Eaton Corp PLC

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Fourth Quarter 2023 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. Should you require assistance during the call, please press star then zero, 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, Yan Jin. Please go ahead.

Hey, good morning. Thank you all for joining us for Eaton's fourth quarter 2023 earning 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 opening remarks by Craig. Then he 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'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. The presentation includes adjusted earning per share, adjusted free cash flow, and other non-GAAP measures. The recounts are 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 forelooking 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 presentation. With that, I will turn it over to Craig.

Okay. Thanks, Jen. We're pleased to report our Q4 results and record performance for the year. Our team continued to deliver our commitments, supported by strong markets and good execution. So let me begin with some highlights of the quarter on page three. We generated adjusted EPS of $2.55 for the quarter and $9.12 for the year, both all-time records. Adjusted EPS was up 24% and full year was up 20%. And we continued to post strong margins. Q4 was 22.8%, up 200 basis points, and above the high end of our guidance. We also delivered strong incremental margins, 42% in the quarter. and we continue to see strong market activity. On a rolling 12-month basis, book to build for electrical and aerospace was 1.1, and our backlog increased by 15% for electrical and 13% for aerospace. And as you've read, we're initiating guidance for 2024 and expect another year of strong organic growth. Double-digit increases in adjusted EPS and continued strength in cash flow. And I'll go through the full guidance details shortly. Lastly, we're announcing a multi-year restructuring program that will eliminate fixed costs and improve our overall efficiency. The program will cost $375 million and deliver $325 million of mature year benefits. So the combination of market tailwinds, our internal growth initiatives, and our continued focus on operating efficiency will allow us to deliver outstanding results for years to come. And speaking of market tailwinds, let's turn to slide four. In the last couple of quarters, we shared our framework for how we think about key growth drivers for the company. The chart reflects the six secular growth trends that will positively impact our business today and for years to come. And we're stepping up our investment in R&D and capital to ensure that we're well positioned to capture this growth. We think Eaton is uniquely positioned in that most of our businesses are expected to see an acceleration in market-driven growth opportunities. Prior to earnings calls, we provided a summary of progress on infrastructure spending, re-industrialization, utility and data center markets and electrical, and our aerospace business. Today, we'll provide an update on the impact from re-industrialization and how it continues to drive a record number of megaprojects in North America. We'll also provide you with a framework for how to think about the timing impact on megaprojects from when a project is announced to a negotiation to an order and eventually to a sale. So let's take a look at slide five in the presentation. We've shared this data previously and it's a good proxy for the re-industrialization trend we're seeing. You'll recall This summarizes the number of megaprojects that have been announced since January of 2021. And a megaproject, once again, is a project with an announced value of $1 billion or more, and there have been 333 of those through the end of last year, beginning in January 2021. Note that this is North America data, but we're seeing a similar trend in Europe, although the dollars are not as large. A few points to note. At $933 billion, this number is 3x the normal rate, and the increase translates directly into electrical markets. As a reminder, the electrical content on these projects is typically anywhere from 3% to 5%. Second, the number continues to grow and is up 9% from Q3. This will not go on forever, we're sure, but there continues to be strong momentum for US industrial projects and we're building a multi-year backlog. And third, about 72% of these projects are still in the planning phases and only 18% have actually started. Some 10% have been canceled or significantly delayed, but this number is actually lower than historical rates. For those that have started, we've won over a billion dollars in orders with a win rate of approximately 40%. were in active negotiations on another $1 billion of electrical content on a small subset of these total projects. So as you can see, megaprojects are a compelling reason to be optimistic about the future. Turning to slide six, we want to highlight the timing and the duration of these megaprojects as they become opportunities for our electrical business. The primary conclusion is we've not seen a significant impact from the large step up in the number or size of megaprojects yet, but it's coming. While each project is different, we put together our view of three representative examples of reindustrialization projects, including a semiconductor, an EV battery, and a healthcare example. The slide indicates the number of months between an announcement of a megaproject and the time we begin to negotiate it, the time from an announcement of an order, the time from an announcement to an order, and from an announcement to a shipment. As you can see, it takes on average three to five years from when a project is announced to when it shows up in our revenue. So while the gratification is certainly delayed, this is what's showing up in our backlog and providing outstanding visibility to future growth. With over $1 billion of orders that we've already won, We expect revenues to be recognized over the next several years in line with each of these products' individual timelines. And just as a point of reference, our revenues in Electrical America from Mega Project in 2023 was only about 3% of our total revenues. By contrast, they represent 16% of our negotiations and 6% of our orders. Hence, the conclusion that most of the impact from this significant step up in megaprojects is still ahead of us. Now let me just turn it over to Tom, but before I do, I do want to take this opportunity to thank Tom. I mean, Tom has just been an outstanding leader for Eaton in his tenure with us, and I couldn't have asked for a better partner or a more effective CFO, and Tom, we're absolutely disappointed To see you go, we fully understand the reason you made this decision. We wish you all the best of luck, and thanks once again for this outstanding leadership over the last three years.