[Abrupt Start] Conference Call. [Operator Instructions] And as a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host, Yan Jin, Senior Vice President of Investor Relations. Please go ahead..

Good morning. Thank you all for joining us for Eaton’s third quarter 2023 earnings call. With me today are Craig Arnold, our Chairman and CEO; and Tom Okray, Executive Vice President and Chief Financial Officer.

Our agenda today includes the opening remarks by Craig, then he will turn it over to Tom, who will highlight the company’s performance in the third quarter. As we have done in our past calls, we will 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 earnings per share, adjusted free cash flow and other non-GAAP measures that are reconciled in the appendix. A webcast of this call is accessible on our website and will be available for replay.

I would like to remind you that our commentary today will be including 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 the presentation. With that, I will turn it over to Craig..

Okay. Thanks, Yan. We are pleased to report our Q3 results in another record quarter. Our team continued to deliver on our commitments, supported by strong markets and good execution. So, let me begin with some of the highlights on Page 3.

As we have shared for some time now, megatrends, including reindustrialization, energy transition, electrification and digitalization are continuing to expand our markets, revenues, orders and negotiations pipeline as these trends are once again evident in our results in the quarter, especially in our Electrical Americas business.

We posted another quarter of record financial results with strong revenue, margins, earnings and cash flow growth. While our markets continue to be strong, we’re also continuing to improve on our overall effectiveness, which drove our record operating margins, and we’re once again raising our earnings outlook.

We’re raising our ‘23 guidance for margins, adjusted EPS and cash flow. Our EPS growth for 2023 at the midpoint of our guidance is now 19%. I’d also like to highlight our growing backlog, which was up 15% in Electrical and 22% in Aerospace. And we continue to have a strong book-to-bill ratio of 1.1 for Electrical and 1.2 for Aerospace.

Lastly, we recorded record third quarter operating cash flow of $1.1 billion, up 18% and free cash flow margins of 16%. Tom will share additional details. But overall, as you can tell, we’re pleased with the results and well positioned to close out a record year. Moving to Slide 4.

In the last quarter, we shared a framework for how we think about our key market drivers for the company. The chart notes six megatrends that are driving growth capital investments and how they intersect with various businesses within Eaton.

As you can see, we’re uniquely positioned in most of our businesses and expect to see accelerated growth opportunities. It’s our intention to cover each of these markets and megatrends during our earnings call and to keep you appraised of progress.

In our Q2 earnings call, we provided a summary of progress on infrastructure spending, reindustrialization and the utility market in Electrical and our Aerospace business.

Today, we’ll spend a few minutes on how reindustrialization continues to drive a record number of mega projects in North America and how Eaton is positioned to win in the fast-growing data center market.

We received an extensive number of questions on each of these topics and hope our updates are helpful as you think about the growth outlook for the company. So let’s begin with Slide 5 in the presentation. We’ve shared this chart previously, and the data is a good proxy for reindustrialization and what we’re seeing inside of many of our markets.

You’ll recall this chart summarizes the number of mega projects that have been announced since January of 2021, and a mega project is a project with an announced value of $1 billion or more. Note that this is the North America data, but we’re seeing a similar trend in Europe, although the dollar amounts are not as large. Three key points to note here.

One, at $860 billion, this number is 3x the normal rate, which translates directly to future opportunities for electrical markets. As a reminder, the electrical content on these projects range from 3% to 5%. Two, this number continues to grow at a faster rate.

Announced mega projects grew between 25 – grew 25% between Q3 and Q2, and Q2 was up 20% from Q1. This will not go on forever, but there continues to be strong momentum for industrial projects in North America. And third, only 20% of these projects have actually started.

For those that have started, we’ve won roughly $850 million of orders with a win rate of approximately 40%. And we’re actively negotiating another $1 billion of electric content on a small subset of these announced mega projects. Turning to Slide 6. We highlight the data center market.

I can’t think of many markets that have better secular growth dynamics than data centers. The world’s appetite for data, new insights and software solutions continues to grow at an exponential rate. And natural language processing, like ChatGPT, will only accelerate this trend.

This is a very good thing for Eaton as we have a strong portfolio of data center solutions and the data center/IT channel represents 15% of our total revenue. While the numbers continue to be refined, we now think this market grows at a 16% compounded rate between 2022 and 2025 and likely for much longer.

As expected, our customers are continuing to expand their data center CapEx build-outs, some of which are being modified to support the adoption of generative AI. Just consider some of these metrics. 120 zettabytes of data have been generated in 2023, a 60-fold increase over the 2 zettabytes generated in 2010.

And the amount of data generated is expected to grow to 180 zettabytes by 2025, a 50% increase over 2023. And the AI impact is just starting to show up in our order book. During Q3, we won a large order of approximately $150 million for a new AI training data center and saw a roughly 61% increase in hyperscale orders overall.

These AI data centers require both high-power and high-power density and as a result, higher electrical content. Another trend driving higher electric content is the need for solutions that allow bidirectional flow of power back to the grid and the ability to optimize the use of renewable energy to power data centers.

So this market and Eaton are well positioned for higher growth for years to come. And on Page 7, we highlight Eaton’s unique positioning in the data center market and note that we have the electrical industry’s broadest portfolio of power manager solutions for data centers.

Centralized data centers come in a variety of sizes with incoming power draws between 10 and 500 megawatts with the average data center of 40 to 50 megawatts, which is the variety that we show here on this slide.

Eaton, we, support the flow of electrons from where they enter the facility from our transformers to our medium-voltage and low-voltage switchgear through our electrical busway to our uninterruptible power systems all the way into the server rooms, where we offer racks and power distribution units.

In addition, we have a broad suite of software and service solutions that provide real-time diagnostics, prognostics and uptime support. As a rule of thumb, Eaton’s market opportunity in data centers is about $1.5 million per megawatt.

Here, we’re distinguishing this market from the myriad of smaller data centers that exist to support many different markets and smaller applications. And we continue to improve our position in the market with our Brightlayer for data center suite of software solutions.

This platform is the first in the industry to unite asset management, IT and operational device monitoring, power quality metrics and advanced electrical supervision into one single application.

This new software provides electrical power, power quality, distributed IT equipment performance management that improves efficiency, data accuracy and certainly uptime. So overall, Eaton is well positioned and continues to build on our strength in this rapidly growing market.

Given our broad set of megatrends and our growth outlook, we’re naturally investing to add capacity in many of our businesses, as noted on Slide 8. In fact, on the normal run rate, we’re investing more than $1 billion of capital to support the growth that we see over the next 5 years.

These investments expand our production capacity across a wide range of markets and position Eaton to win more than our fair share of these opportunities. As you have heard, while somewhat improved, our lead times are still longer than ideal. And these investments will address the bottlenecks in our manufacturing sites.

The primary investments are being made in utility markets to support transformers, both the regulators and our line insulation and production equipment and circuit breaker capacity to support the rapid growth in industrial projects and to add redundancy to our existing capability and in our global Electrical business to support growth in a number of fast-growing emerging markets, where we’ve been gaining share but have ample opportunities to do significantly more.

And of course, we’re building a completely new eMobility business and making significant investments to build out new manufacturing capacity there. These capital investments support higher organic growth, provide excellent return on investment and are indicative of our confidence in the future of the company.

We’ve made some of these capital investments this year, while others will be layered in over the next couple of years. Now I’ll turn it over to Tom to cover our financial results and outlook for the year..

Thanks, Craig. I’ll start by providing a summary of our Q3 results, which include several records. With respect to the top line, we posted an all-time quarterly sales record of $5.9 billion.

Organic growth continues to be strong, up 9% for the quarter, building upon 6 consecutive quarters of double-digit growth and 3 quarters on a 2-year stack of mid-20s growth. Operating profit recorded all-time records on both a margin and absolute basis. Operating profit grew 23%, and segment margin expanded 240 basis points to 23.6%.

We posted a very strong incremental margin of 46%, up sequentially from 33% in Q2 and 27% in Q1. Adjusted EPS increased by 22% over the prior year to $2.47 per share, an all-time quarterly record and well above the high end of our guidance range. This performance resulted in a third quarter operating cash flow record.

Our $1.14 billion in operating cash flow was 18% higher than the prior year, generating 16% free cash flow margin and over 100% free cash flow conversion. Looking at our results on a year-to-date basis. Organic growth is up 12%. Segment margin is up 170 basis points.

We generated incremental margin of 35%, adjusted EPS growth of 19%, a 73% increase in operating cash flow versus prior year and free cash flow up 90% year-over-year. Moving on to the next slide. Our Electrical Americas business continues to execute well and delivered another very strong quarter.

We set all-time quarterly records for sales, operating profit and margins. Organic sales growth remained very strong at 19%. Electrical Americas has generated double-digit organic growth for 7 consecutive quarters with 6 of the quarters greater than 15%. On a 2-year stack, organic growth is up 37%.

In the quarter, there was broad-based growth in nearly all end markets with double-digit growth everywhere except residential and especially robust growth in industrial, utility, machine OEM and data center markets.

Record operating margin of 27.7% was up 420 basis points versus prior year, benefiting from higher volumes and effective management of price cost. Incremental margin was 50% for the segment. On a rolling 12-month basis, orders were down 3%.

It’s important to note that the dollar value of orders remains high, and the decline needs to be viewed in context of the 36% order growth in Q3 of last year. As discussed on last quarter’s call, order intake is an important metric but needs to be analyzed together with record backlog.

Currently, in our Electrical sector, we have backlog coverage of almost 3x our historical average. We have looked at multiple scenarios with meaningful order intake decline and are confident in those scenarios, given our backlog coverage that we can generate robust organic growth for several quarters into 2025.

In this regard, Electrical Americas backlog increased 19% year-over-year and 5% sequentially, resulting in a book-to-bill ratio above 1.1 on a rolling 12-month basis. For orders, we had particular strength in data center, industrial facilities and institutional markets.

Also, our major project negotiations pipeline in Q3 was up 33% versus prior year and 19% sequentially from especially strong growth in data center, institutional, government and water, wastewater markets. Data center negotiations increased almost 4x. On a 2-year stack, our negotiation pipeline was up 180%.

Overall, Electrical Americas continues to have a very strong year. On Page 11, you’ll find the results for our Electrical Global segment. Despite flat organic growth, we posted a Q3 right sales record. We had strength in our commercial and institutional, industrial and utility markets.

Regionally, we saw weakness in EMEA markets that were offset in other markets where growth was in line with expectations. We expect the softness in EMEA to be short-term with organic growth in the segment returning to low to mid-single digits in Q4. Operating margin of 21.8% was up 120 basis points compared to prior year.

Operating profit and margin were all-time quarterly records. Margin improvements were primarily driven by effectively managing price cost. Orders were up 1% on a rolling 12-month basis with strength in data center and utility markets. Importantly, book-to-bill remained greater than 1.

Before moving to our industrial businesses, I’d like to briefly recap the combined electrical segments. For Q3, we posted organic growth of 11%, incremental margin of 53% and segment margin of 25.5%, which was up 320 basis points over prior year.

On a rolling 12-month basis, our book-to-bill ratio for our electrical sector remains very strong at more than 1.1. We remain quite confident in our positioning for continued growth with strong margins in our overall electrical business. The next slide highlights our Aerospace segment. We posted all-time quarterly sales and operating profit records.

Organic growth was 10% for the quarter with a 3% contribution from foreign exchange. We’ve posted double-digit growth in 6 of the last 7 quarters in this segment. Growth was driven by broad strength across all markets with particularly strong growth in commercial OEM and commercial aftermarket, which were up 21% and 27%, respectively.

Operating margin of 24.1% was up 10 basis points on a year-over-year basis and up 160 basis points sequentially. Growth in orders and backlog continue to be very strong. On a rolling 12-month basis, orders increased 16% with especially strong growth in commercial OEM, commercial aftermarket and defense OEM.

Year-over-year backlog increased 22% in Q3 and 4% sequentially, reflecting continued momentum in the Aerospace recovery. On a rolling 12-month basis, our book-to-bill for our Aerospace segment remains very strong at 1.2. Moving to our Vehicle segment on Page 13. In the quarter, organic growth was down 1%. Foreign exchange had a 2% favorable impact.

We saw growth in APAC, North American automotive and EMEA markets more than offset by a decline in North American Class 8 and South American markets. Operating margins came in at 17.4%, 60 basis points above prior year driven by effective price cost management, partially offset by lower sales volumes.

17.4% margins represents 210 basis points of sequential increase primarily driven by manufacturing efficiency improvements. We continue to pursue and win new business in growth areas such as EV torque win with a major Chinese OEM. We also have momentum winning program length extensions and volume increases with multiple OEMs globally.

On Page 14, we show results for our eMobility business. We generated another strong quarter of growth, including an all-time sales record. Revenue was up 19%, all organic. Margin improved 150 basis points versus prior year to breakeven. The result was mostly driven by higher volumes from ramping programs and improved manufacturing productivity.

Overall, we remain very encouraged by the growth prospects of the eMobility segment. So far in 2023, we have won new programs worth $1.1 billion of mature year revenues. This is nearly a 145% increase in new program wins since the $450 million highlighted in last quarter’s earnings call.

Through these wins, we continue to find opportunities to leverage expertise and differentiated technologies across segments. Should be noted, we have increased our interim revenue target for 2025 by 25% from $1.2 billion to $1.5 billion. Moving to Page 15. We show our Electrical and Aerospace backlog updated through Q3.

As you can see, we continue to build backlog with Electrical stepping up to $9.4 billion and Aerospace reaching $3.1 billion, sequential increases of 5% and 4%, respectively. Both businesses have increased their backlogs by significantly more than 100% since Q3 2020. The backlog build gives us confidence in our order outlook for the quarters to come.

On the next page, we show our fiscal year organic growth and operating margin guidance. For organic growth, we are increasing Electrical Americas, lowering Electrical Global and eMobility, while narrowing the range of our total organic growth, resulting in a 50 basis point increase at the midpoint.

We now expect organic growth in Electrical Americas to be 16.5% to 18.5%, up 250 basis points from our prior 14% to 16% guidance. This represents 850 basis points improvement from our initial 2023 guidance. For Electrical Global, we’re lowering our organic growth guidance from 6% to 8% to 4% to 6% based on weaker-than-expected end markets in Europe.

For eMobility, the midpoint of our organic growth guidance is now 25% versus 35% mostly due to OEM-related delays for their EV platforms. For segment margins, we’re increasing our total Eaton margin guidance range by 50 basis points.

This is a result of an improved outlook in Electrical Americas, where we increased the range by 150 basis points on strong demand and continued operational execution. We are lowering margin guidance for Electrical Global 50 basis points due to lower growth.

The 21.8% midpoint comfortably exceeds our target to reach 21.5% by 2025 and represents a 160 basis point increase versus prior year. In summary, as we approach the final quarter of 2023, we remain well positioned to deliver another very strong year of financial performance. On Page 17, we have additional guidance metrics for 2023 and Q4.

Following our strong year-to-date performance and improved margin expectations, we are raising our full year EPS range to $8.95 per share to $9.05 per share. The $9 midpoint represents 19% growth in adjusted EPS over the prior year.

We’re also raising our operating cash flow and free cash flow guidance ranges by $100 million each to reflect our stronger earnings and solid working capital management. For Q4, we are guiding organic growth of 8% to 10%, segment margins of 22.3% to 22.7%, representing 170 basis point improvement at the midpoint versus prior year.

Adjusted EPS is a range of $2.39 to $2.49, an 18% increase versus prior year at the midpoint. The next chart summarizes the progression of our guidance in 2023. Throughout the year, we’ve demonstrated the ability to execute on our commitments and raise guidance for all of the metrics shown.

We are well on track to deliver our third year in a row of double-digit organic growth with all-time record margins in a $1 billion or nearly 40% increase in operating cash flow. Now I’ll hand it back to Craig..

Thanks, Tom. So moving to Page 19 and turning our attention to next year. We provided our initial view on what we expect from our end markets. And first, I would note this as a starting point, we haven’t changed our view on 2023. And as you can see, we’re expecting attractive growth in nearly all of our markets in 2024.

We expect strong double-digit growth in data centers and distributed IT segment, in utilities, commercial aerospace and electric vehicles. Additionally, we expect solid growth within industrial facilities, commercial and institutional and defense aerospace.

And as you can see, global light vehicle market should be modestly positive with only the residential and commercial vehicle markets experiencing a decline. So it should be another year of significant growth with over 80% of our end markets seeing solid or better growth.

Please note that much of this growth is supported by record backlogs, and we’ll provide more detailed color on organic growth as we come together with our 2024 guidance in February of next year.

As you can see from the outlook, despite mixed signals in the economy and some historical indicators of growth, Eaton remains very well positioned to deliver what we call differentiated growth in 2024 and beyond. So I’ll close with a summary on Page 22 – on Page 20. Last quarter, I noted that we’re feeling good about how our markets are performing.

And today, I reiterate that sentiment. We continue to experience powerful megatrends that are driving a higher outlook for our end markets, and we’re seeing it in our negotiations and order book. And once again, we delivered another record quarter of financial results, increased our earnings and cash flow outlook.

Our orders continue to come in at historically high levels, and we continue to grow our backlog. I would note that our team is executing well, but we have an opportunity to be better everywhere than I’d say in every business. So the setup for 2024 is playing out as we expected, and it should be another strong year.

With that, we will open it up for any questions you may have..

Thanks, Craig. [Operator Instructions] With that, I’ll turn it over to the operator to give you guys the instructions..

Thank you. [Operator Instructions] The first question will come from the line of Andrew Obin from Bank of America. Please go ahead..

Hi, guys. Good morning..

Good morning, Andy..

Just a question on incrementals, just very nice progression in Electrical Americas from first quarter into third quarter and overall for the company. So how should we think about just incremental progression to the fourth quarter and ‘24 because I think within your framework, you’ve used a lower number.

Just maybe expand what’s driving these strong incrementals and how sustainable it is going forward?.

I appreciate the question, Andrew. And our team certainly performed extremely well during the quarter, and we’re proud of our teams and how well they executed in the quarter. And certainly, implied in the guidance are pretty attractive incremental as well.

Maybe I’ll answer the last question kind of first with respect to as we think about incrementals going forward in 2024, and we still think 30% incrementals are the right way to think about the incrementals for the company. Clearly, we’re making some investments in the business that are going to kind of moderate incrementals.

And certainly, if you think about price versus cost and the tailwinds that they provided during the course of 2023, we’re not expected to see the same order of magnitude of tailwinds in 2024. So we still think 30% is a good planning number for next year.

And – but certainly, as we think about Q3 and Q4, we have a pretty strong line of sight to those incrementals that are embedded in our forecast for Q4..

Thank you. And just a follow-up question. You keep announcing additional capacity additions. If I look at Slide 19, you sort of give end market growth assumptions. So how should we quantify the outgrowth opportunity or revenue from capacity additions, particularly relative to your end market assumptions? Thank you..

This is kind of a really attractive problem to have, Andrew, in terms of the growth that we’re seeing in many of our businesses and having to make some investments to deal with the stronger demand that we’ve seen over the last few years and certainly the demand that we expect to see into the future.

And so we talk about kind of this growth outlook for the company in these strong markets. And we need to make some investments in capacity and some key bottlenecks. We talked about the $1 billion in my opening outbound commentary and where it’s going.

And I’d say that these investments that we’re putting in will give us the capacity that we need to support the long-term growth outlook for the company and a little headwind above that if markets turn out to be even a bit stronger than what we anticipated.

And so we are making the investments that we should be making and we need to make to get out in front of the pretty robust outlook that we have for the company’s growth..

Thanks so much..

Thank you..

Thank you. The next question is from Joe Ritchie from Goldman Sachs. Please go ahead..

Thanks. Good morning, everyone. .

Good morning, Joe..

Hey, Craig, can you maybe just talk a little bit about the mega projects for a second? I think you mentioned that 20% of the projects have started.

When you think about the timing of when you typically will see a – like bidding on those projects and the orders coming through, how do you see this kind of playing out based on, again, the projects that have already started and now the funnel is continuing to increase?.

Yes. I appreciate the question, and it’s certainly something that we’ve spent a fair amount of time internally trying to sort to ourselves.

And as you can imagine, inside of this broad array of mega projects, there is very different types of projects that are embedded in those numbers, some of which where you’d have essentially a 12-month kind of cycle, others of which could have 3-year cycles or longer.

So it’s a pretty wide distribution of lead times depending upon the type of projects that we’re talking about.

So I’d say that at this juncture, if you had to use a rule of thumb, I’d say you’re probably – because these tend to be the bigger projects unlike our flow business, they are probably a couple of years on average in terms of from when we actually start and price a project to actually showing up in revenue inside of the company.

If you can figure on average a couple of years out is the way to think about it. I would say that talking about these mega projects in general, we’ve gotten so many questions. There is been so much written about this particular topic.

I would say today that, that is principally perhaps more than anything else, what’s driving this fundamental change in the growth prospects of the company. I mean, these huge projects, much bigger than they have ever been historically. And by the way, I’d note that 60% of these projects are related to whether it’s IRA, the IIJA or the CHIPS Act.

And so these are really big projects. They are different projects. And they are projects that are, quite frankly, being subsidized in many ways by this government spending that’s taking place more broadly inside of the U.S. economy. So we think these projects are solid.

They are going to go forward and we think, once again, going to be really attractive growth tailwind for the company..

And just to complement that, Craig, I mean, those are the mega projects, but we also said in the prepared remarks our negotiated pipeline for the U.S., which was up 33% year-over-year and up 18% sequentially. So a lot of good growth going on in those big projects but less than the $1 billion as well..

Yes, that’s great color, guys. And I guess just my quick follow-on there is just any concern that you have at this point? There is a lot of concern in the market regarding project financing and specifically, I think you guys called out utility CapEx, the market being up double digits next year.

Just any thoughts around the project financing issue, higher interest costs and whether that pushes things out a bit..

Yes. It’s certainly one of the things that we’re watching and we’re concerned about as well, Joe. It’s perfectly logical to say that some of these projects could be delayed or put at risk, given much higher financing cost. I will tell you that we’ve not seen any evidence, any material evidence of that to date.

But it’s certainly, once again, a potential risk. And that’s why I highlight this issue around 60% of these projects basically being financially supported by these government stimulus plans, which is very new. And the dollars, as you know, are quite substantial. And at this point, we will have to wait and see how it plays out.

And we’re going to watch it and make sure that we’re taking the necessary precautions. But to date, we really haven’t seen that impact..

Joe, year-to-date in the Americas, utility is up over 25%. And if you look at the entire electrical sector year-to-date are up over 20%. So it remains very strong..

Great. Thank you, both..

Thank you. Our next question is from Jeff Sprague from Vertical Research. Please go ahead..

Thank you. Good morning, everyone..

Good morning, Jeff..

Hi, good morning. Can we pivot a little bit to Electrical Global? And just maybe a little bit more color on kind of the complexion of demand underneath the surface there by geography. And you noted some project activity starting to come to the floor there. It does seem like Europe, in particular, might end up in a bit of a bidding war with the U.S.

on project stimulus and the like. So maybe just a little bit of color there on how you see things playing out into the first half of next year, not just Q4, but what kind of pipeline might be building..

Appreciate the question, Jeff. And if you think about today, what makes up the global business for us, there is what we do in Asia, there is what we do and what we call GEIS, which was the former crowd science B-Line business. And then it’s our electrical Europe business. Those are the three pieces that make up global for us.

And I will say that we know, without a doubt, did see a slowdown in our European business during the course of our business specifically. We’re a pretty big player into what you call the manufacturing or the OEM segment, and that segment was especially weak. Our business in Asia continued to perform well, growing high single digits.

Our GEIS business continued to perform fine, mid-single digit consistent with what we expected. It’s really what took place during the course of the quarter in Europe, specifically in electrical, that drove the miss of our own expectations and the reduction in our outlook.

Now we – without a doubt, we saw some destocking in the distribution channel and having – had a number of conversations in person with some of our large distributors in Europe, it’s clear that they were doing some inventory adjustments, some overbuying that took place over the last 12 months or so.

And we do think that, that segment gets back to mid-single-digit growth in Q4. And we think, once again, these fundamental trends that we talked about with respect to electrification, energy transition, digital growth and data centers, all of those trends are applicable for Europe as well.

And so we do think while slower growth than the U.S., we think those markets get back to growth once we work through this inventory correction that we’ve seen here in the third quarter..

Encouragingly, Jeff, we’ve seen some good order flow in EMEA. So that gives us – it gives us confidence to go to the low mid-single digits in Q4..

But we will keep watching it. I mean, clearly, there is a lot of geopolitical tensions in the region there as well. And we’re not going to be pollyannish about it. And if we need to make some adjustments, we will make the adjustments we need to make..

Great. And maybe just as a follow-up, different topic, though, is just thanks for the little many deep dive on data centers here. Can you just speak to how your content is changing? So obviously, you gave us a $1.5 million per megawatt, and we got a lot of megawatts coming, right? So you just grow on the back of that for sure.

But is your dollar content per megawatt also going up as part of this equation and how so, where has it been? And where is it headed in your view?.

Yes. What I would tell you is that the simple answer to the question is yes. We are essentially selling more content per megawatt because we’re selling more software solutions. We’re selling more complete data center solutions into the marketplace. So that would be absolutely true.

That impact is kind of dwarfed by just the overall growth in the market though. I mean, the market, as we’ve talked about, continues to be quite robust.

And just maybe some of the data if you look at simply the backlog of projects today in data center in the planning stages, it surpassed $100 billion for the first time ever greater than 6 years of construction, $12 billion in the month of September alone, starts up some 29% driven by the big four and some $42 billion under construction.

So the whole market is growing quite dramatically right now. And obviously, what’s happening today in AI is accelerating that. And if you think about the content opportunity for electrical equipment alone in an AI-centric data center, it’s 5x the growth, the opportunity when you compare it to a conventional data center.

Now having said that, there clearly are some very real constraints in terms of the industry’s ability to really deal with the demand that’s out in front of us. Huge backlog, huge negotiations. We have historically operated with some 3 years, let’s say, of visibility in data center market.

We now have more than, in some cases, 5 years of visibility on projects. And so the whole market is just performing extremely well, and we’d expect it to do so for years to come..

Just to amplify, Jeff, just a little bit more on that, year-to-date in data centers, again, on our negotiation standpoint up 136%. And in the quarter, as we said in the prepared remarks, up 4x. So it’s growing faster than it was at the beginning of the year as well..

Great. Thank you..

Our next question is from Scott Davis from Melius Research. Please go ahead..

Hey, good morning, guys..

Hey, Scott. Good morning..

Not much to pick on, really solid results across the board. But I was wondering if we could talk a little bit about M&A and maybe opportunities to play offense here while cash flow is cooking.

And I was thinking, in particular, is there any opportunities out there to really scale up the eMobility segment to make either – whether it’s several interesting bolt-ons or something a little bit larger to get that to scale a little faster than maybe the current pace?.

I appreciate the question, Scott. And first of all, I would say that with respect to M&A more generally, we said our priorities will be Electrical. They will be Aerospace. And then on the margin, if we could find the right asset, we would consider an acquisition in eMobility as well.

But I think the broader message for the company is that we have enormous growth opportunities in front of us, the organic opportunities that we’re looking at across the business and our ability to grow organically. And I’d say, today, there are just growth opportunities every place.

And unlike perhaps some times past, we don’t need to do deals to significantly grow the company. And that’s true as well in eMobility.

As you heard in Tom’s presentation, we just had another quarter of huge wins, $600 million, Tom, was the number, I believe, in terms of quarter-over-quarter change?.

Yes, yes. It’s up 25%..

So each one of these wins in eMobility just results in just enormous growth for the organization. And so we set this chart of being $2 billion to $4 billion by 2030. We will be selective.

We will essentially – as we talked about in some of the prior conversations, we will make sure that we’re going to play in eMobility, where we have the ability to leverage our scale, our technology and the expertise in our core electrical business. That’s where we have the right to win.

That’s where we have the right to play, and that’s where we can really deliver attractive margins for Eaton. And so that’s really strategically what we’re focused on with respect to the areas of interest that we have in eMobility.

So it really is about power distribution, power protection, doing the same things that we do in our core Electrical business. We get scale that we can leverage into eMobility at the same time, leverage that scale back into our core Electrical business.

So I’d say today, you could expect us in terms of the thinking about M&A, tuck-ins, things that are very much digestible.

Those are the kinds of opportunities we’re looking at in general, and those are the things today that I think makes sense for the company in terms of where we are today with respect to our organic growth opportunities in front of us..

Yes. Just to add a little bit more. The long-term target, as Craig said and we said in the prepared remarks, up 25%. But even since last quarter, our mature year wins was up 145%. That said, we’ve got a ton of flexibility. Net leverage on the balance sheet, 1 5. So we’re always looking, but we do have a lot of food on the table, as Craig said..

That’s helpful. And guys, just to back up a little bit. If you think about Eaton historically, had been a company that always manage price around raw materials, particularly kind of steel and copper.

Is the algorithm more likely in the future going to be pricing around the value you’re adding or perhaps pricing kind of dislocates from the underlying commodities? Or is that just kind of a bridge too far from how kind of customers are conditioned?.

Yes. I’d like to think, Scott, that we were always value pricing, but I think I get your broader message with respect to the whole market dynamics around price versus cost. And certainly, when you’re in a capacity-constrained market, it certainly gives you a bit more leverage than you’ve had historically.

But I’d just say, in general, as we think about the strategy for the company is that we intend to earn our margin accretion by running our businesses better, by running the company better and eliminating waste and inefficiencies. And we will recover inflation where we see it through price.

But the margin expansion for the company, we really intend to rely on volume leverage, improving operating efficiencies in the way we run the company. And those opportunities, by the way, despite record profitability, as I said in my outbound commentary, those opportunities are everywhere.

We’re still not running the company nearly as efficiently as we know we can..

That’s very good. Helpful, thank you. Best of luck, guys. Thank you..

Thanks, Scott..

Thank you. Our next question is from Steve Tusa from JPMorgan. Please go ahead..

Hi, congrats on the good results..

Thank you, Steve..

Just trying to reconcile the $850 million in orders with I think you said 20% of the mega products have started. That’s obviously a pretty big number, but $850 million in orders is relatively small. I mean, I guess that just speaks to where you guys are, the thing starts and then you get the order.

Like can you just reconcile those two numbers?.

Yes. And it’s really – you really can’t necessarily recognize – reconcile those two numbers and – because a start doesn’t mean that we’ve even got an opportunity to bid the project yet much less a negotiation or a win. And so you really can’t reconcile those two numbers.

And I know it’s such a big number and a very attractive one that everybody is trying to get their head around exactly how it’s going to impact revenue for the organization. But those two numbers, you really can’t reconcile them.

What we’re trying to provide is a bit of a framework is this win rate of 40%, which is essentially slightly above our underlying market shares in North America as an indication of what you can expect as these projects play out into the future. But you really can’t link the 20% to the $850 million..

Well, I mean, I think you just did. You basically said it’s out in front of you. Yes. I think you just explained it. And then just one last one on the kind of stock and ship business, if you will.

I know you guys do – you’re a bit more systems-oriented, but Hubbell today continue to talk about destocking, and there is a lot of other industrials talking about that.

Are you guys seeing that in parts of your business, and you just kind of blowing through it because the other businesses, the supply-demand equation is just so strong that you’re kind of weathering some destock in some parts of the business? Maybe just talk about some of those flow businesses and what you’re seeing on the distribution side..

No, I think you’ve summarized it well. I mean, we are seeing very similar trends in some of the shorter-cycle businesses inside of our company, whether that’s residential or whether what we’re seeing today in the MOM segment or the IT channel. We, too, are seeing a slowdown.

And we, too, are – experienced a bit of destocking in certain aspects of the business. And so that – those trends that others have talked about are certainly evident in our business as well.

But I think you hit the nail on the head when you said that the other parts of the business, our systems and large project business, our data center business, the other pieces where we’re seeing the strength is just overwhelming those spots where we’re having this weakness.

Now in Europe, we talked about it in our commentary, we did see weakness in Europe. And those trends clearly showed up in our European Electrical business in the quarter. It’s one of the reasons why we reduced the guidance there. But by contrast, we had this really outside strength.

And we continue to see outside strength in the systems and the project-related business in the Americas that offset the weakness in the flow business in North America as well as what we’ve seen in Europe..

Right. So that would actually be an easy comp for next year in those businesses, assuming things recouple the trend line..

Well, I mean, nothing is easy. And it’s certainly probably too early to put our hand on the scale and predict what’s going to happen in Europe during the course of 2024. But you’re right.

I mean, given the fact that those businesses are weakening, assuming the market stabilizes and the inventory destocking is behind us and we certainly have embedded some of that in our Q4 outlook, yes, it should be a relatively better year for sure in Europe..

Great. Thanks a lot. Appreciate it..

Thank you. And the next question is from Chris Snyder from UBS. Please go ahead..

Hi, thank you. I wanted to follow-up on some of the data center commentary. So I think you said negotiations up 4x in Q3, so building as the year goes on.

Is that increase in conversations all driven by AI? Are you seeing a broadening base of customers that are talking to you on the data center topic? And then when we think about the AI tailwinds, is there any benefit in 2023? Or is the tailwind from that really more 2024? Thank you..

Yes. No, appreciate the question. It’s obviously a topic that’s gotten a lot of attention. And I’d say that I would tell you, first of all, while AI and ChatGPT have gotten a lot of publicity of late, it’s not new. I mean, it has been around for some time. And so we have historically seen some benefit of AI embedded in the data center market.

I’d tell you that, number one. Secondly, as I said in my outbound commentary, yes, the AI-centric bids and orders were up 4x, but we had a 61% increase in hyperscale in general. And that is really across the broad data center market. And so without a doubt, AI will be an accelerator of growth.

But the broader message is essentially more data, more information, more insights requiring more data centers. And those numbers are big and growing as well..

I appreciate that. And then maybe just following up on the intersection of orders and backlog. Orders in the Americas have obviously moderated for about a year now. And your guys have built electrical backlog pretty much every quarter over that time period.

So as we kind of look forward, do you expect the company to start meaningfully working into that backlog? Or are we just kind of in a period of maybe sideways backlog levels into 2024? Any color on that would be helpful. Thank you..

Yes, appreciate the question, and it’s certainly one that we’re spending some time trying to work through ourselves. I mean, orders have moderated. We talked about in the Americas, but we also were comping a 36% increase from last year. And so moderation off of a really big number last year, and the backlog does continue to grow.

I think it’s really, in many ways, kind of the $64,000 question. It’s backlog is a function of how much demand you’re getting versus your ability to satisfy that demand. And at this point, I can only tell you based upon what we’ve seen and experienced to date is that we’ve not been able to materially eat into the backlog. We will at some point.

I mean, this cannot go on forever. And we are adding some capacity. For sure, that’s going to help resolve some of the lead time issues and the bottleneck issues. And so we would expect backlog at some point to turn negative in absolute terms because keep in mind, we’re up 3x.

We’re running a backlog of $9.4 billion in our Electrical business, $3.1 billion in Aerospace, but $9.4 billion in Electrical, and that’s 3x the historical backlog levels. And so yes, one, it’s a function of the fact that markets are good.

And – but secondly, it is a function of the fact we got to get out in front of some of these capacity planning things so that we can satisfy all this demand. But at some point, backlogs will turn negative..

Yes. And this is what I was trying to get at in my prepared remarks, just to amplify it a little bit more. And this is where we’ve modeled the scenarios of meaningful order intake decline on a year-over-year basis.

And given how big the backlog is right now in the backlog coverage, the 3x, as Craig said, we think even with meaningful year-over-year order intake decline and robust organic growth, this is going to take us several quarters into 2025 before we get back to historical levels, so....

And I would say we probably never get back to historical levels if you think about it in terms of absolute terms, right? We will be better, but we will never probably get back to a $3 billion kind of backlog. It’s a bigger business we will need. And so we will run a bigger backlog simply to support the fact that it’s a large, large business.

But what we certainly would expect to, at some point, start eating into the backlog..

Yes. Thank you..

Thank you. The next question is from the line of Nicole DeBlase from Deutsche Bank. Please go ahead..

Hi, Nicole..

Can we just talk a little bit about the capacity investments that you guys are making and just the cadence of when that’s going to start kind of phasing and coming online over the next several years?.

Yes. So appreciate the question, Nicole. And I would tell you that some of these investments have been made already. And we already are bringing on new capacity in products like circuit breakers and the like. Other investments are just now in the early phases.

If you think about some of the investments that we are making in transformer capacity in voltage regulators, and that capacity is probably order of magnitude 12 months to 18 months out. So, it does vary depending upon which particular piece of the investment that you are referring to. But I would say, in all cases, the commitments have been made.

In all cases, we are looking at essentially those aspects of our business where we obviously have more capacity – more growth, more backlog than we certainly have capacity to serve it. And at this point, our teams are kind of geared up for ensuring that we execute it well and bring this capacity online.

It allows us to continue to grow the company and take some market share..

Thanks Craig. And then just on free cash flow, thinking about how this progresses into 2024. Can you talk a little bit about your plans to reduce working capital and other major puts and takes that could influence conversion next year? Thank you..

Yes. Appreciate the question, Nicole. I think the important thing is to look at year-to-date when you are looking at operating cash flow and free cash flow. I mean we had a good quarter, but year-to-date, we are up 73% in operating cash flow and almost 90% in free cash flow.

And if you look at the improvement levers for year-to-date, it’s about split between higher earnings and better working capital. And if you recall, last year, we said we were investing in our customers and investing in the growth and believe that was the right decision.

In the back half of last year, we started getting more efficient with working capital. We expect that to continue going into 2024. We are happy with our free cash flow margin this quarter of 16%. But we have got a lot of opportunity to improve in terms of inventory days on hand, getting better in terms of DSO, our cash conversion cycle.

So, we are not stopping here, we are happy with our progress, but we have got a lot of opportunity for better cash flow going forward..

Thanks Tom. I will pass it on..

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

Hi. Good morning. Maybe I just wanted to ask a quick question about the sort of core revenue or organic revenue outlook. So, you had that very helpful slide on the main end market moving pieces.

Should we sort of assume from that, that that blends to about kind of 6%, 7% market growth, and then you are adding about a point or so of share, and that’s kind of how you get that 7% to 8% organic growth number for next year that you discussed, I think in September?.

I appreciate the question, Julian. And obviously, it’s certainly early for us to give you kind of a definitive side on where we think 2024 will be, and we will do that in February. But I do think that kind of the framework and the way you talked about it is very much consistent with the way we are thinking about it.

We talked about kind of the exit rate of the year in that 7% to 8%. And that’s kind of a good proxy for the way to think about 2024, subject to whatever changes that we see between now and the end of the year. But that – those market outlook slides are very much consistent with our current view.

And unless things go sideways someplace in the world, which we don’t anticipate, that would be a good kind of starting point to think about it..

That’s helpful. Thank you. And then just one thing I wanted to circle back to was around the sort of gap between the products and the systems on the electrical side.

I guess historically, you had – those were sort of two sides of one coin, the products, the shorter-cycle piece, systems is the longer cycle piece and sort of where the lag one would follow the other. So, when we are thinking about next year, the gap between products and systems presumably narrows.

Is the assumption that they sort of meet in the middle, products improve a bit, systems slows down because of comps, or any kind of way we should think about it maybe projects or mega projects mean the systems piece sustains a very wide outgrowth versus products, for example..

Yes. I appreciate that question, Julian. And I would tell you from where we sit, I mean this products versus systems view of the electrical markets, we would suggest it’s probably not the most effective way to think about it in general. And it’s one of the reasons why we changed our reporting structure.

And we have been so much focused on the end markets that we serve. And so we really do the better model and the way – better way to think about the company is here are the big end markets that we serve, commercial and institutional data centers, utilities, residential. These are the big end markets that we serve.

And in every one of these large end markets for the most part, they will accept – can take a product. In some cases, we will sell a system or a solution into these same end markets. And so what we tried to do and the framework that we provided is give you a sense of what we think is going to take place in these end markets.

And where you see differences in the way our businesses perform, take Europe, for example, versus the U.S., we have today in the U.S., a much bigger percentage of our business that would go into end markets like data center and utility than we would have in our business in Europe, where they would be much more indexed into, let’s say, the MOEM segment, which is in decline in Europe or in the residential section – segment, which is really in decline everywhere.

So, I think that’s a better way to think about how to model the company than this distinction between a product and a system..

That’s very helpful. Thank you..

Thank you. The next question is from Steve Volkmann from Jefferies. Please go ahead..

Hi. Great. Thank you, guys for fitting me in. Just a quick follow-up to go back to this kind of backlog thing, which I think you guys have explained pretty well.

But Craig, is it a reasonable planning assumption that we end 2024 at sort of whatever the new normal is for backlogs that’s slightly higher than historical number?.

Yes. I will tell you. And I wish I had an answer to that question definitively, Steve, in terms of what that backlog is going to look like at the end of 2024. I can tell you what we said about this year that we didn’t anticipate this year that we could materially eat into the backlog because, once again, we knew what the underlying orders look like.

We understood, essentially have a very good view on what our markets would be and what our capacity is. We are bringing on some new capacity that will come online in 2024. That will help us eat into the backlog.

Having said that, are we going to end 2024 at the same level as we are today, we would hope quite frankly, that we can reduce backlog during the course of 2024. We would view that as a successful year all else being equal because it’s given us the ability to shorten lead times and do a better job of responding to customer demand.

But sitting here today, I mean to suggest that I would have any visibility into what that number is going to be at the end of 2024, this would not be realistic. And so we hope that we can reduce backlog by essentially shortening up some lead times. But at this point, if the markets continue to be as robust as they have been, that will be challenging..

Yes. Even reducing backlog, it would be hard to imagine based on the scenarios we have looked at that we would get our backlog at the end of 2024 to our historical backlog coverage..

Yes. Well, we probably will never get back there. But hopefully, we can reduce backlog..

For sure, yes..

Great. That’s definitely helpful. And then I am going to pivot to the AI question, but I want to ask it from the other point of view, which is that I think you guys actually capture a fair amount of data from collected IoT devices, etcetera.

So, can you just comment on sort of where you are in terms of collecting your own data and providing services and systems that leverage that data into maybe new business models over the next few years?.

No, definitely appreciate that question. And as you know, this is independent of AI, we had been on this journey inside the company to really digitize and digitalize our company.

And so that what we said is that every single product, every new product that we develop, we expect it to have a microprocessor to be able to stream and process data and information. And so that has been going on inside of the company for the better part of the last 5 years.

And as a result of that, we have been able to create some really attractive and interesting new value propositions around how we essentially can monetize our own data. And it’s one of the things that we wrap up in this term you will hear us talk about called the Brightlayer platform.

So, we have Brightlayer for data centers, Brightlayer for utility markets and Brightlayer for residential.

So, this data platform that we use today to essentially find ways to monetize our data either in the form of data-as-a-service or software is something that’s happening broadly across the company and all enabled by the fact that all of our devices today, most of our devices today, I should say, are intelligent and have the ability to stream data.

I would encourage for those of you on the call, one of the things we are going to try to do next year as a part of our investor meeting is to invite you to our center in Houston and to show you some very real examples of software and data solutions that we are selling today in various applications to our customer base that really monetizes our data and monetizes our software.

So, a really exciting piece of this leg that we talk about these megatrends, one of which is digitalization, we see that in the data center market. And we also see that in the way we are bringing new products and new solutions to market as well across the company..

Great. I look forward to that. Thanks..

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

Hey. Good afternoon and thanks for keeping that’s going here. Slide 19 is good, obviously, very helpful. Just want to clarify a couple of things. So, data center, the 16% CAGR you are forecasting through ‘25 now, that’s for the market, so not necessarily Eaton, right? So, I know you have got some market share growth ambitions there.

So, I just want to make that clear. And then when you talk about data center, are we talking here about the whole market? So obviously, a big chunk of that market is on-prem enterprise data centers, or are we talking about a subset of that market? So, just maybe just clarify that.

And then within this end market matrix, I am pretty sure that if you put this up three months ago, you might have had a bit more of an optimistic view on residential. Obviously, with the higher rates, etcetera, I understand why you are cautious there.

And I know it’s not a big end market, but I am actually wondering if you are starting to see deterioration real time in that market or whether it’s much more sort of macro-driven?.

Okay. So, I think there is three different questions there, but let’s take the first one around. So, the answer to the question is, yes, it is the entire market. So, that 16% growth rate is reflective of what’s happening in hyperscale, on-prem, colo. So, it is our view of the entire market.

And yes, we would expect our businesses to grow faster than market and as a result of that do better than what we think the underlying market is doing. To the point around residential, yes, we have seen the slowdown in residential really around the world. And we have seen it in the U.S.

and what happened in single-family first, though single family, quite frankly, had a little bit of a stronger Q4. Single-family starts were actually up some 6% in Q3. Multifamily wallet kind of record levels of units that are under construction clearly saw a slowdown in Q3. But we are definitely seeing the slowdown in residential.

You see it most acutely, quite frankly, in Europe. Many of you see the market data coming out of Germany and France where residential housing starts are down quite significantly, and everybody has read about what’s going on in China as well. But to your point, residential as a company is not the biggest piece of our market.

And I think the other thing I would add to that is that one of the things we have talked about in prior meetings is that we are seeing higher electrical content in all of the new homes that are built as they meet the latest requirements for UL standards in the U.S.

or other standards, IEC standards around Europe or we see smart homes being built, and they are putting in more smart solutions. And so offsetting somewhat of that decline in units is the fact that we are seeing higher electrical content in new homes.

And new homes are accounting for, quite frankly, a much higher percentage of the new housing market in general as people hold on to their legacy homes. And so yes, no question, residential has weakened up. We are seeing it in our business.

But once again, the strength that we are seeing in the other end markets, big enough to offset those declines in residential..

Yes. Just to add [ph] a little bit, Nigel, on that one. If you look at year-to-date and no question slowing down, but year-to-date for our overall electrical sector, we are actually positive from a residential perspective..

And I think it’s more a function of electrical content being higher, prices being better, the unit volumes would be down definitely as they would for others..

Yes, I know there are there parts to that question. But if I can just sneak one more in, I know we are running light. The eMobility 2025 target of 1.5 is a big step-up from the prior 1.2.

Does that uplift and that’s sort of like that growth ramp from here to 1.5, does that come to support in ‘25, or do you expect it to be a bit more linear through the next couple of years? And does that – is there any implications for margins, I think you have got 11% margin for 2025, how do we think about that? That’s two questions..

Yes. I think that you would expect as you are well aware, and I don’t know this market works in vehicles that when they launch a platform, you will see a big change in the revenue as a function of when these new platforms launch. And so I would say that the volume does tend to be kind of chunky in the space as opposed to being linear.

And once the vehicle launches and it’s in the market, then you will see kind of a linear pattern of growth. But once the program first launches, you will see more of a step function change in revenue. And so between now and 2025, that business will grow.

And we talked about in some of the outlook numbers that we still expect our eMobility segment to see strong growth. It’s a very strong growth for 2024 in our guidance, but some of this growth will be chunky as we think about bringing on these new platforms that we have won..

That’s great..

Thank you. And our next question is from the line of Phil Buller from Berenberg. Please go ahead..

Hi there. Thanks for the questions. Craig, just to follow-up on some of the answers you gave to the prior questions. You talked about the megatrends existing globally, which I get, but how much of the divergence between the U.S.

and elsewhere would you attribute to the current economic differences, which I think is the answer you gave to Jeff’s earlier question versus how much of this is just the weighting towards data center and utilities in the U.S.

being much larger than Europe, which I think is how we answered Julian’s question? I guess I am wondering if there is a third part to this, which is market share. So, I don’t know if you can comment on the market share changes that you see in the U.S. or Europe, please? Thanks..

Yes. No. What I would tell you is that in simple terms, I would say no with respect to market share. When you take a look at our growth in our European business in any given quarter, you could find things bouncing around.

But if you look at our growth on a 2-year stack or 3-year stack and you look at our revenues versus our peers, I think you would find the numbers to be quite comparable. But I would say that it is mega projects and the scale of mega projects that is driving the differences.

It is where we play in, let’s say, the Americas versus where we play in Europe. I talked about our penetration in Europe being a lot of which is in MOEM and industrial equipment. We don’t have today as broad a portfolio in some of these other segments, call it, data center.

We played very well in data centers, but we are not as big a player in data centers. We play in utilities, but we are not as big a player in the utility market. So, we just have a broader, more complete set of solutions in the Americas that are supported by these megatrends.

And the other big difference is, once again, all the stimulus dollars that are being pumped into the U.S. economy that is essentially driving outside growth. And it’s driving outside growth in these same verticals, reindustrialization of industrial facilities, investments in utility markets, investments in chips and the Chip Act.

And so you are finding these kind of broader trends being also turbocharged by government stimulus spending..

Just as a follow-up to that quickly, if I may. What’s your current take on the EU policies these days? Obviously, everyone was quite bullish about the Green Deal and Net Zero Industry Act a year or so ago. Do you think that they will ever lay an egg in a meaningful way like the U.S.

ones do, or is that optimistic?.

No. I think – I mean I think in many ways even more than the U.S., I mean the European government has demonstrated their commitment to essentially moving towards a low-carbon society.

And they are putting both dollars behind it and just as importantly, they are putting regulatory changes in place to drive the adoption of these green technologies, right. So – but as you can imagine, there is a lot going on in Europe today.

There is a lot of challenges on a lot of different fronts in Europe that I think are today getting in the way and holding back some of the benefits that you would ultimately see in that space. And as we talk about the manufacturing segment, Europe is much more – has been much more of a manufacturing engine for the world in places like Germany.

And those markets have clearly slowed dramatically. So – but where we participate, think about data centers, for example, our data center business in Europe is also up dramatically. So, where we have kind of some of these megatrends, energy transition where we play in energy transition markets, those markets are up dramatically in Europe.

But the business mix is quite different. And in that case, it’s being held back. Those benefits are not showing up because it’s being overwhelmed by some of these other structural issues in some of the legacy businesses..

Got it. And finally, if I may just squeeze one very quick one in on Aerospace. There is no change to the 10% to 12% range for the year. But at the nine months, I think you are 13% and a bit and so that implies a bit of a moderation in Q4 from somewhere.

So, can you talk about what’s happening there, please, I assume it’s defense or perhaps there is something else going on that, please? Thanks..

Yes. I don’t think – I wouldn’t over-read that in terms of – we don’t anticipate a slowdown in Aerospace. As we talked about in our prepared remarks that the orders continue to grow, backlog continues to grow, so I would not over-read an implied number for aerospace in Q4.

We still are very much pleased with that market and expect to see longer term kind of growth being quite attractive there..

Thanks very much..

Thank you. And our next question is from Joe O’Dea from Wells Fargo. Please go ahead..

Hi. Thanks. I will keep it to one. I am interested in how you are kind of evaluating the opportunities on mega projects and the degree to which you maybe even thinking that it means win rates can’t be as high as they have historically just because of the magnitude of the opportunity that’s out there.

And so I am sure it’s inspiring some competitors to invest more in some of these verticals as well.

And where are you directing your investment dollars most to maybe position yourself best for at least as good, if not higher win rates moving forward when we think about the verticals that you outlined on Slide 19, where you want your sort of exposure to those to get that much bigger over time and outpace the market?.

I would say that in many ways, it’s quite the opposite. If you think about today where we tend to do well as a company and where our win rate tends to be higher, the bigger the project, the more complicated and sophisticated the project, the more likely it is that Eaton will win and garner higher share.

So, if you think about today, the big mega projects and our win rate on a mega project versus our historical underlying market share, our win rate would be higher.

It would be higher because once again, if you think about our total ability to deliver a complete solution, medium voltage, low voltage and everything in between, today, we have a much better capability than most of the companies that we are competing against in the North America market where most of these mega projects have taken place.

And so yes, without a doubt, the competitive dynamic is such that it’s an attractive space. I will tell you that for the most part, most companies are struggling with the same capacity constraint that we are.

So today, with respect to a disruptor coming in and doing something that would somehow change the dynamics around underlying market share, highly, highly unlikely because there is simply not enough capacity to do it. And then secondly, you need the capability.

And if you think about the size and the scale of these mega projects, you need a company who has pedigree, a company who you can rely upon and trust to essentially bring these projects home for you. The stuff that we do is mission-critical.

And it’s not the kind of place that you would tend to find companies or customers testing or trialing somebody new..

Appreciate it. Thank you..

Thank you. Next question is from Brett Linzey from Mizuho. One moment please. Please go ahead with your question..

Yes. Good afternoon. Thanks.

Just back to the billion investment, is there any way to think about the mix of what’s expense versus capitalized? And is this going to be a program you are going to provide some quarterly guidance on like you have done with some of the restructuring programs in the past?.

No, I would say today, we would not intend to provide any particular quarterly guidance or clarity on that, other than we can certainly let you know when the new capacity comes online, I think that’s perfectly fair. But the other thing to [ph] think about is that, yes, it’s a big investment. There is going to be a mix of capital and expense.

That’s all kind of embedded – going to be embedded in our guidance as we go forward. But as the company has gotten bigger and our denominator, revenue and everything else has gotten bigger, yes, we have historically spent about 3% of revenue in CapEx. That number may pop up to 3.5% order magnitude. But so it’s not going to be – it’s a big number.

It’s going to give us the ability to solve a lot of bottlenecks. But in the big scheme of things, you are talking about maybe 0.5 point movement in terms of our CapEx spend here. So yes, there is going to be some expense associated with it as well.

But once again, all of that embedded in kind of the 30% kind of incremental numbers that we talked about for planning purposes..

Got it. I will leave it there. Thanks a lot..

Alright. Thank you..

Okay. Thanks guys. We reached to the end of the call. I appreciate everybody’s questions. As always, our team will do a follow-up call with you guys if you need to have more questions. Thanks for joining us. Have a good day guys..

Thank you..

Thank you..

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference service. You may now disconnect..