Eaton Corporation plc (ETN) — Q1 2023 Earnings Call Transcript

Hi. Good morning. Thank you all for joining us for Eaton's first 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 our company's performance in the first 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 includes adjusted earnings per share, adjusted free cash flow, and other non-GAAP measures. They 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 commentary today will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and the presentation. With that, I will turn it over to Craig.

Okay. Thanks, Yan. We'll start with some highlights of the quarter on page three. And I'll lead off by noting that we've delivered another strong quarter. We generated adjusted EPS of $1.88 for the quarter, well above our guidance range, record for the quarter, and up 16% from the prior year. We continue to post strong margins, with a Q1 record of 19.7%, up 90 basis points over the prior year. Our sales were $5.5 billion, which was up 15% organically; our third quarter in a row of 15% organic growth. We have particular strength in our Electrical Americas, which was up more than 20%, including very strong growth in commercial, institutional, utility, and data center markets. We also had exceptional growth in our Commercial Aerospace and eMobility businesses. Our orders also came in ahead of expectations for the quarter. On a rolling 12-month basis, Electrical orders were up 13% and Aerospace orders increased by 21%, which led to another quarter of record backlogs, up 39% for Electrical and 27% for Aerospace. I think it's well understood at this point, but I'd note once again that reindustrialization, infrastructure spending, along with secular growth trends of electrification, energy transition, and digitalization have fundamentally changed the growth prospects for our company. Lastly, free cash flow in the quarter was nearly $300 million, driven by higher net income and improved working capital. So I'd say we’re off to a very good start for the year. Moving to page four. I'd like to once again highlight that Eaton is marking its 100th anniversary of our listing on the New York Stock Exchange. As many of you saw, we celebrated by ringing the bell in early March. Eaton is one of 32 companies that have reached this milestone. Our longevity on the exchange and our resiliency is really a function of our ability to adapt to a changing world. But what has remained constant over that time is the spirit of innovation that guides us, and our commitment to all of our stakeholders: employees, customers, shareholders, communities, and all of society. As Eaton stands at the forefront of perhaps the most significant growth trends that we'll see in our lifetime, we’re convinced that our best days are still ahead of us. We’ve been busy planning for this moment. Today, we position ourselves as our customers' trusted partner across the power management spectrum. Slide 5 provides a good example of how we're playing across the electrical value chain from power generation to power distribution, to how it's consumed in various applications. We're building a business that supports our customers with a full range of end-to-end solutions, beginning with deep domain expertise in specific applications and the ability to specify electrical solutions. We're now providing intelligent electrical products, offering Data as a Service, providing software solutions, doing installation commissioning, and providing aftermarket services. Our role has changed from simply selling components to helping owners fulfill their changing energy needs. We're also proving that we can leverage our technology and create scale solutions that serve all of our end markets. For those of you who were with us at our March meeting in New York, you saw an example of this in a new product we call Breaktor. Breaktor is a combination of a breaker and a contactor. We developed the technology in our Electrical business and have successfully sold it in our eMobility and aerospace businesses. As the electrification of everything continues, the need for Eaton's technology and solutions will certainly continue to grow. The primary source of this growth is coming from the mega trends that we've discussed. In addition to electrification, we're benefiting from energy transition, digitalization, and the reindustrialization of the US and European markets, and we're seeing record capital spending levels. This capital is supported by an unprecedented level of infrastructure spending by governments around the world. While early, we’re tracking a large number of infrastructure-related projects. For instance, in our Electrical Americas business, we've already seen over $1 billion of projects and have won roughly $250 million of orders. As this chart reflects, we're also at the beginning of a strong aerospace growth cycle and seeing rapid adoption of electric vehicles. Collectively, these trends have positioned the company for strong growth for the foreseeable future. Next, on page 7 of the presentation, we provide an example of how reindustrialization is creating a record number of mega projects. We define a major project as one with more than $1 billion of capital. Since 2021, announced non-residential mega projects have a cumulative value of almost $600 billion—at least 3x the historical run rate for non-residential projects. This is North America only. $600 billion announced over the last nine quarters, $400 billion more than historical run rate. These projects are in various phases of design, planning, or construction. But as you can see, these secular trends are translating into specific projects, and they haven't slowed down. There are billions more in the planning stages, which will certainly sustain our growth for years to come. On slide 8, we take you from the $400 billion of announced mega projects and discuss what it means for the electrical industry. We estimate that the electrical content on these projects is in the range of 3% to 5% of the total project value. This suggests $12 billion to $20 billion of incremental electrical revenue. Keep in mind, there's a wide range of electrical content on various projects, and our exposure is tied more closely to building infrastructure. But assuming these projects get planned, designed, and built over the next five to seven years, they will expand the electrical market by some $2 billion to $4 billion a year just from what's already been announced in mega projects. Naturally, we expect more large and small projects to come. These projects are a good example of how mega trends are creating a very different growth outlook for the electrical industry and one we think will run for a decade or more. Another helpful proof point is represented on slide nine, showing how our negotiation pipeline has grown. Our negotiation pipeline has doubled from what we've seen historically. In 2022, we saw nearly $5 billion of projects in our negotiation pipeline in Electrical Americas alone. Similar to mega projects, we're seeing broad strength in manufacturing, data centers, industrial, and utility markets. This large step-up in negotiation further supports our expectations for strong markets and faster organic growth as we move forward. Additionally, on page 10, we show how these projects translate into specific orders. Our electric orders have been at record levels for two years. What we're demonstrating here is how these mega projects are translating directly into large wins for our Electrical business. For example, we've secured $180 million of orders to provide toll management solutions for two new EV plants in North America. We're providing power distribution equipment and Brightlayer industrial remote monitoring software. Another example is a $100 million order for a new US semiconductor plant, and we’re already working on Phase 2 of this project, which could be even larger. Overall, we're witnessing record project announcements and negotiations, a record set of orders, which has led to a record backlog. And remember, the revenue impact is mostly in front of us. Moving to page 11, we’re benefiting from mega trends in Aerospace and Vehicle. We're at the beginning of an Aerospace growth cycle in both the commercial and defense markets. Specifically, commercial OEM build rates are expected to grow in the mid-teens over the next several years. Our commercial aftermarket should also grow by double digits, as global revenue passenger kilometers continues to recover to pre-pandemic levels and beyond. We’ve also noted a significant step-up in defense orders and expect to see a substantial increase in defense revenues beginning in 2024. As a point of reference, our defense orders have more than doubled from 2019 levels. In recent years, we've seen increased content on both commercial and defense platforms. In vehicles, electrification continues to accelerate, and we now expect global EV penetration rates to exceed 50% of global auto sales by 2030, up from our prior estimate of 40%. While we're not providing any new revenue updates today, we once again are reassessing our forecast for our eMobility segment. On page 12, we highlighted a few key wins in our Aerospace and eMobility businesses, beginning with a $500 million win for cryogenic coolers and controllers for the CityAirbus urban air mobility program. The CityAirbus win exemplifies how digitalization, software, and electrification are beginning to benefit our Aerospace business. As Tom will report shortly, we're seeing more than 30% growth in our defense and commercial aftermarket orders. In eMobility, we continue to achieve significant wins, particularly coming from our power distribution product line within our eMobility business, leveraging our broader electrical business and unique breakthrough technology. Our latest wins stem from a leading European automotive OEM and will generate $100 million a year in mature revenues. So, like Electrical, our industrial businesses are delivering significant wins tied to long-term mega trends that will support faster growth. Combining the businesses, we are confident that our market should grow at more than double their historical rates, and as we've stated, we're in the early innings. These trends are expected to deliver sustained growth for years to come. With that, I'll turn it over to Tom to walk us through Q1 financial results and updated guidance.

Thanks, Craig. On page 13, I'll start by providing a summary of our strong Q1 results. For the third consecutive quarter, we generated organic growth of 15%. Revenue was up 13%, with the organic growth impacted by two percentage points from unfavorable foreign exchange. Operating profit, a first quarter record, grew 19%, and margins expanded 90 basis points to 19.7%, also a Q1 record. Adjusted EPS increased by 16% over the prior year to $1.88. Overall, strong organic growth and margins enabled us to report a first-quarter record adjusted EPS. Our higher growth not only demonstrates the mega trends but also the importance of prioritizing our customers by maintaining higher levels of inventory when supply chains were challenged. Lastly, our free cash flow of $209 million was nearly $300 million above the prior year and exceeded our expectations. You will recall from our Q4 call, we expected free cash flow to be relatively flat year-over-year. Moving on to the next chart, our Electrical Americas business had another very strong quarter. We set Q1 records for sales, operating profit, and margin. Organic sales growth was 22%. Electrical Americas has generated double-digit organic growth for five consecutive quarters, including back-to-back quarters of at least 20% growth. On a two-year stack, organic growth is up 32%. In the quarter, we saw broad-based growth in all end markets, especially robust growth in commercial, institutional, utility, and data center markets. Specifically, we posted 25% organic growth in our data center revenues in Q1, continuing to show strength in this important market. Utility, commercial, and institutional sectors were up more than 30%. Notably, we posted 17% revenue growth in our residential business. The two-year stack shows over 40% growth. We are witnessing strength in multi-family homes, completion of single-family homes in process, and increased electrical content per home, which offset weakness in new single-family starts. Operating margin of 22.9% was up 380 basis points versus the prior year, benefiting from higher volumes. Incremental margins were strong at more than 40%. We have effectively managed pricing to more than offset inflationary pressures. Orders and backlog show continued strength—on a rolling 12-month basis, orders were up 18%, which remains at a high level with particular strength in data center, distributed IT, utility, and industrial markets. On a quarter-over-quarter sequential basis, orders grew 19%. We continue to build backlog, which was up 51% versus the prior year and up 9% sequentially. In addition to the robust trends in orders and backlog, our major project negotiations pipeline in Q1 grew by over 20% compared to the prior year and nearly 20% sequentially, with especially strong growth in data centers, water, wastewater, and transportation markets. Overall, Electrical Americas had a very strong quarter to start the year. On page 15, you'll find the results of our Electrical Global segment, which posted all-time record sales of $1.5 billion. Organic growth was up 8%, partially offset by headwinds from foreign exchange and a divestiture. Organic growth was driven by strength in utility, data center, and distributed IT markets. Our data center revenues for Electrical Global increased 32% in the quarter, while utility was up 25%, and distributed IT up 20%. Operating margin of 18.3% was down compared to the prior year, primarily due to manufacturing inefficiencies and investment in growth, partially offset by higher sales volume and inflationary price recovery. Orders were up 4% on a rolling 12-month basis, with strength in data center, commercial, and institutional and utility markets. Sequentially, orders grew 12%. Backlog increased 3% year-over-year and 6% sequentially. I'm also pleased to highlight that last month, we closed the acquisition of a 49% stake in Jiangsu Ryan Electrical Company. This Chinese-based business generates approximately $100 million of revenue, which manufactures power distribution and sub-transmission transformers and will accelerate Eaton's growth in renewable energy, data center, utility, and industrial markets. This is Eaton's fourth JV in China in the last two years, enabling us to expand our market presence, serving high-growth markets inside and outside of China. Before moving to our Industrial businesses, I'd like to briefly recap the combined Electrical segment. For Q1, we posted organic growth of 16%, incremental margin of 34%, and operating margin of 21%, representing a 180 basis point year-over-year margin improvement. Orders grew 13% on a rolling 12-month basis, with sequential growth in the quarter of nearly 20%, compared to roughly flat sequential order growth in the six years prior to the pandemic. Backlog grew 39% in the quarter and 8% sequentially. Our rolling 12-month book-to-bill for our electrical sector remains very strong at above 1.2, which was also above 1.2 for Q1. We remain confident in our positioning for continued growth with strong margins in our overall Electrical business. The next page recaps our Aerospace segment. We posted Q1 records for sales and operating profit. Organic growth was 13%, with a one percentage point headwind from foreign exchange. Growth was primarily driven by strength in the commercial aftermarket, which was up more than 30%, and commercial OEM, up more than 25%. Operating margin was 22.5%, representing a 40 basis point improvement over last year, driven by volume growth and inflationary price recovery. Order growth and backlog trends also remain encouraging. On a rolling 12-month basis, orders were up 21% organically, with strength across all end markets, including continued growth in defense OEM orders. Similar to the second half of last year, we continue to see strong growth in our defense orders in the quarter, with OEM up 55% and aftermarket up more than 40%. Our book-to-bill for our Aerospace segment remains very strong at more than 1.2, including more than 1.25 for Q1. Year-over-year backlog growth increased 27% in Q1, an acceleration from 21% in Q4. Moving on to our Vehicle segment on Page 17. In Q1, revenue was up 10%, with 11% organic growth and one percentage point of unfavorable FX impacts. We saw particularly strong growth in both the Americas and EMEA markets. Operating margins came in at 14.5%, which were unfavorable to the prior year primarily due to manufacturing inefficiencies, partially offset by higher sales volume and price cost adjustments. We continue to make progress toward securing more sustainable technology wins, most recently including multiple new programs for our ePowertrain solution. On Page 18, we present results for our eMobility business, showcasing strong growth in the quarter. Revenue was up 17%, including 18% organic growth. Margin was down 30 basis points compared to the prior year, driven by higher manufacturing start-up costs associated with new electric vehicle programs. We remain very encouraged by the growth prospects of the eMobility segment, leveraging our capabilities across our entire portfolio, including core technology in both electrical and industrial businesses. Since 2018, we have won $1.4 billion of mature year revenues in this business, many of which are ramping up in 2023 and 2024. This momentum includes additional recent wins with Breaktor, including on next-generation battery platforms with a large European OEM. Next, on page 19, we showcase historical backlog charts for the Electrical sector and Aerospace segments. We believe it’s important to illustrate how backlog has grown over time. Our record backlog was roughly $12 billion at the end of Q1. This is up nearly three times the ending 2019 level. These metrics provide us with great confidence in the outlook for the full year and beyond. On the next page, we discuss our fiscal year organic growth and operating margin guidance. We are raising our organic growth guidance for 2023. We continue to have a robust negotiations pipeline and build backlog with particular strength in Electrical Americas and Aerospace. We now expect organic growth in Electrical Americas of 11% to 13%, an increase of 300 basis points from our prior guidance of 8% to 10%. We're also raising Electrical Global growth by 200 basis points to 6% to 8% from 4% to 6%. Additionally, we're increasing Aerospace growth by 200 basis points to 10% to 12%, up from 8% to 10%. In total, we are raising our 2023 organic outlook by 200 basis points from an 8% midpoint to a 10% midpoint. Our strong end market growth forecast combined with building backlog provides tremendous visibility and confidence in this 2023 outlook. For segment margins, we're raising our guidance range for Electrical Americas by 20 basis points to a revised range of 23.3% to 23.7%, reflecting continued strong momentum in this business. Overall, we are reaffirming our total Eaton margin guidance range of 20.7% to 21.1%. This represents a 70 basis point increase at the midpoint from our 2022 all-time record margin. For eMobility, we are adjusting both the organic growth and margin ranges due to delayed OEM launch plans and higher start-up costs related to large new program wins. In summary, we continue to be well positioned to deliver another strong year of financial performance. On page 21, we provide the remainder of our guidance for 2023 and Q2. Following our strong Q1 performance and improved organic growth expectations for the year, we are raising our full-year EPS range to $8.30 to $8.50. At the midpoint of $8.40, we have raised guidance by $0.16. This represents 11% growth in adjusted EPS in 2023. We're also raising our CapEx guidance from $630 million to approximately $700 million to fund additional investments for growth, particularly in our utility business, where we continue to experience strong increases. Free cash flow guidance remains unchanged. For Q2, we are guiding organic growth of 10% to 12%, with segment margins between 20.5% and 20.9%, representing 60 basis points of growth at the midpoint versus the prior year, and adjusted EPS in the range of $2.04 to $2.14, showing a 12% increase versus the prior year at the midpoint. Now, I'll hand it back to Craig to wrap up the presentation.

Thanks, Tom. Now, turning to page 22. As we continue to monitor our end markets, we want to provide a clearer view of our assumptions for the year. We still expect a mild recession in 2023, and we've incorporated that into our base case assumptions. However, with healthy demand and strong secular growth trends, we continue to expect growth in almost all of our end markets. We've raised our growth assumption for the utility market from solid growth to strong double-digit growth. Energy transition and electrification continue to gain momentum. We’ve increased our residential market expectation from declining to flat. While we recognize the slowdown in the US single-family housing market, the resilient renovation market, pricing momentum, and strong backlog now support an upward revision. As noted, we posted 17% organic growth in residential in Electrical Americas in Q1. The balance of the forecast remains unchanged, but I want to emphasize once again that despite market concerns about the non-residential construction market, we have a robust negotiation pipeline, a growing backlog, and strong orders. Data centers, utility, industrial, and commercial institutions continue to perform extremely well. While many have referenced the declining PMI data, our market and revenue growth align closely with capital spending, where we continue to see strong momentum. We do not expect any of our end markets to decline in 2023, and most are anticipated to see healthy growth levels. Let me close on page 23 with a summary of a few comments. Once again, we delivered a strong quarter and set a handful of Q1 records. We delivered 15% organic growth and have a record backlog. While electric orders are experiencing some expected normalization, our supply chains continue to improve, and the secular growth trends and strong execution on our backlog support another strong year of growth. Having exceeded our Q1 forecast and encountered sustained secular tailwinds, we’re raising our guidance for the year. Despite macro uncertainty in various markets, we’re observing robust performance and enhancing our internal execution. As I highlighted, we’re seeing more evidence that mega trends are accelerating, and we now believe our end markets will grow at more than double the historical growth rate. These market forces are just beginning to translate into revenue, positioning the company for substantial growth throughout the decade. I’ll stop here and open it up for any questions you may have.

Thanks, Craig. For the Q&A today, please limit your questions to just one question and a follow-up. Thanks in advance for your cooperation. With that, I will turn it over to the operator for instructions.

Thanks. Good morning everyone, and great start to the year.

Good morning, Joe. Thank you.

Let me start by discussing the margins for Electrical Americas. They clearly performed exceptionally well this quarter, marking the highest first quarter we've ever had. Looking at the incremental margins moving forward, it appears you achieved about a 40% increase in the first quarter. How should we approach expectations for the remainder of the year? Are there any factors that might reverse as the year progresses, or do you anticipate maintaining strong incrementals throughout the year?

We appreciate the recognition, Joe. Our team in the Americas is just doing an outstanding job of executing. As we discussed last year, we had significant inefficiencies in our manufacturing operations due to supply chain disruptions. These have improved significantly into the first quarter. While we expect our incremental margins to be in and around 30% company-wide, we anticipate our Americas business to perform better than that as improvements in the supply chain continue.

To add on to that, Joe, there were no unusual items in the first quarter driving the Americas margin.

Got it. That’s super helpful. Craig, you outlined a lot of reasons to be excited about the growth dynamics for the company going forward. I saw you raised the utilities expectation for the year. Are you starting to see some of the money loosen from the Jobs Act, particularly on the flip side, or what’s driving your increased expectations on utilities growth for the year?

This is something that we anticipated, Joe. As we consider the mega trends such as electrification and energy transition, we knew that the utility market would need to invest in its infrastructure to support the electrification of the economy. We mentioned on the last earnings call that one of the longest lead times for equipment is transformers, often over 12 months. We see utilities investing in their distribution infrastructure to support this transition, suggesting the utility market will be a strong growth market for years to come. As we began the year, we were slightly conservative in our expectations, but that's changing as shown in the strong orders growth.

Thank you.

Hi, good morning, guys.

Hey, Josh.

It’s great to see that supply chain looks like it's starting to unlock there in Electrical. I guess, even though it’s not as bad today, labor, whether in your plants or maybe on the installer side or somewhere else in some of these bigger projects, might still be a limiting factor. Craig, if you just sort of take a step back, notwithstanding the current backlog, demand is really good. Is there sort of a cap on how fast the industry can grow when considering the supply chain totality, including the labor pool at the contractor level?

I appreciate the question, Josh. Labor is a significant constraint today as well. The gap between orders and revenue indicates our extended supply chain and labor availability act as constraints. I don't have a clear answer in terms of the upper boundary of the industry's ability to deliver due to these factors. However, things are improving across the board; we feel confident about the growth outlook for our company and the industry.

That's helpful. Shifting to the pipeline for my follow-up, is there any insight on the book-out rate and any churn you see in that pipeline with aspects like financing, supply chain, and stimulus projects? Has there been any underlying volatility, and how should we think about the lead time between when something enters the pipeline and transforms into backlog?

Overall economic activity—negotiations, orders, revenue—are performing significantly better than anticipated. We're seeing stimulus begin to have an impact, especially from the Infrastructure Spending Act and Semiconductor Act. However, we are still early in the process. Lead times on projects have improved, giving us better visibility into the future due to their larger scale, which will be delivered over multiple years.

To emphasize, our negotiation pipeline in the US is up almost 25% year-over-year, with significant growth in key segments.

Good morning, Craig and Tom. How are you?

We’re good, Scott. Thanks.

I want to focus on these big projects because they are new since I’ve been covering this space. Does the competitive dynamic change when you reach this size? There are fewer trusted suppliers for customers with such large orders, correct?

You’re correct, Scott. While we’ve always had mega projects, they’ve increased significantly with the reindustrialization of manufacturing in the US and Europe, leading to substantial investments in this sector. The larger and more complex the project, the fewer companies can deliver the required services. This dynamic favors Eaton due to our capabilities and the higher electrical intensity of these projects.

This shift allows us to look beyond traditional metrics like PMIs, to focus on reindustrialization driving higher CapEx, which we believe will remain strong.

That’s helpful. Switching gears, when you discuss selling less traditional products like software, does that entail a different sales process? Or is it integrated with the traditional sales approach?

We have integrated software sales with our product sales; they are interconnected and focus on solving customer needs

That’s very helpful. Thank you. Best of luck, guys.

Yes. Thanks. Good morning, guys.

Good morning.

Starting with the second quarter outlook for organic growth; it seems to show deceleration from the 15% in Q1. Can you elaborate on what’s driving this deceleration from a segment perspective?

There’s always uncertainty in predicting market trends but the balance of pricing versus volume shows we’ll have less contribution from year-over-year price increase, focusing on volume as the main contributor.

Got it. That makes sense. Thanks, Craig. Also, what’s the current status of channel inventory in Electrical? Are they still pretty low relative to historical levels?

Generally speaking, channel inventories are in good shape, with some spots needing more. It’s crucial to look at inventory within the context of backlog and orders; looking forward tells a different story than looking back.

Thanks. I’ll pass it on.

Great. Good morning, guys. Craig, big picture. Do you think these record backlog levels are the new normal for Eaton, or do you expect the backlog to return to more historical numbers once supply chains normalize?

We do not anticipate reducing backlogs for 2023. We expect to maintain our backlog levels, which are influenced by lead times and capacity to meet increased demand.

As Craig said, the new Eaton reflects higher growth expectations, with markets projected to grow at double historical rates.

Thank you for that. I wanted to shift to Aerospace; 2024 appears to be a significant year for your aerospace business. Can we expect a more substantial increase in revenue and margin in 2024?

It's too early for us to provide guidance for 2024. The commercial aerospace industry is recovering and should see significant growth, and our military business growth will ramp up considerably next year.

Thanks. Good morning, guys. I want to revisit the topic of global margins. In your view, what gets better from a margin perspective to achieve the 19.7% full year?

Higher volumes and reducing manufacturing inefficiencies will drive improvements. The inefficiencies we faced last year due to supply chain challenges are improving, contributing positively to margins.

To clarify, what percentage of the $600 billion in mega projects have been bid on and awarded thus far? And how does your win rate compare to your stated market share?

These are all announced projects with 25% already broken ground. Our underlying win rate on mega projects aligns with or exceeds our overall market share. These projects will be delivered over several years.

Thanks. Good morning. Many electrical and multi-industry manufacturers experienced substantial price tailwinds in Q1. What do you anticipate regarding the normalization of those tailwinds in the upcoming months?

We see a mixed picture regarding commodity costs and labor inflation. Overall, we’re managing effectively and don’t expect significant disruption in our margin metrics.

Thank you, and just following up on those inefficiencies, when should we expect those margins to start improving this year, particularly in Electrical Global and Vehicle?

We expect progress to be made in margins in each quarter throughout the year as we address previous inefficiencies.

Thank you. Craig, you mentioned several times the market growth could be 2x historical levels. Is this a 2023 or 2024 comment, or do you believe this growth outlook is long-term?

It reflects our long-term view; we anticipate markets to grow at least two times the historical growth rates, driven by trends such as electrification and infrastructure investment.

Thank you. Additionally, can you address how the administration's focus on higher domestic content of projects impacts Eaton? Will this allow the company to take higher market share or protect margins?

We anticipate benefiting from our higher market shares in the US, which positions us well to secure a larger portion of projects as manufacturing and reindustrialization increase in the US market.

For the growth rate exiting 2023, should we assume the first quarter is 15%, the second quarter is around 11%, and then the back half of the year closer to 7%? Essentially a framework where we exit around 6% growth?

What we're reflecting here would generally be a good framework as we assess how the year is progressing. If you're looking to make assumptions based on that, it’s a reasonable starting point for what 2024 could look like.

That’s helpful. Thank you so much.

Hi, good morning. Regarding the portfolio, it seems that the growth strategy has been aligned closely with these mega trends. Is there much of a tail at this point that you would deprioritize for investment, perhaps in the Vehicle segment?

While we have positioned the portfolio for growth, we continuously evaluate every business. Today, we see value across all segments, including vehicles, due to significant synergies.

That’s great. Thank you. Just one last quick follow-up regarding the defense business. How are you thinking about defense M&A going forward? High or low priority?

When considering Aerospace, you must encompass defense. While we understand investor concerns, we view defense as a critical component, and we'll continue to prioritize growth in this segment.

Thanks, Craig. As always, Craig and I will be available for answering any follow-up questions. Have a good day, everyone.

Thank you.

Thank you.