Gentlemen, thank you for standing by, and welcome to the Eaton 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. If you should require assistance during the call, please press star followed by the zero. 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, Eaton Senior Vice President of Investor Relations. Thank you all for joining us today for Eaton first quarter 2019 earnings call. 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 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 earnings announcement this morning, and the presentation we will go through today, have been posted on our website at www.eaton.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 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 projection due to a wide range of risks and uncertainties that are described in our earnings release and the presentation. They're also outlined in our related 8-K filing. With that, I will turn it over to Craig.
Thanks, Yan. Appreciate it. I'll begin with page three and the highlights of our Q1 results. 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 the investor cost related to the announced spin-off of our lighting business. At $1.26, our results were 15% above last year and towards the higher end of our guidance range, which as you'll recall, was $1.18-$1.28. Our sales were $5.3 billion, up 4% organically and in line with our guidance, excluding the negative 3% impact from currency. 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 million in the quarter. This is up 63% from Q1 2018 and a first quarter record. Lastly, we repurchased $150 million of shares in the quarter as part of our plan to buy back $400 million of shares in 2019. A very good start to the year. Page four summarizes our income statement versus prior year. I've covered most of these items in the summary comments, 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. That number was, once again, very strong and above our expectations.
We incurred, as we mentioned, the $0.03 per share from the after-tax cost primarily related to the spin of our lighting business. As you can see, adjusted earnings per share increased some 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. 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 and growth in the Americas. Our backlog grew double digits, up 13% in the quarter. Segment operating profits grew 8%, and operating margins were 120 basis points increase to 18.9%. This was a record for Q1.
We're naturally pleased with how well this segment is performing and the consistency of results that we continue to see in this part of the company. Moving to page six, we cover our Electrical Systems and Services results. Revenues here increased 6% with organic growth of 8%, partially offset by 2% currency. 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 started on a high note for sure. You'll recall that our original guidance is for sales to be up 5%-6% organically for the year, 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-month basis, ES&S orders actually increased 8%, with strength in all major end markets and regions. Maybe I'll just pause for a moment on the orders here in Electrical Systems and Services, because I know it's a particular point of question that many of you have. I'll tell you that our ES&S activity level is absolutely performing in line and perhaps maybe even a little bit better than what we anticipated. 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. The other indicator that we have that gives us a lot of confidence in the strength of this business is what we call negotiations.
Our negotiations in this business in Q1 were an all-time record and up 56% from prior year. 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 strong. Our backlog continued to grow. It was up 11% in the quarter. We generated strong operating leverage with operating profits increasing 15% on the 8% volume growth, and margins increasing 100 basis points to 13.1%. You'll also recall that we announced the acquisition of the Ulusoy Electric business in January. We're pleased to have closed the purchase on April 15th. This acquisition will certainly provide a strong platform for us as we serve our customers in EMEA and the Asia Pacific market.
Once again, a really strong performance in our Electrical Systems and Services business, and we continue to be quite bullish 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 4% currency. I'll certainly note that we had some tough comps in this business, 6% organic growth in Q1 2018. Revenue did slow slightly more than we expected, but I would note 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.
We also had tough comps here as well from last year, where orders were up 14%. Backlog declined 6% in the quarter as well. 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. Segment margins were 11.7%, down 100 basis points versus last year. On page eight, we summarize our Q1 results for the Aerospace business. As you can see, this business just continues to perform at a very high level, delivering record performance across almost every single metric. Our revenues increased 10%, with 11% organic growth and 1% negative currency.
Like ES&S, we moved to a rolling 12-month basis for reporting orders. On this basis, orders increased 18%, with particular strength in commercial transport, military fighters, military transport, and both commercial and military aftermarket. Really strength across the board in this segment. Our backlog also increased significantly, up 21% in the quarter. Lastly, we demonstrated very strong incremental margins, which led to a 30% increase in operating profits and a 300 basis point margin improvement in the quarter. Operating margins of 23.1% are another all-time high for the business. 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%-5%, and the ongoing impact of revenue transfers to the Eaton Cummins joint venture. I will note that the joint venture actually saw revenue increases of 27% in the quarter and continues to perform very well. We also had tough comps in this business for organic growth, which increased 13% last year. 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 NAFTA Class 8 production to be at 324,000 units, flat with 2018. We have lowered our outlook for light vehicle markets for the year.
Lastly, despite the lower volumes, operating margins increased 30 basis points to 15.1%, and a decremental margin on the organic of less than 20%. Really strong execution by the team once again in our vehicle business. Wrapping up our segment summaries, we cover our eMobility segment on page 10. Revenues were up 8%, which includes 9% organic growth, partially offset by 1% currency. As planned, we continue to accelerate our R&D spending, which increased by some 130% in the quarter. 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 $1.1 billion.
At our investor conference in March, we did announce a new program win of $100 million mature year revenue for traction inverters with a major global OEM customer. 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 one year ago, and we're certainly ahead of our original schedule for growth in this segment and well on our way to creating what we think is going to be a new $2 billion-$4 billion segment for the company overall. At this point, I'll turn to our outlook for 2019, which is on page 11.
We now expect organic revenues for all of Eaton to grow approximately 4%, down slightly from our prior midpoint of 4.5%. 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&S and aerospace. For hydraulics, we lowered organic growth by 2% at the midpoint to 3%-4%, based upon some slower growth expectations in global mobile equipment markets. For vehicle, coming off what I'd say really was a weak Q1 in light vehicle markets, we lowered our organic growth rate by three points at the midpoint. Now we expect organic growth to be down some 4%-5%, once again, due to primarily the automotive side of the business itself. We've not changed electrical products or eMobility.
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%-14%, and for vehicle, by 90 basis points to 16.5%-17.1% due to lower organic growth primarily. This is more than offset by increases in Electrical Products and in Aerospace margins. Our new expectation for Electrical Products is for margins to be between 19%-19.6%, a 50 basis point increase at the midpoint, and the new expectation for Aerospace is for margins to be 21.8%-22.4%, also a 40 basis point increase at the midpoint. The other two segments remain unchanged. At the midpoint, 17.3%, and this would naturally be another record-level performance for Eaton overall.
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. 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 million. Our margin expectation for the quarter is to have margins between 17.2%-17.6%. We'd expect our corporate cost to be flat with Q2 of 2018, and we'd expect the tax rate of between 13.5%-14.5%. For the full year 2019, we're raising our adjusted earnings per share guidance to $5.72-$6.02 for a midpoint of $5.87, which includes essentially a $0.02 impact from the full year impact of the acquisition of Ulusoy overall. At the midpoint, this continues to represent a 9% increase over 2018.
Other full-year guidance assumptions include organic revenue growth of 4%. We'd expect $100 million of revenue from the Ulusoy acquisition. We'd expect foreign exchange impact to be $300 million, and this is a $50 million 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. 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. With that, I'll turn it back to Yan for Q&A.
Okay. Thanks, Craig. Before we begin the Q&A section of our call today, I do see we have members of individuals that in the queue with questions. Given our time constraint, only an hour today, and our desire to get to as many of these questions as possible, please limit your opportunity to just one question and a follow-up. With that, I will turn it over to our operator to give you guys the guidance.
If there are any questions for the phone lines today, please press star followed by the one on your touch tone phone. You'll hear a tone indicating you've been placed in queue. If you wish to remove yourself from queue at any time, you may press pound on your touch tone phone. Again, for any questions, please press star followed by the one at this time.
Okay. We'll take our first question from Joe Ritchie with Goldman Sachs.
Thanks. Good morning, everyone.
Hi.
Good morning, Joe.
Craig, could you maybe expand on your comments on commercial and data centers being up double digits in ES&S this quarter? We heard some conflicting news, especially on the data center side out of the supply chain, any other further color you can provide there would be helpful.
Yeah, no. 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's up a double digit for data center sales. Activity levels continue to be quite strong. I think the piece that we're trying to clarify for the sake of all of you who follow the company is that data center orders, especially when it comes to the hyperscale, they tend to be quite lumpy. You'll get a big slug of orders in one quarter, and they'll be lighter the next quarter. 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.
For us, we still see very good strength in data center activity overall, and we continue to think that's going to be one of our fastest-growing segments. 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. As I mentioned, we're really experiencing record levels of activity in our Electrical Systems and Services business, with negotiations up 56% in a quarter to record levels. By and large, we've really seen no letup in activity in Electrical Systems and Services, and data centers continues to be a bright spot for us.
Craig, within commercial, what are the verticals that are really driving the strength there?
Yeah, I'd say we're really seeing pretty broad-based strengths in our commercial businesses overall. Certainly oil and gas has come back. We mentioned the strength in data centers. Let's see.
Yeah, for example, if you look at just straight up commercial like office and government, both up just over 10%. Institutional, just a little bit under that. We're seeing broad-based strength in the commercial side of things. If you look at some of the governmental data, C30 reports, et cetera, the Dodge reports, you're seeing numbers that are high single digit, even low double digits. It's all pretty consistent.
It's broad too. We're seeing also strength really around the world as well in commercial businesses in general. 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 inter-quarter that hydraulics had maybe gotten off to a better start in January, February. 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. Can you just kind of contextualize how the quarter went with hydraulics and then also in terms of how it fits with the portfolio longer term?
Sure. First of all, I'd say as we've talked about and we covered 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 transitions, site transitions that we're managing internally as an organization. We always believed that was going to be more of a second half kind of resolution to some of the internal issues. I think the new news for us in the hydraulics business, in terms of what really drove the reduction in guidance, is largely some of the weakness that we're seeing in some of our end markets.
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. The new piece is really some of the weakness that we're seeing largely in some of the mobile equipment markets. I'd say that our orders were certainly weak in Q1. If you take a look at some of our customers, all the names that you know well, I'd say their 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. Right now, it's really more a function of weaker volumes.
At this point, I'd say as we think about hydraulics as a part of Eaton overall, today we have a plan, and the plan is a plan that we believe in, and our team is executing that plan, and we fully expect the hydraulics team to fix 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. For hydraulics, no different than 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 meet the criteria that we set. 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.
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 kind of a project value in dollars? Was there some kind of low ebb in Q1 last year that results in that being such a big, healthy number? What kind of typical conversion rate would you have on kind of a negotiation?
Yeah. The first thing I'll just answer is kind of the question around no. There's absolutely nothing in Q1 of last year that would suggest that we had a low bar to clear. As I mentioned, not only was it higher than Q1 last year, but it was a record all-time level, and it was significantly higher than any other quarter during the course of 2018. 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. It really, for us, is probably the best proxy for the level of underlying economic activity that we have in that business.
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.
It will take time for some of these negotiation bids to become final bids. Typically 90-180 days, sometimes a little longer for big projects. It is quite notable just how strong the activity levels are.
Just as a follow-up, separately on Ulusoy. 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 $0.02 accretive. 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.
That's how it ends up at $0.02.
Great. Thank you.
We are, in fact, holding all the other elements of the guide for the core business, no change at all.
Thank you.
Our next question coming from Scott Davis from Melius Research.
Hi, good morning, guys.
Morning, Scott.
Just to be clear, the reason why you're not raising margin guidance on ES&S, is that because of mix and largely just because of the data center volumes? Is that correct?
I'd say that, first of all, it's early in the year. I'd say that our forecast for margins in ES&S are certainly today within the range that we set for the year. A lot of the growth, to your point, is coming from projects, so we'll have to wait and see how that plays out. Right now, I would not in any way take it as a sign of concern about margins in our ES&S business. Things are going quite well. We're very pleased with our margins in Q1, there's nothing today that I'd say that would suggest that there's anything to be concerned about.
Okay. Just to kind of get your take, Craig, on some of the M&A that's out there. You've got a couple competitors have announced really big deals. Nothing seems cheap. They all seem to be relatively fully priced. What's your take on the market out there and the likelihood that Eaton participates? I guess there's two 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. How do you think about that in the current?
The first thing with respect to pricing and asset values, as you can see by some of the transactions that have been announced, these properties are going for extraordinary prices. We have prided ourselves on the fact that we said we're going to be disciplined through this cycle, we think that our cost of capital continues to be 8%-9%, and we want to deliver 300 basis points over our cost of capital. We will continue to be a disciplined buyer into a market that looks like assets are being priced at extraordinary levels. I'd say that we today are looking at probably more deals than we have in a very long time, we have a very active pipeline as well.
I will make the commitment as we have 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 cash set of financial metrics. That's kind of the way we look at it.
The other side of that, obviously, Craig, is you could sell something. If people are willing to pay full price, maybe now's the time to think about parting with some of-
Yeah
maybe your more cyclical stuff. Is that a possibility?
What I'd say is, first of all, I'd say we tend to look at our businesses strategically through the cycle. As we think about the portfolio itself and are we a holder or 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 establish 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. We generally take a longer term, let's say, more strategic view of the portfolio in terms of 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 coming from Nicole DeBlase with Deutsche Bank.
Yeah, thanks. Good morning, guys.
Hi.
Good morning, Nicole.
Hey there. I just want to focus a little bit on hydraulics. I know organic growth was 1% this quarter. Looks like in your full year guidance, you've brought it down a little bit, but you're still basically implying some improvement in organic growth throughout the year. 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.
I'd say that, maybe to take your first question right out of the gate in terms of certainly we're implying a little bit 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. We're actually not off our internal plan by a measurable amount in Q1. The comps get easier, quite frankly, as the year moves on. 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 bedded down that are going to help improve our growth.
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, two 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. 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. 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?
It certainly was a record quarter for margins in aerospace, an all-time record, not just a record for Q1. I would say that we did have a bit of favorable mix in Q1. Our aftermarkets 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. 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. 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 ES&S again. I know you said bidding is up significantly, but traditionally, what kind of success rates would you have with your bids? What % win versus not win have you had?
Yeah, we have pretty strong market share, Ann, in our businesses. As you know, our Electrical Systems and Services businesses, a lot of this activity is in the Americas market, and we have industry-leading shares in this business. Our win rate is going to be very much consistent with our underlying market share. We do believe that this bidding activity will translate ultimately to growth in our business.
Okay. That's helpful color. I appreciate it. 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 terms of orders? Given how bad farmer sentiment is in the U.S., would you anticipate that maybe staying weaker than expected for the full year?
Yeah, you're absolutely right that sales were actually quite decent in ag in Q1, the order rates in ag was down. 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. 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. We do think that there's at least a cautionary kind of sentiment that's in the market today in and around ag in general.
Yeah, I would think we would have a similar view of the ag market for 2019 and maybe even into 2020. Okay, I'll leave it there. Just get back in line. Must have other questions to answer. Thanks.
Thanks, Ann.
Our next question comes from Nigel Coe with Wolfe Research.
Good morning, guys.
Hi, Nigel.
Just going back to hydraulics, the backlog was down, I think 11%. I understand the backlog's coming off a very high level, but I'm just wondering, to get to your sort of 45% growth for the remainder of the year in hydraulics, do we have to see orders come back positive, or can we still achieve that target with orders remaining flat to negative?
Yeah. The backlog, Nigel, was actually down 6%.
Sorry
versus last year, no problem at all. I think the spirit of your question is, once again, very much like the question I had earlier, what gives us confidence that we can deliver the growth in the outlook for the year? I will say that while the backlog is down, it's still running at very, very high levels from an historical perspective. Obviously the comparison in general, the comps in general get easier as the year wears on. 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.
We think once again, that while there's a little bit of caution in the market, we do believe that the two big markets of ag and construction continue to grow during the year.
Okay, great. Then my follow-on question is the three-point delta on the vehicle outlook. Obviously, we're looking at the light vehicle markets significantly weaker, so that's explainable. I'm just wondering, given the complexity in the segment, how much of that revenue delta is caused by a shift between your legacy transition business and the Cummins JV? Was that a factor at all? Any help there would be great.
Yeah. In terms of the, you say the three-point reduction in the growth for the quarter, I'd say that was really driven principally by the weakness in global light vehicle markets around the world. You see the same data that we see. China was down 10%, Europe was down let's say 3%-4%. The Americas was down a couple points. 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 from manual to automated transmissions, we continue to move more revenue into the joint venture with Cummins, and that is a piece of what's going on in that business.
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 eMobility segment, that also becomes revenue that comes out of our legacy vehicle business and shows up in eMobility. 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.
Okay, great. We'll dig in offline. Thank you very much.
Thank you.
Next question comes from Jeff Hammond with KeyBanc.
Hey, good morning, guys.
Good morning, Jeff.
Just 2 on EPG. 1, can you just talk about what's driving the margin bump without a change in sales? 2, just as the lighting spin has been announced, have you gotten any indications of interest that maybe a sale is as likely or more likely than a spin? Thanks.
Yeah. 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 when we put the plan together. Really compliments to the team for really executing and delivering on some of the cost-out initiatives that we put in the plan. Things are just going a little better than what we anticipated. 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, the prime path continues to be to spin the business, 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've raised an interest in potentially acquiring the business, and it's always good to have an option and a choice. So we'll be obviously working through these two alternatives. Once again, the prime path that we're on is to spin the business.
Okay. Just macro level on Europe, there's been some talk about slowing there. You mentioned the auto. Can you just talk about any areas of resilience or particular weakness in Europe? Thanks.
Yeah. I think to your point around the macro environment in Europe, 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. 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 to perform well in Europe. So Electrical Systems and Services and data centers specifically in Europe. Aerospace obviously is a global industry, is doing well. I think we've seen perhaps on an accentuated basis, more or less a continuation of the same trends that we're seeing globally. No question, Europe is a bit weaker. It's a bit weaker when you think about industrial markets and industrial controls and the like.
It's all incorporated in our guidance, and we think that Europe essentially is not going to be terribly different than what we assumed when we put our profit plan together.
Okay. Thanks, guys.
Our next question comes from Andrew Obin with Bank of America.
Yes, guys. Good morning. Thanks for taking my call.
Sure. Hi.
Just a question on China. Can you talk about 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. If you can give us any color as to how April is developing in China. Thank you.
Yeah. I will say to your point, China started off the year quite weak in January, March was a much better month. We see that in certainly the 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 first two months of the year. 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. We think China probably continues to strengthen from this point forward. Even overall, our revenues actually grew in Q1 in China, as a company.
It was despite the fact that we had some weakness in automotive markets, we actually saw strong mid-single digit growth in China specifically. To your point, hydraulics, the excavator market was quite strong, up some 24%, I believe, in Q1. It's an important market for us, 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. We do think China improves as we look forward.
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. Office starts were up, I think, 18%, residential starts were up 12%. You are seeing a lot of the stimulus in China start flowing into some of these construction-related markets.
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.
I'd say, as we talked about, we're definitely seeing strength in oil and gas, and we think, in our business in oil and gas, that we had a good first quarter of revenue, a good first quarter of orders. We think, the market in 2019 kind of grows mid to high single digits. As a company, we play more downstream than we do upstream, and so we're more exposed to that piece of the market. We do think you saw the rig count is up somewhat 9% or so in Q1. We do think oil and gas continues to strengthen, and that's what we're seeing in our business as well.
We're benefiting from some of these large downstream projects. For example, some of these LNG facilities that are being configured now in petrochemical, and so we're definitely slanted towards downstream-type applications.
How fast does it hit your backlog? The oil price move, do you see it immediately, or is there a lag?
I'd say there's generally a lag. To be quite frank, I've not studied that question in a lot of detail, Andrew, there's clearly a lag from the move in oil price to them putting in place capacity to increase drilling or exploration. Certainly, given the fact that we're downstream, 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 Deane Dray with RBC.
Thank you. Good morning, everyone.
Hi.
Good morning.
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. I didn't hear anything particular about weather. Did that come into play? You talked about the inventory adjustments. Did you see any of your business experience a pull-in out of the first quarter into the fourth quarter last year, and might that have been a factor this quarter?
I'd say, Deane, we try to stay away from those kind of tangential elements around weather and the like, because it's really difficult to ascertain how they impacted your business. At this point, I'd say that 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. 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. Really none of these extraneous variables I'd say would have had a material impact on the results in Q1.
That's fair. Did you say how April has started?
No, we didn't. I'd say, very much in line with the guidance that we just provided for Q2, we'd expect 4% growth, 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. As we mentioned, part of the reason why we've taken the guidance down in the short-cycle businesses. 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 bit of weakness in the short-cycle businesses.
Thank you.
Thank you.
Our next question coming from Andy Casey with Wells Fargo.
Thanks a lot. Good morning, everybody.
Hi.
Hi.
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?
No, I'd say that not really, Andy. We obviously are continuing to do restructuring in our business in hydraulics, so I'd say the margin compression really is largely a function of volume as we articulated earlier, not because we're doing significantly more restructuring in the business. I will say, there's 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. 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 little bit of a shortfall that we're having in the hydraulics business. No, it's really not restructuring. It's really more volume and decrementals on the change in volume.
Okay, thanks, Craig. Then within Electrical Products, you highlighted some strength in residential, which is 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?
Resi for us, was really a standout performer, quite frankly, in Q1, where we saw strong revenue growth and strong order growth. We think that largely, we do think essentially this factor of, as you move to higher valued electrical equipment with AFCIs and ground fault and the regulations and the codes that are driving standards are certainly helping that business. 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.
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 NEMA data would show. Our belief is that is likely to last throughout this year.
We think resi construction is up in our business, up mid to high single digits for the year. It's really a source of strength, we think, for the company.
Thank you very much.
Our next question comes from John Walsh with Credit Suisse.
Hi, good morning.
Morning, John.
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?
Yeah. Thank you. Appreciate the question. Certainly, as we said in the past, and Q1 played out that way, and we think the year will as well, that we think price versus cost, we think will be largely neutral for the company. Commodity prices, as you probably have all certainly noted, have abated a little bit. Copper probably is the one holdout where copper prices are still running at relatively high levels. Most of the other commodities that are important to the company, we've seen commodity costs reduce, obviously, that's a good thing for the company. Also, as we think about price and cost being kind of natural offsets for each other, the less inflation we see, the less price we see. The less tariff-driven cost increases that we see, we obviously can't pass that price on in the marketplace.
We're very comfortable for 2019 that price and cost will be largely neutral, very much like our guidance has been.
Great. Maybe one more way to attack the negotiations.
Sorry, I can't first.
Oh, comment. 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?
Yeah, or the absolute number. A couple of people have attacked it around what the 56% increase means year-on-year.
Yeah. I'd say for us, 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 a question around the short cycle businesses, particularly Vehicle and Hydraulics. Worsening revenue outlook in both versus your prior guide, 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. 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. Is there something changing in terms of mix or what have you later in the year?
Yeah. Maybe to address your first questions first, Julian, 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. 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 cost. That's one of the key metrics that we track all of our businesses on, in terms of the extent that they're flexing their cost down with changes in volume. I'd say for us, that's table stakes. That's something that we expect of every business that we do every day. It's not the kind of thing that, say, we'd spend a lot of time talking about.
The changes that we're talking about in revenue are not big enough to drive material changes in our restructuring plans. Although in the event that the world changed dramatically, we would have the ability to do that. I can promise you, nobody is in any way relaxed about ensuring that we're managing costs inside of our business. With respect to the decrementals in Vehicle, yeah, very strong decremental performance in Q1. The decrementals for the balance of the year are perhaps a little bigger than that, but still well below what we would call as a normal decremental for our Vehicle business. You can 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, so you can count on them continuing to deliver.
That's very helpful. 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? Has there been any change in recent weeks or months?
Yeah. Okay, maybe taking the channel first because that's kind of where you typically would see the big changes. I'd say by and large, not. Inventories 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. We've really not seen any material change there at all. As I mentioned on the call, perhaps where you have seen some adjustments is on the OEM side and some of the short cycle businesses. 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 Mig Dobre with Baird.
Great. Thanks for squeezing me in. I want to go back to a question that's been asked before on vehicle. Looking at this change in organic growth guidance, 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. I'm trying to figure out what changed in your mind that prompted this guidance reduction. Is it really more driven by what's been happening with the JV? Is it shifts to eMobility, or how do we think about this move?
No, I'd say, and it'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. 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. 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 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 not. 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. Certainly, as you know, because we have the joint venture, a lot of that volatility that used to sit inside of our business and our portfolio is no longer there. We've done a lot of restructuring, 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 the call, we do appreciate everybody's questions. As always, Chip and I will be available to address all your questions today and this afternoon and the following weeks. Thank you all for joining us today.
All right. Thank you.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.