Eaton Corporation plc (ETN) Q4 2007 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Eaton Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. [Operator Instructions]. And I would now like to turn the conference over to your host, Mr. Bill Hartman, please go ahead.

Thank you very much and good morning everyone. Welcome to Eaton's fourth quarter 2007 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO; Rick Fearon, Executive Vice President and CFO and it's been our practice, we will begin the day's call with comments from Sandy followed by a question-and-answer session. The information that will be provided on our conference call today will include some forward-looking statements concerning the first quarter of 2008 and full year 2008, net income per share and operating earnings per share on our worldwide markets as well as the relations of these end markets and our growth from acquisition. These statements should be used with caution and are subject to the various risks and uncertainties, many of which are outside of the company's control. Factors that may cause our actual results to differ materially from those in these forward-looking statements are set forth both in today's press release and the related Form 8-K filing. Additional information is also available in today's press release which is located in the corporate news heading on Eaton's homepage at www.eaton.com. And with that preliminary information, I'd like to turn the meeting over to Sandy Cutler. Sandy? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Great, thanks Bill and welcome everyone. Thanks for joining us this morning. We've got two sets of information we would like to review with you this morning, first some highlights of our fourth quarter earnings that we have shared with you in the press release this morning as well as a quick overview on our full year accomplishments, then getting to probably the main event for the day, is our outlook for 2008, both in terms of the economic outlook and our outlook after integrating the two major acquisitions relative to our earnings this year. Turning quickly to the fourth quarter, quarter that came in fairly similarly to what we had expected when we provided guidance at the end of the third quarter. Very solid quarter of operations, $0.09 above the midpoint of our guidance, we think further confirmation that our diversification strategy, both in terms of business mix and international exposure is working well. Record sales for the quarter up some 10%, very strong operating earnings, strong fully diluted earnings as noted in the press release. Segment profits were at new record, at 13.5%. And we think noteworthy as both the balance of those, as we pointed out in the press release as well as the fact that all four segments were over 12%. You'll recall, at the end of the third quarter, we had commented that we had a couple of facilities, which did not yet reach the full productivity levels we had anticipated from some of the Excel 07 statements than we do... our moves. We did achieve the targeted productivity levels in the third quarter and you saw the large pop in earnings in our Fluid Power business that I'll comment in just a moment. Record fourth quarter operating cash flow of $428 million, so the very strong cash flow that you saw in the third quarter continued again in the fourth quarter; continued strong bookings in our Electrical business and our hydraulics businesses. And as we noted in our conference call, that we had, and I believe the 21st of December, we were successful in reaching agreement to acquire The Moeller Group and the Phoenixtec business and very pleased to have them joining us here in 2008. We'll talk a little bit more about that. As we talked about the quarter, we did noted in terms of on the top of the second page of our announcement; we did have a few things that played out a little differently than we've thought. Obviously our tax rate came in lower than we had thought and offset a couple of issues that we alluded to in the press release that I wanted to elaborate on. We are experiencing very strong continued demand, in terms of both bookings and shipments in our Electrical business. We are operating at all time record levels, with all time record backlogs as well going into 2008. And one of the outputs of all that was, in December, we actually ran into some capacity constraints, which are pretty well resolved at this point. But we weren't able to ship all that we had available to get shipped in December and that cost us about $0.05 in the quarter. We also, as we noted, we're in the process of... we were successful in being able to conclude the agreement to buy the two large businesses I just mentioned and in the process of all that due diligence we incurred about another $0.03 of non-capitalizable expenses and so incurred those in the third quarter. We had a ForEx loss of about $0.02. And then for those of you who have looked at our Truck business and have noted the slight fall off in the margins between the third quarter and the fourth quarter, we had a mix change here in North America of a higher mix of vocational vehicles than you normally see in the fourth quarter. That surprised us. We think it's an indication and it's consistent with the fact that OEMs were pulling in the vocational vehicles while there is still continued some weakness in across the highway orders. All of those added up to, as I mentioned, about $0.05 from Electrical, about $0.03 out of the corporate expense area that you saw grow significantly in the fourth quarter and I'll come back and talk about that in more detail. ForEx was about $0.02; the Truck was about $0.06. So if you put that all together and take away the lower tax rate that occurred, that we have provided guidance for, the operating earnings per share would have been about a $1.75. And so we think very handsome operating performance. As I mentioned, the Electrical short term capacity issue is pretty well resolved already as we ended the first quarter. If we think about the individual businesses, just to go through them very quickly. You saw that we had very solid margin performance across each of these segments. And I think it's notable when you look at the Electrical business at 13%. When you look at the Fluid Power business at 13.7%, when you see the Truck business at some 15%; and the Auto business performing well up over 12%, at 12.6%, a quite strong performance at this time and are pleased that we are exiting the year on a very strong basis. If I turn to 2008 and try to give you a sense that to our thinking and clearly it's on everyone's mind trying to understand the economic outlook. Clearly, this morning's news from the Fed that was not something we anticipated would be announced today. But to the question, that does this change our economic outlook? No, it doesn't, because as you recall, in our discussion of the prospective economics, economic outlook for 2008, it had been our anticipation that we would see the year start on a very weak basis and I recall, we started to talk about this in the early fall. And our own forecast has been that you would actually see a decrease in manufacturing industrial production in the first quarter of the year; and that's still our forecast. And we think that will be somewhere between 1% and 2%, as the decrease. We obviously probably came out of the first quarter... fourth quarter numbers were negative as well. And you'll recall, in the early fall we said that we anticipated that we would see this fairly rapid slowdown into the fourth quarter of the industrial side of the economy that would carryover into the first quarter. Then it wouldn't be until the second quarter that we started to see a positive growth in terms of manufacturing industrial production. While we think this large 75 basis point reduction does, is that it simply reinforces the likelihood of a positive growth, starting in the second quarter and more specifically in the third quarter and fourth quarter this year. So no large revision, clearly things have gotten a little bit more shaken in financial markets over the last several weeks and we are hopeful that today's announcement provides us a little more sense of calm, if we look at how that may affect these markets, particularly in the U.S. As we think about our own markets for 2008, we've tried to provide you some additional guidance in terms of our markets both in the U.S. and then those markets really outside of the U.S. and you saw in the press release that our look at market growth is that we'll see about 2% to 3% growth here in North America. We'll see about 5... excuse me in the U.S. and about 5 to 6 points outside of the U.S. Now more specifically, when you think about our lines of business, our Electrical business, we would expect to see the business grow on the order of about 4% in the U.S. and about 6% outside of the U.S. And for those of you who are interested in our view on the non-residential construction market. Our own thinking is there, is that's probably on the order of 6%. I know that you have a lot questions about non-residential construction, let me anticipate...

[Operator Instructions].

Are we back on line Rose? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Back on line?

Yes. You are back on line, go ahead.

Thank you. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Let me back up, so that I understand, we just lost our line and be sure that they haven't missed a piece here. Our apologies, as I repeat a little bit here. Our economic forecast for the U.S. is for the Eaton's end markets 2 to 3 points and our non-U.S. end market growth is estimated to about 5 to 6 points. And you'll recall from what we had shared with you in our December 21st conference call, our expectation is that once we close the acquisitions, of Phoenixtec and Moeller, about 55% of our balance will be outside of the U.S. So if you think about those two pieces, that's the appropriate weighting. In our Electrical business, as I was mentioning, we expect growth here in North America... in the U.S of about 4%; in the non-U.S markets, about 6%. And probably the key number in terms of understanding our U.S. forecast on the non-residential side is that, we believe it will be about 6%. Remember, we were entering the year with very, very strong backlogs and we've continued to book quite strongly in November and December as well. We are continuing to see great strength in core activity in the longer cycle segments, a great example of that obviously is oil and gas. We have not yet seen weakness in the large commercial construction activity, but we would anticipate, if weakness does come, that's where we'll begin to show first emphasize; we are not seeing that weakness at this time. On the residential side, while our marketplace... our wire estimate side that we see a 25% to 30% further drop in housing starts. Remember that the renovation piece of our business and generally in the electrical industry is about 60% of our residential business. And that business is less than 10% of that U.S. business today. And power quality continues to grow very strongly, kind of 8% type plus numbers through here. On the Aerospace business and you'll recall this as the first quarter... in the first quarter, that we will be breaking out our results within the new segments. And so we will have an Electrical segment, an Aerospace segment, a Hydraulic segment, a Truck segment and an Automotive segment. And the Aerospace business, our anticipation is that we'll see 6% growth with about 5% in the U.S. and about 7% outside of the U.S. In the hydraulics market, we are anticipating no growth in the U.S. markets in this coming year of 2008; and about 3% outside of the U.S. And the critical illness, I think for those of you who have been following that market carefully there is that we actually think construction equipment will not have positive growth in the U.S for this year. We think it will actually contract modestly, while the agricultural markets are clearly are stronger. But remember that the agricultural markets are on the order of a one-third the size of the construction market. On the truck markets, we are anticipating 8% growth, really on a worldwide basis. It's really anchored by the strength, we believe, that will come with the beginning of the comeback here in the NAFTA heavy-duty market where we are forecasting a 240,000 unit market this year. Clearly, it will be back end loaded. We've shared with you before, our view that that market needs to be running at about a 300,000 rate exiting the year. But the first quarter is likely to look a lot like the fourth quarter. Yes, we are encouraged by the three successive months of 20,000 roughly units of incoming booking for the industry, in terms of heavy-duty trucks. But we got to continue to see that here through the first quarter and then have it pick up going in to the second quarter. On the Automotive business, pretty flat worldwide growth with sort of a negative 3% look here in the U.S. and a positive 3% around the world, in terms of growth and that's what leads to our forecast of 2% to 3% growth for Eaton's end markets in the U.S., anchored by the high number there being the truck number and then in the non-U.S area 5% to 6% growth, overall, about a 4% growth for Eaton in the coming year. We would anticipate that we will out grow those end markets by about $275 million and that 4% growth gets you on the order of about $500 million, in terms of actual activity this year. Many of you have asked as we have moved through the year of 2007, would we expect to have any incremental benefits from our Excel 07 program which has gone so well here during 2006 and 2007. And we are at a point now where we can share a little bit more of a view on that. And our expectation is there will be about $35 million of incremental savings and net of cost and savings in 2008 over 2007, so obviously, good news in that respect. That leads us to our guidance, and I am going to take you through a little bit of a simplified way of thinking about our guidance this year. You've seen the fully diluted guidance of $7.25 to $7.75 with a midpoint of $7.50; the operating EPS guidance was $7.75 to $8.25, with an $8 midpoint. And for those of you who are trying to compare that $8 midpoint to our $6.90 and seeing if there was an increase of roughly 16%, in comparing that to what we said in our December 21st call, where we talked about an earnings increase in operating earnings per share on the order of 15 to 20, this really is the same guidance for 2008. What it reflects is that instead of finishing the year at $6.85, we finished the year at $6.90. That's the difference, if we had been at the $6.85, we would have been at exactly the midpoint of the 15% to the 20%. So no change in our 2008 outlook, in spite of the fact that the markets, our overall forecast, we weakened by about a point. Now, I'll detail those items that allowed us to obviously recover part of that earnings that we wouldn't have had if we had simply had to lower one point of sales and no recovery, part of that is the higher Excel savings, part of that is a lower anticipated tax rate for next year. So as we start to kind of reconciliation for 2008 versus 2007, obviously we start with a 4% market growth. We would expect to outgrow that by... as I mentioned, by about 50... about $275 million. So you get four points to growth from end market growth. You get two points from out growing it. We then would expect to get about two points from additional ForEx impact. And then from acquisitions, it's about 17 points, or about $2.2 billion. That's how you get up to the 25% increase on overall revenues. Now when you think about moving that into income, the quick way to think about this is that our 2007 actual operating EPS was on the order of $6.90, the market in outgrowth had roughly a 32% margin, would produce about a $1.40 in incremental earnings. The acquisitions and these are all the acquisitions that we concluded last year, plus our expectation of the closing of the Moeller and Phoenixtec acquisitions this year would add about a $1.85. The Excel 07 number I shared with you just a moment ago adds about $0.20. The currency impact of that roughly $250 million will come from incremental revenues by currency this year is about $0.15 of earnings. Lower pension costs, which are slightly larger in terms of a beneficial number than we have quoted to you earlier this year, about $0.25. And then you would have to take out of your estimates, the fact that we did have a contribution to our Charitable Foundation in 2007 that was worth $0.09, if you recall, and that would not reoccur next year. So that total of the pluses is about $3.94. Now there are several negatives that offset that, the first is a higher tax rate, and we'll talk a little bit more about that in a minute. That impacts the earnings by about $0.60. There are the acquisition intangibles and the purchase price accounting adjustments for inventory that are about $0.65. That's obviously related to the many acquisitions that we completed last year. And then the two that we expect to close here quite shortly. The elimination of the contribution from discontinued operations in 2007, that's $0.24, that's an actual. Higher medical and LIFO expense that we are expecting in 2008 over 2007. That's about $0.30. And then the total of the increase in interest expense, share increase from expected financing from our larger... from these large acquisitions and other corporate expenses that we are putting in place as we obviously are growing in many regions of the world that we have not been as large and before, a negative of about $1.05. So you have a total of about a negative grouping there of $2.84 offsetting the positives of $3.94. When you net those two on top of the $6.90, you get to the midpoint of our operating earnings per share of about $8. Now for those of you who have been taking those numbers are trying to understand, kind of a view of our acquisitions. I think the quickest explanation we can give you for those, is to take that $1.85, that I referred to of the increased operating earnings per share that comes from all these acquisitions, deduct from it, the 65% of the acquisition intangibles so the purchase price accounting inventory adjustments and then deduct from that, a portion, the great majority of the increased interest expense, share increases and other corporate expenses, and you'll see that there is a net of about $0.15. Now you'll recall that in our December 21st call we indicated that we expected Moeller and Phoenixtec to be non-dilutive to earnings. So what you are seeing come through here is really the benefits of the other acquisitions that we did during 2007. And we still expect that Moeller and Phoenixtec will be non-dilutive to earnings, but not accretive either, this year. The accretion occurs in 2009. So, that's a quick overview and I might just spend a moment talking about the operating segments, because they are slightly different this year, as I mentioned earlier, that we will now have five reporting segments starting in the first quarter. Let me start with our Electrical business, our largest business. This business, we would expect to have profitability this year on the order of 13% to 14% return on sales. Our Fluid Power segment is being divided now into two reporting segments. Our Aerospace segment, which is a business that will be approximately $1.8 billion in 2008, then we would expect to have operating margins in that 17% to 18% range. Our Hydraulics and Other segment, which would be about a $2.5 billion to $2.6 billion business in 2008 and we would expect to have margins in the 12.5% to 13.5% range. Our Truck business, obviously the same segment you've seen before and with the increased volumes that we would expect this year, we would expect Truck to be operating in that 17.5% to 18.5% range. In our Automotive business, which now contains our traditional Automotive segment plus the Automotive business, the Fluid Connector business, which historically, was in our Fluid Power segment, you'll recall that was a little less than 10% of that segment. And we would expect return on sales for that new combined business to be on the order of about 10%. If I can now turn to the balance sheet, in terms of... hopefully that gives you a good feel for our outlook in not only the markets, but how our revenues and our profitability would correspond to them. We would expect our share count on the balance sheet to be at about 150 million shares prior to any equity issuance for these acquisitions. Working capital, we would expect to see about a day improvement in inventory and receivables each this year. As you saw in the press release, we are planning... we have announced an increase in our quarterly dividend rate, effective in the first quarter from $0.43 to $0.50. And we would expect our operating cash flow to be on the order of free cash flow... excuse me, in the order of $1.25 billion to $1.35 billion and cash from operation about $1.8 billion to about $1.9 billion. Hopefully, that will provide you a good feel for some of the book ends of our outlook this year. I might just comment on the fact that we have a $0.50 range in terms of our guidance this year. That is a little broader than we've had historically. And really, three reasons for that, it still is only about a 6% range, top to bottom, but we feel in light of what's been going on in terms of the worldwide economics, there is a little bit more uncertainty, although we feel quite comfortable with our own forecast. We obviously have larger acquisition closing and integration tasks ahead of us for these two major acquisitions. And then third, the question of our financing plans and both the timings and how we affect them, I would share with you that we would expect that the Phoenixtec acquisition which we've closed earlier in the first quarter, would be financed from cash. We would now expect the Moeller acquisition to close at the end of the first quarter. And with that timing, we are not facing any near term need for financing actions at this time. So with that, Bill will close the comments. And we'll open up for questions.

Great. We would like to proceed folks to our Q&A portion of the session. So, if we could get that underway, that would be great. Question And Answer

[Operator Instructions].

You're all fast. First up on the list is Jamie Cook. Good morning Jamie.

Hi. Good morning and congratulations. I guess my first question Sandy, thank you for the... you gave us some margins what you expected, I guess in the Fluid Power, in the Aerospace division as you'll break it out that way now. But I guess one what you mentioned in your press release you expect to see an improvement in margins. How much of an improvement is that off of 2007 I guess, what's driving that. Is that the Excel 07 savings that you talked about in the release? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, I think Jamie this helps you kind of translate year-to-year, if you were to combine those two groups, they were breaking out, you're talking about margins that you have kind of 12% to 15% weighted average of those two. And so you are seeing a couple of things happen there. Clearly, Excel 07, which we had called out on the third quarter, that we had some challenges in terms of not hitting some of the run rates we wanted. You saw those largely resolved on the fourth quarter with the 13.7% operating margin there. So Excel 07 is one piece. We've got a number of new product launches this year that have been quite successful. And we would expect year-to-year operating improvements. I'd say those are the big items that would really make the difference.

Okay. And then I just guess my next question in your outlook, you talked about I think was $0.05 or so that you lost because of the capacity constraints on the electrical equipment side. We don't... I am assuming that it sort of goes into the first quarter? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, it is.

We are not loosing that? Alexander M. Cutler - Chairman and Chief Executive Officer; President: No that's exactly right. Those are orders that are in house, that we just simply couldn't get out the door at the end of the year. And for those of you who have been around the Electrical industry you know that the end of the year can be a time period when everybody wants things shift right on the very left, say at the year end. So this was a string of issues from not being able to get final inspectors in to supply issues that no one item. And we are pretty well convinced, they are cleared at this point.

And then Sandy, it just gets, my last question, as you look at the quarter was there any material change as you look at the months of October, November and December in terms of a fundamental change in outlook, because I guess for a lot of us the ISM numbers we got in December were pretty concerning. So I am wondering if you saw anything like what we... the drop off we saw on ISM in December, did you see that in any of your... in your numbers in the fourth quarter? Alexander M. Cutler - Chairman and Chief Executive Officer; President: It's a great question Jamie. It's the issue I think we are all trying to put our thumb on right now is, how long is anyone's visibility in the business and what are we seeing at those kind of outer edges of the visibility at this point. I would say clearly on the long cycle type businesses and each of our businesses almost no impact. And anybody serving oil and gas from the alternative energy areas, those are continuing to be... and Aerospace was a great example of that as well. I would say that the only area that I would point to immediately would be the residential area, which again is less than 10% of our Electrical business. An area where there seem to be very hard time finding a bottom. And I think that's been seen across the economy so it is continued to weaken where as if we've been back a year ago we might have expected it would have been starting to turn at this point. But I would say not substantive [ph] change between October, November, December. December is normally a weaker month. We had big bookings in our Electrical business in December again, and we're starting out quite well again this year. So, to kind of give you a feel for a range any of this flow business which would be in our Hydraulics business, be in our filtration activities or be it in our Electrical business. We've got that's kind of a month to two months type feel for what's out ahead of you any other project stuff goes out significantly longer, but no we've not seen a material change in the flow or the project business.

Thank you, I'll get back in queue.

Next we have Andy Casey. Good morning Andy.

Good morning Bill, good morning everybody. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Good morning.

Hi.

Question first on the quarter. Can you describe within Truck, what you saw in terms of replacement demand trends year-over-year? Alexander M. Cutler - Chairman and Chief Executive Officer; President: I don't know I can get it as precise as replacement Andy, but I... what we believe we're seeing is that you know these figures well. So we've seen three months in a row now and this is North American heavy-duty of about 20,000 units. Give or take couple of hundred units in each month. That's encouraging to us, because obviously that would support a 240 rate. We've also seen, there has been some pick up in the fleet transmission side, which is prospectively good news. And three months is not yet a year, because that means that there are some fleets buying, its not just individual operators buying at this point. We do still think demand is below replacement at this point. The good news is what we've seen as an inventory has begun a finished structure out there has reduced very significantly during the fourth quarter. Now I don't want to say that means we are going to see a big robust first quarter. We still think there is at least another quarter of adjustment to go on. And so, that we think the first quarter is very likely to look much like the fourth quarter and indeed you still think pretty weak production schedules. So, we wouldn't really expect to see production schedules picking up until we get into the second quarter and that would be on a fairly modest basis, the bigger increases would be third and fourth quarter.

Okay. When you look out at your forecast for '08, specifically again truck viewing that kind of an early capital cycle, I guess for the U.S. What are you seeing in terms of the order board and the placement of those 20,000 per month over the last three months? Is it first quarter? Or is it basically spread throughout the year? Alexander M. Cutler - Chairman and Chief Executive Officer; President: It fills in from the back forward Andy. It's the same way it was the same last time around. And so if you talk to many of our customers, you'll feel they are still concerned about the first quarter and early part of the second quarter, and so the slots everybody wants right now are December of 2008 and so those will fill and then it will come in this way. That's not 100% true, but we think that's generally the kind of tenure at this point. So, the harder slots to get filled are earlier in the year.

Okay. Thank you very much. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Surely.

Next we have Ann Duignan. Good morning Ann.

Hi guys. Good morning. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Good morning.

Good morning.

Just a quick follow up on the Electrical equipment business that cost to five-tenths [ph] in earnings. Was that known on December 20th when you gave us your initial guidance, because my real question is why we wouldn't we have taken up the midpoint to $8.05 versus kind of $8 number we were talking about on December 20th? Alexander M. Cutler - Chairman and Chief Executive Officer; President: I am not sure, I'm totally following your question, Ann, but I'd say let me answer the way I think I am understanding it. Our guidance is still the $8. We were starting to struggle with those issues as we get into the end of the year in terms of we can see whether inspectors are getting in our... excuse me materials getting in. But we didn't have 100% view on how everything was going to come out over the last 10 days of the month.

So, you didn't take up your late guidance by the $0.05 at that point? Alexander M. Cutler - Chairman and Chief Executive Officer; President: We just didn't know which way it was going to drop.

Okay. Alexander M. Cutler - Chairman and Chief Executive Officer; President: That literally a lot of this comes down to the last couple of days of the year whether you can get all the products shipped or not.

Okay. And then on Fluid Power, your return on sales are lower than your... one of your competitors. What do you think you can get those margins to or return on sales to, as a result of Excel 07 and over the longer terms and/or is it just a mixed difference and kind of really closes the gap? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Well, I think and you know comparing lots of companies you obviously have to be sure everybody puts things on the same light items, two or three and I can't really comment on how people may account for segment versus corporate expenses. But we have been making pretty consistent progress in both these businesses, the Aerospace and the Hydraulics business. Clearly, the Aerospace business is a very profitable business, has handsome returns and I think you can make that comparison the other way around there. The Hydraulics business, we think at 12.5% to 13.5%, has been showing pretty steady progress and we hope we'll be able to show you all this information here sooner or rather than later as we re-pass these segments and provide that historical information to you. So, I wouldn't put a number on it yet. We're breaking it out by itself. At this point we are trying to provide some visibility around it but I would expect to continue to see some improvement over the next couple of years. But we're not prepared to put a target number out there at this point.

Okay. And just one final, real quick. Did you give us a tax rate for 2008? Did I miss that? Alexander M. Cutler - Chairman and Chief Executive Officer; President: I think I may have not mentioned it. Rick, you want to mention it.

Yes, Ann, it's Rick. Expected tax rate for 2008 of 15% to 16%. Alexander M. Cutler - Chairman and Chief Executive Officer; President: That's down one point from what we have told you before.

Down a point from our prior guidance and that really reflects the fact that we are seeing higher income in foreign locations and of course, that's tends to drive the rate down. And then in the first quarter we think the rate will be even lower than that probably, in the range of 14% to 15% and of course, the reason it will be lower is that the truck market, we do not expect to rebound in Q1 and the truck market is North American income, which tends to raise the rate. And also, we don't expect to close Moeller until really right at the end of the first quarter and Moeller comes into Eaton with a much higher tax rate than we have a rate that's over 20%. And so that's why we think that Q1 will have a low rate and in the ensuing quarters will be slightly above the average.

Okay. That's good color. Thank you. I appreciate it. I'll get back in line. Thanks.

Next we have Steve Volkmann. You there, Steve.

Hi. I'm here. Good morning.

Good morning, Steve. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Hello.

Just a sort of a question Sandy and maybe you have given us what you have already here, but I understand why Truck might sort of accelerate for 2008. But the rest of your business is its a little kind of intuitive and yet we have, sort of flattish to slightly up first quarter and then pretty strong growth, sort of backing in to the rest of the year. Is this just kind of a view that rate cut overtime will help? Or is there something specific that you, kind of, pointing to that would give you an acceleration as we go through the year? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, I'd say a couple of items, Steve. Number one, the general economic outlook we've had for sometime and we still believe that's right is that what you'll see is the weakest part of this year will be early and so that we had expected that even before the 75 basis point cut that you'd see the second quarter began to improve and then third and fourth be stronger. So, you got that general tenure moving through many of our businesses. Truck is the one that has got the steepest... heavy-duty truck has got the steepest accent within it. We obviously bring in and we're bringing in, remember we had nine, some other acquisitions reported big two that we announced in December daily and obviously growing, get more profitable as the year goes on. And then we are going to be adding Moeller and Phoenixtec later in the year. But the biggest issue is really in and around our general view on the economy then if you correctly noted supplemented by the truck, heavy-duty truck cycles in North America. It don't... we're operating at strong levels in Aerospace. We've got programs that are picking up there but the ramp is not as deep as it is in the Truck business.

Okay. And then just to follow up, if I may. I think you just said your Aerospace margins are doing well, but we are seeing some other folks who are kind of shifting to OEM in terms of their mix. So there is some higher product development costs on the front end to some of these projects and so forth. Should we expect that margin to come down with that type of shift? Or is there something different going around with your business? Alexander M. Cutler - Chairman and Chief Executive Officer; President: No, this has like the shift in it and I think, we've talked about over the last couple of years and you are correctly noting, I think, the several different factors in this business. You always have the OEM versus the aftermarket mix. You have the military versus a commercial mix, but then importantly and an item that I think many people perhaps didn't appreciate in and around the Aerospace business that weren't watching it all the time. There is one that's load of R&D, new project launch gets heavier. It obviously has higher costs for the supplier and that's been going on for several years here. And so I think if you see individual companies like ourselves enter major businesses, major new contracts and development programs, there is always that issue of how much R&D is upfront. We've been through a very big bubble that's the last couple of years. So whether it was the A380 or was Joint Strike Fighter, but it's now the 787 or the Eurocopter and the new helicopter that we've announced or the very light jets. We've been in the midst of this for some time periods. This does include it.

Sorry. Does that mean its actually fading, if you've been in this bubble for a while or...? Alexander M. Cutler - Chairman and Chief Executive Officer; President: No, just we've been successfully adding new programs as well. Though we don't foresee at this point, save some major problem on a contract which we don't see at this point but it's going to impact these margins materially.

Got it. Thanks a lot.

Next in line is Bob Lagaipa. Bob. Robert Lagaipa - Oppenheimer & Co.: Couple of questions. I guess one; I just want to start off with a clarification. The margin forecast for the segments, just remind me, those are before restructuring costs, acquisition restructuring costs? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, they are before acquisition restructuring costs. That's correct. Robert Lagaipa - Oppenheimer & Co.: And the follow-up to that is what's your expectation for acquisition restructuring in 2008? And what do you expect the distribution to be overtime, because that's obviously is a factor arrive with the operating earnings number. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, we've... for 2008, hold on one second, I think the number is a $125 million.

It's a $125 million. And Bob, it follows the... obviously where we do our acquisition. So, the preponderance of the dollars will be in Fluid Power principally, Aerospace because that's where we've had those acquisitions. And then Electrical, where... of course, you have MGE. You have Phoenixtec and you have Moeller. So, those will be where the majority of those dollars are in '08 and given that that's where we expect to be doing the majority of our acquisitions overtime you should probably expect that that's where you will be seeing more of the acquisition integration costs. Robert Lagaipa - Oppenheimer & Co.: And is that $125 million, do you expect that to scale up, of course over the course of the year, especially once Moeller closes? In other words, starts out at a fairly low number, relatively speaking and then ramps up over the course of 2008? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, that's the fair expectation. Honestly, you don't have any significant costs, acquisition integration costs related the P-tech or Moeller in Q1 and those costs will begin to scale up. There will be some in Q2 and they'll rise as you get into Q3 and Q4. Robert Lagaipa - Oppenheimer & Co.: Of course. And this is a net number, the $125 million. Alexander M. Cutler - Chairman and Chief Executive Officer; President: When you say net... those are the expenses incurred in order to, whether they'd be plant related issues or whether they'd be related to the expenses of the integration team. So, those are the total expenses that we are going to incur. Robert Lagaipa - Oppenheimer & Co.: What do you expect on the net number to be of tax? Alexander M. Cutler - Chairman and Chief Executive Officer; President: When you say net-net of the additional benefit? Robert Lagaipa - Oppenheimer & Co.: No, the $125 million, I mean, obviously as the gross number of pre-tax affect that. I mean, what do you expecting, because I don't know what tax rate you're using. Alexander M. Cutler - Chairman and Chief Executive Officer; President: I mean, typically if you look at it on the margin you would use a marginal type tax rate of around 35%, I mean, that's probably the way to think about it. Robert Lagaipa - Oppenheimer & Co.: Okay. Terrific. And last question if I could. Things related to the financing of Moeller, I mean, is there any update in terms of what you are expecting there, obviously that's not built into the share count at this point. You might be using equity. Is there an update to that in terms of the line of thinking? Alexander M. Cutler - Chairman and Chief Executive Officer; President: It's... given that Moeller is not likely to close now until the end of March, a little over two months from now, and given the volatility and markets, clearly we haven't settled upon a final financing structure. One of the reasons we use the $0.50 range is reflective of the fact that there are variety of financing structures we might employ. Some would involve more shares, some would involve more debt and there might even be some hybrid type structures, depending upon how the markets settle out over the next couple of months. So, the way to think about it, and that's the way we think about it is you have to look at a variety of scenarios and you can't really say I'm sure, I'm going to go on one specific scenario, because there are too many variables right now. Robert Lagaipa - Oppenheimer & Co.: Right. Terrific. Thanks very much. That's helpful.

Next we have David Raso. Good morning David.

Good morning. A couple of quick questions. First, not to mistake but just trying to understand the guidance and any change in your thinking. Previously you had a midpoint for '07, of $6.80 as per the third quarter release. So, if you look at 15% to 20% on that and before you were thinking $7.83 to $8.16, and the range you gave this time is actually wider above $8.25, but given the macro issues right now, it's interesting that you have $7.75 at the low end. And then the tax rate you suddenly just mentioned, it's a 100 bps lower than you previously thought, and that's $0.10 right there. So, I'm trying to understand the comment you made in the release about maintaining our Truck forecast at $2.40. I don't recall that the $2.40. I mean we used to say $2.65 having come down from $2.75. Is that really the difference, the truck number came down and the tax rate is somewhat a bit offset? Alexander M. Cutler - Chairman and Chief Executive Officer; President: I think David, if you take the market forecast in total. The market forecast in total was 5% and we lowered it to 4%. And so that market difference, let's say, you take that the first change. Second change was the tax rate, you correctly noted is down by 1 point, and so that's a partial offset to the overall and there are a lot of pieces within that 4%. You wouldn't be able to peg it simply to just truck per se. We were able to offset the negatives by the lower tax rate, the pension costs decrease which is larger than what we had thought before. So, it's more on the order of about 45 million and 25 million. We'd, probably we get incremental year-to-year reduction... or excuse me benefits from Excel 07. We had not commented on them publicly, but we had thought we would get them. And so the big three items that kind of interrelated if you will, in terms of the guidance was the one point lower overall market, the one point better taxes and then about $20 million of better pension than we had thought. And then as you've noted, the denominator of that comparison year-to-year was impacted by the fact that the denominator for 2007 ended up being better than we have thought back at that time period.

And the end market change. I assume, truck had something to do with that as well. But also Auto. When I blend together the Fluid connector business into your Auto, I suspect you are kind of apples-to-apples, your margins in Auto in '07 were about 11.5 to 12. Assuming that Fluid business, I know its losing money a couple of years ago but I assume it's now back to at least mid single. So, to guide Auto the new way it's been figured, see 10% margins in '08? It's a pretty healthy degradation in the margin and you've... have done a pretty good job holding the margins up. Can you flush out why you see the Auto margins getting hit over 150 basis points, if I'm doing my math correctly? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Think about, I guess, a couple of items. One, there is the change that we've moved the business in there. So, you have a business that was not as profitable as our base business. But also forecasting that the U.S. marketplace for automotive demand... our production will be down 3% in 2008 over 2007, and for those of you who have followed that industry relatively closely you know it's starting off quite weakly this year. There were some inventory accumulations at the end of the year. With fuel prices like they have been, we also believe you are going to continue to see pressure on the... some of the larger vehicles now. We were surprised during 2007 that we did not see a substantial movement in terms of an increase of passenger cars as a percentage of the total versus the CUV, SUV and light truck. But we still believe that's going to happen and even though we're seeing some oil weakness there, we think the general trend is more expensive fuel and that's going to put more pressure there.

Great. So essentially, kind of back into the idea of the revenues. The base of the mix domestic occurs off the volumes down domestic. I mean the pressure is down over the years. Your international auto margins are really not terribly different now than North America. And international business isn't much smaller than North America, its not maybe a little bigger now. Alexander M. Cutler - Chairman and Chief Executive Officer; President: No, that would be a correct type prophecies [ph].

It's just the mix. It's the idea of the... Alexander M. Cutler - Chairman and Chief Executive Officer; President: Bigger mix this year. Yes.

Okay. Thank you very much. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Certainly.

Next we have Andrew Obin. Good morning, Andrew.

Good morning. Just a question. Looking at your SG&A expense and I know you have given some explanation as to what happened in the quarter, but I am just looking, it seems that sequentially it's up close to $50 million and it's also up $40 million - $50 million versus my forecast. Could you give me granularity as to why SG&A expense increased that much and not in sense but maybe you can do it in an absolute dollars for the quarter. I apologize if I missed it. Alexander M. Cutler - Chairman and Chief Executive Officer; President: I think Andrew you are really trying to holding on the corporate expense number. I think, if looking at the income statement. There was a fairly large increase year-to-year here in the fourth quarter. I would step back and say instead of simply looking at the fourth quarter though, I think we ought to talk just a moment about corporate expense that in the context of the size of our company, which has grown fairly substantially and will grow next year and so that seeing the kind of percentage if you calculate it as a percentage of our revenue, we think its very appropriate and very consistent with what its been over the last several years as well. Having said that, in the fourth quarter we got a number of items that have caused some increases there and part of that is, we got some pension increase that's in there. We've got some purchase, some accounting that has to do with acquisitions as well. We got higher cost taken as we were working to try to nail down these two acquisitions quite a bit, I mentioned that upfront, quite a bit of travel of our due diligence teams trying to get these deals pulled together and then we had some gains last year and then within that net of that number and so, if you put that all together, that's really what drove the higher expense in this quarter.

Could you quantify the 4Q pension increase relative to decline in '08? Alexander M. Cutler - Chairman and Chief Executive Officer; President: I guess, you are looking at the increase quarter-over-quarter. The $9 million increase that... it really, the reason is, it depends on the calculation of pension expense and that's the weighted average of the assets and the plan because you've got now to the end of '07, you drop off, a relatively lack luster year and so you are calculating it based on a higher asset value and you're calculated on a higher discount rate as well, and so all of those changes then come into effect in 2008 and that's what causes the expense to start dropping in '08.

So, how much discretion did you have in bulging [ph] expense and for the fourth quarter versus your expectation for '08? How much discretion was there between having that expense in '07 versus '08? Alexander M. Cutler - Chairman and Chief Executive Officer; President: It's a calculated number, there is not any discretion.

So you are outside actually [ph] tell you the number? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes.

Okay. And the second just to follow-up on Dave's question. Just going and I know you sort of said there are a lot of puts and takes, but if you had to take the top three reasons for lower growth rate, 4% versus 5% we'll be talking at the end of December. I mean where no truck has won but one outflow there is just the really big things? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Well, I think, I know this may not be totally satisfactory for you. There are so many factors involved in our forecast. I guess I'd have to sit back and go through all the various different variables. We have a lot of subsets that are underneath each of these. I think, generally what we've just felt is that with all its going on over the last several months and the concerns about markets and the kind of overhang of what I call more or less psychological pressure on markets. And what we've seen actually materialize, we felt that was appropriate to lower growth in the U.S. Having said that the great benefit we have is that that we are being butcherers [ph] by the fact that we've got an increasing percentage of our business outside of the U.S. at this point and that's allowed us to, when you look at this target guidance for the U.S. growth rate of 2% to 3% to offset that obviously with over half of our business now being in environment that look to have what we think will be about a 5% to 6% growth rate.

Am I correct in assuming that you did not change your outlook for European growth? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Well, I have to go back to everyone of these sub pieces as well and when you talk European, I think it's important to keep in mind again, when we talk about that region we don't talk simply about Western Europe, we also talk about Eastern Europe and that does include Russia as well. And so, I think there is an over weighting off and when people talk about Europe they are thinking just about the Western countries and we see some pretty robust growth continuing particularly on the East side of that and then up in the Nordic countries as well.

I mean, is it fair to say once you incorporated Eastern Europe and Nordic countries, it's still pretty inline with what you thought at the end of the third quarter? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, I'd say it's inline with what we were working on in the fourth quarter, because that obviously was part of the basis for why we acquired the Moeller companies. So, we'd spend quite a lot of time in trying to get an updated view of what was happening in each of those economies.

Thank you very much.

Next we have Jeff Hammond. You are here, Jeff.

Hi. Sandy, just a quick clarification on Auto. Could you just try to frame what the margins would have been in '07, for Auto with Fluid connectors just for comparison? Alexander M. Cutler - Chairman and Chief Executive Officer; President: No. Jeff, we wouldn't do that now, because we are going to issue all that data here and I wouldn't want to make an estimate before it's all finalized. We'll be trying to get that data here to you this winter in terms of the new segment. So that will be for each of the segments that have been reconfigured.

I mean is it fair to say that the margins year-on-year on a comparable basis will be down now in Auto? Alexander M. Cutler - Chairman and Chief Executive Officer; President: The whole, the new segment that put together. I think I guess I would want to reserve till we go back and look at the pieces and put them together that way, but I think we are seeing some pressure in the North American markets with the volume backing up, and then I guess the second question is we believe there is going to continue to be a mixed change though. So, I would guess all things being equal those two lead to slightly less, a less robust profit forecast.

Okay. And then just... on discontinued ops, you had some income in discontinued ops in the fourth quarter. Is that a new business that you own, that you moved into discontinued ops, or does that carry over from mere controls? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, that's just the finalization of the prior transactions principally nero [ph] controls and relates to obviously when you sell a business, you make various estimates about how certain contingencies are going to resolve themselves and they resolve themselves more favorably than we had anticipated.

Okay. Thanks guys.

Next we have Terry Darling. Good morning Terry.

Thanks good morning. Sandy, I am wondering if you could talk about how the outgrowth by segment might look differently in '08 versus '07? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, I think the majority and if we think about the business and I think the best way to kind of approach this is to think about what the company is going to look like in terms of percentage of revenues and with the biggest portion of this over $2 billion of acquisitions and we are adding, dropping into the Electrical business, obviously that becomes our largest business. And so when we think about $275 million of outgrowth, the great preponderance of it are to go towards the Electrical business, then followed with performance in our Aerospace and Aerospace Hydraulics and Truck businesses. We would not forecast a lot of the outgrowth in the Automotive business.

And on truck side? Alexander M. Cutler - Chairman and Chief Executive Officer; President: I would include truck that in that second category of both Aerospace, Truck and Hydraulics. You could expect over... above market growth in there as well. But the bigger dollars will be up in Electrical area, we think.

Okay. And you don't see any one of those four really being stronger in '08 or weaker in '08 versus '07. You see that all pretty symmetrical? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, not... in terms of our competitive positioning. No, I don't but again just because of the size of the business, more of the dollars will be up in the Electrical part.

Okay. And then so you come back to the longer term outlook for non-res, I think you were indicating 6% in 2008 is your expectation. Can you talk about second half versus first half? Do you see that slowing in the second half and as you look out to 2009, given what we have going on in the credit markets, do you see some potential for non-res U.S. to decline in 2009? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, I think we clearly see the rate of those declining and we all know the numbers. We have come off a couple of years of double-digit growth. We are up at very high level. So, 6% growth on top of that is you are up in awfully attractive areas. We are seeing a little bit of a hand-off, what I'd call segments within it and if you all have seen the data, all the segments are kind of 6% to 7% of piece. There is no one in there that is 50% of the total non-res by activity and where we have expected to see the weakness is we expected to see it come out of retailing, come out of the small strip stores, and some of the large chains. It hasn't got terribly weak there. We would expect it would and the we think that there is the opportunity for continued real strength in some of the longer cycle starts and we are seeing great strength right now in the medical area, a lot of institutional and educational. I mentioned, oil and gas being an area where it's just very busy right now. And I wouldn't anticipate you are going to see those weaken in the next year or two, but I think where people are concerned is kind of lodging the call, the office building in some of the major metros and whether employment problems start to bring those into some risks and generally they do. I mean that's what history tells us but we think that provides for very strong growth again and I call it 6% strong growth here in 2008. We think that will carryover. Now history will tell us that you don't tend to see 10-year booms in commercial construction. So, by the time you get out into the end of this year and early next year, I think we'll be seeing that growth starting to trim down at the time that our Aerospace growth will really begin to take off, not to use a better analysis here but its just because the fact that you have got many of these new programs, 787, really coming into its big burst of shipments and then also having the Joint Strike Fighter, which we're very well positioned on, comes into big production in the sort of 9, 10, 11 timeframe.

I think, pretty early in '07 you had sort of talked about end market expectations for '08. Will you be doing that similarly this year, you have two analyst meeting coming up? Alexander M. Cutler - Chairman and Chief Executive Officer; President: You mean, will we do guidance for 2009?

Yes, or just your initial thoughts. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, I think in, obviously in the markets that we are in right... the overall, worldwide economy is pretty hard to call things out 18 months at this point. We'll obviously share with you what thoughts we've got at that point but its... we're really trying to keep ourselves pretty focused on having a tight view of 2008 and ensuring that we can deliver what we think will be another very strong year of performance, a reason that we came off an all time record year in 2007. A year where I think we all know, many people doubted that we'll have the ability to deliver the $6.40 per share we had for our operating earnings per share and we came in some $0.50 over that. So we are up 8% from 2006. We are now talking about in a period of some economic uncertainty we think a very tight operating plan growing the company by 25%, increasing our bottom line by 15% for another record. And we think that that's of the strong performance to this time period.

Great. Lastly on housekeeping, I'm wondering if, Rick maybe you can hit us with FX effect on the top line for the segment in the fourth quarter?

Yes, I'd be happy to do that. As I mentioned in the release, there was a 4% growth due to FX. So that's a $130 million on the top line and on the bottom line that was about $14 million.

Can you give us segments on top line?

Actually, I don't have that right at hand. So, Bill we will be happy to give you those details if you give him a call later today.

Good enough. Thanks.

Okay. Next we have Mark Koznarek, Mark.

Hi good morning, can you hear me? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Hi.

Question on the Electrical business for the full year '07, can you give us a sense of what roughly the proportion was of power quality versus your construction related businesses? Alexander M. Cutler - Chairman and Chief Executive Officer; President: I am not sure I have got that number right here with me Mark, but generally what we have tried to indicate here and of course adding in the MGE business, which came in November as you recall. Increase that power quality business, that we have generally thought of this business just being on a global basis being about 40% has been kind of in that non-res power distribution and control construction and about 40% of it being in the overall power quality business. The remaining 20 was in and around about 10% being in residential and of course that number is getting a little less if the market comes down and remember about 60%... 50% or 60% of that residential number is a number that relates to renovation which doesn't tend to get impacted the way the new built does. Then the last 10 points are in and around of variety of markets like utility and then some industrial drivers.

Okay. I wanted to just ask little bit more about power quality in terms of the drivers, that are propelling that business and whether there is any change expected in '08. Can you give us a sense of whether the key driver has been telecom and data centers or is a lot of this sort of backup power insurance in industrial and other health care, and other kinds of operations like that. What sort of a key to that business? Alexander M. Cutler - Chairman and Chief Executive Officer; President: It's a very broad based business and you mentioned a couple of the markets there, but I see the number one issue that's driving it across all those segments is the continued digitations of data and then the fact that if you want to back up all these digital devices and online storage. You really need uninterruptible power supply as well as back up generator capabilities and all the systems in monitoring that goes with that. So, whether we are talking about what's happening with online storage, which is causing this huge explosion in data centers, because everybody wants things online versus in cold storage, whether we are talking about medical institutions where all those digital instruments in the hospitals really need to be backed up, you can't afford to have them go down for obvious reasons. We are talking about the new back up FAA systems, because you don't want to be up in airplane where systems, goes down. So that's the big driver and we are not seeing the infrastructure being put in place quickly enough in terms of the T&D side of things to assure that everyone can have that security. So, actually that's the big driver. It's a new construction and it's a retrofit issue. Now within that data centers have been very hard as I mentioned. Telecom has been spotty depending upon where you are in the world and it kind of depends, which contracts you win and which you don't. So, it depends who is expanding and who is implementing at any onetime, but I'd say it's a broader based business market, and I think many people have the impression it's not coming off at just anyone segment. We do not see a change there.

Okay. Great thanks.

Next we have Ted Wheeler [ph]. Good morning Ted.

Good morning everyone. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Good morning Ted.

Just a couple of may be housekeeping items. The comments you made on the puts and takes included the... excuse me uptick and intangibles and the inventory rep, I wonder if you could may be quantify the inventory right up portion of that?

Ted I don't have that split right here but a great majority of that $0.65 drag is the acquisition intangibles.

I guess the inventory impact would be pretty much confined to one turn so it might just be a second quarter?

Yeah we, it will hit more strongly in the second quarter, because of course you complete the acquisitions write up the inventory and then as the inventory works off you take the charge, and so by the end of the second quarter it should be largely worked out.

Okay. And just shifting a little bit on aerospace up 6% guidance I think, if you look at Airbus and Boeing production schedules they are up a little bit more than that and I guess my thought was your content had been going up, I know you do more than just commercial, but I wonder if you could put a little color on the 6% aerospace and market growth rose for '08? Alexander M. Cutler - Chairman and Chief Executive Officer; President: I think that and you are correct the commercial and business jet side, our thinking is that number is closer to 9% number when you take that whole mix of the wide bodies, the narrow bodies, the business jets and there are some capacity constraints in the industry and some of those areas that business is so there isn't some comment [ph] this is an issue of what's going on the assembly lines to some of these planes today. So that 9% is a big number coming off where we were last year. On the other side you remember we are about 60% commercial and above 40% defense, on defense side we are forecasting pretty modest growth in 2008 on the order of just a couple of percent. So, when you weight those two that's how we get to our 6%.

Great and the last question, if I kind of run through the numbers on the impact of this capacity constraint in the fourth quarter, feels like it's about a $60 million revenue impact, and yet it seems to me very quickly to get that resolved. I wonder if you could put some color on that? Alexander M. Cutler - Chairman and Chief Executive Officer; President: It's not that high, it may be about half a size that, but it's a lot of products that we're able to turn around and ship pretty quickly in the early parts of January, because we're able to resolve the issues we had, so.

Well these are meeting, you may put in more people and more assets, or did you? Alexander M. Cutler - Chairman and Chief Executive Officer; President: No, I mentioned that front, part of it is just having customer inspections incurred on time, part of it is parts issue that don't arrive at any given time and so its not, you tend to end up with a big lump at the end of the year and that's what we had hoped to get out little bit more than we were able to actually get out.

Okay very good thank you. Great quarter.

Great thanks. Next we have Joel Tiss. Yes Joel?

Yes, I am still here and I still have some questions too can you believe that. I wondered, I think Andrew opened with asking about this, can you just maybe give us like a even a soft target for SG&A as a percent of revenues by 2010, say you didn't make any more acquisitions like, just an idea, of the run rate for that number? Alexander M. Cutler - Chairman and Chief Executive Officer; President: You one way, let me take a stab at this Joel, if you look at our other corporate expense as a percentage of sale, it has been trending down, it was in '04, it was a little over 1.6%, in '07 it was a little under 1.4%. Our expectation is that it would probably stay in that 1.3% to 1.4% range and you know that's why next year with a much larger business and when lot of countries that we haven't historically been in so you have corporate infrastructure required. We are anticipating that our corporate expense, next year, is going to be on the order of $220 million so about 55 a quarter.

And then... but SG&A as a percent of revenue that's sort of 16.5% I just wondered if you could give us like a best practices again across your pretty wide group of businesses? Alexander M. Cutler - Chairman and Chief Executive Officer; President: You know I'll be honest we don't typically look at SG&A on an average for Eaton overall because we have businesses that are very different in characteristics and they have different levels of SG&A. So we tend to look at it business-by-business and so you know frankly I can't very readily give you a target because that's not how we build up to the SG&A numbers that we incur.

Okay. And just another question I mean it may be it's a little unfair but you could help us just sort of think about it if we go into recession, this year and say you know the second quarter and the second half gets a little worse than what we see in the first quarter. And can you just help us like think about the combination of cost savings and acquisition integration versus where you might see some pain and some of your operations to get a sense about 2009... you know would 2009 earnings be better than '08 and I don't not so worried about the answer as I am about the process? Thank you. Alexander M. Cutler - Chairman and Chief Executive Officer; President: I think any prudent management team has obviously got continuously plans in place and particularly in the current environment but that is not our prime case and we still feel confident of this economic forecast we have, we feel confident of the balance and we feel quite confident about the cost actions that we took 2 years ago if you recall that it really allowed us to significantly lower our breakeven points and give us more flexibility then we would have, had if we had not taken all the actions under Excel 07. Now we would like to tell you that we saw this particular financial crisis coming. We didn't, but the actions that we took because we did see a weakness occurring in the fourth quarter a year ago in the first quarter of 2007 really puts us in very good position vis-à-vis again what we think is probably a six-month time period that we can demand that's being the fourth quarter of 2007 and clearly the first quarter of 2008 that we've been trying to signal for some time. And so now we... we think we've got to plan some place. We've taken the actions and that is not our prime plan, our prime plan is the one that we have laid out.

Okay. Thank you very much.

Next up is Eli Lustgarten.

Good morning. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Good morning Eli.

I think its still morning. You probably should keep talking to the market is only down 65 at the moment. So it was down almost 300 when you started taking. So you have done something. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Thank you Eli. We should buy another hour of time.

Quick question. One pricing assumption in the outlook forecast I assume you don't have much pricing but that's not going to be uniformly true by sector. Some were positive some were negative. Can you tell us what you are thinking that pricing was in these? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, you are exactly right Eli it isn't going to be uniform by sector or by product line. But I think the important relationship here is between what we anticipate is going to happen in commodity cost and what we, what we anticipate is going to happen on pricing. Because we are operating a pretty good operating margins here at 13.5% all time record for the company. Our own view is that what you are seeing is that the world has continued to be at pretty high demand levels. If there is a benefit to the slowdown in the fourth quarter and the first quarter it has taken a lot of the heat off, some of the pressure off the commodities. And you've seen that happen in a couple of different areas. So we do not think we are facing a period of risk, like we were coming out of the end of 2003 into 2004 where the economy had to get used to the subject of passing through commodity prices. So we're not trying to say that the markets are totally accepting of all increases at this point. But we have announced increases, this fall, on various different product lines and we think successful when our customers being able to pass them through. So we're not anticipating this is a year in which we are going to see a squeeze in that regard between commodity prices and our own prices.

Do you have any positive pricing in the numbers at all, or it is zero or what you...? Alexander M. Cutler - Chairman and Chief Executive Officer; President: It's fairly minor at this point. And again the way we think about it is the net. We don't think about it as just price. We think about it as a net between our commodity cost and pricing.

Okay. During... we're breaking out numbers until you give it to us. We talk about Automotive, I think we talk about Automotive margins being down. In Fluid Power, if you take out being 6 [ph] of Aerospace and $500 million of Automotive, onetime item with little margin. Do you think you truly have the 30% margin for Fluid Power is just a pretty good step up in '08, versus '07? Something happens to mix is that the all Excel 07 benefits that you are looking at, by putting that you are taking out a much higher... much bigger higher margin business. So still keeping margins relatively close? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, without commenting on the specific numbers Eli. I think what you're seeing in terms of the step off point in the fourth quarter is you're seeing that business operating at the overall Fluid Power segment operating at very attractive levels here in the upper 13's if you will. What will pull us slightly lower margins business out of that total and you'll see that new total of those two businesses, this is Aerospace and Hydraulics I am speaking to, come close to around 15% in terms of a weighted mix of those two. So yes there is some Excel 07 strength in there, but I think what it also tells you is that our Aerospace business and our Hydraulics business have been more profitable than most people have been anticipating. And we think they compare quite attractively in the industry.

We'll get those numbers I guess in the... Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes. Yes you will.

In winter time. And Automotive number you said down 3%. What was the base... what base are you using for productions in 2007? I thought it was like 14.8, 14.9, I don't know between that of 14.3 or 4 so... That holds right.

Yes, the North America vehicle production in 2007 was 15.0 and we expect Eli in 2008, it will drop to 14.6, down about 3%.

Okay. Thank you very much.

Okay. And next is Nigel Coe [ph].

Hi good morning, just digging a bit deeper into Electrical guidance 2008, you talked about data centers obviously being very strong and that continues. But do you have any concerns or receiving any signs that banks obviously big consumers of data center capacity. That they maybe coming back and investments and maybe that might cause a little bit of break in that market? Alexander M. Cutler - Chairman and Chief Executive Officer; President: No it's a great question Nigel, because they've been an important part of activity and something we have been watching quite carefully. To-date, no, we've not seen it and we are continuing to quote on projects. But that's an area we are watching. I would say the other side of the equation to keep in mind, because I think people tend to underweight it is that one of the really hot growth areas continues to be this whole area of online data storage. And believe me that is not backing off at all and so the demand for having everything we all can think of that we would like to have immediate access to online. Neither is the whole online computer gaming activity which is, to me it is only how fast it's growing. It's growing at a very fast number as well. So, there are a number of drivers that are helping to drive these large data centers.

Okay great. And then looks like we are going to have diversions between institutional markets and the non-institutional markets for the non-res at least in North America. Can you just confirm... I think the answer is yes, but whether there is a significant difference in average contract side between say hospital and a college versus say retail mall or a luxury service conduit [ph]. Is there a big difference between in, say, revenue per square foot between institutional and non-institutional? Alexander M. Cutler - Chairman and Chief Executive Officer; President: All right. I have to think about that, because it... we quote on so many different projects whether they be in a hospital setting or an educational side, it would just depend on the scope of the project. And I don't think we could give you a good indicator there.

But it is probably fair to say that if you look at some of the non-residential that still is quite strong. Petrochemical, for example, they tend to be very large dollar contracts, because you're typically providing power for a very large scale facility. And that market as Sandy indicated has remained strong and we think we'll continue in that mode.

Okay great. And just finally on the, just on the Truck margins you mentioned the mix in 4Q and I'm sorry if I missed this, if you have answered this already. But is that just a one quarter issue or do you expect that to continue into the first of 2008? Alexander M. Cutler - Chairman and Chief Executive Officer; President: What we think, that I would stress again. This is a series still waiting for full facts. We think what it indicates is that it parallels that everyone is sharing is close to the marketplace. That you're continuing to see a concern on the fleet side about taking trucks right now. And I think you hear that if you're talking to our large customers and you are talking to fleets. And so what you're seeing is more of a vocational part of the business which tends to have less of a data to it in terms of its cyclicality is a bigger percentage of the business right now. The good news that perhaps provides a little bit of an offset to that is, that you have seen these three months of approximately 20,000 units of orders, but as I think Andy Casey asked earlier, most of those orders are going into the end of the year and so the 2008 will fill from the back end forward. And that's why you need to have more months of this kind of 20 to kind of fill that back up and pull it into so you start to get higher shipments. So I think there is a little bit of plus and little bit minus in the pieces of data out there. But it does not feel out of line with what our expectations would be at this part of the cycle, that things would tend to feel kind of empty and then they will fill up very quickly once it starts and that's been the pattern of each of these last several cycles.

Okay, many thanks.

We've reached the end, we have one more follow-up question from Andy Casey and that will be it.

Thanks, hello again. Alexander M. Cutler - Chairman and Chief Executive Officer; President: Hi Andy.

I guess some more background on your end markets and a couple of questions if I could sneak them in. Could you give us your sense of North American distributors just in general, ability to get credit and fund working capital? Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, its and you've heard kind of speak to this issue before is that, we think that the way these cycles often work is that when you get tightening in the form of interest rate increases, it starts to influence the type of loans that come out of the regional banks who provide the type of credit to distributors and dealers that are important for working capital. And we think that tends to have kind of a six-month type of cycle to really having the impact. And that's what we felt when we saw concerns break out in that August-September time period that you'd really see this start to have heavy grips at the end of 2007 and in the first quarter. Now the e-thing that went on last fall, and then obviously, this boatful [ph] that was kind of thrown at the market this morning, we think raises the likelihood between the two that you start to see obviously the loaning institutions feel a little bit more favorable toward putting those kind of working capital loans out that would feel like that's going to start to hit in the second quarter. And with what was done today, it's probably end of the second quarter, early summer. So I think your question is on point that what's causing this problem. And remember we also saw that $28 billion or $29 billion inventory increase in the third quarter in the U.S. That has to come out of the economy. In the fourth quarter, we think that's probably going on in the first quarter. So liquidating those inventories getting us back to a point where manufacturers are at the correct level of inventories and then we start to see some stimulation in the end market demand. That's all part of our thinking for why you start to pull the suit, but why you get the negative industrial production in the first quarter, because we are still in a industry wide or U.S. economy wide inventory liquidation time. So that's kind of the backdrop to a lot of our thinking on why you end up with the calenderization of the recovery here in the U.S.

Okay thanks. And then last question on... if I look at some past commentary going way back Sandy, coming out of the recession early 2000, you made comments about encouraging your internal managers to invest in capacity and get ready for the growth, if I look at the implied CapEx, I can come to a bunch of different conclusions, given that the acquisitions that you're bringing onboard this year. What are you doing internally next in '08? Is '08 kind of a batten down the hatches until you see the growth or are you just investing in expectation that comes? Alexander M. Cutler - Chairman and Chief Executive Officer; President: I think in terms of the first quarter Andy, I think we are I think being very prudent in terms of trying to keep an eye on the both incremental expense and assets, because we do believe, as I mentioned here in the U.S. and I want to be specific about that. We're going through this period, kind of digestion of excess inventories in the economy. Outside of the U.S. we are continuing to have quite robust growth. And if I was to take just two markets in the U.S., our Electrical business and our Aerospace business have pretty robust demand right here in the U.S. So we don't have sort of one line of command if you will on what are we going to be doing. We are really trying to be responsive of what's happening in each of the businesses. But said in the larger context again in the U.S. we expect to see a stronger second half. We are continuing to expand in some areas where we are convinced and feel very comfortable with these market forecast. And some of the ones we painted for you earlier, where we are saying we seeing very low growth. We'll be very careful on those areas about adding resources.

Thank you very much.

Well thank you all. That will conclude this morning's call and probably there will be an available time this afternoon to continue to field your calls. Thank you for participating.