Eaton 4Q16 Earnings Call Notes

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Richard H. Fearon

Impact of border adjustment tax would not be significant

“But let me just say this: Without knowing the exact policy changes, if the policy that came in was something along the lines of a border adjustment tax, we believe the impact on us would not be significant, since we are balanced if you total up our imports. And we’ve recently been looking in some detail at this just to make sure we fully understand the numbers. But we’re balanced when you total up the imports versus our direct and indirect exports. When I say indirect, we make a lot of parts that go into other assemblies, other people’s products that are then exported. And so we believe the way it would come out, we would likely be able to get an offset for all of those exports. So we should be neutral.”

Craig Arnold

Not expecting a V shaped recovery in hydraulics

“we’re very comfortable saying that we think we’ll see very slight growth in Hydraulics during the course of the year. But at this point, we’re not forecasting kind of the V-shaped recoveries that we have historically seen in this business. You never know. When these markets turn, they tend to turn hard and fast, but we’re not yet in a position to call that turn.”

Optimism but haven’t seen the turn yet

“And we do think, as we take a look at the oil and gas assumption for 2017, yes, rig counts have increased nicely, and that’s a good indicator, but we’ve not yet seen a significant turn in orders. And we think in our harsh and hazardous business that we talked about in Electrical Systems and Services, we think it’s another down year. We could be wrong. We hope we’re wrong, that a lot of the enthusiasm today that’s built into a number of expectations, we hope that translates into orders and sales, but we’ve just not yet seen it. ”

Commodity prices have been very volatile, not sure whether we can pass them into the marketplace yet

“What we are really dealing with, we think, today is a lot of speculation built into the expectations of global growth, and hence the demand for commodities or the price of commodities have really been fluctuating quite significantly. Just to give you, as a point of quantification, post the U.S. elections, our commodity prices on the basket of commodities that Eaton acquires are up 7%, making this issue obviously a bit more difficult to manage and to pass on quickly in the marketplace. We’re seeing also large swings in volatility. To give you maybe another couple of data points that will maybe be helpful, bar steel prices over the last 12 months have been as low as $185 a ton, and they hit a high at the end of the year of $303 a ton. And today, they’re $265 a ton. Copper prices over the last 30 days have been as low as $2.49 a pound. Today they’re $2.73 a pound. So a 10% change over a 30-day period. And so this period of volatility is really going to have to work its way through the system before we can really understand exactly where commodity prices are going to settle out and where we can put plans in place to either offset them or pass it on in the marketplace.”

Automotive still doing very well

“I’d say today, the global auto markets around the world continue to do extremely well. Even if we got the January numbers for the U.S. market and down from the fourth quarter kind of record levels but still north of 17 million cars and about flat with prior year, which is largely what our forecast is for North America. So we think North America continues to run at flat at very high levels. We think Europe is maybe some modest slight growth, and we think China continues to be kind of a standout performer. I mean, China really posted very large numbers during the course of 2016, and we think it moderates a bit, but we think it’s still positive.”

For the most part we’ve seen commodity costs go up over the last 90 days

” most of the commodities, certainly the two that you mentioned, are up, whether it’s bar steel or flat steel or hot roller beam. So really it’s almost across the board where we’ve seen commodity inflation creep into the system. And so it’s – I mean, there are a few commodities, like silver and the like, that have perhaps come down slightly. But, for the most part, we’ve seen most of our commodity input costs go up over the last 90 days or so.”

Improvement in hydraulics was not just a December surge

“Yeah, in our case, Andy, the simple – short answer to the question is no, it was not a December surge, as we also have heard others articulate, spending budgets at the end of the year. We really did see the strength largely play out throughout the quarter. And so far in January, I’d say that we’re encouraged that some of the strength that we’ve seen in Q4 has continued.”