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Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, today's conference is being recorded.
I would now like to turn the conference over to your host, Yan Jin, Senior Vice President of Investor Relations. Please go ahead.
Hi, good morning. I'm Yan Jin. Thank you for joining us for Eaton's second quarter 2022 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 include opening remarks by Craig, highlighting the company's performance in the second 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. 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 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 current earnings release and the presentation.
With that, I will turn it over to Craig.
Okay. Thanks, Yan. Appreciate it. And we'll start with a summary of the quarter on Page 3, and I'll begin by noting that we had a strong quarter. We posted a number of all-time records led by 11% organic growth. Our performance was particularly strong in our Electrical businesses, both in the Americas and Global. And as you can see, orders remain strong, and we continue to build record backlogs, supporting the outlook for the year and really, in many cases, I'd say, into next year.
And I'd emphasize that nearly all of our end markets remain strong, but we're seeing significant strength in commercial, in industrial and data centers, and residential markets and our Electrical businesses. And in our Aerospace business, we saw strong growth, in the commercial business, both in aftermarket and in OEM. This strength, I'd say, is reflected in order growth in Electrical, which was up 25% and the Aerospace business, which was up 19% on a rolling 12-month basis. And our backlog was up some 74% in Electrical and 12% in Aerospace.
As reported, we also delivered adjusted EPS of $1.87, a 9% increase over prior year and an all-time record, more than offsetting a $0.12 headwind from the impact of acquisitions and divestitures. You'll recall that we owned the Hydraulics business in all of Q2 last year. The $1.87 a share was close to the high end of our guidance range as well. We also posted an all-time record segment margins of 20.1%, up 150 basis points over prior year and above the high end of our guidance. So in addition to strong growth, our teams have done really an effective job of managing price to offset inflation.
And lastly, we're raising our full year guidance as well. We're increasing our organic growth forecast from a range of up 9% to 11% to up 11% to 13%. And we're increasing our full year adjusted EPS to $7.56 at the midpoint, 14% year-on-year growth and despite additional headwinds from FX, from higher interest expense and lower pension income.
Moving to Page 4, we show the financial results for the quarter, and I'll just note a few items here. First, our revenues were flat year-over-year with 11% organic growth offset by the net impact of acquisitions and divestitures of some 9% and 2% from negative FX. And we're certainly very pleased with this level of organic growth, but I would also note that growth could have been much better but for persistent shortages of electronic components and COVID-related lockdowns in China.
Second, currency headwinds were worse than we expected in our guidance and almost $150 million impact versus prior year. As you'll see in our forward guidance, we expect this number to get worse in the second half. The FX headwinds will also reduce our adjusted EPS by approximately $0.05 in the quarter. Lastly, I'd like to emphasize that we really did achieve a number of all-time records in the quarter, including segment operating profit, segment operating margins and adjusted EPS.
Next, on Page 5, we have the results of our Electrical Americas business, and really just a strong quarter across the board here. As you can see, organic growth up 16% and record segment margins of 23.2%. We delivered strong growth across all end markets, with particular strength in commercial, residential and industrial markets. And organic growth actually accelerated from Q1, up some 10%, and with sequential acceleration in nearly all of our markets with the biggest increases coming from utility, data centers and commercial markets.
We did manage to -- through a number of fairly significant supply chain constraints, but did see improvements in metals and resins and logistics, but continue to see challenges in electronic components. Orders on a rolling 12-month basis were up 29% with strength across all end markets with a range of anywhere from up 18% to up 39%. So we continue to be pleased with strong demand that we're seeing in our end markets and with our backlog, which increased some 89% to a new record level.
On a sequential basis, our backlog growth was up almost 20% from Q1. We also delivered record operating margins of 23.2%, up 190 points driven largely by better-than-expected volumes. And of note, we were successful in offsetting inflation with price and expect this to continue to be on the plus side in the second half.
Turning to Page 6. We show the results of our Electrical Global segment, which produced another very strong quarter, including all-time record sales. In fact, this is our fifth quarter in a row with double-digit organic revenue growth. Organic growth was 12%, with 7% headwind from currency. We saw growth in all regions with particular strength in data centers, commercial and industrial markets. And orders on a rolling 12-month basis were up some 19%, while our backlog grew 38% to a new record level. We also delivered record Q2 operating profits and operating margins. At 18.9%, operating margins were up some 60 basis points from prior year.
And lastly, we recently closed a new joint venture in China by acquiring 50% of Jiangsu Huineng Electric, which manufactures and markets low-voltage circuit breakers in China for the renewable energy market. And I'd say here, this is our third electrical JV in China in the last eight months, which allows us to expand our market participation by offering what we'd say is a multi-tiered portfolio of products serving this very high-growth market both inside and outside of China. And on a combined basis, these three JVs increase our addressable market to about -- by about $17 billion. And so really important part of our future growth strategy coming out of these JVs.
Before we move to our industrial businesses, here's what I'd summarize the performance of our combined Electrical business. Overall, our electrical sector posted a strong Q2, with 14% organic growth and a 150 basis point improvement in margins. And of note, we really have not seen a slowdown in any of our markets. We continue to see strong growth in orders and backlogs are at record levels. And I'd say that the secular growth trends that we've discussed in the past, including energy transition, are clearly showing up in our order book.
Moving to Page 7. We have a recap of our Aerospace segment. Revenues increased 19%, including 10% organic growth, 12% growth coming from Mission Systems acquisition and 3% currency headwind. Organic growth in the quarter was particularly strong in our commercial aftermarket and commercial OEM businesses. On a rolling 12-month basis, orders increased 19% while backlog was up 12%.
In the commercial market, as many of you know, travel continues to show positive improvements in both domestic and international markets, certainly a positive indicator for future growth and is consistent with what we saw in the quarter. I would add that while strong, our commercial aftermarket bookings are only at 85% to 90% of their pre-pandemic levels. So we still have ample room for additional growth in this particular segment. And commercial OEM activities, as you've read, also continued to recover.
For military markets, we expect to see increased tailwinds in defense spending, including an uptick in U.S. defense budgets. We've already seen renewed commitments from the European NATO members and expect this to lead to increased defense spending over the next several years. We're also pleased with the profitability of this segment as operating margin stepped up 90 basis points to 21.9%. You'll recall that the peak margins for our Aerospace business was 25%. So we expect this number to continue to move up over the next few years.
Next, on Page 8, we summarize the performance of our Vehicle segment. Revenues were up 5%, which includes 7% organic growth and 2% negative currency. We had particular strength in the North America light vehicle markets and in our South America business, which was partially offset by flat performance in Europe and weakness in China largely due to the COVID lockdowns. Operating margins were down some 260 basis points driven primarily by margin compression from inflationary costs and the normal lag in our ability to recover price in the marketplace. We do expect that the price inflation equation will improve in the second half, and it's reflected in our outlook for the year.
Turning to Page 9. We show the results of our eMobility business. Revenues increased 55%, which includes 11% organic growth, 46% from the acquisition of Royal Power and a negative 2% currency impacts. During the quarter, we also delivered more than $70 million of material wins, including a number of wins that leverage our core competency as a company in power distribution and power protection. And while still slightly negative, we narrowed the operating losses by some 530 basis points. This improvement was delivered -- generated by higher volumes and certainly by the acquisition of Royal Power.
I'd also note that at the six-month point, our integration of Royal Power remains on track, and the expected synergies allowing Eaton to sell a broader solution to the marketplace is playing out just as we had hoped. Overall, we continue to make steady progress towards our 2030 goal which is to create a $2 billion to $4 billion business with attractive 15% segment margins. And as we noted at our investor meeting earlier this year, we expect the segment to deliver $1.2 billion of revenues and 11% margins by 2025.
Next, on Slide 10, we have the updated guidance for 2022. As you can see, for the second time this year, we're increasing our organic growth guidance for all but one of our segments really based upon continued strength in all of our end markets. We're raising our overall organic growth from 9% to 11% to 11% to 13% on the back really of strength in our Electrical segment, where we've increased growth by 300 basis points in the Americas and 150 basis points in Global.
For margins, we're raising our full year guidance for Eaton to be in the range of 20% to 20.4%, which represents, at the midpoint, a 130 basis point improvement over 2021. The two changes in the segment include increasing margin guidance for Electrical Americas by 70 basis points to 22.2% at the midpoint and lowering our margin targets for vehicle by 120 basis points to 16.5% at the midpoint. And as we talked about, the Vehicle reduction really reflects the timing and margin compression associated with inflation versus price realization that we discussed earlier. So overall, I'd say a strong first half, including robust demand and orders, record levels of backlog, and we're very well positioned for the year.
Moving to Page 11. We show the balance of our guidance for the year. For the second time this year, we're raising our '22 guidance for adjusted EPS, which is now forecast to be between $7.36 and $7.76 a share. And as I covered on prior pages, we're increasing our organic growth outlook to 11% to 13%. I would note this is partially offset by $250 million of negative currency, which compares to our previous guidance of negative $250 million. The stronger dollar requires us to, in this case, offset some additional $0.08 of earnings versus our prior guidance, which we are clearly doing and is reflected in our outlook.
We also expect that our corporate expenses will now be $20 million to $40 million above 2021 levels or between $580 million and $600 million. So another $0.04 to $0.08 headwind that we are offsetting in our adjusted EPS guidance for the year and this is primarily due to higher interest expense and lower pension income.
So to recap, we're raising our adjusted EPS guidance by 4% -- by $0.04 despite between $0.12 to $0.16 of incremental headwinds from FX, interest and pension. The remainder of our full year guidance remains unchanged.
And now just a few highlights on our Q3 guidance. We expect adjusted EPS to be between $1.95 and $2.05 per share, organic growth to be between 13% and 15%, and segment margins to be between 20.6% and 21%. And at the midpoint of our guidance, margins are expected to be up some 70 basis points from Q2. And at EPS midpoint of $2 a share, our Q3 guidance represents 14% growth versus prior year.
So just wrapping up on Page 12, just to recap a few points. First, I'd say we continue to realize the benefits of our active portfolio management, which is certainly showing up in our record levels of financial performance. Second, we're seeing secular trends that are enhancing our end market growth rate now and we fully expect this to continue into the future. We've discussed growth in electrification and energy transition and digitalization for some time now. And these trends, really, I'd say, have only accelerated.
So despite all the talk about a potential slowdown and downturn in the market, and we'll be ready if we have one, we're focused on investing to capitalize on what we see as the super growth cycle, driven by favorable trends and the recovery in some of our other end markets. So every time you hear sustainability, climate change and resiliency, you're really hearing about growth opportunities for our company that we're capitalizing on today and will be for the foreseeable future. And this is certainly showing up in our sales results, our orders and our backlog, which are all at record levels.
Now these factors obviously contribute to our confidence in our ability to raise guidance for the year. But more importantly, I'd say they really give us confidence in the long-term outlook for the company. In the short term, we're working through supply chain disruptions, focusing on controlling the things that we can control, building more resilience in our operations and delivering our commitments.
But with that, I'll turn it back to Yan, and we'll open it up for Q&A.
Okay. Good. Thanks, Craig. For the Q&A section today, please limit your question to one question and one follow up. Thanks in advance for your cooperation. With that, I will turn it to the operator to give you guys the instruction.
[Operator Instructions] And our first question will come from the line of Andrew Obin from Bank of America.
So yes, a question for Craig. The view among investors, right or wrong, is that we will see an economic downturn soon. So how would Eaton's Electrical incremental margins perform in an environment where the majority of revenue growth is from pricing versus sort of more normal periods was balance of volume and price contribution?
Appreciate the question, Andrew. And I'd say the first of all, in general terms, in our company, we've always performed well in an economic downturn. And we know how to do a few things well. And certainly, one of those is we know how to flex the company in the event of an economic downturn and we typically perform much better from a decremental basis than we do, certainly on an incremental basis. And in a typical recession, we would see some 20% to 25% decremental performance in our business.
And I don't think that our Electrical business will be largely different than that. I think that, at this point, as I mentioned, we're not anticipating a reduction in growth in our business even in the event of a typical mild recession, we think our company and certainly our Electrical business will continue to grow. You saw some of those order numbers, the backlog numbers that we talked about, our negotiation pipeline has never been stronger.
And so we think that the company overall as a result of a lot of portfolio-related changes that we've made as a result of these secular growth trends performs well in the -- even in the event of an economic downturn. But if there is one, we have a playbook. We understand what we need to do in the event of an economic slowdown that impacts our revenue. We have projects identified ready to go if we end up in that scenario, but that is certainly not our base case. But I'd say you could think about 20% to 25% decrementals in the event of slowdown, a material slowdown.
Great. And then just a follow-up, maybe just speaks why you're confident, but can we just get your initial view on Senator Manchin news and potential additional $370 billion on spend on energy security? Like how meaningful could this be for Eaton's end market? And more broadly, have you started to see orders tied to U.S. and the U.S. stimulus bills, which both have sizable energy infrastructure spending levels?
Yes. I mean I'd say the compromise that Manchin and the other members of the -- certainly House have come up with at this point would be certainly positive for our company. If you think about where those dollars are going to go in whether it's energy transition, whether it's related to EVs, whether it's related to building out some of our critical infrastructure, water, wastewater, airports, I mean, it is certainly a net positive for our company overall. And I'd say that at this juncture, we've not factored obviously any of that in. That becomes naturally an additional tailwind for the company.
All of these spending bills obviously need to go through the final approvals and ultimately be signed off on by the President. But I'd say from a timing standpoint, that really becomes largely a '23, '24 kind of tailwind for the company overall as are most of the stimulus-related projects. Very seldom do you have a stimulus bill approved that results in any near-term impact on revenue, but it's certainly all very positive for the long-term growth outlook, especially in our Electrical business where we'll see most of these benefits.
And any impact from what's been passed already? Are you starting to see it in the numbers? Or it's just robust numbers reflect a lot of it already?
Yes. No, I'd say at this juncture, on the margin, there have been some minor projects, I'd say, Andrew, that we've seen some benefit from. But most of this stuff, I'd say, maybe you get something in the fourth quarter, minor, but you don't really get to any material impact from most of these stimulus measures until you really get into '23 and some of them actually extend out into '24, depending upon the type of project and the lead time. But all positive, all net positive for the company.
The next question is from Nigel Coe from Wolfe Research.
This is Ryan Cooke on for Nigel. So just expanding more on the Electrical Americas segment, could you just talk a little bit about what might have changed during the quarter? Have you seen improvements in supply chain bottlenecks or factory labor productivity?
Yes. I'd say that really strong quarter, as we talked about in our Electrical Americas segment. And I'd say that with respect to supply chain, we had been very constrained really across the board. And during the course of the quarter, certainly, some of the important commodities for us, whether it's copper, steel, aluminum, some of the logistics and supply chain-related issues that we've been dealing with during the course of the year have gotten materially better. We still have pretty significant issues when it comes to electronic components and anything that's semiconductor based.
And so we're certainly not out of the woods there. We do expect to see some modest improvement in the second half of the year, but really likely going to be sometime into the latter part of '23 before most of those issues resolve themselves. And so I'd say that in the Americas business, the big message here is that our end markets are very strong across the board and it's the growth in our end markets that it's allowing our business to perform as well as it is.
Okay. That's great. And then just shifting gears for my follow-up on the Aerospace segment. Could you just dig into a little more looking at the growth in commercial versus military and OEM versus aftermarket? I know that you mentioned an uptick in defense spending over the next few years. So I guess just touching on that and any other supply constraints that we should be thinking of in the back end of the year?
First of all, I'd say that just as you think about our Aerospace business with the acquisition of Cobham, we're now balanced about 50-50 between commercial and defense. As we talked about in some of my outbound commentary, we're seeing a very strong recovery on the commercial side of the business, both in the aftermarket as well as in the OEM side. And so -- but still, as I mentioned, well below pre-COVID levels that we experienced back in 2019. And so we still have a long way to go on the commercial side, but those businesses in those markets are performing well, and we expect to see them continue to recover over the next few years or so.
And on the defense side, we really come into the year with an expectation of those markets being flat to up slightly. And quite frankly, with some of the conflicts that are happening around the world, we've already seen, certainly, the Europeans commit to increasing their defense spending. We saw a defense budget in the U.S. come in higher than what was originally anticipated. So we do believe that even on the defense side of the equation, that we think that the defense markets will grow more favorably over the next few years than we were thinking certainly coming into the year.
And so I think aerospace is another one of these businesses that's really poised for, let's say, cyclical growth on the commercial side and giving some of the geopolitical challenges in the world, defense spending is likely to go up around the world. And so we're feeling very good about the way we're positioned in Aerospace, and I think that's going to be an attractive market for us for some years to come.
And our next question is from the line of Scott Davis from Melius Research.
It all sounds super positive, in fact, almost too positive. I have to ask the question, is there -- do you have a sense of where inventories are at in each of your key end markets and if there's a little bit of a buildup going on there?
Yes. I mean I could certainly appreciate kind of the thought, Scott, that it all feels positive. In some cases, too positive, we want to pinch ourselves sometimes as well because, I mean, the facts and the data would suggest that things are good right now. I mean, as you heard, as I talked about, the strength in our orders across the board, in our Electrical business. And then you factor on top of that a cyclical recovery in aerospace, higher defense spending given the geopolitical events and quite frankly, even in the vehicle market, given the level of inventory, you mentioned a question around inventory.
Inventory levels in the passenger car market around the world are at historically low levels. And so even in the event of an economic slowdown, you have to rebuild inventories in the channel. And certainly, there's a lot of rebuilding that needs to take place in global vehicle markets around the world. Then you have eMobility, which is a real growth vector for the company that's just starting to become a more material part of the organization. So we have a little -- we have a lot of really positive things going for the organization.
To the specific question on inventory in the channel, I think that's probably likely an electrical question. I'd say there -- we test for that as well because we're obviously concerned about is there inventory being built up in the channel? Is there double ordering taking place? And every time we test for it, the answer comes back the same, not at all the case. And in fact, the channel today doesn't have as much inventory as they'd like, especially in products like circuit breakers.
We'll oftentimes answer this question around double ordering. And keep in mind that in our Electrical business that 75% of what we do in Electrical is project-based. I mean it's -- nobody goes out and replaces their electrical circuit breakers or their panel boards because there's a new color coming out, right? So it's all tied to a project that our distributors and customers are ordering products for. And so we have a lot of confidence that the backlog, up some 89% in the Americas, is solid.
We do -- we would expect a slowdown. I mean, you can't continue to grow at these levels for an indefinite period and the base effect, obviously, you can be comping some much bigger numbers as we move forward and into next year. But the markets are actually quite good right now.
Yes. And Scott, just to add a little bit more color to that pinch-me story. I mean if you look in the Electrical business in both sales as well as orders, every single one of our end markets was up significantly. And within those end markets, some of them growing significantly more. So it's really strength across the board.
The next question is from the line of Josh Pokrzywinski from Morgan Stanley.
Craig, just wanted to ask about Electrical Americas margins. They're pretty impressive here, and I would presume still kind of primed for health for metals deflation maybe later this year or into next year. Where should we think about as sort of the ceiling on those maybe over the next kind of 12, 18 months? Or maybe said differently, how high are you willing to let those go before you start kind of really putting the pedal to the foreign reinvestment?
Yes. No, I'd say that we are reinvesting -- maybe we take the second end of that question first, and we are absolutely reinvesting in the business and reinvesting at a rate that's higher than we've ever invested. Our R&D spending was up in the quarter quite materially and we'll continue to invest. And so we are not in any way holding back on investments. As you think about -- we talk about the really important secular growth trends that we're looking in the face of energy transition, digitalization, electrification.
Every one of these initiatives requires R&D. We're investing in capitalizing and building new factories to support this growth outlook that we have and so we're clearly investing in the business. To the point on margins and how high can they go and when do we become concerned, I'd say that we've set long-term margin targets for the business. And what we've done historically, our practice is you deliver those targets and then you think about the next raise. And so I'd say at this point, once we get to that plateau and consistently deliver these longer-term targets, which I believe we said were 22% for the Electrical Americas business, I mean we'll then as we took -- we do every year as we think about it in our investor meeting, we'll take a look at whether or not it's appropriate to raise those numbers.
But I would say that the -- if you think about even our execution performance today, we have a lot of inefficiencies that we're absorbing today in the business. As you can manage some of these supply chain issues have created fairly significant disruptions in our plants and our facilities. And so we're not operating today anywhere close to our peak efficiency. And so there is room to raise margins by disimproving our execution, working through some of these supply chain issues and getting some of the inefficiencies out. So I'd say that we're not near the top in terms of controlling our own destiny, independent of what happens in the marketplace.
Just one nuance on investment. We're also -- in addition to R&D., we're investing in selling resources as well. And to the doing better, I mean, if you look at our distribution, our freight, we're doing a lot less than truckload because of our supply disruption. So definitely can get a lot better.
Got it. That's helpful. And then hard not to notice that on the orders front, you guys have sort of comped the comp at this point in terms of that big step-up in the order comps kind of post pandemic. Attributable to any specific end markets, you kind of mentioned pretty broad-based growth, but trying to tease out if there's any specific market that kind of drove that that performance versus the comp or if price played kind of an unusual role.
No, I'd say that on the order side, these big numbers that we're talking about, and we'd love to think that we're getting 25% to 30% price, but trust me, it's nowhere close to those numbers. And so this is just real economic activity. It's real volume in the order growth. And as we talked about really strong order growth in data centers, really strong order growth in the utility markets, really strong order growth in many cases, even in commercial which is a segment that people were concerned about.
Residential as well.
Yes. And even resi. I mean, in resi, at some point will turn. But despite all of the gloom and doom that's been forecasted in resi, we had very strong orders and very strong sales growth in the quarter in resi as well.
The next question is from John Walsh from Credit Suisse.
I wanted to build on that Electrical Americas line of questioning. Just trying to conceptualize what backlog up 89% year-over-year really means? Kind of how much of that gives you visibility already into next year, I've always thought of that as kind of a shorter cycle. And then maybe just anything around what the price looks like in that backlog because I would assume that's going to be a margin tailwind as you deliver it.
No, I appreciate the question. I mean it's 89% increase in the backlog, we think, is a reflection, as we talked about, clearly, we have strong markets. The other thing that we believe and we've seen evidence that's taking place is that we probably we're not getting orders that we would not have gotten otherwise. But we're probably getting orders today a little earlier in the project than we would historically receive them.
So I do believe some of this backlog is a function of the fact that you're going to get that order in October if that order maybe you're getting now in September. So the orders are coming in a little earlier than they would have. But it is good news in terms of visibility. I mean it certainly gives us -- it's certainly visibility into projects and gives us a lot more confidence as we think about 2023. And to your point, a lot of these projects will be delivered in 2023. Even if we wanted to deliver them this year, we don't have the capacity in our operations to do it. And so we do have perhaps better visibility than we've ever had going into 2023 at this point in the year.
And to the question on price, I don't expect the price in the backlog to have a material impact on margins. I think reflected in our margin guidance is very much consistent with the underlying margin performance that we're seeing in the business today. You saw we posted a very strong number in the second quarter of 23-plus percent in the Americas segment.
So I would not expect this backlog to be delivering accretive margins to kind of the underlying assumptions that we have, even in the implied number, 22.7%, 22.8% in the second half of the year. But in many cases, we have had to go out and reprice the backlog. And that's part of -- one of the things that we're certainly seeing the benefit of today or certainly not seeing a drag on margins as a result of commodity versus price.
And the next question is from Joe Ritchie from Goldman Sachs.
Yes. So maybe just parsing out those price volume comments a little bit. How much of the organic growth this quarter was price? And then, Craig, as you kind of think about the second half of the year and the impact that price cost has to the business, like how -- what kind of like positive impact are you expecting to see either on a dollar basis or from a margin perspective versus the first half?
I appreciate the question, and we've been asked this one before in terms of really separating price versus volume. And Joe, one of the things we said is that because we're in so many different businesses and so many of our different businesses have really different makeups that we would not have given out a number, and we're not going to do that today either in terms of price versus volume, I will tell you that we are getting significant contributions from both certainly in our results as well as in our order outlook.
And I'd say in terms of price versus cost, I'd say today, if you think about it on an all-in basis, we are now as a company on the plus side, which I mentioned in my commentary. And some of our businesses, we still have some work to do to catch up, as we mentioned, in the Vehicle business where today, we are recovering inflation. For the most part, we're not getting margin on inflation. And as a result, it's compressing our return on sales. So -- and I'd say as we look forward, we would not expect price versus commodities to basically be -- have a positive impact on our overall segment margins.
Okay. Helpful. Craig. And just my quick follow-on question, since no one's asked it. Like the demand trends have all sounded really good. Clearly, there's a lot of concern around Europe. And so I'm just wondering, just on the margin, can you maybe provide some additional color on what you're seeing specifically across your end markets in Europe?
Yes. And I appreciate the question. And I can say we're certainly watching all of the same macro issues. We're watching, obviously, the impact that the war in Ukraine is having and concerned about what that could potentially do to demand. Having said that, we had a good quarter in Europe, both in our sales as well as in our orders, which continue to be quite strong through Q2 every place, I'd say, in markets other than perhaps in our Vehicle business, which is where I mentioned that our sales were essentially flat.
But outside of the Vehicle business, Europe for us, continues to perform well and hold up better than what you would expect, given all of the issues that they're dealing with. And so we remain quite frankly, optimistic about Europe as we look forward. We're going to be prepared like we always are in the event that things turn down. But so far, orders continue to hang in there. And as I mentioned, the strength in the electrical markets, and we're seeing strength every place in these end markets. It's not just in the Americas. We're seeing the same types of strength in Europe as well, in data centers, in commercial markets, these markets are strong there as well.
And the next question is from Stephen Volkmann from Jefferies.
Just a couple of end market questions for me as well. Can you just give us a little color on what you're seeing in sort of the real heavy industrial Crouse-Hinds kind of harsh and hazardous type end markets?
Yes. I mean those markets are doing well. And we talk about what's happening in our global business, and that's where we report Crouse-Hinds and oil and gas, industrial. And Crouse-Hinds business is performing very well. I mean I would tell you that we're still well below the peak in that business. If you think back to what took place back in the '08, '09 timeframe and so those markets, I'd say, are still below those levels, but we're certainly seeing strong double-digit growth in that side of the business as well.
And we would expect to see that continue for some time to come, given the broader issues that we're dealing with, the macro issues and the availability of reliable sources of energy, whether that comes from some of the renewables or whether that be more traditional sources, I think the reality is, as we think about the implications of what's happening today in Europe, we're going to see more investment on both sides. We're going to see more investment in renewables. We're going to see more investment in more traditional sources of energy and both of those are good things for the growth outlook for our industrial businesses and specifically to our Crouse-Hinds business.
Yes. Crouse is another one of our businesses that it's just broad across the board as well. If you look at all of our end markets, up significantly in sales this quarter.
Super. And then on data centers, I assume that's one where you have a little bit more lead time visibility as well. Anything to call out there relative to sort of size of the data centers or locations or just anything to call out?
No, no, other than to say that data center markets continue to be very strong. I'd say if we take a look at our order growth specifically, our order growth on a rolling 12-month basis in data centers was up some 25% in the quarter. And we're really seeing strength everywhere around the world in data centers. And so I mean, it's one of these markets that we think is going to be really positive for the company.
It's -- I think on a current basis, it's maybe some 18%, 19% of the business, in our Electrical business comes from data centers. And so it's an important segment for us overall. And it's one that just continues to grow. And I personally believe as the world just continues to consume increasing amounts of data as there's more edge computing and autonomous vehicles, I think the data center is one of these markets that's going to be a very attractive market for some time to come.
Our next question is from Julian Mitchell from Barclays.
Maybe just a first question perhaps for Tom. Just to try and understand the free cash flow here. Because I think the guidance at the midpoint implies a sort of 70%, 80% increase year-on-year in the second half to hit the free cash flow guide. Maybe just help us sort of bridge that, how much you're attributing to sort of earnings versus -- underlying earnings versus working capital versus any sort of onetime repeats or non-repeats just to try and bridge that big increase?
Sure. Thanks for the question, Julian. First of all, let me take a step back and look at our cash conversion cycle. The DSO was slightly favorable. DPO was favorable. Where we've really made an investment is in our inventory, our days on hand. And this is an intentional choice to make sure that we are protecting the significant growth that we've been talking about on the call as well as being prepared for our customers with the choppiness as it relates to the supply disruption. As it relates to the second half versus the first half, historically, we generate significantly more free cash flow in the second half of the year than we do in the first half. So we think the second half is going to get better, and we feel comfortable with our guide right now.
And so is the view that -- yes, there'll be a very substantial inventory kind of liquidation in the back half, is that the sort of the biggest lever behind earnings driving that cash flow up?
Well, I don't want to talk about that hypothetically right now. We're going to balance that, obviously, with order flow and what's happening with supply chain. But potentially, we will be liquidating some working capital in the back half of the year.
Yes. If you think about it, Julian, I'd say that today, as I mentioned in some of my commentary, we just have an enormous number of inefficiencies that we're dealing with right now in our operations because of supply chain disruption. And as you can imagine, it only takes one component, could be a very inexpensive component, that prevents you from shipping a very large piece of electrical and expensive piece of electrical switch gear.
And so we're clearly in some cases, as Tom talked about, consciously putting some inventory in to protect customers to deal with the forward demand. When you look at these orders increase when you look at our backlog, but some of this is also just inefficiencies as a result of all of the supply chain disruptions that we've been living with.
Yes.
And so we clearly. And I would be disappointed -- and I know my team is listening on the call if we don't do a much better job in DOH in the second half of the year.
Absolutely. Absolutely. And I mean just an anecdotal related to the supply disruption, we've got a lot of work-in-process inventory in our factories. And we're waiting for those one or two components to come in so we can ship the product. That also creates disruption in terms of the labor and the manufacturing. So yes, there's a lot of improvement that we can do in the second half of the year, and we're on it.
That's helpful. And then just a quick follow-up. The Vehicle segment, so I think the sales are guided there to be up high teens or something in the back half year-on-year organically. Maybe just help us understand sort of how much is that sustained growth in truck, if you like, versus a big turnaround in light vehicle? Any kind of color on the different growth outlook between those two?
Yes. Appreciate the question, Julian. I'd say what we've actually done in terms of the commercial truck market, we've actually taken our outlook down. We had anticipated that North America truck market would be roughly 305,000 units in our prior guidance. We now think it's going to be closer to 294,000. So we've actually taken the truck piece down but we -- but certainly, a lot of the growth is really a return, first of all, in China.
I mean China, as you know, was essentially shut down for much of Q2. And we have a very sizable business in our vehicle business in China. And then you have a lot of these supply chain disruptions that have been especially difficult in the light vehicle market, and many of those are starting to abate. And so we're anticipating that the light vehicle market will see much better performance in the second half than in the first half.
The next question is from Nicole DeBlase from Deutsche Bank.
Just maybe circling back to the electrical order activity. Can you just comment, Craig, on what you guys have been seeing with respect to like large projects versus the shorter cycle component of orders?
Yes. I'd say that quite frankly, I don't have that piece of data at my fingertips, Nicole, in general around kind of stratifying the various project sizes and we'll get back to you at the end and the team get back to you more specifically on the project side. But I would say, just to kind of restate a point that we're making, we're seeing broad-based strength every place across the board in our Electrical business.
And as I mentioned, even on our negotiations, which has obviously comes before an order, our negotiations are up some 50% versus last year and some 20% versus Q1. And so we're really just seeing broad-based strength in the Electrical business. And we'll have to wait and see what the exact data sets, but tough to imagine that we're not seeing it in large, medium and small projects, but we'll get you the data.
Yes. And on those negotiations, we're seeing growth in both commercial and industrial, both very strong versus last year and the previous quarter.
That's great to hear. And then just as a quick follow-up, I guess, market volatility has obviously picked up. How are you guys feeling about the M&A pipeline and maybe the potential for continued bolt-ons in this sort of a macro environment?
Yes. No, as we said and certainly reflected in our guidance this year with respect to a relatively modest share buyback that it was our intention to really to prioritize M&A this year. And as we look forward, as we looked at the pipeline of opportunities that the teams are looking at, and we still believe that, that's the right call. Valuations, in some cases, have still held up despite the fact that the market has retreated. As you know, it always takes a little time between the market retrenchment and rising interest rates and what that does to future earnings before sellers internalize that.
So I'd say we're still working with some opportunities that we think could be interesting. But obviously, no announcements to make today, but it's certainly still a key priority for the company.
The next question is from Brett Linzey from Mizuho.
Just wanted to come back to pricing and specifically stickiness. Just in terms of the compounding price we've seen in the industry for the last several quarters, are you getting any push back at all from distribution? And then, I guess, would it be a fair assessment that some of the larger investments around solutions that have a payback, you tend to hold price historically better. I'm just curious how you see that playing out in a deflationary environment.
Yes. The first thing I would acknowledge is that this inflationary environment is not like any that we've ever seen in our lifetimes. And so we'll have to wait and see how it all plays through. But having said that, and to the point that you raised, historically speaking, price has been very sticky in our business. And as you know, because we go to market through distribution, distributors like price, gives them an opportunity to revalue inventories. And as long as the world continues to hang in there, it tends to be a good thing for our distributors as well. And today, I don't know what is it, some 70% of our business goes through distribution. And so I'd say that what we would generally expect in our business is that price to be very sticky. And we're obviously seeing a little bit of retrenchment and commodity costs on the material side. But having said that, labor costs are up, the logistics costs are up, energy costs are up.
And so we're just seeing a lot of inflation in almost every aspect of the economy, that I would say that even if commodity costs come off a little bit, these other factors are going to keep prices and inflation at probably higher levels than you would probably imagine at first blush. So I'd say long story short, we think it's going to be fairly sticky, which is consistent with the way it's behaved historically.
No, I appreciate that. And just a follow-up, you talked about some of the R&D and selling force additions you've made. But could you just talk about capital investment and enhancing capacity to capture some of these secular trends? Are you selectively investing in kind of brick-and-mortar and new capacity? And then where is the current plant utilization for your Electrical business?
Yes. I'd say the short answer to the question is absolutely yes. We are, in fact, making investments in brick-and-mortar to deal with this -- the secular growth trends that we see coming, to deal with the strong order growth that we have already as well as our outlook for future years. And so we are having to make capital investments principally to your point, in our Electrical business. And so we're making those investments today. We'll continue to make them in the future.
And I think it's a reflection of the confidence that we have that these markets are going to play out as we expected. And both in R&D, which I talked about originally to come up with products and solutions, to come up with digital offerings and solutions that we're selling into these markets, to deal with some of the new technology that we're investing in, to be ready for energy transition and building out the electrical charging infrastructure across the U.S. and the rest of the world. And so we're definitely in an investment cycle and putting more capital into the business today than we probably have in many, many years. I'd say...
Very encouraging...
In Aerospace and Vehicle it’s largely different. We have -- we really have the investments we need there because we're still well below peak volume levels. But in the Electrical business, without a doubt, we're making big investments in capacity expansion.
The next question is from Deane Dray from RBC Capital Markets.
Just covered a lot of ground here, but I was interested in having you expand on the point about circuit breaker scarcity because that's one of your core businesses. And my guess is it's directly related to semiconductor shortages. But we have heard from a number of companies this quarter talking about kind of gradual improvement and semiconductor availability. How has that badly impacted you all on the electrical side and then specifically in circuit breakers?
No, you're absolutely right, Deane. The places where we're having the biggest challenges right now is on anything that takes a microprocessor and increasing what we're finding in the world of circuit protection, whether that's in a residential home or whether that's in a commercial and industrial building, the intelligent circuit breakers are in demand. They're growing at a faster rate, and that's where we have been challenged, certainly, up to this point this year. And I'd say, as we look forward, we have -- things have gotten better.
We have basically crawled and circled the earth trying to find every available circuit breaker that we -- of electrical component that we can find. In many cases, buying stuff from distributor markets at very high prices, by the way. And so things have definitely improved. But I would say by no means are we out of the woods when it comes to shortness of supply, when it comes to anything that has an electronic component.
Lead times have gone out pretty dramatically, and we continue to have shortages. One of the reasons why our backlog is growing at the rate that it's growing is that we just don't have the ability to serve all the demand that we're seeing. And so on the one hand, you have demand that's as good as it's ever been. On the other hand, you have an industry that probably underinvested. And as a result -- and then you have all these other supply chain disruptions that we've been dealing with around China and now in parts of Europe to the war as well that are exacerbating things. So I'd say, in short, it's getting better, but by no means that we're out of the woods.
Okay. Thanks, guys. We have reached the end of the call, and we do appreciate everybody dialing in to ask questions. As always, Chip and I will be available to address you guys' follow-up questions. Thank you. Have a good day.
Thank you, and that does conclude our conference for today. Thank you for your participation and for using AT&T Event Conference. You may now disconnect.