Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Eaton first quarter earnings call. At this time all participants are in listen only mode. They will conduct a question answer session and instructions will be given at that time. If you should require assistance. During today's call. Please press Star then zero as reminder, today's call is being recorded no action.
Some of your host young Gen Senior Vice President Investor Relations. Please go ahead.
Good morning.
You know senior Vice President Investor Relations. Thank you all will join US today, if we don't fourth quarter 2020, ordering cool I hope that you and your families that stay healthy and also stay safe.
Me today, a quick article or chairman and CEO and to recreate ill, let chairman and chief financial and applying the office.
Oh agenda today include the opening remarks by Craig highlighting the company's performance in the fourth quarter.
I've done your popcorn well be taking questions Craig's comments, the press release and a presentation. We go through today have been posted on our website at Www Dot you didn't dot com leased note that both the press release and a presentation include recounted agents to non-GAAP measures a webcast of this call is.
That's both our website and it will be available for replay.
Good luck to remind you that all the comments today, well, including statements relate to expected future results of the company and order for forward looking statements.
Actual results may differ materially for our forecast the projections due to a wide range of risk and uncertainties that I described in <unk>.
Earnings release, and a presentation. There also all lined <unk> 8-K filing with that I would turn it over to correct.
Appreciate it.
Let me start on page three and I'd like to begin by providing an overview of our isn't directing the impact of cope with 19 with with our key stakeholders our employees our customers our shareholders certainly our communities in general.
First we are actually is up I couldn't be more pleased with how well our team is managing through the crisis.
As always the safety of our employee has been continued to be our top priority. Most of you are very familiar by now with the best practices around eliminating the spread of Cobot 19, I had eaten we've adopted the mall and I'd say that most of them even before they were common place.
We learn from what we saw in China, we activated and stood up our pandemic management in response to early and created a Colgate 19 playbook. This playbook as become part of the business system. It's specified exactly what we expect of our factories in offices around the world.
Including how we ensure compliance.
We also continue to serve customers around the world as you're aware most of our products have been deem to be a critical part of global infrastructure. As a result, our factories remain open with very few exceptions.
We are however, things lower utilization and weak demand some of our end markets and so we have had some temporary closure is a couple of facility.
I'd also note that organic growth continues to be our top priority.
We want to make sure that we're well positioned to take advantage of all opportunities, including a you know the increases in expenditures on government infrastructure. When it comes and we do think it's coming.
And I'm, especially proud of the work that our employees are doing around the world to support our communities and caregiver.
We don't even know equipment reusing, our additive manufacturing capabilities to produce personal protective equipment, and we've increased our charitable giving to support those impacted by cope with 19.
And finally I'll detail in the next couple of flight wrong, what taking the appropriate cost reduction in Kathmandu reactions to ensure solid incremental profit margins strong liquidity and cash flow.
Let me begin with liquidity and cash flow on page four and both are actually in great shape.
As of March 31st we had $450 million cash and short term investments on hand, and access to $2 billion of Undrawn multiyear bank facility.
If that Weve never draw on our bank facilities and they don't expect use them Werent 2020.
We have been in touch with our bankers in are comfortable with our ability to access them need it.
We also have access to the commercial people market obviously.
In 2020, we do have one relatively small debt maturity of $240 million victories due at the end of Q4.
As a point of reference note at the end of March that our debt to adjusted trailing 12 month EBITDA was only 2.1 time.
And in terms of cash flow, yeah, we're updating our 2020 guidance.
So we expect now free cash flow to be in a range of 2.3.
2.7 billion at the midpoint of 2.5.
And you're not seeing a while this is lower than our original forecast. It represents strong performance in Chile.
Cash flow and whatever economic environment, we find ourselves.
Our cash flow is more than sufficient to continue to invest in the business.
Maintain our dividend.
Many of you may or may not be aware, but eaton has paid a dividend for nearly 100 years and we don't see any scenario in which that would change.
Uh Huh planned during Q1, we repurchased $1.3 billion of our shares using the proceeds from the lighting sales.
And our draw so where we expect we see $3.3 billion a cash.
I draw works by the end of year, leaving us with my tribal creatively and even lower leverage.
I want to strong balance sheet, our optionality for additional share repurchase and M&A really remains intact.
We continue to think that our stock provides a very attractive return.
Given the 3.4% dividend yield and or free cash flow yield more than 7%.
No we're equally focused on ensuring that we deliver attract decremental margins one of our top priorities and we've moved quickly to put cost saving measures in place.
We summarize some of these actions on page five.
First.
The first production was really the one taken by our leadership team.
First and the biggest cut 25 to 50 cents reduction in base salaries in Q2.
And our board of Directors also agreed to a 50% reduction in their cash retainer for Q2, and these funds will actually go into an employee relief on those impacted by cope with 19.
These actions are in place for Q2 buttons that can be extended its a forecast a recovery comes later than expected.
We've also dramatically reduced discretionary expenses are put in place hiring freezes for all but a few critical.
In a number of other actions that include unpaid leave for most of our workforce.
We delayed the planned 2020 merit increase until next year.
And we take a significant reduction as you can imagine or the elimination of incentive compensation.
All difficult, but necessary steps as we work to ensure that we approached a challenge with shared sacrifice, but those of us with the greatest means naturally shouldering, a bigger piece of the responsibility or burden.
Lastly, we've eliminated not essential capex.
You'll see in the updated Capex guidance in a few slides, it's a pretty significant reduction.
Let me say that Robert pandemic is new for all of US Eaton has managed through severe economic declines in the path.
Quite frankly, we've always emerged stronger company, it's something we fully expect to do this time around.
Moving to page six I'll turn to our traditional set of charts quarterly results Q1 earnings per share.
As you saw a dollar seven on a GAAP basis on a dollar line, excluding the two cents charge for acquisition and divestiture.
Adjusted earnings per share were reduced by investment of 14 cents due to the impact of covert 19.
This is a bit more than to test and in fact that we estimated in early March but the impact of coal that 19 really spread.
Turning into the rest of world.
Our sales of 4.8 billion.
Were down 7% organically, which includes a 3% decline.
That we anticipated in our original guidance.
Some additional 4% or 200 million dollar impact to cope with 19 and this is some $50 million more than we estimated in early March and you'll recall that our March 2nd Investor meeting, we indicated that revenue shortfall cobot 19 would be approximately $150 million.
Segment margins were 15.8% down slightly from Q1 19.
But I'd also note that this includes additional an unplanned restructuring charges. That's what made the decision to begin to rightsize. The some of the businesses that are being heavily impacted by this economic downturn.
Other notable events in the quarter, we have now the sales dropped as a stand for 3.3 billion, which we expect to close at the end of 2020.
The sale of writing for 1.4 billion.
We deployed $1.3 billion repurchase shares equal to 3.4% shares outstanding at beginning of 20 Twond.
And on page seven we summarize our Q1 performance and I'll just kind of note a few highlights here from.
We're changing our historical practice and are now recognizing all charges related to acquisition divestiture at corporate rather than in the second level. So the gain for example, lighting would be at corporate not in one of the segment.
We think this makes it easier for you to forecast that model by segments as well as the overall company.
Second during Q1 acquisitions increased sales by 2%, which was more than offset by three and a half a cent impact from divestitures.
Negative currency also lowered sales by.
Yeah.
Finally, our team continue to actively manage costs.
This is what it enabled us to deliver.
Yeah for mental margins of 17%.
In the quarter. So we see once again this is a very strong.
Well.
This particular environment.
Moving to page eight we have the quarterly summary of our new electrical Americas segment.
Revenues were down 9% to put that decline in organic revenues.
The result of covert 19, and a 6% decline from the divestiture of lighting and negative currency impacted sales by 1%.
As you can see noted on the chart, if you exclude lighting and the cobot 19 impact.
Organic revenues were up 2%.
Strength in Q1 was driven by commercial construction and the utility in market.
Operating margins increased by 20 basis points to 17.2% and this is mostly due to the favorable impact some of the divestiture of the lighting business in early March.
Excluding lighting orders were up 3% on a rolling 12 month, so pretty decent orders are wall.
Given the re segmentation, which combined electrical products and electrical systems and services into Americas. We're now reporting orders on a 12 month world and B, it's going forward.
This is walt will be true for the electrical segment.
In the quarter, we saw strength in data centers and Chile residential markets.
Really offset by weakness in industrial work.
Next on page nine well, we have a Q1 results for the electrical global segment revenues were down 8%.
Declined organically.
And this entire decline was driven by the impact of corporate 19, and most of this really coming out of China.
We also had 1% growth from all the slight acquisition and the negative currency impact sleep et cetera.
Operating margins declined 80 basis points to 14.5%.
And I'd point out that this number does include increase restructuring charges that will not plan that we're taking in this segment.
Orders declined a 1% here on a rolling 12 month basis.
In the quarter itself.
We saw significant growth in data centers.
More than offset by decline.
I would imagine in global oil and gas Mark.
On page 10, we summarize our hydroxide, but you'll recall that but the lease segmentation announced in March. This segment now includes only the hydraulics.
Filtration and golf equipment now reported.
Part of the aerospace.
I'd emphasize once again that we continue to expect the sale of this stuff visit the therefore.
At the end of 2020, a very strategic deal for them and things.
Looks like to remain on track.
For Q1 revenues were down 16%, 14% organic decline.
That includes an estimated 3% decline due to cope with 19 and negative currency impact.
With that.
Operating margins improved 100 basis points to 10.8%.
And orders for the quarter were down 11% a year over year, driven really by continued weakness in global mobile with what.
Moving to page 11, we summarize our results for the aerospace segment.
Revenues were up 13% or negative 1% organic growth.
We estimate 3% of this decline due to over 19, and and certainly solely 14% increase as a result of the acquisition of Soria.
Operating margin declined 110 basis points to 21.6% so very strong and this decline was primarily due to the acquisition of store, yet, which obviously came in at lower margins than the underlying business.
Organic.
Orders Skews me declined 1% on a rolling 12 month basis and in the quarter.
We saw strength and and military fighters.
Military aftermarket.
Of particular weakness as you can imagine in commercial transport.
Turning to page 12, we look at our vehicle segment revenues here declined 26%.
It's 20% was organic.
Included in the organic revenue decline, we estimated that go with 19 had a negative impact of some 5%.
In addition to divestiture of the automotive fluid conveyance business impacted revenue by 4%, albeit a 2% negative impact from currency.
I'd say here that the largest part of Q1 revenue declined was expected.
The result of lower class eight OEM production, which was down from 31%.
And continued weakness in global light vehicle markets, where production was down from 21.
As noted operating margins declined 160 basis points to 30.5%.
Also point out here despite significant.
And in volume.
Decremental margins were less than 20% or team continued to proactively manage both discretionary and six form.
Given covert 19.
We now expect NAFTA class eight production to be 180000 units down from our original forecast to over 3000 units for nearly 50% lower than 2019.
And I'll ask segment is Emobility on page 13.
Your revenues were down 13% with organic revenue was down 12.
Including an estimated four and in fact.
But 19, and we had a 1% impact negative currency.
Operating margin declined 1.4% missed as a result.
Reduction.
Good.
Internal combustion engine platform as well as a manufacturer startup costs associated with a new wins on electric bills affordable.
And lastly, we summarize our Q2 and 2020 outlook on page 14.
I'll begin by stating that due to the economic uncertainty from the Google lighting pandemic.
Drawing our full year 2020 guidance.
I wish we weren't a position to provide revenue forecast that we just don't have that level of clarity at the moment.
I would add that for the month April.
Month to date revenues running down approximately 30% and started up 30% obviously.
Electrical would be better than that number and some of the more impacted businesses of vehicle and aerospace we'll be running.
Like worse.
You know what I'm wondering.
The month in May and June to be somewhat stronger, but clearly it's too early to tell for sure.
We do a better visibility going decremental margins and free cash flow and in our guidance is.
Correct.
We're getting decremental margins of 30% to future and 25% to 3% for the full year.
Like prior downturns.
Shouldn't really focused on cost control.
Taking a number of cost control actions already.
And importantly, we have contingency plans in place to do more Needham.
We do expect decremental margins to be higher in Q2.
The quarter, where we'd expect quite frankly, the largest volume impact as well of course that we'll see the biggest restructuring charge.
Our capex forecast for the year is now approximately $40 million down from our prior guidance of $550 million.
And our free cash flow guidance now at 2.3 to 2.7 billion 2.5 billion at midpoint. So we continue to expect free cash flow convergence remains strong.
We're also maintaining our dividend, which we increased by 3% everywhere.
Let me just close by saying that while we recognize that these are the overall.
Certainty created by Cobot 19.
In economic impact.
As a company we remain focused on generating strong cash flow, which we've always done.
Just on implementing our long term strategy around how we transformed into a company that delivered over the long term hargrove higher margins and certainly more consistent earnings.
So with those opening comments I will stop here and I'll turn it over that one particular that hey, thanks, Greg before we begin all acute in his section of the call today I do see is that we have on number of the individuals into Q with questions. So given all the time culture into full only on our today. Please.
Thank you our opportunity will only one question on one follow up. Thank you you know once when you'll corporation with that I'll turn it or to the operator, we'll give you guys a instruction.
Thank you and ladies and gentlemen, if you do wish SASSA question. During today's conference. Please press one zero on your Touchtone phone you will have an acknowledgment that you've been placed in Q.
You may removed himself from queue at any time by pressing one zero again.
And once again, ladies and gentlemen, if you do have a question. Please press one than zero at this time.
First question is going to come from lineup, Jeff Sprague from vertical research. Please go ahead.
[noise].
Craig I was wondering if you could addressing a little more detail.
No the specific actions, you're taking to manage decrementals in other words, you gave some color on the on the employee actions and compensation.
How much of that is temporary and <unk>.
How do you see that kind of rolling through and.
Kind of the related follow up maybe that I'll just ask right now as you mentioned restructuring a couple times two right so that sounds a little bit more structural and permanent. So can you just unpack those two items and give us a little more color on how that kind of get her head around those.
Yeah. Thank you mean appreciate the question you know maybe I'll begin by saying that you know as you're well aware, we have really spend as a company in excess of $500 million over the last three or four years to really get at structural and fix cost inside of our company.
And in those you know benefits are certainly playing through in our business today around better profitability at every point it kind of in the in the economic window that we deal with and as you're aware as well, Jeff We don't like other companies today, we run restructuring through our personnel and we.
Every year, we're spending order of magnitude.
I see the $70 million worth a restructuring and those restructuring programs are generally targeted that structural costs costs that are.
Go away and don't come back and you know independent of what happened on the on economic front and so we continue to have a playbook around restructuring opportunities and as Weve.
Discussed in the path as we think about managing through periods, where we have economic weekend. We have programs that are on the shelf that we can simply slide in a in do a little bit more restructuring in periods, where we find ourselves.
Facing more economic weekend, and we anticipate and so as we think about those businesses inside of our company that are dealing with perhaps more structural and longer term downturns.
Result of covert 19, what you're going to find itself.
Or likelihood accelerate and pull in some of those restructuring initiatives to once again deal with fixed costs in those businesses.
So at this point a as I mentioned, we will continue to run it through the personnel.
One of the things that we think because it is important as you think about.
The company itself and looking at on a comparison basis Oh, we.
We think it's just part of running the business and Thats stuff that we're focused on on an ongoing basis.
So to be clear, though so you're just spending the normal 50 to 70 or there's an elevated amount.
I don't think spending we are spending we did in Q1, and we would expect to for the full year to spend and elevated amount.
That was part of the reason we called out even in our Q1 results that we did spend additional restructuring more restructuring dollars than planned.
But for that restructuring Conversely, our results would have an even stronger.
Great. Thank you.
Thank you.
And our next question is going to come from line of it.
Deane Dray from RBC capital markets. Please go ahead.
Thank you good morning, everyone.
Hi, Thanks.
Hey, I appreciate all the color today, given limited visibility, you're actually stepping up and giving that free cash flow guidance, which is.
Pretty impressive.
For the comment on April being down 30% since you've shown the ability to.
Separate how much you think the cold that 19 impact is up for this first quarter. How much of April are you attributing to the April being down 30%, how much you attributing that to called at 19.
Yeah, I mean, I think it's a will probably be at a better position to to really parse that if we get to the ended the quarter, but Dave from where we sit today. There's no reason to assume that 100% of that reduction isn't tied to covert 19, I mean, I think if you take a look at how the company was performing prior to kind of covert 19.
You know and quite frankly prior to becoming a pandemic and hitting the rest of world. The company was actually performing quite well and we were we weren't we were in very good shape and so there's absolutely no reason for us to believe that you know 100% of that reduction isn't tied to cope with 19 as you're well aware.
Governments around the world of shutdown economies and so our customers a close factories all that is really tied to covert 19.
That's helpful and.
Craig was interested in having you expand on your comment that your degree of confidence that there is going to be increased government spending commenting on the infrastructure side, we've certainly seen this before.
And just on an early look how do you. Thank.
You all are position to any particular businesses that you think would benefit the mouse.
Yeah I appreciate the questions about the and then they know what I'd say that we're getting ready I mean, and we've been here before we we have a playbook that we created as a result of living through whether it's been hurricanes or other kind of event.
Where we.
Today have an organization that we set up to really.
Be prepared to deal with these economic stimulus plans as they come we do believe and we'll have to wait and see when it comes in and we're starting to see kind of the early signs of it in China. So we think the U.S. will eventually have an infrastructure spending plan and it will certainly benefit our company a immensely certainly.
But most of those benefits coming in our core electrical business.
But at this point that's great.
Too early but we're getting ready.
Great and just lastly, a comment I don't know if your ears were burning but wesco.
In the last call just had really nice things to say about eaton's manufacturing precision and keeping the supply chain fall for them in terms of having.
As a vendor so congrats to you on the Tim.
Thank you appreciate that we have a very strong partnership with Wesco and with all of our distributors and we're doing everything we can to keep them up and running.
Thank you.
Our next question then will come from the line of Joe Ritchie from Goldman Sachs. Please go ahead.
Hey, Thank you. Good morning, everyone Hope you guys are all well.
Maybe maybe just starting off Craig a and just thinking about the restructuring plans like temporary versus versus structural it sounds like a lot of the the plans that you outlined today seem more temporary in nature I want to put words in your mouth, but so maybe you can address that and then secondly.
Why would now be like a a more opportune time to maybe accelerate some of that the plant footprint rationalization plans that you've talked about in the past.
Yes.
Yeah I appreciate the question Joe you know the way, we think about restructuring in general so anytime we talked about restructuring were for the most part always talking about structural changes may want to things that we would expect each of our businesses. The do it as well as what we do in or support functions is that we have to flex our businesses.
So as volume changes you know, there's a natural expectation and mechanism for us to flex.
Our support costs, our manufacturing costs as you know economic levels go up and down and restructuring for US really is focused on making structural changes to the company into your point looking at things like you know the manufacturing footprint structural footprint, where we do work in different places around the world and.
I wouldn't I would say about that is that clearly you know we have.
A plan that we were focused on executing.
In 2020, we've already made a decision to accelerate.
Some of those items and do more in 2020 than we originally anticipated we would never intend to get out in front of our internal communication plans around what we would intend to do but making announcements, but I will tell you, though in the event that this you know economic contraction goes on longer or.
Worse than we anticipated we have the ability to accelerate and pulling more ideas.
So right now we have a plan that was laid out we're doing more than what we originally anticipated and we feel good about the fact that we can accelerate that do even more if the the environment calls for.
Oh, that's that's helpful. Craig maybe maybe to that end right you guys have outlined decremental margins of 30 in the second quarter 25 to 30 city year.
There's got to be some type of scenario planning that's going on as well. So I guess I guess my question is is what kind of downturn.
Are you guys thinking about for a kind of 25% to 30% type detrimental for the year and end and at what point if things are actually worse than then you anticipate the tito's decrementals turnout to be able little bit higher than than where we are today.
Yes, I'd say that you know what we started is that we're living in an environment right now what we just don't have enough.
Certainty and clarity around our markets to provide guidance as you've seen many where customers are not providing guidance either so tough for us to provide guidance when when the customers aren't willing to kind of way in it and put a stake in the ground either and so what I would say today is that.
You can rest assured that we have done scenario planning, we've done scenario planning with respect to.
Not only what a depth, but it doesn't look like what is cash flow look like and I didn't I would tell you first of all the cash flow under every scenario.
Our cash flows remain strong in fact, a in many cases as a as we continue to liquidate working capital.
That would even improve under certain conditions, but with respect to you know the forecast in.
The range of possibilities.
At this point we're not.
It's kind of guidance, but the rest assured that we we have an internal plan.
That.
Lays out a number of different possibility, we do believe that Q2 will be the weakest quarter.
But any of that into that channel.
Being blown girls protracted didn't know we're currently.
Forecasting we have the ability to do more and won't we hopefully we'll be in a position as we get to the end of Q2 to give you a better indication of what the years Gonna look like.
So I know that probably doesn't answer your question directly Joe because we were just not in a position to give you kind of a view of you know kind of revenue for the year.
But hopefully where you know maybe 60 days away from being able to do so.
Thank you that our next question will come from one to Scott Davis. Please go ahead.
Hi.
Good morning, Craig Iraq.
Hi, Good morning, Scott.
Caller I. I think one of the things I'd like to get a sense I don't really know your big distributors are healthy, but what's the status of your smaller distributors in their financial health.
Yeah, you know at this point, Scott I'd say that.
No we don't anticipate at this juncture.
You know.
Any distributor kind of issues as we work through you know kind of this this downturn as you know one of the good things about being deemed a central.
You know by most governments around the world is that mostly you know our distributors continued to deliver you know goods and services and projects continued to be a to be executed. They certainly will be impacted like everybody else, but at this juncture I'd say, it's a it's it we've not seen.
You know any material change in the health of most of our distributors were obviously monitoring it closely but at this juncture. There's nothing that we could really add that would really suggest that the smaller distributors are going to be somehow imperiled and as a result of this particularly economic downturn.
And Scott, it's Rick I might add that if as I look at a the payments from these distributors, we haven't seen any significant deterioration in the days that they're paying their invoices in.
Okay. That's super helpful. And then as a follow up I'd just like when I think about our model that tough just want to forecast is probably aerospace because.
I would imagine your decremental margins here could be a bit higher than you're at the average at you're calling out just based really on a.
On our plans I can I get parked are already blown parked and did you have that give me confidence is there.
Can you internally models and feel comfortable at least at the Decrementals Ken.
Be somewhat in the ballpark of what's your forecasting broader or should we expect something a little bit bigger.
No I mean, it looked like doing appreciate the question Scott, but let me give me just to be extremely extraordinarily clear we have absolutely modeled what we would anticipate the year to look like so embedded in those assumptions around what the decrementals looked like for Q2, what the Decrementals looked like for the full year, we've absolutely we've absolutely mom.
So what we think the range of possibilities for the year would be and and that's why we've given a range in terms of decrementals for the year.
Q2 will clearly be the most challenging quarter and we're talking about a 30% detrimental in Q2, which you know will be you know.
For all intents and purposes, you know not a very attractive quarter right in terms of.
All the governor instead of shutdown activity around the world and so even in that quarter were saying, we think we can deliver a 30% decremental. We think the decrementals for the year can be better than that because we think the back half.
It's better than than Q2 is gonna be so we absolutely have a plan that we've modeled and you're absolutely correct. The decrementals in aerospace would be higher than the decrementals in some of the other businesses, but on balance we're very comfortable very comfortable with the range of possibilities that we laid out.
Okay. That's very helpful. Thats good luck guys.
Thank you.
Thank you.
[noise] then we're going to have a question from the line of and digging in from JP Morgan. Please go ahead.
Hi, good morning, Thank you.
Yeah.
Maybe you can give us some more details on the data center performance in both at the electrical businesses can you quantify the size of the business I'm trying to find the growth that you saw in the quarter burst since the fall off in sum up the other weaker areas like oil and gas you know just to help us.
Think about modeling longer time like strengthen datacenter is continuing maybe weakness in something like Palestine is continuing and beyond antenna. So any help you can get that's one thing I totally appreciate it.
Yeah, I think you just did a great job man of hitting the two outlier, it's because certainly on the positive side data center orders were quite strong in the quarter.
Well, let's say.
Mid double digit.
In the quarter, so very strong performance in the datacenter Mark and I think you know the datacenter market continues to be strong and if anything.
Kind of work from home the use of technology at home and the use of data in general I think it just once again to strengthens a case for the long term growth prospects for the datacenter market in general and so we're very pleased with our own performance in data centers in in the quarter and we'd expect that that market to remain.
Quite attractive you know even in the midst of this economic downturn on the other side. The equation as you appropriately noted you know the oil and gas markets.
Certainly being hit pretty hard.
By what's going on today by you know certainly the extraordinarily low oil prices and.
Most of the major companies, reducing their capital spending and we're obviously experiencing those reductions as well, but I do think those are kind of the two bookings. If you think about today, what's going on inside of our other core electrical business and by the way that pattern is pretty much true whether you're looking at what's happening in the U.S. So you look at what's happening in markets.
Outside of the U.S.
And what you'd like to size then decline in order to same kind of tie in its first just as you did the data center outside.
Yeah, I'd say, it's its bigger.
And if you think about today, we talked about you know sales specifically in terms of what we experienced in the month of April when I talked about the fact that you know sales are down order magnitude, Naples, and 30% or in some business as a worse than that somewhat better than that I would say crouse hinds would be in the case.
Category of where we're seeing more weakness and on an average inside of the company.
Right and it's also useful to factor in that coming into the call that downturn only about 30% up crouse was oil and gas.
So that's a reduction for what it had been at the time of the Cooper acquisition.
Yeah, we never really saw the market recovery to the level.
That it was that you know and at the time, we acquired a Cooper so you're absolutely right Rick the impact on the company is less than it would have been let's say four or five years ago.
We're clearly seeing project reminder, thank you Jim depend the project delays that we've seen today really have been particularly in the oil and gas market.
We haven't quite frankly seen significant cancellations at this point, but we haven't vaccine delay.
Okay. Thank you I leave it there appreciate that.
Thank you.
And our next question is going to come from line of Nigel Coe from Wolfe Research. Please go ahead.
Thanks, Good morning dense.
Yeah, that's not quota.
I'm wondering can maybe just to talk about the hydraulic sale what kind of progressive you may be able to make and sense of getting the deal close to or moving through the process given the.
At the home restrictions around the globe and so maybe just update us in terms of next major steps and and timing of the close thanks.
Yeah, I'd say that you know, we're certainly confident as we've talked about you know that the deal will close a you know as we announced earlier, we do expect the deal to close at the end of the year.
In late January we did file the purchase agreement.
A material contract with the FCC and.
As you can see in the contract.
You know the buyer it doesn't really have outs for financing or regulatory issues, but I think even more importantly than that you know we're very much in touch with the team at Dan fourth and strategically. This makes is much sense for them today as it did in the beginning and they're doing everything that they can to accelerate the closure of the transaction as well and so.
They remain very much.
So strategically committed to the deal into the merits of the deal and and and still believe it will be extraordinary beneficial to them both in the in the near and into long term.
You know remains a very strong strategic fit for the and for US overall, obviously, we have to go through the regulatory approval process, which we're working through now and at this point. They all look we can tell you is that we fully expect you know this deal to to close in the current estimated by the end of the year and.
At this point, you love to wait and see to what extent if anything you know this cold with 19 impacted from a regulatory approval process. There's been no indication of that to date, but from where we sit everything remains on track.
That's great to hear Thats, Craig and then my follow on question is really on the footprints and you've you've been very open about the fact that eaton's footprints.
Made great progress still not optimal at this point, but would you use this crisis and this slowdown.
To to celebrate some of those footprint plans.
As you could position coming out of the out of this recession.
Yeah, Yeah anyway, I'd answer that question I don't know it at this juncture I'd say that option is there and depending upon the shape of the downturn the depth of downturn in the recovery. We obviously have the ability to pull forward restructuring programs to pull forward.
Some of the plans that we've kind of thought through around how we could restructure of the company as we've said as well will clearly make those announcements.
Internally with our organization before we would talk about it externally.
So I from where we sit today, we have a fairly a plan that were fairly comfortable with using the assumptions that we outlined with respect to.
The company and but those options are clearly there and we feel confident that in the event that we needed to we could accelerate some of these restructuring actions.
That's great color, thank very much and best of luck.
Thanks. Thanks.
So next question will come from line of Andrew Olden from Bank of America. Please go ahead.
Sure. This is David Ridley lane on tranche or.
Can you maybe size the benefit of the restructuring actions you took in first quarter and I guess broadly or are these.
And the a timeline I for one year payback.
Yes.
Yes, one of the things that we've made the decision appreciate the question there, but we didn't make the decision you know.
Couple of years ago that.
As a company we undertake restructuring every year and we thought that it would be better served and you wouldn't be better served that you know if these are gonna be ongoing restructuring programs things that we do systematically every year to deal with structural costs that we don't call them out.
As onetime items, because we do anticipate doing them you know on an ongoing basis and as I'd mentioned in my opening commentary and Weve. You know we size that normally at order of magnitude you know $60 million to $70 million of year.
Clearly, we're going to do more this year, but once again. This is what we intend to do is to run it through our operations and not to call. It out as a separate onetime item now with regard to the point, where we had to do a very large sizable plan over multiple years, yes, we would perhaps consider.
Pattern than that but as long as it's kind of in the ordinary course.
You know the way, we're running the company or if it's one of the margin that's not a significant departure.
From what we've spent historically, we would intend to just running through operations.
Okay and then.
Our lower raw material costs are going to be a meaningful benefit for you in 2020 gross margin line.
Yeah, where we absolutely would hope so and certainly we have experienced to date that most of the key raw materials that we you know acquire whether that.
Copper aluminum silver.
You know steel prices have certainly turned favorable.
So far this year and in many cases, you know as we've talked about over the years. The way, we really think about commodity costs and journalists that they're there and neither a net drag or net positive to earnings a you know to the extent that costs are going up you know we intend to pass those you know.
Costs on to customers in the marketplace in to the extent that they come down the expectation is that overtime. They would also come down as well and so we're clearly seeing lower commodity prices today.
Once again the way, we think about it over the long term is that it's not net negative nor a net positive in terms of S.
Thank you very much.
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Then our next question is going to come from line of John inch from Gordon Haskett. Please go ahead.
Hi, Thank you and good morning, everybody.
Yeah.
Good morning, I got drops unfortunately, it earlier, so I, hopefully I'm not going over something you've already covered creggan, Rick but I'm wondering if we can talk a little bit about the puts and takes on cash flow and maybe working capital I'm presuming.
The shift from two nine to two five the preponderance of that it's just the lower earnings expectation that said I mean, how much working capital would you guys expect to release to kind of buffer cash this year and secondly on cash conversion do you expect the cash conversion numbers on adjusted income to go higher I'm, assuming so you need.
Sense of how much higher.
It was could fall out this year.
Yeah, I'd be happy to address your questions John.
First of all just a few few data points to consider if you think about our classic working capital receivables inventory and less payables.
It's about 19% of sales and so as sales come down you pull out that working capital at the same time as we've commented in the past we came into this year with.
Inventory levels above what they showed up then and we've commented that.
As much as.
$300 million to $400 million higher than they should have been in so what you're looking at as a situation now that future activity has fallen off there is a real.
Imperative van and a real push within the company to pull down inventories in particular.
Just to give you an order of magnitude if deal age at the end of March was the same as deal age at the end of.
2019 are indeed, our inventories would've been $400 million lower.
And so the biggest opportunity isn't deal eight the second opportunity is then in receivables.
Where we're we're actually managing that pretty well, but weve as is normally the case on a downturn.
They pushed out a day to two and we have every confidence that we will pull that back again, we're working very hard at that and then on days payable we have made progress and came in a little bit better than planned.
In March and we believe that we can make further progress there.
Another pretty record your inventory.
I'm sorry go ahead, sorry, I was just gonna say another perspective, I think that that's helpful is that if if you looked at.
Our free cash flow Oh wait no nine lets just look at history.
From all wait till now and our free cash flow improved 22%. If you looked at 15 to 16 again, another down market our free cash flow was up 9% done and those improvements to Willie we're working capital related liquidating working capital to offset.
The decline in profits, but at the same time also our it's managing Decrementals and the Decrementals that we had in Oh wait no nine.
We're pretty attractive they were.
Decremental of.
24% cannot wait no nine and in fact in 15 to 16, the decremental was only down 19%. So it's a combination of managing Decrementals and pulling working capital out then to your last question John.
Typically your cash conversion ratio improves.
These kinds of downturn due to the amount of looking like working capital that you liquidate and so we would expect that we would do much better on our free cash conversion.
In 2020 compared to 2019.
That makes sense and would you say Rick the inventories on the three to 400 access that you had are they kind of more than mequilibrium as you closed out the quarter I guess, it's kind of a bit about falling knife in terms of the future right but.
Yeah that I'd, probably did it get burnt did it get burned off much of that no not not much not much and then we had future sales fall off and so this is something we're working really really hard and I think we'll make a lot of progress in Q2, I don't know that well get it entirely back to where we like.
By the end of Q2, but if the world begins to improve as most forecasters think in Q3 in Q4 will we will continue to constrain adding inventory back as as volume starts rising.
So not only had the isn't just about the way the quarter unfold and most of our businesses.
Outside of China would doing just fine up until mid March and so there's really no. Yeah. We saw this fall off in the last two weeks of the quarter, which is which you know driven some of this excess inventory and just in our ability to give it out it does take time and so if you think about in general if you have if you have 90 days worth of inventory you about 90.
Days away from fixing in inventory problem.
No totally makes sense and just one more quick one Craig at the analyst meeting you alluded to abundant supply chain efficiency or cost saving opportunities and I'm. Just wondering if the past few weeks as provided the backdrop to kind of review those opportunities, perhaps would we ever see perhaps establish maybe some formal targets are initially.
Zohr any of that kind of being communicated.
I'm sorry to supply chain, you said, specifically and we say supply chain you mean, yeah right. Your that's right around your supply chain and I think at the analyst meeting it wasn't part of your presentation, but someone asked me about supply chain and you made a comment no. There is actually quite a lot of opportunity efficiency opportunities I'm just curious if.
That's it that's become a topic during the downturn as an opportunity.
I'd say in general we do believe there are.
Large opportunities within the supply chain and things that we're doing across the company to did bring more visibility into leverage the scale of accompany more effectively across the enterprise and those initiatives.
Our ongoing and have been ongoing.
I'd say that in the context of an economic downturn because obviously.
Greater sense of urgency around everything and I would put you got.
Into the same bucket of where we have opportunities to accelerate the ways in which we're leveraging the scale of the company. It's just getting a lot more attention during an economic downturn, but that I would put that into category of kind of the ongoing.
Continuous improvements around the way we're running the company.
Makes sense, thanks very much. Thank you. Thanks.
Our next question then it's going to come from line of John Wall from Credit Suisse. Please go ahead.
Hi, good morning.
Hi, good morning.
I guess a quick what your highlighted your strong liquidity position.
You mentioned share repurchase acquisitions.
So should we think that actions like that are on hold until you close hydraulics or can you actually you know where would you actually do something before that.
Yes, and what I'd say you know John is as we think about kind of in the first thing I would say that typically during economic downturns, there aren't a lot of transactions done in general as evaluations tend to decline and that takes a while for the reality to said in terms of kind of what assets are worth and so I would.
Say that in general you don't tend to find a lot of deal was done during economic downturns for that reason, but I, but I, but I will tell you that you know as you look and we continue to work.
The pipeline and we continue to look at opportunities.
I think practically speaking you know from where we sit today.
You know the kind of things that make the most sense for us tend to be that tuck in type of transactions.
And that's most of what we're looking at but I would say no way do what we think we have enough confidence in the cash flow of the company and enough confidence in that the transaction will close that we certainly if we needed to if we found something that was really strategic at the right price right you know we.
Certainly we can take bridge loans, we can do things to finance the transaction until we got to the point, where the cash flow from let's say the sale of hydraulics and quite frankly, all the cash up will generate for the balance of this year came it.
You know.
So that's kind of the way we think about its really a you know when that opportunity comes we think we have enough financing flexibility to do a deal once again, recognizing that we're going to maintain our discipline.
I'm going to overreach.
We clearly feel like buying back our stock is certainly an option as well and every deal is got to compete with that as an alternative.
But but no if we found something that was really strategic.
At the right price, we would certainly have enough financing flexibility to do it even in the near term.
Great and just I asked the question we've heard some companies actually you know suspend or decide that they're no longer gonna do share repo, but it sounds like that that's not the case here you would be able to do that a few so chose.
Yeah, I mean, our cash flow in liquidity remains quite strong and it did as I said in my opening commentary you know given the cash up will generate.
The optionality around M&A and share repurchases is absolutely still on the table for us because what we said as well we don't we said I don't see a need to let a bunch of cash build up on our balance sheet, we generate a lot of free cash flow in periods of economic weakness and our cash flows or <unk> or amazingly consistent in good times it.
And bad and so that option this though so on the table for us.
Great and then you know you touched a little bit on construction markets wondering high level.
You're kind of viewing the corporate name crew disruption as an event or if you know that kinda exacerbate some well bigger I call.
We've had some companies use the word air pocket on new construction just.
Moving on that kinda commercial vertical of your business.
Your next I'd say for the most part if it's too early to really call them and I think the without a doubt they'll be different segments of the market and our businesses that will be affected differently and perhaps in some cases.
The shape of the recovery will look different depending upon what business or were in but I think you know quite frankly, as we kind of sort through it at this point. It is just too early to call and say, yes to what extent you know are these business is going to look different on the other side of the of the covert 19 economic downturn than they.
Before I mean, there's lot of debate and speculation around aerospace.
Certainly with oil prices being at a level that the red today has been a lot discussion around what happens with the oil and gas markets on a go forward basis.
But we think the fundamentals around the global economy, you know.
For this event work quite strong and there's no reason to assume that.
Once we get to the point, where we have a therapeutic vaccine that the world doesn't return to to trend growth.
Great. Thank you.
Thank you.
And our next question is going to come from the line.
Julian Mitchell from Barclays. Please go ahead.
Hi, Good morning. This is John one for Julien.
No you're taking that.
Maybe taking a closer look intellectual global you mentioned that some of the declines this quarter were attributed to.
China and Asia Pacific lead you know sort of sort of obviously, but can you talk a bit about maybe what you're seeing in the region in April and whether you're seeing some signs dougs kind of normalization or a return to growth and maybe how you're using that as sort of a read to the electrical Americas segment.
Yeah I appreciate the question and I think our experience in China specific Julian is very much like what you probably have heard from other companies, where we did in fact see a China come back.
In the month of March not necessarily going to levels that it was that no prior to the economic downturn, but we did see it clear recovery.
And our factories in China are all open.
We have we're full capacity today in terms of like in our available capacity. Some of the end markets continue to be weaker than they were before the economic downturn, but I can tell you that if we have a china like experience in the rest of the world that would be extraordinarily positive.
Much more positive than we're assuming in our base case.
We do believe that the weight China approach to this particular economic event.
Was different it was more unified and so you few you found that Oh, you know companies in the economy went down and all came up kind of in a much more unified fashion and that was a fundamentally good for business and industry.
Given the kind of disparate nature of the way that's taken place around the world and in other countries. We think the returned to growth will be a more gradual more haphazard than probably what were experiencing in China and that's what we haven't our base case.
Got it. Thank you and then maybe a follow up on some of the restructuring plans.
Is there sort of a focus here on aerospace just given that we could be in for a bit of a longer downturn and you know the first kind of significant downturn in some time for the end market. It is they're focused here on some of those off the shelves kind of restructuring programs to be targeted at aerospace or is it more but the total company outlook.
No I think it would be fair to say Julian that we are focused.
In those businesses that we'll likely see the biggest economic downturn and perhaps those businesses that will face the biggest structural issues and so you can you could assume that it to the extent that industries are going through a pretty significant economic downturns, whether that's aerospace or oil and gas markets you can assume that.
We are focusing our activities around restructuring in those businesses. In addition to the things that we're doing more broadly across the company.
Perfect. Thank you.
Okay. Good. Thank you all we have reached the end of the Oracle and we do appreciate everybody today and not the question as always chip and I will be available to address your follow up calls essential for joining us today have a good day bye.
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