Eaton Q1 2023 Earnings Call Transcript

Participants

Corporate Executives

• Yan Jin, Senior Vice President of Investor Relations
• Craig Arnold, Chairman and Chief Executive Officer
• Tom Okray, Executive Vice President and Chief Financial Officer

Analysts

• Joe Ritchie, The Goldman Sachs Group, Inc.
• Josh Pokrzywinski, Morgan Stanley
• Scott Davis, Melius Research
• Nicole DeBlase, Deutsche Bank Aktiengesellschaft
• Steve Volkmann, Jefferies Financial Group Inc.
• Nigel Coe, Wolfe Research
• Julian Mitchell, Barclays PLC
• Chris Snyder, UBS Group AG
• David Raso, Evercore ISI
• Phil Buller, Berenberg Bank

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Eaton First Quarter 2023 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to your host, Yan Jin. Please go ahead.

[Yan Jin, Senior Vice President of Investor Relations at Eaton]

Hey, good morning. Thank you all for joining us for Eaton's first quarter 2023 earning call. With me today are Craig Arnold, our Chairman and CEO and Tom Okray, Executive Vice President and Chief Financial Officer. Our agenda today include 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 including adjusted earning per share, adjusted free-cash flow and other non-GAAP measures. They are reconciled in 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 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 risk and uncertainties that are described in our earning release and the presentation.

With that, I will turn it over to Craig.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Okay. Thanks, Yan. We'll start with some highlights of the quarter on Page three and I'll lead off by noting that we 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 prior year. And we continue to post strong margins, Q1 record of 19.7% up 90 basis-points over prior year. Our sales were $5.5 billion, up 15% organically, our third quarter in a row of 15% organic growth. We had particular strength in our Electrical Americas business, which was up more than 20%, including very strong growth in commercial, institutional, utility and data center market.

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 tech of the 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 a good start to the year that keeps us on-track to deliver our free cash flow guidance, despite higher revenue and receivable balances. So on balance, 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. And as many of you saw, we celebrated by ringing the bell on in early March. Eaton is one of 32 companies who have reached this milestone. So I'd say our longevity on the exchange and our resiliency is really a function of our ability to adapt to a changing world. But what does it mean constant over that time is the spirit of innovation that guides us and our commitment to all of our stakeholders, our employees, our customers, our shareholders, communities and all of society.

Now Eaton stands at the forefront and perhaps the most significant growth trends that we've seen in our lifetime, we're convinced that our best days are still ahead of us. And we've been busy planning for this moment. As we look at Eaton today, we position ourselves as our customers' trusted partner across power management spectrum and Slide five 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 application.

We're building a business that support our customers with a full range of end-to-end solutions. Beginning with deep domain expertise and specific applications and the ability to specify Electrical Solutions, we're now providing Intelligent Electrical Products, offering data as a surface, providing software solutions, doing installation and commissioning and providing aftermarket services. Our goal 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 and the 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.

And as the electrification of everything continues, the need for Eaton's technology and solutions will certainly continue to grow. And the primary source of this growth is coming from the mega trends that we've discussed. And in addition to electrification, we're benefitting from energy transition from digitalization and the re-industrialization of the US and European market. And we're seeing record capital spending levels.

And as you know, this capital is being supported by an unprecedented level of infrastructure spending by governments around the world. And while early, we're tracking a large number of infrastructure related projects. For example, in our Electrical Americas business, we've already seen over $1 billion of projects and have won roughly $450 million of order. And as this chart reflects, we're also at the beginning of a strong Aerospace growth cycle and seeing rapid adoption of electric vehicle. Collectively, these trends position the company for a strong growth for the foreseeable future.

Next, on Page seven of the presentation, we provide an example of how reindustrialization is creating a record number of mega projects and we define a major project as a project with more than $1 billion of capital. Since 2021, announced, non-residential mega projects have a cumulative value of almost $600 billion, at least 3 times historical run rate of non-residential projects. And this is North America only. $600 billion announced over the last nine quarters, $400 billion more than the historical run rate. These projects are certainly 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 is billions more in the planning stages, which will certainly sustain our growth for years to come.

On Slide eight, we take you from the $400 billion announced mega projects, what it means for the Electrical industry. We estimate that the electrical content on these projects is in a range of 3% to 5% of the total project value. This suggest $12 billion to $20 billion of incremental electrical revenue. Keep in mind, there is certainly a wide range of electrical content on various projects and our exposure is tied more closely to building infrastructure, but assuming these projects get plan, design and built over the next five to seven years, they will expand the Electrical market by some $2 billion to $4 billion a year. And that's just from what been already announced in mega projects, in that we expect more large and small projects to come.

Let's say, I say these projects are a good example of how megatrends are playing out and creating a very different growth outlook for the Electrical industry and one we think will run for decades or more. Another helpful proof point is represented on Slide nine where you can see how our negotiation pipeline has grown. As you can see, our negotiation pipeline has doubled from what we've seen historically.

In 2022, we saw nearly $5 billion of projects in our negotiations pipeline in Electrical Americas alone. And similar to mega projects, we're seeing broad strength in manufacturing and datacenter, industrial and utility market. This large step-up negotiations is further supported, our expectations further supports our expectations for strong markets and faster organic growth as we go forward.

And just one additional proof point is noted on Page 10. Here we show a few examples of how these projects are translating into specific orders. As we reported, our Electrical orders have been at record levels for two years now. So what we're demonstrating here is how these mega projects are translating directly into large wins for our Electrical business. For example, we've won $180 million of orders to provide power management solutions for two new EV plant in North America. Specifically, 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.

So overall, we're seeing record project announcements, record negotiations, a record set of orders that has led to record backlogs. And keep in mind, the revenue impact is mostly in front of us.

Moving to Page 11, we're also benefiting from megatrends in Aerospace and Vehicle. We're at the beginning of an Aerospace growth cycle in both commercial and defense market. Specifically, commercial OEM build rates are expected to grow in the mid-teens over the next several years and our commercial aftermarket should also grow by double-digits as global revenue passenger kilometers continue to recover to pre pandemic levels and beyond. We've also noted the significant step-up in defense orders and expect to see a significant lift in defense revenues beginning in 2024.

As a point of reference, our defense orders have more than doubled from 2019 levels. And in recent years, we've won increased content on both commercial and defense platforms. In vehicle, 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 re-looking our forecast for our eMobility segment.

And on page 12, we highlight 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 is a good example of how digitalization, software and electrification are beginning to benefit our Aerospace business. And as Tom will report shortly, we're seeing more than 30% growth in our defense and commercial aftermarket orders.

And in eMobility, we continue to realize significant wins. The most significant of which are coming from our power distribution product-line within our eMobility business. You'll recall, this is where we're able to leverage our broader electrical business and our unique breakthrough technology. Our latest set of wins comes from a leading European automotive OEM and will generate a $100 million a year a mature year revenues. So like Electrical, our industrial businesses are delivering significant wins type of long-term megatrends that will support faster growth. When you combine the businesses, we're confident that our market should grow at more than 2x historical rate. And as we stated, we're in the early innings. These trends are expected to deliver outside growth for years to come.

With that, I'll turn it over to Tom to walk us through Q1 financial results and updated guidance.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

Thanks, Craig. On Page 13, I'll start by providing a summary of our strong Q1 result. For the third consecutive quarter, we generated organic growth of 15%. Revenue was up 13%, with the organic growth reduced by 2 percentage points of 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, all-in the strong organic growth and margins enabled us to report our first quarter record adjusted EPS.

Our higher growth not only demonstrates the megatrends, but also the importance of prioritizing our customers by carrying higher levels of inventory when supply chains were challenged. Lastly, our free cash flow of $209 million was nearly $300 million above prior year and exceeded our expectation. 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 have set Q1 record 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, there was broad based growth in all end-market with especially robust growth in commercial and institutional utility and datacenter market. Specifically, we posted 25% organic growth in our datacenter revenues in Q1. So we continue to see very strong growth in this important market. Utility and commercial and institutional were up more than 30%. It's also worth noting that we posted strong revenue growth of 17% in our Residential business. The two-year stack is over 40% growth. We're seeing strength in multifamily homes, completion of single-family homes and process and increased electrical content per home, which are more than offsetting weakness in new single-family start.

Operating margin of 22.9% was up 380 basis-points versus prior year, benefiting from higher volumes. Incremental margins were very strong at more than 40%. We continue to manage price effectively to more than offset inflationary pressure. 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 datacenter, distributed IT, utility and industrial market.

On a quarter-over-quarter sequential basis, orders grew 19%. We're also continuing to build backlog. Backlog was up 51% versus prior year and up 9% sequentially. In addition to the robust trends in orders and backlog, our major project negotiations pipeline in Q1 was up more than 20% versus prior year and nearly 20% sequentially from especially strong growth in datacenter, water wastewater and transportation market. 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%, which was partially offset by headwinds from foreign-exchange and a divestiture. Organic growth was driven by strength in utility, datacenter and distributed IT market. Our datacenter revenues for Electrical Global increased 32% in the quarter. Utility was up 25% and distributed IT up 20%. Operating margin of 18.3% was down compared to prior year, primarily from 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 datacenter, commercial and institutional and utility market. 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 Electric Co. This is a Chinese based business with approximately $100 million of revenues, which manufactures power distribution and sub-transmission transformers and will accelerate Eaton's growth in renewable energy, datacenter, utility and industrial market. This is Eaton's fourth JV in China in the last two years, allowing 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%, which was a 180 basis points of year-over-year margin improvement. Orders grew 13% on a rolling 12 month basis, with sequential growth in the quarter of nearly 20%, compared roughly compared to roughly flat sequential order growth in the six years prior to the pandemic. Backlog grew 39% in the quarter and 8% sequentially. On a rolling 12 month basis, our book-to-bill for our Electrical sector remains very strong at above 1.2, it 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 record for sales and operating profit. Organic growth was 13% with a 1 percentage point headwind from foreign exchange. Growth was primarily driven by strength in commercial aftermarket, up more than 30% and commercial OEM, up more than 25%. Operating margin was 22.5%, which was 40 basis-points 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-market, including continued outgrowth in defense OEM order. Similar to the second half of the year, we continue to see 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%.

On a rolling 12 month basis, 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 up 21% in Q4.

Moving onto our Vehicle segment on Page 17. In Q1, revenue was up 10%, with 11% organic growth and 1 percentage point of unfavorable FX. We saw particular strong growth in both the Americas and our EMEA market. Operating margins came in at 14.5% with the unfavorability to prior year, primarily due to manufacturing inefficiencies, partially offset by higher sales volume and price cost. We continue to make progress towards securing more sustainable technology wins, which most recently includes multiple new programs for our ePowertrain solution.

On page 18, we show results for our eMobility business. We generated strong growth in the quarter, revenue was up 17%, including 18% from organic growth. Margin was down 30 basis-points versus prior year, driven by higher manufacturing start-up costs associated with new electric vehicle program. We remain very encouraged by the growth prospects of the eMobility segment. We continue to leverage 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, with many of these programs ramping-up in 2023 and 2024. This strong momentum includes additional recent wins with Breaktor including our next-generation battery platforms, with a large European OEM.

Next on page 19, we show historical backlog chart for the Electrical sector and Aerospace segment. We think it's important to illustrate how backlog has grown over-time. Our record backlog was roughly $12 billion to end 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 going-forward.

On the next page, we show our fiscal year organic growth and operating margin guidance. We are raising our organic growth guidance for 2023. We continue to have 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%, up 300 basis-points from our prior 8% to 10% guide. We're also raising Electrical Global 200 basis-points to 6% to 8% from 4% to 6%. And we are increasing Aerospace 200 basis-points to 10% to 12% from 8% to 10%.

In total, we're increasing 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%, which reflects the continued strong momentum that we have in this business.

Overall, we are reaffirming our total Eaton margin guidance range of 20.7% to 21.1%. As a reminder, this is 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. This is primarily 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 have the balance 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, including 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%, segment margins of between 20.5% and 20.9%, representing 60 basis points growth at the midpoint versus prior year. And adjusted EPS in the range of $2.04 to $2.14, a 12% increase versus prior year at the midpoint.

Now, I'll hand it back to Craig to wrap-up the presentation.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thanks, Tom. Now turning to Page 22, as we continue to track our end-markets, we want to provide a slightly revised look at our assumptions for the year. Once again, we do expect a mild recession in 2023, we've built that into our base-case assumptions. But with healthy demand and strong secular growth trends, we continue to expect growth in almost all of our end-market. And we raised our growth assumption for the utility market from solid growth to strong double-digit growth.

Here, energy transition and electrification continue to gain momentum. And we've increased our residential market from declining to flat. So while we recognize the slowdown in US single-family housing market, the combination of resilient renovation market, pricing momentum and strong backlog now supports an upward revision. And as Tom noted, we posted a 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 non-residential construction market, we have a robust negotiation pipeline, a growing backlog and strong orders. Datacenters, utility, industrial, commercial institution continue to perform extremely well. And I know that most of you have drawn reference to the declining PMI data, but I point out that our market and revenue growth are much more aligned with capital spending where we continue to see strong momentum. As a result, we do not expect any of our end-markets to decline in 2023 and most are expected to see healthy levels of growth.

Let me close on Page 23 with just a few summary comment. Once again, we delivered a strong quarter and set a handful of Q1 record. We delivered 15% organic growth and at record backlogs. While Electric orders are experiencing some expected normalization as supply chains continue to improve, the secular growth trends and strong execution on our backlog support another strong year of growth. Having exceeded our Q1 forecast and continued secular tailwinds, we're raising our guidance for the year.

Despite macro uncertainty and markets -- despite macro uncertainties, our markets are performing well and we're improving our internal execution. And as I highlighted, we're seeing more evidence that megatrends are accelerating. And we now think our end-markets will grow at more than 2x historical growth rate. These market forces are just beginning to show-up in revenue and will position the company for strong growth for the decade to come. I'll stop here and open it up for any questions you may have.

[Yan Jin, Senior Vice President of Investor Relations at Eaton]

Hey, thanks, Craig. For the Q&A today, please limit your opportunity just 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.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question is from the line of Joe Ritchie from Goldman Sachs. Please go ahead.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

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

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Good morning, Joe. Thank you.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

Let me just kind of start on the Electrical Americas margins. Clearly a standout this quarter, I think your highest quarter, highest first-quarter ever. As you think about kind of like the incremental margins going forward, it looks like you posted about a 40% incremental in the first quarter. How should we be thinking about the rest of the year? Are there any items that potentially reverse as you progress or do you expect incremental to be as strong throughout the year?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

We appreciate the recognition, Joe and our team in the Americas is just doing an outstanding job of executing. And as we talked about last year, we had a fairly sizable inefficiencies in our manufacturing operations as we were dealing with a number of supply-chain related disruptions. And so, those got clearly better into the first quarter and we would expect that as we go forward, while the incrementals for the company, we're still calling the company in and around 30%. We do expect our Americas business to perform better than that as we continue to see improvements in supply-chain.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

Yeah and the only thing I would throw on top of that, Joe, is there to your specific question, there were no unusual items in the first quarter driving the Americas margin.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

Got it, that's super helpful. And look, Craig, you outlined a lot of reasons to be excited about the growth dynamics for the company going forward. I saw you took up the utilities expectation for the year. I'm curious, are you starting to see some of the money loosen from the Jobs Act, particularly on the grid side or what's kind of driving your increased expectations on utilities growth for the year?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, I mean, this is something that had been long anticipated quite frankly, Joe by us as we think about all of these megatrends of whether it's electrification of the economy or energy transition, we knew at some point the utility market would have to start to make the kinds of investments that are going to be needed to support the electrification of the economy. As I mentioned, I think on the last earnings call, one of the longest lead-time pieces of equipment that you could order today in the electrical industry is a transformer and in many cases lead times are 12 months or beyond. And so we continue to see the Utilities making investments in their distribution infrastructure, they really support this energy transition that's taking place, the electrification of the economy.

And so, yeah, we think the utility market is going to be a really strong growth market for some years to come as they deal with needed investment and so. No question, as we began the year, we were little bit conservative in terms of what the expectation is, but it's coming through as you heard from Tom and some of the orders growth. The orders growth are quite significant now. And we think that's going to go on much again for some years to come.

[Joe Ritchie, Analyst at The Goldman Sachs Group]

Thank you.

[Operator]

Thank you. The next question is from Josh Pokrzywinski from Morgan Stanley. Please go ahead.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Hi, good morning, guys.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Hey, Josh.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

So, good 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 maybe labor with the either and your plans or maybe on the installer side or somewhere else and some of these bigger project might still be a limiting factor. Craig, I guess if you just sort of take a step-back, notwithstanding the current backlog, demand is really good, all those sort of things. Is there sort of a cap on how fast the industry can grow thinking about kind of the totality of the supply-chain, including that labor pool at the contractor level?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

No, I appreciate the question, Josh, now certainly one of the things that we're spending a lot of time trying to sort through right now. I mean, clearly, as I mentioned, supply chain on the material side from our suppliers has improved. We're not out-of-the woods by any means especially when you think about our electronic and semiconductor related components, they still are constrained, constraining our growth. But to your point, labor, is also a fairly significant constraint today.

And so one of the reasons why I think you've seen this big gap between orders and revenue is because once again our extended supply chains and labor availability have been constraints on the industry. I don't really have an answer to your direct question, in terms of, from an industry perspective, what's the limiter, because as you know, in these very complicated supply chains, it only takes one supplier, one player in the market to become the constraining factor. So it's a great question and one that we're trying to spend some time thinking through, but not one today that we have really clear answer to today in terms of what is the real upper boundary of the industry's ability to deliver given labor, given our extended supply chains and some of these material constraints.

I can tell you that today, things are getting better across-the-board and we're feeling much better about the growth outlook for our company and for the industry, just tons of positives that we talked about in our opening commentary, where we're seeing just significant broad-based strength and it's showing up in our backlog, is showing up in our order books and we would hope that we continue to post very strong revenue growth tied to these secular trends.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Got it, that's helpful. I understand it's not an easy question to answer just yet. Maybe shifting over to the pipeline for my follow-up, anything you can share in terms of the book out rate and maybe any churn that you see in that pipeline with things like financing supply chain, all these stimulus projects, some of which I would imagine are kind of mutually exclusive. Is there -- has there been any underlying volatility in that and how should we think about the lead-time between when something enters the pipeline and then maybe transmits in the backlog?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, appreciate the question and it's I mean there's a lot in the question that you asked very specific in terms of whether or not we're seeing a lot of churn. I'd say that overall economic activity, whether it's negotiations or orders or revenue everything is kind of doing significantly better than it has historically and certainly better than even quite frankly we anticipated when we put our plan together pretty or so in general, things are positive and we continue to with more negotiations, with more orders than we anticipated, obviously translating to more revenue. So I'd say that stimulus specifically, we talked about that a little bit in some of the opening commentary. We are starting to see stimulus have an impact. We are in the very early innings. If you think about that $600 million of projects, mega projects that we talked about, we think some 25% of that has already broken ground and started and many of that whether it's semiconductors or EV factories, battery factories are obviously being budgeters by some of the early infrastructure spending Act.

The Inflation Reduction Act, we really have not seen any impact from that yet. We're certainly seeing some impact from the semiconductor act. So yeah, a little bit of a mixed bag there, but I'd say most of the impact there continues to be out in front of us and lead times today on these projects. I would say we have better visibility today as these projects are bigger. They tend to run then over a multi year period. And so, we're feeling great about our visibility into the future because these very large projects that will be delivered over multiple years.

But I'd say...

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Hey, that's great color [Speech Overlap].

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

Yeah, the only part that I would amplify on that is, going back to our speaker remarks, our negotiation pipeline in the US. Quarter-over-quarter is up almost 25%, year-over-year up almost 25% and some of the big segments are up well over 30% growth. So, we're seeing very robust pipeline here.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Got it, appreciate it, guys.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thank you.

[Operator]

Thank you. The next question is from Scott Davis from Melius Research. Please go ahead.

[Scott Davis, Analyst at Melius Research]

Good morning, Craig and Tom and how are you?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Good.

[Scott Davis, Analyst at Melius Research]

Look, I want to just fixate on these big projects because this is so new, at least since I've been covering the space. Maybe couple of different angles to go out here. One is just the competitive dynamic, does it change when you get to this size meaning there's just a lot less people that can really, at least be trusted suppliers for these for the customer, when you're talking about orders and 10 plus million up to a $100 million kind of total bid stuff?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, you mean to, first of all, we'll acknowledge what you just said, Scott. These -- we've always had mega projects, but historically speaking, they've been relatively few and far between but I think it's really if you go back to this broader theme that we talked about around reindustrialization of manufacturing in the US for sure to a certain extent also in Europe. This is resulting in a really, I'd say a big surge of investing in the manufacturing sector in the US. And to the point that you raise, the bigger the project the more complex the project, the fewer companies who were able to essentially provide the services that our customers need. And so we think the competitive dynamic in this environment certainly favors companies like Eaton because of our large capable organization and quite frankly, in general, when you think about the more complex projects in general, they're also more electric intensive.

If you think about typical office building versus a typical semiconductor plant or an EV factory, the Electrical intensity or a datacenter of electrical intensity of these applications is much greater than typical strip mall or office building, which also helps support the underlying growth of the industry and companies like Eaton. So we think it's certainly -- that's an important trend that's going to drive growth for the industry, but should also allow our companies to grow at a faster rate.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

And I think it really gives another lens in terms of what these big projects focus not so much on the PMIs which we've all read historically and to Craig's point, this reindustrialization which is driven by these higher levels of capex, which we just don't see it slowing down.

[Scott Davis, Analyst at Melius Research]

Yeah, helpful and then just to backup a little bit, when you talk about selling less traditional products and I'd just say like software/remote monitoring, etc., is that a separate sales process? And in the facilities like this, is it the same, I mean, I'm struck, I'm kind of picturing the EPC from putting out a bid, but this is a little bit of a different animal. So how does the sales process really change and evolve with this type of unique product?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yes, you know, as we've spent some time with you over the years, talking about the way we think about the sale of software to sale of data and insights that for us, we really do think it's linked to the equipment. And so for us, for the most part, we're selling products that are digitally-enabled, they're digitally native. These products will have the ability to stream data. From that data, we create algorithms and that allow us to provide insights from the data coming off our products and we can either monetize that either in the form of data as a service or software.

So for us and it's not the same for every company in this space. We do link the sale of hardware, the places where we have deep domain knowledge and expertise to the sale of data and software and these services that we bundle together. So for us in the way we go-to-market, we do go together. We do go together through the same channel, through the same decision point. But that's not the same for every company in this space.

[Scott Davis, Analyst at Melius Research]

It's very helpful. Thank you. Best of luck, guys.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thanks, Scott.

[Operator]

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

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

Yeah, thanks, good morning, guys.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Good morning.

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

Just maybe starting with the second quarter outlook for organic growth, embedding a bit of a deceleration from the 15% in the first-quarter. Just can you talk a little bit about what's driving that deceleration from the segment perspective?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, I'd say that, there's always a bit of uncertainty, Nicole, as you can imagine when you look forward in terms of where you think the market is going to land. But one of the things that I'd say is, clearly, if you look at the balance between price and volume, as you move forward for the balance of the year, you get relatively smaller contributions from year-over-year price increase. And you get and obviously a pretty significant contribution from volume. And so you clearly have that dynamic that's taken place in the business throughout the year and inclusive of the second quarter.

So we'll see, I mean at this point, we're early days into Q2, we're off to a good start here. And so if we're able to convert and we continue to have some of the supply chain issues resolved, certainly we have a range of possibilities for the quarter, it could be better, but at this point, I'd say we're taking a prudent view based upon the fact that we're not out-of-the woods completely from supply-chain standpoint. And once again, I mentioned less price on a relative year-over-year basis than we certainly had in Q1.

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

Got it, that makes sense. Thanks, Craig. And then second question, just update on what you're seeing with respect to channel inventory and Electrical still pretty low relative to history or any movement there in the past quarter? Thank you.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, we think today channel inventories are actually in relatively good shape, obviously, with some spots where they would like more and I think when you look at channel inventory, I think probably the most important message like to leave with a group that really got to look at those inventories in the context of, the size of the backlog in the context of the orders. If you're looking backwards, you're going to draw one conclusion with respect to inventories. If you're looking-forward, you're going to draw a very different conclusion, it's one of the things that we try to express for our own company in our Q1 earnings call, where Tom laid out some of the ratios between inventory and backlog inventory in order to say that we are actually below where they've been historically based upon a forward view of our industry in our market.

And so, today, I'd just say inventories in general are generally speaking in good shape, our distributors today where I'm having phone calls and discussions with distributors, it's 90% of the time it's about I need more. Can you help me solve a particular issue I have today with our customer, because I don't have enough inventory. But in general, I'd say they're in fairly good shape. We did see a little bit of an issue in the fourth quarter in Europe where there was a little bit of destocking in Europe in the fourth quarter that since that time turned around, as Europe performed better than even we anticipated. So on balance, inventories are in good shape.

[Nicole DeBlase, Analyst at Deutsche Bank Aktiengesellschaft]

Thanks, I'll pass it on.

[Operator]

Thank you. And the next question is from the line of Steve Volkmann from Jefferies. Please go ahead.

[Steve Volkmann, Analyst at Jefferies Financial Group]

Great. Good morning, guys, thanks for fitting me in here. Craig, sort of a big-picture question, based on sort of what you were just saying, do you think these backlog levels are the new Eaton and we should think about Eaton operating with these types of backlog numbers going forward or do you think as the world sort of normalizes from supply chain or whatever that backlogs will come back down again?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

It's a great question and it's not one once again I could tell you that I have clarified a well thought through answer too specifically. We certainly as we think about for 2023, we don't anticipate reducing backlogs, we think we'll carry the same level of backlog throughout much of 2023. A lot of that will have to do with obviously lead times and whether or not we can actually get out in front of some of these ramps that are taking place in the industries in the markets that we serve. And can we get capacity online quick enough to reduce lead-time, so that we can go back to perhaps where we've been historically in terms of state at lead times to our customers. And so we're not there today and I do think a lot of it will be a function of how the markets unfold. It did not just in terms of the demand level because the demand level I think we know what is going to be strong, but how quickly can we and others put capacity in to support this higher-level of growth.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

And Steve where I would chime in on that, I think it's connected. Your question was backlog, but I think the new Eaton is definitely a higher-growth Eaton and as Craig said in his prepared remarks, we see the markets doubling over where they have been historically and that's a big thing, when you say doubling and that doesn't include our outgrowth that we think we can put on-top of that. And just some perspective if you look also at order growth that we've got going back to first quarter of 2019, there's such strong numbers Electrical Americas growing above 50% in terms of their quarterly orders, Electrical Global up over 25% and Aero up over 40%.

So just a volume of quarterly orders that we're seeing coming in and the continued building of the backlog. I think the new Eaton has a much higher-growth Eaton.

[Steve Volkmann, Analyst at Jefferies Financial Group]

Great, thank you for that. And then switching gears to Aerospace, we haven't talked about that one too much, but just kind of reading from the commentary on this call and others that I've heard you guys talk about, it feels like 2024 maybe like a real stair-step for your Aerospace business. I think you mentioned, Craig, that you have a bunch of military business that sort of ramps-up. I'm just curious if we should be thinking that there's kind of a bigger increase in revenue and margin in 2024 than might normally kind of be the year-to-year case?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

You know, I think it's certainly early for us to be putting our guidance for 2024, we'll have an opportunity to do that obviously later in the year, but your thesis is, is not off the mark. We do believe that certainly on the commercial side, that industry continues to ramp. Both Airbus and Boeing have already put out numbers in terms of increases in line rate for single is improving. Consumers are getting on planes, revenue passenger miles and kilometers continue to grow up I think some 60%. I think in Q1, Stelmach back to 2019 levels. So there's a long way to go, just to get back to 2019 on revenue passenger miles, which as you know drives the aftermarket for us.

And then on the military side, huge growth in orders this year that will begin -- be delivered most of them into 2024, so I think the set-up for our Aerospace business is certainly quite favorable right now and we'll certainly be in a position later in the year to give you an indication of how good we think it's going to be.

[Steve Volkmann, Analyst at Jefferies Financial Group]

Okay. Appreciate the color. Thanks.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thank you.

[Operator]

Thank you. And the next question is from Nigel Coe from Wolfe. Please go ahead.

[Nigel Coe, Analyst at Wolfe Research]

Thanks, good morning guys, thanks for the question.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Good morning.

[Nigel Coe, Analyst at Wolfe Research]

I do want to come back to these mega projects, but before we get into that quickly just global margins. You know you went through the investments, maybe just piggybacking on global what we've seen in some of the major end-markets and what gets better from a margin perspective to get to that 19.7% full-year?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, I'd say the big thing that gets better, they get to the higher margins is, one, you know you're getting to higher volumes and you're obviously delivering an incremental, but I'd say the single biggest one is, as we talked about last year, we had fairly significant manufacturing inefficiencies in the business last year. Given the supply chain challenges, lots of people standing around in factories, waiting for components that did show-up on-time and lots of expedited freight and logistics cost. And so we despite the fact that we had a record year of profitability in 2022, we had a year of record inefficiencies as well. And so if I had to put it on one, thing that's going to get better and is getting better, it's really of the elimination of many of these manufacturing inefficiencies that we experienced over the last 12 to 18 months or so.

[Nigel Coe, Analyst at Wolfe Research]

Okay. Volumes and more prices, makes sense. And then, at the risk of beating a dead horse, going back to the $600 billion of mega projects, in a very general sense, roughly what percentage of those have been bid on and awarded at this point, you said the majority haven't, but just wondering how that looks. And then what's your win rates, your market share in the US, North America is about 3%, how does your win rate compared to that bogey?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, as I said on these mega projects, these are all announced projects. And as I said, we said 25% of them are actually broken ground and are under-construction. And I'd say that our underlying win rate on these mega projects is essentially pretty much at or above the underlying market share for the company overall. So we've been very pleased with our success rate, as we talked about earlier, the bigger the project, the more complex the project, the higher the likelihood that we would be selected. And so the underlying win rate on these projects and keep in mind, these projects will be delivered over the next, let's say, three to seven years.

And so, Scott, they have a fairly long-tail on them, so I wouldn't necessarily expect to see big movements in the near-term based upon these projects, but the underlying win rate is good. And the underlying profitability is also good.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

The only thing I would amplify that for the given quarter, we were actually materially above our our share win rate. So yeah, we're doing well in terms of closing the deal.

[Nigel Coe, Analyst at Wolfe Research]

That's helpful, thanks guys.

[Operator]

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

[Julian Mitchell, Analyst at Barclays]

Thanks, good morning. Maybe just my first question would be around, a lot of electrical equipment manufacturers and sort of broader multi-industry ones have had very disproportionate price tailwinds to revenue in Q1 and a very, very substantive price-cost margin tailwind as well in Q1. So I just wondered sort of on those two points, how do you see the pace of normalization of those two tailwinds over the next 12 months?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, I'd say, as we look at our own business, Julian, I'd say that, price versus cost I mean while commodity costs are certainly down versus where they were a year-ago, commodity costs in many cases were actually up versus where they were in the fourth quarter. Take a look at steel, for example, commodity prices for steel, it's actually down about 25% from a year-ago, but it's actually up 25% from where it was in the fourth quarter.

So you have a mixed bag there and then also on the labor side, as you can imagine, we're seeing more labor inflation in the business today. And so in our own company, the price versus volume piece maybe it's not as significant it is for others, but I would say that as we look-forward and embedded in our guidance is mostly, it's around volume at normal incrementals and the elimination of a lot of the inefficiencies that are in the business, that's going to ultimately drive the growth in earnings and the growth in our margins more than it is this relationship between price and cost. As we said, you know from a strategic standpoint, we don't think prices either additive or subtracted from the underlying margin rates of the business and that's the way we manage the company.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

Yeah, what I would add, Julian, is we don't see ourselves losing business because of our price cost either. We're not giving feedback from our sales organization that we've got too much price. We just think we're managing effectively.

[Julian Mitchell, Analyst at Barclays]

That's helpful and then just my quick follow-up. Craig, you mentioned those inefficiencies just now and those were most apparent in the first quarter margins, Electrical global and I think vehicle. As we go through the year, we should see those margins kind of start to expand year-on-year. Just wondered, when does that happen for the two segments, is it as soon as the second quarter or it's more kind of the second half is when the margins expand in EG and Vehicle?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

We would expect to see progress, Julian, in each quarter, I mean and without a doubt, those were the two places where we had some challenges specifically, in inefficiencies and we would expect then in each of the subsequent quarters to see our businesses get sequentially better.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

For sure and not to get too much into the accounting, but what we're seeing from last year roll-through the P&L in the first quarter and muted the margins somewhat because it was coming off of the balance sheet. So it should be a tailwind going-forward.

[Julian Mitchell, Analyst at Barclays]

That's great. Thank you.

[Operator]

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

[Chris Snyder, Analyst at UBS Group]

Thank you, Craig, you mentioned a few times that the secular drivers coming through or pushing market growth to x above historical levels. Is this a 2023, 2024 comment or do you believe that 2x market growth rate is not the long-term view? And with that, could you just kind of quantify what the 2x uplift means for market growth from here? Thank you

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, there is no question, it is the long-term view. As you think about, most of these secular trends that we're talking about, whether it's energy transition the move to renewables, the electrification of the economy, whether it's cars or cooking appliances or equipment in your factories, the growth in digital and data and connectivity, reindustrialization, you think about all the investment that needs to go into the US market as an example to basically reinvest in manufacturing that had moved offshore and the stimulus dollars that are all supporting that.

So this is clearly our long-term view that we think our markets would grow at least 2x, not 2x, but at least 2x the historical growth rate. And so we think those growth rates for the markets are in the mid-single-digit range.

[Chris Snyder, Analyst at UBS Group]

Thank you. Appreciate that. And then if I want to -- just my follow-up on the US mega projects and just broader domestic investment. There has been a focus of the administration to drive higher domestic content on projects or infrastructure where the government is providing incentives. Does this have a material benefit for Eaton as a US manufacturer and could it allow the company to take higher share or even maybe just protect margins or support margins on these mega projects relative to prior cycles? Thank you.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah, what I would tell you is that where we get the most direct benefit is the fact that we tend to have higher market shares in the US. Most of the global, electrical companies that we compete with around the world, they also have fairly much localized much of what they do, but our US market share just tend to be higher. And so we'll get an unfair share projects as this reindustrialization in manufacturing takes place in the US market.

[Chris Snyder, Analyst at UBS Group]

Thank you.

[Operator]

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

[David Raso, Analyst at Evercore ISI]

So the growth rate exiting 2023, just for the framework of how you're laying out your organic sales growth, is it right to assume 15% first-quarter you're saying 11% for the second quarter and then the back half of the year is about 7%. So, let's call it 8% in the third and 6% in the fourth, is that just a decent general framework of how we're exiting 2023, that kind of 6% growth rate is the framework?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Yeah and I'd say that, at this point, we missed the front-end of your question, I think I got the gist of what you're asking that based upon the implied numbers in our guidance, order of magnitude, 7% growth rate would be the exit rate for the year and there's a lot of assumptions that we need to work through, Dave, to really understand what's the guidance is going to be for next year, what happens with supply-chain, how the year unfolds, but I don't -- given where we sit today, if you had to pick a number, that would not be a bad starting point if you're looking to make an assumption for what 2024 looks like. It wouldn't be a bad starting point.

Now keep in mind, as we talked about, there are certain of our markets that we think are going to really inflect very positively next year, Aerospace is one. And so early days, but if you had put an anchor down today as a starting point, it wouldn't be a bad place to start.

[David Raso, Analyst at Evercore ISI]

Yeah, I'm just trying to think through how much negativity you already have baked into Vehicle to end the year, particularly the truck part would probably be viewed positively, so I guess within vehicle, do we have truck down by the fourth quarter, Aerospace is 150% the size of a truck, so if Aero is up big in 2024, no problem, if truck is down even significantly [Speech Overlap].

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

We do have -- by time we get to the fourth quarter of this year, we think North America Class eight truck will be negative and that is baked into our assumptions.

[David Raso, Analyst at Evercore ISI]

That's helpful. Thank you so much.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thank you, David.

[Operator]

The next question is from Phil Buller from Berenberg. Please go ahead.

[Phil Buller, Analyst at Berenberg Bank]

Hi, good morning, thanks for fitting me in. Question for Craig, in relation to the portfolio. Obviously, this has come along quite a lot on your watch and you frame things with this, I guess grow the head and shrink or fix the tail analogy which is now allowing the group very nicely to these megatrends. But I'm wondering if there is much of a tail at this point, I don't get that sense from the prepared remarks. I that there's always room for some incremental sales here and there and you touched on some of the efficiencies, but what if anything would you be deprioritizing from here in terms of organic or inorganic investment. And I guess I'm asking in relation to the Vehicle segment or trucks or potentially there's something else that you'd call-out?

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

I'd say that, appreciate the acknowledgment. We have done a lot of work to position the portfolio to be where we are at this moment-in-time to really participate in these secular tailwinds and that's certainly paying-off. And to your point as well, we think we're never done with the portfolio. I mean, clearly, every year we go through a fairly comprehensive process with our Board of Directors, looking at every business in the portfolio and understanding whether we like it today, we're going to like it five years from now. And so that is a very well and Green process inside of our company as we look at the portfolio.

And so we will continue to do that, we'll continue to evaluate every piece of the portfolio not only the Vehicle businesses, we're going to evaluate everything today. We like where we are, we think there's a real synergistic element of what we do today across Aerospace across Vehicle as the whole world in the mobility space specifically continues to electrify. We're getting real benefits today by as we launched this new eMobility segment by being a legacy provider to all of the automotive OEMs around the world.

And so today, it works. We can't say that it's going to always work into the future, every business has got to earn the right to stay a part of the portfolio and that message is one that we deliver to everything, to every part of the company, not just the Vehicle team.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

Yeah, a tangible example of that is, if you go back to the prepared remarks in Electrical Global, we actually had a divestiture which impacted the results in the quarter, was a non-strategic business by our [Technical Issues] and it's a great example of power sector in the tail, Craig, Craig is constantly challenging the organization for that.

[Phil Buller, Analyst at Berenberg Bank]

That's great. Thank you. And just one very quick follow-up if I may, in terms of the defense business, obviously is a good spot to be in, in terms of the growth outlook, but there's a lot of investors where defense exposure is a bit of a herd or particularly sorry for some European investors. So I'm wondering how you're thinking about defense M&A from here and whether or not that's a higher a low priority for you going forward? Thanks.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

Yeah, strategically, you know, the way we think about the Aerospace businesses you're either in or out. And if you're going to be in Aerospace, you need to be in defense. It's an important part of national security for sure. So there is a -- we understand the ESG related concerns and we understand that many investors have this 5% threshold, today Defense is close to that number for Eaton, it's maybe 5% to 6% of our business overall. But I'd say that for us, we're really focusing on good businesses that make strategic sense for the company. And Aerospace is a platform within the company that we'd like to continue to grow.

It's a good business, it's got all the right characteristics and businesses that we like, it's high-margin, it's the highly-differentiated based upon technology, you've got great position platforms with a huge aftermarket that runs for decades. And so it has all the right set of characteristics for businesses that we like. So we will continue to prioritize first and foremost Electrical. As we've said in the past for a lot of reasons, including these secular tailwinds, but Aerospace from a priority standpoint is second only behind Electrical.

[Phil Buller, Analyst at Berenberg Bank]

That's great, thanks very much.

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thank you.

[Operator]

Thank you. And at this time there are no further questions in queue, please continue.

[Yan Jin, Senior Vice President of Investor Relations at Eaton]

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

[Craig Arnold, Chairman and Chief Executive Officer at Eaton]

Thank you.

[Tom Okray, Executive Vice President and Chief Financial Officer at Eaton]

Thank you.

[Operator]

[Operator Closing Remarks]