伊頓 (ETN) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Eaton First Quarter 2017 Earnings Call.

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

I'd now like to turn the conference over to Senior Vice President of Investor Relations, Don Bullock.

Please go ahead.

Good morning.

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

Thank you all for joining us for Eaton's first quarter 2017 earnings call.

With me today are Craig Arnold, our Chairman and CEO; and Rick Fearon, our Vice Chairman and Chief Financial and Planning Officer.

The agenda today, as typical, will include opening remarks from Craig, highlighting the results in the quarter along with our outlook for 2017.

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

The press release from our earnings announcement this morning and the presentation we'll go through today, after some initial technical delays, were posted on our website at www.eaton.com.

Please note that the press release and the presentation do include reconciliations to non-GAAP measures.

A webcast of this -- of today's call will also be available for replay after the call.

Before we get started, I do want to remind you that our comments today do include forward-looking statements and the actual results may differ from those and that any of those risk and uncertainties are outlined in our related 8-K that's filed.

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

Thanks, Don.

And we're very pleased with our Q1 results.

As you've seen, net income and operating EPS coming in at $0.90 -- $0.96 a share and 13% above the midpoint of our guidance, which was $0.85 a share.

And we're especially pleased to see the return to positive revenue growth in the quarter.

This quarter represents the first quarter in over 8 quarters where revenue growth is positive and reflects improving market conditions in many of our businesses, with a real acceleration in the month of March.

Organic revenues were up 2%, with ForEx being a negative 1% in the quarter.

Segment margins were 14.4%, and we'll speak in more detail about this later in the presentation.

But excluding restructuring costs of $17 million in the quarter, segment operating margins were 14.8%.

We also had very strong cash flow in the quarter of $463 million, which was a Q1 record, and this does include a $100 million contribution that we made to our U.S. qualified pension fund in the quarter.

In addition, we repurchased $255 million or 3.6 million shares in the quarter and increased our quarterly dividend from $0.57 to $0.60 per share and we announced this back in February.

Turning to Page 4. We've outlined the major drivers of the Q1 EPS results, which exceeded our guidance, which we, as you recall, was $0.85 at the midpoint.

And the real story here is revenue.

Organic revenues were up slightly below 2%, but approximately 3 points higher than our original guidance.

And as you'll recall, our guidance was that revenues were going to be down 1.5%.

FX was also 1% less negative than our original guidance of 1.5%.

Total restructuring costs in the quarter were actually $20 million, with $17 million of that in the reporting segments, which was about $6 million lower than our original plans.

And we'll talk more about the restructuring program for Q1 and the remainder of the year later in the presentation.

Finally, total corporate expenses were up about $0.02, driven by largely pension expense in the quarter, which was slightly higher than we anticipated.

So on balance, we think a very strong performance, really led by the increase in volume.

Quickly looking at segment income statement.

As we mentioned, organic growth was up 2%, driven principally by strength in Hydraulics and Electrical Products segment, offsetting about 1% negative FX overall.

Segment operating profits were up 4% or $30 million in the quarter to $700 million and, excluding the impact of restructuring costs, segment margins were down about 30 basis points in Q -- from Q1 of '16 but at 14.8%.

As we discussed when we provided guidance for Q1, we did see commodity cost inflation in the quarter that in many ways largely offset some of the additional restructuring benefits that we would ordinarily have seen flow through.

But we do expect this issue to wash out by time we hit the second half of the year, so we see it as largely a first half issue.

And between the work that we're doing around cost and pricing, we don't expect to see this impact linger on into the second half of 2017.

Overall, restructuring expenses declined from $63 million in Q1 '16 to $20 million in Q1 '17, with a portion once again reflected in the segment results, declining from $59 million to $17 million, respectively.

Turning to Electrical Products segment.

Revenues were up 2% with organic revenues up 3%.

So you have 1% negative FX and revenues were up in all regions, consistent with the pattern that we've been seeing where we saw strength in residential products and lighting.

What's really new this quarter is the strength that we experienced in industrial controls and particularly in the European market.

Orders were up 3% in the quarter.

We saw growth in the U.S. and in Europe.

Residential products were up low double digits.

Lighting was up low single digits.

Industrial controls was up low single digits.

And the areas of strength were particularly offset by some weakness that we saw in single-phase power quality, largely a result of a onetime order that we had in Q1 of 2016.

Order growth in Q4 '16 was also up 3%, so this is really a continuation of the pattern that we've seen in our Electrical Products segment.

We're also very pleased with the operating margins at 17.4%, or 17.6%, excluding restructuring costs, up some 50 basis points over Q1 2016.

And looking at Electrical Systems and Services, organic revenues were flat in the quarter, and we see this as really good news after 8 quarters of consecutive revenue declines.

ForEx was down 1%.

Sales in the quarter continue to be impacted by weakness in what we call large industrial projects and in the oil and gas segments.

So very much consistent with what you've likely seen from others and heard from others.

Regionally, we saw strength in Europe and Asia.

We also experienced strength in the Americas in commercial assemblies and in three-phase power quality.

Our orders in the quarter were flat.

We saw notable order strength, however, in Asia, offsetting continued weakness in the Americas and in Europe.

And I will point out, though, flat orders in the quarter, this does compare to a 7% decline in Q4 of 2016.

So perhaps an inflection point.

Margins were down 30 basis points year-on-year to 11.6%, down 90 basis points to 11.8% when you exclude restructuring costs.

And so we do continue to experience a negative margin impact as large industrial projects and oil and gas remain weak in this segment.

On to Hydraulics and perhaps the biggest story in the quarter as it appears that markets are showing significant improvement.

Organic revenue was up 9% in the quarter, following strength in orders that we noted in Q4.

And orders were up 22% in Q1 on strength in what we saw in really all regions of the world with particular strength in Asia, followed by Europe.

And the order strength really extended both to the OEM and the distribution channels and both were up double digits.

So really, a broad-based strengthening in our Hydraulics business.

Segment operating margins continued to improve, they were up 280 basis points over Q1 of '16 at 10.2%.

And excluding restructuring costs, up 150 basis points year-on-year to 11.8%.

And this improvement reflects the continued benefits that we're seeing from the restructuring program for sure.

But I'd also note that it's been somewhat mitigated by a regional mix impact from stronger revenue growth in Asia Pacific, where our margins tend to be modestly below those in North America.

Turning to Aerospace.

Organic revenues in the quarter were down 1%, with foreign exchange down 3% in the quarter.

This is primarily a function of the weak British pound where we have a major presence.

We experienced weakness in military aftermarket and military rotorcraft, biz jets and regional jets, I think pretty much consistent with what you've heard from other companies.

And this was offset by strength that we continue to see in commercial transport and also in commercial aftermarket.

Orders were up 2% in the quarter on strength in commercial transport, commercial aftermarket, military rotorcraft and biz jets, and this was particularly offset by weakness in military transport, fighters and particularly in [NRE], our customer-reimbursed engineering expenses.

And excluding NRE , orders were actually up 6% in the quarter.

So that -- we think that's a really encouraging sign in our Aerospace business.

And we continue to see strong margin performance out of the segment, with operating margins at 18.5%, or 18.7% when you exclude restructuring costs.

And lastly, in our Vehicle segment, organic revenues declined 2% in the quarter, largely driven by weakness in NAFTA heavy-duty production, which was down some 20% in the quarter.

You will recall that in 2016, the year started quite strong and weakened significantly as the year progressed.

But the comps do get easier from this point forward.

So we'd expect that, relatively speaking, Q1 was our most challenging comparable versus last year.

Margins in the quarter were at 13.7%, 14% excluding restructuring, down about 240 basis points from prior year.

And while largely consistent with our guidance, margins were below normal for 2 unusual items.

First, I'd say, we're ramping up the precision medium-duty transmission and volumes are not yet at scale, so we're still running some inefficiencies there; and secondly, we did have a warranty issue in the quarter that also depressed margins.

So we'd expect things to improve from this point forward.

Page 11 is a summary of the revenue guidance for the year.

And as a result of strength that we experienced in Q1, we're increasing our growth expectation in 3 of our segments: in Electrical Products; Electrical Systems and Services; and in Hydraulics.

And in all 3 businesses, revenues and orders came in above expectations in Q1.

We've also generally seen better-than-expected conditions in a number of the end markets that are important to each of these businesses.

And we're increasing at the midpoint then our guidance for Electrical Products by 1 point and Electrical Systems and Services by 2 points and then Hydraulics by 6 points.

Our view is unchanged for the other 2 businesses.

Now, these 3 changes take the midpoint of guidance for Eaton to up 2% for the year, 2 points higher than our prior guidance.

Now, turning our attention to restructuring.

I thought it would be helpful to provide a bit more guidance on the pattern of restructuring spending for the remainder of the year, since the pattern of this year's spending is somewhat different than what we've seen in prior years.

If you'll recall, we pulled forward $70 million of spending originally planned for 2017 into Q4 of '16.

And that resulted in our Q1 spending being somewhat lower than it would have otherwise been with a step-up in restructuring beginning in Q2.

So we outlined this plan on Page 12.

Our expectations for spending for the entire year.

And consistent with prior guidance, we expect to spend $100 million this year and will obtain $155 million of incremental benefits in 2017 over 2016.

In Q1, we spent $20 million, modestly below our plan of $26 million, primarily driven by the timing of a couple of projects that were shifted into Q2.

In Q2, we plan to spend $40 million with the remaining $40 million for the year planned in the second half.

Overall, our restructuring plan remains on track.

As we reported earlier, we expect, on an all-in basis, the program to cost $440 million and to see benefits of approximately $520 million.

Page 13 is the summary of our segment margin guidance for the year.

In Hydraulics, due to strength that we're seeing in markets and higher volumes that we now expect, we're raising the midpoint of our guidance by 40 basis points.

Overall, other than Hydraulics, we think that each of our businesses are within the margin ranges that we guided to for the year.

And due to the relative size of Hydraulics business, a change in Hydraulics margins does not change the overall margin guidance for the company for the year.

And the other thing I would point out and as a point perhaps of clarification, as a matter of practice, what we would intend -- we would intend to change our margin guidance only when we believe our performance will be outside of the ranges provided.

And this holds true for each of the business segments individually and for the company overall.

And on Page 14, we've provided the customary summary of our guidance for both the year and subsequent quarters, and as we've covered most of these numbers in prior slides, I'll just summarize by indicating what's changed.

First, a $0.15 increase in the midpoint of our guidance, with a new range of $4.45 to $4.60, a 2 point increase in the midpoint of our revenue guidance.

Also, a change in our -- change from our prior guidance, we think FX will be negative $150 million for the year.

And this is down from our prior guidance which was $300 million.

And all other items remained unchanged from prior guidance.

Turning to Q2.

We expect EPS to be between $1.05 and $1.15, with $1.10 midpoint; organic revenue growth to be up 1% to 2%; negative FX to be negative 1.5%; and segment margins between 15.2% and 15.6% and this does include restructuring costs; and lastly, a tax rate of between 8% and 9%.

I'd also note that this guidance does not include any impact from the recently announced JV with Cummins as we continue to expect that the JV will close sometime in Q3.

And lastly, Page 15 is a summary of the key points covered in today's presentation, and I'll just close by stating that we're encouraged by the signs of improvement that we're seeing in a number of our end markets and we generally feel better about growth prospects for the year.

We would naturally expect this to translate into higher EPS, and that's our expectation and that's what's reflected in our guidance.

Our cash flows remain strong.

Our share repurchase plan is on track as is our restructuring program.

So we remain cautiously optimistic that 2017 continues to represent a turning point for a number of our end markets and a turning point to our company.

So I'll stop there and turn it back to Don.

The operator is going to provide for us instructions for the question-and-answer session.

(Operator Instructions)

Our first question today comes from Scott Davies from Barclays.

So it's nice to see the Hydraulics numbers pick up so quickly.

But I have to ask, can you satisfy demand that quickly in a segment you've been restructuring aggressively?

I mean, I assume your supply chain is well and are you comfortable at least you can ramp up production fast enough?

Yes, I mean, I'd say this.

The short answer to the question is, Scott, it will certainly take a concerted effort and good execution by our team, but we're ready for this turn.

We've been living, as you know, with -- in down markets in Hydraulics for the better part of 3 years.

And so our team is ready, willing and able to take on the volume challenges that we're facing.

And so at this point, we're comfortable that Eaton, and we're working obviously, through our supply chain to make sure that they're ready as well.

But our team is ready for it.

Okay, fair enough.

And just on ESS, when you think about the oil and gas markets and you're specifically pointing to -- the comment, oil and gas markets negatively impacting margin.

I assume that's -- a big part of that's Crouse-Hinds, but help us understand that the mix of your oil and gas kind of onshore or offshore and if you expect that to come back in 2Q?

So I think a lot of your peers have already seen a somewhat meaningful snapback at least in the onshore stuff that's short cycle like that.

Do you want to take it, Rick?

Scott, it's Rick.

Our mix, historically, has been more downstream than upstream.

And so we aren't as impacted by improvements on the upstream side.

We have not really seen our upstream activities accelerate at this point.

We're looking for it.

We have seen a little bit of improvement in MRO in the harsh and hazardous space and even in the industrial controls that go into some of the onshore rigs particularly.

But we have not seen any broad-based pickup yet on the project side.

Our next question comes from Joe Ritchie with Goldman Sachs.

This is actually Evelyn Chow on for Joe.

Maybe just turning to ESS for a second, very encouraging to see maybe some incipient signs of stabilization or recovery.

But it looks like the project business hasn't picked up much yet.

Does your higher guide imply any acceleration there?

Or it's sort of going through things as status quo?

Yes, at this point, it does not.

I mean, we came into the year with what we'd say is a relatively well-grounded assumption around the way large projects would unfold for the year.

And to date, I'd say it's largely playing out the way we anticipated.

So we do not have a return to growth in large projects backed into -- built into the second half of the year.

That's helpful context, Craig.

And then maybe just turning to price/cost for a second.

Totally understand the dynamic of maybe things normalizing a bit in the second half.

Just wanted to see how that squared with your previous expectation of about $80 million of material inflation in 2017?

Yes, appreciate the question.

Certainly, we -- as you pointed out, we did come into the year anticipating about $80 million of, let's call it, uncovered commodity price inflation that we would experience in the business and we'd indicated that, that would be largely a first half issue.

And that's largely what we've seen.

We saw it certainly come through in Q1.

We came into the year with an expectation that commodity prices would start high, and we'd see some mitigation in commodity prices as the year unfolded.

That is still largely our belief that, number one, commodity prices will probably mitigate as the year unfolds.

But more importantly, what will -- we'll have some time under our belt and we will have essentially been able to offset this commodity price with price increases in the marketplace.

And that is largely still our anticipation.

It is mostly a second half event and that is the plan that our teams are currently executing towards.

The next question comes from Ann Duignan with JP Morgan.

Could you just give us a little bit more color on the Hydraulics business on the orders?

If you could break out maybe by region, mobile or construction versus ag, mobile versus distribution and then just around the world.

And then a follow-up, Craig, you highlighted industrial controls Europe as up.

If you could just give us a little bit more color on that also, I'd appreciate it.

Yes, I'd say, Ann, if you think about Hydraulics orders and you obviously know this market well, what we've seen is largely a relatively pronounced snapback beginning in the Asia Pacific region, largely in mobile markets.

Those markets had been down and down hard over a period of multiple years.

And so clearly, the biggest strength that we're seeing today inside of Hydraulics is coming out of the China market and largely coming out of the mobile market on the construction side of the business.

But having said that, Europe was also quite strong, stronger than what we anticipated.

And there too, a lot of the growth was in the mobile segment but also, we saw strength in the industrial segment as well.

And so I would say that in general, the recovery in Hydraulics has been relatively broad-based, principally led by mobile, construction, but also, I'd say, equally balanced between what we're seeing today in both the OEM channel and the distribution channel, which we find quite encouraging.

We also, in doing a bit of a channel check, we think today that the distribution channel is selling through, that we're not building inventory at this point in the cycle.

So we're really encouraged by the outlook.

So...

And then the comment on your industrial controls, Craig?

Yes.

Ann, I think we see that more broadly.

And as I mentioned in the commentary, what's really changed today in our Electrical Products business is the fact that industrial controls, we're seeing pretty broad-based strength in those markets.

And I would argue that a lot of that strength, quite frankly, that we're seeing in industrial controls is a function again of what's happening in the China market.

As those markets continue to improve, we see industrial controls in Europe really picking up a lot of that equipment that actually flows into China, but even in the domestic market, we're continuing to see strength in industrial controls.

Too early to say exactly how this unfolds longer term.

But certainly, a pretty broad-based basis of strength around the world in industrial controls and in Q1.

Is it fair to say, Craig, just the ISM PMIs in Europe have been strengthening in GDP and your strengthening, is that underlying what you're seeing over there?

Yes, and I'd say yes, we're certainly seeing perhaps even more underlying strength in many of our end markets than the PMIs would suggest and industrial production would suggest, which tells us perhaps some of that is also tied to what's going on in markets outside of Europe, mainly what's going on in China.

But in general, what we've seen across each of our businesses, and I think what we've generally seen in industry, is that Europe turned out to be much stronger than most of us anticipated.

The next question comes from Julian Mitchell with Crédit Suisse.

Just one more on ESS, I'm afraid.

I guess this question would be really around the margin progression through the year.

The margins were down a bit in the first quarter with flattish sales.

So when you're thinking about your guidance for up margins for the year as a whole, is that because it's what you see in your backlog today and that gives you 6 to 9 months of visibility?

Or is it really just basic stuff around the restructuring charges comp from late 2016, the commodity cost headwind abating in the second half, that sort of thing?

Yes, I think, Julian, it's more the latter, that today, where we have been undertaking a fairly significant restructuring effort in our Electrical Systems and Services business, and those benefits certainly improve as the year unfolds.

Secondly, we talked about the commodity inflation issue that we're dealing with and so we certainly saw in our Electrical Systems and Services business like we did for the balance of the company.

We saw commodity price inflation that also that we were not able to offset with price increases or other cost-out measures in Q1.

And that also begins to mitigate itself as the year unfolds as well.

So we think it's largely those are the reasons why we're confident that our margins will improve in Electrical Systems and Services.

And also, we tend to feel volume tends to grow as well and we tend to be more back-end focused from a volume standpoint in Electrical Systems and Services and that will help margins as well.

And then just switching over to Vehicles.

You had a nice sequential increase in revenue in the first quarter, so back to some kind of normal seasonality perhaps.

Could you discuss a little bit your expectations for the balance of the year in terms of truck versus light vehicle?

I think a lot of companies had a very strong first quarter for light vehicle supply chain.

To what extent do you think that persists through the balance of the year?

And maybe give any color you can on the truck side, the build rate plans of the OEMs?

Yes, first, maybe on light vehicle markets around the world, and I'd say they continue to perform and hold up very well.

And quite frankly, we've been surprising by the size or the strength in certain markets, principally I'd say Europe, where markets were quite strong in Q1.

And so at this juncture, we'd say there's no real reason to suggest that light vehicle markets around the world are going to turn out to be any different than what we anticipated when we set our plan for the year, which was to be essentially flat to up slightly.

So we remain very much convinced that, that forecast will hold to be true.

With respect to the NAFTA heavy-duty production, I mean, right now, if you take a look at the production schedule for the year, the production schedule for last year, it was essentially a year where we started quite strong and we saw weakness in the back half of the year.

And today, most of the indicators are that the NAFTA Class 8 market is strengthening.

And so we think, as I mentioned in the commentary, that Q1 represented the most difficult comparable where production was down 20%.

And we think that things essentially begin to improve from this point forward.

And so our number for NAFTA Class 8 is flat for the year.

There are a whole multitude of forecasts out there, some of which are lower, some of which are higher and -- but we remain convinced that flat is the right call on the North America Class 8 market for 2017.

And, Julian, in the context of flat, this is how we think about the market.

We think that -- or at least [ACT] data is that production was 51,000 units in Q1.

And by the time you get to the back half of the year, we think you're going to see production per quarter in the neighborhood of 60,000 units.

And that's how you get to flat.

Now, if you actually look at the straight build plans that we collect, they would actually total to a bit more than flat.

So we think it's a little early to make that firm conclusion.

And the build plan typically is above the market.

So that would be very much consistent with pattern historically.

Our next question comes from Nigel Coe with Morgan Stanley.

Just wanted to dig into lighting.

Obviously, we've seen a couple of your big competitors in North America report somewhat disappointing trends.

You called out low-single digit growth, I think, in orders.

I'm just wondering, maybe just shine a bit of light on lighting, pricing and maybe the impact on margins this quarter from any price pressure you saw?

Yes.

No, what we saw -- the way I'd characterize kind of the underlying performance of our Lighting business and what we're seeing, Nigel, is it really continues to perform in line with the patterns that we've seen.

A lot of lighting is going into nonres construction, into commercial buildings.

It's going into residential housing.

And so we think Lighting to be up low single digits is very much in line with what we've seen from the market and very much what we expect going forward.

And if you think about the key industries that essentially drive that market, we don't expect it to perform any differently.

To your question around margins, clearly, we continue to see the price of LED-underlying technologies come down.

That's, in many ways, being passed on to the marketplace, and so we continue to get cost out of Lighting.

That is largely in line with the underlying reduction in the input cost.

And our underlying margins overall in our Lighting business actually continue to improve.

Yes, so I think in the NEMA data's calling for lighting to be flat to down this quarter.

I think actually down low single digits.

Is there anything in your footprint, be it new construction versus replacement or resi versus C&I, that would explain that performance?

Or do you think you're gaining share like-for-like?

Well, if I could just make a comment, Nigel.

The NEMA data is not inclusive of the entire market in that they -- it's a subset of the participants.

And so you've got to take that data with a little grain of salt.

So as we create our own index of the lighting market, we use the NEMA data and then we use some estimates of what other participants likely have done.

And our belief is that the market is growing in the low to mid-single digit kind of category.

But that said, we'd be disappointed if weren't gaining a little share.

That's certainly the expectation, so it's...

Right, okay.

That's interesting.

And just a couple of quick ones.

Rick, why would the second half tax rate be higher?

I mean, that's obviously what's embedded in the guidance.

And then maybe just call out the impact of the warranty true-up this quarter in Vehicle?

The tax rate is largely, this year, a function of the mix.

And so as we start seeing seasonally higher growth and also, seasonally higher earnings in the U.S., that typically is what pushes the rate up a bit and as well as in Brazil.

We expect that economy to improve as we go across the year.

So that's the major impact.

If you're asking about the -- are you asking…

Warranty.

On the warranty on truck, the Vehicle impact in the first quarter was about 8 -- and I'm going to get to the exact number, $6 million.

That was the impact in the first quarter.

Our next question comes from Jeff Sprague with Vertical Research.

Just one little follow-up on Lighting.

Was there a distinction in your growth rate between nonres and resi, or between large projects and smaller projects on the nonres side?

Jeff, I don't really have the data.

I don't believe there was, but we can certainly take that as a follow-up and Don can follow up with you after the call.

But I don't believe that we saw any significant difference in our performance.

I mean, large projects, in general, are pretty much following the pattern that we've seen and in general, there's fewer very large industrial projects in general.

But I'd say that that's not what drives most of our Lighting business.

It's more of the commercial projects and street lighting and resi.

And we've not seen, I don't think, any significant difference in the pattern of sales or orders in those segments.

Okay, great.

And just back to kind of the margin guide not moving.

I'm just wondering if there's some headwind.

My rough math: 2 points of organic growth at a 30% incremental is kind of 60 bps of margin.

And your margin guide range for the year is 60 bps.

So it does seem like the better revenue should have knocked you outside of the range.

Is -- I mean, maybe 30% incremental at the sales level's not the right number or there's something else, but how should I think about that?

Yes, I'm not sure what calculus that you're doing, Jeff.

But in our own calculus, in our -- which is reflected in our guidance, we think we are still within the range.

And that's kind of the basis for the guidance that we provided.

We don't think that the volume changes and the other assumptions take us outside of the range that we've indicated.

Our next question comes from Steve Volkmann with Jefferies.

Curious about your thinking now that Hydraulics looks like it's clearly bottoming and getting better.

How do we think about what sort of more normalized margins in that segment might look like given all the cost saves that you've done there?

What we said, Steve, about Hydraulics is that if you think about this business, we said that we established a range of profitability of 13% to 16%.

And we said that even at the bottom of the economic cycle, post restructuring, and I will point out that we're not done with restructuring yet, we still have the balance of 2017 to get through, at the very minimum, that you could expect this business to deliver at any point in the economic cycle, 13%, and we're still very much convinced that that's the case.

And then we said from that point forward, you could expect, obviously, margins to ramp from that point.

And you could expect probably pretty good incrementals on that.

So at this point, we're not prepared to go outside of those ranges that we've established.

We have to first of all get into those ranges and demonstrate and prove that we can sustain that.

But that's now where we're parked on the business.

We think it's 13% to 16% through the cycle.

Okay, great.

And then, I think, Craig, you mentioned in the outset that the cadence of the quarter was positive and that March was a big month for you.

I don't want to put words in your mouth, but I'm curious, as you look at that, it sounds to me, sort of across the board, that North America was kind of the weaker of all the geographic markets.

And I'm curious if you're seeing signs that North America is actually sort of starting to participate in the green shoots that we're seeing here?

I think it's accurate first to say that we definitely saw an acceleration in the rate of growth in the month of March, and that really was pretty much across the board in all regions and in all businesses.

But I will say to the point around the U.S. market, the Americas markets versus rest of the world, I'd say that we continue to see more robust growth outside of the U.S. and that pattern is really, I think, largely continuing.

Our next question comes from Chris Glynn with Oppenheimer.

A follow-up on tax rate.

I think your long-term outlook is roughly for 1 point of increase a year.

If the mix progression that you have into the second half outlook holds, would we be looking at a little bit greater magnitude of tax rate increase for 2018?

Well, that -- I haven't looked at that specifically.

I mean, clearly, the biggest mover on our rate is the mix, the geographic mix, the 2 biggest factors being the U.S. and Brazil, which are the countries that currently have the highest tax rate.

I don't know what the tax rate is likely to end up with after the administration finishes its work in the States.

And so really, that's how I'd have you think about it.

To the extent that Europe and Asia continue to grow faster than the U.S., then no, you wouldn't have a negative mix impact on the rate.

But if that flips around and the U.S. does start to accelerate, perhaps because of infrastructure programs or a tax cut that causes an increase in business investment, then yes, you might see the rate edge up a little faster.

Our next question comes from Andrew Krill from RBC.

On the lower restructuring in the quarter and, I guess, just specifically which segments saw less than planned?

Andrew, we didn't catch the first part of your question.

(inaudible) Can you repeat it?

Sorry, it was that on the -- back to the restructuring, could you give some more specifics on, I guess, which segments saw less than expected?

And if this kind of had anything to do with maybe trying to avoid interrupting any orders on the verge of a possible recovery?

Yes, it's a $6 million delta from the original plan, Andrew.

And I'd say that probably most of that delta was in the electrical side of the house, Systems and Services.

Systems and Services, and really it had to do with projects that we thought could get done but got moved into Q2.

Right.

So really it had nothing to do with us interrupting orders.

It was simply our ability to kind of get everything done and booked in the quarter.

Okay, got it.

And now, just kind of with demand seemingly on the verge of a recovery, broadly speaking, is there any chance that you may not need to do all the restructuring you currently have planned?

Or could that be tamped down?

What I'd say is a lot of what we're doing, Andrew, as we talked about in the past, is that we're making structural changes to the businesses, things that will fundamentally lower our structural costs inside the company that doesn't in any way prevent us from flexing our businesses and growing as volumes go up over time.

And so no, we think that this restructuring plan, independent of volume, is the right plan and really does position our businesses in the company to deliver this higher margins through the cycle and at all points in the cycle.

Our next question comes from Rob McCarthy with Stifel.

Rob McCarthy here.

I guess the first question is just an update on kind of your outlook for M&A as a whole because, I think, Craig, when we spoke in the February time frame, I think you cited expensive valuations across the board.

That's continued, and you can see that in kind of the slow rate of global M&A overall.

And then like, I think, Rick, when we sat down, I think there was some ambient concern around, let's just say, achieving cost synergies, particularly in an environment where it seems globally people are a lot more zealous about protecting the raw material of cost synergies often, which is workers unfortunately.

So could you talk about kind of how you look at the M&A environment right now?

Is it just incrementally worse?

And does this kind of push you to really think about doing other things with your cash right now?

Yes, I'll take that, Rob.

Clearly, valuations are still high, but, of course, earnings growth is accelerating and that is definitely improving over time how you look at these valuations.

Secondly, we have seen -- just in the last several months, we have seen more and more situations where it appears that a sale could be possible.

And so we have become more active at looking at opportunities.

Hard to know at the end of the day what, if anything, we end up getting done.

But as you know, we have had a long history of completing a significant number of acquisitions, and we think we're pretty good at it.

And so we are now devoting more time to looking at opportunities.

To the comment about synergies, it's very hard to tell to what extent there will be any institutional constraints on achieving cost synergies.

It does appear that the commentary around that has subsided quite a bit.

And so we'll just have to look at each situation on its own merits to decide whether we're comfortable with the synergy possibilities.

Okay.

And then just any kind of -- and I might have missed it, there might have -- this might have already been covered in the context of the call, but any update from your perspective on the JV with Eaton-Cummins and kind of the messaging there?

Because I think there was an update today.

Anything incremental you want to add on this call?

Yes, and I'd say, not really.

I mean, we -- I think we -- in the call that we had, we laid out the strategic rationale for the joint venture.

And we're excited about the prospects that it will add and what it will do to accelerate the growth rate in our automated transmission businesses.

And at this point, we would expect that the transaction will close in Q3.

There's actually 7 antitrust filings that we have to make and that's really the long lead time item that we're working through right now.

But we remain optimistic that Q3 is the right timing, and we think it really does strategically advantage our transmission business going forward.

Our next question comes from Andrew Obin with Bank of America.

I guess, just a question on the Hydraulics business.

Just a version of normalized margin question.

A, do you think you can continue to post positive order growth through the end of the year?

And b, if you look at the normalized volume for this business, how much -- where are we relative to normalized volume, 80%, 70%, 60%?

Yes, Andrew, I think that's the 64,000 question regarding the future and whether or not we're at kind of this key turning point in hydraulics market.

I can just tell you, based upon history, for those of us who've been around in this industry for a long time, you typically go through pretty long up cycles.

And all indications are we're at the front end of an up cycle in Hydraulics.

And so our expectation would be that orders continue to be positive throughout the balance of the year.

But at this point, we think, well, let's see how Q2 unfolds.

But at this point, we are certainly optimistic that, that will be the case.

The other half of your question had to do with...

No, I mean, I think that's sort of where we are relative to normalized volume.

And just -- yes, sorry.

Yes, sure.

The thing I'd say -- no, I'd say -- on that question, I'd say relative to normalized volume, I'd say we're probably still some 25% below what we'd call the normalized volume for those markets.

And so I think we have a long way to run before we get back to what we'd say would be kind of a normal level of market activity.

And just a follow-up on Hydraulics.

Historically, you've had very strong exposure to agriculture.

Can you provide some color what you're seeing in those markets and how much it's contributing to the order strength?

Because I think on the construction, it's more apparent.

Yes, we had strong orders in agriculture as well in the quarter, Andrew.

But one other comment I might make just to talk about the order pattern across the year, there is a question of the extent to which the very strong orders in China continue.

You probably saw the data excavator sales, for example, are up very dramatically.

And so that is one factor that certainly you could see coming down a little bit.

The growth still being very positive but perhaps not quite as positive as it was in the first quarter.

So that's one thing that we're looking out for as the year progresses.

Our next question comes from Andy Casey with Wells Fargo.

Near-term question, and you may have just answered it, Rick.

But the Q2 revenue guidance implies -- well, it includes 1% to 2% organic versus 2% in Q1.

Clearly, it's slight, but it implies a deceleration.

I'm trying to understand the drivers behind that.

Is it end market like the China comment that you just made?

Or is it something else like fewer business days?

Yes, I guess the way I would characterize it, Andy, is that the first quarter rounded up to 2%, but it was between 1.5% and 2%.

And so our guidance for Q2 really implies essentially very similar kind of organic growth in Q2 to Q1.

The other thing I would add, Andy, that part of perhaps the hesitancy that you're seeing from us and others is that March was a very strong month.

And so there's a real question to what extent did what we experience in March.

Was it a function of the fact that Easter fell in April this year versus March?

And is there a normalization of what happened in the month of March?

And so, at this point, we're a little bit hesitant to make a more robust call because March was such a big piece of the quarter.

Okay, Craig, I'm going to take the bait within that response.

It's kind of somewhat related.

Eaton has a very diverse view of the U.S. market.

And per your comments, March being very strong globally, we've seen some deceleration in PMIs in the U.S. in April.

I'm just wondering if the company has seen any similar deceleration in April relative to March?

No, actually, we haven't at this point.

I mean, the month of April has unfolded largely as we anticipated.

But once again, as you can see from our guidance, what we anticipated was a Q2 that would largely look like Q1.

Okay.

And then squeeze one last in, just a clarification.

On ESS, understand large project activity in oil and gas.

You called that as remaining weak.

With -- just wondering, within that segment, did any end-market demand actually get worse?

Or is what we're seeing in that commentary more a function of comparisons?

I would say it's largely a function of comparisons.

It's the three-phase power quality market had had some very large orders in the prior year.

And so that -- with ESS, you didn't see orders that totally replaced those strong three-phase orders.

But other than that, there really wasn't anything that got worse.

Other than perhaps the Middle East was -- weakness in the Middle East as well.

Yes, which is not a giant part of the business but clearly, in Saudi Arabia, for example, there is some softness.

Our next question comes from Jeff Hammond with KeyBanc.

Just one more on 2Q guidance.

It looks like you're calling for about segment margins to be flat, and you had a good lift in 1Q and your guide has a nice lift.

So anything within that, the 2Q guide, whether it be restructuring timing or savings timing that would support more flattish margins versus the lift?

The only thing I would say, Jeff, as we talked about this issue of commodity prices versus price realization in the marketplace versus other cost-out initiatives and I'd say that's probably the one issue that we continue to work through that is holding back margins being stronger in Q2.

We have a plan.

But as we mentioned to you, that issue essentially mitigates and solves itself by the time we get to the second half of the year, but that continues to be a pressure point in Q2.

Yes.

If I could slip one more in.

In ESS, you noted -- you cited the strength in Asia.

What's driving that particularly?

Yes, I'd say we're seeing broad strength across the board in the Asia market.

And whether it's the stimulus spending that the Chinese government is pumping into the economy, whether it's the monetary policy, we're generally seeing across the board strength in the Asia market.

And tough to tell exactly what's driving it, but it's pretty broad based.

Our next question comes from John Inch with Deutsche Bank.

Hey, Craig, the $80 million of raws headwinds, is there any -- or (inaudible), is there any way to parse out how much was in the first quarter and maybe a little bit of color by segment?

Or was it more weighted?

I would -- really, I'd say that we'd rather not parse it.

We're seeing it across the board in each of our businesses.

We -- the front end of the pressures were probably more electrical-centric.

Of late, they're more industrial-centric.

But I think we're really seeing it across the board in each of our businesses.

And at this point, as we talked about the absolute size of the number, we said essentially, it was about offsetting the restructuring benefits.

And so it was certainly a material number.

And the reason, Craig, we're not raising prices in response is because we expect these cost basically to be transitory?

Is that how the market thinks?

Or is there some other reason?

No, what I'd -- the way I'd say, the way you should think about it is that we are, in fact, raising prices, but it takes time and -- number one.

And secondly, one of the big challenges was, as we talked about in the last earnings call and guidance for the year, commodity prices were highly volatile.

And up and down from one day to the next.

And so you have to get to a period of stability where you actually understand exactly what the -- where the commodities are going to settle before you can really have an intelligent conversation with customers around taking prices up.

So we had to get to a point of stability before we could actually implement price increases.

But -- so we're going to -- between price increases and other cost-out measures, we'd expect this commodity inflation issue to go away in the second half of the year.

Yes.

No, that makes sense.

By the way, how did the -- within transport -- or Vehicle, how did auto do?

And what are your -- can you remind us what your auto build assumptions are for the year?

Yes, auto did well by the way and largely on the back of continued strength in China and surprising strength, quite frankly, in what we saw in Europe, where the car registrations were up quite nicely in the European market.

So I'd say, by and large, the market's doing fine.

The overall build assumption, we said it would be -- I think it's flat to up slightly.

Flat to up slightly.

And that encompassed the U.S. being down just modestly.

And so things are playing out, if anything, maybe a little better than we thought because of the non-U.

S. production.

And principally, Europe was -- more than anything.

That's really the market that surprised on the upside in Q1.

Yes.

No, that makes sense.

And maybe then just lastly.

There's a lot of attention focused on these oil and gas projects, and you've called out ESS for more than 1 quarter, right?

The question I have is do you think these -- Craig or Rick, do you think these projects can actually come back with oil prices at these levels?

In other words, is it a question of just the timing?

So oil holds at $50.

Do the projects actually come back?

Or do you need a little bit more of other things to sort of stimulate the activity?

And maybe with the answer to that, is the discussions you folks may be having with people in the field, that sort of thing?

Let me take a stab at that.

I mean, you have seen over the last couple of months, several companies announce fairly significant downstream type plans.

And so I do think some of those projects are likely to move forward.

On the upstream side, I think particularly for the very large offshore oil projects, I think that's the area that is not clear because unless an oil company really believes that prices are going to sustainably be at least at these levels, if not a little bit higher, question can some of those offshore, which are very big projects, can some of those make economic sense.

Thank you all for joining us today.

With that, I think we're going to wrap up our call.

As always, we'll be available to take questions and follow-up for the next couple of days.

Thank you for joining us.

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

Thank you for your participation.

You may now disconnect.