happy to assist you. If you experience issues with the slides refreshing, 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 Schauenberg, Vice President of Investor Communications. Please proceed.
Thank you, Shaquana. Good morning and welcome everyone. We're pleased to host today's second quarter webcast. Regarding the materials for the webcast, we issued the press release earlier this morning, the presentation slides are available via the webcast. The slides are available for download and printing on our website at www.ge.com/investor. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. 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 Sherin, our new CFO for GE, Jeff Bornstein. I'd now like to turn it over to our Chairman and CEO, Jeff Immelt.
Great. Thanks, Trevor, good morning, everybody. Look on the first page, our environment improved slightly in the second quarter. Emerging markets remained resilient while Europe stabilized. Orders in the U.S. were the strongest we've seen some time with 20% growth. Overall, our orders grew by 4% and backlog increased to $223 billion. Earnings were solid. Reported EPS was $0.36, this includes $0.02 of uncovered restructuring. On a sustaining basis, it would've been $0.38, up slightly from 2012. Year-to-date EPS is $0.75, up 6%. Operations were strong in the quarter. Margins grew by 50 basis points, we're on track for 70 basis points for 2013. Our simplification efforts have resulted in $470 million of costs out year to date, we had a solid performance in cash. Our disciplined balanced capital allocation plan continues.
Through the half, we have returned about $10 billion to investors. We're on the way to our $18 billion goal. As for M&A, we've completed Lufkin and Avio remains on track for a third quarter close. All in all, a good quarter for operating and strategic execution. Our orders growth remained solid at +4%, as I said earlier, backlog grew to $223 billion. Performance was broad-based. We had services growth in five of six businesses. Orders growth accelerated in China, the U.S., Europe. Aviation and oil and gas remained very strong, with their combined backlog growing by $7 billion. Let me give you a few other highlights. Oil and gas orders grew by 24% with double-digit growth in four of five segments. Aviation 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 there are signs of strength. We continue to add price to backlog with orders pricing up 0.9%, and we've now had positive orders price for the past six quarters. This will contribute to a positive value gap in the second half of 2013 and beyond. Organic growth was down 1% for the quarter, but it's really a wind turbine story. Organic growth ex Power & Water grew by 5%. Growth markets expanded by 5% with four of nine 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. We're encouraged by services in aviation, Oil & 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. Service margins grew by 70 basis points, and backlog grew to $166 billion. We made solid progress across the company with our new product launches. The Paris Air Show was very successful for GE with $26 billion in wins. We're gaining share in healthcare with robust product launches, and we're expanding service offerings with new software launches in aviation, power, and healthcare. In the second half, revenue will be positively impacted by Power & Water shipment timing. Specifically, 70% of our gas turbines, wind turbines, and distributed power products will be shipped in the second half.
We have strong margin expansion with growth of 50 basis points. Every business grew in the quarter except for home and business solutions. 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. We'll have one of the strongest value gaps in history as we generate both price and material deflation. We'll manage R&D to be flat for the year. We'll reduce SG&A by at least $1 billion. We continue to execute multiple restructuring projects with attractive paybacks. 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 & Water volume growth, where we remain on track.
Overall margins were slightly better than we expected in the second quarter. That gives us more confidence going forward. Our cash execution improved in the quarter. Our second quarter industrial CFOA was up 60%, excluding the impact of NBC-related taxes. In the quarter, we announced that GE Capital will pay up to a $6.5 billion dividend to the parent for the year. We remain on track for our CFOA goals. We've returned $9.9 billion to investors in the first half through dividends and buyback. This is well on our way to our $18 billion goal. Our announced deals of Lufkin and Avio will close in the second half. Both fill our model of bolt-on deals that are accretive to earnings. We end the quarter with a consolidated cash position of $89 billion with $19 billion at the parent.
This is a symbol of our financial strength and supports balanced capital allocation. Now over to Keith. As you know, this will be his last call, but you'll see him again at GE Capital. Welcome to Jeff, my new partner. Keith, over to you.
Jeff, thanks. I'll start with the second quarter summary. We had continuing operations revenues of $35 billion. That was down 4% from last year. Industrial sales of $24.6 billion are down 2%, driven by Power & Water, as you can see on the right side. GE Capital revenues of $11 billion are down 3%. Operating earnings of $3.7 billion 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. We also no longer have the NBCU earnings, which was $0.02 in 2012 in the second 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 $3.7 billion, including a very strong performance in Q2 from the Industrial CFOA, plus $1.9 billion 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, 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, depending on the outcome, we currently expect a rate of high teens to 20% for GE for the full year. The capital rate's down from our forecast because of larger benefits, including the tax-efficient foreign disposition transactions, as well as the recapture of prior untaxed losses at real estate.
As we previously indicated, we do expect a GE Capital rate in the mid-single digits for the year, there could be some variability at GE Capital as well, depending upon IRS audit resolutions and the tax on other possible dispositions. On the right side, you can see the segment results. Total Industrial segment profit was up 2%. Ex Power & Water, our Industrial businesses grew their segment profit by 12%. Power & Water was down in the second quarter. However, the results were a significant improvement over Q1. GE Capital earnings were down in the second quarter in line with the lower assets. 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, $0.02 related to Industrial, and that's in the corporate line at the Industrial reporting, $0.01 was in GE Capital. We continue to reduce our cost structure by lowering our SG&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 two 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 a $0.01 Industrial benefit.
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 GE Capital tax rate. For discontinued operations at the bottom of the page, we had $122 million after-tax impact in the quarter. On WMC, we recorded $128 million of new pending claims, so that's down significantly over the run rates that we've been seeing. We added $47 million in reserves in the quarter, resulting in a total reserve balance of $787 million, covering both pending and future claims. On GrayZone, we booked $76 million of additional reserves to reflect ongoing claims, and we ended the quarter with $557 million in reserves. On the bottom of the page is a summary of our operating EPS and our Industrial gains and restructuring.
In the first quarter, 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 $0.36, and that included a $0.02 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. For the total year, we don't expect the NBCU gain and restructuring to have any impact on EPS. I'll move on to the businesses, and let me start with Power & Water. Orders of $6 billion were down 1%, and Europe remained challenging, down 40%. Ex-Europe orders were up 6%. Equipment orders of $3 billion were down 5%. Thermal orders remained soft at $690 million, down 50%. We had orders for 24 heavy-duty gas turbines versus 30 last year.
We had a strong renewables quarter with orders of $1.4 billion, up 55%. Distributed power orders of $700 million were up 3%, and service orders of $3 billion 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 & Water, orders pricing was up 1.6%. Revenue of $5.7 billion was down 17%, driven by lower volume. Equipment revenue of $2.6 billion was down 30%. We shipped 19 gas turbines versus 31 last year, and we shipped 351 wind turbines versus 726 last year. Service revenue of $3.1 billion was down 3%. Power Gen 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 $1,087 million was down 17%, driven by the lower volume.
SG&A costs were down 9% in Q2. Value gap was positive, and margins increased by 10 basis points. 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 fourth quarter than the third quarter. Renewables will continue to improve, Distributed Power and Services continue to improve, and costs are going to continue to go lower. 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 second quarter were very strong. Orders of $5 billion were up 24%. Equipment orders of $2.8 billion 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 $2.3 billion were up 8%. We saw 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 Measurement & Control, which was down 1%. While still down, this is up from the first quarter, when M&C was down 13%, so some improvement in the market. Our backlog grew by $1.1 billion in the quarter to $18 billion, and our orders pricing was up 80 basis points, our ninth quarter of positive order price increases. Revenue of $4 billion was up 9%. Equipment revenue of $2 billion was up 11%, driven by growth in Subsea and Drilling & Surface.
Service revenues of $2 billion were up 6%, driven by stronger global spare parts sales. Segment profit of $532 million was up 14%, as the benefits of higher volume, positive price, and SG&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 $5.8 billion were up 4%, with equipment orders of $3.2 billion up 7%. Commercial Engine orders of $2.5 billion were up 81%, driven by $1.4 billion of CFM orders, including $670 million of LEAP orders. Military equipment orders of $300 million were down 72%, driven by no repeat of the Saudi F-110 order last year, which was $890 million. Service orders of $2.6 billion were up 1%. Commercial service orders of $2 billion were up 11%.
The 2Q average daily spares order rate was $24.6 million, 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 $5.3 billion was up 9%, driven by equipment up 12%. We shipped 596 commercial engines in the quarter, which was up 30 units or 5%. We shipped 33 GEnx units, up from 27 last year, and we shipped 280 military engines, which were up 21 units or 8%. Service revenues of $2.6 billion 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 $106.7 million was up 16%, driven by the strong value gap, pricing up 3.6%, also by higher volume, margin rates grew by 1.1 points in the quarter. On the right side is Healthcare. Orders of $4.8 billion were up 2%. Equipment orders of $2.8 billion were up 4%, that's seven points better than we saw in the first quarter. Developed markets were up 3%, with the U.S. up 5%. Europe was up 7%. Japan was down 26%, is 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 sciences was down 1%, diagnostic guidance systems was down 5%. Service orders of $2 billion were down 2%.
Revenue of $4.5 billion was flat, again, that's driven by the growth markets up 10%, offset by the developed markets down 4%. Segment profit of $726 million was up 5%, as the benefits of restructuring and higher volume more than offset the impact of lower pricing, margin rates were up 80 basis points in the quarter. Next is Transportation. Orders of $1.1 billion were down 23%. Equipment orders of $444 million were down 45%, as we continue to see the impact of soft North American locomotive and global mining equipment markets. Service orders of $633 million were up 7%, driven by locomotive services. Orders pricing was up 40 basis points, revenues of $1.6 billion 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 million was up 11%, driven by the positive value gap and services growth, which also drove margins up 160 basis points. Energy Management had a strong quarter versus last year. Orders of $2.3 billion 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 of $2 billion were up 6%, driven by Power Conversion up 7%, partially offset by lower revenues in Digital Energy. Segment profit of $31 million was up from $4 million last year, driven by the improved value gap, segment margins were up 140 basis points. Home and Business Solutions had another positive quarter. Revenues of $2.1 billion were up 5%, as 8% growth in appliances was partially offset by a 4% decline in lighting sales.
Segment profit of $83 million was up 5%. 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. We continue to see strength in housing. Second-quarter housing starts were up 18%, boosted by single family up strong double digits and multifamily starts up over 20%. With that, let me turn it over to Jeff Bornstein to cover GE Capital.
Thanks, Steve. GE Capital revenue was just under $11 billion in the quarter, down 3%, driven by lower assets, partly offset by higher gains. Assets were down 7% or $37 billion year-over-year. Net income was $1.9 billion, down 9% from prior year, primarily driven by lower assets. 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 pre-tax income on lower assets. We ended the quarter with $391 billion of ending net investment. That's down $40 billion from last year and down $11 billion sequentially. Our net interest margin was up 18 basis points versus 2012 to 5% and flat with the first quarter.
Tier 1 common ratio on a Basel I basis improved to 11.2% in the quarter, driven by the reduction in investment in the balance sheet and after paying $1.9 billion 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 expected in our U.K. mortgage business. In addition, non-earning assets totaled $6.6 billion. That's down $600 million from the first quarter and down $1.6 billion versus last year. CPE ended the quarter at $36 billion, well on its way to the $35 billion plan for the year. Liquidity was very strong, ending the quarter at $70 billion. Now to walk through the segment performances of the CLL, commercial lending and leasing businesses ended the second quarter with $174 billion of assets.
That's down 6% from last year, driven by a reduction of non-core assets of about $7 billion. $4 billion of lower core assets, primarily driven by asset sales, including the Fleet Canada disposition Keith referred to. On-book core volume was 6% higher than the second quarter of 2012. New business returns remained attractive at about 2% returns on investment. Earnings were stronger across all the regions and up 31% 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. Non-earning assets were down 30% versus the second quarter of 2012. In the consumer segment, we ended the quarter with $136 billion of assets, up 1%.
Net income of $828 million 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 first quarter. We expect reserve coverage in the U.S. retail business to be about the same in the third quarter. The U.S. retail business earned $563 million in the second quarter, down $78 million 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 million 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 billion. That's down 28% year-over-year.
Net income of $435 million was up two times versus 2012. That was driven by higher gains on the equity portfolio and higher tax benefits. The business sold 180 properties with a book value of $1.9 billion for about $200 million in gains in the quarter. Asset quality continues to improve with 30-day delinquencies on the debt book at 2.1%. That's six basis points lower sequentially. The verticals. GCAS earned $304 million. That's 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 million 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 million of tax benefits from the BP business properties transaction in the second quarter of 2012, explains the higher corporate charge year-over-year. Overall, GE Capital continues to perform well. Its results were in line with our strategy to reduce the size of the business. As you look forward to the third quarter, 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 about 1.8%-1.85% in earnings. 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. Again, as I said, no change to our 2013 operating framework. We still plan on solid industrial earnings growth for the year, driven by expanding margins. Our second 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.
Everything's consistent with what we said at EPG, and we're well-positioned to deliver for investors. In conclusion, let me recap our status versus investor goals we set for the year. First, 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, 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 second quarter exceeded our expectations, and the teams did a solid job on execution. We expect to receive up to a $6.5 billion dividend from GE Capital this year. Organic growth will likely be at the low end of our 2%-6% range for 2013.
Again, the wind turbine cycle is a headwind, we're well-positioned for the future with a solid backlog. The balance of our Industrial businesses should grow in line with our 5%-10% organic growth goal. We're on track to return $18 billion to shareholders through dividends and buyback. For GE, this is a solid quarter and we're on track for a good year. I will turn it back to you. We'll take some questions.
Great. Thanks, Jeff, Keith, and Jeff. Why don't we open up the lines and take some questions?
Yes, sir. Ladies and gentlemen, if you wish to pose a question, please press star one on your telephone. If your question has been answered or you wish to withdraw your question, please press star two. Please press star one now. Your first question comes from the line of Scott Davis representing Barclays. Please proceed.
Hi. Good morning, guys.
Hey, Scott.
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 seem to be somewhat wavering. Maybe it seemed like a reach goal. Putting up the 50 basis points this quarter, 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?
Yeah, Scott, it really does. I think the teams have been executing well. I would decompose it a little bit, the way we talk about margins. The value gap is on track to be significantly positive this year. Our SG&A, our simplification efforts, I think are just gaining momentum, so that looks good. R&D, I think levelizes for the year. Mix levelizes for the year. The Power & Water units are in backlog. Scott, I think as we execute that ramp, and we feel pretty confident in the 70 basis point for the year. We still have a slight hedge in the numbers, and I just think we're building momentum.
Makes sense. 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. When you really look at the order growth and the fact that you're getting. You were down, including wind, excluding wind, up 5%, you said. You say in the slides, not counting on environment improving, 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?
Oh, yeah. It definitely does. Scott, like you know, just looking at the wind profile, if you look at Power & Water, it's going to strengthen in the second half. The other businesses, I'd say, are already demonstrating some nice momentum. Things like aviation spares, which were a drag last year, have turned into a tailwind this year. Oil & Gas, I'd say four or five segments, double-digit orders growth, even M&C, I'd say a better quarter. If you just pick through one by one, you're going to get some gathering momentum, I think, in the second half of the year.
Okay. Just clarification, the loss in Brazil, I assume that's the EBX Eike Batista investment?
Yep.
That's right.
That's right.
Okay. Fair enough. Thanks, guys. I'll pass it on.
Yeah. Thanks, Scott.
Thanks, Scott.
Your next question comes from the line of John Inch representing Deutsche Bank. Please proceed.
Good morning, everyone.
Hey, John.
John.
Morning, guys. I have a couple of clarifications. 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, it was immaterial, John. In total, across the industrial segments, the impact of gains was zero.
The rise, Keith or Jeff, in the year-over-year corporate, you did call out 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, sorry to be nitpicky, but may have helped the margins and then in turn, did that flow through the corporate line, or 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 billion. Remember, you got to take out the non-operating pension, which on a pre-tax basis is $661.
We're at $1.2 billion in the quarter. There's really three things. We have $280 million of pre-tax restructuring in corporate, which is $0.02. Again, that for the year, will be against the NBCUniversal gain. We had the impairment of $108 million in the corporate line. 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 million. If you take the second quarter and you get to a run rate, you're basically at the run rate we need to be about $3 billion for the year.
Okay. No, that makes sense. Keith, can I ask you about WMC in Japan? We're still taking charges for it. Remind us, if I'm not mistaken, wasn't there a statute of limitations in New York that perspectively kind of makes the run rate on WMC, hopefully, or you tell me, sort of much lower kind of going forward? 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. 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, and we basically are 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. 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 first quarter with Shinsei, and we will have a discussion with them, and whether we can reach agreement or not remains to be seen.
There is an opening there in the first quarter that we'll be pursuing and negotiating with them.
Perfect. Thanks very much.
Thanks, John.
Your next question comes from the line of Jeff Sprague representing Vertical Research Partners. Please proceed.
Thank you. Good morning, everyone.
Hey, Jeff.
Hey. First, just back on kind of the question of gains. You said it kind of netted out year-over-year in the quarter. Can we just put a finer point on what it actually was, TransDigm and what other stuff you might have had?
Yeah. The Aviation TransDigm benefit was immaterial in the segment. I didn't say it netted out year-over-year. I said it was zero in the quarter, in the segments.
Okay. I thought you said net neutral year-over-year.
No. In the quarter, the small benefit we got in TransDigm in Aviation, if you go to the segment profit level, it was zero across the segment profits for the industrial businesses.
Okay, great. Just shifting to Power. Power price looked decent in the quarter. I just wondered if you could give us a little color around service price versus order price and what's driving that.
Sure. Power & Water, if you look, the equipment pricing was up 3.5% in the quarter. The service pricing was down 0.3% and overall up 1.6%. Thermal and PGS was down 2.2%. Renewables was very strong, up 11%. Those would be the biggest drivers.
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 playing over the balance of the year?
Yeah, I think one bright spot in service was certainly in the U.S. If you looked at the U.S. PGS, the orders were up 29%. In the first quarter, 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. 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%, Jeff. The fleet operating hours, we had reduced outages. It's U.K., Italy, and Spain. 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 Winoker representing Sanford Bernstein. Please proceed.
Thanks, good morning.
Hey, Steven.
Hey. Just first, a quick clarification again 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 $1.2 billion, there's $280 million of restructuring. On a pre-tax basis, that's Industrial. There's another $0.01 that's in Capital and Corporate. Out of the $0.03, $0.02 is in Industrial and $0.01 is in Capital.
That $280 is part of that $1,883, right?
Yes, it is.
Okay. That was at Corporate. Okay.
Right, was the NBCUniversal gain in the first quarter, we said the restructuring would be in Corporate through the year.
Right.
Just repeat that, Steve, because I want to make sure everybody gets that right, that on the NBCUniversal gain.
Sure. In the first quarter, we had the NBCUniversal gain. We've 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 first quarter. We have additional work to do to identify and complete the projects. We had $0.04 of restructuring in the first quarter against the NBCUniversal gain, and that left a net of positive $0.04 in that first quarter EPS. In the second quarter, we had a naked $0.02 after tax of Industrial restructuring, and in the third quarter and the fourth quarter, we'll probably have another $0.01 at least each quarter. That for the year, Steve, basically it's a zero. It's in the Corporate line.
In the first quarter, it was a net positive. In the second quarter, it's a net drag. In the third and fourth quarter, it'll be a slight net drag.
Okay, great.
Does that help? Okay.
Yeah, it does a lot. Thanks.
Good.
A little more clarification on the GE Capital side, guys, since we have a lot of GE Capital horsepower there now. Just the CRE-
I've heard this before, I think.
It's always good, right? The commercial real estate gains, the $200 million you talked about, we continue to see an environment where you're getting these every quarter. As you run down that book, what's your visibility to that going forward and how long and sustainable it is?
Yeah. We did have $200 million in the quarter. The team has done a pretty good job as we've reduced that book down to about $17 billion of our 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's been the biggest, the fastest. We're seeing some signs of life in Europe, in Northern Europe, and the U.K., and France. There's still a long way to go there, and Japan's a little bit better. 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 billion at the same rate, I think remains to be seen. I think that's going to be a little bit of a challenge.
Okay. 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 million year-over-year. $200 million of that was associated with our retail business in the U.S. When we went to that reserve model change that we completed in the first quarter, one of the outcomes of that is we removed the seasonality that we historically had had in the second quarter. That didn't repeat year-over-year. Then, we added $100 million of reserves in CLL, principally in our U.S. CLL business. I think provisions came in just about where we expected them. They were down sequentially because we made that final change in the retail reserves in the first quarter, which was like $600 million. That's why they sequentially look lower.
Okay. Maybe just sneak one last in 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. There's been commentary about transactions, even though we don't like to specific talk about companies, I would say, when you guys think about 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. Is that a good way to answer your question, Steve?
Couldn't be more direct. Thanks, Jeff. I'll pass it on. Thanks.
Okay, Steve. Thanks.
The next question comes from the line of Deane Dray representing Citi Research. Please proceed.
Thank you. Good morning, everyone.
Morning, Deane.
Best wishes to Keith and to Jeff Bornstein in their new responsibilities. Jeff Bornstein, since you're on the hot seat now, how about just some color? I know it was a foregone conclusion that GE Capital would be declared a SIFI, are there any consequences regarding capital requirements, reporting, and so forth?
We have been in preparation for this day for the better part of two or three years. We've had the Fed with us for the last two 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. I don't think incrementally it is anything that we won't be able to deal with. I think our capital is in very good shape. I think our processes are improving every day. I don't think at the margin that the designation is going to mean all that much to the business.
Great. Then for Jeff Immelt, 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. Can you give us any update as to where that process stands?
Yeah, 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, you'll be hearing from us in due time. The notion, the strategy that we outlined at EPG is still on track.
Great. Thank you.
Thanks.
Your next question comes on the line of Nigel Coe, representing Morgan Stanley. Please proceed.
Oh, thanks. Good morning.
Good morning, Nigel.
Yeah. 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. How does that compare to the plan? Given that pricing and orders is improving, the backlog price is 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 million of inflation. This year we've got significant deflation. I think we expect that to continue. We do a lot to lock in our purchases on a forward buy basis. We're feeling pretty good about the value gap. Jeff's 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. 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. 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.
Nigel, I think 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. You think of a point or more of margin benefit in the back half of the year from price inflation. Obviously the Power Water margins were pretty incredible given the sharp decline in revenues. You called out the price value gap, obviously, but then mix. 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 installed fleet.
Well, it was a positive for us. If you look at the service business, it was actually up slightly on op profit. 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. I think it's a positive. We're up on op profit even with the revenue being down a little bit. Services versus equipment was a benefit certainly in the energy segment.
A quick one on the GE Capital dividend, $1.9 billion in the quarter, $6.5 billion for the full year. How do you expect that to phase over the balance of the year?
Yeah, we've got that loaded in evenly over the third and fourth quarter. Another billion and a half in the third and a billion and a half in the fourth is the assumption today.
Great. Thanks a lot.
That's for the specials.
For the specials.
Yeah.
30% of our X.
Yeah.
Your next question comes from the line of Shannon O'Callaghan, representing Nomura. Please proceed.
Morning, guys.
Morning, Shannon.
Hey, Shannon.
Hey. I just want an update on sort of gas turbine order expectations for the year. I think you had been talking about 120, 130. We're only at 32 here in the first half. Is that still the target? If it is, what are the things, sort of where do those orders come from?
Shannon, my hunch is that the overall market's not going to be quite as strong as we'd initially expected. My hunch is that the order for the year will be between something like 100 and 115, in that range. Again, 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 the U.S. to be better this year than last, but at a small level. Europe, pretty sluggish. Africa, okay. They tend to come in buckets. My hunch is that's where the orders will come in.
You have pretty good visibility into those. Are there some lumpy things kind of in two stages to get there?
We do. Yeah, we do. I think we have a pretty formal process we go through on booking orders and stuff like that. We kind of see, have what I would say is pretty good visibility there.
Then just on these, in the U.S., on the advanced gas path upgrades. I know you had talked about, I think they got pushed out of 1Q and you're expecting them in 2Q. 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?
There's still more to come in the second half. Again, it's always between when we book the order and the revenue, but I think we've got something like 50, don't we, Keith, for the year?
We have a goal of 50 for the year.
Yeah.
We did two in the first quarter, 12 in the second. We've got eight in the backlog, and we've got a number that are working. Yeah.
Yeah.
I think there's a lot in progress. What we talked about in the second quarter, we had three of them that were working that slipped, and two of those actually booked in the second quarter, in addition to another 10.
Yeah.
I think the team has made a lot of progress there, and they're positioned probably for the first quarter 14 outages as you look at where they go. They'll be in the second half, later in the second half of the year, we think, Nigel. 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.
Hey, Julian.
Hi, Julian.
Hi. Morning. I just had a question around the simplification and the cost cutting. You had sort of $474 million 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. I'm just trying to square away, you've got $500 million of savings already in the first half. You talked before about $1 billion or so.
Yeah.
Is that $1 billion number for the year a lot higher now? I guess you should, again, per the Q1, you should be getting most of the cost-saving benefit in the second half.
Yeah, we had actually $200 million in the first quarter, Julian. That's how you get to the $468 or whatever at the half. We're targeting at least $1 billion, and we have an intense focus in this company around simplification. There's a regular rhythm. Everybody's engaged. We're reducing P&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 billion, and we've got a good backlog of projects.
Okay, great. Within the services overall, just the total company, the orders were much better in Q2 than Q1. You talked about revenues being obviously at the bottom end of the 2%-6% range. Is that solely on equipment? How has 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. I think the mix is still mainly equipment-driven on the total revenue.
Got it. Thanks. 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's still bad, but just what you're seeing generally from your customers there.
We had obviously a big improvement in Europe in the orders. You remember the first quarter was down 17%. The second quarter, we're up 2%. It was mixed. We talked about power being tough, but the positives, Oil & Gas was very strong. Oil & Gas orders were up 37% in the quarter. A lot of those were up in the Nordic. We have a great position in Oil & Gas in the North Sea. Aviation was up 26%. It was a mix of both equipment orders as well as service orders. We've seen a rebound of services in the Europe whole. Services were up about 15% for aviation. Healthcare had a nice turnaround. The Power & 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.
Yeah, just another nuance on Keith. I'd say the most short-cycle business we have in Europe is healthcare, they had the first positive orders, I'd say, in a couple of years, probably three years.
Three years. 4% up.
John, 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 in 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.
Andrew, good morning.
Good morning.
Good.
Just a question on rising interest rates impact at GECC. 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 billion of debt year to date in addition to the billion dollar preferred we talked about, so $29 total against a total year plan of $30-$35. Most of our borrowing in the year is done. Fortunately, we were 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 vis-à-vis benchmark rates. I would say, generally, I think on a longer-term trend basis, higher rates are better for the business. I think from a liability perspective, we're in great shape. We run a match-funded book.
A 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. We should be in pretty good shape.
Just a question on healthcare. Just surprised how strong equipment orders were in North America in the quarter. At the same point, CMS released the 2014 proposed Medicare hospital outpatient payment regulations, those seem pretty bleak. 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's pretty good right now, and our positioning is pretty good. We're not counting on the U.S. market in healthcare to be super robust. Look, I think on the outpatient side, there's been pressure on reimbursements for a long time, we're pretty cognizant of where it goes there. I'd say the U.S. market feels like it's growing flat-ish to maybe up a couple of points, I don't see that changing that much.
This quarter for you, it's market share gain, you think?
You never know until you see the NEMA data, it seems like a better run rate for us this quarter. We'll see when we get the market data. It's usually a lag of a couple of weeks. Outside the U.S., in the growth markets, we're 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 Tusa, representing JP Morgan. Please proceed.
Hey, thanks for putting me in. Appreciate it.
Hey, Steve. How are you?
Good. The orders price in GE Power & Water was one and a half %. 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 five and a half. That's more in line with what you're seeing in the softness in the thermal market. The renewables was up 12%. I think those were the two biggest pieces. Distributed power was about flat.
What's driving that renewables dynamic and, I guess, just pricing generally, with obviously volumes down too across your business, maybe Jeff, you can just from a macro perspective, but pricing holding in there. You're making a conscious choice to walk away from some business? Does it really not matter what the price is? It's more about the level of activity that's out there, and that's just more of a macro question, I guess, Andrew Obin.
Well, in the wind business, we've got tremendous new product introductions, and we're delivering value to our customers. 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 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 ways, locomotive behind product performance. So it's 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, just one last question on the Power & Water services stuff. Clearly good news that some of these upgrades and service work is coming through. Is that just the delayed reaction to the significant increase in gas utilization last year? If that is the case, is this something you have a line of sight on into 2014, or is this a pent-up demand being released this year, as they switch back to coal, perhaps, 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 and 2014. We've got a decent backlog of these advanced gas paths. We do have some turnarounds next year that are going to be helpful. I view this as the ability to have stable growth in the power gen service side.
It's really good economics for the customer.
Yeah.
We're developing additional new product upgrades for them that give them better efficiency and operating performance, and we can demonstrate those economics. 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, there have been upgrades through the periods, but this is a.
More significant.
Advanced gas path.
Okay, great. Thanks.
Great, Steve. Thanks.
All right, Steve.
Your next question comes from the line of Jason Feldman representing UBS. Please proceed.
Good morning.
Good morning.
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 things we do are in aviation and stuff like that, are dollar trades anyhow. We haven't seen the Japanese companies becoming more competitive, if that's what you mean. 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-
Okay
from a cost position standpoint.
Got it. At healthcare 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. What do you see as needing to change before that improves? Is that something that's possible anytime in the near to medium term?
This is kind of a historical thing. The healthcare business is a little bit on the electronics cost curve, half of it's physics and half of it's electronics, and you have a fairly rapid new product standpoint. Healthcare grows at CM rate, even when we show, 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. It's a unique character in our portfolio.
Okay, got it. Thank you very much.
Great, thanks.
There are no further questions at this time. Mr. Schauenberg, do you have any additional remarks?
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. Our third quarter 2013 earnings webcast will be held on Friday, October 18th. As always, we'll be available to take your questions today. Thank you, everyone.
This concludes your conference call. Thank you for your participation.