Eaton Corp PLC

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Hey, good morning. Thank you all for joining us for Eaton's third quarter 2023 earning course. With me today are Craig Arnold, our Chairman and CEO, and Tom Oakry, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Craig, then he will turn it over to Tom. who highlight the company performance in the third quarter. As we have done our past course, we'll be taking questions at the end of Craig's closing commentary. The price release and the presentation we'll 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're reconciled in the appendix. A webcast of this course is accessible on our website and will be available for replay. I would like to remind you that our commentary today will include a statement related to the 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 earnings release and the presentation. With that, I will turn it over to Craig.

Craig Johnson Okay. Thanks, Shen. And we're pleased to report our Q3 results in another record quarter. Our team continued deliberate on our commitments, supported by strong markets and good execution. So let me begin with some of the highlights on page three. As we've shared for some time now, megatrends, including re-industrialization, energy transition, electrification, and digitalization, are continuing to span our markets, revenues, orders, and negotiations pipeline. As these trends are once again evident in our results in the quarter, especially in our electrical America's business. We posted another quarter of record financial results with strong revenue, margins, earnings, and cash flow growth. While our markets continue to be strong, we're also continuing to improve on our overall effectiveness, which drove our record operating margins. And we're once again raising our earnings outlook. We're raising our 23 guidance for margins, adjusted EPS, and cash flow. Our EPS growth for 2023 at the midpoint of our guidance is now 19 percent. I'd also like to highlight our growing backlog, which was up 15 percent in electrical and 22 percent in aerospace. And we continue to have a strong book-to-bill ratio of 1.1 for electrical and 1.2 for aerospace. Lastly, we recorded record third quarter operating cash flow of 1.1 billion, up 18 percent, and free cash flow margins of 16%. Tom will share additional details, but overall, as you can tell, we're pleased with the results and well positioned to close out a record year. Moving to slide four, in the last quarter we shared a framework for how we think about our key market drivers for the company. The chart notes six megatrends that are driving growth capital investments and how they intersect with various businesses within Eaton. As you can see, we're uniquely positioned in most of our businesses and expect to see accelerated growth opportunities. It's our intention to cover each of these markets and megatrends during our earnings call and to keep you appraised of progress. In our Q2 earnings call, we provided an assembly of progress on infrastructure spending, reindustrialization, and the utility market and electrical, and our aerospace business. Today, we'll spend a few minutes on how reindustrialization continues to drive a record number of megaprojects in North America and how Eaton is positioned to win in the fast-growing data center market. We received an extensive number of questions on each of these topics and hope our updates are helpful as you think about the growth outlook for the company. So let's begin with slide five in the presentation. We've shared this chart previously. And the data is a good proxy for re-industrialization and what we're seeing inside of many of our markets. You'll recall this chart summarizes the number of megaprojects that have been announced since January of 2021. And a megaproject is a project with an announced value of $1 billion or more. Note that this is the North America data, but we're seeing a similar trend in Europe, although the dollar amounts are not as large. Three key points to note here. One, at $860 billion, this number is three times the normal rate, which translates directly to future opportunities for electrical markets. As a reminder, the electrical content on these projects range from 3 to 5 percent. Two, this number continues to grow at a faster rate. Announced megaprojects grew 25 percent between Q3 and Q2, and Q2 was up 20% from Q1. This will not go on forever, but there continues to be strong momentum for industrial projects in North America. And third, only 20% of these projects have actually started. For those that have started, we've won roughly $850 million of orders with a win rate of approximately 40%. And we're actively negotiating another $1 billion of electrical content on a small subset of these announced mega projects. Turning to slide six, we highlight the data center market. You know, I can't think of many markets that have better secular growth dynamics than data centers. The world's appetite for data, new insights, and software solutions continues to grow at an exponential rate, and natural language processing, like chat GPT, will only accelerate this trend. This is a very good thing for Eaton as we have a strong portfolio of data center solutions and the data center slash IT channel represents 15% of our total revenue. While the numbers continue to be refined, we now think this market grows at a 16% compounded rate between 2022 and 2025 and likely for much longer. As expected, our customers are continuing to expand their data center CapEx build-outs, some of which are being modified to support the adoption of generative AI. Just consider some of these metrics. 120 zettabytes of data have been generated in 2023, a 60-fold increase over the two zettabytes generated in 2020-10. And the amount of data generated is expected to grow to 180 zettabytes by 2025, a 50 percent increase over 2023. And the AI impact is just starting to show up in our order book. During Q3, we won a large order of approximately $150 million for a new AI training data center and saw a roughly 61 percent increase in hyperscale orders overall. These AI data centers require both high power and high power density, and as a result, higher electrical content. Another trend driving higher electric content is the need for solutions that allow bidirectional flow of power back to the grid and the ability to optimize the use of renewable energy to power data centers. So this market and Eaton are well positioned for a higher growth for years to come. And on page seven, we highlight Eaton's unique positioning in the data center market And note that we have the electrical industry's broadest portfolio of power manager solutions for data centers. Centralized data centers come in a variety of sizes with incoming power draws between 10 and 500 megawatts, with the average data center of 40 to 50 megawatts, which is the variety that we show here on this slide. Eaton, we support the flow of electrons from where they enter the facility from our transformers to our medium voltage and low voltage switchgear, to our electrical busway, to our uninterruptible power systems all the way into the server rooms where we offer racks and power distribution units. In addition, we have a broad suite of software and service solutions that provide real-time diagnostics, prognostics, and uptime support. As a rule of thumb, Eaton's market opportunity in data centers is about $1.5 million per megawatt. Here, we're distinguishing this market from the myriad of smaller data centers that exist to support many different markets and smaller applications. And we continue to improve our position in the market with our bright layer for data center suite of software solutions. This platform is the first in the industry to unite asset management, IT, and operational device monitoring, power quality metrics, and advanced electrical supervision into one single application. This new software provides electrical power, power quality, distributed IT equipment performance management that improves efficiency, data accuracy, and certainly uptime. So overall, Eaton is well positioned and continues to build on our strength in this rapidly growing market. Given our broad set of megatrends and our growth outlook, we're naturally investing to add capacity in many of our businesses as noted on slide eight. In fact, down the normal run rate, we're investing more than $1 billion of capital to support the growth that we see over the next five years. These investments expand our production capacity across a wide range of markets and position Eaton to win more than our fair share of these opportunities. As you've heard, while somewhat improved, our lead times are still longer than ideal, and these investments will address the bottlenecks in our manufacturing sites. The primary investments are being made in utility markets to support transformers, voltage regulators, and our line insulation and production equipment, in circuit breaker capacity to support the rapid growth in industrial projects and to add redundancy to our existing capability, and in our global electrical business to support growth in a number of fast-growing emerging markets where we've been gaining share but have ample opportunities to do significantly more. And, of course, we're building a completely new e-mobility business and making significant investments to build out new manufacturing capacity there. These capital investments support higher organic growth, provide excellent return on investment, and are indicative of our confidence in the future of the company. We've made some of these capital investments this year, while others will be layered in over the next couple of years. Now I'll turn it over to Tom to cover our financial results and outlook for the year. Thanks, Craig.