Ladies and gentlemen, thank you for standing by, and welcome to Eaton's Second Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, Yan Jin, Senior Vice President of Investor Relations. Please, go ahead.

Good morning, guys. Thank you all for joining us for Eaton's second quarter 2023 earnings call. With me today are Craig Arnold, our Chairman and CEO; and Tom Okray, Executive Vice President and Chief Financial Officer. Our agenda today includes the opening remarks by Craig, then he will turn it over to Tom, who will highlight the company's performance in the second quarter. As we have done on our past calls, we'll be taking questions at the end of Craig’s closing commentary. The press release and the presentation we'll go through today have been posted on our website. This presentation, including adjusted earnings per share, adjusted free cash flow and other non-GAAP measures, are reconciled in the appendix. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today 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 that are described in our earnings release and the presentation. With that, I will turn it over to Craig.

Thanks, Yan. Hey, today we're pleased to mark the end of the first half with one of our strongest performances ever, and a performance that strengthens our conviction about our long-term growth prospects. Our teams continue to deliver on our commitment, propelled by both strong markets and good execution. We'll begin with some of the highlights of the quarter on Page three. Well understood at this point, megatrends, reindustrialization, infrastructure spending are continuing to expand our markets, driving our revenue, orders and backlogs. We posted another quarter of record financial performance with strong revenue, margins and earnings growth. And we executed well. Our first half performance along with our growing backlog is what allows us to once again raise our full-year guidance. We're raising our 2023 guidance for organic growth, margins and adjusted EPS; our EPS growth at the midpoint of our guidance is now up 16%. Tom will walk you through the details shortly. But from my perspective, the highlights of the quarter really are our growing backlogs — up 22% on Electrical and 26% in Aerospace — with a book-to-bill ratio of 1.2 for both Electrical and Aerospace. We also generated strong operating and free cash flow, of $1.2 billion and $900 million, increases of more than 200% and 600%, respectively. Free cash flow in the first half of the year is almost $800 million above prior year. So we're on track to deliver our full-year guidance despite the higher growth and higher receivable balances. Overall, we're pleased with the results and well positioned for the second half. Moving to Slide four, we wanted to provide a simple framework that summarizes how we think about key growth drivers across our businesses. The important megatrends are listed here on the left at Eaton markets, and our segments are listed across the top of the page. At the intersection is where we see these trends having a material impact on the growth rate of our end markets. And without getting into a lot of the detail, the important message is that this long list of mega projects is impacting many of these end markets. What we intend to do during the course of our quarterly earnings call today and really into the future is to talk about these trends and how they impact our end markets. Today, we'll spend a few minutes on infrastructure spending and the Inflation Reduction Act, reindustrialization and an update on mega projects as well to look at Eaton's position in the utility and aerospace markets. We're highlighting the Inflation Reduction Act since it has considerable upside to the initial estimates of future government spending. And on mega projects because they continue to grow dramatically. We picked the utility segment since it's quickly becoming one of our largest markets. It was approximately 15% of Electrical Americas sales last year, and is running well ahead of that rate this year. We received also some extensive questions from investors about our position in this market. Lastly, we'll highlight our aerospace business through the double-digit growth outlook, ramping defense and commercial platforms, including a substantial new win on the Bell V-280 Valor platform. Moving to Slide five, we're showing an updated look at expected spending tied to the Inflation Reduction Act. Most of the spending is focused on improving U.S. infrastructure. And as you can see, the estimates have increased significantly. At the time of passage, estimates on the cost impact, including credits and incentives, was $271 billion. The legislation was recently rescored and government spending is now expected to be $663 billion, up nearly 2.5 times due to what is really an uncapped program. Importantly, these tax credits because they're uncapped are expected to continue to grow. These dollars are naturally a strong catalyst for infrastructure spending, much of it targeted at industries where Eaton will be a significant benefactor. The implementation of the IRA is in the very early stages, and we think it will provide significant tailwinds over the next 10 years. Very little of this impact is currently in our order book, and none of it has impacted revenue yet. On Page six, we have an updated chart showing the continued growth of mega projects in North America. We introduced this chart last quarter. You will recall that we included announced projects that are greater than $1 billion in this category. The value of announced mega projects has increased by $116 billion or 20% between March and June. So the momentum continues and we'd expect the category to continue to grow at well above historical trends. We've seen recent announcements for EV, semiconductor plants and new battery plants — really across the board. A few examples of some of the other major projects include $174 billion of downstream oil and gas or chemical, $33 billion of LNG export terminals, and $64 billion of power generation and renewable energy projects. Just another confirming data point, the Dodge Data for U.S. industrial projects continues to expand at a record pace, with 12-month manufacturing construction starts up 72% on a rolling 12-month basis, and up 84% if you include LNG activity. And as a reminder, only 25% of these mega projects have started, so we're just at the beginning of this reindustrialization mega trend. Lastly, I remind you that we expect each of these mega projects to have between 3% and 5% electrical content. Moving to Page seven, we highlight the utility segment of the Americas business. As we reported, in 2022 this market accounted for approximately 15% of Electrical Americas revenue and represents an even bigger percent to date. We've historically viewed the utility segment as a stable but slow growth business, generally in the low single digits. Over the next decade, utility distribution CapEx will account for 60% of the total utility CapEx globally, growing at a CAGR of 9%. Over the '22 to '25 period, we would expect an 11% CAGR. The impact of sustainability initiatives across the globe have significantly boosted this number. This includes grid modernization, renewable energy, electrification of everything, enhanced reliability and safety needs, and government incentives are all contributing to this growth outlook. And while the electrical needs of the world continue to increase, our utility customers are finding it challenging to maintain an increasingly aging grid infrastructure. As a point of reference, over 70% of U.S. transmission and distribution lines are over 25 years old. We're naturally making capital investments to address the growth here and have already committed to new capacity in our three major product families: transformers, voltage regulators, and line insulation products. It's worth highlighting that in this quarter, our Americas utility business backlog has increased 45%, organic revenues grew 30% in the Americas, and 20% in our global segment. The graphics on Page eight highlight Eaton's unique position in the North America utility market where we're primarily focused on distribution. And given the significant changes taking place in this market, including the need to integrate renewables, undergrounding for increased resiliency, the increased demand for grid services, we could not be more pleased with what we have to offer in this segment. You can see from this slide that we have a broad position in the market. In fact, we have the industry's broadest portfolio of utility solutions. This includes grid planning software, design and engineering services, a complete offering of critical utility products, automation software, as well as extensive project management expertise. We also offer a broad range of digitally enabled hardware, grid edge controllers, for overhead, underground and for substations. Lastly, our Brightlayer solution for utility includes distribution planning software, distribution and substation automation, as well as smart grid communication centers and demand management. So overall, we're well positioned given our substantial portfolio of hardware, digitally enabled software and solutions. In the quarter, we supported a broad range of wins in the market, including hardware solutions for voltage regulators, power distribution, digital solutions for grid planning in our software we call SIM, smart metering and also in utility services. Moving to Page nine, we'd like to highlight another well-known trend, the growth in aerospace markets. As you can see, we expect double-digit growth in each of the years between now and 2025, driven by the rebound in commercial OEM, commercial aftermarket and increased defense spending. The commercial market is expected to be very strong as Airbus and Boeing are both significantly increasing production volumes on their most important platforms. For example, Airbus is expected to increase production on the A320 from 45 to 50 per month currently to 75 per month by 2026. And Boeing is expected to increase production on the 737 from 31 per month currently to 50 per month in the '25 to '26 timeframe. Global passenger air travel is expected to return to 2019 levels by the end of this year, and grow at an 11% CAGR between now and 2025. We also expect to see increased defense spending driven by various global conflicts, and governments allocating more dollars to our type of equipment to improve fleet readiness. Our aerospace business is especially well positioned on key defense platforms, both those targeted by our organization, and our new platforms that are being ramped up. On Slide 10, in addition to the high volume single-aisle growth that you hear so much about, the next group of key platforms driving new growth today and into the future are listed here. These platforms are a good representation of important platforms ramping in the near term, over the next five years, and critical growth platforms for future decades. In all cases, we have more content than ever on each of these aircraft. In the future category, we're showing the win with a bow on the V-280 Valor program. The V-280 is a replacement for the Blackhawk helicopter, and we have five times more content and are still bidding for more opportunities. We put the KC-46A and the F-35 in the next category, aircraft that will be ramping in the near term, and will contribute materially to our revenue growth beginning next year. As you can see, our content per aircraft here is 2 to 3x legacy platform. Lastly, we're starting to see once again growth in the wide-body market. The long-haul market has been especially weak during the COVID and post-COVID period, and is now beginning to pick up. The important message here is that as these programs ramp up, we'd expect to grow faster than our end markets, given the increased content on each of these programs. So between market recovery and increased content per platform, our aerospace business is expected to see significant growth over the next five years or even longer. Now, I'll turn it over to Tom, who'll take us through the financial slides.

Thanks, Craig. I'll start by providing a summary of our record Q2 results. Organic growth continues to be strong, up 13% for the quarter, the sixth quarter in a row with double-digit organic growth. Operating profit, an all-time quarterly record, grew 21% and segment margins expanded 150 basis points to 21.6%, also an all-time quarterly record. We posted solid incremental margins of 33%, up sequentially from 27% in Q1. Adjusted EPS increased by 18% over the prior year to $2.21, an all-time quarterly record, and well above the high end of our guidance range. Looking at our first half results, we've had a very strong start to the year with organic growth up 14%, segment margins up 130 basis points, incremental margin up 30% and adjusted EPS growth of 17%. Finally, last year, we explained that we were making a deliberate decision to invest in working capital to protect our customers and their orders. With supply chains improving, we are now able to better optimize working capital. The result, together with strong earnings, is a 600% increase in free cash flow in the first half of the year to $900 million. Moving on to the next chart, our Electrical Americas business delivered another very strong quarter. The megatrends are having a favorable impact on our U.S. business. We set all-time quarterly records for sales, operating profit and segment margin. Beginning with the top line, organic sales growth of 19% remains very strong. Electrical Americas has generated double-digit organic growth for six consecutive quarters, with five of the quarters greater than 15%. On a two-year stack, organic growth is up 35%. In the quarter, there was broad-based growth in nearly all end markets, with especially robust growth of 25% to 30% in data center, utility, industrial and commercial and institutional end markets. Operating margin of 26.4% was up 320 basis points versus prior year, benefiting from higher volumes and effective management of price and cost. On a rolling 12-month basis, orders grew 7% with particular strength in data center and distributed IT, industrial and commercial and institutional end markets. Book-to-bill ratio remains above 1. We increased backlog by 30% year-over-year and sequentially 3%. It's worth noting that we secured orders for two large data centers worth nearly $300 million, including content to support these customers' AI growth projections. Finally, our major project negotiations pipeline in Q2 was up more than 17% versus prior year and nearly 9% sequentially from especially strong growth in data center, institutional, government, health care and transportation markets. On a two-year stack, our negotiation pipeline was up 65%. Overall, Electrical Americas continues to have a very strong year. On Page 13, you'll find the results of our Electrical Global segment, which posted all-time record sales of nearly $1.6 billion. Organic growth was up 6%, which was partially offset by a small divestiture. This represents a two-year stack of 18% organic growth. The growth was broad-based driven by strength in utility, data center and distributed IT and industrial end markets. Operating margin of 18.5% improved 20 basis points sequentially, but was down 40 basis points compared to prior year. The year-over-year decline was mostly driven by unfavorable product mix, partially offset by effective management of price and cost and higher volumes. Orders were up 1% on a rolling 12-month basis with strength in utility and data center and IT end markets. Importantly, book-to-bill remained greater than 1. Before moving to our industrial businesses, I'd like to briefly recap the combined Electrical segment. For Q2, we posted organic growth of 14%, incremental margin of 38% and segment margin of 23.4%, which was up 200 basis points over prior year. On a rolling 12-month basis, our book-to-bill for our Electrical sector remains very strong at 1.2 and our record backlog grew 22%. We remain very confident in our positioning for continued growth with strong margins in our overall Electrical business. The next slide highlights our Aerospace segment. We posted an all-time quarterly sales record and a Q2 operating profit record. Organic growth was 14% for the quarter. We've posted double-digit growth in five of the last six quarters in this segment. Growth was driven by broad strength across all markets with particularly strong growth in commercial OEM and commercial aftermarket, which were up 21% and 30%, respectively. Operating margin was 22.5%, up 60 basis points over last year primarily driven by higher volumes. Growth in orders and backlog continue to be very strong. On a rolling 12-month basis, orders organically accelerated from up 21% in Q1 to up 26% in Q2 with especially strong growth in defense, OEM and aftermarket for both commercial and defense. Year-over-year backlog growth increased 26% in Q2, in line with growth in Q1. On a rolling 12-month basis, our book-to-bill for Aerospace remains very strong at 1.2 times. Moving on to our Vehicle segment on Page 15. In Q2, organic growth was up 6%. We saw particularly strong growth in North America light vehicle, APAC and EMEA markets, all up double digits. Operating margins came in at 15.3%. During the quarter, we delivered improvements in our manufacturing facilities, which contributed to sequential margin improvement of 80 basis points. We continue to win new business tied to clean technology solutions, including multiple clean commercial valve actuation programs. Additionally, we've won over $60 million per year in program length extensions and volume increases with multiple OEMs. On Page 16, we show results for our eMobility business. We generated another quarter of strong growth. Organic revenue was up 18%. Margin improved 100 basis points versus prior year, mostly driven by higher volumes. Overall, we remain very encouraged by the growth prospects of the eMobility segment. So far in 2023, we have won new programs with more than $450 million of mature year revenues, positioning us very well to exceed our 2025 target of $1.2 billion of revenue. Through these wins, we continue to find opportunities to leverage expertise across all segments. For example, we've reached an agreement with a major OEM to supply a power electronics control unit for an electrically heated catalyst to meet emissions regulations. This win demonstrates Eaton's ability to leverage capabilities across our entire portfolio, including core technology in both electrical and industrial businesses, such as brake torque, power protection and busbar fuses. We've also capitalized on our extensive vehicle expertise and added content in connectors from our Royal Power acquisition. Moving to Page 17, we show our Electrical and Aerospace backlog updated through Q2. As you can see, we continue to build backlog with Electrical stepping up to $9.1 billion, a sequential increase of 2%. Electrical backlog is up about 110% since Q2 of 2021 and over 200% higher than Q2 2020. Aerospace backlog is holding steady at $3 billion. This is a 30% increase since Q2 2021 and over 100% higher than Q2 of 2020. On a rolling 12-month basis, book-to-bill was 1.2 for both Electrical and Aerospace with absolute orders remaining at high levels and record backlogs. Our book-to-bill over 1 times is yet again a key metric that gives us confidence in our outlook into the quarters to come. With all the tailwinds in our end markets, we think it is likely that we will have high levels of backlog going forward, which enhances our visibility over the planning horizon. On the next page, we show our fiscal year organic growth and operating margin guidance. We are raising our organic growth guidance for 2023 in both Electrical Americas and for the total company. We now expect organic growth in Electrical Americas of 14% to 16%, up 300 basis points from our prior 11% to 13% guidance. This represents a 600 basis point improvement from our starting 2023 guidance for the business. In total, we're raising our 2023 organic growth outlook to a midpoint of 11%, up from a 10% midpoint in our prior guidance. Our strong end market growth forecast, expanding negotiations pipeline and building backlog provide tremendous visibility and confidence in this 2023 outlook. For segment margins, we are increasing our total Eaton margin guidance range by 40 basis points from a prior range of 20.7% to 21.1% to a new range of 21.1% to 21.5%. This is a result of an improved outlook in Electrical Americas where we increased the range by 80 basis points on strong demand and continued strong operational execution. The increased outlook now represents a 110 basis point increase from the midpoint of our 2022 all-time record margins. In summary, at the halfway mark, we remain well positioned to deliver another very strong year of financial performance. On the next page, we have additional guidance metrics for 2023 and Q3. Following our strong first half performance and improved organic growth expectations for the year, we're raising our full year EPS range to $8.65 to $8.85. At the midpoint, $8.75, we have raised guidance by $0.35. This represents 16% growth in adjusted EPS in 2023 over prior year. We now expect currency translation to be roughly neutral and the remainder of our full year guidance remains unchanged. For Q3, we're guiding organic growth of 9% to 11%. Segment margins of between 22% and 22.4% representing a 100 basis point improvement at the midpoint versus prior year, and adjusted EPS in the range of $2.27 to $2.35, a 15% increase versus prior year at the midpoint. Now I'll hand it back to Craig to wrap up the presentation.

Thanks, Tom. Now turning to Page 20. As a reminder, last quarter, we raised our growth assumption for the utility market to strong double-digit growth, and we increased our residential market outlook to flat from declining. We're now increasing our growth assumption for the commercial institutional and for data center markets to strong double-digit growth. In addition to stronger than anticipated demand for new projects, existing buildings are being retrofitted with more electrical infrastructure as EVs continue to increase their penetration in the market. And data center demand continues to remain at very high levels and we now expect to see double-digit growth in this market as well. The balance of our end markets continue to perform well and are tracking along our prior projections. So while the macroeconomic outlook remains choppy, we continue to expect growth in almost all of our markets. I'll close with a summary on Page 21. As you can tell, we're feeling good about how our markets are performing this year, and we think that will be strong for many more years to come. In fact, the megatrends that we've discussed for some time now are expected to be even more impactful than we originally anticipated. Our markets are strong, but we also had solid execution in the quarter and delivered another strong set of results that included a number of financial records. And as we look to the back half of the year and into 2024, our increasing backlog provides great visibility on our growth outlook. As noted, we raised our guidance for growth and EPS for the second time, and our largest business, Electrical Americas continues to post new records. With that, we'll open it up for questions you may have.

Thanks, Craig. For the Q&A today, please limit your opportunity to just one question and one follow-up. Thanks everyone for your cooperation. With that, I will turn it over to the operator to give you guys the instructions.

Our first question will come from the line of Joe Ritchie from Goldman Sachs. Please go ahead.

Thanks. Good morning. And congrats, everyone. So look, my first question: you guys called out a few of those large data center wins that you booked into orders this quarter. I'm just curious, Craig, maybe just kind of help conceptualize what that means from like content per data center and how that's going to — how that's shifting for your business now that there's a lot of discussion around generative AI and what that means for you guys?

I appreciate the question, Joe. I know there's been a lot of discussion around AI and how it's going to impact the world, not only data centers. The data center market, as we've talked about on these calls for some time now, has been strong and it's been strong for multiple years. On the AI side, that market has been growing at double digits. The big wins that we booked during the quarter, I'd say most of that really has nothing to do with the AI impact yet. A lot of that is in the future. A lot of the major data center players are still trying to sort out the way they're going to configure their data centers to deal with this AI environment and the increased energy intensity. So I'd say, for us, it was just another very strong quarter of data center wins that really has not yet seen the impact of the whole emergence of generative AI. We're feeling great about that market and we think generative AI and its downstream implications are just going to keep that market strong for a much longer period of time, and we're well positioned there.

That's great to hear. And maybe just a broader question around your backlog and the type of visibility that it's providing for you. I think I asked you last year whether — why wouldn't you be able to grow double digits this year. And now it looks like you're very well on track to do so. Trying to really kind of think through the implications of your backlog today and what that means for 2024 and beyond. So any comments around that would be helpful.

Yes. As you can imagine, we're not in a position to provide guidance at this point for 2024, given the fact that it's still early in the year, and we'll probably have an opportunity to do that towards the end of the year as we would normally do so. But to your point, the backlog continues to grow. The backlog, as you saw in these reports, is up multiples of where we've been historically, which gives us much better visibility, better visibility than we've ever had into the outlook for the upcoming 12 to 18 months. We're feeling very good about what 2024 is going to look like. It will be another strong growth year for the company, and we'll certainly provide some guidance on what the year looks like as a part of our normal process and timing for giving the outlook. But the backlog certainly gives us a lot of confidence with respect to what we think the year is going to look like, given that the growth and where it is relative to where it has been historically.

Maybe I can just piggyback on that a little bit. We've seen a lot of focus on order intake and certainly, that's a very important metric to look at. But it's important that you look at it in the context of this historically high backlog that we have together with the protracted delivery times and lead times that we have. So as Craig alluded to, we're nearly three times our historical backlog coverage. And we went through modeling scenarios where you look at various order intake declines and combine that with robust organic growth — we're confident that we will not hit our historical backlog coverage timing until two to three years out. So we're very bullish on the transparency that the backlog gives us, and it really does mute the order intake and order decline a little bit.

Super helpful. Thank you.

Your next question is Josh Pokrzywinski from Morgan Stanley. Please go ahead.

Hey, good morning guys. So I feel like you guys have done a really great job of kind of scoring some of the background announcements, whether it's the mega projects or, I guess, Slide five, with some of the stuff from IRA. Maybe just give us an update on where we are in looking through that. I would imagine the vast majority of that is not really in the order book. You talked about really high customer interaction or engagement or kind of the front log, I forget what the exact term was. But where are we through kind of those orders or initial discussions yet?

No, I appreciate the commentary, Josh, and this is really an important message with respect to some of these big government stimulus spending or the mega projects that we're talking about. We do think one of the key messages is the fact that most of this impact has not shown up at this point in our order book, and it certainly has not shown up in our revenues. We did talk about on some of the infrastructure projects, some $2 billion of projects that we have visibility to; we've won visibility. $1 billion of that have been out to quote; we won about half of that. But that is a really small piece of the total dollars that will ultimately be spent tied to some of these infrastructure and other mega projects that we talked about. So it is very early innings for us with respect to the forward-looking programs that we've shared with you on these calls, and it's what gives us confidence that what we're dealing with here is a long-term structural shift in our business with respect to the underlying growth rates. We'll certainly continue to report out as we learn more, and we'll do this on a quarterly basis. But we're really encouraged by the fact that most of the goodness that we're talking about is still in the future.

Got it. That's helpful. And then maybe just a quick follow-up, respecting that orders and backlog have kind of had their own cadence right now with what you guys are going through and just explained. Are the shorter cycle parts of Electrical seeing kind of that lead time normalization show up in orders? I think some of your peers have seen that. Obviously, you guys are longer cycle and things like switchgear maybe don't fall into it. But any part of that where you're seeing either like a destock or lead time normalization show up?

Yes. We're certainly not seeing any destocking across the business. In fact, around the short-cycle businesses — whether that's residential or what's happening in the OEM channel or distributed IT — those would be three shorter-cycle markets that we clearly have seen a slowdown in orders overall, and lead times as a result of that have come in quite nicely in those three end markets, obviously being more than offset by strength in the other much larger segments that we serve. But in those three short-cycle pieces of the business, we have clearly seen lead times come in, we've seen orders moderate in those three end markets.

Helpful colors always. Thanks a lot guys.

The next question is from the line of Chris Snyder from UBS. Please go ahead.

Thank you. I want to follow up on Josh's question, specifically around the Inflation Reduction Act. It sounds like not many orders yet on the back of the IRA. Is it reasonable to think that orders there could start coming through in 2024? And when we look across all the company's various business lines, which ones do you think will benefit most from the IRA specifically? Thank you.

Yes, I do think in terms of the timing, as we think about 2024, we would expect to start to see those projects be clarified in negotiations and some orders begin to show up in 2024, maybe some early shipments at best at the end of the year. But as you know, these projects tend to be much longer term. A lot of these dollars are going to support mega projects and, by definition, mega projects tend to be much longer cycle than the typical stock-and-flow business that we have. So we would expect to start to see that begin to show up next year. On which verticals within the company, if you look at Slide four in our presentation, infrastructure spending is very broad, it plays across the board and impacts most of our segments. It will show up most materially in the Industrial segment. If you think about what’s going on today in investments in new EV factories and battery factories, what's going on in the chemical space, a lot of it will show up in what we call industrial facilities. But it really does cut across pretty broadly in most of the end markets in which we participate.

No, absolutely. I very much appreciate that. Then maybe following up on that industrial comment. Everyone, I think, has kind of seen the massive manufacturing starts that's now leading to higher activity put in place. How should we think about the lag in which that flows to your business from the start to when it starts generating revenue for Eaton? You guys said these are very long cycle projects. Just wondering kind of how long a single facility kind of generates revenue for you? Thank you.

I appreciate that question. From announcement to a negotiation, negotiation to an order, and order to a shipment — it varies widely depending upon the type of project you're referring to. It could be as short as six months, it could be as long as three years. When you think about a lot of these mega projects, they tend to be longer in nature, so they would tend to be on the longer end of that cycle just by virtue of the size of these projects.

And I think the exciting thing about it, as we said in the prepared remarks, we see each quarter like $100 billion coming in, and then it is going to give us a nice cadence going forward for quite some time. And just to come back to the Inflation Reduction Act, I mean, we put that particular act in for illustrative purposes, but just to draw your attention, we've also got the Infrastructure Act, the CHIPS Act and in Europe, the EU recovery plan. So when you put all this together, there's just a ton of government stimulus supporting key parts of our business.

Thank you.

Our next question is from Nicole DeBlase from Deutsche Bank. Please go ahead.

Yes, thanks. Good morning, guys. Maybe just on free cash flow. I noticed you guys raised the EPS guidance by a pretty considerable amount but free cash flow remained consistent. Can you just talk about the drivers of that? And I'm sure part of that has to do with your working capital plans for the second half? Thanks.

That's a great question, Nicole. We were up almost $800 million. The majority of that, let's call it, $550 million was from working capital optimization and $250 million was from earnings. We debated whether to raise the guidance on free cash flow, and we thought because it kind of fits within the range right now, we'd give it another quarter. We're happy the way it's going. Obviously, up 600% is something to be happy about. We've improved cash conversion cycle by nine days. That said, we still have a lot of work to do, and we want to get our free cash flow margin up even higher.

I'll just add, as we grow as well, we're obviously putting more cash into receivables. And so we're all having to fund as well the increased working capital as a result of the higher growth.

Got it. Makes sense. And then on the non-resi vertical, obviously, ongoing questions about the strength there. Are there any patches within the whole non-resi complex where you guys are seeing any signs of slowing activity?

If you just think about it in the context of the end market segments we've laid out on Slide four, most of what we do is non-resi. Specifically, we've seen a slowdown in what we call distributed IT. We've seen a little bit of a slowdown in what we call the MOEM segment of the market as well. Fortunately for us, those tend to be smaller segments of the market and the growth in the other verticals is clearly more than offsetting that weakness. We have seen a little bit of a slowdown in those other two verticals as well.

That said, if you look at the first half of the year organic growth, we're up in every single end market. Some of them obviously significantly more than others.

Including residential, which we adjusted upward from prior expectations. If you recall from the prior quarter, we actually took our outlook for the year up in residential, where we originally thought that market would be down. Residential is doing much better than we anticipated as we began the year.

Excellent. Thanks guys, I’ll pass it on.

The next question is from David Raso from Evercore ISI. Please go ahead.

Hi, thank you very much. I apologize if I missed this earlier. The Electrical Americas organic growth, the first quarter '22, '19, back half of the year — we're looking for about 10.5 as per the guide. What percent of that growth has been pricing, or even the assumption for the second half, whatever you're willing to discuss? And then just a sense of the pricing that's in the backlog? I'm trying to get a sense of the pricing dynamic relative to the overall organic sales growth.

I appreciate the question, Dave. One of the reasons why we are forecasting a slowdown in growth between the first half and the second half is really the strong comparables. If you look at the back half of last year, we were up some 19% and a lot of that was price, and we're getting much less contribution from price in the back half of this year. When you take a look at it on a two-year stack, the growth is essentially the same — about 30% versus 2021, essentially normalizing for the really strong back half last year, much of which was priced. In terms of price in the backlog, I would say that, as you may recall, one of the things that we did was we actually repriced much of our backlog. So if you think about the underlying performance today, what you're seeing in the Electrical Americas business and we're shipping a lot of that out of backlog because the backlog is so long, we don't expect backlog to have a material adverse impact on the underlying performance of the business as we ship it.

I guess trying to maybe get a little more detail on that. For the back half of the year or even Q2, what are volumes in the guide for the back half of the year? And then just trying to think about supply chains improving. Some of these demand drivers shouldn't fade away that quickly versus some of the shorter-cycle businesses that are turning down. I'm just trying to balance volume and price exiting the year.

Sure. I know you're trying to get at the split between price and volume. We've told you before on these calls we're not going to provide an exact split. What I will tell you is that we are getting much greater contributions from volume than we are from price in the second half of the year.

I appreciate. Thank you so much.

Keep in the context of the prepared remarks, we've raised organic growth in Electrical Americas 600 basis points since the original guide. Our fiscal year guide is 15% for that business, which is a strong number. Overall, when you step back and look at it, it's pretty aggressive, and we think volumes are growing.

And volumes are growing. I would love to think we could get 15% price, but we can't.

The next question is from Julian Mitchell from Barclays. Please go ahead.

Thanks. Good morning. I wanted to start with the Electrical Global business. You mentioned some very strong markets and maybe some that are a little bit weaker. How long are you expecting that weakness to last? And when we look at profitability in Electrical Global, you've got that nice sort of margin turnaround in the back half which I think is driving an acceleration in year-on-year profit growth to close to double-digit levels in the second half. Maybe just help us understand the main drivers of that pickup?

On a relative basis, Electrical Global is not growing at the same rate as we're growing in the Americas. But I wouldn't call those markets weak — they are seeing attractive growth. With respect to the first half versus the second half, we did have a particular mix challenge in our Electrical Europe business in Q2. Those margins were held back due to some very specific mix-related issues in that business. Based upon the visibility we have into the second half, we believe they do not repeat, and the business gets back to a more normal level of profitability in the second half of the year. We have pretty high confidence that's going to take place.

A couple of other areas we're counting on in addition to mix in the back half are higher volume and improvements in productivity in our manufacturing.

That's really helpful. Thank you. And then I'm not sure you want to hazard a guess at this, but when you think about your backlog-to-revenue coverage, total company, it's gone from around 20% towards 50-plus percent in the last three years at Eaton. Some of your peers who also have good mega-trend exposure are talking about that backlog normalizing maybe to 30% of sales. I'm not asking you to put a fine point on your view of that for Eaton but just a sense of the pace at which backlog-to-sales may normalize? Because the experience of other companies is once the backlog peaks, it doesn't seem to stay there very long; it starts to move down as customers normalize lead times.

That's an understandable question. We're talking about the unknowable to some extent. If you think about Eaton's business and the breadth of our portfolio and how it's impacted by these megatrends, we aren't the same as other electrical companies — many of them are exposed to some but not others. What makes Eaton unique is the breadth of our portfolio and the end markets we serve and how each of these markets are benefiting from these megatrends. We would likely have much broader exposure to a number of these trends than other electrical companies.

To add, our backlog in the quarter is up 220% since the end of 2019. With all the mega projects, stimulus spends, and secular trends Craig mentioned, we don't have a lot of discussion about the backlog going down.

Also, some electrical companies play heavily inside factories and may not play on the infrastructure side. We are a massive infrastructure player. As you think about Eaton versus other companies, you can't necessarily draw a straight-line correlation between us and them. We play in very different end markets than some of our electrical peers.

We also have a nice mix of selling through the channel as well as doing direct mega projects. So we've got a good balance there.

That’s very helpful. Thank you.

The next question is from the line of Steve Volkmann from Jefferies. Please go ahead.

Great. Thanks for fitting me in. I wanted to actually switch to Aerospace, if I could. I appreciate your comments there; the medium-term outlook looks very robust. I'm curious how you think the real ramp that you outlined in OE will impact margin mix over the next sort of three to five years?

I appreciate the question. OE margins tend to be well below aftermarket margins. The good news is we're finding that both OE and aftermarket, which is tied to revenue passenger kilometers, are ramping. In the quarter, we actually saw more growth in aftermarket than OE. We don't anticipate a negative mix impact from the OE ramp as we look out to the forecast for the next several years. If OE were to grow faster than aftermarket, that could have a negative impact on margins, but that's not our expectation.

Just to remind you, trailing 12-month aftermarket is about 25%, and that's across both defense and commercial.

Great. That's super helpful. And then just one quick longer-term question, Craig. Given all these trends across your businesses, we're obviously going to have a period of very strong growth here. How do you think about capacity because the rates of growth seem like they're really kind of inflecting for a longer term?

First, you're absolutely right — this is a very different electrical industry and a very different Eaton than in the past. We're making sizable investments in capital equipment. We discussed investments in the utility space, including transformer capacity, regulators and line insulation products. We've made investments in circuit breaker capacity over the last couple of years. We're having to invest more in capital equipment. In the big scheme of things, the level of investment may tick up 0.5% to maybe another percent of sales, but it's very manageable in the context of the overall growth of the company.

The important thing is the focus is really there. We just recently met with our Board and discussed strategy, and a big part of that was capacity related to meeting this hyper growth. We're very focused and hungry to capture the opportunities.

Great. Thank you.

The next question is from Nigel Coe from Wolfe Research. Please go ahead.

Thanks. Good afternoon. We cut a lot of ground. So back to Electrical. You mentioned retrofit activity, which I think was in relation to commercial & institutional end markets in particular. I know you talked about this in the past, increasing load content, and I think it was in relation to charging specifically. Maybe just talk about what activity you're seeing within retrofits and how you think that develops over the next couple of years?

If you think about why we're incrementally more positive around commercial and institutional, it's the growth in electrification, EV charging infrastructure, and investments being made to support increased demand for electricity on the grid. Quantifying the impact of retrofits versus new builds is challenging — we're still working on that. But retrofits and modifications — whether in homes to add electrical infrastructure, or in commercial buildings to support EV charging, solar, battery storage — all of these investments to improve electrical capacity and resiliency are contributing to growth. We're still trying to put pen to paper to better quantify it, but it's an important and growing piece of what we're seeing.

No, I agree. And then on data centers, I just want to take the other side — are you seeing any signs of weakness? Maybe China might be softer. And when you think about generative AI and GPU racks, does this increase the revenue per megawatt? Or does this just increase the total megawatts in the market? Any thoughts there would be helpful.

To your first question, are we seeing any signs of weakness? Not really. We're seeing strength across hyperscalers, colo and on-prem globally. On AI's impact, we know data centers will need more power, and power density per rack will go up, but we still don't know exactly how they'll be configured. It's early days, and we owe you an answer as we continue to talk to the big data center providers about configurations. We don't yet have all the answers on that.

Each part of the world for the first half of the year, data centers including hyperscale grew double-digit. It's a matter of whether it grew mid-double digits, in the 20s, or in the 30s. We're seeing robust growth across the board.

Okay, that’s great detail. Thanks a lot.

And the next question is from Steve Tusa from JPMorgan. Please go ahead.

Thanks for fitting me in. When you said greater contributions from volume and price in the second half of the year, what exactly do you mean by that? Do you mean that you just expect the skew to be more towards volume in the second half versus the first half? Or maybe just a little more color on what you meant?

Yes, that's primarily what we're referring to. Most of the big price increases we put through were in the second half of last year; we're anniversarying those increases now. So on a relative basis, the contribution to growth in the second half will be more from volume than from price.

Okay. That's helpful. And then just on the Electrical Americas business: should we think about this margin you're doing, especially here in the second quarter — is that the jumping-off point for next year? How sustainable is that? Any moving parts to call out as we tinker with our models for next year?

Our team continues to execute well. We did have a bit of favorable mix in Q2, which may explain some movement between Q2 and the back half. There's nothing unusual in those numbers — it's straight operating performance and execution. Yes, that should be a jumping-off point as we think about what this business should look like into 2024 and beyond. We expect continued strong performance.

And Steve, to add, we know what the implied segment margins are for the back half; we're hoping to do better than the implied number.

Okay. Straightforward. Thank you.

The next question is from Deane Dray from RBC Capital Markets. Please go ahead.

Thank you. Good day, everyone. Covered a lot of ground, but I did hear a couple of references to unknowables and a choppy macro. It kind of begs the question about the initial assumption for this year — a mild recession. Any clarity in terms of your assumption there? Or is everything skewing much higher?

We, like many others, had anticipated a mild recession this year and our thinking around a recession continues to be pushed out, as it does for many economists. At this juncture, we're feeling pretty good about the year — that's one reason we're raising guidance. The bigger message is that even in the event of a mild recession, given the megatrends and stimulus spending and the strength of our end markets, we don't believe it will have a material impact on Eaton's growth. That's what we said at the beginning of the year and we continue to believe it.

Deane, to reiterate, we've modeled downturns in order intake as a proxy for a mild recession — even then, given our backlog and the megatrends, we're confident we can power through it.

Yes. That seems clear. And just a quick follow-up on capacity: when we were all together in New York, we talked about shortages of smart switchgear and transformers. Is that in any way holding back the utility demand? Are you able to supply? How does that change?

As an industry, things are better than a year ago, but we're not out of the woods. Certain markets and verticals are still challenged with lead times; the utility market is one of those. The longest lead-time device we have is typically a transformer for the utility segment. Lead times vary by product and end market. In general, things are improving, but lead times remain extended compared to pre-2019 levels. Our lead times are competitive with peers, but still extended in certain product lines.

Thank you.

The next question is from Brett Linzey from Mizuho. Please go ahead.

Good afternoon. I wanted to follow up on that utility comment. You gave the growth framework to '25 — I think you said 11% growth. How should we think about Eaton's relative growth in the context of wallet share per opportunity or any share shifts from some of these capacity additions?

Eaton's relative performance versus peers: as we discussed, we have a broader portfolio of utility solutions than many competitors. We think we're well positioned to grow at market or faster. Many of our peers are capacity constrained as well, so the real limiter on growth in the utility market will be the ability to add capacity to deal with demand. Until new capacity comes online, it will be difficult to grow much faster than the overall market.

Okay. Great. And then just one follow-up: on the project funnel, you guys have been giving that rate of growth year-over-year and sequentially. How did that fare in the quarter?

The negotiated major projects pipeline was up 17% year-over-year and 65% on a two-year stack.

Great. Thanks a lot. Best of luck.

The next question is from Joe O'Dea from Wells Fargo. Please go ahead.

Hi. Thanks for taking my questions. I'll ask them together because they're related. One is lead-time related, one is backlog. Any additional color on some of the biggest revenue product categories — perspective on where lead times are, where they were at their worst, what you need to get back to for normalization — and related to that, the tailwinds from mega projects and stimulus: Tom, you commented it might take two to three years for backlog to get back to normal. Even as lead times correct, is it going to take quite some time before we really start to see any notable step down in backlog levels?

On lead times: they remain extended, though they've improved in shorter-cycle businesses like residential, OEM, and distributed IT. For big project-related products, lead times are still fairly extended; the utility market hasn't improved much. We're essentially sold out in many areas and don't have a lot of excess capacity to deal with faster acceleration in growth. Until capacity comes online, we wouldn't expect lead times to get materially better. The same applies to backlog — until lead times reduce, and barring a significant market slowdown, you won't see meaningful reductions in backlog. Under our planning horizon, backlog will stay elevated for some time. The two-to-three years Tom mentioned was in a downturn scenario and meant to provide conservative comfort.

Yes. The two to three years I quoted is in a turndown situation and is a conservative estimate.

Got it. Makes sense. Thanks a lot.

Thank you. At this time, there are no further questions in queue. Please continue.

Thanks, guys. As always, Chip and I will be available to address any of your follow-up questions. Thanks for joining us today. Have a great day.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.