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General Electric Company (NYSE:GE)
Q2 2018 Earnings Conference Call
July 20, 2018, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to the General Electric second quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. My name is Christine and I will be your conference coordinator today. If at any time during the call you require assistance, please press * followed by 0 and a conference coordinator will be happy to assist you. If you experience issues with the slides refreshing or there appear to be delays in the slide advancement, please hit F5 on your keyboard to refresh.

As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Matt Cribbins, Vice President of Investor Communications. Please proceed.

Matt Cribbins -- Vice President of Investor Communications

Good morning and welcome to GE's second quarter earnings webcast. I'm joined by our Chairman and CEO, John Flannery; CFO, Jamie Miller; and our new head of IR, Todd Ernst.

Before we start, I would like to remind you that the press release, presentation, and supplemental have been available since earlier today on our investor website at www.GE.com/investor.

Please note that some of the statements we are making today are forward-looking and are based on our best view of the world and our business as we see them today. As described in our SEC filings and on our website, those elements can change as the world changes. And now I will turn the call over to John Flannery.

John Flannery -- Chairman and Chief Executive Officer

Thanks, Matt. The second quarter was an important one for GE. We described 2018 as a reset year and in the quarter we made significant progress on that journey. At an overall company level, we laid out our path to a simpler and stronger GE by announcing our broad portfolio strategy going forward to drive shareholder value.

The core of GE will consist of our aviation, power and renewables businesses. We also announced our plans to move our healthcare, BHGE, and transportation businesses out of the GE core to enable them to pursue more focused group strategies as stand-alone companies.

We made significant ongoing progress on our tactical priorities. We have now closed the sale of Industrial Solutions and Value-Based Care. We also announced the merger of our transportation business with Wabtec and our sale of Distributed Power. This essentially completes the announcement or actual closing of our target of $20 billion of dispositions. We've moved on this with deliberation, but with an eye for value as well.

We are materially shrinking the size of GE Capital, with planned asset reductions of $25 billion over the next two years. We continue to take out structural costs. We've achieved $1.1 billion in cost out through the first six months and we are on track to exceed our goal of $2 billion. We also announced changes in our operating model that will allow us to take out an additional $500 million-plus at corporate by 2020.

The aviation market continues to be very strong. We had a strong orders quarter and a good week at the Farnborough Air Show with $22.6 billion of wins.

The biggest challenge we face continues to be working through the turnaround of our power business. The market continues to be difficult with softness in orders putting pressure on our cash flow and working capital. The team continues to focus on right sizing footprint, reducing base cost, improving quality and maximizing the value of our installed base. This transformation is taking place in the context of a very dynamic macro environment.

Overall, economic activity remains solid in most parts of the world. I made trips to Europe and to China and Korea in the past six weeks and we continue to watch the global trade picture carefully. Our businesses see significant opportunities both in Europe and Asia and it was also a chance for me to see the very strong GE teams winning on the ground.

In terms of business performance in the quarter, our overall results were in line with our expectations. Adjusted EPS was $0.19 with particularly strong performances in aviation and healthcare and a good performance in oil and gas.

Free cash flow was $258 million, about what we expected for the quarter. Through the first half, cash is about $1 billion better than last year. I'm pleased that we're executing well on cash, meeting or beating our plan across all businesses except power. Given the ongoing market challenges and related volatility in power, we anticipate free cash flow will be approximately $6 billion for the year.

Orders were up 1% organically, organic revenue was down 6%, and margins were down 80 basis points organically. I'll share more details on these metrics in the next few pages.

Overall, we are executing on our framework and the plan we laid out for you in June. This plan was built around driving shareholder value by focusing the portfolio for growth, de-levering and de-risking the company, and operating in a new, decentralized manner. The team is energized by our path forward and we've made solid progress in the first half of the year and will continue to execute.

We expect earnings and cash pressure and power will be offset by strength in aviation and healthcare, and lower corporate costs. Renewables, transportation, and oil and gas should be about as expected. Our current roll-up for EPS is at the low end of the range we guided to of $1.00 to $1.07.

Next, onto orders. First quarter orders totaled $31 billion, up 11% reported, and up 1% organically. Equipment and services orders were both up 1% organically. We saw strength in equipment orders in aviation, healthcare, and transportation. Power was down 29% and renewables was down 34% on tougher comps. We had good service orders growth in 5 of 7 businesses. Strong spares in aviation and repower and renewables. Power services declined 22%.

I'll take you through some of the market highlights on the right. As I said earlier, power remains challenging. First half trends continue to point to a market less than 30 gigawatts in 2018, which is down from 34 gigawatts last year and 48 gigawatts in 2016. We are planning for the environment to be in this range through 2020.

In aviation, healthcare, and renewables, we see a lot of opportunity for growth. Aviation markets are robust. Global revenue passenger kilometers grew 6.8% year-to-date, with strong growth both domestically and internationally. Air freight volumes grew 5.3%. Load factors continue to be strong.

As I mentioned earlier, we had another very successful week in Farnborough. David and the team led the air show with $22.6 billion of orders and commitments. In healthcare, we saw strength in the U.S. up 6% organically and emerging markets up 5%. Europe continues to see modest growth up 2%.

I was with our healthcare team in China last week, and they had another strong quarter with orders up 10%. The market continues to be robust and the team recently launched the Pioneer MR that helped contribute the 19% MR growth in China.

Our renewables orders were down in the quarter, but we continue to see strong global demand for onshore wind. Our onshore backlog is up 43% year-over-year and although pricing remains challenging, it is improving. Overall, the majority of the markets we are in are strong and growing and we see opportunity for growth.

Next, I'll go through our results on revenue, margins, and cost. Industrial segment revenues were $29 billion, up 4% reported and down 6% organic. The difference is due mainly to the impact of the Baker Hughes acquisition. Aviation saw very strong growth of 13% and healthcare was up 4%. As expected, power, oil and gas, transportation, and renewables had negative organic revenues. Jamie will walk through each of the businesses in more detail.

Industrial margins were 10.4% in the second quarter, down 160 basis points. Organically, margins were down 80 basis points in the quarter but are up 40 basis points for the half on strong cost out. Aviation margins were down 110 basis points on higher LEAP shipments, but are up 110 basis points at the half. We expect aviation margins will expand in the year. Power margins were down 500 basis points in the quarter, primarily due to lower volume in price.

Structural cost reduction remains on track. We reduced cost an additional $300 million in the second quarter, bringing the total for the first half to $1.1 billion versus our full-year target of $2 billion. We continue to look aggressively at all cost out opportunities. We've begun implementing the actions we outlined in June to run the company with the businesses as the center of gravity. This will result in at least $500 million of incremental corporate cost out through 2020.

With that, I'll hand it over to Jamie.

Jamie Miller -- Senior Vice President and Chief Financial Officer

Thanks, John. On the consolidated results, second quarter revenues were $30.1 billion, up 3% reported. Industrial revenues were $27.7 billion, up 4% reported, with the industrial segment also up 4%, but down 6% organically.

For the quarter, adjusted EPS was $0.19, down 10% from the second quarter of 2017. The industrial businesses delivered $0.21 of EPS, down 9%, driven by continued softness in power, partially offset by strength in aviation and healthcare. GE Capital contributed negative $0.02 on the quarter, which I'll cover later in the GE Capital results.

Continuing EPS was $0.08 and included $0.15 of cost related to restructuring and other, non-operating pension and benefit costs, and tax charges related to the plan separation of GE Healthcare. It also includes $0.05 gains in other marks, which I'll cover in more detail on the next page. Net EPS of $0.07 includes discontinued operations.

Adjusted industrial free cash flow was $258 million for the quarter, down by about $100 million from prior year. I'll walk through more details on our cash performance on the next couple of pages.

The reported GE tax rate was 39%, which was higher than previously expected, due to the approximate $200 million tax charge to restructure our operations related to the planned separation of GE Healthcare. The adjusted industrial tax rate was 18%.

On the right side of the segment results, industrial segment op profit was down 10%, driven by double-digit declines in power, renewables, and transportation, partially offset by solid growth in aviation and healthcare. Industrial operating profit, which includes corporate, was down 11%. Through the half, industrial segment op profit was down 3%.

Next, I'll go through a walk of earnings per share. Net EPS was $0.07, including losses and discontinued operations of $0.01 related to trailing costs from the GE Capital exit plan and a reserve for an unfavorable tax resolution related to a prior disposition. EPS from continuing operations was $0.08.

This included $0.02 of gain primarily related to the sale of Industrial Solutions to ABB. On industrial restructuring and other items, we incurred $0.08 of charges. $0.05 was related to ongoing cost out actions at corporate, power, and renewables. We also incurred a $0.01 charge in our oil and gas segment, which represents our portion of Baker Hughes GE's restructuring, and $0.03 related to the planned separation of GE Healthcare and a small impact related to other tax reform adjustments.

For the year, we expect restructuring to be about $2.7 billion pre-tax, ex-Baker Hughes GE. In the quarter, we also had a $0.02 favorable mark-to-market related to our equity investment in Pivotal. The company IPOed in April and as required by GAAP accounting for equity securities, we marked our investment to fair value based on the publicly traded share price as of the end of June. This non-operating item is not included in our $1.00 to $1.07 EPS guidance for the year. Any future marks for this investment will continue to be backed out of our adjusted EPS each quarter in 2018.

Finally, non-operating pension and benefit costs were $0.06, which gets you to an adjusted EPS of $0.19.

Next, I'll cover cash. Our total industrial free cash flow was negative $600 million in the quarter. This represents total GE, including 100% of Baker Hughes GE free cash flow. Adjusting for pension plan contributions, deal taxes, and Baker Hughes GE on a dividend basis, our adjusted industrial free cash flow was $258 million. This was up significantly from the negative cash flow of $1.7 billion that we reported last quarter. Adjusted industrial free cash flow year-to-date was negative $1.4 billion, and that is up $1 billion compared to last year.

Overall, second quarter free cash flow performance was in line with expectations. Continued weakness in power was offset by strength in other business segments. If we continue on the right, you can see the drivers of the second quarter cash performance. Income depreciation and amortization totaled $2.2 billion. Working capital usage was negative $900 million for the quarter. The primary driver was net liquidation of progress collections in our power segment, reflecting a challenging new orders dynamic.

Excluding power, working capital was flat, indicative of a normal business cycle in the other businesses. We saw cash usage in these businesses through buildup of receivables and inventory, which was funded by a similar increase in payables and progress collection. Contract assets were at cash usage of $500 million this quarter, driven by $400 million of deferred inventory build in our renewables segment due to timing of units that were shipped but not rev-recced. We expect to recognize these units in the second half.

In addition, we had about $300 million of usage in our long-term services agreement portfolio, primarily driven by revenue in excess of billing. This was partially offset by $200 million of cash collections ahead of revenue on equipment contracts. Other cash flows were flat in the period.

We spent $800 million in capital expenditures to support growth in our business segments. This was down $300 million versus prior year, reflecting our focus on right-sizing investment spend. For the year, the continued challenges we are seeing in power are putting pressure on our total year adjusted industrial free cash flow outlook. We currently expect it to be about $6 billion, reflecting the tougher power market dynamics, which is offsetting strength in other businesses.

Cash on hand ex-Baker Hughes GE of $8.9 billion is down $2.9 billion versus year end. At the half, we've used $1.4 billion of adjusted industrial free cash flow and have paid out $2.1 billion in quarterly dividends. We received $2.3 billion from cash from business dispositions, primarily from the sale of our Industrial Solutions business to ABB that closed this quarter.

Additionally, we had $1.1 billion of investing activity primarily related to $900 million of activity in our aviation business in the first quarter, where we acquired IP assets for $700 million, as well as a minority shareholding in our camp for $200 million, one of our additive businesses. Debt went up by $800 million, primarily driven by debt related to pension funding, and as we had previously disclosed, we will be making total contributions of $6 billion in 2018 to our U.S. principal pension plan, which includes contributions in the first half of $900 million. These contributions are being funded by utilizing excess debt in GE Capital.

The $1.3 billion change in other is comprised of $900 million of pension plan funding made this year that I previously mentioned, as well as other timing items during the year. We plan to end the year at more than $15 billion of cash. The principal drivers in the second half are free cash flow and dividends for the remainder of the year. In addition, we are expecting to receive approximately $5 billion from disposition proceeds and will have cash usage from the exercise of the $3 billion of Alstom puts in the fourth quarter.

Now, I'll take you through the second quarter results by segment. For power, orders of $7.4 billion were down 26%, with equipment down 29%, and services down 22%. Equipment was down primarily in gas power systems, which was down 78%. This was driven by lower gas turbine orders of 7 units versus 24 last year, lower balance of plant down $600 million, and less aero derivatives orders of 3 versus 12 last year.

We have 82 gas turbine units in backlog, including 33 H units. Services orders were down 22% and down 17% excluding the water disposition. Contractual orders were down 5%, principally on lower upgrades and outages. Transactional orders were down 30%, driven by lower upgrades in parts. Revenue of $7.6 billion was down 19%, with both equipment and services down double digits. Lower equipment revenues were driven by gas turbine shipments of 7 versus 21 units, and aero units of 5 versus 17 in the prior year.

We expect to ship about 50 gas turbines this year, with 90% in backlog today. Aero shipments are estimated to be around 30 units, with about 55% in backlog. Shipments for both are in line with total year expectations.

Services revenues were down 15% and down 8% excluding water. CSA revenue was down 8% on lower outages, unfavorable mix of contract scope, and lower long-term service agreement gain. Utilization on CSA units continues to perform as expected and in line with last year. Transactional service revenues were down 21% on fewer upgrades and outages. Transactional revenues were also impacted by several large transactions of about $200 million, where commercial closure moved to the second half. In total, services revenue should be stronger in the second half. However, we will continue to have year-over-year pressure from CSA outage and contract mix.

Operating profit of $421 million was down on lower volume, price, and unfavorable productivity in mix. Structural cost out totaled $212 million in the quarter, and $566 million for the first half. We are on track for $1 billion of cost out for the total year.

The power business had another challenging quarter. As John mentioned, the market continues to be soft and we have seen new orders in both gas turbines and aero derivatives moving out to the second half. We have visibility to a solid pipeline of activity in the second half, however, the timing of closing on these orders remains difficult to forecast. We expect orders to be better in the second half versus the first half and about flat with last year.

We're making progress on operational improvements, but this is a multi-year process. Our lead time on H turbines is down about 15%, and we have implemented ERP systems that will provide greater visibility earlier on cost positions and scheduling issues in our project business. We continue to make progress on upgrading our transactional service technical sales and capabilities. We have visibility to 90% of the non-CSA GE units over the last year, and have initiated commercial actions on 80% of these units.

We are focused on gaining traction and winning new business with transactional revenues up 5% for the first half. We expect to see improvement in the second half, especially as we move into the fourth quarter. As is typical with this business, as we look to the second half, we are back-end loaded to the fourth quarter. No change to our prior comments on power performance for the year, but clearly we are very focused on operational change and improvements.

On renewables, orders were down 15% in the quarter, driven principally by onshore wind, down 18% on lower wind turbine volume and down 44% on units. This was partially offset by higher onshore service orders up 2.6X versus last year. The decline in wind turbine orders is principally driven by timing. Year-to-date onshore wind orders are flat with last year. Pricing for new units in the quarter improved sequentially, but was still lower than last year.

Backlog for the total business grew 32% to $16.5 billion, with onshore up 43%. Revenues were down 29% principally on lower onshore wind turbine deliveries, down 54% on units. This was partially offset by onshore services up 44%. Operating profit was down 48%, driven by lower volume and unfavorable pricing, partially offset by better cost performance.

Backlog continues to expand in this business based on strength in onshore wind. The team is investing in building capacity and is very focused on ensuring that we have the capability to deliver on a large second half ramp-up in shipment. The onshore wind business has about 70% of the expected second half new units in repower sales in backlog today with good visibility to the remaining 30%. This, along with continued strong service growth should put us on track for revenue growth in line with our prior guidance, 7% to 10% organic. We continue to bring product cost down and we expect to see benefit from those actions as we deliver volume in the second half.

Next on aviation, orders in the quarter were up 29% to $9.5 billion. Equipment orders grew 62%, driven by commercial engine orders, which were up 90% as a result of key wins in GEnx up 9X and continued LEAP momentum up 37%. Military engine orders were up 19%, largely driven by a U.S. Navy 414 order. Service orders grew 9%. Not included in orders are $22.6 billion of wins at list price for GE and CFM from the Farnborough Air Show, with engines of about $19 billion and services of about $4 billion. We saw significant activity in key commercial engine segments, including LEAP, with $12 billion of wins, and GEnx and GE90 of $5 billion.

Revenues in the quarter grew 13% to $7.5 billion. Equipment revenue was up 24% on higher commercial and military engine shipments. We shipped 250 LEAP engines this quarter, with improving cost positions, versus 69 a year ago and 186 in the prior quarter. Services revenues grew 8% with a spares rate of $26.6 million per day, up 23% versus prior year. This was partially offset by lower CSA revenue.

Operating profit of $1.5 billion was up 7% on higher volume, improved year-over-year price, and operating productivity. Operating profit margins were pressured by 110 basis points in the quarter, principally due to unfavorable mix on higher LEAP shipment. As I said earlier, we shipped 250 LEAP engines in the quarter, and for the first half, we have delivered 436 versus 459 for all of 2017. We are about four weeks behind schedule, but are making good progress on our commitment to recover on LEAP deliveries by year end and remain on track for 1,100 to 1,200 engines in 2018.

For the year, David and the team are on track to deliver 15%+ op profit growth.

Next on healthcare, orders of $5.3 billion were up 7% and 5% organically. Geographically, organic orders were up 6% in the U.S. and 2% in Europe. Emerging market organic orders were up 5%, with China up 10%. On a product line basis, life sciences orders were up 12% reported and 9% organic, with Bioprocess strong up 14% organic.

Healthcare Systems orders were up 6% reported and 4% organically. Healthcare revenues of $5 billion grew 6% reported and 4% on an organic basis, with Healthcare Systems up 4% and life sciences up 5%. Emerging markets continue to be strong, up 10% organically, while developed markets were up 2%.

Operating profit of $926 million was up 12% reported and 10% organic, driven by continued volume growth in productivity. Margins expanded 100 basis points in the quarter, as material deflation and cost productivity more than offset price pressure. The healthcare team is making progress on portfolio action. The sale of the value-based care portfolio of healthcare digital to Veritas Capital was completed on July 10.

Next, on oil and gas. Baker Hughes GE released its financial results this morning at 6:45 and Lorenzo and his team will hold their earnings call with investors today at 9:30. Since we hit the one-year anniversary of the merger of oil and gas with Baker Hughes in July, this will be the last quarter that I provide a comparison of the combined business based on financials as if the merger had taken place on 1/1 of 2017.

For reference, I'll give you the total organic orders and revenue comparisons as well. These represent the results of our legacy oil and gas business. Orders were $6 billion, up 95% reported and up 2% organic. On a combined business basis, orders were up 9%. The oil and gas market continues to grow as crude oil prices have remained relatively stable. Our short-cycle businesses are already benefiting from this, which is driving the growth this quarter, particularly in the upstream oilfield services business, which was up 13% year-over-year.

Our outlook for long cycle is become more constructive and we saw good growth in oilfield equipment orders, which were up 30% on a large award from Chevron for the Gorgon Stage 2 project. This was offset partially by turbo machinery and process solutions down 4%, and digital solutions down 6%. Revenues were $5.6 billion, up 85% reported and down 12% organic. On a combined business basis, revenues were up 2%.

Short-cycle oilfield services and digital solutions revenues were up 14% and 7%, respectively. While the longer cycle oilfield equipment and turbo machinery and process solutions were down 9% and 13%, respectively.

Operating profit was $222 million, up 86% reported and down about 27% organic, driven by declines in our longer cycle oilfield equipment and turbo machinery businesses, partially offset by synergy. During the quarter, cash distributions from BHGE totaled $439 million, including the share repurchases and the quarterly dividend of $125 million.

Lorenzo and Brian will provide more details on their call today. We are pleased with the team's execution on strategic goals of growing share and improving cash and margins. The integration is going well, with $189 million of synergies in the quarter, and is on track for $700 million for the year.

Next, on transportation. North American car load volume was up 5% in the quarter, primarily driven by intermodal car loads up 7% and commodity car loads up 4%. Parked locomotives continue to improve, ending the quarter down about 31% from last year. Orders of $1.1 billion were up 42%, with equipment orders of $486 million up 110%. We received orders for 115 locomotives principally from North American customers versus 26 in the second quarter of '17.

Additionally, we continue to see strong growth in mining wheels, with unit orders up 115%. Services orders of $620 million were up 13%, driven by double-digit growth in both locomotives and mining. Backlog was up $300 million versus prior year to $18.3 billion, with equipment up 30% and services down 7%. Revenues of $942 million were down 13%, with equipment down 40% on lower local volume.

We shipped 7 North American locomotives this quarter versus 37 in the second quarter of 2017. International unit shipments were 47 in the quarter, versus 83 in the second quarter of '17. This was partially offset by mining, which was up 109%. Services revenue was up 12%, driven by locomotive and mining parts growth. Operating profit of $155 million was down 15%, due to lower locomotive volume, partly offset by services growth.

We announced in May that our transportation business will be merging with Wabtec. The deal is progressing and we expect it to close in early 2019.

Moving over to lighting, revenues for the segment were down 9% with current up 6%, and the legacy lighting business down 26%. Revenues for the segment were up 6% organically. Operating profit was $24 million, up from $17 million last year. In the second quarter, we closed on the majority of our sale of our Europe, Middle East, Africa, Turkey, and global automotive lighting businesses. These businesses represented approximately 15% of Current & Lighting's annual revenues. We expect to sign a deal to sell the remainder of Current & Lighting by the end of 2018.

Finally, I will cover GE Capital. Continuing operations generated a loss of $207 million in the quarter, down 20%. We had a $38 million charge associated with the upfront cost of calling approximately $700 million of excess debt, which will be accretive by the end of 2019. Compared to last year, the business recorded lower gains and higher impairments, primarily related to EFS, which was mostly offset by higher base earnings and lower cost.

As mentioned previously, for the year we're targeting to be about break-even on continuing net income. We expect to have higher income in the second half driven by lower excess debt cost, incremental tax benefits in the fourth quarter, and additional asset sale gains. The timing of asset sales could impact the exact outcome.

GE Capital ended the quarter with $136 billion of assets, including $16 billion of liquidity. We paid down $7 billion of long-term debt during the quarter, and reduced our commercial paper program by $1 billion, which is in line with our overall capital allocation framework.

As we announced in January, we modified on July 1st the internal GE Capital preferred stock to be mandatorily convertible into common equity in January 2021. Remember, this was a back-to-back arrangement with GE, so the modification does not change the terms of the external GE preferred stock. In January 2021, the GE preferred stock becomes callable and we'll make a decision about this as part of our overall capital structure at that time.

Our strategy with respect to GE Capital remains clear. We intend to materially shrink the balance sheet of GE Capital. We're making progress on our target reduction of $25 billion in energy and industrial finance assets by the end of 2019. We sold approximately $2 billion of assets in the second quarter and expect to exit more than $10 billion of assets in the second half.

With that, I will turn it back over to John.

John Flannery -- Chairman and Chief Executive Officer

Thanks, Jamie. In summary, we see continued strength in aviation, healthcare, and corporate cost in the second half. This will offset pressure in power and renewables, transportation, and oil and gas should be about as expected. Cost out was $1.1 billion in the first half, on track to be better than the $2 billion target. We are aggressively reviewing all cost out opportunities for the second half.

We are targeting GE Capital earnings to be break-even for the total year due to portfolio actions. We expect the second half to be better than the first half. GE is on a multi-year transformational journey and the path forward is clear. Overall, we feel good about our execution. We see strength across the majority of the portfolio. We remain focused on implementing the broad macro strategic changes we outlined in June, while making sure our micro execution in each business continues to improve across the company.

With that, Matt, I'll turn it back over to you.

Matt Cribbins -- Vice President of Investor Communications

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

Questions and Answers:


Ladies and gentlemen, if you wish to ask a question, please press *1 on your telephone. If your question has been answered or you wish to withdraw your question, please press *2. Our first question comes from Scott Davis of Melius Research. Please go ahead.

Scott Davis -- Melius Research -- Analyst

Thanks, operator. Good morning, guys and gals. The power business continues to get a bit worse it seems and the news flow continues to get worse. I guess the question is, the original restructuring plan, when you look at it now, is it enough? Can you get enough? With the agreements that you have with the French government, is it even possible to take out enough capacity to get close to matching up supply and demand on that?

John Flannery -- Chairman and Chief Executive Officer

Scott, let me just start out saying clearly our top priority is managing through and fixing our issues in the power business. We're working that intensely and with a total sense of urgency. The market is challenging but we need to work through that. It's going to be a multi-year fix, I think with some volatility. This is not something that's going to move straight line quarter-to-quarter.

But let me take it in three pieces, really. One, is just the market. Two is how we're fixing it. Then just as we look into '19 and beyond. I'll start with market. We're looking basically 50% down the last two years. We're planning to stay at those levels. We're not looking for any rebound there.

On the installed base side, the industry is not going away. If you look at every forecast, recent forecast, Bloomberg and others, that the amount of electricity generated by gas turbines will increase. So, we think there's something substantial to build around and longer term here. Our strategy is to restructure the business and maximize the value.

We've got 5 basic things, Scott, in the plan here in terms of addressing this. One is right-sizing the footprint in the base cost. I think the team made good progress on that. We're about $550-$560 million in cost out in the first half. They'll be ahead of the target of $1 billion out.

The maximizing the value of installed base, again, we've gone through that with you before, but we continue to make progress, I think, in improving our visibility, improving our commercial execution, sales, incentives, pricing control. I think the team, we've got execution in quality and in liquidated damages, and in cycle time. Selling non-core assets. IS sold. DP announced low-voltage motors and changes in management. We see a very clear plan of what we need to do there. The market continues to be a challenge.

And so what we announced today, Scott, was we see pressure on orders. We're going to have to take additional cost out. We're going to continue to have to restructure the footprint. We can do that and we will do that, but it's going to take some time. So, I don't see any change to our core strategy with the business, our core approach to what we see in the market. But I agree with your point that it's going to take more ongoing actions here and that's what the team is focused on.

I think, as we look beyond, 2019 and beyond, we're already working with an assumption of a very challenging market. So, we had 107 gas turbines last year; we're about half of that this year. We're not expecting any improvement on that. We have the commercial teams intensely focused on getting our fair share, but make sure we're disciplined on the terms of that. We just continue to grind down the footprint and the base costs.

I think big picture, the industry is not going away. The short-term cycle is severe. We've got to manage through that, but there's an asset worth maintaining and preserving and expanding the value there.

Scott Davis -- Melius Research -- Analyst

That makes sense. Just quickly, you guys haven't really given us a number yet on what you think the run rate corporate expense is once all the healthcare spend and transportation -- once this all occurs. Do you have a sense of how much it takes in pure dollars and sense to run a company like GE from a corporate perspective?

Jamie Miller -- Senior Vice President and Chief Financial Officer

Yes, Scott, from a corporate perspective, for this year, we're looking at between $1.2 and $1.3 billion of corporate. Back on June 26th, we announced both externally and internally a number of changes to our corporate structure. First was really decentralizing a lot of what is done at corporate today and both moving folks to the businesses, as well as a number of headcount reductions.

I'd say the second thing is we had historically run a lot of things centrally here at corporate as well, and that is all getting pushed out to the businesses. Things like global growth, things like ventures, things like IT and other shared services. As you look at that, part of that as well was to announce at least $500 million in incremental cost out over the next two years. Those are actioned or in the process of really laying out the execution for that right now, and that really starts now and into the second half.

John Flannery -- Chairman and Chief Executive Officer

As I said, Scott, on that, just as a matter of philosophy, I'm deeply committed to the philosophy that the corporate center should be significantly smaller and really focused only on governance, on talent, on capital allocation strategy. So, a radical resizing of what it's been in the past.


Thank you. Our next question is from Andy Kaplowitz of Citigroup. Please go ahead.

Andrew Kaplowitz -- Citigroup -- Analyst

Good morning, guys. John or Jamie, can you give us more of an update on GE Capital in the sense that you mentioned some smaller impairments in ESS. Can you give us more color on those? You said you still expected GE Capital to be break-even for the year, with a decent ramp-up in the second half. Has visibility decreased at all in that target, given your results in 2Q or do you still see a nice ramp in second half gains to get you there? I assume no new update in WMC at this point?

Jamie Miller -- Senior Vice President and Chief Financial Officer

On GE Capital, we are targeting roughly break-even. That really hasn't changed from our earlier conversations. That could vary based on the timing of asset sales. We do expect fourth quarter tax planning benefits like we've had in the past and asset sale gains. I think one important thing to note in the first half versus the second half is as we've begun the process of asset sales and we're doing pricing discovery, we often have to take marks or impairments on specific assets where there may be a loss on sale, but those gains we have to defer until the actual sale happens. So, that gain portion of it really flushes through in the second half.

We'll also see lower excess interest cost. You saw see had a number of debt maturities in the first half. Still in targeting roughly break-even for GE Capital, but again, timing of some of that could vary and that's a rough guide.

In WMC, I would say at this point really no change to what we talked about before.


Thank you. Our next question is from Jeff Sprague of Vertical Research. Please go ahead.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning, everyone. Just a quick one for me. First on restructuring in 2018, I was wondering how much of the $3.7 billion you would label as actual cost out restructuring relative to write-offs, the GE Healthcare charge the like. The second question, I was just wondering on looking at the aviation margins sequentially, pretty significant drop on sequential spares growth. A little bit of a lift in LEAP volumes, but not materially. So, just trying to get a better handle on how aviation looks for the year. Jamie, I think you said up 15% in OP. Is that correct and what's the revenue trajectory associated with that? Thank you.

Jamie Miller -- Senior Vice President and Chief Financial Officer

Let met start with the restructuring. I'm going to talk about restructuring including Baker Hughes GE. Restructuring for the year at this point we expect to be about $3.2 billion. That includes about $500 million of Baker Hughes GE. When you really break that down, of that $3.2 billion, we see roughly $2.6 billion being related to headcount reduction, site closures, other facility exits, things like that. We do have a heavier run rate of what I'll call BD and transaction-related cost this year.

Just as you know, we've announced our $20 billion of dispositions. We're working through the other portfolio changes. So, we do see things like carve-out audits, transaction fees, and other things rolling through there as well. That's that piece of it.

Just shifting to aviation for a minute, let me start with for the full year, we expect aviation to have positive margin uplift and that's consistent with the 15%-plus op margin discussion we've had before. But just looking at second quarter in particular, you saw a couple of things here. First, sequentially, we had 64 more LEAP engines in second quarter versus first quarter. But if you look at second quarter year-over-year, that ramp was really 3-4X. So, that was really a significant pull and really impacted margins in the second quarter.

When you start to look at the second half, LEAP continues to come down the cost curve, so while volume continues to ramp up, we're seeing a nice benefit continuing in terms of the cost piece of it. On the services side, we are seeing some higher turnaround times in our shops, just given the volume ramp, which is resulting in higher shop cost. We saw some of that in the second quarter. The team is taking very specific action on that. We expect some of that services pressure to continue in the second half, but not as the same level. Remember, we've got a very strong spares rate we're seeing right now and we expect that to continue.

But bottom line is when you put all that together, we expect full-year margins to go up, but second quarter definitely has some shifting, especially with that year-over-year comparison in LEAP.

John Flannery -- Chairman and Chief Executive Officer

I'd just add just as a macro comment on the aviation business overall, this continues to be an extremely strong asset. I think if you look at market conditions, they're extremely good in commercial, extremely good in freight, frankly picking up. Good in military. We have a very strong team. The team is working through the LEAP launch well. David went through at the Farnborough show this week in terms of our delivery schedules and being on track with our delivery schedules. They're on track. Coming down the cost curve as well on a per-unit cost.

So, we've got, I think, a good market, a very strong franchise. We continue to clearly outperform on the orders and with customers, and a very strong team running that business with a great execution track record. So, when I step back and look at our portfolio of businesses, this one remains a premium business with a very good and visible long-term outlook.


Thank you. Our next question is from Andrew Obin of Bank of America Merrill Lynch. Please go ahead.

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Good morning. I guess I have two questions. One related to Farnborough and another one related to power, both in services. There was a quote on Bloomberg from one of your colleagues, I think, one of your after-market folks, about some sort of MRO sharing arrangement with Boeing. It was fairly vague, but I'm just trying to understand. Is that the direction you're going?

Second, if you could just provide more color as to when you guys think transactional business is going to bottom in terms of revenues? Thank you.

John Flannery -- Chairman and Chief Executive Officer

I'm not familiar with the comment, Andrew, on the Boeing MRO strategy. So, that sounds off point to us, but we'll follow up with you on that one. On the transactional services business, I assume you're referring to the power side of things. I would just say it's a longer cycle process. So, you're dealing essentially with coverage of our installed base and coverage of outages.

So, our first step obviously has been trying to drive visibility into our installed base. That's up to about 90% right now from quite low levels. We've got about 80% of those sites with commercial processes and commercial bids being worked on. This is something that's going to unfold over the next several questions, but I think the tactical steps up front around visibility, commercial intensity, sales incentives, the building blocks if you will of something that can unfold over the next several quarters, the team feels good about what they're doing there. So, it'll take some time, but it's an opportunity for us.

Margin rates were up I think about 400 basis points on the CM line in transactional, so we've got some work we can do on pricing and product quality and things. But it will take several quarters, I think, for this to unfold.

Jamie Miller -- Senior Vice President and Chief Financial Officer

Andrew, I would just add on the transactional piece of that, we did see lower core volume in the quarter with fewer outages, but the other piece to take into consideration is that upgrades were down close to 50% year-over-year as well.


Thank you. Our next question is from Steve Tusa of J.P. Morgan. Please go ahead.

Steve Tusa -- J.P. Morgan -- Analyst

Good morning. I just want to thank Matt for all the help over the years. He was extremely diligent with us. I really appreciate his help. So, thanks, Matt.

Matt Cribbins -- Vice President of Investor Communications

Thanks, Steve.

John Flannery -- Chairman and Chief Executive Officer

You just stole the thunder from my wrap, but go ahead.

Steve Tusa -- J.P. Morgan -- Analyst

Sorry about that. So, just two questions. The first one on aviation, just to kind of clarify and I think you've made a lot of comments on the call about third quarter, fourth quarter. Given that seasonality has probably changed a little bit with the new accounting, it's a little bit unclear how we're supposed to think about aviation seasonally. Would you expect it in the third quarter to be down, flat, or up relative to the second quarter from a profit perspective at aviation?

Jamie Miller -- Senior Vice President and Chief Financial Officer

Up. Yeah, we see the second half with the volume story. We see strong services continue. We see third quarter being up versus second quarter sequentially.

Steve Tusa -- J.P. Morgan -- Analyst

Third quarter being up versus second quarter, OK, great. Then on the restructuring side, so $2.6 billion, how much of that is actual headcount?

Jamie Miller -- Senior Vice President and Chief Financial Officer

I don't have that split with me. We'll have to follow up with you after that. But of that $2.6 billion, Steve, all of that relates to investment spend we make against headcount reduction, site and facility closure, and other cost out actions.


Thank you. Our next question is from Nicole DeBlase with Deutsche Bank. Please go ahead.

Nicole DeBlase -- Deutsche Bank -- Analyst

Thanks. Good morning, guys. I guess two questions for you. The first is just a high-level question. If you could just kind of comment a little bit on the work you've done around the potential impact from all of the tariff activity that's been thrown around over the past few months and if there's risk to your guidance associated with that.

The second thing is just thinking about the power ramp in the second half of the year. How much of that improvement is underwritten by restructuring actions that have already been taken? I'm just trying to get a sense of the risk if we see further deterioration in the top line.

John Flannery -- Chairman and Chief Executive Officer

Okay, Nicole. Let me take the China tariff situation and then Jamie can follow up on the power thing. Let me give you context really on our business in China first and then how we see this unfolding. We import about $29 billion of good globally into the U.S. About 10% of that comes from China. Our business in China, we do about $7 billion, a little over $7 billion of revenue in China and the majority of that is in our aviation and healthcare business.

If you go and look at the actual tariffs, the $50 billion that are announced and implemented and $200 billion announced, but not implemented yet, I'd say we look at it sort of a gross and a net basis. It could be $300 to $400 million at a gross level before any mitigating factors are taken there. There's some significant mitigating factors. The first is what's called duty drawbacks. These are basically credits for any components and things that we would import from China and ultimately reexport as part of a gas turbine or an MRI machine or an aircraft engine. That's a significant amount of what we import. We think that could mitigate half or more of what the tariff picture is there.

Then obviously, over time, we also can adjust our supply chain in response to some of these issues, if that's what made sense. So, I'd say we don't see a major impact yet financially. Certainly not on our '18 guidance. But that said, we are a company that's built for fair and open trade. That's obviously a subject of debate and discussion. I think that's what you're seeing right now.

We're supportive of fair and open trade. We have a massively global business in every sense. Customers, supply chains, everything. Our view right now is we hope and we expect that ultimately these matters reach a sensible, negotiated conclusion and we think that's really in the best interest of all parties involved. So, we're watching this carefully, but I think the financial parameters of this we've got a good handle on. Jamie, do you want to come on the power question?

Jamie Miller -- Senior Vice President and Chief Financial Officer

On power in the second half? Sure. Just looking at power, first half, second half. I think when you start to look at the second half, one thing to keep in mind is that fourth quarter of 2017 we had $600 million of one-time items with some inventory write-offs and some other things last year. So, you have to think about in the comparison first.

In the second half, we do see lower gas turbine units year-over-year. Services, as John mentioned, we do expect to start to see that pick up here in the second half, as the results of Scott's efforts really start to take hold.

Cost out you asked about. We have $1 billion cost out program in power this year. For the first half, we've seen about $560-$565 million of cost out already. We expect to see at least that same amount in the second half. For fourth quarter is our biggest quarter. We've got the volume being lower, the services ramp coming through, the cost out coming through. And one other thing just to remember on volume is that of our gas turbine volume, about 90% of that is already in backlog. Then just when we look at the aero units for the second half, we have a very strong pipeline there, but that can be a bit lumpy too.


Thank you. Our next question is from Julian Mitchell of Barclays. Please go ahead.

Julian Mitchell -- Barclays Capital -- Analyst

Thank you very much. Just a couple of quick questions. One is on the second half free cash flow of about $7.5 billion. Within that portion, how much is really coming from working capital versus the sort of $2 billion, $2.5 billion outflow in the first half? And I guess how much of that is power?

Then secondly, you talked a lot about the structural cost out. You had about $1 billion out or more in the first half firmwide, but your industrial EBIT still only slackish year-on-year. So, I guess I'm trying to get a sense of the urgency around the magnitude of stepping up the cost plan because maybe not that much of it is dropping through to the bottom line.

Jamie Miller -- Senior Vice President and Chief Financial Officer

Good morning, Julian. Let me walk you through the second half on the free cash flow and then maybe I'll touch a little bit on the cost out element and John may comment as well.

So, for the second half on free cash flow, we do see higher earnings across all of the businesses, as we've got a very strong volume second half, as you see. With respect to working capital, we see about $3 billion of inventory liquidation coming through in the second half. Really with the shipment profiles we're seeing across aviation, power, and renewables, we continue to expect progress drag at power, but we also expect that to be largely offset by renewables second half collections as we really start to see that PPD cycle in '18, '19, and '20 ramp.

On contract assets, we had usage in the first half of about $900 million. We expect usage to be higher in the second half, but lower than the $3 billion usage we had probably planned. So, that's a little bit there. Just talking about the structural cost piece of it. So, $1.1 billion out year-to-date. We still expect the $2 billion-plus for the year. When you look at the $1.1 billion and where we're seeing some shifting in the industrial margins, we are seeing lower volume impacting our margins primarily at power. That was about $600 million. We're seeing mix also affect the margin's element, primarily LEAP there, and some FX. So, it is being offset in terms of what you see right now in your operating margins. But again, expect a strong second half as well on both cost control and cost out.

John Flannery -- Chairman and Chief Executive Officer

Julian, I'll just say on the cost side of things, a couple of things here. One is the cost out initiatives will never end. If we have headwinds in other parts of the business, as Jamie mentioned, that are eating that up, we just have to do more. So, we are looking constantly and aggressively at everything on the cost side of things. I think the sense of urgency and our knowledge of the need to execute on that is front and center.

I continue to see additional opportunities, I think, in corporate. We have also gone through with our teams this whole notion of decentralizing corporate, pushing down, if you will, or eliminating activity at the corporate level. I expect that's also happened at the Tier 1 levels in the power business, in the healthcare business, etc. I think there's more to do there. But this is a self-help execution story for us and cost is a huge part of that.


Thank you. Our last question is from Steven Winoker of UBS. Please go ahead.

Steven Winoker -- UBS -- Analyst

Thanks. Good morning, all. I've got just two quick ones. The first one is, I know you guys give us adjusted EPS guidance of $1.00 to $1.07, but I think most of the companies that we cover tend to give us a GAAP number as well, especially considering all the moving parts around restructuring and everything else. Is there a way you could give us a sense of what that implies from your perspective on GAAP?

Then the second question is around just pricing in the order book, particularly around wind and on the equipment side and power. Thanks.

Jamie Miller -- Senior Vice President and Chief Financial Officer

Let me start with the pricing discussion for a minute. Pricing from a power perspective, as you see, the market is very soft right now. We're expecting a flattish market for the next couple of years on power. There's a lot of over-capacity in the market. As you would expect, we're seeing continued price pressure on equipment in many markets.

I would say on the services side, we're seeing pricing being relatively stable in transactional services. You saw that come through in the first half with orders and revenue on transactional services up 5%.

When you start to look at renewables, a couple of dynamics here. First, we are still feeling the effects from the European auction environment. So, pricing does continue to be challenging, but we're seeing it moderate and we saw that this quarter. As we move into what should be a very strong volume couple of years, we expect that to help the pricing element as well.

John Flannery -- Chairman and Chief Executive Officer

I'd just add with respect to the adjusted earnings topic in general, that's something I've asked Jamie and now Todd as he's coming in here to look at. I understand your point and I would say expect an update on that later this year.

Matt Cribbins -- Vice President of Investor Communications

Great. Thank you. Just as a reminder, John, before you wrap, a replay of today's call will be available this afternoon on our investor website.

John Flannery -- Chairman and Chief Executive Officer

Great. Thanks a lot, Matt. As Steve noted earlier, I do want to thank you really for just a tremendous job in this role. You've led us through a lot of change and movement in the company and have always been responsive and service oriented to our investors and analysts. So, thank you for an incredible effort and performance there.

We welcome Todd Ernst, as well. Todd, the baton is passed to you and we have every expectation you'll build on that great work.

I'll just finish really by saying this is really the one year anniversary, if you will, for me. As I reflect back, really much progress has been made at the company. If I look back, I see obviously we've spent a lot of time working on a very clear strategic direction, positioning the portfolio so that the businesses can thrive, de-levering the company, decentralizing the management approach. So, strong progress on the strategic direction of the business.

Good ongoing progress on our tactical execution items. The $20 billion of disposition, cost out, the team just continuing to execute on the day-to-day things we need to advance things, and a lot of change. Change at the top of the company in terms of the leadership team, changes in our Board, changes in the culture of the company. A lot has happened in 12 months.

As we stand today, I just say we look forward and say the path is clear. This is really a pivot point for us that this is an execution story going forward. We know what we need to do. We know where we want to go. We know what our strengths are and they're significant. And we know what our issues are and some of those are significant. So, we're focused on execution going forward.

I'd say the team is clear where we're headed. They know what they need to do. They know where they can contribute. They're excited about the path we're on. In different pieces of the company, we have different roles to play. But there's a confidence in the future and I'm personally certain we're on the right path. As we said, it's a multi-year journey, but I'm highly confident in the direction we're on and it's up to our team to execute and I'm confident in our ability to do that. That's it. Matt, thanks again for great performance.

Matt Cribbins -- Vice President of Investor Communications

Thank you.


Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 65 minutes

Call participants:

John Flannery -- Chairman and Chief Executive Officer

Jamie Miller -- Senior Vice President and Chief Financial Officer

Matt Cribbins -- Vice President of Investor Communications

Scott Davis -- Melius Research -- Analyst

Andrew Kaplowitz -- Citigroup -- Analyst

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Andrew Obin -- Bank of America Merrill Lynch -- Analyst

Steve Tusa -- J.P. Morgan -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

Julian Mitchell -- Barclays Capital -- Analyst

Steven Winoker -- UBS -- Analyst

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