Eaton Corporation plc (ETN) Q2 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Eaton Corporation's Second Quarter Earnings Conference Call. At this time, all phone participants are in a listen-only-mode. Later there will be an opportunity for your questions. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Senior Vice President of Investor Relations, Bill Hartman. Please go ahead, sir.

Thank you very much and welcome everyone to Eaton's second quarter 2008 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO and Rick Fearon, Executive Vice President and CFO. As been our old practice, we will begin today's call with some comments from Sandy followed by a question and answer session. The information provided on our conference call today will include some forward-looking statements concerning the third quarter of 2008, full year 2008 and 2009 comments concerning net income per share, operating earnings per share, our worldwide markets, growth in relation to those markets. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside the company's control. Factors that may cause results to differ materially from those in these forward-looking statements are set forth in today's press release and related Form 8-K filing. Additional financial information is also available in today's press release, which is located at www.eaton.com. And with that, I would like to turn the session over to Sandy Cutler. Sandy?

Great. Thanks Bill. This is what I would like to do this morning and our time... to allow plenty of time for questions to cover four primary topics with you. First, an overview of the quarter. Second, a little bit of analysis on the quarter, giving us some reconciliation of the elements that contributed to the quarter. Third, a little bit more detailed discussion of our end market forecast and the rationale supporting our reduction of roughly 1 point in the weighted average of our end market growth. And then fourth, I will give you some additional insights into the balance of this year in terms of our full year guidance and our thoughts after 2009. I would like to come back now and start with a overview of the quarter. We had a very strong quarter. You obviously saw the numbers. Sales up some 32%, earnings up 35%, fully diluted earnings up 24%, the difference obviously being the financing that we did in April for our recent acquisitions. We are very pleased that we did that financing at the time we did when we found a period of some stability in the equity markets. And as noted in the press release, completed both our equity and our debt financing during the second quarter, which is one of the reasons that you saw us reduce the breadth of our... or range of our guidance because really the financing risk is out of our operating plan now for this year. If we walk through the individual quarter, we think it's significant that if you look at the balance of earnings, some 74% of the total segment earnings are now in our Electrical, hydraulic and aerospace businesses as they continue to become a bigger and bigger portion, third [ph] portion of the company. We had really strong growth. The 32%, as you saw, was some 19% from acquisitions, 5% from ForEx, 6 points from end market growth and a very... excuse me, 6 points from market growth and 2 points from out growing those end markets. So very strong performance in that regard. Great bookings in our Electrical business, up some 11% in the quarter and significantly up 15% in June. So we continue to see good market strength... end market strength in our largest business. Aerospace orders up by 13% for the quarter, again, continuing to fuel the increase in revenues that you have been seeing in our businesses. Our operating earnings in three of our segments: Electrical, Hydraulic and Aerospace, were higher as a percent of sales than they were a year ago. So that overall, that contributed to the 0.41% [ph] increase in operating earnings, up to 13.3% at the segment level. Made some good progress on working capital, about a four day improvement in days on hand and three days in our accounts receivable days outstanding. We do have a little bit of a challenge on the subject of our new acquisitions. They are growing actually faster than we anticipated, which is good news. They have a little higher level of working capital in them that leaves before us a little bit of a challenge for this year and next year. We think it's a really good opportunity to bring those down to more Eaton-like levels so that... while that will reduce our operating cash flow, and I'll come back to that in a moment, this year slightly, we think it's a short-term issue and nothing really to be concerned about in that regard. Debt to capital, net debt to capital ratio came down to just under 35% in the quarter, very much where we had been targeting things, both the financing for our acquisitions. You will recall that after these acquisitions, we were close to 50%, and that's why we wanted to complete the financing in the second quarter. Quickly looking at within Electrical, a real boomer of a quarter, really outperformed even our own expectation. Very strong top line, up some 67% with 5% of that from end market growth, about 53% from acquisitions, 2% from ForEx, 7% from market out growth, so you can tell we are continuing to do very well in the business. Operating profit 13.3% before acquisition charges, up from 12.2% last year, an 82% increase. The strategy is working. The backlog is continuing to expand. And for those of you who have been watching the non-resi market, if you look at the second quarter in the U.S., 70% of the categories grew at over 10% from a year ago. And the overall grouping of the total segments was up some 18%. So while we continue to foresee that this will weaken as we go through the second half, the strength we have been forecasting for the first half has indeed occurred. We've profited from that, we've built our backlog and that backlog will allow us to have higher shipments in the second half of this year. If we move to the hydraulics business, a very strong quarter, up 12%. If you look at the profits in the business, some 13.4%, up from 11.5% a year ago, so very strong progress. You recall, we had indicated in the first quarter that we had had a plant closing that had depressed our returns by about a point. We'll see the benefits of some of that cost reduction work here in the second, third and the fourth quarter. We are very pleased with our overall activity there in the hydraulics business. Our aerospace business, up some 15%, overall markets grew by 7%. Clearly, you're seeing the benefit of the large bookings and great positioning that we've got on many of the newer aircraft. Second quarter profits at 16.1% versus 15.7% a year ago. So in spite of the fact that aerospace commercial aftermarket is weakening, as we talked about in our first quarter conference call, it clearly occasioned further by the consolidations going on, particularly in the U.S. commercial fleet. Our profits we think are very, very strong in another great quarter of bookings, up some 13%. Truck business up some 26% this quarter, 16% end market growth. Big contribution of ForEx in this particular business, the one that has had the largest lift in that regard, about 9 points from ForEx. We are continuing to see great strength in South America. We did get an increase in the U.S. But as I will talk about a little bit more in our full year guidance, we have flattened our guidance for this year for the NAFTA heavy-duty truck market to 215,000 units. And that's really a reflection of what we think has happened in fuel, and I will talk more about that a little bit later. Great profitability, holding at 15% level in markets that have not come back as fully as we had hoped they would at this point. The automotive market, sales down about 2%, worldwide market down about 3%. And clearly, everyone located in the U.S. is reading lots about the U.S. market having been down 16% in the quarter while international was up about 6%. We are very pleased that we were able to hold a 9.4% return on sales in this business; that is down from 12.2% last year. Clearly, the market is more challenging. We referenced in our guidance at the end of the first quarter that our expectation at the one large supplier strike in this industry that had been hurting one of the large OEMs would be resolved by the middle of the second quarter. I think all of you who have read, it really got resolved in early June. So that hit us a little bit more. It impacts us about [ph] four tenths of 1%. So the way we think about this business operating through the first half, this is operating around 10% without the impact of that supplier strike. So that's a quick overview of our first quarter. I might give you a very quick reconciliation, however, to give you an insight as to why we are as pleased as we are with the second quarter performance. You know that the actual operating earnings per share that is not including acquisition integration costs was $2.10. We did note that we were able to pull into the quarter a tax project consolidating legal entities that was not in our guidance for 2008. That benefited the quarter by about $0.20. So it would have been $1.90 without that. And then we issued equity earlier in the quarter in April than we had anticipated, and I think you will recall from my comments in our first quarter conference call that with the choppiness of the equity markets, we thought there was a good possibility we wouldn't issue until the end of the second quarter or slightly later. We actually issued, as I mentioned, in 10 April. That earlier issuance costs us about $0.15 versus our guidance, so that if you net the $0.20 positive from taxes with $0.15 negative from earlier issuanced equity than we had planned, the adjustment for those two would say that the first quarter would be $2.05 on an operating earnings per share versus our guidance of $1.95. So we really outperformed our expectations by about $0.10. And when you say gee, how is that possible in a time period when, clearly in May, we believe that fuel prices hit a point of elasticity, it had started to cause real demand differences, particularly on the automotive, truck and aerospace markets. The real story that offset that was our stronger Electrical business and our very strong hydraulic business. So our diversification strategy is working. Our largest business, the Electrical business, some 45% of our volumes is performing very well. In fact, a little better than we had anticipated in the second quarter. Now let me move on to our end market forecast. I know a subject of interest to all of us is we are trying to gauge what impact are these roughly 40% higher fuel prices having upon world economic growth. And as I mentioned just a moment ago, and I mentioned in a couple of conferences at which I spoke in May this year, our feeling is that sometime in May, whether that was between $3.85 per gallon and $4 per gallon, a point was hit where we really saw elasticity begin to get tested in terms of demand for fuel cost. We saw a dramatic turndown in the North American factory sales, retail sales here. For passenger cars, we saw a flattening of heavy-duty truck demand. We saw the contraction between 8% to 14% of commercial airline fleets here in the U.S., trying to retire more expenses or less fuel efficient aircraft. All of that really seems to have kind of hit its head sometime in May, and that's why we saw, actually in our own shipments, we saw lower than we expected shipments in our automotive, our truck and our aerospace business here during the second quarter. But as I mentioned, we were able to offset that by our stronger hydraulics, in particular, aerospace business... our Electrical business. All of that feeling of these higher fuel costs, of 40% higher fuel costs, have caused us to revive our overall economic growth or global growth by about a point. And you see that reflected in terms of our reduction of our own end markets from about 4 points down to 3 points. If you think about the guidance that we provided you in terms of our five segments previously, we had indicated that our Electrical business would grow at approximately 5% to 6% this year. We now believe it will grow at about 5%, that... these are the end markets I am speaking about, not our own business. Our aerospace business, we had said would grow at about 7% and in light of the fact that we think the aftermarket on the commercial side will pull back here as we go through the balance of the year, we have reduced that to 6 points. Our hydraulics business has performed a little better than we had thought this year. And we had told you we thought those end markets would grow at about 2%. We now believe they will grow at 3%. The truck market, where we are continuing to see strong demand in South America, in particular. But we have revived our thinking here in North America as we have seen orders fall out in the heavy duty and medium duty area here in North America. We have reduced that growth from previously 7% to 5% now. Then the automotive business, the big change has really been here in North America, we have reduced our previous guidance from 0% down to 2%. Putting all that together gives you... a negative 2, excuse me, down to negative 2%. Putting all that together is how we come up with the total reducing from what we had stated previously, 4% now down to 3%. So with about a 25% reduction in terms of our end market growth, if you will, in terms of taking 1 point off of a total of 4 points, we are reducing our full year guidance midpoint by 2.5%. Now if we step back and talk a little bit about our guidance for the remainder of the year and try to reconcile quickly for you what has changed, I would encourage you to think about it in three buckets. Let me start first with the benefit of the lower tax rate in the second quarter. That's approximately a $0.20 benefit. Second, the higher financing cost that was because we went in early April instead of the end of June or July, a negative of about $0.15. And then the change in operating earnings per share, which is both due to our higher effectiveness during the second quarter and then the market decreases that we are forecasting from our original expectations of growth. And you recall, we talked about a market rebound in the U.S. in the second half, wishing [ph] no longer will occur. And the way that adds up is a plus $0.10 as I mentioned before in the second quarter and then our guidance for the third quarter versus what we had against our earlier expectations, a negative $0.15 in the third quarter, a negative $0.20 in the fourth quarter. So to recap those three for you again, the total of the plus 10 in the second quarter, negative 15 in the third, negative 20 in the fourth quarter is the total of a negative $0.25 in terms of operating earnings per share. The higher financing cost is a negative of $0.15, the lower tax rate is a benefit of $0.20. All of that is a net of $0.20, and that's the difference between the $8.05 that was our previous guidance and the $7.85 that is our current guidance. Now for those of you who have already calculated, and I am sure you have, that if our third year guidance is... if our third quarter guidance is... or the midpoint of operating earnings per share of $1.95, that inherently means that our fourth quarter guidance is a midpoint of $2.10. And if you are trying to quickly reconcile how you get from our $2.10 in the second quarter to $1.95 in the third and then $2.10 again in the fourth quarter, I'd give you a couple of quick reconciliation elements that may be helpful for your understanding there as well. First, we will have the full impact of the higher shares in the third and the fourth quarter where we only had them for two months of the three months in the second quarter. That's an additional negative $0.07 in the third and the fourth quarter that reduces $2.10 down to $2.03. Secondly, a number of you noted that our overall corporate expenses were higher in the second quarter than they were in the first quarter. There was approximately $0.16 of our acquisition purchase price accounting which fell into the second quarter. And so that is a plus of $0.16 that won't reoccur in the third and four quarter. Offsetting that will be, we do not expect to get the $0.20 benefit that we got in the second quarter for taxes. So you have a plus 16 for the lower purchase price accounting and then a negative 20 for the change in the tax rate. If you add those to the negative $0.07, you are now down to a base of $1.99 for the third quarter and the fourth quarter. Into that, just a couple of comments as to how we think the business then goes forward for the remainder of the year. ForEx has continued to move on us. We're continuing to see higher sales as a result of more exchange than we had anticipated. And that's going to add about a penny or two in each [ph] of the third and fourth quarter versus our second quarter. Our Electrical business will continue to strengthen through this year. And for those of you say well gee, if the markets are not going to be growing quite as quickly, where is that coming from? It's coming from the very large backlog that we have built. Plus we'll have the full quarter of Moeller. And so we will get about additional $0.03 in the third quarter from our Electrical business, about another $0.10 in the fourth quarter. Our Truck business, there we are not anticipating much of a plus in the third quarter, but we do feel that we will see some lead into higher activity in the fourth quarter, and that's on the order of a couple of cents. The third quarter in automotive is likely to be weaker than the second quarter was, for two reasons, number one, you are all familiar with a normal seasonal that occurs where the third quarter is the weakest quarter of the year. But secondly, clearly, we don't think the turmoil is over here in North America in terms of the adjustment. So we think that that's a negative of maybe up to $0.04, $0.05. And then we've spoken to you that in our guidance for the full year that we expected to be incurring higher corporate expenses as we went through the year as we are really building out our regional capabilities around the world because Eaton is now a company with 45% of its revenues in North... in the U.S. and 55% elsewhere. So that's probably about a nickel negative in each quarter. You add that up and that's how we get to our $1.95 and our $2.10, which are the pieces necessary then to complete the $7.85 midpoint of our guidance for this year. Last comment and then we'll open things up for questions. It was 2009, many of you will recall that when we provided our guidance in the first quarter in January this year for the year, we provided a very early look into 2009 because we recognized that 2008 was down and is increasingly a challenging year to think your way through from all the changes that are occurring from an economic point of view. And at that time, we had shared with you that a couple of pieces of guidance relative to 2009. We had indicated to you that we thought that our end markets would be up on the order of 5% to 6%. Now clearly, sitting here in mid July, it's a little hard to make a market call on this turmoil about 2009. But we think it's a reasonable expectation that if our end market growth has come down by about a point this year, we think that guidance we gave you of several months ago of 5% to 6% probably should be calibrated to be 4% to 5% at this point. We had told you that we thought our pension expense would decline by approximately $20 million, and that was pre bringing on Moeller and Phoenixtec. It obviously was for the stock market performing a little bit better than what we have all seen happen here over the last several months. And so we think that that will be less of a positive. We don't know exactly where to peg that number at this point, but probably at least $10 million less of a benefit. Tax rate, we still think 16% to 17% is good guidance for 2009. And then the most important number at all we had told you, we thought that we could achieve earnings growth of 15% to 20% in 2009 on top of the midpoint of our guidance for 2008. And we still think that can be done that that 15% to 20% is a range that we're comfortable with at this point, but recognize our midpoint is now $7.85 versus $8.05. But we think the basic themes of the effect of diversification and participation in international markets, the great strength of our Electrical business, all that holds true. So in summary, what we have tried to present for you today and we are very pleased about in terms of the quarter is that we had really an outstanding we think second quarter in a period of a lot of economic turmoil. We have reduced our full year guidance by 2.5% on a basis of 8 point... $8.05. And we think that's prudent in light of what's happened with this 40% impact in terms of oil on likely global growth at this point. So with that, Bill, why don't we open things up for questions?

I would like to turn it back to our conference coordinator and go to the Q&A please. Question And Answer

[Operator Instructions].

Okay, the first name on the screen is Bob Cornell. Are you there Bob?

Yes, I'm there.

Good morning.

Definitely a good quarter. But a couple of questions. Sandy, you mentioned the electrical businesses were growing faster than you thought. Maybe you could differentiate between the electrical low voltage business and the UPS business. That will be the first question. And how about the integration synergies and the integration efforts, give us an update there?

Sure. Thanks Bob. In terms of the market, really, we are very pleased that our three recent acquisitions, the MGE small systems business and our UPS, I mean [ph] the Phoenixtec business in our power quality area and then Moeller are all performing better than we anticipated. And that's the top line and bottom line numbers. So really pleased with all three of those. We also continue to see great strength in what I'm going to call the power side of our base electrical business. And those are the segments that we have spoken about in terms of non res that are continuing to do so well, whether it is oil and gas, whether it is medical, whether it's educational. And so that's pretty good strength really across the board there, Bob. And we've built backlog again in the second quarter, which we think is a very good indication for the strength of the shipments for the business for the balance of this year. In terms of the integration of both Phoenixtec, MGE and Moeller, very much on schedule. As you can tell by looking at our guidance in terms of difference between the operating earnings per share and the fully diluted earnings per share, our integration expense ticks up in the third and fourth quarters from where we have been in the first and second quarters. And that's really when we begin the implementation of a number of the integration activities. They are not all publicly announced inside our businesses yet. So we are not ready to detail them externally. But they are very much in line with what our expectations were, and, as I mentioned, the margins and the rest --

No change in that number for the year, Sandy?

No. No change in that number. And the revenues and profits have been running a little better than had expected, which is part of what's contributing to very strong activity in Electrical.

Yes, a follow-up question related. Down [ph] electrical products, I think it was you [ph] that mentioned that Eaton saw non-res construction up in '09. With the changes in the market you have seen and various other comments you have made, how would you calibrate that scenario at this point?

Yes, I would still break non-res, Bob, into kind of two... this is U.S. non-res we are talking about... I'd break it into two pieces. I'd break it into what I would call kind of the commercial side of the business. Surprisingly to us, if you look at the second quarter, areas such as lodging, which we would have said probably should have turned down at this point, was still a positive double digit. You actually saw office was still positive double digit. We thought these things would have turned by now. We think they turn in the second half. And as we look at negotiations... order negotiations out three to six months, they are indicating they will turn down. That is not true of the power side. So when we look into areas like oil and gas, whether we look into manufacturing, housing, and remember, refinery has dropped into manufacturing, housing; they don't drop into the oil and gas expiration category that shows on here. Education, medical, those are continuing to show quite strongly. So we think the way to think about 2009 is to kind of commercial side office building, lodging, retail probably goes flat to negative. But you will see the multiyear long cycle power side of it stay positive, and so we think that gives you the possibility of flat to low growth on the non-res side next year. Remember, we will be carrying quite big backlogs into next year too. And that's another element obviously to keep in mind relative to our business on the project side.

Thanks very much, Andy.

Okay. Next, we have Eli Lustgarten. Good morning Eli.

Good morning. We survived the quarter, I guess. So a couple of difficult things. Tax rate in the second half of the year is going to be 16%, is that right, Rick? And the share is about 169.5 or something like that? That's the number --

Yes, the shares will be right around 169.5, and we think the tax rate in the second half, Eli, will be between 15 and 16.

Between 15 and 16. Okay. Now you reduced the truck number to 6... to 215,000. And in your guidance next year, what kind of truck number are you using for 2009?

Yes, obviously, a hard one to call right now. But we are sort of in the 285 range at this point, 285-290. And so it does not have a three in front of it, but we think if the market is a little lower like that, that probably means that 2010 doesn't dip quite as far as it would have been if you saw a year that went up over 300 next year. And that's an important part, Eli, when you come back to our guide... our initial thoughts about 2009 in terms of 4% to 5% market growth. When you get that kind of an increase, say, a 285 over a 215, that obviously [ph] provides some propellant into Eaton's end market growth that you won't find with people who don't have a truck cycle coming back next year.

So that number is a very key number for next year is part of your guidance evidently. Can you also give us some insight into what you are expecting for profitability in the second half by the various segments? Is there much change from the guidance that you have given for the full year? Particularly, I am thinking aerospace, maybe a little weaker and fluid power looks like it's a little stronger than we thought in that. Can you give us some insight by segment which... your operating profit? You mentioned that automotive would still be around 10%.

Yes, if you go through our full year guidance in terms of the segments, we had provided original guidance for Electrical of 13% to 14%. That's still our guidance for that sector. We have not changed that. In terms of Aerospace, we had originally provided guidance of 17% to 18%. We think it's more likely to be 16% to 17%, and that really has to do with the fact that we see commercial aftermarket potentially moving negative in terms of growth in the second half of this year in response to so many of the older planes that have been flying that are a little bit more expensive to operator being retired. And you are seeing numbers up to say 130 Boeing 737-300s just as one example. I am not picking on that plane; I am just saying this is an example of some of the older planes that are being retired. We've not changed our guidance for our hydraulics segment where we have provided guidance of 12.5 to 13.5. Our truck business, we have provided guidance of 17.5 to 18.5. We think that is much more likely to be 16 to 17 now that we don't have what we had originally anticipated in the third and fourth quarter in terms of a fairly steep ramp up in the NAFTA market. In the automotive markets, we had provided guidance of roughly 10% for the full year. We think that's more of an 8% to 9% number for the full year at this point. And that, obviously, as you think about a weaker third quarter seasonally and then with some of the turmoil that's being going on here in North America, we think that that's the right kind of range for this year. All of those numbers tie right back into the guidance that we provided for the midpoint of the third quarter of $1.95 and then $2.10 for the fourth quarter.

And my final question and then I'll give it to somebody else there, can you talk about cost price issues, LIFO charges and what are you seeing across the business? How much of your business is pricing at this point? You can probably dissect [ph] this by sector, so we get some idea of what's going on and the cost pressures of the business being reported?

No. When we came in this year, we had indicated that we had thought that we would be seeing a commodity... if I start on the cost side... commodity environment that would continue to have higher prices for commodities. And as we commented at the end of the first quarter and I think commented at a number of analyst presentations we were at through the spring time, that has completely fulfilled our expectations and probably a little bit more. At the same time, we've been busy this year in terms of working on a lot of cost reductions, helping to offset part of these costs for our customers. And we've announced additional price increases in the majority of our product lines during 2008. And so the net of cost reductions, alternative materials, new products and higher prices as well as some protection that we've had in terms of our costs through longer term contracts, that... I think you can see our margins are continuing to improve. So we are continuing to do pretty well through a commodity driven period of inflation. So we would continue to characterize what we've seen over the last couple of years and this year as commodity-driven inflation where we have been able to either pass through price increases and/or do a very effective job of getting those costs out to help protect the cost positions of our customers.

Right, thank you.

Next we have Ann Duignan. Good morning, Ann.

Hi guys, good morning.

Good morning.

Hello

Rick, my first question is just a point of clarification for you. Your outlook for rate for the back half of the year is 15% to 16%. The outlook for '09 is 16% to 17%.

Yes.

And yet in the press release, you guys mentioned... or Sandy, you mentioned that the tax projects that you have been working on would result in a benefit to earnings in future years. So how do I think about that? Is the 16% to 17% for '09 kind of a hedge at this point?

No, there will be a benefit from the tax consolidation project, Ann. But the benefit each year is going to be on the order of about $5 million. So it really won't fundamentally change that 16% to 17% rate, and of course the reason rate rises next year is principally because of the larger truck market, which results in more North American income.

Okay, that's helpful. And then Sandy, could you comment a little bit... something on Eli's question. Could you comment a little bit, if you look out to back half of '08 and into '09, where do you think the biggest risks to your earnings are? Is it weaker end market growth or is it inflation and the growing difficulty of passing through higher input costs? Which do you worry about most?

Ann, I reported more on the economic issue. But I think the two are interrelated. Because clearly, what I think you are seeing monetary agencies both here and around the world trying to deal with is they are trying to watch inflation here at the same time that there is tremendous concern right now about growth. And so they have got a very difficult challenge of walking this knife blade right now of not raising interest rates at a time when growth is obviously beginning to be more conservative if you will. But at the same time, we are continuing to see these commodity prices. So I think you can't really fully separate the two. I would really say, I think it's around the growth issue. We have always said that we characterize our earnings guidance within an economic forecast. That's why we really started again in the press release to discuss why we felt a 3% global growth rate in our market is more prudent than a 4% because of what's happened with the oil shock. And we have never seen a 40% increase in oil prices in a two month time period. And I think to have thought that you would see no impact on markets would have been not very thoughtful. And so I don't think you can separate them. I would say, I think the big issue right now is global growth and we think we have taken a point out of roughly around the world you see it here, you see it in Europe, seen it in terms of our own reduction in terms of what we think will happen in China as well. Still some pretty attractive numbers in China, but they are not quite at the stratospheric numbers they were at. So we think that this higher oil price issue is affecting global growth, and that's really the issue we are trying to keep our eye on.

And with that in mind, what's Jim Mills [ph] call on interest rates? Does he think that the Fed will focus on inflation and therefore raise interest rates or focus on growth and lower interest rates?

Yes. I guess our best shot right now is probably neither.

Neither.

As I mentioned, this is a difficult period and I think you've seen something written in the last few days on Europe as well that while people felt that there was a likelihood that we might have another quarter point. But while we're getting this tremendous uncertainty that's coming out of the credit markets currently, it seems to be just rocking things on a daily basis that the idea of an additional quarter point increase here in the next 30, 45 days just feels like that's going to throw a lot more fire on the flame. So our short-term thinking, it's probably not a movement.

Okay, I will get back in line then I have some detailed questions for --

Thank you. Next we have David Raso, you there David?

Yes, I am. Just one quick question. If you look at the second half guidance, I mean you essentially took $0.35 out of the operating earnings. And for every 1% revenue lost by any change in your end market outlook, even if I put a 30% incremental margin on that tax effect, it's only $0.10. You wouldn't change your end market that much when you think of hydraulic up, electrical down a bit. Is it nothing other than lower truck, lower aerospace, those of your higher margin businesses and the mix is what's driving what would be pretty extreme detrimental [ph] margins in the second half? Or are we are not implicitly giving a increase in your raw material costs that are flowing through?

Yes, I think David... I think two issues I would urge you to think about. These were full year changes in the market. So that means that I think the analysis the way you just did it, I may be wrong, is to try to take a look at it on what that would have been in terms of that one point for the full year. Actually, that one point drops into the second half. So it is more of a pushdown because, you recall, we had originally anticipated the second half of the U.S. would have a fairly significant rebound. And when you looked into those numbers, just to get a feel for that second half, we were talking about Europe growing the first half, let's say, EU-27 at 2.5%. We think it grows at 1.5%. We were talking about U.S. manufacturing production in the second half in the third quarter growing anywhere between 3% and 5%. We are now talking about them growing between flat and 1.5%. So some... we think the stimulus packages which came out here in the U.S. did contribute to stronger GDP growth here in the second quarter than many people even want to think about right now. And you are seeing a fair number of people actually marking up their second quarter. We think that has worn off by the time we get into the third and fourth quarter. But the fuel prices and the impact of that have not worn off. And that's why we have taken it down to the second half so that if you think about that market decrease, it is in aerospace, it is in truck, it is in automotive. And clearly aerospace and truck are two of the more profitable businesses that we have had. The good news is that we saw a stronger first half in hydraulics, but we don't think it moves up a lot from where we are now in that we have had a good, obviously, a very good year going in electrical.

Yes, essentially, I mean it looks like the core growth for the quarter was the highest you have had in over two years. Obviously, there was... your full year outlook, for example, hydraulics you mentioned, you bumped it up from two to three. But you are saying you saw a lot of the bump up already in the sense of better than expected second quarter. Your electrical numbers were strong this quarter; though, essentially the back half reductions relatively notable on the end market demand.

Yes. And what we tried to provide you, David, in terms of that walkthrough, the reconciliation for the third and fourth quarter, is the sense that really where we are looking for the improvement in the third and fourth quarter versus where we are in the second quarter, it's in our electrical business. And then it's in the fourth quarter lift that we still think will happen from the North American heavy-duty truck market. And that one I think you would have to argue is a little bit more of environmental cycle than it is economically driven, whereas the electrical one, we are getting the benefit of markets staying pretty much as they are, but we've obviously done quite well in building our backlog in this time period. And that will allow us to be stronger through the balance of the year.

And then related to that, is the '09, the EPS growth number you are sticking to is obviously a pretty high rate. But if you think about the next 18 months, what's come down a little bit? Truck, high margin business; Electrical high margin... pretty high margin business, especially the margin we have seen of late and obviously the aerospace is pretty much your highest margin business. So when I think of doing that kind of EPS growth rate today versus what you said three months ago, the mix has gone against you. What is offsetting [indiscernible] to that kind of EPS growth rate?

Well, I don't... again, remember that the current year came down. So on the truck issue, the reduction from $2.30 to $2.15, next year, you would have been looking at a reduction from something that had a 3 in front of it down to a 2.85. So on a percentage basis, that has not really changed much. So that... I think what we're really seeing is we are taking it as roughly $0.20 out of the guidance this year. The base is adjusted down. And we actually think the numerator and denominator relationships remain about the same between the two years.

Okay. And the cost issue for '09, currency for '09, you are essentially looking at price will at least equal [ph] the cost in '09 and obviously the currency is not going to be as much of a help if one would... at least conservatively kind of play out in the model. But overall, basically, you still stick in the 15 to 20 for '09?

Yes. But that's our best shot. And obviously, David, I think sitting here in July, I think it's difficult for almost any firm to be definitive about 2009. We are all working through an economy that's pretty uncertain. What we take a lot of confidence from is looking at our second quarter performance in a period of time that's probably got as much turmoil with any quarter we have seen over the last five to six years. Eaton had an exceptional quarter. 32% revenue is up; 35% earnings up, very strong cash flow. That's one heck of a quarter and we think what it's really reflecting is the diversification strategy and the balance in the company, whether you look at that across product lines or geographic lines. That's what's serving us very well. And we have seen nothing that removes our confidence about that in terms of our ability to perform again in 2009.

And lastly, with the balance sheet, how should we think of the use of the cash flow and balance sheet going forward?

I think... let me just comment on this here because I said I would comment on something I made the mistake of not doing so before. We had a goal... or we had guidance this year in terms of our operating cash flow for this year to be between 1.8 and 1.9, because this is cash from operations, 1.8 billion to 1.9 billion. I mentioned as a result of these faster growing new acquisitions, and their higher consumption of working capital. We've reduced that to be 1.6 billion to 1.7 billion. Now, again, that really is an opportunity we think in terms of getting down these days on hands of inventories and days outstanding of receivables. They are running 20 to 30 days higher than our base operations. We are very comfortable we can get them there. What we didn't foresee is that their growth would take off as quickly as it has this year. So that's the good news, bad news. We've reduced our own capital expenditures this year, down from what was a midpoint of about 550, down to about 525. So sort of a tuning. So that obviously means our free cash flow will only come down from about 175 million from our original guidance of 1.25 billion to 1.35 billion. Now let me come back to the bigger question, which is sources of cash this year. We had indicated historically, and we've not changed any of this, that our dividend policy is to increase our dividend in line with our anticipated increase in earnings. And our publicly stated goals are 15% increase in earnings. We don't see a reason to be changing that policy or guideline. We have been obviously working to get our balance sheet back in a stronger position post the three acquisitions we talked a lot about today. We're very pleased with the equity issuance in the second quarter. And by the end of this year it will be down below our target kind of range. And what we've said relative to additional acquisitions is that there really are two issues of capacity there. One is management capacity, and we are pretty busy in our electrical business so that targeted acquisitions are more likely to occur in our aerospace and hydraulic segment and that we don't expect to close anything come in the near future, because we are working both on kind of a management capacity issue and the financial capacity issues. So that game plan has not changed for us.

Okay, great. I appreciate it. Thank you.

Next we have the Andy Casey. Good morning Andy.

Good morning everybody. Thanks.

Good morning Andy.

Clarification on the 8% organic growth in the quarter, how much of that was related to pricing?

We don't break pricing out by piece Andy. I think what we can say is if you look at the margins by segment, though, we are continuing to expand margins, so we are keeping them in pace. And it's... we are in so many different product lines; we are not really able to get a good weighted average for that number. But about 6% of it came from end market growth and about 2% from out growth.

Okay. And then if we can switch on to some of the questions, on the international growth reduction that you cited in the press release, your answer to David's question kind of indicated most of that is concentrated in Europe. Can you give us some end market color specifically? Are you seeing a fuel price induced slowdown in auto and truck over there as well?

And I wouldn't... let me just add one point of clarification there, Andy, is that clearly on EU-27, it's a fairly easy piece of data to get, so I quoted that on. But we have also reduced our growth in China by a point. And I think what you would find generally in most markets, we have taken down by about a point, because we think that that's the best thinking that we have been able to put together in terms of what that impact is. So these... many of these more mature economies will growing below trend instead of slightly above trend and the emerging countries have come down a point or so as well. In terms of color, I would say that I think whether it was most pronounced here in the U.S. in terms of what happened in May, because the U.S. has been, let me call it, a more casual user of energy and so it hit much harder here in terms of how the consumer bought vehicles that hit higher energy in terms of trucks. Many of these other regions are used to much higher prices for fuel than we have been. So it is hitting there, but not quite as extremely. I think you also see that on what's happened in aircraft. Aircraft in terms of fleet reduction is in much more extreme here in the U.S. And there is a reason for that; that's why all the average age of the fleet is much older here than it is abroad. So there is a higher percentage of these less fuel efficient planes flying. But no, we do think, Andrew, that you are seeing a reduction around the world in these economies. Now interestingly, there are a couple of kind of counter pieces to this is that Brazil vehicles, continuing to go quite strong. But remember, on the passenger car side, over 85% of the cars are fueled with ethanol. We are seeing the ag markets be very strong there and we're seeing ag markets elsewhere be strong for all the reasons we've all discussed beforehand. And thankfully, the European passenger car market was a little stronger in the second quarter than we had anticipated it was going to be. But when we look at that full year, we still think that that's a market where you're likely to see kind of a 4% growth over there. It's not a 5% or a 6% number.

Okay, thanks for that Sandy. And then just kind of to revisit some questions that have been asked before a little bit differently. You have operating earnings guidance variance kind of negative 15 in the third quarter, negative 20 in the fourth quarter. If I look into '09, does that kind of imply that a lot of the growth you're looking for in the recovery is a bundle of auto and truck is kind of more concentrated in the second half?

Can you repeat that just once more, Andy. I want to be sure I understood that fully.

Yes, if I look at the walk that you gave us on operating earnings variance, the negative 15, negative 20 in Q3 and Q4, it kind of implies a bit of a deceleration. And per your commentary, a lot of that is somewhat related to auto and truck. Does it imply that with the recovery that you have talked about, the 285 off the 215 base, does it imply at least in the truck that it's more concentrated in the second half versus the first half?

2009?

Yes.

No, I think what we would anticipate is that you would see a ramp that as we have all seen over time in the truck market, it would fill in from the back forward so that you would have a fairly steep ramp going in 2009. That's our best thinking at this point. Yes. I think on the automotive side, we are really not forecasting much of a rebound there. So I would say that the biggest single end market year-to-year growth, which is likely to be a double-digit number, will be in the worldwide truck markets because of this influence of what happens in the NAFTA heavy duty market.

Okay. Thank you very much.

And next is Terry Darling. Hello Terry.

Thanks. Rick, I guess question for you to make sure I understand the adjustment factor on the higher other corporate expenses, $0.22 in the quarter, 36 million gets you down to 35 million to 40 million. Is that a run rate for 3Q, 4Q, or are we supposed to add something for the build out of the international infrastructure on top of that?

Here is how I think about that Terry. If you look at the 69 million of corporate expense in Q2, 34 million of that was due to the purchase price adjustments related to fair value for inventories, principally in Moeller. So if you take out that 34 million, you get to 35 million, which is a more normalized rate. And there will be very... there will perhaps be a million or so of this inventory adjustment in Q3. But it's largely worked out. And then in Q3 and Q4, we think each of those quarters will bump up about 10 million over that 35 rate. So you are likely to see a progression, 35 in Q2, 45 in Q3, 45 in Q4. That means that the overall corporate spending for the whole year is going to be right around 200 million.

Great, thanks. And to come back to the raw material question while the other airport industrials will call out for you, what the revision to the raw material expectation has either in absolute dollars or percent change in terms of percentage of cost of goods. Is that That's something you could help us with in those terms.

At this point, Terry, the net-net of the two isn't outside of what we expected, and that's why we are not calling it out. You'll recall a couple of years ago when we called out the net difference impacted us for X number of cents both in a quarter and the full year. And at this point, it's not outside of that range.

And I wonder if you could give us some color kind of around your confidence on that view. I mean your U.S. growth now down to zero. I wouldn't have expected you would have nail down all of the purchase prices on all the raw materials you need fully for the second half of the year at this point. What message really should we come away with you in terms of your confidence on that balance remaining favorable for you?

Again, Terry, just a correction. We said U.S. growth is one, but I don't think that changes the nature of your question.

Yes.

Now we have an announcement [ph] for those of you, a number of you have written articles in terms of on our various different price increases that are out in the marketplaces and in our different businesses. And we have announced additional price increases as we have gone to the spring and the early summer. Obviously, those have to be realized, but we think our record over the last couple of years is probably the best guidance as to how well we have been able to do. And both realizing those and getting the cost reductions put in place to share [ph] where we do not have to pass on costs. So we are pretty confident in terms of that view in terms of how it effects our guidance for this year.

And how would you characterize sort of where you are with walking down, the prices on the raw material you meet in the second of that, that still up in the area sort of largely covered or where on that?

It's very different by business and type of commodity. But we don't see the risk issue there being anywhere akin to what it was in late 2003 and early 2004.

Okay. And then on the lower truck and auto margins, quickly, just trying to get the sense as to whether that is a mixture of raw materials and volume or just volume. How do we nail that one down?

The way to think about truck is it really is market related. We had talked about having a market that start this year at 240 was our heavy duty forecast. We brought it down to 230 at the end of the first quarter. We brought it to 215. So you're looking at a 25,000 unit difference and that's really that difference in terms of the margin up there. It's not other items, and on the automotive side make one clearly only have to look at the month of May, and what's happened in terms of the enormous mix shift away from the light truck segment to the passenger car segment in our earlier comments on that impact. That's the big issue plus obviously there was another important conference call going on this morning at 9 o'clock. And I think you're continuing to see a lot of turmoil here in the North American automotive space, and that's why we've taken a look at the third quarter saying that we think it's likely to be below the second quarter in terms of demand levels.

Okay. Thanks very much.

Next is Jeff Hammond. Good morning Jeff.

Hi, good morning. Sandy, wanted to go after the international commentary a little bit differently. I mean you talked about the top down, the macro view and just kind of knock in a point off across the board. But can you talk about for a bottoms up perspective, what you're actually seeing in your businesses? Is that coinciding with kind of the top down view? Because some of the commentary seems a little more favorable vis-à-vis your business versus macro.

Yes, I think probably the big question, Jeff, has been we've been saying for some time that we thought there was... let me start with Europe... that there was weakness in Spain, weakness in the UK, clear weakness in Italy and that you were beginning to see things flatten in France. And the $64,000 question I think for people has been what's happening in Germany. And I think to everyone who has been reading all the data and there was more data out this morning, clearly, the trend in Germany has been one of weakness. And you saw a consumer confidence number come out this morning in Germany that was well below even what the people expected, which had been a decline. So we think clearly Europe is slowing. That's why we've taken the growth down there from about 2.5% in the first half to 1.5%, and that is what we have seen in some of our businesses. Not all of our businesses have seen it yet, but we are planning that that is likely to occur. We've not seen material weakness in Asia in this regard. Now clearly, with some of the catastrophes that have occurred in China in terms of the earthquake area, business in those areas has been pulled back, but it has not affected our overall business in that regard. South America has stayed remarkably strong through this, and so each of our businesses is there continuing to see very robust demand. Then as I mentioned here in the U.S. the primary change in our view here in the U.S. in the truck market, it's in the passenger car market and it's in the commercial aerospace side, particularly on the after market side. And so those will be kind of the overall trends that we've seen, Jeff, how it kind of lays out. I would say that Eastern Europe has continued to be quite strong. Russia has continued to be quite strong. We still believe that many of these areas in the world that are very active in infrastructure build out are still and will still grow at a premium to what we have been seeing in the more developed nations of the world. Than we shared a new statistic with you in our press release that about 20% of Eaton's revenues today are now in the emerging nations of the world. And so when you think about so much of what's being written in terms of economic forecast currently, it's written about the U.S., it's written about the OECD countries and it doesn't really look at the growth rate and that's occurring in these emerging countries and we are doing quite well there and its again another part of the overall mix in balance story for Eaton with 20% of our revenues now coming out of those fast growing economy.

Okay, thanks a lot.

Next we have Jamie Cook, Jamie?

Hi, good morning. Most of my questions have been asked. Just first, how much did FX help on the operating income line?

Jamie, let me get you an exact number; it was about 14 million.

Okay. And then I guess just following up on the electrical equipment line, I guess how far exactly do you have visibility I guess into 2009? And then just a second question, when I look at bookings, I think it was up 11% in the quarter. You said it was up 15% in June. It seems like that is accelerating, but you are taking your end market forecast down slightly. So I'm just trying to reconcile with you, or is there some sort of seasonality that I'm not adjusting for?

Jamie, I think on the market question, it really... as we think of our global growth being reduced, we think it then has to have some impact on the electrical businesses. And clearly, with all the financing pressures that are out there, we think that it has some impact on prospective new building. Having said that, where we are having such a strong participation, and that's why our business is performing so much better than the market, is in many of these power-related markets. Take petrochem for example. We all know that everybody is trying to build about everything everyone can in that area. It's true in medical as well, it's true in a number of these other areas. So that's part of the reason we are outgrowing as well as we are. We also have a bigger part of our footprint in that business in some of the emerging nations now. And that's come through the acquisition of MGE, Phoenixtec and Moeller, each of which had very important participations in a number of these economies that are growing quite quickly. In terms of your question of how far out do we have visibility, we are normally on large project bids, we are out six months. But I would tell you on some of these big power bids, when you are quoting a refinery, something of that size, that's a multi-year lookout. So that's why we say the long cycle side of that business, we can see out into 2009 and in some cases projects that are... they want to have delivered in 2010. But at the side of it, we have been trying to keep a very close eye on is what's happening on this short-term commercial side where people are building retail or smaller strip stores, and the stuff turns in a moth or two. And we are still having good bookings on those, but... I will say it again, we anticipate that will slow down during the second half. And that's why we have continued to say our kind of guidance for this year was mid single-digit growth or non-res... and that's U.S. non-res. And then as you get into next year, that business has gone flat or negative and the power side stays stronger. Now we --

Are you --

Excuse me?

NoI was going to say, I am sorry, are you seeing any cancellations within the electrical equipment business yet?

Nothing material. No.

And then just quickly on Phoenixtec and Moeller, when I think about them, they are, if you look at Moeller, I think when you guys announced the acquisition that Western Europe was about 60% of sales like in Phoenixtec. Here it's about 35% of sales. So I guess that's the part that concerns me with Western Europe slowing, how that impacts those two acquisitions. Can you comment on how you sort of balance the weaker macro environment and the integration challenges and whether you are seeing any weakness there yet.

Yes. We have promised you here at the end of the second quarter a restack up of our electrical business and market exposure. Let me give you that, it may help address some of those questions. We had always described our business before these three acquisitions as the end markets being 40% non-residential construction, 10% residential, 40% power quality, 10% spread between industrial and utility; that adds up to 100%. Post these three acquisitions, the business is now 30% non-residential construction, 15% residential, 30% power quality, 20% industrial and 5% utility. So I hope what you take away from that right away is the business is more balanced than it's ever been. Now when you hop inside [ph] and the business is now 40% U.S., 60% outside of the U.S. We had told you before it was 45%, 55% and actually, as we stacked all this up now, it looks like it's even looked more outside of the U.S. than it was on our first look at it. When you look at it from a geographic point of view, the business is 40% U.S., 10% South America, Canada; 40% EMEA and remember, that includes the Middle East as well, it also includes Russia, so it's not just Western Europe and has Eastern Europe as well and then 10% Asia Pacific. If you step within the residential business, which is a question many people have when you say gee, the business is now 15%, about 70% of that's outside of the U.S. And so... and in the last question many of you had raised over time was if you look inside your power quality business, how much of it is new construction? How much of it is aftermarket and upgrades? And it's about 65% new, about 35% aftermarket and upgrade. I hope what you take away from all of that is our electrical business is exceptionally well balanced now. And that's really what we were trying to drive from both a geographic and an end market segment basis through these three deals.

And I appreciate that breakdown, but are you seeing any weakness in Western Europe in those two acquisitions?

No. What I mentioned... no, Moeller has continued to be quite strong, MGE is [indiscernible]. The one area that we have talked about a couple of times this spring is that we are seeing weakness in Italy, in Spain and that's kind of to be in some of the IT channels there as well. And that goes along with some of the residential weakness we've seen there as well. And so that is some of the lower end of the UPS product line, but... and that's part of why we've taken our growth down there. But we are outgrowing end markets, and you are seeing that through our 7 points of outgrowth, again. And that's... we are outgrowing in Europe as well as we're outgrowing here in North America.

And I'm assuming your forecast in '09 takes into account a weaker Western European market for this business?

Really, for all businesses, it's that lower rate that we talked about for the second half of this year.

All right, thanks. I'll get back in queue.

Yes.

Next we have Mark Koznarek. Mark?

Hi, good morning.

Good morning.

Hello.

Couple of things I wanted to go into a little bit more, the electrical business on the margin side. Clearly, since the Moeller and Ptec acquisitions were just concluded, they haven't yet been integrated. So could you tell us what the core electrical business would have done in terms of reported margin and what the acquisitions are doing? Are they about equal or is one significantly different than the other?

I think as we had mentioned, Mark, when we acquired the businesses that Moeller was a very profitable business, as was the MGE business and that Phoenixtec was somewhat of a lower profit. It's hard for us with the way these are getting integrated at this point to break out kind of base business versus those businesses. So we are undoubtedly getting some benefit from the acquisitions, but we are not getting the benefit, that you correctly pointed out, of the integration from significant cost moves we've made yet. Those actions, as I think I mentioned in reply to Bob's question earlier, will really start in earnest in the third and fourth quarter so that we'll start to see, as we had indicated, the big accretion from these businesses net of financing occurs in 2009. And I think everyone will recall from our press conference when we talked about those, that was $0.25 to $0.35. So when you come back to our 2009 guidance, again, you'll remember we are talking about 4% to 5% growth in that market, $0.25 to $0.35 accretion from Moeller and Phoenixtec, then the pension benefit. And all of that is what has led us to believe that we can get this 15% to 20% increase in earnings next year.

Well, Sandy, with the acquisitions, did they contribute to margin in this quarter or were they dilutive to the --

They definitely contribute to margin. But again, I guess the way we think about that too is net of financing so that you're seeing a beneficial impact in the segment. And the financing cost is not in the segment obviously.

And then you had previously indicated that for the year, the acquisitions would be roughly neutral to earnings. Is that still the expectation?

Yes, I think the only issue is that... I think that we haven't calculated that specifically at this point, Mark. I think that's right, except we went a little earlier on the financing herein. We'd have to go back and take a peek at that just in terms the timing. But I think for all practical purpose, we can assume that.

Okay. And then the final thing I wanted to ask you about is the comments about '09 with 4% to 5% being the new overall market outlook and you're heavy truck outlook is up 35% in that roughly 10% a year, well maybe like 8% at this of the overall business. But that really leaves only 1 to 2 points of growth to be contributed by 90% of your overall remaining revenues. So roughly, what is going to be sort of flat to down to offset some of the categories that presumably are going to grow like aerospace, like electrical et cetera? Roughly, what do the rest of the markets directionally look like for next year?

Yes, our calculation will be a little different than yours. I think it's leading you a little too low on the other side, but we're not prepared this early in the year to lay out guidance by each of the quarters. The only reason we've laid out... excuse me, by each of the segments. The only reason we've laid the truck one out is that we know a lot of people were out there with a three in front of that number. And we just think that's not the right place to be in terms of thinking about it at this point. But as we get closer to next year, Mark, and hopefully a little bit more stability in end markets, we'll start to provide that kind of a layout by each of the individual segments.

Okay. All right. I'll look forward to that. Thank you.

Next, we have Ted Wheeler. Are you there, Ted?

You might in your earlier comments take this... answer this question off the table, but I guess I thought I'd try it. And that was aerospace next year. You talked about the aftermarket business being flat, maybe even down in the second half. For next year, what do you see for the aftermarket in aerospace and what do you see for commercial OE and what do you see for defense?

I think, again, a little early to tune that one, Ted. But I think if you watch Farnborough this week, it's already sort of an interesting insight. Most people went into that show which began this weekend with the expectation that it was going to be all about order cancellation. First three announcements I have seen at the show are all about new order placements. And what you're seeing is a fair number of order placements. You've not seen cancellations so far. It doesn't mean that they aren't going to come. But we think with those backlogs, and what's happening is people want the newer, highly fuel efficient aircraft. And I think you've seen a release from Boeing in which they talked about the 737-800 as some 30% more efficient than a -300. That's the race right now, is to try to get these more fuel efficient aircraft. So we don't see the OEM side backing off here. And remember, then on the defense side, you've got some very major programs that are coming into the high point of shipment now, Joint Strike Fighter, clearly being one of them. And with the new defense budget authorization, it was just not contain the spending for a lot of the retrofit activity on many of the aircraft that have been so heavily used in the Middle East. These are primarily a lot of the cargo and then the rotorcraft that have been beyond maintenance kind of cycles. And there's a lot of work to be done there. So we think those areas continue quite strong, but we've not yet taken all that and broken it down into a finite forecast yet for 2009.

Right. And just lastly, you talked I think about the proposal activity on I think you mentioned lodging specifically and then lumped it together with retail and some other short lead time. If you looked at that proposal activity, is it down single digit, double digit? I mean where do you sort of see that piece of electrical, those end markets trending in '09?

Our expectation for '09 is where we think those businesses will end up is kind of the light commercial side of non-res is that those are going to end up being flat to negative. And that's generally what happens in the cycle, in that we'll end up still with positive power side. And that together will give us a slightly positive number. But we would very much expect that, whether you are talking retail, whether you are talking office, whether you are talking any of that light strip store type stuff, that should be negative at the time of the cycle. And that's consistent with what our view was before.

Thanks for the color.

Next is Dan Douge, you there Dan?

I am.

Good.

So two quick things. One is, did I hear you correctly, Sandy, that you're not seeing a slow down in infrastructure-related efforts in emerging markets? You indicated you're sort of taking your GDP growth down, but I thought I heard you say that the infrastructure efforts were not coming off, is that correct?

What I said is that the growth is continuing quite strong in those emerging nations. China as an example, though, we've taken a point out of growth in China. So... but we've not seen significant project cancellations or back offs except in the area that really was hit by the earthquake so terribly. It's our expectation that as those governments begin to pass through fuel costs, which you've seen in India and China and Malaysia for example that you'll have some impact on growth. But we've not seen a big impact yet; it's more of our expectation that it's reasonable to think the growth comes down a point. Having said that, you are still ending up with very high single digit, in some cases, low double-digit growth in those areas of the world.

Okay, great. And then one quick follow up on the electrical segment. Is any of that out growth of the end market, I mean that's a pretty extraordinary rate of out growing your end markets. Is any of that due to revenue synergies in Moeller and Phoenixtec? I know you don't bake that into your acquisition projections, but are you starting to see any of that?

Little early still. As we have said, we primarily have used kind of the cost and working capital approach to finding the way to be able to buy these businesses. And we regard revenue growth as kind of gravy on the top. We do think we will get some of that, but it's a little too early, yes.

All right. Thank you.

Next is Martin Sankey. You there Martin?

Hi, good morning.

Good morning.

And thank you for permitting me to ask a question. Okay, I would like to go back to Mark Koznarek's and others questions regarding the 2009 outlook. If we sort of look at it from a macro perspective, you have taken down the growth forecast... excuse me, pension expense is... benefit is less, tax rate about the same, up. Kind of what's going right in order to keep the range between 15% and 20%?

Well I think part of it is the denominator has come down. The denominator came down from $8.05 to $7.85 midpoint of this year's guidance. And so while we have taken the market growth down slightly, the denominator came down, the and relationships hold about the same.

Okay. But I mean your base is the same, but... what I mean is if you look at the factors that go into the forecast, the growth piece is less, the accretion aspect is about the same, the tax rate is about same. I am just trying to get a handle on why the... what's compensating for the lower growth piece.

Mark, if I can help you, one of the things to remember is that we will have the full year benefit of Moeller and Ptec as well.

Right.

Which,we only have part year impact in '08.

But that was part of the original 15% to 20% growth articulation?

Yes, but it's just another factor on top of the fundamental market growth rate.

Right.

Mark, we are not trying to suggest, obviously, that we have a decimal point of accuracy in terms of our view for 2009 yet. And we tried to provide, when we provided this in January, a general guidance as to what we thought the major factors were. Our numbers still add up to suggesting that based upon the factors we have got here that we can deliver that kind of 15% to 20% growth in earnings.

Okay, I will accept that, Sandy. Okay, thanks for the answer.

Yes.

Okay. We have one more here, Chris Glynn, you there, Chris? Christopher Glynn - Oppenheimer & Co.: Yes, thanks. So I guess maybe thinking of in answer to Martin's question that with the integrations and synergies for the acquisitions, some of the early signs, maybe that the synergies there will be one of the biggest drivers next year, the electrical operating margins?

And the business is clearly running better than we had thought originally. Christopher Glynn - Oppenheimer & Co.: Okay. And then just bridging to the growth for next year from this, we are looking at about 3% from the markets this year and 4% to 5% next year. Now the first half was above the 3%, so implying maybe 1 or 2 from the markets in the second half. That's quite a leap up to the 4% to 5% next year. Just wondering if I'm thinking about that correctly.

That is correct. We're talking about there not being a lot of growth here in the second half from where we are here in 2008. I think, again, a couple of people put their finger on us that one of the big issues relative to next year will be the fact that we will have a rebound in the truck business. And so that 285 type number versus 215. I think the second issue has to do with our kind of base economic forecast where you'll recall that earlier in the year, we were anticipating a rebound in the second half here in the U.S. Higher fuel prices in particularly and some more of the kind of credit woes, if you will, we think have pushed that out of this year. And we do expect that we will see that begin to come back, but it's been pushed out by a good six months. So our expectation is we have got six months more of this kind of digestion that we're all getting to watch on the television every day, and that's going to manifest itself during the second half of this year. And at some point during next year, we're going to come through getting people enough settled with their credit environment that we'll begin to see some form of stability start to return. I think the very good news is that Eaton's balance, right, during the heart of all this degree of turmoil here in the second quarter produced an extraordinary second quarter. And that's why we remain confident about what we think is a very strong second half, albeit the total full year guidance is down by some 2.5%. But we think that's pretty immaterial in this kind of environment to hold that kind of earnings power and balance right through this period of turmoil. So if I could leave you with one thought, I think the diversification strategy is working, the balance is working, we're able to withstand lower end markets than we have thought. And our view of 2009 is still quite strong and we think we are a attractively positioned company to deal with what are fairly highly tumultuous end markets at this point. But it has not changed our base confidence in our outlook. Christopher Glynn - Oppenheimer & Co.: Okay. Thanks. Your other comment on sort of a six month push out of a rebound was particularly helpful.

Great.Now that concludes the Q&A portion. And again, I would like thank everyone for their participation, and as always, I will be available through the rest of the day and probably into tomorrow to continue to answer your questions. Thanks again.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.