Eaton Corp PLC

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. Later, we will conduct a question and answer session. If you wish to put yourself into the question queue, please press 1 then 0 on your telephone keypad. If you would require assistance during the call, please press star then 0. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Senior Vice President of Investor Relations, Mr. Yan Jin. Please go ahead.

Hey, good morning, everyone. I'm Yan Jin, Eaton Senior Vice President of Investor Relations. 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 Oakry, Executive Vice President and Chief Financial Officer. Our agenda today, including the opening remarks by Craig, highlighting the company's performance in the fourth quarter. 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. This presentation includes the adjusted earning per share, adjusted free cash flow, and other non-GAAP measures. They're reconciled in the appendix. A webcast of this call is accessible on our website, and it will be available for replay. I will remind you that our comments today will include statements related to the expected future results of the company and are therefore forelooking statements. Our actual results may differ materially from our forecasted projection due to a wide range of risks and uncertainties as outlined in our presentation release and presentation. With that, I will turn it over to Craig.

Okay, thanks, Ian. Let's start on page three with a few highlights of the quarter. I'll begin by saying that despite what's now very well publicized and ongoing supply chain issues. You know, our team delivered solid results in the quarter and a record performance for the year. And in Q4, we generated adjusted EPS of $1.72, a fourth quarter record. Our sales of $4.8 billion, up 6% organically. And I'd say here we had particular strength in residential data centers and in industrial markets. And I'd say also our aftermarket businesses in both commercial aerospace and vehicle continued to deliver strong growth. We were certainly impacted by supply chain constraints, which had an impact on our revenue, and I'd say especially in our electrical Americas and our vehicle segment. The good news is the markets remained strong. Order growth accelerated in the quarter, and we ended the year with a record backlog. For our combined electrical business, orders were up 21% on a rolling 12-month basis, and our backlog was up 56%. Our aerospace business also had a significant increase in orders, up 19% on a rolling 12-month basis, and the backlog was up 16%. We also continued to post strong segment margins, 19.3% in the quarter, and a Q4 record. And I say here, the actions that we've taken to mitigate inflation, our portfolio changes, and the restructuring savings are all contributing to the strong incremental margin performances. I'd also note that we benefited from favorable mix in the quarter. And I say that our portfolio changes continue to be an important part of our strategy. We're pleased to have completed the Royal Power Solutions transactions a few weeks ago. And the addition of Royal Power will allow us to accelerate our growth in e-mobility and actually in the broader electrical market as the economy continues to adopt more electric solutions. As I say, I think you'd agree that we're not sitting still. We're managing the things that we control operationally while continuing to advance our strategic agenda. Moving to page four, I'll highlight a few additional points on our quarterly results. First, total revenues of up 2%. We increased operating profit by 14%. continued to demonstrate strong operating leverage. Second, acquisitions increased revenues by 7%, which was more than offset by the sale of hydraulics, which was a 10% headwind. And while not complete, we're certainly pleased with our progress on the portfolio. We continue to drive changes to support our overall goals of creating a company with higher growth, higher margins, and more earnings consistency. Third, I just point out that our margins of 19.3%, as I noted, were above the guidance range of 18.8 to 19.2, and I think a good indicator of our team's ability to execute operationally while once again managing the things that are in our control. And lastly, as we noted, both adjusted EPS of $1.72 and second margins of 19.3 were Q4 records in the face of these significant supply chain constraints that we've been dealing with. Next, on page five, we show the financial results of our Electrical America segment. Revenues were up 13 percent, 5 percent organic, and 8 percent from the Triplight acquisition. The organic sales growth was really driven by strength in residential, industrial, and data center markets. And on a sequential basis, organic growth did step up from 1% in Q3 to 5%, so we're making progress, but still, as I noted, continue to be impacted by supply chain constraints. In some cases, our ability to meet demand was also impacted by labor availability as we had the spike in the Omicron version, certainly at the end of the year. Operating margins of 19.2% were down 190 basis points year over year, And the decline was driven really by higher input costs, labor, and supply chain inefficiencies and disruptions in our facilities. And on price recovery, we're making good progress. We made good progress in the quarter, but certainly not fast enough to prevent some margin erosion on the net between inflation and price and the way that plays through to operating margins. And as noted in my opening remarks, market demand remained strong, which was reflected in orders and the growth in our backlog. On a rolling 12-month basis, orders were up some 20%, accelerating from up 17% in Q3 and 13% in Q2. And our backlog reached another record, up 57% from last year, and that's 7% higher than it was in Q3. The strongest markets continue to be residential and data centers. And I say here also, beyond orders, we also have strong momentum in our negotiation pipeline, which was up some 11% in the quarter. Turning to page six, we summarize our electrical global segment. And as you can see, we delivered really strong results in this segment. Organic growth was 15%, with strength in all regions, and particular strength in commercial, data center, and industrial markets. We also delivered significant operating leverage with operating margins of 19.5% and incremental margins of 40%. We did have a little bit of favorable mix here from our exposure to industrial end markets, but we do expect this to continue. Like the Americas, orders remain strong, a 22% increase on a rolling 12-month basis and a step up from the 17% number we posted in Q3. And our growth and our backlog remained above 50%. In this segment, the order strength was especially strong in data centers, residential, and utility markets. Yeah, so I'd say overall, I'd say that our electrical global business had a very strong quarter on top of a strong year and is really carrying a lot of strong momentum into 2022. Moving to page seven, we summarize results for our aerospace segment. As you can see, we had a strong quarter. The industry's recovery has certainly begun. Revenues increased 40%, 4% organic, 37% from the acquisition of carbon emission systems, and currency at a 1% negative impact.