Q2 2025 Eaton Corp PLC Earnings Call
Thank you for standing by and welcome to the Eden second quarter, 2025 earnings results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session to ask a question during this session. You'll need to press star 1, 1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue simply press star 1 1 again, as a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program. Yeonjin, senior vice president investor relations. Please go ahead sir.
Good morning, thank you all for joining us for Eaton. Second quarter 2025 earnings call with me today are Paulo Ruiz chief executive officer and only way neonati Executive, Vice President and the Chief Financial Officer.
Our agenda today includes offering a remarks by Paulo.
Then he will turn it over to Aleve. Who will highlight the company's performance in the second quarter.
As we have done our past course, we'll be taking questions at the end of Apollo's. Closing commentary.
The price release and the presentation will go through today. Have been posted on our website.
This presentation, including adjusted earnings per share, free cash flow, and other non-GAAP measures, will include reconciliations. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today will include statements related to expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to the wide range of risks and uncertainties that are described in our earnings release and the presentation. With that, I will turn it over to Paulo.
Thanks Jan and thanks everyone for joining us. I'm really pleased with the first half of the Year, our team delivers strong set of results.
Among the Q2 highlights or adjusted earnings per share were up 8% versus Q2 2024. But segment, emergency is the Q2 record up 20 base points versus 2024
organic growth for the quarter was 8% driven by growth in the electrical Americas Aerospace and electrical global
On a rolling 12-month basis, our orders accelerated in electrical Americans. Now up 2%, from down 4%, last quarter,
Our electric America's backlog grew 17% year-over-year, heating a new all-time record.
Demand in our Aerospace, business remains very strong.
We have other growth of 10% on our only 12 months basis in a backlog, expansion of 16% year-over-year,
As a result, our book-to-bill for the combined segments increased to 1.1.
And we continue to deliver robust growth in the data center Market as well.
Our orders jumped approximately 55% and our sales were 50% up versus Q2 2024.
Highlight.
We are raising 2025 guidance for organic growth and adjusted DPS at the me point.
Olivia and I will dive into Q2 and the full year outlook in just a minute. But first, let's go to page 4 to have a conversation about our investments, to grow the company.
So on page 4, I told you at our investor conference in March, we laid down our bold new strategy.
It's anchored by 3 pillars, lead invest and execute for growth.
All 3 year design to accelerate our growth and create sustained value for our shareholders.
Those 3 pillars also align very well with the key Mega Trends with disgust for the last few years with you.
Today, we will focus on the middle pillar, invest for growth.
We executed strategic Investments this quarter with key Acquisitions breakthrough, Technologies, and transformative Partnerships.
This momentum is unlocking growth opportunities across our portfolio.
So we accelerating our focus on high growth and high margin markets to maximize the opportunities I had.
And let's start with an acquisition on page 5.
We signed an agreement in June to acquire Ultra PCS.
We are very excited about this deal and we expected to close in the first half of 2026.
Strengthens our position, the fast growing Next Generation Aerospace, and defense markets.
It ties in very well with our 2020, acquisition of carbon emission systems.
Ultra PCS expands our exposure to both the increasing global defense market and the expanding European defense market.
We anticipate cost and sales synergies, particularly from growing aftermarket services and securing new program opportunities.
We expect this business to pose High single digits through low teens growth over the next several years with immediate margin accretion to our Aerospace segment.
now, moving to slide 6, we highlight our most recent acquisition resilient Power Systems,
This is a great example of how Ethan is investing for growth through cutting-edge innovation.
This is a game-changer for data center, customers and other DC power applications.
Resilient makes solid state Transformer, technology to replace traditional copper windings. It is a critical building block in the future. High power AI Center designs as well as EV charging and battery storage.
Our customer cities capabilities critical and very, uh, very critical competitive Advantage for us.
It works accelerate and simplify the construction of AI data centers.
But we also investing for growth through strategic Partnerships. You see 3 examples here on page, 7, Nvidia, Simmons, energy and charge point
With partnering with Nvidia to transform the infrastructure of data centers in video understands, the design is cheap out and they recognize we are partnered. They need
We bring incredible expertise and capabilities in power distribution architecture, including higher voltage, DC power.
So we are developing power Management Solutions for their high density gpus and solving other problems in Iraq.
We've also joined forces with Siemens Energy. This partnership unlocks opportunities where utilities can't provide enough power to data center operators.
In this case, seems handles the on-site power generation and it to take care of the model or power of distribution together with deliver flexible distributed power with no dependency on the grid.
Which means shorter project timelines and greater operational flexibility to our customers.
Finally, we formed a partnership with charge point a leading, EV charging provider, and jointly, we are developing Global integrated. EV charging power distribution and software Solutions enables vehicle electrification at scale.
Broadly speaking, if I think about the portfolio, I hope you agree that we made strong progress in a short period of time.
So we demonstrated strong commitment and resolve to execute on our portfolio strategy, we will continue to Double Down investing on high growth and high margin businesses.
And I'm proud of my team that delivered on our short-term, commitments. And at the same time took decisive steps in our portfolio.
Now, I'll turn it over to Olivier who walk us through our financial performance. Olivier, thanks Paulo. I start by providing a brief summary of our Q2 results. We posted 8% organic sales growth at the end of our guidance range driven by broad strength in many of our end markets.
Which iterated record quarter revenue of 7 billion dollars and extended margins by 20 basis points to 23.9%.
Adjusted, EPS of 295 increased by 8%, which is at the end of our guidance range.
Now, let's move to the segment details.
On slide 8, we highlight the electrical America segment. The business continues to execute at a high level and delivered, another record quarter.
Organic sales. Growth of 20% was driven primarily by strength in data centers up. About 50%, along with strength in commercial, and institutional and markets.
This represents the 11th consecutive quarter with 25 or more group on the 2-year stack basis.
Operating margin of 29.5% was down 40 basis points versus the prior year. Due to dilution,
On a dollar basis and higher cost to support growth initiatives.
Orders accelerated.
to up 2% on a trailing 12 months basis from done for percent with particular strength in the data centers up about 55% in the quarter,
this represents a strong acceleration with quarterly orders of sequentially, by more than 20%.
Within the data center space. I highlight that there is particular strength from multi-tenant data center customers, which is consistent with the strategy. We communicated earlier this year.
As including the lumpiness from a large multi-year data, center order in q1 2024.
orders for the segments were up 11% accelerating from 4% last quarter on a rolling, 12 months, adjusted basis,
Data center orders were up 23% on the same basis.
Even with record sales.
Book to build increased to 1.1 with 17% growth in our large 11.4 billion dollars backlog. Providing strong visibility for our organic growth in 2025 and Beyond.
Our major project negotiations pipeline Q2 was up 31% versus prior year, remaining at a high level up, approximately 60% since Q2 2023.
Mega projects remain strong, with 65 project announcements at a value of $333 billion on a year-to-date basis.
The U.S. economy's mega project backlog is at $2.4 trillion, up 31% year-over-year.
To about 50% of the projects have started, which still provides a multi-year Runway.
The acquisition of fiber bond closed on April 1st and the business is off a great start in our portfolio exceeding our initial expectations for the quarter.
Now, we'll summarize the results for our electrical Global segment.
Total growth of 9% included, organic growth of 7% and 2 points FX Tailwind.
We have strength in Data Center and machine. Um and markets.
We saw continued strength in APAC, posting double digit, organic growth and ongoing recovery in mea up meet single digits, organically.
operating margin of 20.1% was up 110 basis points over prior, year driven primarily by sales growth and operating efficiencies
Orders were down 1% on the holding 12 month basis with high single digit growth in APAC.
Backlog increased by 1% from the prior year while book to be.
Booked to bill remained at 1 on a whole, hauling a 12-month basis.
Before to move.
To our industrial businesses. I like to briefly recap the combined electrical segments performance for Q2. We posted organic growth of 10% and segment margin of 26.3% which was up 30 basis points over prior year.
On a holding 12 month basis, orders were up 1% and our book book to be ratio for our electrical sector remains above 1.
Over 1 overall. We are very pleased with the electrical businesses execution, in the first half of the year and remain confident in our position for growth going forward.
Page 11 highlights our Aerospace. Segment organic sales, growth of 11% remained at the at a high level and resulted in a all-time record sets.
We had growth in all markets, and in particular, strengths in defense and the commercial aftermarket.
Operating margin expanded by 70 basis points to 22.2%, driven primarily by sales growth.
On a rolling 12-month basis orders. Increased 10% with growth in all segments and particular strength in calm in defense, OEM up 25%.
At 1.1 resulting in backlog, increase of 16% year-over-year and 3%. Circum sequentially.
Overall iOS space posted a solid first, half remains well positioned going forward and we are very pleased to have signed the agreement to acquire Ultra PCS, as parallel described.
Moving to our vehicle segment on page 12 in the quarter, the business declined by 8% on the total and organic basis. Primary driven by weaknesses in the North America truck Market.
Despite Topline weaknesses the team managed to deliver solid margins of 17% up from 15.5% in q1.
On page 13, we show results for our e-mobility business.
Over a new decreased 4% from 7 lower organic partially offset by 3%. Favorable effects.
Operating loss was 10 million dollars.
Now, I will pass it back to Paulo to go over our Market assumptions and guidance.
Thanks, Olivia, strong results in Q2 and thanks for helping me shaping, the portfolio.
Um, moving on to the assumptions for the year, here on page 14 is our view of Eaton's and market growth. We see no material change in our end markets from the last quarter.
Most of the end markets are growing fast. The app arrows, represent, 80% of our Revenue over 80% of our Revenue. So we have many paths to growth and we believe it's sustainable.
And we see positive development in the data centers and defense Aerospace versus past quarter. While the other parts that aren't growing like residential internal combustion, engine, live vehicles and commercial vehicles, are the smallest part of the company.
We are confident in our end Market positioning to deliver differentiated growth this year.
Here on page 15 is our updated guidance for the year for organic growth and operating margins big picture. We are raising our guidance for the year on both.
So let's start on the middle column, organic growth. We increasing our guidance here by 50 base points to arrange of 8.5 to 9.5%,
By segment, we've raised electrical Americas by 50 base points, electrical Global by 100 base points and Aerospace by 200 base points.
Meanwhile, the growth of vehicle in Mobility are weaker than prior expectations from challenging market market conditions, as you know,
Now for margin guidance. As you see, our guidance is 24.1% to 24.5%. So if we also increase our guidance range by 10 basis points by segment, we've raised our expectations for both Electrical Americas and Vehicle by 20 basis points.
But it's partially offset by lower margins in the e-mobility business.
Moving to page 16. Here is our outlook for Q3 and our updated guidance, guidance for the year.
for the upcoming quarter, we see EPS of
3.01 cents to 3.7 cents.
And we see organic growth between 8 and 9%.
And the segment operating margins between 24.1 to 24.5% for the year. We are raising our just DPS guidance to a new range of $11.97 to 12.17% growth in earnings per share at the midpoint
I will close with a quick summary on page 17.
We had a great quarter.
Record Revenue, segment, profit, and margins.
We see order acceleration increased in negotiation Pipeline and strong growth in our backlog.
This gave us the confidence to raise our growth.
And earnings guidance for 2025.
And we invest in our future growth as well. As we are uniquely positioned as a growth company with a broad portfolio.
Bought online. We are delivering our financial commitments in 2025, and we are well positioned to deliver on our ambitious. 2030 growth plan.
We believe our best years ahead of us.
And with that, we are happy to take your questions now.
Thanks. You know, the ones for your cooperation with that, I will turn it over to operator to give you guys the instruction.
Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1, 1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue. So, we press star 1 1 again. Our first question comes from the line of Joe Richie from Goldman. Sachs your question, please.
Uh, I think hey guys, good morning.
Good morning. Good morning, Joe.
Yeah, so I want to I want to start out ordering um so so clearly like look you saw a little bit of a rebound in electrical America's orders up this quarter versus down last quarter. I'm just curious as you kind of think about the rest of the year, what what is your expectation for electrical America's and Global orders and then similarly, you know, clearly your backlog continues to grow, that's giving you some more visibility if you can touch on the backlog as well, that would be great.
Okay. Thanks Joel. Um, so we are really um, we have a very strong quarter before orders strong momentum. Uh and we also see a much stronger negotiation pipeline so that gives us strong visibility into key 3 orders as well, especially in electrical America's. So as we have specific projects we are tracking. And negotiating today we expect this trend to continue to accelerate in Q3
Um, and then if you asked about the the the backlog here, uh, it's too early to call. But, based on this performance, we can can confidently say that, we're going to have a book to view higher than 1 for the year.
Okay, great. Uh that's a great follow and if I could maybe just ask a follow-up to what you just said. If if you think about like the different end markets, clearly data centers have been strong. Um, if you backed out your data center orders, this specific quarter were calculating that like the rest of EA was probably down somewhere in like the high single digits order of magnitude, is that just a function of comps and that strength that you're seeing in 3 Q is are you seeing strength Beyond data centers?
So the answer is yes to both. Uh, so if you extract the, the large q1 order, we had in 2024 the electrical America's orders are up 11% on the 12-month basis. So the underlying business is really strong. We always point to, uh, 12 months rolling because those big orders can be really lumpy. So that's, that's 1 reason to to say that. Um, and we see also uh strength in other markets. Um, we going to uh, we're going to see big orders coming out of the data center as well. Um, and we are doing well in commercial institution and we also winning in other markets, like utilities,
And so on. So there's more than just data center. But data center with big orders changed to move the the the the media quite well.
Thank you. And our next question comes from the line of Sabrina Abrams from Bank of America. Your question, please.
you might, oh,
Is it Andre oven? Hello.
Yes, your line is open. Oh yeah, yeah, we can hear you.
Yeah, yeah. Uh, hi. It's, it's Andrew Oen. Uh, just uh, the question on, um, Electrical Americas and just generally what's happening with the market share?
Uh, do you think, uh, electrical America's has been gaining market share in the US and just sort of following up on Joe's question, you know, maybe more around here. Uh, if you are getting share, what end markets.
Yeah, no. Thanks Andrew for the question. The short answer is. Yes. Uh, we the market data, we see today points to market share gains in North America, in the number of, uh, end markets and the key proof Point. Uh, we shared the data center performance. Uh, the business grew at 50% where we estimate the market to be around the low 30s, uh, year-over-year. And we believe, as we put more capacity, online.
In the second half that this trend will be favorable not only towards data center but other end markets as well.
Uh excellent and just maybe you highlighted Acquisitions and just on data centers uh you know uh fire Bond and resilient uh can you just please recap uh your data center strategy uh in regards to both gray space and white space. How do you see it? Going forward. Thank you.
Know, we we proud ourselves to have a broad and deep portfolio for both the green, the white space and we have a comprehensive strategy and our starting point. Even before those moves was already a very strong 1 but we keep strengthening our position as a company listening to our customers and we want to help them with the biggest. Um, I would say pain points The Experience today, the biggest bottlenecks and I can list those bottlenecks to be the power availability, the speed that they have to build the data centers and also they're looking at increasing their Returns on their Capital employed. So we are looking always for opportunities to make our customers more successful here. So addressing each 1 of those, the partnership with Siemens energy helps with the power of bottleneck that I mentioned before, our fiber bond acquisition. That means modeler solutions, for equipment addresses. 2 pain points 1 is the speed of construction and the other 1 is the higher Returns on Capital.
and what I mean by this is that when you use models, you need less specialized crafts,
Uh in the data center itself to build the data center. So it's faster and removes the labor shortages. And at the same time when you place those models outside the data center, you increase the space for the service inside. So the revenue per square foot also goes up. So that's the second pain Point. Our customers have. And I think this acquisition clovers that
But we also see with the AI adoption that increased power density in the white space will bring a number of opportunities for Ethan to provide sophisticated Technology Solutions in that space. So we partner with Nvidia to help our customers with optimized designs from the chip out.
And recently, we also announced the acquisition of resilient power, uh, and that put us in a position to offer this C, power conversion at scale, right from the utility field, all the way down to the gpus. So, we have a strong position before Andrew and I think after those moves, our position is much stronger and we we consider ourselves to be the only company in the data center space. That can go all the way from the utility down to the chip. So if we have a good position before now, it's even stronger.
Thank you.
Thank you. Thank you.
And our next question comes to the line of Chris Snider from Morgan Stanley. Your question, please.
Thank you. I wanted to follow up on, um, electrical America's orders which obviously show, nice sequential Improvement. So, I understand the company only discloses orders on a trailing 12-month basis, but our math takes Q2 up, you know, maybe in that 25% year-on-year range. So, I guess is this the right bar Ballpark? And it does seem to imply pretty nice order growth outside of uh Data Center. Thank you.
Yeah so we we understand Chris that uh we don't share that you guys calculate based on the information we share you on the right ballpark. Uh it's around 25% uh growth accelerating well and we also see growth in other markets as well as not only about data center.
Yeah, to to compliment on this and and and we said it, uh, earlier on, we are starting to see also some uh, green shoots in the short cycle that was a headwind to the port of for your starting to turn positive. As we said in our prepared remarks,
Cni commercial, and and institutions was is very strong and utility was as well. So, you see today, many in markets, uh, being driving growth for our company and the industry.
Uh, thank. Thank you, appreciate that. And if you look at the America's organic guide, it calls for better growth in the back half, uh, you know, versus what we got in the first half, um, is that just a function of orders getting better? Um, or is there also maybe some volume unlocked from the capacity you guys are adding or, or maybe even price realization on the back of the Tariff? Please let me kind of talk about that. The implied Step Up in growth as the year goes on. Thank you. Yeah. Yeah. Chris I think that the the biggest um contributor to the growth in electrical America is the capacity we're putting online in the second half.
We announced those uh, Investments uh uh since um a couple of quarters is not a couple of years and this capacity is coming online as we speak. And the second half, we're going to see most of it for the year. So that's the biggest contributor to the acceleration of growth.
Thank you, appreciate that.
Question please.
Hey thanks. Good morning, everyone.
Um, hi John. Hi, I'll come back to electrical America is also. Um, just trying to get my head around, um, you know, the strengths and data center, right? I mean, um, if data center and distributed, it are 17% of eaten, right? That makes it 24 or 25% of of electrical. So, you know, it, it sounds like all the growth really, you know, um, was in data center in the quarter.
Uh, can you just maybe speak to that? I get residential was probably weak; was something else weak offsetting maybe the utility strength? Maybe just unpack those moving pieces for us, if you could.
Yeah, so so first of all, to clarify the data center data that we gave is data set to Pure data center is not including distributed it, right? So it's not to take the 17%, um, and you're right. There's more to it, uh, than data center only. We see, um, middle sink, um,
High single digit, uh, growth in utilities for the Americas. For example, we see also, um, you know, recovery in some of the short cycle businesses we had. So it's not only about data center in this quarter and moving forward to Olivier's point, on short cycle, we saw uh, you know, a a change, not only in Revenue quart of a quarter, where we see, uh, the short cycle business,
Business turning positive in Q2, but the order is also, in fact, it, uh, very positively, especially the OEM, uh, Machinery, OEM orders jumped, uh, nearly 30% in the quarter. So that with all of the puts and takes takes the the 12-month basis orders for the short cycle to, to meet single digits for the 12 months rolling. So there's more to it and I would say, uh, for the overall company as well. If you look at Aerospace, the Aerospace growth is um, almost a quarter of Ethan's growth, right? And it's been consistent quarter of a quarter. And we have a couple of businesses that actually declining with the market, which are vehicle and immobility. So overall, we have different, um, areas of growth, um, it's aligned with the market and we are gaining share in most of them.
Great. Uh, and then just on Fiber Bond, it looks like revenues are coming in much stronger than you anticipated. I think the trailing 12-month revenues as of February were about $378 million, and now you're run-rating it looks like $560 million or so. Um, so maybe just speak to that, and also specifically, I'm wondering how much Fiber Bond backlog came into the backlog number that you shared with us today. There's got to be some inquisitive backlog, I would imagine.
Yes. So uh, first of all, we are really happy with fiber bond. Uh, we, the executing really well. So we are confident that we can get more volume out of, the, their facility. So, this is the reason why we increased, uh, the Outlook, um, and they also winning new businesses. They're winning new orders because the value proposition to my earlier point is a strong 1 for data center, operator. So, um, it's really well done. Um, the process is going well Integrations going well that performing at high level
And then if you think about um, you know, the second part of your question, um, if you think about the other areas of of growth here, um, on the backlog, we disclosed the backlog growth being organic. So we want to talk about the the backlog growth for Americans is the organic number and then fiber bond brings other 1.2 billion dollars on top of it.
And uh, for a period of time, so we have integrated fiber bond as part of our go to market. So it start to be difficult today to differentiate fiber bond alone, to to fiber bond within on electrical America. So, the lines are starting to be very, very blurred.
Yeah, yeah. Thank you.
Thank you. And our next question comes from the line of Steve Tusa from JP Morgan your question, please.
Hi, good morning.
I see.
Um, sorry what, what was that? EA backlog organic again, first of all and then um, secondarily I think, uh, on an organic basis here. Your TTM for total electrical orders was still down modestly. Um, do you expect that to go positive in the next couple quarters?
You raised its 17% for electrical Americans. The growth.
That's organic. And then you said you
Total backlog. That's total includes. Yeah. Okay. The the fiber bond? We talked about earlier. Yeah got it got it? Yep that makes sense. Got it got it. Okay sorry go ahead.
Yeah. And then what was your second part of your question again?
Yeah, the the uh I think uh we have the total uh TTM for electrical total electrical down modestly uh on an organic basis in the quarter. Do you expect that to go positive in the next couple quarters?
TTM, are you talking about? Are you talking about orders?
Yes, total. Um, electrical orders in global and Americas.
We do not see today, if you look on the TTM basis, straight 12 months, uh, the orders turn positive, uh, for the total sector and for electric current America that were up 2% when they were in the prior quarter on the same basis down 4%, Steve.
Okay, so you're already you. You so, you're already comping positive on an organic basis. TTM is your point? Yes.
Yeah, sorry, it's a little bit. Sorry, it's a little bit tough to tease out and then just secondarily in in the second half. Are we seeing, um, the impact of that? Uh, production Step Up, um, in 3 and 4 q and then, how does that, you know, play into into next year? I know you guys have added capacity, you announced, uh, I don't know, 12 to 18 months ago and I think you said, second half of 25, you should start to see some of that. Are we seeing that play through at this stage in the guide? Yes.
Yes, so is reflecting in the guide, it supports the, the sequential growth of the company and the good, the the process are going well. Uh the the expansion process are going well, a good way to think about it. We have around a dozen projects that are ongoing 6 of them. You know, the construction is done. We're ramping it up in the second half. Um, you know, with all the, you know, the initial difficulties to put new, uh, operations running, but it's going really well. And then we're going to have Beyond 25 moving to 26 and Beyond other 6 projects that going to add to the Top Line as well. So that's a good way to think about it. So the answer is yes. Uh, we have a new capacity coming in projects are on track and we have more to come towards next year's.
Okay, great. Thanks for the caller.
Thank you. And our next question comes from the line of Nigel Ka from Wolfe Research. Your question, please.
Oh thanks uh, good morning. Um, most of my questions have been answered but um in terms of the capacity um, Coming online um
Obviously, you're you're in that, you talked about investing. And the Tariff offset, says, the 2 factors, uh, in the EA margin. So I'm wondering, are you absorbing a lot of the capacity ramp costs today? And, and therefore, as you start shipping out the capacity, you start getting better operating leverage or are there additional costs? Uh, that will come when you when you uh increase that capacity uh, in the second half of this year.
The answer is yes. Uh, as I mentioned, um, a second ago, we were ramping up 6 different facilities in electrical America so we are dealing with those inefficiencies as we speak. And as that normalizes, those inefficiencies will go away and then we can print, uh, you know, better results coming out of those plans. Um, I don't know if you want to add anything. Yeah. And and we have always asked this question, what is the impact of those? We also investing in go to marketed capabilities, based upon the exciting and markets we are facing. We see today, due to the ramping of the Investments about the point of margin Edwin in electrical America today, 100 base points. Yeah,
100 basis points. Okay, that's material. Um, is that peak pressure? Um, or does that sort of live with us now for the next, you know, 12 months? And then as you start to get better absorption, we start to get better leverage.
Uh, we would expect the leverage to be better. Probably next year, not earlier Nigel.
Okay, great. And then a quick 1, um, on the Erp Investments. I, I think, um, that's the, the major driver of the corporate expense, uh, increasing. Uh, so just maybe talk about, uh, you know, where, where are we today on the it systems, you know, what is the end date of where you want to achieve?
Yeah, so you're talking about the below line items, correct? So let let me take a step back and give you the the the the bigger picture here. Um, so first of all, we see increase in the corporate cost due to the m&a activity we have because first of all we have higher interest expenses coming from the commercial papers. This is 1 1 reason. The second 1 is that we also would have
Uh, smaller cash, uh, balances due to the Acquisitions. So we have lost, also some interest in the new guidance, that's another way to think about it. And finally, um, to the back of your question, we decided to double down and accelerate AI investments in the company. Um, so we are launching tools, uh, to improve front end. So think about electrical America, the way we interact with, uh, Distributors and our customers, our supply chains across the whole company and modernizing systems for our factories as well. We believe, uh, this will pay back in spades, uh, as we grow our Top Line in the next years to come, and we work to manage the cost growth more effectively by having those 2. So, this is 1 reason. And, um, the other way to think about it, is, if you look at the above, the line segment performance is very solid, right? We, we have 25, uh, cents beat, um, on on average.
This year. So instead of letting all this 25 cents flow to to, to the bottom line, we are redeploying this into investment for our growth because we see sustained growth, not only this year, but in years to come and to answer to the second part of your question, Nigel, this is a short-term investment which shouldn't flow into 2026.
Okay, that's great. Thank you.
Thank you. And our next question comes from the line of Scott Davis from Melius 3. Search your question, please?
Good morning, guys.
on the, um,
Color on the expenses coming in because that's key. And the scale and the mix and stuff, but which kind of segues into my question: can you get to 40% gross margin once that capacity?
Uh, scales up and, uh, Erp spend kind of trails down and such as is that a kpi that you guys are looking at?
No. I mean we gave you a long-term guide uh as we discussed do we doing our investor days. We said to you that we would increase margin by about 4 Points. 400 basis points over the planning period. There was no indication today that we do not have line of sight of those numbers Scott.
Yeah, no, no understand Olivia. I think what I'm getting at though is certainly on the operating, you know, operating leverage or operating profit line. Uh, I'm just wondering kind of the puts and takes of how much of that can you get on gross margin versus operating margin.
Yeah. I mean, today we are planning indeed to be close to 40% in gross margin, and we are today, including that in our guide you will see ramp being included in the second half of this year. And, um, yeah, this is where I will, um, the way I would comment on it, Scott.
Okay. Now, totally fair. Okay, I appreciate it, guys. I'll pass it on. Thank you, and best of luck. Thank you.
Thank you, and our next question comes from the line of Nicole Dub Blaze from Torture Bank. Your question, please.
Nicole, you might have your phone on mute.
And our next question comes from the line of Dean drank from RBC Capital markets your question, please.
Thank you. Good morning everyone.
Morning.
Hey, I just want to go back to the new capacity that's coming online. Can you remind us? Kind of like in size order of which products, uh, capacities are coming on. I would imagine Transformers is the biggest investment, but just like, if you could size us, uh, that would be great.
Yeah, so it's not only about transformers, including transformers as well, but we are also expanding capacity on switchgear.
Like uh voltage Regulators as well. So those are the 3 biggest for the second half.
Um, but then we're going to have more coming into the next couple of years, especially on the data center UPS side, etc.
And if we were thinking you're Transformer, backlog has extended. This is pre capacity, as, as extended to up to 4 years. How far do you think that backlog? How much does it come down in normal lives? Uh, based upon this new capacity.
I do see now we are offering lower lead times uh, to our customers um, on the lower range of the Transformers, we could reduce more the lead times as you go up the bigger Transformers is still very long. So this is where we are tackling but more than thinking about a linear 1 to 1, uh, approach. What I wanted to invite to think about is that we have differentiated Solutions. We we have actually a 3 in a box solution that a couple of our, our hyperscalers standardize their data centers around it. So we we going to actually are running uh, behind. Uh, we're catching uh, uh, on the orders Trend that we have. So we we don't see necessarily that uh the backlog will materially go down uh, at least in the second half of this year.
Because we see the artists coming in.
Thank you.
Thank you. Thank you.
Next question.
We have.
From Georgia Bank, your question, please.
Hi, guys. Good morning. Can you hear me now?
Yes, hi Nicole. Welcome to know, sorry about that. I had sent troubles. Um, I would like to start with electrical Global margins. I bought the margin. Performance was pretty impressive in the quarter north of 20%, just curious. Why you guys didn't opt to raise the full year. It does imply a bit of a step down in the second half. Um, thank you.
Yeah, I mean, we want to be prudent, we are pleased with the performance of of electrical Global, not only from a revenue standpoint, but and from a margin standpoint, as well. Uh, over time we want electrical Global margin to go up and to get closer to Esa. Uh, we're looking at portfolio actions. Uh, most of the restructuring program for the business, is going to impact Global, uh, Europe being the build of it and we're looking at. So at ways to simplify the business, so we believe the margin is going to keep increasing in global, but we wanted to be prudent in the second half of the year.
Okay. Totally understood, thanks Olivia and then sticking with electrical Global. Can you guys talk a little bit about what you're seeing in the pipeline there, any sort of Step Up in activity, in Europe in particular? And it does sound like Asia has been pretty strong. Thank you.
Yeah. So Asia continued to perform at a very high level new call. Uh, we're talking about double digit growth.
Um, and if you look at the European business, we we start to get traction uh, on orders, on data centers in in a, in an interesting way and the traditional business um of of the European group is around short cycle, right? And we see here green shoots, right, I quoted before this, um, inflection in, in orders, in, in Q2, so that is a good sign, as well. So, to leave this point before, we have a lot of work to do to bring, uh, emia and in the electrical, um, Global part closer to where we are in electrical America. We have a plan to do exactly that uh, operationally the business already running better, uh, in in Europe, it has ex a very, very good performance in Asia and that continues. So operationally we're running the machine better and then we also look at uh,
Reshaping the portfolio through organic actions to resemble what we have in Electrical Americas, but we also, if we find the right target, are going to take inorganic actions as well.
Thanks, Paolo. I'll pass it on.
Thank you. And our next question comes from the line of Stephen. Volkman from Jeffrey's your question, please.
Think about, you know, moving into 2026. Are there any changes in kind of product mix or End Market mix? That we should be aware of relative to how that might impact margins?
No. Um I think you you watch if you watch the news you see that there's more excitement around uh defense markets so we raised the End Market. Uh you know, uh, performance there. Uh, if anything, that's the change moving to next year. The the as you say backlogs are are solid. We keep, uh, as Olivier shared we we keep winning, not only OE business, but also after market so Remains the Same mix. The only change will be as we get more of the military and Defence orders to be executed in the next year. That's the only change but strength overall.
We we keep having also, as we are ramping this, uh, this part of the portfolio. Uh, we still have inefficiencies in Aerospace. Uh, we believe we have a few points, uh, few, uh, hundreds basis points of inefficiency still today, impacting the margin of this business. So, going forward, as we keep running it better, and we are pleased with the progress today. We should see margin expansion for this business naturally coming well said. Yeah, excellent. Okay. Great. Thank you. And, and then, I'll
Maybe just a shift, uh, e-mobility. It feels like the ground has shifted under us quite a bit since we last chatted. Just how do you view that business? Now anything different that you feel like you want to do as we go forward in this new kind of environment.
Yeah, so for the, for the long term, uh, we believe still that electrification is going to come, it's going to come later than our original plan.
Um, but we still see that transitions happening. Um, more often and more frequently and strongly outside the US than here, as as you can track, uh, conversion. Um, we in, in the short term we experiencing with a couple of big customers. We have problems, they're having issues with their own ramp up of their product lines. So that's the temporary issue. We see, um, we understand, uh, the market dynamics. Um, if you think about the way we prioritize, our investments in that business, we prioritize in the last couple of years, the electrical technology we had already for the electrical sector. So we are not starting suffering from scratch and that, you know, protects our bottom line, and we still see, um, the the traditional vehicle business as a natural Hedge for some headwinds. We can get from the Electrical, uh, side of the passenger car market.
Fair enough. Thank you guys.
Thank you, thank you. And our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your question, please.
Hey, good morning. Thanks for putting me in.
Good morning. Good morning.
Um,
I think you mentioned, you know, some order acceleration around, you know, this capacity at and I'm just wondering, you know, how much orders of maybe been held back by the capacity and as you as you, you know, kind of bring this capacity on, we could see, you know, some some acceleration or further acceleration in orders and then just,
You know, given the given the growth in data center, any, you know, incremental capacity at your your contemplated at this point.
To your first question, we have...
we have strength in the orders and we believe this is going to continue um we see that uh strongly in our negotiation pipeline for for the quarter as well. And then um if you look Beyond uh, what we're doing here in terms of capacity, uh we believe for example, the business, we acquired fiber bonds. We already considered in our acquisition that we needed to invest in that business because they're getting tremendous traction, uh, with data center. Operators both uh multi-tenant and now also increase hyperscaler interest.
So if there's an area that will be new to you guys is where we already saw. When we acquiring fiber bond, that potentially, we need to invest to expand that business already.
And in term of capacity expansion for ESC as we indicated earlier, we keep adding capacity next year as well. So the capacity will start to Platt Edition will start to Plateau at the end of 2026.
Find those orders.
Okay, great. And then, um, I just want to get a feel for, you know, confidence within the cash flow and if there's any cash flow benefit from, you know, changes in the new tax bill.
We are, uh, we have not changed the guide for cash flow. Uh, we gave you today a range. We believe we will more than likely trend towards the end of the guide, a few reasons for this and a few reasons which are new since we shared the guide at the start of the year.
First impact of the tariff, which is a drag on free cash flow, because of the way we handle the payment terms as associated with it.
But within that, we will be within the range.
Okay, thanks a lot.
Thank you.
Thank you. And our next question comes from the line of Joe O'Day from Wells Fargo. Your question, please.
Hi, good morning. Um, just just want to make sure hey, just want to make sure it kind of understand demand Trends in EA correctly because it sounds like you may have seen a bit of an inflection and, and it comes back to
Just for eggs earlier point where data center growth in the quarter, seems like an can explain the vast majority of the organic Revenue growth. Um, but then the commentary around orders sounds like there's broader based growth across cni and utility and maybe some other areas. Um, so can you can you just sort of comment on that and the degree to which you? You did see an inflection within orders and then any color on some of the end markets outside of data center,
Yeah. So we saw strengths in, uh, commercial institutional for sure.
And we also see a growth in utilities business while we see, you know, as we anticipated before. Um we also see growth in the m in orders and start to turn into a positive in revenues as well. And the the areas where we see downside um continue to be down is the resi market and distributed, it is flat.
So that's the good way to have a picture of the electrical business.
And did you see that happening in orders before you’ve seen it? Happen in revenue, and so we’ve got that kind of heading into the back half of the year.
Yes, as I commented before, on the short-cycle business, we already saw that inflection in orders there.
From Q2 to Q1 to Q2.
The answer is yes.
Okay. And and then um just 1 on the announcement during the quarter and and around high voltage direct current in power infrastructure. For AI data centers um at the investor day, when he talked about the the content per megawatt in in an AI data center, you talked about that being in a range of roughly, 1.2 to 2.9 Million just curious, as, as you see, some sort of Technology shift opportunities there and you talk about the hvdc, how how we should think about the, the content opportunity for you and that kind of architecture.
Yeah, so it's a very important question, so we see our dollars per megawatt to go up with a new, uh, architectural data centers. And the main reason for that is that would increase power density of the white space. We see it as a very attractive market for it. And, uh, we start demanding much more sophisticated, uh, Power Management Solutions, Distribution Solutions. Uh, in the past, our our share of the data center. We are heavily focused on gray space like 70% of our business because in
Of the data center more, much more effectively.
Thanks for the call.
Yeah.
Thank you.
This question comes from the line of Julian Mitchell from Barclays. Your question, please.
Oh, hi. Um, good morning. Thanks for squeezing me in um 1 thing, I don't think it's been addressed yet but perhaps the most notable thing from the release this morning was the cut to the high end of the EPS guidance. Um, and and I can see that versus say April FX is a Tailwind. Now, not a headwind. Uh, you took up the m&a, revenue contribution for fiber bond versus April. So you've got sort of more Tailwinds from FX and m&a but the EPS guide high-end coming down. Um, and I can see the orders are very good, but you know, you, you generally have sort of 6 months of Revenue in backlog, so a lot of the good orders recently, you'll you'll see in the second half and it's in that guide. Um, so maybe just help me understand a little bit there. The guide moving parts.
So just to clarify and I would give the colors Julian. Uh we have increased the midpoint of the guide by 7 cents just to clarify. So meaning the beat of of of Q2 flow 2 plus an additional 2 cents. So 7 cents increase at the midpoint that's the way we we would like the community to think about it. Let me answer to your
Question, uh, you're right. Uh, FX is uh, a telwin. The fiber bond. We are very pleased with the performance. That's also a telwin. Uh, they are investments in the business. Today, we are pleased with the way, uh, our end markets are behaving. We want to invest in, uh, the business. Uh, we talked about, uh, AI being 1 of them. We investing also, in front-line resources. We have some part of the port of, for your performing, a bit less well than an expected. Parallel mentioned that vehicle and Mobility are the 2. I will refer to and then Rezi has been not has been recovering a bit, but still in the close to zero. So, overall, if you take the put and takes does the way, I will explain the guide and I would finish by saying, we want to be prudent as well regarding the way we guide. Uh, we have some lingering
Macro uncertainties and also tariff question marks. So that's the way we would think about the second half, Julian.
That's helpful. Thanks, Olivia. And maybe my second question, just following up on something you said, um, Paulo.
Maybe 15 or 20 minutes ago or something. Um, you know, in the context of more capacity coming on stream, particularly in electrical Americas, in the balance of the year, um, I think you said we should not expect the backlog to go down materially in the second half. Um, so is the view there that as you get more capacity, you can recognize the backlog more quickly in revenue? So, the backlog shrinks, but it's not a steep drop because the orders are still pretty good coming in? Is that the sort of conclusion?
Yeah, they're actually, you're right. Um, but we with the strength in orders, uh, we don't share reason to believe that book will be less than 1 for the year. So yes, the orders are, are, are good. We have visibility good, visibility on Q3 orders already. And, uh, yes, we're going to ramp up production, but that shouldn't eat much of the backlog in the second half.
It's good to be very difficult for us to believe that the backlog will not increase by the end of the year. A lot of Putin takes, but with a book to be in ratio over 1, uh, it's very unlikely to happen, Julian.
And you saw it was very strong again in Q2 growing nicely, uh in in by by about 15% for the for the company.
Thank you.
Thank you, Jen.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Yan for any further remarks.
Hey, thanks, guys. Uh, you know, as always, our team will be available for any follow-up. Of course, uh, I have, uh, the rest of the day, you know, feel good. Thank you, guys. Bye.
Thank you, ladies and gentlemen, for your participation. In today's conference, this does conclude the program. You may now disconnect. Good day.