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

Scott Davis - Barclays Joe Ritchie - Goldman Sachs Jeff Hammond - KeyBanc David Raso - Evercore Shannon O'Callaghan - UBS Ann Duignan - JP Morgan John Inch - Deutsche Bank Eli Lustgarten - Longbow Josh Pokrzywinski - Buckingham Christopher Glynn - Oppenheimer Julian Mitchell - Credit Suisse Deane Dray - RBC Rob McCarthy - Stifel Andy Casey - Wells Fargo Steve Winoker - Bernstein.

Ladies and gentlemen, thank you for standing by. Welcome to the Eaton First Quarter Earnings Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn this conference over to our host, Eaton’s Senior Vice President of Investor Relations, Mr. Don Bullock. Please go ahead sir..

Good morning. I’m Don Bullock, Eaton’s Senior Vice President of Investor Relations. Thank you for joining us today for Eaton’s first quarter 2015 earnings call. With me this morning 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 first quarter, along with our outlook for the remainder 2015. As has been our practice on prior calls, we’ll be taking questions at the end of Sandy’s comments.

The press release today from our earnings announcement this morning and the presentation we’ll go through have been posted on 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 with Sandy’s comments, I’d like to remind you that our comments today will include statements related to the expected future results of the company and therefore are considered forward-looking statements.

Our actual results may differ materially from those forecasted projections due to a range of risk and uncertainties we’ve described in our earnings release and our presentation. They are also outlined in the related 8-K. With that, I’ll turn it over to Sandy..

Great, Thanks, Don, and welcome, everybody. I'm going to work on the presentation that was posted on our website earlier this morning. I’m going to start on Page 3. I'll give you a moment to get there as titled Highlights of Q1 results.

We started the year, I think as you’ve all seen with a solid high-quality quarter, and in spite of, what was obviously, weak economic conditions, I think we've all just seen this morning the 0.2% U.S. GDP growth. And in summary, really our balanced strategy is working.

Our balance from a geographic point of view, our balance across our individual businesses and that's what allowed us to deliver what we think is a solid first quarter. Operating earnings per share of $1.01 was a penny above our guidance, about $0.03 above consensus.

And when we look through the individual pieces, the top line was just marginally weaker, a split about half between physical volume and additional FX impact. You've seen in our guidance that we now things that the FX full-year impact will be larger than we thought it would be when we started the year and I'll comment more on that in just a minute.

We continue to do, I think, a very strong job of controlling our corporate expenses. They were down about a penny. And our tax rate came in closer to 8% versus the midpoint of our guidance for the full-year of 10%. And that accounted for about $0.02.

So overall we think a very strong quarter in spite of some bumps out there in the economy and think off to a good start for the year. Our sales were $5.2 billion, down 5%. When you curve that apart, organic growth of 1%, and then this larger impact of FX of negative 6%.

Our segment margins came in right where we thought they would be, 14.6%, up from 14.5% a year ago, down from the 15.9% in the fourth quarter, but as I said, in line with our expectations for the first quarter, which is normally a seasonally weaker quarter for us. We did repurchased $170 million of our shares, about 2.4 million shares.

You'll recall that last year we had repurchased 650 million shares or about 2% of our outstanding. And our Cooper integration is right on track. You’ll recall that this year we’re counting on $150 million of incremental synergy profits compared to 2014. And in the first quarter, we did achieve $29 million.

So we are on track and I'll talk more about that as we go through the two electrical segments. If you turn to Page 4, just a quick summary overall of the financial results. You see the comments in the light green box in the lower hand corner about organic growth versus Forex. You’ll also I think get a sense looking at the sales number.

Obviously a decrease in sales but obviously was positive organic growth. I think you’ve probably digested most of the numbers on this page, so I'm going to recommend we turn onto Page 5 and start with an overview of the performance of our individual segments. Let's start with the electrical products segment. Significant.

Obviously it’s about 33% of the total company revenues. Sales were down 2% from last year. And if I could refer you to start here, you’re looking at the light green box in the lower left hand corner. Organic growth was up 4%, very solid again. You’ll recall it was up 5% in the fourth quarter.

Clearly we see a big impact of Forex here at negative 6% and that sort of results on the overall down 2%. In terms of the booking activity, very strong bookings once again, up 5%. You'll recall in the fourth quarter, they were up 4%. And the story is much the same as we shared with you over the last couple of quarters.

The strength was in the Americas, where we were up 7%, and then weaker outside the U.S. We were particularly pleased - and you will hear this as we talk about many of our businesses. The quarter started quite weakly in January and February. We commented on that when we were in New York at our meetings then.

And we were very gratified obviously that the months ended strongly in March. So you'll see strong bookings results in a number of our businesses. And I think that’s parallel to what we were seeing in the economy generally with the slow January and February and then quite a recovery in the month of March.

If we think about markets, we’re continuing to see real strength in the residential and non-residential construction markets, particularly strength in lighting, where again we were up very strongly at 16% this quarter, so a very strong quarter. Also have seen some rebound in our businesses in our electrical businesses in Latin America and Canada.

The weakness in the U.S. has been around industrial. And I think you have heard that from a couple of companies that there seems to be a little bit more of a malaise on industrial spending. In Asia-Pacific, as the mentioned conditions continue a little weaker mixed country by country.

And Europe is still caught and waiting for the recovery really to occur. I did want to comment on the margin. You see the margins at 15.7%, actually below last year's 16.2%. And obviously there, there are a couple of things going on here that I wanted to provide some insights to you.

The volume is down and we shared with you this year that we thought our incremental or decremental will be on the order of 20%. We did achieve about half of that synergy savings and remember the synergy savings of $29 million is made up of $24 million of cost and $5 million our profits that come from higher sales.

So what you would see on this line is really the half of the $24 million or positive $12 million. And what was offsetting it was actually embedded exchange of about negative $10 million. And this has to do with product made in the U.S. that is then used in Canada.

And typically you heard us talk about our practice as being to manufacturing on the currency, clearly the drop in the Canadian dollar has not had quite the highlight that the euro and the Brazilian reals have, but it did impact us.

We've been able to - as we’d comment a little later on it, to put mechanisms in place that we think solve this in the second quarter. But it did hit us in both this segment and then you'll see also in the electrical systems & services. In spite of that, we made our full guidance. Then the last would be is that we've had a little bit of negative mix.

And here we think that recovers full-year. We've not changed our overall guidance. And so I'll be glad to talk more about that as we get to questions. If we move to the electrical systems & services segment. This particular segment is about 29% of the company’s revenues. You'll recall, we had as you see sales down some 5%.

If you look down to the lower left hand corner, you'll see that Forex is the big contributor to that, although organic sales were down about 1%.

You'll recall last year we talked quite a bit about the fact that the way to think about this segment is to look at bookings in the previous couple of quarters are good indication of what you'll see in shipments, because this is a backlog business. And you’ll recall in the fourth quarter bookings were flat - in the first quarter, they were flat.

A little different regional participation here that the real strength here was in APAC, with the rest of the regions; America flat, Europe down, Asia-Pac up.

And the business that really was up for us in Asia-Pacific was the large three-phase power quality market shipping into large datacenters, and we had a particularly successful booking quarter in that regard in Asia. Very pleased with the margin performance. Obviously stronger than a year-ago, even though the volumes were lower.

And we also were offsetting some Canadian embedded exchange problems here, and you see the benefits coming through of about $12 million of synergy cost benefits in this segment as well. If we switch to the hydraulic segment. Again, roughly about 13% of the company sales, down 15%.

If the organic pressure has not been enough and obviously you see it’s 9% in this quarter. It was 2% last quarter negative. The Forex impacted obviously hit this segment pretty hard as well of negative 6%. So overall volumes down 15%, margins at 10.1%.

We did, as we had shared with you, we are doing restructuring in this business in light of the end-markets. We can talk more about that later.

But the way I'd have you think about the restructuring is that in light of the magnitude of the down wraps in these end-markets, we will have restructuring expense in every quarter as we go through this year and it'll be on about the same level as we had this year, basically taking somewhere between a point and point and half out of margins in every quarter as we go through the year.

If we talk about bookings. Bookings down 18%. I don't think the OEM news is probably noteworthy in terms of this is not tremendously different experience that we've been seeing over the last several quarters. But you'll recall in the fourth quarter, our distributor orders were actually positive and they were negative in this quarter.

And what we are seeing is the roll-through in the distribution of some of these end-markets we’ve talked about, oil and gas, Ag. Both of them - we serve some of the smaller OEMs through distribution in those marketplaces. That's where we see the weakness in distribution.

We see strength in other areas in terms of construction, vocational vehicle, some of the marine markets and then kind of flattish conditions in industrial. But I think really what we're seeing here is the continued roll-through of negative oil and gas and negative Ag investment.

As we go outside the U.S, the story is very much the same in terms of the weakness in the global agricultural markets. And the China construction equipment market really does not show much signs of improvement at this point.

So conditions not terribly different than we've been talking about, except for we’re starting to see the roll-through in the distribution side. And that's why you'll see we've taken our guidance down in terms of the margin in this business, and I’ll talk also a little bit about more negative outlook in terms of end-markets here.

The good news as we turn to page as this is being made up for by the performance in our aerospace segment, again one of the balanced - benefits of balance for Eaton. Flat sales. Profits up 24%. Again, we are quite pleased with the organic sales here. If you look at the lower left hand corner, 8% positive organic sales.

That followed 9% organic last quarter, being offset by the divestitures that you’ll remember that we divested in the second quarter of last year and then negative Forex. If we look at the bookings, maybe a little caution though when we look at the 1%, but we still think the conditions are quite strong.

Generally, we saw that some of the placements from the commercial transport segment within commercial weren’t quite as strong during this quarter. As we’ve seen them, we remained void however by the forward-looking line rates which we have from all our OEMs, which are continuing to expand. So we think that's fairly temporary.

The military side was down in this quarter, but the aftermarket strong, and we are pleased about this continuing aftermarket booking, particularly on the commercial side where we've seen it pick-up during the last three quarters now. And finally, if we can move to Chart 9, our vehicle business, about 17% of the company. Sales down 4%.

But again if you look to the small green chart in the left hand corner, organic up 4%. You’ll remember last quarter organic was up 8% percent, so continued strong performance offset by, not only euro but here you see the big impact of the Brazilian currency, down 8%. And so overall, the overall business down 4%. Profits helpfully up 9%.

And our outlook remains much the same as you've heard us talk about here in North America, where we continue to think that this year's Class-8 build forecast would be about 330,000 units. It's pretty well balanced half in the first half and half in the second half in terms of our outlook. We continue to think the backlog is healthy and supports that.

Good strength in the light vehicle markets here. But further weakness in the South America vehicle and agricultural equipment markets, not unlike I think you’ve heard from a number of other companies and that's why we’ve actually lowered our growth outlook for the full-year in terms of these markets. It's all based on the South American weakness.

If we move to Chart 10. As I said that economic conditions started a little weaker in 2015. We think we've had very strong margin performance in aerospace and vehicle that helped to offset some of the weakness on the hydraulic side.

The overall 3% bookings improvement, when you put the two electrical sectors together, is encouraging to us particularly the pace in March. On the other side, clearly we're seeing continued weakness in hydraulics. And we’re pleased we’re able to achieve 10 basis point improvement in our margins and only 1% organic growth increase.

And our decision to go ahead and repurchase $170 million of shares, I think continues our pattern of opportunistic purchases. If we turn to Chart 11. Just a quick recap of our expectations of organic revenue. You'll recall that our guidance, when we talked with you at the beginning of the year in total for the company was 3% to 4%. It's now 2% to 3%.

And really where that change has taken place is the biggest changes in the hydraulics markets, where we had started this year thinking they would be somewhere between zero and negative 2%. You could see based upon weaker conditions in the U.S., Europe and Asia, we think it's likely to be more now in the order of negative 2% to negative 4%.

No change in aerospace. Vehicle has come down from 5% to 7%, to 3% to 5%. That’s all based upon the continued negative outlook in South America. No change in EMEA or North America. And then electrical is down just one point from where we started the year. And that's really based on a little bit more tepid growth in Asia. No real change in the U.S.

or Europe outlooks at this point. Turning to Page 12. I commented a little bit on this, and you'll recall that when we gave our guidance this year, we talked about 20% incrementals and decrementals.

That was based upon this economic outlook that I talked little bit about, slow global growth, challenges particularly in Europe and Latin America, hydraulic market downgrades and FX pressure. And so you’ll see here is that we have not changed our overall margin performance. We came in where we expected to be in the first quarter.

We’ve strengthened our outlook in aerospace based upon the very strong performance in the first quarter and our expectations of that continuing on a pretty steady rate through the balance of the year.

And then we’ve lowered hydraulics down a point in light of the weaker start this year and where we think the markets are likely to be this year without any recovery. Moving to Page 13. A couple of quick points about our guidance. This is our first guidance we’re providing for the second quarter, $1.10 to $1.20 operating earnings per share.

Obviously the midpoint of that is $1.15. You all know, for those of you who followed Eaton for sometime that we have a pretty standard 5% seasonal revenue increase between Q1 and Q2. On a physical volume basis, that's again what we expect this year. We think it's supported by what we’re seeing in our markets.

Offset by probably a negative point of additional FX compared to the first quarter of this year. So that nets you out in sort of 4% net of FX top-line. We do expect to get about a point improvement in our margins, again pretty usual for us between the first and second quarter.

And because the tax rates started a little lower this year and we’re maintaining our full-year guidance of 9% to 11%, we think that the second through fourth quarters are likely to be more in the area of 10% to 11% in terms of tax rates. Full-year.

We revised our guidance to $4.65 to $4.95, pretty much in line with current consensus that’s been out there, $4.82. And a reduction of 2% from our original guidance this year is primarily due to higher negative FX impact. You'll recall we started the year thinking that FX would negatively impact our top-line on the order of about $900 million.

We think it's closer to $1.2 billion at this point. And that really is the explanation for the change. If we flip to Page 14. We’ve tried to give you a quick summary of our guidance.

We’ve provide you with the February, all the points I just made about our April guidance and you can see where the changes are down one point and organic growth down $300 million of additional FX pressure. No change in the segment margins, but down in hydraulics, up in aerospace, again the benefit of our breath.

About a $20 million reduction in the collection of our corporate expenses that we show you there. And then that obviously leads the $0.10 reduction or 2% reduction in our overall guidance for the year.

I think significantly if you look at the operating cash flow number, you'll recall that we've not change those numbers, still $2.7 billion to $3.1 billion. They do represent a 15% increase from last year, some $2.5 billion, $3 billion in operating cash flow.

So we remain quite bullish in our cash outlook and that really sets up the discussion we’ll have with your about capital structure following our second quarter’s earnings release. So if we move to 15, our summary. Again we think a very solid first quarter. We did see a necessary acceleration in March, recovering from the weaker January, February.

I mentioned the FX that we think now will impact our top-line by about negative 5%, again the trade-off of aerospace versus hydraulic margins. And then if we think about this overall guidance of $4.80, it does represent 3% growth over last year.

But within that, I think other factors we’ve talked with many of you about this year is that we are anticipating obviously this $1.2 billion negative impact of Forex, which is about $0.26 full-year negative for us that's higher obviously than what we outlined to you in January. And then about a negative $0.17 for the tax rate.

So there is about negative $0.42 from those two items that are embedded in our year-to-year comparison. And that negative $0.43 is compared to the $0.36 that we had outlined for you in the first quarter. And then once again, the Cooper integration savings very much on target.

Obviously it's one of the reasons that our profitability is higher in the second half than the first half because you'll recall back to Tom Gross’s presentation in February, we are finishing out many of the manufacturing plant moves and that's the next big piece really, the savings that come in and I am very pleased to report those plans and actions are very much on plan at this point.

So with that, Don, why don't we open things for questions?.

Very good. [Operator Instructions].

Before we begin our Q&A session today, I see that we have a number of individuals queued up with questions. Due to our time constraints for an hour today, I would ask that you please hold it to a single question and a follow-up. Thank you very much in advance for your cooperation, so we can get to as many of these questions as possible.

Our first question is from Scott Davis with Barclays..

Hi, good morning guys.

Trying to sell get a sense of if the strength in March continued through April, and what would you attribute that the strength in March to, given the week start to the year, was it inventories finally got low enough, or there was a bit of a restock, or do think there is some real macro acceleration, particularly things like non-res?.

Yes, we don't have April results yet, Scott. But I guess our thoughts about March is that we really saw a fairly weak order patterns in January and February. Hard to know whether those are attributed to the weather, whether they were attributed to concerns about port strikes or all of the above. We’re pleased.

What we did see was a very strong activity in March. And I don't want to overplay that because as you normally find that the third months in the first quarter is disproportionately important. And so we see some of that pattern every year. But it was stronger really across the board in terms of end-market segments that we saw within those businesses.

And we're off to, I would say a reasonable start from what we can tell in April, but we don't have final numbers yet..

Understood. And I don't know much about the hydraulics business, but when I look at your total year for cash negative 2% negative 4% coming off of negative 9% this quarter. I mean that does imply maybe you expect a real improvement back-end loaded improvement of somewhat.

Is that - I'm asking if it’s a realistic assumption? I guess when I look at it, I’m a little skeptical.

Maybe you can make us feel a bit better about that?.

Yes, I think the issue again that what we are seeing is that the - we have seen a fair number or most of the weakness come out of the OEM side. That's not a typical when the hydraulics market is going through a change in cycle.

So most of the bookings that we are receiving now are bookings that are coming in for the short-term, kind of one through three months. It feels a lot like what we saw when we saw the inflection changes back in 2008, 2009. We’ve looked pretty hard at this forecast. We think it's a realistic forecast at this point, but we’re not forecasting.

This business will look pretty flattish as we go through this year. There will be some improvements in margins that will come from the restructuring we are doing. But we obviously took a point out of our margin guidance for the year in light of the fact that we don't see this rebound really happening at this point..

Okay, good answer. Thanks guys and good luck..

Our next question comes from Joe Ritchie with Goldman Sachs..

Thank you and good morning. So my first question I guess just would be on the aero margins this quarter. Was there anything specific that really drove the strength, the 320 basis points? I see that you guys have a step-down as the year progresses.

And I'm just curious like what was really underlying the strength in that business this quarter?.

Well, again if you look back over the last portion of last year, our business was strengthening as well and so that we've got a business that we think is being very well run. There always is the two kind of issues that are going on in any aerospace business.

There is the current shipments and then there is a development project or new order project work. And I think the team is doing a good job on both of those. So I wouldn’t point out any one issue of being unusual. We had good order placements all last year. You're seeing the commercial side of the market continue to be quite strong.

The defense side hasn't been as bad as some people had forecasted. Now, that has a lot to do with the specific programs we are on. But I think we are also doing a better job of managing our new development projects. And so that has helped to margin structure as well.

So while we’re saying that we think the margins will be fairly consistent through the end of the year, I think that's a reflection that we’re comfortable with the market outlook and I think our teams are doing a really good job on managing these big projects..

Okay, fair enough. And maybe my follow-up. Just a question, Sandy, when you're walking through the puts and takes on electrical products this quarter, clearly organic growth was good. It seems like you had $12 million in synergies that came through that was a positive.

FX was a negative $10 million and yet operating profit was down despite the organic growth that came through.

And so I'm just curious, was there something about your mix this quarter on why you weren’t able to grow profit on the electrical product side this quarter?.

Yes, and I did mention that there was a negative mix. And I think most people know that the lighting industry doesn't have quite the margins that some of the component businesses that we’re in do. And I mentioned our lighting business was up some 16% in the quarter again doing very, very well. So we're very pleased with that business.

But it didn't have a positive mix impact upon us..

Okay, great. Helpful. I'll get back in the queue..

Yes, thanks..

Our next question comes from Jeff Hammond with KeyBanc..

Good morning guys. Just back on that FX transaction dynamic with Canada.

Can you quantify what that was in the quarter? And then I think Sandy you mentioned - Rick could maybe clarify what you're doing going forward to kind of pull that out of the dynamics?.

I mentioned it was about $10 million in the product segment. And it's less than that and....

It’s around $5 million..

And the situation, Jeff, is that as you know we largely neutralize FX by manufacturing and selling in the same region, where we have an intra-region exposure, we attempt to put hedges in place to neutralize that. But you’re limited by uncertainty about volumes and in some cases by regulatory limitations.

And in the case of the flow to Canada, it's really the Cooper product flowing to Canada. They had not had a program in place because of some regulatory changes that occurred towards the end of last year. We weren’t able to hedge as much of that Cooper flow as we normally would.

But the good news is that we now have gotten through those flows what we hedged starting into second quarter. So this is an issue that should go away as those hedges works their magic [ph]..

Okay, great.

And then, can you just, Sandy, give us an update assessment of what you're seeing in your energy facing businesses relative to kind of how you're thinking about it? And maybe just sliding one more, just give us a free cash flow number for the quarter?.

Our view on the oil and gas business is very similar to what we describe you upfront. Now you may recall, our forecast for this year was that it might have a little bit more pressure than some others had outlined early in the year. But the way we think about it is oil and gas is about 6%. It's the same number I told you in the last quarter.

And that you really have to think about this in terms of sort of the upstream, midstream and downstream exposure. The majority of Eaton’s exposure is downstream, approximately 70%. And so when we look through all of this, we've said we thought that the upstream onshore would be on the order of 35% impact negative this year.

Offshore would be closer to something around 25%. Now you’ve got to take all of these with - it's a plus or minus 5% off of those. And there is no accounting accuracy to forecast out in a market like this. And we think the downstream gets affected a little less. It’s more on the order of about 20%.

So when you put that all together, you come up with something that probably says that we see something on the order of 20% pressure in terms of oil and gas for Eaton this year.

That indeed as we've spend a lot of time in a lot of regions in the world talking to OEMs, users, distributors, EPCs seems to be pretty well laying out in terms of the activity as we see it. We've also indicated, Jeff, that we think that some of the order weakness that people will see this year will manifest itself next year in terms of shipments.

So a lot of the shipments impact will occur kind of in the second half and then into next year, because there are a lot of projects that are underway that they are going to complete versus just stopping those in half way through it. So that's our view of oil and gas at this point.

It spelt differently in distribution than it is in terms of the OEM side as well and little different timing..

Jeff, you asked about operating cash flow and free cash flow. Operating cash flow, before the pension contribution, was $300 million. We made $223 million pension contribution both, U.S. qualified as well as the non-qualified portions and the international portions in the quarter. And CapEx was just over a $100 million..

Our next question comes from David Raso with Evercore..

Hi good morning. Questions on the electrical outlook. Your order growth accelerated a bit, but you lowered the organic sales outlook.

Can you flush that out for us a little bit?.

Yes, it really is a mix as we look around the world, David. I guess I mentioned the change. We've not changed the U.S. That is where we continue to see strength and did last year as well. We are seeing conditions to be a little bit choppy in Asia.

And clearly China is I think the question in many people's mind as to exactly what the growth will be and in what segment. Of our view is that it is slower than we had originally anticipated there. So that's the primary change. So we are continuing to do quite well in the U.S.

and that is the area that obviously it’s the best house in the neighborhood currently..

And you made a comment about Europe not necessarily seeing a recovery yet.

Is there any signs at all in the order book, or is it just status quo and it's just optimism at this stage?.

No, we've actually seen on the product side - speaking to electrical, we've actually seen there a slight uptick. We're seeing orders up kind of on the order 2% to 3% there. We've not seen it on the larger kind of system side at this point in Europe. So maybe a little bit more of a maintenance spend, if you will.

I know we're seeing a lot written about with the euro dropping that we are going to see MLM [ph] or machine builders start to be more competitive. We've not yet seen that yet. Our, I guess experience with that is that it general takes more than a couple of months.

It's usually six months to a year of these kind of basic currency changes to see substantial changes in the export patterns. And so that may still be out ahead of us..

And lastly, the CEO succession planning with the mandatory retirement.

When should we expect an announcement regarding that?.

Yes, we don't have a further update for you. The board will make that announcement when they are ready to make the announcement..

Okay. I appreciate it. Thank you..

Sure. Our next question comes from Shannon O'Callaghan with UBS..

Good morning, guys. Sandy, you mentioned the recovery sort of paralleling what you're saying in the economy. I guess fair amount of the economic data has been choppy too.

Can you maybe just flush that out a little bit?.

So, I think we were hearing during the early part of the year, January and February, people were asking questions when you see a similar weather impact that we saw last year, while it was cold, we didn't have what I’m going to call the devastating ice storms that we had a year ago that really hit that Carolinas in such a big way.

And so I think as people got through that, they relaxed a little bit about the full impact of the weather. We obviously had the port strikes that went on that affected some portions of the economy. But I think it's clear that January and February were weak, and we saw those months not being spectacular months I'm talking to the U.S.

in terms of activity. The second issue that's a little different this year than a year ago, and all of you are well aware of this is that Chinese New Year was really prolonged period of time this year. Some people talk about it being almost five weeks long.

I think a reflection effect that again that governments and companies took advantage of the holiday time to simply extend it to try to eat up some of the weak economic conditions. But then March obviously came on much stronger. And I think that's somewhat the recovery for maybe people under-spending in January and February.

Having said that, I think having the benefit of like four hours or three hours since the GDP numbers came out this morning, I don't think many people were surprised that the U.S. GDP came out that this fraction of what was already a pretty dollar forecast of 1% and it came out obviously you all thought as well at 0.2%.

That's not a whole lot of growth in the economy that’s supposed to be the one that’s most ambulant in the period of time. So I think again it simply says we’re in a period of time of relative moderate global growth. And that's why these self-help stories such as the $150 million of incremental savings from the Coopers deal are particularly important..

Okay, great. Thanks. And then just on the strength in three-phase power quality in Asia.

Should we think about that as just kind of nice win for you in a tough market, or are you actually seeing market conditions get any better there?.

Yes, there is a lot of dataset - datacenter building being talked about in Asia. It says a number there being let is not still a very high number. So I think it's a reflection that we are doing quite well in a market that's not going growing as quickly as it was couple of years ago..

Okay, great. Thanks..

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

Hi, good morning. Can we go back to hydraulics for a moment? I have to admit that I share Scott Davis’ skepticism.

Given that 50% of that business is either energy, agricultural or construction/mining, where exactly are you expecting the improvements, given what we saw in Q1 and where the orders are?.

Yes, and again our forecast is pretty flat in this business. So we are not expecting from a shipment point of view substantial improvement during this year.

We are continuing to receive orders, but if you go back and look at the part of the challenge we’re looking at the order comparison as we go back and look at orders, they were still relatively good in the early part of the last year. We’re living off the orders of the second year.

So we're much more consistent with the order patterns in the second half of last year in our shipment patterns. So we're not suggesting a big recovery. Neither are we suggesting a huge recovery in margins. We do think margins will be marginally better in the second half than the first half, but primarily as the result of the restructuring we're doing..

And if you just look, Ann, I might add that the growth rates - the comparisons get markedly easier as you go through the year, given that the business that started to substantially decline sales-wise in the second of last year..

Yes. I appreciate that primarily in the Ag space but okay, I'll take it offline maybe. Just a follow-up then on your half forecast.

Sandy I think you mentioned in your comments that you now expect the 330 build to be roughly 50-50 first half - second half?.

Correct..

And last quarter that was most skewed seasonally to first half versus second half.

What’s change there or is it just nuance?.

I think it's far more nuance than anything else, Ann. We continue to think this is going to be a very strong year for truck. We aren’t seeing any reasons to choose any differently. That's in NAFTA what we're talking..

Yes..

But we see obviously the more weakness when we get down to Latin America, particularly driven by the real challenges in the Brazilian economy..

Okay. I'll leave it there. Thanks..

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

Thanks. Good morning everyone..

Good morning, John..

Hi Sandy, do you think that if you kind of look at the way this winter played out, the Northeast and Canada and Midwest had a really tough February. And a year ago we had tough January and March. So just trying to think back to electrical and what happened.

Is it possible given sort of end-markets and stocking/destocking that sort of thing that effectively what happened is because March had, call it easier comparison February and wasn't as bad that maybe things that might have been delayed or deferred in February got slipped into the March.

I'm just trying to understand if really the March trends you’ve seen are sustainable?.

Yes, I would say, John, in both years, we really did not see a destocking in one month then a restocking in the other. I don't think that was as much of an issue, because it's hard for distributors to simply destock one month, restock the next. That's normally the way they think.

They are trying to now think about spring, is what they are thinking about in March. And what they want to have on the shows for the time period and we think their view is that the non-residential and residential continues to be pretty strong this winter in the areas you just talked about.

There wasn't much going on obviously with the weather being bad. We can't put an accounting accuracy to that. That's our best sense. We're trying to do the same thing you are, try to understand with a very, very strong March because it was both on the product side as well on the systems and services side.

Does that automatically carryover in the spring? It's a little too early for us to know because generally April is a tough month to read the whole quarter on. May and June become very important in the second quarter..

I think that's a fair answer. I mean, we know that - and obviously we know non-resi and construction markets are still improving. Here is the sort of the second part of my question. I want to go back to restructuring. I think you had targeted 35% to 40% for the year, and this is going to be weighted to hydraulics and so forth.

Your peer competitor in Cleveland, Parker-Hannifin, you sort of listened to their call and their offline commentary and you look at the GDP print this market. Debatably we could almost already be in an industrial manufacturing recession. And I realize each and every company has their own mix and buying your shares and so forth.

But my question is, do you have a playbook that you would theoretically - because you did restructuring last year be accelerating restructuring? And if so, what is that playbook or you just sort of not there yet because you don't have enough information?.

I think maybe a very appropriate question, John, because I think everyone is trying to get a sense, particularly on the industrial side of the economy, so getting away from a commercial construction and getting away from non-res, so what's really happening.

And our plan I think as you recall as we outlined it as that this year in our electrical business obviously we are finishing out much of the integration of the Cooper business, and inherent in that is about $40 million, that was in our guidance overall for integration expense of $45 million of work that we're doing there.

And so that we have the benefit of still bringing those two franchises together and getting them sized and equipped well for what we think the current environment is.

We had said in hydraulics that restructuring would be somewhere between about a point and point and a half impact on margins, and you can obviously calculate that to the kind of number you just mentioned. And that we think that goes on all the way through this year. And so we have a fairly active playbook to your point in place.

We have been obviously committed to being sure that we go deep enough to really deal with what is weaker in hydraulics. And we think that is the plan we put in place. We've got different businesses than some of our competitors, but we think we are well sized at this point for the outlook we've outlined for you..

And Rick, raising debt to repurchase your shares? Is that a new strategy or are you being opportunistic or - it looks like you raised about $170 million of debt?.

Well, we didn't really raised debt. We had a term debt maturity on April 1, which is a pretty unusual date do have a maturity. So we simply took down commercial paper to make that payment and the plan is as we get towards the end of Q2, we would not expect to have any substantial CPE on the balance sheet at the end of Q2.

So it was really just, I'd call it a tactical funding requirement, because of the calendar of the term debt repayment..

Got it. Thanks guys..

Our next question comes from Eli Lustgarten with Longbow..

Good morning, everyone..

Good morning, Eli..

Can we talk a little bit questions of what's going on in some of the regions outside the U.S., particularly South America, which is Brazil is a complete mess it looks like, and it really has a big impact probably on hydraulics and vehicle in some of your reporting.

And touching on that, can you talk about pricing? Of course those businesses and really around the world of what's happening in price competition at this point?.

The business that has the biggest impact for us, Eli, in terms of Latin America is our vehicle business. It really - and as we've shared with you, almost 30% of our revenues in vehicle come out of South America in particular. So that's really the focal point for us I guess as we think about that area. And you're right, the Brazilian economy.

And we've talked with many of you at great depth about it, our concern over the last couple of years that there were a lot of macro policies that were just kind of end up with a problem and that’s indeed what we've ended up with at this point. So we don't see the likelihood that that economy is going to recover this year.

Our own forecast is that the manufacturing IP is going to be negative several points in Brazil this year. It’s a GDP that’s likely to shrink one to two points this year. You don't see that in many countries. And so I think it talks about the challenge over there.

And you're right and if you get to the West Coast and a couple of the economies, it looked like promising a couple of years ago, be the Peru or Chile. With the mining pullback, they've obviously been heavily impacted as well. So it is a more difficult region in terms of growth.

There are individual product lines and all that were doing well in, but I think you’d have to market as a disappointing region versus ours and many people's thoughts a couple of years ago..

And can you talk about pricing across the businesses.

So I mean, it looks like with not much inflation and pricing is getting relatively competitive in some of the electrical businesses and hydraulic businesses?.

Yes, our net on it - because I guess the way we all think about pricing is our cost versus pricing versus the new products that we are introducing that have got a better price point or better margin point and overall pretty neutral for us this year.

We've just taken a pretty deep dive on that across all of our businesses and it's not that conditions aren’t competitive, but I'd say that in terms of impact to our margin is pretty neutral..

All right. Thank you..

Yes..

Our next question comes from Josh Pokrzywinski with Buckingham..

Hi, good morning guys..

Good morning..

Just a follow-up on the electrical guidance and some of the tweaks to the organic growth there. Sandy, you mentioned Asia being a little bit of drag there and that was the reason for that downward revision, but you also talked about strength in ESS in APAC.

So I guess I'm just trying to reconcile the two and where is the weakness, and is there is something in the order book that concerns you, or what's driving that?.

Yes, I guess I would start again and say recognize these are fine-tunings. They are not what I would call wholesale changes. And so it's a matter of which way we kind of round things. But markets generally were weaker in the first quarter than we had thought they would start.

And I think that's really across many of our businesses, not just electrical or hydraulics. And I think you'll see that in the GDP data, not only here but elsewhere. At the same time, there are a number of encouraging numbers that are out there as well.

I think some of the news residential in the U.S., you just saw new ABI data this morning which is never conclusive but at least is pointing at a little bit more positive direction. And so I wouldn't overreact one way or the other on, and I think it's more of fine-tuning.

I think one of the pieces of data I think everyone is struggling a little bit right now is the non-residential information which you saw as part of GDP this morning, showed a negative number in terms of non-res investment.

We actually think non-res construction was probably up in the order of something around 3%-ish in the first quarter, and we think it will be somewhere between there and 5% when we look at the full-year. So obviously that means we think it picks up as you get into the better seasonal portions of this year..

Okay, I guess I meant specifically Asia sounded like it was both, better and worse?.

Let me come back to Asia. On Asia, I would say it's really an issue of China. We think China is continuing to slow. That doesn't mean it's going negative. It means its rate of growth is slower, and that does have an impact in terms of large projects in our power distribution business..

Okay. And then just one more follow-up on the vehicle business. Clearly some headwinds that you guys are seeing in Brazil on the Ag on truck side, but keeping the margin assumption there unchanged.

I understand it's a pretty high mix business for you guys, so is there more that you're doing on restructuring or some other benefits that's offsetting that?.

No, I'd say that we think 200 basis point expansion in margins, so when volumes are coming down it really speaks to the productivity and the costs, but it's not wholesale restructuring. You'll recall last year we did some restructuring in our vehicles business.

We had said that would provide some benefit this year, but as not as much about current year restructuring as it is about the benefits that we got from last year.

Recall there is about $35 million of benefit that flowed into 2015 from restructuring actions that took place in our industrial sector, and vehicle was one of those segments we spent the money in last year..

Yes. Thanks guys..

Our next question comes from Christopher Glynn with Oppenheimer..

If you take a look at the oil and gas that you described, I think down 25%, and please correct some of my assumption if they were off, but I think about 90% of that's going to land in ESS. And it's pretty good mix to - you have solid margin expansion in the outlook.

So I'm just wondering how you're factoring in that mix impact and maybe FX is actually a positive to ESS margin, I don't know..

Chris I’m sorry, I missed the first part of your question because there was another comment on the line and we couldn't hear you..

Okay, yes. The oil and gas, I think you summed those down 25% overall. And I'm placing about 90% of that in ESS as good margin mix too.

So I'm just wondering how that mix impact would square with the margin guidance for pretty good improvement?.

Yes, I would say firstly, it's 20% not 25%.

They were thinking things will come down this year, and actually our oil and gas exposure goes across - everyone except for aerospace, it's less than vehicle but it's not an aerospace but it is in both our electrical and hydraulics, and it's not disproportionately in one electrical versus the other, because we sell a fair amount of standard comp, things that we call standard components and oil and gas as well as systems and services.

So that's pretty well spread across. And then the upstream, you can obviously think of that as being upstream onshore is fracking and that tends to be a fairly heavy use of hydraulics equipment..

Okay, thanks. That helps.

And then with lighting, I'm wondering about the LED opportunity for Eaton to leverage digital lighting and the low voltage access for data capture in the whole IOT environment?.

Yes, we are really very proud of the additional investments Eaton has made in the business we’ve purchase from Cooper in our lighting business. LED is now over half of our total lighting sales. In some categories, it’s as high now as 70%. We're really pleased.

In this last quarter, we've introduced a new product that we call, Night Falcon, which now takes LED into outdoor to architectural lighting. That's traditionally been the prevalence of metal halide and low pressure sodium.

And so we're continuing to push those technologies into new areas and there is no question that one of the things we talked about when we bought Cooper was that we like the ability now to bring our ability to manage power for customers into the whole lighting arena as well as our traditional strength in and around controlling and having efficiency in and around electrical motors.

And that allows us now to have an even bigger play for people in energy-saving. So yes we are not only thinking out but are successful now at this point and really making that play work for us.

The issue about digital lighting digital control, for those of you who've attended a couple of our workshops you’ve seen us talk about where we think that real potential is and that's one of the reasons we are putting more money into this business..

Thanks for the color..

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

Hi thank you. Just on the electrical systems and service margins. So you didn't have much of an increase off of very low base in Q1. Just wondering in light of the soft bookings maybe Q2 margins are also subdued.

So why do you think we should see sort of 100, 150 bps increase year-on-year in the second half, given how bookings are trending?.

Yes, a couple of things here to think about. Number one is remember about half of our synergies, savings for the Cooper integration fall into each of our two electrical segments. So unlike last year we were about 75% of it felt into products. This year it’s about 50-50.

I shared with you the about $29 million of total $150 million was in the first quarter. Obviously you can figure out what the balance has got to be and it gets higher each quarters as we go through the year, because that's when we are finishing up many of the manufacturing consolidations.

Secondly Julian, we expect to eliminate actually was $8 million of embedded change, in this particular segment, and in addition to the $10 million in the other. And we expect to eliminate that as we go here into the second quarter.

And then there is the benefit of some additional volume that we do expect to see if the non-res portion, particularly in the U.S. continues to strengthen as we go through the year. I would say those are the three primary elements..

Thank you. And then my second question just on capital allocation. I think before you talked about maybe having 1.5 billion to 1.6 billion of available to deploy capital through the end of next year. We look at the 170 million. We look at the trailing nine-months spend on buyback.

Have you changed your view on sort of optimal leverage, or should we assume that now the available capital deployed at the end of March is now 1.3 billion or so?.

Yes, Julian we’ll give a fairly complete view on this subject of capital structure as we come out of the second quarter.

And so I don't want to get ahead of that discussion, but I think the timing you all recall as we’ve said that we would address capital structure and the elements of capital structure when we get to mid-year and we'll do that at the time that we do our second quarter earnings release.

But it's still our expectation that we'll be in a position to share with you and all investors, our updated view on that here in mid-year..

Great. Thank you..

Our next question comes from Deane Dray with RBC..

Thank you. Good morning everyone. I know we've covered a lot of ground here. Just if we can go back to the non-res comments and that disconnect between what the GDP indicators are saying some negative spending and your outlook for up 3% to 5%.

More specifically, what kind of customer behavior either front log, is there a particular vertical that's feeling a bit stronger that would give you better outlook at this stage?.

Yes, when we look across, Deane, the preliminary information that was available on strength in non-res, it was pretty well spread across the different segments. And that we see that areas like wastewater, education, healthcare, commercial buildings, even in the light industrial manufacturing has been pretty busy.

There is also been some pretty good datacenter activity here in the U.S. And so I'd say those are the areas that we see has been particularly strong. If you get into utility, it tends to be not as strong as some of those other segments.

And as I mentioned, the industrial area has been a little bit disappointing as you get into the bigger industrial type of installation..

Great. Thank you..

Our next question comes from Rob McCarthy with Stifel..

Good morning everyone. Yes, two questions. One on non-res. I mean, obviously - and the interplay with oil and gas. I think you highlighted that 6% of your overall exposure is oil and gas. Obviously debatably there could be in a larger portion of sales that’s kind of tied to that from the support of data of what's going on in terms of those trends.

And Sandy to be clear on the last up-cycle, I do recall that you were talking about non-residential construction in the context of a supportive outlook for energy spending as a whole.

So I guess the question I have is, what is the echo effect of oil and gas on non-res, and do you think there is a possibility that if we still continue to see challenging trends here, it could potentially choke off non-res recovery?.

Yes, we don't see that, Rob, at this point. And I know there was a lot of speculation in the November. December, January time period as to spending or contracting spending in the oil and gas segment have a disproportionate impact upon oil and gas. I think what we've all seen that has not materialized. And we don't believe it will at this point.

We think as you go around to many of the major cities, you're seeing fairly active construction going on in those areas. And it's not simply what I would call the oil and gas boomtown, if you will.

Clearly if you get out in the areas where there has been a lot of fracking activity, some of the activity that was just at a wild pace and in some of those areas like the Dakotas, that wasn't so much big commercial. It was light commercial and resi has pulled back.

And I think that portion has - but it hasn't affected activity in San Francisco or New York or Philadelphia or Atlanta or Chicago and markets where we’re seeing a lot of building activities. So we don't see that having an impact.

I think the bigger question really right now is around this discussion around a heavy industrial investment and whether there is a pause in that. And obviously remember that the non-commercial portion of non-res is about half of the non-res market. So that's the piece we've not seen pick-up the so-called really big projects.

It hasn’t picked up through this cycle. We didn't see it pick-up in the first quarter either. So we see this portion of the cycle being more of what I'm going to call the light commercial institutional type orientation without the breadth of really big projects that we've seen in the historic rebounce in non-res..

And then just as a follow-up, I mean capital allocation obviously is pretty key here for the story and you’re going through a management succession, and you’ve kind of spoken to that ad-nauseam.

But if a deal of size, kind of opportunity opened up, how do you think about the management of the company in terms of managing a succession and a large acquisition? Could you conceptually think that could occur, can you walk at the same time in that regard, or do you think it just kind of takes a larger more transformative deal off the table?.

I think, Rob, as we’ve indicated in numerous forums that there is no one person who makes decision about major strategic alternatives for the company. We've always done that as a team and as a full management team and we have a great depth in that regard. And we've always done that with our board.

So I see no reason why if we have the right opportunity and pricing was right, that would not cause us any hesitancy in that regard. But it's always about whether we think we can get the right return for our shareholders. And that's really the determining issue..

Well, thanks, and I do like the answers to my questions..

We have time for a couple more this morning. Our next question comes from Andy Casey with Wells Fargo..

Thanks a lot. I just wanted to go back to that one question, and just broaden it out Can you - I'm trying to reconcile U.S. industrial and construction trends.

Do you think it's possible for construction improvement to last a few years if industrial falls into persistent declines?.

Yes, hard to know, Andy, again it's about 50% of the market is just kind of non-commercial. I'd have to go back and look at history actually to say, can we see a period of time when that's been true. I think again remember part of what's in that lower areas is oil and gas and manufacturing.

And so I would guess that if you saw industrial go into a steep decline and that's not what we're seeing. We are just not seeing as heavy growth at this point, that it would be difficult to see really big growth. I think you’d be down in the single-digit type - low-single-digit type growth.

Having said that, we’re seeing really quite good activity on that what I'll call the light commercial activity of the institutional and the commercial side. And so that piece has been encouraging, but I’d actually - I'd have to go back and do a little research, Andy, to give you a really good answer on that one..

Okay. Thank you, Sandy. And then second, you mentioned within the strength that you saw in non-res construction during the quarter, datacenters activity was pretty good.

Did that impact the quarter for you, or is that yet to come-type thing?.

Yes, I would say that it's a yet to come in terms of actually shipping the stuff..

Okay, great. Thank you very much..

Our last question today will come from Steve Winoker with Bernstein..

Hi, thanks for fitting me in. Let me do clean up here. Two questions. One operating cash flow, you're talking about growing 15% this year, and we just saw extension the number of, I guess about 6% last year.

Where is it coming from? What is the real places especially trying to think about that relative to the margin expansion you have elsewhere?.

We always start, Steve, with - by far our weakest operating cash flow quarter in Q1 and it's buffeted by lots of Q1 type payments related to year-end activities to rebuilding working capital. And so it's always a very modest number in Q1, and I wouldn't look at the year-over-year comparison as a particularly good for cash for the balance of the year.

But we do quite a granular buildup to our cash flow for cash and we continue to believe that that range would have given 2.7 to 3.1. It is the most likely range..

Steve, I'd add maybe two comments to Rick’s, where we think this year will be very close to one-to-one cash efficiency ratio.

And one of the other reasons for that is as you recall last year we talked about when we started in on this process of moving over 20 manufacturing plants, we did put in some safety inventory to assure that our customers were not feeling any interruption of service. We’re pealing that back out this year.

So while we’ve built some working capital last year, we'll repealing it back to what we think are more optimal operating levels this year..

Which will allow us to - if you think about DoH, days on the hand inventory, it will allow us to move that down because it had to be elevated to deal with some of the inventory builds..

Okay.

So it sounds like mostly inventory as opposed to receivables or payables?.

Yes. I think that's a right way to think about it..

Okay. And then the second question on corporate expense, the reduction.

Can you just give us some clarity where that's coming from?.

I would say generally - once we saw that we were going to see obviously the hydraulic markets be a little lower, that the vehicle South American be lower, we're simply taking the approach on - and I wouldn’t target it to anyone area, but to an overall, we are going to have to go through another round of really looking hard at expense levels.

That's what we did in the first quarter.

That's where we got an extra penny in the first quarter from that one, and that's what we would plan to duplicate for the rest of the year, and that obviously gets you roughly your $20 million if we do the same thing we did in the fourth quarter - first quarter, do it three more times, we are right at that number..

Right. It's a pretty big reduction though.

I mean, are these growth initiatives you're going to find - I mean I'm just trying to get a sense for what activities no longer happen this year but maybe get deferred in another year?.

Yes, more than that, Steve, I would say, it’s much more of the spirit of we have to continue all the time looking at ways to do more with less. And so lot of its process change. It's the great work our teams are doing in terms of productivity improvement. So I wouldn't say, no, it's not cutting growth initiatives.

It's about, let's identify what creates value and let's keep working on that issue because we obviously are in a slower growth environment and that’s got to be where you're headed is to create value..

Okay, great. Thank you..

Thank you very much. And as always, we’ll be available for follow-up calls throughout the day and the remainder of the week and next week. Thank you very much for joining us today..

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T's Executive Teleconferencing Service. You may now disconnect..