伊頓 (ETN) 2013 Q2 法說會逐字稿

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

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

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

Instructions will be given to you at that time.

(Operator Instructions)

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

I would now like to turn the conference over to Mr. Don Bullock.

Please go ahead.

Good morning.

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

I'd like to welcome you all to our second-quarter 2013 earnings conference call.

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

We'll begin today's call with comments from Sandy and we'll follow up with questions, with a question-and-answer session.

Before we step into the presentation I'd like to take a moment and draw your attention to the statement on page 2 of our presentation.

Our presentation today contains certain forward-looking statements.

Comments on page 2 in the presentation will outline a series of factors that could cause actual results to differ from the statements.

Those factors are also noted in the press release and in a Form 8-K.

Additionally, we have a number of non-GAAP measures in the presentation as defined by SEC rules.

A reconciliation of those measures and the most directly comparable GAAP equivalent can be seen on our Investor Relations website at www.eaton.com.

At this point I'll turn it over to Sandy.

Thanks, Don and good morning everybody.

Thanks for joining us.

I'm going to walk through the packet of information that we posted in terms of our earnings presentation and so I'm turning to page 3 to start.

Just before I comment on this page, I will spend a little longer time this morning talking through our view of end markets because obviously they've had an impact on our guidance for the year and so I'll come to that in a moment.

Let's start on page 3, titled Highlights of the second-quarter results.

I would just remind everyone that this is the second full quarter of our results reflecting our acquisition of Cooper Industries.

Operating earnings per share of $1.09, that compared to our guidance for the quarter of $1.05 to $1.15 and a consensus of $1.11, as of last night.

Our sales were $5.6 billion, up a very solid 38%.

And that's about up 5.5% from the first quarter.

As you'll recall that our guidance when we left the first quarter and were giving guidance for the second quarter was that we expected our sales to move up seasonally about 7.5%.

We had said between 5% and 10%.

So we came in slightly short of that.

We are really delighted that in spite of the market weakness that drove that miss in sales, we had all-time record quarterly segment our operating margins of 15.6%.

I think if you've had a chance to look through the packet you've seen the really strong performance across our businesses.

Strong operating cash flow, $609 million.

And that our Cooper integration remains ahead of schedule.

We are really pleased with the progress our teams are making in this regard.

So we've increased our 2013 synergies by $25 million to $115 million.

I'll comment a little later in the pack on our view on 2014 and 2016, both of which have moved up as well.

What it is obviously allowing us to do is--these cost savings are helping to offset some of the market weakness that we're dealing with.

It really allows us to make some progress by controlling those issues we can control when the markets are a little bit weaker than we anticipated.

If we turn to page 4, just a quick reconciliation to our second quarter guidance.

You recall the mid point of our guidance was $1.10.

We had about $125 million lower sales than we had anticipated.

That's the difference between the 7.5% and the actual achieved 5.5% growth in the first quaarter.

That drove a negative $0.08.

Prior incrementals, you saw the very high segment margin was 15.6%, a new quarterly record for us, up about $0.04.

And the tax rate we said would be around 10% when we gave our guidance and it came in at 7%, that was about $0.03.

So all in all, that is about $0.01 short of what we thought we would be coming into the quarter.

Now if compare the first quarter to the second quarter, I think this is where it is perhaps easiest to get a sense for kind of rate of progress because we do have some difficulty comparing year to year because of the size of the Cooper acquisition.

The first quarter you'll recall our operating earnings per share, I'm on slide 5, was $0.84.

We had higher seasonal volume, about $290 million higher.

We were $5.31 billion in the first quarter, $5.6 billion in the second quarter.

So that's 5.5% I referred to a couple of times.

That drove about $0.19.

We didn't have the inventory charges from the purchase price adjustment that you recall that we had in the first quarter.

That was about $33 million.

You recall in the first quarter.

That did not repeat and won't repeat going forward.

That's a positive $0.06.

Our margins improved from 14% in the first quarter to 15.6% here in the second quarter.

And so that drove about $0.05.

This is improvement beyond the normal 33% incremental that we talked about this year and also the additional synergy, which is on the next line, that we incurred as we're continuing to ramp up our synergy savings from our acquisitions.

The tax rate was a little higher in the second quarter, about 7% versus 5% in the first quarter.

And our corporate expenses increased as we had indicated they would, up to a total, I'm including pension in this category, of about $85 million, so negative $0.04.

That's the reconciliation of you how we get from $0.84 to the $1.09.

Turning the page to page 6, a quick look as we try to compare ourselves back to last year's second quarter.

The second quarter you recall last year we were at $1.15.

The higher acquisition volume, about $1.6 billion drives about $0.66.

Our margins were higher.

Last year they were 14.7% at the segment level, this year, 15.6%.

Our tax rate was a little lower, 7% this year versus 8.7% last year.

And then you get into a couple of the items that are directly related to the acquisition financing, higher number of shares, were about 476 million shares this year.

We were about 339 million last year.

Purchase price accounting and amortization, that's about $66 million.

That's negative $0.18.

Higher interest as you can see looking at our income statement of about $41 million.

And then slightly lower core volume on the order of about $90 million lower volume in terms of core as the markets were weaker this year.

That's the reconciliation.

We know it's a difficult one for you to follow with all the puts and takes because of the acquisition and the associated financing and accounting.

Let's move to chart 7. Quick summary.

You've seen most of these numbers already in our press release.

Sales versus the first quarter were up 5.5%.

You see a very substantial increase in the segment operating margins from 14% in the first quarter to 15.6% here in the second quarter.

We think really good sequential progress in the business.

Turning to the individual product segments.

Let's start on page 8 with the Electrical Products segment.

Versus the first quarter, when we had sales of $1.66 billion, sales are up approximately 6% from the first quarter.

You see the very substantial margin progress, up to 16.2% from 14.7% in the first quarter.

Large contribution here obviously from the acquisition and this is all Cooper in this particular segment.

And then you recall, if you try to compare the second quarter '13 to the second quarter '12 numbers, recall of course that the Cooper numbers are not in the second quarter '12.

What I would tell you when you look within both the Eaton legacy and the Cooper legacy businesses, is we made solid progress in terms of margin improvement in both streams of revenue.

So really very pleased with the revenue performance here.

Bookings up 2%.

Markets not probably a surprise to you, stronger in the US, Middle East and Latin America, weaker in Asia-Pacific and Europe.

I'll come back and comment about that when we talk about our forward look.

As a result of this very strong performance here in the quarter, we're raising our segment margin to 16.5% for the full year versus our original 16%.

So really strong margin performance, integration performance here within the segment.

Turning to page 9, our Electrical Systems and Services segment.

Compared to the first quarter of this year--first quarter 2013, we had sales of $1.521 billion, and so as you see our sales are up about 7% compared to the first quarter.

Margins are up 14.7% versus 14.1% in the first quarter.

When you compare again back to the second quarter of '12 we had the same issue here, the Cooper products were not included in 2012.

They are in 2013.

Again, very solid margin progress in both streams here.

The acquisitions as you see contributing 78% to the sales.

That is the Cooper, Rolec and Gykom acquisitions.

Once again, very strong margin performance and as a result, we're raising our segment margin guidance from 14% to 14.5% for the full year.

If we turn to Hydraulics, compared to the first quarter of 2013 when our sales were $756 million, sales are up 2% sequentially.

Margin's up very strongly, 14.5% compared to 11.9% in the first quarter of this year.

The acquisition numbers you see in terms of contributing 10 points to sales, that is both the Jeil and the SEL polymer acquisitions.

And I think perhaps most important in terms of trying to understand the pace of this business, let's look at the bookings and drill down just a little bit in this area.

Bookings were down 12% versus a very strong second quarter of last year.

When you look within that, I think probably not a surprise in terms of the complexion.

Distributor sales were down for us on the order of about 9%.

OEM's down on the order of about 16%.

And when you drill down within that, no surprise, the larger weakness continues to be on the mobile side of the market where it was down about 18% whereas the stationery side was only down about 8%.

Looking around the world, probably not a lot of surprises in this regard too.

We've not seen a snapback in Asia-Pacific at this point.

Europe continues to be weak and the US is weak at this point, really led by the weakness on the construction and mining side.

Turning to page 11, aerospace.

First quarter sales were $434 million, so our second quarter sales of $446 million were up about 3%.

Again, very solid margin performance here, 15% in the quarter, compared to 14.3% in the first quarter.

Bookings up about 5%, not a surprise again.

I think here really driven by the strength of the commercial OEM market.

After market remains weak and you'll recall that we've said that we thought the first half of this year would be choppy in the after market.

Our expectation is it begins to stabilize in the second half of this year.

Very solid quarter in terms of margin performance and top-line performance.

Turning to page 12, the Vehicle segment.

First-quarter 2013 sales were $939 million.

So our $1.002 billion here in the second quarter of '13 up 7%.

Operating profit again a familiar story by now, a very solid quarter, really an exceptional 17.2% operating margin compared to 14.1% in the first quarter.

The big change here, you saw it in our commentary in our press release, is that we've reduced our NAFTA heavy-duty truck production estimate for 2013 down from 270,000 units to 260,000 units.

And just to anticipate a question, yes, we do still think the second half is stronger than the first half.

In terms of that layout with the first quarter this year having been about 55,000 units, the second quarter about 66,000 units, the third quarter 68,000 is our forecast, fourth quarter 71,000.

Those are all NAFTA production numbers adding up to a 260,000 full-year forecast, down 10,000 units from our earlier forecast.

If you turn to page 13, I think this really becomes the heart of our discussion with you today.

To anticipate questions here, I'm going to spend a little bit more time on this particular chart than we might ordinarily do so.

Before I get into the specific numbers, let me give you the backdrop to our thinking about what's happening globally in terms of economics.

We know there's been a rash of data in the last couple days that has seemed quite positive.

We'd like to put it in a little bit broader perspective and maybe a setting that is, I think, anchored by if you simply look at US GDP in the second quarter what you saw reported this week at a 1.7%.

I think what many have not concentrated upon is that the manufacturing industrial production number was 0.1.

So virtually no growth.

And so as we look around the world, I'll give you a quick rundown how we think about it.

We've obviously changed our full-year market growth guidance to 1% from the guidance we gave you at the end of the first quarter which you recall was 2% to 3% range headed towards the bottom of that range.

We think the global economy is trending up slowly, but it is a real mix of positive and negatives and we don't think we're being dour.

We think we are being realistic in this regard.

US is plodding.

Europe may be at a bottom but we see little prospect for a lot of vigor in a prospective recovery at this point.

And the emerging nations continue to be a mixed bag with China, India and Brazil being good examples of halting progress.

We do not see a major catalyst for change in the second half of this year.

If you think about just a couple end markets, construction is mixed in the US.

It's at best flat, perhaps declining in Europe.

Capital equipment is rising moderately in NAFTA and elsewhere.

Most global vehicle markets are improving and the EU decline and the slope is beginning to flatten.

But US defense and government spending are clearly ham strung by the sequester and fiscal challenges.

As we look here in the US, in Canada we see strong residential construction, weaker nonresidential construction than expected earlier in the year.

Weak Construction Equipment, we've seen indications of that over the last couple of weeks.

Weaker general industrial demand.

I think you've seen that from a number of companies who have announced here.

The utility demand is weaker than it was a year ago, particularly in the distribution segment.

We see flat to weak heavy-duty truck demand.

I spoke about the government issue and then we do see data center demand strengthening, both at the high end and mid end, particularly in terms of prospects for the second half of this year.

If we go to Europe, I think many of us were surprised with the high side PMI surprise we saw in the Eurozone.

And we are hopeful that means we're seeing the economic flatten, but that's one month.

That's not yet a quarter or two quarters.

Then Asia-Pac, I think most people were shaken by the China PMI down side surprise after a number of people felt they saw that market significantly increasing.

Demand continues slow in Australia.

And India I think we see a story of reduced growth from what we were used to several years ago.

As we look at all this, we think it's a fairly realistic appraisal at this point in terms of a 1% growth rate in terms of our end markets this year.

And GDP here in the US, for many of you who follow that in close order, being below 2% this year.

And so not a huge change from where we've been in our forecast but I know it stands in some stark contrast to the very bullish numbers that have come out in a number of areas until people saw jobs today.

I think as people start to concentrate on the industrial production, we see the growth here in the US as primarily on the consumer side, not the industrial side.

Let me bring it back here to page 13 which is our attempt to provide you some insights into our end markets as we see them by each of the segments as we report them.

So if the you take the two electrical markets together, we had been talking about the Electrical Products index growing at 3% in total and the Electrical Systems and Services index growing at 4%.

And so as you can see, these have come down a couple points.

Let me talk to you just about a couple of the places.

Let me do this by end markets.

If we talk about for both Electrical Products and Electrical Systems, our view of the European markets is that they've got to be down on the order of about 2% this year and that Asia-Pacific will be up about 3%.

That is a little weaker in both areas than we had thought earlier this year.

Here in the US, our view is the utility markets will be down on the order of 4%.

Nonresidential construction will be up 2% to 3%, it's weaker than we thought earlier in the year when we said 4% to 5%.

Residential I think we're all following, we think continues to be a strong number, up about 12%.

General industrial about 2%.

And power quality down 2%, after a very, very weak first half and then strengthening into the second half.

That's our view on the electrical businesses at this time.

Hydraulics business, not a big change from our earlier forecast.

We had been forecasting the Hydraulics index in the US would be down 5%.

We've weakened the index outside of the US from a negative 3 at the end of the first quarter down to a negative 5, anticipating that Europe's down about 4, Asia's down about 7 and Latin America down about 3. In the aerospace side, actually we've taken up our view here, really because the commercial story here in the US continues to get stronger.

The only real change we've made here is that we're talking about aerospace, kind of a 9% up instead of an 8% up in that market.

Then outside the US we went up from 4% to 5%.

So overall, aerospace increased from 2% to 3%.

In the vehicle area, really two I think salient changes here.

In the US growth number where we had been at a 1% positive growth, we're at a negative 3% and really the main issue here is our reduction of the NAFTA heavy-duty truck business.

To go outside the US, a little stronger.

We had thought it would be about 3%.

Now we think it will be about 4% and the real issue there is that we have seen Latin America growing less than 10%.

We now think it may grow as much as potentially 18% as we're seeing quite a recovery in the Latin American markets.

So when you step back from all of this, instead of seeing our markets in the US grow to 2% to 3% number, we think they'll be about flat.

Instead of our feeling the non-US markets will grow at about 2% to 3%, we think that they'll be at about 1%.

Putting that all together you get to about a 1% growth for our end markets.

Now, the bright side of this entire picture, when you turn to the next page which is when we talk about margin expectations is that we take our largest business, our Electrical business and move the margins up a half a point.

I think you've seen the demonstration of those margins in the first quarter.

And you've seen very strong margin performance in our Hydraulics aerospace and vehicle businesses which I think give great credibility to those numbers we have for our guidance in terms of segment margins for the balance of the year.

So overall, our margins will go up from the 15% earlier guidance to 15.25% for the full year.

Now, second part of the strength of this story is it's not simply the productivity in the business nor the 30% -- 33% incrementals that we're exceeding that we have provided as guidance this year.

But we are also off to an even faster start in terms of our Cooper integration savings.

You may recall that we originally increased -- we started this year with our synergies at $75 million for operational synergies.

At the end of February we moved that to $90 million.

We're now moving that to $115 million, so up $25 million from our most recent guidance, up $30 million in 2014 and when you go out to 2016, up $35 million, now a total of $440 million.

And we have increased those acquisition integration costs you see at the bottom by $40 million in 2013 and $30 million in 2014, as we're pulling some of these actions in more quickly.

Obviously, a question is where is it going better than we thought?

It's primarily in SG&A savings and some facility consolidation, additional work that we gave you a little bit of an indication we thought there was some more potential when we had our March -- early March analyst meeting.

I think very solid performance here.

If we turn to chart 16, our earnings per share, operating earnings per share and net income forecast for this year.

If you look to the top number there, $4.05 to $4.25, in terms of our operating EPS, full year guidance.

There's no change to the bottom end of that range.

That was the $4.05 that we provided this year.

We did reduce the top end by $0.20, as we're seeing these markets be weaker.

We are able to hold the lower end because of all the productivity, cost savings, good incremental work and better synergy savings that were occurring this year.

Our third quarter $1.05 to $1.15 in terms of our guidance for a midpoint of $1.10.

On page 17, if I could take you through this somewhat busy chart in terms of our operating EPS guidance for this year.

I think I can simplify this with you for a couple comments.

So let me do that.

On the acquisition line, the $2.66 is up $0.18 from our last guidance to you.

And that's the addition of $25 million of integration savings this year, that's the moving from the $90 million to $115 million, and it is higher base productivity in the Cooper, Jeil and SEL businesses as the businesses are running even better than we thought they would.

So up $0.18 there.

The organic growth at 33% incremental margin, no change in the incremental margin but the volume is down from what we provided you earlier of $900 million was our earlier estimate.

We brought that down to $350 million.

That is the impact of reducing these overall markets.

That's down $0.45 from what we provided you at the end of the first quarter.

Then additional expense control, this is additional productivity and cost saving work beyond the integration savings and beyond the 33% incremental.

About a positive $0.15, it's about $55 million and I think those are the actions that we've been able to take and our teams have been able to achieve across the Company to maintain profitability during a period of reduced market demand.

Really good work there.

The total of that top group is a negative $0.12.

The higher number of shares, $1.47 is $0.02 better than our previous estimate.

So, when you net the negative $12 up top and the $0.02 there, that's how you get the $0.10 reduction from $4.25 to our guidance now at the midpoint of $4.15.

If we turn to chart 18 this is a comparison of the second quarter this year to the third quarter this year, supports our guidance of $1.10, the midpoint.

We start with $1.09 that was reported for our second quarter this year.

We're anticipating higher seasonal volume but it's pretty nominal.

It's about $75 million.

Again, reflecting the fact that we don't see an accelerating economy.

That's taken again at a 33% incremental, gives us about $0.05.

Additional acquisition synergy as it continues to ramp up quarter to quarter you through this year of another $0.01.

We're anticipating a slightly higher tax rate in the third quarter of approximately 9% versus the 7% during the second quarter many that's negative $0.02.

Then higher corporate expense of about $15 million, so it would be a total of about $100 million.

I'm including in here our corporate expense, pension and amortization.

So that total is about $0.03 and that gets us to the overall $1.10.

So if we move to chart 19, chart 19 simply a summary of our outlook.

You'll recall that the $350 million of core revenue growth compares to the $900 million in our last guidance we provided you.

No change to the $6 billion of net acquisition revenue, no change to the incremental margin of 33%.

No change to the tax rate of 7% to 9%.

The change at the operating EPS full-year forecast is simply at the high end of the range.

It came down from $4.45 to $4.25.

Our first guidance for the third quarter and operating cash flow in light of the weaker overall volumes coming from the lower market this year, both -- the operating cash flow both at the lower end and higher end have been reduced by $100 million.

You notice the free cash flow has only been reduced by $50 million at both ends of that range.

That's due to the fact that we reduced our CapEx this year from $700 million to $650 million.

And then finally, if we'll move to chart 20, the final chart in this packet, just a quick summary of I think the themes you heard me refer to as we went through this.

The markets started off weaker.

You recall we were down with organic growth about 4% in the first quarter, 2% in the second quarter, and they remain weaker than we originally anticipated.

I went through in some length those markets with you to try to give a granular feel as to how it supports our thinking.

Secondly, we're really very pleased that we're delivering higher operating margins, higher than expected in terms of our segments by a quarter of a point.

You saw specifically we took them up in our two Electrical segments and continue to have very strong performance across our industrial businesses.

And then also are very pleased with the terrific work that our integration teams are doing.

Specifically here, we've increased both the full-year 2013 and each of the future-years, 2014, '15 and '16 forecast for increased savings.

So as we think about the quarter, it's a quarter all about controlling what you can control.

And we can't control our end markets but we can certainly control our segments in terms of our operating margins and the productivity work and the integration work.

And I hope you see in the results that we've chosen to pull forward a number of these integration activities as markets have been weaker.

That's allowing us to get at the synergies more quickly and the $55 million of additional savings this year that are not related to the acquisitions and they're not related to the 33% incremental I think are an indication of the effectiveness of all that productivity and cost control work in a period of weaker demand.

So I hope we've given you a little bit more of a granular understanding for our thinking around markets because we anticipate that's where a lot of your questions may be this morning.

And with that, Don, I'll turn things back to you.

If you would, our operator will give you some instructions regarding the question-and-answer session.

(Operator Instructions)

Our first question this morning comes from Steve Winnaker from Sanford Bernstein.

A lot to cover here but just maybe first on the outgrowth versus the markets.

You've talked obviously a lot about the market weakness that you've experienced.

But traditionally you've given us a very good flavor on how you think Eaton has done relative to those markets.

Could you maybe provide some color across the portfolio about how you think you did on a relative basis and why?

Yes, Steve, we indicated in our first quarter this year that we would not be providing quarterly breakouts on that during this year.

We will do so at year end.

Really the reason why is we've got a number of new businesses and a very large number of data streams.

And I can tell you with what's just been issued this week in terms of the re-basing of some many of our traditional data streams, it's very difficult for us to do that on a quarterly basis.

So our sense is, I can tell you across our businesses, that we're doing well in these businesses but we don't have an ability to quantify it this year.

Okay.

All right.

Maybe talk a little bit about what you're seeing in non-res specifically.

You talked about it being weaker than your prior expectations.

What do you think' s driving that?

What are you anticipating?

Are you seeing any inflection points there?

I would say not an inflection point but I would say certainly on the government side, those projects that are government financed, you're seeing a negative number in that segment and so the private put in place, if you will, is stronger than this 2% to 3%.

But you're seeing a government side which is on the order of sort of a negative 5% to 6%, and that is providing, I guess I would say, some downward pressure on that.

We see a lot of projects being talked about, a lot of projects being bid.

But there's some caution I guess I would say in the marketplace that I think is very much what we're seeing broadly across our businesses here in the US, where people aren't quite sure how to really continue to invest in a GDP that's clearly not going to reach 2% this year.

And so I think that degree of caution, while you'll find individual segments where people are very bullish, you'll see other areas where people are really kind of biding their time.

It's say it's not a lack of projects on the drawing board or projects that are being bid, it's really more kind of getting them released and moving them forward.

Okay.

And just before I hand it off, could you maybe give us a view sequentially in the third quarter by business unit, sales and margin?

We don't go into the specifics in terms of our guidance in terms of -- I could tell you kind of from a historical point of view.

Generally you've seen vehicle markets have a third quarter because of some of the shutdown periods that's a little weaker than the second quarter.

Generally, the second and third quarter are your stronger Electrical segments out of the year with the fourth quarter being a little weaker and the first quarter being the weakest.

Aerospace tends to be fairly consistent through the year.

Hydraulics generally is a little weaker in the second half than it is the first half.

Those are sort of the patterns how they normally lays out.

That's what you assumed more or less?

Yes.

The one business that I think you get a little difference, we talked about the first quarter and it is still true, even with our 260,000 unit forecast is the North American heavy-duty truck market.

From those numbers I provided we do expect ramps up during the third and the fourth quarter.

And as we talked with many of you over time, the critical element there is really seeing the orders come in and we did see some weaker order patterns here at the back end of the second quarter in that business.

That's the reason we had dropped our forecast by 10,000 units.

Thanks.

Let me hand it off.

Yep.

Our next question comes from Joe Ritchie with Goldman Sachs.

Good morning, everyone.

Good morning, Joe.

So as I think about the cadence for the rest of the year and what your guidance implies, it looks like second half versus first half you're looking at about a $0.20 increase in EPS at the midpoint of your guidance.

I think some of it is going to be seasonality.

Clearly the cost outs are also increasing the back half of the year.

So perhaps maybe you can provide some color on how much of that increase is expected to come from the cost outs versus seasonality versus volume improvement.

You can tell by our guidance, Joe, for the second quarter only up $75 million on a $5.6 million base, we're not counting on a lot of volume here in the second half.

And we just think in this marketplace we're better to manage our business assuming that the markets aren't going to get a lot stronger.

We do get obviously, higher integration savings are one of the largest drivers here in the second half and that's very much within our control.

I did mention that in the third quarter we're going to see higher taxes.

We're also going to see higher corporate expense and that will play out in our own guidance we think in the fourth quarter as well.

So I'd say the two issues that are kind of tugging on one another is not a lot of help from higher volumes in the second half.

We will drive our own additional higher profits from our integration and productivity work and that will be offset to some extent by the higher taxes and the higher corporate expense.

And part of that higher corporate expense for those of you who have gone to the balance sheet already is that our intangible expense coming from these acquisitions is going to be a little higher than we had originally anticipated, being offset in some other areas but that's going to flow through here in the second half.

So I'd say those are the elements that tend to kind of push one another.

That's helpful.

And as it relates specifically to the cost synergies, it seems like you had a $0.01 incremental benefit this quarter, expecting $0.01 next quarter.

Is the fourth quarter supposed to be a big quarter?

As I was tracking I thought you guys for this year had $35 million that you achieved thus far.

I think the target for the year is 115.

I just want to make sure my numbers are right.

I'd say we're on the order of $35 million to $40 million here in the first half and then the balance happens in the second half.

That's why I say we do get a positive from the integration benefits and it's the largest portion of what drives higher profits in the second half.

Okay.

And then one last question.

I think maybe too early to start talking about '14.

Maybe you can talk about some puts and takes.

It seems like the cost-outs alone will add about $0.18.

There would be a pension tailwind.

Any puts and takes as you see it today as we head into '14?

Yes, I'd say the only one that we'd be really comfortable talking about, because it's a little early to get to '14, is that clearly we're going to get the integration savings that we talked about and that is a positive.

You saw that we did increase it for next year, as well, and so that is a positive to us.

And I think as you stand back and think about the economic situation, for those of you who think Europe is already turned up, we're not yet in that mode.

But at some point out of this very stale situation that's been there for a couple years we're going to turn from a negative to something being more stable.

And for those who are most optimistic, maybe very slightly positive.

China has been going through a real digestion period.

We think that continues but at some point that begins to stabilize as well.

And we think we're in a period of time where until you solve the fiscal issues here in the US, you've got relatively low growth, similar to what we've been facing the last couple years.

So we think most likely we're in a period of time here for global economies that you don't get the propulsion that we got used to many years ago out of the emerging nations because they've got some issues as well.

Means you've really got to find a way to create your own sources of profit growth.

That's why we're really pleased that all the work that's going on in terms of increasing margin, whether that be from higher productivity or integration of these large acquisitions that we completed last year is really providing that opportunity.

Okay.

Thanks.

I'll get back in queue.

Next question comes from John Inch with Deutsche Bank.

Good morning, everyone.

Good morning, John.

Good morning, guys.

Hey, so the magnitude of the sort of end market revision, one it's not really that surprising and it's not a big number but it does come only sort of three months later and it's not as if there seems to be a lot that's really changed.

I'm sort of thinking Sandy, you were relatively more optimistic at EPG toward the end of May with respect to Lighting, new products, et cetera.

Can you just help us with trying to put this into a context in terms of--perhaps did the month of June get a lot worse versus what your trajectory had been expecting?

Just seems like Hubbel and some other companies are more constructive.

Maybe you're more realistic.

Just trying to put all this together.

Glad to, John.

I think if you remember our guidance at the end of the first quarter, and I repeated it down at EPG, was that we started the year thinking our markets would be up 2% to 3%.

At the end of the first quarter, we said after what we've seen in the first quarter, we think pretty clearly it's going to be toward the lower end of that range, it's going to be more like 2%.

And we're now saying we think it's like 1%.

So I think the difference we're talking about is really that difference of that lower end of the 2% to 3% range, down to the 1%.

Having said that, you kind of go around the world and say what's a little different than you might have expected back at that time period.

Here in the US, I think that we haven't seen the truck orders come in that we thought were going to come in and so that's that drop from -- remember we said that we thought you'd have to start to see monthly truck orders of 20,000 to 25,000.

That has not materialized.

Secondly after a very strong quarter of quarter-to-quarter booking progress in the Hydraulics business, we've seen a quarter now where it was down 12%.

And then I'd say not much of a change in aerospace.

I'd say third in the Electrical business, that we saw growth come in through the quarter, about a point lower than we had thought.

And as you look to the pieces of that in terms of you how it materializes, I'd say the non-res issue, the outlook has slowed a little bit from where we were.

Res is fine.

Utility market I think people -- you've heard most of the people comment on utility, that it's softer than people thought and we have seen that as well.

And then I'd say the last piece in that regard has to do with how we think about Europe and Asia-Pacific.

They have not, what I call, stabilized quite yet.

And so we still saw more negative numbers in those regions than we had thought would come in.

I wouldn't say the quarter decelerated greatly.

Our individual months were fairly similar.

I'd say what we lacked was an acceleration during the quarter.

Okay.

That kind of makes sense.

How did Lighting, Sandy, do?

Very well.

It was one of those areas in our Electrical business that was really smoking in the quarter.

And so very healthy double-digit increases and really delighted with some of the new products I've spoken to a number of you about.

When you think about that whole wave stream LED recessed commercial Lighting area, it's really doing well and winning large tenders.

A lot of your product obviously runs through distribution.

And I realize a little bit -- there's subtleties between Hydraulics versus Electrical.

Did distribution play a role in some of this?

Was there some incremental de-stocking that you could tell?

And kind of the corollary to that question is you guys are doing much better, or at least better on Cooper perhaps and just wondering like in all these situations sometimes there are distraction costs that are created.

I'm just wondering if maybe you lost a little bit of share, may be hard to quantify just around the edges, maybe not that material but it may be happening because you're doing --you're just focused on Cooper.

John, we don't think so.

It's something that we monitor pretty closely and I would say that I think distribution had a good quarter, not an outstanding quarter.

And I think that's, again, reflected by some concern.

If you're a resi guy, life is just spectacular.

If you're someone who is a balance that's dealing with resi and non-resi and industrial MRO and maybe some utility work you've got some elements in there where there's some areas that are going a little softer on you.

And if you're a person that's really oriented at single phase power quality you've had a really rugged first half.

And so I'd say it's a little different by the type of distributor but no, we do not see and we get pretty good market share data out of organizations like NEMA for example, that we don't see any evidence of that.

Just finally here, I know they are these OECD tax meetings.

I hate to kind of bring this up but I don't know if Rich -- is there something that's percolating behind the scenes that would in any way cause you to think perhaps somewhat differently in any kind of a context, positively or negatively, about obviously your tax rates which are much lower than everybody else because of your Irish status?

the report you refer to is one that came out a week ago Friday and which the OECD published 15 principles.

And they've put together work groups to look at these streams of areas.

But no, we've said before we're Irish incorporated.

We have no special deals in Ireland and so we don't think the issues pertain to Eaton.

Perfect.

Thank you very much.

Our next question comes from Ann Duignan with JPMorgan.

Hi.

Good morning.

Good morning, Ann.

Good morning.

Sandy, on the public construction data- you know we published it this morning also.

We have seen a significant deceleration in public spending since sequestration and given that we face another potential $40 billion incremental cut from sequestration going into next year, how confident are you that public construction segment won't deteriorate further before it gets better?

I don't know that we can give you assurance on that, Ann.

Those numbers look to us like in both the first quarter and second quarter this year they were down about roughly 6% from a year ago.

Those are some pretty big numbers when you think about usually peak to trough in these markets is kind of on the 30% to 35% side.

You are seeing some pullback there.

I think perhaps the bigger question is whether the private put in place which has been running more in -- this year, more in this kind of 3% to 4% area, does that begin to pick up as you continue to see job hiring go up, unemployment comes down, very nominally but it has been coming down by a tenth or two and that's the kind of balance we're looking a at.

We're seeing a fair amount of activity in the commercial area which is usually in one of those areas that's more interest-sensitive so you would expect to see that.

So that's kind of our eye.

But we can't give you a guarantee.

None of us really know exactly where sequestration is going to fall out.

I think the same question pertains to the aerospace market where we've been forecasting sort of a 6% contraction.

You're seeing a lot of people now beginning to talk about the individual services, talk about how they're meeting those.

And in many cases they're what we would consider employment and forces reductions as much as they are capital equipment which is more where we tend to get involved.

Okay.

That's good color.

Thank you.

Then for more strategic standpoint, this is probably not a question you're going to answer directly but I'll throw it out there anyway.

Part of the reason for the negative earnings revisions this morning was Hydraulics and Trucks and just kind of highlight and remind investors that Eaton still has machinery exposure.

I guess my question, Sandy, is why wouldn't you look at the strategic rational of having those businesses in your portfolio going forward?

I'll come back to your question in a minute.

If I could maybe correct one piece.

When you look at the overall markets, actually the Electrical markets which are markets we're quite bullish on as well as the others, came down and had an influence as the other markets did.

Just to kind of correct that base period.

We actually, let me come back to the other comment about Hydraulics for a minute.

Hydraulics obviously, we think, has gone through a big adjustment as construction equipments was over built around the world.

The prospect we think is the growth is really quite good in that segment going forward.

We've come through two years of fairly difficult adjustment here and so we think there's a real opportunity to create shareholder value there.

And in the vehicle market, actually the growth rate's not bad.

It's really if you look at the light vehicle side of the marketplace, I think it's where you're seeing a number of people report some fairly exciting sales and earnings opportunities.

And you see the 17.2% margin, the highest margin we have within Eaton in that individual segment, I think are indications that we think we can continue to create real value there.

So as a power management business we continue to think they fit.

Okay.

I'll leave it there and get back in line.

Thank you.

Our next question comes from Steven Volkmann with Jefferies.

Good morning, guys.

Good morning, Steve.

I'm wondering if we can just talk about these changes in the Cooper synergies a little bit.

Obviously you raised those numbers.

But you also raised the costs associated with that.

We should be sort of looking at that net I assume, right?

Yes, no, I think the cost to achieve is obviously they're incurred once.

We get the repeat in terms of what happens over multiple years in terms of the savings.

Basically there are two reasons that cost has gone up and the savings have gone up.

Number one, we're finding even more SG&A savings than we had originally estimated.

They're happening more quickly.

And those will run into the future.

I think that speaks well to the future margin character of the businesses.

And then secondly, as we had talked about--as Tom had shared with you in the March New York meeting, we think there's more potential on the side of the plant consolidation as well.

Generally, the plant consolidation is a little bit more expensive than SG&A and we announced a number of facility consolidations.

I'm not going to get ahead of the process of our other announcements at this point.

We think there's very attractive opportunities there for productivity and efficiency and improved service to our customers.

So yes, we are up that 40 and 30 on the integration side.

Through the time period being up $25 million savings this year, 30 and 35 and 35, we think we well pay for that increase and more.

Okay.

That's good color.

But really for 2013, the net is a bit of a headwind here.

Yes, in terms of the fully diluted, that is correct.

Great.

Okay.

So that was one thing.

I was just curious I think John sort of started to ask this question but with respect to distribution and I guess I'm thinking more specifically in Hydraulics, are you able to see anything kind of specifically going on with the sort of de-stocking at the distributor level and any color on sort of where that process may be?

I think if I could take us back to our comments in the first quarter, we thought we saw more of that distributor de-stocking toward the end of last year and the first quarter.

I don't -- we don't believe there's a lot of active de-stocking going on at this point, although the distributor demand is weaker.

We think that simply reflects their end markets, not so much that they're thinning their inventories.

They're pretty thin right now.

What we've not seen is a really active restocking there.

But I think again, put yourself in the position of any one of these business partners who are looking at end markets that aren't positive right now.

And so I don't -- we don't sense that it's a really active de-stocking, it's just that they aren't feeling they're having to put a lot of inventory in anticipation of a immediate snapback in the market.

That's super helpful.

Thanks so much.

Next question comes from David Raso with the ISI Group.

Good morning.

Good morning, Dave.

I know I brought this issue up last call as well but the concern around the core volume implied growth.

The first half of the year the core volume on a pro-forma basis was down like 3.5%.

To do the full year number, the second half's got to be up 6.8%.

I think the sector's sort of facing this right now.

If you look at your comps from a year ago, the comps get easier.

First half of the year, standalone Company, core growth was positive 3% to 4% in the first half, negative 4% in the back half.

Comps alone I can see why the core business in the second half should be positive.

But the 6.8 seems like a strong enough number.

I'm just -- when you hear your description of your end markets, just doesn't sound like it's a 6.8% type back half of the year.

So it was asked a bit earlier but are there some markets on an out performance basis or am I doing my math wrong?

Just doesn't feel like a back half of 6.8% from everything we're hearing on the call and obviously the work that we do.

We've been through that exact same analysis by project, by segment, by quarter.

And we do think it all fits together.

Let me just take a couple to give you a sense for.

Probably the one that's easiest to actually get your head around is the vehicle issue, where you're continuing to see a strong retail demand here in the US for light vehicle.

You're seeing Europe is not declining like it was.

You're seeing South America strengthening and you're seeing Asia-Pacific strengthening.

That was all light vehicle.

On the heavy duty side I think we can quickly get our heads and the fact that there's a ramp in the second half.

I think we can sort of take vehicle and put that one on the side.

If we take aerospace, aerospace I think if you looked at our bookings, quite strong during the first half of this year.

I think they support what we have in terms of the shipments, our bookings have been going up faster than our shipments during the first half.

In Hydraulics where you had quite a severe contraction in the first quarter, but very strong bookings if you recall them.

Less of a contraction here now in the second quarter, is our anticipation that business again, as you said, weak comps starts to compare better in the second half because you recall it was running off in the second half of last year.

Then in the Electrical business, seasonally a strong quarter in the third quarter, resi tends to be a big quarter in the third quarter.

I mentioned earlier in my comments, it perhaps was very early in the call, that we see quite a difference in the power quality markets in the second half to the first half, because particularly the three phase area has strengthened very substantially on the bookings side.

We've got good visibility now in terms of what we're shipping in the second half.

That's really -- those are the major pieces.

Excuse me.

Europe, we think is more stable in the second half than it was in the first half.

And we think actually Asia is a little bit better in the second half than it was in the first half.

So those are the elements as we have gone through this by each of the businesses and each of the regions to support our view of the second half versus the first half.

Let's say if like last quarter we find out the core volume guidance was a little bit aggressive for the latter part of the year.

Are there some levers to pull on the cost side?

I'm not sure how much people are willing to pay for it.

But the tax rate always seems to save you a couple pennies every quarter.

Versus what we have as a core growth story for the back half.

I would still argue that last quarter looks a little optimistic.

Are there some levers to pull on the cost side to feel comfortable with the back half of the year even if core volume did disappoint?

Are there things that were maybe another incremental boost to the synergies.

Just trying to understand the downside business isn't 6.8, it's 4. How do we offset that?

And then the thought of course what's that kind of run rate mean going into next year.

I think clearly what you heard us talk about here in the second quarter, David, is exactly the sort of thesis you're postulating there.

In a slow growth marketplace you've got to find ways to create sources of profitability.

I think we've been pretty successful in doing so.

I can't tell you I know exactly what that individual lever is at this point.

That's exactly what our teams have been working all through this year.

That's why you see us with $55 million of higher savings than the 33% incremental would suggest.

That's a very high incremental, by the way.

And above the increased $25 million in the integration savings.

So those are exactly the issues we're continuing to work because I would tend to agree with you.

It is that it's hard to predict in this kind of an environment exactly what the global economy's going to be because it's full of pluses and minuses.

Which by the way is characteristic of when you have slow growth because there's just not as much of a variable to work with.

And so our -- obviously the reason that we're sharing with everyone a you view of the market, it's a little bit more calibrated.

I think what people were hearing in the last two to three days is it's our belief that just like the last three years, where people got too enthused with economic growth early in the year, and then we're facing dramatic slow downs as the year went on.

We're trying to manage within that envelope.

And that's the reason we're putting the real premium on cost reduction, margin improvement and asset management.

I guess last question, you can answer as much detail as you wish.

Hopefully good detail.

If next year another muddle through economy.

You can move the geographies around but another modest, modest core growth year.

How does that impact how we think about the synergy opportunities and ideally if somebody wants to quantify it would be great.

If I gave you that kind of 1% core growth for the year, what can the Company do next year, could be outgrowth, could be obviously some synergy savings, I mean, however you want to use the balance sheet, I'm just trying to think about how much can this be a self help versus we can self help for the first year or so with Cooper and there's some synergies but at some point I need 3%, 4%, 5% core growth again.

I'm just trying to get a feel of how you feel for how you plan for next year modest growth, how does it change how you act and what you can do self-help wise.

I think the chart that was in the packet, I'm just paging through the page number here, it's the one that's got the integration savings on it.

I think is a good place to start.

It's page 15.

Because obviously you see a jump there in the operational synergies between $115 million and $210 million.

I think a very important source of additional profitability to the Company.

That would assume if you had nothing else, that occurs.

Now I do think there will be something else.

I would say however that to be consistent with what we've said with our economic forecast, we think the US will improve so there will be growth but we're not forecasting a breakout in the economy.

We are thinking that Europe gets a whole lot closer to stability or potentially positive.

I think China will be a more stable story by next year than it is now.

We did see good progress in China between the first quarter and the second quarter this year.

Our sales were up 20%.

Now, having said that, we don't think the economy is jumping and you normally see some sequential increase between second and third.

But we were up most solidly in our vehicle businesses in China as you would expect, the automotive market's been quite strong.

We were up high-single digits in our Electrical business.

We were still down in our Hydraulics business.

Mobile oriented there as well.

And I do think you're going to continue to see these emerging nations get better but they're not going to be quite the propulsion that we saw a number of years ago.

We haven't put a number on what we think end markets are next year but it feels that it would be better than it will be this year but we haven't really tuned it up at this point.

The incremental synergies add 4% EPS growth off the base right there.

So at least there's -- from the self-help aspect, synergies give you 4% growth from a baseline perspective.

That's obviously why we're pulling the synergies ahead is we recognize in a slower growth marketplace those sources of profitability become even more important.

Now, we're not taking our hand off the growth issue.

We've got a whole string of new products and we can manage up quite well.

We just think the danger in these types of markets is that people plan for too much growth, let their expenses get out of control and their working capital out of control and then you end up with a period of time where people are trying to pull back expenses.

That's not an error we want to make.

We're quite confident we can scramble upwards if we see the volume occur.

Thank you.

I appreciate the time.

Thanks.

Next question comes from Jeff Sprague with Vertical Research.

Thank you.

Good morning.

Good morning, Jeff.

Good morning.

Just a couple things.

First, just to the balance sheet, can you explain a little bit what is going on with the big bump in intangibles?

I see goodwill actually came down but the movement in intangibles is much larger.

How do we think about that actually amortizing through the P&L on what kind of time line, this additional increase?

Jeff, let me address that.

As you know, when you go through a purchase price accounting it involves a series of detailed analyses of the various categories of intangibles.

Just having bought Cooper at year end and at March 30th we had not, or our outside appraisers had not, gone through all of the details that you need to go through.

We've now been through much more of that.

We're not 100% done but we're certainly well beyond 50%.

The conclusion is that the intangibles, particularly the trade names, were more valuable.

But also as we refined our plans around how we're going to use the trade names, how they're going to be used over time in particular, we concluded that the amortization period would be a bit longer as well.

The net of it all is that amortization costs go up by between $10 million and $15 million a year.

As a result of the change in the intangible valuation.

Thank you.

Sandy, a lot of questions I think people trying to get around outgrowth and things like that and your answer was kind of understood.

One thing I am trying to just understand though is what's going on in Asia with your business.

Electrical business in particular.

A lot of mixed results from folks.

Schneider had a good performance in Asia, Rockwell was up in China but down elsewhere.

Mixed bag out of ABB, slightly positive.

Can you just give kind of the state of the world and kind of the Electrical franchises in Asia as you see it, and where you might be gaining or losing ground?

Our Electrical business as I mentioned was up high-single digits second quarter versus first quarter this year.

I'd say the biggest portion of -- I'm speaking specifically to China right now.

And I think there--while the mining market has been weak, weaker in China than it's been before, we are seeing the market get a little bit better in that regard.

And just to kind of complete the picture, I mentioned that Hydraulics in China was down and vehicle was up.

And so like you've heard from a number of companies, second quarter was substantially better than the first quarter in that regard.

There too, we've seen that with the pressure on liquidity, particularly for smaller customers, there are certain segments of the market that have not been as strong and I would take just single phase-power quality as an example of that which tends to go through smaller distributors.

Liquidity pressure is really being felt by some of those smaller firms.

I'd say that's the only maybe kind of unique element that we've seen in that regard.

And then just finally, what is the prospect for some share repurchase this year?

Obviously as you look into next year, you've got a very strong cash flow.

I see you're bringing your debt balances down already.

But at what point do we maybe get kind of a mix of share reduction and debt reduction kind of in this post Cooper period?

Really no change in game plan there, Jeff.

We indicated really our number one issue obviously we start off is financing our R&D and capital expenditures, our dividend which we had increased this year.

And then we said really that with the free cash flow after that working first priority really to reduce this debt and we kind of scheduled out for everyone a couple different times.

Was about $2.1 billion of that 4.9 billion that we would get repaid.

We've done just over [$300] million of that.

We've got a larger tranche, order of $550 million that comes due next year.

We have not anticipated beyond simply neutralizing dilution that occurs as a result of option exercise.

We're not anticipating or forecasting any share repurchase.

Thank you.

Our next question comes from Christopher Glynn with Oppenheimer.

Question kind of going back to Joe's, looking for some complexion of 2014 puts and takes.

Trucks coming through a little slower here but FTR forecasting very high utilization rates in the become half.

Seemingly at odds.

Wondering if you have any thoughts from customer discussion or otherwise to see how that could trend.

I think the real critical issue in terms of trying to understand that market demand is going to be watch orders here during this third quarter.

Because to support the fourth quarter ramp-up that we outline in terms of our guidance, we've still got to see those orders start to come in above 20,000 to 25,000.

And so a little difficult to call '14 at this point.

We do see fleets making money, plenty of freight at this point, all those kind of drivers seem to be positive.

But in spite of that, orders were a little weaker here at the end of the second quarter and that was our reason for bringing it down.

We don't -- we see all the indications for why it ought to be stronger, but it's not.

Understood.

Thanks.

Our next question comes from Nigel Coe with Morgan Stanley.

Yes, thanks.

Good morning.

Good morning, Nigel.

You've covered a lot of ground.

Really appreciate all the end-market color.

A couple quick ones from me.

I think the big theme from the quarter was obviously excellent cost control and execution on Cooper.

The $0.15 from the additional cost control in the bridge, Sandy, just want to clarify.

Is that structural cost savings or somewhat discretionary that might come back in '14?

I don't know I can give you a precise characterization on that but I think that level of productivity and focus is something that I would hope we can continue to repeat at this point.

I think it's just a reflection of around the world everybody recognizing that markets are a little slower, so we have to find ways to continue to do it.

There was not a big restructuring cost we took to do it.

It's more a series of hundreds and hundreds of projects and programs people are working on.

So I tend to think about that more as something we ought to expect as a baseline for us, not something we end up giving back.

Okay.

And then just into aerospace.

Again, you referenced the better trends in after market in the back half of the year which still is reasonable to me.

In spite of the weak, your margins were north of 14%.

I'm wondering if we get a richer spares mix in the back half of the year, why wouldn't aerospace margins expand from here.

Well, what we really like to see is to see, as you mentioned, that driver of the bookings start to materialize on the after market.

Because they really did not here in the second quarter.

There was lots of talk at Parish Air Show this year.

Almost everyone was talking about the expectation of the higher after market bookings.

We'd like to see them.

And I think if they come in at the volumes people are talking about, that is beneficial.

But we would like to have them on the books first.

Okay.

That's fair.

Finally, looking at the tax rate, I've gone through the last 10 years.

Your 4Q tax rate is usually your lowest tax rate for the year.

I'm just wondering that [difference] in range.

Is 7% more realistic than 9%?

We continue Nigel, to believe that 7% to 9% is where the full year will come in.

There isn't really a seasonality in tax rate.

It is based upon the precise mix in the given quarter.

It's also based upon a variety of items that get resolved around the world.

It's also now as we're continuing to complete all of the projects related to the movement to Ireland, it's the impact of those projects being completed.

And it's a very complex thing to forecast but we continue to believe that the tax rate in the second half of the year will be a bit higher than the rate in the first half.

Okay.

That's very helpful.

Thank you very much.

We're going to be able to take one additional call since we have run past our normal scheduling time.

Our next call would be Andrew Obin with Bank of America.

Just a question on the vehicle margins.

Very impressive margin.

Europe auto seems to be getting better.

Brazil which is a very good business for you is doing quite well.

Specifically you highlighted increasing forecast there.

Why are you leaving the vehicle outlook unchanged.

I would imagine Brazil would have offset North American margin wise.

Can you talk a little about the interest segment dynamic?

Andrew, I think your characterization of the regions is correct from our view and I think the good news is that the rate of decline in Europe has begun to get less.

And clearly the new news in this quarter in terms of our guidance was the strength in Brazil.

Having said that, normally the third quarter is a weaker quarter from a margin perspective than the second quarter is and that's a result of some of the shutdowns.

We're seeing as we mentioned, good demand on the retail side.

That's also true -- excuse me, light vehicle side.

That's true in China as well where that market's quite strong and is the reason that our vehicle market is up so strongly, vehicle business is up so strongly in China.

So I'd say in terms of the margins, it's just the expectations that you see this down in the third quarter.

The second quarter is often the strongest quarter in terms of margins in that business.

And can you just comment what are you seeing in terms of pricing and sort of price less cost going into the second half and how is it versus your expectations?

The way we tend to think about it, you heard us talk about it before is really trying to have a pricing and commodity pressures be relatively neutral and that's to the main very much our experience this year.

Thank you very much.

Thank you all for joining us today.

As always, we will be available to take calls and questions throughout the day and next week.

Look forward to speaking with each of you and again, thank you very much for joining us on the call today.

Thank you.

Ladies and gentlemen, that does conclude your conference call for today.

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

You may now disconnect.