Eaton Corp. Q4 2009 Earnings Call Transcript

123jump.com Staff
31 Jan, 2010
New York City

Sales fell 10.3% to $3.13 billion and net income rose 29.4% to $211 million or $1.25 a share. Strong continued margins in this business, 15.2% in the quarter. Operating EPS declined by 62%. This is compared to 2008. Then the change in operating EPS came down by some 72%.

Eaton Corporation ((ETN))
Q4 2009 Earnings Call Transcript
January 25, 2010 10:00 a.m. ET

Executives

William Hartman - Investor Relations
Alexander M. Cutler - Chairman, President and Chief Executive Officer
Richard H. Fearon - Vice Chairman and Chief Financial and Planning Officer

Analysts

Eli Lustgarten - Longbow Research
David Raso - ISI Group
Ann Duignan - J.P. Morgan
Robert Wertheimer - Morgan Stanley
Jeffrey Hammond - KeyBanc Capital Markets
Terry Darling - Goldman Sachs
Robert Cornell - Barclays Capital
Nigel Coe - Deutsche Bank Securities
Timothy Thein - Citigroup
Christopher Glynn - Oppenheimer & Co.
Jamie Cook - Credit Suisse
Mark Koznarek - Cleevland Research Company
Andrew Casey - Wells Fargo Securities, Llc
Ted Wheeler - Buckingham Research Group
Daniel Dowd - Sanford C. Bernstein & Co., Inc.
Robert McCarthy - Robert W. Baird & Co., Inc.

Presentation


Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Eaton Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session, with instructions being given at that time. If you should require assistance during the call, please press star and then zero. As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host, Mr. Bill Hartman. Please go ahead, sir.

William Hartman

Thank you. Good morning, everyone. Welcome to Eaton’s fourth quarter and full year 2009 earnings conference call. Joining me this morning are Sandy Cutler, Chairman and CEO; and Rick Fearon, Vice Chairman and Chief Financial Planning Officer. As has been our practice, we’ll begin today’s call with comments from Sandy followed by a question and answer session.

As a reminder, the information provided on our conference call today will include some forward-looking statements concerning the first quarter 2010 and full year 2010, net income per share and operating earnings per share, full year 2010 estimates on revenue, our worldwide markets, our growth in relation to those markets and our growth from acquisitions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside the company’s control. Factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in today’s related Form 8-K filing.

As a reminder, we have included a presentation of the fourth quarter results, which can be accessed on Eaton’s Investor Relations page. Additional financial information is available in today’s press release, which is located on Eaton’s home page at www.eaton.com.

And with that, I’d like to turn the session over to Sandy Cutler. Sandy?

Alexander M. Cutler

Thanks, Bill. Let me welcome everybody. Thanks for joining us this morning. We’ve got a very strong quarter and we think some exciting guidance relative to 2010 to go through with you this morning.

I am going to work from the presentation that Bill mentioned, so if you all have that in front of you, I’d ask you to turn to page three, highlights of the fourth quarter.

But just before I walk through these numbers with you, in the 10 some years we have been doing these forums, the audience has obviously changed a great deal and it’s obviously much broader than it once was.

So let me start this morning by thanking first our customers for their continued confidence through what has been a challenging year, 2009 and especially to thank our employees, whose focus and sacrifices throughout the year have really made an extraordinary difference in converting a difficult economic environment into what we think were very strong results at the end of this year.

Turning to our results, obviously on this sheet you see our operating earnings were up some 25% year-to-year. Obviously also stronger than the guidance we provided for the fourth quarter.

Net income per share also up some 28%, our sales of $3.1 billion, down 10% from a year ago, so we think it is significant, obviously our earnings are up on down sales and reflect all the work we have done during this year to get our cost structure and our balance sheet situated to really deal well in this environment.

End markets down still some 15% but clearly better than we saw earlier in the year and that is continuing in every quarter this year. Some 25% of our sales now from developed nations.

Operating cash flow, the beat goes on there obviously with very strong performance in the fourth quarter. Operating cash flow was $469 million and for the full year a free cash flow record of $1.2 billion and embedded in both of those figures in terms of the operating cash flow achievement as well as the free cash flow achievement are very substantial and we think permanent improvements in our working capital.

Days on hand were down some 19 days from a year ago in the fourth quarter, also down three days from the end of the third quarter and our DSO was down some seven days from year end 2008, four days from the third quarter. So not simply reductions in dollars on the balance sheet but a real change in the efficiency of our working capital during the year.

If we turn to chart four, quick comparison to our fourth quarter guidance. Obviously the guidance we provided for operating earnings per share for the fourth quarter was $1.20. We had higher RIF expense during this quarter. We detailed in our earnings announcement that we did take some action in a number of our lease cycle businesses to further trim our cost structure. That cost us about $24 million or $0.17 per share more than we anticipated when we put our $1.20 guidance together.

RIF savings came in a little lower than we estimated, really nothing material there about $12 million difference, $0.08, so about $0.25 pressure from those two items, which then were more than made up for the fact that our tax credit came in at about 25% instead of the 17% we had anticipated at the beginning of the quarter. But the real big news is the improved performance in the businesses of $0.32, really continuing that very strong momentum we saw in the third quarter in this respect.

So then our actual came in at $1.35 about 12.5% above our guidance. And the revenues were as we expected about $3.1 billion and the full year market finished down at about 21%, as we anticipated really for the whole second half of last year.

Turning to page five, just a quick summary. I’ll just highlight a couple figures on this chart because you have seen them all at this point. Obviously the $3.1 billion in sales and 11.1% operating margin at the segment level that compared to 10.9% in the third quarter, 8.2% in the second quarter and 4.2% in the first quarter. So that gives you a sense for the rate of improvements throughout this year.

Market growth, as we mentioned, the lower left-hand corner of the chart was down about 15% in the fourth quarter and Forex flipped from the earlier quarters in the year, now contributing about 5% to sales. All of that nets out to 10% reduction in our sales for the quarter.

If I ask you to turn to chart six, just start into our individual business segment, Electrical Americas segment sales of $827 million that was down from the third quarter of $843 million. You recall this segment peaked in the second quarter of this year as we have seen these markets continue to run off during this year and I will talk more about next year in a couple of charts.

Strong continued margins in this business, 15.2% in the quarter. We commented in the press release it would have been 16.1%, except we did elect to take some additional reduction in force charges to help ready ourselves for the market as we continued to see the nonresidential portion of this segment weakening.

Bookings a little bit better in the third quarter but generally still down 18%, nonresidential construction down some 25% from a year ago. And our stimulus orders, which we have been talking about really since May of being an expected source of strength for us during 2010, now at $140 million and we’re in the middle of negotiating about another $325 million, so we feel comfortable we’ll get to this $500 million number for shipment in 2010. Our overall markets down from 22%, as you can see is slightly offset by the 2% Forex.

If we turn to Electrical Rest of World this trend continued quite strong through this year in terms of both volume increase quarter-to-quarter and operating margin increase quarter-to-quarter.

Third quarter volumes were $646 million. You can see we’re up $698 million in this quarter, very significantly, we broke back into double-digit operating margins at 10.6%. That compared to 8.8% in the third quarter, 4.4% in the second quarter and 1.8% in the first quarter, so real source of strength for us.

We’re pleased in terms of what we’re seeing in terms of bookings, down 2%, obviously we’re starting to get close to having this business reach the levels of volume that we have seen the year before, you can see the top line was only down 1% in the quarter.

And the big surge has been in Asia, where orders up 16%. Europe is improving but it’s still down 10% from the year before and if you flip over to the left-hand side, you can see the composite of the market for the region still down some 13%.

If we move to chart eight, which is hydraulics, pretty flat sales. For third quarter, sales were $418 million. They’re $419 million here in the fourth quarter, so I guess that does determine flat. If you look at the operating margins of 3.1%, they would have been 5.1%. We did take additional reductions of course in this mid cycle business and as we do some margin here in the fourth quarter.

U.S. markets still down very strongly, down 39%, rest of the world down 21%. But a big change has occurred in this business worth noting and that is bookings. This is the first quarter that we have seen global bookings up over the year before, up a very strong 11%, up 8% from the third quarter and most significantly the month of December was a real whopper for us. We had an outstanding booking month in December. One month does not make a trend but we’re very encouraged. We have seen a significant change in the hydraulics market.

Talking about the market growth, you see overall down 30% and you see the reconciliation on the left side that gives you the year-to-year down 21% in volume.

We move to aerospace, which is on page nine. This market again you remember we said peaked in the second quarter of year, third quarter volumes were $394 million, fourth quarter $381 million. Our margin has declined. You will recall we came off the mid 17% range in second quarter, down to 15.5% in the third quarter, now 13.1%, would have been 14.2% without the additional RIF expenses and this is just continued walk down in terms of the volume.

Overall markets, pretty much as we expected. U.S. markets down about 5%, internationally down about 20%. Commercial aftermarket continues soft for all the reasons we well understand and you can see the sales mix reconciliation on the left that explains the 15% volume decrease from a year ago.

If we move to chart 10, the truck segment, a sequential quarter-to-quarter volume increase, $443 million, up from $401 million in the third quarter, really very strong operating margin of 11.5%. You will recall 6.2% in the third quarter and negative 0.9% in the second quarter, negative 11.6% in the first quarter. So we have seen a real snapback in spite of the fact that we still have this very, very low level of Class A builds this year that you can see detailed in the yellow footnote.

And the real bright news within this in terms of a growing segment is the hybrid business continues to accelerate but still overall weak markets.

If we then move to chart 11, which is the automotive segment, again quarter-to-quarter volume growth here, it grew up to $363 million from $326 million in the third quarter and again quite significantly a very big step up in margins to 8.8%. That compared to 7.1% in the third quarter, negative 7% in the second quarter, negative 16.7% in the first quarter, so a real change here in terms of the profit run rate in this business.

Non-U.S. markets up some 17%. U.S. markets, when you take out the transplants because we actually served the transplant through our association with Nittan Valves and so that’s not recorded in our sales, down some 5%.

And the real activity here is what we’re reading about on a daily basis, is that fuel economy and emissions remain absolutely critical and that is around the world and that’s really what’s driving our product development and our revenue at this point.

If we move to chart 12, just a quick synopsis for your convenience of the sequential improvement, I covered some of these figures, but you obviously can see we started this year markets down very hard, very weak activities. We were visibly restructuring and taking costs out of the company and you can see the second half of benefit from that if you look at net income or segment operating margins and indeed the cash flows as well.

If we move to chart 13, just a quick recap of many of the activities that we were undergoing during this year to help get at our cost structure. We noted in our press release slight changes from our estimates at the end of the third quarter. It ended up obviously with $182 million of severance costs we had told you would be $158 million. Those are the additional costs we took in December, savings of $416 million, we had told you $428 million and the net is $234 million versus what we talked about being $270 million. So that obviously was $0.25 pressure we felt in December that was more than offset by the better operating performance in the company.

Then significantly, if you drop to the bottom box on chart 13, we had been indicating year to year 2010 benefit of $220 million and that is now increased to $260 million. That’s the additional benefits that are coming from the activities that we undertook in the month of December, so good news for 2010.

If we turn to chart 14, this has been an extraordinary year in terms of strong cash flow and there are a couple of elements to it that we thought might be helpful to you in understanding the actions relative to our balance sheet and our pension plan.

Obviously you can see on the top line the operating cash flow, second line is our capital expenditures, which we indicated to you we would be at $200 million and came in slightly less than that.

You can see the derivation of free cash flow but significantly, when you step back and look at the year accomplishments in this regard, we did pay down $750 million of debt. We were able to contribute $270 million to our pension plans and then here in early January we contributed an additional $300 million to our pension plans in January 2010.

So very significant results of all of this, very strong cash flow. This now allows us to have no term debt payable in the year of 2010, in fact we don’t really face a payment until we get out in 2012, so very strong position in terms of our liquidity.

If we turn to page 15, let’s start to talk a little bit about 2010. 2010 we had captioned here at the top of the chart as a transition year. The reason why is we do expect to see positive growth, which is very welcome news, but we think that 2010 is in many ways a transition year to a fuller resumption of economic growth in 2011 and beyond.

You can see these numbers, so I won’t tick through each of these. The summary in the right-hand column is detailed in our press release. I do want to just comment on the Electrical Americas index in U.S. growth.

That negative 3% growth is the composite of a nonresidential construction assumption of a negative 14%, residential growth of a plus 6%, a power quality market growth of a plus 5% and industrial utility and other markets growth of 6%.

So it is not a 3% forecast for nonresidential construction. It is a negative 3% growth for the weighted average of those four markets I mentioned, which includes nonresidential construction at about negative 14%.

If we turn to page 16, obviously outlines our guidance for this year in terms of the midpoint for operating earnings per share of $3.85, net income per share $3.65, for the first quarter $0.80 for operating earnings per share, net income $0.75.

Trying to help you walk through a logical transition between, if you turn to chart 17, excuse me, between our 2009 operating EPS of $2.59 and our $3.85 midpoint of our guidance for next year. You will see our assumption of the 5% market growth, our year-to-year risk savings, those are the $260 million of additional market outgrowth at 35% margin and Forex contribution and then again another strong year of additional cost synergies coming out of the Moeller and Phoenixtec acquisitions.

Offsetting that is the tax change we have spoken to you about on several occasions, actually being a tax charge in 2010 versus a credit we experienced in 2009. The restoration of what we call the other savings category that’s the $225 million of temporary actions which took place in 2009 that now flow right back into our cost structure and starting with the first quarter of this year.

The net of some very small acquisitions and divestitures we did during this year primarily small product line activity. A slight increase in our weighted average of our shares as we move through the year and then higher amortization and other expenses, the biggest single piece being about a $20 million increase in our year-to-year amortization.

To give you some feel for how this works its way through the segment, our Electrical Americas segment, we’re anticipating margins on the order of about 13% during 2010, Electrical Rest of World averaging about 9%, aerospace about 15.5%, hydraulics about 8%, truck about 10%, automotive about 5%.

And if you work your way down through the corporate level activities, net interest expense of about $145 million, intangible expense I just spoke about, about $190 million, up about $20 million from this year, pension and retiree healthcare running about $33 million per quarter, down obviously from the rate this year, stock option expense of about $15 million and net corporate expense about $35 to $36 million per quarter.

Our tax rate at about 15% but we do anticipate that it will start the year a little lower and finish the year a little higher, so probably first quarter rates in the 12% range.

Turning to the balance sheet, average shares outstanding somewhere between $169 and $170 million as we go through the year. Further improvements in days on hand in terms of working capital obviously very critical as we think about how cash will be used this had year, probably on the order of about three days.

We think capital expenditures will return to about $400 million and that our dividend policy -- our dividends at this point we have not changed it in the first quarter but our board will revisit it as we go through the year.

And then as we talk a little later, our positive cash flow from operations somewhere in about the $1 billion to $1.1 billion range and free cash flow of about $600 million to $700 million.

If we turn to the next page, which gives you a quick reconciliation of the first quarter for 2010, obviously there is large moving pieces here. We thought this might be helpful to you as you think your way through the first quarter.

Let’s start with our fourth quarter operating EPS of $1.35. The elimination of the other savings, as we called them last year, this is the $225 million of other savings we talked about, that now drops to a negative $0.39.

The tax rate changed that’s from the negative, excuse me, the credit last year to the charge this year. That’s about a negative $0.30 impact. The amortization of intangibles and others about a negative $0.07 and then the additional RIF benefits that I spoke to you about that was higher than we originally estimated of about $0.21. That’s how you move from the $1.35 to the $0.80.

Now, because there are those number of large moving pieces, we also felt it might be helpful to give you a comparison of what you might call normalized earnings without the tax impact in them and so this chart on page 19 is really meant to do that.

In 2009 our sales declined by 23%. Our operating EPS declined by 62%. This is compared to 2008. Then the change in operating EPS came down by some 72%.

Now, if we were to compare that as you look forward to 2010, as our guidance indicated, our sales go up we expect on the order of 11%. Our operating earnings per share go up by 49% but if you restate it, excuse me, the 2009 results to the 2010 tax rate you’d see the impact that our earnings are actually going to be going up over 100% on an 11% increase in sales. And we think that’s just the kind of leverage that we ought to be achieving now that we’ve got sales moving up and we’re taking advantage of the cost structure we have put in place.

Finally, if we turn to page 20, quick summary of major points in our 2010 guidance and then we’ll quickly open things up for questions here. Market growth of about 5% throws off about $600 million of volume. We expect to outgrow by about 50% that’s $300 million.

Forex about a 4% contribution about $450 million, that leads to the operating EPS and fully diluted EPS numbers that I covered earlier as well as the operating cash flow and free cash flow.

So our net is that we think we finished the year very strongly. We’re really very pleased with the fourth quarter results both in terms of income statement and the balance sheet. We are really pleased if you’re looking at a year now of having market growth and think the operating plan that stands behind the numbers we represented to you is one that will recapture very attractive incrementals as we begin to move up the volume curve.

So that’s Bill, we’ll open things for questions.

William Hartman

Great. Like to make sure we get the proper instructions out there, so if you can proceed in the queue?

Question-and-Answer Session

Operator

Thank you. And ladies and gentlemen, if you would like to ask the question, please press star then one on your phone, you’ll hear tone indicating that you’ve been placed in queue. If you like to remove yourself from queue at anytime by pressing the pound key and if you are using a speakerphone, please pick up your handset before pressing the numbers. Once again, for questions, please press star then one at this time.

William Hartman

Okay. The first name we have on the list is Eli Lustgarten. Good morning, Eli.

Eli Lustgarten - Longbow Research

Good morning. Nice quarter. Nice to see your profitability being so solid. A couple of questions. One clarification, the RIF expenses that you took in the fourth quarter to $26 million, that’s all buried in the operating number, you didn’t put that in any of the restructuring numbers, correct?

Alexander M. Cutler

That’s correct.

Eli Lustgarten - Longbow Research

So that’s over and above the numbers that we’ve talked about. Can we talk a little bit about the electrical businesses, you gave us a negative 3% blended decline in North America and a 5% gain overseas. I mean, I understand the margin decline in North America from 15.3% for the year end of the quarter to 13%. Does that include any of the $500 million for stimulus business and is that do you think the trough if anything of how that margin will unfold?

And secondly in the electrical business Rest of World, an 8% margin, it’s sort of below the 9% margin, more like the third quarter or the fourth quarter numbers, maybe a little bit light versus the fact that the profitability shown in the second half of the year?

Alexander M. Cutler

Yeah, Eli, I mean, take those two separately and start with Electrical Americas revenues is that. Yes, it does include the stimulus and that’s in our market forecast as well, so I think that’s a way of thinking about the Electrical Americas revenue is, if you take the $3.4 million of volume this year and take our 3% estimated weighted average market reduction and add back in what we would expect to be about $150 million of outgrowth and then there is some Forex on top of that. That probably gets you up to a reasonable range in that kind of $3.5 million range for volume this year.

Eli Lustgarten - Longbow Research

$500 million of stimulus business this year or something less than that?

Alexander M. Cutler

We’re still anticipating we’ll get that $500 million, so that’s built in so you get up to $3.5 million range, right.

Eli Lustgarten - Longbow Research

Okay.

Alexander M. Cutler

Now, across, second question, as you go to the Rest of World, if you look through the kind of seasonality of the electrical business, it always starts off weaker in the first quarter both here in the Americas and in terms of Rest of World.

You’re absolutely correct it is the second half experience for our Rest of World business has been a whole lot better than it was in the first two quarters and last year. So but we would anticipate the first half would be more in that kind of 7% to 10% range, whereas the second half would be probably over the 10% range and that is where you get to sort of 9% average.

Eli Lustgarten - Longbow Research

And that 13% decline in the Electrical Americas business go to the trough level, I mean, I assume you’re going to get down to a little bit low double-digits in the first half before you build up again. Is that sort of the pattern we expect there?

Alexander M. Cutler

Yeah. Normally the first quarter again is your weaker quarter and you start to build as you get out to the end of the year. And we do anticipate, when you look at previous nonresidential construction downturns and of course, there is always some danger trying to measure any downturn versus another.

But we tend to think the things go on over about a three year time period and tend to be a total 30% to 35% trough, these kind of numbers we’re forecasting for the nonresidential market in Americas this year plus what happened over the last year and half we think pretty well wash this thing out by the time we get to the end of 2010 and early 2011.

Eli Lustgarten - Longbow Research

All right. Thank you.

William Hartman

Thank you. Next up is Dave Raso. Good morning, David.

David Raso - ISI Group

Hi. Good morning. If you can indulge me for a second here, I apologize, I must be doing the math wrong. But on page 17, when you speak of market improvement of 5% at a 35% incremental and you say it is worth $1.44, if I do sort of 5% on top of your ‘09 revenue, give it a 35% margin even if I don’t tax effect it, it is only $1.23.

Richard H. Fearon

Yeah. David, let me, it is Rick. Let me just clarify. The way this has been constructed is that we have taken the extra profits for market improvement and we’ve taken it at the ‘09 tax rate, which of course is a credit, so actually increases it and then we put all the tax rate change in that tax rate change line. You can do it the other way, I mean, there are two ways to do this chart, but that’s how we put it together.

David Raso - ISI Group

Okay. That’s helpful. And then lastly on the truck margin, if I heard you correctly, you mentioned truck margins around 10% for ‘10. You appear to have higher growth forecast for your domestic market, where, correct me if I’m wrong, but I would think you have a little better margin than international. But you have the margins for the year lower than we just put up in the fourth quarter. Can you help explain that?

Alexander M. Cutler

I think again one of the things you have to remember in each of these segments is the other savings we talked about $225 million, start to flow back into these businesses right away in the first quarter. And a way of thinking about it if you’re trying to think through how much belonging to each segment, it is almost ratable according to volume. So I think if you go through that exercise and see that $225 million over the estimated sales for this year comes up between 1.5 and 2.

David Raso - ISI Group

Okay. Terrific. Thank you.

William Hartman

Next up is Ann Duignan. Good morning, Ann.

Ann Duignan - J.P. Morgan

Hi, guys. Good morning.

Alexander M. Cutler

Good morning.

Richard H. Fearon

Good morning.

Ann Duignan - J.P. Morgan

Sandy, can you help us understand, I know you said in the hydraulics business you took further RIF costs in the fourth quarter and yet you also said that bookings were up sequentially 8% and December was huge. How do I reconcile both of those comments and specifically where, which businesses within hydraulics were up in December significantly?

Alexander M. Cutler

I think this is perhaps the market that is currently one of the most difficult to try to fix a point on exactly where it is going to end up here in 2010. It has been improving. It has been improving not only here but quite dramatically in Asia, not as much in Europe. And while we have had the one very big month that I referenced, we sure hope we can see a couple more months like that, before I recall this trend.

Having said that, our forecast now for this market to grow is quite a different I would say mental outlook than we had even three to four months ago, so I’d say this is getting better. We still felt it was prudent and we’ve adopted what we think is a prudent planning level for volumes for this year to take out some additional costs in the month of December to allow us whether the markets come back more strongly or not to capitalize quite strongly.

We have plenty of capacity, so we’re not concerned in this business if we end up being a little low on this 11% market forecast overall. But, really, it is a huge December in light of what we have been seeing the previous months and we’ve been surprised with -- it is a good surprise and we saw is not only on the OEM side but saw reasonable demand out of distribution channels.

Ann Duignan - J.P. Morgan

Sandy, I know you mentioned geographically where things are better and maybe what about mobile versus industrial? I know you talked a little bit about distribution, but a little bit more color in the mobile side if you could, please?

Alexander M. Cutler

Yeah. We had commented last year Ann on several occasions what had happened is many of the longer term orders, orders that would tend to be out beyond a couple of months that pretty well disappeared, we have not really seen that begin to bake in yet. I think that’s the activity that one would expect to see after the market starts to get firmer and shorter deliverable timetables aren’t as available.

So I would say most of it is still relatively short visibility that we have been seeing. We are not seeing yet a boom on the OEM side. I know there have been a couple very prominent OEMs that have talked about their expectation that there was a real wave of orders coming. We have not seen that yet, so we’re still hopeful and ready when it does.

Ann Duignan - J.P. Morgan

Okay. And then just quickly a follow up on truck outlook. Could you walk us through what you would anticipate in terms of seasonality for the transmission business?

Alexander M. Cutler

Probably the biggest issue there, Ann, is to try to understand the NAFTA heavy duty market. And there we’re in this range of 150,000 unit forecast for this year and we think the way it is going to materialize is that probably the first quarter is stronger than the second quarter.

So something on the order of 35 to 36,000 in the first quarter dropping to something like $30 to $32 in the second quarter and then it begins to ramp into that $42 to $43 range in the third and fourth quarter. I think that is the biggest piece that will be different than a normal year for the truck business.

Ann Duignan - J.P. Morgan

Okay. Thanks. I will get back in line.

William Hartman

Next is Bob Wertheimer. You there, Bob?

Robert Wertheimer - Morgan Stanley

Hey. Good morning, everybody.

Alexander M. Cutler

Good morning.

Richard H. Fearon

Good morning.

Robert Wertheimer - Morgan Stanley

First question on Aerospace aftermarket, you sounded a bit cautious and I wanted to ask if flight hours and crew throughout the year, one of those costs that people had cut last year is travel I guess.

Would your revenues improve in sync with that or lagged and then do you have a sense as to whether there has been a little bit of maintenance push to the edge of the maintenance window, so when it comes back it will come back more sharply?

Alexander M. Cutler

Yeah. I think you got a couple different things working in here, is that, we’ll talk about the OEM side first. As the number of programs, some of them fairly high profile have either pushed out or had their 2010 volumes reduced, OEMs have been working obviously not to order any more material for those programs. So that was a negative more in the supply chain than it would have been in the shipment volume coming out of the OEM.

Second, as the airlines have been under a lot of financial pressure, they have been working hard to adopt new methodologies that allow them to do maintenance more quickly, if you’re sitting at gates, that maintenance can be done right here at the gate now versus the airplanes being pulled off.

So we think there is a lot of pressure all through the year on inventory levels, which is one of the reasons many of the suppliers’ revenues don’t look as wholesome as the OEM suppliers or OEM volumes have.

As we go into 2010, the question now is if flight hours start to increase, you have more corporate travelers again will you start to see some improvement in the aftermarket? We think actually you will, but we’re still in negative numbers in the fourth quarter, so we have not seen that occur yet.

Robert Wertheimer - Morgan Stanley

Okay. Have you hit the trough on, well, can you talk about price cost in electrical sort of quarter-over-quarter and what you are looking at in 1Q?

Alexander M. Cutler

Yeah. I think it is really, we’ve had a number of questions around the issue of particularly the project business and there is a big portion of our Electrical Americas, its really there to much greater degree than it is in our electrical Rest of World.

A big piece of that business is negotiated business and people that have been around the industry a long time have asked the question, won’t you see some pricing pressure in that negotiating project business as the nonresidential market continues to go down? That is our expectation and we’re beginning to see that we’ll see some pressure on prices that actually weaken margins and that softening is in our guidance of that 13% for 2010.

Robert Wertheimer - Morgan Stanley

Can I sneak in a last one quick and why is amortization up year-over-year?

Richard H. Fearon

As you go through and finalize all of your purchase price accounting for principally Moeller and P-tec, you make estimates and then when your final numbers come in, they’re sometimes a bit higher than you originally estimated, so that’s the principal driver.
Robert Wertheimer - Morgan Stanley

Perfect. Thanks, everybody.

William Hartman

Next we have Jeff Hammond. Hello, Jeff.

Jeffrey Hammond - KeyBanc Capital Markets

Hi. Good morning, guys.

Alexander M. Cutler

Hi, Jeff.

Jeffrey Hammond - KeyBanc Capital Markets

Sandy, just on the temporary costs coming out, it seems like you’re modeling coming out right away and maybe just remind me the big piece in there and how they roll out? It would just seem like at least some of our businesses you still have furlough. Are you bringing your 401(k) back right away and a little more color on how it flows back in?

Richard H. Fearon

Yeah. Jeff, the lion’s share, the biggest piece really were our temporary time off without pay a week every quarter for all employees in the company, we have announced internally to all of our employees we expect to be able to cease that as of the first of the year and that would be what we have done and that’s why the costs are rolling right back into the first quarter. Everything else stacks up but that’s why I would say model it equally coming out right across the year.

Jeffrey Hammond - KeyBanc Capital Markets

Okay. And then just can you talk about where you get your market outperformance by business and if there are any segments that you see underperformance?

Alexander M. Cutler

I would say if we look ahead to this year, we think that of that roughly $300 million, we’ll have about $150 is likely to occur in our electrical businesses. We think that hydraulics probably about $50, aerospace around $50, truck around $50. That’s how you get $300 million.

We don’t expect to have significant outperformance in the automotive business and part of that really has to do with how fast some of the Asian markets are growing. Obviously the fastest growing markets in the world and our penetration in those markets is not quite as high as it is in the traditional markets of the world.

Jeffrey Hammond - KeyBanc Capital Markets

Okay. Thanks.

William Hartman

Next is Terry Darling. Good morning, Terry.

Terry Darling - Goldman Sachs

Thanks. Good morning. Just a couple of quick ones. Forex assumptions euro, dollar, can you give us those numbers in the forecast, please?

Richard H. Fearon

Yes, Terry. It is Rick. We have forecast at least for the plan the euro in the $1.45 to $1.50 range. It’s obviously a little weaker than that right now but that’s what’s built into our expectation over the course of the year. The other important number or Forex rate for us is real and we think that is likely to be in the $1.80 to $1.85 range.

Terry Darling - Goldman Sachs

Thanks. And then the doubling of CapEx, Sandy, you talked about 2009 was an unusual year. Can you talk about where that incremental CapEx is going to be headed across the businesses?

Alexander M. Cutler

Yeah. If you look back and that’s why we counseled over time the best way to think about our CapEx is roughly 3% of sales in each year and we obviously in the past year took it down to $195 million, really cut back very significantly.

The biggest portion of our CapEx in a year tends to be around new product development. We have been continuing to spend strongly on that. We have a lot of new product launches on this year. So it spreads equally around the launching of the businesses, because we’re launching new product in virtually all, but I would call it more of a return to our normal rate than a significant increase just over the last year.

Having said that, we will be cautious here early in the year, so I think what you can plan on is that we’re likely to be lighter in the first quarter on CapEx than we will be for the rest of the year.

Terry Darling - Goldman Sachs

And then just coming back lastly to the price cost balance, you talked about electrical. Just across the entire company, can you give us what the assumption in 2010 is or what 2009 was and the assumption 2010 calibrate there?

Alexander M. Cutler

Yeah. I think how we’re thinking about, Terry, the cost price relationship is that it would be neutral ex the issue we’re talking about there in the electrical and associated project business. So our objective is really to not try to gain or to lose all that trade off this year.

Terry Darling - Goldman Sachs

Okay. Thanks very much.

William Hartman

Next I would like to go to Bob Cornell. You there, Bob?

Robert Cornell - Barclays Capital

Yes, I am.

Alexander M. Cutler

Good morning.

Robert Cornell - Barclays Capital

Hi, guys. You know, going back to the comments around visibility and non-res, Sandy, when you talk about visibility there, I mean, how far into 2010 do you think you have visibility on the non-res side?

Alexander M. Cutler

We obviously carry a hefty backlog into the year, so that obviously gives us a good feel for what we have in the early month in terms of our ability to ship that and that backlog has been substantial source of help all through this year and will be through next year as well.

When we’re looking at projects, we’re seeing depending on the type of projects, Bob, they can be 30 days or go out to the really big ones, we’re quoting things that wouldn’t be shipping until the second half. I think we have good visibility on the first half.

Robert Cornell - Barclays Capital

So, I mean, what about inquiry levels, I mean. has that come down or they are going up or I mean, sometimes people talk about a pipeline even before you’re into the official quote activity, funnel type of thing, I mean, how does that look in the non-res side?

Alexander M. Cutler

Obviously with our bookings down 18% in the fourth quarter, I think that’s a good indication of what tended to happen. We’ve seeing it’s down 20% in the third quarter, so we have been seeing this falloff in not only bookings but obviously the quotation opportunities this time.

Robert Cornell - Barclays Capital

Yeah. I am trying to think in terms of when you start to see buildings getting finished, the electrical package tends to go in late and this sort of non-res decline. I mean, do you have an idea of when the trough will be in the shipment of electrical packages into the aggregate or the non-res space?

Alexander M. Cutler

I think that trough is likely to occur in the middle of the year, middle to late in the year because again I would guess you’d see and the hard piece here again, Bob, is the one we talked about which, is the stimulus bill, because many of those projects aren’t proceeding on what you call the normal trough assumption that lays over the top. We have been watching quotations in bookings decline in the nonresidential market really since early 2009 and the markets were weakening end of 2008.

So by the end of the year we should be to about the amount of time it normally takes to delete this off, but we’ll go into next year with a smaller backlog than we’re entering this year just as a result of that. So that quotation, the downturn in the quotation normally followed by three to five months lower shipment, later shipment.

Robert Cornell - Barclays Capital

Yeah. You know, that, actually that leads into my next question is, on the stimulus, it sounds like the projects have just slipped. I mean, you’re talking about $500 million and looks to me like you’ll have $140 in orders you said, but the balance still in negotiations and what is out there that’s causing these projects to slip if that’s the right interpretation?

Richard H. Fearon

Yeah. I don’t know that maybe slip, but remember the money was authorized to be spent in 2010 and 2011, 87% of the non-tax dollars to be spent in those years. So in some cases, they have been able to award these contracts beforehand and some they can’t afford and pay for them but what it does mean is there is a real crash on activities in getting these projects awarded and getting them into the economy.

Robert Cornell - Barclays Capital

Final question for me in the roll forward on reconciliation of the fourth quarter numbers, you had $0.32 of improved performance. You didn’t really go into what really constituted improved performance, maybe you can just explain what that $0.32 was made up of?

Alexander M. Cutler

Yeah. I would say that it is not volume because the volumes came in very much the level we expected. I think that is a mix of better productivity and actually even better cost savings across the enterprise and so many of these informal activities very hard to sum up.

I think what it means is the company is actually operating more profitably than we actually had thought it would and I think that’s the cumulative impact and focus of employees all across the company just really focused in on just doing the priorities and really changing the cost structure, not just temporarily but more permanently.

Robert Cornell - Barclays Capital

I guess one final question. Now, going back to the issue of margins in the Electrical North America, I mean, those things have been tracking 16% last half. I understand the issue about costs coming back in. I recognize the pricing on projects. That’s not just a big piece of the whole business. Why would we forecast margins all the way down to 13% in 2010 when you got a 16% run rate in the second half of this year last year and past year?

Alexander M. Cutler

Yeah. The actual average and we’re forecasting a full year average and full year average for 2009 was 15.3%. So that we think the impact of the lower market plus the costs going back in and a little more price pressure, that’s what leaves us with 13%.

Robert Cornell - Barclays Capital

Fair enough. Thanks.

William Hartman

Next we have Nigel Coe. Good morning, Nigel.

Nigel Coe - Deutsche Bank Securities

Good morning, guys. A lot of moving parts at the margin in 2010 and you gave us good color on the other costs coming back. What about RIF in 2009? Can you give us color on how that broke out by segment, please?

Richard H. Fearon

Well, we, Nigel, we have not gone into the individual segments. I think if you go back early in the year and probably the best guidance I can give you, if you looked early in the year at some of the large costs that we have taken and if you look what we did in December, those fees, basic charges, basically Electrical Americas were in hydraulics and Aerospace.

So I think that’s probably the best guidance I can give you in terms of where to go segment-by-segment. So remember early in the year we took some very big charges and we did break those out by segment at that point.

Nigel Coe - Deutsche Bank Securities

Okay. Great. And just to clarify, the $83 million of pension settlements is that all included within the RIF expenses?

Richard H. Fearon

What we did, Nigel and we detailed it in the note on the last page of the release, there was a portion of the pension costs that had to do with lump sum settlements and the curtailment that we did in the second quarter, all of that, those costs we did put into the RIF costs.

But then, so the simple way to think about it, because there is so many moving parts and that is to just look at what we believe the pension costs are going to be in 2010 and that’s the $33 million a quarter that Sandy quoted.

Nigel Coe - Deutsche Bank Securities

Okay. So the $52 or whatever it was, that’s in RIF, but not the $83?

Richard H. Fearon

Let me…

Nigel Coe - Deutsche Bank Securities

Yeah. Okay, well…

Richard H. Fearon

That’s a detailed question. Let me have Bill address that offline.

Nigel Coe - Deutsche Bank Securities

Sure. And then just to help me understand, the month growth, this is outgrowth, in 4Q I think you under grew in aerospace and auto. Can you go through where you under grew the market? Is it just U.S. versus Rest of World? Just want to understand that?

Alexander M. Cutler

In aerospace, Nigel, I commented earlier in response to the inventory initiatives. We think that’s the big issue is in markets in the order of 10% that we think we under grew versus that by about 6%.

But as you know, the Aerospace industry is a very long lead time industry, so we actually think what’s happened here is this is much more of a timing issue of suppliers delivering to OEM that we tend to measure the market based on OEM shipments. So we think this is really a timing mismatch issue there. Your second question was which segment?

Nigel Coe - Deutsche Bank Securities

No, no. The question being was, so it sounds like it is end market shipments, your shipments to the OEs?

Alexander M. Cutler

Yeah.

Nigel Coe - Deutsche Bank Securities

Right. Okay. Thanks, guys.

William Hartman

Next is Tim Thein. Are you there?

Timothy Thein - Citigroup

I am. Thank you. Following up on that last one, can you comment at all in terms of market growth in the Electrical Americas in the first half of the year was running high single, low double-digits and that basically went away in the back half of the year.

But despite that, you did put up, as you commented, some pretty significant margins or solid margin performance. Has your pricing strategy played into that at all in terms of focusing on price over chasing volume or would you say that’s attributed more to a function of mix or specific product that held up better?

Alexander M. Cutler

I wouldn’t point to a specific pricing strategy per se. I think we have been pretty consistent in what we have been doing in the marketplace, you are getting fairly dramatic changes that you alluded to as to the non-res coming down pretty fast and that’s a big segment for us and we think it is much more along those next lines.

Timothy Thein - Citigroup

Okay. And then, and, Rick, in terms of the components of the free cash flow or the operating cash flow guidance, you mentioned the pension expense and then the contribution.

Anything else in terms of items I guess to work to a balance between net income and then higher D&A? Isn’t that -- is working capital, I take it that’s going to be a use of cash in 2010? Is that correct?

Richard H. Fearon

Yes. We, the simple way to think about operating cash flow for next year, you of course have net income, you’re going to have D&A which is going to be around $620 million and you’re going to have working capital, a small build of probably about $200 million to reflect the growth in the sales.

Timothy Thein - Citigroup

Okay. Got it. And pension contribution $300 million, is that pre-tax or after tax?

Richard H. Fearon

Well, that will be pre-tax.

Timothy Thein - Citigroup

Yeah. Okay. All right. Thanks a lot.

Richard H. Fearon

And you know, I, this is Sandy just reminded me that the $300 is what we put into the U.S. plan. There will be about another $100 that goes into the international plan over the course of the year. So in total, the dollars that we’re putting into pension will be about $400 million.

Timothy Thein - Citigroup

Okay. Thanks a lot.

Richard H. Fearon

Thank you.

William Hartman

Next up is Chris Glynn.

Christopher Glynn - Oppenheimer & Co.

Good morning, Bill. Good morning, everybody.

Alexander M. Cutler

Good morning.

Christopher Glynn - Oppenheimer & Co.

Wondering if you can talk in book-to-bill and related to a couple of the segments, automotive and hydraulics, and how you see in the first half versus second half of those two segments?

Alexander M. Cutler

It is not a convention we use internally here. We used to with our semiconductor business, but it is really not as relevant at this point, but I think we can give you on trends and hydraulics. Clearly we have seen this big fourth quarter that we’re very pleased with.

We still think at this point that the market will be down 35% in the market for the full year and last year got a ways to rebuild. So I think you will see booking and shipment parallel fairly closely as we move up.

The one way you will likely to see the bigger disconnect frankly is going to be the heavy duty truck market and typically as people start to put in orders, they tend to put them in towards the end of the year. So they will put the orders in now for shipment towards the end of the year.

So we would expect to see orders start to turn up in that second quarter this year but they probably won’t be orders in the second quarter. They’re more likely to be orders toward the back end of the year.

Automotive is not much of a disconnect for us. We tend to get orders in and shipped quite quickly and still very much best time to do. So I would really point to the truck market and then aerospace is the other one where you tend to have very long lead times in the marketplace and we tend to get multiple months of forward visibility because I don’t think that’s going to change a great deal for us and of course we got a fairly modest market change forecast in aerospace in 2010.

Christopher Glynn - Oppenheimer & Co.

Okay. Thank you.

William Hartman

Next is Jamie Cook. Good morning, Jamie.

Jamie Cook - Credit Suisse

Hi. Good morning and congratulations. Just a follow up question to Ann, question on the hydraulics business and the bookings in December, I mean, it sounds like while they’re fantastic, you guys are modeling for a more conservative scenario, which is probably prudent, but I guess Sandy specifically sounds like there could be room on the upside. Which end market specifically when you talk to your customer, do you hear incrementally more positive sentiments, is it farm, is it construction, is it industrial? If you can give more color there.

And then last, your balance sheet is in good condition, cash flow is strong. Are you at the point, Sandy, where you feel comfortable enough where you would consider looking at acquisitions again or dividend increases? That was an area last quarter it sounded like you were still in balance sheet preservation mode?

Alexander M. Cutler

Yeah. Okay. Just on the issue of the bookings, we are very pleased with bookings and we think an 11% market increase is frankly a big increase. We would love to have seen the ending to the quarter last year in May.

So we don’t think we’ve got ultimately conservative forecast out there but 10% to 11% increase we think is very good momentum. It obviously is not the size of one month of December. We may prove to be a little conservative in this area but again we think that it is best for us to be planning in the 10% to 11% side.

We have a little bigger exposure on the mobile side than we do on the industrial side. We’ve not seen distributors rebuilding inventories yet and I have said in several settings that generally what we’re seeing is when a distributor sells four items they buy four items. They’re not buying 60 to really build inventory.

And our best estimation is we’re not going to see a lot of that inventory rebuild until there is general more confidence in the economy and people are going to play their own balance sheets careful in that respect and we clearly have the capacity to be able to support them.

We did see some OEM increases obviously here in December to get that kind of booking increase. But again we have not seen the huge numbers that many people talked about might be coming in the way of suppliers this fall. They may well be coming, we just haven’t seen them yet but we’re ready.

So we’re pretty bullish with 10% to 11% market increase and seems to be a much improved year for hydraulics and we would be delighted if it turned out to be strong.

Jamie Cook - Credit Suisse

But on mobile specifically, it sound, I mean, is it construction? Can you just give more granularity within the mobile side?

Alexander M. Cutler

Yeah. I would say it is fairly balanced, obviously you saw one in the construction, one of the ag players this morning announced stronger activity than many people expected. It is just early for us at this point. We just haven’t seen a couple months of orders back-to-back.

Jamie Cook - Credit Suisse

Okay.

Alexander M. Cutler

And what we have been through, I think that’s perhaps the reason we’re a little more cautious at this point. I would say the good news is we didn’t have a flat month in December. We had a very big month in December. Now what we have to see is does this really lay in January, February, March and it would be terrific if it does.

Jamie Cook - Credit Suisse

And you haven’t seen anything, you don’t have January numbers or any?

Alexander M. Cutler

No.

Jamie Cook - Credit Suisse

Okay. And then, sorry, less cash, acquisitions or dividends?

Alexander M. Cutler

Dividends, we did not cut our dividends last year and a lot of people did. The reason we did not is we felt our strategy and our business model was in place and we would see profits and cash flow come back just as they have. And so, yeah, typically this has been something our board as wanted to have very much in line with our forward book in terms of earnings. Obviously our earnings are getting better this year. Our board will revisit that subject as we go through the year.

On the acquisition side, we have not stopped any of our reporting activities and I commented on that in a number of public forums in this time period. Clearly our balance sheet is much better than it was.

Our confidence contributed $300 million in early January to the pension plan is another indication of that. So that I would say we’re going from a period in 2009 of really being on the sidelines in terms of the acquisition markets to one now where we’re looking much more anxiously or enthusiastically at opportunities that are out there.

Jamie Cook - Credit Suisse

Thank you very much.

William Hartman

Next we have Mark Koznarek. Hi, Mark.

Mark Koznarek - Cleevland Research Company

Hi. Good morning.

Sandy

Good morning, Mark.

Mark Koznarek - Cleevland Research Company

Just a little detail here for currency, you’re expecting that to contribute $0.31 next year. What did it -- what was the impact to earnings this year?

Richard H. Fearon

Let me just tell you for the, I have got right at hand here the fourth quarter was $9 million for the fourth quarter and for the full year, Mark, currency, of course the fourth quarter was a positive. The only quarter that was a positive. For the full year it was minus $58.

Mark Koznarek - Cleevland Research Company

That’s percent pre-tax?

Richard H. Fearon

Yes.

Mark Koznarek - Cleevland Research Company

Operating income?

Richard H. Fearon

Yes.

Mark Koznarek - Cleevland Research Company

Okay. Then I had a question on the hybrid outlook. A few years back, you guys gave a rolling schedule. I think you were expecting to do $30 million and $50 million and $70 million in sequential years. Are we within that range exiting ‘09 and what’s sort of the growth rate expected for 2010?

Alexander M. Cutler

Mark, your number is right in terms that we laid out the outlook and we were actually hoping that we would move from $50 to $100 to $150. We now think the $100 is probably an activity that’s more in line for the year 2010, the $150 is probably more 2011 number.

Mark Koznarek - Cleevland Research Company

So $50 was roughly what you hit this past year?

Alexander M. Cutler

We were a little better than that.

Mark Koznarek - Cleevland Research Company

Nice momentum. Thank you.

Alexander M. Cutler

Thank you.

William Hartman

Next is Andy Casey. Hi, Andy.

Andrew Casey - Wells Fargo Securities, Llc

Hi, Bill. Good morning, everybody.

Alexander M. Cutler

Good morning. Hi.

Andrew Casey - Wells Fargo Securities, Llc

A few questions, more detailed because a lot of the higher level ones have been answered. But in truck how did your aftermarket business trend during the quarter? Is that seeing year to year improvements yet?

Alexander M. Cutler

Not yet, not at this point.

Andrew Casey - Wells Fargo Securities, Llc

Okay. And then per the comment for potential order pickup in the second quarter of 2010, are you seeing any multi-year large orders being negotiated for the industry?

Alexander M. Cutler

I am personally not aware of them at this point but that they may be going on that I’m not personally aware of.

Andrew Casey - Wells Fargo Securities, Llc

Okay. And then hydraulics getting back to the order surge that you talked about in December, was there any pricing around that specifically on the distributor side in December or if you did any pricing was that more effective in January?

Alexander M. Cutler

No. We don’t believe the surge was caused by price protection or price avoidance or any of those activities. We think, this was, really, our best understanding is it is real demand improved.

Andrew Casey - Wells Fargo Securities, Llc

Okay. And then lastly, pulling up to the overall on the price discipline that seems to have been existing through the downturn across most markets, would you expect that to hold now that most markets have stabilized or are you seeing people get more aggressive to fill out their capacity more quickly?

Alexander M. Cutler

Andy, I think that story may prove, Andy, to be a little different in each of the segments and as I mentioned in non-res, we think on the large project there is likely to be pressure. But I would say in this backdrop to all is continued commodity movement and continuing to see a number of important industrial metals moving already.

And I think that the good way to think about that is it is being driven by the economy expanding most quickly around the world and that obviously is China. In spite of the fact we have seen some bank policy made in China to try to slow down the acceleration of the economy, we still expect to see the Chinese economy growing in the order of 10% here as we go through the next year and that’s going to continue to put pressure on metals and we just think people will not be likely to be cutting price going right into the metals situation numbers.

Andrew Casey - Wells Fargo Securities, Llc

Thank you very much.

William Hartman

Next is Ted Wheeler. Hello, Ted.

Ted Wheeler - Buckingham Research Group

Hi. Good morning, all.

Alexander M. Cutler

Good morning.

Ted Wheeler - Buckingham Research Group

I just wonder if I can circle back on the margins in both the auto and truck as you laid them out. I guess we had 200 basis points or so for RIF costs pickup for the year and just seems though, I guess 7% adjusted and 12% adjusted on auto and truck margins are a little bit behind where I would think they would go, given your revenue outlook. Is there something else? Is there pricing pressure or am I just not quite getting it here?

Alexander M. Cutler

I think, Ted, I understand the question as you come off the fourth quarter number and those are great numbers we think in the fourth quarter segment. But we obviously look at the average of the year, truck average high 2s, automotive a loss and so there are some different seasonal factors to how this thing goes through the years as well and that’s why we think the roughly 10% and roughly 5% auto are the right numbers.

We may prove to be a little conservative to what we found here in the fourth quarter is the tremendous (inaudible) cost reductions and efficiency all across the company, actually exceeded our own expectations obviously toward on the outperformance in the fourth quarter. So we have been pleasantly surprised on the efficiency across the company. That opportunity still exists, I mean, this is our best thinking as we go through the individual numbers and rack up the numbers.

Ted Wheeler - Buckingham Research Group

Okay. Well, just, I mean, coming out of XL 2007 and some down years, you held margins well and took a lot of costs out since, particularly in truck. Just doesn’t feel that, I mean, just doesn’t feel that’s a little conservative, the way I see it.

Alexander M. Cutler

Yeah. Today, I think the way to think about it, Ted, is we’re still operating in truck levels that are down 16% from volume 2008, still down 12% in 2007. On the automotive side we’ll still be operating at volumes that are down by 28% in 2008 and 37% in 2007 level. So while the volumes are coming back the number of these segments are still at volume levels that are way below what we have seen historically. And that’s why I think we’re all having a little challenge thinking through the margin numbers, the margin numbers we can recall in the businesses, the business are getting better, but even with it getting better, I mean, it still be down 37% from 2007 levels in automotive. That’s a very long way.

Ted Wheeler - Buckingham Research Group

It is, maybe more to come in 2