Ladies and gentlemen, thank you for being here. Welcome to the Eaton First Quarter Earnings Call. Currently, all participants are in listen-only mode. We will have a question-and-answer session later. As a reminder, today's call is being recorded. I will now pass the conference to your host, Yan Jin, Senior Vice President of Investor Relations. Please proceed.

Good morning. I’m Yan Jin, Eaton’s Senior Vice President of Investor Relations. Thank you all for joining us today for Eaton’s first quarter 2020 earnings call. I hope that you and your families stay healthy and also stay safe. With me today are Craig Arnold, our Chairman and CEO; and Rick Fearon, Vice Chairman and Chief Financial and Planning Officer. Our agenda today includes opening remarks by Craig, highlighting the company’s performance in the first quarter. As we have done in our past calls, we’ll be taking questions at the end of Craig’s comments. The press release and the presentation we’ll go through today have been posted on our website at www.eaton.com. Please note that both the press release and the presentation include reconciliations to non-GAAP measures. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today will include statements related to expected future results of the company and are, therefore, forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and presentation. They’re also outlined in our related 8-K filing. With that, I will turn it over to Craig.

Thanks, Yan. Appreciate it. Let me start on Page 3, and I’d like to begin by providing an overview of how Eaton is addressing the impact of COVID-19 with our key stakeholders: our employees, our customers, our shareholders, and certainly our communities in general. The first thing I’d say is I couldn’t be more pleased with how well our team is managing through the crisis. As always, the safety of our employees has been and continues to be our top priority. Most of you are very familiar by now with the best practices around eliminating the spread of COVID-19. At Eaton, we’ve adopted them all, and we implemented most of them even before they were commonplace. We learned from what we saw in China. We activated and stood up our pandemic management and response team early and created a COVID-19 playbook. This playbook has become part of the Eaton business system and specifies exactly what we expect of our factories and offices around the world, including how we ensure compliance. We also continue to serve customers around the world. As you’re aware, most of our products have been deemed to be a critical part of the global infrastructure. As a result, our factories remain open with very few exceptions. We are, however, seeing lower utilization and weak demand in some of our end markets. So we have had some temporary closures in a couple of facilities. Organic growth continues to be our top priority. We want to make sure that we’re well positioned to take advantage of all opportunities, including the increases in expenditures on government infrastructure when it comes, and we do think it’s coming. I’m especially proud of the work that our employees are doing around the world to support our communities and caregivers. We’ve donated Eaton equipment, we’re using our additive manufacturing capabilities to produce personal protective equipment, and we’ve increased our charitable giving to support those impacted by COVID-19. As I’ll detail in the next couple of slides, we’re also taking appropriate cost reduction and cash management actions to ensure solid decremental profit margins, strong liquidity, and cash flow. Allow me to begin with liquidity and cash flow on Page 4, both of which are actually in great shape. As of March 31, we had $450 million of cash and short-term investments on hand and access to $2 billion of undrawn multi-year bank facilities. In fact, we’ve never drawn on our bank facilities, and we don’t expect to use them during 2020. We have been in touch with our bankers and are comfortable with our ability to manage if needed. We also have access to the commercial paper market. In 2020, we do have one relatively small debt maturity of $240 million due at the end of Q4. As a point of reference, I noted at the end of March that our debt to adjusted trailing 12-month EBITDA was only 2.1 times. In terms of cash flow, we’re updating our 2020 guidance, as you saw, and we now expect free cash flow to be in the range of $2.3 billion to $2.7 billion with a midpoint of $2.5 billion. While this is lower than our original forecast, it represents strong performance and shows our resilient cash flow in whatever economic environment we find ourselves in. Our cash flow is more than sufficient to continue to invest in the business and maintain our dividend. Many of you may not be aware, but Eaton has paid a dividend for nearly 100 years, and we don’t see any scenario in which that would change. As planned, during Q1, we repurchased $1.3 billion of our shares using the proceeds from the Lighting sale. We expect to receive $3.3 billion of cash from the sale of Hydraulics by the end of the year, leaving us with much higher liquidity and even lower leverage. With a strong balance sheet, our optionality for additional share repurchase and M&A remains intact. We continue to think that our stock provides a very attractive return given the 3.4% dividend yield and a free cash flow yield of more than 7%. We’re equally focused on ensuring that we deliver attractive decremental margins. One of our top priorities is to put cost containment measures in place, summarized on Page 5. The first reduction was taken by our leadership team, who accepted a 25% to 50% reduction in base salaries in Q2. Our Board of Directors also agreed to a 50% reduction in their cash retainer for Q2, with these funds going into an employee relief fund for those impacted by COVID-19. These actions are in place for Q2 but could extend if the forecast of recovery comes later than expected. We’ve drastically reduced discretionary expenses, instituted hiring freezes for all but a few critical roles, and implemented unpaid leave for most of our salaried workforce. We delayed the planned 2020 merit increase until next year. Significant reductions, including the elimination of incentive compensation, are difficult but necessary steps as we work to ensure we approach the challenge with shared sacrifice. Those of us with the greatest needs shouldered a bigger piece of the responsibility. Lastly, we’ve eliminated nonessential CapEx. The updated CapEx guidance in a few slides reflects a significant reduction. While the pandemic is new for all of us, Eaton has managed through severe economic declines in the past, and we’ve always emerged as a stronger company. Moving to Page 6, I’ll turn to our traditional set of charts, our quarterly results. Q1 earnings per share, as you saw, were $1.07 on a GAAP basis and $1.09, excluding the $0.02 charge for acquisitions and divestitures. Adjusted earnings per share were reduced by an estimate of $0.14 due to the impact of COVID-19. This is a bit more than the $0.10 impact we estimated in early March as the impact of COVID-19 spread beyond China into the rest of the world. Our sales of $4.8 billion were down 7% organically, which includes a 3% decline we anticipated in our original guidance and an additional 4% or $200 million impact from COVID-19—$50 million more than we estimated in early March. At our March two investor meeting, we indicated that the revenue shortfall from COVID-19 would be approximately $150 million. Segment margins were 15.8%, down slightly from Q1 2019, but this includes additional and unplanned restructuring charges as we began to rightsize some of the businesses heavily impacted by this economic downturn. Other notable events in the quarter include the announcement of the sale of the Hydraulics business to Danfoss for $3.3 billion, which we expect to close at the end of 2020. We closed the sale of Lighting for $1.4 billion, and we repurchased shares equal to 3.4% of our shares outstanding at the beginning of 2020. On Page 7, we summarize our Q1 performance, and I’ll just note a few highlights here. First, we’re changing our historical practice and are now recognizing all charges related to acquisitions and divestitures at the corporate level rather than in the segment level. This makes it easier for you to forecast and model our segments as well as the overall company. During Q1, acquisitions increased sales by 2%, which was more than offset by a 3.5% impact from divestitures. Negative currency also lowered sales by 1.5%. Our team continued to actively manage costs, enabling us to deliver decremental margins of 17% in the quarter—a strong set of results in this environment. Moving to Page 8, we have the quarterly summary of our new Electrical Americas segment. Revenues were down 9%, with a 2% decline in organic revenues due to COVID-19 and a 6% decline from the divestiture of Lighting. Negative currency impacted sales by 1%. If you exclude Lighting and the COVID-19 impact, organic revenues were up 2%. Strength in Q1 was driven by commercial construction and the utility end markets. Operating margins increased by 20 basis points to 17.2%, mainly due to the favorable impact from the divestiture of the Lighting business in early March. Excluding Lighting, orders were up 3% on a rolling 12-month basis. We saw strength in data centers and utility and residential markets, offset by weakness in industrial markets. On Page 9, we have our Q1 results for the Electrical Global segment. Revenues were down 8%, with a 6% decline organically—entirely due to the impact of COVID-19, mostly from China. We had 1% growth from the Ulusoy acquisition and a negative currency impact of 3%. Operating margins declined 80 basis points to 14.5%, including increased restructuring charges not planned for this segment. Orders declined 1% on a rolling 12-month basis. We saw significant growth in data centers but faced declines in global oil and gas markets. On Page 10, we summarize our Hydraulics segment. With the re-segmentation announced in March, this segment now includes only the Hydraulics business. Filtration and Golf Grip are now reported as part of the Aerospace segment. We continue to expect the sale of this business to Danfoss to close at the end of 2020, a very strategic deal for them, and things look on track. For Q1, revenues were down 16%, a 14% organic decline, which includes an estimated 3% decline due to COVID-19 and a negative currency impact of 2%. Operating margins improved 100 basis points to 10.8%, and orders for the quarter were down 11% year-over-year, driven by continued weakness in the global mobile equipment market. Moving to Page 11, we summarize our results for the Aerospace segment. Revenues were up 13% with negative 1% organic growth. We estimate 3% of this decline is due to COVID-19, and we saw a 14% increase as a result of the acquisition of Souriau. Operating margins declined 110 basis points to 21.6%, still strong, but the decline was primarily due to the acquisition of Souriau, which came in at lower margins than the underlying business. Organic orders declined 1% on a rolling 12-month basis. In the quarter, we saw strength in military fighters and military aftermarket but particular weakness in commercial transport. Turning to Page 12, we look at our vehicle segment. Revenues declined 26%, with 20% being organic. Included in the organic revenue decline, we estimate that COVID-19 had a negative impact of about 5%. The divestiture of the Automotive Fluid Conveyance business impacted revenue by 4%, and we had a 2% negative impact from currency. The largest part of Q1 revenue decline was expected due to lower Class eight OEM production, which was down about 31%, and continued weakness in global light vehicle markets where production was down from 21%. Operating margins declined 160 basis points to 13.5%. Despite a significant reduction in volume, decremental margins were less than 20% as our team continued to proactively manage both discretionary and fixed costs. Given COVID-19, we now expect NAFTA Class eight production to be 180,000 units, down from our original forecast of 230,000 units, nearly 50% lower than 2019. The last segment is eMobility on Page 13. Here, revenues were down 13%, with organic revenues down 12%, including an estimated 4% impact from COVID-19, and we had a 1% impact from negative currency. Operating margins declined to 1.4%, a result of volume reduction on legacy internal combustion engine platforms, as well as manufacturing start-up costs associated with new wins on the electric vehicle program. Lastly, we summarize our Q2 and 2020 outlook on Page 14. Due to the economic uncertainty from the COVID-19 pandemic, we’re withdrawing our full-year 2020 guidance. I wish we were in a position to provide revenue forecasts, but we just don’t have that level of clarity at the moment. For the month of April, revenues are running down approximately 30%. Inside of that 30%, electrical would be better than that number while the more impacted businesses of vehicle and aerospace will be running slightly worse. I expect the month of May and June to be somewhat stronger, but clearly, it’s too early to tell for certain. We have better visibility on decremental margins and free cash flow in our guidance, as depicted. We’re targeting decremental margins of 30% for Q2 and 25% to 30% for the full year. Like prior downturns, we’re extraordinarily focused on cost control, having taken a number of cost control actions already, and importantly, we have contingency plans in place to do more if needed. We do expect decremental margins to be higher in Q2, which is the quarter where we anticipate the largest volume impact and the quarter where we expect to see the biggest restructuring charge. Our CapEx forecast for the year is now approximately $40 million, down from our prior guidance of $550 million. Our free cash flow guidance is now at $2.3 billion to $2.7 billion, or $2.5 billion at the midpoint. We continue to expect free cash flow conversion to remain strong, and we’re also maintaining our dividend, which we increased by 3% in February. While we recognize the uncertainty created by COVID-19 and its economic impact, as a company, we remain focused on generating strong cash flow, which we’ve always done. We're focused on implementing our long-term strategy to transform Eaton into a company that delivers, over the long term, higher growth, higher margins, and more consistent earnings. With those opening comments, I will stop here and turn it back over to Yan for Q&A.

Thanks, Craig. Before we begin our Q&A session of the call today, I see that we have a number of individuals in the queue with questions. Given our time constraint for only an hour today, please limit your opportunity to only one question and one follow-up. Thank you for your cooperation. With that, I will turn it over to the operator who will give you guys instructions.

Thank you. Our first question will come from Jeff Sprague from Vertical Research. Please go ahead.

Craig, I was wondering if you could address in a little more detail the specific actions you’re taking to manage decrementals. You gave us some color on the employee actions and compensation. How much of that is temporary, and how do you see that kind of rolling through? The related follow-up, maybe that I’ll just ask right now, is you mentioned restructuring a couple of times, too, right? So that sounds a little bit more structural and permanent. So can you unpack those two items and provide a little more context for us?

Yes, Jeff, thank you. I appreciate the question. Maybe I’ll just begin by saying that, as you’re well aware, we have spent in excess of $500 million over the last three or four years to really get at structural and fixed costs inside of our company, and those benefits are certainly playing through in our business today around better profitability at every point in the economic window that we deal with. We don’t like other companies; today, we run restructuring through our P&L. And every year, we’re spending $60 million to $70 million worth of restructuring. Those restructuring programs are generally targeted at structural costs—costs that go away and don’t come back independent of economic conditions. We continue to have a playbook around restructuring opportunities. As we think about managing through periods where we face economic weakness, we have programs that we can slide in and do more restructuring in periods where we anticipate greater economic weakness than we had foreseen. Businesses dealing with structural and longer-term downturns due to COVID-19 will likely see an accelerated pull-in of those restructuring initiatives to deal with fixed costs. For now, we will continue to run it through our P&L, and we think this approach is critical as you consider the company overall and during comparisons.

To be clear, though, are you just spending the normal $60 million to $70 million, or is there an elevated amount?

We did spend more in Q1, and we would expect to spend an elevated amount for the full year. This is part of the reason we called out that we did spend additional restructuring dollars in Q1 compared to our original plans. Without that restructuring, our results would have been even stronger.

Thank you, and our next question is going to come from the line of Deane Dray from RBC Capital Markets. Please go ahead.

Thank you, good morning, everyone.

Hi, Deane.

I appreciate all the color, given limited visibility. You’re stepping up and giving the free cash flow guidance, which is pretty impressive. Regarding your comment on April being down 30%, since you provided clarity on how much of the first quarter was attributed to COVID-19, how much of the April drop is attributed directly to it?

I think we’ll be better positioned to evaluate that at the end of the quarter. From where we sit today, there’s no reason to assume that 100% of that reduction isn’t tied to COVID-19. Looking at how the company performed prior to COVID-19 and the pandemic’s impact, the company was performing quite well and was in good shape. There’s no reason to believe that all of the April reduction isn’t directly tied to COVID-19. As governments have shut down economies and some customers have closed factories, this impact is indeed tied to COVID-19.

That’s helpful. I was also interested in expanding on your comment about confidence in increased government spending on infrastructure. How do you see Eaton positioned based on your early look, and which particular businesses would benefit the most?

Yes, I appreciate the question. We’re prepared. We’ve been through this before, and we have a playbook that we developed from prior events to be ready for economic stimulus plans as they arise. We believe the U.S. will eventually implement an infrastructure spending plan that would immensely benefit our company, particularly in the core electrical business. It’s early, yet we’re preparing.

Lastly, I wanted to add that WESCO had really nice things to say about Eaton’s manufacturing precision and keeping the supply chain full for them as a vendor. Congratulations to you and the team.

Thank you. I appreciate that. We have a very strong partnership with WESCO and all our distributors, and we’re doing everything we can to keep them running efficiently.

Thank you, our next question will come from the line of Joe Ritchie from Goldman Sachs. Please go ahead.

Thank you, good morning, everyone. I hope you’re all well. Craig, I’m considering the restructuring plans, and it appears that a lot of the actions outlined today seem more temporary. Could you clarify that? Secondly, would now be a more opportune time to accelerate some of the footprint rationalization plans you’ve discussed in the past?

I appreciate the question, Joe. When we discuss restructuring, we generally talk about structural changes. Each business and our support functions must flex in response to volume changes. Restructuring is focused on making structural changes to the company. While we had a plan for 2020, we’ve decided to accelerate certain items, so we’ll do more in 2020 than we originally planned. However, we won’t make announcements ahead of internal communication plans around our intentions. If the economic contraction extends, we have room to pull in more ideas.

You’ve outlined decrementals of 30% for Q2 and 25% to 30% for the year. Can you provide clarity on what kind of downturn you’re envisioning to hit that decremental range for the year?

We’re currently in a situation where we lack enough certainty surrounding our markets to provide guidance. Many of our customers are not providing guidance either, making it tough for us. We have done scenario planning for various downturn possibilities. On cash flow, our cash flows remained strong, sometimes even improving with the liquidation of working capital. We believe Q2 will be the weakest quarter. However, if the downturn extends, we can execute more restructuring.

Thank you. Our next question will come from the line of Scott Davis from Melius Research. Please go ahead.

Hi, good morning, Craig and Rick.

Hi.

Morning, Scott.

I appreciate the color. I’d like to get a sense of the financial health of your smaller distributors, even though we know your big distributors are healthy.

At this point, we don’t anticipate any issues with our distributors as we navigate through this downturn. Being deemed essential by governments, our distributors have continued delivering goods and services to projects. They will be impacted like everyone else, but we haven’t seen significant changes in the health of most distributors, and we monitor it closely. There’s nothing to suggest that the smaller distributors will be further impacted by this economic downturn.

As I review payment behaviors from these distributors, we haven’t seen any significant deterioration in the timeline for them to pay their invoices.

That’s very helpful. As a follow-up, I believe Aerospace may be the toughest to forecast. Could you indicate whether the decremental margins here could be higher than the average?

We have modeled anticipated decrementals for this year. It’s essential to clarify that we have considered the decrementals in Aerospace as potentially higher than those in other businesses. However, we are confident in the ranges we’ve provided for decrementals and plan around potential economic changes.

Our next question comes from the line of Ann Duignan from JPMorgan. Please go ahead.

Hi, good morning. Thank you. Can you provide more details on data center performance in your electrical businesses? Can you quantify size growth versus decline in weaker areas like oil and gas?

Yes, Ann, you’ve identified the two extremes. Data center orders were quite strong in the quarter, up mid-double-digit percentage. We are very pleased with performance in the data center market and expect it to remain strong, especially with more reliance on technology at home. Conversely, the oil and gas markets have hit hard due to low oil prices and major companies reducing capital spending, and we have seen that too.

Could you specify the decline in orders in oil and gas, similar to your data center growth?

Yes, it’s significant, especially in the first quarter when sales for April were down around 30%. Some businesses experienced a decline worse than that, while others exceeded that figure. The Crouse-Hinds segment saw more weakness than average.

It’s also useful to consider that coming into this COVID downturn, only about 30% of Crouse was oil and gas, so the impact is less than it was at Cooper's acquisition time.

We’re seeing project delays but haven’t experienced cancellations yet.

Our next question will come from the line of Nigel Coe from Wolfe Research. Please go ahead.

Hi, good morning, gents. Could you talk about the Hydraulic sale status? What kind of progress have you made in terms of getting the deal closed?

We expect closing by the end of the year. In late January, we filed the purchase agreement as a material contract with the SEC. The buyer doesn’t have outs for financing or regulatory issues, and they remain strategically and committed. Everything looks on track, maintaining confidence in closure.

On the manufacturing footprint, will the current crisis and slowdown accelerate your footprint plans as you reposition?

Yes, that option is available. Depending on the downturn’s shape, we can accelerate restructuring programs and plans around restructuring based on evaluation. We have a plan in place, and we feel confident that we can do more if needed.

Our next question will come from the line of Andrew Oldman from Bank of America. Please go ahead.

Sure, this is David Ridley-Lane on for Andrew. Can you size the benefits of the restructuring actions you took in Q1? Are they in the timeline of a one-year payback?

We decided to build restructuring into our ongoing operations from here on out and anticipate each year spending around $60 million to $70 million. This year, we’ll see elevated spending, but we intend for it to run through our operations without separating it as a one-time item. If circumstances change significantly, we might consider adjusting our approach.

Are lower raw material costs expected to benefit you meaningfully on the gross margin line in 2020?

Yes, we hope to see that. Key raw materials have favorable pricing trends this year. Typically, commodity cost changes net to zero in terms of operating profit due to effective pricing strategies, but we’re seeing lower commodity prices now.

Our next question will come from the line of John Inch from Gordon Haskett. Please go ahead.

Thank you. Good morning, everybody. I got dropped earlier, so I hope I’m not repeating anything. Can you discuss cash flow, working capital, and how we should view the shift of two nine to two five? Is most of that due to lower earnings expectations?

To consider, classic working capital constitutes receivables, inventory, and payables about 19% of sales. As sales decline, working capital pulls back. We entered the year with inventory above normal levels, as much as $300 to $400 million higher than indicated. With reduced future activity, there’s a real drive to reduce inventories, particularly where DOH was near the prior year. Reducing DOH could lead to a $400 million reduction if we match the prior year’s levels. The biggest opportunity exists in DOH, and while we’re managing receivables well, as typical during downturns, we expect to enhance efficiency. I would expect cash conversion ratios to improve as we liquidate working capital. Our free cash flow has historically improved in downturns, as seen in examples from ‘08 and ‘09 and 2015 and ‘16, where we experienced free cash flow increases of 22% and 9%, respectively. Improvements were tied into managing working capital to offset profit decline.

So inventory levels—are they closer to equilibrium as you've closed out the quarter, or are they still above what you'd prefer?

Not much progress has been made in reducing excess. We are working hard on this, and while we may not reach ideal levels by the end of Q2, as recovery begins in Q3 and Q4, we will keep inventory stable.

As the quarter unfolded, most businesses outside China were performing well until mid-March. The drop in activity led to excess inventory and reducing it takes time—around 90 days at least.

Just one more quick point, Craig. At the analyst meeting, you mentioned abundant supply chain efficiency opportunities. Has the past few weeks prompted a review of those opportunities? Might we see formal targets or initiatives established?

We believe there are significant opportunities in the supply chain, and ongoing efforts aim to bring more visibility and leverage our scale across the enterprise. This continual improvement gets extra attention during downturns, particularly given the urgency around improving efficiency.

Our next question will come from the line of John Walsh from Credit Suisse. Please go ahead.

Hi, good morning.

Morning.

You highlighted a strong liquidity position. Do share repurchases get held until you close Hydraulics, or can you do something before that?

Typically, there aren't many transactions during downturns, as valuations may decline afterwards. We continue to actively work on the pipeline, focusing on tuck-in type transactions. We have faith in our cash flow; we wouldn’t hesitate to pursue a strategic opportunity at the right price, even before the deal closes.

Some companies have suspended share repurchases. Is that the case here?

Our cash flow and liquidity remain strong, giving us the confidence to maintain options for both share repurchases and M&A. We see no need to let excess cash increase on our balance sheet. Our cash flows remain consistent across both good and bad times, keeping our options available.

You touched on construction markets. Are COVID-19 disruptions an event, or could they slow the cycle? Some use the term air pocket for new construction. What are your thoughts?

At this point, it’s too early to assess. Different segments will be affected differently by the downturn and recovery shapes. Initially being strong, the underlying global economy fundamentals before this event were strong, so once a therapeutic and vaccine arrives, we should return to trend growth.

Thank you. Our next question comes from the line of Julian Mitchell from Barclays. Please go ahead.

Hey, morning. This is John Welsh for Julian. Focusing on Electrical Global, you’ve mentioned declines in Q1 attributed to China, but what are you seeing in April? Are signs of normalization emerging?

Yes, our experience in China mirrors others, where we saw some recovery in March. Factories in China are fully operational now, but some end markets are weaker. If we have a China-like experience elsewhere, it would be very positive and better than our baseline assumptions. Yet, the recovery may happen gradually and sporadically in other regions.

Thanks. As a follow-up, with a focus on Aerospace, should we expect more targeted restructuring given the unique downturn for the end market?

Yes, we are directing our focus on businesses likely to see significant economic and structural challenges. That means Aerospace will see targeted restructuring efforts, but we are also considering our strategies across the total company.

Thank you all for participating in our call today. As always, Chip and I will be available to address your follow-up calls. Have a good day.

Thank you. That will conclude our conference for today. Thank you for your participation using AT&T Executive Teleconference. You may now disconnect.