General Electric Company
Q4 2008 Earnings Call Transcript

Published: 23 Jan 2009

[Operator:]

(Operator Instructions) Welcome to the General Electric Fourth Quarter 2008 Earnings Conference Call. I would now like to turn the program over to your host for today’s conference Trevor Schauenberg, VP of Investor Communications.

[Trevor Schauenberg:]

Joanna and I are pleased to host today’s call. Hopefully you have the press release from earlier this morning and the slides we’ll be walking through are available on our website at www.GE.com/investor. If you don’t see it please refresh, you can download or print to follow along. 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. We will be reviewing the GE press release that went out earlier today and have time for Q&A at the end. For today’s webcast we have our Chairman and CEO, Jeff Immelt, and our Vice Chairman and CFO, Keith Sherin. Now I’d like to turn it over to our Chairman and CEO, Jeff Immelt.

[Jeff Immelt:]

The first page just kind of summarizes the environment. The environment remains very difficult. Credit losses continue in financial services. The financial service industry is still under stress. Those are still tough. Just like we described in December recession and growing unemployment continues just like we saw at our year-end meeting. Two things that are mitigants, deflation is out there and we’re seeing that in our raw material purchases. As the governments around the world fund a stimulus a lot of these are in the GE sweet spot of clean energy and healthcare IT. A few things better but the environment in total is very tough. What I thought I’d do before we dig in is just talk about how we’re running the company and our focus on doing a great job on the things we control. There are just six areas that I would cover. The first one is all of the management processes have been accelerated and intensified. We’ve changed the way the operating leaders and the cadence with which they meet, we’ve outlined a capital board structure that reflects our strategy. We’ve got compensation tools for our team that reflect earnings and cash flow. We’ve got a very strong and engaged management team dealing with this incredible environment that we’re seeing. We’ve diversified and protected our revenues. Services and service business model remains robust. Our global diversity you saw orders like the one in Iraq we’re going around the world to pursue the growth that’s out there. We’ve continued to invest in R&D and content and we retain the ability to finance our backlog into finance growth as it appears to be important. We’ve increased our cash focus. About $48 billion of cash on hand at the end of the year, very strong working capital, and CFOA results. We did the equity raise and our collections were ahead of origination so we’ve got lots of cash on the GE capital balance sheet. We’re executing the plan we outlined on December 2 with the financial services business model towards a smaller more focused business. We exited some product lines at the end of the year. We think we’ve dramatically risk reduced financial services. We’ve really attacked our cost structure. We’ve taken $5 billion of costs out. We’ve done a lot of restructuring in Q4. Deflation is accelerating and we’ve got fewer people and less spending. We’ve positioned ourselves for the stimulus that are being offered on a global basis. Every country in the world is doing stimulus of some kind. We think renewables and Smart Grid and Healthcare IT are good fits for the company. We’ve got very focused execution on the things we can control. This is how we’re really driving the company in this incredible environment. The rest of the presentation basically covers four things. First is to go back to the December meeting and talk about the results you’re seeing today and what we did to prepare for 2009. We’ll talk about liquidity and cash plan and then we’ll go back to the framework that we outlined both in Capital Finance and with our Infrastructure and Media businesses and outline how we’re driving the earnings to be on track or consistent with the framework we laid out in December. With that I’ll turn it over to Keith and talk us through those points.

[Keith Sherin:]

I’m going to start with how we completed ’08 and positioned ourselves for ’09. The first thing that I wanted to highlight was a checklist of what we outlined in December. Starting with revenues $183 billion they were a little less than what was forecast at the end of the year. It was driven by the stronger dollar and some lower financial services revenue. Second, restructuring and other charges, we said we would be at the high end of the $1 to $1.4 billion after tax. We actually came in at $1.5 billion. I’ll cover in a few charts. We delivered $1.78 per share including the impact of the preferred shares. We delivered $18 billion in net income and we were slightly above our industrial cash flow outlook. I’ll cover more detail on all these as we go through the charts this morning. The next page is the key measurements that we report every quarter. For growth, total orders were down slightly but very strong absolute levels in this environment. I’ll have a whole page on that. For industrial sales we had 7% growth which was pretty good in this environment. Good organic growth industrially and capital finance had assets down 2% which is what you’d expect with the actions we’re taking. We delivered the EPS we said, $0.37 excludes the affects of the preferred dividend, $0.36 including the affects of the preferred dividend in line exactly with the way Jeff laid it out in December. Our returns were at 14.8%. We finished the year with margins down a point consistent with the way we operated all year. The industrial cash flow finished the year strong as I said $16.7 billion up 5%. I’ll start with a summary of the fourth quarter. On the left side a summary of continuing operations, revenues of $46.2 billion down 5%. In total you can see the mix is driven by growth in the industrial sales up 7% and continued declines in the financial services revenue with actions we’re taking to refocus GECS. We earned $3.8 billion in net income which was down 44%. For earnings per share we earned $0.36 right in line with our December forecast. That includes the $1.5 billion of after tax restructuring and other charges that we took in the fourth quarter. Total cash flow from operating activities was $19.1 billion and industrial cash flow is $16.7 billion up 5%. I’ll cover more on the cash in a few pages. On the bottom left are our tax rates for the quarter and the year. I’ll cover a full page on tax rates with my next charge but let me describe the summary here. First, the tax rate came in exactly as we expected in December. The consolidated rate for the quarter is -56% and that rate arise from a large tax benefit which is a credit on significantly reduced pre-tax income for the quarter. You can see its all driven by GE Capital with the industrial rate at 25% for the year. The consolidated lower pre-tax income includes the impact in GE Capital higher loss provisions, impairments and also the restructuring that we did in the fourth quarter. For GE Capital the rates a positive because we’re dividing that tax benefit, or credit, into negative pre-tax income resulting in a favorable rate. One key point here is that our industrial earnings enabled us to use these GE Capital tax losses. That’s one of the benefits of having the financial and the industrial company together. I’ll cover the size of the fourth quarter impact on the next page about taxes. On the right side you can see the business results. I’ll cover business by business in a few pages but you can see our industrial business ex C&I were up 3% in the quarter in line with our 0% to 5% forecast in December. That was driven by the double-digit growth in energy. GE Capital Finance earned a little over $1 billion in line with the December guidance. Overall the segment profit was down 25% and the difference between segment profit and the total results reflect the restructuring which is about $850 million after tax year over year higher in the fourth quarter that drives you down to the total net income. Next is more information on taxes, specifically for GE Capital. On the left side is a tax walk going from the fourth quarter of ’07 to the fourth quarter of ’08. The fourth quarter ’07 rate was about 1% in GECS and that’s the $30 million impact that’s listed on the left bar. To compare to the fourth quarter of ’08 as you walk across we had three categories that impacted the tax. We had higher losses and impairments of about $2.6 billion which generated a $900 million tax benefit. We had restructuring and lower income like less US real estate gains which reduced high tax jurisdiction income by about $2.3 billion. That also created a tax benefit that was about $800 million. Third, we made an election in the fourth quarter to permanently reinvest about $1 billion of prior year overseas lower tax earnings. That resulted in about $400 million of one-time benefits. In total for the quarter that’s a $2.1 billion benefit. On the right side it’s the framework of how you think about capital taxes for 2009. I tried to list the biggest drivers. First, we’ll have higher loss provisions in ’09 and I’ll cover a lot about losses in a few pages. That would lower the tax rate. Second, the plan does include less restructuring so that will raise the tax rate. Finally, the plan includes lower global benefits and lower one-time items which will also raise the rate. In 2009 the GE Capital tax framework does anticipate that we’re going to have less one time benefits than we had in 2008. It does anticipate a higher tax rate but it’s still a negative rate as I talked about in December. Next is a summary of the restructuring and the other charges that we took in the fourth quarter. On the bottom half of the page are the restructuring loss provision charges that we talked about in December. We said we’re going to evaluate $1 to $1.4 billion. Jeff said we’d be at the high end of the rate. We came in at $1.5 billion. As I said, in the middle we funded $1 billion of after tax charged to take costs out of the company. We’re completing projects with a little over one year paybacks and we’re reducing our cost structure in every single business as you can see listed here. We’ve also funded incremental reserve provision in GE Capital. To talk about reserves for a second, you can see we added an extra $0.5 billion. Our reserves are primarily calculated based on statistical models. We use historical losses, historical recoveries, we use delinquency data and as we saw an up tick in delinquencies in the fourth quarter we took a comprehensive look at all our reserve models. These charges that we added here reflect updates to get the most recent loss experience, to get changes in recovery experience and to get updates on loss severity assumptions. It was about $300 million in the consumer business and about $200 million in commercial. On top of the restructuring and reserves and other charges we also had marks and impairments in the quarter. You can see we had about $700 million after tax and we’ve listed the categories here. About $500 million of these were in GE Capital services and about $200 million were in our industrial business. On top of the $1.5 billion restructuring we also had about $700 million in marks and impairments that reduced our income in the fourth quarter. We had a lot of charges in the quarter and the $1.5 billion really helped to position us for a better 2009. For all of 2008 we recorded $1.5 billion of after tax restructuring and other charges. This excludes the fourth quarter loss provisions in GE Capital but it does include restructuring that we did throughout 2008 in addition to what we did in the fourth quarter. We had about $0.5 billion throughout the year that also will help reduce our cost structure for 2009. Those actions that we did on reducing our workforce and simplifying our organization and reducing the number of layers they’re going to deliver about $1 billion of benefit in 2009 from the cost out activity. In addition, we also exited a substantial amount of non-strategic assets during 2008. We exited our corporate card business, our partnership marketing group business, the Japanese consumer finance business and we also executed the consumer asset swap with Santander. Overall we exited $14 billion of assets in 2008 and we completed the Santander swap already in the first two weeks of 2009 for another $8 billion. So, $23 billion of reduction in assets from these business exits and we’ll get ongoing benefits from not having most of these operations in 2009 and beyond. I think both the cost out restructuring and the business exits that we were able to accomplish help us to prepare for this tough environment that we’re dealing with. The next section is really talking about liquidity and cash plan and giving an update where we are in funding the company and with cash flow. Let me start with liquidity. First, we beat our commercial paper reduction target. We ended the year at $72 billion, that’s down $29 billion in 2008 and down $16 billion in the fourth quarter alone. The CP market is in better shape. We have strong demand, rates are very low. Our backup lines plus our cash exceed our CEP balances. We haven’t used the CPFF since it opened in November. We’ve had a very good response in the marketplace from commercial paper. We’re going to continue that reduction in 2009, our targets to get down to $50 billion by the end of the year and we have every ability to do that with our plan that we’re executing. The second thing we did was we demonstrated our ability to manage our originations and collections. Our teams reduced our ending net investment by $22 billion on top of the changes that are coming from foreign exchange so that’s actual business reductions. We still originated $48 billion in new book volume in the fourth quarter. A good job of managing collections and originations to help us to get to the size we need to be to meet our leverage targets I’ll cover on the next page. We also closed the year with $36 billion of cash in GE Capital and that was up from $13 billion at the end of the third quarter. The third thing on liquidity that I think is really important is we were successful at growing our retail funding sources. CDs and deposits were up $25 billion in 2008 consistent with our December target. We’re really in great shape here on liquidity and ahead of schedule with the GE Capital actions. In addition to liquidity we also lowered our leverage and we substantially pre-funded 2009. We ended 2008 with 7

[Jeff Immelt:]

I want to recap on capital allocation and want to spend some time dwelling on something that’s received a lot of attention and speculation. We’re planning for a really tough environment. The recession is tough, financial services crisis is worse. We had 12 financial service companies downgrade in the fourth quarter, GE put on negative outlook by S&P. We’re prepared for a really tough environment. What I would say is that we really have prepared the company to perform in this environment. We hit or beat every cash and liquidity commitment since the crisis began. Our industrial CFOA is very strong at $16.7 billion versus $16 billion plan. We generated $5.3 billion of industrial cash flow in Q4. We end the year with very strong positions in cash, CP reductions ahead of plan, 64% of the debt is pre-funded, and leverage is down to 7

[Trevor Schauenberg:]

We’d like to turn it over to the Q&A now.

[Operator:]

(Operator Instructions) Your first question comes from John Inch - Merrill Lynch

[John Inch:]

If we look at capital it strikes me that perhaps one of the biggest sources of pressure within the markets would be the equity portion of you real estate book. I understand your comments vis-à-vis accrual accounting and how you book that stuff. Then you do have this embedded loss. Where I’m coming from is given what’s happened with commercial real estate markets and the pressure these industries are under could you describe how we should be thinking about prospective losses or write downs in that business looking ahead. How long can you hold these levels without having to take a much bigger hit?

[Keith Sherin:]

The thing that you have to recognize is the way I described it this morning. We invest in these properties to hold them for the long term. We don’t mark them to market. We do have the ability to run them. We collect operating income from the tenants. We invest and improve the properties. Our whole period on this equity book is going to be five plus years. We’ve underwritten every single property from a supply and demand characteristic to make sure that we’ve got a high quality asset in a place that’s going to have good supply and demand characteristics. In the short term if you have to deal with the rent decrease or a vacancy issue we can weather that. We include that in our assumptions. We use third party data for our rent growth assumptions. We look at our occupancy based on the market and our actuals. We inflate our expense growth in our forecast. We use sales comps for cap rates. We use third party data. The discount rates are set by third parties. I think we’re really very diligent on how we look at what the value of the properties are going to be, what’s the long term prospect for the property with rent growth and inflation and cap rates. We have the ability to hold these. I think you’re going to see continued pressure in the commercial real estate market obviously from the impact of unemployment and the general economy and we forecast that into how we’ve looked at what this book is going to be. I think you can see further declines from an actual fair value mark to market versus this book but we have the ability to hold these properties for the long term and we intend to do that. When we put the plan together for ’09 we were expecting $0 to $500 million loss for real estate. Included in that we’re going to make $500, $600, and $700 million from the debt portfolio. We’ll lose a similar amount on the equity portfolio in total because we have operating income but that’s offset by carrying costs in this depreciation which lowers the basis. It’s important that we’re lowering the basis every year by $1.2 billion. Overall we’ll probably have a couple hundred million of impairments is the way we looked at 2009. Not a big number and its based on the current market, our estimates of what the future will look like based on our best assumptions for 2009 and 2010 and beyond. We’re prepared to weather the storm. It’s not too dissimilar if you look after 9-11 with GCAS. 9-11 with GCAS we had a lot of airlines under stress but we have good assets. The airplanes have a lot of value and we had the ability to weather that storm and as you look at what we’ve been able to do since 9-11 we’ve been able to not only recover those asset values but we’ve been able to put the whole business back into position where we had substantial gains. That’s what we are, a long term investor. We’re a buy and hold investor, we fix up the properties and we have the ability in the balance sheet to weather this temporary storm in commercial real estate even if its going to be a couple year period.

[John Inch:]

Given the higher provision of $1 billion, as you guys look at the world are you still sticking by your assertion you do not need to raise additional equity capital?

[Jeff Immelt:]

I really look at the cash position in the company today and the strength of our cash flow and things like that. I can’t see a scenario in which we would have to raise additional equity capital. We’ve executed on all of the capital planning, liquidity planning, and cash flow strength. We have navigated this very well and we’ve got high levels of cash and liquidity right now.

[Operator:]

Your next question comes from Nicole Parent - Credit Suisse

[Nicole Parent:]

I’m trying to reconcile the 3% industrial organic growth that you guys are targeting for 2009 with the great color you gave us on the unit deliveries for ’09 and also the order numbers for the fourth quarter. Maybe elaborate on oil and gas you talked about a push out in the quarter, equipment orders down, service strong, transportation orders are up 50%, units forecast for 2009 is down 30% and with healthcare with diagnostic imaging down 30% help us think about how the components get you the kind of growth that you’re talking about.

[Keith Sherin:]

I think you’re going to have to look the backlog, the orders in the fourth quarter don’t really reflect what we have as the backlog that’s shippable for 2009 although it does obviously indicate from the absolute high levels that we’ve been realizing these order a slowdown versus those. If you go business by business I think energy is really well positioned for a good year. I think we’ve got a very strong backlog on the power generation side. The wind side we’re forecasting and in the framework we have it down 14% I think there’s quite a bit of stimulus that may help us to influence that whether it affects ’09 or ’10 we’ll have to see. A renewable portfolio standard as well as a change of the production tax credit to be actually a refund really does change the dynamics of the market for that business so I think they’re well positioned. In oil and gas we’ve seen those push outs. We do have a very good backlog. The good news about the equipment we don’t make a lot of money on the equipment margin as we ship those units. It’s important to build the install base. The service business is growing nicely. In oil and gas it’s going to be a similar profile of fourth quarter where you have less equipment shipments but from a total growth you’re dealing with a lot better service margin and you have enough equipment shipment business to make sure you don’t have a cost problem in your business model. From aviation I think we got pretty good unit forecast. We’ll have to see how the backlog holds when you look at will financing and will the capital markets sustain the total airframe production schedules that they have. We’ve tried to hedge back what we think might happen based on the financial markets but we have a tremendously strong backlog here from an equipment perspective based on the share we gain and the service business based on the install base growth feels pretty good. We’ve taken in aviation, as you know we saw in the summer last year airlines globally announced about 1,500 planes that were going to come out. We’ve taken that into account in our forecasting both for what it means maybe for airlines taking new planes as well as for what it means in overhauls in the install base. With oil coming down to $40 a barrel that’s helped things actually. We’ve had less pressure than we actually thought we’d have by the fourth quarter last year. We were impacted about $200 million in the service business in all of ’08 from those push outs and we think a similar number is likely in ’09. For healthcare it’s going to be a tough business. At the end of the day we’ve got to do a better job with costs. We’re taking a lot of costs out of the cost structure. We’ve got many product lines there, as you know, that will help us from an equipment perspective. We’ve got to do a better job with the surgery business and that’s up and running obviously and will give us some tailwind into 2009. We’re obviously watching that DI market. The one other positive in there is going to be stimulus including things like in China where you’re getting a lot of local benefit to hopefully help the local healthcare markets. We’re seeing that globally. That’s one positive that we’ve got to watch in healthcare. Transportation is going to be down there’s no question about it. You’re going to see lower North American locomotives. We’ve got a lot of global orders we’re chasing but they’re going to have to do a good job with service and they’re going to have to do a good job with the adjacencies like the wind turbine business which helps them because they do the gear boxes. We’ve taken that all into account when you look at the framework of 0% to 5% for industrial. It’s going to be a tough equipment world there’s no question about it. The teams have built their plans for 2009 based on that environment.

[Jeff Immelt:]

The service business is very strong. The backlog is very strong. That’s $8 billion in industrial for earnings right there. If you go back to the December meeting our orders are really in line with what we thought. We have very little sell and install that’s required for 2009 and very robust service backlogs. That’s the key to this year.

[Nicole Parent:]

A follow up on real estate, I think you said you sold $1 billion at a profit could you give us a sense of what the dollar amount of that profit was and was it in line, better or worse that your expectations.

[Keith Sherin:]

We sold about $1 billion of properties; we had about a $50 million net gain on those sales. It was in line with the expectation of a terrible market in the fourth quarter. It’s less than we wanted if you wanted to go back to the second quarter or third quarter but it was in line with what we thought we were going to get when we entered into the fourth quarter here in the environment that we saw.

[Nicole Parent:]

On transportation, you mentioned you were investing in the international platform what was the dollar amount of that investment just so we can normalize an exit run rate for the full year.

[Keith Sherin:]

About $40 million associated with the platform. We developed a locomotive for North Africa. We had an order for about 80 units in Egypt. We haven’t completed shipping all those units but it’s about $40 million of costs. We did get a follow in order for Libya for about 15 or 18 units. It’s a growth area for us and the investment we think will pay off.

[Operator:]

Your next question comes from Jeff Sprague – Citi Investment Research

[Jeff Sprague:]

Can you walk us a little bit through what happened with equity? Sequentially the equity balance is down about $7.5 billion obviously despite a capital raise and net income that’s greater than the dividend. I’m sure some of its pension but its hard to put my arms around what’s going on there.

[Keith Sherin:]

If you go from third quarter we had about $112 billion of equity. In the fourth quarter we ended the year with about $105 billion of equity. We had a little change in the unrealized loss on investments of about $800 million. We had a negative from the change in the value of cash flow hedged about $1 billion. Currency really hit us. The stronger dollar translating over half our assets in financial services overseas and US and the GE Industrial assets that are overseas hurt us about $7.5 billion. Have about $14 billion from the benefit plans that’s mostly pension, the surplus. That went to a deficit we had $15 billion increase from the equity issuance and we have $4 billion increase from the earnings. We paid our dividends. At the end of the day the equity issuance that we did was kind of offset by the benefits plans then we had a decline in equity from foreign exchange.

[Jeff Sprague:]

The GE Capital walk slightly adjusted from the beginning point at $8.6 million but it appears that you’re losses, you’re now expecting a $2.5 million delta based on the $10 billion credit losses you’re talking about for ’09, but you didn’t change that loss headwind of $1.3 to $2 billion.

[Keith Sherin:]

It’s probably a difference between pre-tax and after tax. If you look at the reserve levels and the credit loss provision its pre-tax and the net income walk on GECS the $8.6 million down to the $5 million that’s an after tax number.

[Jeff Sprague:]

Your comment about the tax is we should be more in the middle of that range $1 to $2 billion credit?

[Keith Sherin:]

Yes, I’d say probably somewhere near the lower end of the range than the top end of the range. We have obviously a lot of work going on on taxes to make sure we get that but that’s got some volatility.

[Jeff Sprague:]

The lower end of the range meaning bigger credit?

[Keith Sherin:]

No, I meant the lower end of the range less the credit closer to the $1 billion down than the $2 billion down.

[Jeff Immelt:]

We’ve been able to have the GE capital guys step into a lot in the fourth quarter. I don’t think that should be underestimated the reserves strengthening, the restructuring that’s gone on to take the costs out. I would say that the cost plan we could probably do even better than. I think we’ve done a nice job in Q4 to get positioned for 2009 and all the actions we’ve taken I think make the $5 billion more achievable.

[Jeff Sprague:]

You characterize deflation as positive, maybe we got good deflation here for a while with some of these raw mat costs coming down. Do you see any evidence of the dark side of deflation where its really catching up on your ability to achieve price in the marketplace or you’re getting people evaluating their plans and reconsidering CapEx and other things.

[Jeff Immelt:]

We’ve gone through a cycle if you go through the last couple years. Our pricing in the beginning lagged inflation and then our pricing was better than inflation. Our pricing for instance in businesses like energy was very positive in the fourth quarter. We tend to sell longer than we buy in many of our businesses. I view that as net positive. I also think that projects got cancelled because of inflation that now might get more attention. This is more positive than negative vis-à-vis what we can expect for 2009 from a value gap standpoint.

[Operator:]

Your next question comes from Bob Cornell – Barclays Capital

[Bob Cornell:]

If you look at the fourth quarter for financial services the op profit before provisions was $1.572 billion down from $4.7 billion last year. If you start from that level and you annualize that number you’re looking at $6 billion of op profit in ’09 and then you’re looking at $10 billion of provisions next year. You’re starting out, if you just extrapolate the quarter that this was reported you’re looking at a meaningful loss next year. To the extent you can, obviously that doesn’t count the cost savings and so forth. Is it possible to take the current number and extrapolate into ’09 and maybe help us with that walk?

[Keith Sherin:]

A way to do it if you look at GE Capital the total GE Capital services you had about $1.5 billion pre-tax loss in the quarter. I would start with the restructuring; we had $700 million pre-tax in the fourth quarter that’s above any run rate. I’d add that back. If you look at the loss provisions we had $3.1 billion of loss provisions in the quarter. Clearly even at a ten rate I’m only averaging for quarters and I’m not picking a quarter I’m just saying the average for the year that would be $2.5 billion versus $3.1 billion going at the ten rate. That’s $600 million higher in the fourth quarter than that run rate. Our mark to markets and impairments in the quarter we had $1.2 billion pre-tax of mark to markets in impairments. Even if I said the total year 2009 was going to be the same mark to market impairment levels as we had in 2008 you know we had marks in the first quarter and the third quarter that would be about $1.6 billion pre-tax total year. That would be less than the fourth quarter another $800 million in the fourth quarter. It was a very heavy quarter for us on marks and impairments for GE Capital. Lower costs we got over $2 billion of lower costs year over year you’re talking about $0.5 billion. I can get you back up to over $1 billion of pre-tax income then for the year you roll that out $4.5 billion on pre-tax then this year for the total year you obviously had tax credits of about $2.4 billion for the whole year. With that walk that we’re giving you say the tax credits, the one times and other things don’t repeat at that same level even if you’re $1 billion less of tax credits you have $1.4 billion you’re still close to on the total GE Capital a higher number than the $5 billion you could get yourself up to $5.5 to $6 billion. Imprecise macro numbers off the fourth quarter but I think it’s consistent with the framework we’ve laid out to get to $5 billion for GE Capital Finance for 2009.

[Bob Cornell:]

We’d have thought that GE might give us some thought about the first quarter maybe in terms of a percent of the earnings that might appear in the first quarter is that possible in this call?

[Keith Sherin:]

We said we’re not going to give quarterly EPS guidance and I think we’re sticking to that. We’ve given you the framework for ’09. People just have to build their own model. You can look at what the percent of the year is historically, you can look at run rates that we have by business, and you can do your own modeling about how costs benefits come in based on restructuring and things like that. We’re not giving any guidance on the first quarter.

[Jeff Immelt:]

We did update the framework and the updated framework says based on backlog, order rates, cost out, productivity and industrial we still think 0% to 5% is solid for the year. Keith just gave you a walk on Capital Finance. The framework is something that we want to stick with and we did update that today and we still think based upon what we’re seeing still looks okay.

[Operator:]

Your next question comes from Nigel Coe - Deutsche Bank

[Nigel Coe:]

A follow up on the FX. Of that $7.5 billion how much came within GE Capital?

[Keith Sherin:]

If you look at GE Capital’s equity on its own its about $6 billion from FX so if you look at GE Capital ended third quarter about $56 billion of equity, ended the year at $53 billion basically the $6 billion of change from currency translation was offset by the $5.5 billion contribution we put in from the parent.

[Nigel Coe:]

On the balance sheet reserve for the losses currently running below the loss provision in the P&L. If you’re expecting a $10 million of losses in 2009 why wouldn’t the balance sheet reflect that $10 million?

[Keith Sherin:]

What we have to do is we have to have losses reflect what’s the embedded loss in the portfolio and it’s very statistically driven. If you look at the fourth quarter provision of 3.1 it’s probably a little higher on a run rate. The provision that we have for losses is exactly what we need based on what’s embedded in the current book. Unfortunately we can’t book losses for things that we think might happen in the future. For example, our loss estimate of $10 billion has an average assumption of over 9% unemployment but that’s not where it is today. I can’t book losses for things that I’m forecasting in the future but I am anticipating it and how I put my framework together.

[Nigel Coe:]

On the commercial real estate I want to clear that up, the carrying value of the real estate is the intrinsic value i.e. the discounted rental income that you’re recognizing, is that correct?

[Keith Sherin:]

Carrying value is the book value offset by annual depreciation.

[Nigel Coe:]

So long as the intrinsic value i.e. discounted by the rents holds that value even if there’s a large gap between intrinsic and market value then you still wouldn’t feel pressure to write down.

[Keith Sherin:]

The actual FAS144 test is not on a discounted cash flow basis, it’s on discounted future cash flows. We do test for the fair value and that’s how we come up with our embedded loss that we’ve talk to you about today. The actual accounting test is on discounted cash flow.

[Operator:]

Your next question comes from Scott Davis - Morgan Stanley

[Scott Davis:]

I’m trying to understand a little bit, you’ve talked a little bit about the statistical models and your reserve levels and not being a finance guy you look back at 2002-2003 your reserve coverage was a lot higher. Given how dire this crisis has been so far how do you tweak these models to make them realistic?

[Keith Sherin:]

We have a significant amount of work going on on it. If everyone goes back to 2000 levels the business prior to 2001-2002, I don’t know exactly when the change was made based on accounting requirements had kept a loss provision of 2.63 year in and year out. The accounting change where you had to reflect the embedded loss in your book and as a result as the portfolio quality improved and delinquencies went down and we had a very good period from a credit perspective that went down to what the actual embedded loss was. The change in loss reserves going back to historic time is really driven by a different requirement from a loss provisioning perspective. If you look at where we are today we have done a complete study in the fourth quarter based on the delinquencies we saw and based on the pressure that everybody has on it. Obviously we’d be crazy not to be putting a ton of resources on it, making sure we get it right. The entire team is focused on getting it right. We look at our statistical models, we look at historic loss rates, and we look at an updated in the fourth quarter for more recent loss experience based on delinquency rates. We increased provision by over $0.5 billion after tax based on that study. I think we’re really trying to make sure we’re current and getting it right but we’re in a terrible credit environment, we’re going to see more pressure from the consumer, we’re going to see more pressure from the commercial, we’re anticipating it. The provisions are going to have to increase as we see that materialize. We’re trying to forecast the worst environment that we see today and that’s going to be reflected in higher loss provisions as we go forward. It’s just the way the math is going to work in the formulas.

[Scott Davis:]

I’d be helpful if you just refresh our memory on what percent of assets have to be mark to market versus the long lived assets.

[Keith Sherin:]

In total the majority of our book and financing receivables and those have to reflect the fair value based on the embedded loss. The vast majority of our assets are financing receivables and they have a reserve provision which I’ve shown you that results in a net realizable value based on the fair value of the receivable less the reserve that you have for your embedded loss. The actual mark to market assets in the book is somewhere around $10 billion. That flows directly through the income statement. We have another $45 billion of asset in our insurance portfolio, in our Trinity short term guaranteed investment contract portfolio. Those are mark to market through other comprehensive income. The vast majority of this book are financing receivables and then the other category would be the long lived assets like the real estate equity book and equipment leased to others some of the operating leases in the GCAS portfolio things like that that are held at historical costs and tested for impairment.

[Scott Davis:]

I know we talked a lot about this in December but can we talk about the dividend rational. It’s clearly not supporting your stock. The stock is yielding almost 10%, your debt at about 7% so you have a cost of equity that’s extraordinarily high given your cost of debt. Can you talk a little bit about, the capital markets are telling you something but does that play into your decision whether to keep the dividend, does it not? Are you waiting to see what kind of unemployment rates we’re sitting on in six months before you make a more longer term decision? Maybe talk through what the thought process and also just what the Board has been discussion since your update in December.

[Jeff Immelt:]

The results that we got in the quarter were what we thought we would get when we had the December meeting. The cash flow was actually stronger so our cash position is actually improved today versus even where we were in December. The overall capital inside the company cash inside the company is almost $50 billion. Our industrial cash flow for the quarter was $5.3 billion. We feel good about the liquidity and the cash plan inside the company. The question is how do you use that capital and use that cash for investing in the future so we’re not starving the businesses, we’re reinvesting back into the long term growth of the company. It’s just been our feeling that the dividend is a good return to investors in this moment of uncertainty. We’re not straining in order to pay it. In other words, we’ve got lots of cash and lots of free cash flow and lots of capital inside the company and it’s been the judgment that this has been the most investor friendly use of this capital.

[Operator:]

Your next question comes from Jason Feldman – UBS

[Jason Feldman:]

If I’m reading the slides right you’re showing that the reserves you’re expecting to increase about $2 billion into ’09. The provisions are only going up about $2.5 billion. Am I missing something or are you basically only expecting write offs to increase $500 or $600 million next year?

[Keith Sherin:]

The provisions include the write offs and reserves.

[Jason Feldman:]

If the provisions are up $2.5 billion.

[Keith Sherin:]

Write offs were up $2 billion this year. We really had a massive acceleration of write offs. With the provision up $3 billion the write offs up $2 billion I think you’re seeing those at a run rate that’s more reflective certainly on the consumer side then probably going to accelerate on the commercial side, yes.

[Jason Feldman:]

You expect a deceleration in the rate of growth of the write offs?

[Keith Sherin:]

On the consumer side.

[Operator:]

Your next question comes from Steve Tusa - JP Morgan

[Steve Tusa:]

A question on the reserves, I noticed that you didn’t really change the mix much of consumer and commercial and its kind of hard to read on the bar chart. Commercial looks actually, this is on the credit losses, looks actually flat relative to ’08. Looking at some of the loss statistics and what you guys have said about the corporate credit cycle is that conservative enough or does that increase again in 2010. If you could talk about the dynamics around the commercial side because it looks like, once again most of the provisioning is coming from consumer.

[Keith Sherin:]

Total allowance was up about $400 million from the third quarter in the commercial business it was up $600 million year over year. We’re stepping into the commercial allowance as well. The difference is that we’re senior secured and you’re going to see a slower loss cycle on the commercial side. On the consumer side obviously we’re already seeing it on the delinquencies in the US book specifically. I think the mortgage book has a slower and more delayed loss response. Yes, we’ve stepped up on the commercial side based on broad pressure in the economy, higher delinquencies, and higher non-earnings.

[Steve Tusa:]

Am I right that you’re saying that basically the ’09 rate is about in line with ’08 because you stepped up so much in the fourth quarter?

[Keith Sherin:]

I think both are going to be up in 2009. Maybe the bar chart doesn’t show it I’ll have to get you some better numbers on it. Both are clearly going to be up in 2009. When you take the provision up to $10 billion you’re going to see three quarters of that’s in the consumer side the increase and probably a quarter in the commercial side.

[Jeff Immelt:]

From the December 2 meeting we’ve taken the loss provisions up $1 billion. Stepped into some of it in the fourth quarter and taken the estimates up for next year then the $5 billion walk haven’t changed the dynamic around losses. I think we feel like we’ve been pretty conservative. I don’t think there’s any reason not to be conservative as we estimate these losses. We’re in the credit cycle; we’re been in this business for a long time. We underwrite differently than the banks, we’re senior secured. I think we’ve done a lot to step into a very tough environment.

[Keith Sherin:]

The bar chart, the bars haven’t been updated for the increase so the number at the top of the bar, I apologize for that.

[Steve Tusa:]

Commercial is actually higher than what that bar chart shows.

[Keith Sherin:]

The bar chart is related to the December 2, we didn’t change the bar we just updated the number for the total losses.

[Steve Tusa:]

The mark to market you said this year how much did you have in mark to market $1.6 billion?

[Keith Sherin:]

On a pre-tax basis.

[Steve Tusa:]

That applies to everything basically other than your receivables base like $200 billion in assets is that number we should be thinking about?

[Keith Sherin:]

I’d be a lot less than that. Some of the impairments obviously on the $200 billion are not financing receivables. A lot of the impairments that we took this year are on public equity securities. We had a couple billion dollars that’s down to about $1 billion the amount that is sitting there in that category. We’ve had definitely a lot of marks that we’ve taken that have reduced the basis of a lot of public securities that we had.

[Steve Tusa:]

This goes back to cash flow and on the industrial side, you guys have some pretty solid working capital targets to generate the cash is there anything, a lot of companies are pulling out all the stops to conserve cash. Is there anything that you guys are doing maybe you could talk about what you’re doing on your payables maybe or GE Capital whether its rebate programs to accelerate balance reductions at your customers. Could you talk about how you’ve changed those policies to batten down the hatches? I know all companies are doing that stuff I’m just curious how you guys are going about that.

[Keith Sherin:]

We’ve got an operating council as Jeff said the focus is on margins and on cash. When you look at cash we’ve got specific targets for every single business around inventory. We’re using lean throughout the company to drive inventory down, to get our cycle times down. We’re using the same techniques around our receivables. We’re working diligently to reduce our past due receivables across the company to change our terms where we’ve got too much extended terms versus the margin we get on the equipment. We do have a discount program with GE Capital where suppliers can get paid early by taking a discount, that’s got a good ROE on it. We are working on a supply base to try to extend our payable terms by about four or five days. Every element of working capital is being intensely worked on here across this company. The thing on working capital the environment change actually helps us on, as you know we had high single digit, double digit revenue growth in the industrial business for the last three years now we’re going into a tougher environment we’re not going to need as much working capital. That’s going to help us a lot from a cash flow perspective in 2009 in addition to all the actions we’re doing from the operating council.

[Steve Tusa:]

What are normal payable terms just at high levels?

[Keith Sherin:]

About 55, 60 days.

[Jeff Immelt:]

The point I’d make is we’ve done a lot here to be able to control our own destiny. We’ve taken the costs out, we have for the last year been driving real cash programs. Some of that showed up in the fourth quarter. We’re running the place with intensity and the fact that we’ve got almost $50 billion of cash and liquidity and strong programs demonstrates that we’ve done the right actions to better weather this cycle.

[Steve Tusa:]

How much of your backlog ships in 2009?

[Keith Sherin:]

A little over half.

[Jeff Immelt:]

The chart in December really shows.

[Keith Sherin:]

$26 billion of the $50 billion.

[Operator:]

Your last question comes from Terry Darling – Goldman Sachs

[Terry Darling:]

Coming back to the value gap discussion you had mentioned you’re expecting $2 billion of raw material savings in ’09 in your forecast. I’m wondering if you can give us the net number there which would lead us to ask you about price assumption that context.

[Keith Sherin:]

We’re going to expect to see positive price in 2009. A lot of that obviously is already in the backlog. We haven’t given out a number what the dollar amount is but between the two what we said in December and Jeff outlined what we expect margins to grow and we had a number of tailwinds that were going to help us. We got price in the backlog; we had originally when we came into the fourth quarter ’08 businesses looking at about a little bit of inflation. We’ve been working with the sourcing teams to actually turn that into deflation. We’re talking about a big part of that direct material drop to be from deflation that we’re going to get from the supply chain as work through the year and as the global economy slows and people are going to be really chasing the commodity supplies.

[Terry Darling:]

In terms of the shift here where profit starts to outperform revenue on the industrial side should we be expecting that shift to occur in the first half or more in the second half?

[Kevin Sherin:]

I don’t have a breakout of that. I think we’re going to have to work on that. I think you’re going to see equipment versus services all year long turn into more of a services revenue growth versus equipment. I don’t know exactly the pace by quarter.

[Jeff Immelt:]

The services versus equipment will probably be flip flop in the first half of the year. The value gap I think is pretty solid right now. The restructuring actions get feathered in as the year goes on. You’ve got some that will happen in the first half and some that will happen in the second half is the way I would say it.

[Terry Darling:]

In terms of the additional restructuring you have a number we ought to be thinking about in terms of building into the additional restructuring number we could talk about in terms of building into the numbers at this point?

[Keith Sherin:]

We had this year about $1.5 billion after tax and next year we’re including in the framework about $0.5 billion after tax.

[Terry Darling:]

No update there at this point?

[Keith Sherin:]

$1.5 to $0.5 billion.

[Trevor Schauenberg:]

I’ll turn it over to Jeff Immelt for final comments.

[Jeff Immelt:]

In a very tough environment we delivered results that were consistent with what we talked about in December, earned almost $4 billion in the quarter and $18 billion for the year. The highlight of the quarter is the strong industrial cash flow and the strength of the balance sheet particularly with the cash on hand on the balance sheet. The framework for 2009 we have no change to and that’s what we talked about in December. Lastly, I want to go back to a point which I think was part of Scott’s question that we think given the strong operating performance of the company and the framework and the strong capital position that we still believe that supporting the dividend and doing it without straining, doing it just by controlling our own destiny and by executing with excellence that is the best use of capital and capital allocation. We run the company to be a triple A. We’ve supported and have on hand lots of cash and lots of capital and we’re really running the place controlling our own destiny with real excellence and focus. Thanks for your attention.

[Trevor Schauenberg:]

I appreciate everyone’s questions and their time today. A replay will be available this afternoon on our website. Our next earnings call for the first quarter will be held on April 17. As always, Joanne and I will be available to take your questions today. Thank you very much for your time.