Eaton Corporation plc (ETN) — Q1 2019 Earnings Call Transcript

Good morning. I'm Yan Jin, Eaton's Senior Vice President of Investor Relations. Thank you all for joining us today for Eaton's First Quarter 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 in our past calls, we will 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 include 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 projections due to a wide range of risks and uncertainties that are described in our earnings release and the presentation, that are also outlined in our related 8-K filing. And with that, I'll turn it over to Craig.

Thanks, Jin. Appreciate it. Yes, I'll begin with Page 3 and the highlights of our Q1 results, and I start 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 divestiture costs related to the announced spin-off of our Lighting business. At $1.26, our results were 15% above last year and toward the higher end of our guidance range, which as you will recall was $1.18 to $1.28. Our sales were $5.3 billion, 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 million in the quarter, and this is up 63% from Q1 2018 and a first quarter record. And lastly, we repurchased $150 million of shares in the quarter as part of our plan to buy back $400 million of shares in 2019. So, a very good start to the year. Page 4 summarizes our income statement versus prior year. And I've covered most of these items in the 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 are 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 cost 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 see 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 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 18.9% and this was a record for Q1. And we are actually pleased with how well the segment is performing and the consistency of results that we continue to see in this part of the Company. Moving to Page 6, we cover our Electrical Systems & Services results. Revenues here increased 6% with organic growth of 8%, partially offset by 2% currency and we saw especially strong double-digit revenue growth in commercial construction and in data centers. We continued to have solid momentum in this business and the year had started on a high note for sure. You will recall that our original guidance is for sales to be up 5% to 6% organically for the year, and so we are certainly running above that rate. As we indicated at our Investor Conference in March, we have 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. And maybe, I'll just pause for a moment on the orders here in the Electrical Systems & Services because I know it's a particular point of question that many of you have and I will 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. 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 & Services driven primarily by what we are seeing in hyper-scale 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 are 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 a 100 basis points to 13.1%. You will also recall that we announced the acquisition of the Ulusoy Electric business in January. We are 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 markets. So once again, a really strong performance in our Electrical Systems & Services business and we continue to be quite bullish on 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 at 6% organic growth in Q1 2018, but revenue did slow slightly more than we expected, but I would probably 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 in 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 efficiency issues that we experienced in the second half of last year. And segment margins were 11.7%, 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 performance across almost every single metric. Our revenues increased 10%, an 11% organic growth and 1% negative currency. Like ES&S, 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 transport 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 margins with labor to add to a 30% increase and operating profits and a 300 basis point margin improvement in the quarter. Operating margins of 23.1%, another all-time high for the business. 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 a 6% reduction in organic growth and a negative 3% from currency. The organic sales decline was driven by a combination of declines in global vehicle markets, which were down 45% 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 the quarter and continues to perform very well. We also had tough comps in this business with organic growth, which increased 13% last year. But overall, this business is really performing as we have expected, but with 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. But we have lowered our outlook for light vehicle markets for the year. And lastly, despite the lower volumes, operating margins increased 30 basis points to 15.1% and a decrement of 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 will cover our eMobility 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&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 are 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 a $100 million mature 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 event since creating the segment about one year ago, and we are certainly ahead of our original schedule for growth in this segment and well on our way to accruing what we think is going to be a new $2 billion to $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% and this is largely the result of us increasing our guidance for our long-cycle businesses by reducing guidance for our short-cycle businesses. Specifically, we increased organic growth rates by 1% for both ES&S and Aerospace. And for Hydraulics, we lowered organic growth by 2% at the midpoint to 3% to 4% based upon some slow growth expectations in global mobile equipment markets. And for Vehicle coming off, what I would say really was a weak Q1 in light vehicle markets, we lowered our organic growth rate by three points at the midpoint, and now we expect organic growth to be down some 4% to 5%, and once again, due primarily to the automotive side of the business itself. And we have not changed electrical products or eMobility. And our margin expectations are noted on Page 12. We are modestly raising our guidance from 17.1% to 17.5% or 17.3% at the midpoint. We are 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% to 17.1% due to lower organic growth primarily. But 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% and 19.6%, a 50 basis point increase at the midpoint and the new expectation for Aerospace is for margins to be 21.8% to 22.4%, 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 and $1.55 and at the midpoint, this represents an 8% increase over last year. Other assumptions in our guidance include, we are expecting 4% organic growth, foreign exchange impact of roughly $100 million. Our margin expectation for the quarter is to have margins between 17.2% and 17.6%. We would expect our corporate cost to be flat with Q2 of 2018 and we would expect the tax rate of between 13.5% and 14.5%. For the full-year 2019, we are raising our adjusted earnings per share guidance to $5.72 to $6.02 for the 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 would expect $100 million of revenue from the Ulusoy acquisition. We expect foreign exchange impact to be $300 million and this is a $50 million increase from prior guidance. We would expect, as I mentioned, a segment margin of 17.3% with really no change to the other items in our forecast. So in summary, I would say another strong start for the year in Q1. We are well positioned to deliver another year of record results and we are absolutely thrilled with the way that the Company is performing overall. So with that, I'll turn it back to Yan for Q&A.

Okay. Thanks, Craig. Before we begin the Q&A session of our call today, I do see we have members of individuals peers that are in the queue present. So, given our time constraint to be 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. So with that, I will turn it over to our operator to give you guys the guidance.

Okay. We will take our first question from Joe Ritchie with Goldman Sachs.

Thanks. Good morning, everyone. 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 in the data center side, out of the supply chain. And so any other further color you can provide there would be helpful.

Yes, now the only thing I would tell you that overall the data center market for us continues to perform very well. We are still running as I mentioned, our revenues up double-digits for data center sales. Activity levels continue to be quite strong. I think the piece that I - that we are trying to clarify for the sake of all of you who follow the Company, that data center orders, especially when it comes to the hyper scale, they tend to be quite lumpy. So, you will get a big slug of orders in one quarter and they will be lighter the next quarter, and so that is 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 are seeing in that market. But for us, we still see very good strength and data center activity overall, and we continue to think that is 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 is taking place in the market. And as I mentioned, we are really experiencing record levels of activity in our Electrical Systems & Services business, but negotiation is up 56% in the quarter to record levels. And so, by and large, we have really seen no let up in activity in Electrical Systems & 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 would say we are really seeing pretty broad-based strengths in the commercial businesses overall. And certainly, oil and gas has come back and we mentioned this to strengthen data centers.

Yes, for example if you look at straight up commercial like office and government, both up just over 10%, institutional just a little bit under that. But we are seeing broad-based strength in the commercial side of things. And if you look at some of the governmental data, C30 reports except for the new Dodge report Europe has seen, numbers that are high-single-digit, even low double-digits. So it's all pretty consistent.

Right. It's broad too and we are seeing also strength really around the world as well. In commercial businesses in general. So it's not just in the U.S. market.

Now, that is helpful. Maybe my follow-on just on the Hydraulics business. You know 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 have talked about this, this business and all your businesses meeting to kind of earn the right to be part of the portfolio. Yet, we have 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 how it fits with the portfolio longer term?

First of all, I would say, as we have talked about and recovered during our Investor Day in general, that we have some work to do to fix what I would call some self-inflicted wounds associated with some short move transition, site transition that we are managing internally as an organization. And we always believed 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 the Hydraulics business in terms of what really drove the reduction guidance is largely some of the weakness that we are seeing in some of our end markets. And so, I would 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 some of the weakness that we are seeing, largely in some of the mobile equipment market. And I would 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 would say their sales are holding up better than our orders are. And so there could be a better outlook as we look forward. We are not sure to what extent. There is 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 would 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 as a part of the Company.

Thank you.

Our next question is coming from Jeff Sprague with Vertical Research.

Thank you. Good morning, everyone. Good morning. I was wondering if you could just come back to ES&S one more time anyhow? And just give us some color on what - negotiation is up 36% 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 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 noise. There is absolutely nothing in Q1 of last year that would suggest that we had a low bar to clear. As I mentioned, it not only was higher than Q1 last year, but it was a record all-time level and was significantly higher than any other quarter during the course of 2018. And I think just as you articulate, this is essentially the number of bids and quotations that we are making to our various customers on large projects that we bid on during the course of the 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. So we think it's a really strong indicator of the fact that this business, a long-cycle business that we would 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 days to 180 days, sometimes a little longer for big projects. But yes, it is quite notable just how strong the activity levels are.

And 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 you'd actually more than that and there is maybe a negative offset somewhere else in the equation?

No, 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 is 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.

Our next question is coming from Scott Davis from Melius Research.

Right. Good morning, guys. Just to be clear, the reason why you are not raising margin guidance on ES&S is that because of mix and largely just because of the data center volumes is that correct?

First of all, I would say early in the year. I would say that our forecast for margins in ES&S is certainly today within the range that we set for the year. And a lot of the growth to your point is coming from projects and so we will have to wait and see how that plays out. But 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 and we are very pleased with our margins in Q1 and there is nothing today that I would say that would suggest that if there is anything to be concerned about.

Okay. And it's been actually kind of get your take, Craig, on some of the M&A that is out there. I mean you have got a couple of competitors who have announced really big deals. Nothing seems cheap. They all seem to be relatively fully priced. But what is your take on the market out there and the likelihood that Eaton participates? I guess, there is 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. 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 prided ourselves on the fact that we said we are 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. And so we will continue to be a disciplined buyer into a market that looks like assets being priced at extraordinary levels. And so I would say that we today are looking at probably more deals than we have in a very long time, and so we have a very active pipeline as well. But we will make the commitment as we have in the past. We are 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. So that is 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 for a price and maybe now is the time to think about partnering with some of maybe a more cyclical stocks, is that a possibility?

Yes. First of all, I would say we took a look at our businesses strategically through the cycle. And so as we think about the portfolio itself and how we hold to a seller, we are really trying to look at them over the long-term period and whether or not we think this is going to be a good strategic hole 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 as 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. Yes. So for us, the real piece is looking at where we want to grow and also carrying with us our dividend policy and ensuring that we are trying to maximize value for our shareholders over the long run.

Our next question is from Nicole DeBlase with Deutsche Bank.

Yes, thanks. Good morning, guys. So 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 have brought it down a little bit, but you are still basically implying some improvement organic growth throughout the year. So I guess, I'm curious what is driving that conviction and maybe just frame that with how demand progressed throughout the quarter, if there was any sign of improvement in March or into early April?

I would say that maybe to take your first question right out of the gate in terms of, certainly we are 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. And so, we are actually not off our internal plan by a measurable amount in Q1. And the comps get easier quite frankly, as the year moves on. And we have very specific programs that we are 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 are working on, that have been largely bedded 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, two of our big important markets in Hydraulics and you look at what our customers are saying, in most cases, they are still forecasting growth for the year. They are 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 it certainly was a record quarter for margins in Aerospace, an all-time record, not just a record for Q1 and I would say that 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 is probably not sustainable at those levels. But as you can see, we are forecasting margins for Aerospace that are once again at record levels and I would say even in many cases, industry-leading levels.

Got it. Thank you.

Our next question comes from Ann Duignan with JPMorgan.

Hi, guys. Just back to ES&S again, I know you said bidding is up significantly, but traditionally what kind of success rates would you have been, what percent win versus not win have you had?

We have pretty strong market share Ann, in our businesses. As you know, I mean, in our Electrical Systems & Services business, a lot of this activity is in the Americas market 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 is helpful color. Appreciate it. And then back to Hydraulics also, I have to ask the 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? And given how bad farmer sentiment is in the US, would you anticipate that maybe staying weaker than expected for the full-year?

Yes, I mean, you are absolutely right that sales were actually quite decent in Ag in Q1. But the order rates in Ag were 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 felt like it's kind of a low single-digit kind of grower for the year, but we do think that there is at least a cautionary kind of sentiment that is in the market today in and around Ag in general.

Yes, 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. Most of my other questions were answered. Thanks.

Okay.

Our next question comes from Nigel Coe with Wolfe Research.

Thanks. Good morning, guys. Just come back to Hydraulics and the backlog was down, I think 11% and I understand the backup 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 have to see orders come back positive or can we still achieve that targets with orders remaining flat to negative?

Yes, yes. The backlog, Nigel was actually down 6% versus last year, but no problem at all, but I think the spirit of your question 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 a historical perspective. And so obviously, the comparisons in general, the comps in general, get easier as the year wears on. And I think that is 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 while there is a little bit of caution in the market, we do believe that the two big markets of Ag and construction continue to grow downs the year.

Okay, great. And then my follow-on question is the three-point delta on the Vehicle outlook. And obviously, we are looking at the light vehicle markets significantly weaker. So that is explainable, because 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, think in terms of you say the three-point reduction in the growth for the quarter, I would say that was really driven principally by the weakness in global light vehicle markets around the world and you see the same data that we see. I mean China was down 10%; Europe was down for say, 3% to 4%; the Americas was down a couple of points and so, most of that weakness I would say, is really in the global light vehicle market. We do have, by the way, as I mentioned in my commentary, as the world moves from mails to automated transmissions, we continue to move more revenue into the joint venture with Cummins and that is a piece of what is going on in that business and the other one by the way, that I'll put it 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 become revenue that comes out of our legacy vehicle business and shows up in eMobility. And so there are a number of factors that are going on that perhaps make the underlying revenue growth and our Vehicle business look worse than it really is.

Okay, Craig. We will dig in offline. Thanks very much.

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 and I want to go back to a question that has 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 pretty much everybody knew some of the challenges that existed in the light vehicle space in terms of builds for the year. So trying to figure out what changed in your mind that prompted this guidance reduction? Is it really more driven by what is been happening with the JV? Is it shifts to eMobility or how do we think about this move?

No, I would say 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 is 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 have anticipated at the beginning of the year that there would be some transfer of revenue and that is largely on track. And this change really is a function of what we are seeing today, like global vehicle markets around the world now. We will 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 changing guidance for the year.

I see. Given the adjustment that you had to make the margin and the fact that margins are now going to be slightly lower year-over-year, as we look toward 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 would say not. I mean, as you know, we have done a lot of work over the last number of years to really build the business inside of our Vehicle business that essentially delivers strong margins through the cycle. And certainly 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 have 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, North America Class 8 market that is down significantly from where it is this year.

Okay, good. Thank you. We have reached the end of our call and we do appreciate everybody’s questions. As always, Craig and I will be available to address all your questions today and do something the following weeks. Thank you all for joining us today.

Alright, thank you.