Eaton Corp PLC

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Fourth Quarter Earnings Call. At this point, all participant lines are in a listen-only mode. However, there will be an opportunity for your questions. To queue up for a question, please press 1, then 0. Should you require assistance during the call, please press star 0, and an operator will assist you offline. And as a reminder, your conference is being recorded. I would now like to turn the conference over to Mr. Yan Jin, Senior Vice President, Investor Relations. Please go ahead.

Mr. Hey, good morning, everyone. Thank you all for joining us for Eaton's Fourth Quarter 2022 Earnings Call. With me today are Craig Arnold, our Chairman and CEO, and Tom Okere, Executive Vice President and Chief Financial Officer. Our agenda today includes the opening remarks by Craig, then we will turn it over to Tom, who will highlight the company's performance in the fourth quarter. As we have done on our past calls, we will be taking questions at the end of Craig's closing commentary. The press release and the presentation we will go through today have been posted on our website. This presentation includes adjusted earnings per share, adjusted free cash flow, and other non-GAAP measures. They are reconciled in the appendix. A webcast of this call is accessible on our website, and it 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 are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described into our earnings release and the presentation. With that, I will turn it over to Craig.

Thanks, Jan. Hey, we'll begin with the highlights of the quarter on page three. And I'll start by noting that we again delivered very strong results in the quarter and record performance for the year. We generated adjusted EPS of $2.06 for the quarter and $7.57 for the year, both all-time records in each period. Our Q4 adjusted EPS was up 20% from prior year. Our sales were $5.4 billion, up 15% organically. And for the second quarter in a row, with particular strength in utility, industrial, commercial institutions, data center markets for electrical, and commercial aerospace, vehicle, and e-mobility markets on the industrial side. And we continue to post strong margins, Q4 margins of 20.8 percent. We're up 150 basis points from prior year and near the high end of our guidance range. And incremental margins were 33 percent in the quarter. For the full year, we delivered record segment margins of 20.2 percent, up 130 basis points from prior year. And as noted here, orders continued to remain very strong. On a rolling 12-month basis, electrical orders were up 25 percent, and aerospace orders increased 24 percent, you know, which led, quite frankly, to record backlogs as well, up 68 percent in electrical and up 21 percent in aerospace. Now, lastly, in what was an otherwise challenging year, we generated record free cash flow in the quarter, with adjusted free cash flow up 41 percent. And our free cash flow as a percentage of sales was 18.1 percent in the quarter. You know, while improved cash flow in the second half of the year, it wasn't enough to really achieve the full-year cash flow targets. As we indicated, we continued to prioritize supporting higher organic growth winning new orders, and protecting our customers, which all contributed to higher levels of working capital. But we still have work to do and with a focus on those areas that don't impact revenue growth. On page four, I summarize our performance highlights for last year. Overall, I'd say in a challenging operating environment, our team delivered strong financial results. And as noted here, we exceeded three of our four key financial metrics. First, for organic revenue, we posted 13 percent growth, which was actually more than 60 percent above our original guidance at the midpoint. Throughout 22, we raised our organic revenue growth in all segments, and the team delivered on the organic growth expectations that we set. It's worth noting that our largest business, Electrical Americas, delivered 16 percent organic growth, 2x the midpoint of our original guidance. Second, I'd note that we continue to demonstrate our ability to drive profitable growth with record margins of 20.2 percent in 2022, which was 10 basis points above our original guidance at the midpoint. Third, adjusted EPS of $7.57 was seven cents higher than the midpoint of our original guidance. And I'd note that we fully offset the impact of some $500 million of unfavorable currency or roughly 20 cents a share. Lastly, as noted, we did miss our free cash flow guidance for the year. Most of this miss went into working capital to support higher levels of sales and orders and the record backlogs. But I say here, once again, I know we can do better. As you might expect, supply chain disruptions and our decision to prioritize protecting customers with higher inventory played a major role in this inventory growth over the year. But overall, I'd say it was a good year, despite a year filled with inflation, labor shortages, supply chain disruptions, and FX headwinds. And the team delivered record financial results, and we go into 2023 with positive momentum. So turning to page five, I hope at this point you would agree that 2022 wasn't an exceptional year. but just another year of delivering what we promised. And as it reflects the fundamental changes that we've made to the company over the last decade, we are a very different company today than we were 10 years ago. We've embraced the realities of a changing world and the necessity for us to change as well. We're now in attractive growth-oriented end markets, and we have a proven formula for how we run the company better through the Eaton business system. With this transformation, we've become a stronger company that has delivered higher growth, higher margins, and better earnings consistency. And we've continued to be a good steward of your capital. The end result is the new Eaton, where some 90% of our profits now come from electrical and aerospace businesses. But once again, we're not done. We'll continue to apply our operational model, our strategic framework, and our potential criteria and we'd expect to continue to maximize value for all of our stakeholders. And as you can see on page six, what this transformation has delivered to our shareholders. As you would expect, our strong results have translated into very strong financial results. And for the sake of comparison, we charted total shareholder returns for three, five, and seven years, and we've compared our results with the S&P 500, the medium of our peer group, and the XLI Industrial Index. And in every case, Eaton has significantly outperformed our benchmarks. And I'll explain in the next few slides, we do believe our best days are still in front of us. Turning to page seven, you know, our transformation into a global intelligent power management company has positioned Eaton at the center of some of what we think are some of the most important trends that we'll see in our lifetime, the most significant being climate change and all the downstream implications that it brings. As we all know, climate change is driving the need to transition from fossil fuels to renewables, and increased regulations are driving the demand for new solutions. These solutions will require tremendous investments in renewables and grid infrastructure for both new and existing buildings. This trend is also closely coupled to need to electrify the economy. Cars, trucks, planes, buildings are all requiring more electrical content, and as we move away from fossil fuels, this allows us to take advantage of renewables. And digitization is providing us access to data and insights that is allowing us to be more connected, more productive, and more efficient than ever. It's also, by the way, creating a need for more data centers an important end market for Eaton. Added to these trends, we're also on the front end of an aerospace recovery cycle that will drive growth in both our commercial and military markets. I don't know about you, but I can tell you, I can't think of a company with a better set of market dynamics than Eaton. And while we're not ready to change our long-term growth goals, I'd be surprised if we didn't exceed our previously announced targets of 5% to 8% annual growth. Next, on page eight, we highlight how these megatrends are supported by unprecedented government stimulus spending really around the world. In fact, these programs will have a direct impact on the growth rate of more than half of our end markets. And in the U.S. alone, the Infrastructure Act from 2021 and the Inflation Reduction Act from 2022 will fund some $450 billion of grid modernization and other climate-related programs. And of particular importance to Eton is the $88 billion that are set aside for power grid updates and EV charging networks and incentives. In Europe, the EU recovery plan provides $244 billion of green energy transition, which member states are now working on implementing. And in China, the government has set clear goals to lower carbon emissions. They've laid out plans to strengthen their grid by 2025, including investments in more wind and solar. China also continues to lead the world in the adoption of electric vehicles. But even if you exclude China, we still estimate that between the U.S. and the EU programs, we'll expand Eaton's addressable market by some $11 to $14 billion over the next five years. And I say this is just another powerful tailwind that supports our confidence and the growth outlook of the company. You know, Tom will pick it up here and take you through the numbers. Thanks, Craig.