Eaton 4Q15 Earnings Call Notes

Eaton’s (ETN) CEO Sandy Cutler on Q4 2015 Results

Continue to see strong aerospace activity

” A lot of discussion over the last couple of weeks about what’s happening in the commercial aerospace activity, we’ll talk a little bit more about that when we talk about our guidance for next year, but we continue to see that outlook being strong as we move into 2016 and 2017.”

Have accelerated and expanded restructuring actions

“we’ve now accelerated and in fact expanded our restructuring actions and as our view that a couple of you had commented on your write-ups this morning that 2016 and 2017 will remain somewhat challenged time periods in terms of end market growth and so our focus is getting the cost out and using our balance sheet to buy back shares and to really get the company in well positioned in what will be a period of lower growth then we had seen in previous years.”

Think revenues will be down more than projected in October

“We now, with the benefit of the last several months and I think all weaker and after [ph] news, it’s not only we but you also have been reading as well our detailed discussions with our customers around the world. We think a better expectation tuned up for that doubt is that our organic revenues would decline on the order of 2% to 4%”

We’re in a commodity cycle. It will end, we just think probably not in ’16

“I think clearly we’ve got a couple of big issues going on and we’re in a commodity cycle and it doesn’t matter whether it be oil and gas, whether it be metals, whether it’d be Ag, we’ve seen as the world has slowed down it’s not having a fairly profound effect on a lot of these commodities. This too will bottom we’ve been — lived through a bunch of these. It just our view that we’re not going to see that end in ’16, that’s why we said that it’s so important really to get — to take these restructuring actions in ’15 and ’16. Hard to forecast right now, Scott, whether that turn up is in ’17 or whether that turn up is in ’18, I think most forecasts have always proved to be wrong”

You are starting to see the big integrateds slashing capital budgets

“You are starting to see some of the big integrateds are really slashing capital budgets again and that’s why our view has been that you have a second year of a negative in the oil and gas industry broadly in this year. And once you start these big cycles it takes a couple of years for them to swing back.”

I don’t think we’re seeing anything that would cause us to believe that markets are better than we’re forecasting

“Our view is that there are couple of distributors that have come out and talked about things being a little bit more positive. Actually our direct business peers, I don’t think you’ve heard as much commentary coming out about the first quarter. I don’t think we’re seeing anything at this point that causes us to think that markets are better than what we’re forecasting here. This is a — we’ve seen markets coming off each quarter throughout 2015 typically our first quarter is seasonally weaker than our fourth quarter, it’s our weakest quarter of the year and that’s how we’ve laid out our guidance for this year. So I think it’s a little early to call the year. Fortunately, we haven’t had a major snow event this year which hasn’t given us a big hit in January, but I’d say no were not seeing anything different than our guidance at this point.”

We’re planning as if there wont be a rebound in the second half

“as we put the plans together this fall were not counting on an economic rebound in the second half. We think that’s been kind of an unwise premise to go into these markets where if it does gets stronger, so much the better, we can scramble up, we’ve done that well in the past, but the restructuring actions that we’re taking, this commitment to a three year restructuring plan says that we think 2016 doesn’t recover when we get to the second half.”

Inventories maybe still elevated in oil and gas areas but other than that people have gotten the hatches buttoned down

“I think the one segment where you find when you travel regionally and you talk to different customers, if an individual distributor whether they were electrical or whether they were hydraulic had an unusually high exposure to oil and gas area. They may still be struggling with some inventories because I think that has continued to move in a way that many people didn’t predict it would. But I’d say outside of that, I think they’re fairly balanced. I think people have got their hatches buttoned down tight and they too are trying to live through a period of time when growth is less than they’d hoped it might be a couple of years ago.”

There’s so much time between now and the fourth quarter

“we think we’re better the plan on the fact that we aren’t going to see the rebound at that point. And if we do it will be an upside, there is so much time between now and the fourth quarter in terms of seeing what happens to crop prices, what happens to commodity prices and we’ve seen the volatility in these areas. So, we are not able to forecast that so, we are not assuming it’s going to occur.’

We think it’s a frustratingly slow environment but not a recession

“We don’t see that as the high probability, We do think that we are in this frustratingly slow environment that can often cause people to use the recession word, but I think that’s almost a more of a kind of an emotional issues than it is a the factual basis, we think that GDP is likely to grow in the mid-two’s again this year. However as we are on the industrial side of the economy were seeing industrial production numbers that are more like 1.”

Craig Arnold

An unprecedented period in hydraulic markets

“No, the only thing I would add to what you said is we really are living through what I would argue is a really unprecedented period in the Hydraulic markets and you can’t find the hydraulic end market today that hasn’t gone through a pretty perceptive downturn, whether it’s Ag or it’s China construction, or its mining the oil and gas. Most recently anything tied to capital purchases and on the industrial side the business. “