Don Bullock - Senior Vice President, Investor Relations Sandy Cutler - Chairman and CEO Rick Fearon - Vice Chairman and CFO.

Joe Ritchie - Goldman Sachs Eli Lustgarten - Longbow Securities Julian Mitchell - Credit Suisse Ann Duignan - JP Morgan John Inch - Deutsche Bank Steve Winoker - Bernstein Jeff Hammond - KeyBanc Nigel Coe - Morgan Stanley Jeff Sprague - Vertical Research Josh Pokrzywinski - Buckingham Research Andrew Owen - BofA Merrill Lynch Mig Dobre - Robert Baird Shannon O'Callaghan - UBS Deane Dray - RBC Chris Glynn - Oppenheimer.

Ladies and gentlemen, thank you for standing by. And welcome to the Eaton Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] And as a remainder, your conference is being recorded.

I would now like to turn the conference over to our host, Mr. Don Bullock. Please go ahead..

Good morning. I’m Don Bullock, Eaton’s Senior Vice President of Investor Relations. Thank you all for joining us for Eaton’s fourth quarter 2014 earnings call. With me today are Sandy Cutler, our Chairman and CEO; and Rick Fearon, Vice Chairman and Chief Financial Officer.

Our agenda today includes opening remarks by Sandy, highlighting the company’s performance in the fourth quarter, along with our outlook for 2015. As we’ve done in our past calls, we will be taking questions at the end of Sandy’s comments.

The press release from our earnings announcement this morning and the presentation we will go through today have been posted on our website at www.eaton.com. Please note that both the press release and the presentation include reconciliations to non-GAAP measures. A webcast of this call is accessible on our website and will be available for replay.

Before we get started, I’d like to remind you that our comments today will include statements related to the expected future results of the company and are therefore, forward-looking statements. Our actual results may differ materially from those of our forecasted projections due to the wide range of risk and uncertainties.

Those are described in our earnings release and presentation. They are also outlined in our related 8-K filing. With that, I will turn it over to Sandy..

Great, thanks Don, and good morning, everyone. Thanks for joining us. I’m going to work from the presentation that we posted earlier today and I am going to start on chart #3, its entitled Highlights of Fourth Quarter Results. Clearly, we finished the year with a strong quarter of performance.

We are really delighted that our operating earnings came in at $1.27, up full 18% over year ago and that was versus our guidance as you recall of a $1.20 for the fourth quarter. Sales up 1%, the really bright news I think in terms of the revenue line though really the organic revenue growth of 5%, the highest since the fourth quarter of 2011.

We had record fourth quarter segment margins at 15.9%, you may recall we were at 16% in the third quarter and our guidance at that time was that we'd expected margins might come off as they normally do seasonally by about a 0.5 point in the fourth quarter. Clearly, we did substantially than that.

And these overall margins of 15.9% at the segment level were up 1.3 points versus a year ago.

Record operating cash flow of $944 million, obviously a cash conversion ratio of about 119% in the quarter over 12% of sales and then we continued in the fourth quarter as we had in the third quarter and second quarter repurchased our shares repurchased $326 million of shares that was 4.8 million shares.

I think if you recall from having added up what we did in both the second and third quarter, that’s a total amount of 9.6 million shares or $650 million expended in repurchasing them during 2014. So a total of buy backing about 2% our outstanding shares during 2014.

If we turn to the next chart, chart four, it’s entitled Comparison to Fourth Quarter Guidance. As I mentioned, we are very pleased with the $0.07 beat, really made up of three items. The big headline fairly is the higher margins of 15.9% versus the 15.5% that drives $0.04 of the beat.

Lower tax rate really came as a result of legislative changes not just here in the U.S. but elsewhere around the world for about $0.02 and then the lower share count that I mentioned that’s a result of buying back of 4.8 million shares in the fourth quarter $0.01. So, again, as we look at this the real big news is obviously the better margins.

If we turn to chart five, a summary of really all the numbers you saw in the press release, so I am not going to walk through all these numbers. I do want to just highlight in the lower left-hand corner in the green box entitled Sales Growth.

Again, the organic sales growth of 5%, we think really strong record, obviously performance here in this quarter.

If we turn to the next chart, which is labeled Electrical Products segment and we will start to go through, give you a couple comments on each of the operating segments to report, obviously, our largest segment of the company about 33% of the company, a very strong quarter of performance.

As you can see sales were up 2%, organic was up 5% and here we start to see the impact of ForEx in the quarter, which grew in the fourth quarter to be more significant than it had been earlier in the year and as we will talk about 2015, we think that’s going to continue to grow as we move into 2015.

But sales up 2%, 5% organic, very strong margin performance at 17.6%. I think when you look behind the business in terms of the activity that’s going on. Bookings were up 4%. But once again this is very much a story of great strength in the Americas and then weaker activity outside the Americas.

Anything you will hear us talk about really in terms of each of our businesses and to give you just a dimension of that. Our bookings in the U.S. were up almost 7%. So I think you can get a sense for the difference around the world. Again, we get into individual products and end markets, lighting again very strong, volume up 13%.

We are delighted that our investment in LED is really paying off, about 50% of total revenue, now in the fourth quarter was actually LED. Very strong and residential very similar numbers to what we saw in lighting, industrial activity was quite strong. We are pleased with the rebound in our Canadian business that was quite strong.

Those really the highlights of where that booking strength came. You may recall bookings in the third quarter were 5%, booking in the fourth quarter 4%. So, continued nice tone in this business. If we move to the next chart, entitled Electrical Systems and Services segment, about 29% of the company, obviously a very nice quarter here.

While sales were basically flat with the third quarter and flat with last year. You continue to see the, I think very strong margin performance here. I think many of you’ll recall we've had disappointing second quarter, we’d indicated at that point that our plan was to get our margins in the second half to an average of 14%.

You recall in the third quarter we were at 14.6% and the fourth quarter we were at 15.2%. So, obviously, significantly stronger than we had laid out in the second quarter. Bookings were flat and once again in this particular business we've been seeing a real flatness or weakness on the power quality side, really around the world. And here in the U.S.

somewhat of a split in terms of the major project work, in terms of small projects, things aimed at sort of light commercial type market continued to be very robust. The very large projects, more heavy industrial tend to be weaker and tend to being postponed at this time period.

And then, I would say, the Utility markets continue to be a weak at this point. Many of you, I am sure are looking at the bookings progression here, 3% in the third quarter, zero percent in the fourth quarter. I'll talk a little bit more about the implications of this in terms of our guidance for next year.

But it does mean that we would expect to start in this segment a little slower in the first half of next year, because, obviously, the last two quarters of bookings have been little weaker. That’s all in our guidance already. If we move to the next chart, Hydraulic segment, about 13% of the company again. Clearly 6% volume decrease from a year ago.

If you look toward the green box in the lower left-hand corner, you see that 4 points of those 6 points was ForEx, but no question the market itself weaker as we’ve talked about. Margins of 12.2%, down from a year ago, up just slightly from the third quarter, which was 11.7%.

And when we get inside the economic, economic activity here again, I think you look at our bookings, they declined about 3% from a year ago. But again very similar to what we discussed with you in the third quarter, distributor orders were up 9%.

It was the OEM side of this business that was down again double-digit, down 22% and the story within that OEM weakness is exactly the same as they was in the third quarter. It’s the story of the big ag retrenchment going on here and so that really had, okay, tone, with our OEMs, but very, very weak here on the ag side.

As we look forward and I will talk a little bit more about this when we talk about guidance. But we will be taking some actions in this business to restructure our business further in light of these volumes and I will talk a little bit more about that in terms of how it lays out in 2015. Next chart, Aerospace, just less than 10% of the company.

We think a really fine quarter, volumes up 2%. But again I can refer you to the green box in the lower left-hand corner, organic growth of 9% offset by, as you recall, the divesture of the two small business units, we divested during the second quarter this year, that’s how we get 1 point negative ForEx, that’s how we get to the 2%.

Bookings continued to have a good tone here, both on the commercial and the military side. Commercial is a little stronger than military, but they both positive numbers. And the aftermarket running at about 8% continues to be robust. And we are really pleased to see that activity, very solid margin performance here at 15.4%.

And then finally, the next chart entitled, vehicle segment, about 17% of the company. We think a very strong quarter, volumes up 4%, margins of 16.9%. Within that volume, again if I can refer you to that green box on the lower left hand corner, 8% organic growth, very strong growth offset by 4% negative ForEx impact.

And for those of you who are looking at the 320 basis point increase in margins, the 16.9% versus the 13.7% last year, I think you recall in the fourth quarter of '13, we had a number of launches, high volume launches that we had not done as well on and that had depressed those margins by about 1.8%.

So I think the real correct comparison for you to think about is 16.9% versus sort of a run rate a year ago of about 15.5%. Now we are at the front end of -- we continued to have a pretty attractive number of quarters here in terms of economic activity within North America in heavy duty truck business.

I think most of you saw in December the NAFTA Class orders came in at 43,800 units that’s for the industry. The fourth quarter total orders were 130,900 units.

And if you look back over the total bookings for 2014, we believe it maybe a record year of individual bookings in the industry, all that is leading to our forecast of a build -- an industry build for NAFTA Class sales of about 330,000 units this year.

And we think it’s going to start at a pretty brisk level, about 82,000 units in the first quarter, about 85,000 in the second quarter, about 82,000 in the third, and then 71,000 in the fourth, and that’s our present view for how this will lay out over the quarters this year.

We can then move to chart 11, which is entitled highlights of full year 2014 results. We think a very good year. Organic revenue growth of 4%. FX was just 1% this year. And of course in our guidance, we will be talking to you about a negative 4% next year. So, three additional negative points going into 2015 about what we experienced this year.

With all the puts and takes and changes in economic environment and individual operating issues, our guidance originally was $4.70 and we came out with $4.67, up 13% over a year ago and it does exclude the legal settlements and the divestiture gains.

Segment margins up 40 basis points to 15.3%, operating cash flow, excluding the legal settlements, a record $2.53 billion, that’s about a 0.9 cash conversion or just over 8% of net sales, the Cooper integration, really doing very, very well. We have fully achieved that $95 million of incremental savings that we expected to achieve in 2014.

And as I mentioned earlier, all this has enabled us to repurchase about 2% of our outstanding shares at a cost of $650 million this year.

If we then kind of switch hats here and move out of '14, although we would love to talk some more about the fourth quarter results, but we know your interest is really in trying to understand our thinking about 2015 and that really starts on chart 12 of this packet.

Clearly, we are operating and what I think many people have titled mixed global economic conditions.

And our view on that really has not changed, the relative US strength, the weakness in Europe and Latin America, the slowdown in China, and then probably the newest factor that was introduced in the second half of 2014 is the extreme currency volatility that we’ve all seen and that’s done nothing but accelerate into the New Year here.

So set in that context of overall global GDP that we think is going to be around 2.5%, we would expect our organic revenue and this is combination of both market and whatever we do to grow in excess of that to be between 3% and 4% 2015.

And what we have raised for you on this chart is our view of the likely ranges of that organic growth in these four businesses. And maybe just to give you a little bit of color in and around this. In the electrical business, clearly we continue to see real strength in the residential markets.

We think that those may well increase again this year on the order of 15%, but non-res very solid single-digit type growth, similar to what we saw -- mid-single digit, similar to what we saw this year.

Utility will be one of the lower growers, maybe a 1% type market and then the global power quality markets we think will be flat, not much growth this year. In the hydraulics market, I know there is a lot of interest in trying to understand the end market activities here, not much new versus what we have been talking about.

Real retrenchment of US in global ag, particularly at very large equipment area what many people are calling large ag, and those numbers on a global basis on the order of a 20% large ag pullback. US construction, mid-single digit. Industrial is pretty reasonable. Mining, a negative.

And clearly, we continue to see weakness in the Chinese construction equipment market. And that’s what leads us to this forecast. On the aerospace side, we see the 2% to 4% range. You are seeing commercial around the world sort of is 5% to 6% and then US defense at roughly a negative 2%.

And then on the vehicle side, you have heard us already talk about our forecast of 330,000 in terms of heavy duty truck. We are in the high-16s in terms of the US retail sales. And then we continue to think that the Latin American market is not going to show much growth here during 2015.

All of that leads us to this overall view of our organic revenue growth this year of about 3% to 4%, remembering again that that’s going to be offset by about 4% of negative ForEx impact. Moving to chart 13, a quick look at segment margins.

What we’ve shown you here is in the first column is the full year 2014 actuals, 2015 ranges for each of our five segments, and then in total I think they speak for themselves in terms of that they are all increases with the exception of hydraulics. And I will comment on that one just in a moment.

Electrical Products, I think pretty clear continued very attractive margins, continued growth. We get additional synergies in that segment as well this year. And so, I think no further comments needed there.

Electrical Systems and Services, I did comment that and we talked about quite a bit with many of you is that this is a backlog business so that the bookings in the previous two quarters are somewhat of an indicator of lightly revenues and the success of third quarter.

As a result, as we think about the first quarter in this business that is always the weakest quarter for Eaton in total, it is also the weakest quarter for the systems and services businesses.

And as we look at the bookings of last two quarters, we think this business will start a little slower the early portion of this year and then pick up as the year goes on. In the Hydraulics business, all the comments I made about the tough market conditions obviously apply here.

As a result of those tough market conditions, we are going to pull some additional restructuring and head into this business. Most of that will be completed or expensed in the first and second quarters.

So I would encourage you to think about this business as being one that starts slower from a margin performance point of view and then margins are higher in the second half.

And then as you think about the total, as you look at the 15.9% to the 16.5% for the entire company, I think you are all well familiar that we tend to have our lowest segment margins in the first quarter.

And when you add two those, the two comments that I made on Electrical Systems and Hydraulics, we think a good place to think about first quarter segment margins are probably in this 14.5% to 15.0% type range. And obviously they pick up from there for the year.

And if we can move to chart 14, which is the summary and I won’t repeat many of the areas that I have already touched upon here that organic growth is of 3% to 4%, that’s about $675 million to $900 million. And obviously you get a sense for the 4%, negative ForEx is $900 million.

Corporate pension, interest, and general corporate expenses, we think will be about $30 million to $40 million higher than 2014 levels. The tax rate, this is very consistent with what we have been indicating to you over the last six months, we think it will be 9% to 11% and that obviously is different than the less than 6% in 2014.

That leads us to our full year operating earnings per share guidance of $4.75 to $5.05 and our first quarter guidance of $0.95 to $1.05. Operating cash flow, up some 15% from 2014 and that’s a cash efficiency ratio, our conversion ratio of about 1%.

Free cash flow, obviously just the difference between our operating cash flow and the CapEx, which we think will be about $675 million.

And then as you saw in our release that we anticipate about $45 million of acquisition integration expense in 2015 and that includes both Cooper, and then the last pieces of the ramp up of a few of our smaller acquisitions, also concluded in 2012. So if you move to the last chart, chart 15 entitled summary.

Again 2014, we think we had a really strong fourth quarter, the 5% organic growth, the record segment margins, the all-time record quarterly cash flow. Finished the year we think well, up some 13%.

We think that really steeps the basis for another record year in 2015 for organic growth of 3% to 4%, offset by the negative 4% ForEx, operating earnings growth of 5% at the midpoint of our guidance.

And then we tried to give you a dimension into kind of the major elements that are affecting that 5% guidance that we are expecting ForEx is about a negative $0.20 this year. That’s the impact of that $900 million of negative revenue impact and the move to that 9% to 11% tax increase from less than 6% is about another $0.17.

So you’ve got about $0.37 of negatives from those two headwinds. And if you were to take those out of our guidance, obviously that’s what then drives the 13%.

The reason we felt it was important to come back to that number is that I’ve talked with many of you on different occasions about the fact that I think the challenge for industrial companies is to think about in this relatively low growth market, how do you drive earnings in this 10% to 12% range? I think our formula in terms of the acquisition integration benefits and the base earnings being a multiple of revenue is still in place.

Unfortunately, we're dealing with it and we have to deal with, the ForEx and the higher tax rate issue here this year. In the first quarter, specifically, the impact of ForEx and the tax rates about $0.09. And you obviously can get the impression that it’s about that same number, as it runs through each of the other quarters as well.

The good news for all of this is that the Cooper integration savings and the additional restructuring benefits we had from the work we did in our industrial sector this year are helping us really offset this negative $0.37.

So, again, if I just come back to the first quarter, I’d ask you just to be thinking about currency and tax impacts, seasonally weakened margins, hydraulic restructuring, slower ESS start, that's what leads us to sort of our dollar midpoint for the first quarter and what we think is still going to be another great year for Eaton.

So with that, Don, I'll turn things back to you and look forward to the questions..

Very good, Bill. Before we begin our Q&A session on our call today, I see that we have a number of individuals in the queue with questions. So given our time constraints today of an hour and our desire to get as many of those questions as possible, please limit your opportunity to one question and a follow-up. Thanks in advance for your cooperation.

With that, I will turn it back over to our moderator who will give you some instructions..

Thank you. [Operator Instructions].

Our first question will come from Joe Ritchie at Goldman Sachs..

Thank you. Good morning, everyone..

Good morning, Joe..

All right. So my first question’s really on the electrical side of the house. Can you just give us a little bit more color, Sandy? You saw your bookings numbers up in EPG, yes, that's flat and I know you talked a little bit about the industrial market and I think is great.

I guess what I'm just trying to understand is, as you look into ‘15 and your organic growth assumptions of 3 to 5 across electrical, I’m just trying to understand what’s embedded in your substance for growth, quarter growth in those two segments?.

I think we really think about the market as being across both of them, Joe. And I say that the big issue is, is really a continuation again of U.S. strengths, not much growth in Europe and growth somewhere between the U.S. and EMEA and Asia-Pacific.

But I’d say in the non-res market, we again think we are going to see here in the U.S., speaking to that a single-digit type performance, a single -- mid-single-digit type performance. And on the smaller kind of industrial projects, there is still a fair amount of activity. It’s really large projects that we've seen have been drier in that regard.

Utility, we don't expect to get a tremendous amount of help out. We think that's going to be kind of a 1% grower again this year. In the residential activity, we continue to think we’ll be quite strong.

So, basically, the products that go through distribution are in that EPG pieces that include service activity, which has been quite strong, as well as some of the larger projects and the smaller projects that have been quite strong is in the ESS segment..

All right. And maybe I guess my follow-up, just focusing on Hydraulics for a second. You mentioned that basically the order retention this quarter was predominantly driven by ag. But there has been negative commentary from the OEMs on the construction side as well.

This quarter, you had CAT, specifically talk about your production being down next year? So, I’m just trying to get a sense for what your expectations are there on the Hydraulics side, specifically as it relates to construction?.

On construction, the big-big negative has been the China construction story and that leaked into a couple of stories that you just mentioned. And so our view on mining is still down. We think in ’15 over ’14. We think the China construction market does not come back in ‘15 either. We think the low-end of the construction market in the U.S.

isn’t bad and these are kind of mid-single digit type numbers. But then the ag piece is the piece that hits particularly hard really around the world on the order of kind of a negative 20 at the big ag side. On the industrial side of the business, is not bad. Again, that’s kind of a mid-single digit type business, so I’d say those are the elements.

But I think certainly in concert with comments you’ve heard from others that Chinese construction market and ag and mining are not positives as we go into ’15..

Okay. I will get back in queue. Thanks guys..

Thank you very much. Our next question comes from Eli Lustgarten with Longbow Securities..

Good morning, everyone..

Good morning, Eli..

Actually somebody has to ask for the obligatory oilfield exposure question and how you're looking at it and you tie it to the electrical businesses? You gave us a joint three to five.

Are we really looking at gains in EPG and basically ESS being flat to down in revenues, is that sort of the way you are thinking of that?.

Let me deal with oil first. Trying to be precise on oil is a little bit of a rolling dice currently. Clearly, last time we all talked about this, oil was $20 to $30 higher than it is now. And so for Eaton, it is sort of a 6% number in terms of our oil and gas exposure.

And so it's another one of those five to six end markets that we have many of and is one of our advantages of being kind of broadly spread across a lot of end markets. Our view is, it really does matter whether you're upstream, midstream or downstream and as we've indicated in a couple forums, we are predominantly downstream.

We think the biggest immediate impact is an upstream, particularly in terms of being on onshore upstream and I think most people have seen that impact already starting to hit. We think the downstream impacts are more likely to be felt in the second half of the year than the first half of the year.

But having said all of that, our thinking is that you have to be thinking there's a 20% to 25% impact in kind of the oil activity that's out there. And so, I'm sure you're working your calculator at this point, the 6%, about a $1.3 billion for Eaton. I save you a couple of keystrokes there.

And we think that the strict oil and gas impact is sort of a 20% to 25% reduction. Now having said that, I think the piece that many people have missed is that there are whole bunch end markets that lower oil and gas actually help our customers and our business.

And I think when you look at the light vehicles or the truck market, or the aerospace market, or portions of the construction market those are all aided by it. So it is not a net-net for Eaton, 25% of $1.3 billion.

But all that’s in our guidance for this year to the best that we've been able to approximate at 20% to 25% type impact on the direct revenues net area. Now, coming back to your second question, Eli and I’d address the oil one, which is this issue of do we expect to see growth in ESS this year? Yes, we do.

And so we expect to see growth on both sides of the way we have split our electrical business for reporting of both the products in the ESS business.

Typically, the ESS business always starts with a weaker fourth quarter and when you think about major construction activity and all one has to do is look out the window where most of us are located right now and you see what’s lying on the ground, which is what ties up construction projects this time of the year. But we do expect growth on both.

But because the power quality market is in the ESS, the big three phase portion is that it’s probably going to grow little less quickly than the EPG side will..

Great. Thank you..

Our next question comes from Julian Mitchell with Credit Suisse..

Hi. Thanks. Just a question on the balance sheet usage, I guess, you have said last year that the real scope to use it comes in second half of ‘15. You spend $650 million on the buyback, actually the last six months.

So what's left vis-à-vis that billion dollars in the second half or is your view changed on kind of appropriate leverage levels?.

No our views -- thanks for the question. Our views have not changed on the appropriate leverage levels. And I think you recall, we said is by the middle of 2015, so end of June that we’d be in a position to share with investors more specific plans on what our next capital allocation plans would be.

We said that we thought it would be a mixture of both repurchase and potential acquisitions. We want to get little closer to that time and really see what the relative merits of one of the other tend to look like. It wasn’t that we were going to actuate in action or take an action on June 30th.

But it would be in a position to talk about what we do over the second half of 2015 but that plan continues. We obviously stepped into buy our shares in the third and fourth quarter. When we saw a period of weakness, we remained quite bullish on our forward prospects.

And we think the fact that we alone are stepping it by 2% of our shares is an ample evidence of that.

Thanks. Then my follow-up is just on the overall segment margins. They grew about 40 bps, I think last year, the full year issue at the midpoint, you’re guiding for about 90 bps or so of increase. So if I back out Cooper savings and the restructuring benefits, those I think totaled about 40 basis points.

So it looks like you are assuming sort of underlying that core incremental margin very similar to last year.

Is that right? And I guess how do you see price and commodity cost affecting that base incremental?.

First, Julian, maybe just a little bit of background. Your numbers are correct. We were 15.3 in 2014, 49, so it was the 40 bps you mentioned. And I think within that we recognized, we had disappointments in two of our five segments last year. We had not hit our original targets in Electrical, ESS or Hydraulics.

And so as we look at this year, we try to provide you a little bit of a range for each of these but coming back to direct to your comment, yes, we do expect this year to achieve $150 million in the Cooper integration. Last year, it was 95%.

We’ve talked about this $35 million of additional savings that were coming out of the restructuring last year that we did in our industrial sector. And I’d say that when you work your way through that and the ForEx decrementals, I think what you come out is that we’re in the very low 20s in terms of our incrementals this year.

And we think that takes into effect, the mixed changes that take place in the business, it takes place -- it takes into effect .We think the uncertainties that are generally out there in this environment, when things are growing relatively slow, it's a little harder to have higher incrementals but that’s our planning at this point..

Right. Thank you..

Our next question comes from Ann Duignan with JP Morgan..

Hi. Good morning..

Good morning Ann..

Good morning..

Can you talk a little bit slightly about what you are seeing in Europe? We had seen all the attempts to spur activity over there and everybody is kind of got into nothing happening in Europe.

I’m just curious as to what you guys are seeing by various country and if there are any bright spots?.

Yeah. There are few candles burning at full power. I’d see -- what we’ve seen is a lot of confusion. I m sure no different than the inputs you are getting. You see so many confidence number which are up one month and down another. Clearly, U.K. has been one of the strong areas. France has been very troubled.

Germany, when you talk, the customers there doesn’t sound as bad as some of the economic data does but somebody is reporting bad numbers. So I’d say at this point, our assumption is obviously it’s going to continue to be a challenged region. There are opportunities to grow there if you’re serving the right market segments.

But from an overall region, there is still a lot of challenge to get shaken out during 2015..

And would you anticipate any pickup in export side of places like Germany just under a weak currency?.

Yeah. Our experience Ann is that it normally takes sort of six to nine months in industrial markets for currency to have significant impacts upon trade flows.

Now obviously it’s been falling, the Euro has been falling during the fourth quarter and has really come down obviously very hard here already in the first part of this year, which would lead us to believe that if you’re going to see much of that, it’s going to start to materialize in industrial goods.

I’m not talking about consumer goods but in industrial goods, it’s going to be more of a second half story than it’s going to be a first half story..

And then in that context space, just a real quick follow-up, Sandy, what about competitiveness vis-à-vis European competitors.

Are you seeing any pricing, aggressive pricing in the marketplace and I’ll leave it there?.

No, we haven’t really seen any change at this point. It’s early as I said in terms of kind of seeing that but of course then you’re going to think about the physical size and you also have to think about the different standards. And so that typically hasn’t been as big an issue on our end markets..

Okay. I appreciate the color. Thanks..

Our next question comes from John Inch with Deutsche Bank..

Thanks. Good morning everyone..

Morning John..

Morning. So Sandy and Rick, I believe you talked about the 26% incremental margin read through and now it’s low 20s. And I think you said mix. Is this a project, kind of a larger project issue because I would have though given the environment would be deferral of larger projects.

And so far as you got oil tied and not what actually improve your mix yet or is the placeholder just you’re trying to be conservative? I’m really just trying to understand because your volumes are not bad.

So why exactly are we sort of three or four points lighter on the conversion?.

Yeah. We had talked about 26 as it pertained 2014 and ‘15 during the fourth quarter in a number of sessions. We’ve talked about this being a lower 20s number. And so this is very consistent with what our planning had been for ‘15.

It’s really a result, John, I would say, just about the fact that as growth has been slower, we just see it’s little harder to get out of those higher incrementals. Some may call as conservative, we think its appropriate and these types have shift a lot of uncertainty around these market places at this point..

But to Ann’s point, there is no -- that's in this report, you pretty much refuted it.

But there is no pricing in electrical or anything else that you’re growing more concerned about?.

No, it’s not an issue. Let me say a kind of a structural change in terms of how the market set up, no..

Okay. And then just in terms of, I guess, we did $0.08 of restructuring in the second quarter. You said there is more restructuring coming in hydraulics and then we did obviously the share repurchase.

What’s in the guide in terms of share repurchase this year and then the restructuring and what quarter does it fall into? Is there anyway to know that yet?.

In terms of the guide for the share buyback and you recall that we ended the year around 470 million shares. Our best estimate is and this is consistent with our planning each year is that we try to put into our planning basically buying back shares to offset option dilution. And in many years, that’s been around $100 million.

So I’d say that’s probably your best kind of planning number. In terms of the restructuring is that, this year as I indicated that we’re doing work in our hydraulics business in light of all the factors, we’ve talked about.

And that’s going to hit in both the first and the second quarter and that was where my comments were that expect margins to be lower than the average in the first half and higher than the average in the second half..

But in terms of the $0.08, does that -- do you have any sort of -- is it like half that rates split in Hydraulics between the two quarters or is it turning out you just don’t know yet?.

The only reason John we called out a number last year is that we pulled forward restructuring that we haven’t planned at doing in the year after we given out our guidance. Our guidance every year has normal restructuring just part of run on the business and we haven’t broken it out because we really regard that as just a cost of doing the business.

And that’s very much this year. And so it’s not different than the total we do in the company every year. You’re just going to hit that segment in a way that you’ll notice it in the first and second quarter..

Right. So in other words, the second quarter should actually get helped because you’re not calling out specific $0.88. So in theory, you’ve got less restructuring in the second quarter.

Is that fair?.

Yeah. I think that’s the fair interpretation, yes..

Okay. Great. Thank you very much..

Our next question comes from Steve Winoker with Bernstein..

Thanks. Good morning guys..

Good morning Steve..

Could you just maybe provide a little more clarity on the ESS margin dynamic again? Just refreshing where we’re on pricing mix and freight, some of those issues that you’ve talked about and the sustainability going forward?.

Sure. I think as many people recall that when we had the poor results in the first half of 2014, we were dealing with three things, some pricing dynamics, some freight issues and some efficiency issues in terms of having had weak levels of bookings.

I think what you saw in the second half is we considered those three things largely addressed or cured if you will at this point. So we’re jumping off the second half of last year, now we think in a healthy condition.

My comments about how this year would layout is that, we would always encourage people to sort of look at the previous two quarters of bookings as an indicator for what sales are likely to be in the third quarter or the successive quarter.

And because we’ve had two quarters of bookings now, they were flat in the fourth quarter and they were just 3% in the third quarter 2014. That’s going to mean the year is going to start a little slower than if we’ve had a five and seven, the two quarters before as an example.

My last comment was that, remember in the seasonality of our businesses for all of the -- the first quarter is always the weakest quarter. And obviously, we get that indication from our $1 overall midpoint of our guidance versus the overall $4.90.

But it is particularly usually weaker in the Electrical Systems and Services business because it is a lot of large construction activity that doesn't tend to get kind of put in place as much in the quarter. So that would be I guess the vintage I would give you on thinking about the first quarter there, and all this in our guidance of the $1..

Okay. And maybe just a little bit of thoughts on the tax side, so I know you’ve already prepped us for the 9% to 11% this year.

But as you sort of think now about your visibility of tax rate going forward, how are you thinking about that over a longer term? I mean, should we be confident that we’re in the kind of a reasonable zone assuming no policy changes at this point, or how are you thinking about that?.

Well. Let me, Steve, give you a little color. First of all, the rate in '14 end up exactly where we thought other than the R&D tax credit, which was reenacted at the end of the year. That’s what pushed it down to 5.2. But if you recall, we've been saying it would be 6. And so we ended up right spot on.

For '15 mainly because of the mix issues, the rate is going up to just 9% to 11%. And absent major changes in tax law, it is not likely to change dramatically. It might move a point or two from this 9% to 11%, but it is not likely to move a lot. Now there could be changes in tax law, that's very hard to get one's arms around.

As you know there have even been various things moved at recently about that, but absent the changes on the tax code not likely to be big changes..

Okay. Great. I’ll pass it on. Thanks..

Our next question comes from Jeff Hammond with KeyBanc..

God morning, guys..

Good morning, Jeff..

So Sandy, just back to the ESS, I guess what gives you the confidence that things do improve in the second half.

I mean, do we expect these projects to break free?.

We can’t specifically comment on individual projects per say, but it’s our sense from what we see out there being worked upon, what we’re quoting upon, what if you followed the Dodge reports and activities, said this stuff will start to break loose. We obviously saw that happen last year if you looked at the pattern as well.

It always generally looks thinnest about this time a year. But we come back to the non-residential construction, our view in this year came out a little stronger than I think most people thought it would in 2014. And we think this year again that we’re likely to see this to be a mid-single digit type number.

The kind of industrial MRO activity is pretty solid through here. And so that’s what it’s based on as our view of non-res being a big influencer and industrial continue to be strong..

Okay.

And then quick color on oil and gas, is there a way to carve out, how you saw order rates trend at least qualitatively within oil and gas basin businesses?.

Yeah. We really to-date have seen very minimal impact. We spent a lot of time talking to customers at the multi different levels of the oil and gas industry. And that’s what we say looking forward, we think it's prudent to assume that we’re going to see this kind of 20% to 25% impact, but not much of it has been felt at this point.

I do think you see a very different profile between upstream and downstream in terms of both how hard they will be hit and also what the timing will be that you feel this upstream will be a bigger hit and it’s going to happen sooner. The downstream obviously has to be hit to some degree as well, but it's probably going to be out a little bit further.

And clearly you’re seeing a lot of announcements thing rolled out here during just a last couple of weeks. So this is a fairly dynamic topic..

Okay. Thanks..

Our next question comes from Nigel Coe with Morgan Stanley..

Thanks. Good morning. Just wanted to focus a little bit here on the cash flow and you’ve obviously provided the guidance Sandy.

But in terms of pension contributions and cash taxes, can you maybe just provide a bit of color on these two items, please?.

Sure, Nigel. I’ll ask Rick to get those for you..

Yeah. In terms of pension contribution, Nigel, we are going to be putting in about $40 million less into our U.S. plan to this year than we did in '14. That obviously is one of the factors that helping cash conversion.

Also, we think cash taxes based on our best view of that is likely the difference between cash and book taxes, and it was about $140 million difference in '14. But we think that that will likely be about half that in '15. And so those are two of the factors that are improving our cash conversion.

But, frankly, and even bigger factor is that our working capital consumed about $260 million of cash in ’14 and we expected to be about neutral in ’15. And so those are the three big elements that improve the cash conversion ratio in ’15..

And then what’s driven that dramatic improvement in working capital?.

Well, first of all, sales are suppose to be or expected to be largely flat and typically with flat sales you wouldn’t expect to see a significant change in working capital. And then secondly, in ’14, because some of our markets did turn out to be a bit different than we had plan for at the start of the year.

We have had a bit more inventory than we had expected. And so it's really those two factors, flat markets plus working down some of the inventories..

And one more, if I could, which is obviously, the integration. We did build inventories purposely during 2015, while we’ve been moving this over 20 factories that are part of the integration of Cooper, as we’ve share with you earlier and these schedules have not changed.

We expect to have most of that work done by the middle of this year and obviously, it makes good sense to take the safety starts off..

Okay. That’s very helpful. And just quick one on the Cooper synergies, you mentioned you are on track and ’15 guidance is in line with your previous guidance 100%.

But has the mix between revenues and cost change at all?.

No. There is a same numbers as we showed you last year. They are very close to that. And in our February meeting in New York, I can’t remember whether it was end of February or early March, but the one that occurs right at that time period.

Tom will take you through a pretty detailed review of how we’re doing against each of those buckets, both on the cost side and the revenue side. But I don’t think there will be any surprises in that. I think you’ve really be pleased to see the level of achievement..

Okay. I will leave it there. Thanks very much..

Our next question comes from Jeff Sprague with Vertical Research..

On cash flow again, I understand kind of the improvements year-over-year.

Rick, it still looks like you’re converting though maybe a touch below 100, which just strikes me, is a bit low given kind of how much amortization there is? Is there some other kind of operational use to cash or something or could you kind of bridge us with the conversion?.

Well, Jeff, we expect that to be right around one maybe at 0.98 maybe at 1.0, but they’ll be right around 1. And in addition to the three factors I mentioned to you, namely the -- we still think that cash taxes are going to be a little bit higher than book taxes. Pension funding is a little bit above pension expense.

Working capital, we think will be relatively neutral but we are expecting that CapEx will be about $100 million more than depreciation. And we are capacitating various programs.

I have several new products that are being introduced and so those are the major factors that they’ll help you understand how the amortization, which is the amortization of intangibles, which is obviously, non-cash is being offset to a certain extent..

Appreciate it. And just a follow-up on oil and gas, Sandy, perhaps, just coincidental, but about 6% of sales is about, how I would size Crouse-Hinds.

Is that how you’re defining oil and gas or you kind of parsing down through exposures in Hydraulics and other businesses that would kind of be exposed oil and gas?.

Yeah. I appreciate the question, Jeff. The Crouse business is not 100% oil and gas. In fact, it’s quite a diversified business. So I think a number of people have the impression that Crouse was 100% oil and gas. Cooper had done a good job and we’ve also taken that franchise into other.

And so this is the total, like 6% it is the total of looking across our Hydraulics and our Electrical business, and trying to get a sense for where some of our vehicle businesses maybe impacted there as well. So we take Crouse into a whole variety of other harsh and hazardous applications as well..

Thank you..

Our next question comes from Josh Pokrzywinski with Buckingham Research..

Hi. Good morning, guys..

Good morning..

First question on price cost as some of these raw materials have come in, when should we start to see that show up in the business, giving natural or financial hazard that you guys use?.

Yeah. I think the relationship is always, what happens to kind of net, net commodity and price impact and then the number of our markets prices due end up adjusting to what happens in commodity. So we think there will be a very small positive for us this year and it is in our guidance at this point.

But you’ve already seen whether you are looking at some of the metals, diesel fuel hasn’t come down as much as, obviously, the traded numbers for WTR at this point. But some of the metals have come down. But those tend to get adjusted fairly quickly in terms of prices in the marketplace..

Got you.

And I’m assuming you guys would still be able to hold on to the net price in the Electrical businesses where you consume most of that?.

Yeah. And I think as you can see that our margins, we are expecting to increase this year..

And then, just a follow-up on that comment around non-res that you made earlier, Sandy, I think in years past for you guys or maybe a little earlier than the rest on non-res in terms of seeing that recovering your business, probably attributed most of it to more industrial than construction type vertical.

If we see some of this oil and gas weakness spill over into other industrial pocket and continue to see construction gets better.

Is the push and pull that a neutral or is the construction piece with Cooper now outweigh the more industrial side of electrical?.

Actually, our balance when we bought Cooper, we became a little less sensitive to non-res because Cooper had a bigger kind of industrial orientation and part of that included oil and gas part of it was just general industrial but we are pretty good.

As I said in the couple of different settings, we’re a pretty good surrogate for the overall non-res exposure because we’ve got good participation on each of these segments. So our real interest is in continuing to see that number increase total non-res and that’s the real driver for us more than anyone of the individual segments..

Got you. Its helpful. Thanks..

Our next question comes from Andrew Owen with BofA Merrill Lynch..

Hey, guys. Good morning..

Hi, Andrew..

Just to focus more on agriculture.

Do you guys forecast any difference based on the production schedules between the spring selling season and the fall selling season? I guess, what I’m trying to get at a, is there any difference between tractors and combines? And b, are we sort of at a point where we starting to hope that this is the bottom?.

Yeah. I think our best view on this, we talk a little bit at the end of the third quarter Andrew was that we didn’t believe it was going to be one crop season that was going to define recovery.

We thought that based upon past downs, it normally takes two to three crops rotations to kind of get you back to a point and that to us said that we would see all of ‘15 be weak and that ‘16 might start weak. That obviously informs part of our thinking as to why we’re doing additional restructuring on our Hydraulics business as well.

So we don’t expect to see a real quick snap back in this regard and it really doesn’t matter whether it’s planting or whether it’s harvesting. The big equipment is getting impacted so your high horse power tractors and combines are both getting hit pretty hard..

And the second thing just a follow-up on aerospace. It seems that most of the companies that have provided outlook so far are not really baking in a significant recovery in the spares business due to low energy prices.

What’s baked into your outlook for your aerospace business particularly in the second half of the year?.

Yeah. you may recall that our business is -- if I went back four years ago, was a business where 60% of the business was OEM and 40% was aftermarket and obviously, that makes us important. The last couple years we’ve been running at 65% OEM and 35% aftermarket.

We do not expect that ratio is going to change in 2015 so that we stay very much at the 65% OEM, 35%, so that means that our aftermarket is not growing at much of a difference than the overall market forecast we have..

Okay. Terrific. Thank you..

Our next question comes from Mig Dobre with Robert Baird..

Yeah. Good morning, guys..

Good morning, Mig..

Sticking with Hydraulics, this is the second quarter where you kind of call out a massive difference between distributor and OEM orders.

I'm wondering how sustainable is this? And in your experience, does one end market have a tendency to lead the other?.

I think the biggest piece is really flowing through distribution tends to be more of the industrial and then aftermarket into a couple of these markets. Generally, the change if you're looking for someone who is serving the mobile market, distributor that serves the mobile market, they might be three to six months behind the OEM.

But I think in this case, the real dynamic to keep in mind here is think about the end markets. The ag markets is going to be weak, the mining market is going to be weak, the construction market is very regional at this point. And then industrial is pretty good around the world. And that’s the way we are trying to think about it.

But again I’d say part of the reason I gave the heading on the businesses when I went through was remember Hydraulics is about 13% of the company..

Sure that’s helpful. And then for my follow-up may be back to ESS, I remember a couple of years ago, you were setting some margin targets there around 16%. And obviously we are still long ways from that.

And I am just wondering how much of the delta your guidance for 2015 versus that target was owed to maybe volume really not being what you expected it as opposed to the Cooper synergies flowing a little bit different than you expected initially?.

I don’t know that I can parse that for you.

I think we said at the end of the second quarter last year that with a slower start we had last year that we thought getting to the original targets that we had set the number of years ago for ‘15 would be a taller pot in both our Electrical Systems and Services segment and our Hydraulics areas and that’s indeed I think what’s reflected in our guidance at this point.

So I think we are going to have a solid year of improvement again in electrical systems and services this year as we will overall for the company. And that’ll be true in every segment except Hydraulics, where we are saying that the midpoint of that range is actually less than what we achieved this year for all the other reasons I mentioned..

All right thanks..

The next question comes from Shannon O'Callaghan with UBS..

Morning guys..

Morning..

Hey, on residential the up 15%, I mean another robust outlook there, I mean it’s been sort of a choppy market in some ways.

Can you just sell out your thoughts on the optimism there?.

I think, we still believe when you look at the big issues what’s going to drive the demographics over time and all the home formation numbers tend us -- continue to support a market that’s on the order of 1.5 million starts per year. We are clearly a long way from that still.

We’ve seen a lot of activity in after market that’s -- this is the kind of retrofitting and home repair that’s been quite strong. But we are seeing it fairly steady. If you don’t look at the month and you don’t look at the quarter.

So if you look at the year, you are seeing a fairly steady recovery in terms of bringing back single-family in the country. Interest rates are still very low. And as you put more money in the pocket of the consumers with lower gas prices, this is one of the areas that is going to tend to be helpful because people have got more money for a mortgage.

And so we do think these ties together and it’s an example of one of those areas that is benefited by lower gas prices..

And there is obviously a pretty big disconnect with the outlook there and the outlook for utility. I mean, do you see that gap closing at some point? I think you said utility up one.

I mean, at some point you would expect utility to kind of follow with those trends you are seeing in residential?.

Historically, portion of it would, but the utility market’s facing some fairly severe capital challenges currently. And the rate increased market is -- the rate increase environment has not been terrific here in the U.S. So where we see most of the money being spend is really is an improvement of efficiency and then recovering from storms.

It’s not been in terms of putting whole new capacity in place. And so that’s the stronger one, I think you can get lot of good information at an institute that speaks right to this issue..

Okay. Great. Thanks a lot, guys..

Our next question comes from Deane Dray with RBC..

Thank you. Good morning everyone..

Good morning, Deane..

Hey. You’ve given all kinds of good color about direct oil exposure. But you’ve touched on a couple of different times, the benefits and the offsets from lower oil and we just heard you answer the Shannon’s question about residential mortgages. And earlier you zip through all the different businesses that would have a benefit.

But maybe just -- just a bit more methodical in terms of what’s in your 2015 guidance in terms of those offsets, fuel lower input cost and maybe is Cooper going to be a benefit? That would be helpful. Thanks..

Yeah. We don’t go that down in all of that detail, Deane. I think maybe the way to think about though is what are some of the markets. I talked to resi. We do think this also has an impact obviously in passenger car.

And it also has an impact in the mix within passenger car because what you are clearly seeing is a move very quickly back toward larger SUVs and light trucks, which have a higher content fleet than passenger cars do. We do think it affects, what goes on in heavy-duty truck because diesel prices will come down. They haven’t come down as far yet.

They’ve been a little sticky in that regard. But that’s going to affect the ability of obviously truckers, their margins and their ability to obviously buy new trucks as well. We think on the aerospace side -- clearly, its depreciation and fuel, those are your two big drivers there again and so we think good for us.

So the way we’ve tried to think about this, Deane, is looking at not just the negative in terms of upstream, midstream, downstream impact on oil and gas, but other sufficient points of exposure for Eaton to other markets that will have a benefit. And as a result, we think this is largely a neutral impact for us.

But it’s going to lead to some pluses and some of our businesses and obviously those businesses that ship capital equipment into oil and gas. Those are going to be a negative..

And how about Cooper, specifically?.

Well. Cooper, again, we tend to have it tied to a lot of different contracts. So, we don't tend to make a gain on Cooper when it goes up or down..

Got it. Just last question.

You led off with some pretty heavy gains in your LED business, can you separate how much of that is -- is it all retrofits and maybe what inning are we in the whole LED retrofit conversion?.

It's very different by individual end market, whether it’d be street lighting or parking lighting or indoor retail. We still think that the big piece of the market, both in terms of new installation, as well as retro is the recessed lighting markets that have traditionally been -- think of your commercial office building as well.

And that’s where we are just so excited about this WaveStream technology that we’ve got in the market almost two years now and it’s just doing extremely well, in all the various different styles that we have it out and so. But we continue to think there's real potential.

We think LED is going to be the technology that really does rule in lighting and we've got some really unique advantages in that regard. And that’s why you are continuing to see us grow at such strong rates..

Thank you..

We have room for one more question today. And that’ll come from Chris Glynn with Oppenheimer..

Thanks. Good morning. I think you had some on taxes, I think you had some discrete benefits in 2014, moving up the 9% to 11% range.

Would you consider that fully normalized or longer-term, is there half more of the mid-teens at this point?.

Well, Chris, we think the 9% to 11% rate is relatively pure and that it doesn’t really have significant discrete items. Now, as I mentioned earlier, it's always possible as mix continues to shift that perhaps the rate would change a point or two, but we don’t see a sea change in the rate, absent changes in tax regulations..

Okay. Thanks.

And then just on FX, the 4% overall, would you be able to kind of tilt that by segment?.

We generally have -- I think if you look at, where it hit in the third quarter that relative kind of weighting where it hit, that’s going to be a pretty indication..

A pretty good indication to think about how it would be next year. It gives you a pretty good exposure for what the U.S. versus non-U.S. kind of load is in each of the businesses..

Makes sense. Got it..

Thank you all. We’ve reached the end of our call today. We do appreciate everyone’s questions. As always, I’ll be available to address your follow-up question today and later this week. Thank you for joining us..

Thank you. And ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..