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spk13: Ladies and gentlemen, thank you for standing by and welcome to the Eaton second quarter 2023 conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. Should you require assistance during the conference, please press star then zero and an operator will assist you offline. And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, Yin Jin, Senior Vice President of Investor Relations. Please go ahead.
spk16: Hey, good morning, guys. Thank you all for joining us for today's Eaton Second Quarter Earnings Call. With me today are Craig Arnold, our Chairman and CEO, and Tom Oakry, Executive Vice President and Chief Financial Officer. Our agenda today includes the opening remarks by Craig, then he will turn it over to Tom, who will highlight the company's performance in the second quarter. As we have done in our past course, will be taking questions at the end of Craig's closing commentary. The price release and the presentation we'll go through today have been posted on our website. This presentation including adjusted earning per share, adjusted free cash flow, and other non-GAAP measures. They're reconciled in the appendix. 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 We're including statements related to expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projection due to a wide range of risks and uncertainties. That is describing our earnings release and the presentation. With that, I will turn it over to Craig.
spk17: Thanks, Jen. Hey, today we're pleased to mark the end of the first quarter with one of our strongest performances ever. and a performance that strengthens our conviction about our long-term growth prospects. Our teams continue to deliver on our commitments, propelled by both strong markets and good execution. We'll begin with some of the highlights of the quarter on page three. Well understood at this point, megatrends, reindustrialization, and infrastructure spending are continuing to expand our markets, driving our revenue, orders, and backlogs. We posted another quarter of record financial performance with strong revenue, margins, and earnings growth, and we executed well. And our first half performance, along with our growing backlog, is what allows us to once again raise our full-year guidance. We're raising our 2023 guidance for organic growth, margins, and adjusted EPS. Our EPS growth at the midpoint of our guidance is now up 16 percent. Tom will walk you through the details shortly, But from my perspective, the highlights of the quarter really are our growing backlogs, up 22% on electrical and 26% in aerospace, with a book-to-bill ratio of 1.2 for both electrical and aerospace. We also generated strong operating and free cash flow, $1.2 billion and $900 million of more than 200% and 600% respectively. The free cash flow in the first half of the year is almost $800 million above prior year, so we're on track to deliver our four-year guidance despite the higher growth and higher receivable balances. Overall, we're pleased with the results and well-positioned for the second half. Moving to slide four, we wanted to provide a simple framework that summarizes how we think about key growth drivers across our businesses. The important megatrends are listed here on the left. at Eaton Markets, and our segments are listed across the top of the page. At the intersection is where we see these trends having a material impact on our growth rate of our end markets. And without getting into a lot of the detail, the important message is that this long list of megaprojects is impacting many of Eaton's end markets. What we intend to do during the course of our quarterly earnings call today and really into the future is really to talk about these trends and how they impact our end markets. Today, we'll spend a few minutes on infrastructure spending and the Inflation Reduction Act, re-industrialization, and an update on megaprojects, as well as a look at Eden's position in the utility and aerospace markets. We're highlighting the Inflation Reduction Act since it's considerable upside to the initial estimates of future government spending and on megaprojects because they continue to grow dramatically. We picked the utility segment since it's quickly becoming one of our largest markets. It was approximately 15% of Electrical America sales last year and is running well ahead of that rate this year. We received also some extensive questions from investors about our position in this market. Lastly, we'll highlight our L-Space business through the double-digit growth outlook, ramping defense and commercial platforms, including a substantial new win on the Bell V280 dollar platform. Moving to slide five, we're showing an updated look at expected spending tied to the Inflation Reduction Act. Most of the spending is focused on improving U.S. infrastructure, and as you can see, the estimates have increased significantly. At the time of passage, estimates on the cost impact, including credits and incentives, was $271 billion. The legislation was recently rescored, and government spending is now expected to be $663 billion, up nearly two and a half times due to really what is an uncapped program. Importantly, these tax credits, because they're uncapped, are expected to continue to grow. These dollars are naturally a strong catalyst for infrastructure spending. Much of it targeted at industries where Eaton will be a significant benefactor. The implementation of the IRA is in the very early stages and we think will provide significant tailwinds over the next 10 years. Very little of this impact is currently in our order book and none of it has impacted revenue yet. On page six, we have an updated chart showing the continued growth of megaprojects in North America. We introduced this chart last quarter And you'll recall that we included announced projects that are greater than $1 billion in this category. The value of announced megaprojects has increased by $116 billion, or 20%, between March and June. So the momentum continues, and we'd expect the category to continue to grow at well above historical trends. We've seen recent announcements for EV, semiconductor plants, and new battery plants. So really across the board. And a few examples of some of the other major projects include $174 billion of downstream oil and gas or chemicals, $33 billion of LNG export terminals, and $64 billion in power generation and renewable energy projects. Just another confirming data point, the Dodge data for U.S. industrial projects continues to expand at a record pace. with 12-month manufacturing construction starts up 72 percent on a 12-month basis, on a rolling 12-month basis, and up 84 percent if you include LNG activity. And as a reminder, only 25 percent of these megaprojects have started, so we're just at the beginning of this re-industrialization megatrend. Lastly, I'd remind you that we expect each of these megaprojects to have between 3 and 5 percent electrical content. Moving to page seven, we highlight the utility segment of the Americas business. As we reported, in 2022, this market accounted for approximately 15% of Electrical America's revenue and represents an even bigger percent to date. We've historically viewed the utility segment as a stable but slow growth business, generally in the low single digits. Over the next decade, utility distribution CapEx will account for 60% the total utility capex globally growing at a CAGR of 9%. Over the 22 to 25 period, we would expect an 11% CAGR. The impact of sustainability initiatives across the globe have significantly boosted this number. This includes grid modernization, renewable energy, electrification of everything, enhanced reliability and safety needs, and government incentives are all contributing to this growth outlook. And while the electrical needs of the world continue to increase, our utility customers are finding it challenging to maintain an increasingly aging grid infrastructure. As a point of reference, over 70% of U.S. transmission and distribution lines are over 25 years old. We're naturally making capital investments to address the growth here and have already committed to new capacity in our three major product families, transformers, voltage regulators, and line insulation products. It's worth highlighting that in this quarter, our America's utility business backlog has increased 45 percent. Organic revenues grew 30 percent in the Americas and 20 percent in our global segment. The graphics on page eight highlight Eaton's unique position in the North American utility market, where we're primarily focused on distribution. And given the significant changes taking place in this market, including the need to integrate renewables, undergrounding for increased resiliency, the increased demand for grid services, we could not be more pleased with what we have to offer in this segment. You can see from this slide that we have a broad position in the market. In fact, we have the industry's broadest portfolio of utility solutions. This includes grid planning software, design and engineering services, a complete offering of critical utility products, automation software, as well as extensive project management expertise. We also offer a broad range of digitally enabled hardware, grid edge controllers for overhead, underground, and for substations. Lastly, our bright layer solution for utility includes distribution planning software, distribution and substation automation, as well as smart grid communications, sensors, and demand management. So overall, we're well positioned given our substantial portfolio of hardware, digitally enabled software, and solutions. And in the quarter, we secured a broad range of wins in the market, including hardware solutions for voltage regulators, power distribution, digital solutions for grid planning in our software we call SIME, in smart metering, and also in utility services. Moving to page nine, we'd like to highlight another well-known trend, the growth in aerospace markets. As you can see, we expect double-digit growth in each of the years between now and 2025, driven by the rebound in commercial OEM, commercial aftermarket, and increased defense spending. The commercial market is expected to be very strong as Airbus and Boeing are both significantly increasing production volumes and are expected to materially increase production on their most important platforms. For example, Airbus is expected to increase production on the A320 from 45 to 50 per month currently to 75 per month by 2026. And Boeing is expected to increase production on the 737 from 31 per month currently to 50 per month in the 25 to 26 timeframe. And global passenger air travel is expected to return to 2019 levels by the end of this year and grow at 11% CAGR between now and 2025. We also expect to see increased defense spending driven by various global conflicts and governments allocating more dollars to our type of equipment to improve fleet readiness. Our aerospace business is especially well positioned on key defense platforms, both those targeted for modernization and on new platforms that are being ramped up. On slide 10, in addition to the high volume single aisle growth that you hear so much about, the next group of key platforms driving a new growth today and into the future are listed here. These platforms are a good representation of important platforms ramping in the near term, over the next five years and critical growth platforms for future decades. In all cases, we have more content than ever on each of these aircraft. In the future category, we're showing the wind with the bell on the V-28 Valor program. The V-28 is a replacement for the Black Hawk helicopter, and we have five times more content and are still bidding for more opportunities. We put the KC-46A and the F-35 in the next category, aircraft that will be ramping in the near term and will contribute materially to our revenue growth beginning next year. As you can see, our content for aircraft here is 2 to 3x the legacy platform. And lastly, we're starting to see, once again, growth in the wide body market. The long-haul market has been especially weak during the COVID and post-COVID period and is now beginning to pick up. The important message here is that these programs, as these programs ramp up, we'd expect to grow faster than our end markets given the increased content on each of these programs. So between market recovery and increased content per platform, our aerospace business is expected to see significant growth over the next five years or even longer. Now I'll turn it over to Tom who will take us through the financial slides. Thanks, Craig.
spk02: I'll start by providing a summary of our record Q2 results. Organic growth continues to be strong, up 13 percent for the quarter, the sixth quarter in a row with double-digit organic growth. Operating profit, an all-time quarterly record, grew 21 percent, and segment margins expanded 150 basis points to 21.6 percent also an all-time quarterly record. We posted solid incremental margins of 33 percent, up sequentially from 27 percent in Q1. Adjusted EPS increased by 18 percent over the prior year to $2.21, an all-time quarterly record and well above the high end of our guidance range. Looking at our first half results, we've had a very strong start to the year with organic growth of 14 percent, segment margins up 130 basis points, incremental margin of 30 percent, and adjusted EPS growth of 17 percent. Finally, last year we explained that we were making a deliberate decision to invest in working capital to protect our customers and their orders. With supply chains improving, we are now able to better optimize working capital. The result, together with strong earnings, is a 600% increase in free cash flow in the first half of the year to $900 million. Moving on to the next chart, our Electrical Americas business delivered another very strong quarter. The megatrends are having a favorable impact on our U.S. business. all-time quarterly records for sales, operating profit, and segment margin. Beginning with the top line, organic sales growth of 19% remains very strong. Electrical Americas has generated double-digit organic growth for six consecutive quarters, with five of the quarters greater than 15%. On a two-year stack, organic growth is up 35%. In the quarter, there was broad-based growth in nearly all end markets, with especially robust growth of 25 to 30 percent in data center, utility, industrial, and commercial and institutional end markets. Operating margin of 26.4 percent was up 320 basis points versus prior year. benefiting from higher volumes and effective management of price costs. On a rolling 12-month basis, orders grew 7 percent, with particular strength in data center and distributed IT, industrial, and commercial and institutional end markets. Book-to-bill ratio remains above 1. We increased backlog by 30 percent year over year, and sequentially 3%. It's worth noting that we secured orders for two large data centers worth nearly $300 million, including content to support these customers' AI growth projections. Finally, our major project negotiations pipeline in Q2 was up more than 17% versus prior year and nearly 9% sequentially, from especially strong growth in data center, institutional, government, healthcare, and transportation markets. On a two-year stack, our negotiation pipeline was up 65%. Overall, Electrical Americas continues to have a very strong year. On page 13, you'll find the results of our electrical global segment, which posted all-time record sales of nearly 1.6 billion. Organic growth was up 6%, which was partially offset by a small divestiture. This represents a two-year stack of 18% organic growth. The growth was broad-based, driven by strength in utility, data center and distributed IT, and industrial and markets. Operating margin of 18.5% improved 20 basis points sequentially, but was down 40 basis points compared to prior year. The year-over-year decline was mostly driven by unfavorable product mix, partially offset by effective management of price cost and higher volumes. Orders were up 1% on a rolling 12-month basis with strength in utility, and data center and IT and markets. Importantly, book-to-bill remained greater than one. Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segments. For Q2, we posted organic growth of 14 percent, incremental margin of 38 percent, and segment margin of 23.4 percent. which was up 200 basis points over prior year. On a rolling 12-month basis, our book-to-bill for our electrical sector remains very strong at 1.2, and our record backlog grew 22 percent. We remain very confident in our positioning for continued growth with strong margins in our overall electrical business. The next slide highlights our aerospace segment. We posted an all-time quarterly sales record and a Q2 operating profit record. Organic growth was 14 percent for the quarter. We've posted double-digit growth in five of the last six quarters in this segment. Growth was driven by broad strength across all markets with particularly strong growth in commercial OEM, and commercial aftermarket, which were up 21 percent and 30 percent, respectively. Operating margin was 22.5 percent, up 60 basis points over last year, primarily driven by higher volumes. Growth in orders and backlog continued to be very strong. On a rolling 12-month basis, orders organically accelerated from up 21 percent in Q1 to up 26 percent in Q2, with especially strong growth in defense OEM and aftermarket for both commercial and defense. Year-over-year backlog growth increased 26 percent in Q2, in line with growth in Q1. On a rolling 12-month basis, our book-to-bill for aerospace remains very strong at 1.2 times. Moving on to our vehicle segment on page 15. In Q2, organic growth was up 6%. We saw particularly strong growth in North America light vehicle, APAC, and IEMA markets, all up double digits. Operating margins came in at 15.3%. During the quarter, we delivered improvements in our manufacturing facilities which contributed to sequential margin improvement of 80 basis points. We continue to win new business tied to clean technology solutions including multiple clean commercial valve actuation programs. We've won over $60 million per year in program length extensions and volume increases with multiple OEMs. On page 16, we show results for our e-mobility business. We generated another quarter of strong growth. Organic revenue was up 18%. Margin improved 100 basis points versus prior year, mostly driven by higher volumes. Overall, we remain very encouraged by the growth prospects of the e-mobility segment. So far in 2023, we have won new programs with more than $450 million of mature year revenues, positioning us very well to exceed our 2025 target of $1.2 billion of revenues. Through these wins, we continue to find opportunities to leverage expertise across all segments. For example, we reached an agreement with a major OEM to supply power electronics control unit for an electrically heated catalyst to meet emissions regulations. This win demonstrates Eaton's ability to leverage capabilities across our entire portfolio including core technology in both electrical and industrial businesses, such as brake tour, power protection, and busman fuses. We've also capitalized on our extensive vehicle expertise and added content in connectors from our Royal Power acquisition. Moving to page 17, we show our electrical and aerospace backlog updated through Q2. As you can see, we continue to build backlog with electrical stepping up to 9.1 billion, a sequential increase of 2%. Electrical backlog is up about 110% since Q2 of 2021 and over 200% higher than Q2 2020. Aerospace backlog is holding steady at 3 billion. This is a 30 percent increase since Q2 2021 and over 100 percent higher than Q2 2020. On a rolling 12-month basis, book to bill was 1.2 for both electrical and aerospace. With absolute orders remaining at high levels and record backlogs, our book to bill over one times is yet again a key metric that gives us confidence in our outlook into the quarters to come. With all the tailwinds in our end markets, we think it is likely that we will have high levels of backlog going forward, which enhances our visibility over the planning horizon. On the next page, we show our fiscal year organic growth and operating margin guidance. We are raising our organic growth guidance for 2023 in both Electrical Americas and for the total company. We now expect organic growth in Electrical Americas of 14 to 16 percent, up 300 basis points from our prior 11 to 13 percent guidance. This represents a 600 basis point improvement from our starting 2023 guidance for the business. In total, we're raising our 2023 organic growth outlook to a midpoint of 11 percent, up from a 10 percent midpoint in our prior guidance. Our strong end market growth forecast, expanding negotiations pipeline, and building backlog provide tremendous visibility and confidence in this 2023 outlook. For segment margins, we are increasing our total Eaton margin guidance range by 40 basis points from a prior range of 20.7 percent to 21.1 percent to a new range of 21.1 percent to 21.5 percent. This is a result of an improved outlook in Electrical Americas where we increased the range by 80 basis points on strong demand and continued strong operational execution. The increased outlook now represents 110 basis point increase from the midpoint of our 2022 all-time record margins. In summary, at the halfway mark, we remain well positioned to deliver another very strong year of financial performance. On the next page, we have additional guidance metrics for 2023 and Q3. Following our strong first-half performance and improved organic growth expectations for the year, we're raising our full-year EPS range to $8.65 to $8.85. At the midpoint, the $8.75, we have raised guidance by 35 cents. This represents 16 percent growth in adjusted EPS in 2023 over prior year. We now expect currency translation to be roughly neutral and the remainder of our full year guidance remains unchanged. For Q3, we're guiding organic growth of 9 to 11 percent, segment margins of between 22 and 22.4 percent representing 100 basis point improvement at the midpoint versus prior year, and adjusted EPS in the range of $2.27 to $2.35, a 15% increase versus prior year at the midpoint. Now, I'll hand it back to Craig to wrap up the presentation.
spk17: Thanks, Tom. Now turning to page 20. As a reminder, last quarter we raised our growth assumption for the utility market to strong double-digit growth, and we increased our residential market outlook to flat from declining. We're now increasing our growth assumption for the commercial, institutional, and for data center markets to strong double-digit growth. In addition to stronger than anticipated demand for new projects, existing buildings are being retrofitted with more electrical infrastructure as EVs continue to increase their penetration in the market. And data center demand continues to remain at very high levels, and we now expect to see double-digit growth in this market as well. The balance of our end markets continue to perform well and are tracking along our prior projections. So, while the macroeconomic outlook remains choppy, we continue to expect growth in almost all of our markets. I'll close with a summary on page 21. As you can tell, we're feeling good about how our markets are performing this year, and we think they'll be strong for many more years to come. In fact, the megatrends that we've discussed for some time now are expected to be even more impactful than we originally anticipated. Our markets are strong, but we also had solid execution in the quarter and delivered another strong set of results that included a number of financial records. And as we look to the back half of the year and into 2024, our increasing backlog provide great visibility on our growth outlook. As noted, we raised our guidance for growth and EPS for the second time, and our largest business, Electrical Americas, continues to post new records. With that, we'll open it up for questions you may have.
spk16: Hey, thanks, Craig, for the Q&A today. Please limit your opportunity to just one question and one follow-up. Thanks in advance for your cooperation. With that, I will turn it over to the operator to give you guys the instructions.
spk13: Thank you. And ladies and gentlemen, if you wish to ask a question, please press 1, then 0 on your touchstone phone. You will hear an acknowledgement tone that you've been placed in the queue. You may remove yourself from queue at any time by repeating the 1, 0 command. And if you're using a speakerphone, please pick up your handset before pressing the number. Once again, if you have a question, please press 1, then 0 at this time. Our first question. Our first question will come from the line of Joe Ritchie from Goldman Sachs. Please go ahead.
spk08: Thanks. Good morning and congrats, everyone.
spk17: Thanks, Joe. Appreciate it.
spk08: So, yeah, so to look, my first question, you guys called out a few of those large data center wins that you put into orders this quarter. I'm just curious, Craig, maybe just kind of help contextualize, you know, what that means for from like, you know, content for data center and how that's going to, how that's shifting for your business, you know, now that there's, you know, a lot of discussion around, you know, generative AI and what that means for you guys.
spk17: Yeah, no, I appreciate the question, Joe, and I know there's been a lot of discussion in and around AI and how it's going to impact, you know, the world, not only kind of data centers, but I would tell you that You know, the data center market, you know, as we've talked about on these calls for some time now, has been strong, and it's been strong for multiple years. And, you know, AI aside, you know, that market has been growing at double digit. And I tell you that, you know, the big wins that we booked on the quarter, I think most of that really has nothing to do with the AI impact yet. A lot of that is in the future. A lot of the major, you know, data center players are still trying to sort out the way they're gonna configure their data centers to deal with this AI environment and the increased energy intensity. So I'd say for us it was just another very strong quarter of data center wins that really has not seen the impact yet of this whole emergence of generative AI. So we're feeling great about that market and we think generative AI and its downstream implications are just gonna keep that market strong for a much longer period of time, and we're well positioned there.
spk08: That's great to hear. Maybe just a broader question around your backlog and the type of visibility that it's providing for you. I think I asked you last year whether, you know, why wouldn't you be able to grow, you know, double digits this year, and now it looks like you're very well on track to do so. I'm trying to really kind of think through the implications of your backlog today and what that means for 2024 and beyond. So, any comments around that would be helpful.
spk17: Yeah, I mean, as you can imagine, you know, we're not in a position to provide guidance at this point for 2024, you know, given the fact that it's still early in the year and we'll probably have an opportunity to do that, you know, towards the end of the year as we would normally do so. But to your point, I mean, the backlog continues to grow, and the backlog, as you saw in these reports, is up multiples of where we've been historically, which gives us much better visibility, better visibility than we've ever had into the outlook for the upcoming 12 to 18 months. And so we're feeling very good about what 2024 is gonna look like. It'll be another strong growth year for the company, and we'll certainly provide some guidance on what the year looks like as a part of our normal process and timing for giving the outlook. But the backlog certainly gives us a lot of courage with respect to what we think the year is going to look like given the growth and where it is relative to where it has been historically.
spk02: And maybe I can just piggyback onto that a little bit. You know, we've seen a lot of focus on order intake and certainly that's a very important metric to look at. But it's important that you look at it in the context of this historically high backlog that we have together with the protracted delivery times and lead times that we have. So as Craig alluded to, we're nearly three times our historical backlog coverage. And we went through modeling scenarios where you look at various order intake declines and combine that with robust organic growth. We're confident that we will not hit our historical backlog coverage timing until two to three years out. So we're very bullish on the transparency that the backlog gives us. and it really does mute the order intake and order decline a little bit.
spk08: Super helpful. Thank you.
spk13: Thank you. Your next question is to ask Parker Zawinski from Morgan Stanley. Please go ahead.
spk04: Hi. Good morning, guys.
spk13: Morning.
spk04: Good morning. So I feel like you guys have done a really great job of kind of scoring some of the you know some of the background announcements whether it's the mega projects or i guess you know slide five with um some of the stuff from ira maybe just you know give us an update on where we are and looking through that i i would imagine the vast majority of that is not really in the order book you talked about you know really high uh custom interaction or you know engagement or kind of the front log i forget what the exact term was but you know Where are we through kind of those orders or initial discussions yet?
spk17: No, I appreciate the commentary, Josh, and this is, I think, really an important message with respect to some of these big government stimulus spendings or whether it's the government stimulus spending and its impact or the megaprojects that we're talking about. We do think one of the key messages that we think is important to kind of get your head around is the fact that Most of this impact has not showed up at this point in our order book, and it certainly has not shown up in our revenues. We did talk about, you know, on some of the infrastructure projects, some $2 billion of projects that we have visibility to. We've won visibility. A billion dollars of that have been out to quote. We won about half of that, but that is a really small piece of the total dollars that will ultimately be spent tied to some of these infrastructure and other mega projects that we talked about. And so it is very early innings for us with respect to the forward-looking programs that we've shared with you on these calls. And it's what gives us confidence that what we're dealing with here is a long-term structural shift in our business with respect to the underlying growth rates. And we'll certainly continue to report out as we learn more. And we'll do this on a quarterly basis. But really encouraged by the fact that, you know, most of the goodness that we're talking about is sell a future.
spk04: Got it. That's helpful. And then maybe just a quick follow-up. Respecting that, you know, orders and backlog have kind of their own cadence right now with what you guys are going through and just explained. Are the shorter cycle parts of electrical... seeing kind of that lead time normalization show up in orders? I think some of your peers have seen that. Obviously, you guys are longer cycle, and things like switchgear maybe don't fall into it, but any part of that where you're seeing either like a destock or a lead time normalization show up?
spk17: Yeah, we're certainly not seeing any destocking across the business, but in fact, to your point around the short cycle businesses, whether that's resi or what's happening in the Those would be three shorter cycle markets that we clearly have seen a slowdown in orders overall and lead times as a result of that have come in quite nicely in those three end markets. Obviously being more than offset by strength in the other much larger segments that we serve, but in those three short cycle pieces of business, we have clearly seen lead times come in, we've seen orders moderate in those three end markets.
spk05: Helpful caller as always. Best of luck, guys. Thank you. Thank you.
spk13: Thank you. The next question is from the line of Chris Snyder from UBS. Please go ahead.
spk05: Thank you. And I want to follow up on Josh's question, specifically around the Inflation Reduction Act. You know, it sounds like not much orders yet on the back of the IRA. Is it reasonable to think that orders there could start coming through in 2024? And when we look across all the company's various business lines, you know, which ones do you think will benefit most from the IRA specifically? Thank you.
spk17: Yeah, I do think in terms of timing, you know, for sure, you know, as we think about 2024, we would expect to start to see, you know, those projects be clarified negotiations and some orders begin to show up in 2024. Maybe some early shipments at the best case at the end of the year, but as you know these projects tend to be much longer term and a lot of these dollars are going to support mega projects and mega projects just by definition tend to be much longer cycle than the typical stock and flow business that we have. And so we would expect to see that begin to show up next year. your point on which companies would benefit the most, I'm not sure, I mean, clearly.
spk05: Sorry, which verticals within, sorry, which verticals within the company? My apologies.
spk17: I'm sorry?
spk05: Which vertical, sorry, which verticals within the company?
spk17: Yeah, you know, I'd say clearly as we think about the various verticals and we kind of lay that out in our presentation on slide four, and this was, you know, appreciate your commentary because what we really tried to do on slide four in our PowerPoint is to give you a sense for the key megatrends and how they impact the various verticals that we participate in. So if you look at infrastructure spending, the great news for us is it is very broad, plays across the board and impacts most of our segments, but I'd say it certainly will show up most materially, I'd say, in the industrial segment. If you think about what's going on today in the investments in new EV factories and battery factories, what's going on in the chemical space, a lot of it will show up in what we call industrial facilities. But it really does cut across pretty broadly in most of the end markets in which we participate.
spk05: No, absolutely. I very much appreciate that. Then maybe following up on that industrial comment, You know, everyone, I think, has kind of seen the massive, you know, manufacturing starts that's now leading to higher activity put in place. You know, how should we think about, you know, the lag, you know, in which that flows to your business from the start to when it starts generating revenue for Ian? You know, as you said, these are very long cycle projects. Just wondering, you know, kind of how long, you know, could a single facility kind of generate revenue for you? Thank you.
spk17: Yeah, no, I appreciate that question. As you can imagine, as we've seen this significant transition to these mega projects, we've spent a fair amount of time internally trying to answer the same question from an announcement, you know, to a negotiation, a negotiation to an order, an order to a shipment. And it varies widely depending upon the type of project you're referring to. And I'd say it could be as short as six months. It could be as long as three years. And when you think about a lot of these mega projects, they do tend to be longer in nature. So they would tend to be on the longer end of that cycle just by virtue of the size of these projects.
spk02: And I think the exciting thing about it, as we said in the prepared remarks, we see each quarter like $100 billion coming in, and then it's going to give us a nice cadence going forward for quite some time. And just to come back to the Inflation Reduction Act, I mean, we put that particular act in for illustrative purposes, but just to draw your attention, we've also got the Infrastructure Act, the CHIPS Act, and in Europe, the EU recovery plan. So when you put all this together, there's just a ton of government stimulus supporting key parts of our business.
spk05: Thank you.
spk13: Thank you. Our next question is from Nicole DeBlaze from Deutsche Bank. Please go ahead. Yeah, thanks.
spk12: Good morning, guys.
spk00: Good morning, Nicole.
spk12: Maybe just on free cash flow, I noticed you guys raised the EPS guidance by a pretty considerable amount, but free cash flow remained consistent. Can you just talk about, you know, the drivers of that? And I'm sure part of that has to do with your working capital plans for the second half. Thanks.
spk02: Yeah, that's a great question, Nicole. Um, and we're up almost 800 million. Um, you know, the, the majority of that around let's call it 550 million was, was working capital optimization. And, uh, you know, 250 was, was from earnings. Um, We debated, do we take up the guidance on free cash flow, and we thought, because it kind of fits within the range right now, we'd give it another quarter. We're happy the way it's going. Obviously, up 600% is something to be happy about. We've improved cash conversion cycle by nine days. That said, we still have a lot of work to do, and... we want to get our free cash flow margin up even higher.
spk17: And I just add, as we grow as well, we're obviously putting more cash into receivables. And so we are having to fund as well to increase working capital as a result of the higher growth.
spk12: Got it. Makes sense. And then on the non-resi verticals, Obviously, like ongoing questions about the strength there. Are there any patches within the whole non-resi complex where you guys are seeing any signs of slowing activity?
spk17: Yeah, no, and I appreciate the question. And once again, if you just think about it in the context of the in-market segments that we've laid out on slide four, I mean, most of what we do is non-resi. And in the context of your question specifically, as we mentioned previously, We have seen a slowdown in what we call distributed IT, and we have seen a little bit of a slowdown in what we call the MOEM segment of the market as well. Fortunately for us, those tend to be smaller segments of the market, and the growth in the other verticals is clearly more than offsetting that weakness. But yeah, we have seen a little bit of a slowdown in those other two verticals as well.
spk02: That said, if you look at the first half of the year, organic growth, I mean, we're up in every single end market, some of them obviously significant more than others.
spk17: And including Rezzy. Yeah, including Rezzy. We took our numbers, if you recall, from the prior quarter, Nicole, we actually took our outlook for the year up in Rezzy, where we originally thought that that market would have been down, and we took the market up to the point where Rezzy is doing much better than, quite frankly, we anticipated as we began the year.
spk02: Absolutely. And MOEM is also up first half of the year.
spk13: Excellent. Thanks, guys. I'll pass it on. Thank you. Thank you. The next question is from David Rosso from Evercore ISI. Please go ahead.
spk14: Hi. Thank you very much. I apologize if I missed this earlier. The electrical Americas, the organic growth, the first quarter, 22, 19, back half of the year, we're looking for about 10.5 as per the guide. What percent of that growth has been pricing, or even the assumption for the second half, whatever you're willing to discuss, and just a sense of the pricing that's in the backlog? I'm just trying to get a sense of, obviously, the backlog is a little bit more the megatrend than the smaller, shorter cycle projects. and businesses. So I'm just trying to get a sense of that pricing dynamic relative to the overall organic sales growth.
spk17: Yeah, I appreciate the question, Dave. And I'd say that one of the reasons why we are forecasting a slowdown in growth between the first half and the second half is really the strong comparables. If you look at the back half of the year, we were up some 19%. And a lot of that, quite frankly, was price. And we're getting a lot less contributions for price in the back half of this year. When you take a look at it actually on a two-year stack, the growth essentially is essentially the same. It's about 30% versus 2021, essentially normalizing for the really strong back half, a lot of which was price. In terms of pricing the backlog, I would say that, as you will likely recall, one of the things that we did was we actually repriced our backlog in much of it. And so if you think about the underlying performance today, what you're seeing in the electrical markets business, and we're shipping a lot of that out of backlog because the backlog is so long, is it's essentially, we don't expect backlog to have a material impact on the underlying performance performance of the business as we ship it.
spk14: I guess trying to maybe get a little more detail on that, the back half of the year, or if you want to even discuss 2Q, what are volumes in the guide for the back half of the year? And then just trying to think about essentially supply chains improving. Obviously, some of these demand drivers shouldn't fade away that quickly. versus some of the shorter cycle businesses that are turning down. I'm just trying to balance volume and price exiting the year.
spk17: Sure. And I know you're really trying to get at the split between price and volume that we've told you before on these calls we're not going to provide it. And so what I would just tell you is that we are getting much greater contributions from volume than we are from price in the second half of the year.
spk14: All right. I appreciate it. Thank you so much.
spk02: All right. Thank you, Dave. Appreciate it. Yeah, I mean, keep in the context of the prepared remarks. We've raised organic growth in Electrical America 600 basis points since the original guide, and our fiscal year guide is 15%, which is fairly sporty. Obviously, we can all do the math on the implied for the back half, but I think overall, when you step back and look at it, pretty aggressive.
spk17: And volumes are growing.
spk02: Volumes are growing, for sure.
spk17: We'd love to think we could get 15% price, but we can't.
spk14: Thank you.
spk13: Thank you. The next question is from Julian Mitchell from Barclays. Please go ahead.
spk11: Thanks. Good morning. I just wanted to start with the electrical global business issue. You mentioned some of the very strong markets and maybe some of those that are a little bit weaker. How long are you expecting that weakness to last? And when we look at the profitability in electrical global, you've got that nice sort of margin turnaround in the back half, which I think is driving an acceleration in year-on-year profit growth to sort of close to double-digit levels in the second half. Maybe just help us understand the main drivers of that pickup.
spk17: You know, I appreciate the question, Julian, and I would say that on a relative basis, certainly electrical global is not growing at the same rate as we're growing in the Americas, but I wouldn't call those markets weak. I would still say those markets are seeing, you know, pretty attractive growth. With respect to the first half versus the second half, as we mentioned to you in some of the outbound commentary in TOMS, we did have a particular mixed challenge in our electrical Europe business in Q2. And so those margins were held back due to some very specific mix related issues in that business and based upon the visibility that we have into the second half, we do believe that they do not repeat and the business gets back to a more normal level of profitability in the second half of the year. We have pretty high confidence that that's gonna take place.
spk02: Yeah, a couple other areas that we're counting on in addition to mix in the back half is higher volume and being better in terms of our productivity in terms of manufacturing.
spk11: That's really helpful. Thank you. And then I'm not sure you'll sort of hazard a guess at this, but I just thought I'd check because it was in focus at one of your electrical peers this morning, but When you think about your backlog to revenue coverage, total company, it's gone from sort of 20% towards 50 plus percent in the last three years at Eaton. Some of your peers who also have good sort of mega trend exposure, they're talking about that backlog normalizing maybe to 30% of sales. I'm not asking you to put a fine point on your view of that for Eaton, but maybe just a sense of the pace at which that backlog to sales may normalize? Because I guess the experience of a lot of other companies is once the backlog peaks, it doesn't seem to stay there very long. It sort of starts to move down as customers normalize lead times.
spk17: I appreciate the question, Julian, and in many ways we're talking about the unknowable, given in terms of the uncertainty around what the future looks like. I would say, though, if you think about Eaton's business, and that's why we thought it was so important to go back to slide four in our PowerPoint presentation, to talk about the breadth of our portfolio and how it's impacted by these various megatrends. I would tell you that we aren't the same as other electrical companies. Some of them are exposed to some, but not others. And I would just say what makes Eaton unique here is really the breadth of our portfolio and the end markets that we serve and how each of these markets are benefiting from these megatrends. And so I'm not sure what particular electrical period you're referring to, but I would say that we would likely have much broader exposure to a number of these trends than other electrical companies.
spk02: Just to add to that, I think we had it included in the prepared remarks, but I think it bears repeating. Our backlog in the quarter is up 220% since the end of 2019. And with all the megaprojects, the stimulus spend, the secular trends that Craig just mentioned, we don't have a lot of discussion about the backlog going down.
spk17: And if you think of it, there's certain electrical companies, for example, who would play heavily inside of factories, you know, who maybe don't play on the infrastructure side. We are a massive infrastructure player. And so I just want to point that out in terms of as you think about Eaton versus other companies, you can't really necessarily draw a straight line correlation between us and them. We obviously have seen our peers announce And there's a very difference in growth in a number of the peers this quarter too, a function of the fact that we play in very different end markets than some of our other electrical peers.
spk02: We also have that nice mix of going through the channel as well as these big mega projects with direct to the customer. So we've got this nice balance as well in that area.
spk17: And the point that Tom's picking up on that I think is really an important one is this notion around if you take a look at what's happening with a number of our distributors, oftentimes you'll want to draw a straight line between what you're seeing in the distribution channel to what we're experiencing in our own business and to Tom's point, these big mega projects that we're talking about, a lot of these big infrastructure related investments, these are direct projects that are not flowing through distribution. So you also will see perhaps a decoupling between how we could perform versus some of the electrical distributors as well.
spk11: That's very helpful. Thank you. Thank you.
spk13: The next question is from the line of Steve Volkman from Jefferies. Please go ahead.
spk10: Oh, great. Thank you for fitting me in. I wanted to actually switch to aerospace if I could. Appreciate your comments there. I know, right? I appreciate your comments there on sort of the medium-term outlook. It looks very robust. I'm curious how you think the real ramp that you outlined in OE will impact margin mix over the next sort of three to five years.
spk17: Yeah, no, I appreciate the question. And what you're kind of poking at a little bit understandably is the fact that, you know, OE margins tend to be, you know, well below aftermarket margins. But the good news here is we're finding that both OE and aftermarket, which is really tied to revenue passenger kilometers or revenue passenger miles, both of those pieces of the business are essentially ramping. And if you heard what we reported in our numbers, we actually saw even more growth in aftermarket in the quarter than we did on the OE side. And so we don't anticipate a negative mix impact from this ramp on the OE side as we look you know, out to the forecast for the next number of years. But to your point, it is certainly something to watch. If you ever get, in many ways, inverted there and OE is growing and aftermarket isn't, it would certainly have a negative impact on margins, but that's not our anticipation.
spk02: Yeah, just to remind you with a couple of numbers here, our trailing 12-month, our rolling 12-month in the aftermarket is 25%. And that's really 25% on both defense and commercial.
spk17: And OE and aftermarket, which is really the important point. Yeah.
spk10: Great. That's super helpful. And then just one quick longer-term question, Craig. I mean, given all these trends across all your businesses, we're obviously going to have a period of very strong growth here. And I just don't think we've compounded at these types of levels over multiple years in the past. So how do you think about capacity here? Because the rates of growth seem like they're really kind of inflecting for a longer term.
spk17: No, first of all, you're absolutely right. This is a very different electrical industry, a very different Eaton than the one that perhaps your grandfather and grandmothers knew. And so as a result of that, we are making fairly sizable investments in capital equipment. We talked about it in the last earnings call, some of the big investments that we're making in the utility space. And I mentioned in my outbound commentary, we've made investments in transformer capacity, voltage regulators, and line insulation products. These are essentially capital investments that are ongoing right now. We've made some fairly sizable investments in our circuit breaker capacity over the last couple of years. And so we are having to invest more in capital equipment. But I would say even in the big scheme of things, the level of investment is maybe going to tick up a half a percent more of sales, maybe another percent of sales, but very well manageable in the context of the overall growth of the company.
spk02: Yeah, the important thing is the focus is really there. We were just recently with our board and our strategy session, and a big part of that was the capacity related to meeting this hyper growth. So, you know, we're very hungry. There's a lot of food on the table. We're very hungry.
spk10: Great. Well, with that, I'll let you go off to lunch. Thank you.
spk13: Thank you. The next question is from Nigel Cole from Wolf Research. Please go ahead.
spk15: Thanks. I guess it's good afternoon now. Lunch sounds good to me. So we've covered a lot of ground, so back to electrical. You mentioned, I think, Craig, retrofit activity, which I think was in relation to CNI end markets in particular. And I know you've talked about this in the past, increasing load content, and I think it was in relation to charging specifically. But maybe just talk about what activity you're seeing within retrofits and how you think that develops over the next couple of years.
spk17: Yeah, no, certainly appreciate the question, and we do, you know, if you think about today, why we are feeling, you know, incrementally more positive around what's happening today in commercial and institutional, and a bit of this is simply what we're all experiencing around, you know, the growth in electrification, the growth in EV charging infrastructure, and the investments that are being put in to support, you know, the growth and the demand for electricity on the grid. And so in terms of quantifying the impact of that versus the impact of the new build, I can say we're probably today not smart enough to do that with any degree of precision. I can tell you that it is an important piece of what we're seeing in terms of growth. It will contribute to growth. How do you quantify the impact of retrofits versus the new build stuff? We're trying to work through some of those questions and answers, but things are moving so quickly right now that, quite frankly, we haven't had a chance to really put pen to paper and really try to figure it out. But we are gonna see, to your point, we're gonna see it in both new buildings, and we're gonna see a lot of retrofits and modifications, whether it's in a home to put in electrical infrastructure, in residential, whether it's in commercial buildings or offices to support EV charging, to support the addition of solar, the additions of battery storage. All of these investments that are being made to improve your electrical capacity, resiliency, a lot of that will go into existing buildings. We'll try to be a little smarter on this topic and get you a little better answer than that, but certainly an important one for us, but one we're still trying to quantify.
spk15: I agree. And then on data centers, I just want to take the other side of sort of the, you know, are you seeing any signs of weakness? It doesn't look like it, but are there any signs of weakness out there? I'm thinking maybe China perhaps might be a bit softer. Yeah. And then when you think about generative AI and GPU racks, does this increase the revenue per megawatts, or does this just increase the total megawatts in the markets? Any thoughts there would be helpful?
spk17: Yeah, I mean, to your first question, are we seeing any signs of weakness, I would say not really. I mean, whether geographically or whether it's, you know, it's not just either the hyperscalers we're seeing at Colo, we're seeing on-prems, We're seeing it around the world. Globally, we're seeing strength in the data center market. And then to the point around, once again, you get back to this important question around AI's impact on data centers and the way they're going to be configured. Certainly, we understand that they're going to need more power. The power density of these racks is going to go up. But we still don't know. I think it's early days, and it's one that we know we owe you an answer, and we know we owe ourselves an answer on that one as well as we continue to talk to some of the big data center providers around how they're gonna be configuring these data centers and how they're gonna change, but I would say we're still in the early innings and we don't yet have all the answers to how they're gonna be reconfigured.
spk02: Yeah, and just a little bit more on Craig's point in your question on slowing. Each part of the world for the first half of the year, data centers, including hyperscale, grew double digits. It's just a matter of whether it grew mid-double digits or in the 20s or in the 30s. We're seeing robust growth across the board.
spk15: Okay, that's great detail. Thanks a lot.
spk13: Thank you. And the next question is from Steve Tusa from J.P. Morgan. Please go ahead.
spk01: Thanks for putting me in.
spk13: Yes, Steve, no problem.
spk01: When you said greater contributions from volume and price in the second half of the year, what exactly did you mean by that? Did you mean that you just expect the skew to be more towards volume in the second half versus the first half, or maybe just a little bit more color on what you meant by that?
spk17: That's primarily what we're referring to, Steve, because if you think about most of the big price increases that we put through in our business, most of those showed up in the second half of last year. We got some modest price increases this year, but most of the big price increases that we got, we got in the second half of last year. So they're really baked into the comparable for 2020, you know, 2022, and we're anniversarying those big increases right now. And so just on the relative contributions to growth, on a relative basis, we're going to get more from volume than we are for price in the second half of the year.
spk01: Okay, that's helpful. And then just on the electrical America's business, I mean, should we think about this margin you're doing, especially here in the second quarter here? I mean, is that like, I know you have it going down sequentially in the second half, I guess, a little bit. Is that the jumping off point for next year? How sustainable is that? And any moving parts there that you want to call out as we, you know, tinker with our models for next year?
spk17: Yeah, and I'd say that our team continues to execute well. We certainly had a little bit of perhaps favorable mix in Q2, and maybe that's what you're seeing in terms of the relative change between Q2 and the back half of the year. But there's nothing, there's no unusuals in those numbers. That's just straight operating performance execution by our team. And yeah, the simple answer is yeah, that should be the jumping off point. as we think about what this business should look like into 2024 and beyond. And obviously, we're going to have volume growth. And so the business is performing well, and we'd expect it to continue to perform well.
spk02: Yeah, and Steve, I would just add, we know what the implied save for the segment margins. We're hoping we do better than the implied.
spk01: Right, but is that the jumping off point for next year? Like, is that a sustainable number that you can improve on next year?
spk13: Yes.
spk04: Yeah.
spk01: Okay. Straightforward. Thank you.
spk13: Thank you. The next question is from Dean Dre from RBC Capital Markets. Please go ahead.
spk07: Thank you. Good day, everyone. Hey, Dean. Hi, Dean. Hey. Covered a lot of ground, but I did hear a couple of references to unknowables and a choppy macro. So it kind of begs the question about the initial assumption for this year so long ago themes. for a mild recession. Is any clarity in terms of your assumption there? Is that everything seems to be skewing much higher?
spk17: Yeah, no, I mean, I think to your point, Dean, we, like so many others, had anticipated a mild recession this year. And our thinking around recession continues to be pushed out as it does for, I think, most of the economists in the world. And so at this juncture, I mean, we're feeling pretty good about the year. It's one of the reasons why we're taking up our guidance. And I think the bigger message becomes, in the event of a mild recession, very much consistent with what we said originally, even in the event of a mild recession, given the megatrends and the stimulus spending and the strength of our end markets, we don't believe it's going to have a material impact at all on Eaton's growth. That's what we said at the beginning of the year, and that's what we continue to believe.
spk02: Yeah, and Dean, I'll take you back to an earlier response. We've modeled even with downturns in order intake, if you use that for a proxy in terms of a mild recession, we are very confident that we can power through that, given our backlog and the megatrend.
spk07: Yep, that seems clear. And then just a very quick follow-up on Steve Volkman's question about capacity. When we were all together in New York a while back, we talked about shortages of smart switch gear and transformers. Is that in any way holding back the utility demand, at least how much you'll be able to supply, and how does that change?
spk17: Yeah, no, I'd say as an industry, things are better. And I'd say we are, the industry and some of the supply chain choke points are materially better today than they were, let's say, this time last year. but we're clearly not out of the woods. And there are certainly certain markets and verticals that are still very much challenged with respect to lead times. And the utility market is one of those. As we mentioned on these calls before that, probably the longest lead time device we probably have today in the company is a transformer that goes into the utility segment. And so very much a function of which end market and which product you're talking about In general, things are getting better, but lead times are still extended. We're still not back to, let's call it the pre-2019 levels of lead times. We think our lead times are competitive with our peers in the marketplace, but yet we're still not back to where we were in 2019, and we still are extended in certain product lines.
spk07: Thank you.
spk17: Thank you.
spk13: Thank you, and our next question is from Brett Lindsey from Mizzou Hall. Please go ahead.
spk03: Hey, good afternoon. I just wanted to follow up on that utility comment there. So you gave the growth framework to 25. I think you said 11% growth. How should we think about Eaton's relative growth in the context of wallet share per opportunity or any share shifts from some of these capacity additions?
spk17: Yeah, I mean, I'd say Eaton's relative growth performance, I think with respect to our peers, as we talked about before, and it's one of the reasons why we included that chart, is that all of our peers aren't the same. We play very broadly across the utility end segment. As I said in my commentary, we think we are the broadest player. We have a broader portfolio of solutions in the utility market than any of our competitors. And so we think we are very well positioned to grow at market, to grow and perhaps grow faster than the market. We are today, as are most of our peers, capacity constrained. And so I do think that the real limiter on growth in terms of the utility market these days is really gonna be our ability to add capacity to deal with the growth that we're seeing. And that is the one segment where lead times are still quite extended. And until we get this new capacity online, it's going to be very difficult for us to grow at a much faster rate than the overall market.
spk03: Okay, great. And then just one follow-up, but I apologize if I missed it. But on the project funnel, you guys have been giving that rate of growth year over year and sequentially. Just curious how that fared in the quarter.
spk02: Yeah, the negotiated, the major projects, Yeah, it was up 17% year over year and 65% on a two-year stack.
spk09: Great. Thanks a lot. Best of luck. Thank you. Thank you.
spk13: Thank you. The next question is from Joe O'Day from Wells Fargo. Please go ahead.
spk06: Hi, thanks for taking my questions. I'll ask them both together because they're kind of related. One's lead time related and one's backlog. But any additional color, if you think about some of the biggest kind of revenue product categories, just some perspective on where lead times are, where they were at their worst, kind of what you need to get back to for normalization. And then related to that, I think all the tailwinds that you're discussing on sort of the mega project support out there, the stimulus support out there, I think, Tom, your comment was it might take two to three years for backlog to get back to normal. But I guess even as these lead times correct, is backlog back to normal really the expectation or you think it's going to – take quite some time before we really start to see any kind of notable step down in these levels.
spk17: Yeah, and I'd say maybe just kind of addressing kind of the first part of your question, which is kind of on lead times. And as I mentioned on the prior question, lead times are in fact still extended. They've improved somewhat. certainly more so in some of the, you know, shorter cycle businesses. We talked about, you know, Resi, MOEM, distributed IT. For the big project-related stuff, you know, a lot of those lead times today are still fairly well-extended, and for utility markets, they probably haven't improved much at all. So it really does vary widely depending upon which vertical you're referring to. And until once again, I said, we are sold out. We don't have a lot of excess capacity today to really deal with what has clearly been a much faster acceleration in growth than what we originated in some of these big industrial-centered kind of product lines and businesses. And so until capacity comes online, we would not anticipate that these lead times get materially better. And the same thing I would say would be true of backlogs. They're obviously, to your point, very much interrelated until you can release, you know, reduce your lead times, barring a significant slowdown in the markets, which we don't anticipate, you're really not going to deal with reducing your backlogs either. And so we do think that under a normal planning horizon, the way we're thinking about it, backlog stay elevated for some period of time. I think what Tom was trying to do was simply to try to provide a little comfort around that even if markets slow down, we should continue to be able to post very attractive revenue growth because we can simply eat backlog.
spk02: That's right. That's right. The two to three years that I quoted is in a turn down situation and is arguably conservative.
spk06: Got it. Makes sense. Thanks a lot.
spk02: Thank you.
spk13: Thank you. And at this time, there are no further questions in queue. Please continue.
spk16: Hey, thanks, guys. As always, Chip and I will be available to address any of your guys' follow-up questions. Thanks for joining us today. Have a great day.
spk13: Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T event conferencing. You may now disconnect.
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