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Eaton Corporation PLC
Earnings Call Analysis
Q4-2023 Analysis
Eaton Corporation PLC
The company finished the year on a high note, translating robust markets and execution into record performance, including all-time bests for adjusted earnings per share (EPS) and margins. Investors can take comfort in consistent growth, with the fourth quarter showcasing a 24% rise in adjusted EPS to $2.55 and a 200 basis point margin improvement to 22.8%. This upward trajectory is expected to sail into 2024 with guidance anticipating continued organic growth and double-digit EPS increases.
In a bold move to secure future competitiveness, the company is deploying a multiyear restructuring program aimed at slicing fixed costs and enhancing operational efficiency. This strategy involves a calculated $375 million investment that promises to reap $325 million in annual cost benefits, proving the company’s commitment to lean management and profitability.
The company is doubling down on research and development (R&D) with six secular growth trends firmly in sight. This commitment to innovation positions it to harness potential growth opportunities across the industry landscape, further bolstering investor confidence in the company’s future.
A surge in 'mega projects'—each valued at over $1 billion—is revving up, offering a significant pipeline for future earnings. While these projects take years to materialize into revenue, the company's ample backlog and adept negotiations suggest a bright and bustling horizon, especially as most mega projects are still in their early stages.
The company has consistently achieved bold targets, leading to a third year of double-digit organic growth and margin expansions. The book-to-bill ratio, a key measure of new business, stood strong at 1.1 for both Electrical and Aerospace sectors, implying a solid backlog and sustained demand.
With an 18% free cash flow margin and a 103% conversion rate, the company’s $1.3 billion operating cash flow marks yet another peak. Cash flow is a crucial indicator of financial health, and such impressive numbers reflect the company's ability to invest in growth, pay dividends, and manage debt effectively.
The company's Electrical Americas sector celebrated eight quarters of double-digit organic growth, ending the year with momentum as it looks toward 2024. Meanwhile, Aerospace enjoyed market-wide growth and a strong order intake, maintaining a vibrant book-to-bill ratio. Each is positioned for a fruitful new year.
The Vehicle segment performed admirably amidst market downturns, leveraging aftermarket strength and product innovations, while the eMobility segment, despite a temporary operating loss due to startup costs, outgrew market averages and continued to secure lucrative opportunities.
The company's order backlog—critical for future earnings—grew impressively, with Electrical and Aerospace both marking over 100% increases against their Q4 2020 backlogs. This amassing of orders, particularly in Aerospace, surpassing expectations and signposts strong growth potential moving forward.
Looking toward 2024, organic growth is forecast between 6.5% and 8.5%, led by strength in Electrical Americas, Aerospace, and eMobility segments—the latter poised for 30% growth due to new program launches and a robust electric vehicle market. The guidance also hints at an improved segment margin range, up approximately 60 basis points from 2023's record margins, underscoring a year of prosperous expectations.
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Ladies and gentlemen, thank you for standing by, and welcome to the Eaton Fourth Quarter 2023 Conference Call. [Operator Instructions] And as a reminder, your conference is being recorded.
I would now like to turn the conference over to your host, Yan Jin. Please go ahead.
Good morning. Thank you all for joining us for Eaton's Fourth Quarter 2023 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 operating remarks by Craig, then I will turn it over to Tom who will highlight the company's performance in the fourth quarter. As we have done on our past calls, we'll be taking questions at end of Craig's closing commentary.
The press release and the presentation we'll go through today have been posted on our website. The presentation includes adjusted earnings per share, adjusted free cash flow and other non-GAAP measures, they 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 the presentation.
With that, I will turn it over to Craig.
Okay. Thanks, Yan. We're pleased to report our Q4 results and record performance for the year. Our team continued to deliver on our commitments, supported by strong markets and good execution.
So let me begin with some highlights of the quarter on Page 3. We generated adjusted EPS of $2.55 for the quarter and $9.12 for the year, both all-time records. Adjusted EPS was up 24% and full year was up 20%. And we continued to post strong margins. Q4 was 22.8%, up 200 basis points and above the high end of our guidance.
We also delivered strong incremental margins, 42% in the quarter. And we continue to see strong market activity. On a rolling 12-month basis, book-to-bill for Electrical and Aerospace was 1.1 and our backlog increased by 15% for Electrical and 13% for Aerospace. And as you've read, we're initiating guidance for 2024 and expect another year of strong organic growth, double-digit increases in adjusted EPS and continued strength in cash flow. And I'll go through the full guidance details shortly.
Lastly, we're announcing a multiyear restructuring program that will eliminate fixed costs and improve our overall efficiency. The program will cost $375 million and deliver $325 million of mature year benefits. So the combination of market tailwinds, our internal growth initiatives and our continued focus on operating efficiency will allow us to deliver outstanding results for years to come.
And speaking of market tailwinds, let's turn to Slide 4. In the last couple of quarters, we shared our framework while we think about key growth drivers for the company. The chart reflects the 6 secular growth trends that will positively impact our business today and for years to come. And we're stepping up our investment in R&D and capital to ensure that we're well positioned to capture this growth. We think Eaton is uniquely positioned in that most of our businesses are expected to see an acceleration in market-driven growth opportunities.
In our prior 2 earnings calls, we provided a summary of progress on infrastructure spending, reindustrialization, utility and data center markets in Electrical and our Aerospace business. Today, we'll provide an update on the impact from reindustrialization and how it continues to drive a record number of mega projects in North America. We'll also provide you with a framework for how to think about the timing impact on mega projects from when a project is announced, to a negotiation, to an order and eventually, to a sale.
So let's take a look at Slide 5 in the presentation. We've shared this data previously, and it's a good proxy for the reindustrialization trend we're seeing. You'll recall, this summarizes the number of mega projects that we have announced since January of 2021. And a mega project, once again is a project with an announced value of $1 billion or more and there's been 333 of those through the end of last year, beginning in January 2021. Note that this is North America data, but we're seeing a similar trend in Europe, although the dollars are not as large.
A few points to note. First, at $933 billion, this number is 3x the normal rate, and the increase translates directly into electrical markets. As a reminder, the electrical content on these projects is typically anywhere from 3% to 5%.
Second, the number continues to grow and is up 9% from Q3. This will not go on forever, we're sure, but there continues to be strong momentum for U.S. industrial projects, and we're building a multiyear backlog.
And third, about 72% of these projects are still in the planning phases, and only 18% have actually started. Some 10% have been canceled or significantly delayed, but this number is actually lower than historical rates.
For those that have started, we've won over $1 billion in orders with a win rate of approximately 40%. And we're in active negotiations on another $1 billion of electrical content on a small subset of these total projects. So as you can see, mega projects are a compelling reason to be optimistic about the future.
Turning to Slide 6. We want to highlight the timing and the duration of these mega projects as they become opportunities for our electrical business. The primary conclusion is we've not seen a significant impact from the large step-up in the number or size of mega projects yet, but it's coming.
While each project is different, we put together our view of 3 representative examples of reindustrialization projects, including a semiconductor, an EV battery and a health care example. This slide indicates the number of months between an announcement of a mega project and the time we begin to negotiate it, the time from an announcement of an order -- the time from an announcement to an order and from an announcement to a shipment.
As you can see, it takes on average 3 to 5 years from when a project is announced to when it shows up in our revenue. So while the gratification is certainly delayed, this is what's showing up in our backlog and providing outstanding visibility to future growth. With over $1 billion of orders that we've already won, we expect revenues to be recognized over the next several years in line with each of these products' individual time lines.
And just as a point of reference, our revenues in Electrical America for mega projects in 2023 was only about 3% of our total revenues. By contrast, they represent 16% of our negotiations and 6% of our orders. Hence, the conclusion that most of the impact from the significant step-up in mega projects is still ahead of us.
And now let me just turn it over to Tom. But before I do, I do want to take this opportunity to thank Tom. I mean Tom has just been an outstanding leader for Eaton in his tenure with us, and I couldn't have asked for a better partner or a more effective CFO. And Tom, we're absolutely disappointed to see you go, we fully understand the reason you made this decision. We wish you all the best of luck, and thanks once again for this outstanding leadership over the last 3 years.
Thanks, Craig. I'll start by reviewing how our fiscal year 2023 results compared to our original guidance. Throughout the year, we demonstrated the ability to execute on our commitments and raise guidance for all key metrics. We've delivered our third consecutive year of double-digit organic growth with a 20% increase in adjusted EPS, all-time record margins and a 48% increase in free cash flow.
A particular note, organic growth and segment margins were up versus the original guidance, 400 and 110 basis points, respectively. Further, adjusted EPS and free cash flow grew 11% and 4%, respectively, versus the original guide.
On the next chart, we have a summary of our quarterly results, which includes several records. With respect to the top line, we posted an all-time sales record of $6 billion, up 11%. Organic growth continues to be strong, up 10% for the quarter. We have generated double-digit organic growth in 7 of the last 8 quarters, with the last 7 quarters growing over 20% on a 2-year stack.
We posted operating profit Q4 records on both a margin and absolute basis. Operating profit grew 22% and segment margin expanded 200 basis points to 22.8%. Incremental margin was very strong at 42%. Adjusted EPS of $2.55 increased by 24% over the prior year. This is an all-time record and above the high end of our guidance range.
This performance resulted in all-time quarterly operating and free cash flow records. Our $1.3 billion of operating cash flow was 9% higher than the prior year, generating 18% free cash flow margin and 103% free cash flow conversion. For the full year, we also set numerous records, including record sales, segment margins, adjusted EPS and earnings and operating and free cash flow.
On Slide 9, we detail our Electrical Americas results. The Electrical Americas business continues to execute very well and delivered another very strong quarter. We set an all-time record for sales, operating profit and margins. Organic sales growth remained strong at 16% with broad-based growth in nearly all end markets. On a 2-year stack, organic growth is up 36%.
Electrical Americas has generated double-digit organic growth for 8 consecutive quarters. All-time record operating margin of 28.5% was up versus prior year 480 basis points, benefiting primarily from higher volumes, effective management of price cost and improved manufacturing efficiency. Incremental margin was 58% for the segment. On a rolling 12-month basis, orders were down 4%. However, it's important to note that the dollar value of the orders remains high, and the decline needs to be viewed in the context of the 34% order growth in Q4 of last year.
As discussed in prior earnings calls, order intake is an important metric that needs to be analyzed together with record backlog. Currently, in our electrical sector, we have backlog coverage of almost 3x our historical average. We've looked at multiple scenarios with meaningful order intake decline and are confident in those scenarios, given our backlog coverage that we can generate robust organic growth for several quarters, well into 2025.
More specifically, Electrical Americas backlog increased 18% year-over-year and was also up sequentially, resulting in a book-to-bill ratio of 1.2 on a rolling 12-month basis. For orders, we had particular strength in data center, MOEM and institutional markets.
Also, our major project negotiations pipeline in Q4 was up 55% versus prior year and up 189% since Q4 2021. On a full year basis, Electrical Americas posted 19% organic growth with 26.5% margins, up 400 basis points over prior year. Electrical Americas posted records for full year sales, along with profit on both a margin and absolute basis. With the tailwinds from secular trends, strong execution and robust backlog, Electrical Americas is well positioned as we enter 2024.
The next chart summarizes our results for the Electrical Global segment. Leveraging Q4 record revenue, organic growth increased to 4% from flat in Q3. We have strengthened data center, industrial and commercial and institutional markets. Operating margin of 18.8% was up 10% versus the prior year.
Orders were up 1% on a rolling 12-month basis, with strength in data center and IT, utility, MOEM and industrial markets. Importantly, book-to-bill continues to remain greater than 1. On a full year basis, Electrical Global posted 5% organic growth and 19.3% margins. The business posted records for both full year sales and operating profit.
Before moving to our Industrial businesses, I'd like to briefly recap the combined Electrical segments. For Q4, we posted organic growth of 11%, incremental margin of 51% and segment margin of 25%, which was up 320 basis points over prior year. On a rolling 12-month basis, our book-to-bill ratio for our Electrical sector remains very strong, above 1.1. We remain quite confident in our positioning for continued growth with strong margins in our overall electrical business.
Chart 11 highlights our Aerospace segment. We posted an all-time quarterly sales and Q4 operating profit record. Organic growth was 8% for the quarter, with a 2% contribution from foreign exchange. Growth was driven by broad strength across all markets, with particular strength in defense aftermarket, in both commercial OEM and commercial aftermarket, which were up 26%, 25% and 18%, respectively.
Operating margin of 22.4% was down 210 basis points on a year-over-year basis, benefiting from higher volumes and effective management of price cost offset by unfavorable mix and favorable defense programs in the prior year. On a rolling 12-month basis, orders increased 7% and with especially strong growth in commercial and defense aftermarket and commercial OEM. Year-over-year backlog increased 13% and was up 3% sequentially. On a rolling 12-month basis, our book-to-bill for our Aerospace segment remained strong at 1.1.
Moving on to our Vehicle segment on Page 12. In the quarter, total revenue was up 2%, all from favorable foreign exchange. Vehicle end markets were down 500 basis points year-over-year, but the business was able to deliver outgrowth, primarily driven by higher aftermarket sales, stronger share in heavy-duty transmissions and a new product launch of electrical vehicle gearing in China.
Operating margin came in at 17.9%, 270 basis points above prior year, driven by effective management of price cost and improvement in manufacturing efficiency. Throughout 2023, we've demonstrated the ability to execute on operational improvements as shown by our 270 basis point improvement in segment margins from the first half to the second half of the year.
On Page 13, we show results for our eMobility business. We generated another quarter of strong growth, including an all-time sales record. Revenue was up 19%, 18% organically and 1% from favorable foreign exchange. Driven by the ramp-up of new product launches, we outpaced the market, which grew 7%. However, due to program start-up costs, the operating loss increased by $14 million when compared to the prior year. On a full year basis, eMobility posted 18% organic growth on slightly lower margins as we continue to invest in the business.
We remain very encouraged by the profitable growth prospects of the eMobility segment. In 2023, we won new programs with more than $1 billion of mature year revenues. Through these wins, we continue to find opportunities to leverage expertise and differentiated technologies across segments.
Moving to Page 14. We show our Electrical and Aerospace backlog updated through Q4. As you can see, we continue to build backlog with Electrical stepping up to $9.5 billion and Aerospace reaching $3.2 billion for a total backlog of $12.7 billion. Both businesses have increased their backlogs by significantly more than 100% since Q4 2020, with Electrical growing almost 200%.
Versus prior year, our backlogs have grown by 15% in Electrical and 13% in Aerospace, which exceeded our expectations as we began the year. As noted earlier, both Electrical and Aerospace have book-to-bill ratios above 1.1. Our strong backlog to close the year gives us continued confidence in our growth outlook for 2024 and beyond.
In addition to our strong backlog growth in 2023, the next page shows the acceleration in growth of our negotiations pipeline, which supports our expectation for stronger markets and structurally higher organic growth rate. In Electrical Americas, the pipeline doubled over the past 3 years and increased a further 29% and in 2023. This is even stronger than the 19% organic growth in our Electrical Americas business, which suggests continued strength going forward. For 2023, we saw $6.2 billion of projects in our negotiations pipeline in Electrical Americas alone.
Now I'll pass it back to Craig to walk through the guidance and wrap up the presentation.
Thanks, Tom. Turning to Page 16, we lay out our end market assumptions for 2024. You'll recall that we provided an early look at our 2024 assumptions during our Q3 earnings call at the end of October. Today, we're updating those assumptions.
And with the exception of residential markets where we have increased our outlook from down slightly to flat in commercial vehicles where we have decreased our outlook from slightly declining to declining, all of our assumptions have remained the same. In contrast to what we're seeing in the macro economy, we continue to expect growth in about 80% of our end markets. And much of this growth is supported by large backlogs.
Turning to Page 17. As you've read, we're announcing a new multiyear restructuring program to reduce fixed costs and enhance our efficiency. While we're structurally positioned to deliver higher levels of organic growth, we also have a vast number of opportunities to improve the way we run the company. And we're at a point in time where we have the organizational capacity to take on a number of these efficiency projects that have been in our pipeline for some time.
The program will focus on reducing structural costs through the consolidation of rooftops, increasing shared services and deploying digital technologies. These actions will also free up time and resources in our businesses, allowing them to focus on growth and driving operational improvements.
Overall, we expect $375 million of restructuring costs over the next 3 years with $325 million of mature year savings in 2027. This includes approximately $175 million of charges in 2024 and $50 million of savings, both of which are included in our 2024 guide, and I'll cover those in the next several slides. While the company is performing well, we see these actions as an important part of how we'll continue to do so for years to come.
Moving to Page 18. We summarize our 2024 revenue and margin guidance. Our organic growth for 2024 is expected to be between 6.5% and 8.5%, with particular strength in Electrical Americas and Aerospace, both expected to be up between 9% and 11% while eMobility is expected to grow some 30% as new programs are launched and the electric vehicle market continues to see solid growth.
And I'd also add that the healthy end markets, combined with our large backlog provides actually better-than-normal visibility for our 2024 outlook. For segment margins, our guidance range of 22.4% to 22.8% is an improvement of 60 basis points at the midpoint from our 2023 all-time record of 22%.
As we've communicated earlier, incremental margins of about 30% are what you should assume, and that's what's reflected in our guidance. These incrementals are consistent with our plan to step up investments in R&D and with the investments we're making to expand our manufacturing capacity, all done to ensure future growth.
On the next page, we have the balance of our guidance for 2024 and Q1. For 2024, our adjusted EPS is expected to be between $9.95 and $10.35 a share, $10.15 at the midpoint and up some 11% from 2023. And for operating cash flow, our guidance is between $4 billion and $4.4 billion, up 17% at the midpoint. The key drivers here are really a combination of higher earnings and improved working capital.
We also expect to repurchase between $1.5 billion and $2.5 billion of our shares outstanding. And given our cash position at the end of the year, at the end of '23 and our strong cash generation this year, we'll still have plenty of room for strategic M&A. For Q1, we expect organic growth to be between 6% and 8%, segment margins between 21.3% and 21.7% and adjusted EPS in the range of $2.21 and $2.31 per share.
Let me just close here on Page 20. As we transition into 2024, I think we can all conclude that Eaton has proven that we're a changed company, a company that delivers higher growth, higher earnings and does so consistently. And we're proud of our team's record performance in 2023. But once again, we see opportunities to be better everywhere. As we look forward, we continue to experience powerful megatrends that are driving higher growth in our end markets, and we're investing to ensure that we're capturing these opportunities while gaining market share.
We're also continuing to optimize the way we run the company, improving our operational execution, leveraging our scale and reducing our fixed costs. This is allowing us to invest like never before in R&D, in capacity expansion and in our people. So our expectations are high, and our teams are looking forward to delivering another exceptional year.
So with that, I'll open things up for any questions that you may have.
Thanks, Craig. [Operator Instructions] With that, I will turn it over to the operator to give you guys the operation.
[Operator Instructions] Then now this question will come from the line of Jeff Sprague from Vertical Research.
Good luck, Tom. Craig, first question for me is just on the restructuring itself. We tend to think of these things being kind of contracyclical, right? Demand is weak. We're in a recession, we do a heavy restructuring. It seems, I don't know, odd or a little risky maybe to undertake a big move like this with such a strong demand pull through both the Electrical and Aero businesses.
So can you maybe just address the risk mitigation and how you manage kind of maybe the capacity through this? I assume you're also trying to increase capacity while you restructure, but love some additional thoughts on that.
Jeff. Appreciate the question. And -- I'm not sure for everybody else but I'm getting a little background noise on the call. I'm not sure -- okay, that's better.
Jeff, we spent a lot of time as a company sorting this one out in terms of whether or not it made sense to take on these restructuring projects at this time. Because, to your point, things are going very well and we have perhaps more growth opportunities than we've ever had in the history of the company. But at the same time, we actually have more capacity today than we've had in a long time.
As you'll certainly be aware, we haven't done many acquisitions over the last couple of years. In fact, we really haven't done any. And so we actually have more bandwidth as an organization today to take on these projects. And one of the things that we do as a company is that we always have a forward view of our opportunities to be better, to improve efficiencies, to eliminate redundancies, to build scale, to essentially leverage some of these new technologies that are coming forth.
And so we, today, as an organization, as a leadership team, all agree with that. There's probably no better time than right now to take on these projects, to improve our cost position and really set the company up for margin expansion for the next 3 years on top of the growth that we're going to see as a business. So lots of confidence today in our ability to take it on, and we have plenty of capacity as an organization to do so.
And what I would just add, Jeff, is add -- I think it would actually be riskier if we didn't do it. Because the foundation of the restructuring program is simplification as well an elimination of waste, which frees up human resource time to focus on the shift that we've been making into growth. So it actually would be riskier if we didn't do it, and it's great to lean forward and execute it at a time of strength.
Yes. That's a great point. I said that in my outbound commentary, this notion that essentially, we're freeing up time in our operations so that they can focus on growth and improving our operational execution, while some of our corporate teams take on a number of these support services. So you're absolutely right, Tom. Thanks for that amplification.
Yes. And just a follow-up -- the background noise might be me, I'm dialing through my computer here, juggling multiple phone calls and different cell phones going on. A crazy day here.
Unrelated question, just on backlog. Obviously, it does provide a lot of visibility and comfort. But we've seen a couple of companies with big backlogs also have sales disappointments, because the backlog is big, but it's not fungible, right? Air pockets develop here and there.
Maybe just kind of address that risk. Do you kind of see anything that you need to kind of navigate through from a timing standpoint, particularly given the way you illustrated the long kind of order conversion cycle on some of those project stuff that's in the backlog?
Yes, no, I appreciate that question, Jeff, and understand the nature of it. But I can just tell you, based upon at least what we're seeing and the nature of our backlog today and as I'm sure you're well aware of that, we, as Eaton and really, quite frankly, as an industry, we've had more demand than we've had capacity largely over the last couple of years.
And so we think we have plenty of ability to accelerate, decelerate if necessary, backlog conversion to essentially keep the top line growing at an attractive rate in the event that you have some sort of order that would be moving in or out or some sort of lack of linearity in the order book itself. And so not a concern. We've not seen it to date. As we look at kind of the stratification of the backlog and when orders are due, we don't have that concern.
And the next question is from Andrew Obin from Bank of America.
Seems like you guys are doing great, yes. Just a different way of asking, I guess, Jeff's question. Can you just talk -- you mentioned capacity additions. Can you just -- and I appreciate that some of this is competitive. But what areas are you adding capacity? When will this capacity be available to really move the needle? And -- yes, and anything you're doing differently on geographies post the whole COVID experience?
Yes, no, appreciate the question, Andrew. And one of the things we tried to do in the last earnings call is add a little bit of color around this $1 billion of investment that we're putting in as a company to support growth. And I would tell you, it's really pretty broad-based.
We talked about investments that we're making to support growth in utilities, in transformers, in both regulators and our line insulation and protection equipment. We talked about, obviously, the huge growth that we're seeing in data centers and growth in institutional markets and the investments that we're making there in low and medium voltage assemblies and fitboards and panelboards. We've had to make investments in our core component circle breaker capacity.
And obviously, we're making big investments in eMobility as well. So I think it's actually fairly broad-based with respect to the product lines. As it relates to the geography, we're clearly seeing much bigger investments, much faster growth in the Americas, and that's really where the -- principally a lot of these big investments have gone.
But we -- to your question about timing, what we're assuming in terms of our own capacity, industry capacity is another issue as we work through suppliers and some of the others in the value chain. But we think a lot of this capacity for us begins to phase in this year. And so sometime between, let's say, the second quarter and the end of the year when we'll have most of our investments done -- and it certainly gives us the capacity to do more, assuming there aren't other bottlenecks and restrictions, whether it be labor or others in the value chain.
Got you. And then just a follow-up, I guess, naturally builds on the first answer. In terms of your supply chain, what are the biggest challenges are you still experiencing? And what has gotten better over the past 3, 6 months? And what's still a problem?
Yes. What I would tell you, in many ways, Andrew, we're really back to where we've been historically, and we've never lived in a world where we didn't have the intermittent supply chain issues. So I would say, by and large, we've seen fairly significant progress every place.
It used to be that electronics were a major bottleneck and issue. Most of those issues are now behind us. We still have pockets of individual challenges in various suppliers with various components. But I would say today, it is really more episodic and unique than it is, I'd say, a pattern or a broader, let's say, capacity constraint in a particular commodity.
And so we, like in our own investments, we've been working hard to build capacity internally. We've also been working with our suppliers, giving them lead time and visibility into our growth over the next multiple years to ensure that they, too, are making investments in capacity to keep up with our demand. And so I would say today, it's largely the episodic issue as opposed to a systemic issue.
Just to jump in, Andrew, on the last point. I think that's really been key, partnering with the suppliers so we can grow together with them. And we've gotten much more efficient, probably as a result of the pandemic, understanding what we need on a go-forward demand basis.
Tom, you'll be missed, and congratulations.
Our next question is from Chris Snyder from UBS.
So obviously, mega projects have become a big driver of the Eaton story and an important driver of the outlook, so I appreciate all the information you guys provided there. But if we step back and look -- and even look through the low single-digit mega project tailwind in 2023, I think you said it was 3% of total of Americas revenue, organic growth has still grown at a double-digit rate for the last 8 quarters.
Can you just talk about why underlying demand has been so strong? Because I think when most investors see the huge growth numbers, everyone just assumes it's the mega project opportunity already playing out.
No, I appreciate the question. And I think I'd say long before we were talking about mega projects, we were talking about secular growth drivers, we were talking about energy transition, we were talking about the electrification of the economy. We were talking about digitalization.
You think about -- today, mega projects deal with these big projects above $1 billion announcements, but we've seen very similar growth in projects that are well below the $1 billion threshold until reindustrialization of the U.S. and other markets where today, you have production moving back in and big investments taking place. And so the trends are much broader than mega projects.
The reason we've put this emphasis on mega projects is because it's a great indicator of the multiyear runway that we have and a chance to give the investor community visibility into the outlook over multiple years. But you're absolutely right. We're seeing broad-based growth in our business much beyond this mega project emphasis, but the mega projects will become a bigger piece of our future. That's why we talked about 3% of sales, 6% of orders, 16% of negotiations, that continues to be a tailwind, a real impetus for future growth.
Yes. And Chris, if I could just throw in on that. We talked about in the prepared remarks at a high level, our major projects, our large project negotiations, and that's much less than these mega projects. And just some of the numbers, if you look at year-over-year for data centers growing over 160% in terms of negotiation volume; institutions over 40%; government and health care over, 30%. So it's really, really broad-based, as Craig says. The mega projects, if you like, just really put the cherry on top and give us just a long runway going forward.
Yes, no, absolutely. I appreciate the durability and sustainability that it brings. And then just kind of on that same topic, my back-of-the-envelope math suggests that this ramp in mega projects at least drives about a $25 billion incremental market opportunity over the next few years. So a pretty massive ramp for an industry that is already having trouble keeping up with demand. So I guess the question is, do you see a pathway forward for the industry to meet this demand? And how does that impact your multiyear expectations for our ability to push price and drive margins higher?
Yes. I think your back-of-the-envelope math is pretty good, actually. It does create a very large growth opportunity for the electrical industry. And I would say to this question around whether or not the industry is going to have enough capacity and bandwidth to capture all of these opportunities, I think one of the restrictions today on growth in general is the fact that there is not enough capacity in the industry, which is why we're making fairly sizable investments in our own manufacturing facilities and working with our suppliers to do the same, so that we can try to get out some of this demand and continue to grow the company.
And then on top of that, perhaps the greatest limiter on growth may be the labor constraint in terms of finding enough skilled trades people to deal with the significant backlog of demand. And so what we think fundamentally is going to happen is that the growth will be there, but the cycle will be extended because we simply will not have enough capacity and labor to deal with all the demand and the time frame in which is requested. And so the cycle will simply be expanded out multiple years beyond where it normally would reside.
The next question is from the line of Steve Tusa from JPMorgan.
Tom, congrats on going out with a bang here. Great, great results. Just the pricing dynamics, what are you guys assuming for -- in your electrical businesses for price roughly in '24 embedded in your guidance?
Yes, Steve, as you probably are aware, we don't provide specific price guidance. We don't separate price and volume. I will tell you that on a relative basis, when you compare, let's say, 2024 and 2023, 2022, the price will contribute a much smaller piece of our growth than volume will. And that's -- so we're going to be probably back to more of a historical level of price realization in terms of 2024.
And that's really a function of the fact that we're not seeing inflation. We had to essentially work the price lever fairly significantly over the last couple of years as we dealt with this inflation that was in the system. Now we still have some inflation principally on the labor side. So we will still get price, but its contributions to our growth will be significantly less than it had been in prior years.
Right. And I guess just on the cash flow statement, I think like -- I'm not sure if I'm seeing this right, but $2 billion of share repo in '24. I mean I think that's a pretty decent-sized number. Anything going on specifically there?
$2 billion at the midpoint -- okay, go ahead, Tom.
Yes, no, we finished 2023 with $2.6 billion in cash. And given how we're guiding, and given how we are doing a better job of managing working capital, given the supply chain constraints are going away, we're going to have a very good year of generating cash in 2024. So we go to our capital allocation tenants, and we're very clear, we're not going to collect cash on the balance sheet. So at the midpoint, we've got $2 billion. As was said in the prepared remarks, though, this gives us plenty of dry powder to do strategic M&A., so even with that $2 billion.
And the final thing I would end with is our net leverage on the balance sheet, which you probably know, Steve, is 1.3. So we've got a very strong balance sheet, just a ton of flexibility from a capital allocation perspective.
Right. So it's a 2% lift from share count in general embedded in the guidance for EPS growth-ish?
Relatively minor, a couple of pennies versus consensus, yes.
Our next question is from the line of Joe Ritchie from Goldman Sachs.
So I think Chris kind of touched on this in his question, but maybe to ask it more explicitly. As you think about that first $1 billion plus in mega projects that you've won, just what's the margin profile of those wins and how we should be thinking about that ultimately materializing in the P&L?
Yes. I would say that the margin profile on these mega projects is not going to be terribly different than the margin profile in the underlying business. It's -- these -- we are in a position, as you can imagine, when your capacity constraint to be selective around where you win. And so we would not expect -- even though they're big projects and oftentimes you find a large project, margins take a bit of a haircut, we should -- you should not expect that as these mega projects translate into revenue.
Got it. That's great to hear, Craig. And then I guess, look, the funnel keeps on growing now for the last couple of quarters at a pretty material rate. There's a lot of concern with the election coming that perhaps this first wave of projects that have broken ground continues, but maybe you get a stall on the second -- in the second wave. Just any thoughts around that? I know you kind of touched on the potential for labor constraints, but I'm really more -- any other thoughts that you would have on just continuing to grow the funnel and then making sure that, that actually -- we'll actually see that ultimately in your outlook?
Yes, no, I appreciate the question and the concern. I mean given the upcoming elections and in many ways, it's kind of an unknowable in terms of how the election is going to turn out. And then, quite frankly, even with the change in the administration, difficult to know what position they will take with respect to a lot of the stimulus spending that is essentially underlying and supporting these mega projects.
And I will tell you, what gives us a fairly high level of confidence that it's not going to change materially, is that a lot of these projects are going into red states. And so despite what may happen kind of on the political front, the benefactor of a lot of these projects are actually those red states. And it's walk to wait and see how it all plays.
And we don't think today it's going to have a material impact. Today, we are looking at more demand and we have capacity to serve. So even if there was a little bit of a give back, the business is still in great shape and to support the long-term growth assumptions for the company. But in many ways, it's kind of the unknowable. We just don't know how the election is going to unfold and then what happens afterwards.
The next question is from Julian Mitchell from Barclays.
Thanks a lot, Tom, for all the help. Maybe just a first question would be around, when you think about sort of the mega projects and the impact on North America orders, so you've had a sort of a book-to-bill well over 1x in 2023 even with those trading 12-month orders being down somewhat off the high base.
When you look at 2024, is it sort of a similar construct where I suppose you could have orders down, but the book-to-bill still over 1x just because of the capacity constraints? And then more broadly, any concerns that you and your peers collectively are adding maybe too much capacity in electrical output?
Yes, no, appreciate the question, Julian. And it's certainly -- it's one of the things that we spend a lot of time thinking about as well in terms of what will the tenor of 2024 would look like. But I think the short answer to the question is, yes. I mean it's very much possible that you could continue to see a moderation of orders and a book-to-bill and a total backlog that doesn't change.
In fact, when we came into 2023, we actually expected to be able to eat into the backlog, and the backlog grew by some 15%. And so the industry continues to be constrained. And obviously -- but for industry constraints, we would post bigger growth numbers than we provided in the guidance. The demand is there to grow faster than 7.5% that we've talked about as the midpoint of our guidance. So that absolutely is possible that you could essentially -- orders could moderate in your backlog to continue to be record highs or continue to grow.
Yes. And just to add a little bit more color to that. And Julian, we talked about this in previous calls and tried to put it in the prepared remarks, but I think it's very important for everyone on the call. We have modeled year-over-year order decline, meaningful order decline. And in those scenarios, given our backlog coverage, as we said in the prepared remarks, we are able to have robust organic growth well into 2025. So that gives us great confidence that even if year-over-year orders continue to decline in a meaningful way, we've still got a good runway.
That's helpful. And then just a quick follow-up. Maybe switching to eMobility. You had raised that medium-term revenue guide a few months back. The noise or the news in the EV world is sort of very, very uneven. So maybe just sort of tell us how you see it for the growth rates of that business. We can see a very high growth rate dialed in for eMobility this year. Maybe just any sort of perspectives on that and maybe how you're outperforming the industry.
Yes. Appreciate the question, Julian. And as you know, as we talked on our guidance, we're anticipating 30% growth in our eMobility business. And I can tell you that 30% number is today dialed back from what our customers are asking us for. We do recognize that the industry itself has gone through a little bit of a, I'd say, a wake-up call with respect to the underlying demand for EVs.
By the way, still great demand, still good growth. Some 20%, I think, in the fourth quarter for us. But overall, a slower rate of growth than perhaps what people were anticipating maybe 12 months ago. So we think the industry will continue to grow and grow nicely.
And what we try to do as we build our own plans and our guidance is to make sure we're appropriately hedged back to ensure that we're able to deliver our commitments. But at the same time, we have the flexibility to respond in the event that some of these customer forecasts and their outlooks are actually -- they actually come to fruition. So yes, we took about $1.5 billion, 11% return on sales. We are absolutely still -- see line of sight and committed to those goals, and our forecasts have not changed.
Yes. And just one other thing I would add, Julian, and taking you back to the prepared remarks. In eMobility, the market grew 7%, we grew 18%. So we're winning some good business there.
Yes. And to your point, Tom, it really is. And I think this was maybe your question, Julian, as well. It really is platform-specific. And our growth really comes from the launching of new eMobility platforms that we have content on. And that's why our growth, we think will clearly be well above the industry's growth rate.
Our next question comes from Steve Volkmann from Jefferies.
Great. I want to go back to the cost-cutting program. The $325 million of benefits in 2027, should we think of that as kind of net in terms of the margin? Or will you have some increased investments that offset some of that?
No, I mean the way we talk about it, we're going to spend $375 million of restructuring to deliver $325 million of mature year benefits. And that is the way you should think about it. We'll spend those restructuring dollars over the next few years. And we had embedded as we talked about, in our 2024 guidance, $175 million of spending and $50 million of benefits, but those benefits will fall through to the bottom line with -- offsetting expenses.
Yes. And I was just going to say, and the cash associated with it is in our cash guidance as well.
Understood. So my guess is it's probably a little more Europe-centric since these things tend to be, but any guidance on sort of where we'll see these results most?
Yes, no, I appreciate the question. I think you can just think about it, it's going to be pretty widespread. And you can think about the total kind of allocation of the benefits being pretty much aligned with the company, 2/3 will be in Electrical, 1/3 will be in Industrial. We'll be focused on taking out rooftops in the company, driving some shared services, leveraging digital. But a lot of these benefits will really cut across the company.
And what I would also say is you've described it as cost cutting, and there is an element of that. But I really want to come back to it's a smarter way of doing business as well.
I mean we've got a number of sites. We're a very complex organization with 5 reportable segments. And we've got opportunities with our central functions to be more efficient and take work off of the business units and allow opportunity cost for leveraging resources, leveraging talent, leveraging capital as well. So there's -- it's not just pure cost cutting. It's a smarter, more efficient way of doing business as well.
And it's the way we help fund the growth, right? It's the way we're funding increases in investments, in R&D and other things that we need to do to grow the company.
The next question is from Nigel Coe from Wolfe Research.
Sorry about. Mute button problems. So to cover a little ground, but coming back to this capacity issue -- or capacity expansions. I mean the 9% to 11% growth in the Americas, Craig, I mean, it feels like given the backlog builds, obviously, orders continue to enter there, it feels like that could be relatively conservative.
So just wondering if there's any kind of capacity constraints that are gating that growth forecast? And are you assuming there's going to be some backlog burn or conversion as we go through the year? Any sense there?
Yes, no. And I think I had mentioned also in my commentary, Nigel, that there's certainly enough demand in the marketplace to post higher growth than we're reflecting in our guidance. And we're making investments to eliminate capacity bottlenecks. And we think by the time we get to the end of the year, we'll be in great shape.
But as you know, we're participating in an industry where you have a lot of players in the value chain where you have fairly sizable labor constraints around skilled trades. And so I do think it's going to be a governor on growth based upon these factors that prevents us and the industry from growing much faster than that. You think about this 9% to 11%, this is on top of some 30% plus growth over the last 2 years.
And so I would say that today, we'll see what happens with in terms of the backlog growth and how much the backlog we can burn or can't. Once again, difficult to really say, there's a lot of variables in that. Once again, we thought we were going to burn backlog in 2023, and we actually increased it, right, some 15%. So the market continues to perform even better than what we imagined. But there are very real capacity constraints in the industry that we think become the governor around this 9% to 11% growth in our Electrical business in the Americas.
Yes, yes. I appreciate that. And then it just feels like data center is the -- obviously, that's probably going to be your strongest growth vertical in '24. And I think you mentioned negotiations up 160% off a pretty high base. So just thinking about capacity in that single end market. I mean is that a concern? And does the $1 billion [ you put in ], does that [ cover ] the kind of growth that we should see coming through in '24, '25 then?
Yes, no, data centers will certainly be a very strong growth market for us in 2024 as well into 2025. We talked about in terms of our own forecast for the industry, we said the data center market, we think, grows at a compound growth rate of some 16% over the next 5 years or so. And that is certainly more than supported by orders. We grew from 20% in Q4. We -- in revenue, orders in the rolling 12 were up 30%. Negotiations were a lot more than that.
So we continue to see just an acceleration in the data center market in terms of rate of growth. And once again, because this industry, too, is capacity constrained, is labor constrained, we think, which ultimately ended up happening, is the -- as a growth cycle, that just extends or could be for a decade at very attractive growth levels.
Yes. Exactly. That's a long time. And '24, do you think '24 will be in that 20% there or even better?
Yes. I mean we'll see. We're not providing guidance per se for individual end markets today, but you can certainly assume that within that 9% to 11%, that our assumption for data centers is going to be on the higher end of that.
Yes. Just to add, the chart for the end markets, we have data centers and distributed IT growing strong double digit. So -- and everything from an order perspective, as Craig said, points to very robust growth in 2024.
Yes, it's vertical. Thanks, Tom, and congratulations.
The next question is from Tim Thein from Citigroup.
Yes. Great. I'll just fire one in here. But I guess, to start, after spending some time with Mike Yelton, I guess, it was around this time last year, I guess, I can better understand why it was such a good move. But just on the -- on the mix in Electrical, I would guess just given the strength in these big projects that there has been a trend, I guess, as Americas comment. But you've seen kind of this continued shift from more of the growth coming from systems versus products.
How do you -- in years' past, there's been times when that's given you challenges in terms of kind of managing the profitability of that. But I guess, maybe your outlook in terms of that mix dynamic in '24 and again, your confidence in terms of managing to the extent that continues, more of the growth coming from systems relative to products?
Yes. And I appreciate the question. I know we kind of created this monster a little bit, but we're trying to get the investor community to move away from this systems versus product distinction. Because practically speaking, they're all connected. So any time you sell an electrical system, it encompasses all of our products and components.
And so for us, we really think about the right way to think about the company is to really take a look at the end markets that we laid out. We have data centers, utilities, industrial facilities, commercial facilities, and that will be perhaps the most informative way to think about the company in the context of where growth is going.
And I can just tell you, in general, from a profitability standpoint today, there is not a significant difference today between the profitability of systems and the components that go into the system. So now there was a time inside the company back when, let's say, we were -- in the lighting business, for example. And lighting was considered a products business. It was a relatively large business with relatively lower margins than the rest of electrical.
And it was a meaningful different perhaps held back by lighting that drove different profitability between the two. But today, we don't have a significant difference in profitability. And we really think the right way to think about the company is really the function of these end markets that we've laid out once again on Slide 16...
Got it. Okay. Yes, yes, for sure. And real quick, Craig, on the Arrow piece within commercial, is there -- do you expect much difference in terms of the growth between OEM and aftermarket in '24? Or are those both similar projected growth rates?
Yes, no, and it's an important question because, as you know, there is a very different profit profile in OE order versus an aftermarket order. Both will grow nicely in 2024. We do expect OE to grow slightly faster than aftermarket, which holds margins back a little bit, which is going to be reflected in our guidance. But we expect to see very strong growth in both commercial as well as the aftermarket piece of the business, the commercial OE and aftermarket.
And our next question is from Deane Dray from RBC Capital Markets.
And congrats, Tom, best of luck. And for -- I don't know if you can parse this out, but is there any way you can frame your expectations on North America Electrical of what would be going through distribution versus direct ship? I'm not sure how precise you can get there, but any color would be helpful.
Yes. I would say, Deane, that in North America specifically, a lot of what we do goes through distribution. And that number, order of magnitude, I think, is about 70% or so. So it's a fairly sizable piece.
And as these mega projects continue to grow, as perhaps data centers, hyperscalers continue to grow, some of that tends to be perhaps more direct by virtue of the nature. But a lot of our business today those through distribution, and our distributors are just -- I'd say -- I've always said, they're perhaps our greatest asset. We are committed to distribution. They add tremendous value. We have a very strong distribution network. So yes, it's one of the real assets of the company.
Great. And I don't think I heard the word destocking come up at all today. So -- and it did create a chuckle there. But is there any destocking, any pockets of it? You all seem to have steered clear of any of that over the past 4 months or 4 quarters, but just any color there would be helpful.
We did talk about a little bit of destocking that we saw in our European business, which, quite frankly, really began at the beginning of 2023. We started to see destocking in Europe specifically. Fortunately, the good news is that we're beyond that.
But in the Americas business, specifically, other than the odd balls and pockets of places, we've not really seen destocking in the Americas. And that's largely because these markets, as we talked about, continue to grow pretty dramatically. But we did have a little bit of it in Europe, but it's fortunately behind us now.
Thank you. And at this time, there are no further questions in queue. Mr. Jin, please go ahead with closing remarks.
Okay. Thanks, guys. I know it's a busy day, and we do appreciate everybody's questions. As always, the IR team is available to address your follow-up calls. Have a good day. Thanks for joining us. Bye.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.