Eaton Corp PLC

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton First Quarter 2023 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. To get in queue to ask your question, please press 1, then 0. And 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 your host, Yin Jin. Please go ahead.

Hey, good morning. Thank you all for joining us for Eaton's Fourth Quarter 2021 Industry 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 includes the opening remarks by Craig, then he will turn it over to Tom, who will highlight our company's performance in the fourth quarter. As we have done on our past calls, will be taking questions aided with Craig's closing commentary. The price release and the presentation we will go through today have been posted on our website. This presentation including adjusted earning 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 will be available for replay. I would like to remind you that our commentary 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 forecast projections due to a wide range of risks and uncertainties that are described in our earnings release and the presentation. With that, I will turn it over to Craig.

Okay. Thanks, Yen. We'll start with some highlights of the quarter on page three. And I'll lead off by noting that we've delivered another strong quarter. We generated adjusted EPS of $1.88 for the quarter, well above our guidance range, a record for the quarter, and up 16% from prior year. And we continue to post strong margins. Q1 record of 19.7%, up 90 basis points over prior year. Our sales were 5.5 billion, up 15% organically, our third quarter in a row of 15 percent organic growth. We had particular strength in our Electrical Americas business, which was up more than 20 percent, including very strong growth in commercial, institutional, utility, and data center markets. We also had exceptional growth in our commercial aerospace and e-mobility businesses. Our orders also came in ahead of expectations for the quarter. On a rolling 12-month basis, Electrical orders were up 13 percent, and aerospace orders increased by 21 percent, which led to another quarter of record backlogs, up 39 percent for electrical and 27 percent for aerospace. You know, I think it's well understood at this point, but I'd note once again that re-industrialization, infrastructure spending, along with secular growth trends of electrification, energy transition, and digitalization have fundamentally changed the growth prospects for our company. Lastly, free cash flow in the quarter was nearly $300 million, driven by higher net income and improved working capital. So it's a good start to the year to keep us on track to deliver our free cash flow guidance despite higher revenue and receivable balances. So on balance, I'd say, you know, we're off to a very good start for the year. Moving to page four, I'd like to once again highlight that Eaton is marking its 100th anniversary of our listing on the New York Stock Exchange. And as many of you saw, we celebrated by ringing the bell in early March. Eaton is one of 32 companies who have reached this milestone. I'd say our longevity on the exchange and our resiliency is really a function of our ability to adapt to a changing world. But what has remained constant over that time is the spirit of innovation that guides us and our commitment to all of our stakeholders, our employees, our customers, our shareholders, communities, and all of society. Now, as Eaton stands at the forefront of perhaps the most significant growth trends that we'll see in our lifetime, we're convinced that our best days are still ahead of us. And we've been busy planning for this moment. As we look at Eaton today, we position ourselves as our customer's trusted partner across power management spectrum. And slide five provides a good example of how we're playing across the electrical value chain from power generation to power distribution to how it's consumed in various applications. We're building a business that supports our customers with a full range of end-to-end solutions. Beginning with deep domain expertise in specific applications and the ability to specify electrical solutions, we're now providing intelligent electrical products, offering data as a service, providing software solutions, doing installation commissioning, and providing aftermarket services. Our role has changed from simply selling components to helping owners fulfill their changing energy needs. We're also proving that we can leverage our technology and create scaled solutions that serve all of our end markets. For those of you who were with us at our March meeting in New York, you saw an example of this in a new product we call Break Door. Breakdoor is a combination of a breaker and a contactor. We developed the technology in our electrical business and have successfully sold it in our e-mobility and aerospace businesses. And as the electrification of everything continues, the need for Eden's technology and solutions will certainly continue to grow. And the primary source of this growth is coming from the megatrends that we've discussed. In addition to electrification, We're benefiting from energy transition, from digitalization, and the re-industrialization of the U.S. and European markets. And we're seeing record capital spending levels. And as you know, this capital is being supported by an unprecedented level of infrastructure spending by governments around the world. And while early, we're tracking a large number of infrastructure-related projects. For example, in our Electrical Americas business, we've already seen over $1 billion of projects and have won roughly $450 million of orders. And as this chart reflects, we're also at the beginning of a strong aerospace growth cycle and seeing rapid adoption of electric vehicles. Collectively, these trends have positioned the company for strong growth for the foreseeable future. Next, on page seven of the presentation, we provide an example of how reindustrialization is creating a record number of megaprojects. And we define a major project as a project with more than $1 billion of capital. Since 2021, announced non-residential megaprojects have a cumulative value of almost $600 billion, at least 3X the historical run rate for non-residential projects. And this is North America only. $600 billion announced over the last nine quarters $400 billion more than the historical run rate. These projects are certainly in various phases of design, planning, or construction, but as you can see, these secular trends are translating into specific projects, and they haven't slowed down. There's billions more in the planning stages, which will certainly sustain our growth for years to come. On slide eight, we take you from the $400 billion announced megaprojects and what it means for the electrical industry. We estimate that the electrical content on these projects is in a range of 3 to 5 percent of the total project value. This suggests $12 to $20 billion of incremental electrical revenue. Keep in mind, there's certainly a wide range of electrical content on various projects, and our exposure is tied more closely to building infrastructure. But assuming these projects get planned, designed, and built over the next five to seven years, they will expand the electrical market by some $2 billion to $4 billion a year. And that's just from what's been already announced in megaprojects. We naturally expect more large and small projects to come. So I'd say these projects are a good example of how megatrends are playing out and creating a very different growth outlook for the electrical industry, and one we think will run for decades or more. Another helpful proof point is represented on slide nine, where you can see how our negotiation pipeline has grown. As you can see, our negotiation pipeline has doubled from what we've seen historically. In 2022, we saw nearly $5 billion of projects in our negotiations pipeline in electrical Americas alone. And similar to megaprojects, we're seeing broad strength in manufacturing, in data center, industrial, and utility markets. This large step up in negotiations has further supported our expectations, further supports our expectations for strong markets and faster organic growth as we go forward. And just one additional proof point is noted on page 10. Here we show a few examples of how these projects are translating into specific orders. As we've reported, our electoral orders have been at record levels for two years now. So, what we're demonstrating here is how these megaprojects are translating directly into large wins for our electrical business. For example, we've won $180 million of orders to provide power management solutions for two new EV plants in North America. Specifically, we're providing power distribution equipment and bright layer industrial remote monitoring software. Another example is a $100 million order for a new U.S. semiconductor plant, and we're already working on phase two of this project, which could be even larger. So, overall, we're seeing record project announcements, record negotiations, a record set of orders that has led to record backlogs. And keep in mind, the revenue impact is mostly in front of us. Moving to page 11, We're also benefiting from megatrends in aerospace and vehicle. We're at the beginning of an aerospace growth cycle in both commercial and defense markets. Specifically, commercial OEM build rates are expected to grow in the mid-teens over the next several years. And our commercial aftermarket should also grow by double digits as global revenue passenger kilometers continue to recover to pre-pandemic levels and beyond. We've also noted the significant step up in defense orders and expect to see a significant lift in defense revenues beginning in 2024. As a point of reference, our defense orders have more than doubled from 2019 levels. And in recent years, we've run increased content on both commercial and defense platforms. In vehicle, electrification continues to accelerate, and we now expect global EV penetration rates to exceed 50 percent of global auto sales by 2030. up from our prior estimate of 40%. While we're not providing any new revenue updates today, we once again are relooking our forecast for our e-mobility segment. And on page 12, we highlight a few key wins in our aerospace and e-mobility businesses, beginning with a $500 million win for cryogenic coolers and controllers for the City Airbus Urban Air Mobility Program. Airbus WIN is a good example of how digitalization, software, and electrification are beginning to benefit our aerospace business. And as Tom will report shortly, we're seeing more than 30 percent growth in our defense and commercial aftermarket orders. And in immobility, we continue to realize significant wins, the most significant of which are coming from our power distribution product line within our immobility business. You'll recall, This is where we're able to leverage our broader electrical business and our unique breakthrough technology. Our latest set of wins comes from a leading European automotive OEM and will generate $100 million a year of mature year revenues. So, like electrical, our industrial businesses are delivering significant wins tied to long-term megatrends that will support faster growth. When you combine the businesses, We're confident that our market should grow at more than 2x the historical rate. And as we've stated, we're in the early innings. These trends are expected to deliver outside growth for years to come. With that, I'll turn it over to Tom to walk us through Q1 financial results and updated guidance.