GE has a vibrant business model. By business model, I mean the imperatives we drive to sustain excellent performance over time. They include:
- A portfolio of strong businesses
- Processes that generate cash and achieve low cost
- Capability to achieve 8% organic revenue growth
We believe that our consistent focus on these imperatives, backed by strong execution, is the key to excellent long-term performance.
A Portfolio of Strong Businesses
Our portfolio is set to deliver double-digit earnings growth in 2005. To achieve this, we invested in fast-growth businesses such as healthcare and entertainment that can accelerate our industrial growth rate. We built new platforms in fast-growth industries like oil and gas, security and water. We exited lower-return insurance businesses and redeployed assets into higher-returning GE Commercial Finance and GE Consumer Finance.
Even during this substantial portfolio reshaping, our performance was exceptional. Nine of our 11 businesses grew earnings by double digits in 2004. We have great momentum as we head into 2005, based on the following factors.
GE TRANSPORTATION AND GE ENERGY should both achieve consistent double-digit earnings growth. Transportation rebounded from the post-9/11 aviation cycle with revenue growth of 15% and earnings growth of 21% in 2004. Aviation services grew revenues 16% and now has a backlog of contractual services agreements totaling $28 billion. The Rail business had a spectacular year, with revenue growth of 18%. Transportation’s technical leadership expanded in 2004. The GEnx™ engine was chosen for both the Boeing 787 and the Airbus A350, and the business has orders for more than 1,200 GE Evolution™ locomotives. This team, led by Dave Calhoun, won our Chairman’s Leadership Award for the best overall performance.
Energy’s earnings dropped 31% in 2004, as its shipments of gas turbines declined as expected. However, the turbine business has stabilized in the U.S. and is expanding globally, so shipments should grow more than 20% in 2005. The balance of Energy performed well in 2004, with services revenues up 11% and Oil & Gas revenues exceeding $3 billion, up 10%. As turbine shipments rebound, services expand and Oil & Gas continues to grow, Energy is poised for a sustained period of double-digit earnings growth. John Rice and his team have exceeded every commitment we made to investors.
These two businesses, representing about 30% of GE’s earnings, are expanding simultaneously for the first time since 2000. Because of their technical leadership and strong service capabilities, we expect them to grow earnings 10–15% in 2005 and beyond.
GE HEALTHCARE, NBC UNIVERSAL AND GE INFRASTRUCTURE have integrated substantial acquisitions and are positioned to grow earnings at least 20% in 2005. Healthcare grew earnings 34% in 2004. We completed the Amersham acquisition and it is performing ahead of plan. Sir William Castell and his team have all of the pieces of “personalized healthcare” and will be able to move down clinical pathways with leadership technology that can predict, diagnose, inform patients and treat disease. We have created a $15 billion growth engine, a leader in diagnostics, that is well positioned for the major trends of healthcare.
NBC Universal had earnings growth of 28% in 2004, including a great performance from Universal. Under the leadership of Bob Wright, the cultures have blended well and the teams are working together creatively. When we decided to pursue Universal, our primary interest was to diversify NBC’s revenue stream. Beyond this, the combination has benefited both NBC and Universal strategically by giving them new ways to market and distribute each other’s content. This has already resulted in improved earnings from their cable properties. In addition, Universal has brought NBC a worldwide distribution channel. We have created a $15 billion content leader positioned for long-term growth.
Infrastructure’s 2004 earnings increased 22% and we continued to strengthen its businesses. We committed $3.4 billion to enhance our capabilities in security and water. We acquired InVision to build a leadership position in homeland defense, and we agreed to acquire Edwards Systems Technology to establish a strong position in fire and integrated building management. These deals will create a $2 billion security franchise, making it an industry leader. For Water, we agreed to acquire Ionics, a global leader in desalination, filtration systems and services. We are building a $2 billion water business and making GE an industry leader.
These businesses represent about 25% of our earnings and are positioned for many years of rapid growth.
COMMERCIAL FINANCE AND CONSUMER FINANCE should continue their strong performance, with earnings growth exceeding 15% in 2005. These well-positioned financial franchises grew combined earnings 15% in 2004 and expanded assets 20%. Commercial Finance acquired consolidating platforms such as Transamerica Financial Services and today has 8,000 salespeople to drive organic growth. Mike Neal and his team are well positioned for sustained growth. Meanwhile, Consumer Finance, already our most global business, is expanding with new investments in Australia and Russia and with specialty mortgages in the U.S. Dave Nissen leads a marketing-driven team that had organic asset growth of 13% in 2004.
These market-leading financial franchises represent about 33% of our earnings. They have sustained double-digit growth for many years, and we have every reason to expect them to continue.
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GE ADVANCED MATERIALS, GE CONSUMER & INDUSTRIAL AND GE EQUIPMENT & OTHER SERVICES are seeing excellent growth in an expanding economy. Their combined earnings more than doubled in 2004 (excluding gains), with double-digit growth expected in 2005. These economically sensitive businesses are executing consistent strategies of investing in technology and reducing structural cost. As a result, they are seeing substantial margin enhancement as the economy has strengthened. The momentum in these businesses, representing about 9% of GE earnings, should continue.
GE INSURANCE will continue its strategic repositioning. Dispositions, increased loss reserves and catastrophes reduced Insurance earnings more than 70% in 2004. We sold approximately 30% of Genworth Financial, our primary life and mortgage insurance businesses, in an IPO. Genworth is executing well and its investors are happy. We expect to sell down the balance of our position in Genworth over the next two years. Meanwhile, GE Insurance Solutions, our reinsurance business, continued its focused strategy to exit unprofitable product lines and improve pricing and underwriting. Insurance Solutions’ net property and casualty reserves now total $17.4 billion, up nearly 40% from 2001. Insurance generated only about 3% of our earnings in 2004, and we will continue to reduce our exposure in this industry.
We are always looking for ways to improve the Company, but this period of heavy transaction activity will subside. We like the way the Company looks. Last year, I told you that we defined GE in two groups, Growth Engines and Cash Generators. Our aspiration was to increase the Growth Engines. These are highly competitive businesses with multiple ways to grow. Since 1999, earnings growth from these businesses has averaged 15% annually. In 2005, we expect approximately 90% of GE’s earnings to come from the Growth Engines.
We never shy away from investing in your Company because we are pretty good at it. The fact is that there are very few “great” deals ever done, that is, deals that enrich investors on the day they are complete. But there are a lot of good deals that become great, where you pay a fair price and then generate excellent returns through smart integration and strong execution. We have been disciplined with your money and are committed to generating great returns for you.
We have created a more valuable Company. We can consistently grow our industrial earnings faster than our financial services earnings for the first time in 20 years. The returns of our financial services businesses have expanded so they will be able to dividend 40% of their earnings to GE and maintain their growth rate. This portfolio is poised to begin a prolonged period of double-digit growth, with expanding returns.
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