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

Scott Davis - Barclays Steve Winoker - Bernstein Ann Duignan - JP Morgan Jeff Sprague - Vertical Research Julian Mitchell - Credit Suisse Jeff Hammond - KeyBanc Deane Dray - RBC Shannon O’Callaghan - UBS Nigel Coe - Morgan Stanley John Inch - Deutsche Bank.

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

I would now like to turn the conference over to our host, Mr. Don Bullock, Vice President of Investor Relations. Please go ahead..

Good morning. I’m Don Bullock, Eaton’s Senior Vice President of Investor Relations. Thank you for joining us for Eaton’s third quarter 2015 earnings call. With me today are Sandy Cutler, Chairman and CEO; Craig Arnold, Chief Operating Officer and President; and Rick Fearon, Vice Chairman and Chief Financial Officer.

Our agenda today includes opening remarks by Sandy, highlighting the Company’s performance in the third quarter along with our outlook for the remainder of 2015 and some preliminary thoughts on 2016. As we’ve done on our past calls, we’ll be taking questions at the end of Sandy’s comments.

The press release from our earnings announcement this morning and the presentation we’ll 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. And a webcast to this call is accessible on our website will be available for replay.

Before we get started, I’d like to remind you that our comments today do include statements related to expected future results of the Company and as so, should be therefore be treated as forward-looking statements.

Our actual results may differ materially from our forecasts or projections due to a wide range of risks and uncertainties and those are described in both earnings release, the presentation and also in the related 8-K. With that, I’ll turn it over to Sandy..

Great. Thanks Don, and I’m going to work from the presentation we posted earlier this morning, and if I could ask you all to turn to page three of that presentation that’s entitled highlights of Q3 results. Couple of comments in terms of our third quarter results.

So, we’re with our margins, we’re particularly pleased with the great cost control and all the restructuring work that’s going on across the Company. And that allowed us to offset the lower volumes that we had outlined in our earnings revision just a week and a half ago as well as more negative FX. I think the big news is that we continued markets.

And as you saw, our weaker bookings have really caused us to drop our second half guidance. And I’ll talk more about the implications for that for 2016 as well. Our operating earnings per share we reported at this morning at $0.97 was in line with our revised guidance.

As you saw, our sales were down a 9% with 6 points of those 9 points due to ForEx the other three organic revenue decline. Segment margins of 14.5% that’s a little bit below the 15% that we had guided to original life of the third quarter and that’s really due simply to the volume impact being down as far as it was from our expectation.

I think the very good news is when you take out the net restructuring impact, and I’ll be talking more about those restructuring plans as I go through my comments this morning, our margins were 16.2%.

Those net restructuring costs, so that’s the costs minus the benefits for about $98 million in the quarter, about $8 million higher than we had provided in our guidance for the third quarter. So that’s all really due to timing and as you all see as we talk through those results for this morning.

We really quite pleased with the overall restructuring program and it’s actually going to drive even more benefits that we had shared with you initially.

A quarterly record operating cash flow; really pleased with that $973 million, obviously a reflection of the work we’re doing in terms of not only improving profitability but also really pulling dollars out of our working capital. And doing that allowed us during the quarter to buy back about $284 million of shares.

That brings our year-to-date repurchases to $454 million. That’s about 1.5% of our outstanding shares. And I know you’ll all recall that in 2014, we also bought back about 650 million shares. If I could ask you to turn to the next chart entitled financial summary.

One number -- I’m sure you’ve looked at these already but I wanted o reference on this chart is if you look in the green box in the lower left hand corner, our organic sales of negative 3, if we go back and look at the second quarter, our organic sales were up positive 1.

And this really reflects I think well what we’re seeing in the downshift in the number of our end markets where we saw positive organic growth in the first half and now we’re seeing negative growth here in the second half. If we turn to the next page and let’s talk through our five reporting segments. I’m on a page titled Electrical Products Segment.

Really great margin performance here this quarter. As you can see, we reported 18.5%. And if we don’t include again the net restructuring and the savings that came from that, 19%, I think really demonstrating the strong performance and margin position and cost position we have in this business.

Again this business is a third of the Company, so it’s really significant for us. The bookings were flat this quarter. And I think if you look back over the last several quarters, you recall that in the second quarter, they were 4%; in the first quarter they were 5%; then all during the previous year, they were 4%, 5% or 6%.

So, clearly we’ve seen a downshift. As we’ve talked with so many of our distributors around the world, they have been seeing a slowing in their end demand. They clearly are not comfortable taking on more inventory in this environment. And we saw this slow as we went through the third quarter.

And so I’ll comment more about that when we get to our fourth quarter guidance. Still positive in the Americas and in Europe but Asia was particularly weak, and it was not simply China; we saw weakness across the region.

We told you in our second quarter conference call, we would share with you the specific restructuring costs and the benefits by segment. You see them detailed here. So, I simply won’t go through repeating them. I think you’ll they are stayed on a consistent basis as we go through each of the segments here.

When we get inside the bookings, the strength has been where hit has been historically, a strong residential here in the U.S., strong lighting activity, weak industrial, weak oil and gas. We get into the Middle East and Europe; clearly the Middle East is the strongest of that region. We also saw some pretty good demand in the single phase UPS market.

And then Asia was basically weak across the board and was the primary reason that the total bookings were flat instead of slightly positive. If we go to the next chart labeled Electrical Systems & Services Segment, again a large segment for the Company, about 28% of the overall Company.

And if you look at this particular chart, I want to call out a couple items. Let me start with the organic growth again in the lower left hand green box. It was a negative 4% last quarter, negative 5% this year.

Again if you look at the bookings being down 3%, and if you back just last several quarters and look at the trends there, it was down 7% in the second quarter; it was flat in both the first and in the fourth quarter -- fourth quarter of last year. So we’ve been seeing weakness in this segment, it has continued.

You’ll recall that we report our Crouse-Hinds business in this segment which has a very large oil and gas exposure. We’ve also seen weakness in the power quality market this year and the utility market’s been pretty flattish this year. Finally, we’re seeing that the large industrial projects within the overall construction market remain weak.

And that’s an area that also affects this particular business. Bright spots in the quarter for us where we saw our systems business and bookings up very substantially.

That’s something we normally look for in the third quarter because there is quite a lot of work that gets completed during the fourth quarter for many of our customers and also on the private side as well as on the government side.

And we were pleased and in spite of fairly flattish conditions in the utility area, we had a good quarter of booking there, our one of the stronger areas. And then finally, our own three-phase UPS business, these tend to go into these larger installations, had a very good quarter of bookings as well.

Crouse however was down very substantially and that obviously affects the margin. So, if you flip up to the margins here and you compare the third quarter to fourth quarter, you’ll see that we reported margins of 11.2%. Without the restructuring costs and the restructuring savings, they were 12.8% but a 180 basis points lower than last year.

And I would say really the factors I mentioned in bookings are exactly what is influencing the margins here that’s the weaker mix and activity for Crouse oil and gas related, it’s the weaker activity from the industrial side, and then we have not had strong bookings for couple of quarters, so they were operating at lower utilization levels.

If we move then on next chart labeled Hydraulics Segment, about 12% of our Company. I don’t think much new news here from what we’ve been chatting with you all about here as these markets continue to be weak, commodity markets across the board around the world are weak.

If we simply look at the bookings number are down 13%, not a whole lot different region to region around the world, nor is it substantially different between OEMs and distributors, as you can see in the comment below.

Within the overall mobile area is again as mentioned, most of these commodity markets continued to be weak and on the stationary side clearly oil and gas are still a negative. Last quarter, again if I can ask you to look at the green box on the left, organic growth was negative 11% this quarter and negative 10%.

And you can see in the yellow box, the magnitude of the restructuring that we’re doing in this business to respond to these weaker markets. You can obviously see that’s significantly affected the reported margin versus the margin without our restructuring costs and benefits.

If we move to the next chart, Aerospace, about 90% of the Company, really good quarter. I think when you look at the margin performance, whether it’s the 17.6% that we reported or the 18.7% that would not include the restructuring costs and the benefits.

Bookings down some 16%, not different than you’re seeing from most of the companies in the aerospace industry during this quarter. OEM activity order placement on both the commercial and the military side weak, whether it’s a matter of comparables or whether it’s a matter of weak, it was a weak quarter.

The one bright spot here, a couple of you have noted was in aftermarket, up solid 11%. And we are making progress towards getting the aftermarket business up toward that historic mix of 40% of total. Again restructuring not as much elsewhere really responding primarily to as programs start to diminish or come to a lower level in this industry.

We’re obviously tuning our manpower and structural costs as well. If we could move to the next chart, the Vehicle Segment, about 18% of Eaton. You can see another very strong quarter in terms of margin performance, 15.2% and then 18.2% when we take out the restructuring costs and benefits.

Our organic growth was a negative 3; you’ll recall, it was negative 4 last quarter. We are seeing a downshift in terms of NAFTA heavy duty truck market build. If I could comment on that just for a moment, you’ve known that our forecast throughout this year has been 330,000 units. We think it’s coming off here in the fourth quarter.

We have dropped our forecast to 325, so a reduction of 5,000 units. And if you look at the third quarter production rate of roughly 83,000 units, our best estimate at this time is it’ll come down to about 74,000 units in the fourth quarter, so down about 11% quarter-to-quarter.

And you get a sense for that when you look at the whole third quarter NAFTA Class 8 orders were about 65,000 for the industry and the backlog has come down approximately 20,000 units during this last quarter.

If we move to chart 10, if we look at our markets this year and we review our organic growth, we do expect -- and I’ll cover more of this on the next chart that our organic revenues will shrink about 1% this year. And that’s driven by our markets coming down approximately 2% during 2015 compared to 2014 and that we will outgrow them by about 1.

So that’s how we get the net of a negative 1%. They’re detailed here in terms of the total organic growth segment-by-segment. I won’t go through each of those. I’ll be glad to answer the questions little later this morning. And the next chart, our chart 11, which is labeled 2015 Segment Operating Margin Expectations.

You’ll recall when we provided segment margin, a guidance at the end of the second quarter; the segment guidance we gave you did not include the restructuring costs or benefits because we had not yet announced those specific plans internally.

These now do, and to help you kind of bridge between the last quarter and this current quarter, the electrical products margins here are affected about by about 20 basis points from the restructuring and savings Electrical Systems and Services, similar at about 20 basis points, Hydraulics at 80 basis points, Aerospace at 20 basis points, Vehicle at 60 and then the total consolidated at 30.

So, you obviously can get a feel of the biggest restructuring that we’re doing proportional to the businesses are in Hydraulics and in Vehicle at this point. If we turn to the next chart, and I want to spend a little bit of time on this chart and the next chart to be sure that how we have displayed our restructuring is easy for you to understand.

Let me start with just a couple of summary comments. Program is on track that we announced to you at the end of the second quarter; it is indeed going to produce even more savings than we had shared with you, at that time. We are reducing our employment by approximately 2,900 employees; we’re closing eight manufacturing plants.

And if you look at this particular chart, you will see that -- you’ve got the actual numbers displayed for both costs and savings and you can see that we actually had higher net cost of about $8 million in the third quarter than we had in our plan, that’s the 98 million versus the 90 million.

We do expect in the fourth quarter that we will have slightly higher net savings and that’s the result obviously you see us taking our savings in that quarter up by $10 million.

And if you shift to 2016, you will see the difference that we’ll spend about $5 million more than we thought originally, but we’re going to get about $20 million more savings that’s the $100 million versus the $80 million.

So, when you go to the bottom of this chart and we say total restructuring program that we announced at the end of the second quarter, we’ll have a program cost of approximately $153 million, up $8 million, $3 million of the $8 million occurs in 2015, $5 million of the $8 million occurs in 2016.

Similarly when you look at the savings of $150 million; of the $25 million of increase of savings, 5 million occurs in 2015, $20 million in 2016. So, that is the program that we’ve announced to you, again about 2,900 employees and closing eight manufacturing plants.

But based upon what we have seen, if we could go to the next page, it’s labeled With Continuation of Weaker Markets.

We had originally shared with you on our second quarter conference call when we were talking about 2016 that in these weak market conditions, we would ordinarily undertake about $50 million to $60 million of restructuring on an annual basis.

We have mentioned that to you so that if you were trying to look at estimates of respective earnings next year, you wouldn’t drop restructuring out of the program. What we had not shared with you is what the anticipated savings it would come from that $50 million to $60 million will do.

So today what we’re doing with this second set of actions which is labeled on this chart, the 2016 program, it is a second set of actions; it’s not any of the same actions that we were taking before; these are actions in addition to those actions, is that we’re going to increase the expected cost of restructuring for these new actions from $50 million to $60 million to $90 million to $100 million.

So if you’ve taken the midpoint of $50 to $60 and had $55 in your estimates and you now take the midpoint of 90 to 100, you have 95; it’s about $40 million more restructuring next year than we had provided you before. We do expect over a two-year time period that we’ll get dollar-for-dollar benefits for this $95 million.

So, if you see on this chart and if you look to the second line from the bottom that’s in the green box, you see that we expect to get $40 million of savings in 2016 and we’ll get the full 95 by the second year, in 2017.

So again, we have two sets of actions, the set of actions which was announced at the end of the second quarter that is resulting in reducing employment by 2,900 people and eight manufacturing plants being closed; and a new supplemental set of actions labeled here as 2016 program.

When you add the two together, you’ll see that from 2015 to 2016, there is a year-to-year benefit of $138 million. Then when you move from 2016 to 2017, there is a year-to-year benefit of $190 million.

Now, I would urge you, don’t use the whole $190 million in your estimates because there will be some regular restructuring action that will go on within the Company as it does on an ordinary basis, in 2017.

I think for planning purposes, you might assume that that could be on the order of $50 million to $60 million, so a midpoint of $55 million, and then we might get on the order of $25 million of cost.

I mentioned those numbers not because they are our forecasts but we don’t want you to simply drop any net cost estimate which is probably on the order of about 30 million bucks out of this comparison, so you might take that $190 million and reduce it to a net of something on the order of $160 million. So, I hope that’s helpful.

I know Don will be able to walk through this individually with you. I understand it can be a little confusing when you think about initial set of actions and a second set of actions.

But clearly the reason we’re undertaking an even larger set of additional actions prospectively here in 2016 is the fact that these markets have fallen off more than we had anticipated at the middle of this year as I’ll detail in just a moment; we think we’re likely to see continued shrinkage of our markets in 2016.

So, we are working hard to get out ahead of these reductions in markets with these very aggressive and I think well led out and being very well executed restructuring programs. With that as a base, let’s move to chart 14, which is labeled Operating EPS Guidance. Our guidance for the fourth quarter is the $1.05 to a $1.15 operating EPS.

And probably the two most significant items here in terms of our thinking on this is, we think organic revenues will come down another 3% from third quarter level. This is not year-to-year; this is compared to the third quarter.

And we get there really that’s more than what normally happens if you look at our seasonal patterns by the fact that we’ve seen bookings obviously decelerate in this last quarter.

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

And so we’re basing our guidance that our organic revenue will come off 3%; the tax rate will be between 5% to 6% and the reason that’s lower than we’ve run in some of the other quarters is that our best estimate is we’re going to have a lower mix of income in some of the high tax countries.

And some of you may have seen just yesterday the recent reduction in the UK tax rate and there is a legislation going through on that. And so we’ve tried to pick the benefit of that as well.

And then last very importantly, the very prudent actions that we kicked off earlier this year in the second quarter are going to allow us to have a net restructuring benefit between the third quarter and the fourth quarter of $123 million as was detailed on the previous chart and that’s about $0.25 that gives us -- helps our run rate during the fourth quarter.

That brings our full year guidance to $4.20 to $4.30 operating EPS and that does include the full net restructuring charge from this initial set of actions that we announced at the end of the second of $73 million net charge or net impact of the negative $0.14. Next page titled 2015 Outlook Summary, just the basic summary that we provide you here.

Obviously the big change on this one is that we had thought in July that our organic revenue growth would be zero to negative 1 and it’s clearly going to be negative 1.

We’ve been working really hard on all of our expenses in the Company, so that whole collection of pension, interest general corporate expense we believe will be $30 million below last year that’s more than we had told you before and the tax rate is a little lower.

And then very importantly with all this change, if you look at the operating cash flow, we had told you 2.4 billion to 2.8 billion at the end of July and that is still our guidance for this year. The team’s really doing a great job in that regard.

And because we’re operating at lower levels of activity, we’ve taken another $100 million out of CapEx, not unlike many industrial firms in this weaker environment that we just don’t need to spend that extra capital. So we actually have taken our guidance up for free cash flow in spite of all this weakness by $100 million.

So, it was $1.8 billion to $2.2 billion, it’s now $1.9 billion to $2.3 billion. So, if we turn to next chart, 2015 Summary, I covered most of these points. Organic growth at about 1% that assumes our markets go down. It clearly reflects what I’ve been commenting on in terms of the slowdown here over the back half of the year.

I already commented on the restructuring program, and that the operating margins are depressed by above 30 basis points for the net restructuring impact. We have repurchased 7.2 million shares through the third quarter of this year. We will pay down this large tranche that we’ve talked about for some time of $600 million of debt in November.

And I think the really good news is, based upon the strong cash flow, we were able to do this level of repurchasing in the third quarter and we’ve got the flexibility to continue to repurchase in the fourth quarter if we deem that’s prudent. Last chart is very important looking forward.

And clearly I think this is the Ouija ball that we are all trying to get a good handle on currently in terms of with the second half of this year having them slower, what are the implications for 2016. And clearly my comments here very inform our decision to go ahead with an even larger second set of actions in terms of restructuring in the Company.

We expect our markets in 2016 compared to 2015 to be slightly negative. And our best thinking -- and please don’t put a decimal point on this, this early time because we’re in the process of trying to get all of this tuned up ourselves, is it’s likely to be on the order of down to 1% to 2%. This year it was down 2%.

And as you try to think through our businesses, because I can hear each of your enquiries of can you give me some color about how might that lay out across your different businesses.

Our best thinking -- but please, it is initial thinking at this point, is that to support that we think that the electric business be up on the order of 1, hydraulic is going to have another down year, we think on the order of roughly 7, aerospace will continue to be strong on the order of about 3 positive and vehicle will come off about 5 and we’re anticipating that the North America heavy duty class 8 business comes off about 15% from this year’s 325.

Now, all of that frankly would get you to a number that feels a little bit more than just one, I think prudence, having watched what’s happened to markets this year is what leads us to believe that we need to be planning based on a negative 1 to negative 2.

We’ll obviously have more to say about that as we work through our profit plans and share guidance with you after the New Year. The restructuring program highlights just what I talked to you before.

The way to read this chart is -- because we didn’t get the labeling quite correct on the little small bullet under the restructuring year-to-year benefits is between 2015 and 2016, we get the $138 million of benefit; between 2016 and 2017, we get a $190 million of incremental savings but remember by caveat, you probably want to take that 190 and reduce it to something closer to 160 because it is highly likely the Company would continue to do some former restructuring on an annual basis which is sort of normal fair.

The Cooper integration savings of about $45 million; the free cash flow up from 2015 by 10% to 15%. And you say how can you feel relatively confident about that? We will not have a U.S. qualified pension contribution; it won’t be required in January. Recall, last year it was about 200 million.

If you look at our guidance for this year and take the midpoint of 2.1 billion, 200 million over 2.1 billion gets you pretty close to 10%. And so, we obviously think we’ll do a little better than that. We do have one more debt repayment in January of 2016; we’ve disclosed this to you before, 240 million.

And then the really good news is that as we’ve shared with you at midyear in 2015, we’re going to continue to have very strong cash flow. You saw that in our third quarter, really exceptional cash flow. That’s going to give us the capacity to deploy over $1 billion of capital through either stock repurchases or acquisition.

And we’ve a strong bias toward repurchases, obviously with our price -- stock price into the range of this at this point. So in total, I would say that I think we’re being realistic about what’s happening in our end-markets.

We are taking the restructuring actions, both with the first set of actions we took and now the second set which will kick off next year.

As the timing, we would expect to kick off those restructuring actions, the new actions we’ve talked about in 2016, will get at them early in the year that means probably the first quarter which obviously means that we can pull more savings into the year as well.

The company is really focused on getting cost down to ensure that obviously we can be competitive and produce the kind of returns that we hold ourselves accountable to as well. And so with that Don, I’ll turn things back to you and look forward to everybody’s questions..

Before we begin the Q&A and have the operator guide for the Q&A portion of the call today, we do have a number of individuals that are queued with questions. Given our time constrains of an hour for the call today and our desire to get as many of those questions as possible voiced, please limit your questions to the single question and a follow-up.

And thanks in advanced for your cooperation. With that I’ll turn it over to the operator to provide guidance on the Q&A..

Thank you. [Operator Instructions].

With that our first question comes from Scott Davis with Barclays..

Can you give us a sense of what your view is on -- I guess the first part of the question is your benefit from price cost in the quarter.

But probably more importantly, what your view is, as you look out in 2016 on potential price weakness in some of your markets?.

I think let me start with the commodity side.

We continue to believe we’re in a period of weak commodity and obviously to inform some of the demand side for us in our hydraulics business, we don’t see -- and of course we’ll all guess wrong when the interest rates will begin to start to be increased but it feels like that’s coming sooner rather than later.

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

And can you quantify the benefit that you saw this quarter on price cost spread?.

I wouldn’t say we were seeing a benefit because in terms of we can’t do it -- I think you know our mode; we tend to keep our pricing pretty much in line with the commodity side. So, we’ve not been getting net price increase, if you will..

And just quickly, any color you have for us on U.S.

non-res? I mean it seems like it’s still reasonably good but you’re outlook there?.

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

And if you look at the Dodge reports, part of the reason we commented in our press release that we saw bookings get weaker through the quarter. Some of the Dodge information about future activity has been concerning. We don’t think that means that we’re going to see a negative number from non-res.

So, we do think it may not grow quite as quickly as it has been..

Our next comes from Steve Winoker with Bernstein..

Couple of questions.

First, on the 2016 thinking, assuming that organic growth does come in, let’s say flat at best or a little bit down for you specifically, what kind of incremental margins do you think you can hold excluding the restructuring and excluding the Cooper synergies?.

Yes, we’ve not -- you’re right on point with the question, Steve, and we’ve not really tuned it formally at this point. But we’re getting down this far in the cycle, earlier on we were able to hold 20% decrementals; we think it’s more on the order of 30 but we’ll have a better chance as we get out.

That’s obviously why we’ve been launching the restructuring we have. I think there always are capacity issues any company that has sort of knees in them and both in the way up and the way down. And with this having come down this far we need to take another knee out. So I think for planning you might use 30% at this point..

And then on the Cooper side, am I correct in looking at the $45 million of integration savings you put on slide 17, is that comparable to the 115 you talked about before?.

You’re absolutely correct. And two issues that are leading to lower synergy as we get out here towards the end of the four-year time period. The first is with the lower volumes that we’re seeing -- we had obviously hoped we would see some market growth with this time period. There is a scaling effect on procurement and plant savings.

We also have experienced negative CapEx and it’s not only affecting the base business, it’s also affecting the synergy. And frankly, we just had enrolled it through to the synergies. And as we’ve been tuning all those stuff, it was clear to us that we had missed the piece of that as it has to do with the synergies.

The last has to do with the oil and gas industry, as well as three regions that have really slowed far more than others. Canada as you know is really been hit very hard in terms of being a natural resource area. Latin America, let me just say, it’s been gutted and leave it right there. And those are the issues that have led to the change.

So, we do think at this point, a more realistic number for next year is about $45 million incremental savings over this year. Once again, Steve, that all informs part of our feeling for why we’ve got to do more restructuring..

And is most of that cost savings now or is there any revenue in that 45?.

There is a very little revenue. Most of it coming right out of the large plant closings that we’re finishing up..

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

Just a follow-up, quick question on the Copper synergies.

Can you just remind us, Sandy, what were the synergies for 2015 versus 150 million as expected?.

We think they will be on the order of about 135 million versus the 150 million and then we think next year it’s this 45 million versus the 115 million..

And then my question is really around Brazil and the impact that financing programs might have on -- particularly on your vehicle business.

How are you thinking about that both into year-end and for 2016?.

We have been a bear on the Brazilian economy, as you know for a couple of years. And while I think it’s salutatory that they are trying to find some ways to turn the economy, our base assumption is that Brazil continues to be weaker next year than this year.

And we just think there are so many macroeconomic issues that have to be addressed, we’re not planning on an upturn effect; we’re planning on it still sliding some more in 2016 versus 2015. .

And that’s embedded in your hydraulic outlook I presume; are there any other businesses?.

Hydraulic and vehicle..

And vehicle? Okay, thank you..

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

I was wondering first just on working capital, Sandy or Rick, if you can give us a little bit of color how much you actually got out in the quarter and what kind of opportunity that is in the next year?.

Jeff, we’re just shy of 300 million from Q2 to Q3 and change in I guess what you talk classic working capital, we really put a full court press on receivables and manage down inventory but we think much more is possible partly because when you’re sales slide off is very hard to keep the inventories going down in line with unexpected sales decline.

So, we would look into next year and view additional opportunities for working capital liquidation and we also do have inventories -- bank inventories we built up for some of these Cooper plant consolidations and we would expect that most of those would be removed by the end of the year.

So, I think you’ll see continued strong management of working capital..

And then maybe flipping it more to the customer level, Sandy, you made a comment about inventories at the customer level. It seems pretty clear there has been a drawdown going on across a lot of these channels.

Do you think your customers are properly sized to current state of end demand or is there still more inventory liquidation that needs to take place in these channels?.

Let me talk to the two channels if I could, Jeff. I agree with your comment on the distributor issue. I think that industry was maybe buying in a little too strongly in the first quarter and second quarter. And as things began to back up here in the second half, they are obviously not buying or trying to window down our inventory.

And our feedback is they’ve got little bit more to do before they’re going to really feel they’re going to optimally sized. When you get out to the end markets, some of these end markets have been week for quite some time and you would hope that they are starting to get it right.

But our view is when markets are falling off like this, it usually takes a while for people to catch up and get right-sized. And so that’s all kind of big into our view in a number of these markets in 2016, we’re still going to see some negative numbers on the growth side.

Don’t know that we’re going to be absolutely right on that, but we think we’re better to plan with that outlook and we’ll get the cost out of the Company, and we can manage up if we need to. If we’re wrong in this market, it’s always harder to manage down..

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

I may just -- your point around capital deployment is more buyback focused, but just taking a step back, the EPS top line is down a bit, your earnings next year 4ish or so. So that’s the way you were before the Cooper acquisition back in 2011.

So, I just wanted how happy you’re with the current state of portfolio, or if your view is that times are tough, so we take out cost for new buybacks and then maybe in a couple of years time where there is clearer macro, you can do something with the portfolio?.

Without giving confirmation one way or the other to your 4 number, I would say our focus right now is that we’re seeing markets have weakened and we need to get the cost out of our overall corporate portfolio that’s at the corporate level and each of our individual businesses.

And we think with the stock not creating at the levels that we think it’s worth, we need to get this cost right so we’re in a position to drive earnings growth in 2016 over 2015. We’ve not finished our planning on that. But that is our primary focus right now is to drive the restructuring program.

We have a singular focus on getting these costs right at this point. We’ll continue to look at the issues of portfolio, as I’ve mentioned a couple of times, there is nothing that prevents us from making changes in our portfolio on a taxable basis at this point.

Part of that change is then when we get out to November 2007 when we have other alternatives that are available to us. But I would say for right now Julian our primary focus that we are driving with single minded purposes across the Company is to get our cost right..

And then just a follow-up on the ESS business, margins under pressure for those volumes I guess.

Is anything happening there on pricing on some of the large projects activity as well, or is it just a volume driven mix phenomenon?.

I’d say a couple of things, Julian, remember that is the sector where we put Crouse-Hinds in and you may recall when we gave our guidance for this year and indicated that about 6% of Eaton’s revenues are in oil and gas, and that we expected that marker would be off about 25%, we’d also said that we thought the primary impact of that would be in the second half of 2015 and that is indeed what we’re experiencing.

While bookings weakened early in the year, we really seeing that impact come through in terms of the shipment side. So that’s the first area. Second area has been this continued weakness in what I would call power systems and in the power quality three-phase market on shipments.

We are encouraged that there is some fairly significant projects that we think will indeed be built and shipped -- they’ll be asking us to ship on next year. So, we see that three-phase issue potentially turning around next year. And the last but not least is the industrial construction big projects have been weaker this year.

That’s part of what’s infecting this as well. And so whenever -- and I’ve candid before that whenever you see weakness in these end markets, you do get more price competition. And so, there is more of a beta of that. And I would say the industry is operating at lower levels of utilization right now..

Our next question comes from Jeff Hammond with KeyBanc..

So, I know it’s early on ‘16 when you give some color on the segments.

But just given the downtick in orders in electrical, what’s the comfort level that you do get growth there in to ‘16 and maybe where do you have the most confidence that you will see that growth?.

Jeff, obviously we’re in the midst of all of our planning and once we start trying to pull that string of yarn, we’re into an awful lot of detail that we don’t feel we’ve got fully vetted enough. I think the biggest issue to think about in electrical is what’s happened in the second half in terms of distributors destocking.

And at some point we all know that that comes to a conclusion and you get rid of that negative impact. But there is so many end markets there. I did mention before that we do think that residential will continue to expand. And certainly that area of non-residential that surrounds residential, so that light side looks pretty solid.

And then I did mention that we’re seeing some better activity obviously out ahead of us in terms of the power quality markets. But I think beyond that we need to really finish the reviews that Craig and I are heavily involved in, in terms of looking at the operating plans for this next year.

And we’ll have a better set of insights when we give you our full guidance for next year..

Next question comes from Deane Dray with RBC..

With regard to the second phase of the restructuring plan, was there any consideration to doing some of that now in the fourth quarter and get a jump start on this?.

Yes clearly, we obviously have thought that through very, Deane. Part of this is the issue of just how much capacity there is to do how much all at one time, and that’s what we really felt. And our best judgment is laid out the right sequence for trying to assure that we not only forecast savings but that we indeed execute them well.

So, Company has been really busy during the third and fourth quarter getting this first group done. And we’ll kick off with second group as I said most likely right in the first quarter. But we really felt that was the right timing and we’re trying to be transparent about the fact as to how the timing of these will feel through.

But that’s our best estimate, the best way to do this..

And then just so we have a perspective on how the third quarter did play out, can you share with us the cadence of the months on an organic basis and how you arrived at the decision that you did need to negatively pre-announce?.

What we had indicated in a number of forms both Craig and Rick and I were in sometimes together and sometimes in different locations is that we saw July and August continue to be very slow. And as we came through the end of August, it was evident that September was going to have to really strengthen substantially.

Now, it did strengthen but it didn’t strengthen enough and that’s where Rick was out at a conference in the middle of September, we shared at that point that we were concerned that revenues looked like they were going to fall short.

We’re right in the midst obviously of working through all of those actions that we had announced in restructuring from the second quarter. But at that point, we believe be looking at whether we were going to need more in terms of restructuring to get cost down. So that’s sort of how it laid out over the time period.

I’d say September was a good month and it’s always a disproportionately big month in the third quarter. It just didn’t come through like we thought it would. And it wasn’t in just one business. I’ve had that question from a number of investors as was the 300 million just in one line of business. No, it was fairly broadly.

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

So, we’re trying to get ahead of this as fast as we can. And no one likes having negative markets but the way you deal with them as you get the cost out and you manage your cash and you be sure you’ve got a strong balance sheet for this time period. And that’s exactly what we’re doing..

Our next question comes from Shannon O’Callaghan with UBS. .

Maybe one for Rick, just initially. You talked about the UK tax change; you also have BEPS going on.

Maybe just an update on the implications of recent global tax activity and how we should think about any implications for Eaton going forward?.

You’re right to focus on some of these changes. It is interesting that despite the BEPS initiative, you still have places like the UK in the process of lowering their tax rate. So, it is an evolving tableau.

The impact from BEPS, frankly, is going to turn out we believe to mainly for us be around all the additional information requirements, the filings for the calendar year 2016 of detailed country-by-country tax reports and increase in required transfer pricing documentation. So that’s going to require some extra manpower, some extra efforts.

We think we have a good plan to do that cost effectively. And we are working right now to put all those resources in place. I think you’ll also see additional audit activity just because that’s been focus we’ve seen over the last year around the world that countries are needing more revenue, so they’re going to do more audit.

So I think that’s another part. All-in-all though the biggest impact on Eaton year-to-year let’s say from 2015 to 2016 is simply likely to be mix, where the income is actually earned and we don’t yet have a good handle on mix for 2016.

It is possible that our rate could move up a small amount from the 7 to 9 that we expect right now, but I wouldn’t expect anything very dramatic..

And then on the hydraulic, minus 8% new organic guidance for the year, it seems like that implies a somewhat more favorable 4Q before we start to get worse again next year.

Is there anything going on in the fourth quarter that I’m missing on hydraulic?.

No. And Craig, maybe you want to comment..

No, I would say no. I think if you take a look at how hydraulics performed during the course of 2014, I think you’ll find that Q4 2014 was also quite a low quarter.

So, I think the denominator in this case helps a bit but we certainly are and when we take a look at the sequential performance of hydraulics, what we’re forecasting is that Q4 will in fact be weaker than Q3. And if you take a look at the seasonality of the business, it’s consistent with what we seen in prior years.

And we’re not assuming any of our end markets get any better..

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

So obviously Sandy, recognizing that you’re still in the midst of plan of the next year, the detail you’ve given is really helpful. Just if next year doesn’t turn out to be a down 1% to 2% type of situation for Eaton, it feels like you’ve taken enough cost out to achieve your aim of growing earnings next year.

Is there anything from a mix perspective or maybe from a pension or tax that maybe hold earnings flat to maybe down next year with these reconstruction actions in place?.

Yes, we don’t -- at this point again, it’s really early Nigel but we don’t see any headwinds if you will in those areas, and little too early to call whether they all be positive. But we’re relatively confident they are not headwinds in those particular areas. So I think your premise is right..

And then just picking up on Deane’s question about how the quarter played out, as we went into October, did some of that relatively good news from September filter through into October? And how would you describe your confidence levels on the down 3% for 4Q which is obviously in line with 3Q but down 3 for 4Q in light of the possibility of extended holiday shutdowns.

Do you think there is a bias to the upside or the downside the number or based on your visibility today either in backlog or trends you’re seeing today the down 3 feels really good..

Typically where we’ll see this practice and we’ve talked about this in previous years where major OEM customer of ours will decide on either the Thanksgiving or the Christmas holidays to add a couple of days of shutdown. We tended to see that in our vehicle business; we’ve tended to see that in our hydraulics business.

And so we’re starting to hear and we did during the month of October what I’ll call a little bit of rolling thunder in terms of people adding additional days. Normal our experience has been when people start to add a couple, they are going to add a couple more.

And so our 3% is more than we would normally see our fourth quarter revenues come down from the third quarter. We’re trying to be very realistic about in a market that -- in a economy that appears to be slowing and more so, clearly on the industrial side than what I am going to call the retail consumer side that we’ve got to anticipate that.

That’s why we’ve tried to say we’ve got to learn to live within 3% volume down is the most likely case here for the fourth quarter. We’ll know more week by week because these things tend to -- they don’t give you a lot of warning.

But I’d say our history tells us this is likely to be a whole lot closer to the negative 3 than just the flat quarter-to-quarter..

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

Could we get a little more color on just the broad based Asian weakness in electrical? And maybe just what’s going on under the hood in that region; is it starting in China and spread or just anything Sandy that maybe you sort of observed there throughout the quarter that could lead to some conclusion one way or another?.

Maybe a couple of items, John. You’ve heard us say before is that we actually think that manufacturing IP in China is growing much slower than has been stated. Having said that, now you look within it and look what’s going on, most of the infrastructure projects have been pulled back. There is not much manufacturing capacity.

And many people are talking about the construction side -- I’m talking commercial construction that has gotten much slower. We’re not seeing the export; this will be machine tool activity, be particularly strong either and that has to do with the receiving countries, not being that strong.

And last but not least, the corruption investigations that resulted in a lot of practices that are -- let say, it’s causing delay in projects and it’s causing very intense price construction because they’re really trying to sure of price pressures because they’re trying to be sure that there are not reasons that awards are being made at a higher price level, be it for futures quality delivery, none of that is accepted at this point.

So, I’d say China is -- I think you’ve seen it from just about everyone was reported on the industrial side has had a very weak third quarter, and it doesn’t feel like it’s going to be significantly different next quarter.

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

And so I would site those three as the primary reasons where same things be slow in that area..

Sandy, since you’ve been CEO, you’ve seen a couple of U.S. recessions, maybe in 2001 it was little more traditional and 2008 was a credit crisis. And what’s going on now seems to be different still.

If I think about your own forecast of markets down very low single digit next year, it’s not that bad but it also begs the question why is it only not that bad, if we’ve seen the sequential deterioration. I am trying to draw a little bit on your own experience and then the backdrop of what got us to here.

So, it’s really just understand why isn’t next year possibly more like a classical recession that’s down perhaps more analogously to 2001; why things are only holding it down smaller level than might be otherwise the case based on historical precedent?.

I think, John, it’s the great macro that we’re all trying to understand. I think there are a couple of salient reasons why they’re different. We don’t see significant bubbles having been created out of this very long, low grinding growth rates.

The banks are in awfully good shape and a lot of the regulations are ensuring very fulsome capital ratios in that regard. We have not yet seen any form of inflation and the prospect that we could get a couple of quarter point interest rate increases doesn’t feel like the thing that will derail an economic growth at this point.

Europe seems to be mending, albeit on a slow basis and a frustratingly slow basis. India is clearly getting better but it’s not big enough to make a difference worldwide. South America is just a washout, let me just take that and put on the side. So, the issue really gets to be how much more a negative impact does China have upon global growth.

And that’s a hard one to put our fingers on. I would say in addition if you look at some of the other issues that we think are influencing things is very big currency changes. It clearly affected capacity assessment. If you were a person exporting out of U.S. at the beginning of this year versus now, you’re 18% less competitive.

That has caused a lot of people to back up. At some point that capacity appraisal will be made and people decide what they’re going to do. And then the last item which we’ve almost all forgotten about is with natural gas dropped two-three years ago, people speculated on the reindustrialization in United States.

We cautioned at that time that that’s going to take five years because designing these plants and building these plants and putting them into production is a five year cycle. Guess what, end of ‘16 and early ‘17 is when a lot of that starts.

And so there is a phase of construction going to come here in the country that’s going to be of a very large size and that is traditionally an area where Eaton has participated quite well but it’s not quite yet.

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

We’re not going to change the markets but we can get our cost down and we can drive superlative cash flow performance that gives us the ability, both to maintain a strong dividend, buy back shares and invest in the business selectively where it makes sense..

John Inch:.

A:.

We have to watch because we’re in a couple of different lines of this. We’ve got to watch a bunch of different things. But I think the likelihood we’re going to see these commodity businesses change substantially during 2016 is probably pretty low. So you talk about ag and construction and mining et cetera.

So, we’ll be watching industrial investment, industrial capacity, MRO spending. I think those are issues that will help inform all of us as to what’s the nature of this going to be. I suspect that residential and light commercial, non-residential constructions will be relatively steady.

I think it’s going to be more around this industrial side that is going to be the area to watch..

Unfortunately we have run out of time for our question session today. But we’ll be available to answer questions following up the call today. But I want to thank you all for joining us. We appreciate your time. And as I said, we’ll be able to address your follow-up questions afterwards. Thank you..

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference service. You may now disconnect..