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spk00: At this time all participants are in a listen only mode. Later we will conduct a question and answer session. If you wish to ask a question, please press 1 then 0 on your touch tone phone. You will hear an acknowledgement tone that you've been placed into queue and you may remove yourself from queue at any time by repeating the 1 0 command. Should you require assistance during your call, please press star then 0 and an operator will assist you offline. And as a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Yen Jin, Senior Vice President of Investor Relations. Please go ahead.
spk11: Hey, good morning. Thank you all for joining us for Eaton's third quarter 2023 earning course. With me today are Craig Arnold, our Chairman and CEO, and Tom Oakry, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Craig, then he will turn it over to Tom. who highlight the company performance in the third quarter. As we have done our past course, we'll be taking questions at the end of Craig's closing commentary. The price release and the presentation we'll go through today have been posted on our website. This presentation including adjusted earning per share, adjusted free cash flow, and other non-GAAP measures. They're reconciled in the appendix. A webcast of this course is accessible on our website and will be available for replay. I would like to remind you that our commentary today will include a statement related to the 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 are described in our earnings release and the presentation. With that, I will turn it over to Craig.
spk14: Craig Johnson Okay. Thanks, Shen. And we're pleased to report our Q3 results in another record quarter. Our team continued deliberate on our commitments, supported by strong markets and good execution. So let me begin with some of the highlights on page three. As we've shared for some time now, megatrends, including re-industrialization, energy transition, electrification, and digitalization, are continuing to span our markets, revenues, orders, and negotiations pipeline. As these trends are once again evident in our results in the quarter, especially in our electrical America's business. We posted another quarter of record financial results with strong revenue, margins, earnings, and cash flow growth. While our markets continue to be strong, we're also continuing to improve on our overall effectiveness, which drove our record operating margins. And we're once again raising our earnings outlook. We're raising our 23 guidance for margins, adjusted EPS, and cash flow. Our EPS growth for 2023 at the midpoint of our guidance is now 19 percent. I'd also like to highlight our growing backlog, which was up 15 percent in electrical and 22 percent in aerospace. And we continue to have a strong book-to-bill ratio of 1.1 for electrical and 1.2 for aerospace. Lastly, we recorded record third quarter operating cash flow of 1.1 billion, up 18 percent, and free cash flow margins of 16%. Tom will share additional details, but overall, as you can tell, we're pleased with the results and well positioned to close out a record year. Moving to slide four, in the last quarter we shared a framework for how we think about our key market drivers for the company. The chart notes six megatrends that are driving growth capital investments and how they intersect with various businesses within Eaton. As you can see, we're uniquely positioned in most of our businesses and expect to see accelerated growth opportunities. It's our intention to cover each of these markets and megatrends during our earnings call and to keep you appraised of progress. In our Q2 earnings call, we provided an assembly of progress on infrastructure spending, reindustrialization, and the utility market and electrical, and our aerospace business. Today, we'll spend a few minutes on how reindustrialization continues to drive a record number of megaprojects in North America and how Eaton is positioned to win in the fast-growing data center market. We received an extensive number of questions on each of these topics and hope our updates are helpful as you think about the growth outlook for the company. So let's begin with slide five in the presentation. We've shared this chart previously. And the data is a good proxy for re-industrialization and what we're seeing inside of many of our markets. You'll recall this chart summarizes the number of megaprojects that have been announced since January of 2021. And a megaproject is a project with an announced value of $1 billion or more. Note that this is the North America data, but we're seeing a similar trend in Europe, although the dollar amounts are not as large. Three key points to note here. One, at $860 billion, this number is three times the normal rate, which translates directly to future opportunities for electrical markets. As a reminder, the electrical content on these projects range from 3 to 5 percent. Two, this number continues to grow at a faster rate. Announced megaprojects grew 25 percent between Q3 and Q2, and Q2 was up 20% from Q1. This will not go on forever, but there continues to be strong momentum for industrial projects in North America. And third, only 20% of these projects have actually started. For those that have started, we've won roughly $850 million of orders with a win rate of approximately 40%. And we're actively negotiating another $1 billion of electrical content on a small subset of these announced mega projects. Turning to slide six, we highlight the data center market. You know, I can't think of many markets that have better secular growth dynamics than data centers. The world's appetite for data, new insights, and software solutions continues to grow at an exponential rate, and natural language processing, like chat GPT, will only accelerate this trend. This is a very good thing for Eaton as we have a strong portfolio of data center solutions and the data center slash IT channel represents 15% of our total revenue. While the numbers continue to be refined, we now think this market grows at a 16% compounded rate between 2022 and 2025 and likely for much longer. As expected, our customers are continuing to expand their data center CapEx build-outs, some of which are being modified to support the adoption of generative AI. Just consider some of these metrics. 120 zettabytes of data have been generated in 2023, a 60-fold increase over the two zettabytes generated in 2020-10. And the amount of data generated is expected to grow to 180 zettabytes by 2025, a 50 percent increase over 2023. And the AI impact is just starting to show up in our order book. During Q3, we won a large order of approximately $150 million for a new AI training data center and saw a roughly 61 percent increase in hyperscale orders overall. These AI data centers require both high power and high power density, and as a result, higher electrical content. Another trend driving higher electric content is the need for solutions that allow bidirectional flow of power back to the grid and the ability to optimize the use of renewable energy to power data centers. So this market and Eaton are well positioned for a higher growth for years to come. And on page seven, we highlight Eaton's unique positioning in the data center market And note that we have the electrical industry's broadest portfolio of power manager solutions for data centers. Centralized data centers come in a variety of sizes with incoming power draws between 10 and 500 megawatts, with the average data center of 40 to 50 megawatts, which is the variety that we show here on this slide. Eaton, we support the flow of electrons from where they enter the facility from our transformers to our medium voltage and low voltage switchgear, to our electrical busway, to our uninterruptible power systems all the way into the server rooms where we offer racks and power distribution units. In addition, we have a broad suite of software and service solutions that provide real-time diagnostics, prognostics, and uptime support. As a rule of thumb, Eaton's market opportunity in data centers is about $1.5 million per megawatt. Here, we're distinguishing this market from the myriad of smaller data centers that exist to support many different markets and smaller applications. And we continue to improve our position in the market with our bright layer for data center suite of software solutions. This platform is the first in the industry to unite asset management, IT, and operational device monitoring, power quality metrics, and advanced electrical supervision into one single application. This new software provides electrical power, power quality, distributed IT equipment performance management that improves efficiency, data accuracy, and certainly uptime. So overall, Eaton is well positioned and continues to build on our strength in this rapidly growing market. Given our broad set of megatrends and our growth outlook, we're naturally investing to add capacity in many of our businesses as noted on slide eight. In fact, down the normal run rate, we're investing more than $1 billion of capital to support the growth that we see over the next five years. These investments expand our production capacity across a wide range of markets and position Eaton to win more than our fair share of these opportunities. As you've heard, while somewhat improved, our lead times are still longer than ideal, and these investments will address the bottlenecks in our manufacturing sites. The primary investments are being made in utility markets to support transformers, voltage regulators, and our line insulation and production equipment, in circuit breaker capacity to support the rapid growth in industrial projects and to add redundancy to our existing capability, and in our global electrical business to support growth in a number of fast-growing emerging markets where we've been gaining share but have ample opportunities to do significantly more. And, of course, we're building a completely new e-mobility business and making significant investments to build out new manufacturing capacity there. These capital investments support higher organic growth, provide excellent return on investment, and are indicative of our confidence in the future of the company. We've made some of these capital investments this year, while others will be layered in over the next couple of years. Now I'll turn it over to Tom to cover our financial results and outlook for the year. Thanks, Craig.
spk16: I'll start by providing a summary of our Q3 results, which include several records. With respect to the top line, we posted an all-time quarterly sales record of $5.9 billion. Organic growth continues to be strong, up 9% for the quarter, building upon six consecutive quarters of double-digit growth and three quarters on a two-year stack of mid-20s growth. Operating profit recorded all-time records on both a margin and absolute basis. Operating profit grew 23 percent and segment margin expanded 240 basis points to 23.6 percent. We posted a very strong incremental margin of 46 percent, up sequentially from 33 percent in Q2 and 27 percent in Q1. Adjusted EPS increased by 22 percent over the prior year to $2.47 per share, an all-time quarterly record and well above the high end of our guidance range. This performance resulted in a third-quarter operating cash flow record. Our $1.14 billion in operating cash flow was 18 percent higher than the prior year, generating 16 percent free cash flow margin and over 100 percent free cash flow conversion. Looking at our results on a year-to-date basis, organic growth is up 12 percent. Segment margin is up 170 basis points. We generated incremental margin of 35 percent, adjusted EPS growth of 19 percent, a 73 percent increase in operating cash flow versus prior year, and free cash flow up 90 percent year over year. Moving on to the next slide, our Electrical Americus business continues to execute well and delivered another very strong quarter. We set all-time quarterly records for sales, operating profit, and margins. Organic sales growth remained very strong at 19%. Electrical Americus has generated double-digit organic growth for seven consecutive quarters, with six of the quarters greater than 15%. On a two-year stack, organic growth is up 37%. In the quarter, there was broad-based growth in nearly all end markets with double-digit growth everywhere except residential, and especially robust growth in industrial, utility, machine OEM, and data center markets. Record operating margin of 27.7% was up 420 basis points versus prior year, benefiting from higher volumes and effective management of price cost. Incremental margin was 50% for the segment. On a rolling 12-month basis, orders were down 3%. It's important to note that the dollar value of orders remains high. and the decline needs to be viewed in context of the 36 percent order growth in Q3 of last year. As discussed on last quarter's call, order intake is an important metric that needs to be analyzed together with record backlog. Currently, in our electrical sector, we have backlog coverage of almost three times our historical average. We've looked at multiple scenarios with meaningful order intake decline and are confident in those scenarios, given our backlog coverage, that we can generate robust organic growth for several quarters into 2025. In this regard, Electrical America's backlog increased 19% year over year and 5% sequentially. resulting in a book-to-bill ratio above 1.1 on a rolling 12-month basis. For orders, we had particular strength in data center, industrial facilities, and institutional markets. Also, our major project negotiations pipeline in Q3 was up 33 percent versus prior year and 19 percent sequentially, from especially strong growth in data center institutional, government, and water wastewater markets. Data center negotiations increased almost four times. On a two-year stack, our negotiation pipeline was up 180 percent. Overall, Electrical Americas continues to have a very strong year. On page 11, you'll find the results for our electrical global segment. Despite flat organic growth, we posted a Q3 sales record. We had strength in our commercial and institutional, industrial, and utility markets. Regionally, we saw weakness in EMEA markets that were offset in other markets where growth was in line with expectations. We expect the softness in EMEA to be short-term, with organic growth in the segment returning to low to mid single digits in Q4. Operating margin of 21.8% was up 120 basis points compared to prior year. Operating profit and margin were all-time quarterly records. Margin improvements were primarily driven by effectively managing price cost. Orders were up 1% on a rolling 12-month basis, with strength in data center and utility markets. Importantly, book-to-bill remained greater than one. Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segments. For Q3, we posted organic growth of 11%, incremental margin of 53%, and segment margin of 25.5%, which was up 320 basis points over prior year. On a rolling 12-month basis, our book-to-bill ratio for our electrical sector remains very strong at more than 1.1. We remain quite confident in our positioning for continued growth with strong margins in our overall electrical businesses. The next slide highlights our aerospace segment. We posted all-time quarterly sales and operating profit records. Organic growth was 10 percent for the quarter with a 3 percent contribution from foreign exchange. We've posted double-digit growth in six of the last seven quarters in this segment. Growth was driven by broad strength across all markets with particularly strong growth in commercial OE, and commercial aftermarket, which were up 21% and 27% respectively. Operating margin of 24.1% was up 10 basis points on a year-over-year basis and up 160 basis points sequentially. Growth in orders and backlog continue to be very strong. On a rolling 12-month basis, orders increased 16%, with especially strong growth in commercial OEM, commercial aftermarket, and defense OEM. Year-over-year backlog increased 22% in Q3 and 4% sequentially, reflecting continued momentum in the aerospace recovery. On a rolling 12-month basis, our book to bill for our aerospace segment remains very strong at 1.2. Moving to our vehicle segment on page 13. In the quarter, organic growth was down 1%. Foreign exchange had a 2% favorable impact. We saw growth in APAC, North American automotive, and EMEA markets more than offset by decline in North American Class A and South American markets. Operating margins came in at 17.4%. 60 basis points above prior year, driven by effective price cost management, partially offset by lower sales volumes. 17.4% margins represents 210 basis points of sequential increase, primarily driven by manufacturing efficiency improvements. We continue to pursue and win new business in growth areas such as EV, torque, wind, with a major Chinese OEM. We also have momentum-winning program length extensions and volume increases with multiple OEMs globally. On page 14, we show results for our e-mobility business. We generated another strong quarter of growth, including an all-time sales record. Revenue was up 19 percent, all organic. Margin improved 150 basis points versus prior year to break even. The result was mostly driven by higher volumes from ramping programs and improved manufacturing productivity. Overall, we remain very encouraged by the growth prospects of the e-mobility segment. So far in 2023, we have won new programs worth $1.1 billion of mature year revenues. This is nearly 145% increase in new program wins since the $450 million highlighted in last quarter's earnings call. Through these wins, we continue to find opportunities to leverage expertise and differentiated technologies across segments. Should be noted, we have increased our interim revenue target for 2025 by 25% from $1.2 billion to $1.5 billion. Moving to page 15, we show our electrical and aerospace backlog updated through Q3. As you can see, we continue to build backlog with electrical stepping up to $9.4 billion and aerospace reaching $3.1 billion, sequential increases of 5% and 4% respectively. Both businesses have increased their backlogs by significantly more than 100% since Q3 2020. The backlog build gives us confidence in our order outlook for the quarters to come. On the next page, we show our fiscal year organic growth and operating margin guidance. For organic growth, we are increasing electrical Americas, lowering electrical global and e-mobility while narrowing the range of our total organic growth, resulting in a 50 basis point increase at the midpoint. We now expect organic growth in electrical Americas to be 16.5 to 18.5 percent, up 250 basis points from our prior 14 to 16 percent guidance. This represents 850 basis points improvement from our initial 2023 guidance. For electrical global, we're lowering our organic growth guidance from 6% to 8% to 4% to 6% based on weaker than expected end markets in Europe. For e-mobility, the midpoint of our organic growth guidance is now 25% versus 35%, mostly due to OEM-related delays for their EV platforms. For segment margins, we're increasing our total Eaton margin guidance range by 50 basis points. This is a result of an improved outlook in electrical Americas where we increased the range by 150 basis points on strong demand and continued operational execution. We are lowering margin guidance for electrical global 50 basis points due to lower growth. The 21.8 percent midpoint comfortably exceeds our target to reach 21.5 percent by 2025 and represents 160 basis point increase versus prior year. In summary, as we approach the final quarter of 2023, we remain well positioned to deliver another very strong year of financial performance. On page 17, we have additional guidance metrics for 2023 and Q4. Following our strong year-to-date performance and improved margin expectations, we are raising our full-year EPS range to $8.95 per share to $9.05 per share. The $9 midpoint represents 19 percent growth in adjusted EPS over the prior year. We're also raising our operating cash flow and free cash flow guidance ranges by $100 million each to reflect our stronger earnings and solid working capital management. For Q4, we are guiding organic growth of 8 to 10 percent, segment margins of 22.3 to 22.7 percent, representing 170 basis point improvement at the midpoint versus prior year. Adjusted EPS is a range of $2.39 to $2.49, an 18 percent increase versus prior year at the midpoint. The next chart summarizes the progression of our guidance in 2023. Throughout the year, we've demonstrated the ability to execute on our commitments and raise guidance for all of the metrics shown. We are well on track to deliver our third year in a row of double-digit organic growth with all-time record margins in a $1 billion or nearly 40% increase in operating cash flow. Now I'll hand it back to Craig.
spk14: Thanks, Tom. Moving to page 19 and turning our attention to next year, we provided our initial view on what we expect from RAND markets. And first, I would note this as a starting point, we haven't changed our view on 2023. And as you can see, we're expecting attractive growth in nearly all of our markets in 2024. We expect strong double-digit growth in data centers and distributed IT segment, in utilities, commercial aerospace, and electric vehicles. Additionally, we expect solid growth within industrial facilities, commercial and institutional, and defense aerospace. And as you can see, global light vehicle markets should be modestly positive, with only the residential and commercial vehicle markets experiencing a decline. So it should be another year of significant growth, with over 80% of our end markets seeing solid or better growth. Please note that much of this growth is supported by record backlogs, and we'll provide more detailed color when we're getting to growth as we come together with our 2024 guidance in February of next year. As you can see from the outlook, despite mixed signals in the economy and some historical indicators of growth, Eaton remains very well positioned to deliver what we call differentiated growth in 2024 and beyond. So I'll close with a summary on page 22, on page 20. Last quarter, I noted that we're feeling good about how our markets are performing, and today I rooted that sentiment. We continue to experience powerful megatrends that are driving a higher outlook for our end markets, and we're seeing it in our negotiations and order book. And once again, we delivered another record quarter of financial results, increased our earnings and cash flow outlook. Our orders continue to come in at historically high levels, and we continue to grow our backlog. I would note that our team is executing well, but we have an opportunity to be better everywhere, and I'd say in every business. So the setup for 2024 is playing out as we expected, and it should be another strong year. With that, we'll open it up for any questions you may have.
spk11: 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'll turn it over to the operator to give you guys the instructions.
spk00: Thank you, and ladies and gentlemen, if you wish to ask a question, please press 1 and 0 on your touchtone phone. You will hear an acknowledgment on that you've been placed in the queue, and you may remove yourself from queue at any time by repeating the 1-0 command. And if you're on a speakerphone, please pick up your handset before pressing the number. Once again, if you have a question, please press 1, then 0. The first question will come from the line of Andrew Obin from Bank of America. Please go ahead.
spk17: Hi, yes, good morning. Good morning, Andrew.
spk00: Good morning.
spk17: Just a question on incrementals, you know, just very nice progression in Electrical Americas from first quarter into third quarter and overall for the company. So, you know, how should we think about just incremental progression to the fourth quarter and 24? Because, you know, I think within your framework, you've used a lower number. Just maybe expand what's driving these strong incrementals and how sustainable it is going forward.
spk14: You know, I appreciate the question, Andrew, and our team certainly, you know, performed extremely well during the quarter and we're proud of our teams and how well they executed in this quarter and certainly implied in the guidance are pretty attractive incrementals as well. Maybe I'll answer the last question kind of first with respect to as we think about incrementals going forward in 2024, and we still think 30% incrementals are the right way to think about the incrementals for the company. Clearly, we're making some investments in the business that are going to kind of moderate incrementals. And certainly, if you think about price versus cost and the tailwinds that they provided during the course of 2023, we're not expected to see the same order of magnitude tailwinds in 2024. So we still think 30% is a good planning number for next year. But certainly, as we think about Q3 and Q4, we have you know, pretty strong line of sight to those incrementals that are embedded in our forecast for Q4. Male Speaker Thank you.
spk17: And just a follow-up question. You know, you keep announcing additional capacity additions. You know, if I look at slide 19, you sort of give end-market growth assumptions. So, how should we quantify the outgrowth opportunity or, revenue from capacity additions, particularly relative to your end market assumptions. Thank you.
spk14: You know, this is kind of a really attractive problem to have, Andrew, in terms of the growth that we're seeing in many of our businesses and having to make some investments to deal with this stronger demand that we've seen over the last few years and certainly the demand that we expect to see into the future. And so we talk about kind of this growth outlook for the company in these strong markets, and we need to make some investments in capacity and some key bottlenecks. We talked about the billion dollars in my opening outbound commentary and where it's going, and I'd say that these investments that we're putting in will give us the capacity that we need to support the long-term growth outlook for the company and a little headwind above that if markets turn out to be even a bit stronger than what we anticipated. We are making the investments that we should be making and we need to make to get out in front of the pretty robust outlook that we have for the company's growth.
spk17: Thanks so much.
spk14: Thank you.
spk00: Thank you. The next question is from Joe Ritchie from Goldman Sachs. Please go ahead.
spk05: Thanks. Good morning, everyone. Good morning, Joe. Hey, Craig, maybe just talk a little bit about the mega projects for a second. I think you mentioned that 20% of the projects have started. When you think about the timing of when you typically will see your bidding on those projects and the orders coming through, how do you see this kind of playing out based on, again, the projects that have already started and now the funnel just continuing to increase?
spk14: Yeah, I appreciate the question, and it's certainly something that we've spent a fair amount of time internally trying to sort through ourselves, and as you can imagine, inside of this broad array of megaprojects, there's very different types of projects that are embedded in those numbers, some of which, you know, where you'd have essentially, you know, a 12-month kind of cycle, others of which could have three-year cycles or longer. So it's a pretty wide distribution of lead times depending upon the type of projects that we're talking about. So I'd say that at this juncture, if you had to use a rule of thumb, I'd say you probably, because these tend to be the bigger projects, unlike our flow business, they're probably a couple of years on average in terms of from when we actually start and price a project to actually showing up in revenue inside of the company. You could figure on average a couple of years out is the way to think about it. You know, I would say that, you know, talking about these mega projects in general, we've gotten so many questions and there's been so much written about this particular topic. You know, I would say today that that is, you know, principally, perhaps more than anything else, what's driving this fundamental change in the growth prospects for the company. I mean, these huge projects, much bigger than they've ever been historically. And by the way, I'd note that 60% of these projects are related to whether it's IRA, the IIJA, or the CHIPS Act. And so these are really big projects. They are different projects. And they are projects that are, quite frankly, being subsidized in many ways by this government spending that's taking place more broadly inside of the US economy. So we think these projects are solid. They're going to go forward. And we think it's, once again, going to be really attractive growth tailwind for the company.
spk16: And just to compliment that, Craig, I mean, those are the mega projects, but we also said in the prepared remarks our negotiated pipeline for the U.S., which was up 33% year over year and up 18% sequentially. So, you know, a lot of good growth going on in those big projects, but less than the billion dollars as well.
spk05: Yeah, that's great color, guys. And I guess just my quick follow-on there is just You know, any concern that you have at this point? There's a lot of concern in the market regarding project financing. And, you know, specifically, I think you guys called out utility capex, the market being up double digits, you know, next year. Just any thoughts around the project financing issue, higher interest costs, and whether that pushes things out a bit?
spk14: Yeah. You know, it's certainly one of the things that we're watching and we're concerned about as well, Joe. I mean, it's perfectly logical to say that some of these projects are could be delayed or put at risk given much higher financing costs. I will tell you that we've not seen any evidence, any material evidence of that to date, but it's certainly, once again, a potential risk. And that's why I highlight this issue around 60 percent of these projects basically being financially supported by these government stimulus plans, which is very new. And the dollars, as you know, are quite substantial. And at this point, we'll have to wait and see how it plays out, and we're going to watch it and make sure that we're taking the necessary precautions. But to date, we really haven't seen that impact.
spk16: Joe, year-to-date in the Americas, utility is up over 25%. And if you look at the entire electrical sector year-to-date, we're up over 20%. So it remains very strong.
spk05: Great. Thank you both.
spk00: Thank you. And our next question is from Jeff Sprague from Vertical Research. Please go ahead.
spk03: Thank you. Good morning, everyone. Hey, good morning. Can we pivot a little bit to electrical global and just maybe a little bit more color on kind of the complexion of demand underneath the surface there by geography? And you noted some project activities starting to come to the floor there. It does seem like Europe in particular might end up in a bit of a bidding war with the US on project stimulus and the like. So maybe just a little bit of color there on how you see things playing out into the first half of next year, not just Q4, but what kind of pipeline might be building.
spk14: I appreciate the question, Jeff. And if you think about today what makes up the global business for us, there's what we do in Asia, there's what we do in what we call GEIS, which was the former Krauss-Heinz Beeline business, and then it's our electrical Europe business. Those are the three pieces that make up global for us. And I will say that we, without a doubt, did see a slowdown in our European business during the course of Q3. Our business specifically, we're a pretty big player into what you'd call the manufacturing or the MOEM segment, and that segment was especially weak. Our business in Asia continued to perform well, growing high single digits. Our Geis business continued to perform fine, mid-single digit, consistent with what we expected. It's really what took place during the course of the quarter in Europe, specifically in electrical industry. that drove the miss to our own expectations and the reduction in our outlook. Now, without a doubt, we saw some destocking in the distribution channel. And having had a number of conversations personally with some of our large distributors in Europe, it's clear that they were doing some inventory adjustments, some overbuying that took place over the last 12 months or so. And we do think that that segment gets back to mid-single digit growth in Q4, and we think Once again, these fundamental trends that we talked about with respect to electrification, energy transition, digital growth and data centers, all of those trends are applicable for Europe as well. And so we do think while slower growth than the U.S., we think those markets get back to growth once we've worked through this inventory correction that we've seen here in the third quarter.
spk16: Encouragingly, Jeff, we've seen some good order flow in EMEA, so that gives us confidence to go to the low mid-single digits in Q4.
spk14: But we'll keep watching it. I mean, clearly there's a lot of geopolitical tensions in the region there as well, and we're not going to be Pollyannish about it. And if we need to make some adjustments, we'll make the adjustments we need to make.
spk03: Great. And maybe just as a follow-up, different topic, though, is just thanks for the little mini deep dive on data centers here. Can you just speak to how your content is changing? So obviously, you gave us a $1.5 million per megawatt, and we got a lot of megawatts coming, right? So you just grow on the back of that for sure. Is your dollar content per megawatt also going up as part of this equation? And You know, how so, where's it been, and where's it headed in your view?
spk14: Yeah, you know, what I would tell you is that the simple answer to the question is yes. We are essentially selling more content per megawatt because we're selling more software solutions. We're selling more complete data center solutions into the marketplace. So that would be absolutely true. That impact is kind of dwarfed by, just the overall growth in the market, though. I mean, the market, as we've talked about, continues to be quite robust, and just maybe some of the data, you know, if you look at simply the backlog of projects today in data center in the planning stages, it surpassed $100 billion for the first time ever, greater than six years of construction, $12 billion in the month of September alone, starts up some 29%, you know, driven by the big four, and some $42 billion under construction, so the whole market is growing quite dramatically right now, and obviously what's happening today in AI is accelerating that, and if you think about the content opportunity for electrical equipment alone in an AI-centric data center, it's 5X the growth, the opportunity, when you compare it to a conventional data center. Now, having said that, clearly are some very real constraints in terms of the industry's ability to really deal with the demand that's out in front of us. Huge backlog, huge negotiations. We have historically operated with some three years, let's say, of visibility in data center market. We now have more than, in some cases, five years of visibility on projects. And so the whole market is just performing extremely well, and we'd expect it to do so for years to come.
spk16: Just to amplify, Jeff, just a little bit more on that, year-to-date in data centers, again, on our negotiation pipeline, up 136%. And in the quarter, as we said in the prepared remarks, up four times. So it's growing faster than it was at the beginning of the year as well.
spk03: Great.
spk16: Thank you.
spk00: Our next question is from Scott Davis from Milius Research. Please go ahead.
spk13: Hey, good morning, guys. Scott. Morning. Not much to pick on, really solid results across the board, but I was wondering if we could talk a little bit about M&A and maybe opportunities to play offense here while your cash flow is cooking. And I was thinking, in particular, is there any opportunities out there to really scale up this e-mobility segment to make either, whether it's several interesting bolt-ons or something a little bit larger to get that to scale a little faster than maybe the current pace.
spk14: You know, I appreciate the question, Scott. And, you know, first of all, I would say that with respect to, you know, M&A, more generally, we set our priorities will be electrical. They will be aerospace. And then on the margin, if we could find the right asset, we would consider an acquisition in e-mobility as well. But I think the broader message for the company is that we have enormous growth opportunities in front of us. The organic opportunities that we're looking at across the business and our ability to grow organically, I'd say today, they're just growth opportunities every place. And unlike perhaps in some times past, we don't need to do deals to significantly grow the company. And that's true as well in e-mobility. As you heard in Tom's presentation, You know, we just had another quarter of, you know, huge wins. $600 million, Tom, was the number, I believe, in terms of quarter-over-quarter change? Yeah, yeah, about 25%. So each one of these wins in e-mobility just results in just enormous growth for the organization. And so we set this target of being $2 billion to $4 billion by 2030. We will be selective. We will essentially, as we talked about in some of the prior conversations, we'll make sure that we're going to play in e-mobility where we have the ability to leverage our scale, our technology, and the expertise in our core electrical business. That's where we have the right to win. That's where we have the right to play. And that's where we can really deliver attractive margins for Eaton. And so that's really strategically what we're focused on with respect to the areas of interest that we have in e-mobility. So it really is about, you know, power distribution, power protection, you know, doing the same things that we do in our core electrical business. We get scale that we can leverage into e-mobility and at the same time leverage that, you know, scale back into our core electrical business. So I'd say today you could expect us in terms of thinking about M&A, you know, tuck-ins, you know, things that are very much digestible, those are the kinds of opportunities we're looking at in general, and those are the things today that I think make sense for the company in terms of where we are today with respect to our organic growth opportunities in front of us.
spk16: Yeah, just to add a little bit more, the long-term target, as Craig said, and we said in the prepared remarks, up 25%. But even since last quarter, our mature year wins was up 145%. That said, we've got a ton of flexibility, net leverage on the balance sheet, 1.5. So we're always looking, but we do have a lot of food on the table, as Craig said.
spk13: That's helpful. And guys, just to back up a little bit, if you think about Eaton historically, it had been a company that always managed price around raw materials, particularly kind of steel and copper. Is this Is the algorithm more likely in the future going to be pricing around the value you're adding, or perhaps pricing kind of dislocates from the underlying commodities? Or is that just kind of a bridge too far from how kind of customers are conditioned?
spk14: Yeah, I'd like to thank Scott that we were always value pricing, but I think I get your broader message with respect to the whole market dynamics around pricing. price versus cost, and certainly when you're in a capacity-constrained market, it certainly, you know, gives you a bit more leverage than you've had historically. But I'd just say in general, as we think about the strategy for other companies, that, you know, we intend to earn our margin accretion by running our businesses better, by running the company better and eliminating waste and inefficiencies, and, you know, we'll recover inflation where we see it, through price, but the margin expansion for the company, we really intend to rely on volume leverage, improving operating efficiencies in the way we run the company. And those opportunities, by the way, you know, despite record profitability, as I said in my outbound commentary, those opportunities are everywhere. We're still not running the company nearly as efficiently as we know we can.
spk13: That's very good. Helpful. Thank you. Best of luck, guys. Thank you. Thank you. Thanks, Scott.
spk00: Thank you. And our next question is from Steve Tusa from JP Morgan. Please go ahead.
spk08: Hey, congrats on the good result.
spk14: Thank you.
spk08: Just trying to reconcile the $850 million in orders with, I think you said, 20% of the mega products have started. You know, that's obviously a pretty big number, but $850 million in orders is relatively small. I mean, I guess that just speaks to where you guys are. You know, the thing starts and then you get the order. Like, Can you just reconcile those two numbers?
spk14: Yeah, and you really can't necessarily reconcile those two numbers because a start doesn't mean that we've even got an opportunity to bid the project yet, much less a negotiation or a win. And so you really can't reconcile those two numbers. And I know it's such a big number and a very attractive one that everybody's trying to get their head around. exactly how it's going to impact revenue for the organization. But those two numbers, you really can't reconcile them. What we try to provide as a bit of a framework is this win rate of 40%, which is essentially slightly above our underlying market share in North America as an indication of what you can expect as these projects play out into the future. but you really can't link the 20% to the 850.
spk08: Well, I mean, I think you just did. You basically said it's out in front of you. Yeah. I think you just explained it. And then just one last one on the kind of stock and ship business, if you will. I know you guys do You know, you're a bit more systems-oriented. But, you know, Hubble today continued to talk about destocking, and there's a lot of other industrials talking about that. Are you guys seeing that in parts of your business? And, you know, you're just kind of blowing through it because the other businesses, the supply-demand equation is just so strong that, you know, you're kind of weathering some destock in some parts of the business. Maybe just talk about some of those more flow businesses and what you're seeing on the distribution side.
spk14: No, I think you've summarized it well. I mean, we are seeing very similar trends in some of the shorter cycle businesses inside of our company, whether that's residential or whether what we're seeing today in the MOM segment or the IT channel. We, too, are seeing a slowdown, and we, too, are experiencing a bit of destocking in certain aspects of the business. And so those trends that others have talked about are certainly evident in our business as well. But I think you hit the nail on the head when you said that the other parts of the business, our systems and, you know, large project business, you know, our data center business, the other pieces where we're seeing this strength is just overwhelming, you know, those spots where we're having this weakness. Now, in Europe, we talked about it in our commentary, we did see weakness in Europe, and those trends clearly showed up in our European electrical business in the quarter. It's one of the reasons why we reduced the guidance there, but by contrast, we had this really outside strength, and we continue to see outside strength in the systems and the project-related business in the Americas that offset the weakness in the flow business in North America as well as what we've seen in Europe.
spk08: Right, so that would actually be an easy comp for next year in those businesses, assuming things recouple to trendline.
spk14: Well, I mean, nothing's easy, right? And it's certainly probably too early to put our hand on the scale and predict what's going to happen in Europe during the course of 2024. But you're right. I mean, given the fact that those businesses are weakening, assuming the market stabilizes and the inventory destocking is behind us, and we certainly have embedded some of that in our Q4 outlook, yeah, it should be a relatively better year for sure in Europe.
spk07: Great. Thanks a lot. I appreciate it.
spk00: Thank you. And the next question is from Chris Snyder from UBS. Please go ahead.
spk15: Thank you. I wanted to follow up on some of the data center commentary. So I think you said negotiations of Forex in Q3, so building as the year goes on. Is that increase in conversations all driven by AI? Are you seeing a broadening base of customers that are talking to you on the data center topic? You know, when we think about the AI tailwind, is there any benefit in 2023? Or is the tailwind from that really more 2024? Thank you.
spk14: Yeah, no, appreciate the question. It's obviously a topic that's gotten a lot of attention. And I'd say that, you know, I would tell you, you know, first of all, you know, while AI and chat GBT have gotten a lot of publicity of late, it's not new. I mean, it has been around for, you know, some time, and so we have historically seen some benefit of AI embedded in the data center market. I tell you that, number one. Secondly, as I said in my up-on commentary, yep, the AI, you know, centric, you know, bids and orders are up 4x, but we had a 61% increase in hyperscale in general, and that is really across the broad data center market. And so without a doubt, AI will be an accelerator of growth. But the broader message is essentially more data, more information, more insights requiring more data centers. And those numbers are big and growing as well.
spk15: I appreciate that. And then maybe just following up on the intersection of orders and backlog. You know, orders in the Americas have obviously moderated for about a year now. And your guys have, you know, built electrical backlog pretty much every quarter over that time period. So, you know, as you kind of look forward, you know, do you expect the company to start meaningfully working into that backlog? Or are we just kind of in a period of, you know, maybe sideways backlog levels into 2024? Any color on that would be helpful. Thank you.
spk14: Yeah, appreciate the question. And it's certainly one that we're spending some time trying to work through ourselves. I mean, Orders have moderated, as we talked about in Americas, but we also were topping a 36% increase from last year, and so moderation off of a really big number last year, and the backlog does continue to grow. I think it's really, in many ways, kind of the $64,000 question. Backlog is a function of how much demand you're getting versus your ability to satisfy that demand And at this point, I can only tell you, based upon what we've seen and experienced to date, is that we've not been able to materially eat into the backlog. We will at some point. I mean, this cannot go on forever. And we are adding some capacity for sure. That's going to help resolve some of the lead time issues and the bottleneck issues. And so we would expect backlogs at some point. to turn negative in absolute terms. Because keep in mind, we're up 3x. We're running a backlog of $9.4 billion in our electrical business, $3.1 billion in aerospace, but $9.4 billion in electrical. And that's three times the historical backlog levels. And so yes, one, it's a function of the fact that markets are good. But secondly, it is a function. In fact, we've got to get out in front of some of these capacity planning things so that we can satisfy all those demands. But at some point, backlogs will turn negative.
spk16: Yeah, and this is what I was trying to get at in my prepared remarks, just to amplify it a little bit more. And this is where we've modeled the scenarios of meaningful order intake decline on a year-over-year basis. And given how big the backlog is right now and the backlog coverage, the three times as Craig said, we think even with meaningful year-over-year order intake decline and robust organic growth, this is going to take us several quarters into 2025 before we before we get back to historical levels.
spk14: And I would say we probably never get back to historical levels, you know, if you think about it in terms of absolute terms, right? We'll be better, but we'll never probably get back to, you know, a $3 billion kind of backlog. It's a bigger business, you know, we'll need, so we'll run a bigger backlog simply to support the fact that it's a larger business. But we certainly would expect to at some point start eating into the backlog. Yep.
spk04: Thank you.
spk00: Thank you. The next question is from the line of Nicole DeBlaise from Deutsche Bank. Please go ahead.
spk14: Hey, Nicole.
spk01: Can we just talk a little bit about the capacity investments that you guys are making and just the cadence of when that's going to start kind of phasing and coming online over the next several years?
spk14: Yeah, so appreciate the question, Nicole, and I would tell you that, you know, some of these investments have been made already, and we already are bringing on new capacity in products like circuit breakers and the like. Other investments are just now in the early phases. If you think about some of the investments that we're making in transformer capacity and voltage regulators, and that capacity is probably order of magnitude 12 to 18 months out. So it does vary depending upon which particular piece of the investment that you're referring to. But I'd say in all cases, the commitments have been made. In all cases, we're looking at essentially those aspects of our business where we obviously have more capacity, excuse me, more growth more backlog than we certainly have capacity to serve it. And at this point, you know, our teams are kind of geared up for ensuring that we execute it well and bring this capacity online. It allows us to continue to grow the company and take some market share.
spk01: Thanks, Craig. And then just on free cash flow, thinking about how this progresses into 2024. Can you talk a little bit about your plans to reduce working capital and other major puts and takes that could influence conversion next year? Thank you.
spk16: Yeah, I appreciate the question, Nicole. You know, I think the important thing is to look at year to date when you're looking at operating cash flow and free cash flow. I mean, we had a good quarter, but year to date we're up 73% in operating cash flow and almost 90% in free cash flow. And if you look at the improvement levers for year to date, it's about split between higher earnings and better working capital. And if you recall, last year we said we were investing in our customers and investing in the growth and believe that was the right decision. In the back half of last year, we started getting more efficient with working capital. We expect that to continue going into 2024. We're happy with our free cash flow margin this quarter of 16%. But we've got a lot of opportunity to improve in terms of inventory, days on hand, getting better in terms of DSO, our cash conversion cycle. So we're not stopping here. We're happy with our progress, but we've got a lot of opportunity for better cash flow going forward.
spk00: Thanks, Tom. I'll pass it on. The next question is from the line of Julian Mitchell from Barclays. Please go ahead.
spk06: Hi, good morning. Maybe just wanted to ask a quick question about the sort of core revenue or organic revenue outlook. So you had that very helpful slide on the main end market moving pieces. Should we sort of assume from that that that blends to about kind of 6%, 7% market growth, and then you're adding about a point or so of share, and that's kind of how you get that 7% to 8% organic growth number for next year that you discussed, I think, in September?
spk14: You know, I appreciate the question, Julian, and obviously it's certainly early for us to give you kind of a definitive guide on where we think 2024 will be, and we'll do that in February. But I do think that kind of the framework and the way you talked about it is very much consistent with the way we're thinking about it. We talked about kind of, you know, the exit rate of the year in that 7% to 8%, and that's kind of a good proxy for the way to think about 2024, you know, subject to whatever changes that we see between now and the end of the year. But those market outlook slides are very much consistent with our current view. And unless things go sideways someplace in the world, which we don't anticipate, that would be a good kind of starting point to think about it.
spk06: That's helpful. Thank you. There's one thing I wanted to circle back to was around the sort of gap between the products and the systems on the electrical side. I guess historically you had, you know, those were sort of two sides of one coin. The products are the shortest cycle piece. Systems is the longest cycle piece. And sort of with a lag, one would follow the other. So when we're thinking... You know, about next year, the gap between products and systems presumably narrows. Is the assumption that they sort of meet in the middle? You know, products improve a bit, systems slows down because of comps or any kind of way we should think about it. You know, maybe projects or mega projects mean the systems piece sustains a very wide outgrowth versus products, for example.
spk14: Yeah, you know, I appreciate that question, Julian. And I would tell you from where we sit, I mean, this products versus systems view of the electrical markets, we would suggest it's probably not the most effective way to think about it in general. And it's one of the reasons why we changed our reporting structure. And we've been so much focused on the end markets that we serve. And so we really think the better model and the better way to think about The company is, you know, here are the big end markets that we serve, commercial and institutional data centers, utilities, residential. You know, these are the big end markets that we serve. And in every one of these large end markets, for the most part, they will accept and take a product. In some cases, we'll sell a system or a solution into these same end markets. And so what we tried to do in the framework that we provided is give you a sense of, what we think is going to take place in these end markets. And where you see differences in the way our business is performed, take Europe, for example, versus the U.S., we have today in the U.S. a much bigger percentage of our business that would go into end markets like data center and utility than we would have in our business in Europe, where they would be much more indexed into data let's say the MOEM segment, which is in decline in Europe, or in the residential segment, which is really in decline everywhere. So I think that's a better way to think about how to model the company than this distinction between a product and a system.
spk06: That's very helpful. Thank you.
spk00: Thank you. The next question is from Steve Volkman from Jefferies. Please go ahead.
spk02: Oh, great. Thank you guys for fitting me in. Just a quick follow up to go back to this kind of backlog thing, which I think you guys have explained pretty well. But Craig, is it reasonable planning assumption that we end 2024 at sort of whatever the new normal is for backlogs that that slightly higher than historical number?
spk14: Yeah, that's it. I tell you, I wish I had an answer to that question. That's definitively Steven Trevor, what that backlog is going to look like at the end of 2024. I can tell you what we said about this year, that we didn't anticipate this year that we could materially eat into the backlog because, once again, we knew what the underlying orders looked like. We understood, essentially, a very good view on what our markets would be and what our capacity is. We are bringing on some new capacity that will come online in 2024 that will help us eat into the backlog. Having said that, are we going to end 2024 at the same levels we are today? We would hope, quite frankly, that we can reduce backlog during the course of 2024. We would view that as a successful year, you know, all else being equal because it's given us the ability to shorten lead times and do a better job of responding to customer demand. But sitting here today, I mean, to suggest that I would have, you know, any visibility into what that number is going to be at the end of 2024 just would not be realistic. And so we hope that we can reduce backlog by essentially shortening up some lead times. But at this point, if the markets continue to be as robust as they've been, that will be challenging.
spk16: Even reducing backlog, it would be hard to imagine, based on the scenarios we've looked at, that we would get our backlog at the end of 2024. to our historical backlog coverage level.
spk14: Yeah, we probably will never get back there. But hopefully we can reduce backlog. Reduce it for sure, yeah.
spk02: Great, that's definitely helpful. And then I'm going to pivot to the AI question, but I want to ask it from the other point of view, which is that I think you guys actually capture a fair amount of data from collected IoT devices, et cetera. So can you just comment on sort of where you are in terms of collecting your own data and providing services and systems that leverage that data into maybe new business models over the next few years?
spk14: No, definitely appreciate that question. And as you know, this is independent of AI. We had been on this journey inside the company to really digitize and digitalize our company. And so that What we said is that every single product, every new product that we develop, we expect it to have a microprocessor to be able to stream and process data and information. And so that has been going on inside of the company for the better part of the last five years. And as a result of that, we have been able to create some really attractive and interesting new value propositions around how we essentially can monetize our own data, and it's one of the things that we wrap up in this term you'll hear us talk about called the bright layer platform. So we have bright layer for data centers, bright layer for utility markets, and bright layer for residential. So this data platform that we use today to essentially find ways to monetize our data, either in the form of data as a service or software, is something that's happening broadly across the company and all enabled by the fact that all of our devices today, most of our devices today, we should say, are intelligent and have the ability to stream data. I would encourage, for those of you on the call, one of the things we're gonna try to do next year as a part of our investor meeting is to invite you to our center in Houston and to show you some very real examples of software and data solutions that we're selling today in various applications to our customer base that really monetizes our data and monetizes our software. So a really exciting piece of this leg that we talk about these megatrends, one of which is digitalization. We see that in the data center market, and we also see that in the way we are bringing new products and new solutions to market as well across the company.
spk02: Great. I'll look forward to that. Thanks.
spk00: Thank you, and the next question is from Nigel Cole from Wolf Research. Please go ahead.
spk04: Hey, good afternoon. Thanks for keeping it going here. Slide 19 is good, obviously very helpful. Just want to clarify a couple of things. So data center, the 16% CAGR you're forecasting through 2025 now, that's for the market, so not necessarily Eden, right? So I know you've got some market share growth ambitions there, so I just want to make that clear. And then when you talk about data center, are we talking here about the whole market? So obviously, a big chunk of that market is on-prem enterprise data centers. Or are we talking about a subset of that market? So maybe just clarify that. And then within this end market matrix, I'm pretty sure that if you put this up three months ago, you might have had a bit more of an optimistic view on residential. Obviously, with the higher rates, et cetera, I understand why. Your course is there, and I know it's not a big market, Steve, but I'm actually wondering if you're starting to see deterioration real-time in that market or whether it's much more sort of macro-driven.
spk14: Okay, so I think there's three different questions there, but let's take the first one around. So the answer to the question is yes, it is the entire market. So that 16% growth rate is reflective of what's happening in hyperscale, on-prem, colo, so it is our view of the entire market. And yes, we would expect our businesses to grow at faster than market. And as a result of that, you know, do better than what we think the underlying market is doing. You know, to the point around residential, yeah, we have seen the slowdown in residential really around the world. And we've seen it in the U.S. and what happened in single family first. Although single family, quite frankly, had a little bit of a stronger Q4. Single family starts were actually up some 6% in Q3. Multifamily wallet kind of record levels of units that are under construction clearly saw a slowdown in Q3. But we're definitely seeing the slowdown in residential. You see it most acutely, quite frankly, in Europe. Many of you see the market data coming out of Germany and France, where residential housing starts are down quite significantly, and everybody's read about what's going on in China as well. But to your point, residential as a company is not the biggest piece of our market. And I think the other thing I would add to that is that one of the things we've talked about in prior meetings is that we're seeing higher electrical content in all of the new homes that are built as they meet the latest requirements for UL standards in the U.S. or other standards, IEC standards around Europe, or we see smart homes being built and they're putting in more smart solutions. And so offsetting somewhat of that decline in units is the fact that we are seeing higher electrical content in new homes, and new homes are accounting for, quite frankly, a much higher percentage of the new housing market in general as people hold on to their legacy homes. And so, yeah, no question residential has weakened up. We're seeing it in our business. But once again, the strength that we're seeing in the other end markets big enough to offset those declines in residential.
spk16: Yeah, just to amplify a little bit, Nigel, on that one. If you look at year-to-date, and no question slowing down, but year-to-date for our overall electrical sector, we're actually positive in a residential perspective. Thanks, Tom.
spk14: Electrical content being higher, pricing being better, the unit volumes would be down as much as they would for others.
spk04: Yeah, I know there were two parts to that question, but if I can just sneak one more in, I know we're running late. The e-mobility 2025 target of 1.5 is a big step up from the prior 1.2. Does that uplift, and that's sort of like that growth ramp from here to 1.5, does that come disproportionately in 2025, or would you expect it to be a bit more linear through the next couple of years? And is there any implications for margins? I think you've got an 11% margin for 2025. How do we think about that? Last two questions.
spk14: Yeah, I'd say that, Jimmy, you would expect, you know, as you are well aware, I don't know the way this market works in vehicles, that when they launch a platform, you'll see a big change in the revenue as a function of when these new platforms launch. And so I would say that the volume does tend to be kind of chunky in that space as opposed to being linear. Once the vehicle launches, and it's in the market, then you'll see kind of a linear pattern of growth. But once the program first launches, you will see more of a step function change in revenue. And so between now and 2025, that business will grow. And we talked about in some of the outlook numbers that we still expect our e-mobility segment to see strong growth. It's a very strong growth for 2024 in our guidance. But some of this growth will be chunky. as we think about bringing on these new platforms that we've won.
spk07: That's great.
spk00: Thank you. And our next question is from the line of Bill Buller from Barenburg. Please go ahead.
spk07: Hi there. Thanks for the question. Craig, just to follow up on some of the answers you gave to the prior questions, you talked about the megatrends existing globally, which I get, but how much of the divergence between the US and elsewhere would you attribute to the current economic differences, which I think is the answer you gave to Jeff's earlier question, versus how much of this is just the weighting towards data center and utilities in the US being much larger than Europe, which I think is how we answered Julian's question. I guess I'm wondering if there's a third part to this, which is market share. So I don't know if you can comment on market share changes that you see in the U.S. or Europe, please. Thanks.
spk14: Yeah, no, what I would tell you is that in simple terms, I would say no with respect to market share. When you take a look at our growth in our European business, in any given quarter, you could find things bouncing around. But if you look at our growth on a two-year stack, a three-year stack, and you look at our revenues versus our peers, I think you'd find the numbers to be quite comparable in But I'd say that it is mega projects and the scale of mega projects that is driving the differences. It is where we play in, let's say, the Americas versus where we play in Europe. I talked about, you know, our penetration in Europe being a lot of which is in MOEM and industrial equipment. We don't have today as broad a portfolio in some of these other, you know, segments call it data center. We play very well in data centers, but we're not as big a player in data centers. We play in utilities, but we're not as big a player in the utility market. So we just have a broader, more complete set of solutions in the Americas that are supported by these megatrends. And the other big difference is, once again, all of the stimulus dollars that are being pumped into the U.S. economy that is essentially driving outside growth, and it's driving outside growth in these same verticals. Reindustrialization of industrial facilities, investments in utility markets, investments in chips and the CHIP Act. And so you're finding these kind of broader trends being also turbocharged by government stimulus spending.
spk07: Just as a follow-up to that, quickly, if I may, what's your current take on the EU policies these days? Obviously, everyone was quite bullish about the Green Deal and Net Zero Industry Act a year or so ago. Do you think that they'll ever lay an egg in a meaningful way like the U.S. ones do, or is that optimistic?
spk14: No, I think in many ways even more than the U.S. The European government has demonstrated their commitment to essentially moving towards a low carbon society, and they're putting both dollars behind it, and just as importantly, they're putting regulatory changes in place to drive the adoption of these green technologies. But as you can imagine, there's a lot going on in Europe today. There's a lot of challenges on a lot of different fronts in Europe that I think are today getting in the way and holding back you know, some of the benefits that you would ultimately, you'll ultimately see in that space. And, you know, as we talked about the manufacturing segment, Europe is much more, has been much more of a manufacturing engine for the world than places like Germany. And those markets have clearly slowed dramatically. But where we participate, think about data centers, for example. Our data center business in Europe is also up dramatically. So where we have kind of some of these megatrends, energy transition, where we play in energy transition markets, those markets are up dramatically in Europe. But the business mix is quite different. And in that case, it's being held back. Those benefits are not showing up because it's being overwhelmed by some of these other structural issues in some of the legacy businesses.
spk07: Got it. And finally, if I may just squeeze one very quick one in on aerospace. There's no change to the 10% to 12% range for the year, but at the nine months, I think you're 13 and a bit. So that implies a bit of a moderation in Q4 from somewhere. So can you talk about what's happening there, please? I assume it's defense, or perhaps there's something else going on there, please. Thanks.
spk14: Yeah, I don't think – I wouldn't overread that in terms of we don't anticipate a slowdown in aerospace, as we talked about in our prepared remarks earlier. that orders continue to grow, backlog continues to grow. So I would not overread an implied number for aerospace in Q4. We still are very much pleased with that market and expect to see longer term kind of growth being quite attractive there.
spk07: Thanks very much.
spk00: Thank you. Our next question is from Joe Odie from Wells Fargo. Please go ahead.
spk10: Hi, thanks. I'll keep it to one. I'm interested in how you're kind of evaluating the opportunities on megaprojects and the degree to which you may be even thinking that it means win rates can't be as high as they have historically just because of the magnitude of the opportunity that's out there. And so I'm sure it's inspiring some competitors to invest more in some of these verticals as well. And where are you directing your investment dollars most to maybe position yourself best for at least as good, if not higher, win rates moving forward when we think about the verticals that you outline on slide 19, where you want your sort of exposure to those to get that much bigger over time and outpace the market?
spk14: You know, I would say that in many ways it's quite the opposite. If you think about today's where we tend to do well as a company and where our win rate tends to be higher. The bigger the project, the more complicated and sophisticated the project, the more likely it is that Eaton will win and garner higher share. So if you think about today, these big mega projects and our win rate on a mega project versus our historical underlining market share, our win rate would be higher. And it would be higher because, once again, if you think about our total ability to deliver a complete solution, medium voltage, low voltage, and everything in between, today we have a much better capability than most of the companies that we're competing against in the North American market where most of these mega projects are taking place. And so, yeah, without a doubt, the competitive dynamic is such that It's an attractive space. I will tell you that, for the most part, most companies are struggling with the same capacity constraint that we are. So today, with respect to a disruptor coming in and doing something that would somehow change the dynamics around underlying market share, highly, highly unlikely. because there's simply not enough capacity to do it. And then secondly, you know, you need the capability. And if you think about the size and the scale of these mega projects, you need a company who has pedigree, a company who you can rely upon and trust to essentially bring these projects home for you. The stuff that we do is mission critical, and it's not the kind of place that you would tend to find companies or customers you know, testing or trialing somebody new.
spk10: I appreciate it. Thank you. Thank you.
spk00: I think your next question is from Brett Lindsey from Mizzou Hall. One moment, please. Please go ahead with your question.
spk12: Yeah, good afternoon. Thanks. Yeah, thanks. Just back to the billion investment. Is there any way to think about the mix of what's expense versus capitalized? And is this going to be a program you're going to provide some quarterly guidance on like you've done with some of the restructuring programs in the past?
spk14: No, I would say today we would not intend to provide any particular quarterly guidance or clarity on that. Other than we can certainly let you know when the new capacity comes online. I think that's perfectly fair. But the other thing I would think about is that Yes, it's a big investment. There is going to be a mix of capital and expense. That's all kind of embedded, going to be embedded in our guidance as we go forward. But, you know, as the company's gotten bigger and our denominator revenue and everything else has gotten bigger, you know, we have historically spent about 3% of revenue in CapEx. That number may pop up to, you know, 3.5% order magnitude. So it's not going to be, it's a big number. It's going to give us the ability to solve a lot of bottlenecks. But in the big scheme of things, you're talking about maybe a half a point movement in terms of our capex spend here. So, yes, it's going to be some expense associated with it as well. But once again, all of that embedded in kind of the 30% kind of incremental numbers that we talked about for planning purposes.
spk12: Got it. I'll leave it there.
spk11: Thanks a lot.
spk07: All right. Thank you.
spk11: Okay, thanks, guys. We've reached the end of the call. Appreciate everybody's questions. As always, our team will do a follow-up call with you guys if we need to have more questions. Thanks for joining us. Have a good day, guys. Thank you. Thank you.
spk00: Thank you, and ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.
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