Eaton's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Eaton (ETN)

Q1 2012 Earnings Call

April 23, 2012 10:00 am ET

Executives

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

Analysts

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

Presentation

Operator

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.

Donald H. Bullock

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?

Alexander M. Cutler

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 the order of $300 million.

About a $0.05 positive from tax where, based upon our starting a little lower this year and our mix being a little bit different than we had anticipated it might be this year, it's more likely to be about 1 point lower than we had guided to. I'll come back to that little later.

And then our number of shares, we think, will be about a point -- excuse me, about $0.01 impact higher than we had originally thought. So a plus $0.06, a plus $0.05, a negative $0.01, that gets you to $0.10.

If we move on to Chart 4. Just a couple comments here in terms of providing you some color around the difference from the midpoint of our guidance for the first quarter. Obviously, the midpoint was $0.85. I mentioned that the currency was less negative in terms of the impact than we had thought. We had originally anticipated we'd see about $150 million negative impact. We saw about $50 million and so that drives about $0.03.

Lower tax rate. It was at 15.6%, as you saw in the notes to our statements. We'd anticipated that while the full year was going to be around 18%, we thought the first quarter would start about 17%. So it's 15.6% versus 17.0%. And I think good news in terms of the improved performance. For those of you who had the chance to look through the incrementals of our business, we came in at about a 32% incremental versus the 28% we provided for our full year guidance, so all that gets you to the $0.92.

And our corporate expenses at $65 million came in at exactly the quarterly average of our full year guidance for this year.

If we turn to Chart 5 of the financial summary. I think these numbers are pretty well thought out in terms of the overall earnings release. So I'm going to spend more time going into the individual segments. I think significant here though is market growth of about 4%, so just a little bit below the overall 5% goal we had for this year. I'll talk a little bit more about what our anticipation is in the second half of this year for growth rates.

We move to Chart 6, which is the Electrical Americas segment. Terrific quarter. Obviously, as you saw, sales up some 13%, a nice strong start in terms of a 15% segment margin. I think encouraging, we've talked quite a bit over the couple years about what might be the curve of recovery in the nonresidential construction market. Really pleased to see it up some -- almost 10% on a broadening recovery. And interesting enough, when you look through the statistics here of U.S. private put in place nonresidential construction. What you'll see is that 9 of the 11 sectors that are reported are all positive. And that includes offices where I know there's been a lot of discussion, is there any office construction going on. Well, the actual detail shows it's positive as well. So what we're pleased about is not only the strength, but we're starting to see it play out into virtually all of the segments that are reported here.

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