General Electric's CEO Presents at 2013 Annual Shareholder Meeting Conference (Transcript)

Seeking Alpha (Transcripts)

Wed, Apr 24, 2013, 5:06 PM

Executives

Jeffrey R. Immelt – Chairman and Chief Executive Officer

Keith S. Sherin – Vice Chairman and Chief Financial Officer

Michael Barbera IVS Associates – VP, Treasurer

Analysts

Tom Borelli – FreedomWorks

Kevin Mahar – Shareholder

John Keenan – AFSCME Employees Pension Plan

Martin Harangozo – Shareholder

Ron Flowers – Retirees Association of General Electric

Justin Danhof – National Center for Public Policy Research

Dennis Rocheleau – Shareholder

Jeffrey R. Immelt

Good morning and welcome to GE’s 2013 Annual Meeting. I’m Jeff Immelt, Chairman of the Board of GE and here with me today are Keith Sherin, our CFO; and Brackett Denniston, our General Counsel.

Each year, we have our Annual Meeting in a GE town that epitomizes what our company is about and that our shareowners deserve to see. This year it’s in New Orleans and we’re very proud to be here. New Orleans is a great vibrant city and the State of Louisiana is a great place to do business. We have more than 1,300 employees working across the state and businesses such as energy management, oil and gas, healthcare and GE Capital and we 1,300 retirees across the state.

In GE, we take on the world’s toughest challenges and we find ways to build a better future. We want to be in places where the people share their same spirit. New Orleans has faced this year challenges and its people have only made this city stronger. That commitment is making a better future is a critical part of GE’s culture. That’s why we’ve invested millions of dollars in the state-of-the-art IT facility here in New Orleans. We approach that we opened the GE Capital Technology center this week and have already begun to staffing the facility. We’ll bring more than 300 jobs in New Orleans and these are high-tech jobs, so they will add to the city’s economy.

Over the years, we’ve developed solutions for our customers. We have build on strong relationships and help the communities. Oscar has been a partner to GE Healthcare for years. It’s a great relationship on several levels, technology, efficiency and culture. And across the U.S., we must develop new models of healthcare, building both the structure and culture that allows us to move faster. This week we also announced the donation to the Congressional Medal of Honor Foundation for the educational programs with World War II Museum here in New Orleans. It’s a way for the great organization and the local teachers and students who’ll help benefit from these programs.

So this is special place for GE and its shareowners and to be I welcome all of you. We like to think that GE as a company that can compete and help our customers to compete in today’s environment and we’re focused on big productivity drivers of our time. And this includes things like unconventional resources, the shale gas revolution, advanced manufacturing, only the analytical layers around our products and simplification which we’ll work on very hard in GE to move faster and be more competitive.

Today with a $100 billion in revenue and 15% margins, we’re the largest and most profitable infrastructure company in the world, selling in more than a 160 countries. We put about 6% of our revenue back into R&D. We invest some $10 billion to launch products and build global capability and we’re big financial service players with an emphasis on specialty finance for small and medium sized business.

The culture of our company is based on four principles, were mission based. We believe that the products we make change the world. We build re-power. We move recur. We’re constantly searching for a better way. We always learn more and do better. We’re working on solutions for our customers and our society like we do here in New Orleans. We’re working on affordable healthcare energy in the bit province to shape the 20% rate and we’re a weak company we believe in team work.

Those are the principles that have allowed us to grow and be successful over the past 130 years and really that’s what keeps us hungry and humble as we look at the future. This is who we are. It’s why GE works and it’s why you could be you proud of your company and why your company is positioned for the success. So now in the order of business, some advice of this meeting is properly convened that we have a quorum and that the proposed resolution set fourth in the proxy statement was filed as part of these proceedings.

We received proxies representing over 79% of the approximately 10.4 billion outstanding shares, eligible to vote. The management proxy committee has voted these shares in accordance with shareowners wishes. It’s now my privilege to introduce the director nominees and the members of your Board of Directors who are here with us today. I’m going to ask the Director to stand briefly as I introduce them, so you can see who they are.

Sandy Warner, former Chairman of the Board of JP Morgan Chase, our Director since 1992. Sandy is Chairman of the Audit Committee; Jim Cash Emeritus, James E. Robertson, Professor of Business Administration at the Harvard Business School, our Director since 1997; Andrea Jung, former Chairman and Chief Executive Officer Avon, our Director since 1998; Ann Fudge, former Chairman and Chief Executive Officer, Young & Rubicam, our Directors since 1999; Shelley Lazarus, Chairman of Emeritus and former Chief Executive Officer, Ogilvy & Mather, our Director since 2000; Shelley is Chairman of the Nominating and Corporate Governance Committee; Ralph Larsen, former Chairman and Chief Executive Officer of Johnson & Johnson, our Director since 2002; Ralph is presiding Director and Chairman of the Management Development & Compensation Committee; Bob Swieringa, Professor of Accounting and former Dean of Johnson Graduate School of Management Cornell University, our Director since 2002; Bob Lind, former Chairman and Chief Executive Officer of Deere, our Director since 2005; Susan Hockfield, President of Emerita and professor of Neuroscience MIT, our Director 2006; Jim Mulva former Chairman and Chief Executive Officer, ConocoPhillips our Director since 2008; Geoff Beattie, Deputy Chairman Thomson Reuters, our Director since 2009, Mr. Beattie's Chairman of the Risk Committee; James Tisch, President and Chief Executive Officer Lowes Corporation, our Director since 2010; Jack Brennan, Chairman of Emeritas and Senior Advisor of Android Group, our Director since of 2012. Francisco D’Souza, Chief Executive, Cognizant Technology Solutions, our Director since 2013; and Mary Schapiro, former Chairman Securities and Exchange Commission, our Director nominee.

I would like to acknowledge three directors who are not attending this meeting, they’re not attending for election today. Roger Penske has been a GE Director for 19 years. We’ll always appreciate Roger’s entrepreneurial spirit and operational insight. Sam Nunn, Director for 16 years. We will always miss his wisdom and judgment across every business and A. G. Lafley who’s a GE Director for 10 years. We’ll always remember A.G.’s strategic and operational skills. Please acknowledge all of their great work, the Board and for the great work on behalf of GE. I would also like to ask Mike Neal and John Rice to stand briefly, the Vice Chairman of GE, Keith Sherin who is here today is with me. Mike and John?

And now the second item on our agenda, a report on company operations. Keith Sherin will review GE’s financial performance and strategy and then I’ll review our long-term outlook and key strategy items. Keith?

Keith S. Sherin

Jeff, thank you. Good morning everyone. It’s great to be here in New Orleans. I’m going to just cover a couple of charts about our financial performance. I’ve got to start with the economy. We see 2013 be shaping up sort of similar to 2012. We have slow growth in the developed world like the United States and Western Europe and Japan and we have pretty strong growth in the emerging markets and that’s continuing.

You could see for our outlook, the United States, we expect to have around 2% GDP growth about flat with last year. We can see that unemployment remains stubbornly high. One of the bright spots that we’re experiencing is in housing. We see a quite an increase in both single family housing starts, as well as multi-family housing starts, that’s good for the economy. It’s good for our appliance business. And then, one of the challenges that we continue to face our larger fiscal deficits and with programs like sequestration, that’s going to continue to provide a drag on growth.

Europe is tougher than we expected. Europe was slow growth last year. This year it could be down a bit for us in the quarter, it was down quite a bit. We expect that to continue through the year as they wrestle with their austerity and fiscal challenges. And the bright spot is in the global markets. Places like China, the Middle East, Africa, Latin America, we continue to see very strong growth, orders were up 17% in the first quarter. So the recovery is mixed, the strength for us is in the emerging markets, and we continue to shift to center gravity of the company to take advantage of those opportunities.

For 2012, we laid out a number of objectives, with investors we had five big commitments we made at the end of 2011, and we had a pretty good year in terms of performance.

Number one, we wanted to grow our industrial earnings double-digit, we grew them 10%, that was a great performance. Number two, we want to increase our pre-tax profitability, our operating margins, we grew them by 30 basis points. Number three, we wanted to restart the dividend out of GE Capital, and the team did a great job, we’ve received $6.4 billion from GE Capital back to the parent last year, which helped a lot with capital allocation.

Number four, we want to continue to run off our non-core assets in GE Capital, make the non-core assets smaller and invest in our mid-market leasing and lending business, and the team exceeded all of there targets, and number five we want to have good year on balanced capital allocation, returning cash back to you, back to our shareholders, we had a good year with a mix about $5 billion of buyback, and $7 billion dividend, so $12 billion back to shareholders.

And on the right side, you can see we still have just tremendously strong fundamentals in the company. We ended the year with a record backlog $210 billion of products and services we will deliver over the next several years.

We had a $77 billion of cash between the cash of GE Capital and the cash of the parent, that keeps GE Capital safe and secure, and it gives GE the ability to do a lot of different things in capital allocation, and we want a strong dividend, our yield last year averaged 3.3%, and it’s very important to us, I’ll couple more in that a minute.

I’m just going to talk about the growth enablers, we continue to invest in our global growth, we continue to invest a new technology, and we continue to invest in our services, both platform. So we had a pretty good year, we met or exceeded all of our investment commitments that we laid out at the end of 2011.

When I talk about investor friendly capital allocation here is really on top of what we invest organically for our new product introduction or globalization or other technology investments. Here’s what we do with investors. On the left side, the dividend is the number one priority for us. Last year, we paid $7.2 billion of dividends to our investors. In December, our board of directors approved a dividend increase of 12%, and in this year we expect to pay about $8 billion of dividend.

With the dividend increase even though the stock is higher the yield is up to 3.3% and in environment where the 10-year treasuries are trailing at 1.7%. It’s a pretty nice return for shareholders on an ongoing basis.

And then a bit on buyback, we are buying back shares, last year we bought back a little over $5 billion of stock with the closing of the NBC transaction we received the cash for selling the remaining 49% back to Comcast. We’ve increased the buyback objective this year. We expect to do almost twice as much as we did last year. And then finally on the right side, our strategic acquisitions, we continue to invest in inorganic capability, we are adding new capability to the company.

We have a $8 billion of announced transactions, the two biggest ones that you are all familiar with our Avio in our Aviation space, which is going to add a lot of capability to the aircraft engine team as well as Lufkin and oil and gas deal that we announced two weeks ago that builds out our oil and gas base, and we are very excited about the both of those acquisitions. So we are returning a lot of capital back to shareholders plus we are reinvesting in the capability of the company.

Now I talked about dividends being a number one priority, I thought I put this chart and to talk about put some numbers to put that in perspective, so this is the amount of dividends that company paid in the decade of the 70s, 80s and 90s and then from 2000 – the first quarter, the amount of dividends we paid, so if you look at from 2000 to the first quarter that’s about a 13-year period. We paid 2.5 times the amount of dividend that we paid over the previous 30-year periods.

So this is a really a big priority for us or our objective is to have an attractive payout ratio. And what we mean by that is that for every dollar of net income we generate, we’re going to pay out about $0.45, 45% of that back to shareholders in the form of the dividend. We’d like to have an attractive yield. So when you buy a share of GE stock and you get that dividend of $0.19 every quarter, on an annual basis today, as I said, that’s about a 3.5% yield which is a premium versus the S&P 500 and a significant premium to some of the other alternative investments out there.

We want to grow the dividend inline with earnings. So as we grow the company, we expect to continue to grow the dividend, and as we said, the Board last increased the dividend in December and it’s at a very attractive level. And then finally, including the buyback, we do have a significant amount of capital, we’re returning back to investors.

So to wrap up, our performance, how the company performs is what’s going to drive the total shareholder return that you all get. This is a chart of our operating earnings per share from 2009 through 2012. You can see through that period, we’ve been able to deliver double-digit earnings growth. Through that period on a cash basis, we’ve delivered $36 billion back to investors in the form of dividends and buybacks.

You could see on the bottom that from that time, 2009 to today, the GE total shareholder return has exceeded that of the S&P 500. In 2012, we delivered a 21% total shareholder return based on our performance and that also exceeded the return of the S&P 500. And while year-to-date, we’re off to a slow start. We’ve always known that we have a plan that has a first half with lower equipment deliveries and the second half has got a much better profile.

Our expectation is that we’re going to have a pretty good year in terms of operating EPS. We’d like to deliver double-digit operating EPS. And if we deliver that performance, we think we’re going to have another very good year for investors. We plan on returning $18 billion of cash to our investors this year, $10 billion through the buyback, $8 billion through the dividend, and most of that is still to come in the second, third, and fourth quarter or so. We have a good outlook for the year. We have a good expectation and we look forward to a good performance delivering good returns.

So, thank you and I’ll turn it back to Jeff.

Jeffrey R. Immelt

Okay Keith, thanks, and just a few comments on kind of where we’re taking the company next. We really have two pieces to the portfolio, a great infrastructure company and a very valuable especially finance company and we expect to get dividends as we grow and strengthen our Financial Services company to back and to invest in the strong infrastructure company. And our enterprise capabilities are really technology, very strong focus on services and growing that into analytics, a very good capability and market share on our growth markets, simple and competitive cost structures. So we as a company really focus on those four things.

From a portfolio standpoint, we really aspire to get our industrial percentage of earnings overtime up close to 70%, we want to have good relative performance versus our peers and we just want to keep investing in great markets where we have long-term tailwinds, continue to build our strength in infrastructure, drive returns and margins, and again, as I said continue to create value in our GE Capital franchise. And so this is something we communicate very frequently.

A good example of how we create fast growth industrial businesses is in oil and gas. This is a place where we put a lot of capital over the last 15 years to kind of grow the business and establish a strong competitive position and to get a business that’s in excess of $15 billion today, should be higher in 2013 with good margins and returns that really leverages the capabilities that I talked about earlier. It leverages all of the GE industrial capability. It allows us to build integrated solutions for our customers. We can leverage our global capability and our global footprint, and we can utilize our cost base and our operating capabilities on margins to build good margins and returns in this business as well.

Financial Services team has done a great job of repositioning in the new world for financial service markets. As you can see on the left, we’re down at about $400 billion of assets and we’ve got very strong liquidity and it really improve the funding profile, a very strong tier 1 capital and so we believe that GE capital ought to be able to increase their dividends back to the GE parent.

In the right hand side, just takes look at GE Capital versus some of our peer banks. And on lot of the metrics that are important that investors follow GE Capital has a very strong position. So we’ve got a great franchisee in mid market areas, we’re generating substantial excess cash and we have a lot of financial strength. So, strong industrial, strong infrastructure, strong financial services.

As Keith said we continue to invest in R&D, I think this is a core strength of the company. We invest between 5% and 6% of our revenues back in the R&D and you see that output in terms of a great array of new technologies and Jet engines and blowout preventers, new healthcare products, mining equipment appliances. Again, we think this is the key competitive advantage as we look at the 21st century and it’s a place where GE wants to invest and grow.

Our services business is incredible driver of profitability. We’ve grown our revenue by more than two times over the last decade. This is a very high margin business. In the services business, we want to continue to grow around our installed base, we want to continue to add technology to improve our customers’ performance and we want to try the analytics, so it is going to help drive better product performance, help our customers to be more profitable.

So service is continues to be a big for us when we look at the company. One of the places where we’re investing a lot of money in R&D is in analytics and this kind of shows you one of the reasons why we do that is to make our customers more profitable. Our big customer base is where our installed base is in places like aviation and power and rail and healthcare and just a 1% improvement in fuel savings over 15 years for Airline customers is where $30 billion of profit to them so these small changes in our product performance really bleed through into great performance enhancements for our customers.

And then the right hand side just shows you some of the opportunities we have to work with customers from a software and analytics standpoint. RailConnect goes to our railroad customers, and help to make them more productive. Teliris goes to our airline customers and helps them reduce their operations cost and help their asset utilization, and (inaudible) is kind of an air traffic control system for hospitals. And so, we have customers for all these, and this is a key way that we can use our service business to add customer value.

We’re winning around the world. We have a business and a framework in our growth markets that’s growing 10% to 15% every year. We’ve added commercial resources and we want you to think about your company as one that can really invest and grow on all these global markets. We can compete in places like China very successfully, India, Russia, all around the world. And so, we are a very strong global company, more than half of revenues are outside the United States, and I expect that will continue into the future.

So, we’ve seen great growth. We have 17% orders growth in these growth markets in the first quarter, and we’d see this big theme continuing into the future.

Our cost margins are very important to all of us in terms of how we run the company. We got a commitment to grow margin rates by 70 basis points in 2013. One of the key ways we’re doing that is by simplifying our cost structure and continue to drive lower cost and administrative cost. And so we see that going down to probably 15% by 2014.

So we continue to grow and work on margins which we are expanding, and we continue to simplify the company to really only be putting the resources where we can get the most (inaudible). And so, it’s all about speed, accountability and compliance when you look at the company.

One of the big investments you saw in some of the videos, and some of the things we’ve done is to invest in advanced manufacturing, just like technology, we think manufacturing is a core part of the Company’s strength, and so when you read about things like additive manufacturing or design to costs or 3D printing or some of the new fees and technologies and technology.

This is going to allow us to be faster to markets, lower our product costs, improve cycle times and we think again this is a place where GE has a strong leadership position. Lastly, when you think about and you read the annual report and the proxy, we always have a 3-year plan that holds managers accountable of certain metrics. We just launched another one in ’13, ’14 and ’15 and that’s all about operating EPS growth, overall cash, both CFOA and cash from disposition growth, a growth in our industrial percent of earnings, and growth in return sort of capitals.

So we think these four metrics, really captures what’s most important to our investors, it’s the way that we will align managers looking forward into the future, and again we think this is make sure that we are focused on what’s most important to you and your colleagues around the world. Culture (Inaudible) at GE, we talked about the culture of GE works, mission based, search for better way, solutions oriented for our customers, and a team that works together working on a way to make the world more valuable, and understand our context and fit with the world.

So that’s just a brief update on the Company operations, and now we are going to move forward with the agenda. So, let’s move to discussion and voting on matters set forth in the proxy statements. We will take up the election of directors and the management ensuring proposals in the order in which they appear in the proxy statement. After the election of directors and management proposals, we are going to do, so what we are going to do is go through up to all the management proposals. There is going to be an opportunity for questions and discussions at that time.

And then after the share holder proposals are introduced there will be chances to discuss those as well. And there will be time later on the meeting for discussion on other business matters, but first we need to address the items that are presented in the proxy statement. The independent Inspectors of Election for this year’s meeting are representatives of IBS Associates. The inspectors have taken the oath of office required by law and it had been a work since proxy started coming in. If you’ve already voted by proxy, there is no need to change your vote by ballot today, unless you would like to change your vote.

You’ll find the ballot on your seat, so let’s return to the Election of Directors into the presentation proposals in the proxy statement. The first matter is the Election of Directors had placed before the meeting to service directors for the coming year. The 17 individuals whoes names and biography appears on pages 3 to 9 of the proxy statement, namely those nominees are Beattie, Brennan, Cash, D’Souza, Dekkers, Fudge, Hockfield, Immelt, Jung, Lane, Larsen, Lazarus, Mulva, Schapiro, Swieringa, Tisch and Warner, each of those nominees has received the overwhelming maturities of the 8 billion shares voted by proxy.

The next on the agenda is the proposal to approve our name to executive compensation, your Board of Directors recommends a vote for the approval of the name of the executives compensation and then the, there is the proposal to ratify the selection of KPMG as independent auditors for ‘13. We have with us today John Veihmeyer and Bill Freeda of KPMG responsible for GE audit were available after the meeting to respond to your appropriate questions. Your Board of Directors recommends vote for the ratification of KPMGs independent auditors. So now if you like to speak, go to one of the two our microphones and I will calling you there, give your name when you recognize, so is there any discussion on the board nominees for the management proposals. So Dr. Borelli, I’m going to start with your Tom on microphone number one.

Question-and-Answer Session