Good day ladies and gentlemen and welcome to the GE Second Quarter 2017 Earnings Conference Call. At this time all participants are in a listen only mode. My name is Jason, and I will be your conference coordinator today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today’s conference, Matt Cribbins, Vice President of Investor Communications. Please proceed.

Good morning, everyone, and welcome to GE’s Second Quarter 2017 Earnings Call. With us today are our Chairman and CEO, Jeff Immelt; our next Chairman and CEO, John Flannery; and GE Vice Chairman and CFO, Jeff Bornstein. Before we start, I would like to remind you that our earnings release, presentation and supplemental have been available since earlier today on our website at www.ge.com/investor. Please note that some of the statements we are making today are forward-looking and are based on our best view of the world and our businesses as we see them today. As described in our SEC filings and on our website, those elements can change as the world changes. And now, I’ll turn the call over to Jeff Immelt.

Thanks, Matt. GE had a solid quarter in a volatile world. Let me give you a few themes that describe the environment. U.S. is stable on a slow growth rate, global growth is accelerating, and resource markets remain challenging. Out topline results are solid. In the second quarter, our organic results were: Orders up 5%; revenue up 2%; margins expanded by 10 basis points; and industrial profit grew by 4%. At the half, orders were up 6%; revenues up 4%; margins expanded by 70 basis points; and industrial profit grew by 11%. At the half, we reduced structural cost by $670 million ahead of plan. We generated $3.5 billion of cash in the quarter, in line with our expectations. In the quarter, we made progress on our portfolio strategy. July, we closed GE Baker Hughes. This move significantly strengthens our position in the sector. This is a more competitive business and positioned for growth. We closed LM, a critical vertical integration move for wind business. LM is already improving growth and margins. We remain on track to close the sale of Water in third quarter and Industrial Solutions by year end. And we see good strategic and operational synergy with Alstom. Overall, we have no change to our 2017 framework. John will update you on his views for 2018 and beyond, later in the year. Our orders have been strong, up 8% year-to-date and 6% in the quarter. We saw strength in both equipment and service. We grew backlog by $3 billion. We continue to see pricing pressure in oil and gas; we have slow industry with excess capacity. Let me give you a few order highlights that we consider most noteworthy. Aviation was up 14%, really an amazing performance. At the Paris Air Show, we announced $30 billion of…

Thanks, Jeff. Starting with consolidated results. Revenues were $29.6 billion, down 12% in the quarter; industrial revenues of $27.1 billion were also down 12%. As you can see on the right side of the page, the industrial segment was down 2% on a reported basis but up 2% organically, driven principally by the appliances disposition. Industrial operating plus verticals EPS was $0.28, down 45% versus the prior year, driven by substantial appliance gain in the second quarter of last year. We had $0.06 of restructuring with no gains in the quarter versus $0.11 of net gains after restructuring last year. Operating EPS was $0.19 in the quarter, down from $0.39 in the second quarter of 2016. This incorporates the other continuing GE Capital activity, including excess debt and headquarter runoff costs that I’ll cover on the GE capital page. Continuing EPS of $0.15 includes the impact of non-operating pension; and net EPS of $0.13 includes discontinued operations. The total disc ops impact was a charge of $152 million in the quarter, driven by GE Capital Exit Plan item. GE tax rate was 13% in the quarter; we still expect the ongoing operations of the business to have a mid teens tax rate for the year. However, the Water disposition will be a low-tax transaction and will bring the overall tax rate for our industrial to around 10% for the third quarter and about that for the total year. The GE Capital tax rate was favorable, reflecting a tax benefit on a pretax continuing loss. We had a better cash quarter. CFOA was $3.5 billion, including $2 billion dividend from GE Capital and industrial CFOA was $1.5 billion in the quarter. It was up $3.1 billion from the first quarter and up substantially from the second quarter of last year. At…

Thanks, Jeff. I just wanted to give you a quick update on our transition process. As you know, my official start date is August 1st. And we’d indicated earlier that I’d be doing a full review of the Company and be back to investors in the fall with my views. We are on track with this process. I am in the middle of a series of deep dives into each of the businesses, looking at everything you would expect. What is the market outlook, where can we grow, where can we improve margins, how is the cash conversion, what returns are we getting on investment? For example, next week, we will be visiting our power and aviation businesses. We are also taking a hard look at our corporate spending, going through a zero base budget exercise on all of our functions and making sure 100% of our GE store outlays are accretive to the overall results of the Company. In addition to the business reviews, I want to repeat the process I used in healthcare to really get out and listen to what people are thinking, good and bad about the Company. I always start with customers and employees, but it’s also important to get the view of our government partners and especially our investors. As I was out with Matt Cribbins last week and we saw about 100 different analysts and portfolio managers, and we will be doing more of that over the next couple of months. There is a lot of positive feedback from these listening sessions but also plenty of suggestions on ways we can improve. This is all leading to a report out in November. Our main focus then will be translating the business assessments into our thoughts on cost out and capital allocation choices as well as reframing our look at 2018 and beyond. I’m really excited to get started officially on August 1st and look forward to our ongoing dialogue. So, Jeff, back to you to wrap.

Thanks, John. Overall, we have no change to the framework but there are puts and takes in each area. We see the key elements of earnings to be on track, 3% to 5% organic growth and 100 basis points of margin enhancement. We have pressure in power, and oil and gas but we’ll outperform structural cost out. We’ve set a target of $17.2 billion for industrial EBIT and we expect to hit it, even with those headwinds. Jeff discussed the impact of additional pressure from the resource sector could have on the EPS range earlier. We expect to hit $16 billion to $20 billion of free cash flow plus dispositions. We still expect to have solid industrial CFOA between the $12 billion to $14 billion, again somewhat dependent on the resource sector. Our dispositions are taking longer than expected but we have to close both in the year. I expect John to take a fresh look at capital allocation, but GE will always have a strong commitment to the dividend. Let’s take a bigger picture view of the Company. We have created a very strong position in power, healthcare, transport and resources, big industrial segments. We don’t like the current on a gas cycle but our business is significantly improved and will prosper as the cycle recovers. We are gaining share in most of our markets with $327 billion of backlog. We have a leadership position in the industrial internet and additive manufacturing, two growth areas and drivers of industrial productivity. And in volatile global economy, our industrial EBIT plus the earnings from our GE Capital verticals should be about $19 billion and again generate between $16 billion and $20 billion in the free cash flow plus disposition. So, a pretty good performance in the volatile environment. I know John Flannery can improve on this. John is off to a great start and I look forward to working with him. Matt, now over to you for some questions.

Thank you. With that let’s open up the call for questions.

[Operator Instructions] Our first question comes from Julian Mitchell from Credit Suisse.

My question would really be on the CFOA for the year coming in at the lower end of the $12 billion to $14 billion guidance, sounds like that’s mostly power, and oil and gas. So I wondered if you could give us some transparency around what is the cash conversion or free cash flow margin like in those two businesses in 2017. And when you think about their cash flow performance this year, how much do you think it’s weighed down by short-term one-time factors? In other words, how quickly do you think it can spring back to an acceptable level of cash flow in those two businesses?

Yes, Julian. So, we expect the power business to deliver a positive CFOA in the year for sure as well as oil and gas. And we actually oil and gas to have -- relative to the environment they are operating in and how do we see their second half, a reasonably good performance around CFOA for the year for oil and gas. So, the power business is going to be something like 50% to 60% conversion in the year; other businesses will be higher. Healthcare will be closer to 100%; aviation will be quite good. But I would guess that power is going to be somewhere between 50% to 60% conversion for the year.

I would also add, Julian. We’re doing $2 billion of cash related to restructuring. A lot of that’s in the power sector. None of us expect that to repeat in 2018. So that’s a natural tailwind, let’s say in terms of CFOA in 2018.

So, why don’t I walk from the first half to the second half a little bit in terms of kind how we’re thinking about it. There is no doubt we have a big second half to deliver on cash, and that’s similar to where we were last year. Relative to the first half, there is really three big drivers. One, we’ve got higher earnings, in line with our volume; our cost-out profile; and gains versus restructuring. In the first half, we had a $0.14 headwind; in the second half, with the gains, we’ll offset that $0.14 headwind and have -- $0.14 offset in earnings. We’ll have significantly better working capital performance. Although I think we feel pretty good about the second quarter. We generated $700 million in CFOA in the second quarter from working capital and that was almost $1.5 billion better than where we were in the second quarter of last quarter. I think importantly within that there was a couple hundred million of inventory improvement, which I don’t think we’ve ever realized in the second quarter of any year in recent history. As we look to the second half, the working capital will get better, largely driven by inventory, a bit by payables and we’ll have some receivables improvement. And that’s consistent where we were last year. So, working capital last year, we improved in the second half, better than $5 billion; we’re not anticipating $5 billion but looking more at just under $4 billion improvement this year. So, we think we’ve executed before, we can execute again in a similar way. And lastly, on contract assets, we still expect contract assets to be a cash usage in the second half but not nearly the rate that we saw in the first half. And we expect it will look very similar to the change in contract assets in the second half of last year, which was about $1.4 billion or $1.5 billion. So, if you look at second half cash flow versus 2016, we delivered $11 billion of CFOA in the second half of last year. We need to do about $1 billion more this year, which is primarily a function of earnings. And we expect working capital to be about $3.9 billion better in the second half. So, the total improvement for the year of about $3.3 billion and that’s less than the $5.1 billion of working capital improvement we had in the second half of last year. As I say contract asset has been a little bit of drag in the second half but in line with where we were in the second half of last year. And I’d say lastly, other operating, all the other elements of cash flow will be better in the second half than the first half and will be better substantially versus 2016. So that’s kind of how we think about going from the first half to the second half.

And also say, Jeff, in 2016, we ran the place with a couple of $3 billion less working capital. We’re into the same thing in 2017. But I think the team -- there is a lot of juice in this left. And I think we have every expectation that we’re going to be able to continue to reduce the amount of working capital that’s needed to run GE in the near future.

Thank you. Our next question comes from Andrew Kaplowitz from Citi.

So, could you give us a little more color on what you are seeing in power? You mentioned trending toward the bottom of your EPS range for the Company, I think despite a lower tax rate. And power specifically, is services overall just a tougher market than you thought? You talked about the delays you are seeing in services, but how much of the power weakness would you say is execution related and how much low-hanging fruit does Russell have to improve delivery timing and overall execution of the business?

So, I guess I’ll start, others can way in. I would say, generally, I think the units market on the equipment side is more or less what we thought it would be. We said -- we saw 40 gigawatt market, down 10%. In that context, we said, we thought we’d take orders for 85 to 95 units in the year; we still think that holds, we’ve got about 39 units during the first half. We said we thought we’d ship 100 to 105; we think that’s still a reasonable expectation. And we talked about the gas turbine business, the units business turning around profitability from the launch last year to this year, and we still expect that holds true. I think on the service front, I think it definitely is softer than we thought when you look at outage volumes. We thought outages were going to be down mid single-digits. Right now, it looks like particularly in the gas base and on the bigger F-class outages, we’re running about 9% down year-over-year that’s partly driven by utilization, it’s partly lower capacity payments, it’s partly extending intervals between outages, but that feels softer. So, the transactional business, which is 50 plus percent of the business, that feels softer than where we came into the year. But, I’ll put it little bit in perspective, I think having said that, to the first half revenues in the business were up 10%; operating profit was 7%; there is definitely some execution there. I talked about 90 plus million of LDs and a fuel mod that we had to do, we don’t expect those to continue. The 70 million of LDs were really around prelaunch H unit where we took a little bit of risk on schedule and commission and not having been through the…

And I would add to that Andrew. As you put the energy connections business together with the power business, you’re going to look at a funnel of maybe another $1 billion of structural costs you can take out of the combined business, rolling into 2018. So, I think to add to Jeff, there is probably close $100 million that shouldn’t repeat that we should have done better in the quarter. I think the profile for the year is still going to look attractive for the segment. And I think the team has a nice cost -- is developing a good cost plan going into 2018 that I think should create a buffer against the market.

There is both, an opportunity and necessity to restructure the cost structure of this business, given the market that we are operating in. And I expected that the business on their structural cost commitments is going to over perform in 2017. And as Jeff just talked about, we are building a plan around something close to a $1 of structural cost out of 2018.

Next, we have Jeffrey Sprague from Vertical Research Partners.

Jeff Immelt. Good luck and thanks for all your thoughts and insights over the year, much appreciated.

Jeff, you and I have done this a long time. I’m going to miss you and I look forward to having a beer with you as a citizen someday, as civilian.

I’d like to do that definitely. Just on cash flow, I guess maybe perhaps for Jeff Bornstein. The first half obviously came in short of what you thought; you thought you would kind of equal last year at roughly $400 million. I wonder if you could also decompose what the source of that may be roughly $600 million shortfall was. And just your comment on share repo, are you linking the conclusion or execution of these divestitures to your share repurchase plan or what variable is really driving the reevaluation of the repo? Thank you.

So, I think what I said on the call, maybe I misspoke on the call. What I meant to say on the call was we expected the CFOA in the second quarter would be substantially better sequentially from the first and substantially better than the second quarter of last year. I didn’t mean to say that we would be flat year-over-year. I think generally speaking at $1.5 billion, $1 billion of CFOA, we felt pretty good about that. Would we have liked it been A bit higher? Sure. But I thought the inventory performance was pretty good, the receivables performance was pretty good; payables were used in the quarter maybe a little higher than we expected but that’s partly driven by the cost-out that’s happening and the inventory improvement. So, I think at a $1.5 billion that was reasonable performance. And it puts us pretty close to where we were at the half. You were right, we’re down 600 year to date year-over-year but that was included in the context of how I kind walked you from how we think about going from the first half to the second half total year and with that means for working capital and other cash flow improvement we expect to see. On repurchase, I think our share buyback has always been predicated on dividends from GE Capital and the disposition. So, no change in there. I think that there is a risk that industrial solutions won’t happen in the year. It’s hard for me to exactly handicap. But, I think there is at least an equal probability that will happen in the first quarter of 2018 it will happen in the fourth quarter of this year. As I mentioned earlier, we feel pretty good about the fact that Water will get to a closing here in the third quarter. So, having said all of that, I think as part of John’s relook about what we’re doing, I think John wants to go back and rethink about how we think about capital allocation in the Company and embedded in that obviously is how we think about share buyback. So, we’re being open objective and John wants to take a look at it and really work through with the team what the right way forward is and what the right alternatives are.

I hate to be a broken record but there is -- Jeff, there is $2 billion of cash associated with restructuring in 2017 that’s probably a $500 million or $600 million more than 2016 and that should mainly not repeat going into 2018. So that’s in these numbers. And I would just eco what Jeffery said about capital allocation what John should do. The only other context I’d give you though is that everybody here prioritizes the dividend in a very high -- at very high level. And I just don’t want anybody to ever be confused about that in the context GE, what we do, how we do, and whoever CEO is how we think about that as a context. I was here the day we cut the dividend, it was the worst day of my tenure as CEO and the dividend is really I think incredibly important for our investors and for the team.

Just one point of clarification on the restructuring cash. So, yes, we’ll probably spend slightly more than $2 billion in cash on restructuring in 2017. Everything else being equal, I’m trying to avoid giving the 2018 guidance here before John’s gone through framework, but we would expect to spend substantially less than that in 2018 but it won’t be zero. There will be projects we do in the third and fourth quarter that allow cash that spills over.

Thank you. Next we have Deane Dray from RBC Capital Markets.

For Jeff, congrats and best wishes on your last earnings call, and we are expecting to hear good reports about improvements in your golf game. A question for John. So, given the management transition and now the mid-November timing for the reset and the new vision for the Company, how can you minimize the effects of GE being in somewhat of a state of limbo until then, for want of a better word?

Listen, we are going through a process that we’ve laid out for you guys. It’s a substantial process in a large company that takes a commensurate amount of time. I’d say Jeff and Jeff have laid out a framework for the year already, so there should be no change in thinking around that. And then, we’re spending a lot of time internally with the team. So, I would say there is no risk of limbo inside the team. I actually start August 1st, but there’s a lot of interaction already. So I’m not worried about internal paralysis, if you will. And you have our outlook for the year. So, I look forward to the November -- a robust discussion in November about the Company and not worried that we’re going to be dead in the water in the meantime.

And I think the teams are still executing against their AIP plans, their LTIP plans. There is a ton of operational focus inside the Company that investors can count on while John’s going through his kind of an over to the top review.

I would just -- if you don’t mind, John, I would just add. It’s an enormous company, it’s complex. We want to reground, rebaseline everything we do in this company, how we do it, the value of the GE store, how it creates value in our franchise. That’s a big, big body work, as well as understanding portfolio and John getting deep on and developing his own views about what we’re going to invest against, what we’re going to not invest against et cetera. So, I understand the point completely Deane. I just think that’s a meaningful body of work and I think when John gets up in front of investors and shares his views, we want that to be as absolutely as well informed as possible. So, I just think it takes that amount of time. But I understand your point between now and then there’ll be a lot of people speculating on how John might come out of it.

Thank you. Next we have Andrew Obin from Bank of America Merrill Lynch.

Yes, good morning. Jeff, thanks for all the work over the years. Look forward to work with your successor. Thank you very much. Just a question on power, the outlook for 2018, just sort of talking about lower and thinking about Siemens’ commentary, is it cyclical or is something structural going on in terms of outlook for power?

I think Andrew, if you look at a micro study like IEA, which or EPE [ph] study of the industry things like that. These would show slow but steady increases in the evolution around natural gas really for the next 20 years, right, in terms of additions to capacity and things like that. And you can triangulate that against whatever your assumptions might be on accelerating penetration of solar, reduction of nuclear. There is a whole series of things over the next five years or 10 years or 20 years. But I think what’s clear is with the ongoing outlook for the cost of natural gas, gas turbans and gas power generation are going to be one of the staples of the future of the industry. Now, does that mean 50 gigawatts, instead of 40 gigawatts in the short-term, I don’t think any of are that smart. You’ve got places like Saudi Arabia that used to be the biggest gas turbine market that have been slower over the last couple of years; they’re going to need capacity; there is -- what does China do, vis-à-vis their environmental issue. There is probably five markets that matter that would make it more on the upside, but I actually think there is a fit for the gas market going forward. That being said, I don’t think there is benefit to Jeff or John or to Russell now to be overly bullish about the near-term kind of dynamics around the industry. But at the same time, I think somewhere in the 40ish area is pretty much where I would think about the industry going forward. And then outrages that Jeff went through, this is going to be a function of kind of renewable mix; it’s going to be a function of hot summer, cold winters, price of coal, price of gas and bunch of other things. But, I think there is reasons to believe that that number stabilizes as time goes on.

Andrew, I think that when we get up in November, we will share our view of where we think the power business is going for 2018 and to some degree beyond that. We think the power market this year for gas turbine can be 40 gigawatts, that’s down roughly 10%. It might be down again next year. I think so far the business is competitively been in a good place. We’ve seen a little bit of price but we are definitely outperforming competition on both, price, orders and share. When John is deep in the business and develop the view with Russell on where this is going, we will share that in November.

I think you are sitting, though, Jeff, in a year where equipment means [ph] is going to be --- the power equipment is going to be 10% or something? It’s going to be high. Let’s put it that way. That doesn’t spell disaster, I don’t think.

Thank you and our final question comes from Chris Glynn from Oppenheimer.

I just had a question on the contract accounting long-term service agreements. Wondering if there is an update on the accounting change impact next year and also if there is any view to somehow monetizing the LTSAs in a way that’s different from the past?

So a couple of things, one is I don’t have an update for you today on the 606 accounting change. We are working it rigorously. When we have an update as to the impact to 2016, 2017 and a relook at what we think the impact might be in 2018, we will share that with you. Right now, we are going through first quarter actuals and auditing those and making sure we’ve got the processes in place to deal with all the changes. So, I don’t have any change in guidance for you on that. I don’t have an update other than we are going through the mechanics in the process. It’s pretty complicated stuff, particularly around LTSAs. On monetization, listen, I’m -- particularly where there has an interest in putting upgrades or other investment into a contract, if there are capital markets solutions to help customers do that and were pricing for that as opposed to us essentially pricing it, I’m wide open on that. Those structures are not simple. But we continue to explore what those might be. We have done a little bit of it. We have done some of it for sure, but mostly focused around how we think about upgrade. And the variable component where it’s utilization based, it’s very difficult to think about doing something around that, but if you’ve got fixed payments embedded, like for an upgrade, that is something that we can think about doing. The last thing I’d tell you just -- in the quarter, nobody asked but our CMRs or LTSA gains in the quarter were $500 million; they were $600 million in the second quarter of last year. So, they are down 100 million year-over-year.

Okay. Thank you. And just a reminder that the replay of today’s call will be available this afternoon on our investor website. And Jeff, to wrap up your last call.

Great, Matt. So, the first time I did this, all we did was fax a press release, and that’s been replaced 64 subsequent times by this incredible work. So, it shows you I’ve been doing this a long time or how much times have changed. I would like to publically thank the GE finance team led by Jeff. You guys have no idea how much work goes into this. Matt, thanks for your great effort. By JoAnna especially you, it’s been great to work with you for so many years. And I just want to all of our investors to appreciate the incredible work that goes into this. We’ve always tried to be respectful, transparent and honest in this process. I’m looking across the table at Jeff Bornstein; he’s got a six-inch binder. He knows every fact and everything to do with the Company. And I feel great about John Flannery and what he is going to do with the Company and going forward. So, again, I’m sure I’ll see many of the investors over time. But I want to use this as an opportunity to do a shout out for the GE team and what great work they do. Thank you. Great.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect. Good day.