General Electric Company (GE) — Q1 2017 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to GE's First Quarter 2017 Earnings Call. Presenting first today is our Chairman and CEO, Jeff Immelt; followed by our CFO, Jeff Bornstein. Before we start, I would like to remind you that our earnings release, presentation and supplementals 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 with that, I will turn it over to Jeff Immelt.

Thanks, Matt. GE had a good quarter and a slow growth in a volatile environment. While the resource sector is challenging, we had the strongest Oil & Gas orders in 10 quarters. We saw global growth accelerating, while the U.S. continues to improve. Since the beginning of 2017, I visited China, Africa, Latin America and Southeast Asia. All are stronger than last year. With orders growth of 10%, we've seen an attractive environment for GE overall. EPS was $0.21 for the quarter. Excluding the impact of uncovered restructuring, industrial EPS was up 15% and verticals grew by 20%. Organic revenue was up 7%, our strongest quarter in more than 2 years. Segment operating profit grew by 15% organically, and total industrial profit was up 20%. Margins are expanding, and our cost-out programs are accelerating. Our cash performance was worse than we expected to start the year with CFOA of $400 million and negative industrial CFOA. We had several one-timers and grew working capital in the first quarter, which we expect to turn around in the second quarter and be on plan for the year. We executed on our portfolio goals. The water sale exceeded our expectations and should produce a $2 billion gain and $2 billion of cash. GE Capital has exited PRA supervision, completing its pivot. This is an incredible accomplishment for the team. Two years after we announced our GE Capital strategy, our actions are largely complete. And Baker Hughes is on track for a midyear close. We're off to a strong start and are reconfirming our framework for the year. We're exceeding our goals for organic growth in margins. We expect to hit our goal for $1 billion of structural cost-out. And our plan is to be on track for cash and capital allocation for the year. Orders were very strong in the quarter, up 10%, which was 7% organically. Backlog grew by $3 billion. Equipment had a great quarter with growth of 11%. Services were strong as well with growth of 8%. Pricing was about flat. Orders growth was broad-based. We saw expansion in 6 of 7 segments in 9 of 12 regions. Let me give you a few order highlights that were particularly significant. Power equipment was up 25%. Growth markets were up 27%. Aviation spares grew by 25%. Healthcare equipment was up 10%. Life Sciences grew by 15%. Renewable service doubled. LED orders grew by 42%. We were encouraged that Oil & Gas orders grew by 9%. Global orders grew by 20% behind some very specific initiatives. Orders grew by double digits in 6 of 7 businesses. Highlights include a big Kazakhstan rail deal; Aviation LEAP quarters of $250 million; a Power Wind in India worth $370 million. Global onshore wind deals were $270 million. Healthcare in China grew by 28%, and mining grew by 16%. Digital orders grew by 7%, including 70% growth in ServiceMax, 60% in Power, 55% in renewables and 41% in Oil & Gas. We continue to reposition our legacy IT businesses for growth in the future. We signed global deals at NEC, Bridgestone, South32 and Deutsche Bank. We established an alliance with China Telecom to bring Predix to China. We expect strong orders to accelerate through the year. So this start reinforces our organic growth goal of 3% to 5% for 2017. Organic revenue growth of 7% was ahead of expectations. Revenue strength was broad-based with 6 of 7 segments having positive organic growth. The old power businesses, as what you see as power and renewables, was exceptionally strong with both growing 18%. And Aviation grew by 8%. Our growth initiatives are paying off. Globalization is a major driver with growth market revenue expanding by 10%, where India was up 27%, Middle East up 12% and Africa up 77%. Services growth was up 8%, and 6 of 7 businesses expanded in the quarter. This was led by Aviation, up 18%, and repowering drove 84% growth in renewables. New products also added to growth. We finished the quarter with 30H turbines in backlog and 12,200 LEAP engine orders and commitments. Healthcare imaging orders in the U.S. grew by 13% behind excellent new products. Digital revenue grew by 16%, led by power, oil and gas and renewables. The additional growth outside verticals doubled in the quarter. GE Store continues to work GE Capital's supported $2.2 billion of industrial orders and GE2GE orders grew substantially. Margins were also a good story. Industrial operating profit margins grew by 130 basis points with gross margins expanding by 90 basis points. Segment margins grew by 110 basis points. Efficiency was driven by a value gap, productivity and Digital Thread. This more than offset headwinds in mix. Corporate costs are ahead of plan, and we saw margin growth in both equipment and services. We're on track to reduce structural costs by $1 billion for the year. In the quarter, costs were down $76 million and $200 million lower than our original $500 million cost-out plan. We expect this to accelerate during the year. We invested $1 billion in restructuring in the quarter. For the year, we expect gains in restructuring to offset. We remain committed to $1 billion of cost-out in '17 and $1 billion of cost-out into '18. On cash, we have CFOA of $400 million. This included a dividend from GE Capital of $2 billion. Industrial CFOA was a negative $1.6 billion. There's no change to our 2017 framework of total CFOA of $18 billion to $21 billion and industrial CFOA of $12 billion to $14 billion. We built working capital in the quarter to support growth, and we're adjusting to a different profile with Alstom. And we're impacted by several one-timers. Cash is lumpy, and we expect to have a strong second quarter. I've asked Jeff to give you a little bit more context on cash flow in the next page. We received an additional $2 billion dividend from GE Capital in April, bringing the year-to-date total to $4 billion against the plan of $6 billion to $7 billion for the year, so a good start. Cash ended the quarter at $7.9 billion. We paid $2.1 billion of dividends and had $2.3 billion of buyback for a total of $4.4 billion returned to shareholders. And with that, I'll turn it over to Jeff to give you more details on cash and operations.

Thanks, Jeff. As Jeff said, we had a strong quarter on orders, revenues and margins. However, our industrial CFOA was at $1.6 billion usage of cash, about $1 billion below our expectations. We expect to see most of this come back over the remainder of the year, and we see no change for our outlook for the year of $12 billion to $14 billion of industrial CFOA. Walking the left side of the page. Industrial net income plus depreciation in the quarter was $1.5 billion. Working capital was a use of $1.3 billion. This was about $700 million higher usage than our expectation. The miss was mainly driven by power and renewables, partially offset by better performance in our Healthcare business. Receivables were a benefit of $200 million, about $400 million less than our plan. Operationally, we've seen improvement in collections. However, we didn't collect on a number of accounts in the quarter that we expected to. In Aviation, which historically has not had issues with past dues, we missed by about $200 million on 5 customer accounts, which will clear in the second quarter with no issue. In Power, we didn't collect on several delinquent accounts in top regions around the world, but we expect to collect these throughout the rest of the year, including in the second quarter. Inventory was a use of $800 million, about $100 million worse than we expected. Most of the businesses were right on the plan. The miss was driven by softness in the U.S. Healthcare market, particularly around ultrasound and LCS. But we expect to work off this inventory over the remainder of the year. Payables were a use of $400 million, roughly as we expected. This was driven by payments of fourth quarter purchases that were significantly higher than the new volume added in the first quarter. And we see this dynamic mostly every year in the first quarter. Progress collections was a use of $300 million. This is primarily driven by 2 things. First, it was the impact of renewables from shipping equipment in the first quarter following the buildup of progress collections from safe harbor wind turbines in the fourth quarter. Secondly, we had several large orders in the quarter that did not reach financial closure. This includes large orders in Energy Connections in Iraq, a power deal in Algeria and a big transportation transaction in Angola. We expect these deals to close in the second and third quarter. Contract assets were a use of $1.9 billion. This was $300 million worse than expected. Of the $1.9 billion, $500 million was from our long-term equipment contract, where the timing of our $1 billion revenue recognition milestones differ. This will catch up throughout the year as we execute against the contract. The remaining $1.4 billion is our long-term service agreements. There were 2 pieces to this. $600 million is related to service contracts where we've incurred cost and booked the revenue, but haven't yet billed the customer. We expect this to partly come back over the year as we see higher asset utilization in Power and Aviation. And we've seen these similar trends in the prior years. The other $800 million are contract adjustments driven by better cost performance in park light, primarily driven by Power and Aviation. Versus expectations, the $300 million of lower cash on contract assets is driven by $200 million of long-term equipment contracts that we expect to come back throughout the year, and the $100 million from services contract adjustments I just walked through, which will come back over the remaining life of those contracts as we build the utilization. In total, we're about $1 billion off our first quarter plan, but we'll recover the vast majority over the second to the fourth quarter. In the first half of 2016, we delivered $400 million of CFOA. For 2017, we expect significantly stronger cash performance in the second quarter with sequential improvement throughout the year. Our total year plan is $12 billion to $14 billion. That's driven by an increase in net income plus depreciation. And we expect to see a benefit from working capital similar to last year's benefit. Contract assets will be similar impact as 2016. And other cash flows will be lower cash usage this year, largely driven by the absence of onetime cash payments in 2016. So with that, I'll move on to consolidated results. Revenues were $27.7 billion, down 1% in the quarter. Industrial revenues were flat at $25 billion. As you can see on the right side of the page, the industrial segments were up 1% on a reported basis. Organically, industrial segment revenue was up 7%, affected by the Appliance disposition. Industrial operating plus vertical EPS was $0.21, flat with the prior year. Excluding gains in restructuring, which was a $0.03 headwind versus the first quarter of last year, industrial operating verticals EPS was up 12%. Operating EPS was $0.14 in the quarter, up from $0.06 in the first quarter of last year. This incorporates other continuing GE Capital activity, including excess debt headquarters runoff costs that I'll cover separately on the capital page. Continuing EPS of $0.10 includes the impact of nonoperating pension. And net EPS of $0.07 includes discontinued operations. The total disc ops impact was a negative $0.03 in the quarter, driven by GE Capital exits that we executed in the quarter. The GE tax rate was 15%, in line with our total year mid-teens guidance. The GE Capital tax rate was favorable, reflecting a tax benefit on a pretax continuing loss. On the right side of the segment results, as I mentioned, Industrial segment revenues were up 1% on a reported basis and up 7% organically. 6 of the 7 businesses were positive organically with Power and Renewables up double digits. Industrial segment op profit was up 9%. And Industrial op profit, which includes corporate operating cost, was up 11%. On the bottom of the page, as I mentioned earlier, industrial operating income plus vertical EPS was $0.21, up 12%, excluding gains in restructuring with industrial operating EPS up 15% on the same basis. Included in the $0.21 was $0.08 of uncovered restructuring that I'll go through on the next page. So next on Industrial and other items in the quarter. As I said, we had $0.08 of charges related to industrial restructuring and other items that were taken at corporate. Charges were $1 billion on a pretax basis with more than $300 million of Alstom synergy investments primarily related to power in Europe. We also made significant investments in corporate, Oil & Gas, Energy Connections & Lighting and Healthcare on the quarter. Restructuring charges totaled about $800 million, and BD charges were approximately $200 million related to Baker Hughes, the water disposition, the Industrial Solutions disposition and the digital acquisition. There were no gains in the quarter. For the year, we expect about $0.25 of restructuring to offset by $0.25 of gains from water and Industrial Solutions dispositions. We are targeting a third quarter close for the water transaction and a fourth quarter close for the Industrial Solutions transaction. For the second quarter, we expect to do about $0.07 of restructuring with no offsetting gains. Next, I'll cover the segments. I'll start with the Power businesses. Power orders of $6.1 billion were up 8%, with equipment higher by 25% and services flat. Equipment growth of 25% was driven by Gas Power Systems up 12% and steam power systems up almost 100%. Gas Power Systems was driven by higher arrow, up 20 units, and 10 more HRSGs versus last year. Gas turbine orders were down 13 units, 12 versus 25. We had orders for 2H units, including our first H in China. We have 30H units in backlog and expect to ship 23 Hs in 2017. Steam power systems recorded orders totaling $591 million, up almost 100%, primarily driven by 2 projects for which the business will provide coal-fired turbine islands. These orders were taken by an existing JV within Alstom, which we took majority control of in the quarter. Service orders were flat. Total orders for upgrades were up 34%, but the AGPs were down 5 units, 20 versus 25 a year ago. Offsetting upgrade growth was lower transactional services in Europe and the Middle East and lower new unit installation volume. Revenues of $6.1 billion were higher by 17%, with equipment revenue growing 59% and services revenue flat. Equipment revenue growth was driven by higher deliveries of gas turbines, HRSG and arrow units. We shipped 20 gas turbines versus 13 a year ago. In addition, we shipped 24 HRSGs versus 1 and 11 arrow units versus 5 compared with last year. H shipments were essentially flat at 4 units. Service revenues were flat despite strong upgrade regrowth, up 26%, including lower AGPs of 21 versus 27. Upgrade growth was offset by lower boilers service volume in North America and a fewer major outages in the Middle East, Africa and Europe. Power earned just under $800 million operating profit, up 39%. Performance was principally driven by cost productivity and equipment volume, offset partly by mix of equipment versus service. Gas Power Systems and steam-powered systems drove most of the improvement in profitability. Power had a good quarter, driving both equipment orders and equipment profitability. The business is intensely focused on structural cost and delivering $500 million of cost out for the year. Power had a very strong organic growth in the quarter on higher arrow turbines and higher gas turbine shipments, driving organic growth up 18%. Our view for the year of mid-single-digit order book unit growth has not changed. Power is on track for 100 to 105 gas turbines in 2017 and expect to deliver the upgrade growth, including 155 to 165 AGPs. No change to the outlook that the business provided in the March Investor Meeting. On Renewables, the business had a solid quarter. Orders of $2.1 billion grew 8%, with onshore wind higher by 4% and hydro orders up 39%. Onshore wind orders were up on $167 million of repower commitments versus none last year. The strength in repower was partially offset by lower wind turbine orders, down 8%. We took orders for 589 units versus 716 units last year, down 18%, but the megawatts for the units ordered grew by 3%. The lower unit cost was driven by the U.S., which down 61% after a very strong fourth quarter, partially offset by a very strong international growth, up almost double. The wind market is very competitive with pressure on price, both in the U.S. and globally. Hydro secured a few large equipment orders in Turkey and Nigeria for 8 Francis turbines. Backlog grew 8% year-over-year to $13.4 billion. Renewables revenue of $2 billion grew 22%, driven by onshore wind up 11% and hydro up 2x. Onshore wind growth was largely driven by repowering deliveries. Wind turbine shipments were down 15%, 567 turbines versus 668 a year ago. However, the megawatts that we shipped were essentially flat on the larger turbines. Operating profit grew 29% in the quarter, driven by cost-out actions on the 2-megawatt NPI, positive value gap and repowering for volume, partially offset by higher NPI spend on the new 3-megawatt turbine. Margins expanded 20 basis points in the quarter. The business made good progress on the 2.x megawatt NPI unit cost, but will require additional cost actions given the competitiveness in the market. We are early in the learning curve and on the cost-out processes on the 3-megawatt NPI. We closed the LM acquisition this week, and the vertical integration will enhance the business ability to drive cost performance and growth. In Aviation, before I discuss the first quarter results for the business, I want to make you aware of a change we've made to how we report our aviation spares rate. Historically, we provided an all-in spares rate that included external shipments of spares, spares using time and material shop visits and spares consumed in shop visits for our engines under long-term service agreements. Going forward, our spares rate will only include externally shipped spares and spares used in time and material shop visits. Over the past several years, the strong growth in our long-term services agreements and the associated shop visits have driven the percentage of spares used in LTSA to be a much greater proportion of the historical order and sales rate. These spares are also part of the LTSA billing and are already accounted for in revenues. We believe the new spares rate provides investors with more visibility to transactional market dynamics. Consumption of spares in long-term service agreements can be impacted by customer fleet management, optimization of shop visits over the life of the contract for various other reasons. Starting with the first quarter of '17, we will report only a ship rate for spares on this new basis as the orders and shipments are virtually the same. This change does not impact any reported financial operation. Historical information for the spares rate on the new basis, as well as the old mapping, are included in the supplemental presentation material. Moving to Aviation's first quarter performance. The business continues to execute well on a strong market. Global revenue passenger kilometers grew 7% year-to-date February, with strength in both domestic and international routes. Air freight volumes increased 7.2% until February. Orders in the quarter were $7.4 billion with equipment up 5%. Commercial engine orders were up 3% on higher LEAP and GEnx, partially offset by lower GE90 and CF6 orders. $1.7 billion of new commercial engine orders included $932 million for LEAP, $206 million for CF34, $138 million for GE90 and $166 million of GEnx orders. CFM orders were also up 13% to $186 million. Military equipment orders of $169 million were down 46%, driven by no repeat of a large Black Hawk T700 armory order from last year. Service orders grew 17%. Commercial service orders were higher by 18% with CSA growth of 20% and the spares ADOR of $21.7 million a day was up 25% on the new basis. Military service orders were up 40% at $610 million on increased spare parts. Backlog finished the quarter at $158 billion, up 3%. The equipment backlog of $33 billion, down 5%, and service backlog of $125 billion ended up 5%. Revenues grew 9% in the quarter to $6.8 billion. Equipment revenues were down 2%, driven by military down 47% on lower shipments, partially offset by commercial growth of 12%. Commercial engine deliveries were down 7%. However, revenue was up driven by increased mix to higher-value GEnx and LEAP engines. Service revenues were up 17%, driven by commercial spares rate of $21.7 million a day, up 25%. Again, the same as the order rate. Operating profit in the quarter totaled $1.7 billion, up 10%, primarily driven by favorable price, volume and cost productivity, partly offset by a negative impact of 81 LEAP shipments versus 0 last year. Margins expanded 50 basis points in the quarter. Demand for the LEAP engine continues to be strong with over $900 million of orders booked in the quarter. The reliability and performance of spec of the 41 aircraft line with LEAP today has been excellent. The business is generating strong productivity to offset the negative mix impact of LEAP and is on track to report 2017 margin rates about flat with last year on continuing cost on programs. We will continue to ramp production to an expected 450 to 500 LEAP shipments for the year. The Oil & Gas environment has been improving led by increased activity in the North American onshore market. Rig count was up 70% versus prior year and up 25% from the fourth quarter of last year and has increased sequentially each of the last 3 quarters. External forecasts continue to be slightly more positive on 2017 upstream spending, particularly among independents. The timing of recovery will vary by segment, and a large degree of uncertainty remains. Crude inventory remained at a 5-year high, and markets are closely watching OPEC output work compliance. Offshore activity remains weak. Before I get into the dynamics of the quarter, just one item regarding Oil & Gas sub-segment reporting. We combined the turbomachinery and downstream technology businesses, so I'll talk to the performance of those businesses on a combined basis. Orders for Oil & Gas of $2.6 billion were higher by 7% with equipment orders growing 30%. Every segment saw higher equipment orders. Turbomachinery and downstream grew 33%, surface up 10% and subsea up 52%. The equipment orders performance is a positive sign that growth is off a very low base. Service orders were down 2%, but flat organically. Turbomachinery and downstream was down 2%, digital solutions was down 3%, surface down 8% and subsea down 18%. Backlog ended the quarter at $20.4 billion, down 10% versus last year. Equipment backlog was down 32%, but service backlog actually grew 4%. Revenues in the quarter of $3 billion were down 9%. Equipment revenues were down 20% driven by subsea, down 29%, turbomachinery and downstream down 19% and surface down 2%. Service revenues were flat with turbomachinery and downstream up 13% and digital solutions up 1%, offset by subsea down 36% and surface down 14%. Operating profit of $207 million was lower by 33%, primarily driven by lower price and volume, partially offset by cost-out. The first half of '17 remains very challenging for the business. Despite positive equipment orders performance this quarter, our longer cycle equipment businesses in turbomachinery, downstream and subsea will lag the recovery on onshore. The team is focused on capturing growth opportunities and rebuilding its backlog. We continue to expect increased activity in our surface, digital solutions and transactional service businesses as we move into the second half of the year. The Baker Hughes deal remains on track to close midyear. We filed the draft S-4 with the SEC and continue to work with global regulators. Both the GE Oil & Gas and Baker Hughes integration teams are making great progress toward the closing. Next up is Healthcare. Our Healthcare business had a solid quarter. Orders grew 7% versus last year and were up 8% on an organic basis. Geographically, organic orders grew 2% in the U.S., 5% in Europe and 21% in emerging markets. Emerging market growth was led by China, up 28%; the Middle East up 16%; and Latin America up 14%. On a product line basis, Healthcare Systems orders grew 5%, 6% organically, driven by growth in ultrasound up 10%, and imaging products up 12% with broad-based growth in MR and CT as well as mammo on successful NPI launches. Growth in HCS and ultrasound was partially offset by Life Care Solutions, which was down 8%, primarily driven by U.S. general market uncertainty around reform. Life Science grew orders 15%, led by bioprocess up 25% and core imaging up 8%. Bioprocess growth was driven by an order for our QBO product in the quarter. Revenues in the quarter grew 3%, both on a reported and organic basis. Healthcare Systems revenues were higher by 3% versus last year, and Life Sciences revenue grew by 5%. Operating profit of $643 million was up 2% reported, but higher by 6% organically, driven by volume and productivity, partially offset by negative price and program and investments. FX was a $32 million profit drag in the quarter. Margins contracted 10 basis points on a reported basis, but were up 50 basis points, excluding the impact of foreign exchange. The business continues to execute well on new product introductions and driving cost productivity. Healthcare is targeting further product cost-out in line with the 2016 performance they delivered. They are focused on driving more competitiveness and sourcing, increasing the number of building factories and over 300 cost-out engineers dedicated to product competitiveness. Despite some uncertainty in the shorter cycle, lower ticket segment of the U.S. market around reforms, we believe the broad healthcare market supports our view of low to mid-single-digit organic revenue growth for the year. Next is transportation. Domestic market dynamics were slightly more positive, building on the modest improvement we saw in the fourth quarter. North American carload volume was up 4.4% in the quarter, driven by 2.2% growth in the intermodal carload space and 6.6% growth in commodity carload. Commodity carload growth was primarily driven by coal, which was up 15%, and agriculture higher by 4%. Petroleum continued its weakness, down 6%. In addition, GE parked locos were down 24% from last year and down 11% from year-end. Although these signs of improvement are important, they're off a weak base and have not yet signaled a consistent trend. Transportation orders for the quarter totaled $1.1 billion, up 70%. Equipment orders of $526 million were higher by 500%. We received orders for 37 locos and over 100 international kits versus no orders in the first quarter of last year. The 37 loco orders included 24 locos for North America. This is the first North American Tier 4 Class 1 order we've taken since 2014. Mining equipment orders were also higher. We received orders for 115 mining wheels versus 84 last year. Service orders of $582 million were up 3%. Backlog finished at $20 billion, down 5% versus last year, driven by equipment down 27%, partly offset by services up 4%. Revenues in the quarter were higher by 6%, with equipment up 15% and services down 1%. Locomotive deliveries were about flat year-over-year at 157 with a higher mix in international locos. North American locomotives were down 33%, while international locomotive shipments grew 159% driven by deliveries in Pakistan and South Africa. Operating profit of $156 million was down 5% on unfavorable mix and higher digital investment, partially offset by cost productivity. No change to the outlook we shared with you in December. 2017 will be a challenging year with locomotive shipments likely down close to 50%, operating profit down double digits, and pressure on margin run rates. The business continues to drive structural cost out as well as building their international backlog. Next on Energy Connections & Lighting. Orders for the segment totaled $2.6 billion, which were down 2%. Energy Connection orders of $2.4 billion were down 12%, driven by Power Conversion down 36% and Grid down 8%, partially offset by Industrial Solutions, which grew 11% in the quarter. Power Conversion performance was driven by continued pressure in Oil & Gas and no repeat of a large inverter order in the first quarter of last year. Grid's first quarter performance was impacted by orders delays in the Middle East that will close in the second quarter, specifically a large order in Iraq. Industrial Solutions, which was up 11%, outperformed versus the NEMA market, which was up an estimated 3% in the quarter. Our current platform had orders in the quarters totaling $243 million. Revenues for Energy Connections grew 1% reported and 4% organically. Grid grew 19%, partly offset by Industrial Solutions down 2% and Power Conversion down 26% organically. Current and lighting revenues were down 11% with current growing 3% and legacy business increasing by 22% as we exit markets and experience lower demand for older technology. Operating profit in the quarter of $28 million was substantially higher versus last year, driven by structural cost actions. Energy Connections earned $20 million, and current and lighting earned $8 million. No change in the 2017 outlook. We expect better execution from these businesses with double-digit profit growth for the year. We expect the divestiture of Industrial Solutions to happen late in the year. Finally, I'll cover GE Capital. The verticals earned $535 million in the quarter, up 8% from the prior year, driven principally by lower impairments, higher tax benefits, partially offset by lower gains. GE cash, energy finance and industrial finance all had strong quarters, and overall portfolio quality remains stable. In the first quarter, the verticals funded $1.8 billion of unbooked volume and enabled $2.2 billion of industrial orders. Other continuing operations generated a $582 million loss in the quarter, driven by excess interest expense, restructuring cost related to portfolio transformation and headquarters operating cost. As I've said in the past, these costs will continue to come down as excess debt matures and we rightsize the organization. Versus the first quarter last year, other continuing costs are down $800 million, driven by these lower excess debt costs, non-repeat of costs associated with both the first quarter of '16 hybrid tender offer and the preferred equity exchange. In addition, we expect incremental tax benefits associated with the completion of the GE Capital restructuring towards the second half of the year. Discontinued operations generated a $242 million loss, driven by exit plan-related items and operating costs. Overall, GE Capital reported a net loss of $290 million. We ended the quarter with $167 billion of assets, including $43 billion of liquidity. Assets were down $16 billion from year-end. GE Capital closed on $7 billion of transactions in the quarter, including the sale of our French consumer finance platform and our Hyundai JV. In total, $198 billion has been actioned since April of 2015, $263 billion, including the spinoff of Synchrony. All major sales activity related to GE Capital exit plan is now complete. $8 billion of assets remaining will largely be runoff over the next 12 to 18 months. As a result of this, as of March 30, GE Capital's non-U.S. activities are no longer subject to consolidated supervision by the U.K.'s PRA. GE Capital paid $2 billion of dividends during the quarter and an additional $2 billion this week. We remain on track for $6 billion to $7 billion of dividends for the total year. Overall, the GE Capital team delivered a strong performance from the verticals while executing on all aspects of our exit plan. And with that, I'll turn it back to Jeff.

Thanks, Jeff. We are reconfirming our 2017 operating framework and we should meet all of our goals for operating EPS. We're off to a good start on organic growth and margins. The goals for industrial operating profit and structural cost-out are in sight. Despite a slow start, we plan to hit $12 billion to $14 billion of industrial CFOA for the year. We believe that capital dividend should be $6 billion to $7 billion for the year. Dispositions are on track. We're on track to return $19 billion to $21 billion to investors through dividend and buyback. So to recap, we had 10% orders growth, 7% organic growth, 130 basis points of margin expansion and 20% organic industrial operating profit growth, and a commitment to hit CFOA for the year. So this is a good start. Matt, now for some questions.

Thanks, Jeff. With that, let's open it up for questions.

I wanted to discuss the timing of the cost reduction. I mentioned a $230 million target for the first quarter, which is what you indicated. I assume that if you maintained this every quarter, you would reach the $2 billion goal on a steady basis. However, you mentioned that the ramp-up would be a bit quicker throughout the year. How do you view that $2 billion? Will it be released evenly over two years, or can you front-load a significant portion of it?

Yes, okay.

And just on that, if you can give a little bit of color on how much of that cost-out is really from last year's restructuring versus new cost initiatives.

Yes. We are discussing structural or base costs, which are fixed costs excluding variable costs. We previously mentioned a plan to reduce costs by $2 billion, with $1 billion targeted for each of the years '17 and '18. Our objective for this year is to eliminate $1 billion from that base cost. In the first quarter, those costs were approximately $75 million lower year-over-year, and we managed to cut over $375 million from those costs. However, this was somewhat offset by an expected increase in digital spending year-over-year and wage inflation of about $80 million, indicating strong underlying performance. We anticipate an acceleration in our efforts throughout the year, as we are implementing numerous actions in the first quarter across all business segments and corporate functions. We mentioned initiatives related to horizontal IT, which we estimate will save $250 million this year, and the recent transition of our corporate tax team to PWC. We have also made several headcount adjustments at both corporate and business levels in the first quarter, which we believe will lead to further growth throughout the year. In our outlook meeting, we had set a goal of $500 million in cost savings, supported by a $1.7 billion pipeline. In the first quarter, we performed $200 million better than the original plan, giving us confidence that we are on track for a higher target of $1 billion for the year. Consequently, we expect to see improved performance in the second quarter, with a significant acceleration anticipated in the second half of the year. Regarding restructuring from the prior year, I mentioned that we achieved $375 million in cost reductions before accounting for digital impacts and wage effects, with about $174 million of that stemming from prior-year restructuring actions.

But I would say, Scott, having a good 130 basis points of margin with a lot of the structural cost totally kick in makes us feel good on the 100 basis point goal for the year on margins.

Right. And I know you're focused on the base fixed cost. On the variable cost, how does that play into the next several quarters?

So as we discussed earlier, let's revisit what we mentioned in our outlook. In our outlook, we aimed for an improvement of 100 basis points in margins, with 50 of those coming from our restructuring efforts and the remaining 50 from our incremental cost plan. Looking at the gross margins for the quarter, we improved by 90 basis points. This reflects the overall product and service costs, which is a promising step towards achieving our total annual margin goal.

And I would say, again, on gross margin, Scott, we built in kind of a negative mix, vis-à-vis, the LEAP and things like that. And we still can more than offset that with other strong programs we've got in the company.

Could we just explore a little more what's going on in Alstom? There was a comment about you're taking a different profile there. It was unclear what you meant by that. And it also sounds like one of the JVs got consolidated in the quarter.

I'm not entirely sure I understood your first question, Jeff. Let me discuss the joint venture and then I’ll let Jeff address the initial part of your inquiry. When we acquired Alstom, we also took an interest in the joint venture in the steam sector in India, where we hold a minority stake. We invested a small, negligible amount to actually gain control of that joint venture in India, which primarily focuses on steam equipment and mainly serves the Indian market.

And then Jeff, the comment I made is the profile of Alstom was always very highly skewed towards their last quarter. It's going to take a while to get that normalized on the kind of the GE time frame just based on some of the EPC work and project work they do. So that was the comment that I made.

Yes. I don't think that the profile is materially different than our own business. We have a lot of long-term contracts, 81 long contracts that we're really building against those here in the first quarter. Those will hit billing milestones over the course of the year. And like our own equipment businesses, the Alstom equipment businesses will improve on cash performance throughout the year.

So obviously, order growth inflected pretty possibly in the quarter. And we know you have your management incentives in line toward delivering significant cash flow. So why isn't cash better? Why not maybe you're going to sacrifice some orders from difficult customers if you have to for better cash or maybe pressure suppliers even harder to generate more cash? I guess, the question I'm trying to figure out is whether your issues are transient and cyclical, which, we think, they are, or sometimes, people think they're structural, especially in Power. How would you answer that question?

When we analyze the first quarter performance, we fell short by $1 billion compared to our expectations, with $700 million of that attributed to working capital issues. Within this, $400 million is specifically linked to receivables. However, our receivables performance was solid this quarter, showing improvement in collections year-over-year. We factored $1.3 billion this quarter compared to the same time last year, which was anticipated. The main driver was a significant amount of past due accounts in Aviation, which we don't typically see. These are starting to clear up in the second quarter. Additionally, we have some notable past due amounts in the Middle East from our power business, which are expected to clear as planned. We anticipate collecting most of what we expected in the first quarter during this second quarter. There was also a slight miss of around $100 million in inventory compared to our expectations, but other business areas met their inventory targets. Year-over-year, our inventory performance improved by $700 million over the first quarter of last year, which is crucial for our working capital goals. We are aiming for more than $3 billion in working capital improvement this year to reach between $12 billion and $14 billion, primarily through inventory. While last year we made significant progress in accounts payable, this year it's focused on receivables and inventory. Although inventory was $100 million less than projected due to Healthcare timing in North America, we’re not overly concerned about that. Additionally, we experienced a couple of hundred million shortfall in progress, resulting in a $300 million use in the quarter. This was primarily due to advancements made last year in our Renewables sector, particularly in U.S. onshore wind, and now we are recognizing revenue and shipping the related units. Much of the associated cash was collected last year. We are also expecting some major orders in the Middle East to reach financial closure in the second quarter instead of the first, including a significant grid order in Iraq, which we feel optimistic about. Next week, we anticipate announcing a major service deal in our power services business in the Middle East, which we believe will close soon. There’s also potential for revenue from West Africa in the second quarter. Overall, we are $1 billion off in the areas mentioned, but we are confident about moving towards our $12 billion to $14 billion target for the year. Starting from a baseline of $17.2 billion in pretax operating profit, we expect to see over $12 billion in net income plus depreciation from the second to the fourth quarter. We aim to generate around $4.5 billion in working capital improvements between the second and fourth quarter, similar to our performance in 2016. We do anticipate a $2 billion drag from contract assets over the next three quarters, aligning with what occurred in 2016. We are not planning for significant changes in performance, and we expect internal operating cash to show improvement this year, especially since we won't have the long-term incentive plan payouts we had last year. This framework helps us estimate achieving our target of $12 billion to $14 billion. Moreover, we foresee some reduction in base costs contributing positively to cash flow as we aim to generate $1 billion in cash, which should prominently reflect in our net income plus depreciation. Overall, this outlines our cash flow strategy for the year.

When reviewing the noncash earnings from contract assets, how is that reflected in the margin bridge? Regarding the $800 million related to restructuring and other expenses, is there anything included that isn't purely attributed to headcount restructuring? If so, what is the amount of that? I believe you had a disclosure in your 10-K regarding the breakdown of restructuring.

The $800 million of restructuring in the quarter is specifically for restructuring, which involves projects that have paybacks. This is well-structured, particularly in terms of headcount and site capacity. To provide more detail, out of the $800 million, approximately $500 million is related to workforce capacity, while about $300 million is tied to plant capacity and consolidating our footprint. The remaining $200 million, which contributes to the $1 billion charge for the quarter, is for business development, including Baker Hughes, water, industrial systems, and some digital acquisitions we completed this quarter. To clarify, the $800 million is entirely invested for payback. Could you please repeat the first part of your question?

Okay. It's on the contracts.

Yes. So on the CSA contracts, which is, I think, what you're talking about, CSA contracts in the quarter were up $1.4 billion year-over-year. $800 million of that increase was associated with contract updates, okay? And that's versus $500 million a year ago. So it's higher by $266 million year-over-year. Of about $300 million, it's up year-over-year, a little more than half of that is in power. And most of that is associated with updates of part cost when we change standards every year. So for the contracts that were under review in the first quarter, if we change the standard on the part cost and deliver against that contract for the future, we did that update. And then there's a small update for escalation that's mostly around our Aviation business. We update it once a year on escalation within the service contract. That part of long-term contracts that are revenues versus billing, so outside of contract updates was $600 million in the first quarter. And that's where we've incurred shop visits, outages. We've incurred costs against those service contracts ahead of actually billing the hours or the events associated with it. So that's mostly timing. And some of that will come back over the course of the year, as we actually bill against the utilization or bill against an outage or a shop visit. So I would say that's mostly timing. That's the $1.4 billion increase that you see in contracts year-over-year.

I have one more quick question regarding cash flow. Jeff Bornstein mentioned $400 million of industrial cash flow from operations in the first half of last year. Should we expect the same level for the first half of this year? Additionally, I’d like to follow up on the contract assets. Last year, there were cash outflows of about $4 billion, which is also about the same this year. In contrast, in 2014 and 2015, it was more in the range of $1.5 billion to $2 billion per year. Considering GE today, what should we anticipate as the normalized annual cash outflows for contract assets going forward?

So let me take part 2 first. So yes, we expect the contract drag on cash flow for the year to be roughly the same, '16 versus '17, as you said, at about $3.9 billion. I think you've got a phenomena that's going on. We're investing like crazy in productivity and cost-out. Whether that's additive, value-engineering, driving these plant closures, restructuring, all of this finds its way into lower costs. When we get lower costs, the cost to execute against our contracts improves. And when they improve, the accounting has to account for that and where it changes our view on the ultimate profitability of these contracts. That's one method in where it's hugely focused on that. And I think you want to focus on to that, that's all future cash, future economics, etc., on a go-forward basis. We're not pulling future profit for it. That is not what we're doing. We're just restating where we are in the contract from inception to date. The second part is where the long-term service agreements that protect our install base, and our penetration continues to improve. When you look at the attach rate on the H turbine, on the LEAP engine, the population and our backlog around this contract is growing substantially and has over the last number of years. And so there's a volume factor associated with it as well. What was the first part?

I think we expect CFOA for the half to be roughly comparable.

So yes. What I would say on the half, we think CFOA is going to be sequentially much better in the second quarter than the first. And we would expect year-over-year CFOA to be better to the half, equal or better to the half.

Power equipment orders increased by 25% in the quarter, even as gas turbine orders fell by about 50%. This appears to support the shift from gas turbine sales to power island sales, along with an expanded product scope. Additionally, the comparisons with Alstom are relatively favorable. I would like some insight into the sustainability of this strong order trend for power equipment, despite the less optimistic outlook for gas turbines.

Look, I think, Shannon, we look at the total gas turbine market probably being roughly flat year-over-year. We do think this increased content is kind of here to stay. So it's our expectation that that continues through the year. And then I think, at the end of the day, we've got a decent competitive position in steam. We don't have any false expectations about that market, but we will pick up some orders there as well.

Just to provide some additional insights, we secured two major steam turbine island orders during the quarter, which is generally a positive sign. We saw a notable increase in arrow unit orders, rising 20% year-over-year for arrow derivatives. Additionally, we received 10 more HRSG orders from Alstom this quarter compared to last year. However, we experienced a decline of 13 gas turbines, indicating a mixed performance in the gas turbine sector.

Just a question in terms of progression of organic growth through the year, how much of first quarter growth was pulled from the fourth quarter '16 shortfall and whether any orders or revenues were pulled from the second quarter and the rest of the year?

Again, certainly, there was going to be some spillover from Q4 into Q1. I still think 3% to 5% is the right way to peg the year. We're encouraged about how the first quarter started. And I would say, Andrew, business outside the U.S. is incrementally better than we had expected, I think, when we lined up the year. So I think there's some macro drivers that are also important in terms of our ability to capitalize on the year. And then I think 10% orders growth is a nice bellwether for investors to reinforce, I think, what our guidance is for 2017.

I want to add that at year-end, we discussed power and mentioned some short shipments we anticipated on gas turbines, including both arrows and units. As we mentioned during the call, we expect those to close in 2017. We believe these are promising projects, but they did not close in the first quarter. Therefore, to respond to your question, the order performance you observed in the first quarter, particularly regarding power that we referenced from year-end, does not include those units.

Thank you. The replay of today's call will be available this afternoon on our Investor website. We remind you that next Wednesday, we'll be holding our Annual Shareholder Meeting in Nashville, North Carolina. And Jeff, you're going to speak at EPG Conference on May 20. With that, Jeff?

Great, Matt. And I would just spike out, I think people were very encouraged by first quarter performance, 10% orders growth, 7% organic, 130 basis points of margin. I think a solid cash profile for the year. So I think, Matt, off to a great start. I think very encouraged by 2017.

Great. Thanks for joining today.