Q3 2019 Earnings Call
And then instructions will be given at that time, if you shouldn't require any assistance during the call. Please press star zero and operator will assist you offline as a reminder, today's call is being recorded I'll turn the call now over to the senior Vice President of Investor Relations. Mr. Yen. Gen. Please go ahead, Sir hi, good morning.
Even senior Vice President Investor Relations. Thank you all will join US we need to third quarter 2019 earnings call with me today, our Craig Arnold, our chairman and CEO and refit outlets, Chairman and Chief financial and timely officer. Our agenda. Today include the opening remarks by Craig highlighting the company's performance in the third quarter.
As we have downing our past calls will be taking questions at end of the Craig's comments. The press release from our earnings announcement. This morning, and a presentation will go through today have been posted our website at www Ethan Dotcom. Please note that both the press release and the presentation includes reconciliations to non-GAAP measures.
A webcast of this call is accessible on our website and there will be available for replay before we get started I would like to remind you that our comments today, we're including statements relate to the expected to future results of the company and are therefore forward looking statements. Our actual results may differ materially for our forecasts.
Lastly to projection due to a wide range of risk and uncertainties that describing our earnings release and the presentation. There also outlined in our related 8-K filing with that our turn it over to Craig. Thanks, Sharon Freesheet. It will start on page three with a highlight of our Q3 results and overall I'd characterize this quarters.
Well Theres really strong earnings results and strong cash flow despite weaker end markets.
Earnings per share as you saw in the press release were $1.44 and GAAP basis, our dollar 52, excluding transaction costs and acquisition and divestiture and exited businesses at $1.52. Our results were 6% above last year, excluding the 2018 arbitration decision and within our guidance range of.
150 to 160.
However, sales were certainly lower than what we expected down 1% organically negative currency impacting us five point half and acquisitions, adding a half a point to our results.
We continue to deliver strong margin performance with another record an all time earnings or margins.
Operating margins of 18.7% or all time record for Eaton and this includes records for electrical products for electrical systems and services and for aerospace.
These margins were also above the high end of our guidance at 110 basis points above last year.
We continue to generate very strong our operating cash flows of 1.1 billion up 8% over Q3, 2018, and another quarterly record and lastly, as it right away of summarizing the results, where we purchased 539 million shares in the quarter, bringing our year to date purchases to now.
949 million or 2.8% of our shares outstanding at the beginning of the year.
Turning to page four we show a summary of our Q3 performance versus prior year announced I'll just point out a few highlights here first we delivered $41 million of increasing segment operating profits despite of 1% decline and organic revenue and this was really driven by strong execution effective cost control.
And favorable mix and a couple of our businesses second we incurred eight cents per share of after tax costs, primarily related to the planned divestiture of our lighting business and lastly, adjusted EPS increased 6%, excluding the 2018 got arbitration decision.
These results I'd say, our consistent with our board of message on how we intend to run the company during periods of market weakness with strong execution proactive cost control and increasing our share repurchases.
On page five we show our quarterly results for electrical products segment. Overall revenues were flat made up of 1% organic growth offset by 1% negative currency, we saw revenue strength in both commercial and residential markets in North America.
Partially offset by softness in industrial controls globally.
Segment operating profits increased 6% and operating margins were up 110 basis points to 20.3%, which was an all time record for the segment.
We also announced the sale of our lighting business to signify for price of $1.4 billion.
We see in our good outcome for our shareholders and another example of how we're actively managing the portfolio to create higher margin and higher growth set of businesses for Eaton.
This this was a decision. It was also good for our employees, who will now be part of a larger and more focused lighting company.
The transaction is expected to close in the first quarter of 2020, and I'd say for our core products business, which now excludes delighting orders were up 1% led by strength in residential and commercial constructors since commercial construction largely once again in the Americas.
Moving to page six we summarize our results for our electrical systems and services segment.
Revenues increased 3%.
3% organic growth, we also had a point and a half of growth from the acquisitions of wireless soy and innovative switch gear solutions and a half a point and a half of negative currency.
Organic growth peer was driven by strength in Datacenters commercial construction and actually also an engineering services are SNS business also produced all time record margins of 18.3%, which were up 290 basis points from prior year operating profit.
It's increasing some 23% on 3% organic growth.
This business benefited from higher sales for sure, but also had very good operational execution and conversion.
And on a rolling 12 month basis, SNS orders were up 5% with growth really across I'd say all regions here.
And if you exclude hyperscale datacenters. The 12 month Rolling average of orders was up 8%, which was really in line with what we saw in Q2. So once again, a long cycle business very much performing at a very high levels.
On the next page, we show our results where I draw extra Q3.
Revenues were down 10% with an 8% decline in organic revenues and 2% negative currency.
Organic revenue declines were driven primarily by weakness in global mobile equipment markets and quite frankly, destocking that we've seen both at the OEM level and also within distribution.
Segment operating margins were 11.9% down 290 basis this from last year.
But I say on a sequential basis margins were actually up 40 basis points. Despite seasonally lower Q3 revenues that came in about $100 million below Q2.
And our orders declined to 14%.
Really as a result of continued weakness as we mentioned in global mobile equipment markets around the world.
Turning to page eight we summarize our quarterly results for our aerospace segment to once again this business posted very strong rigs results with record topline and bottom line performance revenues increased 7% with 8% organic growth and 1% negative currency orders on a rolling 12 month basis.
Increased 13%.
With particular strength in the military markets specifically for fighters for Rotorcraft and also aftermarket. We also saw strength on the commercial side and business Jets.
We continue to demonstrate strong incremental margins with nearly 60% growth in margins on organic revenues, which drove a 23% increase in operating profits and a 310 basis point improvement in our margins.
And as you'll recall, we announced the acquisition of Sorial Sunbank in July and we expect this transaction to close before the end of the year.
So all things are good and aerospace.
On the next page, we summarize our Q3 results for the vehicle segment.
Our revenues were down 13%, which includes a 12% decline inorganic revenues and a negative 1% impact from currency.
The organic sales decline was due to a combination of global weakness in light vehicle markets, which we think were down approximately 4% in the quarter and primarily the impact of the transfer of revenues into the Eaton common joint venture.
For 2019, and NAFTA class eight market remains solid we expect production to be roughly 340000 units this year and up 5% for 2018, we do however, expect global light vehicle market to be down some 4% for the year.
Despite lower organic revenues and volume operating margins continue to run at very high level at 18.3% margins were down only 60 basis points from last year. So our vehicle team. Once again did a nice job of flexi spending which allow them to deliver decremental margins of approximately 25%.
Moving to page 10, we show our E mobility results for Q3.
Revenues were down 1% with flat organic revenues and negative 1% from currency.
Flat organic revenues in this case of due primarily to a mix of platforms that were one I'd ask you to keep in mind that in this business is really made up of a mix of the new electric and hybrid platforms plus the legacy electrical content that we have on internal combustion engines.
Once again, we increased our R&D spending which was really the primary reason why operating margins declined 740 basis points to 5.1%, but now we continue to pursue a large number of additional electric and hybrid programs here and we are very pleased with the progress that we're making to date.
Next on page 10, we summarize our outlook for 2019.
We now expect organic revenue growth of approximately 1% and as you know this is down from our prior estimate of approximately 3%.
And if it really based upon Vienna reduced global growth, particularly in our short cycle businesses. But also include some slow growth and non res construction is well sell growth, but slow growth, which has impacted our electrical business.
With an electrical we now expect full year organic growth of approximately 2.5% for electrical products and 4.5% for electrical systems and services.
In hydraulics global mobile equipment markets remain weak and this weaknesses mean amplified, but really been stocking in both the OEM and distribution channel as a result, we now expect organic revenues to decline of approximately 4.5%.
Aerospace remains strong across the board and we are reaffirming the midpoint of our full year growth estimate of 9.5%.
And vehicle global automotive markets remain weak so we're reducing our organic revenue estimates to be down approximately 10% for the year and we've also slightly modified our estimates for emobility as well, which we think will be growth of 4% at the midpoint of 2018.
And overall, our long cycle businesses within SNS in aerospace are expected to continue to deliver attractive organic growth rates for the year.
While we project low single digit growth for electrical products.
Overall.
Business conditions, the I'd say have clearly been impacted by trade by by the political environment and by the by sale a number of one off events that have weakened our second half outlook I.
Maybe as a as a point of kind of confidence as we look to the future we'd say in it but the fundamentals of the economy still solid low interest rates high employment strong consumer confidence and we'd hope that this pullback would be short lived for off the wait and see.
Moving to page 12, we show our margin expectations for the year and IP based upon the strong Q3 margins were increasing our consolidated segment operating profit margin guidance 20 basis points to a new range of 17.3 is 17.7% or 17.5% at the midpoint.
And this includes increasing margins for three of our six segments electrical products up by 30 basis points electrical systems and services up by 50 basis points and aerospace up by 120 basis points.
And due to expected volume declines were lowering margins in two of our segments hydraulics by 110 basis points and vehicle by 40 basis points.
With this updated guidance I'd say that really on track to deliver another record year of margins with a strong 70 basis point increase at the midpoint over 2018, despite lower revenues than we anticipated.
And finally, turning to page 13, we show our guidance for Q4 in 2019 for Q4, we expect adjusted earnings per share of $1.36 to $1.46.
Other assumptions for Q4 in our guidance include we think our organic revenue will decline by approximately 2%.
We'd expect segment margins of 17.2% to 17.6% flat corporate expenses hub.
Two last year and an adjusted earnings.
Tax rate of approximately 17%.
We are slightly lowering the midpoint of our full year 2019 adjusted earnings per share guidance to 572.
Nine cents below the current consensus and due to low market conditions. At this does still represent a 6% increase over 2018, when you exclude the impact of the arbitration decision.
We're also increasing our operating cash flow guidance by by another $100 million you recall that we increased by $200 million. So far through through this point and we now expect to deliver at 3.4 billion to $3.6 billion for the year.
Cemented the second time that we increased our operating cash flow guidance, which highlights really the strong cash flow generation capability of our businesses.
For 2019, our free cash flow to adjusted earnings conversion is expected to be over 120%.
Our free cash flow to sales is expected to estimated to reach approximately 14%.
Other full year guidance assumptions include 1% organic growth.
$100 million of revenue from the acquisitions of although soy and innovative switch gear solutions.
Foreign exchange impact of a negative $350 million and this is actually $50 million worse than our prior guidance.
Segment margins in the range of 17.3% to 17.7% up 20 basis points at the midpoint.
No change in our tax rate, we think our capex spending this year will be roughly $550 million and this is about $50 million lower than prior guidance.
And we estimate.
For our share repurchases to be increased roughly $1 billion and this is up from our prior guidance of 800 million as we continue to deploy our free cash strong free cash flow.
So overall I think we're very pleased with.
The company's performance. This year, we're delivering very strong cash flow solid EPS growth. Despite what's turned out to be of much weaker economic environment for many of our end markets. So I'll stop with that and turn it back over to yen for QNX, Hey, Thanks, Craig before we begin to Q and SXL will all report today I do see we have.
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Okay, we'll take the first question from Nigel Coe was Walt research.
Oh, Thanks, good morning million annually.
Upsilon good detail on the call but.
I want you did a great job of adjusting to the junior conditions in Threeq you showed as a very nice margin UAN seem in margin stepped down a bit more than normal seasonality into full Q I'm, just wondering what what's driving that.
Craig Reckon is there any additional restructuring coming through in full hue and when your hands on additional restructuring actions in light of that we could mornings.
Appreciate the question Nigel and so assuming two tier statement, yes, we absolutely we arms. If you think about kind of bridge between Q3 in Q2 year were really outstanding performance. In Q3 is a number of items that are impacting us in Q3 Q4 that are taking the margins down one is a higher level of restructuring and.
You could imagine it's largely in those businesses, where we're seeing additional market weakness.
We certainly are seeing a higher tax rate in out in Q4 than we had in Q3 Tiki saw the operational tax rate of roughly 17%. In addition to that there's a few normal factors.
Healthcare costs tend to run higher in in Q4 advancing the print in prior quarters and so there is this a number of kind of let's say one time items that were dealing with in Q4 obvious will be dealing with the GM strike that has a little bit of an impact as well in Q4 that take the margins down, but I'd say that you think about the outlook for.
2020, I save a lot of these are one time items and I know that a number of analyst wrote about extrapolating Q4 into next year, I guess, I'd say actually to keep in mind that there are a number of one time and and seasonal items that are impacting Q4 that you really would not be justified and and extrapolate into the full year.
Okay. That's great color Bluebloods begins the detailed.
Off line, but I do want to just switched to DSS margins and we use in probably two years ago thinking that 15% in this business will be a dream and and here in the sense Im just curious to know.
How compounds, we feel that you can defend this level of margin going forwards and maybe just address what's changed to drive such a high margin.
Yes. Once again, we agree I mean up 18.3% is outstanding performance by our team in general and I can as I mentioned in my commentary really a thing a function of really strong execution by the organization on on higher volumes that we sold in the quarter and we will clearly need to revisit the long term margin.
Revenues for our year segment. If you recall, we talked about this segment performing at 13% to 16 cuts through the cycle, we're already performing well above those numbers and so as we think about giving kind of the early outlook for the business and and setting expectations. We do believe that this business will perform at that at higher levels on a go forward.
Basis.
As Greg.
Hey, good RMS class or income from Jeff Hammond with Keybanc.
Right.
Morning, guys, Hi morning, Jeff.
So just if you could just talk about kind of where we stand in the destocking for hydraulics.
And then just are you seeing any destocking in electrical and maybe just speak through where where in the guide you're seeing softness within I guess, particularly BG.
Yes.
I'd say in terms of hydraulics and.
And as we talked about on our commentary it really we've seen broad based destocking.
Significant let's say destocking at the OEM channel as productions continue to run well below retail sales and you see that in a lot of the public data.
Also in distribution, we're seeing the same thing I think the question becomes how long does this go on and if we could we consider an attempt to speculate when does the destocking and it's really going to be a function of what ultimately happens with the end markets and indicated in the end market demand I will say that today, we take a little confidence in fact.
At the end market demand and many of these hydraulic markets around the world are certainly performing okay, and we're talking about let's say on average of low single digit growth in a market like construction.
Flat to slightly down in markets like AG, but what we're experiencing as a supplier is our numbers at a much worse than that and so if we take some.
Confidence in that that work, we're approaching the and I think ultimately it will be really be a function of what's going to happen with these end markets.
In terms of Destocking and not in hydraulics business.
I'd say it in in the electrical business more broadly we know at this point, we're not really seeing significant destocking in electrical and whats kind of impacted our growth a little bit in electrical in the quarter was largely project delays.
Given the kind of the uncertain political environment that we're living in right now more it's been really more of that issue than it's been an issue of Destocking and certainly you think about our electrical products business much of which goes through distribution in periods of uncertainty as to.
They're kind of being cautious around the inventory levels that they are putting on the shelf in general, but not not at this point I'd say a significant amount of destocking.
Okay, Great and then Craig I think in past years could you provide kind of initial views on the out year in third quarter and I Didnt see anything in there can you just anything you can give on kind of how youre thinking about the markets contrail incrementals on any kind of non operating items and and kind of uses of cash around the the lighting.
Thanks, Yes, yes, I mean your give me your observation is absolutely accurate, Jeff we would typically in this call given kind of some insight into 2020, given the level of uncertainty in the environment that we're currently dealing with whether its trade or geopolitical or some of these one off customer events, we thought it would be prudent.
At this juncture not to provide guidance for 2020 Dillard.
Some of the Q4 play through and that we would then be providing guidance as a part of our earnings call in January and so thats kind of way, we're thinking about that to assist question around uses of cash obviously, we sold the lighting business for so we will sell the lighting business for $1.4 billion and it would.
To be our intention to use those proceeds to buy back shares.
Although we will begin to attempt to be smart and strategic and the timing of the buyback program, but but the intention would be to use those proceeds plus our very strong cash flow generating capabilities to make sure that we fully offset any dilution associated with the divestiture lighting.
Okay. Thanks, Greg.
Our next question come from Dave Wrestle with Evercore.
Hi, Good morning, I apologize I missed the very beginning of the call but.
For the electrical businesses sort of exiting 19 and 20.
The lighting business is still officially in the guide for fourth quarter for correct just to be clear, yes. Okay. So so the orders were up 1% X lighting for HCP and NSS orders. Its overall were probably look a little better people feared.
You help us understand what you're seeing beyond the quarter in the sense of.
Or the but what's in the backlog.
Further visibility the normal shorter than normal just trying to get a sense of to count on electrical the.
To start the year healthy because obviously people are wondering can we get the more cyclical businesses bottoming out.
Some point in the first happen.
Our all grown together and.
End of the year.
Yeah I appreciate the question David.
The business that obviously, we have the greatest visibility to is in our electrical systems and services business and I will say that our order input in Q3 was quite strong across the board.
Most of the end markets that we serve I'd say posted anywhere from mid to high single digit order growth in the quarter, which really bodes well I'd say for the long cycle piece of our business lit electrical some the services into 2020, I think it's too early to make a call on it and Thats one of the reasons why we're not providing guidance.
But certainly as if we take a look at the order book and what happened during the course of Q3 in electrical systems and services, we feel very good about the order intake and how to 2020 is shaping up and electrical products, which tend to be much more of a book and bill business. As we mentioned we did see a little.
A bit of conservatism on the part of distribution and in that business is it just doesnt tend to be a longer cycle business and so we'll just have to see what happens with some of these other kind of world events and what level of this distribution confidence, we're taking and with us into 2020 and X X lighting in the fourth quarter.
Said another way is lighting down in the fourth quarter I'm, just trying to assume that will be out of the business. When we give the guidance January .
The core and when I say and appreciate the question David of given the fact that we've we've entered into a transaction. We signed we would prefer not to comment on lighting as it's going to ultimately be somebody else's business on a go forward basis and so.
As we think about lighting on a go forward basis, and we would prefer not to comment on that business given the transaction.
And the fact that ultimately somebody else's going on it.
I can appreciate that okay. Thank you.
Our next question will come from Scott Davis with millions.
Hi, Good morning, guys Hi.
Craig just to kind of address the elephant around you know when you have quarters like this where you Miss here your guidance on the top line, which doesn't happen to this extreme very often.
Just to make you kind of rethink the portfolio a little bit I mean, you got hydraulics and vehicle that will actually guys around to recycle and.
It's worth the headaches I mean.
And I'll just leave it at that sure I can appreciate the question Scott and as we've talked on this call before we really have.
Led to let's say laid out our criteria for businesses that we like and the conditions under which we think we're going to stay in business and the conditions under which we're going to step out and I will say that if you take a look at our track record over time Eaton has done in I'd say a lot of work around the portfolio and the lighting divestiture in the latest example.
That.
I will say at the end of the day, you think about today hydraulics and the quarter delivered 7% of our company profit facility at the end of the day, whether hydraulics grows.
5% or shrinks, 5% it really doesn't have a significant impact on the ultimate earnings of our company and so.
We'd like to think that we're getting some of the execution issues behind us and it is a cyclical that it will always be a cyclical business, but at the end of today, what really drives Ethan as we sit on the earnings call, 80% of our earnings come from electrical system to the services electrical products in aerospace and Thats really what drives the company and so.
We will continue to work on being up internal plans to improve the execution of hydraulics. They know what they need to do an order to continue to deliver and be a value, creating part of the company.
So I'd say at this point, we're comfortable with the portfolio.
And at the end today, we'll continue to focus on the things that we can control inside of the business recognizing it up these will always be cyclical businesses.
Fair enough Qiagen and just as a follow up in that I know you mentioned that.
You've got this billion dollars coming in and you're going to do more buybacks, but is there.
Is this type of environment or you want to take another more aggressive look at M&A or is this a type environment or so uncertain that it's better to.
Push it to the right there.
So we always look at the trade off right in terms of you know we've we've been very disciplined over the years around terms I understand what our cost of capital is and we think it's roughly 8% to 9% then and we'd expect the return order magnitude tuned into 300 basis points over our cost of capital as a minimum and so we've been a very disciplined buyer.
Through both.
At all points in the economic cycle, and we would continue to maintain that that's the way we will will run the company and so for US, it's always going to be a matter of trading off.
What an acquisition would do for the company in both strategically and in terms of EPS versus the option that we have a buying back shares at very attractive prices.
Okay. Good enough. Thanks. Good luck guys. Thank you. Our next question come from John Welch with Credit Suisse.
Hi, good morning.
Wanted to go back to the the aerospace margins, obviously very strong I know a couple of quarters ago, we had a conversation around OE versus aftermarket mix, but you know similar to that NSS line of questioning is we are above kind of your.
Through the cycle look on that business.
How do you view the sustainability of those really strong aerospace margins.
Yeah, and I'd say appreciate the question and I'd say as I've said on prior calls this has really been a little bit of a goldilocks period for for the aerospace industry. Overall, because you have really strong market demand you were very strong aftermarket and you've got relatively by historical standards standards low program spending and so you're seeing.
The result of that.
Deliver very strong margins, but that is certainly another one of the segments that were going to clearly have to take a look at as we focus provide are once again, our longer term outlook for the business in terms of what margin should look like through the cycle and clearly that's one that will be revisiting and will likely go up given the level that the business is performing at today, but I'd say today when we.
Think about.
Whether or not 25% margins are pretty extraordinary and and the business probably low.
Perform at that level every quarter, but I will say that level, we're very comfortable today that the margins in this business will perform at very high levels and very attractive levels for some time to come primarily because consumers are continuing to get on planes and that drives the aftermarket.
The military business is really just kicking into gear right now and and Boeing and Airbus are sitting on very large backlog and so we think this business will be good for very long time.
Great. Thank you for that and then obviously, there's been a lot of questions around capital allocation in the strong cash it's going to be coming in the door.
I know you don't want to get ahead of yourselves for next year, but you've historically had this expectation to take down 1% to 2% afloat next year I mean should we assume that the high end to that's kind of where we should be based casing. It.
It's Rick I would think about this way.
Our experts say expectation would be take down 1% to 2% float and and the proceeds from lighting on top of that so you'll end up with.
Considerably more than 1% to 2%.
Great. Thank you for that and maybe this is an important point because one of the things that we committed to you in the Investor community in General is that as we think about how we would manage the company dorn during periods of market weaknesses that we said that we would use our strong cash flow generation capabilities in our balance sheet to essentially.
Buy back shares to help offset pressures in terms of VBS and Thats clearly what we did in Q3 and you could you could expect that as we look into 2020, depending upon where markets end up that we will continue to kind of run the same play.
Great. Thank you.
Our next question come from Nicole Deblase with Deutsche Bank.
Yes, thanks, good morning, guys.
And so maybe just the first question around the increase in the operating cash flow guidance and I guess key drivers divide it looks like the receivables balance down inventories Apple and all that so just trying to reconcile you know where thats coming from.
Youre right working capital was very strong if you look at.
The combination of receivables and payables that change from Q2 to Q3 year, just shy of $200 million.
And so we have done a good job all year at managing working capital, we expect that to continue into Q4 and already our initial thinking about next year would have further improvements as a variety of programs relating to for example.
Correcting any billing and accuracy that makes a big difference and receivables, but also in payables and making sure that we are.
That we are.
Paying our suppliers than a commercially reasonable timeframe and we believe we have further opportunities to improve both receivables and payables and to your point Nicole inventories actually are up slightly in on it and typically one year of facing into an economic downturn, we we typically take it.
And towards out of the organization. So we quite frankly have a big opportunity still out in front of us in terms of really reducing our overall inventory levels and so to Rick's point, we would expect 2020 to be of another year of very strong cash flow.
Thanks, Thanks, Craig actually just preempted my second question. So I guess on the line on any any thoughts on the monthly progression of organic growth out the coronary things can a lot worse screens in September and then I guess anything initial that you have to stay on October Valentin guidance that you provided today for the fourth quarter.
And I'd say that one thing and I was out at the Investor Conference Nicole in Laguna and it's been I kind of indicated there that we they already seen.
Really in the first couple of months of the quarter, some market weakness, which really I'd say persisted throughout the quarter. So I'd say no not particularly September was in a particularly weaker month than the other two months in the quarter.
In terms of the progression in highway and unfolded in terms of October I'd say, you know what we've seen so far is largely consistent with the forecast that we provided.
Thanks, I'll pass it on.
Thank you.
Our next question comes strong Joe Ritchie with Goldman Sachs.
Thanks, Good morning, guys.
Joe.
Hi sale on Craig I wanted to touch on the just the disconnect between what you're seeing on the order growth side on SMS and what you're expecting from a growth perspective can you mentioned in your prepared comments project deferrals, and so I'd love to get a little bit more color on where you're actually seeing project deferrals and how that comp plays out into 2000.
20.
Yes, and what you referred to as it as it as a disconnect I would say largely if you think about the electrical systems and services business. It does tend to be a longer cycle business.
And so if you've.
Probably the best proxy for what we would expect for that business in fourth quarter, probably would have been orders that we received in Q2.
2019, and if you recall, we had a relatively weak order.
Intake in Q2, so there is a time lag to that business, but once again to your point, we did see very strong orders in Q3, and and we think that does bode well for Ford for for 2020, and so that's really the way I would I would think about that in the second half of your question was in with regard to the.
How that plant, yes, just basically how that played out for 2020 and I mean, I guess, if I read that Pascal clarifying question. How are you seeing any cancellations and your orders at all or is it just really just deferrals at this point, yes, it's a mostly deferrals as is always the odd ball cancellation that you would do we'd always see in these businesses, but I'd say nothing that increased cigna.
Typically mostly it's really delays.
Okay, and then I guess, that's particularly true on the larger industrial projects.
Okay got it thanks, Rick I guess, my one follow up and somebody asked earlier, but I wanted to see if we can get some type of quantification on the arrow margins and what's the what's the expectation for R&D stepping down both this year and into next and then into 2020.
I think with respect to R&D, we've already seen the step down in R&D. That's currently reflected in our businesses and so today I'd say, we're probably running with respect to R&D as percentage of revenue will probably running right now at historically low levels, primarily a function once again of new platform development from our customers both on the.
Commercial and military side, and so I would not expect.
Additional step down in R&D spending, it's really already reflected in the businesses run rate today in our earnings today.
Okay got it thank you guys.
Our next question comes around Jeff Sprague with vertical research.
Thank you good morning, everyone.
The question on restructuring and I'll wrap it around lighting, a little bit I mean is there Rob you just elaborate a little bit on what you're doing on restructuring front, maybe help us think about how much additional there is in Q4 and is there kind of a stranded cost element lighting that we should be thinking about.
Yes, I'd say that down.
We think about kind of the incremental of restructuring in Q4 menu order magnitude, Jeff we're talking about a couple of two three cents or so in Q4 from where we've been.
In the in than than the lighting.
I think the source of that question is what do you do with the stranded costs right you sell out of $1.7 billion business. Obviously, there's some stranded costs associated with that and we we would fully expect to deal with all of the stranded costs and so we will obviously in the context of the reached the overall.
Restructuring number that we put up in the cost of the ex that we talked about a $200 million of costs associated with the exit of writing embedded in that number was costs to deal with stranded costs. Both at the corporate level and also inside of electrical products and so we would expect to fully deal.
With that stranded costs inside of the business.
You also elaborate a little bit and I don't know if you need to pull apart.
Versus the us us but.
Just kind of the trajectory of of price in your business than just kind of the price cost algorithms looking into Q4 in the early part of next year.
And I'd say that what we've always said around price cost is that where net neutral on and that's really today, I'd say, where we ultimately.
We'll indefinitely, we certainly I think were slightly positive in Q3, just slightly positive, but we would expect once again on a go forward basis that.
Commodity cost inflation.
Terror, driven cost increases that the company will fully offset that and we'll do a better job of making sure that where we're getting price at the same moment that we're experiencing the costs, but we'd really expected to be net neutral to eat and overall.
Great. Thank you.
Our next question comes along and Joel then with Bank of America, Hi, guys. How are you got great.
Yes, just great execution.
Just a question on hydraulics as we think about production costs, a cat and year when do those get incorporated into your revenues are we seeing some of them in Q3 or.
Is that something we're going to see in Q.
In Q when do we see the bulk of it that's what I'm, yes. So we typically appreciate the question Andrew as well because it's what we've been dealing award we typically would run about 90 days.
In front of our customers in terms of whatever they are forecasting in Q4, we would have experienced in Q3, just given the the lead time.
Oil the way back through the supply chain on many of the components that we're sourcing and so we have and this is typical by the way we take a look at this business over time.
So we typically see an outsize impact both on the way up and on the way down when our big OEM customers go through these periods of.
Market correction.
Gotcha and.
On the question in terms of shortfall I know there was a quote from you that you were expecting a 3% you've got 1% and I know you gave it to us by end markets, but can you just given big geography buckets, which one disappointed the most.
So it's obvious I Miss Charlotte sure I'd say that.
And in terms of end market, specifically, it really was a down shifting in the growth rate, let's say the biggest market for us is always the of the Americas, the west market and I'd say, that's what I was returns yep, Yeah and growth do you still positive growth for sure across the board, but but certainly we saw a down shifting in the rate of growth.
In the Americas, we saw it in our electrical systems and services business and large projects. We saw in the distribution channel on electrical products, we saw downshifting in growth in the.
In the oil and gas space, specifically in our Crouse Hinds business.
Okay. Thank you.
Our next question comes strong Chris Glenn with Oppenheimer.
Thank you good morning.
So on hydraulics with the restructuring kind of backed tail and a little more on the fourth quarter.
And some comments about moving past inefficiencies just wondering.
So can you raise margins a little on moderately down revs next year and is 13% kind of the bottom here through the cycle range stat is being attainable.
Yes, and I think I appreciate the question and the goal that we set for this business, 13% at the bottom of cycle. We think is absolutely the right goal for the business and we think it's certainly an attainable I think the real question becomes.
Where do these markets ultimately bottom out at but I think.
It would not be an unreasonable expectation that the business delivered 13% margins at the level of economic activity that we're seeing right now in the business.
Okay. Thanks, and then a book keeping one any early kind of notional comment suddenly corporate guidance for next year should we just leave a comparable.
Well, we've got to work through our planning I as a general matter, we have been quite successful at holding our corporate costs flat.
Year to year, and then down years, taking it down a little debt so that will give some color.
Perfect. Thank you.
Our next question comes around and that number is JP Morgan.
Hi, Thank you most my questions have been answered to Adam maybe on an elegant fs add at Dodge momentum index has been weak all year end up a little bit in September but that reflect sand kept new projects being considered thanks should be a good leading indicator for FX for next year.
In ways that disconnect that they're seeing at that and it may be not momentum the momentum index, but you're seeing that actually Dodge data improve and Thats subscribing current orders.
And I appreciate the question and because we spent a lot of time, obviously internally trying to figure. This one out of this as well it is a long cycle business playing across a very wide.
Set of of end markets and I'd say that a lot of the macro data to your point and what we saw certainly in our own order booked in Q3 was was quite positive and with orders up 5% on a rolling 12, and 8% excluding datacenters those are pretty pretty strong numbers and I'd say you can always find in this business.
That at any given quarter.
You could end up with numbers that vary from the come over the long longer term or medium term growth rates and I think what we experienced in Q3 as we indicated was largely a pullback in large projects and some project delays in a bit of slowdown on oil and gas.
But but certainly what we've seen in Q3 and what we see in most of the macro indicators for this business Nonres construction continues to do well across the world and me a little bit of moderation in the growth rates, but still growth and so we remain optimistic about with them the prospects for this business.
Okay I appreciate the color on land just a follow up on in mobility and nominating apartment carrier revenue, let alone that that has accomplished could you update on that.
Yes, and in this quarter and I'd say, we haven't had any new material wins in the quarters, what we try to do in this business as you know.
These wins come in large chunks in as we get large material wins will be shorter to update you on how we're doing but by and large we continue to be very optimistic the business. As we reported historically were ahead of the schedule that we originally set out for the business and we're still extremely confident in our ability to KRW.
At a $2 billion to $4 billion new segment for the company.
Okay, and I had from last quarter that Germany term revenue wins for about 290 million in fact, Stella what I should think about yes. I mean, they then they would have moved up slightly from that end, but into what we'll try to this report material wins when the number moves into material way, we'll give you an update.
Okay I appreciate data that's it from me. Thank you. Thank you. Our next question comes from Julian Mitchell with spot place.
Hi, Good morning drilling Hey, maybe just first question around these CSS Incrementals you know very very good performance just wanted to make sure there was nothing.
Particular, you saw around mix, so something as a tailwind that you think would say.
When do you think this is just normal course of business and reflect sort of good project disciplined.
Yes, and I say that.
We obviously took a strong look ourselves at this business because the margins at 18.3% or were very very very.
Hi, and above our own expectations and no we did not see favorable mix.
In the quarter, when we look at that issues, specifically and it wasn't mix. It really was largely this strong execution Dino in the quarter, Anthony and obviously there is always a mix of projects in any given quarter any SNS and so but know that wasnt no particular, unusuals, a onetime events that drove the performer.
Thank you Thats helpful. And then secondly, maybe switching to electrical products.
You do have some reasonably large industrial and industrial controls exposure within the particularly now that lighting is coming out maybe talk about that more industrial piece of VP.
How you saw demand trends there in recent months.
If you're expecting Q4 demand in that industrial piece VP to be any difference in Q4 than Q3. We appreciate the question I mean, even without a doubt that the weakest piece of the business today year to date and what we're forecasting is really what's going on in industrial markets in the manufacturing sector and we we generally talk about that being.
About a third of the business itself and so it's a big materials segment for us and we clearly have continued to see weakness in the industrial controls part of the business.
And now as true Julian both on sales and orders in the third quarter.
Great. Thank you very much.
Our next question comes from Baltimore May compete with statements.
Hi, Rob Mccarthy here I.
I guess the first question I would have is.
In thinking about the sale lighting I mean, I think it was seven at times trailing of certainly less than our forward basis, horseshoes and hand grenades paid in 11 to 12 times Hooper.
Even if that was like I had a company average I mean, yes.
Certainty of what you're talking about this isn't exactly value, creating if you're buying at 12 times, an agenda thing that Matt half times trailing.
Call it.
Seven or eight years later, so I mean, you think that this kind of activity.
Belies the fact that perhaps you should look like a looking harder look at breaking up the company.
Well, Rob let me just address that I don't think we'll hear perspective is.
Exactly correct I mean, given idea the the lighting business. When we bought Cooper was just under 1.2 billion and now it's 1.7 billion. So we've grown the business quite significantly over the time period and.
If you look at.
If you sort of just aggregate what we paid for the lighting business as part of Cooper, it's not an awful lot different than what we sold it for.
And now we thought that the business could migrate in certain ways on mailed closer to the broader electrical.
Franchise and that really has not them.
Thats one reason, we believe it's more appropriate as there.
As part of another lighting enterprise or you are possibly as a public company, which was our original game plan, but we would argue that we havent dramatically.
Impacted value in the case of lighting SDN say has happened sometimes businesses don't end up developing in a way to you expect.
Alright, and then in terms the cash generation of the businesses I mean in in the context of how you're thinking about your troughs and the cash EPS Frost certainly I think you would you would highlight rightfully so strong cash conversion overall.
Are you still subscribing to the kind of the trough and the way to think about the trough as you articulated earlier in the year and as anything changed there with respect to either cash generation in a down cycle or the trough itself.
Can we rely on that as the kind of anchor to win work, particularly as we go into a tougher macroeconomic environment.
If you're talking about by trough.
Well, our cash flow changed markedly in a down year, we still believe it's not likely to right and simply because we liquidate working capital that offset.
The profits loss through lower volume.
So even if we add a down year at some point.
In the next couple of years, we don't think you'd see a market change in cash generation and one thing I just one other point I would like to make about cash flow I think it's important to if you think about our free cash flow in 2019 based on the guidance, we've given and you look at the that compared to 2018.
I mean, we're guiding to up 23% and we I think thats a pretty notable number at the end of the day that real value most businesses as a cash to generate them, we're generating a really attractive increases and cash flow in 19, and we would expect continuity and that cash generation next year.
The an absolute cash flow is very strong I guess, when I was relating to specifically what the framework oblique prank laid out for a trough scenario.
You still some gendrive into that yet.
Yes, you're talking about because could could we.
Can we have at least flat EPS and that trough here and we continue to believe that that is a base case plan.
The only caveat we've added that we said post the spin of of lower sale of lighting in post this divestiture of FCD.
And we'd expect to get the FCD transaction done by the end of the year and lighting, some timing and good Q1, but post those transactions, we absolutely have the the planned and fully committed to.
Delivering flat as seen on doing what we call a typical economic recession, which we define added two to three quarters of GDP contraction.
Thanks for your time I appreciate it.
Good our last question come from Deane Dray with RBC.
Thank you. Good morning, everyone 19, Hey was hoping to get a spotlight on a specific geography and a vertical what can you tell us about China.
The tone of business the outlook and then data centers has come up during the call any specifics there in terms of the outlook. Thanks. Yeah. Appreciate the question Damian I'd say, China. So if you think about.
He is across the broad swath of businesses that we deal and maybe deal with a positive first I'd say kind of the non res construction and quite frankly, even rest construction in China actually continues to perform performed very well I mean, you see some of those data as well, but our office starts in Q3 were actually up 10% and are up 16% year to date.
Residential starts are up Q, 6% in Q3, and 9% year to date and so the the whole kind of construction market.
In China is doing willing and quite frankly, even on the hydraulic side.
Excavator sales continued to grow quite nicely in Q3 up 16% and excavators and up.
7% in wheel loaders, and so that piece of the business in China is actually doing quite well.
By contrast light motor vehicle production, you know is down quite significantly down 7% in Q3, and 12% year to date as well as heavy duty truck production is about flat and so it really is a very different.
Story, depending upon which end market you're referring to.
But in the most important part of our company, let's call. It you know the electrical side Nonres construction in the market is holding up quite quite well.
And they didn't analytically datacenters as.
As we mentioned in the opening commentary in our datacenter business.
Performed very well into quarter, we ended up seeing high single digit growth.
Datacenters and so that market continues to perform very well and as we've mentioned on other earnings calls that the hyperscale stuff does tend to be lumpy and we continue to see that lumpiness, but by and large we continue to see very good growth in datacenters.
Great Great just last one for me the.
The lowering of the Capex by 50 million is there any story behind that.
No I thought I'd say that this really us fine tuning the outlook for the year, we in our businesses tend to be little optimistic.
Over the course of the planning process around what they can get done that's really is largely a true up we've not done anything to put any clamps on our capex spending we're still spending on every program that we can get done.
Great. Thanks for the color.
Great. Thanks to all we have reached Indiana lower coal and we do appreciate everybody's question as always chip and I will be available to address any follow up questions. Thank you will have a good day. Thank you.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.