General Electric Company
Q1 2007 Earnings Call Transcript

Published: 13 Apr 2007

[Operator:]

Good day, ladies and gentlemen, and welcome to the General Electric first quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the program over to your host for today's conference, Mr. Dan Janki, Vice President of Investor Communications. Sir, please proceed.

[Dan Janki:]

Thank you, Carol. I would like to welcome everyone to today's first quarter earnings call. Hopefully, you have been able to get through our press release that went out at 6

[Jeff Immelt:]

Great, Dan, thanks. Good morning, everyone. Before we get started, I wanted to make just four broad points about the company. The first one is just the broad strength of GE, led by our Infrastructure business. I think if you look at our Infrastructure business today, we are in the very early phase of, I think, a long-term secular time period where we have high visibility, broad technologies, great global positioning, increasing margins in backlog and equipment, and long-term service agreements that can span over the next 10 or 15 years. I think we are in the first inning of a nine-inning game here in Infrastructure. What you saw in this quarter, I think, is going to be very repeatable. It is broader and deeper than the way we think of the gas turbine situation in the US in the late '90s. Second, we had in the quarter a couple speed bumps. We had WMC that Mark will talk about. We had a shutdown of one of our facilities in the Healthcare business, OEC. Our goal in the first quarter was to get those behind us and to drive forward through the rest of the year. Despite those bumps, we delivered a high-quality 10% growth in earnings per share. We had segment profit growth of 13%. We had organic revenue growth of 8%. We had at least a 100 basis point expansion in return on total capital on margin rates. We had a gain that was offset by restructuring, and the tax rate was in line with expectations. I think the last point I would make is if you think about GE in 2007, we are a safe and reliable growth company that is going to deliver 10% to 12% earnings growth with high visibility, just really based on the strength of the operating model. So with that, just to look at the environment, the environment that we see today is similar to the one we saw at the beginning of the year in our December meeting. Global growth continues. We think the global markets are pretty strong. Service growth is still good. CapEx is leveling in the low single-digits. Housing continues to be a challenge. So when we think about global growth, it is more or less with puts and takes what we thought we were going to see at the beginning of the year. The macro drivers, if you will, are even more robust. Emerging markets are very strong. Infrastructure investment continues. Higher energy prices drive customer reinvestment. Our environmental programs are excellent. So we see real strength there. The margin environment is really as we expected. Material prices are high, but we factored that in. We are driving pricing in many of our long-cycle businesses. Liquidity is high. We are dealing with our competition there, but it's all within expectation. I think when you think about 2007, we are well positioned globally. Our pricing movement is ahead of inflation. We are driving productivity and margin rates. We just feel like generally the environment is in line with expectations. If you look at the key performance metrics that we talk about each quarter -- and we will go into orders in more detail -- but the orders were up 3% but we had significant backlog build, particularly in our Major Equipment segment. We had 8% organic growth, 6% revenue growth, and 22% asset growth. Earnings per share up 10% were on plan. Our return on total capital expanded 100 basis points in line with our expectations. Industrial operating profit rate expanded 130 basis points on a segment op profit basis. Our earnings quality was high. The cash flow growth was 10%. Again, we are off to a good start on cash flow for the year. The four points we frequently talk about with our long-term strategy is to first invest in leadership businesses. Like I said, Infrastructure and Commercial Finance strong, NBC rebounding. We announced some acquisitions in Commercial Finance that we think will strengthen our business, PHH and Sanyo. The redeployment that we talked about early in the year is on track. I will talk more about this later in the presentation with Vetco Gray, Abbott, Smiths, and the Plastics disposition. The execution was solid, segment profit up 13%. As I said earlier, strong operating profit and ROTC and cash flow expansion. Again, when you think about some of the headwinds we saw in Healthcare, GE Money, and Plastics, all of these things we were addressing in the first quarter and we will get behind us as we go through the year. We still expect to have an excellent year in GE Money and Healthcare. Growth as a process is working. Our organic growth rate remained strong. Service revenues were up 10%. CSAs are now at $94 billion. Developing country growth was 14%. So all the things we talked about in growth as a process really are working for us right now in this environment. Lastly, for the team, we are proud of the GE team. We won again Fortune Most Admired, so we feel like we have got a strong team. We have got strong initiatives. The economy is what we expected, and we feel really good about how the company is positioned. With that, I will turn it over to John Rice just to give you a few highlights of the Infrastructure business.

[John Rice:]

Jeff touched on the macro context. But if you look at equipment orders in backlog, we had a great quarter contributing significantly to our backlog. Orders exceeding shipments by 50%; backlog up 32% in the quarter, which as you can see for the last five quarters is a very significant pop. If you look under the covers, we saw strength really across all of our businesses. Our Energy business booked orders for 33 gas turbines in the quarter. 80% of those were international, including more units to Saudi, complementing the big order that we booked in the fourth quarter of last year. Egypt, really breadth across the board. Aeroderivative products were ordered a number of different countries. In Aviation, we saw business from Lufthansa, Emirates, Qatar, Korea. Our Oil & Gas business booked $1 billion of equipment orders, which is up 12% from the first quarter of '06. About $800 million of that was in the Middle East and Africa so again, good global growth across the board. Interestingly, we are starting to see more action in Energy in the United States in terms of inquiries. So that is manifesting itself in the aeroderivative product first, which is usually a pretty good indicator that there will be more strength coming. So all in all, the business is very strong and we had a great quarter. Now I will turn it over to Keith and he will touch on orders.

[Keith Sherin:]

John, thanks. That is a great lead-in for total orders. The headline number for the first quarter, we had total orders of $23.6 billion, up 3%. That headline number is lower than last year in terms of the growth rate. However, there's a couple things I want to point out as I take you through the numbers

[Mark Begor:]

Thanks, Keith. As Keith said, it was a very difficult quarter at WMC. As many of you recall, we bought the business a little less than three years ago. We bought it because we liked the large mortgage business here in the US, which is over $2 trillion. We have very strong mortgage businesses outside the US. It fit our focused consumer finance model to originate through brokers and it had a unique model in that we would originate the mortgages and then sell them to Wall Street. We are originating Alt-A and subprime mortgages, and that worked for many, many years for us until really the fourth quarter when the capital markets in essence shut down. The capital markets stopped buying these mortgages because of home price appreciation declines, as well as an increase in delinquencies. Our underwriting model was really to originate mortgages that would meet Wall Street specifications. Those were the kinds of loans that we originated for the time period we owned the business, and it was done before we purchased it. Going through some of the numbers, you can see our assets $4.8 billion in the fourth quarter, down to $4.5 billion in the first quarter. We curtailed production dramatically during the first quarter and started that in the fourth quarter. During fourth quarter, we originated a little over $9 billion of mortgages. In the first quarter it was about $3.4 billion. As you go through the quarter, March was only $500 million. So I will talk about how we have tightened up a lot of our guidelines and really curtailed a lot of the business activities. If you look at the numbers on the right-hand side, Keith mentioned the $373 million loss that we incurred in the first quarter. $43 million of that is really the cost structure of the business, the resources that we have with virtually no revenue. I will talk in a minute, but we are taking actions to bring that number down. The biggest hit we had was the $330 million from reserves that we had to put up on our balance sheet. That is on an after-tax basis. On a pre-tax basis, we increased our reserves a little bit over $500 million. Those are reserves on our balance sheet both for the loans, the $4.5 billion that we have, as well as for potential future repurchases that may come from investors from loans that we have sold in the past. The challenging thing for the quarter was that, because there is no market, the accounting convention requires you to go out and get a market price and mark your assets to market. Because there was no market we really had to go out and get what we would characterize as a liquidity mark, a price that we wouldn't sell at but we were required to use for the accounting side. That gives us some confidence that we have got this situation boxed going forward with the $330 million or $500 million pre-tax that we put up. We remain committed to the business. We put in a new leadership team. We started changing the leadership team really in November. We put a new CEO in, who I have known very well, is really a turnaround expert, a lot of consumer finance experience. We have got a new CFO in there who is an audit staff alum and worked closely with me personally. We have got a new risk leader that worked in our mortgage business in the UK and Mexico. So we have got a great new team in there. We fixed underwriting. We are no longer underwriting to Wall Street guidelines, we are underwriting to our guidelines. So no LTVs greater than 85; no stated income, so we have really tightened that up. We also increased price. As I said earlier, we think we have got the balance sheet risk covered. We now have $700 million of reserves on our balance sheet to protect us going forward. We are also rightsizing the organization. Keith mentioned the restructuring that we have taken. We are down 1,000 resources or about 40% of the organization since year end. We are going to be taking additional action in the second quarter. We really think we have a more focused business model going forward. When we think about how we are going to move forward, we do feel like we have a fence around the issue with the first quarter reserves. We are committed to the big market and the big business that we have. There's less competitors out there now, which we think is going to be helpful to us going forward. You have all read about that. Also as Keith mentioned some of the strength of GE Money globally really helped us cover a large portion of this WMC challenge both in my business and the Americas, where our card business and sales finance business are very strong, up strong double-digits in the first quarter. Europe in particular was also very strong. As we look forward to the second quarter, we think this'll be something like a $50 million drag for us. We think we can manage that inside of my business, GE Money Americas, and still deliver our plan of being up around 15% in the second quarter.

[Keith Sherin:]

Thanks, Mark. Next, I am going to move onto Industrial. Industrial had a quarter similar to fourth quarter. Really three points to make about the quarter

[Jeff Immelt:]

Great, Keith. Thanks. Just reviewing briefly the business development activities, remember in the last call we had at the end of the fourth quarter, it was filled with the announcements on deals. I just want to give you an update on them. First, Vetco Gray closed. As John said, they are off to a strong start in meeting their deal case already, so we feel good about that one. Smiths, we have received US regulatory approval. We are still working in a constructive way in the EU. We're targeting a second quarter close. We have had a chance to due diligence over the last couple months, and we feel like this is a very solid fit. We like the way this business looks and feel good about the future. Abbott, we have received US regulatory approval. The EU process is underway. This is a complex asset transaction. We are working very closely with Abbott in due diligence and regulatory issues. We expect to close this deal. We think it could take longer than we originally had forecast. But we like this business and continue to think it is a good fit in our Healthcare portfolio. The Plastics transaction is on track. I think great progress, lots of interest in this business. We expect the first round of bids soon. We really are targeting an announcement of a definitive agreement in the second quarter, a close in the third quarter. I'm pretty optimistic about how this process is going and the outlook for our Plastics business overall in terms of doing this disposition. So the deals are all more or less on track. We like the strategy of all of them and feel great about the positioning. So just to wrap up, a solid first quarter despite a few headwinds and really delivered, I think, good results. The Infrastructure Equipment and Service backlog just kind of ending the way I started. Again, I think we're at the very beginning of a long-term run of highly visible growth and expanding margins and returns. The Finance markets look good, both commercial and consumer finance. We think Healthcare will strengthen during the year. Our operating targets of getting 100-basis point improvement in both operating profit rates and ROTC are in sight and on track. The deals look good and are on track. We are reconfirming a 10% to 12% total year EPS growth, up to $2.18 to $2.23. So Dan, with that, let me turn it back over to you and now let's take some questions.

[Dan Janki:]

Carol, we would like to open it up now for questions. Thank you.

[Operator:]

(Operator Instructions) Your first question comes from Nicole Parent of Credit Suisse.

[Nicole Parent:]

On Healthcare, with the weaker revenues, I think in the guidance you had given us you had factored in the Deficit Reduction Act. Could you talk a little bit about why it is weaker? When we think about the forecast in that business for the full year, given the first-half issues in OEC and just the impact on the clinics, how does that change the forecast for the full year?

[Jeff Immelt:]

What I would say, Nicole, on operating profit, the way I would think about it is we missed about $50 million. I would say that the cost to remediate OEC is about half of that and the other half is the Deficit Reduction Act being a little bit worse than we thought. On the revenue side, it is pretty much contained to the clinic business. The drop as Keith said, was down about 60%. We had forecast maybe half that. We have seen that twice before, once in the early '90s, once in the late '90s, where we had reimbursement hits. Typically, the bounce-back is about six months. Procedure growth, if you look at our diagnostic pharmaceutical business, that is up 10%, so that says procedure growth is still solid. That ultimately is what drives this market. The way I would think about the year and again, I will take Abbott out of it , is that I would still expect Joe and the team to do revenues in the mid single-digits and operating profit up 15%. We have had almost no cancellations in OEC. So basically what's that means is once that business starts up again, we will do a year's worth of shipments in however many months are left in '07. Again, I think the business model is strong and the DRA is, I think, a little bit worse than what we thought. But I think the business for the year is going to do fine.

[Nicole Parent:]

Organizationally, when you think about once you're on the FDA's radar screen, it is tough to get off. How should we think about timing and are other businesses at risk in Healthcare?

[Jeff Immelt:]

Nicole, the FDA controls when you get out of a consent decree and things like that, my view is these are things we know how to do. The person who is leading this effort is somebody from the aircraft engines business who is used to the FAA. We are kind of using this as an opportunity to build a competitive advantage around the FDA. At the end of the day, I think a stricter FDA is good for us, not bad for us. It is a competitive advantage and a barrier to entry. What I would say is that we feel good about the overall positioning of GE Healthcare. We think it is going to be a core competency. The best part about OEC is we have had maybe something like $10 million of cancellations, almost nothing. So I think that franchise will remain intact.

[Nicole Parent:]

When you think about the recent attempts of companies to create value like Blackstone, American Standard, and Tyco, does that cause you to reevaluate your options with respect to the portfolio at all?

[Jeff Immelt:]

Nicole, I have always been of the mind that if somebody can run a business better than we can we will sell it. We did that with Insurance, we did it with Motors, we did it with Global Exchange, we did it with Plastics. But when I look at the portfolio today, there is great strength in the diversity of the business model and best practices that are shared across the board. I think if you look at Infrastructure, the totality of who we are in Infrastructure, from the Global Research Center to the way we approach global markets, is what drives this company. I took a trip in the last part of January. In Algeria, we will do $1.2 billion as a company. In Saudi Arabia, Dubai, and Abu Dhabi, $5 billion as a company. Pakistan, $1 billion as a company. Turkey, $1 billion as a company. That is the value that we create, and so we are not like these other guys. We play the totality of the company I think as a great strength.

[Operator:]

Your next question comes from Bob Cornell - Lehman Brothers.

[Bob Cornell:]

First of all, either Jeff or Keith, could you flesh out the comment about orders being up 15% in the upcoming second quarter? Is that all on the strength of long cycle, or are you looking at decent flow orders? Maybe you can just give us some visibility around what you see there, how that mix would break down?

[Keith Sherin:]

I think the change from the first quarter is going to be driven by Major Equipment. We expect Major Equipment, as I said, to be up 20% plus. Services should continue to be strong. Flow, I would say in the zero to 5% range, similar to what we are seeing, probably. We have to see how that comes out. So I think the big change, Bob, is that we do see some large equipment orders continuing and great growth there in John Rice's business.

[Jeff Immelt:]

We have had some big orders just in the first couple weeks of April, Bob.

[Bob Cornell:]

I'm surprised, frankly, that with the $500 million pre-tax provision that you're still looking at a $5 million drag in the second quarter. Maybe you could give us some idea of why you're still seeing a drag on the second quarter, if you took a $500 million provision in the current quarter.

[Mark Begor:]

Sure, Bob. The bulk of that, Bob, is really from the cost structure of the business. We are still expecting the capital markets to be difficult in the second quarter. Even as we take the business structure down, probably two-thirds of that $50 million will be from just running the business and having the resources that we have there, again, with virtually no revenue. We are not counting on a marketplace that is going to come back.

[Bob Cornell:]

How comfortable are you that you have got all the visibility in the blowback on the early payment of default loans that were out there in '05 and '06? Are there still loans that are potentially going to get put back? Do you have any better way of quantifying that?

[Keith Sherin:]

We spent a lot of time looking at that, as you might imagine, Bob, really starting in the fourth quarter. What we have seen is investors have put the loans back to us quicker. It used to take nine months or so for them to come back, when you go back to kind of early '06. That accelerated in the fourth quarter. We are now seeing the put-backs really at the first three-month mark. Second, as I mentioned earlier, we also put up as a part of our reserves in the first quarter reserves for potential future repurchases. So there's about $150 million of the reserves that will cover us for future loans coming back. So we think we have got a pretty good handle on it.

[Bob Cornell:]

What were the changes in the auditing standards that you put in place that will insulate yourself?

[Mark Begor:]

There's a couple things that we did. Historically there was not a time limit on those loans to come to us. In October we put a clock on, that they have to come back within 180 days. So that was one thing we did. Second is we really didn't have a rigorous enough review of those repurchases when they did come back to us. Now we have a very focused team here with ex-auditors and we're really scrutinizing those loans to make sure that they really should be coming back to us. That is also helping in our economics.

[Jeff Immelt:]

Bob, you have seen us over a long time in our financial service businesses, we are good at workouts. We are good at making lemonade out of lemons. I think that is what Mark and his team are going to do here.

[Bob Cornell:]

Mark, you have got so much experience with Wall Street, I'm surprised you are saying that you have a problem because you underwrite these loans to Wall Street guidelines. Mark, you should have known better. You know how it works on Wall Street.

[Mark Begor:]

Good point, Bob.

[Operator:]

Your next question comes from Jeffrey Sprague - Citigroup.

[Jeffrey Sprague:]

Jeff, or maybe since we have got John Rice there, Jeff, you made the comment about first inning here as it relates to Infrastructure. Then there were some comments also about pricing and margin in the backlog. I was wondering if somebody could kind of tie all of that together for us, what you see developing in the U.S. with the recent Supreme Court ruling. You've got Europe deregulating. There certainly is a lot of stuff that would seem to play to your strengths. How should we really expect this to kind of manifest itself in your orders and revenues over the intermediate term?

[John Rice:]

I think it is some of what Keith and Jeff and I talked about in terms of the breadth of activity that we see everywhere. The Supreme Court ruling certainly encourages people to think about alternative energy technologies, and we think we are very well positioned in things like coal gasification, wind obviously, solar coming, but a little further out. Nuclear is going to take a while, as you know. But frankly, that is all good news because short-term, we still see very, very good strength in our traditional gas business in Energy, if you want to look at that. Transportation, we didn't mention that earlier, but the Transportation business shipped more locomotives in the first quarter this year than ever before, up about 40 from last year, and added 5% to their backlog on top of that. So we are seeing transportation interest in rail in countries like Saudi Arabia, which traditionally have never talked to us about heavy haul freight. It is a very long answer to your question. We see 15% to 20% growth, for sure, and higher in some quarters as we have talked about in the second quarter, and tremendous breadth and strength. In the US, as I mentioned, there's been a lot of inquiries in Energy, particularly. We think we are going to see a pickup there. The team has done a great job balancing price, productivity, and inflation; and you are seeing that in the positive margin expansion and we expect that to continue.

[Jeffrey Sprague:]

There was a comment about 3.5% price, I don't recall if that was turbines or Infrastructure in total. Could you just give us a little more color on what is going on in pricing in the backlog?

[John Rice:]

The comment I think related to power gen orders, price was up 3.5%. We are seeing there is a lot of demand out there. Capacity is relatively tight in some areas. A piece of that, obviously, is being fueled by wind. But over the next 12 to 18 months, we see that our ability to get price is going to continue.

[Jeff Immelt:]

Jeff, if you think back to late '90s, that was one product in the US, gas turbines in the US. Now it is every product everywhere. So you've got rail, oil & gas, aircraft engines, energy, for the first time in 50 years, that are secularly all expanding at the same time. We are very well positioned to take advantage of it, both from a revenue standpoint, but more importantly from a supply chain standpoint, which is one of our strengths. So you know, if the US comes back in from a standpoint of gas turbines and wind, that is just icing on the cake. That is going to play to our ability both to price and to do a better job on supply chain.

[Jeffrey Sprague:]

Do you think we will have to see much more gas turbine activity in the US as kind of a bridge to IGCC and nuke maybe five to 10 years from now?

[Jeff Immelt:]

Absolutely, no question.

[John Rice:]

There is just no question. No question, and you're already seeing that with spike in demand for Aero. That usually portends, as I mentioned before, growth in the frame stuff. We have seen this in the past and we will see it again. As Jeff pointed out at the beginning, the good news here is that we have a broader, deeper play, quite frankly. We don't anticipate another US bubble and that is a good thing, because we are going to see more breadth and more depth.

[Jeffrey Sprague:]

Just on the tax rates, Keith, just so we all have this straight. So your guidance of 16% to 17% for the year, that would not assume one of these settlements comes in? Therefore, if we get a settlement, how do we think about that? A settlement is upside to EPS, or a settlement results in additional restructuring?

[Keith Sherin:]

No, what I said, and I will try and clear it up. Settlements will cause more volatility within the quarters on either the Industrial or GECS rate. But everything all in, our estimate for the consolidated rate for the total year is expected to be 16% to 17%. Everything I know and anticipate. I just can't book it that way yet, but that is what I would give you as guidance.

[Operator:]

Your next question comes from Deane Dray - Goldman Sachs.

[Deane Dray:]

First from Mark, the securitizations that you took in the first quarter, the timing on this is a little unusual, you see more securitizations in the back end of the year. Was this a conscious decision to offset some of the WMC losses? What are the securitization expectations for the balance of the year?

[Mark Begor:]

It was a conscious decision to try to accelerate some securitizations to cover a portion of the WMC issue that we talked about. We don't see anything outside of the normal process for the rest of the year.

[Deane Dray:]

Any difference in pricing on any securitizations?

[Mark Begor:]

No, actually there was a very strong demand for what we did in the first quarter, but no change in pricing.

[Deane Dray:]

Good, and then swing over to the OEC and the consent decree. Did you comment on when you think that you will resume shipping? Is it a second quarter or is it a second half?

[Jeff Immelt:]

You know, I think this is one that we can't predict. We are working hard to do all the things that we know we have to do with the facility. My hunch is that it is second half.

[Deane Dray:]

It was very helpful to say that the backlog really hasn't seen much in the way of cancellations. Is there any issue with the FDA giving you approvals on any other requests away from the OEC business?

[Jeff Immelt:]

You know, I don’t believe so. We have FDA reviews of our facilities all the time and have typically passed with flying colors. This is a unique case, and we are kind of treating it that way.

[Deane Dray:]

Great, and last question, bigger picture regarding expectations for organic growth rate. You continue to hit right down the middle of the fairway on two to three times world GDP. If you segment out what organic growth looked like this quarter between Industrial and GE Capital, what was the contribution from emerging markets? What are you thinking about the balance of the year for organic growth?

[Jeff Immelt:]

You know what I would say, Deane, is that the Finance was higher. Finance was like 10% to 12% in Q1. Industrial was like 5%. My sense is that Industrial get stronger during the rest of the year and Financial Services will probably stay in the high single-digit, maybe 10, something like that. Again, we will see organic growth respond as OEC starts up and from NBCU that we haven't had. John is a big part of our Industrial segment, and John had organic growth in the mid-teens for a while. So I think that is how we think about it. Then I would say the business outside the United States is going to continue to grow faster than the business inside the United States.

[Deane Dray:]

Do you have a sense of contribution from emerging markets, imagination breakthroughs?

[Jeff Immelt:]

Emerging markets were up. Our forecast for the year is growth was 14% in the quarter. I think forecast for the year is $32 billion, something like that, $30 billion plus so, you know, mid to high teens of growth. Imagination breakthroughs ought to deliver I would say between $15 billion and $20 billion. They delivered $5 billion in Q1.

[Operator:]

Your next question comes from Steve Tusa – JP Morgan.

[Steve Tusa:]

Thanks for all the detail on restructuring. It's very helpful. It is more than most companies do and a lot of them are serial restructures, so we appreciate that. Just a question on the annual guidance. So Healthcare looks like it's coming in a little bit light. Where is the offset to that given you are reaffirming the number?

[Jeff Immelt:]

John Rice is sitting right next to me here. So John has the ability to continue to execute and deliver very strong. But I would go back, Steve. Again, we're not sure when Abbott is going to close. But I still believe Healthcare has got a reasonable chance to get to 15% op profit V. I would take the blame, personally, to say that I think our guidance was probably too bullish in Q1. But if you just step back, OEC from an op profit standpoint probably cost us $50 million just on itself in the quarter. So when that is up going again, it is going to generate a lot of money for us.

[Steve Tusa:]

I am not quite clear on the second quarter. You know everybody is kind of focused on puts and takes every quarter. Are you factoring in that tax benefit in the second quarter? Or how do you come to an EPS number? What kind of tax rate are you assuming there for the second quarter?

[Keith Sherin:]

I said we are working with the IRS on settlements. I am not sure of the timing of when those are going to occur. All I said was when they occur they will create some volatility. So we are talking about a 16% to 17% consolidated rate for the year.

[Steve Tusa:]

That is how we should think about that, factoring in that EPS number in the second quarter. Provisions in GE Capital were up quite a bit; obviously, some of that is WMC. Up 40% plus. Does that comp, obviously go down over the next couple quarters?

[Keith Sherin:]

Sure, I think, first that provision increase doesn't really have an impact from WMC. Those loans are held for sale; and those would have been mark-to-market writedowns. So the provision increase is really a couple of things. Number one, if you remember the US bankruptcies, it is in the consumer, in the GE Money business, the US bankruptcy law changed at the end of '05; and there was a real acceleration of bankruptcies at the fourth quarter of '05. Then as a result, the normal bankruptcy provisions that you put as part of your ongoing volume were very low in the first quarter of '06. So we have got kind of more normal provision for bankruptcies in the first quarter. That is about $170 million of this growth. Then we had some timing in Commercial Finance. Last year we have recoveries in the first quarter that didn't repeat. We were up about 0.2% in Commercial Finance, which is probably a more normal run rate level. So I think the normalization for bankruptcies is what is driving it, as opposed to any particular change in our view of the quality of the portfolio.

[Steve Tusa:]

So about $1.1 billion going forward here, or should that go down a little bit sequentially? Tough to call?

[Keith Sherin:]

I think from a run rate you're going to be somewhere between 80% and 100%, 100 basis points to ANIE. So it is going to depend upon our asset growth as well, Steve.

[Steve Tusa:]

Okay, perfect. Thanks a lot.

[Operator:]

Your next question comes from Scott Davis - Morgan Stanley.

[Scott Davis:]

Since we have Mark on the line, maybe we can dig into private-label credit cards a little bit, particularly in the US. Mark, are you seeing any risk that maybe this mortgage sub-prime disaster could leak out over to credit cards?

[Mark Begor:]

Scott, we are watching closely, as you might imagine. We actually started back last fall in September and October. We moved at that stage to start adding collectors just to get in front of potential impact from home price appreciation and what we are seeing. We have actually added 700 collectors in the last few months to make calls earlier and more reminder calls. The net result, though, is we haven't seen really any kind of measurable change in our delinquencies. We continue to watch it. As I said, we are trying to get in front of it. It really has been fairly stable.

[Scott Davis:]

Just maybe a comment and a question. Historically, I think, GE Capital has always done a great job of being the buyer of last resort when you have disasters like this. It seems like you're kind of exiting the business or at least slowing origination at a time when maybe historically GE would be stepping up and buying some nonperforming loans or doing things like this. Is there a change of strategy? Is that something that I just don't think it is time yet? Just talk a little bit about strategy there.

[Mark Begor:]

Yes, I would say that it really probably is not the right time for us. We have got our hands full right now getting the business resized to where we want to take it. That said, you are right; we are always opportunistic and we are very close to the market. We are watching what is going on. If we see something, we will certainly look at it. But we have got a lot to do right now in getting the business resized.

[Keith Sherin:]

You know, Scott, we have asked the Commercial Finance team to work with Mark's team and take a look at where do you see the opportunities here in this market? There is an awful lot of turmoil and as you said, we are always looking at the right opportunity. So we are going to be careful about it, but we do have some people who are looking at it to say, where are places here where it may be the right place to put some capital?

[Scott Davis:]

Fair enough. Since we also have John on the line, a little bit of a big picture question. But now you have had GECAS and Energy Financial Services under your management for long enough to probably make a conclusion. Having these businesses, are you seeing any real benefit to helping pull through your core business? Is it worth the hassle that it basically brings upon us in analyzing it together? Or are you seen some tangible advantages?

[John Rice:]

Well, we are definitely seeing tangible advantages. We will book an order in the second quarter in the Middle East that we are negotiating on an exclusive basis in our Water business, because we can work with Energy Financial Services on the same deal. So that is just one example, but it comes up regularly, whether it is the domain expertise that Henry Hodgeman and his team bring to the party, or the financial expertise that Alex Urquhart and his team bring to the party. We see benefits everywhere we look. I would never want to go back to the way it was.

[Operator:]

Your next question comes from David Bleustein - UBS.

[David Bleustein:]

Are the returns getting even close to the level where you might want to keep some US mortgages on balance sheet?

[Mark Begor:]

Well, that is one of the things we are evaluating is keeping mortgages and then using securitization for returns. It is really not driven by what I would call the returns of mortgages or repurchases. It is really driven by the change in the capital markets. This idea of whole loan sales in this market to Wall Street just doesn't work. We have very strong mortgage businesses outside the US in UK and Australia where that is our model, and we're really taking that back here to the US.

[David Bleustein:]

Fair enough. John, you mentioned or at least confirmed a comment on a bridge to getting to IGCC technology. Obviously, there's some plants up and running, but how long do you think it takes before we start to see significant numbers of IGCC plants being built here in the US?

[John Rice:]

Well, David, it depends on how you define significant numbers. But certainly, we are three to four years away from the first one with the new technology, the way we are thinking about it. I would say, probably another three to five years away from significant numbers. There is no question in my mind and I don't think there is any question in our customers' minds that this is going to be important technology in this country and in other countries that rely on coal. It has got to be cost right. The cost has to be right. Consumers have to be ready to pay, and utilities have to be ready to invest. When all that comes together, and it will, this is going to be significant technology.

[David Bleustein:]

Compared to an ordinary combined cycle plant, how much more expensive is the construction cost and how much more do you think it costs to operate?

[John Rice:]

Well, it is really tied to the capital cost. Right now, it is in the 20% to 25% higher range. We think we need to cut that in half and we will over time. It won't be cut in half for plant number one, but it should be by plant number five or number six. So that is the glide slope that we are thinking about. I think that is consistent with the way our customers are thinking about it.

[David Bleustein:]

Then switching gears over to steam turbines, can you talk a little bit about your initiatives in India and the rest of Asia on the steam turbine side?

[John Rice:]

Well, it is interesting, because right now we are seeing a fair amount of steam volume, but it is tied to combined cycle gas turbine. So I was walking through the plant in Schenectady just a few weeks ago, and 75% of the stuff on the floor is for outside the United States, tied to combined cycle gas turbine. So while we still find markets like India, the Middle East, China, interesting from a pure steam play, we are very satisfied right now with the amount of steam business that we are getting associated with combined cycle gas turbines.

[David Bleustein:]

Tax rates, 16% to 17% is what you have got built into the guidance for Q2?

[Keith Sherin:]

On a consolidated basis, yes.

[Operator:]

Your next question comes from Ann Duignan - Bear Stearns.

[Ann Duignan:]

8% organic growth is calculated at constant currency. What impact did currency have on revenues and/or earnings this quarter?

[Keith Sherin:]

Currency was about 1.5 points on revenue and insignificant on earnings.

[Ann Duignan:]

Just in your press release, you noted that you would use the gains on the sales of assets primarily for restructuring. That is a slight change in wording. Where else do you see the uses of the gains on the dispositions?

[Keith Sherin:]

I think that is maybe a fine line on accounting. For example, for us, it is things like the asbestos lawsuit wouldn't technically be restructuring. So we do plan on using any gain to reinvest in the strength of the company, Ann.

[Jeff Immelt:]

We have got things like IP R&D, stuff like that, Ann. So I think it is just a fine point. But basically, what we're saying is the gains aren't going to fall through.

[Ann Duignan:]

Okay, so no big change?

[Keith Sherin:]

None at all.

[Jeff Immelt:]

Zero.

[Ann Duignan:]

One final question on inflation. You noted in Aviation that you were seeing some inflation. Can you just talk about inflation in general across your different businesses? Are there any surprises out there that you have noted during the first quarter, either positive or negative?

[Keith Sherin:]

We have seen inflation, principally in precious metals, and in other metals commodities. Our overall approach for the company has been it has been relatively contained. Our pricing activity has more than offset inflation across the portfolio. We do see some of the inflation in precious metals. We go out and we do everything on long-term contracts and collaborative investments with suppliers to make sure that we can mitigate the impact of that. Then we work like crazy with our commercial teams to make sure that we can recover that in the marketplace. If you look across this portfolio, we were able to do that in the quarter. I think on the other side, though, if you look at pricing in the quarter, to a point that goes with inflation, Aviation pricing was up 2.5%, Energy pricing was up 2%, Transportation pricing was up 1%, Oil & Gas pricing was up 2%. We are working to make sure we recover that in the marketplace. As John mentioned and Jeff mentioned, with the supply-demand equation that we have got going on, Ann, that has been very effective for us.

[Ann Duignan:]

That begs the final question, are you seeing any glimmer of component supply constraint beyond, let's say, wind, which is well documented? Do you worry about any other supply constraints as you ramp up some of these late-cycle businesses?

[Keith Sherin:]

Well in a sense, we are paid to worry about all of them but we're not seeing anything that impacts our business. Our supply chain teams are doing a terrific job. That is one thing we learned very well during the US power bubble, is how to manage these situations. So whether it is the Aviation team, the Transportation team, the Energy Wind team, they are doing terrific jobs dealing with us. We don't see anything that will impact our ability to deliver for our customers.

[Ann Duignan:]

Okay, I think Peter has a follow-up question on Financial Services.

[Peter Nesvold:]

I guess the conventional view is that a lot of these subprime headwinds in mortgages won't expand into Alt-A market. I guess, why that level of conviction in the market, given that a lot of loan characteristics are shared, whether it is ARMs or low documentation or high loan to value?

[Mark Begor:]

Actually, we wouldn't agree with that convention that there is not going to be pressure on Alt-A because we are seeing some of it.

[Peter Nesvold:]

How would you characterize delinquencies, 60-day plus delinquencies in subprime versus Alt-A right now?

[Mark Begor:]

Subprime is probably 50% higher from a delinquency standpoint. But we are clearly seeing some of the Alt-A consumers come under pressure, too.

[Peter Nesvold:]

Did the Alt-A sort of follow the issues you saw in subprime? So did subprime lead? Or did you see them coincident?

[Mark Begor:]

No, subprime definitely led. We started seeing the subprime delinquencies tick up kind of in the summer last year; and Alt-A started really later in the fall.

[Operator:]

Your next question comes from Robert McCarthy - Banc of America Securities.

[Robert McCarthy:]

Good morning, everyone. Maybe you could talk about the low single-digit CapEx obviously everybody is seeing in the broad industrial economy in the US. What kind of trends do you see prospectively? Do you see that further declining, decelerating? Do you expect back half snapback? What is your expectation there?

[Keith Sherin:]

Rob, on the US short-cycle business, I don't see it getting worse. I think the one wildcard is housing; and I guess we don't see housing in its totality. The appliances tends to see completions. But we are not building in our forecast any kind of a big snapback in the second half. We are thinking the economy stays at the level it is at right now.

[Robert McCarthy:]

One thing that caught my eye was lighting was up 10% in the quarter. Does that speak to the strength in US commercial construction? Does that speak to global strength? What does that speak to, given the fact that it was roughly double, I think, your organic growth rate for the overall business?

[Jeff Immelt:]

I wasn’t sure while I was CEO I would ever talk about lighting on one of these calls, so Rob, thanks.

[Keith Sherin:]

We had a great performance in lighting in retail. It's all the retail channels, and I am sure you are familiar it is driven by the compact fluorescent activity across this country and around the world. But incandescent was also very strong. So retail strength, Wal-Mart, Home Depot, Lowes, very good.

[Jeff Immelt:]

I think, Rob, to Keith's point, Ecomagination has been a great demand generation process for the company. Even things like CFLs I think it has made a big difference from the standpoint of how we have even thought about the lighting business.

[Robert McCarthy:]

Okay, fair enough. Obviously, it looks like alternative energy generation, very high visibility and great prospects going forward. On the transmission and distribution side of the house, obviously, you have some fair amount of exposure there I think as well -- not a huge amount, but some. Could you talk about those markets? Would that be an area where you could maybe obviously not this year, given the fact that you have announced several large acquisitions but down the road, would that be a place for maybe investment or further expansion into transmission and distribution?

[Keith Sherin:]

Frankly, Rob, we like the size of our TD business. As you know, we are not the biggest player out there, but we are in some very good, solidly profitable segments, and I don't anticipate a huge expansion. The team that is running that business is doing a great job. We have got a pretty good cost base; we are working to improve it and we kind of like where we are right now.

[Jeff Immelt:]

All of our Industrial deals basically have recurring revenue that go with them, have service franchises. TD really doesn't have a big service franchise that goes with it.

[Robert McCarthy:]

You don't see that changing prospectively?

[Jeff Immelt:]

Not really.

[Dan Janki:]

Carol, can we take one more question?

[Operator:]

Your final question comes from Chris Kotowicz - A.G. Edwards.

[Chris Kotowicz:]

Good morning, everybody. On power gen, you talked about strength in steam turbine sales. Is that on the international side? Is that really being driven by power island sales, or are those stand-alone units?

[John Rice:]

No, when I refer to combined cycle gas turbines, that is probably your definition of power island. They are not standalone.

[Chris Kotowicz:]

I'm talking about the steam turbines.

[John Rice:]

Yes, there is a steam turbine that goes with every two gas turbines, but we are not seeing a lot of stand-alone steam business and certainly not in countries like India or China.

[Chris Kotowicz:]

Okay. Then you talked about the supply chain kind of broadly not being a constraint for you guys. Is that also true on ancillary equipment, and maybe specifically on the energy side or power gen side? The guys around you that maybe you don't actually make their products but that you would need for a power island, do you have any concerns there?

[John Rice:]

Well, we work as closely with them as we do with our direct suppliers. So when we are involved in a plant construction project, we manage them almost the same way. So again, we want to be a little bit concerned, just because we don't want to be complacent. But we don't see anything which is going to limit our customers' abilities to complete these projects.

[Chris Kotowicz:]

Okay. On the coal side, obviously, there has been a lot of momentum. The headlines now and talking to folks, it sure sounds like the reality is that maybe that momentum in coal is slowing. Do you guys have any comments on your view on that right now?

[Jeff Immelt:]

Look, I think the world needs coal. So I think there is going to have to be at some point some confluence between the environmental standards and the need for coal. That is why John and his team have invested in coal gasification and other technologies around it. So I don't know, John, what would you say to that?

[John Rice:]

I totally agree. Coal is a big part of the action in the United States and in many countries, and IGCC will become an important technology. Short term, there is going to have to be new coal plants.

[Chris Kotowicz:]

You talked about, what, four to 10 years kind of initial IGCC plant to more proliferation. Do you see any possibility of a government subsidy there, kind of like you have got on the wind side?

[John Rice:]

Sure, sure. No question, things like production tax credits can work, and that will help. But these are large, sophisticated chemical facilities that will take three plus years to build under any circumstances. So there is only so much you can accelerate that.

[Chris Kotowicz:]

Are you guys going to have to provide the ramp on that, you think?

[John Rice:]

We are looking at all sorts of options and that depends on the customer and what their needs are.

[Dan Janki:]

We would like to thank everyone for participating. Joanne and I will be available all day to answer your question. Replays and transcripts will be available at our website. Thank you very much.