This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Ladies and gentlemen, thank you for standing by and welcome to the Eaton Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Yen Jin. Please go ahead.
spk09: Hey, good morning.
spk14: Thank you all for joining us for Eaton's third quarter 2024 earning call. With me today are Craig Arnold, our chairman and CEO. and Olivier Elnetti, Executive Vice President and Chief Financial Officer. Our agenda today includes the opening remarks by Craig. Then he will turn it over to Olivier, who will highlight the company's performance in the third quarter. As we have done in 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. the recount sale 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 will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projection due to a wide range of risks and uncertainties that are described into our earnings release and presentation. With that, I will turn it over to Craig.
spk13: Thanks, Jen. We'll start on page three, where we summarize the key highlights of another strong quarter. We generated adjusted EPS of $2.84 a share, an all-time record, and up 15% from prior year. We also delivered record segment margins of 24.3%, up 70 basis points from last year. And we're raising our guidance for segment margins and adjusted EPS for the year. We did experience a couple of extraordinary events in the quarter that impacted our revenue. First, the widely publicized strike taking place in the airspace industry, and then Hurricane Helene, which impacted several of our Electrical Americas factories at the end of the quarter. While both of these events will have an impact on our revenue outlook for Q4, they're not impacting our demand, and it's only timing. In fact, our markets continue to be strong. On a rolling 12-month basis, Electrical orders were up 12%, with electrical America's orders up 16%, and aerospace orders increased by 6%. This led to another quarter of growing and record backlogs, up 26% for electrical America's, up 14% for aerospace, with strong book-to-bill ratios. On balance, we're pleased with our results, well positioned for a record year of performance, and expect to carry strong momentum into 2025. Turning to page four, we once again are sharing our overview of megatrends and how they're driving growth in our end markets. I think the key message here is one of breadth, both in the number of megatrends and the number of our end markets that are positively impacted. Something we think is unique to Eaton and will allow us to grow at an accelerated rate for years to come. Last quarter, we provided an end market update on our commercial an institutional segment highlighting the strong growth outlook for institutional and infrastructure markets. Today, we intend to provide a forecast for residential markets and how energy transition is creating new growth opportunities in residential homes. And as we've done in recent earnings calls, we'll also provide an update on the growing number of megaprojects announced during the quarter. So let's begin with that on slide five in the presentation. This chart shows a summary of megaprojects that have been announced since January of 2021 in North America. As a reminder, a megaproject is a project with an announced value of $1 billion or more. Through Q3, we're now at 504 projects with a cumulative value of $1.6 trillion. And the backlog now stands at $1.8 trillion, up 30% from last year. You know, I'd also point out the announcements are continuing to accelerate with Q3 up 48% versus Q2. Approximately 16% of these projects have started, and we expect a record number of starts in 2025. Many of you have asked the questions about cancellations, which we continue to monitor as well. To date, cancellations have been modest, around 10%, and well below historical levels. For projects that have started, we've won over $1.7 billion of orders, and our win rate is almost 40%. Of note, we're in active negotiations on another $3 billion of orders, up 175% from last quarter. While megaprojects continue to garner a lot of attention, deservedly so, the Dodge Momentum Index, which tracks commercial and institutional projects, that are less than $500 million are also at record levels of 22 percent in the quarter. Taken together, we think they provide a strong validation of the megatrends and support our view on the long-term outlook of our end markets. As we, you know, prepare for the growth ahead, we're making investments in our manufacturing capacity naturally. And on slide six, we show an update of our incremental capacity investments, which now stand at $1.5 billion up $500 million from our previous estimate. The increase reflects our increasing confidence in our outlook, as well as increasing demand that we're now seeing in data center markets. These multi-year investments, with the largest addition coming in the second half of 25 and 26, and the capacity investments cover several product families, and importantly, can be used across most of electrical end markets. I'd also add that most of the additional capacity is what we consider light assembly and modular, which allows us to be both flexible and efficient as we deploy capital. Overall, our expansion projects are on track with a number of sites starting to ramp up production. For example, we've recently opened a 110,000 square meter facility in Juarez, Mexico that produces motor controllers and switchboards. And we also opened a new manufacturing facility in the Dominican Republic that will increase our supply of bus mint fuses. Next, on slide seven, we're highlighting our residential markets, which include, naturally, the electrical infrastructure for both new construction and renovation. Residential markets represent 6% of Eaton's total sales and 8% of electrical sales. And the key message here is that these secular trends that we've been talking about that are impacting our industrial and commercial markets are also impacting homes. As a result, the electrical content in homes continues to grow. The growth in solar, electric vehicles, energy storage, and the electrification of heating and cooking are fundamentally changing energy requirements in the home. And new safety codes and standards are also continuing to drive the need for higher electrical content. And as you know, the current IRA tax incentives for electrical panel upgrades are designed to support this growing need for more electrical power. No doubt, residential markets have been feeling the impact of higher interest rates over the last couple of years. With markets now feeling like they've reached a bottom, the housing shortage remains, and we should see positive growth from this point forward. Estimated at a 6 percent CAGR over the next four years, from what's been a drag on growth over the last 24 months should turn positive now. And within the residential market, Eaton is especially well positioned. As homes become more electrified, generate and sometimes sell electrical power, become bigger consumers of electricity, they also need to become smarter. We address these changes in our everything as a grid, including homes slide, which we show on slide eight. For more than a century, power has flowed in one direction, from central power plants into homes. Today, there's a new reality thanks to the addition of solar power, electric vehicles, energy storage, all on the top of the need to run a more electrified home. In simple terms, homes can now act as energy hubs, producing their own power, managing their electrical loads, and selling power back to their local utility, all of which requires more sophisticated electrical equipment. Eaton's Home as a Grid approach creates smart energy systems that allow homeowners to reduce costs, participate in demand response programs, improve resiliency, including islanding from the grid, and to optimize the home by selecting which electrical loads they want to run during a power outage. In addition to homes requiring more electrical power, homes are now required to be more intelligent, to be connected, and to be integrated into a home as a grid solution. Today's fully grid-ready homes have up to 5x the electrical content of a traditional home, a trend that will only increase over time and a tremendous opportunity for Eaton. One example of how we're implementing our home as a good strategy can be seen in the recently announced collaboration with Tesla. As you know, Tesla is one of the biggest names in energy storage. And they needed a solution that would allow homeowners and installers to simplify the integration of energy storage, solar, and load management in the home. This is especially important in the existing home market of more than 40 million homes with only 100 amp service. Eaton's first to market, and what we call Able Edge Smart Breakers provide homeowners with intelligent load management capabilities. This technology allows homeowners to turn their standard loads into a smart load center without replacing the electrical panel. Together with our partners, our systems will manage your solar, your energy storage, and your electrical loads. And it's simple to install. It provides better functionality, and at a much lower cost than other solutions. In fact, we estimate our solution will be three to five times lower cost. Our Able Edge Smart Breakers will be available in early 2025, and we look forward to growing our partnership with Tesla. Now, I'll turn it over to Olivier to take us through the financial results for the quarter.
spk10: Thanks, Greg. I'll start by providing a summary of our Q3 results, in which we once again set many new records. We posted third-quarter record sales of $6.3 billion, up 8%, both in total and organically. However, revenue was negatively impacted by about $50 million from Hurricane Hélène and labor strikes in the aerospace industry. Without these impacts, organic growth would have been above our 8.5% guidance midpoint. Operating profit grew 11% and segment margin expanded 70 basis points to 24.3%. Adjusted EPS of $2.84 increased by 15% over the prior year. This is a quarterly record and above the high end of our guidance range. This performance resulted in all-time record cash flow performance, including operating cash flow of $1.3 billion, up 15% on a year-over-year basis, and free cash flow of $1.1 billion, up 23% versus prior year. On slide 11, we summarize another very strong quarter for electrical Americas. Before we go through the results, we want to acknowledge the significant impact that Hurricane Helene had on our employees and their communities. Electrical Americas employ more than 3,000 people in North and South Carolina in nine facilities, and the safety of our team members is our top priority. We have continued to provide support to our employees, their families, and affected communities, including providing essential and financial assistance. We are pleased to report that our facilities are back up and running to support all the strong consumer demand we are seeing in our markets. Despite these challenges, We set new records for sales, operating profit, and margins. Organic sales growth increased to 14%, reflecting strength in data center, commercial and institutional, and utility and markets. On two-year stack, organic growth was up 33%. Electrical Americas has generated double-digit growth, organic growth, for 11 consecutive quarters. Operating margin of 13.1% was up 240 basis points versus prior year, benefiting from higher sales and increased operational efficiencies that were partially offset by higher cost to support growth initiatives. On a rolling 12-month basis, orders re-accelerated to 16% from 11% last quarter, demonstrating continued tailwinds from the various megatrends. We had particular strength in the data center market where activity is increasingly robust. For example, DOGE data shows U.S. announced data center project starts are up 81% year-to-date nine months. surpassing 2023 levels in Q3 of 2024. U.S. data center construction backlog is now estimated to extend out about nine years based on 2023 bill rates. Also, our major project negotiation pipeline is up approximately 60% year-to-date through nine months. Electrical America's backlog increased 26% year-over-year with a book-to-bill ratio of 1.2 on a holding 12-month basis. These results underscore the tailwinds from secular trends, strong execution, and robust backlog that have allowed us to raise our guidance for the year, which we will discuss later in the presentations. Next chart summarizes the results of our health recall global segment. Total revenue growth was of 5% included organic growth of 4% and FX tailwind of 1%. We had strength in data center and utility markets partially offset by weakness in residential markets. Regionally, we saw continued strength in APAC with double digit organic growth and mid single digit organic growth in emea operating margin of 18.7 percent was generally in line with our expectations for the quarter and down 310 basis points versus prior year primarily driven by a real estate transaction in 2023 Orders were up 6% on a rolling 12-month basis with strength in data center, utility, and MOEM markets. Backlog increased 19% over prior year, and book-to-bill continues to remain strong. Q3 was 1.1 on a rolling 12-month basis. Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segments For Q3, we posted organic growth of 11% and segment margin of 26.2%, which was up 70 basis points over prior year. On a rolling 12-month basis, orders were up 12% and book-to-bill ratios for our electrical sector remained strong at 1.1%. We remain confident in our positioning for continued growth with strong margins in our overall electrical business. Page 13 highlights our aerospace segment. We posted Q3 record sales and all-time record operating profit. Total growth was 9%, including organic growth of 8% for the quarter, driven by strength in commercial OEM, commercial aftermarket, and defense aftermarket. Operating margin was strong at 24.4%, up 30 basis points year over year, and also up 290 basis points sequentially, which was driven by higher sales and mix. On a rolling 12-month basis, orders increased 6%, driven by strength in commercial OEM, commercial aftermarket, and defense aftermarket. Year-over-year backlog increased 14% and was up 4% sequentially. On a rolling 12-month basis, our book-to-bill for our aerospace segment remains strong at 1.1%. And we are pleased with $2.3 billion life of program wins so far this year. Moving to our vehicle segment on page 14. In the quarter, total revenue was down 7%, including a 6% organic decline, primarily driven by weakness in the light vehicle market, and one point of unfavorable effects. Operating margin came up at 19.4%, 200 basis points above prior year, driven by improved operating efficiencies. We have made progress here to increase margins, which this quarter exceeded our mid-term target of 19%. And we are pleased to have won $75 million in mature year sales into a tree across our commercial and passenger vehicle portfolio. On page 15, we show results for our e-mobility business. Sales were up 2%, including organic growth of 1% from slower OEM new product launches and weakness consumer demand. Operating loss was $7 million as we continue to incur launch costs related to new programs. Moving to page 16, we show our electrical and aerospace backlog updated through Q3. We continue to build backlog with electrical stepping up to $11.8 billion and aerospace reaching $3.7 billion for a total backlog of $15.5 billion. This is prior year. Our backlogs have grown by 25% in electrical and 14% in aerospace. Electrical backlog benefited from acceleration in order intake from tailwinds of the circular trends, including hyperscale orders within the data center and market. As noted earlier, book-to-be ratios from electrical and aerospace are 1.1 and 1.1 respectively. The continued growth in our backlog underscores our confidence in 2024 and beyond. Now, I will turn it back to Craig for financial guidance updates and our initial thoughts on 2025.
spk13: Thanks, Olivier. Turning to page 17, we summarize our fiscal year organic growth and operating margin guidance. With less than a quarter to go, we've made a number of adjustments to provide our best forecast on how we expect to close the year. Overall, we continue to expect our 2024 organic growth to be between 8% and 9%. However, with the continuing aerospace industry labor strikes and the slowdown in vehicle markets, we now expect our revenue growth to be on the low end of our range. We're raising our organic growth guidance in electrical Americas by 100 basis points to 13 to 14 percent from 11 and a half to 13 and a half percent. We're lowering the range of our aerospace business by 150 basis points due to the labor strike. We're also lowering our vehicle business from down three to five, from flat to down four, and in e-mobility to five to seven percent growth from 17 to 23 percent growth, given the widely reported industry weakness and outlook. For segment margins, we're increasing the company's margin guidance range by 20 basis points to 23.7 at the midpoint of our guidance. This is driven primarily by the outlook in our Electrical Americas business, where we're increasing our margin outlook by 70 basis points at the midpoint to 29.6%, and vehicle, where we're increasing our margin outlook by 150 basis points at the midpoint to 18%. We're also lowering our margin outlook for electrical global, aerospace, and e-mobility by 90, 50, and 150 basis points, respectively. In total, The company is well positioned to continue to deliver strong financial performance and to close out the year well. On page 18, we list our additional guidance metrics for 2024 and Q4. For 24, our adjusted EPS is expected to be between $10.75 and $10.81 a share. The $10.78 midpoint represents 18% growth in adjusted EPS, an $0.08 raise over our prior guide, and there's also a $0.63 increase versus our original guidance for the year. For Q4, we expect organic growth to be between 6% and 7%, segment margins to be between 23.6% and 24%, and adjusted EPS in a range of $2.78 to $2.84 a share. We do expect Hurricane Helene and the labor strike and aerospace industry to have an impact on our Q4 revenue, and it's embedded in our guidance already. As I noted, while we have reaffirmed a four-year organic growth range of 8 to 9 percent, based upon the impact from Hurricane Helene and labor strikes and aerospace, we expect to be at the lower end of the range. The impact from the hurricane Clean is behind us, and all of our sites are now up and running. The aerospace industry strike is still ongoing, and while they could have an impact on our revenues based upon what's in our outlook, we don't expect an impact in our EPS. If we can shift your attention to 2025, on page 19, we provide our initial view on end market growth expectations for next year. As you can see here, We anticipate attractive growth in nearly all of our markets. We're expecting double-digit growth in data centers and distributed IT, commercial aerospace, and electric vehicles. Solid growth in utility and modest growth across most of our other end markets. Commercial vehicle is the only market that's projected to decline. So overall, 2025 should be another year of significant growth with more than 90 percent of our end markets seeing positive growth. And as you know, our own growth outlook is supported by a strong order book, record backlogs, and secular trends that continue to be favorable. We'll provide our revenue forecast in February, but we do expect to grow faster during our end markets. The company is well-positioned to deliver differentiated growth in 2025, and we think beyond. While we'll provide more details in February, we did want to provide some initial assumptions for our 2025 guidance. Based upon the last chart, we expect our end markets in total to grow between 6 and 8 percent, and for our incremental margins to be between 30 and 35 percent. Due to high interest expense and lower pension income, we anticipate roughly a 20-cent headwind on below-the-cost below-the-line items, and a tax rate of approximately 18 percent. Our multiyear restructuring program costs are expected to be approximately $50 million, with $75 million of savings. And we expect capital spending to be roughly between $900 million and $1 billion. Lastly, we continue to repurchase shares, and we're estimating the number to be approximately $2 billion. While we're still in the early phases of our planning, we also expect another strong year of earnings growth. So let me close on page 21. You know, once again, the trends driving growth in our end market continue to play out as expected and even better in our Electrical Americas business, driven by data center markets and the re-industrialization trend that we're seeing across multiple industries. We also delivered a strong quarter of financial results and continue to see outstanding execution on our key initiatives across the company. As a result, we've raised our guidance for segment margins by 20 basis points and our EPS by 8 cents at the midpoint. And in the quarter, we're especially pleased to see the strength in our negotiations, our orders, and the growth in our backlog, all of which are at record levels, validating our medium and long-term growth outlook. So we leave the quarter with a high level of confidence when we say, Eaton will deliver higher growth, higher margins, and consistent earnings growth and improving free cash flow for years to come. And with that, I'll open things up for questions that you may have. Thank you.
spk14: Hey, thanks, Craig. For the Q&A today, please limit your opportunity just to one question and one follow-up. Thanks in advance for your cooperation. With that, I'll turn it over to the operators to give you guys the instructions.
spk01: Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line from Andrew Obin from Bank of America.
spk12: Yes, good morning. Good morning.
spk13: Morning, Andrew.
spk12: Yeah, so it wouldn't be an eaten call without a data center question. So maybe if you could give us more detail on how did your data center business perform on organic growth orders and negotiations pipeline in the third quarter? Thank you.
spk13: No, Andrew, we appreciate the question. And as has been widely reported, the data center market just continues to perform much better than even we imagined. And the quarter itself, Our data center sales are up 35%. And that's, by the way, up from 27% in the prior quarter. So the rate of growth is accelerating. Our orders were up some 55% on a rolling 12-month basis. And negotiations are up 90%. And so, as you can tell from this data, we just continue to build strong momentum in the data center market. And as we've said, we think that market's going to be very strong for years to come.
spk12: Terrific. And just a follow-up question. You have sort of highlighted the hurricane, and I understand that you do have presence in the Carolinas. That's why we're highlighting. But maybe if you could put a finer point on the impact in the third quarter and how much of an impact do you expect in the fourth quarter? You did say that it's past you, but just is there any lingering impact in the fourth quarter that you're willing to quantify? Thank you.
spk13: No, I appreciate that question as well, Andrew. And as I think most of the investors know, we have a fairly sizable footprint in the Carolinas. In fact, we have, you know, some 3000 employees and multiple facilities that were actually in the path of the storm. Pleased to report that our facilities are all back up and running, all of our employees have been accounted for and safe. And so while It certainly was a bit of a challenge at the end of the quarter and at the beginning of this quarter. It's all behind us now, and the business and the sites are actually performing quite well. So, yeah, without a doubt, you know, what I tell you is that, you know, the Americas put up really strong results in Q3. They could have been stronger, but for the hurricane... And certainly it's shaving a little bit of growth off of the revenue for the Electrical Americas business in the fourth quarter as well. But it just went into backlog. This is not lost business. This is simply timing. As you saw from our orders growth in the quarter and the backlog growth in the quarter, we will certainly realize that revenue, it's just timing. And if I can just for a minute here recognize our team. Our team just did an extraordinary job. of supporting our employees and supporting the community, providing shelter, food, generators. Our team just rose to the occasion, and we'd all be very proud of the way they represented our company in this moment of need and crisis for both our employees and the community.
spk01: Thank you. One moment for our next question. We'll now take a call from Nigel Koh at Wolf Research.
spk11: Thanks. Good morning, everyone. Good morning. And Craig, thanks for the 25 early indications. Just a question, I think, for maybe Olivia. On the electrical America's margins, obviously you tend to be a little bit conservative here, but I think 4Q does tick down a little bit from 3Q, so... Seasonally, you know, normally we see a little bit higher. So just a question there. But the broader question would be, you know, we've seen a huge amount of operating leverage in the Americas. We've got some investment spending. How do we think about operating leverage and margin potential going forward, you know, within that 35% construct? You know, do you think the Americas can be above that level going forward?
spk10: Thank you for your question, Nigel. We are very pleased with the performance of our electrical America business, both on the top line and the margin. To answer to your question directly, we do not believe we have reached our maximum potential. We still believe we have room for improvement. I would mention three levers, one, operating leverage on higher volume growth, two, improving of our manufacturing efficiencies in both our existing and new facilities. And finally, as you know, we have a restructuring program ongoing, and those programs should deliver improvement in margin for the America. Also, you haven't asked the question, but we believe we have margin opportunities. We discussed that before in our electrical global business, but as well in our aerospace business, Nigel.
spk11: Okay, great. Any comments on 4Q would be helpful. But my follow-up question is around the 25 framework. You said 68% end market growth in 25. I think you've got an ambition to outgrow your end market by about two points. So do we think about kind of the starting framework for next year, six to eight, or maybe a little bit higher than that?
spk13: I appreciate that question, and you're absolutely correct. We do have both an ambition and and an expectation that our businesses will grow faster than their end markets. And as you can imagine, it's still very early, and we're still working through our planning for 2025, and you can expect that we'll provide a framework for you, more details as we get to the Q4 earnings call next year. And obviously, Paolo will lay out a more wholesome mid- and long-term strategic framework for you at our investor meeting in Q1 next year. But to your question specifically, we should expect to outgrow in markets the exact magnitude of which we're not prepared to say at this point as we're still working through our internal plans.
spk11: Okay. Thanks, Frank.
spk13: Thank you.
spk01: Thank you. We'll now take a call from Jeffrey Sprague from Vertical Research Partners.
spk07: hey thank you good morning everyone um good morning um a lot going on today um interesting times i wonder um wonder craig if you could talk a little bit uh about you know capital deployment it looks like with you know what you're saying on the share repo you're quite comfortable just to continue to you know put up the organic growth and buy back stock but clearly the nature of my question is right um know liquid cooling is getting more and more attention on the data center side you know schneider making a sizable bet verted there you've got some kind of alliance or kind of partnership um so i know you're sort of on the periphery of this anyhow but maybe just speak to uh do you view that as an important part of your offering or um you know where else you might have holes that might need to be filled from an m a standpoint
spk13: And I appreciate the question, Jeff. And obviously, to your point, you know, data centers as a market is getting just a lot of attention. And, you know, cooling as a space is also one of our hot topics. You know, I'd say to us, if you think about it just more broadly around growth, we have growth opportunities everywhere. You know, we talked about these numbers in our own data center business growing 35% in a quarter, 90% increase in negotiations. And so we have just tremendous opportunities to grow in data center and other markets without looking at an adjacency like cooling. I'm not saying that we would never consider doing something more deliberate there, but it is not required in any way for us to continue to post just significant growth and continue to win in the data center market. And so what I would tell you today is that we're focusing on organic growth. We're focusing on essentially executing well against the opportunities in front of us. Our deal pipeline in general to the broader question around capital deployment is certainly good today. And certainly the pipeline is growing with opportunities. And those opportunities are coming from lots of different areas. But certainly data centers for us is a key market that we're focused on.
spk07: And then speaking of capital deployment, just on the CapEx side, is the additional CapEx still oriented towards those kind of big pinch points of transformers and switchgear, or is this sort of broadening out into other parts of the portfolio that are just looking tight given kind of the growth that you see in front of you?
spk13: As I mentioned in my up-on-commentary, the incremental investment, we talked about a billion dollars of incremental CapEx investment. In the last earnings call, we've now taken that number up to $1.5 billion. And a lot of that increment is, in fact, going into these kinds of markets, data centers, transformers. some of these markets where we've just seen even faster growth than what we originally anticipated. And quite frankly, we're having customers come to us, you know, asking us to make multi-year commitments and signing up for multi-year agreements to provide their requirements and their needs. And so for us, it's just indicative of the underlying strength that we're seeing in our business and our willingness to invest. I mean, this is a case where the risk today is much more on the side of under-investing, not over-investing.
spk07: Understood. Thank you for the color.
spk13: Thanks, Jeff.
spk01: Thank you. One moment for our next question. We'll now take a call from Chris Snyder at Morgan Stanley.
spk15: Thank you and appreciate all the color on the outlooks. You know, maybe if I could ask on the mega projects, you know, I think it's pretty surprising to see that only, you know, 16% of the 1.6 trillion have started. I guess, does that similarly suggest that, you know, around maybe 85 or 84% of the orders related to these projects are still on the horizon? And, you know, I know you guys said that the cancellation of these projects is below historical levels. But are they progressing more slowly in that, you know, the lag between announcement and order has extended versus maybe what we thought a couple years ago? Thank you.
spk13: Yeah, no, I think, Chris, you got it for the most part right in terms of the, you know, 16% of the projects have started. And that does mean 84% or so of the projects are still out into the future. And so, you know, that's pretty straightforward math. And to the point around cancellations, yeah, I mean, they're running at roughly 10%, and there's always been cancellations in these big mega projects historically. And we try to provide some color on how that 10% relates to historical cancellations, and it's lower. And so bigger projects, more projects, and lower cancellation rates, which is why we're, you know, so bullish on the growth. And in terms of the progression question specifically, as you see in the data, the progression for us continues to look really, really positive. The numbers continue to grow quite dramatically, up 175% in terms of the quarter over quarter. I will tell you that there's obviously always a question around the industry's capacity and the ability to digest all of these projects in the time frame that they'd like. Is there going to be enough labor? You've heard the debate in data centers. Is there going to be enough power? And so what you might end up with, quite frankly, is just an extended, longer cycle in the process overall. But these projects are generally pretty diverse as well. They're cutting through in the early days. It was a lot of projects that were EV and battery. What we've seen in the last, you know, pivot in the last quarter is a lot of commercial and institutional projects, a lot of data center projects, a lot of power projects. And so just a broad base of different projects that are being essentially announced and we're certainly hopeful that that turns into, you know, starts next year, which we think are going to be up nicely, and a long-term growth outlook.
spk15: I appreciate that. And then maybe, you know, transitioning over to data center, could you maybe just talk a little bit about Eaton's relationships with the big hyperscalers? And as those companies get better clarity on their forward CapEx plans and Eaton brings more capacity to market, does that change the way that you can enter into commercial agreements? with those customers? Thank you.
spk13: Yeah, so to your point, first of all, our relationship with hyperscalers, we have a very strong relationship with all of the hyperscale data center customers. And as we talked about before, clearly one of our fastest growing markets and even within the data center market, we're growing faster with hyperscalers in general more so than growing with colo as well. We're growing in on-prem, but we're growing most quickly with the hyperscalers. And to the point around commercial agreements, everybody is challenged right now around capacity. And as a result of that, the nature of the discussions, the visibility around projects, the forward commitments have changed. as the hyperscalers and others are working to ensure that they have capacity in place to deal with their outlook and their growth. I mean, today there is a little bit of a competing for capacity dynamic that's taking place in the marketplace, which has obviously led to better and more transparent, more committed commercial agreements with our customers.
spk15: Thank you.
spk01: Thank you. One moment for our next question. We'll now take a call from Steve Dusa from JP Morgan.
spk03: Hi. Good morning. How are you? Hey, Steve. So just on the utility side, I mean, a lot going on there with, you know, all these customers raising budgets. But, you know, Hubble's results were a little bit weak. You guys actually are guiding just below double-digit next year, I think, in this initial market outlook. Maybe you could just talk about what you're seeing in utility and what the slowing is there. And then lastly, how you kind of participate. Just remind us how you participate in generation applications.
spk13: Yeah. You know, the first thing I'd say is that, you know, in Q3, I mean, our utility business continued to perform well. Utilities revenues increased mid-teens in electrical Americas and low teens in electrical global. So, I mean, obviously, when you think about, you know, different companies, they have different product portfolios. You have different customers. You have different mix. But our business is actually continuing to perform quite well, and we remain confident. We talked about, you know, our expectation that the utility market would grow at a growth rate of around 11% a year. You know, our customers continue to invest in CapEx to support this growth. And so from where we sit, you know, while there's always going to be temporary hiccups, you know, and periods of expansion and pause as they digest capacity, there's nothing that we've seen that would suggest that the utility market, at least where we play, won't continue to be a very strong market for years to come. If you think about, you know, the unfortunate you know, ramifications of these storms that we're seeing around the world, certainly two big ones in the U.S. So they continue to spend money on, you know, resiliency to do grid hardening as the consumption and the demand for power continues to go up. Obviously, that's, you know, backing up into utilities having to increase capacity. And by the way, data centers are a really big, important market. for utility customers. And then you have, you know, things like undergrounding that takes place on, that's taking place in places like the West Coast, where a lot of the utility infrastructure is being put underground, which is also creating growth opportunities for us. And so, you know, while once again, I know it's sometimes difficult to get an exact read on these markets based upon perhaps what peers are doing, but, you know, our utility business is strong and going well.
spk03: Okay, and then just lastly on the backlog and order side, you know, these orders are becoming obviously a bit more lumpy, like at a huge first quarter. Nice bounce back here from IMAP in the third quarter. Your backlog went up really nicely. It's up 25% year over year. Is this kind of sequentially like a stable level of orders? Do you see them increasing? you know, continue to pick up a bit sequentially from here? And then why would the backlog where it is today up, you know, 25% year over year, and you're bringing on capacity, so you should be able to release much more of that backlog next year. Why wouldn't things actually accelerate on a revenue basis, at least volume-wise, next year for the electrical business?
spk13: You know, I'd say that, you know, first of all, to your question around orders in general, and as we've tried to characterize, you know, for the investors that, you know, we are living in a period of time now where orders have become a lot more lumpy than they've been historically. And a lot of that is tied to, you know, megaprojects. And it's one of the reasons why we started to talk about megaprojects and, you know, these calls to give the investors transparency in terms of what has been a fundamental shift and the size of a lot of the projects that we're seeing in our electrical business. And with these big projects, with these mega projects, that just creates lumpiness in orders. And it's one of the reasons why we went to a rolling 12 months to try to smooth out these patterns. And then once again, you try to dissect it anyway into a quarter, but we haven't exactly been successful in the smoothing. But the message is that these orders will continue to be lumpy. As long as we're living in a world of these big mega projects, these orders will continue to be lumpy. And the other thing I'd say what we try to do is that, so we try to give you multiple views, right? It's not just orders. We try to say, hey, let me tell you about the front end of mega projects. Let me tell you about what's going on with our negotiations. We give you obviously revenue and we give you orders. And so we try to give you a composite view of all the things that we look at that underlie the confidence in our view on what the world is going to look like going forward. Now, the question around should growth accelerate from this point forward, I'd say on the volume side, as long as the capacity comes in line, yeah, it's very possible that we could see volume acceleration. Now, I would caveat that by saying that we've had a lot of price in the business historically over the last couple of years. And as we've even transitioned this year, the relative contributions from volume versus price have changed quite significantly with most of the volume now, most of the growth now coming from volume. And so you're not going to have the same price tailwind that you've had in growth as we look forward.
spk03: Makes perfect sense. Thank you.
spk13: Thank you.
spk01: Thank you. One moment for our next question. We'll now take a call from Julian Mitchell at Barclays.
spk02: Hi, good morning. This is Jack Kochi for Julian Mitchell. How much is the incapacity constraint at present? How are lead times trending in main electrical product categories like switchgear, UPS? What is the pace at which more capacity can come on stream?
spk13: We broke up the last part of which you said I couldn't quite hear it broke up, but in terms of... Sorry, go ahead. Yeah, your phone. We're having trouble with the connection, but let me... I'll deal with the first part, then maybe you can come back to the second part of your question around how and where are we capacity constrained. You know, we talk about this $1.5 billion of the incremental investment that we're making in capacity constraints, a lot of that, most of that is going into our electrical business to deal with those specific areas and markets where we are capacity constrained, be it in data center markets and things like transformers or electrical switch gear that really cuts across many of the different end markets that we serve. I talked about in some of my outbound commentary the investments we've made in some of the circuit breakers as well as in things like bus and fuses. Where we have capacity constraints or we look forward and we see the potential for capacity strengths, we are proactively making those investments and trying to get out in front of it. Having said that, lead times today are still not where we'd like them to be, ideally. Largely a function of the fact that our businesses continue to be stronger than what we forecasted. No question, even coming into this year, if you take a look at the revenue growth in our Electrical Americas business versus our original guide. I mean, those numbers are up quite significantly, both in revenue, orders, negotiations, really across the board. And so, you know, I would say that we are today working as closely with customers as we've ever had to make sure that we are getting out in front of the capacity requirements needed so that, you know, we don't end up being a bottleneck and a constraint for the industry.
spk02: That's helpful. Thank you.
spk13: Second half of your question, maybe that addressed it or not.
spk02: Yeah, that addressed it. Thank you. And, you know, on the 25 outlook, how are you thinking about electrical America versus global next year? There's a thousand basis point growth gap guided in 24. Is it a very wide gap again next year that's dialed in?
spk13: Yeah, I'd say it's too early for us to provide specific guidance on our various segments for 2025. But having said that, if you think about kind of these big megatrends that we've been talking to you about over the last couple of years, America's business has had a disproportionate benefit, a disproportionate number of them. If you think about what's going on in data centers today, there's data center growth taking place everywhere. But 70% of these data center projects are basically coming in the U.S. We talk about re-industrialization and the amount of money that's being put into increasing the U.S.' 's manufacturing capacity. A lot of that is being disproportionately benefiting the U.S. And so to the extent that these megatrends continue to be what they are, you'll probably continue to see a disproportionate growth coming from the Americas business. Having said that, a lot of what we do in Europe today tends to be more of the short cycle, and we are, in fact, seeing a bottoming in those markets. But long way of saying we're still working through the details, and we'll give you a lot more color when it comes to early next year.
spk02: Understood. Thank you for the questions.
spk01: Thanks. Thank you. One moment for our next question. We'll now take a call from Scott Davis at Milius Research.
spk04: Hey, good morning, guys.
spk13: Good morning, Scott.
spk04: Craig, you threw out a number earlier, about a 40% win rate, and I just want to get a sense of context. It seems like given the capacity constraints that where you guys want to win, I would imagine you generally have pretty high odds of winning. And so does a 40% kind of reflect, you know, first of all, is there any historical context? Is that higher? Is that normal? Is it, you know, but any color around that? Am I reading it right that, you know, there's just some projects maybe that are just less profitable, and so you're going to be less aggressive bidding on them. And so it's, you know, that number can be it's hard for us to know whether that's a good number or a bad number, but perhaps the behind-the-scenes is that number's a little bit better than historical.
spk13: Yeah, and I appreciate the question, Scott, and I would tell you today the instructions that we've given to our team is we want to win every order. We don't want to cede ground on any order or in any segment of the business. But the specific question around the win rate Yeah, you know, the 40% win rate, you know, would be higher than our underlying market share in electrical Americas. And so I think you can read that to be that we're winning at a higher rate than we have historically. And that's certainly a good thing and bodes well for the future. And then you say, why? I mean, largely, I would tell you it's because, you know, the bigger the project, the more complex the project, the more likely it is that we're going to win and that our solutions are going to be chosen over other alternatives. And that's just been historically true for the business that the more mission critical, the more complex the project, it increases the rate of our winning. But if you think about the win rate across various segments, and we talk about this 40% in the context of megaprojects, These megaprojects are broad. They are across almost every one of our verticals with the exception, let's say, of residential. And I would say they're, you know, I quite frankly not looked at the data, but my guess is that our win rate is not terribly different across the various segments of the market.
spk04: Okay. That's helpful. And then I know there's been a lot of questions about capacity ads, but I Can you just give us a little bit of a sense of the breakdown of new rooftops versus kind of adding lines, that kind of thing? Just a sense of what that capacity looks like in footprint.
spk13: Yeah. I can always say it's really a combination of both. In many cases, it is, in fact, expanding in the context of an existing footprint where we have space available on some land where we can build out our capacity. In some cases it's adding lines to facilities and in some cases it is brand new greenfield facilities. And so I can only tell you that it's a mixture of all three of those and very much consistent with where we see our requirements and where we have particular limitations. I'm not sure if I'm addressing your specific question, but I can just tell you that it really does cut through all three of those areas.
spk01: Thank you. One moment for our next question. We'll now take a call from Joe Ritchie at Goldman Sachs.
spk06: Hey, guys. Good morning. Morning. So, um, rather than like, um, try to try to get you to say that you're going to do double digit portfolio growth next year, even though that's what it seems like the, the, the framework is pointing to, I'm just curious, uh, Craig, you know, from a pricing standpoint, I know you said that's moderated. Would you still expect to get pricing across the portfolio in 2025? Yeah.
spk13: The short answer, Joe is yes. I mean, and if you think about, you know, our industry historically has gotten price. And I would say that we're probably back in a more historical pattern of getting price each year, but not during this period of time when we came to, if you go back to what happened over the last few years, you had the COVID driven supply chain disruptions that drove in a period of extraordinary inflation. And so we had to get out in front of that and recover inflation. Then you had the scarcity issue. And so as those issues continue to be in the rear view mirror, uh, you know, we're going to go back to more of a normal level of price realization for the business, but, but absolutely we will still get price, uh, into, you know, 2025 and, and by the way, Price is embedded in those market numbers. We gave you the market assumptions for what we think the market's going to do in 2025, and we do incorporate price in that number as well.
spk06: Okay. Got it. That's helpful. And then I'm just trying to understand the linkage between the project negotiation pipeline being up 60% and then your comments around 2025 starts expecting to hit a new high. Um, as you kind of think about the pipeline, does that include some of the projects that have even started or is that just, or are we, are we talking about kind of like additives, um, that the, that the starts will be higher next year and what you're bidding on today is already what's, what's kind of broken ground.
spk13: Yeah. And I say that, you know, that quite tough to really answer that question because, you know, these projects vary dramatically. in terms of the type of projects that they are and the time between an announcement, a start, and a completion. And what we said in prior calls is that from a completion standpoint, these projects are three to five years out. And so certainly announcements become starts at some point, and it does vary widely depending upon the project itself. But I think the simple answer is, you know, yes, a lot of these announcements today that are embedded in our numbers will, in fact, become, you know, starts in 2025. And, in fact, I mean, if we take a look at it over a longer period of time, let's say 23 to 27, the last data point we had, we were forecasting, you know, could start to be up some, you know, 23 percent over a period of beginning in 2023 going to 2027. We've not updated that number. But clearly, we're seeing an increase in construction starts, which is what you would naturally expect given the size of these announced projects.
spk06: Got it. Very helpful. Thank you.
spk01: Thank you. One moment for our next question. We'll now take a call from Tim Tien at Raymond James.
spk17: Oh, great. Thank you. In the interest of time, maybe I'll squish two together, Craig. Maybe one on just on aerospace, maybe kind of talk through whether it's, you know, orders or actual sales trends, just this kind of as you navigate this strike impact, you know, to the extent that that continues the implications in terms of the mix for you between the more on the commercial side, between OEM and aftermarket. And then just, I guess, part B is just on the electrical side, as you talk about this project pipeline and the growth you're seeing there, some of the big sectors that you've highlighted, like obviously data centers, but I think power and industrial also being pretty fairly equipment intensive. So just how you think about that traditional rule of thumb in terms of kind of the electrical content per project, and if you're seeing any changes in that, just given the complexion of the pipeline. Thank you.
spk13: First, maybe to the aerospace question specifically, and specifically as it relates to the strike impact. At this point, we made some assumptions naturally around what we think is going to happen during the course of Q4. And that's why I mentioned in the commentary, we don't know when these strikes are going to be resolved. We're hopeful that it happens sooner rather than later, but we don't know. And so that's why we said we've made an assumption that's baked into our Q4 outlook. If we're right, it's fine. If we're wrong, it could have a slightly bigger impact on our revenue outlook. But not going to have an impact on our earnings. We'll deliver the earnings under either circumstances, but do feel like the industry will resolve these strikes probably at some point over the course of Q4, but who knows at this junction. In terms of the mix, you're right. At some point, it has a positive impact on mix to the extent that the fleet of new aircraft are not being built and are having to run the existing fleet harder. That doesn't happen right away. There tends to be a lag effect of that, but ultimately speaking, As long as consumers continue to get on planes and fly, and they are, it means the fleet is operating, and in these older aircraft, we'll need additional service, additional aftermarket components, and as you know, aftermarket is very favorable for ETEN and for other companies as well. And so we'll just have to wait and see how that plays out. Certainly disappointing that we needed to reduce our numbers to account for it, but once again, firmly believe that it's simply timing, that these aircraft will be built, these aircraft are needed, and it just pushes some of the demand into 2025 and beyond based upon the current issues that are taking place in the industry. To your question on projects and the project pipeline in electrical, If I get the gist of your question there, you know, yes, it does matter a lot, the kind of project. And we talk about, you know, the electrical intensity of a project. And the electrical intensity of, you know, certain types of projects is very different. I mean, if you take data centers, for example, when we take a look at the non-res construction market, data center, for example, accounts for about 2%. of non-res construction markets, only 2%. Yet it's, you know, it's in the range of let's call it 15 to 20% of our electrical business. And that gives you a sense for the electrical intensity of certain kinds of projects versus others. And so for us, you know, the good news is that if you think about the kinds of projects that are being built today, you know, you think about on the one extreme, you have a commercial office. where the electrical intensity is quite low. Data centers on the other extreme where the electrical intensity is very high. Utilities growing nicely where the electrical intensity is very high. So the type of project matters greatly, and where we sit today in our outlook, that mix will continue to be favorable for our company.
spk17: Got it. Thank you.
spk01: Thank you. One moment for our next question. We'll now take a call from Nicole de Blase at Deutsche Bank. Thanks, guys.
spk00: Good morning. Actually, good afternoon now. Thanks for fitting me in. I guess I'll just ask one in the interest of time. Could you talk a little bit about what you're seeing, Craig, in China? We've heard a few companies say that things got a bit worse there this quarter. And then I guess, you know, you kind of mentioned hope that short cycle in Europe could be bottoming. So if you could maybe expand on, you know, are you seeing any evidence of recovery there today?
spk13: Yeah. Hey, appreciate the question, Nicole. I mean, first on China, you know, our China business has performed very well. I mean, if we look at our China business specifically in Q3, you know, we actually saw very good growth. I think our growth in China was, close to double digits in Q3. And our outlook, even going forward, is for pretty robust growth in our China business. I do think that that's mostly a function of things that we have done specifically in the context of our business. And as you know, we had a number of joint ventures that we signed in China that gave us just a lot of additional capability and capacity and our team in China, we think one of the best in the industry, they're just winning. So our China business is doing well and our outlook for our China business continues to be strong. To the point around Europe specifically, and that's where, to your point, we are more exposed to short cycle, which means residential, MOEM, as is Europe in general, And we do think we bottomed out, you know, and we would think that as we look forward, those markets, you know, continue to grow from this point. And that's kind of embedded as well in our own outlook for Q4. We think that, you know, as interest rates, you know, perhaps start to moderate a bit, that helps the resi market. That helps some of the industrial markets as well. But I'd say we can call today on the short cycle stuff. It feels like we bumped along the bottom throughout the summer months, and we started to see a little bit of liftoff in at least some of the markets, distributed IT, for example, in Q3, and the outlook for MOEM and residential is more positive as we look forward.
spk01: Thanks, Craig. I'll pass it on.
spk13: Thanks, Nicole.
spk01: Thank you. One moment for our next question. We'll now take a call from Andy Kaplowitz at Citi. Good afternoon, everyone. Hey, Andy.
spk05: Craig, can you give a little bit more color into Ian's ability to offset ongoing vehicles market-related weakness? If you look in your vehicles margin trajectory, obviously that 19.4% and declining growth was impressive. Is that a reflection of strong positioning in the market given terrible price versus cost, and how long could that last if the vehicle and market stays weak?
spk13: I appreciate the question. We have worked hard in our vehicle business to, first of all, run our business better and drive better operational execution in our business. We went through a period of time in our own vehicle business through supply chain disruptions and some other operational challenges inside of the business where we weren't executing as well as we know we can. And our team has just done a great job of essentially improving the way we run our factories and our facilities and you know, sorting out, you know, inefficiencies in the plant. We've also been very active in that business on really managing the portfolio. You know, one of the things we've talked to the investors about is that we expect every one of our businesses to be a portfolio manager. Every business has a head, every business has a tail, every business has a piece of it where you'd say, you know, we don't have a competitive advantage here. We don't make great margins. It's not a growth piece of the business, and we got to have a plan to address it and fix it. And so we have been very active in managing the portfolio in terms of the things that we control in our vehicle business as well. And so the margins that we posted this quarter, I think, are a reflection of the fact that our team is executing extremely well, and we would expect them to continue to execute well as we move forward.
spk05: And just a quick follow-up to that, you know, in relation to your restructuring efforts, I think you gave us 75 million for 2025. I would assume a sizable amount of that is in electrical global, and that's going to start to help you close the gap with electrical Americas, or how should we think about that?
spk13: Yeah, I mean, without a doubt, I mean, if you think about, you know, where we're restructuring, it's generally going to be in those businesses where the margins are not at the level that we have in the rest of the company. And certainly global is a piece of that formula as well. But, you know, the big challenge more than that, and we'll do the restructuring, the big thing in Europe is market. I mean, markets, as you've seen from not just Eaton, but from most of our peers and other, you know, companies in the region is that, you know, Europe today is just not getting the growth that we're seeing in the U.S. and in other regions of the world and China. So I think more than anything, you know, we need a return to growth in Europe. Our incremental margins are quite high. on the back of a little bit of growth. And so that for us is the thing that we're focused on most is that, you know, we have to grow our business in Europe and that's going to ultimately, you know, close the gap with some of the margins that we see in the American business.
spk05: Appreciate all the color.
spk13: Thanks, Sandy.
spk01: Thank you. One moment for our next question. We'll now take a call from Joseph O.D. at Wells Fargo.
spk16: Hi, thanks. I'll keep it to one. Craig, just want a little bit more color on the timing of all the capacity investments coming online. I'm sure it's staggered, but by the middle of next year, do you expect to have most of that online? And the reason for the question is when we look at the electrical backlog moving up again sequentially at $11.8 billion, trying to think through the degree to which Eaton is, in some instances, the bottleneck, how quickly you can work that down with some pretty significant capacity additions coming online, even to the degree that can Americas grow faster next year as that capacity comes online?
spk13: Yeah, I think to answer the second-party question, we're absolutely counting on that capacity addition coming in next year to help our volume growth and and most of the capacity will really come in over the next, let's say, two to three years. Some of it's coming in now, as we talked about in some of my up on commentary. But maybe just to address maybe the broader question around the backlog. Backlog is actually a good thing. Past due backlog is a bad thing. And I would tell you that our past due backlog has come down. So we're doing a better job today of ensuring that we're delivering against our customers' expectation. But we have growing backlog largely because our markets are growing and we're getting much better visibility into our customers' requirements. And in many cases, we're getting longer lead time visibility on orders. And so I would say in general, I would not think about a growing backlog as a problem in us being a bottleneck for the industry. A past due backlog would suggest we're a bottleneck for the industry, but I would say today that our lead times in general are very competitive with most of our peers.
spk16: Got it.
spk01: Thank you. Thank you. One moment for our next question. We'll now take our last question from Brett Lindsey at Mizuho.
spk08: Good afternoon. Thanks. Appreciate the thoughts on 25. I just wanted to follow up on the incremental margins. So the 30 to 35% on organic, should we think of this as the base level and then the restructuring savings would be on top of that? or are there some offsets on some of this OpEx investment ramp relative to the restructuring savings? Just wanted to square those pieces. Thanks.
spk13: Robert Nussbaum- Yeah, no, we've given you a range of 30 to 35, but you should really think about that as an all-in incremental and not putting the restructuring on top of that. What we've said historically, we said you ought to be thinking about 30 percent incrementals, and so we've tried to account for restructuring benefits in the different midpoint of where we think the incrementals are going to be. But I'd say that you have a couple of forces, obviously, working for you and against you in terms of as we come through this ramp. On the one hand, obviously, we're getting volume leverage, and that's very helpful. But on the other hand, we're also starting up new factories and there's always inefficiencies with factory startups. We're adding commercial resources to deal with the volume ramps that we're working through right now. So I'd say on balance, take the midpoint or so or that 30 to 35% range, that's better than what we'd use for planning purposes for most of our plans. It's certainly below what we delivered this year, for sure. And this year, I would just point out that there was a lot of price in what we delivered in the form of incrementals this year, as well as we didn't have the same level of startups and ramp-ups in both our factory and commercial activities.
spk08: Appreciate the detail. Best of luck.
spk14: All right. Thank you. Hey, good. Hey, thanks, guys. I think, you know, really appreciate everybody's questions. As always, our team is available to have any follow-up questions with you guys. Enjoy the rest of your day.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer