General Electric (GE): "Wind Energy Market Has Collapsed"

General Electric (GE) reported earnings on Friday, disappointing investors with poor results out of its energy infrastructure division.  The CFO went so far as to say that the US wind market has collapsed with a 15% year over year decline in wind related business.

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Here are some highlights of the conference  call related to their wind energy biz (transcript via Seeking Alpha)

Keith Sherin

“.. if you look with the wind volume, it was down — wind turbines were down 300 units, it’s down $600 million of revenue in the quarter.”

“You know, they’re working their way through a wind market that has really collapsed in the US, and we’ve got a very attractive position there, and they’re adding value by putting new products in place to give customers a little more value into the 1.6, instead of the 1.5 on the wind turbines and things like that”

Steve Tusa – JP Morgan

So you use the term collapse in the wind market, how was renewables down modestly next year in the face of you know, what looks to be pretty hard environment from an order perspective in wind?

Jeff Immelt

A lot of that is going to come globally, Steve, you know, like Canada, Brazil, Turkey places like that. You know, I think are where a lot of the demand is going to be. I’d say probably lower margins you know, the ones we booked a year or so ago in the US, but that’s where the demand will be.

Scott Davis – Morgan Stanley

I want to follow up on Steve’s question a bit, because I think from the phone calls I’m getting in the biggest anxiety [ph] out there is coming from the revenue decline in energy infrastructure. I guess kind of my question is, where you guys surprised at how bad things got and wind is fast, was this something that we just kind of modeled out wrong, and missed the rate of change?

Keith Sherin

We have been talking about the wind market for quite a while here, and we weren’t surprised by it at all. So, maybe we got to look at how do we model it for you guys a little better, but really it is something that is consistent with what John Krenicki and the team have basically been saying to us all along, and the way we have been planning to run the business.

Scott Davis – Morgan Stanley

Fair enough. So, let us dig into that a little bit. I mean, if you think in terms of wind revenues down 32%, can you make money in the business at that kind of level? Do we have a much bigger swing in profits, I know you have outsourced a lot of components here, and so can moderate production down pretty fast, but how do we think about kind of decremental margins?

Keith Sherin

I think wind can stay very profitable for us. It is an attractive business. We don’t disclose the specific profit numbers, but I would say that relative to our equipment margins it is a very profitable business, and as Jeff said, we will probably have a mix shift as we go from some of the backlog stuff that we have in the US. We worked through that in ’09 a little bit, we were through it in ’10. We will have some more of that in ’11. And we’re going to shift into international, probably at slightly lower margins.

But it is at a very good profitability level. We are building our service business as we built our huge installed base, and that is going to over time contribute. We like the business. We are investing like crazy. We have got a big investment in larger wind turbines. We have got a great position that we are working on for offshore.

Jeff Immelt

Scott, if I could just take you back to the mosaic that we talked about in May, and then again in the second quarter, we always flag renewables as a risk, and I think that is well recorded and well-written not just with GE, but others. And we always said that on the other side, the way the industry typically works, you get pretty good orders, where the air derivatives and the gas units [ph]. I think that has taken place. And that leads to a rebound in the heavy duty gas turbine market. That is going to take place. We see pretty good demand outside the US that is taking place.

Our service business is dramatically strengthening. so, I think when you think about ’11 and ’12, we think the diversity of this business is just quite strong, and then as Keith said earlier, we remain deverticalized, so we can keep pretty good margins in something like wind even with the volume, because we have seen this rodeo before, in terms of how the industry can kind of go through these peaks and valleys.

So again, I think the revenue number I get, but I think if you look at the margin number, and the diversity of the energy portfolio, we feel pretty good about how this business is positioned to fight through the next few years.

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