Yahoo Finance Eaton Corporation plc (NYSE:ETN) Q1 2024 Earnings Call Transcript
Eaton Corporation plc (NYSE:ETN) Q1 2024 Earnings Call Transcript April 30, 2024
Eaton Corporation plc misses on earnings expectations. Reported EPS is $2.04 EPS, expectations were $2.28. Eaton Corporation plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Eaton First Quarter 2024 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to your host, Yan Jin. Please go ahead.
Yan Jin: Good morning. Thank you all for joining us for Eaton's Fourth Quarter 2024 Earnings Call. With me today are Craig Arnold, our Chairman and CEO; and Olivier Leonetti, Executive Vice President and Chief Financial Officer. Our agenda today includes the opening remarks by Craig, then he will turn it over to Olivier, who will highlight the company's performance in the fourth quarter. As we have done on our past calls, we'll be taking questions at the end of Craig's closing commentary. The press release and the presentation we'll go through today have been posted on our website. This presentation includes adjusted earnings per share, adjusted free cash flow and other non-GAAP measures. They are all reconciled in the 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 comments today will include the statements related to the 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 into our earnings release and the presentation. With that, I will turn it over to Craig.
Craig Arnold: Okay. Thanks, Yan. And we'll start with some highlights on Page 3, and I'll lead off by noting that we've delivered another strong quarter this year. Our adjusted EPS was $2.40 in the quarter, well above our guidance range, our record for the quarter and up 28% from prior year. I'd also note that our orders came in ahead of expectations with strong order growth in Electrical, both the Americas and Global. On a rolling 12-month basis, total electrical orders were up 7% and aerospace orders increased by 2%. This led to another quarter of growing and record backlogs up 27% for Electrical and 11% for Aerospace, with strong book-to-bill ratios. The growth in orders and backlog support our point of view on the strength of the mega trends that we're in the early stages and that our market should be strong for years to come.
And given our Q1 results, we're raising our guidance for organic growth, segment margins and adjusted EPS for the year. On balance, we're very pleased with our start to the year. In the last few quarters, we shared our framework on how we think about key growth drivers for the company. This chart reflects the sixth secular growth trends that are positively impacting our business today, and quite frankly, for years to come. We continue to think Eaton is uniquely positioned in most of our businesses and are expected to see an acceleration in market-driven growth opportunities for years to come. In the last 3 earnings calls, we provided a summary of progress on infrastructure spending, reindustrialization, utility and data center markets. We also shared the data center -- the data, excuse me, we're tracking on mega projects, including when they are expected to have a material impact on our revenue, and an overview on the growth expectations and drivers for our Aerospace business.
Today, we'll once again provide you an update on what we're seeing on mega projects, but we'll also take a moment to show you the momentum that we're seeing in the nonresidential construction project market for those projects under $1 billion. Additionally, we'll provide you with a summary of the growth outlook for industrial facilities and how we're positioned in this market, and lastly, because it's such a dynamic topic, we'll provide an updated view on how our now higher growth expectations for the data center market is unfolding. Turning to Slide 5 in the presentation. We summarized the number of mega projects that have been announced since January of 2021. And as a reminder, a mega project is a project with an announced value of $1 billion or more, and the number is now 415 projects.
Once again, this is North America data, but we are seeing a similar trend in Europe, although the dollars are not as large. Just a few points to note. We've now surpassed $1 trillion in announced megaprojects, double what we saw over the last -- this time last year and 3x the normal run rate. Approximately 16% of these projects have started but it does vary by type of project. For example, a large percentage of semiconductor and EV battery projects have started, but downstream chemical, power generation, renewables and data center projects have some of the lowest project start rates to date. And cancellation rates continue to be modest, around 10% and below historical rates. Using the current forecast, we expect over $100 billion to $150 billion of these projects to start this year.
It's also worth noting that mega projects represent 15% of total nonresidential construction starts in 2023, a number that we expect to grow over the next 5 years. For projects that have started, we've won $1 billion of orders and our win rate is approximately 40%. We remain active in negotiations on another $1.4 billion of electrical content. Most of the projects represented here have not yet reached a negotiation stage. Turning to Slide 6. We want to highlight the largest part of nonresidential construction market, projects under $1 billion. This market is projected to be over $500 billion in 2024 and represents around 50% of the U.S. market, 56% increase since 2021 and a 16% CAGR. The market was actually up also 10% through Q1 of this year.
So while mega projects grab a lot of the headlines, we're seeing significant strength in projects under $1 billion as well. And for projects less than $100 million, construction starts were up 15%, so once again, strength across the entire market. This momentum is naturally being driven by the same set of mega trends and stimulus spending that we're seeing on mega projects. The primary markets here include utility, power generation, renewable, water, wastewater, manufacturing and data centers. And our win rate in this segment is approximately 35%. Turning to Slide 7, we highlight the industrial facilities end market. As we've reported, this end market accounted for approximately 12% of Eaton's total revenue in 2023. Reindustrialization and nearshoring are having a particularly large impact on this market.
Examples include semiconductor fabrication, EV and EV battery plants as well as LNG terminals. At the same time, industrial markets are undergoing growing pressure to decarbonize to lower cost and develop more sustainable operations. These challenges are naturally driving a significant increase in CapEx investment. It's also coming at a time when technology and digitalization are providing more value to data as a service, software, and therefore, the ability to provide operational intelligence. This allows customers to move from being reactive to proactive when managing energy and uptime, saving them time and money. For us, we increased both our content per project and our average selling price. These are the drivers that support our belief that industrial facilities end market will grow by some 7% between now, 2023 and 2026.
Slide 8 provides an overview of the products and software that we sell as part of our industrial solutions portfolio. As noted, we think we have the broadest portfolio of products in the market. Our solutions are sold in both process and discrete manufacturing industries and are especially well suited to take advantage of the trends we discussed on the prior page. Our solutions help industrial companies optimize performance by lowering the cost of ownership and reducing complexity. They increase operational predictability with data-driven insights and enhanced safety, protecting people and assets. In addition to hardware and software, we provide a full suite of project management services, including design, specifying, commissioning, training, remote monitoring and obviously, aftermarket service.
And our Brightlayer industrial software platform enables customers to preempt operational challenges because of the data and insights that come from our electrical equipment. Moving to Slide 9, you'll see an updated view on the data center market. Last fall, in our Q3 2023 earnings call. We highlighted the data center market and shared our view that we expected the market to grow at a 16% compounded growth rate between 2022 and 2025. We want to provide an update as we've seen continued momentum in this market, driven by the rise of AI, big data and certainly edge computing. As expected, the biggest increase is coming from the very strong demand for AI data centers which is reflected both in our orders and in our negotiation pipeline. Here, orders on a trailing 12-month basis have more than doubled, and our negotiations in the U.S. have increased by more than 4x.
We now think the overall market grows at a 25% compounded growth rate between 2022 and 2025. And as you know, we have a strong position in the data center market and the data center/IT channel accounted for 14% of our revenue last year. Now I'll turn the presentation over to Olivier to cover the financials.
Olivier Leonetti: Thanks, Craig. I'll start by providing a summary of our Q1 results. We posted a Q1 sales record of $5.9 billion, up 8% in total and organically. This represents 8 quarters of growth over 20% on a 2-year stack. We posted Q1 segment profit and margins record. Operating profit grew 27% and segment margin expanded 340 basis points to 23.1%. Adjusted EPS of $2.40 increased by 28% yet over the prior year. This is a Q1 record and well above the high end of our guidance range. This performance resulted in operating cash flow of $475 million, up 42% on a year-over-year basis and free cash flow of $292 million, up 40% versus prior year. As a percentage of full year guidance, both operating cash flow and free cash flow are improved versus prior year.
On Slide 11, we summarize Electrical Americas' very strong results. We continue to raise the bar, setting new all-time records for sales, operating profit and margins. Organic sales growth remained strong at 17%, which reflects broad-based strength in our end markets with particular strength in industrial, data center and institutional end markets. On a 2-year stack, organic growth was up 39%. Electrical Americas has generated double-digit organic growth for 9 consecutive quarters. All-time record operating margin of 29.2% was up 630 basis points versus the prior year, benefiting primarily from higher volumes, effective management of price cost and improved manufacturing efficiency, partially offset by higher costs to support growth initiatives.
On a rolling 12-month basis, orders were up 8% demonstrating a positive inflection as a result of the impact of the various megatrends. We had particular strength in data center end market. Also, our major project negotiations pipeline in Q1 was up 169% versus prior year and up 197% since Q1 2022. Electrical Americas backlog increased 31% year-over-year and was up 21% sequentially, resulting in a book-to-bill ratio of 1.2 on a rolling 12-month basis. These results underscore the tailwinds from secular trends, strong execution and robust backlog that have allowed us to increase growth and margin guidance for the year, which we will discuss later in the presentation. The next chart summarizes the results for our Electrical Global segment. Coincidently, Global results are mostly flat to last year.
Organic growth was up 1%, offset entirely by FX headwinds. We had strength in data center, industrial, as well as commercial and institutional end markets. Regionally, we saw strength in our APAC and GEIS businesses, partially offset by weakness in our EMEA business. Operating margin was 18.3% which was flat to the prior year. Orders were up 4% on a rolling 12-month basis with strength in data center and utility end markets. Book-to-bill continues to remain strong. Q1 was 1.1 on a rolling 12-month basis. Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segments. For Q1, we posted organic growth of 11% and segment margin of 25.3%, which was 430 basis points over prior year. On a rolling 12-month basis, orders inflected strongly positive, up 7% and our book-to-bill ratio for our electrical sector remains very strong at 1.2. We remain quite confident in our positioning for continued growth with strong margins in our overall electrical business.
Page 13 highlights our Aerospace segment. We posted Q1 sales, operating profit and operating margin records. Organic growth was 9% for the quarter. Growth was driven by broad strength across all markets with particular strength in commercial OEM and aftermarket end markets, which were up 17% and 15%, respectively. Operating margin of 23.1% was up 60 basis points year-over-year, benefiting from higher volumes and effective management of price cost. On a rolling 12-month basis, orders increased 2%. Commercial OEM and aftermarket orders were particularly strong, and we expect that the military OEM order patterns will normalize in the second half. Year-over-year backlog increased 11% and was up 4% sequentially. On a rolling 12-month basis, our book-to-bill for our Aerospace segment remained strong at 1.1. Moving on to our Vehicle segment on Page 14.
In the quarter, total revenue was down 2%, including a 3% organic decline, partially offset by a point of favorable FX. Weakness in the North America region was partially offset by strength in Asia Pacific. Operating margin came in at 16%, 150 basis points above prior year driven by effective management of price cost and improvement in manufacturing efficiencies, offset by lower sales volume. On Page 15, we show results for our e-mobility business. Sales were up 7% on an organic and total basis. Our organic growth significantly outperformed the market, driven by new program ramp-ups. Our OEM customers continue to face execution challenges, and while we anticipate improvements throughout the year, we have remained pragmatic in our volume forecast.
As a result, we will discuss shortly that our full year growth guidance of 25% to 35% remains unchanged. Growth programs and investments drove the operating loss of $4 million. We continue to incur launch costs related to our growth programs expected to ramp up over the next coming quarters. In 2023, we won new programs with more than $1.3 billion of mature year revenue, and we continue to expand our pipeline of new opportunities in 2024 with our unique technologies, driven by our electrical pedigree. This will continue to drive our growth well above the market. Moving to Page 16, we show our Electrical and Aerospace backlog updated through Q1. As you can see, we continue to build backlog with electrical stepping up to $11.3 billion and Aerospace reaching $3.4 billion for a total backlog of $14.7 billion.
Versus prior year, our backlogs have grown by 27% in Electrical and 11% in Aerospace. Electrical backlog benefited from acceleration in order intake from tailwinds from the secular trends, including hyperscale orders within the data center end market. As noted earlier, book-to-bill ratios for Electrical and Aerospace are 1.2 and 1.1, respectively. The continued growth in our backlog underscores our confidence in 2024 and beyond. Now I'll turn it back to Craig for the end market outlook and financial guidance updates.
Craig Arnold: Thanks, Olivier. Turning to Page 17, we show a summary of our end market growth assumptions. Overall, our markets continue to perform as expected, and most of these indicators have not changed from what we shared in our Q4 earnings call. We are, however, seeing stronger-than-expected growth in data center and in commercial and institutional markets in the U.S., which is why we're raising our revenue guidance for the year. In contrast, what many are seeing in the macro economy, we continue to expect growth in 80% of our end markets, and much of this growth is supported by the large backlog numbers that Olivier shared. Moving to Page 18, we show our financial year organic growth and operating margin guidance. Overall, our 2024 organic growth is now expected to be between 7% and 9%, which is an increase of 50 basis points at the midpoint.
We're raising our organic growth guidance in the Electrical Americas to 10% to 12% from 9% to 11%, and we're reiterating the growth guidance for the remaining segments. For segment margins, we're increasing the company's margin guidance range by 40 basis points at the midpoint to 23%. This is a result of the improved outlook in Electrical Americas, where we're seeing strong demand and strong performance. Here, we're increasing our margin outlook to 28% and a 100 basis point increase at the midpoint, and we're reiterating our guidance for the remaining segments. On the next page, we have the balance of our guidance metric for 2024 and Q2. For 2024, our adjusted EPS is expected to be between $10.20 and $10.60 a share. The $10.40 midpoint represents a 14% growth in adjusted EPS over prior year and a $0.25 increase over the initial 2024 guidance.
The other elements of our guidance are unchanged. For Q2, we expect organic growth to be between 6.5% and 8.5%, segment margins to be between 22.4% and 22.8%, and adjusted EPS to be in the range of $2.52 to $2.62 a share. So let me just close with a summary on Page 20. Once again, the trends driving growth in our end markets continue to play out as expected and even better in our Electrical Americas business, driven by the data center market. We also delivered a strong quarter of financial results on the back of strong execution across the company. As a result, we raised our guidance for organic growth by 50 basis points, segment margins by 40 basis points and adjusted EPS by 25% at the midpoint. And in the quarter, we were especially pleased to see strength in our negotiations, our orders and the growth in our backlog, all of which hit all-time records, validating our medium- and long-term growth outlook.
So we leave the quarter with a high level of confidence. Eaton will deliver higher growth, higher margins and consistent earnings growth for years to come. Our expectations are high, and that's exactly where they should be. With that, I'll open things up for any questions you may have.
Yan Jin: Thanks, Greg. [Operator Instructions]. With that, I will turn it over to the operator to give you guys the instruction.
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