Gentlemen, thank you for standing by, and welcome to the Eton First Quarter Earnings Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Yan Jin, Senior Vice President of Investor Relations.
Please go ahead, sir.
Good morning. I'm Yan Jin, Ethan Senior Vice President of Investor Relations. Thank you all for joining us today for Eaton's first quarter 2019 earnings call. With me today are Craig Arnold, our Chairman and CEO and Rick Freon, Lead's Chairman and Chief Financial And Planning Officer. Our agenda today includes the opening remarks by Craig, highlighting the company's performance in the first quarter.
As we have done our past calls, we'll be taking questions at the end of Craig's comments. The press release from our earning announcement this morning and the presentation we'll go through today have been posted on our website at www.eton.com. Please note that both press release and the presentation, including reconciliations to non GAAP measures. A webcast of this call is available on our website and will be available for replay. Before we get started, I would like to remind you that our comments today, including statements related to expected future results of the company and are therefore forward looking statements.
Our actual results may differ materially from our forecasted projection due to a wide range of risks and uncertainties that are described in our earning release and the presentation. They're also outlined in our related 8 K filing. With that,
I will turn it over to Craig. Thanks, Jen. Appreciate it. I'll begin with Page 3 and the highlights of our Q1 results And I begin by saying, we had a good start to the year with another strong quarter of performance. Earnings per share were $1.23 on a GAAP basis and $1.26 excluding the impact of divestiture costs related to the announced spin off of our lighting business.
At one point our results were 15% above last year and towards the higher end of our guidance range, which, as you'll recall, was $1.18 to $1.28. Our sales were $5,300,000,000, up 4% organically and in line with our guidance, excluding the negative 3% impact from currency. And we continue to be pleased with our strong margin performance. Segment margins were 16% above the high end of our guidance range and 80 basis points over prior year. We also generated very strong operating cash flows of $551,000,000 in the quarter, and this is up 63% from Q1 twenty eighteen and a 1st quarter record.
And lastly, we repurchased $150,000,000 of shares the quarter as part of our plan to buy back $400,000,000 of shares in 2019. So a very good start to the year. Page 4 summarizes our income statement versus prior year. And I covered most of these items in summary comments, and so I'll only point out once again, the 3% currency impact was driven primarily by, the important currencies for us, which are the euro renminbi and real. We're very pleased with our 32% incremental rate that we delivered on organic growth.
And so that number was once again, very strong and above our expectations. And we incurred, as we mentioned, the $0.03 per share from the after tax costs, primarily related to the spin of our lighting business. And as you can see, adjusted earnings per share increased from 9%. Next, we summarize the quarterly results of our Electrical Products segment. Revenue here increased 2% which includes 5% organic growth, partially offset by 3% currency.
And we've seen particularly strength here in commercial and in residential construction, with global growth rates in the mid to high single digits and even stronger in the U. S. Markets. Our orders increased 4%, led by continued strength in growth in the Americans, and our backlog grew double digits, up 13% in the quarter. Segment operating profits grew 8% and operating margins were 120 basis points, increase to 18.29 percent, and this was a record 4 of Q1.
And we're naturally pleased with how well the segment is performing and the consistency of the results that we continue to see in this part of the company. Moving to Page 6, partially offset by 2% currency. And we saw especially strong double digit revenue growth in commercial construction and in data centers. We continue to have solid momentum in this business and the year has started on a high note for sure. You'll recall that our original guidance is for sales to be up 5% to 6% organically for the year.
And so we're certainly running above that rate. As we indicated at our investor conference in March, We've moved to a rolling 12 month basis for reporting our orders in this long cycle business as well as in our Aerospace business that I'll cover soon. On a rolling 12 one basis, ES and S orders actually increased 8% with strength in all major end markets and regions. And maybe I'll just pause for a moment on the, the orders here in Electrical Systems And Services because I know it's a, a particular point of question that many of you have. And I'll tell you that, our ES and S activity level is absolutely performing in line and perhaps maybe even a little bit better than what we anticipated.
And we talked about this idea of moving to the rolling 12 months because we do, in fact, see, a lot of, let's say, call it lumpiness in the orders that we get in Electrical Systems And Services, driven primarily by what we're seeing in hyperscale data centers. And the other indicator that we have that gives us a lot of confidence in the strength of this business is what we call negotiations. And our negotiations in this business in Q1 were an all time record and up some 56% from prior year. And so despite what we're seeing actually in the orders, and what some of you have reported to be a little bit of weakness versus what we saw in Q4. The overall underlying activity in this business continues to be very, very strong.
Our backlog continued to grow. It was up 11% in the quarter, We generated strong operating leverage with operating profits increasing 15%, only 8% volume growth, and margins increasing 100 basis points to 13.1 percent. You'll also recall that we announced the acquisition of the Olessoe Electric business in January. We're pleased to have closed the purchase on April 15th. And then this acquisition will certainly provide a strong platform for us as we serve our customers in EMEA and the Asia Pacific market.
So once again, a really strong performance in our Electrical Systems And Services business, we continue to be quite bullish on the for the outlook for that business as we go forward. On the next page, we summarize our hydraulics results for Q1, revenues were down 3%, with 1% organic growth, more than offset by a 4% currency. I'll certainly note that we had some tough comps in this business, a 6% organic growth in Q1 twenty eighteen, but my revenue did slow slightly more than we expected, but I would would know here only slightly more than what we had in our original plans for the year. Organic growth of 1% reflected continued growth in construction equipment but some declines in ag and industrial equipment. Our orders stepped down 11%, driven principally by weakness in global mobile equipment markets, And we also had tough comps here as well, from last year where orders were up some 14%.
Backlog declined 6% in the quarter as well. And as we detailed at our investor conference, we continue to work through some inefficiencies in the business, but do expect to see strong margin performance in this business in the second half of the year as we work off some of the, inefficiency issues that we experienced, in the second half of last year. And segment margins were 11.7 percent, down 100 basis points versus last year. And on Page 8, we summarize our Q1 results for the Aerospace business. And as you can see, this business just continues to perform at a very high level delivering record environments across almost every single metric.
Our revenues increased 10%, with 11% organic growth and 1% negative currency. Like ESNS, we moved to a rolling 12 month basis for reporting orders. And on this basis, orders increased 18% with particular strength in commercial transport, military fighters, military transports and both commercial and military aftermarket. So really strength across the board in this segment. Our backlog also increased significantly up some 21% in the quarter.
And lastly, we demonstrated very strong incremental margin which led to a 30% increase in operating profits and a 300 basis point margin improvement in the quarter. Operating margins of 23.1 percent are another all time high for the business. And, so in addition to the volume growth, we also experienced some favorable product mix in the quarter, but really strong execution by the team overall. Next, I'll move to a summary of our Vehicle segment. Our revenues were down 9%, which includes 6% reduction in organic growth and a negative 3% from currency.
The organic sales decline was driven by a combination of, declines in light global vehicle markets, which were down 4% to 5%, and the ongoing impact of revenue transfers to the Eaton Cummins joint venture. And I will note that the joint venture actually saw revenue increases of 27% in quarter and continues to perform very well. We also had tough comps in this business for organic growth, which increased 13% last year, but overall, this business is really performing as we've expected, but for a little bit of weakness in global automotive markets. For the year, we continue to expect snap the class 8 production to be at 324,000 units flat with 2018, But we have lowered our outlook for low for light vehicle markets for the year. And lastly, despite the lower volumes, operating margins increased 30 basis points to 15.1 percent and a decremental margin on the organic of less than 20%.
So really strong execution by the team once again in our vehicle business. And wrapping up our segment summaries, we cover our e mobility segment on Page 10, Revenues were up 8%, which includes 9% organic growth, partially offset by 1% currency, And as planned, we continue to accelerate our R and D spending, which increased by some 130% in the quarter. So We continue to invest heavily in this segment to participate in what we think is really an exciting growth opportunity as we move forward. We're certainly optimistic about the opportunities in this rapidly developing market and our pursuit pipeline for new programs has actually now grown to, $1,100,000,000. At our investor conference in March, we did announce a new program win of $100,000,000 maturity year revenue, for traction inverters with a major global OEM customer and actually in mid April, we announced that PSA is the customer for this program.
This was our first significant win, since creating the segment about 1 year ago, And we're certainly ahead of our original schedule, for growth in this segment and well on our way to accreting what we think is going to be a new $2,000,000,000 to $4,000,000,000 segment for the company overall. At this organic revenues for all of Eaton to grow approximately 4%, down slightly from our prior midpoint of 4.5%, And this is largely the result of us increasing our guidance for our long cycle businesses, but reducing guidance for our short cycle businesses. Specifically, we increased organic growth rates by 1% for both ES and S and Aerospace. And for hydraulics, we lowered organic growth by 2% at the midpoint to 3% to 4% based upon some slower growth expectations in global mobile equipment markets, And for vehicle, coming off, what I'd say really was a weak Q1 in light vehicle markets, we lowered organic growth rate by 3 points at the midpoint, and now we expect organic growth to be down some 4% to 5% once again due to primarily the automotive side of the business itself. And we've not changed electrical products or e mobility.
And our margin expectations are noted on page 12. We're modestly raising our guidance from 17.1% to 17.5% or 17.3% at the midpoint. We're lowering the margin expectations for hydraulics by 60 basis points, to 13.4% to 14% and for vehicle by 90 basis points to 16.5 percent to 17.1 percent due to lower organic growth primarily. But this is more than offset by increases in Electrical Products and in Aerospace margins. And our new expectation for Electrical Products is for margins to be between 1919 96, a 50 basis point increase at the midpoint, and the new expectation for Aerospace is for margins to be 21.8% the 24.22.4 percent, also a 40 basis point increase at the midpoint and the other two segments remain unchanged.
So at the midpoint, 17.3%, and this would naturally be another record level of performance for Eaton overall. And lastly, on Page 13, we summarize our guidance for Q2 and for the year. For Q2, we expect adjusted earnings per share to be between $1.45 $1.55 And at the midpoint, this represents an 8% increase over last year. Other assumptions in our guidance include, we're expecting 4% organic growth, foreign exchange impact of roughly $100,000,000. Our margin expectation for the quarter is to have margins between 17.2% 17.6%.
We'd expect our corporate costs to be flat with Q2 of 'eighteen. We'd expect the tax rate of between 13.5 percent 14.5 percent. For the full year 2019, we're raising our adjusted earnings per share guidance to $5.72 to $6.02 for a midpoint of $5.87, which includes essentially a $0.02 impact from the full year impact of the acquisition of Olusoy overall. At the midpoint, this continues to represent a 9 percent increase over 2018. Other full year guidance assumptions include organic revenue growth of 4% We'd expect $100,000,000 of revenue from the Olusoy acquisition.
We'd expect foreign exchange impact to be, $300,000,000, and this is a $50,000,000 increase from prior guidance. We'd expect, as I mentioned, segment margins of 17.3% and really no change to the other, items in our forecast. So in summary, I'd say another strong start to the year in Q1. We're well positioned to deliver another year of record results, and we're absolutely, thrilled with the way that the company is performing overall. And so with that, I'll turn it back to Jan for Q
And A. Before we begin the Q And A session of our call today, I do see we have members of individuals in the QA's question. Give me our time constraint, hosting an hour today and our desire to get you as many of these questions as possible, please limit your opportunity just one question and a follow-up. So with that, I will turn it over to operator to give you guys the guidance. Okay.
We'll take our first question from Joe Ritchie, Ms. Good morning,
Craig, could you maybe expand on your comments on commercial and data centers, being up double digits in the SS this quarter We heard some conflicting news, especially in the data center side out of the supply chain. And so any other further color you can provide there would be helpful.
The only thing I'd tell you that, overall, the data center market for us continues to perform very well We're still running, as I mentioned, our revenue is up, you know, double digit for data center sales. Activity levels are continue to be quite strong. I think the piece that I that we're trying to clarify for the sake of all of you follow the company is that data center orders, especially when it comes to the hyperscale, they tend to be quite lumpy. So you'll get a big slug of orders in 1 quarter and there'll be later the next quarter. And so that's why we made this decision to really move to a rolling 12 months because we think it more accurately reflects the underlying economic activity that we're seeing in that market.
But for us, we still see very good strength in data center activity overall in we continue to think that's going to be one of our fastest growing segments. And I mentioned once again, we take a look at negotiations, which is the level which for us is a good proxy for the level of economic activity that's taking place in the market. And as I mentioned, we're really experiencing record levels of activity our Electrical Systems And Services business with negotiations up 56% in the quarter to record levels. And so by and large, we've really seen no let up in activity in Electrical Systems And Services, and data centers continues to be a bright spot for us.
And Craig within commercial, what are the verticals that are really driving the strength there?
Yes, I'd say we're really seeing pretty broad based strength in, in our commercial businesses overall. And, certainly, oil and gas is has come back, and we mentioned this to strengthen data centers. We see, let's see. Let me
Yes, for example, if you look at straight up commercial like office and government both up, just over, over 10%, institutional just a little bit under that, but we're seeing broad based strength in the commercial side of things. If you look at some of the governmental data, C30 reports, etcetera, you, at the Dodge reports, you're seeing numbers that are high single digit, even low double digit. So it's all pretty consistent.
And I'd say it's all, it's broad too. It's, and we're seeing also strength really around the world as well in, in commercial businesses in general. So it's, it's not just in the U. S. Market.
No, that's helpful. Maybe my follow on, just on the hydraulics business. It's interesting because it sounded like when we had met intra quarter that Hydraulics had maybe gotten off to a better start in January, February, And you've talked about this business and all your businesses needing to kind of earn the right to be part of the portfolio yet we've taken guidance down already to start the year. And so can you just kind of contextualize how the quarter went with hydraulics? And then also in terms of like how it fits with the portfolio longer term?
Sure. First of all, I'd say, as we've talked about and recovered on our Investor Day in general that we have some work to do to fix what I call some self inflicted wounds associated with, some move transition, site transitions that we're managing internally as an organization. And we always believed that that was going to be more of a kind of a second half kind of, resolution to some of the internal issues. I think the new news for us in hydraulic business, in terms of what really drove the reduction in the guidance is largely in some of the weakness that we're seeing in some of our end markets. And so I'd say, operationally, as we acknowledge, we still have work to do to fix some of our own inefficiencies and our teams are working that.
And we certainly would expect that stuff to be flushed through the system by the time we hit the second half of the year. But the new piece is really the weakness that we're seeing largely in some of the mobile equipment markets. And I'd say that our orders were certainly weak in Q1. If you take a look at some of the, our customers, all the names that you know well, I'd say they're sales are holding up better than our orders are. And so there could be a better outlook as we look forward.
We're not sure to what extent there's some inventory repositioning taking place in this segment. But right now, it's really more a function of weaker volumes. And at this point, I'd say, you know, as we think about Hydraulics as a part of Eaton overall, today, we have a plan and the plan is plan that we believe in. And our team is executing that plan and we fully expect the hydraulics team to fix their their operational issues and turn that into a business that we can all be proud of and would anticipate keeping it as a part of the company. But for hydraulics, no different for any other part of the company, we have expectations that we hold all of our businesses accountable to, and we would expect them to to meet the criteria that we set.
And if we can't meet the criteria for hydraulics or for any part of the company, we're willing to act when necessary.
Thank you.
Our next question coming from Jeff Sprague with Vertical Research.
Thank you. Good morning, everyone. Hi. Good morning, Jeff.
Good morning. I was wondering if we could just come
back to ESS, one more time anyhow. And just give us some color on what negotiations up 56% really means. Obviously, it sounds good. Is that Is that kind of a project value in dollars? Was there some kind of low ebb in Q1 last year that results from that being such a big healthy number?
And what kind of typical conversion rate would you have on kind of a negotiation?
Yes, no, I mean, the first thing I'll just answer is kind of the question around this is absolutely nothing in Q1 of last year that would suggest that we had a low bar to clear. And as I mentioned, it not only was it higher than Q1 last year, but it's it was a record all time level and it was significantly higher than any other quarter during the course of 2018. And I think it's just as you articulate, this is essentially the number of bids and quotations that we're making to our various customers on large projects that we bid on, during the course of a period. And so it really, for us, is probably the best proxy for the level of underlying economic activity that we have in that business and so we think it's a really strong indicator of the fact that this business, a long cycle business that we'd expect to be performing very well at this point in the cycle, is actually performing very much like we anticipate. And
it will take time for some of these negotiation bids to become final bids. Typically, 90 to 180 days, sometimes a little longer for big projects. But, it is quite notable just how strong the activity levels are.
And just as a follow-up separately on Olasoy, Is it $0.02 accretive for the year and therefore the sole reason for the guide or, is it actually more than that and there's maybe a negative offset somewhere else in the equation?
No, it's, it's $0.02 accretive. And the way to think about it, Jeff, is it's really $0.04 accretive, but we have $0.02 of our estimate right now of amortization of intangible costs.
And so
that's how it ends up at $0.02. Great. Thank you.
But we are, in fact, holding all the other elements of the guide for the core business. And so no change at all.
Thank you.
Our next question is coming from Scott Davis from Middle East Research.
Hi, good morning, guys.
Good morning. Hi, Scott.
I, just to be to be clear, the reason why you're not raising margin guidance on ESS, is that because of mix and largely just because of the the data center volumes. Is that correct?
And I'd say that, first of all, I'd say it's early in the year, I'd say that, you know, our forecast for margins in ES and S are certainly today within the range that we set for the year. And a lot of the growth, to your point, coming from projects. And so we'll have to wait and see how that plays out. But right now, I would not, in any way, take it as a, as a sign of concern about margins in our ES and F business. Things are going quite well And, you know, we're very pleased with our margins in Q1, and there's nothing today that I'd say that would suggest that we're there's anything to be concerned about.
Okay.
And the spend, just kind of get your take, Craig, on some of the M and A that's out there. I mean, you've got a couple of competitors have announced really big deals. Nothing seems cheap. They all seem to be relatively, fully priced. But what's your take on the market out there and the likelihood that Eton participates, I guess there's 2 ways to think about it.
You could be a seller of assets into this market of strength as easily as you could be a buyer of assets. So, how do you think about that in the current?
The first thing with respect to pricing and asset values in, as you can see, by some of the transactions that have been announced. I mean, these properties are going for extraordinary prices. We have, prior to ourselves on the fact that we said we're going to be disciplined through this cycle and we think that our cost of capital continues to be 8% to 9%. And we want to deliver 300 basis points over our cost of capital So we will continue to be a disciplined buyer into a market that looks like assets are being priced at extraordinary levels. And so, you know, I'd say that, we today are looking at probably more deals than we've have in a very long time.
And so we have a very active pipeline as well. But I will make the commitment as we've had in the past, we're not going to chase deals with what I would say are unattractive returns when you look at their cash on a cash set of financial metrics. And so that's kind of the way we look at it.
But the other side of that, obviously, Craig, as you could sell something, I mean, if people are willing to pay full price and maybe now is the time to think about parting with some of, maybe a more cyclical stuff. Is that
possibility? What I'd say is, first of all, I'd say, we tend to look at our businesses strategically through the cycle. And so as we think about the portfolio itself and are we a hold or a seller, we really try to look at them over the long term period and whether or not we think this is going to be a good strategic hold based upon the criteria that we established through the cycle. Now having said that, to your point, if you have come to a decision, that you want to exit an asset, now would be a great time to do it. But we generally take a longer term let's say, more strategic view of the portfolio in terms of things that we want to businesses that we want to be in versus businesses that we would choose to exit.
That's fair.
Thank you. And good luck to you guys.
All right. Thank you. Our next question is coming from Nicole DeBlase with Deutsche Bank.
Thanks. Good morning guys.
Hi. Good morning Nicole.
Hey there. So, I just want to focus a little bit on hydraulics. I know organic growth is 1% this quarter. Like in your full year guidance, you brought it down a little bit, but you're still basically implying some improvement in organic growth throughout the year. So I guess I'm curious what's driving that conviction and maybe to frame that with, how demand progressed throughout the quarter if there was any sign of improvement in March or into early April?
And I'd say that, maybe to take your first question right out of the gate in terms of, certainly, we're implying stronger growth in the back half of the year than we delivered in Q1. As I mentioned in my opening commentary, that 1% organic growth was actually within 1% of our internal plan. And so we were actually not off our internal planned by a measurable amount in Q1. And the comps get easier. Quite frankly, as we, as the year moves on.
And we have very specific programs that we're working on as a company that will also help boost growth as we look into some of the out quarters, very specific initiatives that we're working on that have been largely bet it down that are going to help improve our growth. And the other thing I would tell you is that if you take a look at the major end markets that we serve, construction equipment, ag equipment, 2 of our big important markets in hydraulics, and you look at what our customers are saying, In most cases, they're still forecasting growth for the year. They're forecasting low single digit kind of growth levels And so we do believe that there was a little bit of inventory correction that took place in Q1 that probably also held down our relative growth rate.
Okay, got it. Thanks, Craig. And then just shifting to Aerospace, the margin performance was really impressive this quarter. Was there anything special going on there? Is it a mix impact that isn't sustainable?
Throughout the rest of the year just because the full year guidance implies a little bit less margin expansion than we saw in the first quarter?
Yes, I mean, certainly was a a record quarter for margins in Aerospace and all time record, not just a record for Q1. And I would say that, you know, we did have a bit of favorable mix in Q1, our aftermarket business, on a relative basis, was a bit stronger than our core OE business. And that certainly was a help for the quarter, but also the growth in the volume as well also helped push things up. And so I would say, principally it was more a function of the mix of customers and the mix of OE aftermarket that really led to a really strong Q1 performance that it's probably not sustainable at those levels. But as you can see, we're forecasting margins for aerospace that are, once again, at record levels, and I'd say even, in many cases, industry leading levels.
Got it. Thank you.
Our next question comes from Ann Duignan with JPMorgan.
Hi guys. Hi. Just back to ESS again. I know you said bidding is up significantly, but traditionally, kind of what kind of success rates would you have with your have been, what percent win versus not win have you had?
Yes. We have pretty strong mark sure. And, you know, in our businesses, as you know, I mean, our Electrical Systems And Services businesses, you know, a lot of this activity is in the Americas market and And we have industry leading shares in this business. And so our win rate is going to be very much consistent with our underlying market share. So we do believe that this bidding activity will translate ultimately to growth in our business.
Okay. That's helpful color. I appreciate it. And then back to Hydraulics also, I have to ask a question about North American Agriculture, of course. Maybe you could talk about what your customers are saying there.
Is that where the weakness was in the quarter in term of orders and Given how bad farmer sentiment is in the U. S, would you anticipate that maybe staying weaker than expected for the full year?
Yes, I mean, you're absolutely right that, you know, sales were actually quite decent in Ag in Q1, but the order rates in Ag was down And to your point, it's farm incomes and underlying commodity prices being as weak as they are that we think are certainly dampening some of the enthusiasm for the outlook in Ag markets. And I think our call on Ag for the year, we still think it's kind of a low single digit kind of grower for the year. But we do think that there's a, at least a cautionary kind of sentiment that's in the market today even around ag in general.
Yes, I would think we would have a similar view of ag market for 2019 and maybe even into 2020. Okay. I'll leave it there. Just get back in line. Most of my other questions were answered.
Thanks. Our next question comes from Nigel Coe with Wolfe Research.
Just going back to
Hydraulics and the backlog was down, I think, 11%. And I understand the backlog is coming off a very high level, but I'm just wondering to get to your sort of 4% to 5% growth for the remainder of the year in hydraulics. Do we have to see orders come back positive, or can we still achieve that targets with orders remaining flat to negative?
Yes, yes. So the backlog Nigel was actually down 6% versus last year, but no problem at all. But I think the is, once again, very much like the question asked earlier, what gives us confidence that we can deliver the growth and the outlook for the year And I will say that while the backlog is down, it's still running at very, very high levels from an historical perspective. And so, we, you know, obviously, the comparisons in general, the comps in general get easier as the year wears on. And I think that's really the big message with respect to orders with respect to sales is that you have relatively easier comps as the year unwinds.
We have some very specific initiatives that we have put in place as a company that are going to give us some growth that have been very well identified And we think once again that, you know, while there's a little bit of caution in the market, we do believe that the 2 big of ag and construction continue to grow during the year.
Okay, great. And then my following question is, is the 3 point delta on the vehicle outlook. And obviously, we're looking at the light vehicle markets significantly weaker. So that explainable, but I'm just wondering given the complexity in the segments, how much of that revenue delta is caused by a shift between your legacy transmission business and the Cummins JV, was that a factor at all? Any help there would be great.
Yes, I mean, in terms of the you say the 3 point reduction in the growth for the quarter, I'd say that, that was really driven principally by the weakness in global light vehicle markets around the world. And I mean, you see the same data that we see. I mean, China was down 10%. Europe was down, you know, let's say, you know, 3% to 4% the Americas was down a couple of points. And so Most of that weakness I'd say is really in global light vehicle markets.
We do have, by the way, as I mentioned in my commentary, as the world moves some manual to automated transmissions, we continue to move more revenue into the joint venture with Cummins, and that is piece of what's going on in that business. And the other one, by the way, that I'll put on the table, because it becomes a much bigger impact in terms of the legacy business as we move forward as the world moves to electrification and the e mobility segment that also becomes revenue that comes out of our legacy vehicle business and shows up in e mobility. And so there are a number of factors that are going on that perhaps make the underlying revenue growth in our vehicle business look worse than it really is.
Next question comes from Jeff Hammond with KeyBanc. Hey, good
morning guys.
Hi, Jeff.
Just two on EPG-one. Can you just talk about what's driving the margin bump without a change in sales? And then 2, just as the lighting spend has been announced, have you gotten any indications of interest that maybe a sale is likely or more likely than a spin? Thanks.
Yes. I'd say on the margins largely in EPG, I'd say primarily just we're getting better execution and better conversion in the business than we originally anticipated we put the plan together. And so it really complements to the team for really executing and delivering on some of the cost out initiatives that we we put in the plan. And so things are just going a little better than what we anticipated. And then that's kind of what drove the increase in guidance for the year.
As we mentioned in terms of lighting, first of all, I'll say that the process is moving along as we anticipated and the prime path continues to be to spin the business. And we still expect to be ready to make sure that we can get that done by the end of the year. To your point specifically around outside interest, yes. As you can imagine, there has been, a number of companies who raised an interest and potentially acquiring the business and it's always good to have an option and a choice. And so we'll be, obviously, working through these 2 alternatives, but once again, the prime path that we're on is to spin the business.
Okay. And then just macro level on Europe, I mean, there's been talk about slowing there. You mentioned the auto. Can you just talk about any areas of resilience or particular weakness in Europe?
Yes, I think to your point around the macro environment in Europe, and we all see the economic data coming out of Germany would suggest that we are, in fact, seeing some slowdown in growth in Europe overall. And we've seen that as well across many of our businesses. Certainly, we've seen it specifically in the short cycle businesses. I'd say very much like we're seeing in the U. S, the long cycle businesses continue form well in Europe.
So Electrical Systems And Services And Data Center, specifically in Europe. Aerospace, obviously, is a global industry is doing well. So I think we've seen, I think perhaps on an accentuated basis, more or less a continuation of the same trends that we're seeing globally. But no question, Europe is a bit weaker. It's a bit weaker when you think about, industrial markets and industrial controls and the like.
But, but it's all incorporated in our guidance. And we think that, you know, Europe essentially, you know, is not going to be terribly different than what we assume when we put our profit plan together.
Our next question comes from Andrew Holden with Bank of America.
Hi, guys. Good morning. Thanks for taking my call.
Sure. Hi.
Just a question on China. Can you talk about the sort of China progression during the quarter. Frankly, I would have expected mobile China hydraulics to be a bigger positive. So I was just surprised that they didn't move the needle as much. And if you can give us any color as to how April is developing in China?
Thank you.
Yes, I will say to your point, I mean, China started off the year quite weak in, in January and March was a much better month. And we see that. And certainly, GDP data and the IP data specifically coming out of China. Even automotive markets were relatively speaking, stronger in the month of March than they were. In the 1st 2 months of the year.
And so I'd say a lot of the economic stimulus that the Chinese government is putting into place early indicators, but it would suggest that it is having the desired impact. And so we think China probably continues to strengthen from this point forward. You know, even overall, our revenues actually grew in Q1 in China. As a company. So it was despite the fact that we had some weakness in automotive markets, we actually sold strong mid single digit growth in China specifically.
And to your point, yes, hydraulics, excavator market was quite strong, up some 24%, I believe, in Q1. It's an important market for us But it's, but it's obviously not big enough to move the needle given some of the offsets in other regions and other segments that are part of that business. But we do think China improves as we look forward. And Andrew,
if you look at some of the construction metrics in China, they were pretty positive in Q1 and got more positive as the quarter went on. So office starts were up I think 18% and residential starts were up 12%. So you are seeing a lot of the stimulus and China start flowing into some of these construction related markets.
And just a second question, you definitely highlighted strength in oil and gas. Can you give us more color sort of upstream midstream, downstream and maybe some color what specifically you're seeing at Crouse Hinds? Thank you.
Yes, no, you know, I'd say, as we talked about, we're definitely seeing strength in oil and gas. And then we think, you know, in our business in oil and gas, we had a good first quarter of revenue good first quarter of orders. And we think the market in 20 19 kind of grows, mid to high single digits. And as a company, we played more downstream than we do upstream. And so we're more exposed to that piece of the market.
But we do think you saw the rig count is up somewhat 9% or so in Q1. And so we do think oil and gas continues to strengthen and that's what we're seeing in our business as well.
And we're benefiting from some of these large downstream projects, for example, some of these LNG facilities that are being configured now and petrochemical and So we're definitely more slanted towards downstream type applications.
And how fast does it hit
you back like the oil price moves. Do you see it immediately or is there a lag?
I say there's generally a lag. I mean, we quite fine. I've not studied that question in a lot of detail, Andrew, but there's clearly a lag from the move in oil price to them putting in place you know, capacity to increase drilling or exploration. And certainly, given the fact that we're downstream, that the lag would probably even be bigger for us than it would be for companies who are more exposed on the upstream side.
Terrific. Thank you so much.
Next question is from Dean Gray with RBC. Thank
you. Good morning, everyone.
Hey, maybe just touch on some
of the variables in the quarter broadly that a number of the other industrial companies have called out as either a factor or not a factor. So I didn't hear anything particular about weather was, did that come into play? And you talked about the inventory adjustments. Did any of that, you see any of your business experience a pull in out of the first quarter into 4th quarter last year? And might that have been a factor this quarter?
Yes. And I'd say, Dean, you know, we try to stay away from those kind of tangential elements around weather and the like because, you know, it's really difficult to ascertain how they impacted your business. And so at this point, I'd say that, you know, was weather an impact in Q1, it could have been Was it big enough to fundamentally change the outlook or kind of the thesis on the year? I'd say probably not. And to the point around pull ins, we really didn't see any material pull ins as well at the end of, let's say, Q4 that would have impacted our Q1 business.
And so really, none of these extraneous variables, I'd say, would have had a material impact on the results in Q1.
That's fair. And did you say, how April has started?
No, we didn't. But I'd say very much in line with the guidance that we just provided for Q2, we'd expect 4% growth. And the, I'd say that what you're going to likely continue to see is that our long cycle businesses, electrical systems and services, and aerospace and electrical products will continue to perform very well. And as we mentioned, part of the reason why we're taking the guidance down the short cycle businesses. And so once again, I think the company's revenue story is really playing out very much like we anticipated perhaps with more extremes, with more strength in the long cycle stuff, offsetting perhaps a little bit of weakness in the short cycle businesses.
Thank you.
Thank you.
Our next question is coming from Andy Casey with Wells Fargo.
Thanks a lot. Good morning, everybody. I apologize to beat a dead horse a little bit here, but on the hydraulics margin decline, and the reduced margin outlook, is some of that specifically the Q1 compression is some of that related to accelerated restructuring
Yes. No, I'd say that, not really, Andy. I mean, we obviously are do restructuring in our business in Hydraulics. And so I'd say the margin compression really is largely, function of volume, in the business. Now I will say, you know, in a lot of focus, obviously, on hydraulics, and we certainly understand why at the end of the day, hydraulics, as a segment accounts for less than 10% of our profits.
And so I think we have a really strong story in a lot of our other businesses that are just performing extraordinarily well and more than making up quite frankly, for the, for the, a little bit of a shortfall that we're having in the Hydraulics business. But no, it's really not restructuring. It's really more volume decrementals on the change in volume.
Okay. Thanks, Craig. And then within electrical products, you highlighted some strength in residential, which a little bit surprising given some of the macro data that we've been seeing. Is that share gains or what are you seeing there?
Yes, I mean, resi, for us, it was really a standout performer, quite frankly, in Q1, where we saw strong revenue growth and strong order growth. And we think that, largely, we do think this, this, you know, essentially this factor of as you move to higher valued electrical equipment with, you know, AFCIs and ground fault and the regulations and the codes, that are driving standards are certainly helping that business. But by and large, housing prices are up We're seeing a lot of remodels that don't show up necessarily in the housing start data. But we continue to be quite bullish on resi and that certainly played out in Q1. Yes.
And we based on
the data, we believe we have taken some care, but the market overall for resi electrical equipment is pretty strong. That's what the NIMA data would show. And our belief is that that is likely to last, throughout this year.
Yes. We think resi construction is up, you know, our business is up mid to to high single digit for the year. So it's really a source of strength we think for the company.
Our next question comes from John Walsh with Credit Suisse.
Hi. I guess maybe a question on the margin. Can you talk a little bit about how the price versus commodity inflation, I guess, tariff bucket performed in the quarter and how you're thinking about that cadence for the balance of the year?
Yes. Thank you. Appreciate the question. I mean, certainly, as we said in the past, and Q1 played out that way, and we think the year was well, but we think price versus costs, we think will be largely neutral for the company. Commodity prices, as you've probably have all certainly noted, have abated a little bit.
I mean copper probably is the one holdout where copper prices are still running at relatively high levels, but most of the other commodities that are important to company. We've seen commodity costs reduce. And so obviously, that's a good thing for the company, but also as we think about price and costs being, kind of natural offsets for each other, the less inflation we see, the less price we see, though, the less tariff driven cost increases that we see. We obviously can't pass that price on in the marketplace. And so we're very comfortable, for 2019 that price and cost will be largely neutral, very much like our guidance has been.
Great. And then maybe one more way to attack the negotiations. It doesn't sound like you want to give the absolute number, but is there a way to give it as a multiple of revenue in the business just to kind of frame, the size a little bit more?
The size of negotiations as a percentage of revenue
year or the absolute number? I mean, a couple of people have attacked it around what the 56% increase means year on year. Just
Yes, you know, I'd say for us, I mean, we'd really like not to give you a number, but I would tell you that it is a big enough number to give confidence and to be indicative of what the future of the business looks like. It is a very large, very material number.
Great. Thank you.
Our next question comes from Julian Mitchell
with Barclays. Hi, thanks
for squeezing me in. Maybe
just question around the short cycle businesses, particularly vehicle and hydraulics, worsening revenue outlook in both versus your prior guide, but you sound intensely relaxed about the cost outlook I just wondered why maybe there wasn't a bit more urgency around cost reduction in both businesses in the face of the worst top line outlook And then on vehicle, it may just be something small or something in the mix, but I think you had a sort of low double digit decremental margin in Q1. The guide for the year implies maybe a 30% decremental for the year as a whole. So is there something changing in terms of mix or what have you later in the year?
Yes, I mean, maybe to address your first questions first, Julian, I mean, I don't want to leave the wrong impression for a minute, to the extent that we have revenue shortfalls in any of our businesses, I can promise you that nobody is relaxed. That, that both our vehicle business and our Hydraulics business are doing everything that they can. And in many cases, more to flex the variable side of our costs. It's one of the key metrics that we track all of our businesses on, to the extent that they're flexing their costs down with changes in volume. But I'd say for us, that's table stakes.
That's something that we expect of every business that we do every day. So it's not the kind of thing that I'd say we'd spend a lot of time talking about. We don't the changes that we're talking about and revenue are not big enough to drive material changes in our restructuring plans. Although in the event that, you know, the world changed dramatically, we would have the ability to do that. And so I can promise you nobody in any way relax about, ensuring that, we're managing costs inside of our business.
And then with respect to the decrementals in vehicle, yeah, you know, very strong decremental performance in Q1, you know, the decrementals in, you know, for the balance of the year, perhaps a little bigger than that, but still well below what we would call as a normal detrimental for our vehicle business. And so once again, rest assured that our vehicle team is on their game. They do a great job, always have of managing costs in the face of a downturn. And so you can count on them continuing to deliver.
That's very helpful. And then my second question would just be around, any interesting trends you would call out in terms of inventory levels at OEMs or channel partners across the businesses? How do you feel about absolute inventory levels as they
sit today? And has there been any change in recent
weeks or months?
Yes. So maybe taking the channel first, because that's kind of where you typically would see the big changes. And I'd say by and large, not inventory today with our distributor partners are largely in line with where they've been historically and in line with their own outlook for revenue growth. And so we've really not seen any material change there at all. As I mentioned on the call, perhaps where you have seen some adjustments, you know, is on the OEM side and some of the short cycle businesses.
But, but other than that, really, inventories are very well managed.
Very helpful. Thank you.
At this point of the time, I will take the last question from Nick Dobre,
Great. Thanks for squeezing me in. And I want to go back to a question that's been asked before on vehicle. So looking at this change in organic growth, guidance. I mean, correct me if I'm wrong, but when you issued this guidance, I think we pretty much everybody knew some of the challenges that existed in the light vehicle space in terms of builds for the year.
So I'm trying to figure out what changed in your mind that prompted this guidance reduction. Is it, is really more driven by what's been happening with the JV? Is it, shifts to e mobility or how do we think about this move?
No, I'd say it, and it's what's really what we said. It's, light vehicle markets around the world, as I think is evidenced by Q1, have come in weaker at least than what we anticipated. And I think in general, weaker than what most economic forecasters have anticipated. It has absolutely nothing to do with what's going on today inside of the commercial vehicle market, North America Class 8 truck continues to do just fine. The JV revenues, as I mentioned, are growing nicely and certainly we've anticipated at the beginning of the year that there would be some transfer of revenue and that's largely on track.
And this change really is a function of what we're seeing today in light global vehicle markets around the world. Now we'll have to see what the rest of the year brings, but certainly, the Q1 weakness really in all three regions of the world is really what influenced largely our change in guidance for the year.
I see. Given the adjustment that you had to make to margin and the fact that margins are now going to be slightly lower year over year, as we look towards 2020 and we know the challenges that the commercial vehicle side of the business are, is going to have. Is it fair for all of us to be thinking that margins will once again take a step down in 2020?
No, I'd say, I'd say not. I mean, as you know, we've done a lot of work over the last number of years to really, build a business inside of our vehicle business that essentially delivers strong margins through the cycle. And And certainly, as we, as you know, because we have the joint venture, a lot of that volatility that used to sit inside of our business in our portfolio is no longer there. We've done a lot of restructuring. And so I would say, you should not expect this business to take a material change at all in profitability, even with, let's say, a North America class 8 market, that's down significantly from where it is this year.
All right. Thank you.
Okay. Good. Thank you. We have reached the end of our call, and we do appreciate everybody's questions. Always, Chip and I will be available to address all your questions today.
And this afternoon is the following weeks. Thank you all for joining us today.
And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT and T Executive Teleconference Service. You may now disconnect.