Good day, ladies and gentlemen, and welcome to the General Electric First Quarter 2018 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 and welcome to today’s webcast. I’m joined by our Chairman and CEO, John Flannery; and our CFO, Jamie Miller. Before we start I would like to remind you that the press release, presentation and supplemental have been available since earlier today on our Investor website at www.ge.com/investor. Please note that some of the statements we are making 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 will turn the call over to John Flannery.

Great, thanks, Matt. In my letter to shareholders I spoke of our path forward. We are taking what we learned in 2017, recommitting to the fundamentals, and dedicating 2018 to earning back your trust and delivering for you. Today is our first report card for 2018 and we see signs of progress. At a critical time I’m extremely proud of the team’s intense effort and execution focus during the first quarter. Adjusted EPS up $0.16 was up 14%. Industrial had a strong quarter delivering $0.18, up 29%, with strong performances in Aviation, in Healthcare, in Renewables, in Transportation and higher cost out in Corporate. This is partly offset by lower Power, Oil & Gas and GE Capital earnings. Free cash flow was about what we were expecting. It was a $1.7 billion use but, importantly, a $1.1 billion improvement over the first quarter of 2017. We continue to make progress on cash. The team is intensely focused and cash is front and center in every conversation. We see it in our results both in the fourth quarter of last year and in the first quarter. Power continues to be our biggest challenge. The team is making good progress on execution, but the market is challenging and, as we’ve said before, this will be a multiyear fix. We are confident we will exceed our 2018 goal of $2 billion plus of structural cost out. We delivered $800 million in the first quarter, which helped increase the industrial margin rate 60 basis points. We have been working for several years to resolve our WMC-related exposures. As we publicly disclosed, in December 2015, the DOJ started a FIRREA investigation. In the first quarter, we booked a related reserve for $1.5 billion for WMC. Last November we announced our intention to divest $20 billion…

Thanks, John. Before I start with the consolidated results and, consistent with what we laid out in November, we’ve made adjustments to our reporting metrics starting this quarter. First, on EPS we now report an adjusted EPS number which has total continuing operations, excluding industrial gains, restructuring and other and non-operating pension and benefit costs. And on cash we have moved to reporting free cash flow as opposed to CFOA. Both of these changes reflect our continuing effort to simplify our financial reporting and bring our metrics more in line with industry peers. Also as you know, last Friday we filed an 8-K with restated financials for 2016 and 2017 to reflect a number of new accounting standards, the most significant being the new revenue accounting standard known as ASC 606. I will go through more detail on the transition and financial impacts later in the discussion, but all financial metrics and prior period comparisons in this presentation are now on the new basis. And it’s important to note that this does not change anything related to our cash flows and has no impact on our 2018 earnings and free cash flow guidance. On the consolidated results, first-quarter revenues were $28.7 billion, up 7% reported. Industrial revenues were $26.5 billion, up 9% reported with the Industrial segments also up 9% and organically down 4%. For the quarter, adjusted EPS was $0.16, up from $0.14 in the first quarter of 2017 and I will walk you through the Industrial and Capital components of that. The Industrial businesses comprise $0.18 of EPS, up 29% versus last year, driven by strength in Aviation, Healthcare and lower Corporate costs. And GE Capital contributed negative $0.02 driven largely by interest on excess debt and costs relating to calling $2 billion of long-term debt during the…

Okay, thanks, Jamie. There is no change to our 2018 outlook for Industrial EPS or free cash flow. Given pressure in Power we see EPS closer to the lower end of the range. As I said earlier, we expect earnings pressure in Power will be offset by better Aviation and Healthcare earnings and lower Corporate costs. Renewables, Transportation and Oil & Gas should be about as expected. Cost out was $800 million in the quarter, on track to be better than $2 billion. Cost out in Power in the quarter was $350 million. Corporate was down $176 million and we are executing on synergies in BHGE. As Jamie mentioned, GE Capital earnings will be breakeven for the total year due to our portfolio actions and we expect the second half of the year to be better than the first half. We are targeting free cash flow of $6 billion to $7 billion. At $1 billion better than last year’s first quarter our first quarter is on track and no change to the outlook for the year. I thought I would wrap with an update on the actions we are taking to run the Company better and an update on the portfolio. We are in the middle of our three-year strategic planning process and we have enhanced our approach this year. Much more detailed analysis on the markets, on our outlook, and a very detailed three-year financial plan for our businesses. We will be reporting out a summary of that to our Board in the second quarter. We have our shareholder meeting next Wednesday and a Board meeting on Tuesday and we are very excited to have Tom Horton, Leslie Seidman and Larry Culp on board. They have been attending meetings since their announcement and are getting up to speed quickly…

Thanks, John. With that, operator, let’s open up the call for questions.

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

Hi, good morning.

Good morning.

Good morning. Maybe just a first question around the Power business. Some sense I guess as to how much below your prior plan you think this year will shake out on the profit side. And also I guess related to that, what you are thinking about the cash conversion ratio. And if I look at the numbers, obviously profits are down a lot in Q1, but at least it was a fairly normal decremental margin, unlike the second half. So does that tell us that a lot of those excess costs you’d booked in the second half, you think you are through that process now with cleanup?

Good morning, Julian. This is Jamie. Hey, I will take that one and then maybe John can get some color, sort of the broader Power market and what we see operationally. So first with respect to what we see in 2018, and maybe I’ll talk about this a little bit versus last year and a little bit versus the prior guide. As I mentioned earlier on the call, we see 2018 as probably flat to 2017 or flat to prior year. You see the market shifting that we see, so we saw 30 to 35 gigawatts really shifting to maybe less than 30 as we look at the year. So honestly as you look at, whether it is versus prior guide or versus 2017, this is really mostly a market story. Our prior guide had 60 to 70 gas turbine units. Our new guide would be 50 to 55. And on the aero side we had 30 to 40 before and now 20 to 30. And really the impact is just supply chain overhead, as you don’t have those units come through you just see more liquidation impact. The second piece on cash, Power cash I would tell you for the first quarter was below plan, but that is not unusual for us in that business. First quarter is seasonally low – a strong second-half unit shipment and unit profile order – profile for things. And then from a market perspective, as we talk about the market what you really see there is progress burn not being replaced as quickly by progress coming in from new orders. So, Power for this year continues to look like a real second-half profile story both with respect to the gas power business but really also with respect to how we see the trending in services.

And Julian, I would just add just a few sort of macro thoughts about how we are looking at Power right now, and kind of sequentially go through the market, our market share, our cost structure, what we are doing in the service business. I think, as you have all seen, the market and our market share is lumpy by quarter. But I think we do see enough trends, looking at our pipeline over 12 to 18 months, that we think this is going to trend softer than the 30 to 34 by a bit. And I think the factors are well known. Part of it is Renewables penetration. Part of it also is the pricing of renewables keeps moving and we see utility customers in a bit of a wait-and-see mode to see how that pricing evolves over the next year. And then with energy efficiency, on the consumer side of things we are seeing more people comfortable with maybe lower surplus reserves and being able to delay some of their CapEx decisions. So our market share, again, moves around by quarter, but we had about a 50% share last year and that ranged all over the place, about a 40 point swing in various quarters around a mean of 50%. We expect to be in that 45%, 50% basis on a rolling four quarters going forward. Our commercial teams I would say – we continue to be very disciplined on our approach to the risk and return of what we are seeing in the market. And that really leads you to a lower revenue outlook and obviously lower cost plan. So we have announced the 12,000 jobs out, $350 million cost out in the quarter. We’ll exceed the $1 billion target for 2018. And we are taking cost…

Thank you. Next we have Steve Tusa from JPMorgan.

Hey guys, good morning.

Good morning.

Good morning.

When we think about the guidance, so you took down the Power guide, I think you said Healthcare maybe could outperform a little bit. You didn’t talk about the Aviation guidance. And just the way I am looking at this is basically the LEAPs will obviously ramp very hard in the second half and the 56s probably start to come down a bit. So your standing guide is $6.2 billion I believe to $6.3 billion on segment profit there. Any update to that number?

Yes, so on Power, I talked about it being flat to 2017. When you think about the rest of 2018 for the other businesses, we see very solid outlook for Aviation and real strength there. Healthcare is also really looking very solid for 2018 and we see upside there as well. And then the other piece that’s coming through in a really strong way is cost out. And you saw that in the corporate numbers, but we are really seeing that across the board across the businesses in terms of just better cost productivity. Drilling in on aviation just a little bit, I mean obviously the market feels really good. Demand outpacing capacity, and you see that both in commercial and in military. On the operations side we had less LEAP than we expected, but I will tell you, our spares rate was very favorable in the business. And I think that mix story and the cost management story – we see that really continuing throughout the year. Just to touch on LEAP, because I am sure that will be a question at some point, we are about 70 units behind as we hit the end of the first quarter. But as we look to the year we have got a very deep line of sight. The team is really, really focused on it into supply chain and exactly what we need to do, what our suppliers need to do to really move LEAP execution. And right now we are tracking to be back on track by the end of third quarter and be in line for that 1,100 to 1,200 unit shipment story. So really I think on the Aviation side it feels very solid.

Steve, I would just add on the cost side of things, Jamie gave you a good sense as to how strong the outlook is for the business segments in Aviation and Healthcare. But on the cost side of things we just continue to see a lot of opportunity there. So you are starting to see that in our numbers. Russell and the team working it very hard in the Power business; Lorenzo and the team getting the synergies that we need in BHGE. And we still see big opportunities in really the overhead structures of the Company overall. And as I mentioned in earlier remarks about the operating system and really a philosophical sort of shift to pushing the management structures into the businesses, we think there is still more opportunity on cost as we go forward here.

Next we have Jeffrey Sprague from Vertical Research.

Thank you, good morning, everyone.

Good morning.

Good morning. I was wondering if I could ask a couple of questions on the balance sheet actually, just trying to sort a couple things out. The receivable from capital to the parent declined about $4 billion in the quarter. If you could give us any color on what was going on there. And also I see goodwill and intangibles went up in Industrial about $1.5 billion sequentially. Maybe coincidently, but that kind of seems to erase the $1.5 billion equity hit at capital on the reserve. Maybe just a little color on what’s going on in those two pieces.

Yes, the goodwill piece of it was really FX. And so, there really weren’t any other changes. There were a few minor purchase price adjustments, but the goodwill shift was largely just the FX mark on the balance sheet. And in terms of the receivables from GE Capital, that’s really just net maturities of debt.

Thank you. Next we have Steven Winoker from UBS.

Thanks and good morning, all. Just a couple of questions here. First, if I could, on the GE Capital kind of cash walk, cash availability given the $22 billion that you are starting with now. And maybe talk through how you’re thinking about, Jamie, that in terms of asset sales offsetting debt maturities and insurance contributions, kind of what you have left. And then secondly, John, I assume it’s no accident that you are talking about the GE operating system here and you’ve got Larry joining your Board soon. And there’s a lot on that external best practice front to sort of think about in terms of opportunity. Have you sized that opportunity at all and paced it? And is that also what should give us confidence around hitting the EPS walk this year? And sorry about all the questions but I know I might get cut off after this. Thanks.

Hey, good morning. So I will take the GE Capital question here on just how we see liquidity and the asset sales there. So, GE Capital ended the quarter with $22 billion of cash and short-term investments. And we expect to maintain about $15 billion to $20 billion of liquidity through 2018 and 2019 in GE Capital. The asset sales that we talked about in January are well underway. We are seeing a really strong interest in the assets and we have got engagement with multiple parties right now. In March we sold the first tranche of our tax equity portfolio and I think it was a really good template to use for future asset sales. But we see those coming in nicely throughout the balance of 2018 and our outlook right now is that our liquidity profile at Capital should nicely match kind of how we see the needs there in terms of debt maturities and the other flows. John, do you want to talk about the other?

Yes, let me pick up on that. And Steve, I would just say a few things for context. This idea in general is really something that I’ve been experiencing and thinking about frankly for years. If you look back in the last three roles that I really had in the Company going back to – going to India in 2009. I had a sense in that role of frankly how difficult it could be to try to get things done far away from the center of the Company, if you will, and how much concentration there was of decision-making in the center of the Company. Then went to the BD role and had a sense of how we are allocating capital around the Company and between the units. And then in the Healthcare business another perspective of running a business unit. So those three things really formed a thought in my mind that we needed to decentralize the basic management of the Company and push the responsibility out to the regions, out to the businesses. So I would say that’s just sort of background on the evolution of the thinking, if you will. And then the Crotonville exercise was quite interesting. We had half a dozen people come in, many of whom were ex-GE executives that had gone on to other companies. And we went through what are the things you kept, what made sense, what was helpful. So, that was added to the thinking that we already brought to the table and there clearly are companies that have done this well including Danaher. So, I wouldn’t size this number right now, but I would just say we think it could be meaningful on the cost front at the GE corporate level. We think it could be meaningful in the businesses as well. And then I think the main benefit of this overall over time though is better accountability and really pushing the onus of execution and that sense of ownership down into the business units.

Next we have Scott Davis from Melius Research.

Hi, good morning, guys.

Good morning, Scott.

Good morning.

I’m trying to get a sense of just in the Power business explicitly, and really two small questions here. But one is what is the cost of quality going to – what did it hit you this quarter, what do you think it will hit you this year? And is the $2 billion still the right number? I mean, that $2 billion cost out was based on probably a higher market forecast, certainly a higher market forecast and maybe even a higher longer-term market forecast maybe as you guys have dug in a little bit deeper here. I will stop with that.

Yes, Scott, on the operational side, we are really making progress on that. We still have work to do there, but what I would tell you is that the numbers of issues we are seeing and the size of the issues we are seeing continues to go down. When you look at the real comparison to last year, or even the comparison to our previous guide, some of that is market like I talked about and some of that is a reduction in some of the operational issues we are seeing. But remember, we have got a really strong base cost out profile here. And the actions John talked about are really being layered in beginning in the second half of last year and really throughout this year. And we see that is really pulling through and offsetting some of that incremental noise that we expect. The other piece – and I mentioned this earlier but I will just say it again – that I think is important to think about is that Scott Strazik came in to really run the Power Services business. There have been a number of actions Scott and the team have taken both around how they are organized, how they are running the business between the contractual piece and the transactional piece. And then how they are putting in different changes around pricing, around sales incentive programs and other things that, honestly, that ramps as you go through the year too. And services and Power will tend to be I think a second half peak.

Scott, I would add one of the thing. Jamie hit the nail on the head on the costs; we just continue to work that item and Russell and the team are working that very hard. I would just underscore the team is battling extremely hard. I am watching this day in, day out. This is the top priority of our team here. And I’d just say the Power team in a tough environment is digging in hard and really giving it every effort. We have made a lot of changes to the team, so not only in terms of the most senior leadership there but down a level – Jamie mentioned Scott. We have a new services CFO, Chuck Nugent, who as I mentioned came over to the Gas Power Systems CEO. The commercial leader has changed, supply chain leader has changed. So in many ways watching this, it reminds me of the first year I had in Healthcare where just – you changed the team, the team coalesces around the focus on cost and improving the business. And it takes time, obviously it took us time to get into this dynamic and it will take us some time to work out it. But I’d, again, applaud the team’s efforts on this.

Next we have Andrew Obin from Bank of America.

Yes, good morning.

Good morning.

A couple of questions. So, transactional progression, because it seems profit wise that’s a big swing for Power profitability. I guess you indicated it was up double-digits. Can you just sort of talk about what initiatives you are doing inside the transactional business in Power to drive this growth? And what can it be by year-end, how much visibility you have? And second just more geographic color inside…

We don’t give a very detailed focus of that business by numbers, but let me tell you a higher level. As we said, there’s really two key factors here. One is visibility into outages in the non-contracted installed base. And then second obviously is the ability to penetrate, capture and get the right margins in that business. We had an issue with visibility into the installed base. So when Scott got into that business last fall we were seeing that we had visibility around 40%. So we just were missing a significant amount of the opportunities there. And they have gone through an exhaustive method to catalog the installed base and make sure we have got good visibility there. That is trending up close to 90%. So step one obviously is to know better what is going on in the market. And then the rest is shoe leather and sales coverage and making sure the teams have good value propositions, understand what to say in front of the customers, the right incentives. And we have, as I said earlier, specific sales incentives around this area of business and particularly the margin rate in this area of the business. So this is a blocking and tackling exercise on visibility and sales execution and we think it will yield results – good results.

Next we have Andrew Kaplowitz from Citi.

Hey, good morning, guys.

Good morning.

John, can you talk about your line of sight into the $5 billion to $10 billion in Industrial asset sales that you mentioned, and whether you think you will get the valuations that you want on these deals? And then stepping back from there, obviously there has been quite a bit of talk about bigger changes at GE, whether it’s a bigger breakup or spins. Maybe can you give us any color as to what you are thinking at this point on the structure of the Company?

Yes, so Andy, maybe I will take the first piece of that and then throw it over to John for the portfolio piece. So on the dispositions – and John mentioned a number of these things early in the call, but Industrial Solutions, we see that closing in second quarter, $1.9 billion of cash. You probably saw the announcement a couple of weeks ago on Value-Based Care. That’s another $1 billion probably third-quarter close if not second quarter. And then as we really start to move down the list with Distributed Power, a couple of Aviation platforms and Transportation we are seeing strong interest across the board. Multiples will vary by the deals just because the industries are in different cycles, but we see line of sight to these planes landing as we start to get into the second half. The other piece, and I know people have asked this before, so maybe I will just throw it out, is we look at free cash flow going into 2019. If you assume all these close at the end of 2018, these represent about $1.2 billion of free cash flow ex-Industrial Solutions. That’s another data point on that one.

And then, Andrew, just go back to maybe the principles that we went through before. So first and foremost, strong franchises concentrating, as we said, in Power, Aviation and Healthcare. Step one is to make sure we are running those businesses the best way we can and get the best results out of those businesses. I think we are seeing progress on that result, so that we step into any thinking about the portfolio really on our front foot with the businesses performing well, I think that is where we are. But ultimately we have to think through and I have to think through what is the environment and conditions that will help these businesses flourish not just in 2018 but five years ahead, 10 years ahead, 20 years ahead. And in that regard basically we disclosed earlier and discussed earlier looking at all options. Ultimately it’s a question of what’s the right structure for resources, for organic and inorganic strategic flexibility, for the right level of management execution, for the right level of cost structure and things in the Company overall that we reference. And getting the right outcome for customers, for the employees and for the investors. So, there is no sacred cows. We are reviewing a number of structures. We are working through this right now in great detail with the Board, including our new Board members, we are being deeply thoughtful about this, purposeful about this. And we will give you an update in the next couple of months, as we said earlier. So, there’s a lot of work and engagement. The last thing I would say just, importantly, there are factors to consider. We see them as solvable and manageable, but I want to reiterate we are making no changes to the 2018 capital allocation framework, no change to our financial policies. We will honor all the commitments we have with employees and retirees and bondholders as we consider any options that we would look at.

Our final question today comes from Robert McCarthy from Stifel.

Good morning, everyone. Can you hear me?

Yes.

All right, I will keep it quick. In terms of the enumerated assets subject to divestiture, the $20 billion, can you give us an update of what you think the cash conversion, the Industrial free cash flow conversion on those businesses are? And the spirit of the question is what are we playing for here? Because you have got trendline CFOA of probably $11 billion to $13 billion. And from that standpoint with $3 billion of CapEx, what can we be playing for for Industrial free cash flow per share in a bull case in 2019?

So first, we don’t give out 2019 guidance at this point. But I would say a couple of things. So, I mentioned before that these businesses that are in the disposition path represent about $1.2 billion of free cash flow for 2019, assuming they all sort of left at the end of the year and that’s ex-Industrial Solutions. As you get into 2019 there is a couple of other things to remember, most importantly that we’ve got a very heavy load of restructuring cash out this year that really drops as we go into 2019. And so, that offsets a lot, if not more, of the free cash flow exits that we have going. And then as we get into 2019 – as we get into later in the year we will lay out the earnings profile for the businesses. So hopefully that helps at least a little bit at the high-level.

One thing I would just add to that just to clarify, the $1.2 billion is the free cash flow of that grouping of assets. $5 billion to $10 billion is the cash – range of cash proceeds we see; the actual enterprise value and how those deals are structured would be quite higher than that. So you should not take one and divide by the other for multiple of them. Interest level on these assets is good and the multiples are attractive.

All right, great. We’d like to thank everyone for joining today. Just as a reminder, the replay of today’s call will be available this afternoon on our Investor website. Next Wednesday we will be holding our annual shareholders meeting in Imperial, Pennsylvania; and, John, you will be at EPG on Wednesday, May 23.

That’s right. Matt, I’d just like to finish and just say, again, thanks to the GE team. It was a great performance in the quarter by the team, great effort, great focus. And one of the joys of my job is being able to watch you perform around the world. I had a chance to do that in the first quarter. But a reminder to the team and also to everyone else, it’s a step forward in the 2018 plan, but we need to continue to execute, keep the focus there. And the only thing that matters at the end of the day really is delivering the full-year results for 2018 and that’s what we will be focused on. So thanks and we will see you at EPG. All right, thank you.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating and you may now disconnect.