Eaton 2Q17 Earnings Call Notes

posted in: Notes | 0

Craig Arnold – Eaton Corp. Plc

Higher commodity prices

“we had somewhat higher commodity prices, and you’ll see that theme really throughout many of the segments.”

Industrial activity remains weak

“Overall, I’d say industrial activity remains weak with mixed activity across the remainder of what we call nonresidential construction segments. ”

Pockets of weakness in global light vehicle markets

“we have seen pockets of weakness in global light vehicle markets, primarily in North America.”

Mixed economic indicators

“I’d say we’re seeing somewhat mixed economic indicators. On the positive side, manufacturing PMIs are strong in the U.S. and in Europe, north of 57 in both cases. U.S. non-defense capital goods orders were also up 4.5% in the quarter and up 2.8% for the year, so perhaps somewhat of a turn there. However, we’re also seen pockets of weakness. We’re seeing obviously the volatility in oil pricing. We have a lower rate of industrial production growth in both the U.S. and China. The U.S. IP was 1.6% in Q2, and that’s down from 2.4% in Q1. And in China, industrial production was also a bit lower at 5%, but once again lower than Q1. And perhaps more thematically globally, large industrial projects remain weak.”

Growth in office construction beginning to moderate somewhat

“growth rates for most construction markets are slowing, and growth in the office construction is also beginning to moderate somewhat. Large industrial project activity continues to be weak. The manufacturing category, as a key indicator of the C-30 report showed through April and May, down some 8.5%. We’re also seeing somewhat slowing growth in housing starts”

Continue to experience commodity cost pressures

“We do continue to experience commodity cost pressures as we move into the second half. And this does include a recent spike that I think many of you are aware of, that we saw in copper prices where copper prices hit $2.90 or so just last week, and that’s up about $0.30 from where they’d been running. So we continue to struggle with getting commodity prices to seat at a level that we can essentially plan effectively for. And so we’ll continue to face that challenge going forward. ”

V shaped recovery in China construction

“Yes, I mean, what we’re really seeing I think mostly is a pretty broad-based improvement in our Hydraulics business. We’re seeing certainly kind of the V-shaped recovery that I mentioned in China construction. But more systemically, we’re seeing really increases in all regions of the world. And we’re also seeing increases really in both mobile equipment and stationary equipment and then across both construction and ag. And so what we’ve really experienced I’d say mostly is a pretty broad-based recovery in most of the hydraulics markets and a really outsized V-shaped recovery in China construction.”

Commodity prices have retreated but not as much as we anticipated

“it was our original anticipation that commodity prices would start high, and then we’d see them essentially retreat a little bit as the year unfolded. And in fact, that’s largely what has happened. Unfortunately, it hasn’t happened to the extent that we anticipated. And then on top of that, we’re ending up with these extraordinary events where you see spikes in various commodities essentially driven largely by maybe geopolitical factors and I’ll cite copper as a prime example, where copper prices spiked last week due to not necessary a supply/demand issue, but more of a more political kind of issue around China.”

Every commodity is at a higher price than we anticipated

“if you take a look at the basket of commodities that are important to our company and you go commodity by commodity, and I’d say almost every commodity today that we purchase is at a higher level than what we originally anticipated. And so I think it’s a pretty broad-based commodity challenge across most of the baskets of commodities that we buy as a company. So it’s pretty broad-based.”

It’s our intention to recovery cost inflation through price

“suffice it to say that to the extent that we are experiencing more commodity price inflation in our businesses than we originally anticipated, and we don’t have clear line of sight to other measures to offset it with cost reductions, that the intention would be to go out and recover it in the marketplace. And that’s fully our expectation that through the cycles of commodity prices up and down that commodity costs are neither a headwind nor a tailwind to our business.”

Hedging is a temporary fix

“the way we think about hedging in general, it’s kind of a bridge to a permanent answer. And so hedging is never going to be a permanent solution to deal with commodity fluctuation. Ultimately, you have to get price or you have to get costs out of your business. And so we do hedge. But once again, it’s a temporary fix.”

Richard H. Fearon – Eaton Corp. Plc

Would love to do M&A but it’s a tricky environment

“Yes. We are clearly interested, Rob, as we’ve said, of getting back into an M&A mode, which we were out of during the years of Cooper integration. And because of that, we have spent a lot of time in the last three to four months systematically targeting areas and systematically starting to rebuild our pipeline of likely candidates. The environment I think is a challenging one right now. As you know, multiples, by most people’s estimations are above average. And as you’ve seen, the prices paid in many of the acquisitions that have been announced, they’ve been very high. And so I think those of you who know us over a great many years know that we have been very disciplined in how we purchased companies, and we intend to remain disciplined. And so with the caveat that the environment is a trickier one than it sometimes is, we would hope that we would make some good progress over the next 12 to 18 months in hopefully achieving some acquisitions.