伊頓 (ETN) 2014 Q1 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Senior VP of Investor Relations, Mr. Don Bullock.

Please go ahead.

Good morning.

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

Welcome to Eaton's first quarter 2014 earnings conference call.

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

As has been our historical practice, we'll begin today's call with comments from Sandy, followed by the question-and-answer sessions later in the day.

I do want to let you know that we understand many of you have a very tight schedule today with a number of calls.

What we will do, is we will be holding our call to an hour today in respect of the fact that many of you have a number of those to try to get to.

Before I turn it over to Sandy, I want to take a moment to draw your attention to the statement on page 2 of our presentation.

Our presentation today contains forward-looking statements.

The comments on page 2 outline factors that could cause our actual results to differ from those in the statements.

These factors are noted in today's press release and related Form 8-K.

In addition, our presentation also includes non-GAAP measures as defined by the SEC rules.

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

And at that point, I will turn it over to Sandy.

Great, thanks, Don.

And thank you all for joining us this morning.

I am going to work from the earnings presentation that is out on our website, so hopefully you've all had a chance to download this morning.

Our first quarter -- I'm going to turn to page 3 to start this morning -- our first quarter was largely in line with our own expectations, despite the concerns we had about the challenging winter here in the US that we had spoken about a couple of times this winter.

I think one way of thinking about this winter is that we were able to largely recover from the revenue impact from it, but we did incur some higher costs to do so through expediting and overtime.

A couple of highlights on this front chart that hopefully will give you a good summary for what is in the pack today is that we did achieve operating EPS of $1.01.

That included, as we said, about $0.03 or about $13 million of premium expediting and overtime costs, virtually all incurred in our Electrical Systems and Services business.

And that is because our major facilities are located right in the area of the Carolinas that got hit particularly hard, that knocked out workdays for us in January, and February.

Our core growth, I'm really pleased with 4.5%.

That was partially offset by the 1% of negative ForEx.

We are confirming today our full-year guidance, $4.70.

No change.

But it does now include a $40 million charge for restructuring in our industrial sector.

I will talk a little bit more about that.

That is about an $0.08 shift in the second quarter this year.

Our market still we think will grow at about 3% this year.

No change in that.

Cooper integration remains very much on track.

And really pleased that we will be getting that $95 million of synergies this year, another $150 million next year.

Further buttressed by the next point which are the results of the restructuring we are undertaking in our industrial sector.

So, another $35 million there.

So, the year to year 2014 to 2015 self-help story is now $185 million and we think that is very powerful.

The second-quarter guidance for operating earnings per share of $1.05 to $1.15, a midpoint of $1.10.

And that does include the $40 million of restructuring charges I referenced.

The last piece, I think, of helpful news as you think about how the year rolls out is we did experience this winter a negative impact in terms of the large projects placements in our electrical business.

You saw you that in the negative 6% bookings in our Electrical Systems and Services business.

And as we watch April roll out, electrical book quotations and bookings are clearly strengthening in April.

And I'm really pleased with that tone that we're seeing as we've gotten off running here in the first month of the second quarter.

If we turn to page 4, just a couple of highlights of the results.

Operating earnings, up 21%.

Really powerful, we think, in a period of time of relatively slow end-market growth.

Operating earnings per share, up 20%.

We recognize that $0.06 of that achievement was due to, you will recall a year ago in the first quarter, we incurred about $0.06 of purchase price accounting and inventory step-up charges.

Those didn't occur this year.

So, without that $0.06, this is a very solid 13% increase in terms of our operating earnings.

Sales, I mentioned before, $5.5 billion, very much in line with our guidance, up 3.5%.

And that's the net of this very strong 4.5% organic growth.

The best quarter in the last eight quarters in that regard.

You go all the way back to the first quarter of 2012, when we had a 4.5% organic growth number.

Segment margins, very much in line with our own expectations, 14.5%, up 50 basis points.

That's in spite of the $13 million of increased costs due to weather.

That's about 0.2%, that impact.

If we turn to chart 5, volume, again, very much on our guidance and on our expectations.

And, so, really when we look at the puts and takes in the quarter, pretty minor.

A little lower corporate expense.

And we talked at the end of February that as we had seen weather impacting us in January and February, we were working very hard to contain programmatic expenses.

You see that really on this line, with $0.04 of benefit.

Lower taxes.

This is just really a decimal point, up by $0.01.

Negative weather I mentioned, the $13 million, or negative $0.03.

And then a little higher currency translation, as you saw, a negative $56 million number.

We thought it was going to be a little closer to $30 million.

So, overall, about $0.01 better than our guidance this year.

You will also recall, for those of you who are trying to trace our corporate expense, if you remember in the fourth quarter of 2013, we had incurred about $20 million of Cooper-related costs.

And then we also told you this year that we would be getting about $2 million per quarter of synergies on the Cooper line.

So, that is part of how you trace from the fourth quarter to the first quarter.

If we turn to page 6, quick financial summary.

Really nothing more to highlight here than the numbers I have.

Obviously, the volume is up a net 3.5%.

The margin is up 50 basis points.

You can see a very strong core growth.

I am going to hop right into the segments here in light of our time today.

If we start on page 7, titled Electrical Products Segment, volume is very much in line with what we had expected.

Very solid increase in terms of operating margins.

I think very significantly the first quarter bookings were up 6% more than the shipments.

I think that is reflecting our forward look here.

Strongest in Americas.

Weakest in Asia-Pacific.

But I think the really good news here is both in the Americas and in EMEA, we had very solid mid digit increases.

It really reflects in this particular segment, because most of these products are flowing through distributors.

This outgrowth is really due to distributor channel conversions, which are beginning really to build, and, you will remember, one of the very important sources of revenue synergy in our acquisition of Cooper.

So, really very pleased.

And, as I mentioned, the tone in April, is quite good.

And I think as you can imagine, the Northeast and the Central and the Southeast portions of the country were hit pretty hard in the first quarter.

And we're seeing those areas come back in spite of that weather problem, really good momentum here in terms of distribution channel.

Our lighting strength continues.

And very importantly, the LED penetration in terms of our overall lighting exited the quarter at about 37%.

Very pleased with the technology leadership we have there, and our very strong growth across the board there.

The majority of the operational synergies, and you remember in our guidance for this year we said about 75% of those synergies would drop into this segment.

Again, part of the reason for the very strong 150 basis points increase in terms of operating margins.

If we turn to page 8, entitled Electrical Systems and Services Segment, here the volumes are pretty much in line with where we thought they were going to be.

But clearly, the 12.8% margin, down 130 basis points, from a year ago, I'm sure raises some questions in your own mind.

Really, three things to really think about here.

The weather impact, $13 million.

That's worth about 0.9% in this segment.

We do not expect that to repeat.

I'm pretty confident we are not going to have heavy snows during the second quarter.

The unfavorable fix.

And we did talk about the fact on bookings that bookings were down 6%.

That big impact was really right here in the United States.

And that is where it occurred -- the United States and Canada.

And we saw a real paucity of large projects being quoted and awarded in the US and Canada.

Now, that has changed as we have gotten into April, and that is very good news.

But that impact gave us a little bit of negative mix, as well.

And that was about a $6 million negative mix impact.

And then the last item is something that will be with us all this year.

You will notice in our full-year guidance -- I will get to it a little later in the packet -- we have raised the margin guidance for the electrical products segment by 25 basis points.

And we have lowered the guidance for the Electrical Systems and Services segment by 25 basis points.

It is about $4 million a quarter.

We have made, as we have had the chance to manage these combined businesses a little longer, we have looked at the allocation of some of the overheads between the businesses, and we think it is more appropriate that we've shifted about $4 million a quarter to this segment from the product segment.

You put those three together, the 0.3% that comes from unfavorable mix, the 0.9% from weather, the 0.2% from allocations, that's about 1.4 points.

And you can get a sense that we think this business was pretty much in line without those items.

And we don't expect the weather to occur, and we expect the mix piece to come back now that we're seeing the recovery in the business here in the second quarter.

If I move us on then to the Hydraulics segment -- this is page 9 -- we think a very strong quarter of performance.

3% volume growth.

But you can see the core growth was actually 6%.

And we had negative ForEx of 3 points.

So you're seeing, I think, pretty strong volume of top-line growth.

The bookings up another very solid 9%, as you can see below.

And then the profit is up 240 basis points to 14.3%.

So, whether you compare it to the fourth quarter or the first quarter, very strong margin performance here.

Getting within the bookings, just to get a sense for them, within the 9%, clearly the big pluses here were on the mobile side.

You saw construction is up very strongly.

So, construction up strongly, and mining and ag weak.

In the stationary side, led by oil and gas, very strong performance in that segment.

One that also we're quite strong in our electrical business, as well.

And if you take our actual bookings for the last two quarters, so that's the first quarter 2014 and the fourth quarter 2013, and compare them to the two quarters a year before, each of those, we're averaging about 13% increase in bookings.

And so I think you really are seeing the backlog building, the tenor of the market improving.

And you can see from our results, we're really demonstrating in terms of both the volume and the margins.

I would also mention that April is continuing very much in this regard.

If I move to chart 10, which is the Aerospace segment, volume is up some 7%.

2 points of that was positive ForEx, so a 5% volume increase.

Operating profit is pretty flat with the year ago, margin is down slightly.

This is the continuation, really, of the mix that we have been talking to you about.

And you see it in our first-quarter bookings, albeit in this segment we report our quarterly bookings and they can be pretty bumpy depending upon which large OEM orders are booked in the quarter.

Very strong commercial strength, offset by quite a bit of military.

And that's the real story behind the bookings.

The very good news is within those overall bookings, our aftermarket was up some 15%.

We have been talking to you for several quarters about the fact that we had expected to see an uptick occur at some point.

We are very pleased on both the commercial and military side of the aftermarket.

Just a quick update on the divestiture.

We do expect it to close within the second quarter.

And you will recall that that decreased revenue for the full year, and decreased profit for the full year, was already in our guidance for this year.

We had detailed that when we went through the initial guidance for the year.

For those of you who are looking at the 13.4% margin in the first quarter and asking, is that really in line with our expectation for our full-year guidance?

Yes, it is.

This is very much how we anticipated the year laying out.

Moving to chart 11, which is the Vehicle segment, a very strong quarter of performance.

You can see 6% revenue gain.

Actually 9% core growth offset by 3% negative ForEx.

Very strong margin improvement.

You can see 110 basis points.

I think everyone will recall in the fourth quarter, we had experienced some launch challenges that had cost us about $17 million of higher costs in the fourth quarter.

Those have been largely resolved.

You see that in the margin popping back.

We had told you we expected margins to come back in line with normal first quarters.

As you can see, it is actually a little stronger than normal first quarters.

So very pleased.

I think the big news from a market potential is that you saw the March NAFTA heavy-duty orders coming in at 27,400 units.

You saw 91,000 of orders in the first quarter.

You saw an industry backlog of 118,000 units in the first quarter.

And from all we're hearing, April orders again will be, we think, relatively strong.

All of that has led us to increase our Class A heavy-duty market forecast -- and, again, this is NAFTA that we provide -- to 280,000.

We think it will lay out with about 67,000 in the first quarter, stepping up to 72,000 in the second quarter, and then flat-lining along the line of 71,000 to 70,000 for the remainder of the year.

What is offsetting that is what we spoke to you about in our earnings guidance for the full year, is that we were seeing South America start the year weakly.

We had originally forecast those markets would be down a couple percent.

We actually think they will be down closer to 4% at this point.

So, a little bit of an offset, if you will, in terms of the South American impact.

Moving to page 12, which is our 2014 end-market forecast.

As you can see, really no change overall.

But we did move up our vehicle forecast by 1 point.

Frankly, it doesn't round the total of the 3% up for us, but that really recognizes that the heavy-duty market in North America is a little stronger.

No change in the US retail sales outlook for light vehicle, but weak in South America across the board.

Moving to page 13, our margin expectations by segment, you can see the aforementioned change between Electrical Products and Electrical Systems and Services.

Still comes after the same overall number for the total electrical business in terms of what we expect this year.

And if you look down to the bottom, the 15.75%, that is still our expectation there, as well.

So no changes on this chart.

Just a reminder that the 2015 segment margin of 17% does have the benefit of $150 million of additional synergy going from 2014 to 2015 in our electrical segment.

And now, an additional 35 million of benefit that comes from the just announced restructuring in our industrial business.

So, $185 million, if you will, of self help in terms of achieving those margins in 2015.

Moving to chart 14, entitled 2014 EPS Guidance, we are providing our first guidance for the second quarter.

I mentioned it before, it's a midpoint of $1.10 operating earnings per share.

The net income number a midpoint of $1.05 does reflect $35 million of second-quarter restructuring expense, as we look at the overall year.

I will talk a little bit more about full-year restructuring in just a moment.

No change to the full year, either range or midpoint, of operating earnings or net income.

So, the $4.70 is the exact same number, up 14%, from last year, that we provided in our full-year initial guidance.

Moving to page 15, really just some tweaks in terms of this overall guidance.

It is still $4.70.

I would draw your eye to just a couple of line items.

The organic growth of roughly 3%, still the same number of about $990 million of volume.

It is now at $0.50 versus the $0.56.

We do not think we will recover the $0.03 of the weather expense that we got in the first quarter, and the rest I would describe as rounding.

Slightly different number in terms of interest and pension.

We had thought earlier that was a benefit of about $0.20.

We think it is going to be closer to $0.16.

And then when you come down to the tax rate, we had a negative $0.44 there in the first quarter.

As we've worked through the details, we think it is going to be closer to $0.26.

Obviously we have introduced an $0.08 restructuring charge into the last item in the yellow block there, as well, still leading us to our overall $4.70 guidance.

Moving to chart 16, entitled We Remain On Track To Deliver Our Cooper Synergy Projections, no changes on the sales synergies, the cost-out, the total operational synergies.

You will note that under the acquisition integration costs we have lowered the expenses that we expect to spend this year, to achieve our full program.

And the full program has not changed in either breadth or in benefits.

We just think we can get it done for about $10 million less.

You actually saw that materialize in the first quarter, where our actual spending was about $66 million versus the original guidance we had provided you for $76 million.

Nothing to interpret from that about any change in program or benefits.

We're achieving all we expected to do, just getting it done at about $10 million less expense.

If we move on to chart 17, hopefully a helpful first look into our second quarter, and let me step through these.

We start with $1.01 being our operating EPS from the first quarter.

We've then got five items that lead to a total of a plus of 23%.

A fairly typical movement for us, in terms of volume, of about 5% between the second quarter and the first quarter.

That would lead us to think volumes will be up on the order of about 275 million over the first quarter.

At our incrementals, that yields about $0.13.

Then you will see we're anticipating a little lower pension expense than we saw in the first quarter.

We won't have, we believe, the weather cost impacts of the $13 million in the second quarter.

We will get additional Cooper synergies, the same way we had laid them out for this year.

No change there, and another $0.02 there.

Slightly lower interest, as well.

And then three negatives -- the industrial sector restructuring I spoke about.

Let me just talk to that for a moment.

The reason we're doing this is not that our volumes were lower in the first quarter than we anticipated, but when we look at world GDP, certainly the world is experiencing what I will call some growth anxieties, whether people are worried about the China market not materializing as strongly, or the Ukrainian impact potentially in Europe, or the political elections in India, or the US economy showing different degrees of growth in different sectors.

We just felt it was prudent to go ahead and get going on this and ensure that we got the self help to propel our earnings into 2015.

And that's a negative $0.08.

Higher corporate expense.

We had provided you a guidance of $82 million per quarter.

We came in at $64 million in the first quarter.

And as I mentioned, we had really worked to try to hold those expenses down in the first quarter.

And we want to return to get back to a number of growth investments that we think are important to continue to push the Company ahead.

And we tend to have our expenses move up as we go through the year in terms of corporate expense, as well.

And then just a very slightly higher tax rate, probably a little bit north of the 5% number here, in the second quarter.

And all that leads us to our $1.10 guidance for the second quarter.

If you move to page 18, this is the 2014 outlook.

No changes.

The only change here on this page is that we are providing second-quarter guidance that I just reviewed for the first time.

So, we think a clean quarter.

We were able to offset the impact of weather.

We are feeling better about the booking situations now, in terms of our electrical business, particularly there on the side of the systems and services side.

And we think we enter the second quarter on a strong note.

And so with that, Don, we will turn things back to you for questions.

If you will provide instructions?

(Operator Instructions)

Scott Davis with Barclays.

Good morning, guys.

Thanks for taking my question.

I wanted to talk a little bit about the big picture.

Sandy, when you think about the Cooper integration and how you have anniversaried, you have had enough time I think to do the heavy lifting.

Do you think about potentially pulling forward your interest in doing M&A again, particularly in electrical?

Scott, I think we have been consistent.

First, let me just say we're really pleased with where we are in the overall integration, being slightly ahead of where we had hoped to be on the broad array of complex issues we're taking on.

But we've really traced our ability to do M&A to two things.

One, obviously, finishing this integration activity.

And we've said that by two years, 2016.

I think it is going to be late 2015 to where we're back in a more active stage in that regard.

And the second is obviously paying off the acquisition debt.

And you will recall that we had outlined about $2.1 billion of debt that we are going to be paying back.

And the last tranche of that is in the first quarter of 2016.

So I think that is more likely the time period.

We're obviously continuing in the quoting activities, but unlikely to be at the altar here on anything substantial much ahead of that timetable.

Okay, fair enough.

And then just a follow-up.

You've talked a little bit about -- I don't think at least in your prepared comments you talked about channel inventories.

Sometimes these things can whip around a little bit ahead of the building season.

What's your sense of where your customers are at now?

Are they stocking up as usual seasonally?

Or are they stocking up more so than usual because they anticipate a bigger pull-through, sell-through?

I think our best sense, Scott -- and NAED is going on right now so we have had a lot of chance to have a lot of conversations with distributors in our electrical businesses.

This winter was so tough on people who were involved in the construction side, whether that was residential or light commercial.

They saw whole weeks that they missed in terms of being able to get on jobsites.

As a result, they were really careful with their inventories.

So, we do not think the inventories are overstocked on the electrical side.

And I think, as we're starting to see ground opening up, people being able to get going, that we think that we're in that normal seasonal pop-up at this point.

And perhaps in some of the areas of the country, like the Northeast, for example, that really had a very difficult winter, we will see them rebound a little bit more strongly.

But I would say I think it is a plus at this point, not a neutral.

Okay.

Good.

Good luck, guys.

Thank you.

John Inch with Deutsche Bank.

Thank you.

Good morning, everyone.

Sandy, the restructuring in the second quarter, it just seems a little unusual in terms of the timing.

I hear your macro commentary, but I'm trying to dovetail that with the fact that you obviously saw April rebound, right?

It sounds like Cooper is on track.

What exactly is out there that would cause you in the second quarter to pull forward some cost saves?

I'm just trying to understand the timing, that's all.

I wouldn't say there is anything unusual about our timing, John.

We take these actions when we think it is right within our businesses, and we have done the right preparation.

And that always takes some time.

And, frankly, we're not all the way through them, which is why we're not sharing them in terms of how much is in each individual business, what we will get there as we roll them all out.

But, as we watch the first quarter unfold in terms of what I'd call some of the global GDP issues, that is really what caused us to believe this is the right time to move ahead on them.

Frankly, if we had seen the world taking off, and I call it less of a growth anxiety, these may or may not have been the right thing to do.

So, we think it is just a very prudent hedge against the likelihood that we see weakness pop out in any of these markets.

We have not changed our own view of the 3% growth.

Frankly, a number of you felt we were too somber in our 3% for this year.

We still think that is about the right number because the world does have, I call it, growth anxieties right now.

That makes sense.

But the hedge, just so I'm clear, the hedge sounds like it is because this isn't cadencing to your internal plan?

I'm trying to understand.

Did you expect, for instance April has obviously rebounded but did you expect it to rebound even more?

Or are there things that are you seeing, perhaps, and obviously we know what is happening in the emerging markets, and then there's the question mark around Europe.

I'm just making sure there is nothing else.

No, nothing else, John.

Just our sense that the world is probably not going to accelerate substantially beyond the numbers that we've got out there at this point.

And we think that these plans, as our businesses have reviewed them with us, make really good sense.

And all they do is make our businesses more competitive.

And also give us, I think, a stronger self help earnings story, obviously, as we go into 2015.

So, I think a net plus all around for the very fast paybacks, as you can see, roughly at $35 million payback next year, or the $40 million this year.

And so they are very attractive programs.

It looks like the Street, including ourselves, mis-modeled the second quarter a little bit.

So, the first half, based on the midpoint, is going to be about 45% of the year, based on the midpoint.

Historically you have had a bit of a stronger first half.

Is that what you would expect, say, Rick, going forward, that your first half is about that, again pro forma, for Cooper, et cetera?

Is that about right and maybe we just mis-modeled it?

Or is there something else about the sequential that you think we should be thinking about?

No, I don't think there is something else, John.

I think that, frankly, we're aware that the consensus was up in the high 120s for the second quarter.

Frankly, that looks too strong to us.

It is true that we tend to have our strongest quarters in the second and third and fourth quarters.

But this year with obviously having this $0.08 here, that puts you up at $1.18 on an adjusted basis if you were to add that to our $1.10 midpoint.

Again, we're tracking toward a $4.70 guidance.

I know the consensus out there has been a little bit north of $4.80.

And I suspect that difference got plopped into the second quarter.

We obviously don't know what is behind everybody's individual thinking.

But I think that balance, as you say, first half and second half, that is reflected in our guidance at this point is a pretty good way to think about an average year for Eaton.

That makes sense.

Then just lastly, this is the year of Cooper integration I guess, with respect to facilities, manufacturing, distribution, heavy emphasis on Europe.

How are you guys feeling?

Four or five months of the year under our belts, what is the trajectory?

And more to the point, has everything gone okay in Europe?

I realize you spent a little let money.

But that's obviously one of the things where you sit here in North America and you hear all these headlines about you can't do anything in France, et cetera.

How has the progress been?

Any kind of an update would be helpful.

I appreciate the question because it is a very important activity that our teams are involved in.

We are very pleased, whether it be the overall activity -- and you're right, this is the belly of the beast, if you will.

2014 and 2015 are the really heavy lifting years of execution.

And the teams are really doing -- I'm just very pleased.

Specifically in Europe, we are through all of the planning phases.

And we're into the action phase.

And so that, as you say, the fact that it always takes a little longer to get things done in Europe, we think we did a very good job of planning, communicating, and we're now in the execution phase.

So we are in the action phase and it is moving ahead very well.

If anything, I think we're moving a little faster than we had originally anticipated, and that is good news.

And I would say as important as are all of the cost synergies, the area I'm equally really thrilled about is how well the reception is going in terms of the marketplace, with our improved competitive position, and the synergy opportunities.

And you really saw that come through in terms of that very strong organic growth in the product segment, in spite of the weather problems that were out there.

You can see that our organic growth overall for our electrical business of about 2.9% or 3.0%, really fared pretty well when you look at many of the other global competitors.

And we think that is testimony to how well this is coming together.

Understood.

Thanks very much.

Ann Duignan with JPMorgan.

Hi, good morning.

Sandy, can you give us some color on your bookings within the different segments?

Normally you give us how much mobile bookings were up, distribution, et cetera.

Just in the different businesses if you have any more color.

Sure.

Let me start with the one you just referred to, hydraulics.

A little bit of a change for us in this quarter where you have been seeing over the last six to nine months that our mobile bookings have actually been stronger than our stationary.

This time mobile was up 7% and stationary was up 41%.

That huge 41% gives you a feel for what is going on in the oil and gas industry.

And that was the biggest push.

Within mobile, as I mentioned, construction was up very strongly.

And then the negatives, as you would expect, would be mining.

And then we saw ag being slightly negative, as well.

If you flip it and look at it from a distribution and an OEM point of view, because most of the mobile and many of the big oil and gas activities are what I would call OEM oriented, there again, it was heavily more OEM than it was distributor-oriented this particular quarter.

If I flipped you over to aerospace for a moment, the overall bookings of 2 -- and, remember, we had very strong bookings the last quarter.

We don't average ours on a rolling average, we just give them to you at the individual quarter.

This was really a situation where you had all the great commercial strength being offset by defense weakness.

And then I mentioned on the aftermarket side, that the commercial was very strong.

But the military was also a very healthy positive.

So nice balance there.

And then if you go back up into the electrical businesses, I think comments you've heard from other electrical companies, I wouldn't typify the market much different.

I would say there has been improvement in the construction markets.

Oil and gas is strong.

We had a very strong quarter in terms of lighting, high double digits.

We had high double digits on bookings in the residential segments, as well.

The weakness, as I mentioned, was in the US large gear and large UPS.

The big UPS market was weaker in the first quarter.

And then the Canadian economy has been weaker, as I think you've seen with most people.

In Europe, we've been really pleased with the single high digit recovery in our component product lines, virtually across Europe and the Middle East.

And better strength in the small data center area, and the large data center area.

And then when you go to Asia-Pacific, which was the more challenging region, outside of the weather issue that hit North America, there you've got some very strong activity and large data center activity.

Some pretty good attractive large project work in the power distribution side.

But the weaker side of the markets have been the single-phase power quality markets.

And then the Australian economy continues to be weak.

Overall, for Eaton, let me just anticipate the China question, we saw our revenues in the first quarter in China up 10%.

And, so, I think China continues to improve at this point, and I think that is good news because one of the questions we have all had is how quick would that recovery be.

That's the one area of the world that construction equipment market has not recovered.

So, this big driver on construction equipment has been primarily a US, a Europe, a weak South America, and a not recovered China yet.

Okay.

That's great color.

Thank you.

I appreciate it.

And just a follow-up on Brazil, that market then.

Could you just break out your different business segments in Brazil, whether it is ag related or truck or automotive?

Again, overall, for our vehicle Latin America view, when we last gave guidance, we thought the markets for the full year would be down in the order of 2%.

We think it is more likely they will be down on the order of 4%.

And the first quarter -- and we have some question, always, about the accuracy of quarterly data streams, so take this with a little bit of salt, if you will -- we think it probably was down in the order of 6%.

And within that, you saw Brazilian ag being the bigger number, certainly down somewhere between 10% and 15% in the first quarter, with the light vehicle markets being down something just below 10%.

And then the truck and bus numbers look to have been down just a couple of percent.

So, somewhere in those ranges when you try to get the overall feel for the market.

Okay, great.

I appreciate it.

I will get back in line.

Thanks.

Steven Winoker with Sanford Bernstein.

Thanks, good morning.

Just to put a finer point on the Cooper cost synergies, you had moved $5 million out to 2014.

Have these specific actions now taken place in the last quarter, so that that catch-up is cleared, there is complete clarity on that?

Or is it still to be done?

We have things that we will do all through the year this year, but we have not changed what -- and I think Tom outlined, for everyone who had the chance to -- Tom Gross -- identify for everyone who had the chance to attend our meeting in New York, he tried to give you an indication by each of the categories of either the cost or the synergies sales categories.

The vast majorities of decisions have been made, and so we're in an executing mode.

So, I would say, no, there has not been a change in either scope of what we're taking on, nor our schedule.

And we feel we're now three-and-a-half months or almost four months into this year, and it continues to feel very good in that regard.

And, Sandy, do you have a sense for upside from there, as you continue to, now that you continue to make progress, and year in you have talked about a high level, you feel good.

Are you starting to find new areas of opportunities -- you don't need to quantify it but are you getting a sense for even more there on the cost side?

We will get a better sense, I think, because we have a very full plate in what we're working today.

And I think there are always more opportunities.

The question is, will they prioritize high enough that we will get at them during this very focused two to three years of execution.

I wouldn't want to advertise that we've got excess capacity to take things on right now.

We are pretty busy.

There's a lot going on.

I think the team is doing well.

And as we get out towards the end of this year we will have another projection as to whether we think it steps up from there.

But you will recall, we just increased in February what we thought, not what would happen so much this year but what would happen over the 2015, 2016 time period.

And I don't anticipate that we're going to be raising a lot during 2014.

I think the potential would be out there in the future.

And we will look at that as we get toward the end of this year.

Okay.

And just so I understand that ESS commentary on mix, weather and corporate allocation to say that you're on similar to what you would have expected.

And I guess that is 0.2 or 20 basis points for corporate, that allocation year-on-year, you would have done it before.

What kinds of things are we talking about there?

I know it is small but I'm just trying to get a sense for the health of the business.

It is a whole -- these are areas where we have services or assets that support both the segments, as we have just looked at.

You could almost think of it as an activity costing model.

We simply just said we think that about $4 million more per quarter should have been assessed against the ESS segment than the product segment.

So, nothing that affects the health of the business, or the orders, or the competitiveness.

It is really an internal cost allocation issue.

And once we came to this determination during the first quarter, we thought we were better to project it out over the whole year.

And that's why we increased the segment margin target for the full year in products by 0.25 points, and took it down by 0.25 points in the systems and services.

And you're not seeing any pricing pressure in the electrical businesses, are you?

I would say that in every business there are always pricing pressures.

But, no, I would say that at this point we're comfortable with our margin projection, vis-a-vis all of the cost reduction work and new product introduction we do, as well.

Great.

Thanks.

Jeff Hammond with Keybanc.

Good morning, guys.

Just on ESS, outside of maybe the weather and some of the timing noise, can you just characterize what you are seeing in those project-related power quality, power distribution, outside of maybe what your expectations were, and just tone there?

I think the big issue, Jeff 00 and I will comment on a couple specific areas -- was that just as the weather got worse this winter, you saw an awful lot of jobsites frozen out, so a lot of things didn't start.

And there were people also delaying either the quotation or the awarding of large projects.

So, it was a pretty unusual quarter in terms of the number of large projects that were actually awarded.

And we're able to track that data pretty carefully because we've got such a good window.

And I'm speaking primarily about the North American impact.

I would say the second issue -- and I commented a little bit in response to Ann's question earlier -- is that if you look at the large data center side of the market, in the US it was a pretty weak quarter in terms of data centers wanting to receive their equipment.

Now, we see just the opposite happening in the second half of this year, where the schedules for the second half look pretty robust with what we've got on hand at this point.

And so I think those are just examples of -- because there are always hundreds and hundreds and hundreds of these projects, it is not just one project.

But we're feeling much better about it as we see this fill for the second quarter and the balance of the year.

A very unusual first quarter, in our experience, in that regard.

Okay.

And then just remind us on this synergy split between the EPG and ESS, why that is, what is driving it, in terms of the actions and the savings, timing.

And does that start to shift into 2015?

At this point, what we had said is that if you take the roughly $95 million of year to year -- that was 2013 to 2014 -- acquisition synergies -- and that consisted both of sales synergies and cost synergies -- and you remember that we said that about $8 million of that shows up in the corporate line.

So you've got about $87 million that then shows up into the two segments -- that approximately 75% of that would show up in the product segment and approximately 25% in the S&S or ESS segment.

That, indeed, is what it looks like is pretty well happening.

And it has to do specifically with a mix of all of the projects.

We have not yet looked at that for 2015 and laid it out over the two segments precisely.

We will do that as we get to later this year.

It is many projects, as you can imagine.

But right now I think that is a pretty good planning template for you to be using for this year.

Thanks, guys.

Jeff Sprague with Vertical Research.

Thank you.

Good morning.

A couple quick ones.

Sandy, just your view on restructuring, to come back around to that.

You could say in a sense you have taken a naked restructuring here in Q2, running it through your operating number.

How do you think about that relative to gains?

The essence of my question is you will have a gain on the aerospace stuff.

Do you view that as an opportunity to fund some additional restructuring?

Do you view those type of items in the same sentence, if you will?

Or are they totally discrete factors for you?

Obviously we have not included in our $4.70 midpoint operating earnings per share guidance any gain from our announced divestiture to Safran of our two aerospace units.

At the time that we close that transaction we will be in a position to talk a little bit about what that gain will be.

And we do expect to close it in the second quarter.

I think it's just premature for us to comment until we close it, Jeff, at this point.

At this point we want to be very transparent about taking the charge this year.

It is $0.08.

Some people will interpret that, that we have raised our guidance by $0.08, because we have obviously kept a $4.70 operating earnings per share midpoint, and we didn't have the $0.08 in that beforehand.

And then we wanted you to have visibility to what we think the benefit is for 2015.

Because I think increasingly, in these periods of relatively slow end-market growth -- and I would characterize 3% as still in the relatively slow area -- we think it is increasingly important that the self help story, if you will, within companies is a really powerful part of the earnings story.

And with $185 million of self help going into next year, we think that is pretty powerful.

Thank you.

And just two other quick ones.

Could you comment briefly on what you see going on specifically in the US utility market on the distribution side?

Putting aside the weather noise, but how the year plays out, in your view.

And then I was just wondering on tax, does the modest change this year in any way change your view of where tax rate heads in 2015 and in the out years?

On utilities, Jeff, really no different than what our original guidance was this year.

We had said we thought the market would be flattish from last year to this year.

That is still our view.

I think the first quarter was rough around some utilities and others, depending on where they were weather-wise.

Obviously some areas got pretty beat up in terms of the distribution.

But we don't see it as being substantially different.

We think overall it is likely to be a flat year.

And that is pretty much what we're hearing back from our customers in this regard.

And on the tax rate, our guidance for this year remains around 5%.

So, really no change.

And, as I mentioned in terms of the guidance for the second quarter, we feel it will have trended up slightly from where we are in the first quarter.

And it is probably likely to be a little bit north of the 5% because we were a little bit south of it in the first quarter.

And, Jeff, that keeps our view for 2015 at the 8% to 10% range that we talked about on our last earnings call.

Great.

Thank you very much.

Shannon O'Callaghan with Nomura

Good morning, guys.

Sandy, maybe a little bit more on the bookings for ESS.

You mentioned, and we have had two straight down quarters of bookings, you're talking about more robust data center activity in the second half.

Is that when maybe we finally turn the corner back into positive bookings for ESS?

Just a little color on what you see coming in the pipeline.

I would say data centers, Shannon, are just one part of it.

The data center, clearly, the big end data centers, so the three phases, as we call them, is in this particular segment.

And we do see better activity.

In fact, we are pretty confident of very much better activity in the second half.

But I would say the other bigger portion is the Canadian markets have been quite weak coming out of the back end of last year versus a year ago.

And it was true in the first quarter.

And, as I mentioned, I think to I think it was Jeff's question relative to what was unusual about this first quarter, was that we had had really huge bookings in the fourth quarter of 2012 and the first quarter of 2013.

That compounded the fact that when we saw this quarter in the first quarter of 2014, with very few big bookings -- and I'm talking about these are over a certain dollar size.

The market really just pulled back in terms of actually placing those orders.

And you see it in the NEMA data, the National Electrical Manufacturer Association data, quite a different first quarter.

We think that was very much related to not only the fact that people lost work days, but there were so many jobsites frozen out, that people just were waiting.

Now, we're seeing that in terms of, I mentioned in my comments at the beginning of the call, we're seeing that in April, because it has definitively changed in terms of this larger activity.

So, no, it is not simply power quality.

It is on the power distribution side, as well.

And I guess on the margin side for ESS, even if you add back the factors you called out for the quarter, margins didn't go up much this quarter.

When do you think you really start to transition into the margin improvement phase for ESS?

Obviously it is baked into the 2015 number but as we phase across the quarters when do you think you really turn the corner?

Clearly, it has to step up in the second quarter in order for us to be able to hit this 14.5% guidance we have provided for the full year.

We don't think this takes a long time to be addressed.

Okay.

Thanks a lot.

Eli Lustgarten with Longbow.

Good morning, everyone.

Could we talk a little bit about the first half, second half?

Obviously, most people are disappointed with that second-quarter guidance, well below our modeling, which we probably got wrong.

But in order to make your numbers, we are talking a step-up of the earnings now to at least $1.30 kind of a quarter in the second half.

Can you run us through conceptually what takes us up that much between the first half and second half?

Do you have that booking, or is it expectations of power quality?

What is driving that big profile step-up in the second half versus the first half?

The first part, Eli, is you take your $1.10 in the second quarter, add $0.08 for the restructuring.

So, the actual run rate without the restructuring is $1.18.

So, to hop yourself up to $1.30 would be a 10% increase.

When you typically look back at our Company, the difference between seconds and thirds, that is not an unusual number.

And we are obviously also, the synergies continue to increase in this time period.

And we do expect, in the segment I just talked about, electrical systems, and services, those margins, will get better.

You will also see -- I think the earlier point we made on aerospace -- that aerospace started this first quarter at 13.4%, and we're talking about full-year margins there that are 14%.

And then I wouldn't ignore the vehicle piece because, on top of the traditional seasonal in vehicle, we have seen obviously the bookings get strong around North American heavy duty in the industry.

And there is a fairly attractive step-up occurring as we get into this year.

So I think those would be your major factors in this regard.

Now, also, if you look at our corporate, the areas of interest and pension, they trend down as you go across this year, as well.

So, those would be the major points I would point to.

So it's just a normal -- there is nothing business-wise, backlog in shipping or anything that gives you the expectations from a macro standpoint in how you run your business internally.

No, we think it will be a fairly normal progression, ex the $0.08 that is hitting this quarter.

And that makes it look like you're jumping from $1.10 to some quarters that would be like $1.30.

And the $0.08, when you put it in there, I think it makes it feel like it is not that kind of a jump.

And you talk about the industrial restructuring.

But I guess we never were specific about where it is.

Is that pretty well spread across?

Or it's mostly in one sector?

Can you gives us some idea of exactly what you are trying to do in that?

Until we're announced with all of our employees, we are not in a position to do that.

After we have finished all of that, then we will be in a position to be able to do that.

Yes, but is it spread or is it more focused?

It is in all three elements of what we call the industrial sector.

So, it is in Hydraulics, it is in Aerospace, and it is in Vehicle.

All right, thank you.

Andy Casey with Wells Fargo.

Good morning, everybody.

Just a high level question first.

When you look at what you are seeing across markets, and ex-ing out the Q1 weather impact for a moment, are you more or less confident in a pickup in improved US CapEx from your customers in commercial construction during 2014 than you were when you put together the initial forecast towards the end of last year?

I think you have to be more confident just because the numbers that are available from the Department of Commerce would indicate that the first quarter was 7.5%.

And, so, our guidance of 7% to 8% doesn't sound like it is very wild when the first quarter came in at 7.5%.

And it is a bigger number on the private put in place.

It is a negative number on the government.

But I think, again, some of the input you've heard from various companies who have announced, I think they're looking at just individual elements of the nonresidential, and not looking at that whole chart that we've referred people to historically.

Okay.

So, if we look at that, Sandy, and take into account the stronger March/April customer activity that you referred to, do you think the April improvement is just catch-up to where you thought you would be?

Or is it potential upside?

I wouldn't raise our forecast right now.

I think that it is really an indication on these larger projects that there was some pushout in awards in the first quarter.

I think we will have a better sense, Andy, when we get through a full quarter of seeing how that stabilizes over in April, May, June.

So I think it is a little bit early to call that it is going higher than 78.

And, remember, our number is a nominal number.

You will hear some people talking real numbers.

And ours is nominal, just to be clear in that regard.

Okay.

Thanks for that.

And then, lastly, on that April project activity improvement, if everything holds, what sort of revenue recognition lag would you expect based on the projects that you are seeing come in?

It can vary, Andy, from a month to three to five months.

We have a very hefty backlog, so we're well covered in the near term in that regard.

But I think, importantly, from a tone point of view, when you look at the difference between the bookings in our electrical products segment and our electrical S&S segment, it is hard to reconcile the two, that you are up a plus 6% on the distributor side.

But the project side didn't really come through.

That's where the difference in terms of, there is some end-market difference such as big data centers, but an awful lot of it goes into light and bigger commercial construction.

And we think that is the piece that we will see filling in here in the second quarter.

Okay.

Thank you very much.

Joe Ritchie Goldman Sachs.

Hi, good morning, everybody.

Just a few quick questions.

Sandy, can you quantify -- it seems like you have been pretty happy with how April has started -- can you quantify what electrical bookings are up in April?

Since we haven't closed the month, we really don't have a final number.

But they feel a lot more across the board like what we saw in products for the first segment, in both segments, whether it is the S&S or whether it is the product side.

And just to clarify there, it seems like what products was trending towards in Q1?

Yes.

Okay, helpful.

And then, secondly, does the incremental restructuring that you've talked about for Q2, and the incremental savings in 2015, give you any upside to that preliminary 17% margin target that you've talked about before?

I wouldn't change them now.

We obviously will have to go through our planning at the end of the year but I would say I think it just gives additional credence to them at this point, in spite of the slow growth environment.

Okay.

And you guys have been pretty good at calling the truck order number.

Is there a preliminary read on April?

We don't have a final number.

What we're hearing from customers, though, is that we think it is going to be a, let me say, very attractive number again, looking like this trend we've seen over the last four months.

There is really good tone in activity out there.

Okay, that's help.

And one last question.

On the Hydraulics side of your business, it was interesting to hear that your mobile was up outside of China.

Do you have any sense how much of that is underlying demand today versus just a restock of the channel?

We do believe in Europe and in the US that the channels are in pretty good shape.

We talked a lot about this over the last couple of years, that that adjustment has gone on.

I think you've heard from at least one of the big OEMs that they are starting to do restock into that channel, and that is all healthy.

The opposite of that is the situation in China today where I think there is more and more recognition that that channel is very full.

And that the utilization rate of newer equipment sold over the last couple of years is still fairly low.

So, I think most people in the industry are thinking that things are looking up in the US and in Europe.

They're sideways in south America where you've got more of a mining orientation.

Same true in Australia.

And that China is the area that is the harder one to figure out.

It looks like it is off in the future sometime.

Okay.

Helpful color.

Thanks, everyone.

Mig Dobre with Baird.

Thank you for squeezing me in.

Going back to Hydraulics here, you reiterated your 2014 margin guidance.

And I'm looking at obviously what was a very good first quarter.

I'm wondering, how should we be thinking about incrementals for the rest of the year here.

Mig, normally our Hydraulics business, like a number of our industrial segment sector businesses, have stronger first halves than they do second halves.

And so I would say that is maybe the best guidance I can give you in that regard, both from a volume point of view and then obviously the margins, as well.

So, we're pleased.

We've started stronger, as we should have, in terms of achieving this margin.

We will take a look at the full-year projections as we get to mid year.

But I think I would put it under the category we're off to a good start.

We're very much on schedule.

And we're particularly pleased not only with the 240 basis point increase in the margin but with the continued very strong bookings background.

That is what is going to give the ability, really, to power this business up further from a revenue point of view.

I appreciate the color.

And my last question is really on your guidance.

As you look at the earnings guidance range, and assuming the midpoint maybe as the base case, where do you think you could have some of the upside and downside risk at segment level, maybe, that could take you to either the high end or the low end of your guidance?

What we've said is the big issue -- and we said this back when we issued our original guidance -- if you model a 2% to 4% growth rate in our end markets, you get the two wings of our guidance.

The 3% is really the midpoint of our guidance.

So, I think the big plus or minus, really, has to do with how we see these world markets for our end markets.

But at this point, 3% still looks like our best view.

But you wouldn't call out a specific segment for upside or downside risk, it sounds like.

No, I think we're very comfortable with where we are from an execution point of view.

A lot of it is going to deal with just how strong these markets play out for the balance of the year.

Excellent.

Thank you.

Good luck.

Thank you all for joining us today.

And, as always, I will be available for follow-up questions, along with Mark Doheny.

Thank you again, and we look forward to your follow-up questions.

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

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

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