Q1 2023 Eaton Corp plc Earnings Call
Speaker 2: Ladies and gentlemen, thank you for standing by and welcome to the Eaton first quarter 2023 earnings call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session to get in queue to ask your question.
Speaker 2: please press the one then zero. And should you require assistance during the call, please press star zero, and the operator will assist you offline. And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, Yin Yin. Please go ahead.
Speaker 3: Hey, good morning. Thank you all for joining us for Eton's fourth quarter 2020-story earning call. With me today are Craig Arnold, our Chairman and CEO , and Tom Oakry, Executive Vice President and Chief Financial Officer. Our agenda today include the opening remarks by Craig, then he will turn it over to Tom.
Speaker 3: who will highlight our company's performance in the fourth quarter. As we have done on our past course, we'll be taking questions added into Craig's closing commentary. The price release and the presentation we'll go through today have been posted on our website. This presentation including adjusted earning per share, adjusted pre-cash flow, and other non-GAAP measures.
Speaker 3: They are reconciled in appendix. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our commentary today will include the statements related to the expected future results of the company and are therefore for looking statement.
Speaker 3: Our actual results may differ materially from our forecast projections due to a wide range of risk and uncertainties that are described in our earning release and the presentation. With that, I will turn it over to Craig. Okay. Thanks, Yan. We'll start with some highlights of the quarter on page 3. And I'll lead off by noting that we've delivered another strong quarter.
Speaker 3: We generated adjusted EPS of $1.88 for the quarter, well above our guidance range, record for the quarter, and up 16% from prior year.
Speaker 3: and we continue to post strong margins.
Speaker 3: Q1 record of 19.7% up 90 basis points over prior year.
Speaker 3: Our sales were 5.5 billion, up 15% organically. Our third quarter in a row, up 15% organic growth. We had particular strength in our Electrical Americas business, which was up more than 20%, including very strong growth in commercial, institutional, utility, and data center markets.
Speaker 3: We also had exceptional growth in our commercial aerospace and e-mobility businesses.
Speaker 3: Our orders also came in ahead of expectations for the quarter. On a rolling 12-month basis, electrical orders were up 13% and aerospace orders increased by 21%, which led to another quarter of record backlogs of 39% for electrical and 27% for aerospace.
Speaker 3: You know, I think it's well understood at this point, but I'd note once again that reindustrialization, infrastructure spending, along with secular growth trends of electrification, energy transition, and digitalization have fundamentally changed the growth prospects for our company. Lastly,
Speaker 3: Free cash flow in the quarter was nearly $300 million, driven by higher net income and improved working capital.
Speaker 3: So it's a good start to the year to keep us on track to deliver our free cash flow guidance despite higher revenue and receivable balances.
Speaker 3: So on balance I'd say, you know, we're off to a very good start for the year. Moving to page four, I'd like to once again highlight that Eaton is marking its 100th anniversary of our listing on the New York Stock Exchange. And as many of you saw, we celebrated by ringing the bell in early March. Eaton is one of 32 companies who reached this milestone.
Speaker 3: I say, you know, our longevity on the exchange and our resiliency is really a function of our ability to adapt to a changing world. But what is made constant over that time is the spirit of innovation that guides us and our commitment to all of our stakeholders, our employees, our customers, our shareholders, our communities and all of society.
Speaker 3: Now, as we stand at the forefront of perhaps the most significant growth trends that we'll see in our lifetime, we're convinced that our best days are still ahead of us.
Speaker 3: And we've been busy planning for this moment. As we look at Eaton today, we position ourselves as our customers' trusted partner across power management spectrum.
Speaker 3: And slide five provides an example of how we're playing across the electrical value chain from power generation to power distribution to how it's consumed in various applications.
Speaker 3: We're building a business that supports our customers with a full range of end-to-end solutions.
Speaker 3: beginning with deep domain expertise and specific applications and the ability to specify electrical solutions, we're now providing intelligent electrical products.
Speaker 3: offering data as a service, providing software solutions, doing installation and commissioning, and providing aftermarket services.
Speaker 3: Our role has changed from simply selling components to helping owners fulfill their changing energy needs. We're also proving that we can leverage our technology and create scale solutions that serve all of our end markets.
Speaker 3: For those of you who were with us at our March meeting in New York, we saw an example of this in a new product we call Breakdoor.
Speaker 3: Breakthrough is a combination of a breaker and a contactor.
Speaker 3: We developed the technology in our electrical business and have successfully sold it in our e-mobility and aerospace businesses.
Speaker 3: And as the electrification of everything continues, the need for Eden's technology and solutions will certainly continue to grow.
Speaker 3: And the primary source of this growth is coming from the mega trends that we've discussed
Speaker 3: In addition to electrification, we're benefiting from energy transition, from digitalization, and the reindustrialization of the US and European markets.
Speaker 3: we're seeing record capital spending levels.
Speaker 3: And as you know, this capital is being supported by an unprecedented level of infrastructure spending by governments around the world.
Speaker 3: while early we're tracking a large number of infrastructure related projects.
Speaker 3: For example, in our Electrical America business, we've already seen over $1 billion of projects and have won roughly $450 million of orders.
Speaker 3: And as this chart reflects, we're also at the beginning of a strong aerospace growth cycle and seeing rapid adoption of electric vehicles.
Speaker 3: Since 2021, announced non-residential mega projects have a cumulative value of almost $600 billion, at least 3x the historical run rate for non-residential projects. And this is North America only. $600 billion announced over the last nine quarters, $400 billion more than the historical run rate. These projects are certainly in various phases of design, planning, or construction.
Speaker 3: But as you can see, these secular trends are translating into specific projects and they haven't slowed down. There's billions more in the planning stages which will certainly sustain our growth for years to come.
Speaker 3: On slide eight, we take you from the $400 billion announced mega projects and what it means for the electrical industry.
Speaker 3: We estimate that the electrical content on these projects is in a range of 3 to 5 percent of the total project value.
Speaker 3: this suggests
Speaker 3: Keep in mind there's certainly a wide range of electrical content on various projects and our exposure is tied more closely to building infrastructure. But assuming these projects get planned, designed and built over the next five to seven years, they will expand the electrical market by some two to four billion dollars a year. And that's just from what's been already announced in mega projects. We naturally expect more large and small projects to come. So I'd say these projects are a good example of how mega trends are playing out and creating a very different growth outlook for the electrical industry.
Speaker 3: and one we think will run for decades or more. Another helpful proof point is represented on slide 9, where you can see how our negotiation pipeline has grown.
Speaker 3: As you can see, our negotiating pipeline has doubled from what we've seen historically.
Speaker 3: In 2022, we saw nearly $5 billion of projects in our negotiation pipeline in electrical Americas alone. In 2017, we saw nearly $5 billion of projects in our negotiation pipeline in electrical
Speaker 3: our expectations, further supports our expectations for strong markets and faster organic growth as we go forward. And just one additional proof point is noted on page 10. Here we show a few examples of how these projects are translating into specific orders. As we've reported, our electoral orders have been at record levels for two years now. So what we're demonstrating here is how these mega projects are translating directly into large wins for our electrical business.
Speaker 3: For example, we've won $180 million in orders to provide column management solutions for two new EV plants in North America.
Speaker 3: Specifically, we're providing power distribution equipment and bright layer industrial remote monitoring software.
Speaker 3: Another example is a hundred million dollar order for a new US semiconductor plant.
Speaker 3: And we're already working on Phase II of this project, which could be even larger. So overall, we're seeing record project announcements.
Speaker 3: record negotiations, a record set of orders that has led to record backlogs.
Speaker 3: Specifically, commercial OEM build rates are expected to grow in the mid-teens over the next several years. And our commercial aftermarket should also grow by double digits as global revenue passage of kilometers continue to recover to pre-pandemic levels and beyond. We've also noted the significant step up in defense orders and expect to see significant lift in defense revenues beginning in 2024. As a point of reference, our defense orders have more than doubled from 2019 levels.
Speaker 3: And in recent years, we've run increased content on both commercial and defense platforms. In vehicle, electrification continues to accelerate, and we now expect global EV penetration rates to exceed 50% of global auto sales by 2030.
Speaker 3: And on page 12, we highlight a few key wins in our aerospace and e-mobility businesses, beginning with a $500 million win for cryogenic coolers and controllers for the City Airbus Urban Air Mobility Program. The City Airbus win is a good example of how digitalization software and electrification are beginning to benefit our aerospace business.
Speaker 3: And as Tom will report shortly, we're seeing more than 30% growth in our defense and commercial aftermarket orders.
Speaker 3: and in e-mobility, we continue to realize significant wins. The most significant of which are coming from our power distribution product line within our e-mobility business. You'll recall this is where we're able to leverage our broader electrical business and our unique breakthrough technology.
Speaker 3: Our latest set of wins comes from a leading European automotive OEM and will generate $100 million a year of mature year revenues.
Speaker 3: So, like electrical, our industrial businesses are delivering significant wins tied to long-term megatrends that will support faster growth.
Speaker 3: When you combine the businesses, we're confident that a market should grow at more than 2x their historical rate. And as we've stated, we're in the early innings. These trends are expected to deliver outside growth for years to come.
Speaker 3: With that, I'll turn it over to Tom to walk us through Q1 financial results and updated guidance.
Speaker 3: Thanks, Craig. On page 13, I'll start by providing a summary of our strong Q1 result.
Speaker 3: For the third consecutive quarter, we generated organic growth of 15%. It was up 13%.
Speaker 3: with the organic growth reduced by two percentage points of unfavorable foreign exchange. Operating profit, a first quarter record, grew 19% and margins expanded 90 basis points to 19.7%, also a Q1 record.
Speaker 3: Adjusted EPS increased by 16% over the prior year to $1.88.
Speaker 3: All in, the strong organic growth and margins enabled us to report a first quarter
Speaker 3: record adjusted EPS. Our higher growth not only demonstrates the mega trends but also the importance of prioritizing our customers by carrying higher levels of inventory when supply chains were challenged.
Speaker 3: Lastly, our free cash flow of $209 million was nearly $300 million above prior year and exceeded our expectations.
Speaker 3: You will recall from our Q4 call, we expected free cash flow to be relatively flat year over year.
Speaker 3: Moving on to the next chart, our Electrical Americas business had another very strong quarter.
Speaker 3: We have set Q1 records for sales, operating profit, and margin.
Speaker 3: Organic sales growth was 22%.
Speaker 3: Electrical Americas has generated double digit organic growth for five consecutive quarters, including back-to-back quarters of at least 20% growth.
Speaker 3: On a two-year stack, organic growth is up 32%.
Speaker 3: In the quarter, there was broad-based growth in all end markets with especially robust growth in commercial and institutional, utility, and data center markets. Specifically, we posted 25% organic growth in our data center revenues in Q1.
Speaker 3: So we continue to see very strong growth in this important market.
Speaker 3: Utility and commercial and institutional were up more than 30%.
Speaker 3: It's also worth noting that we posted strong revenue growth of 17% in our residential business.
Speaker 3: The two-year stack is over 40% growth.
Speaker 3: We're seeing strength in multifamily homes, completion of single-family homes in process.
Speaker 3: strength in multi-family homes, completion of single-family homes in process, and increased electrical content per home.
Speaker 3: which are more than offsetting weakness in new single-family start.
Speaker 3: Operating margin of 22.9% was up 380 basis points versus prior year, benefiting from higher volumes. Incremental margins were very strong at more than 40%.
Speaker 3: We continue to manage price effectively to more than offset inflationary pressure.
Speaker 3: Orders and backlogs show continued strength. On a rolling 12-month basis, orders were up 18%, which remains at a high level, with particular strength in data center, distributed IT, utility, and industrial market.
Speaker 3: On a quarter over quarter sequential basis, orders grew 19%. We're also continuing to build backlog. Backlog was up 51% versus prior year and up 9% sequentially.
Speaker 3: In addition to the robust trends in orders and backlog, our major project negotiations pipeline in Q1 was up more than 20% versus prior year, and nearly 20% sequentially.
Speaker 3: from especially strong growth in data center, water-waste water, and transportation markets.
Speaker 3: Overall, Electrical Americas had a very strong quarter to start the year. On page 15, you'll find the results of our Electrical Global segment, which posted all-time record sales of $1.5 billion.
Speaker 3: Organic growth was up 8%, which was partially offset by headwinds from foreign exchange and a divestiture.
Speaker 3: Organic growth was driven by strength in utility, data center, and distributed IT market.
Speaker 3: Our data center revenues for Electrical Global increased 32 percent in the quarter. The utility was up 25 percent and distributed IT up 20 percent.
Speaker 3: Operating margin of 18.3% was down compared to prior year, primarily from manufacturing inefficiencies and investment in growth partially offset by higher sales volume and inflationary price recovery. Orders were up 4%.
Speaker 3: on a rolling 12-month basis with strength in data center, commercial and institutional, and utility markers.
Speaker 3: Sequentially, orders grew 12%. Backlog increased 3% year-over-year and 6% sequentially.
Speaker 3: I'm also pleased to highlight that last month we closed the acquisition of a 49% stake in Jansu Ryan Electric Company.
Speaker 3: This is a Chinese-based business with approximately $100 million of revenue.
Speaker 3: which manufactures power distribution and sub-transmission transformers and will accelerate Eaton's growth in renewable energy, data center, utility, and industrial markets.
Speaker 3: This has eaten fourth JV in China in the last two years, allowing us to expand our market presence, serving high growth markets inside and outside of China.
Speaker 3: Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segment.
Speaker 3: For Q1, we posted organic growth of 16 percent.
incremental margin of 34%, and operating margin of 21%, which was 180 basis points of year-over-year margin improvement.
Orders grew 13% on a rolling 12-month basis, with sequential growth in the quarter of nearly 20%, compared to roughly flat sequential order growth in the six years prior to the pandemic.
Backlog grew 39% in the quarter and 8% sequentially.
On a rolling 12-month basis, our book to bill for our electrical sector remains very strong at above 1.2. It was also above 1.2 for Q1.
We remain confident in our positioning for continued growth with strong margins in our overall electrical business.
The next page recaps our aerospace segment.
We posted Q1 records for sales and operating profit. Organic growth was 13% with a 1% headwind from foreign exchange.
Growth was primarily driven by strength in commercial aftermarket up more than 30% and commercial OEM up more than 25%.
Operating margin was 22.5%, which was 40 basis points over last year, driven by volume growth and inflationary price recovery.
Order growth and backlog trends also remain encouraging.
On a rolling 12-month basis, orders were up 21% organically, with strength across all end markets, including continued outgrowth in defense OEM orders.
Similar to the second half of the year, we continue to see the second half of last year
We continue to see strong growth in our defense orders in the quarter, with OEM up 55% and aftermarket up more than 40%. On a rolling 12-month basis, our book to bill for our aerospace segment remains very strong at more than 1.2.
including more than 1.25 per Q1. Year-over-year backlog growth increased 27% in Q1 and acceleration from up 21% in Q4.
Moving on to our vehicle segment on page 17. In Q1, revenue was up 10% with 11% organic growth and 1 percentage point of unfavorable FX. We saw particular strong growth.
both the Americas and AIMA markets.
Operating margins came in at 14.5% with unfavorability to prior year, primarily due to manufacturing inefficiencies.
partially offset by higher sales volume and price cost.
We continue to make progress towards securing more sustainable technology wins, which most recently includes multiple new programs for our e-powertrain solution. On page 18, we show results for our e-mobility business.
We generated strong growth in the quarter. Revenue was up 17%, including 18% from organic growth.
Margin was down 30 basis points versus prior year, driven by higher manufacturing startup costs associated with new electric vehicle programs.
We remain very encouraged by the growth prospects of the e-mobility segment. We continue to leverage our capabilities across our entire portfolio, including core technology in both electrical and industrial businesses.
Since 2018, we have won $1.4 billion of mature year revenues in this business.
with many of these programs ramping up in 2023 and 2024.
This strong momentum includes additional recent wins with Breakdoor, including on next generation battery platforms.
with a large European OEF.
Next on page 19, we show historical backlog charts for the electrical sector and aerospace segment.
We think it's important to illustrate how backlog has grown over time.
Our record backlog was roughly $12 billion to end Q1.
This is up nearly three times the ending 2019 level.
These metrics provide us with great confidence in the outlook for the full year and going forward.
On the next page, we show our Fiscal Year Organic Growth and Operating Margin Guidance.
We are raising our organic growth guidance for 2023.
We continue to have a robust negotiations pipeline and build backlogs with particular strengths in electrical Americas and aerospace.
We now expect organic growth in electrical Americas of 11 to 13 percent, up 300 basis points from our prior 8 to 10 percent guide.
We're also raising electrical global 200 basis points to 6 to 8 percent from 4 to 6 percent.
And we're increasing aerospace 200 basis points to 10 to 12 percent from 8 to 10 percent.
In total, we're increasing our 2023 organic outlook by 200 basis points from an 8% midpoint to a 10% midpoint.
Our strong end-market growth forecast combined with building backlog provides tremendous visibility and confidence in this 2023 outlook.
For segment margins, we're raising our guidance range for electrical Americas by 20 basis points to a revised range of 23.3% to 23.7%, which reflects the continued strong momentum that we have in this business. After all, we are reaffirming our total.
EATN margin guidance range of 20.7% to 21.1%.
As a reminder, this is a 70 basis point increase at the midpoint from our 2022 all-time record margin.
For e-mobility, we are adjusting both the organic growth and margin ranges.
This is primarily due to delayed OEM launch plans and higher startup costs related to large new program wins. In summary, we continue to be well positioned to deliver another strong year of financial performance. On page 21, we continue to deliver a strong year of financial performance related to large new program wins.
We have the balance of our guidance for 2023 and Q2. Following our strong Q1 performance and improved organic growth expectations for the year.
We are raising our full year EPS range.
to $8.30 to $8.50. At the midpoint of $8.40, we have raised guidance by $0.16.
This represents 11% growth in adjusted EPS in 2023.
We're also raising our CapEx guidance from $630 million to approximately $700 million to fund additional investments for growth.
including in our utility business, where we continue to experience strong increases.
Free cash flow guidance remains unchanged. For Q2, we are guiding organic growth of 10 to 12 percent.
Segment margins of between 20.5% and 20.9%, representing 60 basis points growth at the midpoint versus prior year.
and adjusted EPS in the range of $2.04 to $2.14, a 12% increase versus prior year at the midpoint.
Now, I'll hand it back to Craig to wrap up the presentation. Thanks, Tom. Now turning to page 22. As we continue to track our end markets, we want to provide a slightly revised look at our assumptions for the year.
Once again, we do expect a mild recession 2023, and we built that into our base case assumptions. But with healthy demand and strong secular growth trends, we continue to expect growth in almost all of our in-market.
And we raised our growth assumption for the utility market from solid growth to strong double-digit growth..
Here, energy transition and electrification continue to gain momentum.
And we've increased our residential market from declining to flat.
So while we recognize the slowdown in U.S. single-family housing market, the combination of resilient renovation market, pricing momentum, and strong backlog now supports an upward revisit.
And as Tom noted, we posted a 17% organic growth in residential and electrical Americas in Q1.
The balance of the forecast remains unchanged, but I want to emphasize once again that despite market concerns about nonresident construction markets, we have a robust negotiation pipeline, a growing backlog, and strong orders. Data centers, utilities, industrial, commercial institutions continue to perform extremely well.
Now I know that most of you have drawn reference to the declining PMI data, but I point out that our markets and revenue growth are much more aligned with capital spending, where we continue to see strong momentum.
As a result, we do not expect any of our end markets to decline in 2023, and most are expected to see healthy levels of growth.
Let me close on page 23 with just a few summary comments. Once again, we delivered a strong quarter and set a handful of Q1 records.
We delivered 15% organic growth and have record backlogs. While electric orders are experiencing some expected normalization as supply chains continue to improve, the secular growth trends and strong execution on our backlog support another strong year of growth.
having exceeded our Q1 forecast and continued circular tailwinds, we're raising our guidance for the year.
Despite macro uncertainty and markets despite macro uncertainties our markets are performing well and we're improving our internal execution.
And, as I highlighted, we're seeing more evidence that megatrends are accelerating.
And we now think our end markets will grow at more than 2x historical growth rate. These market forces are just beginning to show up in revenue and will position the company for strong growth for the decade to come.
I'll stop here and open it up for any questions you may have. Hey, thanks, Craig. For the Q&A today, please limit your opportunity just one question and a follow-up. Thanks in advance for your cooperation. With that, I will turn it over to the operator to give you guys the instructions. Thank you, and ladies and gentlemen, if you wish to ask a question, please do so.
please press 1 then 0 on your touch tone phone. You will hear an acknowledgement tone that you've been placed in the queue and you may remove yourself from queue at any time by repeating the 1-0 command. And if you're on a speakerphone, please pick up your handset before pressing the number.
Once again, if you have a question, please press 1 then 0 at this time. Our first question is from the line of Joe Ritchie from Goldman Sachs. Please go ahead. Joe Ritchie Thanks. Good morning, everyone, and great start to the year.
Morning Joe, thank you. Let me let me just kind of start on the electrical America's margins. Clearly a standout you know this quarter. I think your highest quarter, your highest first quarter ever. If you think about kind of like the incremental margins going forward it looks like you posted you know.
about a 40% incremental in the first quarter. How should we be thinking about the rest of the year? Are there any items that potentially reverse as you progress or do you expect incremental to be as strong throughout the year?
You know, we appreciate the recognition, Joe, and our team in the Americas is just doing an outstanding job of executing. And as we talked about last year, you know, we had, you know, fairly sizable inefficiencies in our manufacturing operations as we were dealing with a number of supply chain related disruptions.
And so those got clearly better into the first quarter and and we would expect that As we go forward while the incrementals for the company We're still calling the company in and around 30% We do expect our America's business to perform better than that as we continue to see improvements in supply chain
The only thing I would throw on top of that, Joe, is to your specific question, there were no unusual items in the first quarter driving the America's margin. That is super helpful. Craig, you outlined a lot of reasons to be...
the grid side or what's kind of driving your increased expectations on utilities growth of the year?
Yeah, I mean, you know, this is something that had been long anticipated quite frankly, Joe, by us as you know, as you think about, you know, all of these mega trends of, you know, whether it's electrification of the economy or energy transition, we knew that some point the utility market would have to start to make the kinds of investments that are going to be needed to support the electrification of the economy.
As I mentioned, I think on the last earnings call, one of the longest lead time pieces of equipment that you could order today in the electoral industry is a transformer. In many cases, lead times are 12 months or beyond. And so we continue to see the utilities making investments in their distribution infrastructure to really support this energy transition that's taking place, the electrification of the economy. And so, yeah, we think the utility market should provide for thiscients murderer and we're going to see a Lauper that's going to go through some heavy millisecond maybe to 7WW inbass. So let's really see how it plays out when terms help getting the economy hip-hop power going. In the momentum that's coming, is the history of the solution at that climate level, employee performance shoulder to shoulder decline along thekissing line as far as securitypacomach
is going to be a really strong growth market for some years to come as they deal with needed investments.
No question as we began the year we were a little bit conservative in terms of what the expectation is, but it's coming through As you heard from Tom and some of the orders growth You know orders growth are quite significant now, and we think that's going to go on once again for some years to come
question as we began the year we were a little bit conservative in terms of what the expectation is but it's coming through as you heard from Tom and some of the orders growth you know the orders growth are quite significant now and we think that's going to go on once again for some years to come. Thank you.
Thank you. So good to see that supply chain looks like it's starting to unlock there in electrical. I guess even though it's not as bad today, you know, maybe labor with the either in your plants or maybe on the installer side or somewhere else and some of these bigger projects might still be a limiting factor.
Craig, I guess if you just sort of take a step back, you know, notwithstanding, you know, the current backlog, demand's really good, all those sorts of things, is there sort of a cap on how fast the industry can grow, thinking about, you know, kind of the totality of the supply chain, including that labor pool at the contractor level? No, I appreciate the question, Josh, and that's certainly one of the things that we're spending a lot of time.
and constraint today. And so one of the reasons why I think you've seen this big gap between orders and revenue is because, once again, our extended supply chains and labor availability have been constraints on the industry. I don't really have an answer to your direct question in terms of, you know...£
from an industry perspective, you know, what's the limiter because as you know in these very complicated supply chains it only takes one supplier one player in the market to become the constraining factor So it's a great question and one that we're trying to spend some time thinking through But not one today that we have a really clear answer to today in terms of what is the real upper boundary of? the industry's ability to deliver
given labor, given you know extended supply chains and some of these material constraints. I can tell you that you know today things are getting better across the board and we're feeling much better about the growth outlook for our company and for the industry and just tons of positives that we talked about in our opening commentary.
where we're seeing this significant broad-based strength and it's showing up in our backlog, it's showing up in our order books and we would hope that we continue to post very strong revenue growth tied to these secular trends.
Got it. That's helpful. And I understand it's not an easy question to answer just yet. Maybe shifting over to the pipeline for my follow up, anything you can share in terms of the bookout rate and maybe any churn that you see in that pipeline with...
things like financing, supply chain, all these stimulus projects, some of which I would imagine are kind of mutually exclusive. Has there been any underlying volatility in that and how should we think about the lead time between when something enters the pipeline and then maybe transmits in the backlog?
Yeah, no, I appreciate the question and it's, I mean, there's a lot in the question that you asked very specific in terms of, you know, whether or not we're seeing a lot of churn. I'd say that overall economic activity, whether it's negotiations or orders or revenue, everything is kind of doing significantly better than it has historically and certainly better than even quite frankly we anticipated.
when we put our plan together for the year. So in general, you know, things are positive, and we continue to, you know, with more negotiations, with more orders than we anticipated, obviously translating to more revenue. So I'd say that, you know, stimulus specifically, we talked about that a little bit in some of the opening commentary.
We are starting to see stimulus have an impact. We are in the very early innings. If you think about that $600 billion of projects, mega projects that we talked about, we think some 25% of that has already broken ground and started. Many of that, whether it's semiconductors or EV factories or battery factories are... we look at them specially in high quality physical7 as the change return point for the hope of potential industrial revolution for the Ride donated to the mountaintop.
obviously being busters by some of the early infrastructure spending act The inflation reduction act we really have not seen any impact from that yet. We're certainly seeing some impact from the from the Semiconductor act so yeah a little bit of a mixed bag there, but I'd say most of the impact there continues to be out in front of us.
and lead times today on these projects, I would say we have better visibility today as these projects are bigger. They tend to run then over a multi-year period and so we're feeling great about our visibility into the future because of these very large projects that will be delivered over multiple years.
But I'd say, hey, that's great color. Yeah, the only part that I would amplify on that is, you know, going back to our speaker remarks, our negotiation pipeline in the U.S.
quarter over quarter is up almost 25%, year over year up almost 25%. And some of the big segments are up well over 30% growth. So we're seeing very robust pipeline here. Thank you.
Got it. Appreciate it, guys. Thank you. Thank you. The next question is from Scott Davis from Milius Research. Please go ahead.
Yeah, good morning, Craig and Tom. How are you? Good morning, guys. Thanks for having me. I'm Craig
I want to just fixate on these big projects because this is so new, at least since I've been covering this space. I'm going to fixate on these big projects because this is so new, at least since I've
Maybe a couple different angles to go at here. One is just the competitive dynamic. Does it change when you get to this size, meaning there's just a lot less people that can really, you know, at least be trusted suppliers for the customer when you're talking about orders and 10 plus million up to 100.
I think it's really, if you go back to this, you know, broader theme that we talked about around reindustrialization of manufacturing.
the US for sure to a certain extent also in Europe you know this is resulting in
for sure to a certain extent also in Europe you know this is resulting in a really say big
surge of investing in the manufacturing sector in the US and to the point that you raise the bigger the project more complex the project the fewer companies who are able to essentially provide the services that our customers need and so we think the competitive dynamic in this environment certainly favors companies like Eaton because of our you know
large capable organization and and quite frankly In general when you think about the more complex projects in general They're also more electric intensive if you think about a typical office building versus a typical You know semiconductor plant or an EV factory
You know, the electrical intensity or a data center, the electrical intensity of these applications is much greater than your typical strip mall or office building, which also helps support the underlying growth of the industry and companies like Eaton. So we think it's certainly an important trend that's going to drive growth.
for the industry, but should also allow our companies to grow at a faster rate. And I think it really gives another lens in terms of these big projects, you know, focused not so much on the PMIs, which we've all read historically, and to Craig's point, this reindustrialization, which is driven by these higher levels of CapEx, which we just don't see slowing down.
Yeah, helpful. And then, yeah, just to back up a little bit, when you talk about selling less traditional products, and let's just say like software slash remote monitoring, et cetera, is that a separate sales process into facilities like this? Is it the same? You know, I mean, I'm kind of picturing an EPC firm putting out a bid, but this is a little bit of a different animal. So how's the sales process really?
part we're selling products that are digitally enabled, they're digitally native.
We're selling products that are digitally enabled. They're digitally native. These products all have the ability to stream data.
from that data we create algorithms that allow us to provide insights from the data coming off our products and we can either monetize that either in the form of data as a service or software. So for us, and it's not the same for every company in this space, we do link the sale of hardware.
the places where we have deep domain knowledge and expertise to the sale of data and software and these services that we bundle together. So for us, in the way we go to market, we do go together through the same channel, through the same decision point, but that's not the same for every company in the space.
It's very helpful. Thank you. Best of luck, guys. Thanks, Scott.
The next question is from Nicole DeBlais from Deutsche Bank. Please go ahead. Yeah, thanks. Good morning, guys.
The next question is from Nicole DeBlais from Deutsche Bank. Please go ahead. Yeah, thanks. Good morning, guys. Good morning.
Just maybe starting with the second quarter outlook for organic growth, embedding a bit of a deceleration from the 15% in the first quarter. Just, can you talk a little bit about what's driving that deceleration from the segment perspective? Yeah, you know, I'd say that there's always...
bit of uncertainty in Nicole as you can imagine when you look forward in terms of where you think the markets going to land but you know one of the things that I'd say is clearly if you look at the balance between price and volume as you move forward for the balance of the year you get relatively
smaller contributions from year over year price increase and you get obviously a pretty significant contribution from volume. And so you clearly have that dynamic that's taken place in the business throughout the year and that inclusive of the second quarter. So we'll see. I mean at this point, you know, we're early days into Q2. We're off to a good start here.
And so if we're able to convert and we continue to have some of the supply chain You know issues resolved, you know, certainly we have a range of possibilities for the quarter It could be better But at this point I'd say we're taking a prudent view based upon the fact that we're not out of the woods completely from a supply chain standpoint and once again, I mentioned less price
on a relative year-over-year basis than we certainly had in Q1. Got it. That makes sense. Thanks, Craig. And then second question, just update on what you're seeing with respect to channel inventory and electrical. Still pretty low relative to history or any movement there in the past quarter. Thank you. Yeah, we think today channel inventories are actually inaja
you're going to draw one conclusion with respect to inventories. If you're looking forward, you're going to draw a very different conclusion. It's one of the things that we try to express in our for our own company in our Q1 earnings call where Tom laid out some of the ratios between inventory and backlog inventory and orders to say that we you know they're actually below where they've been historically.
based upon a forward view of our industry and our markets. And so today I just say inventories in general are generally speaking in good shape. Our distributors today, where I'm having phone calls and discussions with distributors, it's 90% of the time it's about, I need more. Can you help me solve a particular problem?
You know issue I have today with a customer because I don't have enough inventory But in general I'd say they're in fairly good shape We did see a little bit of an issue at the in the fourth quarter in Europe where there was a little bit of the stocking in Europe in the fourth quarter that since that time turned around and as your
perform better than even we anticipated. So, on balance, inventories are in good shape. Thanks, I'll pass it on. Thank you, and the next question is from the line of Steve. Steve Volkman from Jefferies, please go ahead. Great, good morning guys. Thanks for fitting me in here. Craig, sort of a big picture question based on sort of what you were just saying. Do you think these backlog levels...
to specifically, certainly as we think about for 2023, we don't anticipate reducing backlogs. We think we'll carry the same level of backlog throughout much of 2023. A lot of that will have to do with, obviously, lead times. And unfortunately, the Bellevue emotionally dense
and whether or not we can actually get out in front of some of these, you know, ramps that are taking place in the industries in the markets that we serve.
And can we get capacity online quick enough?
to reduce lead time so that we can go back to perhaps where we've been historically in terms of, you know, stated lead times to our customers. And so we're not there today, and I do think a lot of it will be a function of, you know, how the markets unfold, not just in terms of demand level, because demand level, I think, we know is going to be strong, but, you know, how quickly can we and others put capacity in to support this higher level of growth.
Steve, where I would chime in on that, I think it's connected, your question was backlogged, but I think the new Eton is definitely a higher growth Eton. And as Craig said in his prepared remarks, we see the markets doubling over where they have been historically. And that's a big thing when you say doubling, and that doesn't include our outgrowth that we think we can put on top of that.
volume of quarterly orders that we're seeing coming in and the continued building of the backlog I think the new Eaton has a much higher growth Eaton.
Great, thank you for that. And then switching gears to aerospace, we haven't talked about that one too much, but just kind of reading from the commentary on this call and others that I've heard you guys talk about, it feels like 24 may be like a real stair step for your aerospace business. I think you mentioned, Greg, that...
you have a bunch of military business that sort of ramps up. I'm just curious if we should be thinking that there's kind of a bigger increase in revenue and margin in 24 than might normally kind of be the year-to-year case.
You know, I think it's certainly early for us to be putting out guidance for 2024. We'll have an opportunity to do that obviously later in the year, but your thesis is not off the mark. We do believe that certainly on the commercial side, that industry continues to ramp.
Both Airbus and Boeing have already put out numbers in terms of increases in line rates for single line is improving.
Consumers are getting on planes, you know, revenue passenger miles and kilometers continue to grow up I think some 60% I think in Q1, still not back to 2019 levels. So there's a long way to go just to get back to 2019, you know, on revenue passenger miles which as you know drives the aftermarket for us.
And then on the military side, you know, huge growth in orders this year that will begin to be delivered, most of them, you know, into 2024. So I think the setup for our aerospace business is certainly you know, quite favorable right now and we'll certainly be in a position, you know, later in the year to give you an indication of how good we think it's going to be.
military side, you know, huge growth in orders this year that will begin to be delivered, most of them into 2024. So I think the setup for our aerospace business is certainly quite favorable right now and we'll certainly be in a position later in the year to give you an indication of how good we think it's going to be. I appreciate the color. Thanks.
Thank you. Thank you. And the next question is from Nigel Cole from Wolf. Please go ahead.
Thanks, good morning guys, thanks for the question. I do want to come back to this, these mega projects, but before we get into that quickly, just global margins, you know, you went through the investments, maybe just peel back in on global what we're seeing in some of the major end markets and what gets better from a margin perspective to get to that 19.7% full year.
Yeah, I think that the big thing that gets better to get to the higher margins is one, you're getting to higher volumes and you're obviously delivering an incremental, but I think the single biggest one is, as we talked about last year, we had fairly significant manufacturing inefficiencies in the business last year.
you know we you know given the supply chain challenges lots of people standing around in factories waiting for components that didn't show up on time and lots of expedited freight and logistics costs and so we you know despite the fact that we had a record year of profitability in 2022 we had a year of record inefficiencies as well and so if I had to put it on one
you know, thing that's going to get better and it is getting better, it's really the elimination of many of these manufacturing inefficiencies that we've experienced over the last, you know, 12 to 18 months or so. Okay, volumes and more productivity, that makes sense. And then at the risk of beating a dead horse, going back to the $600 billion of mega projects, in a very general sense, roughly what percentage of those have been bid on and awarded at this point? You said the majority haven't, so just wondering, you know, how that looks and then what's your win rate, you know, your market share in...
higher the likelihood that we would be selected. So the underlying win rate on these projects, keep in mind these products will be delivered over the next, let's say, three to seven years. And so they have a fairly long tail on them. So I wouldn't necessarily expect to see big movements in the near term based upon these projects. But.
The underlying win rate is good and the underlying profitability is also good. The only thing I would amplify that for the given quarter, we were actually materially above our share win rate. So yeah, we're doing well in terms of closing the deal.
That's helpful. Thanks, guys. The next question is from Jillian Mattel from Barclays. Please go ahead. xp&
Thanks, good morning. Maybe just my first question would be around, you know, a lot of electrical equipment manufacturers and sort of broader multi-industry ones have had.
very disproportionate price tailwinds to revenue in Q1 and a very, very substantive price cost margin tailwind as well in Q1. So I just wondered sort of on those two points, you know, how do you see the pace of normalization of those two tailwinds over the next 12 months?
disproportionate price tailwinds to revenue in Q1 and a very, very substantive price cost margin tailwind as well in Q1. So I just wondered sort of on those two points, how do you see the pace of normalization of those two tailwinds over the next 12 months? Yeah. I'd say with, you know, the
If we look at our own business Julian, I'd say that price versus Cost I mean while commodity costs are certainly down Versus where they were a year ago Commodity costs in many cases are actually up Versus where they were in the fourth quarter take a look at steel for example in nature you know
Commodity for us to steal it's actually down about 25% from a year ago But it's actually up 25% from where it was in the fourth quarter So you have a mixed bag there and then also on the labor side as you can imagine we're seeing more labor inflation in the business today and so in our own company you know the price versus volume piece may be
is not as significant as it is for others. But I would say that as we look forward, and embedded in our guidance is, you know, mostly it's around volume at normal incrementals and the elimination of a lot of the inefficiencies that are in the business that's gonna ultimately drive the growth in earnings and the growth in our margins more than it is this relationship between price and cost. As we've said, you know, from a strategic standpoint, you know, we don't think price is either additive or...
Craig, you mentioned those inefficiencies just now and those were most apparent in the first quarter margins at Electrical Global and I think Vehicle. As we go through the year we should see those margins kind of start to expand year on year. I just wondered when does that happen for the two segments.
and inefficiencies and we would expect then in each of the subsequent quarters to see our businesses get you know sequentially better. For sure and not to get too much into the the accounting but what we're seeing from last year rolled through the P&L in the first quarter and
muted the margins somewhat because it was coming off of the balance sheet. So it should be a tailwind going forward. That's great. Thank you. The next question is from Chris Snyder from UBS. Please go ahead.
Thank you. Craig, you mentioned a few times that the secular drivers coming through are pushing market growth 2X above historical levels. Is this a 2023, 2024 comment? Or do you believe that the 2X market growth rate is now the long-term view? And with that, could you just kind of quantify what the 2X uplift means for market growth from here? Thank you.
Yeah, there's no question it is the long-term view. As you think about most of the secular trends that we're talking about, whether it's energy transition, the move to renewables, the electrification of the economy, whether it's cars or cooking appliances or equipment in your factories, the growth in digital and data and connectivity, reindustrialization, you think about all the investment that needs to go into the economy.
2x not 2x but at least 2x the historical growth rate and and so you know we think those growth rates for the markets you know are in the you know the mid single-digit range.
Thank you. I appreciate that. And then if I want to just my follow up on the US mega projects and just broader domestic investment, there's been a focus of the administration to drive higher domestic content on projects or infrastructure where the government's providing incentives. Does this have a material benefit for Eaton as a US manufacturer?
you know, most of the, you know, global electrical companies that we compete with around the world, they also have, you know, fairly much localized much of what they do. But, you know, our US market shares just tend to be higher, and so we'll get an unfair share of projects as, you know, this reindustrialization and manufacturing takes place in the US market.
Thank you. Thank you. The next question is from David Razzo from Evercore ISI. Please go ahead.
So the growth rate exiting 23, just for the framework of how you're laying out your organic sales growth, is it right to assume, you know, it's 15 first quarter, you're saying 11 for the second quarter, and then the back half of the year is about seven. So let's call it eight in the third and six in the fourth. Is that just a decent general framework of how we're exiting?
that kind of 6% growth rate is the framework? Yeah, and I'd say that, you know, at this point, and we missed the front end of your question, but I think I get the gist of what you're asking, that, you know, based upon the implied numbers in our guidance, you know, order of magnitude 7% growth rate would be the exit rate for the year, and there's a lot of assumptions that we need to work through to find out if these sorts of data significantly improve the growth rate and if it moves up the drop-down every time. You know, waste Toolkit and the like, to you know move away from that versus something that we used to call it green-on-out ratio. In terms of the proposals, how would youna bring this together in a short amount of time...
They really understand, you know, what the guidance going to be for next year
What happens with supply chain? How the year unfolds? But I don't, you know, given where we sit today, if you had to pick a number, you know, that would not be a bad starting point if you're looking to make an assumption for what 2024 looks like. It wouldn't be a bad starting point. Now keep in mind as we talked about, there's certain of our markets that we think are going to really inflect very positively next year. Aerospace is one. And so early days.
But if you had to you know put an anchor down today as a starting point, it wouldn't be a bad place to start
Yeah, I'm just trying to think through how much negativity you already have baked into vehicle to end the year, particularly the truck part. Would probably be viewed positively. So I guess within vehicle. Do we have truck down by the 4th quarter? Aerospace is, you know, 150% the size of trucks. So if there was a big in 24.
and that is baked into our assumptions. All right, that's helpful. Thank you so much.
is baked into our assumptions. All right, that's helpful. Thank you so much. Thank you, David.
The next question is from Phil Buller from Barenberg. Please go ahead. Oh, hi. Good morning. Thanks for fitting me in. A question for Craig in relation to the portfolio. Obviously, this has come along quite a lot on your watch, and you frame things with this, I guess, grow the head and shrink or fix the tail analogy, which is now. We'll find out if Lane is rather invite you to watch this video. It's been really exciting.
align the group very nicely to these mega trends. But I'm wondering if there's much of a tail at this point. I don't get that sense from the prepared remarks. I get that there's always room for some incremental self-help here and there and you touched on some of the efficiencies, but what, if anything, would you be deprioritizing from here in terms of organic or inorganic investment?
moment in time to really participate in these secular tailwinds and that's certainly paying off. And to your point as well, we think we're never done with the portfolio. I mean clearly every year we go through a fairly comprehensive process with our board of directors looking at every business in the portfolio and understanding
whether we like it today, we're gonna like it five years from now, and so that is a very well ingrained process inside of our company as we look at the portfolio. And so we will continue to do that. We'll continue to evaluate every piece of the portfolio, not only the vehicle businesses. We're gonna evaluate everything. Today, we like where we are. We think there's a real synergistic element of.
What we do today across aerospace, across vehicle, as the whole world, and the mobility space specifically, continues to electrify. We're getting real benefits today by, as we launch this new e-mobility segment, by being a legacy provider to all of the automotive OEMs around the world. So today, it works.
You know, we can't say that it's going to always work, you know, into the future. Every business has got to earn the right to stay a part of the portfolio. And that message is one that we delivered to everything, to every part of the company, not just to the vehicle team. Yeah, a tangible example of that is, if you go back to the prepared remarks in Electrical Global, we actually...
So I'm wondering how you're thinking about defense M&A from here and whether or not that's a high or a low priority for you going forward. Thanks. Yeah, I'd say strategically, you know, there's a lot of things that we're doing with the M&A. I mean, we're going to have to do a lot of the research, but we're going to have to do a lot of the research to try and figure out what we're going to do. Yeah, let's just help with the
The way we think about the aerospace business is you know you're either in or out and If you're going to be in aerospace you need to be in defense It's an important part of national security for sure so there's a
You know we understand the ESG related concerns We understand that you know many investors have this 5% threshold today defense is you know close to that number for eating It's maybe maybe five to six percent of our business overall, but I say that you know for us we're really focusing on you know good businesses that make strategic sense for the company and then Aerospace is a platform within the company that you know that we're really focusing on.
we like.
So we will continue to prioritize first and foremost electrical.
As we've said in the past for a lot of reasons, including the secular tailwinds, but aerospace from a priority standpoint is second only behind electrical.
That's great. Thanks very much. Thank you. Thank you and at this time there are no further questions. Thank you. Please continue.
Okay, guys. Thanks. As always, Chip and I will be available for answer or any follow-up questions. Have a good day, guys. Thank you. Thank you.
Thank you and ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference service. You may now disconnect.
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