Eaton Corp PLC

Thank you for standing by. Welcome to Eden's third quarter 2025 earnings results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Yan Jin, Senior Vice President of Investor Relations. Please go ahead, sir.

Hey, good morning. Thank you all for joining us for ETHEN's third quarter 2025 learning call. With me today are Paolo Luiz, Chief Executive Officer, and Olivier Biodetti, Executive Vice President and Chief Financial Officer. Our agenda today includes the opening remarks by Paolo. Then we will turn it over to Olivier, who will highlight our company's performance in the third quarter. As we have done on our past course, we'll be taking questions at the end of Paula's closing commentary. The price release and the presentation we'll go through today have been posted on our website. This presentation includes adjusted earnings per share and other non-GAAP measures. There are reconciling appendix. A webcast of this course is accessible on our website, and it will be available for replay. I would like to remind you that our commentary today will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties, as described in our earnings release and presentation. With that, I will turn it over to Paolo.

Thank you, and thanks, everyone, for joining us. I'm happy to report we delivered solid results. From a demand perspective, we continue to see tremendous strength. On a rolling 12-month basis, our orders accelerated in electrical Americas up 7% from up 2% in Q2. Our electrical Americas backlog grew 20% year-over-year, hitting an all-time record. Demand in aerospace business remains very strong as well. we posted order growth of 11% on a rolling 12-month basis and backlogged expansion of 15% year-over-year. As a result, our book-to-bill for the combined segments was 1.2 on a quarterly basis and 1.1 on a rolling 12-month basis. As we continue to deliver robust growth in data center market, our orders accelerated 70% and our sales were up 40% versus Q3 2024. This strong demand picture gives us confidence in our ability to deliver sustained growth and add value to shareholders. Among the Q3 highlights, our adjusted earnings per share were up 8% versus prior year, and our segment margins of 25% hit a quarterly record, up 70 basis points year-over-year. We are also reaffirming our 2025 guidance. Lastly, yesterday, we were excited to announce the agreement to acquire Boyd's Thermal Business, a global leader in liquid cooling, and I will talk through this in much more detail in the following slides. Olivier and I will dive into Q3 and the four-year outlook in just a minute, but first, I'd like to share more details on how we are investing and executing for growth in our operations starting on page four. So earlier this year, I laid out our bold new strategy with three pillars, lead, invest, and execute for growth. All three are designed to accelerate our growth and create sustained value for shareholders. These three pillars also enable us to capitalize on key megatrends we've discussed for the last few years. Today, we will focus on invest and execute for growth. The board acquisition fits squarely into our strategy to invest for growth. Activity for growth involves elevating operations from good to best in class. It includes self-help growing the head and fixing the tail and controlling our destiny independent from end market developments. Today, I'll walk you through a few examples of what we are doing and the results we are starting to see from this strategy. Turning to page five. Yesterday, we announced the acquisition of Boyd, the global leader in liquid cooling technologies for critical markets like data centers, aerospace and defense, and industrial. This is a high-growth business playing a high-growth market, and we expect it to generate $1.7 billion in sales next year at an adjusted EBITDA margin of 25%. This level of sales represents significant year-over-year growth, demonstrating how the business is benefiting from strong customer demand, especially in data centers. And the business itself has a large global presence with over 5,200 employees and 16 manufacturing locations. This global presence is critical to Boyd's success as they are able to support customers almost anywhere in the world as they build out their data center infrastructure. Of those 5,200 employees, over 500 engineers, which is another important part of Boyd's success. These engineers work directly with the customer teams, design the next two platforms to understand the thermal characteristics of this next generation, and then this knowledge gets translated into Boyd's own designs. Boyd's manufacturing engineering teams are also involved in the design of the cooling systems to ensure the highest reliability and the production can be rapidly scaled to meet customer needs anywhere in the world. This deep application engineering expertise combined with world-class manufacturing and supply chain create a powerful flywheel for boards to always stay ahead of the competition in terms of technology, reliability, and scalability. On slide six, we show some market data. As we talked about previously, the chips used to power AI models and other high-performance computer applications are getting more and more powerful. If you look at the data before the advent of Gen AI, the power used in a typical rack was in the 10 to 15 kilowatt range. At this level, you can cool these chips using air cooling, which is a pretty mature technology and has been around for many years. Now, the introduction of more and more powerful AI chips, the power in each one of those racks is just skyrocketing. Take NVIDIA, for example. Its GB200 chip, unveiled in 2024, uses 120 kilowatts per rack. Fast forward a year to 2025, and NVIDIA's GB300 chip now uses 180 kilowatts per rack. And it's only increasing from there. NVIDIA's Robin chip is expected to use 600 kilowatts per rack, and its Feynman chip, 1,000 kilowatts per rack. Now, in addition to these higher power chips requiring more and more electrical equipment, which is a great thing for our business, once you get above roughly 50 kilowatts per rack, traditional air cooling is replaced by liquid cooling. The physics of these power levels require liquid cooling the chip, Otherwise, performance is degraded. Chips don't last as long, or they just might not work at all. So all the demand that you are seeing for Gen AI chips will drive commensurate demand for liquid cooling solutions to cool those chips. The growth goes hand in hand. Market estimates vary, but we believe that the global liquid cooling market will grow around 35% annually through 2028. just tremendous growth that is supported by long-term underlying factors. And to go back to my point from the prior slide, Boyd is the global leader in liquid cooling, which is why we are so excited about this business. With the acquisition of Boyd, Eaton's data center portfolio will now be even bigger than before, shown in more detail on page seven. We can now provide solutions for all major power and cooling systems from the chip to the grid. This includes all of our traditional power distribution, power quality, and infrastructure products in the data center gray space. And here you can see our other two recent acquisitions of fiber bonds, modular pods, and resilient power medium voltage solid state transformers. And in the data center white space, we can provide everything from power distribution units, remote power panels and bus way, to racks, enclosures, cable tray, and in 2026, liquid cooling. And of course, I need to mention our software and services capabilities, which historically have been focused on the gray space and the white space power distribution and power quality equipment only, and now we added the same service capabilities for liquid cooling, which we view as a really attractive avenue for growth. Truly an impressive portfolio of solutions for data centers. Moving to page eight, I already talked about how this acquisition bolsters our data center portfolio. And I also want to mention how it aligns with how our customers are thinking about the future data center architectures. Starting from the cheap out, there are really five main technology blocks that work outward towards the utility grid. There is the thermal management system to handle heat loads primarily from the chip, but also from other heat generating assets like storage devices and power supplies. There is wide space power distribution and infrastructure equipment to get the power to the racks. There is the grid equipment to distribute, transform, and condition medium voltage AC power down to low voltage AC and then low voltage DC power. There is ETHAN assets to connect the data center to the grid. And finally, there's software and services to monitor and manage all these power and IT assets. So with this acquisition of Void, ETA now plays a leading position in each one of those technology blocks. One reason this is important is that we can now offer our data center customers a greater share of wallet. This is important as they seek to consolidate their supply base among a smaller set of stronger, more globally capable players. And the other important reason is that customers are increasingly looking to integrate these various systems to drive increased technical performance and more rapid deployments. This is especially true in data center wide space, which is exactly where Boyd plays. So overall, a really exciting acquisition for us. and one that we know will allow us to continue supporting our customers today and into the future. Now, let's be able to execute for growth another exciting, important pillar of our strategy. So, on slide nine, these are key leading indicators in electrical Americas. This segment is clearly the head of our portfolio, and we have an execution plan to grow it even stronger and with increased margins. All lead indicators on this page are proof points of the generational growth opportunity ahead of us. They also show that our team is executing well to capture this growth. The visibility is unprecedented. So let me walk you through what we are seeing. Over the last two years, the mega project announcements have increased a staggering 185%. In the same timeframe, or negotiations pipeline have increased 35 percent, falling into rolling 12-month orders up 23 percent on a two-year stack and a book-to-bill of 1.1. For data centers specifically, the two-year stack of rolling 12-month orders are up more than 100 percent, and the data center book-to-bill is 1.7. And Latin America's backlog is up 51 percent over the last two years, of which data center backlog extends over two years. On a two-year stack, Electrical Americas has grown 23% organically, and within that, data centers have grown 104%. So the demand indicators clearly support why we are so bullish for this business. Our position of strength in the Americas keeps resonating across the market. We are proud to have the broadest portfolio of electrical products in the market, to cultivate strong and trustworthy relationships, and to be the partner of choice to co-design technologies of the future together with our key customers. Slide 10 showcases the electrical global organic growth journey. Last year, we grew 4%. This year, approximately 7%. We've talked about the focus to increase electrical global margins while we continue to make strong progress. Our 2025 guidance reflects year-over-year margin expansion of 100 basis points. And let's talk about the growth rate in electrical global now. Our electrical global organic growth is accelerating up to about 7% in our 2025 guidance from 4% last year. Our 2030 target of 6% to 9% growth for the portfolio assumes about a middle single-digit growth over the period, and we are off to a great start. We are seeing order acceleration, building strong backlog, and position to win for years to come. We talk about being the right markets, targeting fast-growing markets supported by secular megatrends. For example, the data center growth is impacting our business globally. as governments and enterprises are prioritizing data localization and resiliency, and we are partnering with our hyperscaler customers in various parts of the world. And by the way, all these data centers need power, and we are key beneficiaries of our global utility space as well. And we have a broad portfolio with breadth and capabilities leveraged across end markets. All this enables us to win and position us to gain market share on a global front. The strategy is clear, and as you'll hear from Olivier soon, we are booking sizable orders already, which is momentum to position us for strong growth for years to come. Now I will pass to Olivier to walk through the financials. Thank you, Paolo.

I'll start by providing a brief summary of Q3 results. Organic growth for the quarter was 7%, driven by strength in aerospace, electrical Americas, and electrical global, partially offset by weakness in short-cycle markets, including vehicle and e-mobility. Otherwise, organic growth would have been almost 10 percent. We generated quarterly revenue of $7 billion and expanded margins by 70 basis points to 25 percent. Adjusted EPS of $3.07 increased by 8 percent which is at the high end of our guidance range. Now, let's move to the segment details. On slide 12, we highlight the electrical America segment. The business continues to execute at a high level and delivered another record quarter on operating profit and Q3 record margins. Organic sales growth of 9 percent was driven primarily by strength in data centers up about 40 percent. Operating margin of 30.3 percent was up 20 basis points versus prior year, benefiting from higher sales and increased operational efficiencies. Orders accelerated to up 7 percent on a trading 12-month basis from up 2 percent. This represents a strong acceleration with total quarterly orders up sequentially by more than 11 percent. We are confident that we will have an all-time record level of orders booked in 2025. Book-to-bill remained at 1.1, and our backlog grew by $2 billion, or 20 percent, to $12 billion, providing strong visibility for our organic growth outlook. Now I'll summarize the results of our electrical global segment. Total growth of 10 percent included organic growth of 8 percent, a very strong performance for the quarter. We had strength in data center, residential, commercial, and institutional, and machine OEM. Regionally, we saw high single-digit growth across all three regions, operating margin of 19.1 percent was up 40 basis points over prior year, driven primarily by sales growth, partially offset by higher inflation. Orders were up 2 percent on a rolling 12-month basis, with mid-single-digit growth in APAC and EMEA. EMEA orders increased by more than 30 percent, driven by data center orders, including sizable orders in the Middle East and a large order with a hyperscaler in Scandinavia. This represents strong acceleration with quarterly orders up sequentially 15 percent. Backlog increased 7 percent from prior year, while book-to-bill remain above one on a holding 12-month basis. Before moving to our industrial businesses, I'd like to briefly recap the combined electrical segments performance. For Q3, we posted organic growth of 9 percent and segment margin of 26.6 percent, which was up 40 basis points over prior year. On a rolling 12-month basis, orders accelerated to up 5 percent, and our book-to-bill ratio for our electrical sector increased to 1.1. This represents continued acceleration with quarterly orders up sequentially by 13 percent. We are very excited to capture growth from the robust demand with strong margins in our overall electrical business. Page 14 highlights our aerospace segment. Organic sales growth of 13 percent remained at the high end and resulted in Q3 record sales with broad-based strength across all markets and particular strength in defense aftermarket. Operating margin expanded by 150 basis points to 25.9 percent, driven primarily by sales growth. On a rolling 12-month basis, orders increased 11 percent, driven by defense OEM and aftermarket up 16 and 14 percent, respectively. On a two-year stack basis, trailing 12-month orders are up 17 percent. This demonstrates strong momentum, with quarterly orders increasing over 9 percent sequentially. Our book-to-bill for our aerospace segment remains strong at 1.1 on a holding 12-month basis, resulting in backlog increase of 15% year-over-year and 4% sequentially. Overall, aerospace posted a solid 3 and remains well-positioned going forward. Moving to our vehicle segment on page 15. In the quarter, the business declined by 9 percent on an organic basis, primarily driven by weaknesses in the North America truck and light vehicle markets. Margins are down 160 basis points year-over-year, primarily driven by lower sales and higher inflation. On page 16, we show results for our e-mobility business. Revenue decreased 90 percent from 20 percent lower organic, partially offset by 1 percent favorable effects. Operating loss was $9 million in the quarter. Now, I pass it back to Paulo to go over the remainder of the presentation.

Paulo Rocha- Thanks, Olivier. Here on page 17, is our updated guidance for the year for organic growth and operating margins. We are reaffirming our growth guidance range of 8.5 to 9.5%. We'll likely end up at the low end of this range in total, primarily due to market dynamics in our vehicle and immobility businesses. We are also reaffirming our margin guidance of 24.1 to 24.5%, with minor revisions between aerospace and e-mobility. Moving to page 18, here's the outlook for Q4 in our updated guidance for the year. For the upcoming quarter, we see EPS of $3.23 to $3.43, representing 18% year-over-year growth. We see organic growth at 10% to 12%, which is a re-acceleration of growth for the company. And for the year, we are reaffirming our adjusted EPS guidance at $11.97 to $12.17, which includes our near-term investments to position us for sustained long-term growth. And this represents 12 percent growth in earnings per share at the midpoint, which I promised you in March. Shifting our perspective ahead to 2026, on page 19, we provide our view of end market growth, assumptions for the year. All in, this equates to about 7% market growth rate, and with some outgrowth, is consistent with our 2030 organic growth CAGR of 6% to 9%. I won't go line by line here, but this chart shows that we anticipate growth across our end markets with attractive growth for over 70% of our portfolio. In particular, the data center, distributed IT, and electrical vehicle markets are expected to be the strongest, up double digits. We also expect solid growth in the utility and market, along with both commercial aerospace and defense. In summary, we continue to see many paths toward sustained growth, and we are confident in our end market positioning to deliver another differentiated year in 2026 of growth and strong shareholder returns. I will close with a quick summary on page 20. We have a strong quarter, Q3 record revenue, and an all-time record on segment profit and margins. We are seeing unprecedented demand reflected in continued order acceleration and growing backlogs. Our strategy to lead, invest, and execute for growth is positioning us to capture generational demand and deliver lasting value for our shareholders. We look forward to welcoming and integrating Void into our business and satisfying our customers with a complete solution offering. Bottom line, we have confidence in our guidance to close out the remainder of the year, and we are well positioned as we go into 2026 and beyond. And we remain confident that our brightest days are yet to come. And with that, we are happy to take your questions.

Thanks, Paolo. For the Q&A today, please leave me your opportunity, just one question and follow up. Thanks in advance for your cooperation. With that, I will turn it over to the operator to give you guys the instructions.

Certainly, as a reminder, if you have a question at this time, please press star 11 on your telephone. Our first question comes from the line of Andrew Obin from Bank of America. Your question, please.

Hi, guys. Good morning. Good morning. Morning, Andrew. Hi, Andrew. Yeah, so, you know, I know orders, you know, maybe you guys don't want to talk about them, but the investors certainly do. Maybe we can talk about Electrical America's LTM orders outlook. Electrical America's orders continue to accelerate on an LTM basis. I think it was 2% in second quarter, 7% in third quarter. So what's your expectation for orders in fourth quarter and the beginning of 26, if you're willing to talk about it? Thank you.

Sure. Thanks for the question, Andrew. Based on the orders momentum we had in Q3 and a very strong October in orders, And we also have a growth in our negotiations pipeline. We have a lot of visibility into Q4 orders. So we remain very bullish about orders growth also in Q4. And I say that because we continue to have the specific projects that we track in the pipeline that support this outlook that I'm referring to for strong order acceleration of LTM orders into Q4. So we are bullish about orders.

Excellent. And maybe we can talk about Electrical America's quarterly orders. You only disclose orders on LTM basis, but I think externally we do estimate your orders on a quarterly basis on Electrical America's. I think it sort of came out like mid-20s to close to 30% year-over-year. Is that in the ballpark? And is it close to 30%? Is it close to 25%? Thank you.

Another great question. Thanks again. You know, based on these LTM disclosures we make, we know that people externally estimate quarterly orders as well. I would say this direction you're estimating is in the ballpark. I would say it's towards the higher end of your estimation. So we continue to see strong inflection in orders in Q3, and as I just said, we continue to see momentum in Q4. But most importantly, Andrew, I would like to remind you and the whole team why we are winning businesses at this pace. I think it's important we talk about it. We have this success because we have the broadest portfolio of electrical products in electrical Americas. We have all the solutions and services. We count on strong channels, and we also have deep customer intimacy, so we co-design future technologies with our customers. And this allows us to be a leader in several end markets. I'm not talking only about data centers, but we also lead in utilities. We have very strong orders in utilities, CNI, et cetera. So every investment we make into electrical markets actually scale across many different end markets. And as you know, we're expanding our footprint in North America as well to better serve our customers and to continue to capture more than our fair share of the marketplace. And at the same time, I would say this, that we are also in the position of strength that we have today and winning all these big orders because of the way we intentionally position our portfolio. So we have proven to be disciplined, proven to be nimble, progressive, and you continue to make the right moves to boost our growth. So we believe the best days and years are ahead of this business yet.

And Andrew, there was a lot of focus also on data center and hyperscale. The growth on orders in this particular vertical rise is very strong. In the Americas, close to 70%, same number for global. In total, for the electrical sector, close to 70% of the growth in the quarter for data center and hyperscale.

Okay, well, thanks so much.

Yeah, and I'll just conclude by saying that we are beating every competitor on the marketing orders, and part of this is attributable to the portfolio and our sales channels and the relationships, but partially it's also to the fact we are investing in our footprint and our customers feel comfortable and confident in giving us more orders versus other competitors. So I think that's also a point that I would like to stress.

Thanks so much. Well, I'll let others to ask how Boyd was going to help you with that. Thank you.

Thanks. Thank you. And our next question comes from the line of Andy Kaplowitz from Citigroup. Your question, please.

Good morning, everyone.

Good morning, Andy.

Paolo, you previously said that AI data centers can get you 1.2 million to 2.9 million sales per megawatt, and that you expect data center growth to be 17% over the next several years, but as you suggested today, Eaton and the market have changed even since your investor day, with the market beginning to evolve toward 800-volt DC power architecture. And you added Fiberbond, and now you're obviously adding Boyd. So can you talk about what total Eaton sales per megawatt within your eventual new portfolio could be? And do you ultimately see the data center market growing considerably faster than that 17% with Eaton now performing?

Yes, great question. Let me lead with this. We mentioned to you before that we have the broadest portfolio of power management solutions for data centers. We had it already, even before the announcement we made yesterday. But starting with the wide space products, the wide space is centered around the chips. And moving to the gray space, we have all this core product distribution, power quality products, and all the way to the front of the meter where we have a utility grid product. So we have a very extensive portfolio. And the recent acquisitions we made made our position so much stronger. And as you know, the data centers exist to support the chips, ultimately. And as the chips become more and more powerful, especially in support of AI workloads, as you mentioned, data center operators are moving towards direct currents. Why is that? Because direct current offers advantages in terms of reduced power losses, fewer conversions with alternate current, and the ability to offer direct integration with other sources of power, just like renewables and battery storage. And Eaton is extremely well positioned for this change, not only because today our products touch every conversion of AC and DC in the data center, but also because we have decade-long experience with dealing with DC power in other segments like machinery, industrial facilities, and also in mobility. We're dealing with DC power for a while. So this is another example that makes ETHAN unique in this space. And the resilient power acquisition we made a couple of quarters ago actually accelerates our readiness for DC integration projects. right from the utility feed down to the chips. So the question you made is how this can be possible. We are working with a number of customers. We're also working with institutions and governments, and we have a seat on the table to decide on the codes for the new systems. And we also, as you probably know, we are partnering with NVIDIA, so we designed the data centers from the chip out. On your specific question on the dollars per megawatt, Our range was between $1.2 to $2.4 million per megawatt, being the lower-end cloud and being the higher-end AI loads for the portfolio we have today. And with the acquisition of Boyd, we're going to add another $500,000, so we'll be close to $3 million per megawatt at the higher end of the guide here for construction.

Paul, that's helpful. And then maybe just for Olivia, your organic revenue growth in electrical America is slowed in Q3 versus Q2. I think the costs are pretty similar. I think, you know, you also have more capacity coming on. So can you give us more color on what happened in your end market? So it's, you know, maybe residential is slower. And I know you have a relatively big implied ramp in Q4, easier comps help. But, you know, where is that coming from as a data center revenue growth? And how does that translate into 26?

So if you look at Q3 on organic growth for ESA, we had two factors impacting our sales to the downside. One, residential being slower in September, and two, some small orders, some orders being delayed from Q3 to Q4. We are confident that we'll catch up in Q4. If you look at the implied revenue guide for ESA, that would be in the range of 17% to 18%. We're confident in our ability to deliver this kind of revenue growth as we add the incapacity.

I'd like to complement this. Just to complement what Olivier said, which is absolutely right. I'd like you to take this into perspective, this... myths of electrical America. So the midpoint of the guide, if you calculate the dollars are $80 million, eight zero. Um, if you think about the future performance of the business and the overall company is not comparable, it's not really important. If you compare versus the backlog sequential increase we had for the company. The backlog increase from Q2 to Q3 for the overall company is about $1 billion, being $600 million only in electrical America. So that's what gives us the confidence we have the right number going forward. And then a reminder, last year we had also a tough Q4 because we had impacts of strikes and hurricanes. So the comparables, well, helps in this case year over year.

Appreciate the call, guys.

Thank you, Andy. Thank you. And our next question comes from the line of Chris Schneider from Morgan Stanley. Your question, please.

Thank you. I wanted to follow up on some of that Q3 versus Q4 commentary, but specifically more on EPS. So Q3, EPS was up, I guess, 8% year-on-year. You're guiding Q4 at the midpoint up to 18, you know, above the full year, up 12%. So, you know, is that just all driven by the Americas, you know, seeing stronger organic growth, which you just talked about, or are there other factors in here that's driving that, you know, sharp pickup in earnings growth? Thank you.

Mainly other factors. If you look at first the tax rate, last year our tax rate in the quarter for Q4 was 17.4%. We are modeling 15%. The 15% is supported by discrete tax items. This is under our control. So that would be half of the difference between the 18 and the 12% for the full year. And the other half is a compare benefit. Paolo mentioned that last year we had the impact of strike and hurricanes. which impacted EPS and would benefit from the compare as well. So between the 18 and the 12, 50-50 of the gap between tax and the compare. Chris.

And Chris, I just added one element to this. Just to complete the picture here, if you adjust by the two factors that Olivier just mentioned, the EPS growth will be around 13%, which is a little bit higher than the average of the year. So that gives us confidence that we can hit that. Thank you. I appreciate that.

And maybe if I could follow up with one, you know, maybe more thematically around the void acquisition. I imagine that there has always been some benefits if you were able to supply customers power equipment into both the gray and white space within data center. But it does seem like the ability to supply both is getting more important. Maybe that's on the move to 800 volts. I'm not sure. But I guess, Paolo, from your standpoint, is the ability to sell into both the white and the gray space becoming more important? And was that a big, and if so, why? And ultimately, is that kind of a big motivation for this acquisition? Thank you.

Yeah, no, great question. If you allow me, I'd like to give you a big picture rationale on the acquisition, we can deep dive on this particular topic. We're all excited about the data center market. We all know it's growing at a very fast pace. But if you look at liquid cooling in particular, it's growing at an even faster pace than the average of the data center market. So you saw in your chart, in the low point projection of the market, it's 35% CAGR. So market will be between $6 and $9 billion already in 2028. In 2030, we expect the market to be between $15 and $18 billion. So it will be a massive market. And I told you, I think it's important I get back to that point. I told you last quarter that the white space became much more interesting for ETH given the power ranges and also going to the racks, moving from few kilowatts to a megawatt, which is at site now. And this makes a remarkable change in the way we design the power solutions to be more attractive for Ethan, having mission-critical solutions here. And then if you look at the cooling portion of it, there are technical synergies in the way you design the white space from the chip out. And that's what we are interested in, in converting power and cooling technology and knowledge to come up with better designs for our customers. Then why Boyd? I would say we start with this. Firstly, they really have similar DNA that Ethan, which means that they lead with technology and innovation. Second, they are the market leader. So that provide us with a scaled entry into the market, not the suboptimal assets we saw on the market before. This is a market leader. They have a global footprint, which is impressive in all three continents. and a best-in-class engineering team because they have around 500 engineers, and they are the best schooling experts on the market. So we like what we see, and we also like the way they sell it because they work through technical sales, meaning they work intimately connected with all the cheap companies. So think about the merchant chips like NVIDIA, AMD, but they also work on the captive proprietary custom silicon developers, which are the hyperscalers. So they are in those development projects for the long run. So they know two or three generations ahead of what is commercial today, what's going to be delivered because they are part of those projects. So talking about synergies here, First of all, Eaton, in our power portfolio, we can leverage this connectivity they have with the chip manufacturers and the hyperscalers on their own chips to leverage our power system designs as well. So they have the customer intimacy. On the other end, we believe we can help them grow their co-location, multi-tenant market. We have better access and better relationships than them. And then we also can help them reducing their cost position, giving our purchasing power at ETHAN. So this business is growing really, really fast. And this year, they're going to reach $1 billion in revenue. Next year, they're going to reach $1.7 billion in revenue, which is a staggering 70% growth. We double-clicked on that during diligence, and their Q4 results, exit rate is already 400, which gives 1.6 if you multiply by 4, making this 1.7 plan not only achievable, but there is upside next year. So, I mean, everything we saw from that angle made us believe that was the right asset to go after. And we also know that we keep our discipline with the returns between 200, 300 points, being accretive on year two. So all the good stuff. So the asset is fantastic. I'm really excited about winning this business, especially because we've been working, getting them to know as a supplier first for over a year, getting to know the teams, the technology. We hired independent consultants to browse all the pooling players and all the inputs we got pointed to Boyd as the best option for us. So When the asset came to market, we knew exactly what we wanted to check. We knew what plants we wanted to visit. We had an idea on the talent we wanted to retain. So we were quick. We were fast. And we won by certainty of our proposal, fully vetted by our board, not necessarily because we were bidding higher than other folks. So a great step for us, a great step for the business. And we believe that combining these two technologies in the future will bring a lot of wins for the company, even though I say we didn't need to put much of the synergies into the model to make the math work because the business is growing so fast that it wins on its own merits. Thank you, Paolo. I really appreciate that.

Thank you. And our next question comes from the line of Joe Ritchie from Goldman Sachs. Your question, please.

Hey, guys. Good morning.

Morning, Joe.

Hi, Joe. Hey, Paolo, maybe just continuing the conversation on Boyd. I'm just curious, when you think about this asset and how long they've been providing liquid cooling or CDU solutions to data centers, Maybe help us provide a little bit of the history on that. And then secondly, we're trying to level set the portfolio of their business that you've laid out on slide five. I'm curious specifically, how much is liquid cooling? How much is cold plate? Just any color you can give us on that would be helpful.

Great. So the company historically started by designing cooling systems for aerospace. which is a great place to start because it's very stringent, tough requirements, tough engineering solutions, and they really got traction there. And then when cooling became a reality in the data center space, they migrated to cooling in data centers. You should think about Boyd as over 80% of their revenues are in the data center space and the other 20% are divided between aerospace and industrial applications. So the data center part is growing at a much faster pace, as you know. But the aerospace part is also interesting. We were working on our own projects to achieve exactly that. And now with that technology, we don't need to continue with those projects any longer in aerospace. So it's also important, but not any close to the growth rates that we see in data centers. And as you think about Boyd, they are not a, don't think of Boyd as a co-played company. They are the cooling experts on the market. When you have 500 engineers and you are embedded into two or three generations of chips ahead of what's commercial today, you know what's going to happen in the next five years. And you are designed in. And it's almost like the same behavior we have in the aerospace selling, you get to develop something with your customers, you win, and you are in the platform. The difference here is that the aerospace platforms change every 30 years and the chips change every 18 months. So they are ahead of the curve for the new designs to come to reality, which gives them a lot of advantage. I'm going to explain what I mean by that. When a solution is stable, People will try to copy and do it cheaper. When the design is changing every 18 months, there's no way a company can catch up with them unless you have a seat on the table, you're working with the engineering teams of your customers. That's exactly how they play. So we felt really comfortable with that. And then they have a long range of products in the cooling space, and they also have systems and they have systems capabilities. So the way to think about the future of this business is whatever makes more sense to the customers, they will develop and they will implement. They will not be fighting for product A or product B. They will always be offering the best solution to make the chips work perfectly fine. So that's how they are wired. We love the way they conduct themselves. And we talked a lot about the engineering side of it, but they also have you know, great footprint with plants in Asia, Eastern Europe, North America, and, you know, top the edge, you know, lean qualities as well. So it's a well-run business, and we know we can scale. We know we can scale that business, and we will.

Got it. That's super helpful. And then just a quick follow-on question on EA backlog. So, you know, you've grown the backlog by about $2 billion year over year. It sounds like you have an expectation it will continue to grow through the end of the year. Just how are you thinking about 2026, just given the strong growth that you're seeing and potentially continuing to see backlog growth in EA in 2026?

Yeah. So particularly on electrical Americas, through Q3, we saw this backlog growth of 20%, which includes 9% organically. And on a, you know, LTM basis, our book to bill was 1.1. As I said before, we were supported by higher growth in our end markets. And also because as I said before, we're investing and the customers are trusting us. So great results for Q3. As we look into Q4, and I said before, we are bullish about orders growth once again in Q4, we see momentum in negotiations and orders. So it's very possible. or backlog at the end of 25, you'll be up year over year at similar growth rates as Q3 was versus last year. So there are indications that could be possible. And the book-to-bill could also improve beyond 1.1 as a consequence. For 26, the second part of your question, I would say it's a bit too early to call. We will have more to share when we provide our guidance in February. One thing is for sure I want to share with you. We will start 2026 with record backlogs and just enormous visibility into the fiscal year. That's a guarantee.

Thank you. Thank you. Our next question comes from the line of Nigel Coy from Wolf Research. Your question, please.

Thanks, guys. Good morning. I just want to change gears a little bit here and maybe talk about aerospace. Uh, some pack the, uh, the drivers, um, of the air performance and in particular the margins and, uh, obviously very strong leverage there. So just, just wanted to understand what's driving that.

Okay, great. Thanks. Well, you, you probably remember, uh, Nigel that we shared in March or a plan, uh, for the aerospace business, um, to go to 2030 and to reach 27% margins. Uh, John Sapp explained that to the whole team. I would start by saying that we're on the right track to deliver on 2030 commitments. I see great performance by the aerospace team this year that supports my statement. I'll give you more detail on that. Firstly, I want to say, which is really important for this business, they landed historical wins on new platforms that were available, defense platforms. So those historical wins will give us a lot of revenue. decades to come. So the long-term view of this business is fantastic and incredibly strong. For the short term, I'm again proud of the team as they keep ramping volumes consistently and improving customer satisfaction while they do that, which is also great. So if you compare this business, last year we grew 10%, and this year we're yet again raising organic growth guidance up 100 basis points to the midpoint of 12% this year, which is a great year-over-year performance. And on the margin front, we start to see upside from some of the key strategic levers, which are driving already 70 base points of margin expansion. So I would say we are on track to reach the 27% margins we promised for 2030. You asked for details where we are working to improve margins. The first thing is no surprise in the industry supply chain. We invested in AI tools to improve planning and the connectivity between our suppliers and our customers, including our plants. This is going well. Second, we are investing in manufacturing excellence, improving the way aerospace runs the show, and it's also going the right track. And third, I would say this. We also, although there's not the massive investment we had in Electrical Americas, Aerospace is also expanding a couple of plants, and they're doing that very well. But their growth is basically getting more product out of the same facilities they have, which is great performance. And fourth, I would say this. We talk about portfolio management both for the short term and for the long term. I see also green shoots here. You heard me saying before we treat every GM as a portfolio manager. So John Sapp and his team, they took care of some contracts that we saw as a tail of the portfolio, and they renegotiated those contracts, which will give us better margins in the future. And the other thing I want to highlight, which the team also landed, I don't want you to forget, is that the Ultra PCS announced deal is a great example of an asset we will acquire that would add to the top line in terms of growth acceleration and And we'll start adding to the margin, being accretive to margins right away. So it's a great asset. And we expect now to close this year in Q4 rather than beginning the first half of next year, which is also great news. So I would summarize by saying I'm proud, really proud of this team. And I'm confident that they will deliver on their commitments towards 2030.

One additional statistic, Nigel, if I may. The 12% revenue guide for the year will also assume a backlog growth. So we're not flushing the backlog. We are growing faster than prior year and adding to the backlog. As a reminder, the backlog in Q3 was 15%, 1.5% higher than it was a year ago.

Yeah, that's great. Thanks, guys. And then sticking with margins, there's a lot going on in the Americas, margins, price tariffs, investment spending, et cetera. Obviously, a lot of volume leverage as well. So just wondering how we should think about incremental margins in 2026 and how that all plays out. Thanks.

Yeah, I will start and then I'll allow Olivier to provide more color. It's too early to talk about 2026 margins, but I think... Q3 was a good proxy where the top line didn't come to the levels expected and the business could produce very good margins. And why was this possible? First, because we had a backlog we could deliver on. Second, because the team now covers for all the tariff costs and is not a drag on the margins. So it's not only recovering on the dollar-by-dollar basis by the end of the year now, but also is not dilutive to margins, which is great news. Where are we now in electrical America? That's exactly the discussion we should be having. Think about a business that has been growing consistently with the same portfolio of plants, and all of a sudden now they're expanding 12 facilities at the same time. So six are built and they start to ramp. Other six are in building phase. So it's a lot of activity in that business preparing us to start a new S-curve, a new chapter of growth for the business. That's the way to think about Electrical Americas. Our customers trust that, and it's proven by the amount of orders they're giving us, which is just fascinating to see that. quarter after quarter. So that business is exactly getting ready for all this demand that we announced the expansions on the right time, and we realized that all this order momentum we have, we need to accelerate investments, get the people ready so we can produce on this backlog that we count on today. And with all that, we have over 100 basis points of inefficiencies, minimums, that we have by dealing with those inefficiencies. And all this turmoil are ramping six facilities at the same time. So we're going to give you full guidance in February for 2026. But in 2026, you should expect that we continue to ramp. So some of those inefficiencies are still going to be there. But they're going to disappear over time. And then we can print even better margins for electrical Americas.

Great. Thanks, Paulo.

Thank you. And our next question comes from the line of Jeffrey Sprague from Vertical Research Partners. Your question, please.

Hey, thanks. Good morning, everyone.

Good morning.

Hey, good morning. Hey, a lot of ground covered. I just want to come back to Boyd one more time, at least for me. Just a little more color sort of on, you know, some of the deal assumptions. Paulo, that was very helpful giving us the $1 billion, the $1.7 billion. That was part of my question. But this 25% margin that you're pointing to, is that their organic margin? Is that kind of comparable to Eaton accounting, or do you have some synergies baked into that number? No, this is their margin. This is their margin, yes. Today. And then, so if you think about synergies, you alluded to revenue synergies working together. I would assume you're maybe not ready to totally You know, kind of give us a number on that, although the 500,000 of content certainly is a starting point. But how about on the cost side? Is there a cost story here too? Or, you know, coming out of private equity, maybe these guys have a lot of capacity they need to add or something to kind of keep up with this demand. Should we just think about, you know, kind of investment for growth as opposed to, you know, kind of cost-related synergies as part of the earnings algorithm?

Yeah, we have both. I will say this. I'll go back to the deal criteria, so it's clear that we remain disciplined. This deal is delivering between 200, 300 basis points over cost of capital. It's going to be accretive on year two. And I said before, we didn't need to use the synergies to make the business case work, given all the growth that they have in the pipeline. But if you look at the synergy, the multiple after the synergies, the multiple goes down to high single digit. So there are synergies that we can play here. The quickest and the easiest to implement is on the cost side. We looked at what they buy and we compare to our purchasing volumes and our purchasing power. We believe we can help them a great deal. And then again, the other part of Synergy is about sales that we see as a great opportunity and we work towards that. But once again, we could even take this out of the model and the math would still work fine. Olivier can give you more details on how we're going to run, you know, the financing, et cetera. We also checked our leverage point and we believe that after the deal, we're going to still be at the same credit rating as today, so that would not be affected. You want to add anything, Olivier, to it? Nothing more to add, no.

Okay. I'll leave it there. Thank you very much.

Thank you. Thank you. Our next question comes from the line. That's Steve Tusa from J.P. Morgan. Your question, please.

Hey, guys. Thanks for fitting me in.

Hey, Steve.

So just to kind of clarify on the fourth quarter here, so I guess what you're saying with the EA revenue is that the resi stuff remains weak and some of these other nits and nats that were one-time issues, you know, ship. And so I think the midpoint of the prior range was higher than 18% revenue growth. Is that basically the resi impact in 4Q?

Yeah, so you got this correctly, Steve. I'll go back. So if you look at the sequential revenue growth for electrical America, it's around 200 million. We are confident. We check plant by plant what needs to happen. And this is around 5% to 6% sequential growth. And this is possible because new capacity came online in Q3, and we are ramping up as we speak. In terms of the myths you mentioned, which was half of the myths to the meat of the guidance on growth, you should think about this as being less than one day of sales, right? So think about whole quarter and they missed less than one day of sales. And this is going to be a carry over for us in Q4. So that product is on the pipe. It was on the shop floor and now becomes a tailwind for Q4. So this is one element for you to consider. That's why we believe this strong double digit growth is possible. having this carry over from Q3 that we were working on, we put on the lever. And then the second thing was that last year is the easiest comp of 2024, which the growth was only 9%. So we believe it's possible to achieve that.

Yeah, that makes sense. I like only 9% growth. That's not exactly the easiest comp in the grand scheme of the economy, but I understand for you guys, it's kind of a different scale. And then just lastly, following up on Nigel's question on the margins, I think your margins are guided this year down 50 bps, and you have this 100 basis points of inefficiencies, but you're also absorbing tariffs and maybe a deal here and there this year. Why wouldn't it be better than down modestly next year? Does the 100 bps get worse next year or does that get a little bit better? You know, you should be able to kind of, in my view, engineer to something that's at least up a little bit, you know, for next year for EA.

Yeah. So on the first part of your question, of course, we're dealing with those four different deals and we are investing and we don't regret doing that because that makes our position so much stronger. We cannot continue acquiring companies at that pace. You shouldn't expect that next year, right? We need to digest those deals. They were the right deals in the right time, the right place. but we cannot continue to make acquisitions at that pace for per year is not what we're going to do. So that addresses the first part of your question. And of course, the business is making things better as we speak every month, every day. And you should expect that those inefficiencies will go away as more of the plants that we start to ramp up, they become mature. I'll only caution you, it's too early to give you guidance for 26. We're going to talk in February, and then we're going to give you more detail on the plan. I need to meet with the team to see the bottoms-up plan myself. They're working on that as we speak. But directionally, think about this. Last deals next year, we focus to digest what we acquired this year. And then in terms of efficiencies, should start getting better over time for Latin America as we mature the footprint.

Yeah, that makes a lot of sense. Okay, thanks a lot.

Thank you. And our next question comes from the line of Dean Trey from RBC. Your question, please.

Thank you. Good afternoon, everyone.

Good afternoon.

Good afternoon. Hey, just want to follow up on Jeff's question regarding capacity investments, and particularly for Boyd. We talk about the 70% growth expected for 26. How much capacity do they need to add? You know, one of their key competitors announced their doubling capacity. He said Boyd has 16 plants. Just what's in front of them in terms of capacity? And really, what are you solving for? You know, is there a backlog that you have in mind? that you don't want to exceed in terms of how much capacity you'll be adding.

So this was a key part of our diligence, and we double-clicked on that. They are ramping two facilities, large facilities, one in Asia and one in North America. They have ordered, they have equipment in place, they are hiring people at a high pace And then all the long term, the long lead items, the long lead capital goods, machinery, et cetera, are ordered already. So the capital plan is well underway. So whatever is required for 26 and 27 is already in the pipe. And then we feel really good about their capacity to rent because we were, we saw those plans. We saw the exit rate now in Q4 already in the ballpark of the revenue numbers for next year. So, yes, they are investing. They are growing. The investments are ready. They're a plan. And over time, it could well happen, as it's happening with, you know, Fiberbond, that we can accelerate and augment their wings, and then we can come to a decision later on to invest even further. But today is not required. It's all in.

That's really good to hear. And then just a follow-up, we appreciate the update on the megaprojects. You all have been really good about providing some data points, given your perspective. Can you talk about the number of projects you see today and your win rates?

Yeah, great, great question. We didn't have a slide. We planned to have a slide here before we closed the deal, so we needed to remove. So maybe next quarter I'll bring it back. So another very strong quarter, record announcements once again. So in Q3, the mega project announcements reached $239 billion, which is up 18% year over year. And if you think about the sequential growth from Q2, it's almost 50%. So very, very, very strong quarter. You look at the composition of those mega projects, you would expect a big portion of it be data centers, and it's true. It's almost half of the total. But the other half is not data center, which is also great and diversifies the end market. And if you look at what's happening, I gave you data about starts and announcements last quarter. If you look through September and you look back from January to September, average announcements per month are reaching $65 billion. And the starts for all nine months are only $100 billion. So there's a lot of things to still come to the markets, a long runway. And the backlog today is around $2.6 trillion. So it's up 29% from last year. astronomical numbers, and if you translate to us, we won around $2 billion in orders. We have a negotiation pipeline now. We are active on negotiating other $4 billion-ish in products and solutions, and we win around 40% of what we bid on. So that's a very strong win rate. With all those numbers, and you compare the potential to what we booked so far, I hope you're going to get to the same conclusion I got, which is those large projects typically take between three and five years for announcement to our revenues. So think about this as a great, great tailwind for extended duration of the market growth that we have for even a longer period of time.

You could also triangulate those large projects with the announcement from the hyperscalers. If you remember, during the earnings seasons, the top five in the U.S., they announced a growth in their capex 25 to 24 by 67% year-on-year, and then 26 versus 25. about 45%. And all those numbers are higher than what they had announced the prior quarter. So many triangulation points.

That's a good point. Thanks, Olivier. Really helpful. We can take a last question. Thank you. We are over time. So let's go for the last question, please.

Certainly. Our final question for today comes from the line of Scott Davis from Melios Research. Your question, please.

Hey, guys, and congrats on the numbers, et cetera, or the outlook, I should say, is very encouraging. Hey, just a couple cleanup items because I think you've touched on 99% of what matters here, but the CapEx, I think you were guiding to kind of call it $1.2 billion this year and next combined. Are you at the point where you may need to upsize that 26 CapEx number given the order book?

So we will be higher in capex in 26 versus 25. We have said that in a consistent manner. We think we're going to have leverage. You go back to the question from Paolo on the capex we had deployed in 25. 26 will be a peak, and then we'll go back to the history called capex as a proportion of revenue you had at ETHAN. As of 27, right? As of 27, correct.

So you should think we are actually accelerating our hiring and our ramp now on the existing, you know, expansions we announced already.

Okay. That's helpful. And then, guys, just again, another cleanup item. Where do we stand right now with channel inventories? Are they back to kind of more normal levels?

Yes. So we have a closer look. with our distributors, I think Razzie reached bottom, in my opinion. And then we see other markets that are coming back really, really nicely. Distribution IT, for example, recovered, not only in North America, but also in EMEA, you know, double digits, orders growth. Our utilities business came back very strongly now as well in terms of orders. strong double-digit growth. So this is coming back. RAS is still down, DIT back, and then utilities, very, very strong orders, which we didn't have an opportunity to cover, but utility business did really well in orders as well in Q3.

Okay. I'll pass it on. Thank you, guys.

Thank you. Hey, thanks, guys. As always, the IR team will be available to address your follow-up questions. Thank you for joining us. Have a nice day, guys. Thanks, everyone.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.