伊頓 (ETN) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Eaton Corporation second-quarter earnings conference call.

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

Later we will conduct a question-and-answer session with instructions being given at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Don Bullock.

Please go ahead.

Good morning.

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

Welcome to Eaton's second quarter 2012 earnings conference call.

Joining me today are Sandy Cutler, Chairman and CEO; and Rick Fearon, Vice Chairman and CFO.

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

As you all are aware, we are in the midst of the acquisition of Cooper Industries, which is under the jurisdiction of both US and Irish Takeover Rules.

As a result, I'll draw your attention to a rather wholesome safe harbor statement that's outlined in our presentation and I'll cover portions of that this morning.

This presentation contains certain forward-looking statements.

Many factors could cause actual results to differ materially from these statements including those set forth in our Form 10-K filed with the SEC on February 24, 2012.

And any unanticipated delay or failure to close the Cooper acquisition.

This presentation includes certain non-GAAP measures as defined by SEC rules.

A reconciliation of those measures to the most directly comparable GAAP equivalent is provided in the Investor Relations section of our website at www.Eaton.com.

In addition, the earnings guidance contained in this presentation constitutes a profit forecast for the for purposes of the Irish Takeover Rules.

In accordance with the rule 28.4 of the Irish Takeover Rules, this profit forecast shall be repeated in the S-4 Registration Statement and the reports required by Rule 28.3 shall be mailed to the Cooper shareholders with the S-4 Registration Statement.

With that I'll turn it over to Sandy.

Great.

Thanks, Don.

I'm going to be working from the presentation we saw on our website and I'm starting with page 3 in that presentation.

Just a couple highlights of our second-quarter results.

We had a number of records in our second quarter, the first two referred to on this page, our operating earnings per share of $1.15 which was up 19% and our net income per share of $1.12, up 15% were both all-time records, and reflect that we think our strategy and our balance is really working quite well.

The second two that are referred to here, the segment operating margins of 14.7% and the operating cash flow of $469 million, our second-quarter records of really very pleased with the margin performance as you've seen both in the first quarter and the second quarter are stronger than a year ago.

And then the operating cash flow I think reflects again that our model's working well and our businesses are executing very well.

On sales of $4.1 billion, I think as you saw in our press release that came from core growth of 3%, acquisitions of 1%, and then the large item, a negative 5% from ForEx higher than we expected coming into this quarter and I think reflects the currency volatility we've been all been witnessing as we've gone through this quarter.

Then the final point on this page is that emerging markets constituted for about 24% of our sales.

You recall that this was a higher number last fall, and what we've been seeing is that as the emerging nations have been weaker this year, our sales into those countries have been weaker as well.

Turning to page 4, just a quick reconciliation to the guidance we provided at the beginning of this quarter, we provided in our first-quarter conference call, the midpoint of our guidance for operating earnings per share was $1.10.

Then really four items lead to our $1.15 achievement here in the second quarter.

Markets were lower, again, about 3% as I mentioned was out of our market growth that we saw in our marketplace.

That accounted for about negative $0.06 from the guidance we provided at the beginning of the quarter.

Currency as I mentioned almost twice as much negative as we had thought coming into this particular quarter.

And those two together I think led to what many people have referred to already this morning as the slight volume shortfall that we had in the quarter.

Offsetting those $0.08 of dilution from our original guidance or drag from our original guidance were $0.08 from a lower tax rate.

Then we think really the big news for the quarter because it continues to reflect our performance in terms of each of our operating segments was that $0.05 of improved performance and really record second quarter margins.

All that led to our $1.15 here in this quarter.

If we turn to page 5, quick summary of the corporate wide numbers.

Volume down 1% again, remember, 5 points of that differential there were caused by the negative ForEx.

You can see that in the lower left-hand corner of the green box.

3% for the market 1% from acquisitions.

Volumes were up sequentially from the first quarter, up just under 3% from the first quarter.

You remember that segment operating margins were 13.8% in the first quarter, have moved up to 14.7% and we're very pleased with that here in the second quarter.

If we turn to page 6 now moving to the individual business segments, Electrical Americas had really an outstanding second quarter following what we felt was an outstanding first quarter.

Sales were up from the first quarter just over 4%, margins expanded from 15% in the first quarter to 16.9% in the second quarter, up from 14% last year, record quarterly sales and profits.

Perhaps even more significantly, our bookings continued to be strong not only with a 4% increase in the quarter, but our forward quotations looked very good as well.

Markets were up 8%, and we're seeing really broad strength within the residential and nonresidential construction segments and we'd be pleased to talk more about that during the Q&A section.

Moving to Electrical, Rest of World, sales of $683 million up about 5% from the first quarter.

It was good news.

Margins pretty much on a par with where we were in the first quarter, down from 9.9% last year.

As you can see an 8 point negative due to ForEx as we are seeing the large impact from various, in this business is primarily the European currencies that are hitting us here.

Some additional revenue due to acquisitions.

Bookings came down by about 4%, very much in line with what we're seeing with the market contraction of 3%.

We are noting here that we did complete a small acquisition in the Nordic region that we had released news on earlier in the month.

Moving to our Hydraulics segment another really strong quarter performance record quarterly sales and profits.

Sales up of some 6% from last year, up just under 5% from the first quarter, margins quiet with last year.

Up from 15% in the first quarter.

US markets continued to be strong, although here is one of the areas where we are seeing really our outlook for the market for the remainder of the year weakening outside the US, bookings declined by 9%.

But I think as we commented in the first quarter it's worth keeping in mind that the first and second quarter of 2011 were really almost out of pattern quarters where we had very, very large levels of bookings.

China was still operating at very strong levels and here in the US we were seeing OEMs continue to rebuild their backlogs.

So the business continues to have an attractive level of bookings.

And we were very pleased to have completed the acquisition of SEL in early June and then in early July, the Korean manufacturer of hydraulics, Jeil Hydraulics.

So we told you in our last quarterly conference call those two businesses would have a run rate of over $500 million of additional revenue, and we're pleased that they're both in the Company at this point.

Turning to chart 9, that's the Aerospace segment, sales up 7% from last year, up just about 1.5% from the first quarter, margins of 13.5% up solidly from last year.

The commercial OEM side of the business remains very strong, tempered by the weak military OEM activity.

And then the bookings up some 2%.

You recall they were up 7% in the first quarter, and after market bookings up 4%, they were up 9% in the first quarter.

And I would say if there's a piece of news within this overall market outlook in Aerospace, it's that the commercial after market business has been weaker than we were seeing it at the end of last year.

Moving to the Truck segment, obviously a very strong quarter of performance, although sales were down 7% from a year ago.

And we'll come back and talk about that theme.

Operating margins of 19.2% of 140 basis points from last year, up from 18.4% in the first quarter, even though volumes were off about 1% from the first quarter.

Here we are seeing US markets up some 20%, very much in line with what we had anticipated when we spoke at the end of the first quarter, the second half is a slightly different story.

I'll come back and talk about that when we talk about our market outlook.

The Brazilian truck and bus markets were down 33%.

You'll recall they were down 31% in the first quarter.

So we did not see a rebound in the second quarter in the Brazilian truck and bus markets.

And then we revised our own forecast for the 2012 NAFTA heavy duty truck forecast, down from our previous 300,000 units to 285,000 units and basically that entire change occurs in the -- we believe will occur in the second half.

As you can see again, ForEx was a very difficult headwind in this business, with 8% impact in terms of the top line.

Turning to chart 11, which is our Automotive segment, solid quarter performance $422 million.

Again you can see ForEx impacting that top line by 8%.

So this business was actually off about 1% from the first quarter of this year as well.

Very solid performance in terms of the bottom line in terms of the 11.4%.

And as I mentioned in the first quarter, at that time we have had about 1 point impact from the start up expenses of our new facility in China.

That came down to be about 0.5 points in this particular month, so really pleased that that facility is coming on board.

Strong North American markets, strong Asian markets.

But as you might expect, both Europe and South America considerably weaker.

Moving to chart 12 and really this becomes the heart of why we changed our guidance.

And I want to spend a little bit more time on this chart than we might ordinarily, because I think the context for understanding it is important to understand as we look at the breadth of our businesses around the world.

We'll start with the top line.

Electrical Americas index actually strengthening our growth expectations here in North America.

And really what you're seeing this is all of the Americas, and what you're really seeing here is the great continued strength in the nonresidential markets continuing to strengthen quarter over quarter.

And somewhat of an uptick beginning in the residential markets.

They're not back at the levels they were a number of years ago but they're stronger than we expected.

So overall, we expect growth this year up some 2% from where we had it.

Electrical Rest of World, continued weakness in Europe, China, Brazil, Australia, and really I think that the view here is that we don't believe that there will be any uptick in Europe or China in the fourth quarter.

And when we shared our forecast with you at the end of the first quarter, we had felt there was a pretty good opportunity for the beginning of a rebound in the fourth quarter.

We see that now pushing into next year.

You'll hear that same theme, in terms of those two basic geographic markets, any recovery pushing into 2013 affect a number of our businesses.

And Hydraulics business I would describe the change here in North America, 1 point down as more tuning than anything else, we do sell into the truck and bus market that we have weakened up in terms of our expectations.

And there's some concerns about the ag market in light of what's been going on with the drought across the country.

More fundamentals however in Hydraulics is what's happening in China.

Where clearly we're not seeing the rebound in the construction equipment marketplace there, you've seen a lot of announcements out of China from major customers that are public at this point.

And we don't see Europe coming back in the fourth quarter as we mentioned.

So overall, down 2 points for our Hydraulics expectations this year.

In the Aerospace market, here in the US it really ties back to the comment I made about commercial.

After market been weaker than we had originally expected.

And when you go outside the US and I would say that down 1 point is more of a tuning than anything else and relates to some weaker deliveries here in the second quarter, outside of the US.

On the Truck side, here in North America, that 5-point down from the previous 16% growth to 11% growth really ties into the heavy-duty forecast again, that we've -- and you recall we said at the end of the first quarter we needed to see bookings that would be in the 20,000 to 25,000 unit level as we enter the summer.

As all of you know, we've been seeing orders more in the level of 16,000 to 17,000 the last three months and that's the reason for taking forecast out for the balance of this year.

Outside of the US, Brazil and Asia, the two big issues in here that lead us to taking that now to a negative 4%, so as you can see we've reduced our growth for the worldwide trucks index from about 7% to 2% this year.

On the automotive side still very robust here in North America really pleased with that.

The reduction of one point outside the US really ties into most fundamentally Europe and secondarily Brazil.

And so we now think that market grows at about 3%.

So when you step back from all this, strengthening markets and the Electrical Americas segment continued great strength in the automotive index.

I'd say tuning in the other items in the US, so the big theme here is US market stays strong.

Non-US markets, not much of a recovery expected this year.

I don't think a surprise in any of those comments.

And we end up with about 8% growth in our end markets in the US and about a negative 1% outside the US, for overall 3% to 4% or this midpoint of 3.5% in terms of our expectations versus the previous 5% growth for this year.

Now, while we're on this chart I think it's worth mentioning that obviously our pending acquisition of Cooper plays right into this North American electrical theme that you see really jump out on this particular page.

Moving to chart 13, just two changes that we're making in terms of our guidance for the balance of this year.

Both related to market growth expectations for the Electrical Americas being a little stronger, we've taken it up by 0.5 points.

With the Electrical Rest of World markets now we believe having weakened, we're taking that down a point but overall, margin guidance for the Company still in the same range that we had shared with you at the end of the first quarter.

Turning to page 14, we know there are a lot of moving pieces here and we tried to provide you some reconciliation of how we got from last year's operating EPS of $3.96 to the midpoint of our reside revise guidance of $4.35.

These are operating earnings per share, just to tick down these quickly, the market improvement of 3% to 4% that used to be 5%, and it used to be at a 28% margin, it's now at a 29% margin as we are performing better than we had expected to in terms of our segment margins.

That line item changed by a negative $0.16.

The market outgrowth of $225 million at a 29% margin, again the higher margin is down $0.07 from what we shared with you at the end of the first quarter.

And then if you drop down to the other corporate line, which is in the green box there, that is $0.01 better than it was and that's really due to a low cost control we've been working hard on.

So that top segment of $0.72 is changed by $0.22 from what you saw at the end of the first quarter.

ForEx as we mentioned, a bigger number now, we think now $500 million of drag for the Company this year, that's a negative $0.05.

In the higher tax rate, versus last year is $0.12 less negative than it was when we shared it with you at the end of the first quarter.

So that revised total of $0.33 is $0.07 better than we showed you in April.

All that nets the $0.22 above, $0.07 below, nets you your $0.15 negative in terms of moving us from the midpoint of our previous guidance of $4.50 to now the midpoint of our guidance for operating earnings per share in 2012 of $4.35.

If you move to chart 15, this chart I think has each of the pieces we really try and provide you this for your convenience to keep track of what is changed as we move through our guidance.

As I already mentioned the market outgrowth has come down, or excuse me the market growth expectation has come down from 5% to 3% to 4%.

The ForEx impact has changed from negative $300 million to a negative $500 million.

The incremental margins have improved from 28% to 29%.

The tax rate has been reduced by 2 points, and all that leads to the $0.15 lowering in the midpoint.

As you look at this, and we've not included a chart for specific third-quarter guidance, because our processes that Don went through upfront under the Irish Takeover Laws, we're providing full-year guidance only at this point.

But deductively I think what you can get from the fact that what our first-half earnings are and what our full-year earnings are is that we are expecting our second half operating earnings per share to be pretty darn close to this second-quarter record levels that we just had this past quarter.

So continuing to operate at very attractive levels in spite of the markets being a little lower.

If we move to chart 16, just by way of summary, our outlook in terms of our guidance for the full year really constitutes a recalibration of global growth prospects.

I don't think there's any surprise in any of what we've just shared with you.

We've all been looking at the same series of economic data that's been emerging over the last three months.

Global growth has clearly slowed.

And the European and Chinese recovery we think have pushed out of 2012.

The truck markets in the US and Brazil are likely to be weaker than we previously anticipated when we thought we might see some upturn in the second quarter.

That's not materializing.

Currency volatility has accelerated with particular weakness in the euro and the Brazilian real.

And all of that which gets all the headlines I think sometimes has overshadowed we think real continued strength in Electrical Americas, our Hydraulics Americas, our Automotive Americas and Commercial Aerospace.

And what this says really to all of us is that our business breadth both defined in terms of geography and cycle is really working.

Because in the midst of all this turmoil, we would still expect to have all-time record sales and profits this year.

We have lowered our full-year guidance by $0.15, in recognition of all the items I just talked about.

And when you think about record sales and profits for Eaton this year I think it's important to think about while we're projecting sales to be up 4% this year, that would be 9% before the negative 5 points of ForEx.

And within that 9%, are 2 point of acquisition.

So that our core growth in the midst of all this turmoil could be 7%.

And I think it's important to focus on that number that this balance of business is performing as they are with the technologies we have addressing this continued important issue in our customers' minds of power management is delivering really impressive core growth in this environment.

Our acquisition of Cooper, just a quick mention of that, remains very much on track.

We are in the process of having the S-4 reviewed, and discussions with the SEC.

We did receive the Hart-Scott-Rodino review was completed in July, we're very pleased to have that important step now behind us.

And we've put in place revolving finance facilities that we mentioned in other press releases.

They've been upsized to $2 billion and $600 million of term debt issued.

And so we're continuing to move forward and we still expect that very important transformation deal to close in the second half of this year.

And last I would mention because among all of the discussion of the Coopers business is that we tend to lose track of the Hydraulic acquisitions that we've completed will add about $500 million in full-year revenues as well.

So really quite pleased with the balance of activities we've got going on theM&A side.

With that, we will stop and we'd be glad to answer questions.

Don

(Operator Instructions)

Ann Duignan, JPMorgan.

Good morning guys.

Sandy, just on the Electrical Americas, it remains strong despite the fact that it likely has exposure to net gas fracking either directly or indirectly, we thought that might weigh on the segment.

Can you talk a little bit more about where you are seeing the strength both on the non-resi and the resi side of that business?

Sure.

On the non-res side, again I would reference everybody right back to the same detail we tend to look at, which is looking at the private put in place information and up some just under 4% in the quarter following a very strong quarter in the first quarter.

And when you look go through all the segments there it's interesting, the only segments that really jump out to have a negative's were in the communications area where there's been a lot of discussion around telecom.

And then the second is surprisingly, in mining and petro chem and natural gas, a little lower than a year ago, but virtually the vast majority of all the other segments are positive.

So at a time when people are talking about office and other commercial, they actually grew.

And we are seeing quotation activity continuing to be quite strong as well.

So really pleased with the breadth in that area, really continuing on the theme we've talked about before.

Fracking for us, Ann, has been a little bit more of an issue actually over in our Hydraulics business than it has been on the Electrical side.

And there are clearly after a boom in 2011, when we started to look at the impact of some of the discussions in and around regulations, it has slowed down this year.

So it's not quite the boom that we saw a year ago.

But we remain really quite positive on what we're seeing, not only in what we have booked, but more importantly, the depth of our quotation logs on the nonresidential side.

On the residential side, again I would say we're not in a booming take away but these numbers are up over 20%.

When you look at all the public data versus a year ago.

So we're beginning to see a recovery there which is welcome off of the very low levels we've been in for a couple years.

Okay, Sandy.

Thanks.

And follow-up on the Hydraulics business, you noted potential slowdown in the ag space.

Is that something you're already hearing from OEMs?

Or is that just you gauging the environment and recognizing that the drought is likely to have an impact on farmer sentiment?

I'd say it's more of the latter, Ann, at this point.

And of course there are very different theories on what may happen at this point but we think it's just prudent planning at this point.

Okay.

I agree.

And I'll get back in line.

Thanks for the color.

Jeff Sprague, Vertical Research.

Thank you, good morning guys.

Just a couple high level guidance questions first.

Obviously left a really wide range and we all get kind of the volatility going on out there, but could you characterize to any degree your comfort with the range?

And I guess in particular, although you brought it down Rest of World Electrical, it implies kind of an improvement in the back half, I'd like to understand why that happens.

And you got Truck kind of flattish to up slightly in the back half on what looks like should be lower volumes, why does that happen?

Yes.

A couple comments, Jeff.

We've narrowed our range from $0.40 to $0.30 so we've got about a 7% range at this point.

So we actually don't think that's that big a range for a six-month time period with the kind of volatility that's been out there.

But we felt it was prudent to bring it down by $0.10.

On the Electrical Rest of World, it's obviously been a hard one to call, basically what we're seeing is that Europe has flattened.

It hasn't gotten worse.

It's flattened.

We've actually seen in Asia, we've seen our business up from the first quarter.

But we don't -- part of that is the timing of obviously Chinese New Year as well.

But we aren't forecasting massive increases as we go through the back half, so we're assuming that what we see today is pretty much what we're going to get out front.

That's our best call at this point.

A quarter ago, you may recall we were talking about that we are hopeful we would see particularly in China we see more of a recovery in the fourth quarter.

And we're just not seeing the evidence of that.

Having said that we've all been fooled before.

And have seen the Chinese economy in particular change more quickly, but that's not our expectations this time.

On the Truck market, just a last piece, I think you posed a question on there, really it's due to the order rates.

And we have not seen the order rates come in during the second quarter that we were hopeful we would see.

And that's the reason for the direct bringing it down to 285 number.

You're defending the margins, I was more on the margins side it looks like you're pretty confident on defending the margins as it looks like kind of a production fix in the third quarter especially.

In terms of Truck specifically talking about?

Yes, Sandy, on truck specifically.

We're operating obviously at very attractive levels.

And I think for a number of people who followed us for some time we've built a pretty flexible model in our Truck market in terms of being able to ramp ourselves up and down, so that we do believe we can hold as we say the full-year margins we've got.

In that business we've been operating very well both in the first and the second quarter.

And while the volumes are going to be coming off we think a little bit with the market coming down here, we are convinced we can meet these long-term or excuse me, full-year margin goals in Truck.

And just finally and I'll jump off, can you actually tell us what dollar euro rate and dollar real rate you are using in the guidance so we can all we've been all kind of reset as the things play out here?

Yes.

We sure can.

You may remember we started this year thinking that we would see currency negative headwind hit us for about $550 million.

We revised down to $300 million at the end of the second quarter in a bit of happiness when we saw things were not quite as bad at the end of the first quarter, and now we're pretty well back to where we were at negative $500 million.

What we're assuming is that for the balance of the year we'd be in this $1.20 to $1.22 range for the euro.

And we'd be around $2 for the real.

I think it's helpful when you think about how dramatic these changes have been in the second quarter this year, the average versus the second quarter of last year, for the euro is down about 12%.

But interestingly not everybody tracks the Brazilian currency as carefully.

It's down 20%.

So these are big impacts and that's what's driving this 5% negative impact on our top line in the quarter.

Great.

Thanks a lot.

Jamie Cook, Credit Suisse.

Good morning.

First question, I guess on the guidance front again, I guess I was surprised that you were able to keep your Hydraulic margins at the 16% on the lower growth rate, so can you just help talk about your assumptions behind that?

And then in total, what was price material cost in the quarter and what are the expectations for the back half of the year?

Thanks.

On the guidance, Jamie, remember we've got a couple things going on within our Hydraulics business.

One we've completed a couple additional acquisitions in our filtration space and as we've commented to you, we're very pleased with those businesses.

They're being integrated and that's giving us the benefit of those synergies which is playing into that margin as well.

We think at this level of activity, which is an attractive level we're at, so we're not talking about coming off from where we are at this point, it's that we can maintain very attractive margins in the business.

Very pleased with the way the business has been executing so that's really the piece behind Hydraulics at this point.

We've had a very, very nice first quarter -- excuse me, first two quarters this year getting started in the business.

I'm sorry I forgot the second part of your question, Jamie.

Sorry.

Just a second point on price cost in the quarter.

And then what the expectation -- I'm wondering if you get a benefit in the back half of the year.

Yes, hard to know again, we said a couple times here that the piece that's always hard to predict is the difference between futures and spot pricing because the future prices tend to move with more volatility than do the spot prices, which is more of where we end up actually purchasing.

We have seen I think commodities have weakened up as we've come to this year.

We're not seeing that pressure to the degree we were, and our expectation for this year, was that net between price and cost for the full year would be approximately zero by the time we work through everything.

That's pretty much what we're planning still at this point, if it turns out to be better than that we'd be very pleased but we're not assuming a big plus there.

Okay.

And did you get a benefit in the quarter?

I would say it's fairly immaterial at this point.

Immaterial?

Okay.

Thanks.

Nathan Jones, Stifel Nicolaus.

Good morning guys.

Sandy, in Electrical Americas you started nonresidential construction as a market sharing strength for you.

Can you comment on the recent trends in the ABI, which tend to suggest that the growth you're seeing now may not be sustainable over the next year or so?

And talk about what you're expecting in those end markets for Eaton sort of 9 to 12 months out?

Yes.

ABI we find it -- it's of interest in terms of -- it's an insight in terms of looking at about 50% of the nonresidential space.

ABI really deals with what we would call commercial construction.

It doesn't tend to deal with the big portions of mining shafts, wells, manufacturing, which make up about 50% of what's out there in the marketplace.

So early on in this recovery, the big strength was really in the areas that I just mentioned.

And we were not showing ABI move up at all and we were talking about the non-res market was going to really bottom and start to increase solidly by the middle of last year, and in fact did.

So we don't find ABI to be as helpful in this regard as really watching our quote log.

So looking at our quote log at this point, we're continuing to see a really nice balance of projects that we can see in this next six to nine months.

So our expectation is that we are still in the midst of a several year recovery in the nonresidential market.

It took a 3.5 years for it to trough down.

We think it's reasonable you're going to see a similar length of opportunity here on the upside.

Again, we're looking out now at projects that are six and nine months out, so we think we've got a pretty good view out ahead of us at this point.

We've not put out a number for 2013.

We really won't do so until we get later in this year, but we're very much encouraged with what we're seeing in terms of the quote log for that period of time.

Okay.

And if I could just jump to Electrical ROW, last five quarters in a row you've had negative market outgrowth.

Can you talk about where it is you think you might be losing share and what you're doing to address that?

Yes.

The big issue that we've referenced over the last year was that we had a very outsized position in residential solar.

And really, up for the last four quarters that's really been the burn off of that particular activity.

The second issue is if you go to countries like Australia where we've got a very strong position in the commercial construction side of the business, that economy is struggling right now, and that's not where the activity is there, so we don't really think it's a share activity.

We think it would primarily solar and that's pretty well behind us because we've burned off the year-to-year adjustments in that regard.

I would say the second issue is that our data isn't -- third issue, our data isn't as precise in some of the emerging nations as we would yet like it to be.

I think it's getting better, but I have a little less confidence in our ability to call those markets precisely than I do in the developed nations where we've spent years trying to perfect these economic models.

Great.

Thank you.

Steve Volkmann, Jefferies.

Good morning, gentlemen.

I'm wondering, Sandy, things have deteriorated a little bit here.

I guess we'd probably agree there is not a ton of visibility from a macro perspective.

Can you just talk a little bit about what sort of contingency plans you guys have available and if things do take another leg down, it sort of -- how much restructuring could you do or what types of levers could you pull on and how do you do that planning?

I'd start, Steve, by saying I think it's on everyone's mind, and I would start by saying at this point in a relatively low growth activity right now, you're already seeing us with core growth on the order of 7%.

And I think that speaks to the first issue.

We have I think, evidenced our ability to outgrow these markets even during very difficult time periods and that's because the applications we are in.

And so whether you start through any of one of these businesses -- there's an awful lot of regulation that's driving the adoption of our technologies.

And I don't think that will change.

I think customers will have to make some trade-offs as to what they spend on, but those tend not to be items that you can trade off.

And so I think it starts right there in terms of the strength and positioning of the portfolio.

Secondly I'd say in this relatively volatile and unstable economic growth time period, you're seeing our margins continue to expand and I think that speaks already to the types of steps that we're taking in terms of how we're positioning our products, how were able to then price them in a way that creates real value for our customers as well as for our shareholders.

And the third is I think if we found ourselves in a period of real economic weakness, like the 2008 time period, you saw us move very quickly at that point to take costs out.

Frankly, we've not let a lot of those costs creep back into Eaton and we've shared that in our New York analyst meeting the last two years.

That's part of the reason we're opening up these margins, but if necessary, and we don't see that necessity today because our margins are we think at all-time record levels, we can take steps to cut things back.

And of course we will be in the process of integrating a large acquisition here at some point as well.

And that always provides additional opportunities.

Okay.

That's helpful but I guess to take that to the bottom line, you're not yet at the point where you feel like you need to take any of those actions?

No, we're not.

We're still seeing ex-ForEx, we are seeing positive growth.

And we're being able to capitalize on that.

And the FOREX is an issue that we all watch through the cycle.

And that doesn't cause us to run our business differently.

Fair enough.

And just because you brought it up, maybe this falls under the category of tweaking, but I see your out performance is a little lower than it was.

Is there anything happening there?

No.

I don't -- I go back to the comment that I made to Nathan is that we're we are candidly a little bit challenged with trying to come up with good economic models for some of these emerging nations, particularly as they've reversed their fortunes.

And they're not growing like they were.

And so my hope is that the longer we spend time in these areas we're going to get better and better at it at this point but I'd say no, nothing fundamental.

Great.

Thanks very much.

Andy Casey, Wells Fargo.

Good morning everybody.

First, if you did, I apologize, could you give a little more color behind the very strong Electrical Americas margin improvement?

Was it all volume and mix or is there something else going on there?

I'd say, Andy, a big piece -- no, we hadn't commented on it before -- a big piece remember too is that the first quarter tends to be the weaker quarter for our Electrical Americas segment from a seasonal point of view.

And typically from a margin point of view so you do get that quarter-to-quarter jump.

If you look back to the previous year, I think what we are seeing is very solid volume growth, and were also seeing that a number of what I'm going to call these high spec products, product where we've come out with really unusual technology, they are enjoying a little fuller margin and we are seeing the benefit of that as well, so that's the investment in the business.

And then I just think our team is doing a terrific job of running that business.

I'd say those are probably your three sources and as you can tell from our full-year guidance we think it's quite sustainable.

And we raised the guidance by another 0.5 points in that segment.

So I think you are really seeing the benefit of a business of real scale hitting on multiple cylinders with a lot of new products.

Okay.

And just quickly on another question on that, have you seen a reversal in the data center weakness that you talked about in Q1?

I would say generally I would say that the power quality market was weaker in the second quarter.

And so our bigger strength was on the power distribution side of the business.

And I'd say almost each of the three areas that we typically talk about in power quality whether that be the single phase, business whether that be the three-phase flow business or whether it be the three-phase large data center business, it was a weaker quarter than we had seen in the fourth and first.

Okay.

And then one clarification.

And a broader picture question.

The clarification on the outlook for the Aerospace margin 2012, 15%, first half, by my math comes in about 13.7%.

What are you factoring in to drive the second half margin improvements?

We typically, Andy, if you take a look at us we've done a little stronger seasonally in the second half in that business and we are counting on that as one of the items that will drive that stronger margin.

I would say that's the biggest plus.

You'll remember overall for the year, the big change year-to-year is occasioned by the change in the much stronger commercial OEM production.

And then not as much after market and we saw that after market be even a little weaker than we thought it might be here earlier in the year.

And then really no change at this point from our perspective as the military market would be a mid single digit decline this year in terms of activity and that's pretty well manifesting itself already this year.

Okay, thanks, Sandy.

Then lastly, bigger picture for North America if you're encountering mixed market conditions.

Clearly, seeing weaker Truck and then strong Auto and Construction markets.

You guys have a very broad view on NAFTA truck.

Can you share your perspective on what really is behind the hesitant customer order placement and then why that hesitation would remain kind of isolated to Truck?

I think in some ways, Andy, you're right that the things that are causing the weakness in the Truck market, may be on people's minds in multiple markets, number one.

There were price increases for the new trucks and I think many customers are saying, gee, I'm concerned about the magnitude of that price increase, and maybe I'll wait or maybe I'll negotiate a little longer and we've heard a fair amount of that chatter, I would say secondly is that freight's been good.

Fleets have been getting price increases.

All that is a positive.

There's been quite a bit of buying of new trucks end of last year and first half of this year.

In our talking with dealers and key fleets, they're looking at the fiscal cliff at year-end at and they're saying, I'll wait and I want to see how that's going to sort out.

I think issue that we're all reading about every day and many of us are worried about, the fiscal cliff has very relevant potential impact on what's going to happen for capital goods and personal purchases as we get out to the end of the year.

And we hear it back from a number of customers in a number of markets.

So the closer we get to that I think the more people will be concerned.

And it's not hard for someone to take six months off and then start up again.

Okay.

Thank you very much.

David Raso, ISI Group.

Good morning.

The question's about the second half revenue guidance.

I'm just trying to understand the moving parts.

Basically, the first half, the revenue growth was about 1.7%.

For the second half, has to grow about 6.2%?

To get to the full year?

And the acceleration there, obviously the Turkish acquisition, that alone probably gets you one third or so of that 6.2%.

But the other two key pieces, what is accelerating in growth rate second half year over year versus the first half year over year?

I would think the currency -- at a minimum all else equal is going to be as much a drag as it was in the first half, if not a little more.

So what's accelerating?

Is it just the rest of the world difficulties in Electrical and every other business, just being less of a drag?

Or is something actually accelerating on a positive growth rate?

From the growth rate, because we're now talking 3% to 4%, the market growth rates are pretty flat compared to the first half this year.

Your currency was -- as we told you in the first quarter was about a negative $50 million.

It's about negative $250 million in the first half.

It's about negative $250 million in the second half.

Now, that's larger than we had thought it was going to be for the second half.

That's the difference between us having a negative $300 million in our previous guidance and a negative $500 million now.

But that as you think about growth for the year, you end up with this 3% to 4% base growth, minus negative 3.1%, I think is the percentage if I recall for the $500 million.

And then you end up with a couple points of acquisition growth.

And then the outgrowth is a little higher than it was in the first half.

And I think those are your pieces in terms of trying to figure out that overall growth.

I'm not sure if somebody can -- maybe Sandy can take me through a little more detail, just the pure math of up 1.7%, in the first half, total revenues to get to up 4% for the year, once again you need the growth rate to accelerate to 6.2% in the back half.

The Turkish acquisition probably adds $100 million -- $180 million in the second half.

It added very little to the first half.

So of the acceleration, the 6.2%, I can see right there that Turkish acquisition adds say, 2.2%.

The rest to accelerate, I'm just trying to figure out what's accelerating, especially again, if currency is maybe even a bigger drag year over year?

You know, David, it's Rick.

I think the you're actually understating the acquisition some.

It's not just the Turkish, it's Jeil, the Hydraulics acquisition and as Sandy said FX, should be in absolute numbers, the same.

And in the second half versus the first half, but it's hard to do these kinds of reconciliations online, so why don't I ask you to have Don walk you through it on a later call?

Okay.

And then lastly, when I think about the margins in Auto, in a way having the international business down as much as it is and the total business down, I would say the decremental margins of only 18% in the quarter were actually pretty impressive.

When you think about the next few quarters where again, it's probably domestic auto healthy and international weak, is that a reflection of the international margins in Auto?

Or just not nearly as high as North America?

So I guess that makes is actually net positive and I should expect some pretty modest decrementals?

Or are you already taking some cost out of those international auto businesses?

Again I thought that margin was pretty healthy for a total auto sales, down 8%.

And the decremental wasn't too bad.

We commented in the fourth quarter and then in the first quarter that we've been starting up a new facility in China that we're really excited about because frankly, the volume opportunities have been quite substantial in that marketplace.

And as we look at this full-year guidance of 12% in terms of the margin -- the revenues from margins, excuse me in that segment, we've been, in the first quarter we were down about 1 point due to excess costs of starting up the facility, in the second half about -- second-quarter about 0.5 points.

And those international margins would actually be even a little better without that -- we expect that to be largely behind us now as we go into the second half.

And that's the confidence in the margins are up in the second have sequentially in Auto?

Correct.

That's helpful.

All right.

Thank you very much.

Eli Lustgarten, Longbow.

Good morning everyone.

Can we go over some points -- you talk about power quality being weaker in the second quarter.

Can you talk about what your expeditions there for the rest of the year?

The market has actually been growing a little less quickly than the power distribution market.

And so we think with pressure on individuals buying computer server sales not being outstanding, that we don't see quite the strength that we were seeing in the fourth and the first quarter.

So our market within that overall forecast for both Electrical Rest of World and Electrical Americas is a little weaker now than it was on power quality.

So you're expecting effectively no change for the rest of the year from second quarter?

We don't see a reason to assume that's a big rebound.

That's very fair.

All right.

And you talked about no expectation for Europe and China to get better, Brazil has been a mess that surprised everybody in the first half.

Do you see anything happening in Brazil this point or do we continue to see --

We don't think -- third quarter is likely to look a lot like the second quarter there.

A little harder to call.

Because the fourth quarter wasn't anything real special down there last year, so that no, we think this year you're going to see Brazil be a kind of a disappointing economy versus people's expectations and that's pretty much our view for the rest of the year.

When you talk about Truck market, you cut your forecast to 285,000 and you're holding margins.

In the industry news today it showed producing about 310,000 first half.

And the problem is the order rate, the six-month trailing order rate is 232,000 down from 262,000 if you move it back a few months.

How much sensitivity do you have if you have to bring that order production, truck production down a little bit more to being able to hold that margin?

And is there a risk of that happening?

I think what you've seen from -- you've seen from us kind of zones of profitability as we are -- as we've been -- whether it was the 200,000 or 225,000 or 250,000 all using NAFTA numbers here.

We clearly at this point are thinking we are in this 285,000 range.

If you start dropping down to 250,000 or 240,000 or two and 225,000 all of which I think are highly improbable, but yes, you do see us come down by points.

And I think your best view there is probably just to take a look at those years where we are operating in the 250,000 and that will get you a pretty good view as to what our margin activity is likely to be.

Great.

Thank you very much.

Jeff Hammond, KeyBanc.

Good morning, guys.

Just as you talked to your sales guys or people on the street in China, what are the silver linings or what kind of gives you confidence that we were seeing any kind of improvement or -- to give you confidence in recovery into '13?

It's not as much I would say on the street discussion this point because you will get people who are at both ends of the spectrum that the recovery is a day away and that the recovery isn't going to happen for some time period.

It's more about the actions that the government has been taking.

And they've been beginning to cut interest rates, but we think that doesn't take a long -- we think that's a five to six month impact in terms of that happening.

You have a change in government coming and frankly we thought more would be done by now to try to get the economy up to a higher level ahead of seating the new government.

It does look like they're beginning to move in that area.

And then I would say selectively, in some of the areas we do business we've seen inventories pared significantly, and that's a very necessary precondition to try to get production to ramp up to actually -- excuse me, orders to ramp back up to meet with actual production rates.

So having said all of that, that's why we pushed now to the fourth quarter because we think the actions have needed to be a little earlier and a little bigger to assure we would have seen a fourth-quarter recovery.

Having said all that, it is a very big economy.

There are still very large projects to be done, that need to be done particularly on the energy side of the economy.

And so we remain bullish long-term in terms of the opportunity in the Chinese economy.

Okay.

And then as you jump through the various hoops to getting the Cooper deal closed, anything more definitive on timing or how you think financing shakes out relative to original expectations?

No.

We still think, Jeff, it's a second half transaction.

What we're very pleased about, though, is if you think about those couple comments I mentioned in terms of we're in that process of the S-4 review, we've had the Hart-Scott-Rodino approvals here in the US, and we have been able to get our finance facilities upsized.

And so I look at each of those steps saying, hey, we are very much on plan and it's our expectation to close here in the second half.

Okay.

Thanks, guys.

Christopher Glynn, Oppenheimer.

Thanks, good morning.

Had a question about Hydraulics, just wondering how do you think about how much you've improved the scope of your participation on platforms globally before the great recession?

And really trying to get an eye on how much of your growth there has been cyclical and how much has been strategic?

I don't know, I can give you a decimal point on that one, Chris.

We're obviously number one, we're participating in the fact that there has been a big recovery in the market and we do think there's a very significant change that's taken place in the market.

It's the mobile side of the market that led the recovery.

And we're continuing to see very strong activity there.

If you simply just take these last two acquisitions that we've announced, they greatly expand our capabilities, and really delighted with Jeil in terms of what it brings to us for number of mobile applications, particularly in the construction market place it really widens our capability there.

Were also prior to doing these acquisitions whether it be SEL or whether it be Jeil have introduced a number of new products that have really broadened our capabilities there, as well.

I'm quite enthused with some of the life sense capabilities we've talked about.

We could take you through a whole list of products, so I think what you have in our Hydraulics business is not only a business that has more technology and more product but it has done a really terrific job.

The team has improving the mix of what I would call fixed and variable costs and you've seen the margins improve quite substantially in the business so we're really very pleased with the performance of the business.

And then have added on top of that the two additional filtration acquisitions we did last year, that business has now become a business within Hydraulics of real scale as well.

Okay.

Thank you for that.

And on Electrical Americas, would you say you're less weighted to public then the index?

Less weighted -- excuse me, Chris?

To public construction on the non-res side than the index?

No.

I think because of our position, I think when you look at the whole non-res market, for the Americas, that looks pretty much -- we look pretty much like it.

Okay.

Thank you.

Rob McCarthy, Robert Baird.

Morning everybody.

I wanted to ask about the second half growth outlook from a little bit different perspective in recognizing that these numbers are rounded.

For the second quarter in a row, you reported no outgrowth.

Your guidance for the full year assumes about a 1.4% growth contribution from outgrowth.

The implication then being for the second half of the year it would add something like 2.5% to growth or maybe even a little more.

Could you maybe rank order for us the top two or three contributors to that improved outgrowth performance that you're looking for in the second half, Sandy?

Yes.

And we don't give specific guidance, Rob, so on individual elements.

And so let me maybe give you a little bit more general reply on the subject.

If you look at our larger businesses and Electrical Americas for example, we've got pretty good visibility into what we've got in our backlogs versus what the shipments are going to be.

And so that's probably what gives us quite a bit of confidence when we look at the business is where we got backlog, so we've got fairly substantial backlog in our Aerospace business.

We've got fairly substantial backlog in our Electrical business.

And we've got some backlog obviously in our Hydraulics business.

And with the benefit of knowing what we've got kind of in-house, that's what gives us a little bit more confidence around these numbers.

Okay.

But there's an implication that something is improving in the year-on-year comparisons.

And I thought maybe that you mentioned for example that the comparisons in the Truck business in Brazil it in the fourth quarter, at least on the face of it, would seem to be a lot easier than they were last year.

You mentioned solar.

Are there -- a couple other important moving pieces that would have a similar impact?

I think you've seen pretty consistently in our Electrical Americas business a record of out growth there and it's a whole variety of products that are within there.

And important market segments that we're doing quite well in.

So it's a little bit of all the fleas in the flea market because we are dealing with so many different products here.

I get the gist of your question, but it's more like a two hour answer not like a two minute answer.

(laughter) Fair enough.

Thanks, Sandy.

The other question I wanted to ask was -- surrounded your comments about price cost and really looking for a roughly neutral impact through the year.

And -- I would expect at least some -- you mentioned it yourself, seeing some improvement on the cost side, I wondered if we could talk about where you see the most -- I guess, pressure would be the right word, on the price side or where you've got the greatest resistance there.

And I assume maybe that that would be Electrical Rest of World?

I would say the issue, generally let's go back a year when you had commodities increasing, fairly dramatically, lots of companies not just our own were trying to both find ways to cost reduce products, substitute materials and yes, selectively increase prices where necessary.

I think it's clearly a different market today.

I don't think there are a lot of price increases out there at this point.

Particularly with the uncertainty that's going on in the end markets.

And so we're continuing to work really hard right now to continue to find material substitution where necessary but also to continue to introduce the products that are really creating a real value for our customers.

And that's the way we think about it is that energy costs are starting to go up again right now.

We've all been watching that again the last three weeks and that's starting to put pressure on issues where people want to invest and we think we've got the high-value products that can really make that difference.

So my take away, Sandy, is maybe I've got this wrong, is that the elements are both about neutral as well?

In other words, not much change on cost side for the full year, not much change in price realization?

Yes, we've not given -- Rob, I appreciate your question, we've not given specific guidance on either because it's pretty much competitive information but the net of no impact is correct.

Okay.

Thank you.

Andy Kaplowitz, Barclays.

Good morning guys.

Sandy, you've talked in the past this year about building scale in the rest of world business to help that business, to help it out grow and to help it with margin performance.

How have you been doing this year?

How is the build out going?

And then is it possible to talk about how Cooper can help that business over the next year assuming the deal closes?

Let me speak to the Cooper piece first.

And I'll say just what we said when we announced the transaction is that if you recall going back into February of 2011, one of the items that we talked about in our conference in New York was that we were looking to increase our EBIT by about 4.5 points over a five year time period.

3 points would come from increase of segment margins, that was from the 13% to the 16% and we've since increased that a little bit higher.

The other 1.5 points would come in terms of corporate costs with the largest portion coming from lower costs coming from the pension plan.

We've not been particularly good predictors of the discount rate.

So let me move right by that one and talk about the balance which was about 0.5 points that was going to come through better absorption of corporate expenses.

And part of those higher corporate expenses had come that we had invested in infrastructure ahead of growing our businesses in rest of the world, and those are all our businesses, not simply the Electrical business.

What we commented when we announced the Cooper acquisition is it gave us additional volume into a number of emerging nations, where we had already built the infrastructure and should allow us then to reach our goals of absorbing those higher costs more quickly.

So that we do believe will happen as something we talked about in our announcement at that time.

And beyond that I can't really say too much more about the Cooper acquisition.

I'd say that assuming all our assumptions were up front in terms of what we announced, we still think that that would be true.

What are we building out in terms of our own rest of world activity?

Not only in Electrical but in businesses like Hydraulic and Truck and Automotive, we've been continuing to invest in these areas because we really do believe long-term that those markets will grow more quickly than the developed nations.

And so while the markets are weaker right now, we think the right strategic bet for our shareholders is to continue to drive strong participation in those regions.

Okay.

Thanks for that, Sandy.

Just shifting gears to Hydraulics, obviously your US Hydraulics business has been quite strong for you.

You mentioned ag.

Construction markets have been pretty strong.

What's the visibility like in that segment?

How long can you see out based on your backlog in that segment?

That it looks relatively healthy still?

We are back to backlogs that aren't as long as they were in 2007 and 2008 because I think at that point people were feeling that the world might never change and people had a little dose of reality, you've got to watch these cycles, but we've been operating at pretty similar levels from the business really since the third quarter 2011 through now.

And so I would describe this more as a period of stability.

You're seeing these negative booking comparisons to the first quarter and the second quarter of 2011 because those were just big booming quarters, both in China and in the rebuilding of the backlog by major OEMs.

So generally we're seeing out three to six months but our forecast is as good as our OEM's forecast is because they're the ones that are really providing us with the order commitments.

Got you.

And then at least for three to six months, things still look pretty good in both of those segments?

Yes.

They do.

And where we're operating at quite good levels and I think the difference really in our forecast just so everybody gets the tonality correctly is that what we're saying is that China doesn't recover in the fourth quarter and that Europe stays more or less like it is.

It isn't that Europe is getting much, much worse.

And it's not that we think that there will never be a recovery in China.

Okay.

Thanks, guys.

Jason Feldman, UBS.

Good morning.

On Hydraulics you've talked about the mobile side.

Could you give us a little bit more color on what's happening with the stationary?

Any particular areas of strength or weakness relative to what you saw last quarter?

I'd say fairly consistent and we're not talking about big percentage changes here.

I think clearly you're seeing US exporters having a little different situation on their hands than they had six months ago with the change in the currency.

But I would say that outside of the fracking market which was really, really hot as you came out of the end of last year, not dramatic changes at this point.

Okay.

And then lastly, the tax rate was cut with guidance.

I'm just kind of curious, because it sounds like the US markets seem to be holding up better relative to your expectations than some of the foreign markets, which presumably are lower tax jurisdictions, what are the dynamics there given what's going on with the US versus international end markets with the tax rate being lower, and your expectations for the year?

Jason, it's Rick.

Let me handle that.

Not all non-US markets are low tax markets.

Brazil, for example, is a very high tax rate country and so you have mix changes going on that are a little bit different than we thought about at the start of the year.

And as we referenced in our earnings release, we also had some actions taken in Europe that resulted in a lowering of some deferred tax liabilities and so there were multiple factors that resulted in the rate being a little bit lower than we had thought.

For the full year, we now think the rate will be about 2 percentage points lower than we had previously thought.

Okay.

Thank you.

With that we want to thank you all for joining us this morning.

As always I will be available for the remainder of the day and on into the week to answer any follow-up questions you might have.

Thank you again.

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.