Q1 2025 Eaton Corp PLC Earnings Call
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I'll now hand, the conference over to your Speaker host Yan Jin Senior Vice President of Investor Relations. Please go ahead.
Yan Jin: Hey, good morning. Thank you all for joining us for Eaton's fourth quarter 2025 earnings call with me today are Craig Arnold, our Chairman and CEO Paulo, Reiff, President and Chief operating Officer, and Olivier <unk> Executive Vice President in situ.
Speaker Change: Financial Officer, our agenda today includes the opening remarks by Paulo, then he'll turning to over to Olivier who will highlight the company's performance in the first quarter as we have done all of our past cost will be taking questions at the end of the day Apollo's closing commentary.
Speaker Change: This release and the presentation. We'll go through today have been posted on our website. This presentation, including adjusted earning per share free cash flow and other non-GAAP measures. The recount sailed 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.
Speaker Change: We will include statements related to expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and a presentation with that I will turn it over to Paulo.
Paulo: Thanks, Jim before we begin I just want to take a minute to acknowledge Craig Arnold as he prepares to retire at the end of this month for his incredible leadership over there.
Speaker Change: 25 years that eats them, but especially during the nine years as chairman and CEO. He's focused on fostering a values based culture strong attention to ethics and commitment to high standards have laid a very strong foundation for our growth.
Speaker Change: And the actions you've taken to transform our portfolio have positioned us for faster growth higher margins and better earnings consistency.
Speaker Change: So under Craig strategic guidance, we have consistently delivered strong shareholder returns.
Speaker Change: Our stock value rising from $61 65.
Speaker Change: On June one 2016 to $294.37.
Speaker Change: For April 30th 2025, so thank you Craig for his strong leadership and the legacy you leave us with I'm really excited and energized to be leading Eaton as such that's refined time.
Speaker Change: On that note, let's get into the results, we will start with some highlights on the quarter in which we've delivered another strong set of results to start the year, we generated Q1 record adjusted EPS of $2.72.
Speaker Change: 13% from the prior year.
Speaker Change: Organic growth accelerated to 9% from 6% in the prior quarter with particular strength in electrical Americas Aerospace and electrical global.
Speaker Change: And we also delivered Q1 record segment margins of 23, 9%, which was in line with our guidance and expectations.
Speaker Change: Meanwhile, market activity remains strong and orders remain at a very high dollar value.
Speaker Change: Total company orders increased 3% versus prior quarter and as a result total Ethan book to Bill ratio at one one with backlog growth year over year and sequentially.
Speaker Change: We have a strong start of the year robust backlog and a strong secular trends. We are set up to deliver another year of differentiating results, while we navigate through an increasingly dynamic environment.
Speaker Change: I will go into the details on the full year outlook at a high level, we are raising our expectations for organic growth and reaffirming our adjusted EPS cash flow and share repurchases.
Speaker Change: Turning to page four now we present this chart at our annual Investor Conference in March.
Speaker Change: It provides an overview of the eight end markets, we play in and the Mega trends driving a generational growth opportunity for us.
Speaker Change: Few companies have the opportunity that's in front of US right now with multiple paths to our growth and we remain very confident in the long term market growth prospects for our end markets.
Speaker Change: Now turning to slide five allow me to quickly touch on fiber bond and acquisition, we announced at the annual Investor Conference in which we closed on April one this year.
Speaker Change: Fiber bond is the right asset at the right time.
Speaker Change: Data center players are increasingly focus on capital efficiency and deployment speed to improve their competitiveness.
Speaker Change: Fiber advancing innovative and customer focused businesses positions Eaton as one stop shop to rapidly deploy power where it is needed.
Speaker Change: By deploying outdoor modular powering closures datacenter customers can also expand their area and generate more revenue per square foot inside the data center.
Speaker Change: In data center markets, we continue to see construction starts and put in place construction is showing strong growth.
Speaker Change: As data center construction backlog now stands at nine years.
Speaker Change: Based on the 2020 for build rates up from the seven years of backlog, we spoke about last quarter and.
Speaker Change: And we are also seeing strong activity in EMEA and APAC as well as regional and regulatory policies drive data center build out globally.
Olivier: Okay, and now I will turn it over to Olivier for the financial results.
Olivier: Thanks, Paolo I'll start by providing a brief summary of Q1 results, we posted 9% organic sales well above our guidance range driven by broad strength in many of our end markets.
Olivier: We generated record quarterly revenue of $6 $4 billion and expanded margin of 80 basis points to 23, 9%.
Olivier: Adjusted EPS of $2.72 increased 13% from a strong start to the year above the midpoint of our guidance now.
Olivier: Now, let's move to the segment details.
Olivier: On slide seven we highlight electrical Americas segment once again, the business existed executed at a high level and delivered another record quarter.
Organic sales growth accelerated to 13% driven primarily by strength in data center and ETT and markets.
Olivier: <unk> margin of 30% was up 80 basis points versus the prior year benefiting primarily from higher sales orders from a dollar perspective remained at a high level as expected orders versus prior year were down 4% on a holding 12.
Olivier: Month's basis to a tough comp from one large multi year data center order in Q1 2024.
Olivier: Excluding this lumpiness orders for the segment were up 4% on Rolling 12 month basis and data center orders were up 11% on the same basis.
Olivier: Book to Bill remained above one with 6% growth in our large $10 $1 billion backlog, providing strong visibility for organic growth in 2025 and beyond.
Olivier: Our major project negotiations pipeline in Q1 was up 18% versus the prior quarter remaining at a high level up 168% since Q1 2023 as Paolo discussed we closed the acquisition of fiber bond on April 1st.
Olivier: The next page summarizes the results of our electrical global segment organic growth accelerated from five and half percent last quarter to 9% this quarter, partially offset by 2% FX headwind.
Olivier: We had strength in data center machine OEM and utilities end markets. We saw continued strength in APAC and a recovery in EMEA with both regions posting double digit organic growth.
Olivier: Operating margin of 18, 6% was up 30 basis points over prior year, driven primarily by sales growth and operating efficiencies.
Olivier: Orders were flat on a rolling 12 month basis with double digit order growth in APAC on a sequential basis, we saw an inflection in our quarterly orders up mid teens in EMEA, and Gis up double digits and APAC up more than 30.
Olivier: <unk>.
Backlog increased 5% over prior year and 6% sequentially.
Olivier: Sequentially.
Olivier: Why book to Bill remained strong above one on a holding 12 months' basis.
Before moving to our industrial businesses.
Olivier: I'd like to briefly recap the combined electrical segments for Q1, we posted organic growth of 11% and segment margin of 26, 1%, which was up 80 basis points over prior year on a rolling 12 month basis orders were down 2% and our book to Bill ratio.
Olivier: For electrical sector remains above one we remain.
Olivier: Confident in our positioning for continued growth with strong margins in our overhaul electrical business.
Olivier: Page nine highlights our aerospace segment organic growth accelerated to 13%, resulting in all time record sales with growth in all end markets and particular strength in military aftermarket commercial aftermarket and military OEM.
Olivier: Operating margin was strong at 23, 1% on a rolling 12 month basis orders increased 14% up 10% from the prior quarter with particular strength in military OEM and commercial aftermarket.
Olivier: Holding 12 month basis, our book to Bill for our Aerospace segment remained strong at one one and resulted in backlog increase up 16% year over year and 5% sequentially.
Olivier: We are very encouraged by the strong results from the Io space team this quarter.
Olivier: Moving to our vehicle segment on page 10 in the quarter revenue was down 15%, including an 11% organic decline primarily driven by weakness in both commercial and ice light motor vehicle markets in North America, and 4% and pharma.
Olivier: FX.
Olivier: Despite top line weakness the team managed to deliver to deliver strong margins of 15, 5% with equipment all of less than 20%.
Olivier: On page 11, we show results of our E mobility business, where revenue increased 2% with 3% organic partially offset by 1% and favorable FX.
Olivier: Operating margins were flat to prior year, which continues to include the investments for our growth programs.
Olivier: We are seeing an expanding opportunity pipeline as customers are redesigning vehicles for lower cost and improve efficiencies now I will pass it back to our LOE to global to grow of our market assumptions and guidance.
Speaker Change: Thanks, Olivier before we walk through the details of our end market assumptions and guide.
Olivier: I just wanted to address the uncertainties arising from the dynamic global trade environment.
Olivier: We will fully compensate for the tariff impact through the actions described on this chart.
Olivier: We have maintained a localized sourcing and manufacturing strategy globally for a long time.
Olivier: And as you know, we've recently announced large investments to increase our manufacturing presence in the U S.
Olivier: Those decisions are helping us being even more resilient to the trading impacts the award is experiencing.
Olivier: It's also important to highlight that falling COVID-19. We have spent the last couple of years, introducing additional flexibility resiliency and digital tools into our supply chain.
Olivier: Many of those actions noted on this slide are aligned to our long term strategy and we will take time to fully be implemented as the global landscape continues to evolve, but that's the way we run the company today.
Olivier: In the meantime, we have also implemented our proven playbook to control costs and limit discretionary spending.
Olivier: And we have and will continue to take the necessary commercial actions to offset the impact of tariffs.
Olivier: In dynamics in dynamic markets like this we will rely on our strong Ethan culture and value of our strategic relationships with customers and suppliers. So we can minimize disruption.
Olivier: Now.
Olivier: Shifting our attention to 2025 on page 13, we have our latest view on the end market growth expectations. We.
Olivier: We continue to see growth across most of our end markets with few adjustments to our assumptions, which are highlighted on the slide.
Olivier: In aggregate <unk>.
Olivier: <unk> market growth is similar to the view, we shared last quarter and we are confident in our ability to outgrow the market as we outline in our increased growth guidance.
Olivier: On the plus side, we are raising the defense aerospace to solid growth based on momentum we are seeing with increased government spending however.
Olivier: However, we now expect a slightly lower growth in electric electric vehicles with solid growth instead of strong double digit growth.
Olivier: And we have also lowered our forecast for internal combustion engine light vehicles from slight growth to a slight decline.
Speaker Change: While we acknowledge the current economic uncertainties, we remain confident that our portfolio of businesses and end markets. We enabled Ethan to continue to deliver differentiated growth.
Speaker Change: Moving now to page 14, we have our updated guidance for 2025 and Q2.
Speaker Change: One of the things we pride ourselves on here at Eaton is our ability to plan for and navigate through headwinds.
Speaker Change: Our healthy and diverse end markets combined with our large backlog continued to provide premium visibility to support our businesses.
Speaker Change: Our teams always target high internal plans as you know providing greater line of sight to additional opportunities to hedge against potential pockets of weaker growth.
Speaker Change: We are raising the 2025 organic growth outlook by 50 basis points to a range of seven five to nine 5%.
We are reaffirming our adjusted EPS guidance.
Speaker Change: For 2025, we reconfirm, our adjusted EPS range of $11 80.
Speaker Change: To $12 20.
Speaker Change: The $12 midpoint represents 11% growth in adjusted EPS over the prior year.
Speaker Change: We are also reaffirming our cash flow and share repurchase expectations for the year.
Speaker Change: And we provided guidance for Q2 on this page.
Speaker Change: This reflects the net impact of the announced tariffs and assumes the current 90 day pause or cyclical tariffs will persist through the end of the year.
Speaker Change: On the next page, we have the balance of our guidance for organic growth and operating margin.
Speaker Change: The high organic growth outlook includes increasing the electrical Americas guidance by 150 basis points to a range of 12% to 14% growth.
Speaker Change: Meanwhile, we are decreasing vehicle growth by 350 basis points to a range of minus five five to minus three 5%, which reflects the weaknesses in the lab motor vehicles.
Speaker Change: For segment margins, our guidance range of 24% to 24, 4% is 40 basis points lower than the prior guide.
Speaker Change: Our guidance reflects the impact to margins from our commercial actions.
Speaker Change: Offsetting the impact of tariffs on a dollar for dollar basis as such we are lowering the 2025 outlook for electrical Americas by 80 basis points and in vehicle by 200 basis points.
Speaker Change: And I will close with a quick summary on page 16, we arent the right markets and the Indentified Mega trends are creating some of the biggest opportunities we have seen in our lifetime.
Speaker Change: The growth opportunities are everywhere.
Speaker Change: We had a very strong start of the year, but theres still a lot for us to go do.
Speaker Change: We've discussed before high standards are deeply instilled in our culture.
Speaker Change: And we remain focused on delivering our commitments and we are prepared to weather any uncertainty ahead, so with that I'll open up for your questions.
Speaker Change: Thanks Paulo offer the Q&A today, guys police limits of your opportunity to just one question and a follow up <unk> for your cooperation with that I will turn it over to the operator to give you guys a lean structure.
Speaker Change: Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone and wait brand name to be announced.
Speaker Change: To withdraw your question simply press Star one again, please standby, while we compile the Q&A roster.
Speaker Change: No first question coming from the line of Chris Snyder with Morgan Stanley. Your line is now open.
Speaker Change: Thank you.
Just want to say congrats to Craig <unk> the market cap.
Speaker Change: 100 year old company, it's pretty incredible so best of luck going forward.
Speaker Change: For my question I wanted to ask on data center, given all the market focus there could you just provide some color on Q1 performance.
Speaker Change: And then the comps are really tough obviously in data center. This year I think you guys had 45% organic growth last year and 75% order growth. So what should we expect per data center the rest of the year as well. Thank you.
Speaker Change: Thanks, Chris for the question.
Speaker Change: We remain very excited about this market we shared during our Investor day last month, because the fundamentals are there remained very strong in the marketplace.
Speaker Change: And our business did really really well in Q1 actually very strong double digit growth.
Speaker Change: Last year actually stronger the 45% that we shared with you in our last discussion. So we're really proud of the team performance. There in terms of the look forward, we expect orders to be.
Speaker Change: At a high level the high level of negotiation.
Speaker Change: Activity we have.
Speaker Change: And as discussed before we also really excited about the fiber bond acquisition.
Speaker Change: Because as a timely one when data center operators are rethinking about their designs on how to move quicker and execute on their backlogs and how to make more revenue out of the <unk>.
Speaker Change: Every square foot inside the data center. So we're really excited about that so we remain bullish that business is going well and.
Speaker Change: A key focus for us moving forward.
Speaker Change: Thank you I appreciate that and then maybe just following up.
Speaker Change: Has there been any change in the U S market competitive positioning here following Trump to no tariffs. Obviously you guys have a lot of big EU competitors and we've also heard a lot about the last couple of years around Asian competitors, adding a lot of capacity, whether it be transformers or switch gears.
Speaker Change: Given the under supply so any thoughts on what that could mean.
Speaker Change: Yes, no. Thanks for the question again very very important one.
Speaker Change: We as no surprise for anyone you'll know that we are by far the biggest.
Speaker Change: Player in the U S in terms of our footprint historically.
Speaker Change: But also that we made a record announcements in terms of expanding the footprint that capacity starting already last year. So we have a head start we have a head start and all of those projects are going undergoing.
Speaker Change: Gradually.
Speaker Change: And I think we feel really good about that position to head start we had.
Speaker Change: I would say this in terms of the competitive advantages we have.
Speaker Change: We do do a lot in the U S. So we depend very little external award to serve these big market here, but also globally, our other businesses in Europe and Asia. They don't depend on the U S.
Speaker Change: Some other competitors, we have they serve the U S out of Europe, we don't have that we have a local for local.
Speaker Change: I would say strategy and implementation so on that although we are not advocating for tariffs here, but on that has a positive effect for eaton's competitiveness.
Speaker Change: Thank you Paolo I appreciate that.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: The next question coming from the line of <unk>.
Speaker Change: Andrew Oldman from Bank of America. Your line is now open.
Speaker Change: Yes, good morning, and congratulations to chronic water run.
Speaker Change: Thanks, Andrew appreciate that.
Paula: And now I'll turn it over to Paula so.
Paula: First question on electrical Americas order outlook.
Speaker Change: Look you had a tough comp in the first quarter, but how should we think about your electrical Americas orders going forward for the balance of 'twenty five.
Speaker Change: Okay. Thanks, Andrew for the question.
Speaker Change: I would say this.
Speaker Change: We should expect orders to remain.
Speaker Change: Strong at $1 value and based on the record backlogs, we have and the visibility into 2025, we feel good about.
Speaker Change: Electrical Americas.
Speaker Change: No.
Speaker Change: <unk> performance.
Speaker Change: Performance in execution and that's why we raised our guidance for the full year in terms of growth.
Speaker Change: As we've discussed before and you pointed out those orders can be lumpy, especially when you have a very large multi year order in a single quarter. So it is also important for us to track the pipeline in terms of negotiations.
Speaker Change: So I would say our negotiation pipeline remains very strong similar to past quarters and to give you a little more color since the last time, we met for earnings we see sequential momentum and the sequential momentum is about 18% higher than last quarter and I'll give you more detail.
Speaker Change: Cyber is because we really worked really hard on this pipeline with our team. So for larger businesses think about data centers and think about industrial both up data centers, 18% up industrial over 40% up.
Speaker Change: We also have increases in smaller businesses in terms of health care education.
Speaker Change: Water wastewater et cetera, and on the flip side to be balanced here and give you a big.
Speaker Change: Balanced view, the only markets, we see decline in negotiation pipeline are in commercial buildings and transportation, but there are smaller than the other markets before and they are down around 20%. So overall.
Speaker Change: Number is 18% up so that gives strong confidence in our future order pipeline.
Speaker Change: And to complement and drew you saw the guide ESG at the mid point is going to grow at 13% in all venue and we expect for the company and ESA included our book to Bill to be over one.
Speaker Change: Okay. Thank you and then just a follow up on the electrical Americas.
Speaker Change: Maybe first quarter utility is performance.
Speaker Change: We tend to distribute tech several weeks ago that seem to be.
Speaker Change: Pretty optimistic in your utility business has continued to post strong revenue growth over the last several years so can.
Speaker Change: Can you give us some color about your performance in the first quarter. Thank you.
Speaker Change: Yeah well.
Speaker Change: As we shared in our Investor day. This is another market that we have very strong growth potential we feel really good about activities, we highlighted that in March.
Speaker Change: So I think here again the teams are doing a fantastic job not only in North America as you mentioned, but globally.
Speaker Change: And I would say this if you're already very well positioned with our very very vast and comprehensive portfolio, we're going to be even more prepare.
Speaker Change: Prepared as we continue to invest in leading technologies. So we have a full commitment here to this end market.
Speaker Change: And as said before as well we have a differentiated portfolio. Another commoditized utility portfolio, that's why <unk>.
Speaker Change: Performance is differentiated here so to give you some color on the development year over year.
Speaker Change: Whole electrical business globally for the electrical sector grew mid teens over last year, which is a very strong performance.
Speaker Change: With high single digit in global and high teens in America, So very very strong performance.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And the next question coming from the line of Nigel.
Speaker Change: Nigel Coe from Wolfe Research your line is now open.
Nigel Coe: Good morning, everyone.
Speaker Change: Thanks for the question so.
Speaker Change: Electrical global has been lagging but had a nice acceleration this quarter, 9% organic growth and.
Speaker Change: Pretty strong orders I think you called out APAC orders up 30%.
Speaker Change: And machine OEM also.
Speaker Change: I think double digits. So just curious.
Speaker Change: Maybe just a bit more color in terms of what you're seeing in those two verticals.
Speaker Change: Yeah.
Nigel Coe: Yes, no. Thanks for the question Nigel we had a very strong performance in global this quarter you saw the growth around 9%.
Nigel Coe: And if you look at the individual businesses APAC fantastic performance mid teens.
Nigel Coe: And also.
Nigel Coe: Low double digits for EMEA, so very good story here.
Nigel Coe: What we're seeing in terms of the market development.
Nigel Coe: Energy markets are.
Nigel Coe: On fire globally as I said before data center market is really strong as well over the globe and therefore, the short cycle businesses, we see Mou.
Nigel Coe: Stabilize and start to grow again.
Nigel Coe: And whereas these the market, though where we don't see recovery globally. So that provides a good picture, but I'm glad to see the results of thank you.
Nigel Coe: You pointed out you all analysts and investors that we had opportunities and improving our aerospace and our electrical global businesses and although there is a tone for us to go do for me to go do I'm encouraged by the Green shoots we start to see here with the teams.
Nigel Coe: That's great and the pattern it looks like.
Nigel Coe: Youre leaning at this slide pack.
Nigel Coe: Slides of the missing from.
Nigel Coe: What we normally see so I'm just curious the Mega project.
Nigel Coe: Slide as always gone in a lot of attention. So I'm just curious.
Nigel Coe: What you're seeing.
Nigel Coe: On Mega projects in the U S. I think the last time, we saw that slide is about $1 seven trillion dollars.
I think 17% it kind of be intended so just to mark to market there would be helpful.
Nigel Coe: No. Thanks for the question now in retrospect, I think I should have added that slide backhaul.
Nigel Coe: I gave you the information we track that very rigorously.
Nigel Coe: So in Q1 was another strong quarter for announcements actually 42 projects in dollar amounts 169 billion, so very very high announcement rate over 40%.
Nigel Coe: Versus last year, and if you look back we did that exercise here with our leadership team. If you look back the announcement rates monthly increased to $57 billion. So again very impressive set of numbers and then you think about starts.
Nigel Coe: Most of those projects Havent started just 15% of then started so the message we always.
Nigel Coe: Emphasize we're going to continue to emphasize as of a long tail of businesses coming into the U S from those mega projects and in terms of starts.
Nigel Coe: Dodge data Dodge forecast.
Nigel Coe: Is that it will be around 300 billion in starts for this year versus $1 35 billion last year. So even if we don't believe all those projects will start as planned there is plenty of room to shows too.
Nigel Coe: Strong growth year over year, we're tracking nigella also you due to the level of cancellation and we haven't seen any change is keeping the 11% range, yes, and just to give you. Another data point on momentum here think about this we track this for since 2021 I guess.
Nigel Coe: We booked a little less than $2 billion. So let's say in orders from those projects. We have three 6 billion in negotiation pipeline. Today. So there is definitely acceleration definitely takes time is a long tail for the business.
Nigel Coe: That's great color. Thank you.
Nigel Coe: Thank you.
Speaker Change: Our next question coming from the line of Jesse Sprague.
Speaker Change: From vertical research your line is now open.
Speaker Change: Hey, Thank you good morning, everyone.
Speaker Change: Hey, good aspect.
Speaker Change: Hey, How's it going.
Speaker Change: <unk>.
Speaker Change: Could you share with us what the.
Speaker Change: The gross tariff.
Speaker Change: Impact is that you're wrestling with here and give us some sense of how much of it is.
Speaker Change: Rice versus cost and other actions certainly get price must be an important part in the margin friction, but help us size that up please.
Speaker Change: Yeah.
Speaker Change: Yes, so first of all.
Speaker Change: I want to give you and everyone around the call the reassurance that we'd take tariffs really really seriously and we meet frequently with the team. The teams meet every second day I personally meet with the team every week.
Speaker Change: And I think I should also say and I hope you appreciate is a rather very dynamic environment with announcements coming.
Speaker Change: Every single week, so we decided not to disclose that number because we will be wrong weeks' time.
Speaker Change: While you can expect of US is that we will continue to run this.
Speaker Change: Biggest rigor possible trying to mitigate the cost pressure and at whatever cost pressure, we get we are going to recover on a dollar by dollar basis.
Speaker Change: In terms of pricing.
Larry: Maybe Larry if you want to add some.
Speaker Change: We add.
Speaker Change: A slide on this we're going to use three levers, it's quite an <unk> one we're going to manage our cost.
Speaker Change: Two we're going to implement supply chain actions and three pricing we'd be one of the element. So the three levers would be at play for us to mitigate on a dollar by dollar basis the impact of targets.
Speaker Change: Now we would see out the tariff evolves, we expect over time to recover from a margin standpoint, but not this year.
Speaker Change: Understood understood.
Speaker Change: Okay, and then maybe as a separate question not a follow up per se, but.
Speaker Change: Paul you mentioned.
Speaker Change: Kind of the focus on global right. That's one of your to do list items here as you step into the leadership role.
Speaker Change: Obviously nice to see this market tailwind starting to kick into gear, but.
Speaker Change: How quickly can you sort of.
Speaker Change: Actions kind of organic initiatives, there or start to tuck in with some of the bolt ons must be thinking about.
Speaker Change: Kind of round out your position in some of these growth verticals internationally.
Speaker Change: Yes. So thanks for the question. So I think there are many elements to globals improvement in most if not all of them also applicable to aerospace first of all operationally, we can do better based on the business, we already having hands and we are working on that.
Speaker Change: Strong leadership in place support for the whole company. So that's something that is now full control and self help.
Speaker Change: The other element is about the portfolio, we have an organic strategy. We are dealing with this new environment of project business, we decided to invest.
Speaker Change: In Dubai, we launched that we broke ground in here not only we are investing for the region in terms of.
Speaker Change: Being a player to produce locally so we can win more business in this very fast growing market. While we also going to have a front end group of engineers developing project business for the overall region not only for the middle East. So thats something that we are committed to do and we are doing it. So it's part of the organic play.
Speaker Change: If you look at the rest of the global segment.
Speaker Change: It's no surprise to you that the Gis business continues to perform well, but the market.
Speaker Change: As being flattish over time, so we have opportunity as well on that side of the business to come back up.
Speaker Change: If you'll follow other competitors in the same space.
Speaker Change: So we have that in our favor and then I think the strategy that the agent team implemented over the years.
Speaker Change: <unk> Jv's has proven to be the right one because they're consistently beating the competitors locally and growing double digits in environment. Like this is a testament to the leadership of our leaders down there. So.
Speaker Change: A bit of execution there is a lot of.
Speaker Change: Leadership and discussion around <unk>.
Speaker Change: Organic growth, we can do and we are not close to the right deals if they pop up but we don't depend on them for near future and for our long term plan.
Paul: Great. Thank you Paul Best of luck Greg.
Thank you I appreciate it.
Speaker Change: Thank you.
Speaker Change: Next question coming from the line of let's call the blast.
Speaker Change: Deutsche Bank. Your line is now open.
Speaker Change: Yeah. Thanks, Good morning, guys and congrats on your retirement.
Speaker Change: Maybe just starting with I know this is a bit nitpicky, but the guidance now implies kind of like 47% EPS in the first half of the year I think it was about 48% as of last quarter. So can we just talk about the puts and takes of what might have shifted between first half and the second half.
Speaker Change: Yes.
Speaker Change: Yes. Thank you for your question Nicole Good morning, Youre right. Initially we had indicated 48% for the first half and down about 47. If you do the math. That's about 10 10 10 six of the 10 relates to corporate items.
Speaker Change: That includes higher interest rate associated with the financing of fiber bond.
Speaker Change: And the second element of increase in corporate cost is also the timing of equity compensation for some of our <unk> requirements I don't need to mention names here on this corn you have also so that's <unk> four cents is the timing delay on the recovery.
Speaker Change: <unk> of the tariff we will recover.
Speaker Change: On a dollar for dollar basis over the year, but we have a headwind of about $20 million.05 in in.
Speaker Change: In Q2, Nicole I'll give you another number and Im sure. We mentioned so many statistics is strictly first half is about 46%.
Speaker Change: <unk>.
Speaker Change: Earnings.
Speaker Change: So at 47, we are slightly better.
Speaker Change: Thanks, Olivier that was really helpful. I appreciate all the detail and then this quarter.
Speaker Change: So it's kind of hard to ask because I know you guys don't like to give a lot of color on price and that's totally understandable, but just trying to understand the moving pieces with respect to price and volume in your guidance did you guys actually maybe take a little bit of a haircut to the volume expectations in the second half to embed some potential macro uncertainty and the more short cycle businesses.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes, So let me let me start and then Olivia can add color if he feels like.
Speaker Change: The overall market when we talk about the end markets.
Speaker Change: Is that the same level as we saw before around 7% for the overall end markets we see.
Speaker Change: We have a little change of we see a little bit more pricing because of the tariffs and a little more volume, but it's already embedded in the 7%.
Speaker Change: Having said that we are highly confident based on our backlog position that we can outgrow that market. That's why we've done increased our organic growth for the year. So that's a way to think about it in terms of.
Speaker Change: No less.
Speaker Change: Leveraging the cost base with tariffs we are fully committed the teams are on that and we're going to take action. We've done that in the past we have a playbook.
Speaker Change: And then if we need to go for pricing, we will get the pricing.
Speaker Change: Thank you Paolo I'll pass it on.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: The next question coming from the line of Deane Dray from RBC capital markets. Your line is now open. Thank you.
Speaker Change: Good morning, everyone.
Speaker Change: Good morning, and special Congrats to Craig and then I do want to note that Olivier was so polite not to name any names on retirement packages, but congrats.
Speaker Change: Hey, I want an audit audit that number Olivia I'm not sure.
Speaker Change: Our retirement package as big as what you suggested.
Speaker Change: We'll move on alright, yeah, let's move on so.
Speaker Change: Can we dive a little deeper into the implications on data center backlog going from seven years to nine years for the industry, because thats really significant just talk about implications and opportunities and are there opportunities for Eaton to increase share of wallet in particular.
Speaker Change: <unk>.
Speaker Change: And where might those be and just how do you pull those levers and then related.
Speaker Change: Talk about those five year supply agreement I would imagine if it's being pushed out to nine years, you are being asked to do these more in kind of touch on the economics.
Speaker Change: Yes. Thanks.
Speaker Change: Very very good question here.
Speaker Change: Think about the implications that is not going to take nine years for them to build this the industry will continue to find.
Speaker Change: Ways to build faster and to get things done in a more I'd say productive and competitive way.
Speaker Change: So what you should expect is that modular solutions and the likes of the JV. We made in in Europe, but also the acquisition, we made with fiber bond in North America or to be more relevant one because you take.
Speaker Change: A lot of engineering.
Requirement away from the data center operators is largely used already today by multi tenant data center builders and with very much interest from Hyperscale is to adapt as well.
Speaker Change: So this is one big conclusion, we can derive from <unk>.
Speaker Change: Other one is that data center.
Speaker Change: Operators and investors are much more open for solution discussions with providers like Eaton that have a very broad portfolio and that can sit on the table and help them make their designs better. So we welcome that.
Speaker Change: We are by far the company that keeps investing this the most and we are hiring also experts they can.
Speaker Change: I have this dialogue.
Speaker Change: And the designs of our customers and how to accelerate their their produce the other part of it is not only about speed is about efficiency of capital think about making best returns out of the dollar not only because of timing.
Speaker Change: And then again, we're going to talk about removing equipment from inside the data center. So they can have more revenue from the Rex again, we are there we are at the table. We are discussing with our biggest customers and how to help them. So there are consequences and I think there are positive for Eaton.
Speaker Change: And the five year supply agreement.
Speaker Change: We have those long term agreements of course.
Speaker Change: I don't see a change there I don't see people going for nine years, I think it's too long and too speculative for me to say that I haven't seen that so far.
Speaker Change: Great and just a related question and Chris earlier question touched on their skin address barriers to entry see lots and lots of new competitors I could supercomputer.
Speaker Change: Just.
Speaker Change: Yes, I know being an approved vendor list is extremely important but what are the other barriers to entry.
Speaker Change: Can you repeat the beginning of your question Didnt get the beginning of it yes, just the idea that with this kind of growth there is more competitors coming into the market, Chris Schneider mentioned it in his first question just the idea of how is Eaton positioned already I know youre on a number of approved vendor.
Speaker Change: And the Hyperscale players, but where else are there barriers to entry.
Speaker Change: Because this market is attracting lots of new competitors.
Speaker Change: Yeah.
Speaker Change: Good question of course.
Speaker Change: The designs of the future is when you put your name.
Speaker Change: On the table and then you become relevant.
Speaker Change: So we have this fortunate to be present.
Speaker Change: All the way from the utility feeder all the way down to to the server rack right. So that gives us a tremendous.
Speaker Change: <unk> advantage, there and to your point of course, it's a big market attracts.
Speaker Change: Interest from many players, but we also need to work with the chief manufacturers today, that's the difference in the past we will only work with.
Speaker Change: The data center Hyperscale as a multi tenant today the collaboration.
Speaker Change: It's much more intensive as much deeper therefore, you need to have open discussions with the likes of.
Speaker Change: <unk>.
Speaker Change: Chip manufacturers here in video and so on.
Speaker Change: Not many companies, especially foreign income things can have the dialogue with them. So one again. This is another entry barrier that creates naturally.
Speaker Change: By the way the market is developing.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Next question coming from the line of Joe.
Speaker Change: Joe Ritchie from Goldman Sachs. Your line is now open.
Speaker Change: Thanks, Good morning, guys.
Speaker Change: Good morning, and congratulations Craig.
Speaker Change: Yes. So thanks, Joe appreciate my first question, Yes. My first question I'm, just I know that you don't want to give any exact.
Speaker Change: Tariff impact and there's a couple of ways.
Speaker Change: Maybe just parse this out but if I take a look at just the change in your segment margins in the two segments electrical Americas and in vehicle I think roughly $150 million impact.
Speaker Change: Given based on the original guidance versus the guidance and I fully appreciate.
The vehicle market.
Speaker Change: A little bit worse, but that doesn't that doesn't fully explain it and so I'm just trying to I'm trying to understand like maybe even outside of a one for one tariff and pricing impact what else does anything else really changed on the margin.
Speaker Change: Fully recognizing that vehicle has probably gotten a little bit worse.
Speaker Change: Joe If you were to look we haven't changed our guide.
Speaker Change: 12.
Speaker Change: <unk> at the midpoint of EPS.
Speaker Change: Fiber barneys neutral from an EPS standpoint.
Speaker Change: You have to conclude that.
Speaker Change: Tom.
Speaker Change: Neutral from from a dollar standpoint, as well we have said this.
Speaker Change: Largely the guide excluding talking even fiber bond is unchanged all achieved what we add at the start of the.
Speaker Change: As such after the year you could then give a bit of.
Speaker Change: You could size a bit what is going on to the P&L with wattup chipset largely unchanged prior fiber bond and the impact of <unk> on the P&L.
Speaker Change: And bottom line.
Speaker Change: Okay, Alright, thanks, and I'll walk through some of the math maybe offline, but then but then also just on the cadence that you guys have on that on the top line. So some of it it sounds like better growth some of it to get a little bit a little bit of an impact from pricing, but it does also appear like there is a lag you've got this <unk>.
Speaker Change: <unk> impact that you called out for the second quarter. So I guess my question is on the pricing side given that you have a portion of your business going through distribution. We also have projects that you have now booked into your backlog.
Speaker Change: Yes.
Speaker Change: <unk> EZ is it going to be for you to get the pricing that you need to cover the tariff intact.
Speaker Change: And does it impact the margin profile of some of the projects that you've already booked into your backlog.
Speaker Change: Yes, good question and I will get started here. So first of all we definitely we definitely will.
Speaker Change: We will take care of backlog as needed as well as not.
Speaker Change: Not off the table of course and in terms of the pricing approach here there is a little lag in Q2 because.
Speaker Change: Price realization through sales.
Speaker Change: It takes a little time for us to see in the bottom line. So that explains why not only the below the line.
Olivier: <unk> that Olivier talked about but also.
Olivier: <unk> margin has a little lag that as we said before we are fully compensate.
Olivier: During the fiscal year, and we're going to recover the margin structurally moving forward. According to our long term plan. So.
Olivier: That's the way to think about it.
Olivier: Okay. Thank you very much.
Olivier: Thank you.
Speaker Change: Our next question coming from the line of Amit <unk> from UBS. Your line is now open.
Speaker Change: Great. Thanks, good morning.
Speaker Change: Can you just talk about the.
Speaker Change: <unk> for data center orders to actually re.
Speaker Change: Reaccelerate given the changes obviously theyre happening you rack density from the transition to hopper to Blackwater.
Speaker Change: Talking about 60 kilowatts to over 100 kilowatts per rack is that transition already reflected in the backlog or can we actually see orders actually tick up in absolute dollar terms.
Speaker Change: Reflect that opportunity in terms of total energy intensity.
Speaker Change: Well. Thanks. So everything you described in terms of the rack power. It goes right into our Ali what we are good at of course benefits our business I would say the so for the long run I would say.
Speaker Change: It is logical to think these markets continue to be stronger for longer.
Speaker Change: Very difficult to make order forecasting on the quarter. That's why we always point to 12 month, rolling and even 12 months rolling given some oversized orders can be lumpy as well. So I would invite you to think about the negotiation pipeline. We have so once again, if I go back to the answer I gave.
Speaker Change: Earlier in the Q&A, our data center business grew over that 45% I talked about last quarter and our negotiation pipeline is up 18% even to last quarter. So yes. It definitely is a trend difficult to predict orders, but we are.
Speaker Change: Negotiated in the next designs with our customers and Thats a trend that we embrace and we're going to benefit from if you go back to what we said not too long ago doing investor days, we have said that this market. We expect this market to grow at 15%.
Speaker Change: By the way that number was considering.
Speaker Change: Constrained due to power, which is the business. We are in with that these constraints you could argue that the.
Speaker Change: The level of business would be maybe double of that.
Speaker Change: And if you look at all the quarters. We have had this week all the apus can have confirmed the level of Capex. So we believe that is 15% CAGR for data center.
Speaker Change: Is still intact.
Speaker Change: Okay and just.
Speaker Change: It's a fast moving technology and market so.
Speaker Change: Things can change, which is what I'm trying to figure out. So the question. When we think about this $1 $5 million of content per megawatt that you guys have put out there is there a difference if the AI data center proliferation is done via retrofit versus Greenfield and May be also related do you expect electric America's back.
Speaker Change: Log to be up this year or maybe do we start burning some of that just as the capacity comes online.
Speaker Change: So after the first part of your question.
Speaker Change: I would say this that the.
Speaker Change: Data centers will increase our dollar per.
Speaker Change: Per megawatt content.
Speaker Change: Because of the reasons you just described before in terms of the power density how much of electrical equipment goes within it.
Speaker Change: Also because.
Speaker Change: Need.
Speaker Change: As even four.
Speaker Change: The liquid cooling part of the portfolio. So there is definitely a growth in that area.
Speaker Change: Then a second part of your question was was once again a lot.
Speaker Change: Can you repeat the second part.
Speaker Change: Sure.
Speaker Change: It was just about the retrofit versus the Greenfield part of the of the equation in terms of content that matters.
Speaker Change: And the EAP.
Speaker Change: Backlog growing year on year.
Speaker Change: Okay. That's the part of us missing the backlog so on the on the retrofit versus new builds.
Speaker Change: Try to find solutions for our customers that it's modular so think about <unk>.
Speaker Change: Building blocks, though Phil will look the same.
Speaker Change: Whether youre doing inference of what Youre doing training AI. So if we and we are working on that very closely when we get the designs done with customers then it becomes a very good opportunity for us to retrofit. So it's not.
Speaker Change: Just going back to therefore, it is a very well connected effort. So your question on the backlogs for electrical Americas.
Speaker Change: Again.
Speaker Change: It is difficult to predict order development, but we see that our book to Bill will continue to be above one that's what we're aiming for.
Speaker Change: Wonderful. Thank you have a good weekend appreciate it.
Speaker Change: Same to you.
Speaker Change: Thank you.
Speaker Change: Next question coming from the line of <unk> from Raymond James Your line is now open.
Speaker Change: Oh, great. Thank you.
Speaker Change: Going back to the electrical.
Speaker Change: Global discussion earlier and nice to see maybe we've got some not some tailwind there from a organic growth perspective.
Speaker Change: About the implications for.
Speaker Change: For profitability.
Speaker Change: I think that the restructuring has been underway there has been over.
Speaker Change: Just over $100 million of restructuring charges.
Speaker Change: But that segment has incurred.
Speaker Change: How should we think about kind of the timing and the <unk>.
Realization of some of the associated savings in that particular business.
Speaker Change: Yeah.
Speaker Change: The improvement of the margin in our global business has been a focus for the management team.
Speaker Change: And that's why we have most of the restructuring targeted at this business, we see the second half.
Speaker Change: Of our.
Speaker Change: The second half being impacted by restructuring programs more than the first half indeed.
Speaker Change: Meaning the savings with that or.
Speaker Change: Im sorry, both the impact of the program and the associated savings correct.
Speaker Change: Got it got it Okay, Alright, and then maybe why you have the mic just a comment on cash conversion.
Speaker Change: Specifically I'm just.
Speaker Change: Obviously.
Speaker Change: There is a typical seasonality in terms of your cash collection, but.
Speaker Change: Yes.
Speaker Change: The days sales outstanding it seemed to kind of jump out.
Speaker Change: Curious if that's a reflection or should we think about <unk>.
Speaker Change: As youre doing more more and more business with some of that.
Speaker Change: The hyperscale or does that have an implication in terms of.
Speaker Change: Ultimate collection or is there something else going on there. Thank you.
Speaker Change: No. If you look at the performance of the cash in the quarter the big variable impacting our cash flow is actually inventory and that was intentional we bill.
Speaker Change: Companies, we build inventory to manage tariff.
Speaker Change: It's about four days give or take of inventory, it's about $250 million and inventory was built in parts, which are going to be more targeted by by time, we havent change our free cash flow guide for the year and to answer to your question on DSO.
Speaker Change: DSO should be a whole actively flat year on year nothing specific.
Speaker Change: Going on you could have a phasing in the quarter because how the cells are phased in.
Speaker Change: In a particular quarter, but nothing happening on DSO its a its inventory.
Speaker Change: Inventory story.
Speaker Change: Okay very helpful. Thank you Sir.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And the next question coming from the line of.
Speaker Change: Scott Davis from Melius Research your line is now open.
Scott Davis: Hey, good.
Speaker Change: Good morning, guys.
Scott Davis: Hey, good morning, most of the most.
Scott Davis: Most of the questions have been asked that are relevant but I wanted to back up a little bit and just talk about lead times and your own.
Scott Davis: Capacity in the context of.
Scott Davis: Where are we now.
Scott Davis: I am sure Transformers are still pretty long ways out maybe even still 'twenty three 'twenty four months, but as far as the rest of your offering.
Scott Davis: We'll be back to normalized lead times for the most part.
Scott Davis: Yes.
Speaker Change: No. So we are not back to normal we see improvement in our lead times think about 20% to 25% depending on the product line.
Speaker Change: But we.
Speaker Change: We keep pretty loaded.
Speaker Change: In terms of the investment in our capacity to the first part of your question.
Speaker Change: We said before that we don't have one or two of <unk>.
Speaker Change: As we have two dozen of projects happening so think above expansions. They are already in play and that is supporting.
Speaker Change: The print that electrical Americas seem could put on the table right strong 13% growth and a vast majority if not all is volume rights not very little pricing today on that so that starts to show. Nevertheless, we consider to invest we have projects in early stages. So we should expect.
Speaker Change: <unk>.
Speaker Change: More of a capacity coming online in the second half and beginning of next year. So that's a good way to model.
Speaker Change: Okay.
Speaker Change: That makes that makes sense and I think you said something in your prepared remarks pollo about.
Capacity adds.
Speaker Change: In North America, just above and beyond perhaps what you had planned for it before but maybe I'm misreading that.
Speaker Change: Can you comment are you actually accelerating some plans to build local a local in light of the tariff announcements or is that.
Speaker Change: Am I over reading that.
Speaker Change: No.
Speaker Change: Before we made this 1.2 billion additional investment in growth.
Speaker Change: Public much before tariffs, we're just executing on that plan, we don't depend on that plan.
Speaker Change: And we continue to monitor things were changed we have a plan we feel really good about capacity adds for a number of reasons. We felt good before because the end markets are very strong number one.
Speaker Change: Number two question.
Speaker Change: Question before some of our customers give long term commitments. So we felt good about it.
Speaker Change: Number three.
Speaker Change: We have.
Speaker Change: In our in our business something really particular to Ethan that our capacity is fungible. So if you think about the power transformer I can sell it to data center can sell it to commercial institutional can sell to industrial so on and so forth.
Speaker Change: Very few companies have that opportunity so feel good about it and ultimately our our investments our own assembly don't think about this having machinery high capital intensive we can get a lot of output for the dollar we invest so we feel good about it we'll continue to monitor it and if needed.
Speaker Change: We will expand it but we don't see that needed as of today.
Speaker Change: Okay helpful. Thank you best of luck this year guys.
Speaker Change: Thank you.
Speaker Change: Thank you Hey, guys.
Speaker Change: I think hey, guys. We have reached the end of the call and appreciate everybody's questions as always the IR team will be available to address.
Follow up questions.
Speaker Change: The rest of your day.
Speaker Change: Thanks, everyone.
Speaker Change: Yeah.
Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.
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