Q2 2023 Eaton Corporation PLC Earnings Call

Only mode. Later, we will conduct a question and answer session and instructions will be given at that time should you require assistance. During the conference. Please press Star then zero and an operator will assist you offline and as a reminder, your conference is being recorded I would now like to turn the conference over to your host Yan Jin senior.

President of Investor Relations. Please go ahead.

Good morning, guys. Thank you all for joining us with today's <unk> second quarter earnings call with me today are Craig Arnold, our chairman and CEO and Tom <unk> Executive Vice President and Chief Financial Officer.

Our agenda today includes the opening remarks by Craig then he will turn it over to Tom who will highlight the company's pro forma in the second quarter as we have done our past calls we'll be taking questions at the end of a craigs closing commentary the price release and the presentation. We'll go through today have been posted on our lives.

Right.

Presentation, including adjusted earning per share adjusted free cash flow and other non-GAAP measures. The recall sale in the appendix a webcast of this call is accessible our lifestyle will.

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

Our earnings release, and a presentation with that I will turn it over to Craig. Thanks, Tien Hey, today, we're pleased to Mark the end of the first quarter with one of our strongest performance has ever had.

The performance that strengthens our conviction about our long term growth prospects are.

Our teams continue to deliver on our commitments propelled by both strong markets and good execution.

We will begin with some of the highlights of the quarter on page three.

Well understood at this point Megatrends Reindustrialization infrastructure spending are continuing to expand our markets driving our revenue orders and backlogs.

We posted another quarter of record financial performance with strong revenue margins and earnings growth.

And we executed well.

And our first half performance along with our growing backlog is what allows us to once again raise our full year guidance.

We're raising our 2023 guidance for organic growth margins and adjusted EPS.

Our EPS growth at the midpoint of our guidance is now up 16%.

Tom will walk you through the details shortly but from my perspective, the highlights of the quarter really are growing backlogs up 22% on electrical and 26% and aerospace.

The book to Bill ratio of one two for both electrical and aerospace. We also generated strong operating and free cash flow $1 2 billion and 900 million up more than 200%, 600% respectively.

Free cash flow in the first half of the year is almost $800 million above prior year. So we're on track to deliver our full year guidance, despite the higher growth and higher receivable balances.

Overall, we're pleased with the results and well positioned for the second half.

Moving to slide four we wanted to provide a simple framework that summarizes how we think about key growth drivers across our businesses.

The important Megatrends are listed here on the left lead markets and our segments are listed across the top of the page.

At the intersection is where we see these trends having a material impact on our growth rate of our end markets.

And without getting into a lot of the detail. The important message is that this long list of Mega projects as impacting many of Eaton <unk> markets.

We intend to do during the course of our quarterly earnings call today, and really into the future. It's early to talk about these trends and how they impact our end markets.

Today, we will spend a few minutes on infrastructure spending and the inflation reduction Act.

Industrialization and an update on Mega projects as well as a look at EBIT position in the utility and aerospace markets.

We're highlighting the inflation protection Act since it's it's considerable upside to the initial estimates of future government spending and on Mega projects, because they continue to grow dramatically.

We put the pick the utility segments. It is quickly becoming one of our largest markets.

It was approximately 15% of electrical Americas sales last year and is running well ahead of that rate this year.

We received also some extensive questions from investors about our position in this market.

Lastly, we will highlight our aerospace business due to the double digit growth outlook ramping defense and commercial platforms, including a substantial new win on the Bell V 280 Valor platform.

Moving to slide five we're showing an updated look at expected spending tied to the inflation reduction Act.

Most of the spending is focused on improving U S infrastructure.

And as you can see the estimates have increased significantly.

At the time of passage.

On the cost impact, including credits and incentives with 271 billion.

The legislation was recently re scored and government spending is now expected to be 663 billion up nearly two five times.

Due to really what is a non cap program.

Accordingly, these tax credits because they are uncapped I expect it to continue to grow.

These dollars are naturally a strong catalyst for instruct infrastructure spending much of it targeted at industries, where Eaton will be a significant benefactor.

The implementation of the IRR is in the very early stages, and we think will provide significant tailwind over the next 10 years.

Very little of this impact is currently in our order book and none of it has impacted revenue yet.

On page six we have an updated chart showing the continued growth of Mega projects in North America.

We introduced this chart last quarter and Youll recall that we included announced projects that are greater than $1 billion in this category.

The value of announced Mega projects has increased by $116 billion or 20% between March and June .

So the momentum continues and we would expect the category to continue to grow at well above historical trends.

We've seen recent announcements for EV semiconductor plant, a new battery plants, so really across the board and a few examples of some of the other major projects include 174 about $1 billion of downstream oil and gas or chemical $33 billion of LNG export terminals and 64 bit.

Power generation and renewable energy projects.

Just another confirming data point.

The Dodge data for U S. Industrial projects continues to expand at a record pace with 12 month manufacturing construction starts up 72% on a 12 month basis on a rolling 12 month basis and up 84%. If you include LNG activity.

And as a reminder, only 25% of these mega projects have started so we're just at the beginning of this reindustrialization megatrend.

Lastly, I'll remind you that we expect each of these mega projects to have between 3% and 5% electrical content.

Moving to page seven we highlight the utility segment of the Americas business as we reported in 2022. This market accounted for approximately 15% of electrical Americas revenue and represents an even bigger percent to date.

We've historically viewed the utility segment is a stable, but slow growth business generally in the low single digits over.

Over the next decade utility distribution Capex will account for 60% of the total utility capex globally growing at a CAGR of 9%.

Over the 'twenty to 'twenty five period, we would expect an 11% CAGR.

The impact of sustainability initiatives across the globe have significantly boosted this number.

This includes grid modernization renewable energy electrification of everything enhance reliability and SAP.

Needs and government incentives are all contributing to this growth outlook.

And while the electrical needs of the world continue to increase.

Our utility customers are finding it challenging to maintained an increasingly aging grid infrastructure.

As a point of reference over 70% of U S transmission and distribution lines are over 25 years old.

We're naturally making capital investments to address the growth here and have already committed to new capacity in our three major product families transformers voltage regulators and line installation products.

It's worth highlighting that in this quarter, our Americas utility business backlog has increased 45% organic revenues grew 30% in the Americas and 20% in our global segment.

The graphics on page eight highlight <unk> unique position in the North American <unk> market, where we're primarily focused on distribution.

And given the significant changes taking place in this market.

<unk> need to integrate renewables underground for increased resiliency the increased demand for grid services, we cannot be more pleased but what we have to offer in this segment.

You can see from this slide that we have a broad position in the market. In fact, we have the industry's broadest portfolio of utility solutions.

This includes grid planning software design and engineering services, a complete offering of critical utility products automation software as well as extensive project management expertise.

We also offer a broad range of digitally enabled hardware.

<unk> edge controllers for overhead underground and four substations.

Lastly, our brightly solution for utility includes distribution planning software.

Distribution and substation automation as well as smart grid communications sensors and demand management.

So overall, we're well positioned given our substantial portfolio of hardware did.

Digitally enabled software and solutions.

And in the quarter, we secured a broad range of wins in the market, including hardware solutions for voltage regulators power distribution digital solutions for good planning.

And our software we call Syme at smart, meaning metering and also in utility services.

Moving to page nine we would like to highlight another well known trend.

<unk> and aerospace markets.

As you can see.

We expect double digit growth.

In each of the years between now and 2025 driven by the rebound in commercial OEM commercial aftermarket and increased defense spending.

The commercial market is expected to be very strong as Airbus and Boeing are both significantly increase in production volumes are not expected to materially increase production on their most important platforms.

For example, Airbus is expected to increase production on the <unk> hundred 20 from 45 to 50 per month currently to 75 per month by 2026, and Boeing is expected to increase production on the 737 from 31 per month currently to 50 per month in the 'twenty five 'twenty six.

Timeframe.

And global passenger air travel is expected to return to 2019 levels by the end of this year and grow at a <unk> percent CAGR between now and 2025.

We also expect to see increased defense spending driven by various global complex.

And governments allocating more dollars to our type of equipment to improve fleet readiness.

Our aerospace business is especially well positioned on key defense platforms.

Both those targeted for modernization and on new platforms that are being ramped up.

On Slide 10 in addition to the high volume single aisle growth that you hear so much about the next group of key platforms driving a new growth today and into the future are listed here.

These platforms are a good representation of important platforms ramping in the near term over the next five years and critical growth platforms for future decades.

In all cases, we have more content than ever on each of these aircraft.

And the future category, we're showing the win with the Bell on the V. 28 dollar program. The V 28, as a replacement for the Blackhawk helicopter and we have five times more content.

And are still bidding for more opportunities.

We put the KC 46, a and the F 35 in the next category aircraft that will be ramping in the near term and will contribute materially to our revenue growth beginning next year.

As you can see our content per aircraft here is two to three X the legacy platform.

And lastly, we're starting to see once again growth in the wide body market.

The long haul market has been especially weak during the Covid and post Covid period and is now beginning to pick up.

The important message here is that these programs.

As these programs ramp up.

We would expect to grow faster than our end markets given the increased content on each of these programs.

So between market recovery and increased content per platform. Our aerospace business is expected to see significant growth over the next five years or even longer.

Now I'll turn it over to Tom who will take us through the financial slides.

Thanks, Craig.

I'll start by providing a summary of our record Q2 results.

Organic growth continues to be strong.

Up 13% for the quarter, the six quarter in a row with double digit organic growth.

Operating profit and all time quarterly record.

21% and segment margins expanded 150 basis points to 21, 6% also an all time quarterly record.

We posted solid incremental margins of 33% up sequentially from 27% in Q1.

Adjusted EPS increased by 18% over the prior year to $2 21.

And all time quarterly record and well above the high end of our guidance range.

Looking at our first half results, we've had a very strong start to the year with organic growth up 14% segment margins up 130 basis points.

Incremental margin of 30% and adjusted EPS growth of 17%.

Finally last year, we explained that we were making a deliberate decision to invest in working capital to protect our customers and their orders with supply chain is improving we are now able to better optimize working capital. The result, together with strong earnings is a 600%.

The increase in free cash flow in the first half of the year to $900 million.

Moving on to the next chart, our electrical Americas business delivered another very strong quarter.

The Mega trends are having a favorable impact on our U S business.

We set all time quarterly records for sales operating profit and segment margin.

Beginning with the topline.

<unk> sales growth of 19% remains very strong.

Electrical Americas has generated double digit organic growth for six consecutive quarters.

With five of the quarters greater than 15%.

On a two year stack organic growth is up 35%.

In the quarter, there was broad based growth in nearly all end markets.

Was especially robust growth of 25% to 30% and datacenter utility industrial and commercial and institutional end markets.

Operating margin of 26, 4%.

It was up 320 basis points versus prior year benefiting from higher volumes and effective management of price cost.

On a rolling 12 month basis orders grew 7% with particular strength in data center and distributed.

Industrial and commercial and institutional end markets.

Book to Bill ratio remains above one.

We increased backlog by 30% year over year and sequentially 3%.

It's worth noting that we secured orders for two large data centers worth nearly $300 million, including content to support these customers AI growth projections.

Finally, our major project negotiations pipeline in Q2 was up more than 17% versus prior year and nearly 9% sequentially.

From especially strong growth in data center institutional government health care and transportation markets.

On a two year stack, our negotiation pipeline was up 65%.

Overall, electrical Americas continues to have a very strong year.

On page 13, you will find the results of our electrical global segment, which posted all time record sales of nearly $1 6 billion.

Organic growth was up 6%, which was partially offset by a small divestiture.

This represents a two year stack of 18% organic growth.

The growth was broad based driven by strength in utility.

Data center and distributed it.

And industrial end markets.

Operating margin of 18, 5% improved 20 basis points sequentially.

But it was down 40 basis points prior compared to prior year.

The year over year decline was mostly driven by unfavorable product mix, partially offset by effective management of price cost and higher volumes.

Orders were up 1% on a rolling 12 month basis.

With strength in utility and data center and end.

And markets.

Importantly book to Bill remained greater than one.

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

For Q2, we posted organic growth of 14% incremental margin of 38%.

And segment margin of 23, 4%, which was up 200 basis points over prior year.

On a rolling 12 month basis, our book to Bill for our electrical sector remains very strong at 1.2 and a record backlog grew 22%.

We remain very confident in our positioning for continued growth with strong margins and our overall electrical business.

The next slide highlights our aerospace segment with.

We posted an all time quarterly sales record and our Q2 operating profit record.

Organic growth was 14% for the quarter.

We posted double digit growth in five of the last six quarters in this segment.

Growth was driven by broad strength across all markets with particularly strong growth in commercial OEM and commercial aftermarket, which were up 21% and 30% respectively.

Operating margin was 22, 5% up 60 basis points over last year, primarily driven by higher volumes.

Growth in orders and backlog continue to be very strong.

On a rolling 12 month basis orders organically accelerated from up 21% in Q1 to up 26% in Q2, with especially strong growth in defense OEM and aftermarket for both commercial and defense.

Year over year backlog growth increased 26% in Q2 in line with growth in Q1.

On a rolling 12 month basis, our book to Bill for Aerospace remains very strong at one two times.

Moving on to our vehicle segment on page 15.

In Q2 organic growth was up 6%.

We saw particularly strong growth in North America light vehicle.

Pak.

He MA markets all up double digits operating margins came in at 15, 3%.

During the quarter, we delivered improvements in our manufacturing facilities, which contributed to sequential margin improvement of 80 basis points.

We continue to win new business tied to clean technology solutions, including multiple clean commercial valve actuation programs.

Additionally.

We've won over $60 million per year and program length extensions and volume increases with multiple Oems.

On page 16, we show results for our E mobility business.

We generated another quarter of strong growth.

Organic revenue was up 18%.

Margin improved 100 basis points versus prior year, mostly driven by higher volumes.

Overall, we remain very encouraged by the growth prospects of the E mobility segment.

So far in 2023, we have won new programs with more than $450 million of mature year revenue positioning us very well to exceed our 2025 target of $1 2 billion of revenues.

Through these wins, we continue to find opportunities to leverage expertise across all segments.

For example, we reached an agreement with a major OEM to supply power electronics control unit for an electrically heated catalyst to meet emissions regulations.

This win demonstrates eaton's ability to leverage capabilities.

Cross our entire portfolio.

Including core technology in both electrical and industrial businesses such.

Such as break tour power protection and Busman fuses.

We've also capitalized on our extensive vehicle expertise and added content in connectors from our Royal power acquisition.

Moving to page 17.

We show, our electrical and aerospace backlog updated through Q2.

As you can see we continue to build backlog with electrical stepping up to $9 1 billion, a sequential increase of 2%.

Electrical backlog is up about 110% since Q2 of 2021 and.

And over 200% higher than Q2 2020.

Aerospace backlog is holding steady at $3 billion.

This is a 30% increase since Q2 2021 and.

And over 100% higher than Q2 2020.

On a rolling 12 month basis book to Bill.

Was 1.2 for both electrical and aerospace.

With absolute orders remaining at high levels and record backlogs our book to Bill.

Over one times is yet again, a key metric that gives us confidence in our outlook into the quarters to come.

With all of the tailwind in our end markets. We think it is likely that we will have high levels of backlog going forward, which enhances our visibility over the planning horizon.

On the next page, we show our fiscal year organic growth and operating margin guidance.

We are raising our organic growth guidance for 2023, and both electrical Americas and.

And for the total company.

We now expect organic growth in electrical Americas, a 14% to 16%.

Up 300 basis points from our prior 11% to 13% guidance.

This represents a 600 basis point improvement from our starting 2023 guidance for the business.

In total we're raising our 2023 organic growth outlook to a midpoint of 11%.

Up from 10% mid point in our prior guidance.

Our strong end market growth forecast, expanding negotiations pipeline and building backlog provide tremendous visibility and confidence.

In this 2023 outlook.

For segment margins, we are increasing our total Eaton margin guidance range by 40 basis points from our prior range of 27%.

21, 1%.

To a new range of 21, 1% to 21, 5%.

This is a result of an improved outlook and electrical Americas, whereas we increased the range by 80 basis points on strong demand and continued strong operational execution.

The increased outlook now represents 110 basis point increase from the midpoint of our 2022, all time record margins in.

In summary at the halfway Mark we remain well positioned to deliver another very strong year of financial performance.

On the next page, we have additional guidance metrics for 2023 in Q3.

Following our strong first half performance and improved organic growth expectations for the year.

We're raising our full year EPS range to $8 65 to.

To $8 85.

At the midpoint the $8 75.

We have raised guidance by 35.

This represents 16% growth in adjusted EPS in 2023 over prior year.

We now expect currency translation to be roughly neutral in the remainder of our full year guidance remains unchanged.

For Q3, we're guiding organic growth of 9% to 11%.

Segment margins of between 22, and 22, 4%, representing a 100 basis point improvement at the midpoint versus prior year.

And adjusted EPS in the range of $2 27.

To $2 35.

15% increase versus prior year at the midpoint.

Now I'll hand, it back to Craig to wrap up the presentation.

Thanks, Tom now turning to page 20, as a reminder, last quarter, we raised our growth assumption for the utility market to strong double digit growth and we increased our residential market outlook.

That from declining.

We're now increasing our growth assumption for the commercial institutional and for data center markets to strong double digit growth.

In addition to stronger than anticipated demand for new projects existing buildings are being retrofitted with more electrical infrastructure as evs continue to increase their penetration in the market.

And data center demand continues to remain at very high levels, and we now expect to see double digit growth in this market as well.

The balance of our end markets continue to perform well and are tracking along our prior projections.

While the macroeconomic outlook remains choppy, we continue to expect growth in almost all of our markets.

I'll close with a summary on page 21.

As you can tell we're feeling good about how our markets are performing this year and we think will be strong for many more years to come.

In fact, the Mega trends that we've discussed for some time now.

Are expected to be even more impactful than we originally anticipated.

Our markets are strong, but we also had solid execution in the quarter and delivered another strong set of results that included a number of financial records.

And as we look to the back half of the year and into 2024, our increasing backlog provide great visibility on our growth outlook.

As noted we raised our guidance for growth in EPS for the second time in our largest business electrical Americas continues to post new records.

That will open it up for questions you may have.

Hey, Thanks, Craig for the Q&A today, please limit your opportunity to just one question and one follow up thanks in the ones for your cooperation with that I will turn it over to the operator gave you guys a instructions.

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My first question.

Our first question will come from the line of Joe Ritchie from Goldman Sachs. Please go ahead.

Hi, Thanks, good morning, and congrats everyone.

Thanks I appreciate it.

Yeah. So look my first question you guys called out a few of those large data center wins that you booked into orders this quarter.

Curious Craig maybe maybe just kind of help contextualize.

What that means for for Mike.

We have content or data center, and how thats going and how that shifting for your business.

Now that there is a lot of discussion around generative AI and what that means for you guys.

And I appreciate the question, Joe and I know, there's been a lot of discussion in and around AI and how it's going to impact the world and not only kind of datacenters, but I would tell you that the data center market as we've talked about on these calls for some time now has been strong and it's been strong for multiple years and.

Side that market has been growing at double digit and and I would tell you that.

Big wins that we booked during the quarter I would say most of that really has nothing to do with the the AI impact yet a lot of that is in the future.

Sort of a major data center players are still trying to sort out the way theyre going to configure their datacenters to deal with this.

AI environment and the increased energy intensity, so I'd say for US. It was just another very strong quarter of data center wins that really has not seen the impact yet of this whole emergence of generative AI.

Okay.

We're feeling great about that market and we think generative AI and its downstream implications are just going to keep that market strong for for a much longer period of time, and we're well positioned there.

That's great to hear and maybe maybe just a broader question around your backlog and the type of visibility that it's providing for you I think asti last year, whether you know why why wouldn't you be able to grow.

Double digits this year and now it looks like you are very well on track to do so.

China really kind of think through the implications of your backlog today and what that means for 2024 and beyond so any comments around that would be helpful.

Yes, I mean as you can imagine we're not in a position to provide guidance at this point for 2024.

Given the fact that it's so early in the year and we'll probably have an opportunity to do that towards the end of the year as we would normally do so but to your point I mean, the backlog continues to grow in the backlog as you saw on these reports as up multiples of where we've been historically, which gives us much better visibility.

Better visibility than we've ever had into the outlook for ups.

Coming 12 months to 18 months and so we're feeling very good about what 2024 is going to look like it will be another strong growth year for the company and we will certainly provide some guidance on what the year looks like.

As a part of our normal process and timing for giving the outlook, but the backlog is certainly gives us a lot of.

Courage with respect to what we think the year is going to look like given the growth and where it is relative to where it has been historically.

Maybe I can just taking back onto that a little bit.

We've seen a lot of focus on order intake and certainly that's a that's a very important metric to look at.

But it's important that you look at it in the context of.

Historically high backlog that we have together with a protracted delivery times and lead times that we have.

As Craig alluded to were nearly three times, our historical backlog coverage.

And we went through modeling scenarios, where you look at various order intake declines.

And combine that with robust organic growth, we're confident that we will not hit our historical backlog coverage.

Until two to three years out.

<unk>.

We're we're very bullish on the.

Currency that the backlog gives us.

It's real.

Really does mute the order intake and order decline a little bit.

Super helpful. Thank you.

Thank you. Your next question is Jeff Parker Lewinsky from Morgan Stanley . Please go ahead.

Hi, good morning, guys.

Good morning, Hey, Marni.

So I feel like you guys have done a really great job of kind of scoring some of the some of the.

Background announcements, whether it's the mega projects or I guess slide five.

Some of the stuff from IRI.

Maybe just.

Give us an update on where we are and looking through that I would imagine the vast majority of that is not really in the order book you talked about really high customer interaction.

Or kind of the front log I forget what the exact term was but yes.

Where are we through kind of those orders are initial discussions yet.

No appreciate the commentary Josh and this is I think and really an important message with respect to <unk>.

Some of these big government stimulus spendings or whether it's the government stimulus spending and its impact or the mega projects that we're talking about we do think one of the key messages that we think it's important to kind of get your head around is the fact that most of this impact.

Has not showed up at this point in our order book and it certainly has not shown up in our revenues we did talk about.

Some of the infrastructure projects, some $2 billion of projects that we have visibility to.

We've won.

Yes.

Visibility of $1 billion of that have been out to quote we want about half of that but that is a really small piece of the total dollars that will ultimately be.

B spend tied to some of these.

Infrastructure and other Mega projects that we talked about and so it is very early innings for us with respect to the.

The forward looking programs that we've shared with you on these calls and it's what gives us confidence that what we're dealing with here is a long term.

Structural shift.

In our business with respect to the underlying growth rates.

And we will certainly continue to report out as we learn more and we will do this on a quarterly basis, but.

Really encouraged by the fact that.

Most of the goodness that we're talking about is sell a future.

Got it that's helpful. And then maybe just a quick follow up.

<unk> orders in backlog have kind of have their own cadence right now with.

With what you guys are going through and just explained.

Are the shorter cycle parts of electrical seeing kind of that.

<unk> time normalization show up in orders I think some of your peers have seen that obviously you guys are longer cycle and things like switchgear, maybe don't fall into it but any part of that where youre seeing either like a destock or a lead time normalization show up.

We're certainly not seeing any destocking across the business, but there but in fact to your point around the short cycle businesses, whether that's <unk> or what's happening in the OEM channel or distributed.

Those would be three shorter cycle markets that we clearly have seen a slowdown in orders.

Overall in lead times as a result of that have come in quite nicely in those three end markets, obviously being more than offset by strength in the other much larger segments that we serve but in those three short cycle pieces of the business, we have clearly seen.

Lead times come in we've seen orders moderate.

And those three end markets.

Helpful color as always lets walk us okay. Thank you. Thank you.

Thank you. The next question is from the line of Chris Snyder from UBS. Please go ahead.

Thank you and I want to follow up on <unk> question, specifically around the inflation reduction Act.

It sounds like not much orders yen on the back of the IRI.

Is it reasonable to think that orders there could start coming through in 2024, and when we look across all the company's various business lines.

<unk> do you think will benefit most from the IRS specifically thank you.

Yes, I do think and in terms of the timing.

For sure as we think about 2024, we would expect to start to see.

Those projects be clarified negotiations and some orders begin to show up in 2024.

Maybe some early shipments at the best case at the end of the year, but as you know these projects tend to be much longer term and a lot of these dollars are going to support mega projects in Mega projects, just by definition tend to be much longer cycle than the typical stock and flow business that we have and so we.

We would expect to start to see that begin to show up next year now that Youre planning on which companies would benefit the most I am not sure.

Clearly.

Which verticals within solid verticals within the company.

Officers.

I'm sorry.

With vertical sorry, which.

Accordingly, the company yes.

I would say clearly as we think about the various verticals and we kind of lay that out in our presentation on slide four and this was I. Appreciate your commentary because what we've really tried to do on slide four in our Powerpoint is to give you a sense for the key mega trends and how they impact the various verticals that.

We participate in so if you look at infrastructure spending.

The great news for US is it is very broad plays across the board and impacts most of our segments, but I'd say it certainly will show up most materially I would say in the industrial segment. If you think about what's going on today in the investments in new EV factories.

Battery factories, what's going on in the chemical space.

A lot of it will show up in what we call industrial <unk>.

Industrial facilities, but it really does.

Cut across pretty broadly.

And most of the end markets in which we participate.

No absolutely all very much appreciate that then maybe.

On that industrial comment.

Everyone I think has kind of seen the massive.

Manufacturing starts.

Leading to higher activity put in place.

How should we think about.

The lag.

Which that flows to your business from the start so when it starts generating revenue for Ian.

<unk> a long cycle projects, just wondering kind of how long.

Okay single facility kind of generate regulatory thank you.

Yes, no I appreciate that question as you can imagine as we've seen a significant transition to these mega projects. We spent a fair amount of time internally trying to answer the same question from from an announcement.

Two on negotiation of negotiation to in order in order to a shipment.

And it varies widely depending upon the type of project you are referring to.

And I would say it could be as short as.

Six months it could be as long as three years and when you think about on a lot of these mega projects. They do tend to be longer in nature. So they would tend to be on the longer end of that cycle just by virtue of the size of these projects.

And I think the exciting thing about it is as we said in the prepared remarks.

We see each quarter like a $100 billion coming coming in and then it is going to give us a nice cadence going forward for quite some time.

And just to come back to the inflation reduction activity. We've put that we put that particular act and for illustrative purposes, but just to draw. Your attention. We've also got the infrastructure Act that the chips Act and in Europe .

<unk> recovery plan. So when you put all this together, there's just a ton of government stimulus support in key parts of our business.

Thank you.

Thank you. Our next question is from Colin.

Blaise from Deutsche Bank. Please go ahead.

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

And maybe just on free cash flow notice you guys raised the EPS guidance by a pretty considerable amount, but free cash flow remain consistent can you just talk about the drivers of that and I'm sure part of that has to do with your working capital plans for the second half. Thanks.

Yes, that's a great question Nicole.

We were up almost $800 million.

The majority of that around let's call it $550 million was with working capital optimization and.

250 was was from earnings.

We debated do we do we take up the guidance on free cash flow and.

We thought because it kind of fits within the range right now we'd give it another quarter.

We're happy the way, it's going obviously up 600% is something to be happy about.

We've improved improved cash conversion cycle by nine days.

That said, we still have a lot of work to do and.

We want to get our free cash flow margin up even even higher than that.

Just to add you know as we grow as well, where we're obviously putting more cash into receivables and so that's great, but we're having to fund as well as the increase working capital as a result of the higher growth.

Got it makes sense and then on the non resi vertical obviously like ongoing questions about the strength. There are there any patches withstand the haul nonresident complex, where you guys are seeing any signs of slowing activity.

Yes, no I appreciate the question and once again, if you just think about it in the context of the the end market segments that we've laid out on slide four.

Most of what we do is non <unk>.

In the context of your question specifically as we mentioned we have seen a slowdown in.

What we called distributed.

And we have seen a little bit of a slowdown in what we call. The M. OEM segment of the market as well.

Fortunately for US those are those tend to be smaller segments of the market and the growth in the other verticals is clearly.

More than offsetting that weakness, but we haven't seen a little bit of a slowdown in those other two verticals as well.

Thanks Scott.

If you look at the first half of the year, our organic growth I mean, we're up in every single end market some of them, obviously significant more than others and including record.

Rajiv we took our numbers if you recall from the prior quarter, Nicole we actually took our outlook for the year up.

<unk>, where we originally thought that that market would have been down and we took the market up.

To the point, where <unk> is doing much better than quite frankly, we anticipated as we began the year absolutely. An OEM is also is also up first half of the year.

Excellent Thanks, guys I'll pass it on.

Thank you.

Thank you. The next question is from David Raso from Evercore ISI. Please go ahead.

Hi, Thank you very much I apologize if I missed this earlier.

The electrical Americas, the organic growth rate the first quarter 'twenty 219 back half of the year, we're looking for about 10 and a half as per the guide what percent of that growth has been pricing like say or even the assumption for the second half whatever you're willing to to discuss and then just a sense of the pricing that's in the backlog.

I'm, just trying to get a sense of obviously the backlog a little bit more of the mega trend than the smaller shorter cycle projects and businesses. So I'm just trying to get a sense of that pricing dynamic relative to the overall organic sales growth.

Yeah. Appreciate the question, Dave and I would say that.

One of the reasons why we are forecasting a slowdown.

<unk> growth.

Between the first half and second half is really the strong comparable if you look at the back half of the year, we were up from 19%.

And a lot of that quite frankly was price and we're getting a lot less contributions for price in the back half of this year. When you take a look at it actually on a two year stack the growth.

Essentially is essentially the same it's about 30%.

Versus 2021.

Essentially normalizing for the really strong back half a lot of which was priced in terms of price in the backlog I would say that as you will likely recall one of the things that we did was we actually repriced our backlog.

And much of it and so if you think about the underlying performance today, what youre seeing in the electrical Americas business and we're shipping a lot of that out of backlog because the backlog is so long as it's essentially we don't expect backlog to have a material impact on the underlying performance of the business as.

We ship it.

Just trying to maybe get a little more detail on that the back half of the year or where it's wanted even discuss <unk> what are the volumes and the guide for the back half of the year and then just trying to think about.

Essentially supply chain, improving obviously some of these demand drivers shouldnt fade away that quickly versus some of the shorter cycle businesses are turning down I'm, just trying to balance volume and price exiting the year sure Sharon I know, you're really trying to get at the split between price and volume that we've told you before on these calls we're not going to provide.

And so what I would just tell you is that we are getting much greater contributions from volume than we are from price in the second half of the year.

Alright I appreciate it. Thank you so alright. Thank you Dave appreciate it yes, I mean keep in the context of the prepared remarks, we've raised organic growth in electrical Americas 600 basis points since the original guide and in our fiscal year Guide is 15%, which is which is fairly sporty.

Obviously, we can all do the math on the implied for the back half, but but I think overall when you step back and look at it pretty pretty aggressive.

And volumes are growing in volume growing through love to think we could get 15% price but.

We can.

Thank you.

Yes.

Thank you. The next question is from Julian Mitchell from Barclays. Please go ahead.

Hi, Thanks, good morning.

Just wanted to start with the electrical global business.

You mentioned some of the very strong markets and.

Maybe some of those that are a little bit weaker.

How long are you expecting that weakness to last and when we look at the profitability in electrical global you've got that nice sort of margin turnaround in the back half.

Which I think is driving an acceleration in year on year profit growth to sort of close to double digit levels in the second half maybe just help us understand the main drivers of that pickup.

I appreciate the question Julian I would say that on a relative basis, certainly electrical global is not growing at the same rate as we're growing in the Americas, but I wouldn't call those markets weak.

They'll say if those markets are seeing.

Pretty attractive growth.

With respect to the first half versus the second half as we mentioned to you and some of the outbound commentary and Toms we did have a particular mix challenge in our electrical Europe business in Q2, and so those margins were held back due to some very specific mix related issues in that business and base.

Upon.

The visibility that we have into the second half we do believe that.

Do not repeat and the business gets back to a more normal level of profitability in the second half of the year, we have pretty high confidence that thats going to take place a couple a couple of other areas that we're counting on in addition to mix in the back half as higher volume in and being better in terms of our productivity in terms of.

Manufacturing.

That's really helpful. Thank you and then.

I'm not sure you'll sort of hazard.

But I just thought I'd check because it was in focus.

One of your electrical peers. This morning, but when do you think about your backlog to revenue coverage total company and it's gone from sort of 20% towards 50 plus percent in the last three years at Eaton.

Some of your peers, who also have good sort of megatrend exposure theyre talking about that backlog normalizing maybe to 30% of sales I'm not asking you to put a fine point on your view of that for Eaton, but maybe just a sense of the pace at which that backlog to sales may normalize I guess the experience of a lot of other <unk>.

<unk> is once the backlog piece.

It doesn't seem to stay there very long it sort of starts to move down as customers normalized lead times.

And I appreciate the question Julian and in many ways, we're talking about the unknowable right given the in terms of the uncertainty around what the future looks like I would say, though if you think about eaton's business and Thats why we thought it was so important to go back to slide four in our Powerpoint presentation to talk about.

The breadth of our portfolio and how it's impacted by these various megatrends and I would tell you that we arent the same as other electrical companies and some of them are exposed to some but not others and I would just say what makes Eaton unique here is really the breadth.

Of our portfolio in the end markets that we serve and how each of these markets are benefiting from these megatrends and so yes.

I'm not sure what particular.

Electrical period, referring to but I would say that.

We would.

It would likely have much broader exposure to.

A number of these trends and other electrical companies yeah.

And then just to add to that.

We had it included in the prepared remarks, but I think it bears repeating.

Backlog in the quarter is up 220% since the end of 19 and with all the Mega projects as stimulus spend the secular trends that Craig just mentioned.

We don't have a lot of discussion about the backlog going down.

And if you think I mean are there certain electrical companies for example, who would play heavily inside the factories.

<unk>.

Who maybe don't play on the infrastructure side.

We are massive infrastructure player.

And so I just wanted to just point that out in terms of as you think about Eaton versus other companies you can't really necessarily draw a straight line correlation between us and them.

We saw obviously, you've seen our peers announce and Theres a very difference in growth.

In a number of the peers this quarter to a function of the fact that.

We play in very different.

End markets in some of our other electrical peers.

We also have that nice mix of going through the channel as well as these big Mega projects with direct to the customer. So we've got this nice balance as well in that area and the point that Tom's picking up on that I think is a really important one is this notion around if you take a look at what's happening with a number of our distributors off.

Sometimes you'll want to draw a straight line between what Youre seeing in the distribution channel to what we're experiencing in our own business and to Toms point. These big Mega projects that we're talking about a lot of these big infrastructure related investments. These are direct projects that are not flowing through distribution. So you also will see.

Perhaps a decoupling between how we could perform versus some of the electrical distributors as well.

That's very helpful. Thank you.

Thank you.

The next question is from the line of Steve Volkmann from Jefferies. Please go ahead.

Oh, great. Thank you for fitting me in I wanted to actually switch to aerospace if I could.

Any comments there.

Alright.

Appreciate your comments there on sort of the medium term outlook looks very robust I am curious how you think the real ramp that you outlined in OA.

It will impact margin mix over the next sort of three to five years.

Yeah and I appreciate the question and what's your kind of poking at a little bit understandably is the fact that OE margins tend to be.

Well below aftermarket margins, but the good news here is we are finding that both OE and aftermarket which is really tied to revenue passenger.

Kilometers of revenue passenger miles both of those pieces of the business are essentially ramping and incurred.

Third what we reported in our numbers, we actually saw even more growth in aftermarket in the quarter than we did on the OE side and so we don't we don't anticipate a negative mix impact from this ramp on the OE side as we look.

To the forecast for the next number of years, but to your point. It is certainly something to watch if you ever get in many way inverted there in an OE is growing in aftermarket isn't it would certainly have a negative impact on margins, but that's not our anticipation yes, just to just to remind you with a cup.

Our numbers here, our trailing 12 months, our rolling 12 month is an aftermarket is 25% and thats really 25% on both defense and commercial.

In OE and aftermarket with the important point.

Great.

Super Helpful. And then just one quick longer term question, Craig I mean, given all of these trends across all your businesses.

We're obviously going to have a period of very strong growth here.

I just don't think we have compounded at these types of levels over multiple years in the past. So how do you think about capacity here.

Because the rates of growth seem like they are really kind of inflicting for longer term.

No first of all Youre absolutely right. This is a very different electrical industry a very different.

And then the one that perhaps your grandfather and grandmothers do but.

And so as a result of that we are making fairly sizeable investments in capital equipment.

We talked about it in the last earnings call some of the big investments that we're making in the utility space.

Mentioned in my outbound commentary, we've made investments in transformer capacity voltage regulators and line installation products. These are essentially capital investments that.

Our ongoing right now we've made some fairly sizable investments in our circuit breaker capacity.

Over the last couple of years and so we are having to invest more.

Capital equipment, but I would say even in the big scheme of things the the level of investment is maybe going to tick up.

Half a percent more of sales maybe another percent of sales, but very well manageable in the context of the overall growth of the company.

Yes. The important thing is the focus is really there were just recently with our board and our strategy session and a big part of that was the capacity related to meeting this hyper growth. So.

We're very hungry Theres a lot of food on the table, we're very hungry.

Great well with that I'll, let you go off to lunch. Thank you.

Sure.

Yes.

Thank you. The next question is from Nigel Coe from Wolfe Research. Please go ahead.

Thanks, Good I guess its good afternoon now.

Sounds good to me.

So we've cut a lot of ground so back to electrical.

You mentioned I think Craig Retrofits, I think retrofit activity, which I think was in relation to C&I end markets and in particular and I know you've talked about this in the past increasing load content and I think it was in relation to charging specifically, but maybe just talk about what activity you're seeing within retrofits.

How do you think that develops over the next.

Yes.

Yes, no certainly appreciate the question we do reduce.

You think about today, why we are feeling incrementally more positive around what's happening today in commercial and institutional and a bit of this is simply what we're all experiencing around.

The growth in electrification and the growth in EV charging infrastructure in the investments that are being put in to support.

The growth in the demand for electricity on the grid and so.

In terms of quantifying the impact of that versus the impact of the new build I can say, we're not we're probably today not smart enough to do that with any degree of precision.

I can tell you that it is an important piece of what we're seeing in terms of growth.

It will contribute to growth.

How do you.

Quantify the impact of retrofits versus the new build stuff.

We're trying to work through some of those questions and answers but.

Things are moving so quickly right now that quite frankly, we haven't had a chance to really put pen to paper and really try to figure it out.

Yeah.

But we are going to see to your point, we're going to see it.

In both new buildings, and we're going to see a lot of retrofits modifications, whether it's in a home to put in electrical infrastructure and residential and whether it's in commercial buildings, our offices to support EV charging to support. The addition of <unk>.

Solar.

The additions of battery storage all.

All of these.

Investments that are being made to improve your electrical capacity resiliency.

A lot of that will go into existing buildings.

But.

You're a little smarter on this topic and get you a little better answer than that but.

Certainly an important one for us, but one we're still trying to quantify.

No I agree and then on data centers I just wanted to take the other side of the of.

Sort of the.

Are you seeing any signs of weakness it doesn't look like it but are there any signs of weakness out there I'm thinking maybe China, perhaps might be might be but itself.

And then when you think about general with AI and GPU.

<unk>.

Does this increase the revenue per megawatts or does this increase the total megawatts.

And in the markets and any thoughts there would be helpful.

Yes.

To your first question are we seeing any signs of weakness I would say not really I mean, whether it's geographically or whether it's.

Not just either the.

The hyperscale or as we're seeing it Colo we're seeing on Prem.

Seeing it around the world globally, we're seeing strength in the data center market and then to the point around once you get back to this important question around.

<unk> impact on data centers and the way, they're going to be configured certainly we understand that they're going to need more power. The power density. These racks is going to go up but we still don't know I think it's early days in it.

One that we know we owe you an answer we ourselves an answer on that one as well as we continue to talk to some of the big data centers.

<unk> around how theyre going to be configuring. These data centers and how they are going to change, but I would say we're still in the early innings and we don't yet have all the answers to how theyre going to be reconfigured.

Yes, just a little bit more on Craig's point in term and your question on slowing.

Each part of the world for the first half of the year, our data centers, including Hyperscale grew double digits. It's just a matter whether it grew mid double digits or in the twenty's or in the <unk>, we're seeing robust growth across the board.

Okay, that's great detail thanks, a lot.

Thank you and the next question is from Steve Tusa from Jpmorgan. Please go ahead.

Thanks for fitting me in.

Yes, no problem.

When you said greater contributions from volume and price in the second half of the year. What exactly did you mean by that did you mean that you just expect this skewed to be more towards volume in the second half versus the first half or maybe just a little bit more color on.

What you meant by that.

That's primarily what we're referring to Steve because if you think about most of the big price increases that we put through in our business most of those showed up.

In the second half of last year, we got some modest price increases this year, but most of the big price increases that we got we got in the second half of last year. So they are really baked into the comparable.

For 2020.

2022, and we're anniversarying those big increases right now and so just on the relative contributions to growth.

On a relative basis, we're going to be giving it more from volume and we offer price in the second half of the year.

Okay.

That's helpful and then just on the electrical <unk>.

<unk> business I mean.

Should we think about this this margin youre doing.

Especially here in the in.

In the second quarter here I mean is that like I know you havent going down sequentially in the second half I guess a little bit.

Is that the jumping off point for next year, how sustainable is that and any any moving parts. There that you want to call out as we.

Tinker with our models for next year.

Yes, and I would say.

Our team continues to execute well, we certainly had a little bit of perhaps favorable mix in Q2, and maybe thats, what youre seeing in terms of the relative change between Q2 and the back half of the year, but theres nothing Theres no unusuals in those numbers.

Street operating performance.

Execution by our team and yet the simple answer is yes that should be the jumping off point as we think about what this business should look like into 2024 and beyond and obviously, we're going to have volume growth.

And so the business is performing well and we would expect it to continue to perform well.

Yeah, and Steve I would just add we know what the implied save for the segment margins were hoping we'd do better than the implied.

Right, but is that the jumping off point for next year.

Is that a sustainable number that you can improve on next year.

Yes, yes.

Okay great.

Great. Thank you.

Thank you. The next question is from Deane Dray from RBC capital markets. Please go ahead. Thank you good day everyone.

I D.

Covered a lot of ground, but I did hear a couple of references to unknowable.

Choppy macro so it kind of begs the question about the initial assumption for this year, so long ago themes.

A mild recession is.

Any clarity in terms of your assumption there is that.

It seems to be skewing much higher.

Yeah, No I mean, I think to your point Deane, we like so many others had anticipated a mild recession this year.

And our thinking around recession continues to be pushed out.

As it does for I think most of the economic economists in the world and so at this juncture I mean, we're feeling pretty good about the year one of the reasons why we're taking up our guidance and I think the bigger message becomes in the event of a mild recession and very much consistent with what we said originally even in the event of a mild recession given the mega.

Trends in the stimulus spending and the strength of our end markets.

We don't believe it's going to have a material impact at all on Eaton's growth. That's what we said at the beginning of the year and Thats, what we continue to believe.

And Dean I'll take you back to an earlier response.

So we've modeled even even with <unk>.

Downturns in order intake if.

If you use that for a proxy in terms of a mild recession.

We are very confident that we can power through that.

Given our backlog and the megatrend.

Yes that seems clear and then just a very quick follow up on Steve Volkmann question about capacity.

When we were all together in New York, a while back we talked about.

Shortages of smart switch gear and Transformers is that in any way holding back the utility demand at least that I'm not sure you'll be able to supply and how does that change.

Yeah, No I would say as an industry things are better.

Say, we are through the industry and some of the supply chain Chokepoints are materially better today than they were let's say this time last year, but we're clearly not out of the woods and there are certainly certain markets and verticals that are still very much challenge with respect to lead times and the utility market is one of those is.

We mentioned on these calls before that probably the longest lead time device, we probably have to any of the company as a transformer that goes into the utility segment and so very much a function of which end market in which product you're talking about in general things are getting better, but they're each lead time to sell.

Extended we're still not back to let's call it the pre.

2019 levels of lead times, we think our lead times are competitive with the.

Our peers in the marketplace.

And but yet we're still not back to where we were in 2019 and we sell our extended in certain product lines.

Thank you.

Okay. Thank you.

Thank you and our next question is from Alright Clancy from Mizuho. Please go ahead.

Hey, good afternoon.

Wanted to follow up on that utility comment there. So you gave the growth framework to 25, I think you said, 11% growth how should we think about eaton's relative growth in the context of wallet share per opportunity or any share shifts from some of these capacity additions.

Yes.

Hey, <unk> relative performance.

Thank you.

With respect to our peers because.

As we talked about before and it's one of the reasons why we included that chart is that.

All of our peers arent the same we play very broadly across the utility and segment as I said in my commentary. We think we are the broadest player we have a broader portfolio of solutions and the utility market than any of our competitors and so we think we are very well positioned to to grow.

<unk>.

At market to grow and perhaps grow faster than the market we are today.

Are most of our peers capacity constraint and so I do think that the real limiter on growth in terms of the utility market. These days is really going to be our ability to add capacity to deal with the growth that we're seeing and that is the one segment where lead times are still quite extended and until we get this new capacity.

<unk> online, it's going to be very difficult for us to grow at a much faster rate than the overall market.

Okay, Great and then just one follow up and I apologize if I missed it but on the project funnel you guys have been giving that that rate of growth year over year and sequentially. Just just curious how that fared in the quarter.

Yes.

Negotiated the major projects.

It was up.

17% year over year, and 65% on a two year stack.

Great. Thanks, a lot best of luck. Thank.

Thank you. Thank you.

Thank you. The next question is from Joe O'dea from Wells Fargo. Please go ahead.

Hi, Thanks for taking my questions.

Now I'll ask them, both together because they're kind of related ones one lead time related once backlog.

But any additional color if you think about some of the biggest kind of.

Revenue product categories, just some perspective on.

Where lead times are where they were at their worst kind of what you need to get back to for normalization and then.

Related to that and I think all the tailwind that youre discussing on sort of the mega projects support out there the stimulus support out there.

I think Tom your comment was you know it might take two to three years for backlog to get back to normal, but I guess, even as these lead times correct.

It's back up back to normal you don't really the expectation or you think it's going to.

Take care.

Take quite some time before we really start to see any kind of notable step down in these levels.

And I'd say, maybe just kind of addressing kind of the first part of your question, which is kind of on lead times.

As I mentioned.

So the prior on the prior question lead times are in fact still extended.

They have improved somewhat.

Certainly more so in some of the shorter cycle businesses, we talked about.

E M OEM.

Distributed.

For the Big project related stuff.

A lot of those lead times today are still fairly well extended for utility markets. They probably haven't improved much at all so it really does vary widely depending upon which vertical you're referring to.

And two once again, where we.

Are sold out.

We don't have a lot of excess capacity today.

To really deal with what has clearly been a much faster acceleration and growth than what we originally did in some of these big industrial center kind of product lines and businesses.

And until until capacity comes online we would not anticipate that these lead times.

Get materially better.

And the same thing I would say would be true backlog, they're obviously to your point very much interrelated until you can release.

Reduce lead times.

Borrowing.

Significant slowdown in the markets, which we don't anticipate you're really not going to deal with.

Reducing your backlog either and so we do think that.

Under a normal planning horizon the way, we're thinking about it backlogs stay elevated for some period of time I think what Tom was trying to do or simply to try to provide a little comfort around that even if markets slow down.

We should continue to be able to pose very attractive revenue growth because we can simply eat backlog.

That's right.

That's right the two to three years that I quoted.

Is it a turndown situation and is arguably conservative.

Got it makes sense, thanks a lot.

Thank you.

Okay.

At this time there are no further questions. Thank you. Please continue.

Hey, Thanks, guys as always chip and I will be available to address any of your guys fallout <unk>. Thanks for joining us today have a great day.

Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Keybanc Conference and you may now disconnect.

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Ladies and gentlemen, thank you for standing by and welcome to the Eaton second quarter 2023 conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time should you require assistance during the conference.

Press Star, then zero and an operator will assist you offline and as a reminder, your conference is being recorded I would now like to turn the conference over to your host Yan Jin Senior Vice President of Investor Relations. Please go ahead.

Hey, good morning, guys. Thank you all for joining us for today's <unk> second quarter earnings call with me today are Craig Arnold, our chairman and CEO and Tom Okray, Executive Vice President and Chief Financial Officer. Our agenda. Today includes the opening remarks by Craig then he will turn it over to Tom who will highlight the company.

Performance in the second quarter as we have done our past calls we'll be taking questions at the end of a craigs closing commentary.

Price release, and the presentation. We'll go through today have been posted on our website. This presentation, including adjusted earning per share adjusted free cash flow and all the non-GAAP measures. The recalls out in the appendix a webcast of this call is accessible our life site.

We'll be available for replay I would like to remind you that our comments today will including statements related to expected future results of the company and are therefore forward looking statements. Our actual results may differ materially from our forecasted projection due to a wide range of risks and uncertainties that are described.

Our earnings release, and a presentation with that I will turn it over to Craig. Thanks, Tien and today, we're pleased to Mark the end of the first quarter with one of our strongest performances ever.

Performance that strengthens our conviction about our long term growth prospects are.

Our teams continue to deliver on our commitments propelled by both strong markets and good execution.

We will begin with some of the highlights of the quarter on page three.

Well understood at this point Mega trends Reindustrialization infrastructure spending are continuing to expand our markets driving our revenue orders and backlogs.

We posted another quarter of record financial performance with strong revenue margins and earnings growth.

And we executed well.

And our first half performance along with our growing backlog is what allows us to once again raise our full year guidance.

We're raising our 2023 guidance for organic growth margins and adjusted EPS.

Our EPS growth at the midpoint of our guidance is now up 16%.

Tom will walk you through the details shortly but from my perspective, the highlights of the quarter really are growing backlogs up 22% on electrical and 26% and aerospace.

The book to Bill ratio of one two for both electrical and aerospace. We also generated strong operating and free cash flow $1 2 billion and $900 million of more than 200% at 600% respectively.

Free cash flow in the first half of the year is almost $800 million above prior year. So we are on track to deliver our full year guidance. Despite the higher growth and higher receivable balances overall, we're pleased with our results and well positioned for the second half.

Moving to slide four we wanted to provide a simple framework that summarizes how we think about key growth drivers across our businesses.

The important Megatrends are listed here on the left lead markets and our segments are listed across the top of the page.

At the intersection is where we see these trends having a material impact on our growth rate of our end markets.

And without getting into a lot of detail. The important message is that this long list of Mega projects as impacting many of Eaton <unk> markets.

We intend to do during the course of our quarterly earnings call today, and really into the future. It's early to talk about these trends and how they impact our end markets.

Today, we will spend a few minutes on infrastructure spending and the inflation reduction Act.

Reindustrialization in an update on Mega projects as well as a look at EBIT position and the utility and aerospace markets.

We're highlighting the inflation protection act since its.

Its considerable upside to the initial estimates of future government spending and on Mega projects, because they continue to grow dramatically.

We put the pick the utility segment is quickly becoming one of our largest markets.

Approximately 15% of electrical Americas sales last year and is running well ahead of that rate this year.

We received also some extensive questions from investors about our position in this market.

Lastly, we'll highlight our aerospace business through the double digit growth outlook ramping defense and commercial platforms, including a substantial new win on the bill.

280 valor platform.

Moving to slide five we're showing an updated look at expected spending tied to the inflation reduction Act.

Most of the spending is focused on improving U S infrastructure.

And as you can see the estimates have increased significantly.

At the time of passage estimates on the cost impact, including credits and incentives was 271 billion.

The legislation was recently re scored and government spending is now expected to be 663 billion up nearly two five times.

Due to really what is a non cap program.

Importantly, these tax credits because they are uncapped I expect it to continue to grow.

These dollars are naturally a strong catalyst for interrupt infrastructure spending much of it targeted at industries, where Eaton will be a significant benefactor.

The implementation of the IRR is in the very early stages, and we think will provide significant tailwind over the next 10 years.

Very little of this impact is currently in our order book and none of it has impacted revenue yet.

On page six we have an updated chart showing the continued growth of Mega projects in North America.

We introduced this chart last quarter and Youll recall that we included announced projects that are greater than $1 billion in this category.

The value of announced Mega projects has increased by $116 billion or.

Or 20% between March and June .

So the momentum continues and we would expect the category to continue to grow at well above historical trends.

We've seen recent announcements for EV semiconductor plants, a new battery plants, so really across the board and a few examples of some of the other major projects include 174 that $1 billion of downstream oil and gas or chemical $33 billion of LNG export terminals and 64 billion.

Power generation and renewable energy projects.

Just another confirming data point.

The Dodge data for U S. Industrial projects continues to expand at a record pace with 12 month manufacturing construction starts up 72% on a 12 month basis on a rolling 12 month basis and up 84%. If you include LNG activity.

And as a reminder, only 25% of these mega projects have started so we're just at the beginning of this reindustrialization megatrend.

Lastly, I'll remind you that we expect each of these mega projects to have between 3% and 5% electrical content.

Moving to page seven we highlight the utility segment of the Americas business as we reported in 2022. This market accounted for approximately 15% of electrical Americas revenue and represents an even bigger percent to date.

We've historically viewed the utility segment is a stable, but slow growth business generally in the low single digits.

Over the next decade utility distribution Capex will account for 60% the total utility capex globally growing at a CAGR of 9%.

Over the 'twenty to 'twenty five period, we would expect an 11% CAGR.

The impact of sustainability initiatives across the globe have significantly boosted this number.

This includes grid modernization renewable energy electrification of everything enhance reliability and safety needs and government incentives are all contributing to this growth outlook.

And while the electrical needs of the world continue to increase.

Our utility customers are finding it challenging to maintain an increasingly aging grid infrastructure.

As a point of reference over 70% of U S transmission and distribution lines are over 25 years old.

We're naturally making capital investments to address the growth here and have already committed to new capacity in our three major product families transformers voltage regulators and line installation products.

It's worth highlighting that in this quarter, our Americas utility business backlog has increased 45% organic revenues grew 30% in the Americas and 20% in our global segment.

The graphics on page eight highlight <unk> unique position in the North American <unk> market, where we're primarily focused on distribution.

And given the significant changes taking place in this market.

<unk> need to integrate renewables under grounding for increased resiliency the increased demand for grid services, we could not be more pleased but what we have to offer in this segment.

You can see from this slide that we have a broad position in the market. In fact, we have the industry's broadest portfolio of utility solutions.

This includes grid planning software design and engineering services, a complete offering of critical utility products automation software as well as extensive project management expertise.

We also offer a broad range of digitally enabled hardware.

<unk> edge controllers for overhead underground and four substations.

Lastly, our brightly solution for utility includes distribution planning software.

Distribution and substation automation as well as smart grid communications sensors and demand management.

So overall, we're well positioned given our substantial portfolio of hardware.

Digitally enabled software and solutions.

And in the quarter, we support a broad range of wins in the market, including hardware solutions for voltage regulators power distribution digital solutions for grid planning.

And our software we call Syme at smart, meaning metering and also in utility services.

Moving to page nine we would like to highlight another well known trend.

<unk> and aerospace markets.

As you can see.

We expect double digit growth in.

Each of the years between now and 2025 driven by the rebound in commercial OEM commercial aftermarket and increased defense spending.

The commercial market is expected to be very strong as Airbus and Boeing are both significantly increasing production volumes are expected to materially increase production on their most important platforms.

For example, Airbus is expected to increase production on the <unk> hundred 20 from 45% to 50 per month currently to 75 per month by 2026.

Boeing is expected to increase production on the 737 from 31 per month currently to 50 per month in the 25 to 26 timeframe.

And global passenger air travel is expected to return to 2019 levels by the end of this year and grow at a <unk> percent CAGR between now and 2025.

We also expect to see increased defense spending driven by various global conflicts.

And governments allocating more dollars to our type of equipment to improve fleet readiness.

Our aerospace business is especially well positioned on key defense platforms, both those targeted for modernization and on new platforms that are being ramped up.

On Slide 10 in addition to the high volume single aisle growth at year. So much about the next group of key platforms driving a new growth today and into the future are listed here.

These platforms are a good representation of important platforms ramping in the near term over the next five years and critical growth platforms for future decades.

In all cases, we have more content than ever on each of these aircraft.

And the future category, we're showing the win with the Bell on the V. 28 dollar program. The V 28, as a replacement for the Blackhawk helicopter and we have five times more content.

And are still bidding for more opportunities.

We put the KC 46, a and the F 35 in the next category.

Aircraft that will be ramping in the near term and will contribute materially to our revenue growth beginning next year.

As you can see our content per aircraft here is two to three X the legacy platform.

Lastly, we're starting to see once again growth in the wide body market.

The long haul market has been especially weak during the Covid and post Covid period and is now beginning to pick up.

The important message here is that these programs.

As these programs ramp up we would expect to grow faster than our end markets given the increased content on each of these programs.

So between market recovery and increased content per platform. Our aerospace business is expected to see significant growth over the next five years or even longer.

Now I'll turn it over to Tom who will take us through the financial slides.

Thanks, Craig.

I'll start by providing a summary of our record Q2 results.

Organic growth continues to be strong.

Up 13% for the quarter, the six quarter in a row with double digit organic growth.

Operating profit and all time quarterly record.

21% and segment margins expanded 150 basis points to 21, 6% also an all time quarterly record.

We posted solid incremental margins of 33% up sequentially from 27% in Q1.

Adjusted EPS increased by 18% over the prior year to $2 21.

And all time quarterly record and well above the high end of our guidance range.

Looking at our first half results, we've had a very strong start to the year with organic growth up 14% segment margins up 130 basis points incremental margin of 30% and.

And adjusted EPS growth of 17%.

Finally last year, we explained that we were making a deliberate decision to invest in working capital to protect our customers and their orders.

With supply chain is improving we are now able to better optimize working capital. The result, together with strong earnings is a 600% increase in free cash flow in the first half of the year to $900 million.

Moving on to the next chart, our electrical Americas business delivered another very strong quarter.

The megatrends are having a favorable impact on our U S business.

We set all time quarterly records for sales operating profit and segment margin.

Beginning with the top line organic sales growth of 19% remains very strong.

Electrical Americas has generated double digit organic growth for six consecutive quarters.

With five of the quarters greater than 15%.

On a two year stack organic growth is up 35%.

In the quarter, there was broad based growth in nearly all end markets.

Was especially robust growth of 25% to 30% and datacenter utility industrial and commercial and institutional end markets.

Operating margin of 26, 4%.

It was up 320 basis points versus prior year benefiting from higher volumes and effective management of price cost.

On a rolling 12 month basis orders grew 7% with particular strength in data center and distributed.

Industrial and commercial and institutional end markets book.

Book to Bill ratio remains above one.

We increased backlog by 30% year over year and sequentially 3%.

It's worth noting that we secured orders for two large data centers worth nearly $300 million.

Including content to support these customers.

Growth projections.

Finally, our major project negotiations pipeline in Q2 was up more than 17% versus prior year and nearly 9% sequentially.

From especially strong growth in data center institutional government health care and transportation markets.

On a two year stack, our negotiation pipeline was up 65%.

Overall, electrical Americas continues to have a very strong year.

On page 13, you will find the results of our electrical global segment, which posted all time record sales of nearly $1 6 billion.

Organic growth was up 6%, which was partially offset by a small divestiture.

This represents a two year stack of 18% organic growth.

The growth was broad based driven by strength in utility.

Data center and distributed.

And industrial end markets.

Operating margin of 18, 5% improved 20 basis points sequentially.

But was down 40 basis points prior compared to prior year.

The year over year decline was mostly driven by unfavorable product mix, partially offset by effective management of price cost and higher volumes.

Orders were up 1% on a rolling 12 month basis.

With strength in utility and data center and end.

And markets.

Importantly.

Book to Bill remained greater than one.

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

For Q2, we posted organic growth of 14% incremental margin of 38%.

And segment margin of 23, 4%, which was up 200 basis points over prior year.

On a rolling 12 month basis, our book to Bill for our electrical sector remains very strong at 1.2 and a record backlog grew 22%.

We remain very confident in our positioning for continued growth with strong margins and our overall electrical business.

The next slide highlights our aerospace segment with.

We posted an all time quarterly sales record and our Q2 operating profit record.

Organic growth was 14% for the quarter.

We've posted double digit growth in five of the last six quarters in this segment.

Growth was driven by broad strength across all markets with particularly strong growth in commercial OEM and commercial aftermarket, which were up 21% and 30% respectively.

Operating margin was 22, 5% up 60 basis points over last year, primarily driven by higher volumes.

Growth in orders and backlog continue to be very strong.

On a rolling 12 month basis orders organically accelerated from up 21% in Q1.

To up 26% in Q2.

With especially strong growth in defense OEM and aftermarket for both commercial and defense.

Year over year backlog growth increased 26% in Q2 in line with growth in Q1.

On a rolling 12 month basis, our book to Bill for Aerospace remains very strong at one two times.

Moving on to our vehicle segment on page 15.

In Q2 organic growth was up 6%.

We saw particularly strong growth in North America light vehicle.

Pak.

<unk> markets all up double digits operating margins came in at 15, 3%.

During the quarter, we delivered improvements in our manufacturing facilities, which contributed to sequential margin improvement of 80 basis points.

We continue to win new business tied to clean technology solutions, including multiple clean commercial valve actuation programs.

Additionally.

We've won over $60 million per year in program length extensions and volume increases with multiple Oems.

On page 16, we show results for our E mobility business.

We generated another quarter of strong growth.

Organic revenue was up 18%.

Margin improved 100 basis points versus prior year, mostly driven by higher volumes.

Overall, we remain very encouraged by the growth prospects of the E mobility segment.

So far in 2023, we have won new programs with more than $450 million of mature year revenue positioning us very well to exceed our 2025 target of $1 2 billion of revenues.

Through these wins, we continue to find opportunities to leverage expertise across all segments.

For example, we reached an agreement with a major OEM to supply power electronics control unit for an electrically heated catalyst to meet emissions regulations.

This win demonstrates <unk> ability to leverage capabilities.

Across our entire portfolio.

Including core technology in both electrical and industrial businesses.

Such as break tour power protection and Busman fuses.

We've also capitalized on our extensive vehicle expertise and added content in connectors from our Royal power acquisition.

Moving to page 17.

We show, our electrical and aerospace backlog updated through Q2.

As you can see we continue to build backlog with electrical stepping up to $9 1 billion, a sequential increase of 2%.

Electrical backlog is up about 110% since Q2 of 2021 and.

And over 200% higher than Q2 2020.

Aerospace backlog is holding steady at $3 billion.

This is a 30% increase since Q2 2021 and.

And over 100% higher than Q2 2020.

On a rolling 12 month basis book to Bill.

Was 1.2 for both electrical and aerospace.

With absolute orders remaining at high levels and record backlogs our book to Bill.

Over one times is yet again, a key metric that gives us confidence in our outlook into the quarters to come.

With all of the tailwind in our end markets. We think it is likely that we will have high levels of backlog going forward, which enhances our visibility over the planning horizon.

On the next page, we show our fiscal year organic growth and operating margin guidance.

We are raising our organic growth guidance for 2023, and both electrical Americas and.

And for the total company.

We now expect organic growth in electrical Americas, a 14% to 16%.

Up 300 basis points from our prior 11% to 13% guidance.

This represents a 600 basis point improvement from our starting 2023 guidance for the business.

In total we're raising our 2023 organic growth outlook to a midpoint of 11%.

Up from a 10% mid point in our prior guidance.

Our strong end market growth forecast expanding negotiations pipeline and building backlog provides tremendous visibility and confidence.

In this 2023 outlook.

For segment margins, we are increasing our total Eaton margin guidance range by 40 basis points from our prior range of 27%.

21, 1%.

To a new range of 21, 1% to 21, 5%.

This is a result of an improved outlook and electrical Americas, whereas we increased the range by 80 basis points on strong demand and continued strong operational execution.

The increased outlook now represents 110 basis point increase from the midpoint of our 2022, all time record margins in.

In summary at the halfway Mark we remain well positioned to deliver another very strong year of financial performance.

On the next page, we have additional guidance metrics for 2023 in Q3.

Following our strong first half performance and improved organic growth expectations for the year.

We're raising our full year EPS range to $8 65 to.

To $8 85.

At the midpoint the $8 75.

We have raised guidance by 35.

This represents 16% growth in adjusted EPS in 2023 over prior year.

We now expect currency translation to be roughly neutral in the remainder of our full year guidance remains unchanged.

For Q3, we're guiding organic growth of 9% to 11%.

Segment margins of between 22, and 22, 4%, representing a 100 basis point improvement at the midpoint versus prior year.

And adjusted EPS in the range of $2 27.

To $2 35.

A 15% increase versus prior year at the midpoint.

Now I'll hand, it back to Craig to wrap up the presentation.

Thanks, Tom now turning to page 20.

As a reminder, last quarter, we raised our growth assumption for the utility market to strong double digit growth and we increased our residential market outlook to flat from declining.

We are now increasing our growth assumption for the commercial institutional and for data center markets to strong double digit growth.

In addition to stronger than anticipated demand for new projects existing buildings are being retrofitted with more electrical infrastructure at <unk>.

<unk> continued to increase their penetration in the market.

And data center demand continues to remain at very high levels, and we now expect to see double digit growth in this market as well.

The balance of our end markets continue to perform well and are tracking along our prior projections.

While the macroeconomic outlook remains choppy, we continue to expect growth in almost all of our markets.

I'll close with a summary on page 21.

As you can tell we're feeling good about how our markets are performing this year and we think there'll be strong for many more years to come.

In fact, the Mega trends that we've discussed for some time now.

Are expected to be even more impactful than we originally anticipated.

Our markets are strong, but we also had solid execution in the quarter and delivered another strong set of results that included a number of financial records.

And as we look to the back half of the year and into 2024.

Our increasing backlog provide great visibility on our growth outlook.

As noted we raised our guidance for growth in EPS for the second time in our largest business electrical Americas continues to post new records.

With that we'll open it up for questions you may have.

Thanks, Craig for the Q&A today, please limit your opportunity to just one question and one follow up thanks in the ones for your cooperation.

That I will turn it over to the operator gave you guys a instructions.

Thank you and ladies and gentlemen, if you wish to ask a question. Please back to one zero on your Touchtone phone you will hear next Alex you meant Tom that you've been placed in the queue. You may remove yourself from queue at any time by repeating the Wednesday will command.

And if you're using a speakerphone. Please pick up your handset before pressing that number once again, if you have a question. Please back to London zero at this time.

My first question.

Our first question will come from the line of Joe Ritchie from Goldman Sachs. Please go ahead.

Hi, Thanks, good morning, and congrats everyone.

Thanks I appreciate it.

Yeah. So look my first question you guys called out a few of those large data center wins that you booked into orders this quarter.

Just curious Craig maybe maybe just kind of help contextualize.

What that means for for Mike.

You have content per data center, and how thats going and how that's shifting for your business.

Now that there is a lot of discussion around generative AI and what that means for you guys.

And I appreciate the question, Joe and I know, there's been a lot of discussion in and around AI and how it's going to impact the world and not only kind of data centers, but I would tell you that the data center market as we've talked about on these calls for some time now has been strong and it's been strong for multiple years.

AIA side that market has been growing at double digit and and I would tell you that.

The big wins that we booked during the quarter I say most of that really has nothing to do with the the AI impact yet a lot of that is in the future.

A lot of the major data center players are still trying to sort out the way theyre going to configure their datacenters to deal with this AI.

AI environment and the increased energy intensity, so I'd say for US. It was just another very strong quarter of data center wins that really has not seen the impact yet of this whole emergence of generative AI.

Okay.

We're feeling great about that market and we think generative AI and its downstream implications are just going to keep that market strong for for a much longer period of time, and we're well positioned there.

That's great to hear and maybe just a broader question around your backlog and.

Type of visibility and it is providing for you I think I asked you last year, whether why wouldn't you be able to grow.

Double digits this year and now it looks like you are very well on track to do so.

Trying to really kind of think through the implications of your backlog today and what that means for 2024 and beyond so any comments around that would be helpful.

Yes, I mean as you can imagine we're not in a position to provide that guidance at this point for 2024.

Given the fact that it's still early in the year and we'll probably have an opportunity to do that towards.

At the end of the year as we would normally do so but to your point I mean, the backlog continues to grow in the backlog as you saw on these reports as up multiples of where we've been historically, which gives us much better visibility better visibility than we've ever had into the outlook for.

Upcoming <unk>.

To 18 months and so we're feeling very good about what 2024 is going to look like it will be another strong growth year for the company and we will certainly provide some guidance on what the year looks like.

As a part of our normal process and timing for giving the outlook, but the backlog is certainly gives us a lot of.

Courage with respect to what we think the year is going to look like given the growth and where it is relative to where it has been historically.

And maybe I can just take me back onto that a little bit.

We've seen a lot of focus on order intake and certainly that's a that's a very important metric to look at.

But it's important that you look at it in the context of.

Historically high backlog that we have together with a protracted delivery times and lead times that we have.

As Craig alluded to were nearly three times, our historical backlog coverage.

And we went through modeling scenarios, where you look at various order intake declines.

And combine that with robust organic growth, we're confident that we will not hit our historical backlog coverage timing until two to three years out so.

We're we're very bullish on the transparency that the backlog gives us.

It really does the new order.

Order intake in order to decline a little bit.

Super helpful. Thank you.

Thank you. Your next question is Jeff Parker Zielinski from Morgan Stanley . Please go ahead.

Hey, good morning, guys.

Hey, Marni.

So I feel like you guys have done a really great job.

Scoring some of the some of the.

Background announcements, whether it's the mega projects or I guess slide five.

Some of the stuff from IRI.

Maybe just.

Give us an update on where we are and looking through that I would imagine the vast majority of that is not really in the order book, you talked about really high customer interaction or engagement or kind of the front log I forget what the exact term was but yes.

Where are we through kind of those orders or initial discussions yet.

No appreciate the commentary Josh and this is I think and really an important message with respect to some of these big government stimulus spendings or whether it's the government stimulus spending and its impact or the mega projects that we're talking about we do think one of the key messages that we think it's important to kind of.

Get your head around is the fact that most of this impact.

Not showed up at this point in our order book and it certainly has not shown up in our revenues we did talk about.

The infrastructure projects, some $2 billion of projects that we have visibility to.

One.

Visibility of $1 billion of that have been out to quote we want about half of that but that is a really small piece of the total dollars that will ultimately be spent tied to some of these infrastructure and other mega projects that we talked about and so it is very <unk>.

Early innings for us with respect to the forward looking programs that we've shared with you on these calls and it's what gives us confidence that what we're dealing with here is a long term.

Structural shift.

In our business with respect to the underlying growth rates.

We will certainly continue to report out as we learn more and we will do this on a quarterly basis.

<unk>.

Really encouraged by the fact that.

Most of the goodness that we're talking about is sell a future.

Got it that's helpful. And then maybe just a quick follow up.

Respecting that orders in backlog have kind of have their own cadence right now with.

With what you guys are going through and just explained.

Are the shorter cycle parts of electrical seeing kind of that.

We tie normalization show up in orders I think some of your peers have seen that obviously you guys are longer cycle and things like switchgear, maybe you don't fall into it but any part of that where youre seeing either like a destock or a lead time normalization show up.

We're certainly not seeing any destocking across the business, but there but in fact to your point around the short cycle businesses, whether that's <unk> or what's happening in the OEM channel or distributed.

Those would be three shorter cycle markets that we clearly have seen a slowdown in orders.

Overall in lead times as a result of that have come in quite nicely in those three end markets, obviously being more than offset by strength in the other much larger segments that we serve but in those III short cycle pieces of the business, we have clearly seen.

Lead times come in we've seen orders moderate.

And those three end markets.

Helpful color as always lets walk us okay. Thank you. Thank you.

Thank you. The next question is from the line of Chris <unk> from UBS. Please go ahead.

Thank you I wanted to follow up on Joshua's question simply around the inflation reduction Act.

It sounds like not much orders Yang on the back of the IRI.

Is it reasonable to think that orders there could start coming through in 2024, and when we look across all the company's various business lines.

<unk> do you think will benefit most from the IRI specifically thank you.

Yes, I do think and in terms of timing.

For sure as we think about 2024, we would expect to start to see.

Those projects be clarified negotiations and some orders begin to show up in 2024.

Maybe some early shipments at the best case at the end of the year, but as you know these projects tend to be much longer term and a lot of these dollars are going to support the mega projects in Mega projects, just by definition tend to be much longer cycle than the typical stock and flow business that we have and so we.

We would expect to start to see that begin to show up next year now you pointed out which companies would benefit the most I am not sure I mean clearly.

What verticals within those verticals within the company.

<unk>.

Im sorry.

With vertical.

Well the carnival in the company.

I would say clearly as we think about the various verticals and we kind of lay that out in our presentation on slide four and this was I. Appreciate your commentary because what we've really tried to do on slide four in our Powerpoint is to give you a sense for the key megatrends and how they impact the various verticals that we.

We participated so if you look at infrastructure spending.

Great News for US is it is very broad plays across the board and impacts most of our segments, but I would say it certainly will show up most materially I would say in the industrial segment. If you think about what's going on today in the investments in new EV factories.

Battery factories, what's going on in the chemical space.

A lot of it will show up in what we call industrial <unk>.

Industrial facilities, but it really does.

Cut across pretty broadly.

And most of the end markets in which we participate.

No absolutely all very much I appreciate that then maybe.

On that industrial comment.

Everyone I think is kind of seeing the massive.

Manufacturing starts.

Leading to higher activity put in place.

How should we think about.

The lag.

That flows to your business from the start when it starts generating revenue for Ian.

Very long cycle projects, just wondering kind of how long.

So the single facility kind of generate regulatory thank you.

Yes, no I appreciate that question as you can imagine as we've seen the significant transition to these mega projects. We've spent a fair amount of time internally trying to answer the same question from from an announcement.

Two on negotiation of negotiation to in order in order to a shipment.

And it varies widely depending upon the type of project you are referring to.

And I'd say it could be as short as.

Six months it could be as long as three years and when you think about a lot of these mega projects. They do tend to be longer in nature. So they would tend to be on the longer end of that cycle. This by virtue of the size of these projects.

I think the exciting thing about it is as we said in the prepared remarks.

We see each quarter like 100 billion coming coming in and then it is going to give us a nice cadence going forward for quite some time.

And just to come back to the inflation reduction Act I mean, we put that we put that particular act and for illustrative purposes, but just to draw. Your attention. We've also got the infrastructure Act that the chips Act and in Europe .

<unk> recovery plan. So when you put all this together, there's just a ton of government stimulus support in key parts of our business.

Thank you.

Thank you. Our next question is from Colin.

Blaise from Deutsche Bank. Please go ahead.

Yeah. Thanks, good morning, guys.

Morning, Nicole.

And maybe just on free cash flow noticed you guys raised EPS guidance by a pretty considerable amount, but free cash flow remain consistent can you just talk about the drivers of that and I'm sure part of that has to do with your working capital plans for the second half. Thanks.

Yes, that's a great question Nicole.

We were up almost 800 million.

The majority of that around let's call it $550 million was with working capital optimization and.

250 was was from earnings.

We debated do we do we take up the guidance on free cash flow and.

We thought because it kind of fits within the range right now we'd give it another quarter.

We're happy the way, it's going obviously up 600% is something to be happy about.

We've improved improved cash conversion cycle by nine days.

That said, we still have a lot of work to do and.

We want to get our free cash flow margin up even even higher.

I'd just add you know as we grow because well, we're obviously, putting more cash into receivables and so yes, we're having to fund as well as the increase working capital as a result of the higher growth.

Got it makes sense and then on the non resi vertical obviously like ongoing questions about the strength. There are there any patches withstand the haul nonresident complex, where you guys are seeing any signs of slowing activity.

Yes, and I appreciate the question and once again, if you just think about it in the context of the the end market segments that we've laid out on slide four.

Most of what we do is non <unk>.

In the context of your question specifically as we mentioned we have seen a slowdown in.

What we called distributed.

And we have seen a little bit of a slowdown in what we call. The M. OEM segment of the market as well.

Fortunately for US those are those tend to be smaller segments of the market and the growth in the other verticals is clearly.

More than offsetting that weakness, but yes, we have seen a little bit of a slowdown in those other two verticals as well.

That's good.

If you look at the first half of the year our organic growth.

We're up in every single end market some of them, obviously significant more than others and including ready.

Rajiv we took our numbers if you recall from the prior quarter, Nicole we actually took our outlook for the year up and raise where we originally thought that that market would have been down and we took the market up.

To the point, where <unk> is doing much better than quite frankly, we anticipated as we began the year absolutely. An OEM is also is also up first half of the year.

Excellent Thanks, guys I'll pass it on.

Thank you.

Thank you. The next question is from David Raso from Evercore ISI. Please go ahead.

Hi, Thank you very much I apologize if I missed this earlier.

The electrical Americas, the organic growth rate the first quarter 'twenty 219 back half of the year, we're looking for about 10 and a half as per the guide what percent of that growth has been pricing like say or even the assumption for the second half whenever you're willing to to discuss and then just a sense of the pricing that's in the backlog.

I'm, just trying to get a sense of obviously the backlog a little bit more of the mega trend than the smaller shorter cycle projects and businesses. So I'm just trying to get a sense of that pricing dynamic relative to the overall organic sales growth.

Yeah. Appreciate the question, Dave and I would say that.

One of the reasons why we are forecasting a slowdown.

<unk> growth.

Between the first half and second half is really the strong comparable if you look at the back half of the year, we were up some 19%.

And a lot of that quite frankly was price and we're getting a lot less contributions for price in the back half of this year. When you take a look at it actually on a two year stack the growth.

Essentially is essentially the same it's about 30%.

Versus 2021.

Essentially normalizing for the really strong back half a lot of which was price in terms of price in the backlog I would say that.

As you will likely recall one of the things that we did was we actually repriced our backlog.

And much of it and so if you think about the underlying performance today, what youre seeing in the electrical Americas business and we're shipping a lot of that out of backlog because the backlog is so long as it's essentially we don't expect backlog to have a material impact on the underlying performance of the <unk>.

As we ship it.

I guess trying to maybe get a little more detail on that the back half of the year or where it's wanted even discuss <unk>.

What are the volumes and the guide for the back half of the year and then just trying to think about.

Essentially supply chain, improving obviously some of these demand drivers should fade away that quickly versus some of the shorter cycle businesses, turning down I'm, just trying to balance volume and price exiting the year sure Sharon I know, you're really trying to give it the split between price and volume that we've told you before on these calls we're not.

Provided and so what I would just tell you is that we are getting much greater contributions from volume than we are from price in the second half of the year.

Alright I appreciate it. Thank you alright. Thank you Dave I appreciate it yes, I mean keep in the context of the prepared remarks, we've raised organic growth in electrical Americas 600 basis points since the original guide in our fiscal year Guide is 15%, which is which is fairly sporty.

Obviously, we can all do the math on the implied for the back half, but but I think overall when you step back and look at it.

Aggressive.

And volumes are growing in volume growing three love to think we could get 15% price but.

Right we can.

Thank you.

Yes.

Thank you. The next question is from Julian Mitchell from Barclays. Please go ahead.

Thanks, Good morning.

Just wanted to start with the electrical global business.

You mentioned some of the very strong markets.

Maybe some of those that are a little bit weak.

How long are you expecting that weakness to last and when we look at the profitability in electrical global you've got that nice sort of margin turnaround in the back half.

Which I think is driving an acceleration in year on year profit growth to sort of close to double digit levels in the second half maybe just help us understand the main drivers of that pickup.

I appreciate the question Julian I would say that on a relative basis, certainly electrical global is not growing at the same rate as we're growing in the Americas, but I wouldn't call those markets weak I would still say that those markets are seeing.

Pretty attractive growth with respect to the first half versus the second half as we mentioned to you and some of the commentary and Toms We did have a particular mix challenge in our electrical Europe business in Q2, and so those margins were held back due to some very specific mix.

<unk> related issues in that business and based upon.

The visibility that we have into the second half we do believe that they do not repeat and the business gets back to a more normal level of profitability in the second half of the year, we have pretty high confidence that that's going to take place. Yes. A couple a couple of other areas that we're counting on in addition to mix in the back half is higher volume.

And and being better in terms of our productivity in terms of manufacturing.

That's really helpful. Thank you and then.

I'm not sure you'll sort of hazard.

But I just thought I'd check because it was in focus at.

One of your electrical peers. This morning, but when you think about your backlog to revenue coverage total company, that's gone from sort of 20% towards 50 plus percent in the last three years at Eaton.

Some of your peers, who also have good sort of megatrend exposure theyre talking about that backlog normalizing maybe to 30% of sales I'm not asking you to put a fine point on your view of that for Eaton, but maybe just a sense of the pace at which that backlog to sales may normalize I guess.

The experience of a lot of other companies is once the backlog peaks.

Seem to stay there very long it sort of starts to move down as customers normalized lead times.

And I appreciate the question Julian and in many ways, we're talking about the unknowable right given in terms of the uncertainty around what the future looks like I would say, though if you think about eaton's business and Thats why we thought it was so important to go back to slide four in our Powerpoint presentation to talk about that.

The breadth of our portfolio and how it's impacted by these various megatrends and I would tell you that we arent the same as other electrical companies and some of them are exposed to some but not others and I would just say what makes <unk> unique here is really the breadth.

Of our portfolio in the end markets that we serve.

Each of these markets are benefiting from these megatrends and so yeah.

I'm not sure what particular.

Electrical Pierre you're referring to but I would say that we.

Would likely have much broader exposure to a number of these trends and other electrical companies.

And then just to add to that I think we had it included in the prepared remarks, but I think it bears repeating our backlog in the quarter is up 220% since the end of 19 and with all the Mega projects the stimulus spend the secular <unk>.

<unk> that Craig just mentioned.

We don't have a lot of discussion about the backlog going down.

If you think I mean are there certain electrical companies for example, who would play heavily inside of factories.

Who maybe don't play on the infrastructure side.

We are massive infrastructure player.

And so I just wanted you just pointed out in terms of as you think about Eaton versus other companies you can't really necessarily draw a straight line correlation between us and them.

We saw we obviously you've seen our peers announce and Theres a very difference in growth.

In a number of the peers this quarter to a function of the fact that.

We play in very different.

End markets than some of our other electrical peers.

We also have that nice mix of going through the channel as well as these big Mega projects with direct to the customer. So we've got this nice balance as well in that area and the point that Tom is picking up on that I think is a really important one is this notion around if you take a look at what's happening with a number of our distributors off.

Sometimes you'll want to draw a straight line between what Youre seeing in the distribution channel to what we're experiencing in our own business and to Toms point. These big Mega projects that we're talking about a lot of these big infrastructure related investments. These are direct projects that are not flowing through distribution. So you also will see.

Perhaps a decoupling between how we could perform versus some of the electrical distributors as well.

That's very helpful. Thank you.

Thank you.

The next question is from the line of Steve Volkmann from Jefferies. Please go ahead.

Oh, great. Thank you for fitting me in I wanted to actually switch to aerospace if I could.

Any comments there.

Alright.

Appreciate your comments there on sort of the medium term outlook looks very robust I am curious how you think the real ramp that you outlined in OA.

Will impact margin mix over the next sort of three to five years.

Yeah and I appreciate the question and what's your kind of poking at a little bit understandably is the fact that OE margins tend to be <unk>.

Well below aftermarket margins, but the good news here is we are finding that both OE and aftermarket which is really tied to revenue passenger car.

Kilometers of revenue passenger miles both of those pieces of the business are essentially ramping and.

You heard what we reported in our numbers, we actually saw even more growth in aftermarket.

In the quarter than we did on the OE side and so we don't we don't anticipate a negative mix impact from this ramp on the OE side as we look.

To forecast for the next number of years, but to your point. It is certainly something to watch if you ever get in many way inverted there in an OE is growing in aftermarket isn't it would certainly have a negative impact on margins, but that's not our anticipation, yes, just to just to remind you with.

A couple of numbers here, our trailing 12 months, our rolling 12 months is in the aftermarket is 25% and Thats really 25% on both defense and commercial.

And OE and aftermarket.

An important point.

Great.

Super Helpful. And then just one quick longer term question, Craig I mean, given all of these trends across all your businesses.

We're obviously going to have a period of very strong growth here.

And I just don't think we have compounded at these types of levels over multiple years in the past. So how do you think about capacity here.

The rates of growth seem like they are really kind of inflicting.

Longer term.

No first of all Youre absolutely right.

Is a very different.

Electrical industry, a very different.

And then the one that perhaps your grandfather and grandmothers, but.

And so as a result of that we are making fairly sizeable investments in capital equipment.

<unk> talked about it in the last earnings call. Some of the big investments that we're making in the utility space and I mentioned in my outbound commentary, we've made investments in transformer capacity voltage regulators and line installation products. These are essentially capital investments that are ongoing right now we've made some fairly sizable investments.

In our circuit breaker capacity.

Over the last couple of years and so we are having to invest more in capital equipment, but I would say even.

In the big scheme of things the the level of investment is maybe going to tick up.

A half a percent more of sales maybe another percent of sales, but very well manageable in the context of the overall growth of the company.

Yes. The important thing is the focus is really there were just recently with our board and our strategy session and a big part of that was the capacity related to meeting this hyper growth. So.

We're very hungry Theres a lot of food on the table, we're very hungry.

Great well with that I'll, let you go off to lunch. Thank you.

Yeah.

Yes.

Thank you. The next question is from Nigel Coe from Wolfe Research. Please go ahead.

Thanks, Good I guess its good afternoon now.

Sounds good to me.

So we've cut a lot of ground so back to let's go.

You mentioned I think Craig benefits, I think retrofit activity, which I think was innovation to C&I end markets in particular.

I know you've talked about this in the past increasing load content and I think it was nice to charging specifically, but maybe just talk about what activity you're seeing within retrofits.

How do you think that develops over the next.

A couple of years.

Yes.

Yes.

Appreciate the question, we do reduce.

Think about today why we are feeling.

Mentally more positive around what's happening today in commercial and institutional and a bit of this is simply what we're all experiencing around the.

The growth in electrification and the growth in EV charging infrastructure in the investments that are being put in to support.

The growth in the demand for electricity on the grid and so.

In terms of quantifying the impact of that versus the impact of the Newbuild I can say, we're not we're probably today not smart enough to do that with any degree of precision.

I can tell you that it is an important piece of what we're seeing in terms of growth.

It will contribute to growth.

How do you.

Quantify the impact of retrofits versus the new build stuff.

We're trying to work through some of those questions and answers but.

Things are moving so quickly right now that quite frankly, we haven't had a chance to really put pen to paper and really try to figure it out.

Yeah.

But we are going to see to your point, we're going to see it.

In both new buildings, and we're going to see a lot of retrofits modifications, whether it's in a home to put in electrical infrastructure and residential and whether it's in <unk>.

Commercial buildings, our offices to support EV charging to support.

The addition of solar.

The additions of battery storage.

All of these.

Investments that are being made to improve.

Our electrical capacity resiliency.

A lot of that will go into existing buildings.

Yes.

Great Little smarter on this topic and get you a little better answer than that but.

Certainly an important one for us, but one we're still trying to quantify.

No I agree and then on data centers I just wanted to take the other side of the of sort of the.

Have you seen any signs of weakness it doesn't look like it but are there any signs of weakness out there I'm thinking maybe China, perhaps might be might be a itself.

And then when you think about generally with AI and GPU.

Thanks.

Does this increase the revenue per megawatts or does this just increased the total megawatts.

And the markets and any thoughts there would be helpful.

Yes.

To your first question are we seeing any signs of weakness I would say not really I mean, whether it's geographically or whether it's.

Not just either.

The hyperscale or as we're seeing it Colo, we're seeing on Prem where.

Seeing it around the world globally, we're seeing strength in the data center market and then to the point around once you get back to this important question around.

Impact on data centers and the way, they're going to be configured certainly we understand that they're going to need more power. The power density. These racks is going to go up but we still don't know I think it's early days and it's one that we know we owe you an answer we ourselves an answer on that one as well as we continue to talk to some of the.

Data centers.

<unk> around how theyre going to be configuring. These data centers and how they are going to change, but I'll just say, we're still in the early innings and we don't yet have all the answers to how theyre going to be reconfigured.

Just a little bit more on Craigs point in term and your question on slowing.

Each part of the world for the first half of the year data centers, including Hyperscale grew double digits. It's just a matter whether it grew mid double digits or in the twenty's or in the <unk>, we're seeing robust growth across the board.

Okay, that's great detail thanks, a lot.

Thank you and the next question is from Steve Tusa from Jpmorgan. Please go ahead.

Thanks for fitting me in.

Yes, no problem.

When you said greater contributions from volume and price in the second half of the year. What exactly did you mean by that did you mean that you just expect is skewed more towards volume in the second half versus the first half or maybe just a little bit more color on.

What you meant by that.

Primarily what we're referring to Steve because if you think about most of the big price increases that we put through in our business most of those showed up in.

In the second half of last year, we got some modest price increases this year, but most of the big price increases that we got we got in the second half of last year. So they are really baked into the comparable for 2022.

<unk> 2022, and we're anniversarying those big increases right now and so just on the relative contributions to growth.

On a relative basis, we're going to get it giving it more from volume than we offer price in the second half of the year.

Okay.

That's helpful and then just on the electrical <unk>.

Because business I mean.

Should we think about this this margin youre doing.

Especially here in the.

In the second quarter here I mean is that like I know you havent going down sequentially in the second half I guess a little bit.

Is that the jumping off point for next year, how sustainable is that and any any moving parts. There that you want to call out as we.

Tinker with our models for next year.

Yes.

Our team continues to execute well, we certainly had a little bit of perhaps craveable mix in Q2, and maybe thats, what youre seeing in terms of the relative change between Q2 and the back half of the year, but theres nothing Theres no unusuals in those numbers.

Street operating performance.

Execution by our team and yet the simple answer is yes that should be the jumping off point as we think about what this business should look like into 2024 and beyond and obviously, we're going to have volume growth.

And so the business is performing well and we'd expect it to continue to perform well.

Yes.

Steve I would just add we know what the implied save for the segment margins were hoping we'd do better than the implied.

Right, but is that the jumping off point for next year.

Is that a sustainable number that you can improve on next year.

Yes, yes.

Okay.

Thank you.

Okay.

Thank you. The next question is from Deane Dray from RBC capital markets. Please go ahead. Thank you good day everyone.

Hi, Deane.

<unk> covered a lot of ground, but I didn't hear a couple of references to unknowable.

And a choppy macro so it kind of begs the question about the initial assumption for this year, so long ago themes.

For a mild recession is.

Any clarity in terms of your assumption there is that everything seems to be skewing much higher.

Yeah, No I mean, I think to your point Deane, we like so many others had anticipated a mild recession. This year end and our thinking around recession continues to be pushed out.

As it does for I think most of the economics the economists in the world and so at this juncture I mean, we're feeling pretty good about the year one of the reasons why we're taking up our guidance and I think the bigger message becomes in the event of a mild recession and very much consistent with what we said originally even in the event of a mild recession given the mega.

Trends in the stimulus spending and the strength of our end markets.

We don't believe it's going to have a material impact at all on Eaton's growth. That's what we said at the beginning of the year and that's what we continue to believe.

And Dean I'll take you back to an earlier response.

We've modeled even even with.

Downturns in order intake if.

If you use that for a proxy in terms of a mild recession.

We are very confident that we can power through that.

Given our backlog in the Mega trend.

Yes that seems clear and then just a very quick follow up on Steve Volkmann question about capacity.

When we were all together in New York, a while back we talked about.

Shortages of smart switch gear and Transformers is that in any way holding back that utility demand at least I'm not sure you'll be able to supply and how does that change.

Yeah, No I would say as an industry things are better.

Say, we are through the industry and some of the supply chain Chokepoints are materially better today than they were let's say this time last year, but we're clearly not out of the woods and there are certainly certain markets and verticals that are still very much challenge with respect to lead times and the utility market is one of those is.

We mentioned on these calls before that probably the longest lead time device, we probably have to any of the company as a transformer that goes into the utility segment and so very much a function of which end market in which product you are talking about in general things are getting better, but they're each lead time to sell.

Extended we're still not back to let's call it the pre.

2019 levels of lead times, we think our lead times are competitive with.

Our peers in the marketplace.

But yet we're still not back to where we were in 2019, and we sell our extended in certain product lines.

Thank you.

Okay. Thank you.

Thank you and our next question is from Alright Clancy from Mizuho. Please go ahead.

Hey, good afternoon.

Wanted to follow up on that utility comment there. So you gave the growth framework to 25, I think you said, 11% growth how should we think about eaton's relative growth in the context of wallet share per opportunity or any share shifts from some of these capacity additions.

Yes.

Hey, <unk> relative performance.

Thank you.

With respect to our peers.

<unk> talked about before and it's one of the reasons why we included that chart is that.

All of our peers arent the same we play very broadly across the utility segment as I said in my commentary. We think we are the broadest player we have a broader portfolio of solutions and the utility market than any of our competitors and so we think we are very well positioned to to grow.

At market to grow and perhaps grow faster than the market we are today.

As our most of our peers are capacity constrained and so I do think that the real limiter on growth in terms of the utility market. These days is really going to be our ability to add capacity to deal with the growth that we're seeing and that is the one segment where lead times are still quite extended and until we get this new <unk>.

Capacity online, it's going to be very difficult for us to grow at a much faster rate than the overall market.

Okay, Great and then just one follow up and I apologize if I missed it but on the project funnel you guys have been giving that that rate of growth year over year and sequentially. Just just curious how that fared in the quarter.

Yes, the negotiated the major projects, yes, it was up 17% year over year and 65% on a two year stack.

Great. Thanks, a lot best of luck.

Thank you.

Thank you. The next question is Joe O'dea from Wells Fargo. Please go ahead.

Hi, Thanks for taking my questions.

I'll ask them, both together because they're kind of related ones one lead time related once backlog.

But any additional color if you think about some of the biggest kind.

Revenue product categories, just some perspective on.

Where lead times are where they were at their worst kind of what you need to get back to for normalization and then relate.

Related to that and I think all the tailwind that youre discussing on sort of the mega projects support out there the stimulus support out there.

I think Tom your comment was it might take two to three years for backlog to get back to normal, but I guess, even as these lead times correct.

It's back up back to normal really the expectation or you think it's going to.

Take it.

Take quite some time before we really start to see any kind of notable step down in these levels.

Yeah, and I'd say, maybe just kind of addressing kind of the first part of your question, which is kind of on lead times.

As I mentioned.

So the prior on the prior question lead times are in fact still extended.

They have improved somewhat.

Certainly more so in some of the shorter cycle businesses, we talked about <unk> OEM.

Distributed.

For the Big project related stuff.

A lot of those lead times today are still fairly well extended for utility markets.

We haven't improved much at all so it really does vary widely depending upon which vertical you're referring to.

And two once again.

We are sold out.

We don't have a lot of excess capacity today.

To really deal with what has clearly been a much faster acceleration and growth than what we originally did in some of these big industrial center kind of product lines and businesses.

And until until capacity comes online we would not anticipate that these lead times.

Get materially better.

And the same thing I would say would be true of backlogs, they're obviously to your point very much interrelated until you can release.

Yeah.

Reduced lead times.

Borrowing.

Significant slowdown in the markets, which we don't anticipate you're really not going to deal with.

Reducing your backlog either and so we do think that.

Under a normal planning horizon the way, we're thinking about it backlogs stay elevated for some period of time I think what Tom was trying to do was simply to try to provide a little comfort around that even if markets slow down.

We should continue to be able to pose very attractive revenue growth because we can simply eat backlog.

That's right.

That's right the two to three years that I quoted.

Is it a turned down situation and is arguably conservative.

Got it makes sense, thanks a lot.

Thank you.

Yes.

At this time there are no further questions. Thank you. Please continue.

Hey, Thanks, guys as always chip and I will be available to address any of your guys fall off <unk>. Thanks for joining us today have a great day.

Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Keybanc Conference and you may now disconnect.