Q1 2021 Eaton Corporation PLC Earnings Call

May 4, 2021

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Yes.

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Okay.

Ladies and gentlemen, thank you for standing by welcome to Eaton's first quarter earnings call.

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Just you offline as a reminder, today's conference is being recorded and I would now like to turn the conference over to our host Eaton's Senior Vice President of Investor Relations. Mr. Yan Jin. Please go ahead.

Hey, good morning, guys. Thank you all for joining us for Eaton fourth quarter, 2021 and learning call with me today are Craig Arnold, our chairman and CEO and Tom <unk> Executive Vice President and Chief Financial Officer, our agenda today, including opening remarks by Craig highlighting the company's performance in the fourth quarter as we have done all of it.

Past calls, we'll be taking question for Ada and other Craig's comments the price of the release and the presentation. We'll go through today have been posted on our website at Www Dot Eaton Dot com this presentation, including adjusted earning per share adjusted free cash flow and other non-GAAP measures the recon sales in the appendix.

A webcast of this call is assessable, our lifestyle and that will be available for replay I would like to remind you that our comments today will including statements related to the expected future results of the company in order for forward looking statements. Our actual results may differ materially from our forecast for the projection.

Due to a wide range of the risks and uncertainties as described in our earnings release and presentation with that I'll turn it over to Craig. Thanks.

Yeah I appreciate it it will start on page three with our recent highlights and first I'd. Just say you know we had a terrific quarter and we're significantly increasing our full year guidance. As you saw our teams have just done an outstanding job of managing through this dynamic market environment, which is reflected in our strong results.

Q1, adjusted earnings per share of $1 40 for or a solid 15% increase year over year and 18% above the midpoint of our guidance.

Our Q1 revenues of $4 7 billion were up 5% organically, which was well above the high end of our guidance range of down 3%.

This outperformance was driven primarily by the two electrical segments as well as our vehicle business.

We also posted a Q1 record for segment margins of 17, 7%.

And looking at our Incrementals that we generated $73 million of higher profit, despite having $97 million of lower revenues.

This was the result of weak say strong execution ongoing improvements in the cost structure from the multi year restructuring program that we announced in the second quarter of 2020, as well as closely managing price and inflation in the quarter.

Our cash flow was also very strong adjusted operating cash flow increased by 42% and our adjusted free cash flow increased by 62%.

And we had another successful quarter of M&A closing free deals.

We're also making good progress towards the closure of the previously announced acquisition of carbon emission systems as well as the divestiture of hydraulics and.

And finally, we recently announced the agreement to acquire <unk>, 50% of Jiangsu, meaning electric.

That's way business in China, an important part of our growth strategy for the Asia Pacific region.

Having having been quite busy on the M&A front, we thought it'd be helpful to provide a summary of these free recent deals.

We covered trip light and carbon emission systems acquisitions in some depth on the investor meetings.

But each of these three deals here.

Certainly advance our strategic growth objectives, and our electrical business.

First green motion based in Switzerland, It expands our capabilities in the electrical charging market, where we expect to see significant growth over the next decade linked to energy transition.

They are proven charter designs in advanced power management capabilities.

Billing software are valuable additions to our existing energy storage and power distribution offerings that support our view of everything is a grid.

We also closed our previously announced investment in <unk> <unk> is based in China and provides a strong portfolio of products that will open up significant growth opportunities in our business throughout Asia Pacific.

They make cost effective circuit breakers and contractors.

That gives us access to tier two and tier three markets in Asia Pacific.

And finally last week, we were pleased to announce the agreement to acquire a 50% of <unk> electric bus business in China.

<unk> strong busway capabilities in China.

Combined with Eaton's broad portfolio of products will really position us well to participate in the high growth data center industrial and high end commercial segments, and allowing us to pull through related electrical products.

Han you and Union transactions I'd also add significantly expand our addressable market in China and in Asia Pacific certainly, allowing us to accelerate our growth rate in the region.

Moving to page five we summarize our Q1 financial results and I'll just note a couple of points here.

First acquisitions increased sales by 1%, but this was more than offset by the divestiture of lighting, which reduced sales by five 5%.

Youll recall that we sold the lighting business in March of 2020.

Second segment margins of $831 million for 10% above prior year and this is despite a 2% decline in total revenue.

This was largely the result for I'd say, a solid execution restructuring savings and really our ability to effectively manage price and inflation during the quarter.

We expect the inflation in fact, the worst and certainly in Q2, but we will for more than fully offset this for the full year.

And lastly, our adjusted earnings of $577 million up 12% and when combined with our lower share count we delivered a 15% increase in our adjusted EPS.

Turning to page six you see the results for our electrical Americas segment.

Revenues were up 2% organically driven by strength in data centers residential and utility markets, which offset weakness in industrial and commercial markets.

The acquisition of trip light and PDI added two percentage of revenues by the divestiture of lighting reduced revenues by 14%.

We're very pleased to also have closed the tripwire acquisition sooner than planned and to welcome their team to the E family.

Operating margins as you can see increased sharply up 330 basis points to 25% a quarterly record and as you can see profits were $24 million higher on significantly lower revenues.

These results once again were driven by good execution cost savings and really favorable mix due to the divestiture of lighting.

We're also pleased with the 11% orders growth in the quarter. This was driven by once again strength in data center and residential markets.

Our backlog was actually up 23% versus last year and due to ongoing strength in once again data center and residential markets.

We were also encouraged to see some very large orders in select commercial markets.

Perhaps a sign here that these markets too are beginning to turn positive.

And while it's difficult to judge and we do think the order strength could have been due to some concern about some for some of the supply chain shortages that you certainly have been reading about.

Next on page seven we show the results for our electrical Global segment, we posted a 5% organic growth with 5% favorable impact from currency largely due to the weaker dollar.

Organic revenue growth was driven by strength in data centers residential and utility markets you can see the pattern here.

Also delivered 250 basis point increase in operating margins and posted a new Q1 record of 17%.

Our incremental margins in this segment were also strong more than 40%.

And were also driven by good cost control measures savings from actions taken from our multi year restructuring program.

Orders grew 7% in the quarter and like sales the primary contributors to the growth came from data centers residential and utility markets.

I'd say dragged down by the earlier COVID-19 related declines orders declined 12% or excuse me, 5% on a rolling 12 month basis.

And lastly here, our backlog was up 17% versus last year driven by the same three end markets.

Moving.

To page eight we summarize our hydraulics segment.

Revenues increased 11% with strong, 9% organic growth and 2% positive currency impact.

Operating margin stepped up significantly to 15% are for.

420 basis point improvement over last year.

And our Q1 orders were also very strong up 53% driven primarily by strength in mobile equipment markets.

As we anticipated Dan Force did receive conditional regulatory approval from the EU to acquired Hydraulics business, which is an important step in the process and this sale is still expected to close in the second quarter here.

Turning to page nine we have the financial results for our aerospace segment.

Revenues were down 24%.

<unk>, 26% organic decline driven by the continued downturn in commercial aviation.

Currency as you can see added two percentage of revenues.

And as you can also see operating margins were down 310 basis points to 18, 5%.

Down, but still at very attractive levels overall.

Our team I give them a lot of credit they've moved quickly to flex the business and we're able to really deliver better than normal decremental margins of approximately 30%.

Orders were down 36% on a rolling 12 month basis once again due to the ongoing downturn in commercial aerospace markets.

I would add on a sequential basis, we are starting to see some improvement as orders were up 14% from Q4.

And lastly, our previously announced acquisition of carbon emission systems remains on track and we expect the transaction to close at the beginning of Q4 2021.

Thanks Sheila.

Next on page 10, we show the results of our vehicle segment as you can see revenues increased 9% and were much stronger than anticipated the strongest growth came from.

Global commercial vehicle markets and from the Chinese light vehicle market, just as a point of reference here NAFTA class eight production was up some 12%.

Operating margins also improved significantly year to 17, 3%.

Another quarterly record and a 380 basis point increase with incremental margins of nearly 60%.

The strong margin performance was driven certainly by increased volume and also from savings from the multi year restructuring program that we've undertaken.

And despite volumes that were still below <unk> levels. This business is approaching our target segment margins of 18%, so making very strong progress in our vehicle segment.

One additional noteworthy development in this segment was the introduction of the new automated transmission.

For the heavy duty truck market in China through our Eaton Cummins JV.

Product I would say is already getting great traction and seeing strong growth in the market.

Turning to page 11, we summarize our E mobility segment.

Here revenues increased 15%, 13% organic and 2% from currency.

We experienced solid growth in global vehicle markets, which was driven both by high and low voltage products operating margins were a negative 18 eight.

4% as we continued to invest heavily in R&D.

And as I've reported in the past we continue to manage this a fairly robust pipeline of opportunities of note in Q1, we secured a multiyear agreement with a leading global automotive customer to buy our next generation <unk>.

Break Dor Circuit protection technology for battery electric vehicles.

This award represents $33 million in mature year revenue sales.

And we hope to be awarded additional vehicle platforms using the same technology.

This win I would say it really does highlight the strength of our electrical pedigree and how we're able to leverage this strength to grow in E mobility markets.

And on Slide 12, we've updated our organic revenue guidance for for the year.

As you can see we're significantly increasing our organic revenue growth for the year with our strong Q1 results. We are optimistic about the remainder of 2021.

Our strong order book and growing backlog persists that markets and market demand is really increasing and improving across most of our end markets.

We now expect overall Eaton organic growth to be up 7% to 9% and this is up from 4% to 6% previously.

And while we're experiencing some supply chain issues, we have confidence in our team's ability to manage through these temporary challenges.

As you can see we've kept our forecast for aerospace unchanged.

Vehicle has increased by 600 basis points.

Electrical global's increased by 400 basis points and all other segments have increased by 300 basis points.

Encouragingly I'd say here about our electrical segment, we're seeing higher than expected demand across all of our markets with the exception of utility and that market remains in line with our original outlook, which was for mid single digit growth really strong performance in the electrical segments.

Moving to page 13, we show our updated segment margin guidance for the year, where we're also <unk>.

Significantly increasing our guidance.

For Eaton overall, we're increasing segment margins by 50 basis points at the midpoint with a range of 17, 8% to 18, 3%.

And we've raised our margin guidance in each of our segments with the exception of aerospace in E mobility, which are unchanged.

Compared with our original guidance, we expect to deliver better incremental margins for sure on this higher volume I would also note that for the full year, we continue to expect net price versus inflation to be neutral.

And on page 14, we have the balance of our 2021 guidance.

We're raising our full year adjusted EPS by <unk> 50.

To $5 90 to $6 30.

Our midpoint of $6 10.

And this is a 9% increase over our prior guidance and a 24% increase over 2020.

With our recent M&A activities, we now expect a net 4% headwind from acquisitions and divestitures down from our prior outlook of 8%.

I'd say, it's also worth noting here that our segment margin guidance of $18 one to 18, 5%.

190 basis point increase at the midpoint.

Over 2020 and will be an all time record.

It's also this is a point of reference above our <unk>.

Pandemic margins of 17, 6%, which we posted in 2019, which was also an all time record.

So we're off to a strong start and I'd say well on our way to achieve our longer term targets of getting to 21% segment margins.

The remaining components of our full year 2021 guidance remain unchanged and.

And lastly for Q2, our guidance is as follows.

We expect to be between $1 45, and $1 55.

On earnings for organic revenue to be up 24% to 28% and for segment margins to come in between 17, 5% and 17, 9%.

And then if I could just finally on page 15, I'll wrap up with a kind of a high level summary of why we think Eaton remains an attractive long term investment.

And I begin with first.

Intelligent power management strategy really does position us to capitalize on these key secular growth trends that we've talked about.

For the last couple of years electrification energy transition and digitalization.

And we're gaining traction here and all of these areas with a number of new wins or technology solutions, including a bright line platform are being well received by customers.

And as a result, we continue to expect higher than historical organic growth rates for the company and over the next five years, we're reaffirming our view that for years to 6% outlook looks very much in hand.

This accelerated growth.

Plus our what I call proven ability to deliver margin expansion will allow us to deliver on average 11% to 13% EPS growth per year over the next five years.

We will also continue to deliver very strong free cash flow, which provides the optionality to invest in organic growth to add strategic acquisitions and to return cash to shareholders.

And our commitment to ESG remains strong we will continue to develop sustainable solutions for our customers for our own businesses and certainly for the environment that we all share.

So with that I'd like to turn it back to Yan obviously, we're very pleased with a really strong start to the year and looking forward to answering your questions.

Thanks, Craig given our time constraints only an hour today really appreciate it if you guys can limit your opportunity to just one question and a follow up and.

With that I will turn it over to the operator will give you guys the instruction.

Thank you once again for a question. Please press one then zero on your Touchtone phone, you'll hear an acknowledgment that you've been placed into Q U K remove yourself from queue at any time by repeating that one zero command or.

Our first question today is going to come from the line of Nicole the blades of Deutsche Bank. Please go ahead.

Thanks, guys good morning.

Nicole.

Maybe we could just start with a clarification question getting a lot of.

Inbounds from investors about this so when we look at the guidance today relative to where you were a few months ago, what's been added in with respect to hydraulics into the second quarter and then the incremental.

Our earnings associated with chip like closing early.

Yes, I appreciate the question Nicole and it's obviously been a very busy quarter with a number of.

Positive moving pieces, so that our current assumption hydraulics is that it would close here in the second quarter and so you could think about a couple of months at about <unk>.

A month for hydraulics, and then specifically as it relates to trip light.

You could add about 10 center sold for excuse me about seven for AAA and then it has a couple of cent negative.

With the acquisition of Green motion, so about 15 or so between the M&A activity.

Okay got it Craig that's really clear thanks for that and then maybe you could talk a little bit about price costs. So I know you said neutral for the full year, but as we think about the phasing of margin throughout the year are there certain quarters, where you will be facing more of a price cost headwind until we should be factoring that into our segment margin assumption.

And.

Certainly appreciate that question as well and it's obviously one of the.

Bigger topics that we're dealing with internally and I think youre dealing with in terms of trying to model our results and others and I would say that what we experienced in Q1 I would say is largely.

We were able to offset a lot of this commodity inflation that we had been experiencing through hedges.

Working out of inventory and other agreements and so the biggest impact for us will be in Q2, and it's one of the reasons why you look at our Q2 guidance you say it may be a little muted given the very strong Q1, but that really is the quarter, where we expect to see the biggest impact of material cost inflation.

We're obviously getting price in the marketplace. It does take us typically a quarter or two to fully get pricing seeded into the marketplace and so certainly Q2 will be the most challenging quarter, it's certainly factored into our guidance.

We've laid out and it will get better.

From that point forward, So Q3, and Q4 will be certainly better on an incremental basis in Q2 will be.

Got it thanks, Craig I apologize.

Fully offsetting it for the year I.

I would add as well, it's sometimes in hyper inflationary environment, it's tough to get a full incremental margin on material cost inflation will certainly more than offset it but certainly if you think about a hyperinflationary environment you generally don't get a full incremental margin on on inflation.

Thank you.

Thank you well go next to the line of Andrew <unk> of Bank of America. Please go ahead.

Oh, yes, good morning.

Good morning.

Just a question.

You guys did these deals in China, and you don't see a lot of companies in the U S being a being.

Being physically able to sort of find things to do in China, and b sort of execute on them.

Can you just give us a bit more background as to how these deals.

Came around and also very intriguing opportunity that youre able to do more deals like that in China. Thank you.

Yes. Thanks, Thanks for the question as well and we are absolutely thrilled with.

What our local team has been able to do in the China market and I can I would in fact put the emphasis on our local team and our local team haven't been in the market for for a number of years building strong relationships with with some of the electrical companies in the region, we're able to pull off.

Some really attractive deals.

And I think a lot of that is attributed to the fact that we're willing to partner.

These jv's debt, we have 50% of.

<unk> consolidated revenue.

In China will leverage their products and their low cost footprint and will consolidate revenues as we grow these businesses outside of China, but I'd say, it's a combination of our local teams connectivity to the market.

And eaton's willingness and proven track record of really being a very successful JV partner as you know we have a number of jv's inside of our company in China in our aerospace business in China, and I think we have a very strong reputation in the country around a company that can very effectively you can very effectively partner.

And at the same time.

<unk>.

Do things that are helpful too to both our company into the companies that we're partnering with.

And so we are.

Build with it.

Add that to your other question we are in fact, having a number of other conversations.

Around other similar types of transactions nothing to announce here today, but we're hopeful that we will continue to build on kind of this pattern of filling.

<unk> gaps and whether that's a GAAP because it's a technology Donald.

We don't have like the bus way products in the China market or it's a product GAAP in the form of the ability to really compete in the local market because you have a low cost products, we see other opportunities to do very similar things in other parts of the portfolio.

Fascinating thank you.

Just a question on data centers can you just give us color on how much visibility do you have in Hyperscale enterprise and maybe by region has just been such a hot market in such a big driver of growth for you guys.

Do you have one quarter visibility six months, a year or just maybe a bit more of a deep dive here. Thank you.

Yes.

Certainly the data center market has been one of the hottest markets.

In the electrical space and we see that market.

Growing by low double digits and so it's a very strong market and we think it'll be a very strong market for a very long time, and we get back to this this whole idea of saying to the extent that you believe that the world will continue to generate consume process in store increasing amounts of data. The data center market will continue to be a very attractive.

Market to be in for a very long time in terms of visibility specifically in Hyperscale and we're typically in the six to 12 months.

Out window in terms of having fairly good visibility as we've said historically high.

Hyperscale, specifically tend to be a relatively lumpy market and so orders come sometimes in big slugs in one quarter or one year versus the others as they reconfigure.

Their data centers, but certainly when you look at the market more broadly.

We are just thrilled by our position in this market and by the prospects for continued to grow here.

Thanks, so much.

Thank you.

We will go next to the line of Nigel Coe with Wolfe Research. Please go ahead.

Thanks, Good morning.

So I wanted to get into an excellent America is a little bit deeper.

Obviously very impressive margin leverage the E.

Our residential and data center is particularly strong markets.

Is there any mix impacts here Craig.

We used to industrial being margin accretive maybe commercial being dilutive, but how does the essential and.

Data center impact margin mix.

I'd say if anything to your point Nigel I think you know the business well that we tend to make higher margins on a relative basis in the industrial side of the business.

The more commercially oriented stuff tends to be lower margin and so we certainly.

Not experienced any positive mix and the electrical Americas business I think this margin that youre seeing and is posting these record levels of margins is really a function of the things that we talked about which is our teams are executing well.

We're certainly benefiting from some restructuring that we've done as a company and the volume is obviously, helping and the big one is obviously, if you think about electrical Americas, we divested.

Lighting business and as we continue to.

Work the portfolio and what we call growth ahead, and shrink detail. We continue to do things inside of the company to ensure that we're serving attractive markets.

But no we would we would expect that.

There is more room to grow and when we think about margin expansion in our electrical Americas segment, and certainly as the industrial markets come back.

That's going to certainly be accretive to margins.

Alright, Okay, great. Thank you and then on the end markets you basically said that all of them will go on hire with exception of utility which remains in the mid single digit range and you called out strength in global non U S. So I'm just wondering what we're seeing in the U S utility space, all we seen maybe slightly softer trends in the first half of the year any any kind of therapy.

Helpful.

I mean, the utility markets for us I'd say largely performing in line with what we originally said we knew as we started the year that the utility markets, we would be a relatively strong market at mid single digit growth.

And the market is just really continuing to perform in line with those numbers and so.

The distinction I would say between the commentary around global versus the U S is really a function of change versus our original expectation.

So utility markets continue to be very attractive space, we think.

Work that we've talked about and the things that are going on around energy transition.

Hardening of the grid grid resilience, we're seeing a lot of.

Good activity.

If you look at our broader negotiations in our electrical business. They were up quite significantly from the fourth quarter and so yes. This is a market that we continue to be optimistic about and we think the utility segment.

Very much different in its history is really going to be one of the important growth vectors for the company as we look forward.

Alright, Thanks, Craig Thank you for that.

Thank you we'll go next to the line of Jeff Sprague of vertical research. Please go ahead.

Thank you good morning.

Craig maybe just to pick up a little bit on that discussion about.

Industrial.

Are you.

Actually seeing anywhere in your business kind of early signs that some of those later cycle elements of your business.

Are beginning to pick up perhaps it hasnt materialized in orders yet but.

Just kind of what Youre hearing from your customers and the channel would be interesting.

Yes, it's obviously too early Jeff to declare victory on any of this stuff but.

But we are certainly seeing some early signs in the industrial markets are things starting to to come back and as I mentioned negotiations for it as you know in our businesses and you have a pipeline you do negotiations and you end up with a booking it ultimately a sale and so we track negotiations in our business and they are up quite significantly.

<unk> from the fourth quarter and most of that increase I'd say the biggest part of that increase in what we call. Our negotiations is coming from our industrial businesses and so we're certainly seeing some green shoots there.

You can see a lot of discussion about this whole trend towards reassuring.

And you certainly see that today in the semiconductor market for example, where a number of very large semiconductor companies have announced very sizable projects.

Here in the U S.

And those are very big industrial projects and so yeah. We're clearly seeing some early signs too early too, let's say once again declare that.

We know exactly where we're headed here, but but it's certainly encouraging.

And secondly, unrelated, but just back to what Youre doing here on M&A.

Maybe just a little more on green motion.

It sounded like that was a really interesting partner at your analyst day. It shows obviously to just kind of take them out.

In entirety.

What was the thought process there and it sounds like maybe there is no revenues, but you feel like you have very little but you have some revenue visibility out into 'twenty, three and 'twenty four.

Yes.

Green motion is a company that started back in 2009 so for.

Relatively new organization is everything in and around kind of.

Electrification of vehicles is new and so they have some revenues net revenues are relatively modest at this point is as I mentioned dilutive to margins as we continue to invest in this business, but yet strategically.

It's a perfect fit for us and we Wouldnt and his team has spent a lot of time talking about energy transition and what it's going to mean in terms of opportunities with respect to the grid as electric vehicles continued to grow and they have both the hardware and the software technology in the billing <unk>.

Systems to allow us to really participate in this really fast growing and exciting space and so today they have a solution that works perfectly.

In the Nordic countries and most of Europe will be taking that technology and integrating it with what we're currently doing in North America. So that we have a solution for the north American market as well and so it is really important.

Part of our strategy.

And it really accelerates what we would have done organically inside of our company by by acquiring this company. This gives us I would say at least.

A couple of year head start for what we were planning to do organically I think if you think about it in terms of our longer term goals of where we said we'd be by 2030, probably doesn't change that materially because we planned on making these investments organically.

But it certainly accelerates our progress.

Alright, thank you for that.

Thank you we'll go next to the line.

Davis with Melius research. Please go ahead.

Good good morning, guys.

Good morning, Scott.

Got it good good.

<unk> talked about so far, but if we backed up a little bit.

Craig and just talk through the supply chain issues. Your company your business mix is a little bit different than.

Kind of our average how would you rank the supply chain issues is it more around.

Is it more about rock higher raw material costs is it more of a freight I mean, how do you guys think about it and how are you managing it.

Yes.

Hey.

It's probably fair to say Scott we are dealing with all of those challenges. We are dealing with certainly if you look at the basket of commodities that we buy whether that's copper aluminum sheet steel.

No.

We're probably seeing today levels of inflation in those key raw materials that probably are at levels that we have not seen since probably 2010 2011, so clearly commodity cost increases on our key.

Input materials is quite a significant challenge.

As you mentioned freight around the world.

<unk> is up dramatically.

As well.

And then with these challenges, obviously youre dealing with the intermittent availability issues on things like you're reading the newspaper with respect to semiconductors, which is impacting our vehicle business and also to a certain extent is impacting our electrical business and so I think we're dealing with this entire.

Kind of portfolio of challenges right now in the market and our teams are managing through it extraordinarily well and I would tell you that.

The good news in all of this is a great indicator of just how strong the market is until the the other side of dealing with these challenges around inflation and freight and the like is that something very positive must be going on in your end markets and thats really what were experiencing and as you know.

Getting price as a company is something that we do.

It's certainly easier in certain cases distribution for example, as long as the market moves.

Price is a good thing for distributions and.

And so today I would I would tell you that we're dealing with each of these challenges and there'll be certainly.

Intermittent hiccups that we will see an E business or in a product line or in a quarter, but by and large our teams are managing it well and we'd expect things to start to to improve beginning in Q3, and then by the time, we get to Q4, perhaps at the end of the year for a lot of the bigger issues to be behind us, but but we're manner.

<unk> through all of these challenges, but we've been here before this is nothing new for our company we've dealt with inflation before we've got with these intermittent supply chain issues before and.

And I am confident that we will manage through this one extremely well as well.

That's helpful. Craig and just I think I think this is part of Jeff's question, but you mentioned the semiconductor fabs.

Onshoring thing, but.

I always think of the rule of thumb on new factories kind of 10% of it is going to be electrical content.

How do you how do you guys think about.

Semiconductor fab I've actually never been in one so is it does it heavier electrical content than an average kind of.

Would your factory is it lighter perhaps.

Clearly it would be.

The energy requirements are for semiconductor facility, we tend to be higher than your typical commercial project for example, and so the electrical intensity of that kinds of project would be it would be much much higher one of the other markets that we didn't talk about as well.

As water wastewater that's another one of these markets I would tell you where that we're starting to see growth in projects with another market that once again has higher electrical intensity in some some of the other products on the industrial side.

Very helpful. I'll pass it on thank you and good luck guys. Thank.

Thank you Ken.

Thank you we will go next for the line of John inch of Gordon Haskett. Please go ahead.

Thank you good morning, everybody.

Hey, Craig is is aerospace right sized for a pending commercial flight rebound over the next couple of years.

Likely on a lagging shop visit aftermarket basis.

It's still a rebound nonetheless or would you actually have to begin to re hire.

And I appreciate that I appreciate that question, John It's a little different one that we're getting around aerospace these days, but.

But certainly appreciated I would tell you that.

One of the things that we've done as you know we've lived through <unk>.

Cyclical businesses and have a lot of experience inside of our company around how do you manage these businesses that go through.

Periods of time, these pretty big cyclical swings and so I would tell you that our business is sized appropriately and is well positioned for a rebound in commercial aerospace the bigger challenges always tend to be the supply chain.

So what we're trying to do and make sure that not only we have our house in order and we're ready for the rebound, but also throughout the supply chain that everyone is prepared and like everything else in these businesses. It's the weakest link that tend to create issues for your businesses and so yes, our business itself very well.

Put it.

Our viewpoint of we think it's $23 20 for recovery, we did take some restructuring actions inside of the business. Most of it was around fixed structural costs that will not come back.

Things that we would have done anyway.

Even in a more healthy environment and as we as we talked about this prior years. When we tried to do in each of our businesses have in what we call a shovel ready projects and so this list of restructuring projects that we would undertake at any point in time, and then we simply accelerate or decelerate based upon the market environment that we're living.

And that's simply what we did in aerospace things that we wanted to do any way, we would've done them anyway, we simply accelerated them. During this period of low economic activity, but not things that take capacity and capability.

To respond out of the system.

So we're in great shape, and obviously, we're working with our suppliers to make sure that they're also prepared for the ramp.

And then it sounds like E.

Pretty good positioning to be Yan.

Maybe just as a follow up Tom I wanted to ask.

Your first 90 days what have you uncovered.

I'm sure.

With your boss sitting there youre going to say a lot of positive things, but I'm wondering also though if you could talk about areas for maybe opportunities for Eaton and where your background could be additive to this so maybe like some areas for improvement I don't know whatever whatever you'd like to say.

Yes, I appreciate it John I guess, a few things that I've seen.

The first one is just a tremendous amount of opportunity I knew that coming in and it's even more than I expected.

Specifically in the area of organic growth.

That's a great opportunity for us and hopefully that's something that I can be additive to <unk>.

Another thing that I've found us.

With all of the issues that we've been managing whether it be commodities or supply chain just the professionalism of the organization to get after it and just to mitigate it has been has been really remarkable.

And the final thing is just a really top notch leadership team that wants to win and all of that is just a great combination and I couldnt be happier to be here.

Terrific. Thank you Paul.

Thank you next we'll go to the line of Jeff Hammond with Keybanc. Please go ahead.

Hey, good morning, guys.

Good morning, Hey, Craig I think.

Early in the year. When you first gave your outlook commercial construction and oil and gas for Laggards can you just kind of frame what youre seeing there and how you're feeling about those end markets versus a couple months ago.

Yeah. Appreciate the question, Jeff and I would say largely speaking you mean in the context of what's happening in our electrical business overall, they are clearly laggards.

Within commercial there are certain segments that continue to do well we've talked about for example, warehousing. For example is a segment that is very strong and once again, it's another one of these markets with a much higher electrical intensity than other commercial applications, but.

And so but the commercial market I'd say.

Our view on it in general what we call commercial institutional is that this year, we're calling that market to be flat to up slightly.

But still a laggard relative to the.

The overall electrical.

Markets that we're seeing in general and then in oil and gas while we are another place where we're certainly seeing some green shoots in the market is certainly firming. The rig count is increasing we're starting to see more MRO projects and alike. So that market is improving.

But once again relative to the overall electrical market.

For that market is still a lot.

Laggard versus the overall electrical market and that market, we're still calling to be essentially largely flat on the year.

But still not.

A return to kind of the growth that we certainly would expect to see perhaps beginning at the end of this year into next year.

Okay. That's helpful. And then just on vehicle you guys raised your outlook.

Pretty materially and certainly <unk> was a lot better and that seems to be where a lot of the supply chain and semiconductor chip issues or can you just speak to kind of the push pull of kind of raising that pretty materially versus some of the.

Supply chain headwinds youre seeing in those markets. Thanks.

Yes, I appreciate that and I would say that if you think about our semiconductor issue. It certainly has hit the light vehicle market.

Harder than it has let's say the commercial vehicle market.

Not to say, if we arent challenges in commercial vehicles. There are we have issues there as well, but it's certainly been a much bigger issue in the light vehicle market and the one thing that has helped us a little bit I would say with respect to.

The way the Oems are responding to kind of the.

E shortages of semiconductors is that.

They are tending to make decisions to to manufacturer to produce.

Theyre more expensive vehicles, and so what you're finding is.

Trucks.

And things, where they tend to make higher margins are also places where eaton has higher content.

And so our impact in the way, we're being impacted by the semiconductor issue as being somewhat muted by the way the Oems are prioritizing what they produce and so as we think about Q2.

<unk>.

Maybe a 2% to 3% impact on revenues.

Revenues would have been 2% to 3% higher but for the semiconductor issue.

Overall, and so our teams once again, managing it well, but it is a real issue and one that we expect to really deal with.

Through throughout Q2, and maybe even into Q3.

Okay. That's interesting thanks.

Thank you next we'll go to the line of Josh Parkers Lewensky of Morgan Stanley. Please go ahead.

Hey, good morning, guys.

Good morning.

Josh.

Craig maybe to follow up on your earlier comments in electrical.

It sounded like you thought you guys were benefiting a little bit from supply chain shortages, maybe some advanced ordering or.

For a double ordering that people just sort of trying to get ahead of of supply constraints.

How much of that.

That 23% backlog growth that you saw in the Americas would you attribute to something that's maybe a bit more atypical versus the underlying business just trying to get a handle on.

Whats that timing that mechanism might be worth.

Yes.

It's obviously a difficult question to really know for certain in terms of.

The behavior and what's going on specifically in the channel I would say that we.

We probably did see some some some order surges that took place at the end of Q1 in the month of March.

Tough to call it double ordering I think some of that ordering could be certainly trying to get out in front of price increases some of that order it could be to put in some.

Safety stock to protect against concerns about shortages, but I would say that overall, if you think about inventory levels as the inventory levels in general I would say are still probably slightly below where they really ought to be if you think about some of the end markets of residential.

And others.

And let's say in some of our.

Factory OEM equipment markets inventory.

Inventory levels, there are probably well below where they need to be and we're still kind of hand to mouth with respect to <unk>.

Dealing with some of the demand that we're seeing.

So I would say, it's kind of the spirit of the question is.

Do we think this.

<unk> net we're seeing in the electrical business has legs.

Or is it a little bit of an artificial.

<unk> that we're seeing I think mostly we're comfortable that it's real the underlying demand that we're seeing in these end markets is real and that's what's really driving the ordering more than anything in and we'd love to be in a position today, where we actually had more inventory in that day that same sentiment I would tell you it would be largely true for almost all of our customers.

Got it that's helpful. And then maybe just following up on on electrical.

Obviously at the analyst day, a lot of discussion around electrification and sort of some secular shifts in the way customers are buying.

As you guys are bidding on projects is there some I don't know higher content level that youre seeing show up that would suggest this is playing out or is this just kind of project velocity picking up rather than I guess project content.

No I would say that it's both it's both it's both.

Velocity unit, it's also content.

One I always go back to which is which is an easy one to relate to it is really what's going on even in residential construction today. If you think about today the electrical content in your homes.

As you move from standard mechanical.

Circuit breaker to an electronic circuit breaker or a circuit breaker that has the ability to.

Do fall protection.

We're seeing more electrical content.

In almost every project that we that we participate in.

And almost every single end market distinct this idea of.

We talk about.

The digitization connectivity these broader secular growth trends are really.

Requiring an increase in the electrical content and the equipment that we provide so I would say it's both it's both.

The velocity of projects as.

As well as increased content on every project that we sell.

Got it appreciate the color best of luck.

Thank you we'll go next to the line of Joe Ritchie of Goldman Sachs.

Please go ahead for everyone.

Thanks, Joe.

So.

Craig I know you've been pretty front footed on the investments that you've been making on the E mobility offering for the.

<unk>.

For spring announcement last week.

ABB like initiating a carve out of their business their business being smaller than your business. Today I'm. Just curious you guys have.

Ben Franklin at as well in terms of your portfolio I guess, how are you thinking about this business.

Longer term and is this for a potential opportunity for a carve out of this business isn't as you build momentum.

Yeah.

We obviously follow that announcement as well from AVB and I'd say that every company has got their own strategy around how you unlock value.

Your organization and as we think about the connectivity between what we do in our E mobility business with the broader electrical business, we see just tons of synergies between them and so we really think about that as being a.

Key growth platform for Eaton and a great source of synergies with respect to the way we develop technology the way we leverage scale in our in our supply chain and so we really do see it as an integrated part of our company as we go forward.

Think about one of the examples that we've mentioned in the earnings call today around this breakthrough technology, which is basically a resettable circuit breaker thats using a vehicle application in a market that has historically only use fuses.

A great example of that core technology came from our electrical business, that's where it was developed and so our E mobility team lifted that technology naturally modified it for the commercial vehicle space and here, we landed a number of key wins that we think.

At maturity.

We could be talking about this $100 million worth of business.

In this kind of space around this breakthrough technology once we get to get to full maturity and we bid down all the wins that we're working on right now so we really do see it as a core piece of the way we run the company the way, we leverage our scale and the way we will ultimately grow our business and synergies that will flow back to both.

Our electrical into our E mobility segment.

Makes a lot of sense Craig I appreciate the color there I guess my follow on question and I know, we've talked a lot about different end market trends and I'd be curious.

If you guys could quantify how April has been trending relative to some of the inter quarter trends that you saw in the first quarter.

Yes, I would say that.

We had a good we had a good April.

Naturally we are working get some rather modest comps given COVID-19 last year, but.

For the month of April for US came in very strong and came in actually slightly better than what we were forecasting and so at this juncture we think.

Everything is looking good for another strong quarter in Q2.

Got it thank you guys.

Thank you next for what's the line of Ann Duignan.

J P. Morgan. Please go ahead.

Yes. Good morning, most of my questions have been answered, but just maybe on the electrical side can you talk about any growing.

Start quoting in terms I E.

State and local government, either retrofitting for renewable energy and requirements or retrofitting part.

Modernization of infrastructure and are you seeing any of that kind of activity pick back up a minute.

Budgets are in better shape than we might have anticipated now without the money they've gotten.

In terms of aid I'm, just curious if youre seeing any evidence of green shoots there.

Yes.

Appreciate that question as well and Youre, absolutely right I mean.

The infrastructure.

Needs in our country.

Our vast and.

What's happening today in terms of the.

The stimulus programs that are being either approved already or proposed by the Biden administration.

We're going to put significant dollars in the hands of both state and local governments in and I can tell you today, it's early days.

In terms of what's been approved already.

Say that we are starting to see some of those projects and when you look at kind of the C 30 report.

The public sector has tended to be a little stronger than the private sector. When you think about what's going on in commercial construction and so we obviously have seen some of that already but the biggest piece of it. We think is still out in front of us.

We think that.

And obviously, it's going to depend upon where these dollars go in terms of this infrastructure build.

Okay.

If it's in roads and bridges that probably won't have a material impact on our company, but if it's where the Biden administration is pointing a lot of those dollars whether that's in.

Reduced energy consumption and greening of the economy electrification of the economy.

<unk>.

Building out the electrical infrastructure.

Grid resiliency a lot of the things that the administration of talking about.

Not baked into our current forecast and outlook could be another real I'd say.

Leg of growth for our company and we're hopeful but I think today, we've seen very little of that really show up in our business.

Okay. That's helpful. Thank you and then.

Just back on pretty much on day.

Electrical charging company in Europe can you talk a little bit of bad luck is some day.

<unk> net back.

Company because.

And we think that.

<unk>.

Net charging is being commoditized very quickly over time and the barriers James here not that high and it's very regional lenders standard issues across different countries.

Just talk a little bit about it.

Right.

Anthony and why you think sales feed the winter.

Yes.

I would say clear.

Clearly when you think about.

The charging infrastructure side are there is obviously the hardware and I think when you think about the piece Thats. Today you could argue is not very differentiated it's really the hardware itself. It's the equipment.

We view that as really more of a as a gateway and the real value creation really comes in the software associated with how do you managing manage the charging infrastructure and so yes, they have charging and they have the hardware associated with charging.

And that piece for us is interesting because we do think that depending upon the application net you're in.

All charging isn't the same.

There is an opportunity we believe depending upon which segment of the market, you're serving with a charging infrastructure in it of itself is important we think theres an opportunity to really pull through in couple of the charging infrastructure with what we do on the electrical equipment, a year side, which we think will be value.

Creating but the real value ultimately is really in the software and the way.

The solutions around how do you manage the charging.

Vehicles are free.

<unk>.

Managed to load in a smart way.

And a really complex environment, and that's ultimately where we see the biggest value in what really intrigued us a lot about what green motion has already done and the ability to do billing as well and what green motion has already done in the Nordic countries.

Anything further Ann.

Thank you sorry, I was on mute I appreciate it thank you.

And we have time for one more question that will come from the line of Julian Mitchell of Barclays. Please go ahead.

Hi, good afternoon.

Maybe just.

Clarification question around the free cash flow I don't think anyone's asked about it yet but that guidance was unchanged I think from before the adjusted net income guide was raised by about $200 million.

So just wondered what the moving piece or is it around big a working capital headwind.

Or is it more to do with perhaps a lot of those sort of adjustments to EPS non.

Net cash.

Just wanted to check on that thank you.

Hey, John I think the way to think about it the working capital pieces. It's just it's early I would say that today, we are dealing with a number of uncertainties as it relates to supply chain and we may need to build a little bridge inventory to deal with some of these supply chain challenges and so I the way I think about it more than anything.

It's just early in the year.

And some uncertainty around.

How some of these supply chain challenges are going to work their way through the system.

You saw in the numbers that we had a very strong Q1.

And free cash flow better than our plan for sure.

And there is nothing particular that we can see today that would prevent that from playing through for the year, but it's just early and Theres a number of these uncertainties around what's going on in the supply chain and Thats, what kind of held us back from from taking that guidance up at this point.

Thank you and then just a quick follow up on aerospace specifically.

The margin guide for the year Embeds.

Maybe two 300 points desktop from Q1 for the balance of the year.

I assume that's commercial after market recovering and carrying a very high mix tailwind with it.

Maybe just help us understand what your assumption is for commercial after market sales growth for the year.

<unk> in that context.

Yes, so commercial aftermarket the aftermarket typically lags the OEM.

By a quarter or two and so we are we are certainly expecting.

In aftermarket as we get into the second half of the year and Thats certainly going to be very much accretive to margins overall and so that's certainly baked into our assumptions and the other place and as I said, we did.

A lot of restructuring in the company a lot of that went into aerospace and so certainly as a restructuring program to get completed we'll see those benefits as well show up in our expanded margins but.

But we're very comfortable with the margin outlook for aerospace.

Even in even in Q1.

Margins that we delivered a net business of 18 five.

5% very attractive margins on volumes that are down dramatically and so as we think about the business and the margin profile overall, nothing that I'd say would be extraordinary or herculean and our effort to deliver the forecast.

That's great. Thank you.

Okay.

Yes.

Okay. So.

Okay guys.

<unk>.

Thanks for all the questions as always chip and I will be available for any follow up questions.

Have a good day alright. Thank you. Thank you guys.

Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and so using AT&T event conferencing you may now disconnect.

We're sorry your conferences ending now please hang up.

[music].

Ladies and gentlemen, thank you for standing by welcome to Eaton's first quarter earnings call.

You'll hear an acknowledgment tone that she's been placed in Q you can't remove yourself from Q&A anytime by repeating that one zero command if you're on a speaker phone. We ask that you. Please pick up your handset before pressing the numbers and if you should require any assistance for them and operator during the call. Please press star and then zero and an operator bolus.

Hey, good morning, guys. Thank you all for joining us for Eaton fourth quarter 2021 earnings call with me today are Craig Arnold, our chairman and CEO and Tom <unk> Executive Vice President and Chief Financial Officer, Alright agenda today, including opening remarks by Craig highlighting the company's performance in the fourth quarter as we have done all of them.

Past calls, we'll be taking question for Ada and other Craig's comments the price release and the presentation. We'll go through today have been posted on our website at www Dot Eaton Dot com this presentation, including adjusted earning per share adjusted free cash flow and other non-GAAP measures are reconciled in the appendix.

A webcast of this call is assessable all of our life side that will be available for replay I would like to remind you that our comments today will including statements relate to the future.

Expected future results of the company and are therefore forward looking statements. Our actual results may differ materially for our forecasted projection due to a wide range of the risks and uncertainties as described in our earnings release and presentation with that I'll turn it over to Craig. Thanks Yan appreciate it hey will.

Starting on page three with our recent highlights and first I'd. Just say you know we had a terrific quarter and we are significantly increasing our full year guidance. As you saw our teams have just done an outstanding job of managing through this dynamic market environment, which is reflected in our strong results Q1 adjusted earnings per share of $1 40 for war.

Solid, 15% increase year over year, and 18% above the midpoint of our guidance.

Our Q1 revenues of $4 7 billion or up 5% organically, which was well above the high end of our guidance range of down 3%.

This outperformance was driven primarily by the two electrical segments as well as our vehicle business.

We also posted a Q1 record for segment margins of 17, 7%.

And looking at our Incrementals that we generated $73 million of higher profit, despite having $97 million of lower revenues.

This was the result of that we'd say strong execution ongoing improvements in the cost structure from the multi year restructuring program that we announced in the second quarter of 2020, as well closely managing price and inflation in the quarter.

Cash flow was also very strong adjusted operating cash flow increased by 42% and our adjusted free cash flow increased by 62%.

And we had another successful quarter of M&A closing free deals.

We're also making good progress towards the closure of the previously announced acquisition of carbon emission systems as well as the divestiture of hydraulics.

And finally, we recently announced the agreement to acquire 50% of Jiangsu.

<unk> electric bus OE business in China, an important part of our growth strategy for the Asia Pacific region.

Yes.

Having having been quite busy on the M&A front, we thought it'd be helpful to provide a summary of these free recent deals.

We covered trip lightened carbon emission systems acquisitions in some depth on the investor meetings.

But each of these three deals here.

Certainly advance our strategic growth objectives, and our electrical business.

First green motion based in Switzerland, It expands our capabilities in the electrical charging market, where we expect to see significant growth over the next decade linked to energy transition.

They are proven charter designs in advanced power management capabilities.

Billing software are valuable additions to our existing energy storage and power distribution offerings that support our view of everything is a grid.

We also closed our previously announced investment in her new <unk> is based in China and provides a strong portfolio of products that will open up significant growth opportunities in our business throughout Asia Pacific.

They make cost effective circuit breakers and contractors in that day.

It gives us access to tier two and tier three markets in Asia Pacific.

And finally last week, we were pleased to announce the agreement to acquire 50% of <unk> electric buffet business in China.

Gaining strong busway capabilities in China.

Combined with Eaton <unk> broad portfolio of products will really position us well to participate in the high growth data center industrial and high end commercial segments, and allowing us to pull through related electrical products.

Han you and Union transactions I'd also add significantly expand our addressable market in China and in Asia Pacific certainly, allowing us to accelerate our growth rate in the region.

Moving to page five we summarize our Q1 financial results and I'll just note a couple of points here.

First acquisitions increased sales by 1%, but this was more than offset by the divestiture of lighting, which reduced sales by five 5%.

You'll recall that we sold the lighting business in March of 2020.

Second segment margins of $831 million for 10% above prior year and this is despite a 2% decline in total revenue.

This was largely the result for I'd say, a solid execution restructuring savings and really our ability to effectively manage price and inflation during the quarter.

We expect the inflation impact the worst and certainly in Q2, but we will for more than fully offset this for the full year.

And lastly, our adjusted earnings of $577 million up 12% and when combined with our lower share count we delivered a 15% increase in our adjusted EPS.

Turning to page six you see the results for our electrical Americas segment.

Revenues were up 2% organically driven by strength in data centers residential and utility markets, which offset weakness in industrial and commercial markets.

The acquisition of trip light and PDI added two percentage of revenues by the divestiture of lighting reduced revenues by 14%.

We're very pleased to also have closed the tripwire acquisition sooner than planned and to welcome their team to the <unk> family.