Q4 2023 Eaton Corp PLC Earnings Call
Okay.
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the Eaton fourth quarter 'twenty.
Speaker Change: 2023 conference call at this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time should you require assistance during the call. Please press Star then zero and an operator will assist you offline.
And as a reminder, your conference is being recorded I would now like to turn the conference over to your host Yan Jin. Please go ahead.
Yan Jin: Hey, good morning. Thank you all for joining us for <unk> fourth quarter. Two during this earnings call with me today are Craig Arnold, our chairman and CEO and Tom Okray, exactly Vice President and Chief Financial Officer.
Craig Arnold: Our agenda today includes opening remarks by Craig that I will turn it over to Tom who will highlight the company's performance in the fourth quarter.
Thomas Okray: As we have done all of our past calls, we'll be taking questions Hey, Dan Craig It's closing commentary.
This release and the presentation. We'll go through today have been posted all the life side.
Thomas Okray: Orientation include adjusted earning per share adjusted free cash flow and other non-GAAP measures the retail sell in appendix a webcast of this call is accessible our lifestyle and it will be available for replay I would like to remind you that our comments today will include statements related to the expected future results of the company.
Thomas Okray: 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 a presentation with that I will turn it over to Craig Okay. Thanks, Tien and we're pleased to report our Q4 results.
Craig Arnold: And the record performance for the year.
Craig Arnold: Our team continued delivered our commitments supported by strong markets and good execution. So let me begin with some highlights of the quarter on page three.
Craig Arnold: We generated adjusted EPS of $2.55 for the quarter and $9 12 for.
Craig Arnold: For the year.
Craig Arnold: Both all time records adjusted EPS was up 24% and full year was up 20%.
Craig Arnold: And we continued to post strong margins Q4 was 22, 8% up 200 basis points above the high end of our guidance.
Craig Arnold: We also delivered strong incremental margins, 42% in the quarter.
Craig Arnold: We continue to see strong market activity on a rolling 12 month basis book to Bill for electrical and Aerospace was one one and our backlog increased by 50% for electrical and 13% for space.
Craig Arnold: And as you've read we're initiating guidance for 2024 and expect another year of strong organic growth.
Craig Arnold: Double digit increases in adjusted EPS and continued strength in cash flow.
Speaker Change: I'll go through the full guidance.
Speaker Change: Details shortly.
Speaker Change: Lastly, we're announcing a multiyear restructuring program that will eliminate fixed costs and improve our overall efficiency.
Speaker Change: The program will cost $375 million and deliver $325 million of mature your benefits.
Speaker Change: So the combination of market tailwind, our internal growth initiatives and our continued focus on operating efficiency will allow us to deliver outstanding results for years to come.
Speaker Change: And speaking of market tailwind, let's turn to slide four.
Speaker Change: And the last couple of quarters, we shared our framework for how we think about key growth drivers for the company.
Speaker Change: The chart reflects the six secular growth trends that will positively impact our business today and for years to come.
Speaker Change: And we're stepping up our investment in R&D and capital to ensure that we're well positioned to capture this growth.
Speaker Change: We think Eaton is uniquely positioned and that most of our businesses are expected to see an acceleration in market driven growth opportunities.
Operator: Thank you for watching. I hope you enjoyed this video. If you did, please like and subscribe.
Speaker Change: And our prior two earnings calls we provided a summary of progress on infrastructure spending.
Operator: I'll see you next time. Bye. Ladies and gentlemen, thank you for standing by, and welcome to the Eaton fourth quarter conference. 2023 At this time, all participants are in a listening mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If you do require assistance during the call, please press star then zero, and an operator will assist you offline.
Speaker Change: Reindustrialization utility and data center markets in electrical and our aerospace business.
Speaker Change: Today, we will provide an update on the impact from Reindustrialization and how it continues to drive a record number of Mega projects in North America.
Speaker Change: We will also provide you with a framework for how to think about the timing impact on Mega projects from when a project is announced to a negotiation to an order and eventually to a sale.
Ian: And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, Ian. Please go ahead.
Speaker Change: So let's take a look at slide five in the presentation.
Ian: Hey, good morning. Thank you all for joining us for Eaton's 4th Quarter 2020 Newsweek Earnings. With me today are Craig Arnold, our Chairman and CEO, and Tom Okray, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Craig, then he will turn it over to Tom, who will highlight the company's performance in the fourth quarter. As we have done in previous courses, we will be taking questions at the end of Craig's closing comments. The prize release and the presentation we'll go through today have been posted on our website. The presentation includes Adjusted Earnings Per Share, Adjusted Free Cash Flow, and other non-GAAP financial measures. The recount failed in the following areas: A webcast of this call is accessible on our website, and it will be available for replay.
Speaker Change: We've shared this data previously and it is a good proxy for the Reindustrialization trend we're seeing.
Speaker Change: Youll recall.
Speaker Change: This summarizes the number of Mega projects have driven announced since January of 2021.
Speaker Change: And a megaproject once again as a project with the amount of value of $1 billion or more.
Speaker Change: And there have been 333 of those through the end of last year beginning in January 2021.
Speaker Change: Note that this is north America data, but we're seeing a similar trend in Europe, although the dollars are not as large a.
Speaker Change: A few points to note first at.
Speaker Change: At 933 billion this number as three X the normal rate.
Speaker Change: And the increase translates directly into electrical markets.
Ian: I would like to remind you that our comments today will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and, With that, I will turn it over to Craig.
As a reminder.
Speaker Change: The electrical content on these projects is typically anywhere from 3% to 5%.
Speaker Change: Second the number continues to grow and is up 9% from Q3.
Speaker Change: This will not go on forever, we're sure but there continues to be strong momentum for U S industrial projects.
Craig Arnold: Thanks, Jan. And we're pleased to report our Q4 results and record performance. Our team continued to deliver our commitments: Fortify, Strong Markets, and Good Equity. So I'm going to begin with some highlights of the quarter on page...
Speaker Change: And we're building a multiyear backlog.
Speaker Change: And third about 72% of these projects are still in the planning phases, and only 18% have actually started.
Speaker Change: Some 10% have been canceled or significantly delayed but this number is actually lower than historical rates.
Craig Arnold: Generated Adjusted EPS of $2.55 for the quarter and $9.12 for the year, both all-time highs. The adjusted EPS was up 24%, and we continue to post strong marks. Q4 was 22.8% 200 basis points and above the high end of a. We also deliver strong incremental margins. Forty-two percent, and we continue to see a strong market on a lowly 12-month basis. Book, The Bill for Electrical and Aerospace was 1.1, and our backlog increased by 15% for last year.
Speaker Change: For those that have started.
Speaker Change: We've won over $1 billion of orders with a win rate of approximately 40%.
Speaker Change: And we're in active negotiations on another $1 billion of electrical content on a small subset of these solar projects.
Speaker Change: So as you can see mega projects or a compelling reason to be optimistic about the future.
Speaker Change: Turning to slide six I want to highlight the timing and the duration of these mega projects as they become opportunities for our electrical business.
Speaker Change: The primary conclusions, we've not seen a significant impact from the large step up in the number of size of Mega projects yet.
Speaker Change: But it's coming.
Craig Arnold: As you've read, we're initiating guidance for 2024 and expecting another year of strong organic growth. Double-digit increases in adjusted EPS and continued strength in cash flow, and I'll go through the full guide, https://www.youtube.com. Lastly, we're announcing a multi-year restructuring program that will eliminate fixed costs and make the company more efficient. The program will cost $375 million and deliver $325 million of mature revenue per year. So the combination of market tailwinds, our internal growth initiatives, and our continued focus on operating efficiency will allow us to deliver outstanding results for years. And speaking of market tailwinds, let's turn this slide. In the last couple of quarters, we shared our framework for how we think about key growth. The chart reflects the six secular growth trends. Thank you all for joining us tonight. I hope you have a great evening.
Speaker Change: While each project is different.
Speaker Change: Put together our view of three representative examples of Reindustrialization projects, including a semiconductor and EV battery and a health care example.
Speaker Change: This slide indicates the number of months between an announcement of a megaproject.
Speaker Change: And the time, we begin to negotiate at the.
Speaker Change: The time from the announcement of a quarter.
The time from announcement to an order and from an announcement to a shipment.
As you can see it takes on average three to five years from when a project is announced.
Speaker Change: So when it shows up in our revenue.
Speaker Change: So while the gratification has certainly delayed.
This is what's showing up in our backlog and providing outstanding visibility to future growth.
Speaker Change: With over $1 billion of orders that we've already won we expect revenues to be recognized over the next several years in line with each of these products individual timelines.
Craig Arnold: And I hope that we can all work together to positively impact our business today and for years to come. And we're stepping up our investment in R&D and capital to ensure that we're well positioned to capture this. We think Eaton is uniquely positioned in that most of our businesses are expected to see an acceleration in market-driven growth. Prior to earnings calls, we provided a summary of progress on infrastructure spending and re-industrialization. Utility and Data Center, Markets and Electronics, and our Earl Spitzer. Today, we'll provide an update on the impact of re-industrialization, And how it continues to drive a record number of megaprojects. And we will also provide you with a framework for how to think about the timing impact on megaprojects. For example, when a project is announced, there is a negotiation, an order, and eventually to an end.
Speaker Change: And just as a point of reference.
Speaker Change: Our revenues in electrical America for Megaproject in 2023 was only about 3% of our total revenues.
By contrast, they represent 16% of our negotiations and 6% of our orders.
Speaker Change: Hence the conclusion that most of the impact from the significant step up of Mega projects is still ahead of us.
Speaker Change: Now, let me just turn it over to Tom, but before I do I do want to take this opportunity to thank Tom Tom has just been an outstanding leader for Eaton. It is.
Thomas Okray: Tenure with us.
Thomas Okray: I Couldnt have asked for a better partner or more effective CFO and Tom were absolutely.
Thomas Okray: Disappointed to see you go we fully understand the reason we made this decision we wish you all the best of luck.
Thomas Okray: Thanks, once again for his outstanding leadership over the last three years.
Craig Arnold: So let's take a look at slide 5 in the presentation. We've shared this data previously, and it's a good proxy for the re-industrialization trend. You'll recall, this summarizes the number of megaprojects that have been announced since January of 2021. And a mega project, once again, is a project with an announced value of $1 billion a month, and there have been 333 of those through the end of last year beginning in January 2020. Note that this is North American data, but we're seeing a similar trend in Europe, although the dollars are not as large. A few points to note, for example At $933 billion, this number is 3x the normal rate, and the increase translates directly into electricity. As a reminder, The electrical content on these projects is typically anywhere from 3 to 5%.
Speaker Change: Thanks, Craig I'll start by reviewing our how our fiscal year 2023 results compare to our original guidance.
Speaker Change: Throughout the year, we demonstrated the ability to execute on our commitments and raise guidance for all key metrics.
Speaker Change: We have delivered our third consecutive year of double digit organic growth.
Speaker Change: With a 20% increase in adjusted EPS.
Speaker Change: All time record margins and a 48% increase in free cash flow.
Speaker Change: A particular note organic growth and segment margins were up versus the original guidance 400, and 110 basis points respectively.
Speaker Change: Further adjusted EPS and free cash flow grew 11% and 4% respectively versus the original guide.
Craig Arnold: Second, the number continues to grow and is up 9% from Q3. This will not go on forever, we're sure, but there continues to be strong momentum for U.S. industrial projects, and we're building a multi-year backlog. And third, about 72% of these projects are still in the planning phase, and only 18% of them are actually underway. Some 10% have been cancelled or significantly delayed, but this number is actually lower than historical rates.
Speaker Change: On the next chart, we have a summary of our quarterly results, which includes several records with.
Speaker Change: With respect to the top line, we posted an all time sales record of $6 billion.
Speaker Change: Up 11%.
Speaker Change: Organic growth continues to be strong up 10% for the quarter.
Speaker Change: We have generated double digit organic growth in seven of the last eight quarters with the last seven quarters growing over 20% on a two year stack.
Craig Arnold: For those that have started... We've won over a billion dollars in orders with a win rate of approximately $40,000. And we're in active negotiations on another $1 billion or less on a small subset of these totals. So, as you can see, megaprojects are a compelling reason to be optimistic about the future. Turning to slide 6, we want to highlight the timing and the duration of these megaprojects, as they become opportunities for our electrical business. The primary conclusion is we've not seen a significant impact from the large step-up in the number or size of megaprojects yet, but it's coming. Well, each project is different.
Speaker Change: We posted operating profit Q4 records on both a margin and absolute basis.
Operating profit grew 22% and segment margin expanded 200 basis points to 22, 8% incremental margin was very strong at 42%.
Speaker Change: Adjusted EPS of $2 55.
Speaker Change: Increased by 24% over the prior year. This is an all time record and above the high end of our guidance range.
Speaker Change: This performance resulted in all time quarterly.
Speaker Change: Operating and free cash flow records are $1 3 billion of operating cash flow was 9% higher than the prior year generating 18% free cash flow margin and 103% free cash flow conversion.
Craig Arnold: We put together our view of three representative examples of re-industrialization, including a semiconductor, an EV battery, and a healthcare examiner. The following slide indicates the number of months between an announcement of a megaproject and the time we begin to negotiate. It's time for an announcement of an order of magnitude, time from an announcement to an order, from an announcement to a. As you can see, it takes on average three to five years from when a project is announced to when it shows up on our website.
Speaker Change: For the full year, we also set numerous records, including record sales segment margins, adjusted EPS and earnings and operating and free cash flow.
Speaker Change: On slide nine we detail our electrical Americas results.
Speaker Change: The electrical Americas business continues to execute very well and delivered another very strong quarter.
Craig Arnold: So while the gratification is certainly delayed, this is what's showing up in our backlog and providing outstanding visibility into the future with over $1 billion of orders that we've already won. We expect revenues to be recognized over the next several years in line with each of these products' individual timetables. It just is a point of reference. Our revenues in Electrical America from Megaprojects in 2023 will be only about 3% of our total revenue. By contrast, they represent 16% of our negotiation.
We set an all time record for sales operating profit and margins.
Speaker Change: Organic sales growth remained strong at 16%.
Speaker Change: With broad based growth in nearly all end markets.
Speaker Change: On a two year stack organic growth is up 36%.
Speaker Change: Electrical Americas has generated double digit organic growth for eight consecutive quarters.
Speaker Change: All time record operating margin of 28, 5% was up versus prior year 480 basis points.
Speaker Change: Benefiting primarily from higher volumes effective management of price costs and improve manufacturing efficiency.
Craig Arnold: 56% of our order. Hence, the conclusion that most of the impact from this significant step up in megaprojects is still ahead of us. Now let me just turn it over to Tom, but before I do, I do want to take this opportunity to thank Tom. I mean, he has just been an outstanding leader for Eaton in his. Couldn't have asked for a better partner or a more effective CFO, and we were absolutely, disappointed to see you go. We fully understand the reason you made this decision.
Speaker Change: Incremental margin was 58% for the segment.
On a rolling 12 month basis orders were down 4%. However.
Speaker Change: However, it's important to note that the dollar value of the orders remains high.
Speaker Change: And the decline needs to be viewed in the context of the 34% order growth in Q4 of last year.
Speaker Change: As discussed in prior earnings calls order intakes, an important metric, but needs to be analyzed together with record backlog.
Speaker Change: Currently in our electrical sector, we have backlog coverage of almost three times our historical average.
Speaker Change: We've looked at multiple scenarios with meaningful order intake decline and are confident in those scenarios given our backlog coverage.
Speaker Change: That we can generate robust organic growth for several quarters.
Thomas Okray: We wish you all the best of luck. Thanks once again for this outstanding leadership over the last year. Thanks, Craig.
Speaker Change: Well into 2025.
Speaker Change: More specifically electrical Americas backlog increased 18% year over year and was also up sequentially, resulting in a book to bill ratio of one point to on a rolling 12 month basis.
Thomas Okray: I'll start by reviewing how our fiscal year 2023 results compared to our original forecast. Throughout the year, we demonstrated the ability to execute on our commitments and raise guidance for all. We delivered our third consecutive year of double-digit organic growth, with a 20% increase in adjusted EPS and an all-time record margin.
Speaker Change: For orders, we had particular strength in data center, and OEM and institutional market.
Speaker Change: Also our major project negotiations pipeline in Q4 was up 55% versus prior year and up 189% since Q4 2021.
Speaker Change: On a full year basis, electrical Americas posted 19% organic growth with 26, 5% margins up 400 basis points over prior year electrical.
Thomas Okray: Forty-eight percent increase in frequency. Of particular note, organic growth and segment margins were up versus the original guide, 400 and 110 basis points, respectively. Further, adjusted EPS and free cash flow grew 11%. Thank you, guys.
Electrical Americas posted records for full year sales along with profit on both the margin and absolute basis.
Speaker Change: With a tailwind from secular trends strong execution and robust backlog electrical Americas is well positioned as we enter 2024.
Thomas Okray: On the next chart, we have a summary of our quarterly results, which includes several records. With respect to the top line, we posted an all-time sales record of $6 billion, up 11% of total sales. Organic growth continues to be strong, up 10% for the quarter. We have generated double-digit organic growth in seven of the last eight quarters. For the last seven quarters, growing over 20%. 2-Year Staff.
Speaker Change: The next chart summarizes our results for the electrical global segment.
Speaker Change: Leveraging Q4 record revenue organic growth increased to 4% from flat in Q3, we.
Speaker Change: We had strength in data center, industrial and commercial and institutional market.
Speaker Change: Operating margin of 18, 8% was up 10% versus the prior year.
Speaker Change: Orders were up 1% on a rolling 12 month basis with strength in data center and <unk>.
Thomas Okray: We posted operating profit Q4 records on both a margin and absolute basis. Operating profit grew 22%, and segment margin expanded 200 basis points to 22.8%. Incremental margin was very strong at 40. Adjusted EPS of $2.55 increased by 24% over the prior year. This is an all-time record and above the high end of our guide.
Speaker Change: Utility M OEM and industrial markets importantly.
Speaker Change: Importantly book to Bill continues to remain greater than one.
Speaker Change: On a full year basis, electrical global posted 5% organic growth and 19, 3% margins.
Speaker Change: The business posted records for both full year sales and operating profit.
Speaker Change: Before moving to our industrial businesses I'd like to briefly recap the combined electrical segment for.
Thomas Okray: This performance resulted in all-time quarterly... Operating and Free Cash Flow Rationals. Our $1.3 billion of operating cash flow was 9% higher than the prior year, generating 18% free cash flow margin and 103% free cash flow conversion.
Speaker Change: For Q4, we posted organic growth of 11% incremental margin of 51%.
Speaker Change: And segment margin of 25%, which was up 320 basis points over prior year.
Speaker Change: On a rolling 12 month basis, our book to Bill ratio for our electrical sector remains very strong above one one.
Speaker Change: We remain quite confident in our positioning for continued growth with strong margins and our overall electrical business.
Thomas Okray: For the full year, we also set numerous records, including record sales, segment margins, adjusted EPS and earnings, and operating and free cash. On slide 9, we detail our Electrical Americas results. The Electrical Americas business continues to execute very well and delivered another very strong quarter. We set an all-time record for sales, operating profit, and margin. Organic sales growth remains strong at 16%.
Speaker Change: Chart 11 highlights our aerospace segment.
Speaker Change: We posted an all time quarterly sales in Q4 operating profit records.
Speaker Change: Organic growth was 8% for the quarter with a 2% contribution from foreign exchange.
Speaker Change: Growth was driven by broad strength across all markets with particular strength in defense aftermarket and both commercial OEM and commercial aftermarket, which were up 26%, 25% and 18% respectively.
Thomas Okray: With broad-based growth in nearly all end markets, on a two-year stack, organic growth is up 36%. Electrical Americas has generated double-digit organic growth for eight consecutive quarters. An all-time record operating margin of 28.5% was up versus prior year 480 bases.
Speaker Change: Operating margin of 22, 4% was down 210 basis points on a year over year basis.
Speaker Change: Benefiting from higher volumes and effective management of price cost offset by unfavorable mix and favorable defense programs in the prior year.
Thomas Okray: Benefiting primarily from higher volumes, effective management of price costs, and improved manufacturing efficiency, the incremental margin was 58% for the segment. However, on a rolling 12-month basis, orders were down 4%.
Speaker Change: On a rolling 12 month basis orders increased 7% with especially strong growth in commercial and defense aftermarket and commercial OEM.
Year over year backlog increased 13% and was up 3% sequentially.
Speaker Change: On a rolling 12 month basis, our book to Bill for our Aerospace segment remained strong at one one.
Thomas Okray: However, it's important to note that the dollar value of the orders remains, And the decline needs to be viewed in the context of the 34% order growth in Q4 of last As discussed in prior earnings calls, Order intake is important, and it needs to be analyzed together with record background. Currently, in our electrical sector, we have backlogged coverage of almost three times our historical average. We've looked at multiple scenarios with meaningful order intake decline.
Speaker Change: Moving onto our vehicle segment on page 12 in the quarter total revenue was up 2% from favorable foreign exchange.
Speaker Change: Vehicle end markets were down 500 basis points year over year, but the business was able to deliver outgrowth.
Speaker Change: Primarily driven by higher aftermarket sales stronger share in heavy duty transmissions.
Speaker Change: And our new product launch of electrical vehicle gearing in China.
Speaker Change: Operating margin came in at 17, 9% 270 basis points above prior year, driven by effective management of price cost and improvement in manufacturing efficiencies.
Thomas Okray: We are confident in those scenarios, given our backlog coverage, that we can generate robust organic growth for several quarters, well into. More specifically, Electrical America's backlog increased 18% year-over-year. It was also up sequentially, resulting in a book-to-bill ratio of 1.2 on a rolling 12-month basis. For orders, we have Particular Strength and Data Center, MOEM, institutional, Also, our major project negotiations pipeline in Q4 2021.
Speaker Change: Throughout 2023, we've demonstrated the ability to execute on operational improvements as shown by our 270 basis point improvement in segment margins from the first half to the second half of the year.
Speaker Change: On page 13, we show results for our E mobility business.
Speaker Change: We generated another quarter of strong growth, including an all time sales record.
Speaker Change: Revenue was up 19%, 18% organically and 1% from favorable foreign exchange.
Speaker Change: Driven by the ramp up of new product launches, we outpaced the market, which grew 7%.
Speaker Change: However, due to program startup costs, the operating loss increased by $14 million when compared to the prior year.
Thomas Okray: On a full year basis, Electrical America has posted 19% organic growth and 26.5% margins, up 400 basis points over prior years. It posted records for full year sales along with profit on both a margin and absolute.
Speaker Change: On a full year basis E mobility posted 18% organic growth and slightly lower margins as we continue to invest in the business.
Speaker Change: We remain very encouraged by the profitable growth prospects of the E mobility segment.
Thomas Okray: With the tailwinds from secular trends, strong execution, and robust backlogs, Electrical America is well positioned as we enter 2020. The next chart summarizes our results for the Electrical Global Summit. Leveraging Q4 record revenue, organic growth increased to 4% from flat in Q3. We have strengthened data center, industrial, and commercial and institutional markets. Operating margin of 18.8% was up 10% versus the prior year.
Speaker Change: In 2023, we won new programs with more than a $1 billion of mature year revenue.
Speaker Change: Through these wins, we continue to find opportunities.
Speaker Change: To leverage expertise and differentiated technologies across segments.
Speaker Change: Moving to page 14, we show, our electrical and aerospace backlog updated through Q4.
Speaker Change: As you can see we continue to build backlog with electric close stepping up to $9 5 billion in aerospace, reaching $3 2 billion for a total backlog of $12 7 billion.
Speaker Change: Both businesses have increased their backlogs by significantly more than 100% since Q4, 2020 with electrical growing almost 200%.
Thomas Okray: Orders were up 1% on a rolling 12-month basis with strength in data center and IT, utility, M-O-E-M, and Industrial Markets. Importantly, book-to-bill continues to remain greater than one. On a full year basis, Electrical Global posted 5% organic growth and 19.3% margin. The business posted records for both full-year sales and operating.
Speaker Change: Versus prior year, our backlogs have grown by 15% in electrical and 13% in aerospace.
Speaker Change: Which exceeded our expectations as we began the year.
Speaker Change: As noted earlier, both electrical and aerospace have book to Bill ratios above one one.
Speaker Change: Our strong backlog to close the year. It gives us continued confidence in our growth outlook for 2024 and beyond.
Thomas Okray: Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segment. For Q4, we posted organic growth of 11 percent. Incremental margin of 51% and segment margin of 25%, which was up 320 basis points over prior years. On a rolling 12-month basis, our book-to-bill ratio for our electrical sector remains very strong, above 1.1%. We remain quite confident in our positioning for continued growth, and strong margins in our overall electric business. Chart 11 highlights our aerospace business, which posted an all-time quarterly sales and Q4 operating profit. Organic growth was 8% for the quarter, with a 2% contribution from foreign exports. Growth was driven by broad strength across all markets, with particular strength in the Defense Aftermarket and both Commercial OEM and Commercial Aftermarket, which were up 26%, 25%, and 18%, respectively. However, operating margin of 22.4% was down 210 basis points on a year-over-year basis.
Speaker Change: In addition to our strong backlog growth in 2023. The next page shows the acceleration in growth of our negotiations pipeline, which supports our expectation for stronger markets and structurally higher organic growth rate.
Speaker Change: And electrical Americas, the pipeline doubled over the past three years and increased a further 29% in 2023.
Speaker Change: This is even stronger than the 19% organic growth in our electrical Americas business, which suggests continued strength going forward.
Speaker Change: For 2023, we saw $6 2 billion of projects in our negotiations pipeline in electrical Americas alone.
Now I will pass it back to Craig to walk through the guidance and wrap up the presentation.
Craig Arnold: Turning to page 16, we lay out our end market assumptions for 2024.
Craig Arnold: You'll recall that we provided an early look at our 2024 assumptions during our Q3 earnings call at the end of October.
Craig Arnold: Today, we're updating those assumptions.
Craig Arnold: And with the exception of residential markets, where we have increased our outlook from down slightly to flat and commercial vehicles, where we have decreased our outlook from slightly declining to declining all of our assumptions have remained the train the same.
Craig Arnold: Contrast to what we're seeing in the macro economy, we continue to expect growth in about 80% of our end markets.
Thomas Okray: Benefiting from higher volumes and effective management of price costs offset by unfavorable mix. Favorable Defense Programs in the Prior Year. On a rolling 12-month basis, orders increased 7% with especially strong growth in commercial and defense aftermarket and commercial OE. Year-over-year backlog increased 13% and was up 3% sequentially.
Craig Arnold: And much of this growth is supported by large backlogs.
Craig Arnold: Turning to page 17, as you've read we are announcing a new multi year restructuring program to reduce fixed costs and enhance our efficiency.
Craig Arnold: While we are structurally positioned to deliver higher levels of organic growth. We also have a vast number of opportunities to improve the way we run the company.
Craig Arnold: And we're at a point in time, where we have the organizational capacity to take on a number of these efficiency projects that have been in our pipeline for some time.
Craig Arnold: The program will focus on reducing structural costs through the consolidation of rooftops.
Craig Arnold: Increasing shared services and deploying digital technologies.
Thomas Okray: On a rolling 12-month basis, our book-to-bill for our aerospace segment remains strong at one point. Moving on to our vehicle segment on page 12, in the quarter, total revenue was up 2%, all from favorable foreign currencies. However, vehicle end markets were down 500 basis points year over year.
Craig Arnold: These actions will also free up time and resources in our businesses, allowing them to focus on growth and driving operational improvements.
Craig Arnold: Overall, we expect $375 million of restructuring costs over the next three years with $325 million of mature year savings in 2027.
Thomas Okray: But the business was able to deliver outgrowth, primarily driven by higher aftermarket sales, stronger share and heavy duty transmission, and a new product launch of electrical vehicle gearing in China. Operating margin came in at 17.9%, 270 basis points, above prior year, driven by effective management of price, cost, and improvement in Manufacturing Efficiency.
Craig Arnold: This includes approximately 175 million charges in 2024.
Craig Arnold: And $50 million of savings both of which are included in our 2024 guide and.
Craig Arnold: I'll cover those in the next several slides.
Craig Arnold: While the company is performing well we see these actions as an important part of how we'll continue to do so for years to come.
Craig Arnold: Moving to page 18, we summarize our 2020 for revenue and margin guidance.
Craig Arnold: Our organic growth for 2024 is expected to be between $6 five and eight 5% with particular strength in electrical Americas and aerospace both expected to be up between nine and 11%.
Thomas Okray: Throughout 2023, we've demonstrated the ability to execute an operational improvement, as shown by our 270 basis point improvement in segment margin from the first half to the second half. On Page 13, we show results for our e-mobility business, which generated another quarter of strong growth, including an all-time high revenue revenue was up 19%, 18% organically, and 1% from favorable foreign. Driven by the ramp-up of new product launches, we out However, due to program startup costs, the operating loss increased by $14 million when compared to the prior year.
Craig Arnold: While E mobility is expected to grow from 30% as new programs are launched in the electric vehicle market continues to see solid growth.
Craig Arnold: And I'd also add that the healthy end markets combined with our large backlog provides actually better than normal visibility for our 2020 for outlook.
Craig Arnold: For segment margins, our guidance range of 22, 4% to 22, 8% is an improvement of 60 basis points at the midpoint from our 2023, all time record of 22%.
Craig Arnold: As we've communicated earlier incremental margins of about 30% of what you should assume and that's what's reflected in our guidance.
Craig Arnold: These incrementals are consistent with our plan to step up investments in R&D and with the investments, we're making to expand our manufacturing capacity.
Craig Arnold: Done to ensure future growth.
Craig Arnold: On the next page, we have the balance of our guidance for 2024 and Q1.
Thomas Okray: On a full year basis, e-mobility posted 18% organic growth, slightly lower margins as we continue to invest. We remain very encouraged by the profitable growth prospects of the e-mobility sector. In 2023, we won new programs with more than a billion dollars of mature year revenue. Through these wins, we continue to find opportunity to leverage expertise and differentiated technologies across Moving to page 14, we show our electrical and aerospace backlog updated through Q4.
Craig Arnold: For 2024, our adjusted EPS is expected to be between $9 95.
Craig Arnold: And $10.35 a share.
Craig Arnold: $10 15 at the midpoint and up some 11% from 2023.
Craig Arnold: And for operating cash flow our guidance is between 4 billion and $4 4 billion up 17% at the midpoint.
Craig Arnold: The key drivers here are really a combination of higher earnings and improved working capital.
Craig Arnold: We also expect to repurchase between $1 5 billion and $2 5 billion of our shares outstanding.
Thomas Okray: As you can see, we continue to build backlog, with electrical stepping up to 9.5 billion and aerospace reaching 3.2 billion for a total backlog of 12.7 billion. Both businesses have increased their backlogs by significantly more than 100% since Q4 2020, with electrical growing almost 200%. Versus the prior year, our backlogs have grown by 15% in electrical and 13% in aerospace, which exceeded our expectations as we began. As noted earlier, both electrical and aerospace have book-to-build ratios above 1.1. Our strong backlog to close the year gives us continued confidence in our growth outlook for 2024.
And given our cash position at the end of the year at the end of 'twenty, three and our strong cash generation. This year, we will still have plenty of room for strategic M&A.
Craig Arnold: For Q1, we expect organic growth to be between 6% to 8%.
Craig Arnold: Segment margins between 21, 3% and 21, 7% and adjusted EPS in a range of $2 21.
Craig Arnold: And $2 31 per share.
Speaker Change: So let me close here on page 20.
Speaker Change: As we transition into 2024, I think we can all conclude that Eaton has proven that were changed company.
Speaker Change: A company that delivers higher growth higher earnings industrial consistently and.
Speaker Change: And we're proud of our team's record performance of 2023.
Speaker Change: But once again, we see opportunities to be better everywhere as.
Speaker Change: As we look forward, we continue to experience powerful megatrends that are driving higher growth in our end markets and we're investing to ensure that we're capturing these opportunities while gaining market share.
Speaker Change: We're also continuing to optimize the way we run the company.
Speaker Change: Improving our operational execution.
Speaker Change: Averaging our scale and reducing our fixed costs.
Thomas Okray: In addition to our strong backlog growth in 2023, the next page shows the acceleration in growth of our negotiation pipeline, which supports our expectations. Stronger Markets, Structurally higher organic growth. In Electrical Americas, the pipeline doubled over the past three years and increased a further 29% in 2023.
Speaker Change: This is allowing us to invest like never before in R&D and capacity expansion in our people.
Our expectations are high and our teams are looking forward to delivering another exceptional year.
Speaker Change: So with that I.
Speaker Change: I'll open things up for any questions that you may have.
Speaker Change: Thanks, Craig for the Q&A today, please limit your opportunity to one question and a follow up thanks Ananda the ones for your cooperation with that I will turn it over to the operator gave you guys the operation.
Craig Arnold: This is even stronger than the 19% organic growth in our Electrical Americas business, which suggests continued strength going forward. In 2023, we saw $6.2 billion of projects in our pipeline for electrical America solutions. Now I'll pass it back to Craig to walk through the guidance and wrap up the presentation. Turning to page 16, we lay out our NMARC assumptions for 2020.
Speaker Change: Thank you and ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your Touchtone phone you will hear a ton, indicating that you've been placed in the queue and you may remove yourself from queue at any time by repeating the Wednesday mcmann.
Speaker Change: If you're on a speakerphone please pick up your handset before pressing the number once again if you have a question. Please press the one zero at this time.
Speaker Change: And our first question will come from the line of Jeff Sprague from vertical research. Please go ahead.
Craig Arnold: You'll recall that we provided an early look at our 2024 assumptions during our Tuesday earnings call at the end of October. Today, we're updating those assumptions. And with the exception of residential markets, where we have increased our outlook for down slightly Commercial Vehicles, where we have decreased, Slightly declining to declining, all of our assumptions have remained the same.
Jeff Sprague: Thank you good morning, everyone. Good luck Tom.
Jeff Sprague: First question for me is just on the restructuring itself. We tend to think of these things as being kind of contra cyclical right.
Jeff Sprague: Demand is weak we are in a recession, we do have the restructuring.
Jeff Sprague: Thanks.
Jeff Sprague: I don't know at or a little risky maybe to undertake a big big move like this with such a strong demand costs through both the electrical and Aero businesses. So can you maybe just.
Craig Arnold: In contrast to what we're seeing in the macroeconomy, we continue to expect growth in about 80 percent of our..., and much of this growth is supported by large. Turning to page 17, as you've read, we're announcing a new multi-year restructuring program to reduce and enhance our. While we're structurally positioned to deliver higher levels of organic growth, we also have a vast number of opportunities to improve the way we run And we're at a point in time where we have the organizational capacity to take on a number of these efficiency projects that have been in our pipeline for some time. The program will focus on reducing structural costs through the consolidation of roofing, increasing shared services, and deploying Digital Technologies.
Jeff Sprague: Dress the risk mitigation and.
How do you manage kind of maybe the capacity through this I assume you're also trying to increase capacity, while youre restructure but mothers.
Speaker Change: Love some additional thoughts on that.
Speaker Change: Love some additional thoughts on that.
Speaker Change: Thank you I appreciate the questions.
Speaker Change: Eight.
Speaker Change: If everybody is getting a little background noise on the call I'm not sure.
Speaker Change: Okay, that's better.
Speaker Change: We spent a lot of time as a company.
Speaker Change: <unk> this one out.
Speaker Change: In terms of whether or not it.
Speaker Change: Makes sense to take on these restructuring projects at this time because to your point things are going very well and we have.
Speaker Change: Perhaps more growth opportunities than we.
Speaker Change: Ever had in the history of the company, but at the same time, we actually have more capacity today than we've had in a long time.
Certainly be aware, we haven't done many acquisitions over the last couple of years in fact, we really haven't done any.
Speaker Change: And so we actually have more bandwidth as an organization today.
Speaker Change: Take all of these projects and one of the things that we do as a company is that we.
Speaker Change: We only have a forward view of our opportunities to be better to prove efficiencies to eliminate redundancies and build scale.
Craig Arnold: These actions will also free up time and resources in our businesses, allowing them to focus on growth and driving operational improvement. Overall, we expect $375 million of restructuring costs over the next three years, with $325 million of mature year savings in 2020. This includes approximately $175 million in charges in 2024.
Essentially levered some of these new technologies that are coming forth and so we today as an organization as a leadership team all agree that there's probably.
No better time than right now too.
Speaker Change: Take all of these projects to improve our cost position and really set the company up for margin expansion for the next three years on top of the growth that we're going to see as a business.
Speaker Change: So lots of confidence today, and our ability to take it on and we have plenty of capacity as an organization to do so.
Craig Arnold: $50,000,000 of savings, both of which are included in our 2024 guide, and I'll cover those in the next section. While the company is performing well, we see these actions as an important part of how we'll continue to do so for years to come. Moving to page 18, we summarize our 2024 revenue and margin. Our organic growth for 2024 is expected to be between 6.5 and 8.5%, with Particular Strength in Electrical Americas and Errol Smith both expected to be up between 9 and 11.
Speaker Change: And what I would just add Jeff to that is I think it would actually be riskier. If we didn't do it because of the foundation of the restructuring program is simplification as well and elimination of waste, which frees up human resource time to focus on the shift to that we've been making into.
<unk> into growth so.
Speaker Change: Actually would be riskier, if we didn't do it and it's great to lean forward and executed at a time of strength.
Jeff Sprague: Yes, it's a great point, Greg said that in my opening commentary this notion that essentially we're freeing up time in our operations.
Speaker Change: That they can focus on growth and improving our operational execution, while some of our corporate teams take on a number of these support services. So you're absolutely right Tom Thanks for that.
Speaker Change: Applications.
Speaker Change: Yes, Thanks, just to follow in the background noise might be EMEA dialogue through my computer here juggling multiple phone calls.
Craig Arnold: While e-mobility is expected to grow some 30% as new programs are launched and the electric vehicle market continues to see growth, Shalva Groves. And I'd also add that the healthy end markets, combined with our large backlog, provide better than normal visibility for our 2025 economy. Shaggit Marty, The guidance range of 22.4% to 22.8% is an improvement of 60 basis points at the midpoint from our 2023 all-time record of 22. As we've communicated earlier, incremental margins of about 30% are what you should assume, and that's what's reflected in our guidance.
Speaker Change: Cell phones going Crazy day here.
Speaker Change: Unrelated question.
Speaker Change: Just on backlog, obviously, it does provide a lot of visibility.
Speaker Change: Comfort, but.
Speaker Change: <unk> seen a couple of companies with Big backlogs also have sales disappointment is supposed to be kind of the backlog is big but it is not fungible right.
Speaker Change: Market developed here and there.
Speaker Change: Yes, maybe just kind of address that risk.
Speaker Change: Anything that you need to kind of navigate through from a timing standpoint, particularly given the way you illustrated the long kind of order conversion cycle on some of those projects stuff that's in the backlog.
Speaker Change: Thank you.
Speaker Change: No appreciate that question, Jeff and understand the nature of it but I can just tell you based upon at least where fee and the nature of our backlog.
Craig Arnold: These incrementals are consistent with our plan to step up investments in R&D and with the investments we're making to expand our manufacturing capacity. All done to ensure the future. On the next page, we have the balance of our guides for 2024 and Q1. In 2024, our adjusted EPS is expected to be between $9.95 and $10.35, $10.15 at the midpoint and up some 11% from 2020.
Today, and as I'm sure, you're well aware of that.
Speaker Change: Eaton and really quite frankly as an industry we.
Speaker Change: We've had more demand than we have had capacity largely over the last couple of years.
Speaker Change: So we think we have plenty of ability to.
Speaker Change: To accelerate.
Speaker Change: Accelerate if necessary.
Speaker Change: Backlog conversion to essentially keep the topline growing at an attractive rate in the event that you have some sort of.
Craig Arnold: And for operating cash flow, our guidance is between $4 billion and $4.4 billion. Key drivers here are really a combination of higher earnings and improved work. We also expect to repurchase between $1.5 billion and $2.5 billion of our shares. And given our cash position at the end of the year, at the end of 23, and our strong cash generation this year, we'll still have plenty of room for strategic investment. For Q1, we expect organic growth to be between 6 and 8 percent, segment margins between 21.3% and 21.7, and Adjacent EPS in a range of $2.21.
Speaker Change: Sure.
Speaker Change: Order that would be moving in or out or some sort of.
Speaker Change: Lack of linearity in the order book itself until not economic concern, we've not seen it.
Speaker Change: To date.
Speaker Change: As we look at kind of the.
Speaker Change: The stratification of the backlog and when orders are do we don't have that concern.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Thank you and the next question is from Andrew Ahlborn from Bank of America. Please go ahead.
Andrew Burris Obin: I guess good morning, how are you.
Andrew Burris Obin: Andrew we're doing great Hello to you good morning, Joe.
Andrew Burris Obin: Yes, so it sounds like you guys are doing great yes.
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Craig Arnold: 2031. Let me close here on page 20. You know, as we transition into 2024, I think we can all conclude that Eaton has proven that we're a changed company. This is a company that delivers higher growth and high earnings, and that's so, and we're proud of our team's record performance in 2020. And once again, we seek opportunities to be better every day.
Speaker Change: Just a different way of asking.
Speaker Change: I guess jeffs question can you just talk to you mentioned capacity additions.
Speaker Change: Just you know and I appreciate.
Speaker Change: At this time all this is competitive.
Speaker Change: But what areas are you, adding capacity when will the capacity be.
Speaker Change: Available to really move the needle.
Speaker Change: And.
Speaker Change: Yes, and anything youre doing differently on geographies.
Speaker Change: Post the whole COVID-19 experience. Thank you.
Speaker Change: Yes, no appreciate the question Andrew and one of the things we tried to do on the last earnings call to provide a little bit of color around the one.
Craig Arnold: As we look forward, we continue to experience, and we're investing to ensure that we're capturing these opportunities while gaining will also continue to optimize the way we run the company, Proving our operational execution, leveraging our scale, and reducing our... This is allowing us to invest like never before, in R&D, Capacity Expansion, and R&D. So, our expectations are high, and our teams are looking forward to delivering another. So with that.
Speaker Change: $1 billion of investment that we're putting in as a company to support growth and I would tell you, it's really pretty broad based.
Speaker Change: We talked about investments that we're making to support growth in utilities.
Speaker Change: In Transformers, and voltage regulators and our line installation and protection equipment, we talked about.
Speaker Change: See the huge growth that we're seeing in data centers and commercial and institutional markets and the investments that we're making there in low and medium voltage assembly, which forward in panel boards.
Craig Arnold: I'll open things up for any questions that you may have. Thanks, Craig. For the Q&A today, please limit your opportunity to one question and a follow-up. Thank the other participants for your cooperation. With that, I will turn it over to the operator to give you guys the operation. Thank you, and ladies and gentlemen, if you wish to ask a question, please press one, then zero on your touchtone phone. You will hear a tone indicating that you've been placed in queue, and you may remove yourself from queue at any time by repeating the one, zero command.
Speaker Change: We've had to make investments in our core components circuit breaker capacity and obviously, we're making big investments in E mobility as well so I'd say, it's actually fairly broad based with respect to the product lines.
Speaker Change: As it relates to the geography, we are clearly seeing.
Speaker Change: Much bigger investment much faster growth in the Americas, and Thats really where the principally who are these big investments have gone.
Speaker Change: But.
Operator: If you are on a speakerphone, please pick up your handset before pressing the number. Once again, if you have a question, please press 1, then 0 at this time. And our first question will come from Jeff Sprague from Vertical Research. Please go ahead. Thank you. Good morning, everyone.
Speaker Change: To your question about timing.
Speaker Change: What we're assuming in terms of our own capacity industry capacity is another issue as we work through suppliers and some of the others in the value chain, but we think a lot of this capacity for us begin to phase in this year and so sometime between let's say this.
Jeff Sprague: Good luck, Tom. Hey, Craig, the first question for me is just on the restructuring itself. We tend to think of these things being kind of contra-cyclical, right?
Speaker Change: Second quarter in the end of the year when we'll have most of our investments done.
Speaker Change: And certainly gives us the capacity to do more assuming there aren't other bottlenecks and restrictions whether it be labor or others in the value chain.
Jeff Sprague: Demand is weak. We're in a recession. We have a heavy restructuring. Seems, you know, I don't know, odd or a little risky maybe to undertake a big, you know, big move like this with such a strong demand pulse through both the electrical and aero businesses. So can you maybe just, you know, address the risk mitigation and, you know, how you manage kind of maybe the capacity through this?
Speaker Change: Gotcha.
Speaker Change: Just a follow up I guess natural belts on the first answer.
Speaker Change: In terms of your supply chain what are the biggest challenges are you still experiencing and what has gotten better over the past three to six months and what's still a problem. Thank you.
Craig Arnold: I assume you're also trying to increase capacity while you're restructuring, but I would love some additional thoughts on that. Hey, Jeff, appreciate the question. You know, and I'm not sure if everybody else is getting a little background noise on the call. I'm not sure.
Speaker Change: Yes, what I would tell you is in many way Andrew we're really back to where we've been historically and we've never lived in a world where we didn't have.
Craig Arnold: Okay, that's better. Hey, you know, Jeff, we spent a lot of time as a company sorting this one out in terms of whether or not it made sense to take on these restructuring projects at this time. Because, to your point, things are going very well, and we have, perhaps, more growth opportunities than we've ever had in the history of the company. But at the same time, we actually have more capacity today than we've had in a long time. You know, as you'll certainly be aware, we haven't done many acquisitions over the last couple of years. In fact, we really haven't done any.
Speaker Change: The intermittent supply chain issues, so I would say by and large we've seen fairly significant progress every place.
Speaker Change: It used to be that electronics were a major bottleneck in issue.
Speaker Change: Most of those issues are now behind us, we still have pockets of individual challenges.
Speaker Change: And various suppliers with various components, but I would say today. It is really more episodic and unique and it is I'd say a pattern.
Speaker Change: Or or a broader let's say capacity constraint in a particular commodity.
Craig Arnold: And so we actually have more bandwidth as an organization today to take on these projects, and one of the things that we do as a company is that we always have a forward view of our opportunities to be better, to improve efficiencies, to eliminate redundancies, to build scale, to essentially leverage some of these new technologies that are coming forth. And so we today, as an organization, as a leadership team, all agree that there's probably no better time than right now to take on these projects, to improve our cost position, and really set the company up for margin expansion for the next three years, on top of the growth that we're going to see as a business. So, I have lots of confidence today in our ability to take it on, and we have plenty of capacity as an organization to do so.
Speaker Change: And so we like in our own investments, we've been working hard to build capacity internally. We've also been working with our suppliers give.
Speaker Change: Giving them lead time and visibility into our growth over the next multiple years to ensure that they too are making investments in capacity to keep up with our demand and so I would say today, it's largely.
Speaker Change: The <unk>.
Speaker Change: <unk> issue as opposed to a systemic issue.
Speaker Change: Yes. Thank you so much.
Speaker Change: Just to jump in Andrew on that last point I think that's really been key partnering with the suppliers. So we can grow together with them and we've got much more efficient probably as a result of the pandemic understanding what we need on a go forward demand basis.
Craig Arnold: And what I would just add, Jeff, to that is that it would actually be riskier if we didn't do it, because the foundation of the restructuring program is simplification as well as elimination of waste, which frees up human resource time to focus on the shift that we've been making into growth. So it actually would be riskier if we didn't do it, and it's great to lean forward and execute it at a time of strength I said in my commentary that this notion that essentially we're freeing up time in our operations so that they can focus on growth and improving our operational execution, while some of our corporate teams take on a number of these support services. So you're absolutely right, Tom. Thanks for that explanation. Yeah, thanks. And just to follow in the background noise, it might be me.
Speaker Change: Actual Tom Thanks, so much for all your help you'll be less time, Craig congratulations.
Speaker Change: Thank you Andrew Thank you.
Thank you. Our next question is from Chris Snyder from UBS. Please go ahead.
Chris Snyder: Thank you. So obviously mega projects have become a big driver of <unk> and story and an important driver of the outlook. So appreciate all the information you guys provided there, but if we step back and look and even look through the low single digit Mega project tailwind in 2023, I think you said it was three <unk>.
Chris Snyder: Of total revenue.
Chris Snyder: America's revenue.
Chris Snyder: Organic growth is still growing at a double digit rate for the last eight quarters can you just talk about why underlying demand has been so strong because I think when most investors see the huge growth numbers, everyone. Just assumed that Mega project opportunity already playing out thank you.
Speaker Change: No I appreciate the question and I think.
Speaker Change: I'd say long before we were talking about Mega projects, we were talking about secular growth drivers. We were talking about energy transition we were talking about the electrification of the economy, we were talking about digitalization.
Jeff Sprague: I'm dialing through my computer here, juggling multiple phone calls and different cell phones on a crazy day here. Unrelated question, just on the backlog. Obviously, it does provide a lot of visibility and comfort.
Speaker Change: You think about today Mega projects deal with these big projects above $1 billion announcements, but we've seen very similar growth in projects that are well below the $1 billion threshold and so.
Craig Arnold: But, you know, we've seen a couple companies with big backlogs also have sales disappointments because, you know, the backlog is big, but it's not fungible, right? You know, air pockets develop here and there, you know, maybe just kind of address that risk, you kind of see anything that you need to kind of navigate through from a timing standpoint, particularly given the way you illustrated the long, you know, kind of order conversion cycle and some of this project stuff that's in the backlog. Thank you. I appreciate that question, Jeff, and understand the nature of it, but I can just tell you, based upon at least what we're seeing and the nature of our backlog. Today, and as I'm sure you're well aware that, you know, we as Eaton and, really, quite frankly, as an industry, we've had more demand than we've had capacity, you know, largely over the last couple of years.
Speaker Change: Reindustrialization of the U S and other markets.
Speaker Change: Today, you have production moving back in.
And our big investments, taking place and so the.
Speaker Change: The trends are much broader than mega projects. The reason, we put this emphasis on Mega project because it is a great indicator of the multi year.
Speaker Change: Runway that we have and the chance to give the investor community visibility into the outlook over multiple years, but youre absolutely right, we're seeing broad based growth.
Speaker Change: In our business.
Speaker Change: Much beyond.
Speaker Change: Megaproject emphasis but the mega projects will become a bigger piece of our future and that's why we talked about 3% of sales.
Speaker Change: Percent of orders 16% of negotiations.
Craig Arnold: And so we think we have plenty of ability to accelerate, deaccelerate, if necessary, you know, backlog conversion to essentially keep the top line growing at an attractive rate in the event that you have some sort of, you know, order that would be moving in or out or some sort of, you know, lack of linearity in the order book itself. So, not a concern; we've not seen it to date as we look at kind of the stratification of the backlog, and when orders are due, we don't have that concern. Thank you very much.
Speaker Change: <unk> continues to be a tail.
Speaker Change: <unk>.
Speaker Change: <unk> for future growth.
Speaker Change: Yeah, and Chris if I could just throw in on that.
Speaker Change: We talked about in the prepared remarks at a high level are our major.
Speaker Change: <unk>, our large project negotiations and so that's much less than these mega projects and just some of the numbers. If you look at year over year for data centers growing over 160% in terms of negotiation volume institutions over 40% governments.
Speaker Change: And healthcare over over 30%.
Andrew Burris Obin: And the next question is from Andrew Obin from Bank of America. Please go ahead. Good morning. How are you?
Speaker Change: So it's really really broad based as Craig says.
Speaker Change: <unk>.
Speaker Change: The Mega projects, if you like just really put the cherry on top and give us just a long runway going forward.
Craig Arnold: Good, Andrew. We're doing great. How about you? Morning, Andrew.
Speaker Change: Yes, no absolutely appreciate the durability and sustainability of that it brings and then just kind of on that same topic. My back of the envelope math suggests this ramp in Mega projects, we've talked about a $25 billion incremental market opportunity over the next few years.
Thomas Okray: Yes, it seems like you guys are doing great. Yes. Just a different way of asking, I guess, a fair question.
Andrew Burris Obin: Can you just talk, you mentioned capacity additions, can you just, you know, and I appreciate that some of this is competitive, but what areas are you adding capacity to? When will this capacity be available to really move the needle? And, Yeah, and anything you're doing differently in geographies, you know, post the whole COVID experience?
Speaker Change: So a pretty massive ramp for an industry that is already having trouble keeping up with demand.
Speaker Change: I guess the question is do you see a pathway forward for the industry to meet this demand and how does that impact your multiyear expectations for our ability to push price and drive margins higher. Thank you.
Craig Arnold: Thank you. Yeah, no, I appreciate the question, Andrew. And you know, one of the things we tried to do in the last earnings calls is give you a little bit of color around this billion dollars of investment that we're putting in as a company to support growth. And I would tell you, it's really pretty broad.
Speaker Change: Yes, I think your back of the envelope math is pretty good actually it does create a very large.
Speaker Change: Growth opportunity for the electrical industry.
Speaker Change: And I would say to the question around whether or not the industry is going to have.
Speaker Change: <unk> capacity and bandwidth to capture these opportunities.
Craig Arnold: We talked about investments that we're making to support growth in utilities, in transformers, in voltage regulators, in our line insulation and protection equipment. We talked about, obviously, this huge growth that we're seeing in data centers and commercial and institutional markets and the investments that we're making there in low and medium voltage assemblies and switchboards and panel boards. We've had to make investments in our core components, circle breaker capacity, and obviously, we're making big investments in e-mobility as well. So I'd say it's actually fairly broad-based with respect to the product lines. As it relates to geography, what we're clearly seeing is much bigger investments, much faster growth in the Americas, and that's really where principally a lot of these big investments have gone. But we, you know, your question about timing.
Speaker Change: One of the one of the restrictions today and growth in general is the fact that there is not enough capacity in the industry, which is why we're making fairly sizable investments in our own manufacturing facilities and working with our suppliers to do the same so that we can try to get out in front of.
Speaker Change: Homeless demand and continue to grow the company and then on top of that perhaps the greatest limiter on growth.
Speaker Change: Maybe the labor constraint in terms of finding enough skilled tradespeople to deal with the significant backlog of demand and so what we think fundamentally is going to happen is that the growth will be there, but the cycle will be extended because we simply will not have enough.
Speaker Change: Past the labor to deal with all the demand and the timeframe in which we.
Speaker Change: Requested.
Speaker Change: The cycle will simply be expanded.
Speaker Change: Couple years beyond where it normally would reside.
Speaker Change: Thank you I appreciate that.
Speaker Change: Thank you. The next question is from the line Steve Tusa from Jpmorgan. Please go ahead.
Craig Arnold: You know, what we're assuming in terms of our own capacity, industry capacity is another issue as we work through suppliers and some of the others in the value chain, but we think a lot of this capacity for us begins to phase in this year, so sometime between, let's say, you know, the second quarter and the end of the year, when we'll have most of our investments done and certainly give us the capacity to do more, assuming there are Gotcha. And just a follow-up, I guess, naturally built on the first answer.
Hey, good morning.
Steven Winoker: Hey, Steve.
Steven Winoker: Yeah.
Steven Winoker: Tom Congrats on not going out with a bang here great.
Steven Winoker: Alright, great. Thanks, Matt appreciate it.
Steven Winoker: Just the the pricing dynamics.
Steven Winoker: What are you guys assuming for in your electrical businesses for.
Steven Winoker: Price roughly in 'twenty four embedded in your guidance.
Steven Winoker: Yes, Steve as you probably are aware, we don't provide specific.
Price guide.
Steven Winoker: Guidance, we don't separate price and volume I will tell you that.
Andrew Burris Obin: In terms of your supply chain, what are the biggest challenges you're still experiencing, and what has gotten better over the past three, six months, and what's still a problem? Thank you. Yeah, what I would tell you is, in many ways, you know, Andrew, we're really back to where we were historically. And we've never lived in a world where we didn't have, you know, the intermittent supply chain issues.
Steven Winoker: Relative basis, when you compare let's say 2020 for 2023 2022, the price will contribute a much smaller piece of our growth than volume oil and so we're going to be probably back to a more of a historical level of price realization in terms of 2002.
Steven Winoker: And that's really a function of the fact that we're not seeing inflation.
Steven Winoker: We had to essentially work the price lever fairly significantly over the last couple of years as we dealt with this inflation that was in the system now we still have some inflation principally on the labor side. So we will still get price, but its contributions to our growth will be significantly less than it had been in prior years.
Craig Arnold: So I would say, by and large, we've seen fairly significant progress everywhere. You know, it used to be that electronics were a major bottleneck in issues. Most of those issues are now behind us.
Craig Arnold: We still have pockets of individual challenges in various suppliers with various components, but I would say today it is really more episodic and unique than it is, I'd say, a pattern or a broader, let's say, capacity constraint in a particular commodity. And so, like in our own investments, we've been working hard to build capacity internally. We've also been working with our suppliers. And so I would say today it's largely an episodic issue as opposed to a systemic issue. Just to jump in, Andrew, on that last point, I think that's really been key to partnering with the suppliers so we can grow together with them, and we've gotten much more efficient, probably as a result of the pandemic, understanding what we need on a go-forward demand basis. That's all. Tom, thanks so much for all your help. You'll be missed, and Craig, congratulations.
Speaker Change: Right and I guess just on the on the cash flow statement.
Speaker Change: Yes.
Speaker Change: But I'm.
Speaker Change: I'm not sure if im saying this right, but $2 billion of.
Speaker Change: A share repo in 'twenty four.
Speaker Change: I think thats, a pretty decent size number.
Speaker Change: Anything going on specifically there.
Speaker Change: No no no going in at the midpoint, Okay, great Tom.
Thomas Okray: Yes no.
Speaker Change: We finished we finished 2023 with $2 6 billion in cash and.
Speaker Change: Given how we're guiding and giving how we are doing a better job of managing working capital given the supply chain constraints are going away, we're going to have a very good year of generating cash in 2024. So we go into our capital allocation tenants and we're very clear, we're not going to collect.
Speaker Change: Cash on the balance sheet. So at the midpoint, we've got $2 billion as was said in the prepared remarks. So this gives us plenty of dry powder to do strategic M&A. So even with that two 2 billion and the final thing I would end with is our net leverage on the balance sheet, which you probably.
Andrew Burris Obin: Thank you, Andrew. Thank you, thank you. Our next question is from Chris Snyder from UBS. Please go ahead.
Chris Snyder: Thank you. So obviously, megaprojects have become a big driver of the Eaton story and an important driver of the outlook. So I appreciate all the information you guys provided there. But if we step back and look and even look through the low single-digit megaproject tailwind in 2023, I think you said it was 3% of total America's revenue. However, organic growth has still grown at a double-digit rate for the last eight quarters.
Speaker Change: Now Steve is one three so we've got a very strong balance sheet, just a ton of flexibility from a from a capital allocation perspective.
Speaker Change: Right. So it's a 2% lift from share count.
Speaker Change: In general embedded in the guidance for EPS growth.
Speaker Change: Yes.
Speaker Change: Relative.
Speaker Change: <unk> minor a couple a couple of pennies versus consensus yet.
Speaker Change: Okay got it alright, thanks a lot.
Craig Arnold: Can you just talk about why underlying demand has been so strong? Because I think when most investors see the huge growth numbers, everyone just assumes it's the mega project opportunity already playing. No, I appreciate the question. And I think, you know, I say long before we were talking about mega projects, we were talking about secular growth tribes. We were talking about the energy transition.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is from the line of Joe Ritchie from Goldman Sachs. Please go ahead.
Joe Ritchie: Thanks, Good morning, everyone.
Joe Ritchie: Good morning Joel.
Joe Ritchie: So I think Chris touched some asking his question, but maybe to ask it more explicitly as you think about that first $1 billion plus in Mega projects that you've won it just what's the what's the margin profile.
Joe Ritchie: Of those wins.
Joe Ritchie: How we should be thinking about that.
Joe Ritchie: Ultimately materializing in the P&L.
Craig Arnold: We were talking about the electrification of the economy. You know, we were talking about digitalization. You think about, you know, today, mega projects deal with these big projects above a billion dollars in announcements. But we've seen very similar growth in projects that are well below the billion dollar threshold. And so, you know, the reindustrialization of the U.S. and other markets where, today, you have production moving back in and big investments taking place. And so, the trends are much broader than megaprojects. The reason we put this emphasis on megaprojects is because they're a great indicator of the multi-year runway that we have and the chance to give, you know, the investor community, visibility into the outlook over multiple years. But you're absolutely right.
Joe Ritchie: Yes, I would say that the margin profile on these mega projects is not going to be terribly different than the margin profile on the underlying business.
Joe Ritchie: We.
Joe Ritchie: We are in a position as you can imagine when you're capacity constrained.
Joe Ritchie: Be selective around where you win.
Joe Ritchie: And so we would not expect even though they are big projects and oftentimes you signed with large projects.
Joe Ritchie: Margins.
Joe Ritchie: A bit of a haircut, we should you should not expect that as these megaproject.
Joe Ritchie: Projects.
Joe Ritchie: To translate into revenue.
Speaker Change: Got it that's that's great to hear Craig and then I guess.
Look the funnel keeps on growing now for the last couple of quarters that are pretty material rate.
Speaker Change: There's a lot of concern with the election coming that.
Speaker Change: Perhaps this first wave of projects that are broken ground continues, but maybe you get a stall in the second and the second wave just any thoughts around that I know you kind of touched on the potential for labor constraints, but I'm really more any other thoughts that you would have on just continuing to grow the funnel and then making sure that that actually we actually see that ultimately.
Craig Arnold: We're seeing broad-based growth in our business, much beyond this mega project emphasis, but the mega projects will become a bigger piece of our future. That's why we talked about 3% of sales, 6% of orders, and 16% of negotiations. That continues to be a tailwind, a real impetus for future growth. Yeah, and Chris, if I could just throw in on that, you know, we talked about in the prepared remarks at a high level our major projects, our large project negotiations, and that's much less than these megaprojects.
Speaker Change: And you're in Europe, and your outlook.
Speaker Change: Yes, no no I appreciate the question and the concern given.
Speaker Change: The upcoming elections.
Speaker Change: And in many ways, it's kind of an unknowable in terms of how the election is going to turn out and then quite frankly, even with the change in the administration difficult to know what position they will take with respect to <unk>.
Speaker Change: Lot of the stimulus spending that is essentially underlying and supporting these mega projects.
Speaker Change: I'll tell you what gives us a fairly high level of confidence that it's not going to change materially is that a lot of these projects are growing into into red states and so despite what may happen.
Thomas Okray: And just some of the numbers, if you look at year over year for data centers growing over 160% in terms of negotiation volume, institutions growing over 40%, governments, and healthcare growing over 30%. So it's really, really broad-based, as Craig says, you know, the, the megaprojects, if you like, just really put the cherry on top and give us just a long runway going forward. Yeah, no. I absolutely appreciate the durability and sustainability that it brings.
Speaker Change: On the political.
Speaker Change: Political front the benefactor of a lot of these projects are actually.
Speaker Change: Those red States.
Speaker Change: And so we'll have to wait and see how the unemployment and we don't think today, it's going to have a material impact today. We are looking at more demand than we have capacity to serve so even if there was a little bit of give back.
Speaker Change: The business is still in great shape to support the long term growth assumptions for the company, but in many ways. It's kind of the unknowable. We just don't know how the election is going to unfold and then what happens afterwards.
Chris Snyder: And then, just kind of on that same topic, my back of the envelope math suggests that this ramp in megaprojects drives about a $25 billion incremental market opportunity over the next few years. So a pretty massive ramp for an industry that is already having trouble keeping up with demand. So I guess the question is, do you see a pathway forward for the industry to meet this demand? And how does that impact your multi-year expectations for the ability to push price and drive margin?
Speaker Change: That's helpful Craig and best wishes Tom Thank you.
Speaker Change: I appreciate it thank you.
Speaker Change: Thank you. The next question is from Julian Mitchell from Barclays. Please go ahead.
Julian Mitchell: Thanks very much.
Thanks, a lot Tom for all the help.
Julian Mitchell: Maybe.
Craig Arnold: You know, I think your envelope map is pretty good, actually. It does create a very large growth opportunity for the electrical industry. And I would say to the question about whether or not the industry is going to have enough capacity and bandwidth to capture all these opportunities. I think one of the restrictions today on growth in general is the fact that there is not enough capacity in the industry, which is why we're making fairly sizable investments in our own manufacturing facilities and working with our suppliers to do the same, so that we can try to get out in front of some of this demand and continue to grow the company. And then on top of that, perhaps the greatest limiter on growth may be labor.
Julian Mitchell: Maybe just a first question would be around.
Julian Mitchell: When you think about sort of the.
Julian Mitchell: Mega projects and the impact on North America orders.
Julian Mitchell: We've had a sort of a book to bill.
Julian Mitchell: One times in 2023, even with those trailing 12 months orders being down somewhat after high base. When you look at 2020 full is it sort of a similar construct where I suppose you could have orders down but the book to bill still over one times just because of the capacity.
Julian Mitchell: Constraints.
Julian Mitchell:
Julian Mitchell: And then more broadly.
Julian Mitchell: Any concerns that you and your peers collectively, adding maybe too much capacity in the electrical output.
Craig Arnold: In terms of finding enough skilled tradespeople to deal with, you know, the significant, you know, backlog of demand. And so what we think fundamentally is going to happen is that the growth will be there, but the cycle will be extended because, you know, we simply will not have enough capacity and labor to deal with all the demand and the timeframe in which it's going to happen. Requested.
Speaker Change: I appreciate the question Julian and certainly.
Speaker Change: Sure.
Speaker Change: One of the things that we spend a lot of time thinking about it as well in terms of.
Speaker Change: What will the 10% of 2020 will look like but I think the short answer to your question is yes.
Speaker Change: Much possible that you could continue to see a moderation of orders and a book to bill in the total backlog that it doesn't change. The fact, when we came into 2023.
Speaker Change: We actually expect it to be able to eat into the backlog and the backlog grew by some 15%.
Chris Snyder: And so the cycle will simply be expanded, you know, out multiple years beyond where it normally would reside. Thank you. Thank you. The next question is from the line of... Next up, J.P. Morgan. Please go ahead. Hey, good morning.
Speaker Change: And so.
Speaker Change: The industry continues to be constrained, obviously, but for industry constraints.
Speaker Change: We would post <unk>.
Speaker Change: Bigger growth numbers than we provided in the guidance.
The demand is there to grow faster than 75% that we talked about at the midpoint of our guidance so that absolutely its possible that you could.
Steven Winoker: Hey Steve, and Tom, congrats on going out with a bang here. Great, great result. Thanks, man.
Speaker Change: Essentially yes.
Thomas Okray: Just the pricing dynamics, what are you guys assuming in your electrical businesses for price roughly in 24 embedded in your guidance? Yeah, Steve, as you probably are aware, we don't provide specific price guidance; we don't separate price and volume. And I will tell you that on a relative basis, when you compare, let's say 2024, 2023, 2022, price will contribute a much smaller piece of our growth than volume will. And that's why we're probably going to be back to more of a historical level of price realization in terms of 2024. And that's really a function of the fact that we're not seeing inflation. We had to essentially work the price lever fairly significantly over the last couple of years as we dealt with this inflation that was in the system. Now, we still have some inflation, principally on the labor side.
Speaker Change: Orders could still moderate in your backlog to continue to be.
Record highs will continue to grow.
Speaker Change: Yeah, and just to add a little bit more color to that and Julien we've talked about this in previous calls and tried to put it in the prepared remarks, but I, but I think it's I think it's very important for everyone on the call.
Speaker Change: We have modeled the year over year order decline meaningful order decline.
Speaker Change: And in those scenarios given our our backlog coverage as we said in the prepared remarks, we are able to have robust organic growth well into 2025. So that gives us that gives us great confidence that even if year over year orders continue to declining.
Speaker Change: A meaningful way, we still got a good runway.
Speaker Change: That's helpful. Thanks, very much and then just a quick follow up.
Speaker Change: Maybe switching to E mobility.
Steven Winoker: So we will still get the price, but its contributions to our growth will be significantly less than they have been in prior years. Right, and I guess just on the cash flow statement, you know, I think like, I'm not sure if I'm seeing this right, but $2 billion of share repo in 24, I mean, I'd, I think that's a pretty decent-sized number. Anything going on specifically there? No, he's bringing up the midpoint.
Speaker Change: You would raise that medium term revenue guide a few months back.
Speaker Change: The noise. So the news in the EV World is sort of very very uneven.
Speaker Change: Maybe just sort of tell us how you see it so the growth rates of that business. We can see a very high growth rate in E. Mobility. This year, maybe just any sort of perspectives on that and maybe how you're outperforming the industry.
Yes appreciate the question Julian.
Speaker Change: As we've talked about in our guidance, we're anticipating 30% growth in our E mobility business and I can tell you that 30% number is today.
Speaker Change: <unk> dialed back from what our customers were asking us for.
Thomas Okray: Okay, go ahead, Tom. Yeah, no, you know, we finished 2023 with 2.6 billion in cash. And, you know, given how we're guiding and giving how we are, you know, doing a better job of managing working capital, given the supply chain constraints are going away, we're going to have a very good year of generating cash in 2024. So we go to our capital allocation tenants, and we're very clear, we're not going to collect cash on the balance sheet.
Speaker Change: We do recognize that.
Speaker Change: The industry itself is.
Speaker Change: Gone through a little bit of a I'd say.
Speaker Change: A wakeup call with respect to the underlying demand for evs by the way still great demand still good growth from 20% I think in the fourth quarter for us, but but overall a slower rate of growth than perhaps what <unk>.
We are anticipating maybe 12 months ago.
Speaker Change: So we think the industry will continue to grow and grow nicely and what we're trying to do as we build our own plans and our guidance is to make sure we're appropriately hedged back.
Steven Winoker: So at the midpoint, we've got $2 billion. As was said in the prepared remarks, though, this gives us plenty of dry powder to do strategic M&A. So even with that 2 billion, and the final thing I would end with is our net leverage on the balance sheet, which you probably know, Steve, is 1.3. So we've got a very strong balance sheet, just a ton of flexibility from a capital allocation perspective. Right, so it's a 2% lift from share count, you know, in general embedded in the guidance for EPS growth. Yes, relatively, relatively minor a couple of pennies versus consensus. Yeah. Okay. I got it. All right, thanks a lot.
To ensure that we're able to deliver our commitments, but at the same time, we have the flexibility to respond in the event that some of these customer forecast and their outlooks are actually they actually come to fruition.
Speaker Change: Yes.
Speaker Change: Took about $1 5 billion.
Speaker Change: The 11% return on sales.
Speaker Change: Absolutely so.
See line of sight and committed to those goals and our forecasts have not changed.
Speaker Change: And just one other thing I would add Julian and taking you back to the prepared remarks.
Speaker Change: In mobility the market grew seven we grew 18.
Thomas Okray: Thank you. Thank you. Our next question is from the line of Joe Ritchie from Goldman Sachs. Please go ahead. Thanks. Good morning, everyone. Good morning, Joe.
Speaker Change: So we're we're.
Speaker Change: We're winning some good business there.
Speaker Change: Yes, and yes to your point in time, it really is and I think this was maybe your question Julie as well it really is platform specific and our growth really comes from the launching of new E mobility platform, we have comp general one.
Joe Ritchie: So I think, you know, Chris kind of touched on this in his question, but maybe to ask it more explicitly, as you think about that first billion plus and mega project that you've won, just what's the margin profile of those wins? And how should we be thinking about that, you know, ultimately, materializing in the P&L? Yeah, I would say that, you know, the margin profile on these megaprojects is not going to be terribly different from the margin profile on the underlying business. You know, we are in a position, as you can imagine, when your capacity constraints force you to be selective around where you win, and so we would not expect, even though they're big projects and oftentimes you find with large projects, your margins, you know, take a bit Scott, that's great to hear from you, Craig.
Speaker Change: And that's why our growth, we think will clearly be.
Speaker Change: Well above the industry growth rate.
Speaker Change: That's great. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Steve Volkmann from Jefferies. Please go ahead.
Stephen Edward Volkmann: Great. Thanks for fitting me in I wanted to go back to the cost cutting program the $325 million of benefits in 2027 should we think of that as kind of a net in terms of margin or will you have some increased investments that offset some of that.
Speaker Change: No I mean, the way we talked about it we're going to spend.
Speaker Change: $375 billion of restructuring to deliver bringing up to $25 million of mature your benefits and that is the way you should think about it what we'll spend.
Speaker Change: Those restructuring dollars over the next few years.
Craig Arnold: And then I guess, Look, the funnel keeps on growing now for the last couple quarters at a pretty material rate. There's a lot of concern with the election coming that, you know, perhaps this first wave of projects that have broken ground continues, but maybe you get a stall on the second in the second wave. Just any thoughts around that?
Speaker Change: And we had embedded as we talked about in our 2024 guidance $175 million up spending $50 million of benefits, but those benefits will fall through to the bottom line.
Speaker Change: With Super Bowl.
Speaker Change: Expenses.
Speaker Change: Expenses.
Speaker Change: Perfect. Thanks.
Speaker Change: Thanks for that Tom Brian.
Joe Ritchie: I know you kind of touched on the potential for labor constraints, but I'm really more any other thoughts that you would have on just continuing to grow the funnel and then making sure that that actually we actually see that ultimately in your outlook. Yeah, no, no, I appreciate the question and the concern. I mean, given, you know, the upcoming elections and in many ways it's kind of an unknowable in terms of how the election is going to turn out and then quite frankly even with the change in the administration difficult to know what position they will take with respect to a lot of the stimulus spending that is essentially you know underlying and supporting these mega projects and I will I will tell you what gives us you know fairly high level of confidence that it's not going to change materially is that a lot of these projects are going into into red states and so you know despite what may happen kind of on the on the political front the benefactor of a lot of these projects are actually you know you know those red states and so we'll have to wait and see how it unplugs and we we don't think today it's going to have a material impact today we are looking at more demand and we have capacity to serve so even if there was a little bit of give back, Business is still in great shape to support the long-term growth assumptions for the company, but in many ways it's kind of the unknowable. We just don't know how the elections are going to unfold and then what happens after.
Speaker Change: And I was just going to say in the cash associated with it is in is in our cash guidance as well.
Speaker Change: Understood. So.
Speaker Change: My guess is it's probably a little more Europe centric since these things tend to be but any guidance on sort of where we will see these results most.
Yes, no I appreciate the question I think you can think about it it's going to be pretty.
Speaker Change: Widespread and you can think about the total kind of allocation of the benefits being pretty much aligned with the company two thirds will be an electrical one third will be an industrial will be focused on taking out rooftops.
Speaker Change: And the company.
Speaker Change: Driving some shared services leveraging digital but a lot of these benefits will really cut across the company.
Speaker Change: Yes.
Speaker Change: What I would also say is.
Speaker Change: You've described it as cost cutting.
Speaker Change: And there is an element of that but I really want to come back to it is a smarter way of doing business as well.
Speaker Change: We've got a number of sites, we're very complex organization with five reportable segments, and we've got opportunities with our with our central functions to be more efficient and take take work off of the business unit and allow opportunity cost for leveraging <unk>.
Speaker Change: Sources leveraging talent leveraging.
Speaker Change: Capital as well so so it's not just pure cost, it's a smarter more efficient way of doing business as well.
Speaker Change: Great. Okay I appreciate it.
Craig Arnold: That's helpful, Craig. And best wishes, Tom. Thank you. I appreciate it.
Speaker Change: And it's the way we haven't formed the growth rate is the way, we're funding increases and investments in R&D and other things that we need to do to grow the company.
Speaker Change: Thanks, guys.
Speaker Change: I appreciate it.
Joe Ritchie: Thank you. Thank you. The next question is from Barclays, please go ahead. Thanks very much and thanks a lot, Tom, for all the help.
Speaker Change: Sure.
Speaker Change: Thank you. The next question is from Nigel Coe from Wolfe Research. Please go ahead.
Nigel Coe: Mr. Cohen your line is open.
Julian Mitchell: Maybe just a first question would be around, you know, when you think about sort of the mega projects and the impact on North American orders. So you've had a sort of a book to bill well over one times in 2023, even with those trading 12 month orders being down somewhat off the high base. When you look at 2024, is it sort of a similar construct where I suppose you could have orders down, but the book to bill is still over one times, just because of the capacity constraint? And then more broadly, you know, any concerns that you and your peers collectively are adding maybe too much capacity in electrical output? You know, I appreciate the question, Julian. And certainly, it's one of the things that we spend a lot of time thinking about as well in terms of, you know, what will the tenor of 2021 look like? But I think, you know, the short answer to the question is yes. I mean, it's very much possible that you could continue to see a moderation of orders and a bill on the total backfile that doesn't change. In fact, when we come into 2023.
Nigel Coe: Some of that.
Nigel Coe: Problems. So good afternoon, everyone.
Nigel Coe: Thanks for the question so.
Nigel Coe: A couple of ground.
Nigel Coe: Coming back to this capacity issue or collect expansions I mean, the 9% to 11% growth in the Americas, Craig I mean, it feels like given the backlog built obviously orders.
Speaker Change: Continue to add to that feels like that to be relatively conservative. So just wondering if there's any.
Speaker Change: Kind of capacity constraints that are getting that.
Speaker Change: That growth forecast and are you, assuming there's going to be some backlog.
Speaker Change: Ben or conversion.
The year I mean any any since then.
Speaker Change: Yes, I think I had mentioned also in my commentary Nigel that.
Speaker Change: There are certainly.
Speaker Change: Enough demand in the marketplace to post higher growth than we're reflecting in our guidance.
Speaker Change: And we're making investments to eliminate capacity bottlenecks in and we think by the time, we get to the end of the year, we'll be in great shape.
Speaker Change: As you know we are participating in an industry where.
Speaker Change: Do you have a lot of players in the value chain, where you had fairly sizable labor constraints around skilled trades.
Speaker Change: So I do think it's going to be a governor.
Speaker Change: On growth based upon these factors that prevents us from the industry from growing much faster than that you think about this 9% to 11%. This is on top of.
Craig Arnold: We actually expected to be able to eat into the backlog, and the backlog grew by some 15%, and so the industry continues to be constrained, and obviously, you know, but for industry constraints, we would post bigger growth numbers than we provided in the guidance. The demand is there to grow faster than the 7.5% that we talked about as the midpoint of our guidance. So it absolutely is possible that orders could moderate, and your backlog could continue to be record highs or continue to grow. Yeah, and just to add a little bit more color to that, Julian, we've talked about this on previous calls and tried to put it in the prepared remarks, but I, but I think it's, I think it's very important for everyone on the call.
Speaker Change: Some 30% plus growth over the last two years.
Speaker Change: And so I would say that.
Speaker Change: Today.
Speaker Change: We'll see what happens with in terms of the backlog growth how much the backlog, we can burn or can't.
Speaker Change: Once again difficult to really say, there's a lot of variables in that.
Speaker Change: Once again, we thought we were going to burn backlog in 2023, and we actually increased it by some 15%.
Speaker Change: As the market continues to perform even better than what we imagined.
Speaker Change: But there are very real.
Speaker Change: The constraints in the industry that we think become the governor around 9% to 11% growth in our <unk>.
Speaker Change: Electrical business in the Americas.
Speaker Change: Yes, yes, I appreciate that.
Speaker Change: It just feels like data center is the obviously that that's probably the strongest growth.
Speaker Change: Michael in 'twenty, four and I think you mentioned negotiations up 160% up a pretty high base.
Thomas Okray: We have modeled year-over-year order decline, meaningful order decline, and in those scenarios, given our backlog coverage, as we said in the prepared remarks, we are able to have robust organic growth well into 2025. So that gives us great confidence that even if year-over-year orders continue to decline in meaningful ways, we've still got a good runway. That's helpful. Thanks very much.
Speaker Change: So just thinking about capacity in that single end market.
Speaker Change: Is that fair.
Speaker Change: And then does the billion dollars does.
Speaker Change: Does that.
Speaker Change: Kind of growth that we should see coming through in 'twenty four 'twenty five.
Speaker Change: Yes.
Speaker Change: Data centers will certainly be a very strong growth market for us in 2024, as well and into 2025, we talk about it.
Speaker Change: Terms of our own forecast for the industry and he said the data center market. We think grows at a compound growth rate of 16% over the next five years or so.
Julian Mitchell: And then just a quick follow-up, maybe switching to e-mobility. You know, you'd raised that medium-term revenue guide a few months back. But the noise or the news in the EV world is sort of very, very uneven.
Speaker Change: And that is certainly more than supported by <unk>.
Craig Arnold: So maybe just sort of tell us how you see it for the growth rates of that business. We can see a very high growth rate dialed in for e-mobility this year. Maybe just any sort of perspectives on that.
Speaker Change: Orders growth of 20% in Q4.
Speaker Change: We.
Speaker Change: Revenue orders on a rolling 12 up 30% negotiations.
Craig Arnold: And maybe how you're outperforming the industry. Yeah, you know, I appreciate the question, Julian. And, you know, we talked about our guys anticipating 30% growth in our e-mobility business. And I can tell you that 30% number is today dialed back from what our customers were asking us for. We do recognize that, you know, the industry itself has gone through a little bit of a, I'd say, wake-up call with respect to the underlying demand for eBees. By the way, still great demand, still good growth, some 20%, I think, in the fourth quarter for us, but overall, a slower rate of growth than perhaps people were anticipating maybe 12 months ago. So we think the industry will continue to grow and grow nicely, and what we try to do as we build our own plans and our guidance is to make sure we're appropriately hedged back to actually come to fruition.
Speaker Change: More than that but we continue to see just an acceleration.
Speaker Change: In the data center market in terms of rate of growth.
Speaker Change: And once again.
Speaker Change: This industry too is capacity constrained is labor constrained, we think which ultimately end up happening.
Speaker Change: A growth cycle that just extends well it could be for a decade.
Speaker Change: At very attractive levels.
Speaker Change: That gives us a long time 24, do you think 24 will be in that zone.
Speaker Change: Even better.
24: Yes, I mean, we'll see but we're not we're not providing guidance per se for individual end markets today.
24: But you can certainly assume that within that 9% to 11%.
24: That our assumption for data centers.
24: Going to be on the higher end of that.
Speaker Change: Right, Yeah, Okay Thats great.
Speaker Change: Great.
Speaker Change: Yes, just to add the chart for the end markets, we have data centers and distributed it growing strong strong double digits, so and and everything from an order perspective, as Craig said points to very robust growth in 2024.
Speaker Change: Yes, it's vertical thanks, Tom and congratulations.
Craig Arnold: So, yeah, we talked about 1.5 billion, 11% return on sales, we're absolutely still seeing the line of sight and committed to those goals, and our forecast has not changed. And just one other thing I would add, Julian, and taking you back to the prepared remarks, in e-mobility, you know, the market grew seven, we grew 18. You know, so we're, you know, we're winning some good business there. Yeah, and to your point, Tom, it really is. And I think this was maybe your question, Julian, as well. It really is platform specific.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question is from Tim Thein from Citigroup. Please go ahead.
Tim W. Thein: Yeah, great. Thanks, a lot.
Tim W. Thein: Could you just hire one in here, but.
Tim W. Thein: I guess just start.
Tim W. Thein: We are spending some time with Mike and me and I guess it was around this time last year I guess I can better understand why this particular therapy.
Tim W. Thein: But.
Tim W. Thein: Just on the.
On the mix in electrical.
Tim W. Thein: I would guess just given the strength in these big projects that there has been a true.
Tim W. Thein: And I guess as the Americas.
Comment but.
Tim W. Thein: <unk> seen kind of this continued shift from.
Tim W. Thein: More of the growth coming from from systems versus products, how do you.
Thomas Okray: And our growth really comes from the launch of new e-mobility platforms that we have contact with. And that's why our growth, we think, will clearly be well above the industry's growth. That's great. Thank you. Thank you. The next question comes from Jeffreys, please go ahead. Great. Thanks for fitting me in. I want to go back to the cost-cutting program, the $325 million in benefits in 2027.
Tim W. Thein: In years past that there has been times and Thats, giving you challenges in terms of managing the profitability of that but I guess, maybe your outlook in terms of that mix dynamic in 'twenty four and again your confidence in terms of managing it to the extent that continues more of the growth coming from from a systems relative to.
Speaker Change: Products. Thank you.
Tim W. Thein: Yes.
Speaker Change: I appreciate the question.
Speaker Change: No we kind of created this monster a little bit, but we're trying to get.
Speaker Change: The investor community to move away from this.
Speaker Change: Systems versus products distinction because practically speaking.
Jeffrey D. Hammond: Should we think of that as kind of net in terms of margin? Or will you have some increased investments that offset some of that? No, I mean, the way we talked about it, you know, we're going to spend $375 million on restructuring to deliver $325 million of mature year benefits. And that is the way you should think about it.
Speaker Change: They are all connected.
Speaker Change: Anytime you sell a electrical system.
Speaker Change: Inc, Compasses, all of our products and components.
Speaker Change: So for US, we really think about the right way to think about the company has really taken a look at the end markets that we'd laid out.
Data centers utility industrial facilities commercial facilities and that will be perhaps the most informative.
Speaker Change: Way to think about the company in the context of <unk>.
Craig Arnold: You know, we'll spend those restructuring dollars over the next few years. And we had embedded, as we talked about, in our 2024 guidance $175 million of spending and $50 million of benefits. But those benefits will fall through to the bottom line, with no offsetting expenses.
Speaker Change: Where growth is going and I can just tell you in general from a profitability standpoint today there.
Speaker Change: There is not a significant difference today between the profitability of systems.
Speaker Change: And the components that go into systems out there was a time and sorry to come back with let's say, we will we started the lighting business. For example, enlightening, what's considered a products business with a relatively large business with relatively.
Jeffrey D. Hammond: Yeah, perfect. Thanks for that. Sorry, Tom, go ahead.
Thomas Okray: Yeah, and I was just gonna say the cash associated with it is in our cash guide. Understandable. So my guess is it's probably a little more Europe-centric since these things tend to be, but any guidance on sort of where we'll see these results most?
Speaker Change: Lower margins than the rest of electrical and there was a meaningful difference perhaps.
Speaker Change: Backed by Lady that drove different profitability between the two but today, we don't have significant difference of profitability and we really think the right way to think about the company is really.
Jeffrey D. Hammond: Yeah, no, I appreciate the question. You know, I think you can just think about it. It's going to be pretty, you know, widespread. And you can think about the total kind of allocation of the benefits being pretty much aligned with the company. Two-thirds will be in electrical, one-third will be in industrial. We'll be focused on, you know, taking out rooftops, you know, in the company, driving some shared services, leveraging digital, but a lot of these benefits will really cut across the company. And what I would also say is, you know, you've described it as cost-cutting, and there is an element of that, but I really want to come back to it being a smarter way of doing business as well.
Speaker Change: Function of these end markets that we've laid out once again on slide 16.
Speaker Change: Okay.
Speaker Change: Yes, yes for sure.
Speaker Change: Real quick Greg.
Speaker Change: <unk> Aero piece within commercial is there you expect much difference in terms of the growth between OEM and aftermarket and 24 are those both.
Speaker Change: Yes.
Speaker Change: Similar projected growth rates.
Greg: Yes, it's an important question because as you know the rig very different profit profile on an OE order versus an aftermarket order both will grow nicely in 2024, we do expect OE to grow slightly faster than aftermarket, which hold margins back a little bit which has been reflected in our guidance.
Thomas Okray: I mean, we've got a number of sites, we're a very complex organization with five reportable segments, and we've got opportunities with our central functions to be more efficient and take work off of the business units and allow opportunity costs for, you know, leveraging resources, leveraging talent, leveraging, you know, capital as well. So there's, it's not just pure cost-cutting; it's a smarter, Great, Okay, I appreciate the new one.
Greg: But we expect to see very strong growth in both commercial as well as the aftermarket piece of the business of course, OE and aftermarket.
Speaker Change #101: Okay, great. Thanks for squeezing me in.
Speaker Change #101: Right.
Speaker Change #101: Thank you and our next question is from Deane Dray from RBC capital markets. Please go ahead.
Deane Dray: Yes. Good afternoon, thanks for fitting me in.
And congrats Tom Best of luck.
Deane Dray: Four.
Deane Dray: I don't know if you can parse this out but is there any way you can frame your expectations.
Nigel Coe: And that's the way we help fund growth, right? It's the way we're funding, you know, increases in investments in R&D and other things that we need to do to grow the company. Thanks, guys. I appreciate it.
Deane Dray: North America, electrical or what would be going through distribution versus direct ship I'm not sure. How precise you can get there, but any color would be helpful.
Speaker Change #103: Yes, I would say gain.
Craig Arnold: Thank you. The next question is from Nigel Coe from Wolf Research. Please go ahead. Nicole, your line is open. Sorry about that, meat button problems.
Speaker Change #104: North America, specifically a lot of what we do goes through distribution.
Nigel Coe: So, good afternoon, everyone. Thanks for the question. So, I've got a lot of ground to cover, but coming back to this capacity issue or capacity expansion, I mean, the 9 to 11 percent growth in the Americas, Craig, it feels like given the backlog bills, you know, obviously orders continue to add to that, it could be, you know, relatively conservative. So, just wondering if there's any kind of capacity constraints that are getting that growth forecast. And are you assuming there's going to be some backlog burn or conversion as we go through the year? I mean, is there any sense in that?
Speaker Change #104: That number.
Speaker Change #104: Order of magnitude I think it's about 70% or so total.
Speaker Change #104: Fairly sizable piece.
Speaker Change #104: <unk>.
Speaker Change #104: And Ed.
Speaker Change #104: These mega projects continue to grow.
Speaker Change #104: As you know.
Speaker Change #104: Perhaps data centers Hyperscale has continued to grow so that tends to be perhaps more directed by virtue of the nature, but a lot of our business today goes through distribution and our distributors are.
Speaker Change #104: I would say I've always said, they're perhaps our greatest asset.
Craig Arnold: You know, and I think I've mentioned in my commentary, Nigel, that there's certainly enough demand in the marketplace to post higher growth. And we're reflecting on our guidance. And we're making investments to eliminate capacity bottlenecks. And we think by the time we get to the end of the year, we'll be in great shape.
Speaker Change #104: We are committed to distribution to add tremendous value, we have a very strong distribution network.
Speaker Change #104: So yes, it's one of the real assets of the company.
Speaker Change #105: Great and I don't think I heard the word destocking come up at all today. So it did create a chuckle there but.
Craig Arnold: But as you know, we're participating in an industry where you have a lot of players in the value chain, and where you have fairly sizable labor constraints around skilled trades. And so I do think there's going to be a governor on growth based upon, you know, these factors that prevent us in the industry from growing much faster than. Think about this 9 to 11 percent; this is on top of, you know, some 30 percent plus growth over the last two years. And so I would say that today, we'll see what happens with in terms of the backlog growth and how much of the backlog we can burn or can' Once again, difficult to really say; there are a lot of variables.
Speaker Change #105: Is there any destocking any pockets of it.
Speaker Change #105: You all seem to have steered clear of any of that over the past four months four quarters, but just any color there would be helpful.
Speaker Change #105: We did talk about a little bit destocking that we saw in our European business, which quite frankly, it really began at the beginning of 2023, we started to see Destocking in Europe specifically.
Speaker Change #105: Fortunately the good news is that we're beyond that but in the Americas business, specifically other than the odd ball pockets of places we've not really seen destocking in the Americas and that's largely because these markets as we've talked about continued to grow pretty dramatically.
Speaker Change #105: But we did have a little bit of it in Europe, but fortunately behind us now.
Speaker Change #106: Got it thank you.
Speaker Change #106: At this time there are no further questions in queue. Mr. Chen. Please go ahead with closing remarks, hey, thanks.
Chen: Thanks, guys I know, it's a busy day and we do appreciate everybody's questions as always the IR team is available to address your follow up calls have a good day, thanks for joining us.
Craig Arnold: Once again, we thought we were going to burn backlog in 2023, and we actually increased it by some 15%. The market continues to perform even better than we imagined. But there are very real capacity constraints in the industry that we think will become the governor around this nine to 11% growth in our electrical business in the Americas. Yeah, yeah, I appreciate that. And then it feels like data center is obviously going to be the strongest growth vertical in 24. And I think you mentioned negotiations of 160% of a pretty high base.
Speaker Change #108: Thank you, ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
Speaker Change #108: Yeah.
Craig Arnold: So just thinking about capacity in that single end market, I mean, is that concern and does that billion dollars, but then does that the kind of growth that we should see coming through in 2425 then? You know, data centers will certainly be a very strong growth market for us in 2024 as well. And into 2025, we talked about, you know, in terms of our own forecast for the industry, we said, you know, the data center market we think grows at a compounded growth rate of some 16% over the next five years or so. And that is certainly more than supported by, you know, orders. We grew some 20% in Q4. You know, we, you know. In revenue, orders on rolling 12 were up 30%.
Yeah.
Craig Arnold: Negotiations were up a lot more than that. So we continue to see just an acceleration in the data center market in terms of greater growth. And once again, you know, because this industry, too, is capacity constrained and is labor constrained, we think what you ultimately end up experiencing is a growth cycle that just extends or could be for a decade. Very attractive group. Yeah, a decade. That's a long time. And 24, do you think 24 will be in that 20% zone or even better?
Speaker Change #109: We're sorry your conferences ending now please hang up.
Craig Arnold: Yeah, I mean, we'll see. We're not providing guidance per se for individual end markets today, but you can certainly assume that within that nine to 11%, you know, that our assumption for data centers is going to be on the higher end of. Right. Okay. Thanks, Craig.
Speaker Change #109: [music].
Speaker Change #109: Yes.
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Craig Arnold: Yeah, just to add the chart for the end markets, you know, we have data centers and distributed IT growing strongly, strong double digits. So and, and everything from an order perspective, as Craig said, points to very robust growth in 2020. Yeah, it's vertical.
Okay.
Speaker Change #109: Yes.
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Thomas Okray: Thanks, Tom, and congratulations. Thank you. Thank you. The next question is... from Citigroup, please go ahead. Yeah, great. Thanks. I'll just fire one in here. But I guess to start, you know, after spending some time with Mike Yelton, I guess it was around this time last year, I guess I can better understand why he was in such a good mood.
Speaker Change #109: Yes.
Speaker Change #109: Thanks.
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Sure.
Nicole DeBlase: But, you know, just on the, On the mix in electrical, I would guess just given the strength in these big projects that there has been a trend, I guess this is America's comment, but you've seen kind of this continued shift from, More of the growth coming from systems versus products, how do you, you know, in years past that there's been times when that's given you challenges in terms of kind of managing the profitability of that, but I guess maybe your outlook in terms of that mixed dynamic in 24 and again your confidence in terms of managing it to the extent that continues, you know, more of the growth coming from systems relative to products. Thank you. Yeah, and appreciate the question. I know we kind of created this monster a little bit, but we're trying to get, you know, the vast community to move away from this. Systems versus products distinction.
Speaker Change #109: Yes.
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Craig Arnold: Because, you know, practically speaking, they're all connected, so anytime you sell an electrical system, it encompasses all of our products and components. And so for us, the right way to think about the company is to really take a look at the end markets that we have laid out. You know, data centers, utilities, industrial facilities, commercial facilities, and that will be perhaps the most informative way to think about the company in the context of where growth is going, and I can just tell you, in general, from a profitability standpoint today, there is not a significant difference today between the profitability of systems and the profitability of the components that go into the systems. Now, there was a time inside the company when, let's say, we were in the It was a relatively large business with relatively, you know, lower margins than the rest of electricity. And there was a meaningful difference, perhaps, held back by lighting that drove different profitability between the two.
Speaker Change #109: [music].
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Nicole DeBlase: But today, we don't have a significant difference in profitability, and we really think the right way to think about the company is really as the function of these end markets that we've laid out, once again, on slide 16. Okay. Yeah, yeah, for sure. And real quick, Craig, on the arrow piece within the commercial, do you expect much difference in terms of the growth between OEM and aftermarket and 24? Or are those both?
Craig Arnold: and similar projected growth rates. Yeah, no, and it's an important question, because, as you know, there is a very different profit profile on an OE order versus an aftermarket order. Both will grow nicely in 2024. However, we do expect OE to grow slightly faster than aftermarket, which holds margins back a little bit, which has been reflected in our guidance. But we expect to see very strong growth in both the commercial as well as the aftermarket piece of the business, of course, OE and aftermarket. Okay, great. Thanks for squeezing me in, And our next question is from Dean Dray. Capital Markets, please go ahead. Yes, good afternoon.
Deane Dray: Thanks for fitting me in. Hey Dean, and congrats to Tom, best of luck. I don't know if you can parse this out, but is there any way you can frame your expectations for North America Electrical of what would be going through distribution versus direct ship? I'm not sure how precise you can get there, but any color would be helpful.
Craig Arnold: Yeah, you know, I would say, Dean, that, you know, in North America, specifically, a lot of what we do goes through distribution. And that number, order magnitude, I think it's about 70% or so. So it's a fairly sizable piece.
Deane Dray: You know, and as these megaprojects continue to grow, as, you know, perhaps, you know, data centers, you know, hyperscalers continue to grow, some of that tends to be perhaps more direct, it's by virtue of nature. But a lot of our business today goes through distribution, and our distributors are, you know, I say, I've always said, they're perhaps our greatest asset. We are committed to distribution.
Craig Arnold: We have a very strong distribution network. So, yeah, it's one of the real assets of the company. Great, and I don't think I heard the word de-stocking come up at all today, so it did create a chuckle there. Is there any de-stocking, any pockets of it? You all seem to have steered clear of any of that over the past four months or four quarters, but just any color there would be helpful.
Deane Dray: You know, we did talk about a little bit of destocking that we saw in our European business, which, quite frankly, really began at the beginning of 2023. We started to see destocking in Europe specifically. Fortunately, the good news is that we're beyond that. But in the Americas, specifically, other than the oddballs and pockets of places, we've not really seen destocking in the Americas.
Craig Arnold: And that's largely because these markets, as we talked about, continue to grow pretty dramatically. But we did have a little bit of that in Europe, but it's, you know, fortunately behind us. Got it. Thank you. And at this time, if there are no further questions in queue, Mr. Chen, please go ahead with the closing remarks. Hey, thanks, guys. I know it's a busy day, and we do appreciate everybody's questions. As always, you know, the IR team is available to address your follow-up calls. Have a good day. Thanks for joining us. Bye. Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect. We're sorry, your conference is ending now. Please hang up.