The operator introduces the Eaton First Quarter 2024 Earnings Call and turns it over to host Yan Jin. CEO Craig Arnold and CFO Olivier Leonetti will discuss the company's performance in the fourth quarter. Questions will be taken at the end of the call. The presentation includes non-GAAP measures and a webcast is available for replay. The company had a strong quarter with adjusted EPS of $2.40, above guidance and up 28% from prior year. Orders were also ahead of expectations, with strong growth in the Electrical and Aerospace sectors.

Eaton is experiencing strong growth in orders and backlog, leading to an increase in guidance for the year. The company is uniquely positioned to take advantage of six secular growth trends and is expected to see continued growth opportunities for years to come. The company will provide updates on infrastructure spending, reindustrialization, utility and data center markets, and will also discuss the momentum in the nonresidential construction project market and the growth outlook for industrial facilities. An updated view on the data center market will also be provided.

The article states that there are currently 415 mega projects in North America, with a total value of over $1 trillion. Around 16% of these projects have started, with a higher percentage in semiconductor and EV battery projects. The cancellation rate for these projects is low, and it is expected that $100-150 billion worth of projects will start this year. Mega projects represent 15% of total nonresidential construction starts in 2023 and this number is expected to grow in the next 5 years. The article also highlights the strength of projects under $1 billion, which make up 50% of the U.S. market and have seen a 56% increase since 2021. Projects under $100 million have also seen a 15% increase in construction starts.

The industrial facilities end market is experiencing growth due to reindustrialization, nearshoring, and the need for decarbonization. This is leading to increased investment in CapEx and a focus on technology and digitalization. Eaton has a strong portfolio of products and software that are well-suited to meet these market trends and help industrial companies optimize performance and reduce complexity.

The company offers project management services and software to enhance operational predictability and safety in the data center market. They have seen significant growth in this market, particularly in AI data centers, and expect it to continue at a 25% compounded growth rate. In Q1, the company achieved record sales, segment profit, and adjusted EPS, exceeding their guidance range.

In the most recent quarter, Electrical Americas saw a 42% increase in operating cash flow and a 40% increase in free cash flow compared to the previous year. This was due to strong organic sales growth of 17%, which has been consistent for 9 consecutive quarters. The segment also achieved a record operating margin of 29.2%, driven by higher volumes and effective cost management. Orders and backlog were also up, indicating positive momentum in the market. On the other hand, Electrical Global saw mostly flat results, with a 1% increase in organic growth offset by FX headwinds. Both segments saw strength in data center, industrial, and commercial and institutional end markets.

In the first quarter, the company saw strength in its APAC and GEIS businesses, but weakness in its EMEA business. Operating margin remained flat and orders were up 4% on a rolling 12-month basis, with strong performance in data center and utility end markets. The combined electrical segments had organic growth of 11% and strong segment margin. The Aerospace segment posted record sales, operating profit, and operating margin, with organic growth of 9% driven by strength in all markets. The Vehicle segment saw a 2% decline in total revenue, but strength in Asia Pacific partially offset weakness in North America.

The company's operating margin has improved due to effective management of price cost and manufacturing efficiencies, despite lower sales volume. The e-mobility business saw a 7% increase in sales, outperforming the market due to new program ramp-ups. The company's growth guidance of 25% to 35% remains unchanged for the full year, driven by new programs and investments. The backlog for Electrical and Aerospace has grown by 27% and 11%, respectively, highlighting the company's confidence in future growth. The end market outlook and financial guidance have been updated on Page 17.

The company's markets are performing as expected, with stronger growth in data center and commercial and institutional markets in the U.S. The company is raising its revenue guidance for the year and expects growth in 80% of its end markets. The 2024 organic growth is now expected to be between 7% and 9%, with an increase of 50 basis points at the midpoint. The company is also increasing its segment margin guidance by 40 basis points and reiterating its guidance for the remaining segments. The adjusted EPS for 2024 is expected to be between $10.20 and $10.60 a share, representing a 14% growth over the prior year. The company's guidance for Q2 remains unchanged.

Eaton's Electrical Americas business has seen strong growth driven by the data center market, leading to a raise in guidance for organic growth, segment margins, and adjusted EPS. The company is confident in its medium- and long-term growth outlook, with record negotiations, orders, and backlog. The company expects to continue delivering higher growth, margins, and consistent earnings. During the Q&A, the CEO discussed the potential impact of labor constraints on the $1 trillion pipeline of mega projects and any new products that may be needed to meet customer demands.

Craig Arnold, CEO of a company, is addressing a question about labor shortages and their impact on the company's outlook for the year. He explains that the company is closely monitoring the situation and that labor participation rates in their industry are growing at a faster rate than the overall economy. He also mentions that the company announced a restructuring program last quarter and there is a significant difference in margins between their Electrical Americas and Electrical Global businesses.

The company is focused on narrowing the gap between the margins of its two business segments, with a particular emphasis on improving margins in the Electrical Global business. The company has launched a restructuring program to achieve this goal, with the majority of the spending and benefits expected to come from the Electrical segment. The gap between the margins of the two segments has widened due to strong performance in the North America market and weaker performance in European markets. However, the company expects margins to improve in the second half of the year and sees plenty of opportunity to expand margins in the Global segment.

Craig Arnold, the operator of the conference call, introduces the next question from Jeff Sprague of Vertical Research. Sprague asks about data centers and their impact on the company's revenue. Arnold explains that while data center markets have been strong, the order growth in this sector is even higher, indicating a potential for even more growth in the future. He also mentions that data centers are a big contributor to the company's negotiations and are expected to become a larger part of the company's overall business.

During a conference call, Craig Arnold and Jeffrey Sprague discussed data centers and Electrical Americas margins. When asked about the inclusion of data centers in a previous chart, Arnold believed they were embedded in the overall data. Sprague also asked about the potential for margins to decrease in the following quarter, to which Arnold mentioned investments and spending in the business as potential factors. The next question came from Deane Dray from RBC Capital Markets.

Deane Dray asks Craig Arnold about the demand for data centers and the potential bottlenecks in the supply of electrical equipment. Arnold confirms that there are constraints in the market and that the company is making investments to address them. He also mentions that they are signing multiyear agreements with customers to ensure capacity and are confident that they will not be the bottleneck in the industry. However, it is difficult to predict where other constraints may arise.

Craig Arnold, CEO of Eaton Corporation, discusses the company's strategy for going to market and the importance of distributor partnerships. He also mentions that there may be a shift in the mix of direct ship versus distribution, particularly in the data center market. In the first quarter, the Electrical Global segment had modest growth and underperformed in Europe, but the company expects low to mid-single-digit organic growth for the year.

The speaker talks about the company's performance in the second half of the year, mentioning that the comps will get easier and that they are seeing growth in Asia. They also mention that the European Electrical business has been weaker than expected, but they are not anticipating a significant change in the trajectory of the business. The speaker then discusses the margin outlook, attributing the expected decrease in Q2 to higher investments in Electrical Americas. They emphasize the team's strong execution and anticipate it will continue, but the margin decrease is due to investments in future growth. The next question is about the margin outlook, specifically the decrease in Q2, and the speaker confirms that it is due to investments in the business.

Charles Tusa asks Craig Arnold about the headwinds from investments and if there will be an abrupt start-up cost. Arnold explains that there will be some costs associated with the new capacity expansions and investments made to support growth. He also mentions that the team is executing well and could do better than what is currently reflected. Tusa also asks about the order front and if orders will be delivered further out. Arnold says that lead times have not pushed out further.

The speaker talks about the surge in orders and extended lead times in the past couple of years. They have seen some progress in reducing lead times, but orders continue to grow and lead times have not changed significantly. They mention that some hyperscale data center companies are placing orders earlier than usual. The company is now entering into long-term supply agreements, which is a new concept in the industry, to address capacity constraints and the strong outlook for growth.

The speaker discusses the changing business landscape and the need for multiyear contracts with customers and suppliers to ensure capacity to meet demand. They mention that most contracts have protections in place for investments and express confidence in the structure of these contracts. When asked about the percentage of SKUs that are currently sold out, the speaker says they have not calculated it but estimates that long-cycle products are at capacity while short-cycle products are not. They mention a split of 75-25 between long and short-cycle products. The next question is about capacity constraints and the speaker responds that they have constraints on long-cycle products but not on short-cycle products.

Nicole DeBlase asks Craig Arnold about the impressive 17% organic growth in Electrical Americas in the first quarter. Arnold explains that the company is being cautious with their guidance for the rest of the year, but there is potential for upside. He also mentions that the comps get more challenging and there is less contribution from price in subsequent quarters. DeBlase also asks about the free cash guidance, and Arnold explains that they did not raise it despite higher earnings because it is still early in the year and they want to be cautious. They will revisit the guidance in the second quarter.

The speaker, Craig Arnold, responds to a question about the performance of the Electrical business in China and their specific strategy of using joint ventures. He mentions that the China business grew high single digits in Q1 and the joint ventures grew 35% in 2023. He also explains their strategy of partnering with local Chinese companies to expand their portfolio and compete in Tier 2 and Tier 3 markets. The speaker is pleased with the performance of the joint ventures and believes they will contribute to future growth. In response to a technical question, he states that inventories are well balanced and aligned.

The company's backlog and lead times continue to grow, indicating strong demand for their products. The CEO mentions that while there may be some longer inventories in certain product lines, overall, inventories are well balanced. The company expects data center growth to increase from 16% to 25%, driven by the increasing demand for data processing and the explosive trend in AI. This has resulted in a higher demand for their products, and they are currently negotiating orders for AI training data centers.

The company's outlook for the market has improved due to increased orders and negotiations, not because labor and power constraints have been resolved. They plan to bring on new capacity in the second half of this year and into 2025, with $1 billion allocated for investment. It's possible that more investment may be needed to capture all the growth opportunities.

The speaker is addressing concerns about bottlenecks and investments in the company's growth. They clarify that the $1 billion mentioned is an incremental number and they do not intend to be a bottleneck. They also mention their asset light business model and their ability to bring on capacity with minimal CapEx. The speaker also mentions revisiting their numbers to ensure enough capacity for their growing forecasts. The question of market share is brought up, but the speaker states that there has not been a significant shift in market share among traditional players or new entrants.

The company is doing well in the expanding market, with high win rates for mega projects and non-residential construction projects. They do not expect significant shifts in market share due to strong positioning and reputation. Negotiations refer to active discussions in response to requests for proposals or quotes, and data center projects are typically already permitted before negotiations begin.

The speaker discusses the level of cancellations in their outbound data, stating that it is around 10%, which is lower than historical rates. They also mention that there will always be a certain level of cancellations in any project, but they are generally approved before negotiations. They then address the question of adding capacity to existing footprints, stating that it varies depending on the product line and may involve adding a line or shift, or building a new facility. The call concludes with the moderator thanking participants and stating that they can address any follow-up questions.

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