伊頓 (ETN) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton First Quarter Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Yan Jin, Senior Vice President of Investor Relations.

Please go ahead, sir.

Good morning.

I'm Yan Jin, Eaton's Senior Vice President of Investor Relations.

Thank you all for joining us today for Eaton's First Quarter 2019 Earnings Call.

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

Our agenda today includes the opening remarks by Craig, highlighting the company's performance in the first quarter.

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

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

Please note that both press release and the presentation, including reconciliations to non-GAAP measures.

A webcast of this call is available on our website and will be available for replay.

Before we get started, I would like to remind you that our comments today will include statements related to expected future results of the company and are, therefore, forward-looking statements.

Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and the presentation.

They're also outlined in our related 8-K filing.

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

Thanks Jin.

Appreciate it.

I will begin with Page 3 in highlights of our Q1 results.

And I begin by saying, we had a good start to the year with another strong quarter of performance.

Earnings per share were $1.23 on a GAAP basis and $1.26 excluding the impact of divestiture costs related to the announced spin off of our Lighting business.

And $1.26 of results were 15% above last year and towards the higher end of our guidance range which as you recall was $1.18 to a $1.28.

Our sales were $5.3 billion, up 4% organically and in line with our guidance, excluding the negative 3% impact from currency.

And we continue to be pleased with our strong margin performance.

Segment margins were 16% above the high end of our guidance range and 80 basis points over prior year.

We also generated very strong operating cash flows of $551 million in the quarter and this is up 63% from Q1 '18 and a first quarter record.

And lastly, we repurchased $150 million of shares in the quarter as part of our plan to buy back $400 million of shares in 2019.

So a very good start to the year.

Page 4 summarizes our income statement versus prior year.

And I've covered most of these items in the summary comments and so I'll only point out, once again, the 3% currency impact was driven primarily by the important currencies for us, which are the euro, renminbi and real.

We're very pleased with our 32% incremental rate that we delivered on organic growth and so that number was once again very strong and above our expectations.

And we incurred, as we mentioned, the $0.03 per share from the after-tax cost primarily related to spin of our Lighting business.

And as you can see, adjusted earnings per share increased some 9%.

Next, we summarized the quarterly results of our Electrical Products segment.

Revenue here increased 2%, which includes 5% organic growth partially offset by 3% currency.

And we've seen particularly strength here in commercial and in residential construction with global growth rates in the mid- to high single digits and even stronger in the U.S. markets.

Our orders increased 4%, led by continued strength in growth in the Americas, and our backlog grew double digits, up 13% in the quarter.

Segment operating profits grew 8% and operating margins were 120 basis points increase to 18.9% and this was a record for Q1.

And we're actually pleased with how well the segment is performing and the consistency of results that we continue to see in this part of the company.

Moving to Page 6. We cover our Electrical Systems & Services results.

Revenues here increased 6% with organic growth of 8% partially offset by 2% currency, and we saw especially strong double-digit revenue growth in commercial construction and in data centers.

We continue to have solid momentum in this business and the year has started on a high note for sure.

You'll recall that our original guidance is for sales to be up 5% to 6% organically for the year and so we're certainly running above that rate.

As we indicated at our Investor Conference in March, we've moved to a rolling 12-month basis for reporting our orders in this long-cycle business as well as in our Aerospace business that I'll cover soon.

On a rolling 12-month basis, ES&S orders actually increased 8%, which strengthened all major end markets and regions.

Maybe I'll just pause for a moment on the orders here in Electrical Systems & Services because I know it's a particular point of question that many of you have, and I'll tell you that our ES&S activity level is absolutely performing in line and perhaps maybe even a little bit better than what we anticipated.

And we talked about this idea of moving to the rolling 12 month because we do in fact see a lot of, let's say, call it, lumpiness in the orders that we get in Electrical Systems & Services driven primarily by what we're seeing in hyperscale data centers.

And the other indicator that we have that gives us a lot of confidence in the strength of this business is what we call negotiations.

And our negotiations in this business in Q1 were an all-time record and up some 56% from prior year.

And so despite what we're seeing actually in the orders and what some of you have reported to be a little bit of weakness versus what we saw in Q4, the overall underlying activity in this business continues to be very, very strong.

Our backlog continued to grow.

It was up 11% in the quarter.

We generated strong operating leverage with operating profits increasing 15% only 8% volume growth and margins increasing 100 basis points to 13.1%.

You'll also recall that we announced the acquisition of the Ulusoy Elektrik business in January.

We're pleased to have closed the purchase on April 15, and this acquisition will certainly provide a strong platform for us as we serve our customers in EMEA and the Asia-Pacific market.

So once again, a really strong performance in our Electrical Systems & Services business, and we continue be quite bullish on -- for the outlook for that business as we go forward.

On the next page, we summarize our Hydraulics results for Q1.

Revenues were down 3% with 1% organic growth more than offset by a 4% currency.

I'll certainly note that we had some tough comps in this business, 6% organic growth in Q1 '18.

But revenue did slow slightly more than we expected.

But I would note here only slightly more than what we had in our original plans for the year.

Organic growth of 1% reflected continued growth in construction equipment but some declines in ag and industrial equipment.

Our orders stepped down 11% driven principally by weakness in global mobile equipment markets, and we also had tough comps here as well from last year where orders were up some 14%.

Backlog declined 6% in the quarter as well.

And as we detailed at our Investor conference, we continue to work through some inefficiencies in the business but do expect to see strong margin performance in this business in the second half of the year as we work off some of the inefficiency issues that we experienced in the second half of last year.

And segment margins were 11.7%, down 100 basis points versus last year.

And on Page 8, we summarize our Q1 results for the Aerospace business.

And as you can see, this business just continues to perform at a very high level, delivering record performance across almost every single metric.

Our revenues increased 10%, with 11% organic growth and 1% negative currency.

Like ES&S, we moved to a rolling 12-month basis for reporting orders.

And on this basis, orders increased 18% with particularly strength in commercial transport, military fighters, military transports and both commercial and military aftermarkets.

Really strength across-the-board in this segment.

Our backlog also increased significantly up some 21% in the quarter.

And lastly, we demonstrated very strong incremental margins, which led to a 30% increase in operating profits and a 300 basis point margin improvement in the quarter.

Operating margins of 23.1% are another all-time high for the business.

And so in addition to the volume growth, we also experienced some favorable product mix in the quarter but really strong execution by the team overall.

Next, I'll move to a summary of our Vehicle segment.

Our revenues were down 9%, which includes 6% reduction in organic growth and a negative 3% from currency.

The organic sales decline was driven by a combination of declines in light global vehicle markets, which were down 4% to 5% and the ongoing impact of revenue transfers to the Eaton Cummins joint venture.

And I will note that the joint venture actually saw revenue increases of 27% in the quarter and continues to perform very well.

We also had tough comps in this business for business organic growth, which increased 13% last year.

But overall, this business is really performing as we've expected but for a little bit of weakness in global automotive markets.

For the year, we continue to expect NAFTA Class 8 production to be at 324,000 units flat with 2018 but we have lowered our outlook for low -- for light vehicle markets for the year.

And lastly, despite the lower volumes, operating margins increased 30 basis points to 15.1% and a decremental margin on the organic of less than 20%.

So really strong execution by the team once again in our Vehicle business.

And wrapping up our segment summaries, we covered our eMobility segment on Page 10.

Revenues were up 8%, which includes 9% organic growth partially offset by 1% currency.

And as planned, we continue to accelerate our R&D spending, which increased by some 130% in the quarter.

So we continue to invest heavily in this segment to participate in what we think as really an exciting growth opportunity as we move forward.

We're certainly optimistic about the opportunities in this rapidly developing market, and our pursuit pipeline for new programs have actually now grown to $1.1 billion.

At our Investor Conference in March, we did announce a new program win of $100 million mature year revenue for traction inverters with a major global OEM customer.

And actually in mid-April, we announced that PSA is the customer for this program.

This was our first significant win since creating the segment about one year ago, and we're certainly ahead of our original schedule for growth in this segment and well on our way to creating what we think is going to be a new $2 billion to $4 billion segment for the company overall.

At this point, I'll turn our -- to our outlook for 2019, which is on Page 11.

We now expect organic revenues for all of Eaton to grow approximately 4%, down slightly from our prior midpoint of 4.5%, and this is largely the result of us increasing our guidance for our long-cycle businesses but reducing guidance for our short-cycle businesses.

Specifically, we increased organic growth rates by 1% for both ES&S and Aerospace.

And for Hydraulics, we lowered organic growth by 2% at the midpoint to 3% to 4% based upon some slower growth expectations in global mobile equipment markets.

And for Vehicle, coming off what I'd say really was a weak Q1 in light vehicle markets, we lowered our organic growth rate by 3 points at the midpoint, and now we expect organic growth to be down some 4% to 5%.

And once again, due to primarily the Automotive side of the business itself.

And we've not changed Electrical Products or eMobility.

And our margin expectations are noted on Page 12.

We're modestly raising our guidance from 17.1% to 17.5% or 17.3% at the midpoint.

We're lowering the margin expectations for Hydraulics by 60 basis points to 13.4% to 14% and for Vehicle by 90 basis points to 16.5% to 17.1% due to lower organic growth primarily.

But this is more than offset by increases in Electrical Products and in Aerospace margins.

And our new expectation for Electrical Products is for margins to be between 19% to 19.6%, a 50 basis point increase at the midpoint.

And the new expectation for Aerospace is for margins to be 21.8% to 22.4%, also a 40 basis point increase at the midpoint.

And the other 2 segments remain unchanged.

So at the midpoint, 17.3% and this would naturally be another record level performance for Eaton overall.

And lastly on Page 13, we summarize our guidance for Q2 and for the year.

For Q2, we expect adjusted earnings per share to be between $1.45 and $1.55.

And at the midpoint, this represents an 8% increase over the last year.

Other assumptions in our guidance include, we're expecting 4% organic growth, foreign exchange, impact of roughly $100 million, our margin expectations for the quarter is to have margins between 17.2% and 17.6%.

We'd expect our corporate cost to be flat with Q2 of '18, and we'd expect a tax rate of between 13.5% and 14.5%.

For the full year 2019, we're raising our adjusted earnings per share guidance to $5.72 to $6.02 for a midpoint of $5.87, which includes essentially a $0.02 impact from the full year impact of the acquisition of Ulusoy overall.

At the midpoint, this continues to represent a 9% increase over 2018.

Other full year guidance assumptions include organic revenue growth of 4%.

We'd expect $100 million of revenue from the Ulusoy acquisition.

We'd expect foreign exchange impact to be $300 million, and this is a $50 million increase from prior guidance.

We'd expect, as I mentioned, segment margins of 17.3% and really no change to the other items in our forecast.

So in summary, I'd say another strong start to the year in Q1.

We're well positioned to deliver another year of record results, and we're absolutely thrilled with the way the company is performing overall.

So with that, I'll turn it back to Yan for Q&A.

Okay.

Thanks, Craig.

Before we begin the Q&A session of our call today, I do see we have a number of individuals in the queue with questions.

So given our time constraint almost being an hour today, an hour is there to get to as many of these questions as possible.

Please limit your opportunity to just one question and a follow up.

So with that, I will turn it over to operator to give you guys the guidance.

(Operator Instructions)

Okay.

We'll take our first question from Joe Ritchie with Goldman Sachs.

Craig, can you maybe expand on your comments on commercial and data centers being up double digits in ES&S this quarter?

We heard some conflicting news especially in the data center side out of the supply chain.

And so any other further color you can provide there would be helpful.

Yes.

No, the only thing I'd tell you that overall, the data center market for us continues to perform very well.

We're still running, as I mentioned, revenues up double-digit for data center sales.

Activity levels are continuing to be quite strong.

I think the piece that I -- that we're trying to clarify for the sake of all of you who follow the company is that data center orders especially when it comes to the hyperscale, they tend to be quite lumpy.

So you'll get a big slug of orders in one quarter and they'll be lighter the next quarter.

And so that's why we made this decision to really move to a rolling 12 months because we think it more accurately reflects the underlying economic activity that we're seeing in that market.

But for us, we still see very good strength in data center activity overall, and we continue to think that's going to be one of our fastest growing segments.

And I mentioned once again, we take a look at negotiations, which is the level, which for us, is a good proxy for the level of economic activity that's taking place in the market.

And as I mentioned, we're really experiencing record levels of activity in our Electrical Systems & Services business with negotiations up 56% in the quarter to record levels.

And so by and large, we've really seen no letup in activity in Electrical Systems & Services and data centers continues to be a bright spot for us.

And Craig, within commercial, what are the verticals that are really driving the strength there?

Yes.

I'd say we're really seeing pretty broad-based strength in our commercial businesses overall.

And certainly, oil and gas has come back and we mentioned the strength in data centers.

We let's see...

If you look at just straight up commercial like office and government both up just over 10%, institutional just a little bit under that.

But we're seeing broad-based strength in the commercial side of things.

And if you look at some of the governmental data, C-30 reports, et cetera you -- the Dodge report here seeing numbers that are high single digit, even low double digit.

So it's all pretty consistent.

And can I say, it's almost -- it's broad too.

And we're seeing also strength really around the world as well in commercial businesses in general.

So it's not just in the U.S. market.

No.

That's helpful.

Maybe my follow-on, just on the Hydraulics business.

It's interesting because it sounded like, when we'd met intra-quarter that Hydraulics had maybe gotten off to a better start in January, February, and you've talked about this business and all your businesses needing to kind of earn the right to be part of the portfolio.

Yet, we've taken guidance down already to start the year.

And so can you just kind of contextualize how the quarter went with Hydraulics?

And then also in terms of like how it fits with the portfolio longer term?

Sure.

First I'd say, as we've talked about and we covered on our Investor Day in general that we have some work to do to fix what I'd call some self-inflicted wounds associated with some move transition -- site transitions that we're managing internally as an organization.

And we always believe that, that was going to be more of a, kind of, a second half, kind of, resolution to some of the internal issues.

I think the new news for us in Hydraulics business in terms of what really drove the reduction in guidance is largely some of the weakness that we're seeing in some of our end markets.

And so I'd say operationally, as we acknowledge, we still have work to do to fix some of our own inefficiencies and our teams are working that and we certainly would expect that stuff to be flushed through the system by time we hit the second half of the year.

But the new piece is really some of the weakness that we're seeing marginally in some of the mobile equipment markets.

And I'd say that -- and our orders were certainly weak in Q1.

If you take a look at some of the -- our customers, all the names that you know well, I'd say their sales are holding up better than our orders are.

And so there could be a better outlook as we look forward.

We're not sure to what extent, there's some inventory repositioning taking place in this segment but right now it's really more function of a weaker volumes.

And at this point, I'd say as we think about Hydraulics as a part of Eaton overall, today, we have a plan and the plan is a plan that we believe in.

And our team is executing that plan, and we fully expect the Hydraulics team to fix their operational issues and turn that into a business that we can all be proud of and it would anticipate keeping as part of the company.

But for Hydraulics, no different over any other part of the company.

We have expectations that would hold of our businesses accountable to, and we would expect them to meet the criteria that we set.

And if we can't meet the criteria for Hydraulics, or for any part of the company, we're willing to act when necessary.

Our next question is coming from Jeff Sprague of Vertical Research.

I was wondering if we could just come back to ESS one more time anyhow and just give us some color on what negotiations of $0.56 -- 56% really means?

Obviously, it sounds good.

Is that kind of a project value in dollars?

Was there some kind of low ebb in Q1 last year that results in that being such a big, healthy number?

And what kind of typical conversion rate would you have on kind of a negotiation?

Yes.

No, I mean the first thing I would answer is kind of the question around -- no, there was absolutely nothing in Q1 of last year that would suggest that we had a low bar to clear.

And as I mentioned, not only was it higher than Q1 last year but it was a record all-time level.

And it was significantly higher than any other quarter during the course of 2018.

And I think it's just as you articulate.

This is essentially the number of bids and quotations that we're making to our various customers on large projects that we bid on during the course of a period.

And so it really, for us, is probably the best proxy for the level of underlying economic activity that we have in that business.

And so we think it's a really strong indicator of the fact that this business, a long-cycle business, that we'd expect to be performing very well at this point in the cycle is actually performing very much like we anticipate.

Yes.

And it will take time for some of these negotiation bids to become final bids, typically 90 to 180 days, sometimes a little longer for big projects.

But it is quite notable just how strong the activity levels are.

And just as a follow-up, separately on Ulusoy, is it $0.02 accretive for the year, and therefore, the sole reason for the guide?

Or is it actually more than that and there's maybe a negative offset somewhere else in the equation?

No.

It's $0.02 accretive, and the way to think about it, Jeff, is it's really $0.04 accretive but we have $0.02 of our estimate right now of amortization of intangible costs.

And so that's how it ends up at $0.02.

But we are in fact holding all the other elements of the guide for the core business.

And so no change at all.

Our next question is coming from Scott Davis from Melius Research.

I -- just to be clear, the reason why you're not raising margin guidance on ESS, is that because of mix and largely, just because of the data center volumes?

Is that correct?

And I'd say that it's -- first of all I'd say it's early in the year.

I'd say that our forecast for margins and ES&S are certainly today within the range that we set for the year, and a lot of the growth to your point is coming from projects.

And so we'll have to wait and see how that plays out.

But right now, I would not, in any way, take it as a sign of concern about margins in our ES&S business.

Things are going quite well.

We're very pleased with our margins in Q1 and there's nothing today that I would say that would suggest that we're -- there's anything to be concerned about.

Okay.

And the -- it's been actually kind of get your take, Craig, on some of the M&A that's out there.

I mean you've got a couple of competitors have announced really big deals, nothing seems cheap.

They all seem to be relatively fully priced.

But what's your take on the market out there and the likelihood that Eaton participates?

I guess there's 2 ways to think about it.

You could be a seller of assets into this market of strength as easily as you could be a buyer of assets.

So how do you think about that in the current?

The first thing with respect to pricing and asset value is in there as you can see by some of the transactions that have been announced.

I mean these properties are going for extraordinary prices.

We have prided ourselves on the fact that we're going to be disciplined through this cycle, and we think that our cost of capital continues to be 8% to 9%, and we want to deliver 300 basis points over our cost of capital.

And so we will continue to be a disciplined buyer into a market that looks like assets are being priced at extraordinary levels.

And so I'd say that we today are looking at probably more deals than we've had in a very long time.

And so we have a very active pipeline as well.

But again, we'll make the commitment as we've in the past.

We're not going to chase deals with, what I would say, are unattractive returns when you look at their cash-on-cash set of financial metrics.

And so that's kind of the way we look at it.

And -- but the other side of that obviously, Craig, is you could sell something.

I mean, if people are willing to pay full price and maybe now is the time to think about parting with some of maybe your more cyclical stuff.

Is that a possibility?

What I would say -- first of all, I would say we tend to look at our businesses strategically through the cycle.

And so as we think about the portfolio itself and are we a holder or seller, we really try to look at them over the long-term period and whether or not we think this is going to be a good strategic hold based upon the criteria that we established through the cycle.

Now having said that, to your point, if you would -- have come to a decision that you want to exit an asset, now would be a great time to do it.

But we generally take up a longer term, I'd say, more strategic view of the portfolio in terms of things that we want to -- businesses that we want to be in versus businesses that we would choose to exit.

Our next question coming from Nicole DeBlase with Deutsche Bank.

So I just want to focus a little bit on Hydraulics.

I know organic growth was 1% this quarter.

Looks like in your full year guidance, you brought it down a little bit.

But you're still basically implying some improvement in organic growth throughout the year.

So I guess I'm curious what's driving that conviction?

And maybe to frame that with how demand progressed throughout the quarter, if there is any sign of improvement in March or into early April?

I'd say that maybe to take your first question, right out of the gate in terms of certainly we're implying a little bit stronger growth in the back half of the year than we delivered in Q1.

As I mentioned in my opening commentary that 1% organic growth was actually within 1% of our internal plan.

And so we're actually not off our internal plan by a measurable amount in Q1.

And the comps get easier, quite frankly, as we -- as the year moves on, and we have very specific programs that we're working on as a company that will also help boost growth as we look into some of the out quarters, very specific initiatives that we're working on that have been largely bedded down that are going to help improve our growth.

And the other thing I would tell you is that if you take a look at the major end markets that we serve, construction equipment, ag equipment, 2 of our big important markets in Hydraulics and you look at what our customers are saying, they -- in most cases, they're still forecasting growth for the year.

They're forecasting low single-digit, kind of, growth levels.

And so we do believe that there was a little bit of inventory correction that took place in Q1 that probably also held down our relative growth rate.

Okay.

Got it.

And then just shifting to Aerospace, the margin performance was really impressive this quarter.

Was there anything special going on there?

Is it a mix impact that isn't sustainable throughout the rest of the year just because the full guidance implies a little bit less margin expansion than we saw on the first quarter?

Yes.

I mean it certainly was a record quarter for margins in Aerospace, an all-time record not just a record for Q1 and I would say that we did have a bit favorable mix in Q1.

Our aftermarket business, on a relative basis, was a bit stronger than our core OE business and that certainly was a help for the quarter.

But also the growth in the volume as well also helped push things up.

And so I would say principally, it was more function of the mix of customers and the mix of OE aftermarket that really led to a really strong Q1 performance that is probably not sustainable at those levels.

But as you can see, we're forecasting margins for Aerospace that are, once again, at record levels, and I'd say even in many cases, industry-leading levels.

Our next question comes from Ann Duignan with JPMorgan.

Just back to ES&S again.

I know you said bidding is up significantly.

But traditionally, what kind of success rates would you have with your bids?

What percent win versus not-win have you had?

We have pretty strong market share, Ann, in our businesses.

As you know, in our Electrical Systems & Services businesses, a lot of this activity is in the Americas market.

And we have industry-leading shares in this business.

And so our win rate is going to be very much consistent with our underlying market share.

So we do believe that this bidding activity will translate ultimately to growth in our business.

Okay.

That's helpful color.

Appreciate it.

And then back to Hydraulics also, I have to ask a question about North American agriculture of course.

Maybe you could talk about what your customers are saying there.

Is that where the weakness was in the quarter in terms of orders and given how bad farmer sentiment is in the U.S., would you anticipate that may be staying weaker-than-expected for the full year?

Yes.

I mean you're absolutely right that sales were actually quite decent in ag in Q1 but the order rate in ag was down.

And to your point, it's farm incomes and underlying commodity prices being as weak as they are that we think they're certainly dampening some of the enthusiasm for the outlook in ag markets.

And I think our call on ag for the year, we still think it's kind of a low single-digit kind of grower for the year.

But we do think that there's a at least a cautionary, kind of, sentiment that's in the market today even around ag in general.

Yes.

I think we would have a similar view of the ag market for '19 and maybe even into '20.

Our next question comes from Nigel Coe with Wolfe Research.

Just going back to Hydraulics and the backlog was down I think 11% and I understand the backlog was coming off a very high level.

But I'm just wondering to get to your, sort of, 4% to 5% growth for the remainder of the year in Hydraulics, do we have to see orders coming back positive?

Or can we still achieve that targets with orders remaining flat to negative?

Yes.

Yes, so the backlog, Nigel, was actually down 6% versus last year but -- no problem at all.

But I think the sphere of your question is once again very much like the question asked earlier.

What gives us confidence that we can deliver the growth in the outlook for the year.

And I will say that while the backlog is down, it's still running at very, very high levels from a historical perspective.

And so we -- and obviously, the comparison in general, the comps in general, get easier as the year wears on.

And I think that's really the big message with respect to orders.

With respect to sales, is that you have relatively easier comps as the year unwinds.

We have some very specific initiatives that we have put in place as a company that are going to give us some growth that have been very well identified and we think once again that while there's a little bit of caution in the market, we do believe that the 2 big markets of ag and construction continue to grow during the year.

Okay.

Great.

And then my follow-on question is the 3-point delta on the Vehicle outlook.

And obviously, we're looking at the light vehicle markets significantly weaker, so that's explainable.

But I'm just wondering given the complexity in the segment, how much of that revenue delta is caused by a shift between your legacy transition business and the Cummins JV?

Was that a factor at all?

Any help there would be great.

Yes.

In terms of the, say the 3-point reduction in the growth for the quarter, I'd say that, that was really driven principally by the weakness in global light vehicle markets around the world.

And you see the same data that we've seen.

China was down 10%, Europe was down, say, 3% to 4%, the Americas was down a couple of points.

And so most of that weakness I'd say is really in global light vehicle markets.

We do have -- by the way as I mentioned in my commentary, as the world moves from manual to automated transmissions, we continue to move more revenue into the joint venture with Cummins, and that is a piece of what's going on in that business.

And the other one by the way that I'll put on the table because it becomes a much bigger impact in terms of a legacy business as we move forward, as the world moves to electrification and the eMobility segment, that also becomes revenue that comes out of our legacy vehicle business and shows up in eMobility.

And so there are number of factors that are going on that perhaps make the underlying revenue growth in our vehicle business look worse than it really is.

Next question comes from Jeff Hammond with KeyBanc.

Just 2 on EPG.

One, can you just talk about what's driving the margin bump without a change in sales?

And then 2, just as the Lighting spend has been announced, have you gotten any indications of interest that may be a sale is as likely or more likely going to spin?

Yes.

I'd say on the margins largely in EPG, I'd say primarily just we're getting better execution and better conversion in the business than we originally anticipated when we put the plan together.

And so I -- really compliments to the team for really executing and delivering on some of the cost out initiatives that we put in the plan, and so things are just going a little better than what we anticipated.

And that's kind of what drove the increase in guidance for the year.

As we mentioned in terms of Lighting, first of all, I'd say that the process is moving along as we anticipated and the prime path continues to be to spin the business, and we still expect to be ready to make sure that we can get that done by the end of year.

To your point specifically around outside interest, yes.

As you can imagine, there has been a number of companies who've raised an interest in potentially acquiring the business.

And it's always good to have an option and a choice.

And so we'll be obviously, working through these 2 alternatives.

But once again, the prime path that we're on is to spin the business.

Okay.

And then just macro level on Europe, I mean there's been some talk about slowing there.

You mentioned the auto.

Can you just talk about any areas of resilience or particular weakness in Europe?

Yes.

I think to your point around the macro environment in Europe and we all see the economic data coming out of Germany would suggest that we are in fact seeing some slowdown in growth in Europe overall.

And then we've seen that as well across many of our businesses.

Certainly, we've seen it specifically in the short cycle businesses.

I'd say very much like we're seeing in the U.S. The long-cycle businesses continue to perform well in Europe, so Electrical Systems & Services and data centers specifically in Europe.

Aerospace, obviously, is a global issue, is doing well.

And so I think we've seen perhaps on an accentuated basis more or less continuation of the same trends that we're seeing globally.

But no question, Europe is a bit weaker.

It's a bit weaker when you think about industrial markets and industrial controls and the like.

But it's all incorporated in our guidance, and we think that Europe essentially is not going to be terribly different than what we assume when we put our profit plan together.

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

Just a question on China.

Can you talk about, sort of, China progression during the quarter?

Frankly, I would have expected mobile China Hydraulics to be a bigger positive.

So I was just surprised that they didn't move the needle as much.

And if you can give us any color as to how April is developing in China?

Yes.

Relative to your point, I mean China started off the year quite weak in January, and March was a much better month.

And we see that in certainly the GDP data and the IP data specifically coming out of China.

Even automotive markets were, relatively speaking, stronger in the month of March than they were in the first 2 months of the year.

And so I'd say a lot of the economic stimulus that the Chinese government is putting into place -- early indicators, but it would suggest that it is having the desired impact.

And so we think China probably continues to strengthen from this point forward.

Even overall, our revenues actually grew in Q1 in China as a company.

So it was -- despite the fact that we had some weakness in automotive markets, we actually saw strong mid-single-digit growth in China, specifically.

And then to your point, yes, Hydraulics the excavator market was quite strong, up some 24% I believe in Q1.

It's an important market for us but it's obviously not big enough to move the needle given some of the offsets in other regions and other segments that are part of that business.

But we just think China improves as we look forward.

And Andrew, if you look at some of the construction metrics in China, they were pretty positive in Q1 and got more positive as the quarter went on.

So office starts were up, I think, 18% and residential starts were up 12%.

So you are seeing a lot of the stimulus and China start flowing into some of these construction-related markets.

And just the second question, you definitely highlighted strength in oil and gas.

Can you give us more color sort of upstream, midstream, downstream and maybe some color what specifically you're seeing at Crouse-Hinds?

Yes.

No.

I'd say as we talked about, we're definitely seeing the strength in oil and gas, and we think our business in oil and gas that we had a good first quarter of revenue, a good first quarter of orders.

And we think the market in 2019 kind of grows mid- to high single digits.

And then as a company, we play more downstream than we do upstream, and so we're more exposed to that piece of the market.

But we do think -- you saw the rig count, is up somewhat 9% or so in Q1.

And so we do think oil and gas continues to strengthen.

And that's what we're seeing in our business as well.

And we're benefiting from some of these large downstream projects, for example, some of these LNG facilities that are being configured now and petrochemical.

And so we're definitely more slanted towards the downstream-type applications.

And how fast does it hit your backlog, the oil price move?

Do you see it immediately or is there a lag?

I'd say there's generally a lag.

I mean we got -- that's -- quite frankly, I've not studied that question in a lot of detail, Andrew, but there's clearly a lag from the move in oil price to them putting in place capacity to increase drilling or exploration.

And certainly, given the fact that we're downstream and the lag would probably even be bigger for us than it would be for companies who're exposed on the upstream side.

Next question is from Deane Dray with RBC.

Maybe just touch on some of the variables in the quarter broadly that a number of the other industrial companies have called out as either a factor or not a factor.

So I didn't hear anything particularly about weather was -- did that come into play?

And you talked about the inventory adjustments.

Did any of that -- you see any of your business experience a pull-in out of the first quarter into the fourth quarter last year?

And might that have been a factor this quarter?

Yes.

And I'd say, Deane, we try to stay away from those kind of tangential elements around weather and the like because it's really difficult to ascertain how they impacted your business.

And so at this point, I'd say that was weather an impact in Q1?

It could have been.

Was it big enough to fundamentally change the outlook or kind of the thesis on the year?

I'd say probably not.

And to the point around pull-ins, we really didn't see any material pull-ins as well I think end of, let's say, Q4 that would have impacted our Q1 business.

And so really none of these extraneous variables I'd say would have had a material impact on the results in Q1.

That's fair.

And did you say how April has started?

No, we didn't.

But I'd stay very much in line with the guidance that we just provided for Q2.

We'd expect 4% growth in the -- I'd say that what you are going to likely continue to see is that our long-cycle businesses, Electrical Systems & Services and Aerospace and Electrical Products will continue to perform very well.

And as we mentioned, part of reason why we're taking the guidance down in the short-cycle businesses.

And so once again, I think the company's revenue story is really playing out very much like we anticipated, perhaps with more extremes, with more strength and the long-cycle stuff offsetting perhaps a bit of weakness in the short-cycle businesses.

Our next question comes from Andy Casey with Wells Fargo.

I apologize to beat a dead horse a little bit here but on the Hydraulics margin decline and the reduced margin outlook, is some of that -- specifically the Q1 compression, is some of that related to accelerated restructuring?

Yes.

No, I'd say that not really, Andy.

I mean we, obviously, are continuing to do restructuring in our business in Hydraulics.

And so I'd say, the margin compression really is largely a function of volume as we articulated earlier.

And not because we're doing significantly more restructuring in the business.

Now I will say there's a lot of focus, obviously, on Hydraulics and we certainly understand why.

At the end of the day, Hydraulics, as a segment, accounts for less than 10% of our profits.

And so we think we have a really strong story in a lot of our other businesses that are just performing extraordinarily well and more than making up, quite frankly, for the little bit of a shortfall that we're having in the Hydraulics business.

But no, it's really not restructuring, it's really more volume and decremental on the change in volume.

And then within Electrical Products, you highlighted some strength in residential, which little bit surprising, given some of the macro data that we've been seeing.

Is that share gains?

Or what are you seeing there?

Yes.

I mean resi for us, it was really a standout performer, quite frankly, in Q1 where we saw strong revenue growth and strong order growth.

And we think that -- largely we do think this -- essentially this factor of as you move to higher valued electrical equipment with AFCI and ground fault and the regulations and the codes that are driving standards are certainly helping that business.

But by and large, housing prices are up.

We're seeing a lot of remodels that don't show up necessarily in the housing start data.

But we continue to be quite bullish on resi and that certainly played out in Q1.

And we -- based on the data, we believe we have taken some care but the market overall for resi, electrical equipment is pretty strong and that's what the NEMA data would show.

And our belief is that, that is likely to last throughout this year.

Yes.

We think resi construction is up in our business, up mid- to high single digits for the year.

So it's really a source of strength we think for the company.

Our next question comes from John Walsh with Crédit Suisse.

I guess maybe a question on the margin.

Can you talk a little bit about how the price versus commodity inflation, I guess, tariff bucket performed in the quarter and how you're thinking about that cadence for the balance of the year?

Yes.

Thank you.

Appreciate the question.

I mean certainly, as we said in the past, Q1 played out that way and we think the year as well.

That we think price versus cost we think will be largely neutral for the company.

Commodity prices, as you've probably have all certainly noted, have abated a little bit.

I mean copper probably is the one holdout where copper prices are still running at relatively high levels.

But most of the other commodities are important to the company.

We've seen commodity costs reduce.

And so obviously, that's a good thing for the company.

But also, as we think about price and cost being kind of natural offsets for each other, the less inflation we see, the less price we see, though the less tariff-driven cost increases that we see, we obviously can't past that price on to the marketplace.

And so we're very comfortable for 2019 that pricing costs will be largely neutral, very much like our guidance has been.

Great.

And then maybe one more way to attack the negotiations comment.

Doesn't sound like you want to give the absolute number.

But is there a way to give it as a multiple of revenue in the business just to kind of frame the size a little bit more?

The size of negotiations as a percentage of revenue?

Yes or the absolute number.

I mean, a couple of people have attacked it around what the 56% increase means year-on-year, just...

Yes.

I'd say for us, I mean I -- we really didn't like not to give you a number.

But I would tell you that it is a big enough number to give confidence and to be indicative of what the future of the business looks like.

It is a very large, very material number.

Our next question comes from Julian Mitchell with Barclays.

Maybe just a question around the short-cycle businesses, particularly Vehicle and Hydraulics.

In a worsening revenue outlook in both versus your prior guide, but you sound intensely relaxed about the cost outlook.

I just wondered why maybe there wasn't a bit more urgency around cost reduction in both businesses in the face of the worst top line outlook.

And then on Vehicle, it may just be something small or something in the mix, but I think you had a sort of low double-digit decremental margin in Q1.

The guide for the year implies maybe a 30% decremental for the year as a whole.

So is there something changing in terms of mix or what have you later in the year?

Yes.

I mean maybe to address your first question first, Julian.

I mean, I don't want to leave the wrong impression for a minute.

To the extent that we have revenue shortfalls in any of our businesses, I can promise you that nobody is relaxed.

That both our Vehicle business and our Hydraulics business are doing everything that they can, and in many cases, more to flex the variable side of our cost.

It's one of the key metrics that we track all of our businesses on.

In terms of the extent that they're flexing their cost down with changes in volume.

But I'd say for us, that's table stakes.

That's something that we expect of every business that we do every day.

So it's not the kind of thing that I'd say we spend a lot of time talking about.

We don't -- the changes that we're talking about in revenue are not big enough to drive material changes in our restructuring plans.

Although in the event that the world change dramatically, we would have the ability to do that.

And so I can promise you nobody is in any way relaxed about ensuring that we're managing costs inside of our business.

And then with respect to the decrementals in Vehicle, yes, we have very strong decremental performance in Q1.

The decrementals in -- for the balance of the year are perhaps a little bigger than that.

But still well below what we would call as a normal decremental for our Vehicle business.

And so we want to get rest assured that our Vehicle team is on their game.

They do a great job, always have of managing costs in the face of a downturn.

And so you can count on them continuing to deliver.

That's very helpful.

And then my second question would just be around any interesting trends you would call out in terms of inventory levels, OEMs or channel partners across the businesses?

How do you feel about absolute inventory levels as they sit today?

And has there been any change in recent weeks or months?

Yes.

And maybe taking the channel first because that's kind of where you typically would see the big changes.

And I'd say, by and large, not.

Inventories today, with our distributor partners, are largely in line with where they've been historically and in line with their own outlook for revenue growth.

And so we've really not seen any material change there at all.

As I mentioned on the call, perhaps we've seen some adjustments always on the OEM side in some of the short-cycle businesses.

But other than that, really inventories are very well managed.

At this point of the time, I would take the last question from Mig Dobre of Robert Baird.

I want to go back to a question that's been asked before on Vehicle.

So looking at this change in organic growth guidance, I mean correct me if I'm wrong, but when you issued this guidance, I think we -- pretty much everybody knew some of the challenges that existed in the light vehicle space in terms of builds for the year.

So I'm trying to figure out what changed in your mind that prompted this guidance reduction.

Is it really more driven by what's been happening with the JV?

Is it a shift to eMobility or how do we think about this move?

No.

I'd say, it's really what we said is light vehicle markets around the world, as I think is evidenced by Q1, have come in weaker at least than what we anticipated.

And I think in general, weaker than what most economic forecasters have anticipated.

It has absolutely nothing to do with what's going on today inside of the commercial vehicle market.

North America Class 8 truck continues to do just fine.

The JV revenues, as I mentioned, are growing nicely.

And certainly, we've anticipated, at the beginning of the year, that there would be some transfer of revenue.

And that's largely on track.

And this change really is a function of what we're seeing today in light global vehicle markets around the world now.

We'll have to see what the rest of the year brings.

But certainly, the Q1 weakness, really in all 3 regions of the world, is really what influenced largely our changing guidance for the year.

I see.

Given the adjustment that you had to make to margin and the fact that margins are now going to be slightly lower year-over-year, as we look towards 2020 and we know the challenges that the commercial vehicle side of the business are -- is going to have, is it fair for all of us to be thinking that margins will once again take a step down in 2020?

No, I'd say not.

I mean as you know, we've done a lot of work over the last number of years to really build the business inside of our Vehicle business that essentially delivers strong margins through the cycle.

And certainly, as we -- as you know, because we have the joint venture, a lot of that volatility that used to sit inside of our business in our portfolio is no longer there.

We've done a lot of restructuring.

And so I would say you should not expect this business to take a material change at all in profitability, even with, let's say, a North America Class 8 market that's down significantly from where it is this year.

Okay.

Good.

Thank you.

We have reached the end of our call, and we do appreciate everybody's questions.

As always, Craig and I will be available to address all of your questions today and in the subsequent following weeks.

Thank you all for joining us today.

All right.

Thank you.

And ladies and gentlemen, that does conclude your conference for today.

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