Q1 2022 Eaton Corporation PLC Earnings Call
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Yeah.
Ladies and gentlemen, thank you for standing by welcome to the Eaton first quarter earnings call. At this time all participants are in a listen only mode. If you wish to ask a question during today's call. Please press one then zero on your Touchtone.
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I would now like to turn the conference over to our host senior Vice President of Investor Relations Yan Jin. Please go ahead.
Hey, good morning, guys. Thank you all for joining us for Eaton's fourth quarter 2022.
Our earning cost with me today are Craig Arnold, our chairman and CEO , and Tom Okray, exactly West 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 our past calls we'll be taking questions Ada end of Craig's comments, the price release and <unk>.
Contagion, we'll go through today have been posted to our website. This presentation, including adjusted earnings per share adjusted free cash flow and other non-GAAP measures that are reconciled in the appendix a webcast of this call is accessible on our website and will be available for replay I would like to remind you that our comments today, we will.
Including statements related to expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our projected.
Forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and presentation with that I will turn it over to Craig.
Thanks, Tien he will start on page three with highlights for the quarter and overall I'd say, we had a strong a strong start to the year Q1 coming in modestly better than guidance. Despite additional headwinds in commodities in the quarter we.
We had a particularly strong quarter in our electrical global and aerospace businesses.
And this enables us to deliver a first quarter record for adjusted EPS of $1 62.
A 13% increase over prior year.
Our sales were $4 8 billion up 10% organically from last year and this was above the high end of our guidance range of 7% to 9%.
Most of our end markets remained strong with significant strength in industrial commercial residential markets for electrical and commercial aftermarket and commercial OE for aerospace.
And our orders continue to accelerate allowing us to post another record for backlog.
For our combined electrical business orders on a rolling 12 month basis were up 30%.
An acceleration from last quarter, which was up 21%.
And our backlog for electrical was up 76% compared to 56% at the end of 2021.
Our aerospace business also had a significant increase in demand with orders on a rolling 12 month basis up 35% organically compared to up 19% at year end.
We also posted a first quarter record operating margins.
Of 18, 8%, which were at the high end of our guidance range at 110 basis points over prior year.
So overall, a good quarter with healthy end markets.
Solid execution in what remains a challenging environment overall.
I'd say, we're also executing well on our strategic growth initiatives as noted here on slide four.
Highlighted are here with several new wins tied to the secular growth trends that will focus on we talked about electrification energy transition and digital utilization.
Overall, we continue to see an acceleration in each of these important growth drivers and are convinced that we have the right growth strategy.
In the interest of time I'll highlight one of these recent wins, but we're happy to provide more detail on our follow up call.
While we're not at Liberty to disclose the customer we had another very significant win.
And energy transition project.
This was a very large follow on order for EV charging stations in the U S, where we're providing the full suite of solutions, including power distribution equipment energy storage Inverters control automation and remote monitoring software.
And we continue to work on a number of big opportunities focused on building out the needed electrical charging infrastructure given the explosive growth in electric vehicles.
And so as the world continues to embrace sustainability, our technologies will continue to play a key part.
This solution.
Moving to page five we summarize our key financial metrics for the quarter and then I'll just note a few highlights here.
<unk>.
3% revenue growth included 10% organic growth offset by net headwind of 6% from acquisitions and divestitures and this was primarily the cobham and the tripwire acquisitions offset by the divestiture of hydraulics.
Our acquisitions added six points of growth, while the divestiture of our hydraulics reduced growth by 12 points.
We also had negative FX of 1% in the quarter.
Second with 3% revenue growth, we posted solid operating leverage with 9% growth in operating profits and even stronger adjusted growth.
And EPS growth of 13%.
And third like last quarter.
Both adjusted EPS of $1 62, and segment operating margins of 18, 8% for Q1 Records.
This strong financial performance, we think underscores the power of our portfolio transformation and our ability to execute well under.
Under challenging operating conditions.
Next on page six we have the results of our electrical Americas segment.
Here revenues increased 17%.
Including organic growth of 10%.
And just as a comparison this compares with 5% in Q4 and 1% in Q3.
The acquisition of Tripwire added seven points of growth.
Our organic sales growth was driven by strength in industrial and residential markets overall and as you can imagine we're still working through supply chain constraints.
Which saw modest improvements in the quarter, but remain challenging.
Operating margins were 19, 1% down 140 basis points from last year.
And I say this decline was driven primarily by higher input costs and supply chain inefficiencies and also some increased growth related investments.
Importantly, we were successful to fully offsetting the expected inflationary cost with price increases on a dollar basis.
However, we did not earn incremental margins on inflation, which did compress margins.
As youll see in our full year guidance, we expect this to improve and we continue to expect 90 basis points of margin improvement for the full year.
And as I mentioned in my opening comments market demand remained strong we had very strong order growth on a rolling 12 month orders were up 31% and this compares to up 20% in Q4.
So things continue to accelerate.
We had strength across all end markets with a range of up 28% to up 36%.
This led to a record backlog, which increased 86% on an organic basis.
And on a sequential basis, we posted.
Large one $3 billion increase in our backlog.
Moving to page seven we have a summary of our electrical business, where we had another very strong quarter.
<unk> growth was 18% with 3% headwind from currency, we saw strength in all regions with particular strength in commercial and industrial markets.
We also generated strong operating leverage delivering record Q1 operating margins of 19, 4% and.
And incremental margins of 36%.
Similar to Q4. This included some favorable mix from our exposure to growing industrial end markets, but we expect this to continue.
And as we saw in the Americas orders on a rolling 12 month basis continued to accelerate up 27% in Q1 compared to up 22% in Q4.
We had strength across all end markets with a range of up 22% to up 41%.
And I would say for the fourth quarter in a row, we continued to grow our backlog by 50% or more and achieved a new record in the quarter.
So our electrical mobile business is very well positioned for continued strong growth.
Overall.
Just before we move to the industrial businesses.
Here's a way to really summarize the performance of our combined electrical business.
The business delivered strong organic growth of 14%.
Our sizable backlog, which strengthened certainly our outlook for future quarters, and we improved margins by 20 basis points. So on balance I'd say once again, a strong quarter given the current operating environment.
Let's move to page eight where we recap our aerospace segment.
As you can see we delivered very strong results here with revenues up 38%. This includes 15% organic growth and 25% from the acquisition of carbon emission systems and 2%.
Currency headwind org.
Organic growth in the quarter was especially strong in commercial aftermarket and commercial OEM markets, and certainly including business Jets.
Operating margins were 22, 1% up 360 basis points versus prior year and incremental margins were solid at 32%.
Another area of strength was accelerating orders, where which we saw rolling 12 month orders up 35% in the quarter and this compares to up 19% in Q4.
We also ended the quarter here with a record backlog on an organic basis up 14%.
And consistent with the broader message of industry recovery. We're currently pursuing one 3 billion of life of the program opportunities for strategic military and commercial programs.
All incremental revenue.
So another segment that I'd say, that's very well positioned for growth today and for years to come.
Next on page nine we have the financial summary of our vehicle business revenues were up 3% all organic.
We continued to see solid growth in North America aftermarket business and in our South America business, which was offset by weakness in global light vehicle market.
As you've read this market continued to experience significant supply chain constraints, which certainly impacted revenues in the quarter.
Just as market share begin to see some improvements supply chain issues tied to primarily the war in the Ukraine had a particularly large impact on this market.
These constraints also contributed to operating inefficiencies in our business and a 50 basis point reduction in our operating margins.
We are undertaking a number of price and cost related measures to offset the additional inflation, but it will certainly take some time to get these in place, but certainly something we plan to do before the end of the year.
Turning to growth.
During our Investor meeting earlier this year, we provided an overview of how we're transforming the business by focusing on new spaces.
In products not tied to the internal combustion engine.
And the team is seeing good progress, we continue to see new wins, including a win with a Chinese OEM for our electronic traction control devices. We're also pursuing a pipeline worth $500 million in annual revenue for our powertrain solutions for leading <unk>.
Oems once again all incremental.
So I would say that we're well on our way to transforming our legacy vehicle business by selling into EV and other new markets and so this business is performing.
Very much like we expected.
Moving to page 10, we summarize our E mobility segment revenues increased 52%, including 7% organic and 46% from the acquisition of Royal power with 1% negative currency.
While still negative we narrowed the operating loss in the quarter and then we expect to generate positive margins for the year.
And the outlook for this market continues to strengthen.
Consistent with what you are hearing where.
We're actively pursuing some $2 billion of new program opportunities and this number is really growing every quarter.
I'd also note that our acquisition of Royall power added almost $600 million of pipeline opportunities focused on their innovative solutions for terminal connectors and high voltage bus bars.
As a reminder, here our area of focus and the mobility use around power distribution power conversion and power protection.
And in the area of power protection, we had previously announced a win using our breakthrough technology with a major European OEM manufacturer.
That customer just awarded <unk> with significant.
Additional volume as they are expanding the use of our innovative technology to more of the vehicle platforms and so once again another segment, where things are progressing very much in the way that we anticipated.
Now, let's turn to page 11, where we summarize our updated organic revenue and margin guidance for the year.
Overall, I'd say, despite uncertainties in the broader macro environment, we continue to experience strong demand in our end markets.
We are increasing our guidance on organic growth for all segments, which results in total organic growth stepping up from a range of 7% to 9% to our now our expectation of 9% to 11%.
This growth outlook I'd say, it's easily supported by our ongoing growth in orders and growing backlog.
For margins, we're reaffirming our full year guidance for Eaton that.
<unk> $19, 9% to 23%, which represents a 120 basis point increase over 2021 at the midpoint.
Note, while we increased organic revenues were maintaining our margin outlook and I would say this is largely due to additional inflation that we've experienced in the year.
Spec to see for the balance of the year.
We've continued to increase prices to offset inflation, but I'd say, we're experiencing kind of a normal timing impact.
And not getting a normal margin on top of inflation.
Within electrical we're reaffirming our margins for electrical Americas on increasing the.
<unk> range for electrical global by 10 basis points.
We have also increased margin for our aerospace business by 20 basis points and E mobility by 50 basis points.
These three segments.
Offsetting the lower margins that we're now expecting in our vehicle business due to margin compression from the new wave of inflation that we experienced in the quarter and expect for the year and some inefficiencies as well in our operations.
But at the midpoint, we expect to deliver record margins and to be north of 20% for the first time in <unk> history. So on balance a very strong year.
Turning to page 12, we provide the balance of our guidance for the year, we're raising our 'twenty two guidance.
On adjusted EPS to between 732 and $7 72.
Which is 14% growth at the midpoint and reflective of what we think is going to be a strong year.
We're increasing our organic growth as we talked about 9% to 11% and this is <unk>.
Partially offset by $250 million of negative currency compared.
Compared to our original guidance, where we saw currency would be flat for the year.
So if you think about it we're also offsetting approximately 10.
Of headwinds from negative currency in our earnings.
But for the new FX headwinds, we certainly be taking our guidance up more than we did today.
And we did complete $86 million of share repurchases in the quarter and we're on track for our full year guidance of $200 million to $300 million for the year.
Lastly, our Q2 guidance includes adjusted EPS forecast between.
$1 $78 88 for Q2 organic revenue growth between 7% excuse me, 9% to 11% negative currency, we think it will be $75 million.
8% net revenue impact from M&A for segment margins. Our Q2 guidance is $19 1 million to 19, 5%.
As a sequential improvement of 50 basis points at the midpoint from Q1.
And if you adjust for the <unk> 10 headwind from M&A, our year on year EPS growth in Q2 would be 12% so roughly in line with our full year guidance for the year of 2014%.
Lastly on page 13, I'll summarize by making here just kind of a few closing comments.
As many of you heard at our Investor day, and as I highlighted that started the presentation now we continue to experience accelerating growth in our end markets.
The secular growth trends are really playing out very much the way we anticipated.
It really underpinning our strategy as a global intelligent power management company.
We're delivering key project wins for sure that are also accelerating our growth rate.
These two revenue drivers are certainly showing up in our order book and growing backlog so.
Very much a case of markets inflect positively.
And despite high inflation and supply chain challenges, we're growing our margins.
I would also point out that based upon our Q1 actuals and Q2 guidance.
We expect to generate 46% of our full year adjusted EPS in the first half.
And this is in line with our historical averages are for first half earnings.
So as the global economy continues to face.
Unprecedented number of challenges I would say you can count on our team to continue to execute well to deliver our commitments in both the short and the long term.
So with that I'll turn it back to Yan for Q&A.
Great. Thanks, Greg now is the time for the Q&A I'll turn it over to the operator gives you guys the instruction.
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Okay.
We'll go to the line of Josh <unk> with Morgan Stanley . Please go ahead.
Hi, good morning, guys.
Good morning, Josh Good morning.
Craig you've been kind of accelerating Oregon environment now for call. It the last three quarters, where maybe supply chain is kind of limiting what you can be able to deliver.
The world has changed quite a bit over that time, especially the last quarter or so.
What's the composition of the order book look like and I guess, what I'm trying to get at is have you seen sort of a progression or hand off from some of the more early cycle stops and maybe later cycle or more resource industries.
Or is it just kind of a healthy mix of everything where it's hard to harder to tease out what leadership.
Yes, I appreciate the question Josh.
It certainly had been a period of time, where I'd say, we're really seeing broad based order strength in and as you know we would typically highlight.
Strength in particular end markets, but quite frankly, we're seeing strength across the board and it's why we talked about for example.
In our electrical Americas business, we said, we have a range of strength at the very low end up 28% at the high end up 36%. The same thing is true in our global business, where we said at the low end of the increase was 22% at the high end, it's 41%. So as you can imagine I mean this is.
Very broad based strength across just about every at every end market that we serve.
So things today I think are.
Our very strong across the board and it's tough to really.
Fine much in a way of differentiation between some of these end markets because the numbers are just that good.
Got it that's helpful. And then maybe just a follow up more specifically on the the relationship there with price. So I know, there's a lot of factors driving orders right now and you mentioned some of them just from a broad demand, but I would have to think that some of that comes from customers wanting to get ahead of price increases and it seems like just listening to some of them.
Our peers out there that the pace of those increases is starting to to kind of subside.
What would be your observation on kind of that relationship between orders and folks getting out ahead.
Have you noticed anything in your own book yet here in <unk> was maybe there hasn't been quite the same rate of increases we saw maybe second half of last year.
Yes.
This is one that we spend a lot of time, Josh and really trying to get a sense for.
Shoring ourselves first and foremost at all of these orders are real and and and as you know we are largely in the project business.
Where we can say that the orders that we're taking are all tied to project now we're getting some of these orders, perhaps maybe a little earlier in the process project process in terms of the cycle.
Could be a little of that taking place for sure.
So to the extent that we're getting some benefit from seeing orders earlier in the project that certainly maybe giving us a little bit of a lift a lot of our business. As you know also goes through distribution when I can tell you in the distribution channel.
With almost no exception, they don't have as much inventory as they like and inventory levels today or below.
Levels that they'd like to support their future outlook for the business overall.
And so I do think this is just a broad base of <unk>.
Strengthening in many of our end markets to your point on price and are things slowing down I think it's really a function of what you call us on inflation I would say that certainly coming into the year.
We anticipated that inflation would moderate and as a result, there'd be fewer price increases that we were putting forth. During the course of 2022, but yet what we saw in Q1 as we saw commodities for the most part increase and so we like others certainly are.
Back in the market again.
Taking prices up to deal with the latest round of inflation some of which is obviously being driven by what's happening in the Ukraine, some of which being driven perhaps by another wave of shutdowns that are taking place in China, but I would say that for the most part certainly.
We are seeing more inflation this year than we anticipated.
And at this point I'd say, it's too early.
To call on whether or not it is fundamentally slowed down at this point.
Perfect. Thanks for the color I'll leave there.
Sure. Thank you.
Next we have a line of Joe Ritchie with Goldman Sachs. Please go ahead.
Thank you and good morning, everyone.
Joe.
Greg could you maybe just touch on margins for a second.
Yes, really good start to the year when you take a look at the guidance the updated guidance for the year.
One.
Segment that probably has the most wood to chop I guess in terms of getting within the range as electrical Americas.
Just help frame how much of this is either additional price coming through supply chain using better volume leverage.
How do we get from that low 19 percentage range speak to what the guidance for the year.
I appreciate the question, Joe and I can tell you you know when we have a high level of confidence that electrical Americas will absolutely deliver.
The guidance for the year.
And what we've been chasing as you can imagine for some time now we've been chasing.
<unk> with price as I mentioned, a moment ago, we did anticipate coming into the year that that inflation would have abated somewhat and we ended up taking more inflation in Q1 than we anticipated and so we've obviously had to go to the market for additional price and so if you think about.
The back half of the year and going into second quarters, we're going to have a better relationship between price and inflation and the other thing that we certainly have seen in our Americas business. We've seen a lot of inefficiencies associated with kind of supply chain disruptions as you can imagine.
If you're missing one small component.
You have a bunch of people standing around in factories, not able to complete assemblies that drives fairly material inefficiencies in your operation and so we do anticipate as we look at the back half of the year, Although we're not looking for dramatic improvement we are expecting some modest improvements in supply chain.
And we are expecting quite frankly deliver better price.
<unk> cost.
In terms of commodities in the back half of the year and those are the two principal things that will allow us to increase margins.
Got it.
So the other big pieces volume was increasing rates. So certainly we look at Q1 is always the lowest quarter for our electrical Americas business and so it will be naturally some margin lift on simply.
The higher volumes that are going to come based upon the seasonality of the business.
Makes sense that's helpful and then just.
Maybe just a broader question.
Fully recognized.
Order rates have been really good and continue to accelerate and to Jonathan's question earlier, the environment has changed I'm just curious.
Your perspective, how do we see this all playing out in Europe , there's a lot of concern around demand rationing, China with the lockdown.
Help us kind of.
I wanted to get your perspective on how you think things will play out over the coming quarters.
Yeah, and I would say that.
I wish I had a crystal ball.
Two to really give you a kind of a.
Better than an educated guess.
The way, we see things play see things playing out but.
Our business certainly in Europe , we don't have number one very large exposure to Russia Ukraine.
Ukraine.
Any material.
Piece of our revenue overall and so we don't think we're going to see.
Any material impact at all from from a direct standpoint in terms of what's happening we do have some supply chain larger.
Largely as we've talked about in our vehicle business, where we're seeing the biggest impact as you know as well it certainly.
We will have an impact on the semiconductor industry potentially.
So I'd say at the micro level, we think it's very manageable.
In terms of what the ultimate impact will be on our business on a more macro level in terms of the geopolitical and trade sanctions and the like that one I think it's quite frankly, just too early to make a call on what the downstream implications are going to be in terms of.
Sanctions said as you know in Russia today is a very small part of global GDP.
So I don't think once again.
Having a decoupling of Russia from the global economy will have a material impact on our end markets, where our business is just really becomes.
The sanctions and.
And whether or not it does anything in terms of.
Underlying business confidence and your willingness to make investments, but I can tell you. So far I mean things have held up as you saw on our order book extremely well and we've not really seen any slowdown at all related to the war in Russia in the war excuse me in the Ukraine and at this point.
As a company like we always do we think the key is you have to be agile and flexible.
And be willing to make adjustments as needed as the situation unfolds.
Okay. Thank you.
Yes.
We will next to the line of Steve Volkmann with Jefferies. Please go ahead.
Hi, Good morning, guys. Thanks for taking the question.
My question is also kind of related to the backlog in electrical obviously very impressive but at the same time, Craig you talked about raw materials sort of re accelerating so I'm curious sort of how we handle that those two things together in terms of do you have some ability to reprice backlog if you need to.
Is that something that you're pushing more as the cycle progresses or.
Is there potentially a little risk if inflation continues to move up.
Yeah, No I appreciate the question and I would say that.
While it is not something that we do often and we obviously think long and hard before we would do it but we have had to reprice the backlog in some cases, it's something that we went through in Q4.
And I would say that today, what's baked into our guidance is.
Much manageable in terms of our expectation around.
Inflation and price and obviously, we tried to anticipate some of this as we think about the next wave of price increases that are going in and so as we sit here today, we don't have an expectation of needing to re price the backlog, it's fully baked into our guidance and our plan, but I would say that in the event that we ended up in a situation where things.
<unk> got materially worse in terms of commodity input cost, it's something that we've done in the past and we would be willing to do again, but at this junction. We don't think we need to we think we have a plan that makes good sense.
Fully baked into our guidance that commodities essentially stay at these relatively high levels, we're not anticipating that commodity costs.
Retreat in any material way in the back half of the year if.
If we do that's upside, but that's not our base case.
Understood. Thank you and somewhat unrelated E mobility seems to be.
Progressing well and I am curious now that we're a ways into this.
Are you still convinced that having E mobility and vehicles sort of under the same umbrella as it were is a competitive advantage or there is some.
Data points or anecdotes that might suggest that that's part of the success in E mobility is having a vehicle business.
No that's very much still the case, Steve from our perspective.
From the very fundamental.
Data says, they're all the same customers and so we have a seat at the table we have a reputation.
They know us we know them we know the application.
<unk> always been our thesis around why we thought we had the right to win in E mobility, one because we know the customers the markets and the applications and secondly, it's essentially electrical technology and so we come at it from both a customer intimacy standpoint, and an application intimacy standpoint by virtue of our legacy.
Precision in vehicle and we come at it from a technology standpoint, given our heritage on the electrical side and it really is this connection on both sides of the house that we think gives us the.
The ability to win in that market. If you think about this breakthrough or win that we talked about in our E mobility business.
Largely technology that was first created in our electrical business, then taken and lifted by the mobility team modified for vehicle application, but the origins of that technology actually came out of our electrical business and so we do think the synergistic.
<unk> of what we do as a company is what gives us the right to win in the mobility space.
Super Thanks, a lot.
Yes.
Thank you.
Our next question will come from the line of Andrew <unk> with Bank of America. Please go ahead.
Yes, Hi, Craig how are you.
Hey, Andrew good.
Yes.
So just big picture question, so structurally right I mean, I think most multis this quarter actually had negative volumes right despite price being very positive.
We had negative GDP, so structurally what do you think needs to happen with the U S supply chain.
To debottleneck, it and what do you see actually happening among your supply chain and how long do you think it will take to sort of normalize things and one of the key bottlenecks as you see them I know, it's a big picture question, but would love to pick your brain here. Thank you.
Sure.
Yes.
Say that.
And as you rightly point out Andrew the U S has been an outlier we've not experienced anywhere near the same level of supply chain disruptions and our European or Asia business and I do think that so.
So much of the challenge in the U S is that the U S companies ourselves included.
Have really relied very much heavily on global sourcing and our operations that has obviously created greater interdependencies in terms of <unk>.
Supply.
In the U S had sort of a unique issues around labor and some of the port congestion.
Also dealt with as the world These pretty significant downturns.
In the market associated with Covid, and then a very strong V shaped recovery that has continued so in many ways. It's been a perfect storm.
With respect to.
Creating challenges for global supply chain.
Businesses like our own.
So I'd say, so what's happened since I mean, clearly you've read about and there's lots of discussion and work going on around.
Certainly near shoring re shoring of manufacturing in the U S. I think youre going to continue to see more of that and that will certainly benefit Eaton given our relative size position in the U S market I think we have a lot of companies ourselves, including who are really looking at their supply chain resiliency and Jen.
<unk> and there'll be in many cases.
Some dual sourcing to create additional redundancy in supply chain so as we.
We ended up having to go through another event like this that we can absorb the shock a little better than we did this time around and so I do think that this event.
I don't know if its a black swan event or not but it certainly is for companies to really take a hard look at.
There are supply chain, resiliency, and whether or not we have enough.
Capability to deal with shocks in the system without fundamentally shutting down our businesses.
And so theres going to be as a result of that we think also good for Eaton I think theres going to be more investments in.
Facilities and plants and factories as companies continue to build out some redundancy in their capability and build more local sourcing into their supply chain.
And then just a follow up question you did sort of highlight that you see strength across the board but.
Can we talk about on the utility side clear.
Clearly a more talk about renewables.
We have stimulus are you seeing any projects start to get into the pipeline tied to U S or European stimulus there.
Yes, I'd say I'd say tied to Europe tied to stimulus dollars.
Certainly we're seeing a lot of activity.
A lot of.
I could say projects in this discussion fees I don't know today, Andrew if we've seen material dollars from stimulus.
Started to flow yet, we really think thats more of an end of 'twenty two 2023.
The impetus for the business more than we're seeing in our business today I think what we're seeing today largely in and around utility investment is really much more tied to grid resiliency. It's much tied to the fact that aging infrastructure. It's much more tied to the increase in electrification much more today than it is tied to the <unk>.
Stimulus dollars, but that's clearly coming.
Thank you very much.
I will now go to the line of Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning.
Yes.
Greg.
Because I want to come back to Americas margins. So the the one key margin was actually pretty flat with full queue.
And I think I'm right in saying that normally one key would be weaker than <unk>. So I'll take that as a positive sign that things have improved.
What would you say is driving that improvement primarily is it price cost.
Is it productivity.
Labor or the kind of the.
The kind of the sequencing of materials in anything to help us on that.
Sort of improvement sequentially and then can we then think about Americas margins due to the normal sequential uplift from <unk>.
Yes, I appreciate the recognition on that Nigel maybe youre absolutely right by the way Q1 has historically always been a down quarter for electrical lot of that is volume related and what we've seen historically in the business, we typically see a.
Seasonal volume reduction in Q1 versus Q4, and as a result margins on a decrement petrol basis go down and we are pleased the fact that they actually.
Hold up nicely in this Q1, but the biggest difference between let's say the overall profitability level largely is we're doing a better job in managing price cost overall.
We did in fact in Q1, while still not out of the woods, we did see a little better.
Supply chain performance in Q1.
Around certain commodities that actually got a bit better in the quarter and so I think it's really those two things better price cost achievement in the quarter and a little better supply chain performance from our suppliers.
<unk> included in the price cost is how we're taking cost out of our direct material and our iron in our logistics as well and to come back to the other part of your question. Yes, you can expect to see margins improving in Q2 versus Q1.
Great. Thank you guys and then my follow on is aerospace you took up aerospace by two points.
For 2022.
Maybe just talk about that.
What drove that and im, particularly interested in the outlook for defense because that was obviously problematic and markets and your 2020 outlook. So wondering if given the kind of the good news, though that's not the right word, but given the improvement in defense budget outlooks.
Globally are you starting to see some of that benefit commensurate in the back half of the year.
Yes, I appreciate that you once again.
Call out as well in aerospace really did have a very strong quarter and delivered very strong profitability overall.
And I'd say in aerospace is really a function of largely of.
Where we're getting the growth I mean aftermarket as you know in aerospace had been.
Depressed over the last number of years and so we saw very strong growth in the aftermarket side of the aerospace business and aftermarket as you know carries a much higher profit profitability and we certainly would expect that to continue as we look forward. We also want aerospace like in our other businesses did a better job of managing price versus input costs.
Getting price to offset inflation, which was which was very helpful. For the business and then to your point on defense I'd say defense spending largely we're looking at a year today words.
On average flat to maybe up slightly and we really think that the.
The defense budgets as you think about the fiscal 'twenty three defense budget for the U S and around the world certainly.
Influenced we think also by what's happening to me in the Ukraine, We think budgets are going up on the defense side of the business and so we had a base case assumption of what we thought.
Fence market's going to look like over the next number of years.
And we think that number is certainly going up given already.
Proclamations from many governments around the world around them, increasing their defense spending.
And so we think the aerospace outlook.
Although you hate to benefit from these kinds of events in the world, but we certainly think defense spending is going to.
Prove as we go forward, but it's largely going to be we think a 2023 story more than it is 2022.
Great. Thanks, Greg.
Yes.
We will now go to the line of Scott Davis with <unk> Research. Please go ahead.
Hi, good morning, everybody.
Just Greg on the topic of aerospace fall, where there are the airlines starting to rebuild inventory and spare parts. So I'll have you seen that.
That occurrence.
Yes, I mean, the short answer is yes, and thats part of whats driving the strong growth that we're seeing in our aftermarket business. So absolutely.
Okay.
That's helpful and then going back to kind of the early prepared remarks, you talked about this EV charging contract that you got in <unk>.
Skus that you supplied into it.
What are you.
What are you not getting meaning are there other key components of that.
Could you potentially.
Handle the full project.
Will it ever get bid out that way on a full project basis as opposed to buying components for you or how do you see that playing out I guess is an open question.
Yes.
Thanks for the question Scott I mean, as you can imagine.
Really large opportunities.
By various customers.
Different parts of the platform and so yes, we're winning.
Content and we're also passing on content as well because we don't think it's going to deliver the returns that we expect is as an organization. We're focused as I said one.
How do you distribute power how do you convert power.
And how do you keep it safe.
Side of the car and so we are certainly being selective I'd say in terms of where we think we can participate in this growth in <unk> as we talked about this.
This goal that we set forth for creating a new leg inside of the company and the revenue goals that we set that number could actually be much higher if we were going to be kind of less discriminate in trying to participate in every opportunity that's out there.
So I would say that.
This kind of $2 billion to $4 billion number that we put out there is really taken into consideration that we think.
There's going to be places, where we have technology that allows us to differentiate to offer real value to the customers and there's going to be other elements of what's happening in electrification, that's more commoditized and we're going to stay away from the Commoditized stuff.
And really focus on the places, where we will offer a differentiated technology based solution and Thats. Those are the kinds of programs that we're winning those are the kinds of programs that we want to win.
Yes, I was asking specifically about the charging contract not the not the EV charging.
Charging contract Okay, yes.
Is it the same way.
Okay.
Yes.
It's also true, but I was thinking you were talking about the E mobility.
When specifically.
No I'd say on the on the chartering contracts, specifically as I talked about it was.
Unfortunately, we're not at Liberty to disclose the customer's name, but it's one of the big Big names out there who today is helping build out the nations.
<unk> infrastructure as the world moves to Evs and once again I would say that that answer largely applies I mean, there are going to be clearly parts of whats going to happen in the context of charging infrastructure, where theres going to be essentially.
Okay.
The charger that doesn't have embedded intelligence, whereas it doesn't require a lot of sophistication around the way you manage the load the energy required the energy consumed and how you balanced load, let's call them charging if you will.
You plug it in and it is electrons flow and it doesn't really require much intelligence in between and so we're really not today participating in that into the market place.
Places, where we've decided to compete is where it really does require a fair amount of sophistication in terms of understanding whats happening behind the meter and how much electricity is available where you typically have multiple.
Vehicles plugged in at the same time, so you have to make sure. There is enough electricity available and you have to actually manage the charging and a very intelligent way.
That's where we once again think we bring the most value to the table.
And that's where we think we can make decent returns in that business.
Okay. Thank you for clarifying Greg Good luck appreciate it thank you.
We will now go to the line of Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
One number that stood out to me from the release was the negative free cash flow in the quarter I think thats pretty unusual for Eaton maybe.
Maybe just help us understand kind of the confidence in that full year free cash flow guide.
I think the inventories are up sort of 40% year on year.
So how do we think about those leveling out.
And just to make sure that you're still sort of very confident that the inventories you have very very high but the inventories that everyone you sell in Sweden through a very very low.
Yeah appreciate the question Julian.
Prudently, we invested in working capital in Q1 for for for a number of reasons one is to really protect.
The strong growth that we're seeing.
Another factor in that as the supply chain constraints wanting to make sure that we can serve our customers properly. We've also got a dynamic where we have an elevated amount of work in process inventory, where we're waiting for individual components and then the final the final aspect is.
We just have inflation and thats driving up the cost of the inventory.
As you saw in the prepared remarks, we remain committed to our guide on operating and free cash flow and we expect cash flow to get better throughout the year.
Thanks, and then just on the point on sort of firm wide operating margin. So I think a lot of industrial companies are guiding for a big year on year improvement in operating margins in the second half largely due to price cost dynamics I think for Eaton, it's very very level.
Loaded Europe , I think a 110 bps in the first quarter you are saying the year is up 120.
Just trying to sort of gauge.
I think youre, saying that price cost dynamics improve for you as well, but it doesn't seem to be embedded in that margin rate guide.
Is there any sort of specific headwind kind of coming the other way I know aerospace has a tough margin comp in the fourth quarter and that kind of things, maybe just any sort of help around that mark.
Margin guide.
And the way I think about it Julian in Germany. There is still as you guys know.
As well as us there's still a lot of uncertainties out there in the marketplace, whether it's supply chain, whether it's COVID-19 related shutdowns that are going on in China, whether it's the downstream implications of the war and the Ukraine.
There is a lot of uncertainty that still exists in the marketplace and so it is given where we sit today, we just think it's prudent.
To say that.
Be a little bit on the cautious side with respect to the.
The outlook for the back half of the year I mean, the reality is if we end up with a better supply chain environment.
The Lockdowns in China.
Yes.
Resolve themselves more quickly than we anticipate that they will if the impacts of the the war in the Ukraine are more contained than perhaps they are right now there could be certainly upside in the back half of the year. We just think at this juncture, it's really not prudent to make those assumptions.
And so we put in place a forecast that we think makes sense in the context of the current economic environment and the global political environment that we're dealing in.
And I, just just to reinforce something thats in the prepared remarks, which you noted.
Which is a very good thing we don't have a hockey stick plan, we don't have a back half loaded plan were 46% in the first half were <unk> 54 in the second which is consistent with what we've done in history.
That's helpful. Thank you.
We'll next go to the line of Deane Dray with RBC capital markets. Please go ahead. Thank you good morning, everyone.
Good morning Deane.
Can you comment on inventory in the channel, specifically distributor inventory where does that stand.
Yeah, and I would say.
Mentioned that briefly in my in my comments in response to another question I think today deemed if every conversation we're having with.
Our distributor partners is that they all want more.
Today inventory levels from where they sit are not where they would like them to be.
We continue to have challenges around today supporting all the demand. That's one of the reasons why you know certainly our backlog is growing.
The way it has grown.
Principally in our electrical businesses.
So I'd say today inventories in the channel or.
You are in better shape than they want them to be and with respect to.
They don't have enough.
And so at this juncture I'd say, we keep testing for that.
And make it to ensure that there isn't double ordering taking place in ensuring that people aren't putting provisional orders in the systems to.
Get their place in line.
But I can just tell you today based upon where inventories sit.
In respect to the outlook for the year inventory levels in the channel today are below.
And in some cases well below.
Where they would like them to be.
That's helpful and then on infrastructure spending.
Are you starting to see any of these initiatives around like grid hardening burying power lines.
Has that started to show up in bid activity.
Yes, I'd say I'd say, it's still early days and we think it's another place where we're at is certainly needed.
We think its coming but I think today, even around the margins your utility markets I would say like our markets in general are performing well.
How much of that is tied specifically to grid hardening, how much of that is tied to energy transition.
No.
Tough to really say and bifurcate the two.
But I'd say today, we are certainly seeing strength in utility markets very much like we are in our other end markets as well.
Great. Thank you.
Next we go to the line of Jeff Hammond with Keybanc. Please go ahead.
Hey, good morning, guys.
Just had one quick follow up.
Craig you gave some color on kind of what's different between global and Americas around supply chain and labor, but anything else in there around.
If you look at just the global margin margins versus Americas in terms of momentum around mix or where they are on price cost or structural opportunities globally versus versus Americas.
Yes, so really not much to add Geoff to what we said I mean, clearly as we talked about the global segment, we're certainly getting a benefit.
From better mix as industrial markets.
Continue to rebound.
Our Crouse Hinds business Global Crouse Hinds business continues to rebound coming back to more historical levels of profitability.
That's certainly helping profitability.
<unk> and global.
Mentioned once again.
They're seeing less inflation in commodities, they're seeing fewer supply chain disruptions, so fewer operational inefficiencies in their facilities as well in the Americas business and so that's also part of the story of I'd say more of what's holding the Americas back why it's not even better than it is right now.
But no I don't really think there is anything else going on and certainly if you take a look at our outlook for the year, we fully anticipate that the Americas business margins will be up to 120 bps. This year and so it is going to be a good year.
Okay. Thanks, a lot Greg.
Sure. Thank you.
We'll go to line of Brett Linzey with Mizuho. Please go ahead.
Hi, good morning, all thanks.
First question is just on backlog and revenue coverage, obviously backlog continues to build here.
Given the project nature of your business is I would imagine you have some visibility on timing I'm curious of the current backlog how much shifts this year versus 23 and are you starting to book orders for 2023 at this point.
Yes, it's I appreciate the question and as I mentioned in some of my commentary we are today with respect to backlog seeing some earlier orders, perhaps on some projects than we would typically see them, but I'd say most of what we're experiencing in the backlog is fundamentally strengthening in the markets. The markets are strong in <unk>.
Largely what's what's driving the backlog.
We are today in the backlog there would be some orders that will certainly ship in 2023. Some of those are planned for 2023.
Certain but I'd say by and large the backlog coverage.
Is it as good as it's ever been in the history of the business and so we have better visibility today into what's required wind than we ever have.
And.
And don't feel like there's much in the backlog today that would be in any way a double order or not tied to a very specific project debt.
One in the marketplace.
Okay, Great and then just my follow up on the EV charging stations.
Is there a way to frame eaton's content per site and what that profitability looks like as those wins ramp and then was that booked in the quarter or was it in April .
That win was the one we talked about specifically was in the first quarter. What we tried to do is be pretty clean with respect to <unk>.
Orders and so anytime we talk about an order booked on these calls that will always be in the context of the order quarter that we're talking about.
In terms of the profit.
Yes.
The profitability of those businesses I think it's really it's early right. We're still in the early stages fundamentally of the.
<unk> to build out the electrical charging infrastructure in general, but I would say we have an expectation in the company and we have a standard in the company around what an attractive business looks like and as we think about the way we bid projects and programs and the margin expectations. We have no reason to believe that the <unk>.
Margin expectation in EV charging infrastructure will be any different than the underlying profitability for our electrical business.
Okay, Great I appreciate the answers.
Okay. Thank you.
And our final question will come from the line of Phil bowler with Baron Berg. Please go ahead.
Oh, hi, good morning, Thanks to EMEA and just on the topic of Q2, I think Craig you wanted.
Some of this in Julians question, you're referencing a lot of uncertainties out there, which you appear to have typed into a relatively conservative margin guide for the for the course of the year, but I guess I'm just a little surprised that the Q2 topline guide is as strong as it is 10% organic at the midpoint.
Stomach feels hot basis seems pretty high given all of those uncertainties that are out there. So I was hoping you could just expand on what the key to planning assumptions.
Equally broad based are you, particularly bullish or potentially cautious on one specific end market or another.
Residential or industrial or perhaps add some specific geographies that we need to be calling out I'm thinking at places such as China.
I think I mean, as we think about the Q2 revenue guide of 10%. We don't we don't think that's in any way.
Aggressive number if you just take a look at the growth in the backlog the growth in orders when that number could quite frankly be much higher if we had the ability to ship.
Okay.
Satisfy all the demand that we're seeing in our businesses today.
We are banking on the fact that we are going to see some modest improvements in supply chain and availability, but know that.
That growth number as in Norway.
An aggressive number in the context of the real underlying demand that we're seeing in our businesses.
So we are very comfortable with growth number in Q2.
That's great and just a follow up just not wanting to light at the point, but to be clear the order strength that we're seeing we shouldnt be attributing much of that growth to the giant project type orders that you called out what the EV charger.
OEM charge you talked project.
A big Big deal or Big project, but it's not the predominant driver of the four the momentum we're seeing it radiates quite broad right now.
No I mean I appreciate the question, but the way the electrical industry works in the business works.
All of these projects tend to be on in the scheme of the total business relatively small and so no. It's we're seeing is that so that's why one of the reason we tried to give some color around the strength in end markets. If you think about today, we talk about we serve.
Commercial we serve utility we serve RSV, we serve datacenter we show we serve.
M OEM, we serve industrial so we serve all of these end markets.
I talked about in the Americas a range of.
Growth in these end markets from.
27% on the low end.
Right to 36% on the high end. So every one of these markets are doing.
Very well right now and none of our order growth would be tied to any particular one project.
The only piece that tends to be little lumpy, sometimes datacenters is lumpy when the hyperscale guys come in we've talked about that on some earlier calls sometimes don't come in with some lumpy big orders and sometimes it will take a quarter off but for the most part we're seeing this broad based strength.
That's great. Thanks, guys Okay.
Okay.
Okay, great. Thanks.
Thanks, guys that were reached to the end of the call as always chip and I will be available to do any follow up calls with you guys. I appreciate everybody joining us today.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T event conferencing you may now disconnect.
Yeah.