Ladies and gentlemen, thank you for standing by. Welcome to Eaton's first quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question, please press one and then zero on your touch-tone phone. You'll hear an acknowledgment tone that you've been placed in queue. You can remove yourself from queue at any time by repeating that one zero command. If you're on a speakerphone, we ask that you please pick up your handset before pressing the numbers. If you should require any assistance from an operator during the call, please press star and then zero, and an operator will assist you offline. As a reminder, today's conference is being recorded.
I would now like to turn the conference over to our host, Eaton's Senior Vice President of Investor Relations, Mr. Yan Jin. Please go ahead.
Hey, good morning, guys. Thank you all for joining us for Eaton first quarter 2021 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 including opening remarks by Craig, highlighting the company's performance in the first quarter. As we have done on our past calls, we'll be taking questions at the end of Craig's comments. The press release and the presentation we'll go through today have been posted on our website at www.eaton.com. This presentation, including adjusted earnings per share, adjusted free cash flow, and other non-GAAP measures. They're 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 comments today will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual result may differ materially from our forecasted projection due to a wide range of the risk and uncertainties as described in our earnings release and presentation. With that, I will turn it over to Craig.
Okay, thanks, Yan. Appreciate it. Hey, we'll start on page three with recent highlights. First, I'd just say, we had a terrific quarter, and we're significantly increasing our full-year guidance, as you saw. Our teams have just done an outstanding job of managing through this dynamic market environment, which is reflected in our strong results. Q1 adjusted earnings per share of $1.44 or a solid 15% increase year-over-year and 18% above the midpoint of our guidance. Our Q1 revenues of $4.7 billion are up a half percent organically, which was well above the high end of our guidance range of down 3%. This outperformance was driven primarily by the two electrical segments as well as our vehicle business. We also posted a Q1 record for segment margins of 17.7%.
In looking at our incrementals, we generated $73 million of higher profits despite having $97 million of lower revenues. This was the result of, we'd say, strong execution, ongoing improvements in the cost structure from the multi-year restructuring program that we announced in the second quarter of 2020, as well as closely managing price and inflation in the quarter. Our cash flow was also very strong. Adjusted operating cash flow increased by 42%, and our adjusted free cash flow increased by 62%. We had another successful quarter of M&A, closing three deals. We're also making good progress towards the closure of the previously announced acquisition of Cobham Mission Systems, as well as the divestiture of hydraulics. Finally, we recently announced the agreement to acquire 50% of Jiangsu Yineng Electric's busway business in China, an important part of our growth strategy for the Asia-Pacific region.
Having been quite busy on the M&A front, we thought it'd be helpful to provide a summary of these three recent deals. We covered Tripp Lite and Cobham Mission Systems acquisitions in some depth during the investor meetings. Each of these three deals here certainly advance our strategic growth objectives in our electrical business. First, Green Motion, based in Switzerland. It expands our capabilities in the electrical charging market, where we expect to see significant growth over the next decade linked to energy transition. Their proven charger designs and advanced power management capabilities and billing software are valuable additions to our existing energy storage and power distribution offerings that support our view of everything as a grid. We also closed our previously announced investment in HuanYu.
HuanYu is based in China and provides a strong portfolio of products that will open up significant growth opportunities in our business throughout Asia Pacific. They make cost-effective circuit breakers and contactors and that give us access to tier 2 and tier 3 markets in Asia Pacific. Finally, last week, we were pleased to announce the agreement to acquire 50% of Jiangsu Yineng's Electric busway business in China. Yineng's strong busway capabilities in China, combined with Eaton's broad portfolio of products, will really position us well to participate in the high-growth data center, industrial, and high-end commercial segments and allowing us to pull through related electrical products. The HuanYu and Yineng transactions, I'd also add, significantly expand our addressable market in China and in Asia Pacific, certainly allowing us to accelerate our growth rate in the region.
Moving to page five, we summarize our Q1 financial results, and I'll just note a couple of points here. First, acquisitions increased sales by 1%, but this was more than offset by the divestiture of lighting, which reduced sales by 5.5%. You'll recall that we sold the lighting business in March of 2020. Second, segment margins of $831 million were 10% above prior year, and this is despite a 2% decline in total revenues. This is largely the result, I'd say, of solid execution, restructuring savings, and really our ability to effectively manage price and inflation during the quarter. We expect the inflation impact to worsen, certainly in Q2, but we will more than fully offset this for the full year. Lastly, our adjusted earnings of $577 million, up 12%, and when combined with our lower share count, we delivered a 15% increase in our adjusted EPS.
Turning to page six, you see the results for our Electrical Americas segment. Revenues were up 2% organically, driven by strength in data centers, residential and utility markets, which offset weakness in industrial and commercial markets. The acquisition of Tripp Lite and PDI added 2% to revenues, while the divestiture of lighting reduced revenues by 14%. We're very pleased to also have closed the Tripp Lite acquisition sooner than planned and to welcome their team to the Eaton family. Operating margins, as you can see, increased sharply, up 330 basis points to 20.5%, a quarterly record. As you can see, profits were $24 million higher on significantly lower revenues. These results, once again, were driven by good execution, cost savings, and really favorable mix due to the divestiture of lighting. We're also pleased with the 11% orders growth in the quarter.
This was driven by, once again, strength in data center and residential markets. Our backlog was actually up 23% versus last year, due to ongoing strength in, once again, data center and residential markets. We were also encouraged to see some very large orders in select commercial markets. Perhaps a sign here that these markets too are beginning to turn positive. While it's difficult to judge, we do think the order strength could have been due to some concern about some of the supply chain shortages that you certainly have been reading about. Next, on page seven, we show the results for our Electrical Global segment. We posted a 5% organic growth with 5% favorable impact from currency, largely due to the weaker dollar. Organic revenue growth was driven by strength in data centers, residential, and utility markets. You can see the pattern here.
We also delivered a 250 basis point increase in operating margins and posted a new Q1 record of 17%. Our incremental margins in the segment were also strong, more than 40%, and were also driven by good cost control measures, saving from actions taken from our multi-year restructuring program. Orders grew 7% in the quarter. Like sales, the primary contributors to the growth came from data centers, residential, and utility markets. I'd say dragged down by the earlier COVID-related declines, orders declined 5% on a rolling 12-month basis. Lastly here, our backlog was up 17% versus last year, driven by the same three end markets. Moving to page eight, we summarize our Hydraulics segment. Revenues increased 11%, with strong 9% organic growth and 2% positive currency impact. Operating margins stepped up significantly to 15%, a 420 basis point improvement over last year.
Our Q1 orders were also very strong, up 53%, driven primarily by strength in mobile equipment markets. As we anticipated, Danfoss did receive conditional regulatory approval from the EU to acquire the hydraulics business, which is an important step in the process, and this sale is still expected to close in the second quarter here. Turning to page nine, we have the financial results for our Aerospace segment. Revenues were down 24%, including 26% organic decline, driven by the continued downturn in commercial aviation. Currency, as you can see, added 2% to revenues. As you can also see, operating margins were down 310 basis points to 18.5%, down, but still at very attractive levels overall. Our team, I give them a lot of credit. They moved quickly to flex the business and were able to really deliver better than normal decremental margins of approximately 30%.
Orders were down 36% on a rolling 12-month basis, once again due to the ongoing downturn in commercial aerospace markets. I would add, on a sequential basis, we are starting to see some improvement as orders were up 14% from Q4. Lastly, our previously announced acquisition of Cobham Mission Systems remains on track, and we expect the transaction to close at the beginning of Q4 2021. On page 10, we show the results of our Vehicle Segment. As you can see, revenues increased 9% and were much stronger than anticipated. The strongest growth came from global commercial vehicle markets and from the Chinese light vehicle market. Just as a point of reference here, NAFTA Class 8 production was up some 12%. Operating margins also improved significantly here to 17.3%, another quarterly record and a 380 basis point increase with incremental margins of nearly 60%.
The strong margin performance was driven certainly by increased volume and also from savings from the multi-year restructuring program that we've undertaken. Despite volumes that were still below pre-pandemic levels, this business is approaching our target segment margins of 18%. Making very strong progress in our vehicle segment. One additional noteworthy development in this segment was the introduction of the new automated transmission for the heavy-duty truck market in China through our Eaton Cummins JV. This product, I'd say, is already getting great traction and seeing strong growth in the market. Turning to page 11, we summarize our eMobility segment. Here, revenues increased 15%, 13% organic, and 2% from currency. We experienced solid growth in global vehicle markets, which was driven here both by high and low-voltage products. Operating margins were a negative 8.4% as we continue to invest heavily in R&D.
As I've reported in the past, we continue to manage just a really robust pipeline of opportunities. Of note in Q1, we secured a multi-year agreement with a leading global automotive customer to buy our next generation Breaktor circuit protection technology for battery electric vehicles. This award represents $33 million in material revenue sales, and we hope to be awarded additional vehicle platforms using the same technology. This win, I would say, really does highlight the strength of our electrical pedigree and how we're able to leverage this strength to grow in the eMobility markets. On slide 12, we've updated our organic revenue guidance for the year. As you can see, we're significantly increasing our organic revenue growth for the year with our strong Q1 results. We're optimistic about the remainder of 2021.
Our strong order book and growing backlog persists that markets and market demand is really increasing and improving across most of our end markets. We now expect overall Eaton organic growth to be up 7%-9%, this is up from 4%-6% previously. While we're experiencing some supply chain issues, we have confidence in our team's ability to manage through these temporary challenges. As you can see, we've kept our forecast for aerospace unchanged. Vehicle has increased by 600 basis points. Electrical Global increased by 400 basis points, all other segments have increased by 300 basis points. Encouragingly, I'd say here about our electrical segment, we're seeing higher than expected demand across all of our markets, with the exception of utility, that market remains in line with our original outlook, which was for mid-single digit growth. Really strong performance in the electrical segments.
Moving to page 13, we show our updated segment margin guidance for the year, where we're also significantly increasing our guidance. For Eaton overall, we're increasing segment margins by 50 basis points at the midpoint, with a range of 17.8%-18.3%. We've raised our margin guidance in each of our segments, with the exception of aerospace and eMobility, which are unchanged. Compared with our original guidance, we expect to deliver better incremental margins for sure on this higher volume. I'd also note that for the full year, we continue to expect net price versus inflation to be neutral. On page 14, we have the balance of our 2021 guidance. We're raising our full year adjusted EPS by $0.50 to $5.90-$6.30, a midpoint of $6.10. This is a 9% increase over our prior guidance and a 24% increase over 2020.
With our recent M&A activities, we now expect a net 4% headwind from acquisitions and divestitures, down from our prior outlook of 8%. I'd say it's also worth noting here that our segment margin guidance of 18.1%- 18.5% is 190 basis point increase at the midpoint over 2020 and will be an all-time record. It's also, just as a point of reference, above our pre-pandemic margins of 17.6%, which we posted in 2019, which was also an all-time record. We're off to a strong start, and I'd say well on our way to achieve our longer term targets of getting to 21% segment margins. The remaining components of our full year 2021 guidance remain unchanged. Lastly, for Q2, our guidance is as follows.
We expect to be between $1.45-$1.55 on earnings, for organic revenue to be up 24%-28%, for segment margins to come in between 17.5%-17.9%. If I could, just finally on page 15, I'll wrap up with a kind of a high level summary of why we think Eaton remains an attractive long-term investment. I begin with first, our intelligent power management strategy really does position us to capitalize on these key secular growth trends that we've talked about for the last couple of years. Electrification, energy transition, and digitalization. We're gaining traction here in all of these areas with a number of new wins. Our technology solutions, including our Brightlayer platform, are being well-received by customers. As a result, we continue to expect higher than historical organic growth rates for the company.
Over the next five years, we're reaffirming our view that 4%-6% outlook looks very much in hand. This accelerated growth, plus our, what I call proven ability to deliver margin expansion, will allow us to deliver on average 11%-13% EPS growth per year over the next five years. We'll also continue to deliver very strong free cash flow, which provides the optionality to invest in organic growth, to add strategic acquisitions, and to return cash to shareholders. Our commitment to ESG remains strong. We'll continue to develop sustainable solutions for our customers, for our own businesses, and certainly for the environment that we all share. With that, I'd like to turn it back to Yan. Obviously, we're very pleased with a really strong start to the year and looking forward to answering your questions.
Thanks, Craig. Given our time constraint at only an hour today, really appreciate if you guys can limit your opportunity to just one question and a follow-up. With that, I will turn it over to the operator to give you guys the instruction.
Thank you once again for questions. Please press one then zero on your touchtone phone. You'll hear an acknowledgement that you've been placed into queue. You can remove yourself from queue at any time by repeating that one zero command. Our first question today is going to come from the line of Nicole DeBlase of Deutsche Bank. Please go ahead.
Yeah, thanks, guys. Good morning.
Morning, Nicole.
Maybe we could just start with a clarification question, getting a lot of inbounds from investors about this. When we look at the guidance today relative to where you were a few months ago, what's been added in with respect to hydraulics into the second quarter, and then the incremental earnings associated with Tripp Lite closing early?
Yeah, appreciate the question, Nicole, and it's obviously been a very busy quarter with a number of what I'd call positive moving pieces. Our current assumption on hydraulics is that it would close here in the second quarter, you could think about a couple of months at about $0.05 a month for hydraulics. Specifically as it relates to Tripp Lite, you could add about $0.10 or so for excuse me, about $0.07 for Tripp Lite, there's a couple of cent negative associated with the acquisition of Green Motion. About $0.15 or so between the M&A activity.
Okay, got it, Craig. That's really clear. Thanks for that. Maybe you could talk a little bit about price cost. I know you said neutral for the full year, but as we think about the phasing of margins throughout the year, are there certain quarters where you will be facing more of a price cost headwind, and so we should be factoring that into our segment margin assumptions?
Yeah, no, certainly appreciate that question as well. It's obviously one of the bigger topics that we're dealing with internally, and I think you're dealing with in terms of trying to model our results and others. I'd say that what we experienced in Q1, I'd say, is largely we were able to offset a lot of this commodity inflation that we had been experiencing through hedges and working out of inventory and other agreements. The biggest impact for us will be in Q2. It's one of the reasons why you look at our Q2 guidance and you say it may be a little muted given the very strong Q1, but that really is the quarter where we expect to see the biggest impact of material cost inflation. We're obviously getting price in the marketplace.
It does take us typically a quarter or two to fully get pricing seated into the marketplace. Certainly Q2 will be the most challenging quarter. It is certainly factored into our guidance that we have laid out, and it will get better from that point forward. Q3 and Q4 will be certainly better on an incremental basis than Q2 will be.
Got it. Thanks, Craig. I'll pop off.
Fully offsetting it for the year. I would add as well, sometimes in hyperinflationary environments, it is tough to get a full incremental margin on material cost inflation. We'll certainly more than offset it. Certainly, if you think about in hyperinflationary environments, you generally don't get a full incremental margin on inflation.
Thank you.
Thank you. We'll go next to the line of Andrew Obin of Bank of America. Please go ahead.
Oh, yes. Good morning.
Morning.
Just a question. You guys did these deals in China, and you don't see a lot of companies in the U.S. being, A, being physically able to sort of find things to do in China and, B, sort of execute on them. Can you just give us a bit more background as to how these deals came around and also very intriguing opportunity that you're able to do more deals like that in China? Thank you.
Yeah, thanks for the question as well. We are absolutely thrilled with what our local team has been able to do in the China market. I would, in fact, put the emphasis on our local team. Our local team, having been in the market for a number of years, building strong relationships with some of the electrical companies in the region, were able to pull off some really attractive deals. I think a lot of that is attributed to the fact that we're willing to partner. These are JVs that we have 50% of. We won't consolidate the revenue, at least in China. We'll leverage their products and their low-cost footprint, and we will consolidate revenues as we grow these businesses outside of China.
I'd say it's a combination of our local teams' connectivity to the market and Eaton's willingness and proven track record of really being a very successful JV partner. As you know, we have a number of JVs inside of our company in China, in our aerospace business in China, and I think we have a very strong reputation in the country around a company that you can very effectively partner with, and at the same time, do things that are helpful to both our company and to the companies that we're partnering with. We're thrilled with it. I would add that to your other question, we are in fact having a number of other conversations around other similar types of transactions.
Nothing to announce here today, but we're hopeful that we will continue to build on kind of this pattern of filling product gaps, and whether that's a gap because it's a technology that we don't have, like the busway products in the China market, or it's a product gap in the form of the ability to really compete in the local market because you have a low-cost product. We see other opportunities to do very similar things in other parts of the portfolio.
Wow, fascinating. Thank you. Just a question on data centers. Can you just give us color on how much visibility do you have in hyperscale, enterprise, and maybe by region as just, it's been such a hot market and such a big driver of growth for you guys. Just, do you have one quarter visibility, six months, a year? Just maybe a bit more of a deep dive here. Thank you.
Yeah, certainly the data center market has been one of the hottest markets in the electrical space, and we see that market growing by low double digits. It's a very strong market, and we think it'll be a very strong market for a very long time. We get back to this whole idea of saying, to the extent that you believe that the world will continue to generate, consume, process, and store increasing amounts of data, the data center market will continue to be a very attractive market to be in for a very long time. In terms of visibility, specifically in hyperscale, we're typically in the 6-12 months out window in terms of having fairly good visibility.
As we've said historically, hyperscale specifically tends to be a relatively lumpy market, and so orders come sometimes in big slugs in one quarter or one year versus the others as they reconfigure their data centers. Certainly, when you look at the market more broadly, we are just thrilled by our position in this market and by the prospects to continue to grow here.
Thanks so much.
Thank you. We'll go next to the line of Nigel Coe with Wolfe Research. Please go ahead.
Thanks. Good morning. I want to dig into Electrical Americas a little bit deeper. Obviously very impressive margin leverage there. You called out residential and data center as particularly strong markets. Is there any mix impacts here, Craig? We're used to industrial being margin accretive, maybe commercial being dilutive, but how does residential and data center impact margin mix?
I'd say if anything, to your point, Nigel, I think you know the business well, that we tend to make higher margins on a relative basis in the industrial side of the business, and the more commercially oriented stuff tends to be lower margin. We certainly have not experienced any positive mix in the Electrical Americas business. I think this margin that you're seeing and us posting these record levels of margins is really a function of the things that we talked about, which is our teams are executing well. We're certainly benefiting from some restructuring that we've done as a company, and the volume is obviously helping.
The big one is obviously, if you think about Electrical Americas, we divested the lighting business, and as we continue to work the portfolio in what we call grow the head and shrink the tail, we continue to do things inside of the company to ensure that we're serving attractive markets. No, we would expect that there's more room to grow when we think about margin expansion in our Electrical America segment, and certainly as the industrial markets come back, that's going to certainly be accretive to margins.
Right. Okay, great. Thank you. On the end markets, you basically said that all of them were going higher with the exception of utility, which remains in the mid-single digit range, you called out strength in Electrical Global, but not U.S. I'm just wondering, what we're seeing in the U.S. utility space, are we seeing maybe slightly softer trends in the first half of the year? Any color there would be helpful.
The utility markets for us, I'd say, are largely performing in line with what we originally said. We knew as we started the year that utility markets would be a relatively strong market at mid-single digit growth. The market has just really continued to perform in line with those numbers. Really, the distinction, I'd say, between the commentary around global versus the U.S. is really a function of change versus our original expectation. We have utility markets continue to be a very attractive space. We think with the work that we've talked about and the things that are going on around energy transition, hardening of the grid resilience, we're seeing a lot of good activity. If you look at our broader negotiations in our electrical business, they were up quite significantly from the first quarter.
Yes, this is a market that we continue to be optimistic about. We think the utility segment, very much different than its history, is really going to be one of the important growth vectors for the company as we look forward.
Right. Thanks, Craig. I'll leave it at that.
Thank you. We'll go next to the line of Jeffrey Sprague of Vertical Research. Please go ahead.
Thank you. Good morning. Craig, maybe just to pick up a little bit on that discussion about the industrial. Are you actually seeing anywhere in your business kind of early signs that some of those later cycle elements of your business are beginning to pick up? Perhaps it hasn't materialized in orders yet, but just kind of what you're hearing from your customers and the channel would be interesting.
No, it's obviously too early, Jeff, to declare victory on any of this stuff, but we are certainly seeing some early signs in the industrial markets of things starting to come back. As I mentioned, negotiations for, as you know, in our businesses, you have a pipeline, you do negotiations, and you end up with a booking and ultimately a sale. We track negotiations in our business, they are up quite significantly from the fourth quarter, most of that increase, I'd say the biggest part of that increase in what we call our negotiations, is coming from our industrial businesses. We're certainly seeing some green shoots there.
You can see a lot of discussion about this whole trend towards reshoring, you certainly see that today in the semiconductor market, for example, where a number of very large semiconductor companies have announced very sizable projects here in the U.S., those are very big industrial projects. Yes, we're clearly seeing some early signs. Too early to, let's say, once again, declare that we know exactly where we're headed here, but certainly encouraging.
Secondly, unrelated, but just back to what you're doing here on M&A. Maybe just a little more on Green Motion. It sounded like that was a really interesting partner at your Analyst Day. You chose, obviously, to just kind of take them out in entirety. What was the thought process there? Sounds like maybe there's no revenues, but you feel like you have, or very little, but you have some revenue visibility out into 2023 and 2024?
Green Motion is a company that started back in 2009. It's a relatively new organization, as everything in and around electrification of vehicles is new. Some revenues. Revenues are relatively modest at this point. As I mentioned, diluted the margins as we continue to invest in this business. Yet, strategically, it's just a perfect fit for us. Uday and his team spent a lot of time talking about energy transition and what it's going to mean in terms of opportunities with respect to the grid as electric vehicles continue to grow. They have both the hardware and the software technology and the billing systems to allow us to really participate in this really fast-growing and exciting space. Today they have a solution that works perfectly in the Nordic countries and most of Europe.
We'll be taking that technology and integrating it with what we're currently doing in North America so that we have a solution for the North America market as well. It's really an important part of our strategy, and it really accelerates what we would've done organically inside of our company by acquiring this company. This gives us, I'd say, at least a couple of year head start for what we were planning to do organically. I think if you think about it in terms of our longer term goals of where we said we'd be by 2030, probably doesn't change that materially because we planned on making these investments organically. It certainly accelerates our progress.
Great. Thank you for that.
Thank you. We'll go next to the line of Scott Davis with Melius Research. Please go ahead.
Good morning, guys.
Morning, Scott.
Scott.
A lot of good stuff talked about so far. If we backed up a little bit, Craig, and just talked through the supply chain issues. Your company, your business mix is a little bit different than kind of our average. How would you rank the supply chain issues? Is it more about higher raw material costs? Is it more about freight? How do you guys think about it, and how are you managing it?
I'd say, probably fair to say, Scott, we're dealing with all of those challenges. We're dealing with certainly, if you look at the basket of commodities that we buy, whether that's copper, aluminum, sheet steel, we're probably seeing today levels of inflation in those key raw materials that probably are at levels that we have not seen since probably 2010, 2011. Clearly, commodity cost increases on our key input materials is quite a significant challenge. As you mentioned, freight around the world is up dramatically as well. With these challenges, obviously you're dealing with the intermittent availability issues on things like you're reading in the newspaper with respect to semiconductors, which is impacting our vehicle business and also, to a certain extent, is impacting our electrical business.
I think we're dealing with this entire kind of portfolio of challenges right now in the market, and our teams are managing through it extraordinarily well. I would tell you that the good news in all of this is a great indicator of just how strong the market is. The other side of dealing with these challenges around inflation and freight and the like is that something very positive must be going on in your end markets, and that's really what we're experiencing. As you know, getting price as a company is something that we do. It's certainly easier, in certain cases, distribution, for example. As long as the market moves, price is a good thing for distribution.
Today I would tell you that we're dealing with each of these challenges, and there'll be certainly intermittent hiccups that we'll see in a business or in a product line or in a quarter. By and large, our teams are managing it well, and we'd expect things to start to improve, beginning in Q3, and then by the time you get to Q4, perhaps at the end of the year for a lot of the bigger issues to be behind us. We're managing through all of these challenges, but we've been here before. This is nothing new for our company. We've dealt with inflation before. We've dealt with these intermittent supply chain issues before, and I'm confident that we'll manage through this one extremely well as well.
That's helpful, Craig. Just, I think this is part of Jeff's question, you mentioned the semiconductor fabs and kind of this onshoring thing. I always think of the rule of thumb, a new factory is kind of 10% of it is going to be electrical content. How do you guys think about a semiconductor fab? I've actually never been in one. Is it heavier electrical content than an average kind of-
Yeah
widget factory? Is it lighter? Perhaps some color there would be helpful.
Yeah, no, clearly the energy requirements of a semiconductor facility would tend to be higher than your typical commercial project, for example. The electrical intensity of that kind of project would be much higher. One of the other markets that we didn't talk about as well is water wastewater. That's another one of these markets I would tell you where that we're starting to see growth in projects with another market that once again has higher electrical intensity than some of the other products on the industrial side.
Very helpful. I'll pass it on. Thank you and good luck, guys.
Thank you.
Thank you. We'll go next to the line of John Inch of Gordon Haskett. Please go ahead.
Thank you. Good morning, everybody.
Good morning.
Hey, Craig. Is aerospace right-sized for a pending commercial flight rebound over the next couple of years, likely on a lagging shop visit aftermarket basis, but still a rebound nonetheless, or would you actually have to begin to rehire?
I appreciate that question, John. It's a little different one than we're getting around aerospace these days, but certainly appreciate it. I would tell you that one of the things that we've done is we've lived through cyclical businesses and have a lot of experience inside of our company around how do you manage these businesses that go through, from periods of time, these pretty big cyclical swings. I would tell you that our business is sized appropriately and is well-positioned for a rebound in commercial aerospace. The bigger challenges always tend to be the supply chain.
What we're trying to do and make sure that it's not only we have our house in order and we're ready for the rebound, but also throughout the supply chain that everyone is prepared, and like everything else in these businesses, it's the weakest link that tends to create issues for your businesses. Yeah, our business itself, very well footed, with a viewpoint of we think it's a 2023, 2024 recovery. We did take some restructuring actions inside of the business. Most of it was around fixed structural costs that will not come back. Things that we would've done anyway, even in a more healthy environment. As we talked about this in prior years, what we try to do in each of our businesses have what we call shovel-ready projects.
This list of restructuring projects that we would undertake at any point in time, and then we simply accelerate them or decelerate them based upon the market environment that we're living in. That's simply what we did in aerospace. Things that we wanted to do anyway, we would've done them anyway. We simply accelerated them during this period of low economic activity. Not things that take capacity and capability to respond out of the system. We're in great shape, and obviously we're working with our suppliers to make sure that they're also prepared for the ramp.
Yeah, no, it sounds like a pretty good positioning to be in. Maybe just as a follow-up, Tom, I wanted to ask, in your first 90 days, what have you uncovered? I'm sure, with your boss sitting there, you're going to say a lot of positive things, but I'm wondering also, though, if you could talk about areas for maybe opportunities for Eaton and where your background could be additive to this. Maybe some areas for improvement, I don't know, whatever you'd like to say.
Yeah. Appreciate it, John. I guess, a few things that I've seen. The first one is just a tremendous amount of opportunity. I knew that coming in, it's even more than I expected. Specifically in the area of organic growth, I think that's a great opportunity for us and, hopefully that's something that I can be additive to. Another thing that I've found is, with all of the issues that we've been managing, whether it be commodities or supply chain, just the professionalism of the organization to get after it and just to mitigate it has been really remarkable. The final thing is just a really top-notch leadership team that wants to win. All of that is just a great combination, and I couldn't be happier to be here.
Perfect. Thank you both.
Thank you. Next, we'll go to the line of Jeffrey Hammond with KeyBanc. Please go ahead.
Hey, good morning, guys.
Good morning.
Hey, Craig. I think early in the year or when you first gave your outlook, commercial construction and oil and gas were laggards. Can you just kind of frame what you're seeing there and how you're feeling about those end markets versus a couple of months ago?
Yeah. Appreciate the question, Jeffrey. I'd say, largely speaking, in the context of what's happening in our electrical business overall, they are still clearly laggards. Within commercial, there are certain segments that continue to do well. We've talked about, for example, warehousing, for example, as a segment that is very strong. Once again, it's another one of these markets with a much higher electrical intensity than other commercial applications. The commercial market, I'd say, our view on it in general, what we call commercial institutional, is that this year we're calling that market to be flat to up slightly. Still a laggard relative to the overall electrical markets that we're seeing in general. In oil and gas, while we are in another place where we're certainly seeing some green shoots and the market is certainly firming, the rig count is increasing.
We're starting to see more MRO projects and the like. That market is improving. Once again, relative to the overall electrical market, that market is still a laggard versus the overall electrical market. That market we're still calling to be essentially largely flat on the year. Still not a return to kind of the growth that we certainly would expect to see, perhaps beginning at the end of this year into next year.
Okay, that's helpful. Then just on vehicle, you guys raised your outlook pretty materially and certainly Q1 is a lot better, and that seems to be where a lot of the supply chain and semiconductor chip issues are. Can you just speak to kind of the push-pull of kind of raising that pretty materially versus some of the supply chain headwinds you're seeing in those markets? Thanks.
Yeah. I appreciate that. I'd say that, if you think about the semiconductor issue, it certainly has hit the light vehicle market harder than it has, let's say, the commercial vehicle market. Not to say there aren't challenges in commercial vehicles, there are. We have issues there as well, but it's certainly been a much bigger issue in the light vehicle market. The one thing that's helped us a little bit, I would say, with respect to the way the OEMs are responding to kind of these shortages of semiconductors is that they're tending to make decisions to manufacture, to produce their more expensive vehicles. What you're finding is trucks, and things where they tend to make higher margins are also the places where Eaton has higher content.
Our impact, and the way we're being impacted by this semiconductor issue is being somewhat muted by the way the OEMs are prioritizing what they produce. As we think about Q2, it's maybe a 2%-3% impact on revenues. Revenues would have been 2%-3% higher, but for the semiconductor issue overall. Our teams are once again managing it well, but it is a real issue and one that we expect to really deal with throughout Q2 and maybe even into Q3.
Okay. That's interesting. Thanks.
Thank you. Next, we'll go to the line of Josh Pokrzywinski of Morgan Stanley. Please go ahead.
Hey, good morning, guys.
Morning.
Hey, Josh.
Craig, maybe to follow up on your earlier comments in electrical. It sounded like you thought you guys were benefiting a little bit from supply chain shortages, maybe some advance ordering or, I don't know, double ordering, people just sort of trying to get ahead of supply constraints. How much of that 23% backlog growth that you saw in the Americas, would you attribute to something that's maybe a bit more atypical versus the underlying business? Trying to get a handle on what some of that timing mechanism might be worth.
Yeah. It's obviously a difficult question to really know for certain in terms of the behavior and what's going on specifically in the channel. I would say that we probably did see some order surges that took place at the end of Q1, in the month of March.
Tough to call it double ordering. I think some of that ordering could be certainly trying to get out in front of price increases. Some of that ordering could be to put in some safety stock to protect against concerns about shortages. I would say that overall, if you think about inventory levels, I'd say inventory levels in general, I'd say are still probably slightly below where they really ought to be. If you think about some of the end markets of residential and others, and let's say in some of our factory OEM equipment markets, inventory levels there are probably well below where they need to be. We're still kind of hand to mouth with respect to dealing with some of the demand that we're seeing.
I would say, if kind of the spirit of the question is, do we think this strength that we're seeing in the electrical business has legs, or is it a little bit of an artificial pop that we're seeing? I think mostly we're comfortable that it's real. The underlying demand that we're seeing in these end markets is real, and that's what's really driving the ordering more than anything. We'd love to be in a position today where we actually had more inventory, and that same sentiment, I would tell you, would be largely true for almost all of our customers.
Got it. That's helpful. Maybe just following up on electrical. Obviously, at the Analyst Day, a lot of discussion around electrification and sort of some secular shifts in the way customers are buying. As you guys are bidding on projects, is there some, I don't know, higher content level that you're seeing show up that would suggest this is playing out? Is this just kind of project velocity picking up rather than, I guess, project content?
No, I would say that it's both. It's both velocity and it's also content. One I always go back to, which is an easy one to relate to, is really what's going on even in residential construction today. If you think about today, the electrical content in your homes, as you move from a standard mechanical circuit breaker to an electronic circuit breaker, or a circuit breaker that has the ability to do fault protection. We're seeing more electrical content in almost every project that we participate in almost every single end market. I just think this idea of, as we talk about the digitization connectivity, these broader secular growth trends are really requiring an increase in the electrical content in the equipment that we provide. I would say it's both.
It's both the velocity of projects, as well as increased content on every project that we sell.
Got it. Appreciate the color. Best of luck.
Thank you. We'll go next to the line of Joe Ritchie of Goldman Sachs. Please go ahead.
Hey, everyone.
Joe.
Thanks.
Hey, Joe.
Craig, I know you've been pretty front-footed on the investments that you've been making on the eMobility offering. Saw this interesting announcement last week with ABB initiating a carve-out of their business, their business being smaller than your business today. I'm just curious, you guys have been front-footed as well in terms of your portfolio. I guess, how are you thinking about this business in longer term, and is this a potential opportunity for a carve-out of this business as you build momentum?
Yeah, we obviously followed that announcement as well from ABB. I'd say that every company's got their own strategy around how you unlock value in your organization. As we think about the connectivity between what we do in our eMobility business with our broader electrical business, we see just tons of synergies between them. We really think about that as being a key growth platform for Eaton and a great source of synergies with respect to the way we develop technology, the way we leverage scale in our supply chain. We really do see it as an integrated part of our company as we go forward.
If you think about one of the examples that we mentioned in the earnings call today around this Breaktor technology, which is basically a resettable circuit breaker that's used in a vehicle application in a market that has historically only used fuses, that's a great example. That core technology came from our Electrical business. That's where it was developed. Our eMobility team lifted that technology, naturally modified it for the commercial vehicle space, and here we landed a number of key wins that we think at maturity, we could be talking about it's $100 million worth of business, in this kind of space around this Breaktor technology once we get to full maturity, and we bed down all the wins that we're working on right now.
We really do see it as a core piece of the way we run the company, the way we leverage our scale, and the way we'll ultimately grow our business and synergies that will flow back to both our Electrical and to our eMobility segment.
Makes a lot of sense, Craig. Appreciate the color there. I know we've talked a lot about different end market trends, but I'd be curious if you guys could quantify how April has been trending relative to some of the inter-quarter trends that you saw in the first quarter.
Yeah, I'd say that we had a good April and naturally, we're working against some rather modest comps given COVID-19 last year. The month of April for us came in very strong and came in actually slightly better than what we were forecasting. At this juncture, we think everything is looking good for another strong quarter in Q2.
Got it. Thank you, guys.
Thank you. Next we'll go to the line of Ann Duignan of JP Morgan. Please go ahead.
Yeah, good morning. Most of my questions have been answered. Just maybe on the electrical side, can you talk about any growing interest or quoting in terms of state and local governments, either retrofitting for renewable energy requirements or retrofitting for modernization of infrastructure? Are you seeing any of that kind of activity pick back up? State and local budgets are in better shape than we might have anticipated now with all the money they've gotten in terms of aid. I'm just curious if you're seeing any evidence of green shoots there.
Yeah. I appreciate that question as well, Ann, you're absolutely right. The infrastructure needs in our country are vast and what's happening today in terms of the stimulus programs that are being either approved already or proposed by the Biden administration are going to put significant dollars in the hands of both state and local governments. I can tell you today, it's early days in terms of what's been approved already. I'd say that we are starting to see some of those projects, when you look at kind of the C30 report, the public sector has tended to be a little stronger than the private sector when you think about what's going on in commercial construction. We obviously have seen some of that already. The biggest piece of it we think is still out in front of us.
We think that, and obviously it's going to depend upon where these dollars go in terms of this infrastructure bill. If it's in roads and bridges, that probably won't have a material impact on our company. If it's where the Biden administration is pointing a lot of those dollars, whether that's in reduced energy consumption, the greening of the economy, electrification of the economy, building out the electrical infrastructure, grid resiliency, a lot of the things that the administration are talking about, not baked into our current forecast and outlook, could be another real, I'd say leg of growth for our company. We're hopeful, but I think today we've seen very little of that really show up in our business.
Okay. That's helpful. Thank you. Then just back on Green Motion on the electrical charging company in Europe. Can you talk a little bit about what is so differentiated about that company? We think about charging as being commoditized very quickly over time, the barriers to entry are not that high, and it's very regional, and there are standard issues across different countries. Can you just talk a little bit about why that company and why you think they'll be the winner?
Yeah. I'd say, clearly when you think about the charging infrastructure side of it, there's obviously the hardware. I think when you think about the piece that today you could argue is not very differentiated, it's really the hardware itself, it's the equipment. We view that as really more of as a gateway, and the real value creation really comes in the software associated with how do you manage the charging infrastructure. Yes, they have charging, and they have the hardware associated with charging. That piece for us is interesting because we do think that depending upon the application that you're in, all charging isn't the same. There is an opportunity, we believe, depending upon which segment of the market you're serving, where the charging infrastructure in and of itself is important.
We think there's an opportunity to really pull through and couple the charging infrastructure with what we do on the electrical equipment and gear side, which we think will be value creating. The real value ultimately is really in the software and the way the solutions around how do you manage the charging of vehicles, of fleets, manage the load in a smart way in a really complex environment. That's ultimately where we see the biggest value and what really intrigued us a lot about what Green Motion has already done and the ability to do billing as well, and what Green Motion has already done in the Nordic countries.
Anything further, Ann?
No, thank you. Sorry, I was on mute. Appreciate it.
Thank you. We have time for one more question that will come from the line of Julian Mitchell of Barclays. Please go ahead.
Hi, good afternoon. Maybe just a clarification question around the free cash flow. I don't think anyone's asked about it yet, but that guidance was unchanged, I think, from before. The adjusted net income guide was raised by about $200 million. Just wondered what the moving pieces are. Is it around bigger working capital headwinds, or is it more to do with perhaps a lot of those sort of adjustments to EPS are non-cash? Just wanted to check on that. Thank you.
Joe, I think the way to think about it, the working capital piece is it's just early. I'd say that today we are dealing with a number of uncertainties as it relates to supply chain, and we may need to build a little bridge inventory to deal with some of these supply chain challenges. The way I think about it more than anything is just, it's just early in the year and some uncertainty around how some of the supply chain challenges are going to work their way through the system. As you saw in the numbers, we had a very strong Q1 in free cash flow, better than our plan, for sure. There's nothing particular that we can see today that would prevent that from playing through for the year.
It's just early and there's a number of these uncertainties around what's going on in the supply chain, and that's what kind of held us back from taking that guidance up at this point.
Thank you. Just a quick follow-up on aerospace specifically. The margin guide for the year embeds maybe a 200, 300-point step up from Q1 for the balance of the year. I assume that's commercial aftermarket recovering and carrying a very high mix tailwind with it. Maybe just help us understand what your assumption is for commercial aftermarket sales growth for the year in that context.
Yeah. Commercial aftermarket, the aftermarket typically lags the OEM by a quarter or two. We are certainly expecting a lift in aftermarket as we get into the second half of the year, and that's certainly going to be very much accretive to margins overall. That's certainly baked into our assumptions. The other place, as I said, we did a lot of restructuring in the company. A lot of that went into aerospace. Certainly as our restructuring programs get completed, we'll see those benefits as well show up in our expanded margins. We're very comfortable with the margin outlook for aerospace. Even in Q1, the margins that we delivered in that business of 18.5%, very attractive margins on volumes that are down dramatically.
As we think about the business and the margin profile overall, nothing that I'd say would be extraordinary or Herculean in our effort to deliver the forecast.
That's great. Thank you.
Okay. Okay.
Okay, guys, thanks for all the questions. As always, Craig Arnold and I will be available for any follow-up questions. Have a good day.
All right. Thank you.
Thank you, guys. Bye.
Thank you. 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.