Eaton Corporation Q2 2010 Earnings Call Transcript

| About: Eaton Corp. (ETN)

Eaton Corporation (NYSE:ETN)

Q2 2010 Earnings Call

July 21, 2010 10:00 am ET

Executives

Bill Hartman - IR

Sandy Cutler - Chairman and CEO

Rick Fearon - Vice Chairman and CFO

Analysts

Meredith Taylor - Barclays Capital

Eli Lustgarten - Longbow Research

Steve Volkmann - Jefferies

Ann Duignan - JP Morgan Securities

Rob Wertheimer - Morgan Stanley

Jeff Hammond - Keybanc Capital Market

Andy Casey - Wells Fargo

Terry Darling - Goldman Sachs

Chris Glynn - Oppenheimer & Co.

Andrew Obin - BofA Merrill Lynch

Tim Denovar - Wolfe Trahan & Co

Mark Koznarek - Cleveland Research

Nigel Coe - Deutsche Bank Securities

Jason Feldman - UBS

Robert McCarthy - Robert W. Baird & Co

Operator

Welcome to the Eaton Corporation Second Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to your host Mr. Bill Hartman. Please go ahead, sir.

Bill Hartman

Thank you very much. Good morning everyone and welcome to Eaton's second quarter 2010 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO, and Rick Fearon, Vice Chairman and Chief Financial Officer. As has been our practice, we will begin today's call with comments from Sandy, followed by a question-and-answer session.

As a reminder, the information that we are providing in our conference call today will include some forward-looking statements concerning the third quarter of 2010, full year 2010 with regards to net income per share, operating earnings per share, third quarter and full year 2010 revenues, and discussion of our worldwide markets, our growth in relation to those end markets and any growth we will have from acquisitions.

These statements should be as be used with caution and are subject to the various risks and uncertainties, many of which are outside of the company’s control. Factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in today's press release and related Form 8-K filing.

As a reminder, we have included a presentation on the second quarter results, which can be accessed on the Eaton's Investor Relations page. Additional information is also available in today's press release, which is loaded on Eaton's home page at www.eaton.com.

Then with those comments I would like to turn the session over to Sandy Cutler. Sandy?

Sandy Cutler

Thanks Bill. Welcome everybody. I am going to work off of the certain exhibits that Bill referred to that are posted on our investor webpage. As Bill covered the forward-looking statement on page two, I am going to move right to page three, titled, highlights of second quarter results.

We obviously had a very strong quarter, reporting operating earnings per share of $1.36, net income per share of $1.33. The big change in the month and the quarter versus our own guidance has to do with the top-line where our markets were considerably stronger than we had they were going to be. Our sales were up some 16%, up 9% from the first quarter, so continuing a very solid trend of volume recovery.

I would note however that we are still down 21% from our peak quarter in the second quarter of 2008. So that when you look at our profitability, we are really quite pleased with how strong our profitability is still while we are recovering back to previous peak levels.

Operating cash flow was strong at $469 million in the quarter. It’s a reflection of our confidence not only in our performance this year and for the balance of this year but also looking into 2011, we have increased our dividend by 16% moving from $0.50 per quarter up to $0.58 per quarter. You got a chance to look at our guidance for the year; we narrowed the midpoint from the range from $0.30 to $0.20 and then raised the midpoint by $0.55. So a strong increase in terms of looking into the second half as well as capitalizing on the strong second quarter we had.

If you look at that period of April through December that obviously includes the second quarter. That increase in operating EPS for the year was a 16% increase. It’s obviously a 12% increase if you only look at the full year and the difference obviously is the first quarter didn’t change.

If we move to page four, titled comparison of the second quarter, a quick reconciliation against our midpoint of our guidance for operating earnings per share for the second quarter you recall it was a $1.15. We had a higher end markets, they grew about 3% faster than we thought they might have grown. They came in about 12% in our guidance, we thought they will go around 9%. That contributed about $0.17. Our tax rate came in slightly lower than our guidance. You recall we provided guidance for the second quarter of 12% and actually came in at 9%. That makes the $0.21 difference leaving us up to a $1.36, obviously a very big quarter.

Now moving to page five, a quick financial summary, I think you all have seen these numbers before. They are, the 16% sales growth came 12 point from market growth, 4 point from outgrowth. As we talked at the end of the last quarter Forex has been moving back to a neutral point and if you see that here again no impact and really we had no acquisition impact in the quarter either.

I would note that versus the first quarter of 2010 we moved up from a 11.2% segment operating margin to 12.2%, so very pleased with that increase in profitability coming back strongly as the volumes are coming back.

If we move in to the individual business segment, just to give you a couple of highlights, let’s move to chart six titled Electrical-Americas segment, a very strong quarter. Again, you can see while the market did decrease, we were really pleased to record a slight increase in sales.

I think again, this reflects the really strong performance in this business, in both top-line and in bottom line in a year that many investors were very concerned with the non-residential construction driver in this business, caused this business to have a very poor year we were having a very good year. I think that again speaks to the breadth of businesses we have within this business.

So, 13.5% operating margin, sales of 1%. Second quarter bookings up 27%, much stronger than I think people expected and really reflecting strong industrial markets, that’s the beginning of the mid-cycle businesses starting to come back.

Very strong single phase and three phase power quality markets; very strong activity in infrastructure; our stimulus booking are now as for the end of the quarter at $360 million, so very much on track of what we need to be able to ship the 500 million this year.

Also, we think very significantly, there was really not significant distributor restocking has occurred. Distributors are experiencing more shipments from stock, but an awful a lot of that stock is still being shifted on a quick basis, so the distributor inventories are building significantly. We think that is out ahead of us, as the industry surpassed these starts to come up to higher levels.

If we turn page seven, Electrical, Rest of World, really impressive quarter, 10.1% operating margins compared to 8.1% in the first quarter. Very strong growth on the top-line as you can see 12% with 6% of that coming from market growth, 9% of it coming from outgrowth. Again, impressive bookings, up some 23%. The power quality markets are really leading the strength and particularly in Asia. We are right on track in terms of delivering $0.30 of synergy savings from the integration activities from the major acquisitions.

Again, we do not see significant restocking by distributors. Their stock business is beginning to move up, but it's coming out of, what I would call, sort of flat inventory conditions at this point.

Moving to Hydraulics, this is page eight. Really, an outstanding quarter, a 34% increase. Obviously, that's a big, big number, and you can see that’s really marvelous job, I believe, our team has done in terms of the margin levels, 13.6%, a big jump from the 11% in the first quarter.

Bookings continue strong. Remember, they were over 80% up in the first quarter. They're 69% up, well distributed around the world. The construction equipment OEMs are leading this rebound. We again do not see significant distributor restocking that has occurred.

You read earlier this quarter, we had signed a really important alliance with Linde Hydraulics to co-distribute product. That's going to add a very important product into our capability, particularly for the mobile markets.

As result of the very, very strong quarter of activity here, we've raised our full year market growth to 26%. I'll come back and talk about that little more when we talk about the overall market increase for Eaton. A great quarter in our Hydraulics business.

Now, turning to page nine, aerospace segment. Pretty similar picture to what we talked about in terms of shipment activity and margins to last quarter. Margins were pretty much flat with last quarter, volumes pretty similar to last quarter also. The change however is in the area of bookings.

For the first time now and in over a year, we are starting to see the bookings numbers turn positive. Bookings up 28% in the quarter very significantly, and perhaps more significantly, we've talked quite a bit about this over the last 18 months. We are starting to see the end of the de-stock, if you will, on aerospace aftermarket bookings. They were up 13% in the quarter, and that bodes well for the second half of this year and for 2011.

We are also very pleased and you saw our announcements, two separate announcements in terms of activity on the COMAC C919 and the total of those two will add about $2.2 billion of revenue over the program life. So very pleased in that market and our general feel on aerospace is, industry conditions are starting to improve and clearly if you are watching Farmborough this week, huge raft of additional orders. I think the mood is beginning to move up in the industry.

On the Truck side, on this page 10. Big news here is that we are starting to see the orders coming in North American heavy duty and we obviously increased our own guidance back up to 150,000 units. You recall we started the year, that number came down to 135, we are back up to 150. Really what’s happened is that sway on orders that we expected to come in a little earlier its now starting to come in and we think we still that 150 number this year and it is obviously a much stronger year in 2011. Strong margin performance of 12% up from 10% in the first quarter coming off of big market growth, big outgrowth, very strong quarter up some 53%, in terms of volume from a year ago.

Moving to chart 11, which is Automotive, another very strong quarter of performance. Volumes fairly flat with the first quarter, operating margins down by about a point and that whole difference is really due to the closing of a facility here in North America that we announced during the quarter. So the profitability of the base business is virtually identical first quarter to second quarter.

Pretty strong activity in this marketplace, again markets up some 34% and we have seen tremendous activity in almost every region in the world as we will talk a little later. I’m sure we think second half volumes in the Automotive business will be lower than they were in the first half, really around the world.

Moving in to chart 12. Strong cash flow, really strong quarter again $469 million for operating cash flow. You saw that we spent $64 million in terms of capital expenditures that coupled with the $38 million we spent in the first quarter leads us to a total so far of 104. So the question, are we are really going to spend the $400 million that’s in our forecast. Yes, we will and it really reflects the tremendous flow of new products that we’ve got coming out that came from our decision not to reduce R&D over the last couple of years. It also reflects our confidence that this economy is going to continue to grow and it's prudent to go ahead and spend this money at this point. We also increased as a result of our volume moving up. We increased our guidance for both operating cash flow and pre-cash flow for the year by $50 million.

If we move to chart 13. As you noticed, this is 2010 end market growth forecast. You noted in our earnings release that we increased our full year guidance for the weighted average of our end markets from 6% to 8%. You recall we started the year in January with a forecast of 5%, end of February, we moved to 5.5%, April we moved to 6%, July we are moving to 8%. I hope that gives you a feel for the fact that we are increasingly comfortable and confident that these markets have accelerated and will be a strong year this year.

We put the little green arrows out to the right side of this chart just to give you a feel where the real changes were in this market just to highlight them real quickly for you. Electrical-Americas, we had a negative 3, it’s now a negative 1. Hydraulics, it was 16, it moves up to 26, so the most fundamental of the changes. No change in Aerospace. Truck moved up from 17% to 23%, Automotive from 15% to 17% and the consolidated number is from 6% to 8%.

If we move to chart 14, accompanying the stronger outlook in terms of end markets and accompanying the stronger performance we had in the second quarter, we've moved our guidance up once again in terms of some of the segment margins to see that in Electrical-Americas we've moved up from 9 to 10 and the Hydraulic markets from 11 to 12, from Truck to 10 to 12, and Automotive 9 to 10. All of that adding another point in terms of our segment margin. So we think the news is good. A dividend increase, cash flow improvement, margin improvement, end market and top-line improvement. So, pretty consistent story in terms of how we’re looking at the year this year.

Page 15, that’s the operating EPS guidance. You've seen these number in the press release. It’s a $0.55 increase in terms of our operating earnings per share guidance for the year. A quick way to think about this, for those of you who are trying to figure out how fits up by the quarters, is that if you think about the second quarter, we were up 21% from our guidance. $0.04 was due to taxes. So you had a $0.17 that came from the higher markets. If you add $0.17 for the third quarter and $0.17 for the fourth quarter, you get $0.51. If you add have $0.04 you get $0.55. So, basically what we are telling you is we’re rolling that $0.17 right into the next two quarters on top of where our previous guidance have been.

If you move to chart 16, this is EPS Bridge that we give you, and just to help you work your way through this chart quickly, the changes are on the market improvement of 8% line, it had been 6%. That line is up $0.57 from the last time you saw it. The next change is on the market outgrowth at 40% margins. We’ve increased our market outgrowth forecast to 400 million from 300 million. So, you get an extra $0.23 there. We have eliminated any FOREX impact upon revenues this year. It was at $150 million, its now zero. So, that volume that show zero used to have $0.10 there, and if you drop down the tax rate change, because we’re going have higher earnings for these higher volumes and higher margins, there is another $0.15 of tax. So, those are the reconciling items that get you down to this net of $0.55 increase.

If we move chart 17, which is the second quarter reconciliation to the third quarter reconciliation, pretty sure reconciliation here we started with $1.36. We are expecting additional volumes in the third quarter that will throw up about $0.8 of incremental profitability. Our tax rate will move back up from the 9% in the second quarter to 14%, in the third quarter that’s the negative $0.9, and that’s how we get to the $1.35 that is the mid point our operating EPS guidance.

Then if we move to chart 18, last chart in the packet, I think we have touched on most of these. We've moved our market growth forecast up from 6 to 8. That throws off $250 million of more market growth. Our market outgrowth throws an additional $100 million of revenue. The Forex normally takes off a 150, so we are talking about in total $200 million of higher revenue that we have been talking about at the end of the last quarter. The $0.55 increase in our earnings forecast, $50 million increasing in our cash flow forecast. All of this, it leads us to believe that if we exit 2010, and start to gear in to 2011 that the kind of consensus forecast we see for global GDP in 2011 sort of the 3.4% to 3.5% forecast make prudent sense and that the 2011 consensus forecast for global industrial production of roughly 6% makes sense, and I would say within that context we also have to consider that Eaton specifically is going to have through our late cycle businesses starting to recover in 2011 and aerospace and the non residential construction driver here in North America and then it will also be, we believe, a large build year in the heavy duty truck business. So, once again, I hope you get a sense for our increase confidence about 2010, a very strong quarter in the second quarter and we feel very comfortable lifting our guidance here for the full year by some $0.55.

With that Bill, we will open up things for questions.

Bill Hartman

Great. Thank you, Sandy. If we can get the instructions out for the Q&A period, that would be great.

Question and Answer Session

Operator

(Operator Instructions) One moment please for the first question.

Bill Hartman

The first one up on the screen here, it is Meredith Taylor. Hello Meredith.

Meredith Taylor - Barclays Capital

Hi, good morning. You shared some pretty nice outgrowth relative to your end markets. I am hoping you can address that, in particular in the Electrical, rest of world business. If you could give us a little more granularity on which region and end markets were driving this outgrowth and as well, if you could also address the integration, explain it here please?

Sandy Cutler

I think what you’d find Meredith is that we are pleased with the effort in both of those areas. The markets are actually playing right into some of our strengths. We’ve talked a lot in the Americas about our ability to capture this $500 million of additional revenue in the stimulus projects and as you saw, we are been quite successful in doing that. The public infrastructure projects are strong in the area of water, waste water, government facilities, a number of energy related projects, strong at place [right across the street] and medium low-pitched, industrial MRO business is picking up their again.

On the datacenter, our business in the large datacenter business is beginning to come back quite strongly this time whereas we had already seen this coming from a single phase area. So I’d describe the big front end in our business is doing well, really taking advantage of the strengths in the market.

On the negative side, I would say what you are finding in America still is residential, and everyone has been reading about that in the last couple of days, remains weak. That’s atypical for this time of any climate recovery and commercial construction still some pretty negative numbers in terms of market numbers, but it is our expectation that we will see that begin to turn as we get into 2011.

As we move outside of the United States, our power quality business is a bigger percentage of our business outside of the US than it is in the Americas region. We continue to do very well in that segment. If you look into specifics areas of Europe, the German machine builder business has gotten stronger and I think this is one of the sort of [head fix] about concern about Europe is that some of the Northern regions are continuing to do relatively well. We've got good positions there.

Our datacenters is strong and then in both Asia and in Europe, it's very, very hot currently and we are doing very well in both those segments.

Meredith Taylor - Barclays Capital

Okay, great. I just was hoping you could touch on the comments in the release about slowing in Europe possibly given debt problems. If you could walk through how you see this impact in each of your businesses, that would be helpful and then how much slowing is baked into guidance and whether this comment is really a potential 2011 type of comment?

Sandy Cutler

We’ve commented in a couple of forums that we had started this year with a EU 27 kind of GDP forecast as a background of how we think about Europe. There was more in the mid ones, there were several 1.5, 1.6 area. We currently are down at a one type of level and it’s an indication that we think particularly Southern Europe is the area that is being impacted by this slowdown. It tends to be the country that have got the bigger debt issues. They don’t the export economy, so demographics are worse. So you’re seeing many of the manifestations of the cut backs are occurring there.

The northern countries where there is an export economy, where the lower Euro is actually making them more competitive, where the demographics are little are better and frankly, their national economics are lot better. We are actually seeing some opportunities in those areas. So, I wouldn’t paint Europe with just one brush. I think it now much more of a north versus south versus east versus west.

That’s all in our guidance at this point. At the same time, you know the second area we culled out of that press release was some concerns about China. China has slowed, but they are still very attractive numbers. So, our view at this point is we’re going to see as we put our end markets perform at about 8% this year. As you saw in the chart that’s in our outline its pretty consistent outside of the US versus the US this year. So, we’re saying it’s about 8% in both regions of the world.

Bill Hartman

Next up is Eli Lustgarten

Eli Lustgarten - Longbow Research

Good morning. Never seen so amazing some from this quarters. Just follow-up on the Electricals, I think your guidance for Electrical Americas implies a weaker second half margin than we saw in the first half, the average is 13%, but the way the volume is improving, I mean is, is that a mix of business that’s causing the second half margins at Electrical below 13% versus your average for the year?

Sandy Cutler

Yes, you normally get a little weaker fourth quarter in the business and I think you Eli in most of our business you'll find that the fourth quarter is, the first and fourth are your weaker quarters. Second and third are your stronger quarters.

Eli Lustgarten - Longbow Research

So, it’s just about seasonality and a little mix?

Sandy Cutler

Yes, it not any lack of confidence in the market, or the structure or pricing, I'd say it's much more of a seasonal issue.

Eli Lustgarten - Longbow Research

Thanks. You talked about Hydraulics. You got an amazing step up in the second half even though margins aren't going anywhere. In fact, they are going down from the second quarter. Can you talk about what's driving it?

You sort of indicated there's no inventory restocking, [nothing] going on. Is that strictly end market demand is driving it up dramatically in the second half of the year, and what's causing the margins to weaken at that point?

Sandy Cutler

There are maybe two separate comments here. On the bookings issue, recall, we were up over 80% in the first quarter, we're up over 60% here in the second quarter. That's against perfectly terrible comparables of last year, and recall what was happening last year is, that many OEMs were canceling orders for anything beyond three months.

What we're now seeing is that they are rebuilding out of their own confidence and their visibility looking forward has moved up. So that's the difference why we still say the market will be up by 26%, even though we're booking quite a bit above that and we would want to be clear don't anticipate that our sales are going up by 89%.

I think what we are seeing is there's great rebuilding that's occurring on the OEM side, it's being led by the construction OEMs, the worldwide construction [fitment] OEMs, and the strength is quite uniform around the world, if you cut down this underneath the regions. What we've not seen happen yet.

I would say on the industrial or the stationary side, there are segments that are beginning to strengthen fairly substantially. We are seeing distributor stock business increase, but distributors are not being aggressive about restocking to the levels they were at pre the recession.

Now, we think that's the same caution you see around the electrical side, while companies like ourselves, not at full capacity, can still ship very quickly to people. There's no real need for distributors to be putting in lots of inventory and frankly they are little cautious right now. So we think that build will occur later in this cycle than it has traditionally done just because people are coming of the hardships for the last two year, and they are really trying to be careful with their working capital.

Eli Lustgarten - Longbow Research

Is that affecting the profitability forecast that you've got here? Really as it's weaker in the second half than what profitability we are going to see in the second quarter. I know there is some seasonality in that, but is that also mix or what's causing profitability numbers actually weakened in the second half of the year.

Sandy Cutler

We started off at 11%, we are at 13.6% in the second, so you can average those we end up with something that's just above 12%, and that's basically what we are saying occurs kind of in the back end of the year, where the third quarter that is probably stronger than the fourth quarter, because again you've got the seasonality, when you come down and you got the European business obviously, that ends to have an impact in the third quarter.

I wouldn't attach so much precision to kind of a half point on this one. I'd say it's much more seasonal. Perhaps we're a little bit conservative at this point, we had a spectacular second quarter, we'd sure like to lock another one like that before we declare it as a trend.

Eli Lustgarten - Longbow Research

Just one clarification foreign currency impact in the second half of the year is negative by how much?

Rick Fearon

It’s Rick. It's our expectation, if the euro stays in this mid-120s range and it is hazardous to forecast exchange rate, so that's what we are expecting. If you look sequentially, we think that FX will be largely neutral from the second quarter to the third quarter to the fourth quarter, and so that's what's built in to our guidance right now.

Bill Hartman

Next step we have Steve Volkmann.

Steve Volkmann - Jefferies

A couple of quick things. I was looking at some of your outgrowth trends too, and I think maybe Sandy has said this is getting to be a tougher exercises as you do more business outside the US, but I noticed that in the couple of areas hydraulic, I think and also truck if I'm not mistaken your outgrowth seems to be decelerating, and I am just wondering if there's any trends there that we should be aware of or not?

Sandy Cutler

On hydraulics, we don't believe, so we think that we're in the midst of just enormous ramp, and we'd like to say that data outside of the US is harder data than it perhaps is at this point. We would conceive this one as little tough to call when you are going through these very dramatic ups or down.

On the Aerospace side, we talked about having undergrowth, we think that really has to do a lot with this kind of stocking, restocking schedule that's going on, because as you know, peoples' positions on large aircraft don't tend to change so much once you are on the aircraft.

Truck, we had a really quite a good quarter, and remember that the business was pretty well balanced now on a global basis, and then automotive was a much improved quarter from what we've seen the two quarters before that. We are pretty comfortable when we step back, we had a pretty solid quarter in, where we can really track to specific market share that's submitted by individual industry associations. They tend to pretty well lock in with the numbers we've provided you here.

Steve Volkmann - Jefferies

A quick follow-up there. Specific to truck, can you just comment on what you are seeing in Brazil, and how much you think that’s going to have lags? Then secondarily, just if there is any trend as we work through the quarters? Specifically, did you see sort of signs of weakness in your order booked in Europe or China, where you kind of call out some potential issues as the quarter progressed?

Rick Fearon

I’d say on the truck, Brazil activity, the big driver down there has obviously been the agriculture equipment, which is up just numbers that are kind of hard to fathom how much at this point. They are well up over 50%, some numbers suggest they are up towards 70%, and we think we are going to continue to see that demand through the balance of this year.

As you are aware there are some stimulus and incentives that start to peel off, and I think the question for Brazil lag is really above 2011 versus this year, but you can keep up this touring pace, we would suggest this doesn’t continue with these kind of year-to-year comparisons.

The passenger car and light vehicle markets have been strong there. Truck and bus has been strong there. There have been interest rates increases announced in Brazil to try to slowdown inflation rates. We believe that have to have an impact if you look into '11 to kind of slowdown this proliferate that we have seen this year.

We still think that GDP is on track to be kind of a 7% to 8% increase this year. It's digesting interest rate here in the second half, so I would guess we are going slow slightly from that as we get into '11. Second part of your question Steve was?

Steve Volkmann - Jefferies

Just the trend, month-to-month through the quarter

Sandy Cutler

In terms of, specifically, the China, I think what we have seen in China is some of the infrastructure programs have been pulled back a bit, but at the same time, we are seeing, quiet a lot of activity in Tier II and Tier III kind of cities, which is exactly where the governments wanted to redeploy capital, and so, we continue to believe this.

You look at this over a several year time period, these rates of growth, in this kind 8, 9, 10, 11, rates are pretty solid bet, trying to call by quarter by percentage is pretty tough at this point, but I think there has been a slight pull back in China, in terms of how fast things were growing in the first quarter into the second quarter, but we don’t see it, really deteriorating. The very strong position that we've got in terms of growth whether it be in the electrical markets or hydraulic markets, or vehicle markets.

Then of course, COMAC is kicking off a whole activity here, which is quiet independent of the current infrastructure spending rates for the aerospace market.

Steve Volkmann - Jefferies

Then Europe, did it deteriorate month-to-month second quarter?

Rick Fearon

Really has not. Again I think a lot of it has to do with, more of our business is northern versus southern, and so the weakness on the construction side I would say is very much similar to what we saw through the first quarter, but on the industrial side, we've actually have seen exports and you've seen some of the German export numbers actually pick up. They have been fairly strong and so that has played into some of our strength in the German, Swiss and polish market places.

Bill Hartman

Next week we have Ann Duignan.

Ann Duignan - JP Morgan Securities

First, I just wanted to take a step back and look at the truck business. Sandy, could you describe exactly what the market outgrowth was? I always think of the truck transmission business is having 80% plus market shares, so I'm kind of scratching my head here wondering how you could outgrow by such a significant demand?

Sandy Cutler

Remember that the business isn't all heavy duty and it's not all North America, and so the South American picture we were just talking about it is one that we've been competing very successfully and growing significantly there. Whether that be on the medium duty heavy duty or on the AG side of the business.

You've also got the hybrid business, which is within these numbers as well, and then we do believe also that what we saw if you recall a year ago is you saw some pretty active de-stocking going on, not just by distributor, dealers, but also in terms of OEMs really bringing down their own inventory and they've had to rebuilt part of that as well, so that we try to measure this against the production units in the marketplace, and so to the extent that they are rebuilding some activity, we're gaining back part of what we lost a year ago.

Ann Duignan - JP Morgan Securities

Sandy, just for clarification, can you just remind us what is in your defined market?

Sandy Cutler

You mean in terms of product, or in geography or?

Ann Duignan - JP Morgan Securities

Geography. What's embedded in market growth up to 28%, is that NAFTA heavy duty and NAFTA medium duty and Brazil AG?

Sandy Cutler

Yeah. Brazil AG. It's also got a European piece, it's also got an Asian piece, so we do our best to try to pick up the global commercial vehicle activity.

Rick Fearon

Ann, what we do is we take the market factors that we participate in around the world and we try to estimate in each of those sectors how growth in units changed over the course of the quarter, and so that's what's built into that combined market estimate.

Then as Sandy mentioned, one area that is a little difficult to get one's arms around is if you have inventory restocking or de-stocking, because that can be different from the production units, but there is no external way to really measure inventory changes and so we simply stick with the unit changes.

Ann Duignan - JP Morgan Securities

Okay. That’s helpful and kind of given a sense of how to forecast the outgrowth as we go forward, so any clarification is valuable. Then just a follow-up on Aerospace. You are seeing bookings for aftermarket pickup, and yet your guidance for operating profit didn’t change. What’s going on there, Sandy? Normally, we would think of the aftermarket as being significantly more profitable and favorable to mix, so can you just explain what's going on there?

Sandy Cutler

You recall the first quarter margin was 13.3. We were 13.2 in the second quarter. Our full year guidance is 14.5, and so that 14.5 anticipated a higher mix of aftermarket in the second half than we would have in the first half, and what we are pleased about is that is that that now beginning to materialize, so that’s a reason we really needed this to be able to support the 14.5.

Ann Duignan - JP Morgan Securities

Okay. And real quick, just automotive, how much cost was incurred for the plant closing and what's run rate for margin going forward?

Sandy Cutler

It’s point basically of what we incurred, so that you have virtually the same profitability in the first quarter and second quarter when you take that out.

Bill Hartman

Next is a Rob Wertheimer.

Rob Wertheimer - Morgan Stanley

My first question would be if you could maybe help us understand where bookings stand with relative to sort of prior peak levels, so aero was up 28. It had been down 32 year before, I think, and so it still stands pre-depressed versus what you been at. Can you do that on a segment-by-segment basis? I don’t think it's on your year ago presentation.

Sandy Cutler

No. We don't have all that here. We can provide some of that offline, but we don’t have it going back X number of years. I think that the best way to think about this we are still over 20% in terms of total shipments, down from our peak and so I think what's significant when you look at the margin performance is that in many of these businesses we are at levels that are quite close to where we were at the peak was volume sort of down 20%. I think that really speaks to the economic leverage that’s been created by really change in the cost model or cost structure in the company.

As we began to move on and what we've always said it was going to take several years to get volumes back up to those levels. We think we start to rebuild volumes that are more similar to what we saw in 2007 and 2008 by the time we get out to this kind of 2012 time period that we've got another year that builds next year and we are feeling more comfortable about what that market increase looks like next year.

Rob Wertheimer - Morgan Stanley

Let me ask a follow-up or different one then. Do you have any major segment lines that have not yet troughed or are still in decline maybe that the new builds are commercial construction, maybe that one is even troughed?

Sandy Cutler

I would say that Aerospace and Non-residential construction are probably the two segments where everyone has been trying to get a sense for have they troughed yet. Our sense watching Farmville and watching the bookings that have come in recently is that, from bookings point of view, we are troughing on aerospace, but that probably means we don’t really start to increase volumes till we get out into '11, but I think we are hearing from multiple suppliers in the industry that people are feeling we are starting to see industry conditions improve and that bodes well for '11.

On the commercial construction side, our own view has been that you would start to see this turnaround as you got into '11. You are actually hearing so people talking about the things improving in the second half of this year. We are not quite that bullish at this point. We'd love it if it were to happen. We are starting to see some commercial projects be talked about, but it’s going to take a little while to digest this.

Then, I would say the other one is that the residential market which is relatively small item for us here in the States. I think it's going to be problematic for sometime, and you are clearly seeing that on InterSystem data, but as we step into 2011, our expectation is we’re going to come off with pretty strong ‘10 from what we have been talking about.

Then we’re going to have three of our markets that are perform, we think in a particularly advantageous way for us and maybe a little different than the general economic trends. The first will be non-residential construction, I just mentioned. Second is aerospace, and the third is the Northern American heavy duty truck market, which for all the reasons, a couple of you asked questions about is beginning to find its footing this year and we think is going to return to pretty attractive levels into 2011 and 2012.

Rob Wertheimer - Morgan Stanley

It's going to be bookings specifically in non-res buildings, troughed and I know its going to be pretty bad for while, but is it troughed do you think, or you're just not sure yet?

Sandy Cutler

We were up 27%, and we were obviously down in the fourth. In fact, yes. They have turned, but part of that is that we are doing quite well from a sheer point of view, so it doesn't have just to do with the end market, because the end market was actually down in the second quarter.

Bill Hartman

Next is Jeff Hammond.

Jeff Hammond - Keybanc Capital Market

Sandy, I know you're raising all your end market growth forecast that are holding them, but if you look at just the second half in isolation, are there any pockets of the business where you're actually lowering your assumptions because of some of the worries about Europe or China?

Sandy Cutler

No. I wouldn't say is a lowering of our assumption, but it is important to know, and thanks for bringing it up. Within all of this, we do feel you're going to see a lower second half in the global automotive builds than the first half. The first half has always been your big increases, but in the US, our best look at the third quarter's sales maybe down 5% from the second quarter, and they maybe down more than that in the fourth quarter.

In Europe, I think, most people are forecasting that third quarter is going to be down between 15% and 20%. In the fourth quarter, it comes back slightly, but maybe down something like 10% of the second quarter, and in Asia, where I think people haven't been, we're looking as closely the public data that's out there right now for the third quarter says that might be 15% below the second quarter, so I just think in the automotive area a big, big rebound in the first half.

Production volumes are being forecast by OEMs right now to be down. That's all in our guidance both, in terms of our physical volumes and our margins, but I'd say that's the one area that it may not be as high on everybody's radar screen when you're comparing it to all the rest of these areas.

Jeff Hammond - Keybanc Capital Market

Okay, and then just on rest of the world, you show the bookings up 23 and you are holding the line on growth there. Is there maybe some contingency for slowing in China and Europe?

Sandy Cutler

Yes, I think what you are seeing versus early in the year is that we are a little bit more bullish on Asia and we are a little less bullish on Europe, but they tend to offset one another within that total.

Bill Hartman

Next is Andy Casey. Are you there, Andy?

Andy Casey - Wells Fargo

Few more semantic questions. A lot of the quarter end guidance has really been break over but on NAFTA Class 8 a couple of questions. You are looking for about 10,000 more units in the second half on a production basis. Should we expect Q3 to be sequentially down, will seasonality would pickup in Q4?

Rick Fearon

No, our numbers, we will dig on it for you in a minute here.

Sandy Cutler

Andy, we believe we are going to see sequential improvement as we go through the balance of the year. So, you were 35,000 for each up Q1 and Q2 we think that steps up in Q3. It’s a few thousand units and then steps up again in Q4 and that’s you have the extra 10,000 units.

Andy Casey - Wells Fargo

Okay. So, a slow sustained recovery picking up.

Sandy Cutler

Yes. The real question is going to be is one, when you start to get the pilling on orders and then we had a 16,000 order a month in this last month and at some point if these slots start to fill up toward the end of the year, you are going to see orders accelerate and we think that’s part which then starts to push things up next year. So there isn’t any question of fleet hold, people have been holding off for a bunch of years and we think that pent-up demand is what we are going to experience. Not so much this year because 150 is still a pretty awful number but we will really see in ’11 and ’12.

Andy Casey - Wells Fargo

Okay, thanks, and then sticking on truck for one more and then moving on to Hydraulics. On the truck market, there is a lot of discussion around transition to 13 from 15 liter. I am wondering if you have seen that significant switch based on the type of transmissions being ordered from you, or is it still pretty much what should expect at this point given truck load carriers are doing a little bit better than some of the other sectors?

Sandy Cutler

No significant change for us so far but active discussions.

Andy Casey - Wells Fargo

Okay, thanks, then on Hydraulics and some of your other North American exposure. The comment on the absence of significant inventory restocking, we have seen that but is there any structural change that’s occurred that makes lean inventories relative to sustainable or is it really just a timing issue?

Sandy Cutler

I personally think it’s more of a timing issue, Andy, and then it’s also a recent memory issue. I think anybody who came through remember the distributors destocked later than the OEMs. So that it was perfectly logical the OEMs would restock first. Distributors will maybe four to five months later than OEMs in the hydraulics market destocking and so that is going to push itself but I think everybody still doesn’t want to be caught with more inventory and while there is still a lot of capacity industry you can get this inventory delivered fairly quickly. Things are tightening up, lead times are starting to extend as you continue to have quarters with the kind of booking numbers we just talked about that will, at some point, then really start to pressure this but it just haven’t quite got to that point yet.

Bill Hartman

Okay. Next is Terry Darling. Hello, Terry.

Terry Darling - Goldman Sachs

Sandy, I guess on the question of the second half incremental margins implied by the Truck full year margin full year margin guidance of 12% and the continued strong, top line, sequential improvement there, maybe you addressed earlier, I got a little wait on the call, but it looks to me like you are assuming that those incremental goes down relative to where you just you were tracking the second quarter and obviously we have seen some times in history where the incrementals have been almost double where they are right now. I am just wondering what is going on with that thought process or maybe you are just being a little conservative there?

Sandy Cutler

In the first quarter it was 10%, Terry, second quarter is 12%, and we are saying the year is going to average 12, and so that was latter two quarters are more in line with what is going to happen here in the second quarter, a little bit stronger than that if we start to move the volumes up, you do remember, have because above 40% or 45% of this business was outside of the US in that segment. You do have a weaker fourth quarter, with particularly Brazil that basically takes the month of December off, and the European business is a little weaker during the middle part of the year. So some of those areas are in there. If we are conservative and a couple of people asked us that question, in the first quarter it will prove itself out. We just think, looking at the seasonality and the mix by geography, this is our most prudent forecast at this point. It doesn’t reflect any anticipation of higher variants, as we be ramped up, we have proved our ability to ramp up very well before and we have got that key capability in hand.

Terry Darling - Goldman Sachs

Is that what happened in the second quarter, the incrementals were fine, but that might have expected them to be even better. Is it really a mix issue at the moment, you are just not getting enough of that? You are pure North America heavy duty as a percentage of the total mix to drive those incremental into the 50%, 60% range? Sometimes we have seen them at the right point in the cycle?

Sandy Cutler

Yes, you have to get things pretty specially to get a 50% plus 60%, incremental. I would describe the second quarter as strong performance and it is not an exceptionally favorable mix at this point, and you had some Forex activity in there, remember in terms of those of volumes as well.

Terry Darling - Goldman Sachs

Okay, and then on Aerospace, no change in the end market forecast there are overall but I am wondering if there has been any change in the mix and may be you can just remind us what you are assuming for ROE, RO after market in military within that minus one for the index overall?

Sandy Cutler

No real change in the mix but still a 60/40 business and the negative has been on the defense business. So, here in the US, where the numbers is the slightly negative you have got a slight positive in terms of the commercial and then abroad it is slight negative in there that’s basically a commercial business that’s where you get to the little one ones and ones across that chart. The change, while its hard to reconcile Farmborough and then 28% increase in bookings, 13% increase in after market, no change in end markets, its because most of this, in terms of the OEM activity is really speaking towards shipments in 2011. That’s where you are seeing line rates taken up by Airbus, increased shipments for deliveries. So all this sets the context that '11 is going to be a stronger year that '10 for the aerospace business.

Terry Darling - Goldman Sachs

Then in terms of some commentary from other aerospace players, a lot of talk about higher research and development engineering expense, given all the new programs that are out there, obviously good long term but near terminal pressure on margins for some folks. Where does Eaton, because I see the landscape for your margins in 2011 given that dynamic?

Sandy Cutler

So we have said through our guidance for 2010, we did address that issue because we have said the reason you were seeing our margins come off from these high teen levels to 14.5% level wasn’t any deterioration on our operating margin. It was the fact that our gross margin, it was the fact that we were not cutting R&D and so if you have less volumes with the 9 to 10% volume decrease, our R&D expenses went up and so we don’t see any further change from what our guidance was for this year.

Terry Darling - Goldman Sachs

Then for '11 R&D, flat or would you expect that to be up again?

Sandy Cutler

Yeah, we’ve not commented on '11 yet. I think in terms of individual line items, I think our general run rate we see, the kind of profitability we are talking about this year is probably not a bad bet for next year, but we haven’t done that detailed planning yet.

Terry Darling - Goldman Sachs

Okay. So not a big ramp up for you guys on R&D next year, I will say?

Sandy Cutler

We have been carrying a very heavy program level already.

Bill Hartman

We got a lot of questions and we are running short on time. I am going to ask everybody to limit on to two questions, please. Sorry about that, but with that, next up is Chris Glynn. Hi Chris.

Chris Glynn - Oppenheimer & Co.

Hey Bill, thanks. On the aftermarket bookings up there, just wondering if you would qualify that as a clear sequential inflection in that market or just maybe some initial movement that looks kind of good?

Sandy Cutler

That again we will be able to tell you after two or three more quarters, but our best estimate at this time Chris, is that it's the [nearest] inflection point in that regard and we are tending to hear that around the industry. We have been watching the de-stocking for some time but I think factually, we will have to wait and put another quarter behind it before we can kind of certify that.

Chris Glynn - Oppenheimer & Co.

Okay. Then on the outgrowth for Truck, I think what I am hearing is, it’s half for parts and restocking and then the other part will be competing really well where the growth is better, like Brazil. So I guess we’d expect part of that outgrowth to kind of dissipate and the rest at least kind of remains through the year. Is that a fair way to think about it?

Sandy Cutler

I don’t know that we can be so precise to say half. I wouldn’t suggest that level of precision but yes, I think what we are seeing is with a business that’s 45% outside of the US and everybody when they tend to think about our Truck business tend to think about just North America. We are doing quite well outside of the US and that’s perhaps a bigger piece and I think many people are having that thinking.

Bill Hartman

Next is Andrew Obin. Hello Andrew.

Andrew Obin - BofA Merrill Lynch

A couple of questions. First in terms of capital redeployment. You guys have started to raise your dividend, but how should we be thinking about possibility of share buybacks or should we be thinking that now you wilt towards M&A?

Sandy Cutler

Thanks for noting the dividend increase. We think it’s an important action and again really speaks to our confidence for the balance of this year and next year. Having said that I wouldn’t anticipate a share buyback and we don’t have any immediate plans in that regard. You are seeing M&A activity start to pick up, you saw that we announced the acquisition of the EMC. We also announced the joint venture we formed in China. Activity is beginning to pick up and it's our expectation we would start to return to more normal levels of activity. That’s occasioned by the fact that our balance sheet has gotten a lot stronger and we also think risk is less that it was a year ago. So about this that we will continue to find opportunities on a value accreting basis to deploy this and afterwards we can grow. If we can't, I would say the same thing we have always done. That we would look at a buyback. That we think conditions are improving for finding attractive properties.

Andrew Obin - BofA Merrill Lynch

The second question is, as you raised production going to the second half, could you talk about the pace at which costs are coming back or people bringing back sort of going, I guess stopping some of the temporary cost cutting measures. Can you quantify costs coming back in the second half of the year as revenues start to come back?

Sandy Cutler

Yes. No change. Great question, but no change from what we laid out at the beginning of the year. Remember we asked employees to take a week off without pay in each quarter last year. So, we had a month of additional capacity in terms of people power that came back into the business at the beginning of the year and that takes obviously 8% real volume growth just to absorb that. So we still expect no net hiring across the world this year.

Then as you recall from our February meeting in New York City, we said that we expected to be able to capture on an ongoing basis about half of the cost savings that we achieved a year ago and that’s beyond the temporary ones and that’s part of what leads to this conviction that we can increase our all time segment margins by 200 basis points by 2014 and which would put us up to 15% versus our peak previously of 13%.

Andrew Obin - BofA Merrill Lynch

At which point do you think you need to increase hiring? What it would it take for you guys to consider bringing people back?

Sandy Cutler

At this point we don’t see it with the forecast we have for this year, and if you are talking about the next year, if you use that 6% global industrial growth, we’ll start to size as we look at issues for next year, but we are not feeling capacity pressure at this point.

Bill Hartman

Next is Tim Denovar.

Tim Denovar - Wolfe Trahan & Co

Hi, good morning everyone. Quick question on the supply chain. There been some issues in the past few weeks in North America about with some hurricanes and general weather, have you seen any problems with slowdowns there, and has that had any impact on your outlook in terms of what safety stock levels should be?

Sandy Cutler

Our view has been really that at Eatons there are always there one or another happening somewhere around the world when you are broadly spread as we are, but the area, the supply chain that has proved to be more challenging is there was a very, very rapid increase in electrical products, specifically those that use a lot of electronic components. The global electronic supply chain is very tight now and I think you'd hear that throughout the industry. We think it's going to take some time before that changes and whether it's driven by iPhones or whether it's driven by an industrial product, everything has started to move up at the same time and it's tight.

Tim Denovar - Wolfe Trahan & Co

Are you not seeing any real drive to increase safety stock inventory?

Sandy Cutler

No, it's not a material. That affects our electrical businesses and something we are working hard on, but as you saw, we took another day out of days on hand. This quarter we took a day out of DSO, and so the original projections we had provided you is not having to rebuild large amounts of working capital, are still very much in hand.

Bill Hartman

Next is Mark Koznarek. Mark?

Mark Koznarek - Cleveland Research

Sandy, you were at the one yard line when you were talking about 2011 and you can take the ball over the line. If we're talking 8% market growth this year, and next year, you've got some very important segments accelerating and the other one probably decelerating is Hydraulics, because the question is just how much of a double-digit market outlook do you think it's going to be for next year?

Sandy Cutler

We won't play our [cards] in an offence as we get to the end of this year, early next year, but I appreciate the analogy. We're not comfortable with market at this point obviously sitting in the middle of the year giving a forecast by our markets for next year.

The best thing that I guess we can share with you is that we have found that these production, these global consensus GDP forecast and global consensus IP forecast have been a good surrogate for kind of early direction and we know there's a lot of concern in terms of sustainability in the recovery.

We're quite comfortable looking at our second half at this point. We know as people looking into 2011, it's a very material issue. I understand people are trying to understand what goes up, what goes down and I think as we mentioned we think Aerospace is going to improve. We think non-residential construction is going to improve. We think Aerospace is going to improve, but the general industrial rebound that we described this last January that will take several years to fully materialize we think is still on track. It’s going to have its own little interruption region by region, country by country, but we still think it’s on track. We will tune that numbers as we get to that end of the year, but we are not shaken from our conviction that general slow unit recovery is going to continue in place.

Mark Koznarek - Cleveland Research

Because you are not affirming that it will be a double-digit or you just not saying?

Sandy Cutler

No, we are just not providing a forecast on at this point. The thing to keep in my mind we believe this whole time period is that with all the deleveraging that’s going on and there are still problems in world financial systems. We have said, we felt that this recovery would be slower than past one had been. Didn’t mean there won’t be recovery. It just be slower and so that we got some rebuild earlier this year. Things have moved up substantially. We were positively surprised in the second quarter was how much our market moved up and we moved our guidance in line with that. We don’t see any fundamentals that suggest to us that basic scenario relatively slow consisting growth taking several years to get us back up to the levels we were at. See nothing that suggest that’s not the right one still.

Mark Koznarek - Cleveland Research

Okay. In Electrical, why did North America margins increase very marginally and international up over 200 basis points. What was going on between those two compare to first quarter?

Sandy Cutler

Mark, I couldn’t quite hear your question.

Mark Koznarek - Cleveland Research

Electrical and rest North America versus international?

Sandy Cutler

In the US, which you saw was that the industrial portions of the market strengthen quite a bit more than we had originally forecast. That was the real difference some of that industrial MRO stuff coming in.

Mark Koznarek - Cleveland Research

That is why the margin was flattish with the first quarter?

Sandy Cutler

Why the margin in Electrical Americas?

Mark Koznarek - Cleveland Research

Yes.

Sandy Cutler

Yes, US is 13.5 versus 13.2. Yes, we said this year that we expect that will be right range of the margin then we’re really pleased that it is performing there. So, we are weaker on residential than we had thought we would be. We are stronger on industrial. We are beginning to strengthen on power quality and the non-res just has been marginally weaker than we originally thought it would be this year. Our success on the stimulus is what allowed us to bring the volumes in, and I really wouldn’t place too much significance to the three times difference in terms of margin.

Bill Hartman

Next is Nigel Coe.

Nigel Coe - Deutsche Bank Securities

A couple of [grounds] obviously, but I don’t think we have talked about pricing at least on quite a bit. I was wondering Sandy maybe you could talk about price [difference] in your portfolio, your areas of strength and maybe some areas of weakness.

Sandy Cutler

Yes, I’d say really no big change from the beginning of the year, where we said we thought we would be able to have pricing and cost in that neutral in terms of our overall margins this year and is planning out pretty much that way. We have announced increases in our Electrical business and those have been out there, they went out in April and then some others went out in July. We have announced some increases in our Hydraulics business and they have been out there for couple of months at this point. Those are all dealing with specific commodity issues that have moved in the businesses. I say we are not feeling a net negative or a substantial net positive from pricing this year.

Nigel Coe - Deutsche Bank Securities

Can you characterize the increases in Electrical and Hydraulics successful?

Sandy Cutler

Yes, at this point, yes I think they will be, we will know by the end of the year, but from what we are seeing now, yes.

Nigel Coe - Deutsche Bank Securities

Great, and then secondly, the Linda deal, when Hydraulics looks like that could be quiet impactful JV over time. Could you maybe just about the end and more depths, and when do you expect to cease the benefits accruing from that deal?

Sandy Cutler

Yes, so second question, hopefully very soon, but I’d say that usually in capital equipment markets, you got to give these things a number of quarters to really have some impact. The product exists. So, its not a question of having to design the product is now getting the product and the channels. It really brings us a heavy duty pump that we have needed for some time for applications in the much more heavier duty applications in construction markets in particular. So this really fills out a gap we have had there for some time. We also be able to do some cross marking between the two companies in different regions of the world. So we are really quiet pleased with that. I think it’s again part of the investment that we are trying to put into growing our Hydraulics business more quickly.

Nigel Coe - Deutsche Bank Securities

In that heavy-duty pump, who would be the major competitor in the market?

Sandy Cutler

Yes, we never pick out individual competitors. I think those, who work around the hydraulics market, who has and who doesn’t and so. We are one of the major players and some of the other major players that who will be competing with.

Bill Hartman

Quickly next is Jason Feldman.

Jason Feldman - UBS

A lots been answered, but just two quick questions. In the power quality business, any expected competitive implications from the pending Emerson Chloride acquisition.

Rick Fearon

Yes, I think, that remains to be seen. Let’s comment after the dealers deal prospectively closes. We have a very strong product array and we are obviously, we have been quiet successful with it in those high power range over the last year. So, you are seeing a variety of competitive responses and let’s wait till the deal closes and then we will talk about it.

Jason Feldman - UBS

Fair enough. You touched on M&A before briefly, but are there particular areas of interest or focus, obviously we see more comfortable with your macro outlook of parts of the business, which you are most interested in adding to?

Sandy Cutler

Yes, we have been consistent Jason in this area. It’s not changed it’s our Electrical business, it’s our Hydraulics business and it’s our Aerospace business that are primary point so attention in terms what we are trying to do with our M&A activities.

Bill Hartman

Again quickly Rob McCarthy.

Robert McCarthy - Robert W. Baird & Co

Thanks for taking my question and I’ll stick to the quantifiable. There is a lot of activity going on nuclear right now. Can you help me understand, what that means to Eaton and with what lead times, is there a way to characterize what the average plant could be work to?

Sandy Cutler

It really depends on the specific design Rob. It’s hard to give you a specific number and the lead times are long on this. We have a substantial install base in the third plants we can benefit obviously from the after-market on that, but in terms of our new plant, you are going to be talking five or six years, when the Taiwan are awarded to own ship and equipment.

Robert McCarthy - Robert W. Baird & Co

Very good and I find in the answer to this already, but you took a couple of the questions on this earlier I’m just want to make sure I understand, when you are talking about market growth. For example, let’s talk about NAFTA heavy-duty truck, when you are talking about market growth for purpose of calculating your out performance. Is market growth be growth in production of heavy-duty trucks in the industry or is it that number plus your estimate of the net impact on factory shipments created by either restocking or destocking from the suppliers’ point of view?

Sandy Cutler

Yes, we can’t get out that second piece, but what we would do for North America just to be sure to complete the picture they would be the heavy-duty, it would be the medium duty, it would be estimated after-market activity. So it’s all there on the areas we can get streams and data.

Robert McCarthy - Robert W. Baird & Co

So, it’s Fair to say Sandy that in the early stages of a cycle as things are ramping up, if that really out performance is something that happens cyclically and doesn’t necessarily tell us a whole lot about, I mean it’s very important obviously in terms of forecasting volume, but doesn’t really tell us a lot about relative market position I guess?

Sandy Cutler

Yes, that could be on an individual quarter that can be true. If you look at the rolling impact to the quarters, I think it gives you the right impression.

Rick Fearon

Rob, there are some of our markets, where the industry associations collect data that does actually reflect factory shipments from suppliers like us. So it really just depends on what the data sources are for each of the different segment that we are in.

Bill Hartman

[Steve Searle], you get the last question.

Steve Searle

A follow-up to the earlier capital deployment question. One, do you consider contribution to your pension plans and two, how about opportunistic debt reduction?

Sandy Cutler

That we did make a $300 million contribution in the first quarter to the US qualified pension plan and then we indicated that there is a balance about $100 million will be made equally and that’s I think $25 million per quarter through the four quarters to the international plans. That’s what we had planned in terms of the pension plan. We don’t plan to do any further contributions this year.

Rick Fearon

On the debt point, we don’t have any debt maturity until 2012. We would on an opportunistic basis consider purchasing outstanding term debt obviously it would depend on our assessment of whether that’s a good financial transaction.

Steve Searle

Yes, we just seen a lot of companies issue at low levels now and do some tenders with the higher fund debt and I hope you consider something like that.

Rick Fearon

We actively explore those types of things.

Bill Hartman

Thank you, Steve, and thank everyone for your questions and as always Don Bullock and I will be available all afternoon to continue the discussion. Thank you all.

Operator

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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: transcripts@seekingalpha.com. Thank you!