Q4 2020 Eaton Corporation PLC Earnings Call

<unk> and gentlemen, thank you for your patience and holding and welcome to the Eaton and fourth quarter of 'twenty and 'twenty earnings call.

At this time all of your participant phone lines are in a listen only mode and later there'll be an opportunity for your questions.

Like to queue up during any portion of the presentation. Please press one followed by zero for US just a brief reminder, today's conference is being recorded and.

I'm now happy to turn the conference over to senior Vice President of Investor Relations Yan Jin.

Hey, good morning, I'm Yan Jin.

And you didn't senior Vice President of Investor Relations. Thank you all for joining us for Eaton and fourth quarter, 'twenty and 'twenty, earning call with me today are Craig Arnold and our chairman and CEO and Rick for you Al West Chairman, and our Chief financial and planning Officer, Alright agenda today, including opening remarks by Craig highlighting the company's performance and the fourth quarter as we are.

Have done all of our past calls, we'll be taking question and at the end of Craig's comments. The price released today and the presentation. We'll go through today has to be and posted on our website at Ww Dot E and Dot Com. Please note that both the price release and a presentation include recalls that agent to non-GAAP measures a webcast of this.

<unk> is the festival, our website and will be ready for replay I would like to remind you that our comments today will including 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 and there also.

Described in our earnings release and a presentation. They're also all lines and all were related 8-K filing so with that I will turn it over to Craig Craig. Thanks, John appreciate it and we'll start on page three and we naturally have a lot of good news to talk about today, but I'd say, we'd be remiss. If we didn't begin by at least acknowledging Rick Fearon and.

And his upcoming retirement.

Have you know Rick will reached mandatory retirement age of 65 and March and will retire on March 31, and so I'd like to extend a sincere thanks to Rick for his 19 years of service to Eaton and Rick has obviously played out and.

Rental roll and the transformation and shaping of our company and the company that we have today and he's been a trusted partner to the management team to our board and and certainly to me personally and.

And looking back Rick has participated in more than 75.

Of these earnings calls and this will be his last one.

And so, we certainly which Rick and his family well as he makes this transitioned onto life. After Eaton and if there is life after Eaton and I'm not sure Rick but.

And Rick will also be around for another couple of months and also we will attend the investor meeting on March one.

Moving to page four I would also like to two.

And welcome Tom <unk> and as well.

Tom becomes Eaton and CFO effective April one.

Tom was previously the CFO of Ww Grainger and joined the team in January.

And throughout his career he has held various leadership positions at advance auto parts at Amazon and GM Tom.

Tom is a seasoned CFO with a strong track record of success and we anticipate that will bring a very unique perspective and set of skills to the role here at Eaton is operational EPS growth oriented and he just has outstanding knowledge of distribution channels like Rick. Tom is also a global leader, who has lived and around the world including several.

Countries in Europe, as well as Korea, and so we're very happy to welcome Tom to the Eaton team as well and look forward to.

His contributions and the future.

Now on the move to more good news and turning to page five here, we summarize a number of recent noteworthy accomplishments and I'll begin with the recent announcements to acquire Triplite from 165 billion and carbon emission systems for $2 8 billion, two very strategic acquisitions that improve the profitability and <unk>.

Frankly, the growth outlook for our company the acquisition of AAA will enhance the breadth of our edge computing and distributed it product portfolio and also expand our single phase <unk> business in the United States.

We're paying approximately 12 times 2020, EBITDA 11 times estimated 2021, EBITDA and we expect this transaction to close and the middle part of 2021.

Yesterday, we also announced the acquisition of carbon emission systems.

<unk> is a leading manufacturer of air to air refueling systems, and environmental systems, and actuation and Cabo mosso as highly complementary products to our company and has a strong position importantly on growing defense platforms.

And we're paying approximately 14 times 2020, EBITDA 13 times estimated 21, EBITDA and we expect this transaction to close and the early part of Q4.

And if we can just turn to Q4 specifically.

Certainly have a stronger than expected quarter, and we're pleased with our solid results and our team just continue to execute well. Despite the pandemic Q4 earnings per share of $1 18 on a GAAP basis and $1 28, one of adjusted basis.

For revenues of $4 7 billion were down 5% organically.

At the high end and the range that we provided and it's up 3% versus Q3.

And our decremental margins were 21% and also better than the guidance of 25% that we provided.

I'm also very pleased with very strong free cash flow, our operating cash flows were $943 million and our free cash flows were $845 million, both of which exceeded prior year levels.

And for 2020, and we generated $2 $6 billion of free cash flow, which was at the top end of our guidance range and an all time record for free cash flow to sales at 14, 3%.

A lot of really positive.

Things to talk about there.

And the company continues to execute well.

Turning to page six we summarize our Q4 financial results and I'll note a few items on this page first acquisitions increased sales by 2%, which was more than offset by the divestiture of lighting and automotive fluid conveyance, which reduced sales by 8%.

Our segment margins up 17, 4% were very strong for sure and only 40 basis points below the prior year. Despite lower volumes and then just as a bit of a reminder.

I would note that we record all of our charges related to acquisitions divestitures and restructuring our corporate instead of at the segment level, which hopefully makes it easier to model the company going forward.

Moving to page seven we summarize our electrical Americas segment.

Revenues were down 18% and this was made up of a 1% decline and organic revenues and and 17% mainly due to the divestiture of lighting.

And this segment, we saw strong growth and data centers and residential markets, and which was offset by weakness in industrial and commercial markets.

Operating margins increased 120 basis points to 21, 1%.

And in this very strong margin performance was due to really effective.

Cost containment actions, but also aided by the divestiture of lighting.

This combination resulted in very strong decremental margin performance of 15%.

And while orders were down 1% on a rolling 12 month basis.

Data center, and orders were particularly strong and actually up double digit.

Our backlog grew by 12% and this was driven by strength in both residential and datacenter markets.

Lastly, and as I mentioned at the beginning we're very pleased to have announced the acquisition of AAA.

This business is just a tremendous strategic fit with our and existing electrical franchise and will allow us to continue to capitalize on this digitalization trend that requires edge computing.

And then when you think about some of the future estimates, suggesting that some 75% of enterprise generated data will be created and process. It computing. We expect this rapid growth to continue for some time to come.

Next on page eight we show the results of our electrical global segment revenues.

<unk> declined 5% with a 7% decline and organic revenue, partially offset by a 2% positive currency.

And this was better than the midpoint of our expectations for the quarter.

Organic sales were driven by weakness not surprisingly and oil and gas and industrial markets.

If you exclude oil and gas and industrial businesses kind of more of that more project driven businesses Europe was down slightly and Asia Pacific was actually up.

Single digit.

Operating margins declined 40 basis points on a year over year basis and here once again decremental margins, while Mitt will mill well managed at 25%.

And this segment our orders declined 6% on a rolling 12 month basis with continued weakness in oil and gas and industrial markets and excluding oil and gas and industrial markets orders were down 1% and we saw strength in data centers and residential markets and in fact datacenters were actually up some 30%.

We also continue to expand our backlog, which was up 14% driven once again by strength in residential and datacenter markets.

Lastly, we were pleased to announce in mid December and agreement to buy 50% of <unk> High Tech, which is based in China <unk>.

And you manufacturers low voltage circuit breakers, and contractors and China and also throughout Asia Pacific.

This investment.

And we will provide us access to a really strong portfolio of products and it will open up significant growth opportunities for our company throughout Asia Pacific.

And we'd expect this transaction to close sometime in Q2.

Turning to page nine we summarize our hydraulics segment revenues were up 2%, which was all organic.

And this was much better than the down seven 5% at the midpoint of our guidance as markets continue to recover faster than anticipated and and especially I would say and China and in Europe.

Operating margins were 10, 5% up 70 basis points from Q3.

The momentum and this segment really continued really throughout the quarter, resulting at a 25% increase and Q4 orders with strength and both agricultural and construction equipment markets.

We are working towards closing the hydraulics transaction by the end of the first quarter I.

I would also add though but given some of the time needed to complete all of the regulatory approvals, we wouldn't be surprised to see that slip into the early part of the second quarter.

Next on page 10, we have the results for our aerospace segment as expected revenues declined 13% down 25% organically, partially offset by 11% increase from the acquisition of <unk> and 1% positive currency.

The organic revenue decline was primarily driven by the continued downturn as we all know and commercial markets.

Lastly, offset by double digit growth and military sales.

Operating margins declined to 13, two excuse me to 18, 3%.

But we see that still very healthy levels of performance and.

And lastly, yesterday, we announced the acquisition of carbon emission systems.

Cobham technology leader and important defense aerospace product lines.

And I add a number of complementary capabilities to our aerospace business.

The acquisition will significantly increase our exposure to once again growing defense platforms.

And will enhance our fuel systems business and strongly position, our aerospace business for future growth.

Moving to page 11, we summarize our vehicle segment revenues.

Revenues here declined 7%, including a 1% organic decline a negative 5% from the divestiture of our automotive fluid conveyance business and 1% headwind from negative currency.

The 1% decline and organic revenues was once again much better than the eight 5% declined at the midpoint of our guidance and.

Both light and motor vehicle and truck markets have continued to rebound more quickly than we anticipated.

We had particular strength actually in South America, and and Asia Pacific.

NAFTA class eight production was down 6% and Q4, but once again this was better than expected.

We're certainly happy also to see the rebound and operating margins of 16, 6%.

And then just slightly versus prior year and up 260 basis points sequentially.

And our decremental margin before performance here was once again very solid at 23%.

Turning to page 12, we show the results of our E mobility segment revenues increased 13%, including 11% organic and 2%.

Currency tailwind organic.

Organic growth was also much higher than the one 5% growth at the midpoint of our guidance.

We experienced solid growth across all regions, which was driven by both.

High voltage electrical solutions for.

Yes.

For passenger cars as well as low voltage solutions for commercial vehicles.

Operating margins were a negative five 9% and once again, it's just a reflection of the fact that we continue to invest more in R&D.

D and program implementation and this fast growing segment of the company.

We have a robust pipeline of opportunities and we continue to see electrification as a significant growth opportunity into the future.

And so before we turn our attention to 'twenty, one and I'd like to take a minute to really summarize.

Our results for 2020, and and those are shown on page 13.

And our first while the pandemic caused certainly an impressive economic.

Volatility and downturn, we remained focused on delivering for all of our stakeholders.

And we remain focused on keeping our employees safe.

Delivering for our customers and certainly supporting our communities and we're also proud of how well we performed for our shareholders.

We took the appropriate cost reduction and cost measurement.

Cost management measures to ensure solid decremental margins of 23% and resilient cash flow of $2 6 billion.

Our free cash flow to adjusted earnings conversion was very robust at 149% and.

<unk> cash flow to sales was 14, 3% 90 basis points over 2019, and another all time record.

We launched a $280 million multiyear restructuring program to reduce fixed costs.

This was really targeted mostly and those businesses that have been impacted by the pandemic.

And these actions will yield $200 million and mature your benefits and make certain eaton stronger and the long run.

We also continued to transform our portfolio and.

<unk> are completing divestitures valued at $4 7 billion we acquired.

Power distribution, Inc, and we also announced our intention to acquire <unk>, 50% of new high Tech.

In addition, we returned $2 $8 billion to shareholders via buyback and dividend payments.

And lastly, we delivered very strong shareholder returns.

Our results that were 20 basis points above the median of our peer group and so we're certainly proud of that performance as well.

Overall, certainly proud of the team and certainly even more encouraged by our prospects for the future.

We continue to transform Eaton into a company of higher growth higher margins and more consistent earnings.

The company certainly it feels like in 2020, we took an important step forward demonstrating that is in fact, a different company and we're well on our way to delivering against that goal.

Moving to page 14, we list our revenue and margin guidance for 2021.

Overall here, we expect organic growth between four and 6% with weakness in Q1, followed by sprint thereafter, and obviously given the comparisons particular strength in Q2.

And both our electrical segments, we expect organic growth to be 3% to 5%.

And starting with the Americas, we expect to see continued strength and residential data center and utility markets.

Solid growth and industrial control markets and ongoing weakness in commercial construction markets.

And electrical global we anticipate the strength and residential datacenters utility and industrial coal market. So very much like in the Americas offset by softness in commercial construction.

And in the oil and gas market.

And for Hydraulics, we expect organic growth to be between 4% and 6% with broadly improving markets around the world and and aerospace.

Face, we expect organic growth of 2% to 4% with strength and military.

Offsetting by continued weakness and commercial markets.

And for vehicle, we anticipate strong organic growth, some 10% to 12% with strength and both light vehicle market and truck markets and just as a reminder here.

And our Eaton Cummins joint venture.

We'll actually.

<unk> the revenues associated with this particular joint venture and.

And so.

Much of this growth will show up and the joint venture not meet and <unk> revenue and.

And in E mobility organic growth is expected to be up 40% to 16% driven by strength and electric vehicles globally.

Turning to segment margins, we expect Eaton to be between $17 eight and 18% at the midpoint 140 basis points improvement over 2020.

And and.

And importantly, 20 basis points over the pre pandemic levels in 2019.

If we could turn to page 15, and really before we discuss the rest of our 2020 guidance, we'd like to show you the math behind our new definition of adjusted EPS.

And 2020, we're revising our definition of adjusted EPS to add back amortization of intangibles.

We believe this will provide investors with a more accurate measure of performance and then we'll also quite frankly make it easier for you to compare our performance with our peers.

<unk> shows adjusted EPS, using our current and new definitions for both 2020 and for our guidance range for 2021.

Yeah.

It's important to note here as well.

<unk> tax rate per intangibles is 23, 5%.

This is really based upon the tax jurisdictions, where the intangibles are located.

For 2021, and we expect full year adjusted EPS.

<unk> $5 40, and $5 80.

And this includes 70 from the after tax impact of intangibles 25 of accretion from the addition of trip light and Cobham.

At this 25% is reduced by 15 due to lower than planned share repurchases and additional financing costs.

So on a net basis, the two acquisitions will add 10% to expectations.

Core earnings for 2021.

We're assuming that tripwire closes once again at the start of Q3 and carbon closes at the start of Q4.

Turning to page 16, we cover the balance of our 2021 guidance organic growth as we talked about 4% to 6% with divestitures subtracting, 8% and positive currency, adding $200 million adjusted operating cash flow is expected to be between $2 3 billion and $2 7 billion.

And capex will be approximately $500 million.

And one of the adjusted free cash flow. This is projected to be one.

$8 billion to $2 $2 billion book, a midpoint of $2 billion.

The way I would say to think about this is 2021 for us is really a bit of a transition year with several unusual items impacting cash flow, including.

Approximately $200 million due to the sale of the hydraulics business.

We have an incremental $125 million related to our multi year restructuring plan.

Approximately $125 million due to the repayment of the cares act payroll deferrals from 2020.

And as I noted.

And $110 million increase and capital spending, which we really see is a return to more historical levels and the levels were at prior to the COVID-19, driven reductions.

I would also note that the increase and capital spend is going to support strategic growth and we're really pleased to put balance to work here for example, and Q4, we announced a one <unk>.

Hundred million dollar investment to expand our North America, electrical manufacturing and distribution centers.

Excluding these items.

As I think about this as a transition year the midpoint of our guidance would really be approximately $2 6 billion.

And lastly, our Q1 guidance is as follows we expect earnings to be between $1 17, and $1 27.

For revenues to be down, 3% to 4% per segment margins to come and between $15, 7% and 61% and.

And consistent with the full year, we expect our tax rate to be between 15, 5% and <unk>.

<unk> 16, 5%.

And finally I'd like to conclude on page 17.

And with a summary, we'd say why we think Eaton remains very attractive.

Long term investment first and where.

And intelligent power management company.

And this means we are well positioned to take advantage of perhaps and what we think is the most important secular growth trends that we will experience and our lifetime.

And energy transition driven by climate change.

Increasing electrification really have everything and explosive growth and connectivity.

And it's also helpful and I'll remind you that we've been at it for some time in terms of being a leader and ESG practices.

Which is now becoming increasingly important around the world.

In fact, I'd say that eaton's commitment to sustainability is deeply embedded in the belief and.

And then the belief that what's good for the planet is also good for Eaton and that environmentally friendly solutions will create growth opportunities for our company.

Yeah, as you know our commitment to improve our business portfolio with a focus on higher growth higher earnings and more earnings consistency is ongoing that is.

Exactly what we've been doing over the last number of years and what will continue to do.

Today.

Some 85% of our segment profit come from electrical and aerospace and and that percentage will actually continue to grow with these announced acquisitions.

And while not complete I think it's clear to say that our strategy is working our operating margin guidance for 2021 at 17, 8% and midpoint is an all time record and 20 basis points above 2019.

In addition, our cash flow continues to be a real point of differentiation as we demonstrated in 2020, it's not only strong but to reveal is resilient and under.

All economic conditions and you can expect this point of differentiation to continue.

Lastly, we expect to deliver 8% to 10% EPS growth over the five year planning horizon, including 14% and 2021.

And so with that I'll turn it back to to Yan for Q&A, Hey, Thanks, Craig before we begin the Q&A section of the call. Today. Appreciate that if you can just limit your opportunity to just one placement and and one follow up things in Atlanta, William Corporation with that John will tell you over to the operator, if you guys the injunction.

Thank you ladies and gentlemen, please press one followed by the zero and you touched on phones to place yourself in Q.

And if you are using a speakerphone today, maybe helpful to lift the handset before pressing those keys first we'll go to the lines and Nicole <unk> of Deutsche Bank. Your line is open.

Yes, Thanks, and good morning day.

Good morning, and best of luck and retire them and it was great working with you alright. Thanks Nicole.

And so maybe starting with some of the order trends that you saw within electrical and I'm not sure that the trailing 12 month trend really tells the story.

Especially since.

We are seeing improvement into next year and your organic growth guidance.

Craig maybe you could talk a little bit about what youre seeing and real time, and the end markets and whats whats starting to show.

And to show sequential improvement and the fourth quarter and into early <unk>.

And I appreciate the question and Thats, obviously, the big one that we're all spending a lot of time, focusing on and I'd say that and if you think about our electrical Americas business and the fourth quarter.

And it continued to be impacted quite frankly by the spread of COVID-19, and some intermittent shutdowns and supply chain issues that we experienced principally here and in the U S market and so I would suggest that.

And you think about those areas that have been strong and continue to be strong and the things that are really driving the increase and the backlog residential markets continue to be doing this extraordinarily strong to the point, where I'd say and we're still needing to run after that market, we're still trying to.

Fulfill this increasing backlog and that business and so residential we think.

He used to be extremely strong you heard me talk about what's going on today and in the data center market and so.

The double digit growth and the Americas up 30%.

And global and so datacenter market is driven by this insatiable appetite that we all have for data.

Continues to grow very strongly utility markets continues to do well there's been a lot written about what's happening today and commercial construction and thats. The market that everybody is watching and we are as well we think it's important to note even there that if you think about for Eaton and specifically commercial construction.

Under 20% of our total electrical business and the Americas.

That some one third of it goes into retrofits and upgrades, which tends to be more predictable and then there are markets like warehousing for example, thats in commercial construction, which has a much higher electrical intensity than let's say retail that's doing quite well and so I would say that by and large were comfortable.

With the guidance that we provided for our electrical businesses and the Americas and globally, 3% to 5% very much consistent with.

And the trends that we saw during the course of Q4, assuming we don't have the supply chain related disruptions that we experience and we're certainly encouraged by the fact that we built backlog and as you know the backlog for us typically ships and 12 months or less so that gives us also lots of confidence and our ability to.

Deliver those revenue numbers.

Got it that's very helpful color, Craig and then for my follow up can we just talk a little bit about <unk>.

Backing the outlooks on margins, what you guys have embedded for underlying decrementals relative to other puts and takes like temporary cost coming back some of the restructuring payback that youll start to see this yes, and maybe some M&A impact if you could provide some color there.

Yes and I.

The margins that we guided to seven 8% at the midpoint and all time.

Record.

Certainly very much indicative of the fact that the incremental margins and 2021 are going to be quite attractive.

Certainly we're going to start to see some benefits associated with the $280 million restructuring program that we put in place $201 million and mature you will start to see some of those benefits clearly.

<unk> 21, or the other thing with respect to we did like other companies take a number of temporary.

Cost.

Payment matter measures during the course of 2020 and I'd say for the most part were expecting most of our costs to come back in 2021.

And one place that we'll continue to see some benefits with respect to cost containment measures and certainly we're not spending nearly as much traveling hotels and so our travel and entertainment expenses will certainly continue to run at levels that are well below historical levels, but the other things that we've done during the course.

2022 to contain costs, we are assuming that all of those costs come back into the business during 2021, and so for the most part I would say the plan is very well conceived and thought through.

And and the margins that we articulated for our businesses are very much consistent with where our businesses are currently running and simply adding to that these increments and decrements for cost containment measures plus restructuring benefits and so we're comfortable with the number.

Thanks, Craig I'll pass it on it great. Thank you.

Next we go to the line of Andrew <unk> of Bank of America. Your line is open.

Yes, good morning.

Hi, Andrew.

First I want to extend my congratulations and thanks to Rick.

And you probably don't remember it, but youre and Sandia, where my first meeting as a senior analyst and London years and years ago. So.

Thank you Paul to help.

Youre welcome I do remember that Andrew and that you've been.

Loyal commentator over all these years so thank you.

Thanks, and maybe you can follow Sherlock Holmes and rider monograph on visa or something before you get onto better and bigger things.

But.

Just a question.

Just a broader question a lot of change and Eaton.

If you look there is no appointments.

Katrina Rodman and Roger the CTO you have new head of energy transition can you just sort of talk about what should we think about the change and what does it signal about the direction of the company.

Over the next couple of years, that's my first question.

Yes, I'd say, it's and I appreciate you commenting on the changes because we have like every company you go through a period of refreshment and sometimes these are additions as you think about moving the strategic direction of the company and a particular direction or two and sometimes people just simply time out like <unk> and <unk>.

But certainly if you think about some of the additions that we've made like to add <unk> <unk> to our team and reports to me and he's our chief Digital officer, and that's really a reflection and the fact that I talk about these three big trends that are taking place.

As I mentioned, perhaps the three biggest trends at.

We will see in our lifetimes around energy transition.

And connectivity.

Climate change and alike and so this is really positioning the organization.

To capitalize on these trends that we're seeing inside of our markets and so I think these are changes that we're absolutely thrilled with and we think we're bringing and people are having people step up the take home responsibilities that or ensure that Eaton takes our unfair share of these growth opportunities that we're looking at into the future.

<unk> and.

So I just think.

And if you.

These changes I'd like to hope that you would see that they are very much strategically aligned with where the company has said that we want to go and these are things that are certainly going to help us capitalize on those opportunities.

And just a follow up question, we're getting a lot of questions Your E mobility.

And I know, we're definitely still and the investment stage and will be for a while but could you just comment in terms of who should we think as your customers because clearly a lot of activity and sort.

Electric vehicle space can you just talk to your targeting North American players players and Asia Europe as this thing and mergers and our two or three years from now is a bigger business.

Should we see the key customer base. Thank you.

Yeah and I appreciate the question on E mobility, and obviously, it's a very hot space and a lot going on there and I'd say for us it's not so much a focus on geographic.

Solution as much as it is really a technology driven solution and so we're really focusing on those areas around power electronics power conversion and Inverters converters power distribution and onboard charging so for US we are.

Endeavoring to be a global player.

Serving both the light vehicle market I would say and importantly by the way the commercial vehicle market, where we have a very strong footprint today with commercial vehicle customers and so I would think about it really more we are endeavoring to play.

Round the world and.

And to be balanced quite frankly around the world, but it's really a focusing on very particular technologies and products, where we think we can offer a unique solution and deliver acceptable returns to the company.

I guess my question is when.

Now back to your very strong position with existing players with traditional Oems.

Just going back to your internal combustion engine days, but should we see it's also taking our fair share with the emerging players as well.

Yeah, and I'd say that I'd say, even today, if you think about the emerging players I mean today we.

Tesla is a great example, tesla as a customer today, and so I would say that absolutely.

Whether it's and existing player as they work their way through this this transition to electrification or if some of the emerging players and the U S. Around the world you could think about us pursuing opportunities with all of them.

Thank you very much.

Thank you.

Next to me and the line of Nigel Coe Wolfe Research Your line is open.

Thanks, Good morning.

Good morning I E.

Hey, Gary.

So that's not bad.

Congratulations on a great career, and and we will Miss you.

Thank you and Idaho.

So I just wanted to clarify on the guidance framework.

Hydraulics is that and for one quarter I am sorry, if I missed that and prepared remarks is that and for one quarter and hydraulics and your <unk> guide for organic and margins.

Yes. It is it is and for one quarter and it is included in the guidance for Q1, that's correct and Andy and the market growth rate that we gave for hydraulics as the growth rate in Q1.

Exactly right.

Competition, and then moving onto electrical Americas.

I fully absorbed the comments about COVID-19 and supply chain.

But.

Did come and stay below your plan.

For those reasons, I guess, but just a little bit.

Context in terms of what happened during the quarter and the Americas and <unk>.

Did we see channel Destocking and the sequential.

And of Cuba queue on the margin and that segment with a bed head and then what we would expect another context there would be helpful.

Yes, I would say specifically as the quarter unfolded I would say that.

We and the U S certainly experience.

Second waves and.

And additional kind of supply chain related constraints.

In the Americas that certainly impacted the business and I would say.

On a relative basis, the month of December and the end of the quarter was better than the beginning of the quarter.

And some of the supply chain constraints begin to be sorted somewhat somewhat as you probably read and here there is lots of issues and the various ports La long Beach.

And so it really has been a supply chain issue. It's been in some cases and issue around keeping our sites fully staffed on the manufacturing floor as absentee rates, whether it's for Eaton or some of the suppliers had been a little bit of a challenge during the early part of the quarter and so I would say.

The Americas business specifically.

Performing very much in line with what we would have anticipated, but for these disruptions I, saying and supply chain and specifically to your question around Destocking I would say no I mean, we didn't really see this.

And this juncture, we think inventory levels in the channel with the exception as I noted and residential we think the channel is largely where it should be given the outlook for revenue.

And so I think we quite frankly still have some.

Channel stocking to do in the residential side of the business, but other than that it's pretty well aligned.

Thanks, Greg and leave at that.

And next to go to the line of Jeff Sprague of vertical research. Your line is open.

Thank you good day, everyone and congrats Rick I don't think this is your last earnings call, though I think youre dialing and next quarter with us you'll make it 76 and that kind of luck.

And you can bet on that Jeff.

On the beach with the Margarita.

Hey.

And I just wanted to dig into Cobb I am a little absolutely could.

AAA it looks like a total slam dunk from my vantage point, there's some questions around cobham that.

Hoping you could maybe address.

The PE firm disclosed.

EBIT and I think it was 95 million pounds in 2019, alright. So that's about 124 million Bucks I think youre acquisition multiple implies it's running to 10 ish.

And I'm getting a fair amount of questions is there just some kind of accounting change there relative to falling program accounting and.

And if there's any particular disconnect actually.

And the EBIT and that business relative to how the cash flows might be running and the business.

Hi, Jeff, Jeff I'll address that.

If you looked at.

And that unit that unit had a lot of intercompany relationships with other parts of Cobham, and so you have to actually unpacked that information.

And restate it to get to the the Standalone carbon emission systems EBITDA and so that's what we're referring to the the appropriate standalone carbon emission systems EBITDA.

So theres not any extraordinary growth and between 2019 and 'twenty 'twenty, one on accounting changes or anything no.

And how about the cash flow equation there.

Well.

And yet.

We're not expecting to own it for much of 'twenty one as we said at the start of Q4 is what were building and as the clothes and so there'll be just a modest.

Mt.

Cash flow, but next year, we would expect you would have a full years worth of quite good cash flow EBITDA margins and as a percentage of <unk>.

Sales are quite good.

And in that business.

And then and if I can just add Jeff I would just tell you that we are every bit as excited about carbon emission systems. As we are AAA and we think they are both.

Highly strategic.

Acquisitions, we think both of them do wonders for our business and specific to carbon emission system and I think it's really it's all about what platforms are you on and in the air.

Aerospace business and if you're on the right platforms at the right time. These businesses go on for a very long period of time. The typical military platform could run 40, 50 years and we're at the very front and what's going to be a very long expansion cycle on the military side and complement its been very successful.

<unk> some of the most important military platforms that are going to going to run for variable and period of time. So we think it really adds a large level of continuity and consistency and predictability to the company into our aerospace business for some time to come.

And Jeff just to put some meat on what I said the E.

EBITDA margins are between 20% and 25%.

That's a very attractive business.

Can you also just comment on how you utilize that tax benefit that's part of the deal.

And Thats simply a $3 38 at 10 elections. So all that means is that that will give us a tax deduction.

For the for the asset value and.

Typically in a situation like this you end up paying the seller for that because we're the ones that are going to be able to to deduct that value.

Thank you good luck with the deal.

I appreciate it.

Next we have the line of Scott Davis Melius Research your line is open.

Hi, good morning, guys and congrats Brian.

Thanks.

Hate to ask kind of minutia here, but so what.

What is the full amortization effect once these two big deals close.

Well, here's a way to think about it Scott the growth Sam growth accretion are you talking about amortization or accretion.

Just the amortization not the accretion.

Okay.

You're going to have.

You got 70 cents.

That's the current Eaton.

Amortization and then I'll give you just one second I'll give you the while Richard I'm looking it up Scott if you have a second question, we'll let Rick.

And go through it.

Okay.

If we go back to E mobility, and I know the question was asked and kind of a different way and I'm going to ask it.

And I mean do you expect the growth rate to match up with kind of the penetration of electric vehicles I mean, because I think memory serves me Robert I think the forecast, Sir something like 50% growth rates and Evs and 'twenty.

'twenty one but.

Would it be a higher growth rate and the actual Saar and avs, because you'll have a higher content per <unk>.

Vehicle, that's going and are increasing content I'm just kind of struggling.

And reconcile your conservative forecast with the actual growth.

People are expecting.

And I think so much of it Scott is going to be a function on which platform are you on and when does the platform that you won't euro and get launched into the marketplace and so you know.

A lot of the growth today, and Evs and what's perhaps and some of the forecasts are based upon some existing platforms.

Heavily influenced by companies like.

And like Tesla and.

But the other thing I would say is if you think about our.

And our E mobility business, it's both.

In electrification.

Cars, but it's also the legacy business as well and so it's really all of the electrical content.

That we have going into vehicles in general not just the high voltage electrical solutions that youre seeing specifically on E mobility platforms and so for what it's for US. It's what we have fairly good visibility too.

Things could turn out to be slightly different than that but it's really a function of which platform that you're on.

And Ed and Scott and fair enough.

The answer to your question on the intangible amortization for the full year of both of those deals is about 15.

Okay.

Good I'll pass it on thank you guys and good luck. Thanks, Scott appreciate it.

Next we have line of Joe Ritchie of Goldman Sachs. Your line is open.

Thanks, Good morning, everybody and ill pass along my kudos and congratulations to you as well Rick really really enjoyed working with you throughout the years great. Thanks, Joe.

And so maybe just starting off on the two acquisitions you guys, maybe just provide a little bit more history that you have with the company with both of those companies how long they've been on your radar screen and then also specifically.

Any anything you can tell us about.

And through that through the pandemic.

Yeah, and I would say that.

For Us Joe.

We're always actively courting companies and and strategically if you think about today. The way. These two companies fit into our broader portfolio you could imagine that they've been on our list for some time and and.

We always find that when you create long term relationships and youre working with companies and the management team early on and the process. It increases your likelihood of success and as a result, we're absolutely thrilled to be able to add these two companies to our portfolio and so suffice it to say that we've been at it with these companies for some time.

And obviously these transaction centric coming together fairly quickly, but a lot of courting.

Had taken place long before these deals were finally signed.

Overall, and then in terms of performance.

Both of these businesses performed extremely well through the pandemic and as you saw.

Or you will likely see with complement because it's a military business.

They actually despite the fact that we went through this pandemic.

Our military business, just like our military business held up very well and and that's one of the good attributes of having military businesses in general they tend to be much more consistent much more predictable than.

And then perhaps some of the more commercial endeavors and the same thing I would say it would be.

Be true of AAA, and while the revenues regress, a little bit during the course of.

2020, it held up much better than most other businesses largely because of the segment of the market and its survey and essentially enterprise data solutions computing at the edge, they're exposed obviously to this growth and <unk>.

And so both of these businesses I would say held up better than the underlying markets.

Yes, that's helpful. Craig I guess, maybe just following up on a question from earlier on the cash flow of these two businesses and so and.

Fully recognize it's not going to have much of an impact in 'twenty 'twenty one.

But if you take a look at your EBITDA implied EBITDA.

And the out years.

And annual basis is about 365 $370 million I guess just in that context, how should we think about whether it's an absolute dollar amount and free cash flow margins or free cash flow conversion for the for the two businesses that are coming in.

Okay.

And I believe from a cash conversion basis Youll see that.

It will be very high for these two businesses because they will have a fair amount of intangible amortization and and.

And obviously, that's noncash amortization and our underlying EBITDA margins are quite strong and so they they.

And they should actually be additive to our overall free cash flow margins.

Okay I'll leave it there thank you guys.

Next we go to the line of Ann Duignan Jpmorgan. Your line is open.

Yes.

Hi, good morning, everybody and Rick I think ICU, more likely playing golf and Ireland and sitting on a beach, but however.

Hopefully both.

And we know him well.

Okay.

And anyway.

And so my question I have you is on the trip client acquisition.

Sales for a long time.

And I had said that thing to say, but it's not very attractive end market and it was.

Lower margin and more commodity type business and.

Well that's changed are much different and that triplet that makes you think that this is different this time.

And so I don't know.

Where you got the impression that the single phase and has a lower margin and in fact, it's never been lower margin. It actually has margins that are every bit as good as three phase and and the market actually to look at the entire power quality and market the market splits out historically about half three phase and have single phase and.

And we of course are already a significant participant in the single phase market not as much and the U S. As we are in EMEA and APAC and so this simply gives us a complete global.

Global.

Footprint.

Four four.

For the single Phase business and.

And we.

The single Phase business is one that we built up over really the last 10 years through several acquisitions.

Starting with MGE, which we did and <unk>, seven and Phoenix stack, which we did and a wait and so we've been.

We're a very knowledgeable acquire or in this space and and so this was an opportunity to add a fill in for us.

And that gave us the Americas the exposure that we haven't gotten through those other acquisitions and it's a very high margin space.

It has been ever since we participated in it.

Okay, I'm going back even earlier and Thats, So maybe I'm thinking back too far and my memory.

Apologize for that.

Maybe you can give us a little bit more color and like you did on the electrical Americas, maybe you could talk about and electrical global and once you saw there and through the course of the fourth quarter and any <unk>.

Apply chain issues.

You mentioned supply chain issues in the context of electrical Americas, but what about copper prices are you concerned about input costs as you go through 2021. Thanks.

And I appreciate that question and I'd say very much like we experienced in the U S. I'd say, our electrical global business, while it did better than what we anticipated you find many of the same trends were.

I'd say that residential markets utility markets Datacenters.

<unk> to be very strong.

The one headwind we have that we and.

And electrical global as you know, we report our oil and gas exposure through Kraft Heinz and our electrical global business and the oil and gas markets continued to continue to be weak.

And so that's perhaps holding that business back a little bit, but with respect to supply chain. Yes. We are absolutely seeing it we're seeing inflationary pressures and copper we're seeing it and some steel we're seeing some availability and some pressures also and microprocessors and alike.

Around the company and and the way I would think about that once again is that we've seen this stuff starting to kind of raise its head back in the fourth quarter. Our teams have been very busy putting them together and mitigation plans.

Largely around things that we can do to either change sourcing or taking our prices up and the marketplace and while there could always be a quarter or so timing impact and we're confident that we'll be able to offset.

Any inflation that we see in the business with either cost reduction measures or through pricing and the in the marketplace, but be up but no question and what youre seeing and.

Hearing about copper and some of the other commodity eases absolutely.

Consistent with what we're seeing.

And maybe on the other thing that's an indication also that markets are strengthening so if you haven't got the other side of that equation and you typically see these commodity increases when when the market is inflicting positively.

I'll get back in line I appreciate that and luxury.

Craig.

Thanks.

Next we have the line of David Raso Evercore ISI. Your line is open.

Hi, Thank you and congratulations Rick.

Two calculations I was hoping you can sanity check and then a quick follow up at the end of 'twenty. One after all of the businesses that are sold acquired on a pro forma basis net debt to EBITDA for the company is about let's say about two five times.

And then on value accretion I'm, sorry, if you can please answer that one first.

Yes, yes, certainly.

It has gone up a bit with this with EBITDA, having come down somewhat in 2020, but.

And when Youre looking at 2021 EBITDA.

It's hard to do that on the back of an envelope but.

It sounds.

Roughly correct.

Yes, I tried to run it out through year end and.

<unk> looked at it and pro forma hydraulics out for all year, 'twenty, one and out of the other deals and so forth and <unk>.

<unk> and dividend.

Okay, and the second calc the accretion from the deals.

And on the first full year of ownership not 21 full year of ownership day accretion I'm coming up with is sort of 50% to 60 cents.

EPS is that.

Sort of where we should be thinking.

It's probably the way to think about it Dave is it's probably around if you just look at the growth accretion and you don't factor and that.

And the money that we're using to buys us we would've used for repurchases or whatever but if you look at the growth accretion is probably around 70.

And one way to think about it is you get 25 and.

2021, and you will get another 45 and 2022 and.

And that's before taking saves swag, 2% lost opportunity for.

Interest income our debt short term debt for the on a $4 five.

Bill, Yes, yes, yes, I'm just looking at the growth for that so okay. So it's about 50 to 60 cents. Okay and then after that these I mean, obviously you've been very active I mean, unless last few days alone, but after these moves should we think of the company and more digestion mode through the end of 'twenty two as a base case.

Yes, and I would say that.

What we've always found to be the case is that.

Deals are opportunistic and the sense that you never know when youre going to them and get an opportunity to buy a company that.

Is the right strategic fit at the right multiple and I would say that from a capacity standpoint, we have capacity and do more.

And our team certainly has an appetite to do more and we continue to be active and and having other conversations and.

And so I'd say you can expect us to continue to be opportunistic I mean, the good news about these acquisitions, while they are material in size and in terms of impact and the company that relatively well contained in terms of which piece of the company will have the responsibility for integrating so you could expect that the aerospace team will be busy obviously integrating.

Cobham, and so you could probably expect nothing material.

In addition to Cobham, and aerospace, but the companies large and and.

And we have other businesses today, where they have plenty of capacity to do things to immigrate.

Acquisitions, if we can find the right company that has the right strategic fit at the right price alright.

Alright terrific. Thank you.

Next we have and the line of John inch and Gordon Haskett. Your line is open.

Yes. Thank you good morning still everyone. Rick we're all jealous so congratulations.

And again.

Youre welcome.

And I want to pick up on and I didn't steam and about the raws Craig how much visibility do you have including say risk towards your project backlog and.

Say margins profile and.

Considering obviously the variety of raw inputs and cost increasing how flexible is that.

Are the causes and it just any more color would be helpful and.

And I appreciate the question because and when we obviously are carrying a very large backlog and our electrical businesses, both in the Americas and globally and.

And I'd like to know what I would tell you about the backlog and general that.

<unk>.

And as it relates to the guidance that we provided is that we've factored all that in and so we understand what we have and the backlog.

We understand.

And the type of commodity inflation, we're likely to experience. This year based upon the run up and commodities steel copper and others.

And based upon that we've come up with our kind of the outlook for the year.

But I would tell you it's a bit of a mixed bag and some cases were able to re price things that are and the backlog.

Based upon the agreements and the contracts with customers and.

And basket of commodities and the like and other cases we.

We cannot and.

And then I think the important message for everyone to kind of appreciate is that all of that has been factored in to the guidance that we provided for the year.

No. That's fair are you raising prices now by the way, whether it would be projects or other items and anticipation of the raws and I know you said things lag kind of a quarter or two at what point do you have to say, we got to raise prices.

Chris it's sort of seeing if these moves are temporary and I agree with you I think it is a result of increasing it's a signal of increasing improving demand and an improving economy.

And I'd say that I can tell you today that we have planning going on and some cases actions being taken across the company and.

And it will vary by.

Customer by market by business, but the simple answer is either planning or activity, taking place right now, where we we've seen and experienced inflation and quite frankly, not just on the commodity side, but also and transportation and logistics.

Yes, it makes sense and just as a follow up.

I think one of the items that within his background and that was flagged with perhaps as experienced with respect to distribution distribution and maybe the opportunity to help Eaton.

Further build out its distribution network and growth opportunities outside of the U S. I am wondering if you guys could maybe expand upon what.

And what you see is this opportunity and it was just.

A long term vision or are there actual things you could actually be sort of working on.

And the near term.

Yes.

I'd add to that is and as you know most of our company goes to market through distribution and it's and I can tell you. If you think about and all of the core assets that Eaton has as an organization or distribute our distributors and the relationship that we have with distributors is probably one of our greatest assets.

And I think everybody is also well aware of the fact that the nature of distribution is changing and as we as we think about Tom and what he can bring to the organization based upon his experience at places like Amazon and helping us think through.

The nature of distribution and helping our distributors quite frankly think through changes that they need to make within their businesses to deliver different kinds of experiences to their customers is where we would expect that Tom will put his finger prints on the company and.

And we remain committed to distribution, we think it's a big part of our future we'd like to do more through our existing distributors and so we're just Barry.

<unk>.

Hopeful and.

And and expect that Tom will bring some unique insights there.

Okay.

Thanks, Craig.

Good luck Greg Thanks.

Thank you all I think we're reaching the end of our call and we do appreciate everybody's questions as always and chip and I will be available to answer any follow up questions. Thank you for joining us today and have a great day. Thank you.

And ladies and gentlemen that does conclude the presentation for this morning again, we thank you very much for all of your participation and using At&t's Teleconferencing services you may now disconnect.

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