General Electric's CEO Hosts Annual Outlook Investor Meeting Conference (Transcript)
General Electric Company (GE) Annual Outlook Investor Meeting Conference Transcript December 18, 2013 3:00 PM ET
Executives
Trevor Schauenberg - Vice President, Corporate Investor Communications
Jeff Immelt - Chairman and CEO
Matt Cribbins - Vice President, Audit Staff
Jeff Bornstein - Chief Financial Officer
Analysts
Scott Davis - Barclays Capital
Deane Dray – Citigroup
Steve Winoker - Sanford Bernstein
Andrew Obin - Bank of America Merrill Lynch
Chris Glynn - Oppenheimer and Company
Nicholas Heymann - William Blair & Company
Jeff Sprague - Vertical Research
Nigel Coe - Morgan Stanley
John Inch - Deutsche Bank
Trevor Schauenberg
Good afternoon. And welcome everyone to our Annual GE Investor Outlook Meeting. We have a full crowd here for the folks on the webcast. It is being webcast. It will be available for replay. Our website is www.ge.com/investor you get all the information there on the webcast.
Today just hosting the meeting, we will do a presentation, do some Q&A and then we will have a reception with our leadership team, the several members of our leadership team are here today.
As I always have to say, as always the elements of this presentation are forward-looking, based on the world as we see it today that the world can change, development can change, we interpret them in that light.
So I know everyone want to get started, I’ll turn right over to Jeff?
Jeff Immelt
Thank you, Trevor. Good afternoon, everybody. Thank you, [Mr. Bernanke]. So, he was one warm up, I guess, just in terms like was up earlier here today as well. So, I am in pretty good company but let me just dig right in.
So we are going to complete a solid 2013 good fourth quarter, increasing the pace of organic growth and margin expansion, executing our portfolio plan, Keith and Jeff, took you through this in November, 70% industrial earnings by 2015, planning to exceed in the North American retail business in the capital efficient way.
I will show you some great initiatives today that really solidify organic growth of 4% to 7% range. We go into next year with the higher level of backlog. We are pretty confident of that number.
From a margin standpoint, so we are on track with the 70 basis points for 2013. We have set a goal for 2016 to be about 17% from a margin standpoint. So, pretty good plan in place to kind of continue to grow margins as time goes on.
And balance capital allocation returned $18 billion to investments this year and you saw last week, our capital allocation of course on the dividend, the company has a lot of cash. We are very confident in the position of where we are right now and how we feel about the next few years.
And we thought letting the payout ratio drift up little bit over the next couple years is really a good trade for our investors. So that’s really the tail of the tape in terms of the big messages we are going to deliver today.
I would say the micro environment continues to get little bit better. There is volatility out there. But we say the U.S. continued to strengthen. The consumer has been good. I think we saw more, we have seen more demand in the (inaudible) slightly for commercial credit than we have seen in the past. I view that as a good sign. Europe stabilized as per the best thing I can say, there are segments of Europe that are actually growing pretty well like Germany and the Nordic region.
Really the growth market is still positive, for us China is still a great story, the resource rich markets are still a good story. But there is volatility in places like India and Brazil probably had a tough year this year than we would have expected. But places like Mexico are actually quite strong, when I look at 2014.
Inflation is still pain. We still have lots of fiscal negotiations going on that impact things like military spending and things like that. But our macro themes are pretty solid, when I look 2014 and then the future. So we feel pretty good about the overall outlook.
There is really no change to the earnings framework for 2013. I was just going to reiterate a couple points that Keith and Jeff made in the November meeting. GE Capital is going to have a couple of big games in the Swiss spend in the paid transaction, those are going to be offset by portfolio strengthening as you think about the things that Keith continues to do inside GE Capital.
The Swiss transaction in particular is a very tax efficient transaction. So you are going to see a low tax rate in GE Capital. We are going to be able to do more industrial restructuring in Q4 because that’s going to be offset by gains we have in the industrial portfolio and there will be an adjustment on the grey-zone reserves in the Q4 as well.
So, other than that, we are going to see, we will see good solid industrial performance in Q4 both organic growth and margins, and from an earnings standpoint. So that’s kind of really no change in the framework in terms of how we feel about the year.
And then these are the big investor objectives for 2013. Organic growth, we said, at the low end, slightly better in Q4. Our margin rates are on track for 70 basis points for the year, industrial segment profit, positive in the second half and positive in both the third quarter and the fourth quarter.
Returning cash from GE Capital in the year and returning $18 billion of cash to our investors. So that’s really the things we have talked about last year and how we are doing vis-à-vis a kind of where we stand going into 2014.
Now let’s look forward, in terms of where the company stands right now and some of the big initiatives that we think are going to carry us forward in the future. Jeff outlined the left hand side of the page seeing EPS growth while we are going to this portfolio transition, industrial being up double digits, getting cash out of GE Capital, executing in the retail finance transaction, pretty amount of cash inside the company, that’s still intact. We think that’s important. We are in execution mode on that right now.
Meanwhile, the investments we have made in the company and the investments we continue to make. I think, set us apart from an industrial execution and strategy standpoint. We have got a big backlog of products, high-tech products that are based on the investments we have made in R&D.
We have got $170 billion backlog in services and we will have the $1 billion of orders next year in analytics. So we have continued to invest in growing the service side. Extremely strong growth rates since 2010, since we sent Rice to go pursue our global destiny in the growth markets. We’ve grown our orders 17% on average for the past four years and we’ve been entrusted in restructuring more than $3 billion to lower the cost structure of the company.
So we’ve really invested to improve the profitability -- long-term profitability of GE. And then there is just a lot of cash around the company. Our CFOA growth rate is strong. Key capital has good tier 1 ratios and the commercial paper is going to be below $30 billion. We have very low net debt. The balance sheet is extremely strong inside the company and this just takes you through what we’ve done with the capital in 2013, return both to investors, we are just doing M&A.
So if we stand here going into 2014 as immensely strong company with a ton of cash and great imperatives and objectives strategically and really knowing the portfolio on what we need to execute on and what we need to do. Just to break down industrially, we had solid growth this year and margin expansion. We expect double-digit profit growth next year and margin expansion.
The key execution items for 2014 continue to be geographic expansion, launching the new products, executing on the backlog, continue to drive product cost down in restructuring and continue to upgrade the portfolio, investing adjacencies, fix the low margin businesses and that’s what we have to see in the industrial businesses. And then we just have, I think position the company’s benefit from a number of pretty solid tailwind.
We’ve got good position in infrastructure markets. We’ve got good position in the emerging and growth markets. We’re investing in manufacturing technology. We’ve invested in analytics ahead of our peers. We’ve got solid framework for distributed power, distributed health care. We’ve got ways to participate in this global transportation build out. So there is a number of other things that I think can help the company over the long term where we’re well positioned.
Now oil and gas, the place where we put a lot of capital. Our orders, a decade ago, were $2 billion. Our orders this year will be close to $20 billion. So we’ve really invest and build a good oil and gas business. Our premise here was really one-off. Over time this industry was going to look more like the aviation industry.
When we showed this to our board a quarter decade ago, the aviation industry spends about 8% of its revenue back in R&D. The oil and gas industry from a technology standpoint was reinvesting back less than 2% of the revenue into R&D. The amount of regulation we saw coming in -- just the amount of technical complexity we saw coming into the industry, we felt it was going to take it through a transition where GE could benefit.
And I think that's going to be true. We had some fast-growth segments right now like LNG and subsea and drilling and production, measurement and controls. And so I think we picked the right segments.
And the ways that ultimately over the coming years, we’re going to lead in this business, really had to do a technology. The ability to launch complex systems, the ability to bring all of GE into these oil and gas projects from material science to diagnostic from healthcare to power generation from our power and water business. So just a fantastic framework technically.
We like interfacing with big customers. So the IOCs and the NOCs, this is kind of a GE company of the company approach. And I spend a lot of time and invested the shoe leather in building relationships personally with big oil and gas, CEOs and leadership team’s execution, execution on backlog, execution on projects, execution on product structuring to drive margins up in this business. That’s we were committed to do and over time, we think this is going to be much more of an aviation looking business and we want to be a leader and participate as that transformation takes place.
Our GE Capital business chart from Keith in November. We talked about really where the portfolio is going and the notion that we’re going to spin out the retail finance business. I really have no update on the timing other than what Keith and Jeff said in November but that remains on track and then pivot the earnings and we expect GE Capital to return us cost of capital. We expected to be able to continue to have this great franchise in some of these important mid-market segments.
As we look forward and return cash back to the parents and I think the team did a good job in November of outlining where that was going to go and what we’re going to do as we position GE Capital for the future. So when you think about the portfolio, 70% industrial, 30% financial in GE Capital, a very solid industrial business and tremendous cash, I would say capability and optionality around the company.
Not just update the strategy, so really the big imperatives for the company are more or less the same, investment technology to build leadership. We all focus on services and the analytics, having the world’s best global company and globalization. And this culture of simplification that I’m going to pull a little bit fine put on today that we think is going to provide the foundation for speed, margin enhancement, long-term margin growth and we’re in execution mode on all of these.
The other organic growth is kind of how we position for this year and where we stand going into this year. We think 4% to 7% is pretty well position for how GE in our backlog and some of the key businesses that we have. We’re going to have margins expand up 15.8% from this year.
We should have $90 billion to allocate over the next three years and we’re committed to continue to grow return of total capital to 17% by 2016. So again when you think about margins, we’d like to see steady growth year-by-year-by-year and by 2016 the above 17% from a margin standpoint and that's kind of what we've -- how we’ve positioned the company what we’re executing on right now.
Technology is, I think, one of the things that distinguishes GE. We've invested more in technology differentially over the past let’s say 5 or 10 years. I’d like the company at 5% of our revenue into R&D. I think that's a good place for us to be.
We have really a four high point of products and we’re in it to win. In our core markets, we position ourselves technically to be in the lead, near the lead or capable of leading in the businesses that we have.
We drive a lot of synergy across the company in technology. We talked about technologies like ceramic-matrix, composites that are -- we launched in our aviation business but will be pushed into our energy business. Some of the diagnostics and sensors that come more our health care business and go to our oil and gas business and which is very strong at these big systems, things like aircraft engines, gas turbines, subsea Christmas trees, MR scanners seems to be what GE does its best work.
And so we are very focused and are very strong technology player and this is the way we set forth product margins, and we set the service margins over longer period of time as really build around these big moats. We build technology businesses on a global basis.
We are broad, so you’ll see lots of launches when you look at next year. We'll see continue to fill key gaps in our gas turbine product line and large block and distributed power. We’re the only guy in 2015 that’s going to be -- have both a diesel locomotive that is tier 4 compliance and an LNG locomotive on the rails.
So we've got pretty good position in transportation business. We continue to enhance our power conversion business in marine and build real strength around unconventional fuels and water. We launched a revolution CT at the RSNA.
This is the next generation. I think the CT leadership. In that business, we have a very high margin bioprocess manufacturing business where GE has a extremely strong product position and technology that comes from our GRC. And we really have broadly refreshed our appliance product line to have higher margins and better market share. So the company remains very broad in the technology that we introduced. We are also incredibly deep.
We had to increase our R&D inside the company, let’s say starting five years ago. In some ways, it maybe one of the worst times to have to increase your technology because we wanted to win this wave of aviation launches. And I would say the progress of your company is pretty damn good.
We've got all the interest we’ve launched for our customers, at least a 10% fuel burn many of more. We are better than the competition. We've got $100 billion of aviation product and service backlog. And our installed base in 20 years is going to go from 13,000 engines to almost 50,000 engines.
And this is built on strong proprietary technology, which is good for our service capability and our long-term service margins. And so lot of our attention right now and a lot of our folks right now is just in the supply chain. So, I look at ways to drive better manufacturing technology, things like Additive Manufacturing. We work hard together as team on the learning curve while launching these new engines.
With Avio, we have a great base now to capture more of the supply chain margin, which we intend to do as these engines continue to come to market. So we think in aviation, we are exceptionally well positioned from a margin and growth standpoint over the long-term.
And healthcare is also an NPI. I mean, this is a very global business as those of you that follow the healthcare industries, but there is a ton of volatility in markets like the U.S. and in Europe. And this is a place where NPI and NPI margin makes a huge difference. So we launched about 80 new products a year. The products we launched have about five points in the contribution margin rate for what they were placing. We launched it into a 100 different countries around the world, the cycle times is coming down. And a lot of this is about really managing segmentations.
So when I went into business 15 years ago, the top left is basically all we worked on, with the high end academic product line and then the features would just trickle down from there. Now we design products in all these different segments. We’ve got value products. We have 50% plus contribution margins. We make local MR scanners. In China, we make ultrasound products and seven different countries around the world.
The products we make that go into this growth markets are very high margin. And we work along on customer workforce, low cryogenic magnets, portable ultrasound and all these are incorporated into driving long-term margin rates into the company from an NPI standpoint.
Our services have always been a key GE strength. This is a valuable -- extremely valuable asset to our customers. This is a place where our -- for our investors. This is a place where our growth will continue and our margin rates will continue to grow. We’ve always been an innovator here and it always puts us on the same side as our customers. So you not only get a very strong aftermarket revenue stream but you also get this closeness to our customers that’s very valuable.
And the next iteration of services we think is this merger of the physical and the analytical, all of our products that have sensors on them now. The sensors all produce a tremendous amount of data. GE has this incredible depth in terms of domain and usage and how the products are used and now we are getting data about day in and day out usage as well that goes with that.
And so our high prophesies is that industrial companies are all going to be evolving into analytics and software as times goes on and we are in the lead. And we’ve invested, we’ve been thinking about this for five years. We’ve started investing maybe three years ago. We’ve been talking about it for two years and we are starting to see -- I would say momentum in results when you think about our installed base in terms of where we are going. So we view this as a tremendous competitive advantage, not just in terms of value we bring for investors but also the value we bring for our customers.
So here is what I think about it. Deep domain in the physics, we have that. We have a $170 billion backlog of service contracts. GE really owns this space. We know the usage. We know the customers. We know the domain. We have contracts already in place. We’ve added to that investment and analytics. We’ve done this organically. We’ve done it primarily in California where each of our businesses are participating.
We’ve got shared capabilities, so we’ve got now a software framework called Predix, that all of our software comes on. We have a one platform. We’ve got great partners, people like AT&T and Cisco and other people that have worked with us. And we are virtually on this six week launch cycle as it pertains to new software and new analytics that can be used in our service agreements with our customers.
From our customer’s standpoint, small changes mean a lot. So if you just look at the GE installed base of aircraft engines, one point of fuel burn across the installed base of GE aircraft engines is worth more than $2 billion in profit to our customers. 1 percentage of yield or operating efficiency to our rail customers is worth almost $2 billion a year. So small changes make real differences.
We are now in the marketplace, so we’ve launched 24 Predicitivity solutions so far. We’ll launch more next year. We’ve got a $600 million of order run rate in 2013. That will be more than a $1 billion in 2014. And these go basically in two buckets. They go to things that can be sold as part of service contracts or asset optimization, making the GE assets operate better.
There are things that could be sold separately to customers to make the entire enterprise work better. This are like tight management programs in aviation, Rail 360 in our rail business. And so for investors, one point of growth -- incremental growth in our service business is worth $5 billion of margin in real money. And so we vary this inside our service business.
So we are trying to get more dollars for installed base, increase service margins and grow our software business roughly 15% a year or 50% over three years. So that’s really -- when you read about services $2, when you think about what we are doing in industrial, that’s what I mean. So let me just drill some examples.
These are the advanced gas path that you’ve heard us talk about. We will do 15 issues. We will do more next year. These are really a combination of controls and softwares that we sell into the 7FA gas turbine units. These allow our customers based on what the needs to get better output, get better energy efficiency, to get better time of day use, to get better control. And for our customers this is roughly a two year payback.
High ROI investment, it basically doubles the dollars for installed base when we do this and this was part of our 2012 Predicitivity launch, already has a good uptake and making real progress. In our locomotive business, we have what we call Rail 360. This is a business where our dollars for installed base had grown by 8%.
And in 2013, we are able to mitigate a very tough market because our software and our service businesses grew so robustly and our backlog is up about a $1 billion. And this will be a series of offerings that can be sold as part of CSAs.
So things like fuel optimizer, things like remote monitoring and diagnostics. And then separate packages that can help the customer manage their dispatch, help the customer manage their real assets in the yard and so of course each note for the customers we have offerings that can enhance our dollars per installed base on margins in the rail business.
In the Healthcare business, it’s a lot about healthcare information technology and selling outside the installed base. So, on the left hand side is what we call Centricity 360. This is a post processing tool. So one of the things about radiology is the MR scanners and the CT scanners and the modality, they generate more information than a radiologist can use real time.
So there is a lot of post processing tool that need to go in. What we are basically doing is taking and putting on the cloud. So we have tremendous installed base applicability. We think this is a $2 billion market and when where GE will be in the full position because we already have an installed base of hard assets that are already out there in the marketplace.
And on the right hand side, because meaningful use, the industry has invested in electronic medical records like it’s going out of style and as you’ve talk to a hospital CEO, they are sitting and saying, okay, now, I have my EMR, what the hell do I do with this fundamentally.
And so there is going to be a tremendous demand for applications that can sit on top of the electronic medical records and this is where the joint venture between Microsoft and GE will play in and we have got population health and productivity metrics and things like that. So this will be incremental service sales for the healthcare business.
And then, I just wanted to give you a sense of analytics that there is ton of like nitty-gritty applications that come out every day, every week and every month that drive big benefits for customers and us. So the top left is what’s called [I-Link ], it’s for subsea bar preventers and subsea products allow the customers to watch so no one playing downtime and custom operations.
In the middle of the time-on-wing tool that allows our service business to segment the fleet. So the each engine basically has its own signature and the way that we can ever do before and by segmenting the service that we need to do on the engine, just a one customer, this can save $20 million inside that service agreement.
So tremendous savings there. At the bottom left is what we call flight efficiency services that we go into an airline and try to model their fuel performance or 1% to 3% fuel advantage for customer is huge, it’s massive.
In the physical world, we have got 50% of parts that can be repaired. We have got IT tools with our fuel engineers and analytical tools with our fuel engineers to allow them to save 5% to 10% on productivity and we have got controls and software that goes into fleets like our wind fleets to allow them to operate more effectively.
So, I just want to give you a sense from the service standpoint that the analytics mission is real. They were in the lead and that you can eat it right now in terms of benefits to the customers and benefits to us.
Our growth region is, I think another place where GE has tremendous strength. This has seen tremendous growth over the last couple of years and we continue to grow in the future. We just play in a very broad and deep fashion in these growth markets.
Since John has been out there we have seen an immense, I would say, competitive advantage being formed in terms of GE’s breadth and depths. And so we now sell in 160 countries where our first move in localization we have got tremendous customers and partners, and we have got a cost position that this investment is going to allow us to harvest as time goes on as well.
Even in China, we still China in the markets we are in, in a positive way. We think that some of the big economic drivers in China like conversion to gas, consumers and its part of the 12th five-year plan which benefits the healthcare business. The massive investments that are being made in airports and transportation, all benefit GE and we are seeing it this year and we look our backlog in the coming years.
Even if you look out five years in this country in the businesses we are in. Healthcare, I think from a diagnostic imaging standpoint, there is every likelihood that the market in China is bigger than the U.S. over that time period and diagnostic imaging. There is every likelihood in the commercial aviation market that China is equal to or in the same ballpark with the U.S. commercial aviation in terms of planes.
If the government continues to convert from coal to gas, my sense is that new gas demand in China is going to be every bit as big as the United States over the past -- over the next five or six years, and oil and gas such a tremendous amount of investment going on to tap in the shale gas and LNG and things like that. So we still view China as a key strategic region and a place where we are localizing and a place has got a great capability in future.
One of the places where we have got absolutely, I think, distinguish ourselves and what we call the resource rich countries like 15, this set of countries will be $50 billion in orders by 2015 which was less than $10 billion a decade ago and it’s real. I mean I could just go down, list of things, Algerian Power, Russia Rail.
Some of the biggest airline customers in the world are in the ASEAN region and the GRC in Brazil, the Africa Distributed Power, impact that we’ve had in Saudi Arabia at the Ministry of Health. So tremendous, I would say growth in the resource rich regions that should continue and we have again a very strong competitive advantage in understanding the themes, having the best partners, being able to localize.
We are doing both the hard things in terms of investment but also the soft things in terms of cultural risk management and things like that, that’s build a position that we think is a great foundation for future growth.
And then globalization also gives a great chance to build the cost. From a manufacturing standpoint, there is two ways that we look at building a good cost position. One is just in areas that are very productive like India right now. We have built a multi-modality facility in India.
By multi-modality, I mean, all the new businesses, all the new plans for building outside of United States, held more than one GE business. So basically the way we look at it now is when we go to factory, it’s going to do oil and gas or aviation packaging or other components across the entire company.
And then we don’t have localized, in the places that have local content, places like Brazil, we have really, I would say improved dramatically in terms of our ability to localize. From an engineering standpoint we have got these very productive engineering centers in Poland and Querétaro. We are just building one in Vietnam and in Chengdu and these are good not just from a efficiency standpoint but also just from a capacity standpoint.
I mean if you are in the oil and gas business, your bottleneck is requisition engineering and the ability to add a thousand engineers, get them up to speed quickly, you can’t do it without having these big engineering centers in the future.
And shared services, you heard Jeff talk about this, when you get in November, but we are making a big push in our backrooms and finance, in HR and IT to really drive shared services across our footprint and that is going to productivity as well.
So, I think the stories in technology, the stories in services, the stories in globalization, our both stories of organic growth in margins, organic growth and margins. Each one has a dual benefit as we have invested, as we have grown, had to deliver on both of those and that’s critical.
And so from a simplification standpoint, this is where we want take the company. Again we have, great growth last year, we have got growth this year. We have kind of set a target of 17% by 2016. So end this year at 15.8% and simplification is going to be a big driver.
We plan to continue to get good cost out there. We’ll have more than a $1.5 billion cost out this year. We’ll be more than a $1 billion of cost out next year. That $1 billion was already loaded into the plans and that’s how we got projects associated with it. So it’s very strong and real.
And the value gap is going to be positive again next year. From a mix standpoint, I would say, probably slightly negative on mix but will have margin growth in both services and equipment. So we’ll have positive margin growth in both of those, but the mix will probably be slightly negative because even though service growth is good, the equivalent growth is probably better.
As I said, I would say R&D if anything should be a slight positive next year and then you’ve got conflation, in fact on payroll, things like that. And I think what makes it sustainable is really a multi-facet program to drive simplification into our cost structure, speed in terms of how we approach, our product cost and our product competitiveness. And intense focus on markets and customers and the processes associated with that and a very strong IT foundation.
And we think these elements of simplification are going to be what really allows us to continue to sustain this margin performance as time goes on. I talked about the culture simplification inside the company. This is something we’ve driven around the company for almost last few years, last 18 months. And to me, it’s just a different way to run the company.
And if you think just of GE over the last 5 or 10 years, we are immensely global. We’ve got a different product set than we had 10 years ago. There is different technology available to us in terms of information technology and how you run it. And I think the leadership team really is focused on dramatically changing the way we run the place. And it starts with just a Lean management structure.
If you have to run the company with 5% of revenue and R&D and in 160 countries, one of the sources of productivity have to be the way you run the administration of the company. And that’s why we think SG&A or G&A is so critical. So we basically have gone through a very strong process of learning P&L structure, shared services, just the way the processes work inside the company. And we in 2014 will be 14% down from 17%, and we’re going to drive this place down to an extremely Lean administrative structure in terms of how we think about simplification.
But if it’s just restructuring alone, we just not going to get the kind of sustainable progress we want to get inside the company. So we’ve launched probably two years ago, what we called FastWorks. We’ve done Lean for 20 years. FastWorks takes some of the elements that we’ve got knot of lessons from Silicon Valley in some of the faster start-up companies.
And this is really Lean with the strong IT foundation. It’s a real focus on test and learn, being able to pivot quickly as you implement these projects and very strong outcomes focus. And we’ve really applied this very hard at product, product cost and product margins. We think one of the places this can really drive tremendous capability is engineering productivity, its product design, its manufacturing footprint and the speed associated with how to do that.
And that’s sitting right in with this Lean structure in terms of the company, and then just an extremely strong focus on commercial intensity, the inquorate order process, the order to remittance process, making sure that those are incredibly strong driven by our commercial leaders, supported by the business.
And we've had a series of sessions during the year and this is one of the places where I've spend a ton of time both in Fastworks and then this commercial intensity and commercial operations process because this is the way you get a lot of front-end margin, that are contracting with less leakage, better project execution, better folks on global market share, better focus on global capability to make decisions around the world. And this is incredibly important for us.
And then this is going to be build-on the network of fewer ERPs, more mobility from a digital standpoints and more -- I would say, capability in the field to drive the right elements of cost and margin and customer satisfaction. So, I think about this in its entirety. Inside the company, we say I’m in because we want all the leaders, we want 90,000 plus salaried workforce to be driving ideas and projects and they want to be successful here.
So this, I think, is one of the most exciting elements that where the company is today because I think it’s going to be the foundation on which we build steady margin improvement, steady speed and win both in the marketplace, in the bottom line at the same time.
Lean structure, 12% SG&A, very, very strong focus on products speed, product margins, equipment capability, a very, very capable company in the eyes or our customers and a strong digital foundation. And we think again, this provides a great framework for the company going forward.
SG&A, you see it today, you see a ton of cost coming out of the company this year. We've been able to do a lot of restructuring. We’ve got full set of commitments for next year from a restructuring standpoint and SG&A standpoint. Our shared services is going up, the number of facilities is going to go down by 15%. Over time, we’re going to have 80% fewer ERPs, so that’s going to drive a much simpler structure.
Our fewer P&Ls, a year ago we had three different P&Ls, what’s called distributed power. Now we have one. It is more market focused. It moves faster. It is more capable than it was as three and having an incredible year. We’ve got a bunch of stories just like that.
A smaller headquarters including Fairfield, in terms of how we run ourselves and where the company is going, everybody complains about that as you can imagine. You can ask Steve and some of the guys here and lower to an extent. So we think this is sustainable. We’ve got a roadmap to get us to 12% of raw cost out and revenue help us touch as time goes on. But I would say early on, this is really about a ton of cost out of the company from a G&A standpoint and continue to make good progress here.
Like, I said the value gaps are going to be positive, we still see some decent pricing opportunities in the business. And from an inflationary standpoint, it's pretty benign. So we see a positive value gap, not as good as this year but still pretty good. Lot of the FastWorks teams, a lot of simplification teams are working in the equipment margin area. And I kind of just, there’s really five big buckets of things we’re doing. Every business is doing its own thing but there's some of the businesses are more focused on some of the areas and others.
Product structure and simplification, this is the absolute key to the oil and gas business in terms of driving long-term margin improvement. It’s also a key in place like health and distributed power. But the number of change orders and the potential of our margin leakage in some of these businesses is huge and a big focus on product structuring and simplification in a ton of our businesses there.
Exerting speed and productivity -- look, if we can get a first engine to test cycles down, if we can get more productivity out of the engineering resources we have in the aviation business and some of the other businesses such as flows to the bottom line. And so if you look at the cycle for the LEAP versus the GEnx, it's better, faster. The economics around the key in process metrics are stronger and so engineering, speed and productivity are absolute key.
Our manufacturing technology and productivity -- this is when you think about what Steve’s done in the power and water business around heavy-duty gas turbines. We may able to drive real improvements in terms of product cost and competitiveness and at the same time, we’re attacking structure. We’re attacking number of plants in a business like energy management where we’ve got a bunch of restructuring, that’s going to simplify our manufacturing footprint going forward in the future.
Our sourcing competitiveness, we’re a big buyer of stuff and the ability to reduce the amount of sole specs and do a better job in the supply chain as always, means of way to find money around here and just driving product reliability, better performance. That’s a great way, a great feed in to our service contract profitability. And so again, like I said earlier, we intend on improving our product margins inside the company and FastWorks is a big part of how we do that.
Just a couple of FastWorks projects inside the company. The top-left is an NPI, when this is in our distributed power business. We will launch a diesel power generation product next year. It’s going to be done in 18 months at 30% lower cost to get in the market place. This is a product launch that would have taken three or four years in the past. So getting in the market fast with less cost.
Like I said engineering productivity, this is a FastWorks product in aviation. It’s all about how to get more output out of our engineers. There is a lot of key in process metrics that these guys measure in terms of time to get drawings certified, things like that, that just allowed for better output and that’s going to improve the cycle times there.
The oil and gas business is all about impacting lead times, customer availability. So our FastWorks’ teams in the oil and gas business is all about ITO cycle and create order cycles. Order to remittance are reducing the cycle times, improving the margins as delivered, lots of progress there.
And then from a systems capability standpoint, we’re going on to take a business like transportation. And by 2016, probably have it down to one ERP for the entire business. And this just drives a ton of productivity as it pertains to IT and where we go.
So I think we’ve got very specific, programmatic margin plans for the company. It’s sustainable year in and year out and then you’ll see -- you will see a good year in 2013 and a good year in ‘14 and just steady progress for the company. And then we take a least with portfolio we have today that’s 17% -- some more above 17% by ‘16 is a pretty good margin performance for the company going forward. And we’ve got the programs in place to do that.
Every now and then around GE, there’s interest in capital allocation I’ve noticed. So I thought I spend a little of time, just talking about capital allocation. First maybe look back on what we’ve done since 2010. And this just kind of goes around the horn.
We’ve cede the company on CapEx, IT stuff like that but those of you that know the company have been following so on time. This is just not a cap on -- we're just not a big cap-on intensive businesses.
So we can run the company and feed the kind of growth we need and the CapEx is plenty and then the dividends have been $26 billion that’s been about 43% payout looking backwards. We’ve done $19 billion of buybacks over the last few yeas. And we’ve done about $23 billion of acquisitions but we’ve done about $24 billion of divestitures. So that’s kind of what’s happened if you will, over the past three or four years. And so if you just kind of think out loud, I sit there and say when we sat here four years ago, right. It’s all about GE Capital safe and secure. I mean, GE capital is very strong today. So first and foremost, so we finished service business that’s fairly strong.
From a CapEx discipline standpoint, I think the notion we have today of strong investment to the information technology which we think liberate our capacity and a very strong focus on multi-modality facilities. So you can get the most out of your -- the capital that you are investing. We’ve always been disciplined but I think we’ve got a pretty good handle on our capital expenditures and what we need to do.
The dividend remains a great source of benefit for investors. And so we continue to prioritize revenue, what I said earlier about, let the payout ratio drift up. We’re going to make steady progress on the share count. We’re still on track to be below 9.5 billion shares by 2015. We’ll make steady progress year by year on share count reduction in between 2015 that will be done 10% in share count
And then acquisition, actually sometimes when I talk about one to four, the context side -- that’s more of the output function than the input function for the company. When I look at the deals, I think we’re best for the companies today that are single point technologies. We’re the one that adds the distribution value, the service value, the globalization value, the systems integration value.
We’re the one that adds that -- not -- we’re the one that buys that and then try to stay away from buying rollups and company’s that have a lot of inherited goodwill and things like that and as you go through that process that leads you to transactions that have been in the $1 billion to $4 billion range.
We just don’t plan to change that. We like that kinds of deals we’re looking at. We see a lot of good deals that seem to make sense in that context. And so that’s -- that’s where we are and we are not afraid to make portfolio moves. We’ve sold plastics and we sold NBC and we’ve sold the North American retail finance business. We sold the reinsurance business, the insurance business, the bond insurance business. So we’re not -- we're always looking at the portfolio in terms of ways to make it better, good trades, smart trades and things like that.
So that’s kind of where the company has been and then kind of looking for the next three years, we ought to have $90 billion of cash to allocate and that’s the retail finance at GE Capital dividend. It is the industrial CFOA. As I said earlier, we had just no net debt fundamentally in the company. So there’s -- maybe smart opportunities around. The balance sheet -- there is always going to be need for parent cash and when you look at the right hand side, this is kind of the ways that we think about spending it.
So we’ll continue to invest organically. We’ll continue to do the dividend and I’ll talk about that. We’ll continue reduce the share count and we think that retail finance transaction as a capital efficient transaction. We’ll continue to do acquisitions in a capital efficient way in a $1 billion to $4 billion range and that’s kind of tail of the tape. So I think from the investor standpoint, this is tremendous amount of cash that company can deploy and good ways for you for all of us. And I feel good about where that is in terms of the company’s financial strength looking forward.
So now at the business. So I have kind of gone through the portfolio, big initiatives, capital allocation, now just take a quick tour. This is kind of your (inaudible) sheet. I’m going to go through each one of the businesses but this just kind of gives you the lay of the land from our segment standpoint year-over-year and kind of how we think about it and that where we go. So I’m just going to track a few of this.
Power and Water, you are going to have a better year in win next year. We’re not counting on much from the standpoint of Europe. We said we thought Europe is going to be tough. We get a good product line, product finish the year. We talked about heavy duty gas turbines orders been between 100 and 150. Now we think it’s probably going to between a 110 and a 120 for the year.
Good service model, the teams I think, Steve and his team done very good job in a difficult market this year. The service team has done a nice job. Steve and the team done, they have basically taken out almost 20% of SG&A for the last couple of years. So these guys have done a [hell of job] from an SG&A standpoint over the last couple of years.
Distributed Power and Water executing and then the mix being impacted on the wind side and Europe remains tough. But this is a good competitive business and there is some opportunities out there we think maybe in 2014 places like China and the team -- if you compare them to the peers has executed in 2013 very well, very well.
In oil and gas business, we expect to see good revenue growth, good margin growth. It’s a still pretty good market. We see again the basic pieces around. Technical intensity is still intact and people are just trying to get -- customers are trying to get these projects executed as times goes on.
So we continue to invest in project execution, globalization, technology and the real focus I would say in this business is execution and building up global footprint, but the team is continues to improve their and I think that’s going to continue to be a good business and a good business story for us here as we go margins and operating profit this time as time goes on.
Energy management has been a mixed market, I would say this year. The utility based stuff has been tough, some of the end-used markets have been little bit better around the oil and gas and some of the renewable have been better. And we continue to have a very strong backlog. I would say our execution could have been better this year in this space. We are going to do a ton of restructuring in this business next year.
So we are going to be -- we are basically going to be do a turnaround the footprint, the manufacturing base, to just make us more competitive. We are still smaller than a lot of head to head competitors, I would say, conversion are quite competitive but some of the others are smaller and we are going to really focus on simplification and try to drive this business and make it more competitive in 2014.
The appliance and lighting business, actually has done a pretty good job in 2013 particularly appliances. And we will continue to do good job in 2014 in both businesses, but the appliance business is in a nice position right now with good products, a better market expanding -- expanding margin.
So our product line is very competitive. We are following some LED conversion lots of other people are following and it is still competitive market. So this is, even though we are expanding margins, this is still a sub 10, our margin business although the returns are better. So this is the appliances and lighting business for 2014.
The transportation business, I would say market, particularly North America, this market is tough with the reduction in coal. It has been, I would say, more competitive North American market for our customers.
We think the revenue is going to be flat to down slightly and margins are probably down slightly next year in this business and operating profit as well, even though the business will do fantastic job. And we’ll in more next year than any year than this year. So the business is still going to operate well. It’s just the market is going to be tougher.
We have good products. I would say our Tier 4 is going to be world-class and the first to market, we have got LNG business. Our service business is going to be very good next year. And then the wheels business which is associated with mining is going to weak next year in line with the mining business. But we would try to good cost out and this team has done a fantastic job of execution through this cycle and we will continue to do good job next year.
Healthcare business, yeah, we see single-digit revenue growth. We see margin enhancement and this business going into next year, so good strong product pipeline, good rebound in services.
I would say, Europe has stabilized, the U.S. is okay. It’s not gangbusters, it’s not terrible, its okay. And this business has some ways to grow, a very good emerging market platform in the Healthcare business, very good sustainable simplification program in the Healthcare business.
I think when you look at the Affordable Care Act and stuff like that, when I talked to hospital CEOs, most of what I hear a more procedures and lower reimbursement. So we see more volume, tougher price scenarios. So we’ve kind of adjust our footprint accordingly in the product mix that we have and so we are quite I think ready for the kind of market to win today from a healthcare standpoint and this business continues to execute pretty well in this environment.
Aviation, great market, great business, great execution, we are going to see descent revenue growth, we are going to see margin enhancement. We are going to see good operating profit growth.
Militaries, the headwind in terms of how to think about 2014 and but commercial engine backlog is strong and the services had been a very strong in terms of spares and service profitability and things like that.
Avio, so far we like what have been able to do and like what we see from the supply chain standpoint and just good technology. So we are driving product cost, product launches, service captures, supply chain productivity. But I think aviation business is in full execution mode with the really good team, a really capable team in terms of how they position and where they think about where they go.
GE Capital, this is really from a month ago, in terms of what Keith presented, we have kind of talked about earnings being around $7 billion this year and around $5 billion in 2015 as we complete the retail finance spend and just a good industrial lending business able to return incremental cash to the parent, good solid strength in the balance sheet, the ability to return as cost to capital and deliver -- become a strong deliver of earnings as they go forward and with this is the plan we are implementing to really focus on the mid-market companies and where we go.
So that’s kind of the statements I would say, industrial, pretty good breadth of earnings and margin enhancements this year and GE Capital, you kind of know the puts and takes as it pertains to 2014 versus 2013.
And look, I would say, we have always talked about GE Capital in terms of things that are under our control and I think that’s been a pretty good play. I look at 70:30 has been what’s under our control, I think there is still going to be non-core assets even when we are at 70:30, and so we will continue to think about the business from an optionality standpoint and things like. But 70:30 is what we can control with retail finance in terms of where we stand here today.
So you add that all up and this is the framework and you have gotten all of this already, you get industrial good organic growth, 47% organic growth in margin enhancement. We got GE Capital earning about $7 billion, that’s kind of what we talked about in November.
The way to think about corporate is, we are going to be basically have less corporate cost and that’s going to be offset the loss of the NBC earnings that we had in the first quarter of this year, so those two basically offset and the dragon corporate is just restructuring ahead of gains.
So counting on doing a frame out of restructuring, we have got little bit of gains still on the plan but not much and look if we can do better on asset disposition and other things we can chew into that. But that’s basically the negative. And then you will have fewer shares. So you will have a benefit in EPS from having less shares and that’s really what’s in the corporate line which is very consistent of what, Jeff, told you about the ongoing SG&A reduction, the ongoing restructuring and how we manage that going forward.
A good cash year and then we talked about organic growth already, we expect capital that continue to have less revenue but the industrial businesses will be fine in that context. So that’s really the operating framework for the company.
So may be just close on some ways to think about the company and then be happy to take your questions. First think about performance, what’s sustainable in the performance of the company.
I would say from a portfolio standpoint, a strong portfolio growing our industrial businesses, gaining cash on GE Capital growing EPS every year as we go through this portfolio transition to get the 70:30.
So 70:30, a lot of cash, grow EPS every year, strong industrial, that’s how I think about where the portfolio is positioned and what we can execute on and what you should count from us.
Sustainable organic growth, big initiatives and foreplay, right. Good technology, good services, right global footprint. I would say these are places that we’ve invest in good times and bad. They are delivering, they are going to continue to deliver, they are well positioned, they are going to continue to drive good sustainable organic growth.
Simple way to run the company, in terms of investing and restructuring, giving SG&A cost down, $1.5 cost out this year and another $1 billion plus next, continued to drive good efficiency structurally inside the company.
So portfolio, organic growth, investment structure, which then delivers expanding margins, so start with high $15, this year $15.8, go to $17 over the next few years, make progress every year.
Allocate capital in a smart way, $90 billion is a lot over three years that we can allocate in a disciplined and balanced way to reduce the share count continuously, continue to have a great dividend and do acquisitions that make sense from a return on capital and long-term growth and strategic standpoint and then expand returns. So we will be above 15% this year industrially and we think we will be to expand returns over the next couple years as we continue to make progress. So that’s the performance.
And the team kind of get paid as they execute on that plan, that’s kind of the big metrics that we have in the next long-term incentive plan for the team as EPS growth, cash generation, growing the percentage on industrial revenues and increasing ROTC and margins, and these are meant to be length, right. So if you can grow EPS and grow your industrial percentage, that’s the good thing, right, higher value earnings, we grow both at the same time, guys do well, right.
So cash and ROTC, again those two at length, so lots of cash and lots of cash optionality but also disciplined in terms of the way we invest it personally. And then culturally basically the leadership team, all the people in the company and every corner of the company are focused on this culture of simplification.
Lean management, process speed, very strong focus on commercial excellence, commercial execution, and a very, very strong IT backbone that facilitates that and let us play then.
We call it, I’m in, in the side the company, on November 20th we stood down the company for the day and had everybody focused just on customer execution for day around the world and this is a way that kind of again coach on culture and change, and long-term sustainability and we think that sustainability is really what facilitates good organic growth and margin enhancement at the same time.
That’s really the story and now I am happy to take questions. And as is my custom, I always start with [Cliff] every year. So I am superstitious, Cliff, and I hate to break this trend. So I am going to start with you.
Earnings Call Part 2:
