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spk06: Ladies and gentlemen, thank you for standing by. Welcome to Eaton's First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question, please press one and then zero on your touchtone phone. You'll hear an acknowledgement tone that you've been placed in queue. You can remove yourself from queue at any time by repeating that one zero command. If you're on a speakerphone, we ask that you please pick up your handset before pressing the numbers. And if you should require any assistance from an operator during the call, please press star and then zero, and an operator will assist you offline. As a reminder, today's conference is being recorded, and I would now like to turn the conference over to our host, Eaton's Senior Vice President of Investor Relations, Mr. Yan Jin. Please go ahead.
spk10: Hey, good morning, guys. Thank you all for joining us for Eaton's fourth quarter 2021 earnings call. With me today are Craig Arnold, our Chairman and CEO, and Tom Oakrey, Executive Vice President and Chief Financial Officer. Our agenda today, including opening remarks by Craig, highlighting the company's performance in the fourth quarter. As we have done on our past course, we'll be taking questions at the end of Craig's comments. The price release and the presentation we'll go through today have been posted on our website at .eaton.com. This presentation, including adjusted earnings for share, adjusted free cash flow, and other non-GAAP measures, they're reconcealed in the appendix. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today will include statements related to the expected future results of the company and order for forwarding statements. Our actual result may differ materially from our forecasted projection due to a wide range of the risk and uncertainties that are described in our earnings release and presentation. With that, I will turn the floor to Craig.
spk04: Thanks, Yan, appreciate it. Hey, we'll start on page three with recent highlights. And first, I'll just say that we had a terrific quarter and we're significantly increasing our full year guidance, as you saw. Our teams have just done an outstanding job of managing through this dynamic market environment, which is reflected in our strong results. Q1 adjusted earnings per share of $1.44 were a solid 15% increase year over year and 18% above the midpoint of our guidance. Our Q1 revenues of 4.7 billion were up by half percent organically, which was well above the high end of our guidance range of down 3%. This outperformance was driven primarily by the two electoral segments, as well as our vehicle business. We also posted a Q1 record for segment margins of 17.7%. And looking at our incrementals, we generated $73 million of higher profits despite having $97 million of lower revenues. This was the result of, we'd say, strong execution, ongoing improvements in the cost structure from the multi-year restructuring program that we announced in the second quarter of 2020, as well as closely managing price and inflation in the quarter. Our cash flow was also very strong. Adjusted operating cash flow increased by 42%, and our adjusted free cash flow increased by 62%. And we have another successful quarter of M&A closing free deals. We're also making good progress towards the closure of the previously announced acquisition of carbon emission systems, as well as the divestiture of hydraulics. And finally, we recently announced the agreement to acquire 50% of Jiangsu, Yining, electric busway business in China, an important part of our growth strategy for the Asia-Pacific region. Having been quite busy on the M&A front, we thought it'd be helpful to provide a summary of these three recent deals. We covered trip flight and carbon emission systems acquisitions in some depth during the investor meetings, but each of these three deals here certainly advance our strategic growth objectives in our electrical business. First, Green Motion, based in Switzerland, it expands our capabilities in the electrical charging market, where we expect to see significant growth over the next decade linked to energy transition. Their proven charger designs and advanced power management capabilities and billing software are valuable additions to our existing energy storage and power distribution offerings that support our view of everything as a grid. We also closed our previously announced investment in Hanyu. Hanyu is based in China and provides a strong portfolio of products that will open up significant growth opportunities in our business throughout Asia-Pacific. They make cost-effective circuit breakers and contractors that give us access to tier two and tier three markets in Asia-Pacific. And finally, last week we were pleased to announce the agreement to acquire 50% of Zhengsu Yining's electric busway business in China. Yining's strong busway capabilities in China, combined with Eaton's broad portfolio products, will really position us well to participate in the high growth data center, industrial, and high-end commercial segments and allowing us to pull through related electrical products. You know, the Hanyu and Yining transactions, I'd also add, significantly expand our address of the market in China and in Asia-Pacific, certainly allowing us to accelerate our growth rate in the region. Moving to page five, we summarize our Q1 financial results and I'll just note a couple of points here. First, acquisitions increased sales by 1%, but this was more than offset by the divestiture of lighting, which reduced sales by 5.5%. And you'll recall that we sold the lighting business in March of 2020. Second, segment margins of 831 million were at 10% above prior year, and this is despite a 2% decline in total revenue. This is largely the result, I'd say, of solid execution, restructuring savings, and really our ability to effectively manage price and inflation during the quarter. We expect the inflation impact to worsen certainly in Q2, but we will more than fully offset this for the full year. And lastly, our adjusted earnings of 577 million, up 12%, and when combined with our lower share count, we delivered a 15% increase in our adjusted EPS. Turning to page six, you see the results for our Electrical America segment. Revenues were up 2% organically, driven by strength in data centers, residential and utility markets, which offset weakness in industrial and commercial markets. The acquisition of Triplight and PDI added 2% of revenues by the divestiture of lighting, reduced revenues by 14%. We're very pleased to also close the Triplight acquisition sooner than planned, and to welcome their team to the Eaton family. Operating margins, as you can see, increased sharply, up 330 basis points to 20.5%, a quarterly record. And as you can see, profits were $24 million higher on significantly lower revenues. These results, once again, were driven by good execution, cost savings, and really favorable mix due to the divestiture of lighting. We're also pleased with the 11% orders growth in the quarter. This was driven by, once again, strength in data center and residential markets. Our backlog was actually up 23% versus last year, and due to ongoing strength, and once again, data center and residential markets. We were also encouraged to see some very large orders in select commercial markets. Perhaps a sign here that these markets, too, are beginning to turn positive. And while it's difficult to judge, we do think the order strength could have been due to some concern about some of the supply chain shortages that you certainly have been reading about. Next, on page seven, we show the results for our electrical global segment. We posted a 5% organic growth, with 5% favorable impact from currency, largely due to the weaker dollar. Organic revenue growth was driven by strength in data centers, residential, and utility markets. You can see the pattern here. We also delivered a 250 basis point increase in operating margins, and posted a new Q1 record of 17%. Our incremental margins in the segment were also strong, more than 40%, and were also driven by good cost control measures, saving from actions taken from our multi-year restructuring program. Orders grew 7% in the quarter, and like sales, the primary contributors to the growth came from data centers, residential, and utility markets. As I say, dragged down by the earlier COVID-related declines, orders declined 5% on a rolling 12-month basis. And lastly here, our backlog was up 17% versus last year, driven by the same three end markets. Moving to page eight, we summarize our hydraulic segment. Revenues increased 11%, with strong 9% organic growth, and 2% positive currency impact. Operating margins stepped up significantly to 15%, a 420 basis point improvement over last year. And our Q1 orders were also very strong, up 53%, driven primarily by strength in mobile equipment. And then we have the open markets. As we anticipated, Danfoss did receive conditional regulatory approval from the EU to acquire the hydraulics business, which is an important step in the process, and this sale is still expected to close in the second quarter here. Turning to page nine, we have the financial results for our aerospace segment. Revenues were down 24%, including 26% organic decline, driven by the continued downturn in commercial aviation. Currency, as you can see, added 2% to revenues. And as you can also see, operating margins were down 310 basis points to 18.5%, down but still at very attractive levels overall. Our team, I give them a lot of credit, they moved quickly to flex the business, and were able to really deliver better than normal decremental margins of approximately 30%. Orders were down 36% on a roll in 12 month basis, once again due to the ongoing downturn in commercial aerospace markets. However, I would add, on a sequential basis, we are starting to see some improvement, as orders were up 14% from Q4. And lastly, our previously announced acquisition of copper emission systems remains on track, and we expect the transaction to close at the beginning of Q4 2021. Thanks, Shio. Next, on page 10, we show the results of our vehicle segment. As you can see, revenues increased 9% and were much stronger than anticipated. The strongest growth came from global commercial vehicle markets and from the Chinese light vehicle market. Just as a point of reference here, NAPA Gladys 8 production was up some 12%. Operating margins also improved significantly here to 17.3%, another quarterly record, and a 380 basis point increase with incremental margins of nearly 60%. The strong margin performance was driven certainly by increased volume and also from savings from the multi-year restructuring program that we've undertaken. And despite volumes that were still below pre-predemic levels, this business is approaching our target segment margins of 18%, so making very strong progress in our vehicle segment. And one additional note-working development in this segment was the introduction of the new automated transmission for the heavy-duty truck market in China for our Eaton Cummins JV. This product, I'd say, is already getting great traction and seeing strong growth in the market. Turning to page 11, we summarize our e-mobility segment. Here, revenues increased 15%, 13% organic, and 2% from currency. We experienced solid growth in global vehicle markets, which was driven here both by high and low voltage products. Operating margins were a negative .4% as we continue to invest heavily in R&D. And as I've reported in the past, we continue to manage just a really robust pipeline of opportunities. Of note in Q1, we secured a multi-year agreement with a leading global automotive customer to buy our next generation brake door circuit protection technology for battery electric vehicles. This award represents 33 million in material revenue sales, and we hope to be awarded additional vehicle platforms using the same technology. And this win, I would say, really does highlight the strength of our electrical pedigree and how we're able to leverage this strength to grow in the e-mobility markets. And on slide 12, we've updated our organic revenue guidance for the year. As you can see, we're significantly increasing our organic revenue growth for the year with strong Q1 results. We're optimistic about the remainder of 2021. Our strong order book and growing backlog process that markets and market demand is really increasing and improving across most of our end markets. We now expect overall eaten organic growth to be up seven to 9%, and this is up from four to 6% previously. And while we're experiencing some supply chain issues, we have confidence in our team's ability to manage through these temporary challenges. As you can see, we've kept our forecast for aerospace unchanged. Vehicle has increased by 600 basis points. Electrical logos increased by 400 basis points and all other segments have increased by 300 basis points. You know, encouragingly, I'd say here about our electrical segment, we're seeing higher than expected demand across all of our markets, with the exception of utility, and that market remains in line with our original outlook, which was for mid single digit growth. So really strong performance in the electrical segments. Moving to page 13, we show our updated segment margin guidance for the year, where we're also significantly increasing our guidance. For eaten overall, we're increasing segment margins by 50 basis points at the midpoint, with a range of .8% to 18.3%. And we've raised our margin guidance in each of our segments with the exception of aerospace and e-mobility, which are unchanged. Compared with our original guidance, we expect to deliver better incremental margins for sure on this higher volume. I'd also note that for the full year, we continue to expect net price versus inflation to be neutral. And on page 14, we have the balance of our 2021 guidance. We're raising our full year adjusted EPS by 50 cents to $5.90 to $6.30, a midpoint of $6.10. And this is a 9% increase over our prior guidance and a 24% increase over 2020. With our recent M&A activities, we now expect a net 4% headwind from acquisitions and divestitures, down from our prior outlook of 8%. I say it's also worth noting here that our segment margin guidance of 18.1 to .5% is 190 basis point increase at the midpoint over 2020, and will be an all time record. It's also, this is a point of reference above our pre-pandemic margins of 17.6%, which we posted in 2019, which was also an all time record. And so we're off to a strong start, and I'd say well on our way to achieve our longer term targets of getting to 21% segment margins. The remaining components of our full year 2021 guidance remain unchanged. And lastly, for Q2, our guidance is as follows. We expect to be between $1.45 and $1.55 on earnings, for organic revenue to be up 24 to 28%, and for segment margins to come in between .5% and 17.9%. And if I could just finally on page 15, I'll wrap up with a kind of a high level summary of why we think Eton remains an attractive long term investment. And I begin with first, our intelligent power management strategy really does position us to capitalize on these key circular growth trends that we've talked about for the last couple of years. Electrification, energy transition, and digitalization. And we're gaining traction here in all of these areas with a number of new wins. Our technology solutions, including our bright layer platform, are being well received by customers. And as a result, we continue to expect higher than historical organic growth rates for the company in over the next five years, where we affirmed in our view that four to 6% outlook looks very much in hand. Now this accelerated growth, plus our, what I call proven ability to deliver margin expansion, will allow us to deliver on average 11 to 13% EPS growth per year over the next five years. We'll also continue to deliver very strong free cash flow, which provides the optionality to invest in organic growth, to add strategic acquisitions, and to return cash to shareholders. And our commitment to ESG remains strong. We'll continue to develop sustainable solutions for our customers, for our own businesses, and then certainly for the environment that we all share. So with that, I'd like to turn it back to Yan. Obviously we're very pleased with a really strong start to the year, and looking forward to answering your questions.
spk10: Hey, thanks, Craig. Giving our time constraint only an hour today. Really appreciate if you guys can limit your opportunity just one question and a follow up. And with that, I will turn it over to the operator to give you guys the instruction.
spk06: Thank you. Once again, for questions, please press one then zero on your touchtone phone. You'll hear an acknowledgement that you've been placed into queue. You can remove yourself from queue at any time by repeating that one zero command. Our first question today is going to come from the line of Nicole DeBlaze of Deutsche Bank. Please go ahead. Yeah, thanks, guys. Good morning.
spk04: Morning, Nicole.
spk07: Maybe we could just start with a clarification question, getting a lot of in-bounds from investors about this. So when we look at the guidance today relative to where you were a few months ago, what's been added in with respect to hydraulics into the second quarter, and then the incremental earnings associated with trip light closing early?
spk04: Yeah, appreciate the question, Nicole. It's obviously been a very busy quarter with a number of what's called positive moving pieces. So our current assumption on hydraulics is that it would close here in the second quarter, and so you could think about a couple of months at about five cents a month for hydraulics. And then specifically as it relates to trip light, we could add about 10 cents or so for, excuse me, about seven cents for trip light, and then there's a couple of cents negative associated with the acquisition of re-motion. So about 15 cents or so between the M&A activity.
spk07: Okay, got it, Craig. That's really clear. Thanks for that. And then maybe you could talk a little bit about price costs. So I know you said neutral for the full year, but as we think about the phasing of margins throughout the year, are there certain quarters where you will be facing more of a price cost -to-head, and so we should be factoring that into our segment margin assumption.
spk04: Yeah, no, I certainly appreciate that question as well, and it's obviously one of the bigger topics that we're dealing with internally, and I think you're dealing with in terms of trying to model our results and others. And I'd say that what we experienced in Q1, I'd say, is largely we were able to offset a lot of this commodity inflation that we had been experiencing through hedges and working out of inventory and other agreements. And so the biggest impact for us will be in Q2, and it's one of the reasons why you look at our Q2 guidance and you say it may be a little muted, given the very strong Q1, but that really is the quarter where we expect to see the biggest impact of material cost inflation. We're obviously getting price in the marketplace. It does take us typically a quarter of two to fully get pricing seeded into the marketplace, and so certainly Q2 will be the most challenging quarter. It's certainly factored into our guidance that we've laid out, and it'll get better from that point forward. So Q3 and Q4 will be certainly better on an incremental basis than Q2 will be.
spk07: Got it, thanks Craig, I'll pass it on.
spk04: Fully offsetting it for the year. You know, I would add as well, sometimes in hyperinflationary environments, it's tough to get a full incremental margin on material cost inflation. We'll certainly more than offset it, but certainly if you think about in hyperinflationary environments, you generally don't get a full incremental margin on inflation.
spk07: Thank you.
spk06: Thank you. We'll go next to the line of Andrew Obin of Bank of America. Please go ahead.
spk11: Oh yes, good morning. Morning. Just a question. You know, you guys did these deals in China, and you don't see a lot of companies in the US being A, being physically able to sort of find things to do in China and B, sort of execute on them. Can you just give us a bit more background as to how these deals came around, and also very intriguing opportunity that you're able to do more deals like that in China? Thank you.
spk04: Yeah, thanks for the question as well. And we are absolutely thrilled with, you know, with what our local team has been able to do in the China market. And I would, in fact, put the emphasis on our local team. And our local team, having been in the market for a number of years, building strong relationships with some of the electrical companies in the region, you know, were able to pull off, you know, some really attractive deals. And I think a lot of that is attributed to the fact that, you know, we're willing to partner. You know, these are JVs that we have 50% of. We won't consolidate the revenue, at least in China. We'll leverage their products and their low cost footprint, and we'll consolidate revenues as we grow these businesses outside of China. But I think it's a combination of, you know, our local team's connectivity to the market, and Eaton's willingness and proven track record of really being a very successful JV partner. As you know, we have a number of JVs inside of our company in China, in our aerospace business in China. And I think we have a very strong reputation in the country around a company that can very effectively, that you can very effectively partner with, and at the same time, you know, do things that are helpful to both our company and to the companies that we're partnering with. And so we're thrilled with it. I would add that to your other question, we are in fact having a number of other conversations around other similar types of transactions. Nothing to announce here today, but we're hopeful that we will continue to build on kind of this pattern of filling product gaps, and whether that's a gap because it's a technology that we don't have, like the busway products in the China market, or it's a product gap in the form of the ability to really compete in the local market because you have a low cost product. We see other opportunities to do very similar things in other parts of the portfolio.
spk11: Fascinating, thank you. And then just question on data centers. Can you just give us color on how much visibility do you have in hyperscale, enterprise, and maybe by region, it's just, you know, it's been such a hot market and such a big driver of growth for you guys. Just, you know, do you have one quarter of visibility, six months a year, just maybe a bit more of a deep dive here. Thank you.
spk04: Yeah, I mean, and you know, certainly the data center market has been one of the hottest markets, you know, in the electrical space, and we see that market, you know, growing by low double digits, and so it's a very strong market. And we think it'll be a very strong market for a very long time, and we get back to this whole idea of saying, you know, to the extent that you believe that the world will continue to generate, consume, process, and store increasing amounts of data, the data center market will continue to be a very attractive market to be in for a very long time. In terms of visibility, specifically in hyperscale, and we're typically in, you know, the six to 12 months, you know, out window in terms of having fairly good visibility. As we said, historically, hyperscale specifically tends to be a relatively lumpy market, and so orders come, you know, sometimes in big slugs in one quarter or one year versus the others as they reconfigure, you know, their data centers. But certainly, when you look at the market more broadly, you know, we are just thrilled by our position in this market and by the prospects to continue to grow here.
spk11: Thanks so much.
spk06: Thank you. We'll go next to the line of Nigel Coe with Wolf Research, please go ahead.
spk08: Thanks, good morning. So I wanted to get into Electro-America a little bit deeper. Obviously, very impressive margin leverage there. You call our residential and data center pretty strong markets. Is there any mix impacts here, Craig? You know, we're used to industrial being marginal, creative maybe commercial being dilutive, but how does residential and data center impact margin mix?
spk04: You know, I say, if anything, to your point, Nigel, I think you know the business well that we tend to make, you know, higher margins on a relative basis in the industrial side of the business and the more commercially oriented stuff tends to be lower margin. And so we certainly have not experienced any positive mix in the Electro-America's business. I think this margin, you know, just seeing and us posting these record levels of margins is really a function of the things that we talked about, which is our teams are executing well. We're certainly benefiting from some restructuring that we've done as a company and the volume is obviously helping. And the big one is obviously, if you think about Electro-America's, you know, we divested, you know, the lighting business. And as we continue to, you know, work the portfolio in what we call grow the head and shrink the tail, we continue to do things inside of the company to ensure that, you know, we're serving attractive markets. But no, we would expect that, you know, there's more room to grow when we think about margin expansion in our Electro-America segment. And certainly as the industrial markets come back, that's gonna certainly be accretive to margins.
spk08: Right, okay, great, thank you. And then on the end markets, you basically said that all of them will go on higher with the exception of the utility, which remains in the mid-single digit range. And you called out strengthening global, but not US. So I'm just wondering, you know, what we're seeing in the US utility space. Are we seeing maybe slightly softer trends in the first half of the year? Any kind of that would be helpful?
spk04: You know, I mean, the utility markets for us, I say are largely performing in line with what we originally said. We knew as we started the year that, you know, that utility markets would be a relatively strong market at mid-single digit growth. And the market is just really continuing to form in line with those numbers. And so really the distinction I'd say between the commentary around global versus the US is really a function of, you know, change versus our original expectation. And so utility markets continue to be a very attractive space. We think with the work that we've talked about and the things that are going on around energy transition, you know, hardening of the grid, grid resilience, we're seeing a lot of, you know, good activity. If you look at our, you know, broader negotiations in our electrical business, they were up quite significantly from the fourth quarter. And so, yeah, this is a market that we continue to be optimistic about. And we think the utility segment, you know, very much different than its history is really gonna be one of the important growth vectors for the company as we look forward.
spk08: Right, that's great, I'll leave it at that.
spk06: Thank you. We'll go next to the line of Jeff Sprague of Vertical Research. Please go ahead.
spk02: Thank you, good morning. Craig, maybe just to pick up a little bit on that discussion about industrial. Are you, you know, actually seeing anywhere in your business kind of early signs that some of those later cycle elements of your business, you know, are beginning to pick up? Perhaps it hasn't materialized in orders yet, but just kind of what you're hearing from your customers and the channel would be interesting.
spk04: You know, and it's obviously too early, Jeff, to declare victory on any of this stuff, but we are certainly seeing some early signs in the industrial markets of things starting to come back. And as I mentioned, negotiations for, you know, as you know, in our business, you have a pipeline, you do negotiations, and you end up with a booking and ultimately a sale. And so we track negotiations in our business and they are up quite significantly from the fourth quarter and most of that increase, I'd say the biggest part of that increase in what we call our negotiations is coming from our industrial businesses. And so we're certainly seeing some green shoots there. You see a lot of discussion about this whole trend towards reshoring, you know, and you certainly see that today in the semiconductor market, for example, where a number of very large semiconductor companies have announced very sizable projects here in the US and those are very big industrial projects. And so, yeah, we're clearly seeing some early signs, too early to, let's say, once again, declare that we know exactly where we're headed here, but certainly encouraging.
spk02: And secondly, unrelated, but just back to what you're doing here on M&A, maybe just a little more on green motion. You know, it sounded like that was a really interesting partner at your analyst day, you chose obviously to just kind of take them out in entirety. What was the thought process there? And sounds like maybe there's no revenues, but you feel like you have, or very little, but you have some revenue visibility out into 23 and 24?
spk04: Yeah, I mean, it's, you know, green motion, this company had started back in 2009, so it's a relatively new organization. As everything in and around, kind of, you know, electrification of vehicles is new. And so they, you know, some revenues, but revenues are relatively modest at this point. As I mentioned, diluted the margins as we continue to invest in this business, but yet, strategically, I mean, it's just a perfect fit for us. We, you know, Ude and his team spent a lot of time talking about energy transition and what it's gonna mean in terms of opportunities with respect to the grid as, you know, electric vehicles continue to grow. And they have both the hardware and the software technology and the billing systems to allow us to really participate in this really fast growing and exciting space. And so today they have a solution that works perfectly in the Nordic countries and most of Europe will be taking that technology and integrating it with what we're currently doing in North America so that we have a solution for the North America market as well. And so it's really an important, you know, part of our strategy and it really accelerates, you know, what we would have done organically inside of our company by acquiring this company. This gives us, you know, I'd say at least, you know, a couple of year head start for what we were planning to do organically. I think if you think about it in terms of our longer term goals of where we said we'd be by 2030, probably doesn't change that materially because we planned on making these investments organically. So, but it certainly accelerates our progress.
spk02: Great, thank you for that.
spk06: Thank you. We'll go next to the line of Scott Davis with Mellius Research. Please go ahead.
spk13: Good morning, guys.
spk04: Morning, Scott. Hey,
spk13: a lot of good stuff talked about so far, but if we backed up a little bit, Craig, and just talk through the supply chain issues, your company, your business mix is a little bit different than kind of our average. How would you rank the supply chain issues? Is it more around, you know, is it more about, you know, higher raw material costs? Is it more about freight? I mean, how do you guys think about it and how are you managing it?
spk04: Yeah, and I'd say, you know, probably fair to say, Scott, we're dealing with all of those challenges. We're dealing with certainly, if you look at the basket of commodities that we buy, you know, whether that's copper, aluminum, sheet steel, you know, we're probably seeing today levels of inflation in those key raw materials that probably are at levels that we have not seen since, you know, probably 2010, 2011. So clearly, commodity cost increases on our key, you know, input materials is quite a significant challenge. You know, as you mentioned, freight around the world, you know, is up dramatically as well. And then with these challenges, you know, obviously you're dealing with the intermittent availability issues on things like you're reading the newspaper with respect to semiconductors, which is impacting our vehicle business, and also to a certain extent is impacting our electrical business. And so I think we're dealing with, you know, this entire kind of portfolio of challenges right now in the market, and our teams are managing through it extraordinarily well. And I would tell you that, you know, the good news in all of this is a great indicator of just how strong the market is. And so the other side of dealing with these challenges around inflation and freight and the like is that something, you know, very positive must be going on in your end markets, and that's really what we're experiencing. And as you know, you know, getting price as a company is something that we do. It's certainly easier, you know, in certain cases, you know, distribution, for example, as long as the market moves, you know, price is a good thing for distribution. And so, you know, today I would tell you that, you know, we're dealing with each of these challenges, and there'll be certainly intermittent hiccups that we'll see in a business or in a product line or in a quarter, but by and large, you know, our teams are managing it well and would expect things to start to improve, beginning in Q3 and by the time you get to Q4, perhaps at the end of the year for a lot of the bigger issues to be behind us, but we're managing through all of these challenges, but we've been here before. This is nothing new for our company. We've dealt with inflation before, you know, we've dealt with these intermittent supply chain issues before, and I'm confident that we'll manage through this one extremely well as well.
spk13: That's helpful, Craig, and just, I think, I think this is part of Jeff's question, but you mentioned the semiconductor fabs and kind of this onshore thing, but, you know, I always think of the rule of thumb, you know, a new factory is kind of 10% of it is gonna be electrical content. You know, how do you guys think about a semiconductor fab? I've actually never been in one, so, you know, is it heavier electrical content than an average kind of, you know, widget factory? Is it lighter? You know, perhaps some kind of- You know, it clearly would
spk04: be,
spk13: you know, the energy
spk04: requirements of a semiconductor facility would tend to be higher than your typical commercial project, for example, and so the electrical intensity of that kind of project, you know, would be much, much higher. You know, one of the other markets that we didn't talk about as well, you know, is water waste water. That's another one of these markets, I would tell you, where that we're starting to see growth and projects with another market that once again has, you know, higher electrical intensity than some of the other products on the industrial side.
spk13: Very helpful, pass it on. Thank you and good luck,
spk04: guys. Thank
spk06: you. Thank you, we'll go next to the line of John Inch of Gordon Haskett, please go ahead.
spk15: Thank you, good morning, everybody. Hey, Greg, is aerospace right-sized for a pending commercial flight rebound over the next couple of years, likely on a lagging shop visit aftermarket basis, but still a rebound nonetheless, or would you actually have to begin to rehire?
spk04: And I appreciate that question, John, it's a little different one that we're getting around aerospace these days, but certainly appreciate it. And I would tell you that, you know, one of the things that we've done is, you know, we've lived through, you know, cyclical businesses and have a lot of experiences out of our company around how do you manage these businesses that go through, you know, from periods of time, these pretty big cyclical swings. And so I would tell you that, you know, our business is sized appropriately and is well positioned for a rebound in commercial aerospace. You know, the bigger challenges always tend to be the supply chain. So what we're trying to do and make sure that it's not only we have our house in order and we're ready for the rebound, but also throughout the supply chain that everyone is prepared. And like everything else in these businesses, it's the weakest link that tends to create issues for your businesses. And so, yeah, our business itself, very well footed with, you know, a viewpoint of, you know, we think it's 23, 24 recovery. We did take some restructuring actions inside of the business. Most of it was around fixed structural costs that will not come back. Things that we would have done anyway, even in a more healthy environment. And as we talk about this, you know, prior years, what we try to do in each of our businesses have what we call shovel ready projects. And so this list of restructuring projects that we would undertake, you know, at any point in time. And then we simply accelerate them or decelerate them based upon the market environment that we're living in. And that's simply what we did in aerospace. Things that we wanted to do anyway, we would have done them anyway. We simply accelerated them during this period of low economic activity, but not things that take capacity and capability to respond out of the system. So we're in great shape and obviously, you know, we're working with our suppliers to make sure that they're also prepared for the ramp.
spk15: Now, it sounds like a pretty good positioning to be in. Maybe just as a follow-up, Tom, I wanted to ask, you know, in your first 90 days, what have you uncovered? And I'm sure with your boss sitting there, you're gonna say a lot of positive things, but I'm wondering also though, if you could talk about areas for maybe opportunities for each and where your background could be additive to this. So maybe, you know, like some areas for improvement, I don't know, whatever you'd like to say.
spk14: Yeah, I appreciate it, John. I guess, you know, a few things that I've seen. The first one is just a tremendous amount of opportunity. I knew that coming in and it's even more than I expected. And, you know, specifically in the area of organic growth, I think that's a great opportunity for us. And, you know, hopefully that's something that I can be additive to. Another thing that I've found is, you know, with all of the issues that we've been managing, whether it be, you know, commodities or supply chain, just the professionalism of the organization to get after it and just to mitigate it has been really remarkable. You know, and the final thing is just a really top-notch leadership team that wants to win. And, you know, all of that is just a great combination and I couldn't be happier to be here.
spk15: Perfect, thank
spk14: you
spk15: both.
spk06: Thank you, next we'll go to the line of Jeff Hammond with KeyBank, please go ahead.
spk01: Hey, good morning guys. Hey, Craig, I think early in the year or when you first gave your outlook, commercial construction and oil and gas were laggards. Can you just kind of frame what you're seeing there and how you're feeling about those end markets versus a couple months ago?
spk04: Yeah, appreciate the question, Jeff. And I think, you know, largely speaking, you mean, in the context of what's happening in our electrical business overall, you know, they are felt clearly laggards. You know, within commercial, you know, there are certain segments that continue to do well. We've talked about, you know, for example, warehousing, for example, as a segment that is very strong. And once again, it's another one of these markets with a much higher electrical intensity than other commercial applications. But the commercial market, I'd say, you know, our view on it in general, what we call commercial institutional is that, you know, this year we're calling that market to be flat to up slightly, but still a laggard relative to, you know, the overall electrical, you know, markets that we're seeing in general. And then in oil and gas, you know, while we are in another place where we're certainly seeing some green shoots, and the market is certainly firming, the rate count is increasing, we're starting to see more MRO projects and the like. So that market is improving, but once again, relative to the overall electrical market, you know, that market is still, you know, a laggard versus the overall electrical market. And that market we're still calling to be essentially, you know, largely flat on the year, but still not a return to kind of the growth that we certainly would expect to see, perhaps beginning, you know, at the end of this year into next year.
spk01: Okay, that's helpful. And then just on vehicle, you know, you guys raised your outlook, you know, pretty materially and certainly one cue is a lot better. And that seems to be, you know, where a lot of the supply chain and semiconductor chip issues are. Can you just speak to kind of the push-pull of kind of raising that pretty materially versus some of the, you know, supply chain headwinds you're seeing in those markets? Thanks.
spk04: Yeah, and I appreciate that. And, you know, I'd say that, you know, if you think about the semiconductor issue, it certainly has hit the light vehicle market harder than it has, let's say, the commercial vehicle market. I mean, not to say there aren't challenges in commercial vehicles, there are. We have issues there as well, but it's certainly been a much bigger issue in the light vehicle market. And the one thing that's helped us a little bit, I would say, with respect to, you know, the way the OEMs are responding to kind of these shortages of semiconductors is that they're tending to make decisions to manufacture, to produce, you know, their more expensive vehicles. And so what you're finding is, you know, trucks, you know, and things where they tend to make higher margins are also the places where Eaton has higher content. And so our impact in the way we're being impacted by this semiconductor issue is being somewhat muted by the way the OEMs are prioritizing what they produce. And so as we think about Q2, you know, it's maybe a 2% to 3% impact on revenues. And, you know, revenues would have been 2% to 3% higher, but for the semiconductor issue overall. And so our teams are once again managing it well, but it is a real issue and one that we expect to really deal with, you know, throughout Q2 and maybe even into Q3. Okay, that's interesting. Thanks.
spk06: Thank you. Next we'll go to the line of Josh Pockerswinski of Morgan Stanley. Please go ahead. Hey, good morning guys. Josh.
spk03: Craig, I need to follow up on your earlier comments in electrical. Sounded like you thought you guys were benefiting a little bit from supply chain shortages, maybe some advanced ordering or, I don't know, double ordering, people just sort of trying to get ahead of supply constraints. How much of that 23% backlog growth that you saw in the Americas, you know, would you attribute to something that's maybe a bit more atypical versus, you know, the underlying business, just trying to get a handle on, you know, what's the timing that mechanism might be worth?
spk04: Yeah, I mean, it's obviously a difficult question to really know for certain in terms of, you know, the behavior and what's going on specifically, you know, in the channel. I would say that, you know, we probably did see some order surges that took place at the end of Q1 in the month of March. Tough to call it double ordering. I think some of that ordering could be, you know, certainly trying to get out in front of price increases. Some of that ordering could be to put in some, you know, safety stock to protect against, you know, concerns about shortages. But I would say that overall, if you think about inventory levels, I'd say inventory levels in general, I'd say, are still probably slightly below where they really ought to be. If you think about some of the end markets of residential and others, and let's say, in some of our, you know, factory, you know, OEM equipment markets, you know, inventory levels there are probably well below, you know, where they need to be. And we're still kind of hand in the mouth with respect to, you know, dealing with some of the demand that we're seeing. And so I would say, it's kind of the spirit of the question is, do we think this, you know, strength that we're seeing in the electrical business has legs, or is it a little bit of an artificial pop that we're seeing? I think mostly we're comfortable that it's real. The underlying demand that we're seeing in these end markets is real, and that's what's really driving the ordering more than anything. And we'd love to be in a position today where we actually had more inventory and that same sentiment, I would tell you, would be largely true for almost all of our customers.
spk03: Got it, that's helpful. And then maybe just following up on electrical, obviously at the Analyst's Day, a lot of discussion around electrification and sort of some secular shifts in the way customers are buying. As you guys are bidding on projects, is there some, I don't know, higher, you know, content level that you're seeing show up that would suggest this is playing out, or is this just kind of project velocity picking up rather than, I guess, project content?
spk04: I would say that, you know, it's both. It's both velocity and it's also content. You know, one I always go back to, which is an easy one to relate to, is really what's going on even in residential construction today. If you think about today, you know, the electrical content in your homes, as you move from, you know, standard mechanical, you know, circuit breaker to an electronic circuit breaker or a circuit breaker that has, you know, the ability to do fault protection. I mean, we're seeing more electrical content, you know, in almost every project that we participate in in almost every single end market. And I just think this idea of, as we talk about the digitization connectivity, you know, these broader secular growth trends are really requiring an increase in the electrical content in the equipment that we provide. So I would say it's both. It's both, you know, the velocity of projects, you know, as well as increased content on every project that we sell.
spk10: So I appreciate the call. That's all I
spk06: have. Thank you. We'll go next to the line of Joe Ritchie of Goldman Sachs. Please go ahead. Hi, everyone. Thanks.
spk12: So, Craig, I know you've been pretty front-footed on the investments that you've been making on the e-mobility offering. Saw this, you know, interesting announcement last week with ADD, like initiating a carve out of their business. I guess their business being smaller than your business today. I'm just curious, you guys have, you know, been front-footed as well in terms of your portfolio. I guess, how are you thinking about this business, you know, longer term? And, you know, is this a potential opportunity for a carve out of this business as you build momentum?
spk04: Yeah, you know, we obviously followed that announcement as well from ABB. And, you know, I'd say that, you know, every company's got their own strategy around how you unlock value in your organization. And as we think about, you know, the connectivity between what we do in our e-mobility business with our broader electrical business, you know, we see just tons of synergies between them. And so we really think about that as being a key growth platform for Eaton and a great source of synergies with respect to the way we develop technology, the way we leverage scale in our supply chain. And so we really do see it as an integrated part of our company as we go forward. You think about one of the examples that we've mentioned in the earnings call today around this brake tour technology, which is basically a resettable circuit breaker that's used in a vehicle application in a market that has historically only used fuses. That's a great example. That core technology came from our electrical business. That's where it was developed. And so our e-mobility team lifted that technology and actually modified it for the commercial vehicle space. And here we, you know, landed a number of key wins that we think, you know, that maturity, you know, we could be talking about just a hundred million dollars worth of business, you know, in this kind of space around this brake tour technology, once we get to get to full maturity and we've got down all the wins that we're working on right now. So we really do see it as a core piece of the way we run the company, the way we leverage our scale and the way we'll ultimately grow our business and synergies that will flow back to both our electrical and to our e-mobility segment.
spk12: It makes a lot of sense, Greg. Appreciate the color there. I guess my follow-on question, and I know we've talked a lot about different end market trends, but I'd be curious if you guys could quantify, you know, how April has been trending relative to some of the interquarter trends that you saw in the first quarter?
spk04: Yeah, I'd say that, you know, well, we had a good April and, you know, naturally we're working against some rather modest comps given COVID-19 last year, but, you know, the month of April for us came in very strong and came in actually slightly better than what we were forecasting. And so at this juncture, you know, we think, you know, everything is looking good for another strong quarter in Q2.
spk12: Got it. Thank you,
spk06: guys. Thank you. Next, we'll go to the line of Ann Dignan of JPMorgan. Please go ahead.
spk05: Yeah, good morning. Most of my questions have been answered, but just maybe on the electrical side, can you talk about any growing interest or quoting in terms of, you know, state and local governments, either retrofitting for renewable energy requirements or retrofitting for modernisation of infrastructure? You know, are you seeing any of that kind of activity picked back up? I mean, state and local budgets are in better shape than we might have anticipated. Now with all the money they've gotten in terms of aid, I'm just curious if you're seeing any evidence of green shoots there.
spk04: Yeah, I can appreciate that question as well, Ann, and you're absolutely right. I mean, you know, the infrastructure needs in our country, you know, are vast. And what's happening today in terms of, you know, the stimulus programs that are being either approved already or proposed by the Biden administration, you know, are going to put significant dollars in the hands of both state and local governments. And I can tell you today it's early days. In terms of what's been approved already, you know, I'd say that, you know, we are starting to see some of those projects. And when you look at kind of the C30 report, you know, the public sector has tended to be a little stronger than the private sector when you think about what's going on in commercial construction. And so we obviously have seen some of that already, but the biggest piece of it, we think, is still out in front of us. We think that, you know, it obviously is going to depend upon, you know, where these dollars go in terms of this infrastructure bill. You know, if it's in roads and bridges, that probably won't have a material impact on a company, but if it's where the Biden administration is pointing a lot of those dollars, whether that's in, you know, reduced energy consumption, the greening of the economy, electrification, you know, of the economy, you know, building out the electrical infrastructure, grid resiliency. A lot of the things that the administration is talking about, you know, not baked into our current, you know, forecast and outlook could be another real, I'd say, leg of growth for our company. And we're hopeful, but I think today we've seen, you know, very little of that really show up in our business.
spk05: Okay, that's helpful. Thank you. And then, yeah, just back on Green Motion and the electrical charging company in Europe, can you talk a little bit about what is so differentiated about that company? Because, you know, we think that charging is being commoditized very quickly over time. I mean, the barriers to entry are not that high, and it's very regional, and there are standard issues across different countries. I mean, just talk a little bit about why that company and why you think they'll be the winner.
spk04: Yeah, yeah, I think, you know, clearly when you think about the charging infrastructure side of it, there is obviously the hardware. And I think when you think about the piece that's, you know, today you could argue is not very differentiated. It's really the hardware itself, it's the equipment. We view that really more as a gateway, and the real value creation really comes in the software associated with how do you manage the charging infrastructure? And so, yes, they have charging, and they have the hardware associated with charging, and that piece for us is interesting because we do think that depending upon the application that you're in, you know, all charging isn't the same. You know, there is an opportunity, we believe, depending upon what segment of the market you're serving, where the charging infrastructure in and of itself is important, we think there's an opportunity to really pull through and couple the charging infrastructure with what we do on the electrical equipment on your side, which we think will be value creating. But the real value ultimately is really in the software and the way, you know, the solutions around how do you manage the charging of vehicles, of fleets, you know, manage the load in a smart way, you know, in a really complex environment. And that's ultimately where we see the biggest value and what really intrigued us a lot about what Green Motion has already done and the ability to do billing as well and what Green Motion has already done in the Nordic countries.
spk06: Anything further,
spk05: Anne? No, thank you, sorry, I was on mute, appreciate it. Thank you.
spk06: And we have time for one more question that will come from the line of Julian Mitchell of Barclays, please go ahead.
spk09: Hi, good afternoon. Maybe just a clarification question around the free cash flow, I don't think anyone's asked about it yet, but that guidance was unchanged, I think, from before. The adjusted net income guide was raised by about 200 million. So just wondered what the moving piece are, is it around bigger working capital headwinds or is it more to do with perhaps a lot of those sort of adjustments to EPS, non-cash? Just wanted to check on that, thank you.
spk04: You know, I think the way to think about it, you know, the working capital piece is it's just early. I'd say that, you know, today we are dealing with a number of uncertainties as it relates to supply chain and we may need to build a little bridge inventory to deal with, you know, some of these supply chain challenges. And so the way I think about it more than anything is it's just early in the year and some uncertainty around how some of these supply chain challenges are gonna work their way through the system. As you saw in the numbers, we had a very strong Q1 in free cash flow, better than our plan for sure. And there's nothing particular that we can see today that would prevent that from playing through for the year, but it's just early and there's a number of these uncertainties around what's going on in the supply chain and that's what kind of held us back from taking that guidance up at this point.
spk09: Thank you, and then just a quick follow up on aerospace specifically. The margin guide for the year embeds, you know, maybe a two, 300 point step up from Q1 for the balance of the year. I assume that's commercial aftermarket recovering and carrying a very high mixed tailwind with it. Maybe just help us understand what your assumption is for commercial aftermarket sales growth for the year in that context.
spk04: Yeah, you know, so commercial aftermarket, the aftermarket typically lags the OEM, you know, by a quarter or two. And so we are certainly expecting a lift in aftermarket, you know, as we get into the second half of the year and that's certainly gonna be very much accretive to margins overall. So that's certainly baked into our assumptions. And the other place, and as I said, you know, we did a lot of restructuring in the company, a lot of that went into aerospace and certainly as our restructuring programs get completed, we'll see those benefits as well show up in our expanded margins. But we're very comfortable with the margin outlook for aerospace, you know, even in Q1, you know, the margins that we delivered in that business of 18.5%, very attractive margins on, you know, volumes that are down dramatically. And so as we think about the business and the margin profile overall, nothing that I'd say would be extraordinary or herculean in our effort to deliver the forecast.
spk09: That's great, thank you.
spk04: Okay, so.
spk10: Okay guys, I think, you know, thanks for all the questions. As always, Chip and I will be available for any follow-up questions. Have a good day. All right, thank you. Thank you guys, bye.
spk06: Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.
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