Thank you, everybody. I'd like to welcome you to our 14th Annual Laguna Conference. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. I'm pleased to be here with Eaton. I'm here with CEO Paulo Ruiz, and looking forward to speaking.
Thank you. Good afternoon.
Starting off, you're getting into year two on the job as CEO. You just completed the first year, and 2026 is tracking pretty well ahead of the plan you laid out. What's changed since you started, and what should investors expect from here?
I would say our strategy is really working, and it's gathering pace. Execution, we have execution momentum. You just pointed out we are ahead of our own committed numbers this year. We initiated guidance with 8% organic growth. In the first review, we turned to 10%, and now in the second review, we said we can do 12%. We want to keep operating that way, proving that we can do more and actually increasing our own numbers. That's the spirit. That's how the whole team is working on. We feel really good about the traction and the momentum we have. If you take a step back and look at historically what the company has achieved, it took us 100-plus years to get to $20 billion, right? It only happened when we made the acquisition of Cooper in 2013.
After that, it was a decade of making the portfolio better. We reshaped the portfolio. We didn't grow much. The top line was only $1 billion in 10 years, but we improved margins significantly. That was a decade of improving margins. If you fast-forward the last three years, including the guidance I just gave you for this year, we're going to be adding $10 billion to the top line in just three years. Just think about that momentum of $1 billion in 10 versus $10 billion in three. Looking forward, that will inflect even faster right now, looking towards 2030. We feel really good about that. If you think about this in the construct of what the company is doing as an overall strategy, we see that the best years for this business are still ahead of us.
I'm really confident there's a new Eaton taking place because the strategy we have in place today is designed to do both top-line growth and margin expansion at once. We have all the measures in place to achieve exactly that. I would say out of the construct we are today as a company, you should see a new Eaton coming up, a new inflection point in terms of growth. I'm certain that all the things we did in the past and we did recently are going to pay good dividends looking forward.
To the point on that guide, any update on how things have been tracking in Q3, and any updates for the year?
We feel really good about Q3. We had a very strong July, also very strong August. We are aiming at the high end of the guidance for everything we tracked. We also look the same way towards full year. It's very strong end of the year. We are looking at the high end of the guidance for where we were. Once again, the spirit, no one is taking a victory lap here in the company. We're aiming for the upside, and we want to be able to surprise for the good side as we move on. All the measures in place. Why we feel good about this? First of all, we were ramping 24 facilities, as you guys know. Three quarters, so 16 if you think about six. So 16 of the 24 actually are in ramping phase and producing much better rates every day.
That turns to be a tailwind for us moving forward. Price cost, we took pricing actions in April, we took pricing actions in August, and we did selective repricing of the backlogs as well. That construct, together with strong end markets and record backlogs, make us really confident about not only Q3 and Q4, but also looking forward to 2027.
To that point on 2027, without guiding, any sense on how that is shaping up? Right now, we are seeing consensus and modeling incrementals below the Q4 exit rate. Any commentary around it?
You do not expect me to guide today. I know that, but it is fine. The setup is a strong one. As I said before with the ramp, most of the disruption of that ramp behind us that happened Q1 this year and Q4 last year. We start to bring much better revenue per day numbers. To be precise, in Electrical Americas, we are actually in Q2, we are showing already 25% revenue per day increase to January last year. So we grew around 16% in five quarters. It was a heavy lift. In just a quarter from Q1 to Q2, we grew 8% sequentially. It is a tremendous work by the team. So I feel really good about that. Once again, pricing is going to be a tailwind versus a headwind in price cost.
The markets are strong, and we are sitting on very strong backlogs, record backlogs as we speak. That is a very strong construct for 2027. On top of that, we took action on our portfolio, being on the acquisitive side, making the right acquisitions. Boyd is then going to start counting as organic growth starting Q2 next year. So it is going to be a huge tailwind for us. The announced Reverse Morris Trust deal with Dana is on track. When you look at Q2 next year, we are going to have Boyd counting on organic. We are going to have the separation of the Mobility business, which helps both top line and margins. So it is a very strong setup.
Then speaking a little bit more on that, on the portfolio, you deployed $13 billion in capital, agreed to separate Mobility within a year. How should investors think about the portfolio from here?
I am really proud of what the team did in terms of changing the portfolio so fast. We were even more disciplined than in the past because we picked our lanes. We said we will do data center, we will do aerospace only, therefore, we could move quicker. I am really glad that every acquisition we made is printing better numbers than we initially forecasted, so it is a good thing. Also, looking forward, if you think about this, looking forward in the portfolio, you should see us continue to have activity on the electrical side.
But you should not expect large acquisitions like the one we had with Boyd. So we are digesting, we are ramping those businesses. They are all growing very fast. So we are still going to have some bolt-on moves to make, especially in Electrical, but we do not want to make any large acquisitions in the next couple of years.
Also still kind of staying on that capital allocation framework, you mentioned the facilities ramping up, 16 already in that ramp-up phase, eight more left in the plan. Any sense on the timing from here and how that ramp should pace through 2027?
No, so this is, again, it is much easier when you are dealing with six versus dealing with 18 as we did. So we have that advantage in our books and in our momentum. But we also changed the way we operate culturally. We are much closer to the operations as an executive team, as a leadership team, and that is yielding a lot of good results. So we are fostering that culture of proximity with the operations, with the supply chains, with engineering teams. So we are working to augment and make these people successful. So that is helping us put problems and opportunities faster on the table, and therefore, we are making tangible progress as a corporation. So there will be more coming up on this cultural reset we are having, but it will be easier for us because there is less disruption, and we are better equipped.
Speaking more about that, the culture, can you walk us through Eaton's culture model, and how does this connect to the business performance we are seeing this year?
Our culture model is, at the same time, very simple and very powerful. We distilled what we expect out of our people in three different behaviors, mainly. The first one, think big. The second one, act boldly. The third one, win together. Instead of talking to you theoretically about that, what I think is better use of the investors' time here is to talk about tangible results of those behaviors in action. I think that's a better way to describe that. If I start with the first one example of many, but one example of thinking big was the fact that we sat down as a leadership team and looked at our data center portfolio, and we said, "Well, we are clearly a leader in gray space. There's a lot of growth. Are we happy with that?" The answer was no. Let's think bigger.
That thinking process pushed us to think about being a leader in the white space as well and move all the way from the utility down to the chips. With that thought process, then you look at acting boldly. We took the actions decisively to get to that point. Acting boldly in that case means, okay, we want to make an acquisition of Resilient Power because that will fast our progress on 800-volt solid-state transformer DC architectures. Let's do that. Let's make the acquisition of Fibrebond. By the way, they grew fantastically in their first year of ownership. By the way, let's go and acquire the cooling leader in the market called Boyd. That is the thinking big, putting to action, and taking bold actions to make it happen.
Winning together, I started talking about that before, but winning together is nothing else than putting everyone in the organization to work closer to where the customers feel the company. So closer to our operations, close to our sales teams, close to our design teams. We changed the way we run the company, the cadence of the company. The win together example I want to give you is actually the one with Electrical Americas, the ramp. We meet every week in a very hands-on way with the Electrical Americas leadership and their people, and we look plant by plant, and every function and every leader in the organization is there to support that team being successful. So that's, I think, a better way to describe the culture we are striving for through real, tangible examples.
I know I'm very passionate about that, so is my leadership team, and we are investing in coaching four levels of the organization. Actually, 1,500 people are going through training and coaching to behave that way. You're going to see that in our numbers. I see that every day. There's more to come.
Kind of following up on those acquisitions you mentioned, especially looking at Modular and Fibrebond, I guess when you're looking at your share of RFPs and how those are moving to prefab and modular, how do these acquisitions change your competitive positioning?
Modularization is a clear trend in the industry, especially in data centers. Not only, but especially in data centers. The big question is why is it so important to operators? There are three main reasons. The first one, everyone knows about labor scarcity for plumbers and electricians. As much as we can move that activity away from stick-built construction in the data center to a factory environment, we deal with that constraint. That's one of the key value propositions of Modular. The second one is speed. Even if you have all those electricians and those plumbers, it will take 18 months for you to build what you need to do in a data center. A module can be built in nine months, so it's half the time. The third one, some operators decide to use, some don't, but it's an extra bonus here.
When you have all this equipment put into one module, delivered as one box or one container, you can decide to put this outside the building and use most of the space inside the building for servers, where the data center operators generate revenue. They can decide to put this underground. There are many other options, but the three measures are important, and this is part of the menu of our customers using modular solutions. To give you a proof point, because this is just a theory, but the proof point, when we acquired Fibrebond, their fiscal year, they produced $375 million in revenue, the 12 months prior acquisition. The 12 months after acquisition were over $600 million, so from $375 million- $600 million.
We had in our investment thesis an expansion of their existing plant, and the build-out of a new plant was already in the works when we acquired the company. That is what we put in our financial model. That happened very quickly because they are already working on the expansion of existing site, and we just announced the build-out of a new factory in Arkansas. Think about doubling the capacity once in their existing site they operate today and doubling again with a new site. There is a lot of traction there. That is a proof point. Look outside the U.S. to see similar trends for modular, and this is why we ended up having this partnership, a joint venture with NordicEPOD AS in Europe. It is a clear trend, and it is growing.
Similarly, looking at Boyd Corporation, how does that enhance your offering to your customers? There are a lot of new entrants entering liquid cooling. What is Boyd Corporation's competitive advantage?
We worked really hard before acquiring Boyd Corporation. On our own, we hired consultants to browse the market and interview hyperscalers and chip manufacturers. We zeroed in, going after Boyd Corporation for a couple of reasons. The first one, they are the market leaders, number one. They have the engineering power that allow them to be in multiple silicon platforms that are going to be launched in the future at the same time. They have 350 design engineers, the best in the industry, and they have 150 engineers that turn those designs into producible units in the factory. They have a very strong engineering pedigree. They cut their teeth in aerospace in the past, so you know aerospace, failure is not an option. Very stringent quality, very stringent engineering mindset. They are bringing that to the data center. We felt really good about acquiring the leader.
Also, because we did not have a liquid cooling business in the company, if you go after a smaller player, we would not have a home for them, because it would be a standalone, $100 million company in the $30 billion organization. It would be tough. Having a large business, now we can augment that and grow even faster. Engineering power, leadership, and the fact they look forward in the development of the silicon also gives a lot of strategic power, not only for the cooling business in the future, but also for our power business that we are so strong today, and also software business. Let us not forget, we all talk about liquid cooling growing really fast. It is true, it is growing really fast. Last year, $1.1 billion revenue.
We adjusted our guidance this year for 1.8, so that's the growth from one to 1.8 year-over-year. I'll be shocked if they don't actually go higher than that. I think they're going to achieve higher than 1.8, in my view. Looking forward, if you think about the loads today, very few data centers actually have liquid cool direct to chip today. There's a lot of tailwind for years to come. I feel really good about it.
Looking at these changes in the industry and these infrastructures, turning to 800-volt DC, every company seems to claim leadership. Why should investors believe that Eaton will be a winner?
I think the big difference is that we looked at the architecture of a new 800-volt DC data center more holistically than just one product line. We look at everything that will be required to win in the future, and we decide that, once again, think big and act boldly. What do we do to be in the leading position, each one of those four blocks? I'm going to run through that in a minute. Before I do that, I must say, this is part of our culture in our company. We could settle where we are today because we are a leader in data centers, especially with the Boyd acquisition, the Fibrebond acquisition. Why would we bother then looking at transforming that, a business that we are a clear leader, from the utility feeder all the way down to the chip?
The answer is that there is economic value to moving to 800-volt DC for our customers, which is the 5% losses that we can avoid by moving that way. Just do the math on 5% on a gigawatt site. It's a lot. If our customers want that to happen, this is going to happen. We want to be in a position to drive that, and we want to be in a position to be future ready. To the core of your question, why you should feel that Eaton is leading there? I believe we are leading each one of the four major blocks I'm going to talk about. The first block is medium-voltage solid-state transformers. We were developing our own technology, and we decided two years ago to go after Resilient Power. We accelerated that development.
The feedback we get from both hyperscalers, multi-tenant data centers, but also the silicon providers, is that we are ahead of competition. As a consequence, we have 10 prototypes that were committed. We got those 10 orders for prototypes with these people. We are working on that as we speak. We also decided to start preparing our lines in where we produce our UPSs in a flexible way that we could produce UPS and solid-state transformer. We are ready, and we start to see activity for larger bids also coming in the second half of the year. We are already working on them. That is the first block, leading position. By the way, we are also working as a chair or co-chair for all the safety and the code discussions among other suppliers to be ready for that new world.
The second block is around when you have the solid-state transformer, you need to have DC breaker technology. We are strong there as well. We have been doing breakers forever. We are leading the pack there as well. The third piece is around power electronics. Think about UPSs, think about sidecars. We are very strong there, and we do not see any issues migrating to the new world. The fourth one is actually liquid cooling. You cannot do 800-volt direct to chip if you do not have liquid cooling done properly. We talked about Boyd, I do not need to repeat that. Everywhere you look, we have a leadership position, each one of the four. Once again, we are working to make that possible. We do not need the market to migrate to that to be successful. But when it does migrate, we are going to be leading the pack.
As you look at those technologies coming together, rack density is rising. How do you think of the content opportunity for Eaton, especially with the move to 800-volt and liquid cooling taking share?
Yeah. I will talk to you about the transition from cloud to AI, then we can talk about this new world with 800-volt DC. The move from cloud data centers to AI make a very favorable impact on our content per megawatt, moving from $1.5 million per megawatt in the cloud space to $3 million on the AI space before the Boyd acquisition. With the Boyd acquisition, that content goes up to $3.4 million. We moved from $1.5 million- $3.4 million already as a company. Looking forward, there are many things we need to answer with our customers. We are still working on the designs of the new four building block I described, the reference designs we agreed with NVIDIA, et cetera. But still a moving target.
I think the best number for all the investors in terms of modeling is still to use the $3.4 million we have today.
We're going to mature on that discussion with customers. When we have a better view, we can update you guys. $3.4 is a good planning number for the future.
Just looking at demand more broadly, data centers orders were up 85%, revenues up about 65%. How much runway is left, and how do you answer investors who think this pipeline could be a bubble?
The $1 trillion question. The market is really strong. Let me give you this. Of course, we grew 65%, revenues 85%, orders. You look at the pipeline, the negotiation pipeline was over 130% in data centers. This is what we are working today as we speak. We're negotiating with our customers. You look at what our customers announced, that most of those projects we are not even yet quoting for. Every time you look at that, the number is higher. When we released our Q2 numbers, the total announced projects for data centers was 307 GW to be built. Just think about that. Today, we checked this week, it's already 342. A month later, it's already more. You contrast to what this industry has ever built, we have installed 50 GW. Today operating there, 50 GW .
We are talking about between six and seven times what exists today is what's going to be built in the next years. Most of this is not going to turn into 2027, 2028 revenue. It's going to be a longer cycle. That's the way to think about it. Everywhere we look, we see strength in this market. I also aware of the discussions around models. I think large language models can adapt much quicker than the physical infrastructure. I don't see a slowdown. I don't expect a large slowdown anytime soon.
I guess, as you think about that visibility and orders, your backlog was up about, I think, $700 million sequentially, book-to-bill 1.3. What kind of visibility do you have, and how far out does that look?
So once again, we have a larger business, just the data center. We track our negotiation pipeline. Our negotiations pipeline was up 60%. A part of that is data centers being up 130%. So we have a lot of visibility. We also look beyond that and look at the markets. I just talked about 340 GW of data center to be built. We look at mega projects announcement that goes much broader-based to chemical plants, and pharmaceutical plants, and semiconductor plants. Every indication, including reshoring, extends to a much more solid market coming up, which is great for data centers, but goes much beyond data centers. We are proud of the portfolio we have because we have multiple paths to growth, including utilities, including commercial, institutional, industrial facilities, et cetera.
And let's not forget the smaller part of our portfolio, which is the short-cycle business. We see some green shoots of that market coming back. So it's a good setup.
To that point on the verticals outside of data centers, the growth does not seem only driven by one end market. What other verticals have been most attractive, and what are the underlying drivers there?
Still today, data centers get most of the air coverage, which is understandable. It is a very exciting market. The biggest segment we have today is still commercial and institutional. We have a massive and very traditional, very well-performing distribution network as a company, especially in North America, but also all over the world. That is a perpetual growth market. It is not susceptible to much of the cycle, and it is a good business to be in. We are also very strong in utilities. In utilities, you have all the dynamics we talked about being data centers. Even before data centers, there is electrification of society in many different areas, right? Loads were increasing even before data centers. They are going to increase much more. You still have on top of that grid hardening because of natural disasters, et cetera.
You also have old infrastructure, especially in North America, that needs to be replaced. The utility market is a growth story today, and it is going to be even stronger in the future. Just think about all this power generation coming online that all those gas turbines being sold, et cetera. This is going to turn into transmission already now, and it is turning to utility distribution business for us in the next couple of years. This is coming our way. It is a great place to be. Again, we have other markets in the electrical franchise that are also coming back, like machine OEMs. We see that coming back. We also see distributed IT, which is more on the edge, not so much on data center. That market is also recovering. We have many paths to growth. Let us not forget about aerospace as well.
That adds up.
Then kind of shifting gears, looking at electrical global, 18% organic growth. What has been driving that strength, and how durable is it, given what some of your peers have been saying about Europe?
We are really proud of the global electrical franchise as well. You said 18% growth. We see that every business inside that global segment did their work. I am talking about APAC, I am talking about EMEA, both growing 20% organically, and then our global energy infrastructure business related more to energy markets growing high teens. Everyone delivered on the quarter. The underlying performance is motivated by improvements in our portfolio, improvements in execution, and also the fact that, especially in Asia and in Europe, that we are getting a lot of traction on data centers. Coincidentally, we reported that in Q2 that the data center business for the global segment grew the same 65% as the North American business last year, coincidentally. But if you look at their backlogs for the whole business, global, the backlogs were up 103% year-over-year.
Large orders, gaining share, gaining momentum. Even if you look at the total backlog, and I got the question earlier today, "Well, Paulo, how much of that was Boyd?" Boyd was half of the backlog. If you deduct Boyd, the traditional legacy Eaton businesses in electrical global grew backlog 54%. Very strong performance. The mindset back to think big and act boldly and win together is about not looking at PMIs, not looking at this, if we have market share gains, and we have the platform, and our customers in the U.S. want us to be successful elsewhere, let's win with them. Let's win with the hyperscalers, let's win with the multi-tenant, and let's win with the local players as well. That's the mindset. No one is looking at PMIs.
Honestly, it seems like all the electrical players have been able to beat and raise on AI demand. What differentiates Eaton?
I think what differentiates Eaton is that we started early in this moment of recognizing we need to ramp. We have most of the headache behind us. I told you guys that Q4 and Q1 will be the bulk of the disruption. We have that behind us. The other thing that differentiates us in this environment is that we can categorically say today we have the most complete portfolio from the grid all the way down to the chip. Everything you see inside the data center that matters, we have a strong presence as a company, and we are not taking a victory lap here. The difference is that not only we have that, we are saying, "What's next?
Let's be ready for that environment where this is going to change to 800-volt DC, and we want to be the leader in that new world. We have all those four tech blocks I talked about. The difference is we are ready today in a very strong position all the way from the utility down to the chip, one. Two, we are working in being future-ready in that particular market. Three, we don't depend on data center only. We have many other growth avenues you asked me about. So that differentiates us. The fact that we have that connection to utility market data center is something we want to explore more as well because we can help our data center operators to be much successful in the way they handle the loads with the utility. It's a unique setup, and I think this differentiates us.
The other thing that differentiates us is the culture, because we have this culture of humility, courage, and collaboration that not everyone is displaying the same way.
Between the capacity coming online, the portfolio coming together, as we look out to the 2030 targets, that $31 billion revenue for electrical, at this point, is that maybe a floor? Can that push higher?
It is a floor. You got me. Yan is I'm looking at him here. We need to see investors next year ready. Why is it a floor? When we announced the 2030 growth set up, and let's just summarize to all investors here, we said we would grow between 6% and 9% organically, so 7.5% at the midpoint. We said we will reach a 28% margin, segment margin, and we would reach 32% margin in Electrical Americas. As you look at our set up today, including our guidance for this year, we're going to reach already 33%. What we didn't have in our model, and I told everyone, so we conservatively baked only 17% growth in data centers in that model. In Q2, we completed eight consecutive quarters of growth beyond 35%, including last one was 65%.
We're clearly ahead because of the data center growth. We also didn't include in that growth any of the M&A dollars. I said we have a strong balance sheet, and since then, we deployed $13 billion in acquisitions, so that was not part of the calculus. What also was not part of the calculus was the fact that back then, we still have, and we still have today, the Mobility business. But moving forward, as they become part of this combined business with Dana, that will have an impact, a positive impact on our growth rates organically and also in terms of our margins. We need to get all of this together. Probably going to be seeing you guys next year to make a mid-cycle review to the upside.
I guess at this point, demand seems like it's pretty hard to argue, but what most people have started to poke at is execution risk. I think some of your peers have pointed to supply chain congestion and push out some project timing. How has Eaton been able to deliver through that environment?
We've been there. It is a reality, right? We started earlier than other folks, which is a good position to be in today. Most of that hard work, and it's hard work, was a headwind for us in Q4 last year and Q1 this year. Think about building new facilities physically, but also staffing, training people, but also bringing your supply chains along. The numbers I described before of 25% revenue per day increase, that's the way we track. We track revenue per day increase. We could only get there because we did the homework in the last 18 months. Now in a much better place, having 18 of our 24 expansions behind us and ramping really fast. We see that most of that headache is behind us.
Moving forward, what we're going to do a little bit differently is to have not so many projects done at once. We did a lot of catch up as a company, so we announced one project here, we might have another project launch next year, but we should not expect the company to be running 20 projects in parallel.
I think we're about at time, but thank you again. Really appreciate it.
Thank you so much.
It's been great.
Thank you so much.