The paragraph is an introduction to Eaton's First Quarter 2025 Earnings Conference Call. It starts with the operator welcoming participants and introduces the speaker host, Yan Jin, Senior Vice President of Investor Relations. Jin introduces key company executives present, including Craig Arnold, the CEO; Paulo Ruiz, the President and COO; and Olivier Leonetti, the CFO. The agenda involves opening remarks by Paulo, followed by Olivier discussing the company's performance. The presentation will cover financial metrics and forward-looking statements, with a Q&A session at the end. Jin acknowledges the impending retirement of Craig Arnold, honoring his leadership over 25 years at Eaton, particularly his 9-year tenure as Chairman and CEO.

The paragraph discusses the strong leadership and strategic guidance of Craig at Eaton, which has resulted in significant growth in stock value and consistent strong shareholder returns. Under his guidance, the company achieved a record adjusted EPS of $2.72 in Q1, with organic growth accelerating to 9%. Eaton delivered record segment margins of 23.9% and notable performance in Electrical Americas, aerospace, and Electrical Global. Additionally, the company saw a 3% increase in total orders and a high book-to-bill ratio of 1.1, indicating a robust backlog and setting up expectations for continued strong performance throughout the year. The company is raising its expectations for organic growth while reaffirming estimates for adjusted EPS, cash flow, and share repurchases.

The paragraph discusses the company's involvement in eight end markets and the mega trends driving significant growth opportunities. It highlights the acquisition of Fiber Bond, emphasizing its importance in meeting the increasing demand for capital efficiency and deployment speed in the data center industry. The acquisition positions the company as a one-stop shop for rapid power deployment, allowing data centers to expand IT areas and increase revenue. The data center construction backlog in the U.S. has grown to nine years, and there is robust activity in EMEA and APAC due to regional and regulatory policies. The financial results show a strong Q1 performance with 9% organic sales growth, record revenue of $6.4 billion, a margin expansion, and a 13% increase in adjusted EPS. The focus then shifts to the Electrical Americas segment.

The business experienced a strong quarter with a 13% increase in organic sales, primarily driven by data center and utility markets. Operating margin improved to 30%, aided by higher sales. While orders dipped 4% compared to the previous year due to a large prior order, they rose 4% when excluding this anomaly, with data center orders up 11%. The backlog increased by 6%, providing growth visibility for 2025 and beyond. The project negotiations pipeline grew significantly. Notably, the acquisition of Fiber Bond was completed on April 1. The Electrical Global segment saw organic growth accelerate from 5.5% to 9%, despite a 2% FX headwind, with strong performance in APAC and EMEA. Operating margins improved due to sales growth and efficiencies. Orders remained flat annually, but saw an uptick sequentially, especially in EMEA and APAC. The backlog grew, and book-to-bill remained above 1.

The company reported strong performance in several segments for the first quarter. The electrical segment had an organic growth of 11% with a segment margin increase of 80 basis points from the previous year. The aerospace segment posted a 13% organic growth, hitting record sales across all end markets, particularly in military and commercial aftermarket, with an operating margin of 23.1%. Orders increased by 14% over the rolling 12-month period, resulting in a backlog increase. The vehicle segment faced a 15% revenue decline, primarily due to weakness in commercial and ICE light motor vehicle markets in North America, but maintained strong margins of 15.5%. The e-mobility business saw a 2% revenue increase, driven by a 3% organic growth, although margins remained flat as the company continued to invest in growth programs. The company is optimistic about future growth and margins.

The paragraph discusses the company's strategy to manage uncertainties from the global trade environment, including tariffs, by leveraging localized sourcing and manufacturing, especially in the U.S. It emphasizes recent investments to enhance resilience and flexibility in supply chains post-COVID. The company is controlling costs, limiting discretionary spending, and taking commercial actions to offset tariff impacts. It values strong relationships with customers and suppliers to minimize disruptions. Looking ahead to 2025, they expect growth across end markets, with positive adjustments in defense aerospace due to increased government spending. The company remains confident in outperforming market growth.

The paragraph discusses Eaton's updated growth and financial guidance for 2025, highlighting a slight adjustment in growth expectations for electric vehicles and internal combustion engine vehicles due to economic uncertainties. Despite these revisions, Eaton remains confident in its diverse end markets and backlog to support continued growth. The company is raising its 2025 organic growth outlook to 7.5%-9.5% and reconfirming its adjusted EPS guidance of $11.80-$12.20, projecting an 11% growth over the prior year. Eaton also reaffirms its cash flow and share repurchase expectations and provides guidance considering current tariffs. The Electric Americas growth outlook is increased to 12%-14%, while vehicle growth is decreased to -5.5% to -3.5%, citing weaknesses in the light motor vehicles sector. Segment margins are adjusted down by 40 basis points to a range of 24%-24.4%.

The paragraph discusses a company's updated financial guidance, noting adjustments to their 2025 outlook due to tariff impacts on electrical products in the Americas and vehicles. Despite lowering forecasts, the company remains optimistic about growth opportunities driven by market megatrends. They emphasize their commitment to high standards and preparedness for potential uncertainties. During a Q&A session, Chris Snyder from Morgan Stanley acknowledges the achievements of the company's executive, Craig. He inquires about the data center market performance, to which Paulo Sternadt responds with enthusiasm for its strong fundamentals and indicates continued market strength, following significant growth the previous year.

In the paragraph, the speaker highlights the strong performance of their business in Q1, with significant double-digit growth exceeding 45%. They express optimism about future orders and the Fiber Bond acquisition, which supports data center optimization. Chris Snyder inquires about the impact of the "Trump 2.0" tariffs on the U.S. market, particularly concerning competition from EU firms and capacity increases in transformers and switch gears. Paulo Sternadt responds by emphasizing the company's leading position and extensive U.S. footprint, which minimizes their reliance on external markets, and notes their proactive efforts to expand capacity further.

The paragraph discusses Eaton's business strategy and performance. Despite not serving the U.S. market from Europe like some competitors, Eaton follows a "local for local" strategy, which enhances its competitiveness. The focus then shifts to a Q&A, where Paulo Sternadt addresses the outlook for Electrical Americas orders. He expects strong orders due to record backlogs and visibility into 2025, leading to raised growth guidance for the year. He notes the potential for variability in orders, especially with large multiyear deals, and emphasizes a strong negotiation pipeline with increased momentum across various sectors, notably data centers and industrial, as well as improvements in smaller sectors like healthcare and education.

The paragraph discusses the company's strong performance and growth potential in various markets. While there's a decline in negotiation pipelines in commercial buildings and transportation by about 20%, overall performance reflects an 18% increase in the order pipeline. The company's revenue is expected to grow by 13%, and their book-to-bill ratio is projected to be over one. In the Electrical Americas market, particularly utilities, the company reports continued strong revenue growth, supported by a comprehensive portfolio and investment in leading technologies. Globally, the electrical business saw mid-teen growth, with high single-digit growth internationally and high-teens growth in America, demonstrating solid performance across sectors.

In the paragraph, Nigel Coe from Wolfe Research asks about the performance and development in Electrical Global, noting strong organic growth and orders, particularly in APAC and EMEA regions. Paulo Sternadt confirms the positive performance and highlights growth in utility and data center markets globally. He mentions that while some markets are still recovering, they are seeing encouraging signs. Additionally, Coe asks about missing slides from their presentation, specifically regarding mega projects in the U.S., to which Sternadt acknowledges the oversight and assures that they track such data rigorously.

The paragraph discusses strong project announcements in the first quarter, totaling 42 projects valued at $169 billion, which represents a significant increase over the previous year. However, only 15% of these projects have started. Future project starts are predicted to reach $300 billion this year, up from $135 billion last year, indicating potential strong growth. Despite concerns about cancellations, the rate has remained steady at 11%. Negotiations for orders from these projects are underway, with a current pipeline of $3.6 billion, suggesting a long-term positive trend. The conversation shifts to addressing tariff impacts, with reassurance given that the company seriously monitors tariffs and frequently meets to discuss relevant strategies.

The paragraph discusses a weekly meeting by a team in a dynamic environment, where they decide against disclosing certain numbers due to potential changes. Their strategy involves using three levers to manage costs: cost management, supply chain actions, and pricing adjustments. They aim to mitigate tariff impacts on a dollar-for-dollar basis but do not expect margin recovery within the year. The discussion shifts to focusing on global improvement, particularly in aerospace, by enhancing operations with strong leadership and company support. Improving the business and portfolio are seen as areas within their control.

The paragraph discusses a company's organic growth strategy, emphasizing investments in Dubai to enhance local production and pursue project business in the region, including beyond the Middle East. This strategy includes establishing a team of engineers to develop this business. The company also sees opportunities for growth in its GIS business and highlights successful strategies implemented in Asia through joint ventures. The company is open to potential deals but does not rely on them for its immediate or long-term plans. Additionally, Nicole DeBlase from Deutsche Bank asks about changes in EPS guidance, noting a slight shift in expectations between the first and second halves of the year.

The paragraph discusses financial adjustments and expectations for a company. Initially, they projected 48% earnings for the first half of the year, but revised it to 47%, with $0.10 attributed to corporate items like higher interest rates due to fiber bond financing and timing of executive equity compensation. There is also a $0.06 impact due to delays in recovering tariffs, expected to balance out over the year with a $20 million headwind in Q2. Historically, the first half contributes 46% to earnings, so 47% is an improvement. Nicole DeBlase and Paulo Sternadt discuss market expectations and volume guidance, with Paulo confident that despite macro uncertainties, their strong backlog will help them achieve organic growth beyond the overall market, which is steady at 7%. There are slight pricing adjustments due to tariffs, but overall growth expectations remain positive.

The paragraph discusses the implications of the data center industry's backlog extending from 7 to 9 years. Despite this timeline, the industry aims to find faster and more efficient ways to build data centers. Eaton sees opportunities in offering Modular Solutions, which can reduce engineering requirements for data center operators. These solutions are already popular with multi-tenant data center builders and are gaining interest from hyperscalers. The discussion also mentions Eaton's joint venture in Europe and acquisition of Fiber Bond in North America, highlighting their growing relevance.

The paragraph discusses Eaton's position in the data center market, emphasizing their broad portfolio and collaborative approach in improving customers' designs and efficiency. Eaton is seen as a leader in investing and engaging experts to optimize customer solutions. The focus is on capital efficiency, not just speed, and the removal of equipment from data centers to increase revenue from racks. Eaton engages in long-term supply agreements and does not foresee changes to their duration. The conversation shifts to addressing market competition and barriers to entry, highlighting Eaton's presence on approved vendor lists and seeking clarification on maintaining their competitive edge amidst new market entrants.

The paragraph features a discussion between Paulo Sternadt and Joe Ritchie, with Paulo emphasizing the importance of collaborating with chip manufacturers like NVIDIA to remain relevant in the market. He highlights their company's advantage of being present along the entire chain from utility feeders to server racks. The dynamic nature of the market creates barriers for new companies which can struggle to engage in open discussions with key players. Joe Ritchie of Goldman Sachs then questions the impact of tariffs on segment margins in Electrical Americas and Vehicle segments, noting a $150 million difference from original guidance. Olivier Leonetti responds, stating there hasn't been a change in their guidance and that Fiber Bond remains neutral concerning EPS (Earnings Per Share).

The paragraph discusses the neutral financial impact of tariffs on a company’s P&L. Joe Ritchie inquires about how the company plans to handle pricing to cover the tariff impact, considering existing backlogs and distribution processes. Paulo Sternadt responds by acknowledging a lag in price realization affecting the Q2 bottom line and operational margin. He assures that the company will address backlogs as needed and expects to fully compensate for the impact during the fiscal year, aligning with their long-term plans to recover margins structurally. The paragraph ends with the next question from another participant.

In the paragraph, Amit Mehrotra inquires about the potential for data center orders to increase as rack density transitions from Hopper to Blackwell, which could significantly boost power requirements per rack. Paulo Sternadt explains that this shift benefits their business, noting that while predicting orders on a quarterly basis is challenging, their long-term market outlook is positive. He highlights their growing negotiation pipeline and previous growth figures. Olivier Leonetti adds that their forecast for the market to grow at 15% annually remains unchanged, even considering power constraints, and notes that without these constraints, growth could be even higher. Hyperscalers have also confirmed their capital expenditure levels, supporting the growth forecast.

The paragraph discusses the impact of AI data centers on the cost per megawatt, noting an increase due to higher power density and the need for additional equipment like UPS systems. Paulo Sternadt explains that both retrofit and greenfield developments can benefit from modular solutions, allowing for flexibility in design and execution. Regarding the Electrical Americas backlog, while it's challenging to predict order development, the company aims to maintain a book-to-bill ratio above 1, indicating continued growth. The conversation concludes as the operator introduces the next question from Tim Thein of Raymond James.

The discussion centers on the financial performance and restructuring of a company's global electrical segment. It highlights that over $100 million in restructuring charges have been incurred with the management focusing on improving margins. Olivier Leonetti mentions that the impact of the restructuring and associated savings will be more evident in the second half of the year. Additionally, the conversation shifts to cash conversion, where Leonetti explains that the increase in days sales outstanding is not a concern but is due to intentionally building inventory worth about $150 million to manage tariffs. Despite this, the company's free cash flow guidance for the year remains unchanged.

In the paragraph, Scott Davis from Melius Research asks about lead times and capacity, particularly in the context of the company's offerings outside of transformers. Paulo Sternadt responds that although lead times have improved by 20% to 25% depending on the product line, they are not yet back to normal. He mentions that the company has several expansion projects in progress to support growth, which is largely volume-driven rather than price-driven. Sternadt also clarifies that they continue to invest in capacity, with new projects expected to come online in the second half of the year and into the next year. Additionally, in response to whether tariff announcements have accelerated plans for local production in North America, Sternadt clarifies that no such acceleration has occurred.

The paragraph outlines Eaton's confidence in their $1.2 billion growth investment plan, implemented before tariff concerns arose. The plan is progressing well, driven by strong markets and long-term customer commitments. Eaton's unique business flexibility, particularly in power transformers' versatility across sectors, bolsters this confidence. Investments focus on assembly rather than heavy machinery, maximizing output for investment. While they are prepared to expand if necessary, current assessments indicate no immediate need. The paragraph concludes with closing remarks from Yan Jin and Paulo Sternadt, with an invitation for further inquiries from the IR team. The conference call then ends.

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