Q3 2021 Eaton Corporation PLC Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Eaton third quarter 2021 earnings call.

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I would now like to turn the conference over to our host.

Senior Vice President of Investor Relations Yan Jin please.

Please go ahead.

Hey, good morning, guys.

You didn't senior Vice President of Investor Relations. Thank you all for joining US why you Didnt third quarter 2020, while earning call with me today I'll, Craig Arnold, our chairman and CEO and Tom Okray, exactly West President and Chief Financial Officer. Our agenda. Today includes opening remarks by Craig highlighting the company's performance in the third quarter.

We have done on our past calls we'll be taking questions at the end of the Craig's comments now price release and presentation. We'll go through today have been posted on our website at www Dot <unk> Dot com this presentation, including the adjusted earning per share adjusted free cash flow and other non-GAAP measures.

<unk> sales in the appendix a webcast of this call is accessible on our website and it will be available for replay.

To remind you that our comments today will including statements related to the expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our projected future due to a wide range of risks and uncertainties that are described in our earning release and the presentation with that I will turn it off.

Over to Craig Okay. Thanks, Dan He will start on page three with highlights for the quarter and by noting that our team delivered record results in Q3, despite kind of the well publicized supply chain challenges in this environment.

We had strong execution across all of our businesses and as we focused on controlling what we could control.

And as you can see we posted an all time record for adjusted EPS of $1 75.

The supply chain constraints did have an impact on our revenue, but we still posted 8% growth in the quarter and for the third quarter in a row, we delivered record segment margins at 19, 9% in Q3.

It was an all time record and an increase of 230 basis points over prior year.

On top of record margin Saar. We're also pleased with our incremental margins, which were 46% in the quarter due to actions that we took to mitigate inflationary cost the portfolio changes that we have undertaken and savings from restructuring programs. We did have a bit of help from favorable mix as well in the quarter.

And while revenues were lighter than expected in our electrical Americas segment, we're very pleased to see the strength in orders and the growing backlog overall demand range remains very strong.

For the electrical business is overall orders were up 17% Rolling 12 month basis, and our backlog was up more than 50%. Another all time record.

Next on page four we summarize our Q3 results and then I'll notice a few points here first our 9% revenue growth, we increased our operating profit by 23%, which reflects strong operating leverage and benefits from our portfolio actions.

Our acquisitions increased revenues by 7%, which was fully offset by the sale of hydraulics.

Naturally pleased to replace the hydraulic revenue with a collection of businesses that are I'd say higher growth higher margin and have more earnings consistency.

And last our margins of 19, 9% were well above our guidance range of 19 to $19 four as our team did an outstanding job of executing despite the lower than expected revenues.

Moving to page five we have the results of our electrical Americas segment Red.

Our revenues were up 9%, including 1% organic and 8% from the acquisition of AAA organic sales growth was driven by strength in data centers and residential markets, partially offset by weakness in large industrial projects and sales to utilities.

As I mentioned earlier revenues were impacted by supply chain constraints, our electrical Americas segment suffered from the general supply chain constraints that we're all feeling but was actually disproportionately impacted by a few unique suppliers, who are especially impactful to this business.

We're naturally addressing these and other supply challenges and expect to do better in Q4.

Operating margins continued to be strong at 21, 7% and were up 40 basis points from Q2.

This is consistent with our expectations and we're doing a good job of getting price to offset inflation.

I'd say the biggest highlight in this segment is the continued growth in orders and backlog.

On a rolling 12 month basis orders were up 17% organically and this was an acceleration from up 13% in Q2.

The strongest segments, where utility and residential markets.

And the backlog is up more than 50% from last year and up 9% from Q2.

And both I would say are encouraging signs and support our expectations that the miss shipments will simply be pushed into future quarters.

Okay.

Turning to page six we summarize our electrical global segment's results, which I would say were strong across the board organic growth was 18% with broad strength in really all end markets and currency added 1%.

We also posted all time record operating margins of 21% and had very strong incremental margins of nearly 40%.

The margin performance was driven by volume leverage strong cost control and savings once again from restructuring actions.

Orders were very strong up 17% organically on a rolling 12 month basis with particular strength in the quarter in industrial commercial and institutional markets.

Like our Americas segment, the backlog is up more than 50% and at record levels.

Before we move to the industrial businesses, Here's the way I'd summarize the performance of our electrical businesses.

You add the two together they delivered solid organic growth of 8%.

Built sizable backlog, which strengthens our outlook for future quarters, and the improved margins by 110 basis points. So on balance I would say a very strong set of quarterly results for our electrical businesses.

Moving to page seven we have the financial results of our aerospace segment.

Revenues were up 38%, 4% organic and 33% from the acquisition of Cobham mission systems and 1% from currency.

Organic growth was primarily due to higher sales in commercial markets, partially offset by weakness in military markets.

Operating margins were 22% up 350 basis points from last year, and 100 basis points sequentially.

This strong performance gives us confidence that as aerospace markets continue to recover we'll meet or exceed the 24% margin targets that have been set for this segment.

In the quarter, we also had strong organic incremental margins, which were driven by favorable mix.

Primarily from the growth of commercial aftermarket business and as a result, once again from savings from the restructuring actions that we've taken.

And by the way Q3 was the first full quarter, where carbon emission systems were part of the company and we're very pleased with the financial performance of the business and the integration process is going very smoothly.

As we look to the future, we're seeing encouraging signs of recovery in this segment with both orders and backlog now trending positively.

Rolling 12 month basis orders were up 4%, primarily with strength in the business jet segment.

And our backlog has increased by 5%.

Next on page eight we have the results of our vehicle segment organic revenues increased 11% with solid growth in North America class eight truck business and strength in South America that more than offset the weakness in North America light vehicle markets and as you're all well aware right.

Production has been severely impacted by supply chain constraints.

Operating margins were 18%.

Generated very strong incremental margins of more than 50%.

In addition to strong execution, we also had some favorable mix in the quarter.

Specifically and of note North America.

The truck business benefited from strong aftermarket where sales were up from 40% at attractive <unk>.

Aftermarket margins.

In our North America light vehicle motor vehicle business also benefited from favorable mix as customers prior prioritized programs with more of our content more full size pickups, and Suvs Suvs and fewer small cars.

So good mix, good volume growth and savings from our multiyear restructuring program all contributed to very strong quarterly operating results here.

Turning to page nine you will see the financial results of our mobility segment.

Where revenues increased 6% organically.

Light vehicle business customer production levels were reduced by supply chain constraints here as well and given the nature of the products that we sell in this segment they were more significantly impacted by the semiconductor shortages that we've all read about.

As a result of our backlog is up significantly here.

Operating margins were negative nine 5% once again due to heavy R&D investments and startup costs associated with new programs.

We continue to be pleased with the progress in this business, which is one programs worth nearly $600 million of which.

Your revenue and we expect to see a significant ramp up in revenues in 2023, which positions us well to achieve our long term revenue targets of 2% to $4 billion by 2030.

On page 10, we provide an update at our organic growth and operating margins for the year.

With supply chain constraints in Q3, continuing into Q4, we now expect overall organic revenue growth of 9% to 11% for 2021.

For electrical Americas, we expect 5% to 7% growth.

You'll note the implied guide.

Guidance for Q4 is actually.

7% to 9%, which is a solid step up from the 1% in Q3.

Organic revenues in aerospace are expected to be roughly flat with strength in commercial markets being offset by weakness in military markets in the other segments had some minor reductions in revenue as well, but just minor.

Despite slightly lower organic revenue growth outlook, we're increasing our operating margin guard guidance by 20 basis points from 18, 6% to 19%.

And I would note that this guidance, we're on track to generate strong incremental margins of approximately 40% for 2021.

Which we see naturally is outstanding performance given the current inflationary environment.

Moving to page 11, we have the remaining items of our guidance for the year, we expect full year adjusted EPS between $6 59 to $6 69.

At the midpoint this represents 35% growth over 2020.

We're also delivering significant margin improvement up 240 basis points from last year at the midpoint of our increased margin guidance.

So I'm pleased we have strong operating performance in the face of what we call historic supply chain challenges and the businesses are doing well.

Next given more active M&A activities, we now expect share repurchase to be between $375 million and $425 million.

And lastly, our Q4 guidance includes earnings between $1 68, and $1 78.

Organic revenue growth between 7% and 9% and segment margins between $18 8 million 19, 2% an increase of 160 basis points at the midpoint versus prior year.

So overall once again, a strong 2021 with solid revenue growth strong orders.

And good execution, allowing us to deliver record margins.

Next on page 12, we did want to provide some preliminary assumptions for our end market for 2022, and and as you can see we're expecting attractive growth in nearly all of our markets.

With very good growth in data centers and locked in industrial facilities, and our electrical business in our commercial aerospace business and certainly in all vehicle markets.

We will provide more detailed color on organic revenue growth assumptions when we provide our 2022 guidance in February but we did want to share some of our preliminary thinking here.

We would also expect to see carryover benefits from pricing actions taken which should also help our year over year growth next year.

And lastly on page 13, we provide.

Summary, thoughts here I'd say first I am proud of the record quarter results.

Particularly our strong margin performance.

Our team has demonstrated that we can manage through a challenging operating environment supply chain constraint inflationary pressures and still improve margins and EPS and.

In the long term secular growth trends of electrification energy transition and digitalization are playing out just as we expected or maybe even better.

We also see 2021 as a transformative year for Eaton in terms of portfolio management.

Our higher growth higher margin and mix and less cyclical company today.

And with strong year to date performance, we are well on track to deliver a very strong 2021 with double digit organic revenue growth and 35% adjusted EPS growth.

And I'd also add we have great momentum.

Into the Q4 and into next year, we have strong order growth, we have a full backlog and many of our end markets are poised for recovery.

And Youll recall at the beginning of the year, we set medium term targets of 4% to 6% organic revenue growth annually.

<unk> to 500 basis points improvement in margins.

11% to 13% annual growth in adjusted EPS.

So evaluating our progress about one year and I'd say that we're running ahead of expectations.

And with that summary, pleased to turn it back over to Yan and two.

And to open the session up for Q&A.

Great. Thanks, Craig for the Q&A section today. Please limit your question to one question and one follow up sanctioning the ones for your cooperation with that ill turn it over to the operator will give you guys the instructions.

Thank you, ladies and gentlemen, if you wish to ask a question. Please press one then zero on your telephone keypad.

You may withdraw your question at any time by repeating the one narrow command.

Our first question comes from the line of Joe Ritchie with Goldman Sachs.

Please go ahead.

Thank you good morning, everyone. Good morning, Joe.

Greg I know you want to give us some some commentary or wait to get this exact commentary on 2022 organic growth expectation in February I guess.

In the context of the long term framework of four to six and with your backlog and the electrical business being up 50% I mean is it fair to assume that just the <unk>.

Electrical business should.

It should be at a very minimum at the 4% to 6% range for next year or maybe slightly better just given what you're seeing across your business.

I appreciate the question, Joe and certainly if you take a look at the performance of the business. This year and the backlog that we're building in 17% order intake you can certainly make a case for.

That business performing better than the.

4% to 6% numbers that we laid out in and you'll also recall by the way as we laid out those targets for growth for the company that the businesses are.

We're all running towards higher growth numbers, and we hedge those numbers back at the corporate level recognizing that things happened in the world that you don't often anticipate and expect I mean Q3 is a great example of that with some of these supply chain constraints and as always a number of uncertainties out there and so I think yes certainly.

A possibility that the electrical segments could perform better than that and we have internal plans that would suggest better performance than that but once again, given the amount of uncertainties that we're dealing with especially in today's supply chain environment, We still think for planning purposes doses still reasonable assumptions to make.

But there could be upside.

Yes.

That's fair and I guess, maybe just.

Following up there.

And just talking about pricing, obviously key topic of conversation across our conference calls, thus far and as you think about your own pricing mechanisms and how this plays out for you in 2022, maybe talk a little bit about how much price. We can expect to come through the system. Thank you.

Yes, no pricing as we talked about a little bit at the Laguna conference as well.

Our expectation continues to be that our businesses will fully offset inflation with price. We are living in an environment today, where I'd say, it's never easy to get price, but its probably easier today given some of the supply chain constraints that we're all dealing with and it's probably ever been.

In my professional career, and so I'd say that our thinking really hasn't changed with respect to pricing. We have good mechanisms in place for our pricing typically lags inflation by a quarter or two depending upon which segment of the market. We're serving we naturally have experienced some more inflation as we came through Q3.

Than we originally anticipated and as a result, we like others have had to go to the market for additional price, but by and large.

This pattern continues and we would expect that as we look forward to 2022, we would expect to once again.

More than fully offset the inflationary pressures that we experienced this year and maybe it's going to add a little bit of a tailwind next year, but by and large are long term.

Kind of expectation on price versus inflation is to fully offset it and that's what we're tracking to for this year.

Yes.

Okay. Thank you. Our next question comes from Andrew <unk> with Bank of America. Please go ahead.

Hey, guys good morning.

Andrew Good morning.

Just to build on.

Joe's question, how much supply chain challenge.

<unk> revenue in the third quarter.

Particularly in North America, I think you alluded to it but if you could character quantified.

Yes, I appreciate the question Joanna It's certainly if you take a look at on balance our electrical business grew from 8% in the quarter. We combined the two but very different performance in our electrical global versus the Americas business, which is where we had.

Clearly our biggest supply chain constraints and I'd mentioned in my opening commentary, we have a number of unique suppliers in that business that.

Really resulted in revenues being below what we anticipated and so as we think about it and you try to quantify the impact in the quarter.

Our backlog grew in the quarter by $280 million. If you look at the shippable piece of that piece that in the quarter.

We could say it's order of magnitude.

North of $100 million, let's call it $130 million of revenue if you simply look at the shippable backlog and in the quarter itself. So we could have very easily posted I would say a 9% growth number enter the electrical Americas business in the quarter, but for the supply chain constraints.

Well. Thank you and then just how should we think about just sort of backlog versus normal because we actually had a number of companies in our coverage.

That normally sort of non for more of a short cycle focus sort of.

Now I'll talk about backlogs up 40, 50, it's 30%.

As you guys think about the world does it mean more visibility or actually more uncertainty because it's so unusual for a business like yours to care so much in terms of backlog.

Are you guys thinking about it internally thank you.

And we clearly see it as more visibility if you think about it a typical year, we would go into let's say the year with 25% to 35% of our orders for the upcoming year in the backlog and certainly.

Certainly running today at the very high end of that and so we clearly see it as better visibility and we test as you can imagine.

The quality of the backlog in and whether or not the backlog is solid in terms of these orders and we're testing.

Customers and channel partners in.

The indication that we're getting although you're never 100% certain it probably is a little bit of.

Order placement that's taken place.

Get your position in line, but by and large the backlog feels extremely solid.

Thanks, very much Craig Thank you.

Thank you. Our next question comes from the line of Jeff Sprague with vertical research. Please go ahead.

Thank you and good morning, everyone.

Good morning, Tony.

Good morning, Hey, just back on the supply chain Craig.

The 1% growth really does jump out relative to <unk>.

Global unmet Schneider really everyone else.

And I just wonder if you could elaborate a little bit more on what the issues were in the quarter and just your confidence level.

They're resolved.

Just trying to think as the market leader in the U S. If anybody could get this stuff it would be yield and that didn't seem to happen in the quarter.

Yeah No I appreciate the question, Jeff and we are a market leader in North America, and as you know our North American electrical business has really posted probably.

10 years in a row of share gain and so we do have a very strong position in the market.

We have great supplier relationships in general.

I would tell you that in our case, what was a little bit unique is that they were.

A few suppliers that we have that support our electrical Americas business.

Who are suppliers that we have that are perhaps not suppliers to others in the industry.

That had some challenges that we're working through it together and so as I talked about if you see it in the growth in the backlog what sales could easily been but for the supply chain challenges I think that number one becomes a 9% number which I think you'd agree is much more in line with what you've seen from some of the.

Others in the industry and so we are absolutely confident that it's timing.

It's tied to very specific supplier issues that we are clearly focused on and working.

We generally speaking like I said have very supportive and strong supplier relationships and it's not.

One of our competitors being over allocated and us being under allocated. These are just suppliers that are unique to our business that are working through some particular issues in their own kind of operations that they need to be worked through and so yes. So I'd say by and large it's timing we will get through.

This in.

About growth numbers of around 8% or so in Q4, and we're setting up well for 2022 and you can see it in our electrical global business. They grew 18% in the quarter and so I think that.

I don't want to aggregate when you look at our global electrical business. Our growth is very much in line with others in the industry and we would have been better.

But for the supply chain issues that we're having in North America. So the franchise is in good shape nothing to worry about we really just see it as timing.

Great. Thanks for that color and then just on price I think you've been a little reluctant to be specific on price but.

I would assume you are in the same ZIP code as what we're seeing out there.

Kind of mid to even high single digit.

Price increases is that kind of directionally correct.

I don't know if could you just maybe share just a little bit more thought on what the wrap around price impact might be in 2022.

Yes, I appreciate the question on price and why you ask for more transparency on it varies widely by customers in <unk> and <unk>.

Different markets that we're in and so.

We're not going to provide more transparency than we provided other than to say that.

We're getting price to offset inflation.

It will be about neutral this year, we think it will be slightly positive next year, but beyond that we would rather not.

Comment on price is it obviously you have lots of different customers who have different <unk>.

End markets you have different supply chain.

Factors affecting different parts of the business and so overall our teams are doing well, we're getting price offset inflation in <unk>.

Would be a net.

Neutral this year, maybe it's a net positive next year, we'll clearly have a RAF impact as you as you mentioned, Jeff just given the timing of the execution of the pricing in 2021.

Okay. Thanks, I'll leave it there. Thank you alright. Thank you.

Thank you. Our next question comes from the line of Nicole <unk> with Deutsche Bank. Please go ahead.

Yeah. Thanks, Good morning, guys good morning, Nicole.

Just to piggyback on Scott's question I guess, you guys are embedding like kind of a snapback in electrical Americas <unk> Park Hill.

As you progress through the beginning of the fourth quarter have you seen some of the supply chain issues.

Just to give us some confidence about the achieve ability of getting back to 7% to 9% organic.

No I appreciate the question, Nicole and obviously as a part of providing guidance externally we were looking at our internal forecasts from our operations, where obviously you've been in a number of very direct conversations with suppliers, who have made commitments to us around improvements in so you can rest assured that that.

Forecast is very much grounded and what we're hearing from our suppliers and we're getting specifically from our businesses in terms of their expectations and so.

We're confident.

Confident.

In that forecast based upon what we're hearing from from our suppliers.

Alright, let's say, we're not completely out of the woods, we still have we still have some challenges once again Q4 could be better. If we were completely resolved from some of the supply chain. So we're not assuming that all of the problems are resolved in Q4, but certainly much better than in Q3.

Okay got it.

And then just maybe to follow up on that thinking about how you guys have positioned margins for the fourth quarter, you do have a bit of a step down coming from near record levels in the third quarter is that just some of this favorable mix dynamic that you experienced in <unk> are you assuming that that goes away just trying to understand the puts and takes I think normally from a seasonal perspective margins would be more like <unk>.

<unk> Q on Q.

Yes, we did as I mentioned in my commentary, we had some favorable mix in Q3 for sure and we have a little bit of unfavorable mix in Q4 as a lot of these big projects that.

Essentially it's been built in the backlog is as we've.

The backlog during the course of the year.

Expected to be shipped in Q4 and a lot of these big projects is carry slightly lower margins in the components business. So I'd say, it's really once again nothing to worry about it's really just a function of mix in the quarter.

Thanks, Craig I'll pass it on.

Thank you.

Thank you. Our next question comes from the line of Josh Packers Winski with Morgan Stanley. Please go ahead hi.

Good morning, guys good morning.

Josh.

Just.

Everyone's standing on everyone else's shoulders for questions. This morning, So I think I'm on Joe Ritchie for this one but on the backlog commentary I mean, if I'm kind of following the pattern versus last year, you guys look like you're going to end the year up at the corporate level, maybe four maybe $5 billion on backlog.

I guess first question does that 2022 kind of preliminary color that's market demand and then anything on price and backlog consumption as sort of incremental and then follow on to that.

And other kind of cyclical environment, what would you view as kind of the bandwidth to be able to convert backlog in any given year like is that something that is kind of a natural we stage gated by by throughput, even even without supply chain constraints.

I. Appreciate your question I will tell you that as we think about the market outlook and our economic forecast the economic forecast of markets would generally include price.

Price would be baked in.

Again, you can debate, whether it should be more or less than what we're assuming body sheets generally baked in.

Backlog reduction.

It's clearly something that we're trying to think through right now as we develop our plan for next year and.

Too early to make a call and give you specific guidance around what our assumptions are around burning down backlog and getting to more of a historical level a lot of that will be highly dependent upon the supply chain environment and how that unfolds during the course of Q4 and into the.

The first part of next year I will say that.

As we think about the supply chain challenges in general, we think will probably be dealing with supply chain challenges through the first half of next year and if you think about semiconductors or some of the electronic components. We think it's maybe it's more like a 2023 before those issues become fully resolved and so we'll give you more guy.

<unk> in February when we lay out kind of our plan for the year.

But at this juncture, we're not in those market outlooks. It does not necessarily assume burned down in backlog, but it would include price.

That's helpful. I appreciate it good luck guys.

Thank you.

Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please go ahead.

Hi, good morning, everybody.

Good morning.

Okay.

Is there are there customer segments that you are selling into that you're concerned about double ordering or folks just.

Perhaps.

Taking product.

They don't need right now.

Given the shortages that are out there in general.

No I appreciate that question, Scott and it's one that we've spent a lot of time pushing on and thinking about as well because when you're dealing with backlog at these levels. That's a natural concern.

As I mentioned in my commentary earlier.

As we test it this specifically with our customers and what you would typically would find it is largely in the distribution channel and today I would say that distributors as they want more inventory they would take more inventory.

If we could ship it to them and their inventory levels are actually reasonably good shape and in lower than you'd like them to be certainly in a number of end markets and so while we can't be completely certain and it would be reasonable to assume that there is a little bit of double ordering going on but I can tell you as we talked to our.

<unk>, it's tough to find it.

Okay. That's helpful and then.

Tom.

This new minimum tax.

Three sides compromise or whatever that's been.

Talked about.

In the press and I know the fine details are probably there yet on how to enforce it but.

Is there any sense of how that impacts Eaton.

On an overall tax rate.

No I appreciate the question Scott obviously, we're following it very closely very well connected with what's going on what I would caution you on as you look at the headlines and the Devil is really in the detail in terms of what the tax code is going to be the legislation that's going to get passed.

Et cetera.

And what I can what I can leave you with is were very confident relative to our peers that we will maintain our relative advantage in a strong position as it relates to to tax.

But more to come on it for sure.

Okay. Good enough I'll pass it on thank you good luck guys.

Thank you.

Thank you. Our next question comes from the line of Ann Duignan with Jpmorgan. Please go ahead.

Yes, hi, thank you.

Perhaps we can turn to 2022.

By end markets.

I appreciate the color, but it is kind of funny to see no red arrows at all across any of your sector.

Sector and if you could just talk about where the risks might lie or end markets that could potentially be done I would think maybe military aerospace and then residential.

And I think you've called it out.

Greg.

Orders in residential were very strong so if you could just.

Maybe this page reflects.

Talking about North America.

Yeah.

Talk to some of those end markets.

Functions that would be helpful. Thank you.

Yes, Thanks, and appreciate the question and to your to your opening commentary you made it is.

An unusual year, where you have all of your end markets that you are expecting to see some growth in and so we're feeling very good about next year as a result of that.

And I would say that.

If you think about specifically.

Whether it's residential markets.

Orders are strong.

If you look at some of the macro indicators around.

So whether it's housing starts or the affordability index of housing there is some macro indicators that would suggest that these markets should naturally slow down that you can't keep posting these huge double digit growth numbers.

An indefinite period of time, and so I'd say, it's really more of the macro indicators that we're looking at in the residential that would have us suggesting that the market is flat ish in 2022.

Not at all consistent with the order growth that we're seeing today, which continues to be strong and not at all consistent with the back order growth in tobacco.

Log in the back order growth is also quite strong in residential.

So we'll have to see how it plays out but certainly at some point that market will slow down.

And that's what's reflected in kind of that outlook for the year and I would say in general the datacenters.

Continues to be extraordinarily strong and there's no reason that would suggest that data centers would in any way backup and so we're comfortable with the datacenter forecasts around the world.

People continue to consume process in store, increasing amounts of data utility markets.

We think utility markets are poised for growth as well as they continue to invest in grid hardening and whether hardening in all of these events that we're seeing around the world whether related events that we will continue to drive investments in.

Utility markets, if you think about today.

What's going on today in the industrial markets.

As we all deal with these labor shortages around the world is certainly going to be an increased appetite. We believe we're investing in automation in factories and equipment and so we.

We talk about these broader trends around.

<unk> transition and investments in.

<unk>.

Electric vehicle charging infrastructure to support all these electric vehicles that are going to ultimately be produced and sold around the world and so I think we are in this little bit of a couple of a goldilocks period with respect to a number of our end markets that.

Most of the indicators are pointing positive as we think about the future global vehicle markets. If you think about the challenges that they've experienced this year and all of the demand that was unmet.

<unk>.

That's another market that is well positioned to two <unk>.

Grow next year and commercial aerospace will come back military markets, you say what could go wrong. What are you worried about we continue to be worried about supply chain constraints that still a bit of an unknown and uncertain.

We worry a little bit about whats happening in Washington, but by and large we think that's net positive in terms of these infrastructure bills that once again, having been baked into our thinking in terms of whether or not we get these big infrastructure spending bills that will come out that will certainly support many of our end markets and so.

I mean, we can certainly talk ourselves into.

Maybe a scenario, that's less optimistic, but but by and large looking at the macro indicators and how our company is positioned we feel very good about not just 'twenty, two but really the medium term outlook.

Thank you.

Greg just as a follow up.

Up to that do you worry at all I mean, if youre right.

And.

Additionally, automotive production comes back strongly and is there any risk that we just exacerbate the supply chain, because we haven't really talked about.

The semiconductor issues.

Okay.

But we Havent started labor freight and all the rest.

Any risk next year revenues and supply chain issues.

Can you for longer than anticipated is that something that you're talking about internally.

Thank you okay.

Is absolutely as you can imagine we're spending.

An extraordinary amount of time right now talking exactly about that issue in terms of all the potential supply chain bottlenecks not only the bottlenecks today, but what becomes the bottleneck tomorrow. When you resolve this bottleneck and it is it has been today a little bit of.

We're playing whack a mole because there had been a number of unforeseen supply chain challenges that have popped up whether it relates to raw materials or whether it relates to labor availability as you've all read about in the newspaper, we won't challenge to fill open jobs in our production operations and so I think that risk is out there.

I think the risk is out there, but I think will it be worse than in 2021, I don't think so I think 2022 will be a better year in 2021, how much better you could debate based upon the rate at which the industry is able to resolve some of these supply chain constraints.

So thanks guys. Thanks, Thank you.

Paul <unk>.

[laughter].

Thank you. Our next question comes from the line of Mig Galbraith with Baird. Please go ahead.

Thank you and good morning.

Morning.

I'm just looking for maybe a little more perspective on on.

The various items on a cost structure that you have to adjust in the back half of <unk>.

This year I mean, you.

You obviously.

200 basis points from your from your topline.

But you raised your margin outlook so.

You mentioned mix helped you in the third quarter I'm wondering if there are other puts and takes here in terms of what allowed for this obviously very good margin performance that we need to be aware of.

Yes, no I'd say that.

Other than the things that we've laid out.

So the one that was probably.

Outside of our control what kind of a good guy that Scott was on the mix front.

Obviously on the film dealing with a lot of other I'd say extraordinary costs that we would normally not having the business around.

Money, we're spending to expedite materials and.

And labor inefficiencies in our factories and so I think in any business there's always.

Our balance of goods and bads and.

And we did call out mix as a positive but there is also as I mentioned a lot of other challenges that we're dealing with as we try to keep our factories fully staffed fully running and productive given some of the supply chain constraints that we've had and so no I'd say that mostly it's just been good execution. Our teams as you know, we we call that.

<unk> early we anticipated that we were going to have a revenue issue due to supply chain and our teams at that point.

We went to work on the things that we can control the things that we can do to maximize our performance.

And deliver our earnings despite these supply chain challenges and so I think we've really seen good execution. The other place that we're seeing better benefits quite frankly than we originally anticipated was in our restructuring programs.

We're running ahead of schedule and some of the benefits associated with restructuring.

Youll see in the Q that we file that we've taken the spending up on restructuring by about to about $40 million and it's going to look at $30 million more benefits than we originally anticipated and so our teams are really just.

Laser focused on executing controlling the things that we don't we can't we can control and managing the things that we can to the best of our ability. So I would say that just really good execution in the quarter and.

For the year it will be a very strong year.

I see but in terms of items like variable compensation or some other component of your of your.

Variables nothing to Colin.

Sure. So certainly it's going to be a very good year. So the comp plan is higher than what we would have originally planned for which is good a good thing. So no the comp plan is higher not lower.

And we're having to offset we're having to offset that as well.

Okay. Then my follow up I'm, just looking to kind of clarify in terms of the supply chain.

Or are things sort of getting less bad in the fourth quarter relative to the third your suppliers sort of catching up and that's kind of how you kind of dig your way out of this.

Or is it a war or are you doing some things proactively in terms of qualifying new suppliers, making adjustments to your supply chain given all that transpired in 2021. Thank you.

It's really all of the above.

Many cases some of these supplier constraints that we've had are getting better.

We're also working hard too.

Where we have the ability to change materials qualify different materials.

We're working on that.

Where we've had some labor constraints, whether it's in our own shops or with our suppliers in some cases, we're actually sending some of our people to suppliers operation sale mainly airlines.

So we're really it's a whole host of things that we're working on and really pulling every lever.

Within our control to improve the supply chain situation.

So.

One thing its really a whole multitude of different initiatives that are being undertaken by our teams around the world to.

To improve the outlook.

Got it thanks.

Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.

Hi, Good morning, maybe just a first question on the portfolio, which I don't think theres been addressed yet in the Q&A.

Intrigued that you took down the buyback guide because of I think a heightened M&A appetite might.

Maybe help us understand sort of what's changing there is it just because it's such a boy in M&A environment Youre seeing a lot more assets.

Sales sort of coming to market than you'd expected, maybe six or 12 months ago.

And also I suppose it tells US that you think valuations for M&A look reasonable so maybe help us understand.

There anything changed no returns.

Or is it just the volume of assets coming to market is what makes it so appealing.

And also then on the divestment side.

Are you getting more.

Intrigued to do M&A should.

Could we expect divestments, perhaps.

Also pick up again next year.

Yeah, Thanks, Julien I would not read too much into the mid level of buybacks that we've done year to date, it's about $123 million what I draw your attention to is the beginning of the year with the big acquisitions that we've done related to comp.

As well as trip flight, we're always we're always on the lookout for very good quality strategic acquisitions, which ceased to have certainly proved to be and therefore, we just took more of our capital dollars and put them back acquisitions as opposed to buybacks. So I wouldn't read anything into it in terms of.

Capital allocation strategy changes and as it relates to divestitures.

As Craig has said many times, we're always on the look out to grow the head and shrink the tail. So.

Whether it's a part of our business is not performing we're always going to look at pruning it and adding on the on the upside but nothing specific to report here.

And the only thing I would add to what Tom said.

Completely agree with or ways that we have been more active this year than we anticipated.

There is obviously the big headline deals of copper.

Complement of tripwire, but we've done a number of other deals during the course of the year as well.

In our electrical business.

JV that we've signed.

China market.

We acquired a.

Green motion business in Europe, and so we have been very active this year in the M&A market I would say from our portfolio transformation standpoint, I think it's one of the most transformational in the history of the company.

And so.

We continue to be focused on opportunities we are in fact seeing.

The better deal flow today, and then we certainly have in the last couple of years valuations in many cases are still stretched.

We will commit to you and promises that we will remain disciplined and you've seen the kind of multiples that we're paying for our acquisitions and the type of assets that we're acquiring and we won't lose our way we will continue to be focused on those kinds of assets focusing in our electrical business focusing in our E mobility segment focus.

In our aerospace business, but we.

We are seeing a better deal flow today and given the trade off between a value creating acquisition is highly strategic and buying back shares. We're obviously leaning in towards <unk>.

Spending those M&A dollars.

Two to grow the portfolio.

That's reassuring thank you.

Then maybe there's been a little questions on the sort of revenue and EBIT and so forth maybe just on the free cash flow.

Year to date Youll sort of EPS is up I think adjusted 40% the cash flow free cash flow is down in the mid teens.

I realize there is some sort of one timers might be driving a wedge between the two metrics. So.

So when we look at 2022.

Should we expect.

Conversions to be closer to 100% maybe.

Maybe any initial thoughts on capex.

Capex have kind of more of a lid on it next year than this year any context around that free cash outlook from here.

Well I think it's important Julien to note that our in the quarter, our free cash flow conversion was approximately a 100% and free cash flow as a percentage of net sales was.

And a 12, 4% or our mid term outlook I think it was 14, so we're on that trajectory.

As it relates to next year and going forward, we would certainly want to be at that 100% or higher free cash flow conversion.

As it relates to Capex.

We're always going to have our first priority in our capital allocation to invest in growth in the business. So we'd be looking for those opportunities.

Great. Thank you.

Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please go ahead.

Thanks, Good morning.

I just wanted to go back good morning, just wondering back to electrical Americas, you did have a tough comp in the prior year.

Some inventory, we still benefits in <unk> 'twenty.

So I'm curious any comments on where inventories are trending right now in your channels I'm guessing it wasn't helpful.

And then just one more crack at the supply chain you do have a pretty complex supply chain.

Puerto Rico and the Dominican.

Dominican Republic I'm, just wondering if that was a.

A factor behind some of these cloud changed basically.

Yes.

On the latter question Nigel no none at all.

We do have a.

Number of our facilities in the Dominican Republic, and Puerto Rico and that wasn't in no way related to the pricing challenges that we're dealing with it really with third party suppliers outside of our four walls, where the issues were largely centered and I missed I missed the first part of your question Nigel what was.

I missed the statement around the first part of your question what was the first part of it yes.

You are comping, some inventory restock benefit in the prior year. So just curious what you're seeing in the inventories within the channel. So this quarter I am guessing it wasn't helpful, but but income in sir.

Yes.

As we talked a little bit in the opening commentary.

We've done these channel checks and talk to our distributor partners and they would tell you today that on balance inventories are either in line with.

Where they'd like them to be or in many cases below where they would like them to be and unfortunately today given some of the demand in the market and some of the supply chain challenges.

Disappointing more distributors and we certainly.

Care to with our inability to ship due.

Due to supply chain constraints in total inventories at this juncture I'd say by and large or are well in control and in many cases below where they need to be.

Yes, that's what I expected and then just a quick follow on with the pension.

Point $2 billion of pension contributions this year.

In some nice benefits from discount rates rising obviously Margaret since being positive just curious the best view on pension funding for the next.

Two or three years based on based on the current funding levels.

Yes, where are our pension as you know is almost is almost fully funded.

Don't anticipate making any additional contributions to it.

How the pension plays out in the next year, obviously is going to depend on the returns and the discount rate at the end of the year end.

More to come on that specifically when we talk in February.

Okay. Thanks, Tom.

Thank you. Our next question comes from the line of David Raso with Evercore. Please go ahead.

My question relates to incremental margins next year in electrical just trying to get some sense. When you look at your slide 12, the end market assumptions.

Just from what you know about what's in the backlog and also how these businesses are structurally when you look at that mix is that a positive for incremental margins neutral negative just trying to get a sense of how you think about those businesses and of course, what you know is in the backlog price cost and everything else.

And I appreciate the question and I would say that there is.

Nothing specifically in the backlog that we think is going to drive any changes in terms of the incremental performance of our business going into 2022.

We've kind of articulated in the past is that you really ought to think about the company delivering about 30% incremental we're obviously delivering a bit better than that this year.

There's been a lot of great work done inside of the business, we're getting some earlier benefits from restructuring.

We're getting some benefits from the portfolio moves that we've made this year, but I think for planning purposes, I think a 30% incremental is really the right way to think about the incrementals for for the electrical business and really for the entire company.

And also this month them Siemens the way they price right. There are playing a little catch up but you heard even low double digit increases on the resi products high single for non resi.

You ABB Schneider is at least kind of five plus 5% to 10%.

I mean, it appears by the first quarter of next year versus the end of last year, I mean pricing might be up as much as almost 20% in aggregate.

Im not hearing you, but I'm just curious maybe I missed it are you hearing any demand destruction at all with this pricing.

No we're really not hearing any demand destruction at all and as I said, it's been a kind of an extraordinary period of time, where.

Pricing is seems to be seamlessly pass through to the marketplace and the demand remains strong.

To your point around incremental margins I mean, clearly what we're dealing with in this environment.

Hyperinflationary environment, where you have really big pricing.

Going into market, but youre, a big cost increases that you typically don't get your normal.

Margins on the commodity increase and so there has been this year and little bit of pressure on me.

Margins as a result of not recovering.

Full margin on the commodity cost increase and so that is certainly something that hold held margins back of it.

Remember such as commodities, increasing we're also seeing obviously labor increases we're seeing logistics increases.

Those are likely sticky somewhat going into 2022 as well, which.

Gets you back to a 30% incremental for planning purposes.

Yeah, which is nice it just doesn't seem like at least we don't find any demand destruction at all so.

Even if hopefully a year from now the year over year costs are not up as much.

Even come down a little bit I mean this is price. This is on surcharge. So it should be pretty sticky it should hopefully in the back half of the year.

Help incrementals even more so.

Yes.

We're hoping it plays through exactly the way you articulated.

Alright, Thanks, a lot appreciate it.

Thank you.

Thank you and our last question will come from the line of John Walsh with Credit Suisse. Please go ahead.

Hi, good morning, everyone. Thanks for fitting me in.

Good morning.

Maybe just a clarification question.

Obviously, we all wanted to take the sales from the supply chain and electrical Americas This quarter.

And run them through and into next year I just want to confirm that these are truly differed sales and kind of none of it was a lost sale and some of the kind of low voltage faster.

Book and ship stuff and that goes through distribution.

Yes, I mean I think.

And once again this is one of the things John what you can and I would never say that 100% right theres always going to be on the.

The margin.

Perhaps an order or two that you've lost as a result of your inability to deliver but by and large the fact that the backlog is up more than 50%.

By and large we typically have in the Americas, especially we have we have dedicated distributors, who are essentially eaton distributors, who are committed to our relationship and in India.

Essentially to our business and so once again, we feel very confident that with our order growth and backlog growth that.

That we're going to hold this business in.

<unk>.

The loss missed shipment today become simply a a future delivery into and that's kind of what we think is the case for the vast majority of the Delta, let's say in growth that we've experienced in the quarter.

Great just wanted to make sure I understood correctly. These are these are typically projects. So much of this business goes into projects and a project where you specify a particular.

Supplier for your electrical switch gear.

It's very difficult.

Once the project has been specified and one by a particular supplier or the other for that to just simply be changed out to another supplier. So I'd say that yes, we feel fairly confident.

Great and then maybe could we just get a little color on what Youre seeing in China, specifically, maybe around data center industrial commercial.

Kind of more of those industrial vertical.

Yeah, and I think we're all reading the same headlines with respect to what's going on in China today.

In an economy that has certainly slowed a bit this year and more than anyone anticipated with some special pressures, let's say on the residential segment of the market I will tell you that in our own business that our China team, we just had an outstanding quarter.

Certainly part of the electrical global segment, whereas you can see that segment posted 18% growth I would tell you that our Asia business numbers Werent.

Terribly different than that and so we had a very strong quarter in China I think we're starting to see some of these real benefits of the joint ventures that we've put in place and we're seeing a lot more opportunities today than we have historically, our datacenter business in the Asia Pacific region, and China is doing well and so we're obviously watch.

The headlines and reading them as well as anyone but to date.

What we've seen in both orders and revenue out of our China business, Our Asia business is doing quite well.

Great I appreciate the color. Thank you.

Alright. Thank you Okay, Hey, thanks, guys. So we have reached to the end of the call and we do appreciate everybody's participation and the questions as always chip and I will be available to address your follow up questions.

Again, and then I have a great day.

Thank you, ladies and gentlemen that does conclude our conference for today, we thank you for your participation and for using AT&T.

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[music].

Ladies and gentlemen, thank you for standing by and welcome to the Eaton third quarter 2021 earnings call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session.

If you wish to put yourself in the question queue. Please press one then zero on your telephone keypad.

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As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host.

Senior Vice President of Investor Relations Yan Jin.

Please go ahead.

Hey, good morning, guys.

You didn't senior Vice President of Investor Relations. Thank you all for joining US why you Didnt third quarter 2020, while earning call with me today I'll, Craig Arnold, our chairman and CEO and Tom Okray exactly.

President and Chief Financial Officer, our agenda today includes opening remarks by Craig highlighting the company's performance in the third quarter as we have done on our past calls we'll be taking questions at the end of the Craig's comments the press release and presentation. We'll go through today have been posted on our website at www Dot <unk> Dot com.

This presentation, including the adjusted earning per share adjusted free cash flow and other non-GAAP measures.

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

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

I'll start on page three with highlights for the quarter and by noting that our team delivered record results in Q3, despite kind of the well publicized supply chain challenges in this environment.

We had strong execution across all of our businesses and as we focused on controlling what we could control.

As you can see we posted an all time record for adjusted EPS of $1 75.

Supply chain constraints did have an impact on our revenue, but we still posted 8% growth in the quarter and for the third quarter in a row, we delivered record segment margins at 19, 9% in Q3 it.

It was an all time record and an increase of 230 basis points over prior year.

On top of record margin Saar, We're also pleased with our incremental margins, which were 46% in the quarter.

Due to actions that we took to mitigate inflationary cost the portfolio changes that we have undertaken and savings from restructuring programs. We.

We did have a bit of help from favorable mix as well in the quarter.

And while revenues were lighter than expected in our electrical Americas segment, we're very pleased to see the strength in orders and the growing backlog overall demand range remains very strong.

For the electrical business is overall orders were up 17% Rolling 12 month basis, and our backlog was up more than 50%.

Another all time record.

Next on page four we summarize our Q3 results and then I'll notice a few points here first or.

9% revenue growth, we increased our operating profit by 23%, which reflects strong operating leverage and benefits from our portfolio actions.

Our acquisitions increased revenues by 7%, which was fully offset by the sale of hydraulics.

Naturally pleased to replace the hydraulic revenue with a collection of businesses that are I'd say higher growth higher margin and have more earnings consistency.

And last our margins of 19, 9% were well above our guidance range of 19 to $19 four as our team did an outstanding job of executing despite the lower than expected revenues.

Moving to page five we have the results of our electrical Americas segment.

<unk> were up 9%, including 1% organic and 8% from the acquisition of AAA organic sales growth was driven by strength in data centers and residential markets, partially offset by weakness in large industrial projects and sales to utilities.

As I mentioned earlier revenues were impacted by supply chain constraints are.

Electrical Americas segment suffered from the general supply chain constraints that we're all feeling but was actually disproportionately impacted by a few unique suppliers, who were especially impactful to this business.

We're naturally addressing these and other supply challenges and expect to do better in Q4.

Operating margins continued to be strong at 21, 7% and were up 40 basis points from Q2.

This is consistent with our expectations and we're doing a good job of getting price to offset inflation.

I'd say the biggest highlight in this segment is the continued growth in orders and backlog on a rolling 12 month basis orders were up 17% organically and this was an acceleration from up 13% in Q2.

The strongest segments, where utility and residential markets.

And the backlog is up more than 50% from last year and up 9% from Q2.

Both I'd say are encouraging signs and support our expectations that the miss shipments will simply be pushed into future quarters.

Yeah.

Turning to page six we summarize our electrical global segment's results, which I would say were strong across the board organic growth was 18% with broad strength in really all end markets and currency added 1%.

We also posted all time record operating margins of 21% and had very strong incremental margins of nearly 40%.

The margin performance was driven by volume leverage strong cost control and savings once again from restructuring actions.

Orders were very strong up 17% organically on a rolling 12 month basis with particular strength in the quarter in industrial commercial and institutional markets.

Like our Americas segment, the backlog is up more than 50% and at record levels.

Before we move to the industrial businesses, Here's the way I'd summarize the performance of our electrical businesses. When you add the two together they delivered solid organic growth of 8%.

Built sizable backlog, which strengthens our outlook for future quarters, and the improved margins by 110 basis points. So on balance I would say a very strong set of quarterly results for our electrical businesses.

Moving to page seven we have the financial results of our aerospace segment.

Revenues were up 38%, 4% organic and 33% from the acquisition of Cobham mission systems and 1% from currency.

Organic growth was primarily due to higher sales in commercial markets, partially offset by weakness in military markets.

Operating margins were 22% up 350 basis points from last year, and 100 basis points sequentially.

This strong performance gives us confidence that as aerospace markets continue to recover we will meet or exceed the 24% margin targets that have been set for this segment.

In the quarter, we also had strong organic incremental margins, which were driven by favorable mix.

Primarily from the growth of commercial aftermarket business and as a result, once again from savings from the restructuring actions that we've taken.

And by the way Q3 was the first full quarter, where carbon emission systems were part of the company and we're very pleased with the financial performance of the business and the integration process is going very smoothly.

As we look to the future, we're seeing encouraging signs of recovery in this segment with both orders and backlog now trending positively.

12 month basis orders were up 4%, primarily with strength in the business jet segment.

Our backlog has increased by 5%.

Next on page eight we have the results of our vehicle segment organic revenues increased 11% with solid growth in North America class eight truck business and strength in South America that more than offset the weakness in North America light vehicle markets and as you're all well aware right.

Production has been severely impacted by supply chain constraints.

Operating margins were 18%.

Generated very strong incremental margins of more than 50%.

In addition to strong execution, we also had some favorable mix in the quarter.

Specifically and of note North America.

The truck business benefited from strong aftermarket where sales were up from 40% at attractive aftermarket margins.

In our North America light vehicle motor vehicle business also benefited from favorable mix as customers prioritize programs with more of our content more full size pickups, and Suvs Suvs and fewer small cars.

So good mix, good volume growth and savings from our multiyear restructuring program all contributed to very strong quarterly operating results here.

Turning to page nine you will see the financial results of our mobility segment.

Our revenues increased 6% organically.

Light vehicle business customer production levels were reduced by supply chain constraints here as well and given the nature of the products that we sell in this segment they were more significantly impacted by the semiconductor shortages that we've all read about.

As a result of our backlog is up significantly here.

Operating margins were negative nine 5% once again due to heavy R&D investments and startup costs associated with new programs.

We continue to be pleased with the progress in this business, which is one program is worth nearly $600 million of mature year revenue.

Revenue and we expect to see a significant ramp up in revenues in 2023, which positions us well to achieve our long term revenue targets of 2% to $4 billion by 2030.

On page 10, we provide an update at our organic growth and operating margins for the year.

With supply chain constraints in Q3, continuing into Q4, we now expect overall organic revenue growth of 9% to 11% for 2021.

For electrical Americas, we expect 5% to 7% growth.

You'll note the implied guidance.

Guidance for Q4 is actually.

7% to 9%, which is a solid step up from the 1% in Q3.

Organic revenues in aerospace are expected to be roughly flat with strength in commercial markets being offset by weakness in military markets in the other segments had some minor reductions in revenue as well, but just minor.

Despite slightly lower organic revenue growth outlook, we're increasing our operating margin guard guidance by 20 basis points from 18, 6% to 19%.

And I would note that this guidance, we're on track to generate strong incremental margins of approximately 40% for 2021.

Which we see naturally is outstanding performance given the current inflationary environment.

Moving to page 11, we have the remaining items of our guidance for the year, we expect full year adjusted EPS between $6 59 to $6 69.

At the midpoint this represents 35% growth over 2020.

We're also delivering significant margin improvement up 240 basis points from last year at the midpoint of our increased margin guidance.

So I'm pleased that we have strong operating performance in the face of what we call historic supply chain challenges and the businesses are doing well.

Next given more active M&A activities, we now expect share repurchase to be between $375 million and $425 million.

And lastly, our Q4 guidance includes earnings between $1 68, and $1 78.

Organic revenue growth between 7% and 9% and segment margins between 18, 8% to 19, 2% an increase of 160 basis points at the midpoint versus prior year.

So overall once again, a strong 2021 with solid revenue growth strong orders in.

And good execution, allowing us to deliver record margins.

Next on page 12, we did want to provide some preliminary assumptions for our end market for 2022, and and as you can see we're expecting attractive growth in nearly all of our markets.

With very good growth in Datacenters and locked in industrial facilities, and our electrical business in our commercial aerospace business and certainly in all vehicle markets.

We will provide more detailed color on organic revenue growth assumptions when we provide our 2020 guidance in February but we did want to share some of our preliminary thinking here.

We would also expect to see carryover benefits from pricing actions taken which should also help our year over year growth next year.

And lastly on page 13, we provide some.

Summary, thoughts here and I would say first I am proud of the record quarter results.

Particularly our strong margin performance.

Our team has demonstrated that we can manage through a challenging operating environment supply chain constraints inflationary pressures and still improve margins and EPS and.

In the long term secular growth trends of electrification energy transition and digitalization are playing out just as we expected or maybe even better.

We also see 2021 as a transformative year for Eaton in terms of portfolio management.

Our higher growth higher margin and mix and less cyclical company today.

And with strong year to date performance, we are well on track to deliver a very strong 2021 with double digit organic revenue growth and 35% adjusted EPS growth.

And I'd also add we have great momentum.

Into the Q4 and into next year, we have strong order growth, we have a full backlog and many of our end markets are poised for recovery.

Youll recall at the beginning of the year, we set medium term targets of 4% to 6% organic revenue growth annually.

<unk> to 500 basis points improvement in margins.

11% to 13% annual growth in adjusted EPS.

So evaluating our progress about one year and I'd say that we're running ahead of expectations.

And with that summary, please to turn it back over to Yan and to open the session up for Q&A.

Great. Thanks, Craig for the Q&A section today. Please limit your question to one question and one follow up sanctioning the ones for your cooperation with that ill turn it over to the operator will give you guys the instructions.

Thank you, ladies and gentlemen, if you wish to ask a question. Please press one then zero on your telephone keypad.

You may withdraw your question at any time by repeating the one zero come out.

Our first question comes from the line of Joe Ritchie with Goldman Sachs.

Please go ahead.

Thank you good morning, everyone. Good morning, Joe.

Greg I know you want to give us some commentary on way to give us exact commentary on 2022 organic growth expectation.

February I guess in.

In the context of the long term framework of 4% to fix and with your backlog and the electrical business being up 50% I mean is it fair to assume that just the electrical business.

It should be at a very minimum at the 4% to 6% range for next year or maybe slightly better just given what you're seeing across your business.

Okay.

I appreciate the question, Joe and certainly if you take a look at the performance of the business. This year and the backlog that we're building in 17% order intake you can certainly make a case for that.

That business performing better than the.

4% to 6% numbers that we laid out and you'll also recall by the way as we laid out those targets for growth for the company that the businesses are.

We're all running towards higher growth numbers, and we hedge those numbers back at the corporate level recognizing that things happened in the world that you don't often anticipate and expect I mean Q3 is a great example of that with some of these supply chain constraints as always a number of uncertainties out there and so I think yes certainly.

A possibility that the electrical segments could perform better than that and we have internal plans that would suggest better performance than that but once again, given the amount of uncertainties that we're dealing with especially in today's supply chain environment, We still think for planning purposes doses still reasonable assumptions to make.

But there could be upside.

Yes.

That's fair and I guess, maybe just following up there.

And just talking about pricing, obviously key topic of conversation across our conference calls, thus far and as you think about your own pricing mechanisms and how this plays out for you in 2022.

Maybe talk a little bit about how much pricing.

We can expect to come through the system.

Yes.

Yes, no pricing as we talked about a little bit at the Laguna conference as well.

Our expectation continues to be that our businesses will fully offset inflation with price. We are living in an environment today, where I'd say, it's never easy to get price, but its probably easier today given some of the supply chain constraints that we're all dealing with and it's probably ever been.

Certainly in my professional career, and so I'd say that our thinking really hasn't changed with respect to pricing we have good mechanisms in place to our pricing typically lags inflation.

By a quarter or two depending upon which segment of the market. We're serving we naturally have experienced some more inflation as we came through Q3 than we originally anticipated and as a result, we like others have had to go to the market for additional price, but by and large this pattern continues and we would expect that.

As we look forward to 2022, we would expect to once again.

More than fully offset.

The inflationary pressures that we experienced this year and maybe it's going to add a little bit of a tailwind next year, but by and large are long term.

Expectation on price versus inflation is to fully offset it and that's what we're tracking to for this year.

Yes.

Okay. Thank you. Our next question comes from Andrew <unk> with Bank of America. Please go ahead.

Hi, guys good morning.

Andrew Good morning.

Just to build on.

Joe's question.

<unk> supply chain challenge impact.

Impact your revenue in the third quarter.

In North America, I think you alluded to it but if you could character quantified.

Yeah. Appreciate the question Joanna It's certainly if you take a look at on balance our electrical business grew from 8% in the quarter. We combined the two but very different performance in our electrical global versus the Americas business, which is where we had.

Clearly our biggest.

Biggest supply chain constraints and I'd mentioned in my opening commentary, we have a number of unique suppliers in that business that.

Really resulted in revenues being below what we anticipated and so as we think about it and you try to quantify the impact in the quarter.

Our backlog grew in the quarter by $280 million. If you look at the shippable piece of that piece that in the quarter.

We could say it's order of magnitude.

Something north of $100 million, let's call it $130 million of revenue. If you simply look at the shippable backlog and in the quarter itself. So we could have very easily posted I would say, a 9% growth number and or the electrical Americas business in the quarter, but for the supply chain constraints.

Well. Thank you and then just how should we think about just sort of backlog versus normal because we actually had a number of companies in our coverage.

That normally sort of non for more of a short cycle focus sort of I'll.

Talk about backlogs up 40, 50, it's 30%.

As you guys think about the world does it mean more visibility or actually more uncertainty because it's so unusual for a business like yours to care so much in terms of backlog.

Think about it internally thank you.

And we clearly see it as more visibility if you think about it a typical year, we would go into let's say the year with 25% to 35% of our orders for the upcoming year in the backlog and we're certainly running today at the very high end of that and so we clearly see it as better visibility.

And we test that as you can imagine.

The quality of the backlog in and whether or not the backlog is solid.

Terms of these orders and we're testing.

Customers and channel partners in.

The indication that we're getting although you're never 100% certain it probably is a little bit of.

Order placement that's taken place.

Yet you're positioned in line, but by and large the backlog feels extremely solid.

Thanks, very much Craig Thank you.

Thank you. Our next question comes from the line of Jeff Sprague with vertical research. Please go ahead.

Thank you and good morning, everyone.

Good morning, Tony.

Good morning, Hey, just back on the supply chain Craig.

The 1% growth really does jump out relative to <unk>.

Global unmet Schneider really everyone else.

And I just wonder if you could elaborate a little bit more on what the issues were in the quarter and just your confidence level.

They're resolved.

Just trying to think as the market leader in the U S. If anybody could get this stuff it would be yield and that didn't seem to happen in the quarter.

Yeah No I appreciate the question, Jeff and we are a market leader in North America, and as you know our North American electrical business has really posted probably.

10 years in a row of share gain and so we do have a very strong position in the market.

We have great supplier relationships in general.

I would tell you that in our case, what was a little bit unique is that their words.

A few suppliers that we have that support our electrical Americas business.

Who are suppliers that we have that are perhaps not suppliers to others in the industry.

That had some challenges that we're working through it together and so as I talked about if you see it in the growth in the backlog what sales could easily been but for the supply chain challenges I think that number one becomes a 9% number which I think you'd agree is much more in line with what you've seen from some of the.

Others in the industry and so we are absolutely confident that it's timing.

It's tied to very specific supplier issues that we are clearly focused on and working.

We generally speaking like I said have very supportive and strong supplier relationships and it is not.

One of our competitors being over allocated and Thats been under allocated. These are just suppliers that are unique to our business that are working through some particular issues in their own kind of operations that they need to be worked through and so yes. So I'd say by and large it's timing we will get through.

This in and we're talking about growth numbers of around 8% or so in Q4, and we're setting up well for 2022 and you can see it in our electrical global business. They grew 18% in the quarter.

So I think that.

I don't want to aggregate when you look at our global electrical business. Our growth is very much in line with others in the industry and we would have been better.

But for the supply chain issues that we're having in North America. So the franchise is in good shape nothing to worry about we really just see it as timing.

Great. Thanks for that color and then just on price I think you've been a little reluctant to be specific on price but.

I would assume you are in the same ZIP code as what we're seeing out there.

Kind of mid to even high single digit.

Price increases is that kind of directionally correct.

I don't know if could you just maybe share just a little bit more thought on what the wrap around price impact might be in 2022.

Okay. I appreciate the question on price and why you ask for more transparency on it varies widely by customers in <unk>.

Different markets that we're in and so.

We're not going to provide more transparency than we provided other than to say that.

We're getting price to offset inflation.

It will be about neutral this year, we think it will be slightly positive next year, but beyond that we would rather not.

Comment on price is it obviously you have lots of different customers to have different <unk>.

End markets you have different supply chain.

Factors affecting different parts of the business and so overall our teams are doing well, we're getting price offset inflation in <unk>.

Would be a net.

Neutral this year, maybe it's a net positive next year, we'll clearly have a RAF impact as you as you mentioned, Jeff just given the timing of the execution of the pricing in 2021.

Okay. Thanks, I'll leave it there. Thank you alright. Thank you.

Thank you. Our next question comes from the line of Nicole <unk> with Deutsche Bank. Please go ahead.

Yeah. Thanks, Good morning, guys good morning, Nicole.

Just to piggyback on Scott's question I guess, you guys are embedding like kind of a snapback in electrical Americas pork you. So Mike as you progressed through the beginning of the fourth quarter have you seen some of the pricing issues go away just to give us some confidence about the achieve ability of getting back to 7% to 9% organic.

Yeah, No I appreciate the question, Nicole and obviously as a part of providing guidance externally.

We're looking at our internal forecasts from our operations were obviously been in a number of very direct conversations with suppliers, who have made commitments to us around improvements in so you can rest assured that that forecast is very much grounded and what we're hearing from our suppliers and what we're getting specifically from our business.

In terms of their expectations and so.

We're confident.

In that forecast based upon what we're hearing from our suppliers.

Alright, let's say, we're not completely out of the woods, we still have we still have some challenges once again Q4 could be better. If we were completely resolved from some of the supply chain. So we're not assuming that all of the problems are resolved in Q4, but certainly much better than in Q3.

Okay got it and then just maybe to follow up on that thinking about how you guys have positioned margins for the fourth quarter, you do have a bit of a step down coming from near record levels in the third quarter is that just some of the favorable mix dynamic that you experienced in <unk> are you assuming that that goes away just trying to understand the puts and takes I think norm.

Blake from a seasonal perspective margins have been more like flattish Q on Q.

Yes, we did as I mentioned in my commentary, we had some favorable mix in Q3 for sure and when we have a little bit of unfavorable mix in Q4 as a lot of these big projects that.

Essentially it's been built in the backlog as we.

Grown the backlog during the course of the year.

We expect to be shipped in Q4 and a lot of these big projects is carry slightly lower margins in the components business. So I'd say, it's really once again nothing to worry about it's really just a function of mix in the quarter.

Thanks, Craig I'll pass it on.

Thank you.

Thank you. Our next question comes from the line of Josh Packers Winski with Morgan Stanley. Please go ahead hi.

Good morning, guys good morning.

Josh.

Yes.

Everyone's standing on everyone else's shoulders for questions. It's Michael I think I'm on Joe Ritchie for this one but on the backlog commentary I mean, if I'm kind of following the pattern versus last year, you guys look like you're going to end the year up at the corporate level, maybe four maybe $5 billion on backlog.

I guess first question does that 2022 kind of preliminary color that's market demand and then anything on price and backlog consumption as sort of incremental and then follow on to that.

And other kind of cyclical environment, what would you view as kind of the bandwidth to be able to convert backlog in any given year like is that something that is kind of a natural we stage gated by by throughput, even even without supply chain constraints.

I. Appreciate your question I will tell you that as we think about the market outlook and our economic forecast the economic forecast the markets would generally include price.

So price would be baked in.

You can debate, whether it should be more or less than what we're assuming body sheets generally baked in.

Backlog reduction.

It's clearly something that we're trying to think through right now as we develop our plan for next year and we.

Too early to make a call and give you specific guidance around what our assumptions are around burning down backlog and getting to more of a historical level a lot of that will be highly dependent upon the supply chain environment and how that unfolds during the course of Q4 and into the.

First part of next year, I will say that.

As we think about the supply chain challenges in general, we think will probably be dealing with supply chain challenges through the first half of next year and if you think about semiconductors or some of the electronic components. We think it's maybe it's more like a 2023 before those issues become fully resolved and so we'll give you more guide.

Since in February when we lay out kind of our plan for the year.

But at this juncture, we're not in those market outlooks. It does not necessarily assume burned down in backlog, but it would include price.

That's helpful. I appreciate it good luck guys.

Thank you.

Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please go ahead.

Hi, good morning, everybody.

Morning.

Okay.

Is there are there customer segments that you are selling into that you're concerned about double ordering or folks just.

Perhaps.

Taking product.

They don't need right now.

Given the shortages that are out there in general.

No.

Appreciate that question Scott and it's one that we've spent a lot of time pushing on and thinking about as well because when you're dealing with backlog that these levels. That's a natural concern.

As I mentioned in my commentary earlier.

As we've tested this specifically with our customers and what you would typically would find it is largely in the distribution channel and today I would say that distributors as they want more inventory they would take more inventory.

If we could ship it to them and their inventory levels are actually reasonably good shape and in lower than they'd like them to be certainly in a number of end markets and so while we can't be completely certain and it would be reasonable to assume that there is a little bit of double ordering going on but I can tell you as we talk to our.

<unk>, it's tough to find it.

Okay. That's helpful and then.

Tom.

This new minimum tax.

Three sides compromise or whatever that's been.

Talked about.

In the press I know the fine details on.

Are there yet on how to enforce it but.

Is there any sense of how that impacts on an overall tax rate yes.

Yes, no I appreciate the question Scott obviously, we're following it very closely very well connected with what's going on what I would caution you on as you look at the headlines.

The Devil is really in the detail in terms of what the tax code is going to be the legislation that's going to get passed et cetera.

And what I can what I can leave you with is were very confident relative to our peers that we will maintain our relative advantage in a strong position as it relates to to tax.

But more to come on it for sure.

Okay. Good enough I'll pass it on thank you good luck guys.

Thank you.

Thank you. Our next question comes from the line of Ann Duignan with Jpmorgan. Please go ahead.

Yes, hi, thank you.

Perhaps we can turn to 2022.

And markets.

Appreciate the color, but it is kind of funny to see no red arrows at all across any of your set.

Sector and if you could just talk about where the risks might lie or end markets that could potentially be done I would think maybe military aerospace.

Residential.

Right.

Thank you Craig.

Orders in residential were very strong so if you could just.

Maybe this page reflects.

Talking about North America.

Talk through some of those end markets.

Functions that would be helpful. Thank you.

Yes, Thanks, Dan I appreciate the question to your to your opening commentary you mean it is.

An unusual year, where you have all of your end markets that youre expecting to see some growth in and so we're feeling very good about next year as a result of that.

And I'd say that.

If you think about specifically.

Whether it's residential markets.

Orders are strong.

If you look at some of the macro indicators around.

Whether it's housing starts or the affordability index of housing there is some macro indicators that would suggest that these markets should naturally slow down that you can't keep posting these huge double digit growth numbers.

An indefinite period of time, and so I'd say, it's really more of the macro indicators that we're looking at in residential that would have us suggesting that the market is flat ish in 2022.

Not at all consistent with the order growth that we're seeing today, which continues to be strong and not at all consistent with the back order growth in tobacco.

Log in the back order growth is also quite strong in residential.

So we'll have to see how it plays out but certainly at some point that market will slow down.

And that's what's reflected in kind of that outlook for the year and I think in general the <unk>.

Data centers.

Continues to be extraordinarily strong and there's no reason that would suggest that datacenters with in any way backup and so we're comfortable with the datacenter forecasts around the world.

People continue to consume process in store, increasing amounts of data utility markets.

We think utility markets are poised for growth as well as they continue to invest in grid hardening and whether hardening in all of these events that we're seeing around the world whether related events that we will continue to drive investments in.

And utility markets, if you think about today.

Going on today in industrial markets.

We all deal with these labor shortages around the world is certainly going to be an increased appetite, we believe for investing in automation in factories and equipment.

So.

We talk about these broader trends around energy transition and investments in.

No.

Electric vehicle charging infrastructure to support all these electric vehicles that are going to ultimately be produced and sold around the world and so I think we are in this little bit of a.

Goldilocks period with respect to a number of our end markets that.

Most of the indicators are pointing positive as we think about the future global vehicle markets. If you think about the challenges that they've experienced this year and all of the demand that was unmet that mean.

That's another market that is well.

<unk> two.

Grow next year and commercial aerospace will come back military markets, saying what could go wrong. What are you worried about we continue to be worried about supply chain constraints that still a bit of an unknown and uncertain.

We worry a little bit about whats happening in Washington, but by and large we think thats net positive in terms of these infrastructure bills that once again, having been baked into our thinking in terms of whether or not we get these big infrastructure spending bills that will come out that will certainly support many of our end markets and so.

I mean, we can certainly talk ourselves into maybe a scenario, that's less optimistic, but but by and large looking at the macro indicators and how our company's position we feel very good about not just 'twenty, two but really the medium term outlook.

Thank you for the question Craig.

Up to that do you worry at all I mean, if youre right about that.

Truck and.

Yeah.

Additionally, automotive production coming back strongly and is there any risk that we just exacerbate the supply chain problem, because we havent really thought to that if we get the semiconductor issue. It's hard to know how many there are plenty of that.

But we havent started the.

And is there any risk to next year's revenue.

Chain issues.

Can you just sort of longer than anticipated is that something that you're talking about internally and I'll leave it there.

Okay.

He is absolutely as you can imagine we're spending.

An extraordinary amount of time right now talking exactly about that issue in terms of all the potential supply chain bottlenecks not only the bottlenecks today, but what becomes the bottleneck tomorrow. When you resolve this bottleneck and it has been has been today a little bit of we're playing we're playing whack a mole because there had been a number of unforeseen supply.

<unk> challenges that have popped up whether it relates to raw materials or whether it relates to labor availability as you've all read about in the newspaper as we won't challenge to fill open jobs in our production operations and so I think that risk is out there.

I think the risk is out there, but I think will it be worse than in 2021, I don't think so I think 2022 will be a better year in 2021, how much better you could debate based upon.

Is the rate at which the industry is able to resolve some of these supply chain constraints.

So thanks guys. Thanks, Thank you.

Paul <unk>.

Yeah.

Thank you. Our next question comes from the line of Mig <unk> with Baird. Please go ahead.

Thank you and good morning good.

Good morning.

I'm just looking for maybe a little more perspective on that.

The various items on a cost structure that you had to adjust in the back half of.

This year I mean, you.

You obviously.

Cut 200 basis points from your from your topline.

But you raised your margin outlook so.

You mentioned mix helped you in the third quarter I'm wondering if there are other puts and takes here in terms of what allowed for this obviously very good margin performance that we need to be aware of.

Yes, no I'd say that.

Other than the things that we've laid out.

The one that was probably.

Outside of our control kind of the the good Guy that we got was on the mix front.

Obviously on dealing with a lot of other I would say extraordinary costs that we would normally not having the business around.

Money, we're spending to expedite materials and.

And labor inefficiencies in our factories and so I think in any business there's always.

The balance of goods and bads and.

And we did call out mix as a positive but there is also as I mentioned a lot of other challenges that we're dealing with as we try to keep our factories fully staffed fully running and productive given some of these supply chain constraints that we've had and so I know I would say that mostly it's been good execution. Our teams as you know, we we call that.

<unk> early we anticipated that we were going to have a revenue issue due to supply chain and our teams at that point.

Went to work on the things that we can control the things that we can do to maximize our performance.

And deliver our earnings despite these supply chain challenges and so I think we've really seen good execution. The other place that we're seeing better benefits quite frankly than we originally anticipated was in our restructuring programs.

We're running ahead of schedule and some of the benefits associated with restructuring.

Youll see in the Q that we file that we've taken the spending up on restructuring by about towards about $40 million and it's going to look at $30 million more benefits than we originally anticipated and so our teams are really just.

Laser focused on executing controlling the things that we don't we can't we can control and managing the things that we can't do the best of our ability. So I'd say it is just really good execution in the quarter and.

For the year there'll be a very strong year.

I see but in terms of items like variable compensation or some other component of your of your variable nothing to Collin I mean sure suddenly certainly it's going to be a very good year. So the comp plan is higher than what we would've originally planned for which is good a good thing so no the comp plan is higher or not.

Sure.

We're having them offset having to offset that as well.

Okay. Then my follow up just looking to kind of clarify in terms of the supply chain.

Are things sort of getting less bad in the fourth quarter relative to the third your suppliers sort of catching up and that's kind of how you kind of dig your way out of this.

As the war or are you doing some things proactively in terms of qualifying new suppliers, making adjustments to your supply chain given all that transpired in 2021.

And I have to say, it's really all of the above in many cases some of these supplier constraints that we've had are getting better.

We're also working hard too.

Where we have the ability to change materials qualify different materials.

We're working on that where.

Where we've had some labor constraints, whether it's in our own shops or with our suppliers in some cases, we are actually extending some of our people to suppliers operation sale man their lines. So.

Really it's a whole host of things that we're working on and really pulling every lever.

Within our control to improve the supply chain situation. So.

Not one thing its really a whole multitude of different initiatives that are being undertaken by our teams around the world to improve the outlook.

Got it thanks.

Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.

Hi, Good morning, maybe just the first.

First question on the portfolio, which I don't think theres been addressed yet in the Q&A.

Intrigued that you took down the buyback.

Because of I think a heightened M&A appetite.

So maybe help us understand sort of what's changing there is it just because it's such a boy in M&A environment Youre seeing a lot more assets.

Sales sort of coming to market than you'd expected, maybe six or 12 months ago.

And also I suppose it tells US that you think valuations for M&A look reasonable so maybe help us understand.

Has anything changed on your returns hurdles or is it just the volume of assets coming to market is what makes it so appealing.

And also then on the divestment side.

If you're getting more.

Intrigued to do M&A could.

Could we expect divestments, perhaps.

Also pick up again next year.

Yeah, Thanks, Julien I would not read too much into the mid level of buybacks that we've done year to date, it's about $123 million what I draw your attention to is the beginning of the year with the big acquisitions that we've done related to Cobham.

As well as trip flight, we're always we're always on the lookout for very good quality strategic acquisitions, which seems to have certainly proved to be and therefore, we just took more of our capital dollars and put them back acquisitions as opposed to buybacks. So I wouldn't read anything into it in terms of.

Our capital allocation strategy changes and as it relates to divestitures.

As Craig has said many times, we're always on the look out to grow the head and shrink the tail. So.

Whether it's a part of our business Thats not performing we're always going to look at pruning it and adding on the on the upside but nothing specific to report here.

And the only thing I would add to what Tom said.

Completely agree with or ways that we have been more active this year than we anticipated.

There is obviously the big headline deals of comp.

Complement of tripwire, but we've done a number of other deals during the course of the year as well.

In our electrical business.

JV that we've signed in the China market.

We acquired a.

Green motion business in Europe, and so we have been very active this year in the M&A market I'd say from a portfolio transformation standpoint, I think it's one of the most transformational in the history of the company.

And so.

We continue to be focused on opportunities we are in fact seeing.

The better deal flow today, and then we certainly have in the last couple of years valuations in many cases are still stretched.

We will commit to you and promises that we will remain disciplined and you've seen the kind of multiples that we're paying for our acquisitions and the type of assets that we're acquiring and we won't lose our way we will continue to be focused on those kinds of assets focusing in our electrical business focusing in our E mobility segment focus.

In our aerospace business, but we.

We are seeing a better deal flow today and given the trade off between a value creating acquisition is highly strategic and buying back shares. We're obviously leaning in towards <unk>.

Spending those M&A dollars.

Two to grow the portfolio.

That's reassuring thank you.

And then maybe there's been a little questions on the sort of revenue and EBIT and so forth maybe just on the free cash flow.

Year to date Youll sort of EPS is up I think adjusted 40% the cash flow free cash flow is down in the mid teens.

I realize there is some sort of one timers might be driving a wedge between the two metrics. So when we look at 2022.

Should we expect.

Conversions to be closer to 100% maybe.

Maybe any initial thoughts on capex.

Capex have kind of more of a lid on it next year than this year any context around that free cash outlook from here.

Well I think it's important Julien to note that our in the quarter, our free cash flow conversion was approximately a 100% and free cash flow as a percentage of net sales was.

And a 12, 4% or our mid term outlook I think it's <unk>. So we're on that trajectory.

As it relates to next year and going forward, we would certainly want to be at that 100% or higher free cash flow conversion.

And as it relates to Capex.

We're always going to have our first priority in our capital allocation to invest in growth in the business. So we'd be looking for those opportunities.

Great. Thank you.

Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please go ahead.

Thanks, Good morning.

I just wanted to go back hi, Good morning, just wanted to back to electrical Americas, you did have a tough comp in the prior year.

Some inventory we saw benefits in <unk> 'twenty.

So I'm curious any comments on where inventories are trending right now in your channel Im guessing it wasn't helpful.

And then just one more crack at the supply chain you do have a pretty complex supply chain.

Puerto Rico and.

Dominican Republic I'm, just wondering if that was a factor behind some of these questions Matt Beasley.

Yes.

On the latter question Nigel no not at all I mean the.

We do have a.

Number of our facilities in the Dominican Republic, and Puerto Rico and that wasn't in no way related to the pricing challenges that we're dealing with it really was third party suppliers outside of our four walls, where the issues were largely centered and I missed I missed the first part of your question Nigel what was.

I missed the statement around the first part of your question what was the first part of it yes.

Youre Comping some inventory restocking benefit in the prior year. So just curious what you're seeing in the inventories within the channel this quarter I'm guessing it wasn't helpful, but but income in sir.

Yes, so I'd say as we talked a little bit in the opening commentary.

We've done these channel checks and talk to our distributor partners and they would tell you today that on balance inventories are either in lined with.

Were they like them to be or in many cases below where they would like them to be and unfortunately today given some of the demand in the market and some of the supply chain challenges.

Disappointing more distributors and we certainly.

Care to with our inability to ship.

Due to supply chain constraints in total inventories at this juncture I'd say by and large or are well.

In control and in many cases below where they need to be.

Yes.

What I expected and then just a quick follow on with the pension.

You've got $2 billion of pension contributions this year.

<unk> seen some nice benefits from discount rates rising obviously Margaret tends to be positive just curious the best view on pension funding for the next.

Two or three years based on based on the current funding levels.

Yes, where are our pension as you know is almost is almost fully funded.

Don't anticipate making any additional contributions to it.

How the pension plays out in the next year, obviously is going to depend on the returns and the discount rates at the at the end of the year end.

More to come on that specifically when we talk in February.

Okay. Thanks, Tom.

Thank you. Our next question comes from the line of David Raso with Evercore. Please go ahead.

My question relates to incremental margins next year in electrical just trying to get some sense. When you look at your slide 12, the end market assumptions.

Just from what you know about what's in the backlog and also how these businesses are structurally when you look at that mix is that a positive for incremental margins neutral negative just trying to get a sense of how you think about those businesses and of course, what you know is in the backlog price cost and everything else.

And I appreciate the question and I'd say that there is.

Nothing specifically in the backlog that we think is going to drive any changes in terms of the incremental performance of our business going into 2022.

We've kind of articulated in the past is that you really ought to think about the company is delivering about 30% incremental we're obviously delivering a bit better than that this year.

There's been a lot of great work done inside of the business, we're getting some earlier benefits from restructuring.

We're getting some benefits from the portfolio moves that we've made this year, but I think for planning purposes, I think a 30% incremental is really the right way to think about the incrementals for for the electrical business and really for the entire company.

And also this month sema.

And the way they price right. They were playing a little catch up but you heard even low double digit increases on the resi products high single for non <unk>. It seems like you ABB Schneider is at least kind of five plus 5% to 10%.

I mean, it appears by the first quarter of next year versus the end of last year, I mean pricing might be up as much as almost 20% in aggregate.

I'm not hearing you, but I'm just curious maybe I missed it are you hearing any demand destruction at all with this pricing.

No we're really not hearing any demand destruction at all and as I said, it's been a kind of an extraordinary period of time, where.

Pricing has seemed to be seamlessly pass through to the marketplace and in the demand remains strong I mean.

To your point around incremental margins I mean, clearly what we're dealing with in this environment where.

Hyperinflationary environment, where you have really big pricing.

Going into market, but youre, a big cost increases that you typically don't get your normal margins on the commodity increase and so there has been this year.

A little bit of pressure on.

Margins as a result of not recovering a full margin on the commodity cost increase and so that is certainly something thats hold held margins back of it and.

And remember it's not just commodities, increasing we're also seeing obviously labor increases we're seeing logistics increases and those are likely sticky somewhat going into 2022, as well, which gets you back to a 30% incremental for planning purposes.

Which is nice it just doesn't seem like at least we don't find any demand destruction at all so.

Even if hopefully a year from now or a year over year costs are not up as much.

Even come down a little bit I mean this is price. This is not a surcharge so it should be pretty sticky it should hopefully in the back half of the year.

Help incrementals even more so.

Yes.

We're hoping it plays through exactly the way you articulated.

Alright, Thanks, a lot appreciate it.

Thank you.

Thank you and our last question will come from the line of John Walsh with Credit Suisse. Please go ahead.

Hi, good morning, everyone. Thanks for fitting me in.

Good morning.

Maybe just a clarification question.

Obviously, we all wanted to take the sales from the supply chain and electrical Americas, this quarter and run them through and into next year I just want to confirm that these are truly differed.

Sales and kind of none of it was a lost sale and some of the kind of low voltage <unk> faster.

Book and ship stuff and that goes through distribution.

Yes, I think.

And once again. This is one of these things John where you can I would never say that 100% right. There is always going to be on the margin.

Perhaps an order or two that you've lost as a result of your inability to deliver but by and large the fact that the backlog is up more than 50%.

By and large we typically have in the Americas, especially we have we have dedicated distributors, who are essentially eaten distributors, who are committed to our relationship in an.

Essentially.

Our business and so once again, we feel very confident that with our order growth and backlog growth that.

No.

We're going to hold this business in.

The loss missed shipment today becomes simply a future delivery.

Kind of what we think is the case for the vast majority of the Delta, let's say growth that we've experienced in the quarter.

Great just wanted to make sure I understood that correctly.

These are typically projects so much of this business goes into projects and on the <unk>.

<unk>, where you specify a particular <unk>.

Playa for your electrical switch gear.

It's very difficult.

Once the project has been specified and one by a particular supplier or the other for that to just simply be changed out to another supplier. So I'd say that yes, we feel fairly confident.

Great and then maybe could we just get a little color on what Youre seeing in China, specifically, maybe around data center industrial commercial.

Kind of more of those industrial vertical.

Yeah, and I think we're all reading the same headlines with respect to what's going on in China today.

In an economy that has certainly slowed a bit this year and more than anyone anticipated with some special pressures, let's say on the residential segment of the market I will tell you that in our own business that our China team, we just had an outstanding quarter.

Certainly part of the electrical global segment, whereas you can see that segment posted 18% growth I would tell you that our Asia business numbers Werent.

Terribly different than that and so we had a very strong quarter in China I think we're starting to see some of these real benefits of the joint ventures that we put in place and we're seeing a lot more opportunities today than we have historically, our datacenter business.

In the Asia Pacific Region, and China is doing well and so we're obviously watching the headlines and reading them as well as anyone but to date what.

What we've seen in both orders and revenue out of our China business, Our Asia business is doing quite well.

Great I appreciate the color. Thank you.

Thank you Okay, Hey, thanks, guys. So we have reached to the end of the call and we do appreciate everybody's participation and the questions as always chip and I will be available to address your follow up questions. Thank.

Thank you again and have a great day.

Thank you, ladies and gentlemen that does conclude our conference for today. We thank you for your participation and for using AT&T Conferencing service you may now disconnect.