伊頓 (ETN) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Eaton third-quarter earnings conference call.

(Operator instructions)

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

Please go ahead.

Good morning.

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

Thank you for joining us for Eaton's third-quarter 2015 earnings call.

With me today are Sandy Cutler, our Chairman and CEO; Craig Arnold, our Chief Operating Officer and President; and Rick Fearon, our Vice Chairman and Chief Financial Officer.

Our agenda today includes opening remarks by Sandy, highlighting the Company's performance in the third quarter, along with our outlook for the remainder of 2015 and some preliminary thoughts on 2016.

As we've done on our past calls, we'll be taking questions at the end of Sandy's comments.

The press release from our earnings announcement this morning and the presentation we'll go through today have been posted on our website at www.eaton.com.

Please note that both the press release and the presentation include reconciliations to non-GAAP measures and a webcast of this call is accessible on our website and will be available for replay.

Before we get started, I would like to remind you that our comments today do include statements related to expected future results of the Company and, as so, should therefore be treated as forward-looking statements.

Our actual results may differ materially from our forecasted projections due to a wide range of risk and uncertainties, and those are described in both the earnings release, the presentation, and also in the related 8-K.

With that, I'll turn it over to Sandy.

Great.

Thanks, Don.

I'm going to work from the presentation we posted earlier this morning.

And if I could ask you all to turn to page 3 of that presentation, it is entitled Highlights of Q3 Results.

A couple of comments in terms of our third quarter results.

We are pleased with our margins.

We are particularly pleased with the great cost control and all the restructuring work that's going on across the Company.

And that allowed us to offset the lower volumes that we had outlined in our earnings revision just a week and a half ago, as well as a more negative FX.

I think the big news is that we continued markets, and, as you saw, our weaker bookings have really caused us to drop our second half guidance and I'll talk more about the implications for that for 2016 as well.

Our operating earnings per share we reported this morning of $0.97 was in line with our revised guidance.

As you saw, our sales were down 9%, with 6 points of those nine points due to ForEx; the other three, organic revenue decline.

Segment margins of 14.5% -- that's a little bit below the 15% that we had guided to originally for the third quarter, and that is really due simply to the volume impact being down as far as it was from our expectations.

I think the very good news is, when you take out the net restructuring impact -- and I'll be talking more about those restructuring plans as I go through my comments this morning -- our margins were 16.2%.

Those net restructuring costs -- so that is the cost minus the benefits -- were about $98 million in the quarter, about $8 million higher than we had provided in our guidance for the third quarter, but that's all really due to timing.

And, as you'll see as we talk through those results this morning we are really quite pleased with the overall restructuring program and it is actually going to drive even more benefits than we had shared with you initially.

Our quarterly record operating cash flow, really pleased with that: $973 million.

Obviously, a reflection of the work we are doing in terms of not only improving profitability, but also really pulling dollars out of our working capital.

And, doing that allowed us during the quarter to buy back about $284 million of shares.

That brings our year-to-date repurchases to $454 million.

That's about 1.5% of our outstanding shares, and I know you'll all recall that in 2014 we also bought back about 650 million shares.

If I could ask you to turn to the next chart, entitled Financial Summary.

The one number -- I'm sure you have looked at these already -- that I wanted to reference on this chart is, if you look in the green box in the lower left hand corner, our organic sales of negative 3% -- if we go back and look at the second quarter, our organic sales were a positive 1%.

This really reflects, I think, well on what we are seeing in the downshift in the number of our end markets where we saw positive organic growth in the first half and now we are seeing negative growth here in the second half.

If we turn to the next page, and let's talk through our five reporting segments.

I'm on the page titled Electrical Products Segment.

Really great margin performance here this quarter.

As you can see, we reported 18.5%.

And if we don't include again the net restructuring and the savings that came from that -- 19% -- I think really demonstrating the strong performance and end margin position and cost position we have in this business.

Again, this business is a third of the Company, so it is really significant for us.

The bookings were flat this quarter.

And I think if you look back over the last several quarters, you recall that in the second quarter they were 4%; in the first quarter they were 5%; and then all during the previous year, they were either 4%, 5%, or 6%.

So, clearly we've seen a down shift.

As we've talked with so many of our distributors around the world, they have been seeing a slowing in their end demand.

They clearly are not comfortable taking on more inventory in this environment.

And we saw this slow as we went through the third quarter, and so I'll comment more about that when we get to our fourth quarter guidance.

Still positive in the Americas and in Europe, but Asia was particularly weak, and it was not simply China.

We saw a weakness across the region.

We had told you in our second quarter conference call, we would share with you the specific restructuring costs and the benefits by segment.

You see them detailed here, so I simply won't go through repeating them.

I think you will see they are stated on a consistent basis as we go through each of the segments here.

When we get inside the bookings, the strength has been where it has been historically: strong residential here in the US; strong lighting activity; weak industrial; weak oil and gas.

We get into the Middle East and into Europe, clearly the Middle East is the strongest of that region.

We also saw some pretty good demand in the single-phase UPS market.

Then Asia was basically weak across-the-board and was the primary reason that the total bookings were flat instead of slightly positive.

We go to the next chart, labeled Electrical Systems and Services Segment -- again, a large segment for the Company, about 28% of the overall Company, and if you look at this particular chart I'm going to call out a couple items.

Let me start with the organic growth again in the lower left hand green box.

It was a negative 4% last quarter.

Negative 5% this year.

Again, if you look at the bookings being down 3%; if you go back this last several quarters and look at the trends there; it was down 7% if the second quarter.

It was flat in both the first and the fourth quarter and then the fourth quarter of last year.

So we have been seeing weakness in this segment.

It has continued.

You'll recall that we report our Crouse-Hinds business in this segment, which has a very large oil and gas exposure.

We've also seen weakness in the power quality markets this year, and the utility markets have been pretty flattish this year.

Finally, we are seeing that the large industrial projects within the overall construction market remain weak.

And that's an area that also affects this particular business.

Bright spots in the quarter for us, where we saw our systems business on bookings up very substantially.

That's something we normally look for in the third quarter because there is quite a lot of work that gets completed during the fourth quarter for many of our customers, and also on the private side as well as on the government side.

And we were pleased, in spite of fairly flattish conditions in the utility area, we had a good quarter of booking there.

One of the stronger areas.

And then finally, our own three-phase UPS business -- these tend to go into the larger installations -- had a very good quarter of bookings as well.

Crouse, however, was down very substantially and that obviously affects the margin.

So, if you flip up to the margins here and you compare the third quarter to the fourth quarter, you'll see that we reported margins of 11.2%.

Without the restructuring costs and the restructuring savings, they were 12.8%, but 180 basis points lower than last year.

And, I'd say really the factors I mentioned and bookings are exactly what is influencing the margins here.

It is the weaker mix and activity for Crouse oil- and gas-related.

It's the weaker activity from the industrial side.

And then we have not had strong bookings for a couple quarters so that we're operating at lower utilization levels.

We move to the next chart, labeled Hydraulics Segment, about 12% of our Company.

I don't think much new news here, from what we have been chatting with you all about here as these markets continue to be weak.

Commodity markets across the board, around the world are weak.

If we simply look at the bookings number of down 13%, not a whole lot different region to region around the world.

Nor is it substantially different between OEMs and distributors, as you can see in the comment below.

Within the overall mobile area, again I have mentioned most of these commodity markets continue to be weak, and on the stationary side, clearly oil and gas is still a negative.

Last quarter -- again if I can ask you to look at the green box on the left, organic growth was a negative 11%; this quarter a negative 10%.

And you can see in the yellow box, the magnitude of the restructuring that we are doing in this business to respond to these weaker markets.

You could obviously see that significantly affected the reported margin versus the margin without our restructuring costs and benefits.

If we move to the next chart, Aerospace, about 9% of the Company.

A really good quarter.

I think when you look at the margin performance, whether it is the 17.6% that we reported or the 18.7% that would not include the restructuring cost and the benefits, bookings down some 16%.

Not different than you are seeing from most of the companies in the aerospace industry during this quarter.

OEM activity, order placement, on both the commercial and the military side: weak.

Whether it is a matter of comparables or whether it is a matter of weak, it was a weak quarter.

They're one bright spot here, that a couple of you have noted, was in the aftermarkets, up a solid 11%.

And we are making progress toward getting the aftermarket business up toward that historic mix of 40% of total.

Again, restructuring: not as much elsewhere, really responding primarily to, as programs start to diminish or come to a lower level in this industry, we are obviously tuning our manpower and structural costs as well.

If we could move to the next chart, the vehicle segment, about 18% of Eaton.

You can see another very strong quarter in terms of margin performance: 15.2% and 18.2% when we take out the restructuring costs and benefit.

Organic growth was a negative 3%.

You'll recall it was a negative 4% last quarter.

We are seeing a downshift in terms of the NAFTA heavy duty truck market build.

If I could comment on that just for a moment -- you have known our forecast throughout this year has been 330,000 units.

We think it is coming off here in the fourth quarter.

We've dropped our forecast to 325,000 units; so a reduction of 5,000 units.

And, if you look at the third quarter production rate of roughly 83,000 units, our best estimate at this time is it will come down to 74,000 units in the fourth quarter.

So down about 11% quarter to quarter.

And you get a sense for that when you look at the whole third quarter of NAFTA Class A orders were about 65,000 for the industry and the backlog has come down approximately 20,000 units during this last quarter.

If we move to chart 10, as we look at our markets this year and we review our organic growth, we do expect - and I'll cover more of this on the next chart -- that our organic revenues will shrink about 1% this year.

That's driven by our markets coming down approximately 2% during 2015, compared to 2014, and that we will out grow them by about 1%.

So, that's how we get the net of a negative 1%.

They are detailed here in terms of the total organic growth, segment by segment.

I won't go through each of those.

We'll be glad to answer questions a little later this morning.

On the next chart, our chart 11, which is labeled 2015 Segment Operating Margin Expectations.

You'll recall when we provided segment margin guidance at the end of the second quarter, the segment guidance we gave you did not include the restructuring costs or benefits because we had not yet announced those specific plans internally.

These now do.

And to help you bridge between the last quarter and this current quarter, the electrical products margins here are affected by about 20 basis points from the restructuring and savings.

Electrical systems and services, similar at about 20 basis points.

Hydraulics at 80 basis points, aerospace at 20 basis points, vehicle at 60 basis points, and then the total consolidated at 30 basis points.

So you obviously can get a feel that the biggest restructuring that we are doing, proportional to the businesses, are in hydraulics and in vehicle at this point.

Turn to the next chart.

And I want to spend a little bit of time on this chart and the next chart to be sure that how we have displayed our restructuring is easy for you to understand.

Let me start with just a couple of summary comments.

Program is on track that we announced to you at the end of the second quarter.

It is indeed going to produce even more savings than we had shared with you at that time.

We are reducing our employment by approximating 2,900 employees.

We are closing 8 manufacturing plants.

And if you look at this particular chart, you will see that you've got the actual numbers displayed for both cost and savings and you can see that we actually had higher net costs of about $8 million in the third quarter than we had in our plan -- that is the $98 million versus the $90 million.

We do expect in the fourth quarter that we will have slightly higher net savings and that's the result -- obviously you see us taking our savings in that quarter up by $10 million.

If you shift to 2016, you will see the difference that we'll spend about $5 million more than we thought originally, but we are going to get about $20 million more savings -- that is the $100 million versus the $80 million.

So when you go to the bottom of this chart, and we say total restructuring program that we announced at the end of the second quarter, we'll have a program cost of approximately $153 million, up $8 million.

$3 million of the $8 million occurs in 2015.

$5 million of the $8 million occurs in 2016.

Similarly, when you look at the savings of $150 million, of the $25 million increase of savings, $5 million occurs in 2015, $20 million in 2016.

So that is the program that we announced to you.

Again, about 2900 employees and closing 8 manufacturing plants.

But based upon what we have seen -- if we could go to the next page -- it is labeled with Continuation of Weaker Markets -- we had originally shared with you on our second quarter conference call when we were talking about 2016, that in these kind of weak market conditions, we would ordinarily undertake about $50 million to $60 million of restructuring on an annual basis.

We had mentioned that to you, so that if you were trying to look at your estimates of prospective earnings next year you wouldn't drop restructuring out of the program.

What we had not shared with you is what the anticipated savings that would come from that $50 million to $60 million would do.

So today, what we are doing with this second set of actions, which is labeled on this chart, The 2016 Program, it is a second set of actions.

It is not any of the same actions that we were taking before.

These are actions in addition to those actions.

It is that we are going to increase the expected cost of restructuring for these new actions from $50 million to $60 million to $90 million to $100 million.

So, if you had taken the midpoint of $50 million to $60 million and had $55 million in your estimates, and you now take the midpoint of $90 million to $100 million, you have $95 million, it is about $40 million more restructuring next year than we had provided you before.

We do expect, over a two-year time period, that we will get dollar-for-dollar benefits for this $95 million.

So, as you see on this chart, if you'd look to the second line from the bottom -- it's in the green box -- you see that we expect to get $40 million of savings in 2016 and we'll get the full $95 million by the second year, in 2017.

So again we have two sets of actions: the set of actions which was announced at the end of the second quarter, that is resulting in reducing employment by 2,900 people and 8 manufacturing plants being closed; and a new supplemental set of actions labeled here as 2016 Program.

When you add the two together, you will see that from 2015 to 2016, there is a year-to-year benefit of $138 million.

Then when you move from 2016 to 2017, there is a year-to-year benefit of $190 million.

Now I would urge you -- don't use the whole $190 million in your estimate, because there will be some regular restructuring action that will go on within the Company as it does on an ordinary basis in 2017.

I think for planning purposes, you might assume that could be on the order of $50 million to $60 million, so a midpoint of $55 million.

And then we might get on the order of $25 million of cost.

I mention those numbers, not because they are a forecast, but we don't want you to simply drop any net cost estimate, which is probably on the order of about $30 million, out of this comparison.

So you might take that $190 million and reduce it to a net of something on the order of $160 million.

So I hope that's helpful.

I know Don will be able to walk through this individually with you.

I understand it can be a little confusing when you think about an initial set of actions and the second set of actions.

But clearly the reason we are undertaking an even larger set of additional actions, prospectively here in 2016, is the fact that these markets have fallen off more than we had anticipated at the middle of this year, and, as I will detail in just a moment, we think we are likely to see continued shrinkage of our markets in 2016.

So we are working hard to get out ahead of these reductions in markets with these very aggressive and, I think, well-laid-out and being very well-executed restructuring programs.

With that as a base, let's move to chart 14, which is labeled Operating EPS Guidance.

Our guidance for the fourth quarter is $1.05 to $1.15 operating EPS.

And probably the two most significant items here, in terms of our thinking on this, is we think organic revenues will come down another 3% from third-quarter levels.

This is not year to year, this is compared to the third quarter.

And we get there really -- that is more than what normally happens if you look at our seasonal pattern -- by the fact that we have seen bookings obviously decelerate in this last quarter, and we continue to hear from specific markets -- I cited one, but it's just one, the heavy duty truck market -- that there are many more days being scheduled now to be closed from our customers than there were just three months ago.

And so we're basing our guidance so that organic revenue will come off 3%, the tax rate will be 5% to 6% -- and the reason that is lower than we've run in some of the other quarters is that our best estimate is we are going to have a lower mix of income in some of the high-tax countries.

Some of you may have seen, just yesterday, the recent reduction in the UK tax rate, and there is legislation going through on that, and so we tried to pick the benefit of that up as well.

And then last, very importantly, the very prudent actions that we kicked off earlier this year, in the second quarter, are going to allow us to have a net restructuring benefit between the third quarter and the fourth quarter of $123 million.

That's what was detailed on the previous chart and that is about $0.25.

That helps our run rate here in the fourth quarter.

That brings our full-year guidance to $4.20 to $4.30 operating EPS and that does include the full net restructuring charge from this initial set of actions that we announced at the end of the second quarter of $73 million net charge or a net impact of a negative $0.14.

Next page, titled 2015 Outlook Summary: just the basic summary that we provide you here.

Obviously, the big changes on this one is that we had thought in July that our organic revenue growth would be 0% to negative 1%.

It is clearly going to be negative 1%.

We have been working really hard on all of our expenses in the Company so that, that whole collection of pension interest, general corporate expense, we believe will be $30 million below last year -- that's more than we had told you before; and the tax rate is a little lower.

And then, very importantly, with all this change, you look at the operating cash flow.

We had told you $2.4 billion to $2.8 billion at the end of July, and that is still our guidance for this year.

The team is really doing a great job in that regard.

And because we are operating at lower levels of activity, we have taken another $100 million out of CapEx.

Not unlike many industrial firms in this weaker environment, that we just don't need to spend that extra capital.

So we actually have taken our guidance up for free cash flow, in spite of all this weakness, by $100 million.

So it was $1.8 billion to $2.2 billion.

It is now $1.9 billion to $2.3 billion.

If we turn to the next chart, 2015 summary, I have covered most of these points.

Organic growth at about 1%, that assumes our markets go down.

It clearly reflects what I've been commenting on in term of the slowdown here over the back half of the year.

I already commented on the restructuring program that the operating margins are depressed by about 30 basis points for the net restructuring impact.

We have repurchased 7.2 million shares through the third quarter of this year.

We will pay down this large tranche that we have talked about for some time of $600 million of debt in November.

And I think the really good news is, based upon the strong cash flow, we were able to do this level of repurchasing in the third quarter, and we've got the flexibility to continue to repurchase in the fourth quarter, if we deem that's prudent.

Last chart, and very importantly, looking forward; and clearly I think this is the Ouija ball that we are all trying to get a good handle on currently, in terms of, with the second half of this year having been slower, what are the implications for 2016?

And clearly, my comments here are very much informed, our decision to go ahead with an even each larger second set of actions in terms of restructuring in the Company.

We expect our markets in 2016, compared to 2015, to be slightly negative.

And our best thinking -- and please don't put a decimal point on this, this early time, because we are in the process of trying to get all this tuned up ourselves -- is it is likely to be on the order of down to 1% to 2%.

This year it was down 2%.

And, as you try to think through our businesses -- because I can hear each of your inquiries of, can you give me some color about how might that lay out across your different businesses -- our best thinking -- but please, it is initial thinking at this point -- is that to support that we think that the electrical business will be up on the order of 1%; hydraulics is going to have another down year, we think on the order of roughly 7%; aerospace will continue to be strong on the order of about 3% positive; and vehicle will come off about 5%.

And we are anticipating that the North American heavy duty class 8 business comes off about 15% from this year's 325,000.

Now all of that, frankly, would get you to a number that feels a little bit more than just 1%.

I think the prudence, having watched what's happened to markets this year, is what leads us to believe that we need to be planning, based on a negative 1% to negative 2%.

We'll obviously have more to say about that, after we work through our profit plans and share guidance with you after the New Year.

The restructuring programs, highlights is just what I had talked to you before.

The way to read this chart is, because we didn't get the labeling quite correct on the little small bullets under the restructuring year-to-year benefits is, between 2015 and 2016, we get the $138 million of benefits.

Between 2016 and 2017, we get $190 million of incremental savings.

But remember my caveat: you probably want to take that $190 million and reduce it to something closer to $160 million, because it is highly likely the Company would continue to do some form of restructuring on an annual basis, which is sort of normal fare.

The Cooper integration savings of about $45 million, the free cash flow of up from 2015 by 10% to 15%.

And you say how can you feel relatively confident about that?

We will not have a US-qualified pension contribution.

It won't be required in January.

Recall last year, it was about $200 million.

If you look at our guidance for this year and take the midpoint of $2.1 billion, $200 million over $2.1 billion get you pretty close to 10%.

So we obviously think we'll do a little better than that.

We do have one more debt repayment in January of 2016.

We have disclosed this to you before, $240 million.

And then the really good news is that, as we've shared with you at mid-year in 2015, we are going to continue to have very strong cash flow.

You saw that in our third-quarter really exceptional cash flow.

That's going to give us the capacity to deploy over $1 billion of capital for either stock repurchases or acquisitions.

And we have a strong bias toward repurchases, obviously, with our price, stock price in the range it is at this point.

So in total, I would say that I think we are being realistic about what's happening in our end markets.

We are taking the restructuring actions, both with the first set of actions we took and now the second set which will kick off next year.

As to timing, we would expect to kick off those restructuring actions, the new actions we've talked about in 2016 -- we'll get at them early in the year.

That means probably the first quarter because obviously it means we can pull more savings into the year as well.

The Company is really focused on getting costs down to ensure that, obviously, we can be competitive and produce the kind of returns that we hold ourselves accountable to as well.

And so with that, Don, I'll turn things back to you and look forward to everybody's questions.

Very good.

Before we begin the Q & A and have the operator guide us through the Q&A portion of the call today, we do have a number of individuals that are queued with questions.

Given our time constraints of an hour for the call today and our desire to get as many of those questions as possible voiced, please limit your questions to a single question and a follow up and thanks in advance for your cooperation.

With that I'll turn it over to the operator to provide guidance on the Q & A.

(Operator Instructions)

With that, our first question comes from Scott Davis with Barclays.

Thanks for the question.

Thank for the details, guys.

Can you give us a sense of what your view is on, I mean, I guess the first part of the question is your benefit from price cost in the quarter.

But probably more importantly, what your view is, as you look out in 2016, on potential price weakness in some of your markets.

Yes, Scott, you know, I think let me start with the commodity side.

We continue to believe we are in a period of weak commodity and obviously it informs some of the demand side for us in our hydraulics business.

We don't see, and of course we'll all guess wrong when the interest rates will begin to start to be increased but it feels like that's coming sooner rather than later.

We don't see pressure on the commodity side hence, we don't see a lot of pricing actions that are likely to be successful out in the marketplace.

So, relatively neutral in that regard, you know, I think the key is going to be for us all to understand when that price, excuse me, when that commodity pressure starts to come back.

But we are not seeing any evidence of that at the present time.

Okay, and can you quantify the benefit that you saw this quarter on price cost spread?

Yes, I wouldn't say we were seeing a benefit because we're, in terms of we can do it, I think you know our model, we tend to keep our pricing pretty much in line with the commodities side so we've not been getting kind of net price increase if you will.

Okay.

Good color.

And then, just quickly, any color already you have for us on US nonres?

Seems like it is reasonably good, but your outlook there?

On the light side, if I could cut it into maybe three pieces.

On the light side, and that is the portion that was being attached to residential and say continues to be quite strong and looks a lot like the residential demand.

On the really large commercial projects, not all that strong.

On the industrial large projects, that's where the weakness has been.

And if you look at the Dodge reports, part of the reason we commented in our press release that we saw bookings get weaker through the quarter, some of the Dodge information about future activity has been concerning.

We don't think that means that we are going to see a negative number from nonres, but we do think it may not grow quite as quickly as it has been.

Okay.

Good luck, guys.

Thank you.

Our next question comes from Steve Winoker with Bernstein.

Thanks, guys.

Good morning.

A couple questions.

First, on the 2016 thinking, assuming that organic growth does come in, you know let's say flat at best or a little bit down for you specifically, what kind of incremental margins do you think you can hold?

Excluding the restructuring and excluding the Cooper synergies?

Yes, we've not, you are right on point with the question, Steve, and we've not really tuned it formally at this point.

But when we are getting down this far in the cycle, you know earlier on we were able to hold 20% decrementals.

We think it is more on the order of 30% but we'll have a better chance as we get out.

That's obviously why we have been launching the restructuring we have.

I think all of us, our capacity issues, any company that has sort of knees in them and both on the way up and on the way down.

With us having come down this far, we need to take another knee out.

I think for planning purposes you might use 30% at this point.

Okay.

And then on the Cooper side, am I correct in looking at the $45 million of integration savings you put on slide 17?

Is that comparable to the $115 million you talked about before?

No, you are absolutely correct.

And two issues that are leading to lower synergy as we get out here toward the end of the 4-year time period.

The first is, with the lower volumes that we're seeing, obviously we'd hoped we'd see some market growth through this time period, there is a scaling effect on procurement and plant savings.

We also have experienced negative FX and it is not only affecting the base business, it is also affecting the synergy.

Frankly, we just hadn't rolled that through to the synergies.

As we have been tuning all this up, it was clear to us we had missed a piece of that, as it had to do with the synergies.

The last has to do with the oil and gas industry, as well as three regions that have really slowed far more than others.

Canada, as you know, has really been hit very hard in terms of being a natural resource area.

Latin America, let me just say it's been gutted and leave it right there.

And those are the issues that have led to the change.

So we do think, at this point, a more realistic number for next year is about a $45 million incremental savings over this year.

Once again, Steve, that all informs part of our feeling for why we've got to do more restructuring.

And, is most of that cost savings now?

Is there any revenue in that $45 million?

There is very little revenue.

Most of it is coming right out of the large plant closings we are finishing up.

Okay I'll pass it on.

Our next questions comes from Ann Duignan with JPMorgan.

Hi.

Good morning.

Good morning.

Just a follow-up, quick question on the Cooper synergies.

Can you just remind us, Sandy, what were the synergies for 2015 versus the $150 million you had expected?

We think they will be on the order of about $135 million versus the $150 million.

And then we think next year, it's this $45 million versus the $115 million.

Okay thank you.

And then my question is really around Brazil and the impact the financing programs might have on, particularly on your vehicle business.

How are you thinking about that both into year end and for 2016?

Yes.

We have been a bear on the Brazilian economy, as you know for a couple years and, while I think it's salutatory that they are trying to find some ways to turn the economy, our base assumption is that Brazil continues to be weaker next year than this year.

We just think there are so many macroeconomic issues that have to be addressed, we are not planning on an upturn effect.

We are planning on it still sliding some more in 2016 versus 2015.

And, that is embedded in your hydraulics, I presume.

Are there any other businesses?

Hydraulics and vehicle.

And vehicle?

Okay, great.

Thank you.

Our next question comes from Jeff Sprague with Vertical Research.

Thank you.

Good morning.

Good morning.

Wondering first just on working capital.

Sandy or Rick, if you can give us a little bit of color.

How much you actually got out in the quarter and what kind of opportunity that is in the next year.

Jeff, we are just shy of $300 million from Q2 to Q3 and changing, I guess, what you would call classic working capital.

We really put a full court press on receivables and managed down inventory but we think much more is possible.

Partly because when your sales slide off, it is very hard to keep the inventories going down in line with the unexpected sales decline.

So we would look into next year and view additional opportunities for working capital liquidation and we also do have inventories, bank inventories we built-up for some of these Cooper plant consolidations and we would expect most of those would be removed by the end of the year.

So I think you'll see continued strong management of working capital.

And then maybe flipping it more to the customer level, Sandy, you made a comment about inventories at the customer level.

It seems pretty clear there has been a draw down going on across a lot of these channels.

Do you think your customers are properly sized to kind of the current state of in demand?

Or is there still more inventory liquidation that needs to take place in these channels?

Let me talk to the two channels if I could, Jeff, I agree with your comment on the distributor issue.

I think that the industry was maybe buying in a little too strongly in the first and second quarter.

As things began to back up in the second half they are obviously not buying or trying to winnow down their inventory.

Our feedback is they've got a little bit more to do before they are going to really feel they are really optimally sized.

When you get out to the end markets, some of these end markets have been weak for quite some time and you would hope that they are starting to get it right.

Our view is when markets are falling off like this, it usually takes awhile for people to catch up and get right sized.

So that is all kind of baked into our view that a number of these markets in 2016, we are still going to see some negative numbers on the growth side.

Don't know that we are going to be absolutely right on that, but we think we are better to plan with that outlook and we'll get the cost out of the Company and we can manage up if we need to, if we are wrong in this market.

It is always harder to manage down.

Thank you.

Our next question comes from Julian Mitchell with Credit Suisse.

Hi.

Thank you.

I noticed your point around capital deployment is more buy back focused.

But just taking a step back, the EPS top line down a bit, your earnings next year is probably [$4-ish] or so, so back to where you were before the Cooper acquisition, you know back in 2011.

So I just wondered how happy you were with the current state of the portfolio or if your view is that, look time are tough so we take out cost with these buybacks and then maybe in a couple of year's time when there is a clearer macro, you can do something with the portfolio?

Yes, without giving confirmation one way or the other to your [$4] number, I would say our focus right now is that we are seeing markets have weakened and we need to get the cost out of our overall corporate portfolio.

That is at the corporate level and each of our individual businesses.

We think with the stock not trading at the kind of levels that we think it's worth, we need to get this cost right so we are in a position to drive earnings growth in 2016 over 2015.

We've not finished our planning on that.

But that is our primary focus right now is to drive the restructuring program.

We have a singular focus on getting these costs right at this point.

We will continue to look at the issues of portfolios I have mentioned a couple of times.

There is nothing that prevents us from making changes in our portfolio on a taxable basis at this point.

Part of that change is then when we get out to November in [2007], when we have other alternatives that are available to us, but I would say for right now, Julian, our primary focus is, that we are driving with single minded purpose across the Company, is to get our costs right.

Thank you.

And then just a follow-up on the ESS business, you know, margins under pressure because of volumes, I guess.

Is anything happening there on pricing, on some of the large project activity as well?

Or is it just a volume driven mix phenomenon?

I'd say a couple things, Julian.

Remember that is the sector where we put Crouse-Hinds in.

And you may recall when we gave our guidance for this year and indicated that about 6% of Eaton's revenues are in oil and gas and that we expected that mark would be off about 25%.

We had also stated we thought the primary impact of that would be in the second half of 2015 and that is indeed what we are experiencing.

While bookings weakened earlier in the year, we are really seeing that impact come through now in terms of the shipment side.

That is the first area.

Second area has been this continued kind of weakness in what I would call power systems and in the power quality three phase markets on shipments.

We are encouraged that there is fairly significant projects that we think will indeed be built and shipped, or they'll be asking us to ship on next year.

So, we see that three phase issue potentially turning around next year.

And the last but not least is the industrial construction big projects have been weaker this year and that's part of what's infecting this as well.

So whenever, and I have been candid before, that whenever you see weakness in these end markets you do get more price competition and so there is more of a beta of that and I would say the industry is operating at the lower levels of utilization right now.

Great thank you.

Our next question comes from Jeff Hammond with KeyBanc.

Good morning, guys.

Good morning, Jeff.

So, I know it is early on 2016 when you give some color on the segments but just kind of given the down tick in orders and electrical, what's the comfort level that you do get growth into 2016?

And maybe where do you have the most confidence, you know, that you'll see that growth?

Yes, Jeff, obviously, we are in the midst of all of our planning and once we start trying to pull that string of yarn, we are into an awful lot of detail that we don't feel we've got fully vetted enough.

I think the biggest issue to think about in electrical is what's happened in the second half in terms of distributors destocking.

And at some point, we all know that, that comes to a conclusion and you get rid of that negative impact.

But there are so many end markets there, I did mention before, that we do think residential will continue to expand and certainly that area of nonresidential that surrounds residential so that light side looks pretty solid.

I did mention that we are seeing some better activity, obviously, out ahead of us in terms of the power quality markets.

But I think beyond that, we just, we need to really finish the reviews that Craig and I are heavily involved in, in terms of looking at the operating plans for this next year and we'll have a better set of insights when we give you our full guidance for next year.

Okay thanks guys.

Our next question comes from Deane Dray with RBC.

Thank you.

Good morning everyone.

Good morning, Deane.

With regard to the second phase of the restructuring plan, was there any consideration to doing some of that now, in the fourth quarter and get a jump start on this?

Yes clearly, we obviously have thought that through very hard, Deane.

Part of this is just the issue of just how much capacity there is to do how much all at one time.

And that's where we really felt in our best judgment, this laid out the right sequence for trying to assure that we not only forecast savings, but that we indeed execute them well.

So the company has been really busy during the third and fourth quarter, getting this first group done and we'll kickoff a second group, as I said, most likely right in the first quarter, but we really felt that was the right timing and we are trying to be transparent about the fact as to how the timing of these will feel through.

But that is our best estimate, the best way to do this.

Got it.

Then, just so we have a perspective on how the third quarter did play out, can you share with us the cadence of the months on an organic basis?

And how you arrive at the decision that you did need to negatively pre-announce?

Yes, what we had indicated in a number of forums that both Craig and Rick and I were in, sometimes together and sometimes in different locations, is that we saw July and August continue to be very slow and we as came through the end of August, it was evident that September was going to have to really strengthen substantially.

It did strengthen, but it didn't strengthen enough.

That is where, when Rick was out at a conference in the middle of September, we shared, at that point, that we were concerned that revenues looked like they were going to fall short.

We were right in the midst, obviously, of working through all of those actions that we had announced in restructuring from the second quarter.

But at that point we immediately began looking at whether we are going to need more, in terms of restructuring, to get costs down.

So that is how it laid out over the time period.

I would say September was a good month and it's always a disproportionately big month in the third quarter.

It just didn't come through like we thought it would.

And it wasn't in just one business.

I have had that question from a number of investors, as to -- gee was the $300 million just in one line of business?

No, it was fairly broadly and so our concern, that we think we are correctly responding to, is that this is a general slow down and then you saw the GDP numbers come out, lower than people thought again.

You saw the industrial production numbers come out now, lower than people thought and not seeing a lot of different news from around the world.

So, we are trying to get out ahead of this as fast as we can.

No one likes having negative markets, but the way you deal with them is you get the cost out and you manage your cash and you be sure you've got a strong balance sheet through this time period.

And that is exactly what we are doing.

Appreciate the color, thank you.

Our next question comes from Shannon O'Callaghan with UBS.

Good morning.

Maybe one for Rick, just initially, you talked about the UK tax change but you also have BEPS going on, maybe just an update on the implications of recent global tax activity and how we should think about any implications for Eaton going forward.

Well, you are right to focus on some of these changes.

It is interesting that, despite the BEPS, the BEPS initiative, you still have places like the UK in the process of lowering their tax rate.

So it is an evolving tableau.

The impact from BEPS, frankly, is going to turn out, we believe, to mainly, for us, be around all the additional information requirements.

The filings for the calendar year 2016 of detailed country by country tax reports, an increase in required transfer pricing documentation.

And so that's going to require some extra manpower, some extra effort.

We think we have a good plan to do that cost effectively and we are working right now to put all those resources in place.

I think you'll also see additional audit activity, just because that's been the focus we've seen over the last year around the world as countries are needing more revenue.

So they are going to do more audits.

So I think that's another part.

All in all though, the biggest impact on Eaton, year to year, let's say from 2015 to 2016, is simply likely to be mix.

Where the income is actually earned and we don't yet have a good handle on mix for 2016.

It is possible that our rate could move up a small amount, from the 7% to 9% that we expect right now.

But I wouldn't expect anything very dramatic.

Okay that's really helpful thanks.

Then on the hydraulics, minus 8% new organic guidance for the year, seems like that implies a somewhat more favorable 4Q before we start to get worse again next year.

Is there anything going on in the fourth quarter on I'm missing hydraulics?

No, and Craig maybe you want to comment on this.

No, I'd say no.

I think if you take a look at how hydraulics performed during the course of 2014, I think you'll find that Q4 2014 was also quite a low quarter.

So, I think the denominator in this case helps a bit.

But we certainly are when we look at the sequential performance of hydraulics, what we're forecasting is that Q4 will in fact be weaker than Q3.

If you take a look at the seasonality of the business, it's consistent with what we have seen in prior years and we are not assuming any of our end markets get any better.

Okay.

Great.

Thanks a lot.

Our next question comes from Nigel Coe with Morgan Stanley.

Thanks.

Good morning.

So obviously, Sandy, recognizing that you are still kind of in the midst of planning for next year, the detail you have given is really helpful.

If next year does turn out to be a down 1% to 2% type of situation for Eaton, it feels like you've taken enough cost out to achieve your aim of growing earnings next year.

Is there anything from a mix perspective?

Or maybe from a pension or tax that maybe hold earnings flat to maybe down next year, with these restructuring actions in place?

Yes, we don't at this point.

Again, it's really early, Nigel but we don't see any headwinds, if you will, in those areas and a little too early to call whether they will all be positive but we are relatively confident they are not headwinds in those particular areas so I think your premise is right.

Okay.

That's really helpful.

And then, just picking up on Dean's question about how the quarter, you know, played out, as we went into October, did some of that relatively good news from September filter through into October?

And, how would you describe your confidence levels the down 3% for 4Q which is obviously in line with 3Q, but the down 3% for 4Q, in light of the possibility of extended holiday shutdowns?

Do you think there's a bias for the upside or downside or based on your the ability today, either in back logs or trends you are seeing today, the down 3% feels really good?

Typically, where we will see this practice, and we've talked about in this previous years, where a major OEM customer of ours will decide around either the Thanksgiving or the Christmas holidays to add a couple of days of shut down, we have tended to see that in our vehicle business, we have tended to see that in our hydraulics business.

And so we are starting to hear, and we did during the month of October, what I'll call a little bit of rolling thunder in terms of people adding additional days.

Normally, our experience has been when people start to add a couple, they are going to add a couple more.

And so, our 3% is more than we would normally see our fourth quarter revenues come down from the third quarter.

We are trying to be very realistic about, in a market that has -- in an economy that appears to be slowing and more so, clearly, on the industrial side, than on what I'm going to call the retail consumer side.

We are going to anticipate that and that is why we've tried to say we've got to learn to live within a 3% volume down is the most likely case here for the fourth quarter.

We'll know more week by week as these things tend to, they don't give you a lot of warning.

But I would say, our history tells us this is likely to be a whole lot closer than the negative 3% than just a flat quarter to quarter.

Right.

Okay, Sandy.

Thanks a lot.

Our next question comes from John Inch with Deutsche Bank.

Thank you.

Good morning, everyone.

Good morning, John.

Could we get a little more color on just the broad-based Asian weakness in electrical?

And maybe just you know, kind of what's going on under the hood in that region.

Does it start in China and spread?

Just anything, Sandy, maybe you have observed there throughout the quarter that could lead to some a conclusion one way or another?

Yes, maybe a couple items, John.

You've heard us say before, is that we actually think that manufacturing IP in the -- in China is growing much slower than has been stated.

Having said that, now you look within it and look what's going on.

Most of the infrastructure projects have been pulled back.

There is not much manufacturing capacity and many people are talking about the construction side -- I'm talking commercial construction side, has gotten much slower.

We are not seeing the export, this will be machine tool activity, be particularly strong either and that has to do with the receiving countries not being that strong.

And last but not least, the corruption investigations have resulted in a lot of practices that are, let me see, it's causing delay in projects and it's causing very intense price construction because they are really trying to be sure, price pressures, because they are trying to be sure that they are not reasons that awards are being made at a higher price level, be it for features, quality, delivery.

None of that is accepted at this point.

So I would say China is, and I think you've seen it from just about everyone who has reported on the industrial side, has had a very weak third quarter and it doesn't feel like it is going to be significantly different next quarter.

As you go down through Indonesia, Malaysia, whatever else, clearly the oil situation is acting as a depressant in that particular area.

You get up into Korea, and of course there are not a whole lot of ships being built currently, and you are seeing this back-up again.

We are not a real big player in the Indian market, and so I would kind of cite those three as the primary reasons we are seeing things be slow in that area.

No, thanks for that.

That's helpful.

Sandy, I mean, since you have been CEO, you've seen a couple of US recessions, maybe in 2001 there was a little more traditional and 2008 was a credit crisis.

And what's going on now, seems to be different still.

You know, if I think about your own forecast of markets down, you know, very low single digit next year.

It is not that bad but it also begs the question, why is it only not that bad if we've seen the sequential deterioration.

I'm trying to draw a little bit on your own experience and then the backdrop of what kind of got us to here, to really just understand why isn't next year possibly more like a classical recession that's down perhaps more analogously to 2001?

Why are things only holding at this down, smaller level than might be otherwise the case, based on historical precedent?

I think, John, it is the great macro that we are all trying to understand.

I think there are a couple salient reasons why they are different.

We don't see significant bubbles having been created out of this very long, low, grinding growth rate.

The banks are in awfully good shape and a lot of the regulations are ensuring very fulsome capital ratios in that regard.

We are -- we have not yet seen any form of inflation and the prospect that we could get a couple quarter point interest rate increases doesn't feel like the thing that will derail economic growth at this point.

Europe seems to be mending, albeit on a slow basis and a frustratingly slow basis.

India is clearly getting better but it's not big enough to make a difference worldwide.

Latin or South America is just a washout.

Let me just take that and put it on the side.

So the issue really gets to be, how much more negative impact does China have upon global growth?

And that is a hard one to put our fingers on.

I would say, in addition, if you look at some of the other issues that we think are influencing things, these very big currency changes, it clearly affected capacity assessment.

If you were a person exporting out of the US, at the beginning of this year, versus now, you are 18% less competitive.

That has caused a lot of people to back up.

At some point, that capacity appraisal will be made and people will decide what they are going to do.

And then the last item, which we have almost all forgotten about, is when natural gas dropped two, three years ago.

People speculated on the re-industrialization of the United States.

And we cautioned at that time, that is going to take five years because designing these plants and building these plants and putting them into production is a five-year cycle.

Guess what?

End of 2016 and early 2017 is when a lot that have starts.

So there is a phase of construction going to come here in the country that is going to be of a very large size.

And that is traditionally an area where Eaton has participated quite well but it is not quite yet.

So again, we don't see this very slow, grinding recession that doesn't have a monetary crisis attached to it, we don't see a reason why that goes dramatically negative.

But it is a difficult, frustrating, grinding environment and that is why we say, again, our strategy has to be built upon at this point.

We are not going to change the markets.

But we can get our costs down and we can drive superlative cash flow performance that gives us the ability both to maintain a strong dividend, buy back shares and invest in the business selectively where it makes sense.

And, Sandy is China really what you are going to be watching here?

In other words, based on your experience, I realize you are not an economist, but is there one or two things you are really going to kind of be focusing on in the coming months to discern if the down 1% to 2% is the scenario or in fact it gets worse, like more of a classical recession.

Yes, we'd have to watch because we're in a couple different lines of this.

We have to watch a bunch of different things But, I think the likelihood we are going to see these commodity businesses change substantially during 2016 is probably pretty low.

So when you talk about ag and construction and mining, et cetera.

So, we'll be watching industrial investment, industrial capacity, MRO spending.

I think those are issues that will help inform all of us as to what's the nature of this going to be.

I suspect that residential and light commercial, nonresidential constructions will be relatively steady.

I think it's going to be more around this industrial side, that's going to be the area to watch.

Thank you very much.

Unfortunately, we have run out of time for our question session today.

But we'll be available to answer questions following up to the call today.

But I want to thank you all for joining us.

We appreciate your time and we will be able to address your follow-up questions afterward.

Thank you.

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

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

You may now disconnect.