Q4 2021 Eaton Corporation PLC Earnings Call

Okay.

Ladies and gentlemen, thank you for standing by and welcome to the Eaton Corporation fourth quarter earnings Conference call.

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I would now like to turn the conference over to our host senior Vice President of Investor Relations. Mr. Yan Jin. Please.

Go ahead.

Hey, good morning, everyone I'm Yan Jin Eaton's senior Vice President of Investor Relations. Thank you all for joining us for <unk> fourth quarter 2021, earning call with me today are Craig Arnold, our chairman and CEO and Tom Okray, Executive Vice President and Chief Financial Officer, Alright agenda today, including the opening remarks by Craig highlighting the car.

<unk> performance in the fourth quarter, we will be taking questions eight end of Craig's comments, the price release and a presentation. We'll go through today have been posted our life side. This presentation includes adjusted earning per share adjusted free cash flow.

Other non-GAAP measures are reconciled in the appendix a webcast of this call is accessible on our website and will be available for replay.

I will remind you that our comments today will include statements related to the expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties all lines in our presentation release and presentation with that.

I will turn it over to Craig Thanks, Dan Hey, let's start on page three with a few highlights of the quarter and I'll begin by saying that despite what's now.

Very well publicized and ongoing supply chain issues, our team delivered solid results in the quarter and a record performance for the year.

And in Q4, we generated adjusted EPS of $1 72.

<unk> fourth quarter record.

Our sales of $4 8 billion up 6% organically and I'd say here, we had we had particular strength in residential data centers and in industrial markets.

And I'd say also our aftermarket businesses in both commercial aerospace and vehicle continued to deliver strong growth.

We were certainly impacted by supply chain constraints, which had an impact on our revenue and I'd say, especially in our electrical Americas in our vehicle segment.

The good news is the market remained strong order growth accelerated in the quarter and we ended the year with a record backlog.

For our combined electrical business.

Orders were up 21% on a rolling 12 month basis, and our backlog was up 56%.

Our aerospace business also had a significant increase in orders up 19% on a rolling 12 month basis, and the backlog was up 16%.

We also continued to post strong segment margins 19, 3% in the quarter and a Q4 record.

And I'd say here and they are the actions that we've taken to mitigate inflation our portfolio changes and the restructuring savings are all contributing to the strong incremental margin performances.

I'd also note that we benefited from favorable mix in the quarter.

And I would say that our portfolio changes continue to be an important part of our strategy.

We're pleased to have completed the Royal power solutions transactions, a few weeks ago and the addition of rural power.

Will allow us to accelerate our growth in E mobility and actually in the broader electrical market as the economy continues to adopt more electric solutions.

And so I would say I think you'd agree that we're not sitting still we are managing the things that we can control operationally, while continuing to advance our strategic agenda.

Moving to page four I'll highlight a few additional points on our quarterly results.

<unk> total revenues of up 2%.

We increased operating profit by 14% so continue to demonstrate strong strong operating leverage.

Second.

Acquisitions increased revenues by 7%.

It was more than offset by the sale of our hydraulics, which was a 10% headwind.

And while not complete we are certainly pleased with our progress on the portfolio. We continued to drive changes to support our overall goals of creating a company with higher growth higher margins and more earnings consistency.

Third I just pointed out that our margins of 19, 3% as I noted were above the guidance range of 18, 8% to 19, two and I think a good indicator of our team's ability to execute operationally, while once again managing the things that are in our control.

And lastly, as we noted both adjusted EPS of $1 72, and segment margins of 19, three where Q4 records.

In the face of the significant supply chain constraints that we've been dealing with.

Next on page five we show the financial results of our electrical Americas segment.

Revenues were up 13%, 5% organic and 8% from the Tripwire acquisition.

The organic sales growth was really driven by strength in residential and industrial and data center markets.

And on a sequential basis in our organic growth did step up from 1% in Q3 to 5%, So we're making progress.

Still as I noted continued to be impacted by supply chain constraints.

In some cases in our ability to meet demand was also impacted by labor availability as we had the spike in the Omicron version.

Certainly at the end of the year.

Operating margins of 19, 2%, we're down 190 basis points year over year and the decline was driven really by higher input cost labor and supply chain inefficiencies and disruptions in our facilities.

And on price recovery, we're making good progress we made good progress in the quarter, but certainly not fast enough to prevent some margin erosion on the net between inflation and price.

And the way that plays through to operating margins.

And as noted in my opening remarks market demand remained strong which was reflected in orders and the growth in our backlog on a rolling 12 month basis orders were up from 20% accelerating from 17% in Q3 and 13% in Q2.

And our backlog reached another record up 57% from last year and net 7% higher than it was in Q3.

The strongest markets continue to be residential and data centers and I'd say here also beyond orders were also have strong momentum in our negotiation pipeline, which was up from 11% in the quarter.

Turning to page six we summarize our electrical global segment.

And as you can see we delivered really strong results in this segment organic growth was 15% with strength in all regions and particular strength in commercial data center and industrial markets.

We also delivered significant operating leverage with operating margins of 19, 5% and.

And incremental margins of 40%.

We did have a little bit of favorable mix here from our exposure to industrial end markets, but we do expect this to continue.

Like the Americas orders remained strong.

92% increase on a rolling 12 month basis, and a step up from the 17% number we posted in Q3.

And our growth and our backlog remained above 50%.

In this segment the order strength was especially strong in data centers residential and utility markets.

Yes, so I'd say overall I would say that our electrical global business had a very strong quarter on top of a strong year and is really carrying a lot of strong momentum into 2022.

Moving to page seven we summarize the results for our aerospace segment.

As you can see we had a strong quarter the industry recovery is certainly begun.

Revenues increased 40%, 4% organic 37% from the acquisition of carbon emission systems and currency had a 1% negative impact.

Yeah.

Aftermarket and Biz jet.

This was partially offset by weakness in military markets.

Operating margins were 24, 9%.

An all time record and up 660 basis points from prior year.

In the quarter, we had solid incremental margins of more than 40%.

Which were helped by favorable mix, particularly the growth in aftermarket and by our portfolio actions.

Another bright spot in the quarter was the growth in orders and backlog on a rolling 12 month basis orders turned positive in Q3.

And were up 19% in Q4 with particular strength in commercial markets commercial transport Biz Jets and commercial aftermarket for all up significantly.

And lastly, our backlog was up 16% from last year.

Next on page eight we show the financial results of our vehicle business.

Revenue was down 2%, 1% organic 1% from currency.

We had strong organic growth in North America truck.

And in our South America business, which was offset by weakness in global light vehicle markets.

As you are aware, we had certainly significant supply chain constraints in this segment, including a number of customer shutdowns that impacted our revenue.

We do have we think the worst is behind US here and we will see improvement in supply chain related disruptions this year.

Overall, I think our team executed well delivering solid margins of 16, 4% in decremental margins of 30%.

Turning to page nine we have the results for E mobility business.

Revenues were up 4% with growth in North America, and Asia, partly offset by weakness in Europe .

Like our vehicle business, we experienced significant supply chain constraints and customer shutdowns in this segment.

And operating margins were negative nine 1% as we continued to invest heavily in R&D and startup costs associated with new program wins.

As I mentioned earlier, we acquired Royal power solutions in January and it will be reported within the E mobility segment.

This is an important acquisition its part of our strategy to improve the long term growth rate of Eden <unk>.

First it expands our addressable market free mobility with a portfolio of highly engineered terminal connectors for electrical applications.

Second Royal power has a strong track record of profitable growth.

And we will continue to grow as the electrical content in vehicles continue to expand.

And third.

Royal will allow us to offer a more complete customer solution as we bundle their products with our own power protection and power conversion products that we're selling and E mobility markets.

Can I say here with organic growth momentum the completion of Royal power acquisition, we're well positioned to realize our long term objective here, which is building.

New $2 billion to $4 billion E mobility business inside of Eaton.

And our cumulative new program wins are now at $801 million mature year revenue. When you include the impact of new wins from Oriel power.

Okay.

Moving to page 10, I'll, just take a minute to recap 2021 performance before we turn our focus to 2022.

First we delivered strong organic growth for the year up 10% with significant strength in our electrical global segment up 15% vehicle up 'twenty one in E mobility up 16.

And I'm, especially proud of the team for delivering record segment margins up 18, 9% 250 basis point improvement over 2020, despite the challenging supply chain environment.

Our team executed at a high level and delivered incremental margins of 43%.

We also had one of the most transformative years in the history of the company. When you think about the portfolio, we completed $8 billion of portfolio actions towards our goal of building this higher growth higher margin company with more earnings consistency and.

We are off to a good start in 2022 with another value enhancing acquisition and Royal power.

The result of our disciplined execution.

Transformative portfolio actions allowed us to deliver 35% growth in adjusted EPS.

And importantly, our shareholders, we are well rewarded for their commitment to Eaton with a total shareholder return of 47% for the year.

Two and a 2021 roads results certainly set a high bar for what we expect of ourselves and I'm sure. What you expect of others of us as well, but we're up for the challenge and we think the best years are still in front of us.

So, let's just turn our focus to 2022.

On page 11, we show organic growth and margin guidance by segment overall, we expect organic growth to be 7% to 9%.

Starting with our electrical businesses.

Americas and global are both expected to grow 7% to 9%.

And we expect these businesses to see growth really across all end markets with particular strength continuing in datacenters distributed it and industrial markets.

In aerospace, we expect organic growth of 10% to 12% with strong growth in both commercial OE and aftermarket channels.

Our base assumption here is that.

Travel continues to expand.

From from.

The COVID-19 impacted downturns without any significant new variants.

And we expect low single digit growth in military markets.

For vehicle, we're anticipating organic growth of seven 5% to nine 5% with strength in both light motor vehicles and truck markets and any mobility, we're expecting organic growth to be 11% to 13% driven by the continued strength in electric vehicles.

And just turning to segment margins, we expect Eaton to be between nine <unk>, 9% and 23%.

At the midpoint. This is a 120 basis point improvement over our record margins that we delivered in 2021.

And we expect to see margin expansion in all of our segments.

Turning to page 12, we cover the balance of our 2022 guidance organic growth as we noted is expected to be 7% to 9% with acquisitions and divestitures subtracting three 5% and currency is expected to be flat.

We're also forecasting corp cost to be flat and our tax rate to be between 16 and 17%.

Adjusted EPS is projected to be in the range of <unk>.

$7 30 to $7 70.

At the midpoint of $7 50, a 13% increase.

Operating cash flow is expected to be between 3 billion and $3 2 billion in capex will be approximately $650 million.

At the midpoint, our operating cash flow is expected to increase.

15% versus last year our.

Our free cash flow is expected to be between two four and $2 6 billion and.

And at the midpoint of $2 5 billion also a 15% increase.

This represents free cash flow to sales of approximately 12% and free cash flow to net income of approximately 100%.

And we expect share repurchases to be between 200 $300 million and this really reflects our pivot to.

What we think is going to be a higher priority on tuck in acquisitions.

And lastly, our Q1 guidance is as follows we expect adjusted EPS to be between $1 55, and $1, 65% organic revenue growth to be up 7% to 9% segment margins to come in between 18, 4% and 18, 8% and we expect our tax rate to be between.

<unk> 15 and 16%.

Hey, just allow me for a moment I'd like to close with once again page 13, which is a brief summary on how we think you should think about the company and I would say first our topline is supported by strong secular growth trends.

And I would say of note. Most of this growth impact is just beginning to show up in our revenue. So most of itself out in front of us.

We've proven that we know how to expand margins and are comfortable with our ability to deliver 11% to 13% EPS growth over our planning horizon.

We also have clear capital allocation priorities and a disciplined approach to M&A, which we think is paying off.

As a result, I'd say, we're a different company today.

We've transformed our portfolio. We're now a company that will deliver higher growth better margins more earnings consistency and I would say once again, we're not done.

We also have a longstanding commitment to ESG. It remains at the forefront of what we do every day in fact sustainability for US is really a part of how we drive growth in the company.

Any of you have gotten to know our chief sustainability Officer, Darrell Jones, and Youll be hearing more from him at our Investor meeting next month.

In the short term you can count on us to continue to manage through these operating challenges as a result of COVID-19 .

Supply chain disruptions and labor shortages by managing the things we can control.

2021, we think was an important proof point on our journey to transform the company and we're proud of our results.

More importantly, we're ready to do it again this year.

Now I'll turn it back to yen and we'll be happy to address your questions.

Thank you Craig for the Q&A of our call today. Please limit your opportunity just to one question and one follow up. Thank you Ana ones for your cooperation with that I will 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 ones Youre welcome Matt.

Our first question will come from the line of Jeff.

Coincide with Morgan Stanley . Please go ahead.

I always know if there is a pause that has to be coming to me. So I can start on mute.

Good morning, guys.

Hey, Josh good morning.

So a couple of questions here I guess first on.

Free cash flow conversion.

How should we think about some of the moving pieces around their working capital or otherwise.

And when do you think we start to get back to kind of more historical conversion rates.

So thanks for the question Josh appreciate it.

We intentionally used GAAP earnings in our prepared remarks, when we said we were close to a 100% in and our free cash flow conversion.

The reason we did this is it's important to look at GAAP earnings when Youre going through multiyear restructurings and doing a lot of M&A.

There's really four main items that you need to think about as it relates to free cash flow conversion.

One is acquisition integration and divestiture costs costs, which are going to generate cash requirements for us in 2022. The other one is the multi year restructuring programme now while we're at the tail end of that we will have cash requirements, which will also be in 2012.

<unk> two.

Another element is capex as you probably noted for our guide we're up $75 million in Capex investing to grow and then the final one is a smaller one but it's relevant the cares act, we still have 50%, which is due which we'll pay in 2022.

If you if youre using adjusted earnings.

You likely got in.

The low Eighty's mid Eighty's, if you adjust for those four items youre going to be well into the mid nineties. So I don't think its a departure between what we've done historically I think it's I think it's consistent the other thing I would note is we're also growing operating cash flow by $400 million in the year.

Year, which is which is significant.

And in addition to that Josh Let me know where else. We're obviously not through a number of the supply chain related challenges and so.

We're certainly as we think about today, how do we protect customers how do we get out in front of some of these supply chain constraints, we're still sitting on a fairly large pile of working capital specifically inventory as we are dealing with some of the supply chain related issues.

Got it that's helpful. And then I guess just speaking of supply chain.

Probably the volume output here is it was held back and we can see that in the <unk> Guide I guess, specifically in electrical but.

If order rates hold what sort of volume growth are you guys thinking about it as kind of a second half our exit rate or.

As some of these supply chain issues abate, how do you guys think about that in the guide here.

Yes.

Certainly.

Question to really address I mean as you can appreciate we and others have got this thing wrong in terms of how long these supply chain constraints would be with us, but certainly the underlying order growth in the businesses is a good proxy for where the real demand is in and I'm sure. The question that fits just behind this one is that.

To what extent do you believe this over ordering taking place.

Restocking in the channel and I can tell you is we continue to test for that we're not seeing it in our distributors.

Certainly today.

<unk>.

Calling for more inventory than we're currently able to deliver to them.

So much of our business is project driven and so on projects Youre not.

Over ordering on a project a project is a project and so if you just look at the order.

Level is that we're seeing in our business I mean orders and sales at some point converge to the extent that there isn't a bunch of over ordering taking place and so we feel really good about the underlying strength in our markets do you see this tremendous growth in our backlog and eventually this stuff is converted to sales and so.

We're talking about a guidance of seven to nine which is well below the underlying order rate that we've seen in our electrical business and so at some point those two things converge.

I guess for perspective, Josh we estimated in Q4 just in the Americas.

We lost about $100 million in sales related to.

Supplier disruption right timing, we didn't say no. So we think thats once those revenues are pushed into 2022.

It just went into the backlog.

I appreciate the color thanks, guys.

Yeah.

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

Good morning.

Andrew Hi.

How are you just a question on backlog.

How much visibility do you currently have from your project backlog, how does the margin profile of those projects look relative to the.

Input costs, because sort of mixed message.

From various folks as to how that's going to play out in 'twenty two thank you.

Yes, I would say that we are naturally sitting on a lot more visibility today than we have ever in the history of the business. When you think about this 57% for the 6% growth in the backlog for a global electrical businesses and so we have much better visibility today than we would have going into almost any year in the <unk>.

History of the company.

And I'd say with respect to pricing in the backlog I mean, we naturally have seen this inflation trend coming for some time now.

We certainly have had the ability to.

We anticipate where it was going as well with respect to commodity inflation and so we're very comfortable today with pricing in our backlog.

And that's certainly reflected in the guidance that we have but we don't expect.

Like perhaps you've heard from some others that have a margin impact as a result of a backlog that's not reflective of today's commodity prices.

Excellent.

Maybe to build.

To build on the previous question so.

<unk> highlighted that sort of the underlying free cash flow conversion as close to a 100% but.

Yeah.

And I think cash flow is one of the factors here as we sort of enter this growth looks like.

Industrial growth period.

Generally do you think about sort of investments needed in capacity working capital supply chain.

To keep up with demand and the longer term.

And how do you see managing it and what kind of impact do you foresee having on margins free cash flow conversion as return on capital et cetera, just big picture question. Thank you.

Yes, I would say if you think about we talk about these important secular growth trends and the fact that we do expect our businesses as we look forward to be a much faster growing business than we have historically.

And we have had to and we talked about some examples before I make some fairly sizable investments in new capacity to do deal with some of this growth that we're going to be that way.

Looking today and will be coming into the future and so I would say as you look into the future certain with respect to investments in capacity to support demand.

<unk>.

Would expect to see a bit of a tick up in capital spending requirements. Our revenue is going to be growing as well and so if you think about capex as a percentage of sales it probably won't be a material change, but there'll probably be a bit of a tick up.

And on the working capital side I would say today, we still have opportunities.

We are sitting today on record investments in inventory.

As we try to protect our customers and protect our sites. So that they can keep running and so I would say I would not anticipate today, a large investment in working capital once we get through some of the supply chain specific driven transitory items.

I would hope that at some point it will be a source of cash even as we continue to grow the business and we literally have built that much inventory inside of the company to really try to protect customers, but on the on the working capital on the excuse me on the Capex side, we would anticipate.

Continuing to make investments in capacity in our facilities.

In resiliency to ensure that we have the ability to support the growth that we see coming.

Yeah, Andrew I think it's also important to note is we're not walking away from our objective of a 100% free cash flow conversion and 14% free cash flow as.

As a percentage of sales that remains something that we're focused on doing.

Really appreciate it thanks so much.

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

Thank you and good morning, everyone.

Morning, Jeff.

Morning.

If we could just kind of peel the price cost the part a little bit further and just wonder specifically.

On price if you can give us some sense of what the what the realization was in the quarter and what is embedded in your in your guide.

And also as part of that Craig you just kind of mentioned you didn't expect price cost to be a margin headwind. So are we it sounds like we're probably.

Positive on dollar rate, perhaps maybe you could confirm that.

And just clarify the margin impact if you will.

Yes, I appreciate the question.

Jeff and this is obviously one that we're spending a lot of time internally on ensuring that we are.

Recovering all of the commodity inflation that we're seeing in our business and so my comment on my opening commentary I talked about the fact that.

We saw a margin impact.

Our electrical Americas business, specifically as it relates to price and cost largely because we are in fact recovering the dollars, but we're not getting a margin.

Leasing in the fourth quarter, we did not get a margin on top of the recovery and so obviously that has a dilutive impact on the margin rate as we look forward, we do expect that we will.

<unk> will be slightly positive in price cost, we think about 2022 and that will just continue to build from this point forward.

<unk> 2022 will be a better year, it will be less of a headwind for sure than we experienced in 2021, and we certainly would expect from an EPS standpoint.

It will be positive to.

Our EPS earnings on the specific question on what the dollar percentage, Jeff as we talked about.

On the last earnings call and I know, it's a number that everybody is looking for and I can understand why but we're in so many different businesses and we have very different inflation rates. When you think about it.

Something in Crouse, Hinds, which has a really heavy content of steel versus something thats in one of our other businesses and so the inflation rates are are quite variable and so we've chosen not to provide that number so as not to confuse customers around prices, they're seeing versus what we're talking about on our earnings call.

Thank you for that since.

Since you mentioned steel maybe I'll go there with my follow up.

Obviously, the futures are pointing a lot lower.

Perhaps you could just give us an update on.

The likely lag effects of.

Perhaps deflation on steel coming through the system.

You do have some big backlogs to work through so certainly I suspect, it's going to take a couple of quarters, but.

Any color there on steel specifically or just other key commodity inputs that we're all keeping an eye on here.

Yes, I appreciate the question as well and like if you'd like you've mentioned we are in fact seeing steel prices kind of retrench, a little bit versus where they were last year and certainly where they were in the fourth quarter and the typical lag time on that can be.

We were from 30 days to 90 days, depending upon which segment of the business and what type of agreement, we have with our suppliers, but I would say with respect to commodities overall is that we're really not seeing commodities overall.

Essentially improved.

Copper is up.

And costs are still high the cost of semiconductors. If you can get them are up dramatically and so we are still living in this inflationary environment.

We would anticipate for much of 2022 that we continue to operate in this elevated environment of scope of input costs steel is the one kind of a good guy right now, but there are more than enough other.

No bad guys out there in terms of where we're still seeing inflation that are offsetting the benefits that we're going to see from steel.

Alright, thanks for the color.

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

Yes, thanks, good morning.

Good morning.

I just wanted to go back to you know the free cash flow and working capital discussion. So completely understand that this is an area of opportunity and thats kind of been reflected over a lot of companies that we've heard from over the past few weeks, but I guess when we think about your 2022 guidance have you embedded continued working capital build or are you anticipating that.

It will be a source of cash for this year.

I think what's embedded.

Correct me, if I'm wrong, but I think it is.

Positive, yes, whats embedded in our forecast we're looking at some networking capital improvement primarily as it relates to inventory right. So it's not a big needle mover for us in 2022. It is a slight positive is what I'd say.

Okay, perfect and once again it could be an area of opportunity if we get through some of the supply chain related challenges and more quickly than we're currently anticipating.

It certainly could be an opportunity to generate stronger free cash flow.

Of course got it thank you.

And then I guess, just kind of following up and finishing up the price cost discussion Craig you, specifically called out Americas, which makes sense are you having price cost headwinds at the margin line in any of your other segments or is this just really isolated predominantly in America. This year.

I'd say, we're having price cost headwinds in all of our businesses for the most part it is just most acute in the Americas and so I'd say.

We haven't.

We've just and if you think about today, what's going on and it's.

Kind of interesting.

What's going on around the world, It's really the U S businesses in general that have had the biggest challenges around price cost.

And that's largely on the input side.

<unk> that we've experienced in our Americas businesses in our U S. Based businesses has been significantly higher than what we've seen in other markets around the world.

But we're having we're having we're having let's say.

Inflationary pressures everyplace it just most acute in the U S based businesses.

Thank you I'll pass it on.

Thank you.

Thank you. Our next question comes from the line of John Walsh with Credit Suisse. Please go ahead.

Yeah.

Hi, good morning.

Morning, Jeff.

Maybe the first one can you give us a little more detail on what you're seeing in the data center market globally, and if you are actually booking out now to 2023 on some of those projects.

Yeah, Jonathan in the data center market has been extraordinarily strong.

For us during the course of the year.

Back of really whats been a multi year trend of really strong market in on whether we're looking at hyperscale, whether we're looking at co locations, where do we look at even own prim.

Each of those markets have been extremely strong.

Has been the channel in general.

And so I'd say today.

If we think about where we're challenged around our ability to really service customer demand.

To these really strong markets of data centers and residential that certainly have built very large backlogs.

And today.

We are struggling to keep up with demand.

And quite frankly, we think that market those stay strong for a very long period of time and you believe link.

Linking back to some of the earlier conversations.

Where are you going to need to make some capital investments to really deal with some of these longer term growth trends its going to be in markets like data centers, which we think is going to be.

Strong for very long period of time as the World continues to as I've said before generate consumed process store, just increasing amounts of data.

And so.

Sitting on the verge of another big growth wave when we think about <unk> when you think about.

Autonomous vehicles, and so we think that market is going to be strong for a very long time, and we're going to have to continue to invest to keep up with the growth.

Great. Thank you for that and then maybe one on aerospace margins if I did the math right. It looks like there's a little pressure on the conversion obviously absolute numbers.

A nice improvement is that mix or is there something else happening there.

So when you say pressure on conversion, you're talking about incremental margins in the quarter. The incremental margins, maybe that's just mix with OE growing fast or something happening commercial let Terry I'm calculating something in like the upper Twenty's mid to upper end of the incremental margins for aerospace business.

Was 40% here four zero.

I'm, saying in the guide sorry, and the forward look for 2022.

Why don't you, let us get back to you on that in terms of the incremental margins in the guide and I think you have an acquisition impact on that as well so.

I'm not sure what youre, assuming in terms of stripping out acquisitions, which obviously don't come at a normal incremental they come at the underlying margin rate of the business. So why don't you, let us get back to you on that one and maybe deal with that offline.

Sure I appreciate you taking the questions. Thank you alright. Thank you.

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please go ahead.

Thank you and good morning, everyone.

Morning.

So Craig.

Interesting dynamic occurring in the market right now on the inventory side.

Hi, you guys build inventory this quarter, which makes a ton of sense, obviously to be able to supply the market.

Sure.

I kind of want to try to square the comments on distributor inventories being lean clearly no inventories.

If youre doing a project.

Whats your sense in the OEM, because we are hearing from some of our companies that they are building inventories, but everybody is also saying that the market is still very lean out there.

Yeah, and I would say that I think it's fair to say everybody would like to build inventory.

And we're getting lots of request.

To get back to historical levels of inventory with our distributors and Oems carrying inventory many of them don't.

Some of them do.

But keep in mind you know so much of what we do today is project business in our electrical and.

Projects typically are not finding.

Obviously any inventory build there and so I would say that.

This is one that has certainly been one that we've been concerned about we've been watching we have been testing forward in terms of whether or not there is over inventory.

In the system, whether or not this double ordering in the system.

I can just tell you having talk with and <unk> been engaged with a number of our teams and our distributors.

That's not what we're hearing or seeing.

They would like more inventory and their inventory levels today are below where they would like them to be given.

They were forward look on revenue growth.

Yes.

Sense Craig.

I appreciate the comments there I guess my one my one follow on question I guess, it would be more around like electrical Americas margins and clearly understand the pressures.

Youre feeling this quarter I think lots of other companies, where we're feeling the same how do you think I know that you guys had a pretty healthy margin expansion baked into 2022.

At what point does that start to turn positive year over year, and then maybe just providing a little bit more color on the cadence would be helpful.

Sure.

When the margin to turn positive year over year.

What quarter do the margins turn positive.

Yes, just cadence around like the puts and takes on margins as we progress through 2022 and electrical Americas.

Yeah, I'd say that certainly.

Tom.

Q2, and we would expect that our margins would turn positive I mean, obviously, we're dealing with.

A number of factors right now in the business and obviously what is getting a lot of attention right now is supply chain related issues, but I can tell you will also be a part of the challenge as I mentioned in my speaking opening commentary that we're seeing significant labor related issues and inefficiencies in our plants to we had.

Pretty large absentees.

In a number of our facilities at the end of last year at the beginning part of this year as a result of Covid.

Suppliers are seeing the same thing and so it's not just <unk>.

Supply chain, and we can't get parts and in many cases, we were challenged to get labor and the run our factories efficiently until all of these inefficiencies today or kind of built into the results in Q4 and to a certain extent in Q1 as well.

It is really Q2 by the time, we really get beyond some of the labor inefficiencies.

We do think that supply chain continues to get better.

Three quarter, but in some cases, we think we're going to be dealing with supply chain challenges for the entire year. When you think about components like semiconductors, but other components, whether that's copper steel and resins. We do think those things continue to get better every quarter.

Makes sense. Thank you Craig it's important to note at the midpoint, which you saw in our prepared remarks, we're 90 bps above the prior year margins in electrical Americas. So.

That reflects.

Bullishness that we feel about things correcting throughout the year.

Great. Thank you.

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

Hey, Julien Hi, good morning.

Yeah.

One.

Starting point, perhaps is just.

Within the electrical.

Americas business.

And I guess I wanted to try and understand sort of on the residential side of that.

How much was.

Residential as a whole.

A portion of that business.

Hi.

How strongly was the business up last year and when Youre thinking about this year ahead.

Dialing in any kind of slowdown there.

And I think people know, obviously pretty cautious about a number of other <unk> facing product categories in multi industry right now.

Sure.

We appreciate the question.

Already today, I think we would say.

18% roughly of our business. It would go into residential markets in that market did grow strongly during the course of 2021.

That business was probably up.

No.

It's around double digit.

30%, yes.

So and we're clearly expecting that market to see somewhat of a slowdown which is baked into our guidance for 2022 still growth in the market, but not at the heavy levels that we experienced during the course of 2021 and the other thing I think its important though as you think about residential markets to keep in mind.

As you really think about this market over the.

The near and the longer term is that it's not just the growth in the housing stock. It really is also the growth in the electrical content in.

Buildings residential buildings multifamily buildings.

As they adopt the new electrical codes it requires additional electrical content and as we really start moving seriously into.

Energy transition, we think the opportunities continue to grow at a really attractive rate.

<unk> put electric cars in their garages and they have to change their electrical infrastructure support the electric vehicles as consumers continue to look at things to improve their resiliency, whether that's solar.

<unk> to the island in the home.

Ability to sell energy back to the grid.

All of these things all of these kind of secular growth trends that are taking place more broadly.

And the economy are going to also have an impact on residential and even though let's say the housing numbers are not going to grow dramatically the electrical content.

Is going to grow at some multiple of that.

That's what we've seen.

Over the last let's say 10 to 15 years in and that really didn't even have the impact of some of these energy transition related trends that we're talking about.

The resi for US we think continues to be a really attractive market, we have great position in residential and it's one we will continue to invest in.

Okay.

Thanks, very much and then my second question I guess touching on what Joe had mentioned earlier about inventory because I guess, if I look at.

Automotive is one area or light vehicles.

Heard about all the constraints.

A very large OEM suite to wholesale.

Wholesale volumes are up.

20% plus in 2022, and they could liquidate inventory.

Early in the year so.

I thought was interesting because it suggests that that's a massive.

Hmm.

Feels like they have enough.

Goods on hand to satisfy double digit growth this year.

And so I just wanted to sort of push a little bit on that point and ask.

And then any areas when you look across different regions or different markets.

Well, Youll salespeople and loyal channel partners.

Do you think maybe that there has been a good amount of inventory.

Bill top I don't know if theres any kind of broad views you have on end markets that had more or less inventory relative to normal as you look today.

Yeah.

Hey Man I'm sure they're out there someplace Julien.

I can tell you that they are out there their voices are being drowned out by probably 100 to one on the other side of customers asking us for more.

Specifically as it relates to the automotive inventory levels I mean, the inventory levels today continue to run at record low levels. I mean, you think about an industry in the U S that is typically variety of 75 days.

Inventory had been running under 30 days of inventory, so I'm surprised that that any automotive OEM would say that they are comfortable with the levels of inventories were not hearing that from any of our customers and so thats I think is a bit of an outlier.

That's helpful. Thank you.

Thank you.

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

Thanks, Paul Good morning.

Good morning.

9%.

Growth across <unk> and 'twenty one.

Since nine and tweaks to your long term targets for the fix so I'd want to get too far ahead of March March Investor day, but how are you thinking about growth.

<unk> seen electrical I'm, assuming it might be a tough one to six but.

And then kind of I would like to that is you're highlighting utility data center.

<unk>.

I've been surprised youre not housing industrial and commercial institutional tuning around because we are seeing some strength noticed that so I'm just wondering what you're seeing in those two markets.

Yeah first of all I. Appreciate your question around the longer term growth outlook in our electrical businesses and to your point, we will be addressing that at our Investor Day next month and I do think it's reasonable to assume that we have seen certainly more strength than we anticipated and it would be fair to.

We anticipate that that number is going to move up slightly.

With respect to the end markets and I'd say for US certainly we talked about industrial industrial markets are doing well and we talked about that as being one of the strong markets for us in general and so we are seeing the strength in industrial we're certainly seeing the strength in utility resi data centers, even in commercial I would say if you think about commercial we've talked about.

This before.

We're still seeing growth in the office low single digit growth, it's not huge there, but we're still seeing positive growth in the office segment.

And but also what goes into commercial as you know things like warehouses and as you think about that.

The continued expansion of the Amazons of the world in the warehouse segments that have much higher once again electrical intensity than a office building or a retail store.

We continue to think that theres going to be positive mix associated with as we continue to move more and more of our retail activity online.

So as we said we think all of the markets are going to be growing next year, but we will see some.

What we think will be outsized strength.

In data centers in industrial markets and utility markets.

But every market, we would anticipate we'd see positive growth.

I mean to craig's going to.

Commercial and institutional we saw high single digit this year growth.

The overall market and for industrial we saw mid teens growth so very strong.

That's great that's great color.

And then the follow on Tom on.

Free cash conversion sorry to come back to this one.

Before the full thank you called out make total sense I see 25 to 30 since coming on.

Restructuring charges and also.

Post.

This is in charge of things, what conant and the gap to headline earnings.

So wrapped up in purchase accounting on the balance sheet, that's going to have cash outflows. This year is this more of a purchase accounting issue.

No no it's really the four things that I described.

Sure.

The acquisition integration and divestiture of the multi year restructuring the Capex and the cares Act and I think you're probably alluding to pension funding and those types of things nothing nothing extraordinary there.

Okay. Thanks, a lot.

Thank you.

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

Good good morning, everybody.

No. Good morning, Scott My questions have been asked.

I'm kind of curious it's been a while since we are in an upcycle in Crouse Hinds is.

Our.

What is your order book look like.

That part of the World and I would imagine probably taken some costs out of that business since.

Since the last.

The last peak.

Perhaps you can just give us a little bit color on that specific business.

Yeah. Appreciate the question Scott and for those of you who.

Followed crouse hinds over the year.

That business.

That we acquired many years ago from Cooper was a very profitable business went through a cyclical industry downturn, but when we think about industrial we talk about industrial strengthening that's where a lot of the crouse Hinds business goes I mean, many of you think about it as an oil and gas business, but a lot of what they do today goes into industrial markets and that business is in fact.

Growing and so we are clearly seeing a rebound in the crouse Hinds business.

A lot of the industrial market that they support and serve our growing nicely.

And so we certainly think we are at the once again the front end.

What should be a pretty attractive.

Recovery in those markets.

Okay. Good.

And then as a follow on it just yet.

Thinking in terms of the projects that are out there.

That youre bidding on it has are there less people bidding on projects today than perhaps a couple of years ago just given the.

The reality that.

Everybody's kind of sold out.

Or is the competitive dynamic not really changed much.

Yes.

I would say that.

Fact that everybody is sold out means that I think everybody is being more selective around the projects that they've taken it and it obviously.

Changes the price dynamic in the marketplace.

So I would say that I can't necessarily say that we're seeing less competition on projects lead times are being pushed out for lots of companies and.

Like I said as I said.

It's never easy to recover inflation, but we are in an environment today, where given how well known the issue isn't how public and visible it is.

Easy as it's ever been in my professional career.

Because everybody kind of understands what we're dealing with but I would say I can't really speak to whether or not we're seeing fewer bidders on our projects but.

I think every company ourselves included.

Have the ability to be a bit more selective today, given the fact that theres more demand than there is capacity.

Yes.

That makes sense well best of luck in 'twenty two guys alright. Thank you.

Thank you. Our next question comes from the line of Brett Linzey with Mizuho America. Please go ahead.

Hi, good morning, all.

Good morning pointed out what.

Wanted to come back to capital deployment. This is probably the lowest share repo guide we've seen in a number of years and you mentioned a focus on bolt ons could you just spend a moment and talk about the action ability of the pipeline.

Some of the sizes Youre shopping and just trying to understand.

Where youre looking within the portfolio.

Yes, I appreciate the question.

You've probably observed over the course of the last 24 months, we've done quite a bit of a portfolio of transformation.

Selling businesses lighting hydraulics.

And we've done a number of acquisitions and we continue to prioritize our electrical business.

And certainly making investments in electrical that are really tied to.

These big secular growth trends that we've talked about of electrification digitalization.

<unk> transition.

And we will continue to look for things in that space you saw us.

Acquired this company called Green motion last year, which is a play into.

Trick vehicle charging infrastructure.

You've seen us do a number of transactions in the Asia Pacific region.

To really participate in a very fast growing Chinese market and dissipate in what we call the tier three tier two market, where we historically have not played.

So youre going to see us do things geographically that allow us to.

Penetrate underserved markets.

You've seen us do the tripwire acquisition, which is obviously a important play into data centers in the channel and so I think what you can expect as we move forward is for us to continue to do.

Transactions in this kind of size and scale.

Really focused on kind of these really important aspects of where we think the future growth is going to.

We said that aerospace continues to be a priority and we've done a number of.

Acquisitions in aerospace we'd like.

The composition of aerospace businesses. These are.

Technology highly differentiated businesses you get paid for your technology.

Very strong aftermarket we want to make sure that we're on growth platforms and that was essentially the play with Cabo.

Their sole sourced on virtually every platform that they're on.

Have a growth.

Outlook for that business that takes it from $700 million to $1 billion based upon program that they've already won.

And it's a very profitable business with a strong aftermarket and so you can count on us to continue to look.

Four acquisitions that are very much consistent with what you've seen us do over the last few years and I would say the pipeline today is.

Is better than it's been in a while we're looking at a number of.

Of opportunities to really buttressed, our capabilities in and around some of these spaces.

<unk> spaces that we talked about.

Well, obviously, we're not in a position to.

Can you talk about anything or to announce anything but.

What youre seeing from US is a is a is a.

Pivot towards as we think about how do we deploy our capital and how we can create the most value for shareholders and we think that we can find value creating acquisitions.

A fair price for them and generate more value today incrementally than perhaps buying back our stock, but having said that we've said before we're not going to let cash build up on the balance sheet. If we can't get deals done we will go back into the market and buy our stock back and so we're just always just trading off how do we create.

The most value for shareholders either.

Through M&A or stock buyback or some other way of returning capital to shareholders.

But it's been a great time.

<unk> seen from us and we.

Like what we're looking at in front of us.

And we would hope to be able to deploy more capital towards value, creating M&A.

The only thing I would add the secular trends give us some really exciting opportunities such as royal power that we can leverage across.

E mobility Aero space and.

Our electrical sectors.

It's exciting that we're seeing read across.

That's great and then just one last one for me on utility T&D noted.

Driver of the order activity within international didn't get a call out in the Americas business. So I'm just curious.

What are you hearing from customers around capex any any change in tone there at all.

Yes, I'd say that.

The T&D market continues to be an attractive market, but I think as you think about.

A place where in desperate need of some significant investments.

And aging infrastructure on the one hand, but also once again the changing nature of the grid, which is also driving the need and requirement for some fairly significant.

Investments and upgrades in the grid and grid resiliency and so yes, we think that in the Americas as well continues to be a really positive story for some years to come.

Grew mid single digits last year, we expect it to grow the same in 2022.

Okay, great. Thanks for the questions.

Thank you and our final question today will come from the line of Marquez Mittermeier with UBS. Please go ahead.

Yes, hi, good morning, everyone.

Craig you mentioned in your opening remarks that in the electrical Americans negotiation pipeline is up 11% if I remember the number right you said anything on whether you're in there on some of the semiconductor activity that <unk> heard from some machine theaters that theres. Some early activity. There just wanted to check if that's already part of that pipeline.

Yes.

Appreciate the question.

Question I can't really answer I don't have that information on my fingertips right now in terms of where the additional negotiations are coming from specific down at that level of specificity, but maybe yen will usher in gen. Two follow up with you on that question to give you the color on the composition of where those negotiations are coming from.

Absolutely, but the semiconductor opportunity, obviously still remains sort of an interesting one.

There is no question.

To the extent that you end up with a.

Fairly sizable infrastructure build out.

Shoring in semiconductors and alike. Those are all markets that need our electrical switch gear and so they certainly create great growth opportunities for us.

Great and then just maybe a very quick one on electrical global you mentioned.

Yeah.

On Crouse Hinds earlier, the strong growth, obviously that you see there should I interpret the very strong margin profile largely as an effect of crowds heightened sorry is it more broad based inside of electrical globally here in the quarter.

Oh, it's definitely broad based yes.

Kraft Heinz is helping but our electrical.

Europe business in electrical is doing a great job of expanding margins and so we're seeing it both in.

Okay.

Let's call it the traditional electrical business and we're seeing it in crowd signs as well.

The 19, 5% margins in the quarter, I mean, which is an all time record for our global and it's really contributions from them and quite frankly contributions from our Asia team as well I mean, our Asia business as well.

Dramatic.

The improvement in profitability over the last number of years since we're really seeing it. If you think about what makes up global it is what we do regionally in Asia, what we do regionally in Europe and then it's the global Crouse Hinds business as these tend to be global businesses, but all three of those businesses saw a significant improvement.

<unk> and profitability during the course of 2021.

Great. Thank you very much good luck.

Thank you.

Hey, Thanks, guys as always chip and I will be available to address your follow up questions have a good day. Thanks.

Thank you.

Sure.

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.

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[music].

Yeah.

[music].

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Eaton Corporation fourth quarter earnings Conference 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 into the question queue. Please.

Press, one then zero on your telephone keypad.

If he would require assistance during the call. Please press Star then zero.

And 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. Mr. Yan Jin. Please go ahead.

Hey, good morning, everyone.

You didn't senior Vice President of Investor Relations. Thank you all for joining us <unk> fourth quarter 2021, earning call with me today are Craig Arnold, our chairman and CEO and Tom Okray, exactly West President and Chief Financial Officer, Alright agenda today, including the opening remarks by Craig highlighting the company's performance in the fourth quarter.

We'll be taking questions eight end of Craig's comments, the price release and the presentation. We will go through today have been posted our life site. This presentation includes adjusted earning per share adjusted free cash flow and other non-GAAP measures. The recall sailed in the appendix a webcast of this call is accessible.

Our website and will be available for replay I would remind you that our comments today will include statements related to the expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties all lines.

In our presentation release and presentation with that I will turn it over to Craig. Okay. Thanks, Dan Hey, let's start on page three with a few highlights of the quarter and I'll begin by saying that despite what's now very well publicized and ongoing supply chain issues. Our team delivered solid results in the quarter and a record performance for the year.

And in Q4, we generated adjusted EPS of $1 70 to a fourth quarter record.

Our sales of $4 8 billion up 6% organically and I would say here. We had we had particular strength in residential data centers and in industrial markets and I'd say also our aftermarket businesses in both commercial aerospace and vehicle continued to deliver strong growth.

We were certainly impacted by supply chain constraints, which had an impact on our revenue and I'd say, especially in our electrical Americas in our vehicle segment.

The good news is the market remained strong order growth accelerated in the quarter and we ended the year with a record backlog.

For our combined electrical business.

Orders were up 21% on a rolling 12 month basis, and our backlog was up 56%.

Our aerospace business also had a significant increase in orders up 19% on a rolling 12 month basis, and the backlog was up 16%.

We also continued to post strong segment margins 19, 3% in the quarter and a Q4 record.

And I'd say here and you are the actions that we've taken to mitigate inflation our portfolio changes and the restructuring savings are all contributing to the strong incremental margin performances.

I'd also note that we benefited from favorable mix in the quarter.

And I would say that our portfolio trade has continued to be an important part of our strategy.

We're pleased to have completed the Royal power solutions transaction, a few weeks ago and the addition of rural power.

Will allow us to accelerate our growth in E mobility and actually in the broader electrical market as the economy continues to adopt more electric solutions.

So I'd say I think you'd agree that we're not sitting still we are managing the things that we can control operationally, while continuing to advance our strategic agenda.

Moving to page four I'll highlight a few additional points on our quarterly results.

<unk> total revenues of up 2%.

We increased operating profit by 14%. So continued to demonstrate strong strong operating leverage second act.

Acquisitions increased revenues by 7%.

It was more than offset by the sale of our hydraulics, which was a 10% headwind.

And while not complete we're certainly pleased with our progress.

Portfolio.

We continued to drive changes to support our overall goals of creating a company with higher growth higher margins and more earnings consistency.

Third I just pointed out that our margins of 19, 3% as I noted were above the guidance range of 18, 8% to 19, two and I think a good indicator of our team's ability to execute operationally, while once again managing the things that are in our control.

And lastly, as we noted both adjusted EPS of $1 72, and segment margins of 19, three where Q4 records.

In the face of the significant supply chain constraints that we've been dealing with.

Next on page five we show the financial results of our electrical Americas segment.

Revenues were up 13%, 5% organic and 8% from the Tripwire acquisition.

The organic sales growth was really driven by strength in residential and industrial and data center markets.

And on a sequential basis in our organic growth did step up from 1% in Q3 to 5%. So we're making progress but still as I noted continued to be impacted by supply chain constraints.

In some cases in our ability to meet demand was also impacted by labor availability as we had the spike in the Omicron version.

Certainly at the end of the year.

Operating margins of 19, 2%, we're down 190 basis points year over year and the decline was driven really by higher input cost labor and.

And supply chain inefficiencies and disruptions in our facilities.

And on price recovery, we're making good progress we made good progress in the quarter, but certainly not fast enough to prevent some margin erosion on the net between inflation and price.

And the way that plays through to operating margins.

And as noted in my opening remarks market demand remained strong which was reflected in an orders and the growth in our backlog on a rolling 12 month basis orders were up some 20% accelerating from 17% in Q3 and 13% in Q2.

Our backlog reached another record up 57% from last year, and net 7% higher than it was in Q3.

The strongest markets continue to be residential in Datacenters and I'd say here also beyond orders were also have strong momentum in our negotiation pipeline, which was up from 11% in the quarter.

Turning to page six we summarize our electrical global segment.

And as you can see we delivered really strong results in this segment organic growth was 15% with strength in all regions and particular strength in commercial data center and industrial markets.

We also delivered significant operating leverage with operating margins of 19, 5%.

And incremental margins of 40%.

We did have a little bit of favorable mix here from our exposure to industrial end markets, but we do expect this to continue.

Like the Americas orders remained strong at 22% increase on a rolling 12 month basis, and a step up from the 17% number we posted in Q3.

And our growth and our backlog remained above 50%.

In this segment the order strength was especially strong in data centers residential and utility markets.

Yes, so I'd say overall I would say that our electrical global business had a very strong quarter on top of a strong year and is really carrying a lot of strong momentum into 2022.

Moving to page seven we summarize the results for our aerospace segment.

As you can see we had a strong quarter the industry recovery is certainly begun.

Revenues increased 40%, 4% organic 37% from the acquisition of carbon emission systems and currency had a 1% negative impact.

Aftermarket and Biz jet.

This was partially offset by weakness in military markets.

Operating margins were 24, 9%.

An all time record and up 660 basis points from prior year.

In the quarter, we had solid incremental margins of more than 40%.

Which were helped by favorable mix, particularly the growth in aftermarket and by our portfolio actions.

Another bright spot in the quarter was the growth in orders and backlog on a rolling 12 month basis orders turned positive in Q3.

And were up 19% in Q4 with particular strength in commercial markets.

<unk> transport Biz Jets and commercial aftermarket were all up significantly.

And lastly, our backlog was up 16% from last year.

Next on page eight we show the financial results of our vehicle business rare.

Revenue was down 2%, 1% organic 1% from currency.

We had strong organic growth in North America truck.

And in our South America business, which was offset by weakness in global light vehicle markets.

As Youre aware we.

We had certainly significant supply chain constraints in this segment, including a number of customer shutdowns that impacted our revenue.

We do have.

Okay.

Okay.

Okay.

But our team executed well.

Colin.

The decremental margin.

Perfect.

Turning to page nine we have the results for E mobility business.

We're up 4% with.

Growth in North America, Asia, partly offset by weakness in Europe .

Like our vehicle business, we experienced significant supply constraints and customer shutdowns in this segment.

Operating margins were negative nine 1% as we continued to invest heavily in R&D and startup costs associated with new program wins.

As I mentioned earlier, we acquired Royal power solutions in January and it will be reported within the E mobility segment.

This is an important acquisition its part of our strategy to improve the long term growth rate of Eton.

First it expands our addressable market free mobility with a portfolio of highly engineered terminal connectors for electrical applications.

Second Royal power has a strong track record of profitable growth.

And we will continue to grow as the electrical content in vehicles continue to expand.

And third.

Royal will allow us to offer a more complete customer solution as we bundle their products with our own power protection and power conversion products that we're selling many mobility markets.

Can I say here with organic growth momentum the completion of Royal Tower acquisition, we're well positioned to realize our long term objective here, which is building.

A new $2 billion to $4 billion E mobility business inside of Eaton.

And our cumulative new program wins are now at $800 million mature year revenue. When you include the impact of new wins from Oriel power.

Moving to page 10, I'll, just take a minute to recap 2021 performance before we turn our focus to 2022.

First we delivered strong organic growth for the year up 10% with significant strength in our electrical global segment up 15%.

Vehicle up 'twenty, one in E mobility up 16.

And I'm, especially proud of the team for delivering record segment margins of 18, 9% 250 basis point improvement over 2020.

Despite the challenging supply chain environment.

Our team executed at a high level and delivered incremental margins of 43%.

We also had one of the most transformative years in the history of the company when you think about the portfolio.

We completed $8 billion of portfolio actions towards our goal of building this higher growth higher margin company with more earnings consistency.

And we're off to a good start in 2022 with another value enhancing acquisition and Royal power.

The result of our disciplined execution.

Transformative portfolio actions allowed us to deliver 35% growth in adjusted EPS.

And importantly, our shareholders, we are well rewarded for their commitment to Eaton with a total shareholder return of 47% for the year.

Two and a 2021 votes results certainly set a high bar for what we expect of ourselves and I'm sure. What you expect of others of us as well, but we're up for the challenge and we think the best years are still in front of us.

Yes, so, let's just turn our focus to 2022.

On page 11, we show organic growth and margin guidance by segment overall, we expect organic growth to be 7% to 9%.

Starting with our electrical businesses.

Americas and global are both expected to grow 7% to 9% and.

And we expect these businesses to see growth really across all end markets with particular strength continuing in Datacenters distributed.

In industrial markets.

In aerospace, we expect organic growth of 10% to 12% with strong growth in both commercial OE and aftermarket channels.

Base assumption here is that <unk>.

Travel continues to expand.

From from.

The COVID-19 impacted downturns without any significant new variants.

And we expect low single digit growth in military markets.

For vehicle, we're anticipating organic growth of seven 5% to nine 5% with strength in both light motor vehicles and truck markets and any mobility, we're expecting organic growth to be 11% to 13% driven by the continued strength in electric vehicles.

And just turning to segment margins, we expect Eaton to be between nine <unk>, 9% and 23%.

At the midpoint. This is a 120 basis point improvement over our record margins that we delivered in 2021.

And we expect to see margin expansion in all of our segments.

Turning to page 12, we cover the balance of our 2022 guidance organic growth as we noted is expected to be 7% to 9% with acquisitions and divestitures subtracting three 5% and currency is expected to be flat.

We're also forecasting cost to be flat and our tax rate to be between 16 and 17%.

Adjusted EPS is projected to be in a range of <unk>.

$7 30 to $7 70.

At the mid point of $7 50, a 13% increase.

Operating cash flow is expected to be between 3 billion and $3 2 billion in capex will be approximately $650 million.

At the midpoint, our operating cash flow is expected to increase.

15% versus last year our.

Our free cash flow is expected to be between two four and $2 6 billion and.

And at the midpoint of $2 5 billion also a 15% increase.

This represents free cash flow to sales of approximately 12% and free cash flow to net income of approximately 100%.

And we expect share repurchases to be between 200 $300 million in there.

This really reflects our pivot to.

What we think is going to be a higher priority on tuck in acquisitions.

And lastly, our Q1 guidance is as follows we expect adjusted EPS to be between $1 55, and $1 65.

Organic revenue growth to be up 79% segment margins to come in between 18, 4% and 18, 8% and we expect our tax rate to be between 15 and 16%.

Hey, just allow me for a moment I'd like to close with once again page 13, which is a brief summary.

We think you should think about the company and I would say first off.

Our top line is supported by strong secular growth trends.

And I would say of note. Most of this growth impact is just beginning to show up in our revenue. So most of it still out in front of us.

We've proven that we know how to expand margins and are comfortable with our ability to deliver <unk>.

11% to 13% EPS growth over our planning horizon.

We also have clear capital allocation priorities and a disciplined approach to M&A, which we think is paying off.

As a result, I'd say, we're a different company today.

We've transformed our portfolio. We're now a company that will deliver higher growth better margins more earnings consistency and I'd say once again, we're not done.

We also have a long standing commitment to ESG. It remains at the forefront of what we do every day in fact sustainability for US is really a part of how we drive growth in the company.

Any of you have gotten to know our chief sustainability Officer, Darrell Jones, and Youll be hearing more from him at our Investor meeting next month.

In the short term you can count on us to continue to manage through these operating challenges as a result of COVID-19 .

Supply chain disruptions and labor shortages by managing the things we can control.

2021, we think was an important proof point on our journey to transform the company and we're proud of our results.

More importantly, we're ready to do it again this year.

Now I'll turn it back to yen and we'll be happy to address your questions.

Thank you Craig for the Q&A of our call today. Please limit your opportunity just to one question and one follow up. Thank you Ana ones for your cooperation with that I will turn it over to the operator gives 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 ones Youre welcome Matt.

Our first question will come from the line of Jeff.

Coincide with Morgan Stanley . Please go ahead.

I always know if theres a pause it has to be coming to me. So I can start on mute good.

Good morning, guys.

Josh Good morning.

So a couple of questions here I guess first on <unk>.

Free cash flow conversion.

How should we think about some of the moving pieces around their working capital or otherwise.

And when do you think we start to get back to kind of more historical conversion rates.

So thanks for the question Josh appreciate it.

We intentionally used GAAP earnings in our prepared remarks, when we said we were close to a 100% in and our free cash flow conversion and the reason. We did this is it's important to look at GAAP earnings when youre going through multi year restructurings and doing a lot of M&A. So there's really four.

Four main items that you need to think about as it relates to free cash flow conversion.

One is acquisition integration and divestiture costs costs, which are going to generate cash requirements for us in 2022. The other one is the multi year restructuring programme now while we're at the tail end of that we will have cash requirements, which will also be in 2020.

Two.

Another element is capex as you probably noted for our guide we're up $75 million in Capex investing to grow and then the final one is a smaller one but it's relevant the cares act, we still have 50%, which is due which we'll pay in 2022.

So if you if youre using adjusted earnings.

Youll likely got in the low eighties mid Eighty's, if you adjust for those four items youre going to be well into the mid nineties. So I don't think its a departure between what we've done historically I think it's I think it's consistent the other thing I would note is we're also growing.

Cash flow by $400 million in the year, which is which is significant and I would just add in addition to that Josh Let me know where else. We're obviously not through a number of the supply chain related challenges into equity.

We're certainly as we think about today, how do we protect customers how do we get out in front of some of these supply chain constraints, we're still sitting on a fairly large pile of working capital specifically inventory as we're dealing with some of the supply chain related issues.

Got it that's helpful. And then I guess just speaking of supply chain.

Probably the volume output here is it was held back and we can see that in the <unk> guide.

I guess, specifically in electrical but if order rates hold what sort of volume growth are you guys thinking about it as kind of a second half our exit rate or as.

Some of these supply chain issues abate, how do you guys think about that in the guide here.

Yes, I mean, it's certainly a tough question to really address I mean that you can appreciate.

We and others have got this thing wrong in terms of how long these supply chain constraints would be with us, but certainly the underlying order growth in the businesses is a good proxy for where the real demand is.

I'm sure. The question. That's just behind this one is that to what extent do you believe this over ordering taking place.

Restocking in the channel and I can tell you is we continue to test for that we're not seeing it.

And our distributors.

Certainly today.

Yes.

Calling for more inventory than we're currently able to deliver to them.

So much of our business is project driven and so on projects youre not over.

Over ordering on a project a project is a project and so if you just look at the order.

Levels that we're seeing in our business I mean orders and sales at some point converge to the extent that there isn't a bunch of over ordering taking place and so we feel really good about the underlying strength in our markets you see this tremendous growth in our backlog and eventually this stuff is converted to sales and so we're.

Talking about our guidance of seven to nine which is well below the underlying order rate that we've seen in our electrical business and so at some point those two things converge yes.

Yes, I guess for perspective, Josh we estimated in Q4, just in the Americas, We probably lost about $100 million in sales related to.

Acquired disruption right timing, we didn't do so and we think that's one thing and those revenues are pushed into 2022.

It just went into the backlog.

I appreciate the color thanks, guys.

Yeah.

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

Good morning.

Hey, Andrew.

Hey, how are you just a question on backlog.

How much visibility do you currently have.

Some of your project backlog.

Does the margin profile of those projects look relative to.

The current input costs.

It's a sort of a mixed message.

From Paris folks.

As to how that's going to play out in 'twenty two.

Yes, I would say that we are naturally sitting on a lot more visibility today than we have ever in the history of the business and when you think about this 57% for the 6% growth in the backlog for a global electrical businesses and so we have much better.

Order visibility today than we would have going into almost any year in the history of the company and I would say with respect to pricing in the backlog I mean, we naturally have seen this inflation trend coming for some time now.

We certainly have had the ability to anticipate where it was going as well with respect to commodity inflation and so we're very comfortable today with pricing in our backlog.

And at the net certainly reflected in the guidance that we have but we don't expect.

Like perhaps you've heard from some others that have a margin impact as a result of a backlog that's not reflective of today's commodity prices.

Excellent and then just maybe to build.

To build on the previous question so.

You are highlighting sort of the underlying free cash flow conversion is close to 100% but.

Look.

I think cash flow is one of the factors here as we sort of enter this growth looks like.

Industrial growth period.

Generally do you think about sort of investments needed in capacity working capital supply chain.

To keep up with demand and the longer term and how do you see managing it and what kind of impact do you foresee it having on margins free cash flow conversion as return on capital et cetera, just big picture question. Thank you.

Yes, I would say if you think about we talk about these important secular growth trends and the fact that we do expect our businesses that we look forward to be a much faster growing.

And we have historically and we have had to and we talked about some examples before I make some fairly sizable investments in new capacity to deal with some of this growth that we're going to be that way.

Booking today and will be coming into the future and so I would say as you look into the future certain with respect to investments in capacity to support demand.

We would expect to up to see a bit of a tick up in capital spending requirements. Our revenue is going to be growing as well and so if you think about capex as a percentage of sales it probably won't be a material change, but there'll probably be a bit of a tick up.

And on the working capital side I would say today, we still have opportunities.

We are sitting today on record investments in inventory.

As we try to protect our customers and protect our sites. So that they can keep running and so I would say I would not anticipate today, a large investment in working capital once we get through some of the supply chain specific driven transitory items.

I would hope that at some point it will be a source of cash even as we continue to grow the business and we literally have built that much inventory inside of the company to really try to protect customers, but on the on the working capital on the excuse me on the Capex side, we would anticipate.

Continuing to make investments in capacity in our facilities.

In resiliency to ensure that we have the ability to support the growth that we see coming.

Yeah, Andrew I think it's also important to note is we're not walking away from our objective of 100% free cash flow conversion in 2014% free cash flow as.

As a percentage of sales that remains something that we're focused on here.

Really appreciate it thanks so much.

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

Thank you and good morning, everyone.

Jeff.

Morning.

If we could just kind of peel the price cost the part a little bit further and just wonder specifically.

On price if you can give us some sense of what the what the realization was in the quarter and what is embedded in your in your guide.

And also as part of that Craig just kind of mentioned you didn't expect price cost to be a margin headwind. So are we it sounds like we're probably.

Positive on on a dollar rate, perhaps maybe you could confirm that.

And just to clarify the margin impact if you will.

Yes, I appreciate the question.

Jeff and this is obviously one that we're spending a lot of time internally on ensuring that we are.

A recovering all of the commodity inflation that we're seeing in our business and so my comment in my opening commentary I talked about the fact that.

We saw a margin impact.

Our electrical Americas business, specifically as it relates to price and cost largely because we are in fact recovering the dollars, but we're not getting a margin.

Lease in the fourth quarter, we did not get a margin on top of the recovery and so it obviously that has a dilutive impact on the margin rate as we look forward, we do expect that well.

We'll be slightly positive in price cost, we think about 2022 and that will just continue to build from this point forward.

So 2022 will be a better year, it will be less of a headwind for sure than we experienced in 2021, and we certainly would expect from an EPS standpoint.

It will be positive to.

Our EPS earnings on a specific question on what the dollar percentage, Jeff as we talked about.

On the last earnings call and I know, it's a number that everybody is looking for and I can understand why but we're in so many different businesses and we have very different inflation rates. When you think about it.

Something in Crouse, Hinds, which has a really heavy content of steel versus something thats in one of our other businesses and so the inflation rates are are quite variable and so we've chosen not to provide that number so as not to confuse customers around prices, they're seeing versus what we're talking about on our earnings call.

Thank you for that since.

Since you mentioned steel maybe I'll go there with my follow up.

Obviously, the futures are pointing a lot lower.

Can you just give us an update on.

The likely lag effects of.

Perhaps deflation on steel coming through the system.

Do have some big backlogs to work through so certainly I would suspect it's going to take a couple of quarters, but.

Any color there on steel specifically or just other key commodity inputs that we're all keeping an eye on here.

Yes, we appreciate the question as well.

If you'd like you've mentioned we are in fact seeing steel prices kind of retrench, a little bit versus where they were last year and certainly where they were in the fourth quarter and the typical lag time on that can be anywhere from 30 days to 90 days depending upon.

Which segment of the business and what type of agreement, we have with our suppliers, but I would say with respect to commodities overall is that we're really not seeing commodities overall essentially improve.

Copper is up.

Resin costs are still high the cost of semiconductors. If you can get them are up dramatically and so we are still living in this inflationary environment.

We would anticipate for much of 2022 that we continue to operate in this elevated environment of scope of input costs steel is the one kind of a good guy right now, but there are more than enough other.

Hey, guys out there in terms of where we're still seeing inflation that are offsetting the benefits that we're going to see from steel.

Great. Thanks for the color.

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

Yeah. Thanks, good morning.

Good morning.

I just kind of wanted to go back to you about the free cash flow and working capital discussion. So completely understand that this is an area of opportunity and that's kind of been reflected over a lot of companies that we've heard from over the past few weeks, but I guess when we think about your 2022 guidance have you embedded continued working capital build or are you anticipating that.

It will be a source of cash for this year.

Okay.

I think what's embedded.

If I'm wrong, but I think it's a slight positive yes.

Better than our forecast, we're looking at some networking capital improvement primarily as it relates to inventory right. So.

It's not a big needle mover for us in 2022. It is a slight positive is what I'd say.

Okay, perfect and once again it could be an area of opportunity if we get through some of the supply chain related challenges.

More quickly than we're currently anticipating a.

Certainly could be an opportunity to generate stronger free cash flow.

Of course got it thank you.

And then I guess, just kind of following up and finishing up the price cost discussion Craig you, specifically called out Americas, which makes sense are you having price cost headwinds at the margin line in any of your other segments or is it just really isolated predominantly in America. This year.

I'd say, we're having price cost headwinds in all of our businesses for the most part it is just most acute in the Americas and so I'd say.

We haven't.

We've just and if you think about today, what's going on and its.

Kind of interesting.

What's going on around the world, It's really the U S businesses in general that have had the biggest challenges around price cost and that's largely on the input side that the inflation that we've experienced in our Americas businesses in our U S. Based businesses has been significantly higher than what we've seen in other markets around the world.

But we're having we're having we're having let's say.

Inflationary pressures every place which is most acute in the U S based businesses.

Thank you I'll pass it on.

Thank you.

Thank you. Our next question comes from the line of John Walsh with Credit Suisse. Please go ahead.

Yeah.

Hi, good morning.

Yes.

Maybe the first one can you give us a little more detail on what you're seeing in the data center market globally.

If you are actually booking out now to 2023 on some of those projects.

Hey, Jonathan.

Data center market has been extraordinarily strong.

For us during the course of the year and on the <unk>.

Back of really whats been a multiyear trend of really strong market and on.

Whether we're looking at Hyperscale, whether we're looking at co locations, where do we look at even own prim each of those markets have been extremely strong in.

Has been the channel in general.

And so I'd say today.

About where we're challenged around our ability to really service customer demand.

He has really strong markets of data centers and residential that certainly have built very large backlogs.

And today, we're struggling to keep up with demand.

And quite frankly, we think that market does stay strong for a very long period of time and you might get back to some of the earlier conversations of where are you going to need to make some capital investments to really deal with some of these longer term growth trends its going to be in markets like data centers, which we think is going to be.

Strong for very long period of time as the World continues to as I've said before generate consumed process store, just increasing amounts of data.

And so and we're sitting on the verge of a another big growth wave when we think about <unk> when you think about.

Okay.

Economist vehicles, and so we think that market is going to be strong for a very long time, and we're going to have to continue to invest to keep up with the growth.

Great. Thank you for that and then maybe one on aerospace margins if I did the math right. It looks like there's a little pressure on the conversion obviously absolute numbers.

A nice improvement is that mix or is there something else happening there.

So when you say pressure on conversion, you're talking about incremental margins in the quarter. The incremental margins, maybe that's just mix with OE growing fast or something happening commercial let Terry I'm calculating something in like the upper Twenty's mid to upper end of the incremental margins for aerospace business was.

40% here four zero.

I'm, saying in the guide sorry, and the forward look for 2022.

Why don't you, let us get back to you on that in terms of the incremental margins in the guide and I think you have an acquisition impact on that as well, so and I'm not sure what youre, assuming in terms of stripping out acquisitions, which obviously don't come at a normal incremental they come at the underlying margin rate of the business. So why don't you let.

Get back to you on that one and maybe deal with that offline.

Sure I appreciate you taking the questions. Thank you alright. Thank you.

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please go ahead.

Thank you good morning, everyone.

Good morning.

So Craig look interesting dynamic occurring in the market right now on the inventory side.

So you guys build inventory this quarter, which makes a ton of sense, obviously to be able to supply the market.

I kind of want to try to square the comments on distributor inventories being lean clearly no inventories if you if you're if.

If youre doing a project.

Whats your sense in the OEM, because we are hearing from some of our companies that they are building inventories, but everybody is also saying that the market is still very lean out there.

Yeah, and I would say that I mean, I think it's fair to say everybody would like to build inventory.

And we're getting lots of request.

To get back to historical levels of inventory with our distributors and Oems carrying inventory many of them.

Some of them do.

But keep in mind you know so much of what we do today is project business in our electrical and.

Projects typically are not finding.

Obviously any inventory build there and so I would say that.

This is one that has certainly been one that we've been concerned about we've been watching we have been testing forward in terms of whether or not there is over inventory.

In the system, whether or not this double ordering in the system.

I can just tell you having talk with and <unk> been engaged with a number of our teams and our distributors.

That's not what we're hearing or seeing.

They would like more inventory and their inventory levels today are below where they would like them to be given their their forward look on revenue growth.

Yes that makes sense Craig.

I appreciate the comments there I guess my one my one follow on question I guess, it would be more around like.

Electrical Americas margins and clearly understand the pressures.

That youre feeling this quarter I think lots of other companies we are feeling the same how do.

You think I know that you guys had a pretty healthy margin expansion baked into 2022.

At what point does that start to turn positive year over year, and then maybe just providing a little bit more color on the cadence would be helpful.

So.

When do margins turned positive year over year.

What quarter do the margins turn positive.

Yes, just cadence around like the puts and takes on margins as we progress through 2022 and electrical Americas.

Yeah, I would say that certainly.

Tom will hit Q2, and we would expect that our margins would turn positive I mean, obviously, we're dealing with.

A number of factors right now in the business and obviously what is getting a lot of attention right now is supply chain related issues, but I can tell you also how big of a part of the challenge as I mentioned in my speaking opening commentary that we're seeing significant labor related issues and inefficiencies in our plants to we had.

Pretty large absentees.

In a number of our facilities at the end of last year at the beginning part of this year as a result of Covid. Our suppliers are seeing the same thing and so it's not just.

Supply chain, and we can't get parts and in many cases, we were challenged to get labor and the run our factories efficiently until all of these inefficiencies.

They are kind of built into the results in Q4 and to a certain extent in Q1 as well.

I think it's really Q2 by the time, we really get beyond some of the labor inefficiencies.

We do think that supply chain continues to get better.

Every quarter, but in some cases, we think we're going to be dealing with supply chain challenges for the entire year. When you think about components like semiconductors.

Other components, whether that's copper steel and resins, we do think those things continue to get better every quarter.

Makes sense. Thank you Craig it's important to note at the midpoint, which you saw in our prepared remarks, we're 90 bps above the prior year margins in electrical Americas.

That reflects both.

Bullishness that we feel about things correcting throughout the year.

Yeah.

Yes.

Great. Thank you.

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

Hey, Julien Hi, good morning, good morning.

Yeah.

One.

Starting point, perhaps is just.

Within the electrical.

Americas business.

And I guess I wanted to try and understand sort of on the residential side of that.

How much was.

Residential as a whole.

A portion of that business.

Hi.

How strongly was the business up last year and when Youre thinking about this year ahead.

Dialing in any kind of slowdown there.

And I think people are obviously pretty cautious about a number of other <unk> facing product categories in multi industry right now.

Sure.

We appreciate the question.

Already today, I think we'd say.

18% roughly of our business, we could go into residential markets in that market did grow strongly during the course of 2021.

That business was probably up.

No.

No.

It's around double digit.

30%, yes.

So and we're clearly expecting that market to see somewhat of a slowdown which is baked into our guidance for 2022 still growth in the market, but not at the heavy levels that we experienced during the course of 2021. The other thing I think its important though as you think about residential markets to keep in mind.

As you really think about this market over the.

The near and the longer term is that it's not just the growth in the housing stock. It really is also the growth in the electrical content in.

Buildings residential buildings multifamily buildings as.

They adopt a new electrical codes it requires additional electrical content and as we really start moving seriously into energy transition. We think the opportunities continue to grow at a really attractive rate.

<unk> put electric cars in their garages and they have to change their electrical infrastructure support the electric vehicles as consumers continue to look at things to improve their resiliency, whether that's solar.

Ability to to island home the ability to sell energy back to the grid.

All of these things all of these kind of secular growth trends that are taking place more broadly.

And the economy are going to also have an impact on residential and even though let's say the housing numbers are not going to grow dramatically the electrical content.

Is going to grow at some multiple of that.

That's what we've seen.

Over the last let's say 10 to 15 years and that really didn't even have the impact of some of these energy transition related trends that we're talking about.

The resi for US we think continues to be a really attractive market, we have great position in residential and it's one we will continue to invest in.

Okay.

Thanks, very much and then my second question I guess is touching on what.

Joe had mentioned earlier about inventory because I guess, if I look at.

Automotive is one area or light vehicles, whether we've heard about all the constraints.

There was a very large OEM early this week, who said wholesale volumes are up 20% plus in 2022 and they could liquidate inventory.

Early in the year so.

I thought was interesting because it suggests that that's a massive OEM who feels like they have enough.

Goods on hand to satisfy double digit growth this year.

And so I just wanted to sort of push a little bit on that point and ask.

And then any areas when you look across different regions or different markets.

Well Youll salespeople loyal channel partners.

How do you think maybe that there has been a good amount of inventory built up I don't know if theres any kind of broad views you have on end markets that had more or less inventory relative to normal as you look today, yes.

Hey Man I'm sure they're out there someplace Julien.

I can tell you that they are out there their voices are being drowned out by probably 100 to one on the other side of customers asking us for more.

Specifically as it relates to automotive inventory levels I mean, the inventory levels today continue to run at record low levels. I mean, you think about an industry in the U S that has typically run 75 days.

Inventory had been running under 30 days of inventory, so I'm surprised that that any automotive OEM would say that they are comfortable with the levels of inventories were not hearing that from any of our customers and so that's I think is a bit of an outlier.

That's helpful. Thank you.

Thank you.

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

Thanks, Paul Good morning.

Good morning.

9%.

Growth of course lets go into 'twenty one.

Since nine and tweaks to your long term targets for the fixed so I don't want get too far ahead of March March Investor day, but how are you thinking about growth.

<unk> seen electrical I'm, assuming it might be about four to six but.

And then kind of I would like to that is you're highlighting utility data center.

<unk>.

I've been surprised youre, not seeing industrial and commercial institutional tuning around because we are seeing some strength noticed that so I'm just wondering what you're seeing in those two markets.

Yes first of all I. Appreciate your question around the longer term growth outlook in our electrical businesses and to your point, we will be addressing that at our Investor Day next month and I do think it's reasonable to assume that we've seen certainly more strength than we anticipated and it would be fair to.

We anticipate that that number is going to move up slightly.

With respect to the end markets and I'd say for US certainly we talked about industrial industrial markets are doing well and we talked about that as being one of the strong markets for us in general and so we are seeing the strength in industrial we're certainly seeing the strength in utility residue to centers even in commercial I'd say, if you think about commercial we've talked about.

Before.

We're still seeing growth in the.

Office low single digit growth, that's not huge there, but we're still seeing positive growth in the office segment.

And but also in what goes into commercial as you know things like warehouses and as you think about it.

Continued expansion of the Amazons of the world in the warehouse segments that have much higher once again electrical intensity than a office building or a retail store.

We continue to think that theres going to be positive mix associated with as we continue to move more and more of our retail activity online and so as we said we think all of the markets are going to be growing next year, but we will see some what we think will be outsized strength in.

Data centers in industrial markets and utility markets.

But every market, we would anticipate we'd see positive growth.

I mean to Craig.

Commercial and institutional we saw high single digit this year growth.

The overall market and for industrial we saw mid teens growth so very strong.

That's correct that's correct.

And then the follow on Tom on.

Free cash conversion sorry to come back to this one.

Before the full thank you called out make total sense I see 25, we will comment more on restructuring charges.

Also.

Post acquisition.

Acquisition charges of things, what conant and the gap to headline earnings.

So wrapped up in purchase accounting on the balance sheet, that's going to have cash outflows. This year is this more of a purchase accounting issue.

No no it's really the four things that I described.

The acquisition integration and divestiture of the multiyear restructuring the Capex and the cares Act.

I think you're probably alluding to pension funding and those types of things nothing nothing extraordinary there.

Okay. Thanks, a lot.

Thank you.

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

Good good morning, everybody.

Good morning, Scott My questions have been asked.

I'm kind of curious it's been a while since we have an upcycle in crouse Hinds is.

Oh.

What's your order book look like in.

And that part of the World and I would imagine probably taken some cost out of that business since.

Since the last the last peak.

Perhaps you can just give us a little bit color on that specific business.

Yeah appreciate the question Scott.

And for those of you.

Followed crouse hinds over the year know that that business.

That we acquired many years ago from Cooper was a very profitable business went through a cyclical industry downturn, but when we think about industrial we can talk about industrial strengthening that's where a lot of the crouse Hinds business goes I mean, many of you think about it as an oil and gas business, but a lot of what they do today goes into industrial markets and that business is in fact growing.

And so we are clearly seeing a rebound in the crouse Hinds business.

A lot of the industrial markets that they support and serve our growing nicely.

And so we certainly think we are at the once again the front end of what should be a pretty attractive.

Recovery in those markets.

Okay.

And then as a follow on it just yet.

Thinking in terms of the projects that are out there.

That youre bidding on it has are there less people bidding on projects today than perhaps a couple of years ago just given the.

The reality that.

Everybody's kind of sold out.

Or is the competitive dynamic not really changed much.

Yes.

Let's say that.

Fact that everybody is sold out means that I think everybody is being more selective around the projects that they've taken it and it obviously.

Changes the price dynamic in the marketplace.

So I would say that I can't necessarily say that we're seeing less competition on projects lead times are being pushed out for lots of companies and as I said.

As I said.

It's never easy to recover inflation, but we're in an environment today, where given how well known the issue isn't how public and visible it is.

Probably easy as it's ever been in my professional career.

Does everybody kind of understands what we're dealing with but I would say I can't really speak to whether or not we're seeing fewer bidders on projects, but.

Every company ourselves included.

Have the ability to be a bit more selective today, given the fact that there is more demand than there is capacity.

Yes.

That makes sense for best of luck in 'twenty two guys alright. Thank you.

Thank you. Our next question comes from the line of Brett Linzey with Mizuho America. Please go ahead.

Hi, good morning, all.

Good morning wanted.

I wanted to come back to capital deployment. This is probably the lowest share repo guide we've seen in a number of years and you mentioned a focus on bolt ons could you just spend a moment and talk about the action ability of the pipeline.

Some of the sizes Youre shopping and just trying to understand.

When youre looking within the portfolio.

Yes, I appreciate the question.

You've probably observed over the course of the last 24 months, we've done quite a bit of a portfolio of transformation.

Selling businesses lighting hydraulics.

And we've done a number of acquisitions and we continue to prioritize our electrical business.

And certainly making investments in electrical that are really tied to.

These big secular growth trends that we've talked about of electrification digitalization.

<unk> transition.

And we will continue to look for things in that space you saw us.

Acquired this company called Green motion last year, which is a play into.

Trick vehicle charging infrastructure.

You've seen us do a number of transactions in the Asia Pacific region.

To really participate in a very fast growing Chinese market and dissipate in what we call the tier three tier two market, where we historically have not played.

So youre going to see us do things geographically that allow us to.

Penetrate underserved markets.

You've seen us do the tripwire acquisition, which is obviously a important play into datacenters in the channel and so I think what you can expect as we move forward is for us to continue to do.

Transactions in this kind of size and scale.

I'm really focused on kind of these really important aspects of where we think the future growth is going to.

We said that aerospace continues to be a priority and we've done a number of.

<unk> acquisitions in aerospace we'd like.

The composition of aerospace businesses. These are.

Technology highly differentiated businesses you get paid for your technology.

Very strong aftermarket we want to make sure that we are on growth platforms and that was essentially the play with Cabo.

Their sole sourced on virtually every platform that they're on.

Have a growth.

Outlook for that business that takes it from $700 million to $1 billion.

Based upon program that <unk> already won.

And it's a very profitable business with a strong aftermarket and so you can count on us to continue to look.

Four acquisitions that are very much consistent with what you've seen us do over the last few years and I'd say the pipeline today is.

Better than it's been in a while we're looking at a number.

Of opportunities to really buttressed, our capabilities in and around some of these spaces.

<unk> spaces that we talked about.

Well, obviously, we're not in a position to.

Can you talk about anything or to announce anything but.

What youre seeing from US is a is a is a.

Pivot towards as we think about how do we deploy our capital and how we can create the most value for shareholders. We think that we can find value creating acquisitions.

A fair price for them and generate more value today incrementally than perhaps buying back our stock, but having said that we've said before we're not going to let cash build up on the balance sheet. If we can't get deals done we will go back into the market and buy our stock back and so what it's always just trading off how do we compete.

The most value for shareholders either.

Through M&A or stock buyback or some other way of returning capital to shareholders.

But it's been a great time.

<unk> seen from us.

We like what we're looking at in front of us.

And we would hope to be able to deploy more capital towards value, creating M&A.

The only thing I would add the secular trends give us some really exciting opportunities such as royal power that we can leverage across.

E mobility Aero space and.

Our electrical sectors.

Exciting and we're seeing read across.

That's great and then just one last one for me on utility T&D noted.

Driver of the order activity within international didn't get a call out in the Americas business. So I'm just curious.

What are you hearing from customers around capex any any change in tone there at all.

Yes, I would say that.

The T&D market continues to be an attractive market, but I think as you think about.

A place where in desperate need of some significant investments.

And aging infrastructure on the one hand, but also once again the changing nature of the grid, which is also driving the need and requirement for some fairly significant.

Investments and upgrades in the grid and grid resiliency and so yes, we think that in the Americas as well continues to be a really positive story for some years to come.

Grew mid single digits last year, we expect it to grow the same in 2022.

Okay, great. Thanks for the questions.

Thank you and our final question today will come from the line of Marquez Mittermeier with UBS. Please go ahead.

Yes, hi, good morning, everyone.

Craig you mentioned in your opening remarks that in the electrical Americans negotiation pipeline is up 11% if I remember the number right you said anything on whether you're in there on some of the semiconductor activity that <unk> heard from some machine theaters that theres. Some early activity. There just wanted to check if thats already part of that pipeline.

Yes.

<unk> the question I don't know.

Okay.

Question I can't really answer I don't have that information on my fingertips right now in terms of where the additional negotiations are coming from specific down at that level of specificity, but maybe yen will actually in gen. Two follow up with you on that question to give you the color on the composition of where those negotiations are coming from.

Absolutely, but the semiconductor opportunity, obviously still remains sort of an interesting one.

There's no question.

To the extent that you end up with a.

Fairly sizable infrastructure build out re shoring in semiconductors and alike. Those are all markets that need our electrical switch gear and so they certainly create great growth opportunities for us.

Great and then just maybe a very quick one on <unk>.

Electrical global you mentioned.

Yeah.

Crouse Hinds early as a strong growth RPC that you see there should I interpret the very strong margin profile largely as an effect of crowds heightened but is it more broad based inside of electrical globally here in the quarter.

Oh, it's definitely broad based yes.

Kraft Heinz is helping but our electrical.

Europe business in electrical is doing a great job of expanding margins and so we're seeing it both in.

But let's call it the traditional electrical business and we're seeing it in crowd signs as well.

The 19, 5% margins in the quarter, I mean, which is an all time record for our global and it's really contributions from them and quite frankly contributions from our Asia team as well I mean, our Asia business as well.

Dramatic.

Improvement in profitability over the last number of years and so we're really seeing if you think about what makes up global it is what we do regionally in Asia, what we do regionally in Europe and then it's the global Crouse Hinds business as these tend to be global businesses, but all three of those businesses saw a significant improved.

And profitability during the course of 2021.

Great. Thank you very much good luck.

Thank you.

Hey, Thanks, guys as always chip and I will be available to address your follow up questions have a good day. Thanks.

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.

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