Eaton Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2025

Key Takeaways

  • Positive Sentiment: In Q2 Eaton delivered a record $7 billion in revenue, with adjusted EPS up 8% year-over-year, segment margins expanding 20 basis points to 23.9%, and organic sales growth of 8%, allowing management to raise full-year guidance.
  • Positive Sentiment: Electrical Americas saw a turnaround in orders—up 2% on a trailing-12-month basis from down 4% last quarter—and backlog grew 17% year-over-year, driven by data centers (+55% orders), commercial & institutional, and utilities, pushing book-to-bill to 1.1.
  • Positive Sentiment: Eaton is investing for growth via strategic acquisitions (Ultra PCS, Resilient Power Systems) and partnerships with NVIDIA, Siemens Energy, and ChargePoint to bolster its positioning in aerospace & defense, AI data centers, and EV charging.
  • Positive Sentiment: Management raised 2025 organic growth guidance to 8.5–9.5% and adjusted EPS to $11.97–$12.17 (approx. 12% growth at midpoint), with Q3 EPS now expected at $3.01–$3.07 and operating margins of 24.1–24.5%.
  • Negative Sentiment: The Vehicle business declined 8% and e-mobility revenue fell 4% (with a $10 million operating loss), while Electrical Americas margins incurred a ~100 basis-point headwind in Q2 from ramping new capacity and tariff costs.
AI Generated. May Contain Errors.
Earnings Conference Call
Eaton Q2 2025
00:00 / 00:00

There are 3 speakers on the call.

Speaker 1

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

Speaker 2

Good morning. Thank you all for joining us for Eaton's second quarter 2025 earnings call. With me today are Paulo Ruiz, Chief Executive Officer, and Olivier Leonetti, Executive Vice President and Chief Financial Officer.

Operator

Our agenda today includes opening remarks.

Speaker 2

Paulo, then he will turn it over to Olivier who will highlight the company's performance in the second quarter. As we have done on our past calls, we'll be taking questions at the end of Paulo'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, free cash flow, and other non-GAAP measures. The reconciling in Appendix A. 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 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.

Speaker 2

With that, I will turn it over to Paulo. Thanks, Jan, and thanks everyone for joining us. I'm really pleased with the first half of the year. Our team delivered a strong set of results. Among the Q2 highlights, our adjusted earnings per share were up 8% versus Q2 2024. Our segment margins hit a Q2 record, up 20 basis points versus 2024. Organic growth for the quarter was 8%, driven by growth in the Electrical Americas, Aerospace, and Electrical Global on a rolling 12-month basis. Our orders accelerated in Electrical Americas, now up 2% from down 4% last quarter. Our Electrical Americas backlog grew 17% year over year, hitting a new all-time record. Demand in our Aerospace business remains very strong. We have order growth of 10% on a rolling 12-month basis and a backlog expansion of 16% year over year.

Speaker 2

As a result, our book to bill for the combined segments increased to 1.1, and we continue to deliver robust growth in the data center market as well. Our orders jumped approximately 55%, and our sales were 50% up versus Q2 2024. A final highlight, we are raising 2025 guidance for organic growth and adjusted EPS at the midpoint. Olivier and I will dive into Q2 and the full year outlook in just a minute. First, let's go to page four to have a conversation about our investments to grow the company. On page four, I told you at our investor conference in March, we laid out our bold new strategy. It's anchored by three pillars: Lead, Invest, and Execute for Growth. All three are designed to accelerate our growth and create sustained value for our shareholders.

Speaker 2

Those three pillars also align very well with the key mega trends we've discussed for the last few years with you. Today we'll focus on the middle pillar, Invest for Growth. We executed strategic investments this quarter with key acquisitions, breakthrough technologies, and transformative partnerships. This momentum is unlocking growth opportunities across our portfolio. We are accelerating our focus on high growth and high margin markets to maximize the opportunities ahead. Let's start with an acquisition on page five. We signed an agreement in June to acquire Ultra PCS. We are very excited about this deal and we expect it to close in the first half of 2026. This acquisition strengthens our position in the fast growing next generation aerospace and defense markets. It ties in very well with our 2020 acquisition of Cobalt Mission Systems.

Speaker 2

Ultra PCS expands our exposure to both increasing global defense and expanding the European defense market. We anticipate cost and sales synergies, particularly from growing aftermarket services and securing new program opportunities. We expect this business to post high single digits through low teens growth over the next several years with a needed margin accretion to our aerospace segment. Now moving to slide six, we highlight our most recent acquisition, Resilient Power Systems. This is a great example of how Eaton is investing for growth through cutting edge innovation. This is a game changer for our data center customers and other DC power applications. Resilient makes solid-state transformer technology to replace traditional copper windings. It is a critical building block in the future high power AI center designs as well as EV charging and battery storage.

Speaker 2

Our customers see this capability as critical and a very critical competitive advantage for us. It will accelerate and simplify the construction of AI data centers. We are also investing for growth through strategic partnerships. You see three examples here on page seven: Nvidia, Siemens Energy, and ChargePoint. We've partnered with Nvidia to transform the infrastructure of data centers. Nvidia understands the design is chipped out and they recognize we have partnered, they need, we bring incredible expertise and capabilities in power distribution architecture including higher voltage DC power. We are developing power management solutions for their high density GPUs and solving other problems in the rack. We've also joined forces with Siemens Energy. This partnership unlocks opportunities where utilities can't provide enough power to data center operators. In this case, Siemens handles the on-site power generation and Eaton takes care of the model of power distribution.

Speaker 2

Together we deliver flexible distributed power with no dependency on the grid, which means shorter project timelines and greater operational flexibility to our customers. Finally, we formed a partnership with ChargePoint, a leading EV charging provider, and jointly we are developing global integrated EV charging distribution and software solutions that enable vehicle electrification at scale. Broadly speaking, if I think about the portfolio, I hope you agree that we made strong progress in a short period of time, so we demonstrate a strong commitment and resolve to execute on our portfolio strategy. We'll continue to double down investing on high growth and high margin businesses, and I'm proud of my team that delivered on our short term commitments and at the same time took decisive steps in our portfolio. Now I'll turn it over to Olivier who will walk us through our financial performance. Olivier, thanks Paulo.

Operator

I start by providing a brief summary.

Speaker 2

Of our Q2 results.

Operator

We posted 8% organic sales growth at the high end of our guidance range, driven by broad strength in many of our end markets. We generated record quarterly revenue of $7 billion and expanded margins by 20 basis points to 23.9%. Adjusted EPS of $2.95 increased by 8%, which is at the high end of our guidance range. Now let's move to the segment details on slide 8. We highlight the Electrical Americas segment. The business continues to execute at a high level and delivered another record quarter. Organic sales growth of 12% was driven primarily by strength in data centers, up about 50%, along with strength in commercial and institutional end markets. This represents the 11th consecutive quarter with 25% or more growth on the two-year stack basis.

Operator

Operating margin of 29.5% was down 40 basis points versus prior year due to dilution from offsetting tariffs, cost on a dollar basis, and higher cost to support growth initiatives. Orders accelerated to up 2% on a trailing 12-month basis from down 4%, with particular strength in the data centers, up about 55% in the quarter. This represents a strong acceleration with quarterly orders up sequentially by more than 20% within the data center space. I highlighted that there is particular strength from multi-tenant data center customers, which is consistent with the strategy we communicated earlier this year. Excluding the lumpiness from a large multi-year data center order in Q1 2024, orders for the segment were up 11%, accelerating from 4% last quarter on a holding 12 months adjusted basis. Data center orders were up 23% on the same basis.

Operator

Even with record sales, book-to-build increased to 1.1 with 17% growth in our large $11.4 billion backlog, providing strong visibility for our organic growth in 2025 and beyond. Our major project negotiations pipeline in Q2 was up 31% versus prior year, remaining at a high level of approximately 60% since Q2 2023. Megaprojects remain strong with 65 project announcements at a value of $333 billion on a year-to-date basis. The U.S. economy mega project backlog is approaching $2.4 billion, up 31% year over year through Q2. About 50% of the projects have started, which still provides a multi-year run rate. The acquisition of Fiberbond closed on April 1, and the business is off to a great start in our portfolio, exceeding our initial expectations for the quarter. Now we'll summarize the results for our Electrical Global segment.

Operator

Total growth of 9% included organic growth of 7% and 2 points FX tailwind. We have strength in data center and machine OEM end markets. We saw continued strength in APAC posting double digit organic growth and ongoing recovery in EMEA up mid single digits. Organically, operating margin of 20.1% was up 110 basis points over prior year, driven primarily by sales growth and operating efficiencies. Orders were down 1% on a rolling 12-month basis with high single digit growth in APAC. Backlog increased 1% from prior year while book to bill remained at 1 on a rolling 12-month basis. Before I move to our industrial businesses, I'd like to briefly recap the combined electrical segments performance for Q2. We posted organic growth of 10% and segment margin of 26.3%, which was up 30 basis points over prior year on a rolling 12-month basis.

Operator

Orders were up 1% and our book to bill ratio for our electrical sector remains above 1 over 1. Overall, we are very pleased with the electrical businesses execution in the first half of the year and remain confident in our position for growth going forward. Page 11 highlights our aerospace segment. Organic sales growth of 11% remained at a high level and resulted in all-time record sales. We had growth in all end markets and particular strength in defense and commercial aftermarket. Operating margin expanded by 70 basis points to 22.2%, driven primarily by sales growth on a rolling 12-month basis. Orders increased 10% with growth in all segments and particular strength in defense OEM up 25% on a rolling 12-month basis. Our book to bill for our aerospace segment remains strong at 1.1, resulting in backlog increase of 16% year over year and 3% sequential.

Operator

Overall, aerospace posted a solid first half, remains well positioned going forward, and we are very pleased to have signed the agreement to acquire Ultra PCS as Paulo described. Moving to our vehicle segment on page 12, in the quarter the business declined by 8% on a total and organic basis, primarily driven by weaknesses in the North America truck market. Despite top line weaknesses, the team managed to deliver solid margins of 17%, up from 15.5% in Q1. On page 13, we show results for our eMobility business. Revenue decreased 4% from 7% lower organic, partially offset by 3% favorable effects. Operating loss was $10 million. Now I will pass it back to Paulo to go over our market assumptions and guidance.

Speaker 2

Thanks, Olivier. Strong results in Q2 and thanks for helping me shaping the portfolio. Moving on, the assumptions for the year here on page 14 is our view of Eaton's end market growth. We see no material change in our end markets from the last quarter. Most of the end markets are growing fast. The F arrows represent 80% of our revenue, over 80% of our revenue. We have many paths to growth and we believe it's sustainable. We see positive development in data centers and defense aerospace versus past quarter. While the other parts that aren't growing, like residential, internal combustion engine, light vehicles, and commercial vehicles, are the smallest part of the company, we are confident in our end market positioning to deliver differentiated growth this year. Here on page 15 is our updated guidance for the year for organic growth and operating margins.

Speaker 2

Big picture, we are raising our guidance for the year on both. Let's start on the middle column. Organic growth. We are increasing our guidance here by 50 basis points to a range of 8.5% to 9.5%. By segment, we've raised Electrical Americas by 50 basis points, Electrical Global by 100 basis points, and Aerospace by 200 basis points. Meanwhile, the growth of vehicle and eMobility are weaker than prior expectations from challenging market conditions, as you know. Now for margin guidance, as you see, our guidance is 24.1% to 24.5%. We've also increased our guidance range by 10 basis points. By segment, we've raised our expectations for both Electrical Americas and vehicles by 20 basis points, but it's partially offset by lower margins in the eMobility business. Moving to page 16, here is our outlook for Q3 and our updated guidance for the year.

Speaker 2

For the upcoming quarter, we see EPS of $3.01 to $3.07 and we see organic growth between 8% and 9% and the segment operating margins between 24.1% to 24.5%. For the year, we are raising our adjusted EPS guidance to a new range of $11.97 to $12.17. This represents 12% growth in earnings per share at the midpoint. I will close with a quick summary on page 17. We had a great quarter, record revenue, segment profit, and margins. We see order acceleration, increase in negotiation pipeline, and strong growth in our backlog. This gave us the confidence to raise our growth and earnings guidance for 2025 and we invest in our future growth as well, as we are uniquely positioned as a growth company with a broad portfolio.

Speaker 2

Bottom line, we are delivering our financial commitments in 2025 and we are well positioned to deliver on our ambitious 2030 growth plan. We believe our best years are ahead of us and with that, we are happy to take your questions now. Thanks, Tono, for the Q and A today. Please limit your opportunity to one question and a follow-up. Thanks in advance for your cooperation. With that, I will turn it over to the operator to give you guys the instruction.

Speaker 1

Certainly. As a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star one one. Our first question comes from the line of Joe Richie from Goldman Sachs. Your question please.

Speaker 2

Hey.

Operator

Hey guys.

Speaker 2

Good morning. Good morning, Joe.

Operator

Yeah, I want to start on orders.

Speaker 2

Clearly, look, you saw a little bit of a rebound in Electrical Americas orders up this quarter versus down last quarter. I'm just curious, as you kind of think about the rest of the year, what is your expectation for Electrical Americas and global orders? Similarly, clearly your backlog continues to grow. That's giving you some more visibility. If you can touch on the backlog as well, that would be great. Okay, thanks, Joe. We had a very strong quarter for orders, strong momentum, and we also see a much stronger negotiation pipeline. That gives us strong visibility into Q3 orders as well, especially in Electrical Americas. As we have specific projects we are tracking and negotiating today, we expect this trend to continue to accelerate in Q3. If you ask about the backlog here, it's too early to call.

Speaker 2

Based on this performance, we can confidently say that we're going to have a book to bill higher than one for the year. Okay, great. That's great, Paulo. If I can maybe just ask a follow-up to what you just said. If you think about the different end markets, clearly data centers have been strong. If you backed out your data center orders this specific quarter, we're calculating that the rest of Electrical Americas was probably down somewhere in the high single digits order of magnitude. Is that just a function of comp? That strength that you're seeing in Q3, are you seeing strength beyond data centers? Yes. The answer is yes to both. If you extract the large Q1 order we had in 2024, the Electrical Americas orders are up 11% on a 12-month basis. The underlying business is really strong.

Speaker 2

We always point to 12 months rolling because those big orders can be really lumpy. That's one reason to say that. We see also strength in other markets. We're going to see big orders coming out of the data center as well, and we are doing well in commercial institution, and we are also winning in other markets like utilities and so on. There is more than just data center, but data center with big orders tends to move the needle quite well.

Speaker 1

Thank you. Our next question comes from the line of Sabrina Abrams from Bank of America. Your question please. Sabrina, you might.

Speaker 2

Oh, is it Andrew Obin? Hello.

Speaker 1

Yes, your line is open.

Speaker 2

Oh yeah, so we can hear you. Yeah, yeah, hi, it's Andrew Oban. Just the question on Electrical Americas and just generally what's happening with the market share? Do you think Electrical Americas has been gaining market share in the U.S. and just sort of following up on Joe's question, you know, maybe more granularity if you are gaining share. What end markets? Yeah, no, thanks Andrew, for the question. The short answer is yes. The market data we see today points to market share gains in North America in a number of end markets. The key proof point we shared is the data center performance. The business grew at 50% while we estimate the market to be around the low 30s year over year.

Speaker 2

We believe as we put more capacity online in the second half that this trend will be favorable not only towards data center but other end markets as well. Excellent. Maybe you highlighted acquisitions and just on data centers, Fiberbond and Resilient. Can you just please recap your data center strategy in regards to both gray space and white space? How do you see it going forward? Thank you. Thanks. As you guys know, we pride ourselves to have a broad and deep portfolio for both the gray and the white space. We have a comprehensive strategy. Our starting point even before those moves was already a very strong one.

Speaker 2

We keep strengthening our position as a company listening to our customers and we want to help them with the biggest, I would say, pain points they experience today, the biggest bottlenecks, and I can list those bottlenecks to be the power availability, the speed that they have to build the data centers, and also they're looking at increasing their returns on their capital employed. We are looking always for opportunities to make our customers more successful here. Addressing each one of those, the partnership with Siemens Energy helps with the power bottleneck that I mentioned before. Our Fiberbond acquisition that means modular solutions for the equipment addresses two pain points. One is the speed of construction and the other one is the higher returns on capital.

Speaker 2

What I mean by this is that when you use modules, you need less specialized craft in the data center itself to build the data center so it's faster and removes the labor shortages. At the same time, when you place those modules outside the data center, you increase the space for the service inside. The revenue per square foot also goes up. That's the second pain point our customers have. I think this acquisition covers that. We also see with the AI adoption that increased power density in the white space will bring a number of opportunities for Eaton to provide sophisticated technology solutions in that space. We partnered with Nvidia to help our customers with optimized designs from the chip out. Recently, we also announced the acquisition of Resilient Power.

Speaker 2

That put us in a position to offer the C power conversion at scale right from the utility field all the way down to the GPUs. We had a strong position before, Andrew, and I think after those moves, our position is much stronger. We consider ourselves to be the only company in the data center space that can go all the way from the utility down to the chip. If we had a good position before, now it's even stronger. Thank you.

Speaker 1

Thank you. Our next question comes to the line of Chris Schneider from Morgan Stanley. Your question please. Thank you.

Speaker 2

I wanted to follow up on Electrical Americas orders, which obviously showed nice sequential improvement. I understand the company only discloses orders on a trailing 12 month basis, but our math peg Q2 up maybe in that 25% year on year range. Is this the right ballpark? It does seem to imply pretty nice order growth outside of data center. Thank you. Yeah. We understand, Chris, that we don't share that. You guys calculate based on the information we share. You're in the right ballpark. It's around 25% growth, accelerating well. We also see growth in other markets as well. It's not only about data center.

Operator

Yeah. To complement on this, and we said it earlier on, we are starting to see also some green shoots in the short cycle. That was a headwind to the portfolio starting to turn positive. As we said in our prepared remarks, CNI commercial institutions is very strong, and utility was as well. You see today many end markets being driving growth for our company and the industry.

Speaker 2

Thank you, appreciate that. If you look at the Americas organic guide, it calls for better growth in the back half versus what we got in the first half. Is that just a function of orders getting better, or is there also maybe some volume unlock from the capacity you guys are adding, or maybe even price realization on the back of the tariffs? Could you talk about that, the implied step up in growth as the year goes on? Thank you, Chris. I think that the biggest contributor to the growth in the Electrical Americas is the capacity we're putting online in the second half. We announced those investments since a couple of quarters, if not a couple of years, and this capacity is coming online as we speak. In the second half, we're going to see most of it for the year.

Speaker 2

That's the biggest contributor to the acceleration of growth. Thank you, appreciate that.

Speaker 1

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

Speaker 2

Hey, thanks. Good morning everyone. Hi, Jennifer. I'll come back to Electrical Americas also. Just trying to get my head around, you know, the strength and data center.

Speaker 1

Right.

Speaker 2

I mean if data center and distributed it are 17% of Eaton.

Speaker 1

Right. That makes it 24%, 25% of Electrical.

Speaker 2

It sounds like all the growth really was in data center in the quarter. Can you just maybe speak to that? I get residential was probably weak. Was something else weak, offsetting maybe the utility strength? Maybe just unpack those moving pieces for us if you could. Yeah. First of all, to clarify, the data center data we gave is data center. Pure data center is not including distributed IT. Right. It's not to take the 17%. You're right, there's more to it than data center only. We see high single digit growth in utilities for the Americas, for example. We see also recovery in some of the short cycle businesses we had.

Speaker 2

It's not only about data center in this quarter and moving forward to Olivier's point on short cycle, we saw a change not only in revenue quarter over quarter where we see the short cycle business turning positive in Q2, but the orders also inflected very positively, especially the OEM machinery. OEM orders jumped nearly 30% in the quarter. That, with all of the puts and takes, takes the 12 month basis orders for the short cycle to mid single digits for the 12 months rolling. There's more to it and I would say for the overall company as well. If you look at aerospace, the aerospace growth is almost a quarter of Eaton's growth and has been consistent quarter over quarter. We have a couple of businesses that are actually declining with the market, which are vehicle and mobility. Overall, we have different areas of growth.

Speaker 2

It's aligned with the market and we are gaining share in most of them. Great. Just on Fiberbond, it looks like revenues are coming in much stronger than you anticipated. I think the trailing twelve month revenues as of February were like $378 million.

Speaker 1

You're run rating it looks.

Speaker 2

Like $560 or so. Maybe just speak to that. Also, specifically, I'm wondering how much.

Speaker 1

Fiberbond backlog came into the backlog number that you shared with us today. There's got to be some acquisitive backlog, I would imagine.

Speaker 2

Yes. First of all, we are really happy with Fiberbond. They're executing really well. We are confident that we can get more volume out of their facility. This is the reason why we increased the outlook. They're also winning new businesses, they're winning new orders because the value proposition, to my earlier point, is a strong one for data center operators. It's really well done. The process is going well, the integration is going well, they're performing at a high level. If you think about the second part of your question, if you think about the other areas of growth here on the backlog, we disclosed the backlog growth being organic. We want to talk about the backlog growth for Americas as the organic number. Fiberbond brings another $1.2 billion on top of it.

Operator

We have been working on this acquisition of Fiberbond for a period of time. We have integrated Fiberbond as part of our go-to-market. It starts to be difficult today to differentiate Fiberbond alone from Fiberbond within Eaton Electrical Americas. The lines are starting to be very, very blurred.

Speaker 2

Understood. Yeah, thank you.

Speaker 1

Thank you. Our next question comes from the line of Steve Tusa from JP Morgan. Your question please.

Speaker 2

Hi, good morning.

Operator

Sorry, what was that?

Speaker 1

EA backlog.

Speaker 2

Organic again, first of all. Secondarily, I think on an.

Speaker 1

Organic basis, your TTM for Total.

Speaker 2

Electrical orders were still down modestly.

Operator

Do you expect that to go positive in the couple quarters?

Speaker 2

The backlog question you raised, it's 17% for Electrical Americas, the growth network. Then you said you total backlog.

Operator

That total includes the Fiberbond we talked about earlier.

Speaker 2

Got it, got it. Yep, that makes sense.

Speaker 1

Got it, got it.

Speaker 2

Okay, go ahead. Yeah, what was your second part of your question again?

Operator

Yeah, I think we have the total.

Speaker 1

TTM for electrical, total electrical down modestly on an organic basis in the quarter. Do you expect that to go positive in the next couple quarters?

Speaker 2

Ttm, are you talking about orders?

Speaker 1

Yes, total electrical orders in global and Americas.

Operator

We do not see today, if you look on the TTM basis, straight 12 months, the orders turned positive for the total sector, and for Electrical Americas, they were up 2% when they were in the prior quarter on the same basis, down 4%.

Speaker 2

Steve.

Speaker 1

Okay, so you're already comping positive on an organic basis. TTM is your point?

Speaker 2

Yes, it's a little bit, sorry.

Operator

It's a little bit tough to tease out.

Speaker 2

Secondarily, in the second half, are we seeing the impact of.

Speaker 1

That production step up in 3 and 4Q, and then how does that play into next year? I know you guys have added capacity. You announced, I don't know, 12 to 18 months ago, and I think you said second half of 2025, you should start to see some of that. Are we seeing that play through at this stage in the guide?

Speaker 2

Yes, yes. It's reflected in the guide. It supports the sequential growth of the company, and the process is going well. The expansion projects are going well. A good way to think about it, we have around a dozen projects that are ongoing. Six of them, you know, the construction is done, we're ramping it up in the second half, you know, with all the, you know, the initial difficulties to put new operations running. It's going really well. We're going to have beyond 2025, moving to 2026 and beyond. The other six projects, they're going to add to the top line as well. That's a good way to think about it. The answer is yes, we have new capacity coming in, projects are on track, and we have more to come towards next years.

Operator

Okay, great.

Speaker 2

Thanks for the color.

Speaker 1

Thank you. Our next question comes from the line of Nigel Coe from Wolfe Research. Your question please.

Speaker 2

Thanks. Good morning. Most of my questions have been answered.

Operator

In terms of the capacity coming.

Speaker 2

Online.

Operator

Obviously, you talk about investing.

Speaker 2

The tariff offsets as the two factors in the EA margin. I'm wondering, are you absorbing a.

Operator

lot of the capacity ramp costs today.

Speaker 2

As you start shipping out the capacity, you start getting better operating leverage. Are there additional costs that will come when you increase that capacity in the second half of this year? The answer is yes. As I mentioned a second ago, we're ramping up six different facilities in Electrical Americas. We are dealing with those inefficiencies as we speak, and as that normalizes, those inefficiencies will go away and then we can print better results coming out of those plants. I don't know if you want to add anything.

Operator

We have always asked this question, what is the impact of those? We are also investing in go to market capabilities based upon the exciting end markets we are facing. We see today, due to the ramping of the investments, about a point of margin headwind in Electrical Americas today.

Speaker 2

100 basis points. Yes, 100 basis points. Okay, that's material. Is that peak pressure or does that sort of live with us now for the next 12 months? As you start to get better absorption, we start to get better leverage.

Operator

We would expect the leverage to be better probably next year, not earlier.

Speaker 2

Okay, great.

Operator

A quick one on the ERP investments.

Speaker 2

I think that's the major driver, the corporate expense increasing. Maybe talk about where are we today on the IT systems?

Operator

What is the end state of what?

Speaker 2

You want to achieve?

Operator

Is this a multi-year investment?

Speaker 2

Cycle or something that's short in duration? Yes. You're talking about the below line items. Correct. Let me take a step back and give you the bigger picture here. First of all, we see increase in the corporate costs due to the M&A activity we have because first of all we have higher interest expenses coming from the commercial papers. This is one reason. The second one is that we also would have smaller cash balances due to the acquisitions. We have lost also some interest in the new guidance. That's another way to think about it. Finally, to the back of your question, we decided to double down and accelerate AI investments in the company. We are launching tools to improve front end.

Speaker 2

Think about Electrical Americas as the way we interact with distributors and our customers, our supply chains across the whole company, and modernizing systems for our factories as well. We believe this will pay back in spades as we grow our top line the next years to come. We work to manage the cost growth more effectively by having those tools. This is one reason. The other way to think about it is if you look at the above, the line segment performance is very solid. Right. We have $0.25 bid on average here. Instead of letting all this $0.25 flow to the bottom line, we are redeploying this into investments for our growth because we see sustained growth not only this year, but in years to come.

Operator

To answer the second part of your question, Nigel, this is a short-term investment which shouldn't flow into 2026.

Speaker 2

Okay, that's great. Thank you.

Speaker 1

Thank you. Our next question comes from the line of Scott Davis from Melius Research. Your question please.

Speaker 2

Hey, good morning, guys. Good color on the expenses coming in because that's key, and the scale and the mix and stuff. Which kind of segues into my question, which is can you get to 40% gross margin once that capacity scales up and ERP spend kind of trails down and such. Is that a KPI that you guys are looking at?

Operator

No, I mean, we gave you a long-term guide. As we discussed during our investor days, we said to you that we would increase margin by about 4 points, 400 basis points over the planning period. There is no indication today that we do not have line of sight of those numbers, Scott.

Speaker 2

I understand, Olivier. I think what I'm getting at though is certainly on the operating, you know, operating leverage or operating profit line. I'm just wondering kind of the puts and takes of how much of that can you get on gross margin versus operating margin?

Operator

Yeah, I mean today we are planning indeed to be close to 40% in gross margin. We are today including that in our guide. You will see a ramp being included in the second half of this year. This is where we'll do where I would comment on it, Scott.

Speaker 2

Okay. No, totally fair. Okay. I appreciate it, guys. I'll pass it on. Thank you. Best of luck. Thank you.

Speaker 1

Thank you. Our next question comes from the line of Nicole De Blase from Deutsche Bank. Your question please. Nicole, you might have your phone on mute. Our next question comes from the line of Dean Drang from RBC Capital Markets. Your question please.

Speaker 2

Thank you. Good morning, everyone.

Operator

Good morning, Dean.

Speaker 2

I just want to go back to the new capacity that's coming online. Can you remind us kind of like in size order of which products capacity is coming on? I would imagine transformers is the biggest investment. If you could size us that would be great. Yeah. It's not only about transformers, include transformers as well. We are also expanding capacity in switchgear and we are also looking at utility equipment like voltage regulators as well. Those are the three biggest for the second half. We're going to have more coming into the next couple of years, especially on the data center UPS side, etc. If we were thinking your transformer backlog has extended, this is pre-capacity adds, is extended to up to four years. How far do you think that backlog, how much does it come down and normalize based upon this new capacity?

Speaker 2

Yeah, what we do see now, we are offering lower lead times to our customers on the lower range of the transformers. We could reduce more. The lead times as you go up, the bigger transformers is still very long. This is where we are tackling. More than thinking about a linear one-to-one approach, what I wanted to invite to think about is that we have differentiated solutions. We have actually a three-in-a-box solution that a couple for our hyperscalers standardized our data centers around it. We are actually running behind. We are catching on the orders trend that we have. We don't see necessarily that the backlog will materially go down at least in the second half of this year because we see the orders coming in. Thank you.

Speaker 1

Thank you.

Speaker 2

Thank you.

Speaker 1

Our next question, we have Nicole DeBlase from Deutsche Bank. Your question please.

Operator

Hi guys, good morning. Can you hear me now?

Speaker 2

Yes, hi Nicole, loud and clear.

Operator

Sorry about that, headset troubles.

Speaker 1

I would like to start with Electrical Global margins.

Operator

I thought the margin performance was pretty impressive in the quarter, north of 20%. Just curious why you guys didn't opt.

Speaker 1

To raise the full year.

Operator

It does imply a bit of a step down in the second half. Thank you. Yeah, I mean we want to be prudent. We are pleased with the performance of Electrical Global not only from a revenue standpoint but from a margin standpoint as well over time. We want Electrical Global margin to go up and to get closer to ESA. We're looking at portfolio actions. Most of the restructuring program for the business is going to impact Global, Europe being the bulk of it. We're looking at ways to simplify the business. We believe the margin is going to keep increasing in Global, but we want to be prudent in the second half of the year.

Speaker 1

Okay, totally understood.

Speaker 2

Thanks, Olivier.

Operator

Sticking with Electrical Global, can.

Speaker 2

You guys talk a little bit about what you're seeing in the pipeline there.

Operator

Any sort of step up in activity.

Speaker 1

In Europe in particular.

Operator

It does sound like Asia has been pretty strong. Thank you.

Speaker 2

Yes. Asia continues to perform at a very high level, Nicole. We're talking about double-digit growth. If you look at the European business, we start to get traction on orders on data centers in an interesting way. The traditional business of the European group is around short cycle. We see here green shoots. I quoted before this inflection in orders in Q2, so that is a good sign as well. To Olivier's point before, we have a lot of work to do to bring EMEA and Electrical Global part closer to where we are in Electrical Americas. We have a plan to do exactly that. Operationally, the business is already running better in Europe. It has very, very good performance in Asia and that continues. Operationally, we're running the machine better. We are also looking at reshaping the portfolio through organic actions to resemble what we have in Electrical Americas.

Speaker 2

If we find the right target, we're also going to take inorganic actions as well. Thanks, Paul.

Operator

I'll pass it on.

Speaker 1

Thank you. Our next question comes from the line of Stephen Volkman from Jefferies. Your question please.

Speaker 2

Great, thank you guys for taking the question. I'm going to ask some non-electrical things if that's okay and that's fine. The first one I wanted to ask about was aerospace. Given the backlog that you have there, I'm curious, as we think about moving into 2026, are there any changes in kind of product mix or end market mix that we should be aware of relative to how that might impact margins? No. I think if you watch the news, you see that there's more excitement around defense markets. We raised the end market performance there. If anything, that's the change. Moving to next year, as you say, backlogs are solid. As Olivier shared, we keep winning not only OE business but also aftermarket. Remains the same mix.

Speaker 2

The only change will be as we get more of the military and defense orders to be executed in the next year. That's the only change.

Operator

Strength overall, we keep adding also as we are ramping this part of the portfolio. We still have inefficiencies in aerospace. We believe we have a few points, few hundred basis points of inefficiencies still today impacting the margin of this business. Going forward as we keep running it better and we are pleased with the progress to date, we should see margin expansion for this business naturally coming.

Speaker 2

Excellent. Okay, great.

Operator

Thank you.

Speaker 2

Paulo, maybe just a shift to eMobility. It feels like the ground has shifted under us quite a bit since we last chatted. Just how do you view that business now? Anything different that you feel like you want to do as we go forward in this new kind of environment? Yeah. For the long term, we believe still that electrification is going to come. It's going to come later than our original plan, but we still see that transition is happening more often and more frequently and strongly outside the U.S. than here as you can track conversion. In the short term, we're experiencing with a couple of big customers, we have programs, they're having issues with their own ramp up of their product line. That's the temporary issue we see. We understand the market dynamics.

Speaker 2

If you think about the way we prioritize our investments in that business, we prioritized in the last couple of years the electrical technology we had already for the electrical sector. We are not starting suffering from scratch and that, you know, protects our bottom line. We still see the traditional vehicle business as a natural hedge for some headwinds we can get from the electrical side of the passenger car market. Fair enough. Thank you guys. Thank you.

Speaker 1

Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your question please.

Speaker 2

Hey, good morning. Thanks for fitting me in. Good morning. Morning. I think you mentioned some order acceleration around this capacity add. I'm just wondering how much orders have maybe been held back by the capacity and as you bring this capacity on, we could see some acceleration or further acceleration in orders. Just given the growth in data center, any incremental capacity adds you're contemplating at this point. To your first question, we have strength in the orders and we believe it's going to continue. We see that strongly in our negotiation pipeline for the quarter as well.

Speaker 2

If you look beyond what we are doing here in terms of capacity, we believe for example the business we acquired, Fiberbond, we already considered in our acquisition that we needed to invest in that business because they're getting tremendous traction with data center operators, both multi-tenant and now also increased hyperscaler interest. If there's an area that will be new to you guys, it's where we already saw when we were acquiring Fiberbond that potentially we'll need to invest to expand that business already.

Operator

In terms of capacity expansion for ESA, as we indicated earlier, we keep adding capacity next year as well. The capacity will start to plateau. Addition will start to plateau at the end of 2026 to satisfy those orders.

Speaker 2

Okay, great. I just wanted to get a feel for, you know, confidence within the cash flow and if there's any cash flow benefit from, you know, changes in the new tax bill.

Operator

We have not changed the guide for cash flow. We gave you today a range we believe we will more than likely trend towards the end of the guide. A few reasons for this and a few reasons which are new since we issued the guide at the start of the year. First, acquisitions expenses and second, also the impact of tariff which is a drag on free cash flow because of the way the payment terms associated with tariff. Within that we will be within the range.

Speaker 2

Okay, thanks a lot.

Operator

Thank you.

Speaker 1

Thank you. Our next question comes from the line of Joe O'Day from Wells Fargo. Your question please.

Speaker 2

Hi, good morning. Just want to make sure.

Operator

Hi.

Speaker 2

Just want to make sure I kind of understand.

Speaker 1

Of understand demand trends in EA correctly because it sounds like you may have seen a bit of an inflection. It comes back to Jess Sprague's earlier point where data center growth in the quarter seems like can explain the vast majority of the organic revenue growth. The commentary around orders sounds like there's broader based growth across CNI and utility and maybe some other areas.

Speaker 2

Can you just sort of comment?

Speaker 1

On that and the degree to which you did see an inflection within orders, and then any color on some of the end markets outside of data center?

Speaker 2

Yes. We saw also strength in commercial, institutional for sure, and we also see growth in utilities business. As we anticipated before, we also see growth in the MOEM in orders and start to turn into positive in revenues as well. The areas where we see downside continue to be down is the resi market, and distributed is flat. That's a good way to have a picture of the electrical business.

Speaker 1

Did you see that happening in orders before you've seen it happen in revenue, and we've got that kind of heading into the back half of the year.

Speaker 2

Yes, as I commented before on the short cycle business, we already saw that inflection in orders there from Q1 to Q2, the answer is yes.

Speaker 1

Okay.

Speaker 2

Just one on the announcement.

Speaker 1

During the quarter and around high voltage direct current in power infrastructure for AI data centers. At the investor day, when you talked about the content per megawatt in an AI data center, you talked about that being in a range of roughly $1.2 million to $2.9 million. Just curious as you see some sort of technology shift opportunities there and you talk about the HVDC, how we should think about the content opportunity for you in that kind of architecture.

Speaker 2

Yeah, it's a very important question. We see our dollars per megawatt go up with the new architectural data centers. The main reason for that is that with increased power density of the white space, we see there's a very attractive market for it and we start demanding much more sophisticated power management solutions, distribution solutions. In the past, our share of the data center, we were heavily focused on gray space, like 70% of our business, because in the white space we saw more of a commoditized market with lower margins because the power density was not there. Now if you start putting 1 megawatt racks, that is sophisticated technology that not only we love, but we know how to do it. That's why we ended up getting a seat at the table for the discussions with Nvidia. We are taking this all the way up.

Speaker 2

We are not stopping the white space. Only as I said before, the acquisition of Resilient Power Systems is a very, very big move to take DC power right from the utility point all the way down to the chips so we can change the architecture of the data center much more effectively.

Speaker 1

Thanks for the color. Thank you. Our next question comes to the line of Julian Mitchell from Barclays. Your question please.

Speaker 2

Oh, hi, good morning. Thanks for squeezing me in. One thing, I don't think it's been addressed yet, perhaps the most notable thing from the release this morning was the cut to the high end of the EPS guidance. I can see that versus, say, April. FX is a tailwind now, not a headwind. You took up the M&A.

Speaker 1

Revenue contribution for Fiberbond versus April.

Speaker 2

You've got sort of more tailwinds.

Speaker 1

From FX and A.

Speaker 2

The EPS guide high end coming down, and I can see the orders are very good, but you generally have.

Speaker 1

Sort of six months of revenue in backlog. A lot of the good orders recently you'll see in the second half, and it's in that guide. Maybe just help me understand a little bit there, the guide moving parts.

Operator

Just to clarify, and I would give the colors. Julian, we have increased the midpoint of the guide by $0.07. Just to clarify, meaning the beat of Q2 flow through plus an additional $0.02. $0.07 increase at the midpoint, that's the way we would like the community to think about it. Let me answer to your question. You're right, FX is a tailwind. The Fiberbond, we are very pleased with the performance, that's also a tailwind. There are investments in the business today. We are pleased with the way our end markets are behaving. We want to invest in the business, we talked about ERP being one of them. We're investing also in frontline resources. We have some parts of the portfolio performing a bit less well than expected. Paulo mentioned that vehicle and eMobility are the two I will refer to.

Operator

Risi has been recovering a bit, but still in the close to zero. Overall, if you take the put and takes, that's the way I will explain the guide. I would finish by saying we want to be prudent as well regarding the way we guide. We have some lingering macro uncertainties and also tariff question marks. That's the way we think about the second half.

Speaker 2

Julian, that's helpful. Thanks, Olivier. Maybe my second question, just Paulo, just following up on something you'd said.

Speaker 1

Maybe 15, 20 minutes ago or something.

Speaker 2

In the context of more capacity coming on stream, particularly in Electrical Americas, in the balance of the year, I think you said we should not expect the backlog to go down materially.

Speaker 1

In the second half.

Speaker 2

Is the view there that as you get more capacity, you can recognize?

Speaker 1

The backlog more quickly in revenue? The backlog shrinks, but it's not a steep drop because the orders are still pretty good coming in. Is that the sort of conclusion?

Speaker 2

Yeah, they're actually right. With the strength in orders, we don't see a reason to believe that backlog will be less than one for the year. Yes, the orders are good. We have good visibility on Q3 orders already, and yes, we're going to ramp up production, but that shouldn't eat much of the backlog in the second half.

Operator

It's going to be very difficult for us to believe that the backlog will not increase by the end of the year. A lot of puts and takes, but with a book to bill ratio of 1, it's very unlikely to happen.

Speaker 1

Julian.

Operator

It was very strong again in Q2, growing nicely by about 15% for the company.

Speaker 2

That's helpful.

Operator

Thank you.

Speaker 2

Thank you, Jurgen.

Speaker 1

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Jan for any further remarks.

Speaker 2

Hey, thanks guys. As always, our team will be available for any follow up. Have the rest of the day, feel good. Thank you guys. Bye.

Speaker 1

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

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