Good day, ladies and gentlemen, and welcome to the General Electric Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Chanel, and I'll be your conference coordinator today. If you experience issues with the slides refreshing or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded.
I would now like to turn the program over to your host for today's conference, Trevor Schonberg, Vice President of Investor Communications. Please proceed.
Thank you, Chanel. Good morning and welcome everyone. We are pleased to host today's Q3 2012 earnings webcast. Regarding the materials for this webcast, we issued a press release earlier this morning and the presentation slides are available via the webcast on our website at www.g.com/investor. As always, elements of this presentation are forward looking and are based on our best view of the world and our businesses as we see them today.
Those elements can change as the world changes. Please interpret them in that light. For today's webcast, we have our Chairman and CEO, Jeff Immelt and our Vice Chairman and CFO, Keith Scharen. Now I'd like to turn it over to our Chairman and CEO, Jeff Immelt.
Great, Trevor. Thanks. Good morning, everybody. Look, we had a good Q3 in a challenging environment. Europe's tough.
Asian resource rich countries are okay. And the U. S. Had pockets of growth, but still some uncertainty. Revenue growth was good in the environment with organic growth up 8% in the quarter and 10% year to date.
We finished the quarter with $203,000,000,000 of backlog. Earnings were solid growing at 13%. Both industrial and capital had double digit earnings growth in the quarter. Every industrial business had positive earnings growth for the first time since the Q3 of 2005. And our simplification efforts are yielding results with corporate costs ahead of plan.
Our margins grew by 70 basis points consistent with our expectations. CFOA is up 63% year to date and we've repurchased $3,000,000,000 of stock. Importantly, in this environment, we remain on track for our 2012 framework. For order, orders were $21,500,000,000 Just some context for orders, factoring in some of the big items. They were up 4% ex wind and excluding the impact of foreign exchange.
Orders pricing was positive for the quarter year to date. The down cycle in wind is as expected and gas turbine orders were fairly strong. We saw about $1,000,000,000 of orders out from Q3 to Q4 and our backlog position is strong as we enter the Q4 and facing into 2013. Our key growth engines remain on track. In fact, every industrial business had positive organic growth in the quarter.
Our growth markets expanded by 9%, including China up 23%, Africa up 22% and Latin America up 21%. We expect 6 of 9 growth regions to have double digit orders growth in 12. We have the highest services backlog in our history with expanding margins and we've launched successful products including the Flex 60, new subsea technology and new appliances and our new aircraft engines are winning high market share. With our investments in place, we should be able to sustain a solid growth rate into the future. Our margins are a good story growing 70 basis points to 14.4%.
We had expansion in every business, including energy if you exclude the impact of our wind business. The fundamentals remain strong as we finish the year. Value gap will be positive in both 20122013. We remain on track for $2,000,000,000 plus in structural cost outdoor simplification efforts. And we're able to do significant restructuring in the quarter.
We're on track for 100 basis points of improvement in 20122013 in line with our plans. Cat's a decent story with year to date total of $10,700,000,000 up 60 3%. The dividend from capital is a positive story for investors. Our industrial CFOA has been pressured by an unusual equipment build, but should have positive growth in the Q4. We're executing our capital allocation plans.
Year to date, we've paid out $5,400,000,000 in dividends and bought back $3,000,000,000 of GE stock. Our balance sheet is very strong and we ended the quarter with $85,000,000,000 of consolidated cash. Now over to Keith to review operations. Thanks, Jeff. I'm going to start with the Q3 summary.
We had continuing operations revenues of $36,300,000,000 that was reported up 3% ex FX, revenues were up 6%. Industrial sales of $24,700,000,000 are up 7%, up 10% ex FX. GE Capital revenues of $11,400,000,000 were down 5% as we continue to reduce our assets. And our operating earnings of $3,800,000,000 were up 10%. Operating earnings per share of $0.36 were up 13% and you can see the 13% excludes the impact of last year's Q3 preferred stock redemption commitment, which you'll remember was an $0.08 reduction in equity.
Obviously, not having a repeat of that results in the huge fees here. So operating EPS is up 50%, continuing and net EPS are up 43% 50%. Continuing EPS includes the impact of non operating pension and net EPS includes the impact of discontinued operations, which I'll cover on the next page. As Jeff said, year to date cash of $10,700,000,000 was up 63%, including the dividends from GE Capital. And for taxes, the GE rate, 21% is consistent with the low 20s rate we forecast in the 1st two quarters and the year to date rate is 22%.
The 4% GE Capital rate is consistent with the mid single digit rate that we forecast at the end of the second quarter and we continue to expect to finish the year with a mid single digit GE Capital tax rate. On the right side, you can see the segment results with total Industrial segment profit up 11%, and it's great to have all 5 Industrial segments delivering positive earnings growth. GE Capital also had another strong quarter with earnings up 11%, so overall a strong segment growth quarter. I'm going to cover each of the segments in more detail in a minute. Before I get into those business results, I'll take you through the other items from Q3.
As we mentioned at the Infrastructure Investor Meeting, we have $0.03 in one time benefits related to the gain from NBCUniversal. The majority of the benefit was driven by the A and E transaction. NBCU sold its remaining 16% stake in A and E and our share of the gain was 0 point 0 $3 after tax. We also had $3 after tax restructuring and other charges in the quarter. These charges related primarily to continued cost structure improvements in energy, healthcare, aviation, HMBSNG capital.
We also had a charge in the quarter related to the planned disposition of 1 of our plants as well as costs related to the acquisitions. On the bottom of the page, there was a minimal net impact from discontinued operations in the quarter. We resolved an outstanding item related to the plastics disposition that resulted in a $0.01 gain at the parent. And for WMC, we had $1,300,000,000 of claims come in, in 3Q. That's significantly less than the 2nd quarter, but higher than we had previously expected.
And that resulted in an after tax reserve impact of $78,000,000 in the quarter. So overall, the EPS and one time benefits and costs were relatively offsetting here. So next, I'm going to go to the businesses and I'll start with energy before I get into it. This is the final quarter that we're going to be reporting energy infrastructure on this basis. And so for the Q4, we'll be reporting the 3 new businesses after the reorganization, Power and Water, Oil and Gas and Energy Management.
And later this quarter, we'll begin providing you with the historical data recast into these three businesses, so you can begin modeling on that basis. Let me look at the total business. I'll start with energy first. Orders of $6,500,000,000 were down 17%. We've said it before, but the impact of wind is huge here.
Ex wind energy orders were flat year over year. Equipment orders of $3,400,000,000 were down 24%. Again, ex wind equipment orders were up 11%. Thermal orders of $1,000,000,000 were up over 160% and we had orders for 29 gas turbines versus 16 last year. Renewable orders of $518,000,000 were down 72%.
We had orders for 241 wind turbines versus 781 last year. Total equipment order pricing was down 1.4% with thermal down 2.6% and renewables down 4.2%. Year to date thermal order pricing is positive 0.8% and our estimate for the total year is about flat for thermal order pricing. Service orders of $3,100,000,000 were down 3%, driven by the declines in energy management, down 8% driven by the declines in energy management. Power generation services of $1,700,000,000 were up 1%.
Revenues of $8,900,000,000 were up 17 percent, driven by the strong volume growth. We had equipment revenue of $5,500,000,000 which was up 30%. We had renewable revenue of $2,100,000,000 which was up 61%. We shipped 1014 wind turbines versus 6 33 last year. Aero derivative revenues of $679,000,000 were up 84% on higher units.
We had 44 units this year versus 31 last year and also larger units. Thermal revenues of $1,600,000,000 were down 19%, driven by lower balance of plant revenues, lower pricing and foreign exchange. Service revenues of $3,400,000,000 were up 1% driven by Power and Water Services and segment profit of 1 $200,000,000 was up 11% as the benefits of all that strong volume and our services strength more than offset the lower pricing. PowerGen Services operating profit was up 15% in Q3. Now we've been breaking out the impact of wind because it masks the remaining business performance.
If you take a look in Q3 for energy ex wind in total, revenues would be up 8%, segment profits up 20% and margins would have been up 146 basis points. On the oil and gas, they had another great quarter. Orders of $4,200,000,000 were up 7%, up 12% ex FX. Equipment orders of $2,300,000,000 were up 10%, driven by growth in Turbomachinery and Subsea Systems. We had $300,000,000 of orders for the Cheniere LNG project.
We had over $200,000,000 of orders for the West East pipeline projects in China. And we also had over $500,000,000 of order push outs for 2 projects that we're working on in Angola and Brazil. Service orders of $2,000,000,000 were up 3%, up 7% ex FX and the orders price index was up 1.7%, the 6th consecutive quarter of positive price for this business. We added $500,000,000 to the backlog in Q3. Revenues of $3,700,000,000 were up 4%, up 11% ex FX and equipment revenues of $1,900,000,000 were up 2%, service revenues of 1.8 were up 6%.
Segment profit of $534,000,000 was up 18%, driven by the strong volume growth and lower costs, which were partially offset by negative foreign exchange. And overall, that resulted in 1.7 points of op profit expansion. So another good quarter for the Energy and Oil and Gas and Energy Infrastructure in total and our current estimate for the Energy Infrastructure segment is that profit growth will be about 10% for the total year 2012. Next is Aviation. Orders of $5,200,000,000 were down 8%.
Commercial engine orders of $918,000,000 were down 51%. When you have backlogs of 2 to 7 years depending on the engine model, we're going to have some quarters with tough comparisons. We also had over $500,000,000 of commercial aviation order push outs for 2 customers in Asia this quarter. Military equipment orders of $1,100,000,000 were up 104%, driven by transports and Navy F-eighteen Fighters. Service orders of $2,600,000 were down 11%.
Our 3rd quarter spares average daily order rate was $22,000,000 per day, which was down 18% versus last year, but it's up from the 2nd quarter and it seems to have stabilized. We continue to get pricing on new orders with total orders pricing up 2.3% in the quarter. Even with the tough order comparisons overall book to bill was 1.09 with both equipment and service up over 1. Revenue of $4,800,000,000 was down 1%. Equipment revenues of $2,300,000,000 and service revenues of $2,400,000,000 were both down 1%.
We shipped 520 commercial engines versus 5 65 last year. And in the quarter we shipped 25 Gen X units versus 28 last year. Segment profit of $924,000,000 was up 7% as the benefits of positive value gap and lower costs more than offset the impact of the one time gain last year from the sale of our Rings business. The business improved operating margin rates 150 basis points in the quarter. And if you exclude the impact of last year's gain, our profit would have been up 17% and our profit rate would have been up 2 70 basis points.
Transportation, the transportation business delivered another great quarter. Orders of $1,200,000,000 were up 21%. Orders pricing was up 0.6%. Equipment orders of $561,000,000 were up 28%, driven by higher international locomotive kits and service orders of $666,000,000 were up 16%. Revenue of $1,400,000,000 was up 9% on strong volume.
Equipment revenues of $781,000,000 were up 5%, driven by off highway vehicle equipment, which was up 55%, partially offset by lower locomotive revenues, which were down 13%. We shipped 146 locomotives in the quarter versus 169 last year and we're on track for a total year estimate of 6 50 units. Service revenues of $627,000,000 were up 16%. Segment profit of $265,000,000 was up 35 percent driven by the positive value gap and also lower costs and our operating year increased 3 60 basis points in the quarter. Next is Healthcare.
U. S. Market was a little tougher than expected in the quarter. Orders of $4,600,000,000 were down 1%, they were up 3% ex FX. Equipment orders of $2,600,000,000 were also down 1%, up 3% ex FX, driven by the developed markets down 5%, partially offset by the emerging markets, which were up 9%.
Just some of the numbers on orders. The U. S. Was down 6%, Europe was down 11%, driven by Southern Europe. China was up 19%, Middle East, Africa, Eastern Europe were up 31%, India was down 17%.
By modality, CT was down 4%, MR was down 9%, Life Sciences was up 3% and Ultrasound was up 1%. Service orders of $2,000,000,000 were down 1%, also driven by Europe down $12,000,000 and revenues of $4,300,000,000 were down 1% or up 3 points FX adjusted. Emerging markets with the strength here up 13%, offsetting the developed markets, which were down 4%. Segment profit of $620,000,000 was up 2% as the benefits of the volume growth and cost reductions more than offset lower pricing and some inflation. As a result, operating profit rate was up 40 basis points in the quarter.
On the right side, Home and Business Solutions delivered positive results despite a continued tough environment. Revenues of $2,100,000,000 were up 1% as appliance revenues were up 9%, offsetting the lighting revenues, which were down 9%. For appliances, we're seeing some contract channel strength. Contract channel revenues were up 22%, driven by housing starts and retail sales were up 1%. Pricing is up and year to date shares up about 1.1 points and the new products continue to be well received in the marketplace.
Lighting continued to see volume pressure in both the U. S. And Europe and overall for the business segment profit $61,000,000 was up 61%, driven by the higher pricing, which was partially offset by the material inflation and the lower lighting volume. So next is GE Capital. Mike, Neal and the team delivered another very strong quarter.
Revenues of $11,400,000,000 were down 5%, in line with assets which were down 7%. Net income of $1,700,000,000 was up 11%, driven by improvements in real estate as well as lower marks and impairments, partially offset by higher credit costs and of course lower assets. We ended the quarter with 4 $25,000,000,000 of ending investment, a quarter ahead of our target and we expect any to continue to decline further in the Q4. Our net interest margin was 4.9%, up 50 basis points and there are more details on GE Capital and capital levels in the supplemental deck that we posted this morning. On the right side, you can see the asset quality metrics were stable in the quarter.
30 day delinquencies were down in mortgage, driven by improved collections and they were up in our U. S. Retail business, driven by normal 3Q seasonality. Delinquencies were close to flat in both real estate and CLL. Volume was up 2%, driven by consumer volume up 5%, commercial volume was down 5% as we continue to originate strong returns.
Non core any was down about $6,000,000,000 in Q3 versus Q2. We're substantially done with our 2012 long term funding. Our capital position strengthened in the quarter and even after paying $5,400,000,000 of dividends, we Q3 with Tier 1 common of 10.2 percent, up 56 basis points. For some comments by business, I'll start with CLL. Commercial lending and leasing business assets were down 8%.
We continue to reduce our non core assets, including 3rd party funding for Penske and the CECO disposition. Commercial volume in the Americas of $7,200,000,000 was down 3%, while we maintained our pricing on new business to earn over 2% return on investment. Overall earnings of $568,000,000 were down 17%. That's driven by lower assets. It's driven by one loss of $32,000,000 loss on one account in Europe and it's driven by continued pressure in Italy about $20,000,000 Even with those items, our European business earned over $40,000,000 and the Americas earned $545,000,000 which was flat with last year and up 3% from the Q2.
For Consumer, our Consumer assets were down 3%. It's driven by runoff in Europe and Asia, partially offset by growth in U. S. Retail. Earnings of $749,000,000 were down 7% driven by higher retail reserves in the U.
S, the impact of lower assets in our non core business, partially offset by the $80,000,000 gain we had from our selling our 7.6% of our wholesale convey the bank in Thailand. The U. S. Retail business earned $445,000,000 which was down 4% as the benefits of higher assets and better margins were offset by the higher loss provisions due to additional segmentation of the portfolio more in line with industry standards. Our core European business earned 119,000,000 dollars which was down 3% on lower assets.
For Real Estate, Real Estate continued to deliver positive performance in the quarter. Earnings of $217,000,000 were up $300,000,000 from last year. They were about flat with Q2. The earnings improvement was The earnings improvement was driven by lower losses and impairments, tax benefits and higher core income. During Q3, we sold 165 properties for $1,700,000,000 realizing $121,000,000 of after tax gains, up $55,000,000 from last year.
We continue to shrink our real estate book as well. Assets of $55,000,000,000 were down 14% versus last year. They're down 4% versus Q2. And in addition, we closed the business properties disposition in October, which will result in another $5,000,000,000 dollars reduction in Q4. Next is GECAS.
GECAS had another very good quarter. Earnings of $251,000,000 were up 21%, driven by higher core income, partially offset by slightly higher impairments year over year. Net impairments this year were $135,000,000 after tax versus $107,000,000 last year. Portfolio quality continues to be strong with only $50,000,000 of non earnings and only 3 aircraft on the ground. Energy Financial Services earnings of $152,000,000 were up 67% driven by asset sales $132,000,000 driven by asset sales.
We completed $600,000,000 of volume in Q3 at approximately 5% ROIS. So overall, another positive quarter for GE Capital. As we look at finishing the year, we think the $1,700,000,000 net income from 3rd quarter is a good proxy for the 4th quarter outlook. We expect lower We'd expect not to have the Bay gain repeat and we'll continue to have a loss of earnings from the shrinking assets ahead of schedule. So that's kind of our view for 3rd quarter look at run rate into 4th quarter.
With that, let me turn it back to Jeff. Great, Keith. Thanks. Look, on the operating framework, we really have no material changes for the 2012 operating framework. We're on track for double digit earnings growth in total and for both Industrial and Financial Services earnings.
Our outlook for the Industrial segments remain in line with our September meeting. You can see in the corporate cost line that our simplification efforts are working and sustainable and we're lowering our estimate for the year to $2,800,000,000 based on Q3 performance. CFOA is on track and industrial organic revenue growth has been about 10% year to date and we expect it to be about 10% for the year. We believe that capital revenue will decline about 10% based on E and I reduction ahead of plan. So total revenue for the entire company will be up about 3% in 2012.
So to summarize, let's recap the big factors for our investors and how we performed against those objectives. Industrial earnings growth results remain positive. This is fueled by good organic growth and momentum and margin enhancement. And as I've said earlier, the simplification efforts really are generating results. We're executing our plan with GE Capital, making it smaller, more profitable and restoring the dividend to the parent.
And we've returned $8,400,000,000 to investors year to date through dividend and buyback. We're executing a balanced capital allocation plan of growing dividends in line with earnings, value creating buybacks and bolt on acquisitions in the $1,000,000,000 to $3,000,000,000 range. The GE team continues to execute in a volatile environment. We expect to continue to outperform in 20122013. Now back to Trevor for questions.
Great. Thanks, Jeff. Thanks, Keith. Chanel, why don't we open up the phone lines for questions?
Our first question comes from Scott Davis with Barclays.
Hi, good morning guys. Hi, Scott.
Good morning, Scott.
One of the things when we try to kind of model out margins and sustainable kind of margin expansion going forward. I mean, can you help us understand if there's any way to think about the 70 basis points? How much of that was value gap? How much of that is kind of from past restructuring?
Any way to kind of carve that up a bit?
Sure. If you look in the Q3, Scott, value gap was about $50,000,000 drag actually in the quarter. That was 0.2 of a point of drag. Mix, equipment versus services and other mix was about 0.5 point of drag, dollars 120,000,000 or so. And cost out is the real driver here.
It's over $500,000,000 It's 1.4 points of improvement and it's across the board. It's lower variable costs. It's better base cost performance with this volume and its simplification efforts starting to kick in. So I think I don't have it relative to prior restructuring as you asked, but I think that's a pretty good framework for the Q3. It's great that the margins have turned positive here and our expectation is that this margin improvement will continue in the 4th quarter and will increase obviously from the Q3 level to get us to our goal of the total year.
We still think value gaps, Scott, will be positive for the year. It's been up more than $100,000,000 year to date before Q3. So for the total year, it will be slightly positive. So for the total year, it will be positive.
And I expect it's going to be positive again in 20 13 as well.
Okay. That's it's going to be positive again in 2013 as well.
Okay. That's helpful. Jeff, going back to kind of your beginning remarks on the macro view, I mean, it seems that looking at some of the results from your peers, that things have degraded a bit in the last couple of months. I mean, when you're thinking about your planning scenarios for really 2013, because I'm guessing you're in that process now. I mean, what are the such a wide range of outcomes out there.
I mean what are you guys planning for? And how do you and I don't know how you want to comment on it, whether you dial it down by region and what kind of GDP assumptions or whether you just want to talk about it more subjectively, what do you plan for, I guess?
Well, Scott, I think you got to have a pretty you got to factor in a number of different scenarios. I think most people are assuming that the fiscal cliff gets resolved in some way. And I don't think we're alone on that one. And then I think just when I look at orders in our growth regions, we'll have 6 growth regions that have double digit orders growth for the year, 6 of 9. That's pretty good, Scott.
That gives me some comfort when I look at the resource rich and rising Asia. And so we still see decent opportunities in China. We still see decent opportunities in the Middle East and Latin America, Russia, places like that. And then Europe is going to be a grind. Europe is going to be we're not assuming that Europe gets any better.
So I think we're kind of looking at 2013 being kind of like 12 with the big variable being the fiscal cliff. And we're ready if it doesn't go through, but we're kind of I think making the same assessment most people do that somehow it gets resolved.
Okay. That's helpful. Thanks guys. I'll pass it on. Great.
Okay, Scott. Thanks.
Our next question comes from Steve Tusa, JPMorgan.
Hey, good morning. Hey, Steve. Energy Infrastructure, now I guess up 10% for the year. What was the expectation prior to this? It seems like that's the growth slows pretty materially in the Q4.
Is that timing around wind something like that?
Yes. There's another obviously large chunk of revenue in wind in the Q4. And that's it is a drag on us. I think that's probably the biggest factor for us. I mean, we still expect energy to be up double digit for the year.
Year to date, they're up about 12% and for the total year, it'll be up about 10%, it'll be up in the mid single digits in the Q4 here for us.
Right. And so how does that kind of make you feel heading into next year, I guess outside of wind, the trends there? And also I guess you talked about orders pricing being up 8% year
to date, but it's going to
come in flat, which means you're going to have a pretty tough orders number orders pricing number in the Q4. Does that change the views at all that you presented at the Investor Day several weeks?
No, just to clear up, it's 0.8% year to date through the Q3 and we're saying we expect it to be flat or slightly positive. So it's not a big change for the there's no change in the Q4 and that's our total year estimate that we stuck to, Steve. So no, I think if you go by business, you got to feel great about oil and gas.
We continue to build backlog. Our orders are strong. We had some
orders slip even in the quarter. We continue to build backlog. Our orders are strong. We had some orders slip even in the quarter. The outlook is very strong for next year as we head into the Q4.
For energy itself, you feel great about the move to gas around the world. It's certainly helping us in terms of our service outlook. It's certainly helping us in terms of our service outlook. And we got to continue to fight for every order that you have on the gas turbine side. We're going to have we think we'll have growing megawatts of gas turbines sold in the outlook.
In the end of September, we kind of said power and water would be up in 12% and flat in 13%, and it would be up really double digits ex wind in 13%. I think we still think that's true. We think oil and gas would be up double digits this year and next. We still think that's true. And we think energy management would be up double digits in 2012 and 2013, and we still think that's true.
So I think it's pretty consistent with what we said in at the infrastructure day.
Okay. And then in Aviation your the service revenues were only down 1, but the service orders were down double digit. Orders were down double digit. What's going on there? I know there's some timing around the price increase that pulled forward some business last year.
Can you maybe just talk about what you're seeing? Have things stabilized on the spares stuff? Or maybe just give a quick update there?
Yes, I think spares outlook seems to stabilize. Going from in the Q3, in the second quarter, the spares rate was 20.6%, in the 3rd quarter, it's 22%. Our outlook in the 4th quarter is similar to that. So right now in the Q3, you're dealing with the biggest negative variance year over year and we're kind of lapping ourselves on that. Our expectation is that at some point revenue passenger miles are still positive year over year, freight is down slightly.
But at the end of the day, with all these flights going on, cycles occurring, there's going to be a pent up demand for service here and we expect that to be positive for 2013. So in the Q4, we're not counting on that. We're counting on the spares orders to be about where they are today. And we think that will be a positive in 2013 as I said.
Okay. Great. Thanks.
All right, Steve. Thanks.
Our next question comes from Nigel Coe with Morgan Stanley.
Good morning.
Hey Nigel.
Yes. So Aviation margins, if we strip out the prior gain, were obviously very strong. Can you maybe talk about how the Gen X the learning curve on Gen X is impacting the comparisons?
Well, in the quarter, it's there's a couple of factors going on around Gen X. First of all, you have just a few lower units. So that's a little bit positive year over year. We had 28 units last year, 25 units this year. And then on a margin per unit, we continue to see good improvement.
We're on track for our cost reductions as we come down the learning curve. And the other thing is that we're moving into better commercial arrangements as we get out of those launch orders for the Gen X shipments. So I think it's on track, it's positive. In the Q4, we're going to have a big increase in shipments here. We're going to go up the total year.
We're expecting somewhere around 125 shipments, I think, Gen X engines. So you're going to have in Q3, they're down a little. In Q4, we're going to go from about 35 last year to close to 60 this year.
Okay. But is the contribution margin materially better on the Gen X versus last year?
Yes. I think the learning curve is down substantially Nigel. And what Keith said is that the original launch orders are usually the most negative from a Centimeters rate. So the combination of those two things, I think, builds every year. So that gets better in 2013.
You're probably seeing 10% improvement in margins year over year 11% to 12%. Yes.
Okay. And then switching to Thermal Energy Service, I think that was up 1%. To what extent is that number being impacted by deferrals on some of the regular maintenance shuttles because of the low gas price.
If you look at the actual business in Q3 had revenue, I think, Keith up 11% and earnings up 15% something like that. Yes. PGS. PGS services up. So the run rate is not it's still a little bit lumpy, but the run rate is not bad.
And then on the ongoing order rate was up 1%. And we still think that some of those are really based on how hard the units are running and that unwinds itself. And then Europe, we have a relatively big installed base in Europe and that has to a certain extent the opposite issue of units not running. But I think in the U. S, there'll be decent growth as time goes on.
I think the performance in the quarter Power Gen Services was probably 15% was a pretty good quarter. Yes.
Right, right. And then just finally, you mentioned you called out a couple of order deferrals push outs into 4Q. To what extent is that just normal lumpiness in the business? And to what extent do you think that's been impacted by some concerns around the macro?
Well, I just think you're always going to have some of that with some of the large orders we're dealing with. I mean, there was really nothing on the Asia Aviation orders other than just timing of approvals. And it just didn't happen in the quarter that we originally estimated it. I think on some of the oil and gas orders, those are those involve a lot of parties with the large energy contractors and government approvals. And so I think that may be more typical that you're always going to have something pushing around.
But for us, over $1,000,000,000 seemed to really push out of the quarter. There were other orders that pushed that seemed like normal quarterly things to us, but there were over $1,000,000,000 that we would have called out as pushing out.
That's great. Thanks very much.
Thanks, Nigel.
Our next question comes from Steven Winger with Sanford Bernstein.
Thanks and good morning. Hey, Steve.
Hey, Steve. Hey, Steve. Hey, just can I just switch over to GE Capital first? Just help me understand again, you mentioned the tie gain. What other gains were in there?
And how much again was that tie gain? And were there any other gains baked into the GE Capital reporting numbers as sort of a normal course of business?
Yes. The tie gain was $80,000,000 from the sale of some of our shares in Bay. We also had the gains in real estate that I talked about from selling properties. And we had one other gain that was over $50,000,000 in the quarter. It was the sale of a pipeline in EFS.
So in the EFS results, that was the large driver of the earnings year over year. Was that 15? Those were the ones. 58.
Oh, 58. Okay.
58 is after tax gain.
Okay. And then was there there wasn't anything I had heard something about Irish Mortgage Bank. There was nothing on that?
I don't have anything on Irish Mortgage. I think it was closed. The deal that we previously announced.
Okay, great. And then the consumer reserve, I just saw it go up from $3,100,000,000 to $3,400,000,000 I'm looking at the credit metrics that you're showing in the supplemental and in sorry in the regular, I don't I'm not quite sure I see the connection. Can you just give me some give us some color for the overall increase in reserving and provisioning and what was driving some of that?
Sure. As I mentioned on the reserves in consumer, we did update our reserve practice for some more granular segmentation of loss types. Essentially what we're doing is we're doing a more detailed look at determine the period of time from the loss event to the write off, the incurred loss period it's called. So we did some of that work in the Q3. The incurred loss period was a little longer using that segmentation.
It increased our reserves about 2 $1,000,000 in the U. S. Retail finance business in the quarter. Outside of that, we had the normal seasonality, which did contribute and we had asset growth, which contributed to reserve growth quarter over quarter and also year over year on asset growth. So if you look though in total assets were up 10% on retail finance volumes up 10%.
The charge off rates are down Steve, they're down 24 basis points year over year, 36 basis points quarter over quarter. Delinquencies are down 36 basis points year over year. So the fundamentals of this business are still very good. It really is a detailed segmentation of the portfolio that added a couple of $100,000,000 to the reserves as opposed to anything to do with
asset quality. Okay. And any
impairments on GECAS? Yes. In GECAS, we had impairments. The total number is about 135 after tax in the quarter. I think in general, I would say that some classic 737s were in there, some A320s, old A320s, older A320s as well as some 50 seat regional jets are probably the three things that would make up that number.
Okay. And last, let me just sneak in one industrial question. On the 29 gas turbines, what countries and that's I know a gross number, any cancellations or deferrals of just the turbine side too?
Yes. There were no cancellations in the quarter. In terms of where the turbines were, there were quite a few from Saudi Arabia. Hang on one second here.
I'm mostly interested in the U. S.
I have 0 in the U. S. We had 5 in China, 8 in Saudi, 2 in Algeria, 2 in Turkey, 7 in Iraq, 2 in Egypt.
Okay. All right. Thanks guys. Yes.
Thanks, Steve.
Our next question comes from Andrew Obin with Bank of America Merrill Lynch.
Good morning. Good morning, Andrew. A question on GE Capital. As we look at ROI on new business, what's the sequential trend by business within GE Capital? Well, I'll give you a few of them.
See, if you look at the Americas for the commercial business, 2nd quarter was 2.4%, 3rd quarter was 2.3%. You look at Asia in CLL, 19, 19. You look at Asia consumer 3, 634%. You look at Europe, CLL was 2.1% in the 2nd quarter, it's 1.7% in the 3rd quarter. You look at retail for us in the U.
S. 4.7% in the 2nd quarter 5.3%. So overall, as I showed you the net interest margins were up 50 basis points and our new business ROIs are still hanging in there on new business volume. Sure. And just also on GE Capital, as you extract more capital out of GE Capital, what should we expect for the pace of share buybacks relative to what we saw in the quarter?
Well, we like the buyback pace in the quarter over $2,000,000,000 a little over $2,000,000,000 Our objective as we've said is to continue to prioritize the dividend and grow that in line with earnings. We continue to have that point. The buyback, our objective is to retire the shares that we issued before the financial crisis over the next several years and we're doing a pretty good job on getting after that. And the cash from GE Capital obviously is a big help. So if we can continue to get the cash, although this year we've already gotten all the special dividends, now we're just getting the regular dividend on orders or on earnings, that's going to help us a lot with the buyback.
And based on the market, we'll see what happens in the Q4. We expect to retire somewhere between 125,000,000 and 150,000,000 shares this year. Thank you very much. Yes. Thanks.
Next question comes from Deane Dray with Citi Research.
Hey, Deane. Just a clarification first. There's some headlines coming up about the revenue guidance total revenue guidance going from 5% to 3%. So we already you told us that GE Capital revenues are down, Maybe there's some FX. But just if you could parse out
for us what the delta is? That was the It's
really GE Capital. Okay. Got it. I don't know if anybody's really forecasting FX. Obviously FX had a big impact on us in the quarter, certainly industrially.
But the change on the framework that we showed you was what Jeff said. The G Capital total year revenue is going to be down closer to 10% than 5%. We thought that was worth updating.
Good. Just want to make sure, because there's a couple of headlines out there and that clears that up. And then on the cash flow, you said there were some equipment build in the Q3 that gets resolved. What's the business? And any color there regarding the size?
Sure. Obviously, we've built up some working capital to support our 4th quarter shipments. You look at it's mostly in Energy. Energy's working capital bill was $1,300,000,000 through the Q3. And we're expecting a big 4th quarter in terms of deliveries.
If you look at the profile last year, Q3 to Q4, we had a big revenue increase between the quarters. We also had a significant increase in cash flow between Q3 and Q4. Q4 will be our biggest cash flow period for the year. And we're expecting a profile similar to last year, a little higher than last year in terms of cash coming out of industrial in the Q4.
And progress on the RED assets at GE Capital?
I don't have a specific number. I know in total we're down about $6,000,000,000 How much? 6,000,000,000 dollars quarter over quarter. Yes, there's about $70,000,000,000 on balance sheet today on the right assets. So in the quarter, we felt great about it.
You look at the runoff we had, just give you some numbers on some things that are down year over year. U. K. Home lending is down $1,000,000,000 Dean. France is down $1,500,000,000 Poland is down $1,300,000,000 Spain is down $1,000,000,000 Those are all non core assets that we're running off here in a pretty good pace.
Great. Just last question for me is maybe some commentary regarding the debt issue for the parent because that certainly doesn't happen often and it's never
a better time
to get issue debt when you don't really need the financing. But just give us a context. There's $7,000,000,000 you did it in 3 tranches. What are
the use of the proceeds?
Yes. It kind of goes back to the first question about what do you think about the environment. I mean, as we look forward, we have a $5,000,000,000 debt in GE that matures February. And so we decided that we really didn't want to be trying to replace that debt in an environment where the fiscal cliff be a disruptor or not. So we decided to go in the Q4.
We like the rates. As you said, we did $7,000,000,000 We'll have a big interest savings. If you look on that debt, we'll probably have annual savings
around $70,000,000 at the rates that we did that
debt at with a mix of 5, 10 30 years as you know. So we decided to get that out of the way. We know we have to do it. We didn't want to do it in a disrupted environment. We like the rates where they are.
It creates a savings for us. Now we do have a little higher interest costs in the 4th quarter because of that. But for us it just seemed like the right thing to do.
That's real helpful. Thank you.
Deane, are you clear on the revenue point? Absolutely. I'm clear to everybody. Yes. Appreciate it.
Thanks. Great.
Our next question comes from John Inch with Deutsche Bank.
Thank you. Good morning. Hey, John. Good morning. Hi, guys.
Keith, maybe a question for you. It's really on the Buffet warrants. With your stock price sort of where it is, I'm just wondering what are you thinking of in terms of possibly maybe buying them in advance? And if you don't do that, is there a dilutionary impact kind of on a net basis to this that provides for a headwind that maybe we should be thinking about?
Yes. John, if you think about it, the dilution is on amounts above $22,000,00025. Right. And it's de minimis even if you we'd love to have the stock go up to $25,000,000 in a quarter. It's still that would be less than $400,000,000 of dilution.
I think it's 135,000,000 shares that you're talking about the dilution on. So I'm thrilled that we're in the money on them. And yet we're going to have to deal with dilution, but I don't think it's a big deal for investors.
Okay. Good. That clears that up. With 0 U. S.
Gas turbine orders, can you just remind us what is your sort of latest thought toward the timing of a U. S. Gas turbine cycle recovery kind of years and maybe you could blend that in with a little bit of your pricing kind of what you're seeing on the pricing side that sort of thing?
John, I would just go back to what Steve basically said in September. I think we think there's activity right now that's going on that will turn into commitments next year. So I think as you go into 2013 and into 2014 those commitments will go into orders. And I think that pace will grow as each year goes by. So we're seeing quoting activity right now.
We expect to book some orders next year and we think that will grow over time. I think the good news is that gas is the fuel of choice. And as new capacity comes in, it's going to be gas turbines.
Yes. So if the trajectory holds presumably the price though doesn't start to meaningfully kick in until what 14 percent if the timeline Look,
I think the good news, John, is that we're we've been kind of firming a bottom right now. So I think you could see some positive OPI into 13 not great, but some positive just because I think we've been troughing for the last period of time. So I think that will start improving. And then I think it accelerates as time goes on.
Just lastly, Jeff, with the cash and the cash position in pretty robust shape, what are your thoughts toward maybe upping your M and A spend targets? Just even given the macro sluggish environment that might be perhaps prompting more companies to consider selling or make more properties available? What are your thoughts here?
I'll go back, John, to our disciplines. I think dividend in line with earnings. We think the dividend is really important. Continuing to buy back stock with an eye on getting back to 10,000,000,000 shares at some point and the $1,000,000,000 to $3,000,000,000 So if we see a good acquisition in that range that meets our hurdle rates, we'll go for it. But it's not burning a hole in our pocket and we don't think we need it to do what we need to do in 2013.
Thanks very much.
Thanks. Thanks, John.
Our next question comes from Shannon O'Callaghan with Nomura.
Good morning, guys. Hey, Shannon.
Hey. So just back on the resegmentation of the U. S. Retail business, I mean, what was the thought process behind making that choice? And then the extra provision in the quarter was that sort of a catch up?
Or what's the sort of normalized annual hit to earnings relative to the way you used to segment it?
Yes. I think we're going through a process in the retail finance business to take a look at our reserve practices and our segmentation relative to industry standards. In the quarter, we did a couple of factors. We did aged accounts and we did fraudulent accounts. I mean, we're basically trying to identify individual events and then go back and say how long is the incurred loss period for that type of event.
And there will be there are other categories we're still looking at, if people pass away, if people reach settlements, if people have bankruptcies. So we're basically trying to segment that book into very detailed and more conservative realistically more conservative look at reserve positions based on when the incurred loss period actually started. So I think in the quarter, there's no more to come from those categories. I think we're going to continue to look at these other categories. To us, we're just trying to make sure that we're in line with industry practices and it's something that we're going to do through Q4 and Q1, I believe.
Okay. And so I mean any estimate of sort of what the more conservative method is in terms of a dollar amount on the earnings impact for a year?
I don't. I'd say the one thing I'd look at is if I think about the outlook from Q3 to Q4, I think retail finance probably has an outlook that's similar in the Q4 to what they had in the Q3. Okay. Even though they've had this one time thing, I think if you look at the outlook, it's probably going to be based on volume growth and based on whatever we're doing with reserves, our outlook is probably close to what we had in the Q3.
Okay. And then just energy into 4Q, I mean, can you give us a little more feel on the number of sort of wind turbine units and the pressure you're expecting? I mean, the margin this quarter was like 13.6% for sort of the pure energy business. You normally have this seasonal uptick, but you've got this pressure. Can you maybe gauge where you see those going?
I gave you the total number. If the total year is going to be up 10%, you look at where we are Q3 to date, I think you can get a pretty good estimate of what we think the margin is for energy for the Q4. I don't have the exact dollars, but I mean that math is pretty clear.
And then what are you thinking for wind turbine units?
It's 750 or so. 750 or so units.
Okay. All right. Thanks guys.
Our next question comes from Jeff Sprague with Vertical Research.
Thank you. Good morning, Jeff.
Good morning, Jeff. Hi, Jeff. Hi, Jeff.
Hi, Jeff. Hi, Jeff.
Hi, Jeff. Hi, Jeff. Hi, Jeff. Hi, Jeff. Hi, Jeff.
Hi, Jeff. Hi, Jeff.
Your customers do, right? So you're running at higher utilization. I wonder if there's some dynamic though that we're running more baseload as opposed to kind of peaking cycles and that's is that playing into what seems to be softer orders there than I guess we would all guess given kind of the trends in the business right now?
I think you heard some of this from Steve Bowles in the infrastructure meeting Jeff. Basically you're absolutely right. I mean people are running the gas turbines a lot more and they are running them as base load. And that is ultimately good news. And I think the idea is going to be you're going to have either sooner maintenance needs or maybe there'll be a little deeper overhaul when you get into fix and repair these units when they do have an overhaul.
But Steve's message was that these are going to pull in running these things at full baseload power at this point is maybe pulling in overhauls by 3 months, 6 months in the out years. These overhauls are pretty well scheduled based on times the units are going to run. So I think it's a positive. I think it's all positive, but I think it's a little further out there. But right now, they're definitely running gas turbine units a lot more and they're running them as baseload.
Jeff, we said I think in September that we expected good earnings growth for Power Gen Services in 2013 and we don't see anything that changes that assessment.
Yes. I thought the comment actually was flattish for 2013 on services. No?
Flattish overall for the Power and Water business. Yes. Flatish for the Power and Water business, but for services we expect growth. We expect wind to be negative.
As we get closer to this wind downturn, is it actually playing the way you thought in terms of the magnitude of drop next year?
Jeff, it is. I think we expect revenues will be down probably 40% something like that next year. And we've always said that it would be about $0.03 of headwind next year. And that really assumes kind of no market in the U. S.
There's some discussion about whether or not there's a production tax credit as you do some kind of tax deal at the end of the year. And if there is one, I think that would be good for the business, but it's not something we're counting on.
And then finally, just thinking about cash flow, I mean, it does look like a challenge in Q4. The idea of the working capital draw is understandable. But does that cash flow forecast, is it also predicated on particular order strength in the Q4 that would drive deposits or progress payments? Is that any part of
your No, it's
not really, Jeff. I think progress remains a headwind. It's an unusual year just because of the spike in wind and stuff like that. So it's this is just been an unusual year from that standpoint. But I think we see the working capital levers to for cash.
It's a pretty similar profile to last year in the Q4. I think the one difference is you do have the wind progress coming down and we factored that in Jeff. We don't have any replenishment of the wind progress in the forecast and basically we're shipping that in the Q4. So I think we're taking that into account. But we know it's a Q4 and we got to execute.
All right. Thank you very much.
Thanks, Jeff.
Our next question comes from Julian Mitchell with Credit Suisse.
Hi, Julian.
Hi. Good morning. Good morning. Yes, firstly on Aviation, I just wanted to follow-up on your comments around some push outs at some Asian carriers. And also in the segment profit growth, I mean, you call out the value gap and productivity driving up EBIT year on year.
I just wanted to check what the latest thoughts were on R and D around the headwinds there in light of the LEAP 1A and 1B designs being frozen. Are you still on track for kind of R and D to start moving flat to down in 13?
Yes, we're on track for the R and D. If you look at the margins in the quarter, stronger pricing was a big part of it and cost productivity was the other part that aviation got and we expect those two factors to continue. If you look at R and D and aviation itself, it was up about it was down about 7% and it's holding steady around 5% of revenue. So as a percent of revenue, as we said, we don't expect this to continue to be a drag. We'll see what happens as we get into 2013.
But we like the position we are in those engines. We've gone to design freeze on 2 of the 3 versions of the LEAP and we're on track for the design freeze on schedule for the 3rd version.
Thanks. And just the comments around some of the push outs on the OE Oh,
the push outs, yes. Yes. Yes. It's purely my understanding of it, it's purely a signature approval. And it's not someone wondering whether they're going to take these planes.
And so we're highly confident that these orders are going to happen in the Q4. And it's 2 customers and it's about $500,000,000 Now again, if you remember last year in Q4, I think the equipment was up 20 plus percent. It was 2 quarter to quarter. Huge quarter to quarter in aviation. So again, with these backlogs, we're going to have that type of lumpiness.
But these orders, there's no it's not like someone worried about their fleet planning or anything.
Got it. And then just secondly on Healthcare. The picture of the past 12 months has been very good growth in emerging markets, Europe very weak and the U. S. Kind of hanging on.
Looking at the U. S. Equipment order trends the last couple of quarters, I mean is there you worry that that's starting to roll over? Maybe 6 months from now, the numbers are looking down kind of high single digit that sort of range as you're looking at U. S.
Healthcare specifically?
I don't see that, Julian. I think it's kind of it's around flat and it's going to continue to be around flat. And there's nothing that our guys see that suggests it's getting materially worse as time goes on. I just think it's a tough market, but it's not like Europe. Okay.
Thanks.
Yes. Great. Chanel, we have one to finish up by 9:30 because of some other earnings calls. Let's take a couple more and then close out.
Will do. Our next question comes from Jason Feldman with UBS.
Good morning. Hey, Jason. I Just wanted to follow-up on the aviation aftermarket. You talked about expectations of improvement next year. Wondering if you had any sense of what kind of impact you've had this year from the kind of earlier than normal retirement of younger planes and cannibalization for parts and whether you expect that to continue or whether you really haven't seen much of that?
That's been part of our run rate and analysis for the business already to take a look at where our used serviceable parts are going to come from. Think the biggest impact that we've had this year really has been on the wide body. It's the CF6 is down. It's down by overhauls and freights and it's really a maintenance pressure on us, while the CFM products and the G90 products are both up. So on the more prevalent installed base narrow body growth that we've had, you're starting to see those engines come in for overall.
Certainly, the G90 and the 777, you're seeing those engines come in for overall. And we're just seeing a push out. I think a lot of it's freight. I think some of it's Europe and some of the older applications the CF6 is on. And we're really having to deal with that more than cannibalization of on the narrow body product.
Okay. Thanks. And briefly on capital, we've heard a lot this earnings season about CapEx kind of being pushed out. You've certainly alluded to the fiscal cliff and whatnot. Have you seen any impact on CLO loan demand?
Or is there still sufficiently few competitors that you're still able to originate as much as you want there?
Well, we said the commercial volume is down about 5%. I think a bigger part of that is this. It's uncertainty. It's people not willing to spend until they have a more certain environment around whether it's taxes or health care or social costs or things like that and just the general backdrop in terms of confidence. So I think we have some of that.
We are seeing a nice volume in the equipment side in the CLO business, but on the CapEx side, I'd say that's been soft. Soft, yes. Great. Thank you. Thanks.
And our final question comes from Brian Langanber with Langanber and Tassman.
Hey, guys. Really quick one.
Good morning, Brian. Good morning. About the $300,000,000 of restructuring
you did, can you just layer that around the segments like how much impact there was in each of the industrial segments?
Sure. If you look at it by business, I'll give you after tax numbers. Energy was 50. Healthcare was 27. G Capital was 25.
HMBS was 17. Aviation was 16. And about 100 was associated with the plan exit.
Okay, great. All right. Little follow ups related, but thank you very much.
Thank you. Thanks. Great. Just before I wrap up, I just want to give some thoughts about the company going forward and just with all the volatility in the environment. I think our Aviation business, we're really winning in the marketplace with a massive backlog.
Oil and gas is a fast growth market with a lot of opportunity for expansion. I think our power and water business is really well positioned for a gas cycle. Healthcare is remains a diagnostics leader with a great growth market foundation. Our transportation business is well positioned for growth based on new technology and global expansion. Energy Management has room to grow.
And our consumer businesses will benefit from an improving housing cycle. GE Capital is smaller, stronger and more competitive. And we're operating the company well with large backlogs, I think successful acquisitions, expanding margins and substantial cash. So from an investor standpoint, while the environment is volatile, I think our path for growth and execution is very well understood by the team. And we think this quarter demonstrates that.
And we think we feel good about how we're positioned for the Q4 in 2013. So Trevor, thanks and have a good day.
A couple of items just
to close out today. A replay of today's webcast will be available this afternoon. We'll be distributing our quarterly supplemental data schedule for GE Capital later today. I do have some announcements of some upcoming investor events. First, on Wednesday, December 12, Steve Bowles, our President and CEO of GE Power and Water will host a plant tour at our manufacturing facility in Greenville, South Carolina.
More details will be sent in the coming weeks about that. 2nd, our annual outlook meeting investor meeting with our Chairman and CEO will be held in New York City, likely to be at 30 Rock again. It will be held on Monday, December 17. We'll send out more information regarding that event. And finally, our Q4 2012 earnings webcast will be held on Friday, January 18.
Thank you, everyone. As always, we'll be available today to take your questions.
This concludes your conference