Eaton Corporation plc (NYSE:ETN) Q4 2023 Earnings Call Transcript

With respect to the top line, we posted an all-time sales record of $6 billion, up 11%. Organic growth continues to be strong, up 10% for the quarter. We have generated double-digit organic growth in 7 of the last 8 quarters, with the last 7 quarters growing over 20% on a 2-year stack. We posted operating profit Q4 records on both a margin and absolute basis. Operating profit grew 22% and segment margin expanded 200 basis points to 22.8%. Incremental margin was very strong at 42%. Adjusted EPS of $2.55 increased by 24% over the prior year. This is an all-time record and above the high end of our guidance range. This performance resulted in all-time quarterly operating and free cash flow records. Our $1.3 billion of operating cash flow was 9% higher than the prior year, generating 18% free cash flow margin and 103% free cash flow conversion.

For the full year, we also set numerous records, including record sales, segment margins, adjusted EPS and earnings and operating and free cash flow. On Slide 9, we detail our Electrical Americas results. The Electrical Americas business continues to execute very well and delivered another very strong quarter. We set an all-time record for sales, operating profit and margins. Organic sales growth remained strong at 16% with broad-based growth in nearly all end markets. On a 2-year stack, organic growth is up 36%. Electrical Americas has generated double-digit organic growth for 8 consecutive quarters. All-time record operating margin of 28.5% was up versus prior year 480 basis points, benefiting primarily from higher volumes, effective management of price cost and improved manufacturing efficiency.

Incremental margin was 58% for the segment. On a rolling 12-month basis, orders were down 4%. However, it’s important to note that the dollar value of the orders remains high and the decline needs to be viewed in the context of the 34% order growth in Q4 of last year. As discussed in prior earnings calls, order intake is an important metric that needs to be analyzed together with record backlog. Currently, in our electrical sector, we have backlog coverage of almost 3x our historical average. We’ve looked at multiple scenarios with meaningful order intake decline and are confident in those scenarios, given our backlog coverage that we can generate robust organic growth for several quarters, well into 2025. More specifically, Electrical Americas backlog increased 18% year-over-year and was also up sequentially, resulting in a book-to-bill ratio of 1.2 on a rolling 12-month basis.

For orders, we had particular strength in data center, MOEM and institutional markets. Also, our major project negotiations pipeline in Q4 was up 55% versus prior year and up 189% since Q4 2021. On a full year basis, Electrical Americas posted 19% organic growth with 26.5% margins, up 400 basis points over prior year. Electrical Americas posted records for full year sales, along with profit on both a margin and absolute basis. With the tailwinds from secular trends, strong execution and robust backlog, Electrical Americas is well positioned as we enter 2024. The next chart summarizes our results for the Electrical Global segment. Leveraging Q4 record revenue, organic growth increased to 4% from flat in Q3. We have strengthened data center, industrial and commercial and institutional markets.

Operating margin of 18.8% was up 10% versus the prior year. Orders were up 1% on a rolling 12-month basis, with strength in data center and IT, utility, MOEM and industrial markets. Importantly, book-to-bill continues to remain greater than 1. On a full year basis, Electrical Global posted 5% organic growth and 19.3% margins. The business posted records for both full year sales and operating profit. Before moving to our Industrial businesses, I’d like to briefly recap the combined Electrical segments. For Q4, we posted organic growth of 11%, incremental margin of 51% and segment margin of 25% which was up 320 basis points over prior year. On a rolling 12-month basis, our book-to-bill ratio for our Electrical sector remains very strong, above 1.1. We remain quite confident in our positioning for continued growth with strong margins in our overall electrical business.

Chart 11 highlights our Aerospace segment. We posted an all-time quarterly sales and Q4 operating profit record. Organic growth was 8% for the quarter, with a 2% contribution from foreign exchange. Growth was driven by broad strength across all markets, with particular strength in defense aftermarket, in both commercial OEM and commercial aftermarket which were up 26%, 25% and 18%, respectively. Operating margin of 22.4% was down 210 basis points on a year-over-year basis, benefiting from higher volumes and effective management of price cost offset by unfavorable mix and favorable defense programs in the prior year. On a rolling 12-month basis, orders increased 7% and with especially strong growth in commercial and defense aftermarket and commercial OEM.