Q3 2023 Eaton Corp PLC Earnings Call

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Three conference call at this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. If you wish to ask a question. Please.

The first one then zero on your Touchtone phone you will hear an acknowledgment tone that you been placed into queue and you may remove yourself from the queue at any time by repeat into one zero command should.

Should you require assistance during the call. Please press Star then zero and an operator will assist you offline and as a reminder, today's 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. Thank you all for joining us for Eaton's third quarter 2023, earning calls with me today are Craig Arnold, our chairman and CEO and Tom Okray, exactly Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Craig.

Ill turn it over to Tom who will highlight the company performance in the third quarter as we have done our past calls we'll be taking questions at the end of Craig's closing commentary the price release and the presentation. We'll go through today have been posted on our website. This presentation, including the adjusted earning per share adjusted free cash.

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

Like to remind you that our commentary 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 projections due to a wide range of risks and uncertainties that are described in our earnings release and <unk>.

Presentation with that I will turn it over to Craig Okay. Thanks, Tien and we're pleased to report our Q3 results and another record quarter.

Our team continued deliberate on our commitment supported by strong markets and good execution.

Let me begin with some of the highlights on page three.

As we've shared for some time now megatrends, including Reindustrialization energy transition electrification and digitalization are continuing to expand our markets revenues orders and negotiations pipeline.

As these trends are once again evident in our results in the quarter, especially in our electrical Americas business.

We posted another quarter of record financial results with strong revenue margins earnings and cash flow growth.

While our markets continue to be strong. We're also continuing to improve on our overall effectiveness, which drove a record operating margins.

And we're once again raising our earnings outlook, we're raising our 'twenty three guidance for margins adjusted EPS and cash flow.

Our EPS growth for 2023 at the midpoint of our guidance is now 19%.

I'd also like to highlight our growing backlog, which was up 15% in electrical and 22% and aerospace.

And we continue to have a strong book to bill ratio of one one for electrical and 1.2 for aerospace.

Lastly, we recorded record third quarter operating cash flow of $1 1 billion up 18% and free cash flow margins of 16%.

Tom will share additional details, but overall as you can tell we're pleased with the results and well positioned to close out a record year.

Moving to slide four in the last quarter, we shared a framework for how we think about our key market drivers for the company.

The chart notes six mega trends that are driving growth capital investments and how they intersect with various businesses within Eaton.

As you can see we're uniquely positioned in most of our businesses and expect to see accelerated growth opportunities.

Operator: Three Conference Call. At this time our participants are analysts in only mode. Later, we will conduct a question in a fifth session. If you wish to ask a question, please press 1.0 on your touch-tone phone. You will hear an acknowledgement tone that you've been placed into queue, and you may remove yourself from queue at any time by repeating the 1.0 command. To do require assistance during your call, please press star then zero, and an operator will assist you offline. It has reminded today's conference to be recorded.

And our intention to cover each of these markets and Megatrends during our earnings call.

To keep you appraised of progress.

And our Q2 earnings call, we provided a summary of progress on infrastructure spending reindustrialization in the utility market and electrical and our aerospace business.

Today, we will spend a few minutes on how Reindustrialization continues to drive a record number of Mega projects in North America.

I know Eaton is positioned to win in the fast growing data center market.

Yan Jin: I would now like to turn the conference over to your host, Yan Jin, Senior Vice President of Investor Relations. Please go ahead. I would like to remind you that our commentary today will include statements related to the expected future results of the company and are there for forward looking statements.

We received an extensive number of questions on each of these topics and hope our updates are helpful. As you think about the growth outlook for the company.

So let's begin with slide five in the presentation.

We've shared this chart previously.

And the data is a good proxy for Reindustrialization in what we're seeing inside of many of our markets here.

Youll recall this chart summarizes the number of Mega projects that have been announced since January of 2021.

And a Mega project is a project with an announced value of $1 billion or more.

Note that this is the North America data, but we're seeing a similar trend in Europe, although the dollar amounts are not as large.

Three key points to note here.

One at 860 billion. This number is three times, the normal rate, which translates directly to future opportunities for electrical markets.

As a reminder, the electrical content on these projects range from 3% to 5%.

To this number continues to grow at a faster rate.

Unknown Executive: Our actual results may differ materially from our forecasted projection due to a wide range of risk and uncertainties that are described in our earnings release and the presentation.

<unk> Mega projects grew between 25 grew 25% between Q3 and Q2.

In Q2 was up 20% from Q1.

Craig Arnold: With that, I will turn it over to Craig. Okay, thanks, Yan. And we'll please report our Q3 results in another record quarter. Our team continued to deliver it on our commitments supported by strong markets and good execution. Let me begin with some of the highlights on page three. As we share for some time now, mega trends, including re-industrialization, energy transition, electrification, and digitalization are continuing to span our markets, revenues, orders, and negotiations.

This will not go on forever, but there continues to be strong momentum for industrial projects in North America.

And third only 20% of these projects have actually started.

Those that have started we've won roughly $850 million of orders with a win rate of approximately 40%.

And we're actively negotiating another $1 billion of electric content on a small subset of these announced mega projects.

Turning to slide six we highlight the datacenter market.

Craig Arnold: As these trends are once again evident in our results in the quarter, especially in our electrical America's business. We posted another quarter of record financial results with strong revenue, margins, earnings, and cash flow growth. While our markets continue to be strong, we're also continuing to improve on our overall effectiveness, which drove our record operating margins. And we're once again raising our earnings outlook. We're raising our 23 guidance for margins, adjusted EPS and cash flow.

I can't think of many markets that have better secular growth dynamics in data centers.

<unk> appetite for data new insights and software solutions continues to grow at an exponential rate and natural language processing like chat GPT will only accelerate this trend.

This is a very good thing for Eaton as we have a strong portfolio of data center solutions in the data Center slash It channel represents 15% of our total revenue.

While the numbers continue to be refined we now think this market grows at a 16% compounded rate between 2022 and 2025.

Craig Arnold: Our EPS growth for 2023 at the midpoint of our guidance is now 19%. I'd also like to highlight our growing backlog, which was up 15% in electrical and 22% in aerospace. And we continued to have a strong book to build ratio of 1.1 for electrical and 1.2 for aerospace. Lastly, we recorded record third quarter operating cash flow of 1.1 billion, up 18% and free cash flow margins of 16%.

And likely for much longer.

As expected our customers are continuing to expand their data center capex build outs, some of which are being modified to support the adoption of generative AI.

Just consider some of these metrics.

120, Zettabyte of data have been generated in 2023.

A 60 fold increase over the two zettabyte generating 2000 2010.

Craig Arnold: Tom will share additional details, but overall, as you can tell, will please with the results and well positioned to close out our record year. Moving to slide four, in the last quarter we shared a framework for how we think about our key market drivers for the company. The chart notes six megatrends that are driving growth capital investments and how they intersect with various businesses within Eaton. As you can see, where you are uniquely positioned in most of our businesses and expect to see accelerated growth opportunities.

And the amount of data generated expected to grow to 180 terabytes by 2025.

A 50% increase over 2023.

And the AI impact, it's just starting to show up in our order book. During Q3, we won a large order of approximately $150 million for a new AI training data center and saw a roughly 61% increase in Hyperscale orders overall.

These AI data centers require both high power and high power density and as a result higher electrical content.

Craig Arnold: It's our intention to cover each of these markets and megatrends during our earnings call and to keep you appraised to progress. In our Q2 earnings call, we provided a summary of progress on infrastructure spending, re-industrialization, and a utility market and electrical in our aerospace business. Today, we'll spend a few minutes on how re-industrialization continues to drive a record number of megatrends in North America and how Eaton is positioned to win in the fast growing data center market.

Another trend driving higher electric content as the need for solutions that allow bi directional flow of power back to the grid and the ability to optimize the use of renewable energy to power data centers.

So this market and Eaton are well positioned for higher growth for years to come.

And on page seven.

Craig Arnold: We receive an extensive number of questions on each of these topics and hope our updates are helpful as you think about the growth outlook for the company. So let's begin with slide five in the presentation. We've shared this chart previously and the data is a good proxy for re-industrialization and what we're seeing inside of many of our markets. You'll recall this chart summarizes the number of megaprojects that have been announced in January of 2021 and a megaproject is a project with an announced value of $1 billion or more.

We highlight <unk> unique positioning in the data center market and note that we have the electrical industry's broadest portfolio of power management solutions for data centers.

Centralized data centers come in a variety of sizes with incoming power draws between 10 and 500 megawatts with a average data center, a 40% to 50 megawatts, which is a variety that we show here on this slide.

Eaton, we support the flow of electrons from where they enter the facility from our Transformers.

So our medium voltage and low voltage switch gear through our electrical busway to our uninterruptible power systems, all the way into the server rooms, where we offer racks and power distribution units.

Craig Arnold: Note that this is the North America data but we're seeing a similar trend in Europe, although the dollar amounts are not as large. Three key points to note here. One at 860 billion, this number is three times the normal rate which translates directly to future opportunities for electrical markets. As a reminder, the electrical content on these projects range from three to five percent. Two, this number continues to grow at a faster rate.

In addition, we have a broad suite of software and service solutions that provide real time diagnostics prognostics and uptime support.

As a rule of thumb eaton's market opportunity in Datacenters is about $1 $5 million per megawatt.

Here, we're distinguishing this market from the myriad of smaller data centers that exist to support many different markets and smaller applications.

Craig Arnold: Announce megaprojects grew between 25 percent between Q3 and Q2 and Q2 was up 20 percent from Q1. This will not go on forever but there can be strong momentum for industrial projects in North America. And third, only 20 percent of these projects have actually started. For those that have started, we've won roughly $850 million of orders with a win rate of approximately 40%. And we're actively negotiating another $1 billion of electric content on a small subset of these announced megaprojects.

And we continue to improve our position in the market with our bright layer for datacenter suite of software solutions.

This platform is the first in the industry to unite asset management.

And operational device monitoring power quality metrics and advanced electrical supervision into one single application.

This new software provides electrical power power quality distributed it equipment performance management that improves efficiency data accuracy and certainly uptime.

So overall Eaton is well positioned and continue to build on our strength in this rapidly growing market.

Craig Arnold: Turning to slide six, we highlight the data center market. You know, I can't think of many markets that have better succulent growth dynamics in data centers. The world's appetite for data, new insights, and software solutions continues to grow at an exponential rate. And natural language processing like chat GPT will only accelerate this trend. This is a very good thing for Eden as we have a strong portfolio of data center solutions. And the data center slash IT channel represents 15 percent of our total revenue.

Given our broad set of Megatrends in our growth outlook, we're naturally investing to add capacity in many of our businesses as noted on slide eight.

In fact on the normal run rate, we're investing more than $1 billion of capital to support the growth that we see over the next five years.

These investments expand our production capacity across a wide range of markets and positioning to win more than our fair share of these opportunities.

Craig Arnold: Andrew. While the numbers continue to be refined, we now think this market grows at a 16% compounded rate between 2022 and 2025, and likely for much longer. As expected, our customers are continued to expand their data center cap ex buildouts, some of which are being modified to support the adoption of generative AI.

As you've heard.

While somewhat improved our lead times are still longer than ideal and these investments will address the bottlenecks in our manufacturing sites.

The primary investments are being made in utility market to support Transformers voltage regulators and our line installation and production equipment.

Circuit breaker capacity to support the rapid growth in industrial projects and to add redundancy to our existing capability and.

Craig Arnold: Just consider some of these metrics. Zeta bites of data have been generated in 2023, a 60-fold increase over the two zeta bites generated in 2020. And the amount of data generated is expected to grow to 180 zeta bites by 2025, a 50% increase over 2023. And the AI impact is just starting to show up in our order book. During Q3, we won a large order of approximately $150 million for a new AI training data center, and saw a roughly 61% increase in hyper skill orders overall.

And then our global electrical business to support growth in a number of fast growing emerging markets, where we've been gaining share but have ample opportunities to do significantly more.

And of course, we're building a completely new E mobility business, and making significant investments to build out new manufacturing capacity there.

These capital investments support higher organic growth.

Excellent return on investment and are indicative of our confidence in the future of the company.

We've made some of these capital investments this year, while others will be layered in over the next couple of years.

Now I'll turn it over to Tom to cover our financial results and outlook for the year.

Thanks, Craig I'll start by providing a summary of our Q3 results which include several records with respect to the top line, we posted an all time quarterly sales record of $5 9 billion.

Craig Arnold: These AI data centers require both high power and high power density and as result, higher electrical content. Another trend driving higher electric content is the need for solutions that allow bidirectional flow of power back to the grid and the ability to optimize the use of renewable energy to power data centers.

<unk> growth continues to be strong up 9% for the quarter building upon six consecutive quarters of double digit growth and three quarters on a two year stack of mid Twenty's growth.

Craig Arnold: So this market and Eaton are well positioned for higher growth for years to come. And on page 7, we highlight Eaton's unique positioning in the data center market and note that we have the electrical industries broadest portfolio of power manager solutions for data centers. Centralized data centers come in a variety of sizes with incoming power draws between 10 and 500 megawatts, with the average data center of 40 to 50 megawatts, which is a variety that we show here on this slide.

Operating profit recorded all time records on both a margin and absolute basis.

Operating profit grew 23% and segment margin expanded 240 basis points to 23, 6%.

We posted a very strong incremental margin of 46% up sequentially from 33% in Q2 and 27% in Q1.

Adjusted EPS increased by 22% over the prior year to $2 47 per share an all time quarterly record and well above the high end of our guidance range.

Craig Arnold: Eaton, we support the flow of electrons from where they enter the facility, from our transformers, to our medium voltage and low voltage switch here, through our electrical bus lane, to our uninterruptible power systems all the way into the server rooms where we also racks and power distribution units. In addition, we have a broad suite of software and service solutions that provide real-time diagnostics and prognostics and uptime support. As a rule of thumb, Eaton's market opportunity in data centers is about $1.5 million per megawatt.

This performance resulted in a third quarter operating cash flow record are 114 billion in operating cash flow was 18% higher than the prior year generating 16% free cash flow margin and over 100% free cash flow conversion.

Looking at our results on a year to date basis organic growth is up 12% segment margin is up 170 basis points.

Craig Arnold: Here we're distinguishing this market from the myriad of smaller data centers that exist to support many different markets and smaller applications. And we continue to improve our position in the market with our bright layer for data center suite of software solutions. This platform is the first in the industry to unite asset management, IT and operational device monitoring, power quality metrics and advanced electrical supervision into one single application. This new software provides electrical power, power quality, distributed IT equipment, performance management that improves efficiency, data accuracy and certainly uptime.

We generated incremental margin of 35% adjusted EPS growth of 19%.

73% increase in operating cash flow versus prior year, and free cash flow up 90% year over year.

Moving on to the next slide our electrical Americas business continues to execute well and delivered another very strong quarter.

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

Organic sales growth remained very strong at 19%.

Craig Arnold: Overall, Eaton is well positioned and continues to build on our strength in this rapidly glowing market. Given our broad set of mega trends and our growth outlook, we're naturally investing to add capacity in many of our businesses as noted on slide 8. In fact, on the normal run rate, we're investing more than $1 billion of capital to support the growth that we see over the next five years. These investments expand our production capacity across the wide range of markets and position to win more than our fair share of these opportunities.

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

With six of the quarters greater than 15%.

On a two year stack organic growth is up 37%.

In the quarter, there was broad based growth in nearly all end markets with double digit growth everywhere, except residential and.

And especially robust growth in industrial utility machine OEM and data center markets.

Craig Arnold: As you've heard, while somewhat improved, our lead time to still longer than ideal and these investments will address the bottlenecks in our manufacturing sites. The primary investments are being made in utility markets to support transformers, both the regulators and our line insulation and production equipment. It's circuit breaker capacity to support the rapid growth in industrial projects and to add redundancy to our existing capability and in our global electrical business to support growth in a number of fast growing emerging markets where we've been gaining share, but have ample opportunities to do significantly more.

Record operating margin of 27, 7% was up 420 basis points versus prior year.

Benefiting from higher volumes and effective management of price cost.

Incremental margin was 50% for this segment.

On a rolling 12 month basis orders were down 3%.

It is important to note that the dollar value of orders remains high and.

And the decline needs to be viewed in context of the 36% order growth in Q3 of last year.

Craig Arnold: And of course, we're building a completely new mobility business and making significant investments to build out new manufacturing capacity there. These capital investments support higher organic growth, provide excellent return on investment, and are indicative of our competence in the future of the company. We've made some of these capital investments this year, where others will be layered in over the next couple of years.

As discussed on last quarter's call order intake is an important metric but needs to be analyzed together with record backlog.

Currently in our electrical sector, we have backlog coverage of almost three times our historical average.

We've looked at multiple scenarios with meaningful order intake decline and are confident in those scenarios given our backlog coverage.

Tom Okray: Now, I'll turn it over to Tom to cover off financial results and outlook for the year. Thanks Craig. I'll start by providing a summary of our Q3 results, which include several records. With respect to the top line, we posted an all-time quarterly sales record of $5.9 billion. Organic growth continues to be strong, up 9% for the quarter, building upon six consecutive quarters of double digit growth and three quarters on a two-year stack of mid-20s growth.

That we can generate robust organic growth for several quarters into 2025.

In this regard electrical Americas backlog.

Increased 19% year over year, and 5% sequentially, resulting in a book to bill ratio above one one on a rolling 12 month basis.

For orders, we had particular strength in data center industrial facilities and institutional markets.

Tom Okray: Operating profit recorded all-time records on both a margin and absolute basis. Operating profit grew 23% and segment margin expanded 240 basis points to 23.6%. We posted a very strong incremental margin of 46%, up sequentially from 33% in Q2 and 27% in Q1. Adjusted EPS increased by 22% over the prior year to $2.47 per share in all-time quarterly record and well above the high end of our guidance range. The performance resulted in a third quarter operating cash flow record.

Also our major project negotiations pipeline in Q3 was up 33% versus prior year, and 19% sequentially from especially strong growth in data center institutional government and water wastewater markets.

Data center negotiations increased almost four times.

On a two year stack, our negotiation pipeline was up 180% overall electrical Americas continues to have a very strong year.

On page 11, you will find the results for our electrical global segment, despite flat organic growth, we posted a Q3.

Tom Okray: Our 1.14 billion in operating cash flow was 18% higher than the prior year, generating 16% free cash flow margin in over 100% free cash flow conversion. Looking at our results on a year-to-date basis, organic growth is up 12%, segment margin is up 170 basis points. We generated incremental margin of 35%, adjusted EPS growth of 19%. 73% increase in operating cash flow versus prior year and free cash flow up 90% year over year.

Sales record, we had strength in our commercial and institutional industrial and utility markets regionally, we saw weakness in EMEA markets that were offset in other markets where growth was in line with expectations.

We expect the softness in EMEA to be short term with organic growth in the segment returning to low to mid single digits in Q4.

Operating margin of 21, 8% was up 120 basis points compared to prior year operating profit and margin were all time quarterly records.

Tom Okray: Moving on to the next slide, our electrical America's business continues to execute well and delivered another very strong quarter. We set all-time quarterly records for sales, operating profit and margins. Organic sales growth remained very strong at 19%. Electrical Americas has generated double-digit organic growth for seven consecutive quarters with six of the quarters greater than 15%. On a two-year stack, organic growth is up 37%. In the quarter, there was broad-based growth in nearly all end markets, with double-digit growth everywhere except residential, and especially robust growth in industrial, utility, machine OEM, and data center markets.

Margin improvements were primarily driven by effectively managing price cost.

Orders were up 1% on a rolling 12 month basis with strength in data center and utility markets.

Importantly book to Bill remained greater than one <unk>.

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

For Q3, we posted organic growth of 11% incremental margin of 53% and segment margin of 25, 5%, which was up 320 basis points over prior year.

On a rolling 12 month basis, our book to Bill ratio for our electrical sector remains very strong at more than one one.

Tom Okray: Record operating margin of 27.7% was up 420 basis points versus prior year, benefiting from higher volumes and effective management of price cost. Incremental margin was 50% for the segment. On a rolling 12-month basis, orders were down 3%. It's important to note that the dollar value of orders remains high, and the decline needs to be viewed in context of the 36% order growth in Q3 of last year. As discussed on last quarter's call, order intake is an important metric, but needs to be analyzed together with record backlog. Currently, in our electrical sector, we have backlog coverage of almost three times our historical average.

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

The next slide highlights our aerospace segment.

We posted all time quarterly sales and operating profit records organic growth was 10% for the quarter with a 3% contribution from foreign exchange, we've posted double digit growth in six of the last seven quarters in this segment.

Growth was driven by broad strength across all markets with particularly strong growth in commercial OE and commercial aftermarket, which were up 21% and 27% respectively.

Operating margin of 24, 1% was up 10 basis points on a year over year basis, and up 160 basis points sequentially.

Tom Okray: We've looked at multiple scenarios with meaningful order intake decline, and are confident in those scenarios given our backlog coverage that we can generate robust organic growth for several quarters into 2025. In this regard, electrical America's backlog increased 19% year-over-year and 5% sequentially, resulting in a book to bill ratio above 1.1 on a rolling 12-month basis. For orders, we had particular strength in data center, industrial facilities, and institutional markets. Also, our major project negotiations pipeline in Q3 was up 33% versus prior year and 19% sequentially, from especially strong growth in data center, institutional, government, and water waste water markets. Data center negotiations increased almost four times. On a two-year stack, our negotiation pipeline was up 180%. Overall, electrical America's continues to have a very strong year.

Growth in orders and backlog continue to be very strong.

On a rolling 12 month basis orders increased 16% with especially strong growth in commercial OEM commercial aftermarket and defense OEM.

Year over year backlog increased 22% in Q3, and 4% sequentially, reflecting continued momentum in the aerospace recovery.

On a rolling 12 month basis, our book to Bill for our Aerospace segment remains very strong at 1.2.

Moving to our vehicle segment on page 13.

In the quarter organic growth was down 1% foreign exchange had a 2% favorable impact.

We saw growth in APAC North American automotive.

And EMEA markets more than offset by a decline in North American class eight and South American markets.

Operating margins came in at 17, 4% 60 basis points above prior year, driven by effective price cost management.

Partially offset by lower sales volumes.

Tom Okray: On page 11, you'll find the results for our electrical global segment. Despite flat organic growth, we posted a Q3 right sales record. We had strength in our commercial and institutional industrial and utility markets.

17, 4% margins represents.

210 basis points of sequential increase primarily driven by manufacturing efficiency improvements.

We continue to pursue and win new business in growth areas, such as EV torque win with a major Chinese OEM.

We also have momentum winning program length extensions and volume increases with multiple Oems globally.

Tom Okray: It was for me to be short term, with organic growth in the segment returning to low to mid single digits in Q4. Operating margin of 21.8% was up 120 basis points compared to prior year. Operating profit and margin were all time quarterly records. Margin improvements were primarily driven by effectively managing price cost. Orders were up 1% on a rolling 12 month basis with strength in data center and utility markets. Importantly, book to bill remained greater than one.

On page 14, we show results for our E mobility business, we generated another strong quarter of growth, including an all time sales record.

Revenue was up 19% all organic margin improved 150 basis points versus prior year to breakeven the.

The result was mostly driven by higher volumes from ramping programs and improved manufacturing productivity.

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

So far in 2023, we have won new programs with $1 1 billion of mature year revenues.

Tom Okray: Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segments. For Q3, we posted organic growth of 11%, incremental margin of 53%, and segment margin of 25.5%, which was up 320 basis points over prior year. On a rolling 12 month basis, our book to bill ratio for our electrical sector remains very strong and more than 1.1. We remain quite confident in our positioning for continued growth with strong margins in our overall electrical business.

This is nearly a 145% increase in new program wins since the $450 million highlighted in last quarter's earnings call.

Through these wins, we continue to find opportunities to leverage expertise and differentiated technologies across segments.

Should be noted we have increased our interim revenue target for 2025 by 25% from $1 2 billion to $1 5 billion.

Moving to page 15, we show, our electrical and aerospace backlog updated through Q3.

Tom Okray: The next slide highlights our aerospace segment. We posted all time quarterly sales and operating profit records. Organic growth was 10% for the quarter with a 3% contribution from foreign exchange. We've posted double digit growth in six of the last seven quarters in the segment. Growth was driven by broad strength across all markets with particularly strong growth in commercial OE and commercial after market, which were up 21% in 27% respectively. Operating margin of 24.1% was up 10 basis points on a year-over-year basis and up 160 basis points sequentially.

As you can see we continued to build backlog with electrical stepping up to $9 4 billion in aerospace, reaching $3 1 billion.

Sequential increases of 5% and 4% respectively.

Both businesses have increased their backlogs by significantly more than 100% since Q3 2020.

The backlog build gives us confidence in our order outlook for the quarters to come.

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

Organic growth, we are increasing electrical Americas, lowering electrical global and E mobility, while narrowing the range, while narrowing the range of our total organic growth, resulting in a 50 basis point increase at the midpoint.

Tom Okray: Growth in orders and backlog continue to be very strong. On a rolling 12 month basis, orders increase 16% with especially strong growth in commercial OEM, commercial after market and defense OEM. Year-over-year backlog increased 22% in Q3 and 4% sequentially reflecting continued momentum in the aerospace recovery. On a rolling 12 month basis, our book to bill for our aerospace segment remains very strong at 1.2.

We now expect organic growth in electrical Americas to be 16, 5% to 18, 5% up 250 basis points from our prior 14% to 16% guidance.

This represents 850 basis points improvement from our initial 2023 guidance.

Tom Okray: Moving to our vehicle segment on page 13, in the quarter, organic growth was down 1%, foreign exchange had a 2% favorable impact. We saw growth in APEC, North American Automotive, in AMIA markets, more than offset by decline in North American class 8 in South American markets. Operating margins came in at 17.4%, 60 basis points above prior year driven by effective price cost management, partially offset by lower sales volumes.

For electrical global we're lowering our organic growth guidance from 6% to 8% to 4% to 6% based on weaker than expected end markets in Europe.

<unk> E mobility, the midpoint of our organic growth guidance is now 25% versus 35%, mostly due to OEM related delays or their EV platforms.

For segment margins were increasing our total Eaton margin guidance range by 50 basis points.

This is a result of an improved outlook and electrical Americas, where we increased the range by 150 basis points on strong demand and continued operational execution.

Tom Okray: 17.4% margins represents 210 basis points of sequential increase, primarily driven by manufacturing efficiency improvements. We continue to pursue and win new business in growth areas, such as EV torque win with a major Chinese OEM. We also have momentum winning program length extensions and volume increases with multiple OEMs globally.

We are lowering margin guidance, where electrical global 50 basis points due to lower growth.

The 21, 8% midpoint comfortably exceeds our target to reach 21, 5% by 2025 and represents a 160 basis point increase versus prior year.

Tom Okray: On page 14, we show results for our E-mobility business. We generated another strong quarter of growth, including an all time sales record. Revenue was up 19% all organic. Margin improved 150 basis points versus prior year to break even. The result was mostly driven by higher volumes from ramping programs and improved manufacturing productivity.

In summary, as we approach the final quarter of 2023, we remain well positioned to deliver another very strong year of financial performance.

On page 17, we have additional guidance metrics for 2023 and Q4.

Following our strong year to date performance and improved margin expectations. We are raising our full year EPS range to $8 95 per share to $9 five per share the $9 midpoint represents 19% growth in <unk>.

Tom Okray: Overall, we remain very encouraged by the growth prospects of the E-mobility segment. So far in 2023, we have won new programs worth 1.1 billion of mature year revenues. This is nearly 145% increase in new program wins since the 450 million highlighted in last quarter earnings call. Through these wins, we continue to find opportunities to leverage expertise and differentiated technologies across segments.

Adjusted EPS over the prior year.

We're also raising our operating cash flow and free cash flow guidance ranges by $100 million each to reflect our stronger earnings and solid working capital management.

For Q4.

We are guiding organic growth of 8% to 10% segment margins of 22, 3% to 22, 7%, representing a 170 basis point improvement at the midpoint versus prior year.

Tom Okray: Should be noted, we have increased our interim revenue target for 2025 by 25% from 1.2 billion to 1.5 billion.

Adjusted EPS is a range of $2 39 to.

Tom Okray: Moving to page 15, we show our electrical and aerospace backlog updated through Q3. As you can see, we continue to build backlog with electrical stepping up to 9.4 billion and aerospace reaching 3.1 billion. Sequential increases of 5% and 4% respectively.

To $2 49.

In the 18% increase versus prior year at the midpoint.

The next chart summarizes the progression of our guidance in 2023.

Throughout the year, we've demonstrated the ability to execute on our commitments and raise guidance for all of the metrics shown we are well on track to deliver our third year in a row of double digit organic growth with all time record margins and a $1 billion or nearly.

Tom Okray: Both businesses have increased their backlogs by significantly more than 100% since Q3 2020. The backlog build gives us confidence in our order outlook for the quarters to come.

40% increase in operating cash flow.

Tom Okray: On the next page, we show our fiscal year organic growth and operating margin guidance. For organic growth, we are increasing electrical America's lowering electrical global and E-mobility while narrowing the range of our total organic growth resulting in a 50 basis point increase at the mid. We now expect organic growth in electrical America to be 16.5 to 18.5 percent, up 250 basis points from our prior 14 to 16 percent guidance.

Now I'll hand, it back to Craig Thanks, Tom I'm moving to page 19, and turning our attention to next year. We provided our initial view on what we expect from our end markets and first I would note. This is the starting point, we haven't changed our view on 2023.

And as you can see we're expecting attractive growth in nearly all of our markets. In 2024, we expect strong double digit growth in Datacenters and distributed it segment and utilities commercial aerospace in electric vehicles. Additionally, we expect solid growth within industrial facilities commercial and institutional and defense aerospace.

Yes.

And as you can see global light vehicle market should be modestly positive with only the residential and commercial vehicle markets experiencing a decline.

So it should be another year of significant growth with over 80% of our end markets showing solid or better growth.

Please note that much of this growth is supported by record backlogs.

Tom Okray: 6 to 8 percent to 4 to 6 percent based on weaker than expected end markets in Europe. For immobility, the midpoint of our organic growth guidance is now 25 percent versus 35 percent, mostly due to OEM related delays for their EV platforms. For segment margins, we're increasing our total Eaton margin guidance range by 50 basis points. This is a result of an improved outlook in electrical America where we increase the range by 150 basis points on strong demand and continued operational execution.

We will provide more detailed color on organic growth.

As we come together with our 2024 guidance in February of next year.

As you can see from the outlook despite mixed signals in the economy and some historical indicators of growth Eaton remains very well positioned to deliver what we call differentiated growth in 2024 and beyond.

So I'll close with a summary on page 22.

On page 20.

Last quarter I noted that we're feeling good about how our markets are performing and today I really that sentiment.

We continue to experience powerful megatrends that are driving a higher outlook for our end markets and we're seeing it in our negotiations and order book.

Tom Okray: We are lowering margin guidance for electrical global 50 basis points due to lower growth. The 21.8 percent midpoint comfortably exceeds our target to reach 21.5 percent by 2025 and represents 160 basis point increase versus prior year.

And once again, we delivered another record quarter financial results increased our earnings and cash flow outlook.

Our orders continue to come in at historically high levels, and we continue to grow our backlog.

I would note that our team is executing well but.

But we have an opportunity to be better everywhere and I'd say in every business. So the setup for 2024 is playing out as we expected and it should be another strong year with that we'll open it up for any questions you may have.

Tom Okray: In summary, as we approach the final quarter of 2023, we remain well positioned to deliver another very strong year of financial performance.

Tom Okray: On page 17, we have additional guidance metrics for 2023 and Q4. Following our strong year-to-date performance and improved margin expectations, we are raising our full-year EPS range to $8.95 per share to $9.05 per share. The $9 midpoint represents 19 percent growth in adjusted EPS over the prior year. We're also raising our operating cash flow and free cash flow guidance ranges by $100 million each to reflect our stronger earnings and solid working capital management.

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

Thank you and ladies and gentlemen, if you wish to ask a question. Please press in London zero on your Touchtone phone you will hear an acknowledgment on that you've been placed in the queue and you may remove yourself from queue at any time by repeating the Wednesday will command and if you're on a speakerphone. Please pick up your handset before pressing the number once again if you have a question. Please press.

London Zero.

Our next question will come from the line of Andrew <unk> from Bank of America. Please go ahead.

Hey, guys good morning.

Tom Okray: For Q4, we are guiding organic growth of 8 to 10 percent, segment margins of 22.3 to 22.7 percent, representing 170 basis point improvement at the midpoint versus prior year. Adjusted EPS is a range of $2.39 to $2.49 in 18 percent increase versus prior year at the midpoint. The next chart summarizes the progression of our guidance in 2023. Throughout the year, we demonstrated the ability to execute on our commitments and raise guidance for all of the metrics shown.

Hey, good morning, Andrew.

Just a question on Incrementals.

Very nice progression in electrical Americas from first quarter into the third quarter and overall for the company.

No.

How should we think about just incremental progression to the fourth quarter and 24 because.

I think within your framework, you've used a lower number.

Just maybe expand what's driving these strong incrementals and how sustainable it is going.

Going forward.

And I appreciate the question, Andrew and our team certainly performed extremely well during the quarter and were proud of our teams and how well they executed in this quarter and certainly implied in the guidance are.

Pretty attractive Incrementals, well, maybe I'll answer the last question first with respect to as we think about Incrementals going forward in 2024, and we still think 30% incrementals or the right way to think about the incrementals for the company clearly, we're making some investments in the business that are going to kind of <unk>.

Tom Okray: We are well on track to deliver our third year in a row of double-digit organic growth with all-time record margins in a $1 billion or nearly 40 percent increase in operating cash flow.

Craig Arnold: Now I'll hand it back to Craig. Thanks. They're moving to page 19 and turning our attention to next year. We've provided our initial view on what we expect from Ren Markets. And first I would note, this is a starting point. We haven't changed our view on 2023. And as you can see, we're expecting attractive growth in nearly all of our markets in 2024. We expect strong, the double digit growth in data centers and distributed IP segment and utilities, commercial aerospace and electric vehicles.

Moderate incrementals and certainly if you think about price versus cost in and the tailwind that they provided during the course of 2023 were not expected to see the same order of magnitude tailwind in 2024. So we still think 30% is a good planning number for next year and but certainly as we.

Think about Q3 and Q4, we have a pretty strong line of sight to to those incrementals that are embedded in our forecast for Q4.

Craig Arnold: Additionally, we expect solid growth within industrial facilities, commercial and institutional and defense aerospace. And as you can see, global light vehicle market should be modestly positive with only the residential and commercial vehicle markets experiencing a decline. So it should be another year of significant growth with over 80% of our in markets saying solid or better growth. Please note that much of this growth is supported by record backlogs.

Thank you and just a follow up question.

You keep announcing additional capacity additions.

If I look at slide 19.

You sort of give end market growth assumptions, so how should we quantify the outgrowth opportunity or revenue from capacity additions, particularly relative to your end market assumptions. Thank you.

Craig Arnold: And we'll provide more detailed color and again a growth as we come together with our 2024 guidance in February of next year. As you can see from the outlook, despite mixed signals in the economy and some historical indicators of growth, Eaton remains very well positioned to deliver what we call differentiated growth in 2024 and beyond.

Yes.

It is a kind of a really attractive problem to have Andrew in terms of the growth that we're seeing in many of our businesses and having to make some investments to deal with the stronger demand that we've seen over the last.

Few years than what certainly the demand that we expect to see into the future and so we talk about kind of this growth outlook for the company.

Craig Arnold: So our close with a summary on page 22, on page 20 last quarter, I noted that we're feeling good about how markets are performing and today I read it that sentiment. We continue to experience powerful mega trends that are driving a higher outlook for our markets and we're seeing it in our negotiations in order book. And once again, we delivered another record quarter financial results, increased our earnings and casual outlook. Our orders continue to come in at historically high levels and we continue to grow our backlog. I would note that our team is executing well, but we have an opportunity to be better everywhere and I say in every business.

These strong markets and we need to make some investments in capacity and some key bottlenecks, we talked about the $1 billion in my opening outbound commentary and where it's going and I would say that these investments that we're putting in.

Give us the capacity that we need to support the long term growth outlook for the company and a little headwind above that if markets turn out to be even a bit stronger than what we anticipated and so we're making the investments that we should be making and we need to make to get out in front of the pretty robust outlook that we have.

The companys growth.

Thanks, so much.

Thank you.

Thank you. The next question is from Joe Ritchie from Goldman Sachs. Please go ahead.

Craig Arnold: So the set up for 2024 is playing out as we expect it and it should be another strong year with that will open enough for any questions you may have.

Thanks, Doug good morning, everyone.

Joe.

Hey, Craig maybe just talk a little bit about the Mega project for a second I think you mentioned that 20% of the projects had started when.

Unknown Executive: Hey, thanks Craig for the Q&A today. Please leave me your opportunity to just one question and a one follow up. Thanks in the ones for your cooperation with that.

When you think about the timing of when you typically will see a.

Operator: I'll turn it over to the operator, give you guys the instructions. Thank you and ladies and gentlemen. If you wish to ask a question, please press one then zero on your touch tone phone. You will hear and acknowledge the tone that you've been placed in the queue and you may remove yourself from queue at any time by repeating the one zero command. And if you're on a speaker phone, please pick up your hands that before press the number. Once again, if you have a question, please press one then zero.

Youre bidding on those projects and the orders coming through how do you see this kind of playing out based on again the projects that have already started and now the funnels are continuing to increase.

Yeah, No I appreciate.

<unk> the question and it's certainly something that we've spent a fair amount of time internally trying to sort through ourselves and as you can imagine inside of this broad array of Mega project is very different types of projects that are embedded in those numbers some of which were you would have essentially.

Andrew Obin: The first question will come from the line of Andrew Oven from Bank of America. Please go ahead. Yes, good morning. Hey, and morning, Andy. Just a question and incremental, you know, just very nice progression in electrical America's from first quarter into third quarter and overall for the company. So, you know, how should we think about just incremental progression to the fourth quarter and 24 because, you know, I think within your framework, you've used a lower number.

12 month kind of cycle, others of which could have three year cycles are longer. So it's a it's a pretty wide distribution of <unk>.

Lead times, depending upon the type of projects that we're talking about so.

Say that.

At this juncture.

You had to use a rule of thumb I would say you're probably because these tend to be the bigger projects. Unlike our flow business that probably a couple of years on average in terms of from when we actually.

Andrew Obin: Just maybe expand what's driving these strong incremental and how sustainable it is going forward. You know, appreciate the question, Andrew. And our team certainly, you know, performed extremely well during the quarter and we're proud of our teams and how well they executed in this quarter and certainly implied in the guidance are pretty attractive incremental as well. Maybe I'll answer the last question kind of first with respect to us. We think about incremental is going forward in 2024 and we still think 30% incremental is the right way to think about the incremental is for the company.

Start.

Rice of project to actually it's showing up in revenue inside of the company you can figure on average a couple of years out is the way to think about it.

I would say that talking about these mega projects and Jonathan we've got so many questions that had been theres been so much written about this particular topic.

I would say today that that is principally.

Perhaps more than anything else.

What's driving this fundamental change in the growth prospects for the company and these huge projects much bigger than they've ever been historically.

Andrew Obin: Clearly, we're making some investments in the business that are going to kind of moderate incremental and certainly if you think about price versus costs and in the tailwinds that they provided during the course of 2023, we're not expected to see the same order of magnitude tailwinds in 2024. So we still think, you know, 30% is a good planning number for next year. And but certainly as we think about, you know, Q3 and Q4, we have, you know, pretty strong line is expected to see the same order of magnitude tailwinds in 2024.

And by the way I would note that 60% of these projects are related to whether it's IRA.

The Iga or the chips Act and so these are really big projects. They are different projects and the projects that are quite frankly being subsidized in many ways by.

Andrew Obin: So we still think, you know, 30% is a good planning number for next year. And, but certainly as we think about, you know, Q3 and Q4, we have, you know, pretty strong line is expected to, to those incremental that are embedded in our forecast for Q4.

This government spending that's taking place more broadly inside of the U S economy.

So we think these projects are solid.

They're going to go forward.

And we think it's once again going to be really attractive growth tailwind for the company.

Craig Arnold: Thank you. And just a follow-up question, you know, you keep announcing additional capacity additions. You know, if I look at slide 19, you sort of give and market growth assumptions. So how should we quantify the outgrowth opportunity or revenue from capacity additions, particularly relative to your and market assumptions? Thank you. You know, you know, this is a kind of a really attractive problem to have, Andrew, you know, in terms of the growth that we're seeing in many of our businesses and having to make some investments to deal with this stronger demand that we've seen over the last, you know, a few years and what certainly the demand that we expect to see into the future.

And just to just to complement that Craig I mean, those are the mega projects, but we also said in the prepared remarks are negotiated pipeline for the U S, which was up 33% year over year and up.

18% sequentially, so lot of good growth going on those big projects, but less than the $1 billion.

As well.

Yes, that's great color guys and I guess, just my quick follow on there is just.

Any concern that you have at this point, there's a lot of concern in the market regarding project financing.

And specifically I think you guys called out utility Capex.

Craig Arnold: And so, you know, we talk about kind of this growth outlook for the company in these strong markets. And we need to make some investments in capacity. We need some key bottlenecks. We talked about the billion dollars in my opening up on commentary and where it's going. And I'd say that these investments that we're putting in will give us the capacity that we need to support the long-term growth outlook for the company and a little headwind above that if markets turn out to be even a bit stronger than what we anticipate. And so we are making the investments that we should be making and we need to make to get out in front of the pretty robust outlook that we have.

The market being up double digits next year, just any thoughts around the project financing issue higher interest costs, and whether that pushes things out a bit.

Andrew Obin: Thanks so much.

Unknown Executive: Thank you.

Yeah.

It's certainly one of the things that we're watching and we're concerned about is well Joe made perfectly logical to say that some of these projects could be delayed or.

Put at risk given much higher financing costs I will tell you that we've not seen any evidence of any material evidence of that to date, but it certainly once again, a potential risk and thats why I highlight this issue around <unk>.

60% of these projects basically being financially supported.

By these government stimulus plans, which is very new and the dollars as you know are quite substantial and at this point, but what the wait and see how it plays out and we're going to watch it in.

Joe Richie: The next question is from Joe Richie from Goldman Sachs. Please go ahead. Thanks. Good morning, everyone. Good morning, Joe. Hey Craig, can we just talk a little bit about the mega projects for a second? I think you mentioned that you know, 20% of the projects have started. When you think about the timing of when you typically will see a, you know, your bit like bidding on those projects and the orders coming through.

And make sure that we're taking the necessary precautions, but to date, we really haven't seen that impact yes, Joe year to date in the Americas utility is up over 25% and if you look at the entire electrical sector.

Sector year to date are up over 20% so remains very strong.

Joe Richie: How do you see this kind of playing out based on again, the projects that have already started and now the funnel is continuing to increase. You know, I appreciate the question and it's certainly something that we've spent a fair amount of time internally trying to sort to ourselves. And as you can imagine inside of this broad array of mega projects is very different types of projects that are embedded in those numbers, some of which, you know, where you'd have essentially, you know, a 12 month kind of cycle.

Yeah.

Great. Thank you both.

Yes.

Thank you and our next question is from Jeff <unk> from vertical research. Please go ahead.

Thank you and good morning, everyone.

Yes.

Morning.

Can we pivot a little bit to electrical.

Global and just.

Maybe a little bit more color on kind of the complexion of demand underneath the surface, thereby by geography.

Joe Richie: So others of which could have three year cycles or longer, so it's a, it's a pretty wide distribution of lead times, depending upon the type of projects that we're talking about. So, so I'd say that, you know, at this juncture, if you had to use a rule of thumb, I'd say you're probably because these tend to be the bigger projects unlike our flow business. They're probably a couple of years on average in terms of from one week we actually.

Noted.

Project activity is starting to come to the floor there.

It does seem like Europe.

Particular might end up in a bit of a bidding war.

With the U S on project.

Stimulus and the like so.

Maybe just a little bit of color there on how you see.

Things playing out into the first half of next year, not just Q4, but.

Kind of pipeline might be building.

Joe Richie: Start and price a project to actually showing up in revenue inside a company. You can figure on average a couple of years out is the way to think about it. I would say that talking about these mega projects in general, we've gotten so many questions and there's been so much written about this particular topic. I would say today that that is principally, perhaps more than anything else, what's driving this fundamental change in the future.

I appreciate the question, Jeff and as soon as we can.

Think about today, what makes up the global business for US there is what we do in Asia is what we do and what we call <unk>, which was the former Crouse Hinds Beeline business and then there is our electrical Europe business. Those are the three pieces that make up.

Global for Us and I will say that we know without a doubt did see a slowdown in our European business. During the course of Q3.

Joe Richie: The growth prospects for the company and these huge projects, much bigger than they've ever been historically. And by the way, I'd note that 60% of these projects are related to whether it's IRA, the IIJA, or the CHIPS Act. And so these are really big projects, they are different projects and they are projects that are quite frankly being, you know, subsidized in many ways by this government spending that's taking place more broadly inside of the US economy.

Our business specifically, we are a pretty big player into what you call the manufacturing or the OEM segment and that segment was especially weak our business in Asia continued to perform well growing high single digits or our guidance.

<unk> business continued to perform fine mid single digit consistent with what we expected it's really what took place during the course of the quarter.

In Europe, specifically in electrical that drove the miss to our own expectations and the reduction in our outlook now.

Joe Richie: So we think these projects are solid, they're going to go forward. And we think it's once again going to be really attractive growth tailwind for the company in just to compliment that Craig. I mean, those are the mega projects, but we also said the prepare remarks are negotiated pipeline for the US, which was up 33% year over year and up 18% sequentially. So, you know, a lot of good growth going on those big projects, but less than the billion dollars as well.

Without a doubt we saw some destocking in the distribution channel and having had a number of conversations person with some of our large distributors in Europe. It's clear that they were doing some inventory adjustments some over buying that took place over the last 12 months or so and we do think that that segment gets back to mid single digit growth in.

Q4, and we think once again these fundamental trends that we talked about with respect to electrification energy transition digital growth in data centers all of those trends are applicable for Europe as well and so we do think while slower growth than the U S. We think those mom.

Joe Richie: Yeah, that's great color, guys. And I guess just my quick follow on there is just, you know, any concern that you have at this point is a lot of concern in the market regarding project financing. And, you know, specifically, I think you guys called out utility capex, the market being up double digits, you know, next year. Does any thoughts around those project financing issue higher interest costs and whether that pushes things out a bit?

<unk> get back to growth once we work through this inventory correction that we've seen here in the third quarter.

Encouragingly, Jeff we've seen some good order flow in EMEA. So that gives us it gives us confidence to go to the low mid single digit in Q4, but we'll keep watching it literally there is a lot of geopolitical tensions in the region there as well.

Joe Richie: Yeah. You know, it's certainly one of the things that we're watching and we're concerned about as well, Joe, me it's perfectly logical to say that some of these projects could be delayed or, you know, put at risk, given much higher financing costs. I will tell you that we've not seen any evidence in the material evidence of that to date, but it's certainly once again a potential risk. And that's why I highlight this issue around, you know, 60% of these projects basically being financially supported by these government stimulus plans, which is very new.

And we're not going to be Pollyannish about it then.

If we need to make some adjustments, we'll make the adjustments we need to make.

Yes.

Great and maybe just as a follow up different topic, though is just thanks for the little mini deep dive on data centers here can.

Can you just speak to how your your content is changing so obviously you gave us a one 5 million per megawatt and we got a lot of megawatts coming right. So you just grow on the back of that for sure.

Joe Richie: And the dollars as you know are quite substantial. And at this point, but what the wait and see how it plays out, and we're going to watch it and make sure that we're taking the necessary precautions, but today we really haven't seen that impact. Joe, you're to date in the America utility is up over 25%. And if you look at the entire electrical sector, you're to date up over 20%. So remains very strong. Great. Thank you, but.

Craig Arnold: Thank you.

Is your dollar content per megawatt also going up as part of this equation.

<unk> had been and where is it headed in your view.

Yes, what I would tell you is that the simple answer to the question is yes, we are essentially selling more content per megawatt because we're selling more software solutions, we're selling more complete data center solutions into the marketplace.

Jeff Strike: And our next question is from death strike from vertical research. Please go ahead. Thank you. Good morning, everyone. Hey, good morning. Can we pivot a little bit to electrical global and just maybe a little bit more color on kind of the complexion of demand underneath the surface there by, by geography and you know, you noted, you know, some project activity starting to, you know, come to the floor there. Those seem like Europe in particular might end up in a bit of a bit more, you know, with the US on project stimulus and the light.

So that would be absolutely true.

That impact is kind of dwarfed by just the overall growth in the market, though I mean, the market as we've talked about continues to be quite robust and maybe some of the data.

If you look at simply the backlog.

<unk> projects today in datacenter in the planning stages, it surpassed $100 billion for the first time ever greater than six years of construction.

12 billion in the month of September alone starts up from 29%.

Driven by the big four and some $42 billion under construct until the so the whole market is growing quite dramatically right now and obviously what's happening today.

Jeff Strike: So maybe just a little bit of color there on how you see, you know, things playing out into the first half of next year, not just Q4, but, you know, what kind of pipeline might be building. Appreciate the question, Jeff, and as we, you know, if you think about today what makes up the global business for us, there's what we do in Asia is what we do and what we call ice, which was the former crowd finds, beeline business.

AI is accelerating that and if you think about the content opportunity for electrical equipment alone and an AI centric data center, it's five ex the growth the opportunity.

When you compare it to a conventional data center now having said that there clearly are some very real constraints in terms of the industry's ability to really deal with the demand that's out in front of us.

Jeff Strike: And then there's our, it's our electrical Europe is those are the three pieces that make up, you know, global for us. And, and I will say that we know, without a doubt, did see a slowdown in our European business during the course of Q3. Our business specifically, we're, you know, we're a pretty big player into what you call the manufacturing or the M OEM segment and that segment was especially weak. Our business in Asia continued to perform well, growing, you know, high single digits, our guys business continued to perform fine, mid single digit consistent with what we expected.

Huge backlog huge negotiations we have historically operated with some three years, let's say visibility and data center market, where now we have more.

More than in some cases five years of visibility on projects until the home market is just performing extremely well and we'd expect it to do so for years to come.

Yes.

Just to amplify Jeff just just a little bit more on the year to date and data centers again on our negotiation pipeline up 136% and in the quarter as we said in the prepared remarks up four times. So it's.

Jeff Strike: It's really what took place on the course of a quarter in Europe, specifically an electrical that drove the mist or our own expectations and the reduction in our outlook. Now, we, we, without a doubt, we saw some destocking in the distribution channel and having had a number of conversations person with some of our large distributors in Europe. It's clear that they were doing some inventory adjustments, some over buying that took place over the last 12 months or so.

It's growing faster, it's growing faster than it was at the beginning of the year as well.

Great. Thank you.

Our next question is from Scott Davis from Melius.

Research. Please go ahead.

Hey, good morning, guys.

Good morning.

Not much to pick on really solid results across the board, but I was wondering if you could talk a little bit about M&A and maybe opportunities to play offense here, while the cash flows cooking.

Jeff Strike: And, and we do think that that segment gets back to mid single digit growth in Q4. And we think, once again, these fundamental trends that we talked about with respect to electrification, energy transition, digital growth and data centers. All of those trends are applicable for Europe as well. And so we do think, well, slower growth than the US, we think those markets get back to growth once we've worked through this inventory correction that we've seen here in the third quarter.

And.

I was thinking in particular is there any opportunities out there to really scale up to see mobility segment too.

Either whether it's several interesting bolt ons or something a little bit larger to to get that to scale, a little faster than maybe the current pace.

I appreciate the question Scott and first of all I would say that with respect to M&A.

Jeff Strike: Encouragingly, Jeff, we've seen some good order flow in, in a Mia, so that gives us, it gives us confidence to go to the low mid single digit and Q4. But we'll keep watching it. I mean, clearly there's a lot of, you know, geopolitical tensions in the region there as well. And, and we're not going to be polyannish about it. And if we need to make some adjustments, we'll make the adjustments we need to make.

More generally we set our priorities will be electrical they will be aerospace and then on the margin.

If we could find the right asset we would consider an acquisition in E mobility as well, but I think the broader message for the companies that we have enormous growth opportunities in front of us the organic opportunities that we're looking at across the business and our ability to grow organically.

Craig Arnold: Great.

Jeff Strike: And maybe just as a follow up different topic, though, is just thanks for the little mini deep dive on data centers here. Can you just speak to how your, you know, your content is changing? So obviously, he gave us the one and a half million dollars per megawatt. And we got a lot of megawatts coming, right? So you just grow on the back of that for sure. Is your dollar content per megawatt also going up as part of this equation and, you know, how so where's it been and where's it headed in your view?

I'd say today, they're just growth opportunities every place and unlike perhaps in some times past.

Don't need to do deals to significantly grow the company and Thats true as well in E mobility as you heard Tom's presentation.

We just had another quarter of.

Jeff Strike: Yeah, you know what I would tell you is that the simple answer to the question is yes, we are essentially selling more content per megawatt because we're selling more software solutions, we're selling more complete data center solutions into the marketplace. So that would be absolutely true. That impact is kind of dwarfed by just the overall growth in the market though. I mean the market as we've talked about continues to be quite robust and just maybe some of the data.

Huge wins.

$600 million, Tom was the number I believe in terms of quarter over quarter change, yes, yes, so 25%. So each one of these wins in E. Mobility just results in just just enormous growth for the organization and so we set this target of being $2 billion to $4 billion.

By 2030, we will be so.

Collective.

We will we will essentially as we talked about in some of the prior conversations we will make sure that we're going to play in E mobility, where we have the ability to leverage our scale, our technology and the expertise in our core electrical business, that's where we have the right to win that's where we are.

Jeff Strike: If you look at simply the backlog of projects today in data center in the planning stages, it surpassed $100 billion for the first time ever, rated in six years of construction, $12 billion in the month of September alone starts up some 29% you know driven by the big four and some 42 billion dollars under construction. So the so the whole market is growing quite dramatically. Right now and obviously what's happening today in AI is accelerating that and if you think about the content opportunity for electrical equipment alone in an AI centric data center, it's five X the growth, the opportunity when you compare it to a conventional data center now having said that there clearly are some very real constraints in terms of the industry's ability to really deal with that.

The right to play and that's where we can really deliver attractive margins for Eaton and.

So that's really strategically what we're focused on with respect to the areas of interest that we have in E. Mobility. So it really is about power distribution power protection.

Doing the same things that we do in our core electrical business, we get scale that we can leverage into a mobility at the same time leveraged at scale back into our core electrical business. So I'd say today, you could expect us in terms of the thinking thinking about M&A.

Tuck ins.

Things that are very much digestible those are the kinds of opportunities. We're looking at in general and those are the things today that I think makes sense for the company in terms of where we are today with respect to our organic growth opportunities in front of us.

Yes, just.

Add a little bit more the long term target as Craig said, and we said in the prepared remarks, a 25%, but even since last quarter, our mature year wins was up 145%.

Jeff Strike: The demand that's out in front of us huge backlog, huge negotiations, we have historically operated with some three years, let's say a visibility in data center market. We're now more than in some cases, five years of visibility on projects. So the whole market is just performing extremely well and we'd expect it to do so for years to come. Just to amplify Jeff just a little bit more on that year to date and data centers again on our negotiation pipeline up 136%. And in the quarter, as we said in the prepared remarks, up four times. So it's growing faster, it's growing faster than it was at the beginning of the year as well.

Scott Davis: Great.

That said, we've got a ton of flexibility net leverage on the balance sheet. One five so we're always we're always looking but we do have a lot of food on the table as Craig said.

Craig Arnold: Thank you.

That's helpful.

Just to back up a little bit if you think about Eaton historically had been a company that always manage price around raw materials, particularly steel and copper.

Is this.

As the algorithm more likely in the future is going to be pricing around the value you are adding or perhaps pricing kind of dislocated from the underlying commodities.

Or is that just kind of a bridge too far from from from our kind of customers are conditioned.

Steve Tusa: Next question is from Scott Davis, family of research, please go ahead. Hey, good morning guys. Good morning.

Yes, I'd like to thank Scott that we were always value pricing, but.

Craig Arnold: Not much to pick on, really solid results across the board, but I was wondering if we could talk a little bit about M&A and maybe opportunities to play offense here while the cash loads cooking and I was thinking in particular. Is there any opportunities out there to really scale up this mobility segment to make either whether it's several interesting bolt-ons or something a little bit larger to get that to scale a little faster than maybe the current pace.

I think I get to a broader message with respect to the whole market dynamics around price versus cost and certainly when you are in a capacity constrained market. It certainly.

Gives you a bit more leverage than you've had historically, but let just say in general as we think about the strategy for the companies that we intend to earn our margin accretion.

By running our businesses better by running the company, better and eliminating waste and inefficiencies and will recover inflation, where we see it through price.

Craig Arnold: You know, I appreciate the question, Scott, and you know, first of all, I would say that with respect to, you know, M&A, more generally we said our priorities will will be electrical. They will be aerospace and then on the margin, if we could find the right asset, we would consider an acquisition and immobility as well. But I think the broader message for the company is that we have enormous growth opportunities in front of us.

But the margin expansion for the company, we we really intend to lie of relying on volume leverage improving operating efficiencies and the way we run the company and those opportunities by the way.

Despite record profitability as I said in my outbound commentary those opportunities are everywhere, we're still not running the company nearly as efficiently as we know we can.

Craig Arnold: The organic opportunities that we're looking at across the business and our ability to grow organically, you know, and I'd say today, they're just growth opportunities every place and unlike perhaps in, you know, sometimes past. We don't need to do deals to significantly grow the company. And that's true as well in immobility. As you heard in Tom's presentation, you know, we just had another quarter of, you know, huge wins, 600 million dollars Tom was the number I believe in terms of court over quarter change.

That's fair good helpful. Thank you best of luck guys. Thank you. Thank you. Thanks Scott.

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

Hi, Congrats on the good result, thank you.

Just trying to reconcile the $850 million in orders with I think you said, 20% of the naked products have started.

Craig Arnold: So each one of these wins in immobility just results in just enormous growth for the organization. And so we, you know, we set this target of being two to four billion by 2030. We will be selective. You know, we will, we will essentially, as we talked about in some of the prior conversations, we'll make sure that we're going to play an immobility where we have the ability to leverage our scale, our technology and the expertise in our core electrical business.

That's obviously, a pretty big number about 850 million in orders is relatively small.

I guess that just speaks to where you guys are.

The thing starts and then you get the order like can you just reconcile.

Those two numbers.

Yeah, and it's really you really can't necessarily recognize the rectal reconcile those two numbers and because our start doesn't mean.

We've even got an opportunity to bid the project yet muscle less negotiation or wind until you really can't reconcile those two numbers and I know, it's such a big number and a very attractive one that everybody is trying to get their head around exactly how it's going to impact.

Revenue for the organization, but those two numbers you really can't reconcile them.

What we tried to provide as a bit of a framework as this.

Craig Arnold: That's where we have the right to win. That's where we have the right to play. And that's where we can really deliver attractive margins for Eaton. And so that's really strategically what we're focused on with respect to the areas of interest that we have in immobility. So it really is about, you know, power distribution, power protection, you know, doing the same things that we do in our core electrical business, we get scale that we can leverage into immobility at the same time leverage that, you know, scale back into our core electrical business.

Win rate of 40%.

Which is essentially <unk>.

Slightly above our.

Underlying market shares in North America as an indication of what you can expect as these projects play out into the future, but you really can't link the 20% to the $8 50.

Well I mean, I think you just did you basically said it's out in front of you.

Yeah Yeah.

Craig Arnold: So I say today you could expect us in terms of the thinking, thinking about amenable, you know, tokens, you know, things that are very much digestible. Those are the kinds of opportunities we're looking at in general and those are the things today that I think make sense for the company in terms of where we are today with respect to our organic growth opportunities in front of us. Yeah, just a little bit more.

Thank you Linda.

And then just one just one last one on the kind of.

Stock and ship business. If you will I know you guys do you have a bit more systems oriented, but hubbell today continue to talk about Destocking and Theres a lot of other industrial talking about that are you guys seeing that in parts of your business and you just kind of blowing through it because the other businesses the supply demand equation is just.

Craig Arnold: The long-term target is Craig said and we said in the prepared remarks of 25%. But even since last quarter, our mature year wins was about 145%. That said, we've got a ton of flexibility net leverage on the balance sheet one five. So, you know, we're always, we're always looking, but we do have a lot of food on the table as Craig said. That's helpful.

So strong that you are kind of weathering some destock in some parts of the of the business, maybe just talk about some of those more flow businesses and what youre seeing on the on the distribution side.

No I think I think you've summarized it well I mean, we are seeing.

Very similar trends in some of the shorter cycle businesses inside of our company, whether thats residential or whether what we're seeing today in the <unk> segment or the it channel we too are seeing a slowdown and we too are experiencing a bit of destocking in certain aspects of the business and so that those trends.

Craig Arnold: And guys, just to back up a little bit, if you think about eating historically, it'd been a company that always managed price around raw materials, particular kind of steel and copper. Is this, is the algorithm more likely in the future going to be pricing around the value you're adding or perhaps pricing kind of dislocates from the underlying commodities? Or is that just a kind of a bridge too far from from from our kind of customers are conditioned?

That others have talked about are certainly evident in our business as well, but I think you hit the nail on the headboard you said that the other parts of the business our systems in.

Craig Arnold: Yeah, but I'd like to think Scott that we were always value pricing, but but I think I get your broader message with respect to the whole market dynamics around price versus cost. And certainly when you're in a capacity constrained market, it certainly, you know, gives you a bit more leverage and you've had historically. What I'd just say in general is we think about the strategy for the companies that, you know, we intend to earn our margin accretion by running our businesses better by running the company better and eliminating waste and inefficiencies and, you know, we'll recover inflation where we see it through price.

Large project business, our data center business, the other pieces, where we're seeing the strength.

Overwhelming those spots, where we're having this weakness now in Europe, we've talked about it in our commentary we did see weakness in Europe and those trends clearly showed up in our European electrical business in the quarter. It's one of the reasons why we reduced the guidance there but.

By contrast, we had this really.

Outside strength and we continue to see outside strength in the systems and the project related business in the Americas that offset the weakness in in the flow business in North America as well as what we've seen in Europe.

Craig Arnold: But the margin expansion for the company, we really intend to rely on volume leverage improving operating efficiencies in the way we run the company. And those opportunities, by the way, you know, despite record profitability, as I said in my outbound commentary, those opportunities are everywhere. We're still not running the company nearly as efficiently as we know we can. That's very good, helpful. Thank you. Best of luck, guys. Thank you. Thank you, Max Scott.

Right, so that would actually be an easy comp for next year in those businesses, assuming things re coupled the trend line.

Well I mean nothing is easy.

And it's certainly probably too early to put our.

And on the scale and predict what's going to happen in Europe. During the course of 2024, but youre right I mean, given the fact that those businesses are weakening assuming the market stabilizes and inventory Destocking is behind us and we certainly have embedded some of that in our Q4 outlook, yes. It <unk>.

Craig Arnold: Thank you, and our next question is from Steve Tusa from Tapey Morgan. Please go ahead. Hey, congrats on the good result. Thank you. Just trying to reconcile the $850 million in orders with, I think you said 20% of the mega-products have started. That's obviously a pretty big number, but $850 million in orders. It's relatively small. I guess that just speaks to where you guys are. The thing starts and then you get the order.

Should be a relatively better year for sure in Europe great.

Thanks, a lot I appreciate it.

Thank you and the next question is from Chris Snyder from UBS. Please go ahead.

Thank you I wanted to follow up on some of the data center commentary. So I think you said negotiations up Forex in Q3, so building as the year goes on.

Craig Arnold: Can you just reconcile those two numbers? You really can't necessarily recognize, reconcile those two numbers, and because a start doesn't mean that we've even got an opportunity to bid to project yet, must less negotiation or win. So you really can't reconcile those two numbers. I know it's such a big number and a very attractive one that everybody's trying to get their head around exactly how it's going to impact revenue for the organization, but those two numbers, you really can't reconcile them.

The increase in conversations all driven by AI are you seeing a broadening base of customers that are talking to you on the data Center Capex and then.

When we think about the AI tailwind is there any benefit in 2023 or as the <unk>.

Not really more 2024, thank you.

Yes, I appreciate the question, it's obviously a topic that's gotten a lot of attention and I would say.

I would tell you first of all you know, while AI and chat GBT I've gotten a lot of publicity of late.

Craig Arnold: What we're trying to provide as a bit of a framework is this win rate of 40%. Which is essentially slightly above our underlying market shares in North America as an indication of what you can expect as these projects play out into the future, but you really can't link the 20% to the $850. Well, I mean, I think you just did. You basically said it's out in front of you. Just one last one on the stock and ship business, if you will.

It's not new I mean, it has been around for some time and so we have.

Historically seen some benefit of AI embedded in the datacenter market I would tell you that number one secondly, as I said in my commentary.

Yes.

Centric.

Bids and orders were up for us, but we had a 61% increase in.

And Hyperscale in general and that is really across the broad data center market and so.

So without a doubt AI will be an accelerator of growth.

But the broader message is essentially more data.

Craig Arnold: I know you guys do your bit more systems oriented, but Hubble today continued to talk about destocking and there's a lot of other industrials talking about that. Are you guys seeing that in parts of your business and you're just kind of blowing through it because the other business is the supply demand equation is just so strong that you're kind of weathering some destock in some parts of the business. Maybe just talk about some of those more flow businesses and what you're seeing on the distribution side.

More information more insights requiring more data centers and those numbers are big and growing as well.

I appreciate that and then maybe just following up on the intersection of orders and backlog.

Orders in the Americas, obviously moderating for about a year now.

In your guidance.

Electrical backlog pretty much every quarter.

Over that time period so.

As we kind of look forward.

Craig Arnold: Now, I think I think you've summarized it well. I mean, we are seeing, you know, very similar trends in, you know, some of the shorter cycle businesses inside of a company, whether that's residential or whether we're seeing today in the MOM segment or the IT channel. We too are seeing a slow down and we too are experiencing a bit of destocking in certain aspects of the business. And so those trends that others have talked about are certainly evident in our business as well.

Do you expect the company to start meaningfully working and so that backlog or are we just kind of in a period of maybe sideways backlog levels into 2020 for any color on that would be helpful. Thank you.

Yes, <unk> the question and certainly one that we're spending some time trying to work through ourselves.

Orders have moderated as we talked about in Americas, but we also we're comping a 36% increase from last year and so.

Craig Arnold: But I think you hit the nail on the head when you said that the other parts of the business are systems and, you know, large project business, you know, our data center business. The other pieces where we're seeing the strength is just overwhelming, you know, those spots where we're having this weakness. Now, in Europe, we talked about it in our commentary. We did see weakness in Europe and those trends clearly showed up in our European electrical business in the quarter.

Our moderation.

Off of a really big number last year and the backlog does continue to grow I think.

It's really in many ways kind of the 64000 dollar question.

Backlog is a function of.

How much demand you're getting.

Versus your ability to satisfy that demand.

And at this point I can only tell you based upon what we've seen and experienced to date is that we've not been able to materially eat into the backlog.

Craig Arnold: It's one of the reasons why we reduced the guidance there. But... By contrast, we had this really outside strength, and we continuously outside strength in the systems in the project related business in the Americas, that offset the weakness in the flow business in North America as well as what we've seen in Europe. Right, so that would actually be an easy comp for next year in those businesses, assuming things re-coupled the trend line.

We will at some point I mean this cannot go on forever.

And we are adding some capacity for sure that's going to help resolve some of the lead time issues and the bottleneck issues and so we would expect backlogs at some point to churn.

Negative.

In absolute terms because keep in mind, we're up three X, we're running a backlog of $9 4 billion in our electrical business.

Craig Arnold: Well, I mean, nothing's easy. And it's certainly probably too early to put our hand on the scale and predict what's going to happen in Europe during the course of 2024, but you're right. I mean, given the fact that those businesses are weakening, assuming the market stabilizes and the inventory destocking is behind us. And we certainly have embedded some of that in our queue for outlook. Yeah, it should be a relatively better year for sure in Europe. Great. Thanks a lot.

Craig Arnold: Appreciate it.

$3 1 billion in aerospace, but $9 4 billion in electrical and that's three times the historical backlog levels and so yes, one it's a function of the fact that markets are good.

And secondly, it is a function in fact, we got to get out in front of some of these capacity planning things. So that we can satisfy all the demand, but at some point backlogs will turn will turn negative and this.

And this is what I was trying to get at in my prepared remarks, just to just to amplify a little bit more and this is where we've modeled the scenarios of.

Christopher Snyder: Thank you. And the next question is from Chris Snyder from UBS. Please go ahead.

Craig Arnold: Thank you. I wanted to follow up on some of the data center commentary. So, you know, I think you said negotiations of 4x in Q3. So building as the year goes on. You know, is that increase in conversations all driven by AI? Are you seeing, you know, a broadening base of customers that are talking to you on the data center topic? And then, you know, when we think about the AI tailwind is is there any benefit in 2023 or is the tailwind not really more 2024?

Meaningful order intake decline on a year over year basis.

And given how big the backlog is right now in the backlog coverage of three times as Craig said.

We think even with meaningful year over year order intake decline.

And robust organic growth this is going to take us several quarters into 2025 before before we get back to historical levels and I would say, we probably never get back to historical levels. If you think about it in terms of absolute terms will.

Craig Arnold: Thank you. Yeah, now, appreciate the question. It's obviously a topic that's gotten a lot of attention that I'd say that, you know, I would tell you, you know, first of all, you know, while AI and chat GBT have gotten a lot of publicity of late, it's not new. I mean, it has been around for, you know, some time and so we have historically seen some benefit of AI embedded in the data center market.

We will be better, but we'll never probably get back to.

$3 billion backlog, it's a bigger business.

We'll need so we'll run a bigger backlog simply to support the fact that it's a large larger business, but what we certainly would expect to at some point start eating into the backlog.

Thank you.

Yeah.

Okay. Thank you and the next question is from the line of Nicole <unk> Deutsche.

Craig Arnold: I'll tell you that number one. Secondly, as I said in my up on commentary, yeah, the AI, you know, centric, you know, bids and orders up 4x, but we had a 61% increase in, in, in hyper scale in general. And that is really across the broad data center market. And so without a doubt, AI will be an accelerator of growth. But the broader messages, essentially more data, more information, more insights requiring more data centers.

Deutsche Bank. Please go ahead.

Hey, Nicole can we just talk a little bit about the capacity investments that you guys are making and just the cadence of when that's going to start kind of phasing in coming online over the next several years.

Yes. So appreciate the question Nicole and I will tell you that some of these investments have been made already and we already are bringing on new capacity.

In products like circuit Breakers, and the like other investments are just now in the early phases. If you think about some of the investments that we're making in transformer capacity in both the to regulators in.

Craig Arnold: And those numbers are big and growing as well. I appreciate that. And then maybe just following up on the intersection of orders and backlogs, you know, orders in the Americas have obviously moderated for about a year now. And you're guys, you know, spilts electrical backlogs, pretty much every quarter over that time period. So, you know, as you kind of look forward, you know, do you expect the companies to start meaningfully working into that backlog?

And that capacity is probably order of magnitude 12 to 18 months out.

So it does vary depending upon which particular piece of the investment that you are you are referring to but I would say.

Hey.

In all cases.

The commitments have been made.

Craig Arnold: Or we just kind of in a period of, you know, maybe sideways backlog levels into 2024 any color on that would be helpful. Thank you. Yeah, appreciate the question. And it's certainly one that we're spending some time trying to work to ourselves. I mean, orders have moderated. We talked about in America, but we also were copying a 36% increase from last year. And so... Moderation, off of a really big number last year, and the backlog does continue to grow.

In all cases.

<unk>, we're looking at essentially those aspects of our business, where we're obviously have more.

Capacity.

It's more growth more backlog than we certainly have capacity to serve it.

And at this point.

Our teams are geared up for.

Ensuring that we executed well and bring this capacity online. It allows us to continue to grow the company and take some market share.

Craig Arnold: I think, you know, it's really in many ways kind of the $64,000 question. It's, you know, backlog is a function of, you know, how much demand you're getting, you know, versus your ability to satisfy that demand. And at this point, I can only tell you, based upon what we've seen and experienced to date, is that we've not been able to materially eat into the backlog. We will at some point, I mean, this cannot go on forever.

Thanks, Craig and then just on free cash flow is thinking about how this progresses into 2024 can you talk a little bit about your plans to reduce working capital and other major puts and takes that could influence conversion next year. Thank you.

Craig Arnold: And we are adding some capacity, for sure, that's going to help resolve some of the lead time issues and the bottleneck issues. And so we would expect backlogs at some point to turn negative in absolute terms, because keep in mind, you know, we're up 3x, we're running a backlog of $9.4 billion in our electrical business, 3.1 billion in aerospace, but 9.4 billion in electrical. And that's three times the historical backlog levels.

Yes, I appreciate the question Nicole.

I think the important thing is to look at year to date, when youre looking at operating cash flow and free cash flow.

We had a good quarter, but year to date, we're up.

73% and operating cash flow and almost 90% and free cash flow and if you look at the improvement levers for year to date, it's about split between higher earnings and better working capital and if you recall.

Last year, we said, we were investing in our customers and investing in the growth and believe that was the right decision in the back half of last year, we started getting more efficient with working capital. We expect that to continue going into 2024, we're happy with our free.

Craig Arnold: And so yes, one, it's a function of the fact that markets are good. And secondly, it is a function of fact, we got to get out in front of some of these capacity planning things so that we can satisfy all those demand. But at some point, backlogs will turn, will turn negative. And this is what I was trying to get at in my prepared remarks, just to amplify it a little bit more.

Cash flow margin this quarter of 16%.

But we've got a lot of opportunity to improve in terms of inventory days on hand.

Getting better in terms of DSO, our cash conversion cycle. So.

Craig Arnold: And this is where we've modeled the scenarios of, you know, meaningful order intake decline on a year-over-year basis. And given how big the backlog is right now in the backlog coverage, the three times, as Craig said, we think even with meaningful year-over-year order intake decline, and robust organic growth, this is going to take us several quarters into 2025 before we get back to historical levels. And obviously, we probably never get back to historical levels.

Not stopping here, we are happy with our progress, but we've got a lot of opportunity for better cash flow going forward.

Thanks, Tom I'll pass it on.

The next question is from the line of Julian Mitchell from Barclays. Please go ahead.

Hi, good morning.

Maybe just.

Just wanted to ask a quick question about the sort of.

Coal revenue organic revenue.

Outlook. So you had that very helpful. Slide on the main end market moving pieces.

Craig Arnold: You know, if you think about it in terms of absolute terms, right, we'll be better, but we'll never probably get back to, you know, a $3 billion kind of backlog. It's a bigger business, you know, we'll need, and so we'll run a bigger backlog simply to support the fact that it's a large, larger business, but what we certainly would expect to, at some point, start eating into the backlog. Yep. Thank you.

Should we sort of assume from that that that blends to about kind of six 7%.

Market growth and then you're adding about a point or so of share and thats kind of how you get that 7% to 8%.

Organic growth number for next year that you discussed I think in September.

Yes.

The question Julian and obviously its certainly early for us to give you kind of a definitive.

Nigel Coe: The next question is from the line of Nicole to blaze from Deutsche Bank. Please go ahead. Hey, Nicole?

And where we think 'twenty 'twenty four will be and we'll do that in February, but but I do think that kind of a framework, where you talked about is very much consistent with the way we're thinking about it we talked about kind of.

Craig Arnold: Can we just talk a little bit about the capacity investments that you guys are making, and just the cadence of when that's going to start kind of phasing and coming along line over the next several years? Yeah, so appreciate the question, Nicole, and I would tell you that, you know, some of these investments have been made already, and we already are bringing on new capacity. In products like circuit breakers and the like, other investments are just now in the early phases.

The exit rate of the year and that 7% to 8% and Thats kind of a good proxy for the way to think about 2024.

Subject to whatever changes that we see between now and the end of the year, but that those market outlook slides are very much consistent with our current view and unless things go sideways someplace in the world, which we don't anticipate that would be a good kind of starting point to think about it.

Craig Arnold: If you think about some of the investments that we're making in transformer capacity and both the regulators, and that capacity is probably order of magnitude 12 to 18 months out. So it does vary depending upon which particular piece of the investment that you're referring to, but I'd say in all cases, is the commitments have been made. In all cases, we're looking at essentially those aspects of our business where we obviously have more capacity, more growth, more backlog than we certainly have capacity to serve it. And at this point, our teams are kind of geared up for ensuring that we execute it well and bring this capacity. It allows us to continue to grow the company and take some market share.

That's helpful. Thank you and then.

This is one thing I wanted to.

Circle back to was around the.

Craig Arnold: Thanks, Craig.

Sort of gap between the products and the systems on the electrical side, Greg I guess, historically you had sort.

Sort of two sides of one coin the products the shorter cycle piece systems is the longest cycle piece and sort of with a lag while much follow the other so when.

When we're thinking about.

About next year.

The gap between products and systems, presumably.

Narrows.

Is the assumption that they sort of meet in the middle products improve a bit systems slows down because of comp so any any kind of way we should think about it.

Maybe projects Mega projects mean, the systems piece sustains a very wide outgrowth versus products for example.

Nicole DeBlase: And then just on free cash flow thinking about how this progresses into 2024, can you talk a little bit about your plans to reduce working capital and other major puts and takes that could influence conversion next year? Thank you. Yeah, I appreciate the question, Nicole. I think the important thing is to look at year to date when you're looking at operating cash flow and free cash flow. I mean, we had a good quarter, but year to date we're up 73% in operating cash flow and almost 90% in free cash flow.

Yes, I appreciate that question Julien and I would tell you from where we sit.

<unk> products versus systems.

View of the electrical markets. We would suggest is probably not the most effective way to think about it in general and it's one of the reasons why we changed our reporting structure.

We've been so much focused on the end markets that we serve and so we really think the better model and the better way to think about the company is.

Here are the big end markets that we serve commercial and institutional Datacenters utilities residential.

Nicole DeBlase: And if you look at the improvement levers for year to date, it's about split between higher earnings and better working capital. And if you recall, last year we said we were investing in our customers and investing in the growth and believe that was the right decision. And in the back half of last year, we started getting more efficient with working capital. We expect that to continue going into 2024. We're happy with our free cash flow margin this quarter of 16%.

The big end markets that we serve and in every one of these large end markets for the most part they will accept can take product in some cases, we'll sell a system or a solution into the same end markets.

Nicole DeBlase: But we've got a lot of opportunity to improve in terms of inventory, days on hand, getting better in terms of DSO, our cash conversion cycle. So, you know, we're not stopping here. We're happy with our progress, but we've got a lot of opportunity for better cash flow going forward.

And so what we tried to do in the framework that we provided this gives you a sense of what we think is going to take place in these in these end markets.

And where you see differences in the way our business has performed take Europe for example versus the U S. We have today in the U S. A much bigger percentage of our business that would go into end markets like data center and utility than we would have on our business in Europe.

They would be much more indexed into let's say the OEM segment, which is in decline in Europe or in the residential section sector.

Tom Okray: Thanks, Tom. I'll pass it on.

<unk>, which is really an declined everywhere. So I think thats, a better way to think about how to model. The company. Then this distinction between a product in our system.

Julian Mitchell: The next question is from the line of Julian Mitchell from Barclays. Please go ahead. Hi, good morning. Maybe just wanted to ask a quick question about the sort of core revenue or organic revenue outlook. So, you had that very helpful slide on the main end market moving pieces. Should we sort of assume from that that that blends to about kind of six, seven percent market growth and then you're adding about a point or so of share. And that's kind of how you get that seven to eight percent organic growth number for next year that you discuss, I think in September.

That's very helpful. Thank you.

Yes.

Thank you. The next question is from Steve Volkmann from Jefferies. Please go ahead.

Alright, great. Thank you guys for fitting me in just a quick follow up to go back to this kind of backlog, saying, which I think you guys have explained pretty well, but Craig is it reasonable planning assumption that we end 2024 at sort of whatever the new normal is for backlogs that slightly higher than historical number.

Yes.

I wish I had an answer to that question definitively Steve in terms of what that backlog is going to look like at the end of 2024.

Craig Arnold: You know, I appreciate the question, Julian, and obviously it's certainly early for us to give you kind of a definitive slide on where we think 20, 24 will be and we'll do that in February. But I do think that kind of a framework and what you talked about is very much consistent with the way we're thinking about it. We talked about kind of, you know, the exit rate of the year in that seven to eight percent and that's kind of a good proxy for the way to think about 20, 24, you know, subject to whatever changes that we see between now and the end of the year.

Can tell you.

What we said about this year that we didn't anticipate this year that we could materially eat into the backlog because once again.

Craig Arnold: But that, you know, those market outlook slides are very much consistent with our current view. And unless, you know, things go sideways, some place in the world, which we don't anticipate, that would be a good kind of starting point to think about it. That's helpful. Thank you.

We knew what the underlying orders look like we understood essentially have got very good view on what our markets would be and what our capacity is we are bringing on some new capacity that will come online in 2024.

That will help us.

Into the backlog.

Having said that are we going to end 2024 at the same levels. We are today, we would hope quite frankly that we can reduce backlog.

During the course of 2020 for it we would view that as a successful year.

All else being equal because it's given us the ability to shorten lead times and do a better job of responding to customer demand, but sitting here today I mean.

Craig Arnold: And then there's one thing I wanted to circle back to was around the sort of gap between the products and the systems on the electrical side. I guess historically you had, you know, those were sort of two sides of one coin that the products for the shortest cycle piece systems is the longest cycle piece and sort of with a lag one would follow the other. So, when we're thinking, you know, about next year, the gap between products and systems, presumably narrows, is the assumption that they sort of meet in the middle, you know, products improve a bit, systems slows down because of comps or any any kind of way we should think about it, you know, maybe projects or mega projects mean the systems piece sustains a very wide outgrowth versus products, for example.

To suggest that I would have.

Any visibility into what that number is going to be at the end of 2024, just would not be realistic and so.

We hope that we can reduce backlog.

By essentially shortening up some lead times, but at this point if the markets continue to be as robust as they've been that.

That will be challenging.

Reducing backlog it would be hard to imagine based on the scenarios. We've looked at that we would get our backlog at the end of 2024 to our historical backlog coverage.

We probably will never get back there, but hopefully we can reduce back and use it for sure. So yeah.

Great. That's definitely helpful and then I'm going to pivot to the question, but I wanted to ask it from the other.

Craig Arnold: Yeah, you know, I appreciate that question, Julian. I mean, I would tell you from where we sit, I mean, this products versus systems view of the electrical markets, we would suggest it's probably not the most effective way to think about it in general. And it's one of the reasons why we changed our reporting structure. And we've been so much focused on the end markets that we serve. And so we really think the better model and the better way to think about the company is, you know, here are the big end markets that we serve commercial and institutional data centers, utilities, residential, you know, these are the big end markets that we serve.

Point of view, which is that I think you guys actually capture a fair amount of data from collected Iot devices et cetera. So can you just comment on sort of where you are in terms of collecting your own data and providing services and systems of that leverage that data into maybe new biz.

MS models over the next few years.

No definitely appreciate that question and as you know this is.

Independent of AI, we had been on this journey inside the company too to really digitize and digitalize our company and so that what we said is that every single product every new product that we develop we expect it to have a microprocessor to be able to stream process data and information and so that has been <unk>.

Craig Arnold: And in every one of these large end markets for the most part, they will accept and take product. In some cases will sell a system or solution into these same end markets. And so what we tried to do in the framework that we provided is give you a sense of what we think is going to take place in these end markets. And where you see differences in the way our businesses perform take Europe, for example, versus the US, we have today in the US a much bigger percentage of our business that would go into end markets like data center and utility.

Going on inside of the company for the better part of the last five years and as a result of that we have been able to create some really attractive and interesting new value propositions around.

How we essentially can monetize our own data and it's one of the things that we wrap up in this term youll hear us talk about called the brightly a platform. So we have bright layer for datacenters bright layer for utility markets and bright layer for residential so this day.

Craig Arnold: Then we would have in our business in Europe where they would be much more indexed into let's say the MOEM segment, which is in decline in Europe or in the residential section segment, which is really in decline everywhere. So I think that's a better way to think about how to model the company than this distinction between a product and a system. That's very helpful. Thank you.

Data platform that we use today to essentially fine.

Find ways to monetize our data either in the form of data as a service or software as something that is happening broadly across the company and all enabled by the fact that all of our devices today most of our devices today, which you would say are intelligent and have the ability to stream data I would encourage for those of you on.

Steve Bowman: The next question is from Steve Bowman from Jeffries, please go ahead. Oh, great. Thank you, guys, for fitting me in just a quick follow up to go back to this kind of backlog thing, which I think you guys have explained pretty well, but Craig, is it reasonable planning assumption that we end 2024 at sort of whatever the new normal is for backlogs? Is that that slightly higher than historical number?

Call. It one of the things we're going to try to do next year as a part of our Investor meeting is to invite you to our center in Houston and to show you. Some very real examples of software and data solutions that we're selling today in various applications.

Our customer base that really monetize our data in and monetize our software. So a really exciting piece of this leg that we talk about these mega trends one of which is digitalization, we see that in the data center market and we also see that in a way, we are bringing new products and new solutions to <unk>.

Craig Arnold: Yeah, that's to say, I tell you, I wish I had an answer to that question that's offensively Steven Trevor, what that backlog is going to look like at the end of 2024. I can tell you, you know, what we said about this year is that we didn't anticipate this year that we could materially eat into the backlog because once again, we knew what the underlying orders look like we understood. Essentially, I've got really good view on what our markets would be and what our capacity.

<unk>.

Well across the company.

Great I look forward to that thanks.

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

Craig Arnold: We are bringing on some new capacity that will come online in 2024. That will help us, you know, eat into the backlog. Having said that, are we going to end 2024 at the same levels we are today? We would hope quite frankly that we can reduce backlog during the course of 2024. We would view that as a successful year, you know, all else being equal because it's given us the ability to shorten lead times and do a better job of responding to customer demand.

Hey, good afternoon, thanks for keeping it going here.

Slide 19 is good.

Very helpful.

Want to clarify a couple of things So data center the 16th take your forecasting through 25 now.

That's the market so not necessarily Eaton right. So I know you've got some market share growth ambitions that so I'm just gonna make that clear and then when you talk about data center, we're talking here about the whole market. So obviously, a big chunk of that market is on Prem enterprise data centers or are we talking about a subset of that market. So just maybe just clarify.

Tom Okray: But sitting here today, I mean to suggest that I would have, you know, any visibility into what that number is going to be at the end of 2024 just would not be realistic. And so we hope that we can reduce backlog by essentially shortening up some lead times. But at this point, if the markets continue to be as robust as they've been, that, you know, that will be challenging. Yeah. Even reducing backlog, it would be hard to imagine based on the scenarios we've looked at that we would get our backlog in at the end of 2024 to our historical backlog coverage. Yeah, well, yeah, well, yeah, we probably will never get back there. Yeah, but hopefully we can reduce backlog for sure. Yeah.

And within this end market matrix.

Show that if you put this up three months ago, you might have a bit more of an optimistic view on residential obviously with the higher rates et cetera, I understand why.

Youre cautious and I know, it's not a big market Stephen I'm actually wondering if you're starting to see deterioration in real time and that markets or whether its much more sort of macro driven.

Okay.

I think there's three different questions there, but let me take the first one around so the answer to the question is yes. It is the entire market. So that 16% growth rate is reflective of what's happening in hyperscale on Prem.

Craig Arnold: Great. That's definitely helpful. And then I'm going to pivot to the AI question, but I want to ask it from the other point of view, which is that I think you guys actually capture a fair amount of data from collected IOT devices, et cetera. So can you just comment on sort of where you are in terms of collecting your own data and, you know, providing services and systems that leverage that data into maybe new business models over the next few years.

Co Lo so illustrates our view of the entire market and yes, we would expect our businesses to grow at faster than market.

And as a result of that.

Do better than what we think the underlying market is doing.

To the point around residential yeah, we have seen the slowdown in residential really around the world and we've seen it in the U S.

And what happened in single family first.

Although single family quite frankly had a little bit of a stronger Q4 single family starts were actually up some 6% in Q3 and Q3.

Craig Arnold: No, definitely appreciate that question. And as you know, this is independent of AI. We had been on this journey inside the company to really digitize and digitalize our company. And so that what we said is that, you know, every single product, every new product that we develop, we expected to have a microprocessor to be able to stream and process data and information. And so that has been going on inside of the company for the better part of the last five years.

Multifamily a wallet kind of record levels of units that are under construction clearly saw a slowdown in Q3, but we're definitely seeing the slowdown in residential you see it most acutely quite frankly in Europe.

Many of you see the market data coming out of Germany and France.

Residential housing starts are down quite significantly in and everybody has read about what's going on in China, as well, but to your point residential as a company.

Craig Arnold: And as a result of that, we have been able to create some really attractive and interesting new value propositions around how we essentially can monetize our own data. And it's one of the things that we wrap up in this term you'll hear us talk about called the bright layer platform. So we have bright layer for data centers, bright layer for utility markets and bright layer for residential. So this data platform that we use today to essentially find ways to monetize our data.

Not the biggest piece of our market and I think the other thing I would add to that is that one of the things we've talked about in prior meetings is that we're seeing higher electrical content.

Craig Arnold: So even the form of data as a service or software is something that's happening broadly across the company and all enabled by the fact that all of our devices today, most of our devices today, which should say are intelligent and have the ability to stream data.

All of the new homes that are built as they meet the latest requirements for.

Okay.

We'll.

Standards in the U S or other standards are standards around Europe, or we see smart homes being built and they are putting in more smart solutions and so offsetting somewhat of that decline in units is the fact that we are seeing higher electrical content in new homes and new homes are accounting for a quite frankly, a much higher percentage.

The new housing market in general as people hold on to their legacy homes and and so yes. No question residential has weakened up we're seeing it in our business, but once again the strength that we're seeing in the other end markets big enough to offset those declines in residential yes just.

Craig Arnold: And I would encourage for those of you on the call, one of the things we're going to try to do next year as a part of our investor meeting is to invite you to our center in Houston. And to show you some very real examples of software and data solutions that we're selling today in various applications to our customer base that really monetizes our data and monetizes our software. So a really exciting piece of this.

Final question Nigel on that one if you look at year to date and no question slowing down but year to date for our overall electrical sector.

Sector, where actually were actually positive.

Craig Arnold: Leg that we talk about these mega trends, one of which is digitalization. We see that in the data center market, and we also see that in a way we are bringing new products and new solutions to market as well across the company. Great, I look forward to that.

Residential perspective.

Thanks, Tom.

Unknown Executive: Thanks. Thank you.

Electrical content being higher.

Being better the unit volumes would be down Epsilon as they would for others.

Yes, I know, there's two parts of that question, but if I can just sneak one more in I know everyone likes the E mobility side.

Nigel Coe: The next question is from Nigel from Wolf Research. Please go ahead. Hey, good afternoon. Thanks for keeping it going here. Slide 19 is good, obviously very helpful. Just want to clarify a couple of things. So, data center, the 16% Kager you're forecasting through 25 now. That's for the market, so not necessarily Eaton, right? So, I know you've got some market share growth foundations there, so I just want to make that clear.

Its target of $1 five is a big step ups in the prior one too.

Does that does that uplift and that's sort of like that growth ramp from here to one five does that come disproportionately 25 or would you expect it to be linear through the next couple of years and does that is there any implications to margins I think you've got it.

Net margin for 2025, how do we think about that.

Two questions.

Say that you would expect.

As you are well aware the way this market works in vehicles that when they launch a platform.

Nigel Coe: And then when you talk about data center, are we talking here about the whole market? So, obviously, a big chunk of that market is on-prem enterprise data centers. Or are we talking about a subset of that market? So, just maybe just clarify that.

Youll see a big change in the revenue as a function of when these new platforms launch and so I would say that.

Nigel Coe: And then within this end market matrix, I'm pretty sure that if you put this up three months ago, you might have had a bit more of an optimistic view on residential, obviously with the higher rates, et cetera, understand why your courses there. And I know it's a big market. I'm actually wondering if you're starting to see deterioration real time in that market, or whether it's much more sort of macro dream.

The volume does tend to be kind of chunky space.

As opposed to being linear once the once the vehicle launches.

It's in the market and you will see kind of a kind of a linear pattern of growth, but once the program first launches you will see more of a step function change in revenue and so.

Now in 2025 that business will grow and we talked about in some of the outlook numbers that we still expect our E mobility segment to see strong growth.

Craig Arnold: Okay, so I think there's three different questions there, but let's take the first one around. So, the answer to the question is, yes, it is the entire market. So, that 16% growth rate is reflective of what's happening in hyperscale on-prem co-low. So, it is our view of the entire market. And yes, we would expect our businesses to grow at faster than market. And as a result of that, you know, do better than what we think the underlying market is doing.

Very strong growth for 2024, and our guidance, but some of this growth will be chunky.

As we think about bringing on these new platforms that we've won.

That's correct.

Thank you and our next question is from the line of Bill Miller from.

Baron Baird. Please go ahead.

Craig Arnold: To the point around residential, yeah, we have seen the slowdown in residential really around the world. And we've seen it in the US. And what happened in single-family first, although single-family, quite frankly, had a little bit of a stronger Q4. Single-family starts were actually up some 6% in Q3. Multi-family, wallet, kind of record levels of units that are under construction clearly saw a slowdown in Q3. But we're definitely seeing the slowdown in residential.

Hi, there thanks for the question.

Craig just to follow up on some of the answers you gave to the prior questions you talked about the megatrends existing globally, which I guess, how much of a divergence between the U S and elsewhere, which you attribute to the current economic differences differences, which I think is the answer you gave to jeffs.

To your question versus how much of this is just the weighting towards <unk>.

Senator and utilities in the U S being much larger than Europe, which I think is how we.

How we answer Julians question, I guess I'm wondering if there's a third part to this which is market share. So I don't know if you can comment on market share changes that you're seeing in the U S or Europe. Please thanks.

Craig Arnold: You see it most acutely, quite frankly, in Europe. Many of you see the market data coming out of Germany and France, or residential housing starts are down quite significantly. And everybody's read about what's going on in China as well. But to your point, residential as a company is not the biggest piece of our market. And I think the other thing I would add to that is that one of the things we've talked about in prior meetings is that we're seeing higher electrical content in all of the new homes that are built as they meet the latest requirements for U.L, standards in the US or other standards to IEC standards around Europe.

Yes.

I would tell you is that.

In simple terms I would say no with respect to market share and when you take a look at our growth in our European business in any given quarter, you could find things bouncing around but if you look at our growth on a two year stack of three years back and you look at our revenues versus our peers. I think you would find the numbers to be quite comparable but I would say that.

It is mega projects in the scale of Mega projects that is driving the differences it is where we play.

Craig Arnold: Or we see smart homes being built and they're putting in more smart solutions. And so offsetting somewhat of that decline in units is the fact that we are seeing higher electrical content in new homes and new homes are accounting for quite frankly, a much higher percentage of the new housing market in general as people hold on to their legacy homes. And so, yeah, no question residential has weakened up. We're seeing it in our business.

In let's say, the Americas versus where we play in Europe I talked about.

Our penetration in.

Europe being a lot of which is in M. OEM and industrial equipment, we don't have today as broad a portfolio and some of these other.

Segments call It data center.

We play very well in Datacenters, but we're not as big a player in Datacenters, we play in utilities, but we're not as big a player in the utility market. So we just have a broader more complete set of solutions in the Americas that are supported by these megatrends and the other big difference is once again all.

Craig Arnold: But once again, the strength that we're seeing in the other end marks. It's big enough to offset those declines in residential. Yeah, just a little bit Nigel on that one. If you look at year-to-date and no question slowing down but year-to-date for our overall electrical sector, we're actually positive from a residential perspective. And I didn't think there was enough electrical content, the entire effort, including better. The unit volumes would be down. Absolutely.

All of the stimulus dollars.

<unk>.

Or being pumped into the U S economy.

That is essentially driving outside growth and its driving outside growth in these same verticals reindustrialization of industrial facilities investments in utility markets.

Unknown Executive: Yeah, I know there are two parts of that question, but if I can just sneak one more and I know we're running late. The immobility 2025 target of 1.5 is a big step up from the prior 1.2. Does that uplift and that sort of like that growth ramp from here to 1.5? Does that come to support you in 25 or do you suppose it will be a little bit more linear through the next couple of years? And is there any implications for margins? I think we've got 11% margin for 2025. How do you think about that?

Investments in chips and the chip back and so you are finding these kind of broader trends being also turbocharged by.

By government stimulus spending.

Just as a follow up to that quickly if I may what's your current take on the EU policies. These days, obviously, everyone was quite bullish about the green deal and net zero industry at Sierra So a guy who do you think that they'll ever.

<unk> in a meaningful way the U S ones do.

Craig Arnold: That's two questions. Yeah, I'd say that you would expect, you know, as you are well aware, you know, I don't know where this market works and vehicles that, you know, when they launch a platform, you'll see a big change in the revenue as a function of when these new platforms launch. And so I would say that the volume does tend to become a chunk of that space as opposed to being linear.

Or is that optimistic.

Craig Arnold: Once the vehicle launches, and it's in the market, then you'll see kind of a linear pattern of growth. But once the program first launches, you will see more of a step function change in revenue. And so, you know, between now 2025, that business will grow. And we talked about in some of the outlook numbers that we still expect our immobility segment to see strong growth. It's a very strong growth for 2024 and our guidance. But some of this growth will be chunky. As we think about bringing on these new platforms that we want. That's great.

No I think I mean.

In many ways, even more than the U S. I mean, the European government has demonstrated their commitment to essentially moving towards a low carbon society.

And they are putting dollars behind it.

Unknown Executive: Thank you.

As importantly, theyre, putting regulatory changes in place to drive the adoption of these green technologies.

So, but as you can imagine there's a lot going on in Europe today, there's a lot of a lot of challenges on a lot of different fronts in Europe.

That I think are today getting in the way and holding back some.

Some of the benefits that you would ultimately you will ultimately see in that space.

And as we talked with the manufacturing segment Europe is much more has been much more of a manufacturing engine for the world in places like Germany.

And those markets have clearly slowed dramatically.

But where we where we participate.

If you think about data centers for example, our data center business in Europe is also up dramatically, so where we have kind of some of these mega trends energy transition, where we play in energy transition markets. Those markets are up dramatically in Europe, but the business mix is quite different in that case, it's being held back those.

Unknown Executive: And our next question is from the line. I feel below from Baronberg. Please go ahead. Hi there. Thanks for the question. Kray, just to follow up on some of the answers he gave to the prior questions you talked about the mega trends existing globally, which which I get. But how much of the divergence between the US and elsewhere would you attribute to the current economic differences, which I think is the answer you gave to Jeff earlier question versus how much of this is just the waiting towards data center and utilities in the US being much larger than Europe.

Benefits are not showing up because it's being overwhelmed by some of these other structural issues and some of the legacy businesses.

Got it and finally, if I may just squeeze one very quick question on aerospace.

Change to the 10% 12% range for the year about the nine months I think.

13, and a bit so that implies a bit of a moderation in Q4 from some lab. So can you talk about what's happening there. Please I assume its defense or <unk>.

Unknown Executive: Which I think is how we answered Julian's question. I guess I'm wondering if they're the third part to this, which is market share. So I don't know if you can comment on market share changes that you see in the US or Europe, please. Thanks. Yeah. Now, what I would tell you is that in simple terms, I would say no with respect to market share when you take a look at our growth and our European business any given quarter, you could find things bouncing around.

Is there something else going on that please thanks.

Yes, I don't think I wouldnt over read that in terms of we don't we don't anticipate a slowdown in aerospace as we talked about.

In our prepared remarks that the.

Orders continue to grow backlog continues to grow.

Unknown Executive: But if you look at our growth on a two year stack, a three year stack, and you look at our revenues versus our peers, I think you find the numbers to be quite complex. But I'd say that it is mega projects and the scale of mega projects that is driving the differences it is where we play in let's say the America's versus where we play in Europe I talked about you know our penetration in Europe being a lot of which is in MOEM and industrial equipment we don't have to today as brought a portfolio in some of these other you know segments let's call it data center we work we play very well in data centers but we're not as big a player in data centers we play in utilities but we're not as big a player in the utility market so we just have a broader more complete set of solutions in the America's that are supported by these mega trends and the other big difference is once again all the stimulus dollars you know that are being pumped into the US economy you know that is essentially driving outside growth and it's driving outside growth in these same verticals re-industrialization of industrial facilities investments in utility markets and investments in chips in the chip act and so you're finding you know these kind of broader trends being also turbocharged by governments stimulus spending just as a follow up to that quick if I may what what's your current take on the EU policies these days obviously everyone was quite bullish about the green deal and net zero industry act for a year or so ago do you think that they'll ever lay an egg in a meaningful way like the US ones do or is that optimistic not no I think I mean I think in many ways even more than the US I mean the European government has demonstrated their commitment to essentially you know moving towards a low carbon society and they're putting you know both dollars behind it and just as importantly they're putting regulatory changes in place to drive the adoption of these green technologies I think so but as you can imagine there's a lot going on in Europe today there's a lot of a lot of challenges on a lot of different fronts in Europe you know that I think are today getting in the way and holding back you know some of the benefits that you would ultimately you will ultimately see in that space and you know as we talked about the manufacturing segment Europe is much more has been much more of a manufacturing engine for the world and places like Germany and those markets have clearly slowed dramatically so I think but where we where we participate think about data centers for example our data center business in Europe is also up dramatically so where we have kind of some of these mega trends energy transition where we play in energy transition markets those markets are up dramatically in Europe but the business mix is quite different and in that case it's being held back those benefits are not showing up because it's being overwhelmed by some of these other structural issues in some of the legacy businesses got it and finally if I may just read one very quick when in on aerospace there's no change to the 10 to 12% range for the year but the nine months I think you're 13 and a bit so that implies a bit of a moderation in Q4 from somewhere so can you talk about what's happening there please I assume it's defense or perhaps there's something else going on there please.

So I would not over read an implied number for aerospace in Q4, we sell are very much pleased with that market.

And expect to see longer term kind of growth.

Being quite attractive there.

Thanks very much.

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

Hi, Thanks, I'll keep it to one.

I'm interested in how you're kind of evaluating the opportunities on mega projects and the degree to which you maybe even thinking that it means when rates can't be as high as they have historically just because of the magnitude of the opportunity that's out there and so I'm sure. It's inspiring some competitors to invest more in some of these verticals as well.

And where are you directing your investment dollars most to maybe position yourself best for at least as good if not higher win rates moving forward. When we think about the verticals that you outlined on slide 19, where you want your or sort of exposure to those to get that much bigger overtime and outpaced the market.

I would say that in many ways, it's quite the opposite.

If you think about today, where we tend to do well as a company and where our win rate tends to be higher the bigger the project the more complicated and sophisticated the project the more likely it is that Eaton will win and garner a higher share. So if you think about today.

<unk>.

Big Mega projects and our win rate on a mega project versus our historical underlying market share.

Our win rate would be higher.

And it would be higher because once again, if you think about.

Our total ability to deliver a complete solution.

Medium voltage low voltage and everything in between today, we have.

Yeah.

Better capability than most of the companies that we're competing against.

In the North American market, where most of these mega projects that are taking place and so yes without a doubt the competitive dynamic is such that it's an attractive space I will tell you that for the most part.

Most companies are struggling with the same capacity constraint that we are.

Today with respect to.

A disruptor coming in and doing something that.

But somehow changed the dynamics around underlying market share highly highly unlikely.

Because there's simply not enough capacity to do it and then secondly.

You need the capability and if you think about the size and the scale of these mega projects you need a company who has pedigree.

<unk>, who you can rely upon and trust.

Two to essentially bring these projects home for you.

The stuff that we do is mission critical and it's not the kind of place that you would tend to find <unk>.

Companies are customers.

Testing, our trailing somebody new.

I appreciate it thank you.

Thank you next question is from Brett Linzey.

Uh huh.

One moment please.

Please go ahead, yes, good afternoon. Thanks.

Yeah. Thanks, So just just back to the 1 billion investment is there any way to think about the mix of whats expense versus capitalized.

And is this going to be a program you're going to provide some quarterly guidance on like you've done with some of the restructuring programs in the past.

Unknown Executive: Thanks. Yeah, I don't I don't think I wouldn't overread that in terms of we don't we don't anticipate a slow down in aerospace as we talked about you know in a prepared remarks that you know orders continue to grow back while continues to grow you know so but I would not overread an implied number for aerospace and in Q4 we sell are very much you know please with that market you know and expect to see longer term kind of growth you know being quite attractive there. Thanks very much.

Yes, no I would say.

I would say today.

We would not intend to provide any particular quarterly guidance or clarity on that other than we can certainly let you know when the new capacity comes online I think that's perfectly fair, but the other thing.

To think about it.

Yes, it's a big investment there is going to be a mix of capital and expense, that's all kind of embedded going to be embedded in our guidance as we go forward.

But as the company has gotten bigger.

Joe O'D: Thank you.

Our denominator revenue and everything else, we've gotten bigger we have.

Craig Arnold: Our next question is from Joe O.D, from a circle please go ahead. Hi, thanks. I'll keep it to 1. I'm interested in how you're kind of evaluating the opportunities on on mega projects and the degree to which you maybe even thinking that it means when rates can't be as high as they have historically just because of the magnitude of the opportunity that's out there. And so I'm sure it's inspiring some competitors to invest more in some of these verticals as well.

Historically spent about 3% of revenue and.

Craig Arnold: And and where are you directing your investment dollars most to maybe position yourself best for at least as good if not higher wind rates moving forward when we think about the verticals that you outline on slide 19 where you want your your sort of exposure to those to get that much bigger over time and I'll paste the market.

And Capex that number may pop up to three.

Three 5% order magnitude, but so it's not going to be it's a big number and it's going to give us the ability to solve a lot of bottlenecks, but in the big scheme of things you're talking about maybe a half a point movement in terms of our capex spend here. So yes, it's going to be some expense associated with it as well, but once again.

All of that embedded in kind of the 30% kind of incremental numbers that we talked about for planning purposes.

Got it I'll leave it there. Thanks, a lot alright. Thank you. Okay. Thanks, guys. We reached to the end of the call appreciate everybody's questions as always our team will do a follow up call with you guys. We would need to have more questions. Thanks for joining us have a good day guys. Thank you. Thank you.

Craig Arnold: You know I would say that in many ways it's quite the opposite. If you think about today where we tend to do well as a company and and where our wind rate tends to be higher the bigger the project the more complicated and sophisticated the project. The more likely it is that eaten will win and and go on a higher share so if you think about you know today you know the big mega projects and our win rate on a mega project versus our historical underfinding market share our win rate would be higher.

Craig Arnold: And it would be higher because once again if you think about you know our total ability to deliver a complete a solution medium voltage low voltage and everything in between today we have a much better capability than most of the companies that were competing against in the North American market where most of these mega projects are taking place. And so yeah without a doubt the competitive dynamic is such that it's an attractive space.

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

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Craig Arnold: I will tell you that for the most part most companies are struggling with the same capacity constraint that we are. So today with respect to you know a disruptor coming in and doing something that would somehow change the dynamics around underlying market share highly highly unlikely because there's simply not enough capacity to do it. And then secondly you know you need the capability and if you think about the size and the scale of these mega projects.

Craig Arnold: You need a company who has pedigree, a company who you can rely upon and trust to essentially bring these projects home for you. The stuff that we do is mission critical. And it's not the kind of place that you would tend to find, companies or customers, you know, testing or trialing somebody new. I appreciate it.

Brett Linzey: Thank you. I think your next question is from Brett Linzey.

Unknown Executive: Please go ahead with your question.

Unknown Executive: Yeah, good afternoon. Thanks. Yes. Thanks.

Unknown Executive: Just back to the civilian investment. Is there any way to think about the mix of what's expense versus capitalized? And is this going to be a program you're going to provide some quarterly guidance on like you've done with some of the restructuring programs in the past? No, I would say today we would not intend to provide any particular quarterly guidance or clarity on that. Other than we can certainly let you know when the new capacity comes online, I think that's perfectly fair.

Unknown Executive: But the only thing I want to think about is that yes, it's a big investment. There is going to be a mix of capital and expense. That's all kind of embedded in our guidance as we go forward. But you know, it's a company's gotten bigger and in our denominator revenue and everything else got bigger. You know, we have historically spent about 3% of revenue and CapEx. That number may pop up to, you know, 3.5% order magnitude.

Unknown Executive: But so it's not going to be it's a big number. It's going to give us the ability to solve a lot of bottlenecks. But in the big scheme of things, you talk about maybe a half a point movement in terms of, you know, our CapEx spend here. So yes, it's going to be some expense associated with it as well. But but once again, all of that embedded in kind of the 30% kind of incremental numbers that we talked about for planning purposes. Got it.

Unknown Executive: I'll leave it there. Thanks a lot. All right. Thank you.

Unknown Executive: Okay. Thanks, guys. We'll reach to the end of the call. I appreciate everybody's questions. As always, our team will do a follow-up call with you guys if you need to have more questions. Thanks for joining us. Have a good day, guys.

Unknown Executive: Thank you.

Operator: Thank you, and ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Telecom for service.

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