Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Second Quarter Earnings Conference Call. At this point, all the participants are in a listen-only mode. However, there will be an opportunity for your questions. [Operator Instructions] As a reminder, today's call is being recorded.

I'll turn the call now over to Yan Jin, Senior Vice President, Investor Relations. Mr. Jin, please go ahead..

Hey, good morning, guys. I'm Yan Jin, Eaton's Senior Vice President of Investor Relations. Thank you all for joining us for Eaton's Second Quarter 2020 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 includes the opening remarks by Craig highlighting the Company's performance in the second quarter. As we have done our past calls, we'll be taking questions at the end of Craig's comments. The price release and the presentation we'll go through today have been posted on our website at www.eaton.com.

This presentation including adjusted earnings per share, adjusted free cash flow, and other non-GAAP measures. There are [Indiscernible] in the Appendix. A webcast of this call is accessible on our website and will be available for replay.

I would like to remind you that our comments today will include statements related to the expected future results of the Company, and are therefore Forward-looking statements.

Our actual results may differ materially from our forecasted projection due to a wide range of risks and uncertainties that are described in our earnings release and presentation. With that, I will turn it over to Craig..

we expect Earnings to be about $0.72 to $1.82. Organic revenues to be up 11% to 13% and percentile margins to come in between 19% and 19.4%. And lastly, I will wrap up the presentation on page 14. You've heard us talk for the last few years about Eaton's transformation into an intelligent power management Company.

This strategy is built on a belief that there are a few growth trends. Electrification, Energy Transition, and Digitalization, that allow the Company to grow at a much faster rate than we have historically. And every day we get confirmations that we're on the right path.

We're seeing it in the growing importance of sustainability initiatives in society. We're seeing it in government spending. And we're certainly seeing it in our opportunities and in our win. We're pleased with the progress that we've made on the portfolio.

Each move has been consistent with our objectives of delivering a Company that has faster growth, higher margins, and better Earnings consistency. And you've seen our track record on margin expansion.

The Eaton business system is what provides the consistent approach to how we run the Company, how we execute, and how we expand margins and it's working. And this enables us to be on track to expand margins by 400-500 basis points over the 5-year planning period. And as you can see we are running ahead of plan.

And we're committed to our sustainability goals. They reflect the right thing to do for society, but just as importantly, sustainability is at the core of what's driving our growth. I'd also note that we published our 2020 sustainability report and our first task force on climate-related financial disclosure report at the end of June.

It encouraged those of you who have a special interest in sustainability to read it. I think they're extremely well done and reflect the direction the Company's headed in. Lastly, we continue to generate very attractive cash flows.

Over $9 billion through 2025, which will allow us to return cash to shareholders and also make investments to grow the Company. And as you can see, we're off to a very strong start in 2021. At the midpoint of our guidance, once again, revenue is expected to grow 12% and Earnings by 37%.

So with that, I will turn it back to Yan (ph) and open the line for questions..

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

Thank you. [Operator Instructions] And first on the line of Josh Pokrzywinski with Morgan Stanley, please go ahead..

Hi, good morning, guys..

Good morning, Josh..

So, Craig, I was wondering if you could talk a little bit about the composition in orders in Electrical. Clearly, pretty solid there, but hoping for a little bit more color on maybe the cyclical momentum versus the secular electrification.

So, I appreciate the examples on slide 3, but really trying to get how much of this is sort of illustrative versus something that you see really moving the needle here in the short to medium term?.

I'd say it's really a combination to your point, Josh, of both of those. The orders were really strong across all geographies and end markets with, as I mentioned, the highest growth coming in data centers and residential. And we talked about the secular growth trends that will be such an important part of the future of the Company.

We still believe strongly that we're just in the early innings of really seeing a material impact from some of these bigger secular growth trends that are going to drive, we think, the future of the organization. We're not seeing any benefits around government infrastructure spending yet.

And so, I'd say a lot of what you're seeing today, I just think is a reflection of the broader strength in many of our end markets, and certainly we always talk about data centers as the great example of the [indiscernible] consuming and processing and storing increasing amounts of data.

So, I think a lot of what you're seeing today is restocking because markets certainly have been strong in many of our end markets, and inventories were taken down pretty hard on the pandemic last year. And so, I'd like to say once again, broad-based strength.

We talked about the fact that there's been a lot of stuff written about what's going to happen with commercial construction. Commercial construction has come back very strongly, and we had outstanding orders as well as negotiations in the commercial and institutional side of the business as well.

So, it really has been a story of fairly broad-based strength in orders across almost every end market and every geography.

So, at this juncture, we think we're at the very front end of what should be a pretty exciting runway as we look forward as some of the longer cycle businesses we talked about whether that commercial construction, or oil and gas, or some of these other markets, large projects start to come back into the business.

We think this should go on for a while as well..

Got it. And then just on the incrementals, you guys are going to be in the low-to-mid 30 this year coming off of really great decremental margin control last year, and presumably some stranded costs for Hydraulics and I think pretty well-documented inflationary environment.

I mean, is the normalized range, once we kind of clear some of the noise out of that, still in this 30% to 35%, or can we go higher as maybe some of these headwinds normalize or dissipate?.

We think that 30% incremental for planning guideline still makes sense at this point, as you think about modeling the Company on a go-forward basis. Clearly, we're having to make some fairly sizable investments in the business right now as we deal with a revenue growth outlook that's more robust than what we've seen historically.

So, we'll be putting some investments in the business. We’re also obviously investing pretty heavily right now in electrification and places like e-mobility as well as in other aspects of the business, like in the Brightlayer platform that we're bringing online.

We think that that 30% incremental number is still a good planning guideline as you think about modeling the future of the organization. And at large, I think on the basis of the investments that we're going to be making in the business, that perhaps will hold back what could be an incremental story that would expand.

But given the investments that we think are important to make for the future growth of the Company, we think 30% makes a lot of sense..

Understood. Appreciate all the comments. Thanks..

Thank you..

And next question is from Andrew Obin with Bank of America. Please go ahead..

Yes, good morning..

Good morning, Andrew..

Yes.

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

Yeah. I appreciate your question on commercial construction. That's obviously been a point of a lot of debate in general. And so, as we talked about in Q2, our order growth of commercial structure was really in line with the rest of the business with more than 40% growth for the entire sector.

And with, quite frankly, particular strength in the global segment as well. And so, we continue to see positive signs in commercial construction markets, and we don't think there's any reason why there should be any let-up in those markets that we think about going to the second half of this year or into 2022.

Our negotiation pipelines, which as we talked about on prior calls proceeds in order obviously. And our negotiation pipeline for both light commercial as well as large commercial projects, including commercial buildings was up very strongly year-on-year and up actually very strongly, sequentially as well.

And so at this juncture, we're optimistic that commercial construction will come back and we think the second half of this year and into next year should post fairly strong growth..

Thank you, Craig. And just my follow-up question, this has been a strange recovery, but your industrial customers, do you see them thinking about CapEx differently? I think you did highlight before your high content in [Indiscernible] facilities, so that's one secular growth driver.

But what kind of longer-term conversations are you having? And do you think people are thinking differently about CapEx needs this cycle versus the prior decade? Thank you..

I think it's fair to say that on the industrial side of the house in general, really across many of our end markets, there’s probably been historically some underinvestment. So I think that on the one hand there is going to be some catch-up that needs to take place.

Then I think the big challenge that everybody is dealing with is fairly sizable labor shortages in many of the markets around the world, and so investments in industrial and automation and the like tends to be what follows.

And so, we think the industrial markets or another one of these markets that I think in the relatively early stages of recovery, there has been relative underinvestment in manufacturing over the last number of years, and so we think that market should do well into '22 and really quite frankly, beyond..

Thank you so much..

Next, we'll go to Scott Davis with Melius Research. Please go ahead..

Hi. Good morning, guys..

Good morning, Scott..

Craig, can you talk a little bit about where you guys -- what's your strategy in EV charging whether kind of content with being a sub-supplier into it or whether you want to perhaps take a bigger role there or what? I'll just leave it at that..

Yeah. Yeah. This is certainly very much at the core of our strategy for our electrical business, and Uday Yadav and the team spent some time during our Investor Day really taking you through strategically what we're trying to get done there. And it's one of the reasons why we made the acquisition of Green Motion.

You know, we acquired Green Motion, which is a European Company that does everything from the physical hardware of charging all the way through the charge port operating and billing systems, and so we think that e-charging whether that's at residential, commercial buildings, or really more on a grid-scale or in the bigger industrial applications, is going to be an important part of what we're trying to do inside of our Electrical business.

Those markets, as you've seen and you see it reflected in some of the infrastructure bills that are being proposed in the U.S., you see fairly sizable investments that are taking place in Europe and in Asia.

So we do think e-charging, both in the physical hardware as well as in the software will be an important part of what we're going to try to get done in our Electrical business. That's an exciting space that's going to grow dramatically and we'd expect to be a part of it..

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

It's tough to really pick a typical e-mobility Vehicle, but I will tell you that as we talked about once again in our investor day that the content opportunity for e-tech in an e-mobility application is a huge multiple of what we saw on our legacy business.

And whether that in some of the new electronic based inverters, converters, power distribution.

But I said it also, even in our legacy Vehicle business and that's what we're really highlighting this quarter that you think about this legacy business that we had and you say, what's going to happen to that business in the context of the world, transition to electric vehicle.

We say, there's a huge growth opportunity in gears, in differentials, hybrid transmissions for our legacy business as well. And so those opportunities for us and we laid out a goal of getting to $2 billion to $4 billion between now and 2030.

But the opportunity set is much larger in order of magnitude, 5, 10 times greater than it would be for our traditional Vehicle business where we're doing valve and valve actuation and some charging. So it's tough to pick a typical Vehicle. I can tell you where we have wins, what we have headwinds.

Once again, these wins and these opportunities are coming once again in multiples of 5x to 10x what we would have on an historical of Vehicle platform..

Good luck, Craig. Thank you..

Thank you..

Our next question's from Joe Ritchie with Goldman Sachs. Please go ahead..

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

Thanks, Joe. Appreciate it..

Craig, maybe just -- I know you talked about the price cost equation basically being neutral for the year, but I'm just curious like as it relates to Q2 and the rest of the year, like what did that look like in Q2 for you guys? And then is there any particular Quarter where we should expect any headwinds? Just any thoughts around like how far ahead you are of inflation at this point?.

Yeah, I appreciate the question, and we are obviously dealing with fairly sizable challenges in and around supply chain and probably no secret in and out of the call.

When we provided our Q2 earnings guidance at the end of Q1, we had an expectation around the amount of commodity inflation that we would see in the business and commodity prices, quite frankly, have only gone up. And in some cases fairly significantly since that time.

So we've naturally as an organization of had to continue to work to offset additional commodity Price inflation more than what we anticipated. And I really think about that whole thing, maybe even shifting a full quarter in terms of the pressure points that we expected to see in the business.

And so at this juncture, when we think about the year, we're calling the year neutral, we don't think it gets worse in terms of the impact in our Company and the balance between pricing costs but we think the year is neutral. And we think the pressure points in Q3 are going to be probably as great as what we expected in Q2.

As a result, quite frankly, we're seeing commodity prices continue to run. And once again, we're running to obviously catch up with that in terms of the things that we're doing around taking prices up in the market, as well as working on things to take costs out of the organization.

So neutral for the year, things have probably shifted according to the right, based upon the fact that commodity prices have continued to run..

Got it. That's helpful context and I guess maybe my quick follow-up question. One area that really surprised us to the upside this quarter with your aero margin.

I was wondering if you can maybe try to help parse out what really benefited Aero this quarter, and should we start thinking about 20+ like a baseline as we start to see the recovery in the commercial Aero business?.

Yeah. And I think, if you think about in simple terms, our team, when we were dealing with kind of this pretty dramatic downturn last year and setting an expectation that we would not see these markets come back to 2024.

The team, very proactively and aggressively put in a number of restructuring program to take out some of the fixed costs that we knew would be a challenge on a go-forward basis and so, I would really attribute it to the team being proactive, putting in the restructuring early in the downturn, and then really doing an effective job of running the business as well as managing costs.

In terms of the expectation going forward, yeah, I think it's reasonable to say that as this business improves, we approached 25% return on sales in our aerospace business back in 2019 prior to the downturn, and our goal is certainly to get back to those numbers.

But I do think something north of 20% is where really we'd expect this business to perform and certainly, as volume comes back to work our way back towards the 24% to 25% return on sales that we used to be at..

Makes sense. Thank you..

Next question is from Nigel Coe with Wolfe Research. Please go ahead..

Hey, Craig. Hey, this is Brandon Rig in for Nigel Coe. I just want to piggyback off of that Aero comment. Also not in the spotlight on the top-line, but certainly very strong performance on the margin. Maybe just some more color on the components of Aerospace.

Like how did commercial OE, commercial aftermarket defense perform in Q2? And maybe just a follow-up would be, what is the outlook for defense, has it changed at all since our last update? Thank you..

Yeah, I appreciate the question. And I'd say that our Aerospace business, probably is not too much of an outlier from what you've seen from others in the market. Clearly, the commercial side of the house continues to be under pretty significant pressure, while we're certainly seeing revenue passenger kilometers return.

Those markets are still running well below where they ran in 2019. We did see a little bit of an improvement in aftermarket in the quarter as that business certainly off dramatically last year, and so I'd say that the Commercial OE continues to be weak, commercial aftermarket still weak versus where we've been historically but improving.

And really on the military side of the house, I'd say pretty much no change. And we think about that business being kind of a low single-digit grower is our outlook for the military market. And we think that pretty much consistent with what we think the outlook is going to be over the near-term as well.

So a lot of the point again, the margin piece really, I'd say mostly a function of our team's ability to execute wasn't in any way driven by, let's say, a dramatic and mix shift to aftermarket business overall..

Our next question is from Jeff Sprague with Vertical Research, please go ahead?.

Thank you. Good morning, everyone..

Morning, Jeff..

Hey, good morning. Maybe just a question on backlog conversion and also just kind of the scramble going on in the channel. Craig, you mentioned, you did -- I think you saw some channel inventory rebuild out there.

We've heard a lot of mixed things from other companies on that, things like people would like to rebuild inventory but can't because there's not availability, et cetera, but maybe you could just give us a little bit of color on that dynamic and do you think we're somewhat caught up on inventory relative to where the demand is?.

The way I'd characterize it today as we think about going to channel checks with our distributor partners, I'd say on balance, in aggregate, inventory levels probably matched the outlook for the demand that we expect.

But then, there are certainly certain segments of the market where we are woefully short and good point, taken point would be what's happening today in the residential market. Currently in the residential markets in Electrical well sure of where we should be and our distributors have not been able to restock.

I think the fact that we're building fairly sizable backlog, is a reflection of the fact that some of these end markets would like to have more inventory than they are currently sitting on.

But in aggregate, I do think that Inventory is probably largely in line with our view and our outlook and attributes outlook for the market going forward other than in certainly of the sub segment of the market..

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

No, I think there's a combination. I just think, as we mentioned, there are these certain sub-segments of the market where clearly there's more demand in residential construction, as an example, then we have the ability to ship. So I think it's a combination of the two, but I think on aggregate, once again markets are good.

The underlying demand is good in most of these end markets and there's certainly no inventory buildup taking place to the channel. But I do think that the fact the backlog has grown to the extent that it has, once again a record backlog in both the Americas and global up some 40% plus in both segments.

I'd say is that mostly a function of the fact that the markets are rebounding quite nicely right now..

Right. And maybe just a follow-up, if I could, just on the you called out at the end of your remarks in your commentary on your deals capacity, things are heating up and obviously you guys have been super busy yourself.

Maybe you could just comment a little bit on the pipeline whether the organization can do more, is ready to do more, and what might be actionable or is there something else that's actionable before your end year?.

And I appreciate the comment that the team has been I'd say very successful at really bedding down a number of acquisitions that are very strategic, very attractive multiples we think as well. And it is to your point, I'd say the deal activity is certainly heated up and the pipeline today is probably about as full as it's been in some time.

And I'd say we do have capacity, depending upon which segment of the business you're talking about.

I'd say that one of the good things about being an organization that works across multiple businesses and industries is that -- and doing the deals, the size that we've done is that none of these deals are going to be so big that they could really consume the capacity of the entire Company.

And so, if you're talking about some of the things that we've done recently in Aerospace, they may be a little bit full on the fuel and motion side of the business but we have capacity may be on the other side, the same thing would be true in Electrical. We really haven't done very large deals in Electrical. We've done very strategic deals.

We've done deals that I think are outstanding in addition to the portfolio. But I'd say by and large, in our Electrical business, we have plenty of capacity organizationally to go out and find opportunities, and to bring them in and integrated them in.

And that will not be a bottleneck or limiter in terms of our ability to actually go out and transact. And we continue to say once from a priority standpoint, we continue to be focused on Electrical and Aerospace as the 2 places that will likely to deploy capital..

Great. Thank you..

Next, we'll go to Nicole Deblase with Deutsche Bank. Please go ahead..

Yeah, thanks. Good morning, guys..

Good morning, Nicole..

Can we just clarify a couple of things in the guidance? I guess, how much of the raise EPS came from the early close of Cobham and Hydraulics in for an extra Quarter? And then can you just also clarify, did you include one month of Hydraulics in the 3Q Guidance given that the deal closed in August or has that been removed from 3Q?.

We -- just maybe I'll work backwards. Certainly, we own Hydraulics for the month of August and so for that month, we did in fact include Hydraulics in the guide. And so that would add 4% [Indiscernible] Craig..

So if you look at the $0.63 [Indiscernible] increase. First of all, we flowed through the $0.22 fee. And within that $0.22 fee, we had about $0.07 that's related to M&A timing, Hydraulics, $0.03 Carbon's. And then we had another $0.13 which was $0.04 for Hydraulics and $0.09 Carbones.

So, in total, M&A timing was $0.20 of the $0.35, which is $0.22 flow through in the $0.13 for the remaining timing. And then the remaining $0.28 is related to operational performance..

Okay. That's really clear. Thanks for that verification. And then I guess, can we just talk a little bit about what you guys are seeing in China? Obviously, a lot of noise with what's going on from a data perspective and questions about stimulus from here.

But have you seen any slowing in your business?.

You know, I'd say no. I mean, our business in China grew quite strongly. We reported as a part of our Electrical Global segment, but I would say that that underlying strength that you saw in our Electrical Global segment is also reflective of what we've seen in our chain a business as well.

The market, we'll see what the future holds, but the market today has performed extremely well and our team has performed extremely well in addition to that. One of the things for us, we've always believed in manufacturing and being local in local markets. And it's one of the reasons why we've made these investments in these joint ventures.

Two of them that we've done so far in China to really expand our access to the market. These huge tier-2 and tier-3 markets in China that we've historically not participated in.

These 2 JVs, I tell you, really create an exciting opportunity for our Company as we move forward to really participate in the largest segments of that market with really strong partners in China. So, for us, I'd say market is important.

Perhaps, even more important than the market is really our opportunity to penetrate the market and grow market share on the basis of really now participating in these very large segments of the market that historically had been closed to us..

Thanks, Craig, I'll pass it on..

Next. We'll go to David Raso (ph) with Evercore ISI (ph). Please go ahead..

Hi. Thanks for the time. On the Electrical focus for M&A. Can you help us think through where the areas of focus is moving forward? Is it more geographic? Is it [Indiscernible] ideally a technology that can cross geography and verticals, but just give us a stance of where you see the portfolio from here still having opportunities and maybe some holes.

And then I just wanted to follow up on the strong doubling of organic sales growth guide for Electrical Global. Maybe a little more color on what's accelerating so much from your thoughts 3 months ago and maybe update us if you could on just currently the geographic sales mix of Electrical Global..

Yeah. So on the M&A focused question specifically, I'd say that if you just think about it strategically, we've laid out, as a Company, these three major secular growth trends over Electrification, energy transition, digitalization.

That will be kind of a good kind of framework when you think about where we are likely to deploy M&A dollars in terms of following these strategic growth factors that we think are important to the Company.

When you think about acquiring a Company like Green Motion, you think about acquiring a Company like Tripp Lite, which is really in datacenters, in 5G expansion.

Especially as you think about what we've done, they ought to be really thought about it as an expressions of the strategy in the areas that we've said that we'd like to really take the future of the Company.

In addition to that, if you think about it geographically, we have huge opportunities, so outside of the America's market to really round out the business portfolio and participate, as we mentioned, like in China and some of these very large market that have been historically close to us. We have those kinds of opportunities in Asia sell.

We have some of those opportunities that still remains in Europe. So there will be some geographic place where we will actually do things to augment, supplement the portfolio as a way of participating in markets that we have historically essentially not played in as fully as we do, let's say, in the North America market.

I think you're going to find that it is a pretty wide set of opportunities that we have to continue to look at ways of growing the Company through M&A in our Electrical business based upon these broader strategic platforms as well as the geographic expansion and filling some of these product gaps and some of these other emerging markets of the world.

The other question that you had with respect to the Global business and why the increase in the guide. I say one, you just think about on a relative basis, the Global markets fell more than the America's business. And so the com is a little easier there.

But also in some of these global markets with specifically in Europe, for example, they are now coming back. The reopening of these markets is also coming into the business at a time when once again, the markets are ramping. And so the same kind of reopening phenomenon that took place in the U.S.

off of a higher base because they didn't close as much, is now starting to take place in markets across Europe. And as I said, it's every place. That means it's not just in these historical hot segments of Datacenters and residential but we're seeing it in commercial and institutional, we're seeing it in Industrial, we're seeing it in utility.

There really is a broad set of end markets that are really responding nicely in Europe and quite frankly in Asia as well as the economies continued open underlying growth in Asia and underlying growth in the European pieces that make up the Global business, those markets I said both performed very well.

This is the one segment that if you recall that we report inside a Global that tend to be, will be more of a later cycle play will be what's happening in [Indiscernible] business, which is the place where we really get most of our oil and gas exposure.

That market is starting to see a number of [Indiscernible] though certainly not back to levels that it was at historically.

But we think second half of this year and into '22, that market also starts to come back and should help continue to drive growth in the Global segment and so it's really a broad range of these end markets, most of which that are doing well right now..

Obviously, it's pretty broad, but maybe you can help us with just some numbers update as geographically the current mix. And I assume Crouse-Hinds rate, that's within the industrial piece within Electrical Global.

If you can remind us roughly [Indiscernible] nowadays?.

Yes. Maybe we can take a normal offline, David, where you can talk to Yan Jin about what we've given historically in terms of that business. Just want to make sure we were consistent with what we provided historically in terms of splitting out the global segment. And so we don't end up with a selected disclosure issue So..

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

Thank you..

Next we go to John Walsh with Credit Suisse. Please go ahead..

Hi. Good morning, everyone..

Good morning..

Wanted to build upon a couple of earlier questions.

I appreciate the price cost commentary for the balance of the year, but just wondering as you look across your portfolio and as we think about incremental next year, where you think price will be most sticky, and maybe you could just remind us the historical experience coming off of the last deflationary cycle I think under the prior segment's products held a little bit more price in the system's business, but any color there would be helpful..

I appreciate the question on price cost and it's many ways we're all working through this period of unprecedented commodity inflation in learning together in terms of where it's actually going to land.

As I said earlier, we anticipated that we would have seen the worst of it in Q2, and it looks like a lot of those pressure points have been pushed out to Q3 into the second half of the year.

And it's once again, I think as a general rule, we talked about being neutral between pricing costs and I don't think there's any reason to suggest that that won't be the case, that price costs will continue to be neutral.

It does, as you can imagine, put a little pressure on our incremental as well, as you don't typically get a normal incremental on commodity inflation. And so in terms of how it impacts incremental, it obviously puts downward pressure on incremental.

But having said that, we still think 30% from a planning perspective is the right way to think about incremental for the Company. On price stickiness, I'd say that typically speaking, if you're in an inflationary environment and commodity costs are up, the price is going to be sticky.

And so in this kind of environment, it's never easy to get price, but I'd say in this kind of environment, it's very understandable that prices are going to go up, it's very well-publicized, everybody's dealing with the same challenges, and so I would imagine that price will be very, very sticky in this environment given the supply shortages across the board, the fact that markets are doing well, really today like they're almost across the board, and so it's never easy, but this is probably one of the easiest times, at least in my professional career to actually pass on price because essentially the environmental factors are essentially warranting it.

We're seeing labor inflation as well, and so all of these things bode well for at least the price environment and the adjusting prices will likely be sticking through this part of the cycle for sometime to come..

Great. And maybe just a follow-up to that. A lot of color given about geographies in the last question but, we've seen very strong organic growth from a lot of your competitors as well.

Was just curious if you're noticing any discernable share shifts that you would call out, or if it's more kind of the strength of the market or do you think there might be some pockets where you are gaining share? Thank you..

Yes. I'd say that if you think about it today, I'd say largely we think shares are pretty much holding across-the-board.

It's always going to be quarterly timing, depending upon what companies do and various end markets and segments or the geographic mix, but I would suggest to you that probably at this point in time, given the fact that so many of us are dealing with supply chain challenges and there's probably more business out there than any of us can handle.

And we are building pretty large backlog s and probably other companies are, as well. My speculation would be that this is probably not large share changes taking place at this point in the market. So we're probably holding market share and it turned into in terms of our core businesses.

And we would imagine that really until you get to the point where you actually have enough capacity to serve the underlying demand overall, and you stop building backlog that share shift it's probably not going to be something that's a big part of the picture, at least in the near-term..

Great. Thanks for taking the questions..

Next, we'll go to Julian Mitchell with Barclays. Please go ahead..

Hi. Good morning. I just wanted to ask about cash flow.

Is there anything that's been touched on yet? I saw the free cash flow guide went up, but if I look at the year's numbers in aggregate, it looks like you're guiding for about an 11% free cash flow margin this year and the adjusted sort of conversion from net income is maybe in the mid or low 80% range.

So, just wondering if you could sort of remind us what are some of those major headwinds on the free cash flow margin and/or conversion at present and if there are any specific items, maybe CapEx coming down next year or working capital headwinds easing when we're thinking about cash flow margins and conversion into 2022?.

Julian, if you, if you look at last year, we finished the year at 2.6 billion in free cash flow, which was considered a strong year. This year we characterize it as a transitory year.

Having said that, we're going to spend roughly 200 million more in FX this year which takes us down to before, we've compares to the midpoint of our guide of 2.2 billion. I'd put that additional 200 million in investments in working capital and given the environment that we're in.

But probably as you think about '22 and beyond, I mean, being above 100% on free cash flow conversion is certainly where you'd expect the Company to perform. And as Tom (ph) mentioned, this is really a transition year do the inventory build and increase in restructuring spending, increase also in CapEx.

I think it's also important to note on an operating cash flow basis year-to-date, we're a little bit ahead of last year, so we feel good about our cash flow performance this year..

Thanks for clarifying. And then on the topline side, just wanted to try and understand what you're seeing in the utility markets at the moment. There is a lot of chatter out there any time there's a stall more something about grid hardening and all the rest of it.

I just wondered if you could give us an update on the utility piece and how the utility market growth looks this year relative to your overall sort of Electrical revenue growth guidance, which I think sort of average out globally in the low teens type range. Thank you..

I appreciate the question on the utility market because as we've said before, this is a very different market segment in terms of what it represents for Eaton and what it represents for growth than it has historically.

And historically, a market that's really been kind of a very low single-digit growth market, we think as we look into the future for the utility market, we think it becomes one of the faster growing segments inside of the Company, and so maybe that growth is mid-single-digits in the near term and as you think about some of the big investments that have to go into energy transition first, which is obviously a really big one, and then that obviously involve things like grid hardening and grid resiliency due to climate change, and some of the weather-related events that we've seen.

And so we like the utility market and we think that that market will certainly be a growth market into the future. I will say that we've not yet seen, once again, these big inflection points that we would expect to see in the utility market. We think most of that growth is still out in front of us.

As those markets, as you know, they tend to move more slowly. We have over the last number of years seeing more investments going into the distribution side of utility, which certainly plays to our strength. But the bigger plays that we think around grid harrowing, good resilience, energy transition.

The things that utilities are going to have to make fairly sizable investments in. We think most of that growth is set out in front of us..

Great. Thank you..

Our final question will be from Ann Duignan with JP Morgan. Please go ahead..

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

Thank you, and I'll leave it there..

Yes, thanks and I appreciate the question. And is it it's obviously one of the most exciting segments that we're in. And certainly the acquisition of a Company like Tripp Lite just strengthens our hand there in terms of what data centers represents for the Company overall.

And I'd say it's the one market I'd say that we have very clearly for some time now seen global strength, which you see it in every region of the world, and we see it across, really, almost every segment of datacenters, whether that's the on-prem, whether it's the call to operators, whether it's the hyperscale data center market, just continues to surprise to the upside.

And as we've said before, that those markets that can be lumpy. There could be a quarter or two, or even a year or so where a particular hyperscale player will take the time to consolidate and not expand. And so the business can be lumpy at least specifically in hyperscale.

But the projections for that market and what we've experienced is that it continues to surprise on the upside with respect to growth. I think this year we're talking about high-teens growth in the data center market. And I said, as we've looked at that market, we've looked at our own forecast for that market.

It's a big piece of what's performing better than what we originally anticipated when we put our guidance out for the year. And once again, this whole idea of more data, more storage, more compute, the world's more connected, and so, we think if there is a trend that's going to continue for a very long time into the future..

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

Alright. Thank you..

Thank you..

Ladies and gentlemen. That does conclude your conference for today. Thank you for your participation. You may now disconnect..