Q3 2022 Eaton Corporation PLC Earnings Call

Okay.

[music], ladies and gentlemen, thank you for standing by and welcome to the Eaton third quarter earnings call. At this point all the participant lines are in a listen only mode. However, there will be an opportunity for your questions if you'd like to ask a question on the call today.

Please press one then zero on your telephone keypad you may withdraw your question at any time by repeating the ones Zero command. If you should require any assistance during the call. Please press star zero and an operator will assist you offline as a reminder, today's call is being recorded I will turn the call now over to you Mr. Yan Jin.

And your Vice President Investor Relations. Please go ahead.

Hey, good morning. Thank you all for joining us for Eaton's third quarter 2022, earning call with me today are Craig Arnold, our chairman and CEO and Tom Okray, exactly Vice President at <unk>.

Chief Financial Officer, our agenda today, including the opening remarks by Craig then he'll turn it over to Tom who will highlight the company's performance in the third quarter as we have done our past calls we'll be taking questions at the end of Craig's closing commentary the price release and the presentation. We'll go through today have been posted to our lives.

Site. This presentation includes adjusted earning per share adjusted free cash flow and non-GAAP measures that are reconciled in the appendix a webcast of this call is assessable, our website and will be available for replay I would like to remind you that our comments today will include statements related to the.

The expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earning release and the presentation was that our tour and there were two over to Craig Thanks, Ed Hey will.

Begin with the highlights of the quarter on page three and I'll start by noting that we delivered another very strong quarter.

And have again posted a number of all time records, including adjusted earnings per share of $2, <unk>, which was up 15% from prior year.

This despite negative impact of FX and the divestiture of hydraulics business, which took place in August of 2021.

Our organic revenue growth also continued to accelerate in the quarter up 11% in Q2 to up 15% in Q3.

And I think encouragingly, we had strength across all of our businesses with exceptional growth in electrical Americas and vehicle any mobility.

We also posted all time record segment margins of 21, 2% up 130 basis points over prior year and above the high end of our guidance with incrementals of 38% in the quarter.

I would also note that our team continues to manage price effectively more than on fully offsetting the impact of inflation.

And as noted here orders continued to accelerate in the quarter as well on a rolling 12 month basis, electrical orders increased 27% versus 25% last quarter, and our aerospace orders increased 22% compared to 19% last quarter.

This order strength I'd say also led to another quarter of record backlogs and electrical which were up from 75% and our aerospace backlogs increased by 17%.

Lastly, we did start to generate positive momentum in our cash flow results. We had a strong year on year performance with operating cash flow up 29% and a 30% increase in free cash flow and our free cash flow as a percentage of sales was 15, 6% in the quarter.

So as expected, we're starting to see improved cash flow from both higher earnings and improved working capital performance.

Moving to page four and before I turn things over to Tom to go through the quarterly results I want to highlight a few of the key themes that are really underpinning our confidence in our long term growth outlook.

As noted here.

We continue to benefit from the three secular growth trends that we reviewed earlier electrification energy transition and digitalization.

And while still in the early stages, we booked some $700 million of new wins in the quarter that are directly tied to these trends.

Within electrification, you've all read the announcements of the very large number of manufacturing projects in the U S.

That includes new semiconductor facilities big investments in new electric vehicle manufacturing plants, new EV battery investments and investments in EV charging infrastructure.

In fact, yes, there is.

<unk> been some one three trillion of new projects announced this year alone.

And the impact of stimulus Bill is yet to show up in these numbers.

These incentives.

Towards large.

Investments that are tied to improving electrical infrastructure and will deliver significant benefits over the next few years.

The next large growth driver is energy transition the move away from fossil fuels to renewables that's taken place for a number of years now and this trend will only accelerate.

And with every renewable resource addition, it requires electrical infrastructure.

But it's not just I'd say connect a power to the grid. It's also investments in technology to keep the grid stable to manage different sources of electrical power investments and batteries to store excess energy and these are all products and services that we naturally provide.

Beyond renewables, we're also seeing an increase in investments relating to improving grid resiliency, which has become a priority due to extreme weather events and really the demand for a need for energy independence.

And lastly, our emerging digital society will drive higher selling prices as we added intelligence to our legacy products.

We will sell new value from data and insights and create new software solutions, all of which require datacenters and important growth segment for Eaton.

These are just a few of the reasons why we remain confident in our electrical businesses and their ability to deliver higher levels of organic growth for some years to come.

Okay.

And as slide five reflects we have a number of attractive growth drivers in our industrial businesses as well.

Begin with the most notable one vehicle electrification here.

Here.

The outlook for EV penetration continues to accelerate.

New announcements coming almost every week.

Say here not just in passenger cars, we're also seeing increasing need for electrification projects and commercial vehicles.

Some for the entire system, but often for a sub system of the vehicle.

And I'd also note here the opportunities we're seeing tied to the acquisition of Royal power are much larger than we anticipated and our E mobility pipeline continues to be very robust.

Just as a point of reference our opportunity per vehicle on an EV is some 18 times higher and the opportunity that we have on a traditional brushing internal combustion engine.

And Youll recall, we expect our mobility segment to become $2 billion to $4 billion in revenue over the next number of years.

The next growth driver is tied to what we're doing in our legacy vehicle business, which is finding new applications for existing technology.

We're seeing a number of new opportunities for our commercial engine brake technology for our mechanical gears that are used in electric vehicles and for our advanced valve train actuation technology.

And in all three cases, we've already booked significant new wins here.

Third we're benefiting from the aerospace industry growth cycle, which over the next several years will continue to accelerate.

Commercial passenger growth has continued to improve and it's translating into significant growth in commercial aftermarket orders, which by the way were up some 40% year to date.

And commercial OEM build rates are forecasted growth of 15% over the next four years.

Lastly, I would note that with our acquisitions of Syria and mission systems, we expect to see even better growth given our position in high growth platforms and as we begin to realize sales synergies.

So overall it is stepping back from this particular set of initiatives that we've delivered some $250 million of wins in industrial and when added to what we noted in electrical we delivered almost $1 billion of growth tied to these secular growth trends in our markets.

So with that what I'd like to do at this point ill turn it over to Tom and ask him to walk through the quarterly results.

Craig.

I'll begin with noting a few key points regarding our Q3 results.

Our revenue was up 8% with organic growth of 15%, partially offset by a 4% foreign exchange headwind and a 3% unfavorable net impact of acquisitions and divestitures.

Related to the acquisitions and divestitures the acquisition of Royal power increased revenue by 1%, while the sale of hydraulics reduced revenues by 3% by 4% sorry for a net of 3%.

With total revenue growth of 8%, we posted solid operating leverage with 15% growth in both operating profit and adjusted EPS.

It's worth noting that the foreign exchange headwind of 4% had an <unk> <unk> impact on adjusted EPS, which was larger than our 3% guidance estimate.

Further growth in adjusted EPS of 15%.

Would have been 22%, excluding the <unk> impact from FX and the <unk> net impact from acquisition and divestitures.

All in stronger organic growth and higher margins enabled us to report adjusted EPS of $2 <unk> that was above our guidance midpoint.

Finally, as we did last quarter, we continue to raise the bar with all time records and adjusted EPS segment operating profit and segment margin.

Moving to the next slide <unk>.

Electrical Americas had another very strong quarter, we set all time records for sales operating profit and margin.

Revenue growth accelerated to 18% organically driven by strength in all end markets with particular strength in commercial and institutional residential industrial and utility end market.

Operating margin at 23, 5% was up 180 basis points versus prior year benefiting from higher volumes.

With respect to price, we continue to manage price effectively to more than offset inflationary pressures in this segment.

In addition, our demand continues to remain very strong.

Orders on a rolling 12 month basis accelerated sequentially coming in at 36% year over year versus 29% in the prior quarter.

Our orders were strong across the board with particular strength in data center utility and industrial end markets.

These order growth translated into another record quarter of backlog up 97%.

On a sequential basis backlog is up 14% versus the prior quarter.

In addition to the robust trends in orders and backlog are major project negotiations pipeline more than doubled year over year, driven by especially strong growth in manufacturing data center industrial and utility end markets.

Turning to page eight.

Electrical global results were also very strong.

<unk> generated a Q3 record for revenue and all time records for operating profit and margin.

Organic growth was up 13% with an 8% foreign exchange headwind.

Notably this.

This is the sixth quarter in a row of double digit organic revenue growth.

We saw solid organic growth in all regions, which with particular strength in our global crowd times Beeline business and solid growth in both Europe and Asia Pacific.

We posted record segment margin of 26% up 50 basis points year over year.

Similar to electrical Americas higher volume was a margin tailwind versus the prior year and we continue to manage price effectively to more than offset inflationary pressures.

Orders were up 14% organically.

On a rolling 12 month basis with strength in commercial and institutional and industrial end markets backlog growth remained strong at up 22%.

Before moving to our industrial businesses I'd like to briefly recap the very strong results of our combined electrical segments.

For Q3, we posted accelerating organic growth of 16% incremental margin of 33%.

And the operating margin of 22, 3% with 130 basis points of year over year margin improvement.

We also generated orders and backlog growth of 27% and 75% respectively with.

With more than doubling of our negotiation pipeline in the United States.

We remain very well positioned for profitable growth and our overall optical businesses.

Our aerospace segment results are captured on the next page.

Aerospace also generated records in the quarter with an all time sales revenue record and a Q3 operating profit record.

Organic revenue in <unk> increased 8% with 5% foreign exchange headwinds.

Organic growth in the quarter was particularly strong in our commercial aftermarket and commercial OEM markets.

Encouragingly military aftermarket.

Grew in the quarter.

Operating margin of 24% was up 200 basis points from the prior year benefiting from volume growth.

On a rolling 12 month basis, our order acceleration continued.

Now, 22% versus up 19% last quarter include.

Including military OEM markets that were also up 22%.

We saw order strength in all end markets as travel continues to accelerate within commercial markets and military orders strengthen consistent with our expectations for increased defense spending.

<unk> remained strong with a 17% increase over prior year and up 5% sequentially.

Moving on to our vehicle segment.

Organic revenue grew 19%, we also experienced a 3% headwind from FX.

We had strength in the North America, South America, Nia EMA markets.

Our North American light motor vehicle business was especially strong with nearly 25% organic growth.

Our South American business was up more than 35%.

Operating margin of 16.

8% was down 120 basis points versus prior year, primarily due to manufacturing inefficiencies.

However, it is important to note improvement in our ability to offset higher inflationary costs with price. This is reflected in sequential margin improvement of 150 basis points.

From Q2.

Eco margin incremental margins on a sequential basis we.

We're up nearly 50% with solid volume growth and continued progress on price cost.

Moving to page 11.

We show results for our E mobility business.

Revenues grew 63%, including 17% organic growth, 49% from the acquisition of Royal power and 3% Foreign exchange headwind.

We continued the trend of narrowing the operating loss on a year over year basis. This quarter operating margin improved 800 basis points, driven by organic volume growth and the impact from the Royal power acquisition.

We are seeing continued momentum to achieve our $2 billion to $4 billion revenue target with new platform wins for power protection solutions, including additional break tour wins.

Our opportunity pipeline remains robust for innovative power distribution conversion and protection solutions.

On the following slide we have a summary of our guidance for the year.

As noted on the chart we are reaffirming.

2020 to organic growth and operating margin guidance in total.

Further we are reaffirming both metrics for all segments, except E mobility.

Operating margin.

More specifically, we continue to expect organic growth in the range of 11% to 13% and operating margin from 20% to 24%.

Turning to page 13, we show the balance of guidance for 2022.

We're not making significant changes to our full year outlook, we tightened our adjusted EPS range of 751% to seven six.

Six one per share from the prior guide of $7 36 to 776.

Consistent with the foreign exchange headwinds that we mentioned throughout the presentation, we increase the unfavorable translation impact of $600 million from $450 million in our previous guide.

Our full year expectations for the other items are unchanged.

With respect to cash flow orders and backlog have grown significantly more than our expectation.

In addition, we have been and will continue to prioritize customers and profitable revenue growth at the expense of cash flow. Therefore, while we have good cash flow momentum in Q3, we have work to do to achieve our objectives.

Shifting to Q4.

Highlighting a few key points on our Q4 guidance, we expect adjusted EPS to be in the two.

$2 and $2.

And Tencent range organic growth to be between 13% and 15% and operating margin to be between 25% and 29%.

Comparing to the prior year, adjusted EPS and operating margin guidance at the midpoint represent over 19% growth and 140 basis point increase respectively.

Now I will handle hand, it back to Craig to walk us through a market outlook and wrap up the presentation. Thanks Tom.

Turning to page 14, we provide an early look at our end market assumptions for 2023, and let me begin by saying that we are expecting to see a typical Marvel recession next year.

But don't expect it will have a significant impact on our growth given the secular growth trends the strong orders and the record backlog that we're sitting on.

Within electrical.

Datacenters industrial facilities in the utility market are all expected to see very good growth.

Together they account for approximately 40% of our total revenue and quite frankly of some of the strongest orders and backlogs on the company.

As a point of reference industrial projects announced this year. So far were up some 300%. So you can see really strong momentum in this in these segments of the business.

Commercial and institutional as well as machinery are expected to see more modest growth.

Orders in C&I continued to accelerate in the quarter with significant strength in government and institutional.

And this is a segment, where you would imagine we expect to see significant benefits from stimulus spending.

The one relatively weak segment is expected to be residential and while we've not seen a downturn yet and our orders are up some.

23% on a rolling 12 month basis through Q3, we do expect this segment next year.

I would have ever note that raise the only accounts for 7% of the total company sales and that residential new build market will be somewhat offset by the renovation market and the renovation market account for some 40% of our residential sales and I would also note that we'd expect to see higher electrical content.

Per home, which is what we've been seeing over the last number of years.

Within our industrial sector, we're expecting it to be a big year for electric vehicles.

Increase in government regulations, and incentives and the large number of new EV introductions will keep this segment strong quite frankly for years to come.

And in commercial aerospace and light motor vehicle markets are both expected to see a cyclical recovery.

The need to rebuild inventories will support vehicle markets and the aerospace aftermarket growth and the ramp up in commercial OEM production will drive aerospace markets higher next year.

Lastly, we expect commercial vehicle market to be flat, but quite frankly.

Healthy levels.

So in total 85% of our markets are expected to see positive organic growth next year.

<unk> actually provide more details on our specific organic growth assumptions during our February earnings call, but we did want to share our preliminary thinking and let you know that we expect 2023 to be another good year of growth for the company.

And lastly on page 15, I'd like to close with maybe just a few points here first.

I'd say im pleased with our Q3 results, particularly with our strong margins or earnings in our orders growth.

We continue to manage the business well and delivered record profits despite ongoing supply chain challenges and inflationary environment.

<unk> FX and.

Interest headwinds.

The transformation of the portfolio has delivered what we promised a higher quality company with higher growth higher margins and better earnings consistency.

And for the balance of the year, we remain on track to deliver our commitments, including our record operating margins.

Adjusted and adjusted earnings per share.

And we're doing so despite offsetting once again the significant headwinds that I talked about around FX pension and interest and these headwinds increase in Q4.

As we look into next year, we remain optimistic despite our recession expectations.

We do expect a slowdown and we'll be prepared in the event of a more significant downturn.

We know how to flex our costs and deliver attractive decrementals.

But as we've said we have good reasons for optimism secular growth trends are driving strong momentum in our businesses and we have a growing pipeline of opportunities.

Going into next year with strong momentum with record backlog and with an expectation that many of the operational efficiencies and supply chain disruptions.

We will get materially better next year.

So we feel great about the quarter, great about the outlook and with that we'll turn it back to <unk> for Q&A.

Craig for the Q&A today, please limit your opportunity to one question and one follow up thanks in the ones for your cooperation with that ill turn it over to the operator gives you guys the instructions.

And ladies and gentlemen, just as a reminder, 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 command. If you use any speakerphone. Please pick up the handset before pressing the numbers.

And our first question will be from Nicole <unk> with Deutsche Bank. Please go ahead.

Yes, thanks, good morning, guys.

Nichol.

And maybe can we just start with maybe going through expectations for 2023, Incrementals I know, it's early to be giving guidance, but you were kind enough to walk us through the end market outlook and I'm. Just curious if you think that it's feasible to kind of be at your long term guidance for incrementals at least as a starting point.

Let's start with that.

I appreciate the question in the call and as you can imagine we're working through our 2023 profit plans right now and I have lots of activity going on at around the company to get prepared for that but but I would say that if you think about next year I think kind of a 30% ish.

<unk> rate would be kind of the right place to be thinking about running your models at this point and we will naturally be in a position by the time, we get to the earnings call for Q4 in February to give you a more specific read on that but we think 30% is probably a good planning number at this juncture.

Got it thanks, Craig and then I guess, what's surprising even though this quarter was just a huge acceleration in electrical America orders definitely encouraging to see that even as comps get difficult. So maybe if you could dig a little bit more into what drove the Q on Q acceleration.

Yes, as we've talked about and shared in some of the outbound commentary we've had pretty.

Broad based strength in orders.

Our electrical business I mean in the Americas specifically.

Data centers was extremely strong industrial markets very strong utility markets, we had orders up some 60% and so it really was broad based even in the resi market in the world.

<unk> 12 month basis.

Even there we had orders that were still up some 20% and so.

It's tough at this point to really call out any particular market in the Americas that I'd say that was weak, but we had really really strong strength in.

And I would say a lot of it really is tied to these big trends, we talked about obviously the.

The utility markets in general are certainly benefiting today from some of these investments in not only energy transition, but grid resiliency.

Data centers.

Theres been lots of debate about that market in <unk>.

Which direction into <unk>, but we're really continuing to see really strong strength in the data center market, even to the point where customers today are looking to place long term commitments and basically hold a slot in our production plans out into 2024. So we continue to see very strong strength in our Americas business once again.

<unk> to these trends that we've been talking about for some time and we're absolutely pleased to see it.

Showing up in our orders and that will obviously convert to revenue as we have the ability to do.

Ship.

And we resolve some of these supply chain issues that we continue to deal with.

Just just to amplify the data centers in the Americas on a quarter over quarter basis up almost 40% and on a trailing 12 month over 50% so.

<unk> been hearing noise on that a slowdown we're not seeing it.

Thank you guys I'll pass it on.

And next one line of Josh <unk> with Morgan Stanley . Please go ahead hi, good.

Morning, guys, Hey, Josh.

Craig on this order surge that you guys have seen anything that you would attribute to timing around stimulus or lead times or anything else, maybe a chunky order in there that we should think about as we look out because we are going to continue to see some tough comps here.

I know that with the Rolling 12, it's all it's kind of hard to parse out maybe some of the quarter to quarter volatility.

Yes.

Tried to provide a little bit of color because I know, there's this question around whether or not what.

What kind of growth are you seeing in orders in the quarter, which is why we try to ensure that not just in the rolling 12, but actually in the quarter.

We're seeing significant strength those numbers that Tom quoted were actually in the quarter quarter over quarter numbers. Despite to your point tougher comps.

In terms of the order surge question as I mentioned in my opening commentary there've been a number of very large projects announced and I'd say as we think about.

Whether it's reassuring or investment in.

Grid infrastructure or its investment in new battery facilities. There are today, perhaps different than some of the other cycles that we've been through.

A lot.

More very large industrial projects that tend to be more electrical intensive as an application that we're certainly seeing in our backlog and thats certainly helping us but that also gives us a lot of confidence as well because these tend to be big multiyear projects that will go on for some time to come.

Stimulus to your question was not yet we certainly would anticipate that at some point down the road that will we will start to see a meaningful impact from stimulus.

Most of those programs.

So probably.

Six to 12 months away from really.

Having a meaningful impact on the company, but once again just another one of these vectors that we think will continue to give us a multiyear growth story, that's pretty compelling and as you know a lot of those stimulus dollars are going directly into the markets in which we participate it's about building out the electrical infrastructure, it's about grid resilience.

See it's about energy transitioned its investments in <unk>.

<unk> see.

Specifically to the point, where they actually specifying upgrading your electrical panel.

As particular parts of the program that qualify for these investments and so it's just another one of these things Josh that gives us confidence in the long term outlook of our electrical business specifically.

Got it Thats helpful.

And just a little more color on the major major projects in the U S.

Manufacturing in the quarter negotiations up over 300% data centers up over almost 170% in the year to date numbers are equally strong. So just really really strong numbers on the major projects.

Got it it's helpful. And then just a quick follow up on the stimulus piece or I guess broader infrastructure spending that you guys are tracking I know theres. Some big dollars. They're obviously not all of that is electrical but as you touched on a lot of things sort of get in the backyard.

At some point, how would you think about what those due to your addressable market here as those start to enter is that like a 5% increase a 30% increase to addressable market like any sort of ring fencing would be helpful.

And I would say, it's maybe a little bit early for us to.

To be able to put a handle on how it's going to impact specifically the relative opportunity of the relative growth as you know they are a very big $1 billion programs directly targeted at electrical infrastructure.

So, but I would just say that at this point, Josh we would hope to at some point down the road give you a better indicator of that but it's just quite frankly today, a little bit too early to see how this is going to all play out, but it's all going to be good.

We're all going to be.

Things that are going to help us continue to accelerate our growth not just in the next 12 months, but quite frankly. These these stimulus programs will help us accelerate growth over the next three to four years.

Yes, great. Thanks for the detail best of luck.

Next we'll go to Andrew <unk> with Bank of America. Please go ahead.

Hey, guys how are you.

Andrew we're doing well thank you.

Good morning.

Can you give us more.

Data point.

Hello, Paul.

Clinical molecule.

We want the data <unk> and we're getting some background noise. It's Terry Duffy here, you, we heard Datacenters, Andrew but we all know.

Good morning.

No.

Let me try this isn't better much better much better yes, so just for data centers, if we could.

Just focus on different geographies and different verticals within the data center market. There's just there's a lot of noise regarding to this market.

What are you guys seeing I know you are bullish, but just as I said more color by geography and vertical.

Yes, and I appreciate the question Andrew We certainly if you think about geographically, we're clearly seeing the strongest growth in the Americas market.

Very strong growth in the Americas market very strong growth.

In Hyperscale, but also in Colo and on Prem maybe today I mean, some I guess, some 40% of the market would be hyperscale, but this really is broad based strength that we're seeing in the data center market.

Certainly in the Americas, we're seeing good growth, but not not as strong growth in Europe and Asia to markets that are also growing.

Once again the channel.

To really distinguish that from the broader data center market, we have seen that tend to be a little shorter cycle and we have seen a little bit relative slower growth still good growth, but relatively slow growth in the it channel relatively slower growth in single phase in markets like Europe , and Asia, but once again, we're still seeing growth in those markets.

Great. Thank you and just on capital allocation as interest rates have gone up Youre clearly cash generative there are more of a strategic buyer.

As the market landscape.

From your perspective.

Does it make more likely less likely to see a deal for the next 12 to 18 months.

Yes, I would say that what's going on in the interest rate environment needs to at some point translate into seller expectations on valuation and I would say, there's always as you know a fairly significant lag between the realities of the market changing.

And company's expectations of what they are their values and so I'd say in general in these kinds of environments you would expect.

Asset valuations to come in a little bit.

And that would therefore increase the likelihood of us doing transactions, but I would say today.

Early and we really have not seen any material change at this point and valuations are expectations, but we continue to be.

On the hunt looking for opportunities in and still think Thats the right priority for the company, but having said that as we've said in the past we will not overreach, we don't intend to overpay, we've been very disciplined buyer and we will we will continue to be a very disciplined buyer and in the event that asset.

<unk> don't come in line with our expectations, we will certainly use that as an opportunity to buyback our stock.

Thank you very much.

Thank you.

And next we'll go to Nigel Coe with Wolfe Research. Please go ahead.

Thanks, Good morning.

Joe.

Okay. So.

The 'twenty 'twenty, three and market outlook it looks like.

If you have to kind of pick a number you'd say, 5% to 6% type title and the growth rates.

The one I guess I'm surprised by is the C&I market, where you're looking for modest growth.

It seems like the leading indicators that all really healthy.

We've got some money coming through so I'm just wondering.

What's driving that view is it.

Is it some kind of a damage from residential.

Is it Europe Asia Pacific and any color that would be great.

And I appreciate and we tried to kind of unpack that a little bit in my outbound commentary, but we are still seeing good growth.

In the C&I market.

Orders on a rolling 12 month basis by the way globally.

23% in the quarter, they were actually up 27% and so actually a very strong quarter with orders actually accelerating in the quarter and I would say on the commercial side.

We're seeing growth, but we're seeing the biggest growth in what we call institutional and government and as I noted in my commentary, that's really where you would expect to see some of the early indications of some of the government dollars in government spending in and around institutional and government, but but that market continues to do.

<unk>, well and we really have not really seen any signs, particularly in that market of a let up I think more generally speaking the Americas as a region tends to be the strongest region in the world really across most of these end markets, but we had a very strong.

Quarter in Europe , as well in the C&I market in Asia also Asia was very strong in commercial and institution actually all the end markets grew quite strong on a quarter over quarter and the truck trailing 12 months I mean, Europe was particularly strong.

In commercial as well as government on a trailing 12 month as well as on a quarter over quarter.

So at some point I mean, as somebody mentioned earlier, we're going to be Anniversarying, some really strong growth numbers and we do expect these growth numbers too slow and moderate some place in terms of the order intake, but also keep in mind, we're sitting on.

Record backlogs that are up.

In some cases.

More than 100% so even if you have a little bit of a slowdown in some of these end markets, which.

You'll likely see some of that.

Our backlog today.

Giving us visibility into almost 60% of next year as demand and that number is about two weeks, what we normally see.

Right Yeah. That's it means it will it sounds great. So just wondering what changed in 'twenty three but my final question is on free cash flow.

A pretty big fourth quarter lined up in the plan.

Gross rates remain very strong so just wondering kind of confidence on what needs to happen to drive that free cash flow.

Yes, no I appreciate the question, we tried to touch on it in the prepared remarks, we had a very we had a very strong Q3.

Cash conversion cycle would improve by by seven days.

On hand went up four days payables up another two days. So we felt really good about that.

I think what we want to get in terms of the prepared remarks is to let you know we're going to prioritize taking care of the customer and protecting the orders and organic growth recognizing that we've got work to do to hit our free cash flow objective no question about it.

Okay. Thanks.

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

Hey, good morning, guys. Good morning, Scott.

I don't think I've heard.

Okay.

Our price specific price number and not asking for anything, particularly precise it can be a range, but of that 15% core was running.

Running typically kind of a little bit more than half in prices at about the same this quarter.

Yes, Scott as you know we said in prior calls is that we haven't given out a split specifically between price and volume largely because it is such a huge variation depending upon.

Markets the customers the.

The various commodities that were selling and so we haven't given out a number but I would say that within that 15% growth we had healthy growth in both volume and price.

Okay. So all right.

Were still going up in volume as well.

Do you guys have a sense of I mean, your customers are they trying to build some inventory ahead of.

Anticipated demand in 'twenty, three or they're trying to get ahead of some price increases what is the incentive or are they just paranoid theyre not going be able to get product.

I'm trying to just get my arms around the incentives are really.

Yes.

Order above actual end market growth, because thats, certainly your growth rate or above.

Global GDP levels by quite some.

First of all I'd say, our end markets are doing very well and so a lot of what we're seeing today is in fact, a reflection of.

This heightened industrial activity heightened investments in.

In manufacturing, we talked about these big investments in things like semiconductors.

New plants for building EV factories.

New factories for building batteries and investments in grid hardening hardening and so in many cases the markets that we're participating in are.

A really strong market right now, having said that I would say that our customers would like to build some more inventory.

And today, they are not and we're not seeing any evidence at this point at all.

More broadly of Overstocking in the distribution channel.

There is some nervousness in the marketplace today around.

To get a place in line until as we've mentioned before we're probably getting orders a little bit earlier in the process than we would normally get on order. So we're getting more lead time, but in general and you can see it in some of the distributor data as well our distributors their sales out.

Our very strong if you look at some of the big.

Electrical distributors in the numbers that they've reported.

Yes, that's really helpful color best of luck I'll pass it on thank you guys. Thanks Scott.

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

Thanks, Good morning.

I think.

Just firstly.

To focus on the fourth quarter for a second.

So it looks like Youre, assuming kind of flattish sales sequentially and margins down maybe 50 bps or so it seems like that is very concentrated in the aerospace division, where there's kind of a big margin reverse so versus what you saw in the third quarter.

Maybe just clarify that please on arrow and if there's anything else kind of going on sequentially on margins in the segments.

Yes, I mean as you know John we had a really strong quarter in aerospace in Q3, and as you know from this business. So much of how you perform in aerospace is really a function of the mix of your aftermarket versus OE sales and so in any given quarter. You can have a very different mix that certainly will.

Your margins around one way or another but the margin levels as it gets.

Implied in our still very strong in aerospace are very much in line with our guidance for the year, but in any given quarter you can in fact see a law.

Little bit of a different depending upon how much OEM business, youre shipping and with the ramp and Oems.

Some of our major customers you probably.

Better than that numbers are probably more OEM shipments than we would typically see are certainly.

And as a mix or as a percentage in Q3, but by and large business is doing well backlog is growing profitability is doing well teams executing well and so we have no concerns about aerospace we think the business is in great shape.

Thanks, very much and then.

This is my follow up.

I suppose would be around kind of.

Volume growth.

It's been healthy.

In the third quarter.

And also assuming its up lets say mid single digit as you think about the backlog from here as supply constraints ease.

Do you think we see an incremental kind of acceleration in backlog conversions.

So revenues.

Our volume growth.

Would accelerate in the next few quarters, even as sales slow down.

Just help us understand kind of that that works through.

Orders into revenue volumes of supply chains and moving around.

And I appreciate the question and it's what we've been chasing really.

Julian for at least the last 12 months, where we quite frankly, we need a little bit of a slowdown quite frankly in orders just to catch our breath and try to deal with some of these backlog that we're building in the business and so.

I'd say that yes, it's absolutely possible that you could have a scenario where.

Just working.

Off the backlog in the past dues gives you the ability to continue to grow your business. Despite what could be a bit of a slowdown in the marketplace. So that's that's entirely possible and quite frankly, we need the ability to.

To take a little bit of a breather to execute on some of this backlog, but to date as you saw on our results I mean, the orders keep coming and they keep coming fairly broadly in the marketplace and we think these secular growth trends that we're we're playing into are going to go on for some time and so we're responding to that is we're investing.

We're investing in capacity and capability and doing things in our supply chain to ensure that we are in a position to deal with these higher levels of economic activity the higher growth and support what we think is going to be higher growth for these businesses for some time to come.

Great. Thank you.

Yes.

Alright next we'll go to Joe Ritchie with Goldman Sachs. Please go ahead.

Yes. Thanks, Good morning, guys good morning Joel.

Yes, so really I guess, maybe two two clarification questions follow ups from what others have already asked the first one just going back to M&A portfolio you guys have done a lot Craig I'm just curious.

What kind of leverage target would you be willing to go to in this environment clearly like your backlogs in really good shape.

I know, there's a lot of concern around the uncertainty for 2023 and and concern around higher leverage levels across the.

Broader multi year and so I'm just curious.

For the right deal at what would be your expectation on leverage.

And as you know Joe you've been around the company for some years and we have in the past Levered up for the right strategic deal in and as an organization as a company we tend to have very good.

Cash generation and so so for us I would say that for the right deal we'd be perfectly willing to lever up and go to the same levels that we've been at historically.

I will tell you that.

Those deals are not right in front of us today, and so I, just I don't want to be.

I want to set an expectation around some near term transaction, that's going to require that we lever up.

Which are likely to see from US are deals that are very much consistent with what we've done recently in terms of.

Kind of bite sized transactions that we can fund largely out of cash without the need to lever up and do larger transactions, but that's just a reality of the marketplace and the type of deals that we'll likely do but at the same time, if we if we could find a bigger more strategic one we'd certainly would be willing to lever.

We're up in order to do it yes.

And just to amplify that a little bit I mean for the baseline everybody we're at $2 one.

Net net leverage so we've got a very strong credit ratings. So we've got a large capacity to go up to Craig's point, and especially with the supply chain constraints starting to mitigate our cash generation will get even better going forward. So we see a lot of flexibility.

Got it that's helpful and maybe just my follow on question I know Julian was trying to get at this as well so maybe I'll focus my comments on the electrical Americas business, it's hard to like get our head around.

Your backlog doubling.

On a year over year at a time when youre growing call. It mid teens. This year in this business. It seems to suggest that that for 2023 kind of set yourself up for another year of double digit organic growth and so.

And just maybe just help us kind of contextualize that.

I'll frame it just for that especially electrical Americas.

Yes, I mean, I think your math is not.

Not wrong necessarily right that certainly given the strong negotiations one as you heard Tom talk about even on negotiations largely before we get an order.

Negotiations continue to be very strong.

These secular trends that we're dealing with.

Orders are strong the backlog is strong and so we would expect.

That to translate to revenue growth next year, even in the event of a slowdown we're not in a position to give you a number for next year, we'll do that as we mentioned in February .

But.

But your math is not not terribly wrong that says we should expect good growth in the Americas next year, even with a little bit of a market slowdown and that's kind of what we tried to do by providing some indications of the various end markets that we're in and how those end markets are likely to perform in 2023.

I think the end market forecast, coupled with the secular trends chart at the beginning of the presentation.

Secular trends are real and we are seeing order flow and backlog consistent with that.

I think we're we're primed for a good run here.

The Big Challenge really is to date has been we just don't have the capacity our suppliers don't have the capacity to deal with this growth that we're seeing I mean, obviously our growth in the quarter.

In Q4 would be much higher if we had more capacity in place to deal with this demand and that's what we're addressing right now not only in our own facilities, but also in the supply chain to make sure. We are in a position to convert on these great growth opportunities.

All sounds good thanks, guys.

Thank you.

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

Hi, good morning, everyone.

Morning.

Okay.

So I apologize I'm going to try to come out. This volume question again, just because I think it's really important.

Are you seeing accelerating or have you seen accelerating volume year over year growth as we've gone through 2022.

Yes.

Yes, yes.

That's great John wanted to hear.

Yes.

I just wanted to confirm that and then you talked about top line and Incrementals. We've had a couple of companies remind us about pension sensitivity asset returns tax already this season I know, it's early but just anything to call out below the line as we think about next year.

Yes.

That's a great question, John I mean, there is a lot of moving parts, let's take pension first week, we've got asset returns discount rate shape of the yield curve just just to name a few and we're going through our plan for next year.

Wouldn't wouldn't be surprised if we had a headwind associated with that we're trying to assess how big that headwind is right right now.

As it relates to interest expense.

The same type of dynamic you've got swap interest income you've got FX income, you've got CP balances and increasing short term rates, we manage that very effectively this year and on a year to date basis.

We will look good as we indicated in our prepared remarks, we will see more of a headwind in Q4, and we're working through what's going to happen in 2023, I guess, what I would stay focused on is we had all those headwinds this year and we were able to deliver what we said we were going to do and.

We will be focused on doing that next year as well and they are familiar with the standards and offsetting some of these headwinds that will be real and Tom articulated that.

This year, we have just seen.

Enormous number of operational inefficiencies that we've had to offset as well.

And we do expect as I mentioned in my commentary that many of these operational inefficiencies many of which are driven by supply chain constraints.

We expect those to get better next year.

So we think we're going to have.

Offset to a number of these.

Our facilities will run more effectively and more efficiently in 2023 Didnt have in 2022.

Great. Thanks for the color I'll pass it along.

And next we'll go to Deane Dray with RBC capital markets. Please go ahead.

Thank you and good morning, everyone.

Dean.

One of the inefficiencies in the supply chain. That's been nagging everyone has been this semiconductor and electric and electronic components situation you guys thought it might get worse in the second half. So how has it been playing out.

What I'd say is I think what we said is a part of our Q2 results that we didn't expect it to get better in fact, we didn't expect it to get better until sometime probably in the second half of 2023 and I'd say it largely played out that way that we've seen we saw.

Some improvements in metal based commodities copper steel aluminum, we saw improvements obviously in resins logistics got better but semiconductors in almost anything electronic related continues to be a challenge and that challenge we dealt with in Q3 and the challenge that we think we're going to end up dealing with.

Probably for another.

Almost 12 months or so before we probably see any material improvement there. So.

So semiconductor is to continue to be a challenge we're working through it.

But we are seeing improvements in other commodities.

That's good to hear and then just the follow up and we've touched on this before a bit and the answers to Joes question and Greg you've been around the company a long time. So you'll appreciate the spirit of this question as in prior cycles.

You would see that the company was so much more exposed to non rats and the non res cycle, we'd be asking you about starts and permits in value in place and so forth.

But the portfolio today and the end markets, whether it's in secular drivers data center electrification. All of this has served to.

Minimise.

The non res cycle, just want to make sure that's correct and should help elongate the cycle in terms of the demand given your backlog and so forth. So it's part of this is a question of how you're positioned better in a downturn and less dependent on non res and.

Just any color around that would be helpful.

What I'd say, maybe just to clarify a couple of points first of all we agree with your conclusion by the way and the conclusion is the portfolio moves that we've made.

Have positioned the company to be less cyclical.

To be more long cycle no cycle.

And that is absolutely true and therefore, we're absolutely convinced that the company will perform very differently in the future in the event of a of an economic downturn and as I mentioned in my commentary, we think there'll be a mild one next year and yet our company and our markets 85% of them, we'll continue to see strong growth, but just the term.

Non res the term non res means everything other than residential and so today for us as we said 7% of the company is residential so non res or 10% of electrical is residential so 90% of everything that we do in data centers and utility in industrial markets.

The term non res really covers a lot of these other end markets that are certainly doing extremely well right now and so we've tried to get more exposure to the secular growth trends tied to really growing end markets and that's what we've really done in terms of the portfolio moves that we've done but your conclusion.

Absolutely correct that the company will be.

Much less cyclical on a go forward basis, and we would expect the company to grow even in the face of a recession.

And just to again I mean, we've talked about this but just to put a couple more numbers on this just just to amplify what Craig was saying I mean utilities you orders on a year over year basis growing about 50% on a trailing 12 month basis about 40% data centers year over year.

About 25% and on trailing 12 months about 35% so either.

Big non res numbers to use your words Dean.

Yes.

That's great. Thank you.

Thank you.

Next we'll go to line of Chris Snyder with UBS. Please go ahead.

Thank you I appreciate you squeezing me in I wanted to follow up on some of the prior commentary around 2023, incrementals in that 30% range and I know that matches kind of.

The targeted or more normalized levels to get to the 2025 targets but.

So I guess my question was it feels like the price cost is still in the Companys favor you guys mentioned earlier about productivity efficiency what would.

Return next year, so that has a margin tailwind as well are there any kind of offsets there.

That kind of push the.

Incremental back just to add to that about 30% or so thank you.

And I appreciate the question and I would say that the other side of that equation.

The investments that we're making inside of the businesses and as we talk about some of these big growth trends that we're facing into and quite frankly, we have a need to invest in so.

We would intend to do that to prioritize growth and putting more feet on the street and investing in technology and the likes to ensure that we're in a great position to take advantage of this growth that was either so we still think 30%. We think from a planning standpoint, we'll give you more details around perhaps.

A better number when we get to February next year, but we still think at this juncture you have.

Unavailing forces, Tom mentioned, a number of them as well.

Around whether it's entrant or pension or like until we still think all in 30% Incrementals still the right way to position.

Your models for now and we'll update that as we know more next year.

Thank you really appreciate all that color and then just a quick follow up on the on the re shoring announcements in the one three trillion of planned investments that you guys highlighted matches a lot of the data that we've aggregated as well.

Can you talk about how much of this is already coming through clearly manufacturing construction has been very very strong and then.

Visibility does this provide as you know these are very large generally.

Slow moving projects. Thank you.

No I think to your point and you hit on kind of we think is an important one where no. We've not really seen today. These one three trillion of announcements.

We've not seen today the impact of most of this or hardly any of this in our order book at this point in some cases it could be in the negotiation pipeline.

Which Tom indicated is up dramatically, but it is not reflected today in our order book and certainly not reflected in our sales and so just another one of these things that gives us a lot of confidence around the future growth rate of our electrical business.

Thank you really appreciate that.

Thank you.

Next we'll go to Joe O'dea with Wells Fargo. Please go ahead.

Hi, Thanks for taking the question.

I wanted to circle back to the negotiation pipeline in the us and talking about that kind of more than doubling in just a little bit more detail on kind of what.

What you used to kind of determined on what qualifies as a major project and then typically what you see from the timeline that goes from negotiation to order and then the timeline from sort of order to revenue generation.

Yes, I'd say the negotiation pipeline today I'd say it's.

To your point, we it's generally large projects, there's a lot of stuff that's going on today that's out in the distribution channel that we don't necessarily have.

Great visibility to but we do track large projects, where we tend to be involved in.

Specifying the application and so these projects we have historically tracked them and have great visibility to them and as we mentioned those numbers are going up.

Dramatically and I would say.

And the cycle between a negotiation in order.

Can vary I mean, it can be.

On the short end 90 days it can be.

Six months.

It varies depending upon the project.

And from an order to a sale and once again it can be assured as 90 days it can be.

18 months.

It varies quite widely depending upon the project that youre actually.

Supporting.

Got it and then on <unk>.

Distribution side of things could you just talk about the mix of product and distribution that might be more kind of commoditized or off the shelf versus the mix thats more specced in and then anything that you could be seeing in terms of deferring sort of inventory management trends, whether some of that more off the shelf that youre seeing inventories.

Down there at all.

Opposed to what would be more spec.

Yes, I'd say to answer maybe the second part of your question.

Today.

We don't really we don't really have almost any part of the business today, where our distributors are saying.

We have more inventory than we need or want.

And I think that's just a reflection of the broad based strength that we talked about in our end markets.

So.

Some markets are growing faster than others.

All of the markets are growing and for the most part we have does.

Distributor.

Challenges around supporting their demand almost across the board today.

Your point around Commoditization, we don't really think we don't really sell anything that I would call a true commodity if you think about in the electrical space, specifically or even in our industrial businesses. Most of what we do is highly specified.

And you go from.

And application engineering to designing a particular solution.

Getting an order you don't tend to find that.

You can trade stuff once you win a job or you win a project you tend to deliver that project.

Because it really is engineered into the solution. If you think about what we're doing in the electrical business essentially and we're protecting assets and people and if our stuff doesn't work I mean really bad things happen and so what we really think that we sell we sell are highly engineered solution and not much of.

Which is what I would call commodity on the commodity side, you may have some wiring devices or the like that could be sold through.

Our distributors are some case could be sold through one of the big box retailers, but for the most part most of what we do and our businesses are highly engineered and highly specified.

It's very helpful. Thank you.

Thank you.

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

Thank you and you're a mild recession scenario for next year.

In Europe do you see in that scenario or Europe remains in positive growth throughout the year.

Honestly, the secular trends I think in North America for a variety of reasons.

More credibility.

And the ability to outgrow the market that much outgrow.

Recession scenario, but do you see the same dynamic in Europe , and again does it stay positive in your base case throughout the year.

Yes.

It's a great question.

David and it's one that we obviously havent fully modeled out clearly.

The range of possibilities around what happens in Europe is much wider than perhaps any other region of the world given what's happening today in the Ukraine, given the uncertainty around energy in and energy resilience and so there is a wide range of possibilities in Europe .

<unk>.

You could certainly imagine a scenario where the orders that we're currently seeing orders continue to be hold up well.

We're also building backlog and have built backlog in Europe .

But that could change quickly depending upon whether or not you have gas flowing into Germany.

So I think the range of possibilities in Europe are quite wide, which is one of the reasons why I said that while we are anticipating really good growth across the board.

But we're going to be ready and we will take a regional view and if we need to flex in Europe , because they end up dealing with a more severe downturn and we're anticipating right now and more severe than the rest of the world and we have a plan ready to deal with a scenario where markets for all perhaps more than we anticipated.

Sure I'm sorry go ahead, yes, I was just going to I was just going to add I think it's important to note that in the quarter. We did see order growth in Europe and in some of the end markets fairly strong.

For example in commercial and institution. So we do see some slowing but we're still seeing growth there.

Answered one of my two follow ups there in a sense are you seeing orders are so positive and electrical global in Europe in the quarter any chance you share with us any sense of how large the backlog is in Europe electrical.

On a year over year basis.

I mean, I don't have that number and I believe our backlog on a rolling 12 month basis in Europe is up 27% I think the numbers I have.

So the backlog is still 27 is what I have is okay. So 27% backlog in Europe and global is up 22 overall, yes.

Okay, so essentially up more than the global number Europe set even higher yes, exactly I think we're just trying to figure out how much coverage do you have if you can avoid cancellations into.

Into the into 'twenty three in Europe in particular.

Electrical Americas in aerospace kind of driver.

Yes.

As you can imagine for us in Europe .

As a percentage of revenue they are relatively smaller so Europe today would account for what roughly 9% 10% of.

The company sales and so.

If you think about yes, we can certainly absorb.

A bit of a slowdown in Europe and not really.

Outsized impact on the overall company's performance given its relative share within the organization and our mix.

I appreciate it thank you.

Thank you.

And next we'll go to Brett Linzey with Mizuho Americas. Please go ahead.

Hi, good afternoon.

Okay.

There's a lot of ground covered I appreciate the additional thoughts on 'twenty three markets I guess, if I work through the weighting of those arrows I get something kind of mid single digit 5% to 6% range for market growth, but then I imagine you have some carryover price and perhaps some outgrowth. So just curious how you would maybe dimension those other pieces.

I think I'd say, it's early for us to kind of give you. The insight we will do that in February .

But clearly there's going to be carryover price I mean, you want to know that price is generally in the market data as well by the way and so when you think about a market index. There is some price built into that as well you could debate how much is built and is it more or less than what youre, assuming that there is price built into that data, but it just early.

At this point for us to give you.

Any particular company related.

Growth numbers, I mean markets are going to be good we would expect generally to do better than markets and so that would be a fair assumption, but it's just early to give you any more detail than that at this point.

Yes, no understood and just one more on the backlog, obviously very robust, but just curious if you could share some color on the margin profile of the orders being booked looks like relative to what's being shipped I would expect there would be some favorability as material prices have come off highs, but anything you can share in terms of mix or price cost there.

And I would say that and as you know we've talked about on prior calls I would say that we took some pretty unconventional steps early on and in many cases, we went out and repriced the backlog and so I would say today that our backlog today in the pricing and the margin in the backlog.

Not terribly different than kind of the way the business is performing today, the underlying profitability of the business today.

Certainly there is a question around the future direction of commodity prices.

Yeah.

And whether or not we see more or less inflation or deflation. It can change it but the but the profitability in the backlog I would argue it's not terribly different today and what we're seeing in our business.

Alright, great I appreciate the insight.

Thank you.

And we'll go to Phil bowler with Bahrenburg. Please go ahead.

Hi, Thanks for taking the question just one from me. Please I. Appreciate you you don't break out price, but do you feel as though you're at.

We're approaching a ceiling anyway on price you've you've clearly explained that a convicted about the demand side outstripping supply in most areas, which we can see pretty clearly in the in the order figures, but are there any areas, where you are now seeing price elasticity kicking back in or have you managed to increase the price intra quarter and a pretty uniform.

Manner across the different businesses. Thanks.

No I appreciate the question. The first thing I would tell you is that as you're thinking about.

Our industries and over a long period of time pricing tends to be sticky in this industry.

Prices once you get a price increase they typically you hold it I think one of the big advantages. We have is because it goes through distribution prices, obviously, good for distributors, but more broadly I would say that we really today are not seeing our overall cost come down either because on the one hand some of the major commodities that.

We buy.

Have come off of some of our peak levels, but what we're really seeing today in the business as we're seeing.

Because of supply and demand not just our supply and demand, but with our suppliers, we're seeing labor related inflation.

And so we're not today really in an environment, where we're seeing deflation necessarily in our costs either on an all in basis.

But I think the bigger message is price does tend to be sticky the idea of a ceiling I think a feeling it's really a reflection of what happens to your input costs and at this point, we do think that the worst is behind us in terms of inflation in aggregate, we think labor will continue to.

See inflation.

And perhaps in an accelerated pace.

That'll probably offset some of the deflation that we're seeing on some of the major commodity inputs that we have but in aggregate we don't anticipate.

To go into a deflationary cycle.

Okay. Thanks, a lot.

And with that no further questions in queue I'll turn it back to the company.

Hey, Thanks, guys that we have reached the end of the call and we do appreciate everybody's questions as always chip and myself will be available for answer any follow up questions. Thank you for joining us and have a great day alright. Thank you.

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

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Ladies and gentlemen, thank you for standing by and welcome to the Eaton third quarter earnings call. At this point all the participant lines are in a listen only mode. However, there will be an opportunity for your questions. If you'd like to ask a question on the call. Today. Please press. One then zero on your telephone keypad you may withdraw your question at any time.

Repeating the one zero command if you should require any assistance during the call. Please press star zero and an operator will assist you offline as a reminder, today's call is being recorded I will turn the call now over to Mr. Yan Jin Senior Vice President Investor Relations. Please go ahead.

Hey, good morning. Thank you all for joining us for Eaton's third quarter 2022, earning call with me today are Craig Arnold, our chairman and CEO and Tom Okray, exactly Vice President Chief Financial Officer, our agenda today, including the opening remarks by Craig then he will turn it over to Tom who will highlight the company's performance in the third.

Good quarter as we have done our past calls we'll be taking questions at the end of Craig's closing commentary the price release and the presentation. We'll go through today have been posted to our life side. This presentation includes adjusted earning per share adjusted free cash flow and other non-GAAP measures that are reconciled in.

Appendix a webcast of this call is accessible our website and will be available for replay I would like to 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 that are described in our earning release and the presentation was that our tour. There were two over to Craig. Thanks, Ed. He will begin with the highlights of the quarter on page three and I'll start by noting that we delivered another very strong quarter.

We have again posted a number of all time records, including adjusted earnings per share of $2, <unk>, which is up 15% from prior year.

This despite negative impact of FX and the divestiture of hydraulics business, which took place in August of 2021.

Our organic revenue growth also continued to accelerate in the quarter up 11% in Q2 to up 15% in Q3.

And I think encouragingly, we had strength across all of our businesses with exceptional growth in electrical Americas and vehicle any mobility.

We also posted all time record segment margins of 21, 2% up 130 basis points over prior year and above the high end of our guidance with incrementals of 38% in the quarter.

I would also note that our team continues to manage price effectively more than on fully offsetting the impact of inflation.

And as noted here orders continued to accelerate in the quarter as well on a rolling 12 month basis, electrical orders increased 27% versus 25% last quarter, and our aerospace orders increased 22% compared to 19% last quarter.

This order strength I'd say also led to another quarter of record backlogs and electrical which were up from 75% and our aerospace backlogs increased by 17%.

Lastly, we did start to generate positive momentum in our cash flow results. We had a strong year on year performance with operating cash flow up 29% and a 30% increase in free cash flow and our free cash flow as a percentage of sales was 15, 6% in the quarter.

So as expected, we're starting to see improved cash flow from both higher earnings and improved working capital performance.

Moving to page four and before I turn things over to Tom to go through the quarterly results I want to highlight a few of the key themes that are really underpinning our confidence in our long term growth outlook.

As noted here.

We continue to benefit from the three secular growth trends that we reviewed earlier electrification energy transition and digitalization.

And while still in the early stages, we booked some $700 million of new wins in the quarter that are directly tied to these trends.

Within electrification, you've all read the announcements of the very large number of manufacturing projects in the U S.

That includes new semiconductor facilities big investments in new electric vehicle manufacturing plants, new EV battery investments and investments in EV charging infrastructure.

In fact, yes, there is.

Ben some one three trillion of new projects announced this year alone.

And the impact of stimulus Bill is yet to show up in these numbers.

These incentives will point.

Towards these large <unk>.

Investments that are tied to improving electrical infrastructure and will deliver significant benefits over the next few years.

The next large growth driver is energy transition the move away from fossil fuels to renewables that's taken place for a number of years now and this trend will only accelerate.

And with every renewable resource addition, it requires electrical infrastructure.

But it's not just I'd say connecting power to the grid.

Also investments in technology to keep the grid stable to manage different sources of electrical power investments and batteries to store excess energy.

And these are all products and services that we naturally provide.

Beyond renewables, we're also seeing an increase in investments relating to improving grid resiliency, which has become a priority due to extreme weather events and really the demand for a need for energy independence.

And lastly, our emerging digital society will drive higher selling prices as we add intelligence to our legacy products.

Sell new value from data and insights.

New software solutions, all of which require data centers, an important growth segment for Eaton.

These are just a few of the reasons why we remain confident in our electrical businesses and their ability to deliver higher levels of organic growth for some years to come.

And as slide five reflects we have a number of attractive growth drivers in our industrial businesses as well.

I'll begin with the most notable one vehicle electrification.

Here.

The outlook for EV penetration continues to accelerate.

New announcements coming almost every week.

Say here not just in passenger cars, we're also seeing increasing need for electrification projects and commercial vehicles.

Some for the entire system, but often for a sub system of the vehicle.

And I'd also note here the opportunities we're seeing tied to the acquisition of Royal power are much larger than we anticipated and our E mobility pipeline continues to be very robust.

Just as a point of reference our opportunity per vehicle on an EV is some 18 times higher and the opportunity that we have on a traditional crushing internal combustion engine.

And Youll recall, we expect our mobility segment to become $2 billion to $4 billion in revenue over the next number of years.

The next growth driver is tied to what we're doing in our legacy vehicle business, which is finding new applications for existing technology.

We're seeing a number of new opportunities for our commercial engine brake technology for our mechanical gears that are used in electric vehicles and for our advanced valve train actuation technology.

And in all three cases, we've already booked significant new wins here.

Third we're benefiting from the aerospace industry growth cycle, which over the next several years will continue to accelerate.

Commercial passenger growth has continued to improve and it's translating into significant growth in commercial aftermarket orders, which by the way were up some 40% year to date.

And commercial OEM build rates, our forecast of the growth of 15% over the next four years.

Lastly, I would note that with our acquisitions of Syria and mission systems, we expect to see even better growth given our position of our high growth platforms and as we begin to realize sales synergies.

So overall the stepping back from this particular set of initiatives that we've delivered some $250 million of wins in industrial and when added to what we noted in electrical we delivered almost $1 billion of growth tied to these secular growth trends in our markets.

So with that what I'd like to do at this point ill turn it over to Tom and ask him to walk through the quarterly results. Thanks Craig.

I'll begin with noting a few key points regarding our Q3 results.

Our revenue was up 8% with organic growth of 15%, partially offset by a 4% foreign exchange headwind and a 3% unfavorable net impact of acquisitions and divestitures.

Related to the acquisitions and divestitures the acquisition of Royal power increased revenue by 1%, while the sale of hydraulics reduced revenues by 3% by 4% sorry for a net of 3%.

With total revenue growth of 8%, we posted solid operating leverage with 15% growth in both operating profit and adjusted EPS.

It's worth noting that the foreign exchange headwind of 4% had an <unk> <unk> impact on adjusted EPS, which was larger than our 3% guidance estimate.

Further growth in adjusted EPS of 15%.

Would have been 22%, excluding the <unk> impact from FX and the <unk> <unk> net impact from acquisition and divestiture.

All in stronger organic growth and higher margins enabled us to report adjusted EPS of $2 <unk> that was above our guidance midpoint.

Finally, as we did last quarter, we continue to raise the bar with all time records and adjusted EPS segment operating profit and segment margin.

Moving to the next slide.

Electrical Americas had another very strong quarter, we set all time records for sales operating profit and margin.

Revenue growth accelerated to 18% organically driven by strength in all end markets with particular strength in commercial and institutional residential industrial and utility end market.

Operating margin at 23, 5% was up 180 basis points versus prior year benefiting from higher volumes.

With respect to price, we continue to manage price effectively to more than offset inflationary pressures in this segment.

In addition, our demand continues to remain very strong.

Orders on a rolling 12 month basis accelerated sequentially coming in at 36% year over year versus 29% in the prior quarter.

Our orders were strong across the board with particular strength in data center utility and industrial end markets.

These order growth translated into another record quarter of backlog up 97%.

On a sequential basis backlog is up 14% versus the prior quarter.

In addition to the robust trends in orders and backlog are major project negotiations pipeline more than doubled year over year, driven by especially strong growth in manufacturing data center industrial and utility end markets.

Turning to page eight.

Electrical global results were also very strong.

<unk> generated a Q3 record for revenue and all time records for operating profit and margin.

Organic growth was up 13% with an 8% foreign exchange headwind.

Notably this.

This is the sixth quarter in a row of double digit organic revenue growth.

We saw solid organic growth in all regions, which with particular strength in our global crowd times Beeline business and solid growth in both Europe and Asia Pacific.

We posted record segment margin of 26% up 50 basis points year over year.

Similar to electrical Americas higher volume was a margin tailwind versus the prior year and we continue to manage price effectively to more than offset inflationary pressures.

Orders were up 14% organically.

On a rolling 12 month basis with strength in commercial and institutional and industrial end markets backlog growth remained strong at up 22%.

Before moving to our industrial businesses I'd like to briefly recap the very strong results of our combined electrical segment.

For Q3, we posted accelerating organic growth of 16% incremental margin of 33%.

And the operating margin of 22, 3% with 130 basis points of year over year margin improvement.

We also generated orders and backlog growth of 27% and 75% respectively with.

With more than doubling of our negotiation pipeline in the United States.

We remain very well positioned for profitable growth and our overall logical businesses.

Our aerospace segment results are captured on the next page.

Aerospace also generated records in the quarter with an all time sales revenue record and a Q3 operating profit record.

Organic revenue in <unk> increased 8% with 5% foreign exchange headwinds.

Organic growth in the quarter was particularly strong in our commercial aftermarket and commercial OEM market.

Encouragingly military aftermarket.

Grew in the quarter.

Operating margin of 24% was up 200 basis points from the prior year benefiting from volume growth.

On a rolling 12 month basis, our order acceleration continued.

Now, 22% versus up 19% last quarter include.

Including military OEM markets that were also up 22%.

We saw order strength in all end markets as travel continues to accelerate within commercial markets and military orders strengthen consistent with our expectations for increased defense spending.

<unk> remained strong with a 17% increase over prior year and up 5% sequentially.

Moving on to our vehicle segment.

Organic revenue grew 19%, we also experienced a 3% headwind from FX.

We had strength in the North America, South America, and <unk> markets.

Our North American light motor vehicle business was especially strong with nearly 25% organic growth.

Our South American business was up more than 35%.

Operating margin of 16.

8% was down 120 basis points versus prior year, primarily due to manufacturing inefficiencies.

However, it's important to note improvement in our ability to offset higher inflationary costs with price. This is reflected in sequential margin improvement of 150 basis points.

From Q2.

Equal margin incremental margins on a sequential basis we.

We're up nearly 50% with solid volume growth and continued progress on price cost.

Moving to page 11.

We show results for our E mobility business.

Revenues grew 63%, including 17% organic growth, 49% from the acquisition of Royal power and 3% Foreign exchange headwind.

We continued the trend of narrowing the operating loss on a year over year basis. This quarter operating margin improved 800 basis points, driven by organic volume growth and the impact from the Royal power acquisition.

We are seeing continued momentum to achieve our $2 billion to $4 billion revenue target with new platform wins for power protection solutions, including additional break tour wins.

Our opportunity pipeline remains robust for innovative power distribution conversion and protection solutions.

On the following slide we have a summary of our guidance for the year.

As noted on the chart we are reaffirming.

2020 to organic growth and operating margin guidance in total.

Whether we are reaffirming both metrics for all segments, except E mobility.

Operating margin.

More specifically, we continue to expect organic growth in the range of 11% to 13% and operating margin from 20% to 24%.

Turning to page 13, we show the balance of guidance for 2022.

We're not making significant changes to our full year outlook, we tightened our adjusted EPS range of 751% to seven six.

Six one per share from the prior guide of $7 36 to 776.

Consistent with the foreign exchange headwinds that we mentioned throughout the presentation, we increase the unfavorable translation impact of $600 million from $450 million in our previous guide.

Our full year expectations for the other items are unchanged.

With respect to cash flow orders and backlog have grown significantly more than our expectation.

In addition, we have been and will continue to prioritize customers and profitable revenue growth at the expense of cash flow. Therefore, while we have good cash flow momentum in Q3, we have work to do to achieve our objectives.

Shifting to Q4.

Highlighting a few key points on our Q4 guidance, we expect adjusted EPS to be in the $2 and $2.

And Tencent range organic growth to be between 13% and 15% and operating margin to be between 25% and 29%.

Comparing to the prior year, adjusted EPS and operating margin guidance at the midpoint represent over 19% growth and 140 basis point increase respectively.

Now I will handle hand, it back to Craig to walk us through our market outlook and wrap up the presentation. Thanks Tom.

Turning to page 14, we provide an early look at our end market assumptions for 2023, and let me begin by saying that we are expecting to see a typical model recession next year, but.

But don't expect it will have a significant impact on our growth given the secular growth trends the strong orders and the record backlog that we're sitting on.

Within electrical.

Data centers industrial facilities in the utility market are all expected to see very good growth.

Together they account for approximately 40% of our total revenue and quite frankly of some of the strongest orders and backlogs in the company.

As a point of reference industrial projects announced this year. So far are up some 300%. So you can see really strong momentum in this in these segments of the business.

Commercial and institutional as well as machinery are expected to see more modest growth.

Note.

<unk> and C&I continue to accelerate in the quarter with significant strength in government and institutional.

This is a segment, where you would imagine we expect to see significant benefits from stimulus spending.

The one relatively weak segment is expected to be residential and while we've not seen a downturn yet and our orders are up some.

23% on a rolling 12 month basis through Q3, we do expect this segment next year.

I would however note that Rajiv only accounts for 7% of the total company sales.

Residential new build market will be somewhat offset by the renovation market and the renovation market account for some 40% of our residential sales and I would also note that we would expect to see higher electrical content per.

Home, which is what we've been seeing over the last number of years.

Within our industrial sector, we're expecting it to be a big year for electric vehicles.

The increase in government regulations, and incentives and the large number of new EV introductions will keep this segment's strong quite frankly for years to come.

And in commercial aerospace and light motor vehicle markets are both expected to see a cyclical recovery.

The need to rebuild inventories will support vehicle markets and the aerospace aftermarket growth and the ramp up in commercial OEM production will drive aerospace markets higher next year.

Lastly, we expect commercial vehicle market to be flat, but quite frankly.

Healthy levels.

So in total 85% of our markets are expected to see positive organic growth next year.

Well actually provide more details on our specific organic growth assumptions during our February earnings call, but we did want to share our preliminary thinking and let you know that we expect 2023 to be another good year of growth for the company.

And lastly on page 15, I would like to close with maybe just a few points here first.

I'd say im pleased with our Q3 results, particularly with our strong margins or earnings in our orders growth.

We continue to manage the business well and delivered record profits despite ongoing supply chain challenges and inflationary environment.

<unk> FX and.

Interest headwinds.

The transformation of the portfolio has delivered what we promised a higher quality company with higher growth higher margins and better earnings consistency.

And for the balance of the year, we remain on track to deliver our commitments, including record operating margins.

Adjusted and adjusted earnings per share.

And we're doing so despite offsetting once again, the significant headwinds that I talked about around FX pension and interest in <unk>.

These headwinds increase in Q4.

As we look into next year, we remain optimistic despite our recession expectations.

We do expect a slowdown and we'll be prepared in the event of a more significant downturn.

We know how to flex our costs and deliver attractive decrementals.

But as we've said we have good reasons for optimism secular growth trends are driving strong momentum in our businesses and we have a growing pipeline of opportunities.

Going into next year with strong momentum with record backlog and with an expectation that many of the operational efficiencies and supply chain disruptions.

We'll get materially better next year.

So we feel great about the quarter, great about the outlook and with that we'll turn it back to you yearn for Q&A.

Craig for the Q&A today, please limit your opportunity to one question and one follow up thanks in the ones for your cooperation with that ill turn it over to the operator to give you guys the instructions.

And ladies and gentlemen, just as a reminder, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command if you.

As any speakerphone, please pick up the handset before pressing the numbers.

And our first question will be from Nicole <unk> with Deutsche Bank. Please go ahead.

Yes, thanks, good morning, guys.

Nicole.

Maybe can we just start with maybe going through expectations for 2023, Incrementals I know, it's a bit early to be giving guidance, but you were kind enough to walk us through the end market outlook and I'm. Just curious if you think that it's feasible to kind of be at your long term guidance for incrementals at least as a starting point.

<unk>.

Let's start with that.

I appreciate the question in the call and as you can imagine we're working through our 2023 profit plans right now and I have lots of activity going on around the company to get prepared for that but but I would say that if you think about next year I think kind of a 30%.

Incremental rate would be kind of the right place to be thinking about running your models at this point and we will naturally be in a position by the time, we get to the earnings call for Q4 in February to give you a more specific read on that but we think 30% is probably a good planning number at this juncture.

Got it thanks, Craig and then I guess whats the pricing even though this quarter was just the huge acceleration in electrical America orders definitely encouraging to see that even as comps get difficult. So maybe if you could dig a little bit more into what drove the Q on Q acceleration.

Yes, as we've talked about and shared in some of the outbound commentary we've had pretty.

Broad based strength in orders in our electrical business I mean in the Americas specifically.

Data centers was extremely strong industrial markets very strong utility markets, we had orders up some 60%.

So it really was broad based even in the resi market on a rolling 12 month basis, even there we had orders that were still up some 20% and so.

It is tough at this point to really call out any particular market in the Americas that I'd say that was weak, but we had really really strong strength in I'd say a lot of it really is tied to these big trends, we talked about obviously.

The utility markets in general are certainly benefiting today from some of these investments in not only energy transition but.

Grid resiliency.

Data centers.

Theres been lots of debate about that market in which direction. It's headed in but we're really continuing to see really strong strength in the data center market, even to the point where customers today are looking to place long term commitments and basically hold a slot in our production plans out into 2024. So we continue to see very strong.

And our Americas business once again tied to these trends that we've been talking about for some time and we're absolutely pleased to see it.

Showing up in our orders and that will obviously convert to revenue as we have the ability to do.

Ship.

And we resolved some of the supply chain issues that we continue to deal with yes, just to just to amplify the datacenters in the Americas on a quarter over quarter basis up almost 40% and on a trailing 12 month over 50% so.

We've been hearing noise on that a slowdown we're not seeing it.

Thank you guys I'll pass it on.

And next we have line of Josh <unk> with Morgan Stanley . Please go ahead.

Hi, Good morning, guys, Hey, Josh.

Greg on this order surge that you guys have seen anything that you would attribute to timing around.

Stimulus or lead times or anything else, maybe a chunky order in there that we should think about as we look out because we are going to continue to see some tough comps here and I know that with the rolling 12, It's all it's kind of hard to parse out maybe some of the quarter to quarter volatility.

Yes, no and we tried to provide a little bit of color because I know, there's this question around whether or not.

Kind of growth are you seeing in orders in the quarter, which is why we try to share that not just in the rolling 12, but actually in the quarter.

We're seeing significant strength those numbers that Tom quoted were actually in the quarter quarter over quarter numbers. Despite to your point tougher comps.

I would say in terms of the order surge question as I mentioned in my opening commentary there have been a number of very large projects announced and I'd say as we think about.

Whether it's reassuring or investment in.

Grid infrastructure or its investment.

New battery facilities, there are today, perhaps different than some of the other cycles that we've been through.

A lot.

More very large industrial projects that tend to be more electrical intensive as an application that we're certainly seeing in our backlog and thats certainly helping us but that also gives us a lot of confidence as well because these tend to be big multiyear projects that will go on for some time to come.

Stimulus to your question with not yet we certainly would anticipate that at some point down the road that will we will start to see a meaningful impact from stimulus.

Most of those programs.

They'll probably six to 12 months away from really.

Having a meaningful impact on the company, but once again I guess another one of these vectors that we think will continue to give us a multiyear growth story, that's pretty compelling and as you know a lot of those stimulus dollars are going directly into the markets in which we participate it's about building out the electrical infrastructure, it's about grid.

You can see it's about energy transition its investments.

Efficiency.

Specifically to the point, where they actually specifying upgrading your electrical panel.

Yes.

Particular parts of the program that qualify for these investments and so it's just another one of these things Josh that gives us confidence in the long term outlook.

Our electrical business specifically.

Got it got it that's helpful.

And just a little more color on the major major projects in the U S.

Manufacturing in the quarter negotiations up over 300% data centers up over almost 170% in the year to date numbers are equally strong. So just really really strong numbers on the major projects.

Got it it's helpful. And then just a quick follow up on the stimulus piece or I guess broader infrastructure spending that you guys are tracking I know theres. Some big dollars. They're obviously not all of that is electrical but as you touched on a lot of things.

Get into he's backyard at some point, how would you think about what those due to your addressable market here as those start to enter or is that like a 5% increase a 30% increase to addressable market like any sort of ring fencing would be helpful.

And I would say, it's maybe a little bit early for us to.

To be able to put a handle on how it's going to impact specifically the relative opportunity with a relative growth as you know they are a very big $1 billion programs directly targeted at electrical infrastructure.

So, but I would just say that at this point, Josh we would hope to at some point down the road give you a better indicator of that but it's just quite frankly today, a little bit too early to see how this is going to all play out, but it's all going to be good.

We're all going to be.

Things that are going to help us continue to accelerate our growth not just in the next 12 months, but quite frankly. These these stimulus programs will help us accelerate growth over the next three to four years.

Yes, great. Thanks for the detail best of luck.

Next we'll go to Andrew <unk> with Bank of America. Please go ahead.

Hey, guys how are you hey.

Hey, Andrew we're doing well thank you.

Good morning.

Can you give us more.

The data points.

Paul.

<unk> clinical multiple verticals within the data <unk> and we're getting some background noise. It's very hard to hear you we heard datacenters Andrew but.

However.

No impact.

Thanks.

Let me try this as does better much better spent much better yes. So just the data centers if we could.

Just focus on different geographies and different verticals within the data center market is just there's a lot of noise regarding to this market.

What are you guys seeing I know you are bullish, but just as I said more color by geography and vertical.

Yes, and I appreciate the question Andrew We certainly if you think about geographically, we're clearly seeing the strongest growth in the Americas market.

Very strong growth in the Americas market very strong growth.

In Hyperscale, but also in Colo and on Prem maybe if you know today I mean, some I guess, some some 40% of the market would be hyperscale, but this really is broad based strength that we're seeing in the data center market.

Certainly in the Americas, we're seeing good growth, but not not as strong growth in Europe and Asia to markets that are also growing.

Once again the channel.

To really distinguish that from the broader data center market, we have seen that tend to be a little shorter cycle, and we have seen a little bit relative slower growth.

Good growth, but relatively slow growth in the it channel relatively slower growth in single phase in markets like Europe , and Asia, but once again, we're still seeing growth in those markets.

Great. Thank you and just on capital allocation as interest rates have gone up Youre clearly cash generative there are more of a strategic.

Strategic buyer.

As the market landscape changed from your perspective.

Does it make more likely less likely to see a deal from Eaton in the next 12 to 18 months.

Okay.

I would say that what's going on in the interest rate environment needs to at some point translate into seller expectations on valuation and I would say, there's always as you know a fairly significant lag between the realities of the market changing.

And company's expectations of what they are their values and so I'd say in general in these kinds of environments you would expect.

Valuations to come in a little bit in and that would therefore increase the likelihood of us doing transactions, but I would say today.

Early and we really have not seen any material change at this point in valuations of our expectations, but we continue to be.

On the hunt looking for opportunities and still think Thats the right priority for the company, but having said that as we've said in the past we will not overreach, we don't intend to overpay, we've been very disciplined buyer and we will we will continue to be a very disciplined buyer and in the event that asset.

<unk> don't come in line with our expectations, we will certainly do use it as an opportunity to buyback our stock.

Thank you very much.

Thank you.

And next we'll go to Nigel Coe with Wolfe Research. Please go ahead.

Thanks, Good morning.

Joe.

Okay. So.

The 'twenty 'twenty, three and market outlook it looks like.

If you had to kind of pick a number you'd say, 5% to 6% type type Linda growth rates.

The one I guess I'm surprised by is the C&I market, where you're looking for modest growth.

It seems like the leading indicators that all really healthy.

We've got some stimulus money coming through so I'm just wondering what's driving that view is it.

Is it some kind of a damage from residential.

Is it Europe Asia Pacific and any color that would be great.

And I appreciate and we tried to kind of unpack that a little bit of my up on commentary, but we are still seeing good growth.

In the C&I market.

Orders on a rolling 12 month basis by the way globally.

23% in the quarter, they were actually up 27% and so actually a very strong quarter with orders actually accelerating in the quarter and I would say on the commercial side.

We're seeing growth, but we're seeing the biggest growth in what we call institutional and government and as I noted in my commentary, that's really where you would expect to see some of the early indications of some of the government dollars in government spending in and around institutional and government, but but that market continues to do.

<unk>, well and we really have not really seen any signs, particularly in that market of a let up I think more generally speaking the Americas as a region tends to be the strongest region in the world really across most of these end markets, but we had a very strong.

Quarter in Europe , as well in the C&I market in Asia also Asia was very strong.

<unk> commercial and institution actually all the end markets grew quite strong on a quarter over quarter and trailing 12 months I mean, Europe was particularly strong.

In commercial as well as government on a trailing 12 month as well as on a quarter over quarter.

So at some point I mean, as somebody mentioned earlier, we're going to be Anniversarying, some really strong growth numbers and we do expect these growth numbers too slow and moderate some place in terms of the order intake, but also keep in mind, we're sitting on.

Backlogs that are up.

In some cases.

More than 100% so even if you have a little bit of a slowdown in some of these end markets, which.

You will likely see some of that.

Our backlogs today.

Giving us visibility into almost 60% of next year's demand and that number is about two weeks, what we normally see.

Right Yeah. That's it means it all sounds great. So just wondering what changes in 'twenty three but my final question is on free cash flow.

A pretty big fourth quarter lined up in the plan.

Gross rates remain very strong so just wondering kind of confidence on what needs to happen to drive that free cash flow.

Yes, no I appreciate the question, we tried to touch on it in the prepared remarks, we had a very we had a very strong Q3.

Cash conversion cycle would improve by by seven days.

On hand went up four days payables up another two days. So we felt really good about that.

I think what we want to get in terms of the prepared remarks is to let you know we're going to prioritize taking care of the customer and protecting the orders and organic growth recognizing that we've got work to do to hit our free cash flow objective no question about it.

Okay. Thanks.

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

Hey, good morning, guys. Good morning, Scott.

I don't think I've heard.

Yes.

Price specific price number and not asking for anything, particularly precise it can be a range, but of that 15% core was.

Running typically kind of a little bit more than half in prices at about the same this quarter.

Yes, Scott as you would know.

What we said in prior calls is that we haven't given out a split specifically between price and volume largely because there's such a huge variation depending upon.

Markets the customers the.

The various commodities that were selling and so we haven't given out a number but I would say that within that 15% growth we had healthy growth in both volume and price.

Okay. So all prior year.

So im going off in volume as well.

Do you guys have a sense of I mean, your customers are they trying to build some inventory ahead of us.

Anticipated demand in 'twenty, three or they're trying to get ahead of some price increases.

Is the incentive or are they just paranoid theyre not going be able to get product and.

Trying to just get my arms around the incentive there really.

Order above actual end market growth because it certainly your growth rate or above.

Global GDP levels by quite some.

Yes.

First of all I'd say, our end markets are doing very well and so a lot of what we're seeing today is is in fact, a reflection of.

This heightened industrial activity heightened investments.

In manufacturing, we talked about these big investments in things like semiconductors.

New plants for building EV factories in new factories for building batteries and investments in grid hardening hardening and so in many cases the markets that we're participating in.

Our really strong markets right now, having said that I would say that our customers would like to build some more inventory.

And today, they are not and we're not seeing any evidence at this point at all.

More broadly of Overstocking in the distribution channel.

There is some nervousness in the marketplace today around I need to get a place in line until as we've mentioned before we're probably getting orders a little bit earlier in the process than we would normally get on order. So we're getting more lead time, but in general when you can see it in some of the distributor data as well our distributors their sales out.

Our very strong if you look at some of the big.

Electrical distributors in the numbers that they've reported.

Yes, that's really helpful color best of luck I'll pass it on thank you guys. Thanks Scott.

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

Thanks, Good morning.

I think.

Just firstly.

To focus on the fourth quarter for a second.

So it looks like Youre, assuming kind of flattish sales sequentially in margins down maybe 50 bps or so it seems like that is very concentrated in the aerospace division, where there's kind of a big margin reversal versus what you saw in the third quarter.

Maybe just clarify that please on arrow and if there's anything else kind of going on sequentially on margins in the segments.

Yes, I mean as you know John we had a really strong quarter in aerospace in Q3, and as you know from this business. So much of how you perform in aerospace is really a function of the mix of your aftermarket versus OE sales and so in any given quarter. You can have a very different mix that certainly will.

Your margins around one way or another but the margin levels.

Implied in our still very strong in aerospace are very much in line with our guidance for the year, but in any given quarter you can in fact see a law.

Little bit of a different depending upon how much OEM business, youre shipping and with the ramp and Oems and some of our major customers you probably.

Better than that numbers are probably more OEM shipments than we would typically see are certainly.

And as a mix or as a percentage in Q3.

The enlarged business is doing well backlog is growing profitability is doing well teams executing well and so we have no concerns about aerospace we think the business is in great shape.

Thanks, very much and then.

This is my follow up.

I suppose would be around kind of.

Volume growth.

It's been healthy.

The third quarter.

And also assuming its up lets say mid single digit as you think about the backlog from here as supply constraints ease.

Do you think we see an incremental kind of acceleration in backlog conversion.

And so revenues.

Our volume growth.

Would accelerate in the next few quarters, even as sales slow down.

Just help us understand kind of that that works through.

Orders into revenue volumes of supply chains and moving around.

I appreciate the question and it's what we've been chasing really.

Julian for at least the last 12 months, where we quite frankly, we need a little bit of a slowdown quite frankly in orders just to catch our breath and try to deal with some of these backlog that we're building in the business and so.

I'd say that yes, it's absolutely possible that you could have a scenario where.

Just working.

Off the backlog in the past dues gives you the ability to continue to grow your business. Despite what could be a bit of a slowdown in the marketplace. So that's that's entirely possible and quite frankly, we need the ability to.

To take a little bit of a breather.

Execute on some of this backlog, but to date as you saw on our results I mean, the orders keep coming and they keep coming fairly broadly in the marketplace and we think these secular growth trends that we're we're playing into are going to go on for some time and so we're responding to that it's we're investing we're investing in capacity.

<unk>.

Capability and doing things in our supply chain to ensure that we are in a position to deal with these higher levels of economic activity the higher growth and support what we think is going to be.

Higher growth for these businesses for some time to come.

Great. Thank you.

Yes.

Alright next we'll to Joe Ritchie with Goldman Sachs. Please go ahead.

Yes. Thanks, Good morning, guys good morning Joel.

Yes, so really I guess, maybe two two clarification questions follow ups from what others have already asked the first one just going back to M&A portfolio you guys have done a lot Craig I'm just curious.

What kind of leverage target would you be willing to go to in this environment clearly like your backlog in really good shape, but I know that theres a lot of concern around the uncertainty for 2023 and and concern around higher leverage levels across it.

The broader multicenter I'm just curious.

For the right deal and what would be your expectation on leverage.

And as you know Joe you've been around the company for some years, we have in the past levered up for the right strategic deal in.

As an organization as a company we tend to have very good.

Cash generation and so so for us I would say that for the right deal we'd be perfectly willing to lever up and go through the same levels that we've been at historically.

I will tell you that.

Those deals are not right in front of us today, and so I, just I don't want to be.

Don't want to set an expectation around some near term transaction, that's going to require that we lever up.

Which are likely to see from US are deals that are very much consistent with what we've done recently in terms of.

Kind of bite sized transactions that we can fund largely out of cash without the need to lever up and do larger transactions, but that's just.

Reality of the marketplace and the type of deals that we'll likely do but at the same time, if we if we could find a bigger more strategic one we'd certainly would be willing to lever up in order to do it yes, and just to amplify that a little bit I mean for the baseline everybody we're at $2 one.

Net leverage so we've got a very strong credit ratings. So we've got a large capacity to go up to Craig's point, and especially with the supply chain.

Constraints, starting to mitigate our cash generation will get even better going forward. So we see a lot of flexibility.

Got it that's helpful and maybe just my follow on question I know Julian was trying to get this as well so maybe I'll focus my comments on the electrical Americas business.

Hard to like get our head around like your backlog doubling.

Our year over year at a time when youre growing call. It mid teens. This year in this business. It seems to suggest that that for 2023 kind of set yourself up for another year of double digit organic growth and so.

Just maybe just help us kind of contextualize that or.

I'll frame it just for that just the electrical Americas.

Yes, I mean, I think your math is not.

Not wrong necessarily right that certainly given the strong negotiations one as you heard Tom talk about even on negotiations largely before we get an order.

Negotiations continue to be very strong into these secular trends that we're dealing with.

Orders are strong the backlog is strong and so we would expect.

That to translate to revenue growth next year, even in the event of a.

Slow down we're not in a position to give you a number for next year, we'll do that as we mentioned in February but.

But your math is not not terribly wrong that says we should expect good growth in the Americas next year, even with a little bit of a market slowdown.

Kind of what we tried to do by providing some indications of the various end markets that we're in and how those end markets are likely to perform in 2023.

The end market forecast, coupled with the secular trends chart at the beginning of the presentation.

Trends are real and.

We are seeing order flow and backlog consistent with that and.

I think we're we're primed for a good run here.

The Big Challenge really is to date has been we just don't have the capacity our suppliers don't have the capacity to deal with this growth that we're seeing I mean, obviously our growth in the quarter.

In Q4, it would be much higher if we had more capacity in place to deal with this demand and that's what we're addressing right now not only in our own facilities, but also in the supply chain to make sure. We are in a position to convert on these great growth opportunities.

All sounds good thanks, guys.

Thank you.

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

Hi, good morning, everyone.

Morning.

Okay.

So I apologize I'm going to try to come out. This volume question again, just because I think it's really important.

Are you seeing accelerating or have you seen accelerating volume year over year growth as we've gone through 2022.

Yes.

Yes, yes.

That's great John wanted to hear.

Yes.

I just wanted to confirm that and then you talked about top line and Incrementals. We've had a couple of companies remind us about pension sensitivity asset returns tax already this season I know, it's early but just anything to call out below the line as we think about next year.

Yes.

That's a great question, John I mean, there is a lot of moving parts, let's take pension first week, we've got asset returns discount rate shape of the yield curve just just to name a few and we're going through our plan for next year.

Wouldn't you wouldn't be surprised if we had a headwind associated with that we're trying to assess how big that headwind is right right now.

As it relates to interest expense.

The same type of dynamic you've got swap interest income you've got FX income, you've got CP balances and increasing short term rates. We've managed that very effectively this year and on a year to date basis.

We will look good as we indicated in our prepared remarks, we will see more of a headwind in Q4, and we're working through what's going to happen in 2023, I guess, what I would stay focused on is we had all those headwinds this year and we were able to deliver what we said we were going to do and.

We will be focused on doing that next year as well and this may have been deferred.

And offsetting some of these headwinds will be real and Tom articulated.

Is that.

This year, we have just seen.

Enormous number of operational inefficiencies that we've had to offset as well.

And we do expect as I mentioned in my opening commentary that many of these operational inefficiencies many of which are driven by supply chain constraints.

We expect those to get better next year.

So we think we're going to have.

The offset to a number of these because our facilities will run more effectively and more efficiently in 2023 and you have in 2022.

Great. Thanks for the color I'll pass it along.

Thank you.

And next we'll go to Deane Dray with RBC capital markets. Please go ahead.

Thank you and good morning, everyone. Good morning Deane.

One of the inefficiencies in the supply chain, that's been nagging, everyone has been semiconductor and electric and electronic components situation you guys thought it might get worse in the second half so how has that been playing out.

What I'd say is I think what we said is a part of our Q2 earnings growth that we didn't expect it to get better.

In fact, we didn't expect it to get better until sometime probably in the second half of 2023, and I would say largely played out that way that we've seen we saw.

Some improvements in metal based commodities copper steel aluminum, we saw improvements obviously in resins logistics got better but semiconductors in almost anything electronic related continues to be a challenge and that challenge we dealt with in Q3 and a challenge that we think we're going to end up dealing with <unk>.

For another.

Most 12 months or so before we probably see any material improvement there.

So semiconductor is to continue to be a challenge we're working through it.

But we are seeing improvements in other commodities.

That's good to hear and then just the follow up and we've touched on this before a bit and the answers to Joes question and Greg you've been around the company a long time. So youll appreciate the spirit of this question as in prior cycles.

You would see that the company was so much more exposed to non rats and the non res cycle, we'd be asking you about starts and permits in value in place and so forth and but the portfolio today and the end markets, whether it's in secular drivers data center electrification.

All of this has served to men.

<unk>.

Non res cycle, just want to make sure that's correct and should help elongate the cycle in terms of the demand given your backlog and so forth. So.

Part of this is a question of how you're positioned better in a downturn and less dependent on non res and just any color around that would be helpful.

What I'd say, maybe just to clarify a couple of points first of all we agree with your conclusion by the way and the conclusion is the portfolio moves that we've made.

Have positioned the company to be less cyclical.

To be more long cycle no cycle.

And that is absolutely true and therefore, we're absolutely convinced that the company will perform very differently in the future in the event of a.

Of an economic downturn and as I mentioned in my commentary, we think there'll be a mild wound next year and yet our company and our markets 85% of them, we'll continue to see strong growth, but just the term non res the term non res means everything other than residential and so today for us as we said 7% of the company is residential so.

Non res or 10% of electrical is residential so 90% of everything that we do in data centers and utility in industrial markets. The term non res really covers a lot of these other end markets that are certainly doing extremely well right now and so we've tried to get.

More exposure to the secular growth trends tied to really growing end markets and that's what we've really done in terms of the portfolio moves that we've done but your conclusion that is absolutely correct that the company will be.

Much less cyclical on a go forward basis, and we would expect the company to grow even in the face of a recession.

Yeah, and just to again I mean, we've talked about this but just to put a couple more numbers on this just just to amplify what Craig was saying.

<unk> your orders on a year over year basis growing about 50% on a trailing 12 month basis about 40% datacenters year over year about 25% and on trailing 12 months about 35% so either.

Big non res numbers to use your words Dean.

That's great. Thank you.

<unk>.

Next we'll go to line of Chris Snyder with UBS. Please go ahead.

Thank you and I appreciate you squeezing me in I wanted to follow up on some of the prior commentary around 2023, incrementals in that 30% range and I know that matches.

The targeted or more normalized levels to get to the 2025 targets but.

I guess my question was it feels like the price cost is still in the Companys favor you guys mentioned earlier that productivity efficiency what would.

Yes return next year, so that has a margin tailwind as well.

Kind of offsets there.

That kind of push.

Incremental back just to add to that about 30% or so thank you.

And I appreciate the question and I would say that the other side of that equation.

The investments that we're making inside of the businesses and as we talk about some of these big growth trends that we're facing into and quite frankly, we have a need to invest in so.

We would intend to do that to prioritize growth and putting more feet on the street and investing in technology and the likes to ensure that we're in a great position to take advantage of this growth that we see there. So we still think 30% we think from a planning standpoint, we will give you more details around perhaps.

A better number when we get to February next year, but we still think at this juncture you have.

Availing forces, Tom mentioned, a number of them as well.

Around whether it's entering or pension or the like and so we still think all in 30% Incrementals still the right way to position kind of your models for now and we'll update that as we know more next year.

Thank you really appreciate all that color and then just a quick follow up on the on the re shoring announcements in the $1 three trillion of planned investments that you guys highlighted matches a lot of the data that we've aggregated as well.

Can you talk about how much of this is already coming through clearly manufacturing construction has been very very strong and then also.

Visibility does this provide as you know these are very large generally.

Slow moving projects that thank you.

Yes, I think to your point and then you hit on kind of we think is an important one where no. We've not really seen today. These one three trillion of announcements we've not seen today the impact of most of this or hardly any of this in our order book at this point in some cases it could be in and the.

Asian pipeline, which Tom indicated is up dramatically, but it's not reflected today in our order book and certainly not reflected in our sales and so just another one of these things that gives us a lot of confidence around the future growth rate of our electrical business.

Thank you really appreciate that.

Thank you.

Next we'll go to Joe O'dea with Wells Fargo. Please go ahead.

Hi, Thanks for taking the question.

I wanted to circle back to the negotiation pipeline in the U S and talking about that kind of more than doubling in just a little bit more detail on kind of what.

What you used to kind of determined on what qualifies as a major project and then typically what you see from the timeline that goes from negotiation to order and then the timeline from sort of order to revenue generation.

Yes, I'd say the negotiation pipeline today I'd say it's.

To your point.

Generally large projects, there's a lot of stuff that's going on today that are in the distribution channel that we don't necessarily have.

Great visibility to but we do track large projects, where we tend to be involved in.

And specifying the application and so these projects we have historically tracked them and have great visibility to them and as we mentioned those numbers are going up.

Dramatically and I would say.

And the cycle between a negotiation in order I mean, it can vary it can be.

On the short end 90 days it can be.

Six months.

It varies depending upon the project.

And from an order to a sale and once again it can be assured as 90 days it can be.

18 months.

It varies quite widely depending upon the project that youre actually.

Supporting.

Got it and then on the.

Distribution side of things could you just talk about the mix of product and distribution that might be more kind of commoditized or off the shelf versus the mix thats more specced in and then anything that you could be seeing in terms of deferring sort of inventory management trends, whether some of that more off the shelf that youre seeing inventories.

Down there at all.

As opposed to what would be more spec.

Yes, I would say to answer maybe the second part of your question.

Today.

We don't really we don't really have almost any part of the business today, where our distributors are saying.

You have more inventory than we need or want.

And I think that's just a reflection of the broad based strength that we talked about in our end markets.

So.

Some markets are growing faster than others.

All of the markets are growing.

For the most part we have.

Distributor chat.

Challenges around supporting their demand almost across the board today to.

To your point around Commoditization, we don't really think we don't really sell anything that I would call a true commodity if you think about in the electrical space, specifically or even in our industrial businesses. Most of what we do is highly specified.

And you go from.

And application engineering to designing a particular solution.

Getting an order you don't tend to find that.

You can trade stuff once you win a job or you win a project.

Tend to deliver that project.

Because it really is engineered into the solution. If you think about what we're doing in the electrical business essentially and we're protecting assets and people and if our stuff doesn't work I mean really bad things happen and so.

What we really think that we sell we sell are highly engineered solution and not much of which is what I would call commodity now on the commodity side you may have some wiring devices or the like that could be sold through.

Our distributors are some case could be sold through one of the big box retailers, but for the most part most of what we do and our businesses are highly engineered and highly specified.

Very helpful. Thank you. Thank.

Thank you.

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

Thank you and you're a mild recession scenario for next year.

In Europe do you see in that scenario, where Europe remains positive growth throughout the year.

Obviously, the secular trends I think in North America for a variety of reasons, there's obviously more credibility.

The ability to outgrow the market that much outgrow recession scenario.

But do you see the same dynamic in Europe , and again does it stay positive and Youre Your base case throughout the year.

Yes.

<unk>.

It's a great question.

David It's one that we obviously havent fully modeled out clearly.

<unk>.

The range of possibilities around what happens in Europe is much wider than perhaps any other region of the world given what's happening today in the Ukraine, given the uncertainty around energy and energy resilience and so there is a.

There's a wide range of possibilities in Europe .

You could certainly imagine a scenario where the orders that we're currently seeing orders continue to be hold up well. We are also building backlog and have built backlog in Europe .

But that could change quickly depending upon whether or not you have gas flowing into Germany, and so I think the range of possibilities in Europe are quite wide, which is one of the reasons why I said that while we are anticipating really good growth across the board.

But we're going to be ready and we will take a regional view in <unk>.

If we need to flex in Europe , because they end up dealing with a more severe downturn and we're anticipating right now and more severe than rest of the world and we have a plan ready to deal with a scenario where markets for all perhaps more than we anticipated.

Would you mind sharing I'm sorry go ahead, yes, I was just going to I was just going to add I think it's important to note that in the quarter. We did see order growth in Europe and in some of the end markets fairly strong.

For example in commercial and institutions. So we do see some slowing but we're still seeing growth there.

Answered one of my two follow ups there in a sense have you seen orders are still positive and electrical global in Europe in the quarter any chance you share with us any sense of how large the backlog is in Europe electrical.

On a year over year basis.

I mean, I don't have that number and I believe our backlog on a rolling 12 month basis in Europe is up 27% I think the numbers I have.

So the backlog is still 27 is what I have is okay. So 25% backlog in Europe and global is up 22 overall.

Okay, so essentially up more than the global number of Europe , even higher yes, exactly I think we're just trying to figure out how much coverage do you have if you can avoid cancellations.

Into 'twenty three in Europe in particular.

Electrical Americas in aerospace kind of driver alright.

Alright.

And as you can imagine for us in Europe .

As a percentage of revenue I mean, they are relatively smaller so Europe today would account for what roughly 9% 10% of.

The company sales and so.

If we think about yes, we can certainly absorb.

A bit of a slowdown in Europe and not really.

Outsized impact on the overall company's performance given its relative share within the organization and our mix.

I appreciate it thank you.

Thank you.

And next we'll go to Brett Linzey with Mizuho Americas. Please go ahead.

Hi, good afternoon.

Okay.

There's a lot of ground covered I appreciate the additional thoughts on 'twenty three markets I guess, if I work through the weighting of those arrows I get something kind of mid single digits.

At 5% to 6% range for market growth, but then I imagine you have some carryover price and perhaps some outgrowth. So just curious how you would maybe dimension those other pieces.

I think I'd say, it's early for us to kind of give you. The insight we will do that in February .

But clearly there's going to be carryover price I mean, you want to know that price is generally in the market data as well by the way and so when you think about a market index. There is some price built into that as well you could debate how much is built and is it more or less than what youre, assuming that there is price built into that data, but it just early.

At this point for us to give you.

Any particular company related growth numbers, I mean markets are going to be good we would expect generally to do better than markets and so that would be a fair assumption, but it's just early to give you any more detail than that at this point.

Yes, no understood and just one more on the backlog, obviously very robust, but just curious if you could share some color on the margin profile of the orders being booked it looks like relative to what's being shipped I would expect there would be some favorability as material prices have come off highs but.

He can share in terms of mix or price cost there.

And I would say that and as you know we've talked about on prior calls I would say that we took some pretty unconventional steps early on and in many cases, we went out and repriced the backlog and so I would say today that our backlog today and the pricing and the margin in the backlog.

Not terribly different than kind of the way the business is performing today, the underlying profitability of the business today.

Certainly there is a question around the future direction of commodity prices.

Yes.

Whether or not we see more or less inflation or deflation that can change it but the but the profitability in the backlog I would argue it's not terribly different today and what we're seeing in our business.

Alright, great I appreciate the insight.

Thank you.

And we'll go to Phil bowler with Behringwerke. Please go ahead.

Hi, Thanks for taking the question just one from me. Please I. Appreciate you you don't break out price, but do you feel as though you're sort of approaching.

Approaching a ceiling anyway on price.

Clearly explained that a convicted about the demand side outstripping supply in most areas, which we can see pretty clearly in the in the order figures, but are there any areas, where you are now seeing price elasticity kicking back in or have you managed to increase the price intra quarter and a pretty uniform manner across the different businesses. Thanks.

I appreciate the question. So first thing I would tell you is that if you're thinking about.

Our industries and over a long period of time pricing tends to be sticking in this industry pricing.

Prices once you get a price increase they typically you hold it I think one of the big advantages. We have is because it goes through distribution prices, obviously, good for distributors, but more broadly I would say that we really today are not seeing our overall cost come down either because on the one hand some of the major commodities that.

We buy.

Have come off of some of our peak levels, but what we're really seeing today in the business as we're seeing.

Because of supply and demand not just our supply and demand, but with our suppliers, we're seeing labor related inflation.

And so we're not today really in an environment, where we're seeing deflation necessarily in our costs either on an all in basis.

But I think the bigger message is price does tend to be sticky the idea of a ceiling I think a feeling it's really a reflection of what happens to your input costs and at this point, we do think that the worst is behind us in terms of inflation in aggregate, we think labor will continue to.

See inflation.

And perhaps at an accelerated pace.

That'll probably offset some of the deflation that we're seeing on some of the major commodity inputs that we have but in aggregate we don't anticipate.

To go into a deflationary cycle.

Okay. Thanks, a lot.

And with that no further questions in queue I'll turn it back to the company.

Hey, Thanks, guys that we have reached the end of the call and we do appreciate everybody's questions as always chip and myself will be available for answer any follow up questions. Thank you for joining us and have a great day alright. Thank you.

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