Q2 2024 Eaton Corp PLC Earnings Call
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Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Eaton second quarter 2024 conference call. At this time, all participants are in a listen only mode.
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the Eaton second quarter.
Speaker Change: 2024 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you wish to ask a question, please press 1, then 0 on your touchtone phone.
Operator: Later, we will conduct the question and answer session. If you wish to ask a question, please press one then zero on your touchtone phone. You will hear acknowledgement that you have been placed into the queue, and you may remove yourself from the queue at any time by repeating the one zero command. Should you require assistance during the conference, please press star then zero, and an operator will assist you offline.
You will hear acknowledgment that you have been placed into queue and you may remove yourself from queue at any time by repeating the 1-0 command.
Should you require assistance during the conference, please press star then zero and an operator will assist you offline. And as a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Yan Jin. Please go ahead.
Yan Jin: And as a reminder, today's call 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 Eaton's second quarter 2024 earnings. With me today are Craig Arnold, our Chairman and CEO, and Olivier Leonetti, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Craig, then he will turn it over to Olivier, who will highlight the company's performance in the second quarter. As we have done in our past courses, we will be taking questions at the end of Craig's closing comments.
Yan Jin: Hey, good morning. Thank you all for joining us for Eaton's second quarter 2024 earnings call. With me today are Craig Arnold, our Chairman and CEO , and Olivier Leonetti, Executive Vice President and Chief Financial Officer.
Yan Jin: The press release and the presentation we'll go through today have been posted on our website. This presentation includes Adjusted Earnings-per-share, Adjusted Free Cash Flow, and other non-GAAP measures reconciled in the. A webcast of this call is accessible on our website and will be available for repurchase.
Speaker Change: The press release and the presentation we will go through today have been posted on our website.
Yan Jin: This presentation includes Adjusted Earnings Per Share, Adjusted Free Cash Flow, and other non-GAAP measures. They are recounted out in the appendix.
Yan Jin: A webcast of this call is accessible on our website and will be available for replay.
Yan Jin: I would like to remind you that our commentary today will include statements related to the expected future results of the company and are therefore forward-looking statements. However, our actual results may differ materially from our forecast projections due to a wide range of risks and uncertainties, as described in our early release and presentation. With that, I will turn it over to Craig. Thanks, Jen.
I would like to remind you that our commentary today will include statements.
related to the expected future results of the company and are therefore forward-looking statements.
Yan Jin: Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties.
Yan Jin: As described in our earnings release and presentation. With that, I will turn it over to Craig. Okay. Thanks, Yan. We'll start with some highlights on page 3, and I'll lead off by noting that we delivered another strong quarter, and we're pleased with the first half of the year.
Craig Arnold: We'll start with some highlights on page three, and I'll lead off by noting that we delivered another strong, and we're pleased with the first half of the year. Our teams continue to deliver on our commitments, propelled by strong markets. Good and
Craig: Our teams continue to deliver on our commitments propelled by strong markets and good execution.
Craig Arnold: We are exceeding our expectations and consensus on strong revenue. Margins and Earnings for Shared We generated adjusted EPS of $2.73 in the quarter, an all-time record, and up 24% from prior years. We also delivered record segment margins of 23.7%, up 210 basis points from last year. And our markets continue to be strong. On a rolling 12-month basis, electrical orders were up 9%, and aerospace orders increased by 4%. This led to another quarter of growing record backlogs, up 27% in electrical and 14% in aerospace, with a strong book-to-bill ratio.
Craig: Exceeding our expectations and consensus on strong revenue, margins, and earnings per share growth.
Craig: We generated adjusted EPS of $2.73 on the quarter, an all-time record, and up 24% from prior year.
Craig: We also delivered record segment margins of 23.7%.
Craig: Up 210 basis points from last year.
Craig: And our markets continue to be strong. On a rolling 12-month basis, electrical orders were up 9% and aerospace orders increased by 4%.
This led to another quarter of growing in record backlogs, up 27% in electrical and 14% in aerospace, with strong book-to-bill ratios.
Craig Arnold: The strength in our orders and backlogs continues to support our view that the megatrends will keep the company growing for some time, but we are in the early stages. And once again, our markets are well positioned. And our growing backlog allows us to once again raise our full-year guidance. We're raising our guidance on organic growth, segment margins, adjusted EPS, and cash flow for the year. On balance, we're very pleased with our results, and we're well positioned for the second half.
Craig: The strength in our orders and backlogs continue to support our view that the megatrends will keep the company growing for some time to come.
Craig: We're in the early stages, and once again, our markets are well positioned for the future.
Craig: And our growing backlog allows us to once again raise our full year guidance. We're raising our guidance on organic growth, segment margins, adjusted EPS, and cash flow for the year.
Craig: On balance, we're very pleased with our results and we're well positioned for the second half of the year.
Craig Arnold: Turning to page four, we once again are sharing the key trends and end markets that are expected to drive Eaton's long-term growth. The broad number of megatrends noted on this chart have created, and will continue to create, a strong growth environment for the above-end market, and Eaton is uniquely positioned in that these are our primary. As a reminder, we're in the early phase and expect to see growth for years to come.
Craig: Turning to page four, we once again are sharing the key trends in end markets that are expected to drive Eaton's long-term growth.
Craig: The broad number of megatrends noted on this chart have created, and will continue to create, a strong growth environment for the above-end markets.
Craig: And Eaton is uniquely positioned in that these are our primary end markets.
Craig: As a reminder, we're in the early phase and expect to see growth for years to come.
Craig Arnold: Today, we'll continue our practice of covering one of these megatrends and how it's impacting growth and one of our key. Last quarter, we gave an in-market update on our industrial facilities in-market, as well as our latest view on growth expectations in the rapidly growing data center. Today, we'll once again provide an update on reindustrialization through the lens of megaprojects, where the activity just remains extremely.
Craig: Today, we'll continue our practice of covering one of these megatrends and how it's impacting growth in one of our key markets.
Craig: Last quarter, we gave an in-market update on our industrial facilities and markets, as well as our latest view on growth expectations in the rapidly growing data center market.
Craig Arnold: And we'll provide a summary of our growth outlook for our single largest, Commercial and Institutional. Before turning our attention to a specific market, we did want to once again remind you of the broad-based nature of our growth expectations. So turning to slide five, we summarize the growth rates in our key environments. This data has not changed from what we shared in recent reports or at our technology showcase earlier this year.
Craig: This data has not changed from what we shared in recent quarters or at our technology showcase earlier this year.
Craig Arnold: And I say, in many ways, this is a once in a lifetime opportunity, in that the megatrends we share are having a broad and significant impact on the growth outlook for most of our employers, and we're seeing the benefit in our sales results, and more significantly in our Orders, Backlog, and Negotiation Pipeline, all of which are at record levels. And we'll share on a few slides how we're investing to support these Commitments that were received from us. Turning to slide six in the presentation,
Craig Arnold: We once again provide a summary of megaprojects that have been announced in January of 2021 in North America. And as a reminder, a megaproject is a project with an announced value of $1 billion or more, and the list now includes 444 projects and $1.4 trillion of cumulative value. This is double where we were this time last year. The backlog for megaprojects now stands at $1.6 trillion, some 25.
Craig: This is double where we were this time last year, and the backlog for megaprojects now stands at $1.6 trillion, up some 25%.
Craig Arnold: You know, it's important to point out that we have not seen any slowdown in the number of announced projects. In fact, Q2 was one of the strongest quarters. Recently, we've seen data center and power generation slash renewable projects take the lead in new projects. These two project types represent some 40% of announced projects in the last 12 months. And the cancellation rate continued to be modest, around 11%, which is well below historical. Note that only 15% of these projects have started.
Craig Arnold: We've won over $1.4 billion, and our win rate has been approximately. We're actively negotiating another $1.3 billion of our liabilities. Lots more to come.
Craig Arnold: Turning to slide 7, we continue to highlight the commercial and industrial. For 2023, commercial and industrial institutional end markets represented 20% of Total Eaton Sales, 28% of our elect, And for Eaton overall, we estimate that new... Real Estate Exposure is only 2-3% of our revenue. We know that this has been a concerning point for some of you, but as you can see, it represents a very small part of it. While the entire category is growing, we expect to see significant strength in institutional infrastructure, which represents 50% of our C&I exposure in electricity. Institutional infrastructure includes education, health care, government, and waste and waste management.
Craig: Turning to slide 7, we continue to highlight the commercial and industrial end markets.
Craig Arnold: I'd also point out that the electrical content in these two segments is much higher than office and other light industrial projects. Excuse me, light, commercial. And as noted, the same set of megatrends, including digitalization, the Energy Transition, and stimulus spending, are also driving outgrowth in this. It's something that we expect to continue. On slide 8, we provide an overview of the products and software that we sell as part of our commercial and institutional building portfolio.
Craig: Institutional infrastructure includes education, healthcare, government, and includes waste and wastewater.
Craig: and something that we expect to continue for years to come.
Craig: On slide 8, we provide an overview of the products and software that we sell as part of our commercial and institutional building portfolio.
Craig Arnold: We include this slide to provide a perspective on how broadly we play across electrical infrastructure and buildings. In fact, we have the industry's broadest set of electrical solutions. Some of the newer categories for us include energy storage, EB Charging Network Managers, and Microgrid Controllers that control energy behind the...
Craig: In fact, we have the industry's broadest set of electrical solutions.
Craig: Some of the newer categories for us include energy storage, EV charging network managers, and microgrid controllers that control energy behind the meter.
Craig Arnold: In addition to the entire suite of digitally enabled hardware, we have our bright layer software suite that does energy management across the building and campus, all of which are supported by our comprehensive service organization. On slide nine, we want to provide an update on our incremental growth investment. As a reminder, we're investing more than a billion dollars of incremental capital to support growth.
Craig: In addition to the entire suite of digitally enabled hardware, we have our BrightLayer software suite that does energy management across the building and campuses.
Craig: On slide nine, we want to provide an update on our incremental growth investments.
Craig: As a reminder, we're investing more than a billion dollars of incremental capital to support growth with 750 million in North America over the next few years.
Craig Arnold: $750 million in North America over the next few years. These investments expand our production capacity for a variety of and support most of our electrical. As you're aware, the market has several capacity constraints, so we're working closely with customers to ensure that our capacity additions are in line with the demand, and in many cases, our contractual agreements, to provide you with a feeling of the magnitude of these investments, will impact 25 of our sites and add over 2 million square feet of manufacturing.
Craig: As you're aware, the market has several capacity constraints, so we're working closely with customers to ensure that our capacity additions are in line with the demand and in many cases our contractual agreements.
Craig Arnold: Overall, these projects remain on track. Many sites are already ramping up new capacity, and additional production capacity will be coming online later this year and into the first half of 2020, to note a couple of recent milestones. We recently opened a new state-of-the-art campus in Helsinki to increase the capacity of UPS systems.
Craig: To note a couple of recent milestones, we recently opened a new state-of-the-art campus in Helsinki to increase capacity of UPS systems.
Craig Arnold: And this obviously includes our latest Energy Aware. This is actually the industry's leading UPS and is 30% smaller than most of the competitive products. And most recently, we signed an agreement to build a new electrical campus in Dubai, expand our commercial manufacturing, and support functions in the rapidly growing Middle East region. Turning to page 10, we're excited to have closed the strategic investment in Nordic EPOC. Nordic Epod designs and assembles standardized power modules for the European data center. It's a design that's standardized, and it's a pre-engineered system that allows for a faster market, and contains all of the critical power, electrical gear, backup power, cooling, and control systems needed to support a data center. These pods are manufactured in Norway, are designed to operate in harsh weather conditions, and can supply up to 2 megawatts of electrical power.
Craig: And this obviously includes our latest Energy Aware UPS.
Craig: And most recently, we signed an agreement to build a new electrical campus in Dubai to expand our commercial, manufacturing, and support functions in the rapidly growing Middle East region.
Craig: Turning to page 10, we're excited to have closed the strategic investment in Nordic Epod.
Craig: Nordic Epod designs and assembles standardized power modules for the European data center market.
Speaker Change: What's unique about their solution is that it's a design that's standardized and it's a pre-engineered system that allows for faster market response.
Craig: The standard power module, or EPOD, contains all the critical power, electrical gear, backup power, cooling and control systems needed to support a data center.
Olivier Leonetti: I'd also note that the power modules are an increasingly preferred approach for many of the data center customers in Europe, and Eaton will naturally supply a significant amount of the electrical equipment and services. This is an outstanding new platform that will allow Eaton to increase our participation in the rapidly growing European data center market. Now I'll turn it over to Olivier, who will take us through the financial results. Thanks, Craig.
Speaker Change: I'd also note that the PAL modules are an increasingly preferred approach for many of the data center customers in Europe .
Speaker Change: This is an outstanding new platform that will allow Eaton to increase our participation in the rapidly growing European data center market.
Craig: Now I'll turn it over to Olivier who will take us through the financial results for the quarter.
Olivier Leonetti: I'll start by providing a summary of our Q2 results, which posted record sales of $6.4 billion, up 8% in total and up 9% organically. This represents 9 quarters of growth of 20% on a two-year basis. We posted record segment profit in March. Operating profit grew 90% and segment margin expanded to an NPN basis point to 23.7 percent. Adjusted EPS of $2.73 increased by 24% over the prior year.
Olivier: Thanks, Craig.
Olivier: I'll start by providing a summary of our Q2 results, which posted record sales of $6.4 billion, up 8% in total and up 9% organically.
Speaker Change: This represents 9 quarters of growth of 20% on a 2 year stack.
Olivier: We posted record segment profit and margins.
Olivier: Adjusted EPS of $2.73 increased by 24% over the prior year. This is a quarterly record and well above the high end of our guidance range.
Olivier Leonetti: This is a quarterly record and well above the high end of our guidance. This performance resulted in Q2 record operating cash flow of $946 million, up 11% year-over-year, and Q2 record free cash flow of $759 million, up 10% versus prior year. On slide 12, we summarize Electric Coal America's very strong... We continue to raise the bar, setting new records for sales, operating profit, and margin. Organic sales growth remains strong at 13%, which reflects strength in data center and industrial landmark.
Craig: and Q2 record free cash flow of $759 million up 10% versus prior year.
Craig: On slide 12, we summarize Electric Coal America's very strong results.
Craig: Organic sales growth remains strong at 13%, which reflects strength in data centers and industrial land markets.
Olivier Leonetti: On a two-year stack, organic growth is up 32%. Electrical Americas has generated double-digit organic growth for 10 consecutive quarters. A record operating margin of 29.9% was up 350 basis points versus the prior year, benefiting from higher sales and manufacturing efficiencies that were partially offset by higher costs to support growth initiatives. On a rolling 12-month basis, orders were up 11%, demonstrating strength across the various megatrends.
Speaker Change: On a two-year stack, organic growth is up 32%.
Speaker Change: Electrical Americas has generated double-digit organic growth for 10 consecutive quarters.
Speaker Change: Record operating margin of 29.9% was up.
Speaker Change: 350 basis points versus prior year, benefiting from higher sales and manufacturing efficiencies that were partially offset by higher costs to support growth initiatives.
Speaker Change: On a rolling 12-month basis, orders were up 11%, demonstrating strength across the various megatrends.
Speaker Change: We have particular strengths in the data center and market.
Speaker Change: Also, our major project negotiations pipeline in Q2 was up 18% versus prior year and up 42% since Q2 2022.
Olivier Leonetti: We have particular strength in the data center and cloud market. Also, our major project negotiation pipeline in Q2 was up 18% versus the prior year and up 42% since Q2 2022. Electrical America's backlog increased 29% year-over-year with a book-to-bill ratio of 1.2 on a rolling 12-month basis.
Olivier: Electrical America's backlog increased 29% year-over-year, with a book-to-bill ratio of 1.2 on a rolling 12-month basis.
Olivier Leonetti: These results underscore the tailwinds from secular trends, strong execution, and robust backlog that have allowed us to increase growth and margin guidance for the year, which we will discuss later in the presentation. The next chart summarizes the results for our electrical global sector. Organic growth was up 3.5%, partially offset by FX Edwin.
Olivier: These results underscore the tailwinds from secular trends, strong execution, and robust backlog that have allowed us to increase growth and margin guidance for the year, which we will discuss later in the presentation.
Olivier: Next chart summarizes the results for our electrical global segment. Organic growth was up 3.5%, partially offset by FX headwinds.
Olivier Leonetti: We are strength in data center markets, partially offset by weaknesses in residential and retail. Regionally, we continue to see strength in our AIPAC and GEIS businesses, partially offset by weakness in our EMEA business. Operating margin of 19% was up 50 basis points versus prior year driven by higher sales and operating efficiency.
Olivier: We have strength in data center markets, partially offset by weaknesses in residential and markets. Regionally, we continue to see strength in our APAC and GEIS businesses, partially offset by weakness in our EMEA business.
Olivier: Operating margin of 19% was up 50 basis points versus prior year driven by higher sales and operating efficiencies partially offset by wage inflation.
Olivier Leonetti: Although partly upset by wage inflation, orders were up 7% on a rolling 12-month basis with strength in data center and utility, and market. Book to Build continues to remain strong. Q2 was 1.1 on a rolling 12-month basis.
Olivier: Orders were up 7% on a holding 12-month basis with strength in data center and utility and markets.
Olivier: Book 2 bill continues to remain strong. Q2 was 1.1 on a rolling 12-month basis.
Olivier Leonetti: Before moving to our industrial businesses, I'd like to briefly recap the combined electrical sector. For Q2, we posted organic growth of 10% and segment margin of 26%, which was up 260 basis points over prior years. On a holding 12-month basis, orders were up 9%, and our book-to-bill ratio for our electrical sector remains very strong at 1.1. We remain confident in our positioning for continued growth with strong margins in our overall electrical business. Page 14 highlights our aerospace... We posted record sales and a Q2 record operating profit. Organic growth was 13% for the quarter, driven by strength in commercial OEM, commercial aftermarket, and military OEM. Operating margin of 21.5% was down 100 basis points year over year, driven by operating inefficiencies and higher costs.
Olivier: Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segments.
Olivier: For Q2, we posted organic growth of 10% and segment margin of 26%, which was up 260 basis points over prior year.
Olivier: On a holding 12-month basis, orders were up 9% and our book-to-bill ratio for our electrical sector remains very strong at 1.1.
Olivier: We remain confident in our positioning for continued growth with strong margins in our overall electrical business.
Olivier: Page 14 highlights our aerospace segment.
Olivier: We've posted record sales and a Q2 record operating profit.
Olivier: Organic growth was 13% for the quarter, driven by strength in commercial OEM, commercial aftermarket, and military OEM.
Olivier: Operating margin of 21.5% was down 100 basis points year over year, driven by operating inefficiencies and higher cost to support growth initiatives that were partially offset by higher sales.
Olivier Leonetti: Support Growth Initiative, that were partially offset by higher sales. On a rolling 12-month basis, orders increased 4% driven by commercial OEM and aftermarket. Within the quarter, orders increased 21% year over year, with commercial OEM up 22% and military OEM up 53%. Year-over-year backlog increased 14% and was up 3% sequentially.
Olivier: On a rolling 12-month basis, orders increased 4% driven by commercial OEM and aftermarket.
Olivier: Within the quarter, orders increased 21% year over year, with commercial OEM up 22% and military OEM up 53%.
Olivier: Year-over-year backlog increased 14% and was up 3% sequentially.
Olivier Leonetti: On a rolling 12-month basis, our book-to-bill for our aerospace segment remains strong at 1.1, and we are pleased with more than $2 billion in life of program wins in the quarter. Moving to our vehicle segment on page 15, in the quarter, total revenue was down 4%, including a 3% organic decline and 1% point of unfavorable effects.
Olivier: On a rolling 12-month basis, our book-to-bill for our aerospace segment remains strong at 1.1.
Olivier: And we are pleased with more than 2 billion dollars life of program wins in the quarter.
Olivier: Moving to our vehicle segment on page 15. In the quarter, total revenue was down 4%, including a 3% organic decline and 1% point of unfavorable effects.
Olivier Leonetti: Weakness in the North America light vehicle market and a European truck market was partially offset by strength in South America. Operating margin came in at 18%, 270 basis points above prior year, driven by operating efficiencies offsetting lower volume. And we are pleased to have won $83 million in mature ESLs across our commercial and passenger vehicle portfolio. On page 16, we show results for our e-mobility business. Cells were up 18% on an organic and total basis.
Olivier: Weakness in the North America light vehicle market and a European truck was partially offset by strength in South America.
Olivier: Operating margin came in at 18%, 270 basis points above prior year, driven by operating efficiencies offsetting lower volume.
Olivier: And we are pleased to have won $83 million in mature ESLs across our commercial and passenger vehicle portfolio.
Olivier: On page 16, we show results for our e-mobility business.
Olivier: Cells were up 18% on an organic and total basis.
Olivier Leonetti: Our organic growth significantly outperformed the market, driven by new program ramp-ups in the European market. Operating profit was $2 million, and we continue to incur large costs related to new programs expected to ramp up over the next coming quarter. In the quarter, we also launched major power protection programs, battery disconnection aids, and brake torque, and were awarded an additional $82 million in mature ESF.
Olivier: Our organic growth significantly outperformed the market, driven by new program ramp-ups in the European market.
Olivier Leonetti: Moving to page 17, we show our electrical and aerospace backlog updated through Q2. We continue to build backlog with electrical stepping up to $11.4 billion and aerospace reaching $3.5 billion for a total of $14.9 billion. Versus the prior year, our backlogs have grown by 27% in electric coal and 14% in aerospace. The electrical backlog benefited from an acceleration in order intake from tailwinds of secular trends, including hyperscale orders within the data center and market. As noted earlier, the book-to-bill ratios for electrical and aerospace are 1.1 and 1.1, respectively.
Olivier: Versus prior year, our backlogs have grown by 27% in electric coal and 14% in aerospace.
Craig Arnold: The continued growth in our backlog underscores our confidence in 2024 and beyond. Now I'll turn it back to Craig for the End Market Outlook and financial guidance. Thanks, Olivier.
Olivier: Now, I'll turn it back to Craig for the End Market Outlook and Financial Guidance updates.
Craig Arnold: Turning to page 18, we show a summary of our in-market growth assumptions for the year. Overall, our markets continue to perform as expected. And most of these indicators have not changed from what we shared during our last two earnings. We are, however, seeing stronger than expected growth in data and in commercial and institutional markets in the U.S., which is why we're raising our revenue growth guidance for the year. We continue to expect growth in about 80% of our end markets, supported by the key megatrends of electrification, energy transition, reindustrialization, and digitalization.
Craig: Thanks, Olivier. Turning to page 18, we show a summary of our in-market growth assumptions for the year.
Craig: Overall, our markets continue to perform as expected, and most of these indicators have not changed from what we shared during our last two earnings calls.
Craig: We continue to expect growth in about 80% of our end markets, supported by the key megatrends of electrification, energy transition, re-industrialization, and digitalization.
Craig Arnold: Moving to page 19, we show our fiscal year organic growth and operating margin guide. Overall, our 2024 organic growth is now expected to be between 8% and 9%, which is an increase of 50 basis points at the midpoint. We're raising our organic growth guidance in electrical Americas by 150 bases, to 11 12% to 13 12%, from 10 to 12, and in aerospace by a hundred bases, 10 to 12 percent from 9 to 11. We're lowering and tightening the range of our e-mobility organic growth guidance to 17% to 23% given the well-reported softening in some of these end markets.
Craig: and in aerospace by 100 basis points to 10 to 12 percent from 9 to 11 percent.
Speaker Change: We're lowering and tightening the range of our e-mobility organic growth guidance to 17% to 23% given the well-reported softening in some of these end markets.
Craig Arnold: And we're reiterating the growth guidance for the remaining segments. For segment margins, we're increasing the company's margin guidance range by 50 basis points at the midpoint to 23.5%. This is driven by the improved outlook in electrical Americas, where we're seeing strong demand and strong operational execution. In this segment, we're increasing our margin outlook by 90% to a midpoint of 28.9. We're also reiterating our guidance for the remaining segments, and we're well positioned to continue to deliver strong financial performance for the balance.
Speaker Change: And we're reiterating the growth guidance for the remaining segments.
Craig: For segment margins, we're increasing the company's margin guidance range by 50 basis points at the midpoint to 23.5%.
Craig: In this segment, we're increasing our margin outlook by 90 basis points.
Olivier: to a midpoint of 28.9 percent.
Craig Arnold: We have additional guidance for metrics for 2024 and Q3. In 2024, our adjusted EPS is expected to be between $10.65 and $10.75. The $10.70 midpoint represents 70% growth and adjusted EPS over the prior year, a 55 cent increase over the initial 2020. $0.30 increase over the prior, tighten the range for free cash, and now expect $4.2 billion to $4.4 billion for operating cash. $3.4 billion to $3.6 billion for free care, an increase of $100 million at the midpoint on both measures.
Olivier: On the next page,
Olivier: We have additional guidance for metrics for 2024 and Q3. For 2024, our adjusted EPS is expected to be between $10.65 and $10.75 a share.
Olivier: The $10.70 midpoint represents 70% growth in adjusted EPS over the prior year.
Craig: An increase of $100 million at the midpoint on both measures.
Craig Arnold: In Q3, we expect organic growth to be between 8% and 9%, segment margins to be between 23.5% and 23.9%, and adjusted EPS in a range of $2.73 to $2.83. So, let me just close with a summary on page 21. Once again, the trends driving growth in our markets continue to play out as we. Even better, in our Electrical Americas business, driven by data center markets and the reindustrialization trend that we're seeing across multiple markets in North America.
Craig: So let me just close with a summary on page 21. Once again, the trends driving growth in our markets continue to play out as we expected. Even better in our Electrical Americas business driven by data center markets and the reindustrialization trend that we're seeing across multiple markets in North America.
Craig: We also delivered a strong quarter of financial results and continue to see outstanding execution on our key initiatives across the company.
Craig Arnold: We've also delivered a strong quarter of financial results and continue to see outstanding execution on our key initiatives across the country. As a result, we raised our guidance for organic growth by 50 basis points, segment margins by 50 basis points, and our adjusted EPS by 30 cents at the mid-term.
Craig: Our segment margins by 50 basis points and our adjusted EPS by 30 cents at the midpoint.
Operator: In the quarter, we were especially pleased to see the strength in our negotiations, orders, and growth and backlog, all of which are at record levels. Validating Our Medium and Long-Term Growth. So we leave the quarter with a high level of confidence when we say Eaton will deliver higher growth, higher margins. Consistent earnings growth for years. And with that, I'll open things up for any questions you may have. Hey, thanks, Craig.
Craig: In the quarter, we were especially pleased to see the strength in our negotiations.
Craig: So we leave the quarter with a high level of confidence when we say Eaton will deliver higher growth, higher margins, and consistent earnings growth for years to come.
Operator: For the Q&A today, please limit your opportunity to one question and one follow-up. Thanks once again for your cooperation. With that, I will turn it over to the operator to give you guys the, Thank you, and ladies and gentlemen, if you wish to ask a question, please press 1 then 0 on your touchtone phone. You will hear an acknowledgment tone that you've been placed into queue, and you may remove yourself from queue at any time by repeating the 1-0 command.
Operator: And if you're on a speakerphone, please pick up your handset before pressing. Once again, if you have a question, please press 1 then 0 at this time. The first question will come from the line of Joe Ritchie from Goldman Sachs. Please go ahead. Thank you. Good morning, everyone. Good morning, Joe.
Speaker Change: And if you're on a speakerphone, please pick up your handset before pressing the numbers. Once again, if you have a question, please press 1 then 0 at this time.
Speaker Change: The first question will come from the line of Joe Ritchie from Goldman Sachs. Please go ahead.
Craig Arnold: Hey Craig, I want to start with, I guess maybe just a longer-term question on, I'm sure you witnessed what happened with the PJM auction this past week and how they saw record-high prices. I'm just trying to get an understanding of ultimately what that means for your utility business going forward. And when you can maybe start to see an inflection, I know that business has been growing well, but we could see a further inflection given how tight capacity is.
Craig: Thank you. Good morning, everyone. Good morning, Joe.
Joe Ritchie: What that means for your utility business going forward and when you can maybe start to see an inflection, I know that business has been growing well, but maybe see a further inflection given how tight capacity is.
Craig Arnold: Yeah, I mean, I mean, as we've talked about, Joe, and appreciate the question that, you know, the utility market is just one of many markets for us that we're, we're absolutely thrilled about the growth prospects for. I mean, as we talked about, you know, these big trends of, you know, beginning with the energy transition, the electrification of the economy, climate change, and the need to build grid resiliency, Converging at the same time is just creating, you know, a pretty unique set of conditions in terms of those opportunities into utility markets.
Speaker Change: Climate change and the need to build grid resiliency, you know, all of these factors.
Joe Ritchie: converging at the same time.
Craig Arnold: And as we talked about before on this call, one of the longest lead time products that probably exists in the electrical industry is getting an electrical transfer. So I'd say that business for us is, it is a big part of the company, you know, some 15%, as we said, of our total market exposure. We talked about our long-term growth rates being, kind of, the low teens for that business. And so we are already seeing quite attractive growth in the utility market, including in this current quarter, and we expect it to go on for some time to come. Yeah, that's that's really helpful, Craig.
Speaker Change: So, I'd say that business for us is, it is a...
Craig: Big part of the company.
Speaker Change: It's some 15%, as we said, of our total market exposure. We talked about our long-term growth rates being in the low teens for that business. And so we are already...
Craig: Seeing, you know, quite attractive growth in the utility market, you know, including in this current quarter, and we expect it to go on for some time to come.
Craig Arnold: And I know I like that you guys highlighted the investments that you're making to increase capacity. I guess, if I take that 2 million plus additional square footage, like what does that represent as a percentage of your total, you know, capacity today? And then if you think about how much leeway that gives you or flexibility that gives you in the coming years, does that make you good through, you know, 2027, 2028? Like how much flexibility does this give you?
Craig: Yeah, that's that's that's helpful, Craig. And I know I like that you guys highlighted the investments that you're making to increase capacity. I guess if I take that $2 million plus in additional square footage,
Craig: What does that represent as a percentage of your total capacity today?
Craig: And then if you think about how much leeway that gives you or flexibility that gives you in the coming years, does that make you good through, you know, 2027, 2028? Like, how much flexibility does this give you?
Craig Arnold: You know, I appreciate the question. In terms of a percentage, Ed, I don't have that number off hand. So we can certainly get that number for you. But I think the way to think about it is that, you know, in every one of those businesses where we are capacity constrained, we're making investments in capacity to deal with, let's call it today, our mid-term out... Obviously, depending upon which piece of the business you're talking about, the response time to put on new capacity varies widely.
Craig: You know, I appreciate the question. In terms of a percentage, Ed, I don't have that number offhand. We can certainly get that number for you, but I think the way to think about it is that, you know, in every one of those businesses where we are capacity constrained,
Craig: We're making investments in capacity to deal with, let's call it today, our midterm outlook.
Craig: Obviously, depending upon which piece of the business you're talking about, the response time to put on new capacity varies widely.
Craig Arnold: We can do it relatively quickly in our electrical assembly businesses. However, in a business like transformers, for example, that goes into lots of different markets, not just the utility market, the lead times there tend to be longer, given the type of manufacturing.
Craig: We can do it relatively quickly in our electrical assembly businesses, in a business like transformers, for example, that go into, you know, lots of different markets, not just the utility market. The lead times there tend to be longer, given the type of manufacturing.
Craig Arnold: And so I would just tell you that today, we're investing to win here; we're making the investments that customers expect and need us to make. And in many cases, we're getting long-term commitments for customers to ensure that we're not putting in too much capacity. But I can just say that it's something that we've done for a long time; we know how to do it well, and we're going to be ready to support our customers as they continue to grow. I appreciate it, Collin.
Craig: And so I would just tell you that today we're investing to win here. We're making the investments that our customers need.
Craig: Expect and need us to make and in many cases we're getting long-term commitments for customers to ensure that
Craig: We're not putting in too much capacity.
Craig: But I can just say that it's something that we've done for a long time. We know how to do it well.
Craig: And we're going to be ready to support our customers as they continue to grow.
Operator: Thank you. Thank you. Thank you. The next question is from Jeff Sprague from Vertical Research Partners. Please go ahead. Hey, thank you. Good morning, everyone.
Speaker Change: Appreciate it, Colleagues. Thank you. Thank you.
Craig: Thank you. The next question is from Jeff Sprague from Vertical Research Partners. Please go ahead.
Operator: Hey, good morning. Craig, really solid results and outlook. As you may or may not be aware, because you're not watching everybody else's prints like we are, but sort of the takeaway from the week has been companies kind of missing and lowering or making the numbers, but cutting organic growth on, you know, weaker project-related outlooks. And I'm not surprised you're outperforming, given the kind of secular exposures you have. But where you have exposure to smaller projects or machine OEM and things like that, are you seeing pockets of weakness underneath the surface?
Jeff Sprague: Hey, thank you. Good morning, everyone.
Craig: Bye.
Jeff Sprague: Good morning. Craig, really solid results and outlook.
Speaker Change: As you may or may not be aware, because you're not watching everybody else's prints like we are, but sort of the takeaway from the week has been, you know, companies kind of missing and lowering or making the numbers but cutting organic growth on
Speaker Change: You know weaker project related outlooks, and I'm not surprised you're underperforming, you're outperforming given kind of the secular exposures you have.
Speaker Change: But where you have exposure to smaller projects or machine OEM and things like that, are you seeing pockets of weakness underneath the surface? Again, obviously being masked by data centers and other things, but just kind of the general lay of the land in the industrial landscape out there.
Craig Arnold: Again, obviously being masked by data centers and other things, but just kind of the general lay of the land and the industrial landscape out there. Hey, Jeff. I appreciate that question. And one of the things, if you recall that we reported on during the last earnings call, because one of the things we wanted to convey was that we're spending a lot of time focusing on megaprojects because it is a fundamental change from the historical patterns in the industry and the sheer number and size of them, and it is changing the dynamics of the business in terms of our order flows.
Page: Page, I appreciate that question, and one of the things, if you recall, that we reported on during the last earnings call, because one of the things we wanted to convey was that
Page: We're spending a lot of time focusing on mega-projects because it is a...
Page: Fundamental change from...
Jeff Sprague: The historical patterns in the industry and the sheer number and size of them, and it is changing the dynamics of the business in terms of our order flows.
Craig Arnold: But the small projects as well, those projects that are under $1 billion, what we reported on the last earnings call is that we're seeing a very similar pattern of growth in projects under $1 billion. In fact, I don't recall the number offhand, but it was... 16%.
Jeff Sprague: But the small projects as well, those projects that are under $1 billion.
Jeff Sprague: What we reported on the last earnings call is that we're seeing a very
Jeff Sprague: Similar pattern of growth in projects under a billion dollars. In fact, I don't recall the number offhand, but it was... Sixteen percent.
Craig Arnold: What? 16%. 16%. Roughly.
Craig Arnold: Up 16%. Yeah. So we are really seeing a broad-based increase in our project-related business, whether it's the megaprojects that we spend a lot of time talking about or the stuff that tends to be more of the smaller flow projects that we've always seen inside the business. I would say today we have not seen any let-up at all in the level of activity, and as we talked about on the megaproject slide, Q2 was... One of the biggest quarter Those projects continue to come in at a significant rate. Our negotiations overall in our electrical business continue to be at record high levels.
Speaker Change: 16%, 16%
Jeff Sprague: Up 16%. So we are really seeing a broad-based increase.
Craig: in, you know, our project related business, whether it's
Craig: The mega projects that we spend a lot of time talking about or the stuff that tends to be more of the smaller flow projects that we've always seen inside the business.
Craig: And so, no, I would say today.
Craig: We have not seen any let-up at all.
Craig: Our negotiations, you know, overall...
Craig Arnold: And so we're obviously mindful and watchful, but we've not seen a slowdown. And by the way, I'll assure you, by the way, we do watch all the other prints as well. We are obviously staying attuned to what's going on more broadly in the marketplace, and our business continues to do well. Wow, interesting stuff. And then maybe, maybe just a little bit more color on, you know, the global side of electricity.
Craig: And so, you know, we're obviously mindful and watchful.
Craig: But we've not seen a slowdown, and by the way, I'll assure you, by the way, we do watch all the other prints as well. We are obviously, you know, staying attuned to what's going on more broadly in the marketplace, and our business continues to do well.
Speaker Change: Interesting stuff and then maybe maybe just a little bit more color on
Craig Arnold: Olivier hit some of it in his prepared remarks, but, you know, some of these secular forces ought to come to bear, you know, in Europe and elsewhere eventually. Is it just resi weakness and kind of general, you know, kind of macro-related pressures that hold it back? Obviously, I'm not expecting it to grow like America's, but it just seems like there should be prospects for growth there, a pickup maybe perhaps as we move into next year.
Speaker Change: You know, on the global side of electrical, Olivier hit some of it, you know, in his prepared remarks, but...
Speaker Change: You know, some of these secular forces ought to come to bear, you know, in Europe and elsewhere eventually. Is it just resi weakness and kind of general, you know, kind of macro related pressures that hold it back? Obviously, I'm not expecting it to grow like America's, but it just seems like there should be prospect.
Jeff Sprague: For growth there, the pickup maybe perhaps as we move into next year.
Craig Arnold: Yeah, I think your statement is largely accurate that the megatrends that we talk about of energy transition, electrification, you know, digitalization, all of those trends are just as relevant in Europe as they are in North America. You know, I will say, though, if you think about, you know, some of the big differences. And what's driving, perhaps, this outperformance in the US is really a lot of re-industrialization, a lot of investments in manufacturing, and LNG, and other sectors, data centers, where you have manufacturing that is historically taking place in other regions of the world. Now those investments are being made in the US. Obviously, these investments are also being helped and supported by a number of stimulus programs as well.
Speaker Change: Yeah, I think, I mean, your statement is largely accurate, that the megatrends that we talk about of energy transition, electrification.
Jeff Sprague: Digitalization, all of those trends are just as relevant in Europe as they are in the North American market.
Speaker Change: You know, I will say, though, if you think about, you know, some of the big differences
Jeff Sprague: and what's driving perhaps this outperformance in the U.S. is really
Jeff Sprague: A lot of re-industrialization, a lot of...
Jeff Sprague: You know, investments in...
Craig: Manufacturing and...
Alan G: and LNG.
Alan G: and other sectors data center where you have manufacturing that is historically taking place in other regions of the world. Now those investments are being made in the U.S.
Alan G: Obviously, these investments are also being helped and supported by a number of these stimulus programs as well. And so over time, we would clearly expect Europe to see more significant impact, although within those same verticals.
Craig Arnold: So over time, we would clearly expect Europe to see more significant impact. Although, within those same verticals, data centers, for example, and utilities, we are seeing good growth in our global businesses, not to the same extent as the US. But it's being overwhelmed by the macro in the market, for sure, in terms of just the overall economy that we see in Europe, and you don't see the same reindustrialization trend taking place. But on balance, markets are overall doing well, and we're pleased. Great, thank you.
Speaker Change: Data centers, for example, and utilities. We are seeing good growth in our global businesses, not at the same extent as the U.S., but it's being overwhelmed by the macro in the market.
Craig: for sure in terms of just the overall, you know, economy that we see in Europe and you don't see the same re-industrialization trend taking place there.
Craig: But on balance, the market's overall doing well and we're pleased.
Operator: Thank you. The next question is from Andrew Obin from Bank of America. Please go ahead. Oh yes, good morning. Morning, Andrew.
Speaker Change: Great, thank you.
Speaker Change: Thank you. The next question is from Andrew Obin from Bank of America. Please go ahead.
Operator: I just want to touch on, maybe just dig a little bit more into AI data centers. Can you just talk about the pace of electrical orders and your win rate, specifically on the AI data center side? Thank you.
Andrew Obin: Oh yes, good morning.
Andrew Obin: Morning, Andrew.
Andrew Obin: I just want to touch on maybe just dig a little bit more into AI data centers.
Andrew Obin: Can you just talk about sort of the pace of electrical orders and your win rate on specifically on the AI data center side? Thank you.
Craig Arnold: Andrew, I appreciate the question as obviously this is perhaps the hottest topic in the world right now in terms of what's going on with AI and how that's driving, you know, increased investments in data centers. And as I think this group is well aware, these AI-centric or training data centers consume a lot more power and a lot more electricity than your conventional data center. So, the basic cloud-based data centers.
Craig: Andrew, I appreciate the question, as obviously this is...
Speaker Change: Perhaps the hottest topic in the world right now in terms of what's going on with AI and how that's driving, you know, increased investments in data centers. And as I think this group is well aware, you know, these AI-centric or training data centers
Craig: Consume a lot more power and a lot more electricity than your conventional data center. So the basic cloud-based data centers. You know, the first thing I would say is that when you think about the growth that we're seeing today in our data center business,
Craig Arnold: Now, the first thing I would say is that when you think about the growth that we're seeing today in our data center business, and you think about the growth projections over time, very little of this today is a result of specific investment in AI.
Craig: And you think about the growth projections over time. Very little of this today is a result of specific investments in AI.
Craig Arnold: It's coming, and we're quoting a lot of projects. I think if you take a look at what the industry and some of the industry leaders talked about last year, five to 10% of their capital spending is on AI-related data centers. So I would say most of the growth related to this and the expansion that we expect to come is still out in front of us with respect to AI data centers. It's coming, and I would say, in terms of its contribution to our orders, it is very much aligned with that.
Craig: It's coming. We're quoting a lot of projects.
Speaker Change: I think if you take a look at what the industry, some of the industry leaders talked about last year that 5 to 10% of their capital spending is in AI-related data centers. So I would say most of the growth related to this
Craig: Ex pants jinn we expect to come is still out in front of us with respect to AI data centers. It's coming and I'd say in terms of its contribution to our delayed orders, in terms of its contributions to our orders is very much in line with that. Most of the orders we are getting,
Craig Arnold: Most of the orders that we're getting... 90-plus percent of the orders that we're getting are really tied to your conventional data centers as more and more companies like ours move applications to the cloud from on-premise. And if you think about this, this massive increase in data that we're all generating, consuming, and storing, that's really what's driving the growth in data centers today. And AI, I would tell you, is still largely a future.
Craig: percent of the orders that we're getting are really tied to your conventional data centers
Craig: More and more companies like ours own move applications to the cloud from on-premise.
Craig: If you think about this, this massive increase in data that we're all generating, consuming, and storing, that's really what's driving the growth in data centers today, and AI, I would tell you, it's still largely a future.
Craig Arnold: And in fact, when you look at the total backlog today of data center projects, close to $140 billion. And if you look at that in the context of historical build rates, that's eight years of production. And we haven't yet hit the inflection point yet for AI. So we think what happens ultimately is that this market expansion and this build-out cycle just gets extended for quite a number of additional years.
Craig: And, in fact, when you look at the total backlog today of data center projects,
Craig: Close to 140 billion dollars. And if you look at that in the context of historical build rate, that's eight years of production and we haven't yet hit the inflection point yet for AI.
Craig: So we think what happens ultimately is that this market expansion and this build-out cycle just gets extended for quite a number of additional years.
Operator: Thank you for a comprehensive answer. Another question just to follow up on capital allocation. Just buybacks. You bought back, I think 740 million in the first half.
Speaker Change: Great to hear. Thank you for a comprehensive answer. Another question just to follow up on capital allocation. Just buybacks, you bought back, I think, $740 million in the first half. So how should we be thinking about the cadence of buybacks for balance of the year?
Olivier Leonetti: So how should we be thinking about the cadence of buybacks for the balance of the year? Andrew, we see today, based upon what we see in the market, a strong upside in the value of our stock, so we will continue to buy back shares. We have said that we would buy back about $2 billion for the year.
Speaker Change: Andrew, we see today, based upon what we see in the market, a strong upside in the value of our stock, so we will continue to buy back shares.
Andrew: We have said that we would buy back about $2 billion for the year.
Olivier Leonetti: That's what the midpoint of our guide implies. But based upon where we see the stock price today, we believe we would be more at the high end of our guidance range. And we would balance this buyback between Q3 and Q4, but we will remain obviously opportunistic. Thanks so much.
Andrew Obin: That's what the midpoint of our guide implies. But based upon where we see the stock price today, we believe we would be more at the high end of our guidance range.
Andrew: And we will balance this buyback between Q3 and Q4, but we will remain obviously opportunistic, Andrew.
Andrew Obin: Thanks so much. I'll go back in the queue.
Operator: I'll go back on the queue. Thank you. Thank you. The next question is from Steve Tusa from J.P. Morgan. Please go ahead. Hi, good morning.
Andrew Obin: Thank you.
Speaker Change: Thank you. The next question is from Steve Tusa from J.P. Morgan. Please go ahead.
Operator: Morning. Congratulations on another strong print here. Good execution.
Steve Tusa: Hi. Good morning. Morning.
Steve Tusa: Congrats on another strong print here. Good execution. Just on the backlog, can that continue to grow in electrical through the rest of this year?
Operator: Just on the backlog, can that continue to grow in electrical through the rest of this year? You know, I think it's a great question, and, you know, if you'd asked me that question at the beginning of the year, I would have imagined that we would start to see a leveling out in the backlog and perhaps even eat some of the backlog this year. But, you know, given how strong markets have remained, the backlog, as we talked about, up 27% year over year, growing still quarter over quarter, from where I sit today, Steve, and based upon the activities and the negotiations we're seeing, my guess is we'll probably continue to build the backlog.
Speaker Change: You know, I think it's a great question.
Speaker Change: Imagine that we would start to see a leveling out in the backlog and perhaps even eating some backlog this year. But, you know, given how strong markets have remained, you know, the backlog, as we talked about, up 27% year over year.
Steve Tusa: growing still quarter over quarter.
Andrew: You know, from where I sit today, Steve, and based upon the activities and the negotiations we're seeing, you know, my guess is we'll probably continue to build backlogs. You know, the industry as well has reached a level where, you know, there are some constraints today.
Operator: The industry as well has reached a level where there are some constraints today that are quite frankly limiting our ability to produce at the rate at which we're receiving orders, and at some point, those will certainly converge, but I would say it's tough to tell for sure, given the advent of these big, megaprojects and what they do to your backlog. You know, the other dynamic that we've talked about before that's taken place in the industry is that we are having some of these, you know, big, you know, hyperscale data center customers giving us multi-year orders. So it wouldn't surprise me at all that the backyard continued to grow.
Andrew: that are quite frankly, you know, limiting our ability to produce at the rate at which, you know, we're receiving orders.
Andrew: And at some point, those will certainly converge. But I would say...
Andrew: It's tough to tell for sure, given especially the advent of these big mega projects and what they do to your backlog.
Andrew: You know, the other dynamic that we've talked about before that's taken place in the industry is that we are having some of these, you know, big, you know, hyperscale data center customers giving us multi-year orders. So it wouldn't surprise me at all that the backyard continued to grow.
Craig Arnold: Okay, so sequentially for the next couple quarters, effectively, you can grow the backlog for three and four Q. You know, I think the truth is, I don't have I don't know, I can't really give you a definitive answer. Yeah, I mean, you know, the negotiations are up about 18% or so in our electrical business. And so we continue to grow our negotiations. And we're growing our negotiations at a faster rate than we're growing our sales. That math would suggest that it's certainly possible that, you know, we're going to continue to build. But we'll just have to wait and see how it all plays out.
Speaker Change: So, like, sequentially, for the next couple quarters, effectively, you can grow backlog
Speaker Change: You know, I think the truth is, I don't have, I don't know.
Andrew: I can't really give you a definitive answer, the negotiations are up 18% or so in our electrical business and so we continue to grow our negotiations.
Andrew: and we're growing our negotiations at a faster rate than we're growing our sales, that math would suggest that it's certainly possible that, you know, we're going to continue to build backlog.
Craig Arnold: Okay. And then just one more on the electrical margins. I think last quarter you guys talked about some investments hitting the margins, but here we are again with another pretty nice upside print on that front. You raised the guidance for the year. It does show a bit of a step down in incremental, still very strong in the second half, no doubt about that. But what's driving the step down in incrementals? Again, I'm not saying it's bad or anything like that.
Andrew: But we'll just have to wait and see, you know, how it all plays out.
Speaker Change: Okay, and then just one more on the electrical margins. I think last quarter you guys talked about
Speaker Change: Some investments hitting the margins, but here we are again with another pretty nice upside print on that front.
Speaker Change: You know, you raise the guidance for the year, it does show a bit of a...
Speaker Change: incremental, still very strong in the second half, no doubt about it. What's driving the
Craig Arnold: I'm just saying I want to kind of understand as things mature in the back half, what's the bit of the step down in incrementals? No, no, I appreciate that question. Without a doubt, a very strong first half of incrementals in our electrical businesses, and I'd say that because of lots of contributions from our teams. execution, and quite frankly, we've had, on a relative basis, a higher contribution from price in the first half than we will have in the second half of the year, and, you know, very much consistent with what we mentioned last quarter, we are ramping up our spending.
Speaker Change: Step Down and Incrementals. Again, I'm not saying it's negative or anything like that. I'm just saying I want to kind of understand as things mature in the back half what's the bit of the Step Down and Incrementals.
Speaker Change: No, no, I appreciate that question.
Andrew: And without a doubt, a very strong first half of incrementals in our electrical businesses. And I'd say that.
Speaker Change: Lots of contributions from our teams.
Andrew: And quite frankly, we've had, on a relative basis,
Speaker Change: We'll have in the second half of the year and, you know, very much consistent with what we mentioned last quarter. We are ramping our spending. We have capacity coming online that brings obviously depreciation,
Craig Arnold: We have capacity coming online that brings, obviously, depreciation and obviously the work that we need to do to ramp up new capacity. We continue to make growth investments in the business, and those tend to be more heavily backed and loaded. Clearly, those margin numbers that we provided you are our best view, but our teams have continued to surprise us as well with their execution. And so if you think about the electrical margins, the range that we provided, I think the range is a good range, and we're hopeful that they can be at the higher end of the range, but at this point, that's our best view. Yeah. Great. All right.
Andrew: And obviously, the work that we need to do to ramp up new capacity, and we continue to make growth investments in the business, and those tend to be more heavily back and loaded.
Andrew: Clearly, you know, those margin numbers, you know, that we provide to you is our best view.
Andrew: But, you know, our teams have continued to surprise us as well with their execution. And so, if you think about the electrical margins, you know, the range that we provided, I think the range is a good range, and we're hopeful that they can be at the higher end of the range. But at this point, that's our best view.
Speaker Change: Yep, great. All right. Thank you. Thanks for the detail.
Operator: Thank you. Thank you. The next question comes from David Raso from Evercore ISI. Please go ahead.
Speaker Change: Thank you. The next question comes from the line of David Raso from Evercore ISI. Please go ahead.
Operator: Yeah, hi, thank you. Electrical Americas on price and cost. Can you give us some update on where we stand on that right now? Particularly if you can give us any sense of volume versus price? Electricity America's growth. 13% this quarter, 17% last quarter.
Speaker Change: Hi, thank you. Electrical Americas, on price cost, can you give us some update on where we stand on that right now, particularly if you can give us any sense of volume versus price?
Speaker Change: in the Electrical America's growth, which, you know, 13% this quarter, 17% last quarter. And then also, given some of the long lead times, how should we think about, as we sit here today, pricing power into 2025? Thank you.
Craig Arnold: And then also, given some of the long lead times, how should we think about, as we sit here today, pricing power into 25? I appreciate the question. And I would say that, certainly, as we come through this inflationary period over the last couple of years, we were a little bit upside down for a period of time on price versus cost.
Speaker Change: I appreciate the question, and I would say that, you know, certainly, you know, as we come through this.
Speaker Change: Inflationary period over the last couple of years.
Speaker Change: We were a little bit upside down for a period of time on price versus cost. Today, I'd say that equation is back balanced, which means not only are we recovering the inflation, but the incrementals.
Craig Arnold: Today, I'd say that equation is back balanced, which means not only are we recovering inflation but the incrementals that we need to maintain our margins, and so fairly balanced today between what we'd expect to see from the business in terms of the relationship between price and cost. On volume versus pricing, as I mentioned a moment ago, obviously, our pricing in the second half of the year will be less on a year-over-year basis than we saw in the first half, and that's simply a function of the timing of when prices went up last year.
Speaker Change: that we need to maintain our margins.
Andrew: And so fairly balanced today between what we'd expect to see from the business in terms of the relationship between price and cost.
Andrew: On volume versus pricing, as I mentioned a moment ago.
Andrew: Obviously, we, you know, our pricing in the second half of the year will be less.
Speaker Change: on a year-over-year basis than we saw in the first half. And that's simply a function of timing of when prices went in last year. So it's kind of in the base already.
Craig Arnold: So it's kind of in the base already. And so I would say today, you know, volume versus price, specifically, in terms of separating those two pieces, as we've said before, we don't provide that number. And we don't provide that number, you know, for a lot of the right reasons in terms of the variability, depending upon who the customer is, and inflation varies by customer, and our ability and need to recover varies by customer. We don't want to create an unintended problem for ourselves.
Speaker Change: And so I would say today, you know, volume versus price, specifically in terms of separating those two pieces, as we've said before, we don't provide that number, and we don't provide that number, you know, for, we think,
Andrew: A lot of the right reasons in terms of the variability, depending upon who the customer is and inflation varies by customer and our ability and need to recover varies by customer. So we don't want to create an unintended problem for ourselves by...
Craig Arnold: Separating the two, when that number could be different for one customer versus the other. To your point on, you know, this balance between, you know, pricing power today. You know, within the business, I'd say we continue to be in an advantageous position with respect to our overall demand versus capacity. And so I would expect, as we go forward, that we will continue to be in an advantageous position.
Andrew: Separating the two, when that number could be different for one customer versus the other.
Andrew: To your point on, you know, this balance between, you know, pricing power today.
Andrew: You know, within the business, I'd say we continue to be in an advantageous position with respect to our overall demand versus capacity.
Andrew: And so I would expect, you know, as we go forward, you know, that we continue to be in an advantageous position. What we've said historically and continue to believe that we have tremendous opportunities to expand our margins by running the company better.
Craig Arnold: We've said historically and continue to believe that we have tremendous opportunities to expand our margins by running the company better. And as we think about the margin expansion that's in front of us, and there are plenty of opportunities to expand margins everywhere, it will largely come from our abilities to run the company better. Quick follow-up, electrical global. The rest of the year, revenue growth organically has to accelerate to up five after the first half was two and change. Is that simply the function of the easier comps in the second half, or is there anything you're seeing that would suggest that could accelerate?
Andrew: And as we think about the margin expansion that's in front of us, and there is plenty of opportunities to expand margins every place, it will largely come from our abilities to run the company better.
Speaker Change: A quick follow-up, Electrical Global.
Speaker Change: The rest of the year, the revenue growth organically has to accelerate to up five after the first half was, you know, two and change.
Speaker Change: Is that simply the function of the easier comps in the second half? Or is there anything you're seeing that would suggest that could accelerate?
Craig Arnold: No, and it's largely a function of comps, you know, the European market, you know, the electrical European market, if there's been a market that's been a little bit of a disappointment this year relative to our expectations. Coming into the year, it would have been the electrical business, specifically, in Europe that's embedded in our electrical global segment. Asia is doing great. We're doing fine in our Geist business, but we have had some slightly weaker results in markets specifically. And you see all the data coming out of Europe, so we're not at all unique in that regard.
Speaker Change: No, and it's largely a function of comps, you know, the European market, you know, the electrical Europe market, if there's been a market that's been a little bit of a disappointment this year, relative to our expectations, coming into the year, it would have been the electrical business specifically.
Andrew: In Europe , that's embedded in our electrical global segment.
Andrew: Asia is doing great, you know, high single-digit growth. We're doing fine in our Geist business, but we have had some, a little bit weaker results in markets specifically. And you see all the data coming out of Europe , so we're not at all unique in that regard. But we think pretty much it's really a function of comps.
Andrew: More than it is we expect a second half turnaround in the European electrical market
Operator: But we think pretty much it's really a function of comp. More than that, we expect a second half turnaround in the European electrical market. Thank you. The next question is from the line of Dean Dray from RBC. Please go ahead. Thank you. Good morning, everyone. Good morning, Deane.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question is from the line of Deane Dray from RBC. Please go ahead.
Operator: Hey, wanted to stay in electrical global if we could. And could you put the spotlight on your data center business outside of the US? Talk about wind rates and market share? Because, you know, how much of that is in that segment today?
Dean Joy: Thank you. Good morning, everyone.
Dean Joy: Good morning, Dean.
Dean Joy: Hey, we wanted to stay in electrical, global, if we could, and...
Dean Joy: Could you put the spotlight on your data center business outside of the U.S., talk about win rates and market share?
Speaker Change: because
Speaker Change: And, you know, how much of that is in that segment today? And I would have thought that would be lifting the growth rates a little bit more, but just some color there would be helpful.
Craig Arnold: And I would have thought that would be lifting the growth rates a little bit more, but just some color there would, And I appreciate the question, Deane. I will tell you that today, very much consistent with, The Balance of the Eaton Franchise. We don't today have, as much, let's say, electrical content, in a data center in Europe as we would have in North America. And that's just largely a function of the share position that we have in North America, in not just UPSs but in electrical switchgear, products like transformers.
Speaker Change: Appreciate the question, Dean. I will tell you that today very much consistent with
Speaker Change: The Balance of the Eaton Franchise.
Speaker Change: We don't today have
Speaker Change: Let's say electrical content.
Speaker Change: in a data center in Europe as we would have in North America. And that's just largely a function of the share position that we have in North America, and not just UPSs, but in electrical switchgear, in products like transformers.
Craig Arnold: And so in the North America market or in the American market, we have the ability to sell a complete suite of solutions end-to-end into data centers. And in the European market, we don't have the same strength. We have the same strength, for example, in UPS, but we wouldn't have the same, let's say, position of strength in the electrical switch.
Speaker Change: And so in the North America market or in the Americas market,
Speaker Change: a complete suite of solutions end-to-end into data centers. And in the European market, we don't have the same strength. We have the same strength, for example, in UPS, but we wouldn't have the same, let's say, position of strength in the electrical switchgear.
Craig Arnold: The other thing I want to add is that when you look at the data center market in Europe as a percent of the total market, it represents a much smaller share of the total business. And so those are really the factors that I'd say are really holding back the relative results of our global business versus America's one, just the breadth of the portfolio. Secondly, the size of the relative market.
Speaker Change: The other thing I want to add is that, when you look at the data center market in Europe as a percent of the total market, it represents a much smaller share of the total business.
Speaker Change: And so, those are really the factors that I'd say are really...
Speaker Change: [inaudible]
Craig Arnold: As you know, historically, Europe has been much more focused on manufacturing and, you know, Machine M-O-E-M in the data center space. That's really helpful, Culler, and thanks for that distinction. And just sticking with Data Center, if you think about your backlog today on your quote activity, how far out are the deliveries? I would imagine it's over two years now, especially in transformers, but any kind of color there.
Speaker Change: You know, M-O-E-N in the data center space.
Culler: That's really helpful, Culler, and thanks for that distinction. And just sticking with Data Center, if you think about your backlog today on your quote activity,
Speaker Change: How far out are the deliveries? I would imagine it's over two years now, especially in Transformers, but any kind of color there. Please.
Craig Arnold: Yeah, you know, I'd say that... You know, when you think about it, you know, I guess it depends upon your perspective on, you know, I think I told you the industry in data centers is looking at perhaps as much of as an eight-year backlog, less fundamentally. We find a way collectively across the industry to step up what we do in building out data centers at a much faster rate. It's one of the reasons that, for example, we talked about the deal that we did in Europe to do these EPODs, which is a standardized modular design, something that enables you to stand up a data center in a much shorter period of time than we have historically. So I think the question becomes, as I think about Eaton, in terms of our constraints, the bigger constraints will not be what comes from Eaton.
Speaker Change: Yeah, you know, I'd say that...
Speaker Change: You know when you think about it, you know, I guess depends upon your perspective on you know I think I told you the industry in data centers is looking at perhaps as much of as an eight-year backlog in less
Speaker Change: Fundamentally...
Speaker Change: We find a way, collectively across the industry, to step up what we do in building out data centers at a much faster rate. It's one of the reasons, for example, we talked about the deal that we did in Europe .
Speaker Change: You know, to do these EPODs, which is a standardized modular design, something that enables you to stand up a data center in a much shorter period of time than we have historically.
Speaker Change: So I think the question becomes as I think about Eaton
Speaker Change: In terms of our constraints, the bigger constraints will not be what comes from Eaton, it will largely be what comes from the industry and the industry's ability to find the land, to find the power, to build out the data centers at a...
Craig Arnold: It will largely be what comes from the industry, and the industry's ability to find the land, to find the power, to build out the data centers at a rate, faster rate than they have historically. So we're going to be fine in terms of what we do. We're not going to be the bottleneck for the industry, but the industry will have challenges keeping up with this growth rate. Thank you. Thank you. I appreciate it.
Speaker Change: Faster rate than they have historically.
Speaker Change: So we're going to be fine in terms of what we do. We're not going to be the bottleneck for the industry, but the industry will have challenges to keep up with this growth rate.
Operator: Thank you. The next question is from Julian Mitchell from Barclays. Please go ahead. Hi, good morning.
Speaker Change: Thank you.
Speaker Change: Thank you. Appreciate it.
Speaker Change: Thank you. The next question is from Julian Mitchell from Barclays. Please go ahead.
Operator: Maybe just a question around the electrical sort of products side of things. I think that, you know, when we look at that business, for example, in the Americas, it's been fairly sluggish in the last kind of nine months versus very, very high growth in systems. And there was maybe some de-stocking that had weighed on that, but that's now passed, and then, to a degree, a similar phenomenon on the global electrical side with weaker products and pretty good system growth.
Julian Matilfam: Hi, good morning. Maybe just a question on the electrical sort of products side of things.
Speaker Change: I think that, you know, when we look at that business, for example, in the Americas, it's been fairly...
Speaker Change: Sluggish the last kind of nine months versus very very high growth in in systems
Speaker Change: And there was maybe some de-stocking that had weighed on that that's now passed. And then to a degree a similar phenomenon in the electrical global side with weaker products and pretty good systems growth. So I just wondered sort of how you're thinking about that products piece from here. I think that the systems revenue growth we could sort of rightly or wrongly take for granted for a few quarters because of the very large backlogs. But products I suppose you have this mix of easier comps in the back half.
Operator: So I just wondered sort of how you're thinking about that products piece from here. I think that the systems revenue growth can sort of rightly or wrongly be taken for granted for a few quarters because of the very large backlogs. But products, I suppose you have this mix of easier comps in the back half, but also maybe the short-term macro numbers per the ISM this morning and so forth are worse.
Speaker Change: but also maybe the short-term macro numbers per the ISM this morning and so forth are worse. So maybe help us understand kind of how you see that product side of things revenue-wise in EA and EG playing out.
Craig Arnold: So maybe help us understand kind of how you see the product side of things, revenue wise, in EA and EG playing out. Hey, appreciate the question, Julian, and I know it's Time Off Times Challenge is a really good insight into what's going on in these individual markets. And as I think most of you are aware, we really don't look at our business as a business anymore by products versus systems.
Speaker Change: Yeah.
Speaker Change: Hey, I appreciate the question, Julian, and I know it's...
Speaker Change: Time off time challenge is really good insight into what's going on in these individual markets and as I think most of you are aware, we really don't look at our business anymore by products versus systems.
Craig Arnold: We really look at it largely in terms of the various end markets that we sell into. And to your point, Julian, there are certain end markets that we sell into that tend to be more product-centric versus system-centric. But we really do look at it by end market. If you think about an end market of residues, you know, the residential market, which today, you know, would account for, it may be, 12-13% of our total business, that market has clearly been slow. We think we've seen some evidence of bottoming in general, but that business today... Comps get much easier going forward. And we think, you know, perhaps with some.
Speaker Change: We really look at it largely around the various end markets that we sell into. And to your point, Julian, there are certain end markets that we sell into that tend to be more product-centric versus system-centric, but we really do look at it by end market. If you think about an end market of Reggie,
Speaker Change: the residential market, which today would account for
Speaker Change: 12, 13% of our total business. That market has clearly been slow. We think we've seen some evidence of bottoming in general, but that business today...
Speaker Change: Comps get much easier going forward, and we think, you know...
Craig Arnold: Cuts in the federal rate, the federal funds rate that we'll see business start to take off. But once again, it's a smaller part of the company. The same thing could be said for what's happening today and what we call MOEM.
Speaker Change: Perhaps with some, you know...
Speaker Change: Cuts in the federal rate to federal funds rate that we'll see that business start to take off But once again, it's a smaller part of the company They said the same thing could be said for what's happening today and what we call M OEM
Craig Arnold: You know, the machine builders, we do sell components into that market, and that market has been weak, especially in Europe, which tends to be more manufacturing-centric. Once again, has that market bottomed? We think so. The comps do get easier.
Speaker Change: You know, the machine builders, we do sell components into that market and that market has been weak, especially in Europe , which tends to be more manufacturing centric.
Speaker Change: Once again, has that market bottomed? We think so. The comps do get easier, so we'll just have to wait and see. But most of our businesses, if you think about it in the context of the end markets,
Craig Arnold: So we'll have to wait and see. But most of our businesses, if you think about in the context of the end markets that we sell into, be that data center, utility, industrial, commercial, institutional, which is the way we think about the business, we're not seeing any sluggishness. And obviously, whatever sluggishness we're seeing in these smaller pieces of the portfolio is being more than offset and overwhelmed by the megatrends and what's going on in the biggest part of our business.
Speaker Change: that we sell into, be that data center, utility, industrial, commercial, institutional, which is the way we think about the business.
Speaker Change: We're not seeing any sluggishness, and obviously whatever sluggishness we're seeing in these smaller pieces of the portfolio are being more than offset and overwhelmed by the megatrends and what's going on in the biggest part of our business.
Craig Arnold: So hopefully that's helpful to you in terms of, you know, as we think about it, it's really, if you want a proxy for products in the way you think about it, it's what's happening in res. And what's happening in, let's call it, M-O-E-M, machinery O-E-M, would probably be the best two proxies for products inside of Eaton. Yes, it has been slow, maybe we're reaching a bottom, but comps do get easier going forward.
Speaker Change: So hopefully that's helpful to you in terms of, you know, as we think about it, it's really, if you want a proxy for products in the way you think about it, it's what's happening in Resy.
Speaker Change: And what's happening in, let's call it, M-O-E-M, machinery O-E-M's, would be probably the best two proxies for products inside of Eaton. Yes, it has been slow. Maybe we're reaching a bottom. Comps do get easier going forward.
Craig Arnold: Thanks very much, Craig. And then just a sort of short-term question looking at maybe margins for a second. So I think the guidance seems to imply sort of midpoints and so on, and I'm aware there's some rounding, no doubt, but it seems to imply the operating margins are sort of flattish sequentially in Q3, I think, and then sort of flat year on year. And then in Q4, it looks like they're sort of flattish again, sequentially.
Speaker Change: Thanks very much, Craig. And then just a more sort of short-term question looking at maybe margins for a second. So I think the guidance seems to imply...
Speaker Change: It's sort of midpoints and so on and aware. There's some rounding no doubt, but it seems to imply the operating margins are sort of flattish Sequentially in in q3. I think and and then sort of flat year on year
Craig Arnold: So just trying to understand that because, normally, the operating margin goes up sequentially in Q3, down sequentially in Q4. And then, as we're thinking year on year, you know, your investments are stepping up a bit, that's crimping the firm-wide operating leverage in Q3. But it's sort of interesting that the margins are guided to be flat despite the 8-9% growth. Yeah, what I would tell you, you know, as we talked about this one a little bit already, Julian, is that we are investing. We are bringing on additional manufacturing capacity, and that brings on obviously start-up expenses, and it brings on depreciation. We are investing in commercial front-end resources to... potentially.
Speaker Change: And then in Q4 it looks like they're sort of flattish again sequentially. So just trying to understand that, because I suppose normally the operating margin goes up sequentially in Q3, down sequentially in Q4.
Speaker Change: And then as we're thinking year on year, understand your investments are stepping up a bit, that's crimping the firm-wide operating leverage in Q3, but it's sort of interesting that the margins are guided to be flat despite the 8-9% growth.
Speaker Change: Yeah, you know, what I would tell you, you know, as we talked about this one a little bit already, Julian, is that we are investing.
Speaker Change: We are bringing on additional manufacturing capacity and that brings on obviously start-up expenses, it brings on depreciation, we are investing in commercial front-end resources to essentially
Craig Arnold: Deal with the growth that we're seeing. And so, yeah, I mean, margins, you know, on balance in the back half of the year, you know, flat. We'll see where we end up. But that's essentially our current view. And you know, if our team continues to execute as well as they have, there could be some upside there. But that's our current view from where we sit today. Thanks very much.
Speaker Change: Deal with the growth that we're seeing and so yeah, I mean margins, you know on balance in the back half of the year
Speaker Change: We'll see where we end up, but that's essentially our current view, and if our team continues to execute as well as they have, there could be some upside there, but it's our current view from where we sit today.
Operator: The next question is from Nicole DeBlase from Deutsche Bank. Please go ahead. Yeah, thanks. Good morning, guys. Good morning.
Speaker Change: Thanks very much.
Speaker Change: Thank you.
Speaker Change: The next question is from Nicole DeBlase from Deutsche Bank. Please go ahead.
Operator: So another really strong set of results. I guess maybe the one blip was aerospace margin down year on year. I guess I'm a bit surprised that you maintained the full year guidance, because it embeds a pretty big step up in the second half.
Nicole Debray: Yeah, thanks. Good morning, guys. Morning.
Nicole Debray: So, another really strong set of results. I guess maybe the one blip was aerospace margin down year on year. I guess I'm a bit surprised that you maintained the full year of guidance. It embeds a pretty big step up in the second half. So, can you just talk about what happened with aero margins in the second quarter and then what drives the implied step up in the back half? Yeah. Okay.
Craig Arnold: So can you just talk about what happened with aero margins in the second quarter and then what drives the implied step up in the back half? I appreciate the question, Nicole. And that's largely because there's such a big difference between, you know, margins and aftermarket. Margins on OEs, and which OE platform do you ship and how much in a given quarter? So I would just say I would just think about it as noise. We're confident in the second half outlook. It's based upon, you know, essentially, you know, orders that we have in-house.
Nicole Debray: I appreciate the question, Nicole, and I would just say that, you know, in aerospace, you know, margins can be lumpy.
Nicole Debray: And that's largely because there's such a big difference between, you know, margins and aftermarket and...
Nicole Debray: Margins on OEs and which OE platform do you ship and how much in a given quarter. So I would just say, I would just think about it as noise. We're confident in the second half outlook based upon, you know, essentially, you know,
Craig Arnold: Pretty clear visibility, so we're confident in the outlook, and I would just look for the noise in the quarter and attribute it largely to, yes, we had some operating inefficiencies in the quarter. They will go away, but mostly it's a function of mix that we ship in a given quarter that really drives the margins. Got it.
Nicole Debray: We have a lot of orders that we have in-house and have pretty clear visibility so we're confident in the outlook and I would just look through the noise in the quarter and attribute it largely to, yes we had some operating inefficiencies in the quarter, they will go away, but mostly it's a function of mixed
Nicole Debray: that we ship in a given quarter that really drives the margin outline.
Craig Arnold: That makes sense, Craig. And then I guess on the Nordic E-Pod investment, is there an opportunity to bring that modular solution to the U.S., or do you view that as more as a European-centric opportunity? Thank you. We'll have to see how the North American market evolves. I mean, modular solutions, we see them in Europe for sure. We see them in Asia.
Nicole Debray: Got it. That makes sense, Craig. And then I guess on the Nordic E-Pod investment, is there an opportunity to bring that modular solution to the U.S., or do you view that more as a European-centric opportunity? Thank you.
Speaker Change: You know, we'll have to see how the North American market evolves. I mean, modular solutions, we see it in Europe for sure. We see it in Asia.
Craig Arnold: You know, two regions of the world where we're tending to think more of this modular approach to data center build out. The U.S., especially hyperscale customers, tend to be more specific and customizable in their build. So we'll have to wait and see how that plays out, but as of today, it does tend to be more what's taking place outside of the U.S. versus what's happening in the U.S. Thank you. I'll pass it on.
Speaker Change: You know, two regions of the world where we're tending to think more of this modular approach to data center build out. The U.S., especially the hyperscale customers, tend to be more specific and customize in their build.
Speaker Change: So we'll have to wait and see how that plays out, but as of today, it does tend to be more what's taking place outside of the U.S. versus what's in the U.S.
Speaker Change: Thank you. I'll pass it on.
Operator: Thank you. And the next question is from Scott Davis from Elias Research. Please go ahead. Hey, good morning slash afternoon. I think it just turned into afternoon.
Speaker Change: Thank you.
Speaker Change: And the next question is from Scott Davis from Alias Research. Please go ahead.
Scott Davis: Hey, good morning-slash-afternoon. I think it just turned afternoon. But anyways, good morning and congrats on the results. Thanks, Scott. Appreciate it.
Operator: But anyways, good morning and congratulations on the result. Thanks, Scott. I appreciate it for the last couple of years. Craig, a couple of small things. I mean, you quote the 40% win rate. I don't recall what that was historically, but if you went back like five years or something, would it be in that ballpark?
Craig Arnold: Is this meaningfully higher than that? That then maybe where you guys were historically? Yeah, I would say that the win rate, and once again, we're relatively early in the megaproject overall, with some 15% of them having started. And so it's a good start at 40%, and that would be, you know, higher than our underlying market share in North America, and so clearly we're encouraged by the start that we're seeing.
Scott Davis: last couple of years.
Scott Davis: Craig, a couple kind of small things. I mean, you quote the 40% win rate. I don't recall what that was historically, but if you went back like five years or something, would it be in that ballpark? Is this meaningfully higher than maybe where you guys were historically?
Craig: Yeah, I would say that the win rate, and once again, you know, we're relatively early, right, in mega projects overall, with some 15% of them having started.
Speaker Change: And so it's a good start at 40% and that would be, you know, higher than our underlying market share in North America. And so clearly we're encouraged by, you know, by the start that we're seeing. But I would say in general.
Craig Arnold: But I would say, in general, the bigger and the more complex the project in general, the more likelihood that Eaton is going to win, and our market share, in general, tends to be higher on larger, more sophisticated projects. And then, Craig, not that anybody's chasing you out the door, you've done an amazing job, but any update on the CEO succession? No, I'll just say thank you, first of all, for the acknowledge
Speaker Change: The bigger and the more complex the project in general, the more likelihood that Eaton is going to win and our market share in general tends to be higher in larger, more sophisticated projects.
Craig: Yeah, that makes a lot of sense. And then, Craig, not that anybody's chasing you out the door, you've done an amazing job, but any update on the CEO succession?
Craig: No, I'll just say thank you, first of all, for the acknowledgment.
Craig Arnold: It's been a pleasure and it will continue to be a pleasure. You know, as everybody on the call is probably aware, we have a mandatory retirement age of 65. I'll turn 65 in May of next year and I'll leave at the end of May.
Craig: It's been a pleasure and it will continue to be a pleasure, you know, as everybody on the call is probably aware. We have a mandatory retirement age of 65. I'll turn 65 in May of next year and I'll leave at the end of May. In the meantime, I'm continuing to enjoy the job.
Craig Arnold: In the meantime, I'm continuing to enjoy the job and having a lot of fun. You know, can't think of a better time, by the way, to be, you know, in my chair and be a part of these industries that we're associated with. We are working on that particular question, and we certainly will announce things as soon as the board is ready to share their feedback and their decision on who's going to be the next leader. Well, they'll have big shoes to follow in. So, best of luck. I'll pass it on.
Craig: And, you know, can't think of a better time, by the way, to be, you know, in my chair and
Craig: and be a part of these industries that we're associated with.
Speaker Change: Working on that particular question, and we certainly will announce things as soon as the board is ready to share their feedback and their decision on who's going to be the next leader.
Speaker Change: Well they'll have big shoes to follow in. So best of luck. I'll pass it on. Thank you.
Operator: Thank you. Thank you. The next question is from Nigel Coe from Wolf Research. Please go ahead. Thanks. Good afternoon, everyone.
Speaker Change: Thank you. The next question is from Nigel Coe from Wolf Research. Please go ahead.
Operator: And Craig, what an amazing career you've had. So I know you're not leaving. This is not the last call, but I just want to acknowledge you've done a fantastic job here. So on the investment spending, the billion dollars, two million square feet of additional capacity, can you just remind us where we are in that ramp up? You know, when does that capacity come online? And I know it's coming on in sequences, but you just give us a sense there. And this investment spends sort of sequentially in electrical Americas. Is that mainly depreciation, or are there some other cash expenses to think about as well?
Nigel Cole: Thanks, good afternoon everyone. And Craig, what an amazing career you've had. So, I know you're not leaving, this is not the last call, but I just want to acknowledge you've done a fantastic job here.
Speaker Change: So, on the investment spending, the billion dollars, two million square feet of additional capacity, can you just remind us where are we in that?
Speaker Change: And that wrap-up... you know, When does that capacity come online? I know it's coming on in sequences, but just to give us a sense there... And this investment spends...
Speaker Change: sort of sequentially in Electrical Americas.
Speaker Change: Is that mainly depreciation or are there some other cash expenses to think about as well?
Craig Arnold: Yeah, so the first question around when, and I'd say, you know, really, I would tell you that it really starts beginning in the second half of this year, with some of the investments that we announced in the early part of that. $750 million North America spend. It really starts to come online this year.
Speaker Change: Yeah, so the first question around when, and I'd say, you know, really, I would tell you that it really starts beginning in the second half of this year, where some of the investments that we announced in the early part of, you know, that.
Speaker Change: $750 million North America spend. It really starts to come online this year.
Craig Arnold: Some of the other investments that tend to be a little longer term, maybe towards the end or so of next year, or even some into 2026. But I think it really does begin in the second half of the year, where we're adding capacities that allow us to obviously address the overall market demand and some of the background. I'm not sure I understood the second part of the question, though. Maybe Nigel, you can remind us.
Speaker Change: Some of the other investments that tend to be a little longer term.
Speaker Change: maybe towards the end or so.
Speaker Change: of next year, or even some into...
Speaker Change: 2026.
Speaker Change: But I think it really does begin in the second half of the year.
Speaker Change: where we're adding capacity that allows us to obviously address the overall market demand and some of the backlog that we're seeing.
Speaker Change: I'm not sure I understood the second part of the question, though, maybe Nigel, you can run that. Yeah, just, yeah, so the spending, kind of the investment...
Craig Arnold: Yeah, just, yeah, so the spending, kind of the investment headwinds in electrical America that you're referencing, is that mainly depreciation on its new capacity, or are there other investments that we should think about as well? Yeah, no, no, there's certainly, it's depreciation. And then there's also the ramp-up cost, right?
Speaker Change: Headwinds and Let's Go Americas that you're referencing, is it maybe depreciation on its new capacity or are there other investments that we should think about as well?
Nigel Cole: Yeah, no, there's certainly, it's depreciation, and then it's also the ramp-up cost, right, when you ramp up a new manufacturing facility or a new line.
Craig Arnold: When you ramp up a new manufacturing facility or a new line, you know, there's obviously inefficiencies that you have to absorb until these lines come up and reach, you know, their targeted capacity levels. And so there's manufacturing inefficiencies, there's depreciation, and then there's investments that we're making in our commercial front end to really address some of this growth that we're seeing both now and into the future. Okay, my final question is, I guess, related in some ways, but, you know, the announcement by Cleveland Cliffs...
Speaker Change: You know, there's obviously inefficiencies that you have to absorb until these lines come up and reach, you know, their targeted capacity levels. And so there's manufacturing inefficiencies, there's depreciation, and then there's investments that we're making in our commercial front end.
Speaker Change: to really, you know, address some of this growth that we're seeing both now and into the future.
Speaker Change: Okay, my final question is, I guess, related in some ways, but, you know, the announcement by Cleveland Cliffs.
Craig Arnold: I can't believe I'm actually mentioning Cleveland Cliffs on this call, but they have announced a transformer manufacturing investment of $150 million for three-phase transformers, which I thought was kind of random, but I'd be interested to kind of get your view here in terms of kind of a new entrant in this market, how much capacity are we seeing coming online in transformers, and how long do you think this market is going to be undersupplied Are we still undersupplied for the next couple of years? I mean, any thoughts on that, Craig?
Speaker Change: I can't believe I'm actually mentioning Cleveland Cliffs on this call, but they have announced a transformer manufacturing investment of $150 million.
Speaker Change: three-phase transformers which
Speaker Change: I thought it was kind of random, but I'd be interested to kind of get your view here on in terms of, you know, kind of a new entrant in this market.
Speaker Change: How much capacity are we seeing coming online in transformers? And how long do you think this market is going to be under-supplied for? Are we still under-supplied for the next couple of years? Any of your thoughts there would be great.
Craig Arnold: Yeah, I mean, we've obviously seen the announcement as well from Cleveland Cliffs. They have not historically been a supplier to transformers into the market. They were, at one point, rumored to be partnering with another transformer manufacturer in that investment. I can just tell you it's based upon the size of the investment and what we know about transformer manufacturing. We're not worried about Cleveland Clifton and what amounts to a very modest, very modest investment in transformer manufacturing. So we're not; we've seen it.
Speaker Change: Yeah, I mean, we've obviously saw the announcement as well from Cleveland Cliffs. I mean, they...
Speaker Change: have not historically been a supplier to Transformers into the market. They, at one point, had rumored to be partnering with another Transformer manufacturer in that investment.
Speaker Change: I can just tell you, it's based upon the size of the investment
Speaker Change: We're not worried about Cleveland Cliffs and what amounts to a very modest, very modest investment in transformer manufacturing.
Craig Arnold: But we're not worried about it and don't think it's going to have any impact at all on our growth rate and very little impact on the industry given the size of the investment. You know, for how long? I'd say that, you know, we talk about these trends. And, as you can imagine, transformers go everywhere.
Speaker Change: But we're not worried about it. Don't think it's going to have any impact at all on our growth rate and very little of any impact on the industry, given the size of the investment.
Speaker Change: You know, in how long? I'd say that, you know, we talk about these trends, and as you can imagine, transformers go everywhere.
Craig Arnold: I mean, they go into data centers, they go into industrial buildings, they go into utility applications. And so the transformer demand that we're seeing today is comprehensive across every one of our end markets. And I would imagine what they're doing is focusing perhaps on maybe one of these verticals. I'm not sure.
Craig Arnold: But I don't see transformer demand and capacity coming into alignment for a number of years. I think that the market is going to be good for a long time. We'll have to wait and see how it all plays out.
Craig Arnold: And our markets, as we've articulated, are expected to continue to see very attractive growth for a long time. Thanks, Craig. Thank you. Our next question is from Joe O'Dee from Wells Fargo. Please go ahead.
Operator: Hi, thanks for taking my question. Actually, on that topic, Craig, could you just provide a little bit more detail on the $750 million spent on capacity in the Americas? Any perspective on some of the categories that are going to see some of the biggest capacity additions? And so what will be the step up in your transformer capacity, anything on switchgear capacity, just to better sort of understand where there are some of the more sizable investments?
Speaker Change: Hi, thanks for taking my question. Actually, on that topic, Craig, could you just provide a little bit more detail on the $750 million of spend on capacity in the Americas?
Operator: You know, I think the right way to think about that is that we're making an investment. In those product lines, and there's obviously a chart in the outbound commentary around the various businesses that are going to be impacted, but every place that we have capacity constraints today, or where we see capacity constraints over the next few years, we're making investments, and we're making those investments in line with our and our customers' medium and long-term outlook for what the demand will be, and, as I mentioned, in many cases. You know, getting customer commitments for the capacity that we're bringing on. And so lots of different products; lots of different businesses. It's difficult to really, perhaps, answer the question as precisely as you've asked.
Craig: or where we see capacity constraints over the next few years, we're making investments, and we're making those investments in line with our and our customers' medium and long-term outlook for what the demand will be, and including, as I mentioned, in many cases,
Speaker Change: And so lots of different products, lots of different businesses. It's difficult to really perhaps answer the question as precisely as you've asked it.
Craig Arnold: Other than to say, you know, we're making the needed investment, as I said in the last earnings call, we don't intend to be a bottleneck for the industry in terms of our capacity to support the growth outlook, and we're comfortable with what we're spending and where we're spending. And then I just want to ask about backlog. If you go back to last quarter, the backlog expected to ship in the next 12 months was up by 2 billion dollars, or 20% sequentially.
Craig: other than to say, you know, we're making the needed investments, as I said in the last earnings call, we don't intend to be a bottleneck for the industry in terms of our capacity to support the growth outlook and we're comfortable
Speaker Change: with what we're spending and where we're spending it.
Speaker Change: And then I just want to ask on backlog, if you go back last quarter, the backlog expected to ship in the next 12 months was up.
Speaker Change: like $2 billion or 20% sequentially.
Craig Arnold: And so, just curious in terms of meeting that demand, how much of that is dependent on capacity that would be coming on in the back half of the year, and then any specifics, you know, the order activity and the end markets that that was directed into with that 2 billion dollar increase in the next 12 months' backlog. Yeah, that's another difficult question to really piece that together in terms of how much of the specific backlog is tied to the capacity expansion.
Speaker Change: and so just curious in terms of meeting that demand.
Speaker Change: How much of that is dependent on capacity that would be coming on in the back half of the year, and then any specifics, you know, the order activity and the end markets that that was directed into with that $2 billion increase in next 12 months backlog?
Craig Arnold: The backlog is obviously quite large, and the backlog cuts across every one of our businesses, some of which are getting additional capacity, some of which are not. It's difficult to really answer that question, maybe in a satisfactory way, to really address that, other than to say, once again, where we are.
Speaker Change: Some of which are getting additional capacity, some of which are not.
Speaker Change: difficult to really answer that question, maybe in a satisfactory way to really address that, other than to say once again, where we have capacity constraints, where lead times have stretched beyond what we think are reasonable and
Craig Arnold: Capacity constraints, where lead times have stretched beyond what we think are reasonable. We're making those investments to get out in front of it, so that, you know, we can, you know, deliver, reduce our lead times to customers, and continue to grow. Difficult to really answer that question in the context.
Speaker Change: And we're making those investments to get out in front of it
Speaker Change: reduce our lead times to customers and continue to grow.
Craig Arnold: These investments, other than to say that if you think about it in, you know, and these are the incremental investments, most of the background information, Most of the backlog is not tied to these capacity investments. We talk about adding two million square feet of capacity impacting 25 of our sites. We have, you know, north of a hundred.
Speaker Change: But difficult to really answer that question in the context of
Speaker Change: These investments other than to say that if you think about it in you know, and these are the incremental investments
Speaker Change: on a relative basis, most of the backlog.
Speaker Change: Most of the backlog is not tied to these capacity investments, right? We talk about, you know, adding 2 million square feet of capacity, impacting 25 of our sites, you know.
Speaker Change: We have, you know, north of a hundred sites.
Craig Arnold: So I would just say that most of the investments, most of the backlog, is obviously going to be satisfied by our facilities where we don't necessarily need to add capacity, but we have some real tight spots in some of the businesses, and that's what we're addressing. Got it. I appreciate it. Okay, thank you.
Speaker Change: So I would just say that it's, you know, most of the investments, most of the backlog
Speaker Change: You know is obviously going to be satisfied by
Speaker Change: our facilities where we don't necessarily need to add capacity, but we have some real tight spots in some of the businesses.
Speaker Change: And that's what we're addressing.
Speaker Change: Got it. I appreciate it.
Operator: Thank you. And the final question in queue is from Bill Fuller from Berenberg. Please go ahead.
Speaker Change: Okay, thank you.
Speaker Change: Thank you. And the final question in queue is from Bill Fuller from Berenberg. Please go ahead.
Operator: Oh hi, thanks for squeezing me in. You used to talk, Craig, about an investment or portfolio strategy of... I think it was growing the head and shrinking the tail, I think that was the phrase you used to use, but essentially throwing all the weight of investment dollars behind the most attractive end markets and dining back or exiting the least attractive parts, and obviously, that's worked really well. I think it's clear today what the best bits are, but is there much happening now on the tail? Is there a tail? Or are there any less?
Bill Fuller: Oh hi, thanks for squeezing me in.
Bill Fuller: You used to talk, Craig, about an investment or portfolio strategy of...
Speaker Change: I think it was growing the head and shrinking the tail. I think that was the phrase you used to use. But essentially throwing all the weight of investment dollars behind the most attractive end markets and dining back or exiting the least attractive parts. And obviously that's worked really well.
Speaker Change: I think it's clear today what the best bids are, but is there much happening now on the tail? Is there a tail or are there any less strategic parts of the business where we might expect potential disposals? Thanks.
Craig Arnold: Strategic Parts of the Business, where we might expect to be. No, I appreciate the question and the short answer is... Absolutely, there's a tale, and there's a tail everywhere.
Speaker Change: No, I appreciate the question, and I...
Speaker Change: The short answer is, absolutely there's a tail.
Craig Arnold: So we posted close to 30% margins in our Electrical Americas business this quarter. The electrical Americas business has a tail. So I would tell you that the way we really think about this is that every one of our business leaders has to be a portfolio manager. They have to be looking at... Products, Applications, Customers, Markets where we don't make the returns, we don't have the right growth prospects, and they need to be actively addressed.
Speaker Change: and there's a tail everywhere.
Speaker Change: You know, we posted close to 30% margins in our Electrical Americas business this quarter.
Speaker Change: The electrical America's business has a tale.
Speaker Change: And so I would tell you that the way we really think about this is that Every one of our business leaders has to be a portfolio manager. They have to be looking at
Speaker Change: products, applications, customers, markets where
Speaker Change: We don't make the returns, we don't have the right growth prospects, and to be actively addressing that.
Craig Arnold: And the inverse is also true, by the way; there's a head, too; there's places where we ought to be doubling down, making incremental investments, and really playing to win because we have the right technology, the right to win, great margins, great growth industries, and so I think the short answer is absolutely. We continue to do portfolio management every day, and there are opportunities across the company to be more focused in the places that we decide to play and where we think we can win. Thanks. And just to follow up, which I guess is an extension of that question.
Speaker Change: And the inverse is also true, by the way.
Speaker Change: in making incremental investments and really playing in the wind because we have the right technology, the right to win, great margins, great growth industries, and so I think the short answer is absolutely.
Speaker Change: We continue to do portfolio management every place.
Speaker Change: and there's opportunities every place across the company to be more focused in the places that we decide to play and where we think we can win.
Speaker Change: Thanks. And just to follow up, I guess, an extension of that question.
Craig Arnold: Broadly speaking, what's your current assessment of the attractiveness of commercial aerospace? I get that backlogs are high, traffic is secular, and so on, but airlines are profit warning daily at the moment, it seems. Airbus and Boeing have a lot of their own challenges to ramp up.
Craig Arnold: I know it's an attractive long-term industry, but what's your evolving view on, death of, the 3-year view on commercial aerospace and its relative attractiveness versus the wider portfolio? Hey, I certainly appreciate the question, right, given today some of the challenges that, you know, some of the OEMs are having. Why you'd ask the question in terms of how we feel about it. But I can tell you we think the aerospace, commercial aerospace industry, is an outstanding industry in the short, medium, and long terms. Why?
Speaker Change: 3-year view on commercial aerospace and its relative attractiveness versus the wider portfolio.
Speaker Change: Hey, I certainly appreciate the question, right,
Speaker Change: how we feel about it. But I can tell you, we think the aerospace, commercial aerospace industry...
Speaker Change: is an outstanding industry.
Craig Arnold: It has all the characteristics of businesses we like. It's a business that pays for technology. It's a business where you can differentiate. It's a business that has a very large aftermarket. It's a business that has a wide moat, where if you're on a platform, you're on a platform for life.
Speaker Change: in the short, medium, and long term, and why? It has all the characteristics of businesses we like. It's a business that pays for technology. It's a business where you can differentiate. It's a business that has a very large.
Craig Arnold: It is a long-term growth industry, and it's an industry where we can make very attractive returns. And so despite the fact that maybe a customer or two is going through a little bit of a short-term issue, the growth outlook for commercial aerospace continues to be one of the best growth outlooks that we have in the company. Aftermarket continues to be very attractive, and so, no, we like the space, and we like the fundamentals, and we think it's... That's great, thank you. Thank you. Okay, great.
Speaker Change: It is a long-term growth industry
Speaker Change: And it's an industry where we make very attractive returns.
Speaker Change: And so, despite the fact that maybe one of the, a customer or two is going through a little bit of a short-term issue.
Speaker Change: The growth outlook for commercial aerospace continues to be one of the best growth outlooks that we have in the company.
Speaker Change: Aftermarket continues to be very attractive, and so, no, we like the space, and we like the fundamentals, and we think it's a very attractive asset.
Speaker Change: That's great, thank you.
Operator: Hey, guys. We've reached the end of our call, and I appreciate everybody's questions. As always, the IR team is ready for any follow-up questions. Thanks for joining us. Have a great day.
Speaker Change: Thank you. Okay, great. Hey, thanks, guys. We've reached the end of our call, and I appreciate everybody's questions. As always, the IR team is ready for any follow-up questions. Thanks for joining us. Have a great day.
Operator: Thank you and that does conclude our conference for today. Thank you for your participation and use an AT&T teleconference. You may now disconnect. We're sorry, your conference is ending now. Please hang up. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Thanks for watching!
Speaker Change: Thank you. And that does conclude our conference for today. Thank you for your participation and use an AT&T teleconference. You may now disconnect.
Speaker Change: and many more. See you next time.
Speaker Change: and many more.
Speaker Change: Music Music Music Music Music Music Music Music
Speaker Change: [inaudible]
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Eaton second quarter 2024 conference call. At this time, all participants are in a listen only mode. Later, we will conduct the question and answer session. If you wish to ask a question, please press one then zero on your touchtone phone. You will hear acknowledgement that you have been placed in queue, and you may remove yourself from the queue at any time by repeating the one zero command.
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the Eaton Second Quarter.
Speaker Change: 2024 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you wish to ask a question, please press 1, then 0 on your touchtone phone.
Speaker Change: You will hear acknowledgement that you have been placed into queue and you may remove yourself from queue at any time by repeating the 1-0 command.
Yan Jin: Should you require assistance during the conference, please press star then zero, and an operator will assist you offline. And as a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Yan Jin. Please go ahead.
Speaker Change: Should you require assistance during the conference, please press star then zero, and an operator will assist you offline. And as a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Yan Jin. Please go ahead.
Yan Jin: Thank you all for joining us for Eaton's second quarter 2024 earnings. With me today are Craig Arnold, our Chairman and CEO, and Olivier Leonetti, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Craig, then he will turn it over to Olivier, who will highlight the company's performance in the second quarter. As we have done in our past courses, we will take questions at the end of Craig's closing comments.
Yan Jin: Hey, good morning. Thank you all for joining us for Eaton's second quarter 2024 earnings call. With me today are Craig Arnold, our chairman and CEO, and Olivier Leonetti, Executive Vice President and Chief Financial Officer.
Speaker Change: Our agenda today includes opening remarks by Craig, then he will turn it over to Olivier who will highlight the company's performance in the second quarter. As we have done in our past course, we will be taking questions at the end of Craig's closing commentary.
Yan Jin: The press release and the presentation we'll go through today have been posted on our website. This presentation includes Adjusted Earnings Per Share, Adjusted Free Cash Flow, and other non-GAAP measures. The reconciled and the, A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our commentary 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 forecast projections due to a wide range of risks and uncertainties, as described in our early release and presentation. With that, I will turn it over to Craig.
Yan Jin: The press release and the presentation we'll go through today have been posted on our website.
Speaker Change: This presentation includes Adjusted Earnings Per Share, Adjusted Free Cash Flow, and other non-GAAP measures. They are reconciled in the appendix.
Speaker Change: A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our commentary today will include statements related to the expected future results of the company and are therefore forward-looking statements.
Speaker Change: Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties.
Speaker Change: as described in our early release and presentation. With that, I will turn it over to Craig.
Craig Arnold: Thanks Jen. We'll start with some highlights on page three, and I'll lead off by noting that we delivered another strong call and we're pleased with the first half of the year. Our teams continue to deliver on our commitments, propelled by strong markets and good expectations. Exceeding Expectations and Consensus on Strong Revenue, margins, and earnings per share. We generated adjusted EPS of $2.73 in the quarter, an all-time record and up 24% from prior years. We also delivered record segment margins of 23.7%.
Craig: We'll start with some highlights on page 3, and I'll lead off by noting that we delivered another strong quarter and we're pleased with the first half of the year.
Craig: Our teams continue to deliver on our commitments propelled by strong markets and good execution.
Craig: exceeding our expectations and consensus on strong revenue, margins, and earnings per share growth.
Craig: We generated adjusted EPS of $2.73 on the quarter, an all-time record, and up 24% from prior year.