Eaton Corporation plc (ETN) Q1 2012 Earnings Report, Transcript and Summary

Donald H. Bullock - Senior Vice President of Investor Relations Alexander M. Cutler - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee Richard H. Fearon - Vice Chairman and Chief Financial & Planning Officer

Stephen E. Volkmann - Jefferies & Company, Inc., Research Division Jeffrey T. Sprague - Vertical Research Partners Inc. Jamie L. Cook - Crédit Suisse AG, Research Division David Raso - ISI Group Inc., Research Division Andy Kaplowitz - Barclays Capital, Research Division Ann P. Duignan - JP Morgan Chase & Co, Research Division Eli S. Lustgarten - Longbow Research LLC Andrew M. Casey - Wells Fargo Securities, LLC, Research Division Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division Terry Darling - Goldman Sachs Group Inc., Research Division Andrew Obin - BofA Merrill Lynch, Research Division Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division Joshua C. Pokrzywinski - MKM Partners LLC, Research Division Brian Michael Rayle - Northcoast Research Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Corporation First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Mr. Don Bullock, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. I'm Don Bullock, Senior Vice President of Investor Relations. Welcome to Eaton's First Quarter 2012 Earnings Conference Call. Joining me this morning are Sandy Cutler, Chairman and CEO; Rick Fearon, Vice Chairman and CFO. As been our practice, we'll begin today's call with comments from Sandy, followed by a question-and-answer session. The information provided on our conference call today will include forward-looking statements concerning the second quarter 2012 and full year 2012 net income per share and operating earnings per share; second quarter and full year 2012 revenues; our worldwide markets; our growth in relation to end markets; and our growth from acquisitions. Those statements should be used with caution and are subject to various risk and uncertainties, many of which are outside the company's control. Factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in today's press release and related Form 8-K filing. As a reminder, we have included a presentation on the first quarter results, which can be accessed on the Investor Relations page. Additional financial information is available in today's press release, which is located on the Eaton's homepage at www.eaton.com. At this point in time, I'll turn it over to Sandy. Sandy?

Great. Thanks, Don, and welcome, everybody, this morning. I'm going to use the presentation that Don referred to, and so I'm going to start on Chart #3 that's entitled Highlights of Q1 Results. Obviously, as you read in our press release, we had a number of records set in our first quarter, we think a very solid start to this year. Operating per share up some 10% at $0.92; net income per share up 10% at $0.91; our overall sales up some 4%; and significantly, a really nice strong start to the year with our segment operating margins of 13.8%, up from 13% a year ago. Emerging market sales were 23% of sales. And this is significant for those of you that recall that in the fourth quarter, it was some 27%, and was even a little stronger than that in the third quarter last year. And this really reflects what is, I think, we're all seeing around the world today with the weakness in China and the Brazilian markets, in particular, versus a year ago. And that's having an impact on a number of our segments, and I'll talk a little bit about that as we go on this morning. We're raising our full year operating earnings per share guidance for the second time this year. Recall that we raised it by $0.05 back in February when we announced our acquisition of SEL and we're now increasing it an additional $0.10. And I think the easiest way to think about this $0.10 increase is about $0.06 of that $0.10 comes from less negative ForEx than we originally anticipated this year. You'll recall our original guidance was for a negative impact of $550 million in terms of our full year sales. We now think it's more likely to be on…

[Operator Instructions]

Our first question this morning comes from Steve Volkmann with Jefferies. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Sandy, I'm interested in your comments on what you described as a fairly significant mix shift, I guess, toward the U.S. and away from non-U.S. growth. And I was surprised that given that, a couple of things happened. I would have expected margin maybe to go up a little bit on a blended basis. Just my feeling is that margins are a little better in the U.S., that maybe that's no longer the case. But also the tax rate, I guess I'm surprised the tax rate would actually go down on a higher mix of U.S. business. So I'm wondering if you could just sort of flesh those things out.

Sure. Let me take the tax one first. I understand your point precisely. However, I would tell you that when we try to estimate tax rate for a year, it is exactly that. And until we start to really see how the mix lays out for a year, we try to be as accurate as we can, but it's a pretty tough art. So I'd say, I think more significant now, Steve, would be kind of comparison to watch first, second, third and fourth because we've got a better view as to how the mix is really laying out this year. So if you want to call that forecast there, I guess I'd put it more in that category. On the issue of regional markets, I think it remains to be seen kind of how the year plays out. I think you're right historically, we've had slightly higher margins here in the U.S. But what's happened really as we begin to mature our margins around the world, that's not as true as it would have been if you went back, say, 4 or 5 years ago. But little early in the year still. We're pleased with those 32% incrementals in the first quarter. But as I tried to highlight in my comments, there seems to be a little bit more uncertainty in kind of global growth rates this year than there was, say, a year ago, and we'll try to kind of have that in hand as we think about these forecasts as well. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Understood, okay. And a quick follow-up on the Electrical business. It looks good outgrowth in Electrical North America, not so much in Electrical Rest of World. Maybe just flesh that out a little bit, and I'll pass it on.

Sure. And here in North America, I think what you're -- or in the Americas, what I think what you're continuing to see is our very strong position here in these markets. I think it gave us the ability going back almost 2 years ago to predict when we'd see the non-res turn. We also had a very good quarter in terms of the large data center business in both on a booking and a shipment basis, so we're very pleased with that. Our service business, quite strong as well. In the Rest of World, that number is exactly the same number as you saw in the fourth quarter. And remember, a piece of that, this year-to-year, is still the solar piece so we would look for that to significantly reduce in terms of undergrowth as we move into the second quarter.

Our next question comes from Jeff Sprague with Vertical Research.

Sandy, can you just flesh out a little more on what you're seeing in the data center market? In the past, you've given us some granularity around kind of different sizes of product. Any color there would be helpful.

Yes, it's always a couple different elements that are flowing through there in terms of it's never as simple as one top line item. But I would say that for those of you who've been watching server sales in the first quarter, it was a little slower and so the IT channel pretty flat really through this first quarter versus a year ago. If you start to look into some of the bigger data centers, of course it always depends upon what an individual competitor wins. We had quite a good quarter, so our orders were up very significantly in that area based upon a number of really good wins. I'd say the middle part of the market, which deals with sort of small to medium business, not as robust as one might think, but I think that's a reflection of kind of this caution that's out there in some areas of the marketplace at this point. So we were very pleased with, again, our continued strong share performance in there. But I would say low end of the market, a little flatter; high end of the market, some good opportunities, but you got to win them. And then for those of you who had the chance to attend our session where we talked specifically about data centers last year, you saw some of the capabilities we've got and some of the thermal management capabilities and that's beginning to come on quite well as well.

And then just shifting to Aero. Looking at your commercial business collectively, so excluding defense, is your OE aftermarket mix in Q1 indicative of what we're going to see over the balance of the year or is it going to shift more towards OE as the year progresses?

No, I think this is relatively indicative of what you're going to see this year because some of these ramps have occurred at this point, and we're very pleased that, some of you saw the tornado damage that occurred to a primary feeder in the U.S. commercial aerospace a week or 2 ago and they seem to have come through that a whole lot better. So we're not hearing any kind of changes at this point in terms of production rates. But again, I'd say this quarter was very much in line, top line and margin-wise to our expectations this year.

And then just finally for Rick, and I'll pass it on. Maybe it's my forecasting error, to use your term, but pension OPEB was lower than I was dialing in. Is Q1 indicative of the run rate for the year?

We still, Jeff, believe that our estimate of pension increase this year that we gave in January is accurate. The pension number bounces around slightly quarter-to-quarter mainly because of changes in lump sum settlement. But for the year, we continue to believe our estimate.

Our next question comes from Jamie Cook with Credit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: Two questions. One, I'd be interested to hear your comments on -- you talked about the push out in overseas markets getting better now. You don't expect it happening in Q3 and more Q4. What gives you that confidence? And are there any markets that are better or worse than you thought? And then my last question, did you get any -- one of the big themes for the first quarter everyone's talking about is potentially the benefit from warmer weather than usual. Did you see that in any of your businesses? And I guess with raising the North America forecast, I just wonder if Q1 was a little better than we thought for that reason. And I'll get back in queue after that.

Sure. Let me take the second one first here, Jamie. Generally, the warmer weather would be an impact, I would guess, in 2 areas: number one, it would affect construction activity, which would fall most heavily into our Electrical Americas business. We really didn't see dramatically different pull-forwards, and I'm guessing it'll be a couple of quarters before we've got enough look-back data to really understand that. We have heard a number of people say in earnings conference calls over the last couple weeks that they saw their bookings slow down as they went through the quarter and some have referenced that to the fact that January and February were unusually strong because of good weather, so March wasn't as much. We did not see a slowdown as we went through the quarter, so that's not our experience. I would say secondly, some people have said that the warmer weather put more people in retail showrooms, and in our case that would have an impact in terms of Automotive. We saw pretty good activity through the quarter. And while I think some estimates got a little over-baked for March in terms of how high retail sales might be, it was still a very, very good month. So for us, we don't think that was a big item, but I would have to tell you I think we probably have to get away from this for a couple of quarters to be able to give you a good perspective. In terms of the Rest of the World markets, we had originally thought that some of the easing activity that was going to go on, let me speak first to China, would have a little stronger -- or a little quicker, let me say, impact. You did see some PMI numbers this…

Our next question comes from David Raso with the ISI Group.

On your international outlook, I'm just interested that you took down Electrical Rest of World, Truck and Automotive, but you kept Hydraulics the same. What's distinguishing the Hydraulic international outlook from the other businesses?

It's held up a little bit better in Europe and part of that -- part of what's been going on within there is it's the machine build side has seemed to hold up a little bit better there whereas it does not serve the residential, commercial construction business to that degree. So again, I wouldn't put high decimal points behind this. It is hard to forecast in these markets that are going through kind of what I call fundamental economic weakness. But that's our best estimate, David.

Okay. And lastly on Truck, and if you said it, I apologize, I missed it. Your full year outlooks, how they were adjusted, say, for Brazil Truck and China Truck. And particularly, with the Euro 5 truck now being built in Brazil, what's your feel from down there right now on the emission changeover? What do we think?

Well, I think it was interesting. I was in Brazil, David, and I can't remember whether it was January or February. And at that point, people were fairly bullish. I've been talking to truck manufacturers about how fast they would burn their inventory. What became clear is that the -- or clearer is that their optimism was perhaps a little bit more than was -- proved itself out because what we saw happen was while people were being optimistic, their production rates were dropping, as we said, by some 31%. We think it takes them well through the second quarter to start to get this to come back up. So we've dropped our forecast of the truck and bus production in South America. And I don't know, Rick, if you got that difference there.

Dave, we're, right now, looking at full year truck and bus production in Brazil to be down about 10%, so much less than the first quarter. But yes, previously, we were expecting it to be flat to just down a small amount.

And I know you're not huge in China, but do you have a China thought process from what it was and what it is?

Yes, it hasn't changed dramatically for us because as we had forecasted China. Last year was a weaker year after they had, had the boom year the previous year and we were not predicting a big, big snapback for this year.

Our next question comes from Andy Kaplowitz with Barclays.

Sandy, maybe you can give a little bit more color on Hydraulics in a different way. I mean, you talked about the bookings declining 15% and that the OEMs are just sort of filling their backlogs. What kind of visibility do you have into the hydraulics market as you go throughout the year? I mean you did raise your Hydraulics forecast a little bit even with the decline in bookings.

Yes, we get -- and of course the question is always the visibility versus what's the likelihood of a change. And so the visibility, we get very good forecasts from our major OEMs and they go out 6 months-plus. I think the bigger issue, as we learned in 2008, is that those forecasts can change. That is not what we're seeing right now. What we've seen and that's why we started a little bit to express this concisely is that a year ago we were still seeing the over 2-month out time period being filled in as OEMs were rebuilding their backlog, their commitments. They were trying to forecast material requirements to us. And it had gotten quite short if you went back into the 2008 and early 2009 time period. That's changed and so now what we're seeing is handsome growth as you're seeing on our top line, but it's not the double-digit growth that we were seeing of last year. And we saw some big fill-ins in the first quarter last year to get that backlog filled out. So we think that the bookings are very adequate to be able to meet our kind of volume expectations this year, but we're not seeing that big year-over-year issue. Conversely, on the other side, I'd say the distributor area, although stronger from that point of view, is that they never built what you'd call distant backlogs and so they are not experience year-over-year weakness.

Okay, that's helpful, Sandy. And maybe if I could ask you about the acquisition landscape. I mean we've seen a couple larger acquisitions from you recently in Hydraulics. What about the other markets then within Hydraulics? Are buyers and sellers getting closer together this year? Is that what we're seeing?

No, and you may recall the comment that I made last year in our third quarter conference calls where I said that after world GDP kind of crashed in terms of people's forecasts in that late July, early August time period, that we felt what probably was occurring in many acquisition negotiations around the world is buyers and sellers had come apart because the buyers immediately recalibrated forward value and the sellers were holding on to what they thought was there beforehand. I do think that's come back together. We've had a period of time now of 6, almost 9 months for people to recalibrate where they think growth is and it's not just Eaton. I think you're seeing a number of companies that are starting to get more transactions now. We're really pleased with these 2. Our strategy remains the same. We're trying to add acquisitions in our Aerospace, our Hydraulics and our Electrical business and we remain focused upon that and our cash flow's been allowing us to do. So and these 2 really add some terrific capabilities to put us into markets that will, we think, be advantageous for Eaton.

Our next question is from Ann Duignan with JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Sandy, just a kind of philosophical question, I guess. You changed your outlook -- revenue outlook for 5 of the 6 businesses, 3 down, 2 up versus a year ago you were taking up your outlook for 3 of the businesses. I'm just curious, on the flip side, you remain confident in your market growth. Are we at a point in the cycle where there can be less -- there can only be less confidence in market growth going forward because things are changing so quickly?

No, I don't think so, Ann. I think we remain convinced that a lot of the drivers that are the primary sources of growth in our markets remain exactly the same. That energy costs are getting more expensive, that regulations are really also helping to drive that speed of technology adoption and it doesn't matter whether it's an emerging nation or a developed nation. So that basic theme for investing in Eaton, that energy costs are going to continue to drive technology, innovation and adoption and that we're well positioned, I think, is very much intact. I think what you are seeing is that in response to 2 different issues: One, I think the government spending crunch in Europe and how they work their way through that process, that has meant that Europe has been more challenging during this time period. And I think in China, I think you're going through a fundamental change as they're trying to move themselves to an economy that's got more balance in the -- from the consumer side or the consumption side and not strictly in investment-based economy, which has obviously served them well for 20 years. Having said that, you've all traveled to China. You know where the construction and the additional electrical capacity, the roads, agriculture is going on, and there are huge parts of China that still need to have that type of investment made and that's generally true in most of these emerging nations. What we're intrigued by, in addition, is that the U.S. market where people would have traditionally said, gee, that's going to be one of the slower growing markets right now, it actually is growing pretty darn well in a number of our markets as you can see by our forecast. So no, we continue to think there's very strong growth. Nothing has changed our view of the fact that we can grow at the top line 12% to 14% per year. I think you're seeing a demonstration of our ability to acquire advantageously during these time periods as well as to grow our sales organically. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay, that's helpful. And then a more tactical question. I noticed that Eaton was present at the automotive suppliers group meeting last week to address the potential lack of resin for both automotive and truck. Can you talk about what you're seeing there and what's happening, what's developing in terms of explosion in the German resin factory?

Yes. Ann, we're aware of the issues. We've not seen any changes at this point from our customers. But I guess I would point to 2 other kind of parallel issues that have happened over the last couple years just to kind of put it in perspective. When the really tragic, tragic disaster happened in Japan, I think there was an overreaction to what was going to happen to global automotive production SOA. What we found is the supply chain scrambled. There's a lot of global capacity that was put in place or utilized in a different way. And that turned out to be way overblown. And I think in terms of Thailand, while it did hit certain parts of the electronics industries, it didn't hit the whole industry. And so I don't mean to be Pollyannish about this, but we've not seen changes from our customers at this point and there are alternatives in this area. And I think we'll see how this works through by the time we get to the end of the second quarter. Ann P. Duignan - JP Morgan Chase & Co, Research Division: So stay tuned, I guess, is the...

Yes, I think that's appropriate.

Our next question comes from Eli Lustgarten with Longbow Securities.

One clarification, and you talked about the second quarter versus the first quarter. You said it's all explained by incremental volume. The implication is that we're going to see a similar tax rate in pension and ForEx for the first quarter, is that what you're telling us at this point?

Yes. Eli, it's right. The tax rate should be broadly the same. There may be very small differences. But overall, we think that those items you cited will be about the same.

And again, for the year...

ForEx. The issue, Eli, so we don't confuse you on the ForEx because the $100 million number that I mentioned for ForEx in the second quarter is a year-to-year, so that's second quarter 2011 to 2012. The $200 million to $300 million of volume with almost no ForEx involved is a Q2 2012 to Q1 2012.

Okay. And can we talk a little bit about the sensitivity of the numbers because I'm sure it's going to come up. We went from the emerging markets turning in the midyear, now the third and fourth quarter. What would be the impact or can you just broadly summarize if the emerging markets really don't turn much and Europe doesn't turn much in the fourth quarter because those are the 2 -- it sounds like 2 assumptions and the probability that they could not turn, so we're still -- what kind of sensitivity that might be for the year?

Well, I think maybe a way to think about that, Eli, is that our sales in the first quarter were approximately 23% from emerging nations. And so if you made the assumption that 23% of the company's sales didn't get 1% or 2% recovery in them, I think that might give you a sense for it.

Okay. And one final question. You've kept your truck number at 300,000 for the year in North America. And the orders have been a little bit softer from that annual rate for the last 3 to 6 months. And more importantly with 78,000 from the first quarter and probably 81,000 on the schedule in the second quarter, you're overproducing even at 300,000 rate. Can you talk about -- I mean, there's got to be some production cuts coming just to bring the rate down even to 300,000. Do you have some idea where do we see the decision points and what kind of outlook, some color of what's going on in the marketplace because it looks like the 300,000 could be a little bit in jeopardy by 10,000 and 20,000 units.

Well, and clearly, what was out there in terms of the production schedules were numbers that were well above 300,000. And I think that's the piece that perhaps has been missing a little bit in people's analysis is that the production cuts, in our mind, are bringing it down closer to the 300,000. There's still over 300,000. And a number of the announcements that have gotten a lot of publicity for the second quarter were necessary to get production numbers down from sort of mid-80,000 numbers down to numbers that made a little bit more sense in light of where we are in the first quarter and where bookings have been. So I think perhaps, again, the original production schedules were maybe a little bit more bullish. They were more bullish than our forecasts, and they're coming into line with our forecasts.

Our next question comes from Andy Casey with Wells Fargo.

I guess somewhat back on Eli's emerging market question, on the Electrical Rest of World initiatives, if my math is right, you incurred approximately $0.02 hit in the first quarter. Is there an all-in impact for 2012 that you could share? In other words, do you expect the benefit to offset the cost?

It's in our margin guidance for the year, Andy. We'd said we took those actions early in the first quarter and those were intended to be able to set up our margins for this year.

Okay, because I'm just -- like Eli, I guess I'm wondering what impact the push out of the non-U.S. recovery has given that you kind of kept unchanged the 2012 operational performance.

Well, we dropped the margin expectation full year for 0.5 point in our Electrical Rest of World based upon the fact that we saw a whole quarter move out. And so we've not calculated precisely what if the fourth quarter didn't occur. But we think this represents our best thinking at this point in terms of -- but we recognize people can have different opinions of when they think Europe will begin to stabilize or when Asia might stabilize. I think the numbers this morning, it's interesting to listen to people's reactions to the PMI numbers that came out this morning because they're still not great numbers, but you got about half the world that's looking at them saying not great numbers and about half the world seems to be looking and saying, well, gee, they're less bad so that's good. So this is a hard time to call that.

Okay. And then could you give a little more, like, granularity back on the 2 Electrical segments? In response to an earlier question, you've indicated you did not see any orders deteriorate for Electrical Americas through the quarter. Was it more evenly spread or did you see any acceleration? And then within Electrical Rest of World, that 6% decrease for the bookings, was there any deterioration through the quarter for that one, particularly in Europe?

No. Actually, it strengthened slightly as we went through the quarter. And I'd say that the issue, remember again in our Electrical business is that the first quarter is the weakest quarter of the year. That's true whether that is our Americas segment or whether it's Rest of World. And there are 2 reasons for that: one is that construction-weather relationship, which is typically worse in the first quarter; second is that the IT reseller channel tends to be weaker in the first quarter than the other quarters and that laid out as well -- this year as well.

Our next question comes from Jeff Hammond with KeyBanc.

Just a few housekeeping items. Just can you reconcile lower end-market assumptions for Auto, Truck and keeping the margins? And then just secondly, on the Hydraulics deals, are those neutral to margins overall? And then if you have a free cash flow number for 1Q, that'd be great.

In terms of the Hydraulics, nothing material change from that. If you recall, they added about -- we added $0.05 to our guidance this year from SEL, which will be in the numbers for a longer time period. But no, we're not changing our earnings guidance for that segment even with those 2 added in this year. Rick, you want to pick up the...

Yes, on the free cash flow, because of the large pension contribution, Jeff, that we made in total, we invested about $330 million of pension, $305 million of which was in the U.S. qualified plan. We ended up with a minus $200 million free cash flow number. Now if you'll recall, normally, we're relatively neutral in the first quarter absent pension-type costs. And so if you take out pension, it was a pretty reasonable quarter.

Okay. And then just on Auto, Truck margins, why not tweak those down, just given the lower market assumptions?

Yes. And what we saw there is it wasn't enough really to move our margins significantly there, Jeff; not to say that if you didn't get further type of weakness, it might hit them. But the big jump in the U.S. activity here in Automotive, in particular, is it allowed us to really hold those margins. And then in Truck, it just didn't move them enough at this point.

Our next question comes from Terry Darling with Goldman Sachs.

Sandy, I wonder if you'd talk about where you see some potential upside in the model at this point? I guess, specifically, I'm interested in your incremental margin at the segment level. You commented on 32% versus 28% guidance for the year. That guidance did not change. Maybe you could comment what you're seeing on price cost in that mix as well.

Yes. And again, Terry, I guess I would put this in the category of we've finished the first quarter and there's a long time to go obviously in the year. But we're very pleased, as you mentioned, with the margins ran a little higher in the first quarter. A bunch of that gets, unfortunately, eaten up by the slightly higher share count. And of course, that's our best forecast at this point as well. I think as we look at this 5% market and we look at the ForEx issue, these are our best estimates at this point. I still think a 28% full year incremental margin's an appropriate way for us to think about this. We do think there will be pressure on the euro, which is -- continues to be why we have that forecast out there. That's the biggest single currency year-to-year change for us. So that I think this range of earnings we've provided, the full range, is a reasonable way to think about the year at this point. We continue to think the outgrowth assumption makes good sense as well. And obviously, at a 14% overall earnings increase for the company we think we're forecasting a pretty robust year already.

Okay. And on price costs, what are you seeing there in the first quarter? And how does that spread trend as you look forward?

Very much in line with what our guidance was. You'll recall that on the whole price cost issue this year, we thought it would be largely neutral for us. We think that's the way it's playing out. We obviously are trying to be sure that with our customers that we're watching this for their benefit as well, so we're not looking to significantly widen these margins at this point from what our guidance is.

Okay, then just on the outgrowth in Electrical Americas, was that all on the data comp side or did you see some in other areas?

No, no. That's a number that covers everything we're involved in. And of course, remember the Americas, that's from Canada all the way down to Argentina. So it's all those countries. But no, we've had a very successful quarter again with major activity in oil and gas, wastewater treatment. These are markets that are continuing to do quite well. Utilities got its head up and moving. And we're pleased -- we've been a very strong player in residential. We've rode that down as that went down. We now are getting to see it finally, it seems like it's been a very long time, starting to come back as well. So no, it's well balanced across the whole power distribution as well as the Power Quality segments.

Okay. And then just lastly, maybe a longer-term competitive question. Fair bit of chatter about automated transmissions penetrating markets in Truck on a longer-term basis. Can you give us your updated view there?

Yes. No, our view again is that these markets are very different as you go around the world and has a lot to do with the duty cycle of what the driver is driving. So that our cross-highway applications here in the U.S., very long runs, that our confident [ph] our transmission still gives you the best efficiency, which is the big driver in terms of what's going on in terms of fuel efficiency. If you get into the medium-duty markets and that, for some time, has been a market that has had significant conversion here and obviously elsewhere over to automated transmissions. Very different when you get into an area like Europe where you've got much shorter hauls and that's why the automated transmission is used as the predominant transmission in that arena. Our share is very strong here in the Americas, speaking directly to your question, and we think we've got competitive product that addresses not only the traditional mechanical, but also the automated transmission.

The next question comes from Andrew Obin with Bank of America.

Just a question on Europe. X inverters, what is -- what would you say the European market did in the quarter?

And which market are you speaking about?

Just overall for the company. Just trying to get the sense where Europe is for Eaton because I understand there are different dynamics, as I said, particular x the inverter business.

Yes, very different if you go through our individual segments. I'd say we still think that the European market's down on the order of 7% or 8% kind of broadly on Electrical. I think you see that in terms of a number of peers who are reporting there as well. Again, it's x the Middle East, which some people include and some people don't include. It's pretty much across the construction markets as well as the industrial markets. And Europe held up a little bit better from a hydraulics point of view during this quarter as you saw some mobile activity continuing to hold it up a little bit stronger. And then the truck market, we're really not big players in the European truck market. We did, and back to an earlier question in terms of automotive, we've become a little less positive on the European automotive market this year and that was in our forecast as to why that number turned down as part of the overall Rest of World.

Sure. And just a follow-up, on Auto profitability, you stated -- you highlighted lower profitability on new capacity in China. I apologize if I had missed it, but what is going on there and what is the implication for auto profitability in China going forward?

Yes, Andrew, in the first quarter conference call back in January, we commented that we're adding a facility that ends -- that adds significant additional capacity for engine valves and the whole valve actuation capability. That plant we incurred about a 1 point negative on our profitability for the fourth quarter, normal start-up costs that happened again here in the first quarter and we think will happen in the second quarter. We continue to do quite well in China. The business is growing quickly. That's why we're adding the capacity, so we're very pleased with that and we still think our overall 12% segment margin is the right guidance for the segment full year. So obviously, we pick up from the level that we're at of just over 10% here in the first quarter.

So Auto profitability for you in China despite slowdown in volumes remains pretty good?

We've still got a very attractive business there.

Our next question comes from Robert McCarthy with Robert Baird. Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division: I wanted to follow up on Hydraulics. I was surprised to hear you describe distribution as flat. Wonder if you could talk about that within the context of your expectations for the full year? And is that influenced by having a higher proportion of foreign OE sales that go through distribution?

And this was a characterization. You said the foreign OE sales? Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division: Well, when you were talking about the Hydraulics segment and bookings being down 15%, et cetera, you mentioned that distribution was flat, then you came back to it again talking about how distribution's holding up better. No growth, though, despite the fact that you got this positive end-market shift going on, more favorable U.S. So that I thought is of interest. And then beyond that, I assume that you do some of your OE business through distribution and I wondered if that could be influencing the overall number?

Yes, there -- I got your question. Thank you, Robert. There is a portion of small OEM business that does go through distribution. And yes, the construction side of that is have -- is pulling it down, so if you were to pull out mobile and look within distribution, yes, it's not flat. Robert F. McCarthy - Robert W. Baird & Co. Incorporated, Research Division: Okay. And my other question really goes to a different question about conservatism and how you're thinking about the rest of the year. There is, of course, some dependence in the U.S. on deteriorating and weaker in your outlook for economic growth, especially in the EU, but -- in the developing countries. So I mean, can we assume that you could have justified stronger numbers yet for the Americas? And -- but you're being cautious because of the potential for a knock-on effect or is it simply that you're not seeing a knock-on effect so you're not yet worrying about that?

Yes, we've not really seen a huge frictional kind of down from it, if you will. And I think you're still seeing that U.S. exports are holding up pretty darn well. It's been a strength point in the economy and so our best estimate is that these numbers, which are pretty strong numbers when you look at 9% growth for the Americas, are very appropriate outlook at this point.

Our next question comes from Josh Pokrzywinski with MKM Partners.

Just wanted to touch back on Electrical Rest of World margins if we could. I guess to hold the incrementals at 28% or I guess at a target of 28% for the rest of the year, with Truck hitting tough comps, certainly strong growth and easier comps in Electrical Americas in the first half, help me understand how incrementals look in Rest of the World as we play through the year and kind of get past some of these solar tariffs? Is it an issue of getting some of that systems business that you talked to at the Analyst Day or is there something else at work there that I need to appreciate in terms of the margin trajectory in the back half?

Yes. No, I wouldn't pick out any one product line or any one region. Our overall guidance of 28% for the company for segment margins is after that I think we've got a very good and strong first quarter, we still think is appropriate. The key, really, in Electrical Rest of World segment at this point is to begin to recover a volume levels and that comes from 2 issues: One, we will not have the large year-to-year decline in the solar business because the second quarter last year is the first quarter it really dropped in whereas the first quarter we still have very robust volumes. And then the second piece would be when we start to see Europe and China, in particular, within Asia Pacific, start to stabilize and not have this kind of year-to-year overall volume growth. Our best estimate is that we begin to start to see that occur really in the fourth quarter, so that -- and that's tied to this overall forecast we've discussed in regard to several questions this morning about when does Europe really kind of flatten and start to stabilize and the same true for China.

I guess what I'm trying to get at is when those markets normalize, stabilize, recover, however you want to term it, do we lever above, at or below kind of that average for the corporation as a whole? In Rest of World?

Yes, I guess we'll have to wait and see, Josh, pretty specific. And our expectation is that the business is going to perform at that 28%. Its actual decrementals were significantly better than that in this quarter. So I think that you get a feel for how effectively expenses are being controlled.

Our next question comes from Brian Rayle with Northcoast Research.

Most of my questions have been answered. I guess if we could just look at the North American electrical equipment improvement of guidance of increasing it 1%. How could you kind of look at what was coming from sort of a new construction increase and new orders coming in versus sort of the traditional sort of restructuring, remodeling business?

Yes, most of what you're seeing here, Brian, is I think it's being driven by maybe 3 fundamental issues: the nonresidential put in place construction, that's new construction being up almost 10%. That's a big driver. Secondly would be the new activity going on in the power quality activity and a new data center. That's new construction. Our service business was quite strong in the quarter, but part of that is it's really not remodeling as much as that tends to be keeping people's equipment really safe and electrically efficient during the time period. I'd say the remodeling activity that many people are talking about now really pertains more to the residential segment where you're seeing a lot of kind of the do-it-yourself, fix-up-your-home activity. That's a portion of residential. But remember residential is less than 10% of our business. So I'd say most of what you're seeing driven here is new construction, new economic activity.

We'll be taking another -- one additional question. And then as always, we'll be available at the end of the day to follow up with any other questions that you might have. Our last question of the day comes from Nathan Jones with Stifel, Nicolaus. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: Sandy, you've talked about the broadening of demand in nonresidential construction. I'm wondering if you can talk specifically about what you're seeing on the commercial side and what your expectations are for the balance of the year and maybe even into 2013 if you have visibility there.

Sure. And let me just share a couple of numbers with you if you haven't had a chance to see these. U.S. private put in place, non-resi construction up, as we said, 10%. The commercial and health care structure segment was up almost 5%. Office was up almost 3%; health care, 5%; other commercial, 6%. That is the segment that has been particularly weak over the last 2.5 years. Manufacture structures, up 29%; power and communications, up 15%; mining structures shaft and wells, up 8%. Now you get into nonresidential structures like amusement and recreation, up 25%. This is a pretty broad recovery. And I've heard characterizations over the last couple of months and people don't think things are being built in the U.S. from a construction point of view. This is put in place and so this is what we saw coming in the bookings last year when we talked about we thought this market would be up because we tend to see the bookings out ahead of when it's actually put in place. Our very solid bookings of 6% in the first quarter are indication to us that we're going to continue to see this kind of build in nonresidential construction. So again, we're not forecasting 15% year-on-year-on-year growth, but we are seeing a broad-based recovery in nonresidential construction in the United States. And that is a very important driver of our Electrical Americas business. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: Yes, and that's why I was asking is I know you guys see those orders before they come out in that construction put-in-place data. So I was wondering if you are seeing continued strength on the commercial side?

Yes, we are. And the good news is that instead of its being in just 1 or 2 of these segments, it is pretty broad-based. And so whether this is petrochem driving it, whether it's wastewater treatment, whether it's health care driving it, whether it's utility driving it or whether it's the more commercial building activity and happening with office construction and if I could take a jump over to non-res -- to res construction for a minute, these rent increases that are beginning to impact rental apartments are obviously starting to drive construction in that segment as well. And so it's been quite some time in coming, but we think it is coming at this point. Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division: And one quick follow-up on Electrical Rest of World. With demand maybe not being as strong as you'd previously thought it was, are you seeing any pressure on the pricing environment; like are you seeing any pressure on margins from competitive pricing from yourself, competitors, et cetera?

Yes. I'd say things are always competitive out there and I'd say it's not different than what was reflected in our guidance for this year. And I think we are continuing to look at those opportunities to keep our own cost structure extremely competitive and that's part of the actions we took in the first quarter. And then we talked a little bit about in our New York meeting in terms of taking costs in the first quarter, taking actions in the first quarter, that would really allow us to size the business appropriately and we think we've taken those actions now.

Thank you, all, for joining us today. And as I said before, we will be available for additional follow-up questions for the remainder of the day and the rest of this week. So thank you very much for joining us.

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