Eaton 3Q15 Earnings Call Notes

Eaton Corporation’s (ETN) CEO Sandy Cutler on Q3 2015 Results

Distributors have been seeing a slowing of their end demand, not comfortable taking on more inventory

“As we’ve talked with so many of our distributors around the world, they have been seeing a slowing in their end demand. They clearly are not comfortable taking on more inventory in this environment. And we saw this slow as we went through the third quarter. And so I’ll comment more about that when we get to our fourth quarter guidance. Still positive in the Americas and in Europe but Asia was particularly weak, and it was not simply China; we saw weakness across the region.”

Asia was basically weak across the board

“Asia was basically weak across the board and was the primary reason that the total bookings were flat instead of slightly positive.”

Seeing a downshift in NAFTA heavy duty truck build

“We are seeing a downshift in terms of NAFTA heavy duty truck market build. If I could comment on that just for a moment, you’ve known that our forecast throughout this year has been 330,000 units. We think it’s coming off here in the fourth quarter.”

Continue to hear that customers are scheduled to be closed more than they were three months ago

“we continue to hear from specific markets, I cited one but it’s just one, the heavy duty truck market, that there are many more days being scheduled now to be closed from our customers than they were just three months ago.”

Not seeing any evidence that pricing pressure is coming back to commodities

“We don’t see pressure on the commodity side. Hence, we don’t see a lot of pricing actions that are likely to be successful out in the marketplace. So relatively neutral in that regard. I think the key is going to be for us all to understand when that commodity pressure starts to come back. But we’re not seeing any evidence of that at the present time.”

US construction has been strong on residential, not that strong on commercial and weak in industrial

“if I could cut it into maybe three pieces, on the light side and that’s the portion that was attached to residential, I would say continues to be quite strong and looks a lot like the residential demand. On the really large commercial projects, not all that strong. On the industrial large projects that’s where the weakness has been”

Base assumption is that Brazil continues to be weaker next year than this year

“our base assumption is that Brazil continues to be weaker next year than this year. And we just think there are so many macroeconomic issues that have to be addressed, we’re not planning on an upturn effect; we’re planning on it still sliding some more in 2016 versus 2015.”

Feedback is that customers have a little more to do before they feel their inventories are optimally sized

“I think that industry was maybe buying in a little too strongly in the first quarter and second quarter. And as things began to back up here in the second half, they are obviously not buying or trying to window down our inventory. And our feedback is they’ve got little bit more to do before they’re going to really feel they’re going to optimally sized.”

Some of these end markets have been weak for some time but still think we’re going to see some negative numbers in 2016

“When you get out to the end markets, some of these end markets have been weak for quite some time and you would hope that they are starting to get it right. But our view is when markets are falling off like this, it usually takes a while for people to catch up and get right-sized. And so that’s all kind of big into our view in a number of these markets in 2016, we’re still going to see some negative numbers on the growth side.”

Primary focus right now is on getting cost out of the business

“our focus right now is that we’re seeing markets have weakened and we need to get the cost out of our overall corporate portfolio that’s at the corporate level and each of our individual businesses.”

Our concern that we’re responding to is that this is a general slowdown

“our concern that we think we’re correctly responding to is that this is a general slowdown and then you GDP numbers come out lower than people thought again; you saw the industrial production numbers come out now lower than people thought and not seeing a lot of different news from around the world. So, we’re trying to get ahead of this as fast as we can.”

We think IP in China is growing much slower than has been stated

“we actually think that manufacturing IP in China is growing much slower than has been stated. Having said that, now you look within it and look what’s going on, most of the infrastructure projects have been pulled back. There is not much manufacturing capacity. And many people are talking about the construction side — I’m talking commercial construction that has gotten much slower. We’re not seeing the export; this will be machine tool activity, be particularly strong either and that has to do with the receiving countries, not being that strong. And last but not least, the corruption investigations that resulted in a lot of practices that are — let say, it’s causing delay in projects”

Things are slow in the rest of Asia too

“I’d say if you go down through Indonesia, Malaysia, wherever else, clearly the oil situation is acting as a depressant in that particular area. You get up into Korea and of course there’re not a whole lot of ships being built currently and you’re seeing this back up again.”

This recession is milder because there haven’t been significant bubbles created out of this long grinding growth rates

“I think there are a couple of salient reasons why they’re different. We don’t see significant bubbles having been created out of this very long, low grinding growth rates. The banks are in awfully good shape and a lot of the regulations are ensuring very fulsome capital ratios in that regard. We have not yet seen any form of inflation and the prospect that we could get a couple of quarter point interest rate increases doesn’t feel like the thing that will derail an economic growth at this point.”

We will finally start to benefit from low natural gas prices in 16 and 17

“the last item which we’ve almost all forgotten about is with natural gas dropped two-three years ago, people speculated on the reindustrialization in United States. We cautioned at that time that that’s going to take five years because designing these plants and building these plants and putting them into production is a five year cycle. Guess what, end of ‘16 and early ‘17 is when a lot of that starts. And so there is a phase of construction going to come here in the country that’s going to be of a very large size and that is traditionally an area where Eaton has participated quite well but it’s not quite yet.”

We don’t see a reason why this goes dramatically negative because this doesn’t have a monetary crisis attached to it

“we don’t see this very slow grinding recession that doesn’t have a monetary crisis attached to it, we don’t see a reason why that goes dramatically negative. But it is a difficult, frustrating, grinding environment, and that’s why we say again, our strategy has to be built upon on this point. ‘

Pretty low likelihood commodity businesses will change substantially next year

“I think the likelihood we’re going to see these commodity businesses change substantially during 2016 is probably pretty low. So you talk about ag and construction and mining et cetera.”