Eaton 2Q16 Earnings Call Notes

Eaton Plc (ETN) Craig Arnold on Q2 2016 Results

Have not seen any indications that the oil and gas market has turned

” I think at this juncture we’d say we certainly have not seen any improvement in oil and gas and maybe we’ve seen a little bit of deceleration in oil and gas. Not material changes from our original assumptions for the year, but clearly we’ve not seen any indications that that market has turned.”

Steel price increases will be passed on to the marketplace if we think they are more permanent

“Yeah. As I said, you raise an excellent point, Eli, because we’ve absolutely seen steel prices move materially up order of magnitude 50%, a lot of that driven by some of the duties that have been put on imports coming out of China, and that’s had a knock-on effect of steel prices around the world. In the near term we think we’re fine in terms of the net impact to the company. We did some pre-buying. We do have some hedges in place. And so we think in the near term, we have the ability to mitigate the impact of steel price increases. We’ll have to wait and see how long these increases stay in effect, whether this is a short-term blip or it’s a long-term blip. And in the event that it’s a longer term impact, we’d have to actually revisit our pricing assumption and we’d find a way to pass it on into the marketplace. And so, we think once again on balance, we’ll do what we’ve always done in inflationary environments. We’ll find a way to pass it on to the customer base.”

We take a cautious view on automotive markets

“To your point around auto weakness, we certainly have seen a lot of the reports, reading the same ones that you have. We continue to take a very cautious view on the outlook for automotive markets. We think North America will be largely flat this year and Europe and Asia will be up slightly. But like you, we’re taking a very cautious view of it and we’re getting prepared that in the event that we do have a downturn, we’re going to be well prepared to deal with it.”

We are definitely seeing the same industrial weakness that others are

“Yeah, I think from our perspective, industrial really has been a source of weakness really this year and for the entire quarter. I don’t know that June was an especially stand-out month for us in terms of the industrial markets, but we are in fact seeing the same weakness that others are talking about. And it’s one of the reasons why in our Industrial Systems and Services (sic) [Electrical Systems and Services] (36:29) business, that we’ve taken the guidance down and the reason why we continue to see some margin challenges in that business. And so we are absolutely seeing the weakness and experiencing it”

Seeing ongoing weakness in China

“I’d say in general what we’re seeing in China is largely ongoing weakness. I think as you heard the commentary as I talked through the various end markets, but for let’s call it the consumer-related market and passenger car markets, we continue to see weakness, mid-single digit weakness in the industrial markets in China. That’s affecting our Electrical business, and we continue to see strong double-digit declines in many of the Hydraulic-related markets as they continue to work off excess inventory.”

There’s still some inventory overhang in China

“So I think we’re still living through a bit of overhang, and sales versus production I think continues to eat into the inventory overhang that we’re dealing with in a lot of the capital equipment markets. Principally I think markets like excavators and road rollers and the other things that are really supporting this major building boom that China went through over the last ten years, but they continue to eat into it. Are inventories today at the level that I’d say are where the market needs them to be? I’d say no. I think they’re still working through a bit of an inventory overhang, and that’s why we’re still dealing with these strong double-digit declines in a lot of the end markets in China. And that’s very much what we’re forecasting.”