Eaton Corp PLC

Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Second Quarter 2024 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 ask a question, please press 1, then 0 on your touchtone phone. You will hear acknowledgment that you have been placed into queue, and you may remove yourself from queue at any time by repeating the 1-0 command. Should you require assistance during the conference, please press star then zero, and an operator will assist you offline. And as a reminder, today's call 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 second quarter 2024 earnings call. With me today are Craig Arnold, our chairman and CEO, and Olivia Leonetti, executive vice president and chief financial officer. Our agenda today includes opening remarks by Craig. Then he will turn it over to Olivier, who will highlight the company's performance in the second quarter. As we have done in our past course, we'll be taking questions at the end of Craig's closing commentary. The price 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're 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 forecasted projections due to the 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, Yan. We'll start with some highlights on page three, and I'll lead off by noting that we delivered another strong quarter, and we're pleased with the first half of the year. Our teams continue to deliver on our commitments propelled by strong markets and good execution, exceeding our expectations and consensus on strong revenue, margins, and earnings per share growth. We generated adjusted EPS of $2.73 on the quarter, an all-time record and up 24% from prior year. We also delivered record segment margins of 23.7%, up 210 basis points from last year. And our markets continue to be strong. On a rolling 12-month basis, electrical orders were up 9%, and aerospace orders increased by 4%. This led to another quarter of growing in record backlogs, up 27% in electrical and 14% in aerospace, with strong book-to-bill ratios. The strength in our orders and backlogs continue to support our view that the megatrends will keep the company growing for some time to come. We're in the early stages, and once again, our markets are well positioned for the future. And our growing backlog allows us to once again raise our full-year guidance. We're raising our guidance on organic growth, segment margins, adjusted EPS, and cash flow for the year. On balance, we're very pleased with our results and we're well positioned for the second half of the year. Turning to page four, we once again are sharing the key trends in end markets that are expected to drive Eaton's long-term growth. The broad number of megatrends noted on this chart have created and will continue to create a strong growth environment for the above-end markets. And Eaton is uniquely positioned in that these are our primary end markets. As a reminder, we're in the early phase and expect to see growth for years to come. Today, we'll continue our practice of covering one of these megatrends and how it's impacting growth in one of our key markets. Last quarter, we gave an end market update on our industrial facilities and markets, as well as our latest view on growth expectations in the rapidly growing data center market. Today, we'll once again provide an update on re-industrialization through the lens of megaprojects, where the activity just remains extremely robust. And we'll provide a summary of our growth outlook for our single largest end market, commercial and institutional facilities. Before turning our attention to a specific market, we did want to once again remind you of the broad-based nature of our growth expectations. So turning to slide five, we summarize the growth rates in our key end markets. This data has not changed from what we shared in recent quarters or at our technology showcase earlier this year. And I'd say in many ways, this is a once in a lifetime opportunity in that the megatrends we shared are having a broad and significant impact on the growth outlook for most of our end markets. And we're seeing the benefit in our sales results, and more significantly in our orders, backlog, and negotiation pipeline, all of which are at record levels and growing. And we'll share in a few slides, we're investing to support the orders and commitments that we received from our customers. Turning to slide six in the presentation, we once again provide a summary of megaprojects that have been announced in January of 2021 in the North America market. And as a reminder, a megaproject is a project with an announced value of $1 billion or more, and the list now includes 444 projects and $1.4 trillion of cumulative value. This is double where we were this time last year, and the backlog for megaprojects now stands at $1.6 trillion, up some 25%. It's important to point out that We have not seen any slowdown in the number of announced projects. In fact, Q2 was one of the strongest quarters ever. Recently, we've seen data center and power generation slash renewable projects take the lead in new project announcements. These two project types represent some 40% of announced projects in the last 12 months. And the cancellation rate continues to be modest, around 11%, which is well below historical levels. Note that only 15% of these projects have started, and for projects that have started, we've won over $1.4 billion in orders, and our win rate has been approximately 40%. We're actively negotiating another $1.3 billion of electrical costs. There's lots more to come here. Turning to slide seven, we continue to highlight the commercial and industrial end markets. For 2023, commercial and industrial institutional end markets represented 20% of total Eaton sales and 28% of our electrical sales. And for Eaton overall, we estimate that new office real estate exposure is only 2% to 3% of our revenues. We know that this has been a concerning point for some of you, but as you can see, it represents a very small part of our sales. While the entire category is growing, we expect to see significant strength in the institutional infrastructure segments, which represent 50% of our CNI exposure in electrical Americans. Institutional infrastructure includes education, healthcare, government, and includes waste and wastewater. I'd also point out that the electrical content in these two segments is much higher than office buildings and other light industrial projects, excuse me, light commercial projects. And as noted, the same set of megatrends, including digitalization, energy transition, and stimulus spending, are also driving outgrowth in this segment, and something that we expect to continue for years to come. On slide eight, we provide an overview of the products and software that we sell as part of our commercial and institutional billing portfolio. We include this slide to provide a perspective on how broadly we play across the electrical infrastructure in buildings. In fact, we have the industry's broadest set of electrical solutions. Some of the newer categories for us include energy storage, EV charging network managers, and microgrid controllers that control energy behind the meter. In addition to the entire suite of digitally enabled hardware, we have our bright layer software suite that does energy management across the building and campuses, all of which are supported by our comprehensive service organization. On slide nine, we want to provide an update on our incremental growth investments. As a reminder, we're investing more than a billion dollars of incremental capital to support growth with $750 million in North America over the next few years. These investments expand our production capacity for a variety of products and support most of our electrical end markets. As you're aware, the market has several capacity constraints, so we're working closely with customers to ensure that our capacity additions are in line with the demand and, in many cases, our contractual agreements. To provide you with a feeling of the magnitude of these investments, we'll impact 25 of our sites and add over 2 million square feet of manufacturing space. Overall, these projects remain on track, with many sites already ramping up new capacity. Additional production capacity will be coming online later this year and into the first half of 2025. To note a couple of recent milestones, We recently opened a new state-of-the-art campus in Helsinki to increase capacity of UPS systems, and this obviously includes our latest Energy Aware UPS. This is actually the industry's leading UPS and is 30% smaller than most of the competitive products. And most recently, we signed an agreement to build a new electrical campus in Dubai to expand our commercial, manufacturing, and support functions in the rapidly growing Middle East region. Turning to page 10, we're excited to have closed the strategic investment in Nordic EPOD. Nordic EPOD designs and assembles standardized power modules for the European data center market. What's unique about their solution is that it's a design that's standardized and it's a pre-engineered system that allows for faster market response. The standard power module, or EPOD, contains all the critical power, electrical gear, backup power, cooling and control systems needed to support a data center. The EPODs are manufactured in Norway, are designed to operate in harsh weather environments, and can supply up to two megawatts of electrical power. I'd also note that the power modules are an increasingly preferred approach for many of the data center customers in Europe. And Eaton will naturally supply a significant amount of the electrical equipment and services. This is an outstanding new platform that will allow Eaton to increase our participation in the rapidly growing European data center market. Now, I'll turn it over to Olivier, who will take us through the financial results for the quarter.