Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Yan Jin. Please go ahead.

Hey, good morning. Thank you all for joining us for Eaton's third quarter 2024 earnings call. With me today are Craig Arnold, our Chairman and CEO; and Olivier Leonetti, Executive Vice President and Chief Financial Officer. Our agenda today includes operating remarks by Craig, then he will turn it over to Olivier who will highlight the company's performance in the third quarter. As we have done in our past 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. We'll start on Page 3 where we summarize the key highlights of another strong quarter. We generated adjusted EPS of $2.84 a share, an all-time record and up 15% from the prior year. We also delivered record segment margins of 24.3%, up 70 basis points from last year and we're raising our guidance for segment margins and adjusted EPS for the year. We did experience a couple of extraordinary events in the quarter that impacted our revenue. First, the widely publicized strike taking place in the aerospace industry and then Hurricane Helene which impacted several of our Electrical Americas factories at the end of the quarter. While both of these events will have an impact on our revenue outlook for Q4, they're not impacting our demand and its only timing. In fact, our markets continue to be strong on a rolling 12-month basis. Electrical orders were up 12% with Electrical Americas orders up 16% and aerospace orders increased by 6%. This led to another quarter of growing and record backlog, up 26% for Electrical Americas, up 14% for aerospace, with strong book-to-bill ratios. On balance, we're pleased with our results, well-positioned for a record year of performance, and expect to carry strong momentum into 2025. Turning to Page 4, we once again are sharing our overview of megatrends and how they're driving growth in our end markets. I think the key message here is one of breadth, both in the number of megatrends and in the number of our end markets that are positively impacted, something we think is unique to Eaton and will allow us to grow at an accelerated rate for years to come. Last quarter, we provided an end market update on our commercial and institutional segment, highlighting the strong growth outlook for institutional and infrastructure markets. Today, we intend to provide a forecast of residential markets and how energy transition is creating new growth opportunities in residential homes. As we've done in recent earnings calls, we'll also provide an update on the growing number of mega projects announced during the quarter. So let's begin with that on Slide 5 in the presentation. This chart shows a summary of megaprojects that have been announced since January of 2021 in North America. As a reminder, a megaproject is a project with an announced value of $1 billion or more. Through Q3, we're now at 504 projects with a cumulative value of $1.6 trillion and the backlog now stands at $1.8 trillion, up 30% from last year. I'd also point out the announcements are continuing to accelerate with Q3 up 48% versus Q2. Approximately 16% of these projects have started and we expect a record number of starts in 2025. Many of you have asked the questions about cancellations, which we continue to monitor as well. To date, cancellations have been modest, around 10% and well below historical levels. For projects that have started, we've won over $1.7 billion of orders and our win rate is almost 40%. Of note, we're in active negotiations on another $3 billion of orders, up 175% from last quarter. While mega projects continue to garner a lot of attention, deservedly so, the Dodge Momentum Index, which tracks commercial and institutional projects that are less than $500 million are also at record levels of 22% in the quarter. Taken together, we think they provide a strong validation of the megatrends and support our view on the long-term outlook of our end markets. As we prepare for the growth ahead, we're making investments in our manufacturing capacity naturally. And on Slide 6, we show an update of our incremental capacity investments, which now stand at $1.5 billion, up $500 million from our previous estimate. The increase reflects our increasing confidence in our outlook as well as increasing demand that we're now seeing in data center markets. These multi-year investments with the largest addition coming in the second half of 2025 and 2026. And the capacity investments cover several product families and importantly, can be used across most of the electrical end markets. I'd also add that most of the additional capacity is what we consider right assembly and modular, which allows us to be both flexible and efficient as we deploy capital. Overall, our expansion projects are on track with a number of sites starting to ramp up production. For example, we recently opened a 110,000 square meter facility in Juarez, Mexico that produces motor controllers and switchboards. We also opened a new manufacturing facility in the Dominican Republic that will increase our supply of Bussmann fuses. Next on Slide 7, we're highlighting our residential markets, which include naturally, the electrical infrastructure for both new construction and renovation. Residential markets represent 6% of Eaton's total sales and 8% of electrical sales. The key message here is that these secular trends that we've been talking about that are impacting our industrial and commercial markets are also impacting homes. As a result, the electrical content in homes continues to grow...

Thanks, Craig. I'll start by providing a summary of our Q3 results, in which we once again set many new records. We posted third quarter record sales of $6.3 billion, up 8% both in total and organically. However, revenue was negatively impacted by about $50 million from Hurricane Helene and labor strikes in the aerospace industry. Without these impacts, organic growth would have been above our 8.5% guidance midpoint. Operating profit grew 11% and segment margin expanded 70 basis points to 24.3%. Adjusted EPS of $2.84 increased by 15% over the prior year. This is a quarterly record and above the high end of our guidance range. This performance resulted in all-time record cash flow performance, including operating cash flow of $1.3 billion, up 15% on a year-over-year basis and free cash flow of $1.1 billion, up 23% versus prior year. On Slide 11, we summarize another very strong quarter for Electrical Americas. Before we go through the results, we want to acknowledge the significant impact that Hurricane Helene had on our employees and their communities. Electrical Americas employs more than 3,000 people in North and South Carolina in nine facilities and the safety of our team members is our top priority. We have continued to provide support to our employees, their families, and affected communities, including providing essentials and financial assistance. We are pleased to report that our facilities are back up and running to support all the strong consumer demand we are seeing in our markets. Despite these challenges, we set a new record for sales, operating profit, and margins. Organic sales growth increased to 14%, reflecting strength in data center, commercial, institutional, and utility end markets. On a two-year stack, organic growth was up 33%. Electrical Americas has generated double-digit organic growth for 11 consecutive quarters. Operating margin of 13.1% was up 240 basis points versus prior year, benefiting from higher sales and increased operational efficiencies that were partially offset by higher costs to support growth initiatives. On a rolling 12-month basis, orders reaccelerated to 16% from 11% last quarter, demonstrating continued tailwinds from the various megatrends.

Moving to Page 16, we show our electrical and aerospace backlog updated through Q3. We continue to build backlog with electrical stepping up to $11.8 billion and Aerospace reaching $3.7 billion for a total backlog of $15.5 billion versus prior year our backlogs have grown by 25% in Electrical and 14% in Aerospace. Electrical backlog benefited from acceleration in order intake from tailwinds of the secular trends, including hyperscale orders within the data center end market. As noted earlier, book-to-bill ratios from Electrical and Aerospace are 1.1 and 1.1, respectively. The continued growth in our backlog underscores our confidence in 2024 and beyond. Now, I will turn it back to Craig for financial guidance updates and our initial thoughts on 2025. Thanks, Olivier. Turning to Page 17, we summarize our fiscal year organic growth and operating margin guidance with less than a quarter ago, we've made a number of adjustments to provide our best forecast on how we expect to close the year. Overall, we continue to expect our 2024 organic growth to be between 8% and 9%. However, with the continuing aerospace industry labor strikes and the slowdown in vehicle markets, we now expect our revenue growth to be on the low end of our range. We're raising our organic growth guidance in Electrical Americas by 100 basis points to 13% to 14% from 11.5% to 13.5%. We're lowering the range of our aerospace business by 150 basis points due to the labor strike. We're also lowering our vehicle business from down 3% to 5% to down to from flat to down 4% and in e-mobility to 5% to 7% growth from 17% to 23% growth given the widely reported industry weakness and outlook. For segment margins, we're increasing the company's margin guidance range by 20 basis points to 23.7% at the mid-point of our guidance. This is driven primarily by the outlook in our Electrical Americas business, where we're increasing our margin outlook by 70 basis points at the mid-point to 29.6% and vehicle where we're increasing our margin outlook by 150 basis points at the mid-point to 18%. We're also lowering our margin outlook for Electrical Global, aerospace, and e-mobility by 90, 50, and 150 basis points, respectively. In total, the company is well-positioned to continue to deliver strong financial performance and to close out the year well. On Page 18, we list our additional guidance metrics for 2024 in Q4. For 2024, our adjusted EPS is expected to be between $10.75 and $10.81 a share, the $10.78 mid-point represents 18% growth in adjusted EPS, an $0.08 raise over our prior guide and is also a $0.63 increase versus our original guidance for the year. For Q4, we expect organic growth to be between 6% and 7%, segment margins to be between 23.6% and 24%, and adjusted EPS in the range of $2.78 to $2.84 a share. We do expect Hurricane Helene and the labor strike in the aerospace industry to have an impact on our Q4 revenue and it's embedded in our guidance already. As I noted, while we have reaffirmed the full-year organic growth range of 8% to 9%, based upon the impact from Hurricane Helene and labor strikes in Aerospace, we expect to be at the low end of the range. The impact from Hurricane Helene is behind us and all of our sites are now up and running. The aerospace industry strike is still ongoing, and while they could have an impact on our revenues based upon what's in our outlook, we don't expect an impact in our EPS. If we can shift your attention to 2025, on Page 19, we provide our initial view on end market growth expectations for next year. As you can see here, we anticipate attractive growth in nearly all of our markets. We're expecting double-digit growth in data centers, distributed IT, commercial aerospace, and electric vehicles, solid growth in utility, and modest growth across most of our other end markets. Commercial vehicle is the only market that's projected to decline. So overall, 2025 should be another year of significant growth with more than 90% of our end markets seeing positive growth. And as you know, our own growth outlook is supported by a strong order book, record backlogs, and secular trends that continue to be favorable.

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

Thank you. One moment, for our next question. We'll now take a call from Andrew Obin from Bank of America.

Yes. So it wouldn't be an Eaton call without a data center question. So maybe if you could give us more detail on how did your data center business perform on organic growth orders and negotiations pipeline in the third quarter? Thank you.

No, Andrew, we appreciate the question and as has been widely reported, the data center market just continues to perform much better than we imagined. In the quarter itself, our data center sales were up 35%, our net, by the way, up from 27% in the prior quarter. So the rate of growth is accelerating. Our orders were up some 55% on a rolling 12-month basis, and negotiations are up 90%. And so as you can tell from this data, we just continue to build strong momentum in the data center market. And as we've said, we think that market is going to be very strong for years to come.

Terrific. And just a follow-up question. You have sort of highlighted the hurricane, and I understand that you do have presence in the Carolinas, that's why we're highlighting. But maybe if you could put a finer point on the impact in the third quarter and how much of an impact do you expect in the fourth quarter? You did say that it's past you, but just is there any lingering impact in the fourth quarter that you're willing to quantify. Thank you.

No. I appreciate that question as well, Andrew. And as I think most of the investors know, we have a fairly sizable footprint in the Carolinas. In fact, we have some 3,000 employees in multiple facilities that were actually in the path of the storm. Pleased to report that our facilities are all back up and running. All of our employees have been accounted for and safe. And so while it certainly was a bit of a challenge at the end of the quarter and at the beginning of this quarter, it's all behind us now, and the business and the sites are actually performing quite well. So yes, without a doubt, what I'd tell you is that the Americas put up really strong results in Q3, they could have been stronger, but for the hurricane. And certainly, it's shaving a little bit of growth off of the revenue for the Electrical Americas business in the fourth quarter as well. But it just went into backlog. This is not lost business. This is simply timing. As you saw from our orders growth in the quarter and the backlog growth in the quarter, we will certainly realize that revenue. It's just timing. And if I can just for a minute here, recognize our team. Our team just did an extraordinary job of supporting our employees and supporting the community providing shelter, food, and generators. Our team just rose to the occasion and we'd all be very proud of the way they represented our company in this moment of need and crisis for both our employees and the community.

Thank you. One moment, for our next question. We'll now take a call from Nigel Coe at Wolfe Research.

Thanks. Good morning, everyone.

Good morning, Nigel.

And Craig thanks for the 2025 early indications. Just a question, I think, for maybe Olivier. On the Electrical Americas margins, obviously, you tend to be a little bit considerate here, but I think 4Q does tick down a little bit from 3Q. So seasonally, normally, we see a little bit higher, so just a question there. But the broader question would be, we've seen a huge amount of operating leverage in the Americas. We got some investment spending. How do we think about operating leverage and margin potential going forward? Within that 30%, 35% sort of construct, do you think the Americas can be above that level going forward?

Thank you for your question, Nigel. We are very pleased with the performance of our Electrical Americas business, both on the top-line and the margin. To answer your question directly, we do not believe we have reached our maximum potential. We still believe we have room for improvement. I would mention three levers: one, operating leverage on higher volume growth; two, improvement of our manufacturing efficiencies in both our existing and new facilities; and finally, as you know, we have a restructuring program ongoing, and those programs should deliver improvement in margin for the Americas. Also, you haven't asked the question, but we believe we have margin opportunities. We discussed that before in our Electrical Global business, but as well in our Aerospace business, Nigel.

Okay. Great. Any comments on 4Q would be helpful. But my follow-up question is around the 2025 framework. You said 6% to 8% end market growth in 2025. I think you've got an ambition to outgrow your end markets by about 2 points. So do we think about kind of starting framework for next year, 6% to 8% or maybe a little bit higher than that?

I appreciate that question. You're absolutely correct that we have both an ambition and an expectation for our business to grow faster than the end markets. It’s still early, and we are actively working on our planning for 2025. You can expect us to share a framework with more detail during the Q4 earnings call next year, and Paulo will present a more comprehensive mid and long-term strategic framework at our investor meeting in Q1 next year. Specifically regarding your question, we should anticipate outpacing end market growth, although we are not currently ready to specify the exact extent, as we are still finalizing our internal plans.

Thank you. We will now take a call from Jeffrey Sprague from Vertical Research Partners.

Good morning. A lot going on today, interesting times. I wonder, Craig, if you could talk a little bit about capital deployment, it looks like with what you're saying on the share repo, you're quite comfortable just to continue to put up the organic growth and buy back stock. But the nature of my question is right, liquid cooling is getting more and more attention on the data center side, Schneider making a sizable bet, Vertiv there. You've got some kind of alliance or partnership, so I know you're sort of on the periphery of this anyhow. But maybe just speak to, do you view that as an important part of your offering or where else you might have holes that might need to be filled from an M&A standpoint?

No, I appreciate the question, Jeff. And obviously, to your point, data centers as a market is getting a lot of attention and cooling as a space is also one of our hot topics. I'd say to us, if you think about it just more broadly around growth, we have growth opportunities everywhere. We talked about these numbers in our own data center business growing 35% in the quarter, 90% increase in negotiations. And so we have just tremendous opportunities to grow in data center and in other markets without looking at an adjacency like cooling; I'm not saying that we would never consider doing something more deliberate there, but it is not required in any way for us to continue to post significant growth and continue to win in the data center market. And so what I would tell you today is that we're focusing on organic growth. We're focusing on essentially executing well against the opportunities in front of us. Our deal pipeline in general, to the broader question around capital deployment is certainly good today. And certainly, the pipeline is growing with opportunities, and those opportunities are coming from lots of different areas. But certainly, data centers for us is a key market that we're focused on.

And then, speaking of capital deployment, just on the CapEx side. Is the additional CapEx still oriented towards those kinds of big pinch points of transformers and switchgear? Or is this sort of broadening out into other parts of the portfolio that are just looking tight given kind of the growth that you see in front of you?

As I mentioned in my commentary, the incremental investment, we talked about $1 billion of incremental CapEx investment in the last earnings call, we've now taken that number up to $1.5 billion. And a lot of that increment is, in fact, going into these kinds of markets, data centers, transformers, some of these markets where we've just seen even faster growth than what we originally anticipated. And quite frankly, we're having customers come to us asking us to make multi-year commitments and signing up for multi-year agreements to provide their requirements and their needs. And so for us, it's just indicative of the underlying strength that we're seeing in our business and our willingness to invest. I mean, this is a case where the risk today is much more on the side of underinvesting, not overinvesting.

Thank you. One moment, for our next question. We'll now take a call from Chris Snyder at Morgan Stanley.

Thank you and appreciate all the color on the outlook. Maybe if I could ask on the mega projects. I think it's pretty surprising to see that only 16% of the $1.6 trillion have started. I guess, does that similarly suggest that around maybe 85% or 84% of the orders related to these projects are still on the horizon? And then I know you guys said that the cancellation of these projects is below historical levels. But are they progressing more slowly in that, the lag between announcement and order has extended versus maybe what we thought a couple of years ago? Thank you.

Yes, Chris, you mostly got it right regarding the 16% of projects that have started, which means about 84% are still in the future. That's a straightforward calculation. As for cancellations, they're currently running at around 10%, and historically, there have always been cancellations in these large mega projects. We've tried to show how that 10% compares to historical cancellations, and it's lower now. With larger projects, more total projects, and a decrease in cancellation rates, we remain optimistic about growth. Regarding progression, the data shows continued positive trends, with a significant 175% growth quarter-over-quarter. There are ongoing questions about the industry's capacity to manage these projects within the desired timeframe, including concerns about labor and power availability in data centers. This could potentially lead to a longer overall cycle. However, these projects are diverse; in the early phases, a lot were focused on EVs and batteries, but recently we've seen a shift towards more commercial, institutional, data center, and power projects. We're hopeful that this will lead to more project starts next year, improving our long-term growth outlook.

I appreciate that. And then, maybe transitioning over to data center. Could you maybe just talk a little bit about Eaton's relationships with the big hyperscalers? And as those companies get better clarity on their forward CapEx plans and Eaton brings more capacity to market, does that change the way that you can enter into commercial agreements with those customers? Thank you.

Yes. To your point, we have a very strong relationship with all of our hyperscale data center customers, which is one of our fastest-growing markets. Within the data center sector, we are seeing growth with hyperscalers at a faster pace than with colocation, although we are also growing in on-premises. Currently, everyone is facing challenges related to capacity, which has altered the nature of discussions, project visibility, and forward commitments. Hyperscalers and others are working to ensure they have the necessary capacity to support their growth forecasts. There's a competitive dynamic for capacity in the marketplace, which has resulted in improved, more transparent, and committed commercial agreements with our customers.

Thank you. One moment, for our next question. We'll now take a call from Steve Tusa from JPMorgan.

Hi, good morning. How are you?

Hey, Steve.

So just on the utility side, I mean, a lot going on there with all these customers raising budgets. But Hubbell's results were a little bit weak. You guys actually are guiding just below double-digit next year. I think in this initial market outlook, maybe you could just talk about what you're seeing in utility and what the slowing is there? And then, lastly, how you kind of participate, just remind us how you participate in generation applications?

Yes. In the third quarter, our utility business continued to perform well, with revenues increasing in the mid-teens for Electrical Americas and low-teens for Electrical Global. Different companies have various product portfolios and customer mixes, but our business remains strong, and we are confident in our outlook. We expect the utility market to grow at around 11% annually, with customers investing in capital expenditures to support this growth. Although there may be temporary disruptions during periods of expansion, we have not seen anything to indicate that the utility market, particularly in our area, will not remain robust for years to come. The storms occurring globally, especially two significant ones in the U.S., have led to increased spending on resiliency and grid hardening to meet the rising demand for power. This, in turn, is pushing utilities to expand their capacity. Additionally, data centers represent an important market for utility customers. Infrastructure initiatives, like undergrounding in areas such as the West Coast, are also generating growth opportunities for us. While it can be challenging to gauge these markets based on competitors' performance, our utility business is thriving.

Okay. And then just lastly on the backlog and order side. These orders are becoming obviously a bit more lumpy, like you had a huge first quarter, nice bounce back here from my math. In the third quarter, your backlog went up really nicely. It's up 25% year-over-year. Is this kind of a sequentially like a stable level of orders? Do you see them continue to pick up a bit sequentially from here? And then why would the backlog where it is today, up 25% year-over-year, and you're bringing on capacity? So you should be able to release much more of that backlog next year. Why wouldn't things actually accelerate on a revenue basis, at least volume-wise next year for the Electrical business?

To address your question about orders, we are currently experiencing a period where orders have become more irregular compared to historical trends. This change is largely linked to larger projects, which is why we've begun discussing mega projects during these calls to provide clarity on the significant shift in the scale of many projects within our Electrical business. These large-scale projects contribute to order fluctuations, prompting us to adopt a rolling 12-month approach to help smooth these variations. Despite our efforts to break it down by quarter, we haven't entirely succeeded in this smoothing process. Orders will likely continue to be irregular as long as these large mega projects remain in play. Additionally, we aim to present various perspectives, not only focusing on orders. We also inform you about the early stages of mega projects and our negotiation status, as well as providing revenue figures, to give you a comprehensive understanding of the factors underpinning our confidence in future trends. Regarding the potential for growth acceleration, I believe that if capacity aligns correctly, we could see a rise in volume. However, I should note that we have experienced considerable price increases over the past couple of years. This year, the balance between volume and price contributions has shifted significantly, with most of the recent growth now stemming from volume. Thus, we should not expect the same price boost in growth moving forward.

Thank you. One moment, for our next question. We'll now take a call from Julian Mitchell at Barclays.

Hi, good morning. This is Jack Pilleteri on for Julian Mitchell. How much is the capacity constrained at present, how are lead times trending in main product categories like switchgear, UPS, what is the pace in which more capacity can come on stream?

Jack, I didn't quite catch the last part of your question, but I will address the first part. We are experiencing capacity constraints in certain areas, and we're making a $1.5 billion investment to enhance our capacity. Most of this investment is focused on our electrical business to address constraints in markets like data centers, transformers, and electrical switchgear, which impact various end markets. I've mentioned our investments in circuit breakers and Bussmann fuses as well. Where we see capacity constraints and potential increases in demand, we are actively investing to stay ahead of those needs. However, current lead times are still not at ideal levels, mainly because our business performance has exceeded our forecasts. If you look at the revenue growth in our Electrical Americas business compared to our initial projections, you will see substantial increases in revenue, orders, and negotiations across the board. We are working closely with customers now more than ever to ensure we meet the capacity requirements and avoid becoming a bottleneck for the industry. I hope this addresses the second part of your question as well.

Yes, that addressed it. Thank you. And on the 2025 outlook, how are you thinking about Electrical Americas versus Global next year? There's a 1,000 basis point growth gap guided in 2024. Is it a very wide gap again next year that's dialed in?

Yes, I'd say it's too early for us to provide specific guidance on our various segments for 2025. But having said that, if you think about kind of these big mega trends that we've been talking to you about over the last couple of years, the Americas business has had a disproportionate benefit, a disproportionate number of them. If you think about what's going on in data centers today, there's data center growth taking place everywhere, but 70% of these data center projects are basically coming in the U.S. We talk about reindustrialization and the amount of money that's being put into increasing the U.S. manufacturing capacity, a lot of that is being disproportionately benefiting the U.S. And so to the extent that these mega trends continue to be what they are, you'll probably continue to see a disproportionate growth coming from the Americas business. Having said that, a lot of what we do in Europe today tends to be more of the short cycle, and we are, in fact, seeing a bottoming in those markets. But a long way of saying, we're still working through the details and we'll give you a lot more color when it comes to early next year.

Thank you. One moment, for our next question. We'll now take a call from Scott Davis at Melius Research.

Craig mentioned a 40% win rate earlier, and I wanted to understand it better. Considering the capacity constraints, it seems that when you aim to win, your chances are likely high. Does the 40% provide any historical context? Is that above average, typical, or something else? It's also possible that some projects might be less profitable, leading to a more cautious bidding approach. It's challenging for us to gauge whether that figure is positive or negative, but could it be that this 40% is actually better than past performance?

I appreciate the question, Scott. I would like to share that our team has been instructed to aim to win every order and not to see any losses in any segment of the business. Regarding the win rate, the 40% win rate is indeed higher than our market share in Electrical Americas, indicating that we are winning at a better rate than we have in the past. This is a positive sign for the future. The reason for this is primarily that larger and more complex projects tend to favor our solutions over alternatives. Historically, the more mission-critical and intricate the project, the higher our chances of winning. When considering the win rate across different segments, this 40% figure is relevant within the context of mega projects, which span nearly all our verticals except for residential. While I haven't reviewed the data recently, I suspect our win rates across various segments do not vary significantly.

Okay. That's helpful. And then I know there's been a lot of questions about capacity adds. But can you just give us a little bit of a sense of the breakdown of new rooftops versus kind of adding lines that kind of thing? So just a sense of what that capacity looks like in footprint?

Yes. I can tell you that it's really a combination of both. In many cases, it involves expanding within our existing footprint on land where we have availability to increase our capacity. Sometimes, it means adding lines to existing facilities, and other times, it involves new Greenfield facilities. It's a mixture of all three, consistent with our requirements and the specific limitations we face. I'm not sure if I'm addressing your question directly, but it does encompass all three areas.

Thank you. One moment, for our next question. We'll now take a call from Joe Ritchie at Goldman Sachs.

So rather than like try to get you to say that you're going to do double-digit portfolio growth next year, even though that's what it seems like the framework is pointing to. I'm just curious, Craig, from a pricing standpoint, I know you said that's moderated. Would you still expect to get pricing across the portfolio in 2025?

Yes, the short answer is yes. Looking at our industry historically, we have generally been able to achieve price increases, and I believe we are returning to that pattern of securing price each year. However, this was not the case during the recent period affected by COVID-related supply chain disruptions, which resulted in significant inflation. We had to take proactive measures to address this inflation, compounded by issues of scarcity. As these challenges start to fade, we can expect a return to more typical levels of price realization for the business. However, we anticipate that we will still achieve price increases through 2025. Additionally, price considerations are included in our market projections, which outline our expectations for the market in 2025.

I understand. That clarification is helpful. I'm trying to grasp the connection between the 60% increase in the project negotiation pipeline and your expectations for reaching a new high in 2025. Does the pipeline include projects that haven’t commenced yet, or are we looking at anticipated increases in new starts for next year? Is what you're currently bidding on already underway?

It's difficult to definitively answer that question because the projects differ significantly in their nature and the time between their announcement and completion. As we've mentioned in previous calls, these projects typically take between three to five years to complete. Announcements do eventually lead to starts, but this varies widely by project. In simple terms, many of the announcements included in our numbers are expected to start in 2025. Looking at a longer timeframe, from 2023 to 2027, we previously forecasted that starts would increase by about 23%. While we haven't updated that figure, there is a clear trend of rising construction starts, which aligns with the scale of the announced projects.

Thank you. One moment, for our next question. We'll now take a call from Tim Thein at Raymond James.

Thank you. To save time, I'll combine two questions. First, regarding aerospace, could you discuss the impact of the strike on orders and sales trends, particularly how it affects the balance between commercial OEM and aftermarket? Secondly, on the electrical side, could you elaborate on the growth in your project pipeline and the major sectors involved, such as data centers and industrial power, which are quite equipment intensive? How do you view the traditional electrical content per project, and have you noticed any changes due to the nature of the pipeline? Thank you.

Yes, regarding the aerospace question and its relation to the impacts of the strikes, we have made some assumptions about what might occur in Q4. We are hopeful for a quick resolution to these strikes, but it remains uncertain. Therefore, we have factored these assumptions into our Q4 outlook. If our assumptions hold true, we will be fine; if not, there may be a slight adverse effect on our revenue outlook, though it will not impact our earnings. We will still achieve our earnings regardless of the outcome. We believe the industry will likely resolve these strikes during Q4, but we cannot predict when exactly. As for the mix, it could positively influence us since the production of new aircraft is being delayed, causing the existing fleet to be used more intensively. However, this effect does not occur immediately; there is generally a lag. Nevertheless, as long as consumers continue to fly, the fleet remains operational. The older aircraft will require additional services and aftermarket components, which benefits Eaton and similar companies. While it was disappointing to lower our forecasts, we remain confident that new aircraft will eventually be produced. This situation simply defers some demand to 2025 and beyond due to the current industry challenges. In terms of our project pipeline in Electrical, the type of project is highly significant. The electrical intensity varies greatly among different project types. For instance, data centers represent about 2% of the non-residential construction market, yet they make up approximately 15% to 20% of our electrical business, highlighting their high electrical intensity. Comparing projects, commercial offices have low electrical intensity, whereas data centers and utilities have very high electrical intensity. The mix of projects currently being built is favorable for our company and will likely continue to be so in the future.

Thank you. One moment, for our next question. We will now take a call from Nicole DeBlase at Deutsche Bank.

Yes, thanks, guys. Good morning, and actually, good afternoon now. Thanks for fitting me in.

Sure.

I guess, I'll just ask one in the interest of time. Could you talk a little bit about what you're seeing, Craig, in China? We've heard a few companies kind of say the things got a bit worse there this quarter. And then I guess, you kind of mentioned hope that short cycle in Europe could be bottoming. So if you can maybe expand on are you seeing any evidence of recovery there today?

Thank you for the question, Nicole. First, regarding our business in China, it has been performing quite well. In the third quarter, we experienced strong growth, close to double digits. Looking ahead, we expect continued robust growth in our China operations. This success is largely due to specific initiatives we have undertaken, including several joint ventures that have enhanced our capabilities and capacity. Our team in China is among the best in the industry, and they are achieving great results. As for Europe, we are indeed more exposed to short-cycle markets, particularly in residential MOEM. We believe we have reached the bottom, and we anticipate growth in those markets moving forward. This expectation is reflected in our outlook for the fourth quarter. We think that if interest rates begin to moderate, it could benefit the residential market and some industrial sectors as well. Overall, for the short-cycle markets, we have been steady at the bottom during the summer months, but we are now beginning to see some lift, particularly in areas like distributed IT in the third quarter. The outlook for MOEM and residential looks more positive as we move forward.

Thank you. One moment, for our next question. We'll now take a call from Andy Kaplowitz at Citi.

Craig, can you give more color into Eaton's ability to offset ongoing vehicles market-related weakness? If you look in your vehicles, margin trajectory, obviously, that 19.4% and declining growth was impressive. Is that a reflection of strong positioning in the market given favorable price versus cost? And how long could that last if the vehicles end market stays weak?

I appreciate the question. We have worked hard in our vehicle business to, first of all, run our business better and drive better operational execution in our business. And as you know, we went through a period of time in our own vehicle business through supply chain disruptions and some other operational challenges inside of the business where we weren't executing as well as we know we can. Our team has just done a great job of essentially improving the way we run our factories and our facilities and sorting out inefficiencies in the plant. We've also been very active in that business on really managing the portfolio. One of the things we've talked to the investors about is that we expect every one of our businesses to be a portfolio manager. Every business has a head. Every business has a tail. Every business has a piece of it where you'd say, we don't have competitive advantage here. We don't make great margins. It's not a growth piece of the business, and we got to have a plan to address and fix it. And so we have been very active in managing the portfolio in terms of the things that we control in our vehicle business as well. And so the margins that we posted this quarter, I think a reflection of the fact that our team is executing extremely well, and we would expect them to continue to execute well as we move forward.

And just a quick follow-up to that. In relation to your restructuring efforts, I think you gave us $75 million for 2025. I would assume a sizable amount of that is in Electrical Global, and that is going to start to help you close the gap with Electrical Americas? Or how should we think about that?

Yes, I mean, without a doubt, I mean, if you think about where we're restructuring, it's generally going to be in those businesses where the margins are not at the level that we have in the rest of the company and certainly Global is a piece of that formula as well. But the big challenge more than that, and we'll do the restructuring, the big thing in Europe is markets. I mean markets, as you've seen from not just Eaton, but from most of our peers and other companies in the region is that Europe today is just not getting the growth that we're seeing in the U.S. and in other regions of the world, in China. So I think more than anything, we need a return to growth in Europe. Our incremental margins are quite high, on the back of a little bit of growth. And so that, for us, is the thing that we're focused on most is that we have to grow our business in Europe, and that's going to ultimately close the gap with some of the margins that we see in the Americas business.

Thank you. One moment, for our next question. We'll now take a call from Joseph O'Dea at Wells Fargo.

Hi, thanks. I'll keep it to one. Craig, I just want a little bit more color on the timing of all the capacity investments coming online. I'm sure it's staggered. But by the middle of next year, do you expect to have most of that online? And the reason for the question is when we look at the electrical backlog moving up again sequentially at $11.8 billion, trying to think through the degree to which Eaton is, in some instances, the bottleneck. How quickly you can work that down with some pretty significant capacity additions coming online, even to the degree that can Americas grow faster next year as that capacity comes online?

Yes. I think to answer the second part of your question, we're absolutely counting on that capacity addition coming in next year to help our volume growth and most of the capacity will really come in over the next, let's say, two to three years. Some of it's coming in now as we talked about in some of my commentary. But maybe just to address maybe the broader question around the backlog. Backlog is actually a good thing. Past-due backlog is a bad thing. And I would tell you that our past-due backlog has come down. So we're doing a better job today of ensuring that we're delivering against our customers' expectation. But we have growing backlog largely because our markets are growing, and we're getting much better visibility into our customers' requirements. In many cases, we're getting longer lead time visibility on orders. And so I would say, in general, I would not think about a growing backlog as a problem in us being a bottleneck for the industry. A past-due backlog would suggest we are a bottleneck for the industry. But I would tell you today that our lead times, in general, are very competitive with most of our peers.

Thank you. One moment, for our next question. We'll now take our last question from Brett Linzey at Mizuho.

Hi, good afternoon. Thanks. I appreciate the thoughts on 2025. I just wanted to follow-up on the incremental margins. So the 30% to 35% on organic, should we think of this as the base level and then the restructuring savings would be on top of that? Or are there some offsets on some of this OpEx investment ramp relative to the restructuring savings? Just want to square those pieces. Thanks.

Yes. No, we've given you a range of 30% to 35%, but you should really think about that as an all-in incremental and that not putting the restructuring on top of that. What we've said historically, we said you ought to be thinking about 30% incrementals. And so we've tried to account for restructuring benefits in the different mid-point of where we think the incrementals are going to be. But I'd say that you have a couple of forces obviously working for you and against you in terms of as we come through this ramp. On the one hand, obviously, we're getting volume leverage, and that's very helpful. But on the other hand, we're also starting up new factories and there's always inefficiencies with factory start-ups. We're adding commercial resources to deal with the volume ramps that we're working through right now. So I'd say, on balance, take the mid-point or so of that 30% to 35% range that's better than what we've used for planning purposes for most of our plans. It's certainly below what we delivered this year, for sure. And this year, I would just point out that there was a lot of price in what we delivered in the form of incrementals this year as well as we didn't have the same level of start-ups and ramp-ups in both our factory and commercial activities.

Hey, thanks, guys. I think I really appreciate everybody's questions. As always, the IR team is available to have any follow-up questions, as you have. Enjoy the rest of your day.

This concludes today's conference call. Thank you for participating. You may now disconnect.