General Electric Company (GE) — Q4 2016 Earnings Call Transcript

Hello everyone and welcome to GE’s fourth quarter 2016 earnings call. Presenting first today is our Chairman and CEO, Jeff Immelt, followed by our CFO, Jeff Bornstein. Before we get started, I would like to remind you that our earnings release, presentation, and supplemental have been available since earlier today on our Investor website at www.ge.com/investor. Also, 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 would like to turn the call over to Jeff Immelt.

Thanks, Matt. GE executed well in a slow growth and volatile environment. We see optimism in the United States, and here orders grew by 23%. In addition, Europe is strengthening, and we see positive momentum. Meanwhile, the resource sector and related markets continue to have headwind. As you know, we closed Alstom on November 1 of 2015. As a result, the fourth quarter of 2016 was the first quarter where Alstom was organic. So, I’ll give a few ways to look at the quarter. On a reported basis, orders were up 4% and revenue was flat. On an organic basis, in other words, including Alstom in November and December in the organic calculation, orders were up 2% and revenue was up 4%. We also show the calculation that excludes Alstom results from the organic calculation, and segment operating profit grew by 6% in the quarter. For the quarter, we had some pluses and minuses. Orders were strong ahead of our expectations. Service growth was very strong for both revenue and orders. Alstom synergies are ahead of plan. Some businesses had very strong years: aviation, healthcare, and renewable. On the negative side, we failed to close a couple of big power deals in tough markets. In addition, restructuring exceeded gains for the year. We are active in the portfolio in the fourth quarter. We announced the acquisition of LM renewables, strengthening our wind supply chain. We further simplified GE, announcing the disposition of our water and industrial solutions businesses. The GE capital team has done a great job. We closed $86 billion of asset sales in 2016, and the move to become an industrial finance company is very positive for GE. I am particularly excited about the Baker Hughes merger, which creates a strong full-stream competitor in the industry. This is a good move for investors and customers. For the quarter, industrial and verticals earnings per share were $0.46, up 6% and for the year, EPS was $1.49, up 14%. Industrial EPS was up 12% for the year. We accomplished much of what we set out to do in 2016, and we have no change for our framework in 2017. To recap the year, we finished in line with what we saw in December and within the range for the year. Overall, earnings per share was $1.49, in line with consensus; organic growth was 1% for the year; and margins of 14% were at the low end of our range. Corporate and Alstom were in line with expectations; foreign exchange created $0.03 per share of headwind for the year; and we launched incremental restructuring which again failed to fully offset, and this created $0.02 of headwind for the year. We met or exceeded most of our cash targets; at $32.6 billion, free cash flow plus dispositions were in line with our December outlook. We had good cash execution across both industrial and capital, and we returned more than $30 billion to investors in buyback and dividends. We’ll go through each of those in more detail. In all, we were able to offset a challenging oil and gas market to deliver a year in line with expectations. Orders grew by 2% organically in the quarter; services were particularly strong with growth of 20%; and we ended the quarter with a backlog of $321 billion, up $6 billion from 2015. We saw solid growth in aviation, renewables, healthcare, and oil and gas. Renewable orders grew by 32%; healthcare had great international strength with China up 20%, Europe up 6%, and Latin America up 16%; GE to GE orders were up 67%. Now, overall, equipment orders declined with tough comps in transportation against last year. Oil and gas orders grew by 2% organically, our first growth in two years. We see some firming in the market; this includes 42% orders growth in Turbomachinery. Oil and gas equipment grew by 10% with services down slightly. And for the year, oil and gas digital orders grew by 30%. Service orders were strong across the Company; power was up 19% and transportation was up 101%. Renewables capitalized on multiple repowering opportunities to drive growth. Aviation service grew by 8% with spares up 14%, and we closed our first big lighting as a service deal with Walmart. Orders in the U.S. grew by 23% and were down about 5% globally. We saw strength in the developed markets, which grew by 8%, and we booked some big global orders including a $1.4 billion order with the Iraq Ministry of Energy for gas turbines. We are gaining share with LEAP in the narrow-body segment. GE Capital facilitated $5 billion in industrial orders in the quarter. Orders pricing was down slightly with sustained pressure in oil and gas. In addition, renewables was impacted by U.S. pricing dynamics; this was in line with our expectations. Predix and software orders, in other words excluding AGPs, grew by 36% in the quarter. At $4 billion, orders were up 22% for the year. Seven of the ten segments grew by at least 10%. Let me give you some more details; for instance, for energy, a key market. Here, energy connections were up 26%, renewables were up 126%, and power was up 213%. For the year, we signed 427 partnerships and have 22,000 developers on Predix. We created a few big global partnerships including Reliance and Maersk, and we signed a first enterprise-wide software agreement with Exelon to apply Predix across more than 2,000 power generation assets. Lastly, we acquired ServiceMax to extend our analytics across field service. So, orders were in line with expectations and consistent with our goals for 2017. Segment organic growth was up 4% in the quarter. This was up 8% without the headwind of oil and gas. We saw substantial strength behind the launch of new products. Power grew by 15% with 9 H turbines shipped. Aviation organic growth was up 6% with 44 LEAP engines shipped, life sciences grew by 9%, and renewable grew by 26% as we shipped 1.9 gigawatts of onshore wind products. Services organic growth was up 5% and was particularly strong with aviation spares growth of 18%, and we saw strong revenue growth in Europe, Japan, India, and the Middle East, China, and Russia. Overall, global revenue grew by 3%. Our gross margins were down 10 basis points in the quarter, driven by difficult mix, and this reflects NPI launches with the LEAP, H turbine, and new wind products. The segment continued to drive down SG&A, which was a benefit of about 30 basis points, and segment operating profit was up 10 basis points, excluding Alstom, and up 110 basis points all in. Total industrial margins for the year were 14%, at the low end of our 14% to 14.5% guide we provided in December. Excluding oil and gas, margins were up 30 basis points. We made good progress on gross margins this year, up 40 basis points. And service continues to be strong with margins up 170 basis points on the year. Just a few comments on Alstom execution. For the quarter, Alstom generated $4.7 billion of orders, $500 million of segment profit, and $500 million of cash. So, we’re seeing solid growth in grid, steam turbines, and services, and we believe Alstom is making GE more competitive, and we have good momentum for 2017. In the fourth quarter, we announced the exits of water and industrial solutions. We’re seeing significant interest in the platforms, and discussions are progressing. We expect to close water around mid-year and industrial solutions late in the year. Net proceeds will be approximately $4 billion, and we’re targeting gains of about $2.5 billion. The gains will be offset with additional restructuring this year. At the outlook meeting, we talked about roughly a 100 basis-point margin improvement per year in 2017 and 2018. About half of that comes from running the cost play we’ve been running and leveling off spend in big programs, like the H, the LEAP, and new wind turbines. We’ve got programs around product and service costs that Jeff and Philippe Cochet are leading. And we’ll drive synergies in Alstom and Baker Hughes and will continue to bring down our corporate cost. The other 50 basis points come from incremental cost out of two big buckets: digitization and integration learnings on structure that we’ll be spreading across the rest of the Company. In total, we’re working on a list of close to $1.7 billion, with a target of getting $1 billion of cost out over two years. We’ve announced the new IT structure to run IT horizontally across the Company, and we expect to save $450 million. We also recently announced the partnership with PWC to hire 600 members of our tax team that will drive another $100 million of savings per year. For cash, industrial CFOA was $8.2 billion in the quarter, the biggest cash quarter in our history. We had significant growth in CFOA and free cash flow versus the fourth quarter of 2015, both growing by more than 30%. We saw a $3.2 billion reduction in working capital for the year. When you add back the $600 million from the 2016 payment of our long-term incentive plan and cash from restructuring, free cash flow conversion was significantly above last year. We received another $4 billion dividend from GE Capital for a total of $20 billion in the year. We reduced net P&E by more than $1 billion versus expectations in the year as we completed the investment in major NPI launches. For the year, free cash flow and dispositions were about $33 billion above our plan, and GE’s balance sheet remained strong. We returned $30 billion to investors in dividends and buybacks, a record, and we remain on track for our goals in 2017. With that, I’ll turn it over to Jeff.

Thanks, Jeff. I’ll start with the fourth quarter summary. Revenues were $33.1 billion, down 2% in the quarter; industrial revenues were down 3% to $30.4 billion. As you can see on the right side of the page, the industrial segment was flat on a reported basis. Organically, industrial segment revenue was down 1% excluding Alstom and up 4% including Alstom for the months of November and December for both 2015 and 2016. Industrial operating plus vertical EPS was $0.46, down 12%; excluding gains and restructuring, which were a net $0.04 of headwind in the quarter, EPS was up 6%. The operating EPS number of $0.43 includes other continuing GE Capital activity including headquarters run-off and other exit related items that I’ll cover on the GE Capital page. Continuing EPS of $0.39 includes the impact of non-operating payment; the net EPS of $0.39 includes discontinued operations. The total disc ops impact was immaterial in the quarter and down significantly from last year, which included the gain associated with the Synchrony exit. As Jeff said, we generated $30 billion of CFOA in 2016, up from $16.4 billion last year, driven by increased dividends from GE Capital. Industrial CFOA was $11.6 billion, down 5% excluding deal taxes and pension contributions. We generated $8.2 billion of industrial CFOA in the fourth quarter, which was up 34% versus last year; this was driven primarily by $5 billion of working capital improvement across all buckets including receivables and inventory, accounts payable, and progress collections. Industrial free cash flow was up 39%, and free cash flow conversion was 212% in the quarter. On a full-year basis, industrial free cash flow conversion was 84% excluding deal taxes, pension, and Alstom. Adjusting free cash flow conversion for gains, free cash flow conversion was 106% for the year. The GE tax rate was a negative 2% for the quarter, driven by tax benefits associated with the non-core business exit in aviation. On a pre-tax basis, the gain on the disposition totaled $49 million, but because of the high tax basis on the aviation deal, after-tax gains were $325 million. Normalizing the tax rate by excluding the tax benefit associated with gains and restructuring, the tax rate for the quarter was 12%, right about where we expected. I want to be clear that the tax benefits associated with the disposition did not fall through in the earnings; they were spent in restructuring charges. Similar to previous quarters, the GE capital tax rate was favorable, reflecting a tax benefit on a pre-tax continuing loss. For the year, the GE tax rate was 9%. On the right side of the segment results, as I mentioned, industrial segment revenues were flat on a reported basis and down 1% organically, but they were up 4% organically including Alstom organic. Excluding oil and gas, which continues to be a challenge, organic revenue including Alstom was up 8% with strength in power, renewables, aviation, and healthcare. Industrial segment operating profit was up 6%, and industrial operating profit, which includes corporate operating cost, was up 2%. On the bottom of the page, as I mentioned earlier, industrial operating plus vertical EPS was $0.46, up 6% excluding gains and restructuring, with industrial operating EPS up 5% on the same basis. For the year, we delivered $1.49 of EPS, which was up 14% versus 2015. Included in the $1.49 was $0.02 of uncovered restructuring that I’ll go to on the next page. So next on industrial other items for the quarter, we had $0.08 of charges related to industrial restructuring and other items that were taken at corporate. This was $0.03 higher than we planned associated with the acceleration of Alstom and lighting restructuring costs as well as higher BD costs associated with decisions we’ve made around water, Baker Hughes, and additive. In total for the quarter, restructuring charges were $1 billion on a pre-tax basis with $300 million related to the Alstom synergy investments. We also made significant investments in lighting, oil and gas, and healthcare in the quarter. Gains in the quarter were $0.04, principally driven by non-strategic business exit in aviation. As I mentioned before, gains were $49 million on a pre-tax basis, but $325 million after-tax, which drove the low industrial tax rate quarter. The aviation divestiture was principally on the tax line because of the high tax basis associated with the business. The gain was more than offset in earnings by higher restructuring. In the fourth quarter, we incurred higher uncovered restructuring charges than we planned. And at the bottom of the page, you can see that for the year, we incurred $0.02 of uncovered restructuring. We chose to accelerate restructuring as we had good projects with attractive returns, and it was the right thing to do for the Company as we head into 2017 and 2018. In 2017, we expect restructuring to be above $2.5 billion, funded by the water and industrial solutions dispositions with the heavier spend in the first half of the year. For the first quarter, we’re estimating restructuring spend of about $1 billion with no offsetting gains. For the full year, as we said, we expect gains to equal restructuring, but there will be variability by quarter. Next, I’ll cover the individual segments. First, I’ll start with power. Power orders in the fourth quarter totaled $11.1 billion, higher by 16%. Organic orders in the quarter including Alstom organic grew 14%. Core GE orders of $8.3 billion were lower by 4%, and Alstom orders of $2.8 billion grew 160% organically. Equipment orders grew 1%. Core equipment orders of $3.3 billion were down 28% on lower gas turbines, 22 versus 55 a year ago. We received orders for 8 H turbines in the quarter versus 12 last year, bringing total H orders to 25 for the year and an ending backlog of 32. Alstom equipment was strong with $1.7 billion of orders including 26 HRSGs versus six last year and 11 steam turbines versus two last year. Organically, Alstom equipment orders grew four times. Service orders were $6.1 billion, up 32% with GE core services up 24% to $4.9 billion, and Alstom orders grew to $1.2 billion. We booked orders for 58 AGPs in the quarter versus 42 last year. Total service upgrades including AGPs grew 87%. Alstom service grew orders 61% organically with strength in India, the Middle East, and Africa. Backlog finished the year at $84.7 billion, up 10%; core GE backlog grew 8%, and Alstom’s backlog of $18.3 billion grew 18%. Revenues of $8.5 billion grew 20%; core GE revenues of $6.5 billion were up 6%, driven by equipment higher by 10% and services up 4%. Equipment revenue grew on gas turbine shipments of 35 units versus 28 last year, including 9 Hs for a total of 26 Hs for the year. Service growth was driven by 27 more AGPs in last year, 62 versus 35, offset partly by fewer installations. Total AGP shipments for the year were 145. Total Alstom revenues of $1.9 billion grew 83% organically. Operating profit of $2.1 billion was up 27%; core operating profit was $1.7 billion, and Alstom contributed $359 million in the quarter. Core earnings were flat on higher volume, favorable FX, and positive value gap offset by the mix impact of 9 Hs this year versus zero last year. H margins are positive and continuing to improve but still well below the margins on our mature F products. Alstom synergies were 454 in the quarter and $1.1 billion for the year. The business shipped 104 gas turbines this year; we’d expected to ship 110 to 115. We expected to ship six more units but those transactions did not close in the quarter, but we expect that those units will close in 2017. In addition, although aero turbines were up in the year, we expected to ship more in the fourth quarter; again, we think those units will likely close in 2017. We operate in very tough geographies in this business. It is always 500 megawatts or gigawatts of deals that are hard to close, and it’s been the nature of the business over the last several years. And we expect this dynamic to continue into the future. In 2017, we expect a flat market in gigawatts. For the year, we are planning on 100 to 105 gas turbine shipments. We have a strong equipment backlog of $70.6 billion, which is up 27%, and a strong services backlog of $67 billion, which was up 6%. The Alstom integration performed well this year with total year orders of $10 billion, building a backlog that is up 18% and delivering over $1 billion of synergies in the year. Our outlook for power remains consistent with the expectations shared at the outlook meeting albeit off of a lower base. As we said in December, we expect double-digit earnings growth in power in 2017. In order to achieve that, we need to execute on Alstom, product margin improvements, and deliver services growth. Lastly, the team has to deliver the incremental cost-out actions given the market conditions we face. Next is renewables. Renewable energy had a strong orders quarter. Orders in total grew 32% to $3.3 billion. Core GE wind orders were higher by 48% to over $3 billion. We took orders for 1,180 turbines versus 827 last year, up 43%, principally in the U.S. where the orders were up 54%, driven by the safe harbor qualification 2016 for 100% PTC benefit going forward. Units were higher by 43%, and megawatts were up 54% on the larger 2 and 3 megawatt turbines. The business also booked $300 million of additional repower upgrades in services. Alstom orders, principally hydro, were $290 million in the quarter. Backlog finished the year at $13.1 billion with GE core up 68%. Revenues in the quarter grew 29% to $2.5 billion with GE core revenue up 20%. The business shipped 786 turbines versus 847 last year, but the megawatts shipped were up 11% on the larger units. Alstom revenues of $279 million were higher by 161% organically. Operating profit of $163 million was up 3X on better Alstom results. The core business was down 8% on increased NPI spending on the 2 and 3 megawatt turbines, lower price, and foreign exchange, partly offset by volume growth and some product cost-out. Alstom generated $48 million of profit in the quarter on strong synergies. For the year, the team delivered about $200 million of synergies, well above the plan, driven by sourcing and SG&A efficiency, particularly in hydro. We expect renewables to have a solid 2017 and contribute double-digit earnings improvement. The unique repower upgrade offering we expect will continue momentum, and the team is making good progress in driving down the cost of the new NPIs, critical given the competiveness in the industry. We expect to close the LM Wind Power acquisition in the first half, and the vertical integration of blades will also help drive results. In aviation, we had another solid quarter in the fourth. From a demand perspective, global passenger air travel continued to grow strongly with RPKs up 6.1% year-to-date November with strength in both domestic and international routes. Air freight volumes grew 3.2% year-to-date in November. Orders in the quarter were $7.2 billion, up 5% with equipment orders higher by 2%. Commercial engine orders were down 4% on lower CF-6, CFM, and GEnx orders, partially offset by strong GE90 and LEAP orders. $1.8 billion of new commercial engine orders included $478 million from LEAP, $186 million in orders for CFM, $577 million orders for GEnx, and $326 million in orders for GE90. Military equipment orders of $360 million were up 2%, driven by another large T700 order for 306 units. Service orders grew 8% in the quarter; commercial service orders were higher by 16% with CSA growth of 22% and spare orders up 14% during to an ADOR of $44.5 million a day. Military service orders were down 18% at $480 million on tough comparisons. Backlog finished the year at $155 billion, up 2% with equipment backlog of $33.3 billion, down 5%, and service backlog of $121 billion, up 4%. Revenues grew 7% in the quarter to $7.2 billion. Equivalent revenue was up 1%, driven by commercial growth of 8% with 692 engine deliveries versus 643 last year, including 44 LEAP engines. This was partly offset by military down 35% on lower shipments. Service revenue was higher by 12%; commercial spares rate was 43.5 million a day, up 18%. Our profit in the quarter totaled $1.7 billion, up 11%, primarily driven by favorable price, volume, and productivity, partly offset by the LEAP mix; margins expanded by 100 basis points in the quarter. Aviation had a very good year. The business shipped its first LEAP engines, and currently 20 A320neos powered by LEAP are flying across six different customers. Reliability has been excellent, and the engines are performing to spec. We had expected to ship a total of about 100 engines in 2016, but in coordination with the airframers, we delivered 77 for the total year, meeting all our commercial commitments. These units will now deliver in 2017, with total shipments of about 500 LEAP engines for next year. The team is also executing in leading our additive strategy. RKM and Concept Laser are great platform additions to our capability. We believe 2017 will be another solid year of execution in aviation. In oil and gas, the environment continues to be challenging, and activity levels remain muted; external market indicators appear to be stabilizing with expected more balanced supply and demand fundamentals, partly influenced by the recent OPEC production agreement. U.S. onshore rig count grew 33% versus the third quarter but was essentially flat versus the beginning of the year. Forecasted E&P spending is expected to be flat to modestly up in 2017. The business had an encouraging orders quarter. Orders of $3.3 billion were flat year-over-year and up 2% organically. Orders for all business segments were up sequentially versus the third quarter. Equipment orders grew 4% versus last year with TMS up 48%, subsea up 26%, and surface up 25%; downstream was down 45% on no repeatable large African order last year. Service orders were down 3% with TMS up strongly at 40%, offset by digital, downstream, subsea, and surface which were all lower. Orders for the total year were down 27%. Backlog finished the year at $21 billion, down 9% versus last year run, with equipment down 32% and services growth up 7%. Revenues in the quarter were down 22% with equipment down 25% and service down 19%. Revenues for the year were also down 22%. Operating profit of $411 million was down 43% on lower volume and price, partly offset by cost out which totals $170 million in the quarter. Total cost out actions for the year were $700 million. Total cost out over the last two years was $1.3 billion. 2016 was an extremely difficult year for oil and gas, and the business expects the first half of 2017 will continue to remain challenging with sequential improvements in the second half of the year. Offshore drilling and subsea activity will likely remain low in 2017. Consistent with what we discussed at the December outlook meeting, we expect the business to deliver lower earnings in 2017. Increased activity in North America onshore and stabilization in the Middle East and Europe are needed to drive improvement in our shorter cycle and surface businesses in the second half. We’ve made significant progress on integration efforts with Baker Hughes and have dedicated more than 200 people to it. We gave you an update on December 8th with no change to that outlook, and we expect to close the deal in mid-year. Next up is healthcare. Healthcare had a good quarter. Orders grew 3% to $5.4 billion. Organic orders were strong in emerging markets, up 10%, led by China higher by 19% and Latin America up 16%. Europe orders were higher by 6% organically, and the U.S. was lower by 1% organically. In terms of business lines, healthcare systems orders grew organically by 3% with imaging up 5% on strength in CT, MI, and ultrasound, partly offset by lower LCS. Life sciences orders grew 6% with bioprocess higher by 7% and core imaging up 6%. Healthcare orders for the total year grew 3% reported and grew 5% organically. Revenues in the quarter grew 3%. HCS revenue grew 2% organically with ultrasound up 6% and imaging up 2%. Life sciences continued to deliver strong growth with revenue growing 9% organically, driven by bioprocess higher by 15%. Healthcare revenues for the total year grew 4% reported and 5% organically. Operating profit of more than $1 billion grew 10% in the quarter; volume and strong cost productivity more than offset lower price and higher digital spending. Margins expanded 130 basis points in the fourth quarter. Healthcare executed strongly in 2016, delivering good organic growth, operating leverage, and earnings. They delivered $450 million of cost out versus a $350 million target. Margins for the year expanded 100 basis points. In 2017, we expect the same focus on cost and product competitiveness with similar results. We will launch 25 new products and are targeting a point of share in 2017. We expect China, Africa, and Asia Pacific to continue their strong growth. Europe is expected to be roughly stable, while the U.S. may be a bit slower due to the uncertainty around the repeal or replace of the Affordable Care Act. Next on transportation, fourth quarter carload volume improved modestly, up 2.1%, driven by intermodal carloads up 3.4% and commodity carloads up 90 basis points. Commodity volume was driven by agriculture, which was higher by 7.4%, metals were higher by 25%, and chemicals were higher by 2.4%, which was partly offset by coal down by 2.8% and petroleum down almost 16%. Notwithstanding the improvement in the quarter, we expect 2017 to continue to be difficult for volume growth. Year-to-date, carload volume was down 4.5%, driven by intermodal down 1.5% and commodities down over 7%. Transportation orders of $1.4 billion were down 58%, consistent with the North American market. Equipment orders of $64 million were down 98% on no locomotive orders versus 1,113 units last year, including the large 10-year, 1,000 loco India order. Service orders of $1.3 billion were very strong, up 2X, driven by a large multiyear modernization order to retrofit 500 locomotives of the North American class one railroad over five years. Backlog finished the year at $20.1 billion, down $2.4 billion, driven by equipment liquidation. Revenues in the quarter were down 23% with equipment down 38% and services up 2%. We shipped 171 locos in the quarter versus 320 last year. Services grew 2% on higher contractual services, partly offset by lower spare parts. Operating profit of $370 million was down 6%, primarily driven by lower volumes, partially offset by cost out and restructuring benefits and mix. Margins exceeded 450 basis points in the quarter. The transportation team executed well in 2016 in a very tough environment. Consistent with the outlook meeting, we expect 2017 to be even tougher with expected loco shipments down 50%, pressuring operating profit down double-digits. Having said that, we expect the team will outperform the industry. Next, Energy Connections & Lighting, orders for the segment totaled $3.1 billion with energy connection orders of $2.8 billion and current orders of just under $300 million. Energy connection orders grew 8% reported; organically including Alstom, orders grew 5%. Power conversion was lower by 23% on continued headwinds in oil and gas. Industrial solutions were down 1%, but outperformed the North American market by a couple of points in the quarter; and grid orders of $1.5 billion grew 27% in the quarter. Revenues for energy connections were higher by 15% and up 16% organically including Alstom. Power Conversion revenues were down 18%, industrial solutions were down 3%, and grid grew 56% revenues in the quarter. Current and lighting revenues were down 14%, with current growing 5% and the legacy business declining 26%, as we continue to resize the business downward. Operating profit in the quarter totaled $102 million; Energy connections earned $98 million and current and lighting earned $3 million. Energy connections earnings were driven by $100 million of grid earnings, $42 million of industrial solutions earnings, up 59%, partly offset by power conversion which was down. Alstom synergy execution was strong in 2016, delivering $226 million of benefits, above our target of $175 million. In 2016, the market backdrop for these businesses was tough, but it was not a good execution year either. In 2017, we expect this segment to deliver double-digit earnings improvement with better execution in industrial solutions, lighting, and power conversion, and we expect grid to continue to perform well. Our estimate is that the industrial solutions divestment will happen later in the year. Finally, I’ll cover GE Capital. The verticals earned $478 million in this quarter, up 9% from the prior year, driven principally by lower impairments in EFS. GECAS, EFS in industrial finance all had strong quarters and overall portfolio quality remains the same. In the fourth quarter, the verticals funded $3.8 billion of on-book volume and contributed through enabling $5 billion of industrial orders. Other continuing operations generated a $262 million loss in the quarter, principally driven by excess interest expense, preferred dividends, restructuring costs related to the portfolio transformation, and headquarter operating costs, partially offset by tax benefits. These costs will continue to come down because excess debt matures, and we right-size the organization structure. Discontinued operations showed $3 million of income, with gains and other related items largely offset by operating costs. Overall, GE Capital reported net income of $218 million. We ended the quarter with $93 billion of ENI excluding liquidity with continuing ENI of 82 billion. Liquidity at the end of the fourth quarter was $51 billion. Asset sales remained ahead of plan. During the quarter, we closed $17 billion of transactions, bringing the total closed transactions through the end of the quarter to $190 billion. We have signed agreements for an additional $4 billion in the fourth quarter, bringing the total signings to $197 billion, which essentially completes our plan given that the majority of the remaining assets will run off as it makes better economic sense. We remain on track for 1.1 times price to tangible book that we initially estimated. GE Capital paid $4 billion of dividends during the fourth quarter for a total of $20 billion in 2016 versus the original $18 billion target for the year; dividends of $5 billion ahead of the original plan announced in April of 2015. Overall, the GE Capital team delivered a strong verticals performance while executing on all aspects of the exit plan. With that, I’ll turn it back to Jeff.

Thanks, Jeff. We have no change to our 2017 framework. Let me take you through the pieces. Orders grew by 2% in the quarter organically; oil and gas seems to have bottomed; and services are very strong. Alstom is generating orders growth. So, we see a line of sight for the 3% to 5% organic growth for the year. We’re executing on a $1 billion incremental cost-out play with plenty of restructuring to support it. So, we see our way to 100 basis points of margin enhancement. Alstom is executing well and should have EPS at the high end of our range, and we end the year with good momentum and working capital. Meanwhile, GE Capital continues to execute on their transition to an industrial finance company. So to confirm for 2017, we see EPS of $1.60 to $1.70; operating cash flow of $16 billion to $20 billion; and cash to investors of $19 billion to $21 billion in buybacks and dividends. So, a good outlook for the Company, a solid year in 2016, and now Matt, let me turn it back over to you.

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

I know we discussed the election in December, but now that a couple of months have passed, what are your customers saying? I understand healthcare might be delayed a bit, but how are your customers in power, renewables, and other sectors with potential regulatory uncertainty responding? Is there a risk of them pushing back orders or delaying projects? This is primarily regarding the U.S., but I’d like to hear your thoughts on it, Jeff.

Scott, I’ll take a crack. I would say, we haven’t really seen much change so far. I think if I took it by segment, the Affordable Care Act is getting the most, I would say both attention and the media and by our customers. I think you could see some caution around the Affordable Care Act as you go forward. We haven’t really seen that much, but that could happen. I think on the renewables side, really with the PTC over the next few years, I think that’s pretty much locked in place. And then, I still think the basic thesis around gas power in the U.S. remains intact as it pertains to being a base-load technology in the future. But then, I think outside the U.S., I really haven’t seen much change in interplay, post-election in terms of what our customers are saying and how to think. I don’t know, Jeff, would you add anything to that?

I think that’s the lay of the land, Scott.

I just wanted to focus on aviation. So, I guess you had a very good EBIT number in Q4, helped by the gain and the high teens growth in commercial spare sales. Should we think that that profit growth levels out in the first half of 2017? You don’t get the same growth rate in spares presumably LEAP shipments catch up after a light Q4. And then, also longer term, your commercial engine orders were down about 940 units in 2016 overall. How are you thinking about the cycle and your commercial OE revenues?

Let me start with a few points, and then I'll let Jeff add his insights. The gain was not included in the aviation segment; it was recorded at the corporate level and offset in restructuring. Therefore, none of the gains are reflected in the aviation segment's performance. We had a robust year for spares, with growth in the double digits. However, we anticipate that the spares sales rate and ADOR will not show the same level of growth next year, expecting instead high single-digit increases. As Jeff mentioned in December, we expect to continue growing operating profit in aviation, despite the LEAP shipments. Currently, we estimate shipping around 500 LEAP engines next year, which is included in our outlook. Additionally, we anticipate that the services business will continue to grow steadily in 2017, supported by the spares growth I just described.

Yes. To reiterate what Jeff mentioned, I believe there are two key aspects to consider regarding aviation: the business model related to services and revenue, as well as cash flow models. Investors should be optimistic about that. Additionally, the execution on the LEAP program is important, and I think Jeff outlined the LEAP shipments well; we are currently on a learning curve. These two factors are crucial for aviation growth. Overall, we believe the aviation team performed well in 2016 and is well-prepared to achieve more success in 2017.

And their commercial equipment backlog is very strong. We took fewer orders on new commercial equipment engines in 2016, but the backlog is very strong.

Since I only have one question, I’d love to focus on cash here. And within that, Jeff, is there any factoring this quarter from GE Capital into GE industrial? And then also, while it’s the strongest cash flow quarter in a while, still a little bit below what we thought you guys implied when we talked about it before, and then as you think about it progressing through 2017 and beyond, maybe just talk a little more about kind of the cash flow initiatives comp that really can give investors confidence that the cash flow part of the story is improving.

In the fourth quarter, we improved working capital by around $5.2 billion, which appears to be the strongest working capital quarter the Company has ever recorded. Specifically, accounts receivable contributed about $0.5 billion, inventory generated $1.2 billion, and accounts payable generated $1.8 billion, much of which came from renegotiated terms. We worked on aligning suppliers with customers to better synchronize the build and collection processes. Additionally, we saw a $1.7 billion improvement in progress as orders did a bit better. That’s how we arrived at the $5.2 billion. Regarding accounts receivable performance, in terms of factoring with GE Capital, there was a $1.6 billion change for the year, compared to $1.7 billion last year. Thus, year-over-year, there was actually a $100 million reduction in the benefit from GE Capital's factoring. Notably, in the fourth quarter, our receivables improved by $500 million from the third to the fourth quarter of 2015, resulting in a $2.3 billion benefit, and the benefit from the previous third quarter to this quarter was $700 million. So, it was down $1.6 billion year-over-year between the third and fourth quarters for each of those years. There is strong underlying performance here, and it’s largely unrelated to GE Capital's factoring.

Steve, I would add that we are still not satisfied with our inventory levels for Q4. We reduced working capital by $3 billion for the year but did not achieve the inventory results that either Jeff or I were hoping for. We anticipate a $2 billion decrease in inventory next year, which we believe will enhance our CFOA and working capital in 2017.

So, let me just follow-up and answer that part of your question. So, we came in with $11.6 billion of industrial CFOA. We were shooting to be something closer to $12 billion of CFOA in the latest update we gave you. When you subtract CapEx and industrial free cash flow, we ended up at $8.9 billion, and that was actually right in the middle of the range we gave you coming into the year on industrial free cash flow. But the 400 light is really all about inventory, and it’s essentially the $1 billion roughly, the $1 billion sales miss left more in inventory than we expected, not all of that would have converted to receivables, and then from receivables would have converted to cash, but a significant piece of it would have been. So, I would say on an industrial free cash flow basis, a couple of hundred million lighter; on industrial CFOA, closer to $400 million lighter; and most of it’s about at volume not going out the door, not being revenue recognition.

And this is all in people’s incentive plans for 2016 and 2017.

So, we are getting a lot of obviously questions around tax policy, and we’ve gotten a lot of questions from investors on you guys have a relatively low tax rate as it is, but there is some conversation we’ve had with investors that say you can go substantially lower, something like almost to like a zero to 5% type of range. I can’t quite get there just doing the high level math. So, maybe if you could just give us some color on how your tax guys are looking at what’s out there from a tax policy perspective?

So, at this point, see, this is all speculation. Right? I mean, the only point of reference you have is a little bit of what’s coming out of the new administration and then what exists in the form of the Brady bill in House Ways and Means. And I think what GE wants and what we think is most important to competitiveness for U.S. companies is essentially a competitive tax rate, something that looks more like the OECD averages, which is just roughly 21%, 22%. And this notion of territoriality that you pay the tax in the jurisdiction that you actually earn it and then from there those earnings are fungible and can move cross-border. Those are the essential things. And then, as a transition item on historical foreign earnings, the companies left offshore, we want a reasonable transition tax if one is necessary in order to true up the historical performance. The real delta between that is a minimum to make U.S. companies more competitive, put them on an equal footing with most of the people we compete with, countries we compete with, is the question about border adjustability. And as I am sure you understand, it’s the way border adjustability has been described, there is an incentive for exporters to export more, because there is essentially no tax on exports, and that’s about trying to drive more production and manufacturing into the U.S. So, if a company is a net exporter, you could envision on the border adjustability, they pay a lot lower tax rate against those export against U.S. But you’re going to remember in the case of General Electric, 55%, 60% of what we do, we do outside the U.S. Order adjustability doesn’t impact at all what we pay for taxes in Sweden, Switzerland, or the UK, Japan, and China. And so, although companies may find themselves in a place with a relatively lower U.S. tax liability, I don’t think it changes in any way how they think about what their foreign tax liabilities are.

Jeff, can you give us a little more color on your power business? It’s understandable that you would see some delays in shipments; it’s a pretty difficult market. But, did you see any incremental delays in closing deals toward the end of the year; and was it a result of GE being more careful around financing or customers just wanting to delay delivery? And then, you mentioned you still expect double-digit earnings growth in power, but how dependent are you on some of these delayed turbine shipments to reach your 2017 forecast?

Yes. I’ll start by saying that a few developments occurred in the fourth quarter. We expected to ship six, possibly seven gas turbines, but ultimately only six were confirmed. Four of these were 13E2 class turbines headed for Bahrain and Iraq, which are challenging regions for logistics. Up until the year's end, we were confident these transactions would proceed, but they did not. However, we remain optimistic they will materialize in the first half of 2017. Additionally, we had two 9E turbines planned for West Africa, but the customer reconsidered, and we are unsure if they will opt for the 9Es that we had in stock or switch to an H class turbine instead. If it converts to an H, it’s uncertain whether we will be able to ship it in 2017. We also had a strong AGP quarter, finishing the year with 145, which is close to our guidance, but we had anticipated completing more AGPs and upgrades. Some of the upgrades, particularly involving Dry Low NOx technology, were postponed. This represents the shortfall in our fourth quarter performance regarding power. Looking forward to next year, we need to see a few key developments. Alstom had a solid year in power in 2016, and we exceeded synergy targets. The order flow was robust, with an 18% year-over-year increase in backlog since the closing. We need the power business to build on Alstom's performance in 2017. Our service business should maintain its mid-single-digit growth, similar to the 7% operating profit growth seen this year. We also need to focus on reducing costs in response to industry conditions. Lastly, we faced several challenges with the H turbine launch this year, affecting both the ramp-up and unit costs. However, the units shipped in the latter half of the year were significantly more profitable than those at the start of the year, though still less so compared to the F technology being replaced. We're expecting a substantial turnaround in 2017, contributing hundreds of millions in improvements as we lower costs and have successfully increased pricing on the H turbines for the past five quarters. Therefore, we plan to deliver 23 H turbines in 2017.

Hey, just a follow-up on the power and also in renewables, as you think about ramping the development programs; both those segments on a core basis had margins down, power 150, renewables 160 this quarter. How do they turn around in 2017; I mean, do both of those still, do you envision the core piece having up margins, and how much of this swing in the development programs is part of that versus other factors?

I’ll start, Shannon. I believe the development programs significantly contribute to the turnaround year-over-year. In the power business, the investment was around $300 million to $400 million of headwind in 2016 compared to 2015. We anticipate most of that to turn around. For the onshore wind business, we were undergoing a major product conversion process in 2016 as well. Therefore, we feel confident that in both cases, we will see core margin improvement going into 2017, both in terms of development and product cost.

Yes. We discussed the factors affecting H, including price, unit cost, and reduced development cost. It’s not more complex than that. In renewables, the lack of price element presents a real challenge for onshore wind turbines. The competitiveness surrounding the repower and the PTC Safe Harbor orders plays a role. In renewables, program costs related to the 2.X and 3.X turbines primarily depend on product unit cost and volume. We plan to ship a similar number of wind turbines as this year, around 3,000. Additionally, we expect to complete over 800 repower units in 2017. Thus, we anticipate significant volume growth, contributing to year-over-year margin improvement through volume leverage.

Just going back to the question overall revenue, as we look at your revenues versus consensus, it just seems that revenues are relatively weak relative consensus across the board. And usually, you guys hit the numbers pretty close. And it’s not just power, it seems to be across the board. And just has anything happened broadly in the last two weeks of the year after the analyst meeting to drive this slowdown; is there sort of a broader development that explains it? Thank you.

I mean, I think Andrew, I would say the fourth quarter organic revenue was power up 15, renewables up 26, oil and gas down 21, aviation up 6, transportation down 22, healthcare up 3, and energy connections up 16. So, the total organic revenue growth was up 4% for the quarter. I think clearly power is explainable. I think clearly oil and gas, even though I like the orders performance in oil & gas, it’s a harder segment to call. I think other than that, Andrew, it’s really just noise. It’s $31 billion or $30 billion to $35 billion a quarter. There is going to be puts and takes on a revenue line. But I think if you go down, if you think about 2017 as being an organic guide of up 3 to 5, and you’ve got 4% organic in Q4 in revenue, I feel pretty secure about the 3 to 5 guide for 2017. I just think you’ve got to look at it that way. Look, power didn’t do as much revenue as we would have liked. It was still substantially up organically, up 5% organically without Alstom and up 15% with Alstom. So, that’s not bad.

I would just add to that, Andrew. So, power is like no question; oil and gas is like mostly a transaction of convertible volume less than the team was forecasting. Everything else is actually better. When you add up the rest of the portfolio against our framework, they came in higher on revenue.

Okay, great. A couple of quick announcements before we wrap. The replay of today’s call will be available this afternoon on our investor website, and our first quarter 2017 earnings call will be on April 21st. We’ll also be holding our annual shareholders’ meeting on April 26th in Asheville, North Carolina. Jeff, back to you.

Yes. So, Matt, just to wrap up, again, I think the team’s focused on 2017. Here is the ways that the GE team is compensated as they look forward into next year: 3% to 5% organic growth, we just kind of went through the pieces of that; 100 basis points of margin enhancement, I think a combination of run rate and incremental cost out actions already in play; and strong free cash flow and dispositions. I think there is good momentum in Q4, more work to do, but I feel like the momentum around the Company is very good. So, we are aligned with what we showed you in December and off and executing. Thanks, Matt.

Thank you.