All right. Thank you, everybody. Chris Snyder, U.S. Multi-Industry Analyst. You know, very excited to have Eaton with me, CEO, Paulo Ruiz. Thank you for coming.
Thanks for having me. Excited to be here.
Oh, absolutely. Maybe just starting high level with the strategy overview. At the March Investor Day, you unveiled three pillars of the strategy. Can you kind of talk us through that? Over the last six months, are there any milestones that you would like to highlight there?
Great. Thanks for the question. I would say that the transition has been fantastic. I could hit the road running, and the fact that I had three quarters of overlap with Craig helped me to gradually take the reins of the company, but more importantly, gave me the opportunity to think about where we needed to raise the bar in terms of our strategy. We launched the strategy back in March, before my start date, and we are already in full implementation. Let me walk you guys through. The great concept of the strategy is that we want to recognize the things that the company is doing really well, recognize, identify, and keep them. At the same time, we are not complacent at all. We want to raise the bar on areas we believe we need to do better. The framework of the strategy addresses exactly that.
It has three pillars, as you mentioned. The first one is Invest for growth. Invest for growth is about us working really hard to be a fast-moving company with higher customer centricity. You might ask, how can you prove this? We decide to think about the fast-moving markets we serve, gather learnings from it, and apply across the company. We are benchmarking with everything that's happening in the data center today. That becomes our new standard on how we approach. We have customer centricity we apply across the organization. If it's good for the fastest growing, it's going to be even better across the portfolio. That's Lead for growth. Under invest for growth, we have generational market opportunity coming from the markets we serve. Think about electrification of society that touches utilities, touches also behind the meter. We have tremendous opportunities on data centers and digitalization of society.
Reshoring in the U.S. is another field. Aerospace, being commercial and defense, is also another growth vector. If you look at all of this, how can we as a company be selective and work and double down on those areas that will give us the biggest return for our buck, give us highest growth and highest margin potential? That's the framework. It's all about the organic investments. We're doing technology and capacity, but it's also about inorganic investments, M&A. It's going really well. It's in full implementation. The third one is about execution. I call Execute for growth. You can have the best ideas under your invest part. You can have the best culture, the best leaders. If you're not executing well, you're not delivering to a potential. We are raising the bar on the way we run our facilities, our factories, our functions.
We are applying AI on top of everything we do with the objective to bend the cost curve, the fixed cost curve, as we grow the top line. Ultimately, talking about things that I love in the company and want to keep. Under execute for growth, I'm committed to keep a concept that Craig Arnold introduced, which is nothing else than we see every general manager as a portfolio manager. Expect the general manager to look at the head of the portfolio, higher growth, higher margin, how do you fast develop that, how you make it work, what is the tail of the portfolio, how you take care of it and either fix or get out of it. In terms of highlights, I would say every pillar is under full implementation. For this public, I would say it's important to note that we announced three deals in three months, right?
Two in the data center space, Resilient Power and Fibrebond, and one in the aerospace. That's the only one that will close next year. The other two already closed. High resolve, lots of discipline, execute on the strategy we share in March.
I wanted to follow up on the invest for growth pillar. You talked about doubling down on the best, highest growth markets and just kind of making sure that organics stay strong. I think kind of from the outside looking in, one of the beauties of Eaton and electrification is that there are a lot of good end markets out there. I guess which ones are the most exciting to you? Which ones do you think deserve the capital?
You're definitely looking at data center, utilities, and aerospace as the premier destination of our investment dollars. I also want to give everyone a reminder, a lot of things we do in our technology and our products are fungible across end markets, right?
Yes.
We look at those end markets as the biggest growth drivers for sure. A transformer can go into multiple different areas. A breaker can go into multiple different end markets. That's the frame you're looking at. Why are we excited about those markets in particular? Think about data center. I asked Yan and his team to give me the data from the last Laguna conference. The last Laguna conference one year ago, the data center industry had $150 billion in backlog in hands between things they were building and things they announced. This number today, folks, is $470 billion. It's over 3x the backlog that the industry had in hands last year. It's a tremendous tailwind for our business, and we are really excited about it. Are we growing this business? Definitely. You guys saw Q2, year- over- year, we grew 50% and our orders grew 55%.
That market is really hot. We also like utilities. We grew decent amounts in the past where electricity growth was only 0.5% per year. Now with electrification of everything at data centers, the load growth is forecasted to be 3%/ year. It's a lot of a change. Everything around aerospace, that you're aware, being commercial and defense, they're actually looking more positive than even the forecast we had for defense back in March.
Yeah. I appreciate that. You highlighted the three deals that you guys have done in recent months. That is a bit of a change. Over the last few years, Eaton's been very much an organic growth story. You guys are adding businesses that are bringing very good growth to the company. Can you kind of update us on the M&A priorities? How is the pipeline? What do you consider to be a bolt-on for Eaton?
Yeah, we said we want to do bolt-on deals. There are two sides of looking at bolt-on. One is the enterprise value, and the other one is the degree of complexity for an integration. For us, bolt-on is when it's less than 5% of a market cap. If you are at $140 billion today, it would be less than $6 billion- $7 billion. The deals we close are much smaller than that, around $1.5 billion, the two bigger ones. Resilient Power is much smaller, the technology play. We think about this as we are very disciplined. We're not going to lose the discipline on the way we acquire. We have high return expectations, and we look at the synergies we create. We remain very, very consistent with that approach that Eaton always had. We have those opportunities that the end markets provide to us.
I just want to remind you that the commitments I made back in March did not include M&A dollars, right? Whatever we do to put this $21 billion of cash generation over the planning cycle to work is going to be an upside.
Yeah, no, I appreciate that. Maybe kind of getting to the more thematic side of the house. You know, anyone who reads my research knows that I'm a big proponent and believer in U.S. reshoring. Obviously, everything needs to get powered. Manufacturing is 26% of the electricity in the country, which I feel like is underappreciated. I guess what do you think about reshoring? What could that mean as you look out to the end of the decade, and what verticals within the Eaton complex benefit?
Yeah, we see the reshoring as a very long tail, and it's actually a trend that touches a number of end markets. Think about, of course, if our definition of mega project is any project that has more than $1 billion in investment, most of the data centers will fall into that category today. There are much more than data centers. Think about LNG terminals, think about petrochemical plants, think about all this manufacturing reshoring that was already happening. We expect that with the advent of the tariffs, it's going to happen even more. It's a long tail. We track this every single month. Since we started tracking those projects for three or four years now, the current backlog of projects is $2.6 trillion.
Wow.
It's incredible, right? Only 15% of it started.
Wow.
It's like $390 billion- $400 billion actually started. The message here is a very, very, very long tail of projects to come. What we see in our books today, early innings, early moves, we closed around $2 billion in orders already. We are in current negotiation of another $3.5 billion. I just wanted to make one project as an example for you to make it more tangible for everyone. We recently closed a deal in Pennsylvania. It's a power gen site. It's called Homer City. It's a huge power generation site, $10 billion for 4.5 GW of power. The electrical content of our product is around $200 million. We are lucky to win the first phase. We already booked $100 million. We feel good about it.
The reflection always is, because we get that question, why your market share is as high or even higher than your bread and butter business? If you're a project manager sitting on a $10 billion budget, would you take a risk on 2% of your costs to maybe save 5% or 10% of 2%? You probably won't. I'm saying here, we know we can compete, and we track this very closely, and they're more than data center only.
Yeah, you mentioned that $2 trillion+ mega projects. I think if we go back to, I think that number probably started in 2021 cumulatively. I guess, any sense on how those mega project announcements are tracking, maybe in 2025 or 2024? Is there any change in conversations with customers following the election and all the policy that's come through?
We track, we always track cancellations and announcements. The announcements are surpassing the starts by a lot. The way to think about it, if you think about announcements, is around $40 billion/ month. Every month, on average, there's $40 billion of announcements on new projects. Starts are on the $25 billion/ quarter, so it's much lower. There's a huge tail. Someone might ask, maybe they're canceling those projects or delaying those projects. We track that as well. The severe delay or cancellation is around 11%, which is lower than the average project size globally. It's not high. Still to be seen whether tariffs are going to increase the pool, we believe it will. We already see a lot of business for us to go back in the new days.
If we kind of think about what you're saying on that announcements for starts, clearly announcements always lead starts. Has there been elongation on that? Why do you think it is? Is it just there's a lot of competition for whether it's a transformer, labor? What's causing that?
Yeah, there is, of course, if you think about data center being a big portion of it, they're competing for the same resources, right? The power, they're competing for the labor, they're competing for the specialized crafts. As we look at it, and it was one of the many reasons why we got so much excited about Fibrebond, we can only observe that or we can work to make it better for our customers, right? When we decided to acquire Fibrebond, it was exactly with that direction, right? We are hearing you want to move faster. You don't have engineering to design one by one. You don't have the labor on site. I can do that in my factories, in a controlled environment. There are actions we can take. Definitely, there is a competition for resources.
That's why in our long-term plan, although we are a firm believer of the data center development, I haircut the CAGR, the forecast CAGR of the market for 35% of the midpoint. I embedded only 17% to my plan. I'm working towards 35% or more. It was just a proactive way to be on the safe side.
Yeah, no, that makes sense. It's hard to know when these constraints are going to come. Maybe just asking on data center, if my memory is right, Q2, you guys had sales up 50%, orders up 55%. I'm not even sure everyone saw Oracle a couple of days ago, pretty eye-popping. I guess kind of maybe leave this one high level. Why are you positioned to win in data center? How do you make sure that you guys capitalize on the opportunity?
Yeah, that's an excellent question. Historically, we've been very strong with our portfolio, diversified products, service offerings, software as well. With the advent of AI, we believe we can even expand our presence. Traditionally, we were very, very strong in the gray space, right? Now, with power requirements being much increased on the server side from a few kilowatts per rack to a megawatt per rack, that requires much more sophisticated power management solutions. The white space that although we always had the technology to attack, we didn't want to because it was highly commoditized, high volume, low margin, it's resembling much more the businesses we love. Mission-critical, high technical content, and that's what we love. With the advent of AI, something that was very, very good for us already is going to get much better. That's why the content per megawatt for Eaton will increase.
We are very excited about the market. Why do we win? Because we approach this from a solutions approach. By the recent acquisitions we made and also the people we hired, today we can have conversations with NVIDIA that we can take all the way up to the utility feed. We can go from the grid to the chip. That's powerful. We have the scale, manufacturing scale. We have the engineering scale. We have the service scale. We have good technology. We have unique IP in some products that we are leveraging. Something that was good, I would say excellent, is supposed to be even better for the company.
I appreciate that. When you guys look within your data center business, can you talk about how you see AI versus maybe some more of that traditional enterprise cloud developing, whether it's growth share of the business, anything you could share there?
Yeah, of course everyone talks about AI all the time, and it's important. It's growing really fast. It's not the majority of the data center business we see. It's moving fast, as I said. Last year, for example, 15% of our orders were AI-related. This year is 30%. It's growing. The cloud is also growing. It's still 70%.
Wow.
Right? There is a lot coming that way. AI gets all the headlines, understandably. It's exciting, but there's more to it.
Yeah, as we kind of move to AI, you talked about the content per megawatt opportunity increasing. I guess, are you having conversations with customers on that side of the business yet or on that specific white place? Is that what makes AI so compelling to you guys, the ability to play on both sides?
Yes. The answer is yes to both. We are having the right conversations, not only the hyperscalers that we always had. We improved a lot with the multi-tenant through acquisitions and relationships. PDI, which was a small business we acquired four years ago, we tripled that business. That business also helped us pull a lot of other Eaton solutions and products through the multi-tenant data center channel. We improved our relationships there. As we start to be more of a solution provider, we were recognized by the likes of NVIDIA as a company they want to partner with and put in their roadmaps of the next chip. We work ahead of the game to make whatever they're trying to put on the market possible inside the white and the gray space.
I appreciate that. Maybe, you know, kind of talking about the ability to serve all of this demand. You know, you guys have talked about $1.25 billion of incremental growth CapEx to kind of serve all the demand that's out there. Is there any updates you can share on that, on the CapEx?
Yeah. We have a dozen projects in the U.S. today that are under implementation. They're going well. Of course, for a business to stomach 12 expansions in a year is not a small feat. I think the business is doing well, and I'm proud of my team there. In terms of completion, if that's the background of your question, out of the $1.25 billion, we plan to finish $700 million of that investment this year, and the remainder will be mostly next year. It's a little bit going to 2027, but between this year and the next, the bulk of it will be done.
We're seeing, if we kind of look at you guys, you guys incurred some margin pressure in Q2. I think there are some tariffs, but also some related to this ramp. We're also seeing a call for acceleration as the year goes on, as that capacity brings new volumes to the business. Can you talk about both the margin and top line implications from these capacity adds, both in 2025, and if you could share anything on 2026 there?
Yeah, so I'm not going to give you a 2026 guide, if that's what you're looking for. No, we're excited about the exit rate. Jokes aside, I would be disappointed if the large Americas business cannot meet the long-term average growth we committed in March, which was 10%. I think we should be there, if not north of it. Guidance will be shared later. If you think about, you talked about the margin pressure in Q2, we calculate those investments we are making and the inefficiencies that come with it to be around 100 basis points, right, of margin pressure. On top of that, in Q2, we had the costs of the tariffs and none of the pricing because we implemented prices in May. This is coming the second half. We saw all that pressure in Q2, and if all of that, the margin eroded 40 basis points.
You load the business with 100 basis points, you load with all the tariff pressure, and still the business absorbed the vast majority of it. We remain confident. We believe we're going to continue to operate well. As soon as those expenses are done and those inefficiencies start to go away, we can push the team to continue to operate better under the execute for growth umbrella.
Yeah, I appreciate that. Maybe I can follow up on the tariff impact on Americas margins. You know, clearly you guys were getting hit with tariff costs, and that pressured the margin. You guys have a lot of backlog, so maybe it takes longer to realize the price. I think the question is, do you guys feel confident that when you go out to the market and get new orders, that they're coming through at kind of a post-tariff price level?
Yes, they do.
Happy to hear that. I guess on the topic of orders, the Q2 accelerated, I mean, faster than I thought. When I tried to isolate Q2, it seemed like it was in that 20% kind of plus range. Can you talk about what drove that improvement, whether it was data center and others? You also talked about Q3 being better again. Any update there that you could share?
Yeah, so the way to think about it, first of all, we are proud of the team and the results in Q2. A good way to think about it, we shared with the investor community, we had a large, large order in Q1 last year that we are anniversary now, over $1 billion in one single order. With that huge bulky order gone, the team managed to compensate for that with, I wouldn't say bad bread and butter business, but not so large orders and stay at the same level over time. Having said that, I'm confident the book-to-build will be larger than one. Making order forecasts is very difficult because we have several large deals we are discussing and negotiating, especially on the data center space. I cannot forecast when they're going to land. They can land in Q3, they can land in Q4, they can land in Q1.
What doesn't change is when it's going to be invoiced and delivered to the customer. What matters to me is that our backlog is at record levels. We expect to have book-to-build higher than one, and our negotiation pipeline is actually 31% higher than last year. That gives me the lead indicator. When the orders will fall, they will fall.
Yeah. One thing that I think is kind of interesting is, over the last year, the view was that when Eaton or other companies with a lot of backlog, as capacity comes online, the thought was orders go down because lead times compress. We obviously saw orders accelerate. Do you think bringing capacity to market and maybe being able to serve customers quicker could be a catalyst or a driver of share gain in the market?
Definitely. Because you said, of course, the laws of the economy would say if you reduce your lead time, you're probably going to see less orders and less backlog. That hasn't happened. That shows the demand is strong. As we bring capacity in and we keep trying to drive lead times down, I think it'll be a competitive advantage for sure.
Yeah, just kind of on that point, you guys are calling for, I guess, depending on where you're in the guide, but America's organic growth to improve in the back efforts, the first half. Is that just, you're bringing the capacity online, so that's all just like incremental volumes flowing through? Is that also just prices coming through on a bit of a lag because that's to work through the backlog?
Yeah, we definitely have both. We have the pricing that's going to hit the second half. If you look at the bulk of the growth, the vast majority is volume.
Yeah. Maybe moving over to Electrical Global, you know, I guess what signs of improvement are you seeing there? I guess anything particularly you want to share on Europe. Beyond just the top line, you know, what's your plan for margin improvement there? I don't think anyone ever expects Global to do an Americas margin, but, you know, can there be a narrowing of the gap?
Yeah, so we're definitely working towards that. If I am to use the strategic framework to give you my answer. We look at the European business, and we thought about the lead for growth, and we decided we didn't have the right team to win. We decided to bring a leader from the Electrical Americas Group who knows exactly how you run Electrical Americas. He's leading our European business. He started now this year. He's bringing the best of the industry to support him. That's under the lead for growth. He has also the mission with his team to not jeopardize the MOEM and, you know, the residue business we have there that is the flow business, which is good. To build on top of that, the systems business that we have in Electrical Americas that makes us win in data centers and makes us win also in utilities.
Under invest for growth, what we are doing there is organically, we are getting our products ready to the European codes and standards, and we are working in partnerships, how we can beat our systems and our assemblies. We decided to invest in the U.A.E.. We have an investment that we kicked off at the beginning of this year to create an engineering center and also to have highly automated manufacturing to serve the growing data center market in the Middle East. That's the invest part. None of this is showing our numbers yet. It's coming up. If you look at execute, we're also running our factories better in EMEA. If you compare this year to last year already, the number for global is 100 base points of margin improvement already year- over- year.
Yeah.
Now, there's a long run to get to the Americas level. We committed in the long run this business could go up to 23%. That's all committed.
Yeah. Is it, when we kind of think about getting growth out of global, is the biggest driver there just data center spreading beyond Americas? Or are there other end markets or verticals where you think you could show improvement?
In Europe or global?
Global.
I think you see what the Asian team is doing is fantastic, right? They're growing double- digits in this market today.
Really?
Yeah, it's fantastic. Leveraging the JVs they made over time, growing organically. Great, great work. Now, can we emulate that in Europe? We can. It takes some time, but we do it.
Absolutely. Maybe moving over to aerospace, the 2030 margin target of 27%. How do you think, what do you see there in the pathway to get to that margin level?
First of all, I shared with you in the past that we are not happy with our operational performance in Electrical Global, especially in EMEA, right? Also in Aerospace. We started taking actions there. I talked about the margin improvement in Global year- over- year, 100 basis points. Aerospace improvement already 70 basis points. We see some green shoots. The business starts to run better. That also gave us the confidence to raise our growth guidance for the year by 200 basis points. We see our positions in the platforms are there, right? It's about execution in the short term. Over the longer term, we also have opportunities to win more in retrofits, especially in the defense side, especially with acquisitions we made. We can also change the margin profile there. Economies of scale with the incrementals over time, running the place better, and then a push for aftermarket retrofits.
You know, Ultra PCS specifically, can you kind of talk about how that plays into there? Can you also talk about how it relates to the margin?
Yeah, this is a very neat business. It's a fantastic small business. Around $250 million in revenue, growing strong double- digits, I would say, on the teens and with EBITDA margins north of 30%. It's accretive not only to aerospace, it's accretive to Eaton overall on growth and margins. Where they play is 75% defense, 25% commercial. They open up a number of opportunities for us in the U.S., but also in Europe where they're quite strong.
Yeah. Maybe kind of shifting back to the home market, the U.S. When I think about the Trump policy, it feels like the first angle is that it could drive more investment into the U.S. I think maybe the second derivative angle is that it could change the competitive landscape in places, whether it's big international companies or even kind of smaller players in the market. I guess, do you think there's been any impact in the competitive landscape or any kind of outlook there?
I'm not mentioning here that I like tariffs, but if there's someone benefiting from tariffs today, it's Eaton in this environment, right? We had the strongest footprint in North America, in the U.S., for a very long period of time. Even before tariffs, we decided to come with the $1.25 billion of additional investments. We are ahead of the curve. We didn't need the tariffs to make a business case for those investments, but we already started. The tariffs are only making our business case stronger. If your question is that some other players might pause their investments and decide not to come to the U.S., it could well be. I just cannot affirm that. It's logically possible. Today's benefiting Eaton quite a bit. We didn't need the tariffs to protect us. We could compete without them, but they just create additional protection for the company today.
I'd be interested to hear what your philosophy on pricing is because, when I hear the stat earlier that the backlog went from a data center with $100 billion- $450 billion, just wild numbers. There also could be some competitive tailwinds. It feels like the company would have the ability to push, I don't want to say as much price as you want, but a lot of price. Clearly that's not always the best way to run a business and maintain relationships. How do you think about throttling that back and forth?
Yeah, we always try to think about generating value and claiming part of the value as pricing. If you just want to push pricing on the same solution or product as anybody else, you probably don't deserve it. You don't get it. We are always looking for opportunities. In data centers, what we did in the past, we created products dedicated to it. Think about IP we have where we put three pieces of equipment in one box. It's a transformer, it's a switchgear, it's the controls tower in one box. The hyperscalers love that. We give them a lot of value back because less footprint is a cheaper solution than three pieces of equipment, but our margins are also higher. That's the way we think about prices. Of course, we can push because the demand is high.
We always will claim, but we also try to create value for our customers so we can claim more than our fair share of it.
Yeah, no, perfectly reasonable. Maybe going back to the portfolio, an M&A conversation. What do you, I guess, how, you guys have announced what I would consider very attractive deals when you talk about the growth rate and the multiples paid. Is there anything you can provide about how big is the pipeline or the opportunity set for you to go out there and find growth to creative businesses at maybe a multiple below your own or whatever that threshold may be?
I think we need to be very intentional. We look at the areas where we decided to play, and there are not so many. When you decide where to play, you can start browsing the market and look for it. We do that very intentionally. I don't want to share the number of targets because that would not tell you anything. The one thing I want to tell you is that we don't want to strike any transformational deals. It's not what I want to do. It's not the right time, especially with a new CEO in place. We can stomach good bolt-on acquisitions where the value creation is evident and we are the best home for the business because then we can create a good arbitrage between the multiple paid that will be always equal or lower than our own multiple.
On top of that, the after synergy is a much lower number. That's the way we are thinking.
What about on, you know, Americas versus Global? Because on one hand, I would think your ability to add value to a new business is the strongest in Americas because you could bring them into the home turf and leverage all the great stuff you do here. On the other hand, I would think maybe Global could benefit from more scale and more touchpoints coming in. How do you think about that?
It is part of our equation as well. As I said before, we believe with a new team in place, we start to run the house better. We can potentially look for deals. That is a reality. We are not in a rush. We do not need to do a deal for the sake of doing a deal. That is not the way we are wired. If we find a good business that will accelerate our organic ambitions, and we can prove once again to my original point that we can create synergies and it is a better home for a business versus standalone or any one of our competitors, we will not be shy to move. Once again, bolt-ons, easy integration, and then also higher returns. That discipline is going to continue there.
Yeah, it looks like we're up on time, but thank you so much. Really enjoyed the conversation.
I enjoyed it. Thank you so much.
Thank you. Thank you so much. That was great. I learned a lot.