In the paragraph, the operator welcomes listeners to the Eaton Fourth Quarter 2023 Conference Call and introduces the speakers, Craig Arnold and Tom Okray. The agenda for the call is outlined, including operating remarks by Craig and a financial report by Tom. The disclaimer about forward-looking statements is mentioned. The highlights of the quarter are discussed, including record-breaking adjusted EPS and strong margins.

In the fourth quarter, Eaton saw strong financial results, with a 22.8% increase in Q4 and a 42% increase in incremental margins. The company also saw strong market activity and expects to continue this trend in 2024 with double-digit growth in adjusted EPS and cash flow. Eaton has also announced a restructuring program to improve efficiency and eliminate fixed costs. The company is well positioned to take advantage of 6 secular growth trends, with investments in R&D and capital. The focus on infrastructure spending, reindustrialization, utility and data center markets, and the impact of reindustrialization on mega projects in North America will continue to drive growth for Eaton.

The article discusses the impact of timing on mega projects, defined as projects with a value of $1 billion or more, and how they contribute to the reindustrialization trend. The data shows a significant increase in the number of mega projects in North America, with a growing trend in Europe as well. Most of these projects are still in the planning phase, but the company has already won over $1 billion in orders and is in negotiations for another $1 billion. This highlights the potential for growth in the electrical business and the importance of understanding the timing and duration of these mega projects.

The primary conclusion is that the impact of the increase in mega projects is still to come, as it takes 3-5 years for these projects to show up in revenue. These projects represent a small portion of current revenue but have a significant presence in negotiations and orders. The speaker also takes a moment to thank the CFO, Tom, for his outstanding leadership and announces his departure. Tom then begins to review the company's fiscal year 2023 results compared to their original guidance.

The company has consistently met and exceeded its commitments throughout the year, resulting in record sales, margins, and free cash flow. Organic growth has been strong, with 7 out of 8 quarters showing double-digit growth. The company also set records for sales, margins, and free cash flow for the full year. The Electrical Americas business performed particularly well, with all-time records for sales, operating profit, and margins, and strong organic growth in nearly all end markets.

Electrical Americas has consistently achieved double-digit organic growth for 8 quarters and recorded an all-time high operating margin of 28.5%. Despite a 4% decline in orders on a rolling 12-month basis, the company has a strong backlog and is confident in its ability to generate strong organic growth for the next few years. Electrical Americas saw an 18% increase in backlog and a book-to-bill ratio of 1.2. The segment also posted record sales and profits for the full year. The Electrical Global segment saw a 4% increase in organic growth, driven by strong performance in data center, industrial, commercial, and institutional markets.

The article discusses the financial performance of the Electrical and Aerospace segments of a company. The Electrical segment saw a 10% increase in operating margin and a 1% increase in orders, with strong growth in data center, IT, utility, MOEM, and industrial markets. The Aerospace segment also had a strong quarter, with an 8% increase in organic growth and all-time high sales and operating profit records. However, the operating margin was down 210 basis points due to mix and defense program factors. The Vehicle segment saw a 2% increase in revenue, solely from favorable foreign exchange. Overall, the company remains confident in its positioning for continued growth and strong margins in the electrical business.

In 2023, the vehicle end markets were down 500 basis points, but the business was able to deliver outgrowth due to higher aftermarket sales, stronger share in heavy-duty transmissions, and a new product launch in China. Operating margin increased by 270 basis points, driven by effective management of price cost and improvement in manufacturing efficiency. The eMobility business also saw strong growth, with a 19% increase in revenue and an all-time sales record. However, operating loss increased due to program start-up costs. The Electrical and Aerospace backlog has also significantly increased since Q4 2020, with Electrical growing almost 200% and Aerospace reaching $3.2 billion for a total backlog of $12.7 billion.

The company's strong backlog and negotiations pipeline in the Electrical and Aerospace sectors support their expectation for continued growth in 2024 and beyond. The company's end market assumptions for 2024 have been updated, with the exception of residential markets and commercial vehicles. The company is also announcing a new restructuring program to reduce costs and improve efficiency.

The company is currently well-equipped to take on efficiency projects that have been in the pipeline for some time. These projects will focus on reducing costs through consolidation and the use of digital technologies, freeing up resources for growth and operational improvements. The company expects to incur $375 million in restructuring costs over the next 3 years, with $325 million in savings by 2027. This will be achieved through $175 million in charges in 2024 and $50 million in savings. The company sees these actions as crucial for its continued success in the future. The 2024 revenue and margin guidance includes an organic growth of 6.5% to 8.5%, with strong performance expected in the Electrical Americas and Aerospace segments. The eMobility segment is also expected to see growth of 30% due to new programs and a growing electric vehicle market. The company's backlog and healthy end markets provide better visibility for the 2024 outlook. The segment margins are expected to improve by 60 basis points at the midpoint from the all-time record in 2023, with incremental margins of about 30%. This is in line with the company's plan to invest in R&D and expand manufacturing capacity for future growth. The remaining guidance for 2024 and Q1 is provided on the next page.

In 2024, the company expects an adjusted EPS of $9.95 to $10.35 per share, a 11% increase from 2023. Operating cash flow is expected to be between $4 billion and $4.4 billion, a 17% increase from the previous year. The company plans to repurchase shares and pursue strategic M&A opportunities. For Q1, organic growth is expected to be between 6% and 8%, segment margins between 21.3% and 21.7%, and adjusted EPS between $2.21 and $2.31 per share. The company is confident in its ability to consistently deliver higher growth and earnings, and is investing in R&D, capacity expansion, and its employees. The company sees opportunities for improvement and is focused on optimizing operations and leveraging its scale. The company expects another exceptional year and looks forward to delivering strong results. The call is now open for questions from analysts.

Jeff Sprague asks about the timing of the company's restructuring, given the strong demand in both Electrical and Aero businesses. Craig Arnold explains that the company has more capacity and bandwidth at the moment due to fewer acquisitions, making it an opportune time to take on these projects and improve efficiency, eliminate redundancies, and leverage new technologies for future growth and margin expansion.

The company is confident in its ability to handle its restructuring program and has plenty of capacity to do so. The program will free up time for growth and it would be riskier if they didn't do it. The backlog provides visibility and comfort, but there is a risk of sales disappointments due to non-fungible orders and long order conversion cycles. The company is aware of this risk and is navigating it carefully.

Eaton has seen strong demand and backlog growth in the past few years, leading them to invest $1 billion in capacity additions to support future growth. These investments are broad-based, with a focus on utilities, transformers, data centers, and institutional markets. The company is confident in their ability to manage any potential fluctuations in orders and maintain attractive top-line growth.

The company has made investments in their core component circle breaker capacity and in eMobility. The investments are broad-based and have primarily been focused in the Americas. The company expects the new capacity to be phased in between the second quarter and the end of the year. The biggest challenges in the supply chain have been resolved, but there are still some individual challenges with specific components. The company is working to build more internal capacity.

The company has been working with suppliers to ensure they can keep up with the demand for their products. They have also seen strong underlying demand due to secular growth drivers such as energy transition and digitalization, even before the focus on mega projects. This growth has been seen in projects of all sizes, including smaller ones below $1 billion.

The company is seeing broad-based growth in their business beyond just mega projects. Mega projects will become a bigger part of their future, representing a significant market opportunity. The company believes that the electrical industry will be able to meet this demand, and it will have a positive impact on their ability to push prices and drive margins higher.

The speaker discusses the potential for growth in the industry, but notes that there may not be enough capacity and labor to meet the demand. They mention making investments to increase capacity and the challenge of finding skilled workers. They also mention that price will contribute less to growth in 2024 compared to volume, as they do not expect inflation to be a factor.

Steve Tusa asked about the $2 billion share repurchase in 2024 and Craig Arnold explained that it was due to strong cash flow and a desire to not keep excess cash on the balance sheet. Tom Okray also mentioned the company's strong balance sheet and flexibility for strategic M&A. Joe Ritchie asked about the margin profile of the first $1 billion in mega projects that the company has won.

The speaker believes that the margin profile on mega projects will not be significantly different from the underlying business. They are being selective in which projects they pursue due to capacity constraints. There is concern about potential disruptions from the upcoming election, but the speaker is confident that the current level of stimulus spending will continue to support these projects, especially in red states.

The speaker discusses the current state of demand and capacity in the business, noting that even with a potential decrease in orders due to the upcoming election, the company is still in good shape. They also address concerns about adding too much capacity in the industry and mention the possibility of orders remaining low in 2024 due to capacity constraints. However, they still expect to see growth in the business.

The company's backlog is at record highs and they have modeled for a decline in orders, but are still confident in their organic growth. The eMobility business is expected to grow by 30%, which is lower than what customers are asking for due to a slower rate of growth in the EV industry. However, the industry is still expected to grow steadily.

The company is focused on delivering its commitments and has hedged its plans to ensure flexibility in responding to customer forecasts. They are still committed to their goals and forecasts in the eMobility market, which has seen 7% growth for the industry and 18% growth for the company. The cost-cutting program will involve $375 million in restructuring costs to deliver $325 million in mature year benefits, with no offsetting investments. The cash associated with the program is included in the company's cash guidance.

The speaker responds to a question about where the company will see the most results from their recent actions. They explain that the benefits will be widespread and will primarily benefit the Electrical and Industrial segments. They also clarify that the actions are not just about cost cutting, but also about finding smarter and more efficient ways of doing business. The goal is to fund growth and increase investments in R&D. The next question asks about capacity constraints that may affect their 9%-11% growth forecast for the Americas.

Craig Arnold, CEO of Eaton Corporation, states that there is enough demand in the marketplace to post higher growth than their guidance of 9% to 11%. However, there are industry-wide capacity constraints, particularly in skilled labor, that may prevent faster growth. Data centers are expected to be the strongest growth vertical in 2024, with negotiations already up 160%. The company's investments of $1 billion should cover the expected growth in this market for the next few years.

In paragraph 26, Craig Arnold discusses the strong growth potential for data centers in 2024 and beyond. He mentions that the data center market is projected to grow at a compound growth rate of 16% over the next 5 years, and the company has seen an acceleration in orders and revenue in this sector. Nigel Coe and Tom Okray also comment on the robust growth expected in data centers in 2024. Tim Thein asks a question about the mix in the Electrical sector, and Craig Arnold mentions the strength in big projects in the Americas.

The speaker discusses the shift from growth coming from systems versus products and the challenges it has posed in the past. However, they believe that the distinction between systems and products is not as important as looking at the end markets and that there is not a significant difference in profitability between the two. They encourage investors to think about the company in terms of its end markets rather than systems versus products.

Craig Arnold, CEO of Eaton Corporation, discusses the projected growth rates for the company's commercial and aftermarket segments in 2024. He mentions that there will be a difference in profit profiles between original equipment (OE) and aftermarket orders, with OE growing slightly faster. He also notes that a significant portion of their North American business goes through distribution, with distributors being a valuable asset to the company. Arnold also addresses the issue of destocking, stating that it did not come up in their discussion.

The speaker addresses a question about destocking in the company's business over the past 4 months or 4 quarters. They mention that there was some destocking in Europe at the beginning of 2023, but it is now behind them. They also state that there has not been much destocking in the Americas due to the market's growth. The speaker thanks the participants and invites them to follow up with the IR team.

This summary was generated with AI and may contain some inaccuracies.