Eaton Corporation plc (ETN) — Q2 2021 Earnings Call Transcript

Hey, good morning, guys. I'm Yan Jin, Eaton's Senior Vice President of Investor Relations. Thank you all for joining us for Eaton's Second Quarter 2020 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 highlighting the Company's performance in the second quarter. As we have done in our past calls, we'll be taking questions at the end of Craig's comments. The price release and the presentation we'll go through today have been posted on our website at www.eaton.com. This presentation includes adjusted earnings per share, adjusted free cash flow, and other non-GAAP measures. There are additional details 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 presentation. With that, I will turn it over to Craig.

Okay. Thanks, Jin. So we'll start on page 3 like we normally do with highlights of the quarter. And I'll summarize by saying that we had another very strong quarter, and we're seeing significant increases in our markets, and as a result of that, we're taking our ‘21 guidance up for the second time. Our teams continue to perform at a very high level despite significant supply chain disruptions and rising commodity costs. Q2 adjusted earnings of $1.72 were a Q2 record, 15% above the midpoint of our guidance; and earnings were up nearly 100% versus last year, and importantly 20% sequentially. Our sales were $5.2 billion, up 35%, 27% organically and above the midpoint of our guidance. For the second consecutive quarter, we delivered record segment margins. Q2 margins were 18.6%, up 390 basis points from the prior year, and up 90 basis points sequentially. We're also pleased with our incremental margins of 30%; we think this is a strong result given the material cost headwinds that we're facing. Our order growth was perhaps the biggest highlight of the quarter. Orders were up more than 40% in each of our Electrical segments and both ended the quarter with a record backlog, and our portfolio transformation continues. We closed the acquisition of Cobham Mission Systems and our 50% ownership in Jiangsu YiNeng Electric business in China. We're also pleased to have completed the sale of Hydraulics to Danfoss yesterday for $3.3 billion. The sale of Hydraulics is certainly a successful outcome for Eaton, our shareholders, and for Danfoss who we think will be an excellent owner of the business. We want to thank our former Hydraulics employees for their loyal service to Eaton and we wish them well under the leadership of Danfoss. Lastly, we continue to make strong progress on our strategic growth initiatives, and I'll point out just a few highlights on the next slide. So, turning to page 4, you've heard us talk about the three most important secular growth trends for the Company; electrification, energy transition, and digitalization. We're making significant progress in all three areas, and we're seeing strong results. Highlighting a few notable examples, I'll begin with electrification where we've had significant wins in both our electrical and vehicle businesses. In vehicle, we delivered $50 million of new wins for our electric vehicle powertrains, which includes EV transmission, EV gearing, and EV differential. I'm noting this example because it demonstrates that even in an area where many of you think about as our traditional vehicle business, electrification is creating very large growth opportunities for the Company. In Electrical, as you would expect, our team secured attractive wins tied to renewable energy and residential applications, noting a win with a leading solar and energy storage OEM. In energy transition, we recently won a large distributed energy management project for a leading financial services company. This is a greenfield project and a great example of building as a grid solution. Eaton will be providing the low- and medium-voltage switchgear, our Foreseer electrical power monitoring software, and our microgrid controller. In digitalization, our Brightlayer team delivered a win in the industrial market with a leading global chemical processing company to provide remote monitoring software solutions. In this application, our solutions leverage Eaton's portfolio of electrical hardware along with our expertise in power management to provide the customer with real-time operational data, alarms, and insights delivered directly to their mobile devices. In addition to the operating benefits, the customer will be able to use Brightlayer's industrial trending and measurement data to optimize energy usage. So, it's an exciting time to be at the center of these three growth trends and we'll certainly keep you updated as we continue to progress in this area. Moving to page 5, we summarize our Q2 results, and I'll point out just a couple of highlights here. First, on 35% total revenue growth, we delivered a 71% increase in operating profit. So, very strong operating leverage. Second, our adjusted earnings of $690 million increased by 99%. We're also effectively managing our corporate costs. Overall, our teams are certainly executing at a very high level. We are efficiently managing supply chain constraints, increasing productivity, and delivering the expected benefits from our multiyear restructuring program, a trend that we expect to continue for the balance of the year. Turning to page six, we summarize the results of our Electrical Americas segment. Revenues were up 15% organically, driven by strength in residential and datacenter markets, but we also had solid growth in commercial and institutional markets as well. The acquisition of Tripp Lite added 8%, and favorable currency added 1%. Looking at our sequential growth, we were up 8% over Q1. Historically, we have seen a 5% lift between the quarters, so I'd say our growth rate is accelerating here. Our operating margins increased 60 basis points to 21.3%, a Q2 record. This is 190 basis points above pre-pandemic levels in Q2 of 2019. Our portfolio changes, the sale of Lighting and the acquisition of Tripp Lite, solid execution, and benefits once again from our multiyear restructuring program all contributed to the improvement. We're also pleased with the 43% growth in orders in the quarter, a 13% increase on a rolling 12-month basis. This led to also a 43% increase in our backlog, which now sits at record levels. We had broad order strength in all end markets with particular strength once again in data centers, residential, and commercial and institutional markets. You'll recall that at the end of Q1, we started to see some large orders in select commercial markets. This pattern strengthened in Q2, and our negotiation pipeline in the commercial market was up significantly. All data would suggest that the second half of the year and really going into 2022 should see solid growth. Turning to page 7, you will see the financial summary of our Electrical Global segment, and as you can see, we had strong organic growth here, up 22% and currency added some 6%. Like the Americas, organic revenue growth was driven by residential and data center markets, but we also had broad-based strength in commercial, institutional, utility, and industrial markets as well. We posted strong operating margins of 18.3%, once again a Q2 record, up 230 basis points from last year and up 130 basis points sequentially. The incremental margins on an organic basis were solid at 32%, the result once again of good cost control and benefits from our multiyear restructuring program. Orders were also very strong, up some 46% from last year and up 10% on a rolling 12-month basis. Once again, we had strength across all markets with particular strength in data center and residential markets, and we ended the quarter with record backlog, up some 50% from last year. Moving to page 8, we show the results of our Aerospace segment. While we have a long way to go, we're starting to see signs of recovery in this market, which posted 17% growth in the quarter. As you know, we closed the Cobham transaction on June 1, and the business delivered solid results in the month of June, adding 16% to our quarterly revenue. Currency also added 3%. Operating margins were 21%, up 600 basis points from last year, and 250 basis points sequentially. With improving volumes, the team executed extremely well, delivering 50% incremental margins on an organic basis. Orders on a rolling 12-month basis are still down 16%, but this is an improvement from down 36% in Q1. In fact, sequentially, orders were up 12%. The commercial industry is seeing an increase in leisure travel, especially in domestic markets, but international travel continued to be down sharply. We think the market will grow over the next several years, but we don't expect it to return to 2019 levels until 2024. Lastly, our backlog here has stabilized and was flat with last year. Next, on page 9, you see the financial results of our vehicle segment. Organic revenues more than doubled with strength in all regions. Operating margins were 17.9%, and we delivered very strong incremental margins which were over 40%. The margin performance was driven by a higher volume certainly, but also once again from the benefit from the multiyear restructuring program. Despite volumes still being down some 10% to 15% below pre-pandemic levels, the business is really already sitting on the cusp of achieving our long-term margin target of 18%. Now turning to page 10, we show a summary of our e-mobility business. Revenues were up 57%, 54% organically, and 3% from positive currency. The organic revenues were driven by strong growth really in all e-mobility markets around the world. The operating margins were negative 6.8%, and they continued to be depressed by heavy investments in new programs. As you know, we're investing in this segment in high-voltage power electronics, power distribution, and power protection. You should also be aware that we have significantly expanded our view of the market here. We now see large opportunities for our traditional business in the e-mobility segment, including EV gearing, EV transmissions, and torque control solutions. As I noted earlier, we already have wins in these areas. In fact, our traditional products have increased the size of the addressable market for e-mobility to some $5 billion. It continues to be a really exciting segment and a big part of the Company's future. Moving to page 11, we've updated our guidance for 2021 on organic revenue. We are significantly increasing our organic revenue growth for the second time this year with an increase in most segments. We are raising the midpoint of our organic growth guidance by 400 basis points from 8% to 12%. This is on top of a 300 basis point increase that we took in Q1. The largest increases are in Electrical Global and Vehicle, with smaller increases as you can see in the Americas and e-mobility. With a very strong first half, robust order book, and a growing backlog, we're comfortable with an 11% to 13% growth outlook for the year. This is despite some of our markets that remain weak and are in the early stages of recovery, notably commercial construction, industrial, oil and gas, and commercial aerospace. We expect to see certainly continued recovery in these markets over the balance of this year, and we think it bodes well for 2022. Next on page 12, we show an update on our segment margin guidance for the year. For Eaton overall, we're increasing segment margins by 30 basis points at the midpoint from 18.3% to 18.6%, which will once again be an all-time record for the Company. The 30 basis point increase, as you know, follows the 50 basis point increase that we reported following our Q1 Earnings Call. We've raised the margin guidance in each of our segments with the exception of e-mobility. We continue to expect organic incremental margins of around 30% and for price and commodity costs to be approximately neutral for the year. Our team has certainly been very effective at managing through these complexities related to price increases and supply chain constraints, and we would expect this to continue through the balance of the year. On page 13, we have the remaining items of our 2021 guidance. We're raising our full-year adjusted earnings per share by 60% to a range of $6.58 to $6.88. At the midpoint, $6.73. This is an increase of 10% over our prior guidance and a 37% increase over 2020. You'll recall that we raised guidance by $0.50 in Q1. With this increase, we are now forecasting a 20% increase from the midpoint of our original guidance which was $5.60. With our recent M&A activities, we now see net headwinds of 1% from acquisitions and divestitures, down from our prior outlook of 4%. We now expect a positive currency impact of $350 million, up from our prior forecast of $200 million. We are also raising our guidance for adjusted operating cash flow and adjusted free cash flow, both up to $200 million at the midpoint. The increase is really driven by a combination of higher profit on organic growth in sales, the timing of acquisitions and divestitures, but also partially offset by some investments we're making in working capital given the current constrained supply chain environment. The remaining components of our full-year guidance remain unchanged. Lastly, our Q3 guidance is as follows: we expect earnings to be about $0.72 to $1.82. Organic revenues to be up 11% to 13% and percentile margins to come in between 19% and 19.4%. Lastly, I will wrap up the presentation on page 14. You've heard us talk for the last few years about Eaton's transformation into an intelligent power management Company. This strategy is built on a belief that there are a few growth trends: Electrification, Energy Transition, and Digitalization, that allow the Company to grow at a much faster rate than we have historically. Every day, we get confirmations that we're on the right path. We're seeing it in the growing importance of sustainability initiatives in society, in government spending, and certainly in our opportunities and wins. We're pleased with the progress that we've made on the portfolio. Each move has been consistent with our objectives of delivering a Company that has faster growth, higher margins, and better earnings consistency. You've seen our track record on margin expansion. The Eaton business system provides the consistent approach to how we run the Company, how we execute, and how we expand margins, and it's working. This enables us to be on track to expand margins by 400-500 basis points over the 5-year planning period, and as you can see, we are running ahead of plan. We're committed to our sustainability goals. They reflect the right thing to do for society, but just as importantly, sustainability is at the core of what's driving our growth. I'd also note that we published our 2020 sustainability report and our first task force on climate-related financial disclosure report at the end of June. I encourage those of you who have a special interest in sustainability to read it; I think they are extremely well done and reflect the direction the Company's headed in. Lastly, we continue to generate very attractive cash flows—over $9 billion through 2025—which will allow us to return cash to shareholders and also make investments to grow the Company. We're off to a very strong start in 2021. At the midpoint of our guidance, revenue is expected to grow 12% and earnings by 37%. With that, I will turn it back to Yan and open the line for questions.

Okay, great. Thanks, Craig. For the Q&A section of our call today, we would like to ask you to limit yourself to just one question and one follow-up. Thanks for your cooperation. With that, I'll turn it over to the Operator to give you guys the instructions.

Hi, good morning, guys.

Good morning, Josh.

So, Craig, I was wondering if you could talk a little bit about the composition in orders in Electrical. Clearly, pretty solid there, but hoping for a little bit more color on maybe the cyclical momentum versus the secular electrification. I appreciate the examples on slide 3, but really trying to get how much of this is sort of illustrative versus something that you see really moving the needle here in the short to medium term?

I’d say it's really a combination to your point, Josh, of both of those. The orders were really strong across all geographies and end markets with, as I mentioned, the highest growth coming in data centers and residential. We talked about the secular growth trends that will be such an important part of the future of the Company. We still believe strongly that we’re just in the early innings of really seeing a material impact from some of these bigger secular growth trends that will drive, we think, the future of the organization. We're not seeing any benefits around government infrastructure spending yet. A lot of what you're seeing today is really a reflection of the broader strength in many of our end markets. Certainly, we always talk about data centers as the great example of consuming, processing, and storing increasing amounts of data. A lot of what you're seeing today is restocking because markets have been strong in many of our end markets, and inventories taken down pretty hard during the pandemic last year. I’d like to say once again, broad-based strength. We talked about the fact that there's been a lot of discussion around what’s happening with commercial construction. Commercial construction has come back very strongly. We had outstanding orders as well as negotiations in the commercial and institutional side of the business as well. It really has been a story of fairly broad-based strength in orders across almost every end market and geography. At this juncture, we think we're at the very front end of what should be a pretty exciting runway as we look forward as some of the longer cycle businesses—whether that commercial construction, or oil and gas or some of these other markets—large projects start to return to the business. We think this should continue for a while as well.

Got it. And then just on the incrementals, you guys are going to be in the low-to-mid 30 this year coming off of really great decremental margin control last year, and presumably some stranded costs for Hydraulics and I think pretty well-documented inflationary environment. I mean, is the normalized range, once we clear some of the noise out of that, still in this 30% to 35% range, or can we go higher as maybe some of these headwinds normalize or dissipate?

We think that 30% incremental for planning guidelines still makes sense at this point, as you think about modeling the Company on a go-forward basis. Clearly, we're having to make some sizable investments in the business right now as we deal with a revenue growth outlook that’s more robust than what we've seen historically. We’ll be putting some investments in the business. We’re also investing pretty heavily in electrification and places like e-mobility, as well as in aspects of the business like in the Brightlayer platform we’re bringing online. We think that 30% incremental number is still a good planning guideline as you think about modeling the future of the organization. Given the investments that we think are important to make for the future growth of the Company, we believe that 30% makes a lot of sense.

Understood. Appreciate all the comments. Thanks.

Thank you.

Yes, good morning.

Good morning, Andrew.

Yes. Just maybe to go into a little bit more depth on commercial construction for the second half in '22, what are you hearing from the customers and just trying to get a sense of how much visibility is there into 2022?

I appreciate your question on commercial construction. That's obviously been a point of a lot of debate in general. Our order growth of commercial structure was really in line with the rest of the business with more than 40% growth for the entire sector, particularly strength in the global segment as well. We continue to see positive signs in commercial construction markets, and we don't think there's any reason why there should be any let-up in those markets as we think about going to the second half of this year or into 2022. Our negotiation pipelines proceed in order as we talked about in prior calls, and our negotiation pipeline for both light commercial and large commercial projects, including commercial buildings, was up very strongly year-on-year and also up sequentially. We're optimistic that commercial construction will come back, and we think the second half of this year and into next year should post fairly strong growth.

Thank you, Craig. And just my follow-up question, this has been a strange recovery, but your industrial customers, do you see them thinking about CapEx differently? I think you did highlight before your high content in certain facilities, so that's one secular growth driver. But what kind of longer-term conversations are you having? Do you think people are thinking differently about CapEx needs this cycle versus the prior decade? Thank you.

I think it's fair to say that on the industrial side of the house in general, across many of our end markets, there’s historically been some underinvestment. There is going to be some catch-up that needs to take place. The big challenge that everybody is dealing with is sizable labor shortages in many markets around the world, and so investments in industrial and automation tend to follow. We think the industrial markets are in the early stages of recovery. There has been relative underinvestment in manufacturing over the last number of years, and so we think that market should do well into '22 and beyond.

Hi. Good morning, guys.

Good morning, Scott.

Craig, can you talk a little bit about where you guys stand on your strategy in EV charging, whether you're kind of content with being a sub-supplier into it or whether you want to perhaps take a bigger role there?

Yeah. This is certainly very much at the core of our strategy for our electrical business, and Uday Yadav and the team spent some time during our Investor Day really taking you through what we're trying to accomplish there. It's one of the reasons we made the acquisition of Green Motion. We acquired Green Motion, a European Company that does everything from the physical hardware of charging to charge port operating and billing systems. We think e-charging, whether that's at residential, commercial buildings, or grid-scale, is going to be an important part of our strategy inside of our Electrical business. Those markets are reflected in infrastructure bills being proposed in the U.S., and sizable investments occurring in Europe and Asia. We believe e-charging, both in hardware and in software, will be integral to our Electrical business.

Okay. Helpful. And then just as a follow-up on e-mobility. Can you give us a sense of the wins that you're getting? What does a good look like on a content story for you guys on an electric vehicle? It can just be an illustration or example if you want, but trying to get a sense of that. Thanks.

It's tough to pick a typical e-mobility vehicle, but the content opportunity for e-tech in an e-mobility application is a huge multiple of what we saw in our legacy business. Whether in new electronic-based inverters, converters, power distribution, or even in our legacy Vehicle business, there’s a huge growth opportunity in gears, differentials, hybrid transmissions for our legacy business as well. We laid out a goal of achieving $2 billion to $4 billion between now and 2030, but the opportunity set is much larger in order of magnitude. It’s 5, 10 times greater than our traditional Vehicle business where we previously focused on valve actuation and charging. These wins and opportunities are now multiples of 5x to 10x what we would have had on a historical vehicle platform.

Good luck, Craig. Thank you.

Thank you.

Thanks, guys. Good morning and congrats on the quarter.

Thanks, Joe. Appreciate it.

Craig, I know you mentioned that the price-cost equation will be neutral for the year, but I'm curious about how that played out in Q2. Can you provide insights on whether there are any specific quarters where we might face challenges? Also, how do you feel you are positioned in relation to inflation at this time?

I appreciate the question. We are dealing with sizable challenges in and around supply chain, probably no secret. When we provided our Q2 earnings guidance at the end of Q1, we anticipated the amount of commodity inflation that would impact the business. Commodity prices have only gone up and significantly since that time. As an organization, we’ve had to offset additional commodity price inflation more than we anticipated, shifting our pressure points for the business. Currently, when we think about the year, we're calling it neutral; we don't think it gets worse in terms of the impact on our Company and the balance between pricing costs. We expect the pressure points in Q3 to mirror the expectations we had in Q2. And once again, we're running to catch up with taking prices in the market as well as working on ways to reduce costs within the organization.

Got it. That's helpful context. I guess maybe my quick follow-up question. One area that really surprised us to the upside this quarter was your aero margin. I was wondering if you could try to help parse out what really benefited Aero this quarter, and should we start thinking about 20+ as a baseline as we start to see the recovery in the commercial Aero business?

If you think about it in simple terms, our team took proactive measures during what was a dramatic downturn last year and set expectations that we wouldn’t see these markets return to normal until 2024. The team put in a number of restructuring programs to reduce fixed costs early on. I attribute this strong performance to the team’s proactive efforts and effective execution, as well as managing costs. As for expectation moving forward, approaching 25% return on sales in our aerospace business back in 2019, we’re aiming to get back to at least 20% as volume comes back.

Hey, Craig. Hey, this is Brandon Rig in for Nigel Coe. I just want to piggyback off of that Aero comment. Also, not in the spotlight on the top line, but certainly very strong performance on the margin. Maybe just some more color on the components of Aerospace. How did commercial OE, commercial aftermarket, and defense perform in Q2? And maybe just a follow-up: what is the outlook for defense? Has it changed at all since our last update? Thank you.

Our Aerospace business is probably not too much of an outlier from what you've seen from others in the market. The commercial side continues to be under pressure, while we're starting to see some revenue passenger kilometers return, those markets are still running well below where they were in 2019. We saw a little bit of improvement in aftermarket this quarter as it certainly rebounded from last year, while Commercial OE continues to be weak and the commercial aftermarket improving but still weak. On the military side, pretty much no change, and we think that business will grow in low single digits, consistent with our near-term outlook. Most of the margin improvement comes from the team’s execution, not from any significant shift to aftermarket business overall.

Thank you. Good morning, everyone.

Morning, Jeff.

Hey, good morning. Maybe just a question on backlog conversion and also just kind of the scramble going on in the channel. Craig, you mentioned you did see some channel inventory rebuild out there. We've heard a lot of mixed things from other companies on that—like people would like to rebuild inventory but can't because there's not availability, et cetera. Maybe you could just give us a color on that dynamic and do you think we're somewhat caught up on inventory relative to where the demand is?

The way I'd characterize it today, after checking in with our distributor partners, in aggregate, inventory levels probably match the outlook for the demand we expect. However, there are certain segments where we are woefully short. A good point would be the residential market. Currently, in the residential markets in Electrical, we are short of where we should be, and our distributors have not been able to restock. The fact we're building sizable backlogs reflects that some of these end markets would like to have more inventory than they are currently sitting on. However, generally, I think inventory is largely in line with our outlook for the market going forward, barring certain sub-segments.

And so the backlog growth you would attribute mostly, or it sounds like, completely to demand-side as opposed to maybe your inability to deliver on a few things in the quarter?

No, I think there's a combination. There are clearly certain sub-segments of the market where there’s more demand—like residential construction—than we can currently ship. So I think it’s a mix of both, but on aggregate, dare I say, the underlying demand is good in most of the end markets, and inventory buildup isn't taking place across the board.

And maybe just a follow-up, if I could. You called out at the end of your remarks in your commentary on deal capacity; things are heating up, and obviously, you guys have been busy yourself. Maybe you could comment a bit on the pipeline—whether the organization can do more, is ready to do more, and what might be actionable before year-end?

I appreciate the comment. The team has been very successful in executing a number of acquisitions that are very strategic and attractive multiples. Deal activity is heated up and the pipeline today is probably about as full as it’s been in some time. We do have capacity organizationally, depending on which segment you’re talking about. A good thing about being an organization that works across multiple businesses and industries is that none of these large deals will overreach the capacity of the entire Company. If you're talking about things done recently in Aerospace, we may be a little full on the fuel and motion side, but we have capacity elsewhere, especially in Electrical. We haven't done very large deals in Electrical. We've conducted strategic transactions that enhance our portfolio. By and large, in our Electrical business, we have plenty of capacity to pursue opportunities and integrate them. That won't be a bottleneck in terms of our ability to transact. Our priority remains focused on Electrical and Aerospace as the two areas where we'll likely deploy capital.

Great. Thank you.

Yeah, thanks. Good morning, guys.

Good morning, Nicole.

Can we clarify a couple of things in the guidance? How much of the raise in EPS came from the early close of Cobham and Hydraulics for an extra quarter? Can you clarify if you included one month of Hydraulics in the Q3 guidance given that it closed in August, or has that been removed from Q3?

We own Hydraulics for the month of August, and we did include it in the guidance. It contributes 4% impact from M&A timing, about $0.07 of the timing from M&A—$0.03 from Cobham, and then $0.13 which was $0.04 for Hydraulics, and $0.09 for Cobham. M&A timing accounted for $0.20 of the $0.35 total.

Okay. That's really clear. Thanks for that verification. Can we also talk a little about what you’re seeing in China? Obviously, a lot of noise with what's happening from a data perspective and questions about stimulus from here. But have you seen any slowing in your business?

I'd say no. Our business in China grew quite strongly. The strength seen in our Electrical Global segment is reflective of what we've seen in our China business. The market today has performed extremely well, as has our team. We've always believed in manufacturing and being local in local markets. It’s one reason we've made these investments in joint ventures to expand our access to the market, particularly in tier-2 and tier-3 markets that we've historically not participated in. These joint ventures create exciting opportunities for our Company moving forward.

Thanks, Craig, I'll pass it on.

Hi. Thanks for the time. On the Electrical focus for M&A, can you help us think through where the areas of focus are moving forward? Is it more geographic or is it technology ideally? A mix of both? Just give us a sense of where you see opportunities and maybe gaps. I also wanted to follow up on the strong doubling of organic sales growth guidance for Electrical Global. Can you provide color on what's accelerating so much from your thoughts three months ago and maybe an update on the geographic sales mix of Electrical Global?

If you think strategically, these three major secular growth trends: electrification, energy transition, and digitalization will be our framework for deploying M&A dollars. An example is when we acquired Green Motion; it expresses our strategy in accomplishing our goals. We also have geographic opportunities to round out our portfolio and participate in markets we haven’t fully engaged in, such as China. There are wide-ranging opportunities to consider for growth through M&A in our Electrical business based on strategic platforms and geography expansion. Regarding the Global business and the increase in guidance: on a relative basis, the Global markets fell more than the America's business, so it's easier to show growth. In Europe, markets are reopening, and this is driving revenue and growth at a time when economies are actually ramping. It’s not limited to high-performing segments like Datacenters and residential but is also being seen in commercial, institutional, and industrial markets as well.

That’s fine. Thank you very much. I appreciate the time.

Thank you.

Hi. Good morning, everyone.

Good morning.

I wanted to build upon a few earlier questions. Appreciate the price-cost commentary for the balance of the year, but just wondering as you look across your portfolio and consider incremental for next year, where you think price will be most sticky. Also, if you could remind us of the historical experience coming off the last deflationary cycle, I think under the prior segment's products held a little bit more price in the systems business, but any color there would be helpful.

I appreciate your question, as we work through this unprecedented commodity inflation. We anticipated seeing the worst of it in Q2; however, it appears to be pushed to Q3 and the second half of the year. So far, we’re calling it neutral between pricing and costs with no major shifts expected. Price stickiness typically means in inflationary environments, price could be quite stable as we’re facing similar challenges across the board. Labor inflation is also a factor. Thus, it appears that price adjustments will likely stick through this cycle for some time.

Great. And maybe just a follow-up. A lot of color given about geographies in the last question, but have you seen any discernible share shifts that you would call out? Or do you think it’s more a function of the strength of the market or might there be some pockets where you’re gaining share? Thank you.

At this point, we think shares are holding in the market. There's always some quarterly variability, but I would suggest that there's likely not been large share changes occurring currently. Given that we’re navigating supply chain challenges, there’s likely more business than any of us can handle. Building our backlog indicates that we’re all experiencing similar trends. At this point, it's reasonable to say we're holding market share in our core businesses until we can adequately serve underlying demand.

Great. Thanks for taking the questions.

Hi. Good morning. I just wanted to ask about cash flow. Is there anything that's been touched on yet? I saw the free cash flow guide went up, but if I look at the year's numbers in aggregate, it looks like you're guiding for about an 11% free cash flow margin this year, and the adjusted conversion from net income is maybe in the mid or low 80% range. I just wondered if you could sort of remind us what are some of those major headwinds on the free cash flow margin and/or conversion at present, and if there are specific items, like CapEx coming down next year or working capital headwinds easing when we're thinking about cash flow margins and conversion for 2022?

If you look at last year, we finished at $2.6 billion in free cash flow, which was a solid year. This year, we characterize it as a transitory year. We're spending roughly $200 million more in FX this year which takes us down to before, we've compares to the midpoint of our guide of $2.2 billion. You can consider that $200 million for investments in working capital given the current environment. Looking ahead, above 100% free cash flow conversion is certainly where we’d expect our Company to perform. As Tom mentioned, 2021 is a transition year; we have to build out our inventory, increase restructuring spending, and manage CapEx. It’s worth noting on an operating cash flow basis, we are ahead of last year, which gives us confidence in our cash flow performance.

Thanks for clarifying. And then on the top-line side, just wanted to try and understand what you're seeing in the utility markets at the moment. There is chatter every time there's a stall about grid hardening and the like. Can you provide an update on the utility piece of the market and how that growth compares to overall Electrical revenue growth guidance, which I think averages out globally in the low teens?

The utility market is a different segment for Eaton, historically a very low single-digit growth category. We see that evolving into one of the faster-growing segments. We expect mid-single-digit growth for the utility market near term, primarily arising from energy transition investments, such as grid hardening and resiliency. We value the utility market and believe it will experience growth going forward, although we’ve not yet seen a big inflection point. A lot of that growth is still out in front of us, pending climate change and adaptation investments. We are observing increases in investments for distribution, which aligns with our strengths.

Great. Thank you.

Yes. Thank you. Appreciate just squeezing me. Most of my questions have been answered, but maybe Craig had a similar question on data center demand and how we saw progress over the quarter from an orders perspective compared to the start of the year, then maybe regionally what you're seeing in data center demand.

It's obviously one of the most exciting segments we are in. The acquisition of a Company like Tripp Lite strengthens our position in this area. We've seen global strength in data centers across all regions. Demand is rising across virtually every segment—on-prem, cloud operators, and hyperscale data centers—telling us that the market continues to exceed expectations. This year we're expecting high-teens growth in the data center market. Our guidance reflects our analyzed impact, pointing to a strong growth trajectory moving forward as the need for more data, more storage, and more compute increases, signaling continued growth in the future.

Okay, good. Thanks, guys. As always, Chip and I will be available to do any follow-up questions. Thank you for joining us. Have a good day.

Alright. Thank you.

Thank you.