Sandy Culter – Chairman and CEO
Jeff Hammond – KeyBanc
Eaton Corporation (ETN) 2013 Electrical Products Group Conference Call May 21, 2013 10:45 AM ET
Okay. If we could just take our seats, trying to catch up a little bit here, if I could ask the doors to be closed that would be outstanding. And thanks everybody, and of course we have Sandy Cutler from EPG. Sandy welcome, thank you for joining us last night, the cocktails and dinner also.
Great, Chris, thanks. So good morning. A number of you had asked us last night at cocktails that we had an acquisition announcement this morning. I’m going to disappoint you and tell you no, one is enough for a year and a half.
But what I would like to do is just take a couple of minutes to update you on what we shared with you on the first quarter, and our view of what’s going on around the markets, and particularly a couple of the new product introductions that have been launched here just recently that we think are really applicable to the couple of trends in the industry, and then get right to your questions.
So, with that, I’ll ask you to memorize this first forward-looking statement, and now we’ll move on to the of the comments. I think as you know what we’ve been working on within Eaton is to really transform the products in the businesses we are involved and to really aim ourselves at those industries that are huge power consumers, and that goes back to our belief that the cost of power is continually going up.
And in a slow growth environment the real key is to get yourself into segments where regulations help drive the consumptive power right into the businesses that you’re in, and that’s really what we’ve done across all these many applications we are involved in today. So whether it’s electrical, or whether it’s fluid, or whether it’s mechanical power, those are the high energy businesses we want to be involved in, and we think even in a 2% GDP world we can grow quite a big quicker than that.
A year ago I think many of you recall it was Monday after the close that we announced our acquisition at Cooper, we were here the next morning to talk a little bit about the acquisition tremendously transformative deal, and in so many ways it’s brought terrific additional capabilities and people to our company.
We’re now over 80% in our hydraulics, aerospace, and electrical business; a plan that we had laid out back in 2000 and we really got there last year, some 65 acquisitions, high number of divestitures as well and really feel we’ve got a portfolio which has put together in a way that it really can’t perform in either high or low growth environments.
So many of you know Cooper’s record well, really an exceptionally run company, one that brings to real Anchor brands to Eaton in addition to our Anchor brands in the electrical business and as I said in a number of forms since then the deal was everything we hoped it would be and more. And so you know we have already increased our synergy projections twice in roughly six months that we’ve owned the business, this business is going to be a real winner for Eaton.
For those of who, who didn’t know the Cooper business well, just a very quick update on what was in Cooper, really seven businesses as you know, several of them with big Anchor brand reputations around the world and Anchor brands are so critical in the electrical industry in terms of really giving your distribution partners something to build their businesses around and what’s unusual about this transaction.
As we have talked about it’s one of those few where there is virtually no overlap and what we are bringing to our partners and our customers is the ability to really solve much more of their power management problem and not causing them to have to go through rationalization of product lines and offerings because we are really complementary.
If you think about the big drivers and I’m sure you have been talking about this in the last couple of days, list on the left hand side, these are some of the big drivers we think really are going on the electrical industry that we have been building our new business around as you can see both Eaton and Cooper were active in a number of these, it bulks up our capability and our scale.
And then in some areas one or the other company really had a participation in it and this allows us really to strengthen that through the scale of the business and the large coverage we now have around the world with our combined sales force as in distribution channels.
All hot growing items, all moving more quickly than the average growth rate in the business, I’ll talk about a couple of the products that we have introduced just in the last couple of months, it really hit on some of the nature, the changing nature in a particular – couple of these particular drivers.
We are also – we are very excited about this acquisition because when we think of verticals, market verticals around the market, around the business, you can see the tremendous additional scale we gained in a number of these. Big platforms as Tom Gross spoke to many of you about in our March meeting in New York.
And these primary platforms really become the backbone of what we think a lot of the additional growth is. Everyone of them over $1 billion in size now that allows us to bring a type of scale to these that neither company was able to bring beforehand.
Now if you think about the products, so we talk a lot about the products – about the products. So we talk a lot about the products, breadth of solution that offers the customers, the opportunity for single sourcing of coordinated project management to be stepped through what we’ve been trying to do in our electrical business that really started in that center where you see power distribution and control and for the purpose of this chart, blue is legacy and red is legacy Cooper.
We then move to obviously into the Control Automation. We strengthened that fairly substantially through our acquisition of Moeller. Backup power production obviously came through the acquisition of Powerware, Phoenixtec and the other some seven acquisitions in that area. Engineering services, we started up on our own in 1997 and now have a couple of 1,000 engineers operating in that area, really terrific capability around the world.
And then you see what came in through Cooper, obviously lighting, a whole new area for us, really exciting one couple of more comments this morning, all the solutions for harsh and hazardous applications, a lot of the same industries, we’ve been participating in with a much wider product capability.
Structural solutions, wiring devices, a big plus and then of course the Powerware product line brought in the fuse approach to circuit protection, so really the major company in the world today offering both circuit breaker and fuse low voltage and medium voltage capability, all the way up to high voltage in that area. So a really complete capability for all the industries you see on the bottom.
We are pretty busy at this time period. We added 29,000 new employees in this acquisition to our base of 73,000. We did four other acquisitions that added another 4,000 employees. So when you think about the magnitude of the transformation just expressed in terms of our employee population, some 33,000 added within the last year on top of this 73,000.
So obviously when you talk about, we’re focused on integration and running our businesses. We are not active in additional M&A at this point as both the result not only of the $4.9 billion of debt that we took on as prior to the acquisition, but also in terms of how fully deployed, we have our integration teams right now.
These are the synergies that we showed you on a number of occasions. We increased the 2013 synergies from $75 million to $90 million because we got off to a little faster start in the corporate synergies and some of the supply chain synergies.
And if you go out to the far right hand side, the cost out synergies of $290 million that was increased from our initial guidance in that area of $230 million – $260 million, excuse and really the difference came as we think there is a little bigger opportunity in some of the facility consolidations than we originally envision, but we think a healthy set of synergies and of course everyone I think has recognized the global cash management and associated tax benefits became effective really with the closing of the deal.
So we’ve been recognizing those benefits write off the bet. So again in total we feel very comfortable with this integration path, feel very comfortable with these individual projections and I think we are off to just a terrific start in this regard having owned the business for just little less than six months.
We talked about the operating synergies. And I’m talking about on the cost side now really coming from these primary five verticals. There’s nothing changed in this chart from what we showed just roughly a month and a half ago, but again if you take the total nature of this $290 million from a two years saving, pretty much in line with what we’ve achieved on the other major acquisitions in the electrical industry, so I would say no leap of faith in this particular area, stuff we know quite well.
We’ve done some 65 acquisitions. We’ve got a very large integration team full-time focused on each of these, be glad to answer questions about them, but I’ll say walking you through everyone of these charts, so we got a little bit more time for questions.
Similarly on the sales synergy side, four big verticals in terms of how we go out and achieve the sales synergies, again complementary products, but in many cases similar channels, similar end customers, similar applications and in the case of service what you see on here, Cooper did not have its own internal service capability, Eaton has a very large service capability, a real natural for us to reclaim what we think is the available aftermarket installed base, we really need service on a lot of the equipment that was sold. And one because we have that scale in place, is one that’s pretty easy for us to get out.
Let me just switch very quickly to a couple of products. I think as we’ve talked over the years, so one of the major elements for us to continue to increase both our market share and our margins has been that we really feel the key is to have industry-leading product solutions, I’ll profile just three of them for you here this morning, but there are continuation of a very large array of new products we are bringing out that really sets standards, hold price point, have high intellectual property content and as a result make a real difference in the industry.
For those of you, who has spent time around the power, quality arena, and data centers, we pioneered the first transformer list design a number of years ago, about six years ago. We have several gigabytes worth of capacity installed around the world at this point. 99% efficiency levels reduces heat, greatly improves efficiency, really meets all the needs of the major data centers.
The question has been, does anyone have that capability in mid-size and small-size configurations, because there is a lot more activity going on in that mid flow area than there isn’t really a big ones.
Just introduced what you see here is a whole new generation of smaller data center solutions, both in a – what we call both an essential and a premier. So, it’s targeted at a very small data center or at the mid-size with the same kind of efficiencies, off to a great start, a reflection of changing requirements in the industry, but our ability to bring those kind of patternable high energy efficient solution really in all ranges now across the board in the terms of the power quality market.
Second one for those of you, who are at LIGHTFAIR just some three weeks ago, I think you are all aware that really exciting transformation activity is going on in the lighting industry today. Obviously LED has revolutionized the lighting industry, it has hit a number of segments, but has not yet met or really attacked the recessed lighting area. So, think about that as a two by two or two by four troffer.
You tend to find them overhead in most conference rooms, most office buildings here in the biggest portion of the lighting business not yet penetrated by LED.
We just introduced the first cost effective solution about three weeks ago. Our new wave stream technology is just a major opportunity. It really cost parity and value parity with your traditional florescent marketplace already we’ll be shipping these in the second quarter this year.
We think that next big leg of continuing to really move this industry far more quickly to the benefits of LED, you all know those well and in terms of 50,000 hour life time, very significant energy equations, paybacks often in the one to two year area. I think a real opportunity in a slower growth end market today overall to really accelerate our own growth.
And third, another product arena that came to us as part of the Cooper acquisition. The whole structured solutions, and this has to do with wiring and cabling support systems. If you are on board, let’s say an offshore oil rig today, many of you know it somewhat like a large iceberg that you see about a third of as above and two-third as below of the water.
The same is issue is true of weight. For every pound of weight that you’ve got above the water line, you need four to five pounds of structure underneath. And so, we can take a pound out of top in terms of these kinds of support structures for all the cabling and electric work that’s done on top. It is a very substantial overall savings to them, again leading the industry in the terms of these innovative solutions in this particular area of real interest in big verticals like oil and gas for us.
So just three quick examples of that in spite of the markets being more of a 2% a year – this year, and we think, I am talking about GDP at this point, and we think likely to continue there for some time. There is a tremendous opportunity in this broad array. We have to continue to accelerate R&D, both the hallmark of both Eaton and legacy Cooper to create industry leading solutions. Again, we think that’s the key to the kind of margin performance, we’re talking about.
Let me just address top line growth. For those of you who followed us for some time, you knew that when we announced our goals for the 2010 to 2015 time period, we had talked about growing at 10% to 12% per year with 2 points to 4 points coming from acquisition. In the early parts of those years of 2010 and 2011, we were seeing markets come back kind of that 14%, 15%, 16% level.
A number of you asked, hey does that kind of number continue going forward? And so, March 1 this year, we clarified no one in this current environment is more like 2% GDP, more like 4% in the market growth return. We think we can grow at 8%, that’s 4 points from end market growth, 2 points from 50% outgrowth, and about 2 points from acquisition. So, we think that’s a more appropriate way to think about revenue growth going forward from this point in time.
We do expect to have a really terrific margins here in 2013. This would be record margins as you see here, 15%. We were roughly 14% in the first quarter, and I think we are off to a really good start and you can see where we’re headed over time. We think 17% margins in this environment of slower growth is still realistic and achievable for Eaton, obviously the synergies from these five acquisitions plays a role in this, but so do the types of products, I just profiled for you because they’ve got a higher margin content to them.
We’ve talked about the markets being relatively slow this year, and when we entered the year, this year we talked about end market growth of 2% to 3%. I won’t walk you through every ones here. You can see this an array of some that are actually negative, some that are positive this year. In our first quarter conference call, we said we think it’s more likely to be towards the lower end of this growth versus the higher end of this range of growth this year, but we’re maintaining our full year guidance in terms of our operating earnings per share.
And this quickly is the summary of our outlook for this year. Again, no changes from what we shared with everyone at the end of the first quarter, off to a very good start. We think a very solid earnings in the first quarter in a period of time, where frankly in the electrical industry we saw a little bit bigger distributor destocking particularly in Europe and in the North America than we had expected.
I said the good news is that our anticipation of second quarter revenues in total for the company being up between 5% to 10%, still looks pretty much on track and that’s pretty much in line with our seasonal, and we are seeing a better activity in terms of distributor destock – restocking now instead of destocking as we enter this quarter.
And so as we step back for Eaton, last year we talked about the Cooper acquisition being transformational for Eaton then. And I think we’ve been able to provide a couple dimensions for you to consider that, that I think have really helped people kind of hone in where the value is.
We’re expecting the revenue growth through the cycle of 8%. We’re expecting segment margin as 17%. But I think the big news is when you look at the new portfolio of Eaton with some over 80% being in the three businesses I mentioned Aerospace, Hydraulics, and Electrical. The beta of our portfolio has changed very substantially, and we profiled that for you in our New York meeting earlier this year. But we’re very close to the midpoint of the premier diversified industrials, another one of our major objectives as we completed this entire transformation of the company.
Very strong synergies, very strong cash flow. Clearly, we’ll get through paying back those $4.9 billion of debt we took on. We plan on paying back $2.1 billion of it to them be in the rating range to re-achieve our A rating. That’s going to mean obviously that we’ve enormous optionality in terms of cash moving forward. And I think a high quality, a problem for the company, one where we really got a lot of flexibility in terms of what we do with that capital structure, and how we build returns for our shareholders.
So, with that just as a quick update, I’d be glad to take any questions that all of you may have this morning.
You talked about the inventory due stock essentially being over, we have copper and steel prices bit of falling a fair amount this quarter over the last couple of months I guess. Are you seeing any price pressure, your customer is coming back and saying, we want the full pass through or even more?
I’d say that’s less an issue in sort of standard products than it would be in large negotiated projects and they are, you tend to I think always see the commodities material a little, materialize a little bit more quickly there, but our objective again is the same as its been last year, is we don’t try to make money on commodities, we really want to have margins to be neutral on that issue and then really get our price based upon the new industry setting products.
Okay. Just as a quick follow up, there is two ways to delever, you can raise EBITDA or you can take down debt and you seem to be doing. You are planning on doing both clearly, but how do you think about if interesting opportunities do come up? Some of your competitors right now would not be all that well-positioned to do transactions, but you could potentially and is it more of a capacity issue for me in power internally or is that concerned about the, the debt levels?
I think it’s both. Number one, it’s easy in a period time like now, where really the, the interest spreads are so indifferent between different kind of ratings on the credit scale to get a little bit I think short-term blinded to that. That won’t continue forever and we all only have to look back to 2008, 2009 to see how critical really a strong balance sheet was.
So, I see number one right now our issue is management capacity. We are busy, we want to be sure we get these five acquisitions better down and meet all of the, the guarantees we have provided in terms of, how well these can perform for our company and our shareholders.
But secondly we do want to get back to a solid, and often you all know this record well in periods of fiscal crisis and monetary crisis, often there is some real opportunities that’s why we really like to have a very strong balance sheet. So we’ll do both. And off that $4.9 billion, we need to pay back $2.1 billion of the term debt and its termed out over about 2 years to 2.5 years to accomplish that.
Yeah. Just on the market share in your Electrical business. I guess a lot of the European companies have been very diligent sort of building out a broad product range, so they can have a good solutions offering for their customers. May be talk a little bit about how much you think Cooper can add in terms of your market share potential from a bigger solutions focus?
And also you mentioned services for them was not really a priority, how quickly can you ramp up as service penetration, I guess it’s a little bit different from when Eaton build up its own one because you have the head count there now in terms of the sales channel. So what are the sort of precise mechanisms you can use to get the service penetration up?
Yeah, let me answer the service one first it’s a little easier frankly is that – you are exactly right, we spend a number of years building up not only the manpower, but all the regional and district capabilities for doing the service from a facility point of view.
So that’s a matter of quoting the business from landing the business. It’s a – we probably will have to add some people hopefully if the volumes comes, but I think that one is one we evaluate as pretty easy to get at and frankly already seeing some opportunities in that regard. So to that one it’s really right in our sweet spot.
I think in terms of the market share issue, the way we think about that is these big verticals, be it mining, gas, be it data centers, be it mining, and you can kind of go on. Really the key in those areas is to see whether you really do have that full array of products and makes it easier for your customer to do business with you and then provides some unusual benefit in that regards. So let me just take oil and gas as an example.
If you take the -the combined product portfolio, that legacy Eaton electrical, legacy Eaton hydraulics, and Cooper, legacy Cooper has, we cover a very broad array from under sea to onshore to a drilling rig to a refinery. And so those same EPCs around the world that you work within all of these applications, we are a much bigger player with them.
We have the regional capability to cover them everywhere. We’ve got the channels that cover them everywhere, and those kind of projects require that kind of coverage. So that’s a lot of what we’ve been working on very specifically and this addition is a very big leap forward in that regard.
So trying to come back to the 8% gross type of growth, two points still to M&A is obviously a lot lower than it’s been for the last 10 years, a lot lower than so many of your peers are talking as well, so I understand it, but towards taking down debt in the short term, but over the cycle, as Eaton evolves in to cash return company, and I guess on top of that, why would you want to make changes to a growth model that’s been very successful over the last 10, 15 years?
Yeah. It’s the hardest one to ever try to approximate. I don’t think our appetite has reduced and I don’t think our capability has reduced in that regard. It’s always a question of what’s available and then at what price, and our value has always been built around the most important decision you make an acquisition, is pricing it correctly because if we don’t do that, you will be fighting out of a bag for a long time.
So, could it be higher than the two? Yeah, it’s lumpy when it happens. We’ve got plenty of opportunities in those three segments I’ve mentioned, Aerospace, Hydraulics and Electrical. So, I don’t think it reflects any view of ours that that gee there is a lack of opportunity or we don t have the capability or the fire power¸ we’ve actually got more of that than we’ve ever had before.
And, we will see a big uptick in investments both CapEx, so engineering – to generate the core MPIs gets to normal?
Unidentified Company Representative
No, I would not say out of character, for where we’ve been. We’ve generally said that think about our CapEx it’s being about 3% of current year sales that’s worked pretty well within a attempt or two, one way or the other. And so, whatever you feel our sales will be that would be sufficient. And I think what you saw is that, in Cooper you saw about five or six years ago a significant ramp up of their R&D. It’s had a little bit more steady state now. And we think – we think that the R&D investments are wholly adequate at this point.
And you’re seeing some of the real benefit in terms of the number of these products that are coming out.
Unidentified Company Representative
Hey Sandy. So, can we talk a little bit more about the operating synergies. 133 mean small plants, I mean that’s obviously the two companies combined 64 DCs. How many of those are Cooper and then, is there a way that you could perhaps....
Those are Cooper numbers.
Those are all Cooper? Okay. Is there a way to contrast the overhead then, sort of your plants versus theirs. And I would think on these DCs, I can understand that the products are completely complementary, right. You probably have a propensity to keep more factories, although it’s equal, but the DCs it wouldn’t there be an opportunity if a product running through a DC to rationalize a lot of those, and is that meaningful?
Yeah. And part of the process and I wouldn’t disagree with you that we think there is some real opportunities. There are also some systems issues that take some time to get done and recognize again that, one of the great strengths that Cooper was the strengths of its individual brands in businesses. But the company wasn’t run as so whatever call an integrated operating company.
So getting everything to talk to one another and works such as you can make some of those facility changes. It takes a little while to get that done, so that’s all part of our kind of calculus and how we put this together. One of the reasons we want to share some of those numbers in the presentation was to give people a sense for the level of opportunity.
There is a significant opportunity, it will take some time, we’ve already announced a number of closures and transfers that we’re starting on, but it always tends to take a little longer than you think when you’re going to move facilities because your number one criteria is really making sure there is no interruption of service for our customers and to be sure we’ve got that systems capability in places that we’ve to get done first.
Yeah. I would say today Eaton is a lot more consolidated in terms of distribution capabilities and I would say that the number of small facilities is a lot less and I think that’s because our integration philosophy has always been to fully integrate and try to get those synergies and that Cooper has been very successful over the lot of acquisitions maybe not as fully integrated as Eaton has fully integrated, as Eaton has been historically.
Probably on the back first. You got to be quick, Jeff.
So one company yesterday talked about short cycle trends in Europe improving to the extent that the components restocking that you mentioned earlier is occurring in Europe that would be helpful color, if not or is just basically a North America phenomenon?
I would still describe Europe as my new favorite word, molasses. It’s pretty easy for the feet to get stuck in Europe right now and I would not say that’s true in the Middle East. It’s not true in Africa, but in Continental Europe, you got a good month and a bad month and a good month and a bad month. I wouldn’t say there is a definitive trend there at this point. I would say here in the U.S.
I think as we’ve come into the spring season, this normal season that we see here, every bit of that’s occurring. We are seeing a couple of individual end markets, you all know well. Everybody is excited about residential. I think there is a reason not to be excited about, it’s simply for 2013, all the hospital formation data would support 1 million, 5 million, 6 million, can take us a couple of years to get to that, but that’s two or three years of I think pretty handsome activity generally.
And this is different than what we’ve seen in this last cycle where really non-res came back before res did for all the reasons we know about mortgage and overhang, and all the rest, but what’s important now is that we never really saw a comeback on the non-res side was what I’m going to call the light commercial and the stuff that tends to follow on residential.
And so we think there is the opportunity as you start to keep moving up towards this 1.2 million, 1.3 million, and 1.5 million housing starts, you’re going to see that traditional early cycle, which hasn’t occurred yet of the smaller light commercial, the tenant refits, the new McDonalds, the shopping – small shopping center that should come with this.
So our view, part of this strength in North America right now is its residential, it is non-residential as well, and we’re talking about that whole trend, not simply the commercial piece first quarter 4% probably put in place about 3% and a little change in terms of when you include the government numbers in it. Those are numbers very much in line with what we’re anticipating this year. Frankly, stronger than the industrial, or the utility, or the power quality areas this year.
And one follow-up question on your guidance for this year. For ESS if I recall correctly, your guidance is for 14% margin yet the first quarter you did higher than that, and you expect volumes to improve as the year progresses. So, from where we said, it looks very conservative for a 14% number, so maybe you can comment on that a little bit?
Yeah. And some feel that other way about the products area where we start a little lower than our guidance for this year, it’s early. We are really delighted with the first quarter. I think it’s a reflection of real productivity improvement in the business, and frankly a very large backlog, we brought into this year.
That segment in our systems and services segment is where we tend to carry a big backlog, the product side is generally in one month. It goes out that month or the next month, and so that’s the area where we felt the destocking. So, I’d say off to a really good start in that business, and feeling good about what we’re seeing now in terms of the distributor activity, which will primarily support the products segment at this point. But it’s a little early in the year. Let’s see how we do second quarter we’ll be back to you. Yeah.
Sandy, I want to come to tax for a better or worse that’s in the news and Tim Cook getting grilled on Capitol Hill today and other stuff going on, and a lot of talk about Irish structures actually. Just wondering as you are now a year in to this and put the structures in place, just your confidence level and the suitability of what you have done, if you look at Eaton’s tax rate versus other I’ll call them redomicile U.S. companies Pentair Tyco IR your tax rate is roughly half of theirs.
So if you could just give us a little kind of feel for what your thought is on, has there’s been any change from anyone about your tax rate, your sustainability of it, any other color you like to add there?
I’d say again, we -everyone is not familiar we redomiciled as a part of the Cooper acquisition Ireland statutory rate is 12.5 and so that our guidance this year is slightly below that and we’ve said generally, we think it probably is going to average out over time closer to 10% and that is – it’s really structural, we are not a U.S. company employing offshore type activities, we are an Irish company.
And so we think quite sustainable and very much in-line with those countries or those companies that actually are headquartered there. There are other companies that have made different investments in different parts of the world, you are going to get different investments that are going to effect the company and the company’s mix will play a role in this as well, but we are very comfortable with both the actions we have taken to redomicile and our corporate structure that we as well, again headquartered in Ireland. Yeah.
Yeah Sandy. We just been hearing some of your comments on the technology changes within data centers. You are – one of your products back a power supply related to heat. So, just in terms of heat management within a datacenter, both implications on what that does to spot heating for that, what it means for transform unless back up power and then maybe a comment on cloud, which seems to be less about the technology and more about an excuse to delay some investments as it plays out.
On the heat issue, a number of you have heard us talk about this and I know a large of you have actually visited our datacenters here in the U.S. And what’s unusual about those datacenters, I think for most of your, is the operate at ambient temperature.
And that in itself is a gigantic piece of news because if you can minimize heat generation which in the electronics, which you all know comes from heat. So, when you talk about efficiency, we have a 90% efficiency in terms of your sever or your UPS equipment, you are generating heat, our stuff operates at 99, leaves the industry, and as a result we are reducing heat.
Now if you can also then figure out, how to not have the air conditioner the size of this room two or three times that operate in just air conditioning or cooling, selected verticals, think of it as a three by three vertical, you then are obviously reducing the tonnage very significantly and that’s what then allows you then to operate the rest of that whole server haul at ambient temperature.
And as a result you then can move away from the traditional type of air conditioning that’s been used, and which is a more expensive form of air conditioning, and go to the generic cooler, so you can go to the traditional brand names that you know in that regard.
That’s indeed what we have demonstrated in our two datacenters we see a lot of people moving to that because the key is not how much more cooling you can get, it’s how much heat you can get rid of because then you don’t have to do the cooling, and your electric cost comes down very significantly.
So I think very significant changes going on in that area. It is an industry that tends to move relatively slowly, because it’s a high reliability issue, so you won’t see this sweep across every data center, but you’re seeing a lot of the cutting edge data centers are employing just that.
I think the cloud issue, a slightly different issue there is that I think for several years, we’ve been seeing an active debate in the industry about proprietary data centers, co-los are using the cloud and then some people use it simultaneously.
For the power quality side, which we’re involved in, if you’re dealing with a co-lo, you have to put in the security provisions for your most secure application or customer. So, I think one of the early misconceptions was that most of these things will get downsized in terms of the – I’m talking the electrical security that goes around, that indeed is not true.
I think what is happening now, is you’re finding some of the social media sites are finding that originally they started up on the feeling that they could never be down for 30 seconds. You’ve seen and you saw Netflix go down right on the Super Bowl this time.
They went down for a period of time. And there are a number of people who have decided they can operate in less than 99s of perfect quality. That’s a decision people will make, but I think it’s a reflection that in a slow growth environment, where people are really trying to squeeze cost, people will start to make tradeoffs in terms of the type of security they’ll build around their electrical protection, doesn’t mean everybody will.
A bank is certainly not going to do that. A company like ourselves or a operating company is not going to do that, but is it critical that you have online search for who is the author of this book and it can’t be down for a second, probably not.
And so, I think you’re just seeing the industry come to a maturity issue trying to kind of size what make sense in that regard. We’re also seeing to your point the hesitancy on the really big data centers and we saw that all last year. It’s been slower this year, although there’s a lot being quoted.
And that’s one of the reasons you saw us come out with essential and premier in terms of these two lines here is that people are a little more willing to do the midsize and the smalls right now. It’s not as big a bite and they can get out of it without having to spend $100 million or $200 million in a major data center. That’s how we really reposition this product to go right after that area.
Unidentified Company Representative
Yeah. One on the tax structure, and one on the operational. Is anything about the way that tax structures formed over time would constrain things you might do strategically, whether that were a largest scale divestiture or anything else? And then on the operations, just with your confidence level that the hydraulics recovery can hold?
Yeah. On the tax issue, no we’re domiciled outside of the U.S. We’ve got great flexibility in terms of how we’re able to move cash around the world, and that really is our – is the issue that gives us our great strategic flexibility, so I’d say no on that one. On the issue of hydraulics, we have forecasted this year that the market will be down this year. You saw that.
What we commented on in our first quarter conference call was that our bookings were down 8% from the previous year that was – that was a lower rate of decline that we’ve seen in the earlier quarters, and that the first quarter absolute number was up about 30% from the fourth quarter.
So, I think what has changed if you just take fourth – I think what has changed if you just take fourth quarter and – fourth quarter last year, and first quarter this year is that Ag, which had been a big negative in the fourth quarter flipped fairly significantly in the first quarter, much better tone, much better orders, and we’re seeing the dealers inventories having come down.
I think the one that we’re all working to try to best understand around the world, this isn’t just Europe, the U.S., or China is in the construction equipment marketplace, when you look at low utilization by end-user, inventory at the dealer, inventory at the OEM, is there really good enough insight through that, and our learning in this area over a bunch of years, is it generally takes a couple of more quarters than anybody is going to think for that to get fully, fully blood out, and this is true in all the regions of the world right now, that’s why we have maintained a negative – an outlook of negative growth this year. We think positive growth doesn’t occur until 2014.
Okay. Sandy, I have a direct investor question here from the audience. As rail continues to take share from trucks in North America, how do you see the replacement level of truck demand trending over the intermediate future and how does that impact your thoughts about your truck business?
Yeah. We think again this year – we run a pretty complex model and some of you are familiar with the work has done in this over the years, really looking at industrial demand, replacement, relative shares of alternative transportation modes, all of that leads us to believe that this year we will look a lot like last year in total volume.
So on that order of 270,000 heavy duty trucks industry production right now, but the year will look very different from the quarter, so that when you look at our overall forecast earnings this year, we said the first half earnings will be out 46% of the full year, 54% in the second half, that’s $0.37 difference first half to second half, $0.17 of that $0.37 is from Cooper, $0.20 comes from basically a slight increase in number of days in the second half.
But more importantly is the ramp in the heavy duty truck market here in the U.S., 54,000 units in the first quarter, 78,000 in the fourth quarter. I think most people who are around that market today see the second quarter is already pretty well locked in with the bookings in place. Last month’s bookings about 23,000.
We need to see bookings in the order of 25,000 per month as we get to the middle of the year and that will pretty well facility that 270, 000 so we think the 270,000 is pretty solid for this year, assuming we get that kind of booking in the middle of the year.
And one from me. You mentioned $10 billion North American opportunity for the LED lighting and you said a two-year payback, I think it was right now?
It depends on the applications yes, but I can be quick than that and even longer than others, that’s not a bad number.
So my question, how is that payback trending, where are you getting into in service, you look a year from now with the technology and the cost base, how tight can you get that?
Yeah. I think what the big payback has been historically good applications like airport, highway lighting, municipal lot lighting, outdoor lighting, then moved into some of the residential applications, but one that no one’s been able to crack is this one that I just mentioned, that’s where this wave stream technology we brought out because it’s more than simply the LED chip.
It’s a whole facilitation of what we do from an optics and heat dissipation, and mounting capability that’s where the big, I think exciting break is, no one’s been able to do this before and attacking the troffer market that’s the biggest part of the lighting business. So, we really think this is a really exciting opportunity here to go after.
And your margins at that cost point – at that price point is comparable to....
They will be attractive margins for us.
I guess. All right. Sandy any closing comments.
Sure. I just, I would say, yeah. I appreciate people’s attention to the transformation of the company, it is a very different company, and again I would say I think the two issues I would leave you with because so many of you have been close to the story is the change in the volatility of the revenue streams for the company fundamental in terms of the valuation.
And second, what happens to our cash generation capability, and the optionality that opens for the company. We’ll get this debt paid back on schedule, and our ability to really have extraordinary cash flow and free cash flow at that point is the one that we think builds additional opportunities for the company.
Thanks very much. Good to be with you today.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!