Good day, ladies and gentlemen, and welcome to the General Electric Second Quarter 20 10 Earnings Conference Call. At this time, all participants are in a listen only mode. My name is Noelia, and I'll be your conference coordinator for today. 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, sir.
Great. Thank you, Noelia. Good morning, and welcome, everyone. We are pleased to host today's Q2 2010 earnings webcast. Regarding the materials for this webcast, we issued the press release earlier this morning and the presentation slides are available via the webcast.
The slides are also available for download and printing on our website at www.ge.com/investor. We'll have time for Q and A at the end. 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 Enno and our Vice Chairman and CFO, Keith Scharen. Now I'd like to turn it over to our Chairman and CEO, Jeff Ennold.
Great, Trevor. Thanks. Good morning, everyone. Just at the outset, I'd say I think the GE team had a really great quarter. Our environment continues to improve.
Media buying was strong, rail loadings were positive, revenue passenger miles were positive, losses have declined and credit demand's up and equipment orders were positive. We're still cautious in a few areas. We're working through a difficult commercial real estate cycle. After many quarters of decline, demand for electricity finally rebounded in the second quarter, and we think that's encouraging. As many people have written, we think this is a multi speed recovery, so it's going to the economy is going to strengthen at different paces around the world.
Our earnings growth resumes. We're excited about that. EPS is up 15%. I think everyone likes what they see in GE Capital. The losses peaked and earnings are rebounding.
And we had strong performances at NBCU, Healthcare, Consumer and Energy. The GE team's execution was very strong, increased margins. We're on track for $13,000,000,000 to $15,000,000,000 of full year cash flow from operating activities. And we had $74,000,000,000 of cash on the balance sheet at the end of the quarter. That gives us many positive capital allocation options ahead.
And I would say, if anything, those options strengthened during the quarter given our strong cash performance. So I'm very pleased with the way we executed in the Q2. I always go through 4 operational kind of updates on the company in general. The first one is with GE Capital. Really same as in the past.
All the metrics are improving. I think the one I would point out on this page is the Tier 1 common ratio at 8.1 percent despite FX having an impact on equity. We think that's very positive. And as the GE Capital earnings improve, that's only going to accelerate. And E and I, we're making progress.
We announced the sale of POC yesterday, and we're well on our way towards the commitments we made on ending that investment. So we have very strong liquidity and very strong capital positions, and those got better in the second quarter. The second thing is how our commercial teams are performing, particularly in orders. This is our first quarterly orders growth since the Q3 of 'eight. Europe had or I'm sorry, Energy had 20% equipment growth, Tech 14%.
Service had many bright spots compared to some one timers last year like nuclear fuels. And the backlog is steady. It's up 12% quarter over quarter and pretty broad based strength. And so I think we feel good about where we stand. The backlog really is flat ex FX.
And we expect single digit orders growth in the second half of the year. These are always tough to predict given the lumpy nature. But when we look at our funnels, that's what we see looking outward. The 3rd area is an operational improvement. We expanded margins in the second quarter.
We had good performance overall, 70 basis points performance to 17.1 percent, which is, I think everyone would agree, I think good execution by GE. Positive margins really driven by a positive value gap from a price and deflation standpoint. We've done aggressive restructuring over the past 2 or 3 years, and that cost those cost savings are showing up in the bottom line, and we think that's great. We've done that while investing heavily in research and development, a significant increase of 14% year to date. We've targeted to introduce 30% more products this year.
We're funding adjacencies in areas like batteries and areas like that, and we're growing our global position. We really have a deep pipeline of leadership products like the GNX in aviation and falling behind that is the TechX and the LEAPX, so we're filling out the product line. We're launching 2 new gas turbines in the second half of the year, multiple new healthcare, both from an information standpoint information technology and also diagnostic imaging devices, increasing our locomotive advantage, launching smart appliances. So we really do have a deep pipeline. And so we're investing in organic growth while growing margin rates, and we think that's a good sign for investors.
Lastly, good operational improvement in cash, solid cash flow in the second quarter, dollars 6,300,000,000 year to date. Our CFOA advanced ahead of net income and depreciation. And again, in general, while we're seeing progress decline, our working capital is offsetting that. And so that's kind of the tail of the tape so far this year. We have a very strong balance sheet with consolidated cash of $74,000,000,000 You go down the walk, you see lots of free cash flow, which is a big part of the GE business model.
It's just lots of cash available for capital allocation as we look at the year. So we continue to build the cash balance. We're on track for CFOA for the year. And I think the cash story and the balance sheet strengthening story is a very positive story for GE and our investors. So with that, let me turn it over to Keith, and he'll go through the operations.
Thanks, Jeff. I'm going to start with the summary of the Q2. For the quarter, we had continuing operations revenues of $37,400,000,000 which were down 4%. The pieces industrial sales of $24,400,000 were down 6%. And that's right in line with our expectations.
If you go back to the 2nd and third quarters of last year, we estimated that our equipment revenues could be down 10% to 15% in 2010 based on the orders profile we were seeing. In December, we updated that to say that we thought our equipment orders equipment revenue could be down 5% to 10% this year. And through the first half, the equipment revenues are down 8%. So that's right in line with what we had as expectations. Financial services revenue was $13,100,000,000 down 2%.
I'll show you more of that on the G Capital page. We earned $3,300,000,000 of net income, which is up 14%. And for earnings per share, we earned $0.30 as Jeff said, which includes the cost of the preferred dividend and the EPS results are up 15%. As Jeff covered, the total cash flow from operating activities was $6,300,000,000 year to date, which puts us right on track for our total year estimate. And for taxes, the consolidated tax rate for the 2nd quarter is 21%.
That's up from 7% in the Q2 of 'nine mainly because of the improvement in highly taxed pretax earnings principally at GE Capital. GE
tax rate
is in line with 2,009. And as you look at the rest of the year, we expect the GE rate for the full year to be somewhere in the mid-20s, a bit lower than we had in the Q2 due to the income mix between G and G Capital and some possible second half audit resolutions that we've talked about. On the right side, one final point, the total JECS tax benefit, I say on the chart that it's a lower benefit. The total benefit in Q2 was $570,000,000 lower than last year's Q2. On the right side of the segment results, you can see our Industrial Businesses, ex Media, had $3,600,000,000 of segment profit, which was down 2% from last year.
NBCUniversal had both revenue and profit growth. And GE Capital earned $830,000,000 up 93%. Overall, segment profit was up 8% and with lower restructuring at the corporate level partially offset by higher interest, the total earnings were up 14%. So it's great to be back delivering strong earnings growth. Now before I cover the business highlights, here's a summary of the 2nd quarter items that impacted our results.
And as you can see, there were very few items to break out this quarter. First, as we've continued to report, we had a total impact of $0.01 from restructuring and other charges. We continue to reduce our lighting cost structure. We had some restructuring in Water, Healthcare and Global Banking. We had 2 gains in the quarter.
We sold a portion of our CFM engine teardown business to SNECMA, and we realized a $77,000,000 after tax gain on that. And we had an environmental insurance settlement that occurred in the quarter for a $75,000,000 after tax gain. So the restructuring offsets the gains. And we also booked $186,000,000 of additional reserves for our gray zone liability in Japan. And I've got a lot more on that on the next page.
I'm going to spend a little bit of time on gray Zone. As you know, our Japanese consumer business is in runoff and discontinued operations. We sold the business to Shinsei in September of 2,008. And as you can see on the top left hand corner of this chart, at the time of the deal, we started with $2,200,000,000 of coverage for future claims through the Shinsei loss share agreement. Through the Q1 of 2010, we had booked another $500,000,000 of additional reserves that related to both the tougher economy in Japan as well as the legislative and regulatory changes that were occurring in the country and affecting the gray zone claims.
And as you can see from the chart on the upper right, we continue to see the claims decline. That's average daily claims on top and then the exposure per claim on the bottom. But the claim trends haven't come down as quickly as we anticipated. And because of that, we booked an additional $186,000,000 of reserves this quarter. In total, we settled $2,200,000,000 of claims to date and we have an additional $700,000,000 of reserves on the books today.
So I want to go through a couple of facts about our book in Japan and the dynamics of our portfolio. First, our liability relates to a closed runoff book. We stopped all new lending as of October 2008. We capped the interest rates for all the accounts by June of 2009 at the 18% level. The existing balances that we have amortized off by the middle of 2013, so they're all in a runoff, in a sort of a term loan runoff.
Shinsei is responsible for all credit losses. So a bankruptcy event is a credit loss and GE retains the gray zone liability, which is the amount above the 18% interest, generally up to around 28%. And finally, 95% of our remaining customers are current on their existing loans. So this is a runoff book with current payments by the majority, vast majority of the customers. So when you put those dynamics together, the current loss estimate we book to has a few assumptions and I've oversimplified this model, but here's the way we have modeled this so far.
The rate of new claims continues to decline. For instance, from March to June, our total claims have come down by 9% a month. And in our model, we project the claims to come down on average 11% a month over the next year. June's average daily claims came in 14% below May, so that's ahead of what claims reductions, basically the model assumes the number of claims by the time you get to 2012 become de minimis. And the average exposure per claim remains consistent with the May levels, and we see the impact from the loss mitigation efforts that are in place.
So those assumptions support the $700,000,000 of current reserves. Now the tougher part here is pegging behavior as we get out into $11,000,000 and $12,000,000 And we know that the more time that people are paid up, the balances are paid off, the less likely they are to claim. There are also a lot of uncertainties. There's the new government lending restrictions that went into place in June. We have not seen an impact from those yet.
There's the state of the economy. So there are a lot of variables here. But if you just want to run a sensitivity and I think this is one that may size this for people. As an example, if the claims continue to run down at only 3% a month, which is consistent with the average since we sold the business. So if you go back to the end when we sold the business, as you can say, the claims have come down on average 3% a month, but that's significantly below the recent pace of deceleration as you can see on the chart.
But just use that as an assumption. That means the tail would extend out another 5 years, even though in the middle of 2013 all the accounts that we have balances on will have matured and should have been paid down. So if you run the tail out through 5 years and you keep the loss exposure at current levels, this set of assumptions would result in about 4 times the incremental claims that we've modeled in our estimates today and about $1,200,000,000 of incremental financial exposure. So on the other hand, we've added a lot of resources to this effort over the last 6 months. We if we can execute through some of the best practices that we learned from some others in Japan, we could impact the existing $700,000,000 reserve favorably by $50,000,000 to $75,000,000 So there's a very dynamic situation here.
Going to continue to give you quarterly updates on what's happening. But at the end of the day, we believe the ultimate exposure here is very manageable for GE. So with that, let me jump into the businesses. I'm going to start with GE Capital. Mike, Neil and the team had a great quarter.
We believe this is the start of a longer term trend of positive earnings momentum. Revenue of $12,300,000,000 was down 3% driven by the lower assets. A real positive in the quarter was a significant improvement they had in earnings quality with pre tax earnings of 741,000,000 Net income of $830,000,000 was up 93%. That's driven by lower credit costs. It's driven by better margins and it's partially offset by some higher real estate impairments.
Our $487,000,000,000 of ending net investment is well ahead of plan. Even if you exclude the impact of the stronger dollar, which if you go back to the chart Jeff showed you on the Annie Walk, we're at year end target of $500,000,000,000 So we're already at the year end target of $500,000,000 We're well on the way to our $440,000,000,000 in 2012, and that gives us lots of flexibility on originations, on funding and on M and A going forward. We had a strong volume quarter with good margins. Total commercial volume of $10,300,000,000 was up 24%, I'll cover some more on that in a minute. With $2,800,000,000 of losses and impairments, which are down $500,000,000 from Q1, mostly driven by lower consumer losses as our book continues to improve, and I'll cover more on that as well.
The unrealized loss estimate in commercial real estate is down to 6 point $3,000,000,000 from approximately $7,000,000,000 at year end. And on lower receivables, our reserve coverage hit 2.66 percent, an all time high. The team continued to do a good job on costs. As Jeff said, we announced the Bock disposition, which is going to give us some more any flexibility, about $8,000,000,000 when it closes, which we would expect probably in the Q4. And based on our first half pre tax results, it seems that there shouldn't be any need for a contribution from GE to GE Capital under the income maintenance agreement.
That's what IMA stands for. So, really a great quarter. Let me do a few highlights by business that are down on the left side if you look. Consumer had a very strong quarter. They earned $735,000,000 that's $484,000,000 more than last year's Q2.
The earnings growth came from over $400,000,000 of lower credit losses and $100,000,000 of lower costs. Our U. S. Retail Finance business earned $393,000,000 which was up over 100%. And again, that's driven by portfolio quality improvements and better margins.
Our Global Banking business earned $293,000,000 up 13 percent also driven by lower credit costs. And UK Home Lending earned $39,000,000 in the quarter and I'll cover more in that portfolio in a few pages. In our Commercial Real Estate business, remained the one tough area in GE Capital as we expected. The business lost $524,000,000 net driven by $280,000,000 of after tax credit losses on our debt portfolio. In the quarter, we saw a 3% decline in asset values for the properties where we booked those loss reserves.
So the valuation declines have definitely slowed and they appear to be less than what we anticipated as we went into the year, and that's good news. We also had $287,000,000 of after tax marks and impairments on our equity book. I'd say there are some positives in real estate. I mentioned the unrealized losses down. We've continued to shrink the portfolio.
Assets are down from operations over $3,500,000,000 from the Q1. Delinquency dollars are flat from Q1 to Q2 and non earning assets were down $130,000,000 from Q1 to Q2. So we also had a few property sales. We sold about $400,000,000 in the quarter. However, while there is some market commentary that there's things are getting more positive in commercial real estate, we still expect the real estate book to remain under pressure for the near future.
Commercial lending and leasing business also had a good quarter. Earnings of $312,000,000 were up 28%. We had over $200,000,000 of lower losses and better margins, which more than offset the tough comparisons from the Q2 'nine Genpact gain. GECAS also had another great quarter. Earnings of $288,000,000 were basically flat as higher core income offset about $30,000,000 of higher impairments.
And Energy Financial Services also had a great quarter driven by core income growth and a gain from the sale of our Regency Journal Partnership position. So overall, a great quarter as GE Capital turns around here. Next, I want to cover an update on financial regulatory reform. I know everybody knows there's still a ton of work to do to finalize the legislation. So the outcome right here is this is what we expect based on what we know today.
And what we know today, we think the impact is going to be manageable. And I thought I'd just cover some of the pieces. 1st and foremost, the good news is the GE business model is intact. We can continue to own GE Capital and the financial supervision will be focused on GE Capital. We'll continue to be able to finance GE Product sales on market terms and at arm's length as we've been doing, so that doesn't change.
We will retain ownership of our banks, the ILC and the FSB in Utah. 2nd, as we look at capital requirements, we think they should be within our GE Capital earnings growth and asset reduction plans. You saw our Tier 1 went up even in the quarter, even with an impact from FX on equity. As we continue to shrink the book and reduce our leverage, We feel confident that we're going to be able to meet whatever the requirements are to be well capitalized. 3rd, we do expect the Fed will be our regulator.
The transition is supposed to occur in the 12 to 18 months after the legislation is enacted. And as we've said, we've been preparing for this for more than a year with the help of outside third parties. 4th, we need to see the final regulatory rules surrounding the Volcker rule. However, we believe that the impact on GE Capital is not going to be significant. We have about $1,800,000,000 investment in private equity sponsored funds, and those are either going to run off or reach levels that are less than our 3% of Tier 1 capital in the 4 to 12 year phase in that's contemplated in the legislation that we have out there.
5th, we've already lowered our late fees on our U. S. Private level credit card business, and we're not a big interchange player. So I think that's going to have a small impact on us. And finally, proposals on derivatives will require us to post collateral going forward like everyone else, but the book is grandfathered.
It will be on a going forward basis, and we can just use some of the cash that we're already carrying for that. We don't see any impact from holding 5% of securitizations. Basically, securitizations are already on book, and we hold 5% in a different form today. So that's not going to have an impact. So a lot of work obviously still to be finalized, but that summarizes the impact that we see today.
On portfolio quality, things continue to improve. I'll start with equipment on the left side. Our 30 day past due delinquencies are better. They're down 21 basis points and that's pretty broad. Americas were down 24%, Europe was down 47%, and Asia was down 11%.
The total commercial non earnings are down about 500 $1,000,000 in the Q2 versus the Q1, which is good news. And it's down 6 basis points to 2.99%. You can see that in the supplementals that we put out with the earnings press release. But the equipment, which is a subset of commercial non earnings, are up over 100,000,000 dollars It's up about 21 basis points to 3.07 percent as you can see here the non earnings. And that's driven by one account.
We had one large account that went into non earning even though it's still paying current. On the bottom, you can see real estate delinquencies are up. We expect them to continue to be up, but the real estate non earning dollars went down $130,000,000 from Q1 to Q2. And on the right side on the consumer, you can see delinquencies are down 6 basis points in total, and it's a split story as it has been. The non mortgage is down 42 basis points driven by our North American retail book.
That's down 87 basis points as the underwriting actions that we took continue to lead to better results. We've had 4 consecutive quarters of declining delinquency there and that is very positive. On the mortgage book, you can see delinquencies were up 71 basis points. It's principally driven by Australia where the delinquency dollars are flat, but the percents went up because of the book runoff. We had a similar phenomenon in the UK home lending book.
Those trends are the same for non earning assets. Overall consumer non earning assets are down $500,000,000 from the Q1. And finally in the UK home lending book, we're down to 9.56 houses in the real estate we own at the end of the quarter. That's our lowest level since the Q2 of 2008. And we realized 117% of our carrying value for the houses that we sold in the quarter.
So the improvements that we're seeing in delinquencies and non earning assets are going to lead to lower losses as we go forward. Next is an update on reserve coverage. Reserves ended the quarter at $9,100,000,000 and coverage increased above our historic high mark to 2.66%. And we do have lower reserves. You can see it went from 9.5 percent to 9.1 percent, but we did not release reserves into income.
I don't know how to get any clear on that. We tried to highlight it in the box at the top of the page. In the Q2, we had $2,200,000,000 of write offs, which resulted in lower assets. When we have a write off, we actually remove the receivable from the books. It's a balance sheet event and it's not a release to income.
It's actually removing a delinquent or non earning asset. And we added $2,000,000,000 in new provisions. And the amount of new provisions we add is based on 2 things really. 1, the book is smaller, so you're going to have less provisions because you have less assets that you're providing against and 2, the improving asset quality. And then finally, we also added the impact of $200,000,000 from the stronger dollar at the end of Q2 versus Q1.
So you can see the split of the reserves. We increased our commercial reserves by $200,000,000 in the quarter, principally the real estate loans where I said we added some reserves. We're up to $1,800,000,000 of reserves in real estate and 73% of our impaired loans are paying current. So we're marking basically a lot of the loan book to market. It's roughly when you're at 100 percent LTV on the loan book, you deal with the volatility on a quarterly basis.
But with a lot of the customers paying current, we think we're going to do better than some of these reserves that we've put up. And then finally, across
the rest of the commercial book, obviously, our
secured lending positions are very important in minimizing the losses book, obviously, our secured lending positions are very important in minimizing the losses given default and we feel good about that. On the consumer, reserves are down $600,000,000 assets are down $12,000,000,000 they're down 7 percent quarter over quarter. Delinquencies are down over $1,000,000,000 and most of the FX impact that I talked about was in Consumer. So one final thing here, it's the non earning numbers aren't on the page. The coverage went up, but the non earning pages are in the supplemental schedule and non earning assets are down in total $1,000,000,000 from Q1 to Q2, which is also a positive.
So if you look at the quarter, we increased the commercial reserves again. Our overall coverage and our non earnings coverage are both up in the quarter. And I'll wrap up GE Capital with a few comments on volume and our outlook. Originations continue to get better. I think we're in a differentiated space here.
We're playing in the mid market. We've got a green light on our mid market and small and medium enterprise originations. And the total on book volume was up 22% versus the prior quarter to $40,000,000,000 So the teams are growing their volume in the quarter and year over year it's up positively. Our commercial lending and leasing business, which is right over the target of mid market and small and medium enterprise pipeline for future business continues to grow, went from $33,000,000,000 to $37,000,000,000 That's a combination of proposals, active credit reviews on specific amounts that customers want and things that are in the backlog. So that's a positive.
The core U. S. Mid market business was $5,700,000,000 in the quarter. That's up 75% over Q1. So these indicators are delivering real volume on the books.
And the retail finance volume was up strongly year over year and the returns remain high. We're getting good returns on our book. In the quarter, margins were up overall in GE Capital. We're up to 5% about in the Q1, we're up around 5.3% in the 2nd quarter. So things are really turning here and the volume picture feels pretty good.
On the right side is the outlook that Mike Neill covered in June. You can see we expect more of the same that we saw in Q2 for the second half. We'll continue to have revenue down as we're ahead of our shrinkage on the Any plan. Margins are good, losses and expenses are good and the pretax and the earnings are definitely better. So if you want to do it by business, if you look at the bottom right, the earnings outlook for the second quarter versus second half of twenty ten versus what we had in 2,009.
And overall, everything in GE Capital feels like it's getting better, and that's good news. Next, I'll move to Industrial. I'm going to start with NBCUniversal. Jeff Zucker and the team delivered a strong performance in the quarter. Revenues at $3,700,000,000 were up 5%.
Segment profit of $607,000,000 was up 13%. It's really a straightforward quarter. We had continued leadership by our cable properties. Cable revenue of $1,200,000,000 was up 7%. Segment profit was up 10%, again led by entertainment, but continued strength at USA and Bravo and Oxygen.
A good performance at CNBC, profit was up 9%. In broadcast, we had a pretty good quarter. Revenues of $1,400,000,000 were up 1% and segment profit was up 6%. We saw continued strength in the ad markets. The scatter was up over 20% in the Q2.
The local stations market continues to be very strong. In the Q2, local stations were up 25% after being up 15% in the Q1. Now the ratings are down in the summer for all the networks, but we are off to a pretty good start. We've got the number one show with America's Got Talent. The development that we've invested in was well received and probably one of the biggest highlights in the quarter was the upfront.
In total, NBCU was up about 18% in dollars booked, about half of that was from higher sellout and about half of that was better pricing. And Leno returned, as you know, and he's maintained a 23% margin over the alternatives in the demo. So that feels pretty good. Film and Parks also had a positive quarter. Revenue was up 6%.
Segment profit was up over $40,000,000 The Film business had a better performance at the box office with Get Them TO the Greek and we had a fantastic start to our automated film Despicable Me at the start of the Q3. And the parks had single digit increases in both attendance and per cap fee spending. Segment profit was down slightly in the quarter from our marketing spend for the opening of Harry Potter World in Orlando and the King Kong 3603d in Hollywood and both of those are off to a fantastic starts. The regulatory review is progressing as expected. We were happy to receive EU approval this week for the Comcast NBCU joint venture.
And Hulu and NBC continue to have CNBC dotcom continued to have very strong growth in the quarter. So overall, pretty solid quarter for NBCUniversal. Next is Technology Infrastructure. John Rice and the team delivered a second quarter in line with our expectations, given their environment, which was challenging. Revenues of $9,000,000,000 were down 6%, segment profit of 1 thing was down 11%.
And if you go business by business, I'll start with Aviation. 2nd quarter orders of $3,900,000,000 were down 6% year over year. We continue to have major equipment orders down. We had $1,600,000,000 of major equipment orders that was down about 8%. We had $920,000,000 of commercial engine orders, dollars 200,000,000 of military orders.
Military orders were down about 13%. The backlog ended the quarter at $19,200,000,000 which is down about 3% from the quarter. Service orders were down 5%. Commercial spare parts orders were $20,300,000 per day which was reported down 7%. But if you adjust for the 2,009 ABL order, that'd be down about 2%.
Revenues of $4,300,000,000 were down 8%, reflecting the impact of the lower new engine shipments, we were down about 4% and lower spare parts sales, which was down about 11%, principally from fewer overhauls. Had about 80 fewer overhauls during the quarter. We've seen airlines defer overhauls and we also saw a decrease in the scope of overhauls and repairs that came through our shops, driven by the airlines preserving cash. We had some impact, I think a little bit of a delay because of the ash impact in Europe in the beginning of the quarter. Overall, segment profit of $8.79 was down about 5%, primarily driven by the lower volume on engines and services, as I said, partially offset by the gain that I covered on the quarterly items page.
And we also had a positive value gap in the quarter, price positive with deflation. So if you normalize the op profit for Aviation, I think for the first half, we've had deals in this year and deals that didn't repeat from last year. If you normalize the op profit, excluding the deal transactions in both years, Aviation op profit will be down about 10% driven by the volume pressure in overhauls and lower commercial unit shipments. Healthcare had another strong quarter. It's a nice turnaround here.
Orders of $4,300,000,000 were up 6%, equipment orders were up 9%, but it saw a pretty strong market. Global diagnostic imaging orders were up 13% with broad participation. The U. S. Was up 5%, China was up 38%, India was up 77%, the Asia Pacific region, including Japan, was up 21%.
MR was very strong with orders up 27% driven by our new Optima 1.5T wide board product, which was well received in the market. Service orders were up 2%. And in the quarter, revenue of $4,100,000,000 was up 3%, driven by equipment up 6% and flat services. And the segment profit of $6.61 was up 12% driven by the higher volume and the benefits from last year's restructuring. Transportation continues to be impacted by just a tough operating environment.
Although there are some signs of improvement for the future. The first one that we talked about were the orders of $1,200,000,000 in the quarter. They're up 84%. We had $660,000,000 of equipment orders, which is up 400%, including a 200 unit North American order, so that's a positive sign. We also saw some strength in the off highway vehicle orders.
We had $114,000,000 of orders in the quarter which were up 150%. For operations, revenues of $700,000,000 in the quarter were down 34%. There's really two factors. So we had 30% fewer locomotive shipments at 80 locomotives this quarter versus 119 last year in the quarter. And we had 37% lower services, reflecting the impact of the park locomotives that we've talked about.
So segment profit of $26,000,000 was driven by the lower volume in equipment and services. Another positive here I'd say is that the customer operating environment is continuing to improve. Q2 volume was up 18% for the railroads. Park locomotives, which are still a drag in services, have improved though. They went from $4,000 to $3,000 in the quarter and that should begin to help our service business going forward.
Next is energy. John Krennicki and the energy team delivered another solid quarter. Despite the lower volume, our revenues of $9,500,000,000 were down 9%, but we had good operating leverage with segment profit of $1,900,000,000 up 3%. And both Energy and Oil and Gas had similar quarterly profiles as you see on the bottom left. If you look at Energy, orders of $8,000,000,000 were up 8% in the quarter.
Equipment orders of $3,700,000,000 were up 19%. This is just a great quarter on orders here. We had thermal orders of $1,700,000,000 that's up 45%. In the Q1, we talked about the Iraq order that was going to happen in the 2nd quarter. It did happen.
That was for 25 gas turbines. And overall, we had orders for 42 gas turbines versus 25 last year. Thermal orders price was down 1%. Wind orders is $600,000,000 We're up 7%. So positive wind orders are good.
We had orders for 2.48 wind turbines up from up 32 from last year and the wind orders price was down about 8. We had mixed orders in the rest of the business. Aero equipment orders of $150,000,000 were down 40%, but yenbacher equipment orders of 100 and $80,000,000 were up 93%. So you're seeing a mix around the world. Service orders were flat at $4,300,000,000 and energy services of $3,200,000,000 were up 6% including over $200,000,000 of smart grid orders, which was up 50%.
The one drag here is nuclear service orders, about $400,000,000 of orders in the quarter, but they're down about 25%. Those refuel reloads have been lumpy, as I've said in the past. In the quarter, on operations, revenue of $8,000,000,000 was down 8%, driven by the equipment being down 16% and services up 5%. We shipped 31 gas turbines versus 42 last year in the Q2 and we shipped 5 11 wind turbines versus 680 last year in the Q2. Segment profit of $1,700,000,000 was up 3% as higher pricing and direct material deflation more than offset the impact of that lower volume.
On oil and gas, Claudia Santiago and the oil and gas team also delivered another solid performance. They're seeing a pretty strong market. Orders of $2,000,000,000 were up 10%. They're up 14% ex FX driven by strong growth in equipment, which was up 20%. Services were down 3%, but they were up 1% ex FX.
Equipment's up driven by a pickup in investment in the downstream market. We haven't seen this in a while. Refiners and petrochemical plants had really invested less during the oil price pullback in 2,007 to 2,009 and we're seeing a lot of increasing activity as oil prices have picked up. We saw particular strength in Kuwait and Colombia and we saw 2 times the number of smaller projects globally. Drilling and production was also up broadly.
We saw particular strength in drill stacks for use in offshore drilling ships slated for the Brazilian market. We had an order for a couple of ships and we expect another 25 to 30 ships to be built over the next 2 to 3 years. And we also received another great order in the quarter for the Gorgon Australian LNG project. It was about $225,000,000 Service orders organically up 1%, driven mostly by lower orders for upgrades and parks in the downstream market, but the backlog in services is up 11% year over year. And in the quarter in terms of operations, revenues of $1,800,000,000 were down 9%, driven by the lower reactor sales for refineries, but that was partially offset by the strong growth in drilling and production equipment revenues and service revenues were down 6% driven by the lower spare parts for refineries.
Segment profit at $292,000,000 that was up 3% as our direct material deflation more than offset the lower volume. The final business page is on Home and Business Solutions. Charlene Begley and the team had another strong quarter. Look at revenues of $2,200,000,000 they were up 4% and great segment profit of $143,000,000 was up 59%. Appliance orders were flat.
We saw 4% growth in the retail market, but that was offset by the contract channel, which was down about 9% given the weak multifamily market that's out there. Lighting orders were very strong, up 12% driven by the growth in energy efficient products. And we continue to invest in building Energy Star qualifying appliances in the U. S. And we received $48,000,000 of E Star credits in the quarter.
That shows up in net income, not in the segment profit. Segment profit growth was driven by the benefits from the restructuring and we also had positive deflation, which more than offset price declines. So overall, another solid quarter in HMBS. I'm going to wrap up with a chart on Europe. Basically, over the last 2 months, we've filled a lot of investor questions on Europe and tried to summarize them on the page.
Will G Capital losses increase if there's more economic turmoil in Europe? We do have a substantial business in Europe. Our businesses are profitable. They're performing well. The net income was $183,000,000 in the quarter on all our capital assets in Europe, up 79% from the Q1.
80% of our assets are secured, so it's a majority commercial finance type business or mortgages. And the losses were down over 50% from last year and they were down 20% from the Q1. We hold less than $300,000,000 of sovereign debt. We don't think that's going to have an impact on us. The second question that we got a lot, will currency translation negatively impact earnings?
We've got a pretty global manufacturing base as we've talked about. It gives us a significant natural hedge. Foreign exchange hasn't been a big variable for us in the past. It's been less than $0.0125 In Q2, we had less than $50,000,000 impact from FX. It's actually positive.
We will be impacted by the euro as you translate the GE Capital assets and equity, but even with that, you saw our capital ratios improved. A couple of macro questions. Could the austerity program slow the growth in Europe? Does a lower euro help European competitors? I think we'll have to see.
We have 14% of our industrial revenue in Europe, and we've already been basically dealing with a slow growth Europe. And we'll have to see what competitors do with the pricing. But as fast as we're worried about the dollar going to 1 to 1, now we're worried about it going the other way. So I think the global nature of the company and the broad manufacturing base we have helps us to kind of weather these short term volatility periods. And based on what we see today, I don't think European volatility should have a material impact on our earnings.
Now Jeff and I were in Europe the week before last. We covered 7 countries. We met with many customers and government officials, bankers and employees. So Jeff, maybe you could make a few comments on Europe before we go into the end here.
No, Keith. As Keith said, we had a lot of chance to talk to people. I'd say while governments are adjusting, the companies and partners that we work with across Europe are all continuing to invest. A lot of them have export franchises. And so there just seems to be a little bit of a disconnect between what has to happen broadly from a macro standpoint and where the individual companies are that we are working with.
So as Keith said, we just don't see a big systemic issue coming out of Europe given
the world we see today. It seems to be a real commitment to the European Union, a commitment to the euro, the austerity programs that people put in place seem to be calming people down. Yes. And I think I could show it. Yes.
Good.
So I'm going to end just with 3 charts that I used at a May Investor Conference EPG. The first is on 2010. 10. We really don't change this. It's similar to before.
I'd say our Industrial business is as expected. NBCU is strengthening. GE Capital is quite good and trending better. Healthcare looks pretty good. The FX is negligible.
And we expect to do more restructuring in the second half of the year to kind of invest in the company so that we improve the long term profitability of GE. And we've always expected to do that in 2010. So I'd say a framework just similar to before, and the signs we've talked about are reasonably strong right now. The next page is another one that we went over with investors and we use this chart again at the EPG. And in a no guidance world, we were just trying to say what are some of the pluses and minuses as we look out over the next few years.
I really don't see any changes for this as we sit here today. There's lots of positive catalysts, lots of new products, global growth, GE Capital is clearly going to be better, the strength of our service business. And the company is always managing through a number of factors, product launches, regulation, pension expense, things like that. So we have positives and negatives. But as I weave through that, we're still positioned for attractive earnings growth in 2011 given with these same set of challenges and opportunities as we look out.
And finally, again, I showed this chart about a month or so ago, and we really don't have a change in that. We're not giving guidance, but we still expect an attractive financial profile with a lot of cash. And if you think about value creation, the 4 things we talked about at my last investor meeting and what we saw in the second quarter, we said that a reposition GE Capital will have significant profit growth and competitive advantage. I think the second quarter shows that the GE Capital business model is intact. And I actually think when you look out in the future for GE Capital, we're competitively advantaged versus lots of other players out there, and we feel like this advantage is going to benefit investors as we look towards the second half of this year and into 'eleven.
Growing in our infrastructure business, we had good orders. We're investing a lot in R and D. We've got a big global footprint. So we continue to invest in that long cycle strength. Building expertise and value around process excellence, our margins are good.
Our cash flow from operating activities are good. Our risk management has held strong. So I think investors should feel good about that. And capital allocation opportunities to create long term shareholder value, I think as more things come into focus on GE Capital returning to earnings growth, financial regulatory reform. This just gives us tremendous flexibility from a cash standpoint in terms of where we invest and how we grow.
So with that, Trevor, I'll turn it back to you and we'll take some questions.
Thanks, Jeff, and thanks, Keith. Noelle, I think we're ready
to jump into questions right now.
Thank Your first question comes from the line of Jeffrey Sprague with Vertical Partners.
Good morning, everyone.
Hey, Jeff. Jeff,
you perhaps created a little bit of a brouhaha perhaps unintentionally and things got maybe a little blown out in the press a couple of weeks ago with your comments on China. But I'm wondering if you could give us just a little bit of additional perspective on perhaps how you see the market transitioning. I mean, clearly, there's probably an intensifying competitive dynamic starting to take form as the market's not all just about Western companies tapping the demand there, but maybe the growth and ultimate resurgence of some of these Chinese companies. Just give us some thoughts on how you navigate that landscape and any thoughts on maybe how you might change how you approach business, kind of the JV structure or other dynamics?
Jeff, I'm going to limit the dinners I have in Italy from now on. I can tell you that much. But the I showed a chart at EPG on China, which I think really reflects our perspective, which is it's an extremely big and strategic market. We've got a big footprint of about $6,000,000,000 and we plan to grow at double digits that our strategy will be multifaceted. We'll have businesses that will completely grow in a significant way like Health Care.
We'll have Health Care and Aviation. We'll have opportunities to do joint ventures with state owned enterprises like the one we introduced this week with Avionics, with AVIC, which I think gives us a chance to leapfrog some of our competitors. And there's going to be places where we have competitors there in the energy business and the rail business. But when you add them all up, I still view China as an immensely strategic market for GE, one that we're doing well in, one that we'll continue to grow in and one where we'll have strategic opportunities from a cost and a business model standpoint as we look forward in the future.
And then just for well, actually maybe for Keith, but for either. There was a mention on supply constraints in one of the businesses, I think, healthcare. Is that actually impacting revenues in any of your businesses? And what impact does it have on the organization overall?
Joe, I'll start, and Keith, you can amplify it. But anybody in the electronic supply chain has seen a tightness around certain components. Healthcare for us is the biggest consumer of electronics. And as you can see the difference between orders in the last two quarters, really 3 quarters in revenue, we're building a lot of backlog. All of us are getting better on the supply chain.
And I think particularly in Healthcare, that just makes it should give us a little bit of juice for the second half of the year is the way I'd look at it. And that's really, I think, other than Healthcare, Keith, when
I look at it I think it's the only place we've really seen it and we've seen it for a while. I think you were talking about around $50,000,000 of revenue that be hung up at the end of the quarter in the supply chain. But the teams have been working it for a couple of quarters. I think they're really working through it and it's not going to have an impact on us.
And just one final one, if I could squeeze one more in. You mentioned energy price being positive in revenues, but I think we've had a couple of quarters here now where price and orders has been negative. And I'm just wondering if there's a kind of a visible inflection out there where you're really booking negative price through the energy business?
I think if you look at the total in Energy, it's down a little bit, Thermal down 1%. Wind on not a huge number of turbines was down 8%. I think you're going to probably continue to see price pressure in the wind area. I think you're going to see pressure in the renewables area in total. But I think the thermal business is a little more stable.
I mean, we aren't really dealing with huge volumes of growth or huge declines in volumes. It's kind of about stable at the 110, 115 kind of gas turbines a year level. And
what I would say, Jeff, is that this team is generating about 4% deflation this year, the sourcing team. So we've got I actually expect the value gap for energy to be okay as you look forward in the future. Great.
Thank you very much.
Your
next question comes from the line of Julian Mitchell from Credit Suisse.
Yes, thanks. I had two questions, please. The first one on Healthcare. Obviously, that's a business where you had kind of 3 consecutive years of falling earnings. You've had decent earnings growth in the first half so far.
Could you maybe give an update on the restructuring in Healthcare and also on the pricing? And then secondly, within the Energy business, just what you're seeing in terms of large tendering activity at the major utilities globally in terms of thermal as well as wind equipment? Obviously, large thermal orders have been fairly dormant for 2 years now. How quickly do you think those might pick up?
Why don't I take a crack and then Keith, you can fill in. Look, I think Health Care, we had a tough couple of years, so all of us are a little bit hesitant to be super bullish. I think there's a couple of things I like about the business right now. One is a lot of the regulatory impact is now known and being reflected. So I think that's good.
There's strong pent up demand among our customers for technology. Our product line is very strong right now in Healthcare. So I see good interest from top to bottom. Our emerging market growth is very strong. Our China and India businesses all grew in excess of 25% in the quarter.
And the team's doing a good job in execution, margin rates, working capital, things like that. So I see some positives as we look at Healthcare going forward that I don't think are just one time type items. I think they're just strong fundamental underlying dynamics as well as us doing okay in the business. In Energy, most of the activity in the Q2 of orders came outside the United States, a lot in the Middle East and Latin America and Asia. And so I think it's other than the Middle East, they're not super huge tenders, but they're a couple of gas turbines at a time.
And we've got a big sales force that can accommodate that. And I think the U. S. Has been still sluggish, no worse than it was last year, but no better. And but the interest outside the United States is pretty good, and we see pretty good funnels there.
And that's true our 3 big win markets are probably going to be Brazil, Canada, Turkey, places like that. So I keep that's my view. I don't know.
Sure, I agree. I think the healthcare restructuring that we did last year, we probably spent $150,000,000 to $200,000,000 in projects that are less than 2 year paybacks. And I think the team is doing a great job of executing. And now they're really focused on growing distribution to be able to take advantage of the growth in the developing world. I think we're continuing to do a little bit of restructuring to help them to combine the diagnostic imaging with the rest of the product line.
So we got a cleaner streamline structure globally. But the team's delivering. I think you see it in the order rates with new products, you see it in the profitability growth and you see it in the margin rates.
Great. Thanks.
Your next question comes from the line of Michael Koh from Deutsche Bank.
Good morning.
I hope it's Nigel still, isn't it?
It certainly is. I'm changing my name here. So
Keith, you gave a good
bit of color on the Fed oversight. So what you expect in terms of the regulatory part of the next 12 months or so? What kind of framework are you managing towards as this policy develops? And maybe specifically, what kind of Tier 1 ratio and leverage ratios are you managing towards?
Well, I think what we're seeing today is what we know so far. If you look at an 8% Tier 1 ratio and you go back to what the large financial institutions in the U. S. Had to do as part of the stress test and to be able to repay TARP, we feel like that's a very strong level of capital. And if you look at what might have to happen in the future from the new regulatory reform bill or from activity like Basel III, which we think is going to be pushed out and maybe be changed a little bit to the benefit of the large financial institutions.
Anything that we can foresee here, we'll be able to deal with based on the fact that we continue to shrink the book. When you get down to $440,000,000,000 of ending that investment, we aren't anticipating a dividend out of GE Capital in 2011. We do think that we'll pay a normal dividend somewhere around 45 percent of their earnings in 2012. But when you get down to those levels of capital, somewhere out in 2013 2014, I mean, we should have excess capital in our Financial Services business. And whether we need it for some really different regulatory level or we can use it to reinvest back in the rest of the company, I think is yet to be seen.
But the outlook for us based on the performance of the business, the shrinkage that we're doing, we're shrinking in very high leverage products. The mortgage business, high leverage and as that shrinks, that gives us an awful lot of capital flexibility. So I feel like we're trying to be thoughtful about it and cautious about it. Obviously, the rules are not written. There's no prescriptive number.
But for the risks that we take in our business, we feel like we're very strongly capitalized and that whatever is going to come at us, we'll be able to deal with on our own. And we do believe we'll have capital flexibility out later this in the next couple of years.
I think you said in the past, you're driving towards a 10% Tier 1. Is that still the target?
We haven't given a number like that, Nigel. I think we want to be well capitalized in the regulatory world and we plan to be that.
Okay, fair enough. Couple of quick ones before I hand it over. First of all, I mean, just following on
to Jeff's
question, 20% -plus ENGIE margins is pretty spectacular. You talked about some pricing and pressure in the backlog. I mean, I think Jeff mentioned that the body gap remains okay. How do we think about the ENGIE margins as that deflation stuff come through the revenues?
So what I would say, Nigel, is that the pricing on new engines is still positive, and we expect that to continue. One of the things that I've talked about in the past is less has less to do with value gap and margins and more to do just with funding of growth and funding strategic funding of the Aviation business going forward. My Mostly
on Energy right now, but
What's that, Keith? He's asking about how
do we feel about Energy going forward.
Oh, you're talking about Energy, Nigel?
Yes. The Energy Martins in particular.
I thought you said Aviation. So I don't know, Keith. Yes. I think if you look at the Energy business for us, we're going to basically be dealing with low equipment growth, as we said. You saw the equipment revenues are down somewhere around 8%.
And the offset to that is the service revenue. And I think the equipment service dynamic in the Energy business is going to play out just like it is in some other long cycle places. And overall, we're going to be able to have pretty good margins here. 70% of our margins came out of the service business in the second quarter and through the first half. And we built a pretty good installed base.
We got a lot of units that haven't gone through the major overhaul on the gas turbine turbine fleet. I think the one place you watch is renewables. I think you're just going to have to watch the wind market, but I think the gas turbines market is going to be relatively flat, not very bubbly or dynamic for us. And the service business is what we're going to have to drive growth in. And we're investing a lot in adjacencies.
You look at investments in smart grid and investments in everything around energy efficiency. We feel pretty good about some of the growth opportunities there.
And we're seeing good solid deflation as well. Deflation as you mentioned, yes. And I don't see that slowing down.
And just a quick follow on there, Keith. You mentioned a lot of the installed fleet still hasn't had their major overhauls. I mean, when do you expect that inflection point to come through?
We need better energy demand, that's for sure. I think Jeff mentioned it. We dealt with energy demand declines last year for the first time in a long, long time. And I think we need better utilization. And you saw that the summer, the hot summers helped quite a bit.
Low gas prices helped. But at the end of the day, we need some global growth. And I don't have a specific time frame for you, Nigel, on that. But I think you know that we've got a lot of it under contract. We've got a huge CSA portfolio we will benefit continued benefit from the services growth in the energy space.
Great. Thanks very much. Yes.
Your next question comes from the line of Terry Darling from Goldman Sachs.
Thanks. Good morning. Wanted to talk a little bit about some of the items on the Mosaic slide. In terms of the 11 items, you've talked about in the following chart, the plus up for earnings in 2011 or 2 pluses as it were. Bill, clearly, it looks like you've got good momentum in GE Capital heading into 2011.
I'm just trying to think about how all the pluses and the minuses on the industrial side add up as you think about it And whether we could see industrial earnings down in 11% offset by that strength in capital to get to the overall up or how you're looking at that right now?
So, Terry, I think we don't give guidance on 11% and we haven't done operating plans and stuff like that. Maybe the easiest thing for me to do is just kind of take you down step by step and give you a sense of each one of the businesses. I think if you take a look at Energy, I think what Keith said just a second ago was probably the most uncertainty is about the wind profile and where that goes. On the plus side, I think we should see some decent orders growth. We've got a good product pipeline, not just in gas turbines, but in places like Distributed Energy, Jernbacher, things like that.
And the adjacencies orders have started to pick up. So we should see some decent momentum and tailwind out of those activities. Oil and Gas is everybody's kind of watching what's going on in the Gulf. In the meantime, our orders are quite strong and our backlog is very good. We think there's still potential for our oil and gas business to get even stronger as we go through the year with a very strong profile.
Aviation revenue passenger miles are growing. Services, we expect, will strengthen as we get into next year. We've got big share positions across the board. I think we will spend really, if you look at this period of time, I'd say over the last 25 years, we've built a very strong leadership position in Commercial Aviation. In the next few years, there's going to be investments, not just in the GNX, but in narrow body business jets, a whole profile and skyline of new technologies.
These generate the earnings stream as you look out over the next 25 years. There's probably new planes being built that will be $500,000,000,000 of profit over the next coming years. So we're going to invest more in R and D and product spend over the next couple of years, anywhere from a couple of $100,000,000 to as much as $400,000,000 or $500,000,000 as we look at the next few years. But that's envisioned in the 11 framework that we give. Healthcare, I think, is more good than bad.
Healthcare has got we worry a lot about government budgets and things like that, but reform is better understood. You've got an older installed base. You've got good procedure growth. You've got emerging market growth. As Keith said earlier, we think transportation has hit a low point and the backlog is strong.
You're going to get some juice out of this business just based on the recovery that you see going on out there. Home and Business Solutions, retail is a little bit better, contract is still soft. We've done a good job on cost and margins in this business. We ought to continue to see decent growth. And then we expect pension headwind to be out there in the future, but that's offset by whatever restructuring we do this year and things like that.
So, Terry, when I put it all together, there's a lot of tailwind, but there's some specific things that we're going to manage our way through as we get through 11. But none of those really change kind of the way I feel about the company going forward.
Okay. And then, Keith, maybe follow-up with you on kind of where we are with the net of restructuring expense and restructuring savings. It sounds like your first half of the year here or at least certainly in the second quarter you got some benefits on a net basis. It sounds like in the second half restructuring expense goes up maybe offset by lower industrial tax rate. Is that the way to think about that?
I think there's a couple of factors for the second half that you'd have to think about. I think there are some potential tax settlements. We would not anticipate they would fall through. If you look at the strength in G Capital, I think that the G Capital team is going to continue to look at opportunities to make sure they continue to improve their earnings profile as we go forward. I don't have a specific cents per share in mind here, but we do have some projects that we're working on that we think can continue to lower the cost structure.
I think if you look at the benefits from the restructuring that we've done, they're really coming through. You can see them in margins, you can see them in our variable margins and you can see them in our base cost productivity this year. So I hope that we can do some more restructuring in the second half and the teams are loading up some projects that we think will lower our cost structure and improve the profitability as we go forward.
So Keith for the year, is it expense is pretty similar to the savings or are you net debt
The expense will be less than
the savings from the the last couple of years we did so much restructuring there. We did several $1,000,000,000 after tax We're not going to approach that level this year.
And then next year, the scope, assuming the world doesn't fall apart on us again, would be continued savings in excess of expense?
Yes, it would. Okay, great. Thanks very much. Yes. Thanks.
Your next question comes from the line of Steven Whittaker from Sanford Bernstein.
Good morning. Hey, Steven.
Jeff, can we just start off with capital allocation? Could you just give us a sense of prioritization across dividends, repurchases and M and A in terms of how your thinking has continued to evolve with changing world events?
I think
the first thing I'd say, Stephen, is that we really have, in many ways, we've executed extremely strongly on the balance sheet and cash availability. I mean, I think the numbers we show you today are all at or above their kind of the baseline and we still have the NBCU transaction and stuff like that out there. So with that as now said, I'll just kind of track through. I think when you think about the dividend, I think it's important for the Board and me as we see capital losses have peaked, pretax earnings accelerating, the regulatory capital standards clarified. I think it gives us confidence as we go through that on the dividend and that's more or less these things were all kind of falling in place.
And so we wanted to be safe, but we also want to be investor friendly when we think about that. And these are things the Board and I will talk through. I think as you get past that, you think about buybacks and then I think it depends on alternatives. If we get good complementary acquisitions are available at the right value, we'd look to deploy our capital there. But if our stock were valued similar to where it is today, then doing a buyback is something that's a good alternative.
And so I think the dividend is easier to focus in on. And then buyback versus acquisitions just really all depends on returns and availability and things like that. And we've got look, when we look at our financial profile, we think that's from underlying operations and the financial flexibility is just the way to make the company even stronger. So that's how I would view the pluses and minuses on capital allocation.
Right. And clearly, there's been some price moves within oil and gas and other sectors that have you have talked about as kind of priority areas over time, right?
Look, we still think the company is going to do M and A in infrastructure, in the right size range, and we have the cash available to do that. Look, I think having just think about it. You've got something like $60,000,000,000 of cash in GE Capital. You're going to have by the end of the year $25,000,000,000 of cash at the parent. We've seen GE Capital really strengthen.
Pretax is growing. Losses seem to have peaked. Keith talked about the fact that essentially we think that GE Capital is going to be able to shrink and grow earnings into whatever capital structure it needs to have. So that gives us tremendous freedom. The income maintenance agreement, look, we'll see what the second half says, but if you just took the first half and multiply it by 2, there's no income maintenance agreement that GE Capital is needed.
But we'll see how that all goes as time goes on. I just think it ought to give investors a heck of a lot of confidence in the capital allocation options available to the leadership
of the company. Okay. And you mentioned cash flow. Just Keith, maybe I
so I get a better
Okay. And you mentioned cash flow. Just Keith, maybe so I get a better idea. On the industrial cash flow on operating assets was down 10%. I know you talked about progress collections again being offset by working capital improvement.
But even relative to revenue, are there any other negatives that are going on there that we should be aware of?
The only dynamic I have is that the progress is down and we've offset that with receivables and inventory and accounts payables. I don't know where In
CapEx. Okay.
All
right. And then I guess on the organic growth number, could you just give us last quarter was down 6%. What was it this quarter for industrial?
Yes. Organic revenue for industrial was down 4%.
Okay. Great. And then the final thing is on the orders front, they were up 17%, but if you depending on how you treated the Iraqi order, obviously, it might be, I guess, 3% if you've thought about that being Q1 versus Q2 or somewhere in between. Again, the progression of orders within the quarter, was that rising or falling across the infrastructure businesses?
I think better. I think if you look at energy, even ex Iraq positive, you look at oil and gas, very positive on equipment, you look at healthcare positive, you look at transportation, some big orders. I think aviation is down. The reality is that airframers are pretty full through 11 and 12. Now we do have some encouraging signs.
You saw that Boeing has said that they're going to increase the 777 from 5 to 7 a month in mid-eleven. Eventually, that's going to impact us on orders on equipment. Airbus is going to take the A320 from 34 to 36 at the end of this year. Boeing is going to take the 737 from 31.5 to 35 a month in 2012. I mean, those will start to flow through in equipment orders again, but we had such a big backlog.
That's the one that I think just a little slow and will stay there a little bit. But the others, I think, are encouraging. It's a lumpy long cycle orders are lumpy, but it's encouraging.
I think, Stephen, you said it right. I think looking at the timing of Iraq and stripping that out, thinking about orders going forward in the single digit ish type range is the right way to think about it.
Okay, great. Thanks guys. I appreciate it. Thanks, Stephen.
Your next question comes from the line of Bob Cornell from Barclays Capital.
Hey, guys. You've covered a lot of ground. The corporate expense is a little less than I would have thought in my model. You talked about restructuring ramping up in the second half. Can you give us a guide for what corporate expense is likely to be for the full year and how that might trend over the balance of the year?
I can tell you what it is in the quarter. I think in the quarter, we're down a couple of 100,000,000 Bob. You go from $500,000,000 of cost to $300,000,000 if you see that on the income statement schedule that we put out, the segment schedule. Basically, that's lower restructuring, partially offset by higher pension. And then we had the gain that I mentioned in environmental, gave you a little bit of a decline there.
I think if you normalize that, the pension continues at the normal level, the higher level, it's on track to be $1,000,000,000 pretax higher ex restructuring for the year. We'll have to see on restructuring. I think restructuring is the flexibility we have in the second quarter in the second half. In the second quarter, there's about $0.01 after tax that be higher as we go into the second half of the year in the corporate line. And I don't anticipate anything like another environmental settlement.
This was a long old case that just settled in the Q2. So I don't think you'll get that credit benefit in the corporate expenses. So I think you'll probably back up closer to the $500,000,000 level on a more normalized run rate.
Well, we had flat for the year. Is that too high a corporate expense number for this year based on what you see now?
I don't know how to compare to your model, Bob. I think I'll ask Trevor to take a look at it with you.
Cool. The other question is, it sounds like in tech that the service numbers were all a little bit lighter than you would have thought. I mean, can you just comment there a little bit quickly?
Sure. The place that we're seeing an impact obviously is in Aviation. It is a little lighter than we thought. The number of overhauls in the quarter was 279 that was down basically 80 overhauls from last year and it's driven by CFM. We're seeing a lot of airlines that are under cost pressure.
They're pushing out service, doing bare minimum of service. I think we had some impact from the lower flying hours in April from the volcano. But now you're seeing growth in revenue passenger miles, you're seeing growth in freight passenger miles. It seems like there's a 3 month lag between the revenue passenger miles rolling into kind of more overall activity and maybe as much as 6 month lag between the freight passenger miles growing at overall activity. But with both of those very positive in the first half, that should be better.
Sequentially, we're looking at overhauls of about 330 in the Q3. That should be up about 10%. But it's still that's sequentially up, but it's still down versus last year about 6%. So I think the good news is in front of us, but I think it's just going to be a little slow to materialize and on a comparison to last year, it's still a little tough.
Okay. Thanks. If you press for time, I'll pass it to Don. Thanks.
Thank you, Bob.
Your next question comes from the line of Chris Glynn from Oppenheimer.
Thanks. Just digging into the orders a little bit to comment on single digit growth in the second half. It's kind of interesting with the tough 4th quarter comp. Just wondering what's driving that strength in particular in the verticals?
I would say there's always a 4th quarter ramp in businesses like healthcare and energy and stuff like that, Chris. So I think when we look at our funnels across the businesses and you think about businesses like transportation that are coming off a very low base, that's really what we base it on. So again, like I said, it's difficult to forecast, it's difficult to predict. It tends to be lumpy. But when we sit down when I sit down and visit with our commercial leaders, this is kind of the roll up that I look at.
Okay. And one follow-up. Energy
through the first half, it's a little lumpy on even something like Iraq through the first half. The total energy is basically down 1. I think on a normalized basis, that's probably better instead of worrying about the lumpiness of Iraq. Is it in or is it out? That's a pretty to get to flat and maybe up slightly in the second half is something the teams are working on.
Okay. And then just on NBCU, I think if we back up the impairment last year, Profits were actually down a little bit. Is everything going all right there with the margins and any restructuring benefits? I was
a little surprised by that.
I don't have anything that we're comparing to last year that gave them a positive V here. I think they had very few other income items in the quarter transactions this year or last year. Whatever they had was the same as last year in my analysis, Chris.
Okay. I must have misplaced something.
The Q3 quarter, they did have a gain from the A and E. Got it. Thanks. Your
next question comes from the line of Steve Tusa from
JPMorgan. Hi, good morning. Hey, Steve. So GE Capital revenues were basically flat, but the assets were down dramatically. You guys are really had a plan there, doing well on the cash conversion.
And you talked about your contributed value margin being 5.3% versus 5%. Where does that contributed value margin get better? Or are you starting to already see degradation there? How does the second half look? Because I know your guidance for the year is 5% on margin.
And just a follow on to that is, was there anything in the quarter in GE Capital revenues that was kind of unusual that needs to be stripped out?
I don't have a lot in GE Capital that needs to be stripped out. I think the margins are better. You can see that on underwriting, the margins that we're getting on new volume is very good. We're going to be rolling off some of the lower margin volume that we did in the last 4 years. The margin contribution to growth in the 2nd quarter was substantial.
And that's not going to change dramatically as you go forward. I mean, with these high margins and the runoff and the comparisons, I think you're going to continue to get benefits from better margin in GE Capital.
So you should be able to
beat that 5% this year, it sounds like?
I have we've given you a 5% number in the quarter. It was 5.3%. It's if it stayed at that level, that would continue to be really good as we go through the year. Okay.
And then one last question. Given the kind of dramatic facelift of the portfolio in GE Capital focused on more of the core businesses as you wind down E and I, Is there reason to believe that those provisions and those reserves should be lower than historical levels kind of out in the normalized period? Or are we just in kind of a different credit environment where those metrics are stubbornly high?
Sure. I think our reserves our loss provisions are going to follow our delinquencies and non earnings. And as those delinquencies and non earnings continue to improve, our loss provisions are going to come down. Eventually, you're not going to have $9,000,000,000 of reserves. Some of it will come down the majority through write offs, but I believe that you're going to have a need for lower reserves in a normalized margin environment.
And it's pretty clear to us that we think losses have peaked If you look versus the Q4 of 'nine, we're $900,000,000 less on the credit provision. Even including margin impairments, we're $600,000,000 less on the High Point. We've got 2 quarters of improvement. I think you're just going to continue to see this book get better. Now that's subject to what happens in the world and the economy, but I think based on the outlook we see today, that's a pretty good earnings generator for the next several years.
Steve, if I can, I would add something just to what Keith said, which is about the front end of the business? We still have the best origination force in the industry. We're well positioned in the bid market franchise. In a lot of the segments that we compete in, we have far fewer competitors today than we did pre crisis. So I think not just from a loss standpoint is the scenario going to get better, but I also think from an origination standpoint, we're at a very good time for GE Capital.
Right. The pretax pre provisioning number actually improves quite a bit too. So clearly, you're getting some good headway on the margin side. One last quick question just on the GE Aviation R and D. You talked about a couple of $100,000,000 Is that a year over year increase every year?
Is that an annual an increase from 2010 that should be sustained for the next several years? I just I didn't quite understand what you were saying there.
I just again, I just think it's there's a lot of new technology that's coming in. And as I look at where we're going to go in the next few years, it's going to be in that range as a year over year basis.
Right. So a couple of $100,000,000 a year.
So I'd say a couple of $100,000,000 up to $500,000,000 per year.
So a year.
In that range.
Okay, great. Thanks a lot.
But again, guys, the way it's all about leadership and it's all about it's really all about driving technology at a moment in time when we think that's of most value.
Okay, thanks.
Your next question comes from the line of Scott Davis from Morgan Stanley.
Hi. Thanks, guys.
Good morning, Scott.
I want to just ask a couple of follow-up questions. I mean, the commercial real estate unrealized losses, pretty nice directional move. How does that is that how do you think about the model? Is that better experience in the actual properties or somewhat of a change in assumptions based on macro variables? I mean, how do you get to kind of that number?
Well, there's I think the number one thing that drives it down is we depreciated the properties we own. Number 2, the impairments we take lower the book value. So those are the 2 biggest pieces. We have not factored into any changes in future rental growth or cap rates or anything to lower that amount. That's mostly coming from our performance, from our write offs and impairments and the depreciation of the properties.
Okay. And that will continue. We depreciate
a little over $1,000,000,000 a year. And obviously, with the impairments in the quarter, dollars 500,000,000 pretax, that's a bite that is right into the unrealized loss. Sure, sure. Okay, that makes sense.
Jeff, I know you talked a bit about R and D, up 14% year over year and you're trying to stimulate new products. I mean, how do you see that growth in R and D? I mean, pretty much since you've taken the job, you've had a nice focus on R and D, but 14% is a pretty good number. I mean, when you look for 2011, 2012, kind of the out years, is there some sort of sweet spot that you hit where you don't need to kind of grow it anymore, where you have your platforms funded?
Yes, definitely, definitely, Scott. I kind of peg it at kind of between 5% and 6% of the of our industrial revenue. And we're going to have about 30% more products this year than in the past. And I think you see that with our market share in health care. And as you know, this is what sets up the service revenue and all the things that come with it.
So I always think that's a sweet spot that gives us a competitiveness position against all of our key competitors.
Sure. So basically growing with revenues from here or growing ahead of revenues?
Look, I'd say growing more or less with revenues from here. Okay.
And just to narrow down a little bit, clearly, you'll have a little bit more R and D in the Aviation side. I mean, does that mean you can take a little bit from an area that doesn't have quite the growth potential?
What I would say is we're going to look across the portfolio. I spike out Aviation because I think they're in a particular cycle. And there might be opportunities to reallocate inside the company. But we also still see good potential for Healthcare and Energy and some of our other platforms as well.
Look, it's the most valuable growth we can do is if we can invest in technology to improve our organic growth and we're committed to it. Every single one of our strategic plans that we went through this year, Scott, the number one thing is what's the R and D deck to continue to improve our competitive position. Sure. The teams are committed to it and I think it's a better place for the company to be at these levels of R and D spending.
Sure, sure. Agreed. Just to again narrow in on it. I mean one of the potential side effects you could argue on Health Imagination is it may be not as much of a focus on the arms race and the next generation of CTG is the
right thing.
But does that mean that you
could Again, when I look at Health Imagination though, the share we're gaining on the lower end in places like China and India is substantial.
But that doesn't require quite as much Exactly. Spend, right? Yes.
Okay.
Okay. And lastly, Keith, just to clarify, I mean, you've the CFOA has been fantastic and working capital has come out pretty aggressively. I mean, we're pretty close to being done with what you can do in working capital now that presumably your growth rates are bottoming out and you'll start to build backlog again?
I don't think so. We basically, as I said, we went through the strategic plan this summer. We're trying to get a goal. We have benchmarks for every one of our businesses and the goal that we would have is probably about a half a turn of working capital improvement each year to continue to offset the growth that we have in the businesses or any pressure from progress collections. And 2 years ago, we stated that as our goal, and we've been able to deliver that through the first half of all of 2,009 and the first half of twenty ten.
So we have an operating council. We meet every month. The teams are focused on improving their processes. Our working capital turnover went up in the 2nd quarter, again a couple of tenths in receivables and inventory and accounts payable. And there's more to do here in terms of using lean and being more efficient and sharing practices across the company where we have better performance.
Scott, when you look at our long term incentive plan, one of the big drivers is cumulative cash flow from operating activities. So all of the leadership team is incented to drive working capital improvement and strong CFOA. And I think this is what you see in the execution.
Okay. Sounds great. Thanks guys. Great. Thanks.
Your next question comes from the line of Jason Feldman from UBS.
Good morning. Hey, Jason. Good morning, Jason. So you've talked a couple of times now about expecting $25,000,000,000 of cash at the parent level by the end of the year. I guess I'm just kind of wondering how much you really need to keep there.
I mean at finance, you've got better capital ratios and leverage ratios than for some time, if ever. How much of a backstop do you still really need at the parent level or how much of that can you deploy?
We haven't really decided yet on this one. I would say clearly we're going to have more cash in the future than we had pre crisis. But with $25,000,000,000 we're going to have substantial flexibility to do the things we want to do to grow the company. I don't know, Keith, would you add to that? Sure.
I think we're obviously priority number 1 was to make the company safe and secure. I think we've crossed that threshold. I think you mentioned in GE Capital, we've got enough capital, we've got a lot of cash and we've got enough cash to handle any liquidity issues there. We're looking from an enterprise risk perspective at how much capital do you need at the parent for unforeseen events, for systemic risk, and it's going to be some amount, obviously, more than we used to hold. We used to hold $2,000,000,000 at the parent.
It's going to be more than that, but we haven't given a specific number. But even above whatever that threshold is, we're going to have substantial cash. We're going to be able to redeploy all the NBCU cash and a lot of our free cash flow from the business operations into capital activities that will improve the future value, as Jeff said.
Okay. And then last question is you mentioned not just today but in the past that you've got far fewer competitors in the finance business than free crisis. At least one large bank, I think another as well mentioned sharply higher originations in small business lending area. Have you seen an uptick in competition as the banks have begun to recover or any change in
the competitive environment? I'd say we really haven't in the spaces we're in. I mean, I think you got to remember about where GE Capital is. We're like deep in things like private label credit cards, mid market lending, aircraft leasing. In the places where we are, sure, we're going to have competitors.
But I think we have pretty unique scale niches, and that's it's we feel good about our dynamics. Okay. Thank you. Noelle, why
don't we take one more question? We've been going for a while here.
Thank you. Your final question comes from the line of John Inch from Merrill Lynch.
Thank you. Good morning, everyone. Hey, John. Good morning, guys. So the implication, I think, Jeff, you made the statement of the $25,000,000,000 still expected by year end in cash.
Does that imply that NBC is still on track to close by year end? And I'm assuming there's some sort of dovetailing with EU approval?
John, I hate to predict exactly when it's going to close just because we don't control it, but we don't see anything today that changes what we've said in the past. And so I we put that in as a marker. But again, remember, we don't control it. And so I want to respect the process. I understand.
The $25,000,000,000 assumes
it closes by year end, but what if it pushes out a little bit? We're still going to get that capital. We do believe this deal is going to close and there is a timing question. Right now, our teams are working very constructively with both the DOJ and the SEC. We filed all the information.
We're in active dialogue and the formal clock is in sometime in November. And so we're going to work like crazy to get that closed by year end, but that's tied to that assumption obviously, right?
And the delta is like what about an $8,000,000,000 $8,000,000,000 Okay. And then Keith, the cash impact of Lake, is it materially different than what we see in terms of the charge offs per quarter? Like was it different than the $0.02 And kind of what's the trend there?
Yes. There was no cash impact yet of Lake, but ultimately the amounts we pay above the $2,200,000,000 will be cash paid to Shinsei for the claims. It's going to be dollar for dollar reserve. Reserve amounts will be cash in Japan and these are without any tax effects. So there's dollar for dollar on the reserve increases.
Okay. That makes sense. Just last question, more of a housekeeping. On the balance sheet, I think the liabilities associated with businesses held for sale seem to go up a lot sequentially, but it didn't look like the assets of the businesses held for sale were up that much. Is there something meaningful there?
I think it was about $4,000,000,000 of change.
Sure. We completed the NBCU debt offering. If you remember in the quarter, we brought we have $6,000,000,000 of term financing that we need to do before we close the deal. We did $4,000,000,000 of that in the 2nd quarter, a very successful offering. So that's what that is.
Okay, great. Thanks, guys.
All
right. Great. Thanks, everyone, for your time and questions today. The just to close out, the replay of today's webcast will be available this afternoon. And I have a few housekeeping items to close out here.
First, we'll be distributing our quarterly supplemental data schedule for GE Capital later today. In the past, we've issued this in conjunction with our 10 Q, so we want to get the data in your hands sooner. 2nd, we have our analyst meeting at the Farm Bureau Aaron Show next week on July 20, and please visit our website for details there. 3rd, we'll be scheduling a GE Capital webcast for later this year. We've had several of our leaders, including Mike Neal, out at the sell side conferences, so we haven't done a webcast, but we'll still be doing one later this year.
So we'll send out details once that's finalized. Finally, our Q3 2010 earnings webcast will take place on Friday, October 15. And as always, Joanna and I are here to take questions and go through anything you have. Thanks, everyone.
Ladies and gentlemen, this concludes your conference. Thank you for your participation today. You may now disconnect.