Ladies and gentlemen, thank you for standing by, and welcome to the Eaton second quarter earnings conference call. At this point, all the participants are in a listen-only mode. However, there will be an opportunity for your questions. You may queue up for a question at any point during the call simply by pressing one, then zero on your touch-tone telephone. If you need any assistance during the call, please press star zero, an operator will assist you offline. As a reminder, today's call is being recorded. I'll turn the call now over to Yan Jin, Senior Vice President, Investor Relations. Mr. Jin, please go ahead.
Good morning, guys. I'm Yan Jin, Eaton Senior Vice President of Investor Relations. Thank you all for joining us for Eaton's second 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 includes the opening remarks by Craig, highlighting the company's performance in the second quarter. As we have done on our past calls, we will 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, are reconciled in the appendix. A webcast of this call is accessible on our website and will be available for replay.
I would like to remind you that our comments today will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and presentation. With that, I will turn it over to Craig.
Okay. Thanks, Yan. Let's start on page three, like we normally do, with highlights of the quarter. I'll summarize by saying that we had another very strong quarter, and we're seeing significant increases, obviously, in our market. As a result of that, we're taking our 2021 guidance up for the second time. Our teams continue to perform at a very high level despite significant supply chain disruptions and rising commodity costs. Q2 adjusted earnings of $1.72 were a Q2 record, 15% above the midpoint of our guidance, and earnings were up nearly 100% versus last year, and importantly, 20% sequentially. Our sales were $5.2 billion, up 35%, 27% organically, and above the midpoint of our guidance. For the second quarter in a row, we delivered record segment margins. Q2 margins were 18.6%, up 390 basis points from prior year, and up 90 basis points sequentially.
We're also pleased with our incremental margins of 30%. We think strong results given the material cost headwinds that we're facing. Our order growth was perhaps the biggest highlight of the quarter. Orders are up more than 40% in each of our electrical segments, and both ended the quarter with record backlogs. Our portfolio transformation continued. We closed the acquisition of Cobham Mission Systems and our 50% ownership in Jiangsu YiNeng Electric in China. We're also pleased to have completed the sale of Hydraulics to Danfoss yesterday for $3.3 billion. The sale of Hydraulics is certainly a successful outcome for Eaton, our shareholders, and for Danfoss, who we think will be an excellent owner of the business. We want to thank our former Hydraulics employees for their loyal service to Eaton, and we wish them well under the leadership of Danfoss.
Lastly, we continue to make strong progress on our strategic growth initiatives, and I'll point out just a few highlights on the next slide. Turning to page four, you've heard us talk about the three most important secular growth trends for the company, electrification, energy transition, and digitalization. We're making significant progress in all three areas, and we're seeing strong results. Highlighting a few notable examples, I'll begin with electrification, where we've had significant wins in both our Electrical and Vehicle businesses. In Vehicle, we delivered $50 million of new wins for electric vehicle powertrains, which includes EV transmission, EV gearing, and EV differentials. I'm noting this example because it demonstrates that even in an area where many of you think about as our traditional Vehicle business, electrification is creating very large growth opportunities for the company.
In electrical, as you'd expect, our team secured attractive wins tied to renewable energy and residential applications. In this case, we're noting a win with a leading solar and energy storage OEM. In energy transition, we recently won a large distributed energy management project for a leading financial services company. This is a greenfield project and a great example of building as a grid solution. Eaton will be providing the low and medium voltage switchgear, our Foreseer electrical power monitoring software, and our microgrid controller. In digitalization, our Brightlayer team delivered a win in the industrial market with a leading global chemical processing company, to provide remote monitoring software solutions. In this application, our solutions really leverage Eaton's portfolio of electrical hardware, along with our expertise in power management, to provide the customer with real-time operational data, alarms, and insights that are delivered directly to their mobile devices.
In addition to the operating benefits, the customer will be able to use Brightlayer's industrial trending and measurement data to optimize energy usage. It's an exciting time to be at the center of these three growth trends, and we'll certainly keep you updated as we continue to progress in this area. Moving to page five, we summarize our Q2 results, and I'll point out just a couple of highlights here. First, on 35% total revenue growth, we delivered a 71% increase in operating profit. Very strong operating leverage. Second, our adjusted earnings of $690 million increased by 99%, so we're also effectively managing our corporate costs. Overall, our teams are certainly executing at a very high level. They're efficiently managing supply chain constraints, increasing productivity, and delivering the expected benefits from our multi-year restructuring program, and a trend that we expect to continue for the balance of the year.
Turning to page six, we summarize the results of our Electrical Americas segment. Revenues were up 15% organically, driven by strength in residential and data center markets, but we also had solid growth in commercial and institutional markets as well. The acquisition of Tripp Lite added 8%, and favorable currency added 1%. Looking at our sequential growth, we were up 8% over Q1. Historically, we'd have seen a 5% lift between the quarters, so I'd say our growth rate is accelerating here. Our operating margins increased 60 basis points to 21.3%, a Q2 record. This is 190 basis points above pre-pandemic levels in Q2 of 2019. Our portfolio changes, the sale of lighting and the acquisition of Tripp Lite, solid execution, and benefits, once again, from our multi-year restructuring program, all contributed to the improvement.
We're also pleased with the 43% growth in orders in the quarter, a 13% increase on a rolling 12-month basis. This led to also a 43% increase in our backlog, which now sits at record levels. We had broad order strength in all end markets, with particular strength, once again in data centers, residential, and commercial and institutional. You'll recall that at the end of Q1, we started to see some large orders in select commercial markets. This pattern strengthened in Q2, and our negotiation pipeline in the commercial market was up significantly. All data, which suggests that the second half of the year and really going into 2022 should see solid growth. Turning to page seven, you'll see the financial summary of our Electrical Global segment. As you can see, we had strong organic growth here, up 22%, and currency added some 6%.
Like the Americas, organic revenue growth was driven by residential and data center markets, but we also had broad-based strength in commercial, and institutional, and utility, and in industrial markets as well. We posted strong operating margins of 18.3%. Once again, a Q2 record, up 230 basis points from last year, and up 130 basis points sequentially. The incremental margins on an organic basis were solid at 32%, the result, once again, of good cost control and benefits from our multi-year restructuring program. Orders were also very strong, up some 46% from last year, and up 10% on a rolling 12-month basis. Once again, we had strength across all markets, with particular strength in data center and residential markets. We ended the quarter with record backlog, up some 50% from last year. Moving to page eight, we show the results of our Aerospace segment.
While we have a long way to go, we're starting to see signs of recovery in this market, which posted 17% growth in the quarter. As you know, we closed the Cobham transaction on June 1st, and the business delivered solid results in the month of June, adding 16% to our quarterly revenue. Currency also added 3%. Operating margins were 21%, up 600 basis points from last year, and 250 basis points sequentially. With improving volumes, the team executed extremely well, delivering 50% incremental margins on an organic basis. Orders on a rolling 12-month basis are still down some 16%, but this is an improvement from down 36% in Q1. In fact, sequentially, orders were up 12%. The commercial industry is seeing an increase in leisure travel, especially in domestic markets, but international travel continues to be down sharply.
We think the market will grow over the next several years, but we don't expect it to return to 2019 levels until 2024. Lastly, our backlog here has stabilized and was flat with last year. Next, on page nine, you see the financial results of our Vehicle segment. Organic revenues more than doubled with strength in all regions. Operating margins were 17.9%. We delivered very strong incremental margins, which were over 40%. The margin performance was driven by higher volume, certainly, also, once again, from the benefit from the multi-year restructuring program. Despite volumes still being down some 10%-15% below pre-pandemic levels, the business is really already sitting on the cusp of achieving our long-term margin target of 18%. Now, turning to page 10, we show a summary of our eMobility business. Revenues were up 57%, 54% organically, 3% from positive currency.
The organic revenues were driven by strong growth really in all eMobility markets around the world. Operating margins were - 6.8%. They continue to be depressed by heavy investment in new programs. As you know, we're investing in this segment in high voltage power electronics and power distribution and power protection. You should also be aware that we have significantly expanded our view of the market here. We now see large opportunities for our traditional business in the eMobility segment. These technologies include EV gearing and EV transmissions and torque control solutions. As I noted earlier, we already have wins in these areas. In fact, our traditional products have increased the size of the addressable market for eMobility that we think some $5 billion. Continues to be a really exciting segment and a big part of the company's future.
Moving to page 11, we've updated our guidance for 2021 on organic revenue. As you can see, we are significantly increasing our organic revenue growth for the second time this year with an increase in most segments. In fact, we're raising the midpoint of our organic growth guidance by 400 basis points from 8%-12%, and this is on top of a 300 basis point increase that we took in Q1. The largest increases are in Electrical Global and Vehicle, with smaller increases, as you can see, in the Americas and eMobility. With very strong first half, robust order book, and a growing backlog, we're comfortable with 11%-13% growth outlook for the year. This is despite, quite frankly, some of our markets that we'd say were in the early stages of recovery, notably commercial construction, industrial, oil and gas, and commercial aerospace.
We expect to see certainly continued recovery in these markets over the balance of this year, and we think it bodes well for 2022. Next, on page 12, we show an update of our segment margin guidance for the year. For Eaton overall, we're increasing segment margins by a 30 basis points at the midpoint, from 18.3% - 18.6%, which will once again be an all-time record for the company. The 30 basis points increase, as you know, follows the 50 basis points increase that we reported following our Q1 earnings call. We've raised the margin guidance in each of our segments with the exception of eMobility. We continue to expect organic incremental margins of around 30%, and for price and commodity costs to be approximately neutral for the year.
Our team has certainly been very effective at managing through these complexities related to price increases and supply chain constraints. We would expect this to continue through the balance of the year. On page 13, we have the remaining items of our 2021 guidance. We're raising our full-year adjusted earnings per share by $0.63 to a range of $6.58-$6.88. At the midpoint, $6.73. This is an increase of 10% over our prior guidance and a 37% increase over 2020. You'll recall that we raised guidance by $0.50 in Q1. With this increase, we're now forecasting a 20% increase from the midpoint of our original guidance, which was $5.60. With our recent M&A activities, we now see net headwinds of 1% from acquisitions and divestitures. This is down from our prior outlook of 4%.
We now expect positive currency of $350 million, up from our prior forecast of $200 million. We're also raising our guidance for adjusted operating cash flow and adjusted free cash flow, both up $200 million at the midpoint. The increase is really driven by a combination of higher profits on organic growth and sales, the timing of acquisitions and divestitures, but also partially offset by some investments that we're making in working capital given the current constrained supply chain environment. The remaining components of our full-year guidance remain unchanged. Lastly, our Q3 guidance is as follows. We expect earnings to be $1.72-$1.82, for organic revenues to be up 11%-13%, and for segment margins to come in between 19% and 19.4%. Lastly, I'll wrap up the presentation on page 14.
Now, you've heard us talk for the last few years about Eaton's transformation into an intelligent power management company. This strategy is built on the belief that there's a few secular growth trends, electrification, energy transition, and digitalization, that allow the company to grow at a much faster rate than we have historically. Every day we get confirmations that we're on the right path. We're seeing it in the growing importance of sustainability initiatives in society, we're seeing it in government spending, and we're certainly seeing it in our opportunities and in our wins. We're pleased with the progress that we've made on the portfolio. Each move has been consistent with our objectives of delivering a company that has faster growth, higher margins, and better earnings consistency. You've seen our track record on margin expansion.
The Eaton Business System is what provides the consistent approach to how we run the company, how we execute, and how we expand margins, it's working. This enables us to be on track to expand margins by the 400 to 500 basis points over the five-year planning period. As you can see, we're running ahead of plan. We're committed to our sustainability goals. They reflect the right thing to do for society, but just as importantly, sustainability is at the core of what's driving our growth. I'd also note that we published our 2020 sustainability report and our first Task Force on Climate-related Financial Disclosure reports at the end of June. I'd encourage those of you who have a special interest in sustainability to read it.
I think they're extremely well done and reflect the direction the company's headed in. Lastly, we continue to generate very attractive cash flow. We'll continue to generate very attractive cash flow, over $9 billion through 2025, which will allow us to return cash to shareholders and also make investments to grow the company. As you can see, we're off to a very strong start in 2021. At the midpoint of our guidance, once again, revenue is expected to grow 12% and earnings by 37%. With that, I'll turn it back to Yan Jin and open the line for questions.
Okay, great. Thanks, Craig. For the Q&A section of our call today, we would like to ask you to limit your opportunities to just one question and one follow-up. Thanks in advance for your cooperation. With that, I will turn it over to the operator to give you guys the introduction.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press one, then zero on your telephone keypad. You may withdraw your question at any time by repeating the one-zero command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may press one, then zero at this time. First, we'll line up with Josh Pokrzywinski with Morgan Stanley. Please go ahead.
Hi, good morning, guys.
Morning, Josh.
Craig, I was wondering if you could talk a little bit about the composition in orders in Electrical. Clearly pretty solid there, but hoping for a little bit more color on maybe the cyclical momentum versus the secular kind of electrification. I appreciate the examples on slide three, but really trying to get at how much of this is sort of illustrative versus something that you see really moving the needle here in the short to medium term.
I'd say it's really a combination, to your point, Josh, of both of those. The orders were really strong across all geographies and end markets, with, as I mentioned, the highest growth coming in data centers and residential. We talk about these secular growth trends that will be such an important part of the future of the company. We still believe strongly that we're just in the early innings of really seeing a material impact from some of these bigger secular growth trends that are going to drive, we think, the future of the organization. We're not seeing any benefits around government kind of infrastructure spending yet. I'd say a lot of what you're seeing today, I just think is a reflection of the broader strength in many of our end markets.
Certainly, we always talk about data center as a great example of the world keeps consuming and processing and storing increasing amounts of data. I think a lot of what you're seeing today is restocking because markets have certainly been strong in many of our end markets, and inventories were taken down pretty hard during the pandemic last year. I'd say, once again, broad-based strength. We talked about the fact that there's been a lot of stuff written about what's going to happen with commercial construction. Commercial construction has come back very strongly. We had outstanding orders as well as negotiations in the commercial and institutional side of the business as well. It really has been a story of really broad-based strength in orders across almost every end market and every geography.
At this juncture, we think we're at the very front end of what should be pretty exciting runway as we look forward as some of the longer cycle businesses we talked about, whether that's commercial construction or oil and gas or some of these other markets, large projects start to come back into the business. We think this should go on for a while itself.
Got it. Just on the incrementals, you guys are going to be in the kind of low to mid-30s this year coming off of really great decremental margin control last year, presumably some strain in the cost for hydraulics and I think pretty well-documented inflationary environment. Is the normalized range, once we kind of clear some of the noise out of that, still in this 30%-35% or can we go higher as maybe some of these headwinds normalize or dissipate?
We think that 30% incremental for a planning guideline still makes sense at this point, as you think about modeling the company on a go-forward basis. Clearly, we're having to make some fairly sizable investments in the business right now as we deal with a revenue growth outlook that's more robust than what we've seen historically. We'll be putting some investments in the business. We're also obviously investing pretty heavily right now in electrification in places like eMobility, and as well as in other aspects of the business, like in the Brightlayer platform that we're bringing online. We think that that 30% incremental number is still a good planning guideline as you think about modeling the future of the organization.
It's largely, I think, on the basis of the investments that we're going to be making in the business that perhaps will hold back what could be an incremental story that would expand. Given the investments that we think are important to make for the future growth of the company, we think 30% makes a lot of sense.
Understood. Appreciate all the color. Thanks.
Thank you.
Next question from Andrew Obin with Bank of America. Please go ahead.
Hi, guys. Good morning.
Morning, Andrew.
Yeah, just maybe to go into a little bit more depth on commercial construction for second half in 2022. What are you hearing from the customers? Just trying to get a sense, how much visibility is there into 2022?
Yeah. No, appreciate your question on commercial construction. That's obviously been a point of a lot of debate in general. As we talked about in Q2, our order growth for commercial construction was really in line with the rest of the business, with more than 40% growth for the entire sector, and with, quite frankly, particular strength in the global segment as well. We continue to see positive signs in commercial construction markets, and we don't think there's any reason why there should be any letup in those markets as we think about going to the second half of this year or into 2022. Our negotiation pipelines, which, as we talked about on prior calls, precedes an order, obviously.
Our negotiation pipeline for both light commercial as well as large commercial projects, including commercial buildings, was up very strongly year-on-year and up actually very strongly sequentially as well. At this juncture, we're optimistic that commercial construction will come back, and we think the second half of this year and into next year should pose fairly strong growth.
Thank you, Craig. Just my follow-up question. This has been a strange recovery, but your industrial customers, do you see them thinking about CapEx differently? I think you did highlight before your high content in semi-cap facilities, so that's one technical growth driver. What kind of longer-term conversations are you having, and do you think people are thinking differently about CapEx needs this cycle versus the prior decade? Thank you.
No, I think it's fair to say that on the industrial side of the house in general, really across many of our end markets, there's probably been historically some under-investment. I think, the big challenge that everybody's dealing with is fairly sizable labor shortages in many of the markets around the world. Investments in industrial and automation and the like tend to be what follows. We think the industrial markets are another one of these markets that I think in the relatively early stages of recovery, there's been relative under-investment in manufacturing over the last number of years. We think that market should do well into 2022, and really, quite frankly, beyond.
Thank you so much.
Yeah.
Next, we'll go to Scott Davis with the Melius Research. Please go ahead.
Hi. Good morning, guys. Good morning.
Morning, Scott.
Craig, can you talk a little bit about where you guys, what's your strategy in EV charging, whether kind of content with being a sub-supplier into it or whether you want to perhaps take a bigger role there or what? I'll just leave it at that.
Yeah. This is certainly very much at the core of our strategy for our electrical business, Uday Yadav and the team spent some time during our investor day really taking you through strategically what we're trying to get done there. It's one of the reasons why we made the acquisition of Green Motion. We acquired Green Motion, which is a European company that does everything from the physical hardware of charging all the way through the charge port operating and billing systems. We think that E-charging, whether that's at residential, commercial buildings or really more on a grid scale or in the bigger industrial application, is going to be an important part of what we're trying to do inside of our electrical business. Those markets, as you're seeing, and you see it reflected in some of the infrastructure builds that are being proposed in the U.S.
You see fairly sizable investments that are taking place in Europe and in Asia. We do think E-charging, both in the physical hardware as well as in the software, will be an important part of what we're going to try to get done in our electrical business. It's an exciting space. It's going to grow dramatically, and we'd expect to be a part of it.
Okay. Helpful. Then just as a follow-up on eMobility, can you give us a sense of kind of on the wins that you're getting, what does good look like on a content story for you guys on an electric vehicle? It can just be an illustration or example if you want, trying to get a sense of that. Thanks.
Yeah. It's tough to really pick a typical eMobility vehicle. I will tell you that as we talked about once again on our investor day, that the content opportunity for Eaton in an eMobility application is a huge multiple of what we saw in our legacy business, whether that's in some of the new electronic-based inverters, converters, power distribution.
I said also, even in our legacy vehicle business, and that's what we're really highlighting this quarter, that you think about this legacy business that we had, and you say, "What's going to happen to that business in the context of the world's transition to electric vehicles?" Well, we say, "Hey, there's a huge growth opportunity in gears, in differentials, in transmissions, hybrid transmissions for our legacy business as well." Those opportunities for us, and we laid out a goal of getting to $2 billion - $4 billion between now and 2030. The opportunity set is much larger, an order of magnitude five, 10 x greater than it would be for our traditional vehicle business, where we're doing valve and valve actuation and some charging. It's tough to pick a typical vehicle. I can tell you where we have wins, where we have had wins.
Once again, these wins and these opportunities are coming, once again, in multiples of 5x-10x what we would have on an historical vehicle platform.
Okay. Good luck, Craig. Thank you.
Thank you.
Our next question's from Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks. Good morning. Congrats on the quarter.
Thanks, Neil. Appreciate it.
Craig, I know you talked about the price-cost equation basically being neutral for the year, but I'm just curious, as it relates to Q2 and the rest of the year, what did that look like in Q2 for you guys? Is there any particular quarter where we should expect any headwinds? Just any thoughts around how far ahead you are of inflation at this point?
Yeah, appreciate the question. We're obviously dealing with fairly sizable challenges in and around supply chain, and probably no secret to anybody on the call. When we provided our Q2 earnings guidance at the end of Q1, we had an expectation around the amount of commodity inflation that we would see in the business. Commodity prices, quite frankly, have only gone up, and in some cases, fairly significantly since that time. We've naturally, as an organization, have had to continue to work to offset additional commodity price inflation more than what we anticipated. I really think about that whole thing maybe even shifting a whole quarter in terms of the pressure points that we expected to see in the business. At this juncture, when we think about the year, we're calling the year neutral.
We don't think it gets worse in terms of the impact in our company on the balance between price and cost. We think the year is neutral, and we think the pressure points in Q3 are going to be probably as great as what we expected in Q2 as a result, quite frankly, of seeing commodity prices continue to run. Once again, we're running Davos to catch up with that in terms of the things that we're doing around taking prices up in the market, as well as working on things to take costs out of the organization. Neutral for the year.
Yes.
Things have probably shifted a quarter to the right based upon the fact that commodity prices have continued to run.
Got it. That's helpful context. I guess maybe my quick follow-on question, one area that really surprised us to the upside this quarter was your Aero margin. I was wondering if you can maybe try to help parse out what really kind of benefited Aero this quarter. Should we start thinking about 20+ as like a baseline as we start to see the recovery in the commercial Aero business?
Yeah, I think if you think about it in simple terms, our team, when we were dealing with kind of this pretty dramatic downturn last year and setting an expectation that we would not see these markets come back to 2024, the team very proactively and aggressively put in a number of restructuring programs to take out some of the fixed costs that we knew would be a challenge on a go-forward basis. I would really attribute it to the team being proactive, putting in the restructuring early in the downturn, and then really doing an effective job of running the business as well as managing costs. In terms of the expectation going forward, yeah, I think it's reasonable to say that as this business improves, we approach 25% return on sales in our aerospace business back in 2019 prior to the downturn.
Our goal is certainly to get back to those numbers. I do think something north of 20% is where really we'd expect this business to perform. Certainly, as volume comes back to work our way back towards the 24%-25% return on sales that we used to be at.
Makes sense. Thank you.
Next question from Nigel Coe with Wolfe Research. Please go ahead.
Hey, Craig. Hey, this is Brandon Reagan. I'm from Nigel Coe. I just want to piggyback off of that aero comment. Also kind of not in the spotlight on the top line, but certainly very strong performance on the margin. Maybe just some more color on the components of aerospace. Like how did commercial OEM, commercial aftermarket defense perform in 2Q? Maybe just a follow-up would be, what is the outlook for defense? Has it changed at all since our last update? Thank you.
Yeah, appreciate the question. I'd say that our aerospace business probably is not too much of an outlier from what you've seen from others in the market. Clearly, the commercial side of the house continues to be under pretty significant pressure. While we're certainly seeing revenue passenger kilometers return, those markets are still running well below where they ran in 2019. We did see a little bit of an improvement in aftermarket in the quarter as that business was certainly off dramatically last year. I'd say that commercial OE continues to be weak, commercial aftermarket still weak versus where we've been historically, but improving. Really on the military side of the house, I'd say pretty much no change.
You think about that business being kind of a low single-digit grower is kind of our outlook for the military market, and we think that's pretty much consistent with what we think the outlook's going to be over the near term as well. Once again, the margin piece really, I'd say, is mostly a function of our team's ability to execute. Wasn't in any way driven by, let's say, a dramatic mix shift to aftermarket business overall.
Our next question is from Jeff Sprague with Vertical Research. Please go ahead.
Hey, thank you. Good morning, everyone.
Good morning, Jeff.
Hey, good morning. Maybe just a question on kind of backlog conversion and also just kind of the scramble going on in the channel. Craig, you mentioned you did think you saw some channel inventory rebuild out there. We've heard a lot of mixed things from other companies on that. Things like people would like to rebuild inventory but can't because there's not availability, et cetera. Maybe you could just give us a little bit of color on that dynamic and do you think we're somewhat caught up on inventory relative to where the demand is?
The way I'd characterize it today is as we think about kind of going to channel check with our distributor partners, I'd say on balance, in aggregate, inventory levels probably match the outlook for the demand that we expect. There are certainly certain segments of the market where we're woefully short and a good case in point would be what's happening today in the residential market. Certainly in the residential markets and electrical, we're well short of where we should be, and our distributors have not been able to restock. I think the fact that we're building fairly sizable backlog is a reflection of the fact that some of these end markets would like to have more inventory than they're currently sitting on.
In aggregate, I do think that inventories are probably largely in line with our view and our outlook and our distributors' outlook for the market going forward, other than in certain of the sub-segments of the market.
The backlog growth, you would attribute mostly or sounds like completely to demand side as opposed to your maybe inability to deliver a few things in the quarter?
I think there's a combination. I think as we mentioned, there are these certain sub-segments of the market where clearly, there's more demand in residential construction, as an example, than we have the ability to ship. I think it's a combination of the two. I think on aggregate, once again, markets are good. The underlying demand is good in most of these end markets, and there's certainly no inventory buildup taking place in the channel. I do think the fact the backlog has grown to the extent that it has, once again, record backlogs in both the Electrical Americas and Electrical Global, up some 40+% in both segments, I'd say is mostly a function of the fact that the markets are rebounding quite nicely right now.
Right. Maybe just a follow-up, if I could. You called out at the end of your remarks with your commentary on your deal capacity. Things are heating up. Obviously you guys have been super busy yourself. Maybe you could just comment a little bit on the pipeline, whether the organization can do more, is ready to do more, and what might be actionable, or is there something else actionable before year-end here?
Yeah. No, I appreciate the comment. The team has been, I'd say, very successful at really bedding down a number of acquisitions at very strategic, at very attractive multiples, we think, as well. It is, to your point, I'd say the deal activity has certainly heated up and the pipeline today is probably about as full as it's been in some time. I'd say we do have capacity, depending upon which segment of the business you're talking about. I'd say that one of the good things about being kind of an organization that works across multiple businesses and industries is that, and doing the deals the size that we've done, is that none of these deals are going to be so big that they're going to really consume the capacity of the entire company.
If you're talking about some of the things that we've done recently in Aerospace, yeah, they may be a little bit full on the fuel and motion side of the business, but we have capacity maybe on the other side. The same thing would be true in Electrical. We really haven't done very large deals in Electrical. We've done very strategic deals. We've done deals that I think are outstanding additions to the portfolio. I'd say by and large, in our Electrical business, we have plenty of capacity organizationally to go out and find opportunities and to bring them in and integrate them in. That will not be a bottleneck or a limiter in terms of our ability to actually go out and do transacting.
We continue to say, from a priority standpoint, we continue to be focused on electrical and aerospace as the two places that we'll likely deploy capital.
Great. Thank you.
Next, we'll go to Nicole DeBlase with Deutsche Bank. Please go ahead.
Yeah, thanks. Good morning, guys.
Good morning, Nicole.
Can we just clarify a couple things in the guidance? I guess, how much of the raised EPS came from the early close of Cobham and Hydraulics being in for an extra quarter? Can you just also clarify, did you include one month of Hydraulics in the 3Q guidance given that the deal closed in August, or has that been removed from 3Q?
Just maybe I'll work backwards. Certainly, we owned Hydraulics for the month of August. For that month, we did in fact include Hydraulics in the guide. That would add four.
Maybe I can unpack it, Craig.
Sure.
If you look at the $0.63 guide increase, first of all, we flowed through the $0.22 fee. Within that $0.22 fee, we had about $0.07 that's related to M&A timing, $0.04 Hydraulics, $0.03 Cobham. We had another $0.13, which was $0.04 for Hydraulics and $0.09 Cobham. In total, M&A timing w as $0.20 of the $0.35 fee, which is the $0.22 flow-through and the $0.13 for the remaining timing. The remaining $0.28 is related to operational performance.
Okay, that's really clear. Thanks for that clarification. I guess, can we just talk a little bit about what you guys are seeing in China? Obviously, a lot of noise with what's going on, from a data perspective and questions about stimulus from here. Have you seen any slowing in your business?
Yeah. No, I'd say no, Nicole. Our business in China grew quite strongly. We report it as a part of our Electrical Global segment. I would say that that underlying strength that you saw in our Electrical Global segment is also reflective of what we've seen in our China business as well. We'll see what the future holds, but the market to date has performed extremely well, and our team has performed extremely well, in addition to that. One of the things for us, we've always believed in manufacturing and being local in local markets, and it's one of the reasons why we've made these investments in these joint ventures, two of them that we've done so far, in China to really expand our access to the market. There's these huge tier two and tier three markets in China that we've historically not participated in.
These two JVs, I tell you, really create an exciting opportunity for our company as we move forward to really participate in the largest segments of that market, with really strong partners in China. For us, I'd say market is important. Perhaps even more important than the market is really our opportunity to penetrate the market and grow market share on the basis of really now participating in these very large segments of the market that historically have been closed to us.
Thanks, Craig. I'll pass it on.
Next, we'll go to David Raso with Evercore ISI. Please go ahead.
Hi, thank you for the time. On the electrical focus for M&A, can you help us think through where are the areas of focus moving forward? Is it more geographic? Is it vertical? make it ideally a technology that can cross geography and verticals. Just give us a sense of where you see the portfolio from here, still having opportunities and maybe some holes. I just wanted to follow up on the strong doubling of organic sales growth guide for Electrical Global. Maybe a little more color on what's accelerating so much from your thoughts three months ago. Maybe update us, if you could, on just currently the geographic sales mix of Electrical Global.
Yeah. On the M&A focus question specifically, I'd say that if you just think about it strategically, we've laid out, as a company, these three kind of major secular growth trends of electrification, energy transition, digitalization. That will be a good kind of framework when you think about where we're likely to deploy M&A dollars in terms of following these strategic kind of growth vectors that we think are important to the company. If you think about acquiring a company like Green Motion, think about acquiring a company like Tripp Lite, which is really in data centers and 5G expansion. As you think about what we've done, they ought to be really thought about as an expression of the strategy in the areas that we said that we'd like to really take the future of the company.
In addition to that, if you think about it geographically, we have huge opportunities still outside of the Americas market to really round out the business portfolio and participate, as we mentioned, like in China, in some of these very large markets that have been historically closed to us. We have those kinds of opportunities in Asia still. We have some of those opportunities that still remain in Europe. There will be some geographic plays where we'll actually do things to augment, supplement the portfolio as a way of participating in markets that we have historically, essentially not played in as fully as we do, let's say, in the North America market.
I think you're going to find that there's a pretty wide set of opportunities that we have to continue to look at ways of growing the company through M&A in our electrical business based upon these broader strategic platforms, as well as the geographic expansion, and filling some of these product gaps in some of these other emerging markets of the world. The other question that you had with respect to kind of the global business and why the increase in the guide? I'd say, one, if you just think about it on a relative basis, the global markets fell more than the Americas business, the comp is a little easier there. Also in some of these global markets, specifically in Europe, for example, they're now coming back.
The reopening of these markets is also coming into the business at a time when, once again, the markets are ramping. The same kind of reopening kind of phenomenon that took place in the U.S. off of a higher base because they didn't close as much, is now starting to take place in markets across Europe. As I said, it's every place. It's not just in these historical hot segments of data centers and residential. We're seeing it in commercial institutional. We're seeing it in industrial. We're seeing it in utility. Really, it's a broad set of end markets that are really responding nicely in Europe and, quite frankly, in Asia as well as these economies continue to open. Our underlying growth in Asia and our underlying growth in the European pieces that make up the global business, those markets, I'd say, both performed very well.
The one segment that, if you recall, that we report inside of Electrical Global that tends to be or will be more of a later cycle play will be what's happening in our KraussMaffei business, which is kind of the place where we really get most of our oil and gas exposure. That market is starting to see a number of green shoots. Still certainly not back to levels that it was at historically. We think, second half of this year and into 2022, that market also starts to come back and should help continue to drive growth in the Electrical Global segment. It's really a kind of a broad range of these end markets, most of which that are doing well right now.
It's pretty broad, but if maybe you can help us with just some numbers, update us geographically, the current mix. I assume KraussMaffei, right, that is within the industrial piece within Electrical Global. If you can remind us roughly the size of KraussMaffei nowadays.
Yeah. Maybe we can take that one offline, David, and you can talk to Yan Jin about what we've given historically in terms of that business. I just want to make sure we're consistent with what we provided historically in terms of splitting out the global segment, and so we don't end up with a select disclosure issue.
That's fine. Thank you very much. I appreciate the time.
Thank you.
Next, we go to John Walsh with Credit Suisse. Please go ahead.
Hi. Good morning, everyone.
Good morning.
wanted to build upon a couple of earlier questions. I appreciate the price-cost commentary for the balance of the year, but just wondering, as you look across your portfolio and as we think about incrementals next year, where you think price will be most sticky? Maybe you can just remind us the historical experience coming off of the last deflationary cycle. I think, under the prior segments, products held a little bit more price than the systems business, but any color there would be helpful.
Yeah. Appreciate the question on price cost. In many ways, we're kind of all working through this period of unprecedented commodity inflation and learning together in terms of where it's actually going to land. As I said earlier, we anticipated that we would've seen the worst of it in Q2. It looked like a lot of those pressure points have been pushed out into Q3, into the second half of the year. Once again, I think as a general rule, we talk about being neutral between price and cost. I don't think there's any reason to suggest that that won't be the case, that price cost will continue to be neutral. It does, as you can imagine, put a little pressure on our incrementals as well, as you don't typically get a normal incremental on commodity inflation.
In terms of how it impacts incrementals, it obviously puts downward pressure on incrementals. Having said that, we still think 30% from a planning perspective is the right way to think about incrementals for the company. On price stickiness, I'd say that, typically speaking, if you're in an inflationary environment and the commodity costs are up, the price is going to be sticky. In this kind of environment, it's never easy to get price. I'd say in this kind of environment, it's very understandable that prices are going to go up. It's very well publicized. Everybody's dealing with the same challenges. I would imagine that price will be very sticky in this environment given the supply shortages across the board, the fact that markets are doing well, really today, I'd say almost across the board.
It's never easy, but this is probably one of the easiest times, at least in my professional career, to actually pass on price because essentially the environmental factors are essentially warranting it. We're seeing labor inflation as well. All of these things bode well for at least the price environment and suggesting prices will likely be sticky through this part of the cycle for some time to come.
Great. Maybe just a follow-up to that. A lot of color given about geography in the last question, but we've seen very strong organic growth from a lot of your competitors as well. I was just curious if you're noticing any discernible share shifts that you would call out, or if it's more kind of the strength of the market, or do you think there might be some pockets where you're gaining share? Thank you.
Yeah. If you think about it today, I'd say, largely, we think shares are pretty much holding across the board. There's always going to be quarterly timing depending upon what companies do and various end markets and segments or the geographic mix. I would suggest to you that probably at this point in time, given the fact that so many of us are dealing with supply chain challenges, and there's probably more business out there than any of us can handle, and we're building pretty large backlogs and probably other companies are as well. My speculation would be that there's probably not large share changes taking place at this point in the market. We're probably holding market share in terms of our core businesses.
We would imagine that, really, until you get to the point where you actually have enough capacity to serve the underlying demand overall and you stop building backlogs, that share shift is probably not going to be something that's a big part of the picture, at least in the near term.
Great. Thanks for taking the questions.
Next, we'll go to Julian Mitchell with Barclays. Please go ahead.
Hi. Good morning. I just wanted to ask about cash flow, as I don't think that's been touched on yet. I saw the free cash flow guide went up, but if I look at the year's numbers in aggregate, it looks like you're guiding for about an 11% free cash flow margin this year. The adjusted sort of conversion from net income is maybe in the mid or low 80% range. Just wondered if you could sort of remind us what are some of those major headwinds on the free cash flow margin and/or conversion at present, and if there are any specific items, maybe CapEx coming down next year or working capital headwinds easing when we're thinking about cash flow margins and conversion into 2022.
Julian, if you look at last year, we finished the year at $2.6 billion in free cash flow, which was considered a strong year. This year, we characterized it as a transitory year. Having said that, we're going to spend roughly $200 million more in CapEx this year, which takes us down to four, which compares to the midpoint of our guide, which is $2.2 billion. I'd put that additional $200 million in investments in working capital given this environment that we're in.
Certainly, as you think about 2022 and beyond, being above 100% on free cash flow conversion is certainly where you'd expect the company to perform. As Tom mentioned, this is really kind of a transition year due to inventory build and increase in restructuring spending, increase also in CapEx.
I think it's also important to note on an operating cash flow base this year to date, we're a little bit ahead of last year. We feel good about our cash flow performance this year.
Thanks for clarifying. On the top-line side, just wanted to try and understand what you're seeing in the utility markets at the moment. There is a lot of sort of chatter out there anytime there's a storm or something about grid hardening and all the rest of it. Just wondered if you could give us an update on the utility piece, and how the utility market growth looks this year, relative to your overall sort of electrical revenue growth guides, which I think sort of average out globally in the low teens type range? Thank you.
I appreciate the question on the utility market, because as we've said before, this is a very different market segment in terms of what it represents for Eaton and what it represents for growth than it has historically. Historically, a market that's really been kind of a very low single-digit growth market. We think as we look into the future for the utility market, we think it becomes one of the faster-growing segments inside of the company. Maybe that growth is mid-single digits in the near term. As you think about some of the big investments that have to go into energy transition first, which is obviously a really big one, then that obviously involves things like grid hardening and grid resiliency due to climate change and some of the weather-related events that we've seen.
We like the utility market, and we think that that market will certainly be a growth market into the future. I will say that we've not yet seen, once again, these big inflection points that we would expect to see in the utility market. We think most of that growth is still out in front of us. Those markets, as you know, they tend to move more slowly. We have, over the last number of years, seen more investments going into the distribution side of utility, which certainly plays to our strength. The bigger plays that we think around grid hardening, grid resilience, energy transition, the things that utilities are going to have to make fairly sizable investments in, we think most of that growth is still out in front of us.
Great. Thank you.
Our final question will be from Ann Duignan with JP Morgan. Please go ahead.
Yes, thank you. Appreciate you squeezing me in. Most of my questions have been answered. Maybe, Craig, a similar question on data center demand, how you saw it progress through the quarter, just from an orders perspective, maybe versus start of the year, and then maybe regionally also, what you're seeing going on in data center demand. Thank you, and I'll leave it there.
Yeah, thanks, Ann. Appreciate the question. It's obviously one of the most exciting segments that we're in. Certainly, the acquisition of a company like Tripp Lite just strengthens our hand there in terms of what data centers represent for the company overall. It's the one market I'd say that we have very clearly for some time now seen global strength, which we see it in every region of the world, and we see it across really almost every segment of data centers, whether that's the on-prem, whether it's the co-lo operators, whether it's the hyperscale. Data center market just continues to surprise to the upside. As we've said before, that those markets, they can be lumpy. There could be a quarter or two or even a year or so where a particular hyperscale player will take the time to consolidate and not expand.
The business can be lumpy, at least specifically in hyperscale. The projections for that market and what we've experienced is that it continues to surprise on the upside with respect to growth. I think this year we're talking about high teens kind of growth in the data center market. As I said, as we've looked at that market and we've looked at our own forecast for that market, it's a big piece of what's performing better than what we originally anticipated when we put our guidance out for the year. Once again, this whole idea of more data, more storage, more compute, the world's more connected. We think it's just a trend that's going to continue for a very long time into the future.
Okay, good. Thanks, guys. As always, Chip and I will be available to do any follow-up questions. Thank you. Joining us, have a good day.
All right. Thank you.
Thank you.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.