Ladies and gentlemen, thank you for standing by and welcome to the Eaton Fourth Quarter Earnings Conference Call. For the conference, all the participant lines are in a listen-only mode. There will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions]. I’ll turn the call now to Mr. Donald Bullock, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning. For those of you I’m Donald Bullock, Eaton's Senior Vice President of Investor Relations. Thank you to all of you for joining us for Eaton's fourth quarter 2018 earnings call. With me today are Craig Arnold, our Chairman and CEO and Rick Fearon, our Vice Chairman Chief Financial and planning officer. The agenda for today’s call includes our opening remarks by Craig, highlighting the performance in the fourth quarter, our outlook and our guidance for 2019. As we’ve done on our prior calls, we’ll be taking questions at the end of Craig’s comments today. Before we dive into that, I do want to make couple of quick passing comments. The press release for our earnings announcement this morning and the presentation we’ll go through today have been posted on our website at www.eaton.com. Please note that the press release and the presentation include reconciliations to non-GAAP measures, and a webcast of this call will be accessible on our website and available for replay after today’s call. Before we get started, I do need to remind you that the comments today do include statements related to expected future results of the company and are therefore forward-looking statements. Any results may differ materially from a forecast that could be due to a wide range of risk and uncertainties, and those are described in the earnings release and the presentation, and they will be also outlined in our related 10 Q filing. With that, I’ll turn it over to Craig.

Okay. Hey thanks, Don. I’ll start on page 3 with highlights of our Q4 results, and I’ll start by saying that I’m very pleased naturally with their report this morning and another very strong quarter performance, which really rounded out our solid year overall. Earnings per share of a $1.46 a share, up 13% from last year, and above the midpoint of our guidance. And this was driven by flows strong growth in sales, as well as higher margins. Sales are actually $5.5 billion in the quarter, an increase of 5% and this includes 7% organic growth and this was above our guidance of 6% for the quarter. Bookings growth in the quarter was also strong, led by double digit growth in both Electrical Systems & Services and in Aerospace. And so we continue to be pleased with our margin performance as well, which increased 100 basis points to 17.4%. We had solid margin performance really across all of the segments and all time record margins in Electrical Systems & Services and in Aerospace. We also generated very strong operating cash flows at $1.1 billion, up 27% and a quarterly record if you exclude the $300 million arbitration payment that we made earlier this year. And lastly, we reported and repurchased $700 million of shares in the quarter, taking advantage of what we saw this frequent pullback in financial markets. And if you’ll recall, we had planned to purchase $240 million in the quarter to achieve our target of $800 million to $1 billion for the year. I’d say for now, you can think about this as an acceleration of purchases and that we were planning to make in 2019. However, if markets remain weak, we’ll certainly take advantage of those opportunities as well and buy at higher levels. Moving…

Thanks, Craig. Before we go ahead to operator to open it up for questions, I do want to make a couple of comments. First, we do acknowledge today, is a day that has an enormous number of peers out there and earnings announcements. So we are going to hold our call to an hour. To do that, it’s important that you limit your questions to a question and a follow up if you would, so we can be sure to cover everyone’s questions. With that, I’ll turn it over the operator to give instructions.

[Operator Instructions]

Our first question today comes from Jeff Sprague with Vertical Research.

Thank you. Good morning. Thought very solid Craig, I was wondering, if you could provide a little bit of additional color on how you saw things play out during the quarter, obviously the quarter itself was very strong. But we did have that peculiar slowdown in September. Did you see people tapping the brakes in December as the market got wobbly and what are you seeing here in January?

Jeff, I guess you’re referencing largely what we talked about on the Q3 earnings call and Electrical Systems & Service where we did see this pause during the month of September. We’d indicated at the time that we thought that was a temporary pause, that these products do at sometimes tend to be lumpy, and we thought that, that would come back in Q4, which it certainly did. No, I’d say Q4 was really pretty much a consistent quarter. We saw the high level of economic activity really across the quarter, pretty consistent across each of our businesses and as I’d noted, with no real significant, no measurable pre buy at all, as evidenced by the growth in our backlog. And so, I think it was a solid clean quarter across the board, and despite the level of economic uncertainty that’s out there. Activity levels are fairly good, and in through the month of January, we’ve really seen kind of a continuation of that performance. Certainly, in the context of our guidance for Q1, which is a little lighter than the growth rate that we saw in Q4, we do think there is some economic uncertainty out there, which is essentially what we have reflected in our guidance. But by and large, activity levels across our businesses are still quite positive and quite strong.

Thanks and unrelated. Just on tax, Rick. I mean your guidance is pretty straightforward, but we’ve seen a couple of companies getting hit by this IRS change and deductibility of interest. Is that an issue for you or a wild card or is that fully encapsulated in your guide?

It’s fully baked into our guide. One of the reasons that the tax rate jumps from roughly around 13% to 15% in 2019 is because we’re reflecting the implications of all these regulations that came out last year, some of which, I think surprise some companies. But we had anticipated that they would come out largely as they did. So that’s why we’re comfortable with this 14% to 16% range for 2019.

Great. Thank you.

Our next question comes from Joe Ritchie with Goldman Sachs.

Thanks. Good morning guys. So Craig, maybe just on the EPS range. $0.30 wide versus kind of like typical is closer to $0.20. Maybe, can you just give us some insight into why you expanded the range, and what market conditions have to be in place to drive you to that towards the higher end or the lower end of the range?

Yes, I would suggest Joe that don’t really over read or read much into the fact that the range is a little bit wider. I mean, I think it’s as our EPS in absolute dollar terms increases the percentage and the range will naturally widen a little bit. But I’d say that, for us, the big variables as we look forward into 2019 that could potentially influence whether you’re on the low end or the high end of the range. It’s largely a function of what happens with our end markets. Right now, I said we’re feeling fairly good. It was a strong fourth quarter, coming in stronger than what most had expected ourselves included. And so I think, it’s really a function of how end markets perform going into 2019, and to what extent some of the geopolitical kind of concerns that the world we’re dealing with in various kind of countries around the world get resolved. But I wouldn’t read anything into the fact that the range has been opened up a little bit. We’re feeling very good about kind of you know the company’s performance overall and degrees of freedom that we have around things that we can do in the event of a little bit of an economic slowdown. So I would not over read that at all.

Craig that said, that’s good to hear. And I guess my follow on, you guys cited power distribution assemblies and data centers as strong growers in 2019. I think data centers are up high single digits. This is though a little at odds with some of the announcements we’ve heard from some of the chip makers, so maybe talk a little bit about like the strength that you’re seeing in data centers that makes you feel good about the prospects for 2019.

Yes. I mean the data center market I’d say if you look at the long term trend of what we’ve been seeing in general, the whole world generates and consumes more and more data. I think it’s pretty compelling for the long term growth prospects. We saw strong double digit growth in 2018 and as well as a lot of major projects being announced. And so, as we think about data centers in general, while on the hyperscale side of the market, it can be somewhat lumpy. We do think that what we’re looking at in the form of an existing backlog and projects, that were in the pipeline, that the numbers that we’re talking about for 2019, which is kind of mid-single digit growth are very much in line with what we have visibility to. I think the chip maker piece is perhaps one that’s a little bit more nuanced in terms of whether or not that’s a direct proxy for what we’re seeing specifically in the data center market, as a lot of the big data center companies are actually in many cases vertically integrating and doing a lot of this work themselves as opposed to relying upon third parties. But now we feel very good about the data center market and about how we’re positioned and about the number of projects that have already been announced. And so we think it’s going to be another strong year.

Okay. Great, thanks Craig.

Our next question comes from Nicole DeBlase at Deutsche Bank.

Morning guys.

Morning, Nicole.

So I guess maybe starting with the 1Q outlook, it seems to me like the step down to 4% organic growth could be a little bit of conservatism reading between the lines of what you said in response to Joe’s question. But I guess, maybe thinking about from a segment by segment perspective, where the step down is coming from?

Yes, I’d say that as we take a look at Q1, we’re certainly seeing a step down in the growth rate. I’d say principally and Electrical Systems & Services is one of the big drivers and hydraulics, I’d say would be another one and then also in Aerospace. So those would be the three big ones that I’d say that’s a relative step down in the growth rate. And I think, largely the way we think about it in the call is the way I answer the question earlier is that, there is a lot of economic uncertainty out there whether it’s Brexit or the funding of the U.S. government or trade disputes with China. And so, we think given the level of uncertainty that’s still out there in Q1 that you could largely see a little bit of a pause in economic activity until some of these major structural issues are resolved there. And that’s kind of what’s baked into our forecast. Could it be conservative, it could be, but given kind of just a level of economic uncertainty out there, we think it’s prudent to plan for these issues to at least extend through Q1 and be resolved at some point and we think all of that logic is baked into our guidance for the year of growing some 4% to 5%.

Okay understood. Thanks Craig. And I guess, maybe my second one just around hydraulics. So one of your big distributors talked about solar power demand stepping down a bit in the last two weeks of December. Curious about that, as well as a confidence in the outlook for China Mobile to remain strong just because I think Cat is looking for more like kind of a flattish equipment environment in China in 2019?

Yes, I know China has continued to -- maybe I’ll deal with that one first before I get to the distributor one. China has continued to perform extremely well. If you take a look at excavator sales in Q4, and [Indiscernible] sales excavator, sales are up more than 20% in Q4. Vehicle [ph] order sales up more than 10%. And so the China construction equipment market at least in terms of looking at the public data continues to perform extremely well and our business does as well. And so, we think as we look into 2019, we do think that growth rates are moderate, but we still think that we see growth in the China mobile market specifically going into 2019 and that’s kind of consistent with what we’re hearing from many of our customers. And quite frankly, Eaton in the region we’ve done extremely well in terms of new wins and gaining some market share on platforms and that also influences our thinking as well. But in terms of the distribution market, I can’t really speak to one distributor in one part of region. I would say that, our hydraulics business in Q4, we had growth of organic growth of 8% and that growth was pretty even throughout the quarter. And so, we felt very good about the growth rates and we did not see generally speaking, or here generally speaking of any slowdown that took place at the end of the year. It wouldn’t surprise me that there is a distributor someplace who saw a slowdown someplace. But more broadly speaking, our business continued to perform well.

Understood. Thanks Craig.

Our next question comes from Ann Duignan with JPMorgan.

Yes. Hi good morning. Maybe Craig, maybe you could dig a little bit deeper into some of your end markets and give us some color in terms of where you’re seeing the strength and looking particularly maybe Electrical Products, which specific industrial markets, which some segment of commercial projects and then likewise maybe power distribution. Just so we get some color as to what’s going on out there.

Yes and I’d say that in the beginning with Electrical Products. One of the things we noted was lighting business returned to natural growth. It’s been a business that obviously we were taking some strategic steps to work through some specific market segment issues, and so that business for us returned to growth in Q4. And we think the outlook for lighting going into 2019, is that business will continue to grow low to mid-single digits. We think that the single phase power quality business, another business that grew mid-single digits in Q4. We had order growth that was a little better than that actually in Q4. And so that market continues to do well, and then largely the power distribution components, a lot of what we sell in the component side goes into small and large commercial projects in general. And so when you think about some of the growth that we see today in our Electrical Systems & Services businesses, mainly most of the components that support that business come through our Electrical Products business, and some of that goes to distribution is aftermarket as well. And so that business continues to do well. So we saw generally speaking, pretty decent growth as I mentioned the strongest growth that we’ve seen since 2014 in Electrical Products and the orders are performing solidly. And so, we think that market continues to have a decent year in 2019. In Electrical Systems & Services and it’s really as I mentioned almost strength across the board. Large industrial projects, commercial projects, those markets continue to perform extremely well, and you see many of the same data streams that we see, non-res construction numbers continue to be up strongly mid-to-high single digits. The Dodge non-res contracts on -- were up 23% in dollars in Q4, and on a square footage basis up 10%. And so we’re really seeing strength in most of the non-res construction markets and as we talked about in data centers hyper scale and data centers in general had very strong results, up strong double digits in 2018 and we think a little bit of moderation in that growth rate as we move into 2019, but still strong growth. And so we think in general, these businesses continue to perform very well and that no real evidence of any economic slowdown at this point. And so we’re feeling very good about 2019. And then [Indiscernible] what your own guess is another one of those segments that’s been a lot of stuff talked about, but we had very good growth in Q4 and our [Indiscernible] business up, strong, single digits, high single digits. And so that business as well despite a little bit of pullback in oil and gas prices at the end of the year, we saw some recovery in December. And so we think that market also continues to grow going into 2019.

Okay, that’s good color. I appreciate that. And then just to follow up on that sustainability of aerospace margins. I mean we know it’s great that high margins in aerospace, but we also know we have to be investing in the future, so can you just talk Craig maybe about the near-term maybe positive mix versus the longer term. You need to be on the next platform in order to sustain those high margins?

Absolutely, and appreciate the question. I think there’s two things that are really driving the high margins in aerospace. I think one, it is the fact that aftermarket is continuing to perform extremely well. In better than most I mean at the end of the day, you make most of your money in aerospace and aftermarket, and an aftermarket is performing extremely well both in commercial and in on the military side. The other thing that I’d say that we and others are getting a real benefit from right now is really what you alluded to and it’s the fact that we’re in a bit of a pause period as an industry in terms of new programs. We went through a massive refresh over the last 10 years, and most of these new programs are actually going into service at this point in time, and the next, by the time you get to the next generation, the next refresh you’re probably 5 years to 10 years out. And so I do think that our aerospace margins will continue to be at very high levels for the next number of years and until we get to the point where we have the next round of major investments required for the next generation of commercial and/or military aircraft. And so, we are investing in the future. We’re doing a lot of investments in offline technology development to be ready, for insertion to get to a technology readiness level that says that we’re ready to participate on the new platforms. But I say it’s really those two things that are really benefiting our business as well as very strong execution by our operational teams.

Right. Thank you. I leave it there. I appreciate there.

Our next question comes from Nigel Coe with Wolfe Research.

Thanks guys. Good morning.

Hi.

So, what a difference [Indiscernible]. I’m just trying to understand the turnaround in ESS because it feels like there’s probably economic concerns in the U.S. than there was back in September, October. So I'm wondering what are you hearing from fields, your sales, engineers, customers whatever in terms of what cause the pause and why there risk now? And maybe just in terms commenting on creep activity this quarter pull ahead a price increases as such. Did you see any of that? And could that explain some of this pressure?

I’d say – Nigel, I appreciate the question. We spend the fair amount of time talking about Q3 earnings call. And I think the way we characterize it at the time was we said the business we thought was in fine shape, at least that we saw a specific pause in the month of September and the business tends to be lumpy anyway and we try to encourage everyone to the look through September and say everything will be fine, which is to way it turned out. And so, I wish I could give you the exact answer to why we saw this pause in the month of September other than saying at sometimes it does happen in these big systems businesses where orders tend to be lumpy. But by and large I think what we characterize in Q3 what that our Electrical System & Services business was doing great. It was in fine shape. And we expected that we would continue to post strong growth in that long cycle business and that's essentially what’s happened. Now and to the point around pull ahead, we’re not really seeing any pull aheads at all. We talked about. As we continue to build backlog in that business. It’s up some 13% from last year. And so I that would, the way I characterize Electrical Systems & Services is once again very much like long cycle business. Its performing as expected and you will occasionally find a month or so where things tend to be lumpy.

Okay. That’s great color. Thanks Craig. And then just maybe address price and in particular lighting price. I feel that lighting price is getting a lot better. And so I just appreciate your comment in what you're seeing in term of demand for lighting, obviously low single-digit since 2019, but specifically the price component of that what you’re seeing in the market?

Yes. I would say that lighting prices in general and some of this could be as a function of trade and other things that are perhaps putting a little bit of a floor underneath some of the pressure that have been coming historically from the Chinese import, but yes, I would say that it did has the pressures in around lighting have somewhat abated. It still remains a very competitive industry and historically speaking if you recall in this business a lot of the lighting price get back was really a function of the fact that the price of semiconductors and electronics in general continued to fall and those prices were essentially passed on to our customers and to the consumers in the form of lower prices of LEDs. And so some of that is also that the price of the core electronic component is not falling at the rate that it has historically and we reached a little bit about bottom on some of that. And I think that also influencing the fact that lighting prices are foaming somewhat. We did have a much better Q4 with the mid-single digit growth. Our outlook going forward is low to mid single-digit and so we do think that the lighting business performs better for sure going into 2019 even it becomes no longer a headwind for the business becomes a little bit of a tailwind with respect to growth and so we’re enthuse by that.

Okay. I’ll leave it that. Thanks Craig.

Our next question comes from Julian Mitchell with Barclays.

Hi. Good morning.

Good morning, Julian.

Good morning. Maybe just the first question around the hydraulics business in the margin profile, as you said you had some operating inefficiencies in 2017 and 2018. If you could quantify at all what kind of margin headwind they comprised in 2018? And how quickly you catch up from those in 2019 and may be any other respects in which it changing how you sort of manage the productivity and the manufacturing pull-through in that business?

Yes. I appreciate the question, Julian, because this is obviously been one of the segment that we spend quite a bit of time talking about during the course of our earnings calls and one of the segments were we did in fact reduce our guidance for the year. And the way we characterize and then, I think it's the largely the case Julian, is that, this industry went through a very significant ramp of V-shaped [ph] recovery the supply chain and our supplier to many cases were just not ready for the ramp. And so we had a lot of inefficiencies in the business as a function of having to expedite parts. We had some challenges in ramping up hiring, not only in our facilities, but our suppliers had the same issues. And so there was just a whole host of inefficiencies associated with an industry that went through a V shape recovery and we were all caught a little bit flat footed. And as a result of that, those inefficiencies I’d say, if you think about the reduction in our margin guidance for hydraulics during the course of the year, you can largely say that is about equivalent to the level of inefficiencies that we saw in the business. And as one of the reasons why we as we look at the guidance for 2019, we think most of those efficiencies come out of this system and we would get to a business once again that’s performing more like what we would expect. And so I’d say that, while we’re not 100% out of the woods, most of the issues that we dealt with doing a course of 2018 and the efficiencies therein are largely behind us now.

Thank you. And then my second question. I think a lot of the Q&A so far has been on demand dynamics, so maybe switch to talking about capital deployment a little bit. You did some accelerated share buyback spend in Q4 when the price was down and obviously you’ve seen a good rebound since so the timing looks very good on that. Maybe flesh out a little bit how you are thinking about buybacks versus M&A and what kind of M&A appetite you have looking out this year?

Yes. Appreciate the question. No we did like, you articulate we saw the overdone Q4 pullback as a real buying opportunity and we did take that opportunity to accelerate some planned purchases into the end of the year. And I’d say, if you think about a capital deployment strategy, I think we’ve laid that out historically and we talked about, as we think about capital deployment. The first call on cash will always be reinvesting in each of our businesses, and making sure that every one of our businesses has the capital that they need to be successful and the win in the marketplace. With respect to M&A versus share buyback, we have been out of the M&A market for the last several years. We do -- I would say that the environment today is such that we’re looking at perhaps more opportunities and more deals in than ever. Pricing continues in some cases to still be a challenge and we've agreed that we’re going to maintain our pricing discipline through this period of perhaps pricing being above what we think is reasonable. We’ve said that our cost of capital is anywhere from 8% to 9%. We want a minimum of 300 basis points over our cost of capital. And so we’re going to be disciplined through this period. But having said that, we would like to get back into the M&A market, and the way I would think about it is our priority will be largely around bolt on acquisitions where you get a lot of leverage within our existing businesses, and therefore we can deliver synergies and value in these acquisitions that we acquire. But having said that, in the event that we’re not able to put capital to work through M&A, we will generate as I mentioned a lot of free cash flow in 2019. We won’t let capital build up on the balance sheet. And so we’ll certainly in the event that we’re not successful in the M&A market, we’ll certainly be more aggressive in buying back our shares.

And Julian, if I might add. We brought our debt levels actually even a little bit lower than we had originally anticipated after Cooper. And if you just do a quick little math of our midpoint of 3.2 operating cash flow on takeout CapEx, takeout of about 600 million, takeout dividends, take out the 400 million repurchases, it leaves us with about $1 billion of just excess cash to use on acquisitions or if we don’t find them presumably raising our repurchase amount.

I might add to that Rick, and we’ve been, we’ve been quite aggressive quite frankly. If you take a look over the last four years, in aggregate, we’ve we bought back some 13% of our shares over the last four years. And so we are certainly willing to step in, when we see these opportunities of weakness, and buy the stock back and given our dividend yield and the current stock prices, we think that it’s a tremendous value to buy Eaton at these levels.

Great. Thank you very much.

Our next question comes from David Raso with Evercore.

Hi. Good morning. I apologize, had phone issues earlier, so I apologize if this has been asked. Just trying to figure out the first quarter organic is slower than the full year. So obviously there's some assumption of some reacceleration as the year goes on. But the comps don't really get any easier. You mentioned ESS starts the year little bit slower on the step down, but the backlog for that business has been up double-digit for three quarters the orders have been the obviously lumpy in the third quarter, but two of the three quarters have been strong. So I am just maybe trying to dig into little bit more why ESS organic slows that much in the first quarter? And if we think of the businesses that you said maybe they start a little bit of a pause period, the acceleration in growth as the year goes on, is that more ESS? Is it aerospace? Just try to understand so that we have a cadence correct?

I appreciate the question, Dave and we did talk about this little bit earlier. And I think it’s really we talked about this. The level of economic uncertainty that exist in the marketplace right now across so many parts of the world that’s really giving us a little bit of a pause with respect to how aggressive we are on this Q1 number. And so I'd say it's really that issue more than anything that has been baked into thinking around acceleration. I mean, you have Brexit coming up. You have trade disputes with China. You have debt issues in the U.S. and so there’s a so many, I’d say, let’s call it geopolitical issues that we’re dealing with around the world that we thought that it would potentially have an impact on Q1 activity levels and that's really what’s baked into our thinking.

Well, I guess more directly. I’m just trying to figure out. Is there something you're actually saying, meaning anything reflective of what we saw on September? Maybe the backlog that you have -- have a little more -- they are little bit further out than traditional. I’m just trying understand how much is – again prudent understanding of some economic uncertainty right now versus something you're actually saying? That’s what I’m trying to dig into.

Yes. No. I'd say that if you characterized the backlog there’s really been nothing in terms of the characterization of the backlog whether that's in Electrical Systems & Services or hydraulics or the other businesses where we build backlog. The characterization and delivery timeframe of our backlog does not look significantly different than it looked historically.

Okay. Now I appreciate the color. Thank you.

Our next question comes from Steve Volkmann with Jefferies.

Hi. Good morning guys. Thanks for fitting me in. So, just may be related to that. I mean, historically I guess when ESS orders start to ramp up and backlog stretches out a little bit there's an opportunity to be a little bit more aggressive with pricing. Can you just talk about what pricing looks like in your order book in ESS? And how much that might have some upside going forward?

Yes. I think the way we generally think about pricing in general, Steve, is that, as to me there are net positive or net negative as we tend to over time offset commodity driven cost increases with price in the marketplace. And I would say today the pricing environment overall on Electrical Systems & Services is better than it's been, better than it’s been largely because of the level of economic activity overall has been better over the last 12 months or so. So, I'd say, as we think about price in general I wouldn't really think about it being a big contributor to pricing, but I think the overall environment today makes it a little bit easier as we think about negotiating with on large projects and with customers simply because from a capacity standpoint, in many cases we’re sold out, our competitors have sold out lead-times and in some cases have pushed out. And so I do think the environment overall is a little better as a function of volume more than anything else in our factories.

Okay. All right. Fair enough and maybe I’ll ask only eMobility question. Obviously there's lots of platforms that are getting announced for the early 20s. Is it too early for you guys to have actually signed any contracts for any of those platforms? Or is that actually happening?

Yes. I'd say that, we have signed some contracts already. Most of what we signed to-date there’s been relatively small, but I'd ask you to stay tune.

I will stay tune. Thank you.

Next question comes from Jeff Hammond with KeyBanc.

Hey, morning guys.

Hi.

Hey. Just a couple of final point questions. One, your margins in EPG looked a little bit lighter on the incremental, any anything there to point out?

What I try to comment on that one, Jeff, appreciate the question, because as you mentioned margins were a little bit lighter than we anticipated as well. And this is largely a function of product mix. And as you think about that to be a very large segment and when you have some of the segments that have lower overall margins growing a little faster; lighting for example that tend to have an impact on your margins overall. But I'd say, overall absolutely nothing to worry about there. The margins in EP are at very high levels and as you saw our guidance going forward we feel very good about 2019.

Okay. Then vehicle, looks like you’re calling for the markets to be flat to up and yet organic decline is -- anything to read into that in terms of share shift? Or is that just the Cummins JV moving around?

Yes. It’s really the Cummins JV. And it’s another question I appreciate, Jeff, because there has been a little bit of confusion around the way the JV impact easting it. So as the JV increases, as the world continues to consume and move from more manual transmissions to automated transmissions that revenue ends up showing up in the joint venture as I mentioned that the JV revenues grew 45% in Q4. And so we obviously get piece of the profits, but you’ll find it as we move forward the revenues for our business really have to be looked at, I’d say, largely in combination with the joint venture. We really want to get a sense for how we’re doing in the marketplace. But it’s really that issue that is driving essentially the flat revenues.

Okay, great. Thanks Craig.

Next question comes from Andy Casey with Wells Fargo.

Good morning everybody.

Hi.

Question on the margin outlook and price cost. Does that 2019 guide embed neutral price cost? You typically do that. And I’m wondering because you probably going to have carryover pricing benefit that spills in the 2019. And you may see raw material cost decline as the year progresses?

Yes. I’d say that what we generally do build in, Andy, to exactly your point is we build in neutral. And there’s always a little bit of timing on the upside and downside depending upon what’s happen with commodity prices. And so typically speaking as commodity increase environment we tend to be a quarter or two behind it. In a deflationary environment we tend to be maybe a quarter or so or two above it, but over the period of say, a 12 month period it kind of washes out to be neutral. And that’s really what we baked into our plan. Specifically as it relates to tariff and what we said in the Q3 earnings call was that we expect $110 million of headwind associated with tariffs. Since then the implementation had been delayed by two months. And so we think that number is now at $100 million, but our base assumption today still would assume that the tariffs -- the phase three tariffs moving from 10% to 25% go into effect and that our teams essentially go out and offset that with incremental price, but don't necessarily get a normal incremental margin on the additional tariff driven cost increases.

Okay. Thank you, Craig. And then on that 4x impact, the 250 million for the year, is that heavily weighted to the first quarter?

Yes. It would be more heavily weighted towards the first quarter, just given where how currencies have performed during the course of 2018, that’s be largely true.

Okay. And does that weigh out in the margin for the first quarter at all?

Yes. I’d say, not really. It really doesn't in terms of the margins itself and it really doesn't weigh on the margin. It certainly weighs on EPS for sure, but it really doesn't necessarily weigh on the margin rates.

Okay. Thank you very much.

Our next question comes from Mircea Dobre with Baird.

Hi. Good morning guys. Going back to EP, maybe try and understand your growth guidance a little bit better. I'm trying to figure out exactly how you’re thinking about getting to 4% to 5% growth. We really haven't seen order growth to that extend yet. Is this simply a factor of lighting no longer being a headwind and everything else pretty much staying the same or some other end market acceleration in there?

I think you kind of hit the nail on the head Mircea, with that one. As you think about what we talked about the course of 2018 where we've made some very specific decisions around our lighting business and walking away from business that wasn't profitable. And during the course of 2018 that business actually contracted some low to mid-single digits. And as we look forward that goes from a negative to a positive. And so that's really what's driving the big difference in the relative growth rate in our EP business.

All right. That’s helpful. And then back on vehicle you're expecting some margin expansion there even though obviously revenues not so much, so what exactly you generating that? And as you look maybe beyond 2019 presumably this businesses going to start see some volume deterioration. How do you plan on managing that?

Yes. I’d say, one of things that we talk about is the fact that we set this joint venture up obviously with Cummins and we don't consolidate the revenue, but we obviously get half of the earnings until the JV we’ll see revenue growth, our earnings growth in 2019 and that will obviously be -- will help us with margin expansion. And then I would say, more broadly, I mean, this is just a business and a management team that just done an outstanding job over decades of very efficiently running our business. And so operational improvements, efficiency improvements, cost out is something that we do extraordinarily well as a company and even better within our vehicle business. And so, we would fully expect that this business continues to operate at very high levels of margins even in the event of economic downturn of somewhat.

Thanks.

Our next question comes from Andrew Obin with BofA Merrill Lynch.

Hey. Good morning. Thanks for fitting me in.

Hi.

Just with economic cycle being so healthy and you guys executing well. How do you think about your capacity overall and North American capacity specifically, how do you deal with these high volumes?

I’d say that, it’s one of the reason, Andrew, I appreciate the question that our incremental rates as we provided our guidance in 2019 are perhaps a little bit less than what we experience in 2018, but we are having to make some investments in a lot of our businesses that are running at very high levels whether that’s Electrical Systems &Services, whether it’s in Aerospace. We made some really big investments in hydraulics during the course of 2018. And so we are having to reinvest in capacity expansion in many of our businesses that are running at very high levels. And so I think that's really the way you deal with. You spend the dollars and you make the investments and in some cases you look at your business models as well around what you invest and what you rely upon your supply base to do, but by and large we are making investments to expand our capacity.

And are you’ll be thinking your global footprint? I mean, the ratio where you investing that’s what I mean?

No. What we always try to do is really manufacturing zone of currency. And so we try to minimize the amount of goods that we ship around the world. And so what we today sell in Europe we largely make in Europe and what we today sell in Asia we largely produce in Asian. And so, from a footprint standpoint there was a lot of work that we've done over, say, the last 15 to 20 years around making sure that we have manufacturing capability and facilities in the right regions of the world. Most of that work is largely done. And so today it's really expanding where we need to in those regions of the world where we have capacity constraints.

And just a follow-up if I can. What’s your cadence in China through the year what are you expecting?

I’m sorry, your cadence around…

Oh, just cadence of revenue growth in China in 2019 through the year seasonality how you want to address it? Thank you.

Yes. I’d have to probably go, take a look at that question specifically as it relates to China. I don't have that level of detail in front of me. But I would say that in general what our belief is that the Chinese government will likely stimulate at some point we saw as you saw as well, the significant slowdown in the economy in Q4 specifically highlighted by what took place in the light vehicle markets which were down some 16%. So we believe and I think it’s largely belief that the Chinese government will stimulate at some point during the course of the year. So we do think that the second half of the year is stronger than the first half. But beyond that it’s difficult to really estimate at this point.

Thank you very much.

At this point in time we’ll have time for one last question, Rob McCarthy with Stephens.

Thanks for fitting me in for the buzz. Can you hear me?

Yes.

Sure. Two questions. One just on oil and gas, how do you think about your exposure there given the fact that you’ve seen the experience not only explicit oil and gas exposure but the implied bleeding of that oil and gas exposure into your industrial business. How do we think about the outer bound of that as we kind of think about your portfolio going forward and assessing the risk of what could be a continued downdraft year?

Yes. I appreciate the question Rob, especially given what I think we all experienced during the last kind of cyclically downturn in oil and gas market. And I’d say, the first thing I just remind the group that we tend to be more downstream focus and we are upstream focus. So it has a much longer cycle. We saw a little bit pull back in oil prices in the fourth quarter, but they came rebounding in December. And I would say, by and large our business performed well through Q4 and we’ve not really seen today any let’s say significant changes in our business in terms of the outlook. The rig count actually for 2018, that actually ended up some 20% for the year when you compare the year overall. And so we think that oil and gas is always a bit of a wild card and tough to predict exactly where it’s going, but given that we’re really coming off of, let’s call it a three or four year pretty significant downdraft in oil and gas market and we’ve just got our legs underneath us that we think oil and gas holds up over next number of years. It’s difficult for say for certain, but I think our base case would be that we don’t see a significant retrenchment in capital spending round oil and gas.

I’ll leave it there. Thanks.

Thank you.

With that, ladies and gentlemen we’re going to wrap up the call. As always we’ll be available for follow-up and questions following the call. Thank you.