Eaton Corp PLC

Ladies and gentlemen, thank you for standing by and welcome to the Eaton First Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. If you should require assistance during the call, please press star followed by the zero. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Yan Jin, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning. I'm Yan Jin, Eaton Senior Vice President of Investor Relations. Thank you all for joining us today for Eaton's first quarter 2019 earning call. With me today are Craig Arnold, our Chairman and CEO, and Rick Fearon, Vice Chairman and Chief Financial and Planning Officer. Our agenda today includes the opening remarks by Craig, highlighting the company's performance in the first quarter. As we have done our past calls, we'll be taking questions at the end of Craig's comments. The press release from our earning announcement this morning and the presentation we'll go through today have been posted on our website at www.eaton.com. Please note that both press release and the presentation including reconciliations to non-GAAP measures. A webcast of this call is available on our website and will be available for replay. Before we get started, I would like to remind you that our comments today will include statements related to expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projection due to a wide range of risks and uncertainties that are described in our earning release and the presentation. They're also outlined in our related 8K filing. With that, I will turn it over to Craig.

Thanks, Jen. Appreciate it. I'll begin with page three and the highlights of our Q1 results. And I begin by saying we had a good start to the year with another strong quarter of performance. Earnings per share were $1.23 on a GAAP basis and $1.26 excluding the impact of the investor costs related to the announced spinoff of our lighting business. At $1.26, our results were 15% above last year and towards the higher end of our guidance range, which, as you'll recall, was $1.18 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 Q118 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 four 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, you know, once again, the 3% currency impact was driven primarily by the important currencies for us, which are the euro, renminbi, and real. We're very pleased with our 32%. incremental rate that we delivered on organic growth. And so that number was, once again, very strong and above our expectations. And we incurred, as we mentioned, the three cents per share from the advertised cost, primarily related to the spin of our lighting business. And as you can see, adjusted earnings per share increased some 9%. Next, we summarize the quarterly results of our electrical product segment. Revenue here increased 2%, which includes 5% organic growth, partially offset by 3% currency. And we've seen particularly strength here in commercial and in residential construction, with global growth rates in the mid to high single digits, and even stronger in the U.S. markets. Our orders increased 4%, led by continued strength 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, increased to 18.29%, and this was a record for Q1. And we're naturally pleased with how well this segment is performing and the consistency of the results that we continue to see in this part of the company. Moving to page six, we cover our electrical systems and services results. Revenues here increased 6% with organic growth of 8%, partially offset by 2% currency. And we saw especially strong double-digit revenue growth in commercial construction and in data centers. We continue to have solid momentum in this business, and the year has started on a high note for sure. You'll recall that our original guidance is for sales to be up 5% to 6% organically for the year, and so we're certainly running above that rate. As we indicated at our investor conference in March, we've moved to a rolling 12-month basis for reporting our orders in this long-cycle business, as well as in our aerospace business that I'll cover soon. On a rolling 12-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 and electrical systems and services, because I know it's a particular point of question that many of you have. And I'll tell you that, you know, 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 role in 12 months. because we do, in fact, see a lot of, let's say, lumpiness in the orders that we get in electrical systems and services, driven primarily by what we're seeing in hyperscale data centers. And, you know, 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 are, were an all-time record and up some 56% from prior year. And so despite, you know, what we're seeing actually in the orders and what some of you have reported to be a little bit of weakness versus what we saw in Q4, the overall underlying activity in this business continues to be very, very strong. Our backlog continued to grow. It was up 11% in the quarter. We generated strong operating leverage with operating profits increasing 15% on the 8% volume growth and margins increasing 100 basis points to 13.1%. You'll also recall that we announced the acquisition of the Old Soy Electric business in January. We're pleased to have closed the purchase on April 15th, and this acquisition will certainly provide a strong platform for us as we serve our customers in EMA and the Asia Pacific market. So once again, a really strong performance in our electrical systems and services business, and we continue to be quite bullish for the outlook for that business as we go forward. On the next page, we summarize our hydraulics results for Q1. Revenues were down 3% with 1% organic growth, more than offset by 4% currency. I'll certainly note that we had some tough comps in this business. 6% organic growth in Q118, but my revenue did slow slightly more than we expected, but I would note here only slightly more than what we had in our original plans for the year. Organic growth of 1% reflected continued growth in construction equipment, but some declines in ag and industrial equipment. Our orders stepped down 11%, driven principally by weakness in global mobile equipment markets. 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, you know, inefficiency 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 eight, 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%, 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, which led to a 30% increase in operating profits and a 300 basis point margin improvement in the quarter. Operating margins of 23.1% are another all-time high for the business. And so in addition to the volume growth, we also experienced some favorable product mix in the quarter, but really strong execution by the team overall. Next, I'll move to a summary of our vehicle segments. Our revenues were down 9%, which includes 6% reduction in organic growth and a negative 3% from currency. The organic sales decline was driven by a combination of declines in light global vehicle markets, which were down 4% to 5%, and the ongoing impact of revenue transfers to the Eaton-Cummins joint venture. And I will note that the joint venture actually saw revenue increases of 27% in the quarter, and continues to perform very well. We also have tough comps in this business for organic growth, which increased 13% last year. But overall, you know, this business is really performing as we've expected, but for a little bit of weakness in global automotive markets. For the year, we continue to expect NAFTA Class 8 production to be at 324,000 units, flat for 2018. But we have lowered our outlook for low for light vehicle markets for the year. And lastly, despite the lower volumes, operating margins increased 30 basis points to 15.1% and a decremental margin on the organic of less than 20%. So really strong execution by the team once again in our vehicle business. And wrapping up our segment summaries, we cover our e-mobility segment on page 10. Revenues were up 8%, which includes 9% organic growth, partially offset by 1% currency. And as planned, we continue to accelerate our R&D spending, which increased by some 130% in the quarter. So we continue to invest heavily in this segment to participate in what we think is really an exciting growth opportunity as we move forward. We're certainly optimistic about the opportunities in this rapidly developing market, and our pursuit pipeline for new programs has actually now grown to $1.1 billion. At our investor conference in March, we did announce a new program win of $100 million mature year revenue for traction inverters with a major global OEM customer. And actually in mid-April, we announced that PSA is the customer for this program. This was our first significant win since creating the segment about one year ago, and we're certainly ahead of our original schedule for growth in this segment and well on our way to creating – what we think is going to be a new $2 billion 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 Eden to grow approximately 4%, down slightly from our prior midpoint of 4.5%, and this is largely the result of us increasing our guidance for our long-cycle businesses, but reducing guidance for our short-cycle businesses. Specifically, we increased organic growth rates by 1% for both ES&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, you know, what I say really was a weak Q1, And like 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 to primarily the automotive side of the business itself. And we've not changed electrical products or e-mobility. And our margin expectations are noted on page 12. We're modestly raising our guidance from 17.1% to 17.5% or 17.3% at the midpoint. We're lowering the margin expectations for hydraulics by 60 basis points to 13.4 to 14, and for vehicle by 90 basis points to 16.5 to 17.1 due to lower organic growth primarily. But this is more than offset by increases in electrical products and in aerospace margins. A 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 increase record-level 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're expecting 4% organic growth, foreign exchange impact of roughly $100 million. Our margin expectation for the quarter is to have margins between 17.2 and 17.6. We'd expect our corporate costs to be flat with Q2 of 18, and we'd expect the tax rate of between 13.5% and 14.5%. For the full year 2019, we're raising our adjusted earnings per share guidance to $5.72 to $6.02 for a midpoint of $5.87, which includes essentially a $0.02 impact from the full-year impact of the acquisition of Olisoi overall. At the midpoint, this continues to represent a 9% increase over 2018. Other full-year guidance assumptions include the organic revenue growth of 4%, We'd expect $100 million of revenue from the Ulusoy acquisition. We'd expect foreign exchange impact to be $300 million, and this is a $50 million increase from prior guidance. We'd expect, as I mentioned, segment margins of 17.3%, and really no change to the other items in our forecast. So, in summary, I'd say another strong start, you know, to the year in Q1. We're well-positioned to deliver another year of record results, and we're absolutely, you know, thrilled with the way that the company is performing overall. So, with that, I'll turn it back to Yen for Q&A.