伊頓 (ETN) 2011 Q4 法說會逐字稿

Thank you for standing by and welcome to Eaton Corporation fourth quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr.

Don Bullock.

Please go ahead.

Good morning.

I'm Don Bullock, Senior Vice President of Investor Relations.

Welcome to Eaton's fourth quarter and full year 2011 earnings conference call.

Joining me this morning are Sandy Cutler, Chairman and CEO, and Rick Fearon, Vice Chairman and CFO.

As has been our practice, we'll begin today's call with comments from Sandy, followed by question and answer session.

The information provided on our conference call will include forward-looking statements concerning the first quarter 2012, full-year 2012 net income per share, and operating earnings per share, full-year 2012 revenues, our worldwide markets, growth and relation to end markets, and our growth from acquisitions.

Those statements should be used with caution and are subject to various risks and uncertainties many of which are outside the Company's control.

Factors that could cause actual results to differ materially from those forward-looking statements are set forth in today's press release and related Form 8-K filing.

As a reminder, we have included a presentation on the fourth quarter results which can be accessed on the investors page.

We placed our earnings presentation and releasing materials out early this morning, earlier than normal since many of you have a number of calls today.

We want to be mindful of that and we will conduct the call -- be concluding at 11.00 p.m.

Additional information is available today in today's press release which is located on Eaton's home page at www.Eaton.com.

At this point I will turn it over to Sandy.

Great.

Thanks, Don.

Welcome, everybody.

Thank you for joining us.

I am going to work from the document that Don mentioned, and I'm on page 3 to start, labeled highlights of fourth quarter results.

We had a very strong quarter filled with a number of records, although we did fall just short of the mid point of our guidance.

Just to highlight a couple of points that are on the chart that you see, our sales were up some 10%.

Our operating profits $1.08 per share were up 27% from last year, net income $1.07 was up 30% from last year.

I was really delighted with that performance.

Emerging markets were about 26% of our sales and as you saw in our press release, they were able 27% for the full year.

That really reflects a theme we'll talk about a little later when we talk about end markets that we saw emerging markets continue to weaken through the fourth quarter.

You put all that together and we had a record year in 2011, our 100th year.

It was our first time we had revenues over $16 billion.

Our sales were actually up 17% from 2010.

Our earnings per share were up 44% from 2010 and 19% above our all-time previous record which was in 2007.

And, importantly, our segment operating margins at 14.2% were up 1.5 points.

Obviously, great progress towards that goal we discussed with you of 16%.

All of this sets foundation for, we believe, another record year in 2012 and that gave us the confidence to increase our dividend by 12% you saw as part of our press release this morning from $0.34 per share to $0.38 per share.

Moving to chart 4, this is a reconciliation to the mid point of our guidance for the fourth quarter.

You recall that mid point guidance was $1.11, which was a 31% increase over last year.

We actually ended up achieving $1.08 at the bottom of the chart which was 27%.

We did encounter lower market growth than we had anticipated in the fourth quarter.

It's approximately $200 million of volume.

We outlined in the press release, so I won't spend time on it right now.

Where it occurred, was primarily in our electrical business.

We had higher corporate expenses in the quarter.

We indicated that they came in about $0.05 higher than we thought.

If you will recall that the quarterly progression of our corporate expenses were about $45 million in the first quarter, $54 million in the second quarter, $56 million in the third quarter.

We had provided full-year guidance that we thought we would be close to about $260 million when we started the year.

We had anticipated it would be on the order of about $80 million in the fourth quarter and as you saw, it came in at $102 million.

Really, that's primarily the result of the fact that as shipments were a little lower than we anticipated, our inventories ended up being a little higher.

That incremental $20 million plus of expense was primarily driven by the higher LIFO expense as I mentioned with our inventories remaining a little higher than we had estimated.

The lack of the commodity hedge recovery that we note on this chart, you recall in the third quarter we had taken mark to market adjustments for our commodity hedges of approximately $22 million.

That had been about $0.06 and if you recall in that reconciliation we said we would not repeat or we did not expect to have another mark to market in the fourth quarter.

We did not, but had expected we might get about $0.02 of recovery.

With commodity prices not really changing fundamentally from where they were at the end of the third quarter, we did not realize that additional income.

So, that was about a negative $0.02.

We had a lower tax rate, about 7.2% tax rate versus the 19% we used in our guidance for the quarter, that accounts for a positive $0.14.

And the very good news that I mentioned on the first page about our operating segments, margins came in at record levels, 15.1% all time record for a quarter for us.

Really great balance performance.

That contributed about a plus 7%.

So, all in all, $1.08, up 27% versus a year ago, a very solid quarter.

As we move to page 5, this is simply the financial summary at the corporate level.

I think most of this is pretty self explanatory, so I'm not going to spend a lot of time on this chart except to note that sales were as is normally true in the fourth quarter off just slightly from third quarter.

If we move to the individual segments, perhaps a little more color is helpful here.

If we move to chart 6 which is labeled electrical, America's segment, a really terrific quarter performance here in our electrical Americas business.

That sales level was actually a record for the quarter.

I'm quite pleased about it.

As we noted in our press release, we had hoped it might be even a little bit better because our bookings have been very, very strong, up again 11%.

This has been a great year of bookings and that's why that backlog continues to be so strong.

We did experience some lower sales than we hoped we might have in the quarter really due to push outs from a number of customers at the end of the month frankly who were just hoping to delay shipment of some fairly large projects.

I expect we'll recover that in the next weeks and months.

So, we don't really see this as a fundamental issue.

It's much more of a timing issue and that large backlog is really what gives us that confidence.

Underlying all of this is the continued rebound now in the nonresidential markets.

You'll recall that we had made the call that we would see this turn by the middle of 2011.

We saw a turn actually in the second quarter of 2011.

The fourth quarter posted some pretty attractive numbers and think we will see continued recovery into 2012.

Residential construction is starting to show a heartbeat.

Numbers are still kind of low, but at least they're positive.

Then, we were very pleased to complete the acquisition of the switch gear manufacturer Peterson which puts us with increased content in to the utility marketplace which is really an important marketplace for the utilization of much of our medium voltage switch gears.

So a really great quarter.

Back to over 15% margins, 15.5% margins, so this business is performing really well.

If we move to chart 7, electrical rest of world segment, we noted in our press release that we saw continued weakness in China and that really has to do with the credit tightening that has affected really all portions of the marketplace.

We'll talk about it again a little in the hydraulics marketplace as well, but we saw tightening affect both power quality and power distribution projects in China.

And then as you can well appreciate, Europe has been on a slow, weakening pace really through the back half of the year and that continued in the fourth quarter.

So, as you can see, numbers down about 7% from the third quarter in the fourth quarter if you look at our third quarter shipments of $755 million compared to the $699 million that occurred here in the fourth quarter.

Booking also down and as we talk a little bit about guidance for 2012, you'll see that we're anticipating, not only in this segment but in other segment that have business participation in Europe and Asia, that the beginning of the year will start slower and that we think recovery, if and when it starts to manifest itself, is more likely to happen later in the year.

If we turn to chart 8, the hydraulics segment, another outstanding quarter.

Sales up 23%, margins 15%, overall bookings up 5%.

Again, really reflecting our strength in the mobile segment.

As we have shared with you, we continue to see the mobile side of this marketplace leading in strength.

Our bookings were up far more than 5% in the Americas.

The weakness really continues over in Asia Pacific at this point and then Europe has really flattened out at this time.

We do expect the China mobile hydraulics marketplace, which is an important one for us, to expect -- to begin to recover in the second half but we're not forecasting that in the first or second quarter of this year.

If we move to chart 9, the aerospace segment, we had told you we would see margins rebound significantly during the second half.

You saw in the third quarter they were at 16.9%, 18.1% now in the fourth quarter, really pleased with the performance here.

The market outlook is really the tale of two cities that you all well appreciate with commercial markets very strong and defense markets softening quickly.

You'll hear that again as we talk about our guidance for 2012.

Our after market bookings, same sort of profile, much stronger on the commercial side than on the defense side but we're very pleased with performance and margin performance in this segment during the quarter.

Turning to the truck segment, came in pretty much as we expected with the exception of South America and many of you have had questions about, what did the pre buy look like in South America?

Actually, a little weaker than we had thought.

And we think that some of that carryover of the inventory that piled up in South America will affect the early part of 2012 as well.

Nonetheless, a really great quarter, sales up 31%, 20.1% operating margins.

We saw the fourth quarter in NAFTA come in pretty much in line with our expectations.

We're leaving the year with sort of 75,000 unit production level, which obviously if you annualize it you are going to come right to our view of what the market will be in 2012.

Moving to chart 11, the automotive segment, a very strong quarter again.

You'll notice on the acquisition line that is in the green box on the lower left-hand corner of this slide, there's a negative number and that is, indeed, the divestiture of a small, small business we divested this year.

It was involved in blow molding; it was something we didn't feel was a good place to keep our investment.

We will re-deploy those dollars elsewhere and that is the negative, if you will.

It also affected obviously the shipment volumes in this quarter, but a solid quarter.

Margins a little lower than what we described in the third quarter.

The 14% margin, you'll recall, in the third quarter we described as the sun, moon, and stars all aligned, everything went perfectly well.

We are very pleased with 10.6%.

It does reflect slightly lower margin because we are bring up additional capacity in China right now for a very good reason that we've had a number of very exciting new program wins in China.

We've got to increase our capacity there.

If we move to slide 12, now kind of transferring over to our guidance for 2012.

I think the overall context I would set these specific numbers in, is that we're expecting a year of slow global growth on the order of 2% GDP.

If you had asked us how we're feeling now versus how we felt three months ago, we would tell you the US looks a little better than we thought it was going to look, that Europe looks a little weaker than perhaps we thought it would be, and that the developing nations are a little weaker at this point than we thought they might be three months ago.

As you think about how the year might lay out, we think it starts little slower and it recovers towards the end of the year and that is really the impact how long it takes for Europe to start to cure itself as well as the time for some of the easing policy in the emerging nations to get traction and orders created in our marketplace.

That is the background.

If you simply look at our overall weighted average growth for our end markets, we think it will grow about 5%; about 6% in the US, about 4% outside of the US.

As I just step through these quickly, in the Americas business -- electrical Americas, we think the nonresidential market will be up about 5%.

Residential will be stronger than that, but it's not that big an item and the power quality slightly less than that.

Overall that averages about 5%.

In rest of world, if you look at -- for electrical, we think Europe will be negative 1% to 0 and Asia-Pacific about 3% and that's how we come to the 1% forecast.

In hydraulics, continued strength is in the US, big strong year again this next year of 6%.

As we look outside the US, we think Europe is probably flat, Asia-Pacific about 3%.

Aerospace, again a big year in terms of commercial in the US, we think up on the order of 15% with defense down on the order of 6% to 7%.

Our number outside of the US is primarily a commercial number.

In the truck market, a 16% increase in the US and that's really anchored by our forecast of 300,000 production for heavy duty truck.

Outside of the US it's really a mixed picture with Asia-Pacific being up about 6%.

We think Brazil will be down about 5% and we think Europe is up about 8%.

Of course, that's a little smaller factor for us in Europe.

Automotive, strong year in the US, this is anchored by expectations of just over $14 million retail sales in the US in terms of our forecast.

In terms of North America -- excuse me, non-US growth, we think Europe is basically flat and Asia-Pacific up about 11%.

That's the background I hope will give some context for our thinking about the likely economic scenario.

We move to chart 13.

This is labeled margin expectations.

The very good news here is after a record year in 2011, as I mentioned earlier, the 14.2% segment margin, 2012 we believe will be further market expansion on our way to the 16% goal we articulated last year in February at our New York analyst meeting.

You will see we are expecting margin expansion in virtually every one of our segments here, although automotive stays the same.

You put that together and it's somewhere between 14.5% and 15%.

We think handsome margins particularly in this period of some economic volatility.

If we move to chart 14, it gives you just a quick look at our EPS guidance.

Let me just address the column operating earnings for a moment.

The $4.15 to the $4.55 guidance with a mid point of $4.33.

We're talking a 5% to 15% low end of the range to the high end of the range in year-over-year improvement with the mid point being approximately a 10% increase.

Now, to give that a little more of a dimension, if you will turn to chart 15, we'll give you a quick look at the bridge between 2011 and 2012.

Overall, this is revenue up 4%, operating EPS mid point would be up 10%.

As I mentioned earlier when, we talked about the markets, we expect a market improvement of about 5% at a 28% margin.

We expect margins a little lower this next year than it has been the last year.

Consistent with what we've said, is that as you go through the cycle, the incremental margin tends to get a little lower.

Market outgrowth of about $320 million.

A decrease in the number of shares outstanding.

You'll remember we made some repurchase in the third quarter so on a weighted average basis you're going to have -- (technical difficulty).

Net acquisitions and divestitures, these are the net of the acquisitions we completed during 2011 minus the divestiture I mentioned of the one automotive business, about $0.02.

Then other corporate expenses and a portion of this is lower intangibles as we had some assets roll off of about $0.02.

So, about $0.90 of pluses offset by the higher tax rate.

You saw in our notes that it averaged 12.9% for the full year 2011.

Our guidance is between 17% to 19%, so 18% is what we have used here.

ForEx, a significant item for us and one we suspect not everyone has had the opportunity to really fully value at this point.

We think it will deduct about 3.5% from sales this year, about $550 million, and that's a negative $0.14.

Obviously we have seen quite a change since the mid to early part of last year to where these valuations are now.

Increased pension expense we had told you at the end of third quarter we thought it would be on the order of $40 million with the even lower discount rates at the end of the year, it's on the order of $45 million.

So, negative $0.51 and that is what gets you to the $4.35 reconciliation.

If I could ask you to quickly turn to page 16 labeled Q1, 2001 to Q1, 2012 Reconciliation, you will recall the first quarter is always our seasonally weakest quarter and 2012 will not be any different.

If we look a year ago, we were $0.84 operating earnings per share.

We expect we will have higher volumes in 2012 than 2011 on the first quarter by $200 million to $300 million.

We'll have lower shares, slightly lower shares, for the reason I mentioned before, that contributes about $0.02.

We'll have a higher tax rate.

That again is at 18% versus the average of last year -- excuse me, the first quarter number being about 14.5%.

We'll have higher corporate expenses than we had last year when we were $45 million and so this is anticipating about a $65 million corporate expense on the first quarter.

We'll have higher pension expense.

This is about $15 million of that $45 million I talked about occurs in the first quarter.

And then about $150 million of this $550 million impact that we think will occur on negative ForEx and that throws off a negative $0.04.

That's how we get to $0.85.

So, obviously higher volumes, better operating performance, higher tax and ForEx offsetting it.

If you move to the last chart in the packet, chart 17, just a quick recap of the 2012 guidance.

I mentioned the market growth of 5%, the market outgrowth of 2%, the net acquisition revenue, which is about 0.5%, and the sales decrease from ForEx of $550 million is a negative 3.5%.

So, that's how you get the 4%.

5% plus 2% plus 0.5% minus 3.5%, that's the 4% growth.

Incremental margin I mentioned 28%, tax rate, 17% to 19%.

I already talked about the operating and fully diluted EPS projections.

Let me just spend a moment on operating cash flow and free cash flow.

We didn't put a box on this chart but obviously the difference between the two is a $600 million plan for CapEx.

I think that completes the key elements of our guidance for this year.

So with that, Don, we would be delighted to address questions.

If you would please instruct the participants on the question process, please

(Operator Instructions)

Our first question is from Andy Kaplowitz from Barclays.

You talked about electrical rest-of-the-world, but your orders were down 10% in 4Q, and they have been down a couple quarters in a row, and your guidance had 1% growth in 2012.

So I guess I'm just wondering, what is your conviction that you will be able to get there given your weak solar inverter market?

Maybe if you could just give us more color on how we are going to get to that up 1%.

Yes, and it's a very good question because I think maybe one of the hardest calls from an economic perspective right now is how long does the European weakness go on?

And then, how long does it take for the response for the easing that we're seeing in China, seeing in Brazil, and people are talking about in India.

How long will that take to actually have an impact?

Generally what we have seen in our markets is these are sort of six- to nine-month lags between when you see easing and when it materializes.

That's what we have tried to use in this respect.

So these forecasts for stabilization, these markets, we think that we have been seeing a weak third quarter.

We saw a weaker fourth quarter.

We don't think Europe gets any better until you get into the second half of next year.

That's our view also on a number of these emerging nations.

That is the underpinning for it at this point.

What we're pleased about is from a bookings point of view, in Asia in the electrical business we actually saw it improve in the last month of the quarter versus the earlier months of the quarter.

I would note, however, that's one month, and I would love to see it for three or four months to declare a trend, but those are the assumptions we're using at this point.

We do think in China there will be an attempt to accelerate the economy.

We feel fairly confident about that.

It's just a question of what that lead lag is going to be.

What we're describing in Europe is a more mild recession, not a dramatic, deep adjustment, and that indeed seems to be what's coming out of some of the data that's more recent in the last month.

It's still down, though.

Okay, Sandy, that's helpful.

One thing I didn't really understand is -- you talked about production shutdowns in the US and Europe and auto.

And so I'm just trying to figure out -- usually we have some holiday shutdowns, I would assume.

Was this more than usual, and why?

And then also maybe, is it possible to quantify the start-up costs with the Chinese capacity expansion in auto?

Yes.

Let me address the first part of that question initially here is that what we saw were really two different issues happen.

In Europe, there were some part shortages from other vendors, not ourselves, that didn't allow people to complete their production schedules, and it affected some of our important products that are involved there.

That will come back because the demand is there and they're back-ordered for us, so we don't think that's a permanent.

Here in the US, you may be aware there were a couple light truck plants that took some time off in maybe the wrong direction because their inventories got stripped down even lower, and that's part of why you are seeing the production build up again here in the first quarter.

That's why we felt those were really timing issues, not Eaton-specific.

The demand is there for the product, and we think we will be fine in that regard.

On the issue of the start-up costs, it's on the order of 0.5 point to 1 point is kind of what we were encountering.

And we're comfortable and we're really pleased to have the opportunity to put in the capacity, and so we'll be ramping that up as we get through '12.

That's great.

Thank you, Sandy.

Our next question comes from Jamie Cook with Credit Suisse.

Hi, good morning.

Two quick questions.

One -- Sandy, could you just comment, when we look at the hydraulics business, and in light of what Parker reported last week, if we look at your bookings, they were up in the fourth quarter 5%, but it is finally hitting the single-digit range relative to where we've been.

So, I'm just trying to get a feel for what areas have weakened, what's still staying strong, and how did the orders look throughout the quarter?

Did it get worse throughout the quarter and improve?

My second question is a follow-up on the electrical rest-of-world.

Revenue, again, up a modest 1%, but you're suggesting margins should improve in 2012.

So I'm just trying to get comfort around that, or how I should think about it, if you could just provide color there?

Thanks, Jamie.

On the first question, in terms of the hydraulics bookings, global, you're exactly right, we're up some 5%.

What we saw is a multiple of that in the Americas, continuing to have extremely strong bookings here, really delighted.

That hasn't backed off much.

Where the weakness is, is Asia-Pacific.

It's the same issue that we described in our electrical business is that with the China construction market down, we have seen many of those firms -- and we started talking about this really at the end of the second quarter, that we've seen a pretty full pullback.

That has not gotten better at this point.

And we, again, anticipate that we are not likely to see their demand come back until the second half.

There's still a fair amount of inventory around.

And some of you have traveled those regions and seen them all on the roads.

Europe has gotten weaker, but is still a positive in the quarter, but it's not quite the boomer that it was earlier this year.

And so, that is sort of hydraulic --.

Just a follow-up on Europe.

Did it get worse each quarter, or was October the best, and can you just talk about in Europe how you saw things?

No, it didn't substantially change month-to-month for us --.

Okay.

-- in the fourth quarter.

It's been weaker, but it wasn't falling off.

I know people's concern is it's falling off the table.

It actually was not, and that is also true in our electrical business in Europe.

It was relatively flat through the quarter.

It didn't fall off.

I think Asia has been the area where you have seen a little higher [beta], if you will, in terms of the degree of change.

Okay.

Sorry, last --.

Yes, the margins on electrical rest-of-world is, we've obviously been -- while the volumes have been coming down, we have been working on adjusting our cost structure.

And that is an element of us being able to obviously deliver better margins at a slightly lower volume.

And so, that's the benefit of the fact we have been adjusting down for a period of time, and that's why we have a good level of confidence in this profitability projection.

Okay.

Great.

I'll get back in queue.

Thank you.

Next question from David Raso with ISI Group.

Good morning.

Good morning.

Quick question.

The way the guidance is playing out the full year, it's representing a little bit lower than normal, like, the last 10 years or so.

If you get rid of '09, which was an anomaly, the first quarter is usually, say, 23% of the full year, the guidance the same, first quarter is only 20%, so it's a little back-half loaded.

What I'm trying to think through is -- let's say I want to take a more conservative tact on the EMs re-accelerating.

Let's say the European weakness is a little bit beyond just a shallow couple of quarters of weakness.

What are the offsets that you see that could make up for that?

Because even just running the numbers on electrical rest-of-world, and let's say instead of up 1% for revs, it's down 5%, and your margins are flattish, not up, it trims about $0.10 or $0.15 from the guidance.

What are the areas we can offset that?

I see maybe electrical Americas, the mix, what kind of mix do you have?

Is there some maybe top-line upside to give some maybe comfort around that as an offset?

Or the truck business -- you said domestic up 16%.

Now, how would you bogey that?

Is that something where, given the order trends lately, maybe there's a little upside there?

I'm just trying to see the -- (multiple speakers).

I understand the question.

And all of these, I'd like to tell you to a third decimal place of precision, but they're not quite that way in this kind of a volume.

I'd say a couple issues to think about, though.

Let me just start on ForEx.

Our view on ForEx is that we built in here $550 million, roughly 3.5%.

That gets anchored by an expectation that we could see the euro in the $1.25 to $1.27 on average this year.

Some people are more pessimistic than that, some people are more optimistic.

That's our view at this point.

We have obviously seen a large adjustment in terms of the value of the Brazilian currency versus the early part of last year.

That is where it is right now, and we think it's likely to stay in this range.

Others have different views on that.

We're trying to be kind of explicit here about what our assumptions are.

The third is one of the ones you just mentioned, and that is the issue of the North American heavy duty truck build.

We came out of the fourth quarter at 75,000 unit production.

We're forecasting 300,000.

You saw one of the single largest monthly freight increases just reported in the month of December that's in recent years history -- 5.9%, if I recall.

So, I think some people are looking out there and saying -- wow, that freight issue is even stronger than we thought it might be.

Then I'd say the fourth one is probably in and around the nonresidential construction market, where I think the mood is changing now.

If you listen to many people are forecasting the market, whereas the middle of last year they thought there would never be another building built.

Now there seems to be a feeling where people are starting to move forecasts up toward high-single digits.

That's not where our forecast is, but there are some people who believe there.

So, I would say those are just a couple examples.

And I would state just one more, David, which is -- the hydraulics has sort of being defying gravity to some degree over the last 1.5 years, and as I have shared with a number of you, we were looking at this very hard in the first half of last year because typically these cycles don't go as long as they have been.

And we think there's been a fundamental shift in the global hydraulics market toward the mobile side being a little larger portion than the stationary side through the cycle, as a result of the fact that there's been great strength in the emerging nations, and here in the US you have been seeing a lot of this replacement demand that's been going on.

The US is still booming in this marketplace, and so I'd say those are some of the factors we're trying to weigh that I think perhaps help offset if we're incorrect on a couple of the others.

That's helpful.

So, you'd throw domestic hydraulic on top of my domestic truck?

Yes.

And the last one you didn't address, my comment about electrical Americas, the mix.

When you think of non-resi up, I think you mentioned maybe UPS not as strong relatively.

Residential is obviously not as big a piece.

What's the mix of your backlog in electrical America?

I want to try to think through that 15.5% margin guidance.

Generally when we have backlog, David, if you think about our business, there's an assemblies business and you tend to book and then it is shipped within a month, or out to maybe six to nine months.

Then there's the flow business, which is pretty much in and out same day or same week.

Our backlog are these project activities.

What's in the backlog is very much what I would call -- it's not a plus or a minus to the overall margins.

It's very representative, so that very big backlog we're carrying in to the year is part of what gives us a lot of confidence in terms of our volume capability.

That's really helpful.

I appreciate it.

Thank you.

Our next question comes from Ann Duignan with JPMorgan.

Hi, good morning.

It's Ingrid, standing in for Ann.

Good morning, Ingrid.

Good morning.

Can you talk a little bit about your outlook for Brazil truck demand versus Brazil agricultural equipment?

Sure.

One of the big speculations I think that we have all been trying to observe in the fourth quarter was the degree to which the pre-buy, which is occasioned by the emissions change after the first of the year of 2012, what kind of big pre-buy would there be?

There was a fair amount of inventory built in Brazil.

The actual pre-buy turned out to not be as big as we and many others thought.

And so you're carrying some inventory over -- I'm talking at the OEM level, into the first quarter of next year.

As a result, our expectation for Brazilian truck and bus is that it will be down about 5% from the 2011 number.

And on the agricultural side, we think it will be up about 5%.

Okay, that's helpful.

Then, can you talk about input costs, and what's built into your guidance?

Input costs obviously not what they were last year.

Aluminum is down, copper is down, steel is up, so, on average, can you talk about what you built into your expectations?

We believe that commodity costs, and of course, this is estimated 12 months out ahead of you, but our thinking is they're likely to be more stable than they were in 2011.

And, of course, that's a pretty low bar in terms of comparison with all the volatility we dealt with last year.

But we have assumed that the costs would be about the same as they were in the average prices in the fourth quarter of 2011.

So, if you then kind of transfer that to our margin guidance, where we're saying we're going to expand margins, that's primarily the result of all of the productivity and cost work we've been doing, as well as the significant new product launches we have, which is always a source of potential margin improvement for us.

Okay, great.

Thank you.

Our next question comes from Stephen Volkmann with Jefferies.

Good morning, guys.

Good morning.

Hi.

I wonder, Sandy, if you could just give us a little more sort of comfort, I guess, on some of these projects that you were talking about being pushed out past the end of the year.

We're kind of through January now.

Are they happening now, or where do you think your visibility is on those and --?

I've been around this business for over 30 years, Stephen, and the classic issue that occurs in December of a year is that if you have a large project that's going to be shipped, normally what's required is an inspector from the customer has to come to your plant and sign off after the full electrical test.

And if they just don't get there the last week for one reason or another, it obviously slops over into the next month.

That's not the full reason that we didn't have some of these things shipped.

Some people gave us a little bit more notice than that, but we had a number of projects that we had scheduled and were working to produce in the fourth quarter and that's why our inventories went up a little bit.

People asked us to hold them for a period of time.

This is not hold them for six months, this is not hold them for three months.

So, I am pretty confident we see this during the first quarter kind of wash out.

Okay, all right.

That's helpful.

And then I wonder if, as we think about your margin guidance for 2012, if we can kind of go back and if you've changed your view about sort of what the margin potential for each of these businesses is.

It seems like a couple of them are getting pretty close to where we've talked historically about the upside of where they can go.

And I guess I'm just curious if you have any comments in that regard?

Yes, I think it's a theme we'll revisit in our February meeting in New York, but you're right because when we've talked about historically where we thought these were as we talked about electrical Americas as having the potential to get to that 17% range and rest-of-world of 14%, hydraulics 16%, aerospace 17%, truck 20%, automotive 12%; that's what supported the 16% targets that we have.

We are ahead of schedule, as we noted earlier this year in terms of getting to that 2015 goal.

I think that's very good news.

On the other side though, I would be candid in saying that none of us anticipated a 4.7% discount rate used for US qualified pension plans, and so you recall our game plan was that we were going to get 4.5 points of EBIT improvement by 2015.

3 points were going to come from the segment margins, and we're well on our way there.

And 1.5 points was going to come out of our corporation expenses through two items.

One was that as we continue to contribute money, and that's kind of been on the order of $300 million last couple of years to our US qualified pension plan.

And we saw hopefully the recovery of these discount rates is something that makes a little bit more sense to all of us with a calculator -- that we would then see our plan no longer be underfunded, and that obviously reduces expense for us.

That's looking like that's pushed out probably a year, I would guess, and anybody's guess is probably the right guess on the discount rate at this point.

So, a little bit of trade-off between the two, but you're exactly right.

The good news is, we're getting there faster on the margin improvement.

I guess what I'm thinking about, and maybe I'm just jumping the gun here, but truck is almost there, and yet you have some volume built in, some significant volume built in going forward.

Hydraulics seems to be relatively strong based on your comments here today, and yet we've already kind of achieved the goal there.

Is there an opportunity that even though some of this corporate stuff might be a little headwind that there's actually some ceiling room on some of these other numbers?

I think you may be right.

What we're going to try to do is get, obviously, a month under our belt here and have the advantage then of being able to chat a little bit more about those with you in the February meeting.

Clearly, I think there is a mix issue that is one that is worth just chatting about here for a moment that is beneficial is that we've been increasing our filtration business obviously, and that is part of our hydraulics segment.

We're delighted with the two acquisitions in that business that have significantly enlarged our business there, and that's really allowing us to continue to help move those margins up, all the operating improvements in that business as well.

We're very pleased with our margin.

I think you're on the right track.

Great.

I'll leave it there.

Thank you.

Our next question comes from Jeff Sprague with Vertical Research.

Thank you.

Good morning, gentlemen.

Good morning, Jeff.

Sandy, I was wondering if you could also address capital deployment maybe to David Raso's question about possible offsets, what the plan is for 2012 between M&A and share repurchase if there is a placeholder on share repurchase.

And if you could also tell us how you ended the year in '11 on cash?

Okay.

Maybe a couple of broad comments, and I'll ask Rick to add to them.

Looking at our balance sheet, you'll probably notice we ended the year with a fair sum of marketable securities and cash.

I think the reasonable question is exactly the one you're asking -- what are you planning to do with it?

We contributed about $304 million to the US qualified pension plan early in January.

That was pretty much per our plan that we had communicated last year, that we would be on that order.

You saw that we just increased our dividend by 12% from $0.34 to $0.38 -- excuse me -- effective in February of this year, so that will be a full year increase of that.

That's on the order of roughly $50 million increase there.

We talked about a $600 million CapEx plan.

And as we talked at the end of the second and third quarter, we've raised our activity in the acquisition investigation market again.

You saw us -- we've closed nine deals during 2011, albeit that they were relatively small.

And we are hopeful that we will have some good opportunities to deploy some of that cash into additional value-creating activities for the Company.

So, we're returning to what I would call a more normal level of acquisition levels for our Company.

I do want to assure you, though, that the fact that we think end market -- excuse me, that our total growth this year of revenues will be on the order of 4% because it's being decreased or depressed by the 3.5% negative ForEx, is not a reason that Eaton then goes out and does a bunch of acquisitions.

We are looking at the acquisition strategy the same way we have in terms of the areas we want to do it and the type of return over our costs of capital that we intend to make.

We're pleased that we were making very good progress on whatever version of this statistic you would like, our net debt to capital ratio.

However, if you look at our balance sheet, you obviously see that by the pension, using a discount rate of only 4.7% versus about 5.5% last year, that our pension liability has gone up about $600 million on the balance sheet.

So, we're aware of that as well.

And Rick, you want to add any other comments to that?

I would add, Jeff, that we're right in the middle of our capital ratios of that increase in debt, or at least the pension liability going up.

We have not built repurchases into the plan other than small amounts to offset option exercises.

But to the extent that we don't end up doing as much in the acquisition arena, it is certainly something we will revisit.

We've said that we do not intend to remain overcapitalized for any sustained period of time, but it happens right now.

We do have a lot of activities underway in the acquisition arena.

It's just hard to know what gets done ultimately.

Right.

Sandy, can you just give us a little more granularity seeing in US non-resi, and is it moving into kind of commercial non-resi or is it still industrially focused?

Any change in tone there over the last three or four months?

Yes, I think the very good news is there that in the fourth quarter, if you've had a chance to look at some of the private non-resi put in place statistics, you saw a number of statistics that the other commercial segment went positive, you're seeing office was down to a very low single-digit negative, which has been one of the ones people have been concerned about.

We are seeing new office and new apartment activity.

You have been seeing leases obviously have been going up in many of the major urban areas.

This whole time we have seen mining.

We have seen the power side.

We have seen areas in and around manufacturing structures being very strong.

And then interestingly, the last two quarters, amusement and recreation sectors have gone positive as well.

You're starting to see a much more broad-based kind of deployment happening in this area, and we're seeing that in our orders as well.

Again, where we're doing quite well many the four quarter again a lot of these large projects.

Great.

Thanks a lot.

Our next question comes from Terry Darling with Goldman Sachs.

Thank you.

Sandy, wondering if you could maybe give us a view on what's going on in the power quality business, both kind of how 2011 ended up and then in your assumptions within the electrical segments for next year, how you're seeing growth there?

Our view, Terry, is that in this -- often what happens when you're in a period of a little bit more uncertainty about economic growth rates, we've seen the power quality market go into weaker years.

So, our assumption is that we will see it here, I will speak to the US first, grow more on the order of 4%, so it's a little bit below the average of our electrical businesses this year.

Through the cycle, we think that business is sort of a 6% to 7% grower, so a little different if you go to the different elements of it.

And if I could split it into three pieces -- and all this, remember, is really dealing with what we call power quality.

I'm not addressing the telecommunications market, and I'm not addressing embedded computing when I make these comments.

So, if you go to the low end of the market, the single phase market, we have all been seeing server sales being fairly weak, and that parallels what happens in terms of the single phase.

The mid flow, which is the flow or midsize, which is more of what would go into the smaller data centers, quite busy and continued to be a strong area.

The very large data centers has been slower, and we've commented on that a couple times and we think it will be slower this year for a variety of kind of technical considerations where people are trying to figure out where they stand on whether they want to do things in-house or whether they want to move things toward the cloud.

We don't think this is a fundamental change.

We think this is more of a reflection of the -- can I push something off right now.

You may recall a statistic that we quoted when we had everyone together at our data center is that 38% of all the data centers in the US are going to run out of power here within 18 months, and so you can't put this off too long.

So, we think it will come back, but we've built in a little slower growth this year.

Okay.

And then just a couple of follow-ups on the margins.

First, on the electrical Americas margin guidance implies incremental substantially better than 2011.

Is that just your expecting price cost to be more benign for you, or what else would be driving your view for better incrementals there?

Yes, the incrementals you may recall that in the first quarter of 2011 we had about $50 million of uncovered commodity cost.

Really, our pricing versus commodities was really in line by the time we got to the third and fourth quarter, so we think the results look more like the third and fourth quarter than they did the first and second.

So, you're exactly on point on that.

But still, incrementals in the fourth quarter were much below the range as well, right?

So, what kind of flips the switch here?

Well, part of what affected the fourth quarter, and you are correct, part of what affected the fourth quarter were some orders in the backlog that were taken back to the time when the pricing and commodities were not in alignment.

And we're washing most of that out at this point.

Okay.

And then on the electrical rest-of-world margins for next year, Sandy, just wondering if you can clarify how much cost you've taken out there?

And presumably the FX impact on the revenue line is much greater than this 3.5 points for the Company overall.

Are you -- should we expect total revenues off of this 1% end market growth outlook -- should we expect all in Eaton rest of world electrical revenues to be down as a result of currency or enough outgrowth to offset that?

We'll have to look that one up.

Give us a moment.

That's a good question.

Do you want to then just talk about the amount of cost out that you have right now calibrated for us?

We're not going to put a specific number on the cost, Terry, it can, for competitive reasons, [but that is an area we control], and we're quite comfortable at the cost work we have done during these last three quarters puts us in a position where we can get the margin expansion.

And of course, this is both our EMEA and our Asia-Pacific regions when we do this, so that I think sometimes there's an over-concentration on the Asia-Pacific region in that regard.

But we're comfortable the cost price situation is in good shape because, again, cost was affected also in the first and second quarter by the same issues we just talked about in North America.

Terry, I would just add to your earlier question.

Our current thinking is that when you factor in FX and growth and outgrowth, that you will end up with a bit of revenue growth in that sector -- in that segment in 2012.

Okay, thanks very much.

Our next question comes from Jeff Hammond with KeyBanc.

Hi, good morning.

Can you just talk about any restructuring that you're contemplating or you're taking?

Is that impacting any of the slower first-half earnings, and maybe just talk about the benefits on the back end?

Jeff, we don't break anything out because we think it's part of running the business, if you will, and so there typically are actions that will get going early in the year because we want to be able to realize some of the benefits toward the back end, but I'd say there's nothing material here really to break out.

Okay.

And then just real quick on the corporate.

I mean, it doesn't look like a huge jump versus last year, but you had a big tax settlement, so I'm just trying to understand a little bit better what the moving pieces were in the corporate line, maybe year-over-year.

You explained some of the LIFO [dynamic].

If I heard -- you had two questions.

One question was on taxes, and one was on corporate expense?

No, just on the corporate expense.

Okay.

[Again, in terms of -- as you mentioned, we ran below -- when we started the year thought it would be about $260 million and ended up being $257 million].

We have a misbalance between quarters, if you will, in that we started off at $45 million, then went to $54 million, and then to $56 million, and then to $102 million.

We actually thought the fourth quarter would be in the range of about $80 million, and that was the result of truing up -- what we expected would be the result of truing up a number of year-end reserves, and what we had originally anticipated in terms of LIFO expense.

On top of that, as I mentioned, then when our sales came in lower than we thought, we had higher inventories, and as a result of that, then we had an additional $22 million expense beyond what we had anticipated, primarily caused by the LIFO adjustment.

Those are really the kind of comparisons.

I think as you think about 2012, we again think corporate expense will be about $260 million.

We think we will start the first quarter closer to about $65 million.

Our best view at this point is we're going to see these quarters be a little flatter as we go through the year on corporate expense than they were here in 2011.

Okay, thanks.

Thank you.

Our next question is from Andy Casey.

Good morning, everybody.

Thanks a lot.

Good morning, Andy.

First, just a clarification, again, on electrical rest-of-world.

I apologize for the second one.

The first, on the capital allocation, when you say you're looking at increasing acquisition activity, is it more like what you experienced in 2011 bolt-ons, or are there properties that are coming available for larger inorganic growth opportunities?

I think, Andy, you know our history in this regard is most of what we end up doing are singles and doubles.

I think that's always the best bet is that's sort of we'll play baseball, if you will, the opportunities for the triples and homeruns are fewer.

We do a lot fewer of them.

They're just not as likely.

I think you can anticipate we are going to stay more in that singles and doubles, and hopefully we won't have to slide.

Okay.

That's somewhat implied by your dividend increase as well.

Then on electrical rest-of-world, and I may have missed this, I apologize.

How truncated is your view to back-half growth versus, first, about China, and then some of the easing comparisons for, albeit a small revenue contributor, the solar market as the year progresses?

Yes.

I think that from a -- as I tried to mention up front, Andy, and it's a good question is, we think the hardest economic calls right now are trying to approximate when these easing actions that are being taken by very different governments, when they will be finalized, when they will reach the market, and how quickly they will start to loosen the market.

We tried to use this sort of six to nine month guideline is the way to think about that.

That's generally been helpful in the past.

We can't certify to you that's exactly going to be right, but that's been our planning scenario.

We're seeing those actions being taken.

They were being taken in the fourth quarter, and they are being taken now in the first quarter and that's why we believe we will start to see effect in the second quarter, but we can't tell you right now that's for sure.

I mean, that's our economic scenario we're trying to plan against at this point.

Equally true for Europe as well, is that I think last Fall many people felt the recession in Europe might be a fourth quarter 2011/first quarter 2012 phenomenon.

I think most people are thinking now it's fourth, first, and second.

You can debate whether it includes the third quarter.

Our view is that this thing will start to stabilize, and we'll start to see things, not grow quickly, but stabilize by the second quarter, second half, excuse me.

Okay.

So, not much out of Europe supporting.

It would be more other regions, is that the correct --?

Yes.

Generally our order patterns, they don't go out that far in these businesses, so that, yes, we're having to plan against an economic scenario versus saying that we have hard orders in hand.

We do not in that regard, and nor would we expect to at this time.

Sure.

Okay, thank you.

Our next question comes from Josh Pokrzywinski from MKM Partners.

Thanks, Don.

Close enough.

Josh, I always get it wrong.

No worries.

You're not the first.

Sandy, just maybe to help understand, going back to an earlier question on the commercial side versus your more traditional non-res electrical markets in North America.

What are you really baking in on more of the commercial construction markets in the guidance?

And I guess maybe thinking about non-res since that has been up nicely for you in 2011, how much more room do we have to run on that?

I guess given the relative importance of retrofit versus maybe new construction, is that a market that is more mature in its cycle than it is on the front end as people get more excited about non-res momentum in '12?

We think there is quite a ways to go here, Josh.

We're in the second half year of recovery here in North America, I'm talking broad geographic recovery across all the different market segments, not just this area.

And we're just beginning to see commercial construction coming back, so you've got almost a four-year down before you're starting to get an up.

Normally, we think these up cycles go several years, so we think '12 is the first of several years of build, if you will, in the commercial side.

And when you look through, and someone asked the question earlier, when you look through all those different segments of office health care, power, communication, petroleum, mining, education, vocational, amusement, recreation, they're not all in at this point growing, and they will begin to as we come back.

So, we have a 5% overall nonresidential construction increase in our number at this point.

Could be low, could be high, but we think this thing is going to grow during '12, and we think it will grow again as we get into '13.

The reason that's important for Eaton is it does drive a very significant portion of our electrical Americas segment.

And I know you've all noticed this, but even when this market was coming down, we were growing.

So, we've been growing our share, and we think that just sets up an even bigger opportunity.

As the market now starts to grow, we think our growth can accelerate further.

That's helpful.

Then just on the shipment delays in the fourth quarter.

Does that set up some sort of de-stock that's implied in first quarter guidance, or is that kind of a smaller non-event?

No, it's not a de-stock because these delays are -- we have standard product, which goes into distributors that stocked.

These project businesses don't go into stock, they tend to be shipped to a job site, per se, not a distributor or a stocking or de-stocking comment.

Okay.

Thanks.

Our last question for the day comes from Eli Lustgarten.

Thank you.

Just a couple of clarifications quickly.

One, what's your auto forecast in the US and Europe for '12?

In the US, we're talking about it's based on retail sales that are just over $14 million units, and we know we're seeing forecasts out there between 13.9 million and 14.5 million, and we're sort of in the low-14 million.

In Europe, we're really plus 1%, relatively flat, whereas in A-Pac, Eli, we're about 10% positive -- 10%, 11% positive.

(inaudible) acquisition about $320 million, I think it was.

How much revenue carryover is in '12?

The net number is the $90 million, and that deletes the -- excuse me -- the divestiture that we made in the automotive segment net of $90 million.

You talk about inventories all over.

Are you planning inventory liquidations in any of the divisions as you go through the year, and how that will affect margins?

We are expecting, Eli, that we should be able to take DOH down one to two days this coming year, particularly given where we ended up the year.

And so, we expect inventory efficiency to improve but, of course, the business is going to grow as well, and so those two factors will cause probably just a very small increase in the absolute amount of inventory.

There is a bit of margin impact going on from the restraints of production, and that's across most divisions at this point?

Can you repeat that?

I'm not sure I heard you.

Well, inventories are going to be taken down, of course, it will have some margin impact.

Not material.

A day or two isn't enough to really cause substantial burden changes one way or the other.

So, it's pretty well spread out across the Company as opposed to any one division --?

Correct.

And your truck number, you said -- 16% is about 295,000.

You think 300,000 this year domestically?

Yes, we're using 300,000 for NAFTA.

Yes.

You're expecting that you will be able to sustain production pretty close for the rest of the year at this point?

Yes.

It basically almost flatlines the 75,000 per quarter.

At this state, more a question of demand than production.

The industry is already producing at a run rate of 300,000, and recent orders have been supportive of this 300,000 outlook.

Are you still having extended lead time problems in some of your divisions, particularly hydraulics is the one we keep hearing?

I don't know that we're having problems, per se.

We're glad to see distributors are really starting to stock at this point now.

I think that's what you hope would happen as you get through this part of the cycle.

We think we have made real progress on some of the areas where there were supply disruptions back really in the first quarter of this year.

So, at this point the lead times are holding at this point, and they are still extended?

I'd say they are consistent lead times at this point.

All right.

Thank you very much.

Thank you all for participating in today's call.

As always, I will be available to speak with you and answer any questions as follow-up.

We did want to be mindful of the earnings calls that are going on after this, so we will close here at 11.00.

For any of you, we do have additional financial information is available in the press release, and are located on our home page at www.Eaton.com.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation, and for using AT&T executive teleconference.

You may now disconnect.