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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the Eaton Third Quarter Earnings Conference Call.
(Operator Instructions) Also as a reminder, today's teleconference is being recorded.
At this time, we'll turn the conference over to host, Senior Vice President of Investor Relations, Mr. Don Bullock.
Please go ahead, sir.
Donald H. Bullock - SVP of IR
Good morning.
I'm Don Bullock, Eaton's Senior Vice President of Investor Relations.
Thank you for joining us today for Eaton's Third Quarter 2017 Earnings Call.
With me today are Craig Arnold, our Chairman and CEO; and Rick Fearon, our Vice Chairman and Chief Financial Officer.
The agenda today, as typical, includes opening remarks by Craig, highlighting our performance in the quarter, the third quarter, and our outlook for the remainder of 2017 and some preliminary comments or thoughts as we look into 2018.
As we've done in the past, we'll be taking questions at the end of Craig's comments.
A couple of opening -- before I turn it over to Craig, a couple of issues.
First, I'd like to note that the press release for today's earnings this morning and the presentation we'll go through were posted on our website at www.eaton.com.
I'd ask you to note that both the press release and the presentation do include some reconciliations to non-GAAP measures, and the webcast for today's call is accessible through our website and will be available for replay after the call.
Before we get started, I do want to remind you that our comments today will include statements related to expected future results of the company and are therefore forward-looking statements.
Actual results may differ from those from a wide range of risk items and uncertainties that we described both in the earnings release and in our 8-K.
With that, I'll turn it over to Craig.
Craig Arnold - Chairman and CEO
Hey, thanks, Don.
Hey, if you have a chance to read, obviously, our results this morning, and so we delivered what we think are very solid Q3 results.
Reported EPS was $3.14, and this included $1.89 gain from the formation of the Eaton Cummins joint venture.
Excluding the gain from the joint venture, operating EPS was $1.25, and this included some $13 million or a $0.03 impact from the natural disaster, so up 9% over Q3 2016.
Sales were $5.2 billion.
That's up 4.5% in total, of which 3.5% was organic, and we had a 1% positive contribution from FX.
The 3.5% organic growth was at the top end of our guidance range.
And we reported segment margins of 16.4%, an all-time record for the company, up 80 basis points from Q2 2017.
And adjusting for $11 million of restructuring costs in the segments, margins were 16.7%.
And I also would add that margins were reduced by another 20 basis points in the quarter as a result of the recent natural disasters.
And so really, a strong quarter of operating results for the business.
In addition, we had exceptionally strong cash flow in the quarter.
Adjusted for the unplanned Q3 pension contribution, operating cash flow was just over $1 billion, once again, a quarterly record for the company.
Also of note in the quarter, we refinanced $1 billion of debt that was maturing in November, and we're very pleased with the attractive rates that we've achieved.
$700 million of -- was financed with a 10-year tenure at 3.1%, and we had $300 million of 30-year debt at 3.9%.
We also took advantage of the very strong cash flow, and we decided to contribute $250 million to our U.S. qualified pension plan, which is now funded at 94%.
Lastly, given the share price volatility that we saw during the second quarter, we repurchased $324 million of our shares in the quarter.
And at an average price of $73.29, this brings our total repurchases to $789 million for the year, and this compares to our original target of $750 million.
Turning to Page 4. This provides a simple bridge explaining our EPS performance for the quarter.
Compared with the midpoint of our operating EPS guidance of $1.25, we delivered $1.25.
Better organic growth delivered a $0.02 improvement, and better FX delivered $0.01.
These 2 positives were offset by the negative $0.03 impact from the hurricanes and earthquakes as we had previously announced on October 10.
In addition, we closed the Eaton Cummins joint venture in the quarter for an after-tax gain of $843 million or $1.89 per share.
This gain was derived from both selling 50% of the business and revaluing the remaining 50% interest that we hold.
Adding the $1.89 from the gain on the sale plus the $1.25 operating EPS, that's how we got to our reported EPS of $3.14 per share for the quarter.
Turning to our financial summary on Page 5. I'd just point out a few items not previously discussed.
First, the 3.5% organic growth is really our best result in 11 quarters.
So we're really pleased with the fact that the businesses are starting to inflect positively in many of our markets around the world.
And despite commodity cost headwinds, we did improve segment margins by some 40 basis points year-on-year.
And when you're adjusting for the impact of restructuring costs, segment margins continued to improve year-on-year.
In the quarter, they were up 20 basis points over Q3 2016 to 16.7% and up 40 basis points when you adjust for the natural disasters.
Moving to segment results.
We'll begin with Electrical Products.
Revenues were up 5%, 4% on organic growth with 1% positive FX.
And we saw notable strength in the Americas, industrial controls, commercial and residential products.
Europe was stronger really across all geographies.
And in Asia Pacific, power quality across the region.
Bookings were up 5% in the quarter, with strength, once again, in all regions.
Bookings improved from both Q1 and Q2, where they were up 3%.
And I would note that we all saw a particular strength in Central and Eastern Europe, which was up over 20%.
Transportation products was up high teens; commercial components up mid-teens; Canada and Latin America were up low teens; and residential in the U.S. was up high single digits.
Profits were at 18.7% or 19.2% when you adjust for the $11 million impact that we experienced from the natural disasters in this particular segment.
And our facilities in Puerto Rico are actually making good progress.
We have 4 facilities on the island, all of which are back in operation.
We've -- we're back on grid power in 2 of our facilities, 2 still running on generators but we have plenty of access to fuel to keep those facilities producing.
And in fact, production at most of our facilities is now running at pre-hurricane levels as we work to make up lost production.
We do expect a reduction in Q4 profits in this segment of another $8 million as a result of air freight, cleanup costs and overtime labor that we're running in our facility.
But we don't expect this problem to linger into 2018.
And in fact, while difficult to size at this point and as the building process begins in earnest, we do expect to see a positive impact on sales in 2018.
Moving to Electrical Systems and Services.
Revenues were down 1% in the quarter, 2% organic, offset by 1% positive FX.
We experienced weakness in large assemblies in the Americas and in power quality, but growth in engineering services and power systems, and notably, first signs of improvement in the Crouse-Hinds harsh and hazardous business.
Bookings were down 1% in Q3, and this compared to being flat in Q1 and down 2% in Q2.
The reductions were primarily the result of weakness in both the utility and data centers in Asia Pacific and large projects in the U.K. and Middle East.
The good news in the segment is that we're beginning to see signs of improvement in large assembly orders in the U.S., which is an important indicator for us in terms of this segment returning to positive growth, which we continue to expect to be the case for 2018.
One important indicator, large projects were up some 16% in Q3, and this is on top of a 25% increase in Q2.
Segment margins, excluding restructuring costs, were 13.8% in the quarter.
That's down 40 basis points from last year on a 2% reduction in organic growth.
As we look forward, we also expect to see an approximately $8 million profit impact in Q4 from the hurricane impact in this segment.
As many of you're aware, the components that we make in our Electrical Products business in Puerto Rico go into our Electrical Systems and Services business.
So that becomes a little bit of an issue for us as well in Q4, but that's fully baked into our guidance that we provided.
Turning to Hydraulics.
The story here is one of continued market strength, really, across all geographies both at the OEM and distribution channels.
Organic revenues were up 13% in Q3, a further acceleration from the 9% increase in Q2.
Margins were improved at 12.6%, and adjusting for restructuring, margins were 14%.
We're getting some benefits, for sure, from higher volume, but most of the improvement is the result of the restructuring efforts that have been undertaken in this particular segment.
We've also had a strong quarter of bookings again, up 22% from last year, and this follows a 32% increase in Q2.
And given the rapid increase in orders in this segment, there's certainly some areas where the industry overall is operating at capacity.
This is causing lead times to extend for some new orders.
And we're certainly in the process right now of flexing up our employment to respond to the increased orders that we're experiencing.
And then our Aerospace business, revenues were essentially flat in the quarter.
In the quarter, commercial transport and commercial aftermarket revenues were up low single digit.
Military OEM was up low teens, and this was offset by weakness in military aftermarket and also in the business jet (sic) [bizjet] segment, both of which were down in the mid-teens.
Bookings were up 11% in Q3 after being up 12% in Q2, and we experienced broad-based improvements here in most of the major markets.
Other than military transport and military rotorcraft, everything else was positive with particular strength in military fighters and also in bizjet.
And margins remained strong at 19.2% in the quarter.
And lastly, in our Vehicle segment, revenues were up 10% with 9% organic growth on strength in NAFTA heavy-duty vehicles, where our production was up 34% in the quarter.
Global light vehicle markets were a bit mixed, but South America up mid-20s, Europe and China was up low single digits with the U.S. down low double digits.
Positive FX contributed 2% to growth, and we had 1% negative impact due to the formation of the Eaton Cummins joint venture in the quarter.
And we're very pleased with our margin results at 17.4% and adjusting for restructuring costs, at 17.7%.
So a very strong conversion quarter for our Vehicle business.
In addition, we closed the Eaton Cummins joint venture on July 31, and we did receive $600 million in cash for selling 50% interest in the venture.
And in addition, during the quarter, we announced the launch of our new heavy-duty Endurant transmissions to really essentially a very positive reaction from the marketplace.
And so we're optimistic about what that's going to bring in the future for that business as well.
On Page 11, it includes an outline of our expected full year organic growth for the segments and for Eaton overall.
At the Eaton level, given the strong performance in Q3, we're fine-tuning our full year outlook from 1% to 3% organic growth to 2% to 3% organic growth for the full year.
So 0.5 basis point improvement at the midpoint for the full year.
In addition, as a result of the stronger NAFTA heavy-duty truck results, we're increasing our 2017 forecast to 250,000 units for the year, taking the overall growth expectations for vehicles to be up 2% from prior forecasts.
The other segments are largely in the range of our prior guidance.
Page 12 provides a brief summary of our restructuring program, which remains on track overall for both cost and benefits.
For the year, we'll spend $100 million, and we expect to see $155 million of benefits during the year.
You'll also note that we spent $22 million on restructuring in Q3, $11 million spent in the segments.
And we expect to spend $25 million in Q4, the majority of which will actually be in our segments.
Page 13 is a summary of our margin expectations for the full year.
And as you can see, the overall margin expectation is unchanged from our prior guidance.
The midpoint of our estimate for Electrical Project (sic) [Electrical Product] margins has been reduced by some 30 basis points, largely due to the impact of the natural disasters.
Electrical Systems and Services is unchanged.
And based upon the midpoint of our margin guidance estimates, the other 3 segments' expectations have actually moved slightly higher for the year.
And turning to Page 14, we provide a look at our guidance for Q4 and for the full year.
For Q4, we expect to deliver $1.19 to $1.29 operating EPS.
We think our organic revenues will be up 3% to 4% versus Q4 2016, really showing continued strength in most of our end markets.
Segment margins, we believe will be between 16.3% and 16.7%, and this does include the impact of the hurricanes in the quarter.
And this represents another, let's say, $0.03 of reduction in operating EPS in Q4.
The tax rate, we think will be between 10.5% and 11.5%.
And so when you roll it all together for the full year, we do expect to deliver $4.55 to $4.65 of operating EPS, excluding the gain from the formation of the Eaton Cummins joint venture.
This includes a combined total of $0.06 impact from the natural disasters that we experienced, both in Q3 and the impact in Q4.
Revenues and margins were really covered on the prior slide, so I won't go back through that.
Corporate expenses, interest, pension and other corporate, we think will now be up $40 million over 2016.
The tax rate, including the impact of the gain from the formation of the Eaton Cummins joint venture, we think will be between 13% and 14% for the year.
And excluding the $250 million pension contribution that we made in Q3, operating cash flow is now estimated to be between $2.7 billion and $2.9 billion for the year.
At the midpoint, this represents $100 million increase over our prior estimate.
And we now believe that our total share repurchases will be $800 million in 2017, $50 million above our prior guidance.
And so if we can just maybe turn our attention a little bit to 2018, and I'd say while it's too early to provide a detailed outlook, we thought it would be helpful to provide at least a few insights into our early thinking.
First, we continue to see improving market conditions in global growth that is setting up well for Eaton's end markets.
While we are still developing our plans, we will provide specific guidance certainly on our Q4 call that we'll have at the end of Q4.
We currently believe that our combined end markets should grow approximately 3%.
As noted, when we announced the Eaton Cummins joint venture, we expect to see lower revenues in both 2017 and 2018 as a result of the joint venture in our Vehicle segment.
For 2017, we now expect to see a $25 million revenue impact, and for 2018, we expect to see $175 million revenue impact.
As for the profit impact for 2018, we would expect to see a small decremental profit on lower revenues.
At this point in the cycle, I would also say that we would typically as a company, expect to see roughly 25% incremental profits on organic growth.
And once again, while it's early in the planning process, we think for 2018, including the net impact of all restructuring costs and benefits, we think you should plan on an incremental rate that would be closer to 40% as you think about the company for 2018.
We expect our tax rate to be between 11% and 13%.
And 2018 is the year that we'll complete our $3 billion share repurchase program.
So we expect to repurchase another $800 million of our shares during the course of the year.
So with that summary, I'll stop here and turn it back over to Don, and we can begin Q&A.
Donald H. Bullock - SVP of IR
Thank you.
Our operator's going to provide you some guidance on the Q&A.
But before he does, I do want on a couple of things.
One, recognizing that many of you have several calls today to address and deal with, we're going to hold the call to an hour today.
What I'd like to do to make sure that we can do that and represent all the questions on the air, I'd ask that you please hold your questions to a question and a follow-up.
And with that, I'll turn it over to the operator.
Operator
(Operator Instructions)
Donald H. Bullock - SVP of IR
Our first question comes from Julian Mitchell with Crédit Suisse.
Julian C.H. Mitchell - Head of Global Capital Goods Research Team, Director, & Lead Analyst for US Electrical Equipment
Just a quick question, I guess on the -- if I look about your 2018 outlook, one of your peers recently talked about next year being a new normal.
If we look at Eaton through that lens, would you think that all segment margins, assuming it is more of a normal year, should be within the corridor that you laid out last year?
Or are there any specific reasons around input costs perhaps, why some of the margins may come in at the lower end?
Craig Arnold - Chairman and CEO
Yes, now we appreciate the question, Julian.
No, I would say absolutely as we laid out during our New York Analyst Meeting, we set margin expectations for each of our segments and we would expect all of our businesses to be solidly in that range during the course of 2018.
To the specific point around, I think you inferred how we're thinking about commodity input costs in 2018, now we think while, once again, it's early to make a call on commodity prices, we don't think it represents a headwind to the business going into 2018.
Julian C.H. Mitchell - Head of Global Capital Goods Research Team, Director, & Lead Analyst for US Electrical Equipment
Understood.
And then my follow-up would just be around the ESS business.
Back at the Analyst Day in February, you talked about an improvement in growth there, 2018 to 2020, based around oil and gas and broader global CapEx.
The oil and gas piece seems to be coming back.
Just wondered what your updated thoughts were on the global CapEx driver within the ESS top line.
Craig Arnold - Chairman and CEO
Yes, and our point of view with respect to the outlook for 2018 as it relates to ESS really is unchanged.
I mean certainly, if you think about some of the macro indicator, the Dodge data certainly indicates that large projects are coming back, and we're seeing that in our own business.
We do expect that commercial projects growth to continue.
Power systems we think, inside of our ESS business, we think it will be a low single-digit growth outlook for 2018.
Maybe hurricanes provide a bit of upside at some point, but it's too early to call.
And we believe the three phase PQ markets are in the low to mid-digit growth range.
And lastly, to your point, our Crouse-Hinds business, well, it's certainly setting up for a much better 2018.
So our thesis with respect to 2018 being a better year and a growth year for Electrical Systems and Services, we think still holds.
Donald H. Bullock - SVP of IR
Our next question comes from Scott Davis with Melius Research.
Scott Reed Davis - Research Analyst
I'm looking at your 3% market growth.
I just want to be clear, you say leading to market growth of 3% in 2018.
I assume you would imagine you would outgrow the market, so your forecast would be a little better than that.
Is that how I should look at that?
Craig Arnold - Chairman and CEO
Yes, I mean that's exactly the way we would think about it.
I mean, it's early, and we'll certainly provide more detailed guidance when we get to our Q4 earnings call.
But at this point, that's meant to be a proxy to what we're seeing in the end markets.
And we would certainly expect our businesses to grow faster than our end markets.
Scott Reed Davis - Research Analyst
And if my memory serves me right, I don't think you or your peers have really gotten price at all in probably the last 4 years.
Is this -- is 2018 setting up as the year where you can go in with, particularly, some of your electrical products and kind of January 1 price increases catalog plus realized?
Craig Arnold - Chairman and CEO
I think, once again, I think it's early to make a call on the net of price and commodity input costs for 2018.
We're still working through our internal planning processes.
But I would say that going into 2018, at least on the input cost side, we think that the headwinds that we experienced in 2017 are not there in 2018.
Once again, early to make a definitive call on it, and we would expect, like, in every year that we go out and we work on getting price in the marketplace.
And so I'd say too early to call.
It's early in our planning process.
But at this point at least, we won't have the big negative that we experienced in 2017.
Donald H. Bullock - SVP of IR
Our next question comes from Jeff Sprague with Vertical Research.
Jeffrey Todd Sprague - Founder and Managing Partner
Just back on ESS, I guess I'm wondering if you could elaborate a little bit more on what you're seeing in utility.
Your business mix isn't exactly like Hubbell's, but this kind of feels like 2 quarters in a row where you're lagging what they're seeing.
You did call out APAC.
I wasn't under the impression that was that big of a business.
So maybe just give us a little bit of the lay of the land on what you're seeing on particularly the domestic utility side of things.
Craig Arnold - Chairman and CEO
Yes.
I mean, it's -- we do have a -- with the acquisition of Cooper, we actually did, in fact, develop a pretty reasonable position in the utility market in Asia as well.
And that's really where we saw the weakness during the quarter.
Our North America power systems business, we actually saw low single-digit growth.
I think pretty much in line with what you're seeing from others in the industry.
And so the real weakness for us was only in the Asia region and principally, in China.
Jeffrey Todd Sprague - Founder and Managing Partner
Yes.
And maybe not to put you on the spot, but everybody on the call here this morning is distracted with this Rockwell Emerson story.
It's kind of interesting from an Eaton standpoint too, right?
If you look at your big 3 electrical competitors, ABB, Schneider, Siemens, they're all big automation houses also.
Just wonder how you feel about that strategically.
Do you think automation is strategically important to Eaton?
And any other comment about how you compete and differentiate in a market that might be consolidating here?
Craig Arnold - Chairman and CEO
Yes.
I mean, as you know, we're not really an automation company today.
And so it's not a space that we participate in but -- today or -- and as we've talked about it in prior years, we think our business, as a stand-alone without automation as a piece of it, we think we like our prospects and our opportunities to continue to grow and to be successful.
So we'll wait and see what happens with that particular potential announcement, but we don't think it has any material impact on Eaton at all.
Donald H. Bullock - SVP of IR
Our next question comes from Nigel Coe with Morgan Stanley.
Nigel Edward Coe - MD
I think Jeff was asking there if you would have an interest in Rockwell.
It sounds like the answer is no, but I'll leave it there.
So just, Craig, you mentioned another $0.03 impact from the hurricanes in 4Q on top of 3Q.
Is it fair to assume that most of that would -- or ESS would be more impacted, given the component supply chain than EP.
And does that $0.03 include any insurance recovery?
Or is that more of a net -- 2018 impact?
Craig Arnold - Chairman and CEO
Yes, it's -- I mean, the way kind of the business works as I think you understand, Nigel, so today we make components.
And most of these components are circuit breakers, molded case circuit breakers, zero circuit breakers are manufactured in Puerto Rico.
And they feed our Electrical Systems and Services business, but they also feed our distributors and they go to -- into the Electrical Products segment as well.
And so it does impact both segments on Q4.
And the reason we didn't see an impact, at least a material impact, in Electrical Systems and Services in Q3 is because we had inventory in the system.
So that's really the way you would think about that.
It will, in fact, impact both businesses.
And to the specific question around insurance, yes, we do have insurance.
There is no insurance recoveries baked into our forecast.
We also have deductibles as well.
And so we're still working through the whole insurance process.
But at this point, we have not factored in any insurance recoveries into Q4.
Nigel Edward Coe - MD
Okay.
That's clear.
And then just thinking about 2018 in a bit more detail.
But thinking about the pension and the impact of the $250 million discretionary contribution, and if you snap the line today on returns and rates, how does that look into 2018?
Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer
Yes.
Now Nigel, it's Rick.
I mean, you're right to mention that we've added assets, $250 million in Q3, $100 million in Q1, so $350 million plus our asset returns as of yesterday, we're about 15% in the pension plans.
And so that's a positive.
Where the discount rate ends up is unclear.
It might actually -- it's hard to believe, but it's possible it might be slightly less than where we ended '17.
It's bouncing around quite a lot.
And so as we look at it, we will clearly have pension expense dropping from '17 to '18.
The precise amount will depend on where the returns and the discount rates settle out.
I would note, however, that our interest expense is likely to go up a little bit.
And the reason is that we are 40% to 50% floating debt.
We issue term debt and then we swapped 40% of 50% into floating.
And as short rates go up, and certainly most forecasts are, that they will continue to go up across next year, that will cause a slight increase in our interest cost.
So that gives you a little bit of color on those 2 main items.
Donald H. Bullock - SVP of IR
Our next question comes from Andy Casey with Wells Fargo.
Andrew Millard Casey - Senior Machinery Analyst
Another question on ESS, can you kind of help us understand what's going on in the power quality markets?
Those continue to be weak, and I'm wondering if you're seeing any sign of improvement there or if it's potentially a candidate for accelerate or restructuring.
Craig Arnold - Chairman and CEO
Yes.
And I'd say to your point, Andy, we have, in fact, experienced a weaker year than what we anticipated in power quality markets.
And as we've said on prior calls, we think this is largely timing as the large customers in this space consolidate activities from prior years as well as look at various architecture changes in the context of the way they configure their data centers.
And so we do think it's largely just digesting a bit of a transitional issue that we're dealing with.
As we look forward to 2018, we continue to believe that this market will grow low single digits.
I mean, some other industry forecasters are out there with even stronger numbers than that.
But we think low single digit makes sense from a planning perspective.
And there's nothing that we've seen that would suggest that there's been any fundamental changes in terms of the overall economics in those markets and why those markets should not continue to grow.
Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer
And certainly, Andy, the data traffic continues to grow quite rapidly, as is obvious as you look around all of the online sites and video and corporate data.
So that's really, at the end of the day, the key driver which says you need more data processing capability.
And it is a little bit lumpy.
It changes quarter-by-quarter a bit just depending on who's placing an order for a large new facility.
And so hopefully, that gives you some color.
Andrew Millard Casey - Senior Machinery Analyst
It does.
And one last question on -- I'm skipping to Hydraulics.
Have you witnessed any supply chain constraints popping up in that channel?
Craig Arnold - Chairman and CEO
Yes.
I would say the short answer, Andy, would be yes.
I mean, this V-shaped recovery that we're living through right now in Hydraulics, it's, on the one hand, very welcome news and very much overdue, but it's certainly caught everybody by surprise.
Orders are up 22% this quarter, 32% last quarter.
And so certainly coming into the year, we and our suppliers were not anticipating the kind of V-shaped recovery that we're experiencing right now in Hydraulics.
And as a result, lead times, as I mentioned in my opening commentary, have pushed out a bit.
We're obviously ramping up our hiring in manufacturing facilities right now to deal with this increased demand.
And so it's a high-quality problem to have.
But certainly, it caught the industry a little bit flat-footed, and we're all scrambling to recover right now.
Donald H. Bullock - SVP of IR
Our next question comes from Joe Ritchie with Goldman Sachs.
Joseph Alfred Ritchie - VP and Lead Multi-Industry Analyst
So I just wanted to clarify, Craig, your comment on the 40% incremental margins for next year.
If I think about the restructuring spending that's occurring and the benefits that you're getting, it seems like you should have at least a $40 million benefit from less spend, and I think roughly about $105 million in incremental benefits from all of the spending that has occurred.
I just want to make sure that I have those numbers straight as I think about that 40% number.
Craig Arnold - Chairman and CEO
No, you absolutely do, Joe.
And the way we think about it is, as I mentioned in my commentary, normally, we would expect, let's say, a 25% incremental at this point in the cycle.
For planning purposes, we think you should be planning roughly a 40% incremental.
And that's fully inclusive of the lower restructuring spending and the benefits that we've committed to deliver.
What we said about restructuring is that typically in our businesses, we have ongoing restructuring every year.
And what we've talked about is that we'd only call out restructuring if it's an extraordinary program or an extraordinary event.
But what we'd like to do is in the ordinary cost, just absorb the restructuring inside of our businesses and not call it out as a separate kind of reporting item.
And so we think, as we go into 2018, we're really closing the chapter on the restructuring program that we've announced.
Most of those activities become behind us by the time we end this year.
And so what's manifested going forward are the benefits.
And that's why we think you can plan on roughly a 40% incremental on the change in volume.
Joseph Alfred Ritchie - VP and Lead Multi-Industry Analyst
Yes, that makes sense.
And then maybe just taking that one step further, assuming hopefully no natural disasters next year that impacts operations, you should also get a tailwind from -- about a $0.06 tailwind from that not recurring next year as well, correct?
Craig Arnold - Chairman and CEO
Yes, absolutely.
For all the operational issues that we experienced this year, that will certainly be a tailwind for 2018.
Joseph Alfred Ritchie - VP and Lead Multi-Industry Analyst
And maybe my one follow-up there is can you guys tell us what the revenue impact was from the natural disasters?
And then specifically on EPG growth, because the growth there is really solid.
It's probably the best levels I think since we've seen since the early part of 2015.
And so maybe a little bit more color on what's driving the strength in that business as well would be really helpful.
Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer
Joe, let me give you the revenue impact.
Our overall revenue reduction in Q3, we estimated $12 million, of which $10 million was in products.
And that's understandable.
I mean, the facilities were shut down for 7 to 10 days before they started up.
And while we did have product in our warehouses, there began to be some shortages as we went through the quarter.
So...
Craig Arnold - Chairman and CEO
Let me -- to your point, I mean, we've covered a little bit of this in the opening commentary.
But really as I've said, in general, we really did see notable strength in the Americas.
Industrial controls, as I mentioned, was strong.
Commercial, residential products was strong.
Europe, I mean, that's really been a standout performer this year, really, across many of our businesses.
Europe was really strong across almost all geographies.
And so I'd say, it was really a pretty broad-based revenue kind of strength that we've experienced in most of Electrical Products.
Donald H. Bullock - SVP of IR
The next question comes from Jeff Hammond with KeyBanc.
Jeffrey David Hammond - MD & Equity Research Analyst
Craig, you mentioned Crouse-Hinds kind of lifting its head up.
Can you just talk a little bit more about what you're seeing there?
And what the customers are telling you about the outlook into '18?
Craig Arnold - Chairman and CEO
Yes, as I mentioned there, we saw revenue turn positive in Q3.
The first time in quite some time and orders as well.
So very much, I'd say, consistent with what we would expect, given stabilization in oil prices and, really, what we think is probably a lot of pent-up demand.
That business is starting to, as we expect it to, inflect positively.
And at this point in terms of customer input, it's very much consistent with our view of the world that we think 2018 should be a better year.
How much better?
At this point, it's premature to say.
We're still in the planning processes, but certainly, it will be a growth year for Crouse-Hinds in 2018.
Jeffrey David Hammond - MD & Equity Research Analyst
Craig, did you give some color on how you think power system shapes up into '18?
Craig Arnold - Chairman and CEO
Yes, we think power systems continues to be in a low single-digit kind of growth.
It's certainly baked into that assumption.
It's not any major infrastructure spending bill.
If we end up getting a major infrastructure spending bill in the U.S., that business could be a bit stronger.
But at this point, we're not counting on it.
And so we think just kind of a normal replacement CapEx cycle and that business continues to deliver kind of low single-digit growth.
Donald H. Bullock - SVP of IR
Our next question comes from Steven Winoker with UBS.
Steven Eric Winoker - Industrials Analyst
So just on that 2018 initial thoughts, a little clarification, are you thinking about holding corporate expense flat for next year, excluding all the insurance impact and things like that?
Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer
I would say we're still in the process of planning, but our general construct is definitely an ambition to hold it roughly flat.
Steven Eric Winoker - Industrials Analyst
Okay, so that if I -- if that's true and I ignore the natural disaster recoveries that might come or the year-on-year impact, then based on what you have ran through and it rose a little bit faster than that 3% market growth that you've put in and the 40% incremental, it seems like you'd be talking about north of 10% EPS growth, if that were to all come together on that page.
Is my math somewhere close?
Craig Arnold - Chairman and CEO
Yes, I mean, that's close.
And in fact, what we've talked about is we said 8% to 9% EPS growth through this planning cycle.
And the implications of that is that between '18 and '20, it's 11% to 13%.
And so you can certainly assume that we're very much on track to deliver that commitment in terms of EPS growth.
Steven Eric Winoker - Industrials Analyst
Okay, great, Craig, that's helpful.
And on the cash flow dynamic, which seem to also be proving out well, any thoughts on or a little color on what's driving the improvement there?
Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer
Well, I would just say that we have managed our working capital quite effectively so far this year.
And of course, our profits are growing as well.
So it's really those 2 key factors.
We're quite pleased with the cash flow and our ability to generate more than we had even anticipated at the start of the year.
And so it leaves us in a very good cash position.
We had net debt to total capital of right around 30% at the end of Q3, and it should go lower than that in Q4.
And so -- and that's why we elected to put a little bit more into the pension plan, just to bring us up to levels that are pretty well funded.
Steven Eric Winoker - Industrials Analyst
And maybe just to follow that up, Craig, I mean given the cash dynamic of the organization and you already timed out some of the capital deployment, but now that you're completing both the share repurchase program, the restructuring is behind you, any initial thoughts on kind of moving to the front foot on some of the things that were too early to talk about a couple of years ago?
But -- and the M&A side getting more maybe aggressive on that front?
Or you still think that's not really the right direction for the corporation?
Craig Arnold - Chairman and CEO
I -- what we've said with respect to M&A is that as we think about the priorities in terms of the call on capital, we'd said number one, it's to reinvest in our businesses to drive organic growth, which is that's the first priority with respect to capital.
We said we'll continue to pay a strong dividend, which we're committed to.
And we also said that we would complete the share repurchase plan.
And we have another year to go, $800 million of share repurchase in 2018.
But then having said that, we said there's still plenty of cash left over to continue to add to strategic assets to the portfolio.
And so we continue to be very much interested in looking at opportunities to acquire strategic capabilities and with a priority in our Electrical and in our Aerospace business, that hasn't changed.
And we're certainly in a much better cash position today to do so.
Having said that, we obviously have nothing to announce.
But we will commit and promise that we won't let cash build up on the balance sheet.
In the event that we're not able to readily deploy cash into value-creating M&A, we'll find opportunities to put the cash to work in the form of perhaps more share buybacks.
We have a debt maturity coming up next year.
So we have some other options around effectively redeploying the cash in the event that the M&A opportunities don't materialize.
Donald H. Bullock - SVP of IR
Our next question comes from Rob McCarthy with Stifel.
Robert P. McCarthy - Senior Analyst
Two questions, and I have a little bit of an ADD as do others.
So I do apologize if some of this has been covered.
But embedded in your expectation for next year, how should we think about kind of the state of play for U.S. nonresidential construction?
What are you seeing now?
Or what's your prospects for growth?
How are you just kind of ringfencing what you're seeing for '18?
And how that could play out?
Craig Arnold - Chairman and CEO
Yes, it's a good question.
It's obviously an important one for us as well and one that we're spending a lot of time internally thinking through.
Perhaps, Rob, would be helpful at this junction, I'll just quote some of the external data that's out there.
And I'd say that by and large, we take a look at most of the consensus numbers and the consensus forecasts for nonres construction next year, and you'd say, it's centering around 3% to 4%.
Perhaps with a little bit of strength on the commercial construction side, a little less strength in industrial construction overall, but it's really centering around 3% to 4%.
And we don't -- we think that number is very much in line with what we're experiencing and expect for the year.
Robert P. McCarthy - Senior Analyst
Okay, and just as a follow-up, if we think about the prospect to Scott's question around market growth leading to maybe more mid-single-digit growth for you because you expect to outperform your markets.
Thinking about the leverage, I think you talked about incremental margins through the cycle kind of 30%-ish range.
But could we stack rank where you'd expect to see higher incrementals in '18 if the growth materializes?
How you would think about your portfolio in that regard?
Because clearly, you would think as you have the first spurt of material growth here after a while of weak volumes and deflation, you should see higher incrementals, at least that year versus through the cycle.
So any commentary around that would be helpful.
Craig Arnold - Chairman and CEO
Yes, Rob.
And what we've said is that for the company, we've said, yes, we'll absolutely see higher incrementals for Eaton overall.
And that's why we said instead of what we would think would be normal at 25% at this point in the cycle, we said you can plan on 40%.
What the specific incrementals are by business at this point, we're really not in a position to comment on.
We've not been through our internal planning processes yet.
And we'll certainly be in a position to provide some margin guidance for 2018 as we discuss the outlook in our Q4 earnings call.
Donald H. Bullock - SVP of IR
The next question comes from Chris Glynn with Oppenheimer.
Christopher D. Glynn - MD and Senior Analyst
Just looking at Aerospace, the orders are starting to compound there nicely, double digits.
I think on double digits orders in the prior year.
Is that business starting to shape up to get into a higher-growth profile as you look into '18?
Craig Arnold - Chairman and CEO
Yes, we certainly hope so.
I mean, this has been a little bit of a flat year for our Aerospace business this year.
And we are very much pleased by the double-digit orders this quarter and last quarter.
And it's certainly shaping up for 2018 to be a better year.
Commercial transport continues to be strong.
Commercial aftermarket continues to be quite strong.
We think as we look at 2018, the one -- a couple of points of weakness that we've experienced this year was in military aftermarket and in the bizjet market.
And our order intake in both of those segments also inflected quite positively in Q3.
And so we think, once again, Aerospace is certainly setting up to have a better year in 2018.
We're not in a position at this point to quantify and forecast a more precise number, but we certainly think it returns to positive growth.
Christopher D. Glynn - MD and Senior Analyst
Okay.
And then as you wait for the appropriate time to give outlook for the segments and ESS, in particular, could you remind us what the peak to trough revenue journey was for Crouse-Hinds in particular?
Craig Arnold - Chairman and CEO
Yes.
Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer
Yes, it was down about between 25% and 35% from the peak to the trough, and now it's starting to climb up.
Christopher D. Glynn - MD and Senior Analyst
And if memory serves, it started at around 1.3 billion maybe?
Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer
It was a little bit higher than that.
It was about 1.5 billion.
Donald H. Bullock - SVP of IR
Our next question comes from Josh Pokrzywinski with Wolfe Research.
Joshua Charles Pokrzywinski - Director & Diversified Industrials Analyst
Just on the organic growth investment you talked about, Craig, where are you guys specifically making some inroads?
And where can we see externally some of that progress?
Because I would imagine that outside of maybe Electrical Products and Hydraulics, you guys haven't maybe been as enthused with the growth.
So what underpinning that should we really be focused on going forward as maybe seeing that investment starting to pay off?
Craig Arnold - Chairman and CEO
Yes.
I mean, Josh, it's kind of a big question for the time that we have.
And most certainly, as we think about our Analyst Meeting in 2018, we'll once again take you through the key growth sectors that we're investing in our businesses as we did this year.
And if you recall, if you had an opportunity to attend our meeting this year, we spent a lot of time talking about investments that we're making in IoT and took you through our strategy there and what we're doing across the company but principally, in our electrical businesses, whether it was Smart Home or Smart Grid, Smart Factory in the investments that we're making around embedding intelligence in all the components that we manufacturer.
But in every one of the businesses, I'd say it's a big question and perhaps one that I can't do justice to in the amount of time that we have on this call.
But certainly, you can look to us to really shed a lot of light on that in our Analyst Meeting that we're going to have in February of next year.
Joshua Charles Pokrzywinski - Director & Diversified Industrials Analyst
Okay.
And then maybe just shifting over to the incrementals.
I know people have asked this a few different ways now.
But I guess if you pull out the restructuring savings and the reduction in spend, you're kind of looking at a sub-20 incremental margin here for next year as kind of a high-level starting point.
Presumably mix starts to go your way, particularly with what's going on in Crouse-Hinds, is there some other big plug that we should be aware of?
The changes as we get into the out years?
I'm not asking for a 2019 guidance, of course.
But I guess what I'm trying to understand is as restructuring becomes a smaller piece of the bridge, is there something that steps up to replace that field?
Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer
Yes, Josh.
I'm not sure what numbers you're looking at.
As we said, we see the incrementals overall being about 40.
And if you were to then adjust for the restructuring, it would be about 25.
And so I -- we don't -- I -- you must be making some other assumptions, but that's our current view right now at this early point in our planning.
Donald H. Bullock - SVP of IR
Our next question comes from Deane Dray with RBC.
Deane Michael Dray - Analyst
Craig, I was hoping you could expand on this high-quality problem of this V-shaped recovery in Hydraulics.
And maybe touch on where are the end markets and applications, how much is mobile versus stationary?
And how sustainable is this uptick?
Craig Arnold - Chairman and CEO
Yes.
The first thing I'd say, Deane, it's been fairly broad-based.
It's been all regions of the world, and it really has covered both mobile and stationary markets with more strength in mobile than in stationary.
But both markets performing quite favorably.
And a lot of the growth, as you probably are aware, is coming out of China.
If you take a look at some of the key end markets in China, markets like the excavator market or the wheel loader markets, yes, those markets in some cases, have been up more than 100%.
And so it's been a very broad-based recovery, a lot of it tied to construction equipment, to material handling.
We also participate in the commercial vehicle market inside of our Hydraulics business as well.
That market has been strong.
And the one market today that's an important market for us that we -- that had started to build positively is also the ag market.
And we think that market, perhaps returns to some more positive growth in 2018.
And so we think at this point in the cycle that Hydraulics is setting up to be kind of a multiyear-growth story.
And quite frankly, that's what's needed, given the fact that we lived through the downturn over the last couple of years.
It's been since 2014 that, that business has grown.
So we think it's certainly setting up to do -- be a positive growth story for at least a couple of years to come.
Deane Michael Dray - Analyst
And then my follow-up is can you clarify the 2018 assumption of -- if I heard it correctly that you're expecting any material cost headwinds.
Just how, if you could frame for us, where that stands today if you snap the line on copper,
on steel.
Are you doing any additional hedging or just advance purchasing?
Anything would be helpful there.
Craig Arnold - Chairman and CEO
Yes, I'd say that -- in every commodity, it has got its own story.
And we have, in fact, continued to see a bit of commodity price increases as we came through Q3, but it's very much in line with what our forecasts had been.
So I don't want to suggest that we've not experienced commodity price inflation.
We certainly have, but it's been very much in line with what we anticipated and expected in the business.
In terms of hedging, we do some hedging in terms of our businesses.
What we think about going into 2018, there was a change in some of the accounting rules that allow you to perhaps take down some additional hedges.
We've not yet thought through exactly how we're going to approach that.
We're still in the early planning stages.
But there is certainly another opportunity, as we think about 2018, to put some additional functional hedges in places that we've not been able to do historically.
Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer
Yes, that's right.
You're able, with these new accounting rules, to hedge components instead of the raw metals.
And that allows you to more -- put on truly economic hedges as opposed to just accounting hedges.
But broadly, Deane, our view is that if you look at the mix of metals, we think that they are not likely to, across '18, to show a significant increase.
So there will be pockets, but on average, we don't see a significant rise likely.
Donald H. Bullock - SVP of IR
Our next question comes from Ann Duignan with JP Morgan.
Ann P. Duignan - MD
Most of my questions have been answered by now, obviously.
But maybe in Hydraulics, you could talk a little bit about whether you are the bottleneck that's driving the lengthy lead times?
Or is it your supply chain?
Just where exactly are the bottlenecks building?
Craig Arnold - Chairman and CEO
Yes.
What I'd say, Ann, it's -- most of the bottlenecks, as you know this business fairly well, it always ends up being kind of the long lead time components, castings and forgings and others back throughout the supply chain where, in many cases, these lead times are 3 to 6 months.
And so we're ramping up our hiring from a labor perspective.
And at this point, labor tends to be much easier to put in place.
But the big issues continue to be in the long lead time components, and I'd say especially in castings.
Ann P. Duignan - MD
And there's no simple way around that, I'm going to assume?
Craig Arnold - Chairman and CEO
No, no simple way around it.
I mean, obviously we're working on some potential longer-term solutions in new technologies like additive and other things that we think hold a lot of promise to shorten those lead times.
But at this point, we -- it is a challenge that we're dealing with.
And lead times have, in fact, pushed out in some cases.
But I'd say, on balance, it's a pretty high-quality problem to have, and we'll work through it in relatively short order.
Ann P. Duignan - MD
Yes, that is quite a high-quality problem to have after so many years.
My second question is maybe one that's better for the Analyst Day, but I'll ask it anyway.
I've been getting a lot of questions on the notion that Boeing is trying to grow its aftermarket business and obviously capture some of those nice aftermarket margins in aerospace.
How is the supply chain reacting to that?
And how do you expect it to change your business over the midterm?
Craig Arnold - Chairman and CEO
Yes.
I mean, we're certainly very much aware of the various initiatives that our different OEMs have to more fully participate in the aftermarket.
And so we're working with them.
We think today, there are, in fact, opportunities in places where Boeing and other customers can have value in that supply chain.
And so our goal is obviously to work with Boeing and others towards a mutually beneficial kind of outcome for both companies, and we're optimistic that we're going to be able to do that.
Ann P. Duignan - MD
So net-net, a positive, perhaps more volume, more original parts versus a negative, is that the way to interpret that?
Craig Arnold - Chairman and CEO
Yes.
We think in every problem, there's probably a win-win outcome there some place, where there's things that we want and places they can help us and things that we can contribute to help them in their -- against their particular goals.
And so we're confident that we're going to find a perfect solution that works for both companies.
Donald H. Bullock - SVP of IR
We have time for one last question, and that will come from Andrew Obin with BofA Merrill Lynch.
Andrew Burris Obin - MD
Just a question on inventory level in the distribution both on Electrical side and Hydraulics side.
Over the past couple of years, we never got sort of this restocking trend going on.
Are you seeing anything that would indicate that at last with macro picking up, dealers are considering restocking inventory in the channel?
Craig Arnold - Chairman and CEO
Yes, what I'd say, probably largely in the Electrical business, we've really had not seen a big change in the inventory levels.
I mean, those markets are certainly improving, but not the kind of movements that we think, at this point, would result in any big changes in inventory levels.
Certainly what we've seen in Hydraulics, we certainly have seen some replenishment of inventory in the hydraulics market.
Although I will tell you that in our sales into the OEM segment continued to outpace our sales into the distribution segment, and so hopefully, that's a positive sign of things to come.
But there certainly has been a little bit of inventory replenishment that's really taken place throughout the supply chain in the Hydraulics business, which is why you see that our order input is obviously up much higher than our sales output and much higher than many of our OEMs' output as well.
Andrew Burris Obin - MD
Got you.
And just a follow-up question on Aerospace, I know we sort of talked about it.
But is there a specific program?
Yes, I'm just a little bit surprised that given your exposure that revenues were flat.
I would have thought that was like 777 exposure, but you did not call it out.
Just trying to figure out if there's a specific military program that's holding you back this quarter.
Because I think, by and large, defense companies that had flat revenues, there was a specific program in charge, and commercial guys generally posted positive growth.
Just if you could give a little bit more detail.
Craig Arnold - Chairman and CEO
Yes, I mean as I mentioned in my commentary, first of all, I would tell you that we're about 60-40.
60% of our business is commercial and 40% is military.
And so -- and where we saw weakness is we saw weakness in, first and foremost, commercial -- the commercial side in bizjet and the bizjet sector continues to be weak.
And we have relatively large content on a number of important bizjet platforms.
And then on the military side, it was military aftermarket.
And that, we would say, is largely a function of a number of large campaigns mods and retrofit upgrades that we had in prior years that have not repeated.
And so we think, once again, transitional kind of issues that we're seeing in the Aerospace business.
Orders are up nicely.
And so we think that really bodes well for 2018 and beyond.
Donald H. Bullock - SVP of IR
Thank you all again for joining us today.
This will wrap up our call.
As always, we'll be available for your follow-up questions this afternoon and the remainder of the week.
Thank you.
Operator
Thank you, and Ladies and gentlemen, that does conclude your conference call for today.
We do thank you for your participation and for using AT&T Executive Teleconference.
You may now disconnect.