Q2 2021 Eaton Corporation PLC Earnings Call

August 3, 2021

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Eaton second quarter earnings Conference call. At this point all the participants are in a listen only mode. However, the will be an opportunity for your questions. You may queue up for a question at any point during the call simply by pressing 1 then.

Zero on your Touchtone telephone if you need any assistance during the call. Please press star zero and operator will assist you offline as a reminder, today's call is being recorded I'll turn the call now over the young Jin Senior Vice President Investor Relations. Mr. Jin. Please go ahead.

Hey, good morning, guys I mean, the engine Eaton senior Vice President of Investor Relations. Thank you all for joining us for Eaton the second quarter 2020, while earning call with me today are Craig Arnold, our chairman and CEO and Tom Okray, exactly the West President and Chief Financial Officer, All of our agenda. Today includes the ultimately remarks by Craig highlighting of the.

Companys portfolio in the second quarter as we have done our past calls we'll be taking question of at the end of the Craigs comment the price of release and the presentation. We'll go through today have been posted on our life site at Www Dot E. <unk> Dot com this presentation, including the adjusted earning per share adjusted free cash flow and other non-GAAP.

<unk> the recon sales in the appendix a webcast of this call is the festival our website and it will be available for replay I would like to remind you of that our comments today will include statements related to the expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our.

Forecast of the projections due to a wide range of risks and uncertainties.

Maybe in our earning release and presentation with that I will turn it over to Craig. Okay. Thanks, Dan. So I'll start on page 3 like we normally do with highlights of the quarter and I'll summarize by saying that we had another very strong quarter with and.

And we're seeing significant increases obviously in our markets and the rig.

<unk> of that we're taking our 'twenty 1 guidance up for the second time, our teams continue to perform at a very high level, despite significant supply chain disruptions and rising commodity costs.

Q2, adjusted earnings of $1.72.

Where Q2 record, 15% above the midpoint of our guidance and earnings were up nearly 100% versus last year and importantly, 20% sequentially.

Our sales were $5.2 billion of 35%, 27% organically and above the midpoint of our guidance for.

For the second quarter in a row, we delivered record segment margins.

Q2 margins were 18, 6% of 390 basis points from prior year.

And up 90 basis points sequentially.

We're also pleased with our income to margins of 30%. We think strong result, given the material cost headwinds that we're facing.

Our order growth was perhaps the the biggest highlight of the quarter orders were up more than 40% in each of our electrical segment and both ended the quarter with record backlog.

And our portfolio transformation continues we close the.

The acquisition of carbon emission systems, and our 50% ownership in Jiangsu of gaining electric business in China.

We're also pleased to have completed the sale of hydraulics Danfoss yesterday for $3.3 billion.

The sale of Hydraulics is certainly a successful outcome for Eaton.

Our shareholders and for Danfoss, who we think will be an excellent owner of the business.

We want to thank our form of hydraulics employees for the loyal service Eaton and we wish them well under the leadership of Dan for Us.

Lastly, we continue to make strong progress on our strategic growth initiatives and I'll point out of a few highlights on the next slide.

So turning to page 4.

You've heard us talk about the 3 most important.

The growth trends for the company electrification energy transition and digitalization.

We're making significant progress in all 3 areas and we're seeing strong results.

Highlighting a few notable examples I'll begin with electrification, where we've had significant wins in both our electrical and vehicle businesses.

In vehicle.

We delivered $50 million of new wins for electric vehicle Powertrains, which includes EV transmission EV gearing and EV differentials.

And I'm, noting this example, because it demonstrates that even in an area of where many of you think about as our traditional vehicle business electrification is creating very large growth opportunities for the company.

In electrical as you would expect our team secured track.

Attractive wins tied to renewable energy and residential applications in this case with noting of win with the leading solar and energy storage OEM.

In energy transition. We recently won a large distributed energy management project for a leading financial services company.

This is the Greenfield project and a Great example of building as the grid solution.

Eaton will be providing the low and medium voltage switch gear or foresee of electrical power monitoring software.

Our micro grid controller.

And digitalization of our bright layer team delivered a win in the industrial market with a leading global chemical processing company.

To provide remote monitoring software solution.

In this application our solutions really leverage Eaton portfolio of electrical hardware.

Along with our expertise in power management, the blood the customer.

Real time operational data alarms and insights that are delivered directly to their mobile devices.

In addition to the operating benefits the customer will be able to use bright layers of industrial trending and measurement data to optimize energy usage.

So it's an exciting time to be at the center of the story growth trends and we'll certainly keep you updated as we continue to progress in this area.

Moving to page 5 we summarize our Q2 results and I will point out just a couple of highlights here first on 35%. The total revenue growth, we delivered a 71% increase in operating profit.

Very strong operating leverage.

Our adjusted earnings of $690 million increased by 99%. So we're also effectively managing our corporate costs.

Overall, our teams of certainly executing at a very high level.

The efficiently managing supply chain constraints, increasing productivity and delivering the expected benefits from our multi year restructuring program.

And of trend that we expect to continue for the balance of the year.

Turning to page 6 we summarize the results of our electrical Americas segment.

Revenues were up 15% organically driven by strength in residential and data center markets, but we also had solid growth in commercial and institutional markets as well.

The acquisition of Tripwire added 8%.

Favorable currency added 1 percentage.

Looking at our sequential growth.

We were up 8% over Q1.

And historically, we have seen of 5% lift between the quarters. So I would say our growth rate is accelerating here.

Our operating margins increased 60 basis points to 21, 3%.

Q2 record.

This is the 190 basis points above pre pandemic levels in Q2 of 2019.

Our portfolio changes.

Sales of lighting and the acquisition of AAA.

Solid execution and benefits once again from our multiyear restructuring program all contributed to the improvement.

We're also pleased with the 43% growth in orders in the quarter.

<unk>, 13% increase when the rolling 12 month basis.

This led to also a 43% increase in our backlog, which now sits at record levels.

We had broad or the strength in all end markets with particular strength once again in data centers.

Residential and commercial and institutional.

Youll recall that at the end of Q1, we started to see some large orders in select commercial market.

This pattern strengthened in Q2, and our negotiation pipeline in the commercial market was up significantly.

Data all data, which suggest that the second half of the year and really going into 2022 should see solid growth.

Turning to page 7 you will see the financial summary of our electrical global segment.

And as you can see we had strong organic growth year up 22% and currency added from 6%.

Like the Americas organic revenue growth was driven by residential and datacenter markets.

But we also had broad based strength in commercial and institutional and utility and in industrial markets as well.

We posted strong operating margins of 18, 3%.

Once again of Q2 record of.

230 basis points from last year, and up 130 basis points sequentially.

The incremental margins 1 of the organic basis were solid at 32%.

<unk> once again of good cost control and benefits from our multiyear restructuring program.

Orders were also very strong up from 46% from last year and up 10% on a rolling 12 month basis.

Once again, we had strength across all markets with particular strength in data center and residential markets.

And we ended the quarter with record backlog up from 50% from last year.

Moving to page 8 we show the results of our aerospace segment.

While we are of a long way to go we're starting to see signs of recovery in this market, which posted 17% growth in the quarter.

As you know we closed the Cobham transaction on June <unk> and the business delivered solid results in the month of June, adding 16% to our quarterly revenue.

Currency also added 3 percentage.

Operating margins were 21% of.

600 basis points from last year, and 250 basis points sequentially.

With improving volume the team executed extremely well delivering 50% incremental margins on an organic basis.

Orders on a rolling 12 month basis, our sell down of 16%, but this is an improvement from down 36% in Q1.

In fact sequentially orders were up 12%.

The commercial industry is seeing an increase in leisure travel, especially in the domestic market.

But the international travel continues to be down sharply.

We think the market will grow over the next several years, but we don't expect it to return to 2019 levels until 2024.

Lastly, our backlog here of stabilized and was flat with last year.

Next on page 9 you see the financial results of our vehicle segment.

<unk> revenues more than doubled with strength in all regions operating margins were 17, 9% and we delivered very strong incremental margins, which were over 40%.

The margin performance was driven by higher volume certainly, but also once again from the benefits from the multiyear restructuring program.

Despite volume still being down from 10% to 15% below pre pandemic levels. The business has really already sitting on the cusp of achieving our long term margin target of 18%.

Now turning to page 10, we show a summary of our E mobility business.

Our revenues were up 57%, 54% organically, 3% from positive currency the.

The organic revenues were driven by strong growth really in all E mobility markets around the world operating margins were negative 6.8%.

They continue to be depressed by heavy investments in new programs.

As you know we're investing in.

Segment, and high voltage power electronics and power distribution of power protection.

But you should also be aware that we have significantly expanded our view of the market here, we now see large opportunities for our traditional business in the E mobility segment.

These technologies include EV gearing EV transmission torque control solution.

As I noted earlier and we already of win in these areas.

In fact, our traditional products of increased the size of the addressable market for E. Mobility, we think some $5 billion or so continues to be a really exciting segment and a big part of the company's future.

Moving to page 11, we've updated our guidance for 2021 organic revenue.

And as you can see we are significantly increasing our organic growth organic revenue growth for the second time this year with an increase in most segments.

In fact, we're raising the midpoint of our organic growth guidance by 400 basis points from 8% to 12%.

And this is on top of of 300 basis point increase that we took in Q1.

The largest increases are in electrical global and vehicle with smaller increases as you can see in the Americas in E mobility.

With very strong first half robust order book and a growing backlog, we're comfortable with the 11% to 13% growth outlook for the year.

This is despite quite frankly, some of our markets that remain in the we'd say we're in the early stages of recovery, notably commercial construction industrial oil and gas and commercial aerospace.

We expect to see certainly continued recovery in these markets over the balance of this year and we think it bodes well for 2022.

Next on page 12, we show an update of our segment margin guidance for the year.

For Eaton overall, we're increasing segment margins by 30 basis points at the midpoint.

From 18, 3% to 18, 6%, which will once again be an all time record for the company.

The 30 basis point increase as you know follows the 50 basis point increase that we reported following our Q1 earnings call.

And we've raised the margin guidance in each of our segment with the exception of view mobility.

We continue to expect the organic incremental margin of around 30% and for price and commodity cost to be approximately neutral for the year.

Our team there has certainly been very effective at managing through these complexities related to price increases and supply chain constraints.

You would expect this to continue through the balance of the year.

And on page 13, we of the remaining items of our 2021 guidance.

We're raising our full year adjusted earnings per share by <unk> 63.

To a range of $6.58 to $6.88.

At the midpoint of $6.73.

This is a increase of 10% over our prior guidance.

The 37% increase over 2020.

You'll recall that we raised guidance by <unk> 50 in Q1.

With this increase we're now forecasting a 20% increase from the midpoint of our original guidance, which was $5.60 of them.

With our recent M&A activities, we now see net headwinds of 1% from acquisitions and divestitures and the sit down from our prior outlook of 4%.

We now expect positive currency of $350 million up from our prior forecast of $200 million.

And we're also raising our guidance for adjusted operating cash flow and adjusted free cash flow, both up $200 million at the midpoint.

The increase is really driven by a combination of higher profits.

Organic growth in sales the timing of acquisitions and divestitures, but also partially offset by some investments that we're making in working capital given the current.

Constrained supply chain environment.

The remaining components of our full year guidance remain unchanged.

And lastly, our Q3 guidance is as follows we expect earnings to be of $1.72 to $1.82 organic revenues to be up 11% to 13% and per segment margins to come in between 19% of $19.4 per channel.

And lastly, I'll wrap up the presentation on page 14.

You've heard us talk for the last few years about.

E transformation into an intelligent power management company.

The strategy is built on the belief that there is a few secular growth trends.

Electrification energy transition and digitalization.

That will allow the company to grow at a much faster rate than we have historically.

And every day, we get confirmation that we're on the right path.

We're seeing it in the growing importance of sustainability initiatives and.

In Society, we're seeing it in government spending and we're certainly seeing it in our opportunities and in a win.

We're pleased with the price that we've made on the portfolio. Each move has been consistent with our objectives of delivering a company.

Faster growth higher margin.

And better earnings consistency.

And you've seen our track record on margin expansion the.

Eaton business system is what provides the consistent approach to how we run the company, how we execute and how we expand margin and it's working.

And this enables us to be on track to expand margins by the 400 at the 500 basis points over the 5 year planning period and as you can see we're running ahead of plan.

And we're committed to our sustainability goals.

<unk> the right thing to do for society, but just as importantly sustainability is at the core of what's driving our growth.

I'd also note that we published our 2020 sustainability report and our first task force from climate related financial disclosure reports at the end of June.

We encourage those of you who are of special interest of sustainability to read it I think theyre extremely well done and reflect the director of the company is headed in.

Lastly, we continue to generate very attractive cash flow.

The generate very attractive cash flow over $9 billion through 2025, which will allow us to return cash to shareholders and also make investments to grow the company.

And as you can see we're off to a very strong start in 2021 at the midpoint of our guidance. Once again revenue is expected to grow 12% and earnings by 37%.

So with that I'll turn it back to Jan and open the line for questions. Okay. Great. Thanks, Craig for the Q&A section of our call today, we would like to ask you to leave in the Europe opportunity just 1 question and 1 follow up thanks in the last of all your cooperation with that I will turn it over to the operator gives you guys. The instead of.

John.

We're using a speaker phone please pick up the handset of more pressing in the numbers. Once again. If you have a question you May press 1 zero at this time and first with the lineup of Josh <unk> with Morgan Stanley. Please go ahead.

Hi, good morning, guys.

Good morning, Josh.

I was wondering if you could talk a little bit of what the composition in orders and electrical clearly pretty solid there, but hoping for a little bit more color on maybe the cyclical.

Yes momentum versus the secular kind of of electrification.

I appreciate the examples on slide 3 but really trying to get at how much of this is sort of illustrative versus something that you see.

Yes, we're really moving the needle here.

In the short to medium term.

I'd say, it's really a combination.

To your point, Josh of both of those and the orders were really strong across all geographies and end markets as.

As I've mentioned, the highest growth coming in data centers and residential.

And we talk about the secular growth trends that will be such an important part of the future of the company. We still believe strongly we're just in the early innings of really seeing a material impact from some of these bigger secular growth trends that are going to drive we think the future of the organization.

We're not seeing any benefits around government kind of infrastructure spending yet and so I'd say a lot of what youre seeing today I just think of the reflection of the broader strength in many of our end markets and certainly we always talk about data centers is a great example of the royalties consuming processing of ensuring increasing amount.

The data so I think of lot of what Youre seeing today.

Is is restocking because markets have certainly been strong in many of our end markets and inventories were taken down pretty hard during the pandemic last year and so I'd say once again broad based strength.

Standing orders as well as negotiations in the commercial and institutional side of the business as well.

It really has been a story of a fairly broad based strength in the orders across almost every end market and every geography.

So at this juncture, we think we're at the very front end of what should be pretty exciting runway as we look forward as some of the longer cycle businesses, we talked about whether that's commercial construction or oil and gas.

Some of these other markets large projects start to come back into the business.

We think this should go on from a wireless bill.

Got it and then just on the Incrementals.

You guys are going to be in the kind of low to mid <unk>. This year.

Off of really great decremental margin control of last year, and presumably some strain the cost for hydraulics.

Pretty well documented.

The inflationary environment.

Is the the normalized range.

Once we kind of clear some of the noise out of that still in the 30% to 35% or can we go higher as.

And maybe some of these headwinds normalized participate.

We think the 30% incremental toward from a planning guideline. It still makes sense at this point as you think about modeling the company on a go forward basis, clearly, we're having to make some fairly sizeable investments in the business right now as we deal with.

Our revenue growth outlook that is more robust than what we've seen historically, so we'll be putting some investments in the business will also obviously investing pretty heavily right now in electrification in places like E mobility, and as well as in other aspects of the business like in the brightly of platform that will bring online. So we think that the 30% increment.

It'll number is sell of good planning guideline as you think about modeling the future of the organization and its largely I think on the function on the basis of the investments that we're going to be making in the business.

Perhaps we'll pull back from what could be.

The incremental story that would expand but given the investments that we think are important to make for the future growth of the company. We think 30% makes it makes a lot of sense.

Understood I appreciate all the color. Thanks. Thank you.

And next question is from Andrew <unk> with Bank of America. Please go ahead.

Hi, guys good morning.

Good morning, Andrew.

Yes, just maybe to go into little bit more depth on the production construction for second half of 'twenty 2.

What are you hearing from the customers and just trying to get a sense of how much visibility.

Is there into 2022.

Yeah No I appreciate your question of commercial construction, that's obviously been a point of a lot of debate in general and so as we talked about in Q2, and our order growth of the commercial structure was really in line with the rest of the business with more than 40% growth for the entire sector.

With the quite frankly, particularly strength in the global segment as well.

And so we continue to see positive signs of commercial construction markets and we don't think there's any reason why.

There should be any lead of in those markets. If we think about pointing to the second half of this year or into 2022.

Negotiation pipelines, which as we talked about on prior calls preseason order, obviously in our negotiation pipeline for both light commercial as well as large commercial projects, including commercial buildings was up very strongly year on year and up actually very strongly sequentially as well.

And so at this juncture, we are optimistic that commercial construction.

We'll come back and we think the second half of this year and into next year should post fairly strong growth.

Thank you Craig and just my follow up question. This has been a strength recovery, but.

The other industrial cost of customers do you see them thinking about Capex differently. I think you did highlighted before your high content in terms of Captisol. So that's 1 thing that kind of growth driver, but what kind of longer term. Our conversations are you having and do you think people are thinking differently about the capex needs the cycle versus the.

The prior decades. Thank you.

Yeah, and I think it's fair to say that on the industrial side of the house in general really.

Of course, many of our end markets has probably been historically from Underinvestment. So I think of you on the 1 hand, theres going to be some catch up that needs to take place.

Then I think the big challenge that everybody is dealing with is fairly sizable labor shortages.

And many of the markets around the world and so investments in the.

The industrial and automation and the life tends to be what follows and so we think of the industrial markets of another 1 of these markets that I think.

In the relatively early stages.

The recovery has been relative underinvestment in manufacturing over the last number of years and so we think that market should do well.

Into 'twenty, 2 and really quite frankly beyond.

Thank you so much.

Next we'll go to Scott Davis with Melius Research. Please go ahead.

Hi.

Good morning, guys good morning, Greg.

Yes.

Ken.

Craig can you talk a little bit about where you guys. What's your strategy in EV charging.

No other kind.

The content with being a <unk>.

Supplier into it or whether you.

I wanted to perhaps take.

The bigger role there.

I'll just leave it at that.

Yes. This is this has certainly been.

At the core of our.

Our strategy for our electrical business annuity out of and the team spent some time during our Investor day really.

Taking you through strategically what we're trying to get done there and it's 1 of the reasons why we made the acquisition of Green motion, We acquired Green motion, which is the European company that.

It does everything from the physical hardware of charging all the way through the charge port operating and billing systems and so we think that.

E charging.

Whether thats residential commercial buildings or really more on the grid.

Grid scale.

Or.

And the bigger industrial applications is going to be an important part of what we're trying to do inside of our electrical business. Those markets. As you are seeing and you see it reflected in some of the infrastructure bills that are being proposed in the U S. You see fairly sizable investments that have taken place in Europe and in Asia.

So we do think E charging both in the physical hardware as well as in the software will be an important part of what we're just going to try to get done in our electrical business. So it's an exciting space. It is going to grow dramatically and we'd expect to be of part of it.

Okay helpful. And then just as a just.

Follow up on E mobility, I mean can you give us a sense of.

On the wins that you're getting.

What is the kind of a content what does it what does good look like on the content story for you guys on an electric vehicle. It could just be an illustration of our example, if you want but.

Trying to get a sense of that.

Yes, and its tough its tough to really pick a typical E mobility vehicle, but I will tell you that as we've talked about once again at our Investor day that the content opportunity for Eaton and in E mobility applications.

<unk> is a huge multiple of what we saw on our legacy business.

And whether that in some of the new electronic based.

The Inverters converters power distribution, but I said it also even in our legacy vehicle business and Thats what were really highlighting this quarter that you think about this legacy business that we had.

Hey, what's going to happen to that business in the context of the world's transition to electric vehicles. When we say hey, this is a huge growth opportunity.

In gears and differential.

Transmission hybrid transmissions for our legacy business as well and so those opportunities for us.

And we laid out of goal of getting to $2 billion to $4 billion between now and 2030, but the opportunity set is much larger in order of magnitude 510 times greater than it would be for our traditional vehicle business, where we're doing valve and valve actuation and some charging so it's.

Tough to pick a typical vehicle I can tell you where we have wins, we have headwind once again these wins and these opportunities are coming once again and multiples of 5 to 10 X. What we would have on a historical of vehicle platform.

Okay. Good luck correct. Thank you.

You.

Our next question is from Joe Ritchie with Goldman Sachs. Please go ahead.

Hi, Thanks, good morning, and congrats on the quarter. Thanks.

Thanks, John I appreciate it.

Hi, Craig maybe just on the E.

You talked about the price cost equation basically being neutral for the year, but I'm just curious like as it relates to the Q2 and the rest of the year like what what did that look like in Q2 for you guys and then.

Is there is there any particular quarter, where we should expect any headwind.

Yes.

Any thoughts around like how.

How far ahead you are of inflation at this point.

Yes, I appreciate the question, we're obviously dealing with.

Fairly sizable challenges in and around supply chain and probably no secret and we are on the call when.

When we provided our Q2 earnings guidance at the end of Q1, we had an expectation around the amount of commodity inflation that we've seen in the business in the commodity price is quite frankly have only gone up.

And in some cases fairly significantly since that time.

We've naturally as an organization of had to continue to work to offset additional commodity price inflation more than what we anticipated and I do really think about that whole thing, maybe even shifting of whole quarter in terms of.

The pressure point that we expected to see in the business and so.

At this juncture when we think about the year, we call of calling the year neutral. We don't think it gets worse in terms of.

The impact on our company on the balance between price and cost, but we think the year of the year as neutral and we think the pressure point in Q3 are going to be probably as great as what we expected in Q2 as a result, quite frankly of seeing commodity prices continue to run and once again, we're <unk>.

Wanting to obviously catch up with that in terms of the things that we're doing around taking prices up in the market as well as working with things to take cost out of the out of the organization.

So neutral for the.

The things that probably shifted according to the rate based upon the fact, the commodity prices have continued to run.

Got it that's the.

Helpful context, and I guess, maybe my quick follow on question, 1 area that really surprised us to the upside of this corner with your Aero margin.

So I was wondering if you can maybe try to help parse out what really kind of benefited aero this quarter.

And should we start thinking about 2000 classes like the baseline as we start the speed of recovery in the commercial air business.

Yes.

And I think if you think about in simple terms our team when we were dealing with kind of this pretty dramatic downturn last year.

The setting an expectation that we would not see these markets come back to 2024 of the team very proactively and aggressively put in a number of restructuring program to take out.

Some of the fixed costs that we knew would be of challenge on a go forward basis, and so I would really attributed to the team being proactive.

Putting in the restructuring early in the downturn.

And then really doing an effective job of running the business as well as managing.

Managing costs.

Terms of the expectation going forward, yes, I think it's reasonable to say that as this business improve we we.

Approach 25%.

<unk> sales in our aerospace business.

Back in 2019 prior to the downturn.

And our goal is certainly to get back to those numbers, but I do think something north of 20% is where really we'd expect the business to perform and it certainly as volume comes back to work our way back towards the 20%, 25% return on sales that we used to be.

Makes sense. Thank you.

Next question is from Nigel Coe with Wolfe Research. Please go ahead.

Hey, Craig Hey, this is Brandon really going on from Hydro <unk>.

Just wanted to piggyback off of that Arrow comment.

Also kind of not in the spotlight on the top line, but certainly very strong performance on the margin.

Maybe just some more color on the components of aerospace.

How did commercial OE.

Aftermarket defense performed in <unk>, and maybe just a follow up would be what is the outlook for defense has it changed at all since our last.

Thank you.

Yes, I appreciate the question and I would say that our aerospace business properly.

Not too much of an outlier from what you've seen from others in the market clearly the commercial side of the house continues to be under pretty significant pressure.

While we're certainly seeing revenue passenger kilometers of return.

Of those markets to sell running.

Well below where they ran in 2019, we did see a little bit of an improvement in aftermarket in the quarter as the.

Is that business.

Certainly off.

Dramatically last year, and so I'd say that from the commercial OE continues to be weak commercial aftermarket still weak versus where we've been historically, but improving and really in the on the military side of the house I would say pretty much no change and when you think about that.

The business being kind of low single digit grower is kind of our outlook for the military market and we think thats pretty much consistent with what we think the outlook is going to be over the over the near term as well.

No.

A lot of the once again the margin piece really I'd say, the more mostly a function of our team's ability to execute wasn't in any way driven by let's say of dramatic mix shift too.

<unk> aftermarket business overall.

Okay.

Our next question is from Jeff Sprague with vertical research. Please go ahead.

Hey, Thank you good morning, everyone.

Good morning, Jeff.

Hey, good morning.

Maybe just a question on.

Kind of backlog conversion and also just kind of the scramble going on in the channel Craig you mentioned.

You did the thank you saw some channel inventory.

The build out there.

We've heard a lot of mixed things from other companies on that things like people like the rebuild inventory, but can't because theres not availability et cetera.

Maybe you could just give us a little bit of color on on that dynamic.

Do you think we're somewhat caught up on inventory relative to where the demand is.

The way I'd characterize it today is as we think about kind of going the channel checks with our distributor partners I'd say.

On balance in aggregate inventory levels, probably match the the outlook for the demand that we expect but then there are certainly certain segments of the market where were woefully short in <unk>.

Good point of care case in point would be what's happening today in the residential market currently and the residential markets in electrical.

Well short of where we should be and our distributors have not been able to restock.

The fact that we're building.

Fairly sizable backlog is a reflection of the fact that some of these end markets.

I would like to have.

More inventory than they're currently sitting on but in aggregate I do think that E.

Inventories of probably largely in line with with our view and our outlook and.

True, but as outlook for the market going forward other than and certainly certain of the sub segments of the market.

And so the backlog growth.

You would attribute.

Mostly or it sounds like completely to the demand side as opposed to you or maybe inability to deliver a few things in the quarter net.

No I think there's a combination I think as we mentioned there are the certain sub segments of the market where clearly.

We there's more demand.

In residential construction as an example, then we have the ability to ship sales.

I think it's I think it's a combination of the 2.

But I think on aggregate once again.

The markets are good the underlying demand is good in most of these end markets and Theres certainly no inventory buildup, taking place from the channel.

But I do think that the fact of the backlog has grown to the extent of it has once again the record backlogs in both the Americas and global.

Up from 40% in both.

Segment, I would say is that mostly a function of the fact that the markets are true.

Bounding quite nicely right now.

Great and maybe just the.

Follow up if I could just on the you called out the end of the remarks with your commentary on your deal capacity.

Okay.

And obviously you guys at the Super busy yourself.

Maybe you could just comment a little bit on on the pipeline whether the organization.

Can do more is ready to do more.

What might be actionable.

Is there something else actionable before year end here.

No I appreciate the comment and the team has been I'd say very successful.

Really betting down the number of acquisitions at the.

It's very strategic at very attractive.

Multiples, we think as well and it is to your point I'd say the deal activity is certainly heated up in the pipeline today is probably.

About as full as it's been in some time and I would say, we do have capacity, depending upon which segment of the business you are talking about and I.

I'd say that 1 of the the good things about being kind of an organization that works across multiple businesses and industries is that and doing the deals the size that we've done is that.

None of these deals are going to be so big that they are going to really consume the capacity of the entire company and so if you're talking about some of the things that we've done recently and aerospace yes, they may be a little bit full on the fuel and motion side of the business.

But we have capacity maybe on the other side and the same thing would be true in electrical we really havent done very large deals and electrical we've done very strategic deals we've done deals that I think.

Sure.

The outstanding additions to the portfolio, but I would say by and large in our electrical business. We have plenty of capacity organizationally to go out and find opportunities and to bring them in and integrate them in and that will not be of bottlenecks or a limiter in terms of R. E.

Ability to actually go out and do.

<unk> transaction and we continued to say once from a priority standpoint, we continue to be focused on electrical and aerospace as the 2 places that will likely the deploy capital.

Great. Thank you.

Next we'll go to Nicole the blades with Deutsche Bank. Please go ahead.

Yes, thanks, good morning, guys.

The morning Nicole.

And can we just clarify a couple of things in the guidance I guess.

How much of their raised the EPS from.

The early close of carbon.

And the hydraulic and for an extra quarter and then can you. Just also to clarify did you include 1 month of hydraulics in the <unk> guidance given that the deal closed in August or has that been removed from Craig Hill.

Yeah.

We just maybe I'll work backwards certainly own hydraulics for the month of August and so for that month. We did in fact the include hydraulics in the guide and so that would add Florida.

Meanwhile, the way the Ikea Craig.

If you look at the 63% guide increase first of all we flowed through the 22 D E and within that 22 <unk>. We had about 7 cents is related to M&A timing <unk> hydraulic <unk> compounds and then we had another 13.

Which was the <unk> for hydraulic and 9 Cobham. So in total M&A timing was 20.

Of the 35 E, which is the 20% flow through in the 13th of the remaining timing and then the remaining 28.

As related to operational performance.

Okay, that's really clear thanks for that clarification.

And then I guess can we just talk a little bit about what you guys are seeing in China, obviously, a lot of noise with what's going on from the data perspective.

Question is about the stimulus from here, but have you seen any filing in Europe.

Yes, no I'd say, none of them I mean, our business in China.

Grew quite strongly you know we reported as part of our electrical global segment, but I would say that the underlying strength that you saw in our electrical global segment is also reflective of what we've seen in our China business as well.

Market.

And we'll see what the future holds but the market to date has performed extremely well and our team has performed extremely well in addition to that.

1 of the things for US, we've always believed in manufacturing and being local in local markets and 1 of the reasons why we've made these investments in these joint ventures.

2 of them that we've done so far in <unk>.

China to really expand our access to the market and of the huge tier 2 and tier 3 markets in China that we've historically not participated in these 2 jv's I'd tell you it really creates an exciting opportunity for our company as we move forward to really participate in the largest segment of that market.

Really strong partners in China, So for US I would say market is important.

Perhaps even more important in the market is really our opportunity to penetrate the market and grow market share on the basis of really now participating in these very large segments of the market that historically have been closed to us.

Thanks, Craig.

Okay.

Next we'll go to David Raso with Evercore ISI. Please go ahead.

Alright, Thank you for the time.

On the electrical focus for M&A can you help us.

I think through where the areas of focus moving forward is it more geographic as a vertical I guess ideally of technology that can cross geography, and verticals, but just give us a sense of where you see the portfolio from here still having opportunities and maybe some holes and then I just wanted to follow up on the strong doubling of organic sales.

The growth guide per electrical global.

Maybe a little more color on what's accelerating so much from your thoughts of 3 months ago.

Maybe update us if you could on just currently the geographic sales mix of electrical globally.

Yes.

On the M&A focused questions, specifically I would say that if you just think about it strategically we've laid out.

As a company the spree kind of major secular growth trends of electrification energy transition due to utilization.

That will be kind of a good kind of framework, where do you think about where we are likely to deploy M&A dollars.

In terms of following the strategic kind of.

The growth vectors that we think are important to the company when you think about <unk>.

The company like Green motion think about acquiring the company like trip light.

Which is really in.

The datacenter is it <unk>.

<unk> expansion is you.

Think about what we've done.

We ought to be really thought.

Thought about it as an expression of the strategy and the areas that we said that we'd like to really take the future of the company. In addition to that if you think about of geographically.

We have huge opportunity outside of the Americas market too to really round out the business portfolio and participate as we mentioned like in China and some of these very large markets that have been historically close to us we have those kinds of opportunities in <unk>.

<unk> sales, we have some of those opportunities that still remain in Europe, and so there will be some geographic plays where we will actually do things to augment supplement the portfolio as a way of participating in markets that we have historically essentially not played in the as fully as we do let's say in the North American market.

So I think youre going to find net.

It is a pretty wide.

Net of opportunities that we have to continue to look at ways of growing the company through M&A in our electrical business based upon these broader strategic platforms as well as the geographic expansion and filling some of these product gaps in some of these other emerging markets of the world.

The other question that you had with respect to kind of the.

The global.

Business and why the increase of the Guy I'd say, 1 you just think about on a relative basis.

The global markets fell.

More than the Americas business and so the comp is a little easier there, but also in some of these global markets of specifically in Europe. For example, they are now coming back the reopening of these markets is also.

Coming into the business at a time when once again.

The markets of ramping and so the same kind of reopening kind of phenomenon that took place in the U S off of a higher base because they didn't close as much is now starting to take place in markets across Europe, and as I said if every place.

It's not just in the.

These historical hot segments of data centers.

The residential we're seeing it in commercial and institutional thing at industrial we're seeing it in utility with the really it's broad.

Set of end markets out of really responding nicely in Europe, and quite frankly in Asia as well.

Economies continue to open up into our underlying growth in Asia and the underlying growth in the European pieces that make up the global business those markets I'd say, both performed very well.

The 1 segment that if you recall that we report inside of the global net tends to be of will be more of a later cycle play will be what's happening in our crouse Hinds business, which which is kind of of the place where we really get most of our oil and gas exposure that.

Of that market is starting to see.

<unk> of Green shoots.

So certainly not back the levels that of was that historically, but we think <unk>.

Half of this year and into 22 that market also starts to come back and should help continue to drive growth in the global segment and so it's really of that.

The kind of a broad range of these end markets most of which that are doing well right now.

Obviously, it's pretty broad, but if maybe you can help us with just some numbers update us geographically the current mix.

And I assume crouse hinds rates.

Within the industrial piece within electrical global if you can remind us roughly the size of the Crouse Hinds nowadays.

Yes.

Maybe we can maybe you can we can take that 1 offline. David you can talk to John about what we've given historically in terms of the business just want to make sure. We were consistent with what we provided the historically in terms of splitting out the global segment and so we don't end up with the select the disclosure it yourself.

Yeah. That's fine. Thank you very much I appreciate the time thank you.

Next we'll go to John Walsh with Credit Suisse. Please go ahead.

Hi, good morning, everyone.

Good morning.

Wanted to build.

Build up on a couple of earlier questions.

I appreciate the price cost commentary for the balance of the year, but just wondering as you look across your portfolio and as we think about Incrementals next year, where do you think price will be most sticky.

And maybe you could just remind us the historical experience coming off of the.

The last deflationary cycle I think.

Under the prior segments products held a little bit more price in the systems business, but any color there would be helpful.

Yes.

Okay I appreciate the question on price cost.

In many many ways, we're kind of all kind of working through this period of unprecedented commodity inflation and learning together in terms of where it's actually going to land.

As I said earlier, we anticipated that we would have seen the worst of it.

In Q2, and it looks like a lot of those pressure points have been pushed out into Q3 into until the second half of the year and it's a.

And once again I think as a general rule, we talked about being neutral between price and cost and I don't think of any reason the suggest that that won't be the case at the price cost we will continue to be neutral.

As you can imagine put a little pressure on our incrementals as well as you don't typically get a normal incremental on commodity inflation and so in terms of how it impacts incremental it obviously puts downward pressure on incrementals, but having said that we still think 30% from a planning perspective.

It is the right way to think about Incrementals for the company.

On price stickiness, I would say that.

Typically speaking if you're in an inflationary environment in the commodity costs are up.

The price is going to be sticky and so in this kind of environment, it's never easy to get price, but I'd say in this kind of environment, it's very understandable.

The prices are going to go up the very well publicized everybody is dealing with the same challenges and so I would imagine net price will be very very sticky in this environment given.

The supply shortages across the board.

The fact that markets are doing well really today, I'd say almost across the board and so.

This is never easy but.

This is probably.

1 of the easiest times at least in my professional career too actually.

Pass on price because.

Essentially the the environmental factors are essentially warranted it.

We're seeing labor inflation as well and so all of these things.

Bode well for at least the price environment and adjusting prices will likely be sticky through this part of the cycle for some time to come.

Great and maybe just a follow up to that a lot of color.

Given about.

Geographies of the last question, but we've seen very strong organic growth from a lot of your competitors as well.

Was just curious if you're noticing any discernible share shifts that you would call out.

Or if it's more kind of the strength of the market or do you think there might be some pockets where youre gaining share. Thank you.

Yes, I would say that if you think about it today I'd say.

Largely we.

The across the board there is always going to be quarterly timing, depending upon what companies do and in various end markets and segments or the geographic mix, but I would suggest to you that probably at this point in time of <unk>.

Given the fact that so many of us of dealing with supply chain challenges and theres, probably more business out there than any of us can handle and.

And we are building pretty large backlogs and probably other companies are as well. So my speculation would be that this is probably not.

Large share change has taken place at this point in the market, but we're probably holding market share.

In terms of our core businesses and we would imagine that.

Really until you get to the point, where you actually have enough capacity to serve the underlying demand overall when you stop building backlog that share shift its probably not going to be something that's a big part of.

The picture at least in the near term.

Great. Thanks for taking the questions.

Next we'll go to Julian Mitchell with Barclays. Please go ahead.

Hi, good morning.

Just wanted to ask about cash flow as I don't think that's been touched on yet.

So the free cash flow guide went up but if I look at the year's numbers in aggregate.

It looks like you're guiding for about an 11% free cash flow margin this year.

And the adjusted sort of conversion from net income is maybe in the mid to low 80% range.

So just wondered if you could sort of remind us.

What are some of those major headwinds on the free cash flow margin Nando conversion presence and if there are any specific items.

The capex coming down next year or working capital.

Headwinds easing.

1 of my thinking about cash flow margins in the conversion into 2022.

Julian issue. If you look at last year, we finished the year at $2.6 billion.

Free cash flow, which.

The strong year this year, we characterize it as a trend of declines here.

Having said that we're.

1 of spend roughly 200 million more in Capex, this year, which would take us down to 4 which compares to the midpoint of our guide to $2 billion I'd put that additional $200 million and investments in working capital and given given the environment.

But sort of as you think.

About 22 and beyond I mean getting.

Being above 100% on free cash flow conversion is certainly where you would expect technology the performance and as Tom mentioned this is really kind of a transition year.

Due to inventory build and increase in restructuring spending increase also in capex.

I think it's also important to note on an operating cash flow basis year to date.

We're a little bit ahead of last year. So.

We feel good about our cash flow performance this year.

Thanks for clarifying and then.

On the top line side.

Just wanted to try and understand what youre seeing in the utility markets at the moment.

There was a lot of sort of chatter out there.

Anytime, there's a storm or something about grid hardening and all of the rest of it.

So just wondered if you could give us an update on the utility piece.

And how the utility market growth this year.

Relative to your overall sort of electrical.

Revenue growth guide, which I think sort of average out globally in the low teens type range. Thank you.

No I appreciate the question on the utility market because as we've said before this is a.

Different market segment in terms of what it represents for Eaton and what it represents for growth than it has historically.

The historically of market, that's really been kind of a very low single digit growth market. We think as we look into the future for the utility market. We think it becomes 1 of the the faster growing segment inside of the company and so maybe that growth is mid single digits in the near term.

As you think about some of the big investments that have to go into energy transition first which is obviously a really big 1 and then net harvesting barrel things like grid hardening and grid resiliency.

Due to climate change.

And some of the weather related events that we've seen and so we like the utility market and we think that that market will will certainly be a growth market into the future I will say that we've not yet seen.

Once again these big inflection points that we would expect to see in the utility market. We think most of that growth is still out in front of us.

Those markets as you know they tend to move more slowly.

We have over the last number of the year seeing more investments going into the distribution side of the utility, which certainly plays to our strength, but but but the bigger plays that we think around.

Grid hardening, good resilient energy transition the <unk>.

Things that utilities are going to have to make fairly sizable investments and we think most of that growth is still out in front of us.

Great. Thank you.

Our final question will be from Ann Duignan with Jpmorgan. Please go ahead.

Yes. Thank you I appreciate you squeezing me in most of my questions have been answered, but maybe Craig asked similar question on data center demand.

Are you sort of progressed through the quarter.

Our term customers orders perspective, and maybe versus <unk>.

The Air and then maybe regionally also of what Youre seeing going kind of in data center demand. Thank you and I'll leave the tax yes.

Yes. Thanks, Dan appreciate the question and it's obviously 1 of the most exciting segments of that we're in.

And certainly the acquisition of a company like AAA shifts.

<unk> strengthens our hand, there in terms of what data centers represent for.

For the company overall and I'd say it's.

It's the 1 market I'd say, the we have very clearly for some time now the global strength you see in every region of the world and we see it across really.

Almost every segment of data centers, whether that's the on Prem whether it's the Colo operators.

Whether it's the Hyperscale.

The center market just continues to surprise to the upside and as we've said before that those markets that can be lumpy, there could be a quarter or 2 or even a.

The year or so aware of particular hyperscale.

<unk> will take the time to consolidate and not expand and so the business can be lumpy at least specifically in hyperscale, but the the projections for that market and what we've experienced is that it continues to surprise on the upside with respect of growth I think this year, we're talking about high teens kind of growth from the data center market.

And it did.

We've looked at that market and we've looked at our own forecast for that market is.

It's a big piece of what's performing better than what we originally anticipated when we put our guidance out for the year.

And once again this whole idea of.

More data more storage more compute.

The world's more connected.

So we think that there is a trend thats going to continue for a very long time into the future.

Okay. Good thanks, guys as always the chip and I will be available to do any follow up questions. Thank you and join us of a good day alright. Thank you. Thank you.

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.

We're sorry your conferences ending now please hang up.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Eaton second quarter earnings Conference call. At this point all of the participants are in a listen only mode. However, the will be an opportunity for your question you may queue up for a question at any point during the call simply by pressing 1 then zero on your Touchtone telephone.

If you need any assistance during the call. Please press star zero, and operator will assist you offline.

As a reminder, today's call is being recorded I will turn the call now of the young Jin Senior Vice President Investor Relations. Mr. Jin. Please go ahead.

Good morning, guys I'm Yan.

Engine Eaton senior Vice President of Investor Relations. Thank you all for joining us for Eaton second quarter 2020, while earning call with me today are Craig Arnold, our chairman and CEO and Tom Okray, exactly the West President and Chief Financial Officer, All of our agenda. Today includes the offering the remarks by Craig highlighting the company's performance in the second quarter.

As we have done our part costs will be taking question of at the end of the Craigs comment the price of released and the presentation. We'll go through today have been posted on our lifestyle and the www Dot E. <unk> Dot com this presentation, including the adjusted earning per share adjusted free cash flow and other non-GAAP measures the recon sales.

In the appendix a webcast of this call is the festival our website and it will be available for replay I would like to remind you of that our comments today will include statements related to the expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our forecast of the projections.

Due to a wide range of risks and uncertainties that are described in our earnings release and presentation with that I will turn it over to Craig Okay. Thanks, Dan.

We'll start on page 3 like we normally do with highlights of the quarter and I'll summarize by saying that we had another very strong quarter with.

And we're seeing significant increases obviously in our market and as of <unk>.

Of that we're taking our 'twenty 1 guidance up for the second time, our teams continue to perform at a very high level, despite significant supply chain disruptions and rising commodity costs.

Q2, adjusted earnings of $1.72.

For Q2 record, 15% above the midpoint of our guidance and earnings were up nearly 100% versus last year and importantly, 20% sequentially.

Our sales were $5.2 billion of 35%, 27% organically and above the midpoint of our guidance for.

For the second quarter in a row, we delivered record segment margins in.

Q2 margins were 18, 6% of 300 of 90 basis points from prior year.

And up 90 basis points sequentially.

We're also pleased with our from the margins of 30%. We think strong result, given the material cost headwinds that we're facing.

Our order growth was perhaps the the biggest highlight of the quarter orders were up more than 40% in each of our electrical segment and both ended the quarter with record backlog.

And our portfolio transformation continue we closed the acquisition of carbon emission systems, and our 50% ownership in Jiangsu of gaining electric business in China.

We're also pleased to have completed the sale of hydraulics Danfoss yesterday for $3.3 billion.

The sale of Hydraulics is certainly a successful outcome for Eaton.

Our shareholders and for Danfoss, who we think will be an excellent owner of the business.

We want to thank our form of hydraulics employees from the loyal service Eaton and we wish them well under the leadership of Danfoss.

Lastly, we continue to make strong progress on our strategic growth initiatives and I'll point out of a few highlights on the next slide.

So turning to page 4.

You've heard us talk about the 3 most important.

Secular growth trends for the company electrification energy transition and digitalization.

We're making significant progress in all 3 areas and we're seeing strong results hi.

Highlighting a few notable examples I'll begin with electrification, where we've had significant wins in both our electrical and vehicle businesses.

In vehicle.

We delivered $50 million of new wins or electric vehicle powertrains, which includes EV transmission EV gearing and EV differentials.

And I'm, noting this example, because it demonstrates that even in an area where many of you think about as our traditional vehicle business electrification is creating very large growth opportunities for the company.

In electrical as you would expect our team secured the track.

Attractive wins tied to renewable energy and residential applications. In this case, we're noting of win with a leading solar and energy storage OEM.

In energy transition. We recently won a large distributed energy management project for a leading financial services company.

This is the Greenfield project and a Great example of building as the grid solution.

Eaton, who will be providing the low and medium voltage switch gear, our fourth year of electrical power monitoring software.

Our micro grid controller.

In digitalization of our bright layer team delivered a win in the industrial market with the leading global chemical processing company.

To provide remote monitoring software solution.

In this application our solutions really leverage Eaton portfolio of electrical hardware.

Along with our expertise in power management the by the customer.

Real time operational data alarms and insight that of delivered directly to their mobile devices.

In addition to the operating benefits the customer will be able to use bright layers of industrial trending and measurement data to optimize energy usage.

So it's an exciting time to be at the center of these 3 growth trends and we'll certainly keep you updated as we continue to progress in this area.

Moving to page 5 we summarize our Q2 results and I'll point out just a couple of highlights here first on 35%. The total revenue growth, we delivered a 71% increase in operating profit.

Very strong operating leverage.

Our adjusted earnings of $690 million increased by 99%. So we're off of effectively managing our corporate costs.

Overall, our teams of certainly executing at a very high level.

They are efficiently managing supply chain constraints, increasing productivity and delivering the expected benefits from our multi year restructuring program.

And the trend that we expect to continue for the balance of the year.

Turning to page 6 we summarize the results of our electrical Americas segment.

Revenues were up 15% organically driven by strength in residential and datacenter markets.

Also had solid growth in commercial and institutional markets as well.

The acquisition of Tripwire added, 8% and favorable currency added 1%.

Looking at our sequential growth.

We were up 8% over Q1.

And historically, we have seen of 5% lift between the quarters. So I'd say our growth rate is accelerating here.

Our operating margins increased 60 basis points to 21, 3%.

Q2 record.

This is the 190 basis points above pre pandemic levels in Q2 of 2019.

Our portfolio changes the.

Sales of lighting and the acquisition of AAA.

Solid execution and benefits once again from our multiyear restructuring program all contributed to the improvement.

We're also pleased with the 43% growth in orders in the quarter.

<unk>, 13% increase on a rolling 12 month basis.

This led to also a 43% increase in our backlog, which now sits at record levels.

We had broad or the strength in all end markets with particular strength once again in data centers.

Residential and commercial and institutional.

Youll recall that at the end of Q1, we started the see some large orders in select commercial market.

This pattern strengthened in Q2, and our negotiation pipeline in the commercial market was up significantly.

Data all data, which would suggest that the second half of the year and really going into 2022 should see solid growth.

Turning to page 7 you'll see the financial summary of our electrical global segment.

And as you can see we had strong organic growth year up 22% and currency added from 6%.

Like the Americas organic revenue growth was driven by residential and datacenter markets.

But we also had broad based strength in commercial and institutional and utility and in industrial markets as well.

We posted strong operating margins of 18, 3%.

Once again of Q2 record of.

230 basis points from last year, and up 130 basis points sequentially.

The incremental margins of 1 of the organic basis were solid at 32%.

<unk> once again of good cost control and benefits from our multi year restructuring program.

Orders were also very strong up from 46% from last year and up 10% on a rolling 12 month basis.

Once again, we had strength across all markets with particular strength in data center and residential markets.

And we ended the quarter with record backlog up from 50% from last year.

Moving to page 8 we share the results of our aerospace segment.

While we have a long way to go we're starting to see signs of recovery in this market, which posted 17% growth in the quarter.

As you know we closed the Cobham transaction on June <unk> and the business delivered solid results in the month of June, adding 16% to our quarterly revenue.

Currency also added 3 percentage.

Operating margins were 21%.

600 basis points from last year, and 250 basis points sequentially.

With improving volume the team executed extremely well delivering 50% incremental margins on an organic basis.

Orders on a rolling 12 month basis are still down from 16%, but this is an improvement from down 36% in Q1.

In fact sequentially orders were up 12%.

The commercial industry is seeing increase in leisure travel, especially in the domestic market.

But the international travel continues to be down sharply.

We think the market will grow over the next several years, but we don't expect the returned to 2019 levels until 2024.

Lastly, our backlog here of stabilized and was flat with last year.

Next on page 9 you can see the financial results of our vehicle segment organic revenues more than doubled with strength in all regions operating margins were 17, 9% and we delivered very strong incremental margins, which were over 40%.

The margin performance was driven by higher volume certainly, but also once again from the benefit from the multi of restructuring program.

Despite volume still being down from 10% to 15% below pre pandemic levels. The business has really already sitting on the cusp of achieving our long term margin target of 18%.

Now turning to page 10, we show a summary of our E mobility business.

Revenues were up 57%, 54% organically, 3% from positive currency the.

The organic revenues were driven by strong growth really in all E mobility markets around the world operating margins were a negative 6.8%.

They continue to be depressed by heavy investments in new programs.

As you know we're investing in.

Segment, and high voltage power electronics and power distribution of power protection.

But you should also be aware that we have significantly expanded our view of the market here, we now see large opportunities for our traditional business in the E mobility segment.

These technologies include EV gearing EV transmission torque control solution.

As I noted earlier and we already of wins in these areas.

In fact, our traditional products of increase the size of the addressable market for E. Mobility, we think from $5 billion or so continues to be a really exciting segment and a big part of the company's future.

Moving to page 11, we've updated our guidance for 2021 organic revenue.

And as you can see we are significantly increasing our organic growth organic revenue growth for the second time this year with an increase in most segments.

In fact, we're raising the midpoint of our organic growth guidance by 400 basis points from 8% to 12%.

And this is on top of the 300 basis point increase that we took in Q1.

The largest increases are in electrical global and vehicle with smaller increases as you can see in the Americas in E mobility.

With very strong first half robust order book and a growing backlog, we're comfortable with the 11% to 13% growth outlook for the year.

This is despite quite frankly, some of our markets that remain in the we'd say we're in the early stages of recovery, notably commercial construction industrial oil and gas and commercial aerospace.

We expect to see certainly continued recovery in these markets over the balance of this year and we think it bodes well for 2022.

Next on page 12, we show an update of our segment margin guidance for the year.

For Eaton overall, we're increasing segment margins by 30 basis points at the midpoint.

From 18, 3% to 18, 6%, which will once again be an all time record for the company.

The 30 basis point increase to as you know follows the 50 basis point increase that we reported following our Q1 earnings call.

And we've raised the margin guidance in each of our segments with exception of E mobility.

We continue to expect the organic incremental margin of around 30% and for price and commodity cost to be approximately neutral for the year.

Our team there has certainly been very effective at managing through these complexities related to price increases and supply chain constraints and we would expect this to continue through the balance of the year.

And on page 13, we of the remaining items of our 2021 guidance.

We're raising our full year adjusted earnings per share by 50%.

To a range of $6.58 to $6.88.

At the midpoint of $6.73.

This is a increase of 10% over our prior guidance and a 37% increase over 2020.

You'll recall that we raised guidance by 50% in Q1.

With this increase we're now forecasting a 20% increase from the midpoint of our original guidance, which was $5.60 of them.

With our recent M&A activities, we now see net headwinds of 1% from acquisitions and divestitures and if the down from our prior outlook of 4%.

And we now expect positive currency of $350 million up from our prior forecast of $200 million.

And we're also raising our guidance for adjusted operating cash flow and adjusted free cash flow, both up $200 million at the midpoint.

The increase is really driven by a combination of higher profit on.

The organic growth in sales the <unk>.

Timing of acquisitions and divestitures, but also partially offset by some investments that we're making in working capital given the current.

Constrained the supply chain environment.

The remaining components of our full year guidance remain unchanged and.

And lastly, our Q3 guidance is as follows we expect earnings to be of $1.72 to $1.82 organic revenues to be up 11% to 13% and per segment margins to come in between 19% and $19.4 per channel.

And lastly, I'll wrap up the presentation on page 14.

You've heard us talk.

The last few years about.

The this transformation into an intelligent power management company.

The strategy is built on the belief that there is a few secular growth trends.

Expectation energy transition and digitalization.

Of that allow the company to grow at a much faster rate than we have historically.

And every day, we get confirmation that we're on the right path.

We're seeing it in the growing importance of sustainability initiatives and.

In Society, we're seeing it in government spending and we're certainly seeing it in our opportunities and in a win.

We're pleased with the price that we've made on the portfolio.

Each move has been consistent with our objectives of delivering a company that has faster growth higher margins and.

The better earnings consistency.

And you've seen our track record on margin expansion. The Eaton business system is what provides the consistent approach.

How we run the company, how we execute and how we expand margin and it's working.

And this enables us to be on track to expand margins by the 400 at the 500 basis points over the 5 year planning period and as you can see we're running ahead of plan.

And we're committed to our sustainability goals. They reflect the right thing to do for society, but just as importantly sustainability is at the core of what's driving our growth.

I'd also note that we published our 2020 sustainability report and our first task force on climate related financial disclosure report at the end of June.

I would encourage those of you who are of special interest and sustainability of the read it I think they are extremely well done and reflect the director of the company is headed in.

Lastly, we continue to generate very attractive cash flow.

Continue to generate very attractive cash flow over $9 billion through 2025, which will allow us to return cash to shareholders and also make investments to grow the company.

And as you can see we're off to a very strong start in 2021 at the midpoint of our guidance. Once again revenue is expected to grow 12% and earnings by 37%.

So with that I'll turn it back to Jan and open the line for questions.

Okay, great. Thanks, Craig for the Q&A section of our call today, we would like to ask you to eliminate the opportunity just 1 question and 1 follow up thanks.

And the lengths of all your cooperation with that I will turn it over to the operator gives you guys of the introduction.

Thank you and ladies and gentlemen, if you would like to ask the question. Please press..1 then zero on your telephone keypad you may withdraw your question at any time by repeating the 1 zero command if youre using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question you May press, 1 then zero.

At this time and first of all the lineup of Josh Kolchinsky with Morgan Stanley. Please go ahead.

Hi, good morning, guys.

Good morning, Josh.

Craig I was wondering if you could talk a little bit about the composition in orders and electrical clearly pretty solid there, but hoping for a little bit more color on maybe the cyclical.

Yes of momentum versus the secular kind of of electrification.

I appreciate the examples on slide 3 but really trying to get at how much of this is sort of illustrative versus something that you see.

We're really moving the needle here.

In the short to medium term.

I'd say, it's really a combination is to.

To your point, Josh of both of those and the orders were really strong across all geographies and end markets as.

As I mentioned, the highest growth coming in data centers and residential.

We're not seeing any benefits.

Around the government kind of infrastructure spending yet and so I would say a lot of what youre seeing today I just think of the reflection of the broader strength in many of our end markets and certainly we always talk about Datacenters. The Great example of the royalties consuming processing and fueling increasing amounts of data. So I think of lot of what you see.

<unk> today.

Is is restocking because markets have certainly been strong in many of our end markets and inventories were taken down pretty hard during the pandemic last year and so I would say once again broad based strength.

We talked about the fact that there's been a lot of stuff written about what's going to happen with commercial construction commercial construction has come back very strongly and we had we had outstanding orders as well as negotiations in the commercial and institutional side of the business as well.

It really has been a story of a fairly broad based strength in the orders across almost every end market and every geography.

Some of these other markets large projects start to come back into the business.

We think this should go on from a wireless bill.

Got it and then just on the Incrementals.

You guys are going to be in the kind of low to mid thirty's. This year coming off of really great decremental margin control of last year, presumably some strain the costs for hydraulics.

Pretty well documented.

Inflationary environment.

Is the the normalized range.

Once we kind of clear some of the noise out of that still in the 30% to 35% or can we go higher as maybe.

And maybe some of these headwinds normalized participate.

We think the 30% incremental tour flow of planning guideline still makes sense at this point as you think about modeling the company on the go forward basis, clearly, we are having to make some fairly sizeable investments in the business right now as we deal with.

Our revenue growth outlook that is more robust than what we've seen historically, so we will be putting some investments in the business will also obviously investing pretty heavily right now in electrification in places like E mobility, and as well as in other aspects of the business like in the brightly of platform that will bring them online. So we think that the 30% increment.

The number is still a good planning guideline as you think about modeling the future of the organization and its largely I think on the function on the basis of the investments that we're going to be making in the business.

Perhaps we'll pull back what could be.

The incremental story that would expand but given the investments that we think are important to make for the future growth of the company. We think 30% makes it makes a lot of sense.

Understood I appreciate all the color. Thanks. Thank you.

Yes.

And next question is from Andrew <unk> with Bank of America. Please go ahead.

Hi, guys good morning.

Good morning, Andrew.

Yes, just maybe to go into a little bit more depth on the back production construction for second half of 'twenty 2.

What are you hearing from the customers and just trying to get a sense how much visibility.

Is there into 2022.

Yes, I appreciate your question of commercial construction Thats, obviously been of point of a lot of debate in general and so as we talked about in Q2 of our order growth of commercial structure was really in line with the rest of the business with more than 40% growth for the entire sector.

With the quite frankly, particularly strength in the global segment as well.

And so we continue to see positive signs of commercial construction markets and we don't think there's any reason why.

There should be any lead of in those markets do we think about pointing to the second half of this year or into 2022 on the.

Negotiation pipelines, which as we talked about on prior calls preseason order, obviously in a negotiation pipeline for both light commercial as well as large commercial projects, including commercial buildings was up very strongly year on year and actually very strongly sequentially as well.

And so at this juncture, we are optimistic that commercial construction.

We'll come back and we think the second half of this year and into next year should post fairly strong growth.

Thank you Craig and just my follow up question. This has been a strength recovery, but.

The other industrial accounts customers do you see them thinking about Capex differently. I think you did highlight before your high content in terms of Captisol. So that's 1 thing that kind of growth driver, but what kind of longer term. Our conversations are you having and do you think people are thinking differently about the capex needs the cycle versus the.

Probably a decade. Thank you.

Yeah, and I think it's fair to say that on the industrial side of the house in general really.

Across many of our end markets has probably been historically from Underinvestment. So I think of you on the 1 hand, there is going to be some catch up that needs to take place.

Then I think the big challenge that everybody is dealing with is fairly sizable labor shortages.

And many of the markets around the world and so investments in the.

Industrial and automation and the life tends to be what follows.

And so we think the industrial markets of another 1 of these markets that I think.

The relatively early stages.

Of recovery, there's been relative underinvestment in manufacturing over the last number of years.

So we think that market should do well.

Into 'twenty, 2 and really quite frankly beyond.

Thanks, so much.

Next we'll go to Scott Davis with the <unk> Research. Please go ahead.

Hi, good.

Good morning, guys good morning, Greg.

Ken.

Craig can you talk a little bit about where you guys. What's the strategy in EV charging.

Other.

Kind of content with being a sub supplier into it or whether you.

You don't want to perhaps take a.

Bigger role there.

I'll just leave it at that.

Yes. This is certainly very much at the core of.

Our strategy for our electrical business annuity out of and the team spent some time during our Investor day really.

Taking you through strategically what we're trying to get down there and it's 1 of the reasons why we made the acquisition of Green motion, We acquired Green motion, which is the European company that.

Does everything from the physical hardware of charging all the way through the charge port operating and billing systems and so we think that.

E charging.

Whether that debt residential commercial buildings or really more on E.

Grid scale.

And the bigger industrial applications.

Going to be an important part of what we're trying to do inside of our electrical business.

Those markets as you are seeing and you see it reflected in some of the infrastructure bills that are being proposed in the U S. You see fairly sizable investments that are taking place in Europe and in Asia. So we do think E charging both in the physical hardware as well as in the software will be an important.

Part of what we're going to try to get done in our electrical business. So it's an exciting space, it's kind of grow dramatically and we would expect to be of part of it.

Okay helpful. And then just as a just.

Follow up on E mobility, I mean can you give us a sense of that.

The on the wins that you're getting.

What is the kind of a content what is the what is good look like on the content story for you guys on an electric vehicle. It could just be an illustration of our example, if you want but.

Trying to get a sense of that.

Yes, and its tough its tough to really pick a typical E mobility vehicle, but I will tell you that as we talked about once again at our Investor day that the content opportunity for Eaton and in E mobility applications.

Is a huge multiple of what we saw on our legacy business.

And whether that in some of the new electronic based.

The Inverters converters power distribution, but I'd say the also even in our legacy vehicle business and that's what we're really highlighting this quarter that you think about this legacy business that we had.

Hey, what's going to happen to that business in the context of the world transition to electric vehicles. So when we say hey, there's a huge growth opportunity.

In gears and differential.

Transmission hybrid transmissions for our legacy business as well and so those opportunities for us.

We laid out of goal of getting to $2 billion to $4 billion between now and 2030, but the opportunity set is much larger in order of magnitude 510 times greater than it would be for our traditional vehicle business, where we're doing valve and valve actuation and some charging so it's the.

Tough to pick a typical vehicle I can tell you where we have wins, we have headwind once again these wins and these opportunities are coming once again and multiples of 5 to 10, what we would have on a historical of vehicle platform.

Okay. Good luck correct. Thank you. Thank you.

Our next question is from Joe Ritchie with Goldman Sachs. Please go ahead.

Alright, Thanks, good morning, and net congrats on the quarter. Thanks.

Thanks, John I appreciate it.

Greg maybe just on NAV.

You talked about the price cost equation basically being neutral for the year of and I'm just curious like as it relates the <unk> and the rest of the year like what what did that look like in Q2 for you guys and then.

Yes. It is there is there any particular quarter, where we should expect any headwind.

Yes.

Any any thoughts around like how.

How far ahead, you are in place and at this point.

Yes, I appreciate the question, we're obviously dealing with.

Fairly sizable challenges in and around supply chain and probably no secret anywhere on the call when.

When we provided our Q2 earnings guidance at the end of Q1, we had an expectation around the amount of commodity inflation that we've seen the business in the commodity price is quite frankly have only gone up.

And in some cases fairly significantly since that time.

The pressure point that we expected to see in the business and so.

At this juncture when we think about the year, we call of calling the year neutral. We don't think it gets worse in terms of.

The impact on our company on the balance between price and cost, but we think the year of the year as neutral and we think the pressure points in Q3 are going to be probably as great. As what we expect the expected in Q2 as a result, quite frankly of seeing commodity prices continue to run and once again, we're <unk>.

Wanting to obviously catch up with that in terms of the things that we're doing around taking prices up in the market as well as working with things to take costs out of the out of the organization.

So of neutral for the higher the things that probably shifted a quarter to the REIT based upon the fact, the commodity prices have continued to run.

Got it that's helpful context, and I guess, maybe my my quick follow on question.

1 area that really surprised us to the upside the corner with your Aero margin because I was wondering if you could maybe try to help parse out what.

What really kind of benefited aero this quarter and should we start thinking about the 20 classes like the baseline as we start to see the recovery in the commercial air of it.

Yes.

I think if you think about in simple terms our team when we were dealing with kind of this pretty dramatic downturn last year.

Setting an expectation that we would not see these markets come back to 2024 of the team very proactively and aggressively put in a number of restructuring program to take out.

Some of the fixed costs that we knew would be of challenge on a go forward basis, and so I would really attributed to the team being proactive.

Putting in the restructuring early in the downturn.

And then really doing an effective job of running the business as well as the managing.

Managing costs.

Terms of the expectation going forward, yes, I think it's reasonable to say that as this business improve.

Approach 25%.

<unk> sales in our aerospace business.

Back in 2019 prior to the downturn.

And our goal is certainly to get back to those numbers, but I do think something north of 20% is where really we would expect this business the form and it certainly as volume comes back to work our way back towards the the <unk>.

<unk> thousand 425% return on sales that we use of <unk>.

Makes sense. Thank you.

Next question is from Nigel Coe with Wolfe Research. Please go ahead.

Hey, Craig Hey, this is Brandon rig and on from Nigel Coe.

Just wanted to piggyback off of that Arrow comment.

Also kind of not in the spotlight on the top line, but certainly very strong performance on the margin.

Maybe just some more color on the components of aerospace like.

How did commercial OE commercial aftermarket defense performed in <unk> and maybe just a follow up would be what is the outlook for defense has it changed at all since our last update thank you.

Yes.

Yes, I appreciate the question in the United say that our aerospace business properly.

Not too much of an outlier from what <unk> seen from others in the market clearly the commercial side of the house continues to be under pretty significant pressure.

While we're certainly seeing revenue passenger kilometers of return.

Those markets are still running.

Well below where they ran in 2019, we did see a little bit of an improvement in aftermarket in the quarter as the.

Is that business.

Certainly off of.

Dramatically last year.

So I'd say that from the commercial OE continues to be weak commercial aftermarket is still weak versus where we've been historically, but improving.

And really in the on the military side of the house I would say pretty much no change and when you think about that business being kind of low single digit grower is kind of our outlook for the military market and we think thats pretty much consistent with what we think the outlook is going to be over the over the near term as well.

So.

A lot of the once again the margin piece really I'd say, the more mostly a function of our team's ability to execute wasn't in any way driven by let's say of dramatic mix shift to aftermarket business overall.

Okay.

Our next question is from Jeff Sprague with vertical research. Please go ahead.

Hey, Thank you good morning, everyone.

Good morning, Jeff.

Hey, good morning.

Maybe just a question on.

Kind of backlog conversion and also just kind of the scramble going on in the channel Craig you mentioned.

You did the thank you saw some channel inventory.

Rebuild out there.

We've heard a lot of mixed things from other companies on that things like people like the rebuild inventory, but can't because theres not availability et cetera.

Maybe you could just give us a little bit of color on on that dynamic.

Do you think we're somewhat caught up on inventory relative to where the demand is.

Yeah, the way I'd characterize the places we think about kind of going the channel checks with our distributor partners I'd say.

On balance in aggregate inventory levels, probably match the the outlook for the demand that we expect but then there are certainly certain segments of the market where were woefully short.

Good point of care case in point would be what's happening today in the residential market currently and the residential markets in electrical.

Well short of where we should be and our distributors have not been able to restart I think the fact that we're building.

Fairly sizable backlog is a reflection of the fact that some of these end markets.

I would like to have more inventory than they're currently sitting on but in aggregate I do think that inventories.

Inventories of probably largely in line with with our view and our outlook and the distributors outlook for the market going forward other than uncertainty certain of the sub segments of the market.

And so the backlog growth.

You would attribute.

Mostly or it sounds like completely to the demand side as opposed to you or maybe inability to deliver a few things in the quarter.

No I think there's a combination I think as we mentioned there are the certain sub segments of the market where clearly.

There's more demand.

In residential construction as an example, then we have the ability to ship.

I think it's I think it's a combination of the 2 but the but I think on aggregate once again.

The markets are good the under.

The lying demand is good in most of these end markets and Theres certainly no inventory buildup, taking place from the channel.

But I do think that the fact of the backlog that's grown to the extent of it has once again the record backlogs in both the Americas and global.

Up from 40% in both.

Segment, I would say is that mostly a function of the fact that the markets are good.

Bounding quite nicely right now.

Great and maybe just the.

Follow up if I could just on the you called out the end of the your remarks of your commentary on your deal capacity.

Okay.

And obviously you guys have been super busy yourself.

Maybe you could just comment a little bit on on the pipeline, whether it's the organization.

Can do more is ready to do more.

What might be actionable.

Is there something else actionable before year end here.

No I appreciate the comment and the team has been I'd say very successful.

Really bedding down a number of acquisitions at the.

It's very strategic at very attractive.

Multiples, we think as well and it is to your point I'd say the deal activity is certainly heated up in the pipeline today is probably.

About as full as it's been in some time.

And I'd say, we do have capacity, depending upon which segment of the business you are talking about it and I'd say that 1 of the the good things about the kind of an organization that works across multiple businesses and industries is that and doing the deals the size that we've done is that.

None of these deals are going to be so big that theyre going to really consumed the capacity of the entire company and so if you're talking about some of the things that we've done recently and aerospace yes, they may be a little bit Paul on the fuel and motion side of the business.

But we have capacity maybe on the other side and the same thing would be true in electric we really haven't done.

Large deals in the electrical we've done very strategic deals we've done deals that I think are.

Outstanding additions to the portfolio, but I would say by and large in our electrical business. We have plenty of capacity organizationally to go out and find opportunities and to bring them in and integrate them in and that will not be of bottlenecks or limiter in terms of our.

The ability to actually go out and do.

Transaction.

And we continue to say once from a priority standpoint, we continue to be focused on electrical and aerospace as the 2 places that will likely the deploy capital.

Great. Thank you.

Next we'll go to the Nicole day Blayne with Deutsche Bank. Please go ahead.

Yes, thanks, good morning, guys.

Good morning, Nicole.

And can we just clarify a couple of things in the guidance and I guess you know how.

How much of their raised the EPS from the early close of carbon.

The hydraulic and for an extra quarter and then can you. Just also to clarify did you include 1 month of hydraulics and the 3 key guidance given that the deal closed in August or has that been removed from great scale.

We just maybe I'll work backwards certainly own hydraulics for the month of August and so for that month. We did in fact include hydraulics in the guide and so that would add Florida.

Meanwhile, the radii kilgus.

Craig.

If you look at the 60 <unk> guide increase.

First of all we flowed through the <unk> 22 cents.

And within that 22 cents EPS, we had about 7 related.

The related to M&A timing <unk> hydraulic <unk> compounds and then we had another 13.

Which was the <unk> for hydraulics and the <unk> Cobham.

Total M&A timing was 20.

The 35 E which.

Which is the 22 flow through and the 13th of the remaining timing and then the remaining 28.

As related to operational performance.

Okay, that's really clear I think that clarification.

And then I guess can we just talk a little bit about what you guys are seeing in China, obviously, a lot of noise with what's going on from the data perspective.

Questions about the stimulus from the ear, but have you seen any filing in Europe.

Yeah, No I'd say no nickel I mean, all of our business in China.

Grew quite strongly you know we reported the support of our electrical global segment, but I would say that that underlying strength that you sold out of electrical global segment is also reflective of what we've seen in our China business as well.

Market.

And we'll see what the future holds but the market to date has performed extremely well and our team has performed extremely well in addition to that.

Yeah.

1 of the things for US, we've always believed in manufacturing and being local in local markets and 1 of the reasons why we've made these investments in these joint ventures.

2 of them that we've done so far.

China to really expand our access to the market the huge tier 2 and tier 3 markets in China that we've historically not participated in these 2 jv's I'd tell you it really creates an exciting opportunity for our company as we move forward the really participate in the largest segment of that market.

With really strong partners in China, So for US I would say market is important.

What's even more important in the market is really our opportunity to penetrate the market and grow market share on the basis of really now participating in these very large segments of the market that historically have been closed to us.

Thanks, Craig I'll pass it on.

Next we'll go to David Raso with Evercore ISI. Please go ahead.

Alright, Thank you for the time.

On the electrical focus for M&A can you help us.

I think through where the areas of focus moving forward is it more geographic is it vertical.

Ideally of technology that can cross geography, and verticals, but just give us a sense of where you see the portfolio from here still having opportunities.

Maybe some holes and then I just wanted to follow up on the strong doubling of organic sales growth guide per electrical global maybe.

Maybe a little more color on what the accelerating so much from your thoughts of 3 months ago.

Maybe update us if you could on just currently the geographic sales mix of electrical globally.

Yes.

On the M&A focused questions, specifically I would say that if you just think about it strategically we've laid out.

As a company the spree kind of major secular growth trends of electrification energy transition due to utilization.

That will be kind of a good kind of framework, where do you think about where we are likely to deploy M&A dollars.

In terms of following the strategic kind of growth vectors that we think will importance of the company do you think about.

Higher of a company like Green motion think about acquiring the company like trip light.

Of which is really in.

The datacenter is the <unk> expansion.

As you think about what we've done.

They ought to be really.

What about as an expression of the strategy and the areas that we said that we'd like to really take the future of the company. In addition to that if you think about of geographically.

We have huge opportunity so outside of the Americas market too to really round out the business portfolio and participate as we mentioned like in China and some of these very large markets that have been historically close to us we have those kinds of opportunities in <unk>.

<unk> sales, we have some of those opportunities that still remain in Europe, and so there will be some geographic place, where we'll actually do things to augment supplement the portfolio as the way of participating in markets that we have historically essentially not played in the as fully as we do let's say in the North America of them.

So I think youre going to find net.

It is a pretty wide.

The other question that you had with respect to kind of the.

The global.

The business and why the increase in the guide I'd say 1.

Think about on a relative basis.

The global markets fell.

Coming into the business at a time when once again.

The markets of ramping and so the same kind of reopening kind of phenomenon that took place in the U S.

From a higher base because they didn't close as much is now starting to take place in markets across Europe, and as I said if every place.

It's not just in these.

Of these historical hot segments of data centers.

Other than residential we're seeing it in commercial and institutional and.

Industrial we're seeing it in utility with the.

Really it's broad.

Net of end markets that are really responding nicely in Europe, and quite frankly in Asia as well.

The economies continue to open into our underlying growth.

In Asia, and the underlying growth in the European pieces that make up the global business those markets I'd say, both performed very well.

The 1 segment that if you recall that we report inside of global net tends to be of will be more of a later cycle play will be what's happening in our crouse Hinds business, which which is kind of the place where we really get most of our oil and gas exposure.

That market is starting to see a number of green shoots.

So certainly not back to levels that of what's that historically, we think second half of this year and into 22 that market also starts to come back and should help continue to drive growth in the global segment and so it's really a.

The kind of a broad range of these end markets most of which that are doing well right now.

Obviously, it's pretty broad, but if maybe you can help us with just some numbers update us geographically the current mix.

And I assume crouse hinds rates.

Within the industrial piece within electrical global if you can remind us roughly the size of Crouse Hinds nowadays.

Yes.

Maybe we can maybe you can we can take that 1 offline. David you can talk to you kind of about what we've given historically in terms of that business just want to make sure. We were consistent with what we provided historically in terms of splitting out the global segment and so we don't end up with the select the disclosure issue. So.

Yeah. That's fine. Thank you very much I appreciate the time thank you.

Next we'll go to John Walsh with Credit Suisse. Please go ahead.

Hi, good morning, everyone.

Good morning.

Wanted to.

Build up on a couple of earlier questions.

I appreciate the price cost commentary for the balance of the year, but just wondering as you look across your portfolio of <unk> and as we think about Incrementals next year, where do you think price will be most sticky.

And maybe you could just remind us the historical experience coming off of.

Of the last deflationary cycle I think.

Under the prior segments products held a little bit more price in the systems business, but any color there would be helpful.

Okay.

Yeah. Appreciate the question on price cost in the.

In many many ways, we're kind of all kind of working through this period of unprecedented commodity inflation and learning together in terms of where it's actually going to land.

I said earlier, we anticipated that we would have seen the worst of it in Q2 and it looks like a lot of those pressure points had been pushed out into Q3 into until the second half of the year.

And it's a.

And once again I think as a general rule, we talked about being neutral between price and cost and I don't think of any reason the suggest that that won't be the case that the price cost we will continue to be neutral.

It does as you can imagine put a little pressure on our incrementals as well as you don't typically get a normal incremental.

On commodity inflation and so in terms of how it impacts of Incrementals. It obviously puts downward pressure on incrementals, but having said that we still think 30% from a planning perspective.

Is the right way to think about Incrementals for the company.

On price stickiness, I'd say that typically.

Typically speaking if you're in an inflationary environment in the commodity costs are up.

The price is going to be sticky and so in this kind of environment, it's never easy to get price, but I'd say in this kind of environment, it's very understandable.

The prices are going to go up it very well publicized everybody is dealing with the same challenges and so I would imagine.

Net price will be very very sticky in this environment given.

All of the supply shortages across the board.

The fact that markets are doing well really today, I'd say almost across the board and so.

It is never easy, but this is probably.

1 of the easiest times at least in my professional career too actually.

Past, the 1 price because.

Essentially the of the environmental factors are essentially warranted it.

We're seeing labor inflation as well so.

All of these things bode.

Bode well for at least the price environment and adjusting prices will likely be sticky through this part of the cycle for some time to come.

Great and maybe just a follow up to that a lot of color.

Given about.

Geographies of the last question, but.

We've seen very strong organic growth from a lot of your competitors as well.

Was just curious if you're noticing any discernible share shifts that you would call out.

Or if it's more kind of the strength of the market or do you think there might be some pockets where youre gaining share. Thank you.

Yes, no I'd say that if you think about it today I'd say.

Largely we think shares of pretty much.

Holding of across the board is always going to be quarterly timing, depending upon what companies do and various end market segment or the geographic mix, but I would suggest to you that probably at this point in time, given the fact that so many of us are dealing with supply chain challenges and theres, probably more business out there than any of them.

Can handle them.

And we're building pretty large backlogs and probably other companies are as well.

Yes.

Speculation would be that this is probably not.

A large share of changes taking place at this point of the market. So we're probably holding market share.

In terms of our core businesses.

Moving to imagine that really until you get to the point, where you actually have enough capacity to serve the underlying demand overall when you stop building backlog that share shift is probably not going to be something thats the big part of the.

The picture at least in the near term.

Great. Thanks for taking the questions.

Next we'll go to Julian Mitchell with Barclays. Please go ahead.

Hi, good morning.

I just wanted to ask about cash flow is there anything that's been touched on yet.

So the free cash flow guide went up but if I look at the year's numbers in aggregate.

It looks like you're guiding for about an 11% free cash flow margin this year.

And the adjusted sort of conversion from net income is maybe in the middle of low 80% range.

So just wondered if you could sort of remind us.

What are some of those major headwinds on the free cash flow margin Nando conversion presence and if there are any specific items.

Maybe capex coming down next year, well working capital.

The headwinds easing.

1 of my thinking about cash flow margins and conversion into 2022.

Julian issue. If you look at last year, we finished the year at 2.6 billion.

Yes.

Cash flow, which flow.

EBITDA from this year, we characterized it as a transition year.

The year.

Having said that we're.

To what extent roughly $200 million more in the Capex This year, which would take us down from Q4, which compares to the midpoint of our guide.

To put that additional $200 million and investments in working capital and given given the environment.

But certainly as you think about 'twenty, 2 and beyond I mean getting.

Being above 100% on free cash flow conversion of its certainly where you'd expect the economic performance and as Tom mentioned this is really kind of a transition year.

The inventory build and increase in restructuring spending increase also in the Capex.

I think it's also important to note on an operating cash flow basis year to day.

We're we're a little bit ahead of last year. So.

We feel good about our cash flow performance this year.

Thanks for clarifying and then.

On the topline side.

Just wanted to try and understand what youre seeing in the utility markets at the moment.

There was a lot of sort of chatter out there.

Anytime, there's a storm or something about grid hardening and all of the rest of it.

So just wondered if you could give us an update on the utility piece.

And how the utility market growth lumps this year.

Relative to your overall sort of electrical.

The revenue growth guidance, which I think sort of average out globally in the low teens type range. Thank you.

No I appreciate the question on the utility market because as we've said before this is a.

Very different market segment in turn.

<unk> of what it represents for <unk> and what it represents the growth than it has historically.

Side of the company and so maybe that growth is.

Mid single digits in the near term.

As you think about some of the big investments that have to go into energy transition first which is obviously a really big 1 and then that obviously involves things like grid hardening and grid resiliency due to climate change.

Some of the weather related events that we've seen and so we like the utility market and we think that that market will will certainly be a growth market into the future I will say that we've not yet seen.

Once again, the big inflection point that we would expect to see in the utility market. We think most of that growth is still out in front of us.

With the market as you know they tend to move more slowly.

We have over the last number of years of being more investments going into the distribution side of the utility, which certainly plays to our strength, but but but the bigger plays that we think around grid.

Grid hardening grid resilient energy transition the things that utilities are going to have to make fairly sizable investments and we think most of that growth is still out in front of us.

Great. Thank you.

Our final question will be from Ann Duignan with JP Morgan. Please go ahead.

Yes. Thank you I appreciate you squeezing me in most of my questions have been answered, but maybe Craig asked similar question on the data center demand.

The top progressed through the quarter from orders perspective, and maybe versus target. There and then maybe regionally also of what Youre seeing going on in data center demand. Thank you and I lead the pack.

Yes. Thanks, Dan appreciate the question and it's obviously 1 of the most exciting segments of that we're in.

And certainly the acquisition of a company like trip life.

Just strengthens our hand, there in terms of what data centers represent for.

For the company overall and I'd say the 1.

1 market I'd say, the we have very clearly for some time now seeing global strength with PC. It in every region of the world and we see it across really.

Every segment of data centers, whether that's the on Prem whether it's the Colo operators.

Whether it's the Hyperscale data center market just continues to surprise to the upside and as we've said before that those markets that can be lumpy, there could be a quarter or 2 or even though.

A year or so aware of particular hyperscale.

Player will take the time, the consolidated not expand and so the business can be lumpy at least specifically in hyperscale, but the the projections for that market and what we've experienced is that it continues to surprise on the upside with respect of growth I think this year, we're talking about high teens kind of growth from the data center market.

And it did.

As we've looked at that market and we've looked at our own forecast of that market.

It's a big piece of what's performing better than what we originally anticipated when we put our guidance out for the year.

And once again this whole idea of.

More data more storage more compute.

Of the world's more connected and so we think that there is a trend that is going to continue for a very long time into the future.

Yeah.

Okay. Good thanks, guys as always the chip and out of it would be available to do any follow up questions. Thank you and join us of a good day alright. Thank you. Thank you.

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.

Q2 2021 Eaton Corporation PLC Earnings Call

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